A Rising Tide Lifts All Ships!

[Uccmal]

Low corporate yields are a "manifestation of the overall interest rate bubble" or at worst "evidence that investors are accepting insufficient returns for the risks they are taking."

This is what Sanjeev is saying in the "how much cash are you holding" thread.

 

My view? We're looking at a sideways market for a while.

 

Pull a 20 year SPY chart.  Markets never move sideways.  I am guessing you mean it will top out, go down 20 or 30%, go back up to where it topped, rinse and repeat.  The absolutely perfect investing climate.  Just buy the same stocks over and over. 

[jay21]

I'm still buying BRK and MKL under 1.5 BV. 

 

But maybe it is because i can't find anything else!

[Parsad]

Are you able to (roughly) quantify the intrinsic value of the index?

 

The S&P500 earnings are around $105 and it's at 1517...so roughly about 15 times earnings.  Neither cheap, nor expensive historically.  It won't provide you returns larger than growth in GDP and inflation plus dividends.  You also have no boost from interest rates, nor profit margins, which are at historical lows and highs respectively.  Cheers!

Sanjeev a question for you...do you attempt to do a rough calculation of the free "call/put option" of cash? It seems to me that this cash option has an inverse relationship with the market P/E. To state the obvious, when prices in the market are high (on average), cash's option is more valuable because the market has more downside.

 

Do you think along these lines at all in terms of holding cash, or do you just say to yourself, "well, everything's expensive, and I wouldn't buy some of what I already own at these prices...so let me sell a bit and wait until things get cheaper"?

 

I think most investment managers view cash as an asset class...one that doesn't do well relative to stocks when viewed long-term.  But their views become myopic when it comes to the short-term value of cash because of that very trait.  So managers, and many investors, want to be fully invested at all times.  If you cannot find cheap stocks, then buy alot more of what you already own...but stay fully invested at all times. 

 

Unfortunately, when you view cash in those terms, you never realize that very inverse relationship you described above.  Cash doesn't have a 1-1 value when markets go down...it becomes exponential the further markets fall.  So when you buy something at 1 times book, rather than wait for half of book, you give up significant returns...probably far more than the short-term low rate of return cash provides relative to stocks at higher valuations.  Cheers! 

[txitxo]

Are you able to (roughly) quantify the intrinsic value of the index?

 

The S&P500 earnings are around $105 and it's at 1517...so roughly about 15 times earnings.  Neither cheap, nor expensive historically.  It won't provide you returns larger than growth in GDP and inflation plus dividends.  You also have no boost from interest rates, nor profit margins, which are at historical lows and highs respectively.  Cheers!

Sanjeev a question for you...do you attempt to do a rough calculation of the free "call/put option" of cash? It seems to me that this cash option has an inverse relationship with the market P/E. To state the obvious, when prices in the market are high (on average), cash's option is more valuable because the market has more downside.

 

Do you think along these lines at all in terms of holding cash, or do you just say to yourself, "well, everything's expensive, and I wouldn't buy some of what I already own at these prices...so let me sell a bit and wait until things get cheaper"?

 

I think most investment managers view cash as an asset class...one that doesn't do well relative to stocks when viewed long-term.  But their views become myopic when it comes to the short-term value of cash because of that very trait.  So managers, and many investors, want to be fully invested at all times.  If you cannot find cheap stocks, then buy alot more of what you already own...but stay fully invested at all times. 

 

Unfortunately, when you view cash in those terms, you never realize that very inverse relationship you described above.  Cash doesn't have a 1-1 value when markets go down...it becomes exponential the further markets fall.  So when you buy something at 1 times book, rather than wait for half of book, you give up significant returns...probably far more than the short-term low rate of return cash provides relative to stocks at higher valuations.  Cheers!

 

  There is an objective reason for avoiding cash. It is intrinsically very difficult to find an accurate timing system which will increase your performance in the long term. Timing systems which generate many signals are useless. Those which generate few signals seem useful, but with so few instances the statistical confidence is not very high, and it is not always clear whether they will work in the future. 

 

  As I have been writing for the last months, there are many signs that NA stock markets are likely to fall, and given current valuations, in a dramatic way. And of course, if one doesn't find anything interesting within his/her stock universe, it is absurd to buy. But I find difficult to justify going to cash with half the world's best companies on sale. It is true that there is huge uncertainties surrounding Europe, but as we all know, that's precisely what creates good opportunities...

