Chris Lau - Seeking Alpha

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Sunday, March 29, 2009

Bonds or Stocks?

In John Mauldin's Thoughts From the Frontline newsletter, Mauldin summarizes an article to be published in late-April by Rob Arnott, Chairman of Research Affiliates. Arnott compares the performance of bonds and of stocks from 1802 to present.

Here are the highlights in comparing bond investments over stock investments:

  • Starting at any time from 1980 up to 2008, an investor in 20-year treasuries, rolling them over every year, beats the S&P 500 through January 2009! Even worse, going back 40 years to 1969, the 20-year bond investors still win, although by a marginal amount. And that is with a very bad bond market in the '70s
  • Starting in 1802, we find that stocks have beat bonds by about 2.5%, which, compounding over two centuries, is a huge differential. But there were some periods just like the recent past where stocks did in fact not beat bonds
  • In the late '90s, stock bulls would point out that there was no 30-year period where stocks did not beat bonds in the 20th century
  • After 2000,  yields on stocks dropped to 1%, compared to 6% in bonds

This point was interesting:

  • When someone tells you that stocks always beat bonds, or that stocks go up in the long run, they have not done their homework. At best, they are parroting bad research that makes their case, or they are simply trying to sell you something

On timing the market:

  • 20-year returns you will get on your stock portfolios are VERY highly correlated with the valuations of the stock market at the time you invest. That is one reason why I contend that you can roughly time the stock market
  • Valuations matter, as I wrote for many chapters in Bull's Eye Investing, where I suggested in 2003 that we were in a long-term secular bear market and that stocks would be a difficult place to be in the coming decade, based on valuations. I looked foolish in 2006 and most of 2007

On Financials (rule change):

  • Mark-to-market rules for assets in distressed markets were suspended
  • They [US Financial Accounting Standards Board (FASB)] widened the definition of "temporary" impairments of troubled assets, which will "allow banks to write up the value of some troubled assets if these have been hit by falling markets without (yet) suffering any significant credit losses." (www.gavekal.com)

Consequence? Banks can report a healthier balance sheet, at least until the commercial mortgage and credit card problems start having to be written off.

In regards to last week's February housing sales figures:

  • the 4.7% rise was "plus or minus 18.3%". That means sales could have risen as much as 23% or dropped 13%. We won't know for awhile until we get real numbers and not estimates. Hanging your outlook for the economy or the housing market on one-month estimates is an exercise in futility, and could come back to embarrass you
  • Ignore month-to-month estimated data. The key thing to look for is the direction of the revisions. If they are down, as they have been for over a year, then that is a bad sign

Source: Thoughts From the Frontline newsletter

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore 

To subscribe to John Mauldin's E-Letter please click here: 
http://www.frontlinethoughts.com/subscribe.asp

My Comments:

The market rules keep changing. This time, it is the accounting rules. Investors need to be aware of such changes. Comparing one set of figures from one year to a previous one ought to take the mark to market rule change into consideration. 

When improving figures are reported for financials, remember that fundamentally, nothing may have changed, the numbers have simply been reported differently.

Thursday, March 26, 2009

Head-Fake

Top-down macroeconomic analysis.

This is from Castlemoore(an investment house in Toronto):

1) The market has rallied over the past two weeks, but there seems to be missing ingredient essential for the growth of healthy portfolios. For one thing, its occurred on relatively low volumes. This means that the prospects of a healthy banking system aren’t as yet being accepted by the investing community at large.

2) The second point that concerns us is that the market is not rallying on any identifiable event. Rather, it’s being schmoozed higher may a man of great charisma, Mr. Obama, and is based on what should happen given the bank rescue plan being proposed by Mr. Geithner.

Comments:
Click image to enlarge. Notice the massive volume in Feb/March 2009 when the S&P 500 declined? Now, notice the trading volume decline with each eye-popping rally?

Time will tell if this rally has legs based on no fundamentals backing it. One investment thesis I am developing and acting on is that we are in a bull rally within a secular bear market.

Chart Source - Stockhouse.com

Wednesday, March 25, 2009

Nothing is Absolute

Treasury Secretary Geithner's tone and conviction that the "toxic mop up" plan will not fail is deeply disturbing:





"Congressman this plan will work. This plan because of the authority provided not just by Congress but the treasury and the Fed gives us broad ability to do what you need to do to get through a financial crisis like this. It just requires will; It's not about ability. We just need to keep at it. We just need to work with Congress to make sure we do this on a scale that will make it work."

When was the last time you heard someone so convinced that something would work, something that was, or that something will change? A gambler who wants to make another run at it to win his money back? A sales person who promises you something but has yet to prove it to you until you after you have bought it?

This is not a comparison of a treasury secretary to a gambler or sales person, but it is the tone of being so absolute that is frightening.

Market Bottom?

