Buffett buffet

Tuesday, March 2nd, 2010

In the video clips below, legendary investor Warren Buffett, chairman and CEO of Berkshire Hathaway, talks to CNBC about a variety of topical issues.

On the economy and politics

Source: CNBC, March 1, 2010.

On currencies and market lessons

Source: CNBC, March 1, 2010.

On deal making and financial regulation

Source: CNBC, March 1, 2010.

On Obama and politics

Source: CNBC, March 1, 2010.

Buffett on health care reform

Source: CNBC, March 1, 2010.

Buffett on succession planning and investment strategy

Source: CNBC, March 1, 2010.

Buffett on banks and earthquake insurance

Source: CNBC, March 1, 2010.

Tags: Advertisement, Banks, Berkshire Hathaway, Ceo, Cnbc, Currencies, Earthquake Insurance, Economy, Health Care Reform, Insurance, Insurance Source, Investment Strategy, Investor, March 1, Market Lessons, Obama, Politics, Succession Planning, Topical Issues, Video Clips, Warren Buffett
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David Rosenberg: “My Take on the Fed”

Friday, February 19th, 2010

WHILE YOU WERE SLEEPING

The U.S. consumer price data is hot off the press and while the headline came in below expected at +0.2% MoM (so much for the PPI being a leading indicator). The real key was the -0.14% print on the core index (which removes food and energy) - deflation in the core CPI is a 1-in-80 event and should be treated seriously in terms of what it means for bond yields and corporate pricing power in the broad retail sector (there were notable declines in recreation, clothing, new car prices, hotels and air fare).

The theme for 2010 is the return of volatility and the appropriate investment strategy is to minimize it through appropriate hedge funds strategies and portfolios that are negatively correlated to risk. Look at what we have on the worry list that we did not have 10 months and 70% ago on the S&P 500:

• China and India tightening credit policy
• The Fed embarking on an exit strategy
• The peak in fiscal stimulus behind us, not ahead of us
• Iran (see today’s WSJ editorial)
• Greece (Portugal? Spain?)
• Sovereign default risks
• China selling U.S. treasuries
• Stricter capital rules for banks

MY TAKE ON THE FED

The hike in the discount rate from 0.5% to 0.75% was only a surprise because of the timing, but the Fed had been warning for some time that this was going to be part of the process of taking the emergency stimulus out of the financial system. Ben Bernanke mentioned this at last week’s prepared text to Congress and

Wednesday’s FOMC meeting contained recommendations from the Fed staff to start raising the discount rate as soon as possible. (We see in today’s NYT that former Governor Larry Meyer quipped “don’t they [the markets] understand the meaning of soon?” Well, after looking up the word in the dictionary, “soon” was defined as “in the future”, not necessarily next week). A whole array of other emergency measures are slated to end in the course of the next month, so yesterday’s after-market-closing move in the discount rate is part and parcel of the Fed’s long-discussed exit strategy.

Before the crisis intensified in 2008, the normal spread between the discount rate and Fed funds was 100bps, and yesterday it went from 25bps to 50bps. The Fed also reduced the term on discount window loans back to overnight from 28 days - all in an effort to “normalize” policy (notwithstanding how fragile this recovery really is and how abnormal it is to still be over 8 million jobs shy of the former peak at this stage of the policy cycle).

The near-term reaction is predictable with equity futures selling off sharply but this is because Mr. Market has always held the discount rate in high esteem - likely more than it deserves (as we recall that old refrain “three hikes and a stumble”). Also keep in mind that the Fed first cut the discount rate before the market opened back on August 17, 2007, and the Dow rallied 233 points that day. It was hardly the right call and it is very likely the case that the market is over-reacting to yesterday’s hike in the opposite direction.

Not that I’m bullish on equities - from my lens, what was far more important in terms of describing the true economic backdrop was what Wal-Mart had to say yesterday in terms of its -1.7% YoY print on Q4 same-store sales (first decline in history and below the flat reading that was expected), not to mention reduced guidance for Q1. The CEO, Mike Duke, bluntly stated that “The economy remains challenged for many of our customers around the world…we expect first-quarter sales in the U.S. will be difficult.” Mr. Duke, you may run the largest retailer in the world, but the bubbleheads on television are telling you that you don’t know what you are talking about! What else does Wal-Mart represent except that 70% chunk of GDP otherwise known as the American consumer?

If the consumer is “challenged”, then how far is an inventory adjustment going to carry along this post-recession recovery. We know, we know - what about the leftover fiscal stimulus out of Washington? Our take: the drag out of the State and local government sector is going to provide a significant offset and the growing opposition to fiscal largesse from the Tea Party movement is going to put a cap on the White House intervention efforts going forward. The situation is so dire that over half of the States are reducing Medicaid services and payments to health care providers to save money (not that we have claimed sainthood, but for economists on CNBC to talk about the wonders of fiscal stimulus when the nation’s poorest people are facing budget cuts just doesn’t seem appropriate).

