What We're Reading ~ 4/27/16

Second level thinking: what smart people use to outperform [Farnam Street]

Consumption in China is resilient, despite troubled economy [Economist]

What if China already had a hard landing? [FT Alphaville]

Baidu - a hidden gem [Variant Views]

A look at Expeditors International [Rational Walk]

The curious case of Hercules Offshore [Oozing Alpha]

A subprime boom, insane interest rates, predatory lending: sound familiar? [Motherjones]

Luck meets perseverance: the creation of IBM's competitive advantage [Farnam Street]

A look at India's e-commerce market through Flipkart [Founding Fuel]

The extinction invention [MIT Technology Review]

Learning Larry Page's Alphabet [Fast Company]

The case for investing in Latin America [Bloomberg]

The affordability crisis: what happens when millennials can't afford homes? [Apartment List]

More than 40% of student borrowers aren't making payments [WSJ]

47% of Americans can't come up with $400 in an emergency [The Atlantic]

Will driverless cars mean the end of auto insurance? [CSMonitor]

Inside the fall of SunEdison [WSJ]

Lessons from SunEdison's collapse [BaseHitInvesting]

Facebook wants to be the layer between you and the future [Buzzfeed]

Inside Apple's secretive iPhone factory [Bloomberg]

Third Point's Q1 Letter: Playing Merger Arb & Pro Forma Situations

Dan Loeb's Third Point is out with its first quarter letter.  In it, they talk about how hedge funds have seen a lot of carnage as of late.

Specifically, they see the decimation in merger arbitrage land as an opportunity, writing, "many of these combined businesses should compound in value thanks to the benefit of synergies, modest financial leverage, and strong or improved management teams that have a history of successful capital allocation."

Their letter outlines their thesis on the following plays:

- Dow / DuPont
- ABInBev / SAB Miller / Molson Coors
- Time Warner Cable / Charter Communications
- Chubb / ACE
- Danaher

Embedded below is Third Point's Q1 letter:

Bridger Capital Boosts Pacific Biosciences of California Stake

Roberto Mignone's hedge fund firm Bridger Capital has filed a 13G with the SEC regarding their position in Pacific Biosciences of California (PACB).

Per the filing, Bridger now owns 5.1% of the company with over 4.46 million shares.  The filing was made due to activity on April 15th.  This is up from the 2.15 million shares they owned at the end of 2015.

Per Google Finance, Pacific Biosciences of California is "designs, develops and manufactures sequencing systems to help scientists resolve genetically complex problems. The Company's Single Molecule, Real-Time (SMRT) technology enables single molecule, real-time detection of biological processes. Based on its SMRT technology, the Company has introduced the PacBio RS II System. It offers The SMRT Cell, Phospholinked nucleotides and The PacBio RS II and Sequel instruments. Based on the Company's SMRT sequencing technology, its products enable de novo genome assembly to finish genomes in order to identify, annotate and decipher genomic structures; full-length transcript analysis to improve annotations in reference genomes, characterize alternatively spliced isoforms and find genes; targeted sequencing to characterize genetic variations, and deoxyribonucleic acid (DNA) base modification identification to help characterize epigenetic regulation and DNA damage.."

Viking Global Discloses Rice Energy Position

Andreas Halvorsen's hedge fund firm Viking Global has filed a 13G with the SEC and disclosed a new position in shares of Rice Energy (RICE).

Per the filing, Viking now owns 6.5% of the company with over 10.13 million shares.  The filing was made due to activity on April 15th.

Per Google Finance, Rice Energy is "an independent natural gas and oil company. The Company is engaged in the acquisition, exploration and development of natural gas, oil and natural gas liquids (NGL) properties in the Appalachian Basin. The Company conducts its operations through two segments: Exploration and Production, and Midstream. The Exploration and Production segment is engaged in the acquisition, exploration and development of natural gas, oil and NGLs. The Midstream segment is engaged in the gathering and compression of natural gas, oil and NGL production of, and in the provision of water services to support the well completion activities of, Rice Energy and third parties. It holds approximately 92,000 net acres in the southwestern core of the Marcellus Shale, primarily in Washington and Greene Counties, Pennsylvania, and approximately 56,000 net acres in the southeastern core of the Utica Shale, primarily in Belmont County, Ohio."

