Perspective on the Gold Miners; Management

Miners long term

SP long term

lt cape

Gold and Nixon

2Q 2016 Tocqueville Gold Strategy Letter – Final

The above charts came from this article.  I would ignore the conclusions but focus on the historical perspective.

http://seekingalpha.com/article/4003004-gold-mining-stocks-best-investment-asset-next-decade

GOOD MANANGEMENT

Enterprise Product Partners August 2016 Presentation

Note the information they give investors. How management communicates is important. Do they provide sufficient detail for you to assess their capital allocation skills and operational performance. Note page 5.

Celebrate when your stock gets downgraged

Analyst Recommendations Do they add value

Yes, There are Good Stockpickers (VIC)

Ted Talks

Evidence suggests the professional investors in my sample have significant stock-picking skills. Interestingly, these skilled investors share their profitable ideas with their competition. I test various private information exchange theories in the context of my data and determine that the investors in my sample share ideas to receive constructive feedback, gain access to a broader set of profitable ideas, and attract additional arbitragers to their asset market. The proprietary data I study are from a confidential website where a select group of fundamentals-based hedge fund managers privately share investment ideas. The investors I analyze are not easily defined: they exploit traditional tangible asset valuation discrepancies, such as buying high book-to-market stocks, but spend more time analyzing intrinsic value and special situation investments.

Can Investors Pick Stocks on VIC 01272010-Wesley Gray

VIC

Bubble in Safety? http://intrinsicinvesting.com/2016/08/24/wd-40-a-case-study-of-the-bubble-in-safe-stocks/

Helicopter Money?

Helicopter money

The source and root of all monetary evil is the government monopoly on the issue and control of money. –Friedrich Hayek

An interesting discussion 

Pivotal to the investment process is interest rates. For entrepreneurs to control capital, interest rates must reflect its real cost rather than merely the cost of printing money. Otherwise the money printers will dominate investment.

Zero interest rates rob future generations by bidding up the value of current government assets and privileges.   A bubble of current assets inflated by near-zero –interest loans does nothing to fund the future.   Retirees face a prospect of shriveled pensions and support and watching their children and grandchildren live slow motion lives. –George Gilder from The Scandal of Money: Why Wall Street Recovers But The Economy Never Does

I’d come to Wall Street for validation. I believed my value was in achievement, that achievement was conferred by instituions and rendered in money. I’d joined an army of bright young men and women dressed in business-casual uniforms, streaming into the service of massive corporation without any sense of why we’d chosen to dedicate our lives to further enriching the already rich, except that we needed proof that we were valuable, because at heart we didn’t really believe we were.  –Sam Polk from The Love of Money

Moving towards a solution

https://monetary-metals.com/arizona-considers-issuing-a-gold-bond/

Deep Value Investor: 2016-05_conference_transcript

HAVE A GREAT WEEKEND!

Toby Carlisle (of DEEP VALUE FAME) Live at NYSSA Aug. 22nd

http://www.nyssa.org/authorseries/ctl/viewdetail/mid/4196/itemid/2691/d/20160822.aspx

YSSA’s Value Investing Thought Leadership Group presents

NYSSA Author Series™:
Tobias Carlisle

Monday August 22, 2016 6:00 PM through 8:00 PM
NYSSA Conference Center
Available as: Live Session
Categories: Market Integrity, NYSSA Author Series™, Programs for Members, Seminar, Value Investing



Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations” is a must-read exploration of the deep value investment strategy, describing the evolution of the theories of valuation and shareholder activism from Graham to Icahn and beyond. The book combines engaging anecdotes with industry research to illustrate the principles and methods of this complex strategy and explains the reasoning behind seemingly incomprehensible activist maneuvers. Written by an active value investor, Deep Value provides an insider’s perspective on shareholder activist strategies in a format accessible to both professional investors and laypeople.

The Deep Value investment philosophy described by Graham is rarely available in the modern market, forcing activists to adapt. Current activists exploit a much wider range of tools to achieve their goals. Deep Value enumerates and expands upon the strategies available to value investors today and describes how the economic climate is allowing value investing to re-emerge.

This event will cover:

  • Strategies and tactics of effective activism
  • Unseating management and fomenting change
  • Target identification
  • Determining advantageous strategies
  • Eyeing conditions for the next M&A boom

Who should attend?

