"Macro" Musings

[giofranchi]

I don't think BRK's or Wal-Mart's performance between, for example, 1975 and 1985 was flat.

 

Not at all!! That’s exactly why I hold investments in the companies I have great conviction about, companies that I think will do very fine (like BRK or WMT did between 1975 and 1985), whatever the market as a whole does.

While I also hold some cash and some short positions, just in case great bargains might present themselves in the not too distant future. :)

 

giofranchi

 

[dcollon]

Rail Traffic Surges To 5-Year High

 

From SeekingAlpha http://seekingalpha.com/article/1677702-rail-traffic-surges-to-5-year-high

[dcollon]

Interesting perspective from the Washington Post on the Jobs numbers today

 

http://www.washingtonpost.com/blogs/wonkblog/wp/2013/09/06/is-pornography-killing-the-economy/

[giofranchi]

"Advantage America" by Gary Shilling

 

 

giofranchi

Advantage_America.pdf

[giofranchi]

"Why Europe Is Still Broken" by Charles Gave

 

 

giofranchi

Daily+9.12.13.pdf

[giofranchi]

"Why We Didn't Learn Enough From the Financial Crisis" by Justin Fox

 

 

giofranchi

Why_We_Didn’t_Learn_Enough_From_the_Financial_Crisis_-_Justin_Fox_-_Harvard_Business_Review.pdf

[giofranchi]

"A New Greek Test for Europe"

 

 

giofranchi

A_New_Greek_Test_for_Europe_by_Ashoka_Mody_-_Project_Syndicate.pdf

[giofranchi]

 

 

Instead we will get more of what we have already seen in the past five years: less growth and less inflation. Even with ZIRP, real rates can turn positive if growth and inflation are dead. When the cost of money is above the potential rate of return, companies start deleveraging and, if the situation persists, eventually default.

 

All this explains why yesterday’s monetary decision smacks of panic. The Fed knows that its policies are failing and, like any bad trader in trouble, it is doubling-down. And of course, the Fed’s panic is causing the US dollar to weaken, which means the US will have less global purchasing power, and the US current account deficit will continue to improve. In the long run, that is very dangerous for the global economy. Stay hedged.

--Charles Gave

 

 

giofranchi

Daily+9.19.13.pdf

[giofranchi]

Real Estate Bubble in China??!

 

giofranchi

[CorpRaider]

This might get interesting here with sort of a confluence of factors, the psychological impact of the spike in mortgage rates, yet the actual yield curve flattening out again because of no taper and throw in maybe a scare around the debt ceiling...Sort of a period of potential nasty transitory influences on the financials, if you will.  Earnings could look pretty nasty for the banks with no mortgage refi's, no real steep yield curve, vastly diminished bond trading volumes, maybe a mark to market on some their fixed income portfolios.  Guess we should start getting negative preannouncements in the next few weeks?

[giofranchi]

"The Unwatched Variable" by Charles Gave

 

 

giofranchi

Daily+9.24.13.pdf

[Liberty]

The always excellent Brooklyn Investor on tapering, Schiller's P/E, market overvaluation, etc:

 

http://brooklyninvestor.blogspot.ca/2013/09/tapering-market-overvaluation-etc.html

[giofranchi]

The always excellent Brooklyn Investor on tapering, Schiller's P/E, market overvaluation, etc:

 

http://brooklyninvestor.blogspot.ca/2013/09/tapering-market-overvaluation-etc.html

 

I usually like to read what the Brooklyn Investor has to say, and very often I agree with his point of view. Unfortunately, I think that “macro” is misunderstood by the great majority of so-called “value investors”.

Let me explain:

 

If you study the Vanderbilts, the Sages, the Mellons, and the Baruchs of the past, I think you will get more and more convinced about basically one truth: they grew steadily and moderately in times of prosperity and optimism, and they grew by leaps and bounds in times of adversity and pessimism.

 

So, if the greatest financial minds of the past were flexible enough to adapt their strategies to the times, why instead should we invest as if the world were always the same?! The answer, as far as I am concerned, is: there is no reason.