 

 

[bmichaud]

WHY IS IT TIMING? ? ? ? ? ? ?

 

Buffett liquidated in 1969/1970 bc he could not find bargains - in other words, the risk/reward was poor - yet the market didn't tank until 1972-1974. Do you honestly think he was timing?

 

 

[hyten1]

was stock over prices in 1929?

 

http://www.crossingwallstreet.com/archives/2013/02/how-overpriced-were-stocks-in-1929.html

 

interesting info

[racemize]

was stock over prices in 1929?

 

http://www.crossingwallstreet.com/archives/2013/02/how-overpriced-were-stocks-in-1929.html

 

interesting info

 

Wow, that I did not know, thanks very much.  I need to read more about the 20's--given that it was not wildly overpriced relative to earnings, were there any good warning signs?

[fareastwarriors]

http://www.bloomberg.com/news/2013-02-12/bridgewater-bets-on-stocks-as-cash-moves-into-market.html

 

Bridgewater Associates LP, the $140 billion hedge fund founded by Ray Dalio, is betting on global stocks and oil as it expects money to move into equities and other assets amid increased economic confidence.

 

Bridgewater, the world’s biggest hedge fund, is bullish on stocks, oil, commodities and some currencies as it expects cash to shift to riskier assets, co-chief investment officer Bob Prince said on a client conference call on Jan. 23.

 

 

 

“You want to be borrowing cash and hold almost anything against it,” Prince said, according to a transcript of the call obtained by Bloomberg News. “We are at a possible inflection point right now with respect to the pricing of economic conditions in markets and then the actual conditions that are likely to occur.”

 

 

[PlanMaestro]

Some problems of timing the market.

 

http://video.ft.com/v/2150605261001/Reversion-to-which-mean-

 

And this is a fantastic report. Credit Suisse Yearbook 2013.

 

http://www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf

[hyten1]

plan nice

[hyten1]

nothing saying either way (get out or pile on the stock market)

 

but one important note just a reminder (I know everyone already knows this)

 

we all know that most of the gain for an investment are achieve during fraction of the holding period.

 

hy

[hyten1]

at the end of the day, its finding value, if you don't find it, stay in cash

 

its harder said than done :)

[bmichaud]

If BAC traded between $20 and $10 every year for three years, for whatever reason, and you thought it was worth $20.....would it be "timing" if you sold at $20 and bought at $10 every time?

 

I think not..... It is merely valuing and assessing the risk/reward.

[ubuy2wron]

I have managed  to generate an annual return in the mid teens for the last 15 years. I have implemented a value approach because it made sense. One of the reasons my returns have been mkt beating is because when the margin of safety declined to level that approached zero I sold or alternatively the holdings I had were subject to a take-over and no bargains were available. MR mkt is now offering us values on average more than double were they where 5 years ago. The preponderance of fat pitches are on the sell side not the buy side right now.

[alpha231616967560]

Some problems of timing the market.

 

http://video.ft.com/v/2150605261001/Reversion-to-which-mean-

 

And this is a fantastic report. Credit Suisse Yearbook 2013.

 

http://www.investmenteurope.net/digital_assets/6305/2013_yearbook_final_web.pdf

 

 

Thanks for sharing these.

 

The report is really well done.

 

My favorite sentence:

The projections we have made for asset returns

over the next 20–30 years are simply our own

best estimates. They will almost certainly be

wrong, but we cannot predict in which direction.

 

[giofranchi]

WHY IS IT TIMING? ? ? ? ? ? ?

 

Buffett liquidated in 1969/1970 bc he could not find bargains - in other words, the risk/reward was poor - yet the market didn't tank until 1972-1974. Do you honestly think he was timing?

 

bmichaud,

you already know very well what my point of view is. But I think txitxo has a good point too. Because at the end it all depends on your circle of competence. For instance, as a business owner and manager, I like to study companies and to delve as deeply as I can into every meaningful aspects of their operations. I know personally, from my own experience of managing businesses that I control, how difficult it really is to know and understand them very well. So that I know I could never completely rely on some kind of “statistical” difference between market price and fair value. I am just too skeptical of being able to assign a fair value to 100 companies, a fair value that would still be (almost) correct, come what may in the market as a whole. And, if I cannot assign a fair value, I cannot either estimate a reliable rate of return for my investments.

