Boyle and McDougall’s hedge fund doesn’t do high frequency trades, so
to find out more I meet Simon Jones, who was running the quants desk at
a major bank up until a few months ago. He is 36 years old.
“The guys and women who worked with me were the best of the best.
They came from all over the world: from India, Russia and China.” The
job was intense and highly competitive. “Let’s say I have noticed that
the moment the Dow goes up the FTSE goes up,” says Jones. “The first
person to notice that and make a trade can make money but to do that
means getting the data from New York to London and then getting my
trading decision across the Atlantic and me buying my FTSE before anyone
else does.”
In this game speed is critical and that has led to what has been
dubbed an arms race between firms. It has got to a point where firms
have actually started moving their servers nearer to an exchange to
speed up connection times.
In 2010, a company called Spread Networks laid a new direct cable
between New York and Chicago, going straight through the Allegheny
mountains, which shaved a little bit more than 1,000th of a second off
the transmission time between stock exchanges.
For the opportunity to use a similarly fast tube between New York and
London, Jones’s old bank was asked to pay $50 million. “It would have
given us an advantage over others of about a six thousandths of one
second,” says Jones.
This focus on the shortest of short-term gains has vastly increased
volatility. “Warren Buffett owns shares in Coca-Cola and when they go
down he says 'I’m holding on to them because I think they will go back
up’,” says Jones. “But the HFT guy, all he cares about is the next
millisecond. And when too many people start panicking about the next
millisecond that’s when you have a crash.”
The perfect example of such a crash took place on May 6 2010. So many
shares were traded that day that the online trading section of the New
York Stock Exchange temporarily froze and between 2.30pm and 3pm the Dow
Jones lost and then regained nearly $1 trillion. In
what became known as the “Flash Crash”, shares in the management
consultancy firm Accenture plummeted to a fraction above zero . Apple shares went up to $100,000.
“None of us knew what to do or what would happen next,” says Dave
Lauer, a quant who was working on a HFT desk that day. “It was
terrifying.”
For Lauer, the Flash Crash was a wake-up call. “I started to see how
the race to be fastest had left things in a very fragile state,” he
tells me. The following year his wife revealed she was pregnant which
prompted him to make a big decision. “I remember thinking, 'How will I
explain to my future child what I do for a living?’” Lauer quit his job
and last year told the Senate Banking committee that High Frequency
Trading had brought the market to crisis point.
The Flash Crash was partly caused by the HFT strategy of “spoofing”;
making bogus offers to buy or sell shares to flush out the intentions of
rivals. On the day, an astonishing 19.4 billion shares were traded,
more than were traded in the entirety of the Sixties, but hundreds of
millions of them were never actually sold; they were merely held for a
few thousandths of a second as traders tested the waters.
Isn’t there something wrong with a system that promotes so much
volatility to the benefit of no one except a handful of hedge funds? Can
it be a meaningful investment of time and technology? Warren Buffett’s
business partner, Charlie Munger, has described High Frequency Trading
as “basically evil”. “I think it is very stupid to allow a system to
evolve where half of the trading is a bunch of short-term people trying
to get information one millionth of a nanosecond ahead of somebody
else,” he said earlier this year. “It’s legalised front-running.” HFT is
certainly of no clear benefit to everyday investors - savers in pension
funds and life policies.
Tuesday, July 30, 2013
Jim Simons, the most famous quant of all
Since the 1969 moon landing, the American government had cut funding
for science programmes and diverted it to the war in Vietnam.
“A generation of physicists who had gone to graduate school left with their PhDs and entered a severely depressed job market,” explains James Owen Weatherall, author of The Physics of Finance. They had to earn a living somehow, and, seeing how much money that there was to be made on Wall Street, many decided to move into finance.
In Britain, the fall of the Soviet Union led to an influx of Warsaw Pact scientists. In both cases, these scientists brought with them a new methodology based on analysing data and also a faith that, using sufficient computing firepower, it was possible to predict the market. It was the start of a new discipline, quantitative analysis, and the most famous “quant” of all was a shambling donnish maths genius with a scraggly beard and aversion to socks called Jim Simons.
For those who know their physics, Simons is a living legend. A piece of mathematics he co-created, the Chern-Simons 3-form, is one of the most important elements of string theory, the so-called “theory of everything”. Highly academic, Simons never seemed the sort of person who would gravitate to the earthy environs of Wall Street. But in 1982, he founded an extraordinarily successful hedge fund management company, Renaissance Technologies, whose signature fund, Medallion, went on to earn an incredible 2,478.6 per cent return in its first 10 years, way above every other hedge fund on the planet, including George Soros’s Quantum Fund.
Its success, based on a highly complex and secretive algorithm, continued in the Noughties and over the lifetime of the fund, Medallion’s returns have averaged 40 per cent a year, making Simons one of the richest men in the world with a net worth in excess of $10 billion.
Of his 200 employees, ensconced in a fortress-like building in unfashionable Long Island, New York, a third have PhDs, not in finance, but in fields like physics, mathematics and statistics. Renaissance has been called “the best physics and mathematics department in the world” and, according to Weatherall, “avoids hiring anyone with even the slightest whiff of Wall Street bona fides. PhDs in finance need not apply; nor should traders who got their start at traditional investment banks or even other hedge funds. The secret to Simons’s success has been steering clear of the financial experts.”
“A generation of physicists who had gone to graduate school left with their PhDs and entered a severely depressed job market,” explains James Owen Weatherall, author of The Physics of Finance. They had to earn a living somehow, and, seeing how much money that there was to be made on Wall Street, many decided to move into finance.
In Britain, the fall of the Soviet Union led to an influx of Warsaw Pact scientists. In both cases, these scientists brought with them a new methodology based on analysing data and also a faith that, using sufficient computing firepower, it was possible to predict the market. It was the start of a new discipline, quantitative analysis, and the most famous “quant” of all was a shambling donnish maths genius with a scraggly beard and aversion to socks called Jim Simons.
For those who know their physics, Simons is a living legend. A piece of mathematics he co-created, the Chern-Simons 3-form, is one of the most important elements of string theory, the so-called “theory of everything”. Highly academic, Simons never seemed the sort of person who would gravitate to the earthy environs of Wall Street. But in 1982, he founded an extraordinarily successful hedge fund management company, Renaissance Technologies, whose signature fund, Medallion, went on to earn an incredible 2,478.6 per cent return in its first 10 years, way above every other hedge fund on the planet, including George Soros’s Quantum Fund.
Its success, based on a highly complex and secretive algorithm, continued in the Noughties and over the lifetime of the fund, Medallion’s returns have averaged 40 per cent a year, making Simons one of the richest men in the world with a net worth in excess of $10 billion.
Of his 200 employees, ensconced in a fortress-like building in unfashionable Long Island, New York, a third have PhDs, not in finance, but in fields like physics, mathematics and statistics. Renaissance has been called “the best physics and mathematics department in the world” and, according to Weatherall, “avoids hiring anyone with even the slightest whiff of Wall Street bona fides. PhDs in finance need not apply; nor should traders who got their start at traditional investment banks or even other hedge funds. The secret to Simons’s success has been steering clear of the financial experts.”
Thursday, July 18, 2013
Detroit files for bankruptcy
The city of Detroit filed for federal bankruptcy protection on Thursday afternoon, making the automobile capital and
one-time music powerhouse the country's largest-ever municipal bankruptcy case.
The case filed inU.S. District Court for the Eastern District of Michigan came after Kevyn Orr, the emergency
manager, failed to reach agreements with enough of the bondholders, pension funds and other creditors to restructure
Detroit's debt outside of court. The final decision rested with Republican Gov. Rick Snyder, who had appointed Mr. Orr
as Detroit's overseer in March.
It was expected that the city would report long-term liabilities close to$20 billion . The city's assets were less
clear, but Mr. Orr had called the city functionally insolvent and recently missed a payment to the city's pension system
of nearly $40 million .
The financial outlook has never been bleaker for theMotor City , which has shrunk from its peak of nearly two million
people in 1950 to 700,000 today.
[wonder if the market will go down tomorrow now]
The case filed in
It was expected that the city would report long-term liabilities close to
The financial outlook has never been bleaker for the
[wonder if the market will go down tomorrow now]
Tuesday, July 16, 2013
budget deficit shrinking
Here is a story still under-told. The US federal budget deficit is plunging. It's been in a steady decline for over four years; but the
pace at which it's improving has really picked up in the past year,
particularly last month. About two-thirds of the improvement has come
from the spending side, with the remainder on the revenue (tax receipts)
side.
I suppose that's good relatively speaking, but only in comparison. It's not that 700 billion in the hole (per year) is good. It just that it was so horrendously bad at 1.5 trillion in 2010. I guess that's what fighting two wars will do.
I see we were running a surplace in the late 1990's/early 2000's. I wonder who was president then, in sayy 1998 through 2002.
Let's see. According to wikipedia, Bill Clinton served from 1993-2001. That's when the deficit went from negative to positve. Then George W. Bush from 2001-2009. And the bottom fell out. (Bush gets blamed for everything.) Coincidence of course.
I suppose that's good relatively speaking, but only in comparison. It's not that 700 billion in the hole (per year) is good. It just that it was so horrendously bad at 1.5 trillion in 2010. I guess that's what fighting two wars will do.
I see we were running a surplace in the late 1990's/early 2000's. I wonder who was president then, in sayy 1998 through 2002.
Let's see. According to wikipedia, Bill Clinton served from 1993-2001. That's when the deficit went from negative to positve. Then George W. Bush from 2001-2009. And the bottom fell out. (Bush gets blamed for everything.) Coincidence of course.
Monday, July 15, 2013
the 1%?
The Koch brothers can get left-leaning Americans' blood boiling just by
drawing breath. Imagine the rage when they actually poke the bear a bit.
In its continued bid to leave its liberal counterparts as red-faced, flustered and hyperventilated as George Soros leaves his conservative detractors, the Charles Koch Foundation recently released a commercial that suggests an annual income of $34,000 puts a worker among the wealthiest 1% -- in the world.
The basic premise is that Americans don't need things like food stamps or the minimum wage to help them, because they're already so much better off than poor people in the world around them. The Economic Policy Institute can't help but disagree. Its Family Budget Calculator notes that a family of three would require an income of $45,000 a year to cover basic needs in Simpson County, Miss., the U.S. region with the lowest cost of living for a family of that size.
Bloomberg puts Charles Koch's wealth alone at $43.4 billion. His brother and Koch Industries partner, David, is worth just as much. While that might jaundice their view of what a person on minimum wage needs to survive, Charles Koch insisted to the Wichita Eagle last week that the minimum wage is just one of the items that need to be removed:
We want to do a better job of raising up the disadvantaged and the poorest in this country, rather than saying, "Oh, we're just fine now." We're not saying that at all. What we're saying is we need to analyze all these additional policies, these subsidies, this cronyism, this avalanche of regulations, all these things that are creating a culture of dependency. And like permitting, to start a business, in many cities, to drive a taxicab, to become a hairdresser. Anything that people with limited capital can do to raise themselves up, they keep throwing obstacles in their way. And so we've got to clear those out. Or the minimum wage. Or anything that reduces the mobility of labor.
In Koch's view, these factors put the hurt on "economic freedom." His ad cites a report from the Koch-funded Fraser Institute showing that the "United States used to be a world leader in economic freedom but our ranking fell. And it's projected to decline even further."
In its continued bid to leave its liberal counterparts as red-faced, flustered and hyperventilated as George Soros leaves his conservative detractors, the Charles Koch Foundation recently released a commercial that suggests an annual income of $34,000 puts a worker among the wealthiest 1% -- in the world.
The basic premise is that Americans don't need things like food stamps or the minimum wage to help them, because they're already so much better off than poor people in the world around them. The Economic Policy Institute can't help but disagree. Its Family Budget Calculator notes that a family of three would require an income of $45,000 a year to cover basic needs in Simpson County, Miss., the U.S. region with the lowest cost of living for a family of that size.
Bloomberg puts Charles Koch's wealth alone at $43.4 billion. His brother and Koch Industries partner, David, is worth just as much. While that might jaundice their view of what a person on minimum wage needs to survive, Charles Koch insisted to the Wichita Eagle last week that the minimum wage is just one of the items that need to be removed:
We want to do a better job of raising up the disadvantaged and the poorest in this country, rather than saying, "Oh, we're just fine now." We're not saying that at all. What we're saying is we need to analyze all these additional policies, these subsidies, this cronyism, this avalanche of regulations, all these things that are creating a culture of dependency. And like permitting, to start a business, in many cities, to drive a taxicab, to become a hairdresser. Anything that people with limited capital can do to raise themselves up, they keep throwing obstacles in their way. And so we've got to clear those out. Or the minimum wage. Or anything that reduces the mobility of labor.
In Koch's view, these factors put the hurt on "economic freedom." His ad cites a report from the Koch-funded Fraser Institute showing that the "United States used to be a world leader in economic freedom but our ranking fell. And it's projected to decline even further."
