Jim Grant Bearish on BlackRock: Invest For Kids Chicago 2016

We're posting up notes from the Invest For Kids 2016 investment conference.  Next up is Jim Grant of Grant's Interest Rate Observer who was bearish on BlackRock (BLK).


Jim Grant's Presentation at Invest For Kids Chicago 2016 

•    So much data – how do we know what is true?

•    Easy to be overwhelmed

•    Narratives as a belief system

•    Active investors accept or reject narratives; passible investors always accept the narrative by default

•    Markets are episodically efficient; they are no more coolly analytical than the people in them or the algorithms they write

•    Interest rates are certainly low – not good for my business model

•    Since 1997, the number of public companies in U.S. has been cut in half

•    Now we have the first nominally negative bond yields in 5,000 years

•    If Fed were late to raise rates it wouldn’t be the first time; likewise wouldn’t be the first time the bond market underestimated the fallibility of human beings



•    Bearish on Blackrock (BLK) 

•    Its motto should be “built for a time of falling rates, rising asset prices, massive inflows…”

•    Tailor-made for the financial moment

•    Hand-in-glove with the Fed – Blackrock is the Federal Reserve’s Wall Street doppelganger

•    BLK took in 18% of all mutual fund and ETF inflows in 2015

•    Assets may come, assets may go

•    Margins? There is a price war in passive. Fees are ~69 bps at BLK versus 15 at Vanguard. Further compression is likely.

•    BLK is at 18x EPS vs. 14x industry average

•    Massive amounts of insider selling at BLK without any buys


Be sure to check out the rest of the presentations from Invest For Kids 2016.

Grant's Spring Conference Notes 2016 - Bessent, Dimon & More

The Grant's Interest Rate Observer Spring 2016 conference just took place yesterday.  Here are some notes from all of the speakers at the event:

David D’Alessandro (CMDTY Capital) – Long Oil

·      Peak oversupply of 1.5-2m barrels/day; started 2016 with 600-700k which isn’t weather adjusted (El Nino).

·      3 buckets of supply

·      North America – modeling down 700-800k by ‘17

·      OPEC – Iraq, Iran, Saudi Arabia. Overall modeling up 600-700k

·      SA – look for them to freeze. Signs are on the table, they’re willing to attend meetings.


·      Iran – ramping to 500k growth yoy due to sanctions lifted. Difficult to export due to capex needs.

·      Iraq – At the limits of their export capacity; won’t raise production.

·      Non-OPEC – Most will be down, some flat. Models down 600-800k


·      Libya is the wild card on supply side – dire situation, but can do 1m/day export if political situation changes.

·      Just on supply, we are undersupplied. Counter: 900m inventory?

·      A third is unusable (essentially reserves that never are used).

·      Look at days of inventory – because demand is increasing, this is decreasing.

·      Demand was up 1.8m in 2015, assuming 1.5m for 2016, range of 1.0-1.8m increase.

·      Drivers: India, South Korea, US, China. - Variant perception

·      Supply is declining


·      Demand is accelerating


·      No sudden surge in US production at $50-55 like sell-side projects

·      Labor markets aren’t as loose

·      Bush-era EPA not around


·      Stricter capital

·      Dug but not completed wells are overstated.

Scott Bessent (Key Square Group) – Japan

·      China isn’t the biggest risk – Japan is.

·      Abenomics – underappreciated aspect is Abe’s leadership in 2006 as PM.

·      Tons of charts on various macro elements in Japan

·      3 arrows partially successful – but craters in the policy

·      JPY depreciation solely during inflation


·      Limited structural reforms outside of women labor participation and corporate governance

·      Services recovery will be needed to drum up CPI.


·      Sales tax increase will be cancelled

·      Good chance of surprise at April BOJ meeting

·      Debt write-off is eventually how we get out of this

·      Never count on immigration or privatization being a factor in Japan

·      If you’re investing, look to take off FX hedges in Japanese stocks, stay long JPY.

Anne Stevenson-Yang (J Capital Research) – L/S China 


·      China since 2006 has looked like Silicon Valley in 1999 – growth at the expense of profitability

·      Two sources of capital – both end with massive capital flight – best short ideas are the most loved names

·      State via household deposits

·      FDI / Portfolio / etc.

