Showing posts with label Greenlight. Show all posts
Showing posts with label Greenlight. Show all posts

Friday, November 17, 2017

Einhorn: "None Of The Problems From The Financial Crisis Have Been Solved"

A month ago, a downbeat David Einhorn exclaimed "will this market cycle never turn?"



Despite solid Q3 performance, Einhorn admitted that "the market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy. The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, "it will turn when it turns"."


Such an open-ended answer, however, is a problem for a fund which famously opened a basket of "internet shorts" several years prior, and which have continued to rip ever higher, detracting from Greenlight"s overall performance.


This, in turn, has prompted Einhorn to consider the unthinkable alternative: "Might the cycle never turn?" In other words, is the market now permanently broken.



While the Greenlight founder did not explicitly answer the question, in a speech yesterday at The Oxford Union in England, Einhorn made it extremely clear just how farcical he believes this market, and world, has become, pointing out that the problems that caused the global financial crisis a decade ago still haven’t been resolved.


“Have we learned our lesson? It depends what the lesson was,” Einhorn, the co-founder of New York-based Greenlight Capital, said at the Oxford Union in England on Wednesday.



Infamous for his value investing style and bet against Lehman Brothers that paid off in the crisis, Bloomberg reports that Einhorn said he identified several issues at the time of the crisis, including the fact that institutions that could have gone under were deemed too big to fail.


The scarcity of major credit-rating agencies was and remains a factor, Einhorn said, while problems in the derivatives market “could have been dealt with differently," and in the “so-called structured-credit market, risk was transferred, but not really being transferred, and not properly valued.”


“If you took all of the obvious problems from the financial crisis, we kind of solved none of them,” Einhorn said to a packed room at Oxford University’s 194-year-old debating society.


 


Instead, the world “went the bailout route.”


 


“We sweep as much under the rug as we can and move on as quickly as we can,” he said.



Einhorn didn’t avoid discussing his underperformance, citing several failed bets that companies’ stocks would decline. He didn’t name the stocks he was shorting, but insisted that none of the companies are “viable businesses.”


Value investing has worked over time, but “it’s not working at all right now,” and in fact “the opposite seems to be working,” he said.



Greenlight remains focused on developed markets, and has no plans to change that, he said.


Which reminds us of his exasperated conclusions from the latest Greenlight letter to investors:


Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?


 


It’s clear that a number of companies provide products and services to customers that come with a subsidy from equity holders. And yet, on a mark-to-market basis, the equity holders are doing just fine.



Ah yes, the Fed-funded "deflation trade" which lowers prices for goods and services courtesy of ravenous investors who will throw money at any "growth" idea, without considerations for return or profit, because - well - more such investors will emerge tomorrow.  After all, in this day and age of ZIRP, what else will they do with their money.









Friday, November 10, 2017

More New Normal - Buy Bloomberg"s "Bubblicious" Index Of Bubbles - Make Out Like A Bandit

If only every year was this “easy”.


Unfortunately, the old adage of the trend being your friend becomes harder to adhere to as a guidepost as one asset market after another goes into bubble territory. As we discussed here, Alberto Gallo of Algebris Investments has ranked (see here) the top 14 bubbles worldwide, according to characteristics such as duration, appreciation, valuation and the degree of irrational behaviour.


When we started in this industry, we were taught by those with the gray hair of experience that betting against the herd was the key to success. Turning up on January 1, imagine the look on their faces if you’d told them you’d bought a portfolio of everything that had gone parabolic (or almost) the previous year. Luckily for them, markets were relatively free and absent $15 trillion of price insenstive asset purchases by central banks. Fundamentals counted for somethiing – and will again (we hope) – there’s just the small matter of getting to the other side of the current bubble, sorry bubble(ssssssssssssssssssssssssssss).


In 2017, the strategy of buying bubbles has obviously worked almost perfectly or, as Bloomberg notes,“Investors can either buy bubbles or be left far behind”. Indeed, it’s gone to the trouble (see here) of creating ts own “Bubblicious” index, which includes an equal weighting of a host of the “usual suspects”. These include:


  • Sunac China Holdings Ltd.: perhaps the poster child of the real-estate frenzy in the world’s second-largest economy, this company’s aggressive acquisition strategy has been met with raised eyebrows among regulators at a time when China is trying to rein in the country’s financial risk.

  • Tencent Holdings Ltd.: A 2,600 percent rise in the past decade? Tencent is the leader of the pack when it comes to Asian tech stocks that have made the sector the biggest component of the MSCI Asia Pacific Index for the first time since the internet bubble.

  • Tesla Inc. and Netflix Inc.: two U.S. tech companies that have both been branded with the b-word by hedge fund manager Einhorn.

  • VelocityShares Daily Inverse VIX Short-Term ETN, ticker XIV: this exchange-traded note is a proxy for the presumed “short volatility” bubble that’s seen investors bet billions of dollars on the prospect of not much happening in markets.

  • Bitcoin Investment Trust, ticker GBTC: the cryptocurrency fund that typically trades at a substantial premium to its net asset value. Bitcoin itself has been called a bubble by bank CEOs including JP Morgan Chase & Co.’s Jamie Dimon, ethereum co-founder Joseph Lubin and many more.

  • ETF Industry Exposure & Financial Services ETF, ticker TETF: this meta exchange-traded product holds a basket of firms poised to benefit the most from the explosion in ETFs -- a proxy for the “passive bubble.”

