Holy sh...

I did not realize...did not pay as much attention to after hours numbers, but in this case...wow.

Wednesday, May 7, 2014
Editor's Corner
What Happens When The Fed Stops Buying And Starts Selling?
Ron Rowland
The Fed Chair Janet Yellen testified to the Joint Economic Committee on Capitol Hill today. She revealed no surprises and generally stuck to the same script that has been in use for months. While basically optimistic on the economy, she reiterated concerns about the labor market, lack of inflation, and disappointing housing activity. She believes the lackluster first quarter GDP figures were mostly weather related and sees signs that spending and production are rebounding.
The Fed’s monthly reductions of asset purchases this year have been based on its assessment the economy was strong enough to support labor market improvements. Yellen reminded everyone that this tapering operation was still adding to the Fed’s holdings, and they in turn were helping apply downward pressure on long-term interest and mortgage rates.
Last year, the market reacted negatively to the idea of the Fed tapering its monthly purchases of Treasury and mortgage-backed securities. Tapering is one thing, but what happens when the Fed starts to reduce its balance sheet? This is seldom discussed, but today Ms. Yellen stated the Fed does in fact expect to shrink its balance sheet over time.
Outright sales of mortgage-backed securities are not planned, with the possible exception of eliminating some residual holdings. Instead, balance sheet reduction will occur by not reinvesting the proceeds the Fed receives when current holdings mature. Although the Fed intends to avoid sales of mortgage-back securities, no such assurances regarding Treasury securities were offered today.
Earlier this year, with the unemployment rate hovering around 6.7%, the Fed eliminated its 6.5% line-in-the-sand regarding when it would begin considering the reduction of monetary stimulus. The reason for this change was the belief the unemployment rate didn’t fully reflect problems within the labor market. Last Friday, the Bureau of Labor Statistics released its April employment reports, and the official unemployment rate plunged a staggering 0.4% to 6.3%.
Today, Ms. Yellen again emphasized that labor markets are still far from satisfactory. People out of work for more than six months and those only able to find part time work remain at historically high levels. The declining participation rate is also a concern, as another 988,000 people left the labor force in April. For these reasons, she believes the Fed was correct in removing the 6.5% threshold.
Markets reacted favorably to all this, giving the relatively new Fed Chief an implicit seal of approval. The Dow Jones Industrial Average climbed more than 117 points, and the 10-year Treasury yield dropped back below 2.6%.
Sectors
Energy and Utilities have been swapping places for the lead the past four weeks, and Energy came out on top today. Utilities had a setback last Friday with earnings misses and downgrades among prominent constituents. The sector is bouncing strongly today and is well on its way to reclaiming the top spot from Energy. Real Estate and Consumer Staples hold down the third and fourth spots for the fourth week in a row. Telecom jumped four places after falling the same amount the prior week. Unfortunately, the group looks like it may not be able to maintain its upward momentum, making it vulnerable to downside action. Materials and Industrials have been hanging out in the middle of the rankings for more than a month now. Technology is another sector on the verge of slipping into a negative trend. The selling in biotechnology stocks seems to have subsided for now, but the Health Care sector is still struggling to regain its footing. Earnings out of the Financials haven’t been offering much hope for the group. Consumer Discretionary continues to encounter setbacks and remains mired at the bottom of the heap.
Styles
Although three pairs of style categories swapped positions, very little has changed. Large Cap Value remains at the top but seems to be settling into a mostly sideways pattern. Mid Cap Value exchanged places with Mega Cap to recapture second place after a one-week absence. Large Cap Blend, Mid Cap Blend, and Large Cap Growth continue to hold down the middle. Mid Cap Growth and Small Cap Value comprise our second pair of categories swapping places. Mid Cap Growth came out ahead this week and even managed to generate a slightly positive momentum reading. Small Cap Blend remains in a negative trend near the bottom of the rankings. Micro Cap slipped below Small Cap Growth to take over last place. Seven weeks ago, Micro Cap was at the top, but now the tables have turned.
Global
We have been commenting for many weeks about the late March surge for Latin America. Since then, it has been digesting those gains and unable to break out of its long-term downtrend, until now. Brazil and Mexico are currently providing the strength for Latin America funds. The U.K. continues to get a currency translation boost, allowing it to climb two spots to second place. Canada strengthened its grip on third place with gains in both equity prices and the Canadian dollar. Pacific ex-Japan slipped two places to fourth as stronger groups moved ahead. The next five categories are keeping the same relative rankings and nearly identical momentum readings as last week. Europe heads up this group of five, followed by Emerging Markets, EAFE, World Equity, and the U.S. Two global categories are in the red, and this week they swapped positions with China replacing Japan at the bottom.
Note:
The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.
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@Maurice. Regarding what you said, "When I first was looking at FAIRX more than 10 years ago, Berkowitz had at least a third of the fund invested in Berkshire Hathaway. So if this style of investment makes you queasy, I can understand that. But Berkowitz's style hasn't changed a lot, since the fund was started. He has been consistent. Isn't that a characteristic that most of us want to see in mutual fund manager?"
+++++++++++
I think Berkowitz investing a significant amount in Berkshire Hathaway is different, because Berkshire Hathaway is more like a mutual fund than a typical individual stock, since there are so many stocks owned by Berkshire Hathaway, as well as very many wholly owned companies such as See's Candies, Nebraska Furniture, etc. So it's like owning a mutual fund run by Warren Buffett. I was in FAIRX for 11 years, and don't recall how much Berkshire Hathaway was in FAIRX, but it didn't approach the 52% that was in AIG not that long ago. The Sequoia Fund used to regularly hold large positions in Berkshire Hathaway for many years.
I'm not sure Berkowitz has been consistent. I kept tabs on him for many years; my take is that he has changed. I see the portfolio as significantly more risky than in years past, both in terms of the percentage concentration in individual names, concentration in the financial sector itself, and the riskiness of some of the individual names, such as Sears, St. Joe, Fannie and Freddie. In my opinion, investing in Sears, St. Joe, Fannie and Freddie is not consistent with having Rule Number 1, Don't Lose Money; Rule Number 2, Don't Forget Rule Number 1. No one knows what is going to happen with Fannie and Freddie. Clearly, it's quite possible to lose one's entire investment in them, if the government carries through it's plan to dissolve the companies, although I doubt that happens. My guess is that Bruce wins big time with them, but they are clearly not investments for someone whose Rule Number 1 is Don't Lose Money. Just not consistent. Probably Bruce wins with all four of those names, as well as with his ultra concentrated bet on AIG, but you don't invest this way if your first rule is don't lose money. He needs to change his talk to match his walk.

