Dan Zwirn's Sohn Canada Presentation

We're posting up notes from the Sohn Canada Investment Conference 2015 (Capitalize For Kids.)  Next up is Dan Zwirn from Arena Investors.

Dan Zwirn's Capitalize For Kids Presentation

-    Dan Zwirn – Westaim Corporation and Arena Investors LP
-    Provide liquidity when needed (almost like a pawn broker)
-    Credit investments and legal agreements provide downside protection
-    6 areas: corporate private credit, real estate credit, commercial and industrial, structured credit, consumer assets, corporate securities
-    Create partnerships with specialists
-    Spreads very tight, invest in idiosyncratic credits with wide diversity to prevent concentration risk and be long put index spreads to capitalize on irrationality in the pricing


Be sure to check out the rest of the presentations from Capitalize For Kids Conference.

Ted Goldthorpe's Sohn Canada Presentation

We're posting up notes from the Sohn Canada Investment Conference 2015 (Capitalize For Kids.)  Next up is Ted Goldthorpe from  Apollo Investment Corporation.

Ted Goldthorpe's Capitalize For Kids Presentation

-    Yield is difficult to find, there is $7 trillion of negative yielding bonds
-    Only 15% of bonds yield > 4%
-    Issuances are currently covenant light
-    Dealer inventories are shrinking, hedge funds stepping in as liquidity providers
-    Energy and Industrials widest spreads
-    Cablevision → 95 to 75 in bonds
-    PetroBras → 100 to 75 -    Big effect by Basel 3 and Dodd-Frank
-    Finding opportunities in complicated and illiquid credits. Found and structured a mid teens yield loan secured by aircrafts which is much than unsecured 4% bonds in public markets


Be sure to check out the rest of the presentations from the Capitalize For Kids Conference.

Marc Lasry on Wall Street Week: "Huge Opportunities" in Energy Debt & Europe

Anthony Scaramucci and Gary Kaminsky this week on Wall Street Week interviewed Marc Lasry of Avenue Capital, which now has $14 billion in assets under management after initially starting with around $7 million.  Lasry likes to take fixed income risk but generate equity-like returns.


Lasry noted that he's been seeing "huge opportunities" in the energy sector, mainly due to the fact that oil's gone down.  He says you don't want to be an equity holder, but you want to be a senior debt holder.

He's also finding some investments in Europe as the banks over there are deleveraging.  Avenue is buying assets at 60-70 cents on the dollar from people who are required to sell due to regulatory pressure.

On what he looks for in an investment:  "We're trying to buy something we think is worth 100 cents for 60 cents on the dollar.  So you're always trying to buy something at a discount to what you think the asset value is.  And you can only do that when you're buying from non-economic sellers... someone who's nervous or somebody who has to sell.  So you need to have a lot of drama or issues around the world."

Embedded below is the video of Marc Lasry's appearance on Wall Street Week:



Be sure to check out previous Wall Street Week episodes like their interview with David Rubenstein as well as Steve Einhorn here.

Jeff Gundlach's Appearance on Wall Street Week

The classic show Wall Street Week has recently been rebooted by Skybridge Capital's Anthony Scaramucci.  The first episode recently aired and featured DoubleLine Capital's Jeff Gundlach.

In it, Gundlach talks about his specialty: fixed income markets.  He pointed out that in 2018-2019, there will be tons of bond maturities.

He's also worried about junk bonds:  "One thing that I think is really important that nobody talks about or has been thinking about is the entire life of the junk bond market has been secularly declining interest rates."

On what will happen to the junk bond market when interest rates go up, Gundlach proclaimed: "I think that's the next bond market crisis."

On interest rates, Gundlach said, "I think the probability of a rate hike in June is very, very low." He also thinks it could be possible that the Fed doesn't raise rates at all in 2015.  He emphasized that the Fed is data dependent and so the data will need to give them a reason to act.

Embedded below is the video of Jeff Gundlach's appearance on Wall Street Week, which starts around the 3:30 minute mark:

Bill Gross on How To Be a Better Investor: PIMCO Investment Outlook

PIMCO's Bill Gross is out with his monthly investment outlook for April.  Entitled "A Man in the Mirror," Gross examines himself as a market participant and provides wisdom by outlaying how others can learn from his mistakes.

One interesting part he raises is how all investors of this generation have benefited from a period of credit expansion.  He writes,

"But let me admit something. There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne. All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience."

