Disconnect Between Corporate Earnings & Market Sentiment

[Packer16]

Wouldn't a metric be the number of cheap stocks you can find?

 

Packer

[benhacker]

I'm not some high and might value snob...

 

but this?

 

Even value investors place stops

 

No, they do not.  It is the opposite of value investing Misterstockwell, at least that is my view.  Selling something because it went down is not value investing.

 

If you're pissed that there used to be lots of rubes to take down your millions of shares easily, and now there isn't, well that sucks but it's hardly a problem with the marekt.  The markets aren't as liquid as they appear (I agree wholeheartedly), and that should be obvious to all at this point.  Buy great companies and minimize trading is the only way to go.... the bigger you are, the harder it is to move around, that's not the market, or the algobots problem.

 

Ben

 

Come to think of it, the idea of liquidity being abundant in various forms I think is the root of much of our problems.

[Guest Bronco]

Misterstockwell - shouldn't you be buying (in your client's account) that great stock idea for $11.  You can place that bid.  

 

I understand you don't want to disclose that stock, but is it liquid? I think a lot of us will suggest that investors shouldn't care if a stock goes from $14 to $11 to $14.  We want that - if we can get that $14 stock at a big discount.

 

I understand your unfortunate position, but I just don't have the same issues with stocks I own.  I buy when stocks get hammered and sell when they go up.  So what is bad for you might be good for me and others.  

 

It is hard to believe though that guys like Buffett can build big positions and not face the same hurdles.  

 

Have you written to your congressman about flash trading?  I am sure they will be very proactive - they are here to serve and protect.

[Cardboard]

The "value" investors living in a vacuum after having been through 2008 and a crash that only ended 16 months ago make me laugh. To them, macro means nothing, countries always recover, etc. Where is Rome today? The British Empire? And more recently Japan?

 

Show me your valuations and then we will submit them to a little stress test called a depression. Are you still so sure that the economy means nothing? Why is it that every investing text book data magically starts post World War II?

 

If you continue doing stupid things for long enough, eventually you get burned. Isn't the lesson from the credit crisis? How long did it take for Watsa, Paulson and Bass to be proven right?

 

Cardboard

 

[Sullivcd]

I like to follow the folks at ECRI who are the only economists that get things correct. Their leading index has headed straight down lately. Not a good sign.

 

I know some on the board are at least occasional readers of John Hussman.  He follows the folks at ECRI as well and wrote about his interpretation of their data in a recent letter.  Here it is:

 

http://hussmanfunds.com/wmc/wmc100628.htm

[Cardboard]

http://seekingalpha.com/article/215792-foreclosures-should-continue-to-pressure-housing-as-modifications-grind-to-a-halt?source=yahoo

 

That chart on ARM resets was presented a while ago by Whitney Tilson. This is not opinion or a fancy interpretation, it is a fact. As the next few months arrive, there will be more and more mortgages reset to a higher interest rate. It simply means less money available to consumers. Less money to buy gadgets and restaurant meals.

 

Stuff like that has to impact the economy and your companies in some real way at some point. It is macro, but I guess smart macro to consider.

 

Cardboard

[goldfinger]

Show me your valuations and then we will submit them to a little stress test called a depression. Are you still so sure that the economy means nothing? Why is it that every investing text book data magically starts post World War II?

 

Exactly!

 

History is not linear in the least: it is full of periods of progression and periods of regression relatively speaking. Most of our egos are just too freaked to recognize that fact and we'd rather go into denial. This time around, it is the entire world (almost) that has a problem of way too much debt. But hey, we will be back very soon!

As for metaphors, patients that suffered heart attacks most of time never come back to their former selves.

[Guest misterstockwell]

Misterstockwell - shouldn't you be buying (in your client's account) that great stock idea for $11.  You can place that bid.  

 

I understand you don't want to disclose that stock, but is it liquid? I think a lot of us will suggest that investors shouldn't care if a stock goes from $14 to $11 to $14.  We want that - if we can get that $14 stock at a big discount.

 

I understand your unfortunate position, but I just don't have the same issues with stocks I own.  I buy when stocks get hammered and sell when they go up.  So what is bad for you might be good for me and others.

