Thanks to Matt for passing this along.
Wednesday, February 29, 2012
I'm pleased to announce the launch of Chanticleer Investment Partners, a North Carolina based registered investment adviser and wholly-owned subsidiary of Chanticleer Holdings, Inc. For those familiar with our other activities at Chanticleer, I think you'll find that this product complements the other things we do.
Tuesday, February 28, 2012
The profits made by the Connecticut-based Pure Alpha – already the world’s biggest hedge fund, with $72bn under management using its trading strategy – beat its own record for the largest one-year dollar gain last year.
However, the ranking by LCH Investments, part of the Edmund de Rothschild group, also showed last year the biggest-ever loss by a hedge fund. John Paulson’s New York-based Paulson & Co lost investors $9.6bn last year, more than was lost in the collapse of Long Term Capital Management in 1998. But Mr Paulson is still ranked third for the best overall returns for investors, at $22.6bn.
LCH, which has been investing in hedge funds since 1969, assesses hedge funds by how much they have made over their lifetimes for investors in dollars. It argues that percentage returns distort performance as fund managers frequently find it hard to maintain big returns as they take in more money. This is important as investors tend to buy funds that have done very well but then those funds often produce mediocre returns on the larger amounts of money.
Feb. 28 (Bloomberg) -- Robert Shiller, co-creator of the S&P/Case-Shiller index of property values in 20 U.S. cities, talks about the U.S. housing market and seasonal patterns affecting prices. The S&P/Case-Shiller index fell 4 percent in December, more than forecast, to the lowest level since the housing crisis began in mid-2006. Shiller speaks with Mark Crumpton on Bloomberg Television's "Bottom Line."
Found via RDFRS.
New archaeological evidence suggests that America was first discovered by Stone Age people from Europe – 10,000 years before the Siberian-originating ancestors of the American Indians set foot in the New World.
A remarkable series of several dozen European-style stone tools, dating back between 19,000 and 26,000 years, have been discovered at six locations along the US east coast. Three of the sites are on the Delmarva Peninsular in Maryland, discovered by archaeologist Dr Darrin Lowery of the University of Delaware. One is in Pennsylvania and another in Virginia. A sixth was discovered by scallop-dredging fishermen on the seabed 60 miles from the Virginian coast on what, in prehistoric times, would have been dry land.
The PIMCO defensive strategy playbook: Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible. Emphasize income we believe to be relatively reliable/safe; seek consistent alpha.
While Wall Street and levered investors have fared better than their Main Street counterparts, it’s not as if they’re in “primetime Deion Sanders” shape either. Conceptualize the historical business model of any financially-oriented firm for the past 30 years and you will see what I mean. Insurance companies, for instance, whether they be life insurance with their long-term liabilities, or property/casualty insurance with more immediate potential payouts, have modeled their long-term profitability on the assumption of standard long-term real returns on investment. AFLAC, GEICO, Prudential or the Met – take your pick – have hired, staffed, advertised, priced and expensed based upon the assumption of using their cash flows to earn a positive real return on their investment. When those returns fall from 7% positive to an approximate 1% negative, then assumptions – and practical realities – begin to change. If these firms can’t cover inflation with historical real returns from their float, then they begin to downsize in order to stay profitable. The downsizing is just another way of describing a transition from offense to defense in a zero bound nominal interest rate world where almost any level of inflation produces negative real yields on investment.
Not only insurance companies but banks suffer from this inability to maintain margins at the zero bound. In the process, they close retail branches that once were assumed to be the golden key to successful banking. Defense! And here’s one of the more interesting anecdotal observations on our current zero-based environment, one to which my investment paragon – Warren Buffett – would probably immediately admit. His business model – and that of Berkshire Hathaway – has long benefitted from what he has described as “free float.” Those annual policy payments, whether for hurricane, life or automobile insurance, have long given him a competitive funding advantage over other business models that couldn’t borrow for “free.” Today, however, almost any large business or wealthy individual can borrow or lever up with minimal interest expense. Buffett’s “Omaha/West Coast” offense is being duplicated around the world thanks to central bank monetary policies, placing an increasing emphasis on stock and investment selection as opposed to business model liability funding. Buffett will succeed based upon his continued strong offensive play calling, but the rules of the game are changing.
The plight of Buffett of course is in some respects the plight of PIMCO or any investment/financially-oriented firm in this new age of the zero bound. And it seems to us at PIMCO that successful investing in a deleveraging, low interest rate environment will require defensive in addition to offensive skills.
It's one thing to say that peripheral eurozone countries are better off leaving the euro, but how, exactly? And how severe can we expect the consequences to be, not only for those nations but also for the entire eurozone – and for the rest of us, worldwide? To minimize fallout from the event(s), it would be helpful to have a solid foundation, based on an historical understanding of similar events, on which we could build a reasonable set of expectations.
