MDCigan

Investors' Collective Fears Point to Continued Losses

FWIW, you might read this:

seekingalpha.com/artic...

"Okay... So the $37.1 billion number we hear about as Berkshire's "exposure" is bunk. Berkshire is exposed to that number IF the value of both European, U.S. and Japanese stock markets goes to zero. A true Doomsday scenario that, should it happen, essentially means the end of all economic activity as we know it."


On Mar 10 03:26 PM paultaut wrote:

> MDC: At what point does Buffett's Put Play exceed the value of the
> entire Company if the S&P drops below 400 and his company holdings
> drop the same on a percentage basis?

Investor Capitulation: What to Watch Now

Chris,

I enjoy your insightful articles, and normally I am 99% with you, but not sure on this one that the final bottom has to play out this way with another VIX super-spike. 2002/2003 did NOT play out that way:

runningofthebulls.type...

"I keep hearing and reading that the market will not bottom until there is maximum fear and capitulation selling. This is a commonly held view by many investors. But is it true?

No it is not necessarily. Bottoms can be marked by capitulation selling but bottoms are as likely, if not more so, to be marked by selling exhaustion.

In his excellent book Anatomy of the Bear (which I will get around to reviewing), Russell Napier makes the same observation. Napier concluded that at the end of bear markets in 1921, 1932, 1949 and 1982, bottoms were marked by exhaustion selling, not capitulation selling."

Investors' Collective Fears Point to Continued Losses

Paultaut,

Not sure what Buffett has to do with this article? On the other thread, I think it has been ***REPEATEDLY*** explained to you that the puts are European style exercise and CANNOT BE EXERCISED EARLY. It is irrevelant where the S&P goes in the next 12 months. What matters is where it is 10 and 20 years from now, and if it is at 200-400 in 10 years, it means the U.S and world economy as we know it has ceased to exist, and it is time to learn to hunt and live in the wilderness.


On Mar 10 03:26 PM paultaut wrote:

> MDC: At what point does Buffett's Put Play exceed the value of the
> entire Company if the S&P drops below 400 and his company holdings
> drop the same on a percentage basis?

Explaining the Berkshire Share Price

runningofthebulls.type...

Explaining the Berkshire Share Price

<i>BRK.A has Billions in cash and apparently can't find companies to invest in, yet Buffet sold Billions worth of puts. Since Options can be exercised at any time, BRK.A has the Potential of suffering big time from this one act, at any time.

This isn't the first time he has strayed. He invested Billions in the Futures markets Betting on the USD's decline a few years back. After Losing Billions he covered.</i>

Wow, this is total BS, and 110% factually incorrect. The puts Buffett sold are European style WHICH MEANS THEY CANNOT BE EXERCISED EARLY. THEY CAN ONLY BE EXERCISED AT EXPIRATION. Unless this is the end of capitalism, then odds are pretty good the major indices will be much higher in 20 years.

Regarding Buffett's bet against the USD, he closed those out at a huge profit, not loss.

Investors' Collective Fears Point to Continued Losses

Excellent article Chris! Your approach of blending fundamentals with technicals really resonates with me. Just curious, is their a valuation level where the technicals "go out the window"? S&P 400? 300? 200? Is their a valuation level where the cheapness is so extreme that trend is no longer relevant if one can just wait at least 3-5 years?

What If Warren Buffett Is Wrong About the Markets?

"This is not a criticism of the man or the individual, rather, this is more about a growing disparity between those with money and those without. The advantage is that the money he puts to work doesn’t need to be pulled out or withdrawn to feed a family, pay a utility bill, or keep the mortgage going for one more month."

Well, if this is true, then it is the problem, right? Money invested in the stock market SHOULD be money not needed for at least 5 years, if not even longer. Who in their right mind would invest money in the stock market that they need NEXT MONTH to "feed their family", "pay a utlity bill", or their mortgage payment.

Hedge Fund Tracking: Tontine Partners

According to a segment on CNBC just now, Tontine is down 66% YTD. Looks like some type of big bet really hit hard.

A Compelling Energy Ratio

"Everybody has an opinion on how bearish the ng storage numbers are right now. May I remind you that we are still below last year's level and are very unlikely to reach that level by November 1st (considered the beginning of heating season). 5-yr storage avgs although somewhat useful do not paint the full picture mainly because ng demand increases every year and supply/demand picture from 5 years ago may or may not be relevant to the present situation. "

**********************...

You are right about where we sit presently relative to the 5-year average, but I think you are way off about it being unlikely to reach there by Nov 1st. At the rate we are going with injections, the 5-year average might be left in the dust in the coming weeks unless producers curtail production.

As far as supply/demand, off the top of my head, I think 2008 supply growth is running around 8-10% annual growth, while demand growth is around 1-2%. I think that is why just in the past day or so you are seeing commercials with Aubrey McClendon pushing CNG for transportation. Right now, it sure looks like an imbalance to me, and new sources of demand need to come on in short order to absorb this increase in supplies. I am still bullish on NG over the next 3-10 years, but the next 6-12 months could be rough unless something changes quick in the supply/demand picture. I hope many of the producers get smart here and start to curtail production. Either that, or some of the smaller, weaker players need to get killed off and that might happen for those companies that are unhedged if NG goes to 4.

A Compelling Energy Ratio

"Given that cooler weather will begin to make itself felt in the weeks to come, the prognosis for natural gas looks promising."

