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Yappy Bears Continued....

Recs

18

May 17, 2009 – Comments (18)

I'm making a follow up to my previous blog because that one got out of control. The last comment I wish to follow up on is #38 from MichaelinWA.

"No fundamental reason for deflation?

How about tight credit, capital destruction, and massive deleveraging? Looks fundamental to me."

Perhaps I should have said no FURTHER fundamental reason for deflation. Tight credit and deleveraging are valid reasons. That's why something like CENX went from $80 to $5.50. But in between that it was less than $2 so people are taking their 300% return and running. Not a bad idea if you're risk averse or an older guy who just recovered his IRA and got his retirement back. I'm neither of those types.

The only reason for further deflation is if you expect further tightening of credit and further deleveraging. By the actions of Mr socialist president I find this very hard to beleive that it will take place. That would be against his entire socialist agenda of spend and debt, nor is he stupid enough to accidentally go against his cause ie like Bush and his record levels of debt despite being one of those fiscally conservative republicans.

As far as capital destruction, not sure what you mean. Capital is buildings, machinery etc. If those get destroyed you have to spend to replace them, a bullish indicator. I think you meant something else.

Then there is #27, the infamous chart where S&P earnings drop below 1935 levels. http://www.chartoftheday.com/20090515.htm?T. Its a beautiful, well timed piece of propaganda, similar to bullish propaganda that was bantering around in Oct 2007. There are a couple problems with it though:

1. It has no comparison to expectations. Apparently every company was priced to bankruptcy 6 months ago, so should that chart not be well into the negatives?

2. Earnings, like I said before are very leveraged. I'm sure there's a chart of Price to Book value that looks absolutely crazy cheap right now. If THAT chart was being copied and pasted onto my blog I might be a little worried about the bull run being over, but no its THIS one being pasted in so all the bearish sheep can feed off of each other.

3. I'm assuming this is net income and not EBITDA so its building in those billions of dollars of writeoffs from the banks that really should be normalised and applied to all earnings throughout the last decade and the billions of dollars of losses from deadweight like GM. For baseball fans, its kind of like Yankees being at the bottom in pitching ERA right now, but most of that is due to Wang. we know that the Yankees pitching isn't really that bad and their ERA should get better.

There's another group of bearish sheep that just annoy me...these belong to the whole group of Elliot Wave/1929 depression/the "big" boys just propped up prices so they can get out or sell bank stocks to raise capital at decent prices camp. These people all have this 2012 destruction/planet Nibiru/Illuminatti conspiracy theorist feel to their posts, rather than having their analysis based on rational thought. These theories make no sense, for instance isn't America's wealth distribution something like the top 5% own 50% of the wealth? So how are they propping up asset prices so they can all get out/sell stock to recapitalize and then leave the general public sheep holding the bag? It doesn't make any sense because the general public doesn't own enough capital to buy all the big boy's stuff. Even if the capitalist system did fail, the argument there is to buy gold and silver, not short sell the market. What good will your FAZ do if we are in an agrarian society where the US dollar is worthless?

One of the bears, goldminingxpert, went to my old blogs and made a point that I was a bear at one time. It was an attempt to undermine me as I was calling him out in my blog, but I think it just lends me credibility.  Check this blog out where I said the DOW will be at 7500 for 2008:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=5780&t=01006636850306521864

I got a grand total of one rec, yet my blog was eerily correct for something from March 2007. I do not spout popular opinions yet the blogs prediction speaks for itself. My basic argument there was that the pigs were irrational idiots in a bull market, and now I predict the same for these bears. The things that I said in the blog happened and the sheep got slaughtered. Now that the sheep are fearful, or they are thanking their lucky stars that they made 300% on CENX or similar stocks and took their money and run, this is the perfect environment for the market to shoot up further.

18 Comments – Post Your Own

#1) On May 17, 2009 at 4:49 PM, Rich1965 (< 20) wrote:

EV38-

 

Nice commentary.  There is so much bearish chatter going around as they work to be rally killers.  It's really driving me crazy so I keep the TV off.  Saw one on Tech Ticker (Yahoo) last week where Davidowitz criticized anyone not scared to death as an idiot.

 Keep blogging!

RCA 

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#2) On May 17, 2009 at 6:29 PM, PumPum (< 20) wrote:

I don't claim to know that we'll have deflation, I just think there are still deflationary forces at work. That was really my main point. Credit is loser than it was, but it's hardly thriving. If commercial real estate tanks, foreclosures keep increasing, and credit card debt continues to default, it is very possible credit will get tighter again as lenders move to again shore up their balance sheets. I hope that doesn't come off as "yappy".   