In the following piece, Jonathan Tepper, my Endgame coauthor, gives us the cornerstone of just such a foundation. With his London firm, Variant Perception, he has prepared a 53-page report with the very confident title "A Primer on the Euro Breakup: Default, Exit and Devaluation as the Optimal Solution."
He reminds us that "during the past century sixty-nine countries have exited currency areas with little downward economic volatility." He makes the case that "The mechanics of currency breakups are complicated but feasible, and historical examples provide a roadmap for exit."
The real problem in Europe, he says, is that "EU peripheral countries face severe, unsustainable imbalances in real effective exchange rates and external debt levels that are higher than in most previous emerging market crises."
The way through? "Orderly defaults and debt rescheduling coupled with devaluations are inevitable and even desirable. Exiting from the euro and devaluation would accelerate insolvencies, but would provide a powerful policy tool via flexible exchange rates. The European periphery could then grow again quickly with deleveraged balance sheets and more competitive exchange rates, much like many emerging markets after recent defaults and devaluations (Asia 1997, Russia 1998, and Argentina 2002)."
We'll need this sort of robust thinking and a willingness to meet the challenge head-on if we're going to get through not just this eurozone crisis but the Endgame in which the whole world finds itself, in the final throes of the Debt Supercycle.
Monday, February 27, 2012
This article reminded me of Malcolm Gladwell's definition of talent: “Talent is the desire to practice. Right? It is that you love something so much that you are willing to make an enormous sacrifice and an enormous commitment to that, whatever it is -- task, game, sport, what have you.”
The most captivating strand of the Jeremy Lin mystique is that he came from nowhere, emerging overnight to become a star, after being underestimated and overlooked, disregarded by college coaches, ignored in the N.B.A. draft and waived twice in two weeks.
Jeremy Lin’s rise did not begin, as the world perceived it, with a 25-point explosion at Madison Square Garden on Feb. 4. It began with lonely 9 a.m. workouts in downtown Oakland in the fall of 2010; with shooting drills last summer on a backyard court in Burlingame, Calif.; and with muscle-building sessions at a Menlo Park fitness center.
It began with a reworked jump shot, a thicker frame, stronger legs, a sharper view of the court — enhancements that came gradually, subtly, through study and practice and hundreds of hours spent with assistant coaches, trainers and shooting instructors over 18 months.
Quite simply, the Jeremy Lin who revived the Knicks, stunned the N.B.A. and charmed the world — the one who is averaging 22.4 points and 8.8 assists as a starter — is not the Jeremy Lin who went undrafted out of Harvard in June 2010. He is not even the same Jeremy Lin who was cut by the Golden State Warriors on Dec. 9.
Smart can hardly recognize his former pupil these days. Nor can Eric Musselman, who coached Lin in the N.B.A. Development League for 20 games. Nor can Lamar Reddicks, a former Harvard assistant coach, who fondly remembers a freshman-year Lin as “the weakest guy on the team.”
What scouts saw in the spring of 2010 was a smart passer with a flawed jump shot and a thin frame, who might not have the strength and athleticism to defend, create his own shot or finish at the rim in the N.B.A. The evolution began from there.
Soon, Smart noticed something else. Lin was the first player at the Warriors’ training center every day, eating breakfast by 8:30 a.m. “Then, all of sudden, you’d hear a ball bouncing on the floor,” Smart said. Practice typically began at noon.
Another assistant, Stephen Silas, began working daily with Lin, and provided him with a catalog of tapes showing elite point guards in the pick-and-roll: how they got into the lane, how they kept the defender on their hip, how they drew in the opposing big man to free up their pick-and-roll partner. Phoenix’s Steve Nash figured prominently. Silas and Lin worked on drills to give Lin other options, like a floater in the lane.
Still, Lin kept arriving early, leaving late, devouring film and working studiously with Silas and later Lloyd Pierce. But what Lin really needed was game repetition. The Warriors sent him to Reno, their D-League affiliate, on three occasions. That is where the lessons started to take hold.
Related previous post: What it takes to be great
As Warren Buffett mentioned in his Letter to Shareholders, Peter Bevelin has put together a new book explaining Berkshire’s investment and operating principles. I’ve interview Peter twice on this blog (HERE and HERE) and those interviews are probably the most popular things I’ve put up over the years. The book will be released at the Annual Meeting on May 5th, but you can preorder a copy HERE. A description from the site is copied below.