Portfolio Managers and Analysts

Speaker

Tobias Carlisle is the founder and managing director of Carbon Beach Asset Management LLC. He is best known as the author of the well regarded website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Prior to founding Eyquem in 2010, Tobias was an analyst at an activist hedge fund, general counsel of a company listed on the Australian Stock Exchange, and a corporate advisory lawyer. As a lawyer specializing in mergers and acquisitions he has advised on transactions across a variety of industries in the United States, the United Kingdom, China, Australia, Singapore, Bermuda, Papua New Guinea, New Zealand, and Guam. He is a graduate of the University of Queensland in Australia with degrees in Law (2001) and Business (Management) (1999).

NYSSA expects all attendees to comply with NYSSA’s Code of Conduct while attending NYSSA events or meetings. NYSSA expressly reserves the right, in its sole discretion, to grant or deny access to any individual, or to expel any individual from any NYSSA event or meeting.

Program Details
Date
Monday, August 22, 2016

Time
6:00 p.m.-8:00 p.m.

Format:
6:00 – 7:30 p.m. Presentation
7:30 – 8:00 p.m. Networking

Location
NYSSA Conference Center
1540 Broadway, Suite 1010, (entrance on 45th Street)
New York, NY 10036

Fees
Member $25
Non-member $50
$10 surcharge for walk-ins.


Registration Deadline

Wednesday, August 19, 2016

Chair
Elliot Trexler

CFA Institute CEs
Credits= 1.5

Speaker
Tobias Carlisle

Consider Becoming a Member 
Contact membership@nyssa.org

Additional Information
If you are unable to register for this event online, please call (212) 541-4530 for assistance.

Register via Mail/Fax
Policies and Procedures

Taking Diet Advice from Fat People; What would you buy?

10fattestpeople-5

Is taking investment advice from Michael Mouboussin Interview similar to taking health and fitness advice from the gentleman above? More here: http://www.michaelmauboussin.com/

Question: Your broker offers you a 10-year bond with a coupon yield (annual interest payment / face value) of 3.0%, and a current yield (annual interest payment / current price) of 2.3%. Assume zero probability of default. Comparing this opportunity with the 1.5% yield-to-maturity available on 10-year Treasury bonds, would you prefer the bond “yielding” 2.3%?   What is your return?

Financial Assets vs Real Assets

What is your return?  The readers who commented below are more accurate in their analysis, but let’s pretend to keep things simple:

If you chose the 2.3% bond anyway, you’ve joined the company of countless other investors who are making effectively the same mistake as they reach for yield across every financial asset. In order for a 10-year 3% coupon bond to provide a 2.3% current yield, one must pay $130 today in return for the following set of future cash flows: $3 a year for 10 years, plus $100 at the end. Paying $130 today in return for $130 in future cash flows, buyers of that bond will inadvertently discover that they’ve locked in a total return of zero. Of course, their real return incorporating inflation is negative.  Who likes that deal?  Yet many “professionals” are choosing that for their clients.  Better to burn your money in a barrel. (Source: http://www.hussmanfunds.com).

Thoughts on Mauboussin

Well, it is hard to take advice from a fatman. However, if we were perfectly rational then it wouldn’t matter if the provider of the advice/info/knowledge was fat or fit. What matters is the content.  I believe you should hear or read what Mr. Mauboussin has to say and critically think if the information is useful to you. You can have all the wisdom in the world, but unless you act on it, of what use is it?

My suspicion is that Mr. Mauboussin does not thrive on the acting part. Common sense is lathered with a patina of sophisticated jargon to make him or his organization seem smart.   How does one take “contrarian” advice who works for a mega-organization like Credit Suisse.

I sat in the back of his security analysis class at Columbia GBS in 2006 as he spoke about the incredible capital allocation skills of Eddie Lampbert.  However, almost no mention was made of the true asset value of Sears.   Sure Mr. Lampert is a master investor, but HOW much of a premium do you pay?   I shook my head in dismay.   The Columbia students gobbled it up in awe.

Shld Mouboussin

Mr. Mauboussin was riding shotgun with Mr. Miller when their fund bought housing stock at the 100,000-year peak in housing stocks. See Pulte below.

