How About Some Market Perspective..?

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bear market, business media, compounders, de-leveraging, fear and greed, growth investing, hindsight, investment checklists, over-confidence, value investing

Go on, admit it…at this very moment, you’re glancing at a business anchor who’s busy losing their mind on your telly. Yes, left, right & centre – lots of markets are correcting. Or should I say collapsing, tanking, plummeting, nose-diving, slumping, free-falling, or simply never ever recovering ever..! And if you can look past the hyperbole, some are unfortunately entering actual bear market territory. Kinda gets the blood pumping, eh? You really should switch off the TV, and just go meditate (or run a marathon) instead! It definitely could save you a few quid & a few stupid decisions. But we’re all too human – and now we’re addicted to this 24/7 diet of escalated corporate & market drama, so it’s become easier than ever for the media to stoke fear (and greed) in our hearts.

Traditionally, a 10% market reversal was defined as a correction, while a bear market was at least a 20% decline. But now the business media’s upped the ante, unilaterally adopting something like 3% & 10% as the new thresholds (respectively). [And I suspect politicians & central banks aren’t far behind]. Look at them now – glued to their desks, fuelled on Red Bull, and kitted out with adult diapers (think about it…live TV, energy drinks & too much excitement?!), they can barely contain their glee at this renewed market turmoil. Which is, of course, sheer madness…

But here we are, lapping it up – feeling so very serious about the market yet again. Because a reversal invariably hits us out of the blue, with the reasons why only trailing after, in its wake… [How many talking heads highlighted a global growth slow-down two months ago?! But now it’s the glib explanation you’re hearing on every business channel]. I mean, we began September with so much promise?! Personally (& somewhat counter-intuitively), I was fairly bullish myself – and I still think I read the charts correctly as being quite promising (though I definitely wasn’t keen on a 2,000+ S&P). Unfortunately, the price action & the charts never quite followed through, and now September & October are living up to their more usual grim reputation.

So, what am I going to tell you here..?

EIIB…Ex-Bank – Love It!

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Arab Spring, asset managers, AUM, banks, de-leveraging, DiamondCorp, EIIB, European Islamic Investment Bank, frontier markets, GCC countries, HBG Holdings, inflation, Islamic finance, John Burbank, MENA, NAV discount, oil, Rasmala Holdings, real assets, Saudi Arabia, Sharia'a, TBTF, Zak Hydari

I have a long-standing aversion to banks. To me, they represent the perfect collision of two really bad ideas:

i) Regular investment in bonds & loans – a strategy offering little prospect of capital gain, but which will (quite often) attempt to wipe out your capital. And the paltry yield you earn offers little compensation. I’ve never understood how people ever find this ridiculously biased risk/reward proposition attractive.

ii) The answer lies in leverage, I guess… Another terrible idea, but this is the incredible solution people usually seize upon to juice low returns. And it usually works just long enough for everybody to forget how savagely leverage can impact liquidity & solvency, when things take an inevitable turn for the worse.

Banks, of course, take this bad marriage to its ultimate & ludicrous extremity. [And require even more leverage to overcome the drag of their cost:income ratios]. But consider the private & public incentives – why wouldn’t they?! When times are good, leverage multiplies profits…which multiplies bonuses! And leverage makes it far easier to reach that ideal bank status: TBTF, where the taxpayer’s forced to pay for your mistakes (& bonuses).

Hitting The Century (XI – Distressed)

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alternative assets, Argo Group, asset managers, bankruptcy, BDCs, business development companies, Colony Financial, de-leveraging, distressed assets, distressed consumers, distressed investing, Fortress Investment Group, income/dividend bubble, JZ Capital Partners, litigation funding, private equity funds

In my last post, I briefly highlighted some difficulties a private investor might face with classic distressed debt investing. Recognizing these limitations, I usually prefer to stick with distressed debt asset managers & investment vehicles. However, there’s many other firms in orbit around this opportunity. Even better, my definition of distressed investing stretches to include what I call the distressed consumer. Consider it exploitation of the poor, if you wish – but the real bonanza is actually much more equal opportunity. To be blunt, it’s really about the exploitation of the (financially) stupid… And stupidity’s an enduring human frailty to bet on, despite the frequent & pointless efforts of politicians to legislate it away.

Let’s begin with the business end of things:

Picture you’re an ailing company whose business & finances are beginning to seize up. You’ve executed on most of the usual cost-control & cashflow measures already, but you still need more juice… Your book of receivables might yield some quick cash – Intrum Justitia (IJ:SS) can help. PRGX Global (PRGX:US) may unearth new and unexpected savings, waste & fraud for you. [PRGX is now expanding into US healthcare. Considering the unconscionable levels of fraud, waste & over-billing in that industry, this could offer them a huge new growth opportunity]. You might have been pinning your hopes on launching/winning a crucial lawsuit, but now you can’t afford the legal expense & uncertainty – Burford Capital (BUR:LN), Juridica Investments (JIL:LN) & IMF Australia (IMF:AU) can lower your risk & provide the necessary funding. Maybe you should also start selling anything that isn’t nailed down – call Ritchie Bros Auctioneers (RBA:CN).

