On September 24th renown hedge fund manager David Tepper made headlines when he was interviewed on CNBC. In that interview he stated that the market would go up no matter what happened because either the economy was going to get better causing stock prices to rise, or the government would intervene by infusing more money into the system to prop up the indexes. Well, he was right on all counts. The economy did get slightly better; the FED also helped the overall markets by issuing QEII, and, since that day in late September, the S&P 500 has continued to percolate higher going from 1149 to 1300 last Thursday. That's a 22% gain which accounts for about all the S&P gains for the past year. It's been a 4 month ride without much of a breather.
This past week I read Vitaly Katsenelson's The Little Book of Sideways Markets, and he claims that we are in a lateral trading pattern that began in 2000 and could go on for another eight years or longer based on historical tendencies. The last decade was not an anomaly but part of a predictable pattern. Katsenelson displays statistics from the past century of boom and bust periods like the bull market we experienced from 1982-2000 and proves that after each successive out-performance of the market which includes P/E expansion, that these cycles are followed by years of P/E contraction and large swings in the indexes that stay within a range.
This is a thesis I've believed in for many years, but it's a concept that's difficult to comprehend because market P/E ratios have been inflated for 30 years so now it's hard to get your arms around the theory. I now fully embrace it. It's tough to say what the actual P/E ratio of the S&P 500 is because different analysts use different metrics to compute the number. Some use operating earnings, some use reported earnings and some follow Robert Shiller's Cyclically Adjusted Price Earnings ratio. I've looked at all three and compared to historical averages for the index, the P/E ratio looks to be overvalued in my humble opinion. Does this mean that the market is ready to crash or correct? No, not necessarily as the bulls point out. Even though the ratio is high, it can still go higher like it did from 1996 to 2000. However, I'm a believer that the P/E ratio for the S&P will trend lower, below the historical averages, so it has the potential to fall significantly.
In the Summer of 2010 I thought I caught a break in my short positions as the market corrected, but during the so called "Tepper Rally", I have been schooled in my asset allocations. Remember that not only am I short the indexes, but I'm leveraged, too. So if the market goes up significantly, I get taken out behind the woodshed to face the music. Although the rally the last four months has tried my patience, I still believe that we are in for a day of reckoning and will hold steady with my Exchange Traded Funds. It may be a foolish move, but like Vitaly Katsenelson, I am still of the school that the overall P/E ratio of the market is going to contract as the sovereign debt gets flushed out of the system somewhere down the line. When will this happen? It's anybody's guess.
I have made proclamations in previous postings that corrections are coming because of macro economic conditions like the European Debt Crisis of last Summer (and is still going on for that matter, but put on the back burner). However, I will not go out on the limb and tell you that the demonstrations and riots in Egypt are the catalyst for the next market downturn. I've been down this road before without any luck, and it only goes to prove that I don't have a crystal ball. Do I believe this is a catalyst of a market downturn? Yes I do, but only because the market has had an outstanding run and 5%-10% corrections are healthy, even in a bull market. This is a market that has legs. If the toppling of the Egyptian government isn't the tipping point of a downward spiral in the S&P 500, then I'll just have to bide my time.
Saturday, January 29, 2011
Monday, January 17, 2011
Smarter Than The Street
Street cred goes a long way in establishing a reputation in today's world whether you are on Main Street, Wall Street, or, in some barrio or ghetto. In investing circles, Gary Kaminsky carries a lot of weight, not only for his success as a billion dollar money manager and director at Neuberger Berman, but also because he parlayed a series of guest spots on CNBC into a co-host position on the network with their very influential "Strategy Session" show airing at noon each weekday. Recently, McGraw Hill published Gary's first book "Smarter Than The Street" which gives his take on not only how retail investors should position their portfolios and select stocks, but also some commentary on overall market direction for the next decade.
Kaminsky states right at the beginning of the book that: "One of the key assumptions of this book is that the next ten years will resemble the last ten.". He backs up his thesis with statistics from author Vitaliy Katenelson and makes a compelling argument for a range bound market where: "Stocks will go up, and stocks will go down. There will be periods of exuberance...and similarly periods in which it looks as if the world is coming to an end.". He feels that investors need to be nimble, but not overly trigger happy when it comes to buying and selling securities because he is not a trader, but an investor, and believes that you should hold stocks for a 3-5 year period. This is especially true if you are investing in companies with good organic growth, which he recommends.
In further discussing portfolio management, Kaminsky also believes that, "There is absolutely no evidence that a 'buy and hold' strategy will work in the future.". This may sound contradictory to his previous advice to keep securities for 3-5 year durations, but later in the book, he goes on to say: "The riskiest form of investing is not buying and holding - it's buying and forgetting.". What Mr. Kaminsky means by that last sentence is that as a retail investor, you need to take charge of your portfolio and do your due diligence if you wish to beat Wall Street money managers which he contends is very possible throughout his book.
