Julian Robertson on … Germany

From More Money Than God:

In early November 1989, when Griffin was on leave at business school at Stanford, the fax machine that he had installed in his room sputtered out a message from the chief: “Big guy, the Berlin Wall is coming down soon. This is gonna be a VERY big deal.” A few days later, the wall duly fell, and two days after that Tiger began to load up on German securities. Robertson knew next to nothing about Germany; but Griffin had studied the German market during a summer stint in London, and Robertson was not going to let an absence of experience get in the way of a historic opportunity. Tiger bought Deutsche Bank, which stood to profit from a unification boom. It bought Veba, a large utility that owned power plants along the West German–East German border and could be expected to capture the emerging eastern market. It bought Felten & Guilleaume, the firm that made the power cables that would carry the electricity into the new territories. Sure enough, Germany’s stock market went on a euphoric tear, and Tiger’s stake in Felten & Guilleaume soon doubled.
The following summer, Robertson and Griffin rode into Germany. They went to East Berlin, where they discovered that nobody had heard of hedge funds or Julian Robertson. They also discovered that Germany was not quite what Robertson had thought. Sitting in the waiting room on his first company visit, Robertson touched the table and held up a dust-blackened finger. “These people have a long way to go,” he said a bit suspiciously. The meetings continued, with Robertson asking Wall Street questions and the Germans doing their best to be genial, and all the while Robertson was grappling with the gap between what he could see in the numbers and what came out of the mouths of these people. By American standards, and relative to the factories and other assets that they owned, German stocks were ludicrously cheap. If the Germans could manage these assets as American managers would, they would generate huge returns for shareholders; and if the incumbent managers were too sluggish to do that, surely a wave of Wall Street–style takeovers would quickly solve the problem?

But the more Robertson toured Germany, the less enthusiastic he became. He would sit in a manager’s office and ask about his company’s return on equity, but the managers cared more about their sales than their profits; they were running the company for the sake of the employees rather than for the shareholders. At the chemical company Bayer for example, Robertson was treated to a lavish lunch by the company’s top management.“It must be great to be the chief executive if you can eat like this,” Robertson said, not mentioning that he would have preferred that the company save money. “Oh no,” his hosts replied. “We serve this meal to all employees.”

“My! The planes here fly so close,” Robertson said, looking out the window. “Yes, that is the company flying club,” came back the answer. “Anyone who wants can train for their pilot’s license.” After the lunch ended, Robertson delivered his verdict to Griffin: “These people just don’t get it.” German managers could not care less about return on equity. By 1994, Robertson had come full circle on his view of the Germans. The nation’s industry was nothing more, he wrote, than a “giant flab bag of inefficiency.”

Then this happened ‘Model’ Germany that has recently rendered Greece a colony/vassal state

VW’s Emissions Cheating Found by Curious Clean-Air Group


So began a series of events that resulted in Volkswagen AG admitting that it built “defeat device” software into a half-million of its diesel cars from 2009 to 2015 that automatically cheated on U.S. air-pollution tests.

source: http://www.bloomberg.com/news/articles/2015-09-19/volkswagen-emissions-cheating-found-by-curious-clean-air-group

Where to Find Alpha: Anti “Risk Parity” Strategies (2015-2017+)

THESIS: Anti “Risk Parity” Strategies will be a major source of alpha generation from Q4 2015 – 2017 (if not beyond). I recommend that investors with allocation to Risk parity strategies pull out ASAP. I am not , and I have no interest in rigorously justifying my thesis. Rather, I will tease you with some hints/considerations/questions:

