FPA Crescent Fund 2Q 2017 Investor Letter

FPA Crescent just published its second quarter 2017 investor letter.

The letter briefly comments on the economy and markets. The high yield market in particularly only offers "return-free risk".

Part of our historical bread and butter has been finding opportunities in the high yield sector, but today we find the bread burned. The yield-to-worst of the US high yield market is a paltry 5.7%, while the EU high yield sector offers a pathetic 2.7%. Importantly, those yields are gross of some future default and recovery rates. If one were to look at the US as a proxy over the past thirty-five years, with an average default rate of 3.7% and recovery of 40.9%, the US gross yield would be reduced to a net yield of 3.5%. In Europe, the return would be negative.

The letter takes an in-depth look at FPA's long-running Naspers/Tencent pair trade. To date the trade has been going against the fund as the discount has widened significantly (with Tencent rallying far more than Naspers stock).

The letter also discusses loans to Sears Canada and FPA's portfolio of financial stocks. The basket of financial stocks has appreciated significantly and in FPA's view is no longer "dirt cheap".

Sam Zell on Global Growth: “Where’s the Demand?”

Sam Zell recently spoke at the CFA Institute's 62nd Annual Financial Analysts Seminar. 

He stated:

“I’m a student of demand and when demand is there, I look at the cost of fulfillment.”

Sam isn't upbeat about US commercial real estate:

“Last year, I was saying that the CRE industry was relatively benign and supply and demand was in balance,” he said. “In the last 18 months, however, there has been an enormous increase in supply.”

Both multifamily residential and office space in the US are seeing strong supply growth while occupancy rates are on the decline. “We are behind the rest of the world in terms of adapting to shrinking office space.”  

Zell is more focused on opportunities in emerging markets.

Full blog post here:

Sam Zell on Global Growth: “Where’s the Demand?”

Barry Sternlicht wants a “train wreck” in Manhattan’s luxe market, warns of less global money coming into CRE

Real estate mogul Barry Sternlicht is very bearish on Manhattan high-end luxury real estate:

“We are beginning to see the cracks of the high-end residential market in Manhattan,” he said. “The building on 57th Street just went through it’s B-lender. Those deals, and the building going up next to MoMA, those deals are going to be a disaster. So high-end resi in New York really is in trouble.”

 

Full article here:

Barry Sternlicht wants a “train wreck” in Manhattan’s luxe market, warns of less global money coming into CRE

 

Sequoia Fund: An epic winning streak on Wall Street — then one ugly loss

Head over to the Washington Post for an in-depth article on the Sequoia Fund and it's expensive mistake in Valean stock.

A big miscalculation on one stock, Valeant Pharmaceuticals International, has cost the Sequoia Fund billions of dollars and compromised its reputation for market-beating performance earned over decades.

To get a sense of how sterling Sequoia's reputation was: 

Sequoia grew to maturity under the glow of Buffett, the folk-hero money mind whose stewardship of Berkshire Hathaway prompted a national following based on the virtues of common-sense investing and avoiding mistakes.

Regarding Valeant (VRX):

How, with all its deep research and money minds, did Sequoia get this so wrong?
The decision to invest and stick with Valeant “was not about one person,” Poppe said.
There is no good answer.

“It almost begins to feel like a Greek tragedy,” McDevitt said. “Goldfarb had been revered in the industry, and rightfully so. For years, he would get it right, even when people said it was wrong. If you are successful when the market says you are wrong, it can create a sense of hubris. It can leave you overconfident in your own opinions and can set you up for a big fall. And that is what happened.”

Full article here:

An epic winning streak on Wall Street — then one ugly loss

 

 

 

 

Hertz - The Final Nail in the Coffin

Another post by Daniel  Ruiz at Blinders Off LLC on the automotive market. He compares Hertz's (HTZ) position with regard to purchase volume, depreciation and fleet mix to the depths of the last recession.

Unlike 2009 when the US government intervened with Cash for Clunkers and the lowest interest rates in history, I don’t foresee a catalyst that will boost or even stabilize used vehicle values for the next 2-3 years. 

Last year was a record setting year for new vehicle sales. We have not experienced a sufficient decline in new vehicle sales which will be necessary to balance the supply of used vehicles. Similar to the 2008 period, I expect that Hertz will have to keep their current fleet longer than expected due to further used vehicle value declines. However, a fleet can only be allowed to age for so long due to higher wear and tear costs like tire and brake replacement.

