• GoldCore
    07/25/2014 - 09:41
    The EU and global drive toward bail-ins continues unabated. Bail-ins are coming to financial institutions and banks in the EU, UK, U.S. and much of the western world - with painful consequences for...

"Making Investment Decisions Based On Fundamentals Is No Longer A Viable Philosophy"

Tyler Durden's picture




 

Yet another in a long stream of relatively esteemed hedge fund managers has decided enough-is-enough and is shuttering his firm. The reason? Same as the rest... As WSJ reports, Steve Eisman, who emerged as one of the stars of the financial crisis with a winning bet against mortgages, has wound up his fund because he believes that "making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy."

As WSJ reports,

Steve Eisman, who emerged as one of the stars of the financial crisis with a winning bet against mortgages, is shuttering his hedge-fund firm, according to people familiar with the matter.

 

...

 

While Emrys gained 3.6% and 10.8% in 2012 and 2013, respectively, its performance lagged behind that of the bull market. It was down this year, one of the people said.

Mr. Eisman's profile grew at the hedge-fund where he previously worked, FrontPoint Partners, which was once owned by Morgan Stanley and where he had managed more than $1 billion. Besides his bet against mortgages, he was known for shorting, or betting against, for-profit education companies and lobbying against the industry in Washington. He was featured in the best-selling book about the financial crisis, "The Big Short."

 

...

 

In a May regulatory filing, the firm wrote it believed that "making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy."

 

Instead, Emrys echoed what many stockpickers have said in recent years about larger factors affecting their ability to invest as they had historically. "While individual company analysis will always be important," it said, "the health, or the change in the health, of the financial system is the starting point of all analysis."

*  *  *

That about sums it up - there is no alpha; it's all beta (levered beta) and the smartest money knows how that ends...as we noted previously, no lesser manager than Baupost's Seth Klarman explained the mirage...

"Born Bulls"

 

In the face of mixed economic data and at a critical inflection point in Federal Reserve policy, the stock market, heading into 2014, resembles a Rorschach test. What investors see in the inkblots says considerably more about them than it does about the market.

 

If you were born bullish, if you’ve never met a market you didn’t like, if you have a consistently short memory, then stock probably look attractive, even compelling. Price-earnings ratios, while elevated, are not in the stratosphere. Deficits are shrinking at the federal and state levels. The consumer balance sheet is on the mend. U.S. housing is recovering, and in some markets, prices have surpassed the prior peak. The nation is on the road to energy independence. With bonds yielding so little, equities appear to be the only game in town. The Fed will continue to hold interest rates extremely low, leaving investors no choice but to buy stocks it doesn’t matter that the S&P has almost tripled from its spring 2009 lows, or that the Fed has begun to taper purchases and interest rates have spiked. Indeed, the stock rally on December’s taper announcement is, for this contingent, confirmation of the strength of this bull market. The picture is unmistakably favorable. QE has worked. If the economy or markets should backslide, the Fed undoubtedly stands ready to once again ride to the rescue. The Bernanke/Yellen put is intact. For now, there are no bubbles, either in sight or over the horizon.

 

But if you have the worry gene, if you’re more focused on downside than upside, if you’re more interested in return of capital than return on capital, if you have any sense of market history, then there’s more than enough to be concerned about. A policy of near-zero short-term interest rates continues to distort reality with unknown but worrisome long-term consequences. Even as the Fed begins to taper, the announced plan is so mild and contingent – one pundit called it “taper-lite” – that we can draw no legitimate conclusions about the Fed’s ability to end QE without severe consequences. Fiscal stimulus, in the form of sizable deficits, has propped up the consumer, thereby inflating corporate revenues and earnings. But what is the right multiple to pay on juiced corporate earnings? Pretty clearly, lower than otherwise. Yet Robert Schiller’s cyclically adjusted P/E valuation is over 25, a level exceeded only three times before – prior to the 1929, 2000 and 2007 market crashes. Indeed, on almost any metric, the U.S. equity market is historically quite expensive.

 

A skeptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla. The overall picture is one of growing risk and inadequate potential return almost everywhere one looks.

 

There is a growing gap between the financial markets and the real economy.

 

...

 

Six years ago, many investors were way out over their skis. Giant financial institutions were brought to their knees...

 

The survivors pledged to themselves that they would forever be more careful, less greedy, less short-term oriented.

 

But here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking the prudent course. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs.

 

Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.

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Fri, 07/04/2014 - 19:04 | 4925662 Looney
Looney's picture

Here’s an interesting “Honey-Do-List” from O’Bamboo to Poroshenko via RAND Corporation:

http://beforeitsnews.com/politics/2014/07/ukrainian-president-uses-rand-corporation-plan-in-eastern-ukraine-2634472.html

 

RAND Corp: http://en.wikipedia.org/wiki/RAND_Corporation

 

Looney

Fri, 07/04/2014 - 19:26 | 4925702 I MISS KUDLOW
I MISS KUDLOW's picture

lou gehring played football: fullback

 

do u get what i mean

Fri, 07/04/2014 - 19:46 | 4925743 International Jew
International Jew's picture

only a scientologist would long vix here

Fri, 07/04/2014 - 20:46 | 4925834 smlbizman
Fri, 07/04/2014 - 23:48 | 4926023 COSMOS
COSMOS's picture

Why is he closing the fund, did the insider tips dry up??

