Feeds:
Posts
Comments

This issue of Barron’s carries a brief article on activist hedge funds and makes mention of activist Jeff Ubben and his firm ValueAct Capital, which is regarded as one of the elite activist funds because it has averaged gains of 144 percent in companies where they filed 13D forms.

Some notable holdings include:

  • ADOBE SYSTEMS INC
  • CBRE GROUP INC
  • MCGRAW HILL
  • MICROS SYSTEMS INC
  • MICROSOFT CORP
  • MOTOROLA SOLUTIONS INC
  • MSCI INC
  • VALEANT PHARMACEUTICALS INTL

You can see a list of their most recent holdings here.

Ubben is speaking at the 9th Annual New York Value Investing Congress taking place September 16 & 17, 2013 at Jazz at Lincoln Center’s Fredrick P. Rose Hall.

Ubben will be accompanied by some of the world’s most accomplished investors, and for good reason: they want to be the first to hear investment ideas from money managers who have a proven track record of generating stellar returns for their clients and themselves.

Readers of Greenbackd can save $1,700 by registering now with discount code N13GB2 before Thursday, June 27th.

About these ads

Here’s the updated St Louis Fed’s FRED on Warren Buffett’s favored market measure, total market capitalization-to-GNP:

FRED Graph

The Q1 2013 ratio – the most recent point – is 110 percent.

According to the FRED data, the Q1 2000 TTM/GNP peak ratio was 158 percent, and the Q3 2007 TTM/GNP peak was 114 percent. The average for the full period – Q3 1949 to Q3 2012 – is 69 percent. The last time the market traded at a below-average ratio was Q1 2009.

Here’s the log version:

FRED Graph

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

In Is the AAII Sentiment Survey a Contrarian Indicator? Charles Rotblut, CFA asks if the AAII Sentiment Survey results signal future market direction.

Each week from Thursday 12:01 a.m. until Wednesday at 11:59 p.m. the AAII asks its members a simple question:

Do you feel the direction of the stock market over the next six months will be up (bullish), no change (neutral) or down (bearish)?

AAII members participate by visiting the Sentiment Survey page (www.aaii.com/sentimentsurvey) on AAII.com and voting.

Bullish sentiment has averaged 38.8% over the life of the survey. Neutral sentiment has averaged 30.5% and bearish sentiment has averaged 30.6% over the life of the survey.

In order to determine whether there is a correlation between the AAII Sentiment Survey and the direction of the market, Rotblut looked at instances when bullish sentiment or bearish sentiment was one or more standard deviations away from the average. He then calculated the performance of the S&P 500 for the following 26-week (six-month) and 52-week (12-month) periods. The data for conducting this analysis is available on the Sentiment Survey spreadsheet, which not only lists the survey’s results, but also tracks weekly price data for the S&P 500 index.

Table 2 from the article has the results:

Table 2. Performance of Sentiment Survey as a Contrarian Indicator

Sentiment Level Number of
Observations
Average
S&P 500
Change
(%)
Median
S&P 500
Change
(%)
% of
Periods
Correctly
Contrarian
(%)
6-Month Performance
Bullish > +3 S.D. From Mean
2.0
7.4
7.4
0.0
Bullish > +2 S.D. From Mean
44.0
-0.7
0.3
48.0
Bullish > +1 S.D. From Mean
167.0
0.8
2.9
34.0
Bullish < –1 S.D. From Mean
212.0
6.9
6.2
80.0
Bullish < –2 S.D. From Mean
16.0
14.0
17.7
100.0
Bearish > +3 S.D. From Mean
3.0
25.8
23.0
100.0
Bearish > +2 S.D. From Mean
50.0
2.8
5.3
60.0
Bearish > +1 S.D. From Mean
162.0
4.7
6.0
71.0
Bearish < –1 S.D. From Mean
211.0
3.8
4.5
26.0
Bearish < –2 S.D. From Mean
9.0
-5.5
-1.7
67.0
All
1,319.0
4.0
4.7
12-Month Performance
Bullish > +3 S.D. From Mean
2.0
3.6
3.6
50.0
Bullish > +2 S.D. From Mean
44.0
-2.0
3.6
48.0
Bullish > +1 S.D. From Mean
167.0
2.4
6.3
31.0
Bullish < –1 S.D. From Mean
206.0
12.9
14.3
84.0
Bullish < –2 S.D. From Mean
16.0
20.7
21.7
100.0
Bearish > +3 S.D. From Mean
3.0
35.0
25.6
100.0
Bearish > +2 S.D. From Mean
50.0
3.1
14.3
60.0
Bearish > +1 S.D. From Mean
152.0
7.1
11.8
74.0
Bearish < –1 S.D. From Mean
211.0
7.7
9.9
24.0
Bearish < –2 S.D. From Mean
9.0
-4.3
4.8
44.0
All
1,293.0
8.4
10.2
Based on data from July 24, 1987, to May 2, 2013. Numbers are rounded.