I think of "capital" also the value of assets rather than the actual buildings, machinery, etc. I guess I also think of it as money available for investment (as in "venture capital"--which has largely dried up), but I may be incorrect there. Maybe "wealth" is a better term. I'll concede to those who know the textbook definition. I'm just a humble CAPS player with of lowish score. In any case, a huge amount of the value of all sorts of assets has disappeared. I believe that is deflationary, and I believe it is continuing, at least in certain segments of the economy. I say that as non-yappish as I can.

Maybe it could even be argued the fact that capital (as you describe it) remains abundant but less productive drives the value of all such capital down, and so companies that need to liquidate certain assets get less for them. That seems deflationary to me. And again, I am not convinced that has come to an end. I think there will be a lot of empty auto dealerships, auto-related factories, etc. 

I'm not really one to try to squash the notion of a rising stock market, I just don't see compelling reasons to believe the stimulus will fill much of the gap in GDP. The stock market could go wild for all I know, I just think there is considerable downside risk. Which is why I hedge, but don't get out totally.

Oops...did I "yap" there at the end? 

Anyway, I agree; keep blogging. Alternate views always force me to check my own assumptions. 

 

 

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#3) On May 17, 2009 at 6:32 PM, RainierMan (78.31) wrote:

EV: PumPum's comment was from me. My 11-year old son logged into CAPS, didn't sign out, and so I suddenly find I am miraculously transformed into PumPum.

As an aside, isn't it amusing that he is beating me in CAPS and he's just 11. And up until today he hadn't touched CAPS in weeks.

Hey, I have to keep a sense of humor : ) 

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#4) On May 17, 2009 at 6:57 PM, goldminingXpert (29.38) wrote:

The only reason for further deflation is if you expect further tightening of credit and further deleveraging. By the actions of Mr socialist president I find this very hard to beleive that it will take place.

Spitting into a hurricane. We've lost untold trillions in credit--look at the losses of CDS swaps alone--and a mere bailout or two will fix that? No! Deleveraging will continue until the housing market is down 50% nationwide. Each new wave of foreclosures brings more foreclosures thus lowering prices more. Interest rates are on the rise despite Uncle Ben's best efforts and the inevitable result is a further decline in the housing market. Without houses, the banks fall further into insolvency and we get a continuation of the deflationary panic.

. Earnings, like I said before are very leveraged. I'm sure there's a chart of Price to Book value that looks absolutely crazy cheap right now.

Book values are falling sharply too. I'd like to see this chart, if you find it post it (I doubt it will show you what you think it will.) Bershire book dropped substantially and it's the best of the best, eh? Report this comment
#5) On May 18, 2009 at 5:24 AM, portefeuille (99.60) wrote:

2. Earnings, like I said before are very leveraged. I'm sure there's a chart of Price to Book value that looks absolutely crazy cheap right now. If THAT chart was being copied and pasted onto my blog I might be a little worried about the bull run being over, but no its THIS one being pasted in so all the bearish sheep can feed off of each other.

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Book values are falling sharply too. I'd like to see this chart, if you find it post it (I doubt it will show you what you think it will.) Bershire book dropped substantially and it's the best of the best, eh?

----------------------- 

An article from October 2008 (with chart!) is here.

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#6) On May 18, 2009 at 5:41 AM, portefeuille (99.60) wrote:

... and with data until April 2009 in this chart (pdf) ...

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#7) On May 18, 2009 at 5:41 AM, portefeuille (99.60) wrote:

(people should start paying me for this ...)

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#8) On May 18, 2009 at 5:57 AM, portefeuille (99.60) wrote:

(now it is getting really cheap ...)

See here for the by now well-known chart, this time embedded in an article saying (below the chart!):

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More importantly, the book value of the S&P 500 is overstated relative to its lows in the early 1980s, as neither technology or biotechnology R&D spending (the biotechnology industry was not born until the late 1980s) is capitalized and treated as an asset on the balance sheet.  For example, Amgen and Genentech – two of the better performing stocks on the S&P 500 over the last 18 months, have P/B ratios of 2.42 and 5.49, respectively.  Even Microsoft, a mature cash cow in the software industry, has P/B ratio of 3.94.  Assuming (conservatively) that 15% of the S&P 500 are made up of such companies that did not exist in their current forms in the early 1980s, and assuming that the book value of such companies are understated by about 50%, the S&P 500's book value for 2008 is closer to around $638 a share.  On a R&D-adjusted basis, the P/B ratio for the S&P 500 is approximately 1.07, or its lowest level since the beginning of the greatest bull market in history in late 1982.  In addition, analysts are still projecting the S&P 500's earnings to be in the range of $35 to $50 a share this year, suggesting that the S&P 500's book value will continue to grow this year.  Based on the price-to-book ratio of the S&P 500, the core earnings power of the S&P 500's components, and the range of liquidity schemes implemented by the Federal Reserve and Bank of England, there is no doubt that stocks now present the greatest buying opportunity of our generation.