Peter Bevelin begins A Few Lessons for Investors and Managers with Warren Buffett’s wisdom, "I am a better investor because I am a businessman and a better businessman because I am an investor." This book is about how managers and investors can increase their chance of success and reduce the chance of harm if managers think more like investors and investors more like businessmen.
There are a lot of books about Warren Buffett, but A Few Lessons for Investors and Managers is different. It tells in a short-easy-to-read way about what managers and investors can learn from Buffett. This is a selection of useful and timeless wisdom where Warren Buffett in his own words tells us how to think about business valuation, what is a good and bad business, acquisitions and their traps, yardsticks, compensation issues, how to reduce risk, corporate governance, the importance of trust and the right culture, learning from mistakes, and more.
- What Investing in Financial Assets is All About
- The Value of a Business
- Return on Tangible Invested Capital Refects the Cash Flow Generating Characteristics of the Business
- Business Characteristics: The Great, the Good and the Gruesome
- Past Results as a Guide: Sometimes Useful and Sometimes Dangerous
- The Importance of Trustworthy and Talented Management
- The Importance of Clear Yardsticks to Judge Management Performance
- Corporate Governance
- Owners and Management
- Management Compensation: I Get What I Reward For
- Mergers and Acquisitions: Dumb Acquisitions Cost Owners Far More than Most Other Things
- A Few Management Issues
- How to Reduce Risk: Prevention is Better than Cure
- Sometimes Mistakes are Made
Last week's letter on taxes drew more response than any letter I have written in years. Questions that were raised simply beg for an answer, and some of the replies were very thoughtful, well-written suggestions for alternatives. This week I am going to do something I can't ever remember doing, and that is to use the entire letter to involve and respond to my readers. Let me begin by thanking all of those who responded, and to observe that every response I read was polite and courteous, even when aggressively disagreeing. Not every site on the internet has such a civil discourse among its readers. I appreciate that. Next week we will return to All Greece, All the Time or whatever the crisis du jour is, although I am much more interested in China of late. I will have to address the world's largest nation at some point soon. At the end of the letter, I provide some very interesting and fun links and a note on an upcoming webinar with investment legend Israel "Izzy" Englander. Now, let's zero in on taxes.
Link to videos:
We do a seven-year forecast every month. On a seven-year forecast, global equities outside the U.S. are boring. They've been so nervous the last year that they mostly reflect the right degree of fear about European problems. Emerging markets and developed markets outside the U.S. are within nickels and dimes of fair value. This is very unusual. We are in the asset-allocation business, and we like to see horrific roller coasters: It gives us something to get our teeth into. What could be more boring than global equity markets at fair value?
About a quarter of the U.S. equity market—the high-quality, boring, great companies—is about fair price, too. The other three quarters are overpriced, and based on our numbers have a slight negative imputed return.
Come back in seven years, and you will not have made a penny, adjusted for inflation, outside the giant brand names, the Microsofts [ticker: MSFT], Apples [AAPL], and so on. So if you add the high-quality brand names to global equities, you have a pretty nice diversified portfolio with a slight high-quality tilt. So you are looking at an almost normal return of 5½% real.
The bond market is a different story. It is manipulated mainly by the Fed to be artificially low, to move the stock market and have a benevolent effect on consumption. Operation Twist [involving the Fed's efforts to lower longer-term interest rates by shifting its portfolio toward lengthier maturities] is a dangerous long-term mistake.
You can push stocks up to get a wealth effect, but we live in a mean-reverting world, and they come back down again when you least need it. It's a pact with the devil. After-inflation and after-tax returns are going backwards, and who benefits? We know the financial system does.
In 2009 and so on, banks couldn't help but make money on the arbitrages involved from zero interest rates and their lending rates, at the expense of the people who would usually invest and use the income. If you could go back and pay pensioners the extra 3% interest, they would have spent all that in the economy.
Who benefits from the banking profits and the banking bonuses? Was there a great capital-spending surge? No. You took money away from people who would have spent it instantly, and gave it to people who have tended to sit on it.
As of February 2012, the S&P 500 is again at a multiple of over 22 times cyclically-adjusted earnings. Regardless of economic prospects, this is a strong headwind. As of February 2012, we estimate that the S&P 500 is likely to achieve an average annual total return of just 4.4% over the coming decade. However, this does not imply that strong investment opportunities will remain scarce for another decade. Projected long-term returns can rise quickly when the stock market declines significantly, which appears likely to occur within a far shorter period than a decade.
Saturday, February 25, 2012
Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge.
Over the past century these instruments have destroyed the purchasing power of investors in many countries, even as the holders continued to receive timely payments of interest and principal. This ugly result, moreover, will forever recur. Governments determine the ultimate value of money, and systemic forces will sometimes cause them to gravitate to policies that produce inflation. From time to time such policies spin out of control.