 

This has nothing to do with “macro bets” or “being in and out of the market”. Macro should be something purely “qualitative”, that gives you an idea of how other investors are behaving. That idea is just one of the many things anyone should take into consideration, while devising his/her strategy. A strategy that will be sometimes more aggressive, sometimes more conservative, depending on the circumstances.

 

According to the GMO 7-Year Asset Class Real Return Forecasts, US Small Caps are to return –3.1% annual, while US Large Caps are to return –1.6% annual. Why on earth would you ignore such forecasts? Because you have found a company selling below BV? That would be like saying: I might have two pieces of information, but the first one is good enough, therefore I won’t even consider the second… Crazy, no?! I want both pieces of information, sure that my whole strategy will be stronger for that!

 

Even Mr. Buffett has always managed to have ready cash at hand, when others instead were in trouble. Given his very long career, which do you think is more plausible? a) he devised a carefully conceived strategy to achieve such a favorable outcome, b) he is the luckiest guy on earth!

 

I repeat: “macro” is only one of the many things that could help shaping an effective strategy. And it must be put in context with all the others. For instance, Mr. Buffett controls many recession resistant businesses, that will keep handing him tons of cash, even during difficult times, and yet holds more than $40 billion in cash & equivalents. He clearly has a strategy and, given how much resilient that strategy is, “macro” might play a very small role, almost no role at all.

 

The question is: which is YOUR strategy? And which role “macro” plays in it? None? Well then, you better be sure your strategy is as resilient as Mr. Buffett’s… Otherwise, chances are you won’t be the one holding the coveted cash, when troubles finally arrive, as they always do.

 

giofranchi

 

[Liberty]

Gio,

 

I'm not sure that anything Brooklyn Investor wrote goes against what you're saying. Are you speaking in general, or about something specific in that piece?

[giofranchi]

.... “macro” is only one of the many things that could help shaping an effective strategy. And it must be put in context with all the others. For instance, Mr. Buffett controls many recession resistant businesses, that will keep handing him tons of cash, even during difficult times, and yet holds more than $40 billion in cash & equivalents....

 

If Buffett is holding more cash is because he can not find good/great deals (hard to find elephants). He would be happy to hold just $10 billion in cash (small for an insurance company, given its size).

 

"Ignore the macro, focus on the fundamentals, know and stay in your circle of competence" is Buffett's mantra. "Buffett of Canada" did not follow this.

 

To have cash in a recession is divine

--Warren Buffett

 

You quote WB, I quote WB. :)

If you decide not to plan, in order to have cash, when all others suffer from a lack of liquidity, you not only choose to disregard WB’s advice, but also the examples of all the great and very successful financial minds that came before him.

 

This being said, I have an extreme aversion to “rules”… because they tend to work, until they don’t… Instead, I want to stay flexible, to adapt, and to go wherever I see value. If you study Warren Buffett long enough, I think anyone would agree that he has always shown great flexibility and adaptability during his whole, very long career, searching for value. Imo, that’s also what the so-called (hey! I really don’t like it!) “Warren Buffett of Canada” is doing.

 

…that’s how we live our lives. Someone gives us a piece of advice, and we try it, and it works for a while, but we keep doing it long after the suggestion has lived out its usefulness.

…Think of political debates: One side yells “tax cuts”, while another yells “infrastructure investments.” Obviously, the solution involves some balancing act between those things, but Republicans and Democrats have a hard time getting past A + B = C. … And we all suffer.

Many of our own personal struggles – to lose weight, to improve our relationships, to grow our businesses – suffer from this same kind of all-or-nothing, black-or-white algebraic thinking. The diet you choose works, until it doesn’t. The new marketing strategy works, until it doesn’t.

--The Plateau Effect – Getting from Stuck to Success

 

giofranchi

 

[giofranchi]

Gio,

 

I'm not sure that anything Brooklyn Investor wrote goes against what you're saying. Are you speaking in general, or about something specific in that piece?

 

Liberty,

nothing in particular… it is just the general tone of the article… something like: “it might be true: markets are overvalued, and are at risk of coming down abruptly… anyway, disregard this piece of information, because it is not actionable.”

Just give me the information, and let me be the one to decide what to do with it! The relevance of the same piece of information might be very different for me than for you. Simply because my situation is different from yours. That’s my point!

