From Barron’s Art of Succesful Investing.
If you missed the last, fear not, as the pages ahead are crammed with the best of AOSI — namely, the wit, wisdom, and investment insights of our nine savvy speakers. At last week’s eighth annual get-together, they generously shared with the public their wide-ranging views on the economy and financial markets; their best investment ideas; and, arguably most important, their time-tested strategies for finding value in a volatile market and troubled world.
You likely will recognize five of the crew — Felix Zulauf, Scott Black, Meryl Witmer, Fred Hickey, and Marc Faber — as members in good standing of our annual Roundtable, and a sixth, options expert Patrick Neal, fom last year’s conference report. Joining them in 2012 were Dan Fuss, vice chairman of Loomis, Sayles, whom my colleague Randall Forsyth calls “the Buffett of bonds”; David Herro, chief investment officer of Harris Associates and a much-lauded international investor; and Bill Priest, CEO and co-chief investment officer of Epoch Investment Partners, who is enjoying a long and distinguished career on the Street.
The interviews that follow are adapted from video interviews conducted at AOSI byBarron’s Senior Editor Kopin Tan and available online at www.barrons.com. So grab a latte, and read on or listen in.
By now everybody knows Europe is in big trouble. Carlos Slim shares some thoughts on what Europe needs to “fix” in order to come back. For starters, forget the sunbathing at 60. From El Pais.
Slim, founder and honorary chairman of the business conglomerate Grupo Carso (Telmex, América Móvil, Sears Mexico and others) and declared by Forbes magazine the wealthiest person alive since 2010, has this piece of advice for Europeans: “What Europe must do is two things: sell assets to reduce its debt and deficit levels, and also invite the private sector to make the kinds of investments that the state no longer needs to make.”
Question. You recently stated in an interview: “You read the numbers, and the numbers tell you what’s going on.” So what do Europe’s numbers tell you? What’s happening there?
The European debt crisis explained: The debt levels around the globe are unprecedented in peacetime. The odds of restructurings and/or defaults are higher than most believe. When does debt become unsustainable? Good reminder video from last year.
Guest post by Peter Tchir.
I liked the book. It was a good read. It is also a compelling strategy. Find something that costs next to nothing to put on with huge potential gains. The big short was the ultimate elephant hunting or lottery ticket.
The beauty of the big short is that some investors found some obvious flaws in a market. They thought the deals themselves had problems and the structure of the more complex deals was also done incorrectly. They went against the grain, they used logic and intelligence to find an opportunity, and in turn crushed it. It really is a great story and is incredibly compelling.
The problem is that things mostly trade rich, because they don’t have much value. CDS, contrary to popular opinion, doesn’t typically have big payouts. It often trades tight because most companies don’t run into trouble.
It is exciting to spot trouble, huge amounts of money can be made getting short, but it isn’t easy. More often than not, companies wiggle out of trouble and it is easy to be bled to death on carry. I like being short, it can be a great strategy, but it isn’t easy.
That to me is one of the biggest problems in the market. Investors, many of whom have underperformed, and are all looking for the big kill to make up the year. Everyone is looking for that one trade that will result in stellar returns, and as far as I can tell, most have come to the conclusion that being short is that trade. As volatility (VIX) has collapsed and stocks have marched higher, many have continued to look at CDS and the credit markets as an ideal short. “It doesn’t cost much” and “can have a huge payoff” is the rationale. To a large extent that is true, but so far it hasn’t worked.
Guest post by Peter Tchir.
Last call is approaching in Europe. It’s getting late, everyone is getting tired, the dance floor is crowded and people are making their move. I can’t get that image out of my head and I can’t help but think that Meatloaf, of all people, sums up where the market is right now:
I gotta know right now
Do you love me?
Will you love me forever?
Do you need me?
Will you never leave me?
Will you make me so happy for the rest of my life?
Will you take me away and will you make me your wife?
I gotta know right now!
Before we go any further
Do you love me?
And will you love me forever?
Let me sleep on it
Baby, baby let me sleep on it
Let me sleep on it
And I’ll give you an answer in the morning
Let me sleep on it
Guest post by Vix and more.