Later, he goes on to emphasize how investors may be forced to adapt and to make a change, an important thing to keep in mind as we approach the potential of a rising interest rate environment in the future.

Embedded below is Bill Gross' April commentary:




You can download a .pdf copy here.

For more from this bond kingpin, head to Gross' previous investment outlook: rational temperance.

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.

Bill Gross on the Death of Equities: PIMCO Investment Outlook

PIMCO's Bill Gross is out with his latest market commentary entitled "Cult Figures" where he essentially claims stocks are dead:  "The cult of equity is dying."

Before reading his latest missive, it's worth noting his inherent conflict of interest: he's at one of the largest fixed income managers out there (of course he would love it if equities were dead and billions in AUM flowed to fixed income managers).

While some may argue his call as a contrarian signal to buy equities, you have to consider that such a call would be a clearer signal if an *equity* investor was staking such a claim.  Capitulation, a shangri-la for contrarians, can't truly come to fruition until the most ardent defenders throw in the towel.

However, one other conclusion from his note is evident regarding inflation.  He writes, "Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed countries over the next few years and even decades." 

Obviously, he argues investors need to prepare for such an environment and we've posted up the best investments for inflation before (as well as the best investments for deflation for those in the other camp).

At any rate, you can read Bill Gross' latest market commentary embedded below (and download a .pdf here):





For more commentary from the PIMCO man, check out his piece on how to generate returns in a low yield environment.

Bill Gross' Investment Outlook: Defense

PIMCO's Bill Gross is out with his latest 2012 investment outlook, entitled "Defense." Given all the equity commentary on the site lately, we thought we'd add some fixed income color.

In his commentary, Gross outlines the core tenets of PIMCO's "offense" from 1981 to 2011. Now, from 2012 onwards, Gross says that "successful investing in a deleveraging, low interest rate environment will require defensive in addition to offensive skills."

To learn what exactly that means, here is Gross' entire commentary below:

• ​Over the past 30 years, an offensively minded Federal Reserve and their global counterparts were printing money, lowering yields and bringing forward a false sense of monetary wealth.
• Successful investing in a deleveraging, low interest rate environment will require defensive in addition to offensive skills.
• The PIMCO defensive strategy playbook: Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible. Emphasize income we believe to be relatively reliable/safe; seek consistent alpha.

They say defense wins Super Bowls, but the Mannings, Bradys and Montanas of gridiron history are testaments to the opposite. Putting points on the board, especially in the last two minutes, has won more games than goal line stands ever have, even if the scoring has been done by the field goal kickers, the names of whom have been confined to the dustbins of football history as opposed to the Hall of Fame in Canton, Ohio. Canton, however, has an approximately equal number of defensive in addition to offensively positioned inductees, so there must be a universally acknowledged role for both sides of the scrimmage line. What fan can forget Mean Joe Greene, Deion Sanders or Dick Butkus? The old, now politically incorrect showtune laments that “you gotta be a football hero, to fall in love with a beautiful girl,” but football and any of life’s heroes can play on either side of the line, it seems.

My point about pigskin offense and defense is the perfect metaphor for the world of investing as well. Offensively minded risk takers in the markets have historically been the ones who have dominated the headlines and won the hearts of that beautiful gal (or handsome guy). Aside from the rare examples of Steve Jobs and Bill Gates, however, the secret to getting rich since the early 1980s has been to borrow someone else’s money, throw some Hail Mary passes and spike the ball in the end zone as if you had some particular genius that deserved monetary rewards 2¹⁰ times more than a Doctor, Lawyer or an Indian Chief. Nah, I take that back about the Indian Chief. The Chiefs, at least, have done pretty well with casinos these past few decades.

