Kamis, 14 April 2016

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. ?



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