There are many ways to translate an opinion about the financial markets into a particular trade. Recently, I decided to act upon my belief that the eurowould weaken against the dollar by booking a couple of weeks in Europe. The trader/VIXologist itinerary would have probably run something likeIreland > Portugal > Greece > Spain > Italy, but instead I elected to steer to the north, vising the Netherlands, Belgium, Luxembourg, Germany and the Czech Republic.
For the first time in many moons, parliamentary votes, etc., the markets were reasonably well behaved during my vacation and the VIX didn’t even make it into the 30s.
As someone who spends a great deal of time nine time zones away from the events behind the European headlines, I was somewhat surprised to see the relative calmness and lack of concern in the people I spoke with about the European sovereign debt crisis. This is not to say that the consensus was that the most difficult phases of the crisis were in the rear-view mirror, only that in due time, all would be sorted out and life would go on in a manner similar to the way it was prior to 2008.
Guest post by Peter Tchir of TF Market Advisors.
Don’t the Markets NEED QE?
No. While QE has helped support the market and was the main reason the S&P 500 managed to stay above 1,300 in spite of weak data, it isn’t necessary. Taking the most “disruptive” scenarios off the table in Europe is more important. If Europe can stabilize, then the markets could price in a better “multiple”. One thing holding down the PE multiple is the concern that Europe could become a complete disaster. As that get removed, there is the real possibility that investors will get more comfortable with risk and we can see a multiple expansion. If we see over time, some (and I hate the term) “green shoots” in Europe, then we could actually see some increased expectations of earnings. Europe has been a drag on earnings, and pessimism about Europe is keeping earnings forecasts down, but it wouldn’t take much of a turn in Europe to give earnings here a small boost.
So if (and it remains a big if) Europe takes tail risk off the table we could see an increased multiple, and if Europe actually manages to stop the slowdown, then we could see earnings expectations grow, so the market could do well as it shifts from QE to PE.
Global lack of leadership, economies, markets and much more. Another must read by the Cravens Brothers.
Interviewer: “What period does this remind you of?”
Economist: ”Last year…the year before that…and the year before that.” – Bloomberg Radio
Recently, I found myself on a plane making an emergency landing, again. I have flown to and from a certain city four times in my life and had emergency landings on two of four occasions (2001 and 2012). I detailed my 2001 adventure in last year’s“Everybody Stay Calm!” The ritual: (i) get on for the ride, (ii) volatile mishap on the way up, (iii) rapid descent, (iv) get out quickly (via fun slide or boring jetway), and (v) wait for indications of what to do next. The violent “accordion-shaped” up and down moves in the commodities and equities markets the first halves of the last three years have left investors similarly “normalized” to the abnormal. This year, the Dow posted the best 1Q performance since 1998 (+8%), followed by the worst May since 1940 (-8%), followed by the best June since 1997, (+4%) – the gain for the first half of the year. Get on for the ride, volatile mishap, rapid descent, and slightly propitious exit.
This year’s odyssey revealed a lack of leadership more awe-inspiring than my first dance with death eleven years ago. Instead of one leader “losing it” (i.e., the pilot), the entire leadership “lost it” (the airline), herding 150 or so passengers around the airport for 5 hours with no explanation, handing out useless taxi vouchers, delaying the replacement flight the next morning for another 5 hours with no explanation, and finally another 2 hours “due to an equipment malfunction” on the plane we hadn’t even boarded yet. Upon hearing this first direct communication from our “leaders” in over 24 hours, two would be passengers flipped out and had to be “escorted” to the “can” by security, ostensibly to be given some literature on how to behave when “Groundhog Day” meets “The Twilight Zone” and one must live through their progeny.
Hudson nails it down.
Europe’s three needs: a debt write-down, a real central bank, and a more efficient tax system
Brussels Talk, Madariaga College, Governing Globalisation in a World Economy in Transition, June 27, 2012
What can Europe learn from the United States?
First, the United States – like Canada, England and China – have central banks that do what central banks outside of Europe were created to do: finance the budget deficit directly.
I have found that it is hard to explain to continental Europe just how different the English-speaking countries are in this respect. There is a prejudice here that central bank financing of a domestic spending deficit by government is inflationary. This is nonsense, as demonstrated by recent U.S. experience: the largest money creation in American history has gone hand in hand with debt deflation.