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Olstein Market View

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With the onset of the Great Recession, investors fled equity markets seeking safety in cash and fixed income investments. A great many of these investors, in the interest of preserving capital, have remained sidelined even though equity markets have rebounded strongly from the lows of 2008 and 2009. In fact, from its March 9, 2009 low through December 31, 2012, the benchmark S&P 500® Index has posted a total return of more than 100%, with many value funds increasing by an even larger percentage. Yet, despite this strong performance, a significant number of investors remain on the sidelines immobilized by doom-filled headlines and afraid of a repeat of 2008.

From our perspective, the primary driver of equity market growth since the global financial crisis and market lows of 2008 and 2009 has been an aggressive easy monetary policy in order to jump start the economy and reduce unemployment. It has been the government’s stated objective to keep interest rates as low as possible for as long as possible. In our opinion, the current approach to monetary policy holds real risk for investors who are “in the now” and out of the market, that is, those investors who have sharply increased their holdings in bonds and cash and have decreased their holdings of common stocks. At some point, the aggressive monetary policy of the past four years is likely to trigger an increase in inflation that could negatively impact the value of fixed income and cash holdings. In fact, we believe that counter to past market cycles, an increase in interest rates from these abnormally low levels would be indicative of an increase in economic growth and be bullish for equity returns and bearish for bond returns.

At this stage of the economic recovery, we believe investors should prepare for the long-term effects of the current low-interest rate monetary policy and seek ways to improve investment returns in a low-growth environment. The real possibility of increased inflation combined with the realities of investing in a low-growth economic environment should compel investors to find ways to benefit from both productivity growth and capital appreciation in their portfolios. While many investors are nervous about equity markets or remain sidelined waiting for robust improvement in the economy, we believe there is a strong case for investing in the equity securities of companies whose real economic value is unrecognized by the market, obscured by market uncertainty or overshadowed by temporary problems. We believe our free cash flow accounting-based investment discipline of looking behind the numbers of individual companies to identify undervalued securities has a decided advantage in the current market environment.

While we attribute much of the current under-exposure in equities to macro- economic concerns and doom and gloom scenarios by most investors and the press, we prefer to focus on the undervalued securities of good companies with strong balance sheets and unique business models that generate (or have significant potential to generate) sustainable free cash flow. In addition, we prefer management teams that are deploying their cash balances to either grow through value-added capital expenditures or return excess cash to shareholders through dividends or stock buybacks.

We also believe it is important to identify those companies that not only have correctly focused their priorities in the face of a fragile economic recovery but have also identified options that have created a substantial strategic advantage for what we believe is an eventual inevitable acceleration of economic growth. As we have stated many times, the Fund focuses on a company’s ability to generate normalized free cash flow as the primary determinant of value. In particular, companies that continue to thrive in a challenging or stagnant economic environment eventually draw the favorable attention of investors.

Above-average long-term returns are generated by paying attention to the cash return an investor can expect from owning a share of a business and whether or not the potential return has enough of a premium (to the risk free rate) to compensate an investor for the risks of the company’s business model and to correctly predict its ability to produce normalized free cash flow. Assessing the adequacy of the cash flow return is of greater importance during an uneven economic recovery especially during a time when investors are being told, often quite loudly, to avoid equities and seek safer opportunities. We believe such times have the potential to set up significant above-average long-term investment returns.

Meridian Value Fund - Q4 2012

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Flowserve is a leading manufacturer of pumps, valves and seals found in a variety of end- markets such as oil & gas, power generation and chemicals. The company holds leading market positions across various geographies, product segments and end-markets. It is also ahead of the competition with aftermarket service centers located throughout the world, providing it with deeper customer relationships and steadier demand for higher margin replacement and repair business. Flowserve’s late cycle markets have bottomed and pricing on new projects is beginning to improve as excess capacity gets absorbed. Additionally, the company should, in our opinion, benefit from the build-out of emerging market infrastructure and domestic opportunities such as new chemical plants and pipeline expansions brought on by abundant natural gas. Flowserve maintains modest financial leverage and generates returns on equity of 20%. We believe the company is attractively valued at 12x our $13 per share estimate of potential earnings power.

WNR Smashes Earnings

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http://www.fool.com/investing/general/2013/02/28/western-refining-smashes-earnings.aspx

Steen Jakobsen

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Macro Update: China PMI weaker than expected at 50.1 after 50.5 in January. Chinese model is broken but market continue to ignore it:

http://www.bloomberg.com/news/2013-03-01/china-feb-manufacturing-pmi-at-50-1-economists-est-50-5.html

Now in Singapore - after South Africa - Budget here was balanced but with a big of focus on the social fabric which is very admirable - This was in my opinion the key statement:
"We need to intensify this economic restructuring and skills upgrading so as to achieve quality growth... If we do not do better in raising productivity, we will be caught in a situation where businesses lose competitiveness and wages eventually stagnate," Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam said in his budget speech.

