Review of 2015 and Considerations for 2016

The below shows self-evaluation of my 2015 “considerations”…but none of the below matters, because I was not up 10x-100x for 2015. Being “right” absent application (i.e. putting $ where mouth is) is little more than mental masturbation. Fortunately, the below roadmap helped me preserve/enhance wealth… a reason to be thankful. 2011 and 2015 were both (rare) years where I could relate both to the “winners” and “losers”.

Considerations for 2015

  • Volatility – YES
  • Us equities market: chop-fest / consolidation – YES
  • The bubble in formation is in bonds, not equities. “first thing I do when i see a bubble is I buy” – the palindrome – YES
  • EURUSD parity is in sight within 24 month – CLOSE ENOUGH
  • Single-name short selling: 2013 was disastrous, 2014 was okay, 2015 okay/meh. The few years after a disastrous year tend to be okay – YES
  • Watching, but not sure what to make of for 2015: (1) Biotech (2) Shareholder activism (3) Mainland China – RIGHT IDEA
  • Gold:2013, Oil:2014, ???:2015

MY BIGGEST MISTAKE FOR 2015 = NOT (FULLY) CAPITALIZING ON THE ABOVE.

Considerations for 2016 (for my own self assessment. may share publicly… tbd)

Having been quite “right” for 2015… I have to assume I may be the perfect contrary signal for 2016. In order to protect myself, therefore, from hostile/nefarious parties who may want to take advantage of me at my own expense, I will keep most of my considerations private. The goal is to be right AND capitalize on being right…ego vindication should be the least of considerations.

  • Key Question for 2016 (across various assets) = Bifurcation

bifurcation

  • Continued cross-asset volatility (I am not implying a specific directional bias)
  • Short Theme X =
  • Short Theme Y =
  • Short Theme Z =
  • Long Theme A =
  • Long Theme B =
  • Long Theme C =
  • Pair Trade A =
  • Pair Trade B =
  • Pair Trade C =
  • Pair Trade D =
  • Special Situation A =

Food For Thought re: 2016

  • Think for yourself
  • Druckenmiller’s comment in that NYTIMES dealbook interview, regarding what will be necessary for survival/excellence in coming years.
  • Why did the SAC/Millennium, and those type of funds/strategies fare well in 2015, both in (debatably) absolute and (unambiguously) relative terms? What does this portend for 2016 (if anything)? Or am I looking for “Moses in the clouds” when there is no such thing?
  • Other than the obvious sector-specific “hedge funds”, why were some US “hedge funds” down 15-30%, in an otherwise flattish (in the indices) year? e.g. Buffett/BRK down -11%? What do these losses portend, if anything?
  • What happened to Passport Capital’s returns in 2015? up 18% through September, and now up 8%?
  • How do momentum and reversion factors play out in 2016 (e.g. oil and gas, gold, etc etc)? Applicable to many disparate situations. Where will momentum persist, versus where will reversion take place?
  • What do the popularity of Bernie Sanders and Donald Trump (and formerly Ben Carson) suggest? Similar question applicable in many other countries.
  • If you’re an active manager, question: in your heart of hearts can you justify your compensation to yourself? Is it possible that as an analyst/portfolio manager/etc… you might actually be pretty useless as an investor/analyst? Worse than useless as an investor/analyst? Why should you get paid 6 figure or more compensation for losing money? Why should you be structured to get paid 2/20 or more for being little more than a closet index guy, or beta monkey?
  • If you’re a passive manager / etf creating machine, question: If your products/services were to disappear tomorrow, would the markets be any worse off?
  • I don’t know what the words inflation/deflation mean anymore. The only phrase that makes sense to me: purchasing power

 

Achieving (or surpassing) the below-like returns, as an investor, matters more than ego vindication:

Michael-Burry-Scion-Capital-Returns

Remember: the above investor is a “one hit wonder”, as believed/preached by the Central Banking apologists.

There’s also the following return profile of a macro investor:

2005: +46.8%

2006: +25.7%

2007: +25.6%

2008: -33% ?

2009: +63%

2010: +22% ?

2011: -31.9%

2012:+0.4%

2013:?

2014:?

2015: +120%

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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

ycharts_chart

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.?

