RBC – Upside to valuations

Further Upside to Valuations

  • Valuations Up 55% in Past Five Years…Five Reasons They Should Go Even Higher:
  • S&P 500 multiples are up 55% over the past five years, increasing from 10.5x to 16.2x today. Not surprisingly, many investors now question the sustainability of P/Es. Below are five reasons we believe they should drift higher:

1. Cash Flow Generation: Companies are generating 20%+ more free cash flow from every dollar of earnings (FCF conversion). This should push P/Es commensurately higher.
2. Return of Capital: The Total Yield (dividends + buybacks) of the S&P 500 is 4.7% versus 4.4% for a 20-year corporate bond. Stocks are extremely undervalued on this and other relative yield metrics. Further, the return of capital is 100% covered by free cash flow.

3. Volatility: Realized and implied volatility have been running ~30% below normal. This should equate to a similar reduction in equity risk premia.

4. Valuation Trends: Equity valuations tend to move from low to high (and back) over very long periods, similar to a slow-moving pendulum. With multiples well within a normal band, the current swing higher appears far from over. (See Exhibit 1 below.)

5. Few Excesses: Stocks are most likely to correct when some group is unreasonably priced. With the exception of Energy, whose multiples are elevated due to falling oil prices, there appear to be few excesses (yes, this would include Staples).


Greg Blotnick - P/E Chart from RBC
Greg Blotnick – P/E Chart from RBC

Unicorns – One King’s Lane – Fortune

Bed Bath & Beyond

E-commerce site fell a long way from its near-unicorn days.

Bed Bath & Beyond paid just $11.78 million to acquire online retailer One Kings Lane earlier this year, according to recently-filed regulatory documents.

The deal was publicly announced in June, but Bed Bath & Beyond BBBY 0.73% only would say that the “purchase price was not material” to the company, which currently has an enterprise value of around $7.6 billion. One press report suggested a price tag south of $30 million, but it seems even that estimate was way too high.

What Bed Bath & Beyond actually paid underscores how far One Kings Lane fell below investor expectations.

One Kings Lane was launched in 2009 by Ali Pincus and Susan Feldman as a Los Angeles-based flash sales site focused on high-end furniture and home decor. It would go on to raise more than $200 million in venture capital funding, from big-name firms like Greylock, Kleiner Perkins, Institutional Venture Partners, and Tiger Global. Its final outside funding round came in early 2014, at a post-money valuation north of $800 million.

The $11.78 million price-tag is net of any acquired cash. Bed Bath & Beyond also said in its regulatory filing that the results of One Kings Lane’s post-acquisition operations have not been material.

A Bed Bath & Beyond spokeswoman has not yet responded to a request for comment.


NYSSA conference – Greg Blotnick, Valuewalk

NYSSA Conference – The NYSSA had an all star panel today for their Ben Graham Conference. ValueWalk attended the conference and below are our informal notes, Enjoy! At the bottom of this post are more notes on the Ben Graham   NYSSA Conference for 2016.

Also see

Sohn Investment Conference 2016 – Full Wrap Up

Milken Conference: Dirty Secret of Activism, 2/20 Fee is Dead …

Grant’s Conference: Zervos, Millstein, Haskell, Warsh, Dimon …

Robin Hood Investor Conference Recap [Highlights]

Sohn Conference 2015 Coverage: Einhorn, Cooperman, Robbins …

Ben Graham Centre 2015 Conference – Presentations

NYSSA Conference NYSSA Conference 2016
NYSSA Conference

NYSSA Conference: Tom Russo – Keynote Speaker

Munger’s three words that keep him out of trouble: “and what’s next?”

In Brexit, seemed a lot of that there. Always think about what the long term “and then what?” and what that leads to. The members of the UK seem to have forgotten to ask this question.

Up until the past 3-4 months, I didn’t have a new investment since 2010. The ability to do nothing with a portfolio is vastly undervalued. For all those at bats you swing at, you have to pay the government 35% – or more in NYC! One of my main takeaways from Graham and Buffett was this ability – the ability to be inactive.

