DAVE TEPPER, THE BOND MARKETS, INFLATION, AND THE FUTILITY OF CALLING MARKETS

9/5/14

Dave Tepper, the former Goldman trader who runs Appaloosa, one of the country’s more successful hedge funds, said yesterday

"It's the beginning of the end of the bond market rally. We are done." 

People in the market, or anywhere, for that matter, don’t get much smarter than Dave Tepper; see AN AMERICAN MANUFACTURING RENAISSANCE; IT’LL TAKE MORE THAN CHEAP ENERGY, 5/15/13  Still, I don’t know if he’s right or wrong here, and I’m not being coy by saying, as is the fashion nowadays, of saying “I don’t know if he’s right here” when one means “He’s wrong here.”   I genuinely don’t know whether Mr. Tepper is right because I fervently believe that very few people, even people as smart as Dave Tepper, can consistently call markets; see the already seminal BULLS,BEARS, AND BRAINS:   THE RELENTLESS PURSUIT OF THE FOOL’S ERRAND OF CALLING THE MARKETS, 8/29/14. But if Mr. Tepper is right about the bond markets, and there is about a 50/50 chance that he is, it won’t be because of the Fed, or at least not because of the Fed in the way that most people say. 

If the bond market rally is over, it will be because the inflation that we all see around us will finally find its way into the government’s questionable statistics and maybe into the markets.  But old guys like yours truly have been saying that inflation is just around the corner for years…and those of us who pay for college tuition, health care and insurance, gasoline, food, cars, restaurant meals, airline tickets…you know, those things that Wall Street tells us are inconsequential, have seen it.  But the government, and the markets, tell us that what is as plain as the noses on our faces doesn’t exist.  When they finally open their eyes and stop playing games, though, there is no doubt that Dave Tepper and like minded souls will be proven correct in their predictions of higher bond rates.

McDONALD’S (MCD): YOURS TRULY MAY NOT BE LOVIN’ IT, BUT…

9/5/14

I bought some McDonald’s (MCD) stock today.

Loyal readers know that I am a fervent believer in the efficiency of markets and therefore in buying index funds, rebalancing with the religiousness of the Pope, and not making the slightest attempt to call the markets or individual stocks; see INDEX INVESTING:  “YOU (DON’T) GOTTA HAVE HEART…”, 8/21/14.  However, old habits die hard.  Consequently, I do trade a little bit of money, mainly to amuse myself and keep myself focused for my writing endeavors, which I also engage in primarily to amuse myself.

With that disclaimer behind us, why did I buy McDonald’s?   The stock has really been beaten up lately; it reached a year to date high of $103.53 on May 13.  It has since traded down 10.2% to the $92.99 at which I bought it.  The S&P in that time period is up 5.7%.  MCD pays a quarterly dividend of 81 cents, which works out to a dividend yield of 3.48%, more than 100 basis points over the ten year treasury. 

Why is MCD down?  Despite what the financial media and most of Wall Street would have you believe, no one knows.  But those who make a living opining on the unknowable tell us that MCD is down because the millennials don’t like McDonald’s  (Who does like McDonald’s…the food, not the stock?  But I digress.), the competition in the fast food business is too much for McDonald’s, and that the pressure for a higher minimum wage that is supposedly sweeping the country will be bad for MCD.  

As a believer in efficient markets, yours truly doesn’t  pretend to know why MCD is down, though I suppose I could guess as well as the people who are paid a lot of money to make such guesses.  What I do know from years of experience, though, is that when the stock of a great American company is down as much as MCD, it is time to consider buying.  When that same stock pays a healthy dividend and has made no indication that that dividend is in danger, it is time to take an even closer look.  When the reasons advanced for the stock’s having arrived at such a seemingly attractive valuation sound like they could only come from people who know little of life beyond the caverns, usually figurative, but often literal as well, of Wall Street, it’s time to put one’s money to work.

That is why I bought McDonald’s.   Was I early?  Will I prove prescient or foolish?  I don’t know.  But, as with football, having a little skin in the game makes watching more interesting.

