Advance Gross Domestic Product , the broadest measure of economic output, fell at an annualized rate of 6.1% in 1Q, much worse than the Bloomberg forecast of a 4.7% decline, and only slightly better than the 6.3% decline in 4Q. The measure is the first reading on economic activity in 1Q, and is likely to be revised in future readings. Personal consumption rose 2.2%, much better than the 0.9% expected rise, after declining 4.3% in 4Q. Personal consumption spending was led by a 9.4% jump in durable goods purchases. GDP was negatively impacted by a drop in exports and business investment spending, which fell 30% and 37.9%, respectively. Real final sales, which exclude the 2.8% impact from a decline in inventories, fell 3.4%.
Pricing pressures gained steam, with the GDP Price Index rising 2.9%, compared to a gain of 0.5% in 4Q and the forecast of 1.8%. The core PCE Index, which excludes food and energy, rose 1.5%, just above the estimate of 1.3%, and the rate sits between the Fed's implied target of 1-2%. Treasuries remain higher after showing little reaction to the data.
Despite the worse-than-expected decline, the market is taking solace in the report, due to the 2.2% rise in spending by consumers, who represent nearly 70% of GDP. Negative impacts of falling inventory (down 2.8%) and government spending (down 4.0%) are expected to be reversed in the future, as the fiscal stimulus kicks in and low stocks of inventories combined with increasing demand imply the need to rebuild inventory in the future. There is some question as to whether the resumption in consumer spending is sustainable in light of high consumer debt levels, and whether the 1Q spending was a temporary blip that resulted from having a few extra dollars in consumer wallets. As Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Market and Sector Analysis, Brad Sorensen, CFA, discuss in their latest Schwab Market Perspective: Do Tough Earnings = Higher Market?, when the crisis took another leg down following the Lehman Brothers bankruptcy last September, consumers went into hibernation and corporations began destocking inventory to align with falling sales. However, the steep fall in spending and manufacturing was so dramatic that it simply could not be sustained and some pent-up demand built up. In 2009, consumers have benefitted from mortgage refinancing, a decrease in gasoline prices versus a year ago, and tax refunds now up 17% from 2008. However, the economy is still contracting and it is probable that the path to recovery will not come in a straight line. Read more on their market perspective at www.schwab.com/marketinsight.
[via Schwab]
[4/28/09] The Consumer Confidence Index rose from an upwardly revised 26.9 in March to 39.2 in April, well above the estimate of 29.9. Along with the improved overall reading, consumer confidence about the present situation and expectations for the next six months improved. The report suggests the recent signs of life in the economy and the preceding rally in equities may be beginning to repair some of the damage in confidence that stemmed from the sharp deterioration in the employment picture and destruction of consumer net worth via the collapse in housing and the severe drop in equity prices in the past two years. However, Schwab's Chief Investment Strategist Liz Ann Sonders, and Director of Market and Sector Analysis, Brad Sorensen, CFA, caution in their latest Schwab Market Perspective: Do Tough Earnings = Higher Market?, the excess supply of homes available for sale will continue to pressure prices, and we expect prices to fall another 10%-15% before finding stability. However, sales typically turn before prices, and once home sales begin to rise, that could boost confidence and get others off the sidelines.
Thursday, April 30, 2009
Monday, April 27, 2009
4-1/2 sounds better than 25
HISTORICAL stock charts seem to show that it took more than 25 years for the market to recover from the 1929 crash — a dismal statistic that has been brought to investors’ attention many times in the current downturn.
But a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low.
How can this be? Three factors have obscured this truth from investors: deflation, dividends and the distinction between the Dow Jones industrial average and the overall stock market.
By MARK HULBERT
Published: April 25, 2009
But a careful analysis of the record shows that the picture is more complex and, ultimately, far less daunting: An investor who invested a lump sum in the average stock at the market’s 1929 high would have been back to a break-even by late 1936 — less than four and a half years after the mid-1932 market low.
How can this be? Three factors have obscured this truth from investors: deflation, dividends and the distinction between the Dow Jones industrial average and the overall stock market.
By MARK HULBERT
Published: April 25, 2009
Saturday, April 25, 2009
Alice Schroeder on Warren Buffett
Q How has your experience with Buffett changed or shaped your way of thinking, both financially and personally?
A Big topic. Yes, it has. This would be a separate interview if we had the time. I’ll just say that he prods people that he is friends with to lift their aspirations and expecations of themselves. He did that for me. At the same time, when you’re around him, you see how hard he works and you realize that you should not be out there trying to invest by yourself. You should buy an index fund.
All of these books that say you can get rich by investing like Warren Buffett, it’s a bunch of baloney. You can’t do it. He’s not only brilliant, but he works like a demon from morning until night and he’s been doing that for 70 years. So, when you see him and you’re around him, you realize the futility of trying to replicate his achievement. It can’t be done. But, at the same time, he lifts your aspirations in many other areas, including being extremely good at whatever it is you are good at. He made me far more focused in my career. He convinced me I could write. I didn’t know I could write.
[via brknews]
A Big topic. Yes, it has. This would be a separate interview if we had the time. I’ll just say that he prods people that he is friends with to lift their aspirations and expecations of themselves. He did that for me. At the same time, when you’re around him, you see how hard he works and you realize that you should not be out there trying to invest by yourself. You should buy an index fund.
All of these books that say you can get rich by investing like Warren Buffett, it’s a bunch of baloney. You can’t do it. He’s not only brilliant, but he works like a demon from morning until night and he’s been doing that for 70 years. So, when you see him and you’re around him, you realize the futility of trying to replicate his achievement. It can’t be done. But, at the same time, he lifts your aspirations in many other areas, including being extremely good at whatever it is you are good at. He made me far more focused in my career. He convinced me I could write. I didn’t know I could write.
[via brknews]
Thursday, April 23, 2009
Jim Rogers and the two Cs
The legendary investor is sticking for now with the two Cs: China and commodities.
WELL, BANK EXECUTIVES and investors can breathe a sigh of relief: Jim Rogers has covered the short positions on financial stocks he put in place ahead of last year's massive meltdown.
But just because this influential investor isn't betting that big banks will fall much further doesn't mean he's confident they will stage a lasting rally either. He feels similarly about U.S. stocks in general.
"I am skeptical about the rally, and the world economy for the next year or two or three," he says. "But if stocks go down, I can make money with commodities."
Rogers, now 66, gained fame as George Soros' hedge-fund partner in the 1970s and 1980s. After retiring from professional money manager in his late 30s, the Alabama native tooled around Europe, Asia, Africa, and Latin America visiting emerging markets, one by one. His resulting book, Investment Biker, helped to popularize emerging market investing at the outset of a bull market for the sector.
He also helped to popularize commodity investing, which for decades was the province of niche investors. In the 1990s, he developed commodity indexes based on futures contracts that in recent years have been turned into exchange-traded funds available to all investors. His 2004 book, Hot Commodities, came ahead of a surge prices for energy, metals, and agriculture.
Since its inception in July 1998, the Rogers International Commodities Index has gained 158%, while the S&P 500 has fallen 23%. And that gain for the commodities index comes despite the fact that it's lost more than half of its value since last July. At these levels, Rogers has been a buyer.
These days, Rogers, now 66, is sticking close to home in Singapore with his wife, Paige Parker, and two small daughters. He's about to release his latest book, A Gift to My Children: A Father's Lessons for Life and Investing (Random House), in which he encourages other people's children to travel widely and learn Mandarin so they can reap the rewards of China's economic boom.
Recently, Rogers talked to Barrons.com by phone from his Singapore home.
Q: When you last did a lengthy interview with Barron's magazine a year ago (see "Light Years Ahead of the Crowd," April 14, 2008) you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?
A: No. I've sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the U.S. since then. I'm not buying anything in China right now because the Chinese market ran up maybe 50% since last November. It's been the strongest market in the world in the past six months and I don't like jumping into something that has been that run up. Still, I'm not thinking of selling these stocks either. I think if it goes down I'll buy more. I think you will find that it's the single strongest market in the world since last fall.
Q: In your latest book, you talk of China as the great investment opportunity of the 21st century, just as the U.S. was in the 20th century. What percentage of a typical American investor's portfolio should be in China?
A: If they can't even find China on a map, I don't think they should have anything in China. They should know something about China before they invest there. If they have the same convictions that I do then they should probably have a lot. If you asked me that question in 1909 about the U.S. stock market, I would have said to put 100% of your money in the U.S.