Capacity to suffer. We love family-owned businesses – ones that don’t bow to the demands of Wall Street who demand constant profits. 60% of our businesses are family owned. I love finding properly-aligned companies like this. They have a time horizon like ours – forever. This is because they’re multi-generational, they have no interest in activists. Buffett made his success on businesses like this – ones that can take bets others can’t take.

We also love businesses we can follow and understand – ie why a consumer would choose Jack Daniels vs Jim Beam. Makes it easy for us to do due diligence and help us understand pricing power.

Emerging market reach is another criteria. Ones that can reach growing parts of the world, favorable population demographics, GDP growth

Historically we’ve owned non-US businesses. “Americans often don’t have a clue” – (Russo asks the room how many people follow cricket – no hands go up) – “Local players have a big advantage here. Cricket has 1.7 billion fans!” 75% of the assets I see are in non-US companies.

Globalization is starting to go the other way. I had this as a tailwind for my career. Now you have Syria, Russia/Ukraine, Brexit – it feels like things are changing – it used to be that new markets would open up, new competition was welcome, initiatives like the EU blossoming… not the same feeling anymore


Q: How do you think about FX risk?

A: “We don’t seek out currency risk in making investments. We think over time as more capital and commerce goes into emerging markets their currency will strengthen.

Q: Thoughts on Buffett/3G?

A: Businesses don’t get as cheap as they used to because of 3G – they have a big cash cannon. Every company we’re involved in is nervous for the potential of 3G coming along. It affects the multiples we’re paying.

Q: Sell discipline?

A: “I sold several companies in 2006 – all family controlled, but they lacked reinvestment. H&R Block, International Speedway. Powerful franchises but they couldn’t go beyond our shores. In some cases, it was too late – they’d already made very bad decisions – I pulled back and redirected the capital to businesses that I think have limitless reinvestment. Global ones. Sometimes a business we own advances sharply and we sell it down to rebalance the portfolio.”

NYSSA Conference – Second panel: “Never Lose Money” – David Poppe, John Levin

David Poppe:

To never lose money requires that you have the right basis in your stocks. And so you have to be patient. Most of us don’t have the patience to wait a year to buy a stock. You need an investor base that is ready for long periods of inactivity punctuated by bursts of activity. Many of us don’t have that – the average investor wouldn’t be happy to go two years without a single investment.

Sole decision maker model can be powerful but also can take you down the wrong path. Consistency of process and clarity of expectations is crucial to having a high-functioning team.

We try not to incentivize people based on how many of their stock picks get into the portfolio. Sometimes the right thing to do is to have less.

There’s a lot of smart people doing this now – way more than there used to be. We try and be humble about what our edge is. Expert networks have taken away a lot of the informational edge that firms like ours enjoyed. We spend a lot more time on qualitative factors than quantitative. Key example: runway for reinvestment. How long is it? This matters a lot more to us than what the firm’s P/E ratio is. If a firm has powerful brands then this generally is conducive to a long runway.

John Levin:

“Never lose money” is a process. As public investors we buy companies with incomplete information and so from time to time you will lose money. It’s about consistency of process. Know whether you’re a growth or a value investor. Buffett stuck to his knitting and was congruent with himself. Long-term capital is another significant competitive advantage.

The rate of disruption is picking up. Long term investing has gotten more difficult as a result. Any company’s competitive advantage can erode much faster than ten or twenty years ago.

NYSSA Conference – Third Panel – “Margin of Safety” – Leon Cooperman, Jason Karp,


Risk is the probability of losing money. I’ll take a volatile 15% return any day over a straight line 10%.

We have a stock selection committee – three senior people. They need to approve any idea. If the stock takes out the downside risk target – then the “cesspool committee” – yes, this is an actual thing – takes over and grills the analyst. Do we want to double down or sell? Usually if you like a stock at 10, you should like it more at 9 and even more at 8. Sometimes circumstances change though – we try and drill down and see if anything has changed. We look for 3:1 risk reward ratio.

