Sunday, December 22, 2013


Not to turn into the doomsdayers at Zero Hedge, but seriously: the next crash is coming... Without a doubt. Here are some screen shots that I took a few minutes ago, which undoubtedly prove it.

Note, this is for the Dow Jones Industrial Average, as of December 20th. It seems that with the market generating just shy of a 30% return in the past year, everyone has forgotten what it is like to lose money. Sure, you would of had some pain by investing at the end of 2008, but since then... WOW!

Compare the most recent period with the 5 year period ending in 2007. The markets peaked out right before crashing... As is the case now, everyone was used to making money... Then a huge crash occurred that made for a great buying opportunity about a year later.

Go back another 4 or so years, to the previous time the market peaked... Again, in the previous 5 years, people just couldn't remember losing money in equities. After all, there was a new normal where companies were valued based on future sales- who gave a damn about current earnings!

Wait a minute... That sounds eeeeeeeerrriiiiilllllllyyyy familiar, doesn't it (TSLA, FB, TWTR, AMZN, etc). Certainly, revenue, margin, and earning expansion have always been theses which have been with us.

Now, check out what the market did in 1987... again, we see that in the previous 5 years, people didn't know how to lose money.

It certainly seems that one could easily come to the conclusion that we are certainly doomed based on these 5 year examples. The expansion has gone on for too long! The world will again collapse!!!

That is, until we get a little bit more in depth; in the next chart, we can see that for the 5 years before 1999, we had a ton of growth in equity prices, with a bull market lasting a full 10 years!

Before that, there was a good bull market that lasted for a significant amount of time before the 1987 crash too...

For long time readers, it should go without saying that this blog has a healthy dose of sarcasm... Once asking why Federal Reserve didn't buy 1/3 of the nation's housing, just to bulldoze it in effort to stimulate growth and even throwing darts at a Wall Street Journal to see what would happen with some random selections versus Facebook's stock (once noting the company's margins, relative to the world's population). That carries to now- these charts illustrate how a taking something that could on some level, seem reasonable- to an illogical extreme (and frankly, doing so in a pretty dumb way) can have some serious points in regard to allocating capital.

For me, the market being at an all time high is only kind of frightening- not alarming, since it is reasonable to think the world will continue to grow wealth- yes, even here in the US. We could very well be in some great economic expansion that the market isn't pricing in yet. Look at the last 2 screenshots for a example of decade long stock market growth (forgetting about tailwinds and conditions for a minute). We are now at a point where people have probably forgotten what it is like to actually lose money on stocks- everyone seems to be long and all about investing in equities. People can also have a short memory. Key to remember here, is that in the past 5 years, it didn't matter if you are a stereotypical growth, momentum, or value investor- it would have been hard to not make money in the past 5 years... And you could have done so by doing some pretty stupid things at the time, which could look incredibly smart- even clairvoyant, now... If repeated under a slightly different situation in the future, could permanently impair capital.

Which brings us to the present day...

Maybe the miracles of monetary policy are going to save us and we can unwind these low interest rates, or, keep them where they are without sparking inflation. Maybe you believe the profit margin arguments, and think that they can stay historically high for a host of reasons. Maybe the 5 and 6 foot tall children in Washington DC are going to finally get along, which will make the country calm enough to buy things again. Maybe the massive de-levering is going to stop, borrowing will pick up again, which along with the low levels of inventories companies are sporting, and the velocity of money will finally reverting to the mean that the Fed wants. Maybe it will happen in a way the Fed doesn't want and inflation blows up, proving that equities have been cheap...

Or maybe none of this will happen and other bad items such as high government debt, Obamacare, and persistent unemployment will send us into a death spiral. There will always be arguments as to what is going to happen, how something will affect something else, and even once said events happened, people will still argue about it. Frankly, I know that I am not smart enough to weigh so many variables and come up with much of a macro view about things. If anything, I like the words of Seth Klarman here: "I think bottom up, but worry top down."

