Dan Loeb at SALT Conference on Japan, Yum Brands, China & More

Skybridge's Alternatives Conference, otherwise known as SALT, is underway in Las Vegas.  Dan Loeb of Third Point spoke last night with Anthony Scaramucci and here's a summary of his comments.

Dan Loeb's Comments at SALT Conference

- Loeb seems constructive on Japan, says the Abe administration was very encouraging when they were involved with Sony (SNE) pushing for change.  Says Third Point probably exited that name "too soon" and probably left $1 billion on the table there as Japanese businesses are starting to focus on changing their ways.  They're more receptive to activism/suggestions and starting to focus more on shareholder return.  Thinks there will probably be more activist opportunities in the country but "they will become their own activists".

- Yum Brands (YUM) isn't really an activist play for them, it's an emerging markets opportunity.  They saw a play and as the food safety issues are taken care of, there's "enormous" upside.  There's basically 3 pillars to his investment here: turnaround potential (undervalued), franchising, and possible China spin-off.  You can read Third Point's thesis on YUM in their Q1 letter.

- Activism can help power the 'powerless' by helping other shareholders.

- On China (paraphrase): I don't know anyone who's gotten rich betting against China.

- Loeb thinks markets will more likely than not be higher over the next 1-3 years from now.  2 rules: Don't fight the Fed and don't fight the 'godfather' (David Tepper).

- On Warren Buffett: "I love reading Warren Buffett's letters.  I love contrasting his words with his actions ... I love his wisdom.  He's a very wise guy.  But I also love how he criticizes hedge funds, yet he really had the first hedge fund.  He criticizes activists, yet he was the first activist."

- Also talked about how the lack of educational opportunities here in America is a big issue.

Steve Kuhn's Presentation on Japan at Invest For Kids Chicago

We're posting up notes from Invest For Kids Chicago 2014.  Next up is Steve Kuhn of Pine River Capital who talked about Japan.


Steve Kuhn's Invest For Kids Chicago Presentation

•    Talk about Japan.
•    Heard a comment – “a land alpha goes to die”.
•    Traded it for 3 yrs on a night desk trading Japanese convertible bonds until 4am at Citadel.
•    #3 economy in the world.
•    Japan is interesting as Japanese stocks are still cheap relative to bonds.
•    Japanese corporate governance: the sun is rising. It is improving and the trend is your friend.
•    “Boring is beautiful”.
•    Pension funds are increasing their equity allocations, especially GPIF, which is material.
•    Long cheap, low volume, higher quality companies with strong track records. Short expensive, high volume, high beta companies with poor track record in return on capital and shareholder friendliness.
•    Their long portfolio trades for 12.2x PE, 8.1x EBITDA, 5% FCF yield, 11% ROE and has returned capital. Short portfolio trades for 23x PE, 11.4x EBITDA and lower returns on capital.
•    Looking to fix corporate governance such as a stewardship code, cross shareholding reduction and adding external directors.
•    GPIF looking to boost share allocation to about ~25%.
•    Japan companies have increased their share repurchases which is up 49% YoY. Dividends also increasing.
•    Cash holdings are still at near record highs – a positive for share repurchases and dividends.
•    62% of companies now have outside directors, up from 32% in FY04. Still in last place when compared to other major economies.
•    Takeover defenses peaked in FY08 and are steadily declining.
•    Easy way just to buy the JPNK index.


Be sure to check out the rest of the hedge fund presentations from Invest For Kids Chicago here.

What We're Reading ~ Analytical Links 11/5/14

The Misbehavior of Markets: A Fractal View of Financial Turbulence [Benoit Mandelbrot]

What's your investing edge? [Clear Eyes Investing]

Building a personal margin of safety [Abnormal Returns]

Managing someone else's emotions [A Wealth of Common Sense]

On taking losses and the value of survival [Long Short Trader]

A look at Ocwen Financial & Altisource Portfolio Solutions [Doug Kass]

A look at C.H. Robinson [Punch Card Investing]

On Hewlett Packard's break-up [Aswath Damodaran]

First time homebuyers hit lowest in nearly 30 years [CNBC]

On Japan and business vs economics [Paul Krugman]

Underwriting the next housing crisis [NYTimes]

An interview with Google's Larry Page [FT]

How confirmation bias can lead to spinning wheels [NYTimes]

Sears has a deal to offer its shareholders [Bloomberg View]

John Maynard Keynes is the economist the world needs now [BusinessWeek]