The offical link: http://app.singaporebudget.gov.sg/budget_2013/default.aspx

Singapore remains in my opinion one of the few pragmatic economies in the world - growth and bull markets mean everyone needs to benefit - everyone.

BOOOM WNR +6.13%

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WNR Q4

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Western Refining, Inc. WNR +3.36% today reported fourth quarter 2012 net income, excluding special items, of $155.7 million, or $1.45 per diluted share. This compares to fourth quarter 2011 net income, excluding special items, of $50.8 million, or $0.50 per diluted share. Including special items, the Company recorded fourth quarter 2012 net income of $207.6 million, or $1.92 per diluted share as compared to a net loss of $64.6 million, or $0.72 per diluted share for the fourth quarter of 2011. The special item for the fourth quarter of 2012 was a non-cash unrealized pre-tax hedging gain of $81.5 million. The quarter-on-quarter improvement was due in large part to higher refining margins resulting from cost-advantaged crude oils and strong product values in the Southwest U.S.

For the year ended December 31, 2012, the Company reported net income, excluding special items, of $552.3 million, or $5.08 per diluted share as compared to net income, excluding special items, of $330.4 million, or $3.14 per diluted share for the year ended December 31, 2011. Including special items, Western recorded full year 2012 net income of $398.9 million, or $3.71 per diluted share compared to full year 2011 net income of $132.7 million, or $1.34 per diluted share.

A reconciliation of reported earnings and description of special items can be found in the accompanying financial tables.

Jeff Stevens, Western's President and Chief Executive Officer, said, "In 2012, Western Refining realized its highest fourth quarter and full year Adjusted EBITDA in Company history. We undertook a number of strategic actions to capitalize on the strong margin environment, strengthen our balance sheet, and invest in the business. Over the last two years, we believe we have demonstrated our ability to capture these positive market conditions and dramatically transform the earnings power of the Company."

The Company successfully completed a number of strategic initiatives during 2012:

-- reduced total debt by $304 million

-- returned $323 million in cash to shareholders via dividends and share repurchases

-- expanded the crude oil capacity of the Gallup Refinery

-- invested in a gathering system for cost-advantaged crude oil in the Permian Basin

Forecasters

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"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, we continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place."
-- Warren Buffett

Value Trap?

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W&T Offshore has been one of my long-positions.

Q4 was not convincing. I think the stock could go down towards support at 13,80 dollar/share.

I will folllow how insiders, that has been very bullish before will do now.

Equities are still not expensive

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The latest rally in equities has been impressive, but despite trading 15.5 percent higher than the April 2010 level, our Z-score valuation model on global equities are lower. Based on multiple valuation metrics, global equities are trading -0.68 standard deviations below their historical mean since 1996. With the current co-incident indicators and leading indicators at hand, I expect global equities will continue to rise throughout 2013 and end the year higher.

VIX +36.39%

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Italy

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Italy is headed to new elections within six months as election results make Italy ungovernable. It is political, economic & financial chaos

Nouriel Roubini

Saxo

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Italian Election: With 80 pc of votes in Berlusconi have 127 mandates vs. Bersani 111. Making it impossible to rule without the bigger winner the comedian Grillo!

http://cise.luiss.it/cise/wp-content/uploads/2013/02/sim80.jpg

Says something does it not? Winner: Comedy Central. Loser: Central Planning (Monti). This is exactly why Draghi's plan for a plan to bail-out Europe does not work - The pressure came off for two month and the Italians reverted to their old ways. Congratulation we have just seen why macro will always fail and why only through serious mandate for change Europe and for that matter the world will change.

Adding Value to Investing

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https://www.youtube.com/watch?v=fZYOLK06oO0

-- Warren Buffett

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"Investors making purchases in an overheated market need to recognize that it will often take an extended period for the value of even an outstanding company to catch up with the price they paid."

Taleb

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Steen's Chronicle

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2012 turned out to be a very different year than most had expected. Personally, I was very negative coming into the year, especially towards the European economies, and was more or less right in my predictions on that account. However, I was also very sceptical of the rising stock markets. It turned out I was right on the real economy, but wrong on the stock markets. But shouldn’t the stock market track or follow the real economy?

