Secular Bull?

[vinod1]

I think his point was that the talk of bubbles now is premature based upon valuation.

 

Packer

 

I thought Shiller's is making the same exact point. No bubble but on expensive side.

 

Vinod

[Packer16]

You are correct but I think the difference lies in the amount of overvaluation at this point.  Siegel think little or non while Schiller thinks there is quite a bit.

 

Packer

[jschembs]

Have any of you guys seen Jeremy Segal's rebuttal for the use of CAPE?  I saw it today at the CFA conference and it was pretty convincing.  The main issue is the use of reported S&P earning which include goodwill and asset write-downs over the past 10 years that were not included in the data before 10 years ago.  If you adjust the data for these reporting differences the CAPE is at or below its historic average.

 

Packer

 

I was satisfied with the argument that you don't buy stocks today for their earnings 10 years ago.  You buy them for the next ten years' and beyond.

 

What happens when your estimates of their future earnings power is incorrect?

 

I thought this was a value blog.

[gary17]

Margin of safety

 

Have any of you guys seen Jeremy Segal's rebuttal for the use of CAPE?  I saw it today at the CFA conference and it was pretty convincing.  The main issue is the use of reported S&P earning which include goodwill and asset write-downs over the past 10 years that were not included in the data before 10 years ago.  If you adjust the data for these reporting differences the CAPE is at or below its historic average.

 

Packer

 

I was satisfied with the argument that you don't buy stocks today for their earnings 10 years ago.  You buy them for the next ten years' and beyond.

 

What happens when your estimates of their future earnings power is incorrect?

 

I thought this was a value blog.

[Liberty]

I thought this was a value blog.

 

It's not a value blog. It's not a blog at all, in fact. It's a forum! :D

[txitxo]

 

Yup. He managed to keep just a little ahead of the market averages by being a basic , but not outstanding value investor while adding a few idiosyncratic positions with inflated present values that captured what the market was doing at the time.  As value investing tailed off in popularity in the late 90's his small number of tech favorites like AOL and Dell caught the wave and kept him above the S&P average while other value investors trailed the averages.  Then, with a little rebalancing reducing his tech exposure, the majority of value stocks in his portfolio caught the value surge post Y2K.

 

It was easy to see the writing on the wall predicting his demise as his idiosyncratic positions became crappy value traps like Kodak and Financials or cyclicals ready to go bust as the credit cycle ran out of gas and turned south.

 

I am pretty sure that you can show that Buffett's returns are almost impossible to generate by chance. But not Miller's.

[giofranchi]

Have any of you guys seen Jeremy Segal's rebuttal for the use of CAPE?  I saw it today at the CFA conference and it was pretty convincing.  The main issue is the use of reported S&P earning which include goodwill and asset write-downs over the past 10 years that were not included in the data before 10 years ago.  If you adjust the data for these reporting differences the CAPE is at or below its historic average.

 

Packer

 

Well, he might have a point, but I guess it is not much relevant, after all… Mr. Hussman, who I think is a very reliable “observer of stock market past”, identifies a syndrome called “overvalued, overbought, overbullish, yields rising”, and he has shown many times that in the past, whenever that syndrome has occurred, steep market losses have followed. And by overvalued he says CAPE must be above 18… Therefore, if it is 25 or 20 makes little difference… Right?

I am not saying the future is bound to repeat the past… What I am saying is that, particularly in a deleveraging, I don’t like an “overvalued, overbought, overbullish, yields rising” syndrome… It simply speaks of overconfidence to me…

 

This being said, even Mr. Hugh Hendry has said the bullish trend might go on for the next 3-4 years… So, what do I know?

 

Actually, what I know is that I am not “a man with a hammer”, I mean I don’t have to rely only on equity investing to build wealth. I have other means to make money. Therefore, if the bullish trend truly goes on for the next 4 years, I will grow my firm’s equity at a satisfactory rate, even while proceeding carefully with the stock market. :)

 

Gio

 

[Packer16]

I am sure Mr. Hussman is smart man but his performance in trying to turn his insights into dollars for clients is worse than an index fund.  Just look at his mutual fund returns versus the Vanguard index fund.  From this we can state that even though he has good insight even he cannot turn that into excess returns.  He is not alone look at Fairfax and for that matter any macro guys I know (Richard Bernstein).  What I take from this is making investment decisions on macro factors is like buying LEAPs, it is deceptively easy but about impossible to beat the index let alone some of your compounders or other's value oriented picks.  Macro provides some nice intellectual conversations which can prevents us from over trading (a hopefully not destructive distraction like CNBC) .  I think we just can't take the results of the conversation into our portfolios too seriously or it will seriously hurt our long-term performance.

