From Whitney Tilson’s latest email to investors
1) Sen. Warren called me on Wed. and told me that she’d taken down the post from 12/1 in which she attacked me. I want to thank the journalists who wrote about this (in addition to Andrew Ross Sorkin’s NYT column on Tuesday, it made the front page of the Boston Globe on Wednesday), as well as the many friends who posted on social media and contacted her on my behalf.
She was very gracious and we had a pleasant conversation for about five minutes. I won’t share anything she said during our call, other than to say that the column (below), which appeared on the Boston Globe’s web site on Wednesday afternoon, captures her sentiments well. Here’s an excerpt from it:
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Elizabeth Warren is still mad as hell at the Wall Street takeover of the next White House. But she’s also a little mad at herself.
That Facebook excoriation of hedge fund manager Whitney Tilson? She shouldn’t have done it, the US senator said Wednesday afternoon, and she planned to call Tilson to tell him that.
“I think I took it too far,” Warren said in an interview.
After we spoke, she removed the post, which called Tilson “thrilled by Donald Trump’s economic team of Wall Street insiders,” and warned that “The next four years are going to be a bonanza for the Whitney Tilsons of the world.”
The problem was, Whitney Tilson isn’t that kind of guy. While he is relieved Trump isn’t putting lunatics in charge of the financial system, Tilson is a vehement critic of the president-elect, and a huge fan of Warren.
Warren sees that now.
“There are many things I agree with Whitney on, and I wish my tone had been less heated,” she said.
Susan and I feel a lot better and are glad we can go back to being enthusiastic supporters of hers once again!
PS—Bess Levin, now at Vanity Fair, had a funny take on it. In her former job writing for Dealbreaker.com, her pen was so sharp that I prayed I’d never be the subject of one of her missives, but what she wrote on Tuesday (Elizabeth Warren Is Sorry She’s Not Sorry For Accidentally Trashing Her Biggest Fan) and Thursday (Elizabeth Warren Apologizes for Trashing Hedge-Fund Manager Who Agrees with Her “100%”) came out ok – and she made a very good point here:
But lo! It turns out that we can put Warren back in the column of good politicians, because she’s thought about it and decided to something that Trump would never, not ever—not if the fate of his pink marble monstrosity on 5th Ave rested on it—do: apologize.
“I think I took it too far,” she told the Boston Globe yesterday. “There are many things I agree with Whitney on, and I wish my tone had been less heated.” She’s taken the post down, while certain president-elect’s tweets trashing everything from a union leader to a beauty queen to a humble magazine remain. All is forgiven.
2) I continue to hold ~60% cash, as I’m finding tons of shorts and no longs. I am highly skeptical of this Trump rally. Trump’s behavior and decisions since election day show clearly that he hasn’t changed a bit (the attention span of a gnat; total disdain for “experts”; reckless behavior; etc.), yet investors appear to have collective amnesia about the nature of the man who takes office in less than five weeks. Doug Kass does a nice job capturing why caution should be in order:
Yell and Roar … and Sell Some More
DEC 9, 2016 | 7:30 AM EST
Stock quotes in this article:
“If wishes were horses then beggars would ride.”
It is that time of the year when we anticipate the holiday season and the New Year.
Markets are often frisky during this period, as my pal Art Cashin reminds us.
2016 is no different than other years, but it does have a twist — The Golden Swan, in the form of President-elect Donald J. Trump.
On top of the optimism associated with Trump’s message of Making America Great Againthrough lower taxes, the repatriation of overseas cash, the elimination of burdensome and expensive regulation and other policies aimed at jump-starting domestic economic growth, the dominant investor today — quant funds such as ones that employ volatility-trending and risk-parity strategies — exaggerates short-term moves.
While markets move on expectations and not facts, here are some of my near- and intermediate-term concerns:
- A Market Honeymoon: There is a precedent in the Ronald Reagan administration (I will discuss this further on Monday of an election-to-inauguration honeymoonthat fizzles out badly and quickly.
“… it is important to remember that during the three-month period from the time Reagan was elected in November 1980 to his inauguration in January 1981, the market euphoria took the S&P Index 8.5% higher. However, the market fell dramatically from January 1981 through August 1982, declining by 28% from the 1980 election and by 20% from the 1981 inauguration.”