Monday, July 08, 2013
predicting the future (is what people want)
Carl Richards writes about our abysmal ability to predict the future:
Jason Zweig tries to save investors from themselves:
Eddy Elfenbein writes on the amazing growth of dividends in the S&P 500 (SNPINDEX: ^GSPC ) :
The Wall Street Journal writes about what falling gold prices are doing to gold miners:
and four more
Forecasts about the future of the market are very likely to be wrong, and we don't know by how much and in which direction. So why would we use these guesses to make incredibly important decisions about our money?
Jason Zweig tries to save investors from themselves:
And while people need good advice, what they want is advice that sounds good.
The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed 'em.
Eddy Elfenbein writes on the amazing growth of dividends in the S&P 500 (SNPINDEX: ^GSPC ) :
S&P reported that dividends for the S&P 500 grew by 15.49% in the second quarter. This was the tenth-straight quarter in which dividends have risen by more than 12%.
This is especially impressive because it comes after the dividend surge from Q4 when dividends rose by 22.77% in an effort to beat higher taxes.
For Q2, the S&P 500 paid out index adjusted dividends of $8.61. Think of it this way: The S&P 500 is currently about 1,625. Every month, it pays out about three points' worth of dividends. For all of 2013, the dividends paid out will be roughly double what was paid out ten years ago.
The Wall Street Journal writes about what falling gold prices are doing to gold miners:
On top of falling metals prices, miners face rising costs. The cost of mining an ounce of gold rose to $775 in 2012 from $280 in 2005, according to BMO. That has left many miners spending more money than they are earning. The shortfall was addressed by raising funds with bonds and shares, but those markets are getting increasingly harder to access.
and four more
Monday, July 01, 2013
Mitch Zacks on interest rates and the stock market
Fluctuations in interest rates will remain center stage in the second
half of 2013. Usually, the ten-year treasury yield should be about 200
basis points, or 2%, above the inflation rate. Right now, as of the end
of June, the ten-year treasury is yielding 2.5%. The problem is that
inflation is not even close to 0.5%. Most likely, depending on how it
is calculated, core inflation is running around 1.1% annually and
projected to rise to around 1.5% in the third quarter of 2013. This is
below the Federal Reserve’s target of 2% and is also substantially below
the average inflation rate we have seen in the U.S. The current low
inflation rate implies that the ten-year treasury should be over 3%. The
reason the ten-year rate is not that high is because the Federal
Reserve is buying $85 billion dollars of treasuries and mortgage backed
securities each month in order to artificially keep interest rates low.
From 1914 through 2013 annual inflation has averaged 3.35% in the U.S. This implies that when the economy returns to normal, the yield on ten-year bonds are likely to at least double from 2.5% to 5%. The 5% number is arrived at by estimating that inflation will return to historical norms of 3% and, in the absence of bond buying by the Federal Reserve, the ten-year treasury will price itself so it yields around 2% above the inflation rate.
If we estimate that the yield on a ten-year treasury will increase from 2.5% to 5% over a three year period, this implies that ten-year bond prices will fall roughly 23% over this three year period. Effectively, if inflation returns to historic levels and the Federal Reserve stops its bond buying, investors holding treasuries are going to have their heads handed to them.
Right now the stock market is unfortunately in a damned if you do, damned if you don’t, state. If the economy recovers stronger than expected, it will likely cause some inflation and the Federal Reserve will be forced to taper their bond buying sooner than expected. This would be a negative for the market. If however, the economy weakens substantially, earnings estimates will be pulled back and the market will sell-off.
To head higher, what the stock market really needs is an economy that is neither too weak, nor too strong. If we see such a goldilocks type of economy, the stock market will continue to benefit from improving earnings due to a growing economy and lower interest rates due to the continued easing by the Federal Reserve. It is starting to look like a narrower and narrower band that economic growth must materialize in for the market to continue at the rate it has in the first half of the year.
As a result, the probability of disappointment is growing and I would not be surprised to see some selling in the second half of the year. At the end of the day, the right course of action is to keep your eye on the long-term and ignore the quarterly, or even yearly, fluctuations in the market. Thus, for the investor with the time horizon of several years, a market pull-back represents a buying opportunity.
While we are likely going to see some volatility and selling in the immediate future, the key is to make sure you are positioned so that despite pullbacks, you can continue to hold equities. Over the long-run, these quarterly fluctuations in the market that we spend so much time worrying and analyzing about, really amount to noise. The key, as always, to making money in the stock market is to be able to hold stocks for a long period of time and not to overreact to market fluctuations.
[Mitch Zacks runs the Zacks Small-Cap Core Fund (ZSCCX) which has an annual turnover of 173%]
From 1914 through 2013 annual inflation has averaged 3.35% in the U.S. This implies that when the economy returns to normal, the yield on ten-year bonds are likely to at least double from 2.5% to 5%. The 5% number is arrived at by estimating that inflation will return to historical norms of 3% and, in the absence of bond buying by the Federal Reserve, the ten-year treasury will price itself so it yields around 2% above the inflation rate.
If we estimate that the yield on a ten-year treasury will increase from 2.5% to 5% over a three year period, this implies that ten-year bond prices will fall roughly 23% over this three year period. Effectively, if inflation returns to historic levels and the Federal Reserve stops its bond buying, investors holding treasuries are going to have their heads handed to them.
Right now the stock market is unfortunately in a damned if you do, damned if you don’t, state. If the economy recovers stronger than expected, it will likely cause some inflation and the Federal Reserve will be forced to taper their bond buying sooner than expected. This would be a negative for the market. If however, the economy weakens substantially, earnings estimates will be pulled back and the market will sell-off.
To head higher, what the stock market really needs is an economy that is neither too weak, nor too strong. If we see such a goldilocks type of economy, the stock market will continue to benefit from improving earnings due to a growing economy and lower interest rates due to the continued easing by the Federal Reserve. It is starting to look like a narrower and narrower band that economic growth must materialize in for the market to continue at the rate it has in the first half of the year.
As a result, the probability of disappointment is growing and I would not be surprised to see some selling in the second half of the year. At the end of the day, the right course of action is to keep your eye on the long-term and ignore the quarterly, or even yearly, fluctuations in the market. Thus, for the investor with the time horizon of several years, a market pull-back represents a buying opportunity.
While we are likely going to see some volatility and selling in the immediate future, the key is to make sure you are positioned so that despite pullbacks, you can continue to hold equities. Over the long-run, these quarterly fluctuations in the market that we spend so much time worrying and analyzing about, really amount to noise. The key, as always, to making money in the stock market is to be able to hold stocks for a long period of time and not to overreact to market fluctuations.
[Mitch Zacks runs the Zacks Small-Cap Core Fund (ZSCCX) which has an annual turnover of 173%]
Tuesday, June 25, 2013
reflections from John Emerson
Part 1
I embark on this investing travelogue with a considerable amount of trepidation: First off, the exercise could be viewed as entirely narcissistic. Secondly, the figures I am about to divulge are not matters of public record, therefore the veracity of the numbers could easily come into question. After all, it would not be the first time that a writer invented figures to suit his purposes.
I decided to push the aforementioned apprehensions aside and proceed with my story since I believe it can serve as an inspiration to younger and disgruntled investors. Further, I believe the essays will establish with a high degree of certainty that value investing actually works and equally important, that value investing is a lifelong learning process.
When I embarked upon my investing career around 20 years ago, I was a buffoon (the first three stocks I purchased were gold junior mining stocks - more on that later). Fortunately for me, I was able to transcend the line that separates a cretin from a competent investor before I had obliterated my life savings. That process required an extensive amount of humility as well as a strong commitment to learn from my mistakes.
1994-2000
Today's edition will profile my early investment years which upon further recollection, started in 1994--maybe I should change the title of the series to "Reflections from 19 Years of Investing". The series will be written informally and serve as sort of an investment diary which chronicles my evolution as a value investor. As the title suggests, today's discussion will cover the period from 1994 to the end of 2000.
I still remember the names of the first three stocks that I purchased nearly 20 years ago. They gold mining companies: Pegasus Gold, Eco Bay Mines and Battle Mountain. I came to purchase the stocks after consulting with one of the telemarketers at the home improvement company where I was employed as a commission salesman. Now "that takes some explaining Lucy." You see, the telemarketer was a former Wall Street investment adviser who developed a nasty cocaine habit and served multiple tours of duties at some of the finest rehab facilities in the U.S., apparently to no avail.
Although at the time I was talking to him, he appeared to be on the straight and narrow, in reality, he was heading straight to his supplier with money that he borrowed from a number of his co-workers which included me. For informational value, never loan money to an "ex-junkie" who consistently wears long-sleeve shirts that cover the entire back of his hands - I never saw more than the guy's fingernails. You see he shot up his medicine through the veins on the back of his hands. Please forgive my temporary digression.
Anyway, the drug addict gave me the 800 number of one of his former cohorts who happened to be a gold bug, and the rest is history - so was two-thirds of my $15,000 "investment" after a matter of months. For younger readers, gold and gold mining stocks were not the place to be in the 1990s, as gold steadily plummeted to less than $250 an ounce.
Undaunted by the loss, I abandoned the gold mining sector and invested my remaining $5,000 in Intel (INTC). Why Intel you might ask? To the best of my recollection, I had heard a number of analysts talking about the stock on CNBC and unlike many of the other technology stocks, it appeared to me to be cheap. I have no idea how I came to that conclusion since I had no ability to price equities at the time. I was still in stock picking kindergarten and the concept of a PE ratio was entirely over my head, let alone the concept of free cash flow or return on equity.
As fate would have it, Intel tripled in about a year and my bank roll was miraculously restored with my only loss being the time value of my money. Bear in mind that saving accounts actually paid interest 20 years ago.
2001-2008 (part 1)
I resume the story in early August of 2001, about one month prior to one of the saddest days in American history, Sept. 11, 2001. For some reason I had suddenly become very apprehensive about the market and for one of the few times in my investing career, I acted completely on impulse. I sold out of about 60 percent of my stock positions. I simply called up my broker one morning (I was not doing my transactions on line at that point) and read off the list companies which I wanted to delete from my investment portfolios.
I recall one thing in particular about going to such a heavy position in cash: It made my life extremely boring for the next few weeks. Still, I held tight to my resolution that I would not make any further investments until the market corrected and I temporarily quit doing stock research altogether. The decision was extremely foolish since it was based upon pure speculation rather than any analysis about the valuations of my holdings. As things would turn out, I did not have to wait before the market corrected.
Like most Americans, I remember exactly what I was doing on Sept. 11, 2001; I was watching CNBC as the horrific drama unfolded. I will never forget watching the backdrop of the Twin Towers when the second plane hit; at that point it was evident to all Americans that their country was under siege from terrorists. Mark Haynes navigated the viewing audience through the terrible ordeal with exquisite poise, never cracking or wavering as Americans sat mesmerized in front of their television sets, watching the shocking developments in stunned silence.
September 11 had a profound effect on the psyche of Americans and without question it had a dramatic influence on their buying and spending patterns. About a month after the attack I attended the Fall Home Show in Omaha and almost none of the vendors did any significant business with one notable exception. The man who sold America flags and retractable flag poles sold out his entire inventory quickly. Many of his customers were forced to endure back order periods of several months before they were able to openly display their love for the United States.
The tragedy had reawakened the patriotic spirit of the American people, drawing its citizens closer together; although it also triggered some temporary changes in their behavior. Americans became much less apt to travel long distances for an extended period, following the tragedy. Airplane traffic dropped dramatically and the following year, businesses which relied upon tourist traffic during the summer months would suffer mightily. It appeared that September 11 had significantly reduced the desire of many Americans to spend their money on things pertaining to leisure and entertainment or much of anything else that did not reflect upon their basic needs. Fortunately, the effects of the attack on the American economy would be temporary in duration.
After the shock and sadness of September 11 began to wane a few days later, I resolved that I was going to spend all my available doing stock research. Free time had become an abundant commodity as my business phone had gone silence following the attack. I began purchasing stocks a few weeks following the tragedy, and within about a month, I was once again fully invested. I would remain fully invested in equities for longer than a decade.
After reinvesting all my funds back into stocks shortly after September 11, I enjoyed a stellar performance until the market engaged in a severe correction in the late summer and early fall of 2002. Following September 11, my portfolios advanced about 25% by year end and by the mid summer of 2002, they had advanced by over 55 percent. Bear in mind that I had never enjoyed any real success in investing prior to that point; therefore I was developing a bit of a “Messiah Complex.” Legendary turf writer Andrew Beyer coined that term to describe the tendency of a horse player to become overconfident following a successful run of luck at the race track.
The late summer of 2002 quickly destroyed any personal delusions I held about shutting down my business and living off my investments. I lost every cent of the 55% in paper gains which I had recorded following September 11 in approximately two months.
Another problem presented itself: My wife was now in full scale panic mode and she was putting me under extreme pressure to sell out of all our equities “while we still had something left.” It seems that she had been talking with one of her friends who had recently gone to cash in her 401-K after knuckling under to the pressure of a rapidly dropping market. My wife thought it would be much more prudent to buy a larger house than to invest our life savings in the market.