  • Lots of long bonds: The iShares 20+ Year Treasury Bond ETF has enjoyed $1.8 billion worth of inflows in a year that saw former Federal Reserve Chair Alan Greenspan warn of a massive bubble in the space. Meanwhile yields on German sovereign debt maturing in 2048 and Japanese bonds maturing in 2050 have dipped ever lower, sealing the latter’s reputation as a ‘widow maker’ for frustrated shorts. The portfolio also includes the infamous Argentinian century bond.


Bloomberg observes that its broad range of choices mean that its Bubblicious portfolio is “fairly well diversified” across the many bubbles. Actually, it could have been more diversified. While we don’t disagree with the inclusion of any of Bloomberg’s picks, it’s worth noting that compared with Gallo’s list, the Bubblicious portfolio does not include European high yield, EM high yield or any of the obvious property bubbles outside China. London, for example, and Australian cities, such as Sydney and Melbourne. Unlike Gallo, we might have chosen New Zealand property instead of London property (where prices have started falling) and, while Bloomberg has chosen Sunac as its “poster child” for Chinese real estate, China Evergrande and others would be equally valid.


Anyway, as Bloomberg explains, the “Bubblicious” index has risen by well more than 120% so far this year.


The best way to crush the crowd in 2017? Buy the things everyone insisted would never keep going up. A portfolio stuffed with allegedly over-inflated assets would have returned more than 120 percent so far in 2017, trouncing the S&P 500 Index and underscoring the challenge for investors facing a plethora of pricey securities.



As the chart shows, if you’d gone “Bubblicious” on 1 January 2017, you’d have smashed the S&P 500 "out of sight" by more than 100%.



As Bloomberg laments.


The hypothetical ‘Bubblicious’ portfolio includes Chinese real estate and internet names, a pair of U.S. tech behemoths, a cryptocurrency fund, the ETF industry, bonds that mature decades from now, and a dash of short volatility bets just to make things more interesting.


 


The out-performance is a testament to the momentum mania prevalent in today’s markets, a dynamic which has prompted the likes of Greenlight Capital’s David Einhorn, Goldman Sachs Group Inc., and Sanford C Bernstein & Co. LLC to mull whether value investing is in the midst of an existential crisis given ultra-low interest rates and abundant liquidity.



Of course it is, but the nature of markets is that they move in cycles. This cycle happens to be the most unpleasant cycle for value investors, active managers and contrarian thinkers, but it’s still a cycle.









Friday, November 3, 2017

Visualizing How Billionaire Investors Hedge Against Geopolitical Black Swans

Investors must always be comfortable with the idea that the market bears risk.


Sometimes this risk flies under the radar and isn’t as pronounced as it probably should be. However, as Visual Capitalists"s Jeff Desjardins notes, in other cases, the topic of risk can catapult to the forefront of discussion. There can be specific events or signals unfolding that give investors the jitters – and during these times, investors will make adjustments to their portfolios to avoid getting caught off guard.


HOW BILLIONAIRES ARE HEDGING


In the following infographic from Sprott Physical Bullion Trusts, we explain the particular geopolitical risks that have the world’s most elite investors concerned today – and what moves they are making to protect themselves from black swans.



Courtesy of: Visual Capitalist


The world isn’t predictable at the best of times – but after unanticipated occurrences such as Brexit and the election of Trump in 2016, the geopolitical tea leaves are getting even more difficult to read.


The world is approaching a major inflection point and the intense amount of global angst we’re experiencing now stems from deep, structural forces that have been building over decades.


– Reva Goujon, VP Global Analysis of Stratfor



According to Reva Goujon, VP Global Analysis of Stratfor, we are experiencing the perfect storm of “-isms”: nationalism, nativism, protectionism, and isolationism.


As a result, the following potential geopolitical risks are at the top of the agenda for experts and top investors:


Domestic risks:
Unpredictability of the Trump administration, government inaction, a trade war with China, and NAFTA renegotiations


 


International risks:
Economic nationalism, further “exits” from the EU, Russia and China seeking to assert authority, terrorism, escalation of Middle East conflicts, and North Korea’s nuclear ambitions



ELITE INVESTORS TAKING ACTION


With these risks perceived to be on the table, some of the world’s most elite investors like Ray Dalio and Warren Buffett are taking action. Here’s what they are up to:


Ray Dalio


Ray Dalio, the founder of the world’s largest hedge fund, Bridgewater Associates, had this to say:


When it comes to assessing political matters we are very humble.


-Ray Dalio, Aug 2017



Dalio’s advice: to stay liquid, stay diversified, and not be overly exposed to any particular economic outcomes. He also recommends a 5%-10% position in gold.


Warren Buffett


The Oracle of Omaha has a similar but very different perspective.


No one can tell you when these traumas will occur – not me, not Charlie, not economists, not the media.


– Warren Buffett, Feb 2017



With this in mind and with equities expensive, the seasoned value investor holds onto piles of cash to prepare for potential buying opportunities. Berkshire Hathaway now has $99.7 billion in undeployed cash, the most in the company’s history.


Bill Ackman


Billionaire hedge fund manager Bill Ackman took a position in “out of the money” call options on the VIX.


This will protect against stock market risk.


