Twenty years junior to Warren Buffett, our Investment Guru of Year 2008 Prem Watsa is known as the “Warren Buffett of the North”, for good reasons, as you will see.
Just as Warren Buffett built Berkshire Hathaway (BRK-A), Prem Watsa built his Fairfax Financial Holding Limited (FFH) empire on the foundation of a collection of excellent insurance subsidiaries, except he cut through the deviations that Warren Buffett experienced during his earlier year -- No time for beating the bushes in textile or retail businesses; if Warren Buffett tried and failed, no need for Prem Watsa to reinvent the wheel.
If short term performance is all that matters, Prem Watsa should pride himself for outshining Warren Buffett considerably in 2008. On February 19, FFH reported best earnings in the company’s twenty-three-year history. Fourth quarter 2008 earning was $346.8 million and annual earning was $1,473.8 million for the 2008 year ($19.62 and $79.53 per diluted share, respectively). Company book value per share reached $278.28 and the company has more than $1.5 billion in cash and marketable at the holding company level.
* * *
So what do Warren Buffett and Prem Watsa have in common in when it comes to stock investing?
First of all, both have a highly concentrated portfolio.
According to GuruFocus Data, As of December 31, 2008, Warren Buffett has a stock portfolio of $52 billion, allocated among 41 stocks. For Prem Watsa, it is $5.2 billion among 44 stocks. Compared to some of other Gurus we follow, such as Kenneth Fisher who owns 632 stocks, or even the 500 companies that S&P 500 index includes, Buffett and Watsa are very concentrated.
Looking closely, their portfolios are more concentrated than these number suggested. The following table lists the top 10 holdings of Warren Buffett and Prem Watsa respectively. Each concentrates more than 85% in their top 10 holding.
Among Watsa's holdings are JNJ (2), PFE (3), DELL (5), INTC (6), GE (7).
* * *
There are twelve (12) stocks that are owned by both Gurus, in particular WFC, KFT, JNJ. The others are BNI, GE, USB, WSC, WMT, USG, GCI, SNY, GSK.
Saturday, February 28, 2009
Tuesday, February 24, 2009
Shiller's P/E below fair value
Yale professor Robert J. Shiller, the author of "Irrational Exuberance," created one of the most useful and predictive measures of stock-market valuation: the cyclically-adjusted price-earnings ratio (CAPE).
As Professor Shiller explains here, the CAPE mutes the impact of the business cycle by averaging 10 years of earnings. It thus provides a good picture of the market's value regardless of where we are in the business cycle.
Professor Shiller's P/E has finally dropped below fair value for the first time in 15 years. The market's cyclically adjusted PE is now under 14X (compared to a long-term average of about 15X).
So is Prof. Shiller going all-in? No. He's waiting until the P/E drops below 10X, which it has done at major market lows in the past.
[via paraguay2es]
As Professor Shiller explains here, the CAPE mutes the impact of the business cycle by averaging 10 years of earnings. It thus provides a good picture of the market's value regardless of where we are in the business cycle.
Professor Shiller's P/E has finally dropped below fair value for the first time in 15 years. The market's cyclically adjusted PE is now under 14X (compared to a long-term average of about 15X).
So is Prof. Shiller going all-in? No. He's waiting until the P/E drops below 10X, which it has done at major market lows in the past.
[via paraguay2es]
Japan's wipeout
Japan's painful hangover from its own version of the global financial crisis is a grim lesson for those who hope for a quick recovery from the present one. Japan is the only major industrialized country since the Great Crash of 1929 to go through a crisis of a similar scale. Like the United States and other world economies today, it suffered a market meltdown, a collapse in consumer confidence and a crisis in its banking system.
It has never fully recovered. After being knocked flat on its back by the bursting of a stock-market and real-estate bubble in the early 1990s, it stayed there for the rest of what became known as its lost decade.” It bounced back slightly after the turn of the century, only to head into trouble again as the global economy weakened. In all, the aftereffects of its crisis have lasted nearly two decades.
Japan's crisis seemed to hit like a lightning bolt from a clear blue sky. In the late 1980s, Japan was on top of the world. Its “miracle economy” had grown by an average of 10 per cent in the 1960s, 5 per cent in the 1970s and 4 per cent in the 1980s, putting its Western rivals to shame. Companies such as Honda, Canon and Sony were flooding the globe with Japanese-made cars, cameras and television sets. Japanese companies bought prized overseas assets like New York's Rockefeller Center and California's Pebble Beach golf course. In books such as Ezra Vogel's Japan as Number One, analysts predicted that Japan's tight-knit social fabric, disciplined business culture, hard-work habit and government-directed growth strategy gave it an irreversible edge over the tired economies of the West.
But trouble was brewing. Officials deregulated the financial markets and lowered interest rates, the same combination that would lead to the credit fiasco in the United States. With money easy to borrow, companies invested heavily in property and stocks, sending prices soaring. The Nikkei stock-market index more than tripled from 1985 to 1989. A square foot of land in Tokyo's Ginza shopping district was going for $139,000 (U.S.). It was said that the property around the sprawling Imperial Palace was worth more than the whole state of California.
When the bubble finally burst, it was a wipeout. The Nikkei dropped by two-thirds over the next two years. Commercial land values in the big cities fell by 80 per cent between 1991 and 2000. They never returned to their bubble levels. Neither did stocks. Today, the Nikkei stands at one-fifth of its 1989 peak.
[via kemcheca]
It has never fully recovered. After being knocked flat on its back by the bursting of a stock-market and real-estate bubble in the early 1990s, it stayed there for the rest of what became known as its lost decade.” It bounced back slightly after the turn of the century, only to head into trouble again as the global economy weakened. In all, the aftereffects of its crisis have lasted nearly two decades.