  • Why is Ray Dalio making more media appearances than even Warren Buffett? Arguably, Cliff Asness too, though his/AQR’s appearances seem a bit more measured. Both seem highly defensive of risk parity. Why? If you’re in a position of strength, why be defensive? Does not pass the “sniff test”.
  • Why does Bridgewater “backtest” returns without factoring in the impact that their and other RP funds’ presence would’ve had on markets in those past periods? http://www.bwater.com/Uploads/FileManager/research/Our%20Thoughts%20about%20Risk%20Parity%20and%20All%20Weather.pdf
  • Why is it that some obscure outfit called Renaissance Technologies seems to obsess over modeling expected profit potential of a strategy as a function of its size?
  • If Bridgewater and other RP funds’ AUM went to zero, would the world care? Would the world be any worse off?
  • Assume I am wrong. Examine the claims of the RP proponents.
  • Compare/verify/test the proponents’ claims with evidence.
  • How much AUM is dedicated to RP strategies? How much EXPOSURE do these funds have (i.e., how much leverage)?
  • The Leon Cooperman / Omega Advisor quotes regarding Risk Parity are a distraction…the reality and truth are perversely ironic. Time will reveal all.
  • Why should the immediate and more distant future resemble the past, when the immediate past and present wildly differ from most of history?
  • The best “risk-adjusted” way of implementing “Anti Risk Parity” will likely be quite…boring. Though immensely profitable.


  • There at least several different ways of implementing Anti “Risky Parity” … they are not complicated. At all.
  • For the large institutions with allocations to “risk parity hedge funds” (e.g. pensions, endowments, etc), implementation of anti risk parity will help you both (I) save a significant amount of money and (II) handily outperform risk parity. The benefit of anti risk parity and/or reducing risk parity exposure is not only experienced via alpha generation, but via reduced costs (i.e. you need not pay a 1-2% management fee, nor a 20% incentive fee).
  • The crowded-ness of risk parity strategies AND unpredictable behavior of the “left hand side” of the balance sheets’ of risk parity operators opens up the path to non-linear outcomes, all detrimental to risk parity investors.. the prudent course of action would seem to reduce exposure to “risk parity” strategies by 50-100% before year’s end (2015). Those with bolder ambitions may not only seek to reduce risk parity exposure to zero, but substitute that exposure with anti risk parity.
  • This AQR “research” piece regarding risk parity is of dubious quality: https://www.aqr.com/cliffs-perspective/risk-parity-the-dog-that-did-not-bite it cites verifiably poor sources of hedge fund information in order to justify/estimate industry/strategy net and gross exposures. Furthermore, single stock short sellers regularly release far more thorough research on simple stocks… one would expect that a company of AQR’s calibre (and resources) can do better than this.
  • Anti risk parity is NOT a “bullish” or “bearish” stance… it’s more complicated than that (although its implementations can be elegantly simple). The only thing I’m “bearish” is the performance of “risk parity” strategies (at minimum, on a relative basis…you add in the fees, and it becomes a no-brainer to be “short” risk parity).
  • Based on other market participants’ public commentary / positioning, there are clearly others who are de facto positioned and/or positioning themselves in an anti risk parity fashion… though they may not be seeing it that way (or maybe they do).
  • I may agree with some of the Risk Parity proponents’ reasoning in disputing the Leon Cooperman assertions… yet I may disagree with their overall portrayal of risk parity (perhaps errors of omission).

Kynikos ( κυνικός )

The word ‘kynikos’ is not ‘cynic’ in Greek… though it is derived from it:

The name cynic derives from Ancient Greek κυνικός (kynikos), meaning “dog-like”, and κύων (kyôn), meaning “dog” (genitive: kynos).[3] One explanation offered in ancient times for why the cynics were called “dogs” was because the first cynic, Antisthenes, taught in the Cynosarges gymnasium at Athens.[4] The word cynosarges means the “place of the white dog”. It seems certain, however, that the word dog was also thrown at the first cynics as an insult for their shameless rejection of conventional manners, and their decision to live on the streets. Diogenes, in particular, was referred to as the “Dog”,[5] a distinction he seems to have revelled in, stating that “other dogs bite their enemies, I bite my friends to save them.”[6] Later cynics also sought to turn the word to their advantage, as a later commentator explained:

