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All notes are the speakers, except words in the brackets which are mine.
Leon G. Cooperman was a General Partner of Goldman, Sachs & Co. and Chairman and Chief Executive Officer of Goldman Sachs Asset Management at the end of 1991 when he left to organize a hedge fund, Omega Advisors, Inc. Omega Advisors currently has over $6 billion under management, and has produced 16% annual returns since inception. For nine consecutive years, Leon was voted the number one portfolio strategist in the Institutional Investor All-America Research Team survey. Leon received his MBA from Columbia University and his undergraduate degree from Hunter College. He is a recipient of Roger Williams University’s Honorary Doctor of Finance and Hunter College’s Honorary Doctor of Humane Letters.
Historically I have been a very bottom off person, but we have entered a very choppy situation. This will change but it might take some time.
About the macro picture, which requre two critical assumptions.
1. assumption #1-the US will not experience a double dip recession. Same store sales, auto sales, employment numbers are encouraging. Warren Buffett and Jeff Immelt say positive signs in their business. Consumers’ savings rate is up to 4%, household liquidity has improved, bank lending standards have relaxed (besires residential RE).
It does not feel good; unemployment is 9%, 10% are undermployed. The Arab spring was a result of 40% unemployment.
Investors are very concerned about 2011 about being 2008. I have found what has hit you in the cycle is not what hit in the past. In 2008, we had weak banking system now banking system is well capitalized besides for possibly Bank of America.
Corporate cash levels are at a record highs.
The Fed’s zero interest rate policy I think will work eventually.
I think Q3 growth could be 2.5%.
Assumption #2- Germany will instill stability in the system and deal with Greece.
Two schools of thought:
1. Euro-Zone’s situation is so complicated that I can’t understand it.
2. The problems are so catastrophic that the Europeans will solve their problem. I am a member of this camp.
Angela Merkel and Sarkosy have both agreed to take the necessary steps to recapitalize the banks. I think they will shed assets, take assets off bank balance sheets onto ECB.
I do not see another approach to this problem.
3. Assumption- not as critical, I was hoping Obama would move to the center, but that has not happened. It wont work with 50-60% of the American people. I hope I don’t offend Whitney Tilson.
4. Assumption-not critical: Middle East issues have to be tied to democracy. I am not an expert but I think people need to look at oil. Israel is not the problem of the Middle East, but somehow seem to get blamed.
Market has already at 1100 has discounted a recession which has not happened. The median bear market is usually 25%, this recent bear market dropped 20%. If we are right that there will be no recession we are at cheap valuations, and the lows have arrived.
A lot of misinformation: Even if we had a recession, corporate profits are 15-20%. So if S&P drops from $100 in earnings to $80 it will still be a 14x multiple, which is cheap. We think 2012 earnings will be above $100 in earnings.
Recoveries usually last four years, so we would still have two years to go. There is a lot of under-capacity in the economy. We need repatriation of cash overseas, stop attacking wealth. Obama needs to be more conciliatory instead of attacking private aviation and the wealthy.
Stocks are cheap relative to valuation, interest rates, and inflation.
When CPI has been 1-3% like today, PE ratio if close to 17%.
10 year treasury historically justifies a 19x multiple.
Equity risk premium at high point in 20 years.
In bottom markets in 1960s was at 12x, and the long term bond yield was close to 10%m now its 5.6%.
I am not a religious guy but G-d tends to even things out, so the odds are against a 10 year bear market.
When people tell me the economy will grow slower than the past? I saw wake up and smell the roses. The market has already priced this in.
High yields were at 25% in 2008, now how yields are close to 8%, yet market multiple is lower today. We are starting to buy more high yield credit as we did in 2008.
In 1958 the treasury yield went above the stock yield. 45% of stocks now have a higher yield than the 10 year treasury, which was the same in 08 before the big equity boom.
10 yr yield is usually in line with nominal GDP. So if we go between 4-6%, you will have a big loss. I would stay away from Government bonds. The best time to buy bonds is when the yield curve is inverted.
Contrary sign is that investors are very scared.
Risks:
ECB wont deliever
Potential for social unrest. Populists of America sent a 48 year old man who never worked a day in his life in business to office. I was hoping he would do well but never did.
I was thinking of running for President, but my investors
This is my platform:
Get out of Iraq and Adfghanistan, give them
Rebuild infrastructure
Allow shale oil drilling
Govt spending to below 1% of nominal GDP growth.
The Department of Education and Energy, I dont know what they do.
Raise retirement age to 70 except for hard labor.
10% tax for three years on people making over $500k
5% vax even though I hate it
Reform health care.
Reinstate uptick rule. Curtail HFT. I spoke to the President of NYSE, and he said that 70% of trading has nothing to do with fundamentals. This is increasing the cost of capital for business.
Concern about high profit margins. With surplass labor capacity I think margins will not revert in 2012.
I got my MBA in 1967. I had no money in the bank. I started with Goldman Sachs the next day, the Dow was at 1,000. 15 years later the market was 1,000. However, I made a great deal of money because there were a lot of undervalued securities.
If you look at the S&P as a company, 1.1x sales etc. it is a very cheap security.
We had a position in El Paso, so we have a good return on that yesterday.
I have found so many bargains, it is hard to allocated money.
I like KKR holdings, which is the debt holding of KKR. They pay 9% dividend, 15-16% ROE, 2x coverage of Income-interest.
My brother say half a line out the mall for the new iphone. They have a pe below 10. They will do well even without Steve Jobs.
Transocean, I am very bullish on. It has 6.5% dividend, I think we are at a turn of the cycle. I think the stock is trading at a $5 billion dividend. Legal costs should only be about 1-2billion.
Qualcomm is 16% grower at a 12 pe.
There are twenty other companies I could name.
I am about 20% net long.
Q&A:
When interest rates go up with 14trillion of debt we are maybe 3 years away from Greece.
Two parties have never been in such a big conflict.
Disconnect in Japan between interest rates & equities? Corporate bond yields also show equities to be cheap. The probability that we are another Japan is small, since we have moved very quickly.
I know holding cash will lead to a negative real return. Ben Bernanke
I own E-trade bonds yielding 9%. I think on some CMBS securities having double digit returns.
I have 3% of my portfolio in Gold. If Gold just goes up in line with CPI it would be $2500. It is not a long term hold, but I can see it going up in the next few years.
I wake up every morning and love going to work. I punish myself because I have nothing better to do with my time.
Are you still bullish on GM stock? My net worth has changed! They have $18 a share on cash. I have been disappointed with the low yield, but I think it is worth in the 30s.
China? Slowing landing, and I think they will start to ease. It is not informed view, but
No views on Fannie Mae and Freddie Mac. But I think it is audacious that Barney Frank can put pressure on FNM and FRE for twenty years, and now blaming the banks for their problems.
Volatility is greater than it has been historically. The HFT is creating this liquidity as academics call it, but its not quality liquidity.
Put the uptick rule back in and lets see what happens.