FYI:
Regards,
Ted
http://www.marketwatch.com/story/us-stocks-end-higher-nasdaq-trims-losses-2014-05-07/print?guid=E6C11479-EC0D-4301-8B38-FCB0542051FA
http://online.wsj.com/news/articles/SB10001424052702304885404579547522674452590#printMode
Major Stock Indexes: http://markets.wsj.com/us

Anyone who likes this kind of strongly opinionated and focused play should, I'd suggest, take a position in CGMFX, and FLVCX too, though Soviero does diversify significantly compared with Berk and Heebner.

@davidmoran: Interesting comment. I would guess that CGMFX and FAIRX are the two most 'focused'/concentrated/non-diversified mutual funds out there today. I think you hit it right on, that both Heebner and Berkowitz are strongly opinionated, and it seems to me they have some parallels too. IIRC, Heebner had extraordinary performance results with CGMFX for the first many years since inception. Truly amazing, not unlike Berkowitz's success at FAIRX from inception through the end of 2010. Then after his success in 2007, Heebner fell down hard, and has yet to get back up again. Berkowitz fell down very hard in 2011, but did very well in 2012 and 2013.
Interesting that they both started their funds at inauspicious times (years), leading up to the big bear that started March 15, 2000, and both had unexpectedly positive performances during that bear.
I'm surprised Heebner has stayed down this long. He's highly educated, and apparently fanatically passionate about investing, to the exclusion of almost everything else. He rarely takes a vacation. Hard to explain the turnover in his fund. He's really much more of a trader, his turnover is that high. I think Heebner is super smart and knowledgeable. He was just recently on WealthTrack with Consuelo Mack, and I was impressed with him. He seems to me to be a gambler with his investments, but I'm sure he sees that very differently.
As stated elsewhere, I believe Berkowitz will beat the market over the long term. I'm just not going to take that ride along with him anymore. Perhaps all the fame and adulation he received over the years, and all that goes with being the recipient of the Morningstar Equity Manager of the Decade in 2010.....I think that may have changed Bruce. He became a Rock Star; he became possibly the most famous mutual fund manager still actively managing a fund.

