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How Bad Is Europe?


ragnarisapirate
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How bad to you think the situation in Europe is?  

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  1. 1. How bad to you think the situation in Europe is?

    • I don't care about Europe. Stocks are Cheap.
    • Europe will cause bad things...
    • The crisis won't be bad, if it even happens.
    • I don't care about Europe stocks are expensive.
    • Sitting on cash/t-bills/your preffered "safe" instrument.


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Thought I would throw out a few, non-number scenarios... Feel free to post with your commentary!

 

Anybody think that we might get back to the levels of March 09?

 

I am in the camp of not caring too much about Europe... My stocks seem pretty cheap and I have a fair amount of orders that are out there waiting to be filled. I have also been buying select securities.

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I'm ambivalent about Europe.  I have a hard time even laying out the scenarios for how Europe plays out over the next 6-12 months.  Does a Greek default lead to an unavoidable crack up of the Euro-zone (via defaults in Italy and Portugal)?  What does a scenario with multiple sovereign defaults do to European bank balance sheets?  Can Germany overcome its distaste for bailing out the peripheral Euro spendthrifts and backstop a bailout?  How big would that bailout need to be?  As a practical matter, how does a shrinking or dissolution of the Euro-zone play out?  How linked are US banks and markets to the fallout of a default scenario?

 

Frankly, I can't answer any of those questions with any conviction.  I'm just a guy with a day job trying to make good decisions.  I like my portfolio; my stocks are cheap and financially strong (BRK, MSFT, FFH are biggest holdings).  I have about 10% cash in my account with another 20% available in case of extreme bargains.  And, I have a small hedge in place (SPY puts) mostly as insurance against a return to a sub 1,000 SP500.

 

A replay of 2008 wouldn't kill me, but it would probably make me lose some sleep.  But, I'd have a good store of cash available for bargains in that scenario.  I'd prefer a clean resolution to the Euro debt issues that avoids a messy aftermath, but I'm not even sure what that would look like.

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We are all buying individual businesses for the long-term, correct?  Then any volatility is a good thing, regardless of how painful the short-term effects (1-4 years) may be.

 

Mr. Market is having a tantrum and today's reason for the tantrum is "Will Greece default?"  Do I care?  Nope.  I don't plan on investing my money for a few months or years.  I plan on doing it until I die, and I'm not about to put it into 10 year treasuries yielding less than 2%, when Wells Fargo's annual dividend alone is going to be double or triple that in the next year or two. 

 

If the price of Wells falls to $9 like it did in 2008/2009, all I'll do is buy more.  If the price stays down below $15 for two-three years...who cares...I'll buy more over two-three years.  To put it as simply and succinctly as I can..."I don't care!"  I live a frugal life and make more money than I spend.  If my investments are undervalued for 2 years, 5 years, 10 years...I don't care.  I'll just keep buying more and more over that time. 

 

The phrase for today, and really for all your days as a value investor, should be...yes, that's right..."I don't care!"  Cheers!     

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It looks like Greece is in an unsustainable situation. Europe does does remind me of how things were in 2008 with US banks. In 2008 we knew trouble lie ahead we just didn't know how it would all play out. The US political situation is a mess; with the election coming next year the two parties WILL NOT work together (unless markets go into free fall and the economic situation gets even worse); the markets understand this. Bernanke also is trying to stay neutral.

 

My read is the downside risk to equities is quite high and the probability of it happening is also quite high (more than one would normally expect). I think there is a reasonable chance that the 'smart money' decides that the US Congress and Bernanke need a stock market sell off to get more stimulus approved. Throw into the US mess the mess in Europe and we have an especially wicked situation.

 

In response, I have been getting more cautious. I am now at 20% stocks (mostly BRK but also MSFT & BMO) and 80% cash. I will not be upset if I miss a bull market rally. Right now my focus is on capital preservation.

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Sanj, I do agree with what you are saying.

 

The key is understanding what constitutes 'cheap'. Since 2000 US stocks in aggregate have been going sideways. Companies are growing earnings. The multiple that the market is willing to pay for those earnings has been dropping.

 

I just wonder if what we think is cheap (based on benchmarks based on the past) does not continue to get driven lower. After all, something is only worth what soneone else is willing to pay for it.

 

I am trying to find that balance between being a value investor, preserving my capital and being respectful of what the future may hold. We certainly live in interesting times!

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How about, "I care about Europe, nonetheless, stocks are cheap."  Largely invested, but keeping a little bit of dry powder around in the event we reach a point of maximum pessimism.  Doesn't feel like we are there quite yet.  Maybe a default/bank failure will get us there, or maybe it won't.

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As always, Howard Marks has a great summation of the current situation:  http://www.gurufocus.com/news/144983/howard-marks-of-oaktree--whats-behind-the-downturn

 

He appears to have many of the same questions about Europe and how things play out.

 

And Parsad, I don't disagree with you much about volatility and opportunity.  But, my current position is that of heads I win, tails I don't lose too much.  I'll be better positioned to capitalize on a significant downturn (if it occurs), while retaining good upside potential of my current holdings.  I'll sleep a little better forgoing more potential upside while insuring against significant pain to the downside.