·      Short BABA

·      Look to put on when the capital flows change


·      Maxed out ecommerce platform – avg annual spend of $1075 vs AMZN $330 (faking?).

·      Poor capital allocation; using capital to generate growth


·      Misleading GMV


·      Dubious assets – Investment in equity investees, goodwill & intangibles

·      Long Tingyi

·      Largest maker of noodles – have scale, brands, operating leverage, 10b US revenues

·      Competes with UPC but UPC backing down / becoming more rational

·      Extensive distribution, partnerships with SBUX & PEP – upside from beverages segment

·      20x PE vs 30x historical, 10% op margin historical vs 3% now > expansion of both leads to 2-3x winner

·      Short RMB

·      Nothing has changed in the policy, but politicians say it has; don’t believe them

·      PBOC using forwards / swaps to hide capital outflows, delay booking in foreign reserve declines

·      9 months before reserves run down to perilous point

Jamie Dimon (JPMorgan Chase)

·      Auto is a little stretched, but overall consumer credit is pristine

·      Student loans are going to be a problem – growing too fast

·      Rate normalization is a good thing – strong economy. 25bps will have a de minimas impact

·      Grant: is the gov’t digging a moat for your biz in regulation? What would it take to replicate JPM?

·      Could give you $1t and you couldn’t remake this.  Employees, customers, goodwill, etc.

·      Banks will trade at 2.0x TBV when regulation, lawsuit overhangs go away.  Look at pace of change in regulation.

·      We’ll be there for energy customers in tough times – most loans are still money good.  We can’t run from the problems or sell stock – we’re not traders, we’re building a business

·      Grant: “The fed out to provide a living will for the central banks.”

·      The fed sets short rates, but market participants set the curve

·      More detail on credit: 10% debt servicing to mortgages; this is near lows, all good here.  Credit cards are pristine. Some may get hur tin auto, terms extending, but will be very small.  $1.3t in student loans, 30% delinquent. Went from 20% to 80% government underwritten.

·      I own stock – HD / YUM / JNJ / BA and the like.

·      Nil chance to make money in US treasuries over the next 10 years.

·      By 2030, China will house 30% of the Global 3000.

  

Pierre Lassonde (Franco-Nevada Corp) – Gold 


·      Demand rising, has outperformed everyone the last decade

·      Mine supply has not kept pace with demand because cost of production risen 4-5x over past 30yrs. 


·      Production next 6-7 years goes down. 


·      Takes 7-12 years to get production online from field discovery, discoveries have fallen since 80’s. 


·      China and India now over 50% of worldwide demand 


·      Shanghai will take over the London Exchange in 5-10 years. It becomes a casino and prices skyrocket. 


·      Central banks went from sellers to buyers in 2010 – now buying 400-600tonnes/year 


·      Retail investment has grown since 2008, Europe now largest market 


·      Negative interest rates spur demand – greater uncertainty, no opportunity cost, uncertainty in FX 


·      Recycling has grown to meet shortfall between supply and demand 


·      Gold: liquid, low volatility, low correlation to other asset classes 


·      80% of price is determined by USD, which will roll over again, driving gold higher (mean reversion). 


·      Trump would accelerate this devaluation

·      DJIA / Gold = financial assets / real assets. Expect normalization at 1:1 and a 3-7 year bull market 


Kevin Warsh (Hoover Institution) – Case of the missing growth 


·      Yellen gets done what she wants to get done; don’t make fed watching more complicated than that.

·      We all have bias to think our economic status is better than other countries 


·      Growth doesn’t just appear by being one step ahead on devaluation 


·      QE was initially to restore markets, drive liquidity, not to boost asset prices.

·      Difference between 2% and 3% GDP growth is not 1%, it’s 50%. And we’re not even getting 2% here, nor 3% internationally, and int’l trade is slowing; policymakers shouldn’t be doubling down. 


