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Get Rid Of Bears Once and For All

CNBC Writes: Bull market’s got another 10 to 15 years left: Pro

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The stock market is only in the second of three phases of a secular bull market, Altaira’s director of technical research, Ralph Acampora, said Monday.

“The first phase of a secular bull market is usually led by quality,” he said. “Second phase of a secular bull market, when people start to feel a little better about things, they buy secondary stocks,” Acampora said. “The third and final phase is totally greed and complacency, and we’re not even close to that. So, the secular bull market has a lot of life left.”

On CNBC’s “Fast Money,” Acampora said that his 1,800 year-end target for theS&P 500 could easily be 50 points higher.

“I’m being a little conservative. Longer term, oh, good god—much, much higher,” he said. “This is a secular bull that has at least another 10, 15 years to run.”

Umm…. CNBC you never disappoint me. I just have 1 question for your PRO.

What bull market?

Let’s take a look. Since the secular bull market top in 2000 (13-14 years ago) the

  • DOW: + 30% (sitting at a bear market top about to reverse and go below 10,000 by 2016)
  • S&P: +14% (sitting at a bear market top about to reverse and go below 1,200 by 2016)
  • NASDAQ: -20% (sitting at a bear market top about to reverse and go below 2,500 by 2016)

Once again, which bull market has another 10-15 years to go? We are not in the bull market. The markets barely moved since the 2000 secular top. Some remain in the negative territory. Perhaps they are talking about the bear market that started at 2009 bottom, but even if such is the case there is very little evidence that it was the start of a full on bull market.

The numbers and dates you see above are based on the precise mathematical work that I do. Not some arbitrary statement. If Mr. Acampora have studied the markets since its opening in 1790 he would soon realize that the bull and bear markets alternate in easy to see and understand 17 year cycles.

As such, we still have another 3-4 years of the bear left.  Don’t let the bear bite you. 

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The Secret To Margin Of Safety (Part 3)

Businessman falling

One of the first things we have to look at from the value investing perspective is the price/book value ratio(P/B Ratio). The book value is defined by total assets – total liabilities/divided by total number of shares outstanding or it could also be determined by dividing shareholder equity/total number of shares outstanding. There are other ways to calculate the book value, but that is the most basic form.

Now, without making this too complicated, book value per share basically means the value left over if you decide to liquidate the company, sell all inventory and assets,  pay off all liabilities and return all remaining capital to the shareholders.  For example, a P/B Ratio=1 means that if the company is liquidated at that time you will get $1 for every $1 invested.  The P/B ratio of 5 means that for every $5 dollars you have invested in the stock, if the company is liquidated now you will only get $1 back.  The P/B ratio of 0.5 means that for every $0.50 cents you have invested, you will get $1 back if the company is liquidated.

Value investors typically try to identify stocks with P/B ratio of 1 or less because it automatically gives them a margin of safety. As with the Radio Shack example above we can see that their P/B ratio stands at 0.67. This is a good start. Meaning that if you invest in Radio Shack today,  you are buying $1 in assets for just $0.67 cents. This gives you an automatic margin of safety to the tune of 33%. This also mean the company is undervalued, providing an investor with a possible gain of 33% or more. Not a bad start.

The next thing we try to do is determine the Intrinsic Value of the business. If you recall, the intrinsic value of the business is typically above book value. It includes its brand name, future growth projections and cash flow, interest rates, etc…. While figuring out Intrinsic Value could be a time consuming process I will show you how to do it fast in the next chapter.  No degree in finance is required.  We then look at the management team, business prospects, competition, products and a few other metrics to add into the calculation.

Once the Intrinsic Value number is estimated (it will never be 100%) we have a much better understanding of what the business is truly worth or we can see the true value of the company. Jumping ahead a little bit,  next chapters shows Intrinsic Value for Radio Shack at $10.  That means that the current stock price of $3.35 gives us a margin of safety of 66.5%.  This is indeed a significant margin of safety that allows us to protect our original capital.  In addition, the 66.5% margin of safety could be viewed as a potential profit margin which could be realized when the Radio Shack stock moves towards its intrinsic value.

Even thought it could be as simple as that, in the real world it is rarely so.  Depending on the future performance of the company both the book value and the intrinsic value calculated above can go up or down. Sometimes substantially so. That is why obtaining a significant margin of safety when purchasing any given investment is so important.  In the majority of the cases that lowers your risk profile and gives you an opportunity to get out without big losses if a mistake is made.

As such, value investors should always strive to minimize their risk by maximizing their margin of safety.