Q: Might it make sense to have a greater weighting in a diversified mix of Chinese stocks than in U.S. stocks?
A: Well yes. Just as in 1909, if you were German or Chinese, you should have had the largest percentage of your money in the United States. The idea of investing is to make money, not to have some sort of political agenda.
Q: That being said, you currently think Chinese stocks are bid-up now, so you're not buying at these levels. So what have you been buying lately?
A: I have been buying commodities through the Rogers commodity indexes I developed because my lawyer won't let me buy individual commodities. I recently bought the all four Rogers indexes – the Elements Rogers International Commodities Index (ticker:RJI) as well as the three specialty indexes, the International Metals (RJZ), the International Energy (RJN), and the International Agriculture (RJA.) That's how I invest in commodities and that's what I bought last week. I have been buying these shares since last fall and up to last week.
Q: Though you got out of emerging markets last year before they fell hard, you seemed be caught by surprise by the fall-off in commodity prices last year. Is that right?
A: Yes, I was surprised. I did not expect commodities to go down that much and in retrospect it was a period of forced liquidation for many (professional) investors. You know AIG went bankrupt, which was huge in commodities. Lehman Brothers was big in commodities.
But at least I was shorting the investment banks at the time and other financials such as Citigroup and Fannie Mae. So I was hedged by being long commodities and short the other things such as financials and as you know most of them were down from 80% to 100%, so I more than made up on my shorts than I lost on my longs. So thank God for (the stock decline in) Citigroup and thank God (for the decline) in Fannie Mae.
Q: Now despite the recent stock-market rally that started in March, many U.S. stocks are trading well off their 2007 highs. How come you see no value to this market?
A: I am not buying U.S. companies mainly because I think we may have seen a bottom but I don't think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.
Q: Can you summarize the reasons for your bullishness about commodities?
A: It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years. And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it's going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to. And in the meantime reserves are declining. As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.
That does not mean that if suddenly the U.S. goes bankrupt that everything won't collapse in price. But I would rather be in commodities because it's the only thing I know where the fundamentals are improving. They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view.
Q: What do you think of bonds?
A: I am anticipating shorting bonds -- the U.S. long bond. It's about the only real bubble around that I can see right now -- other than the U.S. dollar. I am not shorting bonds at this moment because I've shorted plenty of bubbles in my day, and I have learned that you better wait because they go up higher than any rational person can anticipate. But my plan is to short the long bond in the U.S. sometime in the foreseeable future.
Q: I've read that you think the penchant of the last two presidential administrations for bailing out failing U.S. companies is a big mistake and will contribute to prolonging this recession. You argue that it's best to let these companies all go bankrupt. How bad can the economy get?
A: Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn't last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system. The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.
It's laughable on its face, but politicians think they've got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.
***
[10/13/09 more..]
The 21st century belongs to China
According to Rogers, the 19th century was the era of the British Empire and the 20th century was the U.S.’ heyday. But the 21st century is China’s (though the rest of Asia is definitely going to get a boost too).
Jim Rogers is not a Ben Bernanke fan
Yep, it’s a fact. No “Team Bernanke” shirts for Jim Rogers (who said to scattered applause during the Q&A session that if he was in charge of the U.S. economy he would “abolish the Fed and resign.”).
Rogers is appalled by the government’s actions—Bernanke’s in particular. The U.S. government’s strategy calls for the debasement of the dollar, he says, calling it a “horrible policy.” While he concedes it can work in the short term, it NEVER works in the mid- or long term.
“He’s going to run those printing presses until we run out of trees, because that’s the only thing he knows,” Rogers said of Bernanke.
Add that on top of the country’s rapidly growing astronomical debt, and Rogers believes you’ve got a recipe for disaster.
Commodities, commodities, commodities
OK, as mentioned before, there are 3 billion people in Asia, most of whom are aspiring to play the home version of the American Dream game show. And let’s face it: American society is largely about consumption. We like stuff―we buy it, we wear it, we eat it, we flaunt it, we sometimes even bedazzle it (yeah, Google that). So that’s a lot more consumption on the global level. Rogers notes that while consumption is expected to increase exponentially, not a lot of capacity has been added in the last few decades for a lot of commodities. Meaning, not a lot of new refineries have been built, and not a lot of new resources have been discovered or excavated for a variety of commodities.
U.S. government bonds are the next big bubble
Well, would you lend money to us? Rogers says short-term bonds are probably OK, but he advises getting out of anything with a longer maturity. He calls it “inconceivable” that anyone would lend money to the U.S. for 30 years at the going rate, and notes that the U.S. was a creditor nation as recently as 1987.
“Now the U.S. is the largest debtor nation in the history of the world,” he said.
WELL, BANK EXECUTIVES and investors can breathe a sigh of relief: Jim Rogers has covered the short positions on financial stocks he put in place ahead of last year's massive meltdown.
But just because this influential investor isn't betting that big banks will fall much further doesn't mean he's confident they will stage a lasting rally either. He feels similarly about U.S. stocks in general.
"I am skeptical about the rally, and the world economy for the next year or two or three," he says. "But if stocks go down, I can make money with commodities."
Rogers, now 66, gained fame as George Soros' hedge-fund partner in the 1970s and 1980s. After retiring from professional money manager in his late 30s, the Alabama native tooled around Europe, Asia, Africa, and Latin America visiting emerging markets, one by one. His resulting book, Investment Biker, helped to popularize emerging market investing at the outset of a bull market for the sector.
He also helped to popularize commodity investing, which for decades was the province of niche investors. In the 1990s, he developed commodity indexes based on futures contracts that in recent years have been turned into exchange-traded funds available to all investors. His 2004 book, Hot Commodities, came ahead of a surge prices for energy, metals, and agriculture.
Since its inception in July 1998, the Rogers International Commodities Index has gained 158%, while the S&P 500 has fallen 23%. And that gain for the commodities index comes despite the fact that it's lost more than half of its value since last July. At these levels, Rogers has been a buyer.
These days, Rogers, now 66, is sticking close to home in Singapore with his wife, Paige Parker, and two small daughters. He's about to release his latest book, A Gift to My Children: A Father's Lessons for Life and Investing (Random House), in which he encourages other people's children to travel widely and learn Mandarin so they can reap the rewards of China's economic boom.
Recently, Rogers talked to Barrons.com by phone from his Singapore home.
Q: When you last did a lengthy interview with Barron's magazine a year ago (see "Light Years Ahead of the Crowd," April 14, 2008) you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?
A: No. I've sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the U.S. since then. I'm not buying anything in China right now because the Chinese market ran up maybe 50% since last November. It's been the strongest market in the world in the past six months and I don't like jumping into something that has been that run up. Still, I'm not thinking of selling these stocks either. I think if it goes down I'll buy more. I think you will find that it's the single strongest market in the world since last fall.
Q: In your latest book, you talk of China as the great investment opportunity of the 21st century, just as the U.S. was in the 20th century. What percentage of a typical American investor's portfolio should be in China?
A: If they can't even find China on a map, I don't think they should have anything in China. They should know something about China before they invest there. If they have the same convictions that I do then they should probably have a lot. If you asked me that question in 1909 about the U.S. stock market, I would have said to put 100% of your money in the U.S.
Q: Might it make sense to have a greater weighting in a diversified mix of Chinese stocks than in U.S. stocks?
A: Well yes. Just as in 1909, if you were German or Chinese, you should have had the largest percentage of your money in the United States. The idea of investing is to make money, not to have some sort of political agenda.
Q: That being said, you currently think Chinese stocks are bid-up now, so you're not buying at these levels. So what have you been buying lately?
A: I have been buying commodities through the Rogers commodity indexes I developed because my lawyer won't let me buy individual commodities. I recently bought the all four Rogers indexes – the Elements Rogers International Commodities Index (ticker:RJI) as well as the three specialty indexes, the International Metals (RJZ), the International Energy (RJN), and the International Agriculture (RJA.) That's how I invest in commodities and that's what I bought last week. I have been buying these shares since last fall and up to last week.
Q: Though you got out of emerging markets last year before they fell hard, you seemed be caught by surprise by the fall-off in commodity prices last year. Is that right?
A: Yes, I was surprised. I did not expect commodities to go down that much and in retrospect it was a period of forced liquidation for many (professional) investors. You know AIG went bankrupt, which was huge in commodities. Lehman Brothers was big in commodities.
