MDCigan's Comments

Investors' Collective Fears Point to Continued Losses

Fri, 13 Mar 2009 00:03:53 -0400

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

Thu, 12 Mar 2009 22:53:23 -0400

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

Thu, 12 Mar 2009 22:45:56 -0400

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

Sun, 08 Mar 2009 23:45:09 -0400

runningofthebulls.type...

Explaining the Berkshire Share Price

Sun, 08 Mar 2009 23:34:13 -0400

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.

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

Thu, 05 Mar 2009 21:01:19 -0500

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?

Mon, 27 Oct 2008 05:49:28 -0400

"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

Mon, 06 Oct 2008 09:25:08 -0400

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

Tue, 02 Sep 2008 04:55:52 -0400

"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

Mon, 01 Sep 2008 03:59:09 -0400

"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

Tue, 01 Jul 2008 07:19:55 -0400

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

Sun, 23 Mar 2008 11:36:27 -0400

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

Thu, 09 Aug 2007 07:14:42 -0400

"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

Wed, 08 Aug 2007 05:24:12 -0400

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

Mon, 06 Aug 2007 03:09:40 -0400

"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&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.

Hard To See the Connection Between Country Funds and GDP Growth Rates

Fri, 03 Aug 2007 08:44:30 -0400

Thought-provoking note. Since GDP growth doesn't appear to have much predictive power for country stock markets, do you have any thoughts on how one might select coutnries in a top-down manner. I wonder if some combination of relative valuation and price momentum (maybe 6-month) might be effective?

John Hussman: We May Be Seeing a Phase Transition

Thu, 02 Aug 2007 05:01:19 -0400

"The exact cause of Dr. Hussman's failure in this fund could theoretically be caused simply by *************horrendou... stock picking***************... by Hussman Econometrics, but it would have to have been so bad as to be negligent given the positive returns for equities the past 4 years."

Not sure why I am responding. There is a biblical proverb about not arguing with fools. I guess it is just annoying to see you keep repeating the same erroneous assertion.

I'm not sure if you are just too lazy or too stupid to verify what you are saying above (on the stock-picking). In the annual reports for the fund, Hussman breaks out separately the performance of just the individual stock-picks from overall fund performance. The individual stock-picks have *OUTPERFORMED* the market every single year since inception except 2006. The underperformance of the fund is entirely due to being fully-hedged pretty much 100% of the time over the past 3 years. Therefore, the return of the fund is going to be the difference between the stock-picks and the overall market plus the interest earned on the hedges.

You certainly are an interesting fellow. You seem to be on some sort of mission with your plethora of replies to numerous bloggers. You do seem to be a self-proclaimed expert on the market, with the correct stance on "market action" being obvious to you. So help me out, how would you be positioned here. Are you bullish, neutral, bearish? What is your forecast for the next 12 months? Would you be 100% unhedged here, or fully hedged? I suspect you will not give clear answers to these questions, as you have know idea yourself. I think you know how to throw stones, but have no idea how to build the house yourself.

John Hussman: A Sack O' Potatoes Market

Mon, 30 Jul 2007 03:51:21 -0400

"Any thoughts out there ?"

Yes, you have way too much time on your hands, and need to get a hobby or some social activity besides the enormous amount of replies you post on this website. You do realize that with Hussman and Ritholtz they aren't likely reading your responses any way. You are just arguing with yourself in an empty room.

I'd spend the time to discuss some of your points (and I actually think you have a legitimate point on the "market action" issue, I too wonder why he was fully hedged most of the last 3 years even if valuations were high), but my time is too valuable to go back and forth with you on this issue.

Best of luck to you in your investing.

Complacency Runs Deep: Time To Sell

Mon, 30 Jul 2007 03:38:04 -0400

"What you should not do is panic, says Jeffrey Kleintop, chief market strategist at Boston's LPL Financial Services via e-mail. His "Five Reasons Not to Panic" include *********"it's just another 5-7% pullback*******, the temporary unwinding of the yen carry trade is nearly over, profit worries are overblown, subprime losses are unlikely to cause a financial crisis, and no one will be left to sell." Keep in mind that "volatility is back," he says."