With 25 years of experience as a trader, market maker and fund manager, I should have known better! The stock market and the economy are, of course, linked but rarely on a strict day-to-day or even month-to-month basis. Most often it is a mismatch between expectations and the current reality, both amplified by the critical element of monetary policy, that produces sentiment and market pricing that diverge from the real economy. This is very evident today in Europe with the seemingly illogical combination of historical highs in both unemployment and stock markets. Stock markets have reached the pre-crisis highs of 2007/2008.


History shows that such divergence has its limits and expiration dates – either the economy improves dramatically or markets will need to adjust their expectations lower. To grasp such divergences in a historical perspective, it is useful to look at the difference between broad stock indices like the MSCI World and the German IFO. In 2013, the divergence between the underlying weak economic performance as measured by this survey and the stock market has reached the extremes of levels prevailing before markets crashed in 2000. Hardly a good sign, but remember that the difference can be reduced two ways: stocks dropping or the economy improving.

Fundamentally, the stock market is a “sub-component” of the entire economy, or GDP. Therefore, stocks must correspond to some degree with the rise and fall of the economy and relative to other economic factors like inflation and productivity. A long-term bull market in stocks usually coincides not only with economic growth, but increased productivity and risk premiums. Even more importantly, a real bull market makes everyone benefit, rich and poor, through lower unemployment, productivity and investment – all of which are failing in this present run-up in prices.

So how do investors deal with such an investment conundrum? Ironically, to the well-placed investor all the above technical economic understanding does not really matter. Experience shows that an investor willing to risk holding illiquid assets is rewarded with a risk premium for taking on that risk. The risk premium fluctuates based on inflation, current interest rates and income through dividends from a given stock. Stocks must give a higher yield than bonds to compensate for their inferior liquidity.

When European Central Bank president Mario Draghi in July 2012 ensured the world that he would do “whatever it takes” to keep the Euro alive, he created a massive move into more illiquid assets by removing the presumed negative potential in bonds and hence indirectly fuelling stocks. But again – as investors, we do not need to understand this. If we follow simple rules, we do not need to mix our analysis of the real economy with stock pricing. We can be economic agnostics.

In the 1970s, the American investor Harry Browne crafted the so-called Permanent Portfolio. Its logic is very simple. Invest 25 percent in each of four different assets: stocks, long government bonds, metals and cash. Sounds boring? From 1972 to 2011, the yield from such an allocation has been 9.5 percent. In real terms, no less than 4.9 percent. A much higher yield than the stock market and with a significantly lower risk! An investment of USD 10,000 in 1972 would have grown to USD 377,193 by 2012.

This does not mean that active trading does not pay off, but works to illustrate that it wise to always have a “dumb model” as a backstop or frame of reference. Extra risk or changes in allocation should only be taken when one has an “edge” or strong indicators of being right! The famous hedge fund manager Ray Dalio from Bridgewater has expanded the idea into his All Weather Model. As the name suggests, it is designed to handle any economic condition. The results have been very convincing. Since 1996, the annual yield has been approximately 12 percent, turning Bridgewater into the world’s largest fund with USD 141 billion under management.

The difference between the two is that Harry Brown allocates assets while Ray Dalio and Bridgewater allocate risk. What they hold in common is a total agnostic attitude towards the market. They accept the very important premises of trading: we do not know what tomorrow brings; we do not know where we are going and we will get our yield primarily from extracting the risk premium from assets. The beauty of all this is that we do not have to understand the relationship between the economy and stock markets to invest efficiently. Considering the current unpredictable macroeconomic interventions, such an approach should offer a huge relief from trying to understand everything that is going on, and possibly an advantage to any investor who does not have direct access to the minds of powerful policymakers and central bankers.

As I mentioned above, an investor should only depart from this route if he has a very strong feeling or belief that something is going to happen. Personally, I allocate 70 percent in an All Weather Model. That helped me to get a decent yield in 2012 even though I was almost 100 percent wrong in my very conservative stock market predictions. I used the remaining 30 percent to insure against Black Swan events or place opportunistic investments. I am presently long-term bullish on Sub-Saharan Africa investments. The answer to the title’s question is that the stock market may diverge from the real economy for a limited period, but this has no impact on the rationally placed investor. Investing is about logic and rationality – not genius. And that’s a good thing for all of us.




Helicopter money!

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http://video.cnbc.com/gallery/?play=1&video=3000149134

MRO

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My DCF-value is 44-46 dollar/share.

New High New Low

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Small waring in this chart. Seems like the trend is getting weaker.

Gold

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