But at least I was shorting the investment banks at the time and other financials such as Citigroup and Fannie Mae. So I was hedged by being long commodities and short the other things such as financials and as you know most of them were down from 80% to 100%, so I more than made up on my shorts than I lost on my longs. So thank God for (the stock decline in) Citigroup and thank God (for the decline) in Fannie Mae.
Q: Now despite the recent stock-market rally that started in March, many U.S. stocks are trading well off their 2007 highs. How come you see no value to this market?
A: I am not buying U.S. companies mainly because I think we may have seen a bottom but I don't think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.
Q: Can you summarize the reasons for your bullishness about commodities?
A: It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years. And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it's going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to. And in the meantime reserves are declining. As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.
That does not mean that if suddenly the U.S. goes bankrupt that everything won't collapse in price. But I would rather be in commodities because it's the only thing I know where the fundamentals are improving. They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view.
Q: What do you think of bonds?
A: I am anticipating shorting bonds -- the U.S. long bond. It's about the only real bubble around that I can see right now -- other than the U.S. dollar. I am not shorting bonds at this moment because I've shorted plenty of bubbles in my day, and I have learned that you better wait because they go up higher than any rational person can anticipate. But my plan is to short the long bond in the U.S. sometime in the foreseeable future.
Q: I've read that you think the penchant of the last two presidential administrations for bailing out failing U.S. companies is a big mistake and will contribute to prolonging this recession. You argue that it's best to let these companies all go bankrupt. How bad can the economy get?
A: Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn't last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system. The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.
It's laughable on its face, but politicians think they've got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.
***
[10/13/09 more..]
The 21st century belongs to China
According to Rogers, the 19th century was the era of the British Empire and the 20th century was the U.S.’ heyday. But the 21st century is China’s (though the rest of Asia is definitely going to get a boost too).
Jim Rogers is not a Ben Bernanke fan
Yep, it’s a fact. No “Team Bernanke” shirts for Jim Rogers (who said to scattered applause during the Q&A session that if he was in charge of the U.S. economy he would “abolish the Fed and resign.”).
Rogers is appalled by the government’s actions—Bernanke’s in particular. The U.S. government’s strategy calls for the debasement of the dollar, he says, calling it a “horrible policy.” While he concedes it can work in the short term, it NEVER works in the mid- or long term.
“He’s going to run those printing presses until we run out of trees, because that’s the only thing he knows,” Rogers said of Bernanke.
Add that on top of the country’s rapidly growing astronomical debt, and Rogers believes you’ve got a recipe for disaster.
Commodities, commodities, commodities
OK, as mentioned before, there are 3 billion people in Asia, most of whom are aspiring to play the home version of the American Dream game show. And let’s face it: American society is largely about consumption. We like stuff―we buy it, we wear it, we eat it, we flaunt it, we sometimes even bedazzle it (yeah, Google that). So that’s a lot more consumption on the global level. Rogers notes that while consumption is expected to increase exponentially, not a lot of capacity has been added in the last few decades for a lot of commodities. Meaning, not a lot of new refineries have been built, and not a lot of new resources have been discovered or excavated for a variety of commodities.
U.S. government bonds are the next big bubble
Well, would you lend money to us? Rogers says short-term bonds are probably OK, but he advises getting out of anything with a longer maturity. He calls it “inconceivable” that anyone would lend money to the U.S. for 30 years at the going rate, and notes that the U.S. was a creditor nation as recently as 1987.
“Now the U.S. is the largest debtor nation in the history of the world,” he said.
Margin of Safety by Seth Klarman
by Saj Karsan
In the next few weeks, we'll be doing a chapter-by-chapter run-down of Seth Klarman's sought after book, Margin Of Safety. We've discussed Klarman on my website before, as he has consistently demonstrated an ability to generate market beating returns over a long period of time. You can find Klarman's limited edition book selling on ebay for hundreds of dollars.
Chapter 1
Klarman starts out by distinguishing investing from speculating. He uses a Mark Twain quote to illustrate the two times in life when one shouldn't speculate: "when you can't afford it, and when you can!". Speculators buy in the hopes or assumptions that others will want to buy the same asset (be it a painting, a baseball card, or a stock) later, while investors buy the cash flow the investment returns to its owner. (As such, a painting can never be an investment by this definition!)
Chapter 2
What's good for Wall Street is not necessarily good for investors, according to Klarman. Because of how Wall Street does business, it has a very short-term focus. For example, Wall Street makes money up-front on commissions (not from long-term performance), therefore the Street will always push for churn and will always push "hot" investments.
Chapter 3
In this chapter, Klarman discusses how the investment world has changed over the last several decades, and how understanding these changes allows investors to earn superior returns. From 1950 to 1990, the institutional share of the market rose from 8% to 45%, and institutions comprise 75% of market trading volume. But the institutions are hampered by a short-term mindset, and Klarman attempts to explain why.
Chapter 4
In this chapter, Klarman examines the junk bond market in depth to illustrate how Wall Street can create investment fads, only to leave investors much poorer when the tide goes out.
Chapter 5
In the previous four chapters, Klarman focused on describing how investors go wrong. Chapter 5 is an introduction to the second part of the book, where Klarman describes the philosophy of value investing.
Chapter 6
This chapter is dedicated to describing the philosophy of value investing and why it works. The terms used to describe value investing don't require any accounting or finance background, making this an easy read for beginners looking to learn about value investing.
Chapter 7
Klarman introduces what he calls the three central elements to a value investing philosophy:
1) A "bottom-up" strategy
2) Absolute (as opposed to relative) performance
3) A risk averse approach
Chapter 8
Business value cannot be precisely determined, Klarman asserts. Not only do a number of assumptions go into a business valuation, but relevant macro and micro economic factors are constantly changing, making a precise valuation impossible.
Klarman discusses what he believes to be the only three ways to value a business. The first method involves finding the net present value by discounting future cash flows. The second method is Private Market Value. Finally, Klarman discusses liquidation value as a method of valuation.
Chapter 9
Sometimes, there are so many value investments available that the only constraint on the investor is a lack of funds. Most times, however, Klarman finds it difficult to find value investment opportunities. Investors can spend a lot of time reading through financial reports, research reports, and other financial news and end up finding nothing but fairly valued opportunities. Therefore, it is important that the investor look in the right places.
A few of the places Klarman suggests finding investment opportunities include the new-low lists and the largest percentage-decliners lists which are published by major news sources. Klarman also finds that companies whose dividends have been cut or eliminated can also be unduly punished by the market, leaving investment opportunities. Of course, just because a stock shows up on one of these lists does not make it a buy; one still has to go through the valuation process described in previous chapters in order to determine whether it trades at a discount to its fair value.
Chapter 10
This chapter contains of a plethora of value investing examples. Klarman details a number of securities where investors who paid attention to fundamentals (e.g. strong businesses masked by unprofitable divisions, or companies trading at discounts to cash etc.) reaped enormous profits.
Chapter 11
This chapter examines opportunities at the time of writing that value investors had in the banking sector. In the mid-1980s to early 1990s, many banks were selling for less than book value. During the recession of the early 90s, many thrifts had to be bailed out by the government due to some of the high-risk loans they had offered and due to the general downturn in the US real-estate market...remind you of today?
* * *
Value-Stock-Plus page
***
[12/1/09] Currently, Seth Klarman is very popular in the value investment community. He is particularly popular on Gurufocus.com, where people are literally watching every move he makes.
One of the biggest mysteries about Klarman is what is he is actually holding in his portfolio. You can see his stock and convertible bond holdings and their value filed under the 13-F. In Baupost's 13-F for Q3, total securities listed are $1.36 billion dollars. Klarman stated that he had 30% of his portfolio in cash which is not listed on the 13-F.
Now, here is the shocking part. I called up Baupost and they informed me that they had slightly under $20 billion assets under management. Let us assume that they are managing about $18 billion because that is slightly under the amount they named. That means $6 billion is in cash and $1.36 billion is in stocks and convertible bonds. That leaves more than 50% of their assets or about $10.6 billion not listed in their 13-F.
This $1.36 billion is not an insignificant number, however it is clear that most of his return are coming not from the $6 billion in cash or even the $1.36 billion in stocks and convertibles. Most of his return is coming from his bond holdings. In fact, we would not even know that he had $6 billion had the notes not leaked out from the Baupost meeting. Without these details, all one would know is that Baupost had $1.3 billion in convertibles and stocks and about $17 billion unaccounted for.
