While the fountains erupted on schedule outside the Bellagio Hotel in Las Vegas, verbal explosions jolted the nearly 2,000 attendees at the 7th annual SALT Conference hosted by Anthony Scaramucci’s SkyBridge Capital. The most intriguing exchange took place in the afternoon when Scaramucci did a one-on-one interview with Daniel Loeb of New York-based Third Point. Scaramucci asked the sometimes activist about criticisms of hedge funds made recently by Warren Buffett. Loeb was far from deferential. “I love reading Warren Buffett’s letters and comparing his words with his actions,” he said. “He criticizes activists; he was the first activist. He criticizes financial services companies, yet he invests in them. He thinks that we should all pay taxes, yet he avoids them himself.” Wow!
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On investing, Loeb still seems bullish. He said he has learned two things — don’t fight the Federal Reserve and don’t fight “the godfather,” meaning Appaloosa Management’s David Tepper. Earlier this week, Tepper told the Sohn Investment Conference he was still bullish as long as a number of central banks continue to be engaged in their own version of quantitative easing. “The market is more likely to be higher than not over the next two to three years,” Loeb said. He is especially bullish on Japan, which is going through not only monetary and fiscal reforms, but structural changes as well. He noted the move in the yen from 70 to 120 to the dollar, lower corporate tax rates and the entrance of women into the workforce. Loeb also pointed out the huge change in Japan’s attitude toward corporate governance. Companies are now receptive to transformations, pressed by prime minister Shinzo Abe. Since Abe took control over two years ago, Japanese stocks have gone up about 150 percent.
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Will years of zero interest rates, quantitative easing and a seven-year stock market trigger rip-roaring inflation and burst a bond-market bubble? This was the focus of discussion among speakers on several panels. Some hedge fund managers expressed concern about what will happen once the Fed begins to raise interest rates. After all, the central bank will have to tighten eventually, right? Panelists raised concerns over the effects of Fed tightening while suggesting that the economic recovery was not as strong as it appears and pointing out metrics like the low employment-participation rate and an anemic housing recovery. Gene Sperling, the economist who worked in both the Clinton and Obama administrations, conceded that this has not been your typical V-shaped recovery. Still, he pointed out positives: unemployment is down to 5.5 percent, the government made money on TARP and the economy has been growing. “We needed it [quantitative easing] but over-relied on it,” noted Mohammed El-Erian, chairman of President Obama’s Global Development Council and chief economic advisor at Allianz. He added that when central banks around the globe stop their easing programs, there could be problems.
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Peter Schiff, CEO and chief global strategist for Euro Pacific Capital, was a lot more negative. “The U.S. has more in common with Greece,” he asserted, alluding to fellow panelist, George Papandreou, the former Greek prime minister. “The problems were caused by the Fed. They kept rates too low.” As a result, he thought the Fed would soon touch off a huge inflation episode. “They kept rates low for six years and now imbalances are larger than ever. This will be the biggest bubble the Fed has ever blown. They won’t raise rates but we will have the worst financial crisis since 2008. They will then be looking for an excuse for QE4.” He added that being long the dollar is like being long subprime mortgages in 2006. At that point, the hyperbole really began to fly. He talked about how you need a college degree to get a job in McDonald’s but saved the best for a small press gathering afterward. There he suggested the Fed may actually have to take a loss on Treasury paper and may even have to resort to not paying off Federal Deposit Insurance Corp. obligations. When pressed, he says, “They let inflation get out of control.” Forget about the fact that if the FDIC ever stopped honoring deposit insurance, there would be riots in the streets, not to say massive bank runs. Schiff may get a pass because he predicted the 2008 financial crisis. But he may also be peddling his 2012 book, “The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country.”
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One voice of reason came from Don Brownstein, founder and CEO of Stamford, Connecticut-based Structured Portfolio Management. On a panel addressing volatility and risk, he said that investors tended to focus on and overemphasize subjects we constantly hear about, positive or negative. “How many times in 1½ years have we heard about things like the Fed, Greece, Putin, liquidity in the Treasury market?” he asked. “Will Janet Yellen change her mind? Will inflation perk up? Those are things we are able to contemplate and pay attention to, but usually are irrelevant to return outcomes.” Besides, if everyone is talking about those possibilities, he said, they are “more or less priced in.” He said investors are better off paying attention to longer-term issues.