What I do know is this: good deals are getting ever harder to find. A few years ago, it was easy to buy companies where you could be reasonably sure it could liquidate and the initial investment be safe, or at the very least, could bleed cash (practically) forever, as long as they kept the rate of loss to their worst quarter of the last recession... Now, it seems that most investors are looking at companies based on their current/future earnings, with a healthy growth assumption. None of which generally price in a recession of any sort- my gut says that won't end as well as they hope. In recent conversations I have had, people have even proposed getting in bed with some pretty unscrupulous management teams, basically because the stock is the cheapest thing that they can find.

This strikes me as a bit worrisome and something that was very easy to avoid in the near past.

Furthermore, there this bull market, combined with the ever increasing access to and acceptance of the internet, more writers have become widely read, more fund managers reputations made (or broken), and even bloggers have earned jobs as analysts or money managers in a way that no one would of ever thought. This is an interesting time to live in. A lot of people are probably lucky (including me) because of the tailwinds that they have had behind them. It will be interesting to see how people do once the markets start to turn- because eventually, the DOW will have more than a few down days! That should separate the men from the boys so to speak, especially as a lot of the value investors that are active on the interwebs are long only. Keep in mind that due to the internet, victories are a lot more visible, and, we are at a point where they have been more visible, with a huge bull market- basically, a feedback loop of egos (both for investors and their investors), based on a ton of independent variables that could literally not have happened in conjunction at any other point in history.

The lessons of Bill Miller shouldn't be forgotten- star of the investment community to a pariah. Pariah to talented manager again- this could happen to everyone out there, only you wouldn't need billions. A bear market could be more humbling than investing in a fraud!

When everyone out there feels smart for investing, one should probably feel the dumbest. Literally, I have practically been hitting my head against the wall, trying to find new investments that I feel truly comfortable with. As such, I am doing my best to control my emotions and sit on more cash like investments than ever before- be it the recent Chromcraft Revington buyout by Sport Haley, Ethanex, and even a pawn shop chain that was recently bought out and is in the start of an orderly liquidation- there are a few others too. There are potentially few insurance companies that aren't reporting that are pretty interesting as well, but that is a totally different story, for a different post. Rental housing can be good too, so long as you get a good deal- which I think I have been able to do in a few instances recently. However, be warned that the hedge fund types paying in excess of 115 months rent for rentals- before fix up costs?!- are likely not going to do well in the long term. Additionally, the securitization of rental payments is probably as bad of an idea as a mortgage backed security... especially when it is done by people who have probably never swung a hammer. Even publicly traded net-net looking REITs such as Trade Street Residential seem to be overpaying for their properties- the newness of them, alone should be scarry, which is something that was talked about in my beat up Jason Zweig edition of The Intelligent Investor. Certainly, they could do well, but there is a great deal of risk in them. Alas though, this is again the subject of another post...

Regardless, it is key to remember that deals are almost always out there if you look hard enough, turn a lot of rocks over, and inevitably, go down a bunch of dead ends. In the midst of a raging bull market, deals may not be in the form that you think. Let us all be more diligent than ever. After all it's about time that we really earned the money we make.

That, and probably re-read everything Ben Graham ever wrote. Notice the overall downward trend in Benjamin Graham related searches on Google Trends over the course of the bull market? Me too... That might be a touch telling as to where we are at in the grand scheme of things.

Happy hunting.

Disclosure/Disclaimer:  I own and represent whatever is left of the Chromcraft Revington shares that I purchased a little bit ago. I also own and represent share of Ethanex, Premier Exhibitions, that pawn shop I mentioned, and a small insurance company that has not reported to the SEC in over half a decade. Other than that I have nothing in or against any other security mentioned. I reserve the right to change the positions at any time. This post is my nothing more than my thoughts/opinion. Always do a ton of your own research before so much as contemplating anything that I say, do, write, or even think about.