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Pull back - when!


Mandeep
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Guys, I can't believe GS got above the warrants that WEB bought them for.

WOW.

 

I'm sitting here waiting for this "bear market rally" to pull back. I'm missing the action!

Thoughts?

 

What are you guys doing with your money right now? Holding, shorting, or buying?

 

Also what do you think of this discounted cash flow calc-

http://www.gurufocus.com/fair_value_dcf.php

 

I read somewhere that this kind of calc is what BRK uses to evaluate businesses, although I'm sure he doesn't use this site.

Check it out!

 

 

Lata,

 

m

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There was a bloomberg interview with buffet last month and I could have sworn he almost said 2009 could surprise everyone on the upside and when the reporter asked him if this is what he said, he said, 'no, I didn't say that, I don't predict, etc..' It seemed to me he was saying just that. And perhaps it will come to pass. Buffet is always careful to hedge his bets with forecasts.

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I would suggest that the likelihood of an upside surprise far outweighs the likelihood of a new low at this point.  SPY 100 somewhere before the end of the year.  If this was a credit and housing event then the two most significant factors are working themselves out with help. 

 

Credit is loosening significantly, and housing in the US has reached a bottom in terms of new builds.  After the intitial big bust in housing the price drifts slightly lower for a few years on houses but this is actually more a positive effect, than a negative as people are more able to buy houses and get mortgages.

 

Never forget that the stock market is a leading indicator by 6-9 months.  Unemployment can be rising and Main street still deteriorating while the stock market rises 50%. 

 

I have been buying when I can LUK, GE, ACP, WFC Prefs, RBS prefs (thanks board members for these).  I have also been locking in gains with SPY puts which is probably a contrarian indicator if there ever was one  ;) 

 

 

 

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Al,

 

You very well may be right about this. It is well reported that the market turns before overall ecomomy and that may be what we are seeing. But...I HAVE NO EARTHLY IDEA. There are a plethora of factors at work here and I cannot tell how this will play out. 5-7 years down the road I do feel that things will be certainly bettter and will have returned to a sense of normalcy, but what these next few years look like, market-wise, I have no idea.

 

Interestingly, I have been buying LUK (too early in retrospect in the low to mid 20's) and WFC (Luckily at a price closer to the bottom).

 

-Crip

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I'm a bit surprised by the optimism on this thread... but maybe it's just me?

 

Uccmal, so you believe we'll be back to positive economic growth by year end (6-9 months)? I disagree... hence feel this is a bear market (stock) rally. In addition, what type of economic growth are we going to get in 2010? I'd say negative. And when it comes, we are going to have very, very weak recovery....

 

I don't trust Mr. Market telling me the second derivative of leading indicators has turned... frankly he lies and it's been a long time since he's seen deflation. Plus, it's quite amusing how the media is jumping on this second derivative turning "meme."

 

That being said there are a lot of interesting preferred shares, as mentioned on this board.

 

 

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I feel this is clearly a bear market rally. But having said that, who can call the bottom? There are plenty of interesting ideas, just be prepared to hold on if prices fall further. I like LUK - wish FFH would buy more of it than some of the stuff they did like Canwest. Having said that, FFH has upped it stake in ICO to 37m shares, or around 24% of the company. Any thoughts on ICO? To me it is a play on the whole energy sector (if you feel oil is going higher long-term so is coal) plus a nice inflation hedge.

 

cheers

Zorro

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Guest Broxburnboy

It's pretty clearly a bear market rally. The overall economic environment is still pretty grim.

Credit is still contracting, and some financial sectors such as consumer credit and commercial

real estate have not yet felt the impact of delevering.

Current monetary and fiscal policy is aimed at diluting current losses and more money will have to

be created and injected to try to kick start the economy. This effort may not be a total success.

 

Before this puppy turns, governments will no longer have to pump (borrowed or newly created) money into the system.

On an upturn inflation (and interest rates) will have to pick up to reflect the dilution of the currency .

As long as interest rates are below the level of real inflation, investors are still losing money

on every low yield bond investment they make. They will lose more when inflation kicks in.

 

The current level of optimism has been engendered by the further "rescue" of AIG and Citibank and the warm fuzzies generated by the

optimism expressed at the G20 meeting, where the various leaders seem to have committed to devaluing their own currencies in lockstep

with the US.

 

It seems to me that the most sure bets at this point in time are shorts..all the megabanks, US long treasuries, any company that has too much debt.