One important thing to remember is when you see that Klarman has posted 20% returns annually, you might think you can achieve the same returns by coping him. However, this is not necessarily the case since most of his gains are coming from his bonds (which are not reported). This does not mean that Klarman is not an amazing stock investor or that his stock investments should be ignored. In fact, he has achieved some spectacular results from his stock portfolio, including a recent 75% return in one day from his holding in Facet Biotech Corporation. The significance of the above information is one must realize before trying to mimic Klarman is that you are only seeing a small fraction of the full picture. I doubt we will ever know what Klarman’s full holdings truly are.
***
[9/12/10] Seth Klarman interviewed by Jason Zweig
[12/1/11] Seth Klarman interviewed by Charlie Rose (video)
[4/19/12] Notes to Margin of Safety
[4/28/13] The real secret to investing is that there is no secret to investing. Every important aspect of value investing has been made available to the public many times over, beginning with the rst edition of Security Analysis. That so many people fail to follow this timeless and almost foolproof approach enables those who adopt it to remain successful. The foibles of human nature that result in the mass pursuit of instant wealth and effortless gain seem certain to be with us forever. So long as people succumb to this aspect of their natures, value investing will remain, as it has been for 75 years, a sound and low risk approach to successful long term investing.
—Seth Klarman, The Baupost Group [from the Art of Value Investing]
In the next few weeks, we'll be doing a chapter-by-chapter run-down of Seth Klarman's sought after book, Margin Of Safety. We've discussed Klarman on my website before, as he has consistently demonstrated an ability to generate market beating returns over a long period of time. You can find Klarman's limited edition book selling on ebay for hundreds of dollars.
Chapter 1
Klarman starts out by distinguishing investing from speculating. He uses a Mark Twain quote to illustrate the two times in life when one shouldn't speculate: "when you can't afford it, and when you can!". Speculators buy in the hopes or assumptions that others will want to buy the same asset (be it a painting, a baseball card, or a stock) later, while investors buy the cash flow the investment returns to its owner. (As such, a painting can never be an investment by this definition!)
Chapter 2
What's good for Wall Street is not necessarily good for investors, according to Klarman. Because of how Wall Street does business, it has a very short-term focus. For example, Wall Street makes money up-front on commissions (not from long-term performance), therefore the Street will always push for churn and will always push "hot" investments.
Chapter 3
In this chapter, Klarman discusses how the investment world has changed over the last several decades, and how understanding these changes allows investors to earn superior returns. From 1950 to 1990, the institutional share of the market rose from 8% to 45%, and institutions comprise 75% of market trading volume. But the institutions are hampered by a short-term mindset, and Klarman attempts to explain why.
Chapter 4
In this chapter, Klarman examines the junk bond market in depth to illustrate how Wall Street can create investment fads, only to leave investors much poorer when the tide goes out.
Chapter 5
In the previous four chapters, Klarman focused on describing how investors go wrong. Chapter 5 is an introduction to the second part of the book, where Klarman describes the philosophy of value investing.
Chapter 6
This chapter is dedicated to describing the philosophy of value investing and why it works. The terms used to describe value investing don't require any accounting or finance background, making this an easy read for beginners looking to learn about value investing.
Chapter 7
Klarman introduces what he calls the three central elements to a value investing philosophy:
1) A "bottom-up" strategy
2) Absolute (as opposed to relative) performance
3) A risk averse approach
Chapter 8
Business value cannot be precisely determined, Klarman asserts. Not only do a number of assumptions go into a business valuation, but relevant macro and micro economic factors are constantly changing, making a precise valuation impossible.
Klarman discusses what he believes to be the only three ways to value a business. The first method involves finding the net present value by discounting future cash flows. The second method is Private Market Value. Finally, Klarman discusses liquidation value as a method of valuation.
Chapter 9
Sometimes, there are so many value investments available that the only constraint on the investor is a lack of funds. Most times, however, Klarman finds it difficult to find value investment opportunities. Investors can spend a lot of time reading through financial reports, research reports, and other financial news and end up finding nothing but fairly valued opportunities. Therefore, it is important that the investor look in the right places.
A few of the places Klarman suggests finding investment opportunities include the new-low lists and the largest percentage-decliners lists which are published by major news sources. Klarman also finds that companies whose dividends have been cut or eliminated can also be unduly punished by the market, leaving investment opportunities. Of course, just because a stock shows up on one of these lists does not make it a buy; one still has to go through the valuation process described in previous chapters in order to determine whether it trades at a discount to its fair value.
Chapter 10
This chapter contains of a plethora of value investing examples. Klarman details a number of securities where investors who paid attention to fundamentals (e.g. strong businesses masked by unprofitable divisions, or companies trading at discounts to cash etc.) reaped enormous profits.
Chapter 11
This chapter examines opportunities at the time of writing that value investors had in the banking sector. In the mid-1980s to early 1990s, many banks were selling for less than book value. During the recession of the early 90s, many thrifts had to be bailed out by the government due to some of the high-risk loans they had offered and due to the general downturn in the US real-estate market...remind you of today?
* * *
Value-Stock-Plus page
***
[12/1/09] Currently, Seth Klarman is very popular in the value investment community. He is particularly popular on Gurufocus.com, where people are literally watching every move he makes.
One of the biggest mysteries about Klarman is what is he is actually holding in his portfolio. You can see his stock and convertible bond holdings and their value filed under the 13-F. In Baupost's 13-F for Q3, total securities listed are $1.36 billion dollars. Klarman stated that he had 30% of his portfolio in cash which is not listed on the 13-F.
Now, here is the shocking part. I called up Baupost and they informed me that they had slightly under $20 billion assets under management. Let us assume that they are managing about $18 billion because that is slightly under the amount they named. That means $6 billion is in cash and $1.36 billion is in stocks and convertible bonds. That leaves more than 50% of their assets or about $10.6 billion not listed in their 13-F.
This $1.36 billion is not an insignificant number, however it is clear that most of his return are coming not from the $6 billion in cash or even the $1.36 billion in stocks and convertibles. Most of his return is coming from his bond holdings. In fact, we would not even know that he had $6 billion had the notes not leaked out from the Baupost meeting. Without these details, all one would know is that Baupost had $1.3 billion in convertibles and stocks and about $17 billion unaccounted for.
One important thing to remember is when you see that Klarman has posted 20% returns annually, you might think you can achieve the same returns by coping him. However, this is not necessarily the case since most of his gains are coming from his bonds (which are not reported). This does not mean that Klarman is not an amazing stock investor or that his stock investments should be ignored. In fact, he has achieved some spectacular results from his stock portfolio, including a recent 75% return in one day from his holding in Facet Biotech Corporation. The significance of the above information is one must realize before trying to mimic Klarman is that you are only seeing a small fraction of the full picture. I doubt we will ever know what Klarman’s full holdings truly are.
***
[9/12/10] Seth Klarman interviewed by Jason Zweig
[12/1/11] Seth Klarman interviewed by Charlie Rose (video)
[4/19/12] Notes to Margin of Safety
[4/28/13] The real secret to investing is that there is no secret to investing. Every important aspect of value investing has been made available to the public many times over, beginning with the rst edition of Security Analysis. That so many people fail to follow this timeless and almost foolproof approach enables those who adopt it to remain successful. The foibles of human nature that result in the mass pursuit of instant wealth and effortless gain seem certain to be with us forever. So long as people succumb to this aspect of their natures, value investing will remain, as it has been for 75 years, a sound and low risk approach to successful long term investing.
—Seth Klarman, The Baupost Group [from the Art of Value Investing]
Friday, April 17, 2009
How cheap are U.S. stocks?
Using trailing average five year earnings through 2008 to calculate the S&P 500 earnings coupon, U.S. equities are the cheapest they have been since the Depression when compared to the 10-year Treasury yield. Because this calculation encompasses the financials’ losses reported in 2007 and 2008, one could argue that the attractive 7.7% earnings yield is artificially low.
Academicians Eugene Fama and Kenneth French recently published a study that found that value stocks have declined two years in a row only five times: during the Great Depression in 1929-32; at the beginning of WWII in 1939-41; during the Arab oil embargo of 1973-74; when the Internet bubble popped in 2001-02; and now as the housing bubble deflates. Following the four prior periods, stocks snapped back by an average of 60% in the next 12 months.
