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The last time the Dow was here


MrB
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http://www.zerohedge.com/news/2013-03-05/last-time-dow-was-here

 

Dow Jones Industrial Average: Then 14164.5; Now 14164.5

Regular Gas Price: Then $2.75; Now $3.73

GDP Growth: Then +2.5%; Now +1.6%

Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million

Americans On Food Stamps: Then 26.9 million; Now 47.69 million

Size of Fed's Balance Sheet: Then $0.89 trillion; Now $3.01 trillion

US Debt as a Percentage of GDP: Then ~38%; Now 74.2%

US Deficit (LTM): Then $97 billion; Now $975.6 billion

Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion

US Household Debt: Then $13.5 trillion; Now 12.87 trillion

Labor Force Particpation Rate: Then 65.8%; Now 63.6%

Consumer Confidence: Then 99.5; Now 69.6

S&P Rating of the US: Then AAA; Now AA+

VIX: Then 17.5%; Now 14%

10 Year Treasury Yield: Then 4.64%; Now 1.89%

USDJPY: Then 117; Now 93

EURUSD: Then 1.4145; Now 1.3050

Gold: Then $748; Now $1583

NYSE Average LTM Volume (per day): Then 1.3 billion shares; Now 545 million shares

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What's your point exactly? I see a lot of things that can get better, so there is a lot of potential for upside?

 

It's interesting data.

 

Here's a few other data points:

 

US GDP: Then 13,336; Now 15,094

Employed Americans: Then 146,047,000; Now 142,469,000

Trailing 12 month average savings rate: Then 2.43%; Now 3.82%

 

Interestingly enough, I came across this monthly savings rate data to calculate the above:

http://research.stlouisfed.org/fred2/data/PSAVERT.txt

 

The personal savings rate rose above 5% for exactly one month between 1998 and 2008.

 

It's gone above 5% 22 times since 2008.

 

It was above 5% 34 times in the five years prior to 1998.

 

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This will either be the first bull market in my 30+ year career I am missing out on, or the frothiest market built on weak fundamentals. Either way I am glad being only 10% long and have no problem waiting as long as a year or two for the fat pitches.

 

Show me one name that isn't incredibly overvalued in a normalized interest rate environment. Essentially everyone invested heavily or deploying capital in this market is making a political/macro bet on interest rates. That they will stay at near zero or possibly turn negative (nominal negative IE: fed will begin to charge for cash yet another keynsian possibility on the horizon).

 

You compare this market to 2007, I think it's worst. Do you all remember those homes in vegas we were buying? Well they are all 100% rented out and have appreciated by nearly 80% since then. Why? Because everyone is buying 2-3 homes as an investment in vegas and that is because banks have started to lend to investors purchasing home portfolios in vegas. The economics are not nearly as attractive as they were when we entered the game (15-30% cash on cash) now guys are doing deals for a 7-12% levered return...

 

Usually it would have taken 3-5 years for the cycle to progress from trough to peak but in this cycle somehow we have gone from trough to peak in less than 8 months. The velocity of money is clearly increasing and all this fed paper floating around is in fact finding its way into the real economy albeit in the most unproductive and unsustainable ways. Had the US government been delevering while all this was occurring I would be more tempered however all we see is continued levering by the government, by unfunded liabilities, and now by consumers and investors again.

 

We have put up our vegas portfolio for sale - hoping to sell it to Blackstone or one of these other firms entering the game late in the hopes of IPOing their product as a reit (yes this is the new trend buying single family homes and then taking them public). It appears to me that every investment decision out there is predicated on the flawed assumption that rates will stay this low forever. I won't be as foolish.

 

Still open to individual value plays but I can't seem to find any fat pitches. Would love to hear if any of you have come across any.

 

 

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I don't believe the market is too high at all. I believe the economy is strengthening and I am happy to see a process of monetary easing that will continue to add liquidity and ensure economic growth for the long term, and I am glad to see that the US has a government that is willing to carry it out. I believe the rally has strong fundamentals, and am looking forward to profiting from it.

 

If for some reason, some idiots decide that monetary easing should not continue and rates should rise, then my thesis will be invalidated quickly. Hopefully that does not happen.

 

Despite my bullishness, I am 35% in cash. WTF?

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I don't believe the market is too high at all. I believe the economy is strengthening and I am happy to see a process of monetary easing that will continue to add liquidity and ensure economic growth for the long term, and I am glad to see that the US has a government that is willing to carry it out. I believe the rally has strong fundamentals, and am looking forward to profiting from it.

