There is an ever-present fear of being on the wrong side of the market. This, of course, assumes one has taken a position.
The fear comes from having been wrong many times in the past (and knowing that getting on the right side of the market trend is the most critical thing you can do to increase your chances of success), and hopefully leads to a healthy respect for the market and a risk management framework that minimizes the size of ones potential mistakes.
I'm caught in the middle right now, and have a wager either side. I have a healthy cash position should the market experience a retracement (which I am looking for), but maintain a reasonable equity exposure should the market chose to continue moving higher. With a significant lead over my benchmark, I am afforded the luxury of this strategy and position.
Having had good exposure to the beta trade off the bottom, bottoms-up issues are increasingly influencing my investment perspective and portfolio management positioning. As holdings run and hit my target levels, I am happy to let them go. And as prospective targets fall and look more attractive, I am happy to add them to the portfolio.
Tuesday, June 30, 2009
Friday, June 26, 2009
Michael Jackson Died
I, like everyone else who came of age in the 80s, have the beats from his music, the sound of his voice, and the images of his videos ingrained on my mind.
I was sad, but perhaps not surprised to hear of his passing. And it saddens me to think of his life. It has to be hard to be a famous person. Whether a rock star, movie star, or a President. Most famous people have a time in the sun, then recede to the shadows. But some continue to occupy a place in the public mind. Michael Jackson was one. This is a day you remember, much like when Elvis died (I was only 10 at the time, but remember it distinctly).
And let's not forget another icon from a period. Farrah Fawcett died on the same day. Charlie's Angels and the Six Million Dollar Man, almost defined my youthful tv viewing (can't forget Dr. Who either...and many others as I come to think on it).
I was sad, but perhaps not surprised to hear of his passing. And it saddens me to think of his life. It has to be hard to be a famous person. Whether a rock star, movie star, or a President. Most famous people have a time in the sun, then recede to the shadows. But some continue to occupy a place in the public mind. Michael Jackson was one. This is a day you remember, much like when Elvis died (I was only 10 at the time, but remember it distinctly).
And let's not forget another icon from a period. Farrah Fawcett died on the same day. Charlie's Angels and the Six Million Dollar Man, almost defined my youthful tv viewing (can't forget Dr. Who either...and many others as I come to think on it).
Wednesday, June 24, 2009
It's Just That Easy?
The bullish case is predicated to some extent upon the unprecedented amount of stimulus being injected into the system (what I call an artificial impost). I am presuming that the case also extrapolates to a point in time where the stimulus puts us on a self-sustaining track where the govt can hand the economy back to the private sector (but I haven't heard that espoused too much).
I've struggled with the seemingly cavalier way in which some analysts and strategists take it as granted that the borrowing of money is an unmitigated positive. My sense is that they see it this way because the immediate cause is positive and the long term effects somewhere in the future. Similarly, they see it this way because they have been conditioned to this cause/effect throughout their careers. When a problem arose in the past, we simply doused it in money (whether fiscal or monetary, or preferably both), and voila the problem was solved.
If it were only that easy. Something seems wrong about this to me. But I'm not smart enough to fully articulate why. I guess the best response I can make is if it were so simple to goose growth by simply spending and borrowing money, then why don't we do this all the time. If there are no costs/consequences to such an action, why not do it always and at every time. The answer, of course, is that there are limits to such activities.
However, as John Mauldin said last week, saying "this time is different" is a very precarious position to take, and will generally be wrong (except when it is right...wasn't last year a "this time is different" case and didn't all the lemmings fall off the cliff together).
Increasing deficits when the balance sheet is already stretched and the income statement looks terrible (just ask the states and local governments) does not seem like a free lunch to me. The economic optimists seem to be only focusing on the positives (stimulating demand), while failing to factor in the effects (greater debt burden, greater pressure on currency/inflation, a short term fillip, rising taxes).