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Of course, hedge funds have lagged the overall markets for the past six years amid rising criticism over fees. To that point, Wall Street Journal hedge fund reporter Gregory Zuckerman suggested that his portfolio of 60 percent stocks and 40 percent bonds outperformed hedge funds for the past 10 years. Sarah Keohane Williamson, a partner and director of alternative investments of Wellington Management, responded that people invest in alternatives for five reasons, including to diversify, to add value in a separate bucket and to limit volatility. Roxanne Martino, the CEO and partner at Aurora Investment Management, said that if you go back further, the five-year rolling return of hedge funds beat his bogey for over 11 years. “If ever there is a time to invest in hedge funds, now is the time to ramp up,” she said. She recommended event-driven fund, long-short specialists in areas like health care and energy and smaller managers. “We’re finding real opportunity in start-up managers.”
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The panel also discussed fees and whether to negotiate them. Williamson stressed that the net-return crowd just cares about what they keep. However, she did say that many large investors are fee sensitive these days. “It is bifurcated,” she added. In fact, Martino told the audience that fees “are almost completely negotiable.” Colbert Narcisse, managing director and head of global alternative investments at Morgan Stanley, coolly told the audience: “We focus on manager selection. There is too much focus on fees.”
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Macro maven Michael Novogratz, president of Fortress Investment Group, discussed the reasons for and against worrying about impending Fed tightening. He noted that we are at a 300-year low in interest rates and at an all-time high for monetary stimulus, asset prices and debt-to-GDP. Yet, “When you look at equity prices, stocks don’t look that expensive,” especially compared to credit or interest rates, he said. He did add that one factor could kill the party—inflation. Is Novogratz another Peter Schiff? No. He noted that a surge in average hourly wages had not materialized. If it does, that would worry him. “Can it be different? There is a pretty compelling argument that it will be different,” he added. As for where he is investing, Novogratz said the most interesting market has been China, since it underwent its own quantitative easing. For years people worried about huge excess capacity and a real estate and industrial bubble. “Until now they had fingers in the dike,” he said. However, all the monetary and fiscal easing is stabilizing the economy. “I think it will succeed and take tail-risk of disaster away,” he said. He also pointed out that the Chinese government is trying hard to drive wealth to the consumer. He said Chinese people love to gamble and the government is encouraging them to buy stocks. “China will enter one of the great bull markets we will ever see,” Novogratz said. He also finds Japan fascinating. However, he does not see the weakening yen being a big play for now, as it has been for the past two years. Novogratz is also looking at Brazil, “everyone’s market to hate.”
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Marathon Asset Management co-founder Bruce Richards is bullish on a number of non-equity markets. The New York credit and debt specialist is loading up on nonperforming loans from European banks secured by hard assets. He says many of them are selling for 40 cents to 60 cents on the dollar. He has raised funds for this investment and is prepared to plunk down billions of dollars. He is currently working with seven banks in Europe to source the loans. Richards is also buying the paper of beaten-down energy companies. He has taken this exposure from zero to 10 percent in long positions in energy exploration and production companies and service companies. Richards told a small gathering of media that he is looking at industrial commodities companies, for example those mining iron ore or coal. “The whole sector is becoming very attractive,” he said. He singled out as a big favorite the debt of Puerto Rico’s public power utility.
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Of course, you can’t have a hedge fund conference these days without a panel on activists. And SALT had a quartet of luminaries on its panel. One of the more surprising tidbits came from Jeffrey Smith: His New York-based Starboard Value now manages $4 billion and is still accepting money. This is roughly double what he managed a year ago. Smith told the audience he thinks Yahoo’s stock is very cheap and that the value of its cash and stake in Alibaba is worth more than the stock price. “Over the next six to 12 months it will have negative core value,” Smith said.
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Cliff Robbins of Blue Harbour Group, who fashions himself a “friendly activist,” conceded he does not launch proxy fights. Rather, if a company shows disinterest in implementing his suggestions, he will simply sell the stock and move on. In an interview afterwards, Robbins, who now runs $3.8 billion, admitted that this policy may have emboldened several targets to blow him off and wait for him to leave. “I probably missed some opportunities,” he said. But, he doesn’t sweat over it. He said the public is unaware of most of his successful targets since he worked quietly behind the scenes with management. These days he noted that the best risk-reward situation is regional bank Investors Bancorp. The company, which has branches in New York, New Jersey and Philadelphia, has a $4 billion market capitalization and $2 billion in cash. It is trading at 115 percent of book value while the competition is closer to 150 percent to 180 percent of book. “It is overcapitalized,” Robbins said at the conference. “We will return that capital.”
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