Japan's crisis seemed to hit like a lightning bolt from a clear blue sky. In the late 1980s, Japan was on top of the world. Its “miracle economy” had grown by an average of 10 per cent in the 1960s, 5 per cent in the 1970s and 4 per cent in the 1980s, putting its Western rivals to shame. Companies such as Honda, Canon and Sony were flooding the globe with Japanese-made cars, cameras and television sets. Japanese companies bought prized overseas assets like New York's Rockefeller Center and California's Pebble Beach golf course. In books such as Ezra Vogel's Japan as Number One, analysts predicted that Japan's tight-knit social fabric, disciplined business culture, hard-work habit and government-directed growth strategy gave it an irreversible edge over the tired economies of the West.
But trouble was brewing. Officials deregulated the financial markets and lowered interest rates, the same combination that would lead to the credit fiasco in the United States. With money easy to borrow, companies invested heavily in property and stocks, sending prices soaring. The Nikkei stock-market index more than tripled from 1985 to 1989. A square foot of land in Tokyo's Ginza shopping district was going for $139,000 (U.S.). It was said that the property around the sprawling Imperial Palace was worth more than the whole state of California.
When the bubble finally burst, it was a wipeout. The Nikkei dropped by two-thirds over the next two years. Commercial land values in the big cities fell by 80 per cent between 1991 and 2000. They never returned to their bubble levels. Neither did stocks. Today, the Nikkei stands at one-fifth of its 1989 peak.
[via kemcheca]
a lost generation?
The legacy of common stocks as the cause of so much misery in the 1930s has been made all the more emphatic by historians who have felt compelled to finish the story by reminding readers that it took the once mighty Dow Jones industrial average until 1954 — a lost generation it would seem — to claw its way back to the summit reached in 1929. The image is teeming with innuendo.
The implication is that those who acquiesced to their greedy impulses in the late ’20s, which by all appearances included just about everybody, served penance for a quarter of a century thereafter.
To be sure, most who speculated and lost never purchased another stock for the rest of their lives. Even today, the universal mental image of the era begins with the wealth-destroying stock market crash, followed by the demoralizing and seemingly endless economic depression—and culminating with the manifold uncertainties of World War II.
Fear and remorse sounded the death knell for investment in what everyone had come to believe was the riskiest of all asset classes: common stocks. That perception stubbornly clings to the collective psyche as one of the great investment myths when talk turns to the Depression and its aftermath.
Facts Tell a Dramatically Different Story
Using annual data from the beginning of 1930 until the end of 1954, here are the plain facts, presented dispassionately. For openers, if one includes reinvested dividends, as clearly one should, $1 invested on January 1, 1930, in the S&P 500 was made whole during 1936.
That’s less than seven years to break even, not the much-ballyhooed quarter of a century.
As for the so-called “lost generation” from January 1, 1930, to December 31, 1954, the average annual total return (including dividends) for the more broadly based S&P 500 was 8.1%. Starting three years later in the depths of the Depression, on January 1, 1933, the average annual total return jumped to 14% for the 22 years. Sadly, the greater loss for a generation was opportunity, not money.
-- Frank Martin, Martin Capital Management, 2008 Annual Report [via lethean46]
see also http://stockmarketeers.blogspot.com/2009/04/4-12-sounds-better-than-25.html
The implication is that those who acquiesced to their greedy impulses in the late ’20s, which by all appearances included just about everybody, served penance for a quarter of a century thereafter.
To be sure, most who speculated and lost never purchased another stock for the rest of their lives. Even today, the universal mental image of the era begins with the wealth-destroying stock market crash, followed by the demoralizing and seemingly endless economic depression—and culminating with the manifold uncertainties of World War II.
Fear and remorse sounded the death knell for investment in what everyone had come to believe was the riskiest of all asset classes: common stocks. That perception stubbornly clings to the collective psyche as one of the great investment myths when talk turns to the Depression and its aftermath.
Facts Tell a Dramatically Different Story
Using annual data from the beginning of 1930 until the end of 1954, here are the plain facts, presented dispassionately. For openers, if one includes reinvested dividends, as clearly one should, $1 invested on January 1, 1930, in the S&P 500 was made whole during 1936.
That’s less than seven years to break even, not the much-ballyhooed quarter of a century.
As for the so-called “lost generation” from January 1, 1930, to December 31, 1954, the average annual total return (including dividends) for the more broadly based S&P 500 was 8.1%. Starting three years later in the depths of the Depression, on January 1, 1933, the average annual total return jumped to 14% for the 22 years. Sadly, the greater loss for a generation was opportunity, not money.
-- Frank Martin, Martin Capital Management, 2008 Annual Report [via lethean46]
see also http://stockmarketeers.blogspot.com/2009/04/4-12-sounds-better-than-25.html
Four methodologies for valuing stocks
In the Appendix, Exhibits 2–5,17 you’ll find reasonably understandable explanations of four different methodologies for roughly valuing common stocks in the aggregate—and over many decades.
The first compares the total market value of all U.S.-domiciled companies annually with GDP. It has been featured in a number of earlier annual reports. The second, a model originated by Ben Graham and updated by Bob Shiller, traces the 10-year trailing deflated price-earnings ratio from the early 1920s. The third, Tobin’s q-ratio, compares the market value to the replacement value of corporate assets over the same time frame. Finally, a name out of the past, Edson Gould, attempts to use dividend yield as a measure of valuation. Gould’s work is more relevant to the case made below regarding dividends returning to prominence.
These four different ways of looking at the same thing provided not only similar conclusions as to when major market lows occurred but, with reasonable accuracy, how depressed valuations were on those occasions. Common stocks were most out of favor in the early 1920s, the early ’30s, and the early ’80s, the last episode being the only instance of double-digit inflation and interest rates. If the current malaise continues, and those same low valuations are eventually realized, the S&P 500 could decline farther to somewhere between 400 and 550, the Dow Jones industrial average, 4000 to 5500. From year-end prices the further erosion in total market value could range between 30% and 50%.
Exhibit 2: Market Capitalization-to-GDP
One useful measure of aggregate market value is the market capitalization of all publicly traded stocks as a percentage of gross domestic product (GDP). The November 24, 2008, Barron’s article, from which the graphic at right was taken, reveals that the capitalization of the stock market was 59% of GDP. This is below the long-term average of 79% but well above the lows, which, if achieved, would result in a 550 level on the S&P 500.