The way to make solar energy a hot investment? Make it a boring one [Slate]

What We're Reading ~ Analytical Links 7/2/14

Spy the Lie: Former CIA Officers Teach You How to Detect Deception [Philip Houston]

On curating your investment resources [Washington Post]

The Buffett valuation indicator: some interesting odds and ends [Advisor Perspectives]

The unpopularity of patience [Clear Eyes Investing]

A look at TIVO [Micro Fundy]

How to win by doing less [Morgan Housel]

Shinzo Abe's bid to shake up corporate Japan [NYTimes]

Cash no longer king as stock, asset swaps drive takeovers [Bloomberg]

Lessons from John Malone [Simoleon Sense]

Target's leadership lost its way long before data breach [WSJ]

The US consumer is on a tear [Business Insider]

Household net worth hits record high [Business Insider]

Embrace stock market investing as a lifestyle [Montreal Gazette]

Investors seek new hedges in unnatural market calm [Reuters]

John Burbank & Kyle Bass Macro Discussion at Alpha Hedge West Conference

Next up in our series of notes from the Alpha Hedge West Conference is the panel featuring a macro discussion between John Burbank of Passport Capital and Kyle Bass of Hayman Capital.  They touched on China, Argentina, Japan, and many other topics.  Below is their dialogue and JB = Burbank's comments and KB = Bass' comments.


John Burbank & Kyle Bass' Macro Discussion: Alpha Hedge West

KB> First part of taper will be easy.  Fiscal drag of moving Fed Funds from 0% to 3% will be large. 

JB> Does not think Fed policy changes unemployment.  Labor in China first, now technology have a great impact on unemployment.  Firms don't want to hire.  Structural unemployment issues will persist most of our lifetimes.  JB is shifting into equities.  Likes equities with good governance and high quality business.  Not bullish on GDP or global economy or US economy.  Credit got crowded last year.  Equity just getting started.  Companies have gotten very lean and efficient.  Emerging Markets (EM) have been struggling.  That was due.  Development Markets (DM) will outperform EM.  Not that US economy is great, just that US is quality.  As EM people grow, they will want more DM goods, not EM goods.

China

KB> Not investing in China now.  "Univestible" due to banks and shadow banking systems.  Staying away from India too.  Branded luxury and quality did well post crisis.  China has not adjusted from command and control.  Appears Chinal will work, but he think it won't (success is illusory at this point).  Sees restructuring.

JB> His portfolio has turned on its head since 2000 with the exception of internet companies.  Everything in China is rising.  EM and most commodities went up on the industrialization of China.  Won't happen again.  Short the mining companies.  Those businesses have bad economics except when times are really good. Chinese internet companies are winning over US internet companies in China because the Chinese government won't let the Chinese companies lose to US ones.  Internet companies in China at new highs are the ones you probably want to own.  Short EM and Mining.

Why does Bass like Argentina?

KB> People don't understand what is happening there.  Lots of things there are fixable.  Leadership in control has "issues" :).  Energy has been an issue, but recently there have been major energy findings that will change that.  2 years from now, he thinks there will be a new President in October 2015 and pro business people will be running things to take advantage of vast prairies of nature resources.  Argentina's problems can be fixed in 2 years.  Now is the time to start investing.  Sees 50% upside in the sovereign debt.

JB> Would not play Argentina's equities.  Tough betting on turnarounds.  Does not believe in value.  Believes in mispriced growth.  Kyle might be right about Argentina.

KB> "When I'm Right."

Burbank: Long Saudi / Short Russia 

JB> Likes Saudi...though their neighbors are a problem.  He is one of the best informed US investors re: Saudi.  95% of investors in Saudi are local traders. 

Moderator> Is there an opportunity for a paired trade with Saudi?

JB> Short Russia.  Saudi has been crushed.  Instead of easing, they tightened.  They've lagged.  No one wants to invest there.  Aramco would be the largest company in the world by a factor of 10 if it were a public company.  Saudi is like a 1990s EM story in a time capsule.  Dollar rally would crush EM.  Mining gets crushed without rise in commodities.  In '03 and '04 most wouldn't invest in EM.  Now they can't be talked out of investing in EM.  San Francisco is the opposite of EM.  EM has high volumes of low skilled labor.  SF has relatively high concentrations of high skilled labor.  Most people don't understand tech.  Transformational tech requires less capital than ever.  This means lower margins for others.  EM not capable of embracing technology.  SF is impervious to risks like weak GDP, interest rates, etc.  Tech has been camoflauged by rising prices everywhere.  New tech is where you want to be.  Those are "safe" strangely enough.  Investors don't even like to travel to SF.  That will change in the next 3-5 years.