·      This is the most important year since 2008

·      The 8 Growth destructive policies

·      Conflated regimes

·      Politicians fail so fed turns to multipurpose agency

·      Fed has wrong dashboard – backward looking and heavily revised data

·      Short-term time horizon as if managing q/q not thinking like a long-term biz owner

·      QE is copied abroad – the wealth effect – works primarily to boost financial assets, not real assets

·      Regulatory structure is in purposeful limbo with respect to banks – “we’re only 60% done implementing so we can’t be blamed if something goes wrong again” but now tougher for banks to make money

·      Models are still from the 1970’s

·      Story of an aggregate demand shortfall with no acknowledgement of supply side

·      Central bank buying takes away the price signal – no clue about risk premium > price of assets. Asset prices shouldn’t worry the fed but they’re still managing around them, vocal about it.

·      Want growth? More people working and more productive workers.

John Haskell (Explorador Capital) – Long LATAM equities 


·      Forex, earnings, and the multiple in LATAM all down in 2015 – attractive grounds. 


·      INRETC1:PE

·      1/3 malls, 1/3 supermarkets, 1/3 pharmacies (think Walgreens)

·      Hold 22%, 36% and 53% share respectively

·      Accelerating private label from 33% to 40%; drives higher margins.

·      Accelerating store count

·      Reduced dollar exposure from 74% in 2014 to 23%

·      Trading at 13.8x 2018 EPS vs comps > 20x

·      GRAM:US

·      Largest engineering firm in Peru

·      End of commodity supercycle means depressed results in core E&C biz

·      Capital structure stressed due to cash cycle and business shift

·      2016 outlook is positive; inflection point

·      Up 52% since Monday morning, whoops

·      Trading 3.2x ’18 EBITDA – core E&C biz for 1.9x EBITDA

·      ENTEL:CL

·      36.9% mobile market share in Chile (the VZ there)

·      7.6% share in Peru vs Telefonica at 52% and Am Movil at 37%

·      Buy Chila biz for 4.3x ’16 EBITDA and get Peru biz for free

·      25% dilution – due to desire to participate in spectrum auction

·      Founder’s HoldCo owns 55%

·      MCO downgrade

·      Potential Liberty / Malone target

Jim Millstein (Millstein & Co) – Puerto Rico

·      60% of additional 50b in debt from 00-15 was to fund operating deficits.

·      Don’t blame gov’t completely; they’ve tried – raised taxes and cut employment / benefits

·      Framed as liquidity vs insolvency problem and now decidedly unsustainable / insolvent

·      Defaults on May 1 & July 1

·      Author’s note: admittedly didn’t follow much of this presentation

Amy Falls (Rockefeller University Endowment)

·      Low rates – lower returns for savers, increases risk – leverage, excess investment, erodes system’s capacity to absorb risk, increases inequality

·      Endowment provides one-third of budget, spend 5-5.5% of it each year.

·      HEPI outpaces CPI by 1% on avg since 90’s. 70% of HEPI is salary and benefits

·      Absolute rates matter more than credit spreads

·      Seeing shorter durations and less cash holdings in many endowments now

·      Declining implied vol masks increasing structural weaknesses

·      Typically run 2-5% cash, now 8%

·      Seek managers with wide mandates and the ability to exploit them

·      LATAM looks attractive to us, too.

·      You are actually comped for letting your managers hold longer. Longer lockups > higher returns w/lower Std. dev.

·      > 1 yr: 12 - 14%

·      1 mo – 1yr: 11 - 13%

·      < 1 mo : 6 - 9%

·      Don’t outsource your investment functions – intelligent institutions work both sides of the balance sheet

·      Yale model isn’t about the outputs or the allocations, but the analytical rigor.

·      As nations grow as a % of world GDP, their market caps tend to follow – Brazil, Mexico, and Argentina are all the most attractive here.

        

Jim Grant v David Zervos (Jefferies) debate on monetary policy
Zervos

         -  Fed was fighting deflation at any cost. With high debt levels, worst thing to do is deflate. Make assets increase, 
liabilities decrease to repair broken balance sheets from 2008. 


         -  China is pegged to the US however, and we caused their bubble via our QE; we don’t just do monetary policy for 
ourselves anymore, must consider consequences. 

