Packer16 Posted May 29, 2013 Share Posted May 29, 2013 The reason for the higher multiple is a lower required yield due to the surplus of capital/savings. If we agree interest rates are low due to large supply of capital and will be that way for awhile (as has been the case in the past) then the higher multiples make sense since you are just discounting a different tranche of the same cash flow. The senior tranche goes to the bond holders the junior and growth option to the equity holders. I think the biggest threat to multiples is inflation and higher interest rates. I see both interest rates and multiples linked together. If you want to normalize a mean multiple for interest rates I think that makes sense and what you will see that the current multiples are not a stretch for the interest rates we currently have. If you look at the history of interest rates and inflation, you see inflation at times of war (due in part to the destruction and in part due to the debt incurred). In peace, you generally see low interest rates, disinflation or deflation. The surplus of capital in essence is a price taker and as the number of high expected return projects declines it has to finance the low return projects to get some return on investment. Packer Link to comment Share on other sites More sharing options...
giofranchi Posted May 30, 2013 Author Share Posted May 30, 2013 Vanderbilt survived the great disaster (Panic of 1857) with no sign of suffering. He must have felt some pain, for he could not levitate entirely above the great river of credit that carried the economy along. Yet it appears that he possessed deep cash reserves, and never failed to pay a bill or debt even in the worst of the storm. In early 1858, when the Mercantile Agency reported on the Allaire Works – a corporation that operated virtually as an extension of Vanderbilt’s personal business – it observed, “They are [said] to be in [good] condition & to [have paid] all thro the panic. Have done & are [doing] a [good] bus. & are sold to freely.” No doubt all of his other agents, clerks, and companies also paid debts on time and in full. As the panic purged the city, Vanderbilt went to work each day as usual, down to his office on Bowling Green, behind the ticket desk to his private chamber in the rear, where he put on his reading glasses and reviewed letters and invoices and worried the cigar he kept clamped between his teeth. Sometime in September, Allan Campbell, the Harlem’s president, came in to see him. The railroad could not pay its bills. Its own debtors refused to pay it, and its creditors would only take its acceptances (its corporate promissory notes) at the ruinous rate of 5 percent interest per month. “Commodore,” he pleaded, “how will we get along?” --The First Tycoon Now, change 1857 with 2009, change Harlem with GE or GS, and change Vanderbilt with Buffett… and what you get is no change at all!! ;) Dazel, All the great entrepreneurs I have studied throughout history got just one thing in common: they all had cash, when others had trouble. Don’t ask me how they did it… I don’t know! I would be one of them otherwise! But one thing is for certain: they grew slowly and steadily when times were good, and they grew by leaps and bounds when times got hard. I think we should take notice and at least try to emulate them. Packer, I understand that interest rates are going to stay low for a protracted period of time, but a company is worth the discounted value of all the cash it will produce for the next 50+ years. During the 20th century there were many years of very low interest rates, many years of very high interest rates, and many years of average interest rates… why won’t it be so during the 21st century too? giofranchi Link to comment Share on other sites More sharing options...
Guest Dazel Posted May 30, 2013 Share Posted May 30, 2013 GioFranchi, Agreed on cash...I appreciate the asset of cash more than anything else when buying a buck for 50 cents as well....if the market or economy turns on you...both you and the companies you own can take advantage of it... All the best! Dazel. Link to comment Share on other sites More sharing options...
Packer16 Posted May 30, 2013 Share Posted May 30, 2013 Gio, You bring up a good point but I think many of the folks who are warning of an eminent decline are using historical average pricing ratios that use long periods of time when interest rates are much higher than today and much higher than expected interest rates. I agree with the idea of the reversion to the mean but you need to make sure you are using the correct mean which I think is heavily influenced by interest rates. With low interest rates and expectation of low rates should lead to higher multiples as the equity multiples are just suborindated claims of firm cash flows. For example, if a firm can borrow at 3 to 4% why would a PE of 15 not be reasonable for even flat earnings (as this is a 7% yield). If you add growth you can easily get fair value multiples of in the high teen and low 20s. When folks are calling for a decline are they not making a call on interest rates (saying they will increase)? Just my 2 cents. Packer Link to comment Share on other sites More sharing options...