So, my circle of competence is VERY narrow and limited (let’s say, more or less 20 companies). And, if I cannot find bargains inside my circle of competence, I just prefer not to invest…

txitxo, instead, views things differently: he is a scientist and relies very much on his statistical models to find undervalued bargains worldwide (Europe, Japan, you name it!). And he can muster the confidence that he is getting good bargains, come what may with the market in general.

I understand his point of view, and I think he understands mine. I judge both of them to be valid, they are just different.  :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

[bmichaud]

txitxo appears to have developed an incredible tool for assessing the risk/reward equation of the market by looking at the "junkiness" of the market. Why gum up the model's conclusions worrying about "when" the market will decline?

 

If you've done wonderful analysis on BAC and it's worth $20 but currently sells for $12, why should I care "when" it will reach $20?

 

If BAC is at $20, i.e. fair value, and I sell it b/c I want to buy it back with better upside and a more favorable risk/reward equation, why should I care "when" it declines to a more favorable level?

[PlanMaestro]

If someone thinks that BAC's intrinsic value is as low as $20 maybe that would explain it. The thing is that  that's probably wrong and by a wide margin (and I don't think I'm alone on that view.)

 

There is still such a long list of opportunities just in the US that I just don't see how someone can go to a large cash position and not say it's market timing or a macro call. Yes, the market may be a little overvalued, but not by much while some ships have not recovered at all from the 2008 shock.

 

Should I remind everyone what happened with Citi and Wells in the 90s. And the market was way more overvalued then. Bottom up guys (and read Peter Lynch.)

[bmichaud]

If someone thinks that BAC's intrinsic value is as low as $20

 

Was merely illustrative. If it's worth $40 and you sell it at $40 waiting for it to get back down to $20, that's not timing....which was my point.

[bmichaud]

Email blast from Kiron Sarkar today.....interesting comments on Draghi's comments vis a vis the OMT programme:

 

 

 

Australian consumer confidence rose by nearly 8% to 108.3, the highest since December 2010 and the 4th consecutive monthly increase, reports Westpack. Importantly, traders reduced the chances of an interest rate cut by the RBA next month by 10 points to below 45%, from above 50% ahead of the release. The A$ rose on the news. Pretty confusing data from Australia recently;

 

India’s January trade deficit widened to US$20bn, one of the widest ever and up from US$17.7 in December. A rise in oil prices is not helping. The Rupee was relatively flat on the news.

The Indian government is seeking to sell more assets in a bid to curb its budget deficit next fiscal year. Whilst for the wrong reasons, the outcome is great. The Indian government has exercised far too much control over large businesses;

 

Interesting comments by ECB President Mr Draghi in Spain yesterday. He praised the efforts of the Spanish government - well he had to say that. Much more importantly, he stated that the ECB's OMT programme would only be used “if there are major problems in the transmission of monetary policy and if there is strict and effective conditionality attached to an appropriate European Stability Mechanism programme”. Hmmmmm. That suggests to me that countries who have been preparing to use the OMT programme (Ireland) won't be able to do so, as there is no panic in the markets. In addition, the EZ has to impose a serious stability programme on the relevant country. It also suggests the yields will have to rise much higher for countries such as Spain and Italy before the ECB is to step in with an OMT programme. I sense a subtle, but I believe an important change, from that currently believed - markets have ignored Draghi’s comments;

 

German wholesale price index rose by +0.3% in January M/M, as compared with unchanged in December - oil price related?;

 

The Swiss government has ordered banks to hold additional capital to guard against rising property prices. Banks will have to hold a further 1.0% of risk-weighted assets, which are secured against residential property;

 

The French finance minister admitted that GDP growth forecasts would be reviewed, with the results announced on the 15th March.

The French Foreign Minister has also admitted that France is unlikely to meet its budget deficit target of 3.0% - interesting to hear such a comment from a Foreign Minister. Ah ha, another French Minister has popped up to say that France will meet its 3.0% budget deficit target.