Yet Mr. Market was somehow able to ignore the message from Wal-Mart’s miss with the Dow rallying over 80 points. (Though yet again, on lower volume - down 6% on the NYSE!) That reaction basically makes as much sense as the dive that initially followed the discount rate increase - in a sign that this is a market that is manic and increasingly volatile.

Not only did the Fed telegraph the move, but the overall impact on bank funding costs is minimal with discount window borrowing at a mere $14.9 billion (a fraction of the pre-crisis levels of $110 billion) and the commercial banks sitting on a $1 trillion cash hoard as it is.

Moreover, the Fed kept on cutting and cutting and cutting rates all the way from August 2007 through to December 2008 and even at microscopic Japanese-like levels, this traditional mode of central bank stimulus still could not manage to put a floor under the economy, let along the markets. Only when the Fed began to treat this as a credit cycle as opposed to a liquidity cycle by rapidly expanding its balance sheet through quantitative easing measures did the turnaround in most economic indicators and investor confidence turn around.

So, it would stand to reason that the real test for the markets is going to come not from the discount rate, but by what happens when the Fed begins to shrink its balance sheet - particularly the ramifications for mortgage rates.

Bear in mind that the Fed in some sense had already been reducing its support by allowing several programs to run their course - the bond-buying program ended about four months ago too. These are all technical moves that symbolize the end to the emergency liquidity provisioning but the central bank is going out of its way to signal that these are not attempts to actually tighten monetary policy. Of course, Bernanke et al are going to have to walk a fine line and for Mr. Market, what defines “extended period” as far as the more important Fed funds rate is concerned is a key question if “before long” - the words Bernanke used to explain when the discount rate would be hiked - meant little more than a week.

All that said changes in the discount rate still can pack a psychological punch, at least in the near-term. Investors will now be reminded that the exit strategy, while gradual, is about to start in earnest. So don’t look for a lot of talk going forward of a liquidity-driven market. This could have a dampening impact on the market multiple, as has been the case in China where two moves this year to raise reserve requirements have knocked the Shanghai index down by roughly 8%. Those pundits laying claim that what the Fed is doing is great news for the stock market because it is somehow ratification of the view that we are into a sustainable growth phase should heed what has happened in China this year, and also understand that the reason the S&P 500 could muster a 70% rally off the lows of last March in advance of anything beyond ‘green shoots’ in the economy was in large part because of all this Fed- induced liquidity.

While the initial reaction to the Fed’s move may be overdone, we are still at the tip of the iceberg and the one thing Mr. Market does not like is the uncertainty when the game starts to change. I realize that the equity bull market continued well after the first set of policy tightenings in 2004, but credit growth was running rampant then and home prices were skyrocketing - a far cry from today’s landscape, especially the fact that bank lending is contracting at a record 15% annual rate at the current time. For all we know, Bernanke is about to pull a 1937-38 premature exit strategy that ultimately leads to a market and economic relapse. That may not be a base-case scenario but the odds of a policy mis-step are still greater than zero.

To be sure, it does look as though the U.S. economy has moved into an expansion phase, but like the markets, it is volatility around the downward trend. This time last year we are seeing -6.4% GDP growth and then by the fourth quarter of 2009 we are at +5.7%. What a swing. It does remind me of Japan, which has experienced no fewer than 12 quarters of 5%+ GDP growth since its bubble burst in 1990 and one-third of these occurred in the initial years after the crisis began. But there have been twice as many quarters with negative growth. Therefore, volatility is the only certainty in the economy following a credit collapse - and the markets as well.

We recall that that the Nikkei enjoyed 230,000 rally points since 1990 and the market is still down 70% from the peak at that time. It’s no different for the U.S.A. following the prior credit collapse in the 1930s - the decade saw 20 quarters of 5%+ sequential GDP growth! That’s a depression? Of course it was because there were 13 quarters of contractions mingled into those intermittent positive spasms. Real GDP did a bungee jump of 11% in 1934 and yet if memory serves me correctly, the level of economic activity was basically no higher in 1939 than it was in 1929; and because it was deflation and not inflation that predominated in that period (even with the New Deal!) nominal GDP finished the decade with a 13% loss.

It was not until the first quarter of 1941 - with the help of the war effort - that the prior 1929 Q3 peak in nominal economic activity was taken out (despite seven years of massive FDR stimulus and the odd extremely whippy positive GDP quarter). Moreover, the next secular bull market in equities did not begin until 1954 - 25 years after the prior peak. So the message here is to focus on the forest, not the trees … and to look at an inventory-led 5.7% growth rate in Q4 in the context of wiggles around what is still a fundamental downtrend.

So what does the current backdrop resemble in a modern-day sense? The summer and fall of 2007. Think about it. The S&P 500 has been jerking around on either side of 1,100 for five months now. The 10-year note yield has jumped 20 basis points from the nearby low with hardly any reason outside of negative technicals.

