Monthly Archives: March 2014

hedge fund manager Seth Klarman’s market warning

March 24, 2014 By in Current Market Thoughts, hedge funds, Strategy Tags: , , , , , , Leave a comment

Seth Klarman’s shareholder letter

Seth Klarman is a value-oriented hedge fund manager who has remained in business for over thirty years and currently had $27 billion under management at the end of 2013.  I don’t know Mr. Klarman, nor am I familiar with his track record.  Nevertheless, it seems to me that thirty+ years of staying alive in a brutally competitive business and $27 billion under management earn you at least a hearing.

Mr. Klarman has made the news recently, as a result of his yearend 2013 letter to investors (I’ve only seen excerpts from the financial press and on other blogs).  In it he cites a long list of warning signals for stock and bond markets.  They include:

–least year’s 30%+ gain in the S&P without a commensurate increase in earnings

–a near-tripling in stock prices from the market low in 2009

–record amounts of margin debt, high IPO activity

–nosebleed valuations for stocks like AMZN, NFLX, TSLA, TWTR…

–all sorts of speculative activity in the bond market, particularly in lower quality securities like junk bonds.

All these worrisome developments are the unfortunate consequences of a “Truman Show” environment orchestrated by the Fed in the aftermath of the financial collapse in 2008.

Mr. Klarman underlines his concern about the current state of Wall Street by informing clients that he will be returning (this has apparently already happened) a total of $4 billion of their money to them–forgoing a large chunk of annual management fees.  If press reports are correct, Klarman has been running with 50% of his assets in cash and feels he can find nothing at today’s prices to buy.  (In addition, if he is charging a management fee of 2% of assets (+ some percentage of profits), the big cash holding is clipping 1% yearly off his net return.)

a little arithmetic

As of December 31st, Mr. Klarman’s hedge fund held 4.9% of the outstanding shares of Micron Technology (MU).  That’s after selling 20% of his holding during the December quarter.  MU made up 32% of his publicly traded equity exposure at yearend  …meaning his entire equity holding was about $3.8 billion on January 1st.  This implies his non-equity exposure must have been just under $10 billion.  So the stock market is the least of his professional worries.  The bond market is his biggest potential risk.

his big concern

It’s the same as everyone else’s–can the Fed withdraw the excessive monetary stimulus that he believes to be (me, too) the root cause of the high degree of speculative activity without causing a great deal of direct damage to global fixed income markets and a lot of further collateral damage to stocks?

It’s not surprising that a traditional value investor would be having difficulty finding stocks to buy in today’s market.  After all, stocks in general have almost tripled from the lows, with left-for-dead deep value names having done far better.  MU, for example, is up by 10x from its late-2008 low.

In addition, in every market cycle, value works best in the early years.  Than growth takes over.  On top of that, I think that in the post-Internet world traditional value investing will work progressively less well as time goes on.

mine

It’s not what Mr. Klarman is saying.  It’s that I’m not ignoring it in the way I would have a year ago.

More tomorrow.

 

 

 

 

Comcast (CMCSA) and Time Warner Cable (TWC)

March 21, 2014 By in Cable, Entertainment, Industry Analysis, internet, Stock ideas Tags: , , , , , Leave a comment

I laughed out loud when I heard the press report that the Roberts family, which controls Comcast, is concerned that customers are not giving them credit for their attempts to improve service.  On virtually any metric you’d care to choose, and for as long as I’ve been watching the company–both as an investor and as a customer–CMCSA has consistently ranked at or very near the worst in customer satisfaction.  It’s the only reason TWC isn’t in last place.

Hence the legislative and regulatory concern about consolidating the bottom of the pile into one low-service mega-company.   …and, I presume, the claim that customer service is now a priority for CMCSA.

I have only limited experience with TWC.  My impression is that no one is in charge.  This contrasts with CMCSA, where I don’t think incompetence is the issue.  Instead, I believe the profit-maximizing strategy of the firm is to:

–find the line where customer dissatisfaction turns into revolt and make the minimum investment necessary to stay just above it.  I’ve never discussed this with CMCSA management–in fact, I can’t recall ever having spoken with them.  But companies all have personalities.  And that’s the way CMCSA acts.

CMCSA wouldn’t be the first to do this.  Marriott (MAR) had  similar thinking at one time.  It built its hotel rooms with the ceilings an inch or two lower than other companies and the rooms, say, 10% smaller in total area.  The hot water was never really hot.  MAR managment argued to that these deviations from the norm all saved money and were too small for anyone to notice.  People would, at worst, only be vaguely uncomfortable.  And then they wondered why they were never able to attract (lucrative) business customers.