There are four reasons why the Cynics are so named. First because of the indifference of their way of life, for they make a cult of indifference and, like dogs, eat and make love in public, go barefoot, and sleep in tubs and at crossroads. The second reason is that the dog is a shameless animal, and they make a cult of shamelessness, not as being beneath modesty, but as superior to it. The third reason is that the dog is a good guard, and they guard the tenets of their philosophy. The fourth reason is that the dog is a discriminating animal which can distinguish between its friends and enemies. So do they recognize as friends those who are suited to philosophy, and receive them kindly, while those unfitted they drive away, like dogs, by barking at them.[

source: http://en.wikipedia.org/wiki/Cynicism_(philosophy)

Preliminary Thoughts on Yandex (as a Long)

Yandex NV is Russia’s largest search engine company. Given recent market share losses to Google, as well as it being a Russian stock, it is down -54% in the last 12 months. My preliminary take: the stock’s current price/valuation does not offer sufficient compensation for the risks I see. Specifically:

What I don’t like:

  • The stock is down -55%, yet doesn’t look all that cheap (e.g. compare against Google – YNDX trades at 5.5x revenue versus Google’s 6.2x revenue) given the various risk factors.
  • High risk of being a ‘dead money’ stock, or worse, on its way to becoming a value trap
  • Russia risk – The known unknowns and unknown unknowns – from currency, to confiscation, to who knows what risk?
  • Market share has declined in recent years, even as Google market share has risen.

What I like:

    • Appears to be a dominant search engine, despite recent market share losses
    • The google anti-trust legal situation looks interesting
    • Management appears to be good/excellent
    • The business appears to be good/excellent

Other comments:

Russia is out of favor with investors for a variety of reasons, yet Yandex’s valuation does not reflect that to me… the decline in share price reflects that, but down is not cheap… nor is down equal to a buy. Also, the stock does not seem to be discounting for this google risk (though the legal actions yandex has taken is a bullish upside offset). So you have a company with a very negative macro backdrop and some anti-growth idiosyncratic risk factors… so why pay google-like multiples? Yes, it’s a smaller company, but see google’s recent growth.

Short Selling: Lies, Damned Lies, and Statistics

The Financial Times and the New York Times (coincidentally?) featured two articles yesterday, where both writers lament over the apparent loneliness/dearth of short sellers:

  • Shorters Needed by Dan McCrum (Financial Times)- “Dedicated short sellers are a rare breed which has become even rarer in the last five years.”
  • The Loneliness of the Short-Seller by Alexandra Stevenson (New York Times) – “Now, six years into a bull market run, with stocks in the United States smashing one record after another, these naysayers have all but lost their voice.” The title of this piece sounds more like a ballad about unrequited love then about financial markets.

While the primary assertions found in both articles are largely true (both authors did a fine job, despite poor data) – yes, dedicated short sellers have become rarer in recent years – one of the sources they cite is (at best) misleading/inaccurate/incomplete:

HFR Hedge Fund Industry Estimates, from FT

Rather than rigorously proving why (via an academic paper), here are two reasons the above “data” is (disturbingly) problematic:

  • Red Flag #1 – See 2012, 2013, and 2012 to 2013 y-o-y changes, per table above. Compare against what happened in the markets.
  • Red Flag #2 – Compare against the Barclay Hedge data

Additional Comments:

  • History Rhymes – Since 2013, I have been telling/warning some people that perhaps we are living through a period (for short-sellers) that resembles the 1990-1995 period… a period of (similarly) abysmal aggregate short-dedicated performance. And this period came immediately after the 1980s, a period where dedicated shorts were able to return 20-60% annualized returns, even in a rising market environment!
  • Structural Changes over the years – Hedge fund AUM is at all-time highs…and with that, there are significant dedicated short exposure unaccounted for by these ‘check the box’ data series. There are some large and very large hedge funds, not classified as “short-dedicated” with short-dedicated exposure. There are also these mutual fund “Long Short” vehicles and short “ETFs”. Both types of vehicles seem highly pathetic. And then there are the quantitative strategies.
  • The Real Bubble – The real bubble is not in equities – it’s in GOVERNMENT BONDS. Supposing I’m correct, the intellectual (and knee-jerk) temptation is to say that everything else declines, as government bond prices decline. Yet I don’t see this as an inevitability. Capital / marginal capital tends to have pro-cyclical tendencies, i.e. it flees what’s not working, and joins what is working…
  • Inflection Point 2015 (?) – 2014 and 2015 (so far) validated my theory I feared in 2013 (that short-dedicates were experiencing a period that resembled the early 90s)… that being said, I believe we are now at a critical inflection point. I believe that the prevailing patterns in coming years will not resemble the 2006-2008 period. Rather, we will probably start seeing market activity that more resembles that which occurred 50-150 years ago. The suppressed volatility – the hidden build-up of volatility over the last few years – will (finally) lead to some “inhuman volatility” in coming years (starting this 2nd half of 2015) in asset classes that have thus far been immune. The volatility observed in certain key currencies (e.g. euro, yen, USD) since 2013 has started percolating into the government bond markets… a friend of mine says “equity is always the last to know”. I don’t think this rise in volatility is to be interpreted as necessarily ‘bearish’ for equities. I think it’s going to get far more complicated than that in coming years, and starting very soon.

