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Tom Armistead
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I'm a well-informed retail investor and post on SA in order to expose my thought process to critical examination and comment from readers. It makes me a better investor. I'm particularly proud of bullish macro articles posted in 2009 and later, in which I presented ideas that encouraged me to... More
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Tom Armistead's Instablog
  • End of the Week Miscellany  10 comments
    Sep 2, 2011 8:55 PM
    Lots of talk about the goose egg jobs report today. 

    What I saw was, the Verizon strike lowered private sector jobs by 45,000.  Meanwhile, government jobs were down 17,000. So the private sector actually created 62,000 jobs more than were lost.

    That happened in spite of the debt ceiling circus, the feeding frenzy in Europe, and nattering nabobs of negativity. 

    Meanwhile retail sales were better than expected, as were car sales. Car sales have been down by about 5 million per year for 3 years.  Meanwhile a lot of older cars are coming off financing and the owners get a pay raise because they don't have to make car payments for a while.  So they pay down their credit cards and maybe catch up with the mortgage, or maybe they continue in default, to keep their options open.

    I saw a really dumb interview on Bloomberg today.  They were interviewing a gold miner in Death Valley, he was complaining how he needs 15 permits to do anything, meanwhile he has to crush and treat 870,000 lbs of rock to get one ounce of gold.  After all, nobody goes to Death Valley anyway, why make a fuss about the permits?  Why not just turn it into an immense slag heap in order to produce a few ounces of gold? 

    Why not just leave it the way it was?  Is an ounce of gold worth that amount of destruction? Just take an ounce of milk chocolate and wrap it in gold foil, it is worth more.
     
    Another thing, if you go to the Federal Reserve and check out DSR and FOR, both of these metrics are on a pace to be at levels consistent with a robust economic recovery by the middle of this year, or early in the fall.  That would be right now. The consumer is loaded for bear, and many of them are spending in spite of the negativity.  Most of them still have jobs, and they've figured it out: the people who lost their jobs two years ago can't get another one, but everybody else is going to be OK.  So why not give yourself a treat and buy a nice new car as a reward for sticking it out through all that bad stuff at work, the boss making you do the work of two people, no raises, realistic performance appraisals, people looking at their watches when you come in late? 

    And NIPA corporate profits. I went to do my usual article, profits were so high I thought I was looking at the wrong table, I had to check back several years before I could verify I was using the same data.  Corporate profits as a percentage of GDP have never been higher, it was almost 11%.  It used to be 5% or 6%. And these people carp and complain about uncertainty.  Maybe they should spread the wealth around, hire a few trainees, teach them some skills, build up a little bench strength. 

    Good to see FHFA suing all those big banks.  The financial system has a lot of uncertainty about who's holding the bag on all the fraud and dishonesty from the financial crisis.  Really great if the perpetrators wind up holding the bag.  

    I don't see a double dip recession, and look for the economy to pick up during the second half.


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  • Ricard
    , contributor
    Comments (3829) | Send Message
     
    Tom,

     

    This looks like a good contrarian perspective. So many people are screaming the end of the world this time around, it makes one think that things are going to be just fine.

     

    I was going to say that barely anyone saw 2008 coming, but then I remembered all the screaming that took place as the house of cards was collapsing, so can't quite say that.
    2 Sep 2011, 09:29 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5292) | Send Message
     
    Author’s reply » Ricard, I was among those who didn't see 2008 coming, I called every bottom all the way down, but missed the tops.

     

    But as things stand today, the powers that be won't permit an uncontrolled systemic event like Lehman, and the weakness of RMBS assets is fairly clearly defined, so there is some kind of a stable base to the system.

     

    I saw more discussion of soft data vs hard data today, I think the attitude after the weekend will be wait and see, watch the hard data, suspend judgment. From there it will be about jobs, the Obama speech and the Fed. It would be nice if the authorities collectively could establish confidence that they have a handle on things and will develop and implement something fiscal to address jobs.
    2 Sep 2011, 09:46 PM Reply Like
  • lower98th
    , contributor
    Comments (1420) | Send Message
     
    Tom: I've been a reluctant and heavily hedged investor since 2007. Was working in mortgage servicing then and didn't know anything about CDO's, only that our default risk numbers were looking bad. Up only about 20% since then, as I was fully invested during the whole downturn (requirement at the time). Now I have about 25% stocks, minor hedges, and cash. Still don't like the government and Fed smoke and mirrors, and outright lying. And I'm concerned about contagion, Europe, and all those synthetic derivatives out there.
    But I see what you see. A lot of stocks waaayy into the buy range by my parameters, enough cash everywhere that most companies I look at don't need a bank for their mid-term cash needs. Even if I adjust GDP downward, along with forward earnings, and add in some upwards interest rate pressure.....things look better than they should. So I've been adding back in - a position a week during any dips.
    3 Sep 2011, 07:36 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5292) | Send Message
     
    Author’s reply » lower98th,

     

    Congratulations on being very well-positioned. I think you're right to add carefully. The current situation is pretty strange, but if it resolves favorably there's quite a bit of upside.

     

    I was involved in some discussion the other day, Abby Cohen at GS was mentioning a 1,450 target for the S&P 500, meanwhile a colleaque elsewhere in the company was talking doom and gloom, telling his audience (hedge funds) to buy CDS on European corporates.

     

    I would be a lot more comfortable as an individual investor if I had access to a relatively low cost hedge on the European situation, hedge that out and stay heavily invested in US equities.
    3 Sep 2011, 09:17 AM Reply Like
  • Chambord
    , contributor
    Comments (77) | Send Message
     
    The thing for business is that while BHO is in office there will no be meaningful tightening of regulations or taxes. That's 2 or 6 more years of no real change in the status quo for business regardless of who gets in the WH. Obama is pursuing most of W's policies minus the foulups. Interest rates will not rise either if the Fed or government can help it. The system is bounded.

     

    Small business employment has been flat to down for several years. Same for small business profits. I see this in NFIB surveys and in the number of business filings in California. Big business has increased its profits in a flat economy by taking market share from small businesses and profit share from labor. I believe that eventually big business will exhaust most of these opportunities. For example, there are only so many apartment buildings with sufficient units that a REIT would be interested in managing. So the price will go up, the yields down, and leaving small operators to run smaller apartments. I leave aside the issue of yields rising due to higher risk premiums.

     

    What we may see is big business go after the markets of other big businesses. Of course this happens all the time. I live in silicon valley, and I am a little surprised about which big players are getting into areas outside their core. Eventually I think this competition will hurt corporate profits. While barriers to entry for many types of businesses may be high, there are companies with even more cash and positive cash flow.

     

    The system will not change until it has to, and then by a rupture, small or large. Essentially our era is a a self-organizing critical state optimizing for multinational corporations. The ruptures I am most worried about concern social cohesion. The high unemployment, low labor participation seem problematic. We are such a wealthy country with such an aspirational culture that I see it taking a 10 years to get to London style riots. I see it taking until the large Gen Y cohort gets into their late 30s and 40s before Arab spring type of changes occur, perhaps legislatively. Unfortunately for our empire, China is not just marking time. And I really worry about the interplay of 2nd amendment and discontent. Like Brazil, Nigeria, Pakistan, here the middle class will be much more visible and accessible to the discontented than the big corporations and the wealthy that enjoy them.
    3 Sep 2011, 11:54 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5292) | Send Message
     
    Author’s reply » Chambord,

     

    Your description of the self-orginaizing critical state optimizing for multinational corporations strikes me as very accurate about how things are working and developing, and have been for some time now.

     

    Example, we have the CEO of CAT talking pretty big, giving instructions to his home state and nation about how things should be, and taking his business elsewhere.

     

    The investment implication is to own or control as many shares of the favored entities as possible. So as the disruptions occur, and stock prices bounce up and down, the investor needs to keep his attention focused on the main thing.
    3 Sep 2011, 12:03 PM Reply Like
  • bbarberayr
    , contributor
    Comments (153) | Send Message
     
    Thanks for the article Tom - I agree that things are getting slowly better and the odds of another major negative event are small. Even a formal bankruptcy of Greece is so priced into the market, I do not see that causing a major stock meltdown.

     

    Corporate profits as a percent of GDP are very high, but given that 45% of revenues of the S&P 500 are from outside the US, I wonder if that metric is still valid. US business is definitely not as strongly correlated to US GDP as it was in the past.

     

    Also, I went through all of the stocks in the Dow this weekend and, at current prices, they are all look like good value to me unless we do hit another recession. In general, other than a few individual stocks, most valuations in the market look good.

     

    Having said that, I also did not do well with the 2008 market downturn. I thought valuations were not outrageous then and you could do well by picking the right stocks (which obviously was wrong as everything got crushed). The good thing is that buying through 2008 and into March, 2009 turned out to be the right thing to do in the long term and a think a sell-off here would provide a similar opportunity..
    4 Sep 2011, 11:40 AM Reply Like
  • Tom Armistead
    , contributor
    Comments (5292) | Send Message
     
    Author’s reply » Good point on the Dow Jones, you made me curious so I looked up the ETF on Morningstar, they give it five stars with a fair price 17% higher than where it is today. I own six of the stocks involved and I have been through them multiple times and think they're undervalued.

     

    I've been surprised at the severity of this downturn, cashed in all my hedges as the market went down, I still don't believe the sell off hit stocks like MMM and TRV as much as it did.
    4 Sep 2011, 08:36 PM Reply Like
  • bbarberayr
    , contributor
    Comments (153) | Send Message
     
    At the start of the year, I thought we'd have a +20% year due to strong company fundamentals and an improving economy. I'm losing faith in this expectation as we are now in September and still down and the bad news driving valuations even lower. But it its nice to see Morningstar also sees the market similarly undervalued. And I do see the possibility for panic buying into year-end if the market starts to move upwards as I believe you have a lot of underinvested fund managers who will chase performance.

     

    Seems we have similar portfolio ideas with undervalued large caps and insurance stocks as talked about before. I also have a large weighting in commodities (no gold anymore) with a heavy weighting in energy - do you have any opinions on commodity stocks in the current environment?
    4 Sep 2011, 09:06 PM Reply Like
  • Ricard
    , contributor
    Comments (3829) | Send Message
     
    "Even a formal bankruptcy of Greece is so priced into the market, I do not see that causing a major stock meltdown."

     

    I'm not at all convinced of this. If the thesis circling around the macro-discussions holds true, then this will be something bigger than Lehman collapsing. The interconnectivity of Europe is similar to that of the financials in the US, and it would be naive to think that we would be unaffected from a meltdown in Europe.

     

    As Greek 2 year bonds are approaching 50% yields annually, I think there is a good possibility that things get far worse from here. These kind of yields, especially if they're followed by the rest of the PIIGS, would be a much louder alarm bell than Hank Paulson "breaking the glass" and proclaiming the end of the world. The events following may be more orderly than what happened in Oct 2008, but it may end up more severe.

     

    Regardless, something tells me that nominally, stocks may be largely unaffected in the medium term. Sticking to my leveraged GLD position.
    4 Sep 2011, 09:21 PM Reply Like
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