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All Roads Point to Cash? What does the board think


Myth465
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I think those of us who decided not to fight the fed have done quite well over the last 6-9 months. With Fed support coming to an end and pretty much everyone (Gross, Grant, Watsa, etc.) I follow with the exception of Buffett cautious, perhaps its time to raise cash.

 

Combine the above with the fact that - I dont see any great bargains, dont see any great sector plays outside of Banking / Finance, and I dont see any deep value outside of Japan. There are some great long term coin flip bets out there which may deserve some capital (LVLT, MBIA, a few in the oil in gas space), but no no brainers that I see. Everything is up. I even read an article which said that net-nets have pretty much gone away when I remember them being a good 15-20 consistently.

 

I am going to hold what I have, but do you all think its time to raise cash. I have a good inflation hedge (ROIC and Oil and Gas), and what I think is a great deflation hedge (ROIC), a few nice growth stories (ATSG), and some other odds and ends (WDC, SSW Calls, and other stuff).

 

I dont plan on selling too much, but I have a bit of cash coming in and I plan to try to hold onto it. I think summer will be interesting. The macro situation just looks pretty bleak from where I sit. I dont tend to invest based on macro, but what happens when inflation moves up, and rates go up to a reasonable level. What happens if we get deflation. I dont see this tightrope walk continuing. Eventually a gust of wind knocks you off and things get interesting.

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Myth, Respectfully, I disagree completely, except on the lack of values.  It is the third year of a presidential term.  QE may get reduced but it will not be eliminated until Obama wins the next election. They want jobs and they will get their jobs.  That will provide the next leg up to where the Fed can back off. 

 

IMO, Inflation is being caused worldwide by government stimulus.  If you remove the effect of government spending I am betting we are in a deflation right now. 

 

I dont see interest rates going up for years at this point.  So, Companies that get cheap cash and turn it around into profits and pay it back as dividends are a good bet.  I am not and have never been a dividend pig.  My total portfolio is generating upwards of 3% a year on dividends right now.  I bought some SSW on the dip the other day - 4% dividend.  Will buy some more BAC.WS this coming week as they work through their mortgage problems - the thread discussing these is buried way back somewhere.

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Maybe I will go off a cliff but there still appear to be many bargains out there namely: SGA (getting closer to FV), SALM, LNET, FLL, MGAM, SURW, OWW, WOLF, AM, CKEC, NRG, GRVY, TSYS, CSC, ITEX, WDC, LXM and SSW.  All of these sell @ FCFx less than 7x and don't include some of the interesting financial like AGO, MBI, BAC.WTA and  PNC.WT.  Warning my portfolios typically go down by the same amount as the market but up more.

 

Packer

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Maybe I will go off a cliff but there still appear to be many bargains out there namely: SGA (getting closer to FV), SALM, LNET, FLL, MGAM, SURW, OWW, WOLF, AM, CKEC, NRG, GRVY, TSYS, CSC, ITEX, WDC, LXM and SSW.  All of these sell @ FCFx less than 7x and don't include some of the interesting financial like AGO, MBI, BAC.WTA and  PNC.WT.  Warning my portfolios typically go down by the same amount as the market but up more.

 

Packer

 

I am with Packer on this one...

 

I only have one issue though. As we have seen, even cheap companies go down with a lowering tide, but, you hate to not own them... It is pretty frustrating. The best example of this was SNS a few years ago at 9, then 7, 6, 5, 4, and finally, 3 bucks a share... There is no doubt that it was undervalued the whole time, but, it just kept going down. Their debt concerns probably caused a lot of it, but, I can't help but think there was some forced selling a few months before the march lows.

 

Hell, even ITEX got hammered!

 

Personally, I am scared for the dow, but, in my own portfolio feel safe, despite realizing that it will probably get beaten down in the coming year or 2. What's a guy to do? forgo a 30-50 cent dollar to try to get one for 15 cents!? (and I am not asking this rhetorically)

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I’ve let me foot off the gas considerably the last couple of day.  Sold all of my SD position and reduced another position by half.  Currently sitting around 33% cash and will wait for better times to deploy it.  The bar has been raised quite a bit over the last year; prefer not to see how high I can hurdle.  I’ll just wait for the game to come back to me and the prices I’m willing to pay.