 

Of course I put in bids, but only after checking every possible source to see if I was missing something. I can't push buttons as fast as HAL though, so each bid was met with higher bids before my bid hit my own quote screen. HAL sees my bid in nanoseconds with his colocated servers, and acts upon it before I even see my own bid come through. So I got a few thousand shares in the 12's by placing bids way above market. I knew it was a bargain, and I knew it was no company-specific issue causing the drop, but what about the average joe? He is going to see a huge drop and blow out of it. Although I am in the business, and I run my business FOR my clients,  I always tell them that it is the biggest pickpocket business on earth. Someone extracts pieces of flesh at every step, and this is just another added step. I hate it. Average Joe has nobody looking out for him, gets hosed every step of the way, gets blown out, and leaves the stock market forever. Things won't change until we get a bigger wreck than the one day mini-crash, and I am certain that wreck will come.

[turar]

http://seekingalpha.com/article/215792-foreclosures-should-continue-to-pressure-housing-as-modifications-grind-to-a-halt?source=yahoo

 

That chart on ARM resets was presented a while ago by Whitney Tilson. This is not opinion or a fancy interpretation, it is a fact. As the next few months arrive, there will be more and more mortgages reset to a higher interest rate. It simply means less money available to consumers. Less money to buy gadgets and restaurant meals.

Forgive my ignorance, but wouldn't they be resetting to the rates below their current rates, given the current rate index environment, e.g. LIBOR, as compared to say 2005?

[benhacker]

Turar,

 

to understand, you need to know the difference between a reset, and a recast.  Those worrying about loan shocks from option ARM resets really mean "recasts".

 

Oh yeah, and I've discussed here before, the charts floating around the net are mostly wrong despite what Tilson says.  The recast problem from neg am loans is very overstated.

 

Not saying all is rosy, but this isn't a problem.

 

Ben

[Parsad]

I am also confused by Sanjeev. Unless I am mistaken Sanjeev, you sounded anyway quite bearish earlier this year and late last year at about the same level for the S&P. What has changed?

 

I'm still bearish about specific governments, and I have no doubts or misconceptions about how long it will take the U.S. itself to get its fiscal house in order.  But I'm not investing in the United States government...I'm investing in corporations, many that are premier global corporations with diverse currency bases in their revenue stream, with little to no debt, that utilize miminmal leverage. 

 

We thought markets had gotten ahead of themselves when they hit 1200 in April, so we built up our cash levels.  Then the markets started to correct, but they corrected significantly within many quality companies that weren't this cheap for a prolonged period even during late 2008 and early 2009.  And guess what?  Their earnings quality has improved since 2008 and early 2009.  Revenues may be stagnant, but they are making more with the same amount of cash coming through the doors.  I think this will continue to happen and they may get cheaper, but we are starting to stake our claim:

 

We gained enormously from the low prices placed on many equities and businesses in the 1970s and 1980s. Markets that then were hostile to investment transients were friendly to those taking up permanent residence. In recent years, the actions we took in those decades have been validated, but we have found few new opportunities. In its role as a corporate "saver," Berkshire continually looks for ways to sensibly deploy capital, but it may be some time before we find opportunities that get us truly excited. - Berkshire 1997 Letter

 

We were 50% cash in March and April, and we have started to slowly deploy that cash, with more coming in.  Our funds are finding very high quality businesses to invest in now, rather than just the distressed or battered.  Like I said, they are getting cheaper, but in a zero-rate environment, there are some decent deals available.  Cheers!

[biaggio]

"I have watched our largest holding go from 14 to 11 in a matter of minutes, with bids evaporating faster than a quote system can update. Even value investors place stops, and I am sure some were washed out."

 

Misterstockwell, would it be not to our advantage as smaller investors to, being sure of the value you are buying, putting in low bids and being a buyer, rather that trying to compete at their game and stop yourself out. I don t doubt that they purposely get the price down + getting us to panic and selling out to them at a better price.

 

Unfortuneatly for me I have often been caught trying to catch the proverbial falling knife and seeing the shares I just bought at $14 drop + stay at $11.

 

I should probably know this but can the traders and computers actually see the prices that we may be stopped out at or a bid we may have?

[RRJ]

Misterstockwell - shouldn't you be buying (in your client's account) that great stock idea for $11.  You can place that bid.  

 

I understand you don't want to disclose that stock, but is it liquid? I think a lot of us will suggest that investors shouldn't care if a stock goes from $14 to $11 to $14.  We want that - if we can get that $14 stock at a big discount.

