(GMO) Quarterly Letter - Worth Reading - Interesting Data

>>> Looking for Bubbles
Best Guesses for the Next Two Years
With the repeated caveat that prudent investors should invest exclusively or nearly exclusively on a multi-year
value forecast, my guesses are:
1) That this year should continue to be difficult with the February 1 to October 1 period being just as likely
to be down as up, perhaps a little more so.
2) But after October 1, the market is likely to be strong, especially through April and by then or in the
following 18 months up to the next election (or, horrible possibility, even longer) will have rallied past
2,250, perhaps by a decent margin.
3) And then around the election or soon after, the market bubble will burst, as bubbles always do, and will
revert to its trend value, around half of its peak or worse, depending on what new ammunition the Fed
can dig up.

Conclusion and Summary
The bull market may come to an end any time, indeed as I write it may already have happened. It could be
derailed by disappointing global growth, profits sagging as deficits are cut, a Russian miscalculation, or, perhaps
most dangerous and likely, an extreme Chinese slowdown. But I believe it probably (i.e., over 50%) will not end
for at least a year or two and probably not before it reaches a level in excess of 2,250 on the S&P 500. Prudent
long-term value investors will of course treat all of the above as attempted entertainment (although I believe all
statistically accurate) and be prepared once again to prove their discipline and man-hoods (people-hoods) by
taking it on the chin.
I am not saying that this time is different (attention Edward Chancellor). I am sure it will end badly. But given
this regime of the Federal Reserve and given the levels of excess at other market peaks, I think it would be
different to end this bull market just yet.


>>> In Defense of Risk Aversion (Page 16-23)
Conclusion
Believing that value matters is not quite the same thing as believing that valuations mean revert. If you believe
that value matters but valuations do not necessarily mean revert, you should move your portfolio of risky assets
around pretty aggressively as valuations shift among the various risky assets. But you should keep a fairly
constant allocation to risky assets over time except in the rare instances where valuations are so extreme that
risky assets are actually priced to lose out to lower-risk assets. That strategy will outperform a naïve strategy
over time, but if valuations do mean revert, it is substantially sub-optimal. If valuations mean revert, you can
improve the risk/reward trade-offs of your portfolio substantially by adjusting how much risk you take through
time, taking more risk when the return to risk is high, and less when it is low. Since we at GMO believe in
reversion of valuations, we move our allocations to risky assets around fairly aggressively over time, reducing
their allocations not just when risky assets have a worse expected return than lower-risk assets, but whenever
the amount of extra return available is noticeably worse than normal. In our view, today’s opportunity set for
investors is decidedly sub-par, even if it is not as disastrously bad as 2000 or 2007, and we are reducing risk
accordingly. And I warmly look forward to the day we feel the need to write a defense of why we are taking
so much more risk than normal just when everything looks like it is going wrong and risk seems unacceptably
high.

>>> US Gapping Down

Gapping down
In reaction to disappointing earnings/guidance: CPB -5.4%.

M&A news: AZN -9.3% (Co rejects Pfizer's (PFE) final proposal), AMX -5.2% (AT&T (T) to divest interest in AMX to facility regulatory approval process in Lat Am), T -2.4% (AT&T (T) to Acquire DIRECTV for $95 per share), SHLD -2% (Sears Canada announced sale of its minority interest in Trois-Rivieres joint arrangement).

Select EU financial related names showing weakness: NBG -3%, DB -2.3% (raises capital and reaffirms Strategy 2015+), BCS -1.9%, RBS -1.3%, ING -1.1%, UBS -1.1%

Other news: MELI -2.6% (to report Venezuela results at SICAD II exchange rate; expects to incur a one-time re-measurement charge of $47-57 mln in Q2), GME -1.7% (unfavorable Mad Money mention), SNE -1.5% (Bloomberg real M&A column discusses possibility of SNE breakup).

