Take them for what they are, at least we know someone will be at the top of this list in term of accuracy and their opinion then given more weight. More importantly, we’ll know who to ignore…
Tag: davidson
You know the saying. Those who buy the “hot trend” do so eventually hoping to sell to the greater fool. In the case of the dollar trade, the greater fool would be the last guy to short it before the rebound.
You know the saying. Those who buy the “hot trend” do so eventually hoping to sell to the greater fool. In the case of the dollar trade, the greater fool would be the last guy to short it before the rebound.
This is a follow up to a previous post:
“Davidson” is back with some thoughts on the USD/Euro..
“Davidson” is back with some thoughts on the USD/Euro..
Davidson” submits:
With the 2007’s Total Mortgage level over $14.5Trillion of which more than $11.1Trillion were home mortgages it would be hard to find a stronger connection to the financial system than this. Data from US Census Bureau most current information.
Equity REITs are publicly traded investment vehicles which use mortgage debt in the purchase of investment properties and form the REIT asset class that is used as part of your balanced portfolio. The market capitalization of the Equity NAREIT holdings has grown from 1972’s year end $332Mil to 2007’s year end $288.7Bil. This ~870 fold increase results from a combination of growth and increasing holdings from 12 REITs at inception and to 118 REITs at the end of 2007. Data from http://www.reit.com. At the end of 2008 the Equity NAREIT market capitalization had fallen to $176.2Bil. A comparison of the NAREIT Total Return vs Equity Indices in Chart 1 makes clear that ~94% of returns are derived from dividends which in turn by law are 90% of FFO(Funds From Operations).
Chart 2 of the NAREIT Equity Index vs. Ttm(Trailing12mos) Dividend Yield shows that the dividend yield which had held in the 6%-9% for much of the period fell almost to ~3% in 2007 during a period of low cost mtg funding. The subsequent correction of 2008-2009 forced dividend yields to 10.08% in Feb09 which was at a historically high level and was a signal that the Return/Risk had become attractive. The recent fall in dividend yield to July ‘09’s 4.92% is a function of recent changes in the tax law that currently permit REITs to issue stock in lieu of cash which increases their financial flexibility. This change is expected to be a temporary forbearance, a bridge during the current economic period. Most expect regular 90% dividends to be paid in cash once this difficult environment has moderated.
My view is that these dividends will return although it is difficult to predict their timing and their magnitude till there is greater clarity. I continue to recommend REITs as an attractive allocation in balanced portfolios with a strong preference for Global REIT exposure.
Disclosure (“none” means no position):
Davidson” submits:
With the 2007’s Total Mortgage level over $14.5Trillion of which more than $11.1Trillion were home mortgages it would be hard to find a stronger connection to the financial system than this. Data from US Census Bureau most current information.
Equity REITs are publicly traded investment vehicles which use mortgage debt in the purchase of investment properties and form the REIT asset class that is used as part of your balanced portfolio. The market capitalization of the Equity NAREIT holdings has grown from 1972’s year end $332Mil to 2007’s year end $288.7Bil. This ~870 fold increase results from a combination of growth and increasing holdings from 12 REITs at inception and to 118 REITs at the end of 2007. Data from http://www.reit.com. At the end of 2008 the Equity NAREIT market capitalization had fallen to $176.2Bil. A comparison of the NAREIT Total Return vs Equity Indices in Chart 1 makes clear that ~94% of returns are derived from dividends which in turn by law are 90% of FFO(Funds From Operations).
Chart 2 of the NAREIT Equity Index vs. Ttm(Trailing12mos) Dividend Yield shows that the dividend yield which had held in the 6%-9% for much of the period fell almost to ~3% in 2007 during a period of low cost mtg funding. The subsequent correction of 2008-2009 forced dividend yields to 10.08% in Feb09 which was at a historically high level and was a signal that the Return/Risk had become attractive. The recent fall in dividend yield to July ‘09’s 4.92% is a function of recent changes in the tax law that currently permit REITs to issue stock in lieu of cash which increases their financial flexibility. This change is expected to be a temporary forbearance, a bridge during the current economic period. Most expect regular 90% dividends to be paid in cash once this difficult environment has moderated.
