Notes From The Spring 2016 Grant’s Conference

Note From The Spring 2016 Grant’s Conference by @ChesapeakeCap

Grant’s Conference – David D’Alessandro – Long Oil

  • Peak oversupply of 1.5-2m barrels/day; started 2016 with 600-700k which isn’t weather adjusted (El Nino).
  • 3 buckets of supply
    • North America – modeling down 700-800k by ‘17
    • OPEC – Iraq, Iran, Saudi Arabia. Overall modeling up 600-700k
      • SA – look for them to freeze. Signs are on the table, they’re willing to attend meetings.
      • Iran – ramping to 500k growth yoy due to sanctions lifted. Difficult to export due to capex needs.
      • Iraq – At the limits of their export capacity; won’t raise production.
    • Non-OPEC – Most will be down, some flat. Models down 600-800k
    • Libya is the wild card on supply side – dire situation, but can do 1m/day export if political situation changes.
    • Just on supply, we are undersupplied. Counter: 900m inventory?
      • A third is unusable (essentially reserves that never are used).
      • Look at days of inventory – because demand is increasing, this is decreasing.
  • Demand was up 1.8m in 2015, assuming 1.5m for 2016, range of 1.0-1.8m increase.
    • Drivers: India, South Korea, US, China.
  • Variant perception
    • Supply is declining
    • Demand is accelerating
    • No sudden surge in US production at $50-55 like sell-side projects
      • Labor markets aren’t as loose
      • Bush-era EPA not around
      • Stricter capital
  • Dug but not completed wells are overstated.

Grant’s Conference – Scott Bessent – Japan

  • China isn’t the biggest risk – Japan is.
  • Abenomics – underappreciated aspect is Abe’s leadership in 2006 as PM.
  • Tons of charts on various macro elements in Japan
  • 3 arrows partially successful – but craters in the policy
    • JPY depreciation solely during inflation
    • Limited structural reforms outside of women labor participation and corporate governance
    • Services recovery will be needed to drum up CPI.
    • Sales tax increase will be cancelled
  • Good chance of surprise at April BOJ meeting
  • Debt write-off is eventually how we get out of this
  • Never count on immigration or privatization being a factor in Japan
  • If you’re investing, look to take off FX hedges in Japanese stocks, stay long JPY.

Alibaba Group Holding Ltd (BABA) Grant's Conference

Jim Chanos At Invest For Kids: Short This Tech Company As Profits Slump

Jim ChanosAt this year's Invest For Kids conference, hedge fund manager Jim Chanos pitched a tech giant as his favorite short idea. Jim Chanos is a Wall Street legend. The president and founder of Kynikos Associates made his name shorting Enron in the 1990s. He has since identified some of the most profitable shorts in the Read More


Grant’s Conference – Anne Stevenson-Yang – L/S China

  • China since 2006 has looked like Silicon Valley in 1999 – growth at the expense of profitability.
  • Two sources of capital – both end with massive capital flight – best short ideas are the most loved names.
    • State via household deposits
    • FDI / Portfolio / etc.
  • Short BABA
    • Look to put on when the capital flows change
    • Maxed out ecommerce platform – avg annual spend of $1075 vs AMZN $330 (faking?).
    • Poor capital allocation; using capital to generate growth
    • Misleading GMV
    • Dubious assets – Investment in equity investees, goodwill & intangibles
  • Long Tingyi
    • Largest maker of noodles – have scale, brands, operating leverage, 10b US revenues.
    • Competes with UPC but UPC backing down / becoming more rational
    • Extensive distribution, partnerships with SBUX & PEP – upside from beverages segment
    • 20x PE vs 30x historical, 10% op margin historical vs 3% now -> expansion of both leads to 2-3x winner
  • Short RMB
    • Nothing has changed in the policy, but politicians say it has; don’t believe them.
    • PBOC using forwards / swaps to hide capital outflows, delay booking in foreign reserve declines
    • 9 months before reserves run down to perilous point.

