"Macro" Musings

[ERICOPOLY]

This applies far more to me than you though as you are heavilly in BAC.  I am very curious however in the stocks that would interest you if say, you didn't understand banks, or weren't allowed to buy them?

 

I would own a large allocation in Fairfax if I couldn't own BAC.  I do have 25% in AIG warrants at the moment -- that's the only non-BAC thing I own.

 

So if BAC were taken away I'd probably put 50% in FFH and buy more AIG warrants (to a 50% allocation).

 

 

Eric,

 

I am trying to get up to speed on Fairfax.  The fact that you say that means a lot.  Could you let me know why feel so strongly about Fairfax?  I have read the Fairfax board.  Obviously the lack of uw profits doesn't bother b/c you like mgmt, ability to allocate capital, etc.

 

I don't feel strongly that Fairfax is going to explode to the upside.  I feel strongly that if I venture out on my own, my net worth is likely to explode to the downside.

 

So choosing Fairfax is really a signal that I don't trust my ability very much.  I view it as a hedge fund of sorts.  They do a good job over time and unless something really easy to understand like BAC comes along, I'm pretty much better off to be with them (or another manager.

 

This is why I bought the minimums in each Berkowitz fund.  I know very little and will eventually need to park the money somewhere -- quite likely at a time when there is nothing simple enough for me to figure out.

 

[mhdousa]

This applies far more to me than you though as you are heavilly in BAC.  I am very curious however in the stocks that would interest you if say, you didn't understand banks, or weren't allowed to buy them?

 

I would own a large allocation in Fairfax if I couldn't own BAC.  I do have 25% in AIG warrants at the moment -- that's the only non-BAC thing I own.

 

So if BAC were taken away I'd probably put 50% in FFH and buy more AIG warrants (to a 50% allocation).

 

 

Eric,

 

I am trying to get up to speed on Fairfax.  The fact that you say that means a lot.  Could you let me know why feel so strongly about Fairfax?  I have read the Fairfax board.  Obviously the lack of uw profits doesn't bother b/c you like mgmt, ability to allocate capital, etc.

 

I don't feel strongly that Fairfax is going to explode to the upside.  I feel strongly that if I venture out on my own, my net worth is likely to explode to the downside.

 

So choosing Fairfax is really a signal that I don't trust my ability very much.  I view it as a hedge fund of sorts.  They do a good job over time and unless something really easy to understand like BAC comes along, I'm pretty much better off to be with them (or another manager.

 

This is why I bought the minimums in each Berkowitz fund.  I know very little and will eventually need to park the money somewhere -- quite likely at a time when there is nothing simple enough for me to figure out.

 

Interesting.  I actually can't buy BAC or AIG due to them being restricted securities at my wife's employer.  And I don't think I know enough to do a good job of picking other companies.  So I've entrusted most of our net worth to Watsa, Berkowitz, and Chou.  Good to know Eric shares this thinking.

 

[ERICOPOLY]

This applies far more to me than you though as you are heavilly in BAC.  I am very curious however in the stocks that would interest you if say, you didn't understand banks, or weren't allowed to buy them?

 

I would own a large allocation in Fairfax if I couldn't own BAC.  I do have 25% in AIG warrants at the moment -- that's the only non-BAC thing I own.

 

So if BAC were taken away I'd probably put 50% in FFH and buy more AIG warrants (to a 50% allocation).

 

 

Eric,

 

I am trying to get up to speed on Fairfax.  The fact that you say that means a lot.  Could you let me know why feel so strongly about Fairfax?  I have read the Fairfax board.  Obviously the lack of uw profits doesn't bother b/c you like mgmt, ability to allocate capital, etc.

 

I don't feel strongly that Fairfax is going to explode to the upside.  I feel strongly that if I venture out on my own, my net worth is likely to explode to the downside.

 

So choosing Fairfax is really a signal that I don't trust my ability very much.  I view it as a hedge fund of sorts.  They do a good job over time and unless something really easy to understand like BAC comes along, I'm pretty much better off to be with them (or another manager.

 

This is why I bought the minimums in each Berkowitz fund.  I know very little and will eventually need to park the money somewhere -- quite likely at a time when there is nothing simple enough for me to figure out.

 

Interesting.  I actually can't buy BAC or AIG due to them being restricted securities at my wife's employer.  And I don't think I know enough to do a good job of picking other companies.  So I've entrusted most of our net worth to Watsa, Berkowitz, and Chou.  Good to know Eric shares this thinking.

 

 

The advantage though of knowing so little about business is that when something simple enough to understand comes along, it's a really good one!

