Category Archives: Risk Management

MAJOR ANALYST EXAM: Reading a Proxy then Assessing Management and Directors

KO IMGAGE

KO ten

You always read the proxies and the notes to the financials. Today you read Coke 2014 Proxy.   

What is your assessment of management and the Board of Directors? What do you notice? Please justify your reply.

If you are struggling, then here is a hint:

You react: https://youtu.be/_YQR36fQ_Xc?t=43s  Why?

Another hint: KO_VL Jan 2015 for context.

Take a few days if necessary.   This is a critical case study that should be taught at every business school!

Is Gold a Pet Rock; Hedge Fund Analyst Quiz

Gold is money

Is Gold a Pet Rock? http://www.fiendbear.com/Curmudgeon226.htm

Hedge Fund Analyst Quiz

Your boss drops the earnings announcement from Skyworks (SKWS) on your desk.   He asks if he should buy the dip?

big

You spend five minutes on the 8-K: SEC-SWKS-4127-16-57

What hits you like a frozen flounder across the face?  Red lights should be flashing and sirens blaring.   You tell your boss……………………….

Anyone NOT figuring this out needs to read: Earning Quality

or face this:

Socialism at work: http://www.bloomberg.com/features/2016-venezuela-diary/  A frantic search for food in Venezuela.   I am offering $5,000 to anyone who can explain how Socialism improves the lives of ALL citizens over the long-term? Can Socialism ever NOT collapse into death and despair?

HAVE A GOOD WEEKEND!

Pinpoint Bottom in Drybulk Shipping Stocks!

shipwreckThe result for investors in shipping stocks–sinking more than 50% in 2015 alone or 95%+ since 2011.

BDI_blog_120716

A correlation between the Baltic Dry Index for Shipping with the Goldman Commodity Index. So, here’s an idea: Rather than piling onto the bearish bandwagon, when the real price of an indispensable service or commodity drops to a multi-decade low it might make more sense to be bullish. Read more Shipping rates will never go to zero

tsx perspective

Shame on you if you thought I or anyone could predict the bottom of any shipping cycle.  That impossibility allows reward for the investor who can use time arbitrage. You can use a longer time-frame (three-to-five years) than 99.999999% of all investors.  You can listen to an excellent shipping conference here: Marine Money NY Conference.  The whole conference is worth listening to so you develop an understanding the industry.  See 910 Adam Kent – From the Weeds to the Trees and 855 Jeff Pribor Marine Money Presentation and 250 Panel – Untitled, Uncut and 910 Adam Kent – From the Weeds to the Trees and Falling Knife or Bargain 855 and Jeff Pribor Marine Money Presentation.

At that conference, analyst Andrew Horrocks said that institutional investors all say to him, “Yes, Andrew we have the same data as you–assets are at generational lows and supply looks to be diminishing, but call us in 2017 or ‘just before the cycle turns!’ See chart below of drybulk shippers.

shippers

Read his handout Andrew Horrocks on the shipping market and go to page six, then listen to Horrocks Talk to Investors. At minute 11 he points out the good news for drybulk shipping. Supply is waning. There is high scrapping rates, low crude prices, and ordering of new ships is practically nil.  Mr. Horrocks says to never underestimate the dimension of time in investing. Even though public institutional investors see the same data, they can’t afford a longer-term investment horizon than six-to-twelve months.  Therein lies our opportunity.

See more on time arbitrage: http://basehitinvesting.com/the-market-value-fluctuations-of-the-10-largest-companies/

The reason prices for drybulk ships are at 35-year lows is because of simultaneous over-supply met with falling demand from a weaker global economy. Prices adjusted rapidly. Smart ship owners who have been through several cycles are snapping up second-hand ships for cents on the dollar using cash and then expecting to wait three or more years for the cycle to turn.   But for investors in shipping companies, we face the dangers of high debt loads and future dilution. The shipping companies that survive will go up 5, 10 even 30 times or go to ZERO ($0.00). The opportunity/dilemma.