Exhibit 3: Shiller’s Graham P/E
When calculating price-to-earnings ratios (P/E), most investors divide the stock’s price by last year’s earnings per share (or estimated current-year earnings per share). Legendary investor Ben Graham, however, suggested that P/E ratios be calculated using the average earnings of the last 7–10 years as the denominator. Such a methodology smooths yearly earnings gyrations and gives the investor a better sense of price paid relative to a business’s earning power over a full business cycle.
As of the end of 2008, the market was trading at a “Graham P/E” of 15.5 times earnings, close to the long-term average of 16.3 times earnings. However, if we swing pendulum-like through the average and reach the lows of about 6.5 times as we did in ’21, ’32, and ’82, the S&P would fall to 350–400. Even a more reasonable downside of 9 times equates to a 500–550 level on the S&P 500.
Exhibit 4: Tobin’s Q-ratio
Tobin’s q-ratio, named for economist James Tobin, is conceptually a measure of the market price of a firm’s assets relative to their replacement value (market value of capital/replacement cost of assets). A q ratio greater than 1 means the market is valuing the firm’s assets for more than it costs to replace them. In other words, you can buy a business for less than you can build that business. The converse is true for q ratios below 1. Among the many versions and approximations of Tobin’s q is the equitymarket q—or the market value of publicly traded equities divided by their book value. The chart above shows that as of December, the market was valuing aggregate net assets at about 75 cents on the dollar, which is approximately the long-term average. However, it’s obviously a very volatile measure. In four previous bear markets (’21, ’32, ’49, and ’82) the q ratio dipped below 0.3, which, if revisited, would equate to a 400–450 level on the S&P 500.
Exhibit 5: Gould’s Senti-meter
Famed technician Edson Gould hypothesized that the market’s dividend yield was a reasonable indicator of investor psychology. His theory was that dividend yields less than 3% signified an optimistic bias in investor sentiment and portended a market decline, while a dividend yield greater than 6% foretold the opposite.
According to Mark Ungewitter, vice president and portfolio manager at Charter Trust Company, if dividend payout ratios remain unchanged, a 6% yield would equate to about 500 on the S&P 500.
[via Lethean]
The first compares the total market value of all U.S.-domiciled companies annually with GDP. It has been featured in a number of earlier annual reports. The second, a model originated by Ben Graham and updated by Bob Shiller, traces the 10-year trailing deflated price-earnings ratio from the early 1920s. The third, Tobin’s q-ratio, compares the market value to the replacement value of corporate assets over the same time frame. Finally, a name out of the past, Edson Gould, attempts to use dividend yield as a measure of valuation. Gould’s work is more relevant to the case made below regarding dividends returning to prominence.
These four different ways of looking at the same thing provided not only similar conclusions as to when major market lows occurred but, with reasonable accuracy, how depressed valuations were on those occasions. Common stocks were most out of favor in the early 1920s, the early ’30s, and the early ’80s, the last episode being the only instance of double-digit inflation and interest rates. If the current malaise continues, and those same low valuations are eventually realized, the S&P 500 could decline farther to somewhere between 400 and 550, the Dow Jones industrial average, 4000 to 5500. From year-end prices the further erosion in total market value could range between 30% and 50%.
Exhibit 2: Market Capitalization-to-GDP
One useful measure of aggregate market value is the market capitalization of all publicly traded stocks as a percentage of gross domestic product (GDP). The November 24, 2008, Barron’s article, from which the graphic at right was taken, reveals that the capitalization of the stock market was 59% of GDP. This is below the long-term average of 79% but well above the lows, which, if achieved, would result in a 550 level on the S&P 500.
Exhibit 3: Shiller’s Graham P/E
When calculating price-to-earnings ratios (P/E), most investors divide the stock’s price by last year’s earnings per share (or estimated current-year earnings per share). Legendary investor Ben Graham, however, suggested that P/E ratios be calculated using the average earnings of the last 7–10 years as the denominator. Such a methodology smooths yearly earnings gyrations and gives the investor a better sense of price paid relative to a business’s earning power over a full business cycle.
As of the end of 2008, the market was trading at a “Graham P/E” of 15.5 times earnings, close to the long-term average of 16.3 times earnings. However, if we swing pendulum-like through the average and reach the lows of about 6.5 times as we did in ’21, ’32, and ’82, the S&P would fall to 350–400. Even a more reasonable downside of 9 times equates to a 500–550 level on the S&P 500.
Exhibit 4: Tobin’s Q-ratio
Tobin’s q-ratio, named for economist James Tobin, is conceptually a measure of the market price of a firm’s assets relative to their replacement value (market value of capital/replacement cost of assets). A q ratio greater than 1 means the market is valuing the firm’s assets for more than it costs to replace them. In other words, you can buy a business for less than you can build that business. The converse is true for q ratios below 1. Among the many versions and approximations of Tobin’s q is the equitymarket q—or the market value of publicly traded equities divided by their book value. The chart above shows that as of December, the market was valuing aggregate net assets at about 75 cents on the dollar, which is approximately the long-term average. However, it’s obviously a very volatile measure. In four previous bear markets (’21, ’32, ’49, and ’82) the q ratio dipped below 0.3, which, if revisited, would equate to a 400–450 level on the S&P 500.
Exhibit 5: Gould’s Senti-meter
Famed technician Edson Gould hypothesized that the market’s dividend yield was a reasonable indicator of investor psychology. His theory was that dividend yields less than 3% signified an optimistic bias in investor sentiment and portended a market decline, while a dividend yield greater than 6% foretold the opposite.
According to Mark Ungewitter, vice president and portfolio manager at Charter Trust Company, if dividend payout ratios remain unchanged, a 6% yield would equate to about 500 on the S&P 500.
[via Lethean]
secular cycles
We can divide the 20th century into 88 twenty-year periods. Though most periods generated positive returns before dividends and transaction costs, half produced compounded returns of less than 4%. Less than 10% generated gains of more than 10%. The table below reflects that higher returns are associated with periods during which the P/E ratio increased, and lower or negative returns resulted from periods when the P/E declined.
