By now you know that S&P put 15 Eurozone countries on credit watch with negative implications. This was of course not a black swan but simply the latest in a long unfolding saga. The point of today's brief post (I have an incredibly hectic week) is to isolate the ongoing thesis that the worst financial crisis in 80 years for both the US and Europe is going to take a long time to fully unwind (unravel?).
While it may no longer correct to say it is early days in this, using the baseball analogy I would say it is the middle innings at most and to take the analogy a little further it is the middle innings of a Red Sox-Yankees game which tend to last 4.5 hours as opposed to the normal three hours.
I have had and continue to have serious doubts about valuation arguments for the most affected market segments. As I have been saying all along there will be trades to be had for those who are nimble--XLF is up 11.7% in the last five days--but a nice lift does not mean things are fixed fundamentally. At some point the valuation argument will turn out to be correct but for now the news continues to be bad without even a vague notion of what a resolution might be.
Yes buying when there is fear and uncertainty is more than valid, there has been fear and uncertainty surrounding this for several years and "opportunistic" purchases has amounted to catching falling knives and it has worked out badly. Whatever positive argument anyone is making today, the same argument was made a year ago and two years ago and three years ago and four years ago and has been consistently wrong fundamentally.
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10 comments:
Had to laugh over a conversation I had with my oldest son, presently earning a doctorate while serving as a Lt. Col in the USAF.
The subject of Europe came up, and their rather pathetic attempts at providing for their regional defense.
His comment,in jest, was that Europe has the best defense...countries no adversary in their right mind would want to control!
The best humor contains a kernal of truth.
Lieutenant Colonel and PHD?
I am more than impressed, wow.
Roger you are a self attmitted top down exposure anti volatility guy, but why the dig at the value investor?
not intended as a dig. this is an instance where "value" does not work just as there are instances where top down does not work (more correctly is not the best).
Roger,
Your comments have made me extremely cautous. I have been considering a position in JPM.
Of all the big banks, it is the one which probably navigated 2008-2009 the best.
By most measures, it is 40-50 percent undervalued. Its share price has dropped to the low-$28s a couple time in the past couple months.
Tempting, but no one knows for sure it's exposure to Europe.
So I just haven't been able to pull the trigger.
Depending on what eventually happens, I may be thanking you.
also part of the equation, if you think correlations have increased for the time being (I do), is what if your favorite big bank, whatever that might be, thrives, business-wise but one of the other big ones fails?
I would submit that a failure at JPM would crush BAC (just an example).
Roger,
Glad to see you're even *discussing* the "valuation argument". Up to now I've never heard you even mention it, except for dismissing it with simplistic comments like, "How can banks' book values be correct when housing prices are still falling?" (ignoring the obvious answer that banks reserve for expected future losses and that a continuing decline in housing prices does not imply that banks are under-reserved for that event).
Also, there's no inherent conflict between "value investors" and "top-down investors". One can invest top-down but still use valuation to help decide which asset classes and/or countries to overweight/underweight. I've tried to make the point to Roger, on many occasions, that a country or sector having bad fundamentals does *not* necessarily imply that it should be underweighted, just like a country or sector having good fundamentals does not necessarily imply that it should be overweighted. Price matters when you buy stocks, just like it matters when you buy a socks, a house, or farm land. Why not incorporate that concept into your process? There's more to intelligent investing than combining assets that zig when other assets zag. Reducing correlation is not all there is to it. Price/valuation is very important as well, and it should not be ignored.
- aagold
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Need to change your brand of smokes.
"A good example is 2009 where domestic stocks skyrocketed despite what I think were lousy fundamentals at the time."
Roger, look at Q1 2009 earnings and compare them to Q1 2011, or Q1 2012 earnings and you will have the answer to why the market has gone up. Panic gripped the market in 2008 & early 2009 and prices overshot to the downside, fueled by a selling stampede.
I remember one of my stocks, AXP selling at $9 and change early March of '09. AXP will earn $4 in 2011. During the panic days of 2009 it was selling at 2.4x on 2011earnings, with a yield on the low 2009 price of 7.5%. Hundreds of other stocks tell a similar story.
Stocks today are still cheap on an historic basis. I look at the public increasing frustration as bullish, and I look at many recent professional investors (speculators) unfamiliar with bull markets as a bullish contrarian signal.
As Buffutt says, "you pay a high price for a rosy consensus".
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