In conclusion, Hertz has surpassed the previous peak in per unit depreciation and now has to weather a 2 plus year declining used vehicle value storm with a more expensive mix of vehicles. The greatest challenge for Hertz is not behind, it lies ahead, and it’s one that they may not be able to survive this time.

 

Full post here:

Hertz - The Final Nail in the Coffin

 

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

Greenhaven Road Capital 2Q 2017 Investor Letter

Greenhaven Road Capital just published its second quarter 2017 investor letter.

The letters discusses the strategy of owning companies that are "platforms" and benefit from network effects:

...but for our purposes, “software is eating the world” is now “platforms are eating the world.” I have intuitively understood the advantages of network effects and the attractive economics of the incremental customer on platforms, which has led us to currently own four of them within our portfolio: Etsy, Interactive Brokers, Gaia, and TripAdvisor.

The fund's largest positions are also covered: FCA, EVI, ETSY, LMB, and TRIP. The fund also established a new position in Yatra Online (YTRA).

TripAdvisor (TRIP) is covered in detail:

TripAdvisor has a platform designed for transactions and has built an ecosystem that includes apps, rich content users access for free, and free advertising both in-app (via reviews) and in the real world (those recognizable stickers posted in restaurant windows). When you step back, for a reasonable valuation we are getting the best product with excellent owners in an enormous market. As temporary Instant Booking issues subside, we could see revenue growth, margin expansion, and multiple expansion over time. 

Greenhaven Road is also launching a new "Partners" fund:

The Greenhaven Road Partners Fund will be a “fund of funds,” investing in emerging managers focused on small niches of the market. This vehicle will take advantage of my relationships with fellow portfolio managers as well as the relationships the Royce Family Office has developed over decades

You can find the full letter here:

Greenhaven Road Capital 2Q 2017 Investor Letter

More letters here: Hedge Fund Second Quarter 2017 Investor Letters

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

Cliff Asness Remembers 2007: The August of our Discontent

Ten years after the start of the financial crisis in 2007, Cliff Asness remembers the so-called "quant quake" of August 2007. 

The quant quake: "that one week period in August 2007 when quantitative equity strategies like factor investing and statistical arbitrage suffered very large losses and then, in the next few weeks, made an almost full recovery."

Cliff discusses some of the factors that can lead to this kind of short-term underperformance of quant strategies. He also compares the situation of 2007 to today's market environment.

A few select comments by Cliff below:

So the next question is what can trigger sharp selling of a popular well-known strategy even if it's not very over-priced?

But we can identify a few of those things that can start the fire. For example, it could be something like a banking crisis, an abrupt regulatory change, or a loss of ability to maintain short positions. It could be triggered by poor performance if it's severe and abrupt enough to cause people to drastically reduce their desire to take risk in those strategies. It could particularly happen if there are large and sudden redemptions facilitated by investment terms linked to poor short term performance...

Many factor portfolios are still essentially traditional, long-only and implemented without leverage, designed to beat a benchmark by overweighting the stocks preferred by the factor or factors in question. The most famous version here is often called "smart beta"...

Leverage can, and often is, used to make such a market-neutral factor portfolio matter in the investor's overall portfolio. Thus, leverage is quite useful, but it also can be a new danger.

For instance, it seems obvious that the higher the fraction of factor investors that use leverage, and the more leverage they use, the bigger the chance of another August 2007.

On this front we take some comfort in noting that in 2017 versus 2007 it appears that far more of the factor world pursues these strategies without leverage...

You can find his full post here:

The August of our Discontent: Once More Unto the Breach? (2017)

And his 2007 "quant quake" recap here:

The August of Our Discontent (2007)

 

 

 

 

GMO 2Q 2017 Investor Letter

GMO published its second quarter 2017 investor letter. Jeremy Grantham writes: "Why Are Stock Market Prices So High?"

Some of his key points:

Contrary to theory, the market P/E level does not primarily reflect future prospects. It reflects current conditions...

High profit margins and stable, low inflation dominate this feel-good list...

Thus today’s high priced market is the completely usual response from investors...

...Any shift back to a lower P/E regime must therefore be accompanied by a major sustained fall in margins or a sustained rise in inflation (or both)

I do believe these comfort variables will move to be less favorable. But probably not quickly.

Without A Boss Bill Miller Is Betting On Amazon, Bitcoin And Bob Dylan

Forbes article from July on long-time value investor Bill Miller.