But, of course, I might have misunderstood the general tone of the article. :)

 

giofranchi

 

[Kraven]

Gio,

 

I'm not sure that anything Brooklyn Investor wrote goes against what you're saying. Are you speaking in general, or about something specific in that piece?

 

Liberty,

nothing in particular… it is just the general tone of the article… something like: “it might be true: markets are overvalued, and are at risk of coming down abruptly… anyway, disregard this piece of information, because it is not actionable.”

Just give me the information, and let me be the one to decide what to do with it! The relevance of the same piece of information might be very different for me than for you. Simply because my situation is different from yours. That’s my point!

But, of course, I might have misunderstood the general tone of the article. :)

 

giofranchi

 

I thought that the author (Brooklyn Investor) made a very good point in the comments to that blog piece.  He says that according to the CAPE 10 the market looks 50% overvalued, yet when he looks at individual stocks he likes they don't appear 50% overvalued to him.  He gives an example of JPM selling around BV.  Is it worth 66% of BV?  Just goes to the point that the market in the aggregate may be overvalued, yet any number of individual stocks are not.  In a market dislocation correlation may close in on 1, but there is nothing one can really do about that.  He makes a further great point in the article itself by looking at what Schloss, Tweedy and Ruane (Sequoia Fund) did during periods where the market was seemingly overvalued.  Here's the original comment I referred to:

 

"This is the problem with these 'macro' figures. The CAPE 10 makes it look like the market is 50% overvalued, but for example, I really like JPM and they are trading near book value. I don't think JPM is only worth 66% of book value. I like other financials and I don't think any of them are only worth 0.66x where they are trading now. KO is 20x trailing p/e, and I don't think they are only worth 13x p/e. I think they are trading at 16x next year's earnings, and I don't think they are worth only 11x p/e."

 

[Guest ajc]

Matt McLennan: The 'Mirage' Recovery

Is the financial crisis really over? Are we in danger of another one? In a recent speech, Hank Paulson, the Secretary of the Treasury during the crisis said yes, we are still in danger and that “there are a number of issues that trouble and in some cases flabbergast me.” Our guest this week, Matthew McLennan, is in complete agreement. McLennan, whom we have identified as a Next Generation Great Investor, runs the five-star rated First Eagle Global Fund, which he took over from legendary value investor Jean Marie Eveillard five years ago in the midst of the financial crisis. McLennan calls the widely believed “return to normalcy” that we are experiencing a “Keynesian mirage.”

 

http://wealthtrack.com/special-series/great-investors-series/matt-mclennan-the-mirage-recovery/

[giofranchi]

I wonder if I am talking to a politician, not a value investor? What a waste if that is the case.

 

Kumar, I am no politician at all… believe me! And I’d much prefer to be called a “value investor” rather than a “politician”… The truth, though, is I don’t like “labels”… If you want to put a label on me, try this one: “a person who will constantly endeavor to grow the equity of his company 15% annual for the next 45 years”. And I will gladly learn anything that could help me achieve that goal! Therefore, I try to avoid prejudices like the plague. For instance, are there useful skills a value investor might learn from a politician? Of course there are! I wish I had the PR skills of a politician! They would serve me extremely well in my business. :)

 

giofranchi

 

[giofranchi]

Democracy is two wolves and a lamb voting on what to have for lunch. Liberty is a well-armed lamb contesting the vote.

--Benjamin Franklin

 

Great piece by Charles Gave! :)

 

giofranchi

Daily+10.01.13.pdf

[giofranchi]

Good weekly commentary by Mr. David Hay.

 

 

giofranchi

EVA+10.4.2013+NA.pdf

[giofranchi]

"Nightmare on Wall Street: This Secular Bear Has Only Just Begun" by Ed Easterling of Crestmont Research

 

 

giofranchi

Easterling-131004.pdf

[dcollon]

Grant's Take on the Markets

OCT 10, 2013 | 9:51 AM EDT

 

A little Alice in Wonderland from Sir Mark Grant:

 

"Of course it is," said the Duchess, who seemed ready to agree to everything that Alice said; "There's a large mustard-mine near here. And the moral of that is–The more there is of mine, the less there is of yours."

