Death of equities?

[enoch01]

Perhaps we're getting close?  Will this quote in the widely-read zerohedge mark an inflection point?  I don't know.  Retail is continually withdrawing, so I take that as a positive.

 

Put a fork in stocks: America's infatuation with the stock market is officially over.

 

http://www.zerohedge.com/news/14th-consecutive-week-stock-outflows-retail-refuses-go-back-stocks-no-matter-what-market-does

 

 

[Parsad]

Should read death of equities and housing, as no one will ever want to own either again...correct?!  ;D  Cheers!

 

[Guest]

I wonder if Businessweek will ever have that on their cover again. That was epic.  8)

[Green King]

If that is correct this will be a new golden age for value investing. ;D

[Ballinvarosig Investors]

Perhaps we're getting close?

I don't think so.

 

The months following the Lehman Brothers collapse was the closest I have seen to a "Death of Equities" moment. I remember the stunned silences on CNBC as stocks continually hit new yearly-lows and later watching one acquaintance have a nervous breakdown after getting a margin call on a CFD he had taken out.

 

Today, the market is a very different place. There is so much trash in the commanding ridiculous prices (Groupon, Salesforce, Tesla, etc.), not forgeting the mooted $100 billion Facebook floatation. You still have commodities at very high levels and even the stalwart mega-caps (PG, KO, etc.) are now looking at close to fair value. The US market certainly isn't particularly cheap on an overall level, especially when you take into consideration the usual value metric of stock market size to GDP, historic PE's and the long-term treasury yield. I think there is probably a little better value in Europe; Total, Nestle, EDF and a few other large caps are at reasonably cheap prices. There is certainly nothing to suggest a firesale anywhere at the moment.

 

I am probably asking too much to see a return to 2008 when investors were puking their guts up and we saw real capitulation. A disorderly Euro exit, or something that would spook the markets is just what I would like to see.

[Parsad]

I am probably asking too much to see a return to 2008 when investors were puking their guts up and we saw real capitulation. A disorderly Euro exit, or something that would spook the markets is just what I would like to see.

 

It's very unlikely you will see that.  There is just too much activity by federal governments and treasuries to allow such a collapse again.  Any significant hint of something happening, and you will see intervention.  It is far more likely that markets will tread sideways within a range for a period of time, and then slowly move up as deleveraging continues and valuations drop over time. 

 

I stated a while ago that it is unlikely you will see the S&P500 at 1000 again.  Not that it can't happen, but because as we get anywhere near that, governments step in.  It would take some completely unknown shock to the system to cause a collapse like 2008...Chinese banks going under, nuclear attack, massive earthquake in Los Angeles, etc. 

 

You've got a very slow recovery occurring in the U.S., some attempts at stabilization in Europe and China easing monetary policy.  It's unlikely that you will see S&P500 670 again in the next six to twelve months or perhaps even in the next couple of years.  If it is/was going to happen, now would be the time.  If you see any progress with Europe increasing financial ties across the Union, then it is unlikely we will see a significant drop in markets.  But hey, stranger things have happened!  ;D  Cheers!

[MrB]

I still think in the period from 2008-2018 the losers and winners will be broadly separated by those that focused on the macro and as a result were mostly sitting on the sidelines, because it will be volatile without taking any significant direction up or down over that period. Then there will be those that kept their heads down and grind it out by focusing on the fundamentals, whilst not being overly greedy or fearful.

 

I prefer to keep my head down and ignore the noise.

[Uccmal]

I still think in the period from 2008-2018 the losers and winners will be broadly separated by those that focused on the macro and as a result were mostly sitting on the sidelines, because it will be volatile without taking any significant direction up or down over that period. Then there will be those that kept their heads down and grind it out by focusing on the fundamentals, whilst not being overly greedy or fearful.

 

I prefer to keep my head down and ignore the noise.

 

I am with you mostly, although I trade 15% or so into the rallies, and buy back in on the dips.

