Beijing Perspective

Are smart guys that stupid ?

Over the past few weeks we heard the following from some of the smartest guys in the business

Private equity giant Apollo management:

“It’s almost biblical. There is a time to reap and there’s a time to sow,” Leon Black, chairman and chief executive of Apollo Global Management (ticker: APO) declared to the Milken Institute’s global conference in Los Angeles, alluding to that same Scriptural passage. “We are harvesting,” he added pointedly.

That is, the private-equity giant is a net seller because things simply can’t get much better. “We think it’s a fabulous environment to be selling,” he says, noting Apollo has sold about $13 billion in assets in the past 15 months. “We’re selling everything that’s not nailed down. And if we’re not selling, we’re refinancing.”

That’s because there has never been such a good time to borrow — which is raising warning flags for Black. “The financing market is as good as we have ever seen it. It’s back to 2007 levels. There is no institutional memory,” he observed, referring to the peak of the last credit bubble.

Oaktree Capital, Howard Marks firm

“It’s a great time to sell debt and it’s even a great time to sell stocks, so that’s what we’re doing,” John Frank, Oaktree’s managing principal, said on a conference call.

GMO - Jeremy Grantham firm

James Montier said that GMO’s 7 year asset allocation model for US stocks is now predicting  negative returns. GMO are now 50% in cash.  While they’ve been known to hold higher levels of cash than most investors, this seems to be taking things a step further.

So what is going on?

Are these great minds, great investors with great track record
Stupid? NO

They misunderstand that rates are low and values are just great? NO

They use models that do not work anymore? NO, the fundamentals of  investing in businesses have been the same for centuries

They do not understand that the internet will change the world and earnings are irrelevant? Oops sorry that was 1999-2000

They do not understand that housing never goes down because money will always be easy ? Oops that was 2007 top

They did not hear that the fed is printing money and will continue to do so? NO, I think they heard about it…and understand it

They do not understand that this time is different? It is never different

They are wrong in the short term, underestimating the power of the fed in the present moment,  but likely to be very right in the longer term? YES, very likely.

If infect the case is that in the short term momentum will win, there are two thing participants need to understand:

1) If you are chasing stocks and look for potential buyers to take that paper off your hands, it will only be another “chaser” that will buy it from you, value guys are gone.

2) When the market will correct and momentum will break, tomorrow or next year, here or at higher prices (no one knows), ALL the buyers will be gone until much lower prices are established, i.e. it will not be your mom and pop correction, it could be an all out 1987 style crash, momentum guys will be gone when the momentum is gone and value investors sitting on cash will need much lower prices if you want them to buy your paper.

Caveat emptor…

You can not beat the index by trying to beat the index

With everyone chasing three percent yield as if it was a gift from god or a road to wealth (which it is if you can make it to 150 years old healthy and happy,) it helps to get down to basics.

Monish Pabrai gave an hour and forty minute talk at Columbia Business School, explaining how he compounded at 26 percent since 1995.

Whether value investor like Monish, option, futures, frontier or momentum trader, the talk delivers a clear basic message many seem to have forgotten, Do NOT commit capital if you can not see yourself making REAL money (in Monish case 2-4 times his investment,) do not waste your time on a 10 dollar stocks that can possibly go to 12, or go gaga for three percent yield in an overpriced, over-owned Dow stock because the market has been moving up.

Ignore the index tracking mentality, realize that real returns will be lumpy, and focus on finding special situations worthy of your capital, which means sometime there will be nothing to do.

Structure your investment or trading business in order to achieve outsize returns whatever your strategy may be, or don’t structure it at all, as Arnold said “Go heavy or Go Home,” in the investment world, go for it or buy an index fund and stay home.

If you are familiar with Monish you can skip to minute 20, the link is below and well worth the time, even though the sound quality is suboptimal.

http://cbs360.gsb.columbia.edu:8080/ess/echo/presentation/670921b2-4bad-4843-8dc5-4026360f1369

Private equity: “It’s time to sell”

Apollo Management Leon Black at the Milken Institute conference:

“We think it’s a fabulous environment to be selling. Apollo has sold about $13 billion in assets in the last 15 months. We’re selling everything that’s not nailed down, and if we’re not selling, we’re refinancing.”

http://www.milkeninstitute.org/gc2013/

Dangerous Economic Territory

The GailFosler Group posted a great interview with Paul Volcker, below are few priceless nuggets from the interview, you can read the full piece here

In trying to influence job creation through monetary policy, we’re trying to control something over which we have no close control. 

Inflation is a more fundamental danger than speculative investment. Some countries seem to be in the unusual situation where they are trying to create inflation. They will come to regret that.

People think they can manipulate the economy in a way that produces a little good inflation to go along with better economic activity. That’s silly. In Japan, they seem to think that they will snap their fingers and have inflation of 2 percent and the economy will recover.

We may say that we are aiming for nominal GDP of, say, 5 percent. Who thinks you can really do that? It doesn’t correspond to the real world.When have economists been able to predict how much will be inflation and how much real economic activity? 

Monetary policy has little or no control over the real economy and issues, and yet we persist in using it as a tool for generating growth.

 

Who said politicians can not get anything done?

From NYU Local

While Congress might be stuck in a deadlock on just about every issue imaginable, there’s one piece of legislation that both Democrats and Republicans hate unanimously: the Stop Trading on Congressional Knowledge (STOCK) Act, a law passed last year designed to prevent insider trading among lawmakers and government officials by requiring them to post disclosures of their financial transactions online.

Both parties and both houses of Congress hated the disclosure portion of the law so much that it was repealed on Friday without debate—the measure was sent to the president by unanimous consent. The ordeal took about 10 seconds in the Senate and 14 seconds in the House, according to official records .

The STOCK Act would have required members of Congress, their aides, and other federal employees making more than $119,554 a year to disclose their financial dealings in an online database. It was supposed to prevent government officials from using insider knowledge about policy-making to profit from stock trades and other investments.

Upon the signing of the bill into law last year (pictured above), President Barack Obama said, “The idea that everybody plays by the same rules is one of our most cherished American values. It’s the notion that the powerful shouldn’t get to create one set of rules for themselves and another set of rules for everybody else, and if we expect that to apply to our biggest corporations and to our most successful citizens, it certainly should apply to our elected officials—especially at a time when there is a deficit of trust between this city and the rest of the country.” The White House has not said whether the president will sign the repeal.

Despite the repeal, government officials will still have to file disclosures of securities trades over  $1,000 within 45 days, but they no longer have to file them in a searchable database that was to be easily accessible to the public.

Congress and the President had delayed the online posting portion of the act from going into effect 3 times already, but the ultimate repeal came after the National Academy of Public Administration , a nonprofit group, found that publishing the information would create an “unwarranted risk to national security and law enforcement, as well as threaten agency missions, individual safety and privacy,” in a report delivered last month. The group suggested that the online posting requirements should be suspended indefinitely.

Lisa Rosenberg of the Sunlight Foundation, a nonprofit group advocating for government transparency, said that the repeal “sets an extraordinarily dangerous precedent suggesting that any risks stem not from information being public but from public information being online.”

Rosenberg raises an interesting point: Since these financial disclosures are still considered public information, how does not posting them on the Internet mitigate their potential risks to national security? How does obfuscating information about the financial activities of government officials help anyone, other than those officials? Does the potential danger come from foreign terrorists knowing this information or from those citizens who just to know if their government officials are behaving responsibly?

UPDATE: White House spokesperson Jay Carney announced  that Obama has signed the repeal of the internet disclosure portion of the STOCK Act.