Stocks are the new bonds. 65% of the S&P now yields more than bonds. In 1958 – that was the year of the yield reversal. Before that, stocks yielded more than bonds. In 1958 they started buying into total return. The market got repriced. Today we can find so many companies with decent yields and growth prospects – far superior to bonds. Market is fully valued but there’s a lot to do.

This is not a market where you earn 10-15% in stocks. 6-7% is fair. Play it safe. Stocks are still the cleanest shirt.

Income disparity is a huge issue. 45% of jobs in today’s economy will be replaced by automation

“Wall Street is in the midst of a very serious downturn”

“Every investment committee in America is meeting to redeem out of hedge funds.” Inevitable downward pressure on fees. But everything is cyclical. This all happened in 1970 – see Carol Loomis article “Hard times come to hedge funds.”

This will all change in the next bear market. Hedge funds will shine and people will realize the downside of passive management.

Buying bonds here is like walking in front of a steamroller to pick up a dime. You might get away with it but its very risky. Inflation benefits stocks far more than bonds – companies can adjust operating cost into their selling price. Bonds can’t do that. I think inflation is coming and rates will be higher three years from today.

Jason Karp

Multiple kinds of risk: analyst risk, volatility risk, market risk. Analyst risk: most often used but least reliable…estimation of fundamental downside. Company XYZ should never trade below 10x this – and having lived through many cycles, your excel sheets are useless in times of volatility. It’s the lowest weight. Market risk – what has the stock done? Any stock that’s gone down 25% twice in the past 18 months…it’s common sense you need to respect that, clearly 10% downside isn’t a realistic estimate for market risk. You also need to respect option pricing and what that means for vol (vol risk = the third kind)

Analysts tend to overestimate upside and underestimate downside

In the markets – the last 12 months have changed a lot. I began as a quant. We have three quants at the firm. Their job is to find things that traditional fundamental analysts won’t find. We’ve widened our range of outcomes – as in, how much can this thing move while we wait for our fundamental thesis to play out?

Running high gross and high leverage is extremely dangerous right now. Stocks are having insane moves on little or no news.

All these funds and systematic quant funds are dangerous – they’re all linked to the same thing – vol. So they all take down gross at once and that exacerbates vol and it feeds on itself.

In the end, stocks do converge with their fundamentals, but the linkage in the short to medium term is very cloudy.

Example: we’ve been long AMZN vs. short big box retailers for 4 years. “My mom could’ve thought of this trade” – but the volatility over the past 4 years shook a lot of people out.

Our interview process – we take a close look at people’s pasts – CIA interview process. We want people who have faced adversity. The markets constantly tell you that you’re wrong and stupid and adversity is good training for that.

Demographics: most hedge funds don’t pay attention to these because you can’t make money on a 1-2 year horizon off them, but they are very obvious and easy to follow. And they are poor for most developed countries right now.

“Social media is the most dangerous influence on society today. Look at Brexit. This is helping Trump’s campaign and explains why he’s getting so many votes.”

Also more extensive notes on Leon Cooperman which is a NOT WORD FOR WORD transcription of his speech.

I’d like to make an observation to help every body… I think it’s probably more relevant to most of us in this room. When I look at the room, I see youngsters that are coming into the business, I see some senior citizens that pray they’re lucky enough to have retired…I see a number of practitioners.

I’m going to share with you just a thought— I’m very focused on income disparity. I’m one of these kids who made it big in the South Bronx…

Six months ago, I went to a seminar and the seminar was nothing to do with the investing business, but the entire seminar was called ’closing the gap.’ It was one hundred percent focused on income disparity and how to deal with it.

At the seminar, they had a futurist speak. Before I tell you what he said: I’ll quote Warren Buffett who said: ‘The forecaster of the future will tell you more about the forecaster than they’ll tell you about the future.’ The futurist said— his opinion was the biggest problem facing the economy in the next decade was that 45% of jobs being performed in the economy were going to be replaced by automation and there would be no alternative work for the displaced workers.

