This morning's Wall Street Journal carried an op-ed co authored by my former colleague Don Luskin and me. The subject is "Flash Trading" which is under regulatory attack in electronic markets, despite its existence in traditional markets for as long as I can remember. The op-ed can be found at:
http://online.wsj.com/article/SB10001424052970203706604574374431720968204.html#articleTabs%3Darticle
If you don't subscribe to the Journal, let me know and I'll email you a copy.
Thursday, August 27, 2009
Wednesday, August 26, 2009
National Health Care
We've got quite a dilemma as a country. We worry over the cost of universal health care, but it's probably something we should have as part of a process of rationalizing the system. Yet the addition of 40 million new customers will pur a big strain on primary care doctors. I reckon there are about 300,000 of those, and if each new client took 2 hours a year of their time, we'd need another 40,000 or so. Massachusetts has gone to universal health care and has this problem. If we pass universal care, this could create problems for baby boomers looking to retire and move to a new location--they might not be able to find a primary care provider--especially since the growing resorts are often heavily populated by uninsured workers and the undocumented. Ironically, it may be easier to get into the emergency room.
So rationing of some sort has to come, because the price of care will likely be too low for many new customers. Many people want ot cut down those expenses that occure in the last 6 months of life. Problem is, we don't always know when the last six months of life begins. Also, we don't want it to be our grandma, our ourselves!
And finally, there's a genuine concern about a "national option" run by the same people who run the post office, with potential for coercive legislation to ensure it's competitive position, bloat its cost, and further redistribute income.
I'm praying the Bue Dogs can resist their own party's attack dogs and move the plan in a semi-rational direction. Semi-rational--that's all I can expect from the goverment these days...
So rationing of some sort has to come, because the price of care will likely be too low for many new customers. Many people want ot cut down those expenses that occure in the last 6 months of life. Problem is, we don't always know when the last six months of life begins. Also, we don't want it to be our grandma, our ourselves!
And finally, there's a genuine concern about a "national option" run by the same people who run the post office, with potential for coercive legislation to ensure it's competitive position, bloat its cost, and further redistribute income.
I'm praying the Bue Dogs can resist their own party's attack dogs and move the plan in a semi-rational direction. Semi-rational--that's all I can expect from the goverment these days...
Thursday, August 20, 2009
Decoupling: Has the Time Come?
Decoupling may have finally arrived, a little too late for the believers of two years ago. The "this time its different" crowd argued that the emerging markets could stand alone without the US and Europe. It didn't work that way, and emerging market equities were hit even worse than those in the developed markets. Lately the Asian emerging markets have been moving up faster than the US market, but it also seem the economies are as well. And, funny thing, the Eurozone is growing faster than the US--at least for now. There should be concern for the Chinese market after the big rally--lots of IPOs, bank loans up at high rates, and maybe some of that money flooding into stocks. Global banks are considering listing in Shanghai and floating stock there. Of course, hot foreign markets are always the last place Wall Street goes to sell junk, when they've run out of locals who haven't heard the news. While playing the Chinese market in the short term given the current liquidity bubble is not for the faint of heart, especially with the government warning against speculation and bank loans finally slowing, continued economic decoupling may lead to returns exceeding those in the developed markets over a longer horizon.
Wednesday, August 19, 2009
20 Year Performance Results
For the 20 years ended December 31st, 2008, Hynes Capital returned a compound annual rate of 11.7% per annum, versus 8.3% for the S&P 500, for an outperformance of 3.4% per annum. For the year 2008, Hynes Capital returned -37.4% versus 37% for the index. In the first half of 2009, Hynes Capital returned 13.6%% versus 3.2% for the index, for an outperformance of 7%. For 20 and one half year period ending June 30, 2009, Hynes Capital returned a compounded 12.1% per annum versus 8.3% for the index, an outperformance of 3.8% per year.
Two things are always said (by responsible people) about investment performance: first, it should be evaluated over a market cycle, and second, it may take the rest of your life to determine whether a manager adds any skill.
