Bill Gross' Latest Investment Outlook: Rational Temperance

It's been a while since we've checked in on what the bond king Bill Gross is up to over at PIMCO, so below is his latest investment outlook entitled 'Rational Temperance'.

In it, he touches on how investors are stretching for yield and that "corporate credit and high yield bonds are somewhat exuberantly and irrationally priced.  Spreads are tight, corporate profit margins are at record paeks with room to fall, and the economy is still fragile.  Still that doesn't mean you should vacate your portfolio of them.  It just implies that recent double-digit returns are unlikely to be replicated."

Oaktree Capital's Howard Marks also recently commented on high yield bonds in his latest memo.

Gross then goes on to say that, "the conclusion would be that where high yield prices go, stock markets follow, or vice versa.  Narrow yield spreads in high yield credit markets appear to be accompanied by 'narrow' equity risk premiums in the market for stocks, which is another way of saying that the course of future equity returns may not resemble its recent exuberant past."

Basically, the whole theme of Gross' piece "Rational Temperance" is him saying that investors should lower their return expectations.

Embedded below is Bill Gross' latest PIMCO investment outlook:




You can download a .pdf copy here.

Howard Marks: Fixed Income Returns Not Worth The Risk (Latest Memo)

Longtime readers will know we're big fans of Howard Marks' commentary mainly because he often tackles investment process and other key concepts of investing.  The latest memo from the Oaktree Capital chairman is entitled "Ditto" outlines how history doesn't repeat itself but it does rhyme and he outlines some of these repeating themes in financial markets:

- Importance of risk and risk control
- Repetitiveness of behavior patterns and mistakes
- Role of cycles and pendulums
- Volatility of credit market conditions
- Brevity of financial memory
- Errors of the herd
- Importance of gauging investor psychology
- Desirability of contrarianism and counter-cyclicality (we've highlighted an excerpt from Marks' book on contrarianism in the past)
- futility of macro forecasting

As you'll notice, many of the above are related to behavior/emotion (see recommended reading on the topic here).  Because while fundamentals, technicals, or whatever metrics you follow matter, you also have to worry about the two factors that seemingly move markets the most: greed and fear.

He goes on to write, "The good news is that today's investors are painfully aware of the many uncertainties.  The bad news is that, regardless, they're being forced by the low interest rates to bear substantial risk at returns that have been bid down.  Their scramble for return has brought elements of pre-crisis behavior very much back to life."

The key here, is that he's referring mainly to fixed income securities.  After the financial crisis, everyone was looking for "safety."  And then during the low interest rate years, everyone began to stretch for yield.

Marks reiterates something he said in 2004 by saying that, "there are times for aggressiveness.  I think this is a time for caution.  Here as 2013 begins, I have only one word to add: ditto."


Marks' latest memo "Ditto" is embedded below:




You can download a .pdf copy here.

For more wisdom from this manager, be sure to check out Marks' previous letter.

David Tepper Sees "A Lot" of Upside in Equity Markets: Latest Media Appearance

Appaloosa Management's founder David Tepper made a rare media appearance on CNBC this morning so we wanted to highlight the key takeaways and post up the full videos below.

Many of you will recall that one of Tepper's appearances a few years ago launched the aptly-titled 'Tepper rally' in the markets after he said he wouldn't fight the Fed.  So what's his take on the markets this time around?  Read on below:


David Tepper's Latest Thoughts

CNBC noted that Tepper's $16 billion hedge fund is up 25% net on the year. He thinks there's a "pretty good economy, growing 2% give or take" with tailwinds in housing and autos.  He highlighted how the Fed is focused on unemployment.


On Europe

Tepper also drew attention to Europe's situation, noting that "whenever Draghi wants to lower interest rates in Europe, he can do it."  He feels this aspect wasn't really well reported and that it's important because you have a "series of puts over in Europe" via central bank action.


On Credit Markets

The Appaloosa man said that credit markets are "rich and spreads are at pretty good levels right now."  He didn't want to call them in bubble territory, but said they're close.

Andrew Ross Sorkin asked Tepper if he was shorting some high yield, and Tepper said: "No.  I would short with a trillion dollar of stimulus of Fed coming in and short?  You can short it if you want, I'm not going to short it ... This money has to go someplace."


On Equity Markets

Tepper points out that there's a 12-handle PE on the S&P, saying "it's cheap relative to everything, it's the only market that hasn't really rose to new heights."  He says the situation in Washington is holding everybody back, noting that there could be 3-5% downside in the market if things become dire.

When asked how much upside was left in the equity markets, Tepper simply replied "a lot."  It's clear that Tepper continues to live by the mantra 'don't fight the Fed.'

While stocks have risen a solid amount since his original 'Tepper rally' call in 2010, he notes that the P/E hasn't expanded that much.  When asked about current valuation, he replied that "it is really, really interesting.  I hate to say how cheap it is."


On Inflation

He also touched on the Fed's actions and potential inflation:  "At some point everybody's concerned about inflation.  On the way to inflation in the real economy, you're gonna have another sort of inflation.  It's inflation in asset prices."

Tepper pointed out that a lot of hedge fund managers have taken money off the table because they "don't want to take a year-end loss," again pointing to the Fiscal cliff situation and noting the potential downside there.  Tepper says he's willing to take a chance (but you also have to keep in mind he's already up 25% this year."


