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Global Macro Trading Journal
- Thread starter Daal
- Start date
Daal I'm interested in your posts but I am hoping you can provide some clarification.
When you refer to 'real' returns are you talking about inflation-adjusted returns in USD?
Or returns in Brazilian Real?
I appreciate what you've written about Brazil stocks from 1980 to 1992, and how they did well despite the various economic problems.
However I don't think equities are always good in all 10-year or even 20-year rolling periods. I am thinking of course about Japan, and how in 2016 the Nikkei is more than 50% below the level it reached at the peak in 1989/1990. Two lost decades, and over half way through a third lost decade.
What factor(s) made Japanese stocks such a bad investment for such a long period? Obviously a big part was the multiple contraction from the peak, but even still, to lose over 50% in a 26 year period is something that most US investors would find difficult to understand.
.
When you refer to 'real' returns are you talking about inflation-adjusted returns in USD?
Or returns in Brazilian Real?
I appreciate what you've written about Brazil stocks from 1980 to 1992, and how they did well despite the various economic problems.
However I don't think equities are always good in all 10-year or even 20-year rolling periods. I am thinking of course about Japan, and how in 2016 the Nikkei is more than 50% below the level it reached at the peak in 1989/1990. Two lost decades, and over half way through a third lost decade.
What factor(s) made Japanese stocks such a bad investment for such a long period? Obviously a big part was the multiple contraction from the peak, but even still, to lose over 50% in a 26 year period is something that most US investors would find difficult to understand.
.
Here is the dataDaal I'm interested in your posts but I am hoping you can provide some clarification.
When you refer to 'real' returns are you talking about inflation-adjusted returns in USD?
Or returns in Brazilian Real?
I appreciate what you've written about Brazil stocks from 1980 to 1992, and how they did well despite the various economic problems.
However I don't think equities are always good in all 10-year or even 20-year rolling periods. I am thinking of course about Japan, and how in 2016 the Nikkei is more than 50% below the level it reached at the peak in 1989/1990. Two lost decades, and over half way through a third lost decade.
What factor(s) made Japanese stocks such a bad investment for such a long period? Obviously a big part was the multiple contraction from the peak, but even still, to lose over 50% in a 26 year period is something that most US investors would find difficult to understand.
.
http://bvmf.bmfbovespa.com.br/indices/ResumoVariacaoAnual.aspx?Indice=IBOV&idioma=en-us
By real returns I mean inflation ajusted USD (assuming a 2-3% USD inflation rate).
The Japanese situation was a unique one, there the CAPE ratio reached over 70 points! Investment analysis worked pretty well, valuations told you returns would be terrible and well, they were terrible. There is no surprise there. Japan wasnt even that bad in terms of growth (I recall an economist article talking about how per capita GDP growth was actually decent) but what you pay for the stock market matters
In the case of Brazilian stocks, the CAPE ratio is about 10 (depending the source you look at). The current PE is 14 but that is in the middle of a depression which is not a fair look at earnings. When margins pop that PE will come down, dividends will pop as well. Thats why the market is rallying so hard, the smart money has figured out things overshot on the way down and they like the catalysts that are coming
The only real way you get a cheap market to keep getting pounded is with deflationary depressions. Kinda like what happened to Greece (where the index dropped 95% or so), but they are in a very unique situation. They are stuck in that EUR and cant ease their way out of it, and they had a banking crisis. In Brazil, you never even had a NGDP print. NGDP growth was around 5-6% even in the depths of the panic. And the banks are still posting nice profits
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As far as US stocks go, I'm semi-skeptical of this market. The CAPE ratio is rich (and I posted a chart earlier showing that historically, that meant a higher chance of a significant correction) but at the same time, central banks have been pretty good at putting shorts out of business since 2009. So I take shots at being short SPY, short calls and long puts every once and a while but I do it with small size in special situations. I still got core long stock positions (BRKB, PSH, OAK) that I like long-term. But by and large while I dont think its time to go long this market with both hands, I dont think its time to short with both hands either.Daal I'm interested in your posts but I am hoping you can provide some clarification.
When you refer to 'real' returns are you talking about inflation-adjusted returns in USD?
Or returns in Brazilian Real?
I appreciate what you've written about Brazil stocks from 1980 to 1992, and how they did well despite the various economic problems.
However I don't think equities are always good in all 10-year or even 20-year rolling periods. I am thinking of course about Japan, and how in 2016 the Nikkei is more than 50% below the level it reached at the peak in 1989/1990. Two lost decades, and over half way through a third lost decade.
What factor(s) made Japanese stocks such a bad investment for such a long period? Obviously a big part was the multiple contraction from the peak, but even still, to lose over 50% in a 26 year period is something that most US investors would find difficult to understand.
.
For the short trade, there needs to be a significant catalyst.
