Thursday, August 17, 2017

Top Funds' Activity in Q2 2017

David Randall of Reuters reports, Billionaire hedge-fund manager Tepper adds contrarian energy stocks:
Hedge-fund manager David Tepper, known for taking positions in out-of-favor companies in his Appaloosa Management hedge fund, added stakes in embattled Wells Fargo Co and several energy companies in the second quarter as the price of oil fell, according to quarterly filings released Monday.

Among the six new energy companies Tepper added to his fund were Antero Resources Corp, Southwestern Energy Co, and Chesapeake Energy Corp.

Shares of each company are down by 20 percent or more year-to-date as part of a broad sell-off in energy companies. The price of oil hit a 9-month low in June due to concerns about a glut of supply. Overall, energy companies in the S&P 500 are down 12.7 percent for the year through Friday, compared with a 9.3 percent gain in the broad index.

Tepper, who manages roughly $17 billion overall, bought approximately 681,000 shares of Wells Fargo during the quarter. Shares of the company are down 4 percent for the year as the company faces the ramifications of a scandal over unauthorized account openings and lawsuits that charged it modified borrower's mortgages without their authorization.

Overall, shares of financial stocks in the S&P 500 gained 6.9 percent for the year through Friday.

In addition to energy and financial companies, Tepper took a roughly 3.7 million-share stake in Chinese online retailer Alibaba Group Holdings Ltd, making it the third-largest holding in the fund. Dan Loeb's Third Point once again has a stake in Alibaba, having bought 4.5 million shares during the second quarter. Shares of the company are up 76 percent year-to-date after the company raised its revenue forecast in June.

Other new additions to the fund included down-market retailer Dollar General Corp, mall-based retailer L Brands Inc, and travel bookings site Expedia Inc, filings show.

Among technology stocks, Tepper added approximately 449,000 shares of Facebook Inc, increasing his stake in the company by 23 percent, and sold all of his shares of Snap Inc. Shares of the social media company have slid 14 percent since its $3.4 billion initial public offering in March on increased investor concerns that the company may never turn a profit.
It's time for our quarterly sneak peek into the portfolios of "money manager gods" but before I begin looking into what top funds bought and sold during the second quarter, let me once again state my top three macro conviction calls going forward:
  1. Long US long bonds (TLT) as I see the US economy slowing and global deflation spreading to the United States. 
  2. Long the USD (UUP) as I see the global economy following the US economy and slowing. Even if the Fed pauses its rate hikes, the USD will gain as global economies start slowing. If a crisis hits, it's bullish for the greenback and yen.
  3. Short oil (OIL), energy (XLE) and metals and mining (XME) shares as well as commodity currencies. Why in the world would you be long energy and commodities with global deflation looming around the corner? That's just plain nuts.
Given my views on global deflation coming to America, I'm also short emerging markets bonds (EMB), currencies and stocks (EEM) and short financials (XLF) and other cyclical stocks, including industrials (XLI), retail (XRT) and transportation (IYT) shares.

And even though I worry about deflation, I'm also weary of utilities (XLU), REITs (IYR) and even consumer staples (XLP) as I find a lot of these dividend "safe places to hide" are way overvalued and can get clobbered if markets melt down. People don't realize that dividends don't protect you from a market meltdown.

As far as biotech (XBI and IBB) and technology (XLK), the two sectors I liked most right before Trump got elected, I believe these high beta, high flyers are cruising for a major bruising and they will get clobbered when markets head south. This will impact healthcare (XLV) as there are a lot of biotech shares that drove that ETF up.

What about gold (GLD), the sector Ray Dalio recently recommended on LinkedIn to hedge against geopolitical and other risks? Even though there may be a tradable rally, I'm not touching gold given my bullish views on the greenback and I firmly believe that only US long bonds (TLT) will protect your portfolio from the ravages of global deflation.

Importantly, I see huge deflationary risks in the world which is why I truly believe US long bonds (TLT) offer investors the best risk-adjusted returns over the next year or longer and will prove to be the ultimate diversifier, protecting your portfolio from being obliterated as deflation roils all risk assets.

When I tell you that all my money and the money of my loved ones is in US long bonds (TLT), I mean it and the bad news is this isn't the market to be diversified among many ETFs or even to pick stocks, you risk getting killed either way because I foresee both active and passive strategies getting whacked hard over the next six months to a year (active less than passive).

I had to begin this comment with my macro views because every time I post a comment on what top funds bought and sold last quarter, people get all excited and ask me "What did Soros buy? What about Tepper, Griffin et al.?

Listen to me carefully, it doesn't matter what these top funds bought and sold last quarter, I stick by my macro views one hundred percent and that's why I am recommending US long bonds (TLT). If I had Tepper's fund in my hedge fund portfolio, I'd be grilling him on his contrarian energy bets and even his love affair with tech stocks.

"But Leo, that's David Tepper you're talking about! You can't question him, Ray Dalio and other elite hedge fund managers, they have more money than you'll amass in one million lifetimes and everyone listens to them, not you."

That's true but that's also the problem, people glorifying uber-wealthy hedge fund managers, paying them extraordinary fees when all they should be doing is raising their exposure to boring old US long bonds (TLT) and pay NO fees.

I'm willing to bet anyone reading this comment that over the next year, US long bonds will significantly outperform hedge funds on a risk-adjusted basis.

"Yeah but that's not sexy. Hedge funds and other alternative investments offer higher returns than bonds over a long period and we get to travel to New York, London, and other cool places to meet these managers who wine and dine us at nice restaurants and take good care of us, making us feel very important."

I hear you, my dear pension fund managers, been there, done that. All I can say is what the late great George Carlin repeated many times: "It's all bullshit and it's bad for you."

"Leo, is that your hyperthyroid talking or is that really you?". I assure you it's really me, I'm treating my hyperthyroid with two little Tapazole pills every morning and should be fine in one month (the endocrinologist told me I have Grave's disease and likely had it for a long time, but it's treatable).

Folks, I know, bonds aren't sexy. The Maestro and others think there's a bubble in bonds, but they don't understand the inflation deflation mystery. They think Trump will save us with tax cuts and big spending on infrastructure, and rates will rise to new highs. Keep dreaming, I warned you a long time ago, nobody trumps the bond market, especially not Trump.

