Doug Grey's Presentation on the Cost of Money: Value Investing Congress ~ market folly

Tuesday, May 8, 2012

Doug Grey's Presentation on the Cost of Money: Value Investing Congress

Continuing our coverage, today we're posting up more notes from the Value Investing Congress.  Below are notes and the slideshow presentation from Doug Grey of Saddle Peak Asset Management.  His presentation focused on how current interest rates are distorting things and highlighted PepsiCo (PEP).

PEP: Too cheap? Value investors must now look at the macro picture.  Pepsi is just an example to discuss how the current interest rate picture is distorting things.  Bernanke:  Fed view is the flow (buying and/or selling) that dictates the price or level of interest rates, not the quantity of securities held.

Pepsi cost of money in 2002 was 7%, now cost is 2%.  Value = EPS / (r - g).  With r plummeting 5% there is a significant implication on allocation of capital.  So, interest rates make a significance in these valuation matters.  CFO of Pepsi should be borrowing money to buy stock.  Institutional investors should think about actuarial rate considerations.

Discount rate lowered from 7.75% to 7.5%.  Saddle Peak - straightforward - use leverage (i.e. in the money calls).  Hedge interest rate risk with ETFs and interest rate futures.  "All it takes is guts because no one can tell you when interest rates turn around ... just be what you should be - a patient value investor."  The above notes are courtesy of Kyle Mowery from GrizzlyRock Capital.

Question & Answer Session

Own Pepsi - biased to high quality, growing businesses: American Express (AXP), GM (GM), Caterpillar (CAT), Halliburton (HAL) ~ 12% of his portfolio, and Exxon Mobil (XOM).

Oil drillers like HAL is cheapest way to play natural gas.

Use of options versus equity - they buy long dated in the money calls.  Black Scholes does not accurately price long dated options - rather intrinsic value growth makes these long dated calls very cheap.

Embedded below is Doug Grey's presentation on Pepsi & interest rates:

Be sure to click here for other presentations from the Value Investing Congress.

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