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  • The Real Reason Behind This Selloff  [View article]
    Go Lakers,

    You hit the nail on the head regarding housing from my perspective. Home sale prices are definitely localized and it does not appear that their is a broad national over-shoot going on in terms of home prices. You mentioned under-supply and that is definitely an issue in many areas and at the macro level. Our country requires around 1.4 million new residences to be added each year to maintain supply that will meet the household formation needs. We over shot that number for many years prior to 2007, but we have under-shot that number for the last 8 years and we are now under-supplied.
    Jan 26, 2016. 12:27 PM | Likes Like |Link to Comment
  • The Real Reason Behind This Selloff  [View article]
    Martin, I agree and that was exactly the point of the extraordinary monetary and fiscal policy decisions that were made in late 2008 and early 2009. However, whether or not monetary policy is the reason that we had a 6 year bull market is quite another thing. Stocks move to extremes at times, whether the extreme is Nasdaq 5000 in early 2000 or S&P 700 in March, 2009 these extremes have nothing to do with the normal future cash flow discounting process that should price an equity or market. Had the Fed and Federal government not intervened, the downside extreme would have been much lower and the recovery arguably would have been more protracted. However, the recovery would have occurred because at some point the deleveraging would have waned, fear would have been over-taken by fundamental decision-making. The important question today is how much if any have the equity markets over-shot fundamentally justified levels due to reckless investment decisions that have been made over the last several years in response to ZIRP and QE?
    Jan 25, 2016. 06:34 PM | Likes Like |Link to Comment
  • The Real Reason Behind This Selloff  [View article]
    Go Lakers,

    You make a good point. It is foolish for anyone to pick the trough or the peak of a market cycle and try to make an argument that either the ascent to the peak, the dive to the tough or the recovery off the bottom cannot be explained. Of course they can be explained. The stock market is a discounting mechanism of future value creation of a certain companies or basket of companies. That discounting mechanism can become obscured by greed or fear and the result are prices that become disconnected from normal discounting fundamentals.

