Archive for January, 2013
I have seen a lot of things in my two decades in the investment industry, but seeing a verbal cage fight between a senile 76 year-old corporate raider and a white-haired, 46 year-old Harvard grad makes for surprisingly entertaining viewing. The investment heavyweights I am referring to are the elder Carl Icahn, Chairman of Icahn Enterprises, and junior Bill Ackman, CEO of Pershing Square Capital Management. If getting a few billionaires yelling at each other on live TV is not enough to interest you, then how about adding some tongue-laced f-bombs coupled with blow-by-blow screaming from background traders?
What’s the source of the venomous, spitting hatred between these stock market tycoons? In short, it can be boiled down to a decade old lawsuit (profitable for both I might add), and a disagreement over the short position of a controversial stock, Herbalife (HLF). Regarding the legal spat, in 2003 the SEC was investigating Ackman while his Gotham Partners hedge fund was collapsing, so Ackman asked Icahn to buy shares of Hallwood Realty in hopes of salvaging his fund. Eventually, Icahn bought shares, but a difference in opinion over the transaction led to a lawsuit that Icahn lost, thereby forcing him to pay Ackman $9 million.
Icahn also had a beef with Ackman’s handling of Herbalife: Parading in front of hundreds of investors to self-indulgently create a bear raid on an unsuspecting company is poor form in Icahn’s view, and Carl wanted to make sure Ackman was aware of this investing faux pas.
Normally, investing reporting over cable television is rather mundane, unless you consider entertainers like Jim Cramer yelling “booyah” amusing (see also my article on Mr. Booyah)? On the other hand, if you enjoy billionaires embracing the spirit of the Jerry Springer Show by screaming purple-faced profanities, then you should check out the CNBC cage fight here in its entirety:
If you lack time in your busy schedule to soak in the full bloody battle, then here is a synopsis of my favorite highlights:
Icahn on Ackman the “Crybaby”: “I really sort of have had it with this guy Ackman….I get a call from this Ackman guy. I’m telling you, he’s like the crybaby in the schoolyard. I went to a tough school in Queens. They used to beat up the little Jewish boys. He was like a little Jewish boy crying that the world was taking advantage of him.”
Ackman Referring to Icahn as a “Bully” and Himself as “Roadkill on the Hedge Fund Highway”: “Why did he [Icahn] threaten to sue me? He was a bully. Okay? I was not in a good place in my business career. I was under investigation by Spitzer, winding down my fund. There was negative press about Gotham Partners. I was short MBIA (MBI). They were aggressively attacking me and Carl Icahn thought this guy [Ackman] is roadkill on the hedge fund highway… This is not an honest guy [Icahn] who keeps his word. This is a guy who takes advantage of little people.”
Agitated Icahn Tearing a New One for Scott Wapner (CNBC Commentator): “I didn’t get on to be bullied by you [Wapner]… I’m going to talk about what I want to talk about. Okay? If you want to take that position, I will never go on CNBC. You can say what the hell you want. I’m going to talk about what Ackman just said about me, not about Herbalife. I’ll talk about Herbalife when I want to, not when you ask me. I’m never going on a show with you again, that’s for damn sure. Let’s start with what I want to say. Ackman is a liar.”
Icahn on Another Ackman Rampage: “I will tell you something. As far as I’m concerned, he wanted to have dinner with me and I laughed. I couldn’t figure out if he was the most sanctimonious guy or the most arrogant… the guy takes inordinate risk…I don’t have an investment with Ackman. I wouldn’t have one if you paid me, if Ackman paid me to do it… I made a huge mistake getting involved with him…After he won [the lawsuit], he planted some article in the New York Times pounding his chest telling the world how great he was. You know, as far as I’m concerned the guy is a major loser.”
New CNBC Revenue Stream?
