Death of equities?

[turar]

txlaw,

 

No I did not and neither did Seth Klarman if that adds any weight.

 

Do you have a quote from him about that? IIRC, he said stocks bounced back very quickly after March 09, but I don't remember him saying they never got cheap.

[original mungerville]

Parsad,

 

I agree that right now many blue chip large cap equities are cheaper than bonds - some are good value...but equity valuations now are nothing like the late 70s early 80s.  I am not saying we are going to get to those levels, I am just saying this is definitely not the death of equities.

[Parsad]

Parsad,

 

I agree that right now many blue chip large cap equities are cheaper than bonds - some are good value...but equity valuations now are nothing like the late 70s early 80s.  I am not saying we are going to get to those levels, I am just saying this is definitely not the death of equities.

 

Hi Mungerville, I didn't say it was the death of equities.  It was Businessweek or some other magazine.  My point was just that when the media starts touting the death of equities or that we are in the midst of another Great Depression, then that's usually an indication that Mr. Market is feeling a bit too pessimistic. 

 

Are things bad...yes, in Europe.  Things aren't great in the U.S., but they are coming off of a very severe recession due mostly from speculation in the housing market, and significant deleveraging is continuing as we speak.  But things are improving, and from all indications, we are in the midst of a recovery albeit a very slow, precarious one.  U.S. corporations are in the best shape they've been in about 50 years.  They have tremendous liquidity and debt is at near historic lows. 

 

Yes, earnings are historically high, but even if they contracted 25%, you would suddenly have many equities trading at only fair value after that drop.  BAC is trading at 2 times pre-tax, pre-provision earnings!  I don't buy the market, but I do buy individual securities.  I can't control when they will be valued closer to intrinsic value, only that I know they will be over time.  The low for equities during the Great Depression occurred in 1932.  From there, they never looked back!  The low for the Great Recession occurred in early 2009, and equities will not look back either.  We are just fortunate that certain financial securities continue to trade at 2008/2009 valuations, even though their businesses, balance sheets, objectives and operating cash flows have become stronger and stronger. 

 

Markets may tread sideways or they may go up from here...who knows?  But I would bet my last nickel that they won't go down to what we saw in late 2008 and early 2009.  And I assure you we won't see such yields on quality corporate debt again in our lifetime.  That was an extraordinary period for equities...but even more extraordinary on the debt side...significantly cheaper than debt ever was at any period during the 70's, and probably never seen since the Great Depression.  Cheers!   

[original mungerville]

In May 2010: "Given the stock market rally since last year, Klarman is now worried of zero to low returns from the stock market for the next decade." http://www.valuewalk.com/2010/05/notes-seth-klarmans-speech/#.Ttf4TKNWpOQ

 

That give you an idea of where he thinks we are today as equity market prices are not all that different I would imagine. I am not sure where the quote is on equity valuations in 2008/09; we know he went into bonds big but he did not feel equities were that cheap.

[original mungerville]

Parsad, I know you did not say it, I was referencing the title of the thread. 

[stahleyp]

http://bigpicture.typepad.com/comments/images/7265064_e30fd4083b_m_1.jpg

 

EPIC FAIL.

 

As far as Klarman goes, he did indicate that stocks were fairly cheap. He was not as happy as Buffett in the 70s and "oversexed guy in a harem" or anything. From what I gathers this is from October 2, 2008 and was in OID March of 2009.

 

http://www.oid.com/public/html/excerpts/Baupost2009/OIDBaupostInHouse.pdf

 

"Attendee:  How do you see the current investment

scene?

Klarman:  One of the things characterizing today’s markets is the presence of large numbers of urgent sellers — people who are scared, getting margin calls, being liquidated, or who are otherwise being forced to transact.…And one of the things I’m always amazed to see is

otherwise-smart people writing in their client letters: “The markets have become so frenetic and crazy that I’m going to the sidelines.” That “frenetic and crazy” is an opportunity.  If you

want to manage your portfolio to never have a down month, then perhaps T-bills are the only alternative — but they also were the only alternative for the last several decades as well. What better opportunity to take advantage of dislocation than a market where people are periodically —

meaning, every few minutes — getting margin calls, losing their taste for a particular security, overreacting to news, and overreacting to false news.  It’s a remarkable time."

 

Maybe I'm putting words into his mouth, but that seems fairly positive to me.

 

 

[txlaw]

txlaw,

 

No I did not and neither did Seth Klarman if that adds any weight.

 

Well, I do respect Seth Klarman a lot.  You too -- I've always enjoyed reading your posts, particularly those on the old board.

 

But we disagree on this one.  I'm with WEB that US equities were cheap as whole in 2008/2009.

 

I don't know if US equities are cheap as a whole right now, but I do know that certain sectors are ridiculously cheap, and at least 30 pretty well known individual US stocks I follow are also pretty damn cheap.