-- Longleaf Partners, 2008 Annual Report
Academicians Eugene Fama and Kenneth French recently published a study that found that value stocks have declined two years in a row only five times: during the Great Depression in 1929-32; at the beginning of WWII in 1939-41; during the Arab oil embargo of 1973-74; when the Internet bubble popped in 2001-02; and now as the housing bubble deflates. Following the four prior periods, stocks snapped back by an average of 60% in the next 12 months.
-- Longleaf Partners, 2008 Annual Report
Tuesday, April 14, 2009
stock pros who survived the depression
IRVING KAHN SITS AT HIS CLUTTERED DESK, PEERING AT his computer screen through thick, dark glasses. The Dow inched up 38 points today, a small move in light of its 332-point drop earlier in the week. But Kahn has made a career of betting on beaten-down stocks, and he’s hard at work poring over annual reports and studying balance sheets looking for companies that have lots of cash, not much debt and good long-term growth prospects. General Electric has a solid business and looks pretty good at these prices, he muses. General Motors? Not so much.
Like a lot of us, Kahn has seen good times and bad, bull markets and bear markets, recessions and recoveries. But he’s also seen something most of us haven’t: the Great Depression. Kahn, who still shows up at work every day and puts in a good six hours, worked as a stock analyst and brokerage clerk on Wall Street in the 1930s. He’s 103 years old.
Like a lot of us, Kahn has seen good times and bad, bull markets and bear markets, recessions and recoveries. But he’s also seen something most of us haven’t: the Great Depression. Kahn, who still shows up at work every day and puts in a good six hours, worked as a stock analyst and brokerage clerk on Wall Street in the 1930s. He’s 103 years old.
Monday, April 13, 2009
Charles Allmon still in cash
Mark Hulbert's column in Barron's
WOULD BEN GRAHAM'S famous value-stock investment strategy have protected you in the bear market that began 18 months ago?
The surprising answer, I have found, is "yes." And that's remarkable, since virtually all of the most popular stock-picking strategies, including those that ostensibly fit into the category of "value investing," lost nearly as much as the overall averages during the recent bear market -- if not more.
Ironically, however, few investors actually benefitted from the protection that Graham's strategy could have afforded. His approach fell out of favor several decades ago, when the bull market of the 1980s and 1990s further and further divorced stock prices from fundamental value.
One of the ancillary benefits of the recent bear market, therefore, may be to reacquaint investors with the advantages of paying attention to value.
That would represent a fitting 75th anniversary present to the value school of investing. Back in 1934, Graham (along with David Dodd) wrote what has become the definitive textbook on value investing -- Security Analysis, now in its sixth edition. In fact, this book not only ushered in value investing, it provided the blueprint for fundamental analysis of stocks.
Perhaps not surprisingly, given that Graham developed his approach to investing during the Great Depression, his definition of value was very strict. Instead of defining value in relative terms, as do most value managers today, Graham defined it in absolute terms. That in turn meant that there would be times when few, if any, securities were considered to represent genuine value.
It took exceptional discipline to adhere to Graham's approach in a bull market that was causing stock prices to soar into the stratosphere, and few value managers possessed it. As their clients left them in droves, many value managers chose instead to define value in relative terms: So long as a stock's price-to-earnings or price-to-book ratios were lower than that of most other stocks, a stock satisfied this modern, more liberal definition of value.
That approach may have afforded value managers the possibility of participating in the bull market. But it left them vulnerable as never before to the downside.
Consider two hypothetical portfolios, one of growth stocks and the other of value stocks, constructed by Eugene Fama and Kenneth French, finance professors at the University of Chicago and Dartmouth College.
The value portfolio contained the approximately 30% of stocks with the lowest price-to-book ratios, while the growth portfolio contained the 30% of stocks with the highest such ratios. At the bear-market low earlier this year, the value portfolio was 57% below its peak in the fall of 2007, while the growth portfolio was "just" 42% below.
If value is not defined in relative terms, then how can it be defined? Graham employed a number of criteria, but his primary one was to compare a company's stock price to its net current assets per share. (Net current assets are total current assets minus total current liabilities, long-term debt and the redemption value of preferred stock.) Graham believed that a stock should be bought only if it was trading for less than two-thirds of its per share net current assets.
At the depths of the Great Depression, hundreds of stocks on the New York Stock Exchange satisfied this demanding criterion. That number fell in subsequent decades, however. By the late 1980s and 1990s, there were many occasions in which not one common stock on the NYSE was able to satisfy it. An adviser who stayed true to Graham's criteria, therefore, would have had no choice but to build up an increasingly large cash position in his portfolio.
To those who think that this would have hopelessly handicapped long-term performance, consider the model portfolio contained by Growth Stock Outlook, a newsletter edited for the last 44 years by Charles Allmon. Though Allmon has not purely adhered to Graham's definition of value, he has come closer over the years than any of the other newsletter editors that the Hulbert Financial Digest (HFD) monitors.
Allmon in fact claims almost apostolic succession from Graham, according to Peter Brimelow, in his book on the investment newsletter industry titled The Wall Street Gurus (Random House, 1986). Brimelow quotes Allmon as saying: "'Graham called me on the phone, as I recall in 1969, maybe 1970. He said, 'I've got a copy of your Growth Stock Outlook, and I've been very intrigued by what you're doing here. How are you spotting these values?' I said, 'Mr., Graham, I'm taking a lot of your own criteria and trying to crank in my own for value relative to growth potential.' And he said, 'Well, it's a very intriguing idea. I think if I were young again, that might be the course I would take. It sort of speeds things up a bit'."
True to Graham's legacy, Allmon began building up a large cash position in 1986. With no more than one or two exceptions since then, his model portfolio has been more than 80% cash. Thanks in no small part to the recent bear market, Allmon's newsletter is now in first place for risk-adjusted performance among all HFD-monitored newsletters since 1980, when the HFD began monitoring the newsletter.
What would Graham be advocating now? You might think that he would be increasing his equity exposure, since the number of stocks selling for less than two-thirds of per-share net current assets is starting to grow. But Allmon, at least, remains firmly in the bearish camp, continuing to recommend that subscribers have more than 80% of their equity portfolios in cash.
He wrote recently that "our country appears to be on the brink of the biggest financial firestorm in our 220-year history." Expressing little confidence that the government will get us out of this mess, he adds that "the trick now is to avoid being scalded in a sea of nonsense."
Of the three stocks that Allmon's newsletter portfolio currently owns, the biggest holding is Newmont Mining Corporation (ticker: NEM); he is forecasting "5% to 15% U.S. inflation," which will in turn lead gold bullion to trade over $1,800 an ounce.
The two other stocks that his model portfolio owns are Altria Group (MO) and Philip Morris International (PM).
We can only wonder whether Graham would have approved.
* * *
[This is interesting to me as I have that book The Wall Street Gurus and used to own Allmon's fund until it became Liberty All-Star back in ... 1995.]
WOULD BEN GRAHAM'S famous value-stock investment strategy have protected you in the bear market that began 18 months ago?
The surprising answer, I have found, is "yes." And that's remarkable, since virtually all of the most popular stock-picking strategies, including those that ostensibly fit into the category of "value investing," lost nearly as much as the overall averages during the recent bear market -- if not more.
Ironically, however, few investors actually benefitted from the protection that Graham's strategy could have afforded. His approach fell out of favor several decades ago, when the bull market of the 1980s and 1990s further and further divorced stock prices from fundamental value.
One of the ancillary benefits of the recent bear market, therefore, may be to reacquaint investors with the advantages of paying attention to value.
That would represent a fitting 75th anniversary present to the value school of investing. Back in 1934, Graham (along with David Dodd) wrote what has become the definitive textbook on value investing -- Security Analysis, now in its sixth edition. In fact, this book not only ushered in value investing, it provided the blueprint for fundamental analysis of stocks.
Perhaps not surprisingly, given that Graham developed his approach to investing during the Great Depression, his definition of value was very strict. Instead of defining value in relative terms, as do most value managers today, Graham defined it in absolute terms. That in turn meant that there would be times when few, if any, securities were considered to represent genuine value.
It took exceptional discipline to adhere to Graham's approach in a bull market that was causing stock prices to soar into the stratosphere, and few value managers possessed it. As their clients left them in droves, many value managers chose instead to define value in relative terms: So long as a stock's price-to-earnings or price-to-book ratios were lower than that of most other stocks, a stock satisfied this modern, more liberal definition of value.
