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I Worry About "The Shot Heard Around The World"


Parsad
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I'm getting more and more freaked out about what I see in the markets.  Cash is flooding in...great, because the funds are up big...but very, very disconcerting as investors continue to accept very low risk premiums.  The cash continues to build! 

 

Anyone else getting worried?  Cheers!

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I'm on watch, but I own some very cheap securities (90% of my portfolio is in $AIG $BAC $CHK).

 

I won't let the herd decide when I enter / exit, but I can sure hear their footsteps.

 

In this thread: a lot of investors discussing macro themes and ignoring underlying valuations of individual companies.

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Yup, I think with Helicopter Ben lands, people who have been reaching for yield will get whacked. I can't figure out how people can pay the kind of multiples they are paying and sleep at night. I feel light headed just writing about it, LOL.

 

TRP - today's numbrs.

 

Valuation Measures 

Market Cap (intraday)5: 34.89B

Enterprise Value (May 8, 2013)3: 56.77B

Trailing P/E (ttm, intraday): 24.56

Forward P/E (fye Dec 31, 2014)1: 19.50

PEG Ratio (5 yr expected)1: 3.35

Price/Sales (ttm): 4.11

Price/Book (mrq): 2.14

Enterprise Value/Revenue (ttm)3: 6.70

Enterprise Value/EBITDA (ttm)6: 13.72

 

 

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Looks like Prem might have been right all along. We are in yr 5 after the crisis. He could make up for all the lost time pretty quickly if this scenario plays out.

 

People are getting excited about mkts.

Reaching for yield and income.

 

Reality:

US is slow

Europe has issues

BRICs are not growing as fast

corporate profits are high and could contract

 

Central banks and govts are maxed out. Cant juice markets much more.

 

Time to be defensive.

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I may buy market puts for the first time in my life.  Could be a bad idea as I probably have no advantage here, but it's an indication of my worry.

 

I have a lot of cash.

 

I have been looking at those puts as insurance, but find that the premiums are too high! I would love to know a cheap way to insure.

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Looks like Prem might have been right all along. We are in yr 5 after the crisis. He could make up for all the lost time pretty quickly if this scenario plays out.

 

People are getting excited about mkts.

Reaching for yield and income.

 

Reality:

US is slow

Europe has issues

BRICs are not growing as fast

corporate profits are high and could contract

 

Central banks and govts are maxed out. Cant juice markets much more.

 

Time to be defensive.

 

wisdom, words of wisdom!  ;D ;D ;D

 

giofranchi

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I may buy market puts for the first time in my life.  Could be a bad idea as I probably have no advantage here, but it's an indication of my worry.

 

I have a lot of cash.

 

I have been looking at those puts as insurance, but find that the premiums are too high! I would love to know a cheap way to insure.

 

Bingo.

 

It dawned on me that things are getting pretty expensive when I have to buy crap like DGIT to try and make a buck.

 

For now I just keep building cash.  Maybe buy some Fairfax if it gets cheaper.  I don't have a lot of good ideas.

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I'm extremely concerned with the real estate market. Two weeks ago i was looking at a multi family property that has listed on the market for 12 days. Within 12 days it had 2 offers and one of the offers was from an international buyer! This market has NEVER been a market where there are international buyers! I had a convo about this with a president of a local bank and he said that its a dangerous time to invest in real estate due to rent rates have not increased really since 2007. But asset prices have increased 25 plus percent since the lows.

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I'm getting more and more freaked out about what I see in the markets.  Cash is flooding in...great, because the funds are up big...but very, very disconcerting as investors continue to accept very low risk premiums.  The cash continues to build! 

 

Anyone else getting worried?  Cheers!

 

I've been building cash over the past 3 months, but it's getting harder and harder to continue to do so in the face of this expanding market. I've gotten to the bottom of the barrel now and don't want to sell LT holdings like FFH, LUK and BRK because of capital gains tax so I've begun to hedge with puts. The problem is the timing! I always get it wrong. Who was it that said they knew it was a good investment only when it made them nauseous?