Interesting comment here from this strategist. In behavioral finance, one of the typical mistakes we humans make in investing decisions is the "recency effect". We tend to overweight more recent experience and discount the distant past. I can't help but wonder if after May-July 06 and Feb 07 the market has "trained" many to assume every quick 5% pullback is absolutely a dip to be bought before a march to new highs. It would be ironic if this particular instance turns out to be trap for all those making that assumption. Be careful.

Premature Return of Equity REITs?

Mon, 30 Jul 2007 03:29:07 -0400

"As a side note, before the purchases were announced, REITs looked the worst from a technical standpoint in the financial space. Now they are the best. So much for the utility of technical analysis."

A few months have passed, so a quick comment on this comment. I'm just not sure what technical analysis tools you were using to make your determination of going from worst to best. Technical picture has been negative since breaking the 200 day moving average, having the 50 day break below the 200 day, and the head and shoulders top:

worldbeta.blogspot.com...

Properly applied technical analysis would have gotten you out and kept you out during the bulk of the recent decline, and indeed did so for my REIT position. I have no issue with the utility of technical analysis.

John Hussman: A Sack O' Potatoes Market

Sat, 28 Jul 2007 07:16:30 -0400

"4. The underperformance is more likely caused by failed short bets"

I'm probably wasting my time even responding to you, but you reveal your ignorance with this statement. It might be a good idea to conduct actual research instead of just random hypothesizing.

The fund does NOT short individual stocks, and is NEVER net short the market. At most, the fund can be market neutral in that it holds a long portfolio of individual stocks that are fully hedged by index options (long puts and short calls).

John Hussman: A Sack O' Potatoes Market

Sat, 28 Jul 2007 07:07:11 -0400

Gembree, Paul, I think you guys pretty much have it right here. Paul, I suspect you are wasting your breath on Mr. Lewing. He seems like a troll who tries to be provocative rather then insightful or rational. I always see his negative attacks on posts by Hussman and Ritholtz and some others.

C meng, you say "Mr. Courtney,

The time period you chose for comparison (July '00 to present) is one that would be most favorable to Hussman. "

I think this is the most logical time frame has cumulatively it encompasses BOTH A BEAR MARKET AND A BULL MARKET. Over the total market history there have been several bull and bear markets. It seems rational to me to assume that at some point the bull market that began in late 2002/early 2003 will end and we will have a bear market. Hussman clearly points out his objective is to outperform the market over a FULL MARKET CYCLE which includes both a bear market and a bull market. The last 4-5 year represents only a bull market. Time will tell, but I suspect that when we get to the trough of the next bear market Hussman will have outperformed starting from the 2003 bull. Now of course, if it's different this time, and bear markets will no longer occur then Hussman will persistently underperform. Is that likely?

Not sure, but your ID looks familiar from the TMF MI board. This should be deja vu for you. Back in 98-00 there were alot of MI momentum guys who were making money hand over fist and thought they were geniuses while the value investors were doing poorly. Of course in the 2000-2002 bear, those MI guys got slaughtered while the value guys did very well.

Look, I am a HSGFX shareholder. I haven't been happy with recent returns, especially 2006, but you have to know why you own what you own. Time will tell whether current stock valuations are "reasonable" or overvalued, but I'd rather err on the side of caution.

Judging Fund Performance: Part 2

Tue, 24 Jul 2007 10:23:31 -0400

"At this point, each investor needs to ask himself or herself whether there is evidence that the managers’ skill has generated the impressive trailing performance or, alternatively, simply an aggressive investment policy, along with a tolerance for taking on some risky positions—such as 10+% in Russian wireless. Is there evidence for sufficient incremental value (beyond asset allocation) to merit the fees that these funds charge and expense that they incur on the basis of their high turnover?"

Good article, and certainly food for thought. My question I would pose to you is what exactly constitutes "manager skill"? Is it just individual stock-picking with basically identical sector weights to the S&P 500, or can manager skill also be part of determining when to have substantial overweights in sectors like utilities, materials, energy, etc.

I think it is fairly easy (as you demonstrate) to do a backwards looking analysis to determine a fund's performance could have been replicated with particular sector and asset class weights using low-cost ETFs. But how would you have known to use that SPECIFIC sector/asset class composition at that point in time? Perhaps the manager skill is knowing when to overweight what sector and when to get out of that sector.

