1)? A modest proposal: The government announces that they will refinance all debtors.? Not only that, but they will buy out existing debt at par, and allow people and firms to finance all obligations at the same rate that the government does for whatever term is necessary to assure profitability or the ability to make all payments.? The US Treasury/Fed will become “The Bank.”? No need for the lesser institutions, The Bank will eat them up and dissolve their losses, taking over and refinancing their obligations.? Hey, if we want a single-payer plan in healthcare, why not in finance?? Being healthy is no good if you can’t make your payments. 😉
This scenario extends the US Government’s behavior to its logical absurd.? The US Government would never be large enough to achieve this, but what they can’t do on the whole, they do in part for political favorites.? They should never have bailed out anyone, because of the favoritism/unfairness of it.? Better to have a crash and rebuild on firmer ground, than to muddle through in a Japan-style malaise.? That is where we are heading at present.? (That’s the optimistic scenario.)
2)? I have exited junk bonds, and even low investment-grade corporates.? Consider what Loomis Sayles is doing with junk.? Yield = Poison, to me right now, which echoes a very early post in this blog.? There are times when every avenue in bonds is overpriced — that is not quite now, because of senior CMBS, carefully chosen.? All the same, it makes me bearish on the US Dollar, and bullish on foreign bonds.? This is a time for capital preservation.
3) High real yields are driving the sales of US Government debt.? Is that a positive or a negative?? I can’t tell, but there is always a tradeoff for indebted governments, because they can usually reduce interest expense by financing short.? When their average debt maturity gets too short, they have a crisis rolling over the debt.? We are not there yet, but we are proceeding on that road.
4)? I have a bias in favor of buyside analysts, after all I was one.? But this research makes me question my bias.? Perhaps sellside analysts are less constrained than buyside analysts?
5) Debtor-in-possession lending is diminishing, reflecting the likelihood of loss.? In some cases that may mean more insolvencies go into liquidation.? Interesting to be seeing this in the midst of a junk bond rally.
6)? Short-selling isn’t dead yet.? Would that they would take my view that a “hard locate” is needed; one can’t short unless there is a hard commitment of shares to borrow.
7) Should we let managers compete free of the constraints imposed by manager consultants?? You bet, it would demonstrate the ability to add value clearly.? I face that? problem myself, in that I limit myself to anything traded on US equity exchanges.? As such, I have beaten most US equity managers (and the indexes) over the last nine years, but no one wants to consider me because I don’t fit the paradigms of most manager consultants.
8 )? Is there a fallacy in the “fallacy of composition?”? I think so.? Yes, if everyone does the same thing same time, the system will be unstable.? But if society adopts a new baseline for saving/spending, the system will adjust after a number of years, and there will be a new normal to work from.? That new normal might be higher savings and investment, in this case, leading to a better place eventually than the old normal.
9)? Anyway, as I have said before, stability of a capitalist system is not normal.? Instability is normal, and is one of the beauties of a capitalist system, because it adjusts to conditions better than anything else.
10)? Corporate treasurers are increasingly engaged in a negative arbitrage where they borrow long and hold cash so that the company will be secure.? How will this work out?? Will this turn into buybacks when things are safe?? Or will it just be a drag on earnings, waiting for an eventual debt buyback?
11)? Does debt doom the recovery?? Maybe.? I depends on where the debt is held, and how is affects consumption spending.? Personally, I think that consumers and small businesses are under a lot of stress now, and it won’t lift easily.
12)? So things are looking better with junk bond defaults.? Perhaps it was an overestimate, or that it would not all come in 2009.? We will see.
13)? Junk bonds do well; junk stocks do better.? In a junk rally, everything flies.? All the more to hope that this isn’t a bear market rally; if so, the correction will be vicious.
14)? Eddy, pal.? Guys who criticize data-mining are near and dear to me.? Now the paper in question has a funny definition of exact.? I don’t know how to describe it, except that it seems to mean progressively more accurate.? I didn’t think the paper was serious at first, but given the relaxed meaning of “exact,” it data-mines for demographic influences on the stock market.? Hint: if you have lots of friends when you are nine, ask for stock as a birthday present.
15)? I’m increaisngly skeptical about China, and this doesn’t help.? I sense that the global recession is intesifying, amid the current positive signs in the US.
16)? Do firms with female board members do worse than companies with only male board members?? No, but they get lower valuations, according to this study.? I started a study on female CEOs in the US, and I got the same result, but it is imcomplete at present — perhaps new data will invalidate my earlier findings.? Why does this happen, if true?? Men seem to be better at managing single investments, while women are better at managing portfolios.
17)? Do we have more pain coming from the banks?? I think so.? Residential real estate problems have not reconciled, and Commercial real estate problems are just beginning.? If we mark loans to market, many large banks are insolvent, and this is not an issue that will easily be healed with time.
18)? As a nation, I like Japan, and would like to visit it someday.? What I don’t want is for the US to imitate its economic stagnation, but maybe that could be the best of all possible worlds for the US.
