US Economic & Financial Markets Outlook: Rationality vs. Hyperbole and Extremism
January started the year of 2011 with a period which gave the country the start of the corporate earnings parade, President Obama’s State of the Union address, a decent 2010 GDP report, and a crazy lunatic deciding to shoot Gabby Gifford’s, the Arizona congresswoman in the House of Representatives. The U.S. economy is analyzed by many different economists from a broad swath of market participants, and the general consensus is it has rebounded from the recession of 2008-2009 and is now poised for quicker growth.
If this is the case, corporate earnings reports should reflect the improving conditions. Indeed, according to the Bespoke Investment Group (The Trader, Egyptian Conniption, Barrons, Bob O’Brien and Lawrence Strauss, January 29, 2011) ‘70% of companies that have reported fourth quarter results have beaten their revenue number.’ Typically, companies with solid businesses report larger increases in profit growth relative to revenue growth, and the better than expected revenue numbers translate into greater growth in profit numbers (that is the theory anyway).
In my opinion, one of the issues for investors to overcome is the current market sentiment. From my perspective, there is way too much extremism in the market and hyperbole and outlandish ideas are well reflected in many asset prices. It is not just stocks, its bonds, commodities, currencies, ETF’s, options, and without even looking at them, probably swaps as well. In many cases, investors are paying a great deal for assets which have quite a bit of risk. It reminds me of my little daughter, call her Superstar, whose age is 3. Superstar rides the emotional roller coaster every day, waking up and crying, and then getting very happy when mommy comes in the room. Her day swings from extreme sadness and crying if she does not get what she wants, to extreme happiness when she does get her desired object.
The same can be said for the current market- bond yields are too low but bond investors think it is justified because of the risk in the world- especially regarding European sovereign debt. Commodities have soared, but because of demand in China and India, those bulls see never ending demand. Stocks have soared almost 100% from the lows of 2009, but with low interest rates and an improving U.S. economy, many investors are paying huge multiples for stocks which have had huge runs. In my estimation, these volatile and emotional swings from market participants, sometimes on a daily and even hourly basis, are the enemy of good investors.
When I have studied great investors, from Jim Rodgers, Charlie Munger, Warren Buffett, John Malone, and even a guy like David Einhorn, a common theme is rationality. In order to be rational, one has to evaluate investment opportunities based on facts. The reality is with investing, before one puts a cent of capital into any kind of asset, trying to obtain every piece of information possible about the opportunity becomes critical in determining how successful the investment will be. Three specific items which you might want to read as a beginning to your investment process include: 1) All the headlines about a company 2) The 10-Q quarterly SEC filing 3) The 10-K annual report filing (at least the Discussion of Operations and Management Analysis). Every single time I have not gathered as much information as I could have; my investments somehow don’t give me the results I want. In many cases, you can acquire the proper research and make a rational decision, and even then, things might not go your way.
However, making rational decisions through very thorough fact gathering keeps your decision making process based on plenty of information. As such, when you see these situations where someone is justifying huge prices based on predictions 5 and 10 years from now, uh, at the very least, go find more information about the situation. Buying stocks at 100 and 200x earnings is not what I would consider rational. It may work out for you in specific situations, maybe as a trade, or maybe as a speculation, but from my perspective it is not a rational way to approach investing. In that light, especially if you are investing your own money, it is always a good idea to ask for a second opinion about what you are doing. Having to explain why you are making an investment to a third party is also a good exercise because it requires clear thinking. As they say in education, the best way to learn something is to go teach it.
Global Economic & Financial Markets Outlook: In 2011- ‘Many Shall be Restored that are now Fallen, and Many Shall Fall that are now in Honor ‘(Graham and Dodd’s Security Analysis, 1934) (All country index data provided by the market data section of the Wall St Journal January 30, 2011)
If you look around the world, a very typical dynamic is taking place in global financial markets, although we are only one month into the year 2011. The country indexes which outperformed in 2010, except for Sri Lanka, have underperformed in 2011. Furthermore, the reciprocal has occurred, those which underperformed in 2010 have outperformed in 2011, at least so far. For example, Thailand, Indonesia, and the Philippines are all down 6%-8% in 2011, and all were up at least 35% in 2010.
