scary article

[Fairfaxnut]

Sorry.  Haven't introduced myself.  This is my first posting to this board, but I've been a long time "lurker".  I just want to say there are a lot of intelligent minds on this forum, and I find and learn many things every day reading here (unlike some other forums).  Thank you!

 

 

www.glasgowcapitalpartners.com

[Guest ValueCarl]

Hi Myth,

 

In all truthfulness, I have a problem with criminal investment banks like Goldman Sachs who utilized their political might and contacts across the globe to fix the board, while deciding who will stay and who will go!

 

As for, "The Greatest One of Them All," my catch phrase for the financial market's greatest maven or guru who ever lived, the fact that he bent them over for fifteen dollars per second is great news for us share holders even though its compounding effect from a share price continues to be less visible while "Mr. Market" remains a stingy SOB both from a valuing and multiple stand point.

 

If you didn't notice, I wanted the authorities to wrest "CONTROL" of him and force him to run the US Treasury for the betterment of all of its CITIZENS.

 

 

My constant theme which should continue reverberating here and about, however, is "The Christ" hasn't returned to earth yet, and no man including Warren E. Buffett or his disciples should become idols, per se, for they all come with baggage while carrying weaknesses and certain levels of infallibility.  

 

"There go I but by the Grace of God." I will be looking into the name you have shared, but I find it difficult to believe you "respect" Ron Paul notwithstanding the fact that you believe him to be some sort of conspiracy kook.

 

I think I am a conspiracy kook myself, from time to time. As a matter of fact, I have earned the utmost respect for another conspiracy kook on a similar front, a man named Patrick Byrne, a PHD businessman, who Wall Street accused of wearing the proverbial, "tin foil hat," but was later proven wrong!

 

<Also I have noticed in your posts you seem to have issues with Buffett and his banking investments.>

[Guest ValueCarl]

I see your man of the year now, Myth. Seems like a bright chap with plausible suggestions for firing up the printing presses, yet again! The biggest encumbrances to his best wishes, unfortunately, remains embedded in two areas both created by psychological acridness.

 

1) Hoarding-banks as well as successful, non-discretionary types of businesses it seems

 

2) Time-to heal the souls of the debt gone wild consumer base in order to pay back what is owed from declining wage bases, and dismal employment opportunities while a negative feedback loop because of hoarding, and damned be you psychology, hooray for us, permeates the marketplace

 

When banks engaged in the crime of this century the way that they did, with the citizen base holding the bag in utter disapproval all along, we all will continue learning the hell each living soul must pay!

 

Unlike you, I am not entirely sure this conundrum ends peacefully or stable-like, nor the "amount of time" required for healing such a hang over, with the exception of pointing to some world event, one that as it has in the past, distracts the common man away from focusing upon the true perpetrators at the banking level who were and are the CAUSE of this DISASTER.

 

This being said, your hedging idea of guns, ammo, and farming doesn't seem so far fetched!

 

On a side note, I do hope they listen to Stiglitz, especially relating to my bias for infrastructure related technology plays. imo   

 

 

“It’s absolutely clear that you need a second round of stimulus,” Stiglitz said. “It needs to be better designed. It needs to be focused more on returns on investment, education, infrastructure, technology. And if you do those kinds of high- powered investments, the long-term national debt will be actually lower and the growth in the future will be higher.”

 

http://www.bloomberg.com/news/2010-08-05/stiglitz-says-anemic-u-s-recovery-means-obama-should-seek-more-stimulus.html

[Cardboard]

Sanjeev,

 

"Schiff is suggesting bailing out of US assets and into commodities and gold...not like everyone else isn't already there!"

 

I agree that commodities are popular, but not gold. It is very far from everyone being there.

 

About 165,000 tonnes have been mined since the beginning of time. Of this, around 30,000 tonnes is held by central banks and 80,000 is jewelry. That leaves max 55,000 tonnes as investment by individuals and institutions via bullion, coins, ETF's or about 2.3 trillion U.S. in value.

 

If you compare that to the size of the world stock market or around 40 trillion that is only 5.4% of the total. If you include bonds, money market funds and other investments held by individuals and institutions, gold is a tiny amount, maybe 1%.