Mr. Bugbee, the president of Scorpio Bulkers (SALT) whose company has diluted shareholders several times to survive, points out that the key is to survive to the other side of the cycle. Go to minute  11 and 24 https://www.marinemoney.com/sites/marinemoney.com/files/325%20Panel%20-%20Dry%20Cargo%20Discussion.mp3 Massive Opportunity or Bankruptcy? Bugbee discusses the opportunities and dangers as Mr. Bugbee talks about survival in this cycle.

He says, ” I have NEVER seen a market that is so EXCITING in the long-term but that is so TERRIFYING in the short-term. Capital is HARD TO COME BY. there is no cash flow in the the market. We hope the market stays ugly for another eighteen months to allow for scrapping rates to clear up the supply, but we should be careful what you wish for. The KEY is to get your company to the OTHER SIDE of this cycle.   Meanwhile investures face DAILY or WEEKLY performance pressures.

And finally, always remember:


HAVE A GREAT WEEKEND!

P.S. Check out Fund Seeder

 

 

Time to Sell Some Miners, But Not Much

Junior Miners

There is no training, classroom or otherwise, that can prepare for trading the last third of a move, whether it’s the end of a bull market or the end of a bear market. Paul Tudor Jones

I am selling about 1/5 to 1/6 of my speculative miners like Minco Silver. It was trading back in Jan. 2016 at about 30 cents.

Minco one yr

This miner didn’t fit all my criteria like jurisdiction and top-flight management, but it had $1 per share in cash and short-term investments and $2.00 per share (basic shares outstanding) in book value with no debt.  I viewed the stock as a cheap call option.  My position was not a full position but diversified in these type of exploration/pre-development type of companies.

MSV_2015YE_FS  Minco Financials

Minco Presentation

This bull market is starting to smell like the 1970 rally!

Bear-market-comparison-Gold-768x685

So, I expect this bull market to last perhaps years or for miners to multiply several times over.  You make your money SITTING.  But when you start feeling smart or, worse, other people think you are smart (where were you in 2015 when my accounts were down 35% to 40%?), it is time to peel some positions off.   Sell into strength. Note the past history of the miners.

bgmi

I wanna go back to the 70’s.

An educational video on the Federal Reserve or why you should own some gold

Have a Great Weekend!

Op. Leverage; Geico and Berkshire Case Study; In Gold We Trust; Overconfidence

ego

Mauboussin on Operating Leverage is a review on margins and operating leverage.  I recommend reading pages 19 to 21 in addition to my prior post: ROIC and more

Berkshire CS_wedgewood partners 1st quarter 2016 client letter

geico case study and presentation 2016

Incrementum-signal-768x439

Do not focus on forecasts but learn from history and economics about gold: In_Gold_we_Trust_2016-Extended_Version

In_Gold_we_Trust_2015-Extended_Version (Referenced in 2016 Ed. Why miners struggled to gain investor respect.)

Avoid Overconfidence

A lesson in trading

A lesson in valuation

It is never different this time

Happy Fourth of July Holiday.  

I will answer the option questions upon return.

Time for Review: Behavioral Portfolio Managment

book cover

Video on Behavioral Portfolio Management

Emotional crowds dominate market volatility (nothing new here). Emotions trump arbitrage.  If you learn anything from this post may it be that you concentrate on your best ideas and do not overdiversify beyond ten or twelve stocks.  Also, understand randomness. Teams hurt performance. Avoid closet- indexers.

See slide 6 for a summary: 10495_Howard Presentation Slides

Behavioral Portfolio Management A research paper

T Howard CFA Behav PM   Short article

And here is a secret not to be shared with others: If you are going to have a behavioral edge, then don’t do what the mass of investors are doing–invest with a at least a five-year time horizon so you can give mean regression to work if you buy non-franchise companies (assets like cyclcial mining, manufacturing, etc.) or allow your franchise companies time to compound because of a slow mean reversion.

nyse-ftse-stock-holding-period

global-stock-holding-periods

But holding stock five years or more is SCARY because of the VOLATILITY.  Not so:

cotd-returns

The enemy

Don’t Believe the Hype

“First, never buy a bank at twice its book value, Number two, don’t trust any bank with a superior earnings record, Number three, you are buying a pig in a poke because the assets are inherenetly unanalysable… ”  “Then there are the contra rules, ” He went on, “such as the inability to earn exponential rates of return except through recklesness or fruad.” Also,” said Tisch…”a really smart person says to himself at a certain point that your pricing is set by the stupidest person in the market,” It is the marginal lender who makes the marginal loan at a bargain-basement rate, and it is impossible to compete with that optimist.