There were only nine periods from 1900-2002 when 20-year returns were above 9.6%, and this chart shows all nine. What you will notice is that eight out of the nine times were associated with the stock market bubble of the late 1990s, and during all eight periods there was a doubling, tripling, or even quadrupling of P/E ratios. Prior to the bubble, there was no 20-year period which delivered 10% annual returns. Every period of above-9.6% market returns started with low P/E ratios. EVERY ONE.
Look at the following table from my friend Ed Easterling's web site at www.crestmontresearch.com (which is a wealth of statistical data like this!). You can find many 20-year periods where returns were less than 2-3%.
The higher the P/E ratio, the lower (in general) the subsequent 20-year average return. Where are we today? As I have made clear in my last two letters, we are well above 20. Today we are over 30, on our way to 45. In a nod to bulls, I agree you should look back over a number of years to average earnings and take out the highs and lows of a cycle. However, even "normalizing" earnings to an average over multiple years, we are still well above the long-term P/E average.
In terms of valuations, markets cycle up and down over long periods of time. These are called secular cycles. You have bull and bear secular cycles. In a period of a secular bull, the best style of investing is relative value. You are trying to beat the market. These periods start with low valuations, and you can ride the ups and downs with little real worry. Think of 1982 though 1999.
But in secular bear cycles, the best style of investing is absolute returns. Your benchmark is zero. You want positive numbers. It is much harder, and the longer-term returns are probably not going to be as good. But you are growing your capital against the day the secular bull returns. And, as bleak as it looks right now, I can assure you that bull will be back. Some time in the middle of the next decade, maybe a little sooner, we will see the launch of a new secular bull.
[I'm not sure, but I don't believe the above data takes into account dividends. If so, then I'd have to say the study is seriously misleading. -mc]
There were only nine periods from 1900-2002 when 20-year returns were above 9.6%, and this chart shows all nine. What you will notice is that eight out of the nine times were associated with the stock market bubble of the late 1990s, and during all eight periods there was a doubling, tripling, or even quadrupling of P/E ratios. Prior to the bubble, there was no 20-year period which delivered 10% annual returns. Every period of above-9.6% market returns started with low P/E ratios. EVERY ONE.
Look at the following table from my friend Ed Easterling's web site at www.crestmontresearch.com (which is a wealth of statistical data like this!). You can find many 20-year periods where returns were less than 2-3%.
The higher the P/E ratio, the lower (in general) the subsequent 20-year average return. Where are we today? As I have made clear in my last two letters, we are well above 20. Today we are over 30, on our way to 45. In a nod to bulls, I agree you should look back over a number of years to average earnings and take out the highs and lows of a cycle. However, even "normalizing" earnings to an average over multiple years, we are still well above the long-term P/E average.
In terms of valuations, markets cycle up and down over long periods of time. These are called secular cycles. You have bull and bear secular cycles. In a period of a secular bull, the best style of investing is relative value. You are trying to beat the market. These periods start with low valuations, and you can ride the ups and downs with little real worry. Think of 1982 though 1999.
But in secular bear cycles, the best style of investing is absolute returns. Your benchmark is zero. You want positive numbers. It is much harder, and the longer-term returns are probably not going to be as good. But you are growing your capital against the day the secular bull returns. And, as bleak as it looks right now, I can assure you that bull will be back. Some time in the middle of the next decade, maybe a little sooner, we will see the launch of a new secular bull.
[I'm not sure, but I don't believe the above data takes into account dividends. If so, then I'd have to say the study is seriously misleading. -mc]
Monday, February 23, 2009
2009 Has No Fire
If the global economy fails to recover in 2009, the housing bubble or credit crunch may not be to blame. It could be a lack of fire. Chinese fortunetellers say fire - one of the five elements mystics believe form the basis of the universe - is essential to financial well-being. And fire is nowhere to be found in the mythology of this coming Year of the Ox, the Chinese Lunar Year that has just began. “Fire is the driving force behind economic growth. Without it, the market lacks momentum,” said Raymond Lo, a Hong Kong Master of Feng Shui, the ancient Chinese practice of trying to achieve health, harmony and prosperity through building design, the placement of objects and auspicious dates and numbers.
Chinese soothsayers see a deepening recession, millions more losing their jobs, and stocks and home prices continuing to fall. That’s more or less in line with what some economists are predicting, but some fortunetellers are throwing in other dire predictions - massive earthquakes, rising U.S.-Russian tensions and trouble for President Barack Obama.
Obama, born in the Year of the Ox, is taking office in a particularly bad year for his Chinese astrological sign. The Ox sign is in direct conflict this year with a traditional Chinese divinity called the “God of Year,” considered a bad omen. Obama also is the 44th president, a number the Chinese deem extremely unlucky, because “4″ is pronounced the same as “death” in Chinese.
“The new U.S. president is not having good luck this year. His honeymoon will only be short-lived,” said fortuneteller Alion Yeo, predicting Obama may even face impeachment in his first year in office. “The Year of the Ox looks slightly better and less dire than last year, but it will still be bumpy.” Yeo also predicted that the U.S. mortgage crisis would worsen and the stock market would plunge to new lows.
But Malaysian numerologist Weng Shi Ming suggested Obama’s birth year would offset his bad luck. Weng said the symmetry of 1961 is “the perfect mix of ying and yang,” rendering Obama “immune to the effects of 44.”
The Ox, 1 of 12 animals in the Chinese zodiac, symbolizes calm, hard work, resolve and tenacity. According to legend, the Ox allowed the cunning Rat to ride on its head in a race to determine the animals’ order. Shortly before the Ox crossed the finish line, the Rat leaped off to claim victory. The Year of the Rat was marked in 2008.
Joey Yap, a Feng Shui expert in Malaysia, saw no economic recovery before 2010. “It will be a daunting year. We haven’t really reached the peak of the problems yet,” Yap said. “We haven’t tasted the main dish, and will most likely experience it during the second half of the year.”