In fact, I'm on record stating the 10-year Treasury note yield is headed below 1% and might touch 0.5% or head even lower if a global deflationary crisis develops.

When that happens, you won't care what Tepper and Soros bought or sold in the stock market. Soros will come out ahead of the hedge fund pack once again, not based on his stock selection skills, but on his great bearish macro calls.

That's why Soros is the undisputed king of hedge funds, because he understands the macro environment better than anyone else.

On that note, let me share some other articles covering what top funds bought and sold in Q2:
And on and on it goes, you can literally spend days reading about what hedge funds bought and sold last quarter. Like I said, it's all noise, these markets are headed lower, and will clobber passive and active managers alike.

All I can tell you is analyzing and trading markets and stocks is a passion of mine. I regularly look at the YTD performance of stocks, the 12-month leaders, the 52-week highs and 52-week lows. I also like to track the most shorted stocks and highest yielding stocks in various exchanges and I have a list of stocks I track in over 100 industries/ themes to see what is moving in real time.

When I tell you these aren't the markets you want to be playing in, I know exactly what I'm talking about because I'm watching these markets closely every day and my deflationary macro call looms large and is weighing on on all risk assets, not just stocks.

These ARE NOT the markets you want to be making any bullish or contrarian bets on. Trust me when I tell you global deflation will obliterate all risk assets and the only refuge will be in US long bonds (TLT).

On that cheery note, have fun looking at the second quarter activity of top funds I listed below (just click on links and then click on the fourth column head, % chg, to see where they descreased and increased their holdings).

Top multi-strategy and event driven hedge funds

As the name implies, these hedge funds invest across a wide variety of hedge fund strategies like L/S Equity, L/S credit, global macro, convertible arbitrage, risk arbitrage, volatility arbitrage, merger arbitrage, distressed debt and statistical pair trading.

Unlike fund of hedge funds, the fees are lower because there is a single manager managing the portfolio, allocating across various alpha strategies as opportunities arise. Below are links to the holdings of some top multi-strategy hedge funds I track closely:

1) Citadel Advisors

2) Balyasny Asset Management

3) Farallon Capital Management

4) Peak6 Investments

5) Kingdon Capital Management

6) Millennium Management

7) Eton Park Capital Management

8) HBK Investments

9) Highbridge Capital Management

10) Highland Capital Management

11) Pentwater Capital Management

12) Och-Ziff Capital Management

13) Pine River Capital Capital Management

14) Carlson Capital Management

15) Magnetar Capital

16) Mount Kellett Capital Management 

17) Whitebox Advisors

18) QVT Financial 

19) Paloma Partners

20) Weiss Multi-Strategy Advisors

21) York Capital Management

Top Global Macro Hedge Funds and Family Offices

These hedge funds gained notoriety because of George Soros, arguably the best and most famous hedge fund manager. Global macros typically invest across fixed income, currency, commodity and equity markets.

George Soros, Carl Icahn, Stanley Druckenmiller, Julian Robertson and now Steve Cohen have converted their hedge funds into family offices to manage their own money and basically only answer to themselves (that is my definition of true investment success).

1) Soros Fund Management

2) Icahn Associates

3) Duquesne Family Office (Stanley Druckenmiller)

4) Bridgewater Associates

5) Pointstate Capital Partners 

6) Caxton Associates (Bruce Kovner)

7) Tudor Investment Corporation

8) Tiger Management (Julian Robertson)

9) Moore Capital Management

10) Point72 Asset Management (Steve Cohen)

11) Bill and Melinda Gates Foundation Trust (Michael Larson, the man behind Gates)

12) Joho Capital (Robert Karr, a super succesful Tiger Cub who shut his fund in 2014)

Top Market Neutral, Quant and CTA Hedge Funds

These funds use sophisticated mathematical algorithms to make their returns, typically using high-frequency models so they churn their portfolios often. A few of them have outstanding long-term track records and many believe quants are taking over the world. They typically only hire PhDs in mathematics, physics and computer science to develop their algorithms. Market neutral funds will engage in pair trading to remove market beta.

1) Alyeska Investment Group

2) Renaissance Technologies

3) DE Shaw & Co.

4) Two Sigma Investments

5) Numeric Investors

6) Analytic Investors

7) Winton Capital Management

8) Graham Capital Management

9) SABA Capital Management

10) Quantitative Investment Management

11) Oxford Asset Management

12) PDT Partners

13) Princeton Alpha Management

Top Deep Value,
Activist, Event Driven and Distressed Debt Funds

These are among the top long-only funds that everyone tracks. They include funds run by legendary investors like Warren Buffet, Seth Klarman, Ron Baron and Ken Fisher. Activist investors like to make investments in companies where management lacks the proper incentives to maximize shareholder value. They differ from traditional L/S hedge funds by having a more concentrated portfolio. Distressed debt funds typically invest in debt of a company but sometimes take equity positions.

1) Abrams Capital Management (the one-man wealth machine)

2) Berkshire Hathaway

3) Baron Partners Fund (click here to view other Baron funds)

4) BHR Capital

5) Fisher Asset Management

6) Baupost Group

7) Fairfax Financial Holdings

8) Fairholme Capital

9) Trian Fund Management

10) Gotham Asset Management

11) Fir Tree Partners

12) Elliott Associates

13) Jana Partners

14) Gabelli Funds

15) Highfields Capital Management 

16) Eminence Capital

17) Pershing Square Capital Management

18) New Mountain Vantage  Advisers

19) Atlantic Investment Management

20) Scout Capital Management

21) Third Point

22) Marcato Capital Management

23) Glenview Capital Management

24) Apollo Management

25) Avenue Capital

26) Armistice Capital

27) Blue Harbor Group

28) Brigade Capital Management

29) Caspian Capital

30) Kerrisdale Advisers

31) Knighthead Capital Management

32) Relational Investors

33) Roystone Capital Management

34) Scopia Capital Management

35) Schneider Capital Management

36) ValueAct Capital

37) Vulcan Value Partners

38) Okumus Fund Management

39) Eagle Capital Management

40) Sasco Capital

41) Lyrical Asset Management

42) Gabelli Funds

43) Brave Warrior Advisors

44) Matrix Asset Advisors

45) Jet Capital

46) Conatus Capital Management

47) Starboard Value

48) Pzena Investment Management

Top Long/Short Hedge Funds

These hedge funds go long shares they think will rise in value and short those they think will fall. Along with global macro funds, they command the bulk of hedge fund assets. There are many L/S funds but here is a small sample of some well-known funds.