Even in the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time. Consequently, a tax-free institution would have needed 4.3% interest annually from bond investments over that period to simply maintain its purchasing power. Its managers would have been kidding themselves if they thought of any portion of that interest as “income.”
For tax-paying investors like you and me, the picture has been far worse. During the same 47-year period, continuous rolling of U.S. Treasury bills produced 5.7% annually. That sounds satisfactory. But if an individual investor paid personal income taxes at a rate averaging 25%, this 5.7% return would have yielded nothing in the way of real income. This investor’s visible income tax would have stripped him of 1.4 points of the stated yield, and the invisible inflation tax would have devoured the remaining 4.3 points. It’s noteworthy that the implicit inflation “tax” was more than triple the explicit income tax that our investor probably thought of as his main burden. “In God We Trust” may be imprinted on our currency, but the hand that activates our government’s printing press has been all too human.
High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based investments – and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.
Under today’s conditions, therefore, I do not like currency-based investments. Even so, Berkshire holds significant amounts of them, primarily of the short-term variety. At Berkshire the need for ample liquidity occupies center stage and will never be slighted, however inadequate rates may be. Accommodating this need, we primarily hold U.S. Treasury bills, the only investment that can be counted on for liquidity under the most chaotic of economic conditions. Our working level for liquidity is $20 billion; $10 billion is our absolute minimum.
Beyond the requirements that liquidity and regulators impose on us, we will purchase currency-related securities only if they offer the possibility of unusual gain – either because a particular credit is mispriced, as can occur in periodic junk-bond debacles, or because rates rise to a level that offers the possibility of realizing substantial capital gains on high-grade bonds when rates fall. Though we’ve exploited both opportunities in the past – and may do so again – we are now 180 degrees removed from such prospects. Today, a wry comment that Wall Streeter Shelby Cullom Davis made long ago seems apt: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”
Friday, February 24, 2012
Feb. 24 (Bloomberg) -- John Burbank, founder and chief investment officer of Passport Capital LLC, talks about investment strategy and the impact of oil prices on global markets. Burbank speaks on Bloomberg Television's "InBusiness with Margaret Brennan.
Feb. 24 (Bloomberg) -- David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc., talks about the outlook for the U.S. economy and the possible impact of higher gasoline prices on growth. Rosenberg also discusses U.S stocks and investment strategy. He speaks with Tom Keene and Michael McKee on Bloomberg Television's "Surveillance Midday."
Jeremy Grantham's 4Q Letter is comprised of three sections: Investment Advice from Your Uncle Polonius, Your Grandchildren Have No Value (And Other Deficiencies of Capitalism), and Investment Observations for the New Year.
The 800-pound gorilla (the one that prefers bond holders to bamboo) is not in the room yet, but you can hear him thumping his chest up in the hills. He will come eventually, and before he does, you should remember that stocks are underrated inflation hedges. The underlying corporations have real assets, employ real people, and sometime even make real things, although a good idea embedded in a small thing (like an iPad) or a service is just as good. Equities have been tested over and over again in different places and in different decades and they have always been found to be very effective hedges. Serious resources – oil and copper in the ground and forestry and farmland – will almost certainly also be good and very probably much better than broad stocks in the short run. Gold may be good too. Who knows? But for stocks to work dependably as inflation hedges one has to have a several-year time horizon: in the short term, rising inflation can hurt stocks badly, for as mentioned last quarter, inflation is usually a powerful negative behavioral input. Investors hate jumps in inflation because they sharply raise the levels of uncertainty. Fairly quickly, though, earnings always catch up, and after multi-year surges in inflation (as in Brazil in the ’80s) we end up with the total market value in its normal range as a percentage of GDP while regular bonds if they exist, get destroyed.
Exhibit 2 shows the co-incident 5-year relationship between the return for stocks, bonds, and gold, respectively, against the CPI since 1919 in the U.S. As inflation picks up, the real price of gold goes up, the real price of bonds declines a lot, and equities decline also, but significantly less. Exhibit 3 looks at exactly the same inflation data but adds the next 5 years of real returns for the three assets. Now, over 10 years, there is only a very slight relationship between either gold or equities with the original 5 years of change in the CPI. In the case of bonds however, there is still a strong tendency for bonds to continue to lose ground. The conclusion from that time period is that surges in inflation have been a very slight issue for holders of equities (and gold) on a 10-year basis, but a very serious one for bond holders. We must also remember that previous inflationary periods in the U.S have mostly followed a pattern of rising several years to a single peak and then falling. The next one may be different. It may move up and then fall back several times, creating more of a range of hills than a single Himalayan peak like 1981. In such a bumpy ride, stocks are likely to adjust more quickly each time while long bonds will see their values steadily eroded.