The S&P 500 versus China A Shares and the “Mr Pink” of Global Macro

The S&P 500 versus China A Shares

Since 2013 (use ANY POINT within 2013 as your starting point), guess which market has outperformed? The S&P 500, or the Shanghai Composite Index? My guess is that many Americans and Europeans would (incorrectly) guess “S&P 500”:

ycharts sse vs sandp level


Questions and Comments:

  • Note how the SSE underperformed the S&P500 for most of the 2013 – Present period… the ‘shift’ / ‘inversion’ from relative underperformance to extreme outperformance occurred fairly recently.
  • There’s only one person I know who was screaming and yelling (and positioning) Long China, Short USA equities since 2013…let’s call him Donald Duck. I think it’s fair to say he’s the “mr pink” of global macro…it may even be appropriate to call Dan Loeb the “Donald Duck” of event-driven investing. Donald Duck has been pounding the table on going short USD over the last 1-2 quarters. That trade has looked ‘stupid’ until recently. Donald Duck has gotten quite a few other major trades / turning points correct (as well as some very wrong). I don’t fully understand the Duck’s “sausage-making” process, but the result seems to be quite tasty.
  • I told Donald Duck back in 2013/2014 that I felt that the better way to express ‘long China” would be to hand-select a basket of US-listed (and potentially other foreign-listed) Chinese stocks, as the A shares, and mainland stocks would be ‘dead money’. That is, to go about “long China” via an Long/Short China approach, or maybe a long-only approach (but with extremely tight due diligence, careful security selection). Donald Duck, however, expressed his preference for the A shares / indices, (I think) given their lack of focus/expertise on individual company analysis/due diligence. Going long select US-listed Chinese stocks looked smarter in 2013 and through most of 2014 (especially if one avoided the NQ Mobile’s of the world, or even went concurrently short them!) versus going long A shares and/or mainland shares…until recently.
  • Why has the SSE outperformed the S&P500 within the last 1-2ish quarters? Why and how long might this trend persist? Why and how might this trade ‘unwind’ ? (I am, as I write this, considering a ‘trade first, analyze later’ approach, i.e. start building a short China, long USA pair trade)
  • What are some fund flow and other considerations between China main-land listed shares, versus China company shares listed elsewhere?
  •  If one doesn’t care about global macro, what might the implications be for single-stock picking, sector investing, etc.?

“Sweep streets so well that all the hosts of heaven and earth will have to pause and say: Here lived a great street sweeper who swept his job well.” MLK

“If it falls your lot to be a street sweeper, sweep streets like Michelangelo painted pictures, sweep streets like Beethoven composed music, sweep streets like Leontyne Price sings before the Metropolitan Opera. Sweep streets like Shakespeare wrote poetry. Sweep streets so well that all the hosts of heaven and earth will have to pause and say: Here lived a great street sweeper who swept his job well. If you can’t be a pine at the top of the hill, be a shrub in the valley. Be the best little shrub on the side of the hill. Be a bush if you can’t be a tree. If you can’t be a highway, just be a trail. If you can’t be a sun, be a star. For it isn’t by size that you win or fail. Be the best of whatever you are.” – Dr. Martin Luther King Jr.


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