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  • Precious Metals: The Shine Continues To Dull [View article]
    Perhaps the markets are pricing in some tail risk and/or probability of continued QEs/currency debasements (debt jubilees?) across the world? Same reason for fine art, trophy real estate, gemstones, etc. to be high as well.

    Other commodities more tied to general economic conditions and also more responsive on the supply side to higher prices. Less scarcity value in other commodities.

    Current conditions a bit different from the '70s where you had generalized inflation that ramped all commodities. Current conditions are ramping anything with scarcity value.

    That's the issue I have with these long-term USD inflation-adjusted charts showing gold/silver to still be overvalued. Where are the USD inflation-adjusted charts for other scarce assets (fine art, gemstones, trophy real estate, etc.)? At the end of the day, wealth of the super-rich has soared, and so have the prices of everything they buy. '70s not really an apt comparison. Different dynamic.
    Nov 23, 2015. 04:41 PM | Likes Like |Link to Comment
  • Should You Buy The Current Dip In Enterprise Products Partners? [View article]
    I think getting 60% in 2000 and 25% in 2001 with limited market exposure and no idiosyncratic stock-specific risk is worth a 2% management fee. But hey, maybe I'm just a generous guy . . .

    More seriously, a do-it-yourself approach using ETFs is possible, but short-selling is very tricky and dangerous to manage the risk while you wait for the market to turn your way. So, I think the professional management for this type of portfolio is warranted in this case. You're actually getting alpha (historically, anyway) and skilled risk management for your 2% as opposed to nearly all of the straight long-only mutual funds which are basically closet indexers who don't add value (or in some cases, gunslingers taking big concentrated risks to try to beat the index).

    I remember scratching my head in 2013-14 as TRGP, PAGP and similar GP growth stories soared to incredible heights, thinking "do people realize that high CAGR growth rates will need to be sustained for a VERY long time to justify these multiples?". Near the end of secular growth booms, people always overdo it on the upside in growth stocks--they price them as though the boom will go on forever. The heavy IPO and M&A/financial engineering in the space during the last year or so was also a big warning sign. Wall Street and industry insiders "selling to the suckers". I played the boom with more conservative large-cap names like EPD, MMP, PAA, KMI and WMB. Even those got richly valued toward the end and started adding on excessive leverage in some cases (KMI and WMB).
    Nov 14, 2015. 11:33 PM | Likes Like |Link to Comment
  • Should You Buy The Current Dip In Enterprise Products Partners? [View article]
    All fair enough, and EPD is one of the best MLPs with a terrific collection of assets, strong management/governance and (relatively) conservative operation/financing. MMP is another though they are less diversified than EPD. Very good companies getting whacked because they got overpriced and caught in a bust cycle.

    My criticisms are aimed more at simplistic yield/CAGR chasing and returns chasing in the absence of true valuation work. Plus largely ignoring huge financial and operating leverage risks in companies like TRGP and PAGP. There's way too much yield-chasing analysis on SA generally.

    At the current time, I favor diversified long/short (market neutral) strategies designed to crank out a high single-digit return while preserving the optionality of cash (i.e the ability to pivot to long exposure after a bear market). For the more adventurous, you could put together a basket of deep value / distressed investments that may do better than that though of course there's risk and volatility.

    Agree that the current investing environment is very tough. I like market neutral L/S as it allows you to seek a modest return while waiting for better opportunities on the long side.

    We'll probably move to a "value style cycle" soon where you get 6-7 years of outperformance by value strategies over growth/momentum strategies. Current set-up similar to 1999-2000 in this regard albeit less extreme.

    The way to make money such a cycle (2000-06) is by shorting overvalued garbage the first couple of years, then going long old economy/"value" the next few years. So, for example, be in a fund like BPLSX or GONIX for 2000-02 then pivot to long-only value strategies for 2003-06. Important to note that you didn't make money from 2000-02 just being long old economy / value--that stuff went sideways while all the overpriced crap (including the market-cap weighted SP 500) collapsed.

