US unemployment rate falls

[shalab]

More than the rate itself, the growth in employment is what is critical. This will get the country off the funk eventually and if the Europeans can get their act together... Germany is not suffering as much as the others because they export a ton of stuff mostly to the U.S and the emerging countries and it is a problem.

 

Not sure what the ECRI guys are saying now.

[Parsad]

Shalab, it's not real!  All spin and a fabrication.  There is no recovery whatsoever...we are headed for the abyss!  Cheers!

[bmichaud]

Yes, yes, I'm SURE they're looking at current employment numbers to gauge the direction of the economy. That makes perfect sense....

 

 

This pains me to write because I know it's going to be labeled as macro forecasting/trading/market timing etc.... etc...., but the following looks at the S&P 500 performance (ex. dividends) in the twelve months following ECRI's initial call that the US is definitively headed into a recession. First price is the initial market value at the time of their call; second is the high-point in the following 12 months; third is the low point in the following 12 months - following the latter two prices is price performance on an unannualized basis excluding dividends.

 

 

February 6, 1990, Geoffrey Moore forecasts the US is headed into a recession (Schiller PE = 17x, 10y = 8.21%):

S&P 500 close on 2/6/1990 =      330       

S&P 500 close on 7/16/1990 =    369        12% gain since initial call

S&P 500 close on 10/11/1990 =  295        -10% decline since initial call, -20% decline since peak on July 16

 

March 2001 ECRI says recession no longer avoidable (Schiller PE = 36x, 10y = 5.1%):

S&P 500 close on 3/15/2001 =    1,174   

S&P 500 close on 5/21/2001 =    1,313    12% gain since initial call

S&P 500 close on 9/21/2001 =    966        -17% decline since initial call, -26% decline since peak May 21

 

January 2008 ECRI says self-reinforcing downturn has already begun (Schiller PE = 26x, 10y = 4.1%):

S&P 500 close on 1/15/2008 =    1,381

S&P 500 close on 5/19/2008 =    1,427    3.3% gain since initial call

S&P 500 close on 11/20/2008 =  752        -46% decline since initial call, -47% decline since peak on May 19

 

September 30, 2011 ECRI says recession cannot be averted (Schiller PE = 22x, 10y = 3.3%):

S&P 500 close on 9/30/2011 =    1,131

S&P 500 close on 12/2/2011 =    1,244    10% gain since initial call

S&P 500 close on 9/30/2012 =    ?

 

.....

 

 

As I have said ad nauseum, with the market overvalued on a long-term basis, risks such as a US recession, European implosion, and a Chinese slowdown are not baked into general market prices with the Schiller PE in the range of 18x earnings. Like it or not, WEB set an example of not being 100% invested when the general market was at unattractive levels even when he was able to find undervalued securities.

 

Here is WEB in his January 1962 letter to investors (http://pragcap.com/wp-content/uploads/2010/02/BP5.pdf):

The generals tend to behave market-wise very much in sympathy with the Dow. Just because something is cheap does not mean it is not going to go down. During abrupt downward movements in the market, this segment may very well go down percentage-wise just as much as the Dow.....It is, of course, also the most vulnerable in a declining market.

 

WEB closed up shop in 1969 after the Schiller PE hit over 22x in 1968.

 

WEB in Forbes November 1974 with Schiller PE at 8x:

Look, I can't construct a disaster-proof portfolio. But if you're only worried about corporate profits, panic or depression, these things don't bother me at these prices.

 

.....

 

WEB talking about the market, economy, and individual securities behind a corporate veil is NOT the hedge fund manager WEB.

[Parsad]

Incidentally, we aren't fully invested...we always have some cash. 

 

The reason I view Buffett's comments with a little more respect than anyone else, including Klarman or ECRI, is because do you know of any investor...be it during the Buffett Partnership days, or the Berkshire days...who has protected on the downside better? 

 

What is the worst actual loss in shareholder equity Buffett has ever suffered?  Minus 9.6% in 2008!  How many down years has he suffered during the Buffett Partnership days?  Zero!  How many years has Berkshire lost shareholder equity during Buffett's nearly 46 year tenure?  Twice!

 

I only swear by the comments of one guy...Buffett!  There is no one like him, and there will never be another one as good, with no particular disrespect to ECRI or anyone else.  Cheers!

[ERICOPOLY]

I trust Buffett more than the ECRI.  He has that private window into all of his diverse businesses.  Plus he is good at judging human nature.

 

However Buffett could do even better if the goal is to not have a down year.  Just sell what remains of the equity portfolio and focus entirely on purchasing wholly owned businesses.  Then you can record increase in book value every single year no matter which way the S&P 500 trades.

 

The consolidated financials make it pretty hard to get beaten.

 

 

[Parsad]

I trust Buffett more than the ECRI.  He has that private window into all of his diverse businesses.  Plus he is good at judging human nature.

 

However Buffett could do even better if the goal is to not have a down year.  Just sell what remains of the equity portfolio and focus entirely on purchasing wholly owned businesses.  Then you can record increase in book value every single year no matter which way the S&P 500 trades.

 

The consolidated financials make it pretty hard to get beaten.