Eventually, the lightbulb came on for the Marriotts. The family ousted the management that thought up this approach.  (Those guys decamped to Disney, where then created the Eurodisney fiasco, and, after being pushed out the door again, went on to severely clip the wings of Northwest Air.)  MAR began to build more comfortable hotels and built a thriving corporate business (by the way, I own MAR shares).

The difference between MAR and CMCSA is that the latter is a semi-monopoly.  Customers have very few other choices.  That’s why a customer-unfriendly strategy continues to work.  It’s also why the question of whether regulators should encourage this behavior is coming up.

I’m not a CMCSA customer any more.  I use FIOS now.  Superstorm Sandy did me in.

The week after the storm, Verizon (VZ, another stock I own) trucks were all over our neighborhood, repairing their mobile and wired internet infrastructure.  CMCSA trucks didn’t arrive for a month!!  Nevertheless, CMCSA continued to charge for the service it was not delivering.  The customer service representatives I spoke with on more than one occasion explained that I could get a refund for the time the service was unavailable.  To do so, however, I would have to submit proof that my electric power had been restored.  And I would not get a refund for any time (a week, in my case) that the electric power was out.  Yes, CMCSA cable and internet weren’t available for a month after the storm.  But for CMCSA that was irrelevant.  Their argument was that without electricity I couldn’t receive the service CMCSA couldn’t provide.  So I had to pay for the non-service anyway.   Talk about through the looking glass.

Anyway, like most everyone else on our street, we switched to FIOS.

It will be interesting to see how the regulators treat the possible merger of CMCSA and TWC.

Janet Yellen’s press conference yesterday

March 20, 2014 By in Current Market Thoughts, Recent Market Action Tags: , , , , , 2 Comments

Janet Yellen, new Chair of the Federal Reserve, held a press conference yesterday, following release of the agency’s policy-setting Open Market Committee.

The committee’s decision was the expected one–to continue its program of winding down over the next six months its program of buying boatloads of federal government bonds.

During the Q&A session, a reporter asked Ms. Yellen how soon after the bond purchases end in September it might be before the Fed begins to raise short-term interest rates in the US from their current ultra-emergency low of 0%.  Her answer:  assuming the economy continues to strengthen, six months or so.  In other words, about a year from now.

This reply sent the stock market, which had been within a stone’s throw of its all-time high, into a tailspin.

From the perspective of investors like you and me, the Yellen comment is not new news.  It’s pretty tame.  In the fast-twitch world of short-term traders, however, the stock market response is understandable.  The market was likely bouncing against the top of its near-term trading range, so down was the likely short-term direction no matter what the news.  Also, this is also the first occasion when the Fed has said when short-term rates might begin to rise.  It’s a few months earlier than the consensus had expected; more important, the timing has been made (more or less) concrete. And the actual shoe dropping–no matter how widely anticipated–almost always provokes a market reaction.

The more interesting issue, to my mind, is why Ms. Yellen said what she did.  I can think of three possibilities:

–Maybe she didn’t intend to specify timing and made a rookie mistake.

–More likely, in my view, the Fed may have made a far more decisive turn toward restoring money policy to normal than the Wall Street consensus has thought.  Yesterday would have presented a good occasion for starting to get this new information disseminated.  The fact that the stock market is at/near record territory suggests it is in a good position to absorb the news; one might even ask if the Fed is worried that too much money is chasing speculative stocks.  Maybe it wouldn’t mind if stocks went down a bit.

–It’s also possible, though I think much less likely, that the Fed has come to believe that its current easy money policy is having a negative effect on the economy.  Maybe it is coming to view itself as an enabler of Washington dysfunction, that the White House and Congress have the luxury of doing nothing because money policy is so loose.

 

After all, what do we really know about Janet Yellen.  Well, she has a grandmotherly appearance and a vaguely unpleasant speaking voice.  That may lead one to forget that she is a woman who has risen to the top of a profession dominated by men.  This means that behind her mild-mannered exterior, she has to be super-competent and very tough.

From an investor perspective, I think the takeaway from the press conference is that monetary policy normalization is no longer an amorphous thing somewhere out in the future, but is rather an important fact of life that must be factored into any investment decision.  We also have to begin to figure out whether or not a latter-day Margaret Thatcher is emerging as head of the Fed, and what this would mean for stocks.

buying Microsoft (MSFT) !?!

