Dylan Ratigan interviews David Stockman

David Stockman is always a treat a listen to:
- "Ben Bernanke is Finished..."
- The problem with our economy is the 30 year build-up in debt - $52 trillion of public and private debt

- Printing more money is not the answer

- Despite all the talk of record cash on the books, the corporate sector has $11 trillion of debt. The debt-to-shareholder's-equity is at its highest in decades
- In 2008-09, Paulson and Bernanke stirred up a panic ["The Blackberry Panic of 2008!!"]. We were not close to a depression. The job losses at that time were "phony" jobs (Banking, Construction,Real Estate) that had been created in the fake 2003-2007 rally.

Jim Grant on Bloomberg (6/22/11)

Jim Grant of Grant's Interest Rate Observer was on Bloomberg to discuss Ben Bernanke's upcoming speech.
- QE2 resulted in a weaker dollar, higher gold prices and measured inflation, and weaker economic growth
- A market decline or decline in measured inflation will open the gates to QE3
- Fed's should not target asset prices or inflation rates
- The Fed is trying to impose prosperity by raising asset prices. A sound economy should result in higher asset prices, not vice-versa
- Not getting adequately compensated for the risks that are out there
- The perceived "Peril of Deflation" has lead to massive Fed action and instability
- One unintended consequence: Money Market funds are going to Europe for yield
- We have replaced the Gold Standard with the Phd Standard. The Fed needs to do less
- What is the meaning of the word "money." Quantitative easing is plain debasement

John Taylor (FX Concepts) on CNBC (6/20/11)

John Taylor (FX Concepts) on CNBC discussing the Greek bailout, surrounded by a bunch of idiot talking heads:
- No hope for Greece - will never be able to pay back the debt
- Best solution is to get them out of the EU quickly
- Will Germans allows a "gift" to be made to the Greeks
- Will Greek politicians be able to withstand the pressure? Terrible history of coups, defaults...
- Surprised Euro is so high - his forecast is parity with the USD

John Taylor (FX Concepts) on Bloomberg April 4, 2011

This is a Bloomberg interview with John Taylor (FX Concepts) from April 4, 2011
- Long-term case for a Euro crisis that will cause a "rebirth" (revolution style collapse)

- Eastern European and commodity currencies will do better than the Euro

- Bearish on German Equity market (stronger currency and higher interest rates)
- Short the USD, but not many short opportunities out there
- Big Question is what happens to the Yen. Earthquakes cause Yen to be repatriated, but the government is trying to fight it. Still an open question, but they are Short Yen but not a big conviction trade.

David Rosenberg Interview on Bloomberg

David Rosenberg is 99% sure of an imminent recession but doesn't provide a confidence interval for his forecast:

John Brynjolfsson on Bloomberg

New interview with John Brynjolfsson from Armored Wolf LLC on Bloomberg.

- Brynjo is still concerned about long-term inflationary pressures in the commodities and traded goods. In order to understand inflation, you can't just look at the US in isolation -- one needs to understand the dynamics of Emerging markets and Commodities.
- The Fed's focus on "core" keeps pressure off. Oil appears to be a counter-trend commodity and there's a real risk of an "air-pocket" or "collapse" due to oversupply from Saudi Arabia.
- He also thinks that the fed will keep their "extended period" language intact and 5 year treasuries could rally

John Taylor (FX Concepts) on Bloomberg

John Taylor expects the risk off trade to dominate and for global markets to head lower for the remainder of the year:

Astounding Fact

“ The proportions and the nations change, but the question remains the same...How did a US government “govern” a nation of 92 million people with an annual budget of $US 0.7 billion and a total (funded and unfunded) debt of $US 2.7 billion one hundred years ago? The answer is very simple. For the most part, they didn’t. And because they didn’t, they didn’t indulge in economic make believe. They had no income tax to “fund” them and no central bank to print more money - if necessary.

Today, the US government “governs” 310 million people with an annual budget of nearly $4,000 billion and a total (funded and unfunded) debt approaching $US 100,000 billion. It takes about 5,400 times as many dollars and about 37,000 times more debt to “govern” about 3.35 times as many people as it did a century ago. Why? The answer is equally simple. Today, the US government “governs” everything. It is all pervasive. It has taken over the economy from its people.”

-- Bill Buckler from The Privateer (by way of Things That Make You Go Hmmm)

Morningstar Conference 2011

The annual Morningstar Conference took place from June 8 - 10 in Chicago.

Complete conference coverage can be found here. It's interesting that this page is not easy to find from their home page and it took some searching to find it.

There are a lot of goodies to explore here like the interviews with Bill Gross (here), Bruce Berkowitz (here), the Sequoia  fund manager (here), and the piece on 3 undiscovered fund managers (here).

Jim Chanos Interview on China

Bloomberg interview with Jim Chanos who is still bearish on China (with good reason). He recently sent some analysts to China and that has in fact increased his confidence in his thesis.

According to Jim, "we're still seeing more cracks in the facade" -- literally! The quality of new construction is suspect.

John Burbank Interview

Bloomberg has a recent interview with Passport Capital's John Burbank.

Burbank has hedged his commodity exposure (energy, agriculture, precious metals) because he sees a "risk-off" environment caused by the end of QE2. He's still a long-term bull on Gold and commodities but sees weakness until August. We may see the prices of commodities revert to levels before QE2. We may also a flight to sovereign debt short-term.