Not sure what you mean or are implying here, but cooler weather is most certainly NOT bullish for NG.

*EXTREME* temperatures, either extreme heat or extreme cold are bullish for NG, because that results in either substantially increased air conditioning which increases usage of NG generated electrictity, or increased NG usage for heating. The *WORST* possible situation is middle of the road temperatures (slightly warm or cool) because then you have NEITHER air conditioning nor heating, and thus NG usage drops off considerably.

I'd be careful with using this ratio at this time, because there may be some strong bearish factors for NG at play. One could be that crude oil prices continue to drop substantially if global demand is weakening, and secondly there is a ton of domestic production presently. Look at the last month or so of actual storage numbers versus estimates. Not bullish.

I'm long some NG producers (CHK and XTO) but definitely concerned about downside at the present. Buying UNG here might be risky. 4-6 might very well be in the cards.

Goodrich Petroleum: Gas in the Ground Doesn't Mean Cash in the Bank

Many naïve investors assume that the value of a company’s reserve position (i.e. the value of the estimated oil and gas under the land the company owns or leases) should translate into its market cap. What they neglect to take into account is that it takes a substantial amount of operational and capital expenditure to extract the reserves.

You've got a good point here, but I think you are missing something critical that makes your short position very dangerous if not outright crazy. *Any* of the smaller operators with Haynesville acreage are takeover targets for larger E&P companies that want to establish a presence in Haynesville, and DO HAVE the operational expertise, capital budgets, and scalability to profitably extract the reserves. Either that, or the smaller company like GDP just partners with a bigger company to do the heavy lifting for them:

uk.reuters.com/article...

I'm long CHK and CHK options

Titanium Metals Is Going Down

Kudos Alan,

Good analysis, and nice call. Interesting to go back and read some of the comments in light of the last few months. Maybe a few people learned something?

Headed For a Normal 20-30% Correction

"When people look backwards to see whats coming they often forget that our markets today have evolved. I am in no way saying that large corrections are no longer possible; what I am saying is that any analysis that reads "we will see big corrections because we saw them before" is overly simplistic. So, what was "normal" in the past is not necessarily what we can expect in the future. It seems obvious but when everyone's looking for explanations and making predictions it is easy to forget that past results are not indicative of future performance."

This is certainly within the realm of possibility, but I think this is highly problematic. IMO, the primary tool for making forward-looking decisions and considering possible future scenarios is past historical experience and past quantitative data. If one starts with the premise that the past is meaningless, then where does that leave you? It leaves you at basically making hunches and guesses based on absolutely nothing. My thought is the past represents a combination of both fundamentals and human psychology. I believe human psychology never changes so the cycles of the past are likely to be repeated in the future in a similar (but not exact) way.

Fundamentals And The Market: Review and Expectations

Thanks for thoughtful reply.

Regarding forward earnings versus backwards looking earnings measures, it does make sense to me that stocks are properly valued using forward earnings. DCF models are built on forward looking projections. At the same time, the dean of value investing, Graham advocated an approach basically looking at the average of the past 10-years earnings in doing valuation. I suppose it just depends on what "margin of safety" one demands before putting money at risk into either the broad market or individual stocks. There is a risk either way. One risk is an opportunity cost of waiting for bargain valuations that may not materialize, and the other risk is capital losses if forward projections turn out to be optimistic.

Difficult choice, and right now I am just trying to strike a balance.

Fundamentals And The Market: Review and Expectations

"Hussman writes long articles attacking the Fed Model and defending his own invention. As a consumer of models, I could have chosen to use his. I did not because I have more confidence in forward-looking earnings estimates than looking backward at "peak earnings." I also cannot find a Hussman analysis that considers simultaneously interest rates and earnings. Surely they are both important."

Shouldn't have been to difficult to find. All the weekly commentaries are archived on the website. In any case, here a few that specifically deal with interest rates and the impact interest rates have on fair valuation multiples. I'm interested in what is valid and not married to any particular viewpoint or model, but I have yet to see anyone do a rigorous quantitative counteranalysis.

David Merkel had what I thought was an excellent analysis, but it was more about determining the ***relative valuation*** between bonds and stocks, and not the absolute valuation of stocks. I think it is important to recognize the possibility that both bonds AND stocks are unattractively valued, and neither is priced for attractive long-term returns (although compelling individual opportunities might exist, I personally think Berkshire Hathaway is undervalued)

www.hussman.net/wmc/wm...
www.hussman.net/wmc/wm...
www.hussman.net/wmc/wm...

"Will's comment suggests that forward earnings estimates are incorrect, given his macro analysis. I read Will's blog regularly and I understand his viewpoint. My own approach is to take advantage of the expertise of others, in this case the hundreds of analysts and macro strategists following companies. If I thought that I could forecast earnings better than they could, then I might use a different approach. We should note that many of those calling the economy weak and predicting lower earnings have been doing so for years. (Not putting Will in this camp -- I haven't checked)."

How many of the hundreds of analysts and macro strategists correctly forecasted the earnings decline in 2001 and 2002? What were consensus earnings forecasts for 2001 and 2002 in late 1999, 2000? When S&amp;P 500 earnings do contract I'll just about guarantee that somewhere between 0 and 1-2 major firms/strategists will correctly anticipate it. At that turning point, valuations based on forward estimates will be way off the mark, and the problem is that by that point it will be too late as the market will probably already have declined because the market anticipates/discounts what is coming, not reacts to what is already obviously known.