Tuesday, December 30, 2008

Buy Moody's

This is not a call based on the fact that the stock is cheap(it is) or that it operates in what is basically an duopoly with S & P. It's not about the 0.76 PEG ratio or the grotesque short ratio that will trigger a pop once everyone covers. No, this is about us, as investors, and our very short memories. Right now, all we can talk about in reference to the ratins agencies is their massive failure, their conflicts of interests. I'm sure books will be written about them, just as analysts were burned at the stake after the Internet bubble burst. I think that people will forget these facts within a year. Businesses will continue to look for Moody's despite the fact that they dropped the ball and enabled the catastrophe that has been the last year. There will be calls to change their models and new players will emerge in the space, but in the end Moody's will remain one of the big boys.

Friday, December 26, 2008

More bad news is good news

I know it's hard to believe that sad saga of Bernie Madoff is a sign of good things to come, but it is. Fraud goes part and parcel with the bursting of any bubble and the hedge fund industry had definitely entered bubble territory. Years ago, Jim Rogers said in an interview "we have 25 000 or 30 000 hedge funds around the world. We don't have that many smart 29 year-olds in the world." Hedge funds are not a different asset class. If you believe that anyone can post positive or market-beating returns every year, regardless of market conditions, you aren't a sophisticated investor. You're either naive, stupid, or greedy.

Don't for one minute think that this is the end, though Madoff might go down as the poster boy of this era of financial tomfoolery/skulduggery. We've only begun to look for malfeasance. Think for a moment about everyone that was getting rich this decade. So far the real estate and financial realms have been carpet bombed, but what about the private equity guys? Are you telling me that there isn't one major fraudster out there amongst the Web 2.0 set? The resource industry is rife with slippery snake oil salesmen. I'm sure the alternative energy biz will produce a Madoff or two.

We just haven't had a perp walk yet.

I digress. These revelations, while painful, embarrassing, and criminal, are an important signal that excesses are being rung out of the system. We're starting to get our act together. Healing requires puss, bruising, scarring, and pain. We should want to hear as many of these stories as possible, get them priced into the market, so that we can move on.

Tuesday, December 23, 2008

The death of buy and hold? Bah, humbug!

Many would-be Cassandras, CNBC included, have been beating their breasts about this topic. Fast Money's Jeff Macke has pronounced the long-term investor dead. Is this true? If not, why would smart guys like Jeff Macke say things like that? Let's think about it.

The market's down a lot.
Many industries are on the verge of bankruptcy.
Some companies are at decades low valuations. The government is printing dollars at a record pace.
The rules of the game seem to be changing on a daily basis.

It looks really bleak doesn't it?

That's why this is the best time to be a long-term investor. You're probably not going to see such pessimism about the global financial system for many years. While I still think the S & P 500 is not historically cheap, there are several large cap companies that are on sale. I'm loading up on GE, GS, JNJ, KO, and other big names.

It doesn't matter if you're in the value or growth camp, there are enormous bargains out there. It's almost like money lying in the street if you're patient. In 5-10 years, some of these companies will have failed, but many more will have recovered and making money hand over fist.

I plan on being first in line when they start handing out the cash.

This is not to say that we've hit a bottom. I don't know. I'm buying now regardless. My local Linens N' Things is having a closeout sale. Every week the deals get better, but there's less of the good stuff. Don't ignore 50% off stocks because you think that next week, stocks will be 75%. They might be, but probably not the good ones.

Friday, December 19, 2008

A way to bet on the debt market recovering

As anyone who has followed the financial crisis knows, the debt markets are currently "challenged." No one trust each others paper, spreads are cavernous, and volume is low.

The Managed High-Yield Plus Fund(HYF) is a good way to play the eventual recovery.

The Managed High Yield Plus Fund is a diversified, closed-end management investment company. The Fund's primary investment objective is to seek high income. Its secondary investment objective is to seek capital appreciation. The Fund will primarily invest in a diversified portfolio of lower-rated, income-producing debt and related equity securities.

These guys are more comfortable with junk than Fred Sanford. They have holdings in gaming, wireless, and publishing, some of the more distressed industries out there.

Sure, there are safer ways, but the risk reward ratio is much higher here. Nonetheless, be warned. This is a tiny closed-end fund with a yield of over 20%. That might make it seem speculative, but it's not. It, like a lot of things right now, is just mispriced.

I think that there's too much fear in these prices. When the market turns it the most marginal businesses that get the biggest pop. As regular readers of this blog know, I like to invest when things look really bad. Right now, we've got a record number of junk bond defaults. Yes, the market can get worse, but probably not much worse. Since I don't know when things are going to turn around, I'm buying know and waiting for the recovery.

Tuesday, December 16, 2008

Recession stocks

Consumers don't stop buying when economies go through down cycles. They look harder for value." The job of the survival marketer in '08 will be to identify that value, proclaim it loudly, and go after the thinning customer herd where others show fear and give up. To keep the sports analogy alive, now is the time to know the playbook and never, never take your eyes off the ball. -Kevin Roberts of Saatchi & Saatchi

Kevin Roberts is telling the truth. People don't stop spending money during a recession, they just spend less of it. Companies just have to fight harder for fewer dollars. What companies are positioned to take advantage of these lean times?

WMT
MCD
FDO
DLTR

All these companies' stocks have risen substantially over the last year. What are they selling? Value.