That approach may have afforded value managers the possibility of participating in the bull market. But it left them vulnerable as never before to the downside.
Consider two hypothetical portfolios, one of growth stocks and the other of value stocks, constructed by Eugene Fama and Kenneth French, finance professors at the University of Chicago and Dartmouth College.
The value portfolio contained the approximately 30% of stocks with the lowest price-to-book ratios, while the growth portfolio contained the 30% of stocks with the highest such ratios. At the bear-market low earlier this year, the value portfolio was 57% below its peak in the fall of 2007, while the growth portfolio was "just" 42% below.
If value is not defined in relative terms, then how can it be defined? Graham employed a number of criteria, but his primary one was to compare a company's stock price to its net current assets per share. (Net current assets are total current assets minus total current liabilities, long-term debt and the redemption value of preferred stock.) Graham believed that a stock should be bought only if it was trading for less than two-thirds of its per share net current assets.
At the depths of the Great Depression, hundreds of stocks on the New York Stock Exchange satisfied this demanding criterion. That number fell in subsequent decades, however. By the late 1980s and 1990s, there were many occasions in which not one common stock on the NYSE was able to satisfy it. An adviser who stayed true to Graham's criteria, therefore, would have had no choice but to build up an increasingly large cash position in his portfolio.
To those who think that this would have hopelessly handicapped long-term performance, consider the model portfolio contained by Growth Stock Outlook, a newsletter edited for the last 44 years by Charles Allmon. Though Allmon has not purely adhered to Graham's definition of value, he has come closer over the years than any of the other newsletter editors that the Hulbert Financial Digest (HFD) monitors.
Allmon in fact claims almost apostolic succession from Graham, according to Peter Brimelow, in his book on the investment newsletter industry titled The Wall Street Gurus (Random House, 1986). Brimelow quotes Allmon as saying: "'Graham called me on the phone, as I recall in 1969, maybe 1970. He said, 'I've got a copy of your Growth Stock Outlook, and I've been very intrigued by what you're doing here. How are you spotting these values?' I said, 'Mr., Graham, I'm taking a lot of your own criteria and trying to crank in my own for value relative to growth potential.' And he said, 'Well, it's a very intriguing idea. I think if I were young again, that might be the course I would take. It sort of speeds things up a bit'."
True to Graham's legacy, Allmon began building up a large cash position in 1986. With no more than one or two exceptions since then, his model portfolio has been more than 80% cash. Thanks in no small part to the recent bear market, Allmon's newsletter is now in first place for risk-adjusted performance among all HFD-monitored newsletters since 1980, when the HFD began monitoring the newsletter.
What would Graham be advocating now? You might think that he would be increasing his equity exposure, since the number of stocks selling for less than two-thirds of per-share net current assets is starting to grow. But Allmon, at least, remains firmly in the bearish camp, continuing to recommend that subscribers have more than 80% of their equity portfolios in cash.
He wrote recently that "our country appears to be on the brink of the biggest financial firestorm in our 220-year history." Expressing little confidence that the government will get us out of this mess, he adds that "the trick now is to avoid being scalded in a sea of nonsense."
Of the three stocks that Allmon's newsletter portfolio currently owns, the biggest holding is Newmont Mining Corporation (ticker: NEM); he is forecasting "5% to 15% U.S. inflation," which will in turn lead gold bullion to trade over $1,800 an ounce.
The two other stocks that his model portfolio owns are Altria Group (MO) and Philip Morris International (PM).
We can only wonder whether Graham would have approved.
* * *
[This is interesting to me as I have that book The Wall Street Gurus and used to own Allmon's fund until it became Liberty All-Star back in ... 1995.]
Sunday, April 12, 2009
David Dreman fired from own fund
NYTimes.com
By FLOYD NORRIS
Published: April 9, 2009
David N. Dreman was a star mutual fund manager. Then he bought bank shares and held on as the financial crisis grew.
Now he has been fired from the flagship fund that bears his name, despite what remains a good long-term record. The fund’s name will be changed, and the fund will take fewer risks. A drab industry will become a little drabber.
In the past, the firings of once-celebrated fund managers have sometimes provided a market signal of its own — that the trend that led to their poor performance was about to end. If that were to happen this time, there could be a revival for so-called value stocks, and particularly for the beaten-down and almost universally disdained financial stocks.
“The success of contrarian strategies requires you at times to go against gut reactions, the prevailing beliefs in the marketplace and the experts you respect,” Mr. Dreman wrote in his best-selling 1998 book, “Contrarian Investment Strategies.”
Mr. Dreman rose to fame in the 1990s, when the fund he began in 1988 amassed an impressive long-term record. But he had been preaching, and practicing, the gospel of investing in unpopular stocks with low price-earnings ratios since the late 1970s. He has been a columnist for Forbes Magazine.
As the fund industry concentrated, the Dreman fund family was bought by Kemper, which was bought by Scudder, which was bought by Deutsche Bank. Last week the fund board installed by Deutsche quietly filed with the Securities and Exchange Commission a disclosure that Mr. Dreman’s firm would no longer manage what is now called the DWS Dreman High Return Equity Fund.
On June 1, Deutsche will take over the management, and assign the job to a team of managers based in its Frankfurt office. The fund will become known as the DWS Strategic Value Fund. Mr. Dreman’s firm will continue to manage three smaller Deutsche funds, but don’t be surprised if those relationships eventually end.
Mr. Dreman, who is 72, did not sound bitter when I spoke to him this week. “The board of directors is obviously entitled to do what they did,” he said. But neither was he repentant. “Low P/E has worked well over time,” he added. “There will be years that we are very out of favor, but we make it up.”
You wouldn’t have known that the fund’s long-term record remained better than the market from reading what Deutsche officials had to say. “We had seen very weak performance for the fund over every major time horizon,” David Wertheim, the bank’s project manager for equities, told Bloomberg News. He declined to speak to me.
Those time frames are one year, three years and five years, the periods that are used by fund raters like Morningstar and Lipper. Just now they are dominated by last year, which was a horrid one for the Dreman fund. Even so, it still has a superior long-term record.
There are few celebrity mutual fund managers any more. Fund groups prefer to promote themselves rather than a manager who could leave to start a hedge fund. In an age when holding on to assets is the way for a fund family to profit, they may well prefer a fund that sticks close to its peers. The new fund managers plan to own more stocks, with less concentration in any one stock, and a broader definition of value investing. They are far less likely to stand out from the crowd.
Mr. Dreman often stood out. I checked the fund’s last 14 annual reports, each of which showed its performance relative to Lipper’s group of equity-income mutual funds. In seven of those years, it was in the top quartile. In four of them, it was in the bottom quartile. Only in three of the years did the fund end up in the middle 50 percent of funds.
The recent bad performance has been costly for Deutsche Bank, as well as the fund investors. Because of a combination of poor performance and investor withdrawals, the fund had $2.4 billion in assets on March 31, down from $8.3 billion in late 2007.
What went wrong? You can get a hint from part of the fund’s most recent annual report, for the year that ended last November. “The cornerstone of our contrarian value investing philosophy is to seek companies that are financially sound but have fallen out of favor with the investing public,” it said.
With too many financial companies, among them Washington Mutual, Citigroup and Fannie Mae, Mr. Dreman and his colleagues did not realize until too late that the companies were not financially sound, no matter what their books seemed to say.
Buying stocks with low P/E ratios can make sense only if the earnings — the “E” — are real. “The E was much worse than anyone thought,” Mr. Dreman told me. “The banks themselves had no idea of how bad the E was.”
He still thinks his strategy will work, and told me he thinks the market may well have hit bottom. As that last annual report put it, “The last few months have provided many opportunities to buy strong companies with good long-term prospects at the lowest prices we have seen in many decades, and we have taken advantage of what we regard as incredible bargains.”
By FLOYD NORRIS
Published: April 9, 2009
David N. Dreman was a star mutual fund manager. Then he bought bank shares and held on as the financial crisis grew.
Now he has been fired from the flagship fund that bears his name, despite what remains a good long-term record. The fund’s name will be changed, and the fund will take fewer risks. A drab industry will become a little drabber.
In the past, the firings of once-celebrated fund managers have sometimes provided a market signal of its own — that the trend that led to their poor performance was about to end. If that were to happen this time, there could be a revival for so-called value stocks, and particularly for the beaten-down and almost universally disdained financial stocks.