Housing Mouboussin

Mr. Maouboussin said in the linked interview (audio) above that only with hindsight bias could someone have foreseen the housing collapse.   I guess he didn’t receive the letters Michael Burry was sending to Alan Greenspan warning of the impending disaster due to massive mal-investment caused by manipulated credit (Thanks Federal Reserve!).

Burry saw it coming:  http://www.nytimes.com/2010/04/04/opinion/04burry.html?_r=0

Greenspan’s replyhttp://www.businessinsider.com/greenspan-on-michael-burry-scion-capital-2010-4

Here is a video of a Mauboussin class

Color me skeptical.

Gold in a Nutshell

A million paper dollars held since 1913, when the Federal Reserve Bank was created, would be worth $20,000 today, down 98 percent. A million dollars of gold in 1913 would now be worth $62 million. Aligned with irreversible time, gold is the monetary element that holds value rather than dissipates it.  (Source: How We Got Here Money: How the Destruction of the Dollar Threatens the Global Economy–and What We Can Do about It, 2014)

How to Lose Money Consistently; A Contrarian Speaks

buy buy sell sell

First, I get my stock tips from experts.

Second, I wait until the recommended stock goes up after the broadcast tip to make sure the trend is your friend.  Who needs to understand accounting anyway or the present value of free cash flow.  I mean understanding the magnitude and sustainablility of free cash flow or how the business makes money is old news.  Compare expectations versus funamentals?  I go with price because price is all.

I don’t need to think probabilistically because there are sure things like following Jim Cramer’s recommendations.

I am often wrong but never in doubt.

What behavioral biases? I am right, always right.  I don’t need losers like you second guessing me.

Now why would I blindly follow Jim Cramer?  The most important part of investing is having someone to blame when you lose money.  I typically lose 9 out of ten times and my losses are triple my wins.   Consistency wins!

Please read: http://ericcinnamond.com/parachute-pants/   A fantastic blog of knowledge from an experienced investor.

This article hits home because I have also felt the pain of being a contrarian as anyone who types in “gold stocks” in the search box can see.

AG

I bought AG in mid-2014 at $8, then $4.50, then $3. Over two years, I was down over 45% based on my average price.  Clients screamed. One said that if my IQ was higher, he could call me stupid.   One client took out an insurance policy on me and told me that I might have an accident.   Now all is forgiven. Yes, I have sold some AG but still retain a position because conditions haven’t changed, but the price has begun to discount the good news. Risk is higher now than in 2015. Yet, there doesn’t seem to be a mania into these stocks–so far.  But mining stocks are burning matches where their assets deplete and deplete.  You have to jump off the train when people are clamouring for these companies.

Parachute Pants

Did your parents ever tell you not to worry about what other people think? I remember my mother telling me this when I was in eighth grade. I’m not sure if she was simply giving good advice or trying to talk me out of buying parachute pants. In the early 80’s parachute pants were a must have for the in crowd. I wanted to fit in, but my mom convinced me it wasn’t necessary to act and dress like everyone else. In hindsight, good call mom. Now if only she would have talked me into cutting off my glorious “Kentucky waterfall” mullet! The pressures of conforming and fitting in don’t go away after eighth grade – it sticks around many years thereafter. Investing is no different.

In the past I’ve discussed and written about the psychology of investing and the role of group-think. The pressure to conform in the investment management industry is tremendous, especially for relative return investors. As their name implies, these investors are measured relative to the crowd. One wrong step and they may look different. Looking different in the investment management business can be the kiss of death, even if it’s on the upside. If a manager outperforms too much, he or she must have done something too risky or too unconventional. For some relative return investors being different (tracking error) is considered a greater risk than losing money. Losing client capital is fine as long as it’s slightly less than your peers and benchmarks. From what I’ve gathered over the years, to raise a lot of assets under management (AUM) in the investment management industry, the key is looking a little better, but not too much better, and definitely not a whole lot worse.

How did we get here? Since my start in the industry, relative return investing has gradually taken share from common sense investing strategies such as absolute return investing. How well one plays the relative return game is a major factor in determining how capital is allocated to asset managers. I believe this is partially due to the growing role of the institutional consultant and their desire to put managers in a box (don’t misbehave or surprise us) and turn the subjective process of investing into an objective science. Institutional consultants allocate trillions of dollars and are hired by large clients, such as pension funds, to decide which managers to use for their plans. The consultants’ assets under management and their allocations are huge and have gotten larger over time, increasing the desire by asset managers to be selected. This has increased the influence consultants have on managers and how trillions of dollars are invested.