I Asked Don Vialoux on where he thought the market was headed:
Where do you think the market will be if indexes are able to rally ABOVE your technical upside targets? What charting patterns would you use at that point? Fundamentals in the banking system will need to be assessed. I suspect that as more confidence (or lack of) sets in, this will drive the market either back down (to re-test lows) or up to those resistance levels you discussed yesterday in your entry.

His Response:
Hi, Chris. The charts will let us know. Technical indicators such as Bullish Percent indices, Up/Down ratios and momentum indicators (particularly MACDs) need to be watched closely. They currently indicate that the TSX Composite and S&P 500 Index already has recorded about half of the gain in the current intermediate cycle. Adding current gains to possible future gains into early summer(i.e. the remaining 50% gain in the cycle) implies target prices close to levels reached on January 6th. Can equity markets exceed these target? Yes, if technical indicators continue to improve beyond normal parameters. But it’s too early to make that call at this time.


On a Completely Unrelated Matter:
IT World Canada magazine kicked off a writing contest. I am participating. Check it out here:
http://blogs.itworldcanada.com/idol/2009/03/24/are-you-a-cost-centre-or-do-you-save-money-for-companies/

Monday, March 23, 2009

On Solving the Housing Crisis

In this week's newsletter of Front Line Thoughts, Mauldin discusses Gary Shilling and Richard LeFrak's solution to the housing problem.

In a nutshell, they propose that the U.S. give foreigners who will come to the US and buy a home resident status (green cards).

Consequence if this is Not Done:

"We believe that if nothing is done to eliminate surplus housing, prices will fall another 20% between now and the end of 2010 for a total peak-to-trough decline of 37%

It would take a little over $1 trillion to reduce their mortgages to the value of their houses, compared to $449 billion for the almost 14 million currently underwater."

Why the Current Solution to the Crisis is Not Working:

Lowering rates, as is being discussed in various circles, will help homeowners who can make their payments, but it does nothing to really bite into excessive inventory.

America -- the US -- is not so much a country as it is an idea, the idea that anyone, regardless of race or religion or gender, can come here and with hard work and determination make their own way. Some end up owning the local deli, and some end up founding Google. Some 25% of Silicon Valley start-ups, I am told, are by immigrants, creating jobs at the bleeding edge of technology. They see the US as a land of opportunity. That is why so many want to come and that is why we can attract a new generation of affluent, self-reliant immigrants who can help us solve a problem that we created.

I can see no downside to changing our immigration policy for a few years. We solve the housing crisis, stabilize home values, brings hundreds of billions in stimulus to the US, and with no taxpayer outlay. For a short time, we substitute one class of immigrant for another, to solve a serious crisis. It is not a matter of immigrants or no immigrants, just which immigrants

So which do you want? 10% unemployment and a decade of lower home values and increasing foreclosures, with a slow, Muddle Through, jobless recovery, or a stable housing market and home construction back to trend?

If you agree with me, I suggest you contact your Congressman. You can go to http://www.visi.com/juan/congress/ (selected at random from many such sites) and type in your address and get the name of your congressperson and senators. Just tell them you like this idea, and cut and paste the link where you read this into the letter. And tell them to get into gear! I would like to point out that this proposal is not Republican or Democrat, it is just common sense. I hope we can get broad bipartisan support.



The link to the Wall Street Journal editorial is: http://online.wsj.com/article/SB123725421857750565.html

The links to the white papers are:

http://www.frontlinethoughts.com/pdf/Housing_Whitepaper_1.pdf

http://www.frontlinethoughts.com/pdf/Housing_Whitepaper_2.pdf

Video Links:

Links to the Yahoo segments:

D.C. to America: You Can't Handle the Truth
http://bit.ly/10rUiF

Plan to Solve Crisis: Let Immigrants Buy Houses
http://bit.ly/W0XLq

Fed Strategy: Spread Economic Pain Over Multiple Years
http://bit.ly/wgGjA

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore


Full Article Here: http://www.ritholtz.com/blog/2009/03/solving-the-housing-crisis/

Friday, March 20, 2009

Buy Bonds, Sell Stocks

In Ken Norquay's Section of Tech Talk, Ken suggests that it is not a good time to own stocks. It is a good time to own bonds. This is a reactino to yesterday's $1.2T policy change:

This article describes the awkward corner into which the stock market has backed big US pension funds. They are over-weighted in stocks and their 10-year return is negative. They are hoping to quietly bail out of the stock market and accumulate safer, higher yielding long term treasury bonds. These giants like to move slowly and steadily from one asset class to another. They don’t want to rock the boat.

But today the US government announced that THEY would be buying long term US treasury bonds too. Ouch! Apparently the US Federal reserve board doesn’t mind rocking the boat when they are trying to save their economy. Now what will those pension managers do?

Here’s one possibility: they will accelerate their selling of their giant stock portfolios and accelerate their buying of long term US treasury bonds.