“The success of contrarian strategies requires you at times to go against gut reactions, the prevailing beliefs in the marketplace and the experts you respect,” Mr. Dreman wrote in his best-selling 1998 book, “Contrarian Investment Strategies.”
Mr. Dreman rose to fame in the 1990s, when the fund he began in 1988 amassed an impressive long-term record. But he had been preaching, and practicing, the gospel of investing in unpopular stocks with low price-earnings ratios since the late 1970s. He has been a columnist for Forbes Magazine.
As the fund industry concentrated, the Dreman fund family was bought by Kemper, which was bought by Scudder, which was bought by Deutsche Bank. Last week the fund board installed by Deutsche quietly filed with the Securities and Exchange Commission a disclosure that Mr. Dreman’s firm would no longer manage what is now called the DWS Dreman High Return Equity Fund.
On June 1, Deutsche will take over the management, and assign the job to a team of managers based in its Frankfurt office. The fund will become known as the DWS Strategic Value Fund. Mr. Dreman’s firm will continue to manage three smaller Deutsche funds, but don’t be surprised if those relationships eventually end.
Mr. Dreman, who is 72, did not sound bitter when I spoke to him this week. “The board of directors is obviously entitled to do what they did,” he said. But neither was he repentant. “Low P/E has worked well over time,” he added. “There will be years that we are very out of favor, but we make it up.”
You wouldn’t have known that the fund’s long-term record remained better than the market from reading what Deutsche officials had to say. “We had seen very weak performance for the fund over every major time horizon,” David Wertheim, the bank’s project manager for equities, told Bloomberg News. He declined to speak to me.
Those time frames are one year, three years and five years, the periods that are used by fund raters like Morningstar and Lipper. Just now they are dominated by last year, which was a horrid one for the Dreman fund. Even so, it still has a superior long-term record.
There are few celebrity mutual fund managers any more. Fund groups prefer to promote themselves rather than a manager who could leave to start a hedge fund. In an age when holding on to assets is the way for a fund family to profit, they may well prefer a fund that sticks close to its peers. The new fund managers plan to own more stocks, with less concentration in any one stock, and a broader definition of value investing. They are far less likely to stand out from the crowd.
Mr. Dreman often stood out. I checked the fund’s last 14 annual reports, each of which showed its performance relative to Lipper’s group of equity-income mutual funds. In seven of those years, it was in the top quartile. In four of them, it was in the bottom quartile. Only in three of the years did the fund end up in the middle 50 percent of funds.
The recent bad performance has been costly for Deutsche Bank, as well as the fund investors. Because of a combination of poor performance and investor withdrawals, the fund had $2.4 billion in assets on March 31, down from $8.3 billion in late 2007.
What went wrong? You can get a hint from part of the fund’s most recent annual report, for the year that ended last November. “The cornerstone of our contrarian value investing philosophy is to seek companies that are financially sound but have fallen out of favor with the investing public,” it said.
With too many financial companies, among them Washington Mutual, Citigroup and Fannie Mae, Mr. Dreman and his colleagues did not realize until too late that the companies were not financially sound, no matter what their books seemed to say.
Buying stocks with low P/E ratios can make sense only if the earnings — the “E” — are real. “The E was much worse than anyone thought,” Mr. Dreman told me. “The banks themselves had no idea of how bad the E was.”
He still thinks his strategy will work, and told me he thinks the market may well have hit bottom. As that last annual report put it, “The last few months have provided many opportunities to buy strong companies with good long-term prospects at the lowest prices we have seen in many decades, and we have taken advantage of what we regard as incredible bargains.”
Saturday, April 11, 2009
Kiplinger Magazine archives
Friday, April 10, 2009
passing the test
The New York Times is reporting that regulators say all 19 banks will pass the stress tests, although some still may require more aid. Quoting officials involved in the examinations, they say this is a test a bank simply cannot fail, if the examiners determine that a bank needs "exceptional assistance," the government will provide it. There is said to be a wide range of results among the institutions.
Thursday, April 09, 2009
Cramer vs. Roubini
TORONTO (AP) — CNBC's Jim Cramer has another feud on his hands.
Just weeks after "The Daily Show" host Jon Stewart took Cramer to task for trying to turn finance reporting into a "game," famous bear economist Nouriel Roubini criticized Cramer on Tuesday for predicting bull markets.
"Cramer is a buffoon," said Roubini, a New York University economics professor often called Dr. Doom. "He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame."
Cramer recently wrote in a blog that Roubini is "intoxicated" with his own "prescience and vision" and said Roubini should realize that things are better since the stock market bottom in March.
Roubini said in 2006 that the worst recession in four decades was on its way. He has attracted attention for his gloomy — and accurate — predictions of the U.S. financial market meltdown.
Roubini said the latest surge is just another bear market rally following the pattern of other rallies after the government intervened. He expects the market will test the previous low because of worse than expected macroeconomic news, disappointing earnings and because banks will fail after the stress tests come out.
"Once people get the reality check than it's going to get ugly again," Roubini said.
Roubini said Cramer should keep quiet.
"He's not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull and he got it wrong," Roubini said in an interview with The Associated Press.
Cramer isn't shutting up. On CNBC, the "Mad Money" host shot back: “We got that guy Nouriel Roubini and he attacked me today, which I regard a great badge of honor."
Just weeks after "The Daily Show" host Jon Stewart took Cramer to task for trying to turn finance reporting into a "game," famous bear economist Nouriel Roubini criticized Cramer on Tuesday for predicting bull markets.
"Cramer is a buffoon," said Roubini, a New York University economics professor often called Dr. Doom. "He was one of those who called six times in a row for this bear market rally to be a bull market rally and he got it wrong. And after all this mess and Jon Stewart he should just shut up because he has no shame."
Cramer recently wrote in a blog that Roubini is "intoxicated" with his own "prescience and vision" and said Roubini should realize that things are better since the stock market bottom in March.
Roubini said in 2006 that the worst recession in four decades was on its way. He has attracted attention for his gloomy — and accurate — predictions of the U.S. financial market meltdown.
Roubini said the latest surge is just another bear market rally following the pattern of other rallies after the government intervened. He expects the market will test the previous low because of worse than expected macroeconomic news, disappointing earnings and because banks will fail after the stress tests come out.
"Once people get the reality check than it's going to get ugly again," Roubini said.
Roubini said Cramer should keep quiet.
"He's not a credible analyst. Every time it was a bear market rally he said it was the beginning of a bull and he got it wrong," Roubini said in an interview with The Associated Press.
Cramer isn't shutting up. On CNBC, the "Mad Money" host shot back: “We got that guy Nouriel Roubini and he attacked me today, which I regard a great badge of honor."
best five-week run
Stocks rallied Thursday, ending a holiday-shortened week on a high note after Wells Fargo forecast a nearly $3 billion quarterly profit, adding to hopes that the banking sector is stabilizing.
It was the fifth straight week of gains for the markets. In that time the Dow rose 22%, for its best five-week run since May of 1933, when it gained 31%.
The Dow Jones industrial average (INDU) gained 246 points, or 3.1%. The S&P 500 (SPX) index rose 31 points, or 3.8%. The Nasdaq composite (COMP) gained 62 points, or 3.9%.
With today's rally, the Dow regained all of its losses from Monday and particularly Tuesday, when it fell 186 points. The finish will give the blue-chip index a 67-point gain on the week, or 0.8%. The S&P 500 ended with a 1.7% gain for the week and the Nasdaq a 1.9% gain.
The Dow is down 7.9% for the year, with the S&P 500 off 5.2%. The Nasdaq is up 4.8%, with the Nasdaq-100 up 10.6%.
The market rally that began on March 10 has now pushed the major indexes up 23% or more.
Twenty-eight of the 30 Dow stocks were higher on the day, along with 445 S&P 500 stocks and 91 Nasdaq-100 stocks.
It was the fifth straight week of gains for the markets. In that time the Dow rose 22%, for its best five-week run since May of 1933, when it gained 31%.
The Dow Jones industrial average (INDU) gained 246 points, or 3.1%. The S&P 500 (SPX) index rose 31 points, or 3.8%. The Nasdaq composite (COMP) gained 62 points, or 3.9%.
