Liberals Behind "The Young Turks" And Vice Apologize For Blatant Sexism

The founders of two liberal news outlets found themselves apologizing over sexist remarks and a "boy"s club" environment filled with sexual harassment. Cenk Uygur, creator and host of popular liberal news show, The Young Turks (TYT), apologized last week for a series of now-deleted blog and social media posts from the early 2000s, published by The Wrap. 

Cenk Uygur

In one entry from 2000 entitled "Rules of Dating," Uygur says of third dates: "If I haven"t felt your tits by then, things are not about to last much longer. In fact, if you don"t get back on track by the fourth date, you"re done." Uygur"s "Rule 2" of dating: "There must be orgasm by the fifth date," and "Rule 3" states "There must be sex by the second month of dating."

There are a lot of allowable exceptions to this rule, but they all involve orgasms.  I"ll let you slide if for unseen circumstances we haven"t gotten to see each other much, and you have been providing me with some excellent orgasms in the meanwhile.

 

But there are no foreseeable reasons why anyone would slip into the fourth month of dating without sex.  But since you do provide a certain level of sexual satisfaction, I will give a requisite talking to you to see "what"s wrong."  If you don"t give it up the date after "the talk," you"re done. -Cenk Uygur

In another post, after an apparent lack of sex, Uygur declared that "the genes of women are flawed" because they "do not want to have sex nearly as often as needed for the human race to get along peaceably and fruitfully." 

There"s quite a bit more on Uygur"s past statements which have been compiled by journalist Cassandra Fairbanks.

Uygur"s defense to his old posts was to claim he was a was a different back then; "I had not yet matured and I was still a conservative who thought that stuff was politically incorrect and edgy. When you read it now, it looks really, honestly, ugly." This post from January, 2000, however - in which Uygur slams conservative Pat Buchanan, suggests his ugliness was coming from the left.   

Oh boy, @TheYoungTurks need to buckle up because if 1/3 of what im hearing is true I can’t see them lasting past Spring. The death blows won’t even be coming from the right, either.

— Cassandra Fairbanks (@CassandraRules) December 24, 2017

In this week"s second exposé, the New York Times ousts left-leaning media outlet VICE for its "boy"s club" environment - from which allegations of sexual harassment and revenge were levied by over two dozen women who say they experienced or witnessed sexual misconduct at the company. 

VICE co-founders Shane Smith and Suroosh Alvi (Reuters/Mike Segar)

VICE settled with four other women for sexual harassment or defamation as well. 

An investigation by The New York Times has found four settlements involving allegations of sexual harassment or defamation against Vice employees, including its current president. -NYT

In a statement to The Times, CEO Shane Smith and co-founder Suroosh Alvi said “from the top down, we have failed as a company to create a safe and inclusive workplace where everyone, especially women, can feel respected and thrive,” adding that a "boys club" culture at Vice had "fostered inappropriate behavior that permeated throughout the company." 

In 2016, Vice"s president, Andrew Creighton paid $135,000 to a former employee who was fired after she wouldn"t sleep with him, while earlier this year, VICE settled with former employee Martina Veltroni, who claimed that her supervisor retaliated against her after they had a sexual relationship. The supervisor, Jason Mojica - the former head of Vice News, was fired last month. 

Joanna Fuertes-Knight

The $6 billion media company also reached a $24,000 settlement with a London journalist, Joanna Fuertes-Knight, who said she had been sexually harassed, and suffered racial and gender discrimination along with bullying. She claims that a Vice producer, Rhys James, made sexist statements to her - including asking whether or not she slept with black men, as well as the color of her nipples. 

Vice started out in 1994 as a punk magazine in Montreal, Canada, before growing to a multi-billion dollar multimedia company catering to millennials. Walt Disney owns an 18% stake, while private equity firm TPG invested $450 million in June, valuing the company at around $5.7 billion. 

These PE Firms Are About To Get Crushed By Their Subprime Auto Bets

In the aftermath of the "great recession," private equity firms placed massive bets on subprime auto finance companies with the typical "thesis" going something like this: "well, people have to get to work don"t they?"...genius, if we understand it correctly.

Of course, the "thesis" seemed to be confirmed when auto securitizations performed relatively well throughout the financial crisis, amid a sea of mortgage bonds getting wiped out, and private equity titans were off to the races with wall street titans from Perella Weinberg to Blackstone and KKR scooping stakes in small niche lenders.

Unfortunately, as Bloomberg points out today, the $3 billion bet on subprime auto lenders hasn"t played out precisely to plan as the "well, people have to get to work" thesis has proved to be somewhat less than full proof.

A Perella Weinberg Partners fund has been sitting on an IPO of Flagship Credit Acceptance for two years as bad loan write-offs push it into the red. Blackstone Group LP has struggled to make Exeter Finance profitable, despite sinking almost a half-billion dollars into the lender since 2011 and shaking up the C-suite multiple times. And Wall Street bankers in private say others would love to cash out too, but there’s currently no market for such exits.

 

Since the turn of the decade, buyout firms, hedge funds and other private investors have staked at least $3 billion on non-bank auto lenders, according to Colonnade. Among PE firms, everyone from Blackstone and KKR & Co. to Lee Equity Partners, Altamont Capital and CIVC Partners waded in.

 

Many targeted smaller finance companies that often catered to the least creditworthy borrowers with nowhere else to turn. Overall, subprime car loans -- those extended to people with credit scores of 620 or lower -- have increased 72 percent since 2011. Last year, about 20 percent of all new car loans went to subprime borrowers.

 

“The PE guys sailed into this thing with stars in their eyes. Some of the businesses have done fine and some haven’t,” said Chris Gillock, managing director at Colonnade Advisors, a boutique investment bank. But right now, “it’s about as out-of-favor a sector as I can think of.”

Of course, the turnaround strategy was "simple." Given that subrpime auto collateral held up well during the great recession, private equity investors figured they were sitting on rock solid collateral that would holdup under even the most egregious loosening of underwriting standards.  Therefore, given that there was "no downside", lenders wholeheartedly embraced deteriorating underwriting standards, like stretching out terms so borrowers could "afford" cars they couldn"t really afford, as a way to grow their loans books. 

Alas, it didn"t work out as planned as subprime delinquencies are suddenly soaring and used car prices are tanking...making profits somewhat elusive.

Take Exeter. The company, which is licensed in all 50 states and works with roughly 10,000 dealerships, hasn’t been profitable since 2011, when Blackstone took a majority stake, an S&P Global Ratings report in September showed. That’s after the PE firm invested $472 million to help Exeter expand and cycled through three CEOs at the lender.

 

On a pretax basis, Exeter turned a profit in 2016 and 2017, according to Matthew Anderson, a spokesman at Blackstone. He added the New York-based firm hasn’t tried to sell the lender.

 

Blackstone may look to unload Exeter later next year, said a person familiar with the matter, who asked not to be identified because it’s private.

 

Bad loans remain an issue. This year, a rash of delinquencies in two bonds stuffed with loans that Exeter made in 2015 caused the securities to dip into their extra collateral to keep investors whole.

 

Another example is Flagship, which Perella Weinberg bought in 2010. (Innovatus Capital Partners, which manages the lender on behalf of Perella Weinberg, was formed by former Perella Weinberg managers last year after they split from the firm.)

As it turns out, the "well, people have to get to work" thesis only works to the extent that auto manufacturers maintain some level of discipline and refrain from exploiting their captive finance companies to flood the market with new supply...a move which will eventually lead to crashing used car prices and massive subprime securitization losses.

Unfortunately, as we pointed out last month, a review of the latest Fed data on auto loans underwritten by "Banks and Credit Unions" compared to those loans provided by "Auto Finance" companies prove that the nightmare scenario is playing out for subprime lenders...

First, taking a look at auto loans provided by traditional banks and credit unions, one can see some marginal deterioration in subprime auto loans.  That said, the deterioration is certainly nothing substantial with 90-day delinquencies pretty much in line with 2004/2005 levels and no where near the rates experienced in 2008/2009.

