Morgan Creek Capital market review and outlook for the third quarter ended September 30, 2016.
Morgan Creek Capital
Morgan Creek Capital – Letter to Fellow Investors
In 1985, legendary film director John Hughes sat down for a week and wrote his “love letter to Chicago” – a story of a slacker teen boy (Ferris Bueller) who decides to take a day off school to show his friend (Cameron Frye) some of the good things in life, and the result was the iconic movie Ferris Bueller’s Day Off. In an interview with the AMC Blog, Hughes said, “I really wanted to capture as much of Chicago as I could. Not just in the architecture and landscape, but the spirit.” That spirit is everywhere in the movie from scenes set on Lakeshore Drive on Lake Michigan to the spectacular vistas from the top of the Sears Tower (now called the Willis Tower for the younger generation who don’t know that Sears was once the dominant retailer in the U.S. instead of a stock to be perpetually short). From mimicking the open outcry hand signals in the trading pits of the Chicago Mercantile Exchange (yes, there was a time when people traded commodities with people instead of machines) to the glorious works in the Art Institute. It’s there in shots along the Miracle Mile of Michigan Avenue and in the Friendly Confines of Wrigley Field (home of the World Champion Chicago Cubs). Hughes shot the film in three months in 1985 and released it in June of 1986 to rave reviews of critics and audiences (including yours truly and his soon-tobe wife who were married two weeks later) and the film was a huge commercial success grossing $70 million after costing less than $6 million to produce. Rolling Stone magazine had an article celebrating the decision by the Library of Congress in 2014 to include the film in the National Film Registry as a work that is “culturally, historically, or aesthetically significant” (we agree on all three). 2016 was the 30th anniversary of the movie (and my marriage), and Paramount re-released the movie, which of course merited another viewing. Ferris was just as good as the first twenty-something viewings (which brought it to mind for the opening of this letter). One of the great parts of the movie is the breaking of the fourth wall, where an actor speaks to the camera/audience to reveal something happening in the film or to share their personal thoughts (like using the parentheticals in these letters) and we will explore some of Ferris’s musings below.
The movie opens with some classic shots of the Chicago skyline, the Gold Coast and O’Hare Airport, with some radio talk show hosts talking about what a beautiful day it is in Chicago and then cuts to a darkened room with Ferris Bueller huddled under the covers with his parents standing over him.
Katie Bueller: “Feel his hands, they’re cold and clammy.”
Ferris: “I’m fine, I’ll get up.”
Tom & Katie Bueller: “No!”
Ferris: “I have a test today. I must take it. I want to go to a good college so I can have a fruitful life.”
Katie Bueller: “Honey, you’re not going to school like this.”
As his parents leave the room, Ferris pops out of bed and gives us the first of many glimpses into his evil genius and ingenuity. It is these elements of Ferris’s character (and the setting in Chicago and the Cubs, which we will discuss later) that make this movie the perfect opening for this quarterly letter. Given what we just experienced in the U.S. elections, many of the themes, scenes and events in the movie are symbolic of, related to, or downright just déjà vu-ish of the election. If life imitates art, then here is yet another example. As Ferris throws open the blinds and begins fiddling with his stereo equipment to fake his voice, he breaks the fourth wall by turning toward the camera and saying:
Ferris: “Incredible, one of the worst performances of my career and they never doubted it for a second. The key to faking out the parents are the clammy hands, it’s a good non-specific symptom. I’m a big believer in it. A lot of people will tell you that a good phony fever is a dead lock, but, you get a nervous mother, you could wind up in a doctor’s office. That’s worse than school. You fake a stomach cramp, and when you’re bent over, moaning and wailing, you lick your palms. It’s a little childish and stupid, but then, so is high school.”
Given the stunning surprise victory of Donald Trump over Hillary Clinton, this passage takes on a myriad of new meanings insofar as there are many who would argue that Trump was “faking it” throughout the entire campaign (some even mused that he was really a Democratic operative running simply to destroy the Republican party) and there are plenty of people who thought he was “childish and stupid,” but in the end, the people that mattered (the voters) never doubted it for a minute and he won. There is a thesis (which I hope is correct), that Trump was indeed performing all throughout the campaign, following something called the Southern Strategy , where a candidate attempts to win over white voters by playing on common phobias and creating a coalition to secure enough Electoral College wins to counteract the northeast and west coast bias toward the Democratic side. The danger of this strategy is that given demographics (white people becoming a smaller proportion of the overall population), you have to win near unanimity of this cohort in order to win the election, which means the rhetoric has to be pretty extreme (and extreme it was). It is also important not to forget that this is not just a Republican strategy (although primarily) and that Bill Clinton won the White House using some of the same tactics. The rest of the thesis goes to something that I have been talking about for many years, that there are no longer the traditional two parties. There are simply those IN power and those who are OUT of power, and those who are OUT do or say whatever it takes to get IN, and those who are IN do or say whatever it takes to stay IN. Trump’s performance in this regard was actually spectacular, as he achieved moving from OUT to IN not once, but twice, both against the Republican Party in the primary and then against the Democrats in the general election. With the ultimate prize being so important (top of the power food chain) the performance had to be perfect (there is another funny irony that with Ferris the symptom was clammy hands given all the jokes about Trump’s hands). The thing about elections is that no matter how many great ideas you have, or how great a person some think you are (lots of people thought Mitt Romney was really smart and had great ideas), if you don’t actually get elected it doesn’t matter because you can’t implement anything if you lose.
Ferris: “How can I possibly be expected to handle school on a day