This content is from: Portfolio

The Morning Brief: SALT, Day Two, and a House Full of Hedgies

I got the feeling that Day Two at SALT was not going to be as meaty as the first — at least for those looking for insights from hedgies — when the first panel had more people full of themselves than full of hedge fund managers. Yet, the four political pundits — Paul Begala, James Carville, Margaret Hoover and Karl Rove — who are as likely to budge from their positions as the Statue of Liberty, were actually more interesting, engaging and informative that I had thought. Too bad I can’t tell you what they said. Regretfully, this was one of four SALT sessions that was off the record. Never mind that the four pundits regularly appear on cable TV. Weird. This did not play well with the media, which had shelled out sizable sums to give SALT free publicity. Why was the session off the record? It did not involve sometimes paranoid hedge fund managers, although Third Point’s Daniel Loeb did not want audio or video coverage of his session — though otherwise he was on the record and his remarks were widely circulated. On Wednesday, former Fed chairman Ben Bernanke’s remarks had been off the record. The guy no longer works in an official government job, is widely deemed to be very smart and is now lining up consulting work with high-profile hedge funds. I chose to pass on him. Another off-the-record session took place Thursday with former defense secretary Chuck Hagel and former national security advisor Condoleezza Rice. Note the word “former” before each of their titles. Are these people afraid they may say something they shouldn’t? Probably not. These folks regularly charge huge fees to make speeches. More likely, they don’t want their comments spread across the Internet, thereby diluting their appeal to audiences that will continue to pay them large sums to speak.

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The investment highlight of the day took place just before lunch when five prominent managers delivered their views. However, in the midst of the first presentation — from Omega Advisors’ Leon Cooperman — an attendee screamed and collapsed. Everything came to an immediate halt. The man egained consciousness and was treated by EMS. He appeared to have suffered a seizure. After a round of applause, the panel continued.

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As it turned out, this panel, with its five well-known hedge fund honchos, was the day’s highlight. Cooperman, who continued his talk without losing his rhythm, essentially delivered the same comments he made earlier in the week to the Sohn Investment Conference and to his investors in his first-quarter letter, which we recently reported on. The one-time Goldman Sachs partner once again said he expects stocks to rise 7 percent to 9 percent this year, including dividends, and that the market’s current price/earnings multiple is appropriate. “The market will perform in line with earnings,” he said. He reiterated that he was negative on fixed-income given the current low levels of interest rates. However, he again assured that the bull market still has two or three more years at least to run, and noted that bear markets begin for one of four reasons: they sense recession, stocks are significantly overvalued, they fail to forecast a significant geopolitical event or the Federal Reserve turns hostile. “Neither is present,” Cooperman said. He pointed out that since the 1950s, the stock market has risen for 30 months after the first rate increase and the market has gone up 9.5 percent one year after that hike. However, he did offer a warning: “Outsized gains in the equity market are behind us.” Cooperman then served up a handful of stock ideas: pharmaceutical company Actavis, Aercap Holdings, an aircraft leasing company, Citigroup, Dow Chemical, General Motors, Google, The Priceline Group and a small cap, Gulf Coast Ultra Deep Royalty Trust, which holds royalty interests in hydrocarbons produced by McMoRan Oil & Gas.

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Short-seller James Chanos of Kynikos Associates made a bearish case for a handful of energy stocks. We recently reported that his New York firm had had a rough time in this aging bull market, with assets down to $2.5 billion as of February 27 from $4 billion last year, more than 60 percent below the $6.5 billion the firm reported at the start of 2012. In any case, Chanos said he is short Royal Dutch Shell and Chevron, repeating previous assertions that big oil companies have poor fundamentals, are spending too much on dividends and stock buybacks and are funding shareholder goodies with borrowed money. He also said they don’t have much in the way of reserve replacement. At SALT Chanos also lambasted Shell’s plan to acquire BG Group for $70 billion. He said two of BG’s businesses that investors have liked in the past don’t look promising—the liquefied natural gas business and its minority stake in Brazil’s Petrobras. Demand for LNG has been flat for three years, he said. And Petrobas is mired in scandal.

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Next up on the panel: Kyle Bass, chief investment officer of Dallas-based Hayman Capital Management. He discussed several pharmaceutical companies. He mocked Teva Pharmaceuticals’ recent $40.1 billion offer to buy Mylan, which had been rejected. He pointed out that Teva, a generic giant, changed the suggested dosage on its prized multiple sclerosis drug that accounts for 55 percent of its cash flow to protect its patent. Mylan challenged this move. “So, Teva went after Mylan, which heavily relies on sales of its EpiPen,” he noted. Bass added that he likes Perrigo as a potential takeover target. He said Mylan is interested but he doubted it would succeed with a bid.

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John Burbank III, founder of Passport Capital, talked up Saudi Arabia and Saudi bank National Commercial Bank, or NCB, which he called “a banking giant no one ever heard of.” Passport now has about 11 percent to 12 percent of its assets in Saudi Arabia. NCB went public in the second-largest Saudi initial public offering of 2014. He was most excited at the prospect of the stock being included in a MSCI index by 2017. He observed that stocks enjoy big gains early on when they’re added to a widely-followed index. As for investing in Saudi Arabia, he called it a country that’s safer, not levered, growing, with a young population. Hopefully, no retail investor playing along at home makes this speculative bet.