James Grant “Banking with Tisch” (October 6, 1986)

Theranos misled me

And that brings us to the lunatic valuation of the FANGs (Facebook, Amazon, Netflix and Google), which was also on display again this week. To wit, 100X+ PE multiples are always and everywhere a deformed artifact of central bank driven Bubble Finance, not the emission of an honest capital market.

The fact is, the greatest technology-based businesses of modern times accomplished its dramatic growth spurt in just over 20 quarters between 2011 and 2015. That was after the i-Phone incepted and the i-Pad worked up a serious head of steam.

Now Apple is pancaking or worse, and it is hard to believe that gimmick products like Apple Watch or Oculus can fill the hole from the fast fading i-Pad and the stalling i-Phone. No harm done, of course, and its entirely possible the APPL will have another modest growth run.

But here’s the thing. Apple essentially proves you can’t capitalize anything at 100X except in extremely rare cases because of the terminal growth rate barrier. That is, after a few years of red hot growth almost every large company’s organic growth rate bends toward the single digit path of GDP.

Fangs and Monetary Fools

 

oil historical

I’m wondering if people may take the wrong message from this chart.  Here’s my read:

The high prices in the beginning were due to oil being a very desirable but very scare resource.  Drilling only began in 1859 and the technology was primitive and inefficient.

Then entered J.D.Rockefeller, who brought major efficiencies to the industry and increased refining capacity to the point where it was in excess of that needed for kerosene (used in lamps), and so the price plummeted.  There was another brief spike in price as Rockefeller gained what amounted to monopoly control of the industry in the late 1870s, and new applications for oil were found.

Thereafter, the price plunged due to improved efficiency and competition from other areas and abroad.  Oil traded in a fairly broad but well-defined range for the next 60 years, depending on prevailing business conditions.  The wide swings in prices during this period suggest that there is a positive feedback mechanism involved in the prices.  Low prices make energy less expensive, which promotes increased economic activity, which increases demand, which causes higher prices, which quenches economic activity, which reduces demand, which reduces prices…

After WWII, with the discovery of the huge Arabian oil fields (as well as others) and the emergence of the US as the guarantor of stable world prices, there emerged a period of remarkable price stability from roughly the end of WWII onwards.  Stability resulted from increases in demand being met with increases in supply at current prices, coupled with the price stability resulting from the Bretton Woods monetary system.

The next significant break came with the “Arab Oil Embargo(s)” of the 1970s.  While there was an obvious political context here, the other part of the equation was that US production was peaking.  There was a short respite once political conditions improved, but the underlying dynamic was that some of the important producers, the US in particular, were unable to keep up with local demand.

This situation became global in the early years of the 21st century, as demand in emerging economies ramped-up, while at the same time production from important established fields was in decline.  New fields were found, but were typically much more expensive to exploit than the earlier fields.  Since that time, the supply/demand dynamic has been at play, with price increases driven by increased cost and limited supply, and price declines being driven by poor economic conditions caused by the heretofore high prices.  The feedback cycle outlined above is in full play, this time with prices being in a generally upward trend due to generally scarce supply at lower price levels.

My reason for pointing this out is that I’m not sure that identifying $47 as an average price is very meaningful.  The bottom line is that demand for oil will be robust whenever prices allow for it, while supply at any given level will become scarcer as the “low-hanging fruit” is picked clean.  My contention is that major price volatility with a generally upward trend is what we have to look forward to.  This will continue until something happens to fundamentally change either the positive feedback mechanism or the fundamental long-term supply/demand relationship.  So the $47 average price may be of historical interest, but may be of limited applicability going forward. (from an anonymous commentor).

 

Stockman is too optimistic

Analyzing Banks and Liquidity; Precious Metals and 2016

Surgery

Katalepsis and liquidity  Understand what drives banking soundness and liquidity.

MM on Gold A different perspective

macrocosm

Where we are and What WILL Happen INEVITABLY

austrian_business_cycle_theory

Short summary of ABCT

Dan Oliver of Myrmikan Capital (Video must watch!)