According to Mr. Kaminsky, individual investors have an edge because they aren't locked in to any specific investing style the way that most mutual fund managers are, so you don't have to be just investing in large caps, or small caps or a particular theme or sector. You can also be more flexible in buying or selling a position than an institution investor because you don't have to wait for a few weeks to purchase or liquidate a large block of shares. He suggests 3-5 hours a week of doing your homework on the Internet of not only the stocks you own, but the overall condition of the economy. He also talks a lot about portfolio structure and utilizes the concentrated portfolio approach where you own no more than 20-30 securities. Anything less and you increase the risk in your holdings, anything more and you become a closet indexer which doesn't bode well for beating the market.
Throughout the process of reading "Smarter Than The Street", I was in lock step agreement with Kaminsky as each chapter unfolded. However, not all investing books are created equal, and as an experienced investor, I didn't discover anything new while reading this book. Therefore, if you are an experienced investor, I wouldn't recommend it because other authors have covered much of the same material in other investing publications. If you are a beginning investor, this would be a terrific place to start for some overall knowledge of macroeconomic conditions, the stock selection process and portfolio management.
Kaminsky states right at the beginning of the book that: "One of the key assumptions of this book is that the next ten years will resemble the last ten.". He backs up his thesis with statistics from author Vitaliy Katenelson and makes a compelling argument for a range bound market where: "Stocks will go up, and stocks will go down. There will be periods of exuberance...and similarly periods in which it looks as if the world is coming to an end.". He feels that investors need to be nimble, but not overly trigger happy when it comes to buying and selling securities because he is not a trader, but an investor, and believes that you should hold stocks for a 3-5 year period. This is especially true if you are investing in companies with good organic growth, which he recommends.
In further discussing portfolio management, Kaminsky also believes that, "There is absolutely no evidence that a 'buy and hold' strategy will work in the future.". This may sound contradictory to his previous advice to keep securities for 3-5 year durations, but later in the book, he goes on to say: "The riskiest form of investing is not buying and holding - it's buying and forgetting.". What Mr. Kaminsky means by that last sentence is that as a retail investor, you need to take charge of your portfolio and do your due diligence if you wish to beat Wall Street money managers which he contends is very possible throughout his book.
According to Mr. Kaminsky, individual investors have an edge because they aren't locked in to any specific investing style the way that most mutual fund managers are, so you don't have to be just investing in large caps, or small caps or a particular theme or sector. You can also be more flexible in buying or selling a position than an institution investor because you don't have to wait for a few weeks to purchase or liquidate a large block of shares. He suggests 3-5 hours a week of doing your homework on the Internet of not only the stocks you own, but the overall condition of the economy. He also talks a lot about portfolio structure and utilizes the concentrated portfolio approach where you own no more than 20-30 securities. Anything less and you increase the risk in your holdings, anything more and you become a closet indexer which doesn't bode well for beating the market.
Throughout the process of reading "Smarter Than The Street", I was in lock step agreement with Kaminsky as each chapter unfolded. However, not all investing books are created equal, and as an experienced investor, I didn't discover anything new while reading this book. Therefore, if you are an experienced investor, I wouldn't recommend it because other authors have covered much of the same material in other investing publications. If you are a beginning investor, this would be a terrific place to start for some overall knowledge of macroeconomic conditions, the stock selection process and portfolio management.
Saturday, January 8, 2011
A Dollar and a Dream
Nothing gets investor's juices flowing like the prospect of getting in on the first day of trading of a hot IPO. At first blush, it would seem that this would be easy money to be had if you pick the right security, and there is a lot to be said for that. In recent history, Google (GOOG) comes to mind. Google (GOOG) launched on August 19th, 2004 at $85/share and closed on Friday just under $620. That's a nice return on your investment if you got in on the ground floor. Back in late 1998 and throughout 1999 during the dot.com boom, both institutional and retail investors jockeyed for position to get in on the first day of trading of the IPO's of that era. Fortunes were being made. On the first day of trading alone theglobe.com up 606%, Foundry Networks up 525%, Cobalt Networks up 482%, Marketwatch.com up 474%, Akamai Technologies up 458% and the list goes on. Those days are over, but IPO's are back in the news.
There's been a lot of buzz about Facebook this past week because Goldman Sachs (GS) "agreed to invest $475 million into Facebook and initiated plans to raise as much as $1.5 billion through a special purpose investment vehicle marketed to private wealth management customers. The private sales would value Facebook at $50 billion.", according to Joseph Giannone and Matthew Goldstein on Reuters. If you are a Main Street investor and want to get in on the action over at Facebook, you're out of luck. At this juncture it's only being offered to Goldman Sachs' clients with a two million dollar minimum.