Truth is, Miller has never cared much about labels or current fashions. Beginning in 1991, his Legg Mason Capital Management Value Trust beat the S&P 500 for 15 years in a row partly because he defined "value" his own way...

As investors chased returns, Value Trust's assets grew to more than $70 billion, and Miller became the most famous active fund manager since Peter Lynch stepped away from the Fidelity Magellan fund in 1990...

Yet heading into the 2007-08 financial crisis, Miller owned everything that would soon turn toxic: subprime mortgage lender Countrywide, now-defunct Lehman Brothers and Bear Stearns, bond insurers, home builders and even AIG...

 

Full article:

Without A Boss Bill Miller Is Betting On Amazon, Bitcoin And Bob Dylan

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

IP Capital Partners 2Q 2017 Investor Letter

IP Capital just published its second quarter 2017 investor letter.

The letter is  deep dive into Alphabet Inc (GOOGL).

With the evolution of systems that track users’ online attitudes, it became possible to monitor them until the time of purchase. As a result, advertisers have definitive proof that their investment has paid off. This basic concept is at the heart of the money-making machine Google has turned into...

At some point, Google’s revenue growth will saturate and keep pace with the growth of the global advertising market...
The perception that the digitization of advertising still has a long runway ahead and that Google remains one of the leaders in this process makes us believe that this moment is still far enough to justify our investment...
Based on its original mission to organize the world’s information and make it available and useful, Google has created a fabulous collection of assets. As an “invisible toll” on the Internet...

Find the full letter here, or in our letter section: Hedge Fund Second Quarter 2017 Letters

IP Capital Partners 2Q 2017 Investor Letter

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

Third Avenue 2Q 2017 Investor Letters

Venerable value shop Third Avenue just released its second quarter 2017 investor letters.

The Value Fund talks about thematic investing and the fund's big bets in financials and housing. It also discusses the new position in Reliance Steel & Aluminum (RS).

The International  Value Fund first discusses the Chinese economy and global commodity markets with a focus on copper and zinc. The letter then outlines the investment case for its holdings in mining and other international companies.

The Small-Cap Value Fund letter discusses six new portfolio holdings: PDC Energy (PDCE), Haynes International (HAYN), Finisar Corp (FNSR), Horizon Global (HZN), AMN Healthcare (AMN), and WesBanco Bank (WSBC).

You can find the full letters here and in our letters section: Hedge Fund Second Quarter 2017 Letters

Third Avenue Small-Cap Value Fund 2Q 2017 Letter

Third Avenue Value Fund 2Q 2017 Letter

Third Avenue International Value Fund 2Q 2017 Letter

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

Ray Dalio: Risks Are Rising While Low Risks Are Discounted

Ray Dalio of Bridgewater Associates just posted his current markets views on LinkedIn. He comments on the recent lack of volatility.

As a rule, periods of lower risk/volatility tend to lead to periods of greater risk/volatility. That is reflected in our aggregate market volatility gauge (see below), and markets are pricing in volatility to remain low next year too.

Ray also highlights several risks that are rising under the surface, while the markets have remained calm:

...prospective risks are now rising and do not appear appropriately priced in

...corporate leveraging up has been high because interest rates are low

...we are seeing 1) two confrontational, nationalistic, and militaristic leaders playing chicken with each other

...the odds of Congress failing to raise the debt ceiling [are] rising.

It’s hard to bet on such things, one way or another, so the best that one can do is be neutral to such possibilities.

He also recommends an allocation to gold.

You can find the full post here:

Risks Are Rising While Low Risks Are Discounted

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

Broyhill Asset Management 2Q 2017 Investor Letter

Broyhill Asset Management just published its second quarter 2017 investor letter.

The letter discusses the current market complacency and the narratives that investors create.

From time to time, it is normal for markets to experience periods of low volatility and high complacency. However, it is dangerous to come to expect them. It is even more dangerous to rely on them

Broyhill cautions investors to expect low returns from the stock market:

Research from Goldman Sachs Asset Management illustrates that at current valuation levels, the S&P has delivered single-digit or negative returns 99% of the time.

The fund has been buying closed-end municipal bond funds.

Starting in December of 2016, we began building a basket of closed-end municipal bond funds. 

The firm is also invested in Cognizant (CTSH), and both Dollar Tree and Dollar General (DLTR, DG). 