 

If for some reason, some idiots decide that monetary easing should not continue and rates should rise, then my thesis will be invalidated quickly. Hopefully that does not happen.

 

Despite my bullishness, I am 35% in cash. WTF?

 

That's fine, but I urge you to watch the entire 1 hour Druckenmiller interview. As he says himself hed be somewhat long into this himself but waiting and watching every morning for the inevitable reversal. This cannot go on forever (artificially low interest rates + global currency debasement + ad infinitum growth in transfer payments). Some managers/investors are happy to play the game but we made so much money in 2012 we can afford to wait for the fat pitches.

 

I sincerely look forward to under-performing the indices this year (as of now only +2% ytd)

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It is true that it will not go on forever, but historically, low interest periods after a deflation tend to stretch into many years. (In case you're not familiar, the Reinhard paper on panoramic views on asset price bubbles details this). The news of people complaining about low rates really worries me, and hopefully the Fed is not listening to them, or its own hawkish members. (My comment about idiots was not aimed at you FYI).

 

You have an explicit assumption mean reversion to "normal" interest rates. But you have to keep in mind that this reversion is dependent upon economic growth. Economy grows, rates will be raised with it. I doubt it will be a "switch on".

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Here are some fat pitches: TVL (6.2x 2-yr EBITDA,  24% 2-yr avg FCF yield), NXST (6.5x 2-yr EBITDA, 22% 2-yr avg FCF yield), TPCA (3.3 x EBITDA), HCOM (3.7x EBITDA), AIQ (3.9x EBITDA, 54% FCF yield), ATSG (4.3x EBITDA, 29% FCF yeild) and that does not even include distressed areas with more risk like OPAP (4.1x EBITDA) or Mediaset (4.8x EBITDA) and Telecom Italia (3.7x EBITDA) or some modestly undervalued financials like BAC or COF.

 

Some of these have gone up but the cash flows appear to be increasing also.

 

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Interest rates have been artificially low since 2008.. That's 5 years lol. The deflation buys are long gone buddy - if you are buying today you are buying with the herd. Hopefully you pick the right companies that can thrive in a normalized environment. You must realize this is an unprecedented macro environment - one which is manipulated to its core. A 14x PE on the DOW might seem "ok" and it really is just "ok" but you better be sure those companies can grow top-line or have liquidity to retire shares in a normalized i-rate environment. Because that 14x can just as easily turn into 18-20x while Corp bond rates will all of a sudden compete for capital again (3-5% Triple AAA rates which were historically below average).

 

My advice is simply to keep a lot of cash on the sidelines.

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Here are some fat pitches: TVL (6.2x 2-yr EBITDA,  24% 2-yr avg FCF yield), NXST (6.5x 2-yr EBITDA, 22% 2-yr avg FCF yield), TPCA (3.3 x EBITDA), HCOM (3.7x EBITDA), AIQ (3.9x EBITDA, 54% FCF yield), ATSG (4.3x EBITDA, 29% FCF yeild) and that does not even include distressed areas with more risk like OPAP (4.1x EBITDA) or Mediaset (4.8x EBITDA) and Telecom Italia (3.7x EBITDA) or some modestly undervalued financials like BAC or COF.

 

Some of these have gone up but the cash flows appear to be increasing also.

 

Packer

 

We are in OPAP (as a matter of fact I started the thread) and it hasn't worked out all that great. Not familiar with the other names but will study them this weekend.

 

We like MCP Debt here and the LEAPS, but we know the asset very well.

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Interest rates have been artificially low since 2008.. That's 5 years lol. The deflation buys are long gone buddy - if you are buying today you are buying with the herd. Hopefully you pick the right companies that can thrive in a normalized environment. You must realize this is an unprecedented macro environment - one which is manipulated to its core. A 14x PE on the DOW might seem "ok" and it really is just "ok" but you better be sure those companies can grow top-line or have liquidity to retire shares in a normalized i-rate environment. Because that 14x can just as easily turn into 18-20x while Corp bond rates will all of a sudden compete for capital again (3-5% Triple AAA rates which were historically below average).

 

My advice is simply to keep a lot of cash on the sidelines.

 

Hey moore, whats your take on the mining sector? There seems to be an inverse relationship between gold prices and gold mining service stocks. If would seem juniors should be able to get financing now since the markets have been performing well for awhile. I'm not really expecting gold to raise alot but, there seems to be a severe disconnect with the price of gold and the earning power of mining companies that havent manifested yet in the market. I see huge earning power in certain companies 2-3 years from now even if gold doesnt move higher. The catalyst are juniors getting financing. Although, i dont really know why juniors are not get financing this year and last year even though the capital markets are percepted to be much improved.

