Posts
There have been three data points over the last week that lead me to believe we are at the bottom for housing prices in the US.
Today, Case-Shiller announced the their 20 city home price index rose from April to May 2009, which was the first month to month increase in three years. The data is not seasonally adjusted, but the point is that prices have stabilized enough for seasonality to generate a positive datapoint. For three years, that wasn't the case.
Second, yesterday, new home sales jumped 11% which was the biggest monthly jump in eight years. This one is a little bit ambiguous because we don't really need a lot of new homes being built if we are trying to stabilize housing prices. It does have the potential to be good news if it implies that the builders are either finally clearing out their inventory, or they are seeing real new demand.
And finally, data from the National Association of Realtors indicates that the share of sales coming from foreclosures is dropping. I couldn't find the data on their website directly, but here is a clip from a Bloomberg article. "The share of homes sold as foreclosures or otherwise distressed properties fell to about 31 percent in June, down from 45 percent to 50 percent seen earlier this year, the real- estate agents’ group said last week". This is great news as it means one of the downward levers on prices appears to be coming off a bit.
If I take these three datapoints, and mesh them with the fact that housing peaked in 2006 (we are in 2009 now), and that the housing price index I mentioned earlier is down 32% from that peak, and that there are other indications that the economy is entering a recovery; I come to the conclusion that housing prices have bottomed. This is great news.
This leads me to a second topic: the changing nature of the current bull market. The conventional definition of a bull market is a 20% gain in the market. What I want to talk about though is the change. From the market low on the S&P500 in early March, the market ran from about 670 to over 900 by early May. I consider this run to have been a relief rally. Fundamentals did not improve much at all during that stretch, but the fear of collapse dissipated. Then the S&P500 stagnated from early May through early July. But the markets started to climb again in the back half of July. I think this most recent rally, to about 975, has been more fundamentally driven and that is a very big deal. Technically, it has all been one bull market, but I think the first leg was sentiment driven, and the second leg has had fundamental underpinnings.
Q2 earnings season is not over, but I have been amazed at how many companies are beating estimates and giving positive guidance. I don't have good statistics on this, just my overall impressions from reading the news every day. My guess is that the S&P500 ends 2009 up about 10%, but I think 2010 will be a very good year for the markets (probably 20+%).
Tuesday, July 28, 2009
My mistake selling CBG
I sold about 60% of my remaining position in CB Richard Ellis yesterday. I had already sold half my shares after the stock doubled from my purchase price. The stock was up 200% from my purchase price yesterday, so I decided to sell some shares.
The question I wrestled with yesterday was whether to sell the whole thing. My investment thesis on CBG was that it was dramatically oversold (as were a lot of stocks). This was a stock I knew pretty well having covered it at my last job. The point is that I didn't buy the stock because I thought the fundamentals of the commercial real estate market were about to get a lot better. Ultimately, this thesis was based on an improvement in sentiment, not intrinsic value. I think sentiment has largely normalized now so that trade is over. For the stock to rise dramatically from here, either sentiment needs to swing to the exuberant side of the spectrum (very unlikely in my opinion) or the fundamentals need to improve enough to raise Intrinsic Value. I have been reading about some renewed interest in commercial real estate from foreign investors, but ultimately, I think fundamentals will come back slowly.
So why didn't I sell the whole position. I think I fell victim to some classic thinking traps. CBG has been my best performing stock and I like owning it as a result. Keeping a small position serves as a trophy of sorts. Second, it is simply hard to sell a stock when it is going up. The fear of missing future gains is powerful and I think I was lured in.
Just wanted to share some of what I'm learning.
The question I wrestled with yesterday was whether to sell the whole thing. My investment thesis on CBG was that it was dramatically oversold (as were a lot of stocks). This was a stock I knew pretty well having covered it at my last job. The point is that I didn't buy the stock because I thought the fundamentals of the commercial real estate market were about to get a lot better. Ultimately, this thesis was based on an improvement in sentiment, not intrinsic value. I think sentiment has largely normalized now so that trade is over. For the stock to rise dramatically from here, either sentiment needs to swing to the exuberant side of the spectrum (very unlikely in my opinion) or the fundamentals need to improve enough to raise Intrinsic Value. I have been reading about some renewed interest in commercial real estate from foreign investors, but ultimately, I think fundamentals will come back slowly.
So why didn't I sell the whole position. I think I fell victim to some classic thinking traps. CBG has been my best performing stock and I like owning it as a result. Keeping a small position serves as a trophy of sorts. Second, it is simply hard to sell a stock when it is going up. The fear of missing future gains is powerful and I think I was lured in.
Just wanted to share some of what I'm learning.
Tuesday, July 14, 2009
Goldman Sachs still king of the mountain
Goldman Sachs reported Q2 earnings this morning that were significantly better than the consensus estimates. As I listened to the conference call, I was reminded again that Goldman's stock really is special and I am angered by the whole situation.
First, why is Goldman special?
