Yesterday was the day Toyota was to “take the gloves off and respond to their critics.” But the company’s media thunder was stolen by a San Diego man who was taken for a very scary ride in his Prius:
via ritholtz.com
This blog is syndicated from "Jesse Felder's My Back Pages"
John Hussman: Why It’s “Margin of Safety” Time
I couldn’t have written it better myself:
A deleveraging cycle is much like a secular bear market in that the market experiences a great deal of volatility, but tends to establish a sequence of troughs, each at lower levels of valuation (even if not at lower absolute prices). In that environment, there is significant risk of abrupt spikes in risk aversion (which implies abrupt price spikes to the downside), so you can’t trade with “hot” valuation or market action criteria. It should be no surprise that Graham and Dodd wrote Security Analysis following the post-credit crisis period of the 1920’s and 1930’s. If there’s one lesson from those environments, it is that valuations and the idea of a “margin of safety” takes precedence over all other considerations.
Here’s to one mutual fund manager that doesn’t think “cash is trash.”
via hussmanfunds.com
Cash Is Trash Again For Mutual Fund Managers
Tomorrow will mark the 1-year anniversary of the rally that has seen stocks surge over 70%. Evidently, mutual fund managers have decided it’s now time to go all-in. Bloomberg reports:
Equity mutual funds are burning through cash at the fastest rate in 18 years, leaving them with the smallest reserves since 2007 in a sign that gains for the Standard & Poor’s 500 Index may slow.
Cash dropped to 3.6 percent of assets from 5.7 percent in January 2009, leaving managers with $172 billion in the quickest decrease since 1991, Investment Company Institute data show. The last time stock managers held such a small proportion was September 2007, a month before the S&P 500 began a 57 percent drop, according to data compiled by Bloomberg.
The last time before that was never (via sentimentrader.com). And a year ago, at the bottom, funds held nearly twice as much cash as they do today. So I think it’s safe to say this is a fairly accurate contrarian indicator.
via bloomberg.com
Tale of the Tape: Small Caps v Financials
Stocks ripped higher today (through the 1121 level I've been watching) on the better-than-expected jobs report. Small caps led the charge pulling to a new 1-year high:
Financials, in contrast, are still below their highs made over the past few months:
In fact, the XLF is now running right into the downtrend line shown above. Financials have led the market for the past few years and they have been diverging from the new highs made in the major indexes since the beginning of the year.
In addition, the VIX is retesting its January lows signaling complacency reigns over fear once again:
Also notice that the last time RSI (top of the chart) for the VIX fell this low was late October of last year just before stocks corrected roughly 7%.
Bottom line is I wouldn't be surprised to see at least a similar pullback begin relatively soon.
Disclosure: long SDS and VXX
Okay, Maybe His Track Record Has Something to Do With It
A couple of days ago I posited that the reason Warren Buffett is the most respected CEO in the world is that he never passes the buck. I guess his impressive track record might also have something to do with it:
Many investors can only look on with envy when Warren Buffett says his investors have seen 20% annualized gains over the past 45 years—even the best mutual funds pale by comparison.
Only two funds are even on the horizon: Fidelity Magellan Fund, which has returned 16.3% a year during Mr. Buffett’s chairmanship of Berkshire Hathaway Inc., and Templeton Growth Fund, up 13.4% a year on average, according to investment researcher Morningstar Inc.
Berkshire’s Class A shares have delivered returns of 22% a year since 1965, based on market price, though Mr. Buffett prefers to judge gains according to book value, which stand at 20.3%.
Using Berkshire’s market-price gains for fairer comparison with mutual funds, $10,000 invested with Mr. Buffett on Oct. 1 1964—equivalent to about $60,000 in today’s dollars—would now be worth about $80 million. The same amount in Fidelity’s fund would have grown to about $9.1 million, while Templeton Growth investors would now have roughly $2.9 million.
The returns covered the 45 years through the end of 2009. During that period the Standard & Poor’s 500 was up 9.3% on an annualized basis—$10,000 would have grown to nearly $560,000. There were 145 mutual funds at the start of 1965.
via online.wsj.com
Is Capitalism What’s Wrong With Healthcare?
Last year Charlie Munger sent a check for $20,000 to Dr. Atul Gawande simply because he was so impressed with an article he wrote about health care costs for The New Yorker. Below is an excerpt:
About fifteen years ago, it seems, something began to change in McAllen [Texas, the most expensive medical city in the most expensive medical country in the world]. A few leaders of local institutions took profit growth to be a legitimate ethic in the practice of medicine. Not all the doctors accepted this. But they failed to discourage those who did. So here, along the banks of the Rio Grande, in the Square Dance Capital of the World, a medical community came to treat patients the way subprime-mortgage lenders treated home buyers: as profit centers.
