Friday, October 7, 2011

Wednesday Thoughts

I have heard that MSFT has no interest in acquiring all of Yahoo!. They might, however, have some interest in some of the smaller pieces of the company.

Rumor has it that Europe's banks will be stress tested based on a larger writedown of Greek debt.

One additional point on the proposed tax repatriation holiday of overseas profits: It may increase corporate dividend payouts, but it not likely to make much of an impact on creating jobs.

It didn’t when a modified version of an overseas tax holiday was introduced in 2004, and it won’t in 2012-13.

The odds of a repatriation of overseas profits are still low despite the introduction of possible legislation.

The reason is that it is more likely to be included in a more far-reaching tax-reform package, and it is unlikely for this legislation to be introduced until the November 2012 elections are decided.

"We are hearing that a large number of hedge funds are going to cash, unable to figure out this market and trying to avoid further losses."

-- Whitney Tilson

I am a realist, and I recognize that there are numerous economic and stock market challenges. And I also recognize that investor sentiment is not the sine qua non and that the threat of premature accumulation (a Bruce Berkowitz term) can be dangerous to your financial well-being.

Two of the most brilliant investors of our time, Berkshire Hathaway's (BRK.A/BRK.B) Warren Buffett and Baupost Group's Seth Klarman, have written about the lack of visibility and difficulty in timing market bottoms:

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month -- or a year -- from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over....

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value….

Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

-- Warren Buffett (2008)

While it is always tempting to try to time the market and wait for the bottom to be reached (as if it would be obvious when it arrived), such a strategy has proven over the years to be deeply flawed. Historically, little volume transacts at the bottom or on the way back up, and competition from other buyers will be much greater when the markets settle down and the economy begins to recover. Moreover, the price recovery from a bottom can be very swift. Therefore, an investor should put money to work amidst the throes of a bear market, appreciating that things will likely get worse before they get better.

-- Seth Klarman (2009)

As a reflection of the loss in investor confidence, hedge fund net exposure is now at the lowest level since April, 2009. Individual investors, too, have dramatically abandoned the U.S. stock market. In June nearly $21 billion was redeemed from domestic equity funds by retail investors. In July almost $29 billion was withdrawn and, in August, it has been estimated that more than $35 billion poured out. The $85 billion of outflows from June to August will likely approach the previous three-month record of $88 billion, which came out of domestic equity funds between September and November of 2008! Thus far in 2011, individual investors have sold about $75 billion of domestic equity funds, only $10 billion less than last year's total outflows. Astonishingly, since the beginning of 2007, domestic equity mutual funds have had net outflows of more than $400 billion (in the same period, $835 billion of fixed-income funds have been purchased!).That spread between stock outflows and bond inflows -- $1.235 trillion -- is unprecedented in the annals of financial history.

-- Doug Kass, “Where I Now Stand”