In Anticipation of the Next “AOL-Time Warner”

This post was inspired by a @PlanMaestro who wrote: “Prediction: #PullingAnAOL will start trending soon.” I fully agree.

As “everyone” knows:

  • Interest rates remain low (and in many cases, negative)
  • Corporate cash balances remain high (at least in the United States, part of the reason there are inversion/tax related “controversies”)

As some know:

  • Capital/wealth has really nowhere to go other than the private sector, as public sector returns are de minimis. Corporate bonds/equities, hard assets, venture capital and private equity are the only game in town. I believe US is (largely) the only game in town as well.
  • Confidence in the corporate sector (C-level suites) is increasing.
  • Mergers and acquisitions are “back”
  • US Equity valuations are on the higher end historically, but can arguably go much higher given the prevailing low interest rate environment AND due to the pressure capital has to flee public sector and go SOMEWHERE.
  • The relatively high equity valuations have some interesting effects: (1) C-level executives face greater pressure to justify their existence, and so will look for ways to prop/grow EPS. (2) high valuations mean cheap currency, so acquisitions may seem, and may occasionally even be “accretive” (3) High valuations may lead otherwise mediocre/poor managers into thinking they are actually competent, and deserving of their absurdly high compensation packages. This dangerous and misplaced rise in confidence may encourage people to take on risks via M&A they otherwise would not.

All the above conditions lead me to believe we are in ripe territory (said differently, in dangerous territory) for a few eventual AOL-Time Warner debacles… I mean, deals. I’m giving it 5-6 quarters. Personally speaking, I am less interested in identifying potential targets on the long side… I’m not “smart” enough to do that. I’ll leave that to other Long/Short and Event-driven folks (I may change my mind, as I somehow magically transform into a super talented long focused guy with the power to foresee acquisitions). I am much more interested in getting involved ex-post. This leaves me plenty of time to observe the frauds and follies that I believe will come to fruition in the near future. 

 

About AOL-Time Warner

“Every time it [AOL] got to a clean quarter, it would buy something so you never saw internal growth. Total scum.” – Lisa Thompson from http://twitter.com/LTommy256/status/508807681579425792

It is my understanding that the AOL Time Warner deal gloriously harmed quite a few short sellers. Kynikos Associates, Rocker Partners, etc. I believe the list of those who lost money shorting in that situation is a “who’s who” list. I believe losses on shorting AOL were in the order of 10x. Note that time actually vindicated the AOL shorts… but little comfort in being “right” and losing considerable amount of capital.

 

David Rocker, Rocker Partners on AOL:

“Ask what the bull case is, other than bull generally,” demands David Rocker, a New York hedge fund head who says AOL is still one of the market’s most overvalued stocks. 1996

source: http://articles.baltimoresun.com/1996-07-28/business/1996210078_1_aol-america-online-steve-case

In addition, the company used questionable accounting practices for new  subscribers and marketing revenue to improve its short-term financials. These practices  would lead to a $385 million write-off in 1996, and accusations that the company was
“morally bankrupt.” 

Former CEO Kimsey described the accounting issue
as “the big turd” that “sat in the middle of the company and smelled up the place.” Id. at 57. Short-seller Rocker
claimed that for AOL, “every revenue is ordinary, and every expense is extraordinary.

http://blogs.law.uiowa.edu/jcl/wp-content/uploads/2012/01/1-Bodie-FINAL.pdf

A well-known short seller of America Online, meaning he has bet that its stock price will decline, Mr. Rocker said that the company inflated its quarterly results by spreading its high marketing costs over two years. At the same time, it was reporting costs to the Government, reporting a loss to receive tax breaks.