 

-- Lewis Carroll, Alice in Wonderland

 

I believe this bit of superb wisdom explains several things. First and foremost it tells you exactly how taxes operate. Next it explains, precisely, the difficulties between the Democrats and Republicans in the United States. He wants, she wants, they all want and expect us to pay for it. You cannot even say, anymore, that you do not wish to pick up the bill for a dinner that you did not plan, did not choose the guests, are not invited to and where you are not welcome to dine. Oh the mad hatters say you get some tidbits of this and that from time to time and then they inform you that if you do not pay well then here comes the Red Queen and off with your head.

 

We have all fallen down the rabbit hole!

 

This morning there is a hint that America might agree on some short term funding solution. Equity futures are like catfish in the river and jumping higher, bond futures are on the banks singing the blues, the White Queen, Ms. Yellen, and her predecessor, the King of Tarts, will not stop pumping out the fabricated milk and honey anytime soon and the very odd croquet game continues. The rest of the world, the spectators for this match, applaud politely and, when asked, just say, "Too much!"

 

"You used to be much more...muchier. You've lost your muchness."

 

-- Lewis Carroll, Alice in Wonderland

 

It is probably an interesting point to consider if America has lost its "muchness." We did seem to have more of the stuff some years back. There seemed to have been some common goals and purposes when I was growing up but then I was at a tender age and being instructed though it seemed, at least, that people were more willing to accept what was handed out at the tea party back then without too much complaint. Now we worry if the tea is organic, the pastries vegan and if the crumpets are fried in oil or baked. It seemed so much simpler back then.

 

Whatever happened to peanut butter and jelly sandwiches?

 

It seems that some of America's cast of characters are regurgitating one of Alice's prime questions; "Who in the world am I? Ah, that's the great puzzle." They want my money, your money or they are quite willing to make new money to pay for anyplace that we might decide to go. There was a time, I had always thought, where the amount of money that you had determined what you could do or not do. This no longer seems to be the case. We are now in a make it, take it or bake it up fresh world.

 

The problem is this; if you keep eating things that aren't there, even if we are told all day long that they are, then eventually you become hungry and undernourished anyway. It is funny how this always seems to work. Even if we are told it doesn't matter.

 

Take some more tea," the March Hare said to Alice, very earnestly.

 

"I've had nothing yet," Alice replied in an offended tone, "so I can't take more."

 

"You mean you can't take less," said the Hatter: "it's very easy to take more than nothing."

 

-- Lewis Carroll, Alice in Wonderland

 

I am criticized, from time to time, for being overly cautious. I don't know; I make what I make, I watch the way they take what they take and you and I are not permitted to bake it up when we choose. That is another "off with your head" offense.

 

I can spend only what I have, they can spend my money, your money, not their money of course because all they live on is my money and your money and then, when cornered, they keep baking away. They will probably keep baking away for some time now as no one seems to know quite where we are going but we must eat, one way or another, in the meantime.

 

"My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that."

 

-- Lewis Carroll, Alice in Wonderland

 

Please do not disparage me for being cautious. I can smell what is in the oven just like you but I occasionally open the oven door and peer at what is inside. Something they do not like at all but I do it nevertheless. What is being baked up is hardly the stuff of a square meal and I fear undernourishment. I remain cautious.

 

"The rule is, jam tomorrow and jam yesterday-but never jam today."

 

"It must come sometime to jam today," Alice objected.

 

No it can't," said the Queen. "It's jam every other day. Today isn't any other day, you know."

 

-- Lewis Carroll, Alice in Wonderland

[giofranchi]

Hoisington Quarterly Review and Outlook - Third Quarter 2013

 

 

giofranchi

HIM2013Q3NP.pdf

[nwoodman]

Hoisington Quarterly Review and Outlook - Third Quarter 2013

 

giofranchi

 

Many thanks. They certainly are sticking to their debt deflation view of the world

 

"Economic growth should be very poor in the final months of 2013. Growth is unlikely to exceed 1%, even less than the already anemic 1.6% rate of growth in the past four quarters. Marked improvement in 2014 is also questionable."

 

Cheers

nwoodman