Increasing debt for equity swap
Sentiment bullish and prices high relative to the past.
Finding good capital allocators
Strategic Presentation May 2017b What would show you that this management team allocates capital well in their resource sector? Are their actions EXTREMELY rare in the Junior Resource Mining industry?
The Perils of Using Sentiment As a Timing Tool
In a blog post in March of this year I discussed the limitations of sentiment as a market timing tool. I wrote that while it can be helpful to track the public’s sentiment and use it as a contrary indicator, there are three potential pitfalls associated with using sentiment to guide buying/selling decisions. Here are the pitfalls again:
The first is linked to the reality that sentiment generally follows price, which makes it a near certainty that the overall mood will be at an optimistic extreme near an important price top and a pessimistic extreme near an important price bottom. The problem is that while an important price extreme will always be associated with a sentiment extreme, a sentiment extreme doesn’t necessarily imply an important price extreme.
The second potential pitfall is that what constitutes a sentiment extreme will vary over time, meaning that there are no absolute benchmarks. Of particular relevance, what constitutes dangerous optimism in a bear market will often not be a problem in a bull market and what constitutes extreme fear/pessimism in a bull market will often not signal a good buying opportunity in a bear market.
The third relates to the fact that regardless of what sentiment surveys say, there will always be a lot of bears and a lot of bulls in any financial market. It must be this way otherwise there would be no trading and the market would cease to function. As a consequence, if a survey shows that almost all traders are bullish or that almost all traders are bearish then the survey must be dealing with only a small — and possibly not representative — segment of the overall market.
I went on to write that there was no better example of sentiment’s limitations as a market timing indicator than the US stock market’s performance over the past few years. To illustrate I included a chart from Yardeni.com showing the performance of the S&P500 Index (SPX) over the past 30 years with vertical red lines to indicate the weeks when the Investors Intelligence (II) Bull/Bear ratio was at least 3.0 (a bull/bear ratio of 3 or more suggests extreme optimism within the surveyed group). An updated version of the same chart is displayed below.
The chart shows that while vertical red lines (indicating extreme optimism) coincided with most of the important price tops (the 2000 top being a big exception), there were plenty of times when a vertical red line did not coincide with an important price top. It also shows that optimism was extreme almost continuously from Q4-2013 to mid-2015 and that following a correction the optimistic extreme had returned by late-2016.
Sentiment was at an optimistic extreme late last year, at an optimistic extreme when I presented the earlier version of the following chart in March and is still at an optimistic extreme. In effect, sentiment has been consistent with a bull market top for the bulk of the past four years, but there is still no evidence in the price action that the bull market has ended.
Regardless of what happens from here, four years is a long time for a contrarian to be wrong. See more at http://www.tsi-blog.com
Lesson? Always place data into context and do not rely on any one piece of information. Sentiment can be useful as part of an over-all picture of a market or company.
Here is an example of an investor who applies that principle in his OWN method of investing. https://www.thefelderreport.com/2017/05/31/how-a-funny-mentalist-learned-to-avoid-annihilation/
He gained INSPIRATION from his investing heroes but did not try to mimic them.
This analyst of gold doesn’t just use news and sentiment but also fundamentals: https://monetary-metals.com/the-anatomy-of-browns-gold-bottom-report-4-june-2017/
And finally, consider the slow crash: https://mishtalk.com/2017/06/12/buy-the-faangs-baby-slow-torture/#more-46281
I like to have a reference to refer back to a year or five years from now capturing certain points in time. The market seems to be placing peak confidence in financial assets (stocks) vs. gold.
This post continues from a prior post: http://csinvesting.org/2016/11/17/when-no-one-wants-em-search-strategy/
The Bearish Gold Articles keep on coming: http://www.businessinsider.com/heres-why-you-should-never-buy-and-hold-gold-2016-12
http://bloom.bg/2hWukKn Running out of metal.
Even bullish mining investors expect “waterfall declines” and gold going below $1,100. Momentum creates the news: http://www.kitco.com/news/video/show/Gold–Silver-Outlook-2017/1456/2016-12-22/Mining-Stocks-Could-See-Waterfall-Declines—David-Erfle To be fair, he is long-term bullish, but note the “certainty, inevitability” of gold falling in USD below $1,100 or even to $1,000. Since he is probably considered strong hands (better capitalized with more experience in precious metals miners) his view indicates VERY bearish near-term (1 day to two/three months sentiment). As I interprete this news.