 

I understand your unfortunate position, but I just don't have the same issues with stocks I own.  I buy when stocks get hammered and sell when they go up.  So what is bad for you might be good for me and others.

 

Of course I put in bids, but only after checking every possible source to see if I was missing something. I can't push buttons as fast as HAL though, so each bid was met with higher bids before my bid hit my own quote screen. HAL sees my bid in nanoseconds with his colocated servers, and acts upon it before I even see my own bid come through. So I got a few thousand shares in the 12's by placing bids way above market. I knew it was a bargain, and I knew it was no company-specific issue causing the drop, but what about the average joe? He is going to see a huge drop and blow out of it. Although I am in the business, and I run my business FOR my clients,  I always tell them that it is the biggest pickpocket business on earth. Someone extracts pieces of flesh at every step, and this is just another added step. I hate it. Average Joe has nobody looking out for him, gets hosed every step of the way, gets blown out, and leaves the stock market forever. Things won't change until we get a bigger wreck than the one day mini-crash, and I am certain that wreck will come. [end quote]

 

I for one am very glad mrstockwell is raising this issue, which I think is extremely prescient.  I find it frustrating and kind of annoying that some on this site take a holier than thou attitude about "who is the purest value investor" because he raises a pretty obviously important question about the very integrity of the market, and the long-term effect that will have on individual investors who are being hosed, and coming to learn of it through such episodes as the flash crash.  

 

Buffett talks about how he asked Graham once about why the market eventually realizes the intrinsic value in companies.  Graham's response was that he did not know, but it just did.  But it can take years -- even a decade or more, to do so, especially when the market's integrity is questioned to the point where the average Joe no longer believes in it.  So you can make the best value buy in the world, and not get the proper return due to a lack of true value-seeking mechanism happening in the market with long-term buyers.  I'm not saying this will happen, but it is possible under these conditions, and it is worth examining how likely that is.  I have friends in the fund of funds business with regular contacts with Wall Street hedge funds.  Many of those insider types are expressing the very same concerns, and talking about how they can only "play the next government intervention" etc.  They talk about how the Supplemental Liquidity Provider program is totally voluntary, meaning that those very liquidity providers that are now supplementing the reduced role of the specialists, can simply opt out on any given day.  Welcome to flash crash city, which triggers all the stop losses, leading prices lower, until there are literally no bids in the queue.  

 

The better part of me tends to avoid chicken little scenarios, and so I see this volatility and lack of true liquidity as a potential deep value buying opportunity.  So I went to 35% cash and am only slowly buying on dips.  But part of me cannot help but wonder -- if these volatile prices are caused by HFT's, and in a rough enough market, they can just turn off the machines, leaving no bids in the queue, how long should we expect the average Joe to continue to trust in this type of market?  They'll just stop -- and many of the well-heeled with money in hedge funds will redeem as well.  Perhaps not to return for a long-time.  My "less financially learned" brethren are already talking about how they are taking ALL of their money out of the market.  

 

There was a time not so long ago when the average number of Americans participating in the market was not 60-70% as it is today, but more like 10%.  That could happen again.  Even moving back down to a 40% participation level would be pretty problematic I'd think, though I suspect a working market can be supported at a very low level of players.  But it won't be the type of market any of us are used to.  It might be the best thing that happened to kill the casino and reset it.  But it would be painful as hell on the way down and through that.  Just ask any of the investors that lived through the 30s.  Oh yeah, there are only about 4 left.    

 

I don't know the answer, but I sure don't think any other buy and holders know either.  And it's certainly worth asking the question.  

 

 

 

[claphands22]

Grantham, Greenwald, Miller and my friend Gus have all highlighted the current reasonable prices on large US multinational companies.

 

Miller makes the point in his recent quarterly that if Exxon continues to use their cash-flow to purchase 300-400 million shares a year, Exxon will be completely out of shares within 15 years! I'm not recommending Exxon or any other large cap but I think that's a good illustration of how cheap current large multinational companies are at the moment. 

 

(I've attached the Miller Quarter)

 

Here are some large multinationals with their respective EV/EBITDA

 

**EV/EBITDA is a tool of valuation, but not THE TOOL of valuation; remember EBITDA = bulls**t earnings - yet, I think it can be used here to illustrate the "cheapness" of some current blue chips

 

JNJ 7.7

KFT 11.21

KO 12.66

MCD 10.58

PM  9.63

WMT 7.01

GOOG 11.48

INTC 5.65

 

 

[the Miller letter is being discussed on another post]

[Guest Bronco]

RRJ - I take exception to your comments.  It is not pompous for one to express their views here - we are all entitled to our opinion.  As long as there are no personal attacks, no one's feelings should get hurt.

