Durges Shah

I guess they have seen each other’s values over a long-period of time and whether it is markets or life, just come to think of it. How many guys do you know whom you would be willing to make an executor to a will? So, there are certain qualities that you believe that some people have seen through times and their behaviour makes you feel that when somebody is putting trust on to you, you know it is a burden, but you are willing to take that and deliver because you know there is a reciprocation from the other side. In more such relationships, the person feels obliged to be a part of the group or a part of the relationship rather than the other way around.

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Baupost

A letter gives a rare glimpse into one of the world's most secretive — and most successful — hedge funds


(Getty Images/ Scott Olson)
There are two types of investing, according to the departing partner of hugely successful and secretive hedge fund Baupost Group: "needle in a haystack investing" and "tide comes in and tide goes out investing."

One type takes rigorous work as you search for a small number of opportunities. The other, "chutzpah."

The partner, Brian Spector, made those comments in a letter to investors in the $27 billion hedge fund.

The letter, included with Baupost's quarterly update, provides a rare glimpse into the Boston-based fund, which is led by iconic value investor Seth Klarman.

Spector, a senior member of the fund's public investment group, will retire at the end of the year after 17 years at the fund to focus on his family and philanthropy, according to the third-quarter update, dated October 15 and obtained by Business Insider.

Klarman, the author of the famed book on value investing "Margin of Safety," described Spector as "an outstanding investor, collaborator, and mentor."

Klarman also asked Spector to write directly to investors.

"Because of his unique perspective and insights, I asked Brian to draft a letter to you that accompanies this letter. He alone determined the content. I hope you find that it furthers your understanding of Baupost," Klarman wrote.

As of the end of last year, Baupost Group had achieved net gains (after fees) of $23.4 billion since its inception in 1982, placing it amongst the top-performing funds in the world, according to data from LCH Investments.

In more than three decades, it has had only two down years. Right now, the fund is on track for its third annual loss, suffering a "mid-single-digit year-to-date decline" after what Klarman described as a "painful" third quarter.

Dot-com bubble

Spector was 25 when he joined Baupost in May 1998 during the "heart" of the dot-com bubble. It was a tough time to be a value investor — broadly defined as finding stocks that are undervalued by the market and poised to rise.

Back then, some thought that the glory days of value investing had passed.

"Traditional metrics like cash flow and asset values were being blatantly disregarded by the market in favor of newfound metrics such as eyeballs and clicks. High-tech companies were the darlings in a rapidly rising market while less-sexy value stocks significantly lagged," Spector wrote in the letter.

Baupost finished the year down over 12%.

Two years later, though, the dot-com bubble burst, presenting an opportunity for Baupost.

While others were selling off their positions, Baupost continued to buy tech stocks at "remarkable prices."

It wasn't easy. Spector wrote that there were many sleepless nights watching investments they made at bargain prices continue to fall:

The bear market picked up steam and we found a number of stocks trading near or even below their net cash value. We bought baskets of formerly hot technology stocks that were getting pummeled, despite having good businesses with contracted revenues. Although many of these companies were experiencing negative cash flow, their management teams were shrinking headcount to align to the new economic reality and were successfully lowering or eliminating cash burn. It seemed like shooting fish in a barrel. We were buying cash at a discount with an option that the underlying businesses had real value. All we had to do was wait for that underlying value to be recognized. What could be easier than buying cash at a discount?

It turns out buying a dollar for 50 cents is a lot harder than it seems. Every day we added to these positions, thinking we were getting an even better bargain than the day before, only to wake up and watch prices drop further. Other respected investors would often comment about how 'value tech' was a 'value trap,' best to be avoided. It was as if the market was having a 'going out of business' sale and we happened to be the only customer who showed up. While both exhilarating and painful at the same time, what I remember most vividly is exhaustion. After countless late nights at the office, I would head home, collapse on my couch and stare at the ceiling. I was unable to read, watch television, or fall asleep. All I could do was worry about what we might have missed in our analysis.

Ultimately, Baupost was right in its thesis. The market turned, and the stocks they had bought shot up.

