Major shift in sentiment on this board

[Myth465]

Unfortunately there is more to this than an ideological dichotomy, with only 2 sides spinning their point of view, promoting  their own narrow interest. There are real and measurable consequences to obviously failed fiscal and monetary policies. If remedied..there are real and measurable benefits to the economy and the public good.  If continued the pain will be eventually greater.

 

I agree but nothing I can do except for try to compound my wealth. People these days arent even open minded enough to engage in meaningful debate / conversations. They are simple slaves to Olbermann / Maddow or the far right, or even worse basically disinterested.

 

This board and its posters are of the highest quality and we have been doing this for 2-3 years by my count. I dont think many have moved from their perch. If I were god, things would be different but I am just a lowly guy trying to ...

 

This too shall pass.

[stahleyp]

Through all the fluff  ;) about macro, I haven't changed my discount rate -- have you?  I am not finding as many undervalued companies as when the markets were obviously underpriced.

 

-O

Buffett has said there are only a few times in someone's investment career where it's fairly easy to determine if the market is priced very high or very low. Otherwise, it's not good to worry about it much. That's the stand I'm taking because I can't time it (usually).

 

Agreed.  Also, I just thought we were all sick to death of talking about macro. :)

 

I have not changed my approaches all that much. With that being said, markets can be very irrational and there are still some bargains out there. My portfolio isn't as large as many on this board, but I am not having an incredibly tough time finding good bargains. Klarman was bearish from like 1992 or so for a really, really long time. While he was ultimately right, he missed out on a ton of potential gains. I don't have the burden of managing money for others and can be somewhat more nimble. I think I'll only make a big move it's incredibly obvious stocks are severely over/under priced.

 

Besides, with my savings rate, even if I'm wrong, I can replenish most of the lost money in a relatively short period of time (a few years).

[StubbleJumper]

No major shift in sentiment here.  I don't normally have much to say about credit markets, unemployment, or GDP growth.  But I do think about broad market valuation on an ongoing basis, and I continue to hold the view that the S&P500 is modestly overvalued.  Based on Shiller's data, I'd be much more comfortable if the S&P500 were valued around 900.

 

This type of modest over-valuation can persist for a very long time.  The implication for me is that I'm not going to buy SPY.  Given my views about valuation, I need to be selective about what I buy to ensure that there's a reasonable prospect of a fair return.

 

 

SJ

 

 

[Zorrofan]

Given the depressing nature of this thread - and I have to admit to being in the bearish camp - how many are hedging for a correction? And how? I am open to ideas as I have been less than successful in calling the direction of the market and my hedging efforts todate have dragged down my performace somewhat....

 

thanks

Zorro  :-[

 

[scorpioncapital]

I think the US stock market is substantially undervalued at this point. Even using a discount rate of 7% (rates are now 0%!) it still looks over 20% undervalued. Look at the Berkshire intrinsic valuator, it shows a conservative value of 100/ B share with a discount rate of 7%! At worst, we can say it's fair value but stocks don't look expensive at all. Greenspan did a very good, as scientific as you can get about the future so take it with a margin of error, analysis in his book, Age of Turbulence. His thesis was that in the 2020's, the long term bond rate would double say from 4-5% to 8-10% gradually. So even if that happens, stocks would not be particularly expensive given current prices and growth by that time.

[opihiman2]

Thanks for the responses, guys.  It has been interesting times these past 2-3 years.  It will be even more interesting to see how things turn out in another 10.  I am in the overvalued camp and have trimmed all of my holdings.  I believe we will face a stagflationary environment in the coming years with high commodity/material prices and rising interest rates.  Although, we'll see, gentlemen.  We will see.

[Parsad]

I think the US stock market is substantially undervalued at this point. Even using a discount rate of 7% (rates are now 0%!) it still looks over 20% undervalued. Look at the Berkshire intrinsic valuator, it shows a conservative value of 100/ B share with a discount rate of 7%! At worst, we can say it's fair value but stocks don't look expensive at all. Greenspan did a very good, as scientific as you can get about the future so take it with a margin of error, analysis in his book, Age of Turbulence. His thesis was that in the 2020's, the long term bond rate would double say from 4-5% to 8-10% gradually. So even if that happens, stocks would not be particularly expensive given current prices and growth by that time.

 

Scorpion, a discount rate of 7% is not adequate, regardless of where rates are.  Use a discount rate that would be reasonable for the next 20-30 years...12-15%...even 18% if you want a significant margin of safety. 

 

There are certainly far fewer ideas that meet that 18% hurdle today, than 6 months ago, a year ago, and most certainly two years ago.  I'm not completely bearish since governments can stimulate to their hearts content and keep prices going up for a while. 

 

But I'm cautious, and really looking at deeply discounted ideas.  We're finding a few really good ones, but the general valuations have risen dramatically...especially for the businesses with the worst balance sheets!  They've gone up multiples and there is always the possibility of another credit crunch, albeit significantly milder than the last one.  Cheers!