 

 

My .02

 

 

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Why LUK? Doesn't seem like much of an upside- Fair value = -4.53, ICO fair value = 2 bucks.

 

http://www.gurufocus.com/fair_value_dcf.php

 

I think we should be loading up on USB like crazy and WFC.

If you guys want to take more risk - C and BAC look cool too.

I heard they are buying MORE toxic assets like crazy at 35 cents to sell it at 85 cents with gov't support.

Can you believe that? It might be the big plan and the gov't doesn't care because they are going to convert their shares to common.

Imagine what will happen when C and Bac report 10 of billions of profit. Their stocks will go to at least 20 bucks.

At that point the gov't is out with massive returns. Taxpayer paid, they lose the toxic BS, win-win, expect for the people who buy them from C and BAC.

 

 

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I would disagree with you on both LUK and ICO. When the recovery does start both are positioned to take advantage of rising commodity prices. FFH was buying ICO at around $4, have been buyers again recently under $2 and I doubt they are simply looking for a run up from $1.87 to $2.

 

cheers

Zorro

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I cannot recollect who said this, but using DCF is like looking through the telescope. If you  move it a tiny bit, you are in a different galaxy. Changing the growth or discount rates a tiny bit can alter the values dramatically. It is best used in a negative sort of way, to try to figure out what growth rates and discount rates are being factored into current prices.

 

Vinod

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Uccmal, so you believe we'll be back to positive economic growth by year end (6-9 months)? I disagree...

 

Not sure I said positive economic growth anywhere.  At this point all we need to stay out of the recent bottom is neutral or a slightly less negative environment.  You will get that as companies actually start to report higher Q/Q earnings as writedowns and layoffs are put behind them. 

 

RE:Luk:  with Luk you are buying a hedge fund run for shareholders.  You get a couple of wineries (real estate), forests, and all sorts of other interesting holdings.  They grow shareholder value including periodic large dividends at about 25% per year.  These days the stock is very cheap.  In the past I have bought LUK in the high 30s and not much has changed except the mark to market book value which will shortly be resolved. 

 

FFH is positioned with ICO to take advantage of the bull market in commodities that precedes the bull market in stocks.  Undervalued company with an undervalued product = rocket fuel. 

 

The other I had was AXP (not ACP), based on the premise that short tail liabilities will work through fairly quickly. 

 

GE based on direct or spinoff infrastructure money - I would think the direct and indirect benefit to GE of stimulus packages will be in the multi-billions/Quarter.  GE has people in every major market whose sole purpose in life is to liase with government officials and they are very good at it (I worked at GE Canada head office and met the Pres. and head of government affairs).

 

Also bought some BAM common recently.

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Using a DCF model to do your valuations can be used for some companies, BUT not all. Leucadia happens to be one of those companies(many more as well, look at Berkowitz 13-f's since his start in 1999 and will find more!) that is you use a simple DCF model you will get a wrong valuation. As Munger has said many times, make sure you have more than one tool in the toolbox, or everything will look like a nail!

 

Essentially you are buying a company that you have to value by taking a Net Asset Value(with whatever adjustments you want) and then ask yourself how much are they going to add in the future and if these assets used in your NAV are undervalued(example is are some of the assets like pushing a ball down in water, that they are going to come back up and fast? Spring loaded double dipping here!).

 

This is actually the way that they say to value there company as well and the reason that Ruane, Cunniff have never owned Leucadia is because they don't like buying companies that you can't place a multiple on it's earnings power.... but if they have an absense of liabilities, are solid financially, and great management with a paper trail of success you don't need to know the future clearly if you have reason to think they will continue to do what they have been doing in the past  in the future! They say wisdom in investing is knowing what to look past! Being in there vehicle, out of there own self interest, will in 5+ years look, with hindsight like a very nice place to have been!

 

The folly of people using only one tool is what causes these prices, and also people saying 'they have lost it'! The same mistake was made in an article on Sears Holdings, where all the analyst did was compare P/E's between Sears and other companies..... absolute stupidity!! Income statements can be made into essentially whatever they want them to be, and is forgetting about the amount of quality and quantity assets on Sears balance sheet, the absense of liabilities, and the fact that it has Eddie Lampert running it(who is not as dumb as everyone thinks he is, or was not as smart as everything used to think he was!).