Fortunately for us, I refused to knuckle under and resolved not to sell any of our positions. The process was greatly aided by the fact that the market turned almost exactly at the point of my wife’s heaviest insistence to liquidate our positions. In the future, I would use her as a “contrarian indicator” and I made a special point to remind her of her wholesale panic whenever she became nervous in regard to a falling market. The experience became extremely important about six years later when the credit crisis developed and our portfolios would lose well over half of their value in a few short months. To her credit, she weathered that storm extremely well.
After the market reversed in the early fall of 2002, our portfolios began an unprecedented run of good fortune. In 2003, the portfolios were up in excess of 80% and by October of 2007 they had more than quadrupled from their trough, around early October of 2002. It was a great five year run; although I never anticipated that approximately that one year later, the majority of those gains would be sacrificed in merely a few short months. But that is a story to be told later in the series.
By 2003 I was developing quit an affinity for purchasing microcap stocks. Apparently, my early experience with Camtek had not destroyed my interest in investing in tiny companies. I decided that I would start investing significant capital in microcap stocks for the following reasons: They were largely under appreciated and under followed by the investing community, and they were more apt to be mispriced than their larger brethren.
I started following a rather sleazy microcap tout service which was later exposed by Barron’s; the service was Ceocast.com. The newsletter did not charge its reading audience a fee; rather they billed the companies which they promoted in the form of cash and shares of their stock. The “pump sheet” was full of extremely low-grade companies which typically traded on the Bulletin Board; however occasionally they would promote a real “diamond-in-the-rough” which traded on a reputable exchange.
Lake Gaming (LACO)
I originally discovered Lake Gaming in the Ceocast newsletter and I eventually purchased shares in the stock, but not for the reasons which the newsletter discussed. Upon reviewing the company, I noticed that Mario Gabelli held a significant position in the stock and it was trading at less than 50% of its tangible book value.
As it turned out, one the major assets the company held, was land on the far south portion of Las Vegas, in close proximity to the airport; they were in the process of monetizing that interest by selling the property to time-share companies. The scenario was reminiscent of Aztar. Furthermore, their balance sheet held significant cash and large amounts of money which was owed to them by certain Indian tribes.
At the end of 2002 the company had a book value in excess of 15 dollars per share. I bought my original position for around 7 dollars a share and following the announcement of non-cash accounting restatement, which had no effect on the book value; the stock dipped to about 4 dollars a share. I doubled my position at around $4.25 per share.
Fate was on my side in the case of LACO; although their Indian Gaming business would not drive their earnings in the near term, another catalyst was about to emerge in early 2003. Lyle Berman, the CEO of LACO was an avid poker player and he had an idea that provided the impetus for the stock to move forward.
Berman pioneered the idea of the World Poker Tour (WPT) and sold the concept to the Travel Channel. Watching poker on television had always been boring since the viewing audience could not see the down cards which the players held. Berman remedied that problem by allowing a camera to expose the down cards to the TV audience. That idea suddenly transformed Texas Holdem into a fascinating spectator’s sport. By the end of 2003 the stock had reached its book value of 15 dollars a share and I decided to take my profits, perhaps a bit prematurely. The stock quickly climbed to about 30 dollars a share on sheer momentum.
In the longer term, the decision to sell turned out to be prudent since the TV success of the WPT never translated into significant profits. The idea may have revolutionized the TV viewing of poker events but it never turned LACO into a cash cow.
Fairchild (FA)
I will conclude today’s discussion with another balance sheet play that resulted in my largest gain at that point in my investing career. The company was Fairchild and I had started accumulating shares in the company, following my reentry to the stock market in the fall of 2001.
It was another company in which Mario Gabelli held a significant position. I can not recall for certain, but I believe the stock was mentioned by Gabelli on CNBC. As is typical with a Gabelli holding, the stock held real estate which was understated on the balance sheet. Specifically, the company owned a large shopping center in Long Island which was almost fully occupied and provided the heavily debt-burdened company with a steady cash flow.
Fairchild held another asset which was extremely undervalued and held a much high intrinsic net worth than the shopping center. More specifically, Fairchild owned a large airplane fastener company which had recorded well over a half a billion dollars in sales in fiscal year 2002 and was returning the company over 70 million a year in EBITDA.
One of the reasons Gabelli liked Fairchild was due to the fact they were extremely overleveraged. That may sound strange but “The Chairman” believed that the CEO and controlling shareholder, Jeffrey Steiner, would be required to do a deal to prevent the holding company from being forced into bankruptcy proceedings.
Steiner had a reputation for several things: Most importantly, he could be described as a very successful wheeler/dealer that was known for buying businesses and later selling them for a tidy profit. Secondly, he was one of the most notoriously overcompensated CEOs on Wall Street and he controlled the board of directors at Fairchild.
When he made a successful deal he was handsomely rewarded in the form of a bonus as well as drawing an excessive base salary. Steiner’s legendary greed was profiled in newspaper articles, business magazines and was even the subject of an entire chapter from the book: "In Search of Excess: The Overcompensation of American Executives".
I bought a large position in Fairchild at around three dollars and when the company dropped to slightly over $2 a share I bought considerably more stock. At that point in my investing career is seems that I was fearless. I as recall, the company represented nearly 20% of my entire holdings when I was finished purchasing the stock. Never before had I taken such a large position as a percentage of my entire portfolios.
In mid July of 2002, I awoke and turned on my living room television set; scrolling across the bottom of the CNBC ticker was the following headline: Alcoa buys Fairchild’s fastener division for 657 million in cash. I jumped so high that I almost hit the 8-foot ceiling in my living room. It seems I had hit the mother lode on Fairchild in less than a year’s time.
When I performed the calculations, I figured that the sale alone should be worth at least $6.50 a share to the Fairchild shareholders but the stock quickly settled under six dollars per share. I pondered the situation carefully and decided that Steiner would never return a dime to the Fairchild shareholders. I sold my entire position at around $5.50 a share, deciding to pay the short capital gains taxes on the shares in my taxable accounts.
The decision turned out to be prudent since Steiner eventually squandered the entire windfall without returning a dime to the shareholders. Of course he received a tens of millions as a finder’s fee for executing the transaction. Gabelli on the other hand, decided to maintain his entire position. For once I had out thought “The Chairman.”
Thereafter, Fairchild dropped slowly and steadily, never again reaching the five dollar range. Following the death of Jeffrey Steiner, the company was liquidated at a small percentage of its former price. As I recall it brought a little over a dollar a share.
*** 2001-2008 (part 2)
I was brimming with confidence entering 2004; I had just recorded my best year ever in terms of gains versus the S&P. All the market indices had recorded a resounding rally since the early fall of 2002; the rally was fueled by the Federal Reserve’s monetary easing policy and a new found optimism about future of corporate profits. It seemed that the tragedy of September 11 was now a distant memory and its effects on the psyche of the US consumer had all but disappeared.
Following precipitous market rallies, value investors must devote increasing research time to uncover bargains. Such was the case in 2004, many of the obvious values had disappeared and simple asset plays, as well as beaten down cyclical stocks were quickly vanishing from the screens of value investors.
During such times, investors either have to become more imaginative in regard to uncovering value propositions, or reduce the number of companies that they hold in their portfolios. At that point in my investing career, I still lacked the confidence to hold just a few large positions; thus I decided to become more creative in my investments. I starting searching for theme investments which I thought would prosper during the cyclical recovery.
The Investing Climate in 2003-2007
Oil, natural gas and other commodities were entering a bull market, driving up the value of the companies who owned or leased the land which held the resources. Oil service and equipment stocks as well as the mining equipment companies would benefit mightily as the demand for their products and services rose dramatically.
Likewise with the housing market, not only were home builders and banks benefiting from the housing boom, so too were the building material suppliers and virtually any business which was related to the worldwide surge in housing market.
I started to focus upon finding companies that would benefit from the aforementioned investment themes, but only investing in companies which still held reasonable valuation metrics. The idea was to locate companies that remained undiscovered by Wall Street which were likely to increase their forward earnings. Furthermore, such companies would frequently become buyout candidates, as larger companies looked to increase their earnings by acquiring businesses that were not already “sky high” in price.
When I would check the ownership of many of the companies that I found to be worthy of research, I frequently ran across the name of Jeffrey Gendell who titled his hedge fund Tontine Asset Management.
The Rise and Fall of Tontine Asset Management and ENGlobal (ENG)
Gendell rarely conducted interviews, almost never publicizing his stock selections or his theories in regard to investing. The average investor had never heard of him or his hedge fund; however anyone who tracked money managers closely, was well aware the outstanding returns which were flowing into the pockets of the clients at Tontine. In 2003 and 2004, Gendell recorded near miraculous gains, approximately doubling the value of his portfolios, in back to back years.
Gendell first caught the eye of Wall Street when he became extremely bullish on US steel companies in the early 2000s. Similar to today, US steel companies were on the outs with investors and Tontine boldly stepped in, heavily overweighting the sector. Shortly after Gendell entered the sector, steel companies began a protracted bull market; it seems that Wall Street had a brand new emerging superstar that was capable of spotting cyclical bottoms as well as possessing sufficient courageous to act upon his convictions.
The prodigious gains of Gendell caught my eye as well, and I began to track the companies in which he held significant ownership. One of the companies that I ran across was tiny ENGlobal (ENG), a Houston-based provider of engineering services to the energy sector. The stock fit my investing theme perfectly and it did not hurt my confidence to know that Gendell felt the same way. Further, the stock appeared to be reasonably valued in terms of the business the company was writing and I believed that its earnings were about ready to spike upward. As you can see, I was not exactly demanding a large margin of safety in my theme investments at that point in time.
I purchased ENG in the spring of 2005 for $2.20 a share; by the mid to late summer of the same year, the stock had climbed to around 9.00 a share. I now had to make a decision on whether to sell the stock and take my gains or continue to hold the stock. As it turns out my decision was made considerably easier when I turned on Mad Money that night and much to my amazement, Jim Cramer was touting this tiny microcap stock. My decision was now etched in stone; I sold ENG at the open of the market the following day, for exactly 9.00 per share.
It had been my experience that Cramer’s late entry into a momentum stocks generally resulted in a market top for the equity. Such was the case with ENG, after the price ascended slightly higher, the stock quickly dropped below 7 dollars a share. In fairness to Cramer, the stock did go much higher several years later but that was a merely temporary spike, the case of a low quality company hitting a temporary sweet spot. A few years later the stock steadily dropped and never recovered; today it trades under a dollar a share.
Now back to the saga of Jeffrey Gendell and Tontine Asset Management. It seemed that Mr. Gendell was not adhering to Ben Graham’s prime directive which suggested that investors should minimize their risk by demanding a sufficient margin of safety on their investment selections. Not only was the hedge fund highly leveraged but almost his entire portfolio was concentrated in debt-laden cyclical companies which were currently benefiting from rising real estate and commodity prices. Apparently, Gendell simply did not believe that the bull market which was triggered by the real estate bubble and the boom cycle in commodities was going to end any time soon.
To make a long story short, in early 2009 Tontine was forced into liquidating its positions and shutting down the fund. I noticed one of the stocks that Gendell was forced to sell was ENG—I wonder if Cramer was still holding the stock? The experience served as a lesson for all investors (me included) who might decide to coat-tail a respected investor without regard to performing their own due diligence on the guru’s stock purchases. The Gendell saga also exposed the extreme danger of employing excessive margin in the hopes of “juicing” one’s investment returns.
2001-2008 (Part 3)
Reflections from 20 Years of Investing (2008-2009)
Reflections from 20 Years of Investing (2010 and Beyond)
The financial crisis of late 2008 and early 2009 had a profound effect on the future investing strategy which I would employ going forward. It literally changed my entire outlook on value investing; I would became a balance sheet oriented investor who held large concentrations in a limited amount of stocks.
The credit crisis had served to remind me of Buffett’s three most importance words in investing: margin of safety. It seemed that my investing success had caused me to lose sight of the potential downside in a stock purchase. That failing had caused me to temporarily underperform the market during the Great Recession. It also had injected an elevated level of risk into my investment portfolios which I was unable to tolerate. The remedy involved making fewer investments and demanding a higher margin of safety.
I embark on this investing travelogue with a considerable amount of trepidation: First off, the exercise could be viewed as entirely narcissistic. Secondly, the figures I am about to divulge are not matters of public record, therefore the veracity of the numbers could easily come into question. After all, it would not be the first time that a writer invented figures to suit his purposes.
I decided to push the aforementioned apprehensions aside and proceed with my story since I believe it can serve as an inspiration to younger and disgruntled investors. Further, I believe the essays will establish with a high degree of certainty that value investing actually works and equally important, that value investing is a lifelong learning process.
When I embarked upon my investing career around 20 years ago, I was a buffoon (the first three stocks I purchased were gold junior mining stocks - more on that later). Fortunately for me, I was able to transcend the line that separates a cretin from a competent investor before I had obliterated my life savings. That process required an extensive amount of humility as well as a strong commitment to learn from my mistakes.
1994-2000
Today's edition will profile my early investment years which upon further recollection, started in 1994--maybe I should change the title of the series to "Reflections from 19 Years of Investing". The series will be written informally and serve as sort of an investment diary which chronicles my evolution as a value investor. As the title suggests, today's discussion will cover the period from 1994 to the end of 2000.
