Cliff Asness Interview

Cliff Asness of AQR was interviewed by Consuelo Mack of recently. Asness who runs hedge fund and mutual funds and has an academic background talks about the importance of diversification among many other topics. He mentions that both momentum and value themes work, although the time frames might differ. Click to watch.

The upside of the damage

The recent government caused fiasco comes with an upside which might support the markets. The conventional wisdom is that Fed tapering is off the table until next year, inflation will remain low and the economy will continue to grow, slowly. Tim Hayes from Ned Davis Research said in today’s WSJ that “This is the best environment for stocks right now. You don’t have rising interest rates becoming a problem. You don’t have inflationary pressures. You do have earnings growth.”

“When the unemployment rate is above 6% and falling, that is the best situation for the stock market” based on the SP performance since the 1940s, said Hayes.



We looked at JNJ today. The stock is selling for $91 and we have been long since 2009 at $55.37. Based on historical parameters over the last five years, the stock is on the very high end of its range which we project to be between $64 and the current price. Looking out to 2017 and assuming a p/e of 16 we are projecting a terminal value of $108. Those numbers are in line with Value Line, they are projecting a price between $90 and $110 between 2016 and 2018. Morningstar has a fair value on JNJ of $90, about where it is today. We would not add or enter a new position here until there was a significant pullback.

We are also long RIG at prices in the low 50s and mid to high 40s. The price is a couple of points off of a recent bottom in the $45 area. The stocks sells at 11x 2013 projected earnings and yields 4.9%. We continue to like RIG.

(Long – JNJ and RIG)

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Phase III?

We wrote last week about the three phases of the market as described by Leon Cooperman. Phase I is the “wow, we survived” phase. Phase II is made up of rising earnings and will go on for 4 years or so. And then Phase III is the “exuberance” phase when things become just too expensive, also described as the “silliness” phase. Cooperman didn’t think we were in Phase III yet although there were some pockets of Phase III activity. Well on Friday add at least a couple more names had advances that might fall into the “silly” category. GOOG shot up 13.79% and CMG was up 16.10%.

(Long GOOG)

Welcome to the new Banana Republic, welcome to the USA

Our country has come much to close to defaulting on our debt, but thankfully we will be saved literally in the final few minutes by last minute legislation which will push out the debt limits for another few months.

But let’s face it, there has been significant damage to this country’s reputation worldwide. We are moving closer and closer to becoming a banana republic, or worse. Some knuckle headed Republicans had a brilliant idea of keeping the government closed, and letting us default on our debt, unless Obamacare was repealed. Like that had any shot in the world of ever happening. Did they forget that Obamacare was already passed into law? Did they forget that there was a Presidential election that Obama won in which his health plan was a major issue? Did they forget the Supreme Court already said it is legal? The Republicans walked into a deathtrap with their eyes wide open and now they will pay the price and worse every US citizen will pay the price. Obamacare may turn out to fail, but that is not the point. We cannot have a minority party, and even a minority of that minority party, close down the United States of America over one piece of legislation that they do not like.

Do they not see the terrible precedent this would set? There has to be a sense of fair play so that we can operate like a normal functioning society. That is one thing that has always set us apart from the rest of the world.

A default would have been disastrous, make no mistake about it. We have avoided that. But we have not avoided the damage this will do to financial markets and to our reputation. There will be long term costs as interests rates will nudge higher due to higher risk premiums. And these costs will be huge. Can you really trust the USA to pay their bills on time in the future?

Oh, and by the way, shutting down the government for 16-days is also not a freebie. Standard and Poor’s estimates the cost at $24 billion. That is all, just $24 billion. That, plus the huge interest rates costs that will now trickle through the economy. And it all could have been avoided had we had a normal, functioning government.

And in a month or two the dysfunctional process will start again.

If we are not already there, we are headed on the road to becoming the new Banana Republic, and until we convince the world that we still are the USA and can govern like the USA, these self-inflicted economic costs will be painful.

Cooperman says market is fairly valued

The great value investor Leon Cooperman was on CNBC today and said the market is about fairly valued. Cooperman described three phases to a bull market. The first phase is the “wow, we survived” phase. That is when you are coming out of a bear market and everyone thinks the world is going to end. That would have been in 2009. Then you have the second phase which consists of 4 or so years of rising earnings. And then the third and final phase would be the “exuberance” or “silliness” phase when stocks are getting just too expensive and prices do not make sense. According to Cooperman, we are not yet in phase III but there are some pockets of phase III type stocks out there, such as TSLA and PBPB.


Notes from Barron’s 10/7/13

Leslie Norton writes about Penn National Gaming (PENN). The Company will split on 11/1 into a REIT and an operating Company that will be the lessee. Shareholders will receive 1.35 shares of the REIT (GLPI) and a dividend of $3.33. The parts could be worth more than the current price of $55. Figure the operating company is worth 8x estimated cash flow, or $15.60 per share. And the REIT could be valued at 13.8x estimated cash flow. or $54. Combined, that is abut $70 per share with growth prospects in the future.

PICO Holdings (PICO) sells at $21.12, just above book value of $19.97. BV might be understated given low cost land purchases in the past. Mathew Martinek of Reinhart Partners values PICO at $35. (A Low-Priced Water Play by David Englander).


Tulane University has a stock research program for MBA students that produces the “Burkenroad Reports”, that researches small, under-followed companies in the southeast. They have a good track record.