There hasn’t been this much fireworks since Professor Jeremy Siegel took Bill Gross to task on the Pimco Boss’s assessment that the “cult of equity is dying” last July. In retrospect, that minor tiff was child’s play relative to the Icahn vs. Ackman battle. With CNBC viewership down from pre-crisis levels, the network may strongly consider instituting a new pay-per-view revenue stream dedicated to battles between opposing investment enemies. I will even offer up my services to verbally smack down some of the enemies I’ve written about previously. If my phones don’t ring, then I can always offer up my American Investment Idol concept in which I can play Simon Cowell.
This may or may not be the last round of the Carl Icahn and Bill Ackman fight, but the ultimate bragging rights may depend on the ultimate outcome of Ackman’s Herbalife short. If Icahn makes a tender offer for Herbalife, I will anxiously wait for CNBC’s Scott Wapner to invite Carl back on the show. I can hardly wait…
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in HLF, MBI, NYT, Hallwood Realty, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Okay, you heard it here first. I’m officially anointing my first new 2013 economic term of the year: “Double-Rip!” No, the biggest risk of 2013 is not a “double-dip” (the risk of the economy falling back into recession), but instead, the larger risk is of a double-rip – a sustained expansion of GDP after multiple quarters of recovery. I know, this sounds like heresy, given we’ve had to listen to perma-bears like Nouriel Roubini, Peter Schiff, John Mauldin, Mohamed El-Erian, Bill Gross, et al shovel their consistently wrong pessimism for the last 14 quarters. However, those readers who have followed me for the last four years of this bull market know where I’ve stood relative to these unwavering doomsday-ers. Rather than endlessly rehash the erroneous gospel spewed by this cautious clan, you can decide for yourself how accurate they’ve been by reviewing the links below and named links above:
If we switch from past to present, Bill Gross has already dug himself into a deep hole just two weeks into the year by tweeting equity markets will return less than 5% in 2013. Hmmm, I wonder if he’d predict the same thing now that the market is up about +4.5% during the first 18 days of the year?
Why Double-Rip Over Double-Dip?
How can stocks rip if economic growth is so sluggish? If forced to equate our private sector to a car, opinions would vary widely. We could probably agree the U.S. economy is no Ferrari. Faster growing countries like China, which recently reported 4th quarter growth of +7.9% (up from +7.4% in 3rd quarter), have lapped us complacent, right-lane driving Americans in recent years. But speed alone should not be investors’ only key objective. If speed was the number one priority, the only places investors would be placing their money would be in countries like Rwanda, Turkmenistan, and Libya (see Business Insider article). However, freedom, rule of law, and entrepreneurial spirit are other important investment factors to be considered. The U.S. market is more like a Toyota Camry – not very flashy, but it will reliably get you from point A to point B in an efficient and safe manner.
Beyond lackluster economic growth, corporate profit growth has slowed remarkably. In fact, with about 10% of the S&P 500 index companies reporting 4th quarter earnings thus far, earnings growth is expected to rise a measly 2.5% from a year ago (from a previous estimate of 3.0% growth). With this being the case, how can stock prices go up? Shrewd investors understand the stock market is a discounting mechanism of future fundamentals, and therefore stocks will move in advance of future growth. It makes sense that before a turn in the economy, the brakes will often be activated before accelerating into another fast moving straight-away.
In addition, valuation acts like shock absorbers. With generational low interest rates and a below-average forward 12-month P/E (Price-Earnings) ratio of 13x’s, this stock market car can absorb a significant amount of fundamental challenges. The oft quoted message that “In the short run, the market is a voting machine but in the long run it is a weighing machine,” from value icon Benjamin Graham holds as true today as it did a century ago. The recent market advance may be attributed to the voters, but long-term movements are ultimately tied to the sustainable scales of sales, earnings, and cash flows.
If that’s the case, how can someone be optimistic in the face of the slowing growth challenges of this year? What 2013 will not have is the drag of election uncertainty, the fiscal cliff, Superstorm Sandy, and an end-of-the-world Mayan calendar concern. This is setting the stage for improved fundamentals as we progress deeper into the year. Certainly there will be other puts and takes, but the absence of these factors should provide some wind under the economy’s sails.