1) Adage Capital Management

2) Appaloosa LP

3) Greenlight Capital

4) Maverick Capital

5) Pointstate Capital Partners 

6) Marathon Asset Management

7) JAT Capital Management

8) Coatue Management

9) Omega Advisors (Leon Cooperman)

10) Artis Capital Management

11) Fox Point Capital Management

12) Jabre Capital Partners

13) Lone Pine Capital

14) Paulson & Co.

15) Bronson Point Management

16) Hoplite Capital Management

17) LSV Asset Management

18) Hussman Strategic Advisors

19) Cantillon Capital Management

20) Brookside Capital Management

21) Blue Ridge Capital

22) Iridian Asset Management

23) Clough Capital Partners

24) GLG Partners LP

25) Cadence Capital Management

26) Karsh Capital Management

27) New Mountain Vantage

28) Andor Capital Management (it shut down again, for now)

29) Silver Point Capital

30) Steadfast Capital Management

31) Brookside Capital Management

32) PAR Capital Capital Management

33) Gilder, Gagnon, Howe & Co

34) Brahman Capital

35) Bridger Management 

36) Kensico Capital Management

37) Kynikos Associates

38) Soroban Capital Partners

39) Passport Capital

40) Pennant Capital Management

41) Mason Capital Management

42) Tide Point Capital Management

43) Sirios Capital Management 

44) Hayman Capital Management

45) Highside Capital Management

46) Tremblant Capital Group

47) Decade Capital Management

48) T. Boone Pickens BP Capital 

49) Bloom Tree Partners

50) Cadian Capital Management

51) Matrix Capital Management

52) Senvest Partners

53) Falcon Edge Capital Management

54) Park West Asset Management

55) Melvin Capital Partners

56) Owl Creek Asset Management

57) Portolan Capital Management

58) Proxima Capital Management

59) Tiger Global Management

60) Tourbillon Capital Partners

61) Impala Asset Management

62) Valinor Management

63) Viking Global Investors

64) Marshall Wace

65) Light Street Capital Management

66) Honeycomb Asset Management

67) Whale Rock Capital

70) Suvretta Capital Management

71) York Capital Management

72) Zweig-Dimenna Associates

Top Sector and Specialized Funds

I like tracking activity funds that specialize in real estate, biotech, healthcare, retail and other sectors like mid, small and micro caps. Here are some funds worth tracking closely.

1) Armistice Capital

2) Baker Brothers Advisors

3) Palo Alto Investors

4) Broadfin Capital

5) Healthcor Management

6) Orbimed Advisors

7) Deerfield Management

8) BB Biotech AG

9) Ghost Tree Capital

10) Sectoral Asset Management

11) Oracle Investment Management

12) Perceptive Advisors

13) Consonance Capital Management

14) Camber Capital Management

15) Redmile Group

16) RTW Investments

17) Bridger Capital Management

18) Boxer Capital

19) Bridgeway Capital Management

20) Cohen & Steers

21) Cardinal Capital Management

22) Munder Capital Management

23) Diamondhill Capital Management 

24) Cortina Asset Management

25) Geneva Capital Management

26) Criterion Capital Management

27) Daruma Capital Management

28) 12 West Capital Management

29) RA Capital Management

30) Sarissa Capital Management

31) SIO Capital Management

32) Senzar Asset Management

33) Southeastern Asset Management

34) Sphera Funds

35) Tang Capital Management

36) Thomson Horstmann & Bryant

37) Venbio Select Advisors

38) Ecor1 Capital

39) Opaleye Management

40) NEA Management Company

Mutual Funds and Asset Managers

Mutual funds and large asset managers are not hedge funds but their sheer size makes them important players. Some asset managers have excellent track records. Below, are a few funds investors track closely.

1) Fidelity

2) Blackrock Fund Advisors

3) Wellington Management

4) AQR Capital Management

5) Sands Capital Management

6) Brookfield Asset Management

7) Dodge & Cox

8) Eaton Vance Management

9) Grantham, Mayo, Van Otterloo & Co.

10) Geode Capital Management

11) Goldman Sachs Group

12) JP Morgan Chase & Co.

13) Morgan Stanley

14) Manulife Asset Management

15) RCM Capital Management

16) UBS Asset Management

17) Barclays Global Investor

18) Epoch Investment Partners

19) Thornburg Investment Management

20) Legg Mason (Bill Miller)

21) Kornitzer Capital Management

22) Batterymarch Financial Management

23) Tocqueville Asset Management

24) Neuberger Berman

25) Winslow Capital Management

26) Herndon Capital Management

27) Artisan Partners

28) Great West Life Insurance Management

29) Lazard Asset Management 

30) Janus Capital Management

31) Franklin Resources

32) Capital Research Global Investors

33) T. Rowe Price

34) First Eagle Investment Management

35) Frontier Capital Management

36) Akre Capital Management

37) Brandywine Global

38) Brown Capital Management

Canadian Asset Managers

Here are a few Canadian funds I track closely:

1) Addenda Capital

2) Letko, Brosseau and Associates

3) Fiera Capital Corporation

4) West Face Capital

5) Hexavest

6) 1832 Asset Management

7) Jarislowsky, Fraser

8) Connor, Clark & Lunn Investment Management

9) TD Asset Management

10) CIBC Asset Management

11) Beutel, Goodman & Co

12) Greystone Managed Investments

13) Mackenzie Financial Corporation

14) Great West Life Assurance Co

15) Guardian Capital

16) Scotia Capital

17) AGF Investments

18) Montrusco Bolton

19) Venator Capital Management

Pension Funds, Endowment Funds, and Sovereign Wealth Funds

Last but not least, I the track activity of some pension funds, endowment and sovereign wealth funds. I like to focus on funds that invest in top hedge funds and have internal alpha managers. Below, a sample of pension and endowment funds I track closely:

1) Alberta Investment Management Corporation (AIMco)

2) Ontario Teachers' Pension Plan

3) Canada Pension Plan Investment Board

4) Caisse de dépôt et placement du Québec

5) OMERS Administration Corp.