BULLS, BEARS, AND BRAINS: THE RELENTLESS PURSUIT OF THE FOOL’S ERRAND OF CALLING THE MARKETS

8/29/14

The geopolitical situation has rarely been worse, short of all out war: 

• Russia is apparently conducting a not all that surreptitious invasion of Ukraine.
• ISIS is sweeping across Syria and Iraq, seizing territory and oil and conducting acts of brutality that are appalling even by Middle Eastern standards.
• A de facto military coup has taken place in Pakistan.
• Ebola continues to spread through western Africa and threatens to burst out of its present geographic constraints to threaten Congo, other African regions, and perhaps the entire world.
• The UK just put on a terror alert that borders on hysteria.
• The western Pacific continues to be a hotbed of sparring between regional and global powers, with the latest developments being an ongoing game of chicken between Chinese fighter planes and American surveillance planes spying on Chinese nuclear submarines.
• Cyber-attacks, on major financial institutions, power providers, retailers, and agencies of government seem to be a weekly, or daily, occurrence.
• The French government was reshuffled for the second time in months.
• It looks like David Cameron’s center-right coalition in the UK is encountering turbulence as euroskeptics start to jump ship.
• The usual nonsense and gimcrackery prevails in Washington, D.C.

Smart market observers are warning of complacency, not only about geopolitical turbulence but about everything; nothing seems to make the stock markets, or, lately, the bond markets, go down.

Equally smart observers point out that there have been many times when people thought the geopolitical situation has rarely been worse, but the world didn’t end and the markets weren’t fazed, largely because the markets seem to operate independently of geopolitics.  The markets have grown used to, and prospered despite, the obtuseness, or worse, of the politicians.  Further, these observers argue that the very fact that smart people are warning of complacency shows that not everybody is complacent.

These bright bulls point out that it is earnings that drive the markets, and earnings, for the most part, are just fine.  Equally bright bears point out that it is future earnings that drive markets, which are perhaps nature’s most efficient and effective discounting mechanism.  A still debt laden economy, weak consumer spending, tepid consumer confidence, and confusing, but largely bearish, economic news out of China don’t bode well for future earnings  These bears point out that the still lukewarm economy, combined with the aforementioned geopolitics, does not present a scenario in which we should be experiencing near record highs in the major stock averages.  Bulls scoff, arguing that record highs are just numbers.  With the S&P trading in the neighborhood of 16-17 times projected earnings, the markets are at best only mildly expensive.  Bears trot out measures like the CAPE ratio, which adjusts earnings for the business cycle and smooths them over the last ten years, is trading at 25, a level that has been reached only in 1929, 2000, and 2007.

The bears argue that, with the 10 year treasury at 2.33% and the 30 year at a calendar year low of 3.07%, bonds are ridiculously expensive and that it is these low rates that provide the helium that inflates our stock markets.   Bulls argue that with the German and Japanese 10 year government bonds at 0.87% and 0.49% respectively, treasuries don’t look rich at all; in fact, they might be cheap.   On the other side of the equation, some observant bulls are pointing out that with U.S. corporate spreads still very tight, treasuries might be cheap not only relative to foreign government bonds but also relative to credit sensitive U.S. paper.   So not only may treasuries be a better value than is commonly supposed but continuing low, and maybe falling, rates will further sustain the stock market.

So what is the point?  Do I delight in confusing my readers?  The latter is certainly not true.

One side of this argument will turn out to be right; the markets, both bond and stock, will either go up or go down.  (They could trade sidewise, in which case both sides will claim victory, but I digress.)   But given the strength of arguments on both sides, those who emerge correct will do so by nearly sheer luck.   Predicting markets is little more than a game of chance, a fool’s errand.  

The two most salient conclusions one can draw from the serendipitous nature of market prognostication are

·        We waste a lot of time and brainpower, in this country and throughout the world, trying to do the impossible—call the markets.  Very smart people are paid very handsomely to do things they can’t do (i.e., call the markets) because people understandably place a very high value on their hard-earned money and still believe that they can get a jump on the markets by listening to the smart guys.  What if those wonderful brains on Wall Street and in the City of London spent their time curing diseases, finding new forms of energy, or working out the logistical and infrastructure problems that look to be a profound source of economic difficulty in the future?  Not only would it be a better world, but everyone would make more money.  The two, by the way, are not at all mutually exclusive; quite the contrary.  But I digress…again.