Remember how sharply the US stock market dropped in Sept-Oct-Nov 2008? Remember how sharply US treasury bonds went up in Nov-Dec 2008? 2009 could turn out to be a good year to own bonds and another not-so-good year to own stocks.

Here is the source.

Comments:
"Don't fight the Fed" is a truism that applies today. It may not apply a few months from now if (most likely when) it turns out that the Fed's action to save both the U.S., and effectively the global economy, fails.

Investors need to work on what we know today, and to re-evaluate the validity of our investment plan. In my case, TLT (long TBT) is no longer a short sale, since the demand for long-term US bonds now exists. The perception that inflation will rise will also change the short-term view of the market, too.

This is a must read: Bernanke Inserts Gun In Mouth

Thursday, March 19, 2009

$1 Trillion

The Federal Reserve is buying $300 Billion worth of long term treasuries over the next few months, and $750 Billion worth of Mortgage backed securities.

They are in effect printing even more money. The last time this was done was 40 years ago. The

Summary of Fed Statement:
http://www.calculatedriskblog.com/2009/03/fomc-buy-300-billion-in-long-term.html

Here are some a very good comments on this latest step:
http://globaleconomicanalysis.blogspot.com/2009/03/bernankes-grand-experiment-continues.html

http://zerohedge.blogspot.com/2009/03/fed-to-buy-treasuries-it-prints-to-fund.html

Wednesday, March 18, 2009

A Positive Entry for Once

1) U.S. Housing Starts


New U.S. housing starts and permits rebounded in February 2009


  • Housing starts jumped 22.2 percent to a seasonally adjusted annual rate of 583,000 units from 477,000 units in January
  • New building permits, which give a sense of future home construction, rose 3.0 percent to 547,000 units, from 531,000 units in January. That also marked the first advance in permits since April last year
  • Year-over-Year, housing starts were down 47.3 percent in February and permits declined 44.2 percent
  • Single-family housing completions in February were at a rate of 505,000; this is 8.2 percent (±11.8%) below the January figure of 550,000.
Source:
http://www.reuters.com/article/newsOne/idUSN1742106520090317

On Calculated Risk blog, the author notes that single-family completions are still significantly higher than single-family starts. Since residential construction employment tends to follow completions, and completions will probably decline further, unemployment in this sector will likely persist.

Comments:
To smoothe out one-off events like this, a prudent investor would want to see 3 consecutive months of continuous improvements in these figures. Otherwise, stock market rallies, which are inherently forward-looking for the health of the economy, will give out head-fake signals.

2) Corporate Financing

The banking system may be crippled, thereby unable to fund large funding requirements for M&A (mergers and acquisitions). But look! Look at the investor demand for Pfizer's bond offering.

$13.5B had 1,700 orders placed.
http://newsfeedresearcher.com/data/articles_b12/pfizer-company-bonds.html#hdng0

Investors are clearly hungry for any investment instrument that will return more than 0%.

Tuesday, March 17, 2009

About Last Week's 9%+ Rally

Below is a highlight from John Mauldin's weekly newsletter. My highlights are the bolded text.

So, I know a lot of you have stayed in the market the whole time it has been falling and are now wondering what to do. If you have a ten-year time horizon you probably can buy here and do OK. But I wouldn't. I think this market is going to have more problems as we confront the real possibility that we will get some really poor earnings for the first and second quarters. The economy is simply weak, and that weakness is hitting more and more companies. From exporting companies to the big international firms, a global slowdown is hitting almost everyone. Even hospitals are being challenged. We could see a real bear market rally lure investors back in, just to crush their hopes this summer.

Markets go from high valuations to low valuations and back again over long periods of time. I believe that we have a long time to go in the current secular bear cycle. As I have written for years, this one began in 2000 and could last until the middle of the next decade. While we will see a "bottom" in stock prices at some point, maybe even this year, we have a long way to go to get to a really low P/E.
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

To subscribe to John Mauldin's E-Letter please click here:
http://www.frontlinethoughts.com/subscribe.asp
Comments & Analysis:

The opportunity cost of the safety in holding cash is, well quite frankly, a rising market to the tune of 9%. Mauldin seems to suggest that a secular bear market stock market rally is underway. It may perist into the summer.

In portfolio management, a manager would be pressured to keep assets invested. Maintaining a high cash position will result in underperformance when the stock market improves. Conversely, a portfolio's value will have less downside if the market continues to fall. I remain conservatively positioned for one simple reason: the banking system is not functional (see LIBOR spreads). The market is rallying as if this system will be fixed very soon.

I do not see fixes for the global banking sector to happen overnight. It will take time. As a result, good entrepreneurial companies in need of raising money to continue its business will hurt. These are the companies to buy. Poor companies who bought other companies at high prices incurred high debt. They now need to raise money to continue operations, but are unable to do so. These are the companies to sell or bet against.

