Saturday, March 14, 2009 0 comments

Articles for the week of Friday the 13th

We had a huge rally this week but my concern has always been whether any raly will be sustainable. Here are some articles you may find insightful...


  • Using trough P/E and trough earnings to figure out the bottom is wrong (The Peridot Capitalist): Chad Brand of Peridot Capital Management points out a mistake made by many. When trying to figure out a rough bottom for the market, one should not use a trough P/E along with trough earnings. Using peak earnings multiplied by trough P/E seems like the appropriate method. (Recommended)
  • A methodology for fundamental analysis (Old School Value): Jae Jun, who is a bottom-up value investor, goes through his methodology for analyzing potential investments. I always like reading everyone's methods because I pick up little bits from each person. I don't think there is one right method; everyone should develop a method that suits them. I think the details depend on the individual and the investing strategy utilized. I quickly notice some big differences between a bottom-up investor like Jae Jun and more a macro-oriented one like me. Ignoring special situations/distressed situations/contrarian situations/etc, I rule out anything if it doesn't fit my macro outlook. For instance, I am bearish on oil&gas so I don't even look at those companies even though a bottom-up investor can probably find some really undervalued ones that will do well even if oil drops to $30. Similarly, I'm bearish on China/India/etc so I don't look at any companies from those places. There are others who have more of a trader mentality and don't buy stocks if they don't fit certain technical analysis patterns (I don't follow tech analysis at all.) I am still trying to develop some process that suits me. As I have mentioned before, I have changed over the years.
  • Japan considers propping up the stock market (BusinessWeek): Japan is thinking of buying stocks in order to prop up their stock market and, indirectly, improve their bank balance sheets, among other things. It's one thing to bail out a failing institution but it's another to try bailing out the whole market by trying to distort the price recovery mechanism of a market. Really dumb, totally anti-free-market, and will accomplish little (I will note that it will probably end up being profitable given current valuations but the question is whether the government should be acting like a hedge fund.)
  • Will China Rebound? (The Atlantic): An insider's look at the situation China is facing presently. It's a good article that looks at China from multiple angles. China has huge potential and stars have aligned in its favour. Yet, I have remained bearish because of potential political problems.
  • The blow-up of CLOs (collateralized loan obligations) (Bloomberg): It's amazing how brutal this bear market has been. During the initial stages of the market correction, I recall reading some articles that suggested that CLOs should do well since they are loans that are slightly higher up on the capital structure. So far, there has been over a trillion in losses on CLOs, including a case the article mentions of Blackstone writing off billions of loans it bought from Deutche Bank an year ago. Think about this: a group of experts who have been in business for many years losing billions with a purchase they made only an year ago.
  • Bull vs Superbear (Gary Shilling) - Part I (consumer), Part II (general market), Part III (China and emerging markets) (Forbes): Forbes covers a debate between superbear Gary Shilling and DWS strategist Robert Froehlich. Gary Shilling is one of the most bearish investors you will encounter and you can get an idea of his extreme bearishness with his 2009 forecast (thanks to Silicon Alley Insider.) Gary Shilling had been bearish for so long and been wrong for very long but he nailed everything last year. I hate the Forbes website (bad layout, too many ads, etc) and I'm not sure if I'm missing any of the articles but there seem to be three so far.
  • End of newspapers weakens democracy? (The Globe & Mail): "This week, San Francisco faced the prospect of becoming the first major U.S. city without a major newspaper, and it is far from alone. But if print is a dinosaur, what will take up its traditional roles — informing the public, animating civic culture and holding government accountable? For all the wonders of online media, so far no viable substitute has emerged for the power of the press. And that has people worried about society's future. -- From Is democracy written in disappearing ink? "
  • Are insurers the next ones to fall? (The Economist): The Economist article points out how life insurers are getting whacked really hard. The market is getting nervous about the solvency of many insurers. So far there has been sell-offs of some isolated companies but one should be remain cautious on the whole sector. As I mentiond in my 2009 investment outlook, insurance companies, not just life insurers but others like property & casulty or reinsurance, may face serious problems if asset markets don't recover. Quite a number of them don't make any money on insurance any more--this goes for Berkshire Hathaway as well--and, instead, depend on returns from their investments. Needless to say, assets have declined anywhere from 10% to 50%. On top of this, as I mentioned in my prediction post, return on assets, particularly bonds, will likely remain low. (I own Montpelier Re (MRH), which is my main investment, and have been contemplating whether to sell if it rallies above cost. The good thing about insurance companies is that they are not correlated with the economy.)
  • John Hussman's present view (Hussman Funds): I haven't covered John Hussman in a while so I thought I would update everyone on his current view of the market. His view is similar to what many, including me, have been saying for a while. Namely, the market is attractive but not exceptionally cheap : "Probably the most important long-term risk to perceived valuations here is that the deleveraging pressure we're observing is increasingly likely to cap future return-to-equity at a much lower level than was possible with extremely high levels of debt. This will make historical norms of price-to-book value and price-to-revenues increasingly relevant, while the recent history of peak-earnings (and perhaps even dividends) may be misleading because the recent peak in profit margins will be far more difficult to recover compared with past cycles. Again, I believe that stocks are undervalued, but not extremely so. Passive, long-term investors in the S&P 500 can reasonably expect average total returns moderately higher than 10% annually over the next say, 7-10 years, but there is a good chance that even these prospective returns are not high enough for value investors to make a firm stand. -- John Hussman"
  • Time to legalize drugs (The Economist): Going to drive conservatives crazy with my opinion but I think it's about time the governments of the world, starting with the American one, and the Candian one in my neck of the woods, admitted that their bogus war on drugs has been a complete failure. I'm not trying to downplay the heroic work of Elliott Ness and The Untouchables in bringing down Al Capone but the fact of the matter is that the legalization of alcohol ended the rampage of various organized criminals, not law enforcement.

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