My view is that these dividends will return although it is difficult to predict their timing and their magnitude till there is greater clarity. I continue to recommend REITs as an attractive allocation in balanced portfolios with a strong preference for Global REIT exposure.
Disclosure (“none” means no position):
Categories
Philadelphia Fed’s Bullish Report
“Davidson” submits:
The Philadelphia Fed report on the business outlook survey has startled Wall Street and set abuzz chatter regarding the long forecasted V-Shaped Recovery by Wesbury. This report was so far better than expected 4.2 vs. an expected -0.2 that Treasuries fell in value as investors sold to buy stocks. The report can be accessed at the URL here and I have presented the relevant chart below.
The market is if anything anticipatory. On CNBC @4:30PM yesterday John Herrmann of Herrmann Forecast LLP commented that he expected the Sept. Purchasing Managers Index(PMI) to show new orders up dramatically to ~59% level.
It would be convenient if investing could be so simple that we could take these pieces of information and invest with confidence into just the right sectors and asset classes. But, the markets are anything if convenient and predictable. While the Return/Risk appears to favor many asset classes, approaching the market with a balanced portfolio has always proven in the long run to have been a prudent strategy. There is always present no matter how bullish the news seems to be developing the significant uncertainty of unseen events. We always know what we would like to have as a return, but we can never know when an unpredicted event will spook the market confidence and implode our short term needs.
Disclosure (“none” means no position):
Categories
Philadelphia Fed's Bullish Report
“Davidson” submits:
The Philadelphia Fed report on the business outlook survey has startled Wall Street and set abuzz chatter regarding the long forecasted V-Shaped Recovery by Wesbury. This report was so far better than expected 4.2 vs. an expected -0.2 that Treasuries fell in value as investors sold to buy stocks. The report can be accessed at the URL here and I have presented the relevant chart below.
The market is if anything anticipatory. On CNBC @4:30PM yesterday John Herrmann of Herrmann Forecast LLP commented that he expected the Sept. Purchasing Managers Index(PMI) to show new orders up dramatically to ~59% level.
It would be convenient if investing could be so simple that we could take these pieces of information and invest with confidence into just the right sectors and asset classes. But, the markets are anything if convenient and predictable. While the Return/Risk appears to favor many asset classes, approaching the market with a balanced portfolio has always proven in the long run to have been a prudent strategy. There is always present no matter how bullish the news seems to be developing the significant uncertainty of unseen events. We always know what we would like to have as a return, but we can never know when an unpredicted event will spook the market confidence and implode our short term needs.
Disclosure (“none” means no position):
“Davidson” Submits:
Subject: Dallas Fed Releases Updated 12mo Trimmed mean PCE Inflation benchmark.
The Dallas Fed released their 12mo Trimmed mean PCE inflation benchmark this morning. This includes the Jun09 and July09 values and was delayed while they went through a periodic review. It should be no surprise that the values are lower as this indicator carries an estimate for cost of housing as well as energy and food. This index “trims” monthly spikes, but includes all relevant expenditures as opposed to earlier “Core Inflation” which simply excludes food and energy components.
This is in a favorable direction for market valuations. My analysis uses the long-term Real GDP trend of 3.15% and adds the 12mo Trimmed mean PCE to produce the Market Capitalization Rate(MCR). This value then is calculated with today’s release to be 4.85%. This then becomes the means of valuing whether the market is over/under priced all things being equal and the same can be said of individual stocks and bonds.
For Treasuries this becomes a simple calculation. One simply takes the 10yr Treasury Yield which today is ~3.46% and by comparison it is simple to see that the general economy should produce a higher return than 10yr Treasuries. The lower 10yr Treasury Yield is because of the risk investors perceive in alternative choices.