The long-term bullish case on Gold
The biggest reason to stay in Gold that the world's central banks are seeing the writing on the wall"
Congress has no appetite for difficult decisions
The growth of the Chinese consumer (will eventually surpass India's consumption of Gold)

How to buy Gold
Recommends buying physical gold or small-cap miners (has hired two geologists).
Gold stocks are discounting a further drop in Gold. If there is additional Fed action, he would jump back in quickly.

Bob Rodriguez Interview

Robert (Bob) Rodriguez of First Pacific Advisors (FPA) is everything a good fiduciary of other people's money should be -- he worries about the Return OF Capital before the Return ON Capital. If his funds didn't have a load, I would seriously consider investing in them (although FPA Crescent managed by Steve Romnick, another excellent FPA manager, is no-load and worthy of consideration).

The following Fortune magazine profile of Bob is an excellent read: Bob Rodriguez: The man who sees another crash

Rodriguez is an anomaly in the sunny world of mutual funds, where the typical manager is perpetually optimistic and happy to welcome ever more investors. Indeed, he's almost an oxymoron: a buy-and-hold man with the stubborn, hard-boiled pessimism of a short-seller. While most money managers focus on attracting assets, Rodriguez closes his funds to new investors when he doesn't see opportunities -- which is often (including today)...

His resistance to investing vogues has paid off richly over the long run: His stock fund, FPA Capital (FPPTX), has returned 15% annually over the past 25 years, beating every single diversified equity fund, according to Lipper. His bond fund, FPA New Income (FPNIX), has never posted an annual loss

Bob isn't sanguine about the future: 

If we don't fix the budget – soon -- the economy faces disaster. "I believe that within two to five years we'll have a crisis of equal or greater magnitude of what we just went through," he says. "And it will emanate from the federal level."

""The financial system is held together with a very thin filament called confidence. When you clip that, all hell breaks loose"

His current investment stance:

FPA Capital now has 30% of its portfolio in cash and 38% in energy stocks because he believes the world's oil supply is declining. Still, even in that sector, he doesn't see many opportunities. He refuses to buy most bonds or long-term government debt. 

Bruce Berkowitz interview

A June 9 Bloomberg interview with a laryngitis-stricken Bruce Berkowitz who discusses his investment in AIG and other financials. Bruce was awarded (cursed?) with Morningstar's Best Domestic Fund Manager of the Decade award last year:

Notes from an interview with a value manager

Here are my notes from a value equity management shop that shall remain anonymous:

Idea Generation

·         They like to screen for low P/S, P/B relative to the company’s own history

·         Price to Sales captures the margin structure and the P/E of a company, and it’s useful to compare current vs. historical margins

·         Price to Book is useful for asset intensive firms

·         Screen Russell 1000 for about 50 ideas

·         The company should have an IG rating

·         Typically like large market cap companies

·         Companies should be dividend payers

·         Typically generate 1 idea a month

·         Also talk to a lot of people in the industry

·         Typically takes 10 minutes to eliminate a company

Questions to ask before buying a stock

·         Identify the key “question” that will determine the success of investing the company. 80% of your success is relating to identifying the right question.

·         Think like a CEO – what would care about? For a financial services company it might be ROA; for a capital intensive company it might be ROC

·         The ability to simplify is key: Be able to explain your investment thesis in 20 words and 3 bullet points

·         Who is the rational buyer and why are they buying?

·         What is the smartest seller thinking?

·         Is this a good business? Does it need to exist?

·         What are the real cash flow dynamics of the business? What is the cash flow at the bottom of the cycle?

·         Is time on your side? Yes, if you look at the FCF at the bottom of the cycle and you have management buying back stock

·         Look at the 10 year history of sales, margins and profits over a full 10 year cycle

·         Look at the balance sheet – typically prefer low debt, but sometimes highly leveraged companies can be good investments

·         Think about ranges of earnings in your earnings models; Don’t use quarterly earnings in your earnings models (too short-term)

·         What are the big liabilities of the company (e.g. pension liabilities)?

Portfolio Construction

·         Not a big fan of conviction weighting. Found that their best ideas typically middle-of-the-pack conviction ideas that made them nervous because there was a good bear case

·         Buying strategy: they typically like to buy in batches or scoops. They initiate a position and then wait for a month since they found that buying early is a typical mistake for value investors, and this strategy maximizes their IRR. This strategy helped them to avoid increasing positions during the financial crisis.

·         Quickest full position takes at least 2 months, and the longest can take several months (and may never come)

·         They either hold positions at 4%, 3%, or 2% of the portfolio

·         They typically buy in the following “scoops”:

o   4% target positions: three scoops of 1.33% (25% IRR target for these position)

o   3% target positions: three scoops of 1%

o   2% target positions: three scoops of 0.67% (15% IRR target for these position)

·         Trading budget is a maximum of 2.5% of the portfolio per month

Challenges

·         Falling in love with companies

·         Loving underdogs and turnaround stories

4 Principles of Math

From a wise man who teaches economics, The 4 Principles of Math:

1. Something times zero is always zero: always pay attention to details and the weakest link(s)
2. Something times infinity is always infinity: always pay attention to low frequency but high severity (LFHS) events
3. Number of equations = Number of unknowns: you can have multiple solutions if there are more equations than unknowns
4. Wonder of Partial Derivatives: for complex problems, think of one thing at a time keeping everything else constant