 

I am not a holier than though value man.  I do consider myself a very good investor and a not so good trader.  But I do some trades because its fun, and thats my choice.

 

But on the investing side, there are some companies that I will likely hold forever.  Pepsi being one.  Loews is probably another.

 

There are other companies that I have identified as good businesses, and I am waiting for a price to hit.  For example, I will start 1/2 of a new position of JNJ at $55.  Same with GOOG at $400.  BRK at $65 - I'll be there.  I have a list on my office wall of companies and the prices I will buy.  So I don't think it is pompous to not care about other people's hysteria if prices drop on a stock.  That is what I am here for.  That is why I am patient.  Others take the same strategy, the same approach.  Don't get offended.  We aren't doing anything wrong - it is the high frequency guys you have a problem with. If one's clients can't stomache risk, then they should get out of the game. 

 

That being said, I wish you and Misterstockwell well.  I hope they resolve the flash trade issues for your sake, but most likely they won't.  But I don't care either way.  Give me crashes...I can take it.  But that's just me though.

[RRJ]

Bronco,

 

I do all the same things, and have pretty much the exact same approach you do.  What I think mrstockwell and I are suggesting is that it is possible -- not necessarily likely, but possible, that this is one of the rare times when a buy and hold approach may not work out as well, or at all, due to a mechanism of the market.  I'm saying this is one thing that is very worth considering right now. 

 

I'm not running for the hills, but I have to wonder about the liquidity issue.  I just don't like it that each time someone has attempted to raise the issue, people say "that's not value investing" and no discussion ensues about that issue -- may be just that no one has anything else to say, but it seems to squelch some opinions.  No offense intended though. 

 

Holier than thou was not intended to imply pompous -- more like judgmental about whether someone is doing value investing.  I promise I'm a value investor -- just one wondering whether this is not a time to ease up on buy and hold a bit.  Maybe the rare time, during deflation and market manipulation and lack of liquidity, when a bit less Buffett and a bit more Klarman and Graham are in order. 

 

Peace.

 

 

 

 

[Guest Bronco]

Peace.  I might take a different slant and suggest it is challenging finding management teams with talent, staying power, and high ethics.  Three qualities that separates Buffett from most others ( when taking these qualities collectively.). When attempting to buy and hold, I would desire a leader with these qualities.

[DCG]

Regarding buy & hold, I almost always try to look at the decision as the business owner, and when/if I am considering selling a stock, I take the Buffet approach and ask myself 'if I owned the entire business privately, would I sell it right now?'. I try to look at hwo the business will be doing in anywhere from 2-20 years from now. That said, when the market gets ahead of itself, I do sometimes sell portions of holdings, largely to free up cash to use during pullbacks.

[Myth465]

Shiller sees double dip for Housing / Economy

 

http://www.gurufocus.com/news.php?id=101299

[Zorrofan]

The Weekly Leading Index (WLI) of the Economic Cycle Research Institute (ECRI) registered negative growth for the seventh consecutive week, coming in at -10.7 and Prem is much more bearish now given that FFH is 93% hedged. Things could start to get interesting!

 

cheers

Zorro

[Myth465]

Honestly the FFH hedge has me rethinking my strategy. I have about 25% cash and am heavy into 2-3 stocks with known catalyst. Prem owns a big chunk of FFH so its a good proxy to see what he is doing with his money.

 

It seems like the really smart money is worried, and it also seems like the smart economist who predicted things are worried.

 

Interesting times.

[SharperDingaan]

 

Keep in mind that a value investment 'buy & hold' is a long term strategy; & it's most profitable when the local economy is improving. Over time, inflation + GDP growth produce positive earnings growth that is magnified by P/E expansion. If there's a friendly business climate, even the dogs will make money.

 

But what if the business climate is not friendly? and it goes on for 5-10 yrs? What if inflation + GDP only ranges from -2% to +2%? You will not make as much, but you'll own lots of quality at cheap to 'historic' prices. When the economy turns around you'll do well, but untill then?

 

There is a lot to be said for liquidity, and the trading of liquidity as & when the opportunities present themselves. 

 

SD