What's more, moments like that don't come up too often in the market. It was a "tide comes in and tide goes out" opportunity.

"Most of the time we are in periods of haystack investing," he explained. "We sift through lots of investment ideas to find a few decent opportunities. We sell more securities than we buy and our cash reserves begin to build."

Then, once or twice a decade, the markets "become significantly dislocated" and the tides change. That's when it's time to get in, and it takes nerve.

From the letter:

We see distressed sellers, illiquid securities, huge redemptions, and an excess of paranoia and fear. We quickly find a number of interesting opportunities, deploying our significant cash balances as we trade our precious liquidity for mispriced securities. We may lose money in the short term, as we add to our portfolio while prices are dropping. But when markets turn, we expect multiple years of strong profitability.

Investing in tide markets takes chutzpah. To do so effectively, you need to fly in the face of public opinion, you have to fight normal human emotions, and you have to be prepared to double down on your bets when your conviction is most in question. As Benjamin Graham once said, 'The investor's chief problem and even his worst enemy is likely to be himself.' But most importantly, you have to be at a place that empowers you to succeed—a place that is uniquely situated to take advantage of these market conditions. A place like Baupost.

A typical day at Baupost involves the team sifting through possible investment ideas:

On most days, it offers a menu full of bland, unhealthy, and fully-priced choices. We do enough work on the offerings to make sure we aren't missing anything and often go home feeling unsatisfied and unproductive.

Then, they find something that's compelling and focus their energy on it:

We work furiously to understand the drivers of the investment. We spend an enormous amount of time focused on the downside and the risk of permanent capital loss. We also try to understand potential optionality and upside. We ask ourselves, 'How and when will the market eventually see the situation differently?' Once we have a hypothesis about why an investment may be interesting, we start down the path of trying to confirm or reject our original thesis. Depending on complexity and price, this process may take days, weeks, or even months. Oftentimes we place investment ideas back on the shelf and wait for a lower price. Only when the investing stars line up will we add the position to our portfolio.

We can do this successfully because we have a culture of patience. Even though we work hard every day trying to uncover the next great investment, we only deploy our capital when we have real conviction that we have found one. When we don't find interesting ideas, we do nothing and hold cash. For this reason, I've often joked that I'm 97% unproductive. While this means I better be damn productive the other 3% of the time, it also means exercising patience often and waiting for great opportunities. On the flip side, when an idea has been analyzed and is fully baked, we drop whatever else we are doing, discuss the investment, and make a decision. Our portfolio decision process must be incredibly efficient, as we recognize that good ideas are scarce and may prove fleeting.

Warren Buffett said, 'Big opportunities come infrequently. When it's raining gold, reach for a bucket, not a thimble.' When a great opportunity comes around, it is imperative to size it correctly.

One key reason the fund is able to invest in those big ideas is it keeps cash on hand:

One of the most common misconceptions regarding Baupost is that most outsiders think we have generated good risk-adjusted returns despite holding cash. Most insiders, on the other hand, believe we have generated those returns BECAUSE of that cash. Without that cash, it would be impossible to deploy capital when we enter a tide market and great opportunities become widespread. Seth has said on a number of occasions in both types of markets, 'If you have great ideas, you will have capital to deploy.' This is incredibly motivating to our investment team.

Aside from discussing how the firm uses the fundamentals of value investing, Spector also delved into the culture of Baupost. Unlike some funds where the environment is super competitive, Spector said that Baupost has a culture revolving around teamwork and confidence in one another.

When a team member finds a good idea, we discuss who should work on it and how it compares to other ideas we are currently finding (as well as other past ideas). This is a complicated management issue. Good ideas are scarce and most investors like to pursue investments they have sourced. At most investment firms, analysts operate as free agents. Their pay is based primarily on the performance of their individual "book." Rather than cooperating and maximizing investment returns for the firm, they are often incentivized to do the converse. This may breed a culture of mistrust and misplaced motivations.