 

Not quite true, as they could suffer a huge insurance loss in any given year like many other insurers.  It's just a testament to their skill of pricing insurance contracts, especially Ajit, that they haven't been slaughtered in any given year with a massive insurance loss.  That in itself indicates how good they are at risk control, and their ability to view economic and societal risk better than anyone else. 

 

People talk about Sokol in the past, and Coombs presently about who should run Berkshire or its investments, but there would be no one better than Ajit who has done probably one of the best jobs in history mitigating insurance risk.  There should be a case study on exactly how he prices insurance contracts and what he scrutinizes when doing so...perhaps an entire book written on him and his conduct!  Cheers!

[ERICOPOLY]

I trust Buffett more than the ECRI.  He has that private window into all of his diverse businesses.  Plus he is good at judging human nature.

 

However Buffett could do even better if the goal is to not have a down year.  Just sell what remains of the equity portfolio and focus entirely on purchasing wholly owned businesses.  Then you can record increase in book value every single year no matter which way the S&P 500 trades.

 

The consolidated financials make it pretty hard to get beaten.

 

Not quite true, as they could suffer a huge insurance loss in any given year like many other insurers.  It's just a testament to their skill of pricing insurance contracts, especially Ajit, that they haven't been slaughtered in any given year with a massive insurance loss.  That in itself indicates how good they are at risk control, and their ability to view economic and societal risk better than anyone else. 

 

People talk about Sokol in the past, and Coombs presently about who should run Berkshire or its investments, but there would be no one better than Ajit who has done probably one of the best jobs in history mitigating insurance risk.  There should be a case study on exactly how he prices insurance contracts and what he scrutinizes when doing so...perhaps an entire book written on him and his conduct!  Cheers!

 

 

Just add some AIG FP managers circa pre-2008 and kaboom!

 

I should have just said that his consolidated financials temper the volatility.  His WFC stock is down this year but if he owned the whole thing he'd be reporting a consolidated gain as WFC's book has grown.  That's really what I meant to convey.

 

 

 

[Parsad]

I trust Buffett more than the ECRI.  He has that private window into all of his diverse businesses.  Plus he is good at judging human nature.

 

However Buffett could do even better if the goal is to not have a down year.  Just sell what remains of the equity portfolio and focus entirely on purchasing wholly owned businesses.  Then you can record increase in book value every single year no matter which way the S&P 500 trades.

 

The consolidated financials make it pretty hard to get beaten.

 

Not quite true, as they could suffer a huge insurance loss in any given year like many other insurers.  It's just a testament to their skill of pricing insurance contracts, especially Ajit, that they haven't been slaughtered in any given year with a massive insurance loss.  That in itself indicates how good they are at risk control, and their ability to view economic and societal risk better than anyone else. 

 

People talk about Sokol in the past, and Coombs presently about who should run Berkshire or its investments, but there would be no one better than Ajit who has done probably one of the best jobs in history mitigating insurance risk.  There should be a case study on exactly how he prices insurance contracts and what he scrutinizes when doing so...perhaps an entire book written on him and his conduct!  Cheers!

 

 

Just add some AIG FP managers circa pre-2008 and kaboom!

 

I should have just said that his consolidated financials temper the volatility.  His WFC stock is down this year but if he owned the whole thing he'd be reporting a consolidated gain as WFC's book has grown.  That's really what I meant to convey.

 

Oh I see.  Yes, that's absolutely correct.  Cheers!

[bmichaud]

Ericopoly hit the nail on the head. It's easy for Buffett to not worry about equity prices for the next three to five years if he owns all of BNSF or Iscar etc...because his return is all from cash returned to BRK. For better or worse, those of us managing money have to live with the market's opinion of the cash our holdings generate. WEB does not for the vast majority of BRK's holdings, as the equity portion is a much smaller part of brk's IV than it used to be.

 

Sure, I would kill to buy a private business right now. There's a regional roofing company near where I live that has a phenomenal brand name, a 95pc annuity business and tremendous pricing power. If the owner was looking to sell, I'd buy at 7x fcf in a second, and would hold for the rest of time generating an immediate 14pc return before any reinvestment or pricing power growth. If I could do that, of course I wouldn't care about Europe, China or a US recession. The most I'd suffer is perhaps a 25pc hit to cash flow at most, but I'd still be looking at a 10pc or greater return on my money, because there would be no change in a publicly-assigned market value of my business.

 

There is mass disagreement regarding the ecri call, and I get that completely. Econ forecasting is fraught with risk. My biggest point is that there are a multitude of risks out there that the market as a whole is not discounting - the ecri call is simply part of that concern. If we were at 900 right now, that stuff is largely baked in.

 

FWIW, WEB closed up shop before one of the biggest bear markets of all time and began investing with permanent capital. Extremely smart to shut it when he did, but he does not have a performance record through a vicious bear market running a fund. He essentially managed through a 90s type bubble then hung it up right at the top. Ironically, when he hung it up, valuations were at today's levels....the tech bubble throws off all historical precedent for normal valuations because they were so high.

[SmallCap]

Could someone help me to pronounce Ajit Jain's name properly? I have only ever read the name and haven't a clue how to pronounce it.

[dcollon]

Here is a link to an interview where they pronounce his name

 

http://www.ndtv.com/video/player/ndtv-special-ndtv-profit/buffett-gives-full-freedom-to-work-ajit-jain/194567