FYI:
Regards,
Ted
http://www.thereformedbroker.com/2014/05/06/ten-surefire-trading-rules-to-make-you-rich/

FYI:
Regards,
Ted
http://www.reuters.com/assets/print?aid=USBREA4603Y20140507

What can I say, I've drunk the kool-aid, I'm sticking with the guy. I've been in FAIRX long enough (8 years) that despite the underperformance of the last 5 years, I'm up a lot compared to the S&P. You certainly can't accuse of him of index-hugging; the man does deliver active management, and he's got pretty much his whole wealth in his funds. I think he personally opens something like 40% of FAAFX.
Warren Buffett says he only gets one or two really good ideas a year, then he sticks with them a long time. That's how I see Berkowitz. And I think that's the only chance a fund manager (or fund investor) has for serious outperformance.
The fewer funds, the better -- if you can pick the right funds. And that goes for stocks too: the fewer stocks, the better, if you can pick the right ones.
But yes, FAIRX is a different fund than it was in 2006, when it was well diversified and had great downside protection. It's become a fund to lock away for 10 years.
And no, I don't understand the SHLD investment, but if it were easy to understand, everyone would be making it.
FAAFX and FAIRX between them are about a quarter of my equity mutual fund portfolio. Time will tell if that is wise. FAAFX is still underperforming the S&P since inception, but I am a patient man.

Bruce once stated he managed his portfolio as if his clients had all of their money invested with him (Wealthtrack interview). In late 2010, I noticed he changed the portfolio drastically; I sold. Fortunately, I did not get hurt by the big drop then. I believe he is talented but I wouldn't want him taking this kind of risk with 'all' of my money.

+++++++++++++
I think he's nuts to have half his portfolio in one stock, AIG.
.

There is an exceptional amount of risk when you have a concentration to the degree that 50% of a portfolio (more or less) is in one stock, which I don't think is really appreciated by the financial media when discussing FAIRX. Not only from the standpoint of something happening to the company, but the risk that the position is difficult to unwind, other funds could try to squeeze you if things become difficult, etc.
Someone can have an exceptional amount of confidence in something, but nothing in investing is certain and 50% in one stock really starts to get to a place where the potential risk is - I think - really unappealing. I could say it's a hedge fund, but I think there's few hedge funds that would effectively take such an "all-in" bet with shareholder money.
Beyond that, I've often said that the financial companies still present a risk from the standpoint of not learning anything from 2008 and continuing to lack transparency. You can talk about book value, but I don't trust that the book value is as stated.
The Kiplinger quote that I often refer to:
A lot of well-known value investors fell on their faces the past year or two. Why did Fairholme hold up as well as it did?
"Maybe it's because I don't invest in things I can't understand....Or take American International Group. If you looked at an AIG annual report six or seven years ago, you saw one paragraph on derivatives. You look at an AIG annual report today and you see 15 pages on derivatives. I don't think company insiders fully understand what's going on, let alone outsiders. So if I don't understand something, I've learned to walk away."
http://www.kiplinger.com/article/investing/T041-C000-S002-a-bargain-hunter-stands-tall.html?page=1
Well, you have Citi's recent scandal, as well as BAC's recent incident. I still think these companies do not know/cannot comprehend the extent of what they have in their books/what's going on in the organization (when too big to fail becomes too big to fully control/comprehend) and that there will be more incidents like BAC's recent announcement.
I still think the full understanding isn't there, but Berkowitz rode the idea that these companies would continue to be supported and catered to long after they were bailed out.
As for Sears Holdings, I've discussed it at great length before. The parts and pieces are worth more than the current price (and that's if everything goes right, there's a mountain to climb between here and there), but I completely disagree with the overly optimistic case.