In 2011, Spain, Italy, and Greece are up 11.4%, 10.8%, and 12.9% respectively, leading almost every index, whereas in 2010, those indexes were all down over 10% in 2010, with Greece down a whopping 47%. Even more interesting is the index of India (Bombay Index), which is down 10.3% for the year, and in 2010 it ended up ahead by 16.7%. Brazil is down by 3.8% year-to-date, and China also has lost 4.2%. Russia continues its positive returns as it is ahead by 6% for 2011.
It would be foolish not to mention the events which are currently taking place in Egypt. With Egypt possibly changing government leadership for the first time in 30 years, there are many possible implications for the global economy- possibly higher oil and commodity prices, restrictions on commerce through the Suez Canal, and a new government which could be lead by extremist leaders which have hostile attitudes toward democratic countries. Time will tell how events play out, and I am sure the majority of investors will keep attune to how the events in Egypt unfold over the coming weeks and months. What I find interesting is social media and technology played a crucial part in the events which are taking place in Egypt, and possibly all over the Middle East
Y H & C Investments: Contrarian Thinking- Things are Seldom As They Seem, So Don’t Judge a Book by Its Cover
Try and remember when you were growing up, so think back to when you were about 10 years old. Personally, I can recall my mom assigning me books to read for a month or sometimes a weekend. Anyway, on many occasions, being a, shall we say, particularly enthusiastic young lad, I would much rather go play a sport or watch television than read the assigned book. So, when it finally came time to read the story, I would wait until the last minute or day to accomplish my task. I know, I know, not the best studying policy.
On of my problems was I would look at the front cover of the book, or read the first few pages of the book and get bored quickly. Probably something other young kids had happen as well. However, what I naturally found out was as I read deeper and deeper in the books, I became more and more interested in the stories.
In that same regard, many investment opportunities require more research than just looking at a description of the company, a quick glance of the stock price, or the spot and futures price of a commodity. From my experience in investing, one must always look deeper into beaten down assets, especially stock prices, as events are seldom what they seem. Consider the following quote by Warren Buffet on being skeptical on acquisitions:
‘It may seem strange that we exult over a year in which we made three acquisitions- given that we have regularly used these pages to question the acquisition activities of most managers. Rest assured Charlie and I have not lost our skepticism: We believe most deals do damage to the shareholders of the acquiring company. Too often, the words from HMS Pinafore apply: Things are seldom what they seem, skim and milk masquerade as cream.’ (The Shareholder Letters of Warren Buffett, Lawrence Cunningham, Pp 163.)
It is important to note Mr. Buffett is referring to possible purchases of businesses and their affect on shareholders whereas I am looking at buying stocks or assets so we do have different contexts. However, the key point is to research these possibilities far beyond one or two variables or data points. There are different facts and facets to each business and understanding the entire situation is the key to finding the diamonds in the rough.
If you have your own way of researching companies, or would like to share your steps in researching investment possibilities, please post your ideas to share with the board!!! Thanks for reading this month and I look forward to hearing how others go about finding their diamonds. Any comments, questions or thoughts, please email info@y-hc.com
As always, on any company mentioned here, past performance is not a guarantee of future returns. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charterholder.
Yale Bock, CFA
President, Y H & C Investments
Monday, January 31, 2011
Sunday, January 2, 2011
Y H & C January 2011 Newsletter
Y H & C Monthly Newsletter- January 2011 Edition #32
US Economic & Financial Markets Outlook: 2010 Leaves the Same Way as It Started, and the Consensus Changes for 2011.
2010 was a solid year for general stock index performance in the United States as all of the broader equity indexes finished ahead by at least 10% over 2009 year ending levels. In retrospect, the deep mistrust of the stock market, especially after 2008, has helped fuel the transition of capital into the fixed income markets. Bond markets have enjoyed a 10 year bull market with 2010 seeinging the 30 year U.S. Treasury yield falling to below 4%. Billions of dollars have left equities because of the lack of performance for the decade from 1998-2008. With flight of capital speaking very loudly, people did not trust the 30% stock market rally in 2009.