I'm still wondering whether the last 20 years has comprised a market cycle yet? A few years ago, I would have said I'd seen a few in this period, which shows you how much I know. While I was chagrined to lose a lot of money in 2008, I noticed many of my value investing heros suffered even worse losses. Legg Mason Value Trust, run by Bill Miller, who beat the market for 15 years in a row, was down 55.1% (although he made almost 50% in the first half of this year--which still leaves him down substantially). Bill Nygren at Oakmark Select I was down 36.2% in 2008, but that followed a horrible -14.0% return in 2007. David Dreman's DWS Dreman High Return Equity was down 45.5% for the year. He's no longer running the fund. 2008 was a year in which, if you kept doing what you'd been doing the past 20 years, you were simply crushed. We had been buying good financial services businesses with good branding/franchises on weakness for years. We were complacent on balance sheet risks. Even though we owned, at times, some of the most famous financial flameouts, some small voice in our ear kept us from averaging down and down and down. It was clear that the balance sheets were getting worse and worse, and we didn't seem to be getting the truth from managements. Our emphasis had always been in financial services, where we had the point of view that increasing productivity would lift living standards beyond the need for physical goods and create plenty of capital for financial companies to get a piece of. So we're glad to have averted absolute disaster last year, and very happy to be making a reasonable recovery so far this year.
Over the years I've tended to have what I call "inside" volatility. I was up less than the market in good years, and protected capital in the declines. While I averted disaster, I really didn't get the mortgage meltdown until it was too late.
I have always focused on relative, not absolute performance. Philosophically, being in the absolute performance business requires a pure arbitrage approach to markets. My concern with this approach is that it removes the benefits of actually owning a share of the production of real goods and services. Performance depends upon the skill of the manager, and not the skills underlying the investments. Given the issue of how long it might take to know whether your manager has any talent, you can see why I would eschew this approach. Rest assured this does not mean I like losing money in any period.
Earnings have outpaced estimates recently, but revenues have often been weak. Doesn't that mean companies have been very aggressive with cost controls and layoffs? Maybe employment won't be as bad as expected going forward. Better than expected employment numbers would really be a plus for consumer lenders such as credit card companies and regional banks. Also, corporate profits tend to get invested rather than spent, so having money in corporate coffers rather than in consumer piggy banks may be a positive for economic expansion.
I'm trying to identify companies with emerging business models that are more efficient than the models they replace. Recessionary times mark an inflection point for these kinds of companies. Older managers at potential customer businesses get laid off, making way for younger folks who appreciate the new, usually higher-technology models. And the new people need to cut costs. Consumers as well are more likely to accept new models. My outperformance this year is partly a result of sticking with some of last year's losers and finding some of these game-changers. I've also been able to make asset class decisions on China and real estate, which seemed to trade at absurdly low values earlier in the year. After being defensive through January and February, almost everything seemed undervalued by the beginning of March. I bought aggressively, and there were stunning returns to be had in some relatively conservative situations, although I suppose that no one believed that taking any risk was conservative.
At this point, my posture is defensive, but I'm worried that just about everyone is bearish. It's a crowded trade, and money seems to pour into the market every afternoon. What's worse, the bear story is fairly obvious. What's not obvious is that the people who seem most anti-wealth, the Congress, is running for re-election next year, and beginning to think about the impact of deficits and tax threats on their chances. The first two months of the year, I believe, were less a result of the economy than a fear of the government's influence on the business climate. While equity valuations seem high relative to historic norms, they seem more reasonable when compared to fixed income.
I think the key to America's future is increasing innovation at the expense of legacy manufacturing. The recession has done us a favor by getting rid of a lot of legacy employment. Because I believe big companies have cut overly deeply into workforces, I believe there will be rehiring. I believe the mature companies, however, will tend to do that hiring in emerging markets, leaving a large potential labor force for the innovators to harness into a more productive manufacturing center. Simply put, we need to make the stuff the offshore folks aren't ready to do yet, not try to compete with them for the business they are good at. Right now we tend to look at the Chinese as a threat. I think China has about 250 million excess farm workers who will roll into the industrial economy over the next 10-20 years. You can guess where a lot of those jobs will come from. We can grow if innovation creates better jobs here. Economics is pretty simple--growth in labor force times growth in productivity equals growth in GDP/GNP.
Two things are always said (by responsible people) about investment performance: first, it should be evaluated over a market cycle, and second, it may take the rest of your life to determine whether a manager adds any skill.