dcollon Posted May 30, 2013 Share Posted May 30, 2013 I thought Joy Global had some interesting, but brief, comments on global growth/supply of materials in their earnings release this morning. http://investors.joyglobal.com/releasedetail.cfm?ReleaseID=768021 Link to comment Share on other sites More sharing options...
petec Posted May 30, 2013 Share Posted May 30, 2013 Packer I'm in total agreement re interest rates. And if you are arguing that the influx of communist workers into the global market and massive advances in IT have curbed inflation and kept inflation low, thus boosting asset prices, then I agree with that too (although that is not how I read your earlier posts). What interests me however is that that period has been truly unique - unless you think there is another huge pool of workers set to enter the workforce. The ending of a period of supernormal productivity growth combined with the beginning of an era of money printing? That spells lower multiples to me. What I have no handle on is the timing. Link to comment Share on other sites More sharing options...
LongTerm Posted May 30, 2013 Share Posted May 30, 2013 The whole point of value investing is NOT to look at the market and make forecasts as to where it will go and when. Thus looking at historical data can be deceptive at best. It can lead you down the slippery slope of believing that the current trend will continue, or that there will be a regression to the mean, or some other conclusion, and thus into making a PREDICTION, which we know is NOT A WISE THING. The value investor simply looks for companies selling at prices that provide A MARGIN OF SAFETY (and not what people are touting as a margin of safety nowadays, either lots of asset -preferably cash - or lots of earnings power). Personally, I look only on an asset basis. When I stop finding 'bargain stocks', as in the current market environment, I simply stop buying. Any new cash just sits there... waiting. When Mr. Market offers me outrageous prices on some of the assets I own, I sell, and the cash builds up faster. I don't really value things based on where interest rates are, as I acknowledge I can't know where they will go or, more importantly, when. Every time I'm tempted to buy something in today's market I think back to what Mr. Market was offering in 1974 or 1980 or even, for those with more limited time horizon, 2008 and think, "Do I really want to tie my money up in something with an earnings yield of under 5% when I could have purchased this same or a similar business for 20% of the current market offer back then (and thus most probably sometime in the not too distant future)?" For me 'Macro' is only confusing. I don't think I'm smart enough to figure out all the moving parts. Link to comment Share on other sites More sharing options...
giofranchi Posted May 30, 2013 Author Share Posted May 30, 2013 Every time I'm tempted to buy something in today's market I think back to what Mr. Market was offering in 1974 or 1980 or even, for those with more limited time horizon, 2008 and think, "Do I really want to tie my money up in something with an earnings yield of under 5% when I could have purchased this same or a similar business for 20% of the current market offer back then (and thus most probably sometime in the not too distant future)?" For me 'Macro' is only confusing. I don't think I'm smart enough to figure out all the moving parts. Hi LongTerm, I couldn’t agree more with you! You have just expressed exactly my own view! :) The only difference is that I don’t find macro confusing… I find it… a lot of fun!! ;D I really enjoy reading all the papers that are posted on this thread… I know, I might sound a little bit weird… Yet, I really prefer them to almost any novel out there! ;) But I know I am, paraphrasing Mr. Kyle Bass, a “macro-tourist”, and I never make an investment decision based on “macro predictions”. giofranchi Link to comment Share on other sites More sharing options...
Kraven Posted May 30, 2013 Share Posted May 30, 2013 The whole point of value investing is NOT to look at the market and make forecasts as to where it will go and when. Thus looking at historical data can be deceptive at best. It can lead you down the slippery slope of believing that the current trend will continue, or that there will be a regression to the mean, or some other conclusion, and thus into making a PREDICTION, which we know is NOT A WISE THING. The value investor simply looks for companies selling at prices that provide A MARGIN OF SAFETY (and not what people are touting as a margin of safety nowadays, either lots of asset -preferably cash - or lots of earnings power). Personally, I look only on an asset basis. When I stop finding 'bargain stocks', as in the current market environment, I simply stop buying. Any new cash just sits there... waiting. When Mr. Market offers me outrageous prices on some of the assets I own, I sell, and the cash builds up faster. I don't really value things based on where interest rates are, as I acknowledge I can't know where they will go or, more importantly, when. Every time I'm tempted to buy something in today's market I think back to what Mr. Market was offering in 1974 or 1980 or even, for those with more limited time horizon, 2008 and think, "Do I really want to tie my money up in something with an earnings yield of under 5% when I could have purchased this same or a similar business for 20% of the current market offer back then (and thus most probably sometime in the not too distant future)?" For me 'Macro' is only confusing. I don't think I'm smart enough to figure out all the moving parts. Good post. Link to comment Share on other sites More sharing options...