Rotblut observes:

Neither unusual nor extraordinarily high levels of optimism are highly correlated with declining stock prices when the entire survey’s history is considered. The 44 periods with bullish sentiment readings more than two standard deviations above average were followed by a six-month fall in the S&P 500 only 48% of the time. The average six-month decline was 0.7%.

Extraordinarily high levels of pessimism have a mixed record of being correlated with higher stock prices. On a six-month basis, the S&P 500 rose 60% of the time following a bearish sentiment reading more than two standard deviations above the historical mean. The average and median gains were 2.8% and 5.3%, respectively. On a 12-month basis, the S&P 500 rose 60% of the time, with an average gain of 3.1% and a median gain of 14.3%. The average increases in prices are well below the typical increases realized throughout the entire history of the survey, though the median increases are greater than the typical gains.

Read Is the AAII Sentiment Survey a Contrarian Indicator?

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

Margin debt in the United States — money borrowed against securities in brokerage accounts — has risen to its highest level ever, at $384 billion, surpassing the previous peak of $381 billion set in July 2007 according to New York Times Business Day’s Off The Charts: Sign of Excess?. Margin debt as a proportion of GDP is not quite yet at the peak set in 2007, but it has exceeded 2.25% only twice previously in the last 50 years–2000 and 2007. The bottom panel shows that each of those instances was followed by a large drawdown:

NYT Margin Debt

Read Off The Charts: Sign of Excess?

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

h/t SD.

Butler|Philbrick|Gordillo & Associates is out with a great new post “Triumph of the Ostriches” discussing the market’s current level of overvaluation. Here is the summary of Butler|Philbrick|Gordillo’s forecasts:

Table 1. Statistical Return Forecasts for U.S. Stocks Over Relevant Investment Horizons

Source: Shiller (2013), DShort.com (2013), Chris Turner (2013), World Exchange Forum (2013), Federal Reserve (2013), Butler|Philbrick|Gordillo & Associates (2013)

Butler|Philbrick|Gordillo comment:

We have yet to see any evidence-based argument for why the valuation based analysis presented above is not relevant. What do we mean by ‘evidence based’? Show us numbers to support an alternative hypothesis, and then show me how those numbers have served to forecast returns in other periods with statistical significance.

Other memes relate to the idea of a ‘permanently high plateau’ (incidentally, the great 20th century economist Irving Fisher coined that phrase in 1929, just three days before the crash that preceded the Great Depression). Purveyors of this delusion cite the current ‘pollyanna’ environment for global corporations as validation for stratospheric equity valuations. “Corporations have high record cash positions”, they crow, “get ready for the great buy back and merger wave that’s coming!” “Profit margins are high, corporate taxes are near all-time lows, wage pressures are non-existent – corporations have never had it better! Oh and financing is effectively free!”

Unfortunately the wailing equity zealots do not factor in Stein’s Law, which states, “If something cannot go on forever, it will stop.” In a period of record fiscal duress, what is the probability that corporations will continue to receive favourable tax status? According to GMO’s analysis, corporate profit margins are one of the most mean-reverting series in finance, so why would be value markets under the assumption that they will stay high forever? Further, how valuable is the cash on corporate balance sheets if there is an equally large debt balance on the other side of the ledger (there is)?

The Ostriches aren’t concerned with valuation metrics or Stein’s Law, and let’s face it, they’ve been right to stick their head in the sand – at least so far. The problem is that in markets we won’t know who is right until the bottom of the final cyclical bear in this ongoing secular bear market. Only then will we see just how far from fundamentals the authorities have managed to push prices, and only then will we see whether it really is different this time.

Until then, investors can choose facts or faith. The facts say that investors are unlikely to be compensated at current valuations for the risks of owning stocks over the next few years. The church of equities says, ‘don’t worry about it’. So far the Ostriches have it, but all meaningful evidence suggests that over the next few years the Ostriches are going to feel like turkeys – at Thanksgiving.

