Snap's New Business Model

From the Slope of Hope: One of the hottest, most widely-anticipated IPOs in years took place in March of this year - - Snap, Inc., which is, of course, the owner of the Snap app (although they insistently refer to themselves as "a camera company".) Perhaps another mission statement is in order, however, as they appeared to have now expanded to..........Halloween costumes.

No, I am not making this up. The one and only product from Snap you can purchase on Amazon is, in fact, this costume in which you can pretend you are a hot dog. 

So the company has never made a dime, and in fact loses hundreds of millions of dollars, and its shareholders have managed to lose half their money since this dog (so to speak) went public:

In spite of this fiasco - - and laughable diversification of its business model - - I must again request that you cut Evan Spiegel, Snap"s CEO and founder, some slack, as he continues to be fully distracted by his new wife, Miranda Kerr, who found Mr. Spiegel terribly attractive around the time he made his gigantic fortune. How about that.

Howard Marks Unveils The 6 Options For Investing In Today's "Low-Return World"

Via Seabreeze Partners" Doug Kass,

In late July, Oaktree Capital Management co-chairman Howard Marks issued several market warnings in "There They Go Again ... Again," which I extensively highlighted in my Diary.

"There is plenty more food for thought in this must-read 22 pages of observations. Howard closes his musings with this advice:

"If you refuse to fall into line in carefree markets like today"s, it"s likely that, for a while, you"ll (a) lag in terms of return and (b) look like an old fogey. But neither of those is much of a price to pay if it means keeping your head (and capital) when others eventually lose theirs. In my experience, times of laxness have always been followed eventually by corrections in which penalties are imposed.

It may not happen this time, but I"ll take that risk. In the meantime, Oaktree and its people will continue to apply the standards that have served us so well over the last [thirty] years."

From my perch, greed reigns today.

As Howard relates, investors make the most -- and safest -- money when they do things that other people don"t want to do. But when most investors are unworried and taking unusually high risks, asset prices are typically elevated, risk premiums are low and markets are risky.

It"s what happens when there is too much money and too little fear."

--Kass Diary, "There They Go Again ... Again," July 27, 2017

In that July memo Howard made these principal points in evaluating current conditions:

* The market uncertainties are unusual in terms of number, scale and insolubility.

* In the vast majority of asset sectors, prospective returns are about the lowest they have ever been.

* Asset prices are high and almost nothing can be purchased at a discount to intrinsic value. In general, the best we can do is find asset classes that are less overvalued than others.

* Pro-risk behavior is commonplace as most investors are embracing increased risk.

In the commentary Howard admitted he was likely issuing a premature warning because it is better to be cautious too early than to be too late in evaluating opportunities and conditions.

Howard is no stranger to cautionary memoranda. Back in 2005, in "There We Go Again," he shared some non-consensus concerns that were most prescient, as they would precede the worst economic contraction since The Great Depression. Reading that memo would have saved an investor a boatload of money.

I find most of Howard"s commentaries as extraordinarily important in understanding market conditions and reward versus risk. His body of work always makes me think and it is invariably logical in argument and characterized by a heavy dose of analytical dissection.

Fast forward to yesterday"s newest (and another value-added) memorandum from Howard Marks, "Yet Again?"

Howard starts his latest commentary with the following introduction:

"There They Go Again . . . Again" of July 26 has generated the most response in the 28 years I"ve been writing memos, with comments coming from Oaktree clients, other readers, the print media and TV. I also understand my comments regarding digital currencies have been the subject of extensive - and critical - comments on social media, but my primitiveness in this regard has kept me from seeing them.

The responses and the time that has elapsed have given me the opportunity to listen, learn and think. Thus I"ve decided to share some of those reflections here."

--Howard Marks, "Yet Again?"

The body of Howard"s memo deals with the media"s reaction to his July memo and a further discussion of his views on bitcoin (and other cryptocurrencies), FANG, the ramifications of passive investing, investing in a low-return world and, of course, evaluating the state of the capital markets.

The State of the Market

There has been a lot of discussion about how elevated I think the market is.  I’ve pushed back strongly against people who describe me as “super-bearish.”  In short, as I wrote in the memo, I believe the market is “not a nonsensical bubble – just high and therefore risky.” 

I wouldn’t use the word “bubble” to describe today’s general investment environment.  It happens that our last two experiences were bubble-crash (1998-2002) and bubble-crash (2005-09).  But that doesn’t mean every advance will become a bubble, or that by definition it will be followed by a crash.

Current psychology cannot be described as “euphoric” or “over-the-moon.”

Most people seem to be aware of the uncertainties that are present and of the fact that the good times won’t roll on forever.

Since there hasn’t been an economic boom in this recovery, there doesn’t have to be a major bust.