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The Secret To Predicting The Future Of The US Economy

Bloomberg Writes: The Enduring Mystery of Financial Markets

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Unfortunately, decades after the three economists had their groundbreaking insights, the crucial question remains unanswered: Can policymakers know with any certainty when markets are dangerously out of line, and is there anything they can do about it?

Economists can’t be expected to predict the future. But they should be able to identify threatening trends and to better understand the conditions that can turn a change in prices into a financial tsunami.

Read The Rest Of The Article Here

Once again, I do not understand why everyone claims that it is so hard to do. The Economy and its bubbles are very easy to see and predict.  For example, you could have looked at 2002-2007 period and have easily determined or came to a conclusion that there was a huge real estate and mortgage finance bubble developing.  When it would collapse, it would take down the entire economy, multiple financial institutions and our financial markets.

No crazy or complicated economic models needed. This is fairly basic and common sense stuff. Same thing applies to today’s environment. While the majority of the economist do not see any present issue either in the economy or the financial markets, they are there.  The majority of economic growth and market recovery over the last couple of years has been driven by an insane amount of credit pumped into our economy by the Fed through a multitude of channels.

Now the economy and the financial markets will have to pay for such a mismanagement by dropping over the next few years (as my timing work indicates). As the Fed perpetuates this cycle of boom and bust by dumping a lot of credit into the economy I remain puzzled why it is so hard to see by most economist and others participating in the financial markets. If you take conflict of interest out of the picture, this becomes very basic. 

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What Everybody Ought To Know About The US Dollar

Daily Ticker Writes: Why the Dollar Will Always Be the Reserve Currency for the World

USD

On Friday morning the U.S. dollar came close to its lowest point of the year against the euro, according to The Wall Street Journal, on expectations that the Fed will have to continue its easy money policies for longer than first forecast thanks to the government shutdown.

“I’ve never been very worried about this,” he asserts. “The reason for that is there really is no alternative. The Chinese are not going to offer – and they cannot, given where they are in development, I think, for a decade or more – a genuine competitor for the dollar.”

Read The Rest Of The Article Here

I tend to agree with the premise of this article. As of right now there is no clear alternative to the US Dollar. The Chinese Yuan cannot be that alternative as it is technically not even a freely traded currency.  It will be decades before Chinese Yuan approaches the point of even being considered as an alternative to the US Dollar. The Euro? Well, there are too many structural issues in Europe.

There is a real possibility that Euro won’t even survive over the next decade. The majority of European economies (well, almost everyone except Germany) are in a big fiscal mess that is not getting any better. If anything, it is getting a lot worse. With the upcoming worldwide recession over the next few years (I discuss in my previous blogs posts) there is a real possibility that it might force some countries out of the EU and out of the Euro.  

That is one of the reasons of why I am so bullish on the US Dollar for the time being. No doubt that the US has some serious economic and structural problems. Yet, that in itself doesn’t determine the value of its currency.

It is quite possible for the currency to appreciate significantly even under dark economic circumstances and that is what I foresee for the US Dollar. Be aware of that.    

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Stock Market Update, October 18th, 2013

daily chart Oct 18, 2013

Summary: Continue to maintain a LONG/HOLD position

In my last weekly update I suggested that traders should set themselves up for a rally that was surely to come due to the US Government resolution. We did get that rally over the last couple of days and the DOW now sits close to the previously suggested range of 15,300-15,500.

Most importantly, we are approaching the moment of truth.

Ladies and gentleman, this is the moment we have all been waiting for. Over the next few weeks we will find out if the bear market has already started or will start in March of 2014. Should the market break below 14,600 over the next two weeks, the probability is high that we have already started the bear market leg into the final 2016 bottom.  The market is certainly going back into the 14,800 as it left a huge gap there, but a firm break below 14,600 will give us a confirmation that the bear is back.

What’s more, my timing work is giving me further confirmations that September 2013 was indeed the top. I will discuss these points over the next few weeks, but there are clear mathematical points of force that lead me to believe that a higher top on the DOW over the next couple of months is highly improbable.

At the same time we cannot yet ignore the technical picture. As such, I continue to advise you to maintain LONG/HOLD position while waiting for a confirmation that the bear market has indeed started.  

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The Secret To Margin Of Safety (Part 2)

Why?

Because the stock market is a much more complex discounting mechanism.  The stock market constantly discounts fundamental data, human psychology and future projections into any given stock price. During this process many errors are possible.  It could based on simple misunderstanding of the fundamental data or a negative psychological mood of the overall crowd or due to a market correction/surge.  As such, stocks end up being either…..