Moderator> Are early stage private companies better investments for tech?

JB>Want to own "Venture Debt".  Low risk.  Even low tech does well.  Innovation premium starting to be revealed.  Want to just be in top 5 or 6 venture funds.  Look for services.  Google is 300B market cap.  Facebook & Twitter.  Not that many tech hedge funds.

Japan

KB> US Recapped.  EU is 3.5x more leveraged than the US.  At some point, debt will matter.  Has always eventually mattered the last 2000 years.  When debts are 24 times revenues you are finished, it is just a matter of when.  Hopes he is wrong.  More he looks, the more he thinks it will happen.  Sees it happening the next few years.  Avoid Europe.  US is 4.5x debts to revs.  Japan is 24.

JB> Dollar is better than Yen or Euro.  Better chance for dollar to rally than market is pricing in.  Chart of S&P to EM tracks closely to dollar chart.  Similar to US in late 90s.  Not because of strength, but due to quanlity and governance in US compared to elsewhere.  Likes Quality in US then betting on low quality of EM.  Believes in multi-year trends until something reaches consensus.  Then you have reversion to mean.

How should mutual funds feel about Macro risks?

KB> If I were long only, I would not be able to sleep at night.  A Japan crisi could not be contained.  It would have huge impacts.

JB> Joke: mutual fund managers happy as long as they beat the benchmark.  This is an era where you want to own the best.  In Silicon Valley it is like winner take all.  Not enough premium on best of breed.

KB> During the Tequilla crisis, Mexican equities down 90%, even with 10x appreciation, you just break even.

Be sure to check out the rest of our summary of the Alpha Hedge West Conference.

Stanley Druckenmiller's Sohn Conference Presentation: Commodities Conundrum, Short Australian Dollar

We're posting up notes from the Ira Sohn Conference 2013 in New York.  Next up is a summary of the presentation from Stanley Druckenmiller of Duquesne Family Office (previously of hedge funds Duquesne Capital and Soros Fund).  His presentation was entitled "The Commodities Conundrum" but he touched on a myriad of topics outlined below.


US Market & Quantitative Easing

Druckenmiller noted everyone is saying, "love the market long term, looking for a correction." He believes the opposite, loves market short-term, but hates it long term. Strongly disagrees with quantitative easing by Bernanke now. Only agreed with the first QE.

"His bond buying is controlling the most important price in the US economy." Says it will end badly, despite money-printing being beneficial to financial assets currently. When Fed slightly tightens, that will hurt things he says. Bernanke completely ignored strong economic data in January and February, but with slightly soft data later, he printed even more money. Expects a "melt-up" in the short-term, due to Fed's current policy.


On Japan

He feels this could be the beginning of a secular bull market in Japan.  Kuroda in Japan is doing QE x3 of the US relative to equity market capitalization. He actually thinks the Japanese QE makes sense, because they've been in deflation, particularly their currency strengthening against everyone else in the world.

He believes when the US economy improves and the Fed tightens, it will overwhelm the growth and cause the market to crash. He does not expect that in Japan, because it has been in a long-term deflation. Expects an 18-month run in Japanese stocks. Could be beginning of a new secular bull market for Japan.


Commodities Conundrum

Why have commodity prices gone down, with this explosion in monetary base around the world? He believes it is due to changes in China, slowing economic growth, and mix shift to economic activity away from commodity consumption. Huge surge of supply going forward.

He is betting that this is the end of the "supercycle" for commodities. China has huge credit growth, "shadow banking" growth, just like the US had right before the 2008 crash. Timing is uncertain, but China is possibly going to have a financial crisis.

"Commodities tend to go down while stocks go up” they hug the cost curve, which goes down over time. This was interrupted by a once in a lifetime burst of growth in China. Chinese consumption has exploded, and as they built their infrastructure, they were literally 50% of all commodity demand. They also used a huge stimulus in 2008, which crowded out productive investments, but most important mining companies ramped up production as if this growth rate would continue forever.

No matter how much Central Banks prints money over the next few years, it won't overwhelm the huge supply gains.


Druckenmiller's Picks

- Own companies that benefit from lower commodity prices, short the opposite.

- Growth over value.

- Avoid Brazil, Canada currencies.