At Baupost, it is just the opposite. This is an area that I believe makes Baupost exceptional and can't be fully understood from the outside. People work together to maximize the returns for our clients, partly because they are incentivized to do so, but also because they believe in one another. No one would want to hand off a good idea and watch another analyst drop the ball. But, since our investment staff is accountable to both the partners and the team, they comfortably make hand-offs, root for one another, and try to help in any way possible. This means reviewing investments, exchanging impactful information and opinions, as well as mentoring one another.

It is a running joke in our industry that portfolio managers look enviously at the teams of their competitors, always assuming the other groups are better. Not here. At Baupost, I've never thought that I would want to go into 'investment battle' with anyone else. Our team is excellent and I believe it has improved as we have grown. (Quite frankly, I wonder if I would even have the opportunity to interview at today's Baupost!) We get along, share ideas, support one another, mentor younger analysts, and have a good time together. I know the part I will miss most about Baupost is the daily interaction with my smart, ethical, hard-working, and funny (some intentionally) colleagues.

He noted that you'd never know what the market is doing based on the atmosphere of the fund's trading floor:

We try to maintain a calm working environment. In order to really understand a firm and its decision-making process, one needs to comprehend how it acts in a period of uncertainty and stress. Are people calm or yelling at each other? Does it feel like business as usual or is everyone paralyzed by all the red on their screens? At Baupost, if you were in our trading room, you would not know if the market was up 5% or down 5%. This is by design. It is much easier to make reasoned decisions without someone screaming at you or second guessing your judgment. It's not always easy, but we try to maintain the same atmosphere and investment process in all markets.

Spector concluded that Baupost's successful long-term track record isn't due to a "silver bullet" of "formula," but rather the 215 people who make up the firm.

NOW WATCH: Tony Robbins reveals the very first investment everyone should make

Chetan Parikh - ISB value investing summit

“Delta”, in investing, is a term that my friend and an investor whose ideas I respect, Dileep Madgavkar, introduced me to. Don’t look only at the fundamentals, but look at the changes, the deltas, in fundamentals.It’s just not changes in margins or changes in returns on capital employed, but even changes in intangibles such as the size of the moat. Markets rerate and derate on “deltas” and it is important to understand what causes them.

“Sigmoid”, I think it is important to be on the sharp upside of the sigmoid curve. It’s about getting in early in a large market opportunity. In my case, I must hasten to add, in most stocks where I have ridden the sigmoid curve up, it has been largely through luck.

"Practiced deconstruction: - If you have ever listened to someone explain a book, a movie, or even a magazine article and you wanted to interrupt and say “But I saw something that contradicts what you are saying”, than you have practiced deconstruction

Here's How Isaac Newton Remembered Everything He Read The scientific genius had very specific habits when he pored over books in his favorite library

Sir Isaac Newton is largely renowned for watching an apple fall to the ground -- in 1666.

While the event has become iconic as a "eureka" moment of inspiration, mostcreativity experts grasp that Newton's genius stemmed from the decades of hard work following that moment. "What most people forget," James Clear notes inQuartz, "is that Newton worked on his ideas about gravity for nearly twenty years until, in 1687, he published his groundbreaking book, The Principia: Mathematical Principles of Natural Philosophy. The falling apple was merely the beginning of a train of thought that continued for decades."

Which means that the juiciest insights into how Newton worked can come from examining his habits before and after the apple. Thanks to a recent post by the Royal Society of London, you now have a chance to learn about one of his most important habits: the way he read books. Specifically, his tendency to "dog-ear" pages that were important to him. 

In fact, the Royal Society -- with tongue firmly in cheek -- gives Newton a good old-fashioned librarian's reprimand. Rupert Baker, the Royal Society's library manager, calls Newton "a serial offender in the area of page-corner tampering." All told, the Royal Society has four books from Newton's personal library in its collection.

• Samuel Foster's Miscellanies: or, Mathematical Lucubrations (1659) 
• A treatise on numismatics from 1700
• A 1610 Basle edition of the Artis Auriferae, a collection of tracts dealing with alchemy
• Heinrich Cornelius Agrippa's De Occulta Philosophia (1533), which was about occult philosophy and ritual magic.