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interesting ...

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#9) On May 18, 2009 at 6:06 AM, portefeuille (99.60) wrote:

More importantly, the book value of the S&P 500 is overstated relative to its lows in the early 1980s, ...

The author means "understated" as can be seen from what follows ...

 

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#10) On May 18, 2009 at 6:12 AM, portefeuille (99.60) wrote:

Some more (and again the by now really really well-known chart) can be found at the bottom of this article ...

(I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, I hate using google, ...)

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#11) On May 18, 2009 at 9:39 AM, awallejr (85.47) wrote:

"(people should start paying me for this ...)"

Not to derail, but portefeuille I really do like reading your replies.  I find them very informative and contributory.  So not actually payment, but at least giving you a pat on the back.

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#12) On May 18, 2009 at 9:46 AM, portefeuille (99.60) wrote:

thank you, that should do!

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#13) On May 18, 2009 at 4:40 PM, Alex1963 (28.36) wrote:

portefeuille

great article link, charts & unique accompanying analysis.

Thanks! I can't pay you but I'm gonna throw some quarters in front of this here bulldozer, we can pick them up together.. :). That is in fact my current market strtegy LOL

Alex 

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#14) On May 18, 2009 at 5:08 PM, Alex1963 (28.36) wrote:

EV

I'm halfway thru Prechter's 2002 book "Conquor The Crash" and it is pretty good. His case for a super-trend is compelling. I think there is something to EW in that IMO it is basically and unapologetically rooted in psychology. Just like head & shoulders patterns seem to be widely recognized as legitimate signals which are simply a charted pattern of common "irrational" markets reactions. I enjoy and follow certain EW TA chartists who have shown a particular proficiency. I don't necessarily trade off them but it is not w/o value to check their pulse either IMO. 

My own overall impression is that is compelling data for both bears and bulls and that is why the indicators I follow are split, why the S&P & Dow etc are so bi-polar etc. I'm trying to position myself to take advantage of both by morphing into a more swing trade mindset but with an overall bull outlook. What I'm wary of and what I guess I think is important to keep forefront is that if you are too sure you could get creamed. Overly bull or overly bear, either position IMO is dangerous. The markets worldwide are as irrational and reactionary as ever in history. To me, getting too married to FA is just as loony. If you do then the market makes no sense but yet it is doing what it's doing so rather than saying "people are nuts" the answer to me is "examine your assumptions". That is what I see alot of in the bear camp. And some of those folks are darn good long term performers. But right now The market is not run by accountants nor by astrologers. My take is that globally investors are anxious for a bull market and running the trend upwards at every opportunity then getting fearful in the face of nothing, then getting hopeful in the face of what you'd think would run them off etc. It's volatile and insane but who cares? I think there is a lot of money to be made swing trading personally by using a combo of FA, TA and common sense investing rules. Once the market settles in to a recognizeable longer trend I may retool but right now I can't see another way to "guarantee a decent yearly OR long term return except by value/growth investing with judicious profit taking. 

For what any of that is worth LOL 

Good post rec from me

Alex 

 

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#15) On May 19, 2009 at 10:47 PM, EV38 (99.77) wrote:

 Great chart portefeuille, thanks!

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#16) On June 28, 2009 at 5:02 AM, checklist34 (99.69) wrote:

rec, eV, and I will add you as a favorite for the unbelievably laudable flip-flop from super bear in the march 2007 post to bull now.

i bet you're making more money in real life than the permabears and congrats, you, Doug Kass, and Steve Leuthold now make the list of people I can think of that flopped.

i hope to myself appropriately flop to bear one day.

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#17) On June 28, 2009 at 5:35 AM, checklist34 (99.69) wrote:

and while i'm sure nobody is reading this anymore, which is too bad...

book value WILL ALSO BOUNCE SOMEWHAT WITH IMPROVEMENTS IN THE MARKETS.

Every insurer, including the aforementioned Berkshire, will see quite possibly profound increases in book value with the recovery of values in fixed-income markets.  The mark down in book value at insurers is not, at least in all cases, largely crystallized but rather, at least in several of the cases that i've looked at, is largely unrealized.

this applies additionally to other segments of the market including the BDC community and, while I don't understand them as well as BDCs or insurers and haven't ever considered them as deep in valuation...  banks too.  

take a company like GNW... i expect it, literally, to mark up billions of book value over the next 3-6 quarters.  more than its current market cap.  we'll see if i'm right.

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#18) On June 28, 2009 at 5:10 PM, checklist34 (99.69) wrote:

hey eV, congrats on the appropriate fop, but I read af ew of your blogs and see you have a serious complex about the US, lordie, hope some yank didn't smooch your girlfriend in college or something.

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