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my cash level have been building its now 40%

 

but there are some values out there, but its very hard not to speculate that a short term drop will occur which will allow you to buy at a lower price

 

 

but then again, i have been waiting for that for a month or 2 as the market keeps going up :)

 

hy

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Guest wellmont

I'm extremely concerned with the real estate market. Two weeks ago i was looking at a multi family property that has listed on the market for 12 days. Within 12 days it had 2 offers and one of the offers was from an international buyer! This market has NEVER been a market where there are international buyers! I had a convo about this with a president of a local bank and he said that its a dangerous time to invest in real estate due to rent rates have not increased really since 2007. But asset prices have increased 25 plus percent since the lows.

 

there is No Institutional memory-----Leon Black May 2013.

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in regards to real estate

 

we just recently sold a place in nyc

 

i was shock when we put it on the market, we had 6 offers at asking or over within a few days, the deal is done before the photographer came to take the picture for the listing. we bought this place at the end 2009 when very few people were buying, now we sold it for over 30% higher

 

crazy :)

 

but then again, i think we bought it at a very good price, with the limited inventory the prices has gone up, but to be honest the price we sold it at (even thought is 30% higher than when we bought it) at the currently condition, its a reasonable price.

 

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I'm getting more and more freaked out about what I see in the markets.  Cash is flooding in...great, because the funds are up big...but very, very disconcerting as investors continue to accept very low risk premiums.  The cash continues to build! 

 

Anyone else getting worried?  Cheers!

 

  Like I've been saying since last year, I'm out of NA markets except for ~20% of my portfolio in FFH. The numbers show a huge amount of optimism, the Shiller P/E is over 23, etc.  Any major piece of bad news can easily provoke a 40-50% crash.

 

  Europe has a Shiller P/E below 14, and you can read everyday articles in FT and other serious publications warning of an impending eurozone break up, half of Europe is in deflation, etc. We haven't had any QE yet, only austerity and more austerity. The indicators show that all that pessimism is baked into stock prices.

 

Which market do you think has more upside?

 

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I feel nervous as well, but I am not sure what to sell since my holdings are still all undervalued. It seems to be a perennial problem to a value investor. In 1999, I could not find any deal or making it easy to be mostly in cash but now, there are still cheap stocks. You can trim a bit, but it does not seem enough to move the needle in terms of cash raising, especially when your portfolio keeps moving up a little bit each day. Take-overs are a blessing at the moment since they give you a nice exit point.

 

Buying index puts is a losing strategy based on my own experience. I did buy some not that long ago and they are now way underwater or the index would need to fall by 8% just to reach strike. I guess it was a well calculated move back then, but now it looks foolish. Do I want to pay another premium at a strike closer to current index prices to be insured once again?

 

Shorting the index is also quite dangerous and you will have to pay a rental fee and the dividend. Lower cost than paying puts premiums, but you have to live with the liability.

 

The other issues that arise are psychological and imperfect hedging. In some ways, you root for the market to go down which feels odd since you still hold some stocks in your portfolio that you believe are undervalued and a rising market should help them somewhat to reach fair value. You also have no reference point whatsoever as to when or at what price to take the hedges off. Round trips are a strong possibility and missing out on the true bear if it comes also. Then the lack of correlation between your stocks and the hedges is often miscalculated when you get into these hedges. A 1% daily down move in the SPY while your stocks are going down 2 or 3% will drive you nuts and will show how little hedged you are with index puts. You can try the Russell ones, but it is a similar story. The volatility is higher so they charge you a higher premium.

 

In the mini correction in mid-April, I found how useful cash is. It always seems to be the beaten down stocks that get more pounded during a correction. Buying them with cold hard cash during these instances of panic driven by margin calls or just market devaluation provides probably the best hedge or defense. So now I am back to the beginning of my post or how to raise it?  :-\

 

Cardboard

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my sentiments exactly

 

hy

 

I feel nervous as well, but I am not sure what to sell since my holdings are still all undervalued. It seems to be a perennial problem to a value investor. In 1999, I could not find any deal or making it easy to be mostly in cash but now, there are still cheap stocks. You can trim a bit, but it does not seem enough to move the needle in terms of cash raising, especially when your portfolio keeps moving up a little bit each day. Take-overs are a blessing at the moment since they give you a nice exit point.

 

Buying index puts is a losing strategy based on my own experience. I did buy some not that long ago and they are now way underwater or the index would need to fall by 8% just to reach strike. I guess it was a well calculated move back then, but now it looks foolish. Do I want to pay another premium at a strike closer to current index prices to be insured once again?

 

Shorting the index is also quite dangerous and you will have to pay a rental fee and the dividend. Lower cost than paying puts premiums, but you have to live with the liability.