[scorpioncapital]

As much as I try, I can't bring myself to use an 18% discount rate when the cost of money is zero now and 4.6% for the next 30 years. Of course it may be hard to borrow money at 4.6% for 30 years for stock investing, usually that's reserved for real estate, which is probably why real estate is such a great deal.

[biaggio]

I think using a discount rate=30 year t bill rate plus 6 % or ~ 10% is reasonable...but then you would want to buy at a discount to that ie 60 or 50% of that (which brings you to the 18% Parsad was talking about).

[UhuruPeak]

I think using a discount rate=30 year t bill rate plus 6 % or ~ 10% is reasonable...but then you would want to buy at a discount to that ie 60 or 50% of that (which brings you to the 18% Parsad was talking about).

I don't think that's right.  You need to calculate the terminal value and then apply the discount.  Your 18% is going to be compounded every year

[StubbleJumper]

I think the US stock market is substantially undervalued at this point. Even using a discount rate of 7% (rates are now 0%!) it still looks over 20% undervalued. Look at the Berkshire intrinsic valuator, it shows a conservative value of 100/ B share with a discount rate of 7%! At worst, we can say it's fair value but stocks don't look expensive at all. Greenspan did a very good, as scientific as you can get about the future so take it with a margin of error, analysis in his book, Age of Turbulence. His thesis was that in the 2020's, the long term bond rate would double say from 4-5% to 8-10% gradually. So even if that happens, stocks would not be particularly expensive given current prices and growth by that time.

 

Scorpion, a discount rate of 7% is not adequate, regardless of where rates are.  Use a discount rate that would be reasonable for the next 20-30 years...12-15%...even 18% if you want a significant margin of safety. 

 

There are certainly far fewer ideas that meet that 18% hurdle today, than 6 months ago, a year ago, and most certainly two years ago.  I'm not completely bearish since governments can stimulate to their hearts content and keep prices going up for a while. 

 

But I'm cautious, and really looking at deeply discounted ideas.  We're finding a few really good ones, but the general valuations have risen dramatically...especially for the businesses with the worst balance sheets!  They've gone up multiples and there is always the possibility of another credit crunch, albeit significantly milder than the last one.  Cheers!

 

 

Well, that's exactly the rub.  The broad market (S&P500) seems to be trading at a PE of around 13.3.  I say "around" because it's never entirely clear to me whether they're using operating earnings or actual reported earnings which can be quite different.  If you invert the broad market PE, you get an earnings yield of around 7.5% (assuming that you believe the earnings number to begin with!).  That gives me a equity risk premium of about 300bps above a historically low risk-free rate. 

 

No, thanks.  I'll continue to be very selective rather than just jumping on the broad market!

 

SJ

 

 

[benhacker]

If you invert the broad market PE, you get an earnings yield of around 7.5% (assuming that you believe the earnings number to begin with!).  That gives me a equity risk premium of about 300bps above a historically low risk-free rate.

 

No, thanks.  I'll continue to be very selective rather than just jumping on the broad market!

 

Stubble, I think you are making a mistake comparing a real yield with a nominal yield.

 

I won't argue the 'realness' of the 13.3 PE which I think needs to be cyclically adjusted, but a true real yield of 7.5% is above the long run average for stocks, and needs to be compared with the real yield of bonds.  It's a 500-600bps difference depending on what you think inflation will be.

 

Not advocating the market is cheap, but by your data points I would say it's fair / decently cheap.

 

Ben

[StubbleJumper]

If you invert the broad market PE, you get an earnings yield of around 7.5% (assuming that you believe the earnings number to begin with!).  That gives me a equity risk premium of about 300bps above a historically low risk-free rate.

 

No, thanks.  I'll continue to be very selective rather than just jumping on the broad market!

 

Stubble, I think you are making a mistake comparing a real yield with a nominal yield.

 

I won't argue the 'realness' of the 13.3 PE which I think needs to be cyclically adjusted, but a true real yield of 7.5% is above the long run average for stocks, and needs to be compared with the real yield of bonds.  It's a 500-600bps difference depending on what you think inflation will be.

 

Not advocating the market is cheap, but by your data points I would say it's fair / decently cheap.

 

Ben

 

 

I'm not sure that I understand.  I just compared a quick and dirty nominal earnings yield for the S&P to a nominal long bond yield, which gives a nominal spread that represents the equity risk premium.  I am quite open to the argument that nominal S&P earnings should have some growth, but the notional spread that I eye-balled is about 65% of the historical equity risk premium. 

 

If you tack on Sanj's point about risk free rates being historically low, you might come to the conclusion that this is not the best time to jump into the broad market.

 

Have I missed something?

 

SJ

[rijk]

shiller's pe10 has officially hit 24 which basically tells us to be extremely cautious as this figure will, sooner or later, revert to it's long term average around 16

 

it would be interesting to learn from board members if

- they take this indicator serious....

- what their strategy is to minimize the damage when the eventual correction/crash hits.....

 

is there a cost effective way to replicate Fairfax's equity hedging strategy or is cash the only real hedge for a small investor?

