How much are you allocated in cash?

[SharperDingaan]

 

40%. High as we did very well on the RIM hype  ;)

[bmichaud]

Hi original mungerville, good to see your still around.  What hedges do you use?

 

 

txitxo, The shiller Cape numbers appear to be out of synch at this point in time.  If you pull a chart of the largest market cap companies in the S&P 500 you find that most are in the range of 9-15 PE.  There are exceptions such as Goog, and Pg, but nothing is too far out of line. 

 

To get the ratios you quote someone has to be making low profits.  I contend that the smaller companies in the index have not become as pofitable as they will be in the near future.  ie. Shit flows downhill. 

 

I also think the starting point on the shiller PE 10 yr. ratio, and its midpoint are skewing results enough to make it irrelevant. 

 

It could also be that the Internationalization of many companies is making the shiller PE irrelevant as well. 

 

I guess my final point on statistics is that they can be produced for any situation for any side of an equation. 

 

My own markers are telling me what fine trader mentions above.  I dont see any major obstacles on the horizon right now.  This is starkly different from the summer of 2007 through summer 2008 when I posted on this board's predecessor something to the effect that "waiting for the collapse is getting interminable".  In 1999/2000 I sat waiting for the Nasdaq collapse (one day in 1999 MSFTs stock trading was greater than all of the TSX). 

 

There's obvious hurdles ahead but no major bubbles that need deflating that will cause greater than about a 20% correction.  In the meantime, there are awesome individual deals to be had. 

 

IMHO.

 

Al,

 

GMO has a wonderful long term record of forecasting asset class returns using long run mean reversion for margins, growth and PEs (i.e. More comprehensive than just Schiller), and their most recent projections indicate rather severe overvaluation for the aggregate market. However, within that aggregate, their "high quality" subset is closer to fairly valued and appears to be what you point to. Please see attached.

 

Who knows what will ultimately drive the market down to or below fair value - but it appears the good majority of the buyers have been sucked in, as evidenced by very high sentiment readings and multi-year highs in hedge fund net long exposure. Even if a decline is limited to 20%, the opportunities that will be available after such a decline, in aggregate, will dwarf any individual opportunities right now, IMO.

GMO_7y_Forecasts_4Q12.pdf

[roundball100]

Hey c'mon...July and August are pretty close to what most people would call summer...but that's about it.  Cheers!

 

Parsad, can someone living in Vancouver really claim to be an authority on summer? My Vancouver friends think it is summer when the few days of the year arrive that it is not raining.  Most other places require summer to include the sun actually coming out, and being able to go outdoors without a sweater on.  (In Ottawa, we get real winters, real summers ... though, often too extreme both ways!)

[SharperDingaan]

You might want to look around you a bit ....

 

The string of month-over-month US employment gains would suggest that the US economy has probably turned. Similar shoots elsewhere ... & every month we get further from green poop.

 

A bump up this year is really a bet on post traumatic growth (Taleb). Probably reasonable, as survivor B/E's are far lower than they were, & most still have a fair bit of remaining capacity. Small revenue improvements are more than likely going to flow straight through to the bottom line, & generate upward earnings bias.

 

Then the bond world ... duration reduction, & a modest re-allocation (<10%) to long term warrants, convertibles, options, etc ? (Taleb barbell). The BAC, AIG, & the TARP warrants that everybody loves?

 

And when everyone starts moving in one direction ... the rest of the herd follows, and amplifies the move. HF algorithmic trading then amplifies it even more .... & the more gaming of the system the more reliable the outcome (antiifragility?) 

 

High cash AND some option positions.

 

SD

     

[LC]

There's obvious hurdles ahead but no major bubbles that need deflating that will cause greater than about a 20% correction.  In the meantime, there are awesome individual deals to be had. 

 

Does the credit spread cause concern for you? I've seen it mentioned recently (either on this forum or other blogspots) that corporate credit is out of whack.

 

That said, I agree with most of what you've written: most large-caps seem fairly valued to me. I'm not sure if small-caps as a whole are overvalued (the ones I own are trading around 15x earnings). Additionally last I checked, the ratio of Market Cap to Nat'l GDP was something like 1.2:1 compared to something like 2:1 during the bubble.