But I thought he was connected and would know when the shit hits the fan and how the fed would react, just like back in 2008.

Maybe the crooks are getting out of the business cause there is nothing more to steal at the moment...perhaps

Sat, 07/05/2014 - 07:48 | 4926234 RiverRoad
RiverRoad's picture

+1   Add in the fact that the Fed absolutely refuses to allow any shorting of our markets.  Checked DOG and SH lately?  What will we do when they get down to zero????

Fri, 07/04/2014 - 20:02 | 4925770 zorba THE GREEK
zorba THE GREEK's picture

Making investment decisions on fundamentals is fine if you understand that

fundamentally everything is skewed and screwed and you buy physical gold

and silver and take possession and have guns and ammo to back it up.

Fri, 07/04/2014 - 20:16 | 4925799 NoPension
NoPension's picture

Let the mutha fuckers crash and burn next time. And then, maybe, the bullshit will stop. At least they might remember the downside of blowing bubbles.

Fri, 07/04/2014 - 19:03 | 4925664 TeamDepends
TeamDepends's picture

"Pin The Tail On The Bagholder" is the method we are embracing.  Currently.

Fri, 07/04/2014 - 19:43 | 4925736 International Jew
International Jew's picture

no.  more like musical chairs.  charlatan.

Fri, 07/04/2014 - 19:15 | 4925685 Seasmoke
Seasmoke's picture

I hear the music still playing....keep moving !!

Fri, 07/04/2014 - 19:25 | 4925698 bankonzhongguo
bankonzhongguo's picture

Getting ready to blow my hands off with the last great Amerikan act - illegal Chinese fireworks.

When even passive bond income can't keep up with basic food inflation, it's time to invest in your home town and local perception and not hand your money to anyone else.

If all you did was stock your pantry and farm it out at a price less than the corner grocer this last year, you would have done better than the average bear (beer).

Sure, keep your money in the DOW 20,000 program. 

You're not going to get the memo to time that market collapse and hence you will be (again) left with less than zero.

In keeping with Independence Day, its worth re-reading the Declaration of Independence and more specifically the list of "repeated injuries and usurpations."

Read that document and ask yourself, friends and family if ANYTHING on that list of 1776 mirrors the perception of life in America today.

That also goes for you suffering government goons trolling these blogs searching for "extremists." Work work work.  Call your parents and ask them how they feel about this "republic" these days.

Good luck to everybody.

 

Fri, 07/04/2014 - 19:44 | 4925740 kchrisc
kchrisc's picture

"...it is their right, it is their duty, to throw off such government..."

Fri, 07/04/2014 - 20:29 | 4925812 Professorlocknload
Fri, 07/04/2014 - 19:30 | 4925713 n.d.v.
n.d.v.'s picture

Well he's really full of shit then. There are plenty of stock markets to invest in besides the US. Sure, you will underperform the sillyness that is the US equity market for as long as the music keeps on playing, but, but 3% and 10% returns are a joke either way.

Fri, 07/04/2014 - 19:35 | 4925725 jack stephan
jack stephan's picture

Yes I did build it, I did it alone in my twenties, single handed. No one can dispute it. Before Internet fame, so fuck every piss drop thought that comes out of your caviar covered textbook, smile on that woman.

You're no hood you're a mommas boy, Iranian version bitch.

http://www.youtube.com/watch?v=Wj6fLaXQioc&sns=em

Even if I go, I lived more than a state itself even before my twenties, no politics no Internet just me and my two hands. Well honestly an a few tanks of gas ill do the rest.

God ( whatever omni champ can dream up an explanation) gave us this, regardless of any point your finger shit.

Happy July 4 th all, fuck em

Fri, 07/04/2014 - 19:42 | 4925735 agent default
agent default's picture

What happens when enough pressure has built up and the fundamentals burst out of the bottle and bite you in the ass?  The truth eventually always comes out.

Fri, 07/04/2014 - 20:36 | 4925823 NoDebt
NoDebt's picture

THat's what we've been waiting the last 5 years around here to find out.

At this point the pattern is clear.  It's going to be a near-repeat of 2008, just when and where it starts will change.

Sat, 07/05/2014 - 08:22 | 4926263 Ban KKiller
Ban KKiller's picture

I said 6/20/14.....wrong! Bulls keep charging. Wrongdementals...you saw it here first.

Fri, 07/04/2014 - 19:48 | 4925750 Harriet Wanger
Harriet Wanger's picture

Duh.

Fri, 07/04/2014 - 20:15 | 4925798 bbq on whitehou...
bbq on whitehouse lawn's picture

The only business seems to be barrowing money and rolling over the money you barrowed.
No customers, no production, no services, no market but that of rolling over debt.
Barrow and rollover. The world has become as dogs.
Is it possable to have a world without products or services because they have become unprofitable? When only debt is profitable there will be nothing else.
Im worried we may be passing the point of no return.
No utilites because they are unprofitable.
No commodites because they are unprofitable.