Hedge Fund Links ~ 4/22/16

Soros says China is resembling 2008 [CNBC]

Advice from hedge fund manager Edward Misrahi [What I Learnt on Wall Street]

Why money manager due diligence is so difficult [A Wealth of Common Sense]

US activist investors finding fewer opportunities, compromise more common [Reuters]

Treasury says hedge funds have stunted oversight [IB Times]

The top performing manager that's too hot for big money to handle [Reuters]

Lone Pine down 8% in Q1 [Reuters]

Bribery probe rattles Och-Ziff [Reuters]

Soros traders leave after disagreeing with CIO [Bloomberg]

Alternative sources of alpha [A Wealth of Common Sense]

Alpha or assets [Investors Field Guide]

How Japan became a hedge fund wasteland [Bloomberg]

Why do smart people keep investing in hedge funds? [Yahoo]

Tiger Global, Viking down in Q1 [Reuters]

US sues ValueAct over Halliburton-Baker Hughes deal disclosures [Reuters]

What We're Reading ~ 4/20/16

The Great Minds of Investing [William Green]

On simplicity versus complexity in investing [Reformed Broker]

Capital allocation - defining what is good and what is bad [Value and Opportunity]

Why we think we're better investors than we are [NYTimes]

Billing by millionths of pennies, cloud computing takes in billions [NYTimes]

Inside Amazon's cloud computing infrastructure [DataCenter Frontier]

Inside the nondescript building where trillions trade each day [Bloomberg]

The Energy Transfer - Williams poker game [SL-Advisors]

Kinder Morgan: asymmetric upside potential [Value and Opportunity]

India's thirst for oil is overtaking China's [Bloomberg]

HDR is TV's next big format war [CNET]

Profile on Google's Sundar Pichai [Buzzfeed]

How Jeff Bezos became a power beyond Amazon [Fortune]

Inside the house that Jack Ma built [Bloomberg]

The billionaire behind Walgreens' quest for global dominance [Fortune]

Media websites battle faltering ad revenue [NYTimes]

Ugg: the look that refused to die [The Guardian]

Critical things successful people do every day [Linked In]

2016 Sohn Conference New York & Investment Idea Contest Announced

The Sohn Conference Foundation, in partnership with CNBC, has announced the speaker lineup for the 21st annual Sohn Investment Conference and 3rd annual Next Wave Sohn event in New York City. 

This is always a fantastic day that features managers sharing investment ideas in order to raise funds for combating pediatric cancer and other childhood diseases.

Here are the details:

Sohn Conference New York 2016 Details

When: May 4, 2016 from 12pm to 5:30pm
Where: Lincoln Center in New York City
Speakers:

- Stan Druckenmiller, Duquesne Family Office
- David Einhorn, Greenlight Capital
- Jeff Gundlach, DoubleLine Capital
- Jim Chanos, Kynikos Associates
- Larry Robbins, Glenview Capital
- Zach Schreiber, PointState Capital
- Jeff Smith, Starboard Value
- Chamath Palihapitiya, Social Capital
- Dan Ariely, Duke University
- Carson Block, Muddy Waters Capital
- Richard Deitz, VR Capital Group
- Adam Fisher, Commonwealth Opportunity Capital
- John Khoury, Long Pond Capital

You can register for the conference by clicking here.


Next Wave Sohn New York 2016 Details

This event takes place on the same day from 9am to 11:15am and features rising stars in investment management.  Conference attendees are able to RSVP for Next Wave Sohn at no additional cost, or you can buy a limited quantity of tickets solely for this portion of the conference.