The short-term correlations between stocks and inflation in the past have been quite high, but short-term correlations are for traders, not investors. I’d advise not getting too carried away with them. In general, I also much prefer to have stocks and other real assets in a longer-term approach than to have complicated hedges and options. Murphy’s Law of complexity is powerful: things will go badly if they can and when you least need them to, but complex things will go bad first, and worst given half a chance, as we saw in the mortgage market a few years ago. Keep it simple when you can. And owning stocks is very simple indeed.
Summary of Recommendations (with apologies for the lack of changes)
- Heavily underweight U.S equities, but not the high quality quartile, which is almost fair price. Non-quality equities, in contrast, have a negative imputed 7-year return after their handsome rally in the last 3 months through to mid-February.
- Slightly overweight other global equities, which are almost fair price, down from a little cheap at year end.
- In total, be about neutral in global equities. Yes, there is more than our normal fair share of potential negatives lurking around, but on our data: a) most of the negatives are reflected in stock prices; and b) all fixed income duration is dangerously overpriced. This last situation is, of course, engineered by the Fed, which hopes to drive us all into taking more risk, notably by buying more equities. I hate to oblige, but at current equity prices it just makes sense to do what they want. As mentioned earlier, equities are also good long-term hedges against inflation.
- Underweight as much as you dare long-term bonds, especially higher-grade sovereign bonds.
- In the long term, resources in the ground, forestry, and agricultural land are attractive, but come with the usual caveats of the risk of short-term over pricing, so average in.
Thanks to Andrew for passing this along.
Drive an hour northwest from Toronto along Highway 10 and you come across some of the best farmland in Canada. Folks here call it the Garden of Eden. Atop a 15,000-acre plateau sits a layer of dark dirt so perfectly balanced with clay and nutrients that it breaks apart in your hand like potting soil. "The stuff is like butter," says a local potato farmer, David Vander Zaag, who sells his spuds to Frito-Lay. Even better: Below the rich topsoil lies a limestone deposit some 200 feet thick, creating an ideal natural drainage system. It once rained nine inches in a day, says Vander Zaag, and he didn't lose a single potato from his crop.
It's that limestone, though, that has brought the farming town of Melancthon, Ontario, pop. 2,900, the fight of its life. Last spring a Canadian firm called the Highland Cos. submitted an application to turn 2,300 acres of area farmland into one of the top-producing rock quarries in Canada. One of the principal owners of Highland is the Baupost Group, a $24 billion hedge fund based in Boston and run by a secretive investor named Seth Klarman.
Related link (Distressed Debt blog): My Favorite Quote from Baupost's 2011 Annual Letter
Warren Buffett bought oil stocks near the peak of an energy boom, declined to spend $35 million on a growing television station and swapped a Berkshire Hathaway Inc. (BRK/A) stake for a shoe company he later said was worthless.
“A friend once asked me: If you’re so rich, why aren’t you smart?” Buffett, Berkshire’s chairman, said in a letter accompanying the 1996 annual report. The billionaire, describing a bet on USAir, told readers at the time, “You may conclude he had a point.”
Buffett’s self-criticism is part of a leadership style that has helped him build a company with 270,000 workers and draw crowds of more than 20,000 to hear him speak. Buffett, 81, who’s scheduled to release his annual shareholder letter tomorrow, relies on his public persona as well as his record to set standards for Berkshire staff and retain investors in good years and bad.
“He doesn’t hesitate to point this stuff out, and it’s not just for the shareholders,” said James Armstrong, president of Berkshire investor Henry H. Armstrong Associates. “It’s also for the employees and managers of Berkshire. It’s sending the message: Admit your mistakes, don’t pretend they didn’t happen.”
Feb. 23 (Bloomberg) -- Jim Chanos, founder of Kynikos Associates Ltd., Jamie Zimmerman, chief executive officer of Litespeed Management LLC, Michael Novogratz, principal at Fortress Investment Group LLC, and Steve Kuhn, head of fixed income trading at Pine River Capital Management LP, discuss the hedge fund industry, the outlook for financial markets and their investment strategies. They speak with Betty Liu on Bloomberg Television's "Titans at the Table."
Thursday, February 23, 2012
Thanks to Barry for passing this along.
When Mr. Buffett releases his annual letter to shareholders on Saturday, the renowned investor is expected to emphasize that his company's value increased faster than the stock market last year, the first such performance in three years.
The Omaha, Neb., conglomerate's growth in book value per share—a measure of net worth, and the performance yardstick Mr. Buffett favors—likely beat the Standard & Poor's 500-stock index's 2.1% return last year by a few percentage points, several analysts estimate. Berkshire likely saw improved earnings at its railroad and manufacturing businesses as well as stock-investment gains in 2011, they say.