 

If the next guy can continue to make a good return over the next year good for him.  

 

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Guest broxburnboy

Those who have held  USD cash over the last 40 years (since 1971 - decoupling from gold) have suffered a severe loss of purchasing power in any real sense (unless of course you saved silver coins from that era).

The value of the USD  is about to be further dilluted by the raising of the debt ceiling and subsequent quantitave easing. (there is no other alternative save canceling all foreign wars, cutting back transfer payments to consumers, precipitating an instant deflationary depression.)

Those who hold USD cash over the next little while are subject to an instant dillution of the buck's purchasing power (think of it as taxation by monetary inflation to replace the real tax dollars the US taxpayer is currently welching on). This is why the Main stream media is suggesting that you hold cash and insisting that there is no CPI price inflation currently... someone needs to buck up.. .

There is some uncertainty in whether the FED/gov't will allow a small stock market retreat (by withholding the heretofore ongoing QE)  in order to get the general consent for more QE it needs... in which case holding USD cash may be a good idea for the short term. Personally, I think it is a set up for cash holders to take the tax hit.

It would probably be best to hold some other currency like the CDN, the AUS, or if you can get hands on some.. Chinese currency.

I am of course sticking with gold, silver and avoiding the USD like a bad cheque.

 

 

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Guest bengrahamofthenorth

I am raising cash as well. I am not finding too many no brainers. I am also pretty cautious of so many valuation ratios (10 year pe, q ratio) being so high. 

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I fear holding a lot of cash over the long term-as the government will devalue this.

 

I am holding more cash than I would like (I have had some new cash coming in to be invested)+ am searching + waiting for long term opportunity. I have been buying small amounts of companies mentioned on this board (FTR, BRK, BMO). I have a wish list with target price.

 

I would like to hold 20% cash to take advantage of buying opportunities/pullbacks/corrections/off chance of deflation.

 

Heard a story last week(to best of my memory/number could be off a bit)--- in 1960 you could buy 1 gallon of gas for a quarter. With that same quarter you can now buy 2 gallons of gas (that would have to be a 1960 silver quarter)

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I tend to ignore my own and others macro predictions, I mean what the hell do I know lol. I am a classic worry wart, so I focus on Parsad and others advice of buy cheap / sell dear. I like ok businesses at 5x FCF and turnarounds. Perhaps thats too much to ask for in a no risk free return world.

 

The huge kicker for me is the lack of no brainers / places to put my capital. I review every VIC idea (3 months late), and most value ideas on many blogs / gurufocus. I also do a bit of screener (very light), and look for cheap sectors (like energy during Horizon). The only thing of interest right now are the packer style stocks. High cash flows and high leverage. Value goes up, as debt goes down. I like them but cant / wont build a portfolio around them. I have 2-3 of them (FTR) and am looking at CKEC and RDI as well to add. I also own (SSW, WDC) and am looking at leaps on the bond insurers from that list Packer gave.

 

CSC - Looks interesting, tech seems to feature. High cash, low / no net debt, high cash flows across the board, must be some unwritten rule in the tech space.

 

Uccmal - The election year bet has gotten me pretty far. I just dont know how long they can walk the tightrope. If the fed sees inflation where they dont want it I think they will be forced to react? I like what I own alot, but dont see much value going forward in new ideas. PEs arent cheap at 15x, and margins are at all time highs. Something has to give at some point (I am sure this post was made in 1995 - 1997). You are probably right, it will happen after 2012.

 

broxburnboy - I agree which is why I have been mostly fully invested. That and a surplus of places to put cash. Energy was deeply undervalued but has really run. I may not sell, but thats the last real sector to run. Now we have retail and banking. I dont like either. Cash would be temporary until things go on sell, but that could be a long wait. Who knows.

 

 

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Fed support coming to an end could affect stock market liquidity but since government intervention don't have a lot of effect on the economy itself , I doubt this support coming to an end will have an effect on GDP..