 

[Guest FFHfan]

Rothschild Market Perspective: Issue 48 | February 2013

 

Q1 2013 Investment Quarterly

MP_-_Feb_2013.pdf

Q1_-_2013_-_English_Final.pdf

[ERICOPOLY]

At least Mr Confident at the ECRI can now be said to be wrong:

 

http://finance.yahoo.com/blogs/daily-ticker/ecri-lakshman-achuthan-no-m-not-wrong-still-145239368.html

[PlanMaestro]

Wrongstradamus.

http://www.ritholtz.com/blog/2013/03/michael-boskin-wrongstradamus/

 

Boskin is a classic example of why you should never let anyone’s politics influence your investing. He is part of the reason why I quarantined money-losers  like the WSJ OpEd pages.

[dcollon]

SoGen

Albert Edwards: Global Strategy

 

The Dow Sets a Record High.  That's Good News Isn't It?

Dow_Sets_Record_High.pdf

[giofranchi]

 

So choosing Fairfax is really a signal that I don't trust my ability very much.  I view it as a hedge fund of sorts. 

 

 

Sorry Eric,

but I cannot agree with your point here… Any business owner, who experiences every day what it really takes to run a business, who understands how much capital allocation is paramount in any business, who constantly studies other businesses, who has developed an interest for the insurance industry in particular, and who knows FFH’s history well, also understands that FFH is not an hedge fund, and that its business model is quite superior to that of any hedge fund. Actually, FFH’s business model is one of the best and most reliable (very predictable in the long term, if not in the short term) I know of.

I guess you remember Mr. Chou asking Mr. Watsa: “Do you know how Warren Buffett has accumulated his enormous wealth?”. And I guess you also remember the answer: “Insurance”. Not the hedge fund industry at all. But insurance. Of course, not “mainstream” insurance… But insurance a là Mr. Keynes first, a là Mr. Singleton and Mr. Buffett later, and now a là Mr. Watsa. :)

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

[PlanMaestro]

Kevin Hassett and James Glassman go to the "Ignored Hacks" list.

 

Dow 36,000 Is Attainable Again.

http://www.bloomberg.com/news/2013-03-07/dow-36-000-is-attainable-again.html

[blainehodder]

Kevin Hassett and James Glassman go to the "Ignored Hacks" list.

 

I always find it interesting when people use single year PE ratios on the broad market as if it has some great predicative power.  The only data backed work on macro market predictions I have seen are from Shiller, Hussman, Carlisle and Gray, Joachim Klement, Natascia Angelini, Giacomo Bormetti, Stefano Marmi, and Franco Nardini etc.

 

It appears to me that the Shiller PE and Hussman models appear to have decent long term predicative power.

 

http://greenbackd.com/2012/07/30/new-global-research-on-graham-shiller-cyclically-adjusted-price-earnings-cape-ratio/

 

The regular news media seems to support wild ass guesses...

 

I imagine the readers of this board understand that the volatility of current market PEs or for that matter profit margins makes them useless for predictions.  It is quite fun to see the single year stats on CNBC regularly.

 

 

[giofranchi]

From Michael Steinhardt's Latest Interview:

 

On whether investors should wait for a pullback in the market after the big run-up: "I'm not sure it's going to stop, but I think that one must marvel at where the stock market is in relation to the rest of world, in relation to the economics, the politics... it's not a glorious happy time."

 

On his average net long exposure:  "I managed money for 29 years, and my average exposure in my funds for those 29 years was between 30-35% net long, now that's probably as bearish as anybody was in that period.  I think having lower risk is a virtue.  I'm not sure I'm a perma-bear."

 

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

 

[Liberty]

For what it's worth:

 

http://www.bloomberg.com/news/2013-03-08/gross-raises-u-s-economic-growth-forecast-to-3-in-2013.html

 

Bill Gross Raises U.S. Economic Growth Forecast to 3% in 2013

[giofranchi]

Mr. Watsa has made reference to this in his recent letter the shareholders: if it weren't so dangerous, it would be very very funny!

 

http://www.businessinsider.com/60-minutes-chinas-ghost-cities-2013-3

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[dcollon]

Gio,

 

That was an interesting video/article.  Thanks for posting it.

 

 

[dcollon]

Dylan Grice (used to be at SoGen)

EdelweissJournal-012.pdf

[giofranchi]

Dylan Grice (used to be at SoGen)

 

I like the way Dylan Grice writes very much. dcollon, thank you for posting!

