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Palladium31

Palladium31
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  • Waiting For The Correction That Might Never Occur [View article]
    This was a really great article Adam.

    For whatever its worth, I took a look at historic earning yields on the s&p 500 compared to historic 10-year treasury yields and what I found is that today's risk premium (i.e. the difference between the two) is historically average, however both the stock and bond prices are historically high. This set up (historically high stock and bond prices with historically average equity risk premiums) presented itself only a few other times in the past 144 years of our country's recorded S&P 500 history, and in each case I found that the next move in the market was a fall in the p/e ratio while bond prices remained high for many years thereafter.

    Thus, for those invested or considering an investment in an ETF like SPY or QQQ, now may not be the best time to start positions in "the market". However, individual companies trading below their historic valuations, especially those in industries that do well in upcoming phases of the normal business cycle, are where I'm focusing my investments at the moment.

    Best,
    P
    Apr 23 04:40 PM | 1 Like Like |Link to Comment
  • New home sales plunge in March [View news story]
    Agreed. Here are a few other reasons:

    1) the PE/single family home REIT money has pulled out of the homebuying market in California for the most part as there are too few deals left.

    2) the lax borrowing standards in China have reversed course in recent months so the all cash speculators have largely pulled left the market.

    3) those that have sold their homes in socal over the past year have not been reinvesting in CA with a move-up buy. Instead, they are leaving the state and becoming all cash buyers in Texas (where you can get a mansion for the price of a starter home in most of CA).

    4) with low wage starting jobs and high grad school debt, a lot of folks that would be first time homebuyers are not in the market at the moment. Instead they are renting near the job opportunities & nightlife, or commuting and living with parents.

    That said, when the folks in #4 feel comfortable about the future and start forming families with children in stronger numbers, we'll see a return of first time home buyers, which should help re-invigorate the move-up market.
    Apr 23 01:47 PM | 2 Likes Like |Link to Comment
  • Seadrill Ltd.: Dayrate Is The Key To Recovery; Time To Buy Is Now With A Target At $50 By 2016 [View article]
    Stock price downside in 2 years is around 22/share (based on the historic cash flow multiple) if they only earn on their existing contract commitments (i.e. ~40% fleet utilization in 2016); however, this would be offset by about 7-8 in dividends (remaining 2014 plus 2015&2016 adjusted for lower assumed cash flows) bringing the extreme downside risk to only ~ 12% over 2-years.

    On the upside, assuming no growth in the day rate and continuing 95% utilization of the fleet, the price could trade up to ~54/share plus dividends for a total return of around 100%. If day rates go up, then there could be considerably more total return than that.

    Thus, with a reasonable total return upside of ~100% and a "worst-case" downside of (12%), I've decided to begin accumulating a position at this time.

    Best of luck to all.

    P
    Apr 23 12:25 PM | 2 Likes Like |Link to Comment
  • Seadrill Ltd.: Dayrate Is The Key To Recovery; Time To Buy Is Now With A Target At $50 By 2016 [View article]
    Great article - this is the type of analysis I appreciate.

    One thing that seems fairly attractive to me is that SDRL's rigs/ships appear to be much newer than their competitors' by several decades. Even if the total offshore drilling demand has consolidated, I would imagine having newer ships gives SRDL a competitive advantage to attract the available capex dollars?
    Apr 22 05:20 PM | Likes Like |Link to Comment
  • Uncertain Fed Plus Uncertain Economy Equals Uncertain Markets [View article]
    Any concern about today's very low volume?
    Apr 21 10:22 PM | 1 Like Like |Link to Comment
  • Risks Accelerating: Sell IBM [View article]
    IBM's average ttm P/E ratio over the past 5-years has been around 13 and bounces between 10 on the low end and 15 on the high end. If you exclude the resolution of their prior year tax audits that resulted in a very significant one-time income tax benefit (granted when the reserve was initially recorded it had a negative non-cash impact on earnings), their P/E ratio today is much closer to 14.3 which is on the high side of their historical valuation range.

