ValueAct Capital Takes Olympus Stake

Jeff Ubben's activist investment firm ValueAct Capital has disclosed a 5% ownership stake in Japanese camera and medical device company Olympus (TYO:7733).  Their stake is valued at around $600 million and is a brand new position.  Their core position size seems to be around $1 billion these days, so this is a bit below that.

As far as we're aware, this is firm's first activist bet in Asia.  ValueAct issued a statement, saying, "Olympus has an exceptional business model, market share, technology leadership and emerging markets presence in the global medical device industry.  We think it's an ideal company for our first investment in Japan."

Activism in Japan seems to slowly becoming more acceptable.  Changes in corporate governance in the country have helped that progress.  A few years ago we highlighted Third Point's activist position in Sony and they had also previously invested in Seven & i.

You can view more ValueAct portfolio activity here.

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.

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.

Notes From SALT Conference Panel With Kyle Bass, Dmitry Balyasny & Steven Tananbaum

At the SALT Conference in Las Vegas today there was a panel called "From Crisis to Renewal: Uncovering Opportunities."  It featured Kyle Bass of Hayman Capital, Dmitry Balyasny of Balyasny Asset Management, Steven Tananbaum of GoldenTree Asset Management, as well as John Bader of Halcyon Asset Management.


Kyle Bass says that we are near the trough of the housing crisis and thinks the bottom could come in the next 12-18 months.  We posted up an excellent presentation on the housing market by Aaron Edelheit from the Value Investing Congress recently.

Talking about the generational balance in Japan, Bass says there's now more adult diapers being sold than baby diapers in that country.  He compared Japan to Bernie Madoff in that lying works until there isn't new money coming in - you can make promises and there won't be any issues as long as you don't have to follow through.

We've posted his Bass' presentation on Japan before as well.  At SALT he said that the country is already monetizing their debt so it's just a matter of time.

He admitted to making a mistake in 2009 by not anticipating all the printing by the sovereigns.  He focuses on the losses and forgets the gains, he says.

As to what the Hayman Capital man recommends now: long non-agency MBS credit while shorting Europe and Japan.  The hedge fund manager also said that Greece would be "ungovernable" in the near future.


Dmitry Balyasny talked about how he is 'neutral' on US companies but always hunting for quality picks.


Steven Tananbaum cited his propensity to favor corporate debt and mortgage backed securities (MBS) as longs in this environment.


John Bader pointed out that there are plenty of liquidation plays in this environment. He also advocated seeking out uncorrelated strategies.  Bader does not seem to be convinced the crisis is over.


For more notes from the SALT Conference, check out:

- Identifying opportunities in emerging markets with John Burbank


- Barry Rosenstein, Leon Cooperman & Joel Greenblatt's panel on stocks


- Risk panel with Phil Falcone and Eric Sprott







The above was compiled from notes sent in along with help from live tweets from: @ldelevingne , @pdmckenna ,  @AttainCapital & @realrobcopeland

Kyle Bass Betting Against Japanese Government Bonds (JGBs)

Kyle Bass of hedge fund Hayman Advisors has a very dim outlook on parts of the world. In a recent interview with CNBC, Bass laid out his themes his hedge fund is playing and positions they've taken as a result. Remember that Kyle Bass will be presenting ideas at the Value Investing Congress in October as well. Market Folly readers can receive a discount here.

Hayman is positioned to benefit from a Japanese restructuring that will likely take place over the next few years. Bass defines the Keynesian end-point as, "when your debt service excedes your revenue". And, he thinks Japan is there. Japan's tax receipts in nominal terms are the same as they were back in 1985, whereas their expenses are 200% higher. He argues that Japan is in secular decline and they're spending roughly twice what they make. Japan has funded themselves by selling bonds to their citizens at low rates and he doesn't feel they'll be able to do this anymore.

As you can see, he has outlined tail risk plays. At the same time, he is trying to earn nominal returns while he waits for these tail events to pay off. As such, 35% of Hayman's investments are in US Mortgages, 25% are in bank debt, 17% are in U.S. distressed positions, and 23% are in high yield. Now these are some of Hayman's 'core' positions but it sounds as though Bass thinks his tail positions could possibly generate quite a return.

In particular, he's focused on Japanese Government Bonds (JGBs). Of them, Bass notes, "At a time at which the bond I think is the most risky asset (or one of them) in the world, the pricing of that asset using the Black-Scholes model is the best it's ever been. So you have this huge convex moment that you can put enormous positions on in Japanese interest rates very cheaply."

Overall, in terms of tail risk plays, he's positioned 10-15% of his portfolio betting against European sovereigns and Japan. Given his view of the world, Bass doesn't know how you can be long stocks. If you want to become instantly depressed, he's the guy to talk to. And Bass isn't the only well known investor betting against Japanese JGBs. In a recent interview, Passport Capital's John Burbank has been short Japanese Government Bonds as well.

Embedded below is a video of Kyle Bass' recent television appearance (email readers will have to come to the site to watch it):



To hear both John Burbank (Passport Capital) and Kyle Bass (Hayman Advisors) present investment ideas, register for the upcoming Value Investing Congress (special discount here).

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.