The rest of the story can be found here and I highly recommend it.
Why Warren Buffett Is the Most Respected CEO in the World
It’s my job to keep Berkshire far away from problems [related to leverage and undue risk]. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer.
Are Borrowers “Missing Out” Or “Passing Up” the Opportunity to Refinance?
This headline on the front of the Wall Street Journal today caught my eye: "Borrowers Pass Up Mortgage Windfall." Interestingly, the digital edition ran the very same article with a different headline: "Borrowers Miss Out on Billions in Savings."
These two very different headlines for the same story tell an interesting tale. There's a big difference between "pass up" and "miss out." The first suggests that borrowers are rejecting the opportunity to refinance; the second suggests they simply can't qualify for refinancing. That the Journal ran both reveals the current debate about whether banks or borrowers are to blame for the current dearth of credit creation.
It's important to try to distinguish between the two because many are accusing the banking industry for the lack of credit creation when there is ample evidence that borrowers simply don't want to borrow any more. If banks are really the problem then there are many ways that Washington and the Fed can give them incentive to lend to help stimulate the economy. But if borrowers simply don't want or need any more debt then there are massive implications for the economy.
I believe it is a combination of the two but I also strongly believe we can't afford to discount the power of a consumer shift toward deleveraging. Obviously, banks have tightened lending standards. Stated income loans and 120% LTV programs are history. We may never see them again in our lifetimes.
However, there is also ample evidence that consumers are now shunning the leverage that created the twin internet and real estate bubbles in the first place. Nick Timiraos writes in the Journal article mentioned earlier,
Around 37% of all borrowers with 30-year conforming fixed-rate mortgages—who collectively hold about $1.2 trillion of home loans—have mortgage rates of 6% or higher, according to investment bank Credit Suisse. Many could reduce their rates by a full percentage point if they refinanced at current rates, about 5%. More than half could lower their rates nearly three-quarters of a percentage point, according to Credit Suisse.
But new refinance applications in January stood near their lowest levels in the past year. Weekly data compiled by the Mortgage Bankers Association also show that refinance activity has been muted, considering that rates are so low…
The last time mortgage rates were at current levels, in 2003, refinancing activity hit $2.9 trillion, according to trade publication Inside Mortgage Finance. Last year, refinance volume reached $1.2 trillion, the highest amount since 2003 but not nearly as much as expected, considering how low interest rates have fallen.
Tighter lending standards must be factored into this decline in total refinancing volume as it's safe to assume that the 25% of mortgage holders currently "underwater" are effectively precluded from refinancing. But I have to believe many of the other 75% of homeowners with at least some equity (Americans still have roughly 50% equity in their homes in total) are simply choosing not extend the duration of their indebtedness.
The Los Angeles Times recently published an article on an interesting new trend towards, "cash-in" refinancing rather than "cash-out" refinancing which was so popular over the past decade or so.Cash-outs hit their highest level of popularity during the wild appreciation streaks in the early and middle years of the last decade. In mid-2006, just before home values began deflating across the country, the rate of cash-outs hit 88%, according to Freddie Mac, which monitors refinancings quarterly.
This meant that nearly 9 out of 10 refinancers whose loan files were sampled by Freddie Mac increased the size of their mortgage balance by at least 5% in the process. It was the heyday of the pile-on-more-debt mind-set — cash me out, I can't lose on my real estate — that came crumbling down in 2007 and 2008, when home equity holdings shrank drastically and painfully…
Now the pendulum in consumer psychology appears to be swinging toward reduction of household debt — whether on credit cards or mortgages.
In Freddie Mac's latest quarterly survey of refinancings, 33% of homeowners put cash into the deal to lower their mortgage balances, the highest percentage ever. By contrast, only 27% of refinancers took cash out — the lowest percentage on record…
Cash-ins, in effect, are a disciplined form of saving — one that in today's depressed rates for competing types of savings might be an astute financial move.
I suggested earlier any signs like this of consumer deleveraging could have severe consequences for the economy. Consider that in 2005, homeowners cashed out roughly $1.4 trillion of their homes' equity. This is equivalent to fully 10% of total United States GDP.
Obviously, after the devastation in home prices we've witnessed over the past five years this level of "cash-outs" will not be seen again for a very long time. That equity is gone and thus so are the cash-outs. 10% of GDP has essentially vanished since the real estate bubble popped. Should homeowners continue to gravitate towards an attitude represented by the "cash-in" trend that will make for an even larger economic headwind.
What is even more troublesome is that while the Fed and Congress have great power to influence the banking system to increase the flow of credit they have very little power to encourage consumer spending if households are focused on shoring up their balance sheets. This is why I am prepared for a prolonged period of sub-par economic performance in both my businesses and my investments.
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