Appaloosa's 2012 Playbook

Tepper laid out how his hedge fund has essentially played this year:  In December (2011), they waited for the LTRO and *then* invested.  In April, he thought the economy was slowing so he bought some puts (noting he saw low put vol at the time).  Then Draghi "gave away" a market put and Appaloosa got invested.  Then in front of the US election, he took down his long exposure, assuming the market would sell-off on Obama's re-election.  And when things sold off, he started buying some equities again, getting long into year-end.

As far as his allocations go, he outlined that "We probably have 70% of our book in bonds and stocks.  We move them up and down based on the individual names."  Then they use options to trade around volatility.


Tepper on Selling Due to Potential Capital Gains Increase

"Yea, we've basically taken a bunch of our long-term gains this year to lock-in these lower rates for our investors."  This is a phenomenon that's certainly happened across the markets and notably amongst hedge funds.  We'd cite Apple (AAPL) as a primary example as many prominent funds were sitting on a large position with large long-term gains.


Videos of Tepper's Interview

Embedded below are videos of Tepper's latest CNBC appearance:

Video 1



Video 2


Video 3

It looks like CNBC has the wrong code for the third video, but you can watch it here.

For more on the Appaloosa founder, head to our review of The Alpha Masters, a book that Tepper is profiled in.

Hedge Fund Best Ideas: Kyle Bass, Dan Loeb, Leon Cooperman, Phil Falcone

All today we've been covering the Delivering Alpha conference and we conclude with the Best Ideas & Alpha panel featuring Kyle Bass (Hayman Capital), Leon Cooperman (Omega Advisors), Philip Falcone (Harbinger Capital), Dan Loeb (Third Point), J. Tomilson Hill (Blackstone Alternative), and Anne Popkin (Symphony Asset Management). Each presented their best current idea:

Kyle Bass (Hayman Advisors)

Bass is well known for his subprime short and prediction of sovereign defaults. At the conference, he said that the sovereign debt crisis is unlike anything seen in history.

Bass believes Japan is in the worst position, saying "Japan spends almost half of their revenue on debt service. So, a minute move can put them literally into check-mate ... We see a structural anomaly creating the cheapest option in the world."

Simply put, Bass says to buy price put options on government bonds in Japan. He believes it's the best opportunity in the world. In the past, we've outlined how Bass was betting against Japanese Government Bonds (JGBs).


Leon Cooperman (Omega Advisors)

Earlier this summer, the legendary hedge fund manager presented at the Leaders in Investing Summit where he was concerned about employment and thought that bonds were screaming to be shorted. At today's conference, Cooperman says that the economic and financial crisis from 2008 would not repeat in 2011 or 2012.

The manager continues to avoid government bonds and again says that stocks are the "best house in the asset management neighborhood." He likes stocks assuming that Obama softens his 'anti-wealth' stance and that the Middle East remains stable. He mentioned liking Apple (AAPL), Sallie Mae (SLM), and Boston Scientific (BSX). To see what other stocks Cooperman is invested in, head to our Hedge Fund Wisdom newsletter.

Cooperman will also be presenting his latest investment ideas at the Value Investing Congress next month.


Philip Falcone (Harbinger Capital)

Falcone has seen somewhat of a transformation lately as his hedge fund looks more like a private equity fund with his large private investment in a 4G wireless network: LightSquared. At the conference, he pitched Spectrum Brands (SPB), noting the company's solid balance sheet and high free cashflow (11-12% free cashflow yield).

The company sells batteries, personal care products, home and garden items, and more. Falcone points to their strong management team and collection of strong global brands. The company is currently focused on debt paydown and reducing leverage from 3.5x to 3x.

Harbinger owns 28 million shares via his publicly-traded Harbinger Capital. We detailed Falcone's original acquisition of SPB shares back in August 2009 as well as his subsequent purchase in April of 2010. While SPB isn't a "high octane" stock, he likes it.


Dan Loeb (Third Point)

We've covered Loeb's recent activist investment in Yahoo! (YHOO) and that's exactly what he talked about at the conference. Just today he sent another letter to Yahoo as his first conversation didn't seem to go too well. Ahh, the trials and tribulations of activist investing.

He feels YHOO has an intrinsic value of around $20 per share and you can see Loeb's investment thesis in his original letter to Yahoo. But in summary, he feels that the company has great assets but has been horribly mismanaged. Calling the board of directors "clowns," Loeb points out that the company hasn't changed since 2004, has kept a "crappy interface" and the "same stupid logo."

In particular, it seems that Loeb really likes their ownership stake in Alibaba Group. Interestingly enough, Loeb says that the company does not need to break up. He says they've hedged the position against the S&P 500 and they've also hedged exposure to Yahoo Japan.

We've also detailed how Third Point has reduced equity exposure for four consecutive months.


J. Tomilson Hill (Blackstone Alternative Asset Mgmt)

This manager believes that non-performing loans and mortgage-backed securities are the best play on a risk-adjusted basis. He also says that, "you have the ability to buy mortgage servicing rights at prices we've not seen before."


Anne Popkin (Symphony Asset Management)

She argued that levered credit is cheap and is focused on loans and high yield bonds. The manager cautioned not to put all your eggs into this one basket and not to buy an entire position right away. Popkin says, "risk management is absolutely crucial here, because volatility is very high." So it sounds as if she's used the volatility in the sector to slowly assemble a position.


Embedded below is video of the entire Best Ideas & Alpha hedge fund panel:




For more coverage of the Delivering Alpha conference, head to our posts:

- Bill Ackman's new investment: long Hong Kong Dollar

- China: Bubble or Bonanza? Dan Arbess versus Jim Chanos

- Paul Touradji & Jeff Scott on commodities

- Jim Chanos: long corruption, short property in China