    With L/S value, the short book makes big money the first couple years of the cycle (while the long book doesn't hurt you too much), and the long book makes big money the rest of the cycle (while the short book doesn't hurt you too much). BPLSX returned +60% in 2000 and +25% in 2001 while staying highly diversified (and 25% net long) the whole time. Long-only value funds produced spectacular returns in 2003 driven by cyclicals.
    Nov 14, 2015. 12:27 PM | Likes Like |Link to Comment
  • Should You Buy The Current Dip In Enterprise Products Partners? [View article]
    It's uncertain whether they will cut, but there are now serious risks, and it's unclear what the long-term total return CAGRs are on various MLPs from here. Hence, it's delusional for any investor to ignore total return / capital losses. There's an old saying: "more people have been killed chasing yield than were killed by the barrel of a gun."

    Yes, it's quite possible that they will rally 30% next year and/or outperform the grossly overvalued US stock market that has barely started correcting. The point of my comments is a post-mortem on how yield-chasing retail investors (the suckers at the poker table) have gotten creamed in this sector by ignoring valuations and failing to understand business models. And incidentally, you need more like a 100% gain to get back to the highs on most of these. Just because something has come down a lot doesn't mean the market is over-reacting--in a lot of cases, it's simply re-pricing to reflect reality.

    For the record, I'm agnostic about quality MLPs (on a relative basis) going forward though I'm generally bearish on the stock market here.
    Nov 13, 2015. 11:39 PM | Likes Like |Link to Comment
  • Should You Buy The Current Dip In Enterprise Products Partners? [View article]
    Brokerage statement vs. checking account--that's delusional--the distributions aren't safe longer term nor are the high CAGR distribution growth rates on the former high-fliers. When all of the debt in the sector has to be rolled over in a few years at much higher rates (due to higher junk spreads), it will eat up the cashflow. Plus the margins are going to be taking a big hit for the next several years on re-contracting. Everything is down big double-digits even the good ones like EPD and MMP.

    I dumped all my MLPs during summer of 2014 with big profits due to valuations / sector froth (perhaps I was lucky?). But, what is most striking is that it was evident by the end of last year with the oil price crash that the MLP growth story (I mean true organic growth, not continued financially-engineered distribution growth) was over. Yet, the prices remained elevated even early this year--anyone could have sold at similarly high prices--KMI at 44, PAA at 54, etc.--even after the writing was on the wall. It's not like anyone really had to get lucky and side-step / foresee the oil price crash to make a timely exit.

    I think there has been (and still is) a lot of naivete among retail investors over how closely MLPs are tied to high commodity prices (not just directly, but indirectly as the high prices fuelled the fracking boom and shape both growth CAGRs and re-contracting margins). That's why a lot of people have been shocked by the collapse in mid-stream MLPs. They should have seen it coming though--a hint was available by looking at how Kinder Morgan and EPD unit prices did at the end of the 1990s when oil crashed--they didn't do well at all. At the end of the day, it's still a leveraged cyclical business, albeit less cyclical than the E&Ps.

    The other lesson in this is that simplistic yield-chasing (and yield-growth chasing) is no substitute for nuanced, complex business analysis and valuation analysis for which most retail investors are woefully ill-equipped. Even then, it's a very tough game.

    There are even more egregious examples out there--see LINE, PNNT, VNR, m-REITs, etc. Investors should focus on total return rather than yield. You can always pay yourself each month from the brokerage account.
    Nov 12, 2015. 09:40 PM | Likes Like |Link to Comment
  • Should You Buy The Current Dip In Enterprise Products Partners? [View article]
    Hi Factoids,

    Just checking in, how are those high CAGR MLP GPs you loved a year or two ago treating you lately? TRGP, PAGP, etc. The valuation / mean reversion theory of gravity is a bitch, and leverage is a double-edged sword, isn't it?
    Nov 12, 2015. 02:44 PM | Likes Like |Link to Comment
  • Greenblatt On Value Investing [View article]
    You are very confused by the semantics. Perhaps it's more useful to distinguish between the three broad groups of market participants:

    (i) "value" investors (those who try to value securities and buy them for less than what they think such securities are worth and are patient to wait for such undervaluation to be recognized by the market). As you point out, this is broader than the traditional "growth" vs. "value" category distinctions in the mutual fund universe;

    (ii) "greater fool" investors--those who don't worry about valuations and buy securities on the idea that they will sell them at a higher price to other buyers (not because they bought them cheap, but due to momentum, macro-forecasting, current business conditions, takeover speculation, technical analysis, or some other perceived timing driver);

    (iii) passive investors (indexing, closet-indexing (most mutual funds), etc.), other price-insensitive buyers such as sovereign wealth funds;

    The first category is only a small sub-set of all market participants.
    Oct 5, 2015. 03:49 PM | Likes Like |Link to Comment
  • Greenblatt On Value Investing [View article]
    Buffett and other value investors are often wrong on individual stocks, but they nonetheless win more than they lose (and have asymmetric risk/reward on their wins/losses given starting valuations). That's what generate superior returns--putting the odds in your favor.