But Feng Shui master Lo saw a glimmer of hope. The combination of two elements changes every lunar year, and this time it’s two earths, the element that represents harmony and peace. Not since 1949, when the world order was settling down after World War II, has an Ox Year seen 2 earth signs. “It is a year for healing … from the turbulent time the world has experienced,” Lo said.
Source: Yahoo
Chinese soothsayers see a deepening recession, millions more losing their jobs, and stocks and home prices continuing to fall. That’s more or less in line with what some economists are predicting, but some fortunetellers are throwing in other dire predictions - massive earthquakes, rising U.S.-Russian tensions and trouble for President Barack Obama.
Obama, born in the Year of the Ox, is taking office in a particularly bad year for his Chinese astrological sign. The Ox sign is in direct conflict this year with a traditional Chinese divinity called the “God of Year,” considered a bad omen. Obama also is the 44th president, a number the Chinese deem extremely unlucky, because “4″ is pronounced the same as “death” in Chinese.
“The new U.S. president is not having good luck this year. His honeymoon will only be short-lived,” said fortuneteller Alion Yeo, predicting Obama may even face impeachment in his first year in office. “The Year of the Ox looks slightly better and less dire than last year, but it will still be bumpy.” Yeo also predicted that the U.S. mortgage crisis would worsen and the stock market would plunge to new lows.
But Malaysian numerologist Weng Shi Ming suggested Obama’s birth year would offset his bad luck. Weng said the symmetry of 1961 is “the perfect mix of ying and yang,” rendering Obama “immune to the effects of 44.”
The Ox, 1 of 12 animals in the Chinese zodiac, symbolizes calm, hard work, resolve and tenacity. According to legend, the Ox allowed the cunning Rat to ride on its head in a race to determine the animals’ order. Shortly before the Ox crossed the finish line, the Rat leaped off to claim victory. The Year of the Rat was marked in 2008.
Joey Yap, a Feng Shui expert in Malaysia, saw no economic recovery before 2010. “It will be a daunting year. We haven’t really reached the peak of the problems yet,” Yap said. “We haven’t tasted the main dish, and will most likely experience it during the second half of the year.”
But Feng Shui master Lo saw a glimmer of hope. The combination of two elements changes every lunar year, and this time it’s two earths, the element that represents harmony and peace. Not since 1949, when the world order was settling down after World War II, has an Ox Year seen 2 earth signs. “It is a year for healing … from the turbulent time the world has experienced,” Lo said.
Source: Yahoo
Friday, February 20, 2009
gold hits $1000
NEW YORK/LONDON (Reuters) - Gold rose above $1,000 an ounce on Friday for the first time since March last year as nervous investors piled into the yellow metal to preserve wealth amid a tumbling stock market.
Long-term inflation worries fanned by the massive U.S. economic stimulus package signed by President Barack Obama this week has driven investors into gold, which is perceived as the most likely asset to hold its value against economic head winds.
"I think there's a little bit of panic out there. Equities are setting new lows and gold is the place to run to. I don't think there's much more than that," said Robert MacIntosh, chief economist at Eaton Vance in Boston.
Bullion continued to appreciate against other asset classes and commodities on Friday amid renewed fears that the U.S. government could be forced to nationalize banks amid a worsening financial crisis.
A ratio of gold against the S&P 500 index rose to its highest level since September 1990, and gold/oil ratio was at its loftiest since December 1998, according to Reuters data.
Long-term inflation worries fanned by the massive U.S. economic stimulus package signed by President Barack Obama this week has driven investors into gold, which is perceived as the most likely asset to hold its value against economic head winds.
"I think there's a little bit of panic out there. Equities are setting new lows and gold is the place to run to. I don't think there's much more than that," said Robert MacIntosh, chief economist at Eaton Vance in Boston.
Bullion continued to appreciate against other asset classes and commodities on Friday amid renewed fears that the U.S. government could be forced to nationalize banks amid a worsening financial crisis.
A ratio of gold against the S&P 500 index rose to its highest level since September 1990, and gold/oil ratio was at its loftiest since December 1998, according to Reuters data.
Saturday, February 14, 2009
Distortions of the Dow
Off and on over the years [John Mauldin has] written about the distortions that the Dow Jones Industrials creates by using a price-based index rather than a market cap index. As an example, if Microsoft with a market cap of $153 billion went to a price of zero, all the Dow would lose would be 136 points, or less than 2%. If IBM with a market cap of $120 billion went to zero, the Dow would lose over 700 points! But it gets worse. David Kotok forwarded this note to me from our mutual friend Jim Bianco (www.biancoresearch.com), which Jim graciously allowed me to reproduce for your edification (prices quoted below are from a few days ago):
"Comment - The Dow Jones Industrial Average (DJIA) is a price-weighted index. The divisor for the DJIA is 7.964782. That means that every $1 a DJIA stock loses, the index loses 7.96 points, regardless of the company's market capitalization.
"Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock that gets below $10 gets tossed out. As of last night's close (January 20), The DJIA had the following stocks less than $10 ...
Citi (C) = $2.80
GM (GM) = $3.50
B of A (BAC) = $5.10
Alcoa (AA) = $8.35
"If all four of these stocks went to zero on today's open, the DJIA would lose only 157.3 points.
"The financials in the DJIA are ...
Citi (C) = $2.80
B of A (BAC) = $5.10
Amex (AXP) = 15.60
JP Morgan (JPM) = $18.09
"If every financial stock in the DJIA went to zero on today's open, it would only lose 331.25 points, less than it lost yesterday (332.13 points).
"If you want to add GE into the financial sector, a debatable proposition, then: GE (GE) = $12.93
"If the four financial stocks above and GE opened at zero today, the DJIA would only lose 434.24 points.
"The reason the DJIA is outperforming on the downside is the index committee is not doing it job and replacing sub-$10 stocks, and the financials are so beaten up that they cannot push the index much lower.