Leverage at the banks is a fraction of the levels reached in 2007, and it was those levels that gave rise to the meltdowns we witnessed.

Importantly, sub-prime mortgages and sub-prime-based mortgage backed securities were the key ingredient whose failure directly caused the Global Financial Crisis, and I see no analog to them today, either in magnitude or degree of dubiousness.

It’s time for caution, as I wrote in the memo, not a full-scale exodus.  There is absolutely no reason to expect a crash.  There may be a painful correction, or in theory the markets could simply drift down to more reasonable levels – or stay flat as earnings increase – over a long period (although most of the time, as my partner Sheldon Stone says, “the air goes out of the balloon much faster than it went in”).

Howard concludes his latest memo with the following:

"A lot of the questions I"ve gotten on the memo are one form or another of "So what should I do?" Thus I"ve realized the memo was diagnostic but not sufficiently prescriptive. I should have spent more time on the subject of what behavior is right for the environment I think we"re in.

In the low-return world I described in the memo, the options are limited:

1. Invest as you always have and expect your historic returns.

2. Invest as you always have and settle for today"s low returns.

3. Reduce risk to prepare for a correction and accept still-lower returns.

4. Go to cash at a near-zero return and wait for a better environment.

5. Increase risk in pursuit of higher returns.

6. Put more into special niches and special investment managers.

It would be sheer folly to expect to earn traditional returns today from investing like you"ve done traditionally (#1). With the risk-free rate of interest near zero and the returns on all other investments scaled based on that, I dare say few if any asset classes will return in the next few years what they"ve delivered historically.

Thus one of the sensible courses of action is to invest as you did in the past but accept that returns will be lower. Sensible, but not highly satisfactory. No one wants to make less than they used to, and the return needs of institutions such as pension funds and endowments are little changed. Thus #2 is difficult.

If you believe what I said in the memo about the presence of risk today, you might want to opt for #3. In the future people may demand higher prospective returns or increased prospective risk compensation, and the way investments would provide them would be through a correction that lowers their prices. If you think a correction is coming, reducing your risk makes sense. But what if it takes years for it to arrive? Since Treasurys currently offer 1-2% and high yield bonds offer 5-6%, for example, fleeing to the safety of Treasurys would cost you about 4% per year. What if it takes years to be proved right?

Going to cash (#4) is the extreme example of risk reduction. Are you willing to accept a return of zero as the price for being assured of avoiding a possible correction? Most investors can"t or won"t voluntarily sign on for zero returns.

All the above leads to #5: increasing risk as the way to earn high returns in a low-return world. But if the presence of elevated risk in the environment truly means a correction lies ahead at some point, risk should be increased only with care. As I said in the memo, every investment decision can be implemented in high-risk or low-risk ways, and in risk-conscious or risk-oblivious ways. High risk does not assure higher returns. It means accepting greater uncertainty with the goal of higher returns and the possibility of substantially lower (or negative) returns. I"m convinced that at this juncture it should be done with great care, if at all.

And that leaves #6. "Special niches and special people," if they can be identified, can deliver higher returns without proportionally more risk. That"s what "special" means to me, and it seems like the ideal solution. But it"s not easy. Pursuing this tack has to be based on the belief that (a) there are inefficient markets and (b) you or your managers have the exceptional skill needed to exploit them. Simply put, this can"t be done without risk, as one"s choice of market or manager can easily backfire.

As I mentioned above, none of these possibilities is attractive or a sure thing. But there are no others. What would I do? For me the answer lies in a combination of numbers 2, 3 and 6.

Expecting normal returns from normal activities (#1) is out in my book, as are settling for zero in cash (#4) and amping up risk in the hope of draws from the favorable part of the probability distribution (#5) (our current position in the elevated part of the cycle decreases the likelihood that outcomes will be favorable).

Thus I would mostly do the things I always have done and accept that returns will be lower than they traditionally have been (#2). While doing the usual, I would increase the caution with which I do it (#3), even at the cost of a reduction in expected return. And I would emphasize "alpha markets" where hard work and skill might add to returns (#6), since there are no "beta markets" that offer generous returns today.

These things are all embodied in our implementation of the mantra that has guided Oaktree in recent years: "move forward, but with caution."" 

*  *  *

Run, don"t walk, to read Howard Marks" newest commentary.

Move forward, but with caution.

50,000 Police Monitor As 47 Million French Voters Decide The Fate Of Europe

After months of anticipatory build up, voting is underway in France on Sunday in the first round of a bitterly fought presidential election that is seen as crucial to the future of the Eurozone, and a closely-watched test of voters" anger with the political establishment.

Local polling stations opened at 0600 GMT and will close at 1800 GMT, with about 47 million voters expected to cast their ballots in around 67,000 polling stations amid a high terror alert.

