The Fearful Investor

Failing The Smell Test

Charles Goldblum — 2009-11-10T10:21:55-05:00

I just read Annaly Capital's latest monthly commentary. These guys invest in mortgage-backed securities and have a great record doing it. Here's my favorite quote re the recent positive GDP report:

"GDP gains driven by personal consumption while incomes are falling, joblessness is rising, and credit availability is shrinking, just don‟t pass the common sense test (see Friday‟s 10.2% unemployment rate and the ghastly consumer credit figure, down $14.8 billion from last month and $125.8 billion from the peak in mid 2008). It‟s impossible to deny that the GDP data from this quarter are better, at least relative to how bad things were earlier in the year. Without the multiplier effect of the stimulus kicking in, however, we believe the third quarter 2009 GDP data could look like an accounting extraordinary item, a one-time event that quality-of-earnings analysts would disregard."

Now, I'm all for a rallying stock market, as a rising tide lifts all boats, including my defensive one, but it's hard to see how less income to the economy and less investing by corporations can make forward prospects look good for companies in which I'd like to invest. Sure, things are getting better, but Intel's 3rd quarter, while better than their 2nd quarter, wasn't as good as last year. Now, easier comps will help going forward, but the growth has got to come from somewhere....

Avoiding Losses Can Be A Winning Strategy

Charles Goldblum — 2009-11-02T15:52:41-05:00

WSJ features an article (subscription required) about diversified equity funds that are doing well over 2008-2009 combined.

Message basically is: If you are up a lot this year and still are down for the past two years, it means you lost too much last year and should think about using low-volatility managers going forward. If you did not lose much last year, you do not need to make so much back this year, to get to break even....

Our strategy has always been to stay conservative and only invest in a diversified set of hi-confidence ideas. See about us and relevant disclosures....

A Story About Jim, Or Why This Market Scares Me

Charles Goldblum — 2009-09-10T14:39:55-04:00

Jim's a (fictitious) friend of mine.

Used to be a hard worker, but somehow lost his mojo and now just lazes around. He halfheartedly looks for work from time-to-time, but since he got laid off from a cushy Wall St. job, he doesn't see the benefit of taking lesser compensation for a 'lesser' job.

He basically has lived off some money left to him by a grandparent and the good name of his family.

Well, last year, as his stock account was getting blasted, Jim began to cut back on his lifestyle. Fewer parties, restaurant visits, trips, etc. He even cut out dry cleaning and his maid, resorting to wearing jeans and t-shirts to all but the most formal of events.

This year, though, things have changed. It seems another inheritance has arrived and Jim's back to living the high-life. No new job, just more money.

If Jim were a stock, he wouldn't be investable. He's generates no cash, and builds no value with the money he spends. Yet, here we are, jacking up all the stocks for companies that Jim supports.
The Gap (GPS), Nordstrom's (JWN), Cheesecake Factory (CAKE) and Starwood Hotels have all doubled from the lows. Ford's (F) a triple from March.

Now, we can quibble about whether it's government stimulus (the new inheritance) or people feeling better that is driving less-bad results from consumer stocks, but we can all agree that there's less income out there to consume retail products.

I hope I'm wrong, because life is more fun when the stock market goes up, but I fear I'm not.

What Happened To Stockpicking?

Charles Goldblum — 2009-07-27T12:07:51-04:00

When I started my investment advisory business, the world was a quaint place. Investments could be chosen on their merit, sector trends, free-cash-flow-based valuations, etc. Sure, one had to keep in mind the ebb and flow of interest rates and currency fluctuations, but these, whether cyclical or secular, were moderate. Now, I'm no greybeard, I started my business in 2003.

These days the bets are macro, and macro only. Sure, the world financial system was on the brink of collapse last year, and sure, Bernanke and his friends abroad have done their best to stabilize markets by conjuring trillions of new credit from thin air. The question is "What's next?" One thing we do know, is that Bernanke is not about to stop supporting debt markets.

The government has become such a large part of the US economy (Omega Advisors estimate that gov't spending will equal 43% of GDP in 2009) that picking investment winners or losers in many industries relies on discerning government spending plans. Stock-specific research has devolved to such game theory as:
- Which area will be stimuated next? See Pimco's "shake hands with the government" investment thesis.
- Since money printing will continue for too long, which non-printable commodity should we buy as a hedge?
- Which winner will the government back next, like they backed the debt holders of Citi, American Express, and GE? Certainly bets have been made predicting which financial is 'just big enough not to fail'. Big bets were made on CIT.
- Regardless of party affiliation, we can all agree that the US Government is spending beyond its means. Which sacred cow shall be slain? Health Care is the odds-on favorite, but what about Defense, or Farm Subsidies?

I think the outperformance of the NASDAQ in 2009, and the rally in tech stocks in particular, emanates from their relative independence from government control.

My clients don't care for investment purism. They care about results. So, we continue to look for ways to conservatively invest without relying on a prediction on where the government aims its largesse.

Two Out Three Aint Bad

Charles Goldblum — 2009-07-01T12:03:55-04:00

I always liked that Meat Loaf song...but that's not the point.

So far this year, we missed most of the big downdraft and a bit less of the big rally, to leave our composite of client accounts abouttwo percent in front of the S&P 500 year to date.

We've been looking for investments that will do well in two out of three likely investment scenarios:

- A strong economy
- A flat economy, or,
- A weak economy

Basically, we're looking for defensive investments with an upside kicker. To see what whe chose in June, see our most recent client newsletter.

Things We're Not Buying: Comcast

Charles Goldblum — 2009-03-10T16:23:44-04:00

For years I've thought that I wanted to buy Comcast -- dependable revenue stream, semi-monopoly, great margins, but it's never been cheap (10x free cash flow, or less).

Now that Comcast has actually fallen to 10x free cash flow, I'm not so sure I want it anymore. Big competition is coming from the Telcos -- Verizon is marketing is FioS service heavily in Philadelphia area. And customers are cutting back on premium services such as the Soprano-less HBO.

Then, there's agency costs, which tries to value the risk associated with management's ability to re-invest profits at high returns. Management has stated that they'll continue to reduce debt and buyback stock as well as maintain a robust capital expenditure program. This all seems prudent. But, you never know what they'll do from a strategic standpoint.

Maybe I'm wrongly tainted by the negative attitudes about the market, or maybe I'm properly concerned about the economic malaise affecting Comcasts customers and emboldening its competition to step up its efforts. Either way, I'm passing.

Why Bottom Fishing May Take A Longer Line

Charles Goldblum — 2009-02-03T14:07:56-05:00

We've made money for our clients in the past in basically one way: find inexpensive companies in strong industries. Inexpensive companies are easy to find, strong industries are not.

Microsoft is plenty cheap at about a 10% free cash flow yield, but the revenue trend is undoubtedly down. Remember when infrastructure spending was going to boost all the machinery stocks? The 22,000 being let go by Caterpillar are wondering the same thing.

When an industry is going well, revenues go up, margins go up and multiples go up in a virtuous cycle. We are now witnessing the opposite.

Has the market discounted the worst? Hard to say. But, if estimates aren't low enough, stocks will follow estimates lower. Take Microsoft again. Consensus estimates for Fiscal 2010 (ending June 2010) are for about $2.00/share. I think those numbers could be 25% lower. Sure, the company will generate boatloads of cash, but (a) what returns will they get with it? and, (b) what is the future trend of their revenues?

Before everyone gets all excited about the market bottoming, let's also entertain the possibility that delevering, lower revenues and lower margins may not be so good for the stock market. One day, the bottom callers will be right,the question is how much will they have left when we get there?

Prop Up The Losers And The Winners Lose, Too!

Charles Goldblum — 2008-12-30T12:40:58-05:00

In November, I attended the Loews' Analyst Day, where the management of publicly-traded CNA Insurance, announced that pricing in the property & casualty insurance business is suffering partially because AIG is aggressively price-cutting to keep existing clients. So, AIG implodes due to its poor investment risk management, the government supports them and the effect is deflation which hurts the rest of the property and casualty industry, who presumably pursued a sounder investment policy.

The government and the FDIC is trying to support the housing market by offering loan modifications for delinquent borrowers. If you can pay your mortgage, no help for you... Good behavior punished for the greater good of fewer foreclosures and a supported housing market...

Yesterday, GMAC raises $5 billion from the U.S. Treasury to enable the company to recapitalize itself and offer aggressive new loan terms for new car buyers. So the U.S. Treasury supports the underperformers (GM, and likely Chrysler & Ford to follow) to compete against the other car manufacturers, who've been gaining share by offering vehicles that consumers want.

Following this logic, completely hypothetically, if FedEx got a bailout, UPS would suffer, and if Circuit City got a bailout, Best Buy would suffer. While I'm guessing we're closer to the end of the bailout-phase of this downturn, it's fair to say if you see one coming to another industry, sell the winner in that industry, because they're sure to suffer, too.

Stock Market Roulette

Charles Goldblum — 2008-12-21T11:50:13-05:00

Deflation or inflation? What's your bet? I think that investing these days has become a binary game, where either deflation takes us into a sustained recession or monetary and fiscal stimulus incite runaway inflation. The visual image I see is a bucket with a big hole underneath a tap spurting water. Will the bucket empty or overflow? Who knows. I'm not into gambling, so we've grown cash postions and only invested new money in investments that ought to pay in either outcome.

How Hedge Fund Tumult Affects You

Charles Goldblum — 2008-12-10T10:00:05-05:00

In order for the stock market to rise, there must be more buyers than sellers. For now, I project sellers will outnumber buyers for the upcoming year. Let's review the players.

The Sellers

I believe that hedge funds will continue to be net sellers over the coming year and thereby hurt investment returns over the next year. Where hedge funds have been incremental buyers of investments in the past as they have raised money and made money that had to be reinvested, they are now and are likely to continue to be incremental sellers going forward, due to withdrawn money and investment losses. As many hedge funds are suspending withdrawals (i.e. DE Shaw, Farallon and Fortress), this selling pressure is being mitigated somewhat and will spread over a longer period as sellers who want to get out today will have to wait until next year or later.

What hedge funds do is important because they invest over $1.4 trillion in assets and if they are selling instead of buying, it will hurt prices of things we own or are looking to invest in. Adding to the selling pressure, poorly performing funds are shutting down completely causing further sales pressure and more will shut down after year end, when they know the extent of this years losses and understand that the big incentive fees they've collected in the past, will only be attainable after 50% gains to recoup 2008 losses. Furthermore, funds that have suspended withdrawals will have a hard time attracting new money as they don't want to add money to a fund that is shrinking.

The Buyers

Now, there are buyers, too. U.S. 3-month treasury bills are yielding 0% because there's lots of cash on the sidelines. There certainly are hedge funds that have large cash balances looking for investment opportunities. I believe the bulk of the sidelined cash is with indivdual investors who are, for the most part, unlikely to be early investors in a market upswing after the negative returs this year.

Surely, there will be indivdual investments that rise, and perhaps the government can print enough money that some of it will leak back into risky assets (such as stocks), but I'm not excited about investing until I "see the whites of the eyes" of more buyers than sellers.