I still remember the names of the first three stocks that I purchased nearly 20 years ago. They gold mining companies: Pegasus Gold, Eco Bay Mines and Battle Mountain. I came to purchase the stocks after consulting with one of the telemarketers at the home improvement company where I was employed as a commission salesman. Now "that takes some explaining Lucy." You see, the telemarketer was a former Wall Street investment adviser who developed a nasty cocaine habit and served multiple tours of duties at some of the finest rehab facilities in the U.S., apparently to no avail.
Although at the time I was talking to him, he appeared to be on the straight and narrow, in reality, he was heading straight to his supplier with money that he borrowed from a number of his co-workers which included me. For informational value, never loan money to an "ex-junkie" who consistently wears long-sleeve shirts that cover the entire back of his hands - I never saw more than the guy's fingernails. You see he shot up his medicine through the veins on the back of his hands. Please forgive my temporary digression.
Anyway, the drug addict gave me the 800 number of one of his former cohorts who happened to be a gold bug, and the rest is history - so was two-thirds of my $15,000 "investment" after a matter of months. For younger readers, gold and gold mining stocks were not the place to be in the 1990s, as gold steadily plummeted to less than $250 an ounce.
Undaunted by the loss, I abandoned the gold mining sector and invested my remaining $5,000 in Intel (INTC). Why Intel you might ask? To the best of my recollection, I had heard a number of analysts talking about the stock on CNBC and unlike many of the other technology stocks, it appeared to me to be cheap. I have no idea how I came to that conclusion since I had no ability to price equities at the time. I was still in stock picking kindergarten and the concept of a PE ratio was entirely over my head, let alone the concept of free cash flow or return on equity.
As fate would have it, Intel tripled in about a year and my bank roll was miraculously restored with my only loss being the time value of my money. Bear in mind that saving accounts actually paid interest 20 years ago.
2001-2008 (part 1)
I resume the story in early August of 2001, about one month prior to one of the saddest days in American history, Sept. 11, 2001. For some reason I had suddenly become very apprehensive about the market and for one of the few times in my investing career, I acted completely on impulse. I sold out of about 60 percent of my stock positions. I simply called up my broker one morning (I was not doing my transactions on line at that point) and read off the list companies which I wanted to delete from my investment portfolios.
I recall one thing in particular about going to such a heavy position in cash: It made my life extremely boring for the next few weeks. Still, I held tight to my resolution that I would not make any further investments until the market corrected and I temporarily quit doing stock research altogether. The decision was extremely foolish since it was based upon pure speculation rather than any analysis about the valuations of my holdings. As things would turn out, I did not have to wait before the market corrected.
Like most Americans, I remember exactly what I was doing on Sept. 11, 2001; I was watching CNBC as the horrific drama unfolded. I will never forget watching the backdrop of the Twin Towers when the second plane hit; at that point it was evident to all Americans that their country was under siege from terrorists. Mark Haynes navigated the viewing audience through the terrible ordeal with exquisite poise, never cracking or wavering as Americans sat mesmerized in front of their television sets, watching the shocking developments in stunned silence.
September 11 had a profound effect on the psyche of Americans and without question it had a dramatic influence on their buying and spending patterns. About a month after the attack I attended the Fall Home Show in Omaha and almost none of the vendors did any significant business with one notable exception. The man who sold America flags and retractable flag poles sold out his entire inventory quickly. Many of his customers were forced to endure back order periods of several months before they were able to openly display their love for the United States.
The tragedy had reawakened the patriotic spirit of the American people, drawing its citizens closer together; although it also triggered some temporary changes in their behavior. Americans became much less apt to travel long distances for an extended period, following the tragedy. Airplane traffic dropped dramatically and the following year, businesses which relied upon tourist traffic during the summer months would suffer mightily. It appeared that September 11 had significantly reduced the desire of many Americans to spend their money on things pertaining to leisure and entertainment or much of anything else that did not reflect upon their basic needs. Fortunately, the effects of the attack on the American economy would be temporary in duration.
After the shock and sadness of September 11 began to wane a few days later, I resolved that I was going to spend all my available doing stock research. Free time had become an abundant commodity as my business phone had gone silence following the attack. I began purchasing stocks a few weeks following the tragedy, and within about a month, I was once again fully invested. I would remain fully invested in equities for longer than a decade.
After reinvesting all my funds back into stocks shortly after September 11, I enjoyed a stellar performance until the market engaged in a severe correction in the late summer and early fall of 2002. Following September 11, my portfolios advanced about 25% by year end and by the mid summer of 2002, they had advanced by over 55 percent. Bear in mind that I had never enjoyed any real success in investing prior to that point; therefore I was developing a bit of a “Messiah Complex.” Legendary turf writer Andrew Beyer coined that term to describe the tendency of a horse player to become overconfident following a successful run of luck at the race track.
The late summer of 2002 quickly destroyed any personal delusions I held about shutting down my business and living off my investments. I lost every cent of the 55% in paper gains which I had recorded following September 11 in approximately two months.
Another problem presented itself: My wife was now in full scale panic mode and she was putting me under extreme pressure to sell out of all our equities “while we still had something left.” It seems that she had been talking with one of her friends who had recently gone to cash in her 401-K after knuckling under to the pressure of a rapidly dropping market. My wife thought it would be much more prudent to buy a larger house than to invest our life savings in the market.
Fortunately for us, I refused to knuckle under and resolved not to sell any of our positions. The process was greatly aided by the fact that the market turned almost exactly at the point of my wife’s heaviest insistence to liquidate our positions. In the future, I would use her as a “contrarian indicator” and I made a special point to remind her of her wholesale panic whenever she became nervous in regard to a falling market. The experience became extremely important about six years later when the credit crisis developed and our portfolios would lose well over half of their value in a few short months. To her credit, she weathered that storm extremely well.
After the market reversed in the early fall of 2002, our portfolios began an unprecedented run of good fortune. In 2003, the portfolios were up in excess of 80% and by October of 2007 they had more than quadrupled from their trough, around early October of 2002. It was a great five year run; although I never anticipated that approximately that one year later, the majority of those gains would be sacrificed in merely a few short months. But that is a story to be told later in the series.
By 2003 I was developing quit an affinity for purchasing microcap stocks. Apparently, my early experience with Camtek had not destroyed my interest in investing in tiny companies. I decided that I would start investing significant capital in microcap stocks for the following reasons: They were largely under appreciated and under followed by the investing community, and they were more apt to be mispriced than their larger brethren.
I started following a rather sleazy microcap tout service which was later exposed by Barron’s; the service was Ceocast.com. The newsletter did not charge its reading audience a fee; rather they billed the companies which they promoted in the form of cash and shares of their stock. The “pump sheet” was full of extremely low-grade companies which typically traded on the Bulletin Board; however occasionally they would promote a real “diamond-in-the-rough” which traded on a reputable exchange.
Lake Gaming (LACO)
I originally discovered Lake Gaming in the Ceocast newsletter and I eventually purchased shares in the stock, but not for the reasons which the newsletter discussed. Upon reviewing the company, I noticed that Mario Gabelli held a significant position in the stock and it was trading at less than 50% of its tangible book value.
As it turned out, one the major assets the company held, was land on the far south portion of Las Vegas, in close proximity to the airport; they were in the process of monetizing that interest by selling the property to time-share companies. The scenario was reminiscent of Aztar. Furthermore, their balance sheet held significant cash and large amounts of money which was owed to them by certain Indian tribes.
At the end of 2002 the company had a book value in excess of 15 dollars per share. I bought my original position for around 7 dollars a share and following the announcement of non-cash accounting restatement, which had no effect on the book value; the stock dipped to about 4 dollars a share. I doubled my position at around $4.25 per share.
Fate was on my side in the case of LACO; although their Indian Gaming business would not drive their earnings in the near term, another catalyst was about to emerge in early 2003. Lyle Berman, the CEO of LACO was an avid poker player and he had an idea that provided the impetus for the stock to move forward.
Berman pioneered the idea of the World Poker Tour (WPT) and sold the concept to the Travel Channel. Watching poker on television had always been boring since the viewing audience could not see the down cards which the players held. Berman remedied that problem by allowing a camera to expose the down cards to the TV audience. That idea suddenly transformed Texas Holdem into a fascinating spectator’s sport. By the end of 2003 the stock had reached its book value of 15 dollars a share and I decided to take my profits, perhaps a bit prematurely. The stock quickly climbed to about 30 dollars a share on sheer momentum.
In the longer term, the decision to sell turned out to be prudent since the TV success of the WPT never translated into significant profits. The idea may have revolutionized the TV viewing of poker events but it never turned LACO into a cash cow.
Fairchild (FA)
I will conclude today’s discussion with another balance sheet play that resulted in my largest gain at that point in my investing career. The company was Fairchild and I had started accumulating shares in the company, following my reentry to the stock market in the fall of 2001.
It was another company in which Mario Gabelli held a significant position. I can not recall for certain, but I believe the stock was mentioned by Gabelli on CNBC. As is typical with a Gabelli holding, the stock held real estate which was understated on the balance sheet. Specifically, the company owned a large shopping center in Long Island which was almost fully occupied and provided the heavily debt-burdened company with a steady cash flow.
Fairchild held another asset which was extremely undervalued and held a much high intrinsic net worth than the shopping center. More specifically, Fairchild owned a large airplane fastener company which had recorded well over a half a billion dollars in sales in fiscal year 2002 and was returning the company over 70 million a year in EBITDA.
One of the reasons Gabelli liked Fairchild was due to the fact they were extremely overleveraged. That may sound strange but “The Chairman” believed that the CEO and controlling shareholder, Jeffrey Steiner, would be required to do a deal to prevent the holding company from being forced into bankruptcy proceedings.
Steiner had a reputation for several things: Most importantly, he could be described as a very successful wheeler/dealer that was known for buying businesses and later selling them for a tidy profit. Secondly, he was one of the most notoriously overcompensated CEOs on Wall Street and he controlled the board of directors at Fairchild.
When he made a successful deal he was handsomely rewarded in the form of a bonus as well as drawing an excessive base salary. Steiner’s legendary greed was profiled in newspaper articles, business magazines and was even the subject of an entire chapter from the book: "In Search of Excess: The Overcompensation of American Executives".
I bought a large position in Fairchild at around three dollars and when the company dropped to slightly over $2 a share I bought considerably more stock. At that point in my investing career is seems that I was fearless. I as recall, the company represented nearly 20% of my entire holdings when I was finished purchasing the stock. Never before had I taken such a large position as a percentage of my entire portfolios.
In mid July of 2002, I awoke and turned on my living room television set; scrolling across the bottom of the CNBC ticker was the following headline: Alcoa buys Fairchild’s fastener division for 657 million in cash. I jumped so high that I almost hit the 8-foot ceiling in my living room. It seems I had hit the mother lode on Fairchild in less than a year’s time.
When I performed the calculations, I figured that the sale alone should be worth at least $6.50 a share to the Fairchild shareholders but the stock quickly settled under six dollars per share. I pondered the situation carefully and decided that Steiner would never return a dime to the Fairchild shareholders. I sold my entire position at around $5.50 a share, deciding to pay the short capital gains taxes on the shares in my taxable accounts.
The decision turned out to be prudent since Steiner eventually squandered the entire windfall without returning a dime to the shareholders. Of course he received a tens of millions as a finder’s fee for executing the transaction. Gabelli on the other hand, decided to maintain his entire position. For once I had out thought “The Chairman.”
Thereafter, Fairchild dropped slowly and steadily, never again reaching the five dollar range. Following the death of Jeffrey Steiner, the company was liquidated at a small percentage of its former price. As I recall it brought a little over a dollar a share.
*** 2001-2008 (part 2)
I was brimming with confidence entering 2004; I had just recorded my best year ever in terms of gains versus the S&P. All the market indices had recorded a resounding rally since the early fall of 2002; the rally was fueled by the Federal Reserve’s monetary easing policy and a new found optimism about future of corporate profits. It seemed that the tragedy of September 11 was now a distant memory and its effects on the psyche of the US consumer had all but disappeared.
Following precipitous market rallies, value investors must devote increasing research time to uncover bargains. Such was the case in 2004, many of the obvious values had disappeared and simple asset plays, as well as beaten down cyclical stocks were quickly vanishing from the screens of value investors.
During such times, investors either have to become more imaginative in regard to uncovering value propositions, or reduce the number of companies that they hold in their portfolios. At that point in my investing career, I still lacked the confidence to hold just a few large positions; thus I decided to become more creative in my investments. I starting searching for theme investments which I thought would prosper during the cyclical recovery.
The Investing Climate in 2003-2007
Oil, natural gas and other commodities were entering a bull market, driving up the value of the companies who owned or leased the land which held the resources. Oil service and equipment stocks as well as the mining equipment companies would benefit mightily as the demand for their products and services rose dramatically.
Likewise with the housing market, not only were home builders and banks benefiting from the housing boom, so too were the building material suppliers and virtually any business which was related to the worldwide surge in housing market.