– Bill Ackman, Aug 2017



David Einhorn


The billionaire founder of Greenlight Capital says he is keeping gold as a top position.


The (Trump) administration comes with a high degree of uncertainty.


– David Einhorn, Feb 2017



Howard Marks


Lastly, the famous value investor Howard Marks warned his clients to move into lower-risk investments to protect against future losses.


The uncertainties are unusual in terms of number, scale and insolubility in areas including secular economic growth; the impact of central banks; interest rates and inflation; political dysfunction; geopolitical trouble spots; and the long-term impact of technology.


– Howard Marks, July 2017



 









Tuesday, October 24, 2017

A Frustrated David Einhorn Asks "Will The Market Cycle Never Turn?"

Just days after Third Point"s Dan Loeb took a victory lap in his latest letter to investors, boasting a 14.5% YTD performance, outperforming the S&P and virtually all of his peers, a decidedly more downcast letter was released today by Greenlight"s David Einhorn, who also had a good quarter, generating 6.2% in Q3, which brought his YTD return to 3.3% after a subpar first half. Yet despite the solid Q3 performance, Einhorn admits that "the market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy. The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, “it will turn when it turns.


Such an open-ended answer, however, is a problem for a fund which famously opened a basket of "internet shorts" several years prior, and which have continued to rip ever higher, detracting from Greenlight"s overall performance.


This, in turn, has prompted Einhorn to consider the unthinkable alternative: "Might the cycle never turn?" In other words, is the market now permanently broken.


Einhorn goes on to explain that his strategy "relies on the assumption that the equity value of a company equals the market’s best assessment of the current and future profits discounted at the company’s cost of capital. Our ability to outperform often comes from our skill in finding opportunities where the market has misestimated current or future profitability or miscalculated the cost of capital by over- or underestimating the risks."


It is here than an unexpectedly exasperated Einhorn emerges:








Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value. What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss? It’s clear that a number of companies provide products and services to customers that come with a subsidy from equity holders. And yet, on a mark-to-market basis, the equity holders are doing just fine.



Ah yes, the Fed-funded "deflation trade" which lowers prices for goods and services courtesy of ravenous investors who will throw money at any "growth" idea, without considerations for return or profit, because - well - more such investors will emerge tomorrow.  After all, in this day and age of ZIRP, what else will they do with their money.


Here Einhorn took aim at his favorite "bubble" shorts: Amazon, Tesla and Netflix. This is what he said:








When we consider the business performance of our three most well-known “bubble” shorts, we wonder if this alternative paradigm is in play. Last quarter, we noted Amazon.com’s (AMZN) earnings estimates had fallen over the prior few quarters. This quarter, AMZN revealed a much lower level of long-term structural profitability, causing consensus estimates for the next five years to drop by 40%, 22%, 18%, 14% and 8%, respectively. Ordinarily, stocks trading at nosebleed multiples fall sharply when such a dramatic reassessment happens. Instead, AMZN fell less than 1% during the quarter. Our view is that just because AMZN can disrupt somebody else’s profit stream, it doesn’t mean that AMZN earns that profit stream. For the moment, the market doesn’t agree. Perhaps, simply being disruptive is enough.


 


Tesla (TSLA) had an awful quarter both in its current results and future prospects. In response, its shares fell almost 6%. We believe it deserved much worse. So much went wrong for TSLA in the quarter that it is hard to only provide a brief summary. The main near-term problems are poor demand for its legacy vehicles and manufacturing challenges for the new Model 3. Notably, TSLA dramatically reduced its gross margin assumption for the September quarter and publicly blamed ramp-up costs for the new Model 3 sedan. More quietly, the company used the lower gross margin hurdle to offer incentives and to lower the cost of options on the Model S and Model X vehicles, and even offered significant markdowns on showroom models. Given the depth of the price cuts, we were surprised that demand for the Model S and Model X only improved modestly.


 


Meanwhile, it is becoming clear that scale manufacturing is actually a skill. While the CEO makes bold claims about TSLA’s superior prowess, continued production shortfalls, defects and product recalls disprove him. TSLA faces competition from established OEMs that have decades of scale manufacturing experience. Some of TSLA’s presumed market lead in areas like autonomous driving may more likely reflect TSLA’s willingness to put inadequately  tested and dangerous products on the road rather than a true technological advantage.


 


Finally, there is Netflix (NFLX), where the quarterly results beat expectations and the shares advanced 21%. Competition is heating up and media companies such as Disney will be removing their content from NFLX to compete directly (bulls used to believe that Disney would pull a Time Warner/AOL and pay-up for the highly promoted but profitless business). NFLX continues to accelerate its cash burn as it desperately tries to compensate for its inability to rely longer-term on licensed content. On the second quarter conference call, the CEO stated, “In some senses the negative free cash flow will be an indicator of enormous success.” To us, all it indicates is that NFLX is capable of dramatically changing the economics of stand-up comedy in favor of the comedians. Perhaps, there really is a new paradigm for valuing equities and the joke is on us. Time will tell.



Einhorn also highlights the biggest winners and losers in the quarter including CONSOL Energy (CNX), General Motors (GM) and Uniper (Germany: UN01) which were the largest contributors, while Caterpillar (CAT) short and Mylan (MYL) were detractors.