Friday, December 12, 2008

Bad news is good news

When I see that the market is plunging on the news of the stalled auto bailout, then I get happy. Yes, that's perverse, but it's true. It means that it's closer to the point of maximum pessimism that Sir John Templeton liked so much. The whole world is swooning! That's great! Bargains for everyone.

I'm not calling a bottom. I have no idea if we're close, but things are starting to look better, that is people are getting more pessimistic. I won't even think of considering a bottom until the the market is trading at a single-digit P/E and many more firms have gone belly up.

Tuesday, December 9, 2008

A must read from an unlikely source


Eliot Spitzer isn't so dumb after all. Read his recent piece for Slate. It is well-reasoned, evenhanded, and shows an imagination that you wouldn't expect from a politican. Unlike most of the pieces that I've read concerning the litany of bailouts U.S. taxpayers are financing, Spitzer's aaks if we're merely rebuilding flawed institutions in the same manner and hoping that the same thing doesn't happen again. In the following paragraphs, he neatly sums up the existential crisis threatening the U.S. financial system.

This long-term change frames the question we should be asking ourselves: What are we getting for the trillions of dollars in rescue funds? If we are merely extending a fatally flawed status quo, we should invest those dollars elsewhere. Nobody disputes that radical action was needed to forestall total collapse. But we are creating the significant systemic risk not just of rewarding imprudent behavior by private actors but of preventing, through bailouts and subsidies, the process of creative destruction that capitalism depends on.

A more sensible approach would focus not just on rescuing pre-existing financial institutions but, instead, on creating a structure for more contained and competitive ones. For years, we have accepted a theory of financial concentration—not only across all lines of previously differentiated sectors (insurance, commercial banking, investment banking, retail brokerage, etc.) but in terms of sheer size. The theory was that capital depth would permit the various entities, dubbed financial supermarkets, to compete and provide full service to customers while cross-marketing various products. That model has failed. The failure shows in gargantuan losses, bloated overhead, enormous inefficiencies, dramatic and outsized risk taken to generate returns large enough to justify the scale of the organizations, ethical abuses in cross-marketing in violation of fiduciary obligations, and now the need for major taxpayer-financed capital support for virtually every major financial institution.


I don't think that there has ever been a more eloquent refutation of the financial supermarket every written.

Friday, December 5, 2008

It can always go lower


This might seem obvious, but it's a good thing to keep in mind, especially as a value investor. It can always get worse. Just look at the disastrous investments that "sophisticated" investors like Temasek and Cerberus made in companies last spring. Stocks can and do go to zero. You should at least learn that lesson from the current financial crisis.

So when you hear about the market possibly re-testing lows or capitulation, please ignore it. I'm not saying those people are stupid. They may in fact be 100% right, but their message is beside the point. As a value investor, you are trying to find a bargain, not the absolute best bargain or the bottom.

So what should you do when you buy a stock and it takes a hit. You should re-evaluate. Has anything material changed about the company or its prospects? Is the market just punishing stocks in general as it was in October? If it has, then please, by all means, sell and live to fight another day. If it hasn't, then maybe you want to buy more, maybe not. That depends upon your appetite for risk, available cash, etc.

You should also ask yourself, "how much am I willing to lose in the short-term?" I know that long-term investors are supposed to be immune to short-term developments, but we're not. We watch CNBC, read the financial press, and read message boards(much to my own dismay). We do not live on islands enjoying a monk-like existence allocating capital. Again, you know yourself better than I do. What kind of losses can you live with? Buffett thinks that anyone who can't take a 50% loss shouldn't be in the equity markets, but that's an unfair standard. Buffett after all is a billionaire buying for an insurance conglomerate. He can afford such a luxury. You, on the other hand, might need that money sometime within the next five years for retirement, paying for college, a down payment, etc.

So be honest with yourself. When it hits your pain threshold, sell. You can always re-establish the position. Don't try to be a hero and prove how smart and disciplined you are. It's good to acknowledge mistakes and learn from them.

Tuesday, December 2, 2008

Should we spare a dime for Detroit? Part 3

The first time around went poorly. Gettelfinger couldn't do much better. So now the Big Three are back. Last time they were given the homework assignment to come up with a plan to become viable. That seemed like a tall order to me. They've been struggling with such an assignment off and on for the last seven or eight years. What sort of brilliance was Congress expecting them to produce during this cram session?
Rick Wagoner has said that bankruptcy isn't an option. Congress is acting like the Jesuits in Portrait of the Artist as a Young Man. I think that Congress is going to give them the money they need and that this is theatrics. However, let's assume that all the options are on the table.

1. Bankruptcy: No one wants to push the red button. It symbolizes the abject failure of what was once a source of pride for this country. Despite the fact that it would probably allow the Big Three to get the necessary concessions from the UAW they need, no one knows just what it would mean cost-wise to the government. If you think that this is likely, then short the shares, the debts, their suppliers, and the Dow.

2. Bridge Loan to a Democratic Congress & President: This seems the most likely scenario to me. Again, the political fallout is too great for this not to happen. This is speculation pure and simple. Buy the common stock or LEAPS.

3. No Money, Big Problems: Let's say they get nothing,but still refuse to declare bankruptcy. This is highly unlikely, but since this is an academic exercise, let's think about it. Ford is the company best positioned to attempt such a far-fetched strategy as it has more cash. As in the bankruptcy scenario, short everything.