Value Investing

Traders and speculators are watching the $1,413/oz resistance level. A daily close above this level will likely trigger the beginnings of a short squeeze. Holdings in the largest bullion-backed exchange-traded product expanded yesterday for the first time since May 9. Strong premiums for gold bars in Asia show that jewellers and investors are busy buying bullion on this dip. In Singapore, Reuters reports that “supply constraints” have sent premiums to “all time highs” at $7 to spot London prices. Animal spirits are returning to the gold market in the ‘Land of the Dragon’ in this the ‘Year of the Snake’. The volume for the Shanghai Gold Exchange’s benchmark cash contract surged to 19,599 kilograms yesterday from 15,641 kilograms the day before. In two days the volumes have nearly doubled and surged from 10,094 kilograms to 19,599 or 94%.

One of the problems with QE is that the Fed is forcing people to buy riskier investments than they otherwise would have. The immorality of their actions aside, they create a significant psychological mismatch between assets and their holders. Stocks are in weak hands, insuring one great stampede for the chairs when the music stops.

These are certainly days of miracle and wonder. Well, of absurd and extraordinary financial experimentation, at any rate. Last week, for example, saw the Bank of Japan abandon any last pretense of restraint and topple headfirst into a gigantic pile of monetary cocaine. It would be difficult to overstate the drama of this monetary stimulus (although we favour the word debauchery). Yet as the Japanese monetary authorities declare a holy war against deflation, it would only be fair to draw attention to the colossal opportunity being presented as the antidote to monetary intemperance, namely gold and gold miners. There is a clear mismatch between the prices of gold and silver mining shares and spot prices of gold and silver. But as to why the miners are trading so poorly relative to the physical is unclear to us.

Warren Buffett’s aphorism: "price is what you pay; value is what you get" has been rightly celebrated. But to be a true value investor, it helps to have values. Courtesy of near-zero interest rates and global competitive currency debauchery, it is increasingly difficult to assess the value of anything, as denominated in units of anything else. The business of investing rationally becomes problematic when market participants are pursuing maximum nominal returns without a second thought as to the real (inflation-adjusted) value of those returns. In a global deleveraging that is likely to persist for some years, the heavily indebted countries will desperately need to attract foreign capital to help service their heavy debt loads. And in order to do so, they will likely devalue their currencies. There is an increasingly disorderly currency war going on out there, and the advantage of gold is clear – they can’t print it, they can’t default on it, and there will always be demand for it. Simply put, in the global currency wars, owning gold is like abandoning the battlefield altogether.

AMZN - Profitless, but making it up in volume.   

The partisan politics of this country is simply insane.

Earlier this week two former Merrill colleagues, since separated, were reunited on several media occasions, and allowed to spar over their conflicting views of the world. The two people in question, of course, are Gluskin Sheff's David Rosenberg, best known during the past 3 years for not drinking the propaganda Kool-Aid, and systematically deconstructing every "bullish" macroeconomic datapoint into its far more downbeat constituent parts, and his ebullient ex-coworker, Richard Bernstein, formerly head of equity strategy at a firm that had to be rescued by none other than Bank of America and currently head of RBA advisors, who just happens to be bullish on, well, everything. And since any attempt at holding an intelligent conversation on CNBC is ultimately futile (as can be seen here) and is constantly broken up by both ads, and interjecting anchors and show producers who care far less about facts than keeping the presentation 'engaging' (and going to such lengths to even allow Jim Cramer to have his own TV show), Rosenberg decided to dedicate his entire letter to clients today to "providing a rebuttal" of the slate of reasons why according to Bernstein the "we are on the precipice of a 1982-2000 style of secular market." What follows is one of the most comprehensive "white papers" debunking the bullish view we have seen in a while. Read on.

...Groupon is now offering a 97% off "four day online stock-trading course." While not nearly as big as the discount we have all grown to expect from Whitney Tilson's Value Investing Congress, this offer demonstrates just how much interest the retail investing public has regarding stocks. And why any administration, whether the current or the future one, that believes it can delude the general public into ignoring the broad economy and focusing only on the Russell 2000 as proof of "how good it is" will have its work cut out.

