Sexy is scary I

Butterwood argues in the Economist that the U.S. stock market is overvalued.  At 32.8, the Cyclically adjusted price earnings ratio (CAPE) is certainly pricey.  Perhaps that is one reason investors have backed off some of their love affair with FAANG stocks.

Buttonwood cites research by Research Affiliates, a fund-management group.
You can hear the authors of the research ("Cape Fear: Why CAPE Naysayers Are Wrong"), Rob Arnott Vitali Kalesnik Jim Masturzo, explain their thesis in in this video.

Is Amazon Vulnerable?

Amazon is the FENG Powerhouse. To avoid a regulatory crackdown, NYU's Scott Galloway says the e-commerce giant must take this defensive measure.

Sam Sdams Makes a Comeback

Barrons: "A New Twist for Boston Beer," 10/2/2017 8:11AM. After a 30-month slide, Boston Beer shares have staged a surprising turnaround.

Amazon Doesn't Want to Make Money

In Barrons: "What Amazon Will Destroy Next?"9/30/2017,NYU's Scott Galloway talks with Barron's about the future of Prime shopping, and why Netflix should be worried. Also, hope for Wal-Mart.  

There is a certain insanity about a firm that has a market capitalization of $460 billion and does its best not to make money.  What are investors valuing?

MLPs

MLP is short for Master Limited Partnership.  These are taxed like a partnership, but are traded much as common stocks are traded.  There will be a general partner, typically a corporation, that assumes the general risk so the unit holders have a limited liability just as shareholders in a corporation.

Marcus McGregor and High Quality MLPs
 Marcus McGregor is a MLP Equity Strategist with Conning Asset Management tells Barron's senior editor Jack Hough investors should buy high-quality MLPs for income and stability because they have stronger balance sheets and less regulation. He says their average yields around 7% look sustainable.

Libby Toudouze Sees a Sideways for MLPs

Jack Hough interviews Portfolio Manager Libby Toudouze of Cushing Asset Management. She suggests three for growth and yield.




4/1/2017

Fast Growing Companies at Value Prices

12/30/2016 5:06PM Heidi Heikenfeld, manager of the Oppenheimer Emerging Markets Innovators fund, is finding health care and tech stocks selling cheaply relative to their growth rates.

Time For Value?

The bottom 20% of the S&P500 ranked by P/E ratio is selling at 10.2 times earnings versus 52.2 times earnings for the top quintile. Is now the time to go for value? 

Here are the views of three value managers interviewed by Barrons: 


4 Deep Value Stocks to Buy Now 9/21/2016 7:00AM Fund manager Bill Smead says Bank of America shares are ready to soar along with three other underpriced companies.  
4 Undervalued Stocks from Scott Black 10/23/2016 8:19AM The Boston-based value investor makes the case for Shire, Carnival, Celestica, and Lionbridge.

Financial Stocks: Undervalued, Earnings Growing 12/9/2015 2:56PM With a Fed rate hike (possibly) around the corner, portfolio manager Chris Davis lists 3 favorite stocks and many reasons he thinks they can beat the market in coming years.

The Making of the Big Short (the Movie That Is.)

Michael Lewis' book, The Big Short: Inside the Doomsday Machine is one of the best on the financial crisis.  No one writes about finance like Lewis, the journalist who started as a bond trader with Salomon Brothers.   His book chronicles the outsiders who bet against the housing bubble. It short be read with Gillian Tett's book, Fools Gold, which follows the tribe of geeks who invented the credit default swaps in the first place. My favorite moment in the book is when Paulson's analysts are at a Deutsche Bank conference.  They are baffled at why the bankers are so ready to sell them credit default swaps after he had been pulling teeth to buy them months earlier. 

Adam McKay directed the movie based on the book.  Here is a Wall Street Journal Cafe interview with him: 



Oddly enough, John Paulson, who made the biggest killing–the biggest short–is not in the movie.  Richard Thaler is.  He is the Ralph and Dorothy Keller Distinguished Service Professor of Behavioral Science and Economics at the University of Chicago Booth School of Business.  He presented a paper at the 1985 FMA meetings in New York which presented evidence against the efficient market hypothesis.  That was my first professional finance meeting and I had the pleasure of discussing the paper.  I sympathized with his difficulty at the time publishing such heresy.  Times change.  Now you can see he is at the pinnacle of the profession. Thomas Kuhn taught us that a scientific orthodoxy is finally finished only when the last member of that school dies.    