–Kass Diary, “Donald Trump, You’re No Ronald Reagan (Part One)“
- An Untested President: Regardless of one’s political affiliation, it can be argued that, as a leader, Donald Trump is untested. His ability to execute far-reaching, complex and cohesive policy remains in question, particularly in a backdrop of deep-rooted animus between the Republican and Democratic parties.
- Monetary Easing Is Over: The monetary largesse is no longer a factor or effective in catalyzing growth.
- The Baton Pass: A baton pass from monetary stimulation to fiscal expansion is likely to be less smooth and will probably be implemented much later than the consensus expects. This applies to both the U.S. and Europe, as it is all now about politics and the ability to successfully coordinate fiscal policy.
- The Effectiveness and Timing of Fiscal Stimulation: Fiscal policy efforts, such as the monetary expansion since 2009, may fail to trickle down to where they are needed most — the middle class. In other words, fiscal policy may not be as effective in catalyzing growth as anticipated. As an example, this week the CEO ofCisco(CSCO) , which possesses a large overseas cash hoard, was asked what the company would do with a repatriation of its foreign profits. The answer he gave was that half would go to merger activity and the balance to share buybacks — none of which will add new jobs; indeed, the former probably will lead to lower net jobs.
- Globalization Leaves the Building: Looking inward (isolationism/nationalism) may produce a slowdown in world trade and pressure multinational U.S. companies. In its extreme, it could have adverse military ramifications.
- Higher Rates: Interest rates are heading higher. While this helps a segment of our markets — e.g., banks, which have an imbalance of rate-sensitive assets over rate-sensitive liabilities — it hurts a broader swath of industry (utilities, telecoms and REITs). A higher risk-free rate of return and cost of capital theoretically reduces the value of equities, produces competition to stocks from fixed-income instruments, likely will moderate buyback activity and could raise the value of our currency, which will diminish the value of our exports and corporate profits.
- A Stronger U.S. Dollar: On this last score, 45% of the S&P Index’s profits are non-U.S. based.
“Yell and roar and sell some more.”
–Joe Gruss (legendary floor trader)
Stocks have moved almost parabolically from the deep decline in futures in the morning following the election.
Emotionally driven markets often detach themselves from reality and the real economy.
But, more often than not, parabolic moves and emotionally driven markets end badly. (See the experience following the Reagan inauguration mentioned previously).
The current euphoria and upside move has been further abetted by price-chasing strategies from the dominant market investor (controlled by machines and algorithms) that exists today.
Based on most of my fundamental measures, the reward vs risk has meaningfully deteriorated and the S&P upside is now likely dwarfed by the potential downside.
By some measure we are now in the 98% quartile of valuation after an eight-year economic expansion that was fueled by zero interest rates, which likely borrowed growth, particularly in housing and autos. Shiller’s CAPE ratio is materially stretched versus history and the S&P Index sells at 26x non-GAAP earnings and nearly 19x GAAP earnings.
Doubt and skepticism have left the street as Wall Street appears to be in a fear-free zonein which surveyed investor sentiment is at an extreme optimistic mode along with a fear/greed ratio moving substantially toward greed.
Fearful of a fourth year of underperformance, many hedge funds and other institutional investors who missed the rally now appear to be now chasing stocks.
As I wrote yesterday, opinions, especially about the market, are like noses — everyone has one, including myself.
It is a fact that the majority of the talking heads who were scared poop-less before the election by the market’s prospects following a potential Trump victory are some of the most effusively bullish today. It is a common and repetitive state that sharply rising stock prices often produce abrupt opinion changes, like the chameleon changing his colors. But their opinions and backbones are conditional and weak — they will change them quickly if the downside appears.
As you watch the now-universal optimism in the business media this week and review my thoughts/opinion, always keep in mind this great quote from William Bernstein:
“There are two kinds of investors, be they large or small: those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor — the investment professional — who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know.”
By all means, respect the market advance (I am basically market neutral now). But also recognize that, despite the growing protestations of bullish optimism that is nearly always the outgrowth of a quickly climbing S&P Index, the only real certainty is the lack of certainty.
My investment mantra today?
Yell and roar and sell some more.