 

A question for you though.  Aside from your own ability to deal with extreme volatility (or a replay of 2008) what about your responsibility to your clients?  Que sera sera is fine when you make that a conscious choice, but your investors may not be so sanguine.  Not intended as a slight, or a critique of how you fulfill your fiduciary responsibilities to your investors, just curious about if/how your investors feel about the volatility and how that informs your decision making.

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"Our job is to protect capital first and get a return second" - Steven Romick, First Pacific Advisors

 

And I think this is a good quote as well -- appropriate for all investment approaches:  "There are only two losses one can experience: capital and opportunity.  If we can protect the capital, there will always be another opportunity."

 

 

And no doubt the time to buy is when there is blood in the streets but demand a high MARGIN OF SAFETY from Mr. Market. 

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A question for you though.  Aside from your own ability to deal with extreme volatility (or a replay of 2008) what about your responsibility to your clients?  Que sera sera is fine when you make that a conscious choice, but your investors may not be so sanguine.  Not intended as a slight, or a critique of how you fulfill your fiduciary responsibilities to your investors, just curious about if/how your investors feel about the volatility and how that informs your decision making.

 

The volatility comes with investing in equities.  We have very good partners who almost all have long-term horizons.  That's what happens when you pick individual partners rather than institutional partners.  Also, this is nothing compared to 2008/2009, and we only had one redemption back then.  And that was because one of our partners wanted to buy a home during a depressed real estate market. 

 

All of our partners handled volatility well during that crisis, and I don't expect their behavior to be any different this time around.  Anyway you slice it, they were better off staying invested in our fund, than redeeming their capital.  Those that invested $100K in May of 2006, had $185K at June 2011...compare that to the S&P500 or T-bills! 

 

And the markets were as rambunctious as they had been in 70 years.  The friggin' credit markets had seized up and had maybe 10 days of liquidity left!  Some of the largest financial institutions in the world went under.  Panic was as swift and deadly as it has ever been.  But I said the same thing then..."I don't care!"  Cheers!

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I just wonder if what we think is cheap (based on benchmarks based on the past) does not continue to get driven lower. After all, something is only worth what soneone else is willing to pay for it.

 

 

Looks like you are trying to time the market. Like Parsad said, if we can buy dollars for 50c why bother with what the market does in the meantime? Why wait in the iddle hope it gets to 30-40c if IV can increase even in rather depressed times?

I don't see why anyone would be invested 90-100% in May/June and would go to 0-50% now, like I have seen many do lately. Everyone knew about the trouble back then, but no one seemed to care because the Good News Show was on. Now we have our portion of the Bad News Show, so be it.

 

I am long 100% in BRK & FFH because:

 

- I am European but feel much saver invested in dollars (100%), I have been buying all the way up to 1.48 and I am lucky to have some weird hedge effect because of it the last couple of days.

- I will double/triple my investable cash in the next 2-4 years because new funds will be rolling in every month. There will be plenty of opportunity to buy more with new cash.

- I am in it for the long run knowing others are compounding dollars for me.

- If things take a turn for the worst I still have the option to shift to even cheaper opportunities.

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Assets values vapourize while the debts remain, the central bank is rendered insolvent and the burden of debt increases through the Fisher debt deflation cycle or the currency is destroyed. I hope they choose the former and put the bankruptcy courts into high gear. "Bad" doesn't even start to describe it. Soon the incompetents that have been running things will disappear into history and we will likely discover like after the fall of the Soviet empire that the truth was much worse than the propaganda.

 

Those that hold stores of value will have the best investment opportunity of their lifetimes if they can find Buffett's patience like he demonstrated in 1969 and his courage which he used to invest in 1974. Capitalism is dynamic and once they get rid of the incompetents Europe will recover.

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All of our partners handled volatility well during that crisis, and I don't expect their behavior to be any different this time around.  Anyway you slice it, they were better off staying invested in our fund, than redeeming their capital.  Those that invested $100K in May of 2006, had $185K at June 2011...compare that to the S&P500 or T-bills! 

 

And the markets were as rambunctious as they had been in 70 years.  The friggin' credit markets had seized up and had maybe 10 days of liquidity left!  Some of the largest financial institutions in the world went under.  Panic was as swift and deadly as it has ever been.  But I said the same thing then..."I don't care!"  Cheers!

 

Thanks Sanjeev; that's interesting. 

 

Despite my collection of unknown unknowns about Europe, I don't think the situation is comparable to 2008 at this point.  As you note, the Fall of 2008 included seizing credit markets and absolute uncertainty about the financial system.  Europe's debt issues have not yet reached that point (obviously).  My worry is that I can't assign a probability to something equivalent happening as a result of the Euro mess.  And, even if Europe's problems are substantially contained, the value destruction of writing down those assets would, I think, affect the US markets.  So, I'm trying to prepare for a significant down move without giving up too much upside potential.

 

 

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Here are a couple of interesting data points, courtesy of Desmond Lachman in today's WSJ.

 

Fitch Ratings highlighted that as of the end of July, the US money-market industry still had over $1 trillion of direct exposure to European banks -- roughly 45% of money markets' overall assets.