Still, the primary way to coin money over the past 30 years has been to use money to make money. Although the price of it started in 1981 at a rather exorbitantly high yield of 15% for long-term Treasuries, 20% for the prime, and real interest rates at an almost unbelievable 7-8%, the gradual decline of yields over the past three decades has allowed P/E ratios, real estate prices and bond fund NAVs to expand on a seemingly endless virtuous timeline. Books such as “Stocks for the Long Run” or articles such as “Dow 36,000” captured the public’s imagination much like a Montana to Jerry Rice pass that always seemed to clinch a 49ers victory. Yet an instant replay of these past few decades would have shown that accelerating asset prices weren’t due to any particular wisdom on the part of academia or the investment community but an offensively minded Federal Reserve and their global counterparts who were printing money, lowering yields and bringing forward a false sense of monetary wealth that was dependent on perpetual motion. “Rinse, lather, repeat – Rinse, lather, repeat” was in effect the singular mantra of central bankers ever since the departure of Paul Volcker, but there was no sense that the shampoo bottle filled with money would ever run dry. Well, it has. Interest rates have a mathematical bottom and when they get there, the washing of the financial market’s hair produces a lot less lather when it’s wet, and a lot less body after the blow dry. At the zero bound, not only are yields rendered impotent to elevate P/E ratios and lower real estate cap rates, but they begin to poison the financial well. Low yields, instead of fostering capital gains for investors via the magic of present value discounting and lower credit spreads, begin to reduce household incomes, lower corporate profit margins and wreak havoc on historical business models connected to banking, money market funds and the pension industry. The offensively oriented investment world that we have grown so used to over the past three decades is being stonewalled by a zero bound goal line stand. Investment defense is coming of age.

This transition is not commonly observed, although it is relatively easy to prove statistically and even commonsensically. Take for instance the rather quizzical notion that lower yields must produce an equal number of winners and losers since there is a borrower for every lender and the net/net therefore should have no effect on the real economy or its financial markets. Chart 1 shows that since 1981, which marks the beginning of the secular decline of interest rates, personal interest income has rather gradually (and now somewhat suddenly) shrunk relative to household debt service payments.

It is Main Street that has failed to keep up with Wall Street and corporate America in the race to see who can benefit more from lower yields. As the interest component of personal income gradually weakens, the ability of the consumer to keep up its frenetic spending is reduced. Metaphorically, it’s akin to a 4th quarter two minute Super Bowl drill, but one where the receivers haven’t been properly hydrated. They’re a half step slow, their legs are cramping, and it shows. Lower interest rates are having a negative impact on households because their water bottles are filled with 50 basis point CDs instead of Gatorade.

While Wall Street and levered investors have fared better than their Main Street counterparts, it’s not as if they’re in “primetime Deion Sanders” shape either. Conceptualize the historical business model of any financially-oriented firm for the past 30 years and you will see what I mean. Insurance companies, for instance, whether they be life insurance with their long-term liabilities, or property/casualty insurance with more immediate potential payouts, have modeled their long-term profitability on the assumption of standard long-term real returns on investment. AFLAC, GEICO, Prudential or the Met – take your pick – have hired, staffed, advertised, priced and expensed based upon the assumption of using their cash flows to earn a positive real return on their investment. When those returns fall from 7% positive to an approximate 1% negative, then assumptions – and practical realities – begin to change. If these firms can’t cover inflation with historical real returns from their float, then they begin to downsize in order to stay profitable. The downsizing is just another way of describing a transition from offense to defense in a zero bound nominal interest rate world where almost any level of inflation produces negative real yields on investment.

Not only insurance companies but banks suffer from this inability to maintain margins at the zero bound. In the process, they close retail branches that once were assumed to be the golden key to successful banking. Defense! And here’s one of the more interesting anecdotal observations on our current zero-based environment, one to which my investment paragon – Warren Buffett – would probably immediately admit. His business model – and that of Berkshire Hathaway – has long benefitted from what he has described as “free float.” Those annual policy payments, whether for hurricane, life or automobile insurance, have long given him a competitive funding advantage over other business models that couldn’t borrow for “free.” Today, however, almost any large business or wealthy individual can borrow or lever up with minimal interest expense. Buffett’s “Omaha/West Coast” offense is being duplicated around the world thanks to central bank monetary policies, placing an increasing emphasis on stock and investment selection as opposed to business model liability funding. Buffett will succeed based upon his continued strong offensive play calling, but the rules of the game are changing.

The plight of Buffett of course is in some respects the plight of PIMCO or any investment/financially-oriented firm in this new age of the zero bound. And it seems to us at PIMCO that successful investing in a deleveraging, low interest rate environment will require defensive in addition to offensive skills. What does that mean? Well, let’s briefly describe PIMCO’s own historical investment offense for the past 30 years in order to provide a defensivecontrast:

PIMCO Offensive Strategy 1981 – 2011

Ready, Set, Hut 1, Hut 2 –

1. Recognize downward trend in interest rates and scale duration accordingly.
   
   A. Emphasize income and capital gains. PIMCO Total Return Strategy.
   B. Utilize prudent derivative structures that benefit from systemic leveraging – financial futures,
   swaps (but no subprimes!)
   C. Combine A and B along with careful bottom-up security selection to seek consistent alpha.
   

