Monday, 17 June 2013

There's a reason I don't own yellow trucks, wine funds and time trialbikes . . . .

It's hard for me to get excited about even my favourite companies at the moment. For a long time I've liked everything about the heavy machinery king Caterpillar. Clearly I'm not alone as evidenced by stock tipster Seeking Alpha which has been filling my mail box with reasons to buy the big CAT of late. Today though was special as they summarised the reason why I'm not interested yet:

Caterpillar (CAT) recently increased its quarterly dividend from $.52 to $.60. The 5-yr dividend growth rate is 8.9%. At the current price of $83.87, the 12 months trailing P/E is 11.3. The current yield is 2.9%. Thus the Tweed Factor ((yield + 5yr dividend growth rate)-P/E)= +.5. 

I don't know or want to know what the "Tweed Factor" is, but I can surmise that it's some type of historical momentum indicator based on earnings etc. The trouble is that if a) interest rates start to go up the dividend on which this recommendation is based will be less relevant; b) the earnings growth in the crucial mining space is slowing; c) US housing construction is yet to gain a decent foothold as we're still clearing much of the existing stock. The P/E doesn't put me off as a good friend of mine who helps manage a hedge fund in NY always told me the time to buy cyclical is when the P/E is high, not low because it's confirming a growth profile consistent with the cycle. The trick of course is not to buy them at the end of the cycle when the less than street smart money sees no end to the good times. CAT at current P/E's sits in line with many of it's cyclical cousins and is therefore a luxury in an active portfolio. Keep it of you own it, watch it if you don't.

If being wary of CAT is too much then perhaps the savy investor can glean something from the recent problems in the wine investing sector. In a past guise I was quite a wine geek as many of my friends know. This week I'll be withdrawing a couple of prized bottles from my cellar to enjoy with friends at a BYO restaurant here in Sydney. Making money from wine investing has never been my goal, though I have been able to make a lot of my drinking pay for itself. To say I've been skeptical of the funds that setup to accumulate positions in wine, art and even vintage cars is an understatement. These have always had a ponzi-ish quality about them, especially the world of high end cars. But back to wine . . .
Vintage Wine fund, a Cayman-based investment vehicle once boasted as much as €110m in assets (peak 2008) now says (according to the FT) that:

“The wine market is dead. It could take years for this market to recover, I think you have to ask whether open-ended structures are suitable for these sorts of illiquid investments. There’s also a danger that wine funds can get too big. When you allow investors to come in and exit on a regular basis, you get huge outflows when things go bad.”

That's what I mean by "Ponzi-ish" . . . "wine funds can get too big . . . " This is what happens when people invest in a class of assets that feeds on itself. The market is just not liquid enough (pardon the pun) to allow a broad range of investors to pool capital into a fund with the sole goal of rolling the stock periodically to produce profits. Here's the problem . . .  Say I'm running a fund and I have to produce a monthly NAV of the holdings, but the auctions for wine at the high end don't occur on a regular basis in the way that the stock market opens every day. I'm therefore left with a holding in '61 Latour that may not be valued in the public market more than say 3 - 4 times a year. Add on to that that said auctions might only see a case or two trade. What happen's if I have to redeem 5 cases quickly? Well maybe the private market is going to pay more or less than the published auction prices, but who knows and therefore what is the correct NAV. Some wines are not even covered at all . . . '28 Latour is a magnificent trophy wine, but what's it worth? The same goes for art. If I own a Monet I can get a reasonable idea maybe once a year, but if the Monet is from a different period from what goes under the hammer how do I value it? Think about someone like Vermeer. The rarity value might mean that you see a trade once a decade if you're lucky . . . If you had one in a fund and only market the NAV to the last traded prices new investors in the fund might be getting a bargain or a pig. That's why open ended funds don't work for illiquid assets and investors should avoid them or directly purchase holdings themselves. Obviously the key is not to drink the assets too early.

It was fascinating watching the final stage of this years Tour de Suisse last night. Time trials are not my thing, but if they were all like this one then I might just become a fan.

This TT was designed by committee headed by an evil scientist and probably included a comedian and a Formula 1 pit boss. The course was just under 27km's in length and flat for the first 17km's, so you needed the time trial bike and super-aero positioning. The fight for the yellow jersey though really began at the 17km mark when the riders hit the base of a 10km 9.5% climb and had to decide whether to switch bikes or try and lug a heavy time trial bike up a hill it was never meant to climb. Most chose to switch which led to some interesting techniques in the makeshift pits. You see it's my belief that the UCI doesn't allow you to have a spare bike waiting out on the course and therefore the bike can only be carried by the following support vehicle. That vehicle can't drive past it's rider and wait up the course because in doing so it may give the rider an unfair advantage by allowing him to slipstream the car. Therefore the rider has to stop, wait for the car, then for the bike to be taken off the roof and finally attempt the switch. This is funny because seeing a small man in a skin tight suit wearing a large comical TT helmet try and climb on to a new bike and set off up a hill is amusing. Rui Costa did it with about as much class as could be expected and won, though given the heat of the day wearing a non-ventilated TT helmet on that climb must have been terrible and some riders clearly suffered. My own view is that it we should have more of this, even if it's slightly cruel on the riders. Sorry.

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