Stock Market

[Fire0nice228]

Good point EPP. I guess it can be done but its risky for average joes. My point was I guess that if the market is at a low enough point that your comfortable, I took the opportunity to buy. But, I'm only 25 years old.. I got plenty of time to wait for things to come up.

I'm small fry and only have the 1 biotech company, but man is it tempting to gobble them up sometimes lol!

EPP do you know much about the ethanol/bio fuel/alternative fuel type stuff? I see that PEIX was up to like 1.5 a share and is now like half that amount. I assume it'd be just speculation at this point but..

[columbia]

On the bright side, the shares we're all purchasing in mutual funds these days - I automatically make a deposit to my IRA every other Monday - will certainly be worth more in the LR.

[ExPatriatePen]

Big day in the market today.

I'd be real careful adding to any holdings here. There's a very good chance that the market gives back most of these gains in a light trading week next week.

If you are feeling lucky, one of the Violtility indexes might be a decent choice here.

[KennyTheKangaroo]

yesterday would have been a juicy day to make a bet on the vix. it was fairly obvious that whatever decision was made by the supreme court, that the markets would be very wild yesterday.

[Fire0nice228]

One of my spec biotech stocks has a big FDA thing in July.. hoping it goes fantastically.

I've learned the hard way that biotech is one of the riskiest sectors in the market. Tread VERY carefully.

Was being careful, and it got FDA approval on Thursday! Hooray! Hoping for buyout from big pharma. I'm avg'd in at around $11.00.. AMRN

[Tomas]

A short note I prepared for the former students of my Corporate Valuation class. Maybe people reading this thread might find this interesting as well (some subscripts/superscripts may not copy well from the original document).
Enjoy!


Are you smarter than PIMCO Managing Director Bill Gross?

Dear friends:
I don’t know whether you caught today’s exciting CNBC article where Bill Gross, the Managing Director of the bond giant PIMCO claims that “stocks are dead.”
Here is the gist of his fascinating argument:
***
For his part, Gross argues that the return of stocks above the rate of economic growth as measured by gross domestic product cannot be sustained.
"The 6.6 percent real return belied a commonsensical flaw much like that of a chain letter or yes — a Ponzi scheme," he says. "If wealth or real GDP was only being created at an annual rate of 3.5 percent over the same period of time, then somehow stockholders must be skimming 3 percent off the top each and every year.
..
"If an economy’s GDP could only provide 3.5 percent more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)?"
***

Now, here is my “homework” for you. Without scrolling down, uncover the giant logical fallacy in Mr. Gross’ argument (after my Advanced course you are absolutely equipped to spot it). That is, I want you to be able to show that even in the economy where the GDP grows by 3.5%, the rates of appreciation on ANY investment (including equity) in excess of that number are completely rational, and not associated with “profiting at the expense of the others.”
AFTER you form your argument, scroll down…












The gist of the fallacy is this: In terms of valuation formulas, Mr. Gross in his argument inexplicably insinuates that rates of returns on investment have to be tied to the numerators (cash flows), while in reality they have everything to do with the denominators (that is, the discount rates investors use to discount the cash flows, to get the compensation for inflation, lost opportunities (reflected by the “real rate”), and the riskiness of investment).
If you click on the actual article:
http://www.cnbc.com/id/48417337 (just in case, the same video should be here: http://www.cnbc.com/id/48423635 )
you’ll get the video of the interview with Prof. Siegel (whom Mr. Gross criticized). Prof. Siegel took Mr. Gross “to school” by pointing precisely the above argument. However, since he talked in pretty abstract terms, here is a simple math example to hammer the point down:

Consider an all-equity firm (so that there are no “poor bondholders” to be taken advantage of) that will pay you FCF=$100 next year. And, because we are in an “anemic economy”, the cash flows will grow by just 1% per year forever. However, shareholders feel their willingness to invest will be rightfully compensated only if they earn 11% per year (because of inflation, lost opportunities, and the riskiness of investment)
In that case, the Equity in the Company (E, incidentally equal to V, as D=0), will be equal to the PV of the growing perpetuity:
E0 = FCF1 / (r-g) = 100 / (0.11 – 0.01) = $1,000 today.
next year, the equity will be worth
E1 = FCF2 / (r-g )= 100*(1.01) / (0.11-0.01) = $1,010
two year from now, the equity will be worth
E2 = FCF3 / (r-g) = 100* (1.01)2 / (0.11-0.01) = $1,020.10
and so on.
Now, remember that the return on investment always equals
Rt = (Dt + Pt) / Pt-1 -1
In the context of our valuation, the “dividend” will be the FCF generated in the particular year, and the “price” will be the value of equity. So, for Year 1:
R1 = (FCF1 + E1)/E0 -1 = (100+1010)/100 -1 = 11%
For year 2:
R2 = (FCF2 + E2) /E1 -1 = (101 + 1020.1)/1010 -1 = 11%
and so on. That is, shareholders will earn 11% return EVERY year, even if the company’s cash flows grow by just 1% per year.