PIMCO Defensive Strategy 2012 – ?

Ready, Set, Hut, Hut, Hut –

1. Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible.
   
   A. Emphasize income we believe to be relatively reliable/safe.
   B. De-emphasize derivative structures that are fully valued and potentially volatile.
   C. Combine A and B along with security selection to seek consistent alpha with admittedly lower nominal returns than historical industry examples.
   

So there you have it – the PIMCO playbook. I suppose if I had any common sense I would hold up that clipboard to the front of my mouth like sideline coaches do during big games. Don’t want to chance any of the competition reading our lips to get a heads up on PIMCO’s next offensive play call. But then that’s never been my or Mohamed’s style, given the importance of informing you, our clients, of what we are thinking when it comes to investing your hard-earned capital. Go ahead competitors and read our lips, we’ll just pound that pigskin down the field anyway. Besides, as I’ve pointed out, the emphasis these days should be on the defensive coach. Leveraging has turned into deleveraging. 15% yields have turned into 0% money. The Super Bowls of the future will have their Mannings and Bradys, but the defensive line may record more sacks and make more headlines than ever before.

William H. Gross

Managing Director
Source: PIMCO

For other market commentary, we've posted up Jeremy Grantham's 10 investment lessons as well as Oaktree Capital and Howard Marks' latest letter.

A Simple Conservative Fixed-Income Portfolio

Wanted to take a second and highlight a simple fixed income portfolio. For those who are too busy to actively manage their portfolio in this crazy market, there's a simpler, "set it and forget it" type of portfolio for generating income. Such a portfolio was just highlighted as a conservative option recently in Kiplingers. They write,

"William Larkin, fixed-income portfolio manager at Cabot Money Management, in Salem, Mass., says his portfolio was originally designed for conservative clients who wanted conservative investments.

These days, though, he finds that many clients who hadn't considered themselves conservative in the past are now interested in fixed-income investing only. This portfolio represents all parts of the fixed-income market at the lowest possible cost, he says, and recently yielded 6.3%. It also has a healthy slug of inflation protection, which is particularly reassuring given all the money that's being printed for various government stimulus and rescue plans around the world.

Larkin's portfolio:

25% iShares Barclays Aggregate Bond ETF (AGG) (Tracks a broad index of high-quality U.S. bonds)
25% iShares iboxx $ Investment Grade Corporate (LQD) (Tracks an index of the most liquid, long-term corporate bonds)
10% Fidelity Floating Rate High Income (FFRHX) (Invests in floating rate bank loans that automatically adjusts to rising short-term interest rates. It offers additional inflation hedge)
10% iShares MBS Fixed Income (MBB) (Tracks a broad index mortgage-backed securities)
7.5% SPDR DB International Govt Inflation-Protected Bond (WIP) (Invests in an index of non-U.S., inflation-linked bonds)
7.5% PowerShares Emerging Markets Sovereign Debt (PCY) (Tracks an index of emerging markets government debt)
7.5% iShares Barclays TIPS Bond (TIP) (Tracks an index of inflation-protected, U.S. Treasury securities)
7.5% iShares Iboxx $ High Yield Corporate Bond (HYG) (Tracks an index of high yield bonds)"

We actually wouldn't change much up with this portfolio. We'd obviously alter the percentage weightings based on age, retirement date goal, and risk tolerance. But, overall, this is a pretty solidly constructed portfolio for a conservative yield-seeking investor. And, you could substitute some other vehicles in there for other exposure as well. We definitely advocate a position in TIP for those desiring protection from the (in our mind) impending inflation. Also, LQD offers a decent yield from corporate bonds of many blue chip companies that aren't as risky. Blend in the corporate bond exposure from LQD with some exposure to HYG for exposure to riskier, higher yielding corporate bonds as well. Those are definitely our three favorite instruments in this portfolio. Emerging Market debt is also a very interesting play that theoretically could be enticing here, but we haven't done enough work in that area yet to really comment further on it.

You can view the entire post: Three Simple Portfolios.

Full Disclosure: market folly was long LQD at the time of publication