 

 

But, a drastically different picture emerges when looking at just the auto loans originated by America"s auto finance captives.  To our great "shock", auto OEMs in the U.S. seem to have been much more "flexible" on underwriting standards over the past couple of years resulting in delinquency rates that nearly rival those last experienced at the height of the great recession.

 

Of course, we"re sure that GM Financial and Ford Motor Credit just got unlucky with their deteriorating credit portfolios...certainly they would never knowingly attempt to game their own short-term financial success by putting millions of Americans into cars they can"t possibly afford, right?

CalPERS Goes All-In On Pension Accounting Scam; Boosts Stock Allocation To 50%

Starting July 1, 2018 stock markets around the world are going to get yet another artificial boost courtesy of a decision by the $350 billion California Public Employees" Retirement System (CalPERS) to allocate another $15 billion in capital to already bubbly equities.  Of course, if this decision doesn"t make sense to you that"s because it"s not really meant to make sense. 

As Pensions & Investments notes, CalPERS" decision to hike their equity allocation had absolutely nothing to do with their opinion of relative value between assets classes and nothing to do with traditional valuation metrics that a rational investor might like to see before buying a stake in a business but rather had everything to do with gaming pension accounting rules to make their insolvent fund look a bit better.  You see, making the rational decision to lower their exposure to the massive equity bubble could have resulted in CalPERS having to also lower their discount rate for future liabilities...a move which would require more contributions from cities, towns, school districts, etc. and could bring the whole ponzi crashing down. 

The new allocation, which goes into effect July 1, 2018, supports CalPERS" 7% annualized assumed rate of return. The investment committee was considering four options, including one that lowered the rate of return to 6.5% by slashing equity exposure and another that increased it to 7.25% by increasing the exposure to almost 60% of the portfolio.

 

The lower the rate of rate means more contributions from cities, towns and school districts to CalPERS. Those governmental units are already facing large contribution increases — and have complained loudly at CalPERS meetings — because a decision by the $345.1 billion pension fund"s board in December 2016 to lower the rate of return over three years to 7% from 7.5% by July, 1, 2019.

Meanwhile, there was only one dissenting vote on the decision to hike the fund"s equity exposure.  Ironically, the dissent did not come from a rational investor looking to preserve the fund"s assets, but rather from a board member named J.J. Jelincic who wanted to go all-in on the pension accounting scam and hike the fund"s equity allocations to 60% so that discount rates could be raised even higher than the current 7%.

Of course, this is hardly a new topic for us. As we pointed out a year ago in a post entitled "CalPERS Board Votes To Maintain Ponzi Scheme With Only 50bps Reduction Of Discount Rate," each year CalPERS has to weigh mathematical realities against the risk of disrupting the ponzi scheme and forcing several California cities to the brink of bankruptcy with lower discount rates..."mathematical realities" rarely win that fight.

But a CalPERS return reduction would just move the burden to other government units. Groups representing municipal governments in California warn that some cities could be forced to make layoffs and major cuts in city services as well as face the risk of bankruptcy if they have to absorb the decline through higher contributions to CalPERS.

 

“This is big for us,” Dane Hutchings, a lobbyist with the League of California Cities, said in an interview. “We"ve got cities out there with half their general fund obligated to pension liabilities. How do you run a city with half a budget?”

 

CalPERS documents show that some governmental units could see their contributions more than double if the rate of return was lowered to 6%. Mr. Hutchings said bankruptcies might occur if cities had a major hike without it being phased in over a period of years. CalPERS" annual report in September on funding levels and risks also warned of potential bankruptcies by governmental units if the rate of return was decreased.

Under the plan adopted Monday, in addition to their 50% equity allocation, CalPERS will have a 28% weighting to fixed income, up from 20%.  Real assets, which includes real estate, will keep its 13% allocation, while private equity will remain at 8% and CalPERS" liquid portfolio, made up of cash and other short-term instruments, will fall to 1% from 4%.

Meredith, Koch Brothers Buy Time Inc In $2.8 Billion Deal

Confirming rumors that had swirled over the past 10 days, on Sunday night Meredith Corp., publisher of Better Homes & Gardens, Martha Stewart Living and Family Circle announced it has agreed to acquire all of Time Inc"s outstanding shares for $18.50/share or $1.85BN; including the assumption of Time"s debt, the deal is valued at a total of $2.8 billion. Meredith has secured $3.55BN in debt financing from RBC Capital Markets, Credit Suisse, Barclays and Citigroup Global Markets, according to the FT.

More importantly, the acquisition is also backed with a $650 million preferred equity commitment from Koch Equity Development, the private equity firm of Charles and David Koch, giving the conservative billionaires a stake in one of America’s best-known publishers. That said, the Kochs will not have a seat on Merediths board and, the company said, “will have no influence on Meredith’s editorial or managerial operations”.

That remains to be seen, especially if Trump now develops aspirations toward Meredith"s Man of the Year award. Needless to say, it is the Koch"s takeover of Time that is giving the left nightmares:

This item about Koch having “no influence” over TIME should give you as much assurance as WSJ’s “editorial independence committee,” which caved to Murdoch just 4 months after the acquisition https://t.co/JUlSLktdih

— Bill Grueskin (@BGrueskin) November 27, 2017

In any case, this is Meredith’s third run at 94-year-old Time according to the FT, which publishes Time, People and Sports Illustrated magazines. The deal has been approved by both companies’ boards and is expected to close in the first quarter of 2018.

As the WSJ reports, "the deal caps the end of an era."

Time, whose namesake Time magazine hit the newsstands in March 1923, emerged as one of the country’s great journalistic enterprises, shaping both the political and cultural landscapes. But in recent years, the magazine publisher lost ground as a shift among readers to digital platforms cut into traditional print revenue and a new generation of online rivals emerged.

Like most other legacy media outlets, Time has been trying to transform itself from a print to a digital media business in the face of successive years of declining revenues but has been shackled with a $1.2bn long-term debt burden. The $2.8bn deal value includes assumption of Time Inc’s debt.  The company has been making sweeping cost cuts, eliminating 300 jobs, cutting back the circulation and frequency of some of its best-known magazines, and attempting to sell its UK magazines division. Time Inc. has also been investing in online video and branded content and even a subscription services for pet owners, yet its print magazine circulation and advertising still account for about two-thirds of total revenue. In the first nine months of the year, magazine revenue dropped 17% to $1.3 billion. Time Inc. claims 30 million print subscribers, although that sounds like the fakest news yet. Time expects to generate about $1 billion this year in nonmagazine revenue.

Time has struggled to find a path to growth since its spinoff from Time Warner in 2014. The publisher’s shares lost more than a third of their value, even as Time has cut traditional jobs while adding digital staffers, reorganized its ad sales and scaled back the circulation and frequency of some titles. As the FT adds:

"Time Inc’s 3½-year run as a standalone publisher has been rocky. It has been hard hit by the erosion of print and has not recorded revenue growth over the past six years. A strategic reorganisation aimed at growing digital revenues and reaching a wider audience has shown some progress, but has been overshadowed by the woes of its traditional magazine business, where revenues have dropped 14 per cent from a year ago."

Time"s new owner, Iowa-based Meredith, publishes monthly magazines aimed at women, including Better Homes & Gardens, Martha Stewart Living and Family Circle, and has long coveted Time titles such as People and InStyle. It has tried and failed to reach a deal twice before. In 2013, talks with Time Warner, which then owned Time Inc, fell apart and the publisher was spun off as an independent company.

Stephen Lacy, Meredith’s chairman and chief executive, said the combined company will be able to reach almost 200 million consumers across all platforms, including digital. “The vision is the absolute premiere media company in the country with premium branded content on every platform,” Mr. Lacy said in an interview. “We’re very excited to bring these businesses together.” Lacy said he has never met with the Koch brothers. “They won’t have a seat on the board of which I chair,” he added.

