Friday, March 28, 2014

Friday noontime noos

A certain swarthy, recently-embearded Englishman from the investment fund world noted yesterday (in a private, unshareable blog post that I certainly can't access oh no) that the present broad market weakness might simply be the result of "allocation season", and that it'll be done after next week. So I guess we can just take our summer positions now.

He also noted the rise in the belly of the Treasury curve is good for banks. And Josh Brown said the banks already are trading at a dismal P/E, so I guess that's the place to go for the next few months? The NASDAQ is already popping its little biotech & 3D bubble, so that's probably done.

Anyway, here's some news:

Crossing Wall Street - there's no such thing as value. It's probably been beaten into your skull already, if you're a value-investing gold mining person. Still, let's quote:
I’ll let you in on a little secret: there’s no such thing as value. There’s no magic value gnome hiding underneath each stock. Instead, there’s only price.

Value is a fiction, but a highly useful one. It’s an excellent way for us to think about a stock.

Telling us that a stock is below its value doesn’t tell us much. What if the stock’s value falls? Or what if the price/value gap grows wider? The price/value dichotomy is further complicated by the fact that price itself can impact value. For example, an elevated share price can make it easier for a company to raise money.

With any investment analysis, your constants are most likely highly contextual, and as a result, they’ll do a poor job of predicting out-of-sample results. That doesn’t bother me so much, and it’s also why I don’t much care for price targets. For all their sophistication, valuation models aren’t reality. They’re merely a blurry and highly conditional image of reality.

The proper job of an analyst is to judge possible outcomes and their impact. Value is a tool, but it must always be seen within the context of if/then scenarios. Too often, modelers become enthralled by their model and don’t look at what the underlying message is.
In other words: quit trying to catch falling knives.

Bespoke - rotation into emerging markets. I don't see why you should. They're fucked. You could make a case that they're oversold, that their fortunes haven't reversed as fast as the market thinks they have; but this shouldn't be a bottom in EMs unless something is really different this time around. - coking coal crashes calamitously. Two takeaways: Frik Els obviously reads this blog religiously, and supply is increasing while miners are all operating at a loss already. Thus the secular bear market in commodities continues.

Huffington Post - GOP lawmakers want to ban online gambling because it takes money away from Sheldon Adelson's casinos. You thought this crony corruption only happened in third-world backwaters? Well, it does!


  1. rotation into emerging markets. - I don't see why you should.

    Go to stockcharts,enter EEM:SPY and then look at the results.

    1. Weekly EEM:SPY is still a quite obvious downtrend, it's only just bounced back up to its Bollinger(20) mean. Daily EEM:SPY has popped >2SD up, so are you saying that's overbought?

      I don't think there's a case to call EMs investable. I'm convinced we're in a secular EM bear now. The problem is that the EMs got too oversold and now India is popping on Modi hopes (so it'll fall afterwards).

      So I'm happy for the guys who get to participate in a bear market rally, but I don't want to be there. Rising US rates means the EMs die a horrible death for the next decade. The market just doesn't understand timescales that long, is all.

  2. Just read his in the Dail Telegraph:
    "So what lessons do I draw from all this about the current investment climate? My observation today is that everyone loves developed markets such as the United States, which, in valuation terms, is expensive against its history, and they hate emerging markets such as China, which is very cheap against its history. This consensus seems to be reaching an extreme."

    Why you should listen to Anthony Bolton
    Anthony Bolton steps down today as a fund manager after a distinguished career. As manager of the Fidelity Special Situations fund in the 28 years to 2007, he achieved annual returns of nearly 19.5pc, turning a £1,000 investment into around £147,000.

  3. "Rising US rates means the EMs die a horrible death for the next decade." To me this sounds like a simple extrapolation of shortterm trends far into the next decade.

    I'd say: rising rates are a sign of a recovering US economy,which should give emarging markets a chance to grow their exports and their economy.
    Long term emerging markets have certain advantages when compared to developed markets such as a young and growing population with low overall debt levels.

    1. EM growth requires an influx of DM money. That *stops* when DM money can find a decent enough return in the DMs. When the inflows become outflows, EMs suddenly see that they've been grossly misallocating capital for the last 10 years, and have to go through a long period of debt destruction to clear the slate. That's the theory anyway.

      EMs can't grow their exports if they haven't been allocating proper amounts into infrastructure (because of misallocation, e.g. due to corruption) - so e.g. India can't export more to the US because their transport and electrical systems are already pushed beyond their limits. And they have no access to cheap capital to fix that anymore. That's a problem with a lot of EMs - India especially.

      Also, growing your labour base to be able to exploit export growth requires government investment in labour skills, otherwise you hit your labour productivity ceiling and your country is strangled by spiralling wage inflation. That was a problem in China 2 years ago.

      Plus, if your EM country *can* build out manufacturing to increase exports to the DM, and if you *do* have access to enough DM capital to make that a reality, you end up with overbuild, competition drives profit margins down, and now no matter what you're exporting it's not improving your economy. We're seeing that in Chinese steel manufacturing right now. US growth doesn't need more steel because it's not particularly capital goods intensive, the way Chinese growth has been - the US will be growing its STEM services, not so much its subways.

      Also, a DM secular boom happens when DM per capita productivity improves. The whole "reshoring" narrative you've been seeing assumes things like cheap US natgas improving US productivity to the point that there's no longer an advantage in manufacturing in the EMs. Reshoring is being costed out by some companies right now, apparently.

      Sure though, there's dozens of different factors that come into play, and they each hit different EMs differently. So you could still say my statement was a gross oversimplification. And maybe some hyperbole. But that's what the people come to this blog for!

    2. Oh - about "rates" above:

      EMs also seem to need artificially low rates to stimulate growth. Those artificially low rates happen because of a secular bear in the DMs.

      And those artificially low rates stimulate misallocation and corruption - thus, in China for example, you hear estimates of a *trillion* dollars of their 2008-9 stimulus having been siphoned off by local politicians.

      Hey, maybe that explains the deeper problem of *why* EMs need artificially cheap rates? The rate the market sets on a loan is determined by demand plus risk premium - so in a secular bear there's more investment demand for bonds over stocks (thus the secular DM bear), and the risk premium gets driven down in the EM.

      But the problem is that the rate of return on that loan (for the EM's economy) is lower in the EMs than it is in the DMs, because more of that money is lost to corruption?

      That's why EMs can never compete with DMs unless the field gets tilted in their favour with an artificial low-rate environment.