[Ballinvarosig Investors]

I agree with you Parsad. What we saw in 2008 and 2009 was likely to be a one-time, generational event. Today, there are too many folks who won't be as fearful the next time we get a crisis, and who will stand in and prevent the market from falling to those kinds of levels again. The European debate is also probably overblown at this stage. If you excuse the expression, it's a "known unknown" and the market isn't even likely to react too badly to an organized break-up of the Eurozone.

 

Unlike some on here, I think it's madness to be fully invested in this market though. There will be surprises in the market and buying opportunities down the line. A European or Chinese bank imploding is certainly not off the cards and could cause panic. Weakness in the Chinese economy could cause the mother of all ruminations as highly-dependent emerging economies could take a pasting. Who knows when we'll get the next crisis but I will wager we won't be waiting more than 2-3 years for one, and that the folks with dry powder who are capable of holding their noses will do quite well.

[Ben Graham]

Perhaps we're getting close?

I don't think so.

 

The months following the Lehman Brothers collapse was the closest I have seen to a "Death of Equities" moment. I remember the stunned silences on CNBC as stocks continually hit new yearly-lows and later watching one acquaintance have a nervous breakdown after getting a margin call on a CFD he had taken out.

 

Today, the market is a very different place. There is so much trash in the commanding ridiculous prices (Groupon, Salesforce, Tesla, etc.), not forgeting the mooted $100 billion Facebook floatation. You still have commodities at very high levels and even the stalwart mega-caps (PG, KO, etc.) are now looking at close to fair value. The US market certainly isn't particularly cheap on an overall level, especially when you take into consideration the usual value metric of stock market size to GDP, historic PE's and the long-term treasury yield. I think there is probably a little better value in Europe; Total, Nestle, EDF and a few other large caps are at reasonably cheap prices. There is certainly nothing to suggest a firesale anywhere at the moment.

 

I am probably asking too much to see a return to 2008 when investors were puking their guts up and we saw real capitulation. A disorderly Euro exit, or something that would spook the markets is just what I would like to see.

 

Perhaps we're getting close?  Will this quote in the widely-read zerohedge mark an inflection point?  I don't know.  Retail is continually withdrawing, so I take that as a positive.

 

Put a fork in stocks: America's infatuation with the stock market is officially over.

 

http://www.zerohedge.com/news/14th-consecutive-week-stock-outflows-retail-refuses-go-back-stocks-no-matter-what-market-does

 

 

 

I still think in the period from 2008-2018 the losers and winners will be broadly separated by those that focused on the macro and as a result were mostly sitting on the sidelines, because it will be volatile without taking any significant direction up or down over that period. Then there will be those that kept their heads down and grind it out by focusing on the fundamentals, whilst not being overly greedy or fearful.

 

I prefer to keep my head down and ignore the noise.

 

All that matters in the investing world is: buying a business at a discount, thereby, giving the owner a margin of safety. Value investors only focus on taking advantage of Mr Market when he offers to sell his shares in the business for more or less than intrinsic value.

 

Sell the business back to Mr. Market if he offers you a price that is close to or over the intrinsic value that you previously paid for the business.

 

These are the only principles I adhere to.

[Uccmal]

Unlike some on here, I think it's madness to be fully invested in this market though. There will be surprises in the market and buying opportunities down the line. A European or Chinese bank imploding is certainly not off the cards and could cause panic. Weakness in the Chinese economy could cause the mother of all ruminations as highly-dependent emerging economies could take a pasting. Who knows when we'll get the next crisis but I will wager we won't be waiting more than 2-3 years for one, and that the folks with dry powder who are capable of holding their noses will do quite well.

 

I got news for you.  We are in the next crisis.  This is what its all about.  I am not suggesting anyone be fully Invested but to use the macro as your guide is madness.  I am fully invested and have been for 15 years straight.  There are times like the summer of 2007 when i downside protect with Spy puts. 

 

I have a few Well out of the money Spy puts right now that I bought recently on up days like yesterday.  To complete the hedge I hold around 40% ffh.  If there is a great EU unravel in the days or weeks ahead I will sell the puts and watch FFH go up, while my Us financials tank, and I buy more of them. 

 

Madness to buy jpm, wfc, bby, ssw, even ffh at multi-generation lows, indeed.