19)? I am de-risking my equity and bond portfolios at present.? I do not think that the present market levels fairly reflect the risks involved.? I am reducing risk in bonds, and looking for strong sustainable equity yields in equities.
20)? Echoing point 17, we face real problems on bank balance sheets from commercial real estate lending.? There is more pain to come.? The time to de-risk is now.
Wow! Thanks for the insights, David. Just a thought (from a man) on the woman-CEO study–is it possible that the companies have lower valuations because S&P 500 companies won’t promote a woman unless things are going to hell in a handbasket already (Carly Fiorina and HP excepted. BTW, why does anyone take her seriously?) I’m thinking of Anne Mucahly (sp?) and Xerox here. So a woman (on average) won’t get the top job unless no one else wants it, i.e., a company in trouble.
Just a thought. I don’t know how big your data pool is.
BWDIK — yes, that is possible. What I would need is a comprehensive list of female public company CEOs in the US, and I have not found that. But even with that, there are so many factors to consider, and the law of small numbers working, that any conclusion should be tentative at best.
“I have a bias in favor of buyside analysts, after all I was one. But this research makes me question my bias. Perhaps sellside analysts are less constrained than buyside analysts?”
There is another factor – sellside analysts make recommendations effecting the markets they operate within. If Goldman recommends a stock, the stock may go up only because of the recommendation. I don’t know how you would control for that, but it may be a significant implicit bias.
David,
Just wanted to say thank for everything you. I like your calm way of writing things. I end up learning a lot from you.
Did you see the Shanghai market. Here is a good chart. http://i30.tinypic.com/51zx48.png
Also, I disagree with you on the Dollar. I belong to deflationary spiral followed by Inflation category. So expect to see market cracking as the Dollar keeps getting stronger.
Finally, I have a terrible time believing this thing will end well, without US citizens demanding some major changes to Fed.
Best to you and your family.
firsttopanic — I’m not optimistic here either, but it is hard to tell what the government will do. After all, during the Great Depression, they had the option of inflating, and did not take it. I don’t think the reason was due to lack of knowledge; the US had been through bimetallism…
7) Should we let managers compete free of the constraints imposed by manager consultants? You bet, it would demonstrate the ability to add value clearly. I face that problem myself, in that I limit myself to anything traded on US equity exchanges. As such, I have beaten most US equity managers (and the indexes) over the last nine years, but no one wants to consider me because I don?t fit the paradigms of most manager consultants.
David,
In my opinion, you are headed down a dead-end road trying to get AUM (institutional and pension) controlled by manager consultants as gatekeepers. I?m not telling you anything you probably don?t already know, but in that world you have to ?play it safe? where that means being down 38% with a S&P 500 down 38% is OK. It is all about ?benchmark risk? and ?career risk?. Career risk is 100x more important then actual capital at risk, and it is much, much better to FAIL conventionally then succeed unconventionally and the take the risk of failing unconventionally and looking stupid compared to your peers.
If I were you, and I was dead serious about getting serious AUM to manage, and had at least some financial backing to start, and was 99% confident I could put up the long-term numbers, here is what I would do. This is high risk-high reward.
Start a mutual fund with your unconventional style. It will be expensive and a money-loser for awhile. Once you build a 2-3 year track record, go after high-end upscale independent RIAs that primarily serve individuals. They don?t care about benchmark risk, and tracking the S&P and other assorted nonsense. They care about delivering absolute returns to clients with the least risk taken.
I?ll use myself as an example. I?m an RIA and I use a mix of mutual funds and stocks in managing client portfolios. Can you guess my 2 largest equity funds (and actually 2 of my largest positions overall)?
Fairholme Fund managed by Bruce Berkowitz and Hussman Strategic Growth by Hussman. Arguably, those are two of the most unconventional equity funds you?ll find in the entire equity fund universe, yet they?ve had no problem attracting massive AUM and going from 0 to billions in under 10 years. I think FAIRX started in 1998 and Hussman in 2000. Now I?d bet my last dollar that the overwhelming majority of money in those funds is not institutional or Joe Retail but high-end RIAs serving individual investors.
Why are they successful IMO? Firstly, they deliver the numbers and serve a function in an overall portfolio (defense). They?ve both beaten the S&P 500 by wide margins cumulatively. Secondly, they clearly articulate their philosophies and strategies. Thirdly, they communicate often and effectively with fund shareholders.
You?ve got this blog. That is a vehicle for both explaining and advertising. At a previous employer, I started to do some DD on starting a fund. It was way too expensive for the size of the firm. I?ve been reading your blog for a long time, and it is in my top 5, no doubt. If I had a more detailed insight into the specifics of your stock selection and portfolio management along with numbers, I would seriously consider investing in a fund you managed.
“I am reducing risk in bonds, and looking for strong sustainable equity yields in equities.”
Do you perhaps mean “strong sustainable ‘dividend’ yields in equities”?
Ben — sorry for the mess-up — earnings and free cash flow yields.