”They have been telling the Government the truth, but they tell investors something else,” he said.

source: http://www.nytimes.com/1996/10/30/business/america-online-announces-a-newer-transformation.html

 

Jim Chanos, Kynikos Associates on AOL:

Q: what was your biggest mistake?
A (Jim Chanos): AOL. It was a short due to accounting, we thought they were masking higher churn then they reported. We thought the value of a subscriber would turn out less than they thought. We started shorting at $2-$4, covered as it went up, and covered the last at $80. We kept it to a 1%-1.5% position. We knew we were in the midst of a bubble, so we kept it small, but it still cost us 10% over 2 years.

source: http://myinvestingnotebook.blogspot.com/2010/05/jim-chanos-power-of-negative-thinking.html

 

Idea Generation: Revisiting Broken Investment Theses (In Celebration of 13Fs)

In 2013, long Yahoo! (“YHOO”) was a big winner for some in the activist/event-oriented world (e.g. Third Point). Yet the long Yahoo! thesis had been around … for quite some time (remember Icahn circa 7 or so years ago?). Recall Greenlight articulated largely the same long Yahoo thesis in 2011…and capitulated in 2011. Long Yahoo! was a broken thesis that transformed into a beautiful thesis.

Microsoft was a perma value play, coming up as a popular long idea in value-oriented conferences, and value circles… but it was ValueAct in 2013 that really got it right.

So perhaps the far more elegant way to use 13Fs are not to follow what other investors have done… but to look for ideas that they give up on, and bet the other way (or examine the merits of doing so). 

Remember Meredith Whitney? Remember all the negative sentiment (rightly so or otherwise) towards her in the last few years, specifically with respect to her munifinance/bond prognostications?

For some reason, this recent @MuniLass* kerfuffle got me thinking that perhaps Whitney’s broken thesis is worth re-examining. From a narrative perspective, it just makes sense –  I’m going to give it 24-36 month to come to fruition, in some form.

 

* Blessed are those who protect the anonymous. I find her outing troubling… that being said, I once followed her briefly years ago, but unfollowed her because I found her unnecessarily nasty towards others. The disrespect and vitriol I sensed in her words (towards those who have variant views) were notable. Short seller regularly receive far worse than I ever saw her receive, but nearly all short sellers simply ignore the threats, false accusations, etc.

::UPDATED on May 16, 2014 8:45 AM EST::

Perhaps a 50% haircut on WWE is reason enough to revisit its long thesis…

Short European Sovereign Debt , and Treat Yourself to some Currywurst, Tapas, etc. Later

The thought/idea came to mind around a month ago. Spoke recently with someone much more knowledgeable about sovvies he mentioned the idea (someone who knows more about sovereign bonds than I do, and has demonstrated ability to monetize).

Then early this morning started seeing that Spanish bond yields are than Uncle Sam’s! Uh huh. Central Banks are Omnipotent (All-Powerful) and Omniscient (All-knowing)… until the Market saith otherwise. The market will humble the ECB.

Can yields go even lower? Yes. Then what? Short more. I started shorting FaceBomb around 69, added more around 71. I didn’t get the top. Oh well.

PLUG Must Be the Envy of All $500-$1,000 million Market Cap Company CEOs

The trading dynamics of PLUG continues to fascinate me (and fortunately, PLUG has been good to me). Let me pose a simple series of questions/thoughts to illustrate why PLUG continues to fascinate and perplex me:

  • Historically significant news is not being released daily, yet PLUG’s shares trade as if this were the case (recently, PLUG has traded 30-100%+ of its market cap… DAILY).
  • I know many $500-1,000 million market cap stocks that might trade 5-15 million $ daily (i.e. trades 1%-3% of market cap daily).
  • It usually is a highly rare event for a company’s stock to trade over 20-30% of its market cap.
  • It is a very, very, very, very, very rare event for a company’s stock to trade 50-100%+ of its market cap.
  • I’ve never seen a legitimate company’s stock (of material size) trade like this before.
  • If I’m a CEO of a $500-$1,000 million market cap company, I would not understand why another company’s shares trades 30-100+% of its market cap 5-15 trading days consecutively, especially absent commensurate news/developments

Here is how PLUG has traded since I first wrote about it (fyi, I’m following PLUG, and writing about it, largely because I’m quite fascinated by what i see as a obviously anomalous activity… the kind of activity that, if I a regulatory body, I would flag immediately and investigate within 48-72 hours):