·        The best course of action for the investor is not to chase the pied piper of market beating returns.  Instead, the investor should, as best as s/he can, determine how much risk s/he is willing to take and set up, alone or with the help of a genuine financial advisor, a balanced portfolio of index or index like products that conforms to that risk profile.  And then rebalance religiously.  See INDEX INVESTING:  COULD ITS SUCCESS BE ITS UNDOING?, 8/23/14 and INDEX INVESTING:  “YOU (DON’T)GOTTA HAVE HEART…”, 8/21/14

MARCHIONNE’S MERGER PLANS: THE SPEED AND MUSCLE OF AN SRT 8, THE AGILITY OF A GIULIETTA…AND PLENTY OF FERRARIS FOR WALL STREET

5/25/13 

This weekend’s (i.e., 5/25-5/26/13’s, page B1) Wall Street Journal featured an article “Fiat Chief Pulls Out the Deal Wrench,” on a topic I’ve been dealing with extensively for at least the last month or so, to wit

CHRYSLER’S QUARTER:   HOW DO YOU SAY “POOR MOUTH” IN ITALIAN? 5/1/13

and

IMPORTED FROM DETROIT:   MARCHIONNE BETTER BE AS FAST AS A CHRYSLER 300 SRT8, 4/25/13

The Journal emphasizes the complexity of Chrysler and Fiat CEO Sergio Marchionne’s plan to merge Fiat and Chrysler and take the company public on a U.S. exchange.  Indeed, this is a complicated deal.   In grossly simplified terms, Mr. Marchionne and his colleagues must

• Buy out the voluntary employee beneficiary association’s (“VEBA”’s) 41.5% stake in Chrysler.  Estimates on the value range from $1.75 b to $4.27 b.   Not only is that quite a spread (and probably serves as a useful proxy for the bid/asked), but final determination hinges in part on an upcoming court ruling.
• Arrange financing to do the above, or use cash.  But if the company eats into its $14.4 billion cash pile to buy out the VEBA, it imperils it credit rating and strains its development budget; designing and building cars isn’t cheap.
• Merge the operations of the two companies; this step is for the most part completed
• Do an IPO of the merged company on a U.S. exchange to raise cash but, more importantly, to establish a higher market valuation (largely because U.S. car companies trade at higher multiples than European car companies) and thus afford the new company greater financial flexibility.
• Raise some money from the IPO and as a result of the heightened financial flexibility to refinance the $2.9 billion in debt Chrysler incurred to repay the U.S. government and $3.2 of other bonds.  These issues must be refinanced because they both contain covenants restricting the transfer of cash from Chrysler to Fiat.  Any debt used to buy out the VEBA would also be refinanced, presumably at or about this time.

Phew!  And that’s a SIMPLIFIED explanation.

As I have argued in my 4/25/13 post, however, at least as daunting as the deal’s complexity may be its timing.   If Mr. Marchionne moves in the very near future, he may be buying into what has been a very ebullient market for U.S. car company stocks.  (See my 5/23/13 piece, THE CAR SALES BUBBLE:  “JUST TELL ME WHAT YOU WANT AND THEN SIGN THAT LINE AND I’LL HAVE IT BROUGHT DOWN TO YOU IN A HOUR’S TIME” for further elucidation on this topic.)   If he buys rich, he will have to move very quickly to do the IPO to avoid selling cheap; to use two trite analogies, he appears to be playing a game of hot potato or musical chairs and wants to avoid getting burned or being left without a chair while holding an expensive Chrysler stake.  If many of the Street analysts are correct, however, and the U.S. car stocks are cheap, as they appear to be based on those analysts’ earnings estimates, there is no concern here.   Gulp.

Further, if Mr. Marchionne is unable to talk down the value of the VEBA stake in Chrysler (See my 5/1/13 post.) and goes ahead and buys rich, not only will he have to move quickly with the IPO, but one would think he would like to make the IPO larger than a symbolic, price establishing issue in order to reap the benefits of a rich price.   Doing so, however, would make it difficult to make the new shareholders happy.

Then we still have the issue of Chrysler’s product line; see my 1/31/13 piece, CHRYSLER’S PROBLEM:  IT’S (MOST OF) THE PRODUCT, STUPID!, which will take plenty of skill, and money, to get up to the standards set by Chrysler/Fiat’s competition.