"So what is driving the index? The highest-priced stocks:
IBM (IBM) = $81.98
Exxon (XOM) = $76.29
Chevron (CHV) = $68.31
P&G (PG) = $57.34
McDonalds (MCD) = $57.07
J&J (JNJ) = $56.75
3M (MMM) = $53.92
Wal-Mart (WMT) = $50.56
"For instance, if all the sub-$10 stocks listed above, all the financials listed above, and GE opened at zero, the DJIA loses 528.63 points. To repeat if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63 points.
"If IBM opens at zero, it loses 652.95 points [IBM has risen since then – JM]. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE, and Alcoa combined.
"The DJIA is not normal as the index committee is not doing their job during this crisis, possibly because to the political fallout of kicking out a Citi or GM. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos."
You could add Microsoft to the list Jim created and not be over where IBM is today in terms of the DJIA index.
Let's look at it another way. A 10% positive move for IBM would move the Dow up by over 60 points. A 10% move by Citigroup would increase the Dow by less than 3 points. Having stocks with low prices clearly prevents the Dow from declining as much as other market-cap-weighted indexes like the S&P 500.
"Comment - The Dow Jones Industrial Average (DJIA) is a price-weighted index. The divisor for the DJIA is 7.964782. That means that every $1 a DJIA stock loses, the index loses 7.96 points, regardless of the company's market capitalization.
"Dow Jones, the keeper of the DJIA, has an unwritten rule that any DJIA stock that gets below $10 gets tossed out. As of last night's close (January 20), The DJIA had the following stocks less than $10 ...
Citi (C) = $2.80
GM (GM) = $3.50
B of A (BAC) = $5.10
Alcoa (AA) = $8.35
"If all four of these stocks went to zero on today's open, the DJIA would lose only 157.3 points.
"The financials in the DJIA are ...
Citi (C) = $2.80
B of A (BAC) = $5.10
Amex (AXP) = 15.60
JP Morgan (JPM) = $18.09
"If every financial stock in the DJIA went to zero on today's open, it would only lose 331.25 points, less than it lost yesterday (332.13 points).
"If you want to add GE into the financial sector, a debatable proposition, then: GE (GE) = $12.93
"If the four financial stocks above and GE opened at zero today, the DJIA would only lose 434.24 points.
"The reason the DJIA is outperforming on the downside is the index committee is not doing it job and replacing sub-$10 stocks, and the financials are so beaten up that they cannot push the index much lower.
"So what is driving the index? The highest-priced stocks:
IBM (IBM) = $81.98
Exxon (XOM) = $76.29
Chevron (CHV) = $68.31
P&G (PG) = $57.34
McDonalds (MCD) = $57.07
J&J (JNJ) = $56.75
3M (MMM) = $53.92
Wal-Mart (WMT) = $50.56
"For instance, if all the sub-$10 stocks listed above, all the financials listed above, and GE opened at zero, the DJIA loses 528.63 points. To repeat if C, BAC, GM, AA, JPM, AXP and GE all open at zero, the DJIA loses 528.63 points.
"If IBM opens at zero, it loses 652.95 points [IBM has risen since then – JM]. So, the DJIA says that IBM has more influence on the index than all the financials, autos, GE, and Alcoa combined.
"The DJIA is not normal as the index committee is not doing their job during this crisis, possibly because to the political fallout of kicking out a Citi or GM. As a result, this index is now severely distorted as it has a tiny weighting in financials and autos."
You could add Microsoft to the list Jim created and not be over where IBM is today in terms of the DJIA index.
Let's look at it another way. A 10% positive move for IBM would move the Dow up by over 60 points. A 10% move by Citigroup would increase the Dow by less than 3 points. Having stocks with low prices clearly prevents the Dow from declining as much as other market-cap-weighted indexes like the S&P 500.
Wednesday, February 04, 2009
Time to buy U.S. stocks?
Is it time to buy U.S. stocks?
According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy - its GNP.
Fortune first ran a version of this chart in late 2001 (see "Warren Buffett on the stock market"). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.
But he visualized a moment when purchases might make sense, saying, "If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you."
Well, that's where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham's statement about the stock market: "In the short run it's a voting machine, but in the long run it's a weighing machine."
[via iluvbabyb]
According to both this 85-year chart and famed investor Warren Buffett, it just might be. The point of the chart is that there should be a rational relationship between the total market value of U.S. stocks and the output of the U.S. economy - its GNP.
Fortune first ran a version of this chart in late 2001 (see "Warren Buffett on the stock market"). Stocks had by that time retreated sharply from the manic levels of the Internet bubble. But they were still very high, with stock values at 133% of GNP. That level certainly did not suggest to Buffett that it was time to buy stocks.
But he visualized a moment when purchases might make sense, saying, "If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well for you."
Well, that's where stocks were in late January, when the ratio was 75%. Nothing about that reversion to sanity surprises Buffett, who told Fortune that the shift in the ratio reminds him of investor Ben Graham's statement about the stock market: "In the short run it's a voting machine, but in the long run it's a weighing machine."
[via iluvbabyb]
affordable housing?
One of the upsides of a crashing-and-burning housing market, as Edward Glaeser noted back in October, is that buying a home becomes more affordable.
And indeed, according to an index released by the National Association of Realtors, housing affordability was at an all-time high in December.
The Housing Affordability Index composite level for December was 158.8. A composite H.A.I. value of 158.8 means that a family earning the median income has 158.8 percent of the income needed to qualify for a mortgage on a median-priced home. The index had fallen during most of the housing bubble, when it became more and more expensive to buy a home. But December’s composite level was the highest the index has reached since the association began collecting this data in 1971.
[via libertarians_2000]
And indeed, according to an index released by the National Association of Realtors, housing affordability was at an all-time high in December.
The Housing Affordability Index composite level for December was 158.8. A composite H.A.I. value of 158.8 means that a family earning the median income has 158.8 percent of the income needed to qualify for a mortgage on a median-priced home. The index had fallen during most of the housing bubble, when it became more and more expensive to buy a home. But December’s composite level was the highest the index has reached since the association began collecting this data in 1971.