    Best of luck to all,
    P
    Apr 21 08:45 PM | 2 Likes Like |Link to Comment
  • Equinix, Iron Mountain gain on CBS Outdoor REIT ruling [View news story]
    CBSO was a pretty straight-forward and uncontroversial ruling given that outdoor billboards could already be treated as real property with a 1033(g)(3) election.
    Apr 21 10:57 AM | Likes Like |Link to Comment
  • Has First Cash Financial Seen The Turn? [View article]
    Nice write-up Stephen.

    It has been my experience that firms don't make the decision to check-the-box to incorporate and assert permanent reinvestment for GAAP purposes lightly. That decision last year combined with Q1's credit financing is a very clear indication to me that they are planning to expand further internationally.

    The other nice thing about the coming quarters in 2014 is that since they made the decision to switch out of gold/jewelry in the second half of last year, most of the elevated same store comps from 2012 and Q1/2 of 2013 (due to the gold bubble) will be behind them with Q3 and Q4 2014 results. The lower Q3 and Q4 2013 results should provide a nice level of support for rising comparables going forward.

    Definitely a long term investment backed by a first class management team.

    Best,
    P
    Apr 18 05:15 PM | Likes Like |Link to Comment
  • What Exactly Is Risk? [View article]
    All I got was "Risk = betta F the market G" :)
    Apr 17 06:39 PM | 2 Likes Like |Link to Comment
  • Dividend Champions Ranking: Part 1, The Heavyweights [View article]
    This is a fine summary article, but I really wouldn't put too much emphasis on a metric system as it can lead to a lot of false positive results. For example, I don't think I agree that MHFI is "inexpensive" from a P/E ratio perspective. If you exclude the one-time 2013 MHE sale, then earnings from continuing operations would give a ttm P/E of over 25.

    There really is no substitute for basic research: reading 10ks, 10qs, earnings call transcripts and doing the same for competitors, building valuation models, etc. If one isn't comfortable with this type of approach, I would strongly recommend starting with passive SPY/RSP/VTI/BND type investments.

    Best of luck,
    P

    Apr 16 12:35 AM | 5 Likes Like |Link to Comment
  • John Hussman: Margins, Multiples, And The Iron Law Of Valuation [View article]
    Thanks KenGold.

    From an intellectual standpoint, I found it curious that in 2009 the pricing of the S&P 500 could suggest 10-14% annual total returns over the next decade, but now in 2014 (half-way through the decade), the pricing suggests annual returns of about 2.7% going forward (with no range).

    If we accept the prior 10-14% range as correct, then it's not clear to me how the range now has narrowed to "about 2.7%" (or 191 on the SPY in 2019 adjusting for ~1.7% dividends) given that the upper band of 14% could take us to 236 on the SPY in 2019 (after adjusting for ~1.7% dividends), or 164 at the lower 10% band (adjusting for ~1.7% dividends).

    Thus, unless I'm missing something, my view is that the model seems to have limited utility in predicting exact outcomes, but I suspect it does have some utility in suggesting probabilities.

    Here is another valuation methodology to consider: the historic p/e of the S&P 500 is ~15, which is a 6.67% earnings yield. The historic yield on the 10-year treasury is ~4.63%. Thus, the historic earnings yield risk premium is ~200 basis points. If the 10-year treasury yield is ~2.6% today (and has averaged ~2.6% over the past 5-years) this suggests that the S&P 500 earnings yield could be about 4.6%, or a P/E of 21.7, whereas today it's ~18.2 (an earnings yield of 5.5%). Given that the P/E is not at 21.7, but rather 18.2, while the 10-year is at 2.6%, this seems to suggest that the market is pricing in higher treasury yields of about 3.5%, or that the future earnings are being discounted. It could be that either the stock market is correct or the bond market is correct, or they're both wrong. But my take away is that trying to value the entire market is an imprecise task.

    For my part I don't invest in the "market", but rather individual securities. At the moment, I'm mostly positioned right now for a low interest rate environment (high quality triple net reits, preferreds), some consumer staples, cash & cash secured puts and foreign value stocks.

    Best of luck,
    P
    Apr 15 01:32 PM | Likes Like |Link to Comment
  • Apple Faces A Problem And Increasing Prices Will Make It Worse [View article]
    My comment had to do with the fact that in 2013, 25% of their gross profit went right back to shareholders while gross profit was down and sales growth was slowing. Dividends and buybacks are fine, but returning 25% of gross profits seems inefficient... although as I also stated, it's a good problem to have.