Meredith’s own magazine revenue has slipped slightly, but it has somewhat of a buffer thanks to its ownership of local television stations. For the fiscal year ended June 30, revenue at its magazine group fell 2% to $1.08 billion, while its TV station group saw revenue rise 15% to $630 million.

Few in the magazine industry have been spared the downturn in print and difficulties of building a sustainable digital business. Condé Nast, the owner of Vanity Fair and Vogue, is slashing budgets and staff; Vanity Fair’s new editor has been tasked with trimming its costs by 30 per cent. Rolling Stone, the iconic rock-and-roll magazine, is being sold by its founder.

As the WSJ concludes, for Time CEO Rich Battista, the sale may be bittersweet. Soon after he took the reins in September 2016, Time found itself the target of several interested buyers, and then a sale process dragged on for months with no deal. While Mr. Battista has emphasized the company’s digital efforts and ramped up the production of TV programming and video, he had relatively little time to shift Time toward a more robust digital future.

“As a publicly traded company, and one operating in such a dynamic industry as media, we know circumstances can change quickly,” Mr. Battista said in a memo to employees. “Meredith presented us with an opportunity to combine companies to create even greater scale and financial flexibility.”

Finally, in light of the animosity between the Koch"s and Trump, the president can forget being Time man of the year for 2017 or as long as the billionaires are de facto in charge.

"This Is A Paralyzed Market": Hedge Fund Turnover Drops To All Time Low

Back in July, Canaccord analyst Brian Reynolds put out a contrarian piece which broke with numerous conventional wisdom norms about the state of the market, key among which was that traders are not complacent, but rather - in light of collapsing trading volumes, something which has plagued bank income statements in the past 2 quarters - simply paralyzed, as they no longer have a grasp of financial "logic" when it is all superceded by central bank liquidity injections, and as such most trades feel fake, forced and just part of the FOMO charade to avoid losing one"s job.

As Reynolds explained, "Investors are not complacent. Their stances range from extremely aggressive to bearish" and added that these "opposing forces have led to a compression of volatility. When stocks have rallied strongly, they have then been met with investor selling. When stocks sell off, the buybacks have picked up after the selling runs its course. That has been the case for more than eight years. Those forces have led to an equity bull market that moves higher in fits and starts, with some brief pullbacks from time to time. Given the positioning of equity investors and continued flows into credit, we do not see that pattern changing for some time." Meanwhile, sandwiched inbetween these two trends, investors - both retail and institutional - find themselves in trade limbo, and the outcome is a gradual decline in trading volumes "which is more reflective of paralysis than complacency among equity investors."

And while one can posit theories explaining this bizarre market until one is blue in the face, the most vivid confirmation of Reyonld"s "paralysis" thesis emerged in the latest batch of hedge fund 13Fs, which was analyzed by Goldman earlier this week, and noted here in "These Are The Top 50 Hedge Fund Long And Short Positions."

In the report, Goldman highlighted various notable outliers, such as the latest record high in hedge fund leverage...

... coupled with the recent plunge in short interest (which as a share of S&P 500 market cap sits just below 2.0%, matching January of this year as the lowest level since 2012)...

... even as hedge fund "crowding" in a handful of top names hits an all time high:

But the most interesting to us, and the hedge fund community, we believe is the following chart, which shows that hedge fund portfolio turnover continued its downward trend and reached a new record low in the third quarter Across all portfolio positions, turnover registered 26% in 3Q. Turnover of the largest quartile of positions, which make up the vast majority of fund portfolios, fell to just 13%.

This means that once hedge funds have established positions, they no longer trade in and out, but simply lean back and let it ride. And why not: with the most popular hedge fund positions this year being also the best performing ones, namely Facebook, Amazon, Alibaba, Alphabet and Microsoft, why ever both selling.  Indeed, as the next chart shows, the bulk of the collapsing turnover is largely due to tech stocks:

Of course, this strategy of loading up on winner and letting them ride is a two-edged sword. while it is the best strategy on the way up, it also becomes a quasi private equity strategy, in which the price formation is created on the margin with increasingly less volume. And, since such tech holdings are becoming ever more illiquid, the threat is what happens once the narrative shifts and instead of buying, hedge funds start to sell these most concentrated of growth names. One could say that a tech selloff is emerging as one of the more concerning black - or at least gray - swans in the market. In fact, we are did say just that...

Facebook, Amazon, Alibaba, Google, Microsoft are the 5 most widely held HF stocks. Tech selloff = black swan pic.twitter.com/XXJ6PRbwUP

— zerohedge (@zerohedge) November 22, 2017

CalPERS Calls The Top: Largest Public Pension Fund Mulls Dumping $50 Billion Of Stocks

Is the largest public pension fund in the United States getting ready to dump about $50 billion worth of stocks?  According to a new note from Bloomberg, CalPERS" board is meeting for a workshop today in Sacramento to discuss asset allocations for the upcoming year which could include a doubling of the fund"s bond allocation from 19% to 44% which would be funded with a massive $50 billion sell down of equities.

Calpers is looking at a menu of options for its fixed-income target ranging from the current 19 percent to as much as 44 percent, according to a presentation for a board workshop in Sacramento coming up Monday. Equities could be cut to as little as 34 percent from 50 percent. Stocks were the best-performing asset class in fiscal 2017, returning almost 20 percent.

 

“The markets have had a pretty good run and it’s possible Calpers staff is thinking this might be a good time to lock in some of the gains,” Keith Brainard, research director for the National Association of State Retirement Administrators, said in a phone interview.

Unfortunately, as we"ve noted before (see: CalPERS Board Votes To Maintain Ponzi Scheme With Only 50bps Reduction Of Discount Rate), a shift toward higher fixed income allocations may require a simultaneous decrease in the fund"s discount rate assumptions which could drastically increase contribution requirements from various public employers all around the Golden State.

“We’ve cut the return expectation to the point that employers are screaming, ‘We can’t afford it. We can’t afford it,’ ” Jelincic said. “I personally would be willing to take on a little more risk.”

 

The average allocation for public pensions is about 23 percent to fixed income and 49 percent to stocks, according to Nasra data.

 

The Calpers board is scheduled to vote on the allocation in December. Almost all of the fixed-income and stock holdings are managed in-house while more complex assets, such as private equity and real estate, are overseen by outside consultants. Allocations to private equity and real assets would stay at 8 percent and 13 percent, respectively, under all scenarios under consideration.

 

The allocation revisions occur every four years. Calpers is working to provide for a growing wave of longer-living retirees.

Of course, while a more conservative asset allocation may be warranted in the current bubbly equity environment, often logic is quickly dismissed by politicians when it"s implementation could expose a massive ponzi scheme that has been hiding in plain sight for decades and risks the financial solvency of local and/or statewide government entities. 

This battle between math/logic and politicians has played out numerous times in states all across the country and somehow we suspect that "math/logic" will continue to lose...better to bury your head in the sand for a couple of more years and pretend there is no problem.

Saudi Wealth Fund Aims To Double AUM To $400 Billion By 2020 - Discovers Leverage Boosts Returns

Saudi Arabia’s sovereign wealth fund, a key engine of the kingdom’s plan to diversify the economy, on Wednesday laid out new targets for growth, saying it aims to nearly double the value of assets it manages to around $400 billion by 2020. That sum includes the expected proceeds from the planned initial public offering of up to 5% of state-owned oil giant Saudi Aramco. The listing, slated for next year, could raise as much as $100 billion, Saudi officials have said. The Saudi fund, called the Public Investment Fund or PIF, held assets worth roughly $224 billion as of September, it said in a document released on Wednesday. It had previously struggled to calculate the value of its holdings, estimating them to be between $200 billion and $300 billion. The PIF has made a series of high-profile investments and announcements since Saudi Arabia unveiled its long-term plan for economic overhaul last year. It has invested $3.5 billion in Uber Technologies Inc., and committed $45 billion to a technology fund led by SoftBank Group Corp.

The PIF’s announcement highlighted its aim of raising the fund’s annual returns.