Monday, March 16, 2009

Oh Canada ... Jobs

March 13 (Reuters) - The Canadian economy shed more jobs
than expected in February, losing a net 82,600 posts in the
month as the unemployment rate jumped to 7.7 percent, the
highest since 2003, Statistics Canada said on Friday.
                    Feb 2009         Jan 2009
  Jobs gain/loss     -82,600        -129,000
   full-time         -110,900        -113,900
   part-time          +28,300         -15,100
   Unemployment rate  7.7 pct         7.2 pct
   Participation      67.4 pct        67.4 pct
   Labor force        18.315 mln      18.292 mln

Source here.

Comments:
In relative terms, the unemployment situation for us is no better
than that of the U.S.

Continue to expect weakness in:
  • Automotive and manufacturing (Ontario)
  • Housing and construction/contracting
  • Resources sector (energy sector in Alberta, forestry in B.C.)

Friday, March 13, 2009

"Dear Ann Landers"

I received an email from a fellow participant on KaChing.com. The trader was seeking advice on how to become a better trader. This entry will have an "Ann Landers" feel to it. For visitors who are not on this SEC-registered soon-to-combine-fantasy-with-reality community, here is my post about all that.

Note that what was missing from my entry is how KaChing has changed my mindset and attitude. It has, in effect, and so far, made me a more focused investor.

I'm a newbie on Kaching and am eager to learn a lot more about trading. I've reset my portfolio a few times in the past two months (my first two) because I got cocky after a first month of 40% and lost basically all my gains and then some by betting the farm and getting it wrong. In hindsight, I think it's likely my 40% gain was just as lucky as my 50% fall. But I want to move beyond luck and start trading skillfully. I'm a bright guy but don't really know the best place to learn. I'm intrigued by Elliott Wave theory but some of the arguments against it make sense to me as well. I don't know much about technical analysis but am also interested to learn more. At root, I'm a fundamentals guy, but I've been burned both ways using fundamentals: some companies that seem to be financial nightmares (low cash, high debt, declining sales, high p/s, high peg, low roi, low roe, etc.) just keep going up while others that seem so sound and promising just plummet. I've fallen victim to the value trap as well. Other times, I've been right but not patient enough...I short at 20, it rises to 24, I take the loss and then it drops to 15 the next week. :)

The best success I seem to be having at present is riding momentum and getting out quickly. Yesterday and this morning I saw the severe uptick in C and BAC and figured the fundamentals haven't changed and they're basically insolvent so they HAVE to come down. I waited for the ticker to start dropping, shorted them heavily and made a killing before getting out. Now I see they're up nicely since then...and I don't understand why.

Anyhow, I write to you in admiration of your slow, steady gains, similar to those I see in Daniel Carroll's portfolio. I'd like to learn how to gain slowly and steadily and would love to ask you for a recommendation for how I might learn more. I'm curious how you pick stocks (technical, fundamental, value?) Any books or sites you'd recommend? Any advise would be much appreciated.

Thanks, [User's Name - protected for anonymity]
You are probably frustrated, both your inconsistency in trading and in trying to make sense in the market. You will be surprised to learn that YOU ARE NOT ALONE.

In fact, I created two groups on KaChing. One is called “Beginner's Guide to kaChing Trading“ (75 members). It serves to give back to the group, and to find users like you. That’s right. I’m looking out for newbies because you may have some fresh insight to bring to people like me. I often get direct questions or posts from the beginner’s group from users who express the same frustration.

The path to trading success was recently dominated by lucky traders (look up the tech bubble, 1999-2000). Trading based on fundamentals is almost irrelevant right now, but I believe that this phenomenon is temporary. It turns out that investors who want to “study” fundamentals will need to understand government policy. The Fed and the central banks around the world are applying Keynesian economic theory on a problem that requires more thought and foresight. I won’t get into the details of what solution will work, but I still agree that some kind of monetary policy is needed to save key institutions like AIG. Just last week, Citigroup and Bank of America were trading like insolvent banks. Even though they are technically insolvent, so are the global banks. This week, the CEO’s for both companies said they generated profits in January and February!

Why do I yammer on about economics (the economics text books were top sellers on Amazon recently, by the way!)? You are trying to rationalize the market when traditional accounting and fundamental laws do not apply….insolvent banks aren’t technically insolvent if there is someone ready to save them at all costs. It is my belief that fundamental analysis will not apply to as large a degree as you would want. Until the banking system is fixed (it will take longer than people realize) lending won’t resume to normal levels. Earnings will shrink for companies because of this, and such things as P/E will not be a reliable measure for security analysis.

Still, there are other figures you will need to look at for a company before you buy them. For example, I would suggest you look at debt/equity, book value excluding goodwill, and cash flow.

I won’t lie. This will take a lot of work.

This was why I created “Intelligent Investing” on kaChing. It’s now 180 members strong.
This is a second group I created to share ideas on security analysis.

