Wednesday, July 23, 2014

More on "Fund Managers' Current Asset Allocation - July"

Bond sentiment charts from the BAML asset allocation report (earlier post).

Bearish on bonds and on the 10 year. They'll be singing a different tune with the 10 year at 1.25% someday.

Comment on China's "History of Recurring and Traumatic Financial Crises"

y0ungmoney posted this as a comment on the China "History of Recurring and Traumatic Financial Crises" post.

I think the lack of property rights in China (and emerging markets more generally) will become a big issue when we have a real EM downturn. It will lead to widespread revulsion-- people will think, "Not only are my EM stocks down 85%, they're going to screw me out of whatever I have left!"

It's the kind of thing that's easy to ignore in a bull market and impossible to ignore once things go bad.
One principle of social mood is that it isn't news that drives market valuations, it's people's mood-based reactions to existing news. Everything needed for the Shanghai index to trade at zero is already known; but people's extraordinarily positive mood prevents them from properly incorporating the information. I wrote about this in my Review of Benjamin Graham and David Dodd's Security Analysis:

"One frequent observation about Graham and Dodd's era is that they had it kinda easy, what with being able to buy lots of net-nets - companies selling for less than their current assets minus total liabilities. Here's how common these opportunities were:
'Our computations indicate that over 40% of all the industrial companies listed on the New York Stock Exchange were quoted at some time in 1932 at less than their net current assets.'
I have never heard anyone stop to reflect on why valuations were so low during the Great Depression. Why didn't anyone buy those compelling values? Those valuations indicate revulsion, which Hussman defines as:
'A growing impatience among investors who conclude that stocks are simply bad investments, that the economy will continue to languish, and that nothing will work to help it recover. Revulsion is not based so much on fear or panic, but instead on despair and disillusionment. In a very real sense, investors abandon stocks at the end of a bear market because stocks have repeatedly proved themselves to be unreliable and disappointing.'
Impatience also with fraud. Shame with being scammed by a flimflam mortgage guarantor or a stock scam.

To read the Lehman Brothers bankruptcy examiner's report, or the New Century Financial report, is to realize that we might reach 1932 valuations before this is over.

If you can't trust a financial institution's balance sheet and you can't rely on the auditors or the bank regulators to do anything, you are going to demand a huge risk premium for the surviving institutions' securities."

"Fund Managers' Current Asset Allocation - July"

Review of BAML asset allocation report from Fat Pitch blog. Highlights:

  • "Remarkably, although US bonds have outperformed SPX so far in 2014, fund managers are still hugely underweight. In July, weightings fell to their lowest in more than 6 months. If there is a hated asset class, it's not equities, it's bonds."
  • "It's worth recalling that last month 88% of fund managers said they believe US 10-year bond yields will be over 2.5% by year end. Yields are currently 2.46%."
  • "In July, 71% of fund managers said they believe global core CPI will be higher in the next 12 months. This is the highest percent holding this view since March 2011. In the next 6 months, US 10-year yields fell from 3.6% to 1.7%."
Not owning (or, even worse, being short) duration is the groupthink clueless trade.

Tuesday, July 22, 2014

Couple Comments on Metallurgical Coal Credits

UBS on coal miners:

"In our view, Alpha, Arch, and Walter may not be good Chapter 11 restructuring candidates since debt comprises most of the long term liability pie. There may be limited ability to shed other liabilities through a restructuring process. Hence, it may make more sense for unsecured bondholders to do exchange offers or agree to other concessions out of bankruptcy. That said, companies with a larger amount of secured debt, like Walter, may be more inclined to go through a Chapter 11 process in anticipation of higher recoveries."
Moody's on met coal:
"At these prices, all Moody's-rated US met coal producers will continue to be stressed, with those that acquired met-coal assets at the height of the market labouring under very high leverage."
Sounds like WLT.

"The Case For Higher Rates Looks Weak… Again"


"The answer, of course, is that the economic profile is still too weak to support higher rates. You can argue, as many do, that it’s all a mirage and that the Fed is artificially holding down long rates. Maybe, but that argument is weak once you consider that private holders of Treasuries include investors the world over and Fed policy doesn’t preclude those investors from selling and driving up rates."
Our hypothesis: Fed purchases of from the flow of Treasury issuance caused interest rates to be higher because the stock of fixed income instruments vastly exceeds the size of the flow of purchases, and those purchases made the holders nervous about inflation.

J.S. Bach - Prelude and Fugue in D Major (BWV 532) - For Orchestra

"China has a history of recurring and traumatic financial crises since liberalization"

Great y0ungmoney post:

"[Y]ou have plenty of professional investors today talking about how the China bear thesis hasn't played out, China is different because of this or that, 'urbanization' will drive growth (and not the other way around), and that shares look 'cheap'. I shudder to think of the well meaning investment professionals in this country allocating to funds raising capital to invest in distressed assets, credulously believing that this is a fair market system that respects the interests of private investors"