 

So IMO, it is extremely far from being a bubble. I see very few rushing to buy it. I have seen people noticing the performance, but very few buying. Now, I can't say it is a bargain at this price, but I can't say it is vastly overpriced either considering cost of production and global growth of the population or demand. It is an error to look at $250 which was the depth of the 20 year bear market in gold and then to compare with today's price and say that it is a bubble because of the appreciation since. I think that $1,000 an ounce is now a long term floor or the value that will likely hold in a future bear market. Between now and then, gold will certainly become more difficult to mine, demand will have risen.

 

You may hate the stuff and keep saying that it does not earn interest, but it does not matter. People will keep buying it as a store of value for a portion of their savings. Then if central banks keep negative real interest rates and keep doing QE, confidence in currencies will keep on declining and there is no way to tell how high gold could go under such scenario. Historically, gold has peaked at 1 to 2 times the value of the Dow.

 

It is certainly not a value play, it would be more riding a trend. However, since it offers protection against insanity by central bankers, I think it is still worth a look by conservative investors. A 5% allocation or buying options while seeing it as an hedge or insurance is the way to go IMO. 

 

Cardboard

[Guest broxburnboy]

An even scarier point of view:

 

http://www.zerohedge.com/article/matterhorn-asset-management-there-will-be-no-double-dip-it-will-be-lot-worse

 

I find the logic here based on facts and trends, even though the mind recoils at his conclusions.

 

"Once you rule out the impossible, then what remains, however improbable, must be the truth."

-Arthur Conan Doyle as Sherlock Holmes

 

 

[Guest Bronco]

Of course the US will get out of this through printing money.  What else is left? 

 

I don't know about gold being the only way to invest this trend though.  I like other hard assets - real estate and oil. 

 

 

[Myth465]

I have no problems with The Austrian school, but I don't think its very useful and do think Ron Paul is a kook as well. Schiff and Paul are anti government conspiracy theorist.

 

While I don't consider myself a very political person, I am curious as to what more has to happen to American citizens before everyone finally becomes skeptical towards our current political system.  Blatant cronyism? Check.  Eroding civil rights? Check.  Immovable bureaucracy? Check. Shameless plutarchy? Check.

 

 

I agree with your checklist and see all of those problems, but also believe that these problems have existed on some level for quite a while. I dont think Schiff or Ron (though to a lesser degree) has the answers though.

 

I also dont see the public waking up until it hits the fan, and has to be addressed. That is the American way. We patch things up when we have to, and keep it moving.

 

Best to realize and understand that first, and then to figure out how to profit from it.

 

ValueCarl I wasnt too happy with the bank bailouts, but they are yesterdays news. Its on to the next crisis, for me. I applaud Buffett for profiting from the whole affair.

[Parsad]

It is certainly not a value play, it would be more riding a trend. However, since it offers protection against insanity by central bankers, I think it is still worth a look by conservative investors. A 5% allocation or buying options while seeing it as an hedge or insurance is the way to go IMO.

 

Everything has some value at some price.  But I think gold the way it is being utilized, as a hedge against armageddon, has had a significant bull run.  There isn't a block in Vancouver that doesn't have some gold exchange store, nor can I watch 30 minutes of television without seeing an ad for gold.  Every day when I pick up the paper, there is at least 2-3 ads for gold services.  The whole endeavour of buying gold at these prices is pure speculation...what will somebody more foolish than me, be willing to pay for this even though I have no idea what it is worth? 

 

No one was buying gold at $300/oz a few years ago, but I did for my personal account.  Why?  Because like anything, I knew it had an intrinsic value higher than what others currently valued it at.  In fact, all the central banks were moving away from gold and gold companies were hedging that it would fall below $200/oz.  Guess what?  They were wrong!  I've sold all of it between $700-$1100 an oz over the last two years.  Why?  Now because I think it's worth less than what everyone else is valuing it at. 

 

Can gold go higher?  Sure, manias always go further than you expect.  Just like everyone floating into low-yield treasuries or corporate bonds, they will have to seek higher yields as time moves forward.  And where are they going to go?  High-yield, high-quality stocks with strong cash flows and dominant market shares.  Putting 5% of my assets into gold right now, would be like putting 5% in fixed income because it "seems like a good idea".  I can't do that.  I buy whatever is cheapest and I'm willing to put alot of my capital into that.  No speculation, no fears about what the consensus thinks is a good idea, no macroeconomic forecast...just buy cheap and then sell when everyone else prices it back up to fair value.  Cheers!   