Speakers include:

- David D'Alessandro, CMDTY Capital
- Nicholas Danaher, Domando Capital
- Genevieve Kahr, Ailanthus Capital
- Davide Leone, Davide Leone and Partners Investment Company
- David Rosen, Rubric Capital
- Nick Tiller, Precocity Capital

For more information about all the events and to register, head to http://www.sohnconference.org


Sohn Investment Idea Contest - Submissions Due by Friday!

The Sohn Conference Foundation is also holding an investment idea conference where the winner will present his or her idea to more than 3,000 attendees at the Sohn Conference on May 4th in New York.

The contest is sponsored by GLG and Seeking Alpha and here are the rules for submission:  it can be for any marketable security (long or shot) with a market capitalization above $1 billion and a one-year investment horizon.

The judges include Seth Klarman, Michael Price, Bill Ackman, and David Einhorn.

Idea Contest Submission Deadline:  Ideas must be submitted by 5pm EST on April 22nd.  This means you only have 4 more days to submit an idea!

To enter the Sohn investment idea contest, click here.

Grant's Spring Conference Notes 2016 - Bessent, Dimon & More

The Grant's Interest Rate Observer Spring 2016 conference just took place yesterday.  Here are some notes from all of the speakers at the event:

David D�Alessandro (CMDTY Capital) � Long Oil

�      Peak oversupply of 1.5-2m barrels/day; started 2016 with 600-700k which isn�t weather adjusted (El Nino).

�      3 buckets of supply

�      North America � modeling down 700-800k by �17

�      OPEC � Iraq, Iran, Saudi Arabia. Overall modeling up 600-700k

�      SA � look for them to freeze. Signs are on the table, they�re willing to attend meetings.?

�      Iran � ramping to 500k growth yoy due to sanctions lifted. Difficult to export due to capex needs.

�      Iraq � At the limits of their export capacity; won�t raise production.

�      Non-OPEC � Most will be down, some flat. Models down 600-800k?

�      Libya is the wild card on supply side � dire situation, but can do 1m/day export if political situation changes.

�      Just on supply, we are undersupplied. Counter: 900m inventory?

�      A third is unusable (essentially reserves that never are used).

�      Look at days of inventory � because demand is increasing, this is decreasing.

�      Demand was up 1.8m in 2015, assuming 1.5m for 2016, range of 1.0-1.8m increase.

�      Drivers: India, South Korea, US, China. - Variant perception

�      Supply is declining?

�      Demand is accelerating?

�      No sudden surge in US production at $50-55 like sell-side projects

�      Labor markets aren�t as loose

�      Bush-era EPA not around?

�      Stricter capital

�      Dug but not completed wells are overstated.

Scott Bessent (Key Square Group) � Japan

�      China isn�t the biggest risk � Japan is.

�      Abenomics � underappreciated aspect is Abe�s leadership in 2006 as PM.

�      Tons of charts on various macro elements in Japan

�      3 arrows partially successful � but craters in the policy

�      JPY depreciation solely during inflation?

�      Limited structural reforms outside of women labor participation and corporate governance

�      Services recovery will be needed to drum up CPI.?

�      Sales tax increase will be cancelled

�      Good chance of surprise at April BOJ meeting

�      Debt write-off is eventually how we get out of this

�      Never count on immigration or privatization being a factor in Japan

�      If you�re investing, look to take off FX hedges in Japanese stocks, stay long JPY.

Anne Stevenson-Yang (J Capital Research) � L/S China ?

�      China since 2006 has looked like Silicon Valley in 1999 � growth at the expense of profitability

�      Two sources of capital � both end with massive capital flight � best short ideas are the most loved names

�      State via household deposits

�      FDI / Portfolio / etc.

�      Short BABA

�      Look to put on when the capital flows change?

�      Maxed out ecommerce platform � avg annual spend of $1075 vs AMZN $330 (faking?).

�      Poor capital allocation; using capital to generate growth?