 

IMHO I think the market is slightly overbought (we are near all-time highs without any noticeable "boon" in the day-to-day living of the everyday person, contrasted to the dot-com bubble or the real-estate bubble) but I can't foresee an event on the horizon which would trigger a giant selloff.

 

That said I am about 20% cash but will probably allocate a bit to cash, up to about 25-27%, by taking some profits from some large caps which have become fairly valued and whose businesses I don't want to be in (POT for example).

[Palantir]

Txitxo-

 

You mentioned that you're bearish on US, but what about Spain? Do you see major moves as likely in Banco Santander the way th e guys here have been bullish on BAC?

[original mungerville]

Uccmal,

 

Thanks, always nice to hear from you. I am still using IWM put options as a hedge.  I will be doing much more bottom-up research shortly (and thus will again start to post more) as I transition a greater part of my time/efforts into the investing field (and away from my day job) later this year.

 

I am glad to see many board members took advantage of, and made out well on, their BAC options - sounds like you did quite well on those as well. Congratulations.

[txitxo]

Txitxo-

 

You mentioned that you're bearish on US, but what about Spain? Do you see major moves as likely in Banco Santander the way th e guys here have been bullish on BAC?

 

Spain's market is very cheap, statistically speaking. That doesn't mean that it can't get cheaper, of course. But last year my screens didn't return any Spanish stocks, now you get a few, which means that some companies are returning to profitability but are still very cheap, some examples are Duro Felguera, Endesa, Repsol, Prim. I don't know about Santander. Botín is a terrible person, but an amazingly competent banker. 

 

[txlaw]

100% long here.  Of course, I expect a good deal of cash to be generated from a DELL deal, as well as cash inflows from my current income.

[ERICOPOLY]

I think taxes can make a big difference.  As Onyx stated the NY taxes are the highest in the nation.  I like in Rochester and the taxes are similar here.  One effect here is the high taxes keep the RE values down.  If folks were not paying these taxes they could afford to pay more $ for the homes.  I think how you grew up makes a difference to.  If you grew up in the middle class you most likely have a do-it-yourself approach to life.  With such an approach getting a property with more than 3000 to 4000 sq. ft. is alot to keep up with other priorities.  I feel that way myself.  We felt uncomfortable having someone else coming and cleaning our house but finally are doing it and I still cut my own grass.

 

Packer

 

 

Home ownership in the US feels more like a long term lease.  It's not really your property if you have it taken away when you refuse to pay the annual "lease".

 

I'm heavily anchored to my (very nearly) migration to Sydney where you don't pay any property tax whatsoever -- no matter how expensive your home is.  They have a land tax on assessments in excess of 400k, but that's only for your second home or investment properties.  Primary home has an exemption.  They do have something called "rates" but it doesn't scale with the value of your home -- it's a regressive tax that helps pay for your fair share of basic services.

 

That's pretty significant.  Property taxes are something that you pay even when you stop working.  It takes away much of your security.

 

At least in California the real property tax payment has gone down over the years -- because they cap the rate of growth for your assessed value at something like 2% annually.  My father for example purchased his Los Altos Hills home for roughly $50k in 1970 and today he pays less than a few hundred a month in property tax.  The home is worth about $2m.  You almost want inflation in California -- bring it on.  Drives down the real cost of your tax bill.

 

 

[bennycx]

~20% in FFH (but shrinking a bit because of the recent drop in the $)

~40% in Bestinver International (which is 90% invested in European stocks)

~40% in a basket of 30 European stocks selected with mechanical screens (and which have gone up by 7% in January).

 

  No cash, no leverage, no hedging (if you exclude FFH). 

 

As I have mentioned, my timing indicator warns of a crash in the US soon. In addition, the Shiller P/E in the US is 23. To go back to their 2009 bottom, US stocks would have to drop by 55%. To get to a secular, Shiller P/E~8, floor, they would have to drop by 65%. 

 

The Eurostoxx50 is still 40% below its 2007 peak. The European Shiller P/E is around 14. A ~30% drop would already get EU stocks to a 2009-like bottom, and even that wasn't reached in 2011, when the sky was falling on our heads. A 40% drop would put EU stocks at a bear-ending, secular bottom.

 

  It seems obvious that, statistically speaking, the downside is much smaller for the eurozone than for the US markets. It seems to me that inflation will start earlier in the US than in the EU (at least while the tee-fest people are in charge). 

