Last month we looked at 13F filings. These are the quarterly portfolio disclosures, required by the SEC, of large investors – those managing $100 million or more.
And we discussed 13D filings. These are required when a big investor takes a controlling stake in a company (ownership of 5% or more of the outstanding stock), he/she is required to disclose it to the SEC, through a public filing within ten days over crossing the 5% threshold. If it’s a passive investment, they file a form 13G. If they intend to engage management (i.e. wield influence) they file a 13D.
Bill Ackman, the well known billionaire activist investor, filed a 13D on Chipotle (CMG) yesterday. Today, we’ll take a look at this move.
In this filing, his fund, Pershing Square, disclosed a 9.9% stake in the company. Ackman thinks the stock is “undervalued” and “an attractive investment.”
Chipotle, at its peak valuation last year, was valued more like a high flying tech company. Yet this was a restaurant, albeit an innovator in the fast food business – in fact, they created a new segment in the food business, “fast casual.”
Then came the food crisis- an outbreak of e-coli cases. And the stock has been crushed – cut in half over the past year. Customers have been walking from Chipotle and into the many fast casual alternatives (competition spawned from Chipotle’s innovation).
Who tends to buy the bottom in these situations? Activists.
What’s a quick and easy fix in a sentiment crisis? Change.
To be sure, Chipotle has been drowning in a sentiment crisis. And even though Ackman thinks the company has “visionary leadership” we’ll see if he makes someone in current leadership a sacrificial lamb, in order to repair sentiment in the stock. This power to influence change is one of the few remaining edges in public stock market investing.
Ackman has said in a past letter to investors, “minority stakes in high quality businesses can be purchased in the public markets at a discount,” arising from two factors: “shareholder disaffection with management, and the short term nature of large amounts of retails and institutional investor capital which can overreact to negative short-term corporate or macro factors.” That’s how you identify value. But how do you close the value gap?
Shareholder disaffection with management is a typical qualifier to make it onto the radar screens of activist investors. There’s an opportunity to shake up management, change sentiment, and unlock value.
Last month, we talked about Mick McGuire, a protégé of Bill Ackman. He filed a 13D on Buffalo Wild Wings (BWLD), and announced a plan for change, and publicly said the stock could double on his game plan — it put a bottom in the stock.
Chipotle is up 5% on the news of Ackman’s involvement. At 42% off of highs, it’s a low risk/ high reward bet to follow Ackman.
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
As we headed into the holiday weekend, stocks were sitting near record highs, yields were hanging around near record lows, and oil had been sinking back toward the danger zone (which is sub $40).
In examining the relationship of those three markets, each has a way of influencing the outcome and direction of the others.
First, the negative scenarios: A continued slide in oil would soon sink stocks again, and send yields (the interest rate outlook) falling farther. Cheap oil, in this environment, has dire implications for the energy business, which has a cascading effect, starting with banks, which effects credit and the dominos fall from there.
What about stocks? When stocks are falling, in this environment, it’s self-reinforcing. Lower stocks, equals souring sentiment, equals lower stocks.
What about yields? As we’ve seen, lower yields are supposed to promote spending and borrowing. But, in this environment, it comes with trepidation. Lower yields, especially when much of the world’s government bond markets are in negative yield territory, is having a stifling effect on economic activity, as many see it as a signal of another recession coming, or worse.
Now, for the positive scenarios. Most likely, they all come with intervention. That shouldn’t be surprising.
We’ve already seen the kitchen sink thrown at the stock market. From a monetary policy standpoint, the persistent Fed jockeying through much of the past seven years has now been handed over to Japan and Europe. QE in Europe and Japan continues to promote stability, which incentivizes the flow of capital into stocks (the only liquid alternative for return in a zero and negative interest rate world).