6) British Columbia Investment Management Corporation (bcIMC)

7) Public Sector Pension Investment Board (PSP Investments)

8) PGGM Investments

9) APG All Pensions Group

10) California Public Employees Retirement System (CalPERS)

11) California State Teachers Retirement System (CalSTRS)

12) New York State Common Fund

13) New York State Teachers Retirement System

14) State Board of Administration of Florida Retirement System

15) State of Wisconsin Investment Board

16) State of New Jersey Common Pension Fund

17) Public Employees Retirement System of Ohio

18) STRS Ohio

19) Teacher Retirement System of Texas

20) Virginia Retirement Systems

21) TIAA CREF investment Management

22) Harvard Management Co.

23) Norges Bank

24) Nordea Investment Management

25) Korea Investment Corp.

26) Singapore Temasek Holdings 

27) Yale Endowment Fund

Below, CNBC's Leslie Picker digs deeper into what the quarterly SEC filings by big-name investors say about the sectors they're buying and selling. Glad to see Ray Dalio increased his stake in US long bonds (TLT) in Q2.

And CNBC's traders discuss how David Tepper of Appaloosa Management, one the most respected and legendary investors in the hedge fund business, is betting big on technology (geez, what a pathetic shmooze fest this was, almost made me heave).

Third, on a more serious note, if there was any doubt about what kind of person went to protest in Charlottesville, Virginia, over the weekend, Vice News’s documentary should put those questions to rest. Watch this disturbing documentary and share it with others (warning: not easy to watch and highly offensive but it exposes the hatred, bigotry, and anti-Semitism right in our backyard).

Lastly, Larry Summers, former Treasury secretary, gives his thought about the role of executives on President Trump's advisory councils. Summers doesn't mince his words and that's why I respect him.

Update: My comment was written prior to the terrorist attack in Barcelona which was behind Thursday's selloff. These senseless acts of terrorism only add to my fears, as do geopolitics in North Korea and elsewhere, but that's not what I'm basing my macro calls on. My macro calls are based on a slowdown in the US economy, followed by a global slowdown which will export deflation to the United States. In this deflationary environment, only US nominal long bonds (TLT) will save your portfolio from being ravaged.  

The message here is clear, forget what hedge fund gurus are buying and selling. Now isn't the time to play with stocks, now is the time to be very defensive and load up on US long bonds (TLT), hunkering down as global deflation obliterates all risk assets, not just stocks.

Wednesday, August 16, 2017

Companies Breaking Their Pension Promise?

Sophia Harris of CBC News reports, Is your pension safe? It may depend on what happens to your company:
You diligently make contributions to your company pension plan with the assumption you'll get what you're entitled to when you part with your employer.

But that may not always be the case — depending on what type of plan you have and what happens to your company.

Currently, workers at both Sears Canada and Northstar Aerospace in Milton, Ont., are facing deep concerns about their pension prospects because of the problems plaguing their employers.

"This is not fair for us," says Naresh Ajmani, who retired from Northstar in 2015 after working for the manufacturer for 22 years, producing helicopter parts.

Ajmani recently learned from his union, Unifor, that because the Milton plant will soon be shut down due to lost business, his pension payments will likely be cut back.

"They have broken their promises," says Ajmani, who joined more than 100 Unifor members Thursday to stage a protest at the plant. "I have set up my retirement. I'm not getting what I'm supposed to get."

$6M shortfall?

Unifor claims that because the plant is shutting down in September, there will be an estimated $6-million shortfall in the employee pension plan, which Northstar is refusing to top up. As a result, the union says the 250 laid-off workers and retirees will face a potential 24 per cent reduction in their pension payments.

"To the workers that are going to lose a couple hundred dollars a month, it's significant. So someone's going to have to fix this," says Unifor national president Jerry Dias.

He also took part in the protest, which included blockading the plant's doors, preventing it from operating that day. "We had to take some dramatic action in order to get their attention."

Unifor may have received some attention, but it still faces an uphill battle for better pensions.

Northstar employees don't have a defined benefit pension where employers promise a certain level of payout to retirees.

Instead, they have a target benefit pension plan where, if there's a shortfall, the employer can choose to dole out reduced payments.

"We're not talking about any flagrant disregard for the collective agreement or breach of the labour relations act," says employment lawyer Muneeza Sheikh, with Levitt LLP in Toronto.

"What we have is a situation where Unifor is saying: what you're doing from a public accountability standpoint, from a moral standpoint, is extremely disrespectful and a slap in the face."

Northstar's parent company, Heligear, claims it's not responsible for any looming pension problems. The U.S. company says it made all the required payments, and that the plan was underfunded when it took over the Northstar plant in 2012.

"Any reduction or shortfall is a function of the plan management and design, which are not within Heligear's control," the company said in a statement.

Still, that's little comfort for retirees like Ajmani, who believes he will get a reduced pension. "Pension is a promise," he says.

It may be a promise, but sometimes, promises get to be broken. Sears Canada retirees also fear they may not get the pension they were promised.

Sears Canada pays 81 per cent

As part of a court-supervised restructuring process, the cash-strapped retailer is closing 54 stores and laying off 2,900 workers without severance.

Sears Canada has also requested court permission to stop topping up the underfunded retiree pension plan, though the retailer recently agreed to postpone that matter until Sept. 30.

Many of Sears' 16,000 retirees fear that if the company is allowed to stop making pension contributions, they will receive reduced pensions. Sears claims that may not necessarily be the case.

Recently laid-off employees who are collecting their pension in a lump-sum payout are facing another concern.

Sears Canada is only paying them 81 per cent of their pension value at this time; the remaining 19 per cent will be paid over five years, which is perfectly legal.

However, the missing money makes Kim Throop nervous. The former floor manager spent 24 years at the Sears store in Coburg, Ont., before it closed in March. She says she has already lost an estimated $16,000 in severance and now worries she may never see the rest of her defined benefit pension.