The reality is that French GDP growth will be anemic (some say negative, but that seems unduly pessimistic at this stage), with the budget deficit almost certainly higher than the 3.0% target;

 

EZ December industrial production came in +0.7% higher M/M (-2.4% Y/Y), much higher than the +0.2% expected and the -0.3% in November;

 

The EU reports that negotiations in respect of a free trade agreement with the US could start in June and that, if implemented, could increase EU growth by +0.5%;

 

The BoE admitted that UK inflation will remain above 2.0% for the next 2 years. In addition, the January inflation rate of +2.7% may well rise to +3.0% later this year. The BoE has not met its inflation target for 4 years and now admits that it won't for a further 2 years. Weaker sterling, together with higher oil prices have forced the BoE to increase its inflation forecast. The governor Mr King also stated that UK growth would be weaker than expected this fiscal year - coming in at +1.7%, rather than the forecast of +2.0% 3 months ago. Sterling got whacked on the news;

 

I have to admit to being totally confused as to intended message of the G7 communique yesterday. I suspect a number of you are equally perplexed. I have tried to read the tea leaves and heres my penny’s worth. The G7 understand that Japan needs to tackle its 15+ year deflation problem and clearly appreciates that will require a combination of monetary and fiscal policy measures. In addition, for geopolitical reasons, the US, the key member of the G7, want a strong Japan. However, the Japanese have been talking openly about Yen levels - that was considered completely out of order. The proposal to buy Yen 50 trn of foreign bonds to weaken the Yen (Mr Iwata’s proposal) was also deemed a foul by other G7 countries and the Japanese were shown the yellow flag - indeed, pretty close to getting the red flag, though the G7 members did not want to risk a major problem, given the current financial crisis. Setting negative short-term interest rates may also result in a red card. So we are down to fiscal stimulus measure and, once the new BoJ governor is in place, major purchases of Japanese assets, including longer term debt. Deposit rates that banks get from depositing funds at the BoJ may also be cut. We await the G20 meeting for further clarification. The confusion suggests that Mr Kuroda is even more likely to become the next BoJ governor - the only problem is that if he is chosen, the Japanese lose him as the head of the Asian Development Bank - important to Japanese politicians/bureaucrats, especially as a Korean may get the role. Overall, it still suggests continuing Yen weakness to little old me + VOLATILITY. However, I’ve cut my Yen short by 50% and may well close totally, as short term, there’s just too much uncertainty - its been a truly fabulous trade, but time to take profits.

Even more confusing Yen related comments today - better to wait for the G20 - hopefully there will be some clarification then. Personally, I don't believe that the Japanese will be criticised publically by the major countries;

 

In his State of the Union speech, President Obama stressed the need for an increase in the minimum wage, additional capex expenditure and an US/EU free trade deal. He also pressed Congress to avoid the sequester, due to take effect on 1st March. However, he reiterated the need for revenue increases, by closing tax breaks for companies and individuals, whilst offering few spending cuts. The response by Mr Rubio accused President Obama of being in favour of big government. This, once again, is going to go down to the wire, but unless the Republican’s can gain some momentum for their arguments, the pressure looks like being on them. The public wants to cut the deficit, but also wants their entitlements. The military and the US defense industry are lobbying Republicans hard to reverse the automatic cuts on defense spending - half the proposed cuts. The odds of the sequester coming into effect on 1st March still seems the most likely outcome - however, I must say, recent comments suggest that a rethink may well be on the cards.

Interestingly, President Obama issued an executive order which would set voluntary standards for infrastructure companies, in particular, to protect against cyber-attacks;

 

US January retail sales came in at +0.1% M/M, in line with expectations, though well below the revised +0.75 in December. Ex autos, gas and building, retail sales came in +0.1%, as opposed to +0.2% expected.

US January import prices rose by +0.6% M/M, lower than the +0.8% expected;

 

Outlook

 

The Nikkei closed lower with the weaker Yen, though it took half a day for it to weaken. European stocks are higher, with US futures indicating a better open.

 

The Yen is all over the place - currently Yen 125.88. The Euro is also pretty volatile - currently US$1.3469, though off its highs.

 

Spot gold is at US$1651, with April Brent at US$117.94 - is it just me concerned about the oil price, which seems to be feeding through into inflation globally.

 

Still believe that the risks outweigh potential rewards. Returns YTD have been great - no point risking them given heightened uncertainty. Will wait for a bit longer before deciding what to do - something which I must admit, I find exceedingly hard to do.

 

Kiron Sarkar

 

13th February 2013

 

[racemize]

If someone thinks that BAC's intrinsic value is as low as $20

 

Was merely illustrative. If it's worth $40 and you sell it at $40 waiting for it to get back down to $20, that's not timing....which was my point.