3) This recent article reminded me of the warnings I issued in early 2008:
Consider how much better prepared investors could have been had they paid attention to this warning from his Seeking Alpha article on March 8, 2008:
In summary, today we are only seeing the tip of the iceberg: an enormous wave of defaults, foreclosures and auctions is just beginning to hit the United States. We believe it will get so bad that large-scale federal government intervention is likely.
This was March 2008 and there weren’t many people who were calling for things to get as bad as they did. Tilson was one of them and he profited from being positioned correctly in advance of the really big blow-up in the fall of that year.
Today, in comparison, I think that an obvious madman/con man becoming President for the next four years is VASTLY more risky than a few trillion dollars of bad loans. That said, I’m certainly not predicting another calamity like that, with an associated halving of the stock market. But I do predict a lot of volatility (which is good for stock pickers), so I want a lot of cash to take advantage.
4) I continue to be very bullish on Fannie and Freddie for reasons Gretchen Morgenson captures well:
So what might happen now? In his comments, Mr. Mnuchin nodded to a crucial issue regarding Fannie and Freddie: safety and soundness. “We’ll make sure that when they’re restructured, they’re absolutely safe and they don’t get taken over again,” he said, “But we got to get them out of government control.”
A first step in ensuring that Fannie and Freddie are safe would be to let them rebuild their capital. Since the government began taking all their profits in 2012, it has directed the companies to operate on a small and shrinking sliver of capital. Under the current arrangement, the companies will have zero capital at the end of 2018.
This is clearly untenable and unsafe for taxpayers, who would again be on the hook if Fannie and Freddie began losing money.
An easy way to let them rebuild capital would be to end the quarterly transfer of all their profits to the Treasury. This would not require legislation; it could be done administratively with incoming Treasury officials advising the Federal Housing Finance Agency, which regulates Fannie and Freddie, to change the terms of the government’s agreement with the companies. This was supposed to happen anyway while the companies were operating under the conservatorship.
5) I also remain bullish on Berkshire, in part for reasons Andrew Bary laid out in Barron’s recently:
Berkshire Hathaway could be a big beneficiary of a lower corporate tax rate because that action would significantly reduce its deferred tax liability and boost book value. President-elect Donald Trump and Republicans in Congress have indicated a desire to cut corporate taxes in 2017.
Barclays analyst Jay Gelb wrote in a client note yesterday that Berkshire’s book value could rise $29 billion, or 11%, if the corporate tax rate is cut to 15% from the current 35%. The benefit would be less, at $14.4 billion, or a 5% accretion to book value, if the corporate tax rate is reduced to 25%.
In discussing a best-case scenario of a 15% tax rate, Gelb wrote: “We would view this magnitude of increase as favorable for Berkshire shares since it is generally valued based on price-to-book value.”
Berkshire’s book value stood at $163,783 per class A share (ticker: BRKA) at the end of the third quarter. An 11% gain in book stemming from a cut in the corporate tax rate would lift the book value to more than $180,000 per class A share. Berkshire has significant deferred tax liabilities, stemming in large part from huge gains in long-term Berkshire equity positions like Coca-Cola (KO) and American Express (AXP).
Never owning COST is one of the big misses of my 18-year investing career.
6) Good to see: Former Insys Officials Charged in Scheme to Push Its Painkiller http://nyti.ms/2hpMW4g. Kudos to Roddy Boyd at SIRF for helping bring this to light. (How did I miss this short?!)
7) Julia LaRoche did a great interview with Howard Schultz (another huge miss):
I wanted to share this interview I did with Howard Schultz. We discussed his unique management style, leadership, and what Robert F. Kennedy would do if he were alive today. I think he has a great message for our country’s business leaders and executives that we are in need of humility and servant leadership.
8) Wow, the destruction Amazon-led destruction in the retail sector over the past decade is mind-boggling:
9) Costco is one of the few retailers that have managed to buck the trend – what an incredible, admirable company!
Lots of companies brag about their culture. But few are as proud of it or as dependent upon it as Costco is. Goldman Sachs retail analyst Simeon Gutman calls it a “super-culture,” which he describes as, “If we continue to serve and delight our customers, they’ll want to keep coming back.
