Although there is no dearth of exciting things happening throughout the world, yesterday the business news all centred around the Delivering Alpha Conference (presented by CNBC and Institutional Investor.) The conference did indeed attract quite an impressive list of top hedge fund managers. There was a little bit of a snafu with parking, but once that was cleared up, the conference ran smoothly.
Parking problems outside the “Delivering Alpha” Conference</a> </div>
I know that it is tempting to tag along with these brilliant hedge fund managers that are filling the incessant CNBC coverage of the conference. They sure all sound so smart, and by golly – they are presenting at Delivering Alpha – if there ever was a way to add alpha, it has to be found here at this conference.
Before you go punch a bunch of blue tickets, take a moment to ask yourself if these hedge fund managers are really offering up an edge for CNBC viewers, or if they are instead simply talking up their book? Now don’t get me wrong, I don’t think these hedge fund managers are engaging in some pump and dump scheme. But these managers are not going to recommend trades they are thinking about putting on. They are going to talk up positions they already have on. Why wouldn’t they? By their very nature, these are the positions the hedge fund managers think have the best chance of going up – that is why the hedge fund managers are long.
However, I contend that these hedge fund managers are increasingly too large a portion of the market. Instead of being a fringe group that smartly scurries ahead of the lumbering mutual funds, they have become the main price setter for stocks. Therefore the last thing you want to do is be on the same side of the trade with them. I have said it once, and I will repeat it today – you want to fade the CNBC gurus.
All the Delivering Alpha conference does is give you an idea about the sentiment running through this hedge fund community. And although these managers all couched their comments with warnings about the precariously low interest rates, there was no doubt that they were all in long. Even the most bearish of the hedge fund managers, my personal favourite ex-Soros partner Stanley Druckenmiller, warned about all the problems with Fed policies, but was still long.
“We’re not looking at an ’08 or ’09 in our future anytime soon,” Druckenmiller said of value bubbles today. “You don’t have to move until they raise rates,” he added later.
The biggest bear in the place was long and playing the game of hot potato with all the other managers. They all think they are smarter than the other guy. They all think they can get out ahead of the other managers.
Although you might take comfort being long with all these smart guys, I view them as the crowd that you want to avoid. There is simply not enough liquidity for them all to trade in the same direction. And to some extent their bullishness is one of the factors of this latest relentless move higher. Earlier in the year they were underweight, expecting the market to correct. This latest stock market move into new highs has squeezed them back into the market. The fact that they are so bullish should be more of a sign of worry that their buying is closer to being finished more so than a great “alpha” generating idea.
These hedge funds need to be in the market. They cannot afford for the market to rally 10% without participating. I know they are supposed to be “absolute return” investors, but at the end of the day, they are competing against equity returns.
Have a look at this great chart from BofA:
For all their talk about “delivering alpha,” they are adding a lot of beta.
Rising markets attract hedge funds which causes them to rise further. At the top of the market, the hedge funds will be the most bullish and the longest. Watching CNBC and buying because some hedge manager is delivering alpha with his great long stock call is a great recipe for getting stuck with beta at the worst possible time.
Two jackasses hug on stage
And in case you don’t think that this whole Delivering Alpha is anything more than orchestrated theatre, it was all put to rest when the previously feuding, two biggest jackass hedge fund managers “bro-hugged” on stage.
Jackass #1 hugs Jackass #2</a> </div>
I threw up a little in my mouth when I saw this.
In case you forgot, here was the half hour of petty, pathetic mud slinging that these two graced CNBC with last year.
I know things are tough at CNBC these days with viewership at all time low levels, but this sort of crap (both the fight and the bro-hug make up) is why I can’t stand to watch it anymore.
And just in case you don’t think these two guys will do anything for a buck, don’t forget how quickly they both put aside their hatred for each other when they figured out they can both make some money teaming up.
I don’t expect them to hate each other for eternity, but the way society fawns all over these jackasses is quite pathetic.
The rest of the Carl Icahn interview just solidified my view of this “great citizen.” Earlier in the year Blackrock’s Larry Fink wrote a thoughtful letter to corporate America lamenting about the “short-term demands of the capital market.”
