"A World Class Value Manager" Finds Current Investments Limited

The Reformed Broker, Joshua Brown, offers Some Anecdotal Stuff from a World Class Value Manager that strikes a chord with my feelings about current investment opportunities. Here’s a key portion of the post:

I ask them why the almost 20% cash position, is there something they're seeing in the macro data or the headlines that their peers (who are much more heavily long) don't necessarily see?

No, they tell me, they don't play that game in terms of trying to read the macro tea leaves or anticipate the political outcomes in the 17-nation Euro Zone.  Rather, they've got a 20% cash pile because as they've sold things, they've not been able to find replacement candidates worth buying given their bottom-up approach.  It's a combination of stocks not being cheap enough around the world to offer the "margin of safety" they live by and earnings growth being non-existent across much of the global landscape.

One pocket of interesting buys is in European multi-nationals that do most of their business outside Europe.  These stocks are being pressured because of the Euro exchanges they are listed on despite the fact that they don't have the perceived exposure to Euro economies that people assume.

My personal cash position has been well above 20% for some time now since the focus of my portfolio is based on a 3-5 year time horizon. At each dip in the market, I’ve picked up a couple new stocks or added shares to positions, only to sell some of those positions as markets rallied back near current levels that remain uninspiring. Multiple expansion has been a primary driver of this year’s US market rally as corporate profits enter a recession. If this trend continues, as I expect, further multiple expansion seems unlikely and the potential for contraction remains well outside most investors’ radar. 

Regarding the pocket of opportunities in Europe, I have also been watching several large multi-nationals come under intense selling pressure as specific country’s markets get sold. While I don’t expect sentiment to change in the near future, investors will likely be rewarded for their patience. Although the “world class value manager” remains a mystery, based on these anecdotes, I definitely wish I had more access to his investment outlook and fund.  

Niels Jensen - "a eurozone exit is not the Armageddon"

From a game theory perspective, the moment one of the 17 eurozone member countries realises it would be better off outside the eurozone, it has everything to gain from being the first mover. We have all been led to believe that a break-up will be devastating for everyone. That is not entirely the case. It could certainly prove disastrous for those left inside a dysfunctional currency union but for the first mover the advantages are numerous and it is only a question of time before someone in Greece, Spain, Portugal or Italy reaches that conclusion.

An exit from the eurozone would create another set of challenges but it wouldn’t necessarily spell the financial Armageddon widely predicted. The media – in particular the British – clearly enjoy the prospects of a bit of drama and do not even attempt to restrain themselves. Neither do politicians when spelling out the consequences of a break-up. Only the other day did Joschka Fisher, Foreign Minister and Vice Chancellor of Germany in Gerhard Schröder’s government between 1998 and 2005, utter the following warning:

“Let’s not delude ourselves. If the euro falls apart, so will the European Union, triggering a global economic crisis on a scale that most people alive today have never experienced.”[1]

The armies of financial analysts and economists employed by banks worldwide (who really should know better) do not exactly paint a rosy picture either. Cascade after cascade of dire predictions about the “end of Europe as we know it” do little for overall confidence. The problem with all these doomsday prophecies is that the history books of currency union break-ups offer little support for all that negativity. In fact, most currency union break-ups have confounded the so-called experts and led not to a collapse of society but to renewed prosperity. The hard facts suggest that this is a hurdle that can indeed be overcome and that those countries that break with the euro would most likely benefit in the long term.

Read it at Credit Writedowns
First Mover Advantage
By Niels Jensen

Jensen’s monthly commentary is another beauty, looking at the actual historical record of currency break-ups. The game theory perspective, which Tyler Cowen also alluded to yesterday, is precisely why I continue to expect at least a partial break-up of the euro. The Greek vote, in two weeks, represents yet another opportunity for a country to express its first mover advantage or, at the very least, threaten to leave in order to gain concessions from Germany. That the politicians and bankers in peripheral nations have been able to prevent this realization for so long is frankly a bit surprising.

As Jensen points out, Germany relies heavily on the rest of the EU to provide an export market. Therefore, as an exit becomes increasingly likely, maintaining free trade and labor mobility within the EU remains critical for supporting economic growth (and peace). Several others have recently backed this view, which you can read here, here and here. Jensen closes on a very positive note:

If structured correctly, a eurozone exit is not the Armageddon it is so often portrayed to be. When the perma bears realise that, and as they begin to see the benefits bestowed upon the first mover, the mother of all equity bull markets will be unleashed in Europe. As I have frequently pointed out in recent months (see for example here), European equities are extraordinarily attractively priced at levels not experienced since the dark days of the early 1980s. We are just waiting for the catalyst, but remember one thing – banks will not be the place to be.