[Munger]

Disagree with Schiff re inflation.  In order for inflation to take hold, borrowing and spending must increase -- i.e., the money supply must increase.  The Fed's so called "printing" of money only increases the monetary base in an effort to increase the money supply -- the Fed is insanely trying to encourage more borrowing and spending.  As was the case for Japan, this approach proves futile if there is already too much debt in the system --few are willing/able to lend/borrow.  Deflation appears more likely and this should be viewed positively by those who live within their means and save money, which I suspect is the case for most on this board.

 

Also disagree with Parsad, who suggested that the country is in a far better position today than in 2006.

 

The only reason the US is not in a full depression today is because the government is running a deficit equal to 14% of GDP.  Without this unsustainable borrow and spend policy, the US economy would be in a worse depression than the one experienced during the 1930s.  Any appearance that the economy is better off today than in 2006 is nothing more than the consequence of an unsustainable borrow and spend ponzi scheme.  The borrowed money has not been invested productively, which renders the so called stimulus nothing more than transitory as it largely pulled forward future demand.  Unless the borrow and spend ponzi scheme continues forever (which it can't), there will be a period of reckoning for the United States, especially for those citizens who used borrowed money to spend beyond their means.  No, we are not better off today than we were in 2006 -- not by any stretch of the imagination.  This doesn't even take into account the future pension, medicare, medicaid, and ss promises that will prove impossible to pay in full.  Impossible to predict when the day of reckoning occurs but unfortunately hardship will be experienced by millions of Americans at some point the future. 

 

In the spirit of Benjamin Graham and Warren Buffett -- we are in a period that requires a very high margin of safety before investing. 

 

 

 

 

 

[Parsad]

Also disagree with Parsad, who suggested that the country is in a far better position today than in 2006.

 

Not country...corporations.  Multitude of general risks (housing bubble, credit derivatives, stock and commodity bubbles, trade deficit, corporate and consumer debt leverage) has also been reduced.  Actual risk has been transferred from corporations to government.  Buying shares in Coca-cola is a safer bet than buying U.S. treasuries over the next ten years.  Cheers!

[Guest ValueCarl]

Mr. Myth, it's no MYTH that everything you say is true here. Buffett, who I sometimes refer to as, BLUFFett, remains my favorite capitalist in the universe notwithstanding certain remarks to the contrary when I feel like calling him out while looking deeper beneath the surface or superficial facade this superior businessman sometimes enjoys displaying for public consumption.

 

There were some sideline fans who used to call Williams out to their own proverbial "wood shed", too, you know!

 

<I wasnt too happy with the bank bailouts, but they are yesterdays news. Its on to the next crisis, for me. I applaud Buffett for profiting from the whole affair.>

 

The MYSTERY, on the other hand, is positioning ones capital correctly in conjunction with all the necessary safety valves as part of ones plan. Much of this board's analysis is designed to accomplish that within the spirit of certain masters of the TRADE. There is no doubt I have failed, and might continue failing at applying and allocating capital correctly during the wake of such uncertain, unsettling times. I have battle scars to prove it, but the thrill of working towards "perfecting" ones game remains too alluring and too potentially "spectacular" to ever give up!

 

In this regard, placing capital with those masters during times of undervaluation, is always a prudent decision if one is not "buy and hold forever" in those Buffett like names for whatever reasons, i.e., non professionals.

 

I am no GOLD BUG, by the way, even though we remained focused on the OIL PATCH from 98-2003, even while we thought about gold in 03, but chose purchasing more BLACK GOLD with the then, ENERGY PRESIDENT, transplant to Texas, DUBYA, right up until GOLDMAN's 2008 FALSE DUKE OF EARL flag calling for $200 price per barrel crude! It was quite a CYCLE of SUCCESS for us.

 

Today, I even like to give kudos to Mohnish Pabrai for having pointed out global supply/demand conditions, especially occurring in India during that final, SELL, SELL, SELL call on my part! Mr. Pabrai offers some wonderful Indian spices, from time to time.