 

I think we all agree on the micro on this point; the issue is applying it to macro (at least if I understand what you are talking about well enough).  From my point of view, it is hard enough to figure out IV for an individual company--attempting to know IV on a market level seems very hard, and I certainly don't think I could profit from my own market calls very well (e.g., you can be wrong for a long time before the market corrects).  If your system works at a macro level, then I'm glad for you!  (As a side question, haven't you been concerned at the macro level for more than a year at this point?  Did this cost you gains in the short term that you are hoping to recoup if/when a market correction happens?  Basically, is your system yielding you more gains than you otherwise would have?)

 

As to calling it "timing", I think that just comes from a heavy skepticism about whether such macro calling systems are reliable and/or profitable.  Micro calls are tricky enough as it is.  My attraction to value investing is its simplicity in concept--making macro judgements takes me well out of the simple concept and into areas where we can be easily fooled by trends/models/etc., at least in my opinion.

[bmichaud]

If someone thinks that BAC's intrinsic value is as low as $20

 

Was merely illustrative. If it's worth $40 and you sell it at $40 waiting for it to get back down to $20, that's not timing....which was my point.

 

I think we all agree on the micro on this point; the issue is applying it to macro (at least if I understand what you are talking about well enough).  From my point of view, it is hard enough to figure out IV for an individual company--attempting to know IV on a market level seems very hard, and I certainly don't think I could profit from my own market calls very well (e.g., you can be wrong for a long time before the market corrects).  If your system works at a macro level, then I'm glad for you!  (As a side question, haven't you been concerned at the macro level for more than a year at this point?  Did this cost you gains in the short term that you are hoping to recoup if/when a market correction happens?  Basically, is your system yielding you more gains than you otherwise would have?)

 

As to calling it "timing", I think that just comes from a heavy skepticism about whether such macro calling systems are reliable and/or profitable.  Micro calls are tricky enough as it is.  My attraction to value investing is its simplicity in concept--making macro judgements takes me well out of the simple concept and into areas where we can be easily fooled by trends/models/etc., at least in my opinion.

 

Awesome response, seriously. Yes I effed up early last year. Fortunately, I reversed course quite quickly and learned from it. In a nutshell, I was purely looking at the broad market valuation and concluded the risk/reward was highly unfavorable. What I did not take into account was sentiment (of various forms....). So the overall risk/reward was not in my favor - valuation was, but everyone was so negative that there were only buyers remaining in the short-run. So now I look at both.... Lesson learned - sentiment rules in the short-run....

 

For example, sentiment became extremely negative after the election. And even though valuations still weren't favorable, I was loading up in order to take advantage of the extreme pessimism.

 

Right now every single aspect is lining up in favor of being defensive (extremely?)...

 

1. valuations suck - GMO is projecting less than 3% per annum over next seven years

2. optimism is at absurd levels

3. Citi Economic Surprise index is plummeting - i.e. the market is highly susceptible to downside surprise at the moment.....

 

Not saying BAC and AIG are not cheap long-term....I just think things are lining up for a very ugly sell-off that will provide many more opportunities in aggregate that will supercede whatever is available right now.

[giofranchi]

There is still such a long list of opportunities just in the US

 

PlanMaestro,

you obviously know many more companies than I do, and you are comfortable investing in a wide range of opportunities. If I had read every post on the BAC thread, I am sure I would be able to judge its intrinsic value as well as you do. But… I cannot find the time! Really! And, please, believe me: it is not a matter of laziness on my part! I think I am a true workaholic… and I would enjoy tremendously knowing all you know about BAC! The truth is I MUST be selective. Remember Mr. Marks? Double level thinking: not only should I be able to correctly judge the future prospects of a company, but I must also be able to have a view on them, which is different from the one held by the market, and most of all which is correct! Wow! It sounds like a lot of work is required for just one company! Hard work! I cannot delve deep into everything. Capital allocation is one responsibility of mine… maybe the most important responsibility, but of course not the only one. And I have chosen to know well a few things and to wait for the right prices before investing. It is limiting, I know. What I call my ‘circle of competence’ expands very slowly... But I think it would really be foolish for me to behave differently.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[PlanMaestro]

From 1997:

 

[enoch01]

From 1997:

 

 

Awesome - thanks for that.