[via libertarians_2000]
Monday, February 02, 2009
two plus two
A mathematician, an accountant and an economist apply for the same job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?
[via web_rules]
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says, "What do you want it to equal"?
[via web_rules]
Gideon Gono deals with inflation
Gideon Gono, widely regarded as the world’s most disastrous central banker, knocked another 12 zeros off the Zimbabwean dollar yesterday in an attempt to bring the national currency back from the realms of the fantastical.
In a stroke, the governor of Zimbabwe’s Reserve Bank slashed the street value of the Zimbabwean dollar from $250 trillion to one US dollar to 250, because the computers, calculators and people could no longer cope with all the zeros.
To counter an inflation rate that economists now estimate to be 5,000,000,000,000,000,000,000 (five sextillion) per cent, Mr Gono has now struck 25 zeros from the plunging national currency since August 2006. One American dollar would now buy Z$2,500,000,000,000,000,000,000, 000,000 (2.5 octillion) had he not done so.
Mr Gono’s announcement came just weeks after the introduction of a Z$100 trillion note, the latest and biggest of 35 denominations that he has brought in since January last year but only enough yesterday to buy half a loaf. “The zeros are too many for our machines to handle,” said Obert Sibanda, the chairman of the Zimbabwe National Chamber of Commerce.
Mr Gono is now ordering Zimbabwe’s red-hot printing presses to produce seven entirely new bank notes ranging from Z$1 to Z$500.
Economists poured scorn on Mr Gono’s announcement, pointing out that four months after he knocked ten noughts off last year they had all returned.
In a stroke, the governor of Zimbabwe’s Reserve Bank slashed the street value of the Zimbabwean dollar from $250 trillion to one US dollar to 250, because the computers, calculators and people could no longer cope with all the zeros.
To counter an inflation rate that economists now estimate to be 5,000,000,000,000,000,000,000 (five sextillion) per cent, Mr Gono has now struck 25 zeros from the plunging national currency since August 2006. One American dollar would now buy Z$2,500,000,000,000,000,000,000, 000,000 (2.5 octillion) had he not done so.
Mr Gono’s announcement came just weeks after the introduction of a Z$100 trillion note, the latest and biggest of 35 denominations that he has brought in since January last year but only enough yesterday to buy half a loaf. “The zeros are too many for our machines to handle,” said Obert Sibanda, the chairman of the Zimbabwe National Chamber of Commerce.
Mr Gono is now ordering Zimbabwe’s red-hot printing presses to produce seven entirely new bank notes ranging from Z$1 to Z$500.
Economists poured scorn on Mr Gono’s announcement, pointing out that four months after he knocked ten noughts off last year they had all returned.
The paradox of thrift
Americans are hunkering down and saving more. For a recession-battered economy, it couldn't be happening at a worse time.
Economists call it the "paradox of thrift." What's good for individuals -- spending less, saving more -- is bad for the economy when everyone does it.
On Friday, the government reported Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.
Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.
The downward spiral has hammered the retail and manufacturing industries. For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.
Today's consumers might even start to rival their penny-pinching, Depression-era grandparents.
"The generation that lived through the Great Depression was very conservative in their spending and aggressive in savings," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "I think we're going to have a set of consumers who are moving in that direction because they don't have that much faith in their assets."
[via chucks_angels]
Economists call it the "paradox of thrift." What's good for individuals -- spending less, saving more -- is bad for the economy when everyone does it.
On Friday, the government reported Americans' savings rate, as a percentage of after-tax incomes, rose to 2.9 percent in the last three months of 2008. That's up sharply from 1.2 percent in the third quarter and less than 1 percent a year ago.
Like a teeter-totter, when the savings rate rises, spending falls. The latter accounts for about 70 percent of economic activity. When consumers refuse to spend, companies cut back, layoffs rise, people pinch pennies even more and the recession deepens.
The downward spiral has hammered the retail and manufacturing industries. For years, stores enjoyed boom times as shoppers splurged on TVs, fancy kitchen decor and clothes. Suddenly, frugality is in style.
Today's consumers might even start to rival their penny-pinching, Depression-era grandparents.
"The generation that lived through the Great Depression was very conservative in their spending and aggressive in savings," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com. "I think we're going to have a set of consumers who are moving in that direction because they don't have that much faith in their assets."
[via chucks_angels]
George Soros and reflexivity
Soros’s experiences in 1944 laid the groundwork for the conceptual framework he would spend the rest of his life elaborating and which, he believes, has found its validation in the events of 2008. His core idea is “reflexivity”, which he defines as a “two-way feedback loop, between the participants’ views and the actual state of affairs. People base their decisions not on the actual situation that confronts them, but on their perception or interpretation of the situation. Their decisions make an impact on the situation and changes in the situation are liable to change their perceptions.”
It is, at its root, a case for frequent re-examination of one’s assumptions about the world and for a readiness to spot and exploit moments of cataclysmic change – those times when our perceptions of events and events themselves are likely to interact most fiercely. It is also at odds with the rational expectations economic school, which has been the prevailing orthodoxy in recent decades. That approach assumed that economic players – from people buying homes to bankers buying subprime mortgages for their portfolios – were rational actors making, in aggregate, the best choices for themselves and that free markets were effective mechanisms for balancing supply and demand, setting prices correctly and tending towards equilibrium.
The rational expectations theory has taken a beating over the past 18 months: its intellectual nadir was probably October 23 2008, when Alan Greenspan, the former Federal Reserve chairman, admitted to Congress that there was “a flaw in the model”. Soros argues that the “market fundamentalism” of Greenspan and his ilk, especially their assumption that “financial markets are self-correcting”, was an important cause of the current crisis. It befuddled policy-makers and was the intellectual basis for the “various synthetic instruments and valuation models” which contributed mightily to the crash.
By contrast, Soros sees the current crisis as a real-life illustration of reflexivity. Markets did not reflect an objective “truth”. Rather, the beliefs of market participants – that house prices would always rise, that an arcane financial instrument based on a subprime mortgage really could merit a triple-A rating – created a new reality. Ultimately, that “super-bubble” was unsustainable, hence the credit crunch of 2007 and the recession and financial crisis of 2008 and beyond.