The ABCs of Income: MLPs, REITs, and BDCs

Jack Hough and Jack Otter on the best investments for income in 2015, including the benefits of dividend stocks and the pros and cons of Treasury bonds.  MLPs are master limited partnerships, REITs are real estate investment trusts, and BDCs are business development companies.  They suggest there are some which are oversold.

Are there are a few undervalued stocks out there?

Meryl Witmer is a portfolio manager with Eagle Partners.  She looks for undervalued stocks which is getting harder and harder as the market gets pricier. Speaking at the Barron's Roundtable,  she explains why two stocks, Houghton Mifflin and Gildan Activewear, are undervalued in this January 17th video:

Buying Back Corporate America

Are U.S. corporations pulling up the drawbridge? Finding an alternative to dividends? or Overlevering themselves? 

The Economist argues that share buybacks may be encouraging shorttermism and that by "reducing the number of shares outstanding, buy-back schemes can also artificially boost a firm’s earnings per share."  Based on its survey, buyback activity "in the S&P 500 index" reached $500 billion in 2013, "close to the high reached in the bubble year of 2007:" that is a third of U.S. corporate cashflow. Furthermore, the Economist notes that "buy-backs have usurped dividends as the main way listed American firms give money back to their owners, accounting for 60% of cash returns last year." 

James McIntosh stresses the levering that buybacks are driving and warns investors, in this September 9th video,  that equity markets may seem calm but the cashflow, and debt raising seem ominously like 2007: the calm before the storm. Mackintosh, the FT's investment editor, charts the close relationship among buybacks, debt raising, and cashflow. Corporate share repurchases have been converting cashflow surpluses into deficits which firms are financing with ever more debt.  The result is more levered balance sheets.

Was Janet Yellen's goal in driving down interest rate to relever corporate balance sheets?




 

The Great Rotation Part I

In this January 31st FT video (5m 18sec), David Bowers, global strategist at Absolute Strategy Research, discusses the main issue in asset allocation with Long View columnist John Authers.  Financial panic has subsided into mere nervousness that a great rotation by investors from bonds into equities could be imminent.  Is the shift in monetary regime clear enough yet, and there is a danger of over-exposure to defensive equities or 'bond proxies.'  

Are Treasuries Turning?

The bull market in US Treasuries is three decades old. 

 

Michael Mackenzie, US markets editor, tells Long View columnist John Authers in this January 25th video (5m 10sec) that this could be about to change.   The rise in equities as a harbinger of a strengthening economy suggests bond yields are set to rise.  

Maybe You Prefer Pisner Urquell or Budweiser (from České Budějovice!) or Klášter, But István Szoke Thinks Staropramen Is a "Hidden Gem."

The MoneyMeisters (I can not call them breumeisters) at Anheuser Busch InBev are shuffling their portfolio.  They are selling to private equity investors, CVC, their eastern and central European operations and distribution system for $2.2 billion.  Matthew Curtin judges "CVC is paying around nine times last year's Ebitda assuming it hits its return targets, triggering another $800 million payment to ABI. CVC will fund the deal with $1 billion in debt raised from a variety of banks. The three times debt to Ebitda is well below the six times-plus multiples typical during the boom."  EBITDA is earnings before interest, taxes, depreciation, and amortization.  It is an operating cash flow approximation that is often used in valuations. Lex in the Financial Times adds, "Evolution Securities estimates $2.23bn represents about eight times 2009 earnings before interest, tax, depreciation and amortisation. That is some way below the 10 times-plus of big boom-era beer deals but for AB InBev it is respectable enough, given the potential extra $800m payments."

Matthew Dalton fills out the price: "AB InBev will receive $1.62 billion in cash for the Central and Eastern Europe assets. AB InBev will also receive a $448 million unsecured deferred payment obligation from CVC with a six-year maturity that can be extended 2 years, paying interest at between 8% and 15%. Finally, AB InBev will get $165 million in minority interests."