Take your example of CGMFX. I've actually wanted to buy this fund for a long time, but unfortunately my broker does not offer it. I've studied the fund and the manager's investment approach and an integral component of his "skill" is making big sector and industry bets based on top-down analysis. At one point, the fund was loaded with homebuilders, and was responsible for strong performance. You could have done a backwards analysis sometime back demonstrating replicating his performance by purchasing the homebuilder ETF, XHB. But he dumped all the homebuilders before they crashed, and therefore captured the gain and missed the losses. Would a static portfolio based on backwards analysis still be holding XHB?

I think there is more to analyzing a mutual fund then just trying to decompose what sector and asset class are driving returns because you have to also try to understand the manager's thought process behind it. Managing a portfolio is a dynamic and not static process so the sector and asset class weighting could be changing quite frequently.

25 Good Short Candidates

Wed, 18 Jul 2007 01:37:44 -0400

"but your closing sentence: "should not be trading near their 52-week high." is a first line risk control measure that immediately eliminates this as a "good" short candidate for any professional trader I know, including myself. In a general bull market, we do not short stocks at, near or just above their 52-wk high. On the contrary, it's generally a good idea to buy in these situations, although I wouldn't want to own CVS for reasons you mentioned, as well as other internal research we have on the sector and CVS in particular. Remember markets will stay irrational longer than you can stay solvent. "

I completely agree with this sentiment. One ticker comes to mind. CROX. I think at some point this probably becomes a great short, but I am not stepping in front of a freight train to get run over. In my view the valuation is somewhere between absurd and insane in terms of pricing in future growth expectations, but who knows how high the market can build this "castle in the sky".

25 Good Short Candidates

Wed, 18 Jul 2007 01:35:15 -0400

"MDC,
All of the data is fundamental; I update long and short once per month and judge them accordingly, but I think one could extend each hypothetical portfolio 6-12 months and still do fine."

Perhaps I'm missing something here, but I don't follow this. In my view, there is absolutely no connection whatsoever between 1-month stock price performance and fundamental factors. Over a 1-month time frame, stock price behavior is probably some combination of technical factors (I do believe in things like stock price trends and oversold/overbought) or just statistical noise (for those more inclined to random walk theory).

"At the same time, the company just doesn't excite me enough to say I would buy it either - I'd prefer to grab more focused companies in areas I like than get all the diversification that is GE."

I agree one can probably find stocks with more upside then GE, but that is different then saying the stock is an attractive short.

"I can't argue the past with ERTS or ATVI, but I can say that with ERTS, their development seems primarily geared to Sony's platform, followed by Microsoft. Nintendo is far in the distance in terms of product offerings and hence revenues, but with the Wii outselling the PS3 I can't see how that translates positively for ERTS in game sales. PS2 was the dominant console for a long time, and many game developers certainly benefitted from that because Sony wasn't focused on game development and let others control that space. That just isn't the story with Nintendo..."

This is true, but it might prove dangerous from the short side to underestimate just how quickly ERTS might be able to turn the ship around and ramp up development for the Wii and start having success on that platform. In my view, the video game industry is still one of secular growth, and in general I think one of the best investment strategies is to go long companies in long-term growth industries which are experiencing "temporary" problems. The key question is are ERTS' problems "temporary"? Time will tell, but if I were forced to bet, I'd bet on them fixing the issues and developing a strong line-up of titles for the Wii that bring the company back to strong profitability.

I appreciate the discussion.

25 Good Short Candidates

Tue, 17 Jul 2007 11:01:14 -0400

Interesting. Quite a few of your short picks actually look interesting to me from the long side with the top 2 being GE and ATVI. You mention these selections are purely the result of your quantitative model. I can understand if you'd rather not share, but I'd be interested to know what quantitative factors lead to GE and ATVI being short candidates. What is the time frame on your model? Are these selections intended to capture 6-month price movement? 1-year? 3-years?

In GE, you've got an above-average company selling at a market multiple, earnings growth rate that appears to be accelerating, and a pretty hefty dividend yield, and from a technical perspective it appears to be breaking out of a long-term consolidation pattern. We're at 40ish right now. I'd bet we see 50 before 30. It looks a little overbought here, but the entire market looks overbought. Maybe we see a pullback to 35-37, but I just don't see any reason to forecast substantial market underperformance over the next 1-2 years which makes me wonder what specific quantitative factors lead you to that conclusion.

