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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: pezz who wrote (50134)	5/19/2004 7:00:40 AM
From: TobagoJack	Respond to of 74559

Hi Pezz, Following was in my e-mail box: Subject: Jeremy Grantham and Davod Einhorn speak Greetings from the Greenwich Roundtable. Our session titled What's Up with the Stock Market was held as our first examination of the public equity markets in over 5 years. Since the bubble burst we have explored private equity or defensive, non-equity strategies. Our speakers were very different from each other. Yet both agreed that stocks should be bought for longer terms. Jeremy Grantham is the co-founder of two highly respected quantitative money management firm, Batterymarch and GMO. His high altitude and bearish insights provoked a cautionary response. David Einhorn is one of the brightest lights in the long-short hedge fund community who revealed some structural anomalies that produce mispriced companies. Don Putnam skillfully moderated this session with his usual panache. DPutnam@PutnamLovellNBF.com > Jeremy Grantham, Grantham, Mayo, Van Otterloo Last night we concluded that the stock market could be condensed to four things. First is mean reversion. Everything goes back to trend. Second is uncertain timing. We don't really know when it goes back to trend. Third is career risk. Nothing is arbitrage-able if you have uncertain timing. At that point your job is at risk. Fourth is that size matters. Do well with $5 million and they'll give you $500 million. Do well with that and they'll give you enough money to make sure that whatever value you could add is gone. The 100-year PE trend on the stock market is 16. The normalized return on sales is 6%. Multiply 16 by 6, which gives you a trend line of 720 on the S&P 500. The stock market will go back to 720. If it does not it will be the first time in history. There have been 27 market bubbles (a 2 standard deviation event that occurs every 40 years) in the last century. All 27 reverted to the mean. There have been no paradigm shifts in the last century in any market. Never has been "different this time" but, hey, hope springs eternal. The ugly thing about reverting trends is that they over-correct. They spend a lot of time below the line. It took over 30 years to recover from the 1929 bubble. Japan has still not recovered from its bubble. We are likely to go below 720 and stay there for a while. Be prepared for a correction. Any expectation contrary to this trend will be in complete defiance to a huge breadth of historical evidence over a vast number of economies and asset classes. Recently we've been trying to get a better fix on timing. We've observed that politics have an important role. > For one-year horizons, the presidential election and Federal Reserve cycle is better than value in predicting the economy. But value or mean reversion is excellent in predicting over 7 years and weak over 1 year. The last two years of a cycle the president engineers a stimulus, a strong economy and rising employment to get votes. In the first two years, they tighten the controls to create room in order to expand in years 3 & 4. In years 3 & 4, speculate. Buy growth stocks. In years 1 & 2, duck! Buy value stocks. Since 1932, the politicians have engineered this to work like clockwork. Our economy is skating on thin ice with record deficits and debt. The ice will hold until after the election. Assets are as overpriced as I've ever seen them. Next year will be the black hole of moral hazard. Timber has higher returns than stocks because it is illiquid and misunderstood. It has beaten the S&P over the last century and has been uncorrelated. All bubbles break. We are still 1.5 standard deviations above the mean. Bear markets don't end with growth and technology stock rallies. They end with talk about fiduciary responsibility, protection of assets, bonds and an obsession with risk. Too much optimism still exists. And career risk is rising. The clients don't want to hear "duck". My personal portfolio in 2005 would short the S&P and junky stocks and go long international blue chips, timber and some REITs. jeremy_grantham@gmo.com > > David Einhorn, Greenlight Capital > My job is to pick stocks from the bottom-up. I don't have any top-down thoughts. But there are some large structural inefficiency baked in the capital markets. The largest one is that the big money in professional management is playing a relative value game against a benchmark. They ask, "Will this security outperform this benchmark?" Whereas I ask, "will the reward outweigh the risk?" This is a fundamentally different question. If you care about a benchmark, you'll pat yourself on the back if you lose less money than the benchmark. The exciting thing is that I'm still in the minority. I don't have to be that smart. I just need to ask the better question about risk and reward. The second big inefficiency is that the majorities of professional investors are lazy in their analytical rigor or are incapable. A recent study revealed that most professional investors use the PEG ratio to gauge a stock's attractiveness. The ratio of Price Earnings to Growth rates is the most widely used metric on Wall Street for its simplicity. But the proper relationship between the PE and growth is not linear. So these professionals are trying to fit a flat line across a sharply increasing curve. It intersects in only 2 points. It's nonsensical. The third big inefficiency is leverage. Analysts don't correct for leverage when they evaluate PE multiples. Levered earnings are more risky than unlevered earnings. They don't seem to understand that it is less risky and cheaper to buy the unlevered company. The last major inefficiency is the investment horizon. Most investors won't buy and hold over 6 months. Equities are long duration assets. Predicting their outcome over 6 months is difficult. The career risk of owning dead money beyond 6 months is high. That's exciting. Investors who won't invest because the stock won't perform in 6 months create opportunity for me. The long-term investor's biggest challenge is to avoid making mistakes. In the long run, absolute return investing should be offered to more people. Big money investors should abandon their benchmarks. david@greenlightcapital.com

To: pezz who wrote (50134)	5/21/2004 9:20:48 AM
From: TobagoJack	Respond to of 74559

Hello Pezz, Today’s Report: I sold my Record Investments at AUD 3.779/shr, netting 26% gain on sale, plus 7% dividend distribution, for a total of 33% loot Message 19255859 <<August 29th, 2003>> <<Small caps takin a beating this week ...me too>> ... me thunk everybody and everything taking beating right now, except the USD. It's the script ... Message 19903883 of DUEED Chugs, Jay P.S. It has been some time since I last posted a trade Message 19982695 <<April 2nd, 2004>> There were some “Today’s Reports” since April 2nd, where I reported that I did nothing :0) Message 20025568 <<April 14th, 2004>> Message 20054421 <<April 22nd, 2004>> Message 20124192 <<May 13th, 2004 >>

To: pezz who wrote (50134)	5/26/2004 11:19:04 AM
From: TobagoJack	Read Replies (1) \| Respond to of 74559

Hello Pezz, Tonight’s Report: I bought back and closed out the following trades – (a) PAAS July Call 17.5 Message 19663584 <<January 7th, 2004>> at USD 0.25, claiming USD 1.15/shr profit; (b) PAAS October Call 17.5 Message 19930269 <<March 18th, 2004>> at USD 0.9/shr, claiming USD 2.3/shr profit; and (c) “Whole lot of NEM September covered Call strike 42.5” Message 19851382 <<February 26th, 2004>> at USD 2.20/shr, claiming USD 2.50/shr. Now that reflation is back on, since Maestro Greensputin made the unspeakable deal, and we either go GUDD or GUDDEEUp or, should an incident happen here or there, GUDDEED, I am getting in tune with the new Force. Chugs, Jay