Financial risk is increasing on US company balance sheets, but then who cares while confidence is high?
Luiz Alves Paes de Barros is something of an enigma in Sao Paulo’s financial circles. At 69, he’s known around town as the “anonymous billionaire” for quietly amassing a fortune by wagering on stocks almost no one else seemed to want.
In Magazine Luiza SA, Barros may have made one of his best bets yet.
Starting in late 2015, Barros’s Alaska Investimentos Ltda. made the battered retailer one of its biggest holdings, a brazen move in a nation stuck in the middle of its worst recession in a century. It paid off. Magazine Luiza has surged more than 1,000 percent since reaching a record low about a year ago, making it the top stock in one of the world’s top-performing markets. That turned Alaska’s Black Master, which Barros co-manages with Henrique Bredda and Ney Miyamoto, into the No. 2 fund among 569 peers focused on Brazilian equities, according to data compiled by Bloomberg.
Barros’s latest success only adds to the intrigue surrounding one of Brazil’s most storied, but media-shy, individual investors. Early in his career, he traded commodities and was a partner of star fund manager Luis Stuhlberger at what is now Credit Suisse Hedging-Griffo. Barros then spent the next half century investing only his own cash, almost exclusively in Brazilian stocks, and regulatory filings show he personally holds 1.2 billion reais in equities.
When it comes to managing other people’s money, Barros is a rookie, having co-founded Alaska in July 2015. But his investing method remains the same. He only holds a handful of stocks, favors companies with bottom-of-the-barrel valuations and usually jumps in as everyone else is bailing.
“Perfecting patience is all I’ve done over the past 50 years,” Barros says. “I love when things get bad. When it’s bad, I buy.”
During two interviews, first in Alaska’s shoebox office in the heart of Sao Paulo’s financial district and then at his personal office on the city’s oldest business thoroughfare, the silver-haired asset manager explained what drew him to Magazine Luiza and went over the stocks he likes now: Fibria Celulose SA, Braskem SA, Marcopolo SA and Vale SA.
“The market has forgotten these stocks,” he says.
Alaska started building a stake in petrochemicals maker Braskem about four months ago (the stock has surged 48 percent since mid-August after tumbling 20 percent this year before then) and pulpmaker Fibria a few months later. Barros likes both companies because they’re fundamentally sound — and valuations are low. Braskem’s price-to-earnings ratio is 8.3, less than half the level three years ago. Fibria’s valuation is less than half the average of the past two years.Marcopolo, a maker of trucks and buses, is a play on Brazil’s rebound from recession, while miner Vale will benefit as global investors start seeking value again over safety. There’s no economic expansion in Brazil without infrastructure investments, he says.
“Vale won’t be a disaster for anyone. When iron-ore prices rise again, Vale will fly,” he said.
If those stocks return just a fraction of what Magazine Luiza did, they’d count as stellar investments. In all, Alaska acquired almost 40 percent of Magazine Luiza’s free-floating shares, regulatory filings show. In 2016’s third quarter, Alaska unloaded half its stake. What’s left of Alaska’s holdings in Magazine Luiza is now worth about 111 million reais ($33 million).
Asked how he knew Magazine Luiza would do as well as it did, he says he didn’t. “I just knew it was cheap.” The fact that the retailer of appliances and electronics had a market value of 180 million reais even though a bank had offered to pay 300 million reais for the right to offer extended guarantees on Magazine Luiza products made that clear.
“Either the bank was crazy or there was value there,” Barros says.
Alaska’s Black Master fund has returned 143 percent in 2016, compared with a 33 percent gain for Brazil’s benchmark Ibovespa stock index. The gains were also driven by a stake in Cia. de Saneamento do Parana, the water utility known as Sanepar that’s almost tripled this year.
Alaska is still a relatively small player in Brazil’s 2.38 trillion-real stock market. The asset manager employs 11 people (“That includes the lady who serves the coffee,” Barros says). While Alaska oversees about 1.6 billion reais, three-quarters of that is Barros’s own cash. But the fund is actively seeking new clients.
