Panic

[dowfin1]

"He said 1025 in October.  Not to split hairs but why is he dishing out different numbers?"

 

 

Grantham wrote this in his October letter, so he may have been sloppy with his words in the interview:

 

 

Our current fair value estimate for the S&P 500 of 975

modified by a likely overrun of 40% would yield a price

of about 585 in an environment of a quite severe economic

and profit recession. If the global economy surprises on the

upside, however, and somehow profit margins hang in, the

result would of course be far less severe. Our conclusion,

though, that the S&P is likely to bottom out in the 600

to 800 range within the next two years can unfortunately

be seen as not particularly pessimistic from a historical

perspective.

 

https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIBOpDzd%2fqvfmyKvO9heUp7mZr7ZNzTXElC4nL%2bbyzwsvOd2v9jLWK05D9gf1qB23jMheM%2bQ18uL1ukRpKGsyM6GsWt%2fZUVdJPU%3d

[alertmeipp]

seriously, when did this board turning into "where is the bottom" board.

 

Looks this is "Berkshire and Fairfax" board and both Prem and Buffet said what they are seeing - values.

[oec2000]

It is at 6,763 today, down 42.5%, nine years after the peak.

 

You overlook the fact that the Dow hit a new peak in 2007.

 

In any case, comparisons with past cycles have no real predictive value. The sample size is so small that trying to draw a pattern is meaningless. Besides, a simple peak to trough computation does not take into account the degree of overvaluation at the peak so it has no real fundamental basis. The Mkt cap/GDP ratio metric is, imo, a better indicator - but even it is limited by sample size.

 

Alertmeipp is right to point out that we are playing the wrong game. Smarter people than us - namely Buffett and Watsa - realise that they cannot call the bottom. Why should we think that we can? The goal should be to buy 50 cent dollars and to buy even more if they become 30 cent dollars. This is a staregy I think I can cope with. Calling the bottom is too hard for me.

 

[arbitragr]

It is at 6,763 today, down 42.5%, nine years after the peak.

 

In any case, comparisons with past cycles have no real predictive value. The sample size is so small that trying to draw a pattern is meaningless. Besides, a simple peak to trough computation does not take into account the degree of overvaluation at the peak so it has no real fundamental basis. The Mkt cap/GDP ratio metric is, imo, a better indicator - but even it is limited by sample size.

 

Alertmeipp is right to point out that we are playing the wrong game. Smarter people than us - namely Buffett and Watsa - realise that they cannot call the bottom. Why should we think that we can? The goal should be to buy 50 cent dollars and to buy even more if they become 30 cent dollars. This is a staregy I think I can cope with. Calling the bottom is too hard for me.

 

 

 

This is debatable. Shiller has done studies all the way back to the 1800s where P/E ratios have shown to be mean-reverting again and again ...

 

Right now he thinks the market is "fairly" valued based upon past P/E cycles. The market has a bit more to drop if it is to get cheap.

 

Calling the bottom is almost impossible, however the problem is when you're a professional ... your clients will pull out of your fund if they see negative losses for too long, so if you're going to invest, and just sit there and watch yourself lose money, then your clients and assets under management will be gone. It's okay to say invest and just sit back and relax if you're investing personally, but professional it's not so straight forward. And no amount of haggling or convincing is gonna change your clients' minds - you have to show results all the time.

The only way to combat this is to either hedge, or buy it cheap enough below IV so that you protect your downside ... but how far is cheap enough? Especially in this environment? Total fear has ensued, and the bubble in treasuries is evident of that. Right now, the markets are not even working, let alone reaching a bottom.

 

[oldye]

GDP in 1996 was 7.7 trillion

[Uccmal]

That's what Buffett was doing back in 1981 Al.  He said he was selling things trading at 3 times earnings to buy things trading at two times earnings.  Cheers!

 

 

Which are the best buys?

 

Basl, That of course is literally the million dollar question.  As I have rejigged things, I have favoured buying lower and lower strike SPY 2011 Leaps because I cannot figure out who will survive, or more importantly thrive.  This has the double benefit of catching whichever sector is first out of the gate on the upswing.  If it is commodities that rally first then the S&P 500 will rise; if its infrastructure companies, same effect; if if is the surviving financials same effect. 

 

Also hold Leaps on GE, AXP, WFC, SBUX, HD, and of course FFH common, and Leaps.  Bought Canadian banks and PWF companies common stock for my Registered accounts to replace NB. 

 

The downside of the reliance on Leaps is the obvious implied leverage.  In this environment the temporary losses can become nearly 100%with Leaps on individual companies.  The effect is less promounced with the SPY leaps than those for individual companies. 

[SharperDingaan]

 

We rather think that the panic has now become self generating.

 

Have you noticed that everytime you do an option tree, the downside P(x) and downside $loss keep getting bigger? ie: The incentive to stay in T-Bills & use options is increasing, pushing equity markets downward, & reinforcing the T-Bill decision.

