Wednesday, August 12, 2009

Wednesday's Links

New found confidence+ investor gullibility=Huge stock market rally: I liked this analysis from Seeking Alpha contributor JS Kim. Every once in a while it is cathartic to go on a well-thought out rant. In this piece Mr. Kim asserts over and over again that the current rally in the market is a result of the gullibility of investors who have mistaken the combination of renewed confidence and some efficacious market manipulation for a sustainable bull market. Of course, he does not believe that the fundamentals of individual companies or the US economy actually justify the current market valuation. Mr. Kim fully admits that if he did believe that things were turning around he would be the first to point out why. However, just as he called some of the major crashes of 2008, he is going out on limb with a significant amount of conviction that this bear market rally will end in tears for people who continue to buy stocks. He warns us to beware of the confidence bubble and concludes with the suggestion that we all stay on the sidelines and be willing to miss another 15% climb to be safe.

The contenders for Berkshire’s throne: In this brief piece, Megan McArdle of the The Atlantic posts some data from a friend of hers that contains the returns of some well known value investors. The context for the discussion has to do with who might vie for the value investing throne when The Oracle is no longer in the game. Based on historic returns, the author identifies Bill Ruane’s Sequoia Fund, Bruce Berkowitz’s Fairholme Fund, Seth Klarman’s Baupost Group and Jean-Marie Eveillard/Bruce Greenwald’s First Eagle Funds. For my money, if anyone will be able to match or beat Buffett’s track record over a long period of time it will be Seth Klarman. That is, of course, until I get into the game full time.

Better to be lucky than good: In this op-ed piece in the Financial Times, Harvard professor and historian (This was a correction requested by my brother in law who is an historian. He apparently was offended that an historian could be confused with an economist) Niall Ferguson discusses the first 6 months of the Obama administration. He suggests that Obama has accomplished a lot in this short time and points out that the President retains a relatively high approval rating despite the adverse circumstances. He got a stimulus passed in record time. He got his Supreme Court nominee approved without any trouble. But, according to Ferguson a lot of his initial success has been built on luck and circumstance. The Democrats have a large majority in the House and the Republicans continue to stumble and fumble politically and personally. What could change his luck? Ferguson argues that the huge fiscal deficits and Obama’s reliance on a very unpopular, pork-inclined Congress could be his downfall. In regards to the former, the risk is that interest rates back up due to investor’s concerns about the massive debt load, a process that stalls the recovery and hurts Obama’s re-election chances. In terms of the latter, the fact that Congress can’t seem to pass any legislation without handouts for cronies or that is self-financed means that as voters become more concerned over the government’s involvement in their lives, they may take it out on the President when the time comes.

90% of people believe in Bigfoot: As a contrarian, this is the kind of data I love to see. At the risk of succumbing to confirmation bias, when I see that 90% of Wall Street economists think that economic downturn will be over this quarter it just reinforces my bearish perspective. It’s funny to see such optimism from economists when the investors that I listen to have such a different perspective. Believe me; I am not easily swayed by the pundits thrown at me on CNBC and Bloomberg. I am very judicious about who I take seriously. But when I hear that Michael Steinhardt, Jim Rogers, and Jim Grant are so unbelievable bearish, I would be foolish not to at least look at the markets with a cautious eye.

Dr. Doom turns into Dr. Reality: When Roubini was predicting things that nobody believed could happen he was known as Dr. Doom. Now that a lot of what he forecasted has actually played out, he is now Dr. Reality. But, despite Joe Kernen’s prodding to admit that he was wrong and turn into a super bull, he continues to see risk in the financial sector and he is concerned about a double dip recession. When I saw Columbia professor Bruce Greenwald speak and someone hinted that Roubini was one of the ones who got it right, he retorted that Roubini had been predicting a recession for 10 years and implied that his apparent prescience should not be taken seriously. I would say those comments were a bit ironic, coming from a value investor. Inherent in value investing is the risk of being too early and looking wrong for extended periods of time. However, if you believe that eventually the fundamentals will play out as you foresee, it is imperative to maintain the course no matter what you hear on CNBC.

(Picture of Roubini courtesy of