In spite of it being written at the beginning of June it is still very relevant.
I liked the article because it
combines the opinions of investors with multi decade investment
experience.
A lot of the current analysts, fund
managers and market commentators have no experience of a severe
recession and bear market.
Probably the worst they have seen was
the internet bubble and crash, and thus they think that the economy
will recover as quickly as it did then.
To equate the internet crash and the
resulting recession with the current recession would be a huge
mistake.
The world economy could start growing quickly
again after the 2001 recession because wealth destruction was limited to the drop in
prices of internet shares only.
In this recession we have:
-
House prices having decreased by more than a quarter
-
Banks that are not able to lend
because of a lack of capital
-
Consumers cutting back on spending
and starting to save again
-
I am still very uneasy about the
current market rally.
Over the past few weeks stock market
participants have had the great fortune that some of this country’s
finest investors and commentators have spoken up regarding their
views on the global equity markets and economy.
Even “retired” investors such as
Michael Steinhardt and Julian Robertson have weighed in. This
provides a unique opportunity to analyze how some of the most
respected and often prescient investors are viewing the ongoing
crisis and what they think the future will look like.
With Ben Graham having passed away and
Warren Buffett (and to a lesser extent Charlie Munger) having to play
the role of national cheerleader regardless of what his actual views
are, I believe it is incredibly prudent to listen carefully to these
elder statesman of investing.
Accordingly, I have chosen some written
and spoken words from a group of people that, based on experience,
should have unique and useful insight on the markets.
1. Julian Robertson (Interviewed in
the May Issue of Value Investor Insight)
“I ask anyone to give me an example
of an economy beefed up by huge amounts of quantitative easing that
did not inflate tremendously when or if the economy improved. I
think what we’re doing now will either fail, or it will result in
unbelievably high inflation – and tragically, maybe both. That
would mean a depression and explosive inflation, which is
frightening.”
In a November 2006 interview in the
same magazine, Robertson warned investors that overly indebted
consumers would not be able to navigate the impending housing crisis
and suggested that the effects on the overall economy could be quite
dramatic. Now, a little more than two and a half years later,
Robertson is again sounding the alert. This time it is about
inflation and the potential for rapidly rising interest rates. In the
article he even goes as far to say that the 20% interest rates the US
saw in the 1970’s could end up looking low in comparison to what is
in store in the near future. What is he doing to protect himself? He
is buying Constant Maturity Swap Rate Caps, which basically are
similar to puts on long term Treasuries. He is also looking into
natural resource stocks and believes that stocks are going to be
better than cash.
“Let me make my viewpoint perfectly
clear, my trust has been severely shaken in the Federal Reserve, the
Treasury, the Congress and the Executive branch of government in
their collective judgement as to what is required and appropriate for
a fundamentally sound long-term economic recovery…Governmental
programs deployed to stabilize and grow the economy appear highly
risky, especially those involving an unprecedented Federal intrusion
into the private capital system. They have been implemented in an
ad hoc fashion with little predictability and consideration for their
long-term effects upon the economy…My financial market outlook is
rather cautious. I believe the recent stock market rally is nothing
more than a bear market rally…Many economists are forecasting an
end to the recession by year end, and I have even seen one
anticipating a “V” shaped recovery. If my previous comments about
the stimulus plan prove to be correct, these forecasts will be
wrong.”
Rodriguez’s keynote speech at the
Morningstar conference was, in a sense, a parting shot at the market
and the fiscal and monetary leaders. He is about to begin a
sabbatical that will take him away from his day to day involvement at
First Pacific Advisors. However, I don’t think his scathing
criticism of the authorities that have managed the crisis and very
bearish comments on the market were attempts to go out with a bang.
Both his most recent letter to FPA shareholders and this speech
detail his legitimate concerns regarding the future growth and
prosperity of the US. I think the most startling aspect, however, is
his complete lack of faith in the government to help mitigate the
effects of the crisis on consumers, homeowners, and the financial
markets.
“But, my sense is that we have had a
terrific rally, we have had a vast amount of stuff:
dollars--injections of all sorts of things into the economy--TARPs
and other new programs and the ultimate effect is hard to know
entirely at this point. But my sense is that this not will not
change the course of what is going to happen very much: that the
economy is weak, it will remain weak. Whether we have seen the
weakest moment, whether we’re to decline at a lesser rate--that may
be true because the rate at which we were declining was so
precipitous. But I’m not sure that’s good enough. And my net
feeling is that this rally does not have all that much more to go and
the dangers out there remain consequential…The dangers in the
economy are most everywhere.”
Watching this conversation with
Steinhardt was the best 25 minutes I have spent in a while. I highly
recommend watching the full
interview. In addition the above concerns, Steinhardt
envisions a lot more pain for the US economy due to continued job
losses and reduced consumer spending. He also details how distressed
he is about the amount of “ugliness” we have seen on Wall Street.
He is very worried that despite the change-focused rhetoric of the
Obama administration, there is not enough legitimate desire to
accept the short term pain required to fix the economy and Wall
Street for the long run.
“Probably the single biggest drag on
the economy over the next several years will be the massive
write-down in perceived wealth that I described briefly last
quarter…This loss of $20-$23 trillion of perceived wealth in the
U.S. alone (although it is not a drop in real wealth, which is
comprised of a stock of educated workers and modern plants, etc.) is
still enough to deliver a life-changing shock for hundreds of
millions of people…So we’re used to the idea of a preferred V
recovery and the dreaded L-shaped recovery that we associate with
Japan. We’re also familiar with a U-shaped recovery, and even a
double-dip like 1980 and 1982, the W recovery. Well, what I’m
proposing could be known as a VL recovery (or very long), in which
the stimulus causes a fairly quick but superficial recovery, followed
by a second decline, followed in turn by a long, drawn-out period of
sub-normal growth as the basic underlying economic and financial
problems are corrected…We have all lost some confidence in the
quality of our economic and financial leadership, the efficiency of
our institutions, and perhaps even in the effectiveness of capitalism
itself, and with plenty of reason.”