There is not enough space this email to detail the analysis of the SP500, but mean estimated earnings are currently $64.50(3Q09) and as I write this the SP500 is priced at 1030. The Earnings Yield of the SP500 is calculated simply by dividing est. earnings by the current price or $64.50/1030 = 6.26%. This is a simple methodology and all the inputs can change over time, but the process produces a relative return comparison that is simple to use. To convert this into a estimate for the SP500 price target one divides the SP500 Earnings Yield by the MCR, 6.26%/4.85% = 1.291 or 29.1% higher. This means that all things remaining equal the SP500 has the capacity to rise to ~1330 IF earnings were to be at median level today and IF investor psychology normalized. Note: If inflation changes so does this number which can dramatically change market pricing. Lots of “IF’s” here but this is how the market works. We can only make estimates and can never make guarantees.
The calculation uses a normalized or mean earnings estimate because the basic assumption is that the companies in the SP500 are expected to recover as they have since 1930(79yrs of economic and investment history). There is nothing that I can see in our current situation that would suggest that a recovery would be impossible. If something should suddenly become apparent that our Free Market Economy had been injured by unthinking government action, then we would have to revisit all assumptions. But, even with all the issues being discussed today which seem potentially injurious to our economy, history shows that sparring political parties generally compromise without major damage to our economy.
This Dallas Fed release makes allocation to stocks and corporate bonds quite favorable at this time.
Disclosure (“none” means no position):
Well, its official, the boo-bird are back out on Eddie Lampert after Sears Holdings (SHLD) recent quarter. Now, it should be noted this is after Q1 results that “surprised” everyone being better that expected and the stock rallied from $35 to near $80.
So, who is right, the cheerleaders or the boo-birds? Neither.
Unlike any other retailers, Sears is mainlined to the US housing market. With 40% of the US market share for appliances, what happens in housing is acutely felt at Sears. With that appliance share, when housing is good, Sears will do well, unfortunately, the opposite hold true. When folks comes to Sears for an appliance for a new home, they will pick up paint in the paint dept., lawn tools, bedding, TV’s etc…
Let look at some number more closely. At Q1 2007 American’s were buying (at an annualized rate) $281 billion in “Furnishings and durable household equipment” (furniture, appliances). That represented the high water mark for that category (wasn’t that the peak in most housing markets also?). FY ending 2/2007 also marks the high water mark for Sears Holdings earnings (the annual average in 2006 vs 2005 for consumer expenditures rose appreciably). By the time Q4 2008 rolled around, consumers were now buying $259 billion a year of those products, a $22 billion annual decline. Remember, Sears holds 40% of the US appliance market. (Note, not all of the $22 billion are appliance sales but with Sears selling appliances and furniture, it is safe to say a significant chunk of the revenue declines at Sears can be traced directly here).
As of Q2 2009, that number is now at $251 billion annually. As of just Q2 2008 the number was $276 billion, an unprescedented one year drop. Anyone still wondering why Sears is seeing declines? ….
Appliances are the main reason folks come to Sears, absent that reason, Sears is just another retailer. So, when housing rebounds, one ought to expect Sears to once again show top-line growth. For that reason, the Q1 Cheerleaders came out way to soon and will probably stay hidden until Q1 or Q2 2010 when housing begin to gain some footing. The good news for them is that by then comps. will be so low that Lampert & Co. will be able to step over them.
Now for the boo-birds. You will be correct for now. BUT, lets look at what Lampert has done. He has steadily used Sears cash to repurchase shares. This is meaningless now but when housing does turn, the 20%+ fewer shares there will be outstanding will mean that a $1 million profit next year will equate to a 20% higher per share number, that is huge. For that reason, Lampert will not even have to deliver profit dollars in absolute numbers anywhere near what he did in the past for shareholder to reap large gains.
For several years the boo-birds have been saying Sears is “dead”, “dying” etc. Yet it has maintained a balance sheet healthier than almost every large retailers with the exception of Wal-Mart (WMT) and Target (TGT). Sears is not going to become extinct. The stories you are reading today are essentially reprints from any bad quarter over the last 4 years. Ignore them. Will Sears still be a big box retailer 5 years from now? Maybe, maybe not. The point is, “Sears Holdings” will still exist.
