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The Morning Brief: Baupost’s Seth Klarman Sounds Alarm on the Markets

One of the most consistent and risk-averse hedge fund managers in the business has sent a warning to giddy investors. Baupost Group’s Seth Klarman said in a recent letter obtained by the Financial Times that investors have been giving short shrift to risk and are not properly preparing for the day central banks stop promoting easy money.

“When the markets reverse, everything investors thought they knew will be turned upside down and inside out,” he tells clients in the letter. “‘Buy the dips’ will be replaced with ‘what was I thinking?’ Anyone who is poorly positioned and ill-prepared will find there’s a long way to fall. Few, if any, will escape unscathed.”

We recently reported that Boston-based Baupost rose about 15 percent, on average, in 2013, its best year since 2009, when it was up 26.77 percent. Baupost now manages more than $26 billion after returning $4 billion to investors at the end of last year, a move we first reported in December. “Any year in which the S&P 500 jumps 32 per cent and the Nasdaq 40 percent while corporate earnings barely increase should be a cause for concern, not for further exuberance,” Klarman states in the letter. “On almost any metric, the U.S. equity market is historically quite expensive. A sceptic would have to be blind not to see bubbles inflating in junk bond issuance, credit quality, and yields, not to mention the nosebleed stock market valuations of fashionable companies like Netflix and Tesla Motors.”

Ken Griffin's Chicago-based Citadel posted a modest 0.5 percent gain in its two main multstrategy funds, Wellington and Kensington, in February. For the year the funds are now up 4.08 percent. Citadel's Global Equities fund gained 1.65 percent for the month and is up 4.6 for the year, while its Global Fixed Income Fund rose slightly last month and is now up 5.2 percent for the first two months.

Omega Advisors founder Leon Cooperman is less fearful about the markets than Seth Klarman, but is not exactly a big bull these days himself. In an interview on CNBC Monday, the one-time Goldman Sachs partner said we are currently in the second phase of what he thinks will be three phases of the current bull market.

In fact, he singled out several stocks he likes — American International Group, which he thinks could rise 25 percent over the next 12 to 18 months, and financials such as JPMorgan Chase, Citigroup and Sallie Mae — as plays on a positive slope to the yield curve.

“For the end of this year, the market — the economy, I should say — is looking well for 2015, and we think it should be,” Cooperman stated. “Then mark it up for another 6 percent, and that gives you a number close to the mid-1,900s, and that’s kind of our central scenario. But I would be surprised if it rages. I think it’ll continue to age because most bear markets relate to recession, and it does not look like a recession is in the cards anytime soon.”

eBay Inc. rejected the two individuals nominated to its board of directors by activist investor Carl Icahn. “The Corporate Governance and Nominating Committee gave serious consideration to the two employees,” stated independent director and corporate governance and nominating committee chairman Richard Schlosberg III in a press release. “After careful review, the board concluded that they are not qualified candidates based on the criteria that have consistently been applied by the committee, including in particular that neither nominee has relevant experience or expertise.” He also said neither Icahn nominee would comply with the board’s governance guidelines on “overboarding,” since each sits on four public company boards.

Tiger Global Management and Insight Venture Partners have invested $50 million in Hotel Urbano, a Brazilian online travel agency. This is the latest of a string of individual investments made in emerging market companies by the New York–based firm’s private equity operation, run by Scott Shleifer and Lee Fixel.

William Ackman’s Pershing Square Capital Management on Tuesday plans to conduct a webcast that purportedly will provide evidence that Herbalife is violating Chinese law. “The report will show that Herbalife’s business in China operates much like the company’s business in the rest of the world — as a pyramid scheme,” it promises in its announcement. On Monday the New York Timeschronicled how Ackman and his staff have aggressively pressured state and federal regulators and politicians to investigate Herbalife, the multi-level marketer of nutrition supplements that he has famously shorted, and helped organize protests, news conferences and letter-writing campaigns in several prominent states.

O. Andreas Halvorsen’s Viking Global Investors disclosed it nearly quadrupled its stake in Illumina, Inc., which makes tools to analyze genes, to more than 7.1 million shares, or 5.5 percent of the total outstanding. The company disclosed the position in a 13G filing, suggesting it is passive.

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