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If you look at history low rates have had a tendency to linger along time after deflationary cycles.  In the 1930's it lasted in the US until the inflation of WWII and in Japan it is still going on and it will be seen if they can stoke inflation with such a large debt to pay off.  I am of the opinion that inflation or higher interest rates will not appear until enough debt is paid off or inflated away to create demand.  With current employment situation we are still always off from that point.  The Fed has monetized the debt (in essence exchanging cash for gov't securities which it plans to hold until maturity).  This is what Sweden did in the 1930s and kept GDP growing.  The UK did a similar thing in the 1930s when it went off the gold standard and the stock market rallied 30% plus above 1929 levels in 1936.  In essence the monetization has offset the real price declines we would have seen if no stimulus was provided.  I think what your seeing in Europe is the non-monetization approach.  Monetization is not good but it is better than deflationary stagnation. 

 

Thanks for the OPAP idea.  It is nice in that they have no debt which would encumber names like Telecom Italia and Mediaset.  It is also cheaper than other players in the space like Lottomatica and Intralot who do have Euro debt.  The other cheap gaming firm is Konami but they have their own issues with being in Japan and competing in other areas like video games and health clubs.   

 

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I don't know where this market is going but I am having trouble choosing among all the bargains out there. Even if you restrict me to large caps.

 

Well, here is another chart for those that think that inflation is just around the corner and rates are about to spike. Velocity is still crashing … sorry Milton, it's not that stable.

 

http://farm9.staticflickr.com/8093/8543150720_2722bbbc35.jpg

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Here are some fat pitches: TVL (6.2x 2-yr EBITDA,  24% 2-yr avg FCF yield), NXST (6.5x 2-yr EBITDA, 22% 2-yr avg FCF yield), TPCA (3.3 x EBITDA), HCOM (3.7x EBITDA), AIQ (3.9x EBITDA, 54% FCF yield), ATSG (4.3x EBITDA, 29% FCF yeild) and that does not even include distressed areas with more risk like OPAP (4.1x EBITDA) or Mediaset (4.8x EBITDA) and Telecom Italia (3.7x EBITDA) or some modestly undervalued financials like BAC or COF.

 

Some of these have gone up but the cash flows appear to be increasing also.

 

Packer

 

Out of curiosity, why do you use FCF yield to note that they are undervalued. Given their debt loads, shouldn't FCF/EV be a better measure of FCF yield?

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It depends on whether you think they can handle the debt loads.  In low interest rate environment, a modest amount of debt can be better as you are borrowing cheap (in essence creating a LT call option with infinite duration - unless the there is a default).  The banks we have said are cheap have much more debt and we determine cheapness on earnings to equity and book value.  I have also included a measure of EV that illustrates their value on a unlevered basis.  I have excluded the firms that have higher EV measures and low FCF yields for that reason.

 

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I don't know where this market is going but I am having trouble choosing among all the bargains out there. Even if you restrict me to large caps.

 

Well, here is another chart for those that think that inflation is just around the corner and rates are about to spike. Velocity is still crashing … sorry Milton, it's not that stable.

 

http://farm9.staticflickr.com/8093/8543150720_2722bbbc35.jpg

 

This is one of the best items that I think I have seen posted in a while. Thanks plan.

 

As a side note, I think that when you couple that with this (M2) you can get a lot of clarification on things.

 

http://research.stlouisfed.org/fred2/series/M2

 

This economy is like a sponge that can't seem to get enough money sucked up... It's crazy when you think about it. To me, it's not a matter of if corporations start spending money again (and banks are making loans again), but when they do... We also have a bunch of baby boomers that are ready to start spending their nest egg- I would think that would help out as well

 

When that happens, it would seem to me that price inflation will go bananas given how it would pick up the velocity. The Dow may go up a ton, but will it be in perfect "real" numbers? Well, that seems to be the question behind one of the greatest experiments in monetary history.

 

As a side note, if we cap our budgetary spending here in the US (somewhat through sequester, or whatever) this inflation could take care of a lot of our budgetary woes. Ken Fisher talked about stuff like that with economic growth- I think.

 

Anyway, I think this is a fascinating time for us to be alive in... if nothing else, just to see who is proved right!

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