I talked about earlier how higher german bund yields (and by extension, higher UST yeilds) could be it, but how long will bunds fall till the ECB starts popping them again? Probably not that long
https://www.elitetrader.com/et/threads/shorting-boxes-as-a-funding-strategy.303880/
I mentioned this as an idea to borrow funds and lever up but its also an idea on how to earn some interest and not take a lot of duration risk (and duration is being punished pretty bad in this market)
It looks like that earns around 1.5%-2% a year, 2 years out. Thats double you can get in 2y UST notes. Pretty interesting way to park cash in this enviroment
The credit risk is minimal given that the OCC is too big to fail
I mentioned this as an idea to borrow funds and lever up but its also an idea on how to earn some interest and not take a lot of duration risk (and duration is being punished pretty bad in this market)
It looks like that earns around 1.5%-2% a year, 2 years out. Thats double you can get in 2y UST notes. Pretty interesting way to park cash in this enviroment
The credit risk is minimal given that the OCC is too big to fail
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VRX tanked on probe news but I still dont see a reason for me to sell my external stake (the one I bought outside PSH, after I closed out my VRX hedge. the avg is around $27 or so, 1% position, my exposure through PSH is also around 1%).
The way I see the stock is there are two realities that are possible, the bullish one, where cash EPS is real and the company is very cashflow positive (trades at 3 times earnings) and they will do ~$8b in asset sales. The asset sales are enough to cover all debt maturities all the way to 2020 (in fact, I think it goes even beyond that, so they do not depend on the bond market). If the bullish reality is right, the business could even deteriorate more and it would still be fine (along with more suits being brought and they having to settle, they would still be able to absorb that)
The bearish reality is that the cash EPS is not real and the asset sales will dissappoint, if that is the case, the stock is worth $0.
So who is right? Well, people with inside information are in a much better position to know how the asset sales will play out and Ackman said there is plenty of demand. Furthermore he also "increased" his stake after becoming a board member. I put increased in quotes because technically (and I believe legally) he didnt, he simply rolled over his options position from 2017 expirations to 2019. He had to pay up to do that (so, he increased his exposure, money wise) but from a % ownership basis, his stake is flat.
Now, I know what the perma critics will say 'he is being emotional and is averging down because he is a bad investor'. I simply disagree with this, I read and watched a lot about him over the years, and his other bad investments (JCP, Borders, TGT) he never kept adding and adding to a position. This is the first time, is it because all these years he had some huge character flaw that somehow never appeared (and enabled him to earn 1000bps+ over the benchmark for more than 2 decades)? Or is it because he strongly believes the bullish reality is the correct one? I'm betting its the latter and the way the stock is priced, I dont even need to be right 50% of the time to make it the correct play to be long
If the bullish reality is right, stock is worth multiples of the current price (and I make 6-8%). But if the bearish reality is right, well, then i'm out 2%
I do know one thing for sure, the bears have no clue how the asset sales will play out, they are not in a position to know. And I do know one insider who is, and he "added" to his stake
Feel free to disagree but until I see something that falsifies this thesis (Ackman leaving the board, Pearson admits he overpaid for everything), I'm sticking with it
The way I see the stock is there are two realities that are possible, the bullish one, where cash EPS is real and the company is very cashflow positive (trades at 3 times earnings) and they will do ~$8b in asset sales. The asset sales are enough to cover all debt maturities all the way to 2020 (in fact, I think it goes even beyond that, so they do not depend on the bond market). If the bullish reality is right, the business could even deteriorate more and it would still be fine (along with more suits being brought and they having to settle, they would still be able to absorb that)
The bearish reality is that the cash EPS is not real and the asset sales will dissappoint, if that is the case, the stock is worth $0.
So who is right? Well, people with inside information are in a much better position to know how the asset sales will play out and Ackman said there is plenty of demand. Furthermore he also "increased" his stake after becoming a board member. I put increased in quotes because technically (and I believe legally) he didnt, he simply rolled over his options position from 2017 expirations to 2019. He had to pay up to do that (so, he increased his exposure, money wise) but from a % ownership basis, his stake is flat.
Now, I know what the perma critics will say 'he is being emotional and is averging down because he is a bad investor'. I simply disagree with this, I read and watched a lot about him over the years, and his other bad investments (JCP, Borders, TGT) he never kept adding and adding to a position. This is the first time, is it because all these years he had some huge character flaw that somehow never appeared (and enabled him to earn 1000bps+ over the benchmark for more than 2 decades)? Or is it because he strongly believes the bullish reality is the correct one? I'm betting its the latter and the way the stock is priced, I dont even need to be right 50% of the time to make it the correct play to be long
If the bullish reality is right, stock is worth multiples of the current price (and I make 6-8%). But if the bearish reality is right, well, then i'm out 2%
I do know one thing for sure, the bears have no clue how the asset sales will play out, they are not in a position to know. And I do know one insider who is, and he "added" to his stake
Feel free to disagree but until I see something that falsifies this thesis (Ackman leaving the board, Pearson admits he overpaid for everything), I'm sticking with it
This is a very different situation from stocks where the business enter into a collapse, starts to lose money and longs keep hoping for a turn around. In that situation, there is only ONE reality (the business is in bad shape). The longs and shorts disagree about the chance of a turn around and they make bets based on that
Here, its different
If the bullish reality is right, the company is still widely profitable and they still got a lot of financial capacity to support its debt and legal costs. If the bearish reality is right, the company is seriously bad financial shape. The longs and shorts mainly disagree about the probability of each reality.