He tells us "The operations being sold are located in Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia."  CVC gets to "brew and/or distribute Stella Artois, Beck's, Löwenbräu, Hoegaarden, Spaten and Leffe -- AB InBev's main brands in Europe" in those countries.  They acquire, among other brands, Staropramen.

InBev wants to focus on big brands in big countries.

But how good a deal is it for the buyers?  Yes they are paying less than the heady multiples of the bubble years. It looks like they have been clever in structuring it.  Interestingly, according to Martin Arnold and Philip Stafford, "István Szoke, head of CVC’s new central and east European buy-out team, told the Financial Times that Staropramen was 'the hidden gem' among the assets."

The deal turns financially on buying at the bottom and an eventual recovery in revenues as the local economies recover.  Mr Szoke told FT, "We think we are buying this business at somewhat of a trough, as we expect the [east European] region to recover and grow, which will benefit the top line of the company." The Czech Republic, a world leader in beer consumption, is like the caboose on a train in the globalized economy.  “We were surprised by how hard beer consumption has been hit in the region,” said Mr Szoke. “But beer consumption is driven by disposable income and that will recover once this crisis ends in a year or so.”  Since world trade started turning around in early spring, maybe the caboose will make back to the pub by next year.

The BRIC Rally Is Based On Fundamentals

Dominic Elliot told us in the July 27th Wall Street Journal that "the 'BRIC' acronym [was] created in 2001 by a team led by Jim O'Neill, Goldman Sachs Group's chief economist to mean Brazil, Russia, India and China. The bank fashioned the acronym while making a prediction about the speed of growth of the four biggest emerging markets."

In his interview with Mr. O'Neill, you will find his case that their recent spectacular stock market performance is based on fundamentals.

China May Be the World Economy's Engine of Growth, But Are Mr, Han's Gauges Accurate?

Earlier this week, Jamil Anderlini wrote in the Financial Times that "China’s gross domestic product figures" do not add up: "the latest set of first-half numbers provided by provincial-level authorities are far higher than the central government’s national figure, raising fresh questions about the accuracy of statistics in the world’s most populous nation.

"GDP totalled Rmb15,376bn ($2,251bn) in the first half, according to data released individually by China’s 31 provinces and municipalities, 10 per cent higher than the official first-half GDP figure of Rmb13,986bn published by the National Bureau of Statistics.

"All but seven of the regions reported GDP growth rates above the bureau’s first-half figure of 7.1 per cent. At the start of the year, Beijing set 8 per cent as China’s growth target for the year. [read more]"

Since China is becoming such an important economy, what its economy does moves world stock markets. Given commentators' cult of GDP as a metric, the shakiness of China's national income accounts drives prudent investors to their worry beads.

Are Stocks Cheap? Will They Get Cheaper?

Martin Wolf in the Financial Times tells us, "Why fairly valued stock markets are an opportunity." With the above graph, he looks at the long run fluctuations in Tobin's Q and cyclically adjusted P/E ratios. He gets the former from Andrew Smithers. The latter comes from Robert Shiller.

To my eye, it appears that long run market trends are associated with inflation regime shifts: the World War I inflation, the resumption of the gold standard, Bretton Woods, the Great Inflation of the 1970s beginning in the mid 1960s, the Vocker retrenchment, and the Greenspan punchbowl (i.e., "We do not prick bubbles and we live in fear of the demon deflation." The traditional role of the Fed was to take away the punchbowl just when the party got interesting.)

The valuations in the 1940s and 1950s may be understated, particularly for Tobin's Q. The government accelerated the recognition of much capital investment as part of the war effort in World War II. some economists believe this led to an underestimation of the capital stock and perhaps also an understatement of reported earnings and equity.

How sanguine should we be? Wolf concludes, "investors with long time horizons (the relatively young, or institutions) are, for the first time in almost two decades, confronting attractive, although not sensationally attractive, market valuations. ... nevertheless, formidable pressures for further falls in valuations, as leveraged players continue to be forced to offload assets at bargain prices."