Costco is a retailing colossus. Its worldwide sales trail only those of Walmart, which has 11,528 stores to Costco’s 715, and Amazon, which just climbed into second place. Costco is the world’s largest seller of choice and prime beef, organic foods, rotisserie chicken, and wine (!), and it moves more nuts than Planters. Its private label, Kirkland Signature, which sells everything from packaged goods and beverages to apparel, generates more revenues than the Coca-Cola Co.
But Costco, big as it is, prides itself on not being your typical multibillion-dollar company. That is where the culture comes in. Executives frequently answer their own phones. (“I may get a call from a cashier,” admits CEO Jelinek, “who says, ‘I’m not getting enough hours.’?”) Its offices are open door. And it takes a journalist forever to arrange a visit, not because the company is secretive, but because it doesn’t feel the need to have a public relations department to make arrangements.
“People will bang down a door to come to work for Costco,” says Craig Wilson, vice president of quality assurance and food safety, and an 18-year Costco veteran. And once there, just about no one leaves. The company’s retention rate for employees who have been there a year is 94%. “You couldn’t throw enough money at me to make me leave this company,” says Paul Latham, VP of membership, marketing, and Costco Services, with 37 years under his belt. “I love it.” And if nobody leaves, almost nobody gets fired either. When the recession hit and most companies were laying off employees, Costco’s brain trust didn’t let anyone go. “It wasn’t even something that we thought about,” Jelinek says. Instead, the company actually raised wages.
10) I really think this technology (whether Google’s or someone else’s) is going to change the world more profoundly and more quickly than most folks realize – mostly in positive ways, but I recently saw an estimate that FIVE MILLION jobs in the U.S. alone will be lost when drivers of trucks, taxis, etc. are no longer needed. Watch the short (1:53) video at: https://www.youtube.com/watch?v=uHbMt6WDhQ8
For nearly eight years, we’ve been working towards a future without the tired, drunk or distracted driving that contributes to 1.2 million lives lost on roads every year. Since 2009, our prototypes have spent the equivalent of 300 years of driving time on the road and we’ve led the industry from a place where self-driving cars seem like science fiction to one where city planners all over the world are designing for a self-driven future.
Today, we’re taking our next big step by becoming Waymo, a new Alphabet business. Waymo stands for a new way forward in mobility. We’re a self-driving technology company with a mission to make it safe and easy for people and things to move around.
We believe that this technology can begin to reshape some of the ten trillion miles that motor vehicles travel around the world every year, with safer, more efficient and more accessible forms of transport. We can see our technology being useful in personal vehicles, ridesharing, logistics, or solving last mile problems for public transport. In the long term, self-driving technology could be useful in ways the world has yet to imagine, creating many new types of products, jobs, and services.
11) Lastly, this is GREAT to see:
It did not take long after election night for the donations to start pouring in to America’s nonprofit journalism organizations.
Almost a month later, the money keeps coming, $10 and $20 and sometimes hundreds of dollars or more from small donors all over the country.
At the Center for Public Integrity in Washington and its international investigative arm, the International Consortium of Investigative Journalists, individual donations are up about 70 percent compared to the same period last year.
The donor pool for the Marshall Project, a two-year-old outfit that examines the American criminal justice system, is up 20 percent since the election.
And at ProPublica, the investigative news organization that pledges to hold the powerful accountable, the postelection haul, $750,000, has easily eclipsed the total raised from small-dollar donors in all of 2015, about $500,000.
The list goes on. From local public radio affiliates to established watchdog groups to start-ups that focus on a single issue, nonprofit, nonpartisan media is having a moment.
Just what is motivating these donors — whether it is a partisan response to the election of Donald J. Trump or a broader concern over the viability of a troubled industry — is a matter of speculation, executives say. But one thing seems increasingly clear: Independent accountability journalism is gaining new support among many Americans mulling the election’s outcome and the country’s political divide.
“Of course, people’s reasons differ, but I think in general a lot of people have felt the need since the election to take some civic action,” said Richard Tofel, the president of ProPublica, which was founded nearly a decade ago. “One of the forms that can take is contributing money to places you think can make a difference in our civic life.”
In this era of fake news, gutted newsrooms, and a President-elect who whips up hatred toward journalists/journalism and traffics in new conspiracy theories seemingly every day, good, in-depth, independent journalism is more important than ever!