�      Misleading GMV?

�      Dubious assets � Investment in equity investees, goodwill & intangibles

�      Long Tingyi

�      Largest maker of noodles � have scale, brands, operating leverage, 10b US revenues

�      Competes with UPC but UPC backing down / becoming more rational

�      Extensive distribution, partnerships with SBUX & PEP � upside from beverages segment

�      20x PE vs 30x historical, 10% op margin historical vs 3% now > expansion of both leads to 2-3x winner

�      Short RMB

�      Nothing has changed in the policy, but politicians say it has; don�t believe them

�      PBOC using forwards / swaps to hide capital outflows, delay booking in foreign reserve declines

�      9 months before reserves run down to perilous point

Jamie Dimon (JPMorgan Chase)

�      Auto is a little stretched, but overall consumer credit is pristine

�      Student loans are going to be a problem � growing too fast

�      Rate normalization is a good thing � strong economy. 25bps will have a de minimas impact

�      Grant: is the gov�t digging a moat for your biz in regulation? What would it take to replicate JPM?

�      Could give you $1t and you couldn�t remake this.  Employees, customers, goodwill, etc.

�      Banks will trade at 2.0x TBV when regulation, lawsuit overhangs go away.  Look at pace of change in regulation.

�      We�ll be there for energy customers in tough times � most loans are still money good.  We can�t run from the problems or sell stock � we�re not traders, we�re building a business

�      Grant: �The fed out to provide a living will for the central banks.�

�      The fed sets short rates, but market participants set the curve

�      More detail on credit: 10% debt servicing to mortgages; this is near lows, all good here.  Credit cards are pristine. Some may get hur tin auto, terms extending, but will be very small.  $1.3t in student loans, 30% delinquent. Went from 20% to 80% government underwritten.

�      I own stock � HD / YUM / JNJ / BA and the like.

�      Nil chance to make money in US treasuries over the next 10 years.

�      By 2030, China will house 30% of the Global 3000.

  

Pierre Lassonde (Franco-Nevada Corp) � Gold ?

�      Demand rising, has outperformed everyone the last decade

�      Mine supply has not kept pace with demand because cost of production risen 4-5x over past 30yrs. ?

�      Production next 6-7 years goes down. ?

�      Takes 7-12 years to get production online from field discovery, discoveries have fallen since 80�s. ?

�      China and India now over 50% of worldwide demand ?

�      Shanghai will take over the London Exchange in 5-10 years. It becomes a casino and prices skyrocket. ?

�      Central banks went from sellers to buyers in 2010 � now buying 400-600tonnes/year ?

�      Retail investment has grown since 2008, Europe now largest market ?

�      Negative interest rates spur demand � greater uncertainty, no opportunity cost, uncertainty in FX ?

�      Recycling has grown to meet shortfall between supply and demand ?

�      Gold: liquid, low volatility, low correlation to other asset classes ?

�      80% of price is determined by USD, which will roll over again, driving gold higher (mean reversion). ?

�      Trump would accelerate this devaluation

�      DJIA / Gold = financial assets / real assets. Expect normalization at 1:1 and a 3-7 year bull market ?

Kevin Warsh (Hoover Institution) � Case of the missing growth ?

�      Yellen gets done what she wants to get done; don�t make fed watching more complicated than that.

�      We all have bias to think our economic status is better than other countries ?

�      Growth doesn�t just appear by being one step ahead on devaluation ?

�      QE was initially to restore markets, drive liquidity, not to boost asset prices.

�      Difference between 2% and 3% GDP growth is not 1%, it�s 50%. And we�re not even getting 2% here, nor 3% internationally, and int�l trade is slowing; policymakers shouldn�t be doubling down. ?