 

Packer

[giofranchi]

I am sure Mr. Hussman is smart man but his performance in trying to turn his insights into dollars for clients is worse than an index fund.  Just look at his mutual fund returns versus the Vanguard index fund.  From this we can state that even though he has good insight even he cannot turn that into excess returns.  He is not alone look at Fairfax and for that matter any macro guys I know (Richard Bernstein).  What I take from this is making investment decisions on macro factors is like buying LEAPs, it is deceptively easy but about impossible to beat the index let alone some of your compounders or other's value oriented picks.  Macro provides some nice intellectual conversations which can prevents us from over trading (a hopefully not destructive distraction like CNBC) .  I think we just can't take the results of the conversation into our portfolios too seriously or it will seriously hurt our long-term performance.

 

Packer

 

+1

 

I agree 100%

 

Gio

 

[twacowfca]

 

Yup. He managed to keep just a little ahead of the market averages by being a basic , but not outstanding value investor while adding a few idiosyncratic positions with inflated present values that captured what the market was doing at the time.  As value investing tailed off in popularity in the late 90's his small number of tech favorites like AOL and Dell caught the wave and kept him above the S&P average while other value investors trailed the averages.  Then, with a little rebalancing reducing his tech exposure, the majority of value stocks in his portfolio caught the value surge post Y2K.

 

It was easy to see the writing on the wall predicting his demise as his idiosyncratic positions became crappy value traps like Kodak and Financials or cyclicals ready to go bust as the credit cycle ran out of gas and turned south.

 

I am pretty sure that you can show that Buffett's returns are almost impossible to generate by chance. But not Miller's.

 

I think one could almost replicate Miller's performance in the years he outperformed by using a simple algorithm, perhaps something like:

 

Put 85% of your portfolio into value stocks using a screen like a Ben Graham value screen.

 

Put the remainder into outstanding growth stocks.

 

Rebalance between growth and value when the growth stocks reach 25% of portfolio value.

 

When growth stocks lose momentum and value stocks begin to outperform growth, get rid of the growth stocks and stick with the basic value style.

[TwoCitiesCapital]

I am sure Mr. Hussman is smart man but his performance in trying to turn his insights into dollars for clients is worse than an index fund.  Just look at his mutual fund returns versus the Vanguard index fund.  From this we can state that even though he has good insight even he cannot turn that into excess returns.  He is not alone look at Fairfax and for that matter any macro guys I know (Richard Bernstein).  What I take from this is making investment decisions on macro factors is like buying LEAPs, it is deceptively easy but about impossible to beat the index let alone some of your compounders or other's value oriented picks.  Macro provides some nice intellectual conversations which can prevents us from over trading (a hopefully not destructive distraction like CNBC) .  I think we just can't take the results of the conversation into our portfolios too seriously or it will seriously hurt our long-term performance.

 

Packer

 

Somebody forgot to tell Ray Dalio and Bridgewater this....

[Packer16]

At some point he will be wrong and you hope he has not bet too much on being right.  The macro is too complicated to figure out.  There are so many factors beyond anyones control that its only a matter of time until you are wrong.

 

Packer

[steph]

"If you look at the psychological characteristics of a “Dangerous Bubble” – they were all present in spades at the peak of

the real estate bubble in 2005. It was a “can’t lose” and “gotta be on board” speculative mentality when it came to owning real estate. The same was true with the tech bubble of the late ’90s."

 

I just read this recently (don't remember where) and from all the people I see and meet today, I can tell that we are not even close to this speculative mentality. People are still extremely sceptical of this bull market.

 

Just my impression.

 

Mr.Hussman is a perma-bear. He will probably wait tu turn positive when markets get as cheap as in 1932. Good luck to him! His cost of ommission will be huge.