"There is some concern there, because you don't know what's going to happen in the next five years," says Throop. "If Sears goes down, will we see that 19 per cent?"

Employment lawyer Chantel Goldsmith says if the restructuring doesn't work and Sears goes bankrupt, chances are Throop won't get the rest of her pension. Retirees would become unsecured creditors who would have to line up behind secured creditors, like banks, to try to recoup that 19 per cent.

"If the secured creditors take all the money in the pool and there's nothing left for unsecured creditors, then, unfortunately, they'd be out of luck," says Goldsmith, with Samfiru Tumarkin LLP in Toronto.

Of course, Sears may successfully restructure and Throop may eventually get her full pension.

But the situation is another reminder that sometimes there are no guarantees that the pension you are promised on paper is what you will actually wind up with in retirement.
Over the last year, I've been reading quite a few articles like this one about Canadian and US companies breaking their pension promise. Unfortunately, it's only going to get worse as the pension storm cometh.

And whenever I read them, it makes my blood boil and only reinforces my fundamental belief that companies shouldn't be managing their employees' pensions, they should be focusing on their core business, that's it that's all.

Who should be managing the pensions of the few Canadian workers who still have a defined-benefit (DB) plan? A large, well-governed public pension plan like CPPIB which invests across global public and private markets or we can create a new public plan to manage these pensions as well as the pension needs of small and medium-sized businesses.

When I was working as a senior consultant/ economist at the Business Development Bank of Canada (BDC) back in 2008-2010, I peddled this idea to senior managers and it fell on deaf ears. I told them straight out, the BDC should provide pension solutions for small and medium-sized Canadian businesses and even create a pension plan that manages their pensions and the pensions of all Canadian workers with a company DB plan.

I was thinking big because in order to tackle this problem, you need to think big and have all pensions managed by a large, well-governed, public pension fund which is backstopped by the federal government.

In fact, and I have repeatedly stated this, I envision a future where all Canadian workers have their pension money managed by CPPIB and other large, well-governed public pensions.

In Canada, we're lucky, we have set the bar high in terms of pension governance, and that's why the future I envision will come to fruition one day.

Now, I recently discussed America's corporate pension disaster, where I stated this:
US corporate pensions use a market rate, not some assumed rate-of-return based on rosy investment assumptions. Some argue this is way too stringent while others argue it is far more realistic and if US public pensions used this methodology, their pension deficits would be far worse than they already are.

Lastly, following my comment on HOOPP's warning of a crisis, Bernard Morency, the former Executive VP of Depositors at la Caisse, sent me this:
On the issue below concerning corporations getting out of the pension business and letting Federal and States (provinces) handle it. As you know, I have been an advocate of a better C/QPP. However, don’t you think that, especially in the US, the States have proven that they are more unfunded and, perhaps, have botched pension math even more than corporations? So we would need to be especially careful if we were to ask them to do more.
Excellent point and let me clarify something, my recommendation is to have large, well-governed public pensions handle all the pension needs of a society. If they don't get the governance right, then state pensions shouldn't be managing corporate pensions. Period, end of discussion.

But clearly America has a public and private pension problem and it is only getting worse, leaving millions exposed to reduced pensions and pension poverty.

And make no mistake, America's pension crisis is a big part of the $400 trillion pension time bomb threatening the global economy and it is deflationary and bond friendly.
The point Bernard Morency made is excellent, but we don't have the same governance issues the US has with their state plans which are for the most part poorly governed because there is way too much government interference.

Having said this, someone sent me an email recently stating that many Californians are seriously contemplating to opt out of CalPERS and go it alone. This is a huge mistake, one they will end up deeply regretting down the road.

There is nothing, NOTHING, like a large, well-governed defined-benefit plan. Target benefit plans are not the solution, they're basically defined-contribution plans which incorporate some risk-sharing. They make perfect sense for companies but fall well short of the ideal pension plan.

Lastly, even well-governed pensions like HOOPP and OTPP have incorporated a shared-risk model where benefits are adjusted (typically cost-of-living) when the plans run into trouble. This makes perfect sense but don't confuse this with a target benefit plan.

Below, Sears Canada is going through a restructuring process, leaving retirees wondering what will remain of their pensions, and it could be a while before they find out. Amanda Ferguson with the details on defined benefit pension plans and their pitfalls.

Tuesday, August 15, 2017

CPPIB and Caisse's Performance Updates?

Jacqueline Nelson of the Globe and Mail reports, CPPIB manages gains amid global competition for ‘real asset’ investments:
With record amounts of capital seeking investments around the world, the Canada Pension Plan Investment Board still found ways to invest billions of dollars in recent months.

From buying an operator of international schools to developing logistics facilities in India, there was no shortage of deals turned out by CPPIB’s investment teams in its first fiscal quarter of 2018, which ended June 30. And new transactions announced since then indicate that pace is set to continue.

This comes at a time when there’s more than $1.1-trillion (U.S.) being held by private capital-investment funds around the world just waiting to be put toward new investments in private equity, infrastructure, natural resources and other so-called real assets, according to a recent report from data provider Preqin. 2017 is on track to be the largest fundraising year ever for private capital funds, exceeding the peak achieved before the financial crisis.

Mark Machin, chief executive officer of CPPIB, said that this trend is squeezing returns and encouraging more competition among investors. But he added that conversations between institutional investors have remained relatively friendly.

“There’s a massive world, and a massive opportunity set, and we have long-term relationships with people,” Mr. Machin said. “We intend to keep those relationships and work with the best and brightest where we can.”

CPPIB, the country’s largest pension fund and manager of the Canada Pension Plan’s portfolio, posted net investment gains of 1.8 per cent in its first quarter. During that period, total assets climbed to $326.5-billion (Canadian) compared with $287.3-billion at the same time last year. Assets increased $9.8-billion in the first quarter, and this gain was made up of investment income of $5.7-billion after costs, as well as $4.1-billion in net CPP contributions.

“Each major CPPIB investment program contributed to first-quarter results. Global equity markets produced a significant uplift and gains from fixed income improved,” said Mr. Machin of the main factors that moved returns this quarter.