What’s more, history shows us that indeed stock prices can go up quite dramatically (more than +325% during the 1990s) when consensus earnings forecasts continually get trimmed. We have seen this same dynamic since mid-2012 – earnings forecasts have come down and stock prices have gone up. Strategist Ed Yardeni captures this point beautifully in a recent post on his Dr. Ed’s Blog (see charts below).
What Will Make Me Bearish?
Am I a perma-bull, incessantly wearing rose-colored glasses that I refuse to take off? I’ll let you come to your own conclusion. When I see a combination of the following, I will become bearish:
#1. I see the trillions of dollars parked in near-0% cash start coming outside to play.
#2. See Pimco’s Bill Gross and Mohammed El-Erian on CNBC fewer than 10 times per week.
#3. See money flow stop flooding into sub-3% bonds (Scott Grannis) and actually reverse.
#4. Observe a sustained reversal in hemorrhaging of equity investments (Scott Grannis).
#5. Yield curve flattens dramatically or inverts.
#6. Nouriel and his bear buds become bullish and call for a “triple-rip” turn in the equity markets.
#7. Smarter, more-experienced investors than I, á la Warren Buffett, become more cautious. I arrogantly believe that will occur in conjunction with some of the previously listed items.
Despite my firm beliefs, it is evident the bears won’t go down without a fight. If you are getting tired of drinking the double-dip Kool-Aid, then perhaps it’s time to expand your bullish horizons. If not, just wait 12 months after a market rally, and buy yourself a fresh copy of the Merriam-Webster dictionary. There you can locate and learn about a new definition…double-rip!
Read Also: Double-Dip Guesses are “Probably Wrong”
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in Fiat, Toyota, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
The world of financial markets is full of fence-sitters, especially in the professional realm. Why? Well, for starters, fence-sitting provides the luxury of never being wrong. If fence-squatting observers do nothing and provide no opinions, then they cannot by definition be wrong or mistaken. Why should a professional put their neck out for an economic, sector, or investment specific forecast, if there is a potential of looking stupid or losing a job?
For many, the consequences of possibly being wrong feel so horrendous that participants choose instead to sit on the non-committal fence. In most cases, the fence posts on any financial issue or investment align along the comfort of consensus thinking. Unfortunately, consensus thinking has a limited shelf life, because the views held by the majority are constantly changing. Repeatedly modifying personal opinions to match consensus views may prevent the bruising of egos, however, this naïve strategy can be destructive to long-term returns. Here are a few examples:
Consensus View: New Normal tech stocks will continue explosive growth; Consensus Outcome: Wrong; Investor Net Result: Losses and/or Lost Profits.
Consensus View: Home prices will rise forever and leverage is beautiful; Consensus Outcome: Wrong; Investor Net Result: Losses and/or Lost Profits.
Consensus View: Greece and European collapse to cause a double-dip global recession; Consensus Outcome: Wrong; Investor Net Result: Losses and/or Lost Profits.
Consensus View: U.S. credit downgrade will be bad for Treasuries and rates; Consensus Outcome: Wrong; Investor Net Result: Losses and/or Lost Profits.
Consensus View: Uncertainty surrounding election bad for equities; Consensus Outcome: Wrong; Investor Net Result: Losses and/or Lost Profits.
Consensus View: China’s slowing growth and real estate bubble expected to cause a global double-dip recession; Consensus Outcome: Wrong; Investor Net Result: Losses and/or Lost Profits.
Consensus View: Impending fiscal cliff bad for equities; Consensus Outcome: Wrong; Investor Net Result: Losses and/or Lost Profits.
Consensus View: Debt ceiling debate bad for equities; Consensus Outcome: ???; Investor Net Result: ???.
Consensus View: Looming sequestration bad for equities; Consensus Outcome: ???; Investor Net Result: ???.
In recent years the market has continued to climb a wall of worry, but will this year be different? We shall soon see.