During my career I’ve presented hundreds of times to institutional consultants. While I have a very high stock selection batting average (winners vs. losers), my batting average as it relates to being hired by institutional consultants is probably the lowest in the industry. It isn’t that they don’t understand or like the strategy. In fact after my presentations I’ve had several consultants tell me they either owned the strategy personally or were considering it for purchase. Although they appreciated the process and discipline, they couldn’t hire me because I invested too differently and had too much flexibility and control (for example, no sector weight and cash constraints). In other words, they liked the strategy, but they were concerned that the portfolio’s unique positioning could cause large swings in relative performance and surprise their clients. In conclusion, in the relative return asset allocation world, conformity is preferred over different, as investing differently can carry too much business risk (risk to AUM).

Over the past 18 years the absolute return strategy I manage has generated attractive absolute returns with significantly less risk than the small cap market. Isn’t that what consultants say they want – higher returns with lower risks? Yes, this is what they want, but they want it without looking significantly different than their benchmark. This has never made sense to me. How can managers provide higher returns with less risk (alpha) by doing the same thing as everyone else? Maybe others can, but I cannot. For me, the only way to generate attractive absolute returns over a market cycle is to invest differently.

Investing differently and being a contrarian is easy in theory. When the herd is overpaying for popular stocks avoid them (technology 1999-2000). Conversely, when investors are aggressively selling undervalued stocks buy them (miners 2014-2015). It’s not that complicated, but in the investment management industry, common sense investment philosophies like buy low sell high have been losing share to investment philosophies and processes that increase the chances of getting hired. Instead of asking if an investment will provide adequate absolute returns, a relative return manager may ask, “What would the consultant think or want me to do?” I believe the desire to appease consultants and win their large allocations has been an underappreciated reason for the growth in closet indexing, conformity, and group-think.

In my opinion, the business risk associated with looking different has reduced the number of absolute return managers and contrarians. And some of the remaining contrarians don’t look so contrarian. For example, look at the four-star Fidelity Contra Fund. According to Fidelity this “contra” fund invests in securities of companies whose value FMR believes is not fully recognized by the public. Three of its top five holdings are Facebook, Amazon, and Google. I suggest the fund be renamed to the “What’s Working Fund”. With $105 billion in assets under management, one thing that is working is the sales department! Wow, that’s impressive. What would AUM be if the fund actually invested in a contrarian manner? My guess is it would be a lot lower, especially at this stage of the market cycle when owning the most popular stocks is very rewarding for performance and AUM.

I’m not just picking on Fidelity. The relative return gang is in this together. After the last cycle we learned most active funds underperformed on the downside. Given the valuations of some of the buy-side favorites currently, I suspect they’ll have difficulty protecting capital again this cycle once it undoubtedly concludes. This could be the nail in the coffin for active management. If the industry is unwilling to invest differently and they don’t protect capital on the downside, why not invest passively and pay a lower fee?

In my opinion, given the broadness of this cycle’s overvaluation, the most obvious and most difficult contrarian position today is not taking a position, or holding cash. In an environment with consistently rising stock prices and the business risk associated with holding cash, I don’t believe many managers are willing to be patient. That’s unfortunate because I’ve found the asset that is often the most difficult to own is often the right one to own. The most recent example of this is the precious metal miners.

After the precious metal miners crashed in 2013, I became interested in the sector and began building a position. Besides a couple positions I purchased during the crash of 2008-2009, I had never owned precious metal miners before. They were usually too expensive as they sold well above replacement value (how I value commodity companies). Miners are a good example of how quickly overvalued can turn into undervalued. In addition to selling at discounts to replacement cost, I focused on miners with better balance sheets to ensure they’d survive the trough of the cycle.

After the miners crashed in 2013, they eventually crashed again in 2014 and became even more attractively priced. I held firm and in some cases bought more in attempt to maintain the position sizes. After adding to the positions in 2014, they crashed again in 2015 and early 2016. I again bought to maintain position sizes. I’ve never seen a group of stocks so hated. Many were down 90% from their highs – similar to declines seen in stocks during the Great Depression. The media hated the miners with article after article bashing them and calling their end product “barbaric”. I haven’t seen many of those articles recently. The bear market in the miners ended in January. Today they’re the best performing sector in 2016, as many have doubled and tripled off their lows.

Owning the miners is a good example of how difficult it can be to be a contrarian. While clearly undervalued based on the replacement cost of their assets, there didn’t appear to be many value managers taking advantage of these opportunities. I thought, “Isn’t investing in the miners now the definition of value investing? Where did everyone go?” It was extremely lonely. Some investors argued they weren’t good businesses as they were capital intensive and never generated free cash flow. Obviously they’re volatile businesses, but after doing the analysis I discovered that good mines can generate considerable free cash flow over a cycle. Pan American Silver (PAAS) did just that during the cycle before the bust. As a result of past free cash flow generation, Pan American entered the mining recession with an outstanding balance sheet. New Gold (NGD) is another miner with a tremendous asset in its low-cost New Afton mine, which also generates considerable free cash flow. I also owned Alamos Gold (AGI). Alamos had a new billion dollar mine, Young Davidson, which was paid for free and clear net of cash and was expected to generate free cash flow. Alamos was an extraordinary value near its lows and was the strategy’s largest position in 2016.

Assuming a mining company had developed mines in production, generated cash, and had a strong balance sheet, I believed while the trough would be painful, these companies would survive and prosper once the cycle turned. They weren’t all bad businesses when viewed over a cycle, as all cyclical businesses should be viewed. Furthermore, many had very attractive assets that would take years if not decades to replicate. In the end, survive and thrive is exactly what happened for many of the miners this year. I sold several of the miners as they appreciated and eventually traded above my calculated valuations. The remainder were liquidated when capital was returned to clients.  It was a heck of a ride and was one of the most grueling and difficult positions I’ve ever taken. But it was worth it.

The reason I bring up the miners is not to boast, but to illustrate how difficult it is to buy and maintain a contrarian position in today’s relative return world. I believe it helps in understanding why so few practice contrarian investing, or for that matter, disciplined value and absolute return investing. During the two and a half years of pain (late 2013-early 2016), equity performance in the strategy I manage suffered. I initially incurred losses and was getting a lot of questions — I had to defend the position. Relative performance between 2012-2014 was poor (high cash levels also contributed to this). During this time, the strategy lost considerable assets under management. People were beginning to believe I lost my marbles. Whether or not I was going crazy is still up for debate, but one thing was certain, holding a large position in out-of-favor miners wasn’t encouraging flows into the strategy. While the miners were eventually good investments, in my opinion, they were not good for business.

As value investors we often talk about being fearful when others are greedy and greedy when others are fearful. However, in practice it’s extraordinarily difficult. In addition to the pain one must endure personally from investing differently, a portfolio manager also takes considerable career and business risk. Given how the investment and consultant industry picks and rewards managers, it can be easier and more profitable to label yourself as a contrarian or value investor, but avoid investing like a contrarian or value investor. Instead simply own stocks that are working and are large weights in benchmarks – the feel good stocks. I’ve always said I know exactly what stocks to buy to immediately improve near-term performance. Playing along is easy. Investing differently is not.

Investing to fit in with the crowd may feel good and it may be good for business in the near-term, but fads are cyclical and often end in embarrassment (google parachute pants and click on images). Participants in fads and manias often walk away asking “What was I thinking?”. But for now owning what’s working is working, so let the good times roll. I’ll stick with a more difficult position. Just like I did with the miners, until it pays off, I plan to stay committed to my new most painful contrarian position – 100% patience.   —

Boy does the above post ring true. 

HAVE A GREAT WEEKEND AND STAY COOL ON THE US EAST COAST.

Sit-on-Your-Ass Portfolio

art

Position and returns Guess

Position and returns

USE high Price As of 8/5/2016
Date Bot Symbol Company Shares Price Purchased Cost Current Price Mkt. Val. CAGR
Q2 2012 XX XXXXX 580,000 $30.00 $17,400,000 $125.00 $72,500,000 42.90%
Q1 2013 XX XXXXX 1,260,000 $14.00 $17,640,000 $37.20 $46,872,000 27.70%
Q4 2011 XX XXXXX 400,000 $45.00 $18,000,000 $107.00 $42,800,000 19.00%
Q4 2011 XX XXXXX 225,000 $85.00 $19,125,000 $167.00 $37,575,000 14.50%
Q4 2011 XX XXXXX 32,285 $400.00 $12,914,000 $924.00 $29,831,340 18.30%
Q4 2011 XX XXXXX 1,200,000 $6.00 $7,200,000 $21.00 $25,200,000 33.00%
Q4 2011 XX XXXXX 25,828 $300.00 $7,748,400 $804.00 $20,765,712 21.80%
Q2 2014 XX XXXXX 25,898 $590.00 $15,279,820 $781.00 $20,226,338 15.00%
Q3 2015 XX XXXXX 400,000 $34.50 $13,800,000 $38.10 $15,240,000 10.00%
Q4 2011 XX XXXXX 100,000 $75.00 $7,500,000 $145.00 $14,500,000 14.10%
Q2 2016 XX XXXXX 20,000 $725.00 $14,500,000 $768.00 $15,360,000 6.00%
Q1 2013 XX XXXXX 250,000 $30.00 $7,500,000 $55.00 $13,750,000 19.00%
Q1 2012 XX XXXXX 100,000 $44.00 $4,400,000 $95.50 $9,550,000 18.80%
Q4 2011 XX XXXXX 80,000 $54.00 $4,320,000 $114.00 $9,120,000 16.15%
Q1 2012 XX XXXXX 500,000 $7.70 $3,850,000 $9.25 $4,625,000 3.50%
Q2 2016 XX XXXXX 50,000 $47.00 $2,350,000 $46.50 $2,325,000 -1.00%
 Avg holding 4 years Totals $173,527,220 five years —-              380,240,390 17.00%
SPY 125 218 11.77%

Do Investors Overreact?

DremanLufkin2000 Do Investors Overreact

Institutions Increase Sentiment

PERSPECTIVE

Aug 5 2016 Gold bull analog

Aug 5 2016 HUI Bull analog Aug 2016

Aug 5 2016 Jr Gold bull analogs

I made my money sitting tight–got that? Jesse Livermore

MGI Debt and not much deleveragingFullreportFebruary2015 (2) A Must Read.

Have a Great Weekend.

Special Situation Quiz Question; An Overcrowded Trade

collection

 Rags make paper,
Paper makes money,
Money makes banks,
Banks make loans,
Loans make poverty,
Poverty makes rags.
-Anonymous

Interview at Special Situations Hedge Fund

You have been working so hard to have an interview with Buffo and Greensplat Special Situations Hedge Fund and now you are in their offices.   The interviewer sits down and then asks, “Can you please tell me what you think was the greatest special situations trade/investment of the past thirty years and what was the catalyst for the trade?”  Hint: This made huge multiples on the original capital.  Few recognized the opportunity until too late.

An overcrowded trade in the search for yield. http://truecontrarian-sjk.blogspot.com/

