From Larry Robbins’ at Invest for Kids in Chicago: “eBay is like a divorce. One is focused on a lifetime of shopping, the other focused on a lifetime of payments.” We think both will ultimately make attractive partners for potential suitors. As they say, beauty is in the eye of the beholder.
Many fundamental “bottom-up” investors often denounce macroeconomic forecasts. What may be less clear, is that this does not imply they are oblivious to macroeconomic developments. Count us in the camp with Third Avenue’s International Team who recently shared some insights regarding the role of macroeconomic information in the investment process:
Macro has two primary roles in our investment process. The first one is as a tool to determine the sensitivity of our investment theses to a variety of macroeconomic environments. This allows us to reject investment opportunities for which our thesis playing out would require a very specific set of conditions.
The second one is as a frequent source of investment opportunities. Dire economic outlooks have indeed been one of our team’s most fruitful hunting grounds over the years. Troubling macroeconomic situations can easily shake investors (speculators) focused on the near-term outlook and paralyze those who require a high level of confidence in their ability to forecast the macroeconomic future. Truth be told, our habit of seizing opportunity in the face of dire macroeconomic circumstances has occasionally appeared foolhardy in the short-term. Yet, the Fund has made many profitable investments in this way in the past.
We couldn’t have said it better ourselves. See also LatAm. See also Scotland. See also Mel Gibson, Braveheart.
– September 26, 2014
– September 23, 2014
Scottish independence has been viewed as a low risk, low probability scenario for some time. Conventional wisdom hasn’t changed much in this regard despite recent polls which displayed a surge in position for independence. And because no one expected the vote to be close, there has not been a lot of preparation for this event. As a result, expect a corresponding surge in volatility if the vote on Thursday is even close.
There are broader issues here. A recent article from Foreign Affairs does a good job outlining Scottish sentiment. History shows that when people are asked, they almost always say yes to independence.
The Guardian looked at about 50 independence votes since 1846, and the vote for independence has averaged 83%, and came out on top in 88% of the votes. The median winning margin across the votes is 93 percentage points.
This is a union that has existed for over 300 years. A very complex sharing of assets and liabilities makes it very unclear how it would split. The linkages between Scottish and British financial institutions raises the risk for financial market instability. The fact that banking assets in Scotland would total 12x national GDP does not help matters.
Needless to say, the break-up of a 300-year union would not bode well for the rest of the Eurozone. We would expect nationalism to intensify across the EU with implications for risk formally knows as the European sovereign debt crisis.
On a somewhat related note, I learned tonight that the Scottish National Animal is actually the Unicorn, which isn’t even a real animal the last time I checked. Then again, bears are as hard to find as Nessie in this market, so what do I know. Probably best to just leave this debate to someone closer to home. The clip below from John Oliver is another must see. Is there anyone better on late night television today?
– September 16, 2014
In Atlanta this week, checking in on a few existing and potential investments. But couldn’t resist following up on Night Moves with a couple additional data points.
The first comes from David Bianco compliments of Zero Hedge. This should sound familiar to those who’ve reviewed the previous targets put out by MS.
We still expect a long lasting economic expansion of moderate growth, which should rival the US record of 10 years with S&P EPS growth averaging 6% until the next recession, on 5% sales growth, flat margins, 1% share shrink. Despite entering the latter years of a typical expansion and high margins vs. history, we now think the trailing S&P PE should average 17 vs. 16 until elevated recession risk returns. This is because we now expect long-term real interest rates to stay below normal through 2016 and thus lower our S&P 500 real cost of equity estimate from 6.0% to 5.5%.
The two major threats to the S&P 500 are either a recession or a rapid increase in interest rates. However, assuming that the US avoids a recession – and no other global factor causes a significant decline in S&P EPS – and that US interest rates climb slowly and rise to a level that plateaus below historical norms, then 2500 is within reach for the S&P 500 by 2018.
So in summary – assuming nothing bad happens for the next five years – and assuming we extrapolate the same linear trend for another 4 years, the S&P 500 can rally to 2500 without any meaningful downside risk.
Why not take this logic a step further? With interest rates at zero for as far as the eye can see, isn’t a 5.5% cost of equity a bit expensive? We can justify just about any valuation for any asset if we just go ahead and use a zero percent discount rate, can’t we?
The same day we picked up this DB report, we caught this gem – Morgan Stanley’s chief international economist, Joachim Fels, appears to be fueling the bullish calls from the firm’s strategy group. Per Bloomberg, he sees recovery from the great recession potentially lasting as long as a decade thanks in part to loose money. “While the expansion is already five years old, it could easily extend another five,” Fels wrote.
Never mind that global expansions have historically lasted between four and eight years and six on average. “The glass is half full,” says Fels. It’s certainly hard to argue that the glass is half full today, but shouldn’t we at least consider the risk that investors may look at the glass differently, some time this decade?
Then again, maybe we give the street too much credit. After reading our last post, a colleague asked, “Does anyone actually believe the stuff these guys are putting out?” Experience would suggest that many unfortunately do.
Believe it or not, it certainly feels like sentiment is reaching an extreme. According to Investors Intelligence, bears have fallen to the lowest level since 1987. Last weekend’s Barron’s survey of market strategists highlighted this sentiment. Nobody thinks markets will go down. Maybe it’s time for some of us to take a page out of the average bear’s play book.
Yogi Bear: Hang on Boo Boo!
Boo Boo: What do we do now?
Yogi Bear: Did you check the safety manual?
Boo Boo: It’s just a picture of us screaming!
[Both scream and flail their arms]
Yogi Bear: We have to deject, Boo-Boo!
Boo Boo: Don’t you mean “EJECT”?
Yogi Bear: Eject is up, deject is
Yogi Bear: doooooooown!
Posted in Portfolio Strategy.
– September 10, 2014