So as EBITDA for companies begins to flatten out and/or decline while corporate interest burdens rise as high yields rise, then the cash to service debt declines. The capital investments made while interest rates were low draw on capital that is NOT there since credit is not based on real savings. Mal-investment shown in massive overcapacity and declining demand (consumer demand was never at the appropriate level due to central bank intervention and distortion of interest rates) in commodities causes equity holders to be wiped out and banks to teeter.  The Fed will respond reflexively as it has over the past 101 years.

More here: Liftoff_Myrmikan Capital Dec 17 2015 

Unambiguously Good_Myrmikan Jan 22 206

Gold senses the danger as it rises relative to commodities (commodities are sold to raise money).  Gold is not rising (yet) in terms of dollars because fiat dollars are in an epic short squeeze–there are only $4 trillion of base money with which to service $90 trillion of debt–tightened by recent Fed action.  When defaults occur and/or the Fed creates the dollars to try to stop the collapse of banks and borrowers, gold will rise against the dollar.  This has been the pattern over the past 4,000 years.

The ancient Greeks discovered that debt could magnify wealth. The debtor feels richer from the use of the borrowed property, while the lender feels richer from the compounding interest yielded by his claim. Both indulge in consumption more freely. As long as the accumulating claims remain contingent, the bubble grows. But, eventually, someone asks to be paid, and the expanding claims on wealth must be reconciled to tangible wealth, much of which has been consumed.

The first recorded credit bubble popped in 594 B.C. Athens. Threatened with a civil war of creditor versus debtor, the Athenian ruler Solon pulled down the mortgage stones to free the debtors and devalued the drachma by 27% to relieve the bankers. Every credit collapse since – from the Panic of A.D. 33 to John Law’s Mississippi Bubble to the Great Depression and many others besides – has followed Solon’s template of debt default and currency devaluation.

“The natural remedies, if the credit-sickness be far advanced, will always include a redistribution of wealth: the further it is postponed, the more violent it will be. Every collapse of a credit expansion is a bankruptcy, and the magnitude of the bankruptcy will be proportionate to the magnitude of the debt debauch. In bankruptcies, creditors must suffer.” – Freeman Tilden, 1936

And against what is currency and debt devalued? Carl Menger, founder of the Austrian School of economics, was the first to explain that money is liquidity and that gold is the most liquid asset. Thus, gold has served as the reference point of value since the origins of money and is that against which currency must be devalued to relieve debts. Paper promises depreciate.

“The faith is lost. All with one impulse people rush to seize the gold itself as the only reality left—not only people as individuals; banks, also, and the great banking systems and governments do it, in competition with people. This is the financial crisis.”
– Garet Garrett, 1932   

Source: http://www.myrmikan.com/port/

GYX_gold_140116

The sequence repeats: a boom based on ponzi finance (fractional reserve banking, fiat currency, etc.) causing a distortion in the production structure, and then bringing on the inevitable bust.

Structure of production

Does anyone see ANY OTHER outcome besides either a credit or currency collapse?   Reward!

Revaluation: Gold Revaluation

How tough it is to pick stocks

P.S.: I will be sending out value vault keys soon.   I usually wait for a que to develop. Thanks for your patience.

When’s the Crash?

Dow and Q

spy

The cyclicality of markets and risk

I have been sour on a majority of the general “market” since the end of 2013 as anyone following this blog would know, but that doesn’t mean ALL stocks are overvalued, but just that risk in general may be mispriced.   The Q represents for me an arbitrage between buying the asset or selling stock.  I don’t know if a big bear market is coming (no one does) but 20% to 40% declines shouldn’t be surprising when prices are bid up on easy credit (ZIRP and BURP).

Q is high

A Ticking Time Bomb

Certain pundits say a market can be “overvalued for years” but risks rise as market “internals” such as credit spreads widen. Bubble and Bust

Distortions and Time Preference

Note how commodities gain on gold during the boom and decline during the bust phase of the cycle. Proof of gold as money and how extremely distorted cycles have become Boom and Bust Indicator

GYX_gold_140116

Have a Good Weekend!

PS: Good example of fracking economics: Oil Markets PZENA