Bruce once stated he managed his portfolio as if his clients had all of their money invested with him (Wealthtrack interview). In late 2010, I noticed he changed the portfolio drastically; I sold. Fortunately, I did not get hurt by the big drop then. I believe he is talented but I wouldn't want him taking this kind of risk with 'all' of my money.

+++++++++++++
I think he's nuts to have half his portfolio in one stock, AIG.
There are many thousands of stocks to choose from. What's the rationale for putting half of "all of their money" into one stock? Not long ago he had 52% of the portfolio in AIG. 50% in AIG; Names such as Sears, Fannie and Freddie, St. Joe. Bruce is a risk taker. I think he is very smart and very talented, but there's a disconnect between what he says and what he does. He says that Rule Number One is Don't Lose Money, Rule Number Two is don't forget rule number one, and he talks the talk of a risk averse investor. But risk averse investors don't construct a portfolio with ultra concentration to the max, (both with respect to individual names as well as sector concentration), and risky investments like St. Joe, Sears, Freddie and Fannie. I don't consider AIG to be a risky investment, but the amount of it he has imparts the risk. My guess is that he outperforms the market over the long term, but if I were inclined to motion sickness, I wouldn't want to be riding with him as the driver.
@BrianW: you sold in late 2010: excellent timing! Right before a disastrous 2011.
I stayed with Bruce for 11 years, then realized he was not the person I thought he was.

WBMIX up (again) today...0.61%.
Interesting to see their shorts:
Name Position % Symbol
iShares Russell 2000 -7.11 IWM
iShares 20+ Year Treasury Bond -5.75 TLT
American Airlines Group Inc -4.65 AAL
SPDR Barclays High Yield Bond -2.56 JNK
iShares Nasdaq Biotechnology -1.62 IBB
Netflix, Inc. -1.07 NFLX
Texas Industries Inc -0.92 TXI
Amazon.com Inc -0.84 AMZN
Facebook Inc Class A -0.83 FB
Chipotle Mexican Grill, Inc. Class A -0.76 CMG
Cree, Inc. -0.74 CREE
Lennox International, Inc. -0.71 LII
Wynn Resorts Ltd -0.7 WYNN
Toro Company -0.68 TTC
Manhattan Associates, Inc. -0.66 MANH
Dorman Products, Inc. -0.63 DORM
Michael Kors Holdings Ltd -0.62 KORS
Tyler Technologies, Inc. -0.6 TYL
Walgreen Company -0.58 WAG
Equinix, Inc. -0.56 EQIX
Concur Technologies, Inc. -0.55 CNQR
Restoration Hardware Holdings Inc -0.53 RH
Pandora Media Inc -0.53 P
TripAdvisor Inc -0.52 TRIP
Salesforce.com, Inc. -0.49 CRM
AvalonBay Communities Inc -0.48 AVB
Harley-Davidson Inc -0.48 HOG
Sonic Corporation -0.48 SONC
Faro Technologies, Inc. -0.46 FARO
Keurig Green Mountain Inc -0.46 GMCR
Zillow Inc -0.45 Z
Acuity Brands Inc -0.44 AYI
Post Properties Inc -0.43 PPS
Red Robin Gourmet Burgers, Inc. -0.42 RRGB
Xylem Inc -0.42 XYL
Mattress Firm Holding Corp -0.41 MFRM
Boston Beer Company, Inc. Class A -0.4 SAM
EastGroup Properties, Inc. -0.38 EGP
Lululemon Athletica, Inc. -0.37 LULU
Sprouts Farmers Market Inc -0.37 SFM
Core Laboratories N.V. -0.37 CLB
PetMed Express, Inc. -0.36 PETS
Amedisys, Inc. -0.35 AMED
Container Store Group Inc -0.35 TCS