“The Program also encompasses efforts to maximize value in PIF’s existing assets, which make up the majority of the Fund’s holdings, and a new target to increase PIF’s Total Shareholder Returns (TSR) up from 3 percent to between 4 to 5 percent.”

While our calculation suggests that they’ll need at least 5% to reach $400bn by 2020, Reuters reports that the PIF is even more optimistic about the “long-term”, aiming for 6.5-9.0% - all-time highs in equities and all-time lows in bond yields notwithstanding.

How will it do this?

As Reuters reported from the Future Investment Initiative in Riyadh, it will invest in almost every asset class (apart from gold and cryptos it seems) and – this might be important - add leverage to juice its performance.

“The 96-page program said PIF will structure its investments in six areas: Saudi equity holdings, sector development, real estate and infrastructure, mega projects, international strategic investments and a “diversified pool” across global asset classes….

 

Outside of Saudi Arabia, PIF’s investments will be in a number of assets such as fixed-income, public equity, private equity and debt, real estate, infrastructure and alternative investments such as hedge funds, the fund said…

 

It also outlined its four major sources of funding to include capital injections from the government, government asset transfers, loans and debt instruments as well as retained earnings from investments.

The PIF’s managing director, Yasir Al-Rumayyan, explained to Bloomberg how it discovered collateralized lending.

“If you look at investments we have today, it’s basically all equity -- we need to look at leverage,” Al-Rumayyan said at the event Tuesday.

 

“If we’re in one project, we can use the underlying project as the base for the leverage with no recourse to the rest of the portfolio.”

It"s not just about returns, however. The PIF’s press release estimated that its program will lead to the creation of nearly 300,000 new jobs.

The Public Investment Fund (PIF) Program (2018-2020) has today been launched as part of the Kingdom’s Vision 2030 Vision Realization Programs (VRP)…

 

The four key objectives underpinning the Program include growing and maximizing PIF assets; launching new sectors; localizing advanced technologies and knowledge; and building strategic economic partnerships…

 

The PIF Program, which is underpinned by 30 separate initiatives, will see the Fund’s AUM increase to SAR 1.5 trillion (over $400 billion) by 2020, creating 20,000 direct domestic jobs, more than half of which are high-skilled roles, and 256,000 construction jobs, which will increase PIF’s contribution to real GDP from 4.4 percent to 6.3 percent

For anyone who’s a tad skeptical about any of this, there were soothing words from “MBS” in the PIF’s press release. HRH Prince Mohammad bin Salman Al-Saud, said:

“The PIF Program represents a vital milestone as we work towards realizing Vision 2030. As well as being recognized for being well-capitalized, the Fund also wants to be known as being well-run, transparent and well-governed, and the PIF Program will ensure this ambition is delivered."

Vulture Investors Swarm To Houston As Flooded Homes Sell For 40 Cents On The Dollar

      "The time to buy is when after there"s blood water in the streets."

As 1,000"s of families along the Texas shoreline continue to struggle with putting their lives back together following the apocalyptic landfall of Hurricane Harvey roughly 6 weeks ago, vulture investors are increasingly swooping in to exploit their misery with offers to buy flooded homes for cents on the dollar.  As Bloomberg points out this morning, one such investor is Bryan Schild who has sourced capital from local "hard-money lenders" to scoop up 30 flooded homes for as little as 40 cents on the dollar.

Bryan Schild drives through the byways of Houston looking for what could be the investment opportunity of a lifetime: homes selling for as little as 40¢ on the dollar. “We Pay Cash For Flooded Homes $$$$$$$$ Don’t fix it, sell it. Quick close,” read the signs piled in the back seat of his Ford pickup.

Schild stops by a ranch-style house where 74-year-old Paul Matlock lives with his wife, disabled from multiple sclerosis. Matlock is desperate to leave and is considering Schild’s offer of $120,000—half the home’s value three weeks earlier. A half-dozen other investors have made offers, one as low as $55,000. “The whole thing makes me feel like there’s a bunch of vultures sitting on my back fence,” Matlock says. “They’re waiting for the dead body to fall over.”

It’s axiomatic on Wall Street that the time to buy is when fear overtakes greed—when blood (or, in this case, water) is in the streets. Now some are eyeing the billions of dollars in hurricane-ravaged property in Texas and Florida and deciding it may be the time to take out their checkbooks. Investors such as Schild figure they can buy low, either fix up and flip the houses or rent them out for several years, and unload them later, doubling their money or more.

And if exploiting the elderly isn"t enough to make you a little queasy, how about taking advantage of a disabled Army vet who has been forced to live out of a hotel room and eat two meals a day just to save a little cash after he lost his home to Hurricane Harvey...

One of Schild’s prospects is Joseph Hernandez, a disabled U.S. Army veteran married to a housekeeper. The couple are living in a hotel and saving money by eating only two meals a day. Schild has made them a painful offer. If they walk away from their two-bedroom house, worth $127,000 before Hurricane Harvey, Schild will pick up the mortgage payments, paying nothing else. Although he says he sympathizes with the Hernandezes’ plight, he thinks the offer is fair because he figures the home is now worth less than its $65,000 mortgage.

Hernandez is in a bind. He didn’t buy flood insurance because his house wasn’t in a high-risk area. He can’t afford to rebuild, and he’s been told he’s eligible for only $23,000 in federal assistance. If he turns over the deed, he’s looking at losing the entire $60,000 in equity he had before the flood. “It’s blurry, what’s coming,” he says. “We’ll probably have to sell to an investor, and that’s not good. We were forced out.”

Hernandez isn’t ready to take Schild’s deal. But Matlock, who rescued his disabled wife from chest-high water, is tempted by the investor’s $120,000 offer. Their home, now stripped to the beams, has flooded twice in two years. Schild says Matlock should be able to recover much of his loss on the house’s value through federal flood insurance. (In past storms, homeowners have complained the program lowballed them.) Before he leaves, he asks Matlock to spread the word. “Anybody looking to sell, tell them to call me,” he says. “I’ll give them a bid.”

But, it"s not just small-time, local investors looking to earn big profits from the misery of displaced Texans.  Nope, wall street investors, led by Bain Capital, are also getting involved.

The cycle begins with small-time investors such as Schild, who’s bought more than 30 waterlogged houses for an average $175,000 apiece. Then Wall Street swoops in. Gary Beasley, former chief executive officer of Waypoint Homes, also sees an opportunity. He’s pitching private equity firms and pension funds on the potential profit in buying flooded homes, repairing them, and renting them back to homeowners.

Bain Capital LP and billionaire Marc Benioff, co-founder of Salesforce.com Inc., are backing Beasley’s two-year-old company, Roofstock Inc. It runs a website where investors can buy and sell single-family rental properties. Beasley thinks owner-occupants may be interested in selling there, too, and that flooded neighborhoods are the Next Big Thing. “It’s much like the housing crisis, when the institutional guys came in to buy homes nobody wanted,” he says. Like other investors, Beasley and Schild view themselves as helping homeowners to move on and Houston to rebuild.

Of course, as Andrea Heuson, a finance professor at the University of Miami, points out, most of the people selling aren"t doing so because of a lack of financial sophistication that impairs their ability to comprehend the fact that they"re getting shafted but rather just a complete lack of alternatives.

Others take a less rosy view. “What worries me is people making pretty dramatic decisions without the education to figure out what the alternatives are and without looking at the situation rationally,” says Andrea Heuson, a finance professor at the University of Miami who specializes in mortgages. Some of those considering Beasley’s strategy don’t want to be named for fear of looking like catastrophe profiteers, Beasley says.

Many homeowners would be forgiven for panicking. During hurricanes Harvey and Irma, wind and water damaged almost 1.8 million homes, causing uninsured flood losses of as much as $57 billion, according to CoreLogic Inc., a real estate data firm. Homeowners without federal flood insurance are most likely to be desperate. Those with policies don’t yet know how much they’ll get for their losses, which is key to deciding whether it makes sense to sell.