Why now, after 50 years of going it alone?
“Because I’m positive that the market is going to rise,” he says.
An ode to the end of a con
How long can deception go on?
When prices are set By banks printing debt
All trust in the “markets” is gone!
There is no stand-alone Narrative regarding gold today (June 2013), as there was in 1895. Today gold is understood from a Common Knowledge perspective only as a shadow or reflection of a powerful stand-alone Narrative regarding central banks, particularly the Fed … what I will call the Narrative of Central Banker Omnipotence. Like all effective Narratives it’s simple: central bank policy WILL determine market outcomes. There is no political or fundamental economic issue impacting markets that cannot be addressed by central banks. Not only are central banks the ultimate back-stop for market stability (although that is an entirely separate Narrative), but also they are the immediate arbiters of market outcomes. Whether the market goes up or down depends on whether central bank policy is positive or negative for markets. The Narrative of Central Banker Omnipotence does NOT imply that the market will always go up or that central bank policy will always support the market. It connotes that whatever the central bank policy might be, it will drive a market outcome; whatever the market outcome, it was driven by a central bank policy.
The stronger the Narrative of Central Banker Omnipotence, the more likely it is that the price of gold goes down. The weaker the Narrative – the less established the Common Knowledge that central bank policy determines market outcomes – the more likely it is that the price of gold will go up. In other words, it’s not central bank policy per se that makes the price of gold go up or down, it’s Common Knowledge regarding the ability of central banks to control economic outcomes that makes the price of gold go up or down.
Instead, the focus of the mainstream Narrative effort moved almost entirely towards what open-ended QE signaled for the Fed’s ability and resolve to create a self-sustaining economic recovery in the US. And it won’t surprise you to learn that this Narrative effort was overwhelmingly supportive of the notion that the Fed could and would succeed in this effort, that the Fed’s policies had proven their effectiveness at lifting the stock market and would now prove their effectiveness at repairing the labor market. Huzzah for the Fed!
Negative News Tends to Cluster at MAJOR bottoms:
My Jaw Dropped: Long gold, short US stocks, Short US Dollar
Will the US Dollar Continue its Rampage Higher? 272660136-Raoul-Pal-GMI-July2015-MonthlyRate hikes are “bad” for gold?
Market Sentiment and Money Supply update: http://www.acting-man.com/?p=31559
James Grant’s Investment Approach (Video) June 12, 2014
Editor: Focus on how Mr. Grant approaches investing not necessarily the current object of his affections.
James Grant: “The Fed’s policy will inevitably fail because hyper-aggressive leveraged finance always seems to step in front of a bus.”
“Macro-economic forecasting is not a useful endeavor. It seems a better way is to consider the panoply of risks and then after having pondered them, look for mis-priced and cheap options on likely but uncertain outcomes.”
[Note: Grant’s comments on gold begin at the 7:12 minute mark.]
“Gold is an example to me of an opportunity,” James Grant, editor of Grant’s Interest Rate Observer said in an interview this week. “[It] exhibits so many of the characteristics of a corpse, although it does occasionally toss and turn.”
“Gold stocks certainly look as if they were dead—but nobody even bothers to poke them with a stick.”
Gold is a cheap option on the failure of price control. Observe how the future is handicapped. We now have low levels of volatility and terrific embedded complacency. You will be paid well if the consensus makes a mistake. Invest in the monetary failure of an improvised monetary system run by tenured professors (Yellen).
Investing is when you want people to agree with you not now but in the future.
“Gold and gold mining shares are very, very cheap-and certainly widely detested options on the failure of this massive world-wide experiment, or the demonstration of the hopelessness of the technique of price control.”
HAVE A HAPPY FOURTH!
“Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria.
Sixteen Rules: Sixteen Rules for Investment Success_Templeton
Gold and silver stocks (as well as gold/silver) certainly fit John M. Templeton’s criteria of a hated asset class. The current 2011 to 2014 bear is near the average in duration and price decline. The worst decline in gold stock history was the 1980 bear market with a 72% decline. So, one sign post is the past. (Gold index used: Barrons’ Gold Mining Index or BGMI)
As you would expect, sentiment follows price. Note the huge decline in Rydex precious metals assets compared to all other financial asset sectors of the market–5%. Even the 2008/09 crisis period had triple the percentage. Of course, public opinion is at near all-time lows.