So, what should you take away from this?
1) It is NOT that the growth in economy does not matter. It very much does, as it influences the “starting” value of investments. In our example, if the FCF growth was, say, 6%, then the initial value of the Equity would be E = 100/(0.11-0.06) = $2,000 , not our original $1,000. Remember that the PERPETUAL growth rate we always used in most of our valuations perfectly reflects the growth in the US economy (that’s why we used the 6% = 3% for the “typical” inflation + 3% for the real growth of the economy).
2) At the same time, the growth in cash flows has very little to do with the RETURNS investors achieve on their investments. The returns are determined by the discount rates investors apply to computing PVs of FCFs. If investors use 11%, their investment return (in expected terms) will be 11%.
3) The negative returns on equity are not the evidence that the “stocks are dead.” Instead, they reflect the fact that both cash flows and the discount rates are revaluated on a daily basis. If the market expects cash flows to decline and/or discount rates to increase, stock prices must go down. BUT, at the end of every trading day, the prices of stocks reflect the base values from which the stock investments are expected to appreciate precisely by the required return. [I don’t want to make this example too long, but imagine that tomorrow we lean really bad news about the economy, causing you to revaluate FCF1 to $50, and growth to 0.5% in perpetuity. The stock will immediately drop to 50 / (0.11-0.005) = $476.19. A really bad news for those who held the stock between today and tomorrow. However, if nothing changes after that, the investment of equityholders will once again grow by 11% per year from the “new base” of $476.19. Try it…
4) You should expect that “bond people” will talk trash about stocks, but, apparently, sometimes their arguments are allowed to make no sense.
5) And, most importantly, if you got the gist of the argument, you are now smarter than the guy whose net worth is.. http://www.forbes.com/lists/2010/10/bil ... _3ESQ.html

Enjoy your summer!

[JeffDFD]

Reviving this thread...anyone have any thoughts on what the fed may have up their sleeve? QE3 or no? Anyone make their millions yet on some small startup and want to share with the LGP community?

[KennyTheKangaroo]

kenny the kangaroo has been on autopilot for the past few months with his investments.

this thread is yearning for a return of EPP

or at least tomas to scare the crap out of us.

[columbia]

EPP is too busy combing the sand out of his beard, to show up here these days.

Spoiler:

Actually, he went back to work.

[Godric]

EPP is too busy combing the sand out of his beard, to show up here these days.

Spoiler:

Actually, he went back to work.

Yeah and he is like crazy busy too

[thehockeyguru]

Thoughts on the possibility of QE3?

[King Sid the Great 87]

QE3 is a rain drop in the ocean. Until the fiscal cliff issues are resolved one way or the other, I wouldn't anticipate much of a move. Too much uncertainty only four months down the road for companies to risk capital by ramping up.

[ville5]

More importantly, someone splain to me hith weather derivatives are traded on the Chicago Merchantile Exchange. And then deny that weather manipulation is going on €¥¡£ :o

[thehockeyguru]

QE3 is a rain drop in the ocean. Until the fiscal cliff issues are resolved one way or the other, I wouldn't anticipate much of a move. Too much uncertainty only four months down the road for companies to risk capital by ramping up.

I agree, the fiscal cliff issues won't be touched until after the election. I believe there is around 400B left before the debt ceiling is hit. How long does it take for the gov't to blow through that?

[ExPatriatePen]

QE3 is a rain drop in the ocean. Until the fiscal cliff issues are resolved one way or the other, I wouldn't anticipate much of a move. Too much uncertainty only four months down the road for companies to risk capital by ramping up.

I agree, the fiscal cliff issues won't be touched until after the election. I believe there is around 400B left before the debt ceiling is hit. How long does it take for the gov't to blow through that?

The Fed is simply "Jaw bonining.

If I could figure out how to make a "pure play" that the Fed won't do anything significant before the Election in November, Well, I'd go "All In".

It's simple politics, the Federal Reserve is supposed to be a politically agnostic entity. Any move by them to ease will be seen by Republicans as an attempt to support the existing administration. As the Fed is already not a favorite of the "political right", the Fed won't want to raise the specter of a GOP backlash.

The Fed "standing pat" until after the election is about as sure a bet as you're ever going to get in investing.

[JeffDFD]

QE3 is a rain drop in the ocean. Until the fiscal cliff issues are resolved one way or the other, I wouldn't anticipate much of a move. Too much uncertainty only four months down the road for companies to risk capital by ramping up.

I agree, the fiscal cliff issues won't be touched until after the election. I believe there is around 400B left before the debt ceiling is hit. How long does it take for the gov't to blow through that?

The Fed is simply "Jaw bonining.

If I could figure out how to make a "pure play" that the Fed won't do anything significant before the Election in November, Well, I'd go "All In".