On the upside, these displaced families will be able to buy their homes back from Bain at double in the price in 5 years or so...

NYC Commercial Real Estate Sales Plunge Over 50% As Owners Lever Up In The Absence Of Buyers

So what do you do when the bubbly market for your exorbitantly priced New York City commercial real estate collapses by over 50% in two years?  Well, you lever up, of course. 

As Bloomberg notes this morning, the "smart money" at U.S. banking institutions are tripping over themselves to throw money at commercial real estate projects all while "dumb money" buyers have completely dried up.

A growing chasm between what buyers are willing to pay and what sellers think their properties are worth has put the brakes on deals. In New York City, the largest U.S. market for offices, apartments and other commercial buildings, transactions in the first half of the year tumbled about 50 percent from the same period in 2016, to $15.4 billion, the slowest start since 2012, according to research firm Real Capital Analytics Inc.

At the same time, the market for debt on commercial properties is booming. Investors of all stripes -- from banks and insurance companies to hedge funds and private equity firms -- are plowing into real estate loans as an alternative to lower-yielding bonds. That’s giving building owners another option to cash in if their plans to sell don’t work out.

“Sellers have a number in mind, and the market is not there right now,” said Aaron Appel, a managing director at brokerage Jones Lang LaSalle Inc. who arranges commercial real estate debt. “Owners are pulling out capital” by refinancing loans instead of finding buyers, he said.

But don"t concern yourself with talk of bubbles because Scott Rechler of RXR would like for you to rest assured that the lack of buyers is not at all concerning...they"ve just "hit the pause button" while they wander out in search of the ever elusive "price discovery."  

At 237 Park Ave., Walton Street Capital hired a broker in March to sell its stake in the midtown Manhattan tower, acquired in a partnership with RXR Realty for $810 million in 2013. After several months of marketing, the Chicago-based firm opted instead for $850 million in loans that value the 21-story building at more than $1.3 billion, according to financing documents. The owners kept about $23.4 million.

“The basic trend is you have a really strong debt market and a sales market that has hit the pause button while it seeks to find price discovery,” said Scott Rechler, chief executive officer of RXR.

The debt market has become so appealing that landlords are looking at mortgage options while simultaneously putting out feelers for buyers, said Rechler, whose company owns $15 billion of real estate throughout New York, New Jersey and Connecticut. That’s a departure for Manhattan’s property owners, who in prior years would pursue one track at a time, he said.

Of course, this isn"t just a NYC phenomenon as sales of office towers, apartment buildings, hotels and shopping centers across the U.S. have been plunging since reaching $262 billion nationally in 2015, just behind the record $311 billion of real estate that changed hands in 2007, according to Real Capital. Property investors are on the sidelines amid concern that rising interest rates will hurt values that have jumped as much as 85 percent in big cities like New York, compounded by overbuilding and a pullback of the foreign capital that helped power the recent property boom.

The tough sales market has put some property owners in a bind -- most notably Kushner Cos., which has struggled to find partners for 666 Fifth Ave., the Midtown tower it bought for a record price in 2007. The mortgage on the building will need to be refinanced in 18 months.

Thankfully, at least someone interviewed by Bloomberg seemed to be grounded in reality with Jeff Nicholson of CreditFi saying that it just might be a "red flag" that buyers have completely abandoned the commercial real estate market at the same time that owners are massively levering up to take cash out of projects.

Some lenders view seeking a loan to take money off the table as a red flag, according to Jeff Nicholson, a senior analyst at CrediFi, a firm that collects and analyzes data on real estate loans. It may signal the borrower is less committed to the project, and makes it easier to walk away from the mortgage if something goes wrong, he said.

But, it"s probably nothing...

When Do We Know These Are Delusional Markets

In his latest investment outlook, Fasanara Capital"s Franceso Filia, who two months ago explained in one chart how the "fake market" operates...

... discuss what happens when a "Twin Bubble meets quantitative tightening" and answers why record-low volatility breeds market fragility and precedes system instability. We"ll have more to share on that shortly, but for now, here is Filia with his take on "when do we know these are delusional markets":

Signs of complacency and disconnect from fundamentals abound. So to sanity check, it may still be helpful to periodically remind ourselves of a few recent ones. In no particular order:

• Argentina uses defaults as a recurrent macro-prudential policy, to tackle debt overloads from time to time. Most recently in 2014, 2001, 1989. Yet, this year, the country issued a 100-year bond for 7.9% yield. Red-hot demand. It was oversubscribed 3.5x.


• The Bank of Japan now owns almost 75% of the entire Japanese ETF equity market. As a result, the BoJ will likely be the major shareholder in 55 companies by the end of 2017 (read). To entrench firm buy-the-dip reflex in the investment community (and their algos), “the BOJ’s ETF purchases help provide resistance to selling pressure against Japanese stocks,” says Rieko Otsuka of the Mizuho Research Institute (read).


• The Swiss National Bank bought $ 100bn between US and European stocks. It now owns 26 million Microsoft shares (read).


• Easyjet is a great company. Still, 1% yield for 7 years is a stretch. Clearly, ECB programs are behind it. However, but, still, come on... The recognition that EasyJet’s bonds owe their valuation entirely to the Central Bank is widespread. Yet, when it comes to equity markets, such recognition is missing, and claims of bubble valuations are easily dismissed.


• US equity at 30X P/E CAPE, despite political/economic policy uncertainty, and 5yr German Bunds sub-zero despite 1.6% inflation and 2.8% PPI, have every right to belong to this list.


• Leverage to buy stocks at the NYSE (margin debt) hit an all-time record of $549bn this year (read), and went up in lockstep with the S&P as both doubled up since 2009.


• Is it 2007 all over again in CLOs? No, way better than that. Covenant-lite loans are over double what they used to be in 2007 (read, read, read). Assuming 2007 was a credit bubble and covenant-lite was one of the thermometers taking temperature, this is twice a bubble, and the thermometers burned.

Cov-Lite Loans In Both EU And The US Reached A Staggering 70% Of All Loan Supply In 2017.
Before the credit bubble burst in 2007, it was 30%.

A Former Lehman Brothers Trader: It's Time To Buy Brick And Mortar

Authored by Jared Dillian via MauldinEconomics.com,

Everyone thinks it is only a matter of time before Amazon puts every department store, every mall, every brick-and-mortar retailer out of business. Amazon gets an infinity market cap and everyone else gets zero.

Sound familiar?

That’s the accepted wisdom.

Is Amazon a great business? Yes.

Is a department store a bad business? Probably.

Does Amazon get 100% market share, with department stores getting zero? Probably not.

Amazon has over 80 million Prime subscribers in the US. It’s not quite saturated, but it’s getting close.

Source: Business Insider

I admit to being a Prime member, a late adopter.

It is pretty cool. Stuff shows up on my doorstep in two days, for free. The huge poker chip set I just ordered probably weighs about 40 pounds—free shipping! And I get all the Prime movies and TV shows.

But here is my thesis: Amazon will grow and grow, but there will always be a role for physical retailers. A reduced role, for sure, but there will always be a role.

From a capital markets standpoint, now might be the time to put on the trade.

The Bottom of Brick and Mortar

This is when I started thinking that we"ve reached a bottom in physical retailers.

Last week, ProShares—a $27 billion ETF manager—registered to list some double short leveraged ETFs on brick-and-mortar retailers! 

Ding!

In my experience, specialty ETFs like this are usually listed at the worst possible times. Plus, you know my thoughts on leveraged ETFs. When 2x short leveraged ETFs are being listed on physical retailers… it is probably time to buy physical retailers.

The graphic from AEI below is a couple of months old. Since then, Amazon’s market cap has soared to $481 billion. Meanwhile, Macy’s market cap has fallen to a little under $6.5 billion.

Source: Yahoo Finance

Amazon is worth around 75 times more than Macy’s? That doesn’t seem right.

I hope by this point I have you thinking.

I am no Macy’s fan. It is a pretty terrible business, it sells middlebrow stuff in middlebrow locations. Although its online business is actually not bad.