Voters, on edge after Thursday"s latest ISIS terrorist attack, will be monitored by more than 50,000 police officers backed by elite units of the French security services patrolled the streets less than three days after a suspected Islamist gunman shot dead a policeman and wounded two others on the central Champs Elysees avenue.

A voté ????#JeVote pic.twitter.com/ZZTw1ZAe7F

— Marine Le Pen (@MLP_officiel) April 23, 2017

A voté. pic.twitter.com/E2DVMIHak8

— Emmanuel Macron (@EmmanuelMacron) April 23, 2017

By noon (6.00 a.m. ET), turnout amid perfect weather conditions across much of France was 28.54%, according to official figures, roughly the same as in the 2012 first round, in which almost 80% eventually took part.

Finally Inside the Lycée in London to vote in French president elex after 2 hours of lines outside And now, more lines. #Presidentielle2017 pic.twitter.com/0UZyzz4EUJ

— Yann Tessier (@Y_Tessier) April 23, 2017

Some polls had been predicting a much lower turnout, closer to the 70% that took the then National Front leader Jean-Marie Le Pen into the second round in 2002. Pollsters are unclear about what a low or high turnout could mean in 2017.

Long queues of French nationals in London waiting to vote in today"s presidential election #frenchelection pic.twitter.com/C4cKFNtp0S

— MarieLouiseGumuchian (@MLGumuchian) April 23, 2017

While we have previewed today"s event extensively (most recently here), Reuters summarized it best: today "voters will decide whether to back a pro-EU centrist newcomer [and a former Rothschild banker], a scandal-ridden veteran conservative who wants to slash public spending, a far-left eurosceptic admirer of Fidel Castro or to appoint France"s first woman president who would shut borders and ditch the euro."

The outcome of today"s election will show whether the populist tide that led to Brexit and Donald Trump"s victory is still rising, or starting to ebb.

The biggest wildcard ahead of today"s outcome is the high level of indecision among the population, with nearly a third of potential voters undecided until the last minute. Hanan Fanidi, a 33-year-old financial project manager, was still unsure as she arrived at a polling station in Paris" 18th arrondissement.

"I don"t believe in anyone, actually. I haven"t arrived at a candidate in particular who could advance things. I"m very, very pessimistic," she said.

Looking at the outcome of today"s vote, while the possibility of a Le Pen-Melenchon run-off is not the most likely scenario, it is the one which alarms bankers and investors.

Putting the performance of Marin Le Pen - as well as that of her father Jean-Marie - in election context:

• Jean-Marie Le Pen, 2002: 16.8%


• Jean-Marie Le Pen, 2007: 10.4%


• Marine Le Pen, 2012: 17.9%

Le Pen has told supporters "the EU will die", while Macron, 39, a former Rothschild banker wants to further beef up the euro zone. Le Pen further wants to return to the Franc, re-denominate the country"s debt stock, tax imports and reject international treaties. Melenchon also wants to radically overhaul the European Union and hold a referendum on whether to leave the bloc.

Le Pen or Melenchon would struggle, in parliamentary elections in June, to win a majority to carry out such radical moves, but their growing popularity also worries France"s EU partners.

Germany"s position on today"s election is hardly a surprise: "It is no secret that we will not be cheering madly should Sunday"s result produce a second round between Le Pen and Melenchon," German Finance Minister Wolfgang Schaeuble said. If either Macron or Fillon were victorious, each would face challenges. For Macron, a big question would be whether he could win a majority in parliament in June. Fillon, though likely to struggle less to get a majority, would likely be dogged by an embezzlement scandal, in which he denies wrongdoing.

Meanwhile, polls opened on Saturday in France’s overseas territories, allowing citizens to cast their ballots a day ahead of voters on the French mainland. According to unconfirmed twitter reports, based on preliminary offshore results, support for Melenchon is far greater than for any of his competitors.

.@BFMTV ????????????#Élysée2017 : La #RTBF publie les résultats définitifs en #Guyane : #Mélenchon 24,72%#LePen 24,29%#Macron 18,75%#Fillon 14,66% pic.twitter.com/5CVZyGmDtn

— ????Le Globe (@LeGlobe_info) April 23, 2017

Occasional live feed from Paris courtesy of Reuters:

Odds Of Healthcare Bill Passing Today Plunge To 13%

Looking for the silver lining . . . .

Rush just made the point that the wise guys managing the repeal of Obamacare have an ulterior motive for NOT repealing it all at once.

Obamacare gives the Secretary of HHS the power to make changes to Obamacare. The Trumpniks MAY intend to keep this part of Obamacare for awhile while the Secretary, Tom Price, uses the power that Obamacare gives him to maim and gut it "on the hoof", and then when it"s nothing but bloody, useless barely living skeleton, administer the coup de grace by repealing it.

So, cheer up.