To some extent Grantham has parted from
his very bearish brethren and has actually pegged fair value of the
S&P around 880. His view is that the unprecedented stimulus being
provided the US government will have an initial positive effect on
the economy and the stock market, potentially pushing the S&P
into the 1000-1100 range. But he cautions investors that they should
not interpret this as a sign of a legitimate and possibly lasting
bull market. As indicated above he sees a long road to recovery
because people’s confidence in the government, financial
institutions, and in the stability of their own balance sheets will
take years to come back.
“This is the worst I have seen in my
entire business career. It happens to be the sharpest market decline,
the biggest…But much more than that this one seems to have had much
more catastrophic, maybe economic consequences. The financials
system’s misdeeds falling over into the general economy in a way
that did not happen in any major way in 1973-74 or in the beginning
of the-when the tech bubble bust-in the beginning of the 21st
century. This is the worst break, measurably, but it has also created
the most difficult economy of all of them. So the pain caused by
the--I’d say the disgraceful behaviour of so many in the financial
system--has spread over to the innocent people. Wall Street taking
advantage of Main Street…”
“The malfeasance and misjudgements by
our corporate, financial and government leaders, de-dining ethical
standards, and the failure of our new agency society reflect a
failure of capitalism. Free-market champion and former Federal
Reserve chairman Alan Greenspan shares my view. That failure, he said
in testimony to Congress last October, "was a flaw in the model
that I perceived as the critical functioning structure that defines
how the world works." As one journalist observed, "that's a
hell of a big thing to find a flaw in."
On numerous occasions during the
interview with Morningstar, Bogle suggests that Wall Street’s
fleecing of Main Street will have a lasting impact on retail
investors and consumers. According to Bogle, aside from just the
psychological damage, the lack of fiduciary care exhibited by a
select few led to a contagion that has poisoned the entire economy.
In fact, the constant theme of the two above pieces and his recent
speeches has been that the people who are supposed to protect mom
and pop investors--institutional money managers and government
regulators--have failed miserably in their duties.
After reviewing this set of admittedly
bearish quotes and excerpts, it is important to step back and
consider the context. All of these men are by nature very
conservative and are unlikely ever to be seen riding a mechanical
bull with Jim Cramer on CNBC. Accordingly, the fact that they are
concerned about the potential downside is not a surprise. To some
extent all of these investors believe in the value investing mantra
of protecting against permanent capital impairment and thus are
understandably cautious, especially given the recent stock market
rally and euphoria over potential “green shoots.”
However, even though (as anyone who
reads my columns knows) I am pretty bearish regarding the stock
market and the US economy over the near term, this is not why I
decided to highlight the insights from these particular investors.
While I do suspect that the current run up in the market will turn
out to be nothing more than a painful bear market rally, it is not
these men’s views on the resilience of the market that concern me.
Specifically, I have been struck and honestly disheartened by the
complete lack of faith (in just about everything I read) in the
government and the Fed to re-establish prosperity without either
causing terrible inflation or saddling future generations with a debt
that cannot be repaid.
What scares me the most is that the
group of investors highlighted above, who have shown throughout their
tenured careers to be able to navigate very complex markets, candidly
espouse their fears regarding the policy measures being implemented.
From what I know of them, none of them is prone to exhibit hyperbole
or make outrageous comments for the sake of publicity. That such
measured and thoughtful investors have become so disillusioned by the
events of the past two years should caution investors to not put too
much faith in the potential for a smooth landing in which we
basically go back to how things were during the boom. In other
words, despite the emerging bullishness, capital protection should
continue to be the focus of all investors.
Have you signed up for my free weekly newsletter "Investing that makes sense" yet?
Sign up now and receive
articles like this in your inbox weekly.
And if you sign up now you will also receive a
10 page free bonus report - Enhanced Checklist for Value Investors - with over
30 proven checklist items to improve your investment returns.
I respect your privacy - Privacy
Policy
About the Inoculated Investor Blog
The reason I have created this blog is
that I believe my insights and research can help both professional
and non-professional investors improve their investing acumen.
Through my commentary, links to high level articles and blogs, my own
investment research, notes from conferences and speakers, and
suggested reading lists I hope to add to my readers' understanding of
investing, the US/world economy, and behavioural finance.
My goal is to post high level links and
longer pontifications on the markets or investing a couple of times a
week. I will also periodically post interesting things that I come
across so it will be important to check in on a regular basis. My
promise is that every external link, reading recommendation, or piece
of research has been read by me and is shared as a result of its
pertinence, relevance and quality.
http://inoculatedinvestor.blogspot.com/
P.S. A media company in the wrong country at the wrong time...
This month the company I found for subscribers is located in France.
In terms of the size of companies I look at its quite large with a market value of €1,72 billion.
The company owns the most popular television channel in one of the largest European countries but is also very active in new media channels including the internet, tablets and smart phones.
In spite of this, the market views it as an old media company that is soon going the way of the dinosaurs. However, when you look at its financial statements you will see what a great business it is.
Its balance sheet is solid with no debt, and it generates a high amount of free cash flow and profits. This enables it to pay a dividend of just under 7% that can easily be maintained and has room to increase.
When I recommended the company it was trading at 7 times free cash flow, 7,7 times 2010 earnings and 5,6 times EBIT to enterprise value.
I am sure you will agree this is undervalued.
To immediately get your hands on this value investment idea (for as little as €39) click here.
|