The probability that Facebook will go public in the next year or two is high, but even when it launches its IPO, as a retail investor you should probably let it trade for a year or two and see if you can catch it on a dip, preferably under it's issuance price. Sounds far fetched, but stranger things have happened and if you chase it, you will probably get burned. As is, "Facebook is now considered to be worth more than Time Warner, DuPont and Goldman's rival Morgan Stanley.", says William Cohan of The New York Times in his article "Friends With Benefits". Goldman Sachs (GS) already values Facebook at 25 times revenues as reported in the Rueters article by Giannone and Goldstein. That's a sky high valuation for a company that may not yet be profitable.
There are numerous academic studies exposing the less than stellar returns of IPO's, most notably 2002's "Pseudo Market Timing and the Long-Run Underperformance of IPO's" by Paul Schultz of the University of Notre Dame, which amalgamates previous scholarly studies on the subject. What Mr. Shultz's study concludes is that IPO's just don't beat the market the majority of the time. If you are an institutional investor, it might make sense to take a flier with a small percentage of your portfolio on some technology upstart like a Twitter, Groupon, Zynga, Linkedin or Facebook. After all, institutional investors have millions, if not billions of dollars to invest with and can afford to gamble a few million bucks on the next big thing. Institutional investors also have the luxury of getting in at the opening bell on the first day of trading.
It's not that easy for the retail investor. Individual investors usually have to wait until the institutional firms have flipped their shares to get a piece of the action, and then it may be too late to make a decent profit. There are exceptions like the previously noted Google (GOOG), but like Jason Zweig said said in his Wall Street Journal column on January, 8th when discussing Facebook and IPO's: "For every Google, there are hundreds of companies like eToys and Lycos; for every Apple, there are countless casualties like Thinking Machines and Network Computing Devices.". If investing in individual securities is a bit like casino gambling, then venturing into the IPO market is like playing the nickel slots. Rarely do you win. We tend to have selective memories and hearken back to those salad days of 1999 when playing the IPO market was like shooting fish in a barrel. If only it were that easy.
There's been a lot of buzz about Facebook this past week because Goldman Sachs (GS) "agreed to invest $475 million into Facebook and initiated plans to raise as much as $1.5 billion through a special purpose investment vehicle marketed to private wealth management customers. The private sales would value Facebook at $50 billion.", according to Joseph Giannone and Matthew Goldstein on Reuters. If you are a Main Street investor and want to get in on the action over at Facebook, you're out of luck. At this juncture it's only being offered to Goldman Sachs' clients with a two million dollar minimum.
The probability that Facebook will go public in the next year or two is high, but even when it launches its IPO, as a retail investor you should probably let it trade for a year or two and see if you can catch it on a dip, preferably under it's issuance price. Sounds far fetched, but stranger things have happened and if you chase it, you will probably get burned. As is, "Facebook is now considered to be worth more than Time Warner, DuPont and Goldman's rival Morgan Stanley.", says William Cohan of The New York Times in his article "Friends With Benefits". Goldman Sachs (GS) already values Facebook at 25 times revenues as reported in the Rueters article by Giannone and Goldstein. That's a sky high valuation for a company that may not yet be profitable.
There are numerous academic studies exposing the less than stellar returns of IPO's, most notably 2002's "Pseudo Market Timing and the Long-Run Underperformance of IPO's" by Paul Schultz of the University of Notre Dame, which amalgamates previous scholarly studies on the subject. What Mr. Shultz's study concludes is that IPO's just don't beat the market the majority of the time. If you are an institutional investor, it might make sense to take a flier with a small percentage of your portfolio on some technology upstart like a Twitter, Groupon, Zynga, Linkedin or Facebook. After all, institutional investors have millions, if not billions of dollars to invest with and can afford to gamble a few million bucks on the next big thing. Institutional investors also have the luxury of getting in at the opening bell on the first day of trading.
It's not that easy for the retail investor. Individual investors usually have to wait until the institutional firms have flipped their shares to get a piece of the action, and then it may be too late to make a decent profit. There are exceptions like the previously noted Google (GOOG), but like Jason Zweig said said in his Wall Street Journal column on January, 8th when discussing Facebook and IPO's: "For every Google, there are hundreds of companies like eToys and Lycos; for every Apple, there are countless casualties like Thinking Machines and Network Computing Devices.". If investing in individual securities is a bit like casino gambling, then venturing into the IPO market is like playing the nickel slots. Rarely do you win. We tend to have selective memories and hearken back to those salad days of 1999 when playing the IPO market was like shooting fish in a barrel. If only it were that easy.
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