Insight on what high-frequency trading and volatility does to markets, with Ron Baron, Baron Capital who says the volatility makes stocks cheaper. and stated that “I assume that Greece is going to be fixed and re-organized and restructured,” Ron Baron also feels stocks are cheap right now. Ron Baron also talked about the recent success of the railroad sector.
Videos and full transcript below:
On Europe and the equity market:
squawk is on the road this morning and we have a very special show lined up for you. would he we’re live from the metropolitan opera house, the location of the 20th annual baron investor krconference. and joining us for the next two hours, ron baron, talking about going long term long term long. we thank you for being here this morning. and shy probably give a littledisclosure because we are pals. my brother-in-law is a baronman. one of our superstar analysts. married to my sister. you can give him a hard time if you want. we talked about europe.jobs are on the horizon. we’ll find out at 8:30 the number. i know that you are not a market timer, but when you look at theeconomy and where with we are today and you think about thesituation and our economy here, you think what? i think that a very small country the size of delaware we’re talking about is making the stock market go up and down when people talk about it and it’s enabled by the computer trading. i think it’s had very little impact on the businesses in which we invest in our country. it has a big impact on stock prices, more volatile stocks means people perceive this greater risk means the stock prices sell lower than they would ordinarily. but you don’t have a broad thesis about where we’re going? i assume degrees will be fix some had way or another and werestructured just like east germany was restructured by westgermany for the next ten years, they totally restructured. now germany is the most prosperous nation in europe. you might be surprised to know which is the lowest labor costs. in west germany now is the lowest labor cost for all europe. cheaper than spain, cheaper than portugal. and how do they do that?they’re doing the same thing now with degrees. the state can’t afford to pay for this, so the leaders have said we’re not going to let our banks go bankrupt, we’ll restructure, we’ll recapitalizethem. and so you think it gets fixed and if you look at where the market is today then, you think it is fairly priced, underpriced, still you have a percentage of no recession, resection? i think the stock market is the cheapest in my lifetime. so the only other time that interest rates have been 2% or less in the whole history of the united states is in the 1940s. so the 1940s, this is after the depression, in the middle of world war ii, interest rateswith your below 2%. afterwards they were below 2% because people were afraid that the soldiers that were going to come back would be unemployed. couldn’t get jobs. so you had all these programs in the united states in the late 40s and 50s, you had a gi bill and all the houses, places where i lived, to give jobs and give shelter and give something to do and educate people. well that’s going happen again. but what’s going to happen to the country, the jobless claims number — it’s all short term. what you have to keep in mind is the business is all doing fine, balance sheets are great. so you’re buying. yeah.interest rates are 2%. that means they’re 50 times. so credit is very expensive. this the past five year, $800 billion has gone into credit because people are afraid. in the past five year, peoplehave taken stock. that’s why they’re so cheap. two months ago there was a survey that said that 34% of americans believe that gold is the cheapest — is the best lonk time investment. so people are afraid of investing in stocks and they’re investing in gold. and because of that, socks which are 2% interest rates, 11, 12 times earnings. and everywhere you look — we’ll be meeting a number of companies that you’re investing in. right now in terms of metrics, right now in terms of metrics, what is the one thing that you are looking for. you’re trying to findbusinesses that have great growth opportunities. we’ve been investing in companies is that are small and mid-sized and made have become large. the biggest mistakes i’ve made in my life have been investing in companies when i started inbusiness all through my career that have become really largeand i invested in mcdonald’s and disney and federal express when i started. very beginning. early 1970s. they all became giant stocks. i sold after i doubled and tripled my money and they went up 40 and 50 times. so the mistakes that i’ve madehave been mistakes of not staying with investments. so you you don’t become a lonk term investor because you start in business and say i’m going to be a lock term investor. that’s not how it happened. you make a whole bunch of mistakes and they inform the way you invest in the future. so you have opportunities because there are so many problems that haven’t been dealt with for so lonk that now you’re getting the chance to solve problems for america and when they do so, make higher returns and you can have great returns for our investments.before i send it back, groupon, ipo launching this morning. is it the next nxt nike, walt disney? i thought the guy who runs it was pretty neat, the people with him were the same. i haven’t done enough work on it. are you investing in that ipo? i don’t know.in a small cap funds, i’m not. because you can’t. because i have a $2.5 billion market cap and i think this is $8 billion or $10 billion coming out. they were offered to be acquired by $6 billion by i think it was facebook. and — google. so they had an offer to be acquired at $6 billion and maybe they’re going public at $9billion or $10 billion. there’s not much down side and they describe to us the process where they can become a muchbigger property and there’s all these synergies and how they can make businesses operate better. but again, i’m not the expert in this. we have three, four, five people in my office who are. and as i said, you can ask mike about that. do and you have mondyou have? we cannot see your pretty face. so i’m going bring up a six month generac chart. i’m looking at it from october. that must have been irene. it was at $15. it’s at $24.when did you start buying this? our costs is $13. and we bought it when it came out and we bought as much as we could when — after it came out. there were very few people who were interested in it when it did come out. it comes on immediately ifyour power goes out. exactly. we have a generator that’s muchbigger than that, than the regular ones that they sell, but as soon as — it tests regularly. it tests every week. every week the generator comes on, workses for a while, and then shuts off.and your generate, to i think that’s the same hinge thathappens. it comes on regularly. takesit is a $1.6 billion co. see, andrew, there’s he these things called trees. like in new york city, you have museums — we don’t have trees in new york city.i know. all you have — and we have all our wires under the ground. we need to put wires under the ground. infrastructure, that would be a great project. it would. by the way, small cap to us means $2.5 billion or less. and you said it’s 1.6 build n$1now. so well within our definition of what a small company is.jersey power and light earlier this week, 95%, we’ll be done thursday. see, they know that if it’s 70% still don’t have power, nobody knows whether they’re the 5 — i could be in the 5%. i could be in — not even a single truck. i mean, this is get a littleold. christy says don’t complain and they probably are working really hard. but not a truck.