[ERICOPOLY]

Have any of you guys seen Jeremy Segal's rebuttal for the use of CAPE?  I saw it today at the CFA conference and it was pretty convincing.  The main issue is the use of reported S&P earning which include goodwill and asset write-downs over the past 10 years that were not included in the data before 10 years ago.  If you adjust the data for these reporting differences the CAPE is at or below its historic average.

 

Packer

 

I was satisfied with the argument that you don't buy stocks today for their earnings 10 years ago.  You buy them for the next ten years' and beyond.

 

What happens when your estimates of their future earnings power is incorrect?

 

I thought this was a value blog.

 

I love your comment  :-* :-* :-*

[Guest]

Hendry is predicting another 3-4 bull market? While possible, that's fairly unlikely. From what I've read, bull markets usually last about 4-5 years. Right now, we are in the middle of that range. Another 3-4 years would put us in 1980s and 90s land - possible, but goes against history (with QE and stimulus though...perhaps history isn't the best predictor).  Personally, I don't know what will happen. However, when even the bears are starting to believe, that signals to me that it's time to be a little cautious (not bearish, mind you, but cautious). 

 

Back in 2007, people weren't super crazy about equities (at least not compared to the 90s). People were concerned about war, oil, inflation, etc. It seems a little outlandish to me to think that our problems are all fixed and we can grow like crazy by doing some monetary fancy work. I've wondered what would bring us back to 70s valuations (one would think the "worst recession since the Great Depression" would have brought valuations back to the land of the 1970s (or at least closer) since this time was allegedly worse) a ton of government and consumer debt with people moving out of cash and bonds to equities to get a return seems like that could get us there.

[Packer16]

I think one aspect of the recovery versus previous upturns is the lack of sub-prime financing as banks have stopped this type of lending.  The void is being filled by other capital providers just now so we may have a way to go until this financing becomes more fully tapped out.  In addition, with the disinflationary environment we are in, I think an above average multiple is appropriate because the alternative investments have such low yields. 

 

Packer

[premfan]

Hendry is predicting another 3-4 bull market? While possible, that's fairly unlikely. From what I've read, bull markets usually last about 4-5 years. Right now, we are in the middle of that range. Another 3-4 years would put us in 1980s and 90s land - possible, but goes against history (with QE and stimulus though...perhaps history isn't the best predictor).  Personally, I don't know what will happen. However, when even the bears are starting to believe, that signals to me that it's time to be a little cautious (not bearish, mind you, but cautious). 

 

Back in 2007, people weren't super crazy about equities (at least not compared to the 90s). People were concerned about war, oil, inflation, etc. It seems a little outlandish to me to think that our problems are all fixed and we can grow like crazy by doing some monetary fancy work. I've wondered what would bring us back to 70s valuations (one would think the "worst recession since the Great Depression" would have brought valuations back to the land of the 1970s (or at least closer) since this time was allegedly worse) a ton of government and consumer debt with people moving out of cash and bonds to equities to get a return seems like that could get us there.

 

1970s valuation wont come back unless rates go up insanely. Current moment s & p earnings yield is 5.04 percent compared to the 10 yr at 2.75 percent. Thats a decent spread and given a choice its rational to invest in the market. Some companies have a higher earnings yield so there is more of a margin of safety in picking individual companies. The market as a whole is fair right now. I can see it getting dicey if the 10 yr gets to say 3.25 and the market continues to go up to say a 4 percent earnings yield.

 

The spread would be so low that the risk/reward  wouldnt  make sense.  We are not buying the market so buying companies with an above average  earnings yield is the margin of safety. If the market corrects  just load up on your horses.

 

 

[Guest]

Packer, good points. I didn't think about that.

 

Good point too, prem. What if we go through a world wide deflationary spiral? Wouldn't it be within reason to possibly see 70s type of valuations again?

 

Were interests all that high in the 70s? From what I see, when the market hit the bottom in 1974, rates were around 7.5% on the 10 year - high, but not abnormally so.

[ERICOPOLY]

Back in 2007, people weren't super crazy about equities (at least not compared to the 90s).

 

The 2007 stock market crash was triggered by an economic crash.  You had all the people borrowing against their homes, you had overbuilding of housing units and the accompanying economic boom... then all that vaporized way too fast.

