- The broad market portfolio was up yesterday against a mixed market. Big movers included:
- Industrias Bachoco [IBA], which acquired a smaller rival Mexican chicken producer for cash.
- ABN Amro [ABN], which might break up into smaller pieces. Excellent idea!
- and Valero Energy [VLO], the largest refiner in the US.
- Also Cemex [CX] and Grupo Casa Saba [SAB]… the Mexican market is hot.
- Howard Simons is one of my favorite columnists over at RealMoney. Yesterday he had a mea culpa over an article he wrote on equity REITs. If Howard needs to do a mea culpa, I guess that I do as well. I’ve thought that they were overvalued for some time, though not enough so to short them. Howard ended his article with, “At some point, the price of REITs will rise to a point where they no longer make sense. We have yet to see firm technical signs of higher prices being rejected, though, so we must conclude the uptrend remains intact for now.”
I agree that we should honor the momentum; that said, I don’t think there is much farther that equity REITs can run; the yields are at a record low versus the 2-year Treasury yield. -
I wish Jim Griffin posted more at RealMoney. I really enjoy his weekly posts. I think he is dead right on his post yesterday where he thought the demise of the carry trade was the biggest global risk. That’s why I am moving my bond positions to lower yielding currencies.
Also, he commented, “Is there a law of conservation of risk? Perhaps there should be, one analogous to the laws of conservation of matter and energy, which Einstein assures us can be neither created nor destroyed. It is pushing the point to declare a scientific law, but, akin to the transference between the states of energy and matter, when risk is seen to be suppressed in the macro economy, it tends to be transferred into financial markets.”
There is such a law. Risk can’t be eliminated from the system, except to the extent that parties for one reason or another naturally want the opposite side of a trade. The best example I can think of is the swap market, where some parties naturally want floating, and others want fixed.
- Not to dis James Cramer, but the Fed doesn’t care about mortgage REITs. It only cares about depositary institutions under their purview. If a mortgage REIT goes bust, it just means that a non-bank lender is gone, thus strengthening the Fed’s hold on monetary policy.
Long VLO SAB CX IBA ABN
David,
Great to see your blog up and running. I look forward to reading!
Hey David! Great idea! Good luck and I really enjoy your articles at Real Money! I am a new investor and learning the ropes and I was hoping you could shed some light on credit spreads. I notice you and others mention them alot and I was wondering where you get that information. Where and what (eg. TIPS spreads, corporate spreads) should I be looking at?
Thanks, Newt.
Paul, bond spread information on the web can be pretty sparse. Here are a few ideas: for general spread data, look at the Investing in Bonds website. For credit derivatives of all types, I would visit hte Markit ABX website.
Spreads are proportional to option implied volatility. When implied vol is low, typically, so are spreads in any corresponding fixed income instrument. Many market players sell options to generate income. When too many do it, implied vol and spreads stay tight, until some discontinuous event comes and upsets the apple cart. The last event like that was the blowup in the CDS market when GM and Ford went to junk. Before that, LTCM in 1998 was a bigger blowup, and spreads and the carry trade were tight as a drum then. We’re close to those levels now, and have superceded them in some ways.
Richard Suttmeier has interesting comments on RealMoney today regarding FDIC performance data of banking institutions; although I think his views are correct in the big picture sense, the sector is large enough and diverse enough that it is possible to find strong operators. Attracting assets; growing loans but have a balanced portfolio; strong credit quality; and have a “reasonable” amount of reserves set aside for losses all have to evaluated. NIM is an obvious issue; but I believe it is okay to invest based on the idea that NIM will increase over the next year and in all likelihood 3 years; hey aren’t we all long term investors??
I’m not sure if there is truly the “bank meltdown” where you would hide; but I hope toi have an epiphany being all in cash if it happens!!
Great blog David; I’m looking forward to all the postings
David –
This has a very nice look and already some useful ideas and information. Like others who read your work on RealMoney, I’ll appreciate the chance for more interaction. You are on my RSS reader 🙂
Best of luck!
Jeff
Jeff, thanks much. That meant a lot to me.
Paul, old pal… Richard Suttmeier has been a bit of a conundrum to me. Initially, I did not like him, but I have grown to like him a little. (I have a funny story that I can share at a future time.) His comments on the banks are in aggregate reasonable. The challenge is ferreting through which ones will be badly hurt, which ones won’t, and which ones may benefit. The firm I work for is really good at that (but too bearish), but I’m not the one with that skill.
In a true bank meltdown, there aren’t any hiding places. The banks I hold at present are all foreign — ABN, RBSPF, and BCS. They all have significant non-interest margin income. That’s a plus in this environment. Slightly before the curve normalizes, it will be time to buy banks with bad, but not terminal, net interest margins.
long ABN, BCS, RBSPF
Totally agree buying before the curve normalizes. Easy challenge right? lol. The Bull case for CBH (although you can’t make a low price to book argument for it); is the deposit inflows are strong enough that they can survive a low NIM environment; when the curve normalizes earnings really ought to grow. That said JJC has commented that exposure to NJ real estate/bad loan risk etc. can certainly kill the stock. When I see the deposit growth numbers it makes me believe they can abosrb mistakes better than most and continue to grow book value; but I think the stock can sit here for some time if the normalization of the curve is 18 months out; it could happen and David and others on Real Money have put up credible arguements about later rather than sooner on rate cuts.