I started to focus upon finding companies that would benefit from the aforementioned investment themes, but only investing in companies which still held reasonable valuation metrics. The idea was to locate companies that remained undiscovered by Wall Street which were likely to increase their forward earnings. Furthermore, such companies would frequently become buyout candidates, as larger companies looked to increase their earnings by acquiring businesses that were not already “sky high” in price.
When I would check the ownership of many of the companies that I found to be worthy of research, I frequently ran across the name of Jeffrey Gendell who titled his hedge fund Tontine Asset Management.
The Rise and Fall of Tontine Asset Management and ENGlobal (ENG)
Gendell rarely conducted interviews, almost never publicizing his stock selections or his theories in regard to investing. The average investor had never heard of him or his hedge fund; however anyone who tracked money managers closely, was well aware the outstanding returns which were flowing into the pockets of the clients at Tontine. In 2003 and 2004, Gendell recorded near miraculous gains, approximately doubling the value of his portfolios, in back to back years.
Gendell first caught the eye of Wall Street when he became extremely bullish on US steel companies in the early 2000s. Similar to today, US steel companies were on the outs with investors and Tontine boldly stepped in, heavily overweighting the sector. Shortly after Gendell entered the sector, steel companies began a protracted bull market; it seems that Wall Street had a brand new emerging superstar that was capable of spotting cyclical bottoms as well as possessing sufficient courageous to act upon his convictions.
The prodigious gains of Gendell caught my eye as well, and I began to track the companies in which he held significant ownership. One of the companies that I ran across was tiny ENGlobal (ENG), a Houston-based provider of engineering services to the energy sector. The stock fit my investing theme perfectly and it did not hurt my confidence to know that Gendell felt the same way. Further, the stock appeared to be reasonably valued in terms of the business the company was writing and I believed that its earnings were about ready to spike upward. As you can see, I was not exactly demanding a large margin of safety in my theme investments at that point in time.
I purchased ENG in the spring of 2005 for $2.20 a share; by the mid to late summer of the same year, the stock had climbed to around 9.00 a share. I now had to make a decision on whether to sell the stock and take my gains or continue to hold the stock. As it turns out my decision was made considerably easier when I turned on Mad Money that night and much to my amazement, Jim Cramer was touting this tiny microcap stock. My decision was now etched in stone; I sold ENG at the open of the market the following day, for exactly 9.00 per share.
It had been my experience that Cramer’s late entry into a momentum stocks generally resulted in a market top for the equity. Such was the case with ENG, after the price ascended slightly higher, the stock quickly dropped below 7 dollars a share. In fairness to Cramer, the stock did go much higher several years later but that was a merely temporary spike, the case of a low quality company hitting a temporary sweet spot. A few years later the stock steadily dropped and never recovered; today it trades under a dollar a share.
Now back to the saga of Jeffrey Gendell and Tontine Asset Management. It seemed that Mr. Gendell was not adhering to Ben Graham’s prime directive which suggested that investors should minimize their risk by demanding a sufficient margin of safety on their investment selections. Not only was the hedge fund highly leveraged but almost his entire portfolio was concentrated in debt-laden cyclical companies which were currently benefiting from rising real estate and commodity prices. Apparently, Gendell simply did not believe that the bull market which was triggered by the real estate bubble and the boom cycle in commodities was going to end any time soon.
To make a long story short, in early 2009 Tontine was forced into liquidating its positions and shutting down the fund. I noticed one of the stocks that Gendell was forced to sell was ENG—I wonder if Cramer was still holding the stock? The experience served as a lesson for all investors (me included) who might decide to coat-tail a respected investor without regard to performing their own due diligence on the guru’s stock purchases. The Gendell saga also exposed the extreme danger of employing excessive margin in the hopes of “juicing” one’s investment returns.
2001-2008 (Part 3)
Reflections from 20 Years of Investing (2008-2009)
Reflections from 20 Years of Investing (2010 and Beyond)
The financial crisis of late 2008 and early 2009 had a profound effect on the future investing strategy which I would employ going forward. It literally changed my entire outlook on value investing; I would became a balance sheet oriented investor who held large concentrations in a limited amount of stocks.
The credit crisis had served to remind me of Buffett’s three most importance words in investing: margin of safety. It seemed that my investing success had caused me to lose sight of the potential downside in a stock purchase. That failing had caused me to temporarily underperform the market during the Great Recession. It also had injected an elevated level of risk into my investment portfolios which I was unable to tolerate. The remedy involved making fewer investments and demanding a higher margin of safety.
Wednesday, June 19, 2013
time to change your strategy
says Cramer.
NEW YORK (TheStreet) -- Buying stocks just because they have big dividends is over, Jim Cramer told his "Mad Money" TV show viewers Wednesday after the market reacted to the latest musings from the Federal Reserve.
Cramer said what will work best from here on out will be those companies that do better as the economy does better.
It may seem confusing that the markets now view the Fed's bond-buying program as a bad thing after rallying on the same news for the past four years. But that is what's happening, he said. The markets have lost faith that the Fed's artificially low interest rates will be enough to slow a growing economy.
Even today, as the Fed pledged to keep rates low, those same rates inched still higher. That means housing-related stocks and those with big dividends will be among the biggest losers, as they now once again have competition from bonds, which offer less risk than stocks, said Cramer.
On the flip side, Cramer said stocks that grow as the economy grows -- stocks such as the industrials, the banks and tech -- will be the places to invest as it's now clear the economy is moving forward, with or without Fed intervention. Big dividends can't offer enough protection anymore, Cramer concluded, so investors need to change their investment strategy starting tomorrow.
NEW YORK (TheStreet) -- Buying stocks just because they have big dividends is over, Jim Cramer told his "Mad Money" TV show viewers Wednesday after the market reacted to the latest musings from the Federal Reserve.
Cramer said what will work best from here on out will be those companies that do better as the economy does better.
It may seem confusing that the markets now view the Fed's bond-buying program as a bad thing after rallying on the same news for the past four years. But that is what's happening, he said. The markets have lost faith that the Fed's artificially low interest rates will be enough to slow a growing economy.
Even today, as the Fed pledged to keep rates low, those same rates inched still higher. That means housing-related stocks and those with big dividends will be among the biggest losers, as they now once again have competition from bonds, which offer less risk than stocks, said Cramer.
On the flip side, Cramer said stocks that grow as the economy grows -- stocks such as the industrials, the banks and tech -- will be the places to invest as it's now clear the economy is moving forward, with or without Fed intervention. Big dividends can't offer enough protection anymore, Cramer concluded, so investors need to change their investment strategy starting tomorrow.
Friday, June 14, 2013
why you don't want to be (too) rich
So you didn't buy the winning Powerball ticket like 84-year-old Florida widow Gloria MacKenzie. You don't have a doting, elderly, loaded uncle. Apple rejected your killer app.
The sad truth is, you're probably never going to be superwealthy.
That may not be such a bad thing. Money can bring a lot of pleasure, power and freedom. It also can bring a lot of headaches.
Read on for nine reasons why you really don't want to be part of the 1 percent.
The sad truth is, you're probably never going to be superwealthy.
That may not be such a bad thing. Money can bring a lot of pleasure, power and freedom. It also can bring a lot of headaches.
Read on for nine reasons why you really don't want to be part of the 1 percent.
Thursday, June 13, 2013
the Bond movie
Bonds have been in a 30-year bull market, so even some of the most
grizzled professionals haven't experienced a prolonged period of pain.
But history doesn't forget. The bond market has been here before. And it
didn't end well.
Interest rates were kept incredibly low in the 1940s and 1950s to help manage the national debt after World 2. Ten-year Treasury bonds yield almost the exact same today as they did in 1950.
What happened to Treasuries after that? Those who held to maturity received their principal back. But inflation eroded all of the value of interest payments, and then some. And as interest rates rose in the 1970s, the value of existing bonds plunged. The result in real (inflation-adjusted) terms was three decades of sheer misery
Interest rates were kept incredibly low in the 1940s and 1950s to help manage the national debt after World 2. Ten-year Treasury bonds yield almost the exact same today as they did in 1950.
What happened to Treasuries after that? Those who held to maturity received their principal back. But inflation eroded all of the value of interest payments, and then some. And as interest rates rose in the 1970s, the value of existing bonds plunged. The result in real (inflation-adjusted) terms was three decades of sheer misery
Saturday, June 08, 2013
Free ETF Trading
Today, almost every major discount broker offers a commission-free
trading program for exchange-traded funds. Brokerages are competing for
investor accounts, and they are leveraging ETFs' popularity to lure
investors. This competition among brokers has helped to reduce the cost
of investing in ETFs. This article will highlight the pros and cons of
the commission-free ETF trading programs offered by Fidelity, TD Ameritrade (AMTD), Charles Schwab (SCHW), E*Trade (ETFC), Vanguard, and Merrill Lynch.
what newspapers were saying
Everyone knows Warren Buffett's saying, "Be fearful when others are
greedy and greedy when others are fearful." It's the most repeated
investment maxim in history.
But here's the truth: It's much easier to say, "I'll be greedy when others are fearful" than it is to do it.
There have been four distinct incredible times to be an investor over the last century: 1933, 1942, 1982, and 2009. During each period, you could have doubled your money over the following three years. And during each period, newspapers around the country preached a constant message: Be fearful. Sadly, most of us listened. We are the "others" Buffett was talking about.
I dug through a pile of news archives to see what the media was saying about stocks and the economy during the four greatest buying opportunities of the last century. What I found is what "fearful" looks like.
But here's the truth: It's much easier to say, "I'll be greedy when others are fearful" than it is to do it.
There have been four distinct incredible times to be an investor over the last century: 1933, 1942, 1982, and 2009. During each period, you could have doubled your money over the following three years. And during each period, newspapers around the country preached a constant message: Be fearful. Sadly, most of us listened. We are the "others" Buffett was talking about.
I dug through a pile of news archives to see what the media was saying about stocks and the economy during the four greatest buying opportunities of the last century. What I found is what "fearful" looks like.
why hold bonds at all?
With expectations of higher interest rates, the risks to many fixed
income investments have risen. This has been widely publicized, and we
have discussed these risks in the past. Bond bears point out that yields
are near forty-year lows and if interest rates rise, the value of bonds
and bond funds will fall. And some well known investors such as Warren
Buffett have advocated selling bonds and just holding a mix of cash and
equities. Nonetheless, we think bonds should still play an important role in an overall portfolio. Here are some reasons.
- Diversification and reduced volatility: One of the primary reasons to have an allocation to fixed income is for the diversification it provides in an overall portfolio. Historically, bonds have tended to move up in price when stocks and other riskier sectors of the market decline. When stocks and bond returns are not correlated, investors benefit by reducing the swings in their portfolios, resulting in lower volatility. When we looked at times when the S&P 500 experienced significant declines (we used declines of 14% or more for our study) since the 1970s, we see that bond returns have generally been positive.
Monday, June 03, 2013
Garrett Van Wagoner
I'm looking through my shelf of old magazines and came across this article in the July 1996 SmartMoney entitled What Makes Garrett Van Wagoner So Hot?
"No mutual fund manager ever finished first among all equity funds two years running. No one, that is, until Garrett VanWagoner did it. Now, he has to prove it wasn't a fluke.
"His record is mind-boggling," says Morningstar's Don Phillips of Van Wagoner. "I only wish I had put my money in at the beginning.
So I wonder how he's done since. LMGTFY.
Here's a 2008 article from Time.
A 1999 headline in Money magazine asked:
"No mutual fund manager ever finished first among all equity funds two years running. No one, that is, until Garrett VanWagoner did it. Now, he has to prove it wasn't a fluke.
"His record is mind-boggling," says Morningstar's Don Phillips of Van Wagoner. "I only wish I had put my money in at the beginning.
So I wonder how he's done since. LMGTFY.
Here's a 2008 article from Time.
A 1999 headline in Money magazine asked:
He’s Baaack! Garrett Van Wagoner has been a genius, a dolt and a genius. So which is he?Nine years later, Van Wagoner appears to have finally answered the question. From today’s WSJ:
Van Wagoner Emerging Growth has consistently disappointed investors, giving it a dubious distinction as the worst-performing U.S. actively managed stock fund over the past 10 years.Van Wagoner was one of the biggest stars of the 1990s tech stock boom. I think the evidence is pretty strong by now that, while an entertaining guy who picked a good time to get into the mutual fund business, he possesses no investing skill whatsoever. Which says something kind of interesting about the mutual fund business.
But at least one thing is changing at the woebegone fund: Longtime manager Garrett Van Wagoner is planning to step down, even though Mr. Van Wagoner, 52 years old, controls the company that sponsors the fund, Van Wagoner Capital Management.
When asked about his best stock pick of the past year, he says, “I don’t know if I have any best picks.”
Wednesday, May 29, 2013
the failure of mutual funds
We spend a lot of time harping on mutual funds. Frankly, they deserve it.
Most underperform their benchmarks and charge fees multiple times
higher than passive index funds. The result is a giant wealth transfer
from investors to fund managers.
But after speaking with a fund manager recently, I realize this story is more complicated than I've made it out to be. Mutual fund investors may only have themselves to blame for awful returns.