    I would agree with you that the market bottom in March, 2009 was pricing in far too much pessimism and the six year recovery was largely justified based upon pessimism receding and investors once again discounting future value creation. One can legitimately argue that ZIRP and QE impacted the pace of the recovery of stock prices from the crisis/fear induced levels, however is that not the point of monetary policy actions following a crisis? A more important and separate point in my opinion is the impact of the resulting stock buybacks on earnings and how much of future earnings growth expectations are erroneously priced into the market based upon an extrapolation of the past several years' pace of buybacks into the future.
    Jan 25, 2016. 12:26 PM | Likes Like |Link to Comment
  • The Real Reason Behind This Selloff  [View article]
    A lot of people speculate as to what are reasons for a stock market correction. The reason is that there are more motivated sellers than motivated buyers. The more important question is why? China is a reason only in so much as that stock market was grossly over-heated and the slowing of that economy and the reckless experimentation with stock market regulations is prompting Chinese investors o run for the exits. However, this does not answer why this leads to selling quality U.S. stocks. The U.S. equity averages have been modestly overvalued, however not at levels which have triggered a major correction or bear markets. The Fed's end of ZIRP is something that the capital markets have been reacting positively to over the previous 6 months or so. The end of QE is a reduction in stimulative monetary policy, but is not inherently restrictive. I believe that the best clue to why there has been an increase in motivated equity selling since August is the strong correlation between falling oil prices and falling stock prices globally. Sustained oil prices below $50 per barrel has put significant fiscal strain on countries such as Saudi Arabia, Norway and Russia. Resource rich countries around the world have built up very large sovereign wealth funds over the last couple decades using budget surpluses created by a long commodity boom. Now that the boom has turned into bust, these countries are not adding to these sovereign wealth funds, thus eliminating that large institutional net buyer from the capital markets. As this commodity bust has deepened these large previous incremental buyers have turned into large incremental sellers. This selling has intensified over the last year with the crash of oil prices. These sovereign wealth funds own many different asset classes such as real estate and private equity, which are not liquid, however they also own public equities that are highly liquid and thus convenient sources of cash when it is needed to plug large holes in their fiscal budgets.
    Jan 24, 2016. 10:09 PM | Likes Like |Link to Comment
  • Freeport-McMoRan: Capitulation?  [View article]
    RH, I don't buy the blame the Fed argument. Yes the Fed's balance sheet has expanded exponentially, however that expansion did not create additional debt issuance by either the private sector or public sector. The expanded balance sheet resulted from QE, which caused the Fed to purchase bonds both from government new issue auctions and private sector holders such as banks and insurance companies. With the liquidity that the private sector seller of those bonds received, those entities reinvested the proceeds in some form of risk assets, thus helping the wealth effect. One could argue that ZIRP caused an increase in leverage, however once again I do not blame the Fed for the "market's" bad behavior or the bad behavior of corporations and consumers. Bad decisions are bad decisions when it comes to leverage and your cannot blame those setting interest rates no more than you can blame Baskin Robbins for the obesity problem in the U.S. No one puts a gun to the consumer's head and forces them to eat that extra ice cream cone each week.
    Jan 12, 2016. 08:19 PM | 2 Likes Like |Link to Comment
  • Freeport-McMoRan: Capitulation?  [View article]
    CH, very interesting compilation of statistics along with a thought provoking causation argument. Thanks!
    Jan 12, 2016. 08:10 PM | 1 Like Like |Link to Comment
  • Why Warren Buffett Isn't Selling IBM Despite Dismal Performance?  [View article]
    89376, thank you for your "real" informed opinion. As Gretzky said, "don't skate to where the puck has been, skate to where the puck is going". In a market such as today, when we have record cash on the sidelines and such little long-term conviction among market participants, it is no wonder that a stock like IBM is languishing.
    Jan 11, 2016. 10:42 AM | Likes Like |Link to Comment
  • Liberty Media Intends To Create Tracking Stocks - What It Means  [View instapost]
    Nice summary! John Malone is the consummate value creator.
    Dec 21, 2015. 10:22 PM | Likes Like |Link to Comment
  • Why Warren Buffett Isn't Selling IBM Despite Dismal Performance?  [View article]
    You just pretty much summed up the difference between an investor's approach to buying into a company and a speculator/trader's approach to buying a stock.
    Nov 22, 2015. 01:15 PM | Likes Like |Link to Comment
  • Why Warren Buffett Isn't Selling IBM Despite Dismal Performance?  [View article]
    giofis, the nuance in my argument is that IBM is a lower risk investment with its 9X P/E versus CAT with its 20X P/E because CAT's multiple is propped up over a more normalized P/E of 16X to 17X because the consensus estimates for CAT's EPS show it troughing in 2016 and rebounding in 2017. If that reality disappoints CAT's multiple is at significant risk of falling. IBM's EPS are expected to trough this year and grow going forward at a relatively low percentage and the sentiment surrounding these expectations is very negative. Therefore, there is a far greater probability that IBM's EPS growth rate surprises on the upside of the pessimistic consensus, which would lead to multiple expansion.
    Nov 19, 2015. 08:40 AM | Likes Like |Link to Comment
  • Why Warren Buffett Isn't Selling IBM Despite Dismal Performance?  [View article]
    We originally were talking about CAT versus IBM from a P/E perspective since you indicated that CAT's P/E was around 20 and IBM was 9. IBM's P/E has gone from 10X to 9X over the last year, whereas CAT's P/E has gone from 13X to 20X. These are one year forward P/E's. Based upon 2015 P/E's CAT is selling at a 15 multiple and only jumps up to a 20 multiple on next year's earnings because those earnings are expected to fall by 20%. In IBM's case, its earnings have only dropped by 9% since 2014 and are expected to remain relatively flat over the next year or so. To your point, IBM's multiple has contracted from 12X to 9X due on only modest earning contraction due to pessimism about a turnaround. CAT has seen a modest multiple contraction from 2014 to 2015 with its P/E contracting from 17X to 15X based upon current EPS. Where I took issue with your statement of indicating that CAT's forward P/E of 20X is due to the market being optimistic about the stock, is that such a P/E expansion is due to a sharp EPS contraction and not a multiple expansion based upon the market anticipating earning acceleration. The reason why I would be more inclined to own IBM versus CAT at current levels is due to an assessment of downside risk. IBM's downside at current multiples given a base case scenario of flat EPS over the next couple years is very limited, especially given a 3.8% dividend yield. On the other hand, if CAT's EPS outlook does not turnaround by this point next year, there will be significant downside pressure on CAT's lofty multiple and thus share price.
    Nov 16, 2015. 12:20 PM | 1 Like Like |Link to Comment
  • Why Warren Buffett Isn't Selling IBM Despite Dismal Performance?  [View article]
    giofls,