Related posts:
Is Non-Existent Austerity Priced in to Euro Stoxx?
Bring Back the Deutsche Mark!!

Bring Back the Deutsche Mark!!

From the most often observed perspective, the picture is an older woman facing to the left, with a witch-like profile, and wearing a shawl.

Indeed, the vision of the old woman represents Greece.

In terms of the EU crisis, the vision of the old woman represents Greece leaving the EUR and going ‘old-school’, by bringing back the Drachma.

But there is an alternative ‘vision’ to be gleaned from within the picture shown above … that of a young woman, with dark hair and a perky little nose, facing left and away from the front and wearing a choker (which also serves as the thin lips of the old woman).

The young woman represents an alternative ‘vision’.

In terms of the European crisis, the young woman represents an alternative ‘solution’, one that does NOT include reviving the Drachma.

Indeed, if the Drachma were revived … eventually, there would be a similar need to bring the Spanish Peseta and the Portuguese Escudo out of retirement too …

… followed by the Italian Lira, and perhaps even the French Franc.

In such a circumstance …

… ALL of these currencies would be immediately ‘devalued’.

So what if we REVERSED the perspective.

What if we took the OPPOSITE ‘view’ ???

What if we suggest that a better solution than pushing Greece back into the Drachma … would be to let Germany resurrect the Deutsche Mark !!!

Read it at The Big Picture

Macro-EU: The Solution Illusion

By Greg Weldon (via John Mauldin)

Greg Weldon provides an alternative solution for the EU crisis with an expansive array of charts depicting the severity of current economic circumstances. As for trading ideas, Weldon notes:

In the meantime, we remain bearish on European stock indexes, along with the US S+P 500 and German DAX. We continue to focus on the Spanish IBEX, the Euro STOXX-50, the ‘Dutch’ AEX, the UK FTSE, and the Italian MIB.

I’ve been looking to shift my own portfolio in this direction as the markets, as a whole, are currently trading with single-digit CAPEs. Regardless of the outcome in Europe, large multinational companies will continue to sell goods and earn profits. Headline risk and economic deterioration may postpone the recovery, but in 5 to 10 years many may look back on the amazing opportunities they missed.  

Related posts:
Is Non-Existent Austerity Priced in to Euro Stoxx?

Is Non-Existent Austerity Priced in to Euro Stoxx?

Deficit spending in the euro zone has also been rising some, and after the latest rounds of austerity and subsequent deficit increasing weakness may total something close to 7% of GDP.

That should be enough to muddle through as well. Austerity hikes unemployment and deficits to the point where the resulting deficit is sufficient to sustain things. Without another round of austerity there should be some sort of stability of output and employment.

That is, while it’s doubtful the ‘new europe’ will engage in meaningful fiscal expansion, it may not proactively raise taxes and/or cut spending in any meaningful way, either.

Read it at The Center of the Universe
macro update
By Warren Mosler

A Euro zone deficit approaching 7% may not be enough stimulus to induce growth but it doesn’t ring of much austerity either. I agree with Warren that most of the promises for further cuts or tax hikes will likely not be implemented in the near future (politicians are recognizing their political careers don’t succeed for long with those plans).

In The Forthcoming Profit Recession, I looked at Kalecki’s Profit Equation and how “government deficits have been the primary driver during this recovery.” Given the comparable size of US and European deficits, it stands to reason that European corporate profit margins will continue to be supported by large deficits too. Although the economic picture in the US remains better than Europe, it’s not clear the difference is as large as suggested by current stock markets (SPX = S&P 500; SX5E = Euro Stoxx 50):

(Source: Bloomberg)

Despite current deficits, if headline risk pushes the private sector to further retrench than Euro zone growth may turn negative. Headline risk itself may pressure Euro stock prices lower as well. However, as Warren notes:

Yes, there will be all kinds of credit related vol, but under it all there will be sales and profits taking place. The businesses that are still around are the survivors who know how to get by in this kind of economy, where, while slower than it ought to be, there is still about $40 trillion worth of goods and services getting bought/sold in the US and Europe. GDP growth has gone to near 0, but not GDP itself.

Companies will still earn profits and still pay dividends. As fear grows, great opportunities to invest in lasting companies will multiply. Wise investors should be currently trying to figure out which companies will survive and at what price the risk/reward becomes a definite buy.