giofranchi Posted May 31, 2013 Author Share Posted May 31, 2013 Interview with Mr. Jim Rogers. giofranchiJim-Rogers-Nobody-Gets-Out-Of-This-Situation-Until-Theres-A-Crisis.pd_____f.pdf Link to comment Share on other sites More sharing options...
giofranchi Posted May 31, 2013 Author Share Posted May 31, 2013 Hugh Hendry April 2013. giofranchiHugh-Hendry-April-2013.pdf Link to comment Share on other sites More sharing options...
giofranchi Posted May 31, 2013 Author Share Posted May 31, 2013 IceCap Asset Management May 2013. giofranchiIceCap-Asset-Management-Limited-Global-Markets-2013.5.pdf Link to comment Share on other sites More sharing options...
giofranchi Posted May 31, 2013 Author Share Posted May 31, 2013 Great letter by Mr. Vito Maida on the importance of time. Enjoy! giofranchiPatient-Capital-Management-Q1-2013.pdf Link to comment Share on other sites More sharing options...
dcollon Posted June 4, 2013 Share Posted June 4, 2013 Bill Gross's latest http://media.pimco.com/Documents/13-0651-GBL%20IO%20JUNE%202013_FINAL.pdf Link to comment Share on other sites More sharing options...
giofranchi Posted June 5, 2013 Author Share Posted June 5, 2013 Some highlights from the 2012 SIC. giofranchiBLOG-2013-06-Look-Whos-Talking.pdf Link to comment Share on other sites More sharing options...
giofranchi Posted June 6, 2013 Author Share Posted June 6, 2013 Mr. Charles Gave on "An Old Fashioned Deflationary Bust". giofranchiDaily+6.5.13.pdf Link to comment Share on other sites More sharing options...
giofranchi Posted June 7, 2013 Author Share Posted June 7, 2013 Albert Edwards: "Has The US Recession Already Begun?" The bottom line: for all the talk of the wealth effect, demand is falling and deflation is closer than at any time since 2009. giofranchiHas-The-US-Recession-Already-Begun.pdf Link to comment Share on other sites More sharing options...
giofranchi Posted June 9, 2013 Author Share Posted June 9, 2013 Financial Sector: Bigger and More Profitable Than Ever giofranchi Link to comment Share on other sites More sharing options...
giofranchi Posted June 11, 2013 Author Share Posted June 11, 2013 Mr. Charles Gave on a deflationary failure, France, and the Euro. giofranchiCharles-Gave-Warns.pdfCharles-Gave-Get-Out-Of-Banks-Get-Out-Of-France-Get-Out-Of-The-Euro.pdf Link to comment Share on other sites More sharing options...
dcollon Posted June 12, 2013 Share Posted June 12, 2013 Albert EdwardsAlbert_Edwards.pdf Link to comment Share on other sites More sharing options...
dcollon Posted June 12, 2013 Share Posted June 12, 2013 SoGen: Dylan GriceDylan_Grice.pdf Link to comment Share on other sites More sharing options...
PlanMaestro Posted June 14, 2013 Share Posted June 14, 2013 Taxonomy of macro bloggers. http://ftalphaville.ft.com/2013/06/13/1533782/a-blogospheric-taxonomy-of-the-fiscalist-vs-monetarist-debate/ Link to comment Share on other sites More sharing options...
giofranchi Posted June 15, 2013 Author Share Posted June 15, 2013 Very good piece by Mr. David Hay. giofranchiEVA+6.14.2013+NA+b.pdf Link to comment Share on other sites More sharing options...
giofranchi Posted June 16, 2013 Author Share Posted June 16, 2013 Real price of Gold since 1791. giofranchi Link to comment Share on other sites More sharing options...
giofranchi Posted June 16, 2013 Author Share Posted June 16, 2013 How American life has changed during the last 100 years. giofranchi Link to comment Share on other sites More sharing options...
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