And we’ve seen them influence oil prices as well, through easing, currency market intervention, and likely the covert buying of oil back in February/March of this year (through China, ETFs via the BOJ or an intermediary Japanese bank). Still, OPEC still swings the big ax in the oil market, and it’s been OPEC intervention that has rigged oil prices to cheap levels, and it looks increasingly likely that they will send oil prices higher through a policy move. The news that Russian and Saudi Arabian might coordinate to promote higher oil prices, sent crude 5% higher on Monday.
As for yields, this is where the Fed is having a tough time. They want yields to slowly climb, to slowly follow their policy guidance. But the world hasn’t been buying it. When they hiked for the first time in December, the U.S. 10 year yield went from 2.25%, to 2.30% (for a cup of coffee) and has since printed new record lows and continues to hang closer to those levels than not (at 1.53% today). Lower yields makes it even harder for them to hike because it’s in the face of weaker sentiment.
Last week, we looked at the U.S. 10 year yield. It was trading in this ever narrowing wedge, looking like a big break was coming, one way or the other, following the jobs report on Friday. It looks like we may have seen the break today (lower), following the week ISM data this morning.
What could swing it all in the positive direction? Fiscal intervention.
As we discussed on Friday, the G20 met over the weekend. With world government leaders all in the same room, we know the geopolitical tensions have been rising, relationships have been dividing, but first and foremost priority for everyone at the table, is the economy.
Even those opportunistically posturing for influence and power (i.e. Russia, China), without a stable and recovery global economy, the political and domestic economic outlook is bleak. So we thought heading into the G20 that we could get some broader calls for government spending stimulus was in order.
The G20 statement did indeed focus heavily on the economy. They said, “Our growth must be shored up by well-designed and coordinated policies. We are determined to use all policy tools – monetary, fiscal and structural – individually and collectively to achieve our goal of strong, sustainable, balanced and inclusive growth. Monetary policy will continue to support economic activity and ensure price stability, consistent with central banks’ mandates, but monetary policy alone cannot lead to balanced growth. Underscoring the essential role of structural reforms, we emphasize that our fiscal strategies are equally important to supporting our common growth objectives.”
Keep an ear open for some foreshadowing out of Europe to promote fiscal stimulus – the spot it’s most needed. That would be a huge catalyst for “risk assets” (i.e. commodities, stocks, foreign currencies) and would probably finally signal the top in the bond market.
After a fairly quiet August, we have a full docket of central meetings in the weeks ahead, starting this week. The European Central Bank meets on Thursday.
Join us here to get all of our in-depth analysis on the bigger picture, and our carefully curated stock portfolio of the best stocks that are owned and influenced by the world’s best investors.
This time last month, the famed oil trader—and oil bull—Andy Hall was dealing with a sub-$40 oil market again. And he was again explaining losses to investors in his multi-billion dollar hedge fund.
A guy that has made a career, and hundreds of millions of dollar in personal wealth, picking tops and bottoms in oil, had entered 2016 coming off his worst year ever. And 2016 started even worse.
I’ve talked about the oil price bust extensively, at the depths of the decline in January and February. While most were glorifying the benefits of a few extra bucks in the pockets of consumers from low gas prices, we walked through the ugly outcome of persistently low oil prices. It would be another global financial crisis, as failing energy companies and defaulting oil producing countries would crush banks, and the dominos would fall from there. Unfortunately, the central banks don’t have the ammunition to pull the world back from the edge of disaster for a second time.
With that, central banks stepped in with more easing in the face of the oil price threat, and oil bounced sharply.
Hall’s fund bounced sharply too, running up nearly 25% for the year, by the end of June. But he gave a lot of it back by the time July ended. And now, again, oil is closer to $40 than $50. Thanks to a report yesterday, that oil supplies were bigger than expected, the price of crude has fallen 10% since Friday of last week.
Hall was the CitigroupC +0.13% oil trader who made billions of dollars for the bank energy trading arm, Phibro, in the early-to mid-2000s. He was one of the first to load up on oil futures in 2002, when oil was sub-$30, on the thesis that a boom in demand was coming from China.