If a company is to make a profit they will be forced to barrow and rollover.
The more businesses who do this the less they do of anything else and the more power banks have, untill there is nothing but banks and bank like businesses.
If this market can't clear, if prices can't drop, then only the machines will find work. We make wake up with money and little to spend it on but more debt.

Fri, 07/04/2014 - 21:04 | 4925862 GooseShtepping Moron
GooseShtepping Moron's picture

I upvote and agree with this comment.

I observed when I worked in retail management that my company seemed to be converging towards a version of the "ideal retailer" which consisted of selling nothing but contracts for a future delivery, to be fulfilled by someone else. It is the counter-stream to the flow of debt rollover you're talking about. Nobody actually does anything anymore, they just move money and contractual obligations in opposite directions.

Sat, 07/05/2014 - 10:19 | 4926380 lucyvp
lucyvp's picture

Im thinking that the wheels come off when debt cannot be rolled over for a lower rate than the previous note.Currently debt in the US is about 61T, interest about 2.5T.  The interest is still trending down.  Debt trending up.  An interest rate spike or a few more years, and rolling over is no longer attractive, that is when the pain begins.

Fri, 07/04/2014 - 21:05 | 4925861 RaceToTheBottom
RaceToTheBottom's picture

"way out over their skis. "

Stupid phrase.  

Every good skier knows that over their skis is where a good skier lives.   Putting the skis outside of the force going through them is not being over their skis and is banking, a skiing error.

 

Sat, 07/05/2014 - 14:12 | 4926910 Beatscape
Beatscape's picture

As a competent skier, I completely agree and thought the same thing when I read it.  As better metaphor would be 'ahead of your headlights'.

Fri, 07/04/2014 - 21:49 | 4925906 AllWorkedUp
AllWorkedUp's picture

"fundamentals no longer matter"

I'll drink to that!

Sat, 07/05/2014 - 10:56 | 4926431 yogibear
yogibear's picture

Fundamentals didn't  matter during the DOT Com days, but hey the rates are already low 

Fri, 07/04/2014 - 22:41 | 4925966 I Write Code
I Write Code's picture

Wimp.

Sat, 07/05/2014 - 00:30 | 4926049 AdvancingTime
AdvancingTime's picture

 What do stock markets around the world have in common with "girls gone wild" the video of college girls on spring break? The answer is both are crazy out of control. We have grown very complacent as money around the world has continued to flow into intangibles and promises.

Currently the market is all a twitter and locked in a "greed and stupidity loop." The loop can be explained as follows, stocks are rising so why get out, not getting out is causing the stocks to rise. When stocks do pullback it is a buying opportunity. Yes, we are indeed experiencing a double down and let it ride mentality. I don't have to explain the greed part. More about this subject in the article below.

http://brucewilds.blogspot.com/2014/06/stock-markets-and-girls-gone-wild...

 

Sat, 07/05/2014 - 08:30 | 4926271 q99x2
q99x2's picture

That reminds me. I have to take a dump.

Sat, 07/05/2014 - 08:51 | 4926296 ToNYC
ToNYC's picture

“That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach.”

 

- - Aldous Huxley, Collected Essays, New York, Harper p 308

Sat, 07/05/2014 - 10:28 | 4926390 BeetleBailey
BeetleBailey's picture

Yeah...I heard/read this same shit in 1986, 1993, 2000, 2007 too....

Sat, 07/05/2014 - 11:50 | 4926502 Money Squid
Money Squid's picture

I sometimes read very detailed analyses here and I wonder if the data does is not valid who is wasting their time analyzing it?

Sat, 07/05/2014 - 12:03 | 4926545 Keltner Channel Surf
Keltner Channel Surf's picture

The mixed feelings in listening to such managers’ laments is that, while one can energetically applaud and agree on moral grounds, “looking solely at the fundamentals” hasn’t been viable since at least the Greenspan era, so while no amount of lobbying to change this unfortunate fact should be considered wasted effort, suffering lagging returns by betting contra to the very realities you’re chronicling, even while admitting they’re firmly in control and have no immediate plans to change policies, not only serves no moral purpose, but only helps fuel the silliness (through short squeezes, etc.).  Similarly, abstaining does nothing in an algo era that removed volume from the equation, any more than shorting in a major recession is “anti-American.”  The role of modern fund managers is akin to medium-term weather forecasters:  enduring a vitamin D deficiency toting a black golf umbrella around a baking desert, sure clouds will open up “at any minute”, is the act of a poor messenger who fancies herself a writer.

Sat, 07/05/2014 - 14:29 | 4926960 Beatscape
Beatscape's picture

One thing that people lose sight of is that the stock market is a leading indicator. Since its job is to predict the future, and essentailly get out in front of its headlights, the stock market is more prone to irrational movement driven by herd mentality, overconfidence, over reacting to the news of the day, asymetrical loss aversion, etc.  Since participants realize that the market is being driven higher by an infinite amount of 'magic money' coined by the central banks, this adds more fuel to overconfidence and a herd mentality that drives it higher into over valued levels. 

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