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Very Good Commentary By Rosenberg


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I liked the article and it follows the same reasonable skepticism exhibited by the PIMCO team. Even my favorite macro-speculator, Michael Aronstein, has largely limited his bullish commentary to inventory rebalancing and 2009's market rebound. I also note that certain of my highly levered companies are beginning to price at levels that don't account for refinancing and covenant issues.


I don't have any brilliant hedging ideas, but I've raised my cash allocation from less than 1%, in Nov. '09 after tax allowance, to 12%. If the market cooperates I'll have it to 30%+ by June. I'm only holding back due to tax considerations, so I'm not exactly holding my cards from a position of strength.

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If I look at my portfolio of companies which includes a 40% position in FFH via common and leaps, the price/book value is below 1.  The companies I have invested in for the most part have done their refinancing and are all in the process of strengthening their capital position.  This includes SSW, PD.un, Rus-T, MFC, PWF, BCE, HD, GE, cfx.un, cfp, mtl.  The weakest position I hold is probably sfk.un which is now my second largest position.  


This market has been the easiest to invest in during my entire investing career.  Every single company that I have listed and everyone in my total portfolio I have held before, or held for over a year so I have gotten to know them well.  When I have made money on one company such as cfx.un I sell some and buy more SSW or PD.un, or MFC.    


For those reasons I have dropped my hedges during the downturn in February.  If things rise to levels I consider to be unsustainable I will move to cash.  The only thing I have that I consider to be at its top end price is probably cfx.un but it is still paying out 11%, and I am sort of assuming that it will continue to pay out 5-6% when it converts to a corp.  The other thing I have looked for is companies that are paying some of their earnings out as dividends.  All of the above excepting PD, sfk, and cfp, are paying reasonable dividends.  


My feeling going forward is that companies that are willing to part with some of their cash as dividends are going to rule.  I noticed that FFH is appearing on blue chip dividend grower and dividend payer charts now.  I think it is going to become a market where the companies have to show the cash to their shareholders.

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Rosenberg makes a good point on income.  The income point also applies to the US mortgage markets as well.  When lenders such as BofA are willing to cut principal to ensure monthly mortgage payments continue to roll in, there is some certainty introduced to the credit markets.  Much of the uncertainty at the macro level is based on the premise that the US consumer will not recover. 


But, if you start digging, the macro picture has improved tremendously in the last few months (viz. employment, housing, exports, etc).  Are we out of the woods - likely not, but we're approaching the clearing.  There are good reasons why deleveraging will continue to occur, but let's not forget that deleveraging has many sources, not just principal repayment (the slowest form).  If lenders are willing to reduce principal directly, then debt/asset ratios will improve much more quickly and more consumer discretionary income becomes available for either further principal reduction or for consumption.


Buffett indicated this month in the BRK AR that housing would start to recover in 2011 and I tend to agree that there is a slow-sloped recovery underway that will continue.  Housing is a proxy market for the health of the consumer and most individual RE markets have stabilized.  Commercial RE is still dodgy.  Not all industries have been as heavily impacted as autos, durable goods, etc, so other consumer-oriented industries have weathered the storm better and will continue to generate good margins.


Best values at the moment are in small capitalization stocks and insurance.  I'm still finding small-cap companies with long histories of high ROE/good FCF that have "glitched" short-term and have recovering/increasing margins.  From a portfolio perspective, a good-sized cash weighting is still valuable for those "wall of worry" moments that Mr Market is bound to have.




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Hoisington has a very good article in this month's CFA Institute Conference Proceedings Quarterly that lays out the technical case, in simple terms, for US deflation. While not new to this board, the case is pretty compelling.


Even we're starting to see lots of small caps with solid managements & great potential, that are quite literally going for a song. We're also seeing mid/large caps being ignored because investors dont fully understand the seasonality and/or temporary changes in their business (PD.UN). And if even retail can see it?


But.... we're seeing very little on the FI and/or cross-currency side. Given that the probability of Cdn rate hikes is now far higher than it was, there should be a rash of refinancing - yet there hasn't been. The $C has appreciated 13% against sterling over the last 90 days - yet there's been no rush to UK gilts. The clear inference is that treasurers either cannot re-finance (unlikely), or they must think that their real cost (rate+sweeteners) will be lower in the future. Same as Hoisington.


There's a tendency to see only equities, look at fixed income.

You may be surprized at what you see.




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