Only the first title directly relates to Newton's study of gravity, which is why this quartet of books is fascinating in its own right. It shows Newton's interests were wide-ranging. Like Van Gogh and Einstein, Newton was a Janusian thinker, someone who could mix and combine seemingly disparate fields to stimulate creative breakthroughs.

Beyond this, there's the way Newton dog-eared these books. To learn more about Newton's dog-earing methods, Baker consulted a book called The Library of Isaac Newton by John Harrison (1978). Here are Baker and Harrison's insights: 

Newton dog-eared pages in a very specific way. 

The common way to dog-ear a page is to fold a corner of the page down or up (depending on whether you're folding the upper or lower corner of that page). Newton took it one step further. He made sure the tip of the dog-ear pointed exactly to the pertinent part of the text. "A sentence, phrase, or even a single word," writes Baker. 

Newton took extensive notes in the book itself. 

His marginalia is extensive. There's so much of it, "marginalia" almost ceases to be an accurate word for it. His notes are copious, often occupying the entirety of a page's white space. 

Newton was exceptionally organized as a note taker. 

MORE:

Here's Why Einstein Thought Final Exams Were Bogus

Steve Jobs's Early Advice to Mark Zuckerberg: Go East

3 Big Predictions for the Future of Technology

Want to Be More Creative? Get Used to Embarrassing Yourself

Does Every Creative Genius Need an Archrival?

In addition to taking up most of the margins with notes, Newton created handwritten indexes and contents lists. The indexes look like present-day indexes: They are alphabetical, by topic. They list page numbers directly after each topical listing. You can surmise how marvelously these indexes complemented his dog-earing habit. 

Newton wasn't afraid to damage the books.

It's a basic point, but it shouldn't be overlooked. Books are property. Sometimes they are valuable property. Newton's physical use of them "clearly reflects Newton's attitude that books are working tools to be used as convenient and to destruction," notes Baker.

Mind you, Baker doesn't want any visitors to the Royal Society library getting the wrong idea. Dog-earing, he notes, is a "habit of historical interest when found in the former possessions of a genius, but present-day culprits will not be treated quite so understandingly," he writes. "The Librarian Death Stare is an actual thing, you know."

100-baggers since 1962... [feedly]

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100-baggers since 1962...
// Value Investing World

Some interesting stats and thoughts from Chris Mayer in his book 100 Baggers: Stocks That Return 100-to-1 and How To Find Them:

There are 365 stocks that have met our 100-bagger threshold since 1962. 

The 100-bagger population seems to favor no particular industry. There are retailers, beverage makers, food processors, tech firms and many other kinds. The only thing they seem to have in common is the subject of the study: they returned at least 100 to 1. 

It's also worth considering the size of these companies when they started their march. Now I hesitate to make generalizations from the statistics, as I've said. And that's why my focus is more on anecdotal evidence and the ideas or theories behind 100-baggers. With that warning, I'll add that the median sales figure for the 365 names at the start was about $170 million and the median market cap was about $500 million. 

That's interesting on two levels: One, it dispels a myth that to get a 100-bagger you have to start with tiny companies. True, these are small companies. But $170 million in sales is a substantial business in any era. It's not a tiny 50-cent stock with no revenues or barely any revenues. 

Secondly, these figures imply a median price-to-sales ratio of nearly three, which isn't classically cheap by any measure. Going through these 100-baggers, you'll find stocks that looked cheap, but more often you find stocks that did not seem cheap based on past results alone. 

So you must look forward to find 100-baggers. You have to train your mind to look for ideas that could be big, to think about the size of a company now versus what it could be. This doesn't mean you have to have a huge market to address, although that helps. Even a small company can become a 100-bagger by dominating a niche. Polaris was a 100-bagger and makes snowmobiles. 

Despite occasional exceptions, you do want to focus on companies that have national or international markets. Far more common than niche companies on the 100-bagger list are companies such as Comcast, Aflac, Dollar General, ADP and Lockheed Martin. These companies came to dominate big spaces, though they all started small. 