He reportedly made $800 million in profits for Citi in 2005 from his original bullish bet. He then made more than $1 billion in 2008 for the bank, as oil prices soared to $147 a barrel and then abruptly crashed. He profited handsomely from both sides, earning a payout from Citi of more than $100 million.
So he’s a guy that has been very right about turning points, and big trends. And he’s been pounding the table for much higher oil prices. He thinks oil prices are in for a “violent reversal” (higher). With an important OPEC meeting scheduled for later this month, Hall, in a past investor letter, reminded people how powerful an OPEC policy shift can be. In 1986, the mere hint of an OPEC policy move sent oil up 50% in just 24 hours.
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
We watched oil closely earlier this year. The oil price bust ultimately pulled down stocks. And when oil aggressively bounced off of the bottom, stocks recovered alongside, returning to new record highs.
Today it was oil again.
Stocks oscillated near record highs and following an anticipated Fed event last week had continued to tread water. That gives the bears a low risk trade to sell the S&P 500 against the top (as a take profit, hedge or just a trade), holding out hope that gravity would take hold.
It hasn’t happened. But we did get a catalyst to get it moving lower today, with a bigger than expected oil inventory build. That sent oil down nearly 4% on the day.
Oil stocks took a hit. But the broader stock market held up well, losing just 1/2 percent and recovering most of it by the day’s end.
The market still sits at critical levels going into the jobs number on Friday. Yields continue to chop in this ever tightening wedge (below) — a break looks certain on the jobs number. This is a very important chart.
And stocks are positioned close enough to the highs to encourage some profit taking (if the highs get taken out, you put the position back on … if the highs hold, you may have an opportunity to buy it back cheaper).
It remains a macro story – a central bank story. And that’s the mindset of the market as we head into the end of what has been a rather sleepy August.
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
Last Thursday, everyone was awaiting the Friday Jackson Hole speech from Yellen. I suggested that, while all eyes were on Yellen, maybe Kuroda (the head of the BOJ) would steal the show: “he could conjure up some Bernanke style QE3. Not a bad bet to be long USD/JPY and dollar-denominated Nikkei through the weekend (ETF, DBJP or DXJ).”
Indeed, Yellen was short on clarity as we’ve discussed in recent days. As of this afternoon, stocks are now unchanged from Thursday afternoon (just prior to her speech). And the 10-year yield is right where it was before she spoke — and looking like a coin flip on which direction it may break. The pain is lower, so it will probably go lower.
As for Kuroda, he did indeed steal the show, at least in terms of market impact. On Saturday, Kuroda hit the wires saying its negative rate policy was far from reaching the limit and said they would act with more QE or deeper negative rates “without hesitation.” That’s a greenlight for buying Japanese stocks and selling the yen (buying USD/JPY).
The Nikkei is up 1.5% from Friday’s close, and USD/JPY is up 2.7% (yen down).
Was Kuroda telegraphing another big round of fresh QE (as Bernanke did in 2012)? Maybe. He said inflation remains vulnerable in Japan and is responding “differently” (i.e. worse) to shocks like falling oil prices.
Inflation in Japan, even after rounds of unprecedented QE, is back in negative territory and has been for five consecutive months of year-over-year deflation. The U.S. economy looks like its running hot compared to Japan. It’s not a bad bet to expect Japan to act first, with more QE, to pump asset prices, and then the Fed would have a little more breathing room to make another hike (either December) or early next year.
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
The Fed’s Janet Yellen was the focal point for markets for the week. She had a scheduled speech at the annual Fed conference at Jackson Hole.
When her speech was finally made public Friday morning, the response in markets was uncertainty (the most used word for the past nine years).
Stocks went up, then down. Yields went down, then up.
So what do we make of it? Let’s start with the headlines that hit the wire Friday morning.
The world was wondering if Yellen would support the messaging from some of her fellow Fed members–that a September rate hike is on the table. Or would she continue the backstepping (dovish speak) the Fed has done for the past five months. The answer was ‘yes.’ She did both.