Some more details: Greenlight added long positions in Hewlett Packard Enterprise, Micron and Tempur Sealy; exited a short position on Best Buy and a long position on PVH. The fund"s largest disclosed long positions at quarter end were unchanged from the end of 2Q: AerCap, Bayer, Consol Energy, General Motors and gold. The parternships had an average exposure of 118% long and 73% short.


The full letter is below:











Monday, October 23, 2017

Japan Sounds Alarm On "Unprecedented, Critical And Imminent” Threat From North Korea

Following the landslide victory by Prime Minister Abe in Japan"s Sunday elections, which left his ruling coalition with a supermajority allowing him to change Japan"s constitution, Abe wasted no time in signalling a push towards his long-held goal of revising Japan"s post-war, pacifist constitution, however as Reuters reported earlier, Abe would "need to convince a divided public to succeed." Parties in favor of amending the U.S.-drafted charter won nearly 80% of the seats in Sunday’s lower house election, leaving the small, new Constitutional Democratic Party of Japan (CDPJ) as the biggest group opposed to Abe’s proposed changes. Still, Abe claimed he wanted to get other parties on board, including Tokyo Governor Yuriko Koike’s new conservative Party of Hope, and was not insisting on a target of changing the constitution by 2020 that he floated this year.


Yet, despite Abe"s soothing vision, just one day after the election Japan was already setting the groundwork for creating the strawman that would be needed to get public support largely behind Abe"s militant venture.


As a result, Japan’s defense minister said on Monday that North Korea’s nuclear and ballistic missile capabilities have grown to an “unprecedented, critical and imminent” level, requiring “different responses” to the threat.


The minister, Itsunori Odonera, was quoted by AP as saying that this rising threat compels his country to endorse the U.S. view that “all options” must be considered, which President Donald Trump says includes possible military action. And since this pivot would require a revised constitution, the next step is already in play.


Odonera’s comments came at the outset of a so-called trilateral meeting in the Philippines (where over the weekend Russia was "delivering" weapons to the Duterte regime, as reported overnight) with U.S. Defense Secretary Jim Mattis and South Korea’s defense minister, Song Young-moo. Each made statements about North Korea before a group of reporters and news cameras, but none took questions according to AP.








Mattis was in the Philippines to attend portions of a two-day meeting of defense ministers from the 10 Association of Southeast Asian Nations. He used the occasion to hold a three-way meeting with his counterparts from Japan and South Korea. He is scheduled later in the week to travel to Seoul to attend annual consultative talks with the South Korean government, which is expected to focus mostly on North Korea.



Elevating the North Korea bogeyman to unprecedented levels, and assuring that "no crisis will go to waste", Odonera said North Korea’s most recent underground nuclear test could have been a hydrogen bomb, which is vastly more powerful than an atomic bomb.








“The country has steadfastly improved it nuclear and missiles capability,” said Onodera. He added: “The threat posed by North Korea has grown to the unprecedented, critical and imminent level.”


 


“Therefore, we have to take calibrated and different responses to meet that level of threat,” he said, without elaborating on what “different” responses Japan favors.



Trump has said he will resolve the North Korea problem alone if necessary, to prevent the North from gaining the capability to attack the United States with a nuclear-armed missile.


As usual, the far cooler Mattis - who clearly does not have a constitution-revising agenda - was much more reserved in his remarks than Onodera, although he did slam Pyongyang for defying U.N. Security Council resolutions against its nuclear and ballistic missile programs. But the U.S. defense secretary did not mention any potential military action. Mattis instead emphasized a unified U.S.-Japan-South Korea position in pressuring the North to give up its nuclear program.


“North Korea’s provocations threaten regional and global security,” he said.


Meanwhile, South Korea’s defense minister, Song, said that North Korea’s behavior is “becoming worse and worse.” In brief remarks to reporters, earlier on Monday Song was asked about the risk of war against North Korea.


“I want to emphasize that war is not as easy as the journalists make it sound in the press and the media,” he said. “As defense ministers who are in charge of national defense and other high tech weapons such as ballistic missiles, we understand the very weight of engaging in a war and as such we will make all the efforts necessary to resolve the issue in a diplomatic and economic way as possible.”


He added: “However, if we are attacked then we will have to take firm actions.”


Most importantly, however, is that it has been a month since North Korea has engaged in any provocative actions, and contrary to expectations that it would launch a ballistic missile in early and mid October, so far Pyongyang has - despite launching the occasional verbal grande at Trump - kept a low profile. Which considering it is now in Japan"s best interest to have a provocative neighbor who will greenlight the desired constitutional changes, will likely change in the near future.









Tuesday, September 5, 2017

North Korea Seen Moving ICBM Into Position For Possible Launch: Report

The USDJPY and 10Y yields snapped lower and gold kneejerked higher following the latest North Korea-related headline out of Bloomberg, according to which:


  • NKOREA STARTS MOVING ICBM FOR POSSIBLE LAUNCH BEFORE SAT.:DAILY

Bloomberg references a just released article in the Asia Business Daily, according to which North Korea started moving the ICBM-class missile, produced at a new Pyongyang research center, on Monday following Sunday"s thermonuclear test.


The report confirms overnight intelligence from South Korea: recall first thing this morning, Yonhap reported that South Korea"s spy agency said it had detected that North Korea is making preparations for a possible intercontinental ballistic missile launch, a move that would further raise tensions a day after it conducted its sixth and most powerful nuclear detonation.