So in this environment, why not invest in solid companies trading at bargains and 'hedge' by shorting SPY. This way you eliminate market risk.

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Guest broxburnboy

broxburnboy - I agree which is why I have been mostly fully invested. That and a surplus of places to put cash. Energy was deeply undervalued but has really run. I may not sell, but thats the last real sector to run. Now we have retail and banking. I dont like either. Cash would be temporary until things go on sell, but that could be a long wait. Who knows.

I think at this point it may be a smart move to shift out of some of the frothier commodities and into some of the forgotten and lonely.

Like forest products (huge anticipated surge on lumber demand from Japan) and natural gas (the price ratio between natgas and oil per energy unit is way out of whack in favour of oil). The Vertex Funds'  monthly commentary got me thinking in this direction from opposing points of view:

 

http://www.vertexone.com/commentary/vertex-fund.html

http://www.vertexone.com/commentary/vertex-managed-value-portfolio.html

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People say don't fight the Fed.  I say don't fight the election cycle.  Mr. Obama wants to get re-elected at all costs. Nothing else matters: not the deficit;  not inflation;  not the devaluation of the $;  not the fact that seniors get nothing on their savings because interest rates are kept artificially low....... 

 

We will have QE-3, the debt cieling will be raised, the stock market will be propped up.  The public will be made to "feel" good. Isn't it great to live in a centrally planned economy.

 

I don't believe there is anything to worry about until after November 2012.

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I was about 28% cash at the end of Q1 (go to http://mevsemt.blogspot.com/2011/04/q1-2011-returns.html and click on the screen shoot to enlarge).  However I've recently added money to my portfolio (http://mevsemt.blogspot.com/2011/04/adding-money.html), putting me around 40% cash. 

 

My watch list is pretty thin right now, although I do think some of the big banks look interesting...

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Due to my foot surgery on the 4th, I've been on pretty heavy dosages of oxycontin & oxycodone.

 

I've spent all of this time lying on my back in bed thinking of reducing risk in my portfolio and moving at least a third into higher quality blue chips.  I would rather be in MSFT or JNJ than cash.

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When I factor in paying taxes if I raise cash, then I'm not inclined to make any changes in my taxable accounts at this time. Besides I see lots more upside to what I'm holding.  

 

We could easily see a decline during the summer doldrums, but I expect another leg up toward the end of the year. QE3 will prevail, jobs are coming back and the economy is strengthening...slowly.  My ~40% fixed income position also provides some downside protection, as well as readily available cash if things get crazy or Mr Market hands me a bargain.

 

 

 

 

 

 

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Hunt and Van Hoisington argue the opposite.  They contend that QE2 has been a failure and that ending QE is paramount for recovery.  Further rounds of QE will put US into recession.  When corporate margins are being squeezed, FCF and other profitability measures are reduced which indicates why many of us are struggling to find adequate pricing for stocks.  Personally, I've been raising cash for several months as profitability has weakened.  My opinions on commodities have been stated a few times.

http://www.hoisingtonmgt.com/pdf/HIM2011Q1NP.pdf

 

-O

People say don't fight the Fed.  I say don't fight the election cycle.  Mr. Obama wants to get re-elected at all costs. Nothing else matters: not the deficit;  not inflation;  not the devaluation of the $;  not the fact that seniors get nothing on their savings because interest rates are kept artificially low.......  

 

We will have QE-3, the debt cieling will be raised, the stock market will be propped up.  The public will be made to "feel" good. Isn't it great to live in a centrally planned economy.

 

I don't believe there is anything to worry about until after November 2012.

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Due to my foot surgery on the 4th, I've been on pretty heavy dosages of oxycontin & oxycodone.

 

I've spent all of this time lying on my back in bed thinking of reducing risk in my portfolio and moving at least a third into higher quality blue chips.  I would rather be in MSFT or JNJ than cash.

 

Eric, please give your evaluation of MSFT.  It's our second largest holding right now, partly because it seems to be a good value, but also because of the much higher proportion of the QQQ's that will be allocated to MSFT in two weeks with the unusual rebalancing of that index.