As a result, the first 4 months of 2010 saw 15% gains in equities as investors watched the market climb a "wall of worry." In April of 2010, the BP oil well blew up in the Atlantic Ocean, the European debt crisis began in full force, and skittish investors again worried stocks were too risky to own. From April to August of this year, stocks retreated about 30% from peak to trough, and yet again, people said, "Enough of this, I'm outta here."
Naturally, September of 2010 saw sentiment shift again and the stock market rebounded 15% in a month, and have rallied through the end of this year. How things can change, and always do, in capital markets!!! In looking at the financial world analytically, one must view alternative choices to stocks to see how attractive stocks are on a relative basis. Even today, bond prices are still way up as bond yields hover around record lows. Commodities have had a nice run in many different areas, especially in coffee, gold, and silver. With an overhang of oversupply in the residential real estate space, private equity deals still on investment banks balance sheets and money market funds yielding next to nothing, stocks look pretty attractive on a relative basis. As such, economists from the majority of investment banks on Wall Street, including the renowned Goldman Sachs, are now predicting a 10-12% rise in the stock market for 2011. Oh boy, the little voice in the back of my thinks, 'It's really time to be careful if these guys think all is clear.'
When one looks at the current market psychology of many participants, these bullish forecasts lead me to believe the first few months of 2011 will be very unpredictable. I note you have guys like Doug Kass predicting a flat market for 2011, with gold catering to $250/ounce. Another noteworthy investor is John Paulson from "The Greatest Trade Ever" book fame, who believes gold will go to $4000/ounce by 2012. You have to love the range of opinions from prognosticators in the capital markets. My opinion is the U.S faces its challenges, like large fiscal deficits, a sky high bond market which needs to be pricked, languishing unemployment, the lingering housing oversupply issues, political dysfunction in Washington, and the debt and deficit issues at all levels of government: local, state, and federal.
However, relative to the rest of the world, the U.S. does not look that bad. Europe struggles with sovereign debt issues which have resulted in huge refinancing in Greece and Ireland, and debt downgrades in Portugal, with Spain and France possibly on the way. South American is laden with so called socialist dictators and incredibly high inflation rates, along with countries where one wonders what the rule of law means at any level. The BRIC countries have GDP growth rates which are quicker than mature countries, but corruption, transparency, lack of infrastructure, a dearth of intellectual property innovation, mounting inflation worries, and relatively low wealth levels make investment in these countries not exactly risk free.
So, all in all, with U.S. corporations enjoying record profit levels, cash rich balance sheets, a high unemployment rate to moderate wage level inflation, low official inflation (if it can be believed), and low interest rates, investing in stocks looks pretty good to me. However, one thing I know is the only constant is change, and the unexpected, so I am wary about the optimism over a good 2011. Still, doing ones homework and trying to use pessimism as your friend leads me to believe I like equities over anything else, but then again, I usually do.
Global Economic & Financial Markets Outlook: 2010 BRIC Peformance and Year End Winners and Losers
(All country index data provided by the market data section of the Wall St Journal December 30, 2010)
2010 was a year where dramatic outperformance and lack of performance occurred all across the globe, which is probably what should be considered "normal", if there is such a thing as normal in the investment business. As opposed to 2008 where almost every market went down, and 2009, when nearly every global market went up, there are dramatic differences with investment results when looking at specific countries, and to a certain extent, global areas. The most obvious result would be the lack of performance in Europe, which investment watchers know has to do with the sovereign debt issues of the member countries. Conversely, many of the big winners are located Asia, with some countries posting very impressive results. First, let's look at the performance of the BRIC countries.
The best phrase to sum up the investment results of the indexes composing BRIC countries would be "a mixed bag." The obvious winner for 2010 would be Russia, up 24%, and India, ahead by 16.7%. Those indexes are the RTS Index of Russia and the Bombay Sensex Index of India. The poor performers were the Dow Jones China 88 Index of China, down 20.6% and Brazil Index (Sao Paulo Bovespa), which lagged at +1.0% for the year.