 

Have you noticed that everytime CNN/Rueters/Bloomberg reports, its sensationalized bad news - but very sanitized news?. Deliberate avoidance of the 'Depression' word ? Deliberate avoidance of the 'Nationalization' word ? - despite ownership positions so large in some cases, that takeover bids are actually a legal requirement.

 

Have you noticed that market 'circuit breakers' are either suddenly not working, or not being reported ? Is it really coincidental that every circuit breaker around the world hasn't tripped in the last 4 months, despite record falls ?

 

Have you noticed that for all the G8, interest rates are now pretty much as low as they can possible go ? & at this point about the only thing Central Bankers can do is print money & nationalize.

 

Hard to see how one gets out of this; but a week long simultaneous closing of all global financial markets, concurrent with nationalizations, & a media reporting ban - has to be getting some play now. The ultimate 'circuit breaker'.

 

Most folks are very short-term orientated, & simply 'taking the cheese away' will set them off. The media also has a vested interest in seeing it happen.

 

Keep your eye on what happens if you wake up one morning, & suddenly find everything shut for a while.

 

SD 

 

 

[T-bone1]

I agree that we can't call the bottom, and then the best thing to do is follow Prem and Warren in saying: "this is close enough and I can survive whatever short term drops might still be ahead"

 

I also note that when markets bottomed in 1980 or so and Buffett was buying things are 2-3 times earnings, ten year treasury rates were are 10. Today ten year rates are at 3% . .. . meaning an equivilent bottom would be higher this time around.

 

The S&P bottomed at a P/E around 7 then, I think that the current P/E of around ten (this is a marketcap-weighted average, so banking losses have less of an effect) is equivlent, considering Treasuries are 7% lower.

 

[alertmeipp]

Seriously, unless you are planning on buying index fund... don't make your investment decision based on S&P P/E.

 

Does it make sense to look at a P/E of Walmart while investing in GE... no, right?

[Mungerville]

I've been more or less hedged since 1999.  So this is not some new let's call the bottom game.  The point here is that yes, we are below fair-value, but the economy is really really in the toilet, there is too much debt, and the market can not think more than a few quarters ahead let alone a few years until strong growth.  This was the same market content to buy at S&P 1500.  Why should we assume the market can not overcorrect on the downside.  It has/is over-correcting on the downside right now - Grantham may be right about S&P 600 sometime in 2009.

 

Finally, yes it is true that treasuries are yielding very low rates whereas in 1981 rates were much higher.  However, we have to consider that junk bond spreads just hit a new record this morning and that corporate spreads remain very wide.  So how can you have a big jump in the stock market when you can get stock-like returns in corporate debt/preferreds in a more senior position?

 

You might be able to if the view was this recession will end and robust growth will return which would favor stocks over bonds but many view that growth after the end of this recession will be muted.

 

Having said all this, if you show me S&P 600, with a view to the long term, that low valuation will begin to outweigh the likely weak economy coming out of the recession and make me want to take my hedges off and go net long stocks over bonds.

 

 

 

[Uccmal]

Well S&P 600 is not very far away now.  695-600/695 = 13.5%... Should be there by the end of the week.

[Uccmal]

Maybe tomorrow. 

[oldye]

I think Prem will eventually be right about an Obama rally.  How many more trillion dollar losses are still not in the system? 2 maybe 3?  We're way closer to the bottom than anything.  Then comes the cost push inflation which will do a number on a lot of companies but Fairfax's portfolio will be ok, if history really repeats we should have a rush to quality in the equity markets. 

 

[Uccmal]

oldye, your right IMO.  At a certain point companies no longer will be reporting losses.  The reports we will start to see will look like this (in much smaller font of course):

1) JPM reports 5B in derivative profits

2) Bell Canada buys The Source stores across Canada

 

and later:

3) BAC reports earnings 29% higher than q1 last year.  Only 400 Million in writedowns.

4) Ford reports 12% higher vehicle sales than February, reports that inventories of finished vehicles are at record lows. 

5) And the Granddaddy of them all.  New housing inventory drops to 3 months.  According to Lennar, D.R. Horton prices have stabilized in the US.

[alertmeipp]

How about Dr. Doom and Robouni reveals huge short position on financial stocks? :)

 

[Partner24]

And...

 

6) God issue a press release: "I would like to comment on some rumors that are going on actually and would like to rectify. This is not the end of the World."

 

[Hershey]

There has been good reason for most Americans to feel panicked.  Major financial institutions are bankrupt, we are in an economic Pearl Harbor, and while the country is burning, our leaders are pushing social programs and environmental reforms, which will place significant burdens on our country's remaining wealth, and is wholly dependent on the US's borrowing capacity. 

 

Are there good buys in the market?  Sure, as we comfort ourselves with optimism, I remain fearful that we still underestimate how crushing the financial weapons of mass destruction have become, and the length of time it will take for the system to clear.  I wish I had acted on my sense of "the emperor is not wearing any clothes" and panicked a couple of years ago when I saw what I saw, but didn't trust myself.  Another lesson learned.