- Short the Australian dollar. There is massive foreign ownership of Australian bonds.

- Long Japan; real estate, banks.

- Long: Google (GOOG), one of his biggest positions. In best 2 areas: search/data, and mobility. "Unlike other massive tech stocks engaged in financial engineering  prodded by hedge fund managers." Obviously, a dig at AAPL. "By the way, Google doesn't have any exposure to China." (Technically they do, via Android).


For more on this manager, head to lessons from Stanley Druckenmiller as well as a rare interview with Druckenmiller.

Check out the rest of the hedge fund presentations from the event: notes from Ira Sohn Conference 2013.

Kyle Bass on SuperMedia Debt & Japan

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Kyle Bass from Hayman Capital.

Bass mentioned that 90% of what he owns is in bonds (he has a ton of RMBS/subprime exposure).  He joked that he's constantly a contrarian since many other speakers at the event expressed disdain for bonds (though to be fair, the others were negative on treasuries, not RMBS).  He presented two ideas:


SuperMedia Debt

Before presenting his ideas, Bass noted that he pulled an 'audible' so this idea wasn't as in-depth.  Bass points out that bankruptcy wiped out billions for the company and that the debt trades at 66 cents while equity has fallen into obscurity.  He notes it's paying a 20% coupon and he thinks it's worth par in 2-3 years.  He also pointed out how SuperMedia is trying to merge with fellow competitor DexOne.


Bass: Don't Own Japan

Bass said that there's 80-200 trillion in global debt. In 18 months Japan will structurally fall apart.  "There's no chance at Japan repaying their debt."

He says psychology is important so look at anchoring bias.  It's important to think about how others think about debt.  Japan's debt to GDP is the worst in the world.  Their debt is 25x their revenues.  (David Einhorn was checking out Bass' slideshow).


Bass said there's 3 axioms that are actually false:

1. Positive current surplus, Japan not self-funding:  This is flat false he says.

2. Bank of Japan not monetizing the debt: Bass says they're already buying 2/3rds of the bonds today.

3. Retail investors will always support JGB's: Bass says Japan has a secular population decline.


We highlighted how in the past Bass has said that Japan would be selling more adult diapers than kids' ones and that's now the case.  He also pointed out how the country is having "adult diaper fashion shows."

He also illustrated how Japan is trying to sell JGB's by showing advertisements of a schoolgirl band selling them and sumo wrestlers pitching JGBs.

Touching on the Softbank/Sprint deal since it was mentioned earlier in the panel by Lee Cooperman, Bass noted that Softbank paying 20 billion yen to buy broken telecom is Softbank exporting yen as investors are starting to flee the currency.

Bass says that Japan has one of the "largest structural fiscal deficits in the world."  He doesn't know when exactly this collapse happens as this could go on for a few years?  He notes the timing on this sort of thing is very hard to peg, but it will "absolutely happen."

He wrapped up talking about playing options on this scenario because if it happens, you get paid a ton.  But in the mean time while you wait for it to happen, you only lose a little (we assume he's referring to price put options on Japanese JGBs, a trade he's talked about in the past).  For more on this manager, we've also recently posted up Bass on Europe and how he's investing.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Japan: Past the Point of No Return By Vitaliy Katsenelson

Vitaliy Katsenelson of Investment Management Associates is back with another compelling presentation on a foreign country. Last time around, he examined how China was the mother of all black swans. Katsenelson provides his thoughts at ContrarianEdge.com and this time around he's focused on Japan and how it is past the point of no return.

Embedded below is the entire slide-deck on Japan:



You can directly download a .pdf of the presentation here.

His presentation focuses on one fact that's been known for a while: the Japanese savings rate is declining as their population ages. But, the main thing to take away from that is that the Japanese will become net sellers of bonds and this has consequences. In order to fight off the yen's depreciation against the dollar, Japan will have to sell some of their dollar reserves. That's a much bigger deal than it sounds when you consider that Japan is the largest holder of US treasuries. While the US isn't in great shape right now, we're in better shape than Japan comparatively speaking. Conclusively, Katsenelson argues that the US economy should work things out naturally rather than relying on continuous stimulus spending so we don't end up like Japan.

Now that you've taken a look at Japan, make sure to check out Vitaliy's other presentation, China: The Mother of All Black Swans. Additionally, we've also detailed global macro hedge fund Woodbine Capital's focus on the dispersion between the industrialized and emerging worlds, a piece well worth the read as well.