So, after my post yesterday I received the following email (reprinted with permission) from a money manager. I am posting it verbatim (only company names added to tickers) and readers can judge who they think is correct…please comment..
First, my post from yesterday.
1- Financials:
Will not be touching them and are currently waiting for Wells Fargo (WFC) to rally a bit to sell out of it. Why? I no longer know the rules of investing in them. TARP and its requirements change almost daily. Going forward, the term (interest) the Gov’t demands and the shareholder dilution that accompanies them will become more onerous. That is bad news. Also, the second body blow from housing is due this year and next. That means more suffering for financials and shareholders.
Now, this does not mean I will never invest in them again, just that I think in 2010 we will still be able to buy them at these levels or lower. Is there value in financials? I just cannot quantify it as long as we have shifting rules from the Gov’t.
2- The Market
Up to 9000, then back to 8000 all year. The market will bounce like a ball but never really go anywhere. I think the risk is to the downside as the recession worsens. Unemployment ought to pass 10%, GDP will be negative for the year and credit is still drying up. So, given those, how do we go to 10,000?
That being said, it is a traders market. If you sell options you can make some money here. If you trade the rang you can also. If you are not a trader, don’t try to be one. Be who you are
3- Oil
Have written a lot about it recently. Why? Demand has fallen true, but the unreported story is production has fallen off a cliff also. Oil is not like a faucet. It cannot just be turned back on. A drilling project shuttered because of low prices today cannot just be flipped back on when prices recover. There is a tremendous lag. As crazy as prices were at $147, they are equally as crazy at $47. US production continues to fall, Mexico’s has plummeted and OPEC is more in power than ever. That only serve to heighten the Geo-Political risk of oil. Translation? One wacko can cause a global oil price spike.
I see the most value here now, or at least a market unfettered by arbitrary Gov’t intervention. Yes, I know that most foreign oil companies are govt’t owned, what I am saying is that if you buy oil today, your ownership cannot be diluted by the gov’t like it can and is in equities today.
4- The dollar and inflation….
Has anyone ever seen a scenario when massive supply of an item has not caused a devaluation of it? How can the current US Gov’t’s “running the dollar printing presses full tilt” like they are now NOT lead to a devaluation of the dollar? Here is the problem. The gov’t WANTS inflation to return. It will increase home prices, increase to prices manufacturers get for their goods, increase equity values etc. The problem is, gov’t always overdoes it. That means that they will pump too much into the system and inflation will get away from them.
That genie, once out of the bottle is only pot back in by inflicting more pain on the economy. It then becomes a vicious circle…
The reader email:
“The history from the 1930 shows a Real GDP that has been quite steady when you average out the results of 3.9% in 1930 to 3.17% at present. You can see the annual fluctuations in the chart of Real GDP-below, but we are not investing for 12mos but for ~5yrs. So….my advice is to trust the history and expect 3.0%-3.2% for the next 5yrs-10yrs as well. Certainly there is an inflation risk that Bernanke needs to offset with a vigorous reduction in liquidity as monetary velocity recovers, but my guess is that he will be sensitive to this and that we are more likely to see inflation at less than 2% THAN see it soar to 7%+.
In my view to be able to buy GE (GE) at the current level assuming a future 20% ROE and a 1.4xBV I calculate that I am getting a 14%+ Owner’s Earnings. Since the market capitalizes earnings back to the core inflation + Real GDP = Current Market Rate of Return when psychology improves (I expect this to be at the 5% level in 2yrs-3yrs), THEN an investment in many issues today with GE’s pricing could easily triple.
The only time the market was last priced so that stocks were showing such high earnings yields and owner’s earnings was during high periods of inflation 1974 and 1982 during which 11% core inflation + Real GDP = ~14%. THIS IS NOT THE FACT TODAY WITH INFLATION AT 2.4% AND FALLING!!
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I see much to like at present. Oil (DBO) will rise. Many good issues like EOG Resources (EOG), Canadian Natural Resources (CNQ), Suncor (SU) and etc look as attractive as GE. Remember oil cannot rise above its economic value or its value to the economy. Oil at too high a price causes the economy to slow and price then self corrects. Oil can only rise to a level that benefits economic growth.