I went home that night and I thought about it— I recognized the potential significance for our industry. OK. And the significance is… passive asset management turnover rate is 3% a year. Active asset management turnover is approximately 30% per year. So if more money goes passive versus active, liquidity in the market is going to diminish because there’s less trading. And the available pool of commission dollars to support Wall Street firm is going to diminish…

Then you turn to the money management side, if active management is 1% or some variation of 2-and-20% within the hedge fund community and you get the index for 3 basis points, 4 basis points, if you’re an institution, maybe 20 basis points in you’re Vanguard, if you’re an individual.. there’s going to be tremendous downward pressure on fees.

Maybe some of the young people should look into going into different industries to go into because I think our industry is in turmoil. It’s very ironic because you’ve got [Hillary] Clinton and [Bernie] Sanders crapping all over us and they don’t realize Wall Street is in the midst of a very serious downturn.

And I think what’s happening in my industry, you know, right now, I have this perception, maybe it’s an exaggeration, but… every investment committee in America is meeting to redeem out of hedge funds.

The industry is breaking down into two categories

One you got he way of these quant traders, algorithmic high frequency traders. I’m not as knowledgable as I should be, but I’m generally in the view that it’s a giant case of front-running, in some cases.


Well, let me explain why I say that: I’m not shooting from the hip there. There’s a lot of good value added— these algorithmic guys are very smart people. The New York Stock Exchange allows these high frequency traders to co-locate next to the stock exchange to give them a split-second advantage over the execution of the public sectors’ orders. I asked a question of the president of the NYSE whose response wasn’t very comforting which was: ‘If we don’t do it, someone else will.’ Rather, than taking the position that it’s morally wrong and it shouldn’t be done.

One part of the industry that’s apparently really successful, which I’m too old and it’s not my skill set is high frequency algorithmic trading.

The other is to be a serious long term investor a la Warren Buffett, Ben Graham, and you guys. The problem with that if you’re running a hedge fund and you’ve got monthly, quarterly, or semi-annual liquidity to deal with, it makes you reluctant to go into things that are less liquid.

I’ve got a little bit of a luxury because 40% of our capital is inside GP capital.

The industry is undergoing a major change. The market that we grew up in, is not the market today— volker rule, dodd frank, discouraged brokers to carry inventory. specialist system demised, can’t understand for the life of me… eliminated the uptick rule enabled .. if it ain’t broke don’t fix it. sec not paying attention to deal with it in my option.

gotta be an investor today or a very astute trader.

I’m basically of the view that everything is cyclical. My fear is—I read an article , reread it, reread it. hard times come to hedge funds written by carol loomis. if you look closely .. written jan 1970. largest hedge fund was michael steinhardt..

The golden period

“The golden period for hedge funds was 2000 to 2007. They became the cocktail party talk. ‘What hedge fund are you in?’ ‘What hedge fund are you in?’ They were outperforming other forms of active managers…Then, all the sudden, 2008 arrives. In my opinion, hedge funds largely lived up to their representation.” the sp down 34, av down 16. down less than half the market.

a lot of withdrawals. hf industry shot themselves in the foot by gating capital.
more scary— hedge funds was not honor a high water mark, asset of the investor. for you to say i’m retiring. that was in 2008. if you’re running a hedge fund it’s very hard to keep up with an index. hedge funds have underpreforme.d my guess is its going to all change in the next bear market…may take a bear market to damage all this passive indexation.. people who say .. hedge funds will shine again


Wednesday June 29, 2016 8:00 AM through 6:00 PM
NYSSA Conference Center
Available as: Live Session
Categories: Conference, Programs for Members, Value Investing

In this conference, we honor the legacy of Benjamin Graham, the founder of NYSSA. The theme of this year’s conference will be Margin of Safety and Risk Management and subtopics will include researchprocess and portfolio management in volatile markets.

Please join us on June 29th to hear some of world’s leading value investors discuss these timeless topics. Portfolio Managers representing more than $80 billion will speak at the conference.