Is the market that dumb that we can pull the wool over its eyes by simply creating money? I don't think so. So there is something else to the markets strong rise. Me thinks it was the simple overshoot of the market in Feb/March in the face of great fear and uncertainty. But with the armageddon factor diminished, we now have to work out what is a reasonable valuation given the fundamental outlook...and that is where it gets interesting.
I've struggled with the seemingly cavalier way in which some analysts and strategists take it as granted that the borrowing of money is an unmitigated positive. My sense is that they see it this way because the immediate cause is positive and the long term effects somewhere in the future. Similarly, they see it this way because they have been conditioned to this cause/effect throughout their careers. When a problem arose in the past, we simply doused it in money (whether fiscal or monetary, or preferably both), and voila the problem was solved.
If it were only that easy. Something seems wrong about this to me. But I'm not smart enough to fully articulate why. I guess the best response I can make is if it were so simple to goose growth by simply spending and borrowing money, then why don't we do this all the time. If there are no costs/consequences to such an action, why not do it always and at every time. The answer, of course, is that there are limits to such activities.
However, as John Mauldin said last week, saying "this time is different" is a very precarious position to take, and will generally be wrong (except when it is right...wasn't last year a "this time is different" case and didn't all the lemmings fall off the cliff together).
Increasing deficits when the balance sheet is already stretched and the income statement looks terrible (just ask the states and local governments) does not seem like a free lunch to me. The economic optimists seem to be only focusing on the positives (stimulating demand), while failing to factor in the effects (greater debt burden, greater pressure on currency/inflation, a short term fillip, rising taxes).
Is the market that dumb that we can pull the wool over its eyes by simply creating money? I don't think so. So there is something else to the markets strong rise. Me thinks it was the simple overshoot of the market in Feb/March in the face of great fear and uncertainty. But with the armageddon factor diminished, we now have to work out what is a reasonable valuation given the fundamental outlook...and that is where it gets interesting.
Tuesday, June 23, 2009
Thinking the Unthinkable
What if all the monetary and fiscal stimulus fails?
What do we do then?
Talk about staring into the abyss.
What do we do then?
Talk about staring into the abyss.
Hitting The Pause Button
My sense of things is that companies hit the pause button at the end of the first quarter, and are taking a wait and see attitude with respect to the economy (the market looks as though it is doing something similar).
If we lose confidence, there is a good chance we will see a second wave of lay-offs with concomitant, negative flow-on effects to the economy.
Are lay-offs the tail wagging the dog (the economy), or the dog wagging the tail?
If we lose confidence, there is a good chance we will see a second wave of lay-offs with concomitant, negative flow-on effects to the economy.
Are lay-offs the tail wagging the dog (the economy), or the dog wagging the tail?
Saturday, June 20, 2009
What A "New Normal" Might Look Like
I'm a 'new normal' kind of guy and I was just musing what a 'new normal' might look like. Here is what it might look like from an investment perspective in a generalized example:
T-5 T-4 T-3 T-2 T-1 Reset T+1 T+2 T+3 T+4 T+5
Revs ($m) 80 85 90 95 100 70 80 83.5 87 91 95
Profit Margin (%) 20% 20% 20% 20% 20% 5% 10% 10% 10% 10% 10%
P/S multiple (x) 2.5 2.5 2.5 2.5 2.5 1.5 1.8 1.8 1.8 1.8 1.8
Firm Value ($m)* 200 212.5 225 237.5 250 105 144 150.3 156.6 163.8 171
Return 6.25% 5.88% 5.56% 5.26% -58.00% 37.14% 4.38% 4.19% 4.60% 4.40%
*Firm value = Revs x P/S multiple
The table above assumes a 'new normal' world, ie. lower growth rates, lower multiples (higher risk premium), and lower margins - much of the 'new normal' hypothesis depends upon growth rates failing to return to normal (due to consumer deleveraging and increased taxes). Here are a couple of takeaways: (1) We experienced a 58% asset reset last year, reflecting an 80%+ decline in reported profits (I consider that the first wave of deflation), (2) We get a bounce gain of around 37% after the reset (already had it), (3) Firm value will take a long time to recover (hard to get back wealth losses if we're going into a 'new normal'), (4) To reduce the damage of the asset reset, you absolutely needed to stay in the market to capture the bounce.