Sears is also making radically changing its online presence in a way that will differentiate it from all other brick and mortar retailers. It way too soon to know if this will payoff but if it does, the payoff will be multiples of what was invested. Pay attention to MyGofer, my gut tells me there is something there consumers will flock too.
My friend “Davidson” has this take on Sears:
While Lampert has improved the financial structure and efficiencies, he has not yet unlocked the value of the brands, i.e. Lands End, Die Hard and Craftsman. He needs to lay out a plan of attack in my opinion that lets investors understand his thinking on expanding brand distribution. At the moment they appear to be locked-up within a dull plain wrapper that is frayed at the corners.
He is right. Lampert’s silence is just fine when things are going great, but, when things are shaky, nervous investors need to be reassured or communicated with more. Lampert need not hold investors hands or bother giving guidance to Wall St., but an occasional letter to shareholders would not hurt. Davidson is right in his call for Lampert to communicate the strategy, shareholders “think” they know the strategy, but no one really “knows”.
I do get the whole “long term approach” Lampert espouses, but if folks are not clear where the ship is ultimately headed to, I’m not sure they can accurately look at where it is today and make an accurate assessment of progress.
A note: After Q2 Morningstar raised its “fair value” for Sears to $105 (hat tip reader Justin)
Just remember, most of what is said out there is simply “noise”.
Sears = Housing, don’t forget it.
Disclosure (“none” means no position):Long SHLD, WMT, none
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Another Look at Dr. Copper
An update from an article back in March…
“Davidson” submits:
It is useful at this time to review “Dr. Copper” and the Baltic Dry Index which many believe offer insight to global economic activity. As I review the multitude of current forecasts there are many which state that the market has over-reached economic reality, others state that while there has been an economic up-tick it will quickly deteriorate to a second dip-the so-called “W”-Shaped recession and a very few see a so-called “V”-Shaped Recovery. Many forecasters point to the short term movements in Comex Copper prices and the Baltic Dry Index to anchor predictions. The net result is a series of “UP” forecasts with up movements in the indices and “DOWN” forecasts with the dips. In some weeks the Baltic Dry Index and Comex Copper are not in alignment and the forecasts are mixed.
My suggestion is to apply Ockham’s Razor and focus on the 3mo trends to smooth out the weekly volatility. Net/net, both of these economic indicators appear to be in up trends.
In my experience there will always be analysts that find a reason to discount market movement. In the current instance their advice is to ignore the trends of Comex Copper and the Baltic Dry Index as being caused by China’s restocking of inventories and that this does not reflect a true increase in economic activity. I disagree! I interpret China’s activity as looking forward to potential needs and making a timely use of excess $US to buy cheaply priced commodities with the marginal cost of production of oil reported in the $70bbl-$80bbl range and for copper the marginal cost of production is reported to be in the $1.50lb-$1.80lb range.
I believe we should view Comex Copper and the Baltic Dry Index in the context of US car and truck sales. US sales turned up months before “Cars for Clunkers” program began and were coupled with anecdotal stories of workers being brought back to factories to replenish inventories. Add to this increased manufacturing activity a story of BYD(the Buffett Chinese electric car company) on August 22, 2009 in which BYD announced its plans to bring its electric cars to the US market in 2010. This is much earlier than previously anticipated.
It seems to me that economic activity is accelerating and that Comex Copper and the Baltic Dry Index are a reflection of this activity. Certainly the activity observed to date does not mean that it will not suddenly stop. But, history supports the notion that once economies begin to turn more positive they generally continue in the same direction even if it appears that government stimulation was involved.
I view this information as positive for investment in stocks and bonds.
Disclosure (“none” means no position):
Categories
“Davidson” on the Investing Noise
This is a great piece of advice from my friend “Davidson”.
The term Ockham’s(Occam’s) Razor is attributed to a Franciscan Friar William of Ockham:
William Ockham (c. 1285–1349) is remembered as an influential nominalist but his popular fame as a great logician rests chiefly on the maxim attributed to him and known as Occam’s razor: Entia non sunt multiplicanda praeter necessitatem or “Entities should not be multiplied unnecessarily.” The term razor refers to the act of shaving away unnecessary assumptions to get to the simplest explanation.