Grant’s Conference – Jamie Dimon

  • Auto is a little stretched, but overall consumer credit is pristine
  • Student loans are going to be a problem – growing too fast.
  • Rate normalization is a good thing – strong economy. 25bps will have a de minimas impact
  • Grant: Is the gov’t digging a moat for your biz in regulation? What would it take to replicate JPM?
    • Could give you $1t and you couldn’t remake this. Employees, customers, goodwill, etc.
  • Banks will trade at 2.0x TBV when regulation, lawsuit overhangs go away. Look at pace of change of regulation.
  • We’ll be there for energy customers in tough times – most loans are still money good. We can’t run from the problems or sell stock – we’re not traders, we’re building a business.
  • Grant: “The fed ought to provide a living will for the central banks.”
  • The fed sets short rates, but market participants set the curve.
  • More detail on credit…
    • 10% debt servicing to mortgages; this is near lows, all good here.
    • Credit cards are pristine.
    • Some may get hurt in auto, terms extending, but will be very small.
    • $1.3t in student loans – 30% delinquent. Went from 20% to 80% government underwritten.
  • I own stock – HD / YUM / JNJ / BA and the like.
  • Nil chance to make money in US treasuries over the next 10 years.
  • By 2030, China will house 30% of the Global 3000.

Gold

Grant’s Conference – Pierre Lassonde – Gold

  • Demand rising, has outperformed everyone the last decade.
  • Mine supply has not kept pace with demand because cost of production risen 4-5x over past 30yrs.
  • Production next 6-7 years goes down.
  • Takes 7-12 years to get production online from field discovery, discoveries have fallen since 80’s.
  • China and India now over 50% of worldwide demand
  • Shanghai will take over the London Exchange in 5-10 years. It becomes a casino and prices skyrocket.
  • Central banks went from sellers to buyers in 2010 – now buying 400-600tonnes/year
  • Retail investment has grown since 2008, Europe now largest market
  • Negative interest rates spur demand – greater uncertainty, no opportunity cost, uncertainty in FX
  • Recycling has grown to meet shortfall between supply and demand
  • Gold: liquid, low volatility, low correlation to other asset classes
  • 80% of price is determined by USD, which will roll over again, driving gold higher (mean reversion).
  • Trump would accelerate this devaluation
  • DJIA / Gold = financial assets / real assets. Expect normalization at 1:1 and a 3-7 year bull market

Grant’s Conference – Kevin Warsh – Case of the missing growth

  • Yellen gets done what she wants to get done; don’t make fed watching more complicated than that.
  • We all have bias to think our economic status is better than other countries
  • Growth doesn’t just appear by being one step ahead on devaluation
  • QE was initially to restore markets, drive liquidity, not to boost asset prices.
  • Difference between 2% and 3% GDP growth is not 1%, it’s 50%. And we’re not even getting 2% here, nor 3% internationally, and int’l trade is slowing; policymakers shouldn’t be doubling down.
  • This is the most important year since 2008
  • The 8 Growth destructive policies
    • Conflated regimes
    • Politicians fail so fed turns to multipurpose agency
    • Fed has wrong dashboard – backward looking and heavily revised data
    • Short-term time horizon as if managing q/q not thinking like a long-term biz owner
    • QE is copied abroad – the wealth effect – works primarily to boost financial assets, not real assets.
    • Regulatory structure is in purposeful limbo with respect to banks – “we’re only 60% done implementing so we can’t be blamed if something goes wrong again” but now tougher for banks to make money.
    • Models are still from the 1970’s.
    • Story of an aggregate demand shortfall with no acknowledgement of supply side.
  • Central bank buying takes away the price signal – no clue about risk premium -> prices of assets. Asset prices shouldn’t worry the fed but they’re still managing around them, vocal about it.
  • Want growth? More people working and more productive workers.