 

The Bank for International Settlement reports that American banks have loan exposure to German and French banks of more than $1.2 trillion.

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We are all buying individual businesses for the long-term, correct?  Then any volatility is a good thing, regardless of how painful the short-term effects (1-4 years) may be.

 

Mr. Market is having a tantrum and today's reason for the tantrum is "Will Greece default?"  Do I care?  Nope.  I don't plan on investing my money for a few months or years.  I plan on doing it until I die, and I'm not about to put it into 10 year treasuries yielding less than 2%, when Wells Fargo's annual dividend alone is going to be double or triple that in the next year or two. 

 

If the price of Wells falls to $9 like it did in 2008/2009, all I'll do is buy more.  If the price stays down below $15 for two-three years...who cares...I'll buy more over two-three years.  To put it as simply and succinctly as I can..."I don't care!"  I live a frugal life and make more money than I spend.  If my investments are undervalued for 2 years, 5 years, 10 years...I don't care.  I'll just keep buying more and more over that time. 

 

The phrase for today, and really for all your days as a value investor, should be...yes, that's right..."I don't care!"  Cheers!   

 

Sanjeev - I want to take a moment to appreciate your attitude. It is the attitude that I aspire towards but have not yet achieved fully. I am currently reading "The Most Important Thing" by Howard Marks (excellent book) and he talks about the inevitability of all sorts of cycles in the market, and how basically you will never be able to predict the future, but you can be sure that the pendulum of the market is always in motion and that somewhere people are always overreacting to that natural motion, which is what creates the greatest opportunities for the investor who can truly keep his emotions in check. Over simple? Maybe, but there is an acorn of truth that is impossible to ignore.

 

 

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Sanjeev - I want to take a moment to appreciate your attitude. It is the attitude that I aspire towards but have not yet achieved fully. I am currently reading "The Most Important Thing" by Howard Marks (excellent book) and he talks about the inevitability of all sorts of cycles in the market, and how basically you will never be able to predict the future, but you can be sure that the pendulum of the market is always in motion and that somewhere people are always overreacting to that natural motion, which is what creates the greatest opportunities for the investor who can truly keep his emotions in check. Over simple? Maybe, but there is an acorn of truth that is impossible to ignore.

 

Hi Alpha, I haven't read that book, but I think that analogy of a pendulum is exactly correct.  I would take it one step further: 

 

The tip of the pendulum swings back and forth, but you notice how the base at the end of the stem is always in the same place.

 

In other words, market sentiment of intrinsic value is the tip (swinging wildly), but actual intrinsic value is the base (steady).  Cheers!

 

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Mr. Market is having a tantrum and today's reason for the tantrum is "Will Greece default?"  Do I care?  Nope. 

 

If the price stays down below $15 for two-three years...who cares..

 

If my investments are undervalued for 2 years, 5 years, 10 years...I don't care.  I'll just keep buying more and more over that time. 

 

The phrase for today, and really for all your days as a value investor, should be...yes, that's right..."I don't care!"  Cheers!   

I imagined that narrated by Randall and it got even more awesome:

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Hi guys,

 

I wouldn't be so glib about what's happening in Europe.  Don't discount the possibilities of the Fear and loathing that we experienced a few years ago. Prem has his portfolio set up in anticipation of this we shouldn't forget and the possibilities are real.

 

Also just to look at the FFH case as we are familiar with it. If financial institutions get hit in Europe remember who owes us money. We have 3.3 billion in unsecured recoverables. These institutions were largely deemed too big to fail a few years ago but maybe haircuts will come this time...

 

If we have a sovereign default domino in Europe it may well harm even our beloved FFH.

 

If we do see true blood in the streets, I want to make sure that I have capital available to take advantage of it.

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If we have a sovereign default domino in Europe it may well harm even our beloved FFH.

 

Greece should default.  It would be the best thing for Europe.  But when it happens, the ECB should step in and do the same thing that the U.S. did with banks here.  Go to all of the exposed financial institutions and tell them they are going to take a haircut...enough to hurt and bleed, but not enough to kill. 

 

The ECB buys the Greek soverign debt from the banks at 50% of the price.  Restructure Greece, collateralize their debts with State assets, and have them pay back the ECB.  The debt is now 50% of what it was originally, the banks write it off but survive, and Greece pays back part of their obligations at the ECB's cost.  Cheers! 

 

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If we have a sovereign default domino in Europe it may well harm even our beloved FFH.

 

Greece should default.  It would be the best thing for Europe.  But when it happens, the ECB should step in and do the same thing that the U.S. did with banks here.  Go to all of the exposed financial institutions and tell them they are going to take a haircut...enough to hurt and bleed, but not enough to kill. 

 

The ECB buys the Greek soverign debt from the banks at 50% of the price.  Restructure Greece, collateralize their debts with State assets, and have them pay back the ECB.  The debt is now 50% of what it was originally, the banks write it off but survive, and Greece pays back part of their obligations at the ECB's cost.  Cheers!

 

If they would just break up the Euro, then, this would probably not be nearly as bad either...

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