Less helpful to CPPIB was the strengthening Canadian dollar, compared with most other major currencies. The pension fund’s philosophy has long been not to pursue a currency-hedging strategy, taking a view that the ups and downs of various countries’ coins and bills will balance out over the long life of the portfolio. That said, Mr. Machin noted that this trend had accelerated in the first half of the current quarter.

“To the extent that that continues, then we will see a dampening of our returns,” he said of the near-term impact.

The Caisse de dépôt et placement du Québec had its own issue with Canada in recent months as national equities performed worst of all the developed markets in the pension fund’s portfolio.

“The weak performance of the Canadian stock market this year contrasts with its strong returns last year and with those of major markets abroad,” Caisse chief executive Michael Sabia said in a statement.

Mr. Sabia noted that he is wondering about the monetary-policy actions that central banks will take in the coming months.

“There appears to be an emerging bias among central banks in favor of tightening monetary conditions. However, it remains to be seen whether these actions will be relatively modest and short-term, or more substantial and sustained over a longer period,” he said. “These scenarios are likely to have quite different consequences for market performance and economic growth.”

The Caisse reported financial results for the first six months of the year on Friday, producing a 5-per-cent return in the period as net assets climbed to $286.5-billion.

Both Mr. Sabia and Mr. Machin said that their portfolios had benefited from global equity-market gains. And both of their funds took steps to continue to diversify investment holdings in an effort to carve out new sources of returns in competitive markets.
You can read the press release on CPPIB's fiscal Q1 results here and la Caisse's mid-year results here.

Now, before I begin, I typically don't cover CPPIB's quarterly results or la Caisse's mid-year results. In fact, I truly believe both organizations should abolish these intra-year performance updates, they are a nuisance and in my opinion, totally useless.

Why? Who cares how CPPIB performs in any given quarter or what la Caisse's mid-year results are? These pension funds manage billions in pension assets for people who have long-dated liabilities, so the only results that truly matter are long-term results.

The other reason why I don't cover these performance updates in detail is they typically omit valuations of private markets, I know that's a fact for CPPIB but maybe la Caisse includes them in their mid-year results.

Having said this, following the 2008 debacle, la Caisse has to report its mid-year results by law and so does CPPIB, its law says the Fund will provide quarterly updates of its performance.

The big story in both these funds is global equities which rallied due to a shift in investor sentiment favoring global over Canadian equities.

However, as shown in the weekly chart of the Canadian dollar relative to the USD, the strength in the loonie impacted performance (click on image):

Keep in mind, CPPIB doesn't hedge its foreign exchange exposure which is a smart move over the long run because it effectively means the Fund is naturally long the USD over the long run. I believe the same goes for the Caisse, it doesn't hedge its F/X exposure.

Now, I'm on record with my top three macro conviction calls going forward:
  1. Long US long bonds (TLT) as I see the US economy slowing and global deflation spreading to the United States. 
  2. Long the USD (UUP) as I see the global economy following the US economy and slowing. Even if the Fed pauses its rate hikes, the USD will gain as global economies start slowing. If a crisis hits, it's bullish for the greenback and yen.
  3. Short oil (OIL), energy (XLE) and metals and mining (XME) shares as well as commodity currencies. Why in the world would you be long energy and commodities with global deflation looming around the corner? That's just plain nuts.
All this to say, if I was consulting la Caisse, CPPIB, and other large Canadian pensions, I would be diversifying outside Canada in both public an private assets and be very defensive at this stage, significantly increasing my allocation to US long bonds.

There will be plenty of opportunities that arise for large Canadian  pensions in the years ahead as I predict severe dislocations across global public and private markets.

In other news, Michael Sabia recently called on Quebec's government to fast-track light rail transit legislation:
The Quebec government must act quickly and pass a bill allowing construction to begin on the fourth largest automated transportation system in the world, the head of the province's pension fund said Friday.

Fund President and CEO Michael Sabia said if construction on Montreal's light rail system is to begin as scheduled in the fall, legislators have to adopt Bill 137 as soon as possible.

"I can't insist more strongly about the importance of Bill 137," he said on a conference call after the fund released its results.

"It's not just an option to pass the law quickly, it's absolutely essential."

The pension fund, called La Caisse de Depot et Placement du Quebec, partnered with the Quebec government to launch the $6-billion project.

If completed, it will be the fourth largest automated transportation system in the world after the projects in Singapore, Dubai and Vancouver.

The fund is contributing $2.67 billion, Quebec has promised $1.28 billion and the federal government confirmed in June it would contribute another $1.28 billion.

Macky Tall, head of the fund's infrastructure arm, said work is scheduled to begin in the fall, and therefore the Quebec government needs to pass Bill 137 quickly.

Quebec's legislature returns from summer recess Sept. 19.

During the first six months of 2017, the fund posted a 5 per cent return, compared to 4.8 per cent for its benchmark portfolio.

Over five years, the fund recorded a 10.6 per cent annualized return, which was more than its benchmark portfolio of 9.3 per cent.

As of June 30, it held $286.5 billion in net assets, an increase of $15.8 billion compared to Dec. 31, 2016.
Michael Sabia and Macky Tall are right, the government needs to fast-track these funds as soon as possible or risk costly delays in this massive light rail project.

La Caisse recently announced it will acquire a significant minority stake in Sebia, a global leader in the medical diagnostics sector, from Astorg and Montagu:
Headquartered in Lisses (Paris, France), Sebia is a global multi-specialty in-vitro diagnostics company focusing on oncology, genetic haemoglobin and metabolic disorders. The company is one of the pioneers of clinical electrophoresis.

With the support of CDPQ, Sebia intends to pursue the successful strategy of the past years, based on the reinforcement of its undisputed leadership position in multiple myeloma diagnostics, the global expansion of its diabetes franchise, and the continued search for other highly-promising applications for its differentiated technology.
You already know my thoughts on biotech and medical diagnostics, I'm bullish over the long run and believe this is a great deal for both parties.

Lastly, an update on the hyperthytoid market which I discussed on Friday. My buddy, a radiologist, did an ultrasound on my neck to see my thyroid and said: "The good news is there are no nodules, so you don't have thyroid cancer and won't need surgery or a biopsy. The bad news is your thyroid is destroyed, most likely from some sort of autoimmune thyroiditis so you need to go see an endocrinologist as soon as possible to regulate your thyroxine because it's causing you all sorts of terrible symptoms including major muscle weakness. You probably had this for a long time and didn't know about it."