Continental Breakfast and Check-In

Opening Remarks

Opening Keynote: Investing in International Equities 
Thomas A. Russo, Partner, Gardner Russo & Gardner LLC


Panel #1
“Rule No.1 is never lose money”, Warren Buffett

Moderator: Michael Oliver Weinberg, CFA


Panel #2
Margin of Safety: How you Identify and Manage Risk in Your Portfolio

Moderator: Elliot Trexler

dying industry


by Polemic’s Pains

Ok, so I was wrong. Cable was not a good buy two days ago and just to prove me REALLY wrong the marvelous Antipodean time zone decided to ram GBP in a way that hasn’t been seen since the SNB spoofed EURCHF.

It’s the small hours of London Friday morning for me  and the reasons for GBP’s freediving world record attempt haven’t yet been formulated. Now I’m afraid that if you started reading this expecting me to tell you what is going on in GBP, then sorry, I don’t know. But having worked in FX for a good chunk of my life I can have a good guess at what is now going on in the banks.

First, every salesperson is struggling to call all their clients who had ‘call levels’ at zones never expected to be hit, whilst trying to fill orders in systems at levels that they think they can get away with. Oh, hang on, no they can’t do that anymore as they need audit trails. So, they will all be huddled around spot desks arguing over whose order was hit at what. Said spot dealers will be shouting a lot and staring at an automated blotter that is slowly dripping in a queue of trades that their antiquated order and back office system in some far off distant place on the planet is trying to process. Basically, there will be a lot of ‘WHAT THE FUCK IS MY POSITION.. ARRRGH ‘ going on.

Meanwhile, clients will be calling in demanding to know why their stops were done 7% below current market and why no one called them. Because if they had been called they would have bought it back at 8% below current markets because they are all retrospective geniuses.

Managers will be trying to recite the rules of engagement for filling stops but can’t find them so call compliance. However, compliance is asleep because they are mostly based in Head Office and that isn’t in the Antipodes, apart from the Antipodean banks whose compliance officers will be teaching some course to the catering staff on how not to deal with Yemeni banks.

By now the dealing systems will be catching up with what’s going on and the spot traders now fit into two categories:-

Group 1 who look at their position screens and see a vast profit who split into groups ‘A’ and ‘B’. ‘A’ stays very quiet knowing that sales will want some of the profit if they see how much it is and ‘B’ who stand up and declare themselves as trading Gods.

Meanwhile Group 2, on seeing vast losses, immediately write emails to every manager under the sun blaming their staggering losses on system latency and the ridiculous guaranteed stop levels that sales made them undertake. If they are lucky management will swerve the losses into a contingency book, but if they are unlucky and the bank was thinking of replacing them with a ‘Raspberry Pi’ algorithm, they will be out of the door by close of Friday.

But back to sales. Those that are still on the phone are quoting the reason for the fall on anything that they feel everyone else is saying because no one has a real clue. They will probably repeat what JPMChase or Goldman say as they reckon that the guys there are cleverer than them and more likely to know. So, clients will currently be being told that it is due to- “Barriers being hit at 1.25, 1.20 , and 1.15” and if they can’t even manage that will say “Stop losses”, which is a great generalised term that demands no justification. But some foolish folk will have done a Bloomberg News search for GBP and decided that it is due to the news that fracking had been allowed in North West England. Which is of course rubbish, because we all know that it happened because Diane Abbott was made the shadow Home Secretary.

By now very senior management will have come down to the dealing room. Bearing in mind this is out of London time zone, the senior managers involved will have absolutely no idea whatsoever about Sterling so will ask questions to frantic spot and sales folks along the lines of “Has Brexit been announced?” or “is this is a big move?” The frustrated dealing staff will have to tread a thin line with them, alternating between wanting to tell them to piss off and ingratiating themselves with them as, with the size of the losses they can see, they may well be up before them the following morning.

Meanwhile sales are noted to be only saying, into phones and Bloomberg chats, “But seriously, that’s where it was” and starting to swear at overseas sales coverage who are trying to goad them into either filling their clients better or having any profits accruing through their clients stops reallocated back to them rather than staying in the center that ripped them off did the execution.