Tuesday, August 2, 2016

THE FIRST AND THIRD SHALL BE FIRST, WHILE THE SECOND SHALL BE LAST (August 1, 2016): There is a fascinating pattern to the trading during the first seven months of 2016. The strongest sectors by far have exclusively been silver and gold mining shares, in that order, followed primarily by other commodity producers and mining-related emerging-market equities. The second-biggest percentage winners have mostly been high-dividend, low-volatility assets including consumer staples, utilities, REITs, tobacco shares, telecommunications companies, and long-dated U.S. Treasuries. The third-best performers of 2016 have been mostly energy companies and a variety of emerging-market stocks and bonds.
This is puzzling is because the first and third groups are inflation-loving assets, whereas the second group performs well when deflation reigns. How can the financial markets be both inflationary and deflationary?
The deflation trade is nearly over, but it has remained in a bull market due to huge inflows from investors desperate for yield.
High-dividend and low-volatility assets including FXG and XLP (consumer staples), IYR and RWR (REITs), XLU, IDU, FXU, and VPU (utilities), along with TLT and ZROZ (long-dated U.S. Treasuries) have been among the second-best performers of 2016. They have also been among the top winners of the past five years. Many of those who have retired or who need to pay their monthly expenses have become overly dependent upon income-producing investments to generate yield. That’s fine as long as high-dividend assets are either bargains or reasonably priced, but it creates a dangerous situation when they are trading at all-time highs even compared with previous historic peaks. There have been all-time record inflows into high-dividend and low-volatility funds which have far outpaced their previous records. A person who has retired with a half million or a million dollars might perceive that he or she “needs income” in order to maintain a basic lifestyle, and most of these investors don’t realize that if everyone goes to their financial advisors and wants the same level of “safe” income then they are all going to end up owning the exact same assets. What would be reasonable for a tiny minority of investors has become an inevitable catastrophe since millions of others are acting similarly without realizing the consequences of collectively being in such an overcrowded trade.
The inflation trade has only been in a bull market since January 20, 2016, and has a long way to go to recover its losses since April 2011.
Unlike most high-dividend assets which had bottomed in the first quarter of 2009, most commodity producers and emerging markets had been in severe downtrends from April 2011 through January 20, 2016, and even after their subsequent strong rebounds remain far below their previous peaks. Earlier this year, many of these assets completed multi-decade nadirs, with some of them touching levels not seen since the 1970s. Therefore, they remain substantially below fair value. Silver and gold mining shares including GDXJ, SIL, GLDX, SILJ, and GDX have tripled on average in just over a half year, and have thereby outpaced nearly all energy producers which had initially rallied but have gone out of favor along with most emerging-market equities during the past several weeks. This has created the best bargains for those assets which are in the process of completing important higher lows including URA (uranium), GXG (Colombia), FCG (natural gas), and FENY, a more diversified and less volatile fund of energy producers.
The Daily Sentiment Index for crude oil, indicating the percentage of traders who are bullish toward any asset, plummeted to 10% at the close on Monday, August 1, 2016. This is an incredibly low level for anything which is in a primary bull market, as energy commodities have been since February 11, 2016. The shares of energy producers mostly approached or reached multi-decade bottoms on January 20, 2016. Whenever it is possible to buy at higher lows during a major uptrend, this is ideal because a sequence of several higher lows is often followed by an accelerated rally.
The high-dividend and low-volatility bull markets are very stale and incredibly popular, while few know about the uptrends for commodity producers or emerging markets.
Almost everyone knows that high-dividend shares have been the biggest winners of the past several years and are still eager to jump aboard the bandwagon, while few realize how overcrowded this bandwagon has become. Historically, the most wildly trendy and popular trades have always proven to be disappointing. Although it is rarely compared with the internet bubble of 1999-2000, the Nifty Fifty overvaluation of 1972-1973, or the blue-chip top of 1929, high-dividend and low-volatility names have become the bubble of the decade. The total assets in USMV, a frequently-touted low-volatility fund, have tripled in one year. Just as in 2000, almost no one who has invested in these securities realizes that they can lose half or more of their money. Almost no analysts, even those who know how overvalued these popular securities have become, can emotionally imagine them plummeting. They might know intellectually that it is possible, but they can’t really imagine it happening any more than anyone at the beginning of the century could envision the Nasdaq plunging by more than 75% within three years. Alas, a similar fate awaits those who are participating in high-dividend and low-volatility shares and funds.
Just because you’re in the water to get exercise doesn’t mean you can ignore the great white sharks.
When I point out the dangerous of owning high-dividend and low-volatility shares, I often hear the refrain that “I’m not in these due to their extreme popularity” or “I only own these to generate the income I need to pay my expenses.” The market won’t treat you differently just because your motivations are allegedly pure. You might be the nicest person on your block, you might generously donate to charities, and you might frequently help old ladies to cross busy streets. Even if you’re swimming in the water just to get your daily exercise, you’re not magically exempt from being eaten by hungry great white sharks that are lurking nearby. If any given trade has become desperately overcrowded, then no matter why you’re involved in it, you’re going to be as badly hurt as the ignorant buyer who is doing it to keep up with his poorly-informed friends. As Warren Buffett has stated, when we strip off the clothing and pretense, we’re all fully exposed underneath. When the U.S. housing bubble collapsed in 2006-2011, as it about to do again in 2016-2021, it won’t spare those who are nice to animals or who do good deeds. I will discuss real estate in more detail in the near future.