Another buddy of mine, a cardiologist at Stanford University shared this with me:
The good news is that it's a highly treatable condition and it's quite straightforward to diagnose the cause. However, eventually, you may need thyroid replacement hormone paradoxically either because of the condition or the treatment. Not a big deal either but you will need to take the medication for rest of your life (very common situation for older women)

I am guessing you have some form of autoimmune thyroid disease (Grave's, Hashimoto's with hashitoxicosis presentation, or thyroiditis). Are you taking any immune modulating drugs right now for MS? Some are associated with thyroiditis (interferon alpha, Interleukin-2).
I haven't been on any drug for MS for over ten years, only diet, exercise, vtiamin D and recently started high dose alpha lipoic acid. I'm looking to get into a new study using biotin to treat MS.

All this to say, check your thyroid regularly, especially if you're an older woman, as you might be suffering from hypothyroidism and not be aware. The same goes for people on medication to treat some autoimmune disease (not just MS), check your thyroid regularly as the new drugs can wreak havoc on your thyroid. Once diagnosed, it can be treated by an endocrinologist, which is where I am headed now.

Below, Jim Lowell of Adviser Investments makes the case for active investors given the need for stock selection in the current market environment. I agree these aren't markets for robo-advisors shoving you in the hottest ETFs. The only ETF I like now is the iShares 20+ Year Treasury Bond ETF (TLT) and that's where I put all my money and the money of my loved ones.

You can also watch a recent interview with Michael Sabia and François Cardinal here where he discusses the light rail project (in French).

Friday, August 11, 2017

Beware of the Hyperthyroid Market?

John Mellow of CNBC reports, Recent history says buy this 200-point dip in the Dow, but some fear it's different this time:
The Dow Jones Industrial average fell 204 points Thursday in its first drop of that point magnitude or greater since a 373-point shellacking in May. Before that, the benchmark had only fallen more than 200 points one other time this year, a 238-point drubbing on March 21.

This has been such a calm bull market that there's been only five single-day declines greater than 200 points by the Dow in the last 12 months.

Using hedge fund analytics tool Kensho, CNBC looked at what happened during the day and week following those five sell-offs. Here is what the Dow did the next day, on average, and its top winners and losers (click on image):

Here's its average performance one week out and top winners and losers (click on image):

The Dow was up 100 percent of the time one week out. (And note Apple leading the bounce again.)

So this "buy-the-dip" market has earned that mantra.

But some investors who have "bought the dip" recently are changing their tune this week because of new factors like over-the-top bullishness and the North Korea war of words initiated this week by President Donald Trump.

Doug Ramsey of The Leuthold Group believes a sell-off amounting to about 8 percent is ahead, citing seasonal weakness that typically comes around this time and an irrational surge in bullish sentiment.

"Conditions have slipped into place for at least a short-term correction," said Ramsey, the CIO of the firm.

Jonathan Krinsky, chief market technician at MKM Partners, wrote in a note to clients Thursday morning that, "While the major indices continue to give a sense of calm above the surface, there is a growing list of negative divergences."

And he cited the seasonal weakness as well, displaying this chart in his note (click on image):

Source: MKM Partners, Bloomberg

So some investors and market observers believe this could be the end of that buy-the-dip mentality.
In my last comment looking at when the tech bubble will burst, I stated are two big risks in the market right now:
  1. A major correction or even a meltdown unlike anything we have seen before as literally every risk asset is way overvalued.
  2. A 1999-2000 melt-up where stocks go parabolic led by tech giants and biotech, forcing fund managers to keep buying at higher mutltipes or risk severe underperformance.
I will let you read that comment in detail but suffice to say that right now, I see huge deflationary risks in the world which is why I truly believe US long bonds (TLT) offer investors the best risk-adjusted returns over the next year or longer and will prove to be the ultimate diversifier, protecting your portfolio from being obliterated as deflation roils all risk assets.

Since writing that comment, stocks and other risk assets got whacked mostly owing to geopolitical jitters due to tensions with North Korea, driving US long bond yields lower (and prices higher), but my bearish views had nothing to do with geopolitics, it was all about my macro views where I see a US slowdown followed by a global slowdown.

I didn't mean to scare people with my cataclysmic views but I think it's really important to properly understand the macro risks going forward because if you get it wrong, you're dead. And buying the dip in this market isn't as simple as before because the macro winds have shifted abruptly.

On Thursday, Bridgewater's Chairman and CEO Ray Dalio posted a comment on LinkedIn, Risks Are Rising While Low Risks Are Discounted:
There are returns, and there are risks. We think of them individually, and then we combine them into a portfolio. We think of returns and opportunities as coming from those things we’d bet on, and we think of risks as the adverse market consequences of us being wrong due to our being out of balance. We start with our balanced beta portfolio—i.e., that portfolio that would most certainly fund our intended uses of the money. Everyone should have their own based on their own projected uses of money, though more generally, it’s our All Weather portfolio. We then create a balanced portfolio of opportunity/alpha bets based on what we think is likely to happen. We then combine them.

We bet on the events/outcomes that we think we have an edge in understanding. For events/outcomes where we don’t think we have a particular edge—e.g., political events—we aim to construct our portfolio to be relatively neutral or balanced to those risks.

Risk and Volatility

As a rule, periods of lower risk/volatility tend to lead to periods of greater risk/volatility. That is reflected in our aggregate market volatility gauge (see below), and markets are pricing in volatility to remain low next year too (click on image).

As a related rule, people adapt to the circumstances they have experienced and are then surprised when the future is different than the past. In other words, most people are inclined to assume that the circumstances they have recently encountered will persist, which leads them to change what they are doing to be consistent with that recently experienced environment. For example, low-volatility periods in which credit is readily available tend to lead people to assume that it’s safe to borrow more, which leads them to lever up their positions, which contributes to greater volatility and hurts them when things change.