In looking for great performance, there were many notable indexes which performed incredibly well. Sri Lanka (Colombo Stock Exchange), posted an incredible 95.4% return, followed by Argentina (Merval), with a 51.4% advance. Other exceptional index performers are Indonesia (Jakarta Composite) +46.1%, Thailand (SET) +40.6%, Phillipines (Manila Composite) +37.6%, Denmark (Copenhagen OMX) +35.3%, Chile (Santiago IPSA) +37.6%, Pakistan +28%, and Poland (WIG) +19.3%.
On the other end of the equation, the biggest losses occurred in Europe with Greece down 47.2%, Spain losing 17.4% (IBEX 35), Italy reversed 13.2% (FTSE MIB), Portugal a -9.6% (PSI 20), and France (CAC 40) falling 2.2%. Poor performers also include China (-20.4%), and Japan (Nikkei) down 3.0%. Interesting about the global indexes is many people see the foreign markets as having more risk, some of which is currency related. I know currencies can be hedged, and in that light, I certainly think China and Brazil are worth more research as growth there should be better than in mature areas like North America and Europe (I know, I am really going out on a limb there).
Y H & C Investments: The Psychology of Contrarian Investing: Independent Thinking, Patience, and Evaluating the Facts are the Ingredients to Successful Long Term Investing.
The 'Chartologist', the 'Trader', 'there is no such thing as long term', 'buy and hold is dead', and the attack on long term investing continues in full force. These are the kinds of terms used to describe the trading mentality which is currently pervasive in the investment community. I believe traders talk their own book in an effort to swing people into the mindset that you can outsmart the market by trading. In addition, in an attempt to acquire assets from individuals or institutions looking for higher returns, traders play into the fear of the unknown by always insinuating the stock market is just 20 seconds away from falling 50%. In my opinion, buying companies at early stages of their life cycle and holding them as they grow from X in revenue and Y in profits (usually operating profit, and net income can be looked at as well), to 5 or 10X revenue and commensurate profit levels is how great wealth is created.
For example, let's look at an investment in companies like Chico's FAS, Apple, JNJ, Exxon Mobile, General Dynamics, Wal-Mart, Target, and Cisco Systems. All of these companies you could have bought at revenue levels of anywhere from 50 million to 1 billion dollars and 5 or 10 years later, an investor would have had returns well over 10% per annum (I don't have the exact numbers). The real important issue is trying to buy these companies when no one likes them, or nobody knows about them. 10 years ago, an investor could have bought Apple at 12 dollars a share when the net cash on the balance sheet was greater than the market value. The key is do you do the research and look at companies competitive position and financial statements and think through the analysis of what makes the company dominant in their industry, not only today, but also 2-5 years from now. If one listens to a trader, if you make 10-20% on an investment you sell. If you do that, forget about ever doubling your money, let alone making 5-10X your money.
Another common theme is if a stock goes down 8-10% from where you buy it, good risk management dictates to sell. Well, down 8-10% can happen in two hours, and it presents a buying opportunity if you really believe in a company. In fact, most of my successful investments have come when a stock falls after I buy it. When good companies stocks fall by 20-50% or more, especially if the balance sheet is full of cash, strongly consider buying the stock-in time the quality companies will eventually reward you.
The other necessary qualities for long term investing success are patience and persistence. If one is not going to see things through from start to finish, it does not matter what kind of endeavor is being undertaken, success will probably avoid you. Many times, as Howard Schultz, the CEO of Starbucks says, the difference between success and failure is the determination to hang in there when times become trying. In 2011 and beyond, rest assure, the stock market will have setbacks where it may swoon 10% or more. When it does, you can bet opportunistic investors will use it as a chance to add shares in their favorite positions for their portfolios. Thanks for reading, and if you have any comments or questions about your portfolio or any other investing situation, please email me at info@y-hc.com.
As always, on any company mentioned here, past performance is not a guarantee of future returns. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charterholder.
Yale Bock, CFA
President, Y H & C Investments
US Economic & Financial Markets Outlook: 2010 Leaves the Same Way as It Started, and the Consensus Changes for 2011.