 

If I were looking for a commodity today, aside from GOLD, it would be SILVER for a plethora of reasons including the cornering of Jamie Dimon's boys at the House that Morgan built! If those criminals were to be cornered in that space, we as a society will be able to chalk it up to JUSTICE!

 

To me, gold had little utility back when we PASSED in 03 at approx. $200 per ounce, and will continue to have NO UTILITY unless there becomes a REVERSION towards using it as the "stored up value" tied to currency. This would be a direct result of movements like Paul's inside the political spectrum for doing so!

 

I'm afraid they're going to have to BEAR UP ARMS to get it, or some similar IV standard, done, however.  >:(  

 

[Cardboard]

Sanjeev,

 

"And where are they going to go?  High-yield, high-quality stocks with strong cash flows and dominant market shares."

 

While I agree with you for the most part, I am getting skeptical of these stocks. They keep salivating about them on CNBC. Many many hedge funds have loaded up into these stocks as part of their "de-risking". And are they that far from fair value?

 

Then you have crazy stocks such as NFLX, AMZN, trading at 48-50 times earnings. Missing earnings and still going higher. OPEN is another one at 89 times earnings. All growing fast, but are these multiple sustainable? 1999-2000 anyone?

 

Then we got this massive hunt for yields in treasuries, corporate bonds and others.

 

So I am not sure that gold is risky at all at this price considering the above. I too bought gold and also silver when it was $300 and sub $5 respectively. Felt very lonely at the time. I see also the ads, but I see more activity toward dumping some old jewelry than buying.

 

It seems that what we have now is a massive amount of money looking for a return wherever it can find it. There is no fear of loss. Just fear of having money sitting in cash. This market looks very very dangerous to me. It would take very little for people to scramble for cash. The value, margin of safety in almost anything appears very thin.

 

Cardboard

[Parsad]

While I agree with you for the most part, I am getting skeptical of these stocks. They keep salivating about them on CNBC. Many many hedge funds have loaded up into these stocks as part of their "de-risking". And are they that far from fair value?

 

Southeastern has a very good chart in their last quarterly letter of the spreads between Dow stock yields at market lows and high quality corporate bond yields.  The spread has widened considerably and probably alot further than listed in the chart, as corporate yields continue to shrink.  While this may continue for some time, the gap is very large. 

 

I have to disagree with the comment about CNBC...I don't think that may people are actually talking about this, since CNBC and everyone else keeps talking about Japan and deflation.  I've only read a handful of people who agree with the disparity in large-cap quality...Hawkins, Grantham, Miller and a couple of others.  Some people are starting to catch on, but the general market is still sitting on treasuries.  Cheers!

[Munger]

Responding to Parsad, who wrote:

 

"Not country...corporations.  Multitude of general risks (housing bubble, credit derivatives, stock and commodity bubbles, trade deficit, corporate and consumer debt leverage) has also been reduced.  Actual risk has been transferred from corporations to government.  Buying shares in Coca-cola is a safer bet than buying U.S. treasuries over the next ten years."

 

Reasonable observation on the surface but if the government wasn't running a budget deficit equal to 14% of GDP, we would be in a depression and corporations would not be better off.  A 14% annual budget deficit is not sustainable and as a result, the current economic environment (which gives the appearance of relatively healthy corporate sector) is not sustainable.  Given that inflated and unsustainable government spending is keeping the economy afloat (barely), risks related to house, credit derivatives, stocks, debt still exist and in fact are greater than before (in my opinion), given that there is now more debt in the system.  Total debt to GDP now equals 358%, greater than the 290% level at the end of WWII.

 

I also don't share the excitement for large cap stocks.  Sure the valuation looks good relative to treasuries but from an absolute value perspective, I don't see the appeal.  You might get a "trade" if capital move from treasuries to large cap stocks (but who can predict with any certainty).  Taking the perspective of Buffet and assuming I buy IBM (or a basket of large caps) with the intention of holding forever, the current economic return wouldn't be much better than 7% -- that's fine for Berkshire Hathaway but I'd rather sit on my cash and wait for a much better risk/return and ideally come across a lollapalooza, in the words of Charlie Munger.  Plus, who is to say the bond market has it wrong and a sharp economic downturn is not on the horizon -- under this scenario, the earnings don't materialize as currently anticipated and stocks in fact are not cheap on any basis and decline accordingly.