Hitting The Century (IX – Property)

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Asia, BIW, catalyst, China, commercial property, de-leveraging, emerging markets, Germany, Joel Greenblatt, KWG Kommunale Wohnen, NAV, Net LTV, Price/Book, residential property, Russia, Sirius Real Estate, special situations, SRE, Stockopedia, Ukraine

Continued from here.

Property (10%):

As with Agri, some of my recent posts will overlap. I should obviously point you to my series on German Residential Property, Post I to Post V – it offers an in-depth look at my allocation & stock selection approach to Property. This culminated in a recent stock-pick I’m v pleased with: KWG Kommunale Wohnen (BIW:GR), a 5.1% portfolio holding.

At EUR 5.475, it’s up +6% since my write-up a month ago (and +9% from my actual avg. entry price). It’s clearly left resistance at EUR 5.25-32 trailing in the dust, and the next EUR 5.60-80 resistance now beckons. A possible break of EUR 6.10-20 in due course may suggest the share’s ready to muscle its way far higher. It’s fascinating to note that price level corresponds to a KWG market cap of about EUR 100 mio: Which is precisely the level I highlighted as a possible sweet spot for the market to award KWG a significantly higher price/book valuation!

You know, I’m not much of a stock screener – I mean why ruin a day of reading annual reports instead?! 😉 But I do think property stocks lend themselves v nicely to a stock screening approach (Stockopedia, of course!) – there’s only a couple of key variables on which you really need to focus. In fact, let me suggest a stock selection strategy, a la Joel Greenblatt:

Hitting The Century (VI – Real Assets)

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agri-business, balance sheet, bank lending, churning, commercial property, de-leveraging, deflation, ECB, Fed, gold, inflation, natural resource stocks, portfolio allocation, residential property

Oh well, back to the grind..! Continued from here, and I guess here: I actually started writing this post the other day, but quickly got side-tracked into a different post – after all, one can’t really talk about real assets without first taking on inflation! For reference, here’s a reprint of my investment allocation pie-chart:

So, Where’s The Bloody Inflation..?!

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baby boomers, banks, Bernanke, budget deficit, capital ratios, de-leveraging, debt monetization, Debt/GDP Ratio, ECB, Europe, European sovereign debt crisis, Fed, financial crisis, fiscal deficits, Flub-Med, GDP growth, Hunt brothers, income/dividend bubble, inflation, Japan, multiplier effect, Occupy Wall Street, politicians, quantitative easing, real assets, risk aversion, savings rate, stagflation, US, Volcker

I was beginning a new post in my recent Hitting the Century series (and here), and realized my next 3 investment allocations were to real assets – Natural Resources, Agri & Property. This v quickly got me thinking about inflation, enough to devote myself to this post instead:

Along the way, dear reader, you may have noticed my pronounced distaste for fiscal & monetary policy in the developed world. Particularly in the US... That’s not intended to be a US slap-down…and certainly not praise for Europe either! It’s simply a pretty inescapable conclusion if you compare the US & (the hard-core of) Europe over the past 4 decades. Jesus, I struggle to think of somebody with any real power in the US who truly gives a flying f**k about their accelerating debt burden, debt monetization, or the long-term external value of the dollar. In contrast, the ECB & certain Eurozone countries still actually exhibit a painful reluctance to take that road to monetary & fiscal oblivion – even in the face of a European sovereign debt crisis!

Asset Managers – OK, Time to Storm the Castle!

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% of AUM, absolute return, Ally Financial, asset managers, carried interest, catalyst, Colony Financial, de-leveraging, distressed assets, Fortress Investment Group, KKR, mortgage servicing rights, MSRs, Nationstar, Newcastle, Nomura, Oaktree Capital, Och-Ziff, Ocwen Financial, pension funds, PHH Corp, Price/Sales, private equity funds, special situations

Continued from here. As I’ve highlighted, (alternative) asset managers have an attractive business model, strong balance sheets, and are generally undervalued. On the other hand, they’re a geared market play. I see 2 ways to alleviate this risk:

i) Ration asset manager allocation in your portfolio. As I’ve discussed,  analyzing, ranking & selecting from the broadest universe of listed managers is the best way to achieve this.

ii) Look for a great story, a great stock, AND a great price. This can significantly transform your risk/reward. Make a poor decision on one attribute, and hopefully the others bail you out. Get them all right, and accelerate & increase your returns…