2010 was a solid year for general stock index performance in the United States as all of the broader equity indexes finished ahead by at least 10% over 2009 year ending levels. In retrospect, the deep mistrust of the stock market, especially after 2008, has helped fuel the transition of capital into the fixed income markets. Bond markets have enjoyed a 10 year bull market with 2010 seeinging the 30 year U.S. Treasury yield falling to below 4%. Billions of dollars have left equities because of the lack of performance for the decade from 1998-2008. With flight of capital speaking very loudly, people did not trust the 30% stock market rally in 2009.
As a result, the first 4 months of 2010 saw 15% gains in equities as investors watched the market climb a "wall of worry." In April of 2010, the BP oil well blew up in the Atlantic Ocean, the European debt crisis began in full force, and skittish investors again worried stocks were too risky to own. From April to August of this year, stocks retreated about 30% from peak to trough, and yet again, people said, "Enough of this, I'm outta here."
Naturally, September of 2010 saw sentiment shift again and the stock market rebounded 15% in a month, and have rallied through the end of this year. How things can change, and always do, in capital markets!!! In looking at the financial world analytically, one must view alternative choices to stocks to see how attractive stocks are on a relative basis. Even today, bond prices are still way up as bond yields hover around record lows. Commodities have had a nice run in many different areas, especially in coffee, gold, and silver. With an overhang of oversupply in the residential real estate space, private equity deals still on investment banks balance sheets and money market funds yielding next to nothing, stocks look pretty attractive on a relative basis. As such, economists from the majority of investment banks on Wall Street, including the renowned Goldman Sachs, are now predicting a 10-12% rise in the stock market for 2011. Oh boy, the little voice in the back of my thinks, 'It's really time to be careful if these guys think all is clear.'
When one looks at the current market psychology of many participants, these bullish forecasts lead me to believe the first few months of 2011 will be very unpredictable. I note you have guys like Doug Kass predicting a flat market for 2011, with gold catering to $250/ounce. Another noteworthy investor is John Paulson from "The Greatest Trade Ever" book fame, who believes gold will go to $4000/ounce by 2012. You have to love the range of opinions from prognosticators in the capital markets. My opinion is the U.S faces its challenges, like large fiscal deficits, a sky high bond market which needs to be pricked, languishing unemployment, the lingering housing oversupply issues, political dysfunction in Washington, and the debt and deficit issues at all levels of government: local, state, and federal.
However, relative to the rest of the world, the U.S. does not look that bad. Europe struggles with sovereign debt issues which have resulted in huge refinancing in Greece and Ireland, and debt downgrades in Portugal, with Spain and France possibly on the way. South American is laden with so called socialist dictators and incredibly high inflation rates, along with countries where one wonders what the rule of law means at any level. The BRIC countries have GDP growth rates which are quicker than mature countries, but corruption, transparency, lack of infrastructure, a dearth of intellectual property innovation, mounting inflation worries, and relatively low wealth levels make investment in these countries not exactly risk free.
So, all in all, with U.S. corporations enjoying record profit levels, cash rich balance sheets, a high unemployment rate to moderate wage level inflation, low official inflation (if it can be believed), and low interest rates, investing in stocks looks pretty good to me. However, one thing I know is the only constant is change, and the unexpected, so I am wary about the optimism over a good 2011. Still, doing ones homework and trying to use pessimism as your friend leads me to believe I like equities over anything else, but then again, I usually do.
Global Economic & Financial Markets Outlook: 2010 BRIC Peformance and Year End Winners and Losers
(All country index data provided by the market data section of the Wall St Journal December 30, 2010)
2010 was a year where dramatic outperformance and lack of performance occurred all across the globe, which is probably what should be considered "normal", if there is such a thing as normal in the investment business. As opposed to 2008 where almost every market went down, and 2009, when nearly every global market went up, there are dramatic differences with investment results when looking at specific countries, and to a certain extent, global areas. The most obvious result would be the lack of performance in Europe, which investment watchers know has to do with the sovereign debt issues of the member countries. Conversely, many of the big winners are located Asia, with some countries posting very impressive results. First, let's look at the performance of the BRIC countries.
The best phrase to sum up the investment results of the indexes composing BRIC countries would be "a mixed bag." The obvious winner for 2010 would be Russia, up 24%, and India, ahead by 16.7%. Those indexes are the RTS Index of Russia and the Bombay Sensex Index of India. The poor performers were the Dow Jones China 88 Index of China, down 20.6% and Brazil Index (Sao Paulo Bovespa), which lagged at +1.0% for the year.