PLUG – 30%-100%+ of its Market Cap Traded EVERY DAY recently. Why? NOT due to news.
Date Open High Low Close Volume Adj Close Value Traded
3/28/2014 6.85 7.15 6.68 6.9 26101500 6.9  $        180,100,350
3/27/2014 6.55 7.19 6.21 6.89 45187800 6.89  $        311,343,942
3/26/2014 7.63 7.86 6.26 6.45 1.19E+08 6.45  $        769,179,915
3/25/2014 5.93 8.48 5.8 8.48 1.37E+08 8.48  $    1,161,942,320
3/24/2014 6.1 6.23 5.56 5.69 26559500 5.69  $        151,123,555
3/21/2014 6.09 6.12 5.33 5.94 52721500 5.94  $        313,165,710
3/20/2014 6.1 6.33 5.91 5.97 27852300 5.97  $        166,278,231
3/19/2014 6.19 6.57 5.99 6.21 52422400 6.21  $        325,543,104
3/18/2014 6.49 6.59 5.82 5.96 56945500 5.96  $        339,395,180
3/17/2014 7.18 7.34 6.27 6.51 58073600 6.51  $        378,059,136
3/14/2014 7.48 7.99 6.58 6.71 75379800 6.71  $        505,798,458
3/13/2014 7.58 8.48 6.96 8 1.31E+08 8  $    1,050,784,800
3/12/2014 5.82 7.4 5.32 6.8 1.41E+08 6.8  $        961,299,000
3/11/2014 11.44 11.72 5.95 6.03 2.44E+08 6.03  $    1,473,620,445
3/10/2014 9.23 11.41 8.57 10.31 2.12E+08 10.31  $    2,183,221,887
3/7/2014 6.79 8.35 6.53 8.27 1.26E+08 8.27  $    1,039,927,690
3/6/2014 6.45 6.69 6.02 6.36 47838600 6.36  $        304,253,496
3/5/2014 6.96 7.01 6.45 6.75 56042600 6.75  $        378,287,550
3/4/2014 6.46 7.09 6.24 6.69 1.21E+08 6.69  $        812,396,136
3/3/2014 4.6 5.83 4.5 5.82 84414000 5.82  $        491,289,480
2/28/2014 4.51 4.84 4.45 4.67 37353600 4.67  $        174,441,312
2/27/2014 4.38 4.57 4.25 4.37 21812200 4.37  $          95,319,314
2/26/2014 4.49 4.64 4.25 4.41 52906000 4.41  $        233,315,460

Global Macro: Very Difficult (if not Impossible), Very (Most) Important, and… Critical in Coming Years

Claim: I believe global macro-related considerations are the most important when it comes to the art of investing/speculating. Macro matters, and everything falls short of macro.

I also believe global macro will become more obviously important in coming years. This recent (and relatively mild) Ukraine/Russia situation is an opportunity for everyone to prepare for what is to come.

Rather than rigorously support my belief, I include a series of thoughts that have led me to the above beliefs. I welcome (and invite) variant views:

  • Macro considerations (for example, interest rates, tax policies, currency, cross border capital regulations, financial institution regulations, corporate regulations, war, retirement/savings regulations, demographics, etc) can render company-specific fundamental analysis  irrelevant.
  • No investment/trading strategy is more scale-able than global macro – if you want to build a $1, $10, $100, $1,000, $10,000 million position in a security… which markets might allow you to do so without moving said markets?
  • The rules of investing/trading have, can, do, and will change.
  • Understanding the movement of capital (inter and intra country) is inextricably tied to understanding the market mechanism. The market is always and everywhere a voting machine. Valuations (i.e. opinions) are not realized in a vacuum, but via the weighted average vote of market participants (although in some cases, i.e. acquisitions, a single ‘voter’ can set a valuation. But that still is a vote)

There is a time for peace… there is a time for war. There is a time for plenty. There is a time for famine.  There is a time for calm… and there is a time for turbulence.

I believe that understanding the true causes of the relative strength of US capital markets vs. EM capital markets in recent history is key to understanding what will likely happen in coming years. Be prepared.

Important Consideration for the next 2 years:

2 forces that fuel upside risk in US equities next 1-2 years:

  • Domestically, Capital fleeing Fixed Income (equity deemed more attractive). Both current and marginal capital flows.
  • International Capital fleeing EM to US.

US equity markets have been due for a correction, but nevertheless face upside pressure from those two forces. I believe we see much higher and much lower within the next 2-3 years.