[Ballinvarosig Investors]

I have been civil, so I don't understand why you are taking such a disrespectful and sarcastic tone with me. You've also decided to put a few words into my mouth to try and back your argument up, this does you a disservice.

 

What have I said that you disagree with? That one should not keep cash on hand for opportunities? That one should not take advantage of a market sell-off driven by macro events? That one should not fish in the cheapest markets?

[SharperDingaan]

 

It is a little more accurate to include our hedges when we say "fully invested".

 

Taking this approach there is a lot to be said for keeping your equity portion fully invested (as your price level view could be wrong), but you will make your money (short term) from adding/lifting your hedges as you see fit.

 

How much you have allocated to equity, versus prior years, is a different issue based on risk tolerance. If you think you can hedge well, you may be willing to tolerate a higher equity weighting.

 

SD 

[alpha231616967560]

I am a bit simple, but I have always just done my best to purchase the most attractive possible businesses at fair value or preferably much less and held them through whatever came up in the ensuing years. If nothing about the business changes, I stick with that through thick and thin. No hedges other than holding securities with some diverse correlation, very little 'dry powder' unless I can't find suitable investments to park it in. I don't need the capital for ten or twenty years. If I did, it wouldn't be invested in the securities markets. It seems like time horizon is the one place where I can control my own destiny. As long as I am willing to remove that variable from the equation, I will be fine.

 

I am always open to different approaches than this and I am certainly not above learning something new, but I've never heard a solid rationale for hedges, etc. for an individual investor.

[bmichaud]

Unlike some on here, I think it's madness to be fully invested in this market though. There will be surprises in the market and buying opportunities down the line. A European or Chinese bank imploding is certainly not off the cards and could cause panic. Weakness in the Chinese economy could cause the mother of all ruminations as highly-dependent emerging economies could take a pasting. Who knows when we'll get the next crisis but I will wager we won't be waiting more than 2-3 years for one, and that the folks with dry powder who are capable of holding their noses will do quite well.

 

I got news for you.  We are in the next crisis.  This is what its all about.  I am not suggesting anyone be fully Invested but to use the macro as your guide is madness.  I am fully invested and have been for 15 years straight.  There are times like the summer of 2007 when i downside protect with Spy puts. 

 

I have a few Well out of the money Spy puts right now that I bought recently on up days like yesterday.  To complete the hedge I hold around 40% ffh.  If there is a great EU unravel in the days or weeks ahead I will sell the puts and watch FFH go up, while my Us financials tank, and I buy more of them. 

 

Madness to buy jpm, wfc, bby, ssw, even ffh at multi-generation lows, indeed.

 

How is holding 40% of your portfolio in FFH, which is inversely correlated with the market per your comment above, any different than holding a 40% short position in the SPY or perhaps a 40% position in the TLT? Not saying it's a bad thing - IMO, that's a very smart portfolio construction, but it's just a bit deceiving saying you're fully invested with a 40% position that is virtually a cash-equivalent.

[beerbaron]

How is holding 40% of your portfolio in FFH, which is inversely correlated with the market per your comment above, any different than holding a 40% short position in the SPY or perhaps a 40% position in the TLT? Not saying it's a bad thing - IMO, that's a very smart portfolio construction, but it's just a bit deceiving saying you're fully invested with a 40% position that is virtually a cash-equivalent.

 

FFH is NOT cash. There is significantly more risk owning FFH then owning Cash. the stock is uncorrelated to the general market but it does not mean it is cash equivalent.

 

What if the guys had Utilities in it's portfolio, should he account for those a virtually cash?

 

BeerBaron

 

[bmichaud]

How is holding 40% of your portfolio in FFH, which is inversely correlated with the market per your comment above, any different than holding a 40% short position in the SPY or perhaps a 40% position in the TLT? Not saying it's a bad thing - IMO, that's a very smart portfolio construction, but it's just a bit deceiving saying you're fully invested with a 40% position that is virtually a cash-equivalent.

 

FFH is NOT cash. There is significantly more risk owning FFH then owning Cash. the stock is uncorrelated to the general market but it does not mean it is cash equivalent.

