The Morning Brief: Sohn Mixes Gloom, Doom and a $3 Trillion Amazon

Gloom and doom were dominant themes at Wednesday’s annual Sohn Investment Conference at New York’s Lincoln Center on Wednesday, with a few rays of optimism. The Sohn conference is one of those events where attendees shell out big bucks to hear top-shelf hedge fund managers share an investment idea or theme, only to see it tweeted instantly and quickly traded on.

But, that’s all right since it’s all for charity, right? In this case it helps support The Sohn Conference Foundation, which aims to treat and cure pediatric cancer and other childhood diseases. The foundation is named in honor of Ira Sohn, a Wall Streeter who died of cancer at the age of 29.

First the optimism. The conference produced its usual share of long recommendations. However, the most dazzling and impressive presentation was made by an individual who is not a hedge fund manager—Chamath Palihapitiya, founder and CEO of Social Capital, a Palo Alto, California venture capital firm.

He argued that Amazon.com could be worth as much as $3 trillion in 10 years. He gets there by estimating that the retail business could be worth $1 trillion, driven by Amazon Prime. He believes Amazon Web Services, the company’s cloud business, could be worth $1.5 trillion. And the rest will come as Amazon offers new IT products. “What it did to retail it will do to IT spend,” Palihapitiya asserted, adding that Bezos “is building the most durable company in the world.” Wow!

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This was not the only bullish presentation.

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John Khoury, founder and managing partner of New York-based Long Pond Capital, made the case that there is a 65 percent potential upside to the intrinsic value of Hyatt Hotels. He asserted that the upscale hotel chain’s valuation is being lumped in with the more downscale companies. He also noted that the lodging industry itself is currently out of favor among investors for a variety of reasons, both economic and industry-related, including the perceived threat from startup Airbnb.

And Larry Robbins sounded like he was addressing his disenchanted Glenview Capital investors irked by double-digit losses last year and the first quarter of this year, stressing that all is well with beaten-down stocks if the fundamentals haven’t changed. He then gave a run-down of a half-dozen or so stocks that have been in his portfolio awhile.

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Otherwise, gloom and doom were the most striking themes.

Bond guru Jeffrey Gundlach of Los Angeles-based DoubleLine Capital told the audience that fighting deflation with negative interest rates is like trying to put out a fire with gasoline. He was frustrated that while gross domestic product is weakening the Federal Reserve is raising interest rates, even as it warns of lower growth for the next few years.

His recommendation: sell the utility index and go long mortgage real estate investment trusts. He points out that the former has surged in price while the latter have fallen. “I expect them to converge, he told the audience.

Gundlach, however, seemed to most enjoy the part of his presentation that poked fun at presidential campaigns over the years. He then warned: “Prepare for a Trump presidency,” adding, “Trump is extremely comfortable with debt.”

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Carson Block, chief investment officer of Muddy Waters Capital, an affiliate of Muddy Waters Research made the case for shorting Bank of the Ozarks, a Little Rock, Arkansas bank-holding company. He argued that the bank has an enormous amount of unfunded off-balance-sheet loan commitments. About 90 percent of its loans are real-estate related, with 35 percent in risky construction loans, Block said. Sure enough, the stock thudded 4.4 percent on Wednesday.

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Zachary Schreiber, one of the founders of New York-based PointState Capital, presented an ominous outlook for Saudi Arabia and its debt. You may recall that two years ago Schreiber, who had worked for Stanley Druckenmiller at Duquesne Capital Management, correctly predicted the oil-price collapse.

This time he recommended investors short the Saudi currency, the riyal, and offset the trade with long positions in the U.S. dollar, Mexican peso and Russian ruble. This is basically a hedge on the global commodities markets, which Schreiber asserted will lead investors to make ten to 50 times their money. “Saudi Arabia’s economy is unsustainable,” he told the audience, adding it will “structurally insolvent” in a few years.

He cited several reasons for his dire view. The kingdom is structured to break even on oil at $90 a barrel, which is roughly double the current price. It spends an enormous amount of money paying salaries to its citizens and on military spending, to defend itself in a dangerous global neighborhood. Like many others commodity sellers, Saudi Arabia is heavily dependent on selling to China, whose economy is slumping badly or worse, depending upon whom you believe.

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Short-selling specialist James Chanos of New York’s Kynikos Associates—the last speaker of the day—also went with the commodities theme and moved his discussion southwest to sub-Sahara Africa. Earlier in the day, he had made yet another bearish case for China and other investment plays in an interview on CNBC.

At the conference, he focused on two countries heavily depend upon on China to sell their commodities—Nigeria and South Africa. He then laid out a litany of reasons why the two countries are experiencing turmoil and troubles—financially, monetarily and socially.

Chanos then used this discussion to lead into his case for shorting MTN Group, a South Africa-based mobile telecommunications company, which, he said, got 62 percent of its revenue from South Africa and Nigeria. Meanwhile, he said, MTN faces a lot of competition, driving down margins. Most of the rest of its business comes from other shaky countries, such as Uganda, Syria and Sudan, as well as Iran.

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Greenlight Capital’s David Einhorn hedged, predicting boom for what he called the undervalued shares of General Motors—a long-time major holding of the New York hedge fund—and gloom for Caterpillar, which he says is a good short. He says Caterpillar has not bottomed out yet even though many investors perceive it to be at the nadir. He expects the maker of construction and mining equipment and diesel engines to trade at half its current price.

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However, the biggest deliverer of doom was Druckenmiller, who shut down his wildly successful Duquesne Capital Management in 2010. The former trigger man for George Soros, who for the past few years has railed at the Fed’s easing policy, lamented that this stance has not successfully boosted the economy, resulting in subpar growth. “The Fed borrowed from future returns,” he asserted, adding it now has boxed itself into a corner and has no end game.

Druckenmiller, who supported Ohio governor John Kasich’s failed Republican presidential bid, also stressed the country badly needs entitlement and tax reform. He stressed that the current economic and fiscal environment is exactly opposite what it was in the early 1980s, on the eve of the greatest bull market of all time and 25-year or so decline in interest rates.

He then concluded his remarks by declaring: “The conference wants a specific recommendation from me. I guess ‘Get out of the stock market’ isn’t clear enough, adding that gold “remains our largest currency allocation.”

Does that mean bailing even on Amazon?

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