Chang Kyung-soo, acting chief of the defense ministry’s policy planning office, told lawmakers on Monday that North Korea was making preparations for a missile firing, according to Bloomberg while Yonhap adds that South Korea"s spy agency said there was a chance the North could fire an ICBM into the Pacific Ocean, saying that the isolated state was able to conduct a nuclear test at any time.



According to the just released Business Daily report, there is high chance N. Korea will fire ICBM missile before Sept. 9 national founding day. More details from the original report, Google translated:





According to the authorities, one ballistic missile produced by a weapons research institute dedicated to the production of North Korea"s ICBM was found to be moving to the west of Hwanghae Island after being mounted on the 4th Mobile Launch Base (TEL) on the day after the 6th nuclear test.


...


Earlier this year, North Korea built a 1980-square-meter weapons lab, which could manufacture ICBMs, in Pyongyang. It was last February that the weapon laboratory was released to the outside world. Although it was a wilderness until 2009, it has now been transformed into a strategic hub for North Korea"s major missiles.


...


According to a joint US-ROK report, North Korea has a maximum of 900 ballistic missiles, and it has been confirmed that there are 108 aircraft capable of launching surprise attacks. According to ballistic missiles, the number of Scud missiles and TEL that can mount Scud missiles are the most common. The number of Scud missiles is 430 (TEL 36).



The report concludes by noting that according to S. Korean intel, "if North Korea conducts further ICBM provocations there is a high possibility that it will choose an unpredictable time and place. To this end, Pyongyang may launch missiles directly from the mobile launch base, or launch multiple missiles at multiple locations simultaneously."


The report also notes that the ICBM mobile launcher is moving "at low speed mainly during the night time" to avoid detection by foreign intelligence authorities. In other words, the US now has a conveniently moving target and a due date by which North Korea will likely launch its next rocket, effectively giving Trump a greenlight for a "preemptive" strike over the next five days.


The market"s reaction to the news, while not as dramatic as to Sunday"s nuclear test, confirms just how much on edge traders remain for every headline out of North Korea.


10Y Yield:


USDJPY:


Gold:


ES:

Monday, May 22, 2017

Bitcoin Blasts Through $2200, Here's Why

Bitcoin is up almost 15% today, breaking through $2000, $2100, and now $2200.




It"s been quite a ride...




As CryptoCompare"s founder Charles Hayter notes, there are numerous drivers for this sudden surge in the virtual currency...



  • Bitcoin is trading at a $400, or 19%, premium on Japanese Markets as Bitcoin fever takes hold.




  • The USD-BTC markets are trading at $2150 whilst the JPY-BTC pair is trading at the equivalent of $2550.




  • Japanese volumes are 42-50% of trading with 132k BTC volume or c.$300 million per day.




  • The Japanese have caught the Bitcoin bug and inefficiencies across markets are being exposed. Irrational exuberance is taking hold as the Japanese stumble over each other to enter the Bitcoin market and drag up international prices.




  • Ethereum has seen a strong price rise on the back of the Ethereum Enterprise announcement and strong buying from Korea where the price is again at a large premium trading at $230 compared to the USD market at $180 - or 27%. The Korean market share of ethereum trading has been steadily increasing and has now reached 15%.



Summary


Bitcoin has hit the $2200 mark after a strong bull run with a fleshing out of the crypto ecosystem where positive regulatory moves, specifically in Japan have prompted a large inflow of fiat in the last couple of months.


The Japanese have given bitcoin the greenlight as a currency and are looking to increase the rigour that their exchanges are subject too - all in all positive for the industry as it moves more mainstream. Alongside you are seeing Chinese exchanges switching bank online after the PBoC halted withdrawals due to AML and KYC concerns in January this year. These exchanges have been trading at a steep discount for the past couple of months as money has essentially been trapped by the PBoC"s diktats.


Interest in other crypto currencies has also brought money to the table that ebbs and flows via bitcoin - although you are starting to see direct ethereum pairs offering immediate exposure. The money is washing in and out of Bitcoin to search for extraordinary returns in the other crypto currencies. Ethereum and Ripple have seen some extraordinary returns this year - and momentum begets momentum with greed taking the lead.


Premia & Discounts


Bitcoin trades across multiple fiat pairs in a range of local and global exchanges. These pairs often trade at different prices due to fees, entrance and exit routes, and various perceptions of the safety of the exchange.


For example on the USD market exchanges have traded at up to a 5% or more difference. This can be exacerbated by various factors.


When these inefficiencies occur there are opportunities to arbitrage the difference. So large discrepancies or rises on one particular pair - for example the JPY BTC pair - can drag up the USD BTC pair as demand on one markets prompts opportunities on another.


Charts below showing the JPY Premium over time and price differential to the USD markets.



The Korean Won is also trading at a premium on the USD exchange of $2750 or a 27% premium. The Korean Won has 5% of Bitcoin trading.



Ethereum


is also seeing its markets dislocate as the Korean won takes a large premium. New fiat on ramps into the crypto currency are distorting market prices  but the fundamental levels of adoption and use by industry have been key in igniting price momentum.



The Enterprise Ethereum Alliance has more than tripled in size, with the group announcing 86 new members, including South Korean telecom Samsung, pharmaceuticals giant Merck, automaker Toyota, investor communications platform Broadridge, financial markets firm DTCC, and the Illinois Department of Financial and Professional Regulation, which oversees licensed businesses in the state.