But in a twist that puzzles many Berkshire Hathaway followers, the company run by the 81-year-old billionaire has by some measures rarely been more ignored by the market. After dropping 4.7% in 2011 and rising only half as much as the S&P 500 index so far this year, Berkshire shares are trading near their lowest valuation in decades: close to 1.1 times book value, versus its average valuation of about 1.6 times book value over the past two decades.
Even though Berkshire consistently outperforms the market over long periods, not all shareholders "have the patience to wait" for that to materialize, says Max Olson, who runs private investment firm Max Capital Corp. in Salt Lake City and has owned Berkshire shares since 2005.
My Thursday column reports from Sudan’s Nuba Mountains on the humanitarian catastrophe building there. But print can’t do justice to the scenes of people living in caves as they shelter from indiscriminate bombings. I traveled with a Times video journalist, Brent McDonald, who put together this video from the trip:
A big thanks to Serge for passing this along!
Broadcast (2012) Adam Rutherford meets a new creature created by American scientists, the spider-goat. It is part goat, part spider, and its milk can be used to create artificial spider's web. It is part of a new field of research, synthetic biology, with a radical aim: to break down nature into spare parts so that we can rebuild it however we please. This technology is already being used to make bio-diesel to power cars. Other researchers are looking at how we might, one day, control human emotions by sending 'biological machines' into our brains.
Related previous post: Steve Jobs quote about biology and technology
One key lesson from Japan is that an essential ingredient to the end of a long valuation bear market is revulsion. It is when buyers-on-dips become sellers-on-rallies. It is when volume dries up to almost nothing. It is the loss of hope.
In Japan we saw huge rallies in the Nikkei on the back of short-lived cyclical recoveries. Each cyclical failure and further new lows in the equity market saw hope being progressively crushed. Previous US valuation bear markets typically take 4 or 5 recessions to fully play out. We have only had two.
The market is once again in a hope phase hoping that the US is now in a self-sustaining recovery; hoping that China might be soft-landing; hoping that the Greece bailout and the ECB liquidity polices have settled things down in the eurozone. These bursts of hope are essential in long bear markets. Essential in the sense that hope must be crushed. It will be crushed. Hope still beats in the breasts of equity investors. The market will rip out that hope and consume it in front of investors' eyes. Only then can the bull market begin.
Wednesday, February 22, 2012
“Since for all men the visibility of the future is zero beyond this instant, assumptions as to how long observed trends will continue must be based on probabilities which in turn have been derived from the past and hence may not apply to the future. This is a long-winded way of saying that all estimates of the future are to some degree subjective.
The business of the stock market is to cash in on the future now. Accordingly it is really not as important, short term, to know what sales and earnings are going to be five and ten years hence as to know what other investors are going to think they will be. In general the longer a trend continues the more people can be found willing to risk their savings on the proposition that it will continue longer still. As a practical matter then we probably should assume that old trends will persist longer than new trends simply because, whether they do or not, more investors will be inclined to assume that they will.”
-Thomas William Phelps, 100 to 1 in the stock market
THE north African desert scorpion, Androctonus australis, is a hardy creature. Most animals that live in deserts dig burrows to protect themselves from the sand-laden wind. Not Androctonus. It usually toughs things out at the surface. Yet when the sand whips by at speeds that would strip paint away from steel, the scorpion is able to scurry off without apparent damage. Han Zhiwu of Jilin University, in China, and his colleagues wondered why.
Their curiosity is not just academic. Aircraft engines and helicopter rotor-blades are constantly abraded by atmospheric dust, and a way of slowing down this abrasion would be welcome. Dr Han suspects that scorpions may provide an answer. As he writes in Langmuir, he has discovered that the surface of Androctonus’s exoskeleton is odd. And when that oddness is translated into other materials it seems to protect them, as well.
“One can train a man so that he has at his disposal a list or repertoire of the possible actions that could be taken under the circumstances…A person who is new at the game does not have immediately at his disposal a set of possible actions to consider, but has to construct them on the spot – a time-consuming and difﬁcult mental task.
The decision maker of experience has at his disposal a checklist of things to watch out for before ﬁnally accepting a decision. A large part of the difference between the experienced decision maker and the novice in these situations is not any particular intangible like “judgment” or “intuition.” If one could open the lid, so to speak, and see what was in the head of the experienced decision-maker, one would ﬁnd that he had at his disposal repertoires of possible actions; that he had checklists of things to think about before he acted; and that he had mechanisms in his mind to evoke these, and bring these to his conscious attention when the situations for decisions arose.