Placing the concern du jour aside, if consensus fears coalesce around a specific upcoming event, chances are that particular issue is already factored into existing expectations and price structures. Therefore, rather than wasting personal “worry” bandwidth on those fears, investor anxiety should be dedicated to less prevalent but potentially more impactful unknown concerns. Or if you need clarification about the unknowns to worry about, perhaps Donald Rumsfeld can clarify the situation by highlighting the risk of “unknown unknowns”:
I Love Data and Pullbacks!
When faced with apprehension or uncertainty, many fence-sitting investors revert to wanting more data or waiting for a better price. For example, I often hear, “I love stock XYZ, but I want to wait for the earnings to come out,” or analyst day, or share buyback announcement, or merger closing, or restructuring, etc., etc., etc. For strategists and economists, they are famished for the next critically irrelevant weekly jobless claims number, Federal Reserve policy minutes, ISM monthly manufacturing data, or latest consumer confidence figure.
More data for fence sitters is not sufficient. I often listen to stock-pickers say, “I love XYZ stock, but not at the current $52.50 price, but I’ll back up the truck at $51.50!” Okay, so you’re telling me that you think the stock is worth +40% more, but you want to litigate the purchase price over $1?!
Sadly, there is a cost for all this fence-sitting: a) if good news comes out, investment prices catapult higher and the investor is stuck with a pricier investment; b) if bad news comes out, that long-awaited price pullback is usually not acted upon because fundamentals have now deteriorated; or c) in many cases the price grinds higher before the long-awaited jewel of information is disseminated. The net result is further fence-sitting paralysis, which paradoxically is not helped by more information or a price pullback.
The other reason fence-sitters say or do nothing is because articulating a gloomy thesis simply sounds smarter. For instance, saying “The reason I’m on the sidelines is because we are in a secular bear market due to the debasement of our currency as a result of inflationary Fed monetary policies,” sounds smarter and more compelling than “Stocks are cheap and are already factoring in a lot of negativity.”
Investing is an unbelievably challenging endeavor, but for those fence-sitters with an insatiable appetite for more data and elusive pullbacks, I humbly point out, there is an infinite amount of information that regenerates itself daily. In addition, there is nothing wrong with having a disciplined valuation process in place, but if your best investment ideas are predicated on a minor pullback, then enjoy watching your returns wither away…as you sit on your cozy fence.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing SCM had no direct position in any security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Article is an excerpt from previously released Sidoxia Capital Management’s complementary January 2, 2013 newsletter. Subscribe on right side of page.
There was plenty of fear, uncertainty, and doubt (F.U.D.) in 2012, and the gridlock in Washington has been a contributing factor to investors’ angst. As the saying goes, the stock market climbs a “wall of worry” and that was certainly the case this year with the S&P 500 index rising +13.4% (over +15% including dividends), and the Nasdaq index soaring +15.9% before dividends. Short-term investors had ample worries to fret about throughout the year, including a European financial collapse, the presidential elections, fiscal cliff negotiations, and a Mayan doomsday (see this hilarious clip). Despite these fears dominating the daily airwaves and newspaper headlines, long-term investors holding an adequate equity asset allocation jumped on the non-stop 2012 party train.
While Americans were served a full plate of concerns this year, global investors benefited from European Central Bank intervention by Mario Draghi who promised to do “whatever it takes” to save the euro currency (the European dominated EAFE index rose +13.6% in 2012). Growth here in the U.S. slowed as cautious consumers and businesses horded cash, but a rebound in the domestic housing market provided support to the sluggish economic expansion (3rd quarter GDP growth was revised higher to +3.1% vs. 2011).
Now that the presidential elections are over and we achieved a partial fiscal cliff deal, the amount of F.U.D. going into 2013 will diminish, which should provide a tailwind to economic growth and the financial markets. The impending debt ceiling and deficit reduction talks may slow the train down, but if a sufficient resolution can be accomplished, the economic party train can continue chugging along.
Attention: Grab Your Ear Muffs
Economists and strategists will continue to sound smart and be completely wrong about their 2013 predictions (see Strategist Predictions & MacGyver), but that won’t stop average investors from neglecting their long-term investment plans. Investors have commonly overindulged in certain narrow asset classes like overpriced bonds and gold, which both underperformed equities in 2012. Diversification may sound like an overused finance cliché, but the principle is paramount if you are serious about reducing risk, beating inflation, and smoothing out incessant volatility.
