Chris Pavese's blog

In his weekly letter, John Mauldin provides us with more signs of stress in Chinese property markets. 

We recently watched a certain TV personality jumping up and down, like Jo-Jo The Idiot Circus Boy with a pretty new pet, and yelling at his viewers to “Sell, Sell, Sell” The St. Joe Company (JOE) after the stock had lost nearly half of its market capitalization in under two months. Viewers were told, “I know it’s got a strong balance sheet. SO WHAT! It may have acquired 477,000 acres of land in North West Florida at a very low cost. SO WHAT! . . . The risk from the oil spill is no longer a question of if, it’s not even a question of when. Now the only question is how much is this going to hurt? Could it wipe out the company??”

We’ll spare the suspense here and answer that one right up front – not a chance.

“The damage and suffering caused by inflation during the course of history are enormous. Still, the worst excesses of inflation occurred only in the 20th century. This development was a consequence of the further technical development of money from coins to paper money and book money together with changes in the monetary regime or constitution ruling supply and control of money.” - Peter Bernholz, “Monetary Regimes and Inflation”

Over the years, I’ve noted that certain subsets of market conditions – occurring together – are associated with very specific outcomes, such as oncoming recessions, abrupt market weakness, strength in precious metals, and so forth. Such indicator subsets, or Aunt Minnies, are essentially “signatures” that often have very specific implications. In medicine, an Aunt Minnie is a particular set of symptoms that is “pathognomonic” (distinctly characteristic) of a specific disease, even if each of the individual symptoms might be fairly common. Last week, we observed an Aunt Minnie featuring a collapse in market internals that has historically been associated with sharply negative market implications.

Our friends at WJB shared these pictures with us earlier today. We’ve been smiling since. Interestingly, we saw a very similar sentiment set-up in September-October 2009, when we wrote "A Gold Mine is a Hole in the Ground with a Liar on Top."

Our friends at Research Edge referred to this weekend’s announcement as The Keynesian Elixir. Wikipedia defines an elixir as “a sweet flavored liquid used in compounding medicines to be taken orally in order to mask an unpleasant taste and intended to cure one’s ills. Elixir in the noun form means a drink which makes people last forever.” In this case, the Euro Elixir is masking the unpleasant aftertaste of unintended consequences. The cure will buy some time, but will emphatically, not last forever

It is important to note that in the near term, the contraction in private sector credit combined with the threat of fresh credit concerns ahead, will likely keep a lid on inflation pressures. This view is perhaps where we differ most from today’s consensus thinking, where many expect an immediate and permanent increase in inflation levels.

The CFA North Carolina Society recently hosted a series of meetings on Avoiding Short-Termism across the state. Jack Gray, Adjunct Professor at the Centre for Capital Market Dysfunctionality at the University of Technology in Sydney, was kind enough to allow us to share his presentation with our readers. Jack's presentation identified the sources of short-termism in addition to offering suggestions for overcoming said barriers, and exploiting long-term value creation.

As we discussed in our Q4-09 Broyhill Letter, it appears that the EU’s initial plan of action (see illustration below) was not exactly a robust plan after all. At the time, we suggested that Mr. Almunnia consult his history books, when he claimed that “There is no bailout problem. In the euro area, default does not exist.” Actually, European nations have defaulted on their debt a stunning 73 times since 1800, with Greece in default more than 50% of the time!

Hands down, our favorite quote on investor’s lack of historical memory comes from Jeremy Grantham who said: “We will learn an enormous amount in the very short term, quite a bit in the medium term and absolutely nothing in the long term. That would be the historical precedent.” In this spirit, we highlight the lessons that should have been learned from the turmoil of 2008, complements of Seth Klarman. The excerpt below is from his annual letter. While most market participants have immediately forgotten these lessons, more prudent investors (who may still suffer from short term memory loss) should consider dusting this list off on an annual basis!

Last Friday was the first 90% Downside Day since February, sentiment gauges are as bullish as they’ve been since the “calm before the storm,”, the CBOE equity put/call ratio is at extremes last seen in August of 2000, stocks are the most overbought since the rally began in March 2009, we’ve gotten within spitting distance of “The Lehman Gap,” volatility is back to complacent levels, and by Jeffrey Saut’s count, last Thursday was session 34 in the “buying stampede” that began on February 26th (rarely do such skeins last more than 30 sessions).

The risks To Blockbuster are well publicized today. The company is fighting off competitors on all fronts with Netflix, Redbox, and OnDemand steadily eroding share from brick and mortar competitors. But Blockbuster’s senior subordinated notes maturing May 2012 are trading below twenty five cents on the dollar today. Investors with an above-average level of risk tolerance may want to give these bonds a closer look. If management can simply execute on its strategic plan, investors stand to make a substantial profit in a very short amount of time. We note that the days of Blockbuster Domination are clearly over, but investors only need a few quarters of stabilization and a briefly extended survival timeline to earn outsized returns.