I used to buy ties at Macy’s, back in 2001. People laughed at those ties. I no longer buy ties at Macy’s.

But look—at a $6.5 billion market cap, Macy’s is reaching distressed levels…

That means we have to put our distressed investor hat on, pick this business apart, and see if there is value—in all parts of the capital structure. Maybe we don’t like the stock, but maybe we like the bonds, for example.  

And, Staples was bought by private equity recently for about 0.4 times revenue. Apply that standard to Macy’s and you get to a $10 billion valuation. They’re still kicking.

Plus, there’s an argument that this whole Internet retailing thing is just a giant bubble, according to the chart below.

Source: @bySamRo

How Do You Play It?

This is a smart trade, but it is also a dangerous trade unless you are smart.

There are two ways to do this:

1)  Be a distressed investor: Look at the worst-case scenario, look at all parts of the capital structure, and find value.

2) Be a quant:  Buy a basket of physical retailers, sell a basket of Internet retailers, and wait for them to converge.

The worst way to play it is just to naively buy Macy’s (or another retailer) and hope for the best.

Furthermore, I think it’s time to go dumpster-diving in mall REITs.

One final remark. As you look around for ideas, invest in things that would get you laughed off the set of CNBC. I assure you, if I went on Fast Money and pitched Macy’s as a long idea, I would get laughed off the set.

Those are the best trades.

Republican Operative Behind WSJ Collusion "Bombshell" Committed Suicide

A longtime Republican operative from Chicago’s North Shore who was at the center of a confusing Wall Street Journal story involving shadowy Russian hackers and Hillary Clinton’s 30,000 missing emails committed suicide, according to the Chicago Tribune. Peter W. Smith, 81, a former private equity executive and longtime political operative, killed himself in a Minnesota hotel room days after telling his story to a reporter from WSJ, according to the Chicago Tribune.

Smith left a carefully prepared file of documents, including a statement police described as a suicide note in which he said he was in ill health and that a life insurance policy was expiring.

Smith"s death, which occurred on May 14, 10 days before the story was published, was one of the most bizarre developments in a hard-to-follow WSJ story that tried (and in our estimation, failed) to implicate former National Security Adviser Michael Flynn in a sinister plot to enlist the help of some Russians to hack the 2016 election...thus "proving" collusion.

In the story, Smith recounted to WSJ his mission to find Hillary Clinton’s missing 30,000 emails – the holy grail of opposition research – which he organized late in the summer of 2016. The project began over Labor Day weekend when Smith, who as WSJ notes had been “active in Republican politics,” assembled a group of technology experts, lawyers and a Russian-speaking investigator based in Europe to acquire emails the group theorized might have been stolen from the private server Mrs. Clinton used as secretary of state. Smith believed that, once found, at least some of the emails would prove to be relevant to her official duties at the State Department, handing the Trump campaign an enormous PR victory and possibly proving that she knowingly misled investigators.

Smith & Co. scoured hacker forums, ultimately finding 5 groups who claimed to have the missing emails, 2 of which were Russian.  However, Smith seemingly doubted the authenticity of the intelligence he received and, as a result, never leaked their contents.

Even more confusing, Smith says he eventually turned over the emails to Wikileaks, but the group hasn’t published them, and denies ever having received them. Smith told the WSJ reporter that he’d considered Flynn an ally, but stopped short of alleging that the two worked together on the project.

Of course, it"s only deep in the story that the WSJ admits they have no idea if Flynn was even involved with Smith...but no one reads an entire article so it"s fairly irrelevant.

What role, if any, Mr. Flynn may have played in Mr. Smith’s project is unclear. In an interview with The Wall Street Journal, Mr. Smith said he knew Mr. Flynn, but he never stated that Mr. Flynn was involved.

And another irrelevant detail from the WSJ:

Mr. Smith said he worked independently and wasn’t part of the Trump campaign.

Smith was found with a bag over his head with a source of helium attached. A medical examiner"s report gives the same account, without specifying the time, and a report from the Rochester, Minnesota police further details his suicide, according to the Chicago Tribune. Smith"s death occurred at the Aspen Suites in Rochester, records show. They list the cause of death as "asphyxiation due to displacement of oxygen in confined space with helium."

In the note recovered by police, Smith apologized to authorities and said that "NO FOUL PLAY WHATSOEVER" was involved in his death. He wrote that he was taking his own life because of a "RECENT BAD TURN IN HEALTH SINCE JANUARY, 2017" and timing related "TO LIFE INSURANCE OF $5 MILLION EXPIRING."

Mystery shrouded how and where Smith had died, but the lead reporter on the stories said on a podcast he had no reason to believe the death was the result of foul play and that Smith likely had died of natural causes.

Smith had been staying at the hotel – in a room typically used by patients of the Mayo Clinic - for several days and had extended his stay at least once but was expected to check out on the day his body was found. "Tomorrow is my last day," Smith told a hotel worker on May 13 while he worked on a computer in the business center, printing documents, according to the police reports.

One of Smith"s former employees told the Tribune he thought the elderly man had gone to the famed clinic to be treated for a heart condition. Mayo spokeswoman Ginger Plumbo said Thursday she could not confirm Smith had been a patient, citing medical privacy laws.

Smith had a history of doing opposition research against President Bill Clinton and had a hand in exposing the “Troopergate” allegations about Bill Clinton"s sex life.

His obituary said Smith was involved in public affairs for more than 60 years and described him as a "quietly generous champion of efforts to ensure a more economically and politically secure world." Smith led private equity firms in corporate acquisitions and venture investments for more than 40 years. Earlier, he worked with DigaComm LLC from 1997 to 2014 and as the president of Peter W. Smith & Co. from 1975 to 1997. Before that, he was a senior officer of Field Enterprises Inc., a firm that then owned the Chicago Sun-Times and was held by the Marshall Field family, his obituary said.

Smith"s last will and testament, signed last Feb. 21, is seven pages long and on file in Probate Court in Lake County, Illinois. The will gives his wife his interest in their residential property and his tangible personal property and says remaining assets should be placed into two trusts.

He was born Feb. 23, 1936, in Portland, Maine, according to the death record.

His late father, Waldo Sterling Smith, was a manufacturer"s representative for women"s apparel firms, representing them in department stores in Maine, New Hampshire and Vermont, according to the father"s 2002 obituary. The elder Smith died at age 92 in St. Augustine, Fla., and his obit noted that he had been active in St. Johns County, Fla., Republican affairs and with a local Methodist church. Peter Smith wrote two blog posts dated the day before he was found dead. One challenged U.S. intelligence agency findings that Russia interfered with the 2016 election. Another post predicted: "As attention turns to international affairs, as it will shortly, the Russian interference story will die of its own weight."
 

Goldman: "Periods Of Low Vol End In Tears... The Biggest Risk Is Central Banks"

One month ago, unleashing the latest series of warnings that the current period of low volatility will not have a very unhappy ending, came from Bank of America, which said that "These Markets Are Very Weird." A few weeks later, JPM" Marko Kolanovic warned that complacency will end in "catastrophic losses" for short vol strategies followed promptly by Deutsche Bank"s Aleksandar Kocic who demonstrated that there is no scarcity of scary adjectives when he likewise warned that the current period of market "metastability" will showed lead to "cataclysmic events." Now it"s Goldman"s turn.

In a note by Goldman"s Christian Glissman seeking to explain "The upside of boring - risks and asset allocation in low volatility regimes", the vol strategist joins the bandwagon and writes that while "low volatility periods do not have to end in tears, they often do." His explanation:

Volatility tends to cluster and is often low for a good reason – this indicates investors should add risk during those periods. However, a prolonged low vol period can also eventually result in excessive risk  taking and latent risks from elevated valuations. But moving out of a low vol period does not have to come with a material ‘risk off’, at least initially. Usually volatility tends to spike and equities settle into a higher volatility regime first (Exhibit 37) and the average drawdown is less than 5%.