 

  I mostly invest in small caps, but my screens are also throwing out large caps, like Exor, Endesa, Aurubis, Freenet, Portucel, OMV, Ahold, Voestalpine, Total. Experienced stock pickers like the ones in the board should have no trouble finding interesting stocks in the Eurozone.

 

Hey! May I know what do your screens consist of?

[shalab]

Eric - hope your move to Australia works out. It seems one will end up paying up one way or the other.

 

From wikipedia, from the PPP stand point, it seems Australia is 40% more expensive than the U.S and Canada 23% more expensive than the U.S. Large cities in developing countries are as expensive or more expensive than the U.S. ( if one wants to have the same standard of living )

 

I was in Canada recently and to have the same standard of living, I would have to pay up a lot more than 25%.

 

http://en.wikipedia.org/wiki/Australia

http://en.wikipedia.org/wiki/Canada

 

[Packer16]

Are taxes included in the analysis as they appear to have a material effect on value

 

Packer

[Guest deepValue]

I think taxes can make a big difference.  As Onyx stated the NY taxes are the highest in the nation.  I like in Rochester and the taxes are similar here.  One effect here is the high taxes keep the RE values down.  If folks were not paying these taxes they could afford to pay more $ for the homes.  I think how you grew up makes a difference to.  If you grew up in the middle class you most likely have a do-it-yourself approach to life.  With such an approach getting a property with more than 3000 to 4000 sq. ft. is alot to keep up with other priorities.  I feel that way myself.  We felt uncomfortable having someone else coming and cleaning our house but finally are doing it and I still cut my own grass.

 

Packer

 

 

Home ownership in the US feels more like a long term lease.  It's not really your property if you have it taken away when you refuse to pay the annual "lease".

 

I'm heavily anchored to my (very nearly) migration to Sydney where you don't pay any property tax whatsoever -- no matter how expensive your home is.  They have a land tax on assessments in excess of 400k, but that's only for your second home or investment properties.  Primary home has an exemption.  They do have something called "rates" but it doesn't scale with the value of your home -- it's a regressive tax that helps pay for your fair share of basic services.

 

That's pretty significant.  Property taxes are something that you pay even when you stop working.  It takes away much of your security.

 

At least in California the real property tax payment has gone down over the years -- because they cap the rate of growth for your assessed value at something like 2% annually.  My father for example purchased his Los Altos Hills home for roughly $50k in 1970 and today he pays less than a few hundred a month in property tax.  The home is worth about $2m.  You almost want inflation in California -- bring it on.  Drives down the real cost of your tax bill.

 

Of course, you don't get the home mortgage interest deduction on a primary residence in Australia.

[txitxo]

 

Hey! May I know what do your screens consist of?

 

The main parameter is a rank which combines several value ratios and financial solidness indicators (something which is present, one way or the other, in all value screens like Graham's Enterprising Investor or Piotroski's). Then I apply a moderate momentum selection (which helps to avoid falling knives, and reduces drawdowns) and try to buy the smallest possible companies (but always with enough liquidity).  I buy a bit every week and typically hold the stocks for at least a year. 

[twacowfca]

 

Hey! May I know what do your screens consist of?

 

The main parameter is a rank which combines several value ratios and financial solidness indicators (something which is present, one way or the other, in all value screens like Graham's Enterprising Investor or Piotroski's). Then I apply a moderate momentum selection (which helps to avoid falling knives, and reduces drawdowns) and try to buy the smallest possible companies (but always with enough liquidity).  I buy a bit every week and typically hold the stocks for at least a year.

 

 

Interesting. May I ask how it has worked for you?

[txitxo]

Hi original mungerville, good to see your still around.  What hedges do you use?

 

 

txitxo, The shiller Cape numbers appear to be out of synch at this point in time.  If you pull a chart of the largest market cap companies in the S&P 500 you find that most are in the range of 9-15 PE.  There are exceptions such as Goog, and Pg, but nothing is too far out of line. 

 

To get the ratios you quote someone has to be making low profits.  I contend that the smaller companies in the index have not become as pofitable as they will be in the near future.  ie. Shit flows downhill. 

 

I also think the starting point on the shiller PE 10 yr. ratio, and its midpoint are skewing results enough to make it irrelevant. 

