Playing Poker with the EU: Why There Won’t Be A QE 3

Wistful visions of a Bernanke Put have kept many invested. It is everything they want it to be: the lifeline, the safety net, the impetus for economic growth.  However, I believe it is unlikely to happen.  The logic is simple: Europe is much more fiscally troubled than the US and is arguably the source of not only market turmoil but also for economic angst in the US.  Without a shock and awe resolution from the EU, any further easing from the US will be ineffective in reversing our declining economic fortunes so why waste the powder.  And with Europe in much more desperate shape, in recession , broadly, and possibly headed toward a depression in Spain (Greece there already) it is much more incumbent upon the EU to provide a shock and awe solution to their economic woes sooner rather than later.  Additionally, Bernanke has come under significant criticism for his prior QE’s so why not let Europe do the heavy lifting this time around?  The European solution, if credible, will obviate the need for further stimulus from the US.  China keeps threatening to stimulate their economy and should this happen,  this could also lessen the burden on the American economy.   If I were Bernanke, I would play this hand to conclusion.  Not even another deficient jobs number will change my view.  In fact, I believe that the payroll report will come in above consensus based upon what I hear from my source who has been almost clairvoyant in their forecasts based upon real-time information.  They see strength across all sectors.  It won’t be a blow out number but should be comfortably above consensus.  This will lead to a short covering rally and a good opportunity to lower exposure

Separately, a great review for The Big Win http://seekingalpha.com/article/625331-book-review-the-big-win :

Book Review: The Big Win
Just as whale watching is a popular adventure tour for nature lovers, reading about the whales of finance is a popular pastime for investors. InThe Big Win: Learning from the Legends to Become a More Successful Investor (Wiley, 2012) Stephen L. Weiss profiles one woman and seven men who have truly excelled.

First, a caveat about what Weiss describes as “the ugly reality of whale watching,” by which he means “blindly following large, smart buyers into a stock or other investment.” (p. 25)

 

Unless an investor has insight into the whale’s rationale for making a particular investment, his time frame, and his risk appetite, the investor is at a considerable disadvantage. It is critically important, as Weiss writes, to “understand the process. … The true value of these case studies … is in understanding each investor’s methods, not standing in awe of their results.” (pp. 32-33)

 

Weiss’s eight legends—Renée Haugerud, James S. Chanos, Lee Ainslie, Chuck Royce, A. Alfred Taubman, James Beeland Rogers Jr., R. Donahue Peebles, and Martin J. Whitman— each carved out a niche and developed an investing style.

Haugerud, for instance, is a top-down investor. Her hedge fund, Galtere Ltd., has a five-stage investment process: taking the temperature of the global markets, developing a few themes, microanalyzing and selecting strategic investments, timing trades technically, and applying risk management. Her “big win” came in 1993. With gold trading as much as 40% above the world’s highest cost of production and the one-year bonds of Canada’s western provinces yielding 9 to 12%, she shorted gold for a rate of less than 1%, bought the bonds, and hedged her short gold position with undervalued small-cap stocks of mining producers in Australia that had high margins and low production costs. “‘All three legs worked,’ as Haugerud puts it, and all kept working for a good long while. It was a simple trade, and the returns were good enough to carry that year’s performance to her stated goal and beyond.” (p. 50)

Chanos is a short seller, Ainslie a stock picker, Royce a small cap investor. Taubman and Peebles are both real estate developers, Rogers is a commodities investor, and Whitman is best known as a distressed debt investor.

What do all these legends have in common? Weiss catalogs seven traits: no emotion, no ego, long-term investors, discipline, thorough research process, passion and work ethic, and drive. Or, reduced to six words:

 

“Drive. Passion. Process. Equanimity. Discipline. Humility. These are the commonalities between all those profiled in this book and the qualities that make for a great—and legendary—investor.” (p. 17)

 

The Big Win is an easy, thoroughly enjoyable read for those who want to learn from the whales.

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