�      This is the most important year since 2008

�      The 8 Growth destructive policies

�      Conflated regimes

�      Politicians fail so fed turns to multipurpose agency

�      Fed has wrong dashboard � backward looking and heavily revised data

�      Short-term time horizon as if managing q/q not thinking like a long-term biz owner

�      QE is copied abroad � the wealth effect � works primarily to boost financial assets, not real assets

�      Regulatory structure is in purposeful limbo with respect to banks � �we�re only 60% done implementing so we can�t be blamed if something goes wrong again� but now tougher for banks to make money

�      Models are still from the 1970�s

�      Story of an aggregate demand shortfall with no acknowledgement of supply side

�      Central bank buying takes away the price signal � no clue about risk premium > price of assets. Asset prices shouldn�t worry the fed but they�re still managing around them, vocal about it.

�      Want growth? More people working and more productive workers.

John Haskell (Explorador Capital) � Long LATAM equities ?

�      Forex, earnings, and the multiple in LATAM all down in 2015 � attractive grounds. ?

�      INRETC1:PE

�      1/3 malls, 1/3 supermarkets, 1/3 pharmacies (think Walgreens)

�      Hold 22%, 36% and 53% share respectively

�      Accelerating private label from 33% to 40%; drives higher margins.

�      Accelerating store count

�      Reduced dollar exposure from 74% in 2014 to 23%

�      Trading at 13.8x 2018 EPS vs comps > 20x

�      GRAM:US

�      Largest engineering firm in Peru

�      End of commodity supercycle means depressed results in core E&C biz

�      Capital structure stressed due to cash cycle and business shift

�      2016 outlook is positive; inflection point

�      Up 52% since Monday morning, whoops

�      Trading 3.2x �18 EBITDA � core E&C biz for 1.9x EBITDA

�      ENTEL:CL

�      36.9% mobile market share in Chile (the VZ there)

�      7.6% share in Peru vs Telefonica at 52% and Am Movil at 37%

�      Buy Chila biz for 4.3x �16 EBITDA and get Peru biz for free

�      25% dilution � due to desire to participate in spectrum auction

�      Founder�s HoldCo owns 55%

�      MCO downgrade

�      Potential Liberty / Malone target

Jim Millstein (Millstein & Co) � Puerto Rico

�      60% of additional 50b in debt from 00-15 was to fund operating deficits.

�      Don�t blame gov�t completely; they�ve tried � raised taxes and cut employment / benefits

�      Framed as liquidity vs insolvency problem and now decidedly unsustainable / insolvent

�      Defaults on May 1 & July 1

�      Author�s note: admittedly didn�t follow much of this presentation

Amy Falls (Rockefeller University Endowment)

�      Low rates � lower returns for savers, increases risk � leverage, excess investment, erodes system�s capacity to absorb risk, increases inequality

�      Endowment provides one-third of budget, spend 5-5.5% of it each year.

�      HEPI outpaces CPI by 1% on avg since 90�s. 70% of HEPI is salary and benefits

�      Absolute rates matter more than credit spreads

�      Seeing shorter durations and less cash holdings in many endowments now

�      Declining implied vol masks increasing structural weaknesses

�      Typically run 2-5% cash, now 8%

�      Seek managers with wide mandates and the ability to exploit them

�      LATAM looks attractive to us, too.

�      You are actually comped for letting your managers hold longer. Longer lockups > higher returns w/lower Std. dev.

�      > 1 yr: 12 - 14%

�      1 mo � 1yr: 11 - 13%

�      < 1 mo : 6 - 9%

�      Don�t outsource your investment functions � intelligent institutions work both sides of the balance sheet

�      Yale model isn�t about the outputs or the allocations, but the analytical rigor.

�      As nations grow as a % of world GDP, their market caps tend to follow � Brazil, Mexico, and Argentina are all the most attractive here.

        

Jim Grant v David Zervos (Jefferies) debate on monetary policy
Zervos

         -  Fed was fighting deflation at any cost. With high debt levels, worst thing to do is deflate. Make assets increase, ?liabilities decrease to repair broken balance sheets from 2008. ?