 

It could also be that the Internationalization of many companies is making the shiller PE irrelevant as well. 

 

I guess my final point on statistics is that they can be produced for any situation for any side of an equation. 

 

My own markers are telling me what fine trader mentions above.  I dont see any major obstacles on the horizon right now.  This is starkly different from the summer of 2007 through summer 2008 when I posted on this board's predecessor something to the effect that "waiting for the collapse is getting interminable".  In 1999/2000 I sat waiting for the Nasdaq collapse (one day in 1999 MSFTs stock trading was greater than all of the TSX). 

 

There's obvious hurdles ahead but no major bubbles that need deflating that will cause greater than about a 20% correction.  In the meantime, there are awesome individual deals to be had. 

 

IMHO.

 

The Shiller ratio can't certainly be used as a timing indicator. It doesn't tell you when you are going to fall, but how hard you may hit the ground. Secular bear markets work by multiple compression, so a CAPE of 20 may be cheap in a bull market and precede a 60% drop in a secular bear. But CAPE is not the only indicator which tells you that US markets are expensive. Mark Spitznagel uses the Q-ratio, which paints a similar picture:

 

http://greenbackd.com/2012/06/04/how-to-value-the-stock-market-using-the-equity-q-ratio/

 

As he shows, when you have large values of Q (like the current one), the probability of a large drop significantly increases.

 

My timing indicator looks at the amount of expensive junk (companies which are both expensive, and in bad financial shape) in the market. I have been able to backtest starting from 1990, and it has produced 3 signals, 2000, 2007 and now. Of course, with three points only, you have to take it with a pinch of salt.

 

  But putting everything together, I think it is much safer, probabilistically speaking, to invest in EU stocks (which besides, is the contrarian thing to do) than to buy US stocks. Even if large caps are fair valued, a big market drop will drag everything down.

 

  This is the worst credit crisis since 1929, with markets which reached a CAPE of 45 in 2000. I think it is very unlikely that the secular bottom was reached in 2009, with a CAPE twice as high as the one reached in 1982. We need to see more multiple compression, and the higher interest rates that moore_capital mentions can be the trigger, without any need for external shocks (not that there will be lack of them...)

 

 

[ERICOPOLY]

I think taxes can make a big difference.  As Onyx stated the NY taxes are the highest in the nation.  I like in Rochester and the taxes are similar here.  One effect here is the high taxes keep the RE values down.  If folks were not paying these taxes they could afford to pay more $ for the homes.  I think how you grew up makes a difference to.  If you grew up in the middle class you most likely have a do-it-yourself approach to life.  With such an approach getting a property with more than 3000 to 4000 sq. ft. is alot to keep up with other priorities.  I feel that way myself.  We felt uncomfortable having someone else coming and cleaning our house but finally are doing it and I still cut my own grass.

 

Packer

 

 

Home ownership in the US feels more like a long term lease.  It's not really your property if you have it taken away when you refuse to pay the annual "lease".

 

I'm heavily anchored to my (very nearly) migration to Sydney where you don't pay any property tax whatsoever -- no matter how expensive your home is.  They have a land tax on assessments in excess of 400k, but that's only for your second home or investment properties.  Primary home has an exemption.  They do have something called "rates" but it doesn't scale with the value of your home -- it's a regressive tax that helps pay for your fair share of basic services.

 

That's pretty significant.  Property taxes are something that you pay even when you stop working.  It takes away much of your security.

 

At least in California the real property tax payment has gone down over the years -- because they cap the rate of growth for your assessed value at something like 2% annually.  My father for example purchased his Los Altos Hills home for roughly $50k in 1970 and today he pays less than a few hundred a month in property tax.  The home is worth about $2m.  You almost want inflation in California -- bring it on.  Drives down the real cost of your tax bill.

 

Of course, you don't get the home mortgage interest deduction on a primary residence in Australia.

 

That's only useful if you have a mortgage.  Also, it's only on the first 1m of loan.

 

So if you have a home the size of what is being discussed here in this thread (5-10 million), it's not really all that material.

[ERICOPOLY]

I think it is very unlikely that the secular bottom was reached in 2009, with a CAPE twice as high as the one reached in 1982.

 

Probably matters to investors what the "real" earnings yield is.  1982 inflation (actual and expected) was very different from 2009 inflation & expectations. 