 

The other issues that arise are psychological and imperfect hedging. In some ways, you root for the market to go down which feels odd since you still hold some stocks in your portfolio that you believe are undervalued and a rising market should help them somewhat to reach fair value. You also have no reference point whatsoever as to when or at what price to take the hedges off. Round trips are a strong possibility and missing out on the true bear if it comes also. Then the lack of correlation between your stocks and the hedges is often miscalculated when you get into these hedges. A 1% daily down move in the SPY while your stocks are going down 2 or 3% will drive you nuts and will show how little hedged you are with index puts. You can try the Russell ones, but it is a similar story. The volatility is higher so they charge you a higher premium.

 

In the mini correction in mid-April, I found how useful cash is. It always seems to be the beaten down stocks that get more pounded during a correction. Buying them with cold hard cash during these instances of panic driven by margin calls or just market devaluation provides probably the best hedge or defense. So now I am back to the beginning of my post or how to raise it?  :-\

 

Cardboard

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My portfolio seems to be going up everyday - that is not normal. I am trying to cash out of anything that is closer to fair value and potentially not a long term hold.

 

There could be better opportunities in the future.

 

The odds are against the market going up even though my portfolio is cheap. Thus, my portfolio could still get hit.

 

Also, note cash amounts:

Buffet - $49B

FFH - 8B or 30% and hedges

Klarman - 30%

Chou - is about 20% and increasing

Berkowitz is at 30%

and you could go on.

 

Assets are generally inflated and thus, as a disciplined value investor one needs to pull back and accept that the market could conitnue its run just like in 1999. But could present opportunities later and the dry powder will help. Need to be patient and let the herd do its thing.

 

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These esteemed value investors could all be collectively wrong, and I feel that pulling out of the market just because it is rising is another form of market timing, which I believed was frowned upon.

 

If you're really worried about the market turning, why not just buy puts? Sure it'll cost a premium, but if your bearish case is incorrect and market keeps rising and you pull out, relative to the index you'll still lose out...or you could be like boilermaker75 and sell options - which ensures he will "win" regardless of which way the market turns....

 

As for the "shot heard around the world", QE will cease contingent upon economic growth (hopefully), which is again bullish for stock prices. There may be a major correction, but over the next few years, especially if EU delevers with Monetary easing, we could well see a bonanza in the stock markets.

 

 

 

 

Just IMO...

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Guest hellsten

I'm selling US holdings and buying Europe. I've been 95% in US stocks for years and now seems a good time to buy Europe. Hope Europe is not the next Japan :-\

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I'm getting more and more freaked out about what I see in the markets.  Cash is flooding in...great, because the funds are up big...but very, very disconcerting as investors continue to accept very low risk premiums.  The cash continues to build! 

 

Anyone else getting worried?  Cheers!

 

  Like I've been saying since last year, I'm out of NA markets except for ~20% of my portfolio in FFH. The numbers show a huge amount of optimism, the Shiller P/E is over 23, etc.  Any major piece of bad news can easily provoke a 40-50% crash.

 

  Europe has a Shiller P/E below 14, and you can read everyday articles in FT and other serious publications warning of an impending eurozone break up, half of Europe is in deflation, etc. We haven't had any QE yet, only austerity and more austerity. The indicators show that all that pessimism is baked into stock prices.

 

Which market do you think has more upside?

 

txitxo,

you already know we have different views here… If the US stock market crashes, every other market all around the world will follow suit. Valuations, pessimism, etc. won’t matter at all. I don’t know of a single instance in which the US stock market crashed and Europe’s instead proceeded undisturbed! Not a single one. I don’t see why this time should be different: imo, everything will fall together.

 

giofranchi

 

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So, I personally feel we're just as easily in the early stages of the rise here, as having any sort of "shock" with a turning point.  I have lost significant money in the past trying to hedge the overall market with s&p puts--I was more than a year early, so I don't play that particular game.

 

In terms of individual stocks, I agree with Cardboard completely.  I also agree that it's a consistant problem.

 

I have not changed anything in my directly-managed portfolios except I have only bought into special situations with new money for a few months.  In my 403b, I cannot invest in individual stocks, and I just recently cut back my markets allocation by 10%, and new funds are just going to stay in cash.  As things rise more I may cut back farther, but as I said we're just as easily early as late.

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