Most dismal mutual-fund returns are the result of managers engaging in the classic "buy high, sell low" dance. But those buy and sell decisions don't necessarily reflect the will of the investment manager. Fund investors are constantly adding to and withdrawing from the fund's they invest in -- almost always at the worst time possible.
"You would be surprised how easy it is for a fund's investors to take control of the fund," the manager told me.
Imagine you're a smart fund manager who thinks stocks are overvalued. You don't have any good ideas to invest in. But you come into the office one morning and your secretary says, "Congratulations, your investors just sent you another $1 billion." What do you do? You can:
The second option is the noble choice, but rarely occurs because funds earn fees on assets under management. When a fund manager goes to his or her boss and says, "I'd like to turn down $10 million in annual fees," the results are entirely predictable. Greenwich real estate doesn't buy itself, you know.
Option three is usually what happens.
Now imagine it's 2009, and everything is going to hell in a handbasket. Stocks are the cheapest you've seen in your career, and the last thing you want to do is sell them. But you come into the office one morning and your secretary says, "Your investors want to withdraw $5 billion."
You only have one option to meet that demand: sell cheap stocks. Forget about all the buying opportunities -- your traders are working overtime to liquidate the portfolio whether you like it or not.
Sadly, that affects all of a fund's investors. Even if one fund investor has a long-term outlook and no intention of selling, the fund's buy and sell actions can be dictated by maniac deposits and panic withdrawals. Other investors' decisions can hurt you. That's why they call it a mutual fund.
Take Bill Miller of Legg Mason. Miller was one the best investors in the 1990s and early 2000s before suffering huge losses during the financial crisis that sullied his long-term track record.
What happened? In part, he made some bad calls. But Miller's early success and media fame led investors to give him a net $4.4 billion in new cash to invest just as stocks were getting expensive last decade. As his skill came into question, they then yanked nearly $10 billion out just as stocks were the cheapest they had been in years. Miller's wisdom didn't really matter last decade. His investors were calling the shots.
***
[6/5/13 - see also Investor Nirvana by James J. Cramer, Worth, May 1997]
But after speaking with a fund manager recently, I realize this story is more complicated than I've made it out to be. Mutual fund investors may only have themselves to blame for awful returns.
Most dismal mutual-fund returns are the result of managers engaging in the classic "buy high, sell low" dance. But those buy and sell decisions don't necessarily reflect the will of the investment manager. Fund investors are constantly adding to and withdrawing from the fund's they invest in -- almost always at the worst time possible.
"You would be surprised how easy it is for a fund's investors to take control of the fund," the manager told me.
Imagine you're a smart fund manager who thinks stocks are overvalued. You don't have any good ideas to invest in. But you come into the office one morning and your secretary says, "Congratulations, your investors just sent you another $1 billion." What do you do? You can:
- Keep it in cash or bonds.
- Close down your fund and refuse new investments.
- Grit your teeth and buy overvalued stocks.
The second option is the noble choice, but rarely occurs because funds earn fees on assets under management. When a fund manager goes to his or her boss and says, "I'd like to turn down $10 million in annual fees," the results are entirely predictable. Greenwich real estate doesn't buy itself, you know.
Option three is usually what happens.
Now imagine it's 2009, and everything is going to hell in a handbasket. Stocks are the cheapest you've seen in your career, and the last thing you want to do is sell them. But you come into the office one morning and your secretary says, "Your investors want to withdraw $5 billion."
You only have one option to meet that demand: sell cheap stocks. Forget about all the buying opportunities -- your traders are working overtime to liquidate the portfolio whether you like it or not.
Sadly, that affects all of a fund's investors. Even if one fund investor has a long-term outlook and no intention of selling, the fund's buy and sell actions can be dictated by maniac deposits and panic withdrawals. Other investors' decisions can hurt you. That's why they call it a mutual fund.
Take Bill Miller of Legg Mason. Miller was one the best investors in the 1990s and early 2000s before suffering huge losses during the financial crisis that sullied his long-term track record.
What happened? In part, he made some bad calls. But Miller's early success and media fame led investors to give him a net $4.4 billion in new cash to invest just as stocks were getting expensive last decade. As his skill came into question, they then yanked nearly $10 billion out just as stocks were the cheapest they had been in years. Miller's wisdom didn't really matter last decade. His investors were calling the shots.
***
[6/5/13 - see also Investor Nirvana by James J. Cramer, Worth, May 1997]
Saturday, May 25, 2013
the market is (still) overvalued
It's that time again.
A growing group of pessimists are asking whether the stock market is back to bubble territory. Some are even comparing it to 1999. They say stocks are being inflated by the Fed. That they're disconnected from the reality of a weak economy. That they're overvalued and bound to fall.
Could they be right? Of course.
They make a forceful case with charts and ratios and historical data.
But they have been making the same argument for four years now, and they have been wrong all the way. Clearly, the world is more complicated than the pessimists assume.
Consider that the S&P 500 has risen as much as 60% since these quotes went to press:
Some of the bubble arguments haven't changed in the face of a 50% rally. Take the cyclically adjusted price/earnings ratio, or CAPE. In 2010, the S&P 500, which traded near the 1,000 level, had a CAPE valuation of around 22, which many pointed out was about 40% above historic norms. Today, trading above 1,600, the S&P 500 has a CAPE of about ... 23. Even as the market exploded higher, the degree to which the market is supposedly overvalued hasn't changed that much, since companies have been busy investing in their operations and boosting earnings. That's why being four years early means being four years wrong.
Some people predicted the financial crisis in 2008. And good for them. But many of them also predicted a financial crisis in 2007, 2006, 2005, 1997, 1995, 1992, 1985, 1970, and so on. They are perma-bears who get ignored during booms and lionized during busts, even though their arguments rarely change. It's the classic broken-clock-is-right-twice-a-day syndrome.
Author Daniel Gardner wrote earlier this year:
What do I think? Well, AAPL has a P/E of 10.6. MSFT has a P/E of 17.7 (forward P/E of 10.8). Berkshire Hathaway has P/B of 1.4 (higher than low of 1.1 in 2011). CSCO has a P/E of 13.1. I would say these stocks aren't overpriced. The current P/E of VFINX is 14.28. While not cheap, that still sounds quite reasonable.
The argument is that current earnings are inflated. I can see that the growth rate will slow, but I still see overall eps increasing from here, if only moderately.
A growing group of pessimists are asking whether the stock market is back to bubble territory. Some are even comparing it to 1999. They say stocks are being inflated by the Fed. That they're disconnected from the reality of a weak economy. That they're overvalued and bound to fall.
Could they be right? Of course.
They make a forceful case with charts and ratios and historical data.
But they have been making the same argument for four years now, and they have been wrong all the way. Clearly, the world is more complicated than the pessimists assume.
Consider that the S&P 500 has risen as much as 60% since these quotes went to press:
"The S&P 500 is about 40 percent overvalued" -- October, 2009Sure, you might say these calls were just early. But let me put forth a truism in finance: When an average business cycle lasts five years, there is no such thing as four years ahead of the game. You are just wrong.
"US Stocks Surge Back Toward Bubble Territory" -- January, 2010
"On a valuation basis, the S&P 500 remains about 40% above historical norms on the basis of normalized earnings." -- July, 2010
"Is The Stock Market Overvalued? Almost Every Important Measure Says Yes" -- November, 2010
"The market is as overvalued now as it was undervalued [in early 2009]," said David A. Rosenberg, chief economist and strategist for Gluskin Sheff, an investment firm." -- March, 2010
"Andrew Smithers, an excellent economist based in London, is telling us that we're way too optimistic, that fair value for the S&P 500 is actually in the 700-750 range. Smithers, therefore, thinks the stock market is about 50% overvalued." -- June, 2010
Some of the bubble arguments haven't changed in the face of a 50% rally. Take the cyclically adjusted price/earnings ratio, or CAPE. In 2010, the S&P 500, which traded near the 1,000 level, had a CAPE valuation of around 22, which many pointed out was about 40% above historic norms. Today, trading above 1,600, the S&P 500 has a CAPE of about ... 23. Even as the market exploded higher, the degree to which the market is supposedly overvalued hasn't changed that much, since companies have been busy investing in their operations and boosting earnings. That's why being four years early means being four years wrong.
Some people predicted the financial crisis in 2008. And good for them. But many of them also predicted a financial crisis in 2007, 2006, 2005, 1997, 1995, 1992, 1985, 1970, and so on. They are perma-bears who get ignored during booms and lionized during busts, even though their arguments rarely change. It's the classic broken-clock-is-right-twice-a-day syndrome.
Author Daniel Gardner wrote earlier this year:
In 2010, [Robert] Prechter said the Dow would crash to 1,000 this year or in the near future. The media loved it. Prechter's call was reported all over the world. Which was nice for Prechter.
Even better, very few reporters bothered to mention that Prechter has been making pretty much the same prediction since 1987.It was similar for investor Peter Schiff. There's a great YouTube video -- worthy of some 2.1 million views -- of Schiff predicting a market crash circa 2007. That was an excellent call. But here's another video of Schiff in 2002 predicting all kinds of gloom that never happened. Sadly, that video received only a handful of views. Gardner writes in his book Future Babble:
[Schiff predicted the 2008 crisis,] but it's somewhat less amazing if you bear in mind that Schiff has been making essentially the same prediction for the same reason for many years. And the amazement fades entirely when you learn that the man Schiff credits for his understanding of economics -- his father, Irwin -- has been doing the same at least since 1976.***
What do I think? Well, AAPL has a P/E of 10.6. MSFT has a P/E of 17.7 (forward P/E of 10.8). Berkshire Hathaway has P/B of 1.4 (higher than low of 1.1 in 2011). CSCO has a P/E of 13.1. I would say these stocks aren't overpriced. The current P/E of VFINX is 14.28. While not cheap, that still sounds quite reasonable.
The argument is that current earnings are inflated. I can see that the growth rate will slow, but I still see overall eps increasing from here, if only moderately.
Friday, May 24, 2013
5 things to know about investing
I own one finance textbook, and I occasionally open it to remind
myself how little I know about finance. It's packed with formulas on
complex option pricing, the Gaussian copula function, and a chapter
titled, "Assessment of Confidence Limits of Selected Values of
Complex-Valued Models." I have literally no idea what that means.
Should it bother me that there's so much about finance I don't know? I don't think so. As John Reed writes in his book Succeeding:
Here are five that come to mind.
1. It takes time.
2. The largest single variable that affect returns is valuations [Peter Lynch might disagree].
3. Simple is better than smart.
4. The odds of high volatility is 100%.
5. The industry is dominated by cranks, charlatans, and salesmen.
Should it bother me that there's so much about finance I don't know? I don't think so. As John Reed writes in his book Succeeding:
When you first start to study a field, it seems like you have to memorize a zillion things. You don't. What you need is to identify the core principles -- generally three to twelve of them -- that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles.Evolution tells you a lot about biology. A handful of cognitive biases explain most of psychology. Likewise, there are a few core principles that explain most of what we need to know about investing.
Here are five that come to mind.
1. It takes time.
2. The largest single variable that affect returns is valuations [Peter Lynch might disagree].
3. Simple is better than smart.
4. The odds of high volatility is 100%.
5. The industry is dominated by cranks, charlatans, and salesmen.
Sunday, May 19, 2013
you have it good
Consider human history. For all but a fragment of it, about half of all children died
before their fifth birthdays. Of the ones who survived, life was nasty,
brutish, and short. According to data compiled by economist Angus
Maddison, the total world population grew at an annualized rate
indistinguishable from zero over the period from A.D. 1 to A.D. 1820.
Over the millennia, there were pockets of progress, some lasting for centuries. The ones we know of included the Roman Empire in Europe, the Tang and Song dynasties in China, and the Inca, Aztec, and Maya civilizations in the Americas. However, these civilizations, for the most part, did not set growth on a permanently higher trajectory. They usually ended in the sacking of great cities and the burning of books. Humanity didn't convincingly break out of this cycle until a couple of centuries ago.
Even narrowing our scope to the 20th century, our current prosperity looks surprisingly fragile and uneven, the outcome of a series of contingent events that plausibly could have led to far worse outcomes. The future of democratic capitalism was up for grabs during the Great Depression. World War I and World War II devastated Europe twice over and Asia once. The Cold War risked nuclear apocalypse. If we could reroll the 20th century many times, creating slightly different starting conditions each time, some outcomes surely would have led to regress (the probability of such outcomes is unknowable, of course). If you were born to a random family in the first half of the 20th century, chances are you would have experienced privation or total war. Even today, the majority of humanity lives in poverty by the rich world's standards. Bad things happen more often than not.
I don't write to frighten you but to let you know how good you've had it these past few decades. They were the most peaceful, stable, prosperous period humanity has ever experienced.
[I'll stop here, but the author makes the case that things will regress from here.]
Over the millennia, there were pockets of progress, some lasting for centuries. The ones we know of included the Roman Empire in Europe, the Tang and Song dynasties in China, and the Inca, Aztec, and Maya civilizations in the Americas. However, these civilizations, for the most part, did not set growth on a permanently higher trajectory. They usually ended in the sacking of great cities and the burning of books. Humanity didn't convincingly break out of this cycle until a couple of centuries ago.