Analyst comments: GNW -2.9% (downgraded to Underweight from Equal-Weight at Morgan Stanley), CSIQ -1.4% (target lowered to $46 from $52 at Northland Capital), ATK -1% (downgraded to Neutral from Buy at Goldman), MO -1% (downgraded to Market Perform from Outperform at Wells Fargo), KMB -0.9% (downgraded to Hold from Buy at Argus).

>>> US Gapping Up


Gapping up
In reaction to strong earnings/guidance: NNVC +8.4%, RYAAY +6.9%, AU +4.8%, DB +2.1%.

M&A news: VTUS +2.8% (to merge with Assembly Pharma in an all-stock transaction), PFE +1.5% (AZN rejects Pfizer's (PFE) final proposal), DTV +0.1% (AT&T (T) to Acquire DIRECTV for $95 per share).

Select metals/mining stocks trading higher: HMY +2.5%, GFI +2.1%, ABX +1%, SLV +1%, GOLD +0.8%, GDX +0.8%, GLD +0.7%.

Other news: ITMN +5.5% (presents Phase 3 ASCEND study of Pirfenidone in idiopathic pulmonary fibrosis), QUIK +3.4% (seeing continued strength, after being +17.5% on Friday), WWE +3.4% (bouncing following Friday's sell-off), STEM +2.9% (provides update on Its Phase I/II study in spinal cord injury; significant sensory gains observed in additional patients), SNMX +1.8% (announces two-year extension of sweet program collaboration with PepsiCo (PEP)), AVP +1.7% (positive Barron's mention).

Analyst comments: EXXI +5.2% (upgraded to Strong Buy from Outperform at Raymond James), GOGO +3.8% (upgraded to Buy from Neutral at UBS), KEYW +1.9% (upgraded to Buy at Chardan Capital Markets), ETFC +1.5% (upgraded to Outperform from Mkt Perform at Raymond James), MU +1.3% (upgraded to Outperform from Sector Perform at RBC Capital Mkts), PRU +0.9% (added to Best Ideas list at Morgan Stanley)

(BFW) AstraZeneca Board ‘Bit Surprised’ to See 55-Pound Bid: Chairman...

 BN 05/19 12:14 *JOHANSSON: BOARD WILL SIT DOWN IF ISSUES RESOLVED, PRICE MET
 BN 05/19 12:14 *JOHANSSON: BOARD WANTS TO SEE PRICE OF 58.85 POUNDS OR BETTER
 BN 05/19 12:14 *JOHANSSON: PFIZER MUST RESOLVE OTHER ISSUES BEFORE FORMAL TALKS
 BN 05/19 12:14 *JOHANSSON: BOARD `BIT SURPRISED' TO SEE NEW OFFER OF 55 POUNDS
 BN 05/19 12:14 *JOHANSSON: PFIZER SAID SUNDAY 53.50 POUNDS WAS LAST, BEST OFFER
 BN 05/19 12:14 *JOHANSSON: PFIZER ONLY TALKING ABOUT PRICE, NOT OTHER ISSUES
 BN 05/19 12:14 *JOHANSSON: BOARD CONCERNED ABOUT EXECUTION RISK, OTHER ISSUES
 BN 05/19 12:14 *JOHANSSON: WOULD NOT SAY IF ASTRAZENECA BOARD IS UNANIMOUS
 BN 05/19 12:14 *ASTRAZENECA CHAIRMAN LEIF JOHANSSON SPEAKS IN PHONE INTERVIEW
AstraZeneca Board ‘Bit Surprised’ to See 55-Pound Bid: Chairman
2014-05-19 12:22:34.671 GMT