[Parsad]

txlaw,

 

No I did not and neither did Seth Klarman if that adds any weight.

 

Well, I do respect Seth Klarman a lot.  You too -- I've always enjoyed reading your posts, particularly those on the old board.

 

But we disagree on this one.  I'm with WEB that US equities were cheap as whole in 2008/2009.

 

I don't know if US equities are cheap as a whole right now, but I do know that certain sectors are ridiculously cheap, and at least 30 pretty well known individual US stocks I follow are also pretty damn cheap.

 

Not only U.S., but there are discounts in Canada too.  We own about 4% of a micro-cap company that is completely liquid, is trading at less than plain cash on hand, and at a 35% discount to plain cash and cash receivables!  What am I going to wait for when buying this company...prices like the 1970's!  If this thing goes to a 50% discount to cash, does that make me silly for buying now and not waiting for that possibility?  It's a pure net-net trading less than cash on hand!  Cheers!

[Cardboard]

"We own about 4% of a micro-cap company that is completely liquid, is trading at less than plain cash on hand, and at a 35% discount to plain cash and cash receivables! "

 

That is net of any debt? Are they burning cash?

 

Usually, the ones I find are quite to totally illiquid. Sometimes I do find high tech or biotech microcaps that are liquid and below net cash, but they are burning it.

 

Sounds like an interesting case study in any case.

 

Regarding the equity market, it may not be that cheap overall, but you can't call it expensive either. The 100 year P/E average is around 15 times. To see the "death of equity" again, I think that we would need to see a massive number of hedge funds to fold. Retail investors are mostly gone from the game since quite a while and it was likely the case also in the mid 70's. When and if that will happen I don't know, but there are certainly pockets of the market that are really cheap now such as financials and some high tech. One could argue that there is money to be made by entering and exiting these air pockets or large dislocations as this "death of equity" may eventually come.

 

Cardboard

[RRJ]

2008/09 wasn't even close to the end of equities let alone today's valuations. End of equities is late 70s with mid single digit P/Es on DEPRESSED earnings relative to GDP.

 

Interest rates were also significantly higher in the 70's and early 80's.  Interest rates are at the lowest levels today since the 1930's.  Your alternatives to GIC's, treasuries and corporate debt is equities whose annual dividend yields are twice as high, while actual yield on investment is more than triple what fixed income would get.  Very big difference than equities trading at 3-4 times earnings in the 70's, but interest rates were at 6-7% or higher.  Cheers!

 

 

But this is why I am so cautious now.  Interest rates ar at historic lows, and central banks are printing money, undermining the currency and ultimately ensuring that folks will demand higher interest to buy our bonds, eventually (who knows when).  So if interest rates will have to go up sometime, and it will be the bond market that starts the process, doesn't that mean that equities will be worth less when that happens, along with every other cash flow stream?  After all, interest rates were one of the reasons stocks got to 3 and 4 times earnings in that period of the 70s and early 80s.   

 

[Parsad]

That is net of any debt? Are they burning cash?

 

Usually, the ones I find are quite to totally illiquid. Sometimes I do find high tech or biotech microcaps that are liquid and below net cash, but they are burning it.

 

Net of all debt...and there is very little.  Not burning through cash, but running a small profit annually.  Dirt cheap!  Cheers!

[Charlie]

here is a good picture that shows that equities are relatively cheap and gives an idea why Buffett is buying so much equities.  :)

[ShahKhezri]

"The Best Opportunities in Half-Century"

 

http://online.barrons.com/article/SB50001424052748703922804577066323160174632.html?mod=BOL_funds_recent#articleTabs_panel_article%3D1

 

 

[Cardboard]

Well Sanjeev, my Bennett Environmental may soon be at net cash. It is very close anyway. And they are supposed to make a nice profit next year. People are just giving up since nothing has happened yet with the new board and CEO on the acquisition front or on other potential moves. That is the sense that I am getting from the Stockhouse board.

 

Uccmal does not like it however as explained on the thread, due to various reasons and he may be right. Others must also think alike looking at the stock movement.

 

I remain curious about yours. I screen a lot of stocks and follow quite a few and I see nothing fitting your description. A Canadian, liquid, microcap at net cash and breakeven is highly unusual. If you share someday, I will certainly analyze it in detail to see how I did not find it with my screening process and what is so special to keep it at such valuation.

 

Cardboard 

[enoch01]

Lots of people looking in the rear-view mirror:

 

http://www.cnbc.com/id/45741694

 

Investors appeared to have lost faith in stocks this year.

 

...

 

Burned by two bubbles in the last decade and facing the second global financial crisis in three years, investors simply don’t have the risk appetite for stocks.

 

...

 

Investors continue to reject stocks and their growing dividend payouts for low-yielding Treasuries and T-Bills.