Markets often enter a higher vol regime before there are larger equity corrections, usually 6-24 months later (Exhibit 38). This suggests a more gradual risk reduction as markets shift into a more persistent higher volatility regime as the macro backdrop worsens. Currently, we see little recession risk in the next 12 months although growth momentum may have peaked and the US economy is moving more late cycle.

So if not a recession, what could unleash more images of traders with hands on their faces? Here Goldman channels the latest note by Matt King, and says that the "bigger risk could prove to be central bank tightening, which could drive more volatility in the near term, especially owing to the elevated uncertainty around the balance sheet runoff by the Fed and ECB."

Further, volatility can spike due to unexpected shocks and tail events – with higher vol of vol risk, running increased cash allocations and some tail risk protection appears sensible. This is particularly true as valuations across risky assets remain high, resulting in poor asymmetry for LT returns.

The shift from a low volatility regime to a higher is shown below:

There are other dangers too, for example low volatility masking correlation risk in multi-asset portfolios.

In multi-asset portfolios, investors might face further risk based on the premise of diversification. Absolute cross-asset correlations tend to increase with higher volatility (Exhibit 39). This is especially a risk for risk parity funds and volatility target funds which often increase risk based on volatility by asset class and on a portfolio level. Since the 1990s bonds have provided hedges for equities in periods of higher volatility, allowing multi-asset investors to run higher risk/leverage levels. But right now, as both bonds and equities appear expensive, bonds may be less good hedges for equities in drawdowns, and there is the potential for negative rate shocks to weigh on equities, as central banks tighten policy. Commodities have helped in high inflation periods like the 1970s but they have been more a source of risk recently, with large oil price declines and still-low inflation.

So why not just go long vol? Well, in a world of BTFD the theta is simply far too great. The result: everyone is shorting vol instead, even though "Short vol strategies are becoming riskier." For more on this, see the latest Kolanovic note.

Unsurprisingly, short vol strategies tend to very profitable in low vol periods, while being long vol tends to be costly. Exhibit 41 shows that being long vol through the VXX (long shorter-dated VIX future ETF) has been very costly since 2011 – the VXX is down 99% since then. It is not just low realised S&P 500 vol but also the contango in the VIX futures curve (in-line steep equity vol curves) that creates a painful rolldown, even if volatility is unchanged (see Navigating the VIX ETP market, April 25, 2017). VIX options can be a better way to position for a rise in the VIX.

As the VIX spikes revert rapidly, it has also been particularly difficult to capture ‘risk off’ episodes through a long VIX future position recently. On the flipside, this has made short vol a popular (and profitable) carry trade; for example, the XIV (short shorter-dated VIX future ETF) has nearly tripled since the beginning of last year. As a result, the net and outright short position in VIX futures is at all-time highs. But the risk of short vol strategies in most markets is clearly rising. For example on May 17, 2017, following to the VIX spike due to concerns on the impeachment of President Trump, the XIV was down 18%.

Taking all of the above, Goldman"s advice: go to cash, and reduce risk.

This further strengthens the case for increased cash allocations and also for broader diversification. Alternatives such as real estate and private equity can help, although they often introduce liquidity risk in the portfolio and also carry equity and duration risk. Generally, a more momentum-based investment approach can help manage risk-adjusted returns in periods of rising volatility – with declining momentum in risky assets in low vol periods, we believe investors should further reduce risk.

One last chart: according to Goldman calculations, 1-month S&P500 realized vol now finds itself in the 0%th percentile. It has never been lower.

Warning: the Oil Crash Is Just Days Away From Triggering a Debt Crisis

The Oil collapse is about to trigger a crisis in junk bonds.

Oil has been going straight down for weeks now. As we write this, black gold is below $43 a barrel, down 16% from its levels a month ago.

“So what?” you might ask, “Oil experiences similar drops all the time. Why is this important?”

This is important, because the high yield, or junk bond market is closely associated with Oil prices. And if Oil continues to collapse we’re going to start seeing some serious contagion risks in high yield credit.

And you know what asset class tracks High Yield Credit or Junk Bonds?

Stocks…

A Crash is coming…

And smart investors will use it to make literal fortunes from it.

We offer a FREE investment report outlining when the market will collapse as well as what investments will pay out massive returns to investors when this happens. It"s called Stock Market Crash Survival Guide.

We made 1,000 copies to the general public.

As I write this, only 79 are left.

To pick up one of the last remaining copies…

CLICK HERE!

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

John Paulson's Outside Capital Base Crashes To Under $2 Billion

Back in 2011, after making a killing off of his infamous mortgage short, John Paulson found himself running one of the largest hedge funds on wall street with $38 billion in total capital under management, including roughly $19 billion in outside capital.  But, after gaining instant fame with his massive subprime bet, Paulson can"t seem to buy a clue in recent years which has left many investors wondering whether he may have been nothing more than a "one-trick pony".

Certainly returns in his Paulson Advantage fund would indicate some difficultly replicating historical success:

• 2011: -51%


• 2012: -19%


• 2013:+32


• 2014: -36%


• 2015: -3%


• 2016: -20%


• 2017 YTD: -9.7%

For those keeping track, an investor who contributed $100,000 to the Paulson Advantage fund on 12/31/2010 would have under $24,000 left today...and that"s before removing Paulson"s annual fees.

Therefore, it"s not terribly surprising that, as Bloomberg points out today, Paulson"s assets under management have crashed since 2011 to under $10 billion due a combination of abysmal returns and investor redemptions.  But, what is surprising is that, per the charts below, of the the $9.5 billion currently under management at Paulson & Co., only $1.8 billion is from outside investors.

Of course, it"s hard work losing that much money...it requires an army of Harvard MBAs and those guys aren"t cheap.  Unfortunately, since Paulson probably doesn"t pay fees on his personal ~$8 billion in AUM, we suspect it"s getting a bit harder to pay that Harvard army these days prompting speculation that Paulson will eventually have to return outside capital and convert to a family office.  Per Bloomberg:

“As outside assets continue to erode, the running question for Paulson becomes more forceful: Why doesn’t he just convert to a family office?” said David Tawil, the founder of Maglan Capital LP, a New York based hedge fund that specializes in event-driven strategies. “But to get the firm back on the rails, I don’t think is impossible.”

Paulson, 61, is making the choice to fight back. The billionaire has no plans to turn the firm into one that solely manages his own wealth, according to a person familiar with his thinking. He’s opened at least three new funds in the past two years, including a private equity fund with a seven-year lock up. But at the end of 2016, that fund contained almost all internal money, the filing shows.

As we pointed out last November, Paulson"s losses came in part due to a massive bet on the consolidation of large multi-national pharmaceutical businesses which he hedged with bearish bets on the broader markets.  Unfortunately, exactly the opposite happened with the broader markets holding up while his largest pharma holdings collapsed anywhere from 20% - 40%. 

Mr. Paulson’s hedge-fund firm, Paulson & Co., is suffering painful losses this year, extending a period of uneven performance that has left the firm managing about $12 billion, down from $38 billion in 2011. Behind the recent difficulties: A big, faulty bet on pharmaceutical companies, as well as excessive caution about the broader market, according to people close to the matter.

Over the past two years, Mr. Paulson has argued to his investors that the pharmaceutical industry’s consolidation would accelerate, boosting growth prospects of specialty drug companies cutting deals. Six of Paulson & Co.’s 10 largest holdings as of June 30 were pharmaceutical companies, the most recent securities filings show, including the firm’s four largest positions. At one point in late 2014, Mr. Paulson told a client that one of Paulson’s major holdings, Valeant Pharmaceuticals Inc., would hit $250 a share. At the time, the stock was trading at around $140. To hedge, or protect, his drug investments, Paulson adopted bearish positions on the overall market, viewing stocks to be expensive.