By Oliver Staley
     May 19 (Bloomberg) -- Pfizer said Sunday 53.50 pounds was
last and best offer, AstraZeneca Chairman Leif Johansson says in
phone interview.
  * Pfizer must resolve other issues before formal talks
  * Johansson: “They want to do price, and price only”
  * AstraZeneca board concerned about execution risk, other
    issues
  * Board wants to see price of 58.85 pounds or better
  * Board will sit down if issues resolved, price met
  * Johansson wouldn’t say if AstraZeneca board is unanimous
  * NOTE: AstraZeneca Rejects Pfizer’s $117 Billion Offer as Too
    Low {NSN N5TDTF6K50Z2<Go>}

Link to Company News:{AZN LN <Equity> CN <GO>}
Link to Company News:{PFE US <Equity> CN <GO>}

For Related News and Information:
First Word scrolling panel: {FIRST<GO>}
First Word newswire: {NH BFW<GO>}

To contact the reporter on this story:
Oliver Staley in London at +44-20-3216-4369 or
ostaley@bloomberg.net

To contact the editor responsible for this story:
Kristen Hallam at +44-20-7673-2584 or
khallam@bloomberg.net

>>> US Early premarket gappers

Early premarket gappers

Gapping up: VTUS +9.4%, QUIK +7.3%, GOGO +2.6%, PFE +2.3%, AVP +2%, RYAAY+2%, CGEN +1.5%, ABX +1.2%, SLV +1%, GOLD +1%, GDX +0.9%, VALE +0.9%, GLD+0.7%

Gapping down: AZN -11%, CPB -4.1%, CSIQ -3.7%, T -2.8%, BCS -2.4%, ING -2.1%,UBS -1.9%, NBG -1.7%, LYG -1.4%, RBS -1.3%, SAP -1%

FT : Final offer may not be Pfizer’s last

Final offer may not be Pfizer’s last

There might still be haggling to come for AstraZeneca
What is the difference between a “final proposal” and a “full and final offer”? A whole heap of haggling, perhaps. Pfizer’s “final proposal” to buy AstraZeneca, at £55 a share, may not be the end of the story. This despite a rejection of the approach by the UK drug company on Monday morning and a 14 per cent fall in its shares in early trading.
The 45 per cent premium to the undisturbed price offered by Pfizer is enough to convince many shareholders. What may give them pause for thought is that although the cash element has been increased from 33 per cent to 45 per cent, they would still take the remainder in the US group’s stock. The value of these shares could take a dive if the tax benefits driving this deal are unpicked by angry US legislators.

The tilt at AstraZeneca by Pfizer of the US has been playing out as a compressed version of Kraft’s purchase of Cadbury a few tears ago – necessarily so, since UK takeover rules were reformed to preclude such long sieges. Amid political furore, a big US company has been executing a bear hug on a smaller UK rival for largely defensive reasons.
Cadbury, chaired by Roger Carr, demurred prettily enough to get the bid value up. Similarly, AstraZeneca’s chairman Leif Johansson named his price for a recommended offer in his rejection statement – £59 a share, which represents a steep 21 times forward earnings.
Investors are liable to ask him to give Pfizer’s hard-nosed boss Ian Read a peek at the books as an incentive to go above £55 a share.
By the same token, Mr Read could probably better his offer to legislators, who with their natural penchant for inaction have just gone on holiday. They have been threatening to investigate and perhaps block the bid on national interest grounds. This would almost certainly be illegal under European law. A hiatus for wrangling with the European Commission would probably kill off the transaction, though.
It could be enough for Mr Read to guarantee a minimum sum of research spending for the UK for a fixed period to quell dissent. Pre-merger assurances have legal force for at least a year, a second reform triggered by the Kraft takeover. The siege defence mentioned earlier was a “put up or shut up” deadline for a firm offer. This is May 26 for Pfizer, but may be extended with AstraZeneca’s agreement.
Ultimately, both companies are in the same spot as blockbuster drugs developers in a world where the returns for blockbuster drugs are attenuating. Not so much two bald men fighting over a comb as two greying men scrapping over a bottle of Grecian 2000, if that is what market credibility amounts to. A pact to share the stuff is still possible.