Yellen said the case for rate hikes has strengthened (yellow marker) because the data is nearing their goals (employment and inflation–the white marker). Ah, rate hike. But then she said the Fed expects inflation to hit the target 2% in the next few years (circled)! And then talked about the strategy for more QE. Huh? And then to top it off, she said they might move the goalposts. They might move the inflation target higher, and start targeting GDP. That means they would be happy to leave conditions ultra accommodative until those higher targets are met. Clearly dovish.
As I said Thursday, they want to raise rates to get the financial system closer to proper functioning, but they don’t want to cause a recession. The Fed wants to raise short-term rates, but promote a flatter yield curve (i.e. promote expectations that the economy will continue to be soft) to keep the market interest rates low, which keeps the housing market on the rails and the economic activity on the rails.
Remember, we talked about the piece Bernanke wrote a couple of weeks ago, where he suggested exactly this type of perception manipulation from the Fed, to balance the need to raise rates, without killing the economy.
That looks like the game plan.
Have a great weekend!
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
Tomorrow is the big annual Fed conference in Wyoming. It typically draws the world’s most powerful central bankers. This is where, in 2012, Bernanke telegraphed a round three of its quantitative easing program.
The economy was still shaky following the escalating sovereign debt crisis in Europe, which had taken Spain and Italy to the brink of default. Draghi and the ECB stepped in first, in late July and made the big “whatever it takes” promise. This is where he threatened to crush the bond market speculators that had run yields up in the government bond markets of Spain and Italy to economic failure levels. He threatened to take the other side of that trade, to whatever extent necessary, in effort to save the future of the euro. It worked. He didn’t have to buy a single bond. The bond vigilantes fled. Yields ultimately fell sharply.
But just a month after Draghi’s threat, it was uncertain at best, that it would work. With that, and given the economies globally were still flailing, Bernanke hinted that more QE was coming at the August Jackson Hole conference.
The combination of those to intervention events ignited global stocks, led by U.S. stocks. The S&P 500 is up 55% from the date of Bernanke’s speech and the climb has been a 45 degree angle.
This time, this Jackson Hole, things are a bit more confusing, if that’s possible. The BOJ, ECB and BOE are QE’ing. The Fed has been going the other way. But in the past six months, they’ve backstepped big time.
The hawk talk went quite for a while earlier this year. Even Bernanke has written that the Fed has shot itself in the foot by publishing an optimistic trajectory and timeline for normalizing rate. It has resulted in an effect that has felt like a rate tightening, without them having to act. That’s the exact opposite of they want. They want to hike to restore some more traditional functioning of the financial system, but they don’t want to slow down economic activity. It doesn’t normally work that way, and it hasn’t worked that way.
So now we have Yellen speaking tomorrow, and people are looking for answers. We have some Fed members now wanting to dial back on public projections, as to not continue to negatively influence economic activity (Bernanke’s advice) and others getting in front of camera’s and telling us that a September hike might be in the cards.
But while everyone is looking to Yellen for clarity (don’t expect it), the show might be stolen by another central banker. Haruhiko Kuroda, head of the Bank of Japan, will be in Jackson Hole too. The agenda is not yet out so we don’t know if he’s speaking. But he could conjure up some Bernanke style QE3. Not a bad bet to be long USD/JPY and dollar-denominated Nikkei through the weekend (ETFs, DBJP or DXJ). Full disclosure: We’re long DBJP in our Billionaire’s Portfolio.
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
As we head into the end of August, people continue to parse every word and move the Fed makes. Yellen gives a speech later this week at Jackson Hole (at an economic conference hosted by the Kansas City Fed), where her predecessor Bernanke once lit a fire under asset prices by telegraphing another round of QE.
Still, a quarter point hike (or not) from a level that remains near zero, shouldn’t be top on everyone’s mind. Keep in mind a huge chunk of the developed world’s sovereign bond market is in negative yield territory. And just two weeks ago Bernanke himself, intimated, not only should the Fed not raise rates soon, but could do everyone a favor — including the economy — by dialing down market expectations of such.