 

 

 

 

[Parsad]

You might get a "trade" if capital move from treasuries to large cap stocks (but who can predict with any certainty).

 

It's a certainty.  Institutions will have to move into these assets because their yields will diminish over the next year or two.  How is a property casualty company or life insurer going to be profitable in such a low-yield environment?  Underwriting?  You can have a few companies with better standards surviving on their underwriting culture, but the broad industry does not behave that way.  They will have to take more risk and seek higher income investments.  What about endowment funds and their constituent expenses?  Hedge funds with their operating expenses?  Baby boomers entering retirement?  All of these institutions and investors will have to move their cash hoard into higher yielding investments.

 

Taking the perspective of Buffet and assuming I buy IBM (or a basket of large caps) with the intention of holding forever, the current economic return wouldn't be much better than 7% -- that's fine for Berkshire Hathaway but I'd rather sit on my cash and wait for a much better risk/return and ideally come across a lollapalooza, in the words of Charlie Munger.

 

7% would be a hell of a lot better than 10-year treasuries yielding 2.8% or 30-year treasuries yielding 3.8%.  7% would allow any insurer to be completely profitable.

 

under this scenario, the earnings don't materialize as currently anticipated and stocks in fact are not cheap on any basis and decline

 

Corporations in general are operating at terrific levels of efficiency.  Even if we run into another period of decreased consumption like we saw in late 2008 and early 2009, corporations don't have the same level of overhead.  You may see a slowdown, but businesses are adapting better, and they have much better balance sheets.  Unemployment went from 5% to 10% between 2006 and 2009, and business is slower today than two-three years ago, yet corporations are generating profits nearly on par or better than 2006 and 2007.  Cheers!

[shalab]

Look at David Sokol's comments in bloomberg - I feel he got it right.

 

[Cardboard]

Something that people should be quite careful of is after-tax corporate profits in relation to GDP. It is currently running at close to record levels or around 8%. Buffett discussed that in 1999 and that since 1951 it oscillated between 4 and 6.5%. He also mentioned:

 

"One thing keeping the percentage down will be competition, which is alive and well. In addition, there's a public-policy point: If corporate investors, in aggregate, are going to eat an ever-growing portion of the American economic pie, some other group will have to settle for a smaller portion. That would justifiably raise political problems--and in my view a major re slicing of the pie just isn't going to happen."

 

It simply won't be acceptable for Democrats or Republicans to keep having 10% unemployment, massive deficits and no GDP growth while corporate America and its CEO's are having a party. Fortune 500's are known to be job cutters. I would expect to see some taxation pressure from Washington going forward on large corporations. If not, it is the economy that will take this % down. A reversal to the mean should be expected.

 

I also don't think that people quite understand or grasp what means a slowdown now or a double dip. We hear the term often, but what does it really mean? IMO, it means unemployment reaching 14 to 15% or catastrophic levels. This would trigger massive changes in society.

 

Getting back to the big caps attraction, while it is true that Buffett has added a lot to JNJ in Q2, he also trimmed PG, KFT and COP. One could argue that all 3 companies being reduced are of the high quality type and cheap. Their dividend yields are all quite attractive relative to treasuries and well covered by the earnings. P&G has the highest P/E around 14, but it is hardly overvalued. The Burlington acquisition is done and there is already $25 billion in cash on the balance sheet. So why did he sell a portion of these names?

 

Cardboard

 

[Munger]

It's a certainty.  Institutions will have to move into these assets because their yields will diminish over the next year or two.

 

I wouldn't be so certain.  The investment approach sounds like one based on the assumption that a greater fool will always be willing and able to buy, which is fine until the music stops.  Problem is that no one knows when the music stops and those left without a seat get destroyed.

 

 

7% would be a hell of a lot better than 10-year treasuries yielding 2.8% or 30-year treasuries yielding 3.8%.  7% would allow any insurer to be completely profitable.