On Volatility:
let’s get parting shots from our special guest host this morning, ron baron, chairman and ceo of baron capital. we’re here, of course, at the metropolitan opera house. how troubled are you by the market and should investors looking at the long term even worry about it? of course you should worry. if you have volatility, stocks will be lower priced than ordinarily. so the concern is the volatility makes stocks cheaper. you just have to figure out what businesses are worth and buy them at a good price and then make good returns. and before joe was giving me credit for an investment that we made in generac. we doubled our money. that didn’t come from me, it came from rebecca ellen. the reason we do so well is we have 28 people growing all the time. so neil rosenburg, mike lipord, we have all the people. ron, i also want to give you credit for — i mean i can almost finish your sentences. you can finish mine about teachers and about capitalism. but at the same time, andrew, you need — ron is a huge leaning hard liberal. you’re a very feeling — you’re philanthropic. he’s right where you are, andrew. i think a lot of us are. but a lot of the times the intentions are good but a lot of times the actual results aren’t what they’re cracked up to be. it’s great to hear ron have, you know, sort of a free market approach to some of this stuff.
On transportation:
squawk box this morning is riding the rails. genesee wyoming is with us now, the chairman and ceo. thanks for having me. you’ve been an investor, ron, in his company since 2004. you jumped in why originally? i think the most interesting question for jack to answer is when you own these railroads, how do you buy them at the price you pay for them? why does the guy that owns him, why does he sell them to you? how do you run it better than the guy that owned it before running it? just to give background, you have rail now not adjustment in the u.s. and canada but australia and netherlands. we have 64 railroads around the world. 55% of our business is in the united states. 30% on australia. ron has a good question. you’ve been able to buy the rails at an underpriced — first of all, what is a short line railroad? a short line railroad, think of it in the united states as the first mile and the last mile to a customer facility. so the big railroads that you’ve heard of like csx and norfolk southern will haul the freight for the first — let’s call it between 100 and 500 miles. we handle it for them. then typically handed off to another short line. you’re the local telephone company. exactly. perfect example. we’re the clac. given that, you do have a pretty good pulse on the economy. yes. and from some of the notes and things i’ve read that you talked about earlier, you saw a lot of the things coming in the past year in terms of where the economy is headed. where do you see the u.s. economy going? the u.s. economy right now feels stable to slightly growing. it was somewhat surreal to be watching what was going on as the world melted down with greek crisis starting in august and, you know, you’re communicating with the board of directors and saying no, really, our freight traffic is stable and we’re up a little bit. we were up 4% to 5% on the volume basis through that whole interv interval. today, you still have that stability. there are pockets of weakness. you’re still having industrial facilities in the united states close down like plywood mills. what about steel? steel is spotty. you’ve got the newly invested steel mills in the united states, for example. there’s a new plant down in calvert, alabama. these are multibillion dollar investments. that’s the future of the steel industry. and that’s growing. and we’ve purchased the railroads that — then i think of australia. iron ore is going crazy. yes, that was during the financial crisis 2008-2009. our iron ore volumes were up through that whole period. we were up 15%. so you’re looking at volumes in the united states dropping 15% in the throes of the financial crisis whereas awe stral yashgs y australia, you almost thought it was a typo. today, we added new iron ore contracts. we’re shipping north and south in awe stral yachlt. when you think of freight, you don’t think of growth. it seems like an old line business. that goes back to so how is it that you’re able to buy these for less than cost to replace them? why do the guys that own them sell them and how do you run them better? one of the keys to our acquisition strategy in the united states in particular is — i’ll start with original genesee wyoming railroad, a 14-mile spur that serve as as a big salt mine in new york. it’s been serving it for 100 years. the deposit has another 100 years to go. we have grown through six or seven contiguous railroads. in putting these together, there are efficiencies and locomotive shops, maintenance and as we’ve built it from 14 miles to 700 miles, the economics, the synergistic economics are doing that and transform the region. we have david walker who is on the set and talking about the super committee and what’s going to happen more broadly. i’m sort of curious when you think about regulation, when you think about what’s happening in washington, how is that impacting your business? in the broadest sense, when i think about the things that keep me up at night, they’re all macro economic. there are things in europe. there is the united states’ inability to deal with the fiscal issues. because that affects the investment climate. we’re an asset intensive business. it’s tough to be optimistic about the economy and it’s tough to invest. i certainly hope there is leadership within the super committee. ron, take the other side of that argument. what do you think of the economy? you said you thought this was the cheapest and best market that you’ve seen in a very long time. and here, one of your portfolio companies, he’s staying up at night because of this. staying up at night because all you read about in the newspaper and headlines it sounds so awful. but when you talk to businesses for the most part, you’re going to find businesses that have balance sheets that are very, very strong. and your — and they’re hunkered down. and they’re protecting themselves against disasters. you know, jack, everyone else, hotel companies are saying we’re not going to spend as much as we wanted to. there are no hotels being built. you have business that’s are very profitable, that are growing many of them slowly. but you see growth everywhere. every business you talk to, businesses are doing better. and the business we’re interested in doing are doing better. and so the economy, who knows? but the businesses we have — you’d never predict it. and everything’s cheap. as i said, 11, 12 times. interest rates are 2%. measuring against that. bonds are 50 times earnings and stocks are eight times pretax earnings. big difference. we’ll continue that conversation after the break. thank you for coming in this morning. thank you. very, very interesting stuff. michelle, back to you.