 

Is you deconsolidate Sears Canada, they have tons of cash and marketable securites, very little debt, lots of quality assets, and quality management with a big incentive to do well!! And yes everyone knows that they have headwinds facing them, but if your a value investor and buying something cheap, there has to be something that has caused it to get there.... and in my opinion it is just short term noise on these two and others!! But out of my own self interest I hope the noise gets louder!

 

Kyle

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Why LUK? Doesn't seem like much of an upside- Fair value = -4.53, ICO fair value = 2 bucks.

 

http://www.gurufocus.com/fair_value_dcf.php

 

I think we should be loading up on USB like crazy and WFC.

If you guys want to take more risk - C and BAC look cool too.

 

I love it! C & BAC better than LUK. Question: If fair value is -4.53 shouldn't LUK be bankrupt and out of business?

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Using that DCF calculator scares the pants off me, and in my opinion is very dangerous! Using a paper and pen, and sitting back and thinking makes you think about the inputs your putting in more clearly and will help a person avoid the 'false precision' those nice calculators provide!

 

Mohnish says that when he reaches for excel, that is a huge STOP sign for him!

 

There is so much more to a company than just those inputs that go into the DCF used, and the inputs that you are using can be incredibly flawed numbers, which would lead to a flawed valuation. Finding normalized, sustainable free cash flows in a company,after looking at many years of reports and studying the industry cold, that also is financially solid and has an absense of liabilities makes the most sense to me. Then I discount with very conservative assumptions(no growth, 10% discount to internity is a approx 10x multiple) and take a margin of safety to find a comfortable intrinsic value. Not all companies are valued the same, but for an earnings power approach this makes the most sense to me.

 

 

In October of 2003 Charlie Munger gave a lecture to the economics students at the University of California at Santa Barbara in which he discussed problems with the way that economics is taught in universities. One of the problems he described was based on what he called "Physics Envy." This, Charlie says, is "the craving for a false precision. The wanting of formula..."

 

The problem, Charlie goes on, is, "that it's not going to happen by and large in economics. It's too complex a system. And the craving for that physics-style precision does nothing but get you in terrible trouble."

 

"This is terrible not only in economics, but practically everywhere else, including business; it's really terrible in business—and that is you've got a complex system and it spews out a lot of wonderful numbers [that] enable you to measure some factors. But there are other factors that are terribly important. There's no precise numbering where you can put to these factors. You know they're important, you don't have the numbers. Well practically everybody just overweighs the stuff that can be numbered, because it yields to the statistical techniques they're taught in places like this, and doesn't mix in the hard-to-measure stuff that may be more important. That is a mistake I've tried all my life to avoid, and I have no regrets for having done that."

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The problem with DCF is that it fails to consider the balance sheet. A company loses $1 every single year for 100 years. Fair value by DCF calculator appears to be negative. It has say $1 billion in equity. Does anybody really believe such a company (which loses $100 over 100 years) has a negative fair value? It may not be worth much more than book, maybe even less, but definitely not negative.

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Al,

 

You very well may be right about this. It is well reported that the market turns before overall ecomomy and that may be what we are seeing. But...I HAVE NO EARTHLY IDEA. There are a plethora of factors at work here and I cannot tell how this will play out. 5-7 years down the road I do feel that things will be certainly bettter and will have returned to a sense of normalcy, but what these next few years look like, market-wise, I have no idea.

 

Interestingly, I have been buying LUK (too early in retrospect in the low to mid 20's) and WFC (Luckily at a price closer to the bottom).

 

-Crip

 

Crip, as usual. I couldn't agree more. I don't know neither about the economy recovery. That being said, if history serve us well, 5 to 7 years down the road we should be in a better situation.

 

Regarding your investments, I've also been buying LUK since last few months. I was very tempted to pull the trigger on WFC when it was below 10$ per share. It has what seem to be a conservative management, a good track record, a good corporate culture, etc. but in the end this business is outside of my circle of competence and I've learned to avoid these kind of businesses even if some of the greatest value investors own them. And they say that if you don't know jewelry, you should know the jewelrer, but I don't know enough about WFC top managers to invest in it.

 

Cheers!