Just looked at it. It gives CGM Focus an A+ down market rating and B up market rating.
As Charles said, hard to follow in the Scribd format.
IIRC, Heebner did very well in 2000 and 2001, which might have gone into their down market performance rating. I agree with davidmoran: "must've been number-crunched and written by Heebner's nephew or something".
CGM Focus was -48% in 2008, vs. -37% for the S&P 500, and it was only up 10.4% in 2009 vs. 26.5% for the S&P 500. It was -26% in 2011, vs. up 2% for the S&P 500.
More often than not, Heebner will be either in the bottom decile or top decile of performance for any given year. I consider him to be a Wild West Gunslinger of the mutual fund world. Yet an unsuspecting very conservative/risk averse investor looking over those tables might see that A+ down market performance and be very attracted to the fund, not wanting to take risk!
His current "risk averse, A+ down market rated" portfolio includes:
19.26% of fund assets in one stock, Morgan Stanley.
32% of fund assets are short US Treasuries !
12% of fund assets in Lennar Corporation
Morningstar says: "he has constructed a nearly 29% stake in homebuilders such as Lennar LEN"

@Scott.
Good grief...

Flying high in April, shot down in May.

Looking at the long term chart of TWTR, I wonder if there was any real long term enthusiasm for this stock? The lock out period kept investors tied to the stock but now that period is over and the price has done a round trip. I am one of those who hasn't fallen for these high flying social media stocks. I prefer something more solid.
http://www.google.com/finance?cid=32086821185414

Whole Foods getting absolutely obliterated AH. You have what feels like a significant portion of momentum names down substantially or in some cases massively (30-40-50%+) from the highs, but the market overall isn't down that bad. The Twitters of the world getting wrecked, but - to use something I own - a Conocophillips holding up quite nicely. I think it's probably not over for Twitter (Twitter founder Dorsey's co Square having also cancelled its IPO) and a number of other names.

Sunday evening we enjoyed the 60-Minutes special on "The 90+ Generation." Monday morning turned on the tube and there was Buffett and Munger jabbing with Becky. Thought for a moment we were watching a re-run. :)
If only all of us could possess that kind of energy and intellect into our 80s and 90s.
(Buffet is 83 and Munger 90.)
---
Added edit: The article's a pretty good read. At $190,000 a share not many of us could afford very many shares of Berkshire A. But, the B shares sell for $125. Here's a stock I wish I had bought many years ago. Looks like kind of an "in-betweener" - between a single company and a fund. I'm not as sanguine as many about the prospects after Warren leaves the scene though. Got to wonder what his son will bring to the table - if, as I understand it, he is to take the helm.

FYI:
Regards,
Ted
http://www.marketwatch.com/story/us-stocks-sell-off-nasdaq-leads-losses-2014-05-06/print?guid=70AC831A-6493-4E2B-A083-957568B1C7E4
Major Stock Indexes: http://markets.wsj.com/us

FYI Just one example is my a recent purchases of Apollo Commercial Real Estate Preferred Stock (ARI-A) 8.625%. I bought it last month, 4/3/14 @$25.64 a slight premium it is presently selling @$26.13 a 1.90% gain with a annual yield based on my purchase price of 8.28%. I also have a major stake in PFF.
Regards,
Ted
http://www.kiplinger.com/printstory.php?pid=12389
M* Snapshot Of ARI-A: http://financials.morningstar.com/preferred/quote.html?t=ARIPRA

That's the last fund I would have expected. I know it's grown very large. I recall 5-10 years ago a lot of the $$ from Catapillar's employees' pension fund came in. Tried to dig up the details on that, but can't for whatever reason. Do recall reading about it at the time.
Guess that's what happens when you have a great run like the fund has had. Recall same thing happened to DODBX nearly a decade ago - and if my fading memory is correct, that fund closed. Course everything blew up couple years later. :)

Did just add on dip under $15...let's trust it will not stay under $15 for long =).