2013 New Year’s Resolution: Avoid Personal Fiscal Cliff
With the New Year upon us, just because politicians have financial problems, it doesn’t mean you have to be fiscally irresponsible too. There is no better time than now to make a financial New Year’s resolution to avoid your own personal fiscal cliff. If you are too heavily parked in cash or over-exposed to low-yielding bonds subject to significant interest rate risk, then now is the time to re-evaluate your investment plan.
There is always something to worry about (see also Uncertainty: Love It?), but in order to prevent working into your 80s, a long-term investment plan needs to be implemented, regardless of economic headlines or market volatility. In other words, investors need to replace their short-term microscope for their long-term telescope. By committing to a disciplined fiscal New Year’s resolution, you can earn a ticket on the 2013 party train!
Monthly News Tidbits
The presidential elections dominated the news cycle in November, but there were a whole host of other tidbits occurring over the last thirty-one days. Here are some of the main storylines:
Congress Approves Mini Fiscal Cliff Deal: After months of debate, Congress painfully and reluctantly agreed upon an estimated $600 billion mini fiscal cliff deal that represents the largest tax increase in two decades. Contrary to a $4 trillion “Grand Bargain” deal, this bill amounts to a more modest reduction in the deficit over 10 years. The Senate passed the bill by a margin of 89-8 and the House of Representatives by a spread of 257-167. The fact that any deal got done is somewhat surprising since the gridlock has been especially rampant in the House. As proof of this assertion, one need only point to the chamber’s meager voting activity record – the House has passed the fewest bills in 60 years during its recent term.
Fiscal Cliff Bill Details: Despite the Senate’s convincing voting margin, large numbers of Congressional Democrats and Republicans were unhappy with the bill’s details. The President made good on his campaign promises by securing revenue-raising taxes from wealthy Americans. More specifically, the law contains provisions including a 39.6% rate on earners above $400,000; a 20% capital gains rate increase from 15%; new exemption/deduction limits; an estate tax increase to 40% from 35%; and a measure to help prevent near-term milk price spikes. There are plenty more details, but I will spare your eyeballs and brain from the painful minutiae. If you haven’t had enough partisan politics, no need to worry, you have the debt ceiling debate to look forward to in a few months.
Quantitative Easing Redux (QE4): Federal Reserve Chairman Ben Bernanke helped orchestrate additional monetary policy stimulus via a fourth round of quantitative easing (a.k.a., QE4). As part of this plan, the Fed will vastly expand its $2.8 trillion balance sheet in 2013 with additional monthly purchases of $45 billion of long-term Treasuries. By executing this invigorating QE4 bond buying program, the Fed pledges to keep interest rates in the cellar until the unemployment rate falls below 6.5% or inflation rises above 2.5%.
Same-Sex Marriage: The Supreme Court tackled a long-debated social issue and declared it would rule on the legality of a law denying benefits to same-sex couples in 2013.
New Female President: Additional hormones were added to the gender-skewed global pool of testosterone-filled leaders as South Korea elected its first female president, Park Geun-hye.
Global Bank Fined: Another greedy financial institution got caught with its hand in the cookie jar. UBS agreed to cough up a $1.5 billion penalty to the U.S., U.K., and Swiss authorities as part of an agreement to resolve its involvement in the manipulation of the London Interbank Offered Rate (LIBOR) – see also Wall Street Meets Greed Street.
Sandy Hook Distressing Disaster: The gun control debate was reignited when 20-year-old Adam Lanza gunned down 20 children and 7 adults (including his mother) at a Connecticut elementary school – Sandy Hook Elementary. Besides the examination of an assault weapons ban, the government needs to revisit the inadequate awareness and resources devoted to the serious issue of mental illness.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs) including fixed income ETFs, but at the time of publishing SCM had no direct position in EFA, UBS, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.