I think your qualitative comments on the video game makers miss the mark. The fact of the matter is if you look at the really long-term performance (past 5-10 years) both ERTS and ATVI have created substantial shareholder value. Historically, the gamemakers have rallied from the summer to late fall/early winter in anticipation of the strong holiday sales. This particular year is likely the sweet spot for this current cycle roll-out and ATVI has a pretty compelling game line-up. From a technical perspective, the stock appears to be consolidating around 18 with some high volume up days (big money accumulating the stock).

Apple Ripe for a Ratio Call Spread

Tue, 17 Jul 2007 06:29:33 -0400

Excellent note. I'm really interested in this sort of thing. Most of the "options" posts are just market and technical analysis with very little actually connected to sophisticated option strategies involving the interplay between price direction, time, and volatility.

I hope you'll continue to post these types of example trades. I checked out your blog after reading this note and subscribed to updates. It appears to me that there is no way to comment on your blog. Is this intentional?

I have an options trade on Chesapeake Energy (CHK) which is a combination of Jan 08 and 09 LEAPs and I am contemplating an adjustment strategy to convert it into a calendar, diagonal, or bull call spread. I'd like to get your feedback and opinion if you have the time. Thanks.

Vanguard's Jack Bogle on Rebalancing: Don't!

Mon, 16 Jul 2007 05:11:58 -0400

"Fact: a 48%S&P 500, 16% small cap, 16% international, and 20% bond index, over the past 20 years, earned a 9.49% annual return without rebalancing and a 9.71% return if rebalanced annually. That’s worth describing as “noise,” and suggests that formulaic rebalancing with precision is not necessary."

I'm not sure this really proves anything against rebalancing. First off, the set of asset classes used isn't very diverse. If you used a more comprehensive set of asset classes with more negative correlation like REITs, commodities and precious metals, emerging markets, etc. in addition to just U.S. large-cap and U.S. small-cap, I'd bet the results would be ALOT DIFFERENT in favor of rebalancing.

Secondly, you would want to test different rebalancing strategies in terms of time frame. There is alot of evidence to suggest there is momentum at the 1-2 year time frame, and mean reversion at the 3-5 year time frame. Perhaps rebalancing less frequently then annually would do even better.

As much as Mr. Bogle is respected in the industry, I think it is important to remember he is biased, and I would not accept anything he says at face value without further investigation of the issues.

Why Bond Yields Are A Sextuple Threat

Thu, 14 Jun 2007 20:06:43 -0400

Timely note from Geoff Gannon:

usmarket.seekingalpha....

"I didn't get into a long discussion of interest rates and normalized P/E ratios before, because I think it's a tricky subject. There is no doubt in my mind that interest rates both matter and matter far less than most people believe."

"Regardless, when buying the entire market, simply looking for low normalized P/E ratios is a much more effective strategy than anything I can come up with involving interest rates. I expected this to be true in the long-term; the fact that it also works pretty well in the short-term surprised me."

Why Bond Yields Are A Sextuple Threat

Thu, 14 Jun 2007 19:51:00 -0400

John,

It is your prerogative to continue with the nasty invective (silly, baseless, vague ramblings, ignorant, etc) but it doesn't bolster your points.

As far as being silly and baseless it is not. For months upon months, I have heard strategist after strategist after strategist on CNBC, on other websites, on notes posted on this site, argue that stocks must appreciate in value to eliminate the valuation gap that exists in the Fed Model. Few if any pointed out the possibility that long-term yields could rise making any undervaluation disappear.

I'm not really sure what your point or issue is. Of course the model result changes if one of the input changes. That is obvious. I don't disagree with that. I don't think Mr. Ritholtz does or anyone else. That isn't relevant. The point is whether this is a valid model or making buy and sell decisions. Because the result can change if the inputs change one should carefully consider the likelihood of continued rising yields in any decision that stocks are "undervalued" and the likelihood that forward estimates may be too optimistic. It is "ignorant" to base the decisioin on whatever value the two current inputs are because they may change substantially tomorrow.