To meet our clients’ needs, we believe the companies we invest in should similarly be focused on achieving sustainable returns over the longer term. Good corporate governance is critical to that goal. That is why, two years ago, I wrote to the CEOs of the companies in which BlackRock held significant investments on behalf of our clients urging them to engage with us on issues of corporate governance…. Many commentators lament the short-term demands of the capital markets. We share those concerns, and believe it is part of our collective role as actors in the global capital markets to challenge that trend…. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks. We certainly believe that returning cash to shareholders should be part of a balanced capital strategy; however, when done for the wrong reasons and at the expense of capital investment, it can jeopardize a company’s ability to generate sustainable long-term returns.
Even though Larry did not single out Carl Icahn by name, the overly sensitive Carl took it as a personal slight. According to Fink:
He did receive what he describes as “angry” calls from two activists–Carl Icahn and another Fink wouldn’t identify.
Icahn thinks that Fink and other critics like long term Wall Street attorney Mary Lipton should mind their own business as Carl demands that companies lever themselves up with balance sheet restructuring so that he can take a quick buck out of the stock. Carl thinks he knows how to run companies better than the current CEOs. He has the audacity to phone up Tim Cook, who helped create one of the most successful companies in the history of capitalism, and demand that Tim should drop everything he has been doing for the last couple of decades while building Apple, and take Carl’s advice on levering up Apple’s balance sheet.
At the Delivering Alpha conference, after bro-hugging his arch-enemy, Carl caps off his self aggrandizing opinion of himself by saying the following:
“We’re going to have morons running these companies,” said Icahn. “I’m having dinner with a lot of these guys afterwards… they’re not bad guys.”
Huh? You’re going to have dinner with these morons afterwards? That should make for a fun evening. It would be kind of like me writing this whole piece about what a jackass Carl Icahn is, and then finishing it off with – gotta hop, having lunch with that crazy old jerk Icahn.
Canadian Dollar short
I am short the Canadian dollar as one of the cross rates to express my US dollar bullishness. Yesterday the Bank of Canada met, and although they did not change interest rates, Bank of Canada Governor Stephen Poloz talked down the Canadian economy. He said that the economy won’t reach its full potential until mid–2016, effectively pushing out the timing of any future hikes. The Bank of Canada also lowered its growth forecast to 2.2% from 2.3% for this year, and 2.4% from 2.5% for next year. Finally, Poloz said that “the bank’s judgement is that inflationary pressures remain muted.” This attitude is similar to the Fed’s comments that recent inflationary upticks have been “noise.”
All in all, the Bank of Canada was about as dovish as you can get. Rates are not going higher anytime soon.
This is probably a good thing as the Canadian does appear to be stalling. We have a stretched real estate market, with a currency that is probably too high, with little signs of any real uptick for the economy on the horizon. Although I am far from a Canadian real estate or economic bear, I think that Canada is going to struggle in the coming quarters. Especially when you compare us to the US.
Over the last few days, traders have been busy passing around this great chart created by BofA for hours worked versus GDP:
The recent sharp drop in hours worked in Canada does indeed seem to portend an ominous warning about the Canadian economy. Whenever I get one of these doomsday charts, I always like to pull a Reagan – trust but verify. Here are the two series in graph form.
CAD GDP (yellow line) vs Hours Worked (white line)</a> </div>
The hours worked has indeed dipped, and this obviously does not bode well for Canadian GDP. The real question is whether this dip will prove to be a 2002/3 type zig zag move before resolving higher, or whether it is more serious like 2008.
Either way, the headlines are going to be on the downside for the foreseeable future.
I think that CAD is a great short in here. We have everything lining up for higher rates in the US, all the while, Canada is set up for rates going sideways (or even lower) for the next couple of years.
Not only that, but the CAD has recently being strong, so we are getting an opportunity to short at a level that is considerably better than the beginning of the year.
USDCAD (higher rate means CAD weakness)</a> </div>
We have the fundamentals lining up with a great spot to get involved from a technical perspective. I doubled the position yesterday.