The trades haven’t worked out. Health care is the worst performer among the 11 sectors in the S&P 500, with a drop of 6.1% so far this year. Paulson’s holdings have done worse. Shares of the firm’s largest investment, U.K. pharmaceutical company Shire PLC, are down 19% so far in 2016. The holding, worth about $864 million at current share prices, represented 9.1% of Paulson & Co.’s portfolio at the end of June, according to FactSet Research Systems Inc. The next three biggest Paulson investments, Mylan NV, Allergan PLC and Teva Pharmaceutical Industries, are down 37%, 40% and 40% this year, respectively. The three stocks represent $2.16 billion of investments for the firm at current prices. Meanwhile, the S&P 500 is up 2.2% this year, undercutting Paulson’s bearish position.

But sure, all you pension managers out there should continue to consolidate your hedge fund allocations to just the "smartest" hedge fund managers.

Softbank Chairman Making Good On Promise To Invest Billions In the US

Looks like Softbank Group Chairman Masayoshi Son is making good on his promise to invest billions and create tens of thousands of jobs in the U.S.

The Softbank Vision Fund, now the world’s largest private-equity fund, announced on Saturday that it has raised over $93 billion to invest in technology like artificial intelligence and robotics, Reuters reported.

Trump tweeted back in December that Masayoshi Son had promised to invest $50 billion in the U.S. – something that, according to Trump, wouldn’t have happened if Hillary Clinton had won the election.

The announcement coincided with President Donald Trump’s visit to Saudi Arabia – his first trip abroad as president – and the signing of billions of dollars’ of deals between the two countries, including a $350 billion arms deal that’s been tagged as the largest ever. Softbank Group and Saudi Arabia"s Public Investment Fund, the kingdom"s sovereign-wealth fund, have partnered the create the fund, which also has received contributions from deep-pocketed investors including Abu Dhabi"s Mubadala Investment, which has committed $15 billion, Apple Inc, Qualcomm, Taiwan"s Foxconn Technology and Japan"s Sharp Corp.

The fund is still hoping to reach $100 billion and expects to complete its money-raising in six months, according to Reuters.

We"re looking forward to the flood of leveraged buyouts that will likely follow.

Welcome To The Corporatocracy

Authored by Robert Gore via Straight Line Logic blog,

The interests of Washington and large corporations have merged so completely they are now inseparable.

America’s large corporations and its government have merged. Or was it an acquisition? If the latter, who acquired whom? Unfortunately, the labels affixed to purely corporate combinations lose their analytical usefulness here. While the two retain their own distinct legal structures and managements, so to speak, such a close community of interest has evolved that it’s no longer possible to separate them or delineate their individual contours. Political labels are no help; the ones most often used have become hopelessly imprecise. The Wikipedia definition of “fascism” is over 8,000 words, with 43 notes and 16 references.

However, the conjoined blob is so big, rapacious, and intrusive that akin to Justice Potter Stewart’s famous non-definition of obscenity, everybody knows it when they see or otherwise come into contact with it. This article will use the term “corporatocracy.” It’s less letters, dashes, and words to type than “the corporate-government-combination.” No serviceable understanding of either US history or current events is possible without close study of the corporatocracy. Unfortunately, such study, like entomology or cleaning septic tanks, requires a stout constitution. But take heart, entomologists grow to love their creepy crawly things, and septic tank cleaners say that after a few minutes you don’t even notice the smell.

A cherished delusion of naive liberals holds that big government is a counterweight, not a partner, to big business. Such a rationale is touted when the righteous demand new regulation, the public and media endorse it, the legislators pass it, and the president signs it into law. However, there are always unpaved stretches on the road to hell—once regulation is law, the righteous, public, media, legislators, and president, and their ostensibly good intentions, are on to the next cause.

In the quiet obscurity they relish, regulators and regulated get down to doing what they do best: bending the law to their joint benefit. Business, whose P&L’s can be powerfully affected by regulations, hire armies of lobbyists and lawyers in a never ending effort to tilt the playing field in their direction, and improve bottom lines, stock prices, and executive bonuses. The return on such investment is far higher than on old fashioned expenditures like research and development, plant and equipment, and job-creating expansion.

Not-so-naive liberals, professed conservatives, and apolitical opportunists work both sides of the street. The revolving door ensures that all concerned do well. Playing this game isn’t cheap, which serves as a barrier to entry to scrappy competitors who compete those old fashioned ways: innovation, hustle, and better products and services at lower prices. Regulation cartelizes industries; look, for instance, at banking and medicine. No surprise that regulatory barriers are one of Warren Buffett’s favorite “moats”: deep and hard-to-cross waterways that protect durable commercial advantages.

Washington doesn’t just fortify favored corporations’ business plans. A $4-plus-trillion-a-year enterprise, the government is the world’s largest purchaser of goods and services. Procuring those contracts employs more armies of lobbyists and lawyers, and has a powerful effect on policy. The shoddy premises supporting the welfare and warfare states, and their epic waste, are obvious to many of the taxpayers forced to underwrite them. They’ve decried them for decades, and voted for candidates promising to cut welfare, waste, war, and taxes. However, beyond voting, taxpayers can devote little time to stopping or slowing the gravy train. Their resources are infinitesimal compared to the resources its passengers expend to keep it running.

The modus operandi for Washington and big business have converged. Debt, its issuance and marketing, is the pillar of the financial nexus and revolving door between Washington and Wall Street. The government and its central bank artificially pump up the economy and hide its deterioration with debt and machinations: ultra low interest rates, quantitative easing, and debt monetization. Big businesses lever their balance sheets to pump up their stock prices or make acquisitions, machinations that do nothing to improve core businesses but often hide ongoing deterioration.

The history of any long-running government program is a catalogue of failures and expanding budgets. Washington cherishes failure, the fountainhead of larger appropriations and more power. Success would put bureaucrats out of work and give politicians less influence to peddle. Likewise in business, failure has become much more acceptable than it was during those bad old days of cutthroat capitalism. Marissa Mayer’s undistinguished five-year tenure at Yahoo, while perhaps not a complete failure, certainly can’t be termed a success. Nevertheless, she’s walking away from the company with at least $186 million for her middling endeavors. Given all that discrimination out there against women, one can only imagine what she would have made if she were a man.

Silicon Valley puts billions into companies like Uber, AirBnb, Snapchat, and Lyft that lose those billions and will continue to do so for the foreseeable—and probably the unforeseeable—future. Private equity shops load up companies with debt that gets paid out as special dividends to the private equity shops, leaving the indebted and enfeebled companies unable to compete and the rest of us wondering how such rape is legal in our rape-conscious age. This recipe for inevitable failure is now playing out in the beleaguered retail sector, which would be nowhere near as beleaguered if it wasn’t so beset with debt.

Tesla, a stock market darling and the quintessence of companies in which failure is the business plan, milks Wall Street for financing and Washington (and a bunch of state and local jurisdictions) for subsidies. It has lost billions during its ten years of existence, but its many admirers sing the praises of CEO Elon Musk, always using the term “consummate salesman”—perhaps it’s on his business card. Musk and fan club dream of “the next big thing” and engage in mutual masturbatory fantasies of transforming the world…and Mars. All this is harmless enough as fodder for dazzling audiovisual presentations and slick speeches, but downright dangerous when real billions, private and public, gets sucked in.

Meanwhile, the corporatocracy crucifies an old-line, profitable corporation, Volkswagen, that cheated on one of its hundreds of thousands of regulations. It undoubtedly wasn’t the cheating that got VW in trouble. Regulations are made to be cheated—it’s impossible to run a business without doing so—but the proper offerings must be made to the corporatocracy. If that were not the case, there would be Wall Street, Pharma, and Defense Contractor wings at federal penitentiaries. VW didn’t kowtow low enough or pay high enough to the bureaucrats and politicians, who retaliated, probably “nudged” by a VW competitor.

As a successful businessman, President Trump knows many of the corporatocracy’s skims, scams, and schemes. Perhaps that will enable him to keep his pledge and drain the swamp. However, it’s extensive, fetid, and teems with loathsome creatures, so a bet he’ll succeed involves exceedingly long odds. You’re probably better off buying Tesla stock.