March 19, 2014 By in Industry Analysis, Recent Market Action, semiconductor manufacturing, software, Stock ideas, Technology Tags: , , , , , 1 Comment

Yes, that’s what I’m beginning to do.  I’ve bought a small amount and intend to add to it on weakness.

For me, this is an unusual step, since MSFT isn’t exactly what you’d call a growth stock.  Quite the opposite.  It’s a value idea.  I’ve been building to it for some time, though.  I few months ago I wrote that in a year like 2014, where I imagined (and still do) that a stock that’s up by 10% will be an outperformer, the bar is set pretty low.  And after thirteen years of decline vs. stocks in general, the news that the company had dysfunctional management and had gone ex growth had been pretty thoroughly worked into the stock price.  My son-in-law told me it’s the nicest thing he’s ever heard me say about MSFT.  (It was a big part of my portfolios all through the 1990s, however.)

I also privately scoffed at prominent value managers who loaded up on MSFT several years ago purely on the notion that the stock was cheap, ignoring the issue that change of control was well-nigh impossible.

What’s changed?   …or, better, what’s changed my mind?

As I mentioned above, the market situation is one thing.

The stock’s metrics haven’t moved much:  steady cash flow of $3+ a share, earnings of $2.75, a dividend yield of just under 3%.

There’s a chance earnings may improve over the next few years:

–the board of directors has put new top management in place.  A cadre of looks-good-in-a-suit-but-doesn’t-do-much lieutenants are disappearing, as well.  There’s no guarantee that the new guys are any better than the old.  On the other hand, it’s hard to imagine they’ll be worse.

–Apple’s failure to produce an adequate alternative to the Office suite has limited the inroads it can make into MSFT’s corporate market.

–Windows 8 (I just got a new touch-screen laptop) is pretty good–very iPad-ish.

–a new generation of Intel chips + the emergence of Samsung, Asus (my brand), Acer and Lenovo making high-quality products may well reenergize the US consumer market.  Much lighter weight, high-resolution screens, instant-on and touchscreens may counter some tablet momentum.

–with its consumer/small business products, MSFT has had a continuing (large) piracy problem.  The shift to the cloud will help police that.

–new management may do good things.  Even if not, the idea that the company is turning a new page will likely support the stock until we can make a better judgment.

“To the People of New Jersey”: from Elon Musk

March 18, 2014 By in Autos, Industry Analysis, Stock ideas, Technology Tags: , , , , , , , Leave a comment

Elon Musk, CEO of Tesla, wrote a blog post last Friday giving details of the circumstances of the revocation of Tesla’s licences to sell cars in the Garden State.  The post was apparently also sent to every New Jerseyan on the Tesla mailing list.  It follows a post three days earlier by Mr. Musk, “Defending Innovation and Consumer Choice in New Jersey,” in which he alerts readers to an about-face by the Christie administration.  After months of negotiations, during which Tesla believed the question of its licences would be put to legislative vote, Musk says the governor decided to have the Motor Vehicle Commission declare that cars in New Jersey can only be sold through third-party dealer networks.  The rationale?  …”consumer protection.”

Musk is considerably less than amused by this development.  At one point in his long post on the 14th, he manages to allude to mafia influence and to the traffic obstruction scandal Mr. Christie is embroiled in, both in the course of a sentence or two.

Musk also derides the notion that anyone would consider car dealerships to be paragons of consumer protection.  He points out as well that the MVC is “protecting” citizens against the vehicle that has achieved the highest ratings Consumer Reports has ever given to any car.  He also cites business publication polls in California, North Carolina and Texas in which overwhelming majorities favor the direct car sales over sales through dealerships.

More substantively for investors, Musk also outlines the difficulties Tesla would face in trying to sell through third-party dealer networks.  This model calls for dealers to sell large numbers of cars, and to make the bulk of their profits through (expensive) aftermarket services.  Tesla’s electric cars don’t require much servicing, however.  At least some of that can be done through software updates over the internet.  In addition, the fact that Tesla will likely sell only 35,000 cars worldwide this year (that would be 0.25% of the US car market if they were all sold here) means Tesla can’t be a significant part of any dealer’s business.  So the dealer might use the Tesla name to get customers onto his lot, but he’s likely to try to steer the client toward more profitable brands.

It’s also striking that, as Musk points out, every independent electric car maker who has tried to sell through existing third-party auto dealers has failed.  Musk says the last successful independent in the US was Chrysler a century ago,

On to Ohio, where the next Tesla vs. dealers battle is being fought.