In terms of your trading, it sounds to me that you are chasing trends, applying various trading “methods” to them to rationalize your positions, only to then get “faked” by the market. You are also day-trading. There are quite a number of day traders on this site, but it was one of the founders/owners of kaChing who posted numerous times that statistically, day traders end up losing in the long run, and that investors with a longer term horizon will last.

Pure technical traders ignore fundamentals. They look at charts alone and ignore fundamentals. The fact you look at them is contradictory to your desire to trade on fundamentals.

I employ technical analysis to a small degree in stock market analysis. I use the basics of this using such things as MACD, moving averages, support and resistance. Again, some swear that technical analysis means nothing, but if the market is efficient (“Efficient Market Theory”) then at the very least, the charts will tell me such things as where things might trade to or whether trends are forming. If everyone else is using charting to trade, then one needs to add this tool to stock market analysis. Note that charting analysis is the weakest form of support for this theory.

You should check out the book "A Random Walk down Wall Street" by Burton G. Malkiel. He discusses Efficient Market Theory. On p.174 the author states that:

Even the legendary Benjamin Graham, heralded as the father of fundamental security analysis, reluctantly came to the conclusion that fundamental security analysis could no longer be counted on to produce superior investment returns.
...the situation has changed...
...investors would be better off in an index fund rather than investing in an actively managed equity mutual fund...
It is my intent to last in both the virtual and real trading world. I have grown a following and I hope that some of those followers will eventually invest in me. That is, the followers will tie a portion of their assets to mirror my investment positions on the site. My advice to you is to keep doing what you are doing: invest in yourself (learn), and then invest in the market. Keep making mistakes. Learn. Reset (after all it is just play money). You will know you reached the next level when you become less emotionally attached to the market and see things for what they are from an objective level.

(Yada yada yada on the usual disclaimers: trade at your own peril, take responsibility and ownership on your own actions...)

Thursday, March 12, 2009

Sustained Rally? Castlemoore's Take

"We’re not convinced. Yet. And certainly not for the “Class Portfolios”, one of the more conservative methodologies we run.

On Tuesday, the TSX rallied by more than 4% and many investors took that as sign that the worst was behind us. Notwithstanding, the fact is that just the day before the market touched lows not seen in almost a decade.

This can be a tough place to invest in. We prefer to seek out securities in bull markets

Truthfully, for the sake of all investors, we certainly hope that the worst is behind us, although that doesn’t preclude further pain from this point onward, nor impact our bullish views on many other asset classes such as bonds, selected convertibles, corporates and preferreds, as well as currencies.

One of the most overlooked aspects of market capitulations—and we certainly too hope that we have had one, but think likely not —is the impact they have on corporate profitability as it pertains to pension plan obligations. The magnitude of these liabilities are a function of the expected growth in the assets of these plans; to the extent that this expected growth is underachieved, pensions become more underfunded. Deficits need to be paid out of future income, so that surprise liabilities lead to surprise earnings shortfalls. No stimulus package need be applied to our collective imagination to realize what the effect of a zero-return for a decade of equity investing might do to future corporate profits, and this at the time when the boomer generation is about to enter retirement. Look to General Motors for an example of how pension obligations can wreak havoc on corporate profitability. (For more on our views on baby boomers and retirement written several years ago please contact us by phone or e-mail).

One of the next shoes to drop (the beast must be an octopus) and the humungous elephant in the room is defined benefit pension plans….this may dwarf any headlines that the car makers have been garnering.

What it suggests is that the future may belong to those companies that are young enough not to have built up massive pension obligations, or those that converted to defined contribution plans - in other words, not constituent members of the more recognizable stock indexes."

Read this commentary on your Blackberry or any other WAP-enabled device. Go to http://www.castlemoore.com/mobile. Feedback welcomed.

If you like to receive bi-monthly newsletter, know more about our model portfolios or access an audio file of our investment philosophy, “Modern Financial Fiascos”, click on the link http://www.formdesk.com/castlemoore/register .

Source: http://www.timingthemarket.ca/techtalk/2009/03/12/tech-talk-for-thursday-march-12th-2009/


Analysis and Comments:

It is good to have a 'pick me up' day when the market rallies with such impressive percentage returns. The dollar gains, however is far smaller than the amount already lost. The thing to watch in the next few days and weeks will be the follow-through. My guess is that follow-through will be limited due to the already mentioned issues. There are many more to be mindful of but let's keep the observations simple and focus monitoring follow-through.

Wednesday, March 11, 2009

Why Platinum?

Don Vialoux, a technical analyst I follow, appeared on bnn.ca. Below is a highlight of his picks. The video links are below.

"The Claymore Oil Sands ETF is benefiting from strength in crude oil prices, up over 30% from their late December lows. Technically, units appear to be forming a double bottom pattern with support near $9.50. Seasonal influences are positive until the end of May. Target price is $14.