Even narrowing our scope to the 20th century, our current prosperity looks surprisingly fragile and uneven, the outcome of a series of contingent events that plausibly could have led to far worse outcomes. The future of democratic capitalism was up for grabs during the Great Depression. World War I and World War II devastated Europe twice over and Asia once. The Cold War risked nuclear apocalypse. If we could reroll the 20th century many times, creating slightly different starting conditions each time, some outcomes surely would have led to regress (the probability of such outcomes is unknowable, of course). If you were born to a random family in the first half of the 20th century, chances are you would have experienced privation or total war. Even today, the majority of humanity lives in poverty by the rich world's standards. Bad things happen more often than not.
I don't write to frighten you but to let you know how good you've had it these past few decades. They were the most peaceful, stable, prosperous period humanity has ever experienced.
[I'll stop here, but the author makes the case that things will regress from here.]
Saturday, May 18, 2013
stocks are headed higher
says David Tepper
Let's get a few things straight:
Here he is on CNBC this morning:
Let's get a few things straight:
- The Federal Reserve is buying $85 billion a month of Treasuries.
- The budget deficit is shrinking very fast thanks to a combination of a stronger economy, budget cuts, and Fannie Mae and Freddie Mac repaying tens of billions of dollars in bailout funds.Â
- Over the next six months, the budget deficit will likely be less than $100 billion, while the Fed will buy more than $500 billion of Treasuries.
Here he is on CNBC this morning:
In My Cousin Vinny there's this moment at the end of the movie where he's making a case and he's summing it up, and he sums it up with so many different things that the prosecution says, "case dismissed." Because the evidence is so overwhelming.
It's kind of like that right now. It's so overwhelming. I mean, the economy is getting better, autos are better, housing is better -- they can't find enough people to work in housing, that's the only thing holding it back right now.
The Fed ... we actually looked at how the numbers run. The numbers are quite amazing -- just truly amazing. The Fed, as you know, is going to purchase $85 billion of Treasuries and mortgages per month ... so over $500 billion in six months.
But what's happened, and what's really amazing, is that over the next six months, because of tax increases, because of budget cuts, because of growth in the economy, and also because of Fannie Mae and Freddie Mac paying back money to the government, the deficit over the next six months is shrinking massively. ... It looks like the next six month's deficit is going to be well under $100 [billion], probably closer to $85 [billion].
Which means -- and this is an important thing -- ... we have over $500 billion we're going to buy over the next six months, and now we only have a deficit that's less than $100 billion over the next six months. ... That means we've got $400 billion -- $400 billion -- that has to be made up.A lot of that $400 billion will make its way into stocks, Tepper concludes.
Thursday, May 09, 2013
how rich would you be
if you had bought Apple stock instead of its gadgets?
Ever wonder how much money you would have now had you invested in AAPL stock instead of the first iPod when it came out? (That's $399 in 2001).
You'd have tens of thousands of dollars (see image).
We put 10 of the most popular Apple products of the last two decades together with what their current value would be if they had been stock investments. Our numbers come from Kyle Conroy, a software engineer who compiled all the data on his website.
If you paid for a new MacBook or iPhone in the past 10 years, seeing these figures may cause you to feel some regret. But it's an interesting reflection of just how successful AAPL stock has been.
You'd have tens of thousands of dollars (see image).
We put 10 of the most popular Apple products of the last two decades together with what their current value would be if they had been stock investments. Our numbers come from Kyle Conroy, a software engineer who compiled all the data on his website.
If you paid for a new MacBook or iPhone in the past 10 years, seeing these figures may cause you to feel some regret. But it's an interesting reflection of just how successful AAPL stock has been.
Saturday, May 04, 2013
the beginning of the end of QE (what happens?)
The Fed met again April 30-May 1 and as expected, kept interest rate
policy unchanged. But the recent debate at the Fed has focused less on
interest rates and more on when to begin reducing its bond purchases
from the current pace of $85 billion per month. A few Fed members have
indicated that they would like to taper down purchases later this year.
What does that mean for the bond market?
A steeper yield curve is likely. When the Fed signals a slowdown in bond purchases it could trigger higher long-term interest rates and a steepening yield curve, in our view. Since the Fed has concentrated its bond buying in long-term debt, less buying would mean that private sector buyers would need to step in to fill the gap. It's likely they would demand higher interest rates than the Fed. Also, presumably the Fed will begin tapering its purchases when they are confident that the economy is a on a sustainable path to stronger growth and lower unemployment. Those factors are likely to push long-term interest rates higher as well. However, based on the latest projections by the Fed, most members see short-term interest rates to remain near zero until 2016. Consequently, we anticipate that the yield curve will steepen with short-term rates remaining anchored at low levels while long-term interest rates move higher.
Bottom line. The Fed could begin to signal that they are going to reduce the pace of monthly bond purchases later this year. We would expect that long-term interest rates are likely to move higher and the yield curve to steepen, in response to that signal. Although we don't expect a sharp rise in interest rates, we suggest preparing for a steeper yield curve by limiting your exposure to long-term bonds.
A steeper yield curve is likely. When the Fed signals a slowdown in bond purchases it could trigger higher long-term interest rates and a steepening yield curve, in our view. Since the Fed has concentrated its bond buying in long-term debt, less buying would mean that private sector buyers would need to step in to fill the gap. It's likely they would demand higher interest rates than the Fed. Also, presumably the Fed will begin tapering its purchases when they are confident that the economy is a on a sustainable path to stronger growth and lower unemployment. Those factors are likely to push long-term interest rates higher as well. However, based on the latest projections by the Fed, most members see short-term interest rates to remain near zero until 2016. Consequently, we anticipate that the yield curve will steepen with short-term rates remaining anchored at low levels while long-term interest rates move higher.
Bottom line. The Fed could begin to signal that they are going to reduce the pace of monthly bond purchases later this year. We would expect that long-term interest rates are likely to move higher and the yield curve to steepen, in response to that signal. Although we don't expect a sharp rise in interest rates, we suggest preparing for a steeper yield curve by limiting your exposure to long-term bonds.
Thursday, April 25, 2013
Jon Stewart on gold
When gold prices plummet and folks like G. Gordon Liddy and Glenn Beck
start advising investors to hoard like Yosemite Sam, there's a voice
that cuts through the commodity fever to the heart of the matter: Jon
Stewart's.
Back on April 15, gold prices dropped to $1,321 per ounce and hit their lowest point since cresting $1,920 per ounce in September 2011.
As convicted Watergate conspirator Liddy shilled for gold in commercial breaks and Beck blamed the slide on a shadowy cabal of government, media and otherworldly forces bent on stripping Americans of their precious gold and damning them to a life of slavery, Stewart used the pulpit on Viacom (VIA -0.74%)-owned Comedy Central's "The Daily Show" earlier this week to suggest it might just be a market correction.
The market wasted little time proving him right, as prices climbed roughly 7% by Wednesday to $1,453.10 per ounce. Still, that didn't prevent Stewart from flogging Beck for his assertion that investors should listen to God by quoting decidedly anti-gold passages from the Bible's books of Exodus and Job.
***
[forwarded from Buddy]
The crash of the price of paper gold on Monday has unleashed an unprecedented global frenzy to buy physical gold and silver. All over the planet, people are recognizing that this is a unique opportunity to be able to acquire large amounts of gold and silver at a bargain price. So precious metals dealers now find themselves being overwhelmed with orders in the United States, in Canada, in Europe and over in Asia.
Will this massive run on physical gold and silver soon lead to widespread shortages of those metals? Instead of frightening people away from gold and silver,the takedown of paper gold seems to have had just the opposite effect. People just can’t seem to get enough physical gold and silver right now. Those that wish that they had gotten into gold when it was less than $1400 an ounce are able to do so now, and it is absolutely insane that silver is sitting at about $23 an ounce.
If the big banks continue to play games with the price of gold, we are going to see existing supplies of physical gold and silver dry up very quickly. And once reports of physical shortages of gold and silver become widespread, it is going to absolutely rock the financial world. But this is what happens when you manipulate free markets – it often has unintended consequences far beyond anything that you ever imagined.
[so doesn't this mean that that gold has bottomed?]
Back on April 15, gold prices dropped to $1,321 per ounce and hit their lowest point since cresting $1,920 per ounce in September 2011.
As convicted Watergate conspirator Liddy shilled for gold in commercial breaks and Beck blamed the slide on a shadowy cabal of government, media and otherworldly forces bent on stripping Americans of their precious gold and damning them to a life of slavery, Stewart used the pulpit on Viacom (VIA -0.74%)-owned Comedy Central's "The Daily Show" earlier this week to suggest it might just be a market correction.
The market wasted little time proving him right, as prices climbed roughly 7% by Wednesday to $1,453.10 per ounce. Still, that didn't prevent Stewart from flogging Beck for his assertion that investors should listen to God by quoting decidedly anti-gold passages from the Bible's books of Exodus and Job.
***
[forwarded from Buddy]
The crash of the price of paper gold on Monday has unleashed an unprecedented global frenzy to buy physical gold and silver. All over the planet, people are recognizing that this is a unique opportunity to be able to acquire large amounts of gold and silver at a bargain price. So precious metals dealers now find themselves being overwhelmed with orders in the United States, in Canada, in Europe and over in Asia.
Will this massive run on physical gold and silver soon lead to widespread shortages of those metals? Instead of frightening people away from gold and silver,the takedown of paper gold seems to have had just the opposite effect. People just can’t seem to get enough physical gold and silver right now. Those that wish that they had gotten into gold when it was less than $1400 an ounce are able to do so now, and it is absolutely insane that silver is sitting at about $23 an ounce.
If the big banks continue to play games with the price of gold, we are going to see existing supplies of physical gold and silver dry up very quickly. And once reports of physical shortages of gold and silver become widespread, it is going to absolutely rock the financial world. But this is what happens when you manipulate free markets – it often has unintended consequences far beyond anything that you ever imagined.
[so doesn't this mean that that gold has bottomed?]
Wednesday, April 03, 2013
CAPE
There are three popular P/E ratios:
There are several problems with the construction of the CAPE, detailed in a terrific report by Steve Wilcox for The American Association of Individual Investors posted on the Seeking Alpha site in 2011, from which I'll pull some data.
The problem with using a 10-year period for earnings is that the average business cycle only lasts about six years. More recently, recessions have become shorter and expansions longer (notwithstanding the long "Great Recession" which ended in 2009), as you can see in the table below. As a result, CAPE tends to overestimate "true" average earnings during a contraction and underestimate "true" average earnings during an expansion.
In the present bull market, the first month the CAPE crossed into overvalued territory (i.e. went above its median) was May 2009, just two months after the market's bottom, since which time the market has more than doubled. Even more dramatic was the cross into overvalued territory by the CAPE in February 1991, a mere nine years shy of the top of the great 1990s' bull market.
- Forward P/E (on subsequent 12-month earnings forecasts)
- Trailing 12-month (TTM) P/E (on most recent 12-month past earnings)
- Robert Shiller's Cyclically Adjusted P/E (CAPE)
There are several problems with the construction of the CAPE, detailed in a terrific report by Steve Wilcox for The American Association of Individual Investors posted on the Seeking Alpha site in 2011, from which I'll pull some data.
The problem with using a 10-year period for earnings is that the average business cycle only lasts about six years. More recently, recessions have become shorter and expansions longer (notwithstanding the long "Great Recession" which ended in 2009), as you can see in the table below. As a result, CAPE tends to overestimate "true" average earnings during a contraction and underestimate "true" average earnings during an expansion.
In the present bull market, the first month the CAPE crossed into overvalued territory (i.e. went above its median) was May 2009, just two months after the market's bottom, since which time the market has more than doubled. Even more dramatic was the cross into overvalued territory by the CAPE in February 1991, a mere nine years shy of the top of the great 1990s' bull market.
Saturday, March 23, 2013
Timeless Investment Classics
I just picked up Where Are the Customer's Yachts? from BookOff today.
Looking at the reviews of the book, I noticed one by Joseph L. Shaefer at Seeking Alpha ran a series reviewing 10 books that he considered "timeless investment classic"s
1. Extraordinary Popular Delusions and the Madness of Crowds (1841)
2. The Crowd: A Study of the Popular Mind (1896)
3. The Battle for Investment Survival (1935)
4. Where Are the Customers Yachts? (1940)
5. Reminiscences of a Stock Operator (1923)
6. Security Analysis (1934)
7. The Intelligent Investor (1949)
8. The Art of Contrary Thinking (1954)
9. Common Stocks and Uncommon Profits (1958)
10. The Money Game (1967)
*** [8/25/13]
Tanner Pilatzke's 27 must-read books for investors
*** [8/29/14] 26 more books reviewed
Looking at the reviews of the book, I noticed one by Joseph L. Shaefer at Seeking Alpha ran a series reviewing 10 books that he considered "timeless investment classic"s
1. Extraordinary Popular Delusions and the Madness of Crowds (1841)
2. The Crowd: A Study of the Popular Mind (1896)
3. The Battle for Investment Survival (1935)
4. Where Are the Customers Yachts? (1940)
5. Reminiscences of a Stock Operator (1923)
6. Security Analysis (1934)
7. The Intelligent Investor (1949)
8. The Art of Contrary Thinking (1954)
9. Common Stocks and Uncommon Profits (1958)
10. The Money Game (1967)
*** [8/25/13]
Tanner Pilatzke's 27 must-read books for investors
*** [8/29/14] 26 more books reviewed
Wednesday, March 20, 2013
don't fear the high
Until the Dow's record on March 5 this year, it had gone 1,973 days
without hitting an all-time high. According to Bespoke Investment Group
(BIG), that's the sixth-longest stretch the Dow has ever gone without
closing at a new all-time high. It's also the second time in the past
decade that the Dow has gone more than two years without closing at a
new all-time high.