    "All participants are value investors"---not true at all. Do you really think all of the small-cap biotech and social media stocks are being bid to the sky by value investors? A lot of money follows momentum strategies, closet-indexing, looking for what will do well in the near-term (rather than longer term) given investor pressures for immediate results, etc. If all participants really were value investors, then yes, there wouldn't be much opportunity except for the investor who has truly exceptional analytical skills (and can out-analyze other value investors).
    Oct 4, 2015. 03:54 PM | 4 Likes Like |Link to Comment
  • Why This Is Not The Start Of A Bear Market [View article]
    Overall, a thoughtful, balanced article. However, where you run astray is the assumption that a bear market cannot start without a recession. This is a myth that's simply not backed by recent history. In reality, in our leveraged, financialized economic system, it's bursting asset bubbles that cause the recession, not vice-versa.

    The 2000 bear market started in March of 2000, and there were no signs of recession on the horizon at that time. In fact, the recession did not materialize until spring 2001 well after the stock bubble had already topped and declined big-time.

    Last time around, peaking home prices in 2006 and their subsequent decline caused the recession to start 18 months later.

    The sentiment indicators are interesting, but these seem to display similar pops in late 1999 and early 2008--not the best time to be going long equities (other than perhaps for a couple of months). This Rydex data reminds me of the AAII surveys--it's very short-swing and not very useful in marking major tops/bottoms. Perhaps more useful for swing traders.

    BTW, you could also argue that the dotcom-era bear market for the AVERAGE stock actually began in mid-1999, while the indices were pushed up a bit further for another six months by a very small number of large-cap high-flier momentum stock (mostly tech-related). Similar pattern this year.
    Sep 26, 2015. 06:50 PM | 2 Likes Like |Link to Comment
  • Is Caterpillar Stock Overvalued? [View article]
    Hi Ray,

    So, looking back at my May 20, 2014 list of shorts in the comment above, how would you say the list done relative to the S&P 500? Any alpha in there?
    Sep 25, 2015. 12:39 PM | 1 Like Like |Link to Comment
  • Making Sense Of Year To Date Price Changes In Midstream Master Limited Partnerships [View article]
    The current distribution coverage ratio only gives you a snapshot in time. You need to assess the business model and the industry / macro environment to assess the safety of the distribution and/or its growth rate. Standard valuation metrics (EV/EBITDA, P/E (taking into account that depreciation may be overstated for some assets such as long-haul pipelines that have real estate-like characteristics, i.e. indefinite lifespans on the easements), FCF, FCF after maint capex but before growth capex, etc.) are also helpful in this regard.

    A classic mistake of "growth" investors in any industry is extrapolating recent growth trajectory and fundamentals indefinitely into the future (and pricing the stock accordingly) when such fundamentals/growth are not sustainable long-term. Remember how optical networking companies were growing at 100% y-o-y for a few years in the late 1990s? At the end of the day, high multiples are dangerous, whether in this industry or any other industry, and usually result in poor long-term returns. Perhaps that's even more true in this industry than in many others, as this is a capital-intensive industry with limited scaleability.
    Aug 30, 2015. 10:40 PM | 2 Likes Like |Link to Comment
  • Making Sense Of Year To Date Price Changes In Midstream Master Limited Partnerships [View article]
    I recall about a year or more ago that you mentioned in connection with high-growth, high-multiple MLPs/GPs, you're a "what have you done for me lately" kind of guy in evaluating MLPs. Well, how has that worked out with high-multiple, overvalued TRGP and PAGP?

    I sold all my MLPs last summer around the time of the KMI and WMB deals, as valuations were very high, and it was increasingly obvious that froth and financial engineering ("slap some more leverage on to pander to the yield-seekers") was at a fever pitch.

    I didn't foresee the oil collapse, but it doesn't really matter. The key is that you need to invest based on valuations (not the yield from financially-engineered and/or commodity price-exposed dividends) to provide yourself with a margin of safety because adverse developments will inevitably happen at some point.