In 1982, Aflac had just $585 million in sales. By 2002, by which time it was a 100-bagger, Aflac had sales of $10.2 billion. Aflac's price-to-sales ratio, by the way, went from about 1.7 to 5.4. So, you had the twin engines: sales growth and multiple growth. Sales went up roughly 17-fold and the price-to-sales ratio went up roughly 3-fold. In combination, and including reinvested dividends, they worked the stock up a hundredfold. Even if we exclude the dividends, Aflac became a 100-bagger two years later, in 2004. 

Another interesting chart to look at concerns how long these stocks took to become 100-baggers. The average time was 26 years. That was also the median.

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Tolstoy and Gandhi

In former times the chief method of justifying the use of violence and thereby infringing the law of love was by claiming a divine right for the rulers: the Tsars, Sultans, Rajahs, Shahs, and other heads of states. But the longer humanity lived the weaker grew the belief in this peculiar, God—given right of the ruler. That belief withered in the same way and almost simultaneously in the Christian and the Brahman world, as well as in Buddhist and Confucian spheres, and in recent times it has so faded away as to prevail no longer against man's reasonable understanding and the true religious feeling. People saw more and more clearly, and now the majority see quite clearly, the senselessness and immorality of subordinating their wills to those of other people just like themselves, when they are bidden to do what is contrary not only to their interests but also to their moral sense. And so one might suppose that having lost confidence in any religious authority for a belief in the divinity of potentates of various kinds, people would try to free themselves from subjection to it. But unfortunately not only were the rulers, who were considered supernatural beings, benefited by having the peoples in subjection, but as a result of the belief in, and during the rule of, these pseudodivine beings, ever larger and larger circles of people grouped and established themselves around them, and under an appearance of governing took advantage of the people. And when the old deception of a supernatural and God-appointed authority had dwindled away these men were only concerned to devise a new one which like its predecessor should make it possible to hold the people in bondage to a limited number of rulers.

And now it seems we are subjugating ourselves to bigger Ruler, the One and only and taking lives in His name!

Practicing Mind

When we practice anything properly, the fact that we are engaging in a difficult learning process not only disappears, but more importantly it dissolves into a period of inner calming that gives us a rest from the tension and anxiety that our “get it done yesterday” world pushes on us every day of our lives. For this reason, it is important to recognize and be in control of the process and to learn to enjoy that part of life's activity

I found that, when given my present moment attention, the practice sessions were very calming, not bothersome. I didn't have to be anywhere but “here,” and I didn't have to accomplish anything but exactly what I was doing “right now.” I found that immersing myself in the process of practicing would shut off all the tensions of the day and all the thoughts of what had to get done “tomorrow.”

We erroneously think that there is a magical point that we are going to get to and then we will be happy. We look at the process of getting there as almost a necessary nuisance we have to go through in order to get to our goal.When you focus on the process, the intended product takes care of itself with fluid ease.

When, instead, your "goal" is focusing on the process or staying in the present, then there are no mistakes and no judging.

Back in the mid-seventies there was a real upheaval going on in the business world of manufacturing. Everyone wanted a Japanese automobile because they were noticeably higher in quality. American auto manufacturers were scrambling to understand why this was and how to fix it. But this wasn't a situation localized in the auto industry. Japanese pianos were becoming popular in this country. Some of them had names people had never heard of and couldn't even pronounce properly, but they could see the quality difference in them regardless.

Dhandho

1. Score keeping is Mr. Pabrai’s most important lesson to achieve success in life and investing. Especially, the track-record is important in investing and gaming. It can help you to track your mistakes and improve your knowledge.
2. Has read the Poor Charlies Almanac 7 times and still finds new insights.
3. Self-improvement is the most important thing, he would bet on the guy with less knowledge and less skills if he has a drive to self-improvement, over a lifetime he will bet the guy with more skills.
4. Pabrai thinks that Fiat is highly undervalued. Minimum margin of safety is 50% and it has the potential to become a +4x. The spinoff of Ferrari will come in less than a month and it is still not considered in the share price.
5. Pabrai currently holds: Fiat 42% of the fund , GM B Warrents >10% , POSCO ~10% , ~15% Horsehead Holding , ~10% Google
6. Dhando Holding IPO will be delayed by 2-3 years, they are currently developing a Smart-Beta value ETF and an own direct small businesses Insurance company (GEICO for businesses)
7. Stone Trust made an underwriting loss of 4 million this year (when the Equity was just 61 million)