Most of what we do is to get people ready to act in situations of encounter consists of drilling in these lists into them sufﬁciently deeply so that they will be evoked quickly at the time of the decision.” –Herbert Simon, Models of My Life
“One of the very few silver linings about me getting sick is that Reed’s gotten to spend a lot of time studying with some very good doctors… I think the biggest innovations of the twenty-first century will be the intersection of biology and technology. A new era is beginning, just like the digital one when I was his age.” –Steve Jobs (from his biography, Steve Jobs)
Any good book recommendations relating to this quote would be much appreciated (Email them to me at: email@example.com).
So far, I’ve added these to my list:
Genome: The Autobiography of a Species in 23 Chapters (a Charlie Munger recommendation)
THE problem with understanding human uniqueness is precisely that it is unique. Though the proper study of mankind may be man, that study will yield little if there is no reference point to compare man with.
That, at least, is the philosophy of Svante Paabo of the Max Planck Institute for Evolutionary Anthropology, in Leipzig. Dr Paabo, whose work on fossil DNA was the inspiration for “Jurassic Park”, has since become interested in human evolution. To this end, he and his colleagues have sequenced the DNA of both Neanderthal man and an Asian species of prehistoric human, the Denisovians, which Dr Paabo’s own work identified.
Now he has turned his attentions to modern Homo sapiens. In collaboration with a team from the Chinese Academy of Sciences, Dr Paabo and his colleague Philipp Khaitovich have compared genetic activity over the course of a lifetime in the brains of humans, chimpanzees and rhesus monkeys. They have then matched what they found with what is known of Neanderthals, and think they have thus discovered at least part of the genetic difference between Homo sapiens and the others that creates human uniqueness.
Dr Paabo and his colleagues focused their examination, just published in Genome Research, on two parts of the brain. One was the dorsolateral prefrontal cortex, which is the seat of abstract reasoning and social behaviour—things that humans are particularly good at. The other was the lateral cerebellar cortex, which is more to do with manual abilities. They extracted cells, post mortem, from people, chimps and monkeys of many ages, and looked at which genes had been active in these cells when the owners were alive.
An additional quote from Bob Rodriguez’s recent speech worth posting:
“I met Charlie Munger in my USC graduate school investment class and had the opportunity to ask him this important question, “If I could do one thing to make myself a better investment professional, what would it be? He answered, “Read history! Read history! Read history!” This was among the best pieces of advice I ever received.” -Bob Rodriguez, "CAUTION: DANGER AHEAD"
Feb. 22 (Bloomberg) -- Jim Chanos, founder of Kynikos Associates Ltd., Jamie Zimmerman, chief executive officer of Litespeed Management LLC, Michael Novogratz, principal at Fortress Investment Group LLC, and Steve Kuhn, head of fixed income trading at Pine River Capital Management LP, discuss the history of the hedge fund industry and government regulation. Betty Liu reports on Bloomberg Television's "In the Loop." The full conversation, "Titans at the Table," airs tomorrow on Bloomberg Television at 9 p.m. New York time.
- The most crowded new ideas during the quarter were DLPH, LMCA, and GLD. Other new positions shared among hedge funds but with less overlap were ORCL, VRUS, QCOM, YHOO, URI, TXN, WFC, and GOOG.
- Fund managers are adding exposure back into Financials and Healthcare after huge declines the last several quarters. Government reimbursement risks associated with the Healthcare sector and low rates and mortgage related put-back problems in Financials may have led managers to trim and exit positions within the space over 2Q11 and 3Q11 and re-enter under attractive valuations in 4Q11.
- We found a majority of hedge funds largest positions were shared amongst the hedge funds in our universe. AAPL was by far the most crowded position in the top 8 holdings for hedge funds: Greenlight, Lone Pine, Blue Ridge, Coatue, and Tiger all have AAPL as the largest position in their holdings. Other large crowded positions include GOOG, QCOM, LMCA, and AMT.
- On average the funds listed below bought companies with a 2011 forward price to earnings ratio of 18.6x. Appaloosa and Baupost bought into the higher valuation stocks at 47.4x and 28.6x respectively while Glenview and Greenlight bought into much lower valuations at 13.4x and 14.1x respectively.
Tuesday, February 21, 2012
This new model of memory isn’t just a theory—neuroscientists actually have a molecular explanation of how and why memories change. In fact, their definition of memory has broadened to encompass not only the cliché cinematic scenes from childhood but also the persisting mental loops of illnesses like PTSD and addiction—and even pain disorders like neuropathy. Unlike most brain research, the field of memory has actually developed simpler explanations. Whenever the brain wants to retain something, it relies on just a handful of chemicals. Even more startling, an equally small family of compounds could turn out to be a universal eraser of history, a pill that we could take whenever we wanted to forget anything.
