The Morning Brief: Gloom — and a Few Ideas — at Delivering Alpha

If the financial markets truly climb that proverbial wall of worry, then attendees of Tuesday’s Delivering Alpha conference in New York must be euphoric by now. There was enough doom and gloom served up to the several hundred guests who packed the Pierre Hotel ballroom to scale even the biggest wall. Seemingly one high-profile speaker after another warned that interest rates remain near their all-time low (causing a bond bubble), a large chunk of sovereigns are yielding 1 percent or less, the global economic growth rate is anemic at best, and thanks to aggressive quantitative easing by central banks, there are precious few tools left in the arsenal to right a sinking ship.

It also didn’t help the depressing mood in the room that compared with the previous five Delivering Alpha events, this year more panels and time were devoted to macro discussions, hedge fund industry issues and peripheral topics, like owning a professional sports team, than to individual investment ideas.


More than one money management luminary drew parallels to the dark days of the 1930s, between the Great Depression and the leadup to World War II. For example, Raymond Dalio, the founder of Westport, Connecticut-based Bridgewater Associates, the world’s largest hedge fund firm, pointed out that the 1929 stock market crash popped a bubble similar to the one in 2008. After the Great Depression, from 1929 to 1932, “You had the monetization, quantitative easing, essentially monetization, producing of money to make up that gap,” he went on. “And you have the reactions after that. Then you bring interest rates down to close to zero.”

Barry Sternlicht, the chairman and chief executive officer of Greenwich, Connecticut-based Starwood Capital Group, compared today’s easing policies and printing of money to Germany’s pre-war Weimar Republic.

Paul Singer, founder of New York-based multistrategy firm Elliott Management Corp., which next year will celebrate its fortieth anniversary, concurred. “The global financial system is fragile,” said Singer, who repeated his assertion that the bond markets are way over-priced and are a massive bubble.


“When interest rates stay too low for too long, bad things happen,” agreed Tony Ressler, co-founder, chairman and chief executive officer of Los Angeles-based Ares Management.

Singer also ominously warned that the recent phenomenon of stocks and bonds moving in lockstep — rather than in opposite directions — further portends big troubles in the financial markets. Some of the blame for our current situation was pinned on the Federal Reserve. “I think that the Fed is putting too much emphasis on the business cycle and not enough on the long-term debt cycle,” Dalio told the audience.

And with rates at near historic lows, there is very little the Fed can do to stimulate the economy if we plunge into another recession, Dalio and others lamented. “If you have a downturn and you don’t have the power, we’ve never been in a world together that’s been like this,” Dalio said.


So, how should investors position their portfolios for all this doom and gloom? Well, the macro and multistrategy mavens had little helpful advice. They mostly agreed the worst place to be is in what Singer called plain vanilla investments. He warned the audience that using the bonds issued by the G-7 nations as a safe haven “is wrong,” calling it the “biggest bubble in the world.” He said there is tremendous risk owning 10-, 20-, 30-year bonds.

He recommended buying gold, stressing it is underrepresented in portfolios. “It is undervalued and underpriced in today’s world,” Singer added. Otherwise his big recommendation for investors’ portfolios: “Removing bad ideas.”


Mark Carhart, chief investment officer and founding partner of New York-based quantitative firm Kepos Capital, was also bearish on traditional financial assets. He stressed that valuations of equities are near their historic highs, while bond interest rates are at their virtual lows. Carhart told the audience he thinks the expected return of the classic 60-40 asset mix of stocks and bonds is now 2.8 percent per year — after inflation — which is half of what it had been over the long term. He too suggested investors move away from these traditional asset classes.

So where does he see value in the markets? Carhart recommended going long on a number of emerging markets currencies with high interest rates, such as the Turkish lira, Brazilian real and Indian rupee. At the same time, he recommended shorting the currencies of countries whose interest rates are very low. Presumably, he was touting this strategy to the pros and not the Main Street investors watching at home on CNBC, who probably are not equipped to deploy this complicated trade.


Mercifully, there was a panel called “Best Ideas,” and we even got a handful of actionable recommendations.

There was Bill Miller, who is mostly famous for co-founding Legg Mason Capital Management and managing the Legg Mason Capital Management Value Trust mutual fund. He is now founder of LMM and serves as the chairman, chief investment officer and portfolio manager for Opportunity Equity and Income Opportunity Strategy. Miller touted a trade whereby you go long the Standard & Poor’s 500 stock index and short the 10-year Treasury bond, noting that interest rates have bottomed, making dividend yields higher.

As for specific stocks, he recommended controversial drug maker Valeant Pharmaceuticals International. He acknowledged it is no longer a fast-growing company dependent on ever-rising price hikes on its products. “It is a busted roll-up,” he explained, adding that its appeal is its huge cash flow and likelihood of selling up to $8 billion assets. “It is a slow growth specialty pharma that generates a lot of cash,” he added.

Miller also touted a long-time favorite:, which he thinks could double in price over the next three years. He says the online retail giant, which has expanded into web services, can grow 25 percent to 30 percent per year for the next three to five years with rising margins.


Also on the Best Ideas panel, Robert Bishop, founder of New Canaan, Connecticut-based Impala Asset Management, talked up the shares of Teck Resources, a Vancouver-based natural resources giant. His case for the stock is that we are at an inflection point for metals, mining and oil prices, fueled in part by a recovery in the Chinese economy, which he elaborated on in a recent interview with Alpha.

“We are in the second inning of a commodity cycle,” he told the audience. “There is a lot of room for earnings to double on the numbers I am talking about.”


Rounding out the panel, famed short seller James Chanos of New York-based Kynikos Associates made the case for shorting Tesla Motors. He called its planned $2.6 billion merger with SolarCity Corp. “a “walking insolvency.” He said the synergies are questionable and asserted the company will burn through $1 billion in cash each quarter.