Latin America

Grant’s Conference – John Haskell – Long LATAM equities

  • Forex, earnings, and the multiple in LATAM all down in 2015 – attractive grounds.
  • INRETC1:PE
    • 1/3 malls, 1/3 supermarkets, 1/3 pharmacies (think Walgreens)
    • Hold 22%, 36% and 53% share respectively.
    • Accelerating private label from 33% to 40%; drives higher margins.
    • Accelerating store count
    • Reduced dollar exposure from 74% in 2014 to 23%.
    • Trading at 13.8x 2018 EPS vs comps >20x
  • GRAM:US
    • Largest engineering firm in Peru
    • End of commodity supercycle means depressed results in core E&C biz
    • Capital structure stressed due to cash cycle and business shift
    • 2016 outlook is positive; inflection point
    • Up 52% since Monday morning, whoops.
    • Trading at 3.2x ’18 EBITDA – core E&C biz for 1.9x EBITDA
  • ENTEL:CL
    • 36.9% mobile market share in Chile (the VZ there)
    • 7.6% share in Peru vs Telefonica at 52% and Am Movil at 37%
    • Buy Chile biz for 4.3x ’16 EBITDA and get Peru biz for free
    • 25% dilution – due to desire to participate in spectrum auction
    • Founder’s HoldCo owns 55%
    • MCO downgrade
    • Potential Liberty / Malone target

Grant’s Conference – Jim Millstein – Puerto Rico

  • 60% of additional 50b in debt from 00-15 was to fund operating deficits.
  • Don’t blame gov’t completely; they’ve tried – raised taxes and cut employment / benefits
  • Framed as liquidity vs insolvency problem and now decidedly unsustainable / insolvent
  • Defaults on May 1 & July 1
  • Author’s note: admittedly didn’t follow much of this presentation

Grant’s Conference – Amy Falls – Rockefeller University Endowment

  • Low rates
    • Lower returns for savers
    • Increases risk – leverage, excess investment, erodes system’s capacity to absorb risk
    • Increases inequality
  • Endowment provides one-third of budget, spend 5-5.5% of it each year.
  • HEPI outpaces CPI by 1% on avg since 90’s. 70% of HEPI is salary and benefits
  • Absolute rates matter more than credit spreads
  • Seeing shorter durations and less cash holdings in many endowments now
  • Declining implied vol masks increasing structural weaknesses
  • Typically run 2-5% cash, now 8%
  • Seek managers with wide mandates and the ability to exploit them.
  • LATAM looks attractive to us, too.
  • You are actually comped for letting your managers hold longer. Longer lockups -> higher returns w/ lower Std. dev.
    • >1yr – 12-14%
    • 1mo – 1yr – 11-13%
    • <1mo – 6-9%
  • Don’t outsource your investment functions – intelligent institutions work both sides of the balance sheet
  • Yale model isn’t about the outputs or allocations, but the analytical rigor.
  • As nations grow as % of world GDP, their market caps tend to follow – Brazil, Mexico, and Argentina are all the most attractive here.

Grant’s Conference – Grant v Zervos debate on monetary policy

Zervos

  • Fed was fighting deflation at any cost. With high debt levels, worst thing to do is deflate. Make assets increase, liabilities decrease to repair broken balance sheets from 2008.
  • China is pegged to the US however, and we caused their bubble via our QE; we don’t just do monetary policy for ourselves anymore, must consider consequences.

Jim

  • If the USD is a commodity, it’s natural price will near the cost of production …
  • 700 PhD economists on fed payroll
  • Fed MO is to distort price mechanism
  • He said a lot of other good classic Jim Grant stuff in here that I didn’t write down…
  • Took a shot at Bernanke at PIMCO and whoever happens to live in Greenwich

Zervos

  • US, China, Japan, Europe – 4 countries that matter for FX.
  • Tightening causes feedback – see August and the Chinese 3% devaluation; our stocks off 10%.
  • If we go, it’s got to be a turbocharged tightening
  • When Europe and Japan devalue, it’s against us but against China too; Draghi took the signal and looked to pump inflation without relative devaluation.
  • Japan can print and buy back its own equities.
  • This is a prisoner’s dilemma – won’t break down before the November election, but Yellen considering all these interdependencies.
  • S&P will form base here and go much higher, but real trade will be in EMs. Worst possible asset to hold is cash; it will be diluted by CBs.
  • Understanding CB reactions to data is the only way to get an edge. Everyone is terrible at forecasting data; I’d never give a trade rec on unemployment, GDP, or inflation.