Larry Robbins of Glenview Capital likes to use basketball analogies when writing his investor letters. As such, the manager of the $9 billion value hedge fund has started the year like Michael Jordan’s 1991 season: off to a strong start and looking like a breakthrough championship season.
Larry Robbins’ Net Returns
Robbins delivered just over 10 percent in the second quarter along, as both his onshore and offshore offerings are posting net returns near 18 percent year to date, according to an investor letter reviewed by ValueWalk, this comes after posting 42 percent returns in Robbin’s flagship fund last year.
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Larry Robbins on Monsanto Company and Wilt Chamberlain
“At this position, we have Wilt Chamberlain, whose 100 point game was perhaps the biggest anomaly in sports history,” Larry Robbins wrote in the investor letter, as he points out corporate debt markets “are wide open,” to use another sports analogy, and their screaming for a pass, yelling “it is dirt cheap to borrow money,” as Robbins wrote of the current credit environment.
Robbins used this environment as a tool to persuade Monsanto Company (NYSE:MON) to borrow capital and repurchase their undervalued shares. Robbins approached the chemical giant on the court and yelled about the cheap money. Monsanto caught on and in late June they completed a $4.5 billion financing deal with loan maturities going all the way out into levels in which rates and sovereign nations might not exist in the same universe. Monsanto has some loans in not just 30 year time frames, but also 50 year time frames. And here is the key: the average borrowing cost was just 2.4 percent after-tax.
Larry Robbins on valuations and the Fed
What Robbins is screaming through is words and actions is that interest rates are at an all time low – and this will drive valuations into the near term. That is, until the Fed faces the grim reaper of reality and starts to pull back the punch bowl – an area where Robbins and Paul Singer of Elliott Management appear to differ in tone and preparation. Singer speaks like a risk manager, always looking to protect against often hidden volatility risks. Robbins is saying lets play a full court press game, because the international risks aren’t manifesting themselves now. With low credit, this is time to run and gun the offense.
“The ability for companies to acquire semi-permanent capital at low single digit after-tax cost of capital is exceedingly powerful and exceedingly supportive of equity valuations,” Robbins wrote in the letter, citing all time lows in borrowing costs using a professional tone that was heard as the equal of yelling for the ball in basketball.
Larry Robbins thinks this is still a good environment in which to invest, particularly given the interest rate environment.
“So we don’t have the LeBron James of valuation anymore,” Robbins wrote, pointing to the S&P 500 moving from valuation multiples from thirteen times their forward earnings to sixteen times. These are reasonable levels, Robbins argues, as he launches into the value orientation of his portfolio. Robbins casually mentions the amazing positive that his portfolio stocks have an average of 12.5 times earnings – demonstrating some upside potential. This is like a friend dropping the name of a famous actress who, similarly, is “just a friend.” Except Robbins is for real, and his portfolio numbers prove the point.
“Valuations are unquestionably not as favorable as before – however in historical context they remain favorable, particularly when accounting for the interest rate environment,” Robbins says. Translated to the basketball court, Robbins is seeing the full court and realizes that, while the other team might have the biggest men down low, they lack speed and are awkward in transition. He’s calling for the ball again, with interest rates this low stocks still remain a value – particularly when you subtract systematic risk / reward from the formula.
Larry Robbins also thinks systematic risk will not appear in 2014
Larry Robbins thinks systematic risk is out of the picture for 2014 just like the big men underneath only have value when playing a half court game. This market is still in the stretch run, keep it moving and catch the big men in transition. It’s like watching a swan get chased by a fox on land: take advantage of the unnatural environment provided by the fed, but watch your back. Robbins says that events in Russia and Iraq have not cascaded, they remain offshore – for now – and this remains a running stock market.
“Defense wins championships, and while 2008 is a distant memory, it is also front of mind and is the right place to start,” Robbins wrote, then he dismissed much of the talk among those who have been watching the time bomb of a debt crisis derivatives blow up tick. “We continue to believe that systemic risk has fallen back to normal levels after being significantly elevated in both 2008 and again in Europe in 2011/12. Robbins points to systemically important financial institutions deleveraging, mortgage losses having been absorbed.”
This is a strong statement, particularly as the notional value of the big bank derivatives has grown substantially to over $700 trillion. It’s all in the accounting of a short volatility play, which is essentially what a big bank derivatives risk exposure looks like. Robbins perhaps doesn’t account for this notional risk exposure being nearly seven times the value of the $72 trillion world economy. No, these are calculations for those like Ray Dialo, Paul Singer and Stanley Druckenmiller to monitor along with a small group of quants who have been tracking the implosion date and the big bank derivatives daisy chain reaction – something very hard to predict but, like Brooksley Born and other did, a structural flaw that, like all structural issues, will manifest itself in the future. Just when in the future is the hard point to predict.
What Larry Robbins is saying is let’s not play defense against a half court team – let’s run the ball, use our speed advantage. Things are improving.
To this, Larry Robbins notes in Europe’s periphery credit spreads that have tightened dramatically and, “on an absolute basis, major economies have never enjoyed such low cost debt access in such scale.” This is calling for the ball. Then Robbins hedges, as he can do the math as well, particularly the little discussed variable of unfunded liabilities that might come due in a matter of years. “While imbalances persist and systemic risk can reappear, we