Seeking an Investment Manager! Lesson on Cost of Capital (VRX)

unfriending

I am bombarded with these types of emails everyday, but I notice the increasing sophistication in these “fishing” missives. I post it as is.

Hi Dear.
Good day to you and your family, i want to use this moment to communicate you privately, I apologize if the contents of this letter are contrary to your moral ethics, I am really happy sending you this letter to know some one like you in my life. Let start from here to know ourselves and see what the future will hold to each other. I am Eleev Belaid a Tunisian by nationality, 26 year old single female and never married before, a first year university student and studying medicine.

My Father, Mr M. C. Belaid worked with the Arabian Gulf Oil and Gas Company as top senior officer in Tripoli Libya and also was purchasing a large quantities of metric tons of raw organic Cotton. He was into exportation of cottons from Burkina Faso Agro-business product company before his sudden death as he was killed by the rebels (al-Qaeda terrorists) on 20th October 2011 during the civil war in Libya. They attacked our house one early morning killing my Mother and my Father. I was not a victim of death because i was not living with my parent but was at the school Dormitory when the incident took place, after i have confirmed the death of my parent, i traveled back to Tunisia (my country) where my Father had his Siblings and investments/properties, my wicked uncle who had been controlling my late Father’s investments/properties whom i met in person said that i have no right according to tradition and custom of the land to inherit my late Father’s investments because i am a female and my Mother didn’t have a male child for my Father since i am the only child for my parent. My attempt to go into argument with him he threaten to killed me which made me to ran away for my dear life.

Firstly, I don’t have another option than to let you know about this so that you can help me out, but before the war got out of hand in Libya, my late Father moved all his funds into one of the European Banks. The amount that was moved to European bank was a total of $5,800,000 Million USD. I had applied to bank for the release of the funds to me, so that I could start a new business, but the bank Directors told me that my late Father left a “Note”(WILL) in the form of conditions, that the bank Must Not release the funds to me until I have an experienced of investing the funds into a very good business venture, and the “Will” also stated that I should present an experienced business partner/manager before the bank, who would assist me in investing wisely.

This then brought me to the issue of searching for a reputable and trustworthy person who would be my investment manager over the transaction with the European Bank and who has vast experiences in profitable businesses, where to invest the funds into. I want you to tell me more about good investments in your country, so that I will move this fund into your account in your country so that I can relocate my investment plan to your country. Tell me more about your country. How good it will be to invest in your country. I will appreciate whatever result you may brief me. Do let me know your idea and knowledge regarding these or any other profitable investment you may suggest. After the whole deal and the fund is released, You will be rewarded with 30% of the total amount for your participation and also any future investment profit you are entitle of 10% as your benefit.

Please, am seeking your humble assistance to uptake and accept the below responsibilities:
1. To stand as my Foreign Partner over the transaction.
2. You are to provide any account for the transaction (either empty account or existing account.)
3. After the transaction process, you recommend a nice university where to complete my studies.

Honestly, my days are not good since i came over here in Ouagadougou, Burkina Faso in this prison called refugee camp. We are only allowed to go out on Mondays and Fridays of the weeks. It s just like one staying in the prison and i hope by God’s grace and with your future assistance i will come out here soon.

Reply soonest to proceed.
Yours Truly
Miss Eleev Belaid

What bonds are saying about Valeant http://seekingalpha.com/article/3994126-bond-market-saying-valeant

Summary

Valeant’s bonds are trading at non-distressed levels, and have done so throughout the past year while the stock has sold off ~90%.

The bonds are currently trading at the same level that they were before the March earnings report, while the stock has sold off by almost 70% since then.

The bond market does not believe the negative message that the stock market has been sending about Valeant.

The B3/B- rating of Valeant’s bonds implies a 27% chance of bankruptcy over 10 years. I show that the share price ~$23 is pricing in a 67% chance of bankruptcy.

This is done using a comparison with peers based on EV/revenue, which shows that Valeant’s shares should be trading at ~$70 in normal circumstances.

One way to determine the cost of capital would be the rate of interest needed for a banker to loan all the firm’s capital. See Chapter 8: Cost-of-Equity-Capital Credit Model in Security Valuation and Risk Analysis by Hackel