These periods of "drought" are very rare.
As you can see in the table below, going back to 1900, there have only been 10 periods when the Dow went two or more years without closing at a new all-time high. For each period, also shown is how the index performed over the following one, three, six and 12 months.
Looking at the average returns, there isn't much credence to the argument that you shouldn't be buying stocks when the Dow is trading at an all-time high. Over the following one, six and 12 months, the Dow saw better-than-average returns. Furthermore, while the average maximum drawdown (loss) was a decline of 8.5% over the following 12 months, the magnitude of the average maximum gain was more than twice that at over 20%.
These periods of "drought" are very rare.
As you can see in the table below, going back to 1900, there have only been 10 periods when the Dow went two or more years without closing at a new all-time high. For each period, also shown is how the index performed over the following one, three, six and 12 months.
Looking at the average returns, there isn't much credence to the argument that you shouldn't be buying stocks when the Dow is trading at an all-time high. Over the following one, six and 12 months, the Dow saw better-than-average returns. Furthermore, while the average maximum drawdown (loss) was a decline of 8.5% over the following 12 months, the magnitude of the average maximum gain was more than twice that at over 20%.
Tuesday, March 19, 2013
the President's economic report
Morgan Housel highlights four charts
[1] The budget forecasts that promise trillion-dollar deficits for decades to come overwhelmingly rely on the assumption that health-care costs will spiral higher, just as they did over the past few decades. But lately, per-beneficiary cost growth for Medicare has actually been below the rate of overall economic growth. I've written more extensively about this here, but the bottom line is that we're really bad at forecasting, so the discrepancy between forecasts and reality shouldn't be surprising. And if the trend of recent years holds up, it's a true game-changer: A majority of projected budget deficits will disappear without lifting a finger.
[2] Evan Soltas of Bloomberg writes:
The importance of that can't be overstated enough, which is why I've written about it a lot. People look back at the housing bubble with a sense of amazement. The market was out of control! It was so crazy! Everything was out of balance! But it's virtually the same today. Except this time, rather than a bust, the end game is likely to be a surge in construction.
[4] Yes, real federal government spending has risen sharply since 2008. But real state and local spending declined sharply during that period. Not only is that unheard of in modern recoveries, but it offset part of the rise in government spending. With the recent federal spending sequestration, total state, local, and federal government spending as a share of GDP will probably be the same in 2013 as it was in 2007, before the recession (36%).
[bottom line: it might not be as bad as people think]
[1] The budget forecasts that promise trillion-dollar deficits for decades to come overwhelmingly rely on the assumption that health-care costs will spiral higher, just as they did over the past few decades. But lately, per-beneficiary cost growth for Medicare has actually been below the rate of overall economic growth. I've written more extensively about this here, but the bottom line is that we're really bad at forecasting, so the discrepancy between forecasts and reality shouldn't be surprising. And if the trend of recent years holds up, it's a true game-changer: A majority of projected budget deficits will disappear without lifting a finger.
[2] Evan Soltas of Bloomberg writes:
For much of the middle class, the real net cost of college has not changed significantly [over the past two decades]. ... Data from the College Board show effectively no change in real net tuition and fees for dependent students at four-year public or private universities whose families are in the lower-two income quartiles.[3] Not only are we currently building too few homes to keep up with demographics, but the skew is almost as large today as it was during last decade's housing bubble -- just in the other direction.
The importance of that can't be overstated enough, which is why I've written about it a lot. People look back at the housing bubble with a sense of amazement. The market was out of control! It was so crazy! Everything was out of balance! But it's virtually the same today. Except this time, rather than a bust, the end game is likely to be a surge in construction.
[4] Yes, real federal government spending has risen sharply since 2008. But real state and local spending declined sharply during that period. Not only is that unheard of in modern recoveries, but it offset part of the rise in government spending. With the recent federal spending sequestration, total state, local, and federal government spending as a share of GDP will probably be the same in 2013 as it was in 2007, before the recession (36%).
[bottom line: it might not be as bad as people think]
Wednesday, March 13, 2013
Sunday, March 10, 2013
the effects of sequestration
The Federal government has agreed to reduce spending by $1.2 trillion
over the next nine years, which amounts to $130 billion a year. This is
set to start immediately and then ramp up over time. This fiscal year,
$85 billion in cuts are required, and then $85 billion the year after.
Subsequently, the spending cuts ratchet up in the years following.
Keep in mind, U.S. GDP is $16 trillion, and the budget deficit is 5.3%, or $840 billion. Therefore, spending cuts of $85 billion takes the U.S. deficit to roughly $760 billion. As U.S. government spending decreases, it reduces GDP, reduces corporate earnings, and could have a negative effect on the market over the short-term.
***
While the sequestration will be a negative for economic growth in the short term, we believe the spending cuts will result in a rise in private growth over the long term.
The U.S. Federal deficit needs to be reduced in order to raise the long-term growth rate potential of the economy. As the U.S. government continues to run a deficit, there is an increasing amount of debt that is issued in the form of treasury bonds.
This debt crowds out investing in the private sector. In the private sector, new ideas, products and companies may not get funded at a lower rate because investors tend to purchase government debt as opposed to lending to corporations. As the debt is reduced, or at least stops growing at such a rapid rate, the economy will benefit over the long term because it will lead to positive growth for the private sector. We believe this is why the market has not reacted negatively to the sequestration. At the end of the day, cutting spending helps long-term GDP growth.
***
The biggest problem with sequestration is that it does not address entitlement programs. Medicare and Social Security are not being touched. Politically, both sides of the aisle do not want to touch entitlement programs that support the elderly because of the historic consequences on national elections.
***
The stock market is soaring to new highs, largely, because of the Fed’s quantitative easing programs. The biggest risk to the market is the reversal of those programs as we believe that would trigger a massive sell-off in the equity market.
Cutting spending actually reduces the risk that quantitative easing will stop. This is because the budget cuts soften the economy, which allows the Fed to continue to essentially print money. Effectively, budget cuts increase unemployment and therefore reduce the chance that the Fed is going to scale back their quantitative easing programs anytime soon.
Cutting spending has become a sideshow. The Fed is the key. The fact that the stock market is approaching new highs is proof that the market and economy are fine with these cuts.
What’s Next
Down the road, we need to see the politicians agree to more spending cuts, and agree to do it rationally. This would help the stock market and the economy. So far, they are not doing it in a coherent, economically efficient, fashion.
-- Mitch Zacks, ZIM Weekly Update
***
The sequester has been advertised as “cutting” discretionary spending over a ten year period by $995 billion. After inflation adjustments and exempting more than a trillion dollars of defense and non defense discretionary spending from the sequester, the CBO projects (in its Table 1.1) discretionary spending to increase by $110 billion over the decade. There is no actual $995 billion cut after the CBO applies its magic adjustments. Rather there is a $110 billion increase.
[In other words, instead of increasing by $1105 billion, it will increase by $110 billion. So about a 90% reduction of increased spending.]
Keep in mind, U.S. GDP is $16 trillion, and the budget deficit is 5.3%, or $840 billion. Therefore, spending cuts of $85 billion takes the U.S. deficit to roughly $760 billion. As U.S. government spending decreases, it reduces GDP, reduces corporate earnings, and could have a negative effect on the market over the short-term.
***
While the sequestration will be a negative for economic growth in the short term, we believe the spending cuts will result in a rise in private growth over the long term.
The U.S. Federal deficit needs to be reduced in order to raise the long-term growth rate potential of the economy. As the U.S. government continues to run a deficit, there is an increasing amount of debt that is issued in the form of treasury bonds.
This debt crowds out investing in the private sector. In the private sector, new ideas, products and companies may not get funded at a lower rate because investors tend to purchase government debt as opposed to lending to corporations. As the debt is reduced, or at least stops growing at such a rapid rate, the economy will benefit over the long term because it will lead to positive growth for the private sector. We believe this is why the market has not reacted negatively to the sequestration. At the end of the day, cutting spending helps long-term GDP growth.
***
The biggest problem with sequestration is that it does not address entitlement programs. Medicare and Social Security are not being touched. Politically, both sides of the aisle do not want to touch entitlement programs that support the elderly because of the historic consequences on national elections.
***
The stock market is soaring to new highs, largely, because of the Fed’s quantitative easing programs. The biggest risk to the market is the reversal of those programs as we believe that would trigger a massive sell-off in the equity market.
Cutting spending actually reduces the risk that quantitative easing will stop. This is because the budget cuts soften the economy, which allows the Fed to continue to essentially print money. Effectively, budget cuts increase unemployment and therefore reduce the chance that the Fed is going to scale back their quantitative easing programs anytime soon.
Cutting spending has become a sideshow. The Fed is the key. The fact that the stock market is approaching new highs is proof that the market and economy are fine with these cuts.
What’s Next
Down the road, we need to see the politicians agree to more spending cuts, and agree to do it rationally. This would help the stock market and the economy. So far, they are not doing it in a coherent, economically efficient, fashion.
-- Mitch Zacks, ZIM Weekly Update
***
The sequester has been advertised as “cutting” discretionary spending over a ten year period by $995 billion. After inflation adjustments and exempting more than a trillion dollars of defense and non defense discretionary spending from the sequester, the CBO projects (in its Table 1.1) discretionary spending to increase by $110 billion over the decade. There is no actual $995 billion cut after the CBO applies its magic adjustments. Rather there is a $110 billion increase.
[In other words, instead of increasing by $1105 billion, it will increase by $110 billion. So about a 90% reduction of increased spending.]
Friday, March 08, 2013
jobless rate at four year low
Job growth surged last month as auto makers, builders and retailers
pushed the unemployment rate to a four-year low, defying concerns that
budget battles in Washington would harm the economic expansion.
Employment rose 236,000 last month after a revised 119,000 gain in January that was smaller than first estimated, Labor Department figures showed today in Washington. The median forecast of 90 economists surveyed by Bloomberg projected an advance of 165,000. The jobless rate dropped to 7.7 percent, the lowest since December 2008, from 7.9 percent.
Stocks, the dollar and Treasury yields all rose on signs the world’s largest economy is gaining strength in the face of federal budget cuts and higher payroll taxes. The report may fuel debate among Federal Reserve policy makers considering how long to maintain record stimulus to boost growth and employment.
[which could be bad for the stock market. when the unemployment rate drops and gdp grows, the Fed will stop buying bonds, raise the interest rate, making stocks less attractive]
Employment rose 236,000 last month after a revised 119,000 gain in January that was smaller than first estimated, Labor Department figures showed today in Washington. The median forecast of 90 economists surveyed by Bloomberg projected an advance of 165,000. The jobless rate dropped to 7.7 percent, the lowest since December 2008, from 7.9 percent.
Stocks, the dollar and Treasury yields all rose on signs the world’s largest economy is gaining strength in the face of federal budget cuts and higher payroll taxes. The report may fuel debate among Federal Reserve policy makers considering how long to maintain record stimulus to boost growth and employment.
[which could be bad for the stock market. when the unemployment rate drops and gdp grows, the Fed will stop buying bonds, raise the interest rate, making stocks less attractive]
Thursday, March 07, 2013
the next Berkshire Hathaway
I'm looking at this blurb (via junk mail) touting the next Berkshire Hathaway. [It's trying to push a subscription to Charles Mizrahi's Inevitable Weath Portolio.]
I'm not about to send for the free report, but I'm sort of curious who it might be.
Googling the next Berkshire Hathaway reveals some candidates:
Sears
Loews, Leucadia National, PICO Holdings, Biglari Holdings
Markel
JSHLY, SNFCA
Ah, here's the answer. It's Leucadia.
I remember I bought OTTR because there was an article comparing it to Berkshire Hathaway. Let me see if I can dig it up.
It was a 2008 CNBC video interviewing James Altucher. He mentions OTTR, MKL, and LUK.
I'm not about to send for the free report, but I'm sort of curious who it might be.
Googling the next Berkshire Hathaway reveals some candidates:
Sears
Loews, Leucadia National, PICO Holdings, Biglari Holdings
Markel
JSHLY, SNFCA
Ah, here's the answer. It's Leucadia.
I remember I bought OTTR because there was an article comparing it to Berkshire Hathaway. Let me see if I can dig it up.
It was a 2008 CNBC video interviewing James Altucher. He mentions OTTR, MKL, and LUK.