Here are my thoughts from the VALUEx Vail conference. The idea for this conference came to me when I attended VALUEx Zurich, organized by Guy Spier and John Mihaljevic in February 2011 (you can register for VALUEx Zurich 2013, here). The thought of spending three days learning and sharing ideas with smart, like-minded value investors felt instantly right. Investing on some level is a never-ending pursuit to get better. Most of us are locked up in air-conditioned offices where we learn through reading SEC filings, magazines, blogs, etc.

The Borg collective formerly known as the US middle class may have no money left (and its credit cards have long since been maxed out), but at least it has every internet-connected gizmo known to man and Klingon. Not surprisingly, this development has not been lost on the very same retailers who are competing dollar for dollar with the vendors who sell these same faddy gizmos to the same Borg collective. For now retailers are losing. But, like stock traders and the administration they are full of hope. And spam. And will make it known. As SM reports, spam emails from retailers "jumped 20% in the first half of the year over the same period in 2011, according to a survey released this week by Responsys, a California-based marketing software company. In June alone, these stores sent an average of 18 emails per subscriber, up 21% on last year." Expect this number to only go up until virtually every email coming into one's inbox is a groupon ad, a penis enlargement device, a PFG "try us for 30 days for free" offer, or a 90%-off "one time only" for the latest value investing congress. Because the only cost associated with spamming people is printing extra email lists. The Fed Chairman can vouch for the sunk cost associated with hitting CTRL+P. So how long until iPhone spam filter makers are more profitable than Belgian caterers?

 I am back from Buffett’s Omaha.  Every year I come back feeling supercharged for the year ahead.  This year was no different.  From morning till night I had the pleasure of sharing and debating ideas with investors from all over the world.  Though I did not plan it this way, the first day I had dinner with value investors/friends from the UK, on the second from Germany, and on the third from Spain.  I have at least a dozen stock ideas to research and new thoughts to process. 

I have to confess, I am tired of writing "structured" articles, the ones where I have to limit my thoughts to 800 words.  So with this one I am taking a break.  This is an unstructured stream of thought, in no particular sequence.  

 Best Buy’s CEO Brian Dunn did a courageous and proper thing for shareholders by resigning.  He was not the right person to lead Best Buy into battle against online-only competitors that use Best Buy’s spacious and beautiful stores as the showroom for their products.  To make things even worse, smart cell phones make comparison shopping so much easier nowadays, and structurally, Best Buy cannot have lower prices than its online competitors.  Its stores also lack the breadth of selection of Amazon and they are at a permanent, competitive cost disadvantage.&nbs

"It Is completely ironic that we would be experiencing one of the most powerful cyclical upswings in the stock market since the recession ended at a time when we are clearly coming off the poorest quarter for earnings... There is this pervasive view that the U.S. economy is in better shape because a 2.2% sliver of GDP called the housing market is showing nascent signs of recovery. What about the 70% called the consumer?...Let's keep in mind that the jump in crude prices has occurred even with the Saudis producing at its fastest clip in 30 years - underscoring how tight the backdrop is... Throw in rising gasoline prices and real incomes are in a squeeze, and there is precious little room for the personal savings rate to decline from current low levels." - David Rosenberg

It seems that the mainstream investment community only takes a break from ignoring gold to berate it: one of gold’s most outspoken critics, uber-investor Warren Buffett, did so recently in his latest shareholder letter. The indictments were familiar; gold is an inanimate object “incapable of producing anything,” so any investor holding it instead of stocks is acting out of irrational fear. How can it be that Buffett, perhaps the most successful (and definitely the most well-known) investor of our time, believes that gold has no place in an intelligently allocated investment portfolio? Perhaps it has something to do with his mentor, Benjamin Graham....for most of Graham's adult life and the most important years of his career, ownership of more than a small amount of gold was outlawed. Banned for private ownership by FDR in 1933, it wasn't re-legalized until late 1974. Graham passed away in 1976; he thus never lived through a period in which gold was unmistakably a better investment than either stocks or bonds. All of which makes us wonder: if Graham had lived to witness the two great bull markets in precious metals during the last 40 years, would he have updated his allocation models to include gold?