 

i personally find it harder and harder to hold on to positions like COP & LUK which have increased by 60-80% over the last 12 months....

 

http://www.multpl.com/

 

regards

rijk

[Myth465]

I take these indicators serious but my stocks are cheap.

For damage control, its long term capital which isnt needed and no call able leverage. (No leverage at my level except for leaps).

Also many catalysts for my holdings.

 

I think cash is the easiest hedge (stolen from Einhorn). I would raise cash levels as you get more nervous. I have 5% cash and would like more but cant find anything to sell. I couldnt buy LUK due to the run, I hold only a token position. Also rotated several of my holdings due to over-valuation.

[vinod1]

shiller's pe10 has officially hit 24 which basically tells us to be extremely cautious as this figure will, sooner or later, revert to it's long term average around 16

 

it would be interesting to learn from board members if

- they take this indicator serious....

- what their strategy is to minimize the damage when the eventual correction/crash hits.....

 

is there a cost effective way to replicate Fairfax's equity hedging strategy or is cash the only real hedge for a small investor?

 

i personally find it harder and harder to hold on to positions like COP & LUK which have increased by 60-80% over the last 12 months....

 

http://www.multpl.com/

 

regards

rijk

 

S&P mini futures. I have not done it and not sure about the exact mechanics, but that is one way to hedge.

 

Vinod

[vinod1]

A good article on current market valuations - several methods of valuing the overall market. I pretty must used to do the same calculations, so this guy made my life simple.

 

http://www.valuewalk.com/stock-market-valuations/stock-market-valuation-february-2nd-2011/

 

Thanks

 

Vinod

[beerbaron]

One measure that I found most interesting in the last GMO letter was the PExMargin chart. It is true that people often double count thinking a high profit margin will be sustained to eternity.

 

My question is where exactly do you find S&P historical profit margin?

 

BeerBaron

[Packer16]

Another factor is how many moated stocks are highly weighted in the S&P 500.  The more moated stocks there are with high weights the higher the P/E should be.  Reversion to the mean works in all markets but much slower with high moat companies.  My gut feeling is there are more high moat highly valued cos todaversus in the past but I don't know for sure.

 

Packer

[twacowfca]

shiller's pe10 has officially hit 24 which basically tells us to be extremely cautious as this figure will, sooner or later, revert to it's long term average around 16

 

it would be interesting to learn from board members if

- they take this indicator serious....

- what their strategy is to minimize the damage when the eventual correction/crash hits.....

 

is there a cost effective way to replicate Fairfax's equity hedging strategy or is cash the only real hedge for a small investor?

 

i personally find it harder and harder to hold on to positions like COP & LUK which have increased by 60-80% over the last 12 months....

 

http://www.multpl.com/

 

regards

rijk

 

I think it's going to be a tough slog to hold most above average S&P 500 companies for the long haul and get good returns.  The current market cap/GDP is very high and the PE10 is 50% above the long term average.  Interest rates will go up in the future ultimately in response to the recent easy money.  When this happens, the Fed Model for pricing stocks will get a big jolt.

 

Nevertheless, I'm from Lake Wobegon, and this doesn't bother me a lot.  I think our investments will generate a lot of cash that will be available to buy bargains the next time the market goes south.

[finetrader]

The current market cap/GDP is very high

 

Isn't this ratio less valid than before since a lot of companies in the S&P500 are heavily active abroad?

 

ex: Caterpillar have plants and operations in emerging countries that if I'm right are not counted in US GDP.

[twacowfca]

The current market cap/GDP is very high

 

Isn't this ratio less valid than before since a lot of companies in the S&P500 are heavily active abroad?

 

ex: Caterpillar have plants and operations in emerging countries that if I'm right are not counted in US GDP.

 

 

That's an excellent point.  I wonder how that ratio might be adjusted to account for the proportion of overseas business over time?

[vinod1]

The current market cap/GDP is very high

 

Isn't this ratio less valid than before since a lot of companies in the S&P500 are heavily active abroad?

 

ex: Caterpillar have plants and operations in emerging countries that if I'm right are not counted in US GDP.

 

 

That's an excellent point.  I wonder how that ratio might be adjusted to account for the proportion of overseas business over time?

 

Dont really know how to adjust for it.

 

This is also closely related to increase in profit margins in US. Most low margin business has been outsourced to developing countries so naturally the profit margins have increased for US companies in aggregate. So this is a big risk for GMO and those of us who tend to take the same attitude that profit margins are going to mean revert - "This time is different". :)

 

Vinod

[rijk]

more indicators, this time from high yield debt markets, to proceed with caution...

 

http://www.distressed-debt-investing.com/2011/02/im-ringing-bell.html

 

regards

rijk

[opihiman2]

Anyone see the 30 yr rates?  Man, they have jumped in the past month.  It's the first time I've seen the 30 yr rates hit over 5% in a while.  Historically, we're just reverting to the mean.  However, mean reversion requires an overshoot to the average.  So, will we see 8.5% 30 yr rates?  Will the Fed be able to monetize debt?  I think anything above 6.5% and the housing market will get creamed.