But the point we’ve been focused on is U.S. market and economic performance. Is the landscape favorable or unfavorable?
The narrative in the media (and for much of Wall Street) would have you think unfavorable. And given that largely pessimistic view of what lies ahead, expectations are low. When expectations are low (or skewed either direction) you get the opportunity to surprise. And positive surprises, with respect to the economy, can be a self-reinforcing events.
The reality is, we have a fundamental backdrop that provides fertile ground for good economic activity.
For perspective, let’s take a look at a few charts.
We have unemployment under 5%. Relative to history, it’s clearly in territory to fuel solid growth, but still far from a tight labor market.
What about the “real” unemployment rate all of the bears often refer to. When you add in “marginally attached” or discouraged job seekers and those working part-time for economic reasons (working part time but would like full time jobs) the rate is higher. But as you can see in the chart below that rate (the blue line) is returning to pre-crisis levels.
In the next chart, as we know, mortgage rates are at record lows – a 30 year fixed mortgage for about 3.5%.
Car loans are near record lows. This Fed chart shows near record lows. Take a look at your local credit union or car dealer and you’ll find used car loans going for 2%-3% and new car loans going for 0%-1%.
What about gas? In the chart below, you can see that gas is cheap relative to the past fifteen years, and after adjusted for inflation it’s near the cheapest levels ever.
Add to that, household balance sheets are in the best shape in a very long time. This chart goes back more than three decades and shows household debt service payments as a percent of disposable personal income.
As we’ve discussed before, the central banks have have pinned down interest rates that have warded off a deflationary spiral — and they’ve created the framework of incentives to hire, spend and invest. You can see a lot of that work reflected in the charts above.
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
We’ve talked about the recent public portfolio disclosures that have made in recent days by the world’s biggest investors.
And as we’ve discussed, the 13F filings only offer value to the extent that there is some skilled analysis applied. Loads of managers file 13Fs every quarter. And the difference in manager talent, strategies, portfolio sizes … run the gamut.
Through our research of over 15 years, among the most predictive factors in these filings is the presence of high conviction positions. To put it simply, the bigger the position relative to the size of their portfolio, the better. Concentrated positions show conviction. Conviction tends to result in a higher probability of success, especially when the investor has a controlling stake and is influencing (or seeking to influence) management. At that stage, these positions will show up first, before the quarterly 13F filing, in more timely filings called a 13D (or 13G) filings.
Here’s a look at a specific case that fits that profile, with some detail on why it matters.
If we look across high conviction positions among the recent 13F filings, among the highest, we find Carmike Cinemas (symbol CKEC). Mittleman Brothers, a $410 million hedge fund and value investment advisor, runs a concentrated portfolio, and owns 9.6% of the CKEC.
The stake represents (as of the most recent 13F filing) more than 31% of its long U.S. equity portfolio (more than 18% of its overall portfolio). That’s a huge stake.
After fees the Mittleman Brothers have returned 17% annualized since inception (2003). So we have a manager that has doubled the S&P 500 over the 14 years, runs a concentrated portfolio, and has an ultra-high conviction stock in CKEC. And in this particular case, they have the ability to influence the outcome in CKEC.
The fund filed a 13D on Carmike back in March, which means they intended to influence management. Mittleman has since been trying to block a sale of Carmike to AMC Entertainment Holdings for a value they deem “unacceptably low.”
At the time of the first takeover offer, the stock traded at just around $25 (so a $30 takeout would be a 20% premium). The stock now trades at $31. But based on industry multiples, Mittleman argues the company should be sold for no less than $40, and as much as $47. The bid has since been raised, but remains at levels Mittleman has deemed unacceptable.
The moral of the story: As we know, management’s mandate in public companies is to maximize shareholder value, but unfortunately it doesn’t always happen (most of the time, only after their interests are maximized). That’s why siding with influential shareholders that are fighting to maximize your return on investment is critical. In the case of Carmike, you have management that is willing to give away the company for as little as 70 cents on the dollar (according to view of one of its biggest shareholders).