Next, I will share my takeaways from the presentation which was attended by approximately 175 guests:

Start of the presentation

In 1920 there were over 100 car manufactures in the US. It came to a bubble, 10 years later only 3 companies survived. The same happened in the 1960s with the electronic industry and in the 2000s with the internet companies.

He speaks about the “Nifty Fifty” and that investors paid any price for good business in the 1950s. At the end of the day the valuation collapsed and the stocks wend down by 75-90% (featured it in “the mosaic theory as well).

According to Pabrai we are currently seeing the “Nifty-Fifty” again. He mentions Amazon, Tesla, Solar Valley, Uber etc. all are good businesses but are valued way to high. Even the CEO of Netflix says that his stock valuation is crazy.

He compares Tesla with GM, which is currently trading at an P/E of 4x according to him.

He then compares Netflix vs. Micron: Only 3 players in the market of Micron. Micron has a market cap of just 20 Bn. And makes 3,6 bn earnings.

Pabrai has launched his fund in 1999 when he bought everything which had a discarded name. According to him, his current portfolio is quite cheap and he again holds many discarded names.

He presents a slide with the number of companies which trade at >100x P/E, we are not yet at the peak of the 2000 internet bubble but close by. But he says that we should stay away from these highly valued stocks as they are no no-brainer. Pabrai thinks that bubbles and bursts are now more frequent and happen somewhere in the world every 3-6 months.

He shows his performance: Since inception he has made 14,6% p.a. far away from his old aim of 23%, but still outperforming the index by a wide margin. He also speaks generally about the power of compounding.

He shows his 5y track record which is with 13,9% below the index (20,6%). But Pabrai doesn’t see a problem with this, as times of underperformance have to be there in accordance to outperform a market over the long run. According to him, the performance will turn around. In the last 2 month the fund lost 12% .

He then starts to talk about positions, this year he makes an exemption of his rule not to speak about current holdings.

Fiat & GM make up ~ 50% of the Portfolio. He doesn’t invest more than 10% into one position but doesn’t mind when a position grows.

The value of the Ferrari spinoff will exceed the initial purchase price of the entire position. In his opinion Fiat will not drop that much after Ferrari is spinout of Fiat. He thinks that Fiat should be at least valued 2x or even more.

GM class B warrents will participate from the share repurchase program which will be enhanced further in the future.

85% of mutual funds underperform the index due to the low fees.

Pabrai funds runs at ultra-low costs, currently he has costs of 0.08-0.04%. This is due to the fact that he pays for everything like rent personally. He mentioned that UBS is the broker for the fund and helps to achieve those low costs.

Pabrai uses a compounding hurdle rate of 6% p.a., which is set on the peak of the fund in 2007. Since than he hasn’t earned any money. If he had charged a 2/20 rate he would have earned +14 Mio., each year!!!

‘Post-mortem’

Helps to make your decisions visible and improves your process.

Sold Bank of America

He bought it at a 0,5x TBV after Buffett went into the stock. TBV (tangible Book Value) is the only metric which is appropriate for a bank investment, but you need a good management! TBV is affected by ROE/ROA. A bank like BoA should trade at a premium x1.4 TBV. Currently we can see a consolidation in the banking sector, due to the higher pressure form regulation. Accordingly, we see a disadvantage for smaller banks (he had a position in Interactive Brokers but sold out). The good thing in investing is that you can make a lot of mistakes in investing but you have to learn from them!

Sold Citi

He bought Citi at a TBV of 0.5x,

Dhandho –Holdings

IPO is delayed by 2-3 years. Raised 152 million in H1 2014 and bought Stonetrust Insurance for ~30 Mio. plus an injection of capital of 30 Mio. ~62 Mio. Equity. It recently announced an underwriting loss of 4 million!!!

Mr. Pabrai was not able to shoot a target, to expand its business, due to too high valuations.

They now try to incubate something on they own:

1. A GEIGO for small business via internet
2. A smart-Beta ETF

They use Puerto Rico as a base due to low costs and low taxes (only 4% tax rate), furthermore he has outsourced the IT of Stonetrust to india which is much cheaper (1/3 of the costs). According to Mr. Pabrai, the new ventures have a low downside in terms of capital and a high potential upside.

Unfortunately, I was not able to write down the questions in the Q&A as I had to stand in a line to ask my question.

Source:http://frenzel-herzing.com/dhando-investor-meeting-2015-a-day-with-mohnish-pabrai/

Anger

The Parable of the empty boat. 🌺⛵
A monk decides to meditate alone, away from his monastery. He takes his boat out to the middle of the lake, moors it there, closes his eyes and begins his meditation. After a few hours of undisturbed silence, he suddenly feels the bump of another boat colliding with his own. With his eyes still closed, he senses his anger rising, and by the time he opens his eyes, he is ready to scream at the boatman who dared disturb his meditation.

But when he opens his eyes, he sees it's an empty boat that had probably got untethered and floated to the middle of the lake.

At that moment, the monk achieves self-realization, and understands that the anger is within him; it merely needs the bump of an external object to provoke it out of him.

From then on, whenever he comes across someone who irritates him or provokes him to anger, he reminds himself, "The other person is merely an empty boat. The anger is within me."
🙏👍

Cash

A man is rich in proportion to the number of things he can afford to let alone.
Henry David Thoreau

Just because the market is open does not mean you have to trade. Cash is a position too.

What QE Actually Impacted [feedly]

On why fed rate hike will have impact on asset prices
 
 

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What QE Actually Impacted

What QE Actually Impacted by Eric Bush, CFA, Gavekal Capital Blog

The Federal Reserve's balance sheet has now been relatively unchanged for about 10 months. Total asset at the Fed are about $61 billion higher than they were one year ago. It sounds like a lot but considering total assets are currently $4.48 trillion, $61 billion is a drop in the bucket.

 

During the various QE programs in the US, a useful template to track different market and economic indicators was to plot them against the 3-month change in total Fed assets (see some of our older posts here, here, and here). Now that we have gone nearly a year since the taper ended, let's check in on some relationships.

QE certainly affected asset prices. For government bonds, yields widened as the Fed's balance sheet expanded and have narrowed as the Fed's balance sheet has stopped growing. For corporate bonds, spreads over treasury narrowed as the Fed was expanding its balance sheet and have since widened substantially as the Fed's balance sheet has stopped expanding. Breakeven inflation expectations have dropped significantly as the Fed's balance sheet has stopped growing as well.

Stocks were positively affected as well. The 12-month change in the S&P 500 has fairly closely tracked the 3-month change in Fed assets. Momentum in the market has also tracked the change in Fed assets.

The effect on economic indicators is much more mixed. QE seems to have clearly impacted the manufacturing PMIs. However, the effect on manufacturing IP itself is tougher to discern.

It's tough to see if QE had much effect on house prices. And it certainly didn't matter to the consumer or small business owners. However, it seems to have negatively impacted economic surprises and increased perceived macro risks in the world as it was winding down.

Finally, QE didn't seem to make much of a difference for nominal GDP or employment.

Unfortunately, overall it seems that QE had a much larger impact on bond and stock prices than on real economic activity. Government bond yields widened when the Fed was expanding its balance sheet while corporate spreads over bond yields narrowed. Stock prices were positively impacted by QE as well and have lost a lot of momentum since QE ended. Manufacturing surveys, in the US and globally, have been affected by QE but real economic indicators such as employment, small business intentions, and GDP have shown little relationship to changes in the Fed's balance sheet level.

The post What QE Actually Impacted appeared first on ValueWalk.

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