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I have looked at MSFT leaps on and off for about a year. It seems like an ok place to park cash but whats the catalyst (primarily related to leaps not common). Regarding common, I agree its better than cash.

 

TWA - you tend to move alot, but are always in interesting investments.

 

omagh - thanks for the Hoisington link. He is always interesting to read. He either has been early or wrong. Based on the quality of people who read / listen I would guess early. What you wrote seems interesting and counter intuitive. I plan on reading it tonight.

 

----

 

I said about 6 months ago that I hated the market, but love my portfolio. I still like my portfolio though a bit less, but still hate the market. It should be interesting. I wont be selling, but this new cash pile wont slip through my hands as easily.

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H & H are interesting reading, but have very little impact on portfolio decisions.  Portfolio decisions are all about finding undervalued securities with margins of safety, sell when estimated value is reached, and periodically remove the deadwood.  Undervaluations are few at the moment, so I'd rather sit in cash and wait as new cash comes in or is raised from securities sales.  

 

In Canada, about 50% of our local stock market is tied to commodities which have had a cyclical surge based on sentiment and currency shifts with a dollop of leverage from speculators.  In the local stock market, it's prudent to have dry powder for the potential mispricings when commodities inevitably revert to the mean as people rush to raise capital in falling markets.  Meanwhile, securities bought at good discounts continue to grow, so that I participate in the upside with high-quality businesses, but position well for other events.

 

This paragraph from H & H gave me some pause thinking that the banks have found a new way to increase leverage using the Fed's balance sheet:

 

According to the outstanding monetary researcher, Rod McKnew, Ph.D. of Newedge, the Fed facilitated inflation through a more direct channel than expectations. He points out that reserve balances, which are not money, increased much more than money. In the past two years, M2 rose 6% while total reserves jumped 85%. But this does not mean that unused reserve balances had no influence on prices, and in particular on commodity prices. To quote McKnew, “In a world of advanced derivatives, high cash balances are not required to take speculative positions. All that is required is that margin requirements be satisfied.” With reserve balances at unprecedented levels, margin risk is minimized for those market participants who wish to take positions consistent with the Fed’s goal of higher inflation and have either direct or indirect access to the Fed’s mammoth reserve balances, which can satisfy margin requirements."

 

There are always unintended consequences of Fed actions, but is this a productive use of capital?  It's a siphoning of wealth from others, not wealth creation.  Long-term wealth creation in commodities businesses is substandard, but obviously a necessary part of a functioning economy.

 

-O

 

omagh - thanks for the Hoisington link. He is always interesting to read. He either has been early or wrong. Based on the quality of people who read / listen I would guess early. What you wrote seems interesting and counter intuitive. I plan on reading it tonight.

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The line about savers getting short-changed by Fed inflation policy amuses me. It's the most misunderstood cliche, makes one sound smart at cocktail parties but since when are cash holders the only savers? Since when is putting your money in the bank the only form of saving? What about the countless people lending their savings to the US government or investing it in their own business as an entrepreneur or buying stocks? This is 100% saving as well!

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The line about savers getting short-changed by Fed inflation policy amuses me. It's the most misunderstood cliche....

 

Well I think you might agree that the US has a large and quickly growing senior citizen class that is retried, or will shortly be retired. These people have no desire to "play" the stock market with their Principle. They want to invest it "safely" for income, particularly after what happened during the last Crash. That principally means Treasuries, CDs, etc. This large and growing segment of the population is getting killed by Fed induced low interest rates, the collapse in the value of the dollar, and the resultant increase in the cost of living, i.e. food, fuel, gas, etc. 

 

If you know anything about economic history when you have a crisis and collapse due to risky behavior the price (interest rates) of capital is supposed to go up not down. Capital becomes scarse not plentiful. Companies that engaged in risky behavior go bankrupt and get sold to the smart people that still have the scarse Capital. The Fed has corrupted the natural healing process.  Make no mistake there will be severe consequences.

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