Grant


         -  If the USD is a commodity, it’s natural price will near the cost of production ... 


         -  700 PhD economists on fed payroll 


         -  Fed MO is to distort price mechanism 


         -  He said a lot of other good classic Jim Grant stuff in here that I didn’t write down... 


         -  Took a shot at Bernanke at PIMCO and whoever happens to live in Greenwich 

Zervos 


         -  US, China, Japan, Europe – 4 countries that matter for FX. 


         -  Tightening causes feedback – see August and the Chinese 3% devaluation; our stocks off 10%. 


         -  If we go, it’s got to be a turbocharged tightening 


         -  When Europe and Japan devalue, it’s against us but against China too; Draghi took the signal and looked to pump 
inflation without relative devaluation. 


         -  Japan can print and buy back its own equities. 


         -  This is a prisoner’s dilemma – won’t break down before the November election, but Yellen considering all these 
interdependencies. 


         -  S&P will form base here and go much higher, but real trade will be in EMs. Worst possible asset to hold is cash; it will 
be diluted by CBs. 


         -  Understanding CB reactions to data is the only way to get an edge. Everyone is terrible at forecasting data; I’d never 
give a trade rec on unemployment, GDP, or inflation. 


Lee Ainslie Interview: Columbia Business School's Graham & Doddsville

Columbia Business School is out with the Winter 2014 issue of its Graham & Doddsville investment newsletter.  This time, they feature a rare interview with Maverick Capital's Lee Ainslie.

The hedge fund manager talked about how he's always trying to learn new things and how he's read every investing book he can get his hands on (if you need some ideas, check out all our recommended reading lists in the right-hand column on the site).


Some interesting quotes from the interview:


On portfolio positioning: "In terms of sizing, our average long is roughly twice the size of an average short at Maverick and our long portfolio is more concentrated than our short portfolio.  This construction allows us to maintain net long exposure typically between 30% and 60%.  The greater diversification of our short portfolio reflects the riskier nature of these investments and that these positions turn over more frequently, so having a deeper bench of such investments is helpful."


On valuation:  "So while we place great emphasis on valuation in our investment decisions, valuation alone should never be the driver of either a long or a short investment ... I believe it is important to identify a catalyst that should benefit the valuation ... The most commonly used valuation metric at Maverick is sustainable free cash flow in comparison to enterprise value."


On what he looks for in deep dives: "The most critical factor that we're trying to evaluate is the quality of management - their intelligence, competitiveness and, most importantly, their desire to create shareholder value."


On what he looks for when hiring: "The most important components we gauge include competitiveness, mental flexibility and emotional consistency - that last trait is surprisingly important."  These are pretty similar to what Julian Robertson looked for when he was hiring or seeding funds.



This issue also highlights talks with Jim Grant of Grant's Interest Rate Observer, Dr. Kenneth Shubin Stein of Spencer Capital and Geoffrey Batt of Euphrates Iraq Fund

Embedded below is Columbia Business School's latest Graham & Doddsville newsletter:




You can download a .pdf copy here.

For past great issues of this newsletter, check out their interview with JANA Partners as well as one interviewing Li Lu.

James Grant Likes Gold & Metropolitan Life: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago is James Grant of Grant's Interest Rate Observer.

•    Grant founded his firm is 1983 and called Japanese bubble and housing bubbles
•    Tongue in cheek legal disclaimer is that “Congress shall make no law abridging the freedom of the press”


Grant's First Idea: Metropolitan Life

•    Metropolitan Life
o    Japanese life insurers died out in long run.
o    825 billion of assets - a great franchise
o    Long due to potential for dividend.


Grant's Second Idea: Gold

•    Gold: is a “legacy monetary asset”
•    1920 there was a depression (not Great Depression). 18 months after peak then industrial production jumped significantly
•    "I'm a professional interest rate observer.  There are none"
•    Grant notes interest rates move in generational cycles

Grant is obviously not alone in his fondness for the precious metal as numerous hedge funds own gold for a myriad of reasons.  Some own it as a hedge against inflation or currency debasement, while others view it as an uncertainty hedge.


For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.