 

Investors should naturally ask for a higher earnings yield in order to earn a return in excess of the rate of inflation.  No?

 

How about comparing the real earnings yield of the market in 2009 vs 1982?

 

[ERICOPOLY]

Eric - hope your move to Australia works out. It seems one will end up paying up one way or the other.

 

From wikipedia, from the PPP stand point, it seems Australia is 40% more expensive than the U.S and Canada 23% more expensive than the U.S. Large cities in developing countries are as expensive or more expensive than the U.S. ( if one wants to have the same standard of living )

 

I was in Canada recently and to have the same standard of living, I would have to pay up a lot more than 25%.

 

http://en.wikipedia.org/wiki/Australia

http://en.wikipedia.org/wiki/Canada

 

We're not going to Australia -- we wound up in Montecito instead.  The issue is that I discovered that Australia recognizes our IRA accounts as some kind of Foreign Investment Fund.  So I have a 7 figure Roth IRA (start of last year) that gained slightly more than 300% in 2012.  They would have taxed it at the 45% income rate -- they don't care what happens within the account, they just tax the annual gain of the account as if it were all realized income..  So it would have cost me more than a million in tax but here in the US my tax on it is zippo, zilch, nada.  My wife's RothIRA is also up to 7 figures now.  It's just way too expensive for us to consider moving.

 

They do recognize "employer sponsored" plans -- so if I'd never rolled my 401k into the IRA I wouldn't be stuck in that mess.

 

And a US citizen could move there for five years and have no issues with their taxes.  The difference is that because I'm already an Australian citizen they're just salivating at the first chance to label me as a taxable resident.

 

 

 

 

 

 

 

 

 

[twacowfca]

I think it is very unlikely that the secular bottom was reached in 2009, with a CAPE twice as high as the one reached in 1982.

 

Probably matters to investors what the "real" earnings yield is.  1982 inflation (actual and expected) was very different from 2009 inflation & expectations. 

 

Investors should naturally ask for a higher earnings yield in order to earn a return in excess of the rate of inflation.  No?

 

How about comparing the real earnings yield of the market in 2009 vs 1982?

 

 

That's a good point.  Ron Muhlenkamp his book has a good chapter showing that market returns have a high correlation with the real earnings yield which was much lower than the nominal earnings yield in the 1970's through early 1980's.

[stahleyp]

how does the real earnings yield of 1982 to 2009 compare? I'd imagine the story is very different, right?

[ERICOPOLY]

A P/E of 25 will get you 4% real returns if inflation rate is 0%.  (well I suppose that's oversimplified given that I'm not including earnings gains from GDP growth and productivity gains).

 

Back in the real world, there is inflation so P/E should be lower than 25.  How much lower should depend on the rate of inflation.

 

Because over the long haul (so I've been told) the market has returned 4% real.

 

[bmichaud]

In the GMO doc I attached, you can see that the long run real return for US large cap stocks is 6.5%....

 

For stocks to be fairly valued here with a 2.5% yield, one must believe in a 4% real growth world. Long run real GR is 3%, so that means 1% deflation. We are running over 2%....

 

If in fact real growth is 3%, then US stocks are fairly valued at a 3.5% dividend yield, which would be around 1,100 give or take.

 

Say inflation ticks up to 5 or 6% as some would project - would US stocks be able to pass through all of that 2 or 3% excess inflation via price increases? If so, then fair value remains around 1,100.

 

I would argue stocks would pass through 50% or so of the excess, which means the FV dividend yield would need to rise 1 to 2% to compensate investors for a lower real growth rate.

[ERICOPOLY]

 

For stocks to be fairly valued here with a 2.5% yield, one must believe in a 4% real growth world. Long run real GR is 3%, so that means 1% deflation. We are running over 2%....

 

I don't follow the computation because I see something missing.  Take WFC for example... only a portion of the cash returned to shareholders comes via the dividends, but you are only capturing the dividends.

 

I'm not sure if my objection matters though -- taken as a whole, how much higher would the dividend yield be if buybacks were totally outlawed and banned?

 

And don't forget the stash that companies keep piling up overseas.  They seem unwilling to pay it out as a dividend because they don't want to pay the US tax on that income.  Again though, I'm not sure how much that moves the needle on dividend yield if you add that in.