I'm still wondering whether the last 20 years has comprised a market cycle yet? A few years ago, I would have said I'd seen a few in this period, which shows you how much I know. While I was chagrined to lose a lot of money in 2008, I noticed many of my value investing heros suffered even worse losses. Legg Mason Value Trust, run by Bill Miller, who beat the market for 15 years in a row, was down 55.1% (although he made almost 50% in the first half of this year--which still leaves him down substantially). Bill Nygren at Oakmark Select I was down 36.2% in 2008, but that followed a horrible -14.0% return in 2007. David Dreman's DWS Dreman High Return Equity was down 45.5% for the year. He's no longer running the fund. 2008 was a year in which, if you kept doing what you'd been doing the past 20 years, you were simply crushed. We had been buying good financial services businesses with good branding/franchises on weakness for years. We were complacent on balance sheet risks. Even though we owned, at times, some of the most famous financial flameouts, some small voice in our ear kept us from averaging down and down and down. It was clear that the balance sheets were getting worse and worse, and we didn't seem to be getting the truth from managements. Our emphasis had always been in financial services, where we had the point of view that increasing productivity would lift living standards beyond the need for physical goods and create plenty of capital for financial companies to get a piece of. So we're glad to have averted absolute disaster last year, and very happy to be making a reasonable recovery so far this year.
Over the years I've tended to have what I call "inside" volatility. I was up less than the market in good years, and protected capital in the declines. While I averted disaster, I really didn't get the mortgage meltdown until it was too late.
I have always focused on relative, not absolute performance. Philosophically, being in the absolute performance business requires a pure arbitrage approach to markets. My concern with this approach is that it removes the benefits of actually owning a share of the production of real goods and services. Performance depends upon the skill of the manager, and not the skills underlying the investments. Given the issue of how long it might take to know whether your manager has any talent, you can see why I would eschew this approach. Rest assured this does not mean I like losing money in any period.
Earnings have outpaced estimates recently, but revenues have often been weak. Doesn't that mean companies have been very aggressive with cost controls and layoffs? Maybe employment won't be as bad as expected going forward. Better than expected employment numbers would really be a plus for consumer lenders such as credit card companies and regional banks. Also, corporate profits tend to get invested rather than spent, so having money in corporate coffers rather than in consumer piggy banks may be a positive for economic expansion.
I'm trying to identify companies with emerging business models that are more efficient than the models they replace. Recessionary times mark an inflection point for these kinds of companies. Older managers at potential customer businesses get laid off, making way for younger folks who appreciate the new, usually higher-technology models. And the new people need to cut costs. Consumers as well are more likely to accept new models. My outperformance this year is partly a result of sticking with some of last year's losers and finding some of these game-changers. I've also been able to make asset class decisions on China and real estate, which seemed to trade at absurdly low values earlier in the year. After being defensive through January and February, almost everything seemed undervalued by the beginning of March. I bought aggressively, and there were stunning returns to be had in some relatively conservative situations, although I suppose that no one believed that taking any risk was conservative.
At this point, my posture is defensive, but I'm worried that just about everyone is bearish. It's a crowded trade, and money seems to pour into the market every afternoon. What's worse, the bear story is fairly obvious. What's not obvious is that the people who seem most anti-wealth, the Congress, is running for re-election next year, and beginning to think about the impact of deficits and tax threats on their chances. The first two months of the year, I believe, were less a result of the economy than a fear of the government's influence on the business climate. While equity valuations seem high relative to historic norms, they seem more reasonable when compared to fixed income.
I think the key to America's future is increasing innovation at the expense of legacy manufacturing. The recession has done us a favor by getting rid of a lot of legacy employment. Because I believe big companies have cut overly deeply into workforces, I believe there will be rehiring. I believe the mature companies, however, will tend to do that hiring in emerging markets, leaving a large potential labor force for the innovators to harness into a more productive manufacturing center. Simply put, we need to make the stuff the offshore folks aren't ready to do yet, not try to compete with them for the business they are good at. Right now we tend to look at the Chinese as a threat. I think China has about 250 million excess farm workers who will roll into the industrial economy over the next 10-20 years. You can guess where a lot of those jobs will come from. We can grow if innovation creates better jobs here. Economics is pretty simple--growth in labor force times growth in productivity equals growth in GDP/GNP.
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