Howard Marks On Catching Falling Knives, FANG, And More

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Howard Marks’ remarks on the investment opportunities in the energy sector, advantages distressed investors will get from low oil prices, liquidity, FANG stocks and the Fed raising interest rates. Full audio below.

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Howard Marks - Co-Chairman, Co-Founder, Principal and Member of Executive Committee

Sure. Well, Alex mentioned, as we were sitting here waiting to start, that I was animated when he spoke to me yesterday, and really, for the credit investor, we have our first opportunities in several years. We thought that the environment was lackluster. I think I told you last year and maybe the year before that, that our mantra for 4.5 years has been "move forward but with caution." We didn't think there were compelling opportunities to move forward and we thought there was a great need for caution. Now of course, there are opportunities. I mentioned to Alex that there's this old Chinese curse, you should live in interesting times. Times are more interesting now. For some, it's a curse. They say in golf, that every put makes somebody happy. And so some of the price declines and some of the weakness, which has been noted so far, makes the perspective buyer very happy, and the holder, very unhappy. But we've raised a lot of capital over the last 1.5 years to be prepared for an opportunity that we believed was coming. And now, we are more interested, now that it seems to be here. We have bonds that have gone from 90 to 60 in the last few months, and not only in the energy sector. And we had a dinner here last night, Jay and I did, and one of our colleagues from the distressed debt group who was supposed to be there from L.A. begged off. He says, "I'd like your permission to stay in L.A. There's too much for us to do." Well believe me, it's been a long, long time since you could say there's too much for us to do. Maybe actually 7 years, fourth quarter of '08. You need to be post Lehman. There was too much to do. And now there is again, but it's been a long time.

Alexander Blostein -  Goldman Sachs Group Inc., Research Division

Let's spend a couple of minutes on the energy space. That's clearly been the area of you and many of your peers talked about, over the last year, 1.5 years as a potential source of investment opportunities. We haven't seen a ton yet. What changes that? I mean oil is obviously having another tough day. Is it $30 oil or below that will create more investment opportunities and when some of this capital will start to come out.

Howard Marks - Co-Chairman, Co-Founder, Principal and Member of Executive Committee

Well, I think that hedges were in place that have worn off that companies will lose their credit lines. And so it's not -- there's never a demarcation line. I think that $37 oil will produce a lot of opportunities for the distressed investor. $30 will produce more if it gets there. Of course, nobody -- maybe with the exception of the people in this room, if you let me know or give me your cards afterwards, nobody knows where the price of oil is going. And there's nothing intelligent to be said about the future of the price of oil. And so, you have to invest in it very gingerly and carefully. But I wrote -- a year ago, December 18, I wrote a memo on oil. I said, "At $110 everybody says, if it ever gets to $90, I'm going to back up the truck. When it falls to $80, at -- they say if it ever hits $60, I'll give it a lot of thought. And when it hits $50, they said, can't touch it, falling knife." So certainly, it looks like a falling knife, but I've always believed that it's our job to catch falling knives, but to do it with caution.

Howard Marks - Co-Chairman, Co-Founder, Principal and Member of Executive Committee

Well, liquidity is a complex topic. And I wrote a memo in the first half of the year about it and anybody who wants to can read it on our website. But if you think about it, we only -- one only needs liquidity for 3 reasons: to be a day trader or a short-term trader, for-profit, which we never are; to be able to realize profits after a long hold; and to be able to fix one's mistakes. But while we do some of all of those, well some -- we do some of the latter too, we don't trade for profit in the short run. But we think of trading just as a way to effect our fundamental long-term investment decisions. And so we don't care that much about trading for the short term. It happens that when liquidity gets worse, it gets harder for the people who have holdings to exit. If we're holding cash at that time, that's -- I mean, dried up liquidity has given us, probably, our best opportunities ever. So we kind of welcome it. And I said in that memo that the best defense against a lack of liquidity is to only own things you can hold through the long term. And I think that because of our investment process and because the vast majority of our capital is in locked up funds, we can hold for a long time. We raised the funds in the last 1.5 years for distressed. So far, we've announced having raised $9.9 billion. And that funds got 10 years to run from here without requiring an LP extension. So we don't need Mr. Market to give us our returns, the fundamental results will give us our returns.


Chief Executive Officer, Director and Member of Executive Committee

And if you look at the breadth of the value in the equity market and eliminate you call it the top 20, top 40, top 60 names, I'm not sure there's as large of a disconnect between the 2 marginal test people talk about. There's more writing about that now.

Howard Marks - Co-Chairman, Co-Founder, Principal and Member of Executive Committee

Yes. I heard yesterday about the FANG market. Everybody knows about the FANG, Facebook, Apple, Nike, and Google. So it's very concentrated, and it was very concentrated last year too.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Okay. One question at [indiscernible].

Unknown Analyst

Any thoughts on the unintended consequences of the Fed raising rates? [indiscernible]?

Howard Marks - Co-Chairman, Co-Founder, Principal and Member of Executive Committee

Unintended consequences of the Fed raising rates. There's nothing in this world that's either all good or all bad. And the Feds [indiscernible] over this for the last 2.5 years certainly indicates that there have been arguments on both sides. It seems clear that the Fed is going to raise rates, unless something happens in the next week or 2 this month. There are reasons not to do it. What we would do to the rate of growth in this country? How can we do it when the rest of the world is cutting rates, what will it do to the dollar, the negative consequences are on our global competitiveness. So it's not an easy thing. I have felt for a while that the merits on balance were on the side of raising rates. I don't like the fact that the rates have been administered, and I don't like the fact that the Fed hasn't had any room to react if the market, if the economy should recon. That room has to come in the form of the ability to drop rates, which is hard to do from 0. But it's not an easy decision, and that's why I'm glad I don't have -- as Obama would say, that's above my pay grade. I'm glad I didn't have to make that decision. But there are a lot of reasons, negatives on both sides. And I think with us having a very strong currency already, further strengthened by relative increases in interest rates, I think it's -- we're going to have significant challenges on the export side.

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