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Michael Karsch, founder and chief executive officer of Hunter Peak Investments, also talked up foreign stocks. He made the case for NOS, a leading cable company in Portugal and bundle player. Karsch explained that in the past European regulators pushed for more competition, which led to underinvestment. However, they have reversed their strategy and are encouraging consolidation to allow investment back in the marketplace. Karsch, who at the start of 2014 shuttered Karsch Capital Management, says NOS is a leader in combining wireless and Internet. “Portugal is a more attractive market than the consensus understands,” he said in a report he posted during the presentation. He insisted there’s little downside and a chance to double your money over the next three years. He added that Altice’s closing of its acquisition of Portugal Telecom will be good for the industry.

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Jim Chanos was not the only one talking energy stocks. The highest-profile pundit on the subject was octogenarian T. Boone Pickens, who was interviewed by Bloomberg’s Stephanie Ruhle. Pickens is one of the most bullish of petro pundits, predicting $90 per barrel by year end and noting that production is going down and demand is rising. He also scoffed at assertions made by Greenlight Capital’s David Einhorn earlier this week that fracking was a new technology that investors should short. “I saw fracking first in 1952,” Pickens said. And when the discussion moved to the fact that oil prices at one point this year had dropped 50 percent, Pickens noted that we have had six price drops of at least 50 percent since 1980. While discussing the controversial Keystone pipeline, Pickens noted that moving reserves from Canada is a lot safer and does not incur the costs of shipping oil through the dangerous Strait of Hormuz. No military costs. Keep in mind that while Pickens does not run a hedge fund, he did several years ago and qualified for the Rich List three times. In 2005, he earned $1.4 billion, making him No. 2 on our list when his equity-oriented BP Capital Energy Equity Fund finished 2005 up 89 percent net of fees and his BP Capital Commodity Fund soared 650 percent.

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In a separate small panel devoted to the energy industry, James McGinnis, chief investment officer of New York-based Halcyon Energy Investors, expressed skepticism that oil prices would rise, let alone go to $90. He said that at least 60 oil rigs are currently sitting idle. Day rates have come way down. Meanwhile, some 83 drilling ships, which take three years to build, will be delivered over the next 2½ years. “There is so much capital chasing so many rigs,” he said. McGinnis noted that the industry needs to retire 80 or 90 rigs, which will take a few years. He recommended shorting three offshore oil drilling contractors: Ensco, Noble and Transocean.

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On the same panel, Christian Zann, partner and portfolio manager-energy for Chicago-based Balyasny Asset Management, pointed out that there is a considerable amount of long-short money in energy now. “They made lot of money and are now covering their shorts,” he said. “Many were caught too short in the first quarter.” He is now recommending going long three small onshore energy-services firms, which he said are able to raise capital. His three favorites: Basic, Tetra Technologies and Tri County Drilling.

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Douglas Rachlin, managing director and senior portfolio manager at Neuberger Berman in New York, likes master limited partnerships. He said the strongest ones are growing their cash flows by high single-digit and low double-digit rates. His favorite: Energy Transfer Equity. He said the company has raised payouts by about 30 percent in the past six months and his impression was that it will hike its distribution to shareholders by another 35 percent this year and 25 percent in 2016.

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Meanwhile, two individuals from smaller, lesser-known firms sitting on another break-out panel made intriguing cases for two well-known media-related companies. The more spectacular presentation came from Gil Simon of Orinda, California-based Apex Capital, which manages about $1 billion. He argued that Netflix’s stock will triple and it will become the next $100 billion company. “It is up 60 percent this year so I know this is bold,” he said. The prediction was bold considering that only three Internet company companies currently have $100 billion market capitalization: Google, Facebook and Amazon. Simon said Netflix is just getting around to moving aggressively internationally and that the company is the buyer of choice for licensed and original content. “Its global subscription model and pricing power will translate into profitability well beyond consensus expectations,” he said, adding that Netflix has already penetrated 45 percent of households with broadband Internet service in the U.S. “I expect it to be fully global in the next two years,” he noted. He’s looking for a $2,000 share price in three years. It’s $565 today.

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David Ford, founding partner at New York-based Latigo Partners, recommended iHeart Media, formerly Clear Channel. He pointed out that it is the No. 1 owner of U.S. radio stations and a leader in outdoor advertising. “Advertisers are underinvested in radio,” he says. “Radio still the cheapest way to get your message out.” The company’s problem is that it took on a huge amount of debt when it was bought out in 2008 in a leveraged buyout. IHeart was also hurt badly by the recession, and suffered from cash flow problem as it struggled to service its debt. However, Ford pointed out, the company, which has 17 distinct tranches of debt, has done a good job recapitalizing its debt and addressing its maturities. IHeart now has no significant maturities until 2019. He recommended iHeart’s 10 percent bonds that mature in 2018, which he thinks can provide equity-like returns, as well as the equity. But, he said, you have to realize iHeart, which went public in 2014, is a thinly traded stock with just a $600 million market capitalization.

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