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Guest Broxburnboy

Claims that most of the risk in the US banking system resides in the top 4 banks

 

Maybe go long the strong regional banks and hedge by shorting Citi or one of the others:

 

Citibank short interest:

http://www.nasdaq.com/aspxcontent/shortinterests.aspx?symbol=C&symbol=CDE&selected=C

 

Stress ratings for US banks by Institution of Risk Analysis:

http://www.institutionalriskanalytics.com/media/news_030109.pdf

 

 

 

 

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Claims that most of the risk in the US banking system resides in the top 4 banks

 

Maybe go long the strong regional banks and hedge by shorting Citi or one of the others:

 

Two things:

 

First, I have been thinking about the regional banks as well. But if commercial real estate is the next to tank it will have a huge impact on regional banks as IIRC they have the most exposure? The implosion at what I thought was a sound reit like KIMCO makes me wonder what the next shoe to drop will be. Gut feeling I have says it isn't over yet.

 

Second, how do you do the quote thingy? (sorry to be so technical  :-[ )

 

cheers

Zorro

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Great post Kyleholmes! What your talking about is also referred to as "garbage in, garbage out." I believe thinking about the structure of the industry and the sustainability of the free cash is really an excellent insight. Also analysts that have covered an industry for a long time have real advantage in having experienced one or several industry cycles.

 

I love that "physics envy" quote--the human brain is an amazing thing. I would highly recommend this radio program, RadioLab's episode on Choice... there is stunning segment in the show on a study showing that when people had to hold seven rather than two number in their memory, their impulse control decreased significantly. Quite surprising, to me at least.

 

http://www.wnyc.org/shows/radiolab/episodes/2008/11/14

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Claims that most of the risk in the US banking system resides in the top 4 banks

 

Maybe go long the strong regional banks and hedge by shorting Citi or one of the others:

 

 

Second, how do you do the quote thingy? (sorry to be so technical  :-[ )

 

cheers

Zorro

 

Block the section you want and then hit the insert quote button on the upper right side of the part you are quoting.  Took me a while too.  Former techhead... now a luddite. :-[

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This is just a bear market rally, & of course - we're not market timers!

 

There is a global & pressing need for a significant market rally, & we would suggest that at least 1 objective of the recent G20 summit was to produce exactly that. Desirable, but dangerous to your wealth.

 

We all acknowledge that these aren't 'normal' times, yet we continue to apply all the 'normal' metrics.

- Bear market rally's are typically 15-20% & the deeper the market fall the bigger the rally; so why would we expect this one to not be at least 25-30% ? 

- Yes, capital mkts do lead main street by 6-9 months; but with the extraordinary amount of stimulus in the system, why would we not expect this to shorten to 4-6 months this time around ? ie: if the 'recovery' is scheduled for Q4 - shouldn't the 'real' rally be late Q2 or Q3, & not now ?

 

Consider that Q1 results are about to be announced

- MTM rules have just been changed, & most would argue that the Q1 result is going to be financials looking a lot better than they really are. Did XYZ bank truly make a Q1 profit, or did they get a little 'help' ? - & how much should I discount them for that uncertainty.

- During Q1 most commodity prices fell, far less was sold, & there were significant job losses. Net of severance provisioning you would expect that most firms will be reporting only a small profit, or break-even, at best. A reality quite different from the 'hope'.

 

Case in point: PDS. O/G services company that is a market leading indicator. Closed 04/03 @ $C 4.25.

- There was a recent unit issue @ $US 3.75 ($C4.25) that caused 30% dilution. For the people who sold it, there is a pressing near-term marketing need to see PDS trade at/above $C4.25. If you believe the 'bottom' was $C3.00 or $C3.50, the current premium is 20-42%. Need + significant premium

- PDS's annual high typically occurrs in Q2 following release of the current drilling seasons results. But we know that drilling activity was at record lows, drilling rates were severely discounted, mud season has started early, & that merger integration expenses must be occurring. Why would you not expect a very rude Q1 result ?  Reality reality quite different from the 'hope'.

 

Yes there have been some material improvements, but will they survive the expected Q1 'reality check' ?

 

Unlikely.

 

SD

 

 

 

 

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The problem with DCF is that it fails to consider the balance sheet. A company loses $1 every single year for 100 years. Fair value by DCF calculator appears to be negative. It has say $1 billion in equity. Does anybody really believe such a company (which loses $100 over 100 years) has a negative fair value? It may not be worth much more than book, maybe even less, but definitely not negative.

 

SC, the problem with your scenario is that the assets of the company are being misallocated. If you have control, or are following the coattaills of a smart activist, then the balance sheet can be unlocked. If not, see ValueVision (VVTV) as an example of what a worthless board can do to a company.

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