The great mass of material that is presented to us each day on investment analysis could benefit in my opinion by “…shaving away unnecessary assumptions to get to the simplest explanation” There is much more information presented in a single day than any single individual could possibly hope to digest in a lifetime. Most of it is designed to encourage a high level of trading based upon momentary headlines that in most instances are of little long term significance for most of us. This is information overload in the extreme!!
I advise that most are better served by applying Ockham’s Razor. This forces one to step back far enough to gain a wider perspective of market history, manager performance and the actions one can take to monitor and offset risk once it has been identified. The investment process becomes one of locating successful managers and letting them attend to the details while we monitor the broad cycles, historical Return/Risk relationships and parse the deluge of daily reports for specific commentary and investment activity of insightful investors known for their keen sense of investment valuation. Then, by rebalancing vs the Return/Risk assessment as it evolves from our broad analysis, portfolios can be adjusted as the situation appears appropriate.
Even with leaving much of the detail to others, continuously monitoring the market keeps me busy each and every day. In this effort, it is not necessary to perfectly identify market “Bottoms”/”Tops”, it is not necessary to make split-second decisions and determine whether a particular issue is or is not owned by a particular manager. These are details that do not determine manager selection or the Return/Risk characteristics of an asset class. In the portfolio management process the focus is on larger issues, namely the on-going Return/Risk relationship of each asset class.
However, examining the details of our manager portfolios as to what is selected and when does provide some insight to their investment decision making. Understanding the manager’s investment style is important to manager selection. I do the same for a select group of individual company CEOs as to which of these corporate managers are best to monitor for their investment insights. Together the selected group of portfolio managers, CEOs and private investors comprise approximately 300 individuals which is continuously tracked. This information can be used manage an all cap US portfolio depending on individual needs and desires as the US portion of a globally balanced portfolio.
The amount of investment commentary available is enormous. Taking the Ockham Razor approach greatly simplifies the investment process. By allocating the detail to others who have proven themselves skilled, the larger and more important allocation decisions can occur with less attention to the daily market static.
With many calls for the market correcting in the near term, the longer term evidence supports remaining positive and disciplined within this context.
Disclosure (“none” means no position):
Categories
Davidson: Why did REIT’s “Melt Up”?
“Davidson” sent this to me last week (Aug 5th) when I was away”
REITs displayed dramatic upside performance and many have asked why. This sudden move is in the face of continued and wide spread headlines that commercial real estate continues to face a tsunami of frozen debt that according to many will create the next great financial crisis. Many view the market activity of yesterday as irrational and insane and refuse to be drawn in.
I offer a different view. For some time I have alerted clients to the actions of investors deemed insightful by other insightful market participants. Often when most are acting on the headlines, there seems to always be a few savvy investors taking a contrarian position that much later proves to have been savvy. I think the untold story of yesterday was hidden in the headline and not visible unless one had been in the habit of following key individuals.
I ascribe yesterday’s events to Donald Trump recapturing the Atlantic City Casino property he once held by partnering with Andrew Beal of Beal Bank. Trump has been considered savvy, but Andrew Beal has been considered by many to be very sensitive to investment valuation. I think his participation in Atlantic City Casino has sparked some to view his action as signaling that values are attractive and some investors at least have become more bullish. Forbes ran a profile on Andrew Beal on April 3, 2009 which you can access using the URL below:
http://www.forbes.com/2009/04/03/banking-andy-beal-business-wall-street-beal.html
There are many examples of contrarian activity by key individuals that in hindsight can be shown to have been helpful with investment decisions. Part of my research effort is focused on the identification of as many of these individuals as possible. I monitor their activity and market commentary in conjunction with an asset class Return/Risk analysis. I find that this effort very helpful.
In my opinion yesterday’s “REIT “Melt Up!” is due to Andrew Beal.
Disclosure (“none” means no position):