The Platinum ETF is benefiting from growing demand in the Far East where auto sales and production are rising (Platinum is used in catalytic converters). Technically, Platinum has established an intermediate uptrend. Strength relative to gold and other precious metals is positive. Seasonal strength continues until May. Target price is $33 U.S.

The Claymore BRIC ETF tracks the equity markets of Brazil, Russia, India and China. The Chinese equity market has established an intermediate uptrend in response to its economic stimulation program. The Chinese are buyers of commodities such as copper and crude oil. Brazil and Russia are selling these commodities to China. Seasonal influences on BRIC equity markets are positive until May. Target price is $20.00."

http://watch.bnn.ca/market-call/march-2009/market-call-march-10-2009/#clip148272

http://watch.bnn.ca/market-call/march-2009/market-call-march-10-2009/#clip148274

Caution!
This entry is not a solicitation or advice to buy the above securities. It is best to listen to the rationale behind the recommendations.

Thursday, March 05, 2009

All Cash

This was the comment made in regards to Castlemoore's Focus Portfolio on Tech Talk:

Depression, not Recession. That’s the Impression.

There. We’ve used the “D” word. And we’re not the first.

While everyone agrees that depressions are extreme economic situations to be avoid at extreme costs—the U.S. stimulus package is a case in point—it’s hard to find a consensus as to what the term actually means. Many consider it to mean a contraction of 10% or more in U.S. GDP, which has happened twice, and a severe case to be a 25% fall, which happened once.

We know that recessions are part of naturally occurring economic cycles, irrespective of measure taken by governments and central banks to manage them. Therefore, one way to define a depression is as an economic retraction that is not simply “naturally occurring”. In other words, it involves some type of structural change which might not be evident at the time and may, in fact take years to recognize.

And what causes us to recognize it is usually the remedies imposed to insure that it doesn’t happen again. In the case of the current economic malaise, we expect that new regulations pertaining to lending practices of banks to a large part of that remedial package.

Whether or not we are in or are entering a depression, we at CastleMoore were depressed enough to sell out everything and start back at square one. Of course, we say this tongue-in-cheek, but we certainly are aware of the dangers that lie in wait for unsuspecting investors who have and continue to fall into the value trap engendered by continued declines in the financial markets.

Our plan was to ease out of the cash position we had amassed, deploying more of it as we became increasingly confident that the intermediate rally was firmly entrenched.

We continue to hold fast to the notion that, once the dark smoke of economic uncertainty clears there will be a once-in-a-lifetime buying opportunity.

For now, it’s back to square one.

If you like to receive bi-monthly newsletter, know more about our model portfolios or access an audio file of our investment philosophy, “Modern Financial Fiascos”, click on the link http://www.formdesk.com/castlemoore/register . We are also accepting interest for an upcoming webinar later in March which can also be indicated on the same form.

CastleMoore Inc. uses a proprietary Risk/Reward Matrix that places clients within one of 12 discretionary portfolios based on risk tolerance, investment objectives, income, net worth and past investing experience. For more information on our discipline and methodology please contact us.


Comments and Analysis: 40% of the mutual funds held by investors are in money market cash funds. People (are they speculators or investors?) are stuck on old ways, thinking in old terms by buying on value or buying on the dips. The wrong action, it seems, is pulling the trigger and deploying the cash on the dips. Yet, how can uncertainty in the foreseeable future most accuately valued? That is the question.

Wednesday, March 04, 2009

The Question of the Year

When will the stock market bottom?

Translation: The stock market is a predictor for the health of the economy and has historically traded about 6 months in advance of a reversal.

Analysis: This question is unfortunately nothing more than a mirage of a question. In actual fact, the volatility index was 50.93. This is nowhere near as high as November 2008's peak @ 89.53. It will be difficult to forecast another down day (followed by rallies) as wide as on Monday. The High/Low ratio (# stocks reaching high, low respectively) also did not register the same peaks to that reached in November.

Conclusion: A bottom is only known in hindsight, but why not try to answer this popular question? The two indicators suggest to me that the market may down more or rally. However, neither direction will be an established one.

More from Tech Talk.


Tuesday, March 03, 2009

The KaChing Evolution

One of my all-time favorite movies was The Matrix. The movie is about A computer hacker, Neo, who learns from rebels about the true nature of his reality and his role in the war against the controllers of it. To reach this, Neo asked repeatedly the question: "What is the Matrix?"

So what on earth this have to do with KaChing?

For Neo to be found by Morpheus is akin to investors being found by KaChing.
KaChing launched last year as a fantasy stock exchange Facebook application. It sought to find the top investors from around the world. It has done this by enabling ordinary and professional people like you and I to manage $10,000,000.

It has so far attracted over 360,000 users. KaChing is on track to move forward in its business plan to turn a virtual world into...a real one. See here. The phrase "Welcome to the real world" comes to mind.