Read Triumph of the Ostriches.

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

Warren Buffett’s favored market valuation metric, market capitalization-to-gross national product, has passed an unwelcome milestone: the 2007 valuation peak, according to GuruFocus:

TMTGNP 2007

The index topped out at 110.7 percent in 2007, and presently stands at 111.7 percent. From GuruFocus:

As of today, the Total Market Index is at $ 17624.4 billion, which is about 111.7% of the last reported GDP. The US stock market is positioned for an average annualized return of 2.2%, estimated from the historical valuations of the stock market. This includes the returns from the dividends, currently yielding at 2%.

I’ve seen several arguments for why this time is different, and why it’s not a bubble. I don’t buy it. When we see clear skies, that’s all we can imagine, and so we extrapolate it over the horizon. From Seth Klarman’s latest:

Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals–recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S.– is the riskiest environment of all.

[O]nly a small number of investors maintain the fortitude and client confidence to pursue long-term investment success even at the price of short-term underperformance. Most investors feel the hefty weight of short-term performance expectations, forcing them to take up marginal or highly speculative investments that we shun. When markets are rising, such investments may perform well, which means that our unwavering patience and discipline sometimes impairs our results and makes us appear overly cautious. The payoff from a risk-averse, long-term orientation is–just that–long term. It is measurable only over the span of many years, over one or more market cycles.

Our willingness to invest amidst failing markets is the best way we know to build positions at great prices, but this strategy, too, can cause short-term underperformance. Buying as prices are falling can look stupid until sellers are exhausted and buyers who held back cannot effectively deploy capital except at much higher prices. Our resolve in holding cash balances–sometimes very large ones–absent compelling opportunity is another potential performance drag.

For more on market value-to-GNP see my earlier posts Warren Buffett Talks… Total Market Value-To-Gross National ProductWarren Buffett and John Hussman On The Stock MarketFRED on Buffett’s favored market measure: Total Market Value-to-GNPThe Physics Of Investing In Expensive Markets: How to Apply Simple Statistical Models.

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

In a great article The Wiki Man: If you want to diet, I’m afraid you really do need one weird rule Rory Sutherland argues that we require a “black-and-white, binary approach” to things we find psychologically difficult to follow. Sutherland says, “And as the world’s religions have known for thousands of years, abstinence is far easier than the continuous exercise of self-restraint. Or, as the neuroscientist V.S. Ramachandran suggests, “humans may not have free will but they do have free won’t.”

Absolute rules (if X, then Y) work with the grain of human nature. We feel far more guilt running a red light than breaking a speed limit. Notice that almost all religious laws are absolute: no food is half kosher; it is or it isn’t. No Old Testament prophet proposed something as daft as the French 35-hour ‘working-time directive’: they invented the Sabbath instead.

In a more complex world weighed down by Big Data, convoluted tax structures and impenetrable legislation, do we actually need more of what religion once gave us: simple, unambiguous, universal absolutes? In law such rules are known as Bright Line Rules: rather than 20 million words of tax law, you simply declare ‘any financial transaction whose only conceivable motivation is the avoidance of tax is by definition illegal’.

Does a complex world need simpler rules? And simpler metrics? The temptation is that because we have gigabytes of data, we feel the need to use all of it. Perhaps all you need is a few bits of the right information?

During the second world war, experts needed to decide whom to train as RAF fighter pilots. Today this would mean a battery of complex tests. Back then they used two simple questions: 1) Have you ever owned a motorcycle? 2) Do you own one now? The ideal recruits were those who answered 1) Yes and 2) No. They wanted people who had been brave enough to ride a motorbike but were sane enough to abandon the habit.

How many of the world’s problems could be solved if we abandoned this pretence of perfect rationality and fell back on simple, heuristic rules of thumb? According to the brilliant German decision-scientist Gerd Gigerenzer, quite a few.

The investing corollaries are easy to find. I’ll expand on that later this week.

Order Quantitative Value from Wiley FinanceAmazon, or Barnes and Noble.

Click here if you’d like to read more on Quantitative Value, or connect with me on LinkedIn.

h/t @abnormalreturns and @farnamstreet

Follow

Get every new post delivered to your Inbox.

Join 3,715 other followers

%d bloggers like this: