Monday, April 20, 2015


Phil DeMuth's Daily Journal Annual Meeting Notes, Part 3 (LINK)

Stan Druckenmiller's interview with Bloomberg (video) [H/T Market Folly] (LINK)

Measuring the Moat – Part 1 (LINK) [The tour de force on this topic is Mauboussin and Callahan's Measuring the Moat.]

60 Minutes was interesting all around this week, with a very powerful first segment that will be difficult for some to watch (LINK)
Scott Pelley reports on the 2013 sarin gas attack in Syria; then, Charlie Rose reports on the popular lecture series TED Talks; and, Lesley Stahl is introduced to an imaginary world by a man with an extraordinary ability.
Elon Musk had a deal to sell Tesla to Google in 2013 (video and article) [H/T The Tech Block] (LINK)
Related book: Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future
Foreign Companies at Risk From Proposed Chinese Law [H/T Matt] (LINK)

Tim Harford: Cigarettes, damn cigarettes and statistics (LINK)
Related book: How to Lie with Statistics
Happy 150th Birthday, Crossness Pumping Station! (LINK)

Breaking the communication barrier between dolphins and humans [H/T The Browser] (LINK)

Hussman Weekly Market Comment: Profit Margins - Is the Ladder Starting to Snap? (LINK)
Though it’s not widely recognized, measures such as the ratio of market capitalization/nominal GDP and the S&P 500 price/revenue ratio are actually better correlated with actual subsequent total market returns than price/operating earnings ratios, the Fed model, and even the raw Shiller P/E (though the Shiller P/E does quite well once one adjusts for the embedded profit margin). To fully understand the present valuation extreme, recognize that the market cap/GDP ratio is currently about 1.29 versus a pre-bubble norm of just 0.55, with “secular” lows such as 1982 taking the ratio to about 0.33. To fully understand the present valuation extreme, recognize that the S&P 500 price/revenue ratio is currently about 1.80, versus a pre-bubble norm of just 0.8, with “secular” lows taking the ratio to about 0.45. 

To put these figures in perspective, if we assume that nominal GDP and corporate revenues will grow perpetually at a 6% nominal rate (which is much faster than we actually observe here), and the market does not experience another secular market low until 2040 – a quarter century from now, the S&P 500 Index would still be approximately unchanged from current levels at that secular low 25 years from today. The arithmetic here is relatively simple. For market cap/GDP the annual percentage change of the S&P 500 Index over that 25 year period would be (1.06)*(0.33/1.29)^(1/25)-1 = 0.37%. For the price/revenue ratio, the calculation would be (1.06)*(0.45/1.8)^(1/25)-1 = 0.28%. In both cases, dividend income would result in a somewhat higher total return over that quarter-century horizon. 

One obtains less extreme conclusions, though still uncomfortable, if one assumes that these multiples simply touch their pre-bubble norms a decade from now. In that case, the annual percentage change in the S&P 500 Index over the coming decade would be -2.67% and -2.26%, respectively. If all of this seems preposterous, keep in mind that these revolting long-term prospective returns in stocks are simply a less recognized variant of what we observe more clearly in the bond market, where long-term interest rates are now negative in about one third of the developed world. Investors are literally paying their governments for the privilege of lending to them on a 5-10 year horizon. Investors are collectively out of their minds if they believe that current equity prices don’t quietly reflect the same absurd state of affairs.