In short, KaChing plans to link real accounts to virtual trading accounts. This means that real money will be invested (by linking) to the activity of a Portfolio Managers' virtual portfolio. Top-performing accounts will likely attract the most assets, and therefore skilled as opposed to lucky traders will make real money. I would argue that both skill and luck are required to succeed in either a fantasy or real world.

This is What KaChing Is (From its FAQ):

You are given $10 million in virtual money to invest when you join the application. You may invest it long or short in any US listed stock or ETF. In order to make a trade, just type the company name of ticker symbol for the stock you want to buy or sell in the box next to the "Trade" button at the top of every page and click "Trade." In order to get ideas as to what to buy or sell we suggest:

  • Visit the "Find Managers" page to find interesting managers from whom you can get investment ideas;
  • Click on the names of the top ranked people on the site and see what they own (you can also ask why on their Wall);
  • Visit the "Research" page to read in-depth stock analyses written by kaChing managers;
  • Check out the "Insight" page for stocks that our best investors own that the community at large doesn't;
  • Read the Home page Wall for ideas;
  • Ask your friends
I am sure that there are many other virtual trading sites. I was on one called marketocracy.com but never liked it. KaChing is different. It's not just a site about making trades, but a site built around social networking.

Humility comes to mind when I am competing with stock traders who have returned well over 440%.

What's the big deal with Funny Money?

Morpheus: “There’s a difference between knowing the path and walking the path.” (Isaiah 2:3)
Anyone who wants to make money from investing needs to do more than read about security analysis or know about what is going on all around us. We need to walk the path. KaChing's platform allows anyone to do this.

Know Your Reality by Knowing Who Runs The Matrix ala KaChing

KaChing has impressive crew maintaining and building the application. It is run by Dan Carroll, founder. It has a number of engineers who worked on the analytics sides at Google.com. It is backed by a venture capital, fund, the most engaging capitalist being an active user and a Professor of entrepreneurship at Stanford University.

Since reality is more than just number crunching and analytics, here is a search engine one might want to use to find others who share the same investment characteristics (respectable return, low turnover, low risk trading activity).

Give Me Stock Tips Now!
  1. Open-minded investors might want to check out Insight for stock tips. "Give me a stock tip." That is the most popular question I receive, next to "When will the market bottom." http://www.kaching.com/kaching#insight
  2. Search for hot investors here: http://www.kaching.com/kaching#find_managers/period=half_year/sort=gain/gain=-0.3,/kaching_risk=,100/num_positions=5,
  3. Look for quality, not quantity. Look past performance and read the details with the research section here: http://www.kaching.com/kaching#research (better yet, search for good performance and then read the research that backs the user's activities).
Note for #1: Insight answers the question "What are the best performers doing that others aren't?" Treat the stocks below as though they are the top recommendations from our best managers.

Stock tips from the Insight engine, as of Monday Mar 2 2009:
3 Month Return comparison here:

KLA-Tencor Corporation @ 19.54 - Short - ~+5% Return
Applied Materials, Inc. @8.85 - Short - ~0% Return
Boston Scientific @ 7.52 - Long - ~5% Return
POWERSHARES DB CRUDE @232.54 - ~100% Return
Silver Wheaton @ 5.31 - Long - ~100% Return

In the book, Outliers, Malcolm Gladwell observed that:

"Success is a function of persistence and doggedness and the willingness to work hard for twenty-two minutes to make sense of something that most people would give up on after thirty seconds."
Morpheus said, "Welcome...to the real world." KaChing is the site that offers the environment to allow everyday people to put the work hard for those twenty-two minutes in learning to become a better investor in the real world.

Everyone else will be the ordinary people - the speculators - who have already given up long before twenty-two minutes. In the world today of attention deficit disorder, thirty seconds seems like a very long time. For the speculator, twenty-two minutes must feel like eternity.

Here is a link to KaChing's website.

Monday, March 02, 2009

Buffett says Economy in Shambles

"The economy will be in shambles throughout 2009 -- and for that matter, probably well beyond." - W. Buffett
This entry is lengthy, because Buffett, and his teacher, Benjamin Graham ("The Intelligent Investor" and "Security Analysis") forms the core fundamentals in my overall investment strategy. Although the market is currently working on a new set of unknown and changing rules, not all of the core fundamentals are applicable at least for the short term. Still, Buffett has returned 362,319% since 1965. In 2008 his company lost 9.6%. The S&P 500 lost 37%. On a relative basis, I would say that Buffett did very well (almost four times better).

Summary of Warren Buffet's Berkshire Hathaway results for 2008:
  • Revenue fell 12 percent to $24.59 billion.
  • Lost $4.61 billion in junk bonds, derivative contracts
  • Profits was $3,224 per share for 2008 against $8,548 in 2007
  • Investments fell from $90,343 per share of Berkshire to $77,793
CNN noted that Berkshire's profits stemmed mainly from interest and dividends on its investments and the earnings of its 70 operating subsidiaries. Berkshire has extensive holdings in two industries, insurance and utilities, whose earnings are not closely correlated with those of the general economy."During 2008 I did some dumb things in investments."