Go back to that period between May and October of 2007, and the S&P was just above or just below the 1,500 mark for over five months. Many didn’t know it then, and we should all be taking it into consideration now, but we were in a classic topping formation. Back then, as is the case today, the bond market was getting hit hard with the 10-year note yield surging 50bps, to 5.2%, and the universe of economists and strategists completely bearish on the Treasury market at just the wrong time. What goes around comes around.

Read the summary of today’s report here.

Read the complete report here.

Tags: 28 Days, Bond Yields, Core Cpi, Core Index, David Rosenberg, Declines, Deflation, Emergency Measures, Exit Strategy, Fed Funds, Fed Staff, Fiscal Stimulus, Fomc Meeting, Hedge Funds, Hot Off The Press, Investment Strategy, Larry Meyer, Leading Indicator, New Car Prices, Nyt, Portugal Spain, Ppi, Retail Sector, Stimulus, Treasuries, Wsj Editorial
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SocGen’s Investment Strategy For 2010

Wednesday, January 13th, 2010

Société Générale (SocGen), France’s second-biggest bank, has told its clients to be bullish on commodities, stay with stocks and “anything but cash” in 2010. SocGen’s Chief Strategist Alain Bokobza spoke to CNBC on Jan. 11, 2010 about the investment strategy.

Fear of Double Dip to Prevent Bond Crash

Bokobza sees an ongoing momentum for growth in the U.S. with higher employment, as well as the emerging economies.  The consensus seems to be we are heading towards a bond market crash in 2010; nevertheless, fear of a double-dip will prevent a bond market crash.

The U.S. Federal Reserve and G4 countries are expected to stay on a near-zero interest rate for much longer than expected, which makes yield curve play attractive.

Yen - The Carry Trade Currency

Bokobza expects the U.S. Federal Reserve and the ECB to announce this summer that the monetary tightening process will start at the end of 2010 or in Q1 of 2011.  At the time of the announcement, i.e., this summer, carry trade will begin to switch from Dollar to Yen.

Overall, the Dollar is expected to be fairly flat against the Euro by the end of this year; however, Yen, as the new major carry trade currency, would fall ”massively”.

SocGen’s Main Advice For 2010

With near-zero interest rates, getting out of cash and into other riskier assets such as equities or commodities should be the strategy this year.

• Anything but cash
• Stay in equities
• Expect rising M&A cycles
• No bond market crash
• Yen carry-trade
• Be a commodity bull

Refer to SocGen’s Cross Asset Research Report dated Jan. 4, 2010 from Scribd.com HERE, and below, for full commentary and recommendations.

Video Source: CNBC

Outlook 2010 (SocGen)

Tags: Alain Bokobza, Bond Market, Chief Strategist, Cnbc, Commodities, Commodity, Dollar To Yen, Double Dip, ECB, Emerging Economies, ETF, Federal Reserve, G4 Countries, Investment Strategy, Market Crash, Q1, SocGen, Societe Generale, Video Source, Yen Carry Trade, Yen Dollar, Zero Interest
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The Power of Conventional Wisdom

Thursday, December 31st, 2009

This article is a guest contribution by James Kwak, from Baseline Scenario.

The week between Christmas and New Year’s is probably a good time to throw out half-baked ideas on topics I don’t know much about.

First, there’s been a lot of talk about the “lost decade” for stocks. The S&P 500 is below where it was a decade ago. Dividend yields bring you back up to break-even (the Vanguard Total Stock Market Index Fund had average annual returns of 0.18% for the ten years through the end of November, and that’s after about 0.1% in expenses), but inflation sets you back a couple of percentage points per year. (Vanguard’s S&P 500 index fund, however, was negative over those ten years.) James Hamilton, drawing on data from Robert Shiller, has some thoughts on why the stock market did badly; the fundamentals were so-so, but the big factor was that valuations were at their historical peak at the beginning of the decade.

For me, the worrying thing about investing in stocks is not specifically the high price-earnings ratio. It’s the fact that in the 1990s, everyone started saying that stocks were the best long-term investment, because “over any thirty-year period ever stocks do better than any other asset class.” That’s not a direct quote, but I’m sure you can find hundreds that are virtually the same. There are two problems with this statement. The first is that it’s assuming the future will be like the past. But the bigger problem is this: if everyone thinks that X is the best long-term investment, then it probably isn’t, in part because enthusiasm about X will drive the price of it up. I believe people were saying roughly the opposite in the late 1970s, and look what happened in the next twenty years.

That said, I’m no investment genius, and I have a fair proportion of my money in equity index or near-index funds. But the general point is that when everyone agrees on an investment strategy, they are probably wrong.*

Second, there’s been a lot of China boosterism in the past year or so, as the Chinese economy has returned to growth and its stock market has soared. The Times had an article today on the topic. I’m far from an expert here, but wasn’t the government basically ordering state-owned banks to  lend money cheaply and without asking too many questions? Aren’t Chinese economic statistics so bad that economists use electricity consumption as a proxy for GDP? Haven’t we seen this movie before all over emerging markets around the world?