Additional factors include:


Global Uncertainty - Bitcoin has reacted as a form of digital gold at times of international crisis and this is often touted as first major price factor. Bitcoin traditionally moves with a higher beta than gold so spikes higher to the upside - periods of high correlation for bitcoin and gold occur when global uncertainty takes the ascendancy - which at present doesn"t seem to be the case. Bitcoin is defying its gold relationship and subject to its own internal machinations. Gold has traded between 1240-1280 USD /oz whilst bitcoin has doubled in the last 3 months. On a macro level Macron"s success, despite the storm clouds of brexit and Trump"s bellicose attitude mean doom and gloom scenarios of political polarisation are improbable but still nonetheless a risk.



Scaling Debate - Litecoin has taken the lead and become the frontline in testing various augmentations for bitcoin with its segwit upgrade and early moves towards adding a lightening network for faster transactions. This has highlighted the fundamental issue of stalemate and hegemony in Bitcoin"s corporate governance DNA. Although there is a proposal being put forward by Barry Silbert that cherry picks various elements to attempt to assuage both side of the political debate - there are no clear indications of a solution as of yet. The issue regularly raises its head as a bugbear for the price and takes centre stage for time with resultant downward pressure.


Bitcoin ETF - BATS exchange have requested the SEC review its refusal to allow the Winklevoss twins exchange to be approved. The reasons for the refusal have not changed substantially so this is not expected to dramatically alter the outlook for bitcoin.

Tuesday, April 25, 2017

Einhorn: "The Longs Say Stocks Can Only Go Up, Seemingly To Infinity And Beyond. We Have Seen This Before"

David Einhorn may write in his latest quarterly letter to investors that "from a portfolio perspective, this quarter was a quiet one" but based on his activity the famous poker playing hedge fund manager was quite busy.


Among his various moves, Greenlight added a new position in Perrigo in the first quarter, after several large guidance cuts, and now sees the company"s earnings forecast as achievable. He also took a new long position in Conduent, as he believes the company as burdened with “underearning” contracts that it can renegotiate and exit. He also took a new long in unidentified European financial institution. On the other side, Greenlight closed shorts in Signet Jewelers, LyondelBasell, and RPC and also closed out shorts in three Canadian banks at a loss after oil and credit loss thesis didn’t “sufficiently” materialize.


Einhorn said he still likes Apple, which is a “superior company that still trades for less than a market multiple” while trimming his short position in Rite Aid after initially expecting deal with Walgreens to close at $9-share with FTC approval, and is watching the RAD situation “carefully” as original thinking was incorrect.


Performance wise, the fund returned 1.3% in Q1, underperforming the S&P"s 6.1% rise. "Apple (AAPL), Chemours (CC) and gold were the biggest winners; the bubble basket, Rite Aid (RAD), and a short position in Tesla (TSLA) were the biggest losers." And as he admits, ""It was a difficult quarter to be short the bubble basket, and TSLA in particular."


One day, TSLA will fall, but not yet.


Below are some of the notable highlights from the letter, presented below.





"It was a difficult quarter to be short the bubble basket, and TSLA in particular. Perhaps as the prospects for tax reform have dimmed, the market has regained enthusiasm for profitless companies that aren’t at risk of paying taxes. A number of these stocks are back in full-blown momentum mode. Analysts continue to raise “target prices” which the market treats as news."



"The bulls explain that traditional valuation metrics no longer apply to certain stocks. The longs are confident that everyone else who holds these stocks understands the dynamic and won’t sell either. With holders reluctant to sell, the stocks can only go up – seemingly to infinity and beyond. We have seen this before. It’s painful for the shorts, as the TSLA CEO has been happy to remind everyone via Twitter."



"There was no catalyst that we know of that burst the dot-com bubble in March 2000, and we don’t have a particular catalyst in mind here. That said, the top will be the top, and it’s hard to predict when it will happen. Notably, a number of bubble stocks advanced despite missed expectations and/or falling estimates. The basket is sized appropriately with the understanding that twice a silly price isn’t twice as silly. In due time, we expect these bubbles to pop."



"Our longs were profitable, though they went up a bit less than the market. Our shorts generated losses but added alpha, and gold gave us a small profit in macro. Apple (AAPL), Chemours (CC) and gold were the biggest winners; the bubble basket, Rite Aid (RAD), and a short position in Tesla (TSLA) were the biggest losers."



"Gold rose over 8% to start the year. Nothing significant happened here (the White House columns are not gold yet); gold simply reversed a portion of the post-election decline it suffered last quarter. Gold remains a long-term position with a thesis that global fiscal and monetary policies remain very risky."



Finally, Einhorn had some comments on the recent activist foray into GM:


While it was quiet on the portfolio front, we made more noise than usual (and more than we’d like) by making public our idea for General Motors Company (GM) to unlock tens of billions of dollars of shareholder value. As a general matter, we prefer to avoid public activism. The last time we did this was with AAPL in 2013 after owning the stock for three years. This is a similar situation; we had owned GM shares for years before advancing our idea to management.


We know this is a tough fight. Fortunately, the math is on our side (if GM does what we suggest, we believe the stock will go up a lot) and the ultimate decision will be made by our fellow shareholders. We believe others recognize that the stock is deeply undervalued and when shareholders grasp the math and the extent of GM’s behavior, they will vote with their wallets and for needed change at the Board level.