Buffett's Investment Strategy
  • The paradox of Buffett's investment year will be evident: To put Berkshire's pile of cash to work at prices he considered attractive -- "I like those preferreds," he said recently -- he had to endure a terrible stock market that savaged many of the stocks the company already held. He has always declared, though, that he is perfectly content to see Berkshire's stocks fall in price, because that allows him to buy more of them cheaply.
Buffett's Investment Goals:

"In good years and bad, Charlie and I simply focus on four goals:

(1) maintaining Berkshire’s Gibraltar-like financial position, which features huge amounts of excess liquidity, near-term obligations that are modest, and dozens of sources of earnings and cash;

(2) widening the “moats” around our operating businesses that give them durable competitive advantages;

(3) acquiring and developing new and varied streams of earnings;

(4) expanding and nurturing the cadre of outstanding operating managers who, over the years, have delivered Berkshire exceptional results."

The Good News:
For objective #4, Buffett is referring to the solid management in their utilities business. In the insurance business, Berkshire made $2.8 billion just to "float" $58.5 billion of insurance.

Notable comment about insurance:
"GEICO grows because it saves money for motorists. No one likes to buy auto insurance. But virtually everyone likes to drive. So, sensibly, drivers look for the lowest-cost insurance consistent with first-class service."

The Bad News:
"I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action."
Comment:
Having little to no reaction is like being a rock that won't change. The economy today needs investors who are more fluid and more reactive to the facts that matter. The challenge, of course, is knowing which facts matter and which ones do not.

On Housing:
Foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay.

...
Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.
Comment:
I am a part-time real estate in Toronto. The first thing I do is check and counsel buyers about how much they can and should spend on a home.

On Clayton, the home lending unit for Berkshire:
At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one.
Comment:
I find this situation troublesome. The government is stepping into the home lending business, and creating a level of competition that hurts healthy lenders.

Buffett Steps It Up a Notch Too:
When forced to choose, I will not trade even a night’s sleep for the chance of extra profits.
Comment:
I do not agree that buying $14.5 billion worth of fixed income from GE, Goldman Sachs, and Wrigley is worth trading in the well-run J&J and P&G. These companies may fall due to declining consumer spending. However, low energy prices will keep costs down, and "recession-proof" items will ensure sales don't fall that much.

...But the U.S. Treasury bond bubble of late 2008 may be regarded as almost
equally extraordinary.

Comment: I am short TLT, long TBT.

On Cash:
Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long. Holders of these instruments, of course, have felt increasingly comfortable – in fact, almost smug – in following this policy as financial turmoil has mounted.

They regard their judgment confirmed when they hear commentators proclaim “cash is king,” even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time.

Comment:
I fit in this category. My investment thesis lies squarely on protecting principle, and acting when there is clear evidence that the economic implosion experienced in Q4/2008 and in the foreseeable future abates. I am sure that Castlemoore Inc. would agree with this thesis, since I have re-modeled my strategy to be "aggressive" than in the past (Castlemoore currently recommends a 30% equity holding and 70% cash).

Admittedly, one thing I am cognizant of is being paralyzed from taking action when the time is right, because there can never really be a way to predict when that time is right.

On being part of the herd:
"Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns."
Comment:
I interpret this as an investors need to be objective, separate, and independent in thought from others.

A Red Flag:
Berkshire has $37.1 billion in put contracts. This means that if the major indices are below a certain level in 2019 - 2028, Berkshire could in theory lose $37.1B if the indices were 0. This is unlikely, so a more reasonable target loss would be a 25% decline in the indices (from inception of each contract). This translates to a $9B loss payable between 2018 and 2028.

To-date, Berkshire has a paper loss of $5.1B (loss is reported due to changes in accounting rules).

The Bad News (Results)

Buffett bought large amount of Conoco Phillips stock when oil prices were near their peak and in no way anticipated the dramatic drop in prices that subsequently occurred.

Buffett said he still thinks the odds are good that oil will sell in the future at much higher prices than the $40 to $50 per barrel. Even if prices should rise, he said, "the terrible timing" of the Conoco purchase has cost Berkshire several billion dollars (paraphrased from CNN Money; link is below).

Other Losses:
  • American Express (AXP, Fortune 500) shares fell by $5 billion
  • Coca-Cola (KO, Fortune 500) stake sank by $3 billion
  • Wells Fargo have lost well over half their market value, falling from $9 billion to $3.65 billion.
  • Holdings in U.S. Bancorp (USB, Fortune 500) is down by around $800 million
Final Comment:
I had thought that Berkshire would reduce or eliminate its holdings in banks, but in doing so the paper losses become real ones.

Links
Full Letter Here
CNN Money's on Berkshire

Other Links
Hedge Fund (Thanks Dan, from KaChing)