With today's rally, the Dow regained all of its losses from Monday and particularly Tuesday, when it fell 186 points. The finish will give the blue-chip index a 67-point gain on the week, or 0.8%. The S&P 500 ended with a 1.7% gain for the week and the Nasdaq a 1.9% gain.
The Dow is down 7.9% for the year, with the S&P 500 off 5.2%. The Nasdaq is up 4.8%, with the Nasdaq-100 up 10.6%.
The market rally that began on March 10 has now pushed the major indexes up 23% or more.
Twenty-eight of the 30 Dow stocks were higher on the day, along with 445 S&P 500 stocks and 91 Nasdaq-100 stocks.
Monday, April 06, 2009
Mike Mayo goes biblical
SAN FRANCISCO (MarketWatch) - Bank analyst Mike Mayo went biblical on the sector Monday, predicting loan losses will probably exceed Great Depression-era levels as the industry is punished for succumbing to the seven deadly sins of gluttony, greed, lust, sloth, wrath, envy and pride.
Mayo, a former Deutsche Bank analyst now with Calyon Securities, passed judgment on the banking industry with an underweight rating.
Shares of Bank of America (BAC 8.82), Citigroup (C), J.P. Morgan Chase (JPM), Wells Fargo (WFC), PNC Financial Services (PNC) and Comerica (CMA) will underperform, the analyst foretold.
Mayo commanded investors to sell shares of US Bancorp (USB), SunTrust (STI), Fifth Third (FITB), KeyCorp (KEY) and BB&T (BBT).
"We are initiating on U.S. banks with an Underweight sector rating given the ongoing consequences of increased risk taking by banks in seven different areas," spaketh Mayo in a note to investors.
"The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators," quoth Mayo.
"A key implication is that loan losses (to total loans) should increase to levels that exceed the Great Depression," the analyst foretold. "While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class."
Loan losses to loans will likely increase from 2% to 3.5% by the end of 2010 given ongoing problems in mortgage and an acceleration in cards, consumer credit, construction, commercial real estate and industrial, the analyst warned.
At the peak of the Depression, in 1934, loan losses reached 3.4% of total bank loans, Mayo noted.
[4/6/09, posted 4/23/09]
Mayo, a former Deutsche Bank analyst now with Calyon Securities, passed judgment on the banking industry with an underweight rating.
Shares of Bank of America (BAC 8.82), Citigroup (C), J.P. Morgan Chase (JPM), Wells Fargo (WFC), PNC Financial Services (PNC) and Comerica (CMA) will underperform, the analyst foretold.
Mayo commanded investors to sell shares of US Bancorp (USB), SunTrust (STI), Fifth Third (FITB), KeyCorp (KEY) and BB&T (BBT).
"We are initiating on U.S. banks with an Underweight sector rating given the ongoing consequences of increased risk taking by banks in seven different areas," spaketh Mayo in a note to investors.
"The seven deadly sins of banking include greedy loan growth, gluttony of real estate, lust for high yields, sloth-like risk management, pride of low capital, envy of exotic fees, and anger of regulators," quoth Mayo.
"A key implication is that loan losses (to total loans) should increase to levels that exceed the Great Depression," the analyst foretold. "While certain mortgage problems are farther along, other areas are likely to accelerate, reflecting a rolling recession by asset class."
Loan losses to loans will likely increase from 2% to 3.5% by the end of 2010 given ongoing problems in mortgage and an acceleration in cards, consumer credit, construction, commercial real estate and industrial, the analyst warned.
At the peak of the Depression, in 1934, loan losses reached 3.4% of total bank loans, Mayo noted.
[4/6/09, posted 4/23/09]
Sunday, April 05, 2009
buy and hold the original Dow?
The Dow is a price-weighted index as opposed to a cap-weighted index. Does that make a difference in performance? Specifically, does it affect how the Dow has performed since it was expanded to 30 names in 1928?
The Dow Industrials was expanded to 30 names from 20 on October 1 of 1928. Today, only nine names of the original 30 remain in the Dow. The committee at Dow Jones has replaced the other names as the companies grew out of favor, were merged into other stocks, were considered too small, or the committee felt that other companies better represented the industrial prowess of the US economy.
What if we went back to the original 30 stocks and simply bought them and held them until today? Good, bad or indifferent, what would the results be?
So, the question of the day: would you have been better off investing in the index, or buying the 30 stocks and holding them? Further, would it make any difference if you price-weighted them or equal-weighted them (explanations below)? What about inflation? And how does that compare to the S&P 500?
And before you answer, remember that one stock, Bethlehem Steel, went bankrupt. You would be stuck with Chrysler, which was removed in 1979 for IBM, which itself had been taken out in 1939 for AT&T. There have been 55 changes in the components of the Dow over the last 80 years. Some of the original 30, listed below, we would all recognize. But our kids might not remember Victor Talking Machines or Nash Kelvinator (Nash Auto).
The Dow Industrials was expanded to 30 names from 20 on October 1 of 1928. Today, only nine names of the original 30 remain in the Dow. The committee at Dow Jones has replaced the other names as the companies grew out of favor, were merged into other stocks, were considered too small, or the committee felt that other companies better represented the industrial prowess of the US economy.
What if we went back to the original 30 stocks and simply bought them and held them until today? Good, bad or indifferent, what would the results be?
So, the question of the day: would you have been better off investing in the index, or buying the 30 stocks and holding them? Further, would it make any difference if you price-weighted them or equal-weighted them (explanations below)? What about inflation? And how does that compare to the S&P 500?
And before you answer, remember that one stock, Bethlehem Steel, went bankrupt. You would be stuck with Chrysler, which was removed in 1979 for IBM, which itself had been taken out in 1939 for AT&T. There have been 55 changes in the components of the Dow over the last 80 years. Some of the original 30, listed below, we would all recognize. But our kids might not remember Victor Talking Machines or Nash Kelvinator (Nash Auto).
The market is at a crossroads
There are signs of both a potential market recovery (the beginning of a larger bull rally), and signs that this recent 20%+ run-up was nothing more than a bear market rally.
The good news is that there will be plenty of opportunities going forward, regardless of which of the above scenarios plays out.
The good news is that there will be plenty of opportunities going forward, regardless of which of the above scenarios plays out.
Friday, April 03, 2009
Best four-week gain since 1938
Stocks weathered a very bad unemployment report on Friday and not only finished higher for the day but enjoyed their best four-week gain since 1938. The finish was quite bullish: The Dow Jones industrials ($INDU), which had been down as much as 80 points in the morning, recovered to close up 40 points, or 0.5%, to 8,018, their first close above 8,000 since Feb. 10. The Standard & Poor's 500 Index ($INX) was up 8 points, or 1%, to 843, and the Nasdaq Composite Index ($COMPX) was up 19 points, or 1.2%, to 1,622.
The market finished with its fourth weekly gain in a row. The Dow's total gain since March 6 is about 21%, with the S&P up 23.2% and the Nasdaq up 25.3%.
The Dow's 21% gain in the four weeks since March 6 is its biggest since 1938. If you measure the gain only against four-week periods where each week finished higher, it’s the best since the four weeks that ended on May 12, 1933.
The market finished with its fourth weekly gain in a row. The Dow's total gain since March 6 is about 21%, with the S&P up 23.2% and the Nasdaq up 25.3%.
The Dow's 21% gain in the four weeks since March 6 is its biggest since 1938. If you measure the gain only against four-week periods where each week finished higher, it’s the best since the four weeks that ended on May 12, 1933.
Wednesday, April 01, 2009
stocks vs. bonds
During the past 25 years, the total return for U.S. equities has been lower than for U.S. 10-year government bonds: –47% in real (inflation-adjusted) returns for stocks vs. +71% in real returns for bonds. With the 10-year Treasury yield currently at 2.7%, the bar has been set quite low for stocks to outperform bonds prospectively.
[4/6/09] For the past 40 years too says Bill Gross
[2/18/10] Most people would consider 40 years to be the "long run." So, it is rather disconcerting, or shocking as Rob puts it, to find that not only have stocks not outperformed bonds for the last 40 plus years, but there has actually been a small negative risk premium.
How bad is it? Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the '70s.
[4/6/09] For the past 40 years too says Bill Gross
[2/18/10] Most people would consider 40 years to be the "long run." So, it is rather disconcerting, or shocking as Rob puts it, to find that not only have stocks not outperformed bonds for the last 40 plus years, but there has actually been a small negative risk premium.
How bad is it? Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the '70s.