    There are many ways to improve "efficiency". One way I suggest is to cut the price of what they sell in an effort to increase market share. I'm not suggesting they create inferior or substandard products.

    Having a high profit margin doesn't mean much if the stock price is falling or stuck in a trading range. Instead, it seems like the market is pricing the stock based on revenue expectations rather than earnings, so sales growth at the cost of lower margins may be a perfectly reasonable trade-off if the company has the same pool of distributable cash at the end of the day.
    Apr 15 12:16 AM | Likes Like |Link to Comment
  • Apple Faces A Problem And Increasing Prices Will Make It Worse [View article]
    Based on 2013 financials (as reported on Yahoo Finance), Apple paid out ~25% of gross profit as stock buybacks (adjusted for net borrowings) and dividends. As a percentage of gross sales, this number is ~9.5%. On the surface this appears quite admirable. However, stated another way, $0.25 out of every dollar of gross profit (or $0.095 out of every dollar in sales) was above the needs of the business, or "excess", and went back to shareholders as buybacks or dividends. Not such a good thing when gross profit is declining year over year and the growth rate of sales is slowing.

    As a side note, they only spent 7% of gross profit (or 2.6% of gross sales) on R&D.

    Thus, these payouts suggest that their pricing may be too high or they're not spending enough on customer acquisition (or R&D, etc). If they come in at a lower price point (or spend more going after new customers), theoretically, their sales should increase, and they'll have better leverage on fixed costs, so they could end up with the same pool of cash to return to shareholders (and their payouts as a percentage of gross profit or sales should come down; i.e. less "excess" and more "efficiency").

    Regardless, they are in a very strong financial position, and their problems are entirely solvable.

    Not long, but considering it.
    Apr 14 10:26 PM | Likes Like |Link to Comment
  • Stock Bounce Does Little To Alleviate Concerns [View article]
    From JHussman's valuation model where he predicted 10-14% annual total returns for 10-years using a Feb 2009 S&P 500 low of 74 on the SPY, the SPY could currently experience anything from a 39% crash followed by 8.3% annual nominal returns for the next 5-years plus 1.7% annual dividends; to growth of nominal 6.1% annualized for the next 5-years plus 1.7% annual dividends. This implies a SPY price in 5-years of either 164 or 244. Quite a wide range of outcomes.

    Thus, I think Chris's technical analysis is a very valuable tool for those looking for guidance on index fund investing.
    Apr 14 08:40 PM | Likes Like |Link to Comment
  • John Hussman: Margins, Multiples, And The Iron Law Of Valuation [View article]
    "The same measures that indicated that the S&P 500 was priced in 2009 to achieve 10-14% annual total returns over the next decade presently indicate estimated 10-year nominal total returns of only about 2.7% annually."

    If I take the February 2009 low of 74 on the SPY, after 10-years a 10% annualized return is ~192, a 12% annualized return is ~229, and a 14% annualized return is ~274. In Feb 2014, the price may be expected to be about ~119 at 10%, ~130 at 12%, and 142 at 14%

    Given that the SPY is ~182 today, it could mean the market is 22-35% overvalued depending on which 10-14% trajectory we were on. It could also mean that if we're to remain on the 14% track from 2009, future annualized returns for the next 5 years could be expect to be around 8.5% (bringing us to 274 in 2019); 4.75% on the 12% track (229 in 2019), or ~1% on the 10% track (192 in 2019).

    Thus, based on your initial statement that equities could be expected to return 10-14% for the next ten years based on the 2009 S&P 500 low, it seems that today in 2014, on the low end we could have a crash of up-to 35% (with 10% returns thereafter for the next 5-years), or no crash with annualized returns of up to 8.5% for the next 5-years (to put us on the 14% annualized trajectory from 2009). I will note however, that you did state "total" returns, and my numbers haven't been adjusted for dividends.

    Quite a wide variety of possible outcomes though.
    Apr 14 02:55 PM | 2 Likes Like |Link to Comment
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