In looking for great performance, there were many notable indexes which performed incredibly well. Sri Lanka (Colombo Stock Exchange), posted an incredible 95.4% return, followed by Argentina (Merval), with a 51.4% advance. Other exceptional index performers are Indonesia (Jakarta Composite) +46.1%, Thailand (SET) +40.6%, Phillipines (Manila Composite) +37.6%, Denmark (Copenhagen OMX) +35.3%, Chile (Santiago IPSA) +37.6%, Pakistan +28%, and Poland (WIG) +19.3%.
On the other end of the equation, the biggest losses occurred in Europe with Greece down 47.2%, Spain losing 17.4% (IBEX 35), Italy reversed 13.2% (FTSE MIB), Portugal a -9.6% (PSI 20), and France (CAC 40) falling 2.2%. Poor performers also include China (-20.4%), and Japan (Nikkei) down 3.0%. Interesting about the global indexes is many people see the foreign markets as having more risk, some of which is currency related. I know currencies can be hedged, and in that light, I certainly think China and Brazil are worth more research as growth there should be better than in mature areas like North America and Europe (I know, I am really going out on a limb there).
Y H & C Investments: The Psychology of Contrarian Investing: Independent Thinking, Patience, and Evaluating the Facts are the Ingredients to Successful Long Term Investing.
The 'Chartologist', the 'Trader', 'there is no such thing as long term', 'buy and hold is dead', and the attack on long term investing continues in full force. These are the kinds of terms used to describe the trading mentality which is currently pervasive in the investment community. I believe traders talk their own book in an effort to swing people into the mindset that you can outsmart the market by trading. In addition, in an attempt to acquire assets from individuals or institutions looking for higher returns, traders play into the fear of the unknown by always insinuating the stock market is just 20 seconds away from falling 50%. In my opinion, buying companies at early stages of their life cycle and holding them as they grow from X in revenue and Y in profits (usually operating profit, and net income can be looked at as well), to 5 or 10X revenue and commensurate profit levels is how great wealth is created.
For example, let's look at an investment in companies like Chico's FAS, Apple, JNJ, Exxon Mobile, General Dynamics, Wal-Mart, Target, and Cisco Systems. All of these companies you could have bought at revenue levels of anywhere from 50 million to 1 billion dollars and 5 or 10 years later, an investor would have had returns well over 10% per annum (I don't have the exact numbers). The real important issue is trying to buy these companies when no one likes them, or nobody knows about them. 10 years ago, an investor could have bought Apple at 12 dollars a share when the net cash on the balance sheet was greater than the market value. The key is do you do the research and look at companies competitive position and financial statements and think through the analysis of what makes the company dominant in their industry, not only today, but also 2-5 years from now. If one listens to a trader, if you make 10-20% on an investment you sell. If you do that, forget about ever doubling your money, let alone making 5-10X your money.
Another common theme is if a stock goes down 8-10% from where you buy it, good risk management dictates to sell. Well, down 8-10% can happen in two hours, and it presents a buying opportunity if you really believe in a company. In fact, most of my successful investments have come when a stock falls after I buy it. When good companies stocks fall by 20-50% or more, especially if the balance sheet is full of cash, strongly consider buying the stock-in time the quality companies will eventually reward you.
The other necessary qualities for long term investing success are patience and persistence. If one is not going to see things through from start to finish, it does not matter what kind of endeavor is being undertaken, success will probably avoid you. Many times, as Howard Schultz, the CEO of Starbucks says, the difference between success and failure is the determination to hang in there when times become trying. In 2011 and beyond, rest assure, the stock market will have setbacks where it may swoon 10% or more. When it does, you can bet opportunistic investors will use it as a chance to add shares in their favorite positions for their portfolios. Thanks for reading, and if you have any comments or questions about your portfolio or any other investing situation, please email me at info@y-hc.com.
As always, on any company mentioned here, past performance is not a guarantee of future returns. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charterholder.
Yale Bock, CFA
President, Y H & C Investments
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