The options trading desk will have appeared to have turned Greek as that is all they are speaking, shouting things like .. “Watch your gamma”, “check your theta”,” where did I trade that delta” and “Oh shit, they said you made money shorting vol. “

For the sales guys with no clients with GBP orders, they will be feeling rather smug and trying to sound intelligent by quoting correlations as to what this should do for other pairs. Such as “Well with the cross correlations we should see a pick up in MXN/CNH vol and our model says that the 3m/1yr calendar spread is the way to play it”, only to find that if they try to get a price from their options desk they are told to “fuck off, haven’t you seen what’s going on in GBP?”.

So, it will all be fun and games. Do I care? Not a bit. Because I am sitting at home, it’s the wee hours of the morning and I am about to go to bed chuckling mischievously to myself, knowing that London FX sales folk are going to have one hell of a miserable start to the day explaining to their clients why they have just lost 7% of their company’s hedge book.

Oh and let’s not forget all those corporate treasurers dusting off the wording for their ‘due to FX volatility, losses were greater than forecast’ statements to add to this year’s accounts.


Ben Thompson – Google



Very few people know for sure who exactly is to blame for the Google-Apple breakup. Yes, Steve Jobs was livid Android phones looked a lot like iPhones, but remember, Google purchased Android two years before the iPhone came out (and a year before Eric Schmidt joined Apple’s board) as a hedge against Microsoft; once the iPhone came out, why but for pride would you build a phone any differently?

Where Google went wrong was with that maps decision: making turn-by-turn directions an Android-exclusive differentiated Android as a platform, but to what end? So that HTC et al could sell a few more phones, and pay Google nothing for the privilege?

The truth is that when it came to making money Google and Apple were not competitors in the slightest: Apple was a vertical company that expended R&D and capital investment to design and build devices that included significant material costs, and then sold those devices in a zero-sum competition against other manufacturers. Yes, marketshare was important, but so was profitability: Apple traded off reaching the entire market in favor of creating a differentiated experience that customers would pay a premium for that far exceeded the (significant) marginal costs of each iPhone.

markets · Uncategorized

Bill Gross – Outlook



My country club locker room is a fascinating 19th hole observatory where human nature and intelligence often come into conflict. Almost all of my golfing buddies are risk takers by nature and many of them are gamblers – not just in the card room but also in the casinos in Las Vegas. Having spent some time in Sin City myself in my early 20s as one of the first blackjack counters, I was, and still am, most familiar with odds and the impossibility of beating the “House” in any game other than blackjack over a long period of time.
Still, this commonsensical conclusion is not so obvious to many of my friends, who first of all, claim that they usually “break even” on any particular weekend jaunt, and secondly, suggest that they can win by using various betting “systems” that somehow allow them to claw back losses or stabilize winnings. An absurd example of this would be to triple your bet if you’ve lost 3 times in a row, and if you lose that, to quadruple your bet and so on. All of these illusions are derivatives of the so-called Martingale System, which claims that
it is mathematically impossible to lose, given enough money and the willingness of the casino to take the increasing bet. The latter conditions, however, are where reality meets the road. A string of 4, 5 or perhaps 30 straight losses cannot work in the long run because the size of the bets eventually reach billions of dollars.
This same mathematical logic seems to have eluded central bankers around the globe. They are quite simply, employing a Martingale System in the conduct of monetary policy with policy rates now in negative territory for both the ECB and the BOJ – which in turn have led to over $15 trillion of negative yielding developed economy sovereign bonds. How else would one characterize the “whatever it takes” statement by Mario Draghi in 2014? How else would one interpret BOJ’s Kuroda when just last week he upped the ante in Japan by capping 10 year JGB’s at 0% until inflation exceeds 2% per year? How else would a rational observer describe Carney and Yellen other than “Martingale gamblers with a wallet or a purse?” Our financial markets have become a Vegas/Macau/Monte Carlo casino, wagering that an unlimited supply of credit generated by central banks can successfully reflate global economies and reinvigorate nominal GDP growth to lower but acceptable norms in today’s highly levered world.