         -  China is pegged to the US however, and we caused their bubble via our QE; we don�t just do monetary policy for ?ourselves anymore, must consider consequences. 

Grant?

         -  If the USD is a commodity, it�s natural price will near the cost of production ... ?

         -  700 PhD economists on fed payroll ?

         -  Fed MO is to distort price mechanism ?

         -  He said a lot of other good classic Jim Grant stuff in here that I didn�t write down... ?

         -  Took a shot at Bernanke at PIMCO and whoever happens to live in Greenwich 

Zervos ?

         -  US, China, Japan, Europe � 4 countries that matter for FX. ?

         -  Tightening causes feedback � see August and the Chinese 3% devaluation; our stocks off 10%. ?

         -  If we go, it�s got to be a turbocharged tightening ?

         -  When Europe and Japan devalue, it�s against us but against China too; Draghi took the signal and looked to pump ?inflation without relative devaluation. ?

         -  Japan can print and buy back its own equities. ?

         -  This is a prisoner�s dilemma � won�t break down before the November election, but Yellen considering all these ?interdependencies. ?

         -  S&P will form base here and go much higher, but real trade will be in EMs. Worst possible asset to hold is cash; it will ?be diluted by CBs. ?

         -  Understanding CB reactions to data is the only way to get an edge. Everyone is terrible at forecasting data; I�d never ?give a trade rec on unemployment, GDP, or inflation. ?

London Value Investor Conference Presentations

Most of the presentation tiles have now been announced for the London Value Investor Conference on May 26th.  This year there will be more investment ideas presented at the conference than ever before, with a minimum of 10 investment ideas planned to be presented in detail:

Programme - Thursday, 26th May 2015
07.30-08.30	Registration and Breakfast
08.30-08.40	Opening Remarks � Simon Denison-Smith, Metropolis Capital
08.40-09.20	Gary Channon, Phoenix Asset Management � TBC
09.20-10.00	David Iben, Kopernik Global Investors � An Unconventional Approach to Value Investing (Click here for a recent article written by David Iben: �The Big Long")
10.00-10.40	Nick Kirrage, Schroders � TBC (Click here for a recent article written by Nick Kirrage: "Think big - Why income-seekers must now take a view on commodities and financial stocks")
10.40-11.10	Coffee and networking break
11.10-11.30	Dan Abrahams, Alfreton Capital � The Power of a Virtuous Circle
11.30-11.50	Jonathan Mills, Metropolis Capital � Building a Moat out of Cost-Discipline
11.50-12.30	Michael Keller, Brown Brothers Harriman � Passive Aggressive: The Implications of �Industrialized� Capital Allocation
12.30-13.10	Jean-Marie Eveillard, First Eagle � If Value Investing Makes Sense and if it Works Over Time � Which it Does � Why so Few of Us?
13.10-14.10	Lunch
14.10-14.50	James Montier, GMO � Investing on the Road Less Travelled
14.50-15.30	Alex Wright, Fidelity � Value Investing Beyond Mean Reversion
15.30-15.50	Alex Morozov, Morningstar � A Focus on Moats Uncovers Opportunities
15.50-16.10	Philip Best and Marc Saint John Webb, Quaero Capital � The Family Company Effect
16.10-16.40	Tea and networking break
16.40-17.20	Anne-Mette De Place Filippini, Burgundy Asset Management � TBC
17.20-17.30	Zama Coursen-Neff, Children�s Rights Division of Human Rights Watch
17.30-18.30	Howard Marks, Oaktree Capital � Fireside Chat with Richard Oldfield, followed by Audience Q&A Session
18.30-19.15	Networking Reception
19.15-22.00	The Peter Cundill Foundation Dinner � Members Dining Room, House of Commons (separate booking is required to attend this dinner)

The Market Folly discount for April 2016 is �150 (inc VAT) - you can book using our code at this link: MARKETFOLLY-APRIL-DISCOUNT

If you have any questions about the conference please direct them to the organisers at contact@londonvalueinvestor.com