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

[giofranchi]

New speech by Kyle Bass:

 

http://media.chicagobooth.edu/mediasite/Viewer/?peid=f15d95d054e8442ab0cc1c60321383101d

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

[dcollon]

Brief commentary from SoGen's Albert Edwards

Albert_Edwards.pdf

[giofranchi]

ECRI's latest presentation: The US Business Cycle in The Context of the Yo-Yo Years.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

ECRI_1303_US_Business_Cycle.pdf

[giofranchi]

Then (2007) and now.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

NA+EVA+3.15.2013.pdf

[giofranchi]

The Market Is On Shaky Grouind - Comstock Partners, Inc.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

The_Market_Is_On_Shaky_Grouind.pdf

[giofranchi]

Efficient Frontier and where the highest risks really are today:

 

I keep telling clients since prices at the beginning of the risk curve are all controlled by the central bank, so are the volatilities. The central banks have suppressed the volatilities but they have NOT suppressed the risks which will come back one day. So the least dangerous part of the curve is the extreme right where there is still some market determined volatility. To reduce the risk, one has to increase volatility, which is a very strange result, and the only way to reduce the risk is through diversification at the extreme right. All that is very strange.

--Charles Gave

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

EVA+3.22.2013+NA.pdf

[giofranchi]

On profit margins:

 

From an investment standpoint, it’s important to recognize that virtually every assertion you hear that “stocks are reasonably valued” is an assertion that rests on the use of a single year of earnings as a proxy for the entire long-term stream of future corporate profitability. This is usually based on Wall Street analyst estimates of year-ahead “forward operating earnings.” The difficulty here is that current profit margins are 70% above the long-term norm. As evidenced by the entire span of available historical data, the elevation of profit margins is directly related – not only in overall level, but also in their point-to-point change over time – to the sum of government and household saving. See the analysis in “Two Myths and a Legend” to understand the strength of this relationship. The deficits of one sector must be the surplus of another.

What’s amazing to me is how aggressive and apoplectic some people have become when confronted with this data. Why get all upset over a fact? Government transfers have shot higher in recent years, and currently represent 21.5% of total consumption spending. If wage income is at the lowest share of GDP in history and people are still consuming, is it so difficult to believe that deficits in the household and government sector are driving the surplus in the corporate sector? Consider nearly 70 years of GDP history. The level of household and government savings as a share of GDP is strongly and inversely correlated with the level of corporate profits as a share of GDP (particularly after 2-4 quarters). The change in household and government savings as a share of GDP is strongly and inversely correlated with the change in corporate profits as a share of GDP (particularly after 2-4 quarters). Most important, the level of corporate profits as a share of GDP is strongly and inversely correlated with the growth in corporate profits over the following 3-4 year period.

Half of my day is typically spent in research, including testing the countless propositions about markets, valuation, trend-following, economic data, monetary policy, and profit margins that are spouted out by Wall Street observers. We’ve found no convincing data that international activity explains elevated profit margins or ensures their durability. Productivity growth does not explain them. There is a clear, logical, economically sound, and empirically provable reason why profit margins are elevated here. That evidence is only uncomfortable because it implies very uncomfortable conclusions – namely that corporate profits are likely to weaken significantly in the coming years even if the economy expands.

As I two weeks ago, I do believe that some of the more difficult challenges for the U.S. economy could be avoided through the combination of efforts to create incentives for real investment and R&D, to restructure underwater mortgage debt, and to increase capital requirements at too-big-to-fail institutions (ideally in the form of mandatorily convertible debt). But none of these appear to be on the horizon.

So objections aren’t enough. Those objections have to be supported in the data. Not just an argument or a theory, but data – decades of it. Warren Buffett was correct about profits as a share of GDP in November 1999 (and it would be useful if he remembered today how correct he was): “In my opinion, you have to be wildly optimistic to believe that corporate profits as a percent of GDP can, for any sustained period, hold much above 6%... Maybe you’d like to argue a different case. Fair enough. But give me your assumptions. The Tinker Bell approach – clap if you believe – just won’t cut it.”

--John Hussman

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

 

[racemize]

Here's a chart showing corporate profits as a % of GDP, following on from Gio's post (I thought it was interesting to look at):

 

http://www.businessinsider.com/corporate-profits-just-hit-an-all-time-high-wages-just-hit-an-all-time-low-2012-6

 

there's a few other graphs in there too.

[stahleyp]

Then (2007) and now.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

What are these guys long term track records? Also, I looked at their first page and pretty much everything they show is negative. If one is honest, we have to look at both sides and not just the negative ones. How about they show valuations, balance sheet healht, or earnings growth? I also didn't care for about he was right about everything...just a bit early. How about he fesses up to his mistakes?