Then TARP was rushed through Congress. Ten systemically important banks were basically forced to take equity infusions. Some of those, most notably J.P. Morgan, probably really didn't need or want the capital. Goldman however needed all the help they could get. Their business model had clearly been under attack and confidence was shaken. As the crisis has since receded, Goldman has fought to return the capital and be free of Congress' heavy hand (I can't blame them for that).
I think what bugs me is that Goldman was basically saved by the government, but there is no humility. Despite being a bank holding company, their last quarter made it crystal clear that Goldman has not really changed at all. They have reduced their leverage, but no one reading through their earnings release would be thinking, "Oh, this looks like a bank". But to listen to their conference call, it is as if nothing weird happened in the last year.
Am I just jealous because they are so good and I did not own the stock from $60 to $150? I am jealous that they are so good, but I'm also suspicious. Almost all banks (I would say all, but there is probably an exception I don't know about) report a lot of detail about their balance sheet and business. Goldman is famously light on detail. Someone asked on this morning's call how much of their FICC revenue came from commodities and they wouldn't answer the question. That specific question isn't that important to me, but it underscores yet again, that we know so little about how they make their money.
The blogs have been buzzing about the stolen code from Goldman's proprietary trading business. I read that the FBI was called in because, in the wrong hands, the code could be used to manipulate the markets. I hope Goldman itself isn't the "wrong hands." But with such little disclosure and such high-powered friends, we may never know.
Despite all my annoyance at Goldman, I think it is very hard to short this stock. My guess is that the M&A cycle will start to improve very soon and this is a high beta stock that will most likely do well in the bull market I am expecting. And as I mentioned, it is hard to come up with a catalyst that would dislodge such a loyal and devoted shareholder base.
First, why is Goldman special?
- This is one of the very few stocks in the financial sector where the expectation is for them to beat expectations. Normally, this is a very dicey position to be in for a stock as it creates the possibility of a dramatic drop in sentiment if they miss. I think JP Morgan might be one of the other stocks that is broadly expected to beat expectations.
- Long-only investors "trust" Goldman more than any other financial stock I have seen. One could argue that Goldman has earned this trust by outperforming its peers for quite a few years now and surviving the financial meltdown of 2008. The reason this is important is that it would be hard to convince these investors to sell their Goldman stock, which makes a short thesis problematic. "Goldman will figure out how to make money," is a widely held view and therefore I think sentiment on the stock could survive an earnings miss that would damage almost anyone else. I think even Warren Buffett is a bit too enamored with Goldman.
- Goldman is possibly the most politically connected firm in the US. This is a double-edged sword, but at least so far, it would appear that it has only helped, without much, if any, backlash.
Then TARP was rushed through Congress. Ten systemically important banks were basically forced to take equity infusions. Some of those, most notably J.P. Morgan, probably really didn't need or want the capital. Goldman however needed all the help they could get. Their business model had clearly been under attack and confidence was shaken. As the crisis has since receded, Goldman has fought to return the capital and be free of Congress' heavy hand (I can't blame them for that).
I think what bugs me is that Goldman was basically saved by the government, but there is no humility. Despite being a bank holding company, their last quarter made it crystal clear that Goldman has not really changed at all. They have reduced their leverage, but no one reading through their earnings release would be thinking, "Oh, this looks like a bank". But to listen to their conference call, it is as if nothing weird happened in the last year.
Am I just jealous because they are so good and I did not own the stock from $60 to $150? I am jealous that they are so good, but I'm also suspicious. Almost all banks (I would say all, but there is probably an exception I don't know about) report a lot of detail about their balance sheet and business. Goldman is famously light on detail. Someone asked on this morning's call how much of their FICC revenue came from commodities and they wouldn't answer the question. That specific question isn't that important to me, but it underscores yet again, that we know so little about how they make their money.
The blogs have been buzzing about the stolen code from Goldman's proprietary trading business. I read that the FBI was called in because, in the wrong hands, the code could be used to manipulate the markets. I hope Goldman itself isn't the "wrong hands." But with such little disclosure and such high-powered friends, we may never know.
Despite all my annoyance at Goldman, I think it is very hard to short this stock. My guess is that the M&A cycle will start to improve very soon and this is a high beta stock that will most likely do well in the bull market I am expecting. And as I mentioned, it is hard to come up with a catalyst that would dislodge such a loyal and devoted shareholder base.
Wednesday, July 8, 2009
Jobs number was disappointing
First off, I wrote this on July 3rd but got distracted and forgot to post it. Sorry about the delay.
The US economy shed 467,000 jobs in June, which was worse than I thought it would be. The context for me is that I have been very bullish on the markets and I thought a steady improvement in the jobs number would fuel the markets. I did not think all the news would be good, because the economy is still clearly weak, but I have been expecting the mix of good/bad news to gradually improve.