You can find the full investor letter here:

Broyhill Asset Management 2Q 2017 Investor Letter

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

How Baidu Will Win China's AI Race - And, Maybe, The World's

Check out this wired interview with Qi Lu who joined Baidu after previously heading Microsoft's AI effort.

 

How do you describe your AI strategy?

We believe the best way to commercialize AI technology is to build ecosystems. Essentially, to enable our partners to better accelerate their pace of innovation, using healthy, stable economic models to build strong, long-term win-wins for our developers and partners. The baseline is Baidu Brain [the term Baidu uses for all of its AI assets]. It’s broader and more extensive than what Microsoft and Google offer today in the United States, because it’s a platform. We have 60 different types of AI services in our suite we call Baidu Brain.

 

You can find the full article here:

How Baidu Will Win China's AI Race - And, Maybe, The World's

 

 

 

Sustainability of hedge-fund reinsurers questioned

Many hedge funds have tried to emulate the Berkshire Hathaway "insurance float plus asset manager" business model. Firms like Third Point, Greenlight and Highbridge have set up insurance vehicles to generate float and invest it in a hedge fund strategy.

S&P Global released a report commenting critically on the performance of this increasingly crowded field.

“The allure of a crossover between hedge funds and reinsurers continues to offer enticing possibilities,” S&P say in its new report, “The Rubber Meets the Road for Hedge Fund Reinsurers,” but “the multibillion-dollar question remains, How viable and sustainable is the HFR model?”

Such reinsurers generally engage in “low-margin and low-volatility (property/casualty) reinsurance business,” and try to generate returns for investors through hedge fund investment or other strategies.

Thus far, however, they “have yet to generate an underwriting profit and their overall operating results continue to lag those of the traditional Bermudian reinsurers,” the S&P report said.

You can find the full article here:

Sustainability of hedge-fund reinsurers questioned

Paul Singer: The World’s Most Feared Investor

Bloomberg put together a list of Elliott Management's activist investment targets. The list ranges from Arconic (former Alcoa) and BHP to Samsung and the country of Argentina.

 

Aggressive, tenacious and litigious to a fault, Paul Singer may be the most feared activist investor in the world...

Singer has targeted the world’s biggest mining company, taken on Warren Buffett in a battle for Texas’s largest electricity distributor, ousted chief executive officers on both sides of the Atlantic and set off a chain of events that led to the impeachment of South Korea’s president.

Singer is best known for battling Argentina for 15 years over its debt default—and impounding one of the country’s war ships in the process. Certainly, his impact is undeniable. He started with just $1.3 million from family and friends in 1977...

Full article and list of Singer's activism targets here:

Paul Singer: The World’s Most Feared Investor

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

Upslope Capital Management 2Q 2017 Investor Letter

Upslope Capital just published its second quarter 2017 investor letter.

The letter discusses several new positions as well as Upslope's short strategy:

My approach to short-selling has always been to focus primarily on secular “losers,” businesses with challenged financial models, and fads. Often, this means shorting companies that appear cheap – but whose stocks are likely to continue to slide, as estimates for future earnings continue to fall. In most cases, an impaired competitive position or lousy financial model can be observed by analyzing certain financial patterns: low returns on capital, poor/unpredictable cash flows, and persistent need to raise additional capital.

Positions discussed:

  • Longs: EROS, OZRK, HACK, EWC
  • Shorts: STOR

You can find the full letter here:

Upslope Capital Management 2Q 2017 Investor Letter

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

If Retail Is Dying, Why Is Money Pouring Into Malls?

Despite the woes of brick and mortar retailers, construction spending on shopping center and malls has been strong.

Across the country, construction spending on shopping centers topped $1.6 billion in June, the largest amount since 2008 and the Great Recession. Builders have been especially busy working on malls, spending $404 million in April. In nominal terms, that’s the second highest monthly total ever according to Census data, coming in behind July 2008.   

 

Full article here:

If Retail Is Dying, Why Is Money Pouring Into Malls?

Wes Gray of alpha architect on Invest Like the Best podcast

Check out this excellent podcast episode of Invest Like the Best with Wes Gray of alpha architect.

alpha architect is a quant/factor investing focused asset management boutique offering ETFs, a robo advisor, and other asset management solutions.

You can find the full podcast here:

Wes Gray of alpha architect on Invest Like the Best podcast

 

 

Wes Gray's bio is fascinating:

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.