 

What if the guys had Utilities in it's portfolio, should he account for those a virtually cash?

 

BeerBaron

 

 

I was going mainly on Uccmal's quote, 

To complete the hedge I hold around 40% ffh. 

 

If macro doesn't matter and fins are at a generational low, why not put that 40% hedge into fins...

[Uccmal]

ballinvarosig,  Sorry, wasn't meant to be sarcastic. 

 

As per being fully invested, I am.  Ffh is not the hedge that cash is.  It may just be better, but I dont know that, obviously.  The Spy hedges I have added as I have increased my 2014 Leap positions and they are by no means 100%. 

 

There are awesome values out there during this latest crisis.  To put things in context, in the summer od 2007 through to early 2008, many of us on thie predecessor board couldn't find anything decent that had value.  I, for one, had moved way down the quality curve with garbage like torstar, and sfk pulp, and liquidation world littering my portfolio. 

 

Now, we have high quality large caps trading at 5-8 times earnings.  It wont likely ever get better

than this.  I mean, there are US companies with moats pulling in billions per year in earnings on generational sales.

[oddballstocks]

 

Now, we have high quality large caps trading at 5-8 times earnings.  It wont likely ever get better

than this.  I mean, there are US companies with moats pulling in billions per year in earnings on generational sales.

 

This intrigued me, so I just did a simple screen, P/E less than 8, Large cap, dividend yield of 1% or greater.  Unsurprisingly 90% of the results are European companies.

 

I'm just curious as to a few of the US companies, there's obviously value in some US large caps, but I'm not seeing the 5-8 P/E with sizable moats.

[original mungerville]

2008/09 wasn't even close to the end of equities let alone today's valuations. End of equities is late 70s with mid single digit P/Es on DEPRESSED earnings relative to GDP. 

[Parsad]

I am a bit simple, but I have always just done my best to purchase the most attractive possible businesses at fair value or preferably much less and held them through whatever came up in the ensuing years. If nothing about the business changes, I stick with that through thick and thin. No hedges other than holding securities with some diverse correlation, very little 'dry powder' unless I can't find suitable investments to park it in. I don't need the capital for ten or twenty years. If I did, it wouldn't be invested in the securities markets. It seems like time horizon is the one place where I can control my own destiny. As long as I am willing to remove that variable from the equation, I will be fine.

 

I am always open to different approaches than this and I am certainly not above learning something new, but I've never heard a solid rationale for hedges, etc. for an individual investor.

 

I think that is exactly what you should be doing.  That's all Buffett cares about as well, and really all we have control over to any degree.  Cheers!

[Parsad]

2008/09 wasn't even close to the end of equities let alone today's valuations. End of equities is late 70s with mid single digit P/Es on DEPRESSED earnings relative to GDP.

 

Interest rates were also significantly higher in the 70's and early 80's.  Interest rates are at the lowest levels today since the 1930's.  Your alternatives to GIC's, treasuries and corporate debt is equities whose annual dividend yields are twice as high, while actual yield on investment is more than triple what fixed income would get.  Very big difference than equities trading at 3-4 times earnings in the 70's, but interest rates were at 6-7% or higher.  Cheers!

[Valuebo]

2008/09 wasn't even close to the end of equities let alone today's valuations. End of equities is late 70s with mid single digit P/Es on DEPRESSED earnings relative to GDP.

 

I should thank you again for the two extra informative posts in the "How to hedge a global depression?" topic. So -> thank you. ;)

 

 

Looking back, history seems to show periods of almost 20 years of under- or overperformance against the average stock market return aren't exceptional. All things considered, at current valuations we could still face sideways markets for 5 years (?) until equities get really cheap. Question is whether this will happen and why any individual investor should really care about it if he can find enough value.

[txlaw]

2008/09 wasn't even close to the end of equities let alone today's valuations. End of equities is late 70s with mid single digit P/Es on DEPRESSED earnings relative to GDP.

 

Mungerville, did you believe US equities were ever cheap in 2008/2009?

[original mungerville]

txlaw,

 

No I did not and neither did Seth Klarman if that adds any weight.