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
Yesterday was the deadline for all big investors to submit, to the SEC, a public snapshot of their portfolios for the quarter ended June 30th.
On that note, as we’ve discussed, this information is covered hot and heavy by the media. You often see headlines like these (these are actual headlines from yesterday): “Activist hedge fund ValueAct takes about 2 percent stake in Morgan Stanley” or “George Soros sells off Apple stake during the second quarter.”
On the above stories, if you own Morgan Stanley should you feel good about it? Conversely, if you own Apple, should you be worried? The heavy coverage of the topic both online and on television implies “yes” to both, which likely gets the average investor stirring. But there’s never context given as to whether or not the information is meaningful, and there’s never evidence given as to what the results tend to be for those that follow. The reason is, it requires a lot of hard work, experience, ingenuity and proprietary research to draw any conclusions from the information.
Still, it’s safe to assume the UK event had considerable influence on the holdings of the world’s biggest investors. Global markets swung violently on the news back in June. Remember, between June 23rd and June 27th, the S&P 500 fell as much as 5.7%. It made it all back the subsequent four days.
So given the timing of the portfolio snapshot with the Brexit fears, let’s talk about Apple, the most widely held stock in the world and the largest constituent in the market cap weighted S&P 500. The headlines were scrolling fast and furious on Apple yesterday, following the filings from billionaire investors David Einhorn, George Soros and Chase Coleman – all of which sold Apple shares in the quarter. Now, it’s important to understand that these funds can trade Apple with virtual anonymity between quarters. The stock is too large for anyone one investor to take a 5% “activist” stake, which would trigger the requirement of a 13D filing with the SEC, which would require updated filings (or amendments) within 10 days of any change in the position size (sell one share, you have to report it).
On that note, let’s start some perspective on Einhorn’s Apple stake: Going into the second quarter Einhorn’s biggest position, by far, was Apple. He had 15% of his fund in the stock (a huge position). It would only make since that he would trim the position and neutralize some risk into an uncertain macro event. In fact, in his second quarter letter, Einhorn brags that they have done a good job of “trading” Apple (i.e. managing the downside). Still, as of the end of Q2, Apple was a very large position, at 12% of his fund.
What about the tech investing genius billionaire Chase Coleman? Coleman had 9% of his $7 billion fund (long public equities) in Apple going into the second quarter. By the end, he had cut it by 75%. Again, playing defense into Brexit. Apple stock is 16% higher than it traded on June 30. Coleman may very well have put the full position back on since the June 30 snapshot (likely).
George Soros? First, we should note that Soros is the world’s best global macro investor. He’s an agile investor that will load up on a theme and just as quickly reverse course and position for another probable outcome. For a career, Soros’ bread has been buttered betting on the unexpected outcome. That’s where the big wins come. Brexit was unexpected, thus his trimming of Apple, the stock with the biggest contribution to his view on a slide in the S&P 500.
And then we have arguably the greatest investor of all-time, Warren Buffett. While others ran from Apple, Buffett increased his stake by more than 55%. Why? Buffett has made his living for more than 50 years buying good companies when everyone else is selling. As he says, “be greedy when others are fearful.”
That’s a sliver of perspective on the popular 13F filings of the past few days. As I said yesterday, the presence of a big investor in a stock is rarely valuable information. Only a small percentage of those reporting investors have the powerful combination of size, influence and portfolio concentration to make their presence alone a potential catalyst for change in a company/and a repricing of the stock.
Follow The Lead Of Great Investors Like Warren Buffett In Our Billionaire’s Portfolio
In our Billionaire’s Portfolio, we’re positioned in deep value stocks that have the potential to do multiples of the broader market—all stocks that are owned and influenced by the world’s smartest and most powerful billionaire investors. Join us today and get yourself in line with our portfolio. You can join here.
