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No. of Recommendations: 62
Jeff! It's great to see you around, though if you think I've got the goods to litter wisdom on this vortex I'm afraid you may be suffering from some early senioritis. You're talking to the guy whose proudest intellectual accomplishment was guessing the final Wheel of Fortune puzzle the day of one of RJMason's Jeopardy wins. In case it was lost on anyone, soldat4800 doesn't look quite as self deprecatory slash bold as it did back in 1999. Ye who bailed on the Dow in 1995 missed out on maybe 13-years of 6% or so total returns, which is roughly what long term treasuries were offering back then.

Quite an amazing investment world, huh? I can't help but pine for the good old naive days at the turn of the millenium when all you had to worry about was when the market would stop trading your crappy value stocks at 3X earnings. Now you have to figure out if the cash plays you own have their deposits at the bank of Christmas Future, or if the 2X EBITDA retailer you're dissecting benefitted from a generation long tailwind of hyper-consumption rendering 15-years of millions of take and pay transactions a mere head fake. It was only a year ago when enough context still existed to separate those other idiots from us, errr, lesser idiots. I mean, buying Claire's or Outback or Ryan's at peak multiples, peak margins, and trough cap rates was nicely silly (let alone being the sucker providing the fixed rate leveraged loans) under the plain old reliable rules that came with the board game. Or junk spreads sub 200 or the Bearing Points of global infrastructure contracting trading as if 150% returns on tangible capital were a good bet into perpetuity or whatever. All in the handbook. But when Abercrombie & Markup trades for 5% implied operating margins versus around 20% for past 12 years, and the no-losses since 1970 Sandlers will best be remembered for handing the bread crumbs to Wachovia just before a black swan came a nipping, the rules seem altogether different.

And that's what the real fear in this market is really about, right? At least for those of us without the pedigree to have seen anything like this before? It's the lack of context, the feeling that some of the economic heuristics and assumptions have become unreliable. It's not simply because of the leverage and the derisking and the wild volatility and the government playing fast and loose with the rules of capitalism. Yes, the leverage and the borrow short-lend long model are behind much of the wrenching volatility. And in fact those features of our economy may quite likely be part and parcel to any underlying context-destroying problem. But whatever the cause, a lot of the uncertainty for the value hunters seems, at least to me, to be real. Real in that it is more value relevant to companies outside the immediate fray than a mere financial market freeze and related main street consequences (and inevitable recovery) that we're so often warned about. Real in that anyone with a working amygdala can't help but be concerned that the usual markers of reliable asset value -- long stretches of historical earnings experience, the reproduction value of existing assets, industry wide-incremental returns and relative competitive position -- seem to flicker at times.

Can large parts of a country go through extended periods of subnormal net national savings, poorly allocated investments, yet misleading macroeconomic indicators such as GDP and productivity that somehow fail to identify the extent of the excess consumption and malinvestment? Can credit, dollar hegemony, financial innovation, disintermediation and false comfort provided by governments that real investment risks can be transformed into safety (i.e. bank loans into bank cash via the FDIC and belief in regulatory prescience, mortgage loans into treasury loans via Fannie and Freddie, volatile creative destruction into smooth sailing via Fed Funds roulette) really conspire to create substantial long lasting dislocations in behavior in real markets? Might this cause previous consumption patterns (historical earnings) unsustainable or previous investment in infrastructure (reproduction value) catering to excessing discretionary consumption poorly allocated and thus devalued? In dollar terms? Then how do we value Starbucks??

I don't know, but I do know that these are the kinds of questions that investors who are normally more concerned with medical loss ratios and store build costs ask when things are really yucky (term of art, luckily my letters aren't outed on dealbreaker) out there. And it's this loss of context, the rules that all investors rely upon as the foundation for their frameworks whether they admit it or not, that makes it so hard to be greedy when the walls are caving in. Unfortunately, the world is just uncertain enough that you can fear something besides fear itself given a little poorly timed deep thought.

I have no wisdom. For quite a while, the world seemed really scary and the equity market seemed to be floating along like household wealth was an abstract concept related to the hadron collider. Hey, mortgage insurance may not be money good, but Nordstrom's should be fine! Now, you can make most equity bets with a lot of apparent scariness factored in (and even more fixed income bets). I mean, we're down to a stock market EV to GDP excluding the debt of financials of about 1X; what more can a girl ask for, right? In some cases, there seem to be bets emerging that might be a little more removed from the scariness but are likewise discounting lots of bad stuff. Even if we've consumed ourselves into gluttons of denim and cell-phones and organic kale, most of this crap we've built isn't going to be worthless, and some of it won't even be worth less. And given the volatility along with the general cheaper-ness, some of this stuff is or is going to trade at really weird prices relative to everything else, so you probably don't have to break your brain worrying about whether to bet on every race on the card. Bank loans are making daily moves normally reserved for biotech stocks. That can't be a bad sign. But you know it's not quite Kansas, either. Give me Worldcom fraud or CMGI evaporation or even portfolio insurance any day over this.
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