So Mr. Marchionne’s plans require skill, speed, timing, and luck.  Doubtless Wall Street will get rich on these plans.  But enriching Fiat’s shareholders, and Chrysler’s new shareholders will strain even the formidable skills of Sergio Marchionne, the auto industry’s current man of the hour.

TESLA (TSLA): THE GREENIES ARE CHARGED UP, BUT…

5/23/13

In the interests of full disclosure, I am effectively short Tesla (TSLA); I am long the July 85 puts, which I bought a few days ago when TSLA was trading more than $4.00 cheaper than it is trading today.  So I am talking my position, and, so far, it is a losing position.  Certainly, I don’t think it will ultimately prove to be a losing position or I would have dumped it.  And I’m not writing this in order to provide a better opportunity to dump it.  Further, as I have said ad nauseam on this blog and in other forums, markets and stocks are notoriously difficult to call, so I never put any kind of real money into trades such as this TSLA trade.  I do it for the intellectual challenge, for fun, and to focus my thinking, largely so that I can write more effectively and entertainingly on such topics.

A lot of, but certainly not all, the “experts” love TSLA because, among other things…

·        Motor Trend and Consumer Reports love the Model S, the company’s flagship electric powered sports sedan

·        The company, using some of the proceeds of a $1 billion stock deal, paid back its $452 mm federal loan, making it the only U.S. car company to have, as Tesla puts it, “fully repaid the government.”

·        In some people’s opinions, electric power is a promising, if not the promising, propulsion system for cars in the future.

Some analysts have come up with ratios, such as market capitalization per vehicle produced, that show that TSLA is wildly overvalued relative to any other car company on earth.  But even these observers, who are usually, but not exclusively, bearish admit that these are irrelevant, perhaps even foolish metrics.   Yours truly does not like TSLA for a variety of even simpler reasons.

The Tesla Model S combines the downside of all electric powered cars (range anxiety and the negation of the automobile’s perhaps most attractive attribute, freedom of mobility (See my 5/9/13 piece, NISSAN LEAF:   WHY GASOLINE?  I’LL TELL YOU WHY GASOLINE!) with a $70,000 base price tag.  Thus, TSLA produces a car that few people want that even fewer can afford.  This is a recipe for success?

A less expensive Tesla model is planned, but not for launch until three or four years from now.  Further, after paying back the government, TSLA doesn’t have the cash to develop the more, but not quite, popularly priced car.  Unless it sells a lot more cars, produces a lot more cash flow per car (which would perhaps involve increasing the already astronomical price), or can convince more investors of its vast potential, TSLA may be a one or two (if it comes through with its planned Model S based SUV, as seems likely) product, boutique car company.   And even if it could do another big stock deal, or co-founder, Chairman, and CEO Elon Musk comes up with more equity, would such dilution be good news for existing holders?

Bullish analysts point out that Tesla is a supplier or potential supplier of electric car technology to other car companies.  Great…TSLA can sell technology for a car that few want and/or can afford to companies who will find few customers to buy such cars.   There is also the argument that someone could buy out TSLA, which is always a possibility.  But one wonders about the business case for buying a company that produces a car few want and fewer can afford.   Maybe a GM, Ford, Toyota, Nissan, Honda, or VW can make better use of the TSLA’s technology than can TSLA, but does anybody really think TSLA knows something these guys don’t?   Still, I don’t completely discount the possibility of someone buying out TSLA; investment bankers can be awfully persuasive when selling their M&A services, especially when trading profits are harder to come by.

One can’t help but believe that much of the appeal of TSLA to Wall Street is that the Street is inhabited by people who can afford to spend $80,000 and up (Who wants a mere base model at $70,000?) to trumpet their green bona fides.   The rest of us have better sense.   And that sense tells us not only that even an “extended range” (200-265 miles at a steady 55, a concept with which not only yours truly is completely unfamiliar) car like the Model S makes no sense, but also that we couldn’t afford it even if it did.

The same common sense tells us that a stock that has more than doubled in just over a month’s time (On 4/17/13, the stock closed at $45.45; it closed today (5/23/13) at $92.73. Exactly a month ago, 4/23/13, it closed at $51.01.) is discounting a LOT of good news, probably a lot more real good news than TSLA is providing.

TSLA:              $92.73

S&P 500:         1,650.51

Dow                 15,924.50