As price quietly stops declining (for now?)
Another sign of bearish Western investor sentiment was the draining of gold from ETFs. Also, there were discounts of up to 8% to 10% in closed end funds such as CEF and GTU that hold gold and silver bullion–an asset with no credit liability! The gold mostly went to Asia. Physical demand is high at these prices. I simply view gold as money that can’t be debased in a world of fiat currency wars. That doesn’t mean the price of gold in US dollars can’t go lower in the near term–three to eighteen months.
Rising demand for physical gold but declining price, video:
All of the above, is one part of a search strategy–look for the biggest price declines with the highest negative (or lowest positive) sentiment. Study the past hundred or so years of the industry (Google: Mark J. Lundeen and gold shares). If you are going to buy precious metals equities or gold/silver 5% to 20% as part of a portfolio, I suggest a high-quality mutual fund like Tocqueville Gold fund (TGLDX) or an ETF like GDX, GDXJ. You are nicked 1% or more in annual fees with a mutual fund but you get the diversification. GDX and GDXJ include companies that may be financially over leveraged or of poorer quality, but you have a lower cost and wide diversification. If gold and silver rise significantly, then highly leveraged–operationally and financially–leveraged companies will vastly outperform higher quality large cap miners like Agnico-Eagle (AEM) for example. I prefer a basket of 15 or so hand-picked gold and silver miners with 1. management with skin in the game, 2. decent balance sheets, and 3. well-defined projects with low cash and capex costs (no explorers unless a prospect generator). My goal is to hold through the beginning of the NEXT bear market–perhaps two-to-five years away?
Finding a hated asset class and then finding financially strong companies is relatively easy with some diligence. The HARD PART is holding on through the wild gyrations of price and sentiment. Stomach and character over brains.
Teaching the Young About Investing
John Del Vecchio and Tom Jacobs, the authors of What’s Behind the Numbers?,
are giving a presentation at the New York Society of Analysts. Attendees will learn:
How companies hide poor earnings quality
Repeatable methods for uncovering what companies don’t tell you about their numbers
Reliable formulas for determining when a stock will get hit
Whether you’re a number cruncher or just curious, you’ll greatly benefit from this seminar, given by two people who combine investment chops with crowd-pleasing stories. So what are you waiting for?
Date: January 13, 2014
Time: 6:30 – 8 pm
Place: NYSSA Conference Center
1540 Broadway, Suite 1010
(entrance on 45th Street)
New York, NY 10036
Price: Nonmember $55
($10 surcharge for walk-ins)
Advance registration is encouraged in order to avoid the additional charge for walk-ins. Also, space is limited by the size of the room.
You may not be able to keep your resolutions about losing weight or going to the gym, but with a successful portfolio, no one will really care. So start the new year right by attending the above seminar.
Thank you for your interest in What’s Behind the Numbers?. Please feel free to share this with your networks!
This won’t end well–Chicago Slim
Only Barron’s semiannual Big Money poll of professional investors also is setting a record — for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks — an all-time high for Big Money, going back more than 20 years. What’s more, about a third of managers expect the Dow Jones industrials to scale the 16,000 level by the middle of next year, notwithstanding a dismal week of selling that left the blue-chip index at 14,547.51 on Friday.
This spring’s survey is notable, as well, for the dearth of bears: A mere 7% of respondents are pessimists today, down from 27% last fall.
A contrasting view:
A few reminders…
“Still Bullish! (Dow 13000)” – Barron’s Magazine Big Money Poll, May 1, 2000
The May 2000 Big Money Poll was published with the Dow Jones Industrial Average at 10733.91. The Dow had already peaked nearly a thousand points higher in January of 2000, and would go on to lose about 40% of its value in the 2000-2002 bear market, with the S&P 500 and Nasdaq faring far worse.
“Dow 14000?” – Barron’s Magazine Big Money Poll, May 2, 2007