Higher oil prices spurs investment in alternatives and alternative technologies. We are in a transition period during which weak oil supply will force invention and result in other energy sources not yet deemed viable or even discovered. My favorite economic text is Julian Simon’s “Ultimate Resource II” in which he wrote that the greatest misunderstanding investors seem to have is our own inventive force and its hidden hand within the economy to wring sea change. As OB1 said, “Trust the force!”
I am more bullish than you.”
This is what I love about this stuff. One of us will be right. For the record, I hope the reader is as my long portfolio will do VERY well (I am not short anything). I just do not think he is, for 2009. 2010 may be a different scenario but we need to get through this year first. If 2008 did not teach you a lot can change in the course of a year, nothing will.
So readers, who is right? Please comment and keep it constructive…
Disclosure (“none” means no position):Long DBO, GE, none
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6 replies on “My Dire 2009 Outlook, A Rebuttal”
Here is my response:
http://changealley.blogspot.com/2009/01/coming-out-of-crisis.html
As for avoiding the financial sector, it strikes me as a little ludicrous. The financials are ground zero, and there is no doubt that some of the deepest bargains are there. I’m sure John Paulson, Wilbur Ross, or Warren Buffett could attest to this. You just have to be able to differentiate between the solid companies and the garbage.
Nick,
But none of them are buying equity in any financials currently…
Buffett did the Goldman deal but that was a preferred @10%. the others, nothing
thee are still huge alt-a loan defaults coming, another leg down
That's not true…
Wilbur Ross has already made significant investments in financials — H&R Block's mortgage unit, Assured Guaranty.
John Paulson is buying MBS and IndyMac bank, and looking to expand those holdings. Eddie Lampert has bought nearly $1 billion worth of financial companies so far, such as Capital One, Hartford Financial, CIT Group, Sallie Mae…
With Buffett — US Bancorp, Swiss Re, increased stakes in Wesco, Moody's, Wells Fargo, M&T Bank, and surely many, many others at current prices.
So there is no doubt that shares are trading and deals being made within the financial sector. Yet, as Buffett wrote:
"Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over."
Nick,
those purchases mostly were made Q1 and q2 last year and all, are stunningly underwater.
the mbs i do not consider “investing in financial stocks”. by that i mean equities. there are probably value in the bonds also but most folks do not buy there..
Q4 reports ought to be rolling out any day and would be willing to bet those positions have not grown and several may be diminished like lampert’s Citi stake.
in the post i said that banks would be good buys again it was just that these prices (or lower) will probably be able to be had farther down the road..
just go back to last January and remember where we were at, or June..
time will tell of course…
Well, it depends on which financial stocks you’re talking about. Certain small-cap financials actually would be a good proxies for direct MBS investments.
Second, the investments I highlighted are not only from Q1 and Q2 — they were made throughout 2008; and in many cases, they’re underway right now, such as the IndyMac deal. For some investors, the current lower prices are a bullish signal, not a bearish one.
In other words, the difference is that these investors are pricing deals, not timing the market. Being stunningly underwater is a judgment made in hindsight, using the subsequent direction of the market as a proxy. I go back to my Buffett quote: Who knows where the market will go? Who even cares?
(I hope it goes lower.)
My only point is that shares are trading and deals are being done, by very shrewd investors who know the financial sector. And the irony is that my examples are the exact investors who best avoided this crisis — such as Paulson, and now Ackman with Visa and MasterCard.
The fact is that in specific financial stocks — and especially small caps — there are absolutely ridiculous undervaluations, some along the lines of Warren Buffett’s historic Daehan Flour or Western Insurance investments. Stocks where the excess balance sheet assets are worth more than the market capitalization, not including numerous, robust business lines, not exposed to mortgages.
I have no view on what will happen with the financial index or GDP or even the blue chip financials, nor do I care. But I can say with absolute certainty that there is tremendous value out there, and some of the deepest values are in complex, small-cap financial stocks.
Of course, the barrier to entry, for most investors, is being able to understand these intricate companies. In many cases, the companies are so small that it isn’t worth large investors’ time to study them. The upside, of course, is historic.
I think we are saying sort of the same thing. I am simply saying i think there is significantly more downside.
most of those name are down 50% of more since the purchases….i think there may be another 50% down in many of them