* * *


Full letter below:

Friday, March 31, 2017

Is Public Equity A Broken Concept?

Submitted by Nick Colas of Convergex


Is Public Equity A Broken Concept


David Einhorn’s proposal to GM that it split its stock into dividend and capital appreciation shares got us thinking about the bedrock principles of public equity ownership.  Other catalysts for this examination: recent IPO SNAP’s lack of shareholder voting rights, the reluctance of venture capitalists to list their “Unicorns”, and the dearth of IPOs generally.  The critical question here is “Does the traditional one-size-fits-all model of publicly-held equity still work in a world that increasingly values customization?”  Further, will other social and economic trends force a change in this structure, such as aging demographics in the US population and the investment-heavy nature of major technological developments like autonomous cars, workplace automation, and artificial intelligence?  Bottom line: “public equity” needs to be a fluid concept that responds to the changing needs of both providers and users of capital.


If it is true that we learn the most from our mistakes, then I would posit that we can glean a lot of useful information from analyzing troubled industries rather than just focusing on commercial “Winners”.  For example, I have studied the US auto industry for the last 25 years as both a sell side and buy side analyst, and more recently in the context of the macro work I do in these notes.  It has been an education that has served me very well, even if the group has historically presented limited long term investment potential.


Here is a summary of everything I know about this auto industry:


  • Demand is economically sensitive and volatile in major markets like the US, Europe and Japan. Since it takes years to design a new vehicle and that process is expensive, automakers have high fixed costs.  This leads to significant variability in earnings over a typical economic cycle and the threat of bankruptcy in a bad downturn is real.  “Hot” product offerings can mitigate this pressure, but not reliably so.

  • There is too much supply. The auto industry employs a lot of people both in final assembly and in the supply chain.  These tend to be good-paying jobs, which means governments are perennially throwing money at car companies to set up shop in their jurisdiction.  Moreover, those same governments don’t ever want to see a plant close.  This makes capacity very sticky, and in some places like Europe there are still too many auto plants.

  • Those two factors make it very hard to earn a decent return on capital over a cycle. Boom times bring excellent free cash flow, but those earnings are later consumed by the lean years.  As a result of both industry structure (point #2) and company-specific earnings volatility (point #1), public equities in the sector tend to have very low normalized valuations.

I was therefore intrigued by investor David Einhorn’s proposal, made public today, to split GM’s stock into two pieces: a dividend paying equity and a capital appreciation “stub”.  To be clear, I have no idea if it would improve the company’s equity market valuation.  You can read a description here and see the slide deck from his firm, Greenlight Capital, as well: http://www.zerohedge.com/news/2017-03-28/david-einhorns-presentation-how-gm-can-unlock-between-13-and-38-billion-value


Einhorn’s proposal got me thinking about the nature of public equity capital.  His thesis is that GM’s equity does not have a clean and distinct ownership base.  Dividend-seeking investors are put off by the company’s share buyback program since it drains cash for purposes they don’t value, and capital appreciation-focused investors would prefer that GM just use all their cash generation to repurchase shares.  Split the stock and the conflict goes away, or so the idea goes.


Regardless of the merits of the idea for GM, Greenlight’s proposal raises a provocative macro question: “Is a one-size-fits-all equity structure really the best approach to both maximizing corporate value and giving shareholders the types of investments they desire?”  Once you pose the question that way, a raft of other capital market trends pop up:


  • Voting rights. The vast majority of public stocks feature a “One share, one vote” structure of corporate governance. Shareholders can elect Boards, vote on major corporate actions like takeovers and mergers, and lobby for changes in management if they feel the business is being mismanaged.

  • The recent high-profile SNAP IPO had an unusual feature, however: no voting rights at all.  While novel, this is the continuation of a trend among technology companies, which in many prominent cases have dual classes of stock with different voting rights.  The intention here is to limit public shareholders’ traditional rights in favor of management’s/core shareholders’ long term business plans and judgment.

  • Dearth of IPOs. Look at a long term chart of the number of Initial Public Offerings in US markets, and you’ll see a significant decline in the number of new issues from the 1990s to now.  The good times were in the late 1990s, of course, when it was customary to see 30-80 IPOs per month.  Now, that number is more like 10-20.

  • Venture capital’s reluctance to list “Unicorns”.   You might argue that capital markets are simply more selective now and the 1990s IPO cycle was an outlier.  But then why are so many truly revolutionary companies like Airbnb, Uber, Lyft, Palantir, and other “Unicorns” all still private?  These are transformational businesses, but the venture capitalists that fund them see no need to take them public. 

    Now, I am sure that Uber’s shareholders are happy just now that the company isn’t subject to the daily vagaries of the stock market, but on balance the absence of “UBER” as a symbol on the NYSE or the NASDAQ  is troublesome.



At its core, the social compact between public equity markets and society is simple: over time, any investor should have access to the equity of important enterprises created by that society.  If that isn’t happening by virtue of some misalignment of incentives, then those need to be fixed.  The alternative – that the winners stay private but the losers are public – is untenable.  Investors will choose to hoard cash and capital will slowly stop circulating to its best possible use.