The way the stock is priced, there is very little margin for error for the shorts but a lot for the longs. If you are short and you are wrong about some of these things, you lose 100-200-300%. So in my mind, it makes sense to be long. Especially given the insider "buying" from Ackman
Am I just rationalizing a bad investment? I dont think so, my investing is not my main income. What I'm down on VRX I can make it bad quickly day/swing trading, I would have no problem ditching this if the thesis fell apart. But at this point it still there. A bad quarter or a criminal probe (and eventual settlement) are still very much fine under that bullish reality
Here, its different
If the bullish reality is right, the company is still widely profitable and they still got a lot of financial capacity to support its debt and legal costs. If the bearish reality is right, the company is seriously bad financial shape. The longs and shorts mainly disagree about the probability of each reality.
The way the stock is priced, there is very little margin for error for the shorts but a lot for the longs. If you are short and you are wrong about some of these things, you lose 100-200-300%. So in my mind, it makes sense to be long. Especially given the insider "buying" from Ackman
Am I just rationalizing a bad investment? I dont think so, my investing is not my main income. What I'm down on VRX I can make it bad quickly day/swing trading, I would have no problem ditching this if the thesis fell apart. But at this point it still there. A bad quarter or a criminal probe (and eventual settlement) are still very much fine under that bullish reality
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VRX isn't likely to issue more debt at this point and rolling over is moot anyways since the next maturity is April'18. However the likelihood of an equity raise is higher here, the dilution needed will hurt at such low prices.
The real question is can the company actually generate enough cash flow to realistically pay down its debt load? I'll be watching and holding on till the conference call in a few days but things don't look good. This is no longer a return to it's glory days, at best your looking at a double or maybe triple in a few years from current prices.
If the CC doesn't project suitable earnings/cash flow trends, I'd be looking to dump(am long VRX too). Plenty more opps in world that isn't dead money. ENDP, HZNP come to mind. Those have a real chance at new all time highs <5 years.
The real question is can the company actually generate enough cash flow to realistically pay down its debt load? I'll be watching and holding on till the conference call in a few days but things don't look good. This is no longer a return to it's glory days, at best your looking at a double or maybe triple in a few years from current prices.
If the CC doesn't project suitable earnings/cash flow trends, I'd be looking to dump(am long VRX too). Plenty more opps in world that isn't dead money. ENDP, HZNP come to mind. Those have a real chance at new all time highs <5 years.
VRX isn't likely to issue more debt at this point and rolling over is moot anyways since the next maturity is April'18. However the likelihood of an equity raise is higher here, the dilution needed will hurt at such low prices.
The real question is can the company actually generate enough cash flow to realistically pay down its debt load? I'll be watching and holding on till the conference call in a few days but things don't look good. This is no longer a return to it's glory days, at best your looking at a double or maybe triple in a few years from current prices.
If the CC doesn't project suitable earnings/cash flow trends, I'd be looking to dump(am long VRX too). Plenty more opps in world that isn't dead money. ENDP, HZNP come to mind. Those have a real chance at new all time highs <5 years.
I dont think an equity raise is something they are considering seriously (And I wanted it to happen at $80). If you look over the last 4 quarters, they are bringing in ~$500M in operating cashflow (GAAP, not Pearson's accounting) per quarter. Last quarter they delevered by almost $1B (combination of operating cashflows and cash on the balance sheet)
The VRX bear/bull thesis is a very long-term one, it has a lot to do with whether the drug portfolio will deliver more than what was paid for it. It certaintly can't be analized by probe news or any other short-term nonsense people are looking at
The VRX stock price has been all about the sentiment around the bull and bear thesis I was talking about earlier. The bears have been winning but with the asset sales coming (leading to a big cash pile plus deleveraging), plus the constant operating cashflows, I'd bet the bull thesis sentiment will pick up going forward. Especially given how bearish people have gotten. Heck, even if the company wont work out long-term, one can still make the case the stock can double from here. Its all about that sentiment around the 2 scenarios
This is why I also reject the Cooperman critique. He said something along the lines of 'the market cap to EV ratio is so low, I can count in one hand that amount of turn arounds from a situation like this'. I dont think he, and almost anyone has seen a situation like this to begin with, as I was saying earlier, this is not a typical 'business is bad, needs a turnaround' type story. The stock is a sentiment trade around the bull and bear realities, if the bull reality is correct, it doesnt matter how low the ratio got, it will turn around because the cash will pile up like crazy. I'd bet even the shorts would admit that
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