Since the end of 2008, the island’s banks have forgiven loans equivalent to 13 percent of gross domestic product, easing the debt burdens of more than a quarter of the population, according to a report published this month by the Icelandic Financial Services Association.
“You could safely say that Iceland holds the world record in household debt relief,” said Lars Christensen, chief emerging markets economist at Danske Bank A/S in Copenhagen. “Iceland followed the textbook example of what is required in a crisis. Any economist would agree with that.”
The island’s steps to resurrect itself since 2008, when its banks defaulted on $85 billion, are proving effective. Iceland’s economy will this year outgrow the euro area and the developed world on average, the Organization for Economic Cooperation and Development estimates. It costs about the same to insure against an Icelandic default as it does to guard against a credit event in Belgium. Most polls now show Icelanders don’t want to join the European Union, where the debt crisis is in its third year.
The island’s households were helped by an agreement between the government and the banks, which are still partly controlled by the state, to forgive debt exceeding 110 percent of home values. On top of that, a Supreme Court ruling in June 2010 found loans indexed to foreign currencies were illegal, meaning households no longer need to cover krona losses.
Larus Welding, the former CEO of Glitnir Bank hf, once Iceland’s second biggest, was indicted in December for granting illegal loans and is now waiting to stand trial. The former CEO of Landsbanki Islands hf, Sigurjon Arnason, has endured stints of solitary confinement as his criminal investigation continues.
Thanks to Andrew for passing this along.
Thank you for having me today; it is a pleasure and an honor to be here. My goal is to shed light on some key economic trends and their potential effects on the financial markets and then briefly discuss how we are positioned in the products I formerly managed.
Initially, the suggested title for my talk was, “The ‘First” Pessimist’s View of Today’s Markets,” while last year’s Fortune magazine interview with me was titled, “The Man Who Sees Disasters.” These sound pretty negative. Rather than being a pessimist or disaster monger, I prefer to view myself as a realist. My conclusions are based on extensive critical thinking and evaluation. Accordingly, I decided to title my talk, “CAUTION: DANGER AHEAD,” because of the risks I perceive.
Before discussing these risks, I would like to share three lessons I learned early in my 41 year investment career that have served me well. I feel they have helped prepare me for these uncertain times.
Of course, our present concerns are based on a smaller and more negative subset of conditions that we've seen even less frequently - presently featuring not just "overvalued" and "overbought" conditions, but adding overbullish sentiment, modest but clear upward pressure on short-term and some longer-term yields, and an "exhaustion syndrome" (a combination of "whipsaw" conditions coupled with falling earnings yields - see Goat Rodeo ), which have historically had a particularly hostile aftermath, including a small set of historical plunges that include 1987, 2000 and 2008.
Notably, these conditions are independent of economic concerns. They are based on factors that have reliably identified elevated market risk without the necessity of concurrent economic strains. That said, while we certainly recognize the recent improvement in economic data, that improvement remains "low level" in that we continue to view the economy as vulnerable to even mild additional shocks. During mid-2011, consumption and production activity fell back, as consumers and businesses put off spending plans based on the flaring credit strains in Europe. Following the coordinated easing and 3-year liquidity operations of the ECB and other central banks, a collective sigh of relief became clearly observable in a burst of pent-up economic activity in recent months. It is still very unclear that this is a sustained or sustainable improvement, and even the latest data from the OECD leading indicators last week did not do much to ease our broad economic concerns.
From an economic perspective, then, we remain generally concerned, as the leading evidence has not improved enough to take the risk of a fresh economic downturn "off the table" - but we are also realistic about the improvement in the general trend of recent months. It may or may not be thin ice, but people are skating on it for now, and there's no denying that.
From an investment perspective, however, it's important to underscore that economic concerns are not the driver of our present defensiveness. We've seen a handoff from negative leading economic indicators to much more general "overvalued, overbought, overbullish" conditions. Either one alone is a headwind, a high-risk condition does not require both, and the vast majority of history has featured neither.
The bottom line is that near-term market direction is largely a throw of the dice, though with dice that are modestly biased to the downside. Indeed, the present overvalued, overbought, overbullish syndrome tends to be associated with a tendency for the market to repeatedly establish slight new highs, with shallow pullbacks giving way to further marginal new highs over a period of weeks. This instance has been no different. As we extend the outlook horizon beyond several weeks, however, the risks we observe become far more pointed. The most severe risk we measure is not the projected return over any particular window such as 4 weeks or 6 months, but is instead the likelihood of a particularly deep drawdown at some point within the coming 18-month period.