It's simple politics, the Federal Reserve is supposed to be a politically agnostic entity. Any move by them to ease will be seen by Republicans as an attempt to support the existing administration. As the Fed is already not a favorite of the "political right", the Fed won't want to raise the specter of a GOP backlash.

The Fed "standing pat" until after the election is about as sure a bet as you're ever going to get in investing.

It seems everyone is anticipating an announcement about more easing this week...mainly due to the poor job numbers.

I understand you saying they wont do anything because they will not want to appear political, but if they instead make it look like: poor job numbers (ie not political) = easing...does that change your opinion? Or are you anticipating a pullback on recent gains after the Fed - because they have been going up in anticipation of more easing?

[ExPatriatePen]

I don't see anyway that the Fed can institute a QE3 in the next 8 weeks.

They can still do any "Operation Twist" (Bond purchase of 30 year bonds while selling 10 year notes and below), but I really cant see them instituting a QE3, especially not with the size of QE3 that would be required.

I've been wrong before, but I think the market is wrong for anticipating a large QE3 move here. And yes, that means we should get a pull back as a response.

Fed announces further easing by buying MBS...

Pretty much what I expected.

The market seems to like the announcement though which surprises me, I would have thought the market was expecting more and would be disappointed. Maybe everyones thinking that the market expected a big QE3 response was overblown?

[ExPatriatePen]

more on the Fed's options tomorrow:

http://www.thestreet.com/story/11697286 ... en=GOOGLEN

[ExPatriatePen]

Good article that gives both sides of the Feds conumdrum.

http://blogs.wsj.com/marketbeat/2012/09 ... -election/

Personally, I think Boris Schlossberg has it right.

People think Ben is only interested in his own re-appointment. I think that type of opinion doesn't give Ben nearly enough credit. Ben is worried about maintaining the independance of the Fed, whether he's chairman or not. He's not about to jeporadize that by being the first Fed chairman to make a move after labor day in an election year.

[columbia]

Independence cuts in both directions:
Not acting (if he thinks it is actually warranted*) because of the election calendar, displays a lack of independence.


* And that's an entirely different conversation.

[ExPatriatePen]

Independence cuts in both directions:
Not acting (if he thinks it is actually warranted*) because of the election calendar, displays a lack of independence.


* And that's an entirely different conversation.

While there's a lot of validity to what you're saying on an intellectual basis, on a political basis (which is the reality - unfortunately), no action is MUCH easier to justify than action, if you're the Fed. Plus, the Dems will NEVER go against the Fed, and the Right is ALWAYS looking for a reason to go after them.

We'll know tomorrow.

[KennyTheKangaroo]

EPP, what are your thoughts on the whole Knight Capital debacle, and the ensuing depressed price on the stock?

Kenny the kangaroo is mulling weather or not the stock is being unfairly punished for an isolated event. Or is it just that with the capital infusions for jp morgan and others, the stock is just not worth as much as it once was.

[ExPatriatePen]

EPP, what are your thoughts on the whole Knight Capital debacle, and the ensuing depressed price on the stock?

Kenny the kangaroo is mulling weather or not the stock is being unfairly punished for an isolated event. Or is it just that with the capital infusions for jp morgan and others, the stock is just not worth as much as it once was.

I have a friend who's playing (has played) this issue in a LARGE way. He's also lost quite a bit of money in the process.

He trades financial stocks quite a bit, his initial opinion was that the 'market' was unfairly punishing KC and that it would 'revert'.

Now he thinks they're pretty much done for and that there's no real upside.

I don't have a take on the stock itself (I find non-bank financials way too complicated to understand and much to volitile)

As far as what occured from an IT process standpoint, I find the story FASCINATING.

[KennyTheKangaroo]

at this point, its just a possible trade that kenny the kangaroo has kicked around pursuing.

but from what little kenny the kangaroo has read, knight was a respectible member of the financial community that made a big boo boo. so the essential questions here: can these guys continue being profitable going forward? if so, how much? they made most of their money as a market maker, correct? If so, can they still be relied on a market maker? And so on and so forth.

the mishap took place in august and the 10Q for the 3rd quarter wont be coming out for a few months. kenny the kangaroo supposes that a judgement really can't be made until then. but research has to start now.

[ExPatriatePen]

at this point, its just a possible trade that kenny the kangaroo has kicked around pursuing.

but from what little kenny the kangaroo has read, knight was a respectible member of the financial community that made a big boo boo. so the essential questions here: can these guys continue being profitable going forward? if so, how much? they made most of their money as a market maker, correct? If so, can they still be relied on a market maker? And so on and so forth.

the mishap took place in august and the 10Q for the 3rd quarter wont be coming out for a few months. kenny the kangaroo supposes that a judgement really can't be made until then. but research has to start now.

Sounds like you're taking the right approach and you're right, KC makes huge money as a MM.

I should have added that my friend is a short term trader, 90% of his portfolio is turned over in less than 90 days.