I think some of the U.S. press coverage of China reflects our pessimism about ourselves; in that sense, it reminds me of the idolization of Japan that took place in the 1980s. Of course, there are huge differences. The Chinese economy has nowhere to go but up, and with over 1.3 billion people its economy will surpass ours in gross output in my lifetime. (On a per capita basis, though, I don’t think that will happen in my daughter’s lifetime, even if there is a Chinese immersion charter school down the road here in Western Massachusetts.) But just as the United States is not on the brink of world-historical disaster, so everything is not perfect in China.

* What’s the right grammar here? I know “everyone” is singular, but are you really supposed to say “when everybody agrees on an investment strategy, he is probably wrong”?

James Kwak is a former McKinsey consultant, a co-founder of successful software company, and currently a student at the Yale Law School.  He is not, never has been, and never will be a member of the Yale Law Journal. However, on December 11, 2009, he was named Grand Heresiarch of the Ancient, Hermetic, and Occult Order of the Shrill by Brad DeLong. He is a co-founder of The Baseline Scenario.

Tags: asset class, Baseline Scenario, China, Conventional Wisdom, Dividend Yields, Emerging Markets, Equity Index, Half Baked, Index Fund, Index Funds, Investing In Stocks, Investment Strategy, James Hamilton, Kwak, Long Term Investment, Next Twenty Years, Percentage Points, Price Earnings Ratio, Robert Shiller, Stock Market Index, Valuations, Worrying Thing
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Bernstein’s top 10 predictions for 2010

Friday, December 18th, 2009

Richard Bernstein, CEO of Richard Bernstein Capital Management and previously Chief Investment Strategist and Head of the Investment Strategy Group at Merrill Lynch, has just formulated his top 10 predictions for next year. Bernstein’s ideas come courtesy of The Business Insider - The Money Game.

1. Stock and bond market returns in the US will again be positive.

2. The US dollar is likely to meaningfully appreciate once market-driven short-term rates begin to rise.

3. US dollar “carry trades” could get killed as 2010 progresses and the US dollar appreciates. Once accounting for leverage, hedge fund performance will likely trail long-only equity performance.

4. The Fed will spend the second half of the year trying to catch up to, and flatten, the yield curve. Short-term rates could increase more than investors currently think. Long-term rates could rise quite a bit in the first part of the year as inflation finally begins to appear, but are likely to fall during the second half of the year when the markets realize the Fed is serious about fighting inflation. The curve is likely to be much flatter one year from today than it is currently.

5. Corporate profits are likely to explode to the upside during 2010. Trailing four-quarter S&P 500 reported earnings growth could exceed 100%. Investors still seem to be under-estimating the operating and financial leverage that is built into corporate profits.

6. Employment in the US will probably continue to improve. Consumer Discretionary stocks will likely be among the best performing sectors.

7. Treasuries will probably underperform stocks. That underperformance is unfortunately likely to reinforce both individual and institutional investors’ views that it is wise to be under-diversified.

8. Small cap value, I think, will be the US’s best performing size/style segment. Small banks’ outperformance might be the biggest surprise for 2010.

9. Financial regulation will progress, but the bull market will probably aid politicians’ “forgetfulness”. As a result, new regulation could be relatively meaningless. In my opinion, serious regulation won’t occur until after the next downturn, which could be worse if no meaningful new regulation is implemented in 2010.

10. I think the Democrats will do better in the 2010 mid-term elections than people currently think they will. It seems very likely to me that in December 2010, investors will look back on the year and realize that monetary and fiscal policy stimulus still works.

Source: The Business Insider - The Money Game, December 16, 2009.

Tags: Bond Market, Business Insider, Cap Value, Capital Management, Chief Investment Strategist, Consumer Discretionary Stocks, Corporate Profits, Earnings Growth, ETF, Game 1, Hedge Fund Performance, Institutional Investors, Investment Strategy, Merrill Lynch, Money Game, Operating And Financial Leverage, Richard Bernstein, Small Cap, Strategy Group, Treasuries, Yield Curve
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WealthTrack: Bruce Berkowitz – golden rules of investing

Thursday, November 19th, 2009

This week Consuelo Mack WealthTrack is joined by Bruce Berkowitz, founder and co-manager of the Fairholme Fund. The fund is given five stars by Morningstar for its top performing long-term record - an average annualized return of 13.0% since its inception in 1999, trouncing the market and most of the competition in the process. Bruce follows an unusual investment strategy which involves a highly concentrated portfolio and focus on cash. He also explains why he has brought Berkshire Hathaway back to the portfolio after selling it a couple of years ago.

Note: The transcript of this interview is not available yet, but will be posted here as soon as it arrives.