The economy shed 322,000 jobs in May which, while still a bad number, was a real improvement. So how does this data impact my views? I'm still trying to sort that out in my own mind, but here are my thoughts. I am still bullish. Being in the job market myself, I have noticed a dramatic improvement in tone as I talk to potential employers and my friends in the investment community. Hiring is still very slow, but I am starting to see firms begin real searches and a friend of mine just got hired again. My guess is that if I worked for an auto manufacturer, dealer, or supplier, I would be observing the opposite trend right now. What I'm getting at is that I think there is starting to be improvement in some industries and continued weakness in others. My best guess is that the positive trend will resume in July, but the pace looks like it will be slower than I thought. I think we could see a -300,000 number in July.
Should this change my bullish stance? I don't think so. I am about the most bullish person I know right now and I would have to admit that I was starting to think a recovery was coming quicker than I originally thought. Yesterday's data was cold water on that increased optimism, but it still leaves me optimistic. I still think we are in the early stages of an economic recovery and I expect the markets to do well ahead of that recovery, and concurrent with that recovery. From a broader view, I want to own equities in this environment even with the understanding that there will be hickups along the way. Predicting those hickups with enough accuracy to trade them is very hard and I would rather try to get the bigger trend right.
The savings rate is up, so Americans with jobs are rebuilding their personal balance sheets. This will most likely mean that consumer spending growth will be anemic for quite awhile (maybe years), but it is setting us up for more stable and sustainable growth. I'm all for that.
The pipeline: On the docket for me are some research on Interactive Brokers and MF Global. I think I will have a chance to sell most of my GFIG stock at $8 within the next couple months so I'm looking for a place to put the cash. MF Global is a similar business, but with a higher risk profile because they act as clearing member for their clients and that does expose them to some risk. 95% of the time, I don't think that extra risk really matters, but it showed up about a year ago when a rough trader ran up huge losses on wheat contracts. The markets were already in witch hunt mode at the time and the stock was crushed. MF Global had to eat the loss and it uncovered some risk management decisions that were questionable at best, but also isolated to a very small part of their business. There was a period where I thought the sentiment had gotten so bad that their customers would all leave and the company would go under. That has not happened and risk management has been improved. Those of us that were burned by this stock will have a hard time buying it again, but I think it is time for another look.
Interactive Brokers is on the docket because I find myself considering opening an account there. I am currently a Schwab client and shareholder and am not looking to sell the stock, but Interactive brokers has a compelling value proposition and the stock looks cheap at first blush. More to come on both.
The US economy shed 467,000 jobs in June, which was worse than I thought it would be. The context for me is that I have been very bullish on the markets and I thought a steady improvement in the jobs number would fuel the markets. I did not think all the news would be good, because the economy is still clearly weak, but I have been expecting the mix of good/bad news to gradually improve.
The economy shed 322,000 jobs in May which, while still a bad number, was a real improvement. So how does this data impact my views? I'm still trying to sort that out in my own mind, but here are my thoughts. I am still bullish. Being in the job market myself, I have noticed a dramatic improvement in tone as I talk to potential employers and my friends in the investment community. Hiring is still very slow, but I am starting to see firms begin real searches and a friend of mine just got hired again. My guess is that if I worked for an auto manufacturer, dealer, or supplier, I would be observing the opposite trend right now. What I'm getting at is that I think there is starting to be improvement in some industries and continued weakness in others. My best guess is that the positive trend will resume in July, but the pace looks like it will be slower than I thought. I think we could see a -300,000 number in July.
Should this change my bullish stance? I don't think so. I am about the most bullish person I know right now and I would have to admit that I was starting to think a recovery was coming quicker than I originally thought. Yesterday's data was cold water on that increased optimism, but it still leaves me optimistic. I still think we are in the early stages of an economic recovery and I expect the markets to do well ahead of that recovery, and concurrent with that recovery. From a broader view, I want to own equities in this environment even with the understanding that there will be hickups along the way. Predicting those hickups with enough accuracy to trade them is very hard and I would rather try to get the bigger trend right.
The savings rate is up, so Americans with jobs are rebuilding their personal balance sheets. This will most likely mean that consumer spending growth will be anemic for quite awhile (maybe years), but it is setting us up for more stable and sustainable growth. I'm all for that.
The pipeline: On the docket for me are some research on Interactive Brokers and MF Global. I think I will have a chance to sell most of my GFIG stock at $8 within the next couple months so I'm looking for a place to put the cash. MF Global is a similar business, but with a higher risk profile because they act as clearing member for their clients and that does expose them to some risk. 95% of the time, I don't think that extra risk really matters, but it showed up about a year ago when a rough trader ran up huge losses on wheat contracts. The markets were already in witch hunt mode at the time and the stock was crushed. MF Global had to eat the loss and it uncovered some risk management decisions that were questionable at best, but also isolated to a very small part of their business. There was a period where I thought the sentiment had gotten so bad that their customers would all leave and the company would go under. That has not happened and risk management has been improved. Those of us that were burned by this stock will have a hard time buying it again, but I think it is time for another look.
Interactive Brokers is on the docket because I find myself considering opening an account there. I am currently a Schwab client and shareholder and am not looking to sell the stock, but Interactive brokers has a compelling value proposition and the stock looks cheap at first blush. More to come on both.
Subscribe to:
Posts (Atom)