This was an incredibly good piece highlighting the bull and the bear arguments.
http://pensionpartners.com/blog/?p=253
Thursday, May 22, 2014
The Odds
The odds are that we are getting toward the end of the current upcycle. The market and the economy bottomed in 2009 and have been on an upward or a recovering trajectory ever since.
My prior thesis of a compressed market cycle because the market was not allowed to clear has proven false.
That having been said, a regular (or average) market cycle is about 5 years or so. On that basis we are therefore closer the end of the cycle than the beginning.
I don't see too many people calling for a recession or even of a decline in the economy. It seems to me that the consensus is that growth has been disappointing but that the economy will continue to heal/recover even if it is at a less than stellar rate.
The bond market is confusing the consensus because the consensus is not looking for or fearful of a recession. However, it may well be the canary in the coal mine pointing to the end of the cycle.
My heart is not fearful of an upcoming recession but my head is mulling the probabilities and cautious.
My prior thesis of a compressed market cycle because the market was not allowed to clear has proven false.
That having been said, a regular (or average) market cycle is about 5 years or so. On that basis we are therefore closer the end of the cycle than the beginning.
I don't see too many people calling for a recession or even of a decline in the economy. It seems to me that the consensus is that growth has been disappointing but that the economy will continue to heal/recover even if it is at a less than stellar rate.
The bond market is confusing the consensus because the consensus is not looking for or fearful of a recession. However, it may well be the canary in the coal mine pointing to the end of the cycle.
My heart is not fearful of an upcoming recession but my head is mulling the probabilities and cautious.
Friday, May 16, 2014
A Little Early On That Call - Now Might Be A Better Time To Brush It Off
I wrote a commentary for the SMID cap strategy at the end of 2009 talking about the likely battle to take place over the next 2-5 years between cyclical forces of recovery coming up against secular headwinds. Here is an excerpt:
"Don't get too comfortable. The economy is fragile, and both short term and long term risks abound. A legion of risks are in plain view. At some point, cyclical tailwinds will run into secular headwinds. Structurally we are in many ways worse off after the recession than before. We lack the political will to make the hard and necessary decisions to get things right. We have, once again, failed to allow the market to clear, and so are left with the burden of accumulated deferments. The lesson from this whole mess is that we haven’t learnt the lesson. There is a price to be paid for profligacy and denying the laws of economics. As a country we (many other developed countries are in the same boat) have lived beyond our means and made promises we are unlikely to keep. Those secular headwinds will be reflected in rising inflation and interest rates, lower growth, increased savings, higher taxes, more regulation, and constraints on government spending going forward."
In hindsight it looks as though I was a little early. But I stick by that general view of the forces and factors in play.
If I might be so repetitive. Now is probably a good time to brush that thesis off and deliver it again.
They say a clock is always right at least twice a day. Perhaps I'll be closer to the truth this time around.
"Don't get too comfortable. The economy is fragile, and both short term and long term risks abound. A legion of risks are in plain view. At some point, cyclical tailwinds will run into secular headwinds. Structurally we are in many ways worse off after the recession than before. We lack the political will to make the hard and necessary decisions to get things right. We have, once again, failed to allow the market to clear, and so are left with the burden of accumulated deferments. The lesson from this whole mess is that we haven’t learnt the lesson. There is a price to be paid for profligacy and denying the laws of economics. As a country we (many other developed countries are in the same boat) have lived beyond our means and made promises we are unlikely to keep. Those secular headwinds will be reflected in rising inflation and interest rates, lower growth, increased savings, higher taxes, more regulation, and constraints on government spending going forward."
In hindsight it looks as though I was a little early. But I stick by that general view of the forces and factors in play.
If I might be so repetitive. Now is probably a good time to brush that thesis off and deliver it again.
They say a clock is always right at least twice a day. Perhaps I'll be closer to the truth this time around.
Thursday, May 15, 2014
Take The Money and Run - Close out CRAY Short
I didn't issue a report or anything like that because there are only two people (three actually) who have seen my Cray report (and I doubt they even read it).
But just for the record, I looked to close the position at $25.50.
Time will tell how propitious that was, but I figured I'd take the money and run.
The report came out when the stock was trading around $35, but I would have looked to short it when it was trading above $40 on the gap from its 4Q earnings.
Timing is incredibly hard in the research game because it takes time to build the case and construct the report.
But just for the record, I looked to close the position at $25.50.
Time will tell how propitious that was, but I figured I'd take the money and run.
The report came out when the stock was trading around $35, but I would have looked to short it when it was trading above $40 on the gap from its 4Q earnings.
Timing is incredibly hard in the research game because it takes time to build the case and construct the report.
Monday, May 12, 2014
The Art of Short Selling - Bubble Stocks
A perfect short sell candidate is a stock with a large float to allow ease of borrowing and no buy-ins (forced buyback), a high stock price for maximum return, and no business or assets to keep the risk nominal and the investment horizon short term. A perfect short can cause terrible losses.
The single most important section in a prospectus is the risk factor section called "Investment Considerations." The company always tells you why it will fail.
The single most important section in a prospectus is the risk factor section called "Investment Considerations." The company always tells you why it will fail.
Wednesday, May 7, 2014
The Art of Short Selling - Short Sellers
Robert Wilson (profiled by John Train in The Money Masters) is the acknowledged grandfather of the short selling hedge fund managers.
Julian Robertson used a fundamental approach based on prodigious research and a long term horizon. Valuation bets on price alone make bad short sales. There must be either a fundamental change in the outlook or a major misconception by the stock buying public.
Alex Porter (Porter, Felleman) - the trick is to be short the stocks you can stay short without pain or expense. He likes shorts where mgmt doesn't own much stock, management is not realistic or forthright, and where the company has a fatal balance sheet flaw.
Joe DiMenna (Zweig Funds) - Short frauds, earnings disappointments, hyped stocks, industry themes where macro forces are negative and deteriorating balance sheets. Try to determine a catalyst. Don't short stocks with strong relative strength and earnings momentum.
Short sellers tend to be odd people. Most are ambitious, driven, antisocial and singleminded. They are contrarian by nature and like to win against the odds. They often have a chip on their shoulder.
The Feshbachs looked for terminal shorts: (1) stock price overvalued at least by 2x's reasonable valuation, (2) A fundamental problem at the company, (3) A weak financial condition, (4) Weak or crooked management. They perceived themselves as hype detectors. To sell short you have to be certain that you see an important factor that other people do not see. You look for something that is obviously misperceived, obviously important, and obviously detrimental. The most important charater trait of a short seller is the ability to remain analytical when other people panic.
For McBear management is rarely the target, unless there is fraud. It is generally Wall St that has engineered the ascent of the stock.
Chanos' specialty is solving complex financial puzzles. He likes to short stocks with secular problems where he can make a "reasonably strong argument, based on the valuaton of the business, that the equity value of the enterprise is $0." Chanos does not visit companies. Likes to focus on return on invested capital as a key financial indicator. When the accounting gets murky people tend to shy away from rigorous analysis and rely on management and just take earnings per share at face value. Therein lies the opportunity.
Julian Robertson used a fundamental approach based on prodigious research and a long term horizon. Valuation bets on price alone make bad short sales. There must be either a fundamental change in the outlook or a major misconception by the stock buying public.
Alex Porter (Porter, Felleman) - the trick is to be short the stocks you can stay short without pain or expense. He likes shorts where mgmt doesn't own much stock, management is not realistic or forthright, and where the company has a fatal balance sheet flaw.
Joe DiMenna (Zweig Funds) - Short frauds, earnings disappointments, hyped stocks, industry themes where macro forces are negative and deteriorating balance sheets. Try to determine a catalyst. Don't short stocks with strong relative strength and earnings momentum.
Short sellers tend to be odd people. Most are ambitious, driven, antisocial and singleminded. They are contrarian by nature and like to win against the odds. They often have a chip on their shoulder.
The Feshbachs looked for terminal shorts: (1) stock price overvalued at least by 2x's reasonable valuation, (2) A fundamental problem at the company, (3) A weak financial condition, (4) Weak or crooked management. They perceived themselves as hype detectors. To sell short you have to be certain that you see an important factor that other people do not see. You look for something that is obviously misperceived, obviously important, and obviously detrimental. The most important charater trait of a short seller is the ability to remain analytical when other people panic.
For McBear management is rarely the target, unless there is fraud. It is generally Wall St that has engineered the ascent of the stock.
Chanos' specialty is solving complex financial puzzles. He likes to short stocks with secular problems where he can make a "reasonably strong argument, based on the valuaton of the business, that the equity value of the enterprise is $0." Chanos does not visit companies. Likes to focus on return on invested capital as a key financial indicator. When the accounting gets murky people tend to shy away from rigorous analysis and rely on management and just take earnings per share at face value. Therein lies the opportunity.
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