Tags: Annualized Return, Berkshire Hathaway, Bruce Berkowitz, Fairholme Fund, Five Stars, Gold, Inception, Investing, Investment Strategy, Mack, Morningstar, Wealthtrack
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The Retirement Lottery

Sunday, October 25th, 2009

On January 1, 1980, Jim and Jane Smith sold their business and retired on $1,000,000. Peter Jones, their financial advisor, determined that they needed $48,000 a year - increasing annually with inflation - to fund their lifestyle. Balancing growth with protection, the couple invested in his recommended portfolio of 60% large cap U.S. stocks and 40% intermediate-term Treasury Bonds. Peter then rebalanced the portfolio every year to this target mix.

Nine years and nine months later, Jim and Jane discussed with Peter how delighted they were with his strategy. Not only had their income kept pace with inflation, increasing to $75,000 in 1989, but their portfolio had skyrocketed in value. As illustrated in the following Exhibit, every $1.00 they had invested in 1980 was worth $2.78 by 1989. Jim and Jane were worth $2,780,000 despite nearly a decade of growing withdrawals. Even the October 1987 market crash was just a bump on the road to success.

Fast forward to January 1, 2000, and Jim and Jane’s nephew, Bill Smith, also retired with $1 million. Having listened for years about the success of Peter’s winning investment strategy, Bill invested in the identical asset mix. He also withdrew $48,000 in the first year and increased his withdrawals annually by inflation. Given his uncle’s and aunt’s experience, he was confident he had a winning plan.

Nine years and nine months later on September 30, 2009, Bill sits down with Peter and complains bitterly as he contemplates the vestiges of his $1 million. As illustrated in the following Exhibit, every $1.00 he invested in 2000 is now worth only $0.65. His million has shrunk to $650,000 and he is glumly contemplating a return to work.

Identical retirement strategies implemented just twenty years apart – yet with dramatically different outcomes. With hindsight, we now know that Jim and Jane Smith had the good fortune to have retired just prior to the great stock bull market of the 1980’s. They also caught a once-in-a-lifetime uplift in bond prices as inflation fell. Conversely, Bill had the horrible luck to have retired on the cusp of the tech meltdown, itself followed by the greatest global financial crisis since the 1930’s.

The paradox is that in each case the outcome was polar opposite of the investment sentiment at the time of retirement. Jim and Jane retired in troubled economic times where fears of inflation and chronic slow growth were rampant. Stocks and bonds had done poorly for years. Bill retired in a bullish era of prosperity and stunning returns.

Unfortunately, investor sentiment is usually in direct contrast to asset valuation levels and it is valuation levels that are of primary importance in assessing the risk of a retirement plan. The Exhibit following displays the rolling 10-year real price-earnings (PE) ratio of the S&P 500 and long-term interest rates, prepared by Robert Shiller, the noted finance professor.

When Jim and Jane retired, stocks were the most inexpensive that they had been in four decades while bond prices, offering double-digit yields, were the lowest on record. Although there was no guarantee that these bargain valuations would translate into high realized returns, cheap acquisition prices created much greater upside than downside. It would only take sound monetary and taxation policies – something about to occur under the helmsmanship of Fed Chairman Volcker and President Reagan – for falling interest rates and rising PE ratios to fuel superior returns.

Bill, on the other hand, bought stocks at their highest valuation level in history. His entry pricing was fraught with risk – anything but economic perfection would result in subpar returns. The bursting of the tech and credit bubbles was ruinous as valuations plunged.

Investors need to know that retirement is a lottery where the chance of winning is more dependent on asset valuations at the time of retirement than the soundness of the investment plan. Individuals planning for their retirement today need to soberly assess their return expectations since stock prices are moderately above the historic average while long-term interest rates are near record lows. Winning tickets will only be available to those who can keep their expenditure levels in line with this reality.

October 23, 2009

www.tacitacapital.com

Tacita Capital Inc. (”Tacita”) is a private, independent family office and investment counselling firm that specializes in providing integrated wealth advisory and portfolio management services to families of affluence. We understand the challenges of affluence and apply the leading research and best practices of top financial academics and industry practitioners in assisting our clients reach their goals.

Tags: Asset Mix, Bill Smith, Bump On, Good Fortune, Hindsight, inflation, Investment Strategy, Jane Smith, January 1, Market Crash, Nephew, Nine Months, Nine Years, Peter Jones, Plan Nine, Recommended Portfolio, Retirement Strategies, Target, Treasury Bonds, Uplift, Vestiges, Withdrawals
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Q&A with Mario Gabelli: The Strong Will Get Stronger

Tuesday, September 8th, 2009

An upshot of the financial crisis could be that investors go back to basics. In the case of equities, the means “plain old stock-picking” as Mario Gabelli of Gabelli Asset Management describes it. The paragraphs below are an excerpt of a recent interview Hedgeweek had with Gabelli.

GFM: Will the US be the first country to lead the way out of the crisis? How do you assess the administration’s actions up to now?

MG: Economic stimulus is co-ordinated, global and powerful. The US economy represents 24 per cent of nominal world GDP, and is about 60 per cent greater than the faster-growing China, Russia, India, and Brazil combined. However, we have our challenges. Within the US, the consumer is about 70 per cent of our economy and has been in a recession for the past year and a half. About nine per cent of Americans are now unemployed, and consumer spending remains hamstrung by rising unemployment, reduced wealth and the decline in stock market and housing prices, but also by the limited availability of credit.

An unintended consequence of the stimulation is likely to be inflation. We think the stimulus will work and that stocks are a good place to be. Both fiscal and monetary policy will work on a global basis, with speed bumps along the way. President Obama inherited a very difficult situation. Under the new administration we have had significant government intervention in the markets, which will be reduced as conditions in the economy improve.

GFM: What are you telling your clients? Have you changed anything in your investment strategy?

MG: The US economy should improve in 2010, helped by an uptick in auto spending and improvement in housing and the ongoing stimulus. There is upside operating leverage in corporate earnings, partly due to cost cutting. The secular themes are the US deleveraging and transferring its wealth to China. We expect more strategically-driven deal activity, as companies buy other companies to enhance growth. Our emphasis, as always, is on POSP - plain old stock-picking.

Click here for the full interview

Source: Hedgeweek, August 28, 2009.

Tags: China Russia, Consumer Spending, Corporate Earnings, Economic Stimulus, Emerging Markets, Fiscal And Monetary Policy, Gabelli Asset Management, Gfm, Global Basis, Government Intervention, India, Investment Strategy, Mario Gabelli, New Administration, Operating Leverage, Secular Themes, Speed Bumps, Stock Market, Unintended Consequence, Upshot, Uptick, World Gdp
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WealthTrack’s Great Investors: A Conversation with Bill Gross

Tuesday, July 7th, 2009

In this first edition of a new WealthTrack series on great investors, Consuelo Mack sat down with “Bond King” Bill Gross, co-chief investment officer of bond giant Pimco, and discussed how he was reconciling his big-picture, secular views of lower investment returns with his higher-return-oriented investment goals. Amongst others, he told her why he was backing away from his investment strategy of making the government his investment partner - a key theme of Pimco’s over the past year - and what he was focusing on instead. Gross also shared what he is doing with his own money.

Gross’ flagship Total Return Fund was up 4% plus last year, nine full percentage points better than its peers. It is up more than 6% for the year to date, again outstripping the competition. Not too shabby!

Do not miss any of this great interview.

Note: The transcript of this interview is not available yet, but will be posted here as soon as it arrives.

Source: WealthTrack, July 3, 2009.

Tags: Big Picture, Bill Gross, Bond Investment, Cape Town, Chief Investment Officer, Giant, Gross Co, Investment Goals, Investment Partner, Investment Returns, Investment Strategy, Investors, Mack, Money, Peers, Percentage Points, PIMCO, Postcards, Sat, Target, Wealthtrack
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Melt-up Fuels Investor Confidence

Friday, June 12th, 2009

Last week Raymond James’ strategist Jeffrey Saut discussed underperformance angst, and how the sentiment is helping to drive stock prices higher, due to skeptical asset managers caving in to performance pressures from clients, peers and benchmarking. This is also referred to as melt-up, the opposite of meltdown:

MarketFolly.com (via SeekingAlpha): We believe that while there is massive panic on the downside as the market tanks, there is equal panic to the upside. Those who miss the initial ramp up begin to panic that they are missing the major move. Then, as the move becomes even more substantial, underperformance angst begins to set in. If you are a fund manager and you are underperforming the markets, you begin to panic. That same panic you felt when the market plunged 40% is now resurfacing as the market rips 30% higher right in your face. It then becomes very tempting to join the herd. Long time readers will know what we think about the herd mentality. You are either with the pack, or against the pack. Buy or die.

Such recent market action can be summed up by the saying that you need to trade the perception, not the reality. And, even if all the buying makes no sense to you, you have to follow along. Otherwise, you’re down huge and you’re losing assets left and right. After all, the industry is now constantly focused on near-term performance, remember? One bad month? Sorry, we’ve got to pull our funds out.

In the midst of what can safely be defined as underperformance angst, it appears that individual investors are slowly regaining confidence, a sign that there may be more upside in the current rally, but also reasons to be cautious:

Bespoke: While some measures of sentiment still show that investors have been slow to embrace the equity market rally, other measures are showing that they are now more comfortable with it.  For example, the weekly survey of newsletter writers by Investors Intelligence shows that the spread between bulls and bears is at its widest level since January 2008 (47.7% bulls vs. 23.3% bears).  However, while Investors Intelligence is showing relatively bullish levels of sentiment, the AAII survey of individual investors is still dead even, with an equal number of bulls and bears (39.35%).

Mutual Funds are now in their 12th consecutive week of rapid inflows:

WSJ: Total estimated inflows were $13.6 billion in the week ended June 3.

Stock funds had estimated inflows of $4.63 billion, up from $1.59 billion the previous week. Weekly outflows from stock funds topped $10 billion earlier this year before the market started to rebound in March, boosting traders’ confidence that the end of the bear market might be in sight. Inflows were $2.83 billion at U.S. stock funds, also marking their 12th-consecutive week of inflows, while foreign funds took in $1.8 billion.

Fund managers, however, remain wary, despite the performance pressures:

WSJ: While a stock surge might force a mutual-fund manager to jump in because he is judged against the index, the pressure on hedge funds is less.

Many funds are skeptical the economy has entered a new period of growth that justifies high equity multiples. Others fear dislocations from governments shoveling money at problems.

Some noted stock pickers remain wary.

Steve Mandel’s Lone Pine Capital bought long-dated, out-of-the-money call positions representing 2.6 million shares of a gold exchange-traded fund in the first quarter, while Och-Ziff Capital Management Group and Atticus Capital have been cautious on the market. A call option is the right to buy a security at a certain price.

If stocks keep surging, hedgies might have to jump in with two feet, giving the market another lift. But their continued hesitancy should be a sign of caution for investors.

Tags: Asset Managers, Asterisk, Bulls And Bears, Downside, ETF, European Fund Managers, Folly, Herd Mentality, Individual Investors, Investment Strategy, Investor Confidence, Investors Intelligence, Market Rally, Market Tanks, Meltdown, Midst, Newsletter Writers, Performance Pressures, Ramp, Raymond James, Seekingalpha, Sentiment, Stock Prices, Strategist, Term Performance, Time Readers
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On Being Right, and other Myths of the Financial Crisis

Wednesday, June 10th, 2009

Is being right overrated when it comes to investment strategy and selection? That is a question provoked by Holman Jenkins of the Hoover Institute in his essay, The Financial Markets and Fear Itself. Abnormal Returns’ Tadas Viskanta, says it is:

Much too much is made in the media about who is right, and who is wrong.  (Not that these thing are well tracked.)  On television, in print and on the Internet we are inundated with pundits who crow about their prescience, while omitting their missed forecasts.  The funny thing is that for investors, being right is greatly overrated.

Investors and traders need only worry about one thing:  profitability.  Are you generating requisite profits from your portfolio for the risks assumed?  Everything else is just noise.

The need to be right is a common error for beginning investors.  Any one who has ridden a stock down for a large loss can attest to this.  Behavioral finance experts have a term for this:  the disposition effect.  Investors tend to sell winners too soon, and losers too late.  You could even think of this as ‘get-even-it is.’  Investors do not want to admit that they made a mistake.

David Merkel, an asset manager, and one of our favourite bloggers, on the other hand asks “Do you want to be proud, or do you want to make some money?”:

I’m going to take the other side of this one. This is a bear/choppy market argument. During a sustained bull market, being right makes lots of money.

When I choose stocks, I do all that I can to have the odds tipped in my favor — industry analysis, earnings quality analysis, valuation analysis, balance sheet analysis, free cash flow use, and even a review of the anomalies like momentum, volatility, balance sheet growth, etc.

It’s not perfect, but I typically have 70% winners, and my winners are larger than my losers. Being right helps make money… does anyone doubt that? But hubris destroys.

Does that mean I give up my risk control disciplines? No. I get things wrong, and when I am wrong, I cut my losses. Every 20% move down requires a review — if the thesis is intact, I buy enough to rebalance. If not, I sell.

Also, my methods continually improve my portfolio, selling things with less potential to buy things with greater potential.

Humility is an asset in all of life — it is even more so when it comes to asset management.  Reckless, macho asset management tends to lose, while those that focus on “what could go wrong?” tend to win.  Ben Graham’s main idea was not cheapness, it was margin of safety — we need to focus on safety more, and cheapness less.

In his long and thought provoking article Holman Jenkins makes the point, that contrary to popular belief, hedge fund managers such as the hugely successful John Paulson and Kyle Bass did not foresee the full extent of the financial crisis:

But, you say, didn’t a handful of shrewd hedge fund managers detect a bubble and clean up from betting against it? Yes, fund managers like John Paulson and Kyle Bass made huge fortunes betting against subprime. This doesn’t prove that all the signs were there to be read and so others must have behaved irresponsibly. Think about this: Somebody is always short something, just as others are long the same thing. For every buyer, there is a seller. But those who bet successfully against subprime did so through elaborate, expensive, negotiated deals to purchase credit default swaps or buy “put contracts” on subprime indexes.

Had they really seen what was coming, they would saved themselves a great deal of expense and bother by simply shorting Citigroup, Bank of America, Lehman, Bear Stearns, etc. Their profits would have been huger, their workload and hassle factor much less. The reason they didn’t, it’s reasonable to suppose, is because no more than anyone else did they foresee the catastrophic consequences we now suppose were destined to flow from excessive issuance of subprime mortgages.

Jenkins goes on to explode several more myths and other urban legends:

Here are some of those myths and counterarguments:

Myth: The Wall Street Mill was out to make suckers out of average Americans:

It isn’t true that Wall Street made these mortgage securities just to dump them on them the proverbial greater fool, or that the disaster was wrought by Wall Street firms irresponsibly selling investment products they knew or should have known were destined to blow up. On the contrary, Merrill Lynch retained a great portion of the subprime mortgage securities for its own portfolio (it ended up selling some to a hedge fund for 22 cents on the dollar). Citigroup retained vast holdings in its so-called structured investment vehicles. Holdings of these securities, in funds in which their own employees personally participated, brought down Bear Stearns and Lehman Brothers. aig, once one of the world’s most admired corporations, made perhaps the biggest bet of all, writing insurance contracts against the potential default of these products.

So Wall Street can hardly be accused of failing to eat its own dog food. It did not peddle to others an investment product that it was unwilling to consume in vast quantities itself.

Myth: Wall Street’s supposedly greedy compensation machine (These guys were personally eating their own cooking, not just their firms):

Nor is it true that Wall Street executives and CEOs had insufficient “skin in the game,” so that “perverse” compensation incentives created the mess. That story also does not pan out. Individuals, it’s true, were paid sizeable bonuses in the years in which the securities were created and sold. But most also had considerable wealth in the form of stock and stock options in their firms, which bet their own capital on these securities. Many also appear to have invested directly in funds to hold the subprime securities.

They had skin in the game. Personal losses to top executives in banks that failed or whose share prices collapsed were in the millions, hundreds of millions, and in some cases billions of dollars.

Myth: It was based on the idea that the housing market was going up forever:

The securitizations had been explicitly designed with the prospect of large numbers of defaults in mind — hence the engineering of subordinate tranches designed to protect the senior tranches from those defaults that occurred.

The designers of these securities, moreover, knew exactly where a disproportionate share of the underlying mortgages were coming from: a handful of counties in southern California, Arizona, and the environs of Las Vegas as well as Florida, where home prices had been rising vertiginously. Far from swallowing the supposed inviolability of the housing-only-goes-up rule, middle-aged mortgage securitization bankers knew that house prices can correct sharply, having lived through regional housing busts in the southwest in the late 1980s, and in New England and California in the early 1990s. Anyone who works in the business knows that the experience of the past half century has been increasing volatility in home prices and a steady rise in the foreclosure rate — a nine-fold increase that began in the 1960s and accelerated in the prosperous 1980s and 1990s.

Finally, there is no national housing market:

Ah, you say, but their risk models and assumptions never allowed for a national drop in home prices. Yes, for good reason — there’s no such thing as a national market for houses. Even well into the subprime implosion, as recently as the middle of 2008, the Federal Housing Finance Agency’s House Price Index was continuing to report stable or rising prices in about half of the 292 metropolitan areas it tracks. Half a million new houses are still going up a year — because people want houses where they want houses.
And he goes on.

Read entire the Holman Jenkins article here.

Tags: Abnormal Returns, Analysis Balance, Anomalies, Asset Manager, Balance Sheet Analysis, Behavioral Finance, Control Disciplines, Diatribe, Earnings Quality, Financial Markets, Free Cash Flow, Funny Thing, Holman, Hoover Institute, Hubris, Investment Strategy, Lots Of Money, Merkel, Prescience, Quality Analysis, Risk Control, Valuation Analysis, Volatility
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Richard Bernstein: 10 guidelines learned in 20 years

Saturday, April 18th, 2009

Respected Global Investment Strategist Richard Bernstein left Merrill Lynch this week after 20 years at the firm.

Bernstein, who also wrote Navigate the Noise: Investing in the New Age of Media and Hype, was voted to the Institutional Investor All-America Research Team in each of the last 14 years.

Writing his last Investment Strategy Update, Bernstein listed what he views as ten of the most important investment guidelines he has learned over the past 20 years. These guidelines are shared below.

1. Income is as important as capital gains. Because most investors ignore income opportunities, income may be more important than capital gains.

2. Most stock market indicators have never actually been tested. Most don’t work.

3. Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.

4. Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.

5. Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.

6. Balance sheets are generally more important than income or cash-flow statements.

7. Investors should focus strongly on GAAP accounting and should pay little attention to “pro forma” or “unaudited” financial statements.

8. Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.

9. Investors should research financial history as much as possible.

10. Leverage gives the illusion of wealth. Saving is wealth.

Hat tip: Alphen Asset Management, April 17, 2009.

Tags: Asset Classes, Bull Markets, Capital Gains, Cash Flow Statements, Financial History, Global Investment Strategist, Hat Tip, Income Opportunities, Institutional Investor, Investment Guidelines, Investment Strategy, Merrill Lynch, Portfolio 6, Return On Capital, Richard Bernstein, Risk Aversion, Scarce Capital, Stock Market Indicators, Time Horizons, Unaudited Financial Statements
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