I was going to post this around 1 pm, but had technical difficulties:
On a day like today, with the long end rallying, it certainly seems like a normal yield curve is far away… given my call on the Fed on hold for 2007, something would have to have to make the bond market sell off on the long end to normalize things. I don’t see it in the near term, but who can tell?
long TLT and some short stuff… but little in-between
I also wonder about Richard Suttmeier — he seems way to precise for something that is fuzzy at best…I mean, to me it doesn’t make sense to say that stock ABC is 18.618382% undervalued
but I did see Richard and Lenny Dykstra on CNBC once (I think that Richard is a mentor of sorts for Lenny)…speaking of Lenny, I question the “low risk” part of his “low risk, high reward deep in the money call buying strategy”
Richard has cut back on the false precision, from what I have seen; I think he got the hint after a number of columnists took him to task on that.
Regarding Mr. Dykstra, I have tried to engage him in the CC over this, but to no avail. Steve Smith’s criticisms are relevant as well; long dated deep in the money options are a financing vehicle for owning stock. Typically, his ideas are geared 4-5x versus owning the common outright.
What seems to allow his strategy to work is that focuses on large cap stocks that have taken a beating. He’s getting a little mean-reversion to help him. I can’t be totally critical of what he does, but it’s not a way that I can play the game, and I don’t recommend it to others.
The DITM calls strategy is a decision that requires picking a short term direction (usually a few months out). Look at the energy sector after the May top; the rotation out of the sector (it’s not as if the fundamentals deteriorated meaningfully in my opinion) made those trades money losers; averaging down is not for the faint of heart. I tried this with Valero calls in April with July expiration; DITM became out of the money pretty quickly; it worked so well back in 2005 sigh!!!!!!!!
This is an area where “technical” aptitude is required and I think you have to be willing to pull the trigger to get out of a bad decision relatively quickly. The effort I put into understanding the company was WORTHLESS for this type of strategy! David is a good sanity check! Sadly, sometimes you need to pay market tuition to learn this lesson.
Paul, alas in my younger days I lost a lot of money on Caldor, imitating Michael Price. Ate up 10% of my net worth. I’ve had eight bone-crunching losses in my time, and someday I’ll write a post about them all. That said, the gains have far outweighed the losses, and I am grateful to God for the success that he has given me. I don’t take my past track record for granted; the next seven years could be as bad as the last seven were good. But that’s why I focus on risk control.
Probably most of the readers have access to RealMoney; your article “Evolution of an investment style” is a good read as it elaborates how you spread your positions out across industries to build your portfolio. Ken Fisher’s new book was a good read; it discusses(relating to your comments on risk control) when you deviate from your chosen index that you are taking benchmark risk. This is a good read for all of us and you can see David’s work reflects Ken’s thoughts on this.
As an aside I met several potential clients Summer 2002 that were in Fisher separate accounts; of course they become clients March 2002 and got clobbered; Ken was about 90 days early shifting his portfolio. I had the unenviable position of lobbying for business and being decent enough (and smart enough!!) not to criticize a great thinker. Some I ended up with; some I did not; but for all of these people not having the personal touch/handholding made it extremely difficult for them to stick with ANY strategy. This is obvious, but it can be extremely discouraging when prices collapse and you have to stick with what your doing. Individuals that had a portfolio designed for cash flow (interest and dividends) suffered much less anxiety. That said; i had a client (July25,2001 investment date) that declined “only” 10% to the bottom October 2002; it was only being able to deal with him personally that he stuck with it. I don’t look like a doofus now; but I had to defend what i was doing many times. Now I’m waiting for the 10% plus spreads again (if only i can avoid the carnage getting there)!!
Past track records are no fun really; you need to use them to demonstrate competence; but true competence is knowing that it is not a sure thing going forward. Now if clients would only cut you slack for that admission. . .
Ken Fisher is always a good read, and I owe him a lot for the e-mail conversations we had seven years ago. It prompted me to evaluate what worked best and worst in my methods, leading to my current approach which is still adapting. Next month in RealMoney I will have an article on my new eighth rule, which is on portfolio reshaping.
You did well not to “trash talk” a competitor. Winners are comfortable with others doing better than them; winners work to improve their own game.
And yes, personal handling makes a ton of difference; I’m not the best at it, but relational capital can paper over a lot during bad times.
Finally, never overpromise. When I was in the pension division at Provident Mutual, our best representatives sold on the features of the product, which was one of the best in the small case pension market. The worst reps sold rate. “We beat the market by 10% last year in our core fund….” Given that a lot of outperformance is not repeatable, due to factors not controllable by the investor, when performance mean-reversion hit, we would lose clients rapidly that bought on the basis of high return expectations.
Treating your clients fairly is the right thing, and in the long run, builds a stable business.