That appears to be the case now—i.e., prospective risks are now rising and do not appear appropriately priced in because of a) a backward looking at risk and b) corporate leveraging up has been high because interest rates are low relative to many companies’ projected ROEs and because past risks have been low. The emerging risks appear more political than economic, which makes them especially challenging to price in. Most immediately, during the calm of the August vacation season, we are seeing 1) two confrontational, nationalistic, and militaristic leaders playing chicken with each other, while the world is watching to see which one will be caught bluffing, or if there will be a hellacious war, and 2) the odds of Congress failing to raise the debt ceiling (leading to a technical default, a temporary government shutdown, and increased loss of faith in the effectiveness of our political system) rising. It’s hard to bet on such things, one way or another, so the best that one can do is be neutral to such possibilities.

When it comes to assessing political matters (especially global geopolitics like the North Korea matter), we are very humble. We know that we don’t have a unique insight that we’d choose to bet on. Most importantly, we aim to stay liquid, stay diversified, and not be overly exposed to any particular economic outcomes. We like to hedge our bets, though we are never completely hedged. We can also say that if the above things go badly, it would seem that gold (more than other safe haven assets like the dollar, yen, and treasuries) would benefit, so if you don’t have 5-10% of your assets in gold as a hedge, we’d suggest that you relook at this. Don’t let traditional biases, rather than an excellent analysis, stand in the way of you doing this (and if you do have an excellent analysis of why you shouldn’t have such an allocation to gold, we’d appreciate you sharing it with us).
I looked at the five-year weekly chart of the S&P Gold Trust ETF (GLD) and see it looks ready to climb higher here (click on image):

But given my deflationary views, I'm bullish on US bonds (TLT) and the US dollar (UUP) here which is why I would avoid gold altogether in a deflationary world (unless there is a major crisis of confidence in the future but we're not there yet).

In fact, I even  posted a comment on LinkedIn in response to Ray's comment which you can read below (click on image):

If you can't read it, I posted this:
Ray, back in 2004, I warned you global deflation is coming and you rightly asked me "what's your track record?". Thirteen years later, I'm still beating the global deflation drum. I don't like gold because I see a deflationary meltdown ahead, so I put all my money in US long bonds (TLT) two weeks ago, stopped trading biotechs (XBI), and been sleeping like a baby ever since. I suggest everyone else reading this comment follow my lead.
One of my great highlights of my short pension career was meeting Ray Dalio. He's imposing, tough, very sharp and he can be very abrasive but that's ok because while he sent me on my way with my balls in my mouth, at least I can say I met Ray Dalio and got under his skin (only got to meet Ray because Gordon Fyfe accompanied me on that meeting. I tend to irritate a lot of people, just ask Gordon.)

I also lied to you when I told you I've been sleeping like a baby lately after I recently put all my money in US long bonds (TLT) and stopped trading biotech (XBI) stocks.

You see, I haven't been feeling well all summer. I lost close to 30 lbs in a couple of months, had night sweats, heat intolerance, been more irritable than normal, extremely weak and haven't been able to sleep well at all.

Now, I was diagnosed with Mutltiple Sclerosis 20 years ago, so intitially I thought my MS was getting worse, but when I was losing weight rapidly and had night sweats, I freaked and was worried I had Lymphoma, so I went to do a battery of tests.

My blood tests showed I have hyperthyroidism (overactive thyroid) which is a condition in which your thyroid gland produces too much of the hormone thyroxine. The classic symptoms are the following:
  • Rapid heart rate and palpitations
  • Shortness of breath
  • Goiter (swelling of the thyroid gland)
  • Moist skin and increased perspiration
  • Shakiness and tremors
  • Anxiety
  • Heat intolerance and sweating
  • Increased appetite accompanied by weight loss
  • Insomnia
  • Irritability
  • Swollen, reddened, and bulging eyes (in Graves disease)
  • Occasionally, raised, thickened skin over the shins, back of feet, back, hands, or even face
  • In crisis: fever, very rapid pulse, agitation, and possibly delirium
  • Changes in menstrual periods
  • Difficulty concentrating
I have many of these symptoms except for changes in menstrual periods (lol). I am always hot, sweating profusely, my heart is beating like crazy, my eyes are bulging, and I wake up in the middle of the night starving and eating like crazy and still lost a lot of weight. And not to share too much information, but I have increased bowel urgency and frequency which is another classic sign of hyperthyroidism.

The image below shows you the symptoms of Grave's disease, an autoimmune condition which affects your thyroid, making it more active (click on image)

It's also important to note that hyperthyroidism is a lot less common than hypothyroidism which has the following symptoms:
  • Unexplained weight gain (even if you eat well and exercise)
  • Fatigue
  • Cold temperature intolerance
  • Muscle weakness, aches or stiffness
  • Joint pain or stiffness
  • Constipation
  • Dry skin
  • Thinning hair
  • Decreased heart rate
  • Depression
  • Memory loss
The autoimmune disease associated with hypothyroidism (under-active thyroid) is called Hashimoto's disease (click on image below):

[Note: Grave's disease is the autoimmune disease typically associated with hyperthyroidism and Hashimoto's disease is an autoimmune disease typically associated with hypothyroidism. It's tricky but your thyroid has to produce just enough thyroxine. Too much or too little leads to major health issues. Read about Hashimoto's thyroiditis here.]

I believe I have suffered from periods of both hypothyroidism and hyperthyroidism for a very long time (it alternates but now it's classic hyper) and because I have MS, I always chalked these symptoms up to MS. And I come from a family of doctors and all my friends are doctors and they too were surprised to hear I have an overactive thyroid.

It's not their fault, doctors often miss thyroid problems. Luckily, both thyroid conditions (hypo and hyper) can be treated by seeing an endocrinologist which is my next step. Left untreated, hyperthyroidism can bring about debilitating long-term effects, including osteoporosis and even blindness.

Bottom line: Always check your thyroid even if you have another condition, it can wreak havoc on your health and well-being.

As far as these markets, they too suffer from hyperthyroidism but they don't know it yet. And there is no endocrinologist in the world that can save these markets from global deflation, and the long-term effects will be equally devastating.

Hope you enjoyed this comment. If you know someone who has these symptoms I described above, or if you have them, please check your thyroid and get the necessary treