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18 februari

LVMH - Love Me Harder

Topic: An investment in LVMH

Conclusion: Just say no

Until today, I've never looked twice at the LVMH share, but that's about to change.

It's now 5:55 p.m. Swedish time on Saturday, February 17, 2018 and I'm about to google the company for the first time, and form an opinion on its shares.

To be clear, it's almost completely irrelevant whether LVMH makes telecom equipment or champagne and leather bags.

The two things that do matter are:

  1. What profits and cash flows LVMH can reasonably be expected to produce
  2. How much of those will be distributed to shareholders, and how the market will value those profits and cash flows (or otherwise decide on the share price)

Everything else is "assistance fluff" used to determine 1 and 2.

Don't get me wrong though, it is important to know what business LVMH is in, in order to assess the company's sustainability. What's not important, however, is my view on the design or quality of their bags, the value for money I get from LVMH's champagne or cognac, or attractiveness of their accessories, watches (did you notice my LVMH watch in the after ski picture above?), perfumes, cosmetics and... magazines (?).

Any single product or brand in this vast conglomerate is all but insignificant, no matter your subjective perception of its importance

But I trust you already understand as much.

By the way, it's now already 6:05 p.m., so I'd better get started.

Valuation vs. financials and market position

My first observation is that with a market cap of 126bn EUR at a P/E ratio of 24.5 and a P/Book ratio of 4.3 they sure need to have a plausible plan for how to grow strongly and consistently for me to be interested. Alternatively, the numbers have to be fudged in some way (NB: fudging usually takes place in the opposite direction).

I have no interest in a deep dive in LVMH's financial statements, so instead I just googled "LVMH financials" and found this on Reuters.

The 5-year sales growth has been 8.8%, and the 5-year EPS growth 8.3%. The numbers unfortunately are all over the place for other time periods, but 8.8% seems plausible as both a historical gauge and an estimate for the future. I mean, why wouldn't a leading luxury goods house take some market share from the general economy, also known as customer "wallet share", and thus grow a few points faster than average?

Another consideration is whether LVMH has a wide moat (sustainable competitive advantage) that warrants a higher than average long term growth forecast? Maybe, maybe not, but for now that's probably the safest bet (that they do have an advantage that will allow for continued growth outperformance). My hunch is that consumers want to be mislead, and LVMH has a position and cash flow that permit outspending competitors in terms of marketing. Did you know that most of the advertising for luxury products is directed toward those who have already bought from the company - it's there to alleviate post-purchase disappointment and cognitive dissonance.


The consensus forecast for 2019 is 12 EUR per share, which is +9% up from 2018, and the long term projected growth rate is 10%. I think that is a little too high, considering the 5-year historical average of less than 9% growth during a global stock market boom and immense central bank liquidity injections. I have nothing to add regarding the company's historical numbers for leverage, margins, tax rates etc., other than that LVMH strikes me as a streamlined and efficient company - a mature category leader. The "mature" part makes me think I can simply extrapolate all numbers into the future. In real life forecasting is never that easy, but for now I'm painting this picture in broad strokes.

There's just one thing that bothers me a bit: the ROE, Return On Equity, is "just" 17-18% for a P/Book of 4.3. That implies a required rate of return for investors of just 4% Sure, there is growth on top of that, and there is compound interest if you let the years pile up, but for every single year, the implied return for an investor is actually just 4% - unless the P/B valuation multiple increases over time. On the other hand the implied return is 4.4 per cent year two...

6:30 p.m. Here I had to take a short break for overseeing dinner, not to mention having a re-fill of champagne

Pros and cons with an investment in LVMH

There are upsides: great market position, proven growth model, proven investor interest in the stock, great cash conversion (cash flow is higher than profits), they already have a normal to high tax rate of 30 per cent, and a future proof product (vanity never dies).

But there are downsides too: a lowly 4% implied return on an equity investment, a P/CF of 17x and a P/E of 24x, not to mention the risk of an unprecedented era of easy money and widespread conspicuous consumption coming to an end.

TINA: There Are No Alternatives?

Sure, I get that in today's low interest rate environment there aren't many good alternatives, and a 4% real return, although with operational risk, is much better than 0% or negative real return.

Nevertheless, remember that the LVMH share has occasionally traded at much lover multiples in the past, and my best guess is they'll do it again when the economic cycle turns. Actually, the LVMH share lost 50% in both of the most recent down cycles. I'm betting they'll do even worse this time round. Notwithstanding that, I think the minimum return requirement for any equity investment should be 8-10%.

Please keep in mind that interest rates and inflation are cyclical phenomena and equity investments have extreme duration. Hence the current ZIRP/NIRP paradigm shouldn't affect your tolerance for high multiples.

I know I'm getting out on a limb here. Some will say the growth rate of 9% should be added to the ROE for a total of 13% de facto ROE. I don't agree, although there is of course some growth effect to consider. Anyway, I'm used to critique regarding my valuation methods. I still, e.g., remember the ridicule I faced when the Swedish retailer H&M traded at 350+ two years ago, and I said I wouldn't touch it above 200 (it's now at 135-140).

The LVMH case smacks of the same situation all over again. Although this is not a recommendation in any way, shape or form, I would hold off buying any LVMH shares above 150. Personally, I doubt I'll buy any until it hits two digits at 99 EUR/share. Why not check at my P/E=1 idea in this post instead?

Cheers (6:50 p.m., I spent almost an hour on this! I hope you're happy!!)

Taggar (blogg): 
4 februari

Se upp med förenklande och fördunklande etiketter

OM du gör bättre investeringar genom att kategorisera bolag som "fina" så fortsätt med det. Allt som fungerar på aktiemarknaden skall uppmuntras, för det finns så mycket som, inte fungerar.

Personligen har jag dock inte lyckats sätta en motiverad värderingspremie baserad på om ett bolag är "fint" eller inte.

Ämne: Den intressanta verkligheten bakom uttrycket "fint bolag"

Slutsats: Det dunkelt sagda är det dunkelt tänkta

I den här artikeln kommer jag förklara varför jag tycker att uttrycket "fint bolag" är så fascinerande, och förhoppningsvis förmedla hur det kan leda till sämre investeringsresultat för den som använder sig av det.

"Fint? Vad betyder det?!"

Världens bästa investerare och wonderful companies

Charlie Munger och Warren Buffett brukar säga att det är bättre att köpa ett fint bolag till rimligt pris än ett ok bolag jättebilligt. Det har gått oerhört bra för Munger och Buffett.

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price"

Men, glöm inte bort att Howard Marks som är nästan lika framgångsrik har sagt att det är priset som är absolut avgörande för avkastningen. Marks säger att det finns ingen tillgång som är så dålig att investeringen inte kan bli bra om priset är tillräckligt lågt.

Citaten från Marks, Munger och Buffett är emellertid irrelevanta för dagens ämne utom på ett sätt: Det är lika dumt att investera baserat på ett uttryck som "fint bolag" som huruvida priset är "lågt" eller om företaget är "wonderful" eller "fair". Man gör sig skyldig till precis samma misstag av icke-analys.

Dessutom, Munger stannar förstås inte vid att kategorisera bolag som "wonderful" eller "fair", eller att värderingarna bara delas in i två lika vaga kategorier. Han och Buffett har förstås en gedigen checklista som avgör om ett bolag uppfyller kriterierna för en långsiktigt högavkastande investering jämfört med alternativen.

Att de har som övergripande strategi att hellre köpa dyrt och bra än billigt och dåligt betyder förstås inte att analysen stannar där. Inte ens ett riktigt bra företag med bra ledning är värt hur mycket som helst.

Det farliga med "fina" bolag

Så här gör man (till exempel) när man tjänar pengar på aktier:

  • Köp en aktie baserat på analys av historiska kursrörelser och sälj den dyrare till någon annan
  • Köp en aktie baserat på analys av bolagets intjänings- och utdelningsförmåga och vänta på utdelningarna
  • Köp en aktie som värderas lägre än motiverat av bolagets intjäningsförmåga och sälj den när marknaden justerat för den tillfälliga felvärderingen

En del lägger till en fjärde punkt: Köp ett bolag som är "fint" och håll det oavsett vad som händer med kurs eller verksamhet så länge det fortfarande är "fint". Sälj bolaget när det inte längre är "fint", förhoppningsvis till någon annan som fortfarande tycker att det är "fint"

Jag förstår att beskrivningen "fint" mycket väl kan användas som förkortning för "rimligt eller lågt värderat i förhållande till bolagets förutsättningar att skapa vinst och kassaflöde", eller kanske "som har kompetent ledning, kompetent personal, tekniskt försprång skyddat av patent, hög och stabil marknadsandel tack vare bra produkter, låga enhetskostnader och nöjda kunder" och liknande positiva beskrivningar. Warren Buffett kanske skulle säga att om företaget har en "vallgrav" (moat) av skydd mot konkurrenter så är det ett fint bolag, men vad vet jag om hur han tänker?

Etiketter formar verkligheten

När du sätter en etikett på något så låser du din uppfattning om saken. Det gäller både när du säger saker om dig själv som "jag är ekonom", "jag kan inte sjunga" och när du kategoriserar andra eller andra saker. Etiketter och fördomar är ibland användbara genvägar, det är därför evolutionen tagit fram dem. Men, på börsen och i många andra moderna sammanhang utgör de s.k. evolutionära mismatches.

Om någon (någon annan eller en tidigare version av dig själv) gjort en gedigen analys av ett företag och år efter år kommit fram till att bolaget outperformar på en rad punkter (tillväxt, resultat, kassaflöde, renommé, anställda) så förstår jag om man inte orkar redovisa allt detta utan börjar kalla bolaget "fint" eller "kvalitativt" eller "det finns en mängd punkter över lång tid som motiverar 30% högre multiplar än liknande företag eftersom det pålitligt vuxit ifatt värderingen på 2 år gång på gång". OK, kalla det "fint" för att du tröttnat på at förklara för oinsatta varför du äger en skenbart dyr aktie.

Men, om du bara hört någon annan kalla det "fint", hur ska du då veta vilken premie som är motiverad?

Eller, om du slutar analysera detaljerna (förståeligt om resultatet varit detsamma åre efter år) och bara tänker "äh, det är ju ett fint bolag, varför skåda hästen i munnen", då kan bolaget eller dess förutsättningar ha förändrats.

Det är denna lättja jag vill varna för när man använder vaga etiketter. Vilket P/E-tal ska ett "fint" bolag ha? Och ett fult då? Så länge etiketten fungerar för dig och du vet precis vad den står för ska du förstås använda den. Det är effektivt - slösa inte tid på att övertyga andra om du inte måste för att din strategi ska fungera.

Men tänk på att när det pratande huvudet på TV säger "det är ett fint bolag" så har du ingen aning om vad just det huvudet menar. Dessutom tycker jag att det påfallande ofta gäller fallna änglar, dvs bolag som t.ex. Hennes & Mauritz som överpresterat historiskt men sedan väldokumenterat tappat mark. Man vill så gärna att aktien och ens pengar ska komma tillbaka så man hänger upp sig på att det ju brukade gå bra och därför struntar i märkliga lageruppbyggnader, fallande marginaler. vilseledande information med mera.

Vad som än får din båt att flyta

Fina bolag fungerar i alla fall inte för mig. Det är för oprecist.

Däremot kan jag också i en snabbpitch säga saker som "de har ett teknologiskt försprång och ett genomtänkt affärsmannaskap som sannolikt gör att tillväxten fortsätter vara högre än branschsnittet samtidigt som lönsamheten är högre. Skalfördelar och en från grunden genomtänkt produktion och distribution gör att företaget sannolikt fortsätter att utöka sitt försprång", dvs jag säger typ "fint bolag och kan därför värderas högre".

Så, om du inte är helt säker på att användning av termen "fint bolag" gör dina aktieaffärer säkrare eller mer högavkastande, var vaksam och gå igenom relevanta fakta en gång extra.

Taggar (blogg): 
28 januari

Never take broker recommendations at face value

Topic: learning about learning in a stock market context

Conclusion: Think through your investment strategy seriously; exactly what is it, that is supposed to make you outperform some of the smartest and most driven people in the world?

The magic formula of outperformance

Do you want to know how to outperform the stock market? Not only that, do you want to know how to both avoid negative years, and outperform the market?

For the benefit of new readers, I was a hedge fund manager for 15 years. Our fund won the to date only HFR reward for "The European Hedge Fund Of The Decade" (2000-2009). Between our inception in October 1999 and our peak in April 2011 the fund returned, net of fees, around 600 per cent to investors while the stock market was flat. With no down years. Our best years were 1999, 2001, 2002 and 2008. In about that order, if I remember correctly.

There exists a concept of an ideal investment method in my mind. I, however, have never been able to follow it. You can read about those Platonesque investment best practices in my TAOS series (and upcoming pamphlet) or in my old (still) give-away e-book.

This article deals with how we in practice used third party research, i.e. brokers, to produce those returns, not what we in theory should have done.

Futuris (the fund) received research reports from around 20 different brokers (Citigroup, JP Morgan, Goldman Sachs, Bear Stearns, Deutsche Bank, Nomura, Morgan Stanley, Merrill Lynch, BNP Paribas, Cheuvreux..., you know the names). Every day a few phone books' worth of research reports landed on my desk (conveniently, I had people that opened the envelopes for me -- during vacation times some of the envelopes remained unopened and went straight to the paper recycling bin).

This is important:

I never took a recommendation at face value.

Many private investors these days buy stocks when their bank or broker issues a buy recommendation. Some might buy just to ride the wave of greater fools buying, but many actually buy just because "an analyst said so". Some even do it only based on public news, that some random research firm or journalist has put the word "Buy" in print.

What I did was collect and compare the underlying data and reasoning supplied in the reports (as well as in IRL meetings with some of the analysts, and client-only conferences). I wanted to triangulate an asymptotic "truth", the real world signal that - distorted through management hyperbole, analyst preconceptions, biases, misunderstandings and muddled reasoning - gave rise to the wide range of reports available to me.

I used all this information and my bird's eye view, to form my own view of a company's position and development, including its 3-12 month finances, and compared that to my assessment of what the important market players were likely thinking. If the discrepancy were large enough, and if the margin of safety in terms of absolute valuation was palatable I put money to work*.

* Putting money to work in a hedge fund with three partners isn't all that straight forward, even if Futuris wasn't big on bureaucracy. Actually, the research part was made as a collaboration effort between me and my in-house analyst (portfolio manager to be, really). Once the idea was more or less fully formed, I pitched it to my two partners, and we discussed whether it was good enough on absolute terms, as well as if it warranted replacing one of the existing forty positions in the fund, i.e., the position's relative merits).

Perhaps the most important lesson to draw from this post is that a professional investor does not follow broker recommendations, so why should you?

About learning, memory and connecting with reality

Initially I set out to write about how to learn, and not least why to learn. When you hear about a "learning machine", ask yourself "what for?". I ask that about God (if he can't 'kick back' as David Deutsch says, what is he good for?). I ask that about the limited number of people I can have a serious relation with (which ones and why: comfort, companionship, learning, challenge...).

A while ago I listened to an episode of The Brain Science Podcast about "affordances" - how the brain perceives objects foremost in terms of what you can do with them = their "affordance". Today, episode #141 of the same podcast series dealt with a similar idea: "concept neurons" and how our memories are mainly based on a few salient key concepts stored in particular single neurons in the hippocampus. These "concept neurons" are connected to a limited amount of facts stored in the cortex and together they form the basis for a made up narrative that the brain decides makes sense for the moment.

Just as we don't see the world, we don't remember it either. The brain makes it all up, and that is why we need notes and commonplaces, and to constantly battle our desire to be right by exposing ourselves to opposing views and as wide a range as possible of "facts", if we want to be able to kick reality harder than it kicks back.

Talking of kicking back, do you really want to compete in the worst conceivable environment, i.e., the stock market? It features the best and most driven competitors, and the market can be characterized as an ever-changing complex beast, where correlations are tentative at best, not to mention highly variable.

Hmm, it seems I need to expand on these last ideas about memory formation, learning and purpose in a separate post later on.

Conclusion: Does it work?

Just take this with you if nothing else: Why do you learn; what do you want to accomplish and why? Why is it supposed to work; what is your theoretical foundation? How do you learn? Is it working? Are you hitting reality, or does it keep hitting you while you punch holes in the air?

Taggar (blogg): 
30 december 2017

Taking stock of the financial year of 2017 and adjusting my direction for 2018

Topic: my poor trading skills, and total tally for 2012-2017, as well as my plans for 2018

Length: short

Conclusion: I'll quit trading listed stocks (after a final handful of  +100%-ers)


(see my post on Hubris here in the TAOS series)

Almost six years ago I opened a private trading account. I did it mainly to take advantage of the coming stock market crash. It never came, and as a result I lost 15.3 million SEK on my short Swedish stocks position (Nasdaq OMX S30 index) - almost 2m USD. This year I sold the last of that position, which means I can finally take stock of the position and tally the result.

Positive surprise

I thought I had barely made up for the losses on other positions, maybe falling short by as much as 5 million SEK or so, but when I finally found the tool for it today, it turned out I've made a positive total result of +1.8 million SEK on my trading account. That means my other positions have gained 17.1 million SEK over the same 5-6 year period. I should be embarrassed - not by the result but by my not knowing the result, and not caring.

Anyway, I've learned a handful things from this experience:

  • I don't care about financial losses (too little, since I haven't bothered to stop the losses or even to calculate the result)
  • I hardly care about gains (I like being proven right, but it's a very fleeting sensation - and a year later it's completely gone; I couldn't care less whether I have 2 million USD more or less in my bank account)
  • I'm not good at predicting the market or at trading
  • It's been a waste of time (except for these lessons)
  • The obvious conclusion is that I should (and will) stop trading listed stocks, and thus free up many quality hours for 2018

Other trading results: why did I make 2 measly dollars in profit on Hennes & Mauritz?

Some people may be interested to know that my life time result on Hennes & Mauritz is 22 SEK (about 2 dollars and 50 cents -- I made one single trade on September 20, 2016 in the stock); that I made half a million SEK in profits on Net Gaming Europe in 2017, and about as much on Gaming Innovation Group over the 2 years I've been active in the stock.

Some Swedes might be surprised to learn that if I add up my lifetime losses on Studsvik and Stockwik and add in my result on URA(nium), CF Industries (Thank you Jesse Felder [I think]), Xact Bull x2, BEAR x15, FING(erprint) and Finepart; that entire pile of dog excrement amounted to nil, zip, nothing but a waste of time.

Calling it quits - soon

Going into 2018, I only hold a few small listed positions in Stockwik, Finepart and Net Gaming Europe, plus a for-fun-position in BEAR x15 (i.e., a devil's instrument for being short the Swedish stock market with a leverage of 1500%). My plan is to get rid of all of them in the coming 12 months unless the market or any of the companies significantly changes character.

I think all positions are set up for 100% gains each in 2018. But, hey, who would listen to the guy who just admitted he lost a fortune on one single position going against the best bull market of a century?

Draghi said "Whatever it takes" back in 2012. Did I listen? Yes. Did I understand or believe him. Apparently not.

Look out for another year end report on the more important aspects of life in a few days.

Meanwhile, here is my pre-year end review for 2016, and the actual YER2016 and here is the one for 2105, and a bonus one that I wrote in May 2016. I'll use those as templates for my coming real Year End Review for 2017.

Taggar (blogg): 
27 december 2017

Creating a confluence of success factors - new people equal new insights

If you don't see new people you won't see new things

-Anna Svahn, networking phenomenon, in my (Swedish) podcast "25 minuter" (link)

If you always see the same people, you'll keep doing the same things, think the same thoughts, commit the same mistakes, miss important investment opportunities, and end up stagnant and disillusioned.

- Change your people, change your life.

I've written extensively before about the importance of perspective for both effectiveness and long term satisfaction, a.k.a. happiness (check out Perspective is gold, Long term satisfaction and Mentally challenged). Anna elaborates on a similar theme.

In my interview* with her, Anna explains how rewarding it can be to step out of your echo chamber, to be proven wrong and learn new things. Not least, she hits the nail on the head when recommending changing the five people you spend most of your time and energy on, lest your own situation and perspective will never change.

* it's 34 minutes packed with insights about networking, efficiency, life rhythm, Tao, writing and much more. If you understand Swedish I strongly recommend you to listen to it on whatever podcast app you're using, e.g., Soundcloud or iTunes #113.

The right people or the right place?

Successful people seem to repeatedly be right where they need to be at the right time. One explanation is that they know and regularly meet with the right people. Or is it the other way around; do they meet the right people because they are at the right place?

"Create the situation you want", is Anna's answer to that. Among other measures she has taken, in order to broaden her perspective and gain new insights, she started having breakfast with inspirational people every Friday; first one-on-one and later in somewhat larger settings. The breakfasts are invitation-only, the guests are a secret and all kinds of documentation and social media is banned. The rules ensure a free flowing conversation about anything from boosting start-ups to discussing investments, crypto currencies, or the weather for that matter.

These breakfasts are as simple as they are ingenious. Start by asking a friend from Facebook or Linked in, or a colleague from a different department. Use the first breakfast to brainstorm who else you could ask. Expand from there. Before you know it you'll have created a vibrant micro community of idea creation that can lead to if nothing else a healthy dose of brain activation and fun, but more likely also to great ideas about personal growth, investing and adventure.

Don't trust chance - create your own

My own life and career consists of a long chain of serendipitous events and a confluence of somewhat unlikely factors. I was always more likely to end up like the meth cooking chemistry professor in Breaking Bad than heading the European hedge fund of the decade and later an appreciated blog and podcast, but luck and grit happened to take me on a different path. Anna Svahn, on the contrary, is exactly where she wants to be and she just turned 25 years old this summer (2017).

Svahn has deliberately created her own confluence of synergistic factors of people, environments, habits (though she calls it rhythms) and activities, whereas I blindly stumbled from one lucky break to the other owing most of my successes to pure grit and a slightly asocial personality (not being invited to the cool kids, not giving a damn, hiding in science and symbol manipulation).

Next, I'll write an article on how my being a bullied loner and a nerd from out of town tied in with computers, programming, mathematics and being tired of school to put me in the perfect time and place for using the dotcom bubble to catapult my career. I was lucky to have the right skill set and lucky to have the right calibration regarding stock market valuations for my two decades as a finance professional.

I'll also describe my development from a die hard "Discounted Cash Flows Are The Only Theoretically Correct Way To Value Companies" advocate, through "Technical Analysis Dabbler", via "Earnings Reports Are All Important" evangelist and "Relative Growth Rates Rule" missionary and a few other of the ways any investor is bound to get lost. My view these days on DCF, TA, trend analysis etc. is too complicated to explain in anything less than a short book, but that's coming sooner or later.

A blueprint for success - creating your own confluence of serendipitous factors

IT legend Roger McNamee (listen to the interview in Superinvestors #18) has provided a blueprint for how to create your own confluence of people, activities, environment and grit in any new and exciting sector. He toured for a year, if not more, with the people who were creating the new IT industry. That's how he saw more clearly than anyone else what companies and what people would succeed, go under, get acquired, get funding, should get funding and so on.

His blueprint is exactly how I have tried saying you should cover developments in blockchain technology, quantum computing, robotics, electric engines, battery technology, AI and so on. That is, if you care about achieving a leading position in an exciting and future oriented field.

Applying the blueprint in practice

Start by reading the basics, then sell that knowledge to public and private organizations as a consultant. Keep learning more about the tech itself, as well as what your prospective clients want or need - both from your meetings with them and through external sources. Not least, keep talking to all and any industry representative you can get hold of. Call them, interview them, go to conferences, travel with them. NB: remember to provide value at all times; ask them what you can do for them. "What do you need? What do you lack? How can I help you?". Keep notes in your commonplace of people, companies, sub industries, sector convergence and divergence etc.

In one year you'll know more than any industry analyst or CEO about the key players, key technologies, key developments, most lucrative investment or employment opportunities. Contrast that with studying books and articles on the internet alone for a year, trying to understand the ever changing flows of a new industry without talking to the people shaping the development.

So, take a leaf from Anna Svahn's and Roger McNamee's books, and test drive all electrical cars you can, talk to e-car owners, talk to local politicians (about regulation), call e-car sub-suppliers and battery start-ups to gauge demand and technological developments, ask for or make your own calculations regarding Tesla's cars (do the numbers add up regarding weight, power, range, charging times, manufacturing cost and so on).

Or, why don't you buy a few toy robots, learn some Python and re-program them, talk to toy store purchase managers, visit robot manufacturers, try your alterations on your or your friends' and their children. What works and what doesn't? What are the manufacturers, innovators and stores missing?

Conclusion - listen to Anna Svahn and Roger McNamee and change your settings to change your life

  • Listen to my interview (#113) with Anna here
  • List the people you spend your time and energy on
  • List who or what kind of people you'd like to see more of
  • Change your daily habits in order to interact more with inspirational people and less with homeostasis dwellers
    • stop eating lunch with the same colleagues at the same place
    • change gym (or talk to new people about new things at your old gym)
    • watch less TV or aimlessly surf the net, and schedule IRL (preferably non alcoholic) activities with inspirational and ambitious contacts you'd like to know better
Taggar (blogg): 
17 augusti 2017

The least tempting stock market charts ever

Topic: a negative view of the Swedish stock market chart

Conclusion: not quite a bargain is it? -50% would be more than reasonable.

Does this series of charts look tempting to you?

(The Swedish OMX stock market index)

First, in the very short term, there seems to be a psychological barrier around 1650. After 3 attempts buyers are giving up. The break out in April looks more and more like a false, last hurrah.

Observing the index from a slightly longer distance, the similarities with the last peak are striking. Even more alarming is that we didn't manage to get above the levels of 18 months ago. If stocks are this weak when US indices are hitting all time highs every day, there's something rotten in the state of Sweden.

Seen from the beginning of the cyclical bull market, the double top of 2015-2017 looks even more ominous. Maybe there's room for a third top before normality ensues, maybe we'll go right through 1250. No matter, I think 1250 is where we're going to start with. We'll cross the bridge of "bounce back to the 1600s, or crash trough to triple-digit territory" when we get there.

In a 2-decade perspective, the current formation looks surprisingly tiny, like a "no volatility, great moderation tremble", rather than a true wash out and re-set of the greatest monetary scandal in history.

My guess is that the latter is what we have before us.

The question is "just" how many more rounds central banks have left before they're empty. In any case, looking for bargains here when stocks haven't even visibly corrected in the chart just doesn't make any sense to me. It's as if Under Armour first raised prices by 200% and then put up signs with "SALE -5% OFF". Tempting?

What to do about it? Get out of stocks unless you have insight in some very specific individual companies. Go cash, or buy something that's currently unloved such as gold, gold mines, uranium or soft commodities.

Read more about the case for a -50% leg on the US stock market here LINK

NB: My next post will NOT be about financials or the stock market.

Stay tuned by bookmarking this page and subscribing to my free weekly newsletter

Taggar (blogg): 
16 augusti 2017

The coming stock market crash of 2017-2018

Topic: The case for a 50% downside for stocks in the coming 12 months, and then some

Style: Funny, 'cause it's true (kind of)

Nota bene: this post should be read in conjunction with my previous post on the bull case for stocks

1 The trend has gone too far

I mean, what are the odds of this trend continuing (see chart) without a major hickup?

Trees don't grow to the sky. Sooner or later, the human psyche will pull the index back to its long term trend (asymptotic to population growth + productivity growth)

Remember that stocks went nowhere between 1996 and 2009, and 2000 and 2012 or was it 2013? That's a long time going nowhere and it seems to be about time for a re-run of a crash and no returns fro a dozen year or so.

2 Stocks are expensive

Historical peaks in the S&P 500 ratio have only briefly broken above the 20 level. Today we're at 24.57. And that's with significant accounting tricks, massive stimulus, zero interest rates and a generally upbeat mood and risk tolerance at highs. Whenever stimulus wanes, reality comes back to bite creative accountants in the derriere, interest rates stop falling or start rising P/E-ratios are bound to explore earlier depths. And that's even before taking into account a less optimistic sentiment, as well as increasing actual need for funds.

By the way, here is an alternative valuation measure. It's based on Price/Sales (from Hussman Weekly the previous week) which is an automatically cyclically adjusted valuation measure (more or less) Notice how the valuation measure has increased 4-fold since 2009. That alone carries an inherent risk of a ca. 75% fall in share prices, if sentiment were to fall to 2009 levels.

A permanently higher plateau?

3 Profits are going... where exactly?

Not that fundamentals are that important, except over very long time periods, but the profits have stalled lately. That's despite historically hysterical monetary stimulus and budget deficits (essentially fiscal stimulus one way or the other). It's hard to conceive of a new and bigger wave of stimulus on top of the already failing ones. There is no new China, no new India, no hoping for Africa to pull profits higher when the low hanging fruit in the U.S. and Europe have been plucked.

In addition, after 9 years of expansion a profit recession is way overdue. The profits for S&P companies quite often decrease by 30-50%, and the swings have become bigger since 1980, not smaller.

With both lower earnings multiples and stalling or falling earnings in the cards, a 50% decrease in S&P 500 is actually a quite modest expectation. Time for a black Friday soon?

Labor costs recently hit a low (inverted scale) and profit margins a mirroring high. With the magic of debt (that postpones the need for a real living wage) faltering it's about time wages reflected living costs, and margins came back to earth. Guess what'll happen to profits... Hint: it's not positive.

4 Interest rates are about to rise

This chart speaks for itself, I hope. With interest rates this low, the only way is up. Retirees and pension funds can't live off of a 2.2% return. Nominal!

Look at the chart, can you honestly say you think rates are going even lower? Anyway, rates don't really matter, at least not fundamentally. If rates are staying low or going lower, then history teaches us that it's because growth is low. In terms of equity valuations, lower interest rates and lower growth will cancel each other out. No, matter, unless we go completely digital, interest rates are not going negative (for long). A situation where suppliers want to be paid late, where you're paid to mortgage your house and so on, simply is to perverse for an economy to take.

5. Dividend yields are low, and if they are about to rise, it's only because stock prices are about to come crashing down

The dividend yield is lower than the interest rate, but rates are fixed and nominal, whereas dividends are risky and contingent of profits and not least cash flow. Dividends can be reduced or cancelled altogether.

Many more and bigger fundamental reasons to worry

There are of course numerous more reasons to expect lower profits, multiples and share prices, such as profit margins mean reverting (or inverting!), increasing churn rate among the top companies in a digital world etc. No need to mention the boomer cohort retiring, thus both reducing their equity portfolios, and cutting back on consumption (due to uncertainty about longevity and investment returns; feeding into lower sales and profits on top of any other adversity or recession trigger). I also don't want to spoil any bull party with mentions of the debt ceiling and a congress that actually wants to see the president fail.

Finally, there is that minor detail of all too much debt in all sectors of the economy (government, corporate, student, auto, mortgage, credit cards) having already pulled sentiment and consumption forward, and henceforth putting a lid on future growth.

Oh, I almost forgot The Fourth Turning which with impeccable timing is soon upon us with its convenient total solution to small matters such as a failing European Union, currency wars, nuclear bickering with North Korea, unsustainable pension promises and the obese healthcare sector. Maybe a digital World War III, followed by a gold backed cryptocurrency fiat re-set accord could interest you?

And the bad news?

Technicals don't look good either. Dr Hussman has frequently noted that high valuations alone rarely slow down equities. However, when the appetite for risk eventually recedes, it's visible in "market internals".

He theorizes that when risk is in universal demand it makes asset classes, industries, sectors and companies converge. The mirror image of such bull behavior is widening dispersion in a number of respects as a harbinger of more widespread flight to safety. The FANG phenomenon is hardly new, and narrowing markets are but one example of an early risk off signal for equity markets.

FYI: As of August 14, Dr Hussman no longer calls the rising risk aversion subtle.

Ain't nuthin' but a FANG!

As a final word: never forget that all securities have to be held until retired. That means that no matter how far a stock price has fallen there is still 100% owners, and thus potential sellers of the stock left. If falling equities means record high NYSE margin debt will trigger forced selling those potential sellers risk becoming increasingly urgent. And then there is the case of Ponzi schemes which have an uncanny knack of being exposed and exacerbating the negativity right when they do the most harm.

Do you still preach dancing while the music is playing, albeit close to the exits (or remaining chairs)? I mean, central banks have no way to go but ever more retard. The same goes for banks and corporations. They'll push for just one more quarter of play pretend. Maybe they can pull themselves up by their own hair a final time before the ultimate solution. Some even claim it was the earlier downturns that were anomalies and due to very specific one-time issues.

Well I'm peepin' and I'm creepin' and I'm creep-in

But I damn near got caught 'cause my beeper kept beepin'

Now it's time for me to make my impression felt

So sit back, relax and strap on your seatbelt

I wouldn't bet on it; there's no reason to. You can always decide to simply pass on this round and see what happens. Or, you just have to ask yourself if you feel lucky.

Well, do ya? (Please read this post in conjunction with my previous ironic post on the bull case for stocks)

Are you afraid yet? You should be.

The fire is lit, and there are very few exits -- small and obscure ones.

You should be

Gold is one of those exits. Bitcoin might be another. Soft commodities could also be worth a look.

Do you want more? Do you want to stay updated? Subscribe, read my book, check in again, tell a friend.

BONUS: Check out Ludvig's write-up in English of our interview with billionaire and hedge fund founder Martin Sandquist here.



Taggar (blogg): 
7 augusti 2017

Stocks about to rally! Is diversification a four letter word?

Topic: The case for a 25% upside for stocks in the coming 6 months

Style: ironic, humorous, short

1 The trend is your friend

I mean, what are the odds of this trend suddenly reversing? Some say it's just getting started. Remember that stocks went nowhere between 1996 and 2009, and 2000 and 2012 or was it 2013? That's a long time going nowhere so it's about time we had a rally, no?

2 Stocks are cheap

We're not even at a recent bottom in PE ratio, let alone an ocular average PE for the recent history. With zero interest rates, massive stimulus, not to mention the internet and general automation boosting productivity PE-ratios should be well above average, right?

3 Profits are going up

Not that fundamentals are that important, except over very long time periods, but the trend for profits is up. In addition profits have hit a temporary plateau while they wait for the most recent monetary stimulus to translate into higher profits. With both higer earnings multiples and higher earnings in the cards, a 25% immediate increase in S&P 500 is actually a quite modest expectation

4 Interest rates are low

This chart speaks for itself I hope. With interest rates this low, there is no alternative to stocks. Retirees can't live off of a 2.2% return. Nominal! True inflation eats up all of that if not more, not least since housing costs are rising. And... look at the chart, can you honestly say you don't think rates are going lower?

5. Dividend yields are real, and they are at a low point in history and thus likely to rise

OK, admittedly the DIV yld is lower than the interest rate, but rates are fix and nominal whereas dividends increase with the economy (if not faster owing to the superior selection of stocks in the top index). By the way, with rising profits, either dividend yields will increase or stocks will rise. And then there is the potential of multiple expansion as well! Please note that DIV yields are abnormally low. Hence, they are likely to rise.

There are of course numerous more reasons to expect higher profits and share prices, such as increasing automation (robots are way cheaper than humans), solar energy (once expensive oil is out of the way, profit margins can expand), profit margins are at historical highs, digital companies like Alphabet, Netflix, Facebook, Amazon etc are not burdened by production costs, 18tn USD of newly minted money globally over the last few years, the 5tn Chinese One Belt One Road initiative, a permanent shift higher in valuation multiples as we now realize stocks are the superior investment alternative... The list goes on and on.

No matter, in the next post we'll go through a few highly speculative and hypothetical challenges to the upside case. We'll talk demographics, pensions, debt, currencies, consumption, inflation, and maybe even throw in some debt ceiling and foreign tax repatriation arguments for good measure.

Could there actually be an alternative to being all in on the stock market? Isn't diversification a four letter word? Stay tuned to find out. Subscribe, read my book, check in again, tell a friend.



Taggar (blogg): 
3 augusti 2017

The next 1000% trade is in gold mines

This post about gold refers to my post about uranium from the day before yesterday. The only real difference is that it's about gold.

Conclusion: I think it's about time to trade some of those expensive stocks for gold. Just as for URA there is a 5x potential in GLD here, and more so in GDX (miners).

The current technical case for gold

Talking about triple bottoms (see the URA trade), check out the senior goldminers ETF:


The chart is right at a pivotal point where the gold miners could break out upward, from the trend of lower highs toward a pretty solid constant bottom.

In a longer term perspective, the current formation looks like it's just the final confirmation pattern of a larger bottoming process:


The low point in early 2016 looks like an anomaly, a final "puke", where a lot of gold bulls simply gave up.

I should know, I did myself sell a minor part of my listed gold holdings there (to start making room for private gold exposure). Luckily, I saved the absolute bulk of my divestments for the peak in July 2016. That didn't mean giving up on gold altogether though, not even temporarily. I simply sold my listed GLD there, and bought shares in a private Canadian precious metals royalty streaming company instead. Read more about my investments here.

Since the Canadian company is moving a bit slowly for my taste with its contract signings, I've re-entered the listed gold market again as well, this time with exposure to GDX (gold miners):

Fair disclosure: My exposure to GDX is only about 1% of my net worth, while my investment in Canada is around 5%.

Looking at the underlying commodity through the GLD ETF, it seems more and more likely to me that the gold price correction (halving, approximately) that began 6 years ago is coming to an end, albeit slowly and hesitantly. Or is it just wishful thinking?


The fundamentals of gold, and the lure of 5x... or 10x

Gold doesn't really have a value per se (read more here). Nonetheless there are fundamentals pointing more and more acutely toward a surge going forward. Not least, China is hoarding the metal as a bargaining chip in a likely fiat reset or other currency accord.

Admittedly, these things take time, potentially decades, but the game is already afoot and I doubt gold can become much cheaper in USD. In contrast it can become much much more expensive.

I would be a little surprised to see the price of gold fall by more than 20% to new decade lows, and not that surprised to see it increase to 5x its current price in dollars. At the same time, I wouldn't be at all surprised to see stock markets halve over the coming 2-5 years, whereas I find it increasingly difficult to see where a 20% upside would come from, apart from a brief inverted puke.

Nota bene that while GLD just about halved between 2011 and 2016, the GDX fell by more than 80% to less than 1/5th of its peak price. If GLD only reclaims its previous peak of 185.84 (+54% from today's 120.77) it's probably realistic to expect GDX to advance by almost 200% from today's 22.79 to its previous peak of 66.92. Actually, I would expect more, thanks to miners having streamlined their operations during the long bear market for gold. Now, imagine what the miners might do if gold rose by 400% (i.e., 5x) instead of a measly 50%.

More recently the GDX increased by 2.6x (+160%) from trough to peak in 2016, while GLD increased by 1.3x (+30%).

You do the math.

(please note though, that there are huge differences between buying physical gold, a gold ETF and a gold mine ETF)

No matter, I'm getting out of the GDX trade as soon as I hear my Canadian venture is fully invested.


Gold has halved while stocks have tripled.

Gold doesn't have a valuation, but stocks are more expensive than ever (on, e.g., a median stock P/S multiple or Market Cap to GVA), and gold could be the go to place in a monetary reset. This is by no means a 100% safe trade, but it's way better today than it was back in 2009-2011.

The upside potential for gold is enormous, while technicals suggest the downside is quite limited. Conversely, the opposite holds true for stocks.

Continue reading about my views of macro, finance and investments here by the headline “INVESTMENTS”, e.g., this post about my holdings. Don’t miss my future musings on life, finance, health and happiness by subscribing to my free weekly newsletter — you’ll get my book on investing for free as well (we’ll see how long I’ll keep that up now that I’ve given away way over 10k pdf copies.

Taggar (blogg): 
1 augusti 2017

A 5x potential trade in the uranium ETF, URA

Topic: holding on to longs in uranium exposure through the ETF "URA"

Summary: Technicals seem to reflect strong demand, which is supported by long term fundamentals

Potential: Once uranium markets reach balance and beyond, URA has the potential to rise by a multiple of the price rise for the underlying metal. It is not unrealistic to envision a 200% uranium price rise from 20 to 60, and a 400% increase for URA from 14 USD to 70 USD. Trying to time a market that has fallen heavily (-85%) for 10 years, however, is tantamount to catching a falling knife, so size adequately.

I'm buying

Earlier this year I finally started buying into the uranium market through the industry ETF "URA". This post deals with my reasons for holding off for so long, as well as why I'm finally testing the uranium waters. Fair disclosure: Since a little more than a year back I'm long the Swedish nuclear consultancy stock Studsvik.

Investing 101

I typically want fundamentals, technicals, sentiment and structural matters/macro on my side in an investment. Other considerations regard geographical location and choice of asset class, not to mention overarching themes such as demographics, climate change, energy production, AI and automation.

Let'start with the technicals because it's the fall in prices over ten years that piqued my interest, not least as stock markets have surged for most of the same period.

Technicals and sentiment

On a multiple-year chart, I see a tendency to URA "wanting" to bottom at 11.30 USD. More importantly of course, there has been a huge glut of uranium stock putting downward pressure on the price for uranium for many years, but there seems to be a limit to how low the uranium price can actually go before it makes sense to stockpile it in some way, fashion or form. That is reflected in the portfolio of uranium companies that make up the holdings of URA.

The pattern of three to four higher lows for the price of URA makes me think there is more real demand for uranium and uranium related companies between 11 and 12 USD for URA than supply coming out from uranium stockpiles. I don't think URA is significantly affected by technical trading, which is actually why I pay any attention at all to these patterns. To be clear, I think the pattern reflects real fundamentals, not other people's lines in charts.

Zooming in on the two bottoms over the last 7-8 months or so, you might identify a very slight false break downward for URA in June of 2017, which was nontheless immediately followed by relentless buying. This only goes to emphasize the significance of the fundamental bottom around 12 USD in URA. I think the demand for URA's constituents reflect actual nuclear facility demand for uranium at the current prices around 20 USD and upward.

Looking very short term, this 3-month chart of URA shows a brutal downward break right before summer from the same levels URA is trading at now. That makes me both wary and hopeful.

Either, there are just as strong fundamental reasons to sell at 14.50 as there are to buy at 11.50, or sellers might have exhausted themselves. There are other possibilities of course, but the way I see it, if we break above 14.70 it's a strong signal of real underlying demand for the physical product. If that happens, I think the price of uranium is ready to start reflecting actual cost of production and demand (which I and many others estimate at at least twice today's prices, i.e., the levels prevailing in 2014). That should help propel the URA upward as well. Interestingly, for those who like really old school technical analysis in instruments not yet ruined by algorithmical trading, there is actually a triple bottom in URA at this shorter time perspective too, with the false downward breakout toward the end of June being the third and final bottom (intraday low of 12.26 USD)

I increased my holdings of URA some six weeks, and almost a dollar, early (before the most recent bottom), in the beginning of May. I'm still slightly underwater on my URA holdings though.

Fundamentals and macro

Given current plans for nuclear plant newbuilds and current production capacity, as well as the time to production for new plants, many industry experts think a long term price for U3O8 would be around 60 USD, or around 200% above the current price of 20.50 USD (July 24, 2017 // Please note that there aren't any formal exchanges or official uranium prices. The 20.50 USD estimate is based on research by UxC and is proprietary to UxC).

Direct link to price chart

Industry experts estimate that at a price of around 60 USD (+/-10 USD), there would be enough uranium mines in operation to create balance in the market. The peak of 137 USD in mid-2007 was a function of high demand and the very long investment cycles in the uranium industry. The price crash that followed was due to surplus production in the wake of overinvestment in mines.

Between 1988 and 2005 the price fluctuated between 10 and 20 USD, with peaks in 1988, 1996 and 2005 before spiking incredulously during the BRICS bubble in 2007. The main problem for the uranium industry is the large stockpiles of uranium. That is simultaneously the great opportunity, since the artificially low price makes sure there is very little investment in new mines as well as maintaining production at existing mines.

The uranium futures market is of no real help at the moment with a slight contango of 2.5% over the coming year, 5% over the year after that, then 7% and 3% respectively. "Contango" means today's spot price is lower than future futures prices since there is a reluctance to take delivery today, and costly to store uranium that is not put to immediate use for electricity production.

If you are interested in doing some research yourself I recommend starting att UxC with their delayed publications of charts, old weekly letters, old annual reports, as well as estimates of demand, and marginal production costs depending on production volume.

Is a 5x return something you might be interested in?

To summarize, there are plans for large build outs of nuclear power facilities, but until those are actually in or close to starting production of electricity, there is too low demand for uranium relative the supply from old stockpiles. However, the price chart of uranium and of the ETF URA  both indicate real demand for the physical substance uranium as well as for uranium mining stocks.

It takes a long time to get a mine online, meaning that once the market runs out of uranium the resulting imbalance could propel prices toward levels of 60 or more. In that scenario I expect the ETF URA to appreciate by at least the same percentage -- probably a lot more. When the spot price fell from 40 to 20, the URA ETF more or less fell from 40 to 10 (March 2014 to January 2016). That dynamic works both ways; in much the same way as for gold and gold mines.

As an added extra, the uranium companies that are still operational should be more streamlined than ever at this point, hence the operational leverage could be larger than usual once the market normalizes.

I don't think it should be ruled out that uranium prices triple and URA rises to 5x the current price.

Nota bene, as of today I have only approximately 1% of my net worth in URA and 1% in Studsvik.

Continue reading about my views of macro, finance and investments here by the headline "INVESTMENTS", e.g., this post about my holdings. Don't miss my future musings on life, finance, health and happiness by subscribing to my free weekly newsletter -- you'll get my book on investing for free as well (we'll see how long I'll keep that up now that I've given away way over 10k pdf copies.

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