Tuesday, January 29, 2008

Weird Science

I don't know when to start or when to stop
My luck's like a button
I can't stop pushing it
My head feels light
But I'm still in the dark
--General Public

Many traders are positioning (or have positioned) for a near term bottom in the stock markets. But I'm largely out of the trading game. Instead, I want to position my portfolio as an investor with a longer term horizon.

So, what does a real investable market bottom look like? I'd like to quote market sage Richard Russell from his 1/25/08 remark:

What do I look for when I'm looking for a bear market bottom? The classic method of identifying the area of a bear market bottom has to do with VALUES. At great bottom such as 1932, 1942, 1949, 1974, and 1980-82, stocks were selling at great values. By that I mean that blue chips were selling at price/earnings ratios in the 10 and below range. They were also offering fat dividends, many in the 6 to 8 percent range and even higher.

Those were big bear markets, and they ended with stocks selling "below known values." That type of vicious, even brutal, bear market is rare, and they come along only once or twice in a generation. Whether we are operating in that type of extreme bear market, of course, I don't know. As I said, these bear markets are rare and associated with disastrous conditions. The odds are always against this type of bear market from appearing.

All true bear markets end in downside exhaustion. The public is out, traders have disappeared, most professionals are beaten, news is grim, and sentiment is black. One hears such expressions as "It's the end of capitalism as we know it," or "Wall Street will never recover from this one." The public is disgusted with investing. The newspapers are filled with horror stories of investors who have lost their money.

Are we in one of those bear markets now? As Russell notes, their rarity by definition suggests that the odds are against it. What I do know is that measures of aggregate market value are closer to tops than to bottoms, and achieving the P/E and dividend yield 'value' signals that Russell speaks of suggests lots of time and/or distance between now and then.

Moreover, we're nowhere near the sour sentimental context that Russell associates with a major bottom.

I suspect that Mr Practical thinks we're beginning one of those rare Bears. Like him, I think risk is high.

So I'm willing to wait for that time, perhaps years out, where I can 'buy the list' at attractive value.

Saturday, January 26, 2008

Fundamental Problem

In violent times
You shouldn't have to sell your soul
In black and white
They really really ought to know
--Tears for Fears

When's the last time a MV prof employed the 4 Primary Metrics (i.e., fundamentals, technicals, psychology, structural) to assess markets and determined that the fundies were the primary factor? Perhaps it's occured since the 'Ville opened in late 2002, but I read every word scribed by the professorship and I don't recall such a thing.

My sense is that the structural dynamic has driven the market's dominant logic away from investing and towards trading--a move that has reduced the importance of fundamental analysis in decision-making processes.

Paraphrasing one sharp cookie's observation, the market's current collective mindset knows the price of everything but the value of nothing.

I think this will change. If/when we experience a general deflation, asset prices will likely sink and folks may once again seek skill in fundamental analysis. If trading loses its lustre, then market participants may once again focus on fundamental factors driving a business like General Electric (GE), and what the cash generating capacity of a potential investment in GE is worth relative to its current price (a.k.a. valuation).

More on this to come, as I would like to expand MV content on fundamental analysis particuarly as it relates to valuation.

Gimme Shelter

Oh, a storm is threatning
My very life today
If I dont get some shelter
Yeah, I'm gonna fade away
--Rolling Stones

From where I sit, the probability of a major deflationary period--perhaps on a worldwide basis--is increasing. If it occurs, then as credit contracts and prices generally fall, a pile of cash should feel pretty good.

But I'm wondering what happens to gold in such a scenario. On one hand, to the extent that the Yellow Dog has been bid up as part of the general speculative credit binge, gold price should decline during deflation as speculators unwind their leveraged trades on the path towards risk aversion. On the other hand, gold could be viewed as the real money that it is and hoarded big time as the ultimate safe haven. In this case, gold price should stabilize and perhaps rise.

I have not seen much data presented on gold's actual performance during broad deflationary events. I'll be digging into this more. Any data you might have would be welcome.

position in gold

Friday, January 25, 2008

Pharm Camp

I went back to the doctor
To get another shrink
I sit and tell him 'bout my weekend
But he never betrays what he thinks
--The Who

Like Mr Practical, I think risk is high and that cash is a very attractive asset class in this environ (an environ that may persist for quite some time). There is one stock market group that has caught my attention: Big Pharma. As a group, they've largely gone nowhere for a few years--prolly w/ good reason as patents expire and pipelines shrink. Plus there's political uncertainty in front of a presidential campaign where health care & and 'big bad business' will be a major stump for some candidates.

Offsetting that is the favorable long term demographic of aging boomers. Plus the nice cash position of many.

Prof Adami recently reviewed the fundies at Pfizer (PFE) and, like him, I dig the overall picture. I'm attracted to the near 6% yield and the $20+ billion cash hoard after the company peeled off its consumer biz to Johnson & Johnson (JNJ). The stock price has been leaking for years-- primary concerns are 2011 patent expiry on mega blockbuster Lipitor and a thinning pipeline.

At PFE's current market cap of about $135 billion, my EVA/discounted cash flow work suggests that the stock, while not massively undervalued, is decently priced if you believe that the company can average 5-7% sales growth without big margin declines or huge increases in invested capital.

Indeed, in the universe of larger cap stocks that I follow, PFE is one of the few that I can find remotely close to fair value from a DCF point of view.

Others in the drug sector have recently come under pressure. I love the JNJ franchise but not the stock price. Every few years, though, something usually happens to cause Mr Market to serve up a nice price for JNJ.

Mr Market may have done just that a couple years back with Merck (MRK). In Fall 2005, the company was selling for about $70 billion and a 5%+ yield in the midst of legal issues surrounding Viox and a shrinking pipeline. I clearly missed that one (at the time, I thought it could actually go lower). Now, MRK is once again under distribution over legal concerns about Vytorin--a compound successfully developed and marketed with Schering Plough (SGP). Technicals are starting to suggest to me that MRK may have a date with the low $40s.

As bearish as I am, I'm attracted to the prospects of owning a few pharma companies that offer a strong payout as a margin of error (particulary if interest rates continue heading south). If/when dividend yields of JNJ and MRK approach 4% or better, I'll be looking hard at these names as long term investments (not trades). Until then, am willing to wait on Mr Market.

position in PFE

Tuesday, January 22, 2008

Snipping Bips

Is there any just cause for feeling like this?
On the surface I'm a name on a list
I try to be discreet, but then blow it again
--Cutting Crew

The Fed responded to another round of overnite market carnage overseas with a 75 cut in the discount rate prior to today's opening bell. Pepe is suggesting that the Fed's action was not about the stock markets but that's hard to believe seeing as the Dow was indicated down over 500 pts prior to the premarket intervention.

The Dow wound up down 'only' about 130 and was close to green a coupla times. Will this central bank stimulus do the trick? Maybe, but not something I want to bet on.

I am in lockstop with Prof Lewis on the positive ramifications of the Fed action on gold. As he notes, this is likely a signal that 'the whole planet is going to print money like it is going out of style.'

position in gold

Monday, January 21, 2008


What a mess! This town's in tatters
I've been shattered
My brain's been battered
Splattered all over manhattan
--Rolling Stones

US markets off today for MLK day but world markets were, um, active last nite. Euro markets down about 5% on ave w/ Asian markets down more. Japan's Nikkei (NIKK) has opened tonite down almost another finski (5%).

Commodity mkts have not been immune. Oil down a duece and gold down about $30.

Can u say deflation?

Should be an interesting day on The Street tomorrow.

position in gold