I was astounded by the implications of the 'new normal' world wrt the loss of wealth (or firm value), but the biggest takeaway from this example is the fact that when you reset asset prices by 58%, long term expected returns are pretty good.
I could have used PE instead of PS for valuation purposes (I prefer PS, especially in a period like the present), and it would have conveyed the same sense.
P.S. Sorry the table looks bad. You'll have to bear with me on that one.
T-5 T-4 T-3 T-2 T-1 Reset T+1 T+2 T+3 T+4 T+5
Revs ($m) 80 85 90 95 100 70 80 83.5 87 91 95
Profit Margin (%) 20% 20% 20% 20% 20% 5% 10% 10% 10% 10% 10%
P/S multiple (x) 2.5 2.5 2.5 2.5 2.5 1.5 1.8 1.8 1.8 1.8 1.8
Firm Value ($m)* 200 212.5 225 237.5 250 105 144 150.3 156.6 163.8 171
Return 6.25% 5.88% 5.56% 5.26% -58.00% 37.14% 4.38% 4.19% 4.60% 4.40%
*Firm value = Revs x P/S multiple
The table above assumes a 'new normal' world, ie. lower growth rates, lower multiples (higher risk premium), and lower margins - much of the 'new normal' hypothesis depends upon growth rates failing to return to normal (due to consumer deleveraging and increased taxes). Here are a couple of takeaways: (1) We experienced a 58% asset reset last year, reflecting an 80%+ decline in reported profits (I consider that the first wave of deflation), (2) We get a bounce gain of around 37% after the reset (already had it), (3) Firm value will take a long time to recover (hard to get back wealth losses if we're going into a 'new normal'), (4) To reduce the damage of the asset reset, you absolutely needed to stay in the market to capture the bounce.
I was astounded by the implications of the 'new normal' world wrt the loss of wealth (or firm value), but the biggest takeaway from this example is the fact that when you reset asset prices by 58%, long term expected returns are pretty good.
I could have used PE instead of PS for valuation purposes (I prefer PS, especially in a period like the present), and it would have conveyed the same sense.
P.S. Sorry the table looks bad. You'll have to bear with me on that one.
Friday, June 19, 2009
A Leap of Faith
I don't think I could have articulated it any better than ISI strategist Francois Traha:
"The market pullback of the past week or so has rattled the conviction of many investors. This is not surprising to us since the recovery in stocks is really about hope rather than concrete evidence of an economic recovery. Thus far, so-called "green-shoots" have been concentrated in indicators that tend to be anticipatory of economic growth (i.e. leading indicators). It always takes a leap of faith to buy into a rally at an economic low since it begins about six months or so before coincident indicators of growth recover. We believe the evidence is overwhelming at this stage, but the "bullish" call on stocks will not become the mainstream until investors see actual growth, which will probably occur later this year."
I don't necessarily agree with his conclusion, but I think he captures the essence of a view.
"The market pullback of the past week or so has rattled the conviction of many investors. This is not surprising to us since the recovery in stocks is really about hope rather than concrete evidence of an economic recovery. Thus far, so-called "green-shoots" have been concentrated in indicators that tend to be anticipatory of economic growth (i.e. leading indicators). It always takes a leap of faith to buy into a rally at an economic low since it begins about six months or so before coincident indicators of growth recover. We believe the evidence is overwhelming at this stage, but the "bullish" call on stocks will not become the mainstream until investors see actual growth, which will probably occur later this year."
I don't necessarily agree with his conclusion, but I think he captures the essence of a view.
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