Given the pace of innovation that seems to be on its way, this problem may only get worse.  If the futurists are correct, there are several societal sea changes just over the horizon, from artificial intelligence to workplace automation to driverless cars, all in various stages of development.  The home for that capital right now too often has a Sand Hill Road address rather than 11 Wall Street.


We’ve come a long way from what now seems like a pretty humble proposal regarding one car company, so let’s put on bow on all this.  A few summary points:


  • For all the innovation on offer in American industry, the concept of public equity is perhaps overly reliant on an outdated concept where one equity security with proportional voting rights is the only flavor available. It is, at least, a topic worth discussing.

  • Investors, in their role as consumers, are used to custom solutions in every facet of their life – so why not think about how to apportion the value of a company to fit their needs? Yes, equity and debt are the traditional solutions.  But why do you think Exchange Traded Funds are so popular?  In part it is because they target investor needs in creative ways.  Corporate boards and investment bankers might take a page from that book.

  • Demographics and technology may force the issue. An aging US population might embrace novel approaches to accessing the corporate cash flows of public companies.  And if there is a new wave of innovation ready to drop on us, the only nature hedge might be to have access to the equity of those businesses.  Even if they don’t carry voting shares or other traditional features.

Now, one caveat: all of this needs sufficient regulation to curtail abuse.  The mortgage market of the early 2000s is the cautionary tale here, of course.  Changes to the notion of public equity need careful scrutiny to make sure disclosures are complete and structures are sound.


But in the end, “Equity” will need to evolve in the same way everything else does in a capitalist society – in a way that serves both investors and users of capital.



Tuesday, March 28, 2017

David Einhorn's Presentation How GM Can Unlock Between $13 And $38 Billion In Value

Moments ago, General Motors holder Greenlight Capital released a presentation in which David Einhorn recommended that GM should distribute, on a tax-free basis, a second class of common stock that the holder calls “Dividend Shares.”


Greenlight wants GM to split its common stock into two classes: one that pays dividends and a second that would entitle its holders to all earnings, including stock buybacks, after the dividend is paid, according to people familiar with the matter. Greenlight believes the move could attract new investors who are willing to pay more for potential earnings growth. GM has a market value of about $52.2 billion, and it pays an annual dividend of $1.52 per share.


The Dividend Shares should trade separately from the existing common stock. As shown in the presentation below, Einhorn believes that the proposed plan will unlock between $13 billion -$38 billion of shareholder value.



However, as CNBC"s David Faber reports, GM said to not agree with Greenlight’s proposal as it would jeopardize GM"s IG investment rating. Even so, GM shares are up 3% after Einhorn"s activist presentation.


As Bloomberg confirms, GM rejected the proposal to create 2 classes of stock, saying proposal is too risky and David Einhorn’s plan is “unproven." Somewhat ironically, GM also said that Einhorn proposal could lower share price, and that it has spent months talking about the proposal.


To be sure, this is not the first time Greenlight has pushed for higher prices at GM, which is one of his top holdings: Einhorn has said as far back as October 2012 that GM had a cheap valuation.


His full presentation below (link).

Wednesday, December 28, 2016

ECB Lowers Deutsche Bank's Capital Requirements, Allowing It To Pay Bonuses

While Deutsche Bank has had a generally terrible year, with its stock price plunging to all time lows on capitalization (and, at times, liquidity) concerns following the now concluded episode of its RMBS fine which the bank settled last week for roughly $7 billion of which just over $3 billion in actual cash payments, well below Wall Street"s worst case scenario, another far more important open item was whether DB executives and staffers would receive a bonus in a year in which markets seriously wondered if the biggest European bank would get a government bailout.


Here, the the rumormill was in overdrive: in October speculation was rampant was that DB would skip cash bonuses, making payments in shares of non-core units of the bank; other rumors tied bonus payments to the company"s share price, while in yet more rumors, some suggested that DB would cancel or even clawback bonuses for/from former executives.  In any case, had DB not succeeded in settling its RMBS litigation, it was assured that the German lender would not pay any bonuses to anyone.


So now that that particular episode in the bank"s history has been concluded, and the management team got an implicit greenlight to make bonus payments... a new problem emerged: Deutsche would be in further breach of its capital requirement had it made billions in bonus payments.


Fast forward to this morning when the ECB once again rode to the rescue, if not so much of Deutsche Bank the company, then certainly the employees of the German bank, and as Reuters reported overnight, Mario Draghi agreed to lower the minimum capital requirements for Deutsche Bank on Tuesday, "giving the lender more leeway to structure bonus payments and dividends."


Deutsche Bank said the ECB requires it to maintain a phase-in common equity tier 1 (CET 1) ratio of at least 9.51% on a consolidated basis, starting January 2017. This is below Deutsche Bank"s current requirement of 10.76 percent, a threshold the bank cannot fall below this year without having to limit dividends, variable remuneration and coupon payments to holders of Additional Tier 1 instruments, the bank said.


The drop in requirements for 2017 comes after a change in the rules. The ECB now expresses parts of its capital demands as voluntary guidance.


The ECB demanded that, on average, banks hold Core Equity Tier 1 capital, a key measure of their own funds, equal to 8.3% of their risky assets if they are to pay out to staff and investors. Once capital guidance is factored in, the ECB"s demands were stable year on year at 10.1%.


However, as it turns out, when that particular number makes the payment of bonuses impossible, "further revisions" are to be implemented with the blessing of the European Central Bank.