Tuesday, December 9, 2008 3 comments ++[ CLICK TO COMMENT ]++

Bill Miller conference call

Thanks to reader hpm for pointing me to Bill Miller's special market overview conference call from October 29th of 2008. If you are a Bill Miller fan, I recommend that you sit through the 1+ hour call. He covers various topics including the mistakes he made and why his fund is performing so poorly; how he thinks the government made the situation worse by seizing Fannie and Freddie and letting Lehman fail; what his future outlook is; various thoughts about stock market crashes as we are experiencing, including some comments about some stuff said by John Maynard Keynes, who was actually a good investor; and so on.

I think Bill Miller is way too optimistic and relies too much on positive things happening from government intervention. I don't share his hope. However, I share similar views when it comes to the low valuations. As Miller points out, Buffett did ring the bell at the bottom. But do keep in mind that, except for a few who bought close to the bottom in 1974, the stock market was an absolutely disaster (in inflation-adjusted terms) until 1982 (unless you were overloaded in specific sectors like commodities or gold.) I suspect we have a higher chance of such a market, in the sense of a drawn out bear market, than any of the other scenarios that are bandied about (including the resumption of the bull market; or the superbearish case of another massive market plunge as in the 30's; or the superbearish hyperinflation case).

I also didn't realize that his main fund, Value Trust, can short securities. He said it was a mistake that they didn't pursue short-selling further. I think this would stray him from his core strengths but it is something that could have been used to hedge some of his risky positions. He said they did short a little bit recently and made some money but it doesn't have much of an impact on the overall fund. Shorting now, as he points out, is too risky and refers to the fact that many of the short-selling hedge funds have record cash positions.

He thinks housing will recover soon. I am not so sure about that but, as surprinsing as it may be, some homebuilders have been the best performers on the stock market this year (e.g. look at a chart of Pulte Homes (PHM) or Toll Brothers (TOL) and you'll see that they are flat for the year, whereas the market is down 40%). I don't have a strong opinion on housing. I have been completely wrong on housing so far. I was bearish on housing a few years ago (it was quite obvious at that time) but thought it was close to the bottom. Yet that call has cost me dearly. I mistakenly thought that a 20% drop in house prices may be the extreme case but it has become the base case. The monoline bond insurers, along with the rating agencies, were projecting a 20% decline as their stress Depression case. Anything above 20% and the tainted bond insurers would be on the brink of bankruptcy, as they have been lately (but their ultimate fate will depend on the final numbers and the specific characteristics of the assets that they insured.) For what it's worth, Miller does address a question about the monolines and he seems to think Ambac is in serious trouble but MBIA may be ok.

Someone asked him about energy and I share similar views as him. He said that he doesn't want to make the mistake as with homebuilders and get in early just because they have dropped 50% and look good on historical measures. He refers to some guy who said $70 oil could be possible when oil was $140, and is saying that $25 oil is possible if the world enters a worldwide recession. This is the risk for oil bulls, not to mention base metal bulls. One can argue that worldwide recessions are rare but most of what is happening is rare. There has been unprecedented synchronized growth in the world (globalization) that it is plausible that the whole world will slow down at the same. In the past, before globalization took hold, some parts of the world will hum along while others slow down. Now, just like with asset markets, all the economies can slowdown at the same time. If that happens, betting on oil is going to be just as painful as those who bought homebuilders 2 years ago.

I'm going to start looking into one of his dogs of the last 8 years: Eastman Kodak (EK). I will start doing more research and see if it's worth following or investing in. I remember looking at it a few years ago because of Miller but the situation is very different now it seems. At that time, I never pursued Kodak because it wasn't clear that it could gain market share in digital cameras. It seemed that companies like Canon were ready to kill Kodak. Over the last few years Kodak has done well in digital cameras (just my impression; need to do more work) so the situation is different. The valuation is very different now too. If the stock chart is accurate, it is trading near 40 year lows (but it isn't even 1/10th of what it was 20 years ago) with a market cap of around $2 billion. Trailing P/E is 3 and forward P/E is 28. Price to book value is 0.5. Quick look also shows that operating income is still negative so it is still not making money... So valuation is low. Just need to do more homework.

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3 Response to Bill Miller conference call

January 4, 2009 at 8:57 PM

What did you find out about Eastman Kodak?

Cash in hand, stabilizing cash flow, innovative products (printers), lloks like the turnaround is starting to turn.

Thinking about investing

January 5, 2009 at 12:12 PM

Haven't looked deeply at Kodak. Asked them to send me the annual report and they refer me to the website. Lame... anyway...

Cameras are discretionary items and it is possible for Kodak to post weak numbers for a while.

Although they have some technology, I don't get the feeling that they are a leader or having any sort of moat. I'm still thinking about it.

The thing to keep in mind is that nearly all stocks, including high quality ones, have been beaten up. So you don't have to bet on turnarounds like Kodak so much. For instance, Canon is down 50% in an year and is trading at forward P/E of around 15 (peak cyclical P/E likely around 10). I'm not recommending Canon (haven't looked into it) but the point is that turnarounds like Kodak need to be really good to (i) survive, and (ii) present better value than other beaten down large-caps.

January 6, 2009 at 1:36 AM

Agree with you. Kodak can wait, but you have to be ready. Looks like an unappreciated and overlooked candidate, my type of investment for when the economy turns.

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