  • Significantly Undervalued $25
  • Undervalued $50
  • Properly Valued   $100
  • Overpriced  $150
  • Speculatively Overpriced $250

Obviously, as value investors we are interested in the first two categories because such stock give us the best margin of safety. Yet, that doesn’t necessarily mean that the margin of safety you are able to obtain will automatically become your profit margin.  For example,  if you have bought an “Undervalued” stock at $50 giving you a 50% Margin of safety,  it doesn’t mean that the stock will simply appreciate to $100 over a certain period of time so you can sell it at 100% profit. It should, but it doesn’t mean that it will.

Many outcomes are possible here.  Yes, if you have done your work right, this particular stock should appreciate to its true value of $100. However, the path it takes is unknown. It could decline even further to $25 before surging back to $100.  It can stay at $50 for a couple of years before surging all the way to $250.  Should you sell at a $100 or keep the stock in your portfolio due to improving company fundamentals?

As you can see there are way too many possible outcomes here to clearly define if your margin of safety is your profit margin. That is why it is best to look at the Margin of Safety as your insurance policy as opposed to your profit center. The profit or loss that will eventually come from your investment can realize itself in many different ways, yet there is only one Margin Of Safety and it is clearly defined. Now, let’s take a look at a real life margin of safety example and how to apply it to an individual stock.

(*I will keep the analysis very simple here without going into an in-depth analysis and/or valuation work).

 rsh

  • Date: 10/18/2013
  • Company Name: RadioShack Corp (RSH)
  • Stock Symbol:  RSH
  • Stock Price: $3.35
  • Market Value: $334 Million
  • Enterprise Value: $613 Million
  • Price/Book Ratio: 0.67
  • Revenue:$ 4.19 Billion
  • Net Loss: ($206 Million)
  • Total Cash: $432 Million
  • Total Debt: $712 Million

A stock that just 3 years ago was selling at close to $25, is now selling at $3.35. That is a about an 85% decline in value for a famous brand name we all know.  This type of a situation (significant decline and strong brand name) should definitely peak an interest of a value investor.  As mentioned earlier, there could be a million different reasons of why this stock has declined so much, but for the sake of simplicity and our margin of safety discussion lets simply look at how much (if any) margin of safety does this stock offer.  

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Bernanke Is Over-Stimulating Americans

Reuters Writes: Fed’s Fisher warns of potential U.S. housing bubble, MBS buys

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(Reuters) – A top Federal Reserve official said on Thursday he is seeing fresh signs of a U.S. “housing bubble” and warned about the central bank’s ongoing purchases of mortgage-based bonds.

“I’m beginning to see signs not just in my district but across the country that we are entering, once again, a housing bubble,” Dallas Fed President Richard Fisher told reporters after a speech in New York. “So that leads me … to be very cautious about our mortgage-backed securities purchase program.”

But citing rising year-on-year house prices in Texas cities, and elsewhere in the country, he warned that the central bank’s hyper-accommodative policies could be inflating dangerous asset price bubbles.

“We have to be watchful and realize there has historically been an era of the Fed over-stimulating” since the Great Depression, Fisher said.

“I worry we are following that tradition now,” he added on the sidelines of a meeting of the New York Economic Club. “No one knows when the bubble pops. But I would argue that … with each dollar we buy in Treasuries and mortgage-backed securities, we’re getting closer to the tipping point.”

Read The Rest Of The Article Here

I have a lot of respect for Fisher. Simply put, unlike most others at the Fed he doesn’t have his head stuck up his ass. He calls it as he sees it. He is absolutely correct by indicating that the Fed is over-stimulating (once again) and that causes all sorts of issues, including another housing bubble.

I do disagree with him on one issue. The fact that “No one knows when the bubble pops”.  There are ways and signs to figure it out. When it comes to the US Real Estate market there are multiple signs that the real estate market is completing its bounce from the 2010 bottom and is in process of rolling over. So much so that I went out on a limb a few weeks ago to call for a housing market top. My previous article “I Am Calling For  A Real Estate Top Here“ I have outlined a case of why I am making that decision. I highly encourage you to revisit that post.

While certain local markets might continue to surge upward for the time being, the overall market is reversing itself NOW. If you are speculating or investing in the real estate right now, it is not going to end well. 

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The Secret To Margin Of Safety

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Margin of safety is one of the most important concepts in value investing and as such deserves a more in depth look and analysis.  

As I have mentioned earlier in this book, your margin of safety is the difference between the price you pay for an asset and how much that asset is truly worth. Let’s take a quick look at another example for better understanding.

Imagine a suburban street with 3 identical houses on it. The house on the right sold a few months ago for $500,000 and the house on the left is on the market right now for $520,000. Yet, you are interested in the house in the middle. The previous owner has defaulted on the loan and the house is soon to be auctioned off. Your house is not in as good of a shape as the other two houses.  In fact, it has been run down by the previous owner and you estimate that it will cost you about $75,000 to bring it back to the condition of the two adjacent houses.