    That is not true, did you happen to notice the very high P/E's on many stocks in 2009 when earnings collapsed, they were not high at the time because the market had such tremendous optimism about the future.
    Nov 15, 2015. 09:15 PM | Likes Like |Link to Comment
  • Why Warren Buffett Isn't Selling IBM Despite Dismal Performance?  [View article]
    As with any investment, there are those who see value and those who don't. Thus there are motivated buyers and motivated sellers and this makes a market for a security. Today it is apparent that those inclined to sell IBM stock are more motivated than the buyers. If the reasons for this stronger motivation to sell are reflected by the reasons given by the majority of those who post on SA who are critical of IBM and its management, the sellers are mostly unhappy with current financial performance and critical of management's inability to more rapidly transform the company. However, many of those who seem to be inclined to be IBM investors tend to discuss growth initiatives, strong cash flows, and dividends. This makes sense because in order to invest in IBM on has to believe that IBM's transformation is on the correct course, that cash flows available to enhance shareholder value will continue to increase, and that dividends are safe and likely to grow.

    Near-term sequential revenue growth and near-term 5% to 10% EPS growth are not a prerequisite for the qualities that the long-term IBM investor is currently focused upon. Long-term investors do not need to time the inflection point with an investment in a high quality company such as IBM during a turnaround period.
    Nov 12, 2015. 11:50 PM | 2 Likes Like |Link to Comment
  • Why Warren Buffett Isn't Selling IBM Despite Dismal Performance?  [View article]
    IBMire, an investor's capital is not disappearing as you say. If I own 1000 shares of IBM at $160 per share that I bought three months ago and today it is only trading at $135 per shares, so what? I still own 1000 shares and I will receive a 3.80% dividend on each of those shares while I wait for the market to decide that IBM has turned the corner. That perceived turn may happen next quarter or it might take another 2 to 8 quarters before the market comes to that conclusion. Along the way I might add to my position and lower my average cost at the same time the company will be buying back shares, thus increasing the proportionate share of earnings and dividends that each of my shares represent as a shareholder. I have lost no capital because when I purchased those shares I traded liquid capital for equity ownership. If the price temporarily drops that does not effect my ownership.
    Nov 10, 2015. 07:58 PM | 1 Like Like |Link to Comment
  • Why Warren Buffett Isn't Selling IBM Despite Dismal Performance?  [View article]
    giofls,

    First of all CAT is selling at close to 20X forward earnings for the same reason that many energy companies have also seen their P/E's rise significantly over the last 12 months - collapsing EPS. CAT's consensus estimates show EPS falling over 20% causing the P/E on trailing earnings of 14X to rise to 20X on forward EPS. On the other hand IBM's EPS is going to be relatively flat over the next year. Amazon is able to be valued on revenue growth. When Amazon finally begins to report consistent profits that market will be able to assign an earnings multiple that is meaningful. Tesla is simple a cult stock and not fundamental valuation metrics are being applied. With IBM the sentiment is very poor because investors have lost patience and generally do not have a good understanding of where Rometty is taking the company, in spite of her articulating it very clearly many times.
    Nov 9, 2015. 10:40 PM | 7 Likes Like |Link to Comment
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