    You seem to take comfort from collecting distributions and ignoring unit prices. Do you really think that all of these distributions are safe longer term? Chanos has come out observing that even the CVX dividend isn't safe and will likely be cut. If that's not safe, how can you believe these more leveraged, higher yielding MLPs are safe? Lots of risks to MLP cashflows and growth over time--re-contracting, higher interest rates, sustained lower commodity prices, growth pipeline drying up as capital flees the energy space, etc.
    Aug 30, 2015. 02:32 PM | 2 Likes Like |Link to Comment
  • Making Sense Of Gold's 'Fundamentals' And Future Prospects: A Case Study In Graphics [View article]
    The thesis about hedge funds / banks shorting gold as a hedge against China exposure seems very credible and likely explains the very recent bout of weakness.

    Taking it a bit further though, she also appears to believe in a dramatic blow-up / hard landing for the Chinese financial system which would ultimately pave the way for the gold shorts to pay off longer term (in a bigger way). I have a problem with that thesis--I think the "long landing" scenario outlined by Michael Pettis is far more credible. I believe the Chinese banking system would simply be re-liquefied by gov't fiat or otherwise--we have enough precedent in Japan and US to know that zombie banks can be kept alive indefinitely if the political will is there to do so. I don't think a gold long is a bet on "Chinese bank solvency" but rather a bet that there will be no catastrophic blow-up of the Chinese banks. It's interesting though that Bridgewater suddenly shifted gears on China the other day.

    I'm also critical of her tendency to trundle out these 100-yr inflation-adjusted price charts of gold, silver, etc. to argue for long-term mean reversion. In terms of big picture super-cycle metals/commodities price trends, the past 100 years, IMHO, is really just a collection of 3-4 data points (each a unique macro era) that doesn't really support any inferential pattern or mean reversion.

    If you pulled out a similar chart of oil (gold/silver/oil all correlate long-term), this would suggest that oil needs to go down to $30 and stay there long-term. I think it can go down there temporarily, but newer geological realities (peak cheap oil) in recent years suggest that such a price level is unsustainable even if recovery costs dip a bit. See also J. Grantham's views on resource depletion, etc.

    Nonetheless a provocative short-term thesis--shows the futility of trying to explain short-term asset price moves with fundamentals--technica... second-order drivers often explain the moves!

    I think we need a weaker USD and will ultimately get one along with a reflation of commodities prices and emerging markets (perhaps after one more leg down). Might not be for a year or two though.
    Jul 30, 2015. 10:41 PM | 1 Like Like |Link to Comment
  • Making Sense Of Gold's 'Fundamentals' And Future Prospects: A Case Study In Graphics [View article]
    The MFITZ thesis is thought-provoking, but ultimately, this thesis would seem to require a global melt-down to play out. I think this ultimately goes back to structural/economic imperatives--as you suggest, the world needs a weaker USD, and note that a number of fundamental measures suggest the USD is over-valued against foreign currencies. A weaker USD would also mean a weaker RMB as they are de facto pegged for the time being, and would help Chinese bank solvency.

    If we were to actually get Chinese bank failures / financial crisis (would be accompanied by a skyrocketing USD and a global deflationary earthquake), the solutions coming out the other end would ultimately involve creating global liquidity and knocking the USD down. Ultimately, gold would come roaring back.

    I think there's consistency between MFITZ / Rickards and yourself in this sense, and analyzing it in terms of structural imperatives is quite useful. Unless the US can roar forward with faster growth rates than the rest of the world, we need higher gold and a weaker USD, and we're likely to get them over time.
    Jul 30, 2015. 12:53 PM | Likes Like |Link to Comment
  • Making Sense Of Gold's 'Fundamentals' And Future Prospects: A Case Study In Graphics [View article]
    This is a really tremendous piece--sophisticated and objective and demolishes a lot of prevalent myths such as the notion that a hike in the Fed Funds rate is dollar bullish / gold bearish (you could have also mentioned the 2004-06 example--amazing how people fail to check history on simple correlations such as this).

    I will read the Fitzgerald article on your recommendation. In the meantime, what do you think of James Rickards' views that there are structural / economic imperatives ultimately requiring a weaker USD and higher gold (to ensure the US debt Ponzi and global/EM growth can continue)?
    Jul 30, 2015. 01:04 AM | 1 Like Like |Link to Comment