On the day of the auction you are able to purchase the house for $150,000. With an additional $75,000 in repair costs, your true cost is $225,000. At the same time you know the true value of the house is about $500,000.

So, $500,000-$225,000=$275,000 Is Your Margin Of Safety

By definition, the $275,000 or 55% discount from the true value of the said house becomes your Margin Of Safety. It becomes your safety net to prevent any losses,  it becomes your security blanket against adverse developments and it becomes your possible profit margin.

What if it takes $150,000 to fix everything up instead of $75,000. That’s fine you are still in the black. What if you find out that there is an additional $50,000 lean against the house? That’s fine, you are still in the black. Your margin of safety on this house will protect you against various unpleasant developments to the tune of $275,000. Yet, an important question still lingers.

Is the Margin Of Safety your insurance policy or is it your profit margin?

Well, it is both and that is why it is so important when it comes to value investing.  First and foremost, margin of safety is your insurance policy. As Warren Buffett so famously said “Investing rule number one…never lose money. Investing rule number two…..never forget rule number one”.  Basically, the margin of safety is there to protect you against any losses and unforeseen events.  

We live in a complex world where your fundamental analysis will not always be right. You will not always be able to predict unforeseen or as insurance industry calls them “Act Of God Events”. Should such events occur your investment will have a large cushion built into it to protect you against significant losses.

It is only after acting as an insurance policy does Margin Of Safety becomes your profit margin. Technically speaking, your asset should appreciate to its true value.  As with the real estate example above your margin of safety of $275,000 becomes your profit if/when you decide to sell the house.  Yet, that is not always the case in the stock market. When we deal with publicly traded companies the situation becomes a lot more complex.  

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Why I Hate Financial Media


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The only time I really enjoy watching financial media is during the time when financial markets melt down. It is fun to watch their blank faces and their dumb expressions repeating the same two questions “Where is the bottom?” and “How come no one saw this coming?”.

Today was a little bit different, but just as fun.  No one could figure out why the market was surging in the morning. There was no real breakthrough or any concrete type of a debt deal coming out just yet.

Quite the opposite, their Armageddon debt default clock was counting down to a “technical” default with just a few hours left. Why was the market surging? I think everyone of them was spinning doom and gloom, yet the market kept surging.

Here is why.  As I have said many times before, the stock market doesn’t follow the news. It doesn’t care about the US Government nor if it defaults on its debt. The market has an exact mathematical structure that it must trace out. It is a future discounting mechanism, not a reactionary one. It has already discounted what has happened or will happen in Washington a long time ago.

Can it get it wrong and drop down big time if the Government doesn’t pass the bill. Sure, but it will be within the range of the overall trend and not the trend change in itself.

In my future writings I will outline the exact mathematical structure of the stock market discussed earlier to prove once and for all that news have no impact on the financial markets.  

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Buffett Agrees…..How US Politicians Just Destroyed America

Reuters Writes: Buffett calls threat to not raise U.S. debt limit a ‘political weapon of mass destruction

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NEW YORK (Reuters) – Warren Buffett, chairman and chief executive of Berkshire Hathaway (NYS:BRK-A – News), said Wednesday that the threat of not raising the U.S. debt ceiling is a political weapon.

The idea that Congress could fail to raise the $16.7 trillion U.S. borrowing limit is a “political weapon of mass destruction,” Buffett told cable television network CNBC.

Buffett said Berkshire Hathaway owns short-term Treasury bills and is “not worried” about the bills being paid, despite concerns about the U.S. debt ceiling.

Of course Mr. Buffett is correct. What happened in Washington over the last couple of weeks is nothing short of a disaster. An absolute disaster. What Mr. Buffett forgot to mention is that this “political weapon of mass destruction” has already gone off.

Surely, the US will not default on its debt. In my previous posts I have clearly stated that neither the market nor should you care about that. The damage has already been done and will be eventually felt on a different front.  This front has to do with our creditors.  I bet you my left leg that this situation was very closely watched and analyzed by both Japan and China (two of our biggest creditors). 

Their conclusion will be very simple. Washington is being run by idiots who have no problem putting the wealth and the future of our countries at risk. Therefore, we should diversify.  I bet you my right leg that these countries will start to lessen their US Debt exposure (if they haven’t started already) as soon as possible. Interest rates will go up and that will cause a significant slow down in the US Economy and a substantial DROP in the financial markets.

BOOM. Thank you Washington.  

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