 

All true but also assumes interest rates remain at record lows for 10 and 30 years, highly unlikely.  In fact, given the excessive US debt, odds are that interest rates rise sharply during these periods as investors demand a higher return to offset the risk of default -- see Greece.  If interest rates rise sharply, the consequent collapse in the principal value of the investment will far offest any benefit from a 2-4% dividend yield, which would might not be sustainable given the likely negative impact of a sharp rise in interest rates on the overall economy and the resulting decline in earnings.  This is in part why the pension problem will prove a disaster and I personally invest in no insurace companies.

 

Further, remember that when Buffett was delivering outsized returns early in his career, he was buying boatloads of companies at 3-7x earnings (with the earnings growing) -- the broader public had truly given up on the stock market.  We are nowhere this type of environment, although I suspect we'll see something similar in the future.

 

Corporations in general are operating at terrific levels of efficiency.  Even if we run into another period of decreased consumption like we saw in late 2008 and early 2009, corporations don't have the same level of overhead.

 

In my opinion, this statement doesn't recognize how far the economy needs to (and will) contract as deleveraging continues...  We're not talking about the 2-3% decline from peak to trough in the most recent recession.  In order for the imbalances to correct, the economy will need to contract by at least 10% (and yes, unemployment will move to currently unimaginable levels -- at least 15%) and no company is prepared for this scenario.  Much of the GDP growth over the past 20-30 years has resulted from debt fueled consumption and the bill now needs to be paid -- the longer the government tries to perpetuate this scheme, the greater the ultimate pain.  The US will face serious hardship as the economy corrects at some point over the next 5-10 years -- the sooner, the better.

 

Look at David Sokol's comments in bloomberg - I feel he got it right.

 

Could not agree more with Sokol -- we will all be very happy if we look back 5 years from now and the economy grew at a 2% annual rate because this is not the likely scenario at the moment and it could easily be much, much worse -- i.e., GDP is lower 5 years from now than it is today.

 

 

 

 

 

 

[Guest ValueCarl]

Sanjeev, if am correct that Charles T. Munger is the same "Munger," a new poster who came out to play with us today, I would strongly recommend that you take his advice that door #2, DEFLATION, is the more likely outcome we are heading into.

 

Cardboard is spot on too, regarding Warren Buffett's large cap unwinding inclusive of GE and XOM when I briefly scanned the report after it hit the newswire earlier.

 

I have only one caveat tied to that very wise, sometimes very "crafty," superior legal mind that comprises Mr. Munger, however.

 

He can be tricky with words, when he wants to, you know.

 

I'll never forget asking him in a fairly quiet, mostly private setting after his Cal Tech symposium circa March, 2008, about illegal naked short selling, and it being a catastrophic problem for the markets as we looked ahead? My question was being proposed as a result of studying Dr. Byrne's work on the subject matter for a few years before the question to this great, wise man.

 

Mr. Munger answered quite assuredly that, "SHORT SELLING is NOT a problem for the markets." Dr. Byrne has long since given him a pass, proving to me that Charles T. was always aware of, while speaking out against those blatant criminals in earlier Berkshire ASM's.

 

Notwithstanding the fact that "two words" being eliminated to make his point, is rather "SCARY" just like this thread!  8)

 

The other thing I might caution you about is "supply/demand" factors as respects your belief system that somehow herd buying will move the stock prices to your perception of fair value from where you sit.

 

All I can say about that is remember how HFT'ng is carving up penny moves in the hundredths sometimes(much greater demand is necessary than traditionally to move the pricing needle), as well as the "computer algorithms" controlled by Goldman Sachs, which are "dictating" prices in automatic fashion for the sake of Alan Greenspan's "liquidity" dreams.  

 

On the other hand, I know you'll tread carefully with your owners' hard earned capital relative to real experience.  ;)

[Parsad]

Carl,

 

That is not Charlie Munger, I assure you.  Cheers!

[Guest ValueCarl]

He was a "DAMN" good impostor! So, I guess he's not, "Damn Right!"  :D

 

I don't know how these Generation X and Y'rs move so easily about with lap tops or smart phones. I have been struggling like a SOB, while being away from my PC!

[Parsad]

I wouldn't be so certain.  The investment approach sounds like one based on the assumption that a greater fool will always be willing and able to buy, which is fine until the music stops.  Problem is that no one knows when the music stops and those left without a seat get destroyed.

 

Nothing to do with greater fool theory, but it does have to do with fools following herd mentality.

 

Further, remember that when Buffett was delivering outsized returns early in his career, he was buying boatloads of companies at 3-7x earnings (with the earnings growing) -- the broader public had truly given up on the stock market.  We are nowhere this type of environment, although I suspect we'll see something similar in the future.

 

Buffett has paid significantly larger P/E's for various businesses over the years, including when he ran the Buffett Partnership.  Think See's Candies, the rest of GEICO, Coca-Cola, Dairy Queen, etc.  I'm not saying to overpay for assets, but that investors should buy the best investment relative to its risk profile...sometimes that is stocks, sometimes bonds, and sometimes that means remaining in cash. 

 

At present, my point is that large-cap, high-quality stocks offer relatively better value than fixed income instruments.  Now, let's make something clear...that doesn't mean every large-cap stock is cheap or a great deal, but if you compare quality large-cap stocks to various subsections of the investment market, they are relatively cheap.  Cheers!

 

[Cardboard]

"Wal-Mart Stores Inc. reported a 3.6 percent increase in second-quarter net income and raised its earnings guidance for the full year as it benefits from cost-cutting and robust global growth in China, Brazil and Mexico."

 

"Walmart U.S. comparable store sales for the second quarter 13-week period declined 1.8 percent. Sam’s Club posted a comparable club sales increase, without fuel, of 1.0 percent."

 

People will say that I only focus on the negatives these days, but I can't ignore this kind of data. Yes, Walmart did beat expectations by a penny (you tell people a tight range and beat that, what a joke!) and raised full year EPS by $0.05 and CNBC and analysts will be all happy. The reality is that things are getting worse in the U.S. economy.

 

The stock is trading at 12.5 times current earnings and 11.5 times next year. The dividend yield is 2.4%. If they can grow earnings at 10% a year for the foreseable future it is a bargain. What if it is only 3 or 4% as these numbers show? Graham once said that stocks with no growth should be worth around 8 times earnings.

 

Still, I agree that the logic is to buy WMT at 3.5% + 2.5% or roughly 6% total return and to sell treasuries at 2.58%. The problem is that this logic fits a static world. Things could change rapidly making this 6% apparent return not satisfactory at all. IMO, something like JNJ has a bigger moat, but they have their own issues.

 

What I think will need to happen with these high quality mega caps is for them to increase their dividend payout to 50% or more. WMT is at 30% now. It will become unacceptable for companies like MSFT to keep sitting on mountains of cash with little growth. Indicated yields will become more important and we may revert to the past where buying many DOW companies at 5 or 6% dividend yields is just normal no matter what treasuries are doing.

 

Cardboard

[Munger]

Buffett has paid significantly larger P/E's for various businesses over the years, including when he ran the Buffett Partnership.  Think See's Candies, the rest of GEICO, Coca-Cola, Dairy Queen, etc.

 

With the benefit of hindsight, See's, GEICO, and Coca-Cola were actually purchased at dirt cheap valuations given the subsequent growth -- Buffett's genius shined.  I don't think anyone expects today's large caps to achieve similar growth.

 

 

At present, my point is that large-cap, high-quality stocks offer relatively better value than fixed income instruments.

 

Couldn't agree more -- and this is a key point for me as well.  Large-cap, high-quality stocks may in fact offer a good relative value trade but from a fundamental/Buffett/Graham absolute value perspective, the appeal is modest at best.  And if the bond market is correct, the spread may narrow by the earnings (and stock price) declines rather than stock price increases.  Personally, I'll wait for a better risk/reward.  

[Guest Bronco]

Munger - so are you holding cash?  If yes, are you implementing a put write strategy, where you can get some income but also buy equities at levels where you deem risk/reward appropriate?

 

I am currently using this strategy, but of course not for my entire portfolio.  But I am using my cash balance for this purpose. 

 

Interesting put write I will do today - Jan 2012 leaps for P&G, $55 strike over $5.  Gives you a cost basis of $50 if you get put.  Not a bad price.  Of course, be careful for the next flash crash! 

 

So if you hold $5,000 reserves (amount you would need if you got put), you will earn $500 over the next 1 year + 5 months.  Probably an annualized return of 6% if you use no leverage and assuming you don't get put the stock.  Not for everyone for sure, but it is better than a 1% return that most get on their cash.