 

Right now, I see underemployment.  I see no special amount of borrowing against appreciated assets.  Housing is still underbuilt on an ongoing basis versus trend household formation, and so if anything we're still getting a negative headwind from real estate -- or at least far from a tailwind.

 

So the jobs keep grinding back.  There isn't a big balloon in the economy about to burst.

[ERICOPOLY]

And the nation's automobile fleet is about as old as it's ever been.  There is a lot of deferred replacement that's yet to kick in.

[Packer16]

An interesting graph about delevering.  I think we are half-way or more to delevering point.

 

http://research.stlouisfed.org/fred2/series/HDTGPDUSQ163N?cid=32267

 

Packer

[Guest]

Eric, I don't disagree with most of what you said.

 

I'd be cautious as to what appears there's no big balloon about to burst. Indeed, these things seem to not be easy to see, except in hindsight.

 

There is a special amount of borrowing on a government level. Perhaps nothing will happen though, but I'm cautious. Klarman referring to the US citizens knowing more than government officials said "they know that a society's wealth is not unlimited, and that if the economy is so fragile that the government cannot allow failure, then we are indeed close to collapse."

 

He goes on to say, "There is no free lunch in economics; if governments could print or borrow money in astronomical amounts without any major adverse consequences, why wouldn't they always do this, forever avoiding downturns while their countries bask in the sunshine of limitless prosperity?"

 

He's been wrong since 2010...but, if his past is any indication, he'll probably be proved right within the next 2 years.

[matjone]

Looks like there's a fair amount of margin debt

 

http://www.nyxdata.com/nysedata/asp/factbook/viewer_edition.asp?mode=table&key=3153&category=8

 

I'm skeptical whether anyone can call these things, but for whatever it's worth it seems a lot of respected value guys with good records are on the record as being worried about the level of the market.

[moustachio]

+1 to Ericopoly. The length of a bull market is probably influenced by a lot of things(perceived macro environment risk, value relative to other assets, etc), but there is more pent up demand from the deep and long recession than there would be from a "normal" recession/expansion cycle. Because of that I wouldn't necessarily compare the length of this bull market or economic expansion to other more "normal" historical markets.

 

I think with cars though there isn't as much pent up demand as it would seem historically, because newer cars just last better and longer. I drive a Honda that will be 10 years old soon and there isn't any rust and no mechanical problems. The last car I had that was 10 years old was getting rusty and little mechanical problems were getting annoying. Average age of the fleet might be going up, but perceived age probably is maybe not as far out of line with historical standards.

 

One of the biggest things I think of these days with regards to macro, other than the elephant in the room of monetary policy, is oil production and a potential boom and bust cycle. Right now increased oil production has to be a nice boost to economic output and should help along a long bull market. However, if the oil industry becomes a victim of it's own success and prices plummet due to excess supply, then a bust in the oil industry might be enough to tip us into recession and end a bull market. I don't know how likely this is, but its definitely near the top of my list on things to watch. If an oil industry bust looks likely I'll be out of stocks. If prices stay stable it should be a nice contributor to a stable growing economy and a potential secular bull market though.

[ERICOPOLY]

I'd be cautious as to what appears there's no big balloon about to burst. Indeed, these things seem to not be easy to see, except in hindsight.

 

The last two have been easy to see in real-time.

 

You suddenly had grocery stores putting ".Com" on the end of their name.  I remember when the local Albertson's became Albertson's.Com.  You had commercials on TV for ETrade where the teenage boy was landing a helicopter on his parents' suburban front yard.  You had people earnings 6-figure salaries if they could code in HTML.  Remember some of those valuations?  MSFT was at 70x earnings.  I think even KO was in excess of 40x earnings. 

 

Then in real estate you had lending in excess of 100% of the homes value.  No documentation loans, etc...  People new to real estate investing suddenly owned 4 or 5 properties with excessive leverage that were appreciating 20% a year.  New housing construction well ahead of household formation -- oversupply building.

 

This wasn't that hard to spot.  Not like today, anyway.  Where is the common man on the street today earning easy money?  Who is lending to him excessively?  Where are new college graduates earning 6-figure incomes with limited experience?  Who is getting rich quick today, what sector?