Chris Shumway: Short CNH, Long Moody's (Sohn Conference Presentation) ~ market folly

Tuesday, May 6, 2014

Chris Shumway: Short CNH, Long Moody's (Sohn Conference Presentation)

We're posting up notes from the Sohn Investment Conference in New York, produced in partnership with Bloomberg LINK.  Next up is Chris Shumway of Shumway Capital.  He pitched shorting the deliverable forward version of Chinese currency (CNH) and also pitched Moody's (MCO) as a long.

Chris Shumway's Sohn Conference Presentation

Shumway: Was at Tiger until 2002.  Grew funds to $8B, CAGR of 17%.  Now runs his own investments and seeds new funds.  First time speaker. Returned outside money in 2011, time horizon has extended - now does some private investments.

His macro views:  his main concern is if the global economy got going too quickly, inflation could take off which would choke off the whole cycle.  China deflation was good, because it meant the economy could grow, disinflationary for a long time.  Now "it feels a little bit strange out there."  Especially the damage to the growth stocks which have gotten crushed on no short-term valuation support.

Three big areas of concern now:   

1. The Fed.  Yellen dashed hopes of "considerable time" to making it 6 months before taper happens quickly.   

2. Russia.  Putin.  Risks are real.  A big risk, that is mispriced.   

3. China. China growth is slowing. Massive excess credit growth, 11% more than GDP.  Over time, it should be the same.  This is unsustainable.  Non-performing loans have skyrocketed.  Shadow banking is 44% of credit growth.  Much of the projects have no return.

IDEA 1:  Short the CNH. (deliverable forward version of Chinese currency.) Tracks the CNY with very little variation.  They have limited stimulus options left, and they all lead to more non-performing loans. Says GDP is growing 6% and decelerating, not the 7% stated.  Simplest way to fix this is currency devaluation.  Did this in 1994, from 5.5 to 9 CNY to the dollar.

IDEA 2: Moody's.  MCO. Long term after tax returns.  Ratings agency, and Investors Services.  A great business, straightforward story. Global duopoly, with third player Fitch.  Unrated debt costs you 150 bps in yield, costs only 5 bps to get rated.  81% ROE over last 10 years. Moodys covers 95% of the companies, S&Ps covers 92%, Fitch does 50%.

Key: "It's a Bloomberg-like business."  Huge cost to have all the data, and they have it.   Corporate EBITDA growth grows at GDP,4%, pricing 4-6% per year. Europe adds 2-3%.  Get 10-13% revenue grower, with 100bps operating margin expansion.  Gets you operating income growth of 14-17%, 5% buyback, plus dividend gets 19-22% total return. Bear case:     1. Litigation.  6 years since Lehman crisis and still no lawsuit. (S&P had it)     2. Revenue growth rate is decelerating due to tougher comps.   Price target is $143 base, $171 upside.

Be sure to check out the rest of the presentations from the 2014 Sohn Investment Conference.

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