It is, at its root, a case for frequent re-examination of one’s assumptions about the world and for a readiness to spot and exploit moments of cataclysmic change – those times when our perceptions of events and events themselves are likely to interact most fiercely. It is also at odds with the rational expectations economic school, which has been the prevailing orthodoxy in recent decades. That approach assumed that economic players – from people buying homes to bankers buying subprime mortgages for their portfolios – were rational actors making, in aggregate, the best choices for themselves and that free markets were effective mechanisms for balancing supply and demand, setting prices correctly and tending towards equilibrium.
The rational expectations theory has taken a beating over the past 18 months: its intellectual nadir was probably October 23 2008, when Alan Greenspan, the former Federal Reserve chairman, admitted to Congress that there was “a flaw in the model”. Soros argues that the “market fundamentalism” of Greenspan and his ilk, especially their assumption that “financial markets are self-correcting”, was an important cause of the current crisis. It befuddled policy-makers and was the intellectual basis for the “various synthetic instruments and valuation models” which contributed mightily to the crash.
By contrast, Soros sees the current crisis as a real-life illustration of reflexivity. Markets did not reflect an objective “truth”. Rather, the beliefs of market participants – that house prices would always rise, that an arcane financial instrument based on a subprime mortgage really could merit a triple-A rating – created a new reality. Ultimately, that “super-bubble” was unsustainable, hence the credit crunch of 2007 and the recession and financial crisis of 2008 and beyond.
Sunday, February 01, 2009
grading the gurus
I reading a blurb by Martin Weiss and wondered just how good this guy is. Obviously this guy is smart, but they all are. So how does he compare?
I came across this website from the CXO Advisory Group called Guru Stock Market Forecasting Grades.
"Can experts, whether self-proclaimed or endorsed by others (publications), provide reliable stock market timing guidance? Do some experts clearly show better intuition about overall market direction than others?"
Here's what they said about Weiss based on 530 trades from November 2007 through November 2008 (that's a lot of trades). 47% of the trades were winning trades with an average return of -6.2% per trade. But the average return per calendar day invested was a positive 0.16%. They summarized Weiss' performance as unimpressive, but it beat the S&P 500's average return per calendar day of -0.11%. So I wouldn't say making money instead of losing money is unimpressive.
Other quick takes on the gurus.
Richard Band is a well below average market timer and apparently achieves results more by holding for the long term than by successfully timing entry and exit points.
Warren Buffett is an investor with superior stock-picking skill that allows him to identify undervalued securities and thus obtain risk-adjusted positive abnormal returns.
Jim Cramer's accuracy in forecasting overall stock market behavior is a little below average. More interesting to me was that Cramer bothered to respond to the evaluation.
The Fast Money experts as a group probably do not offer fast money with their stock picks, and their stock-picking ability as a group is unimpressive.
Ken Fisher is well above average in guiding his readers with respect to stock market timing.
Simple statistics indicate that the Hulbert Stock Newsletter Sentiment Index has little or no predictive power for stock returns over the short and intermediate terms.
The accuracy rate of John Hussman's stock market characterizations is a little above average.
Jim Jubak's record of forecasting the overall U.S. stock market is well below average.
Stephen Leeb's U.S. stock market forecasting record is tentatively above average.
John Mauldin's accuracy in forecasting stock market behavior is below average.
"The [S&P] Outlook" is a about average in forecasting market behavior, and its explicit timing recommendations are sometimes good and sometimes bad.
Robert Prechter has not been successful in applying the Elliott wave principle to time the U.S. stock market in recent years.
Richard Russell is well below average in predicting stock market behavior.
Dan Sullivan's stock market forecasting record is well above average.
Ben Zacks' focus on earnings analysis makes him only an average market forecaster.
[started looking 1/25]
I came across this website from the CXO Advisory Group called Guru Stock Market Forecasting Grades.
"Can experts, whether self-proclaimed or endorsed by others (publications), provide reliable stock market timing guidance? Do some experts clearly show better intuition about overall market direction than others?"
Here's what they said about Weiss based on 530 trades from November 2007 through November 2008 (that's a lot of trades). 47% of the trades were winning trades with an average return of -6.2% per trade. But the average return per calendar day invested was a positive 0.16%. They summarized Weiss' performance as unimpressive, but it beat the S&P 500's average return per calendar day of -0.11%. So I wouldn't say making money instead of losing money is unimpressive.
Other quick takes on the gurus.
Richard Band is a well below average market timer and apparently achieves results more by holding for the long term than by successfully timing entry and exit points.
Warren Buffett is an investor with superior stock-picking skill that allows him to identify undervalued securities and thus obtain risk-adjusted positive abnormal returns.
Jim Cramer's accuracy in forecasting overall stock market behavior is a little below average. More interesting to me was that Cramer bothered to respond to the evaluation.
The Fast Money experts as a group probably do not offer fast money with their stock picks, and their stock-picking ability as a group is unimpressive.
Ken Fisher is well above average in guiding his readers with respect to stock market timing.
Simple statistics indicate that the Hulbert Stock Newsletter Sentiment Index has little or no predictive power for stock returns over the short and intermediate terms.
The accuracy rate of John Hussman's stock market characterizations is a little above average.
Jim Jubak's record of forecasting the overall U.S. stock market is well below average.
Stephen Leeb's U.S. stock market forecasting record is tentatively above average.
John Mauldin's accuracy in forecasting stock market behavior is below average.
"The [S&P] Outlook" is a about average in forecasting market behavior, and its explicit timing recommendations are sometimes good and sometimes bad.
Robert Prechter has not been successful in applying the Elliott wave principle to time the U.S. stock market in recent years.
Richard Russell is well below average in predicting stock market behavior.
Dan Sullivan's stock market forecasting record is well above average.
Ben Zacks' focus on earnings analysis makes him only an average market forecaster.
[started looking 1/25]