Thursday, December 14, 2006
FMD Few More Thoughts on Trading vs Investing
It should be clear that in the process of assessing fair value, I am incorporating a "reasonable" multi-year scenario, and using unspectacular assumptions about loan volume, interest rates (yield curve), credit spreads, and securitization margins. In fact, currently assumptions consist of consensus numbers on volume and earnings in fiscal 2007 early 2008, a modestly bullish fattening yield curve (but much tighter spread between Fed Funds and 10 year Treasuries), and very modest widening of credit spreads (virtually guaranteed through 2008 as broader credit trends weaken). One can posit two different scenarios with potentially very different outcomes (one very bearish, one perhaps more neutralish than the original base-case scenario). The more neutralish scenario (for stock) is the one that has been unfolding for the most part since mid year; low absolute interest rates; goldilocks economy. That will probably stretch out the time frame for the bearish case to unfold more decisively. But lets be honest; those trading are playing a different game of mo-mo, not the same one that "investors" with a multi year horizon are. Those reading this are certainly aware that I'm making no great claim about what next two quarter's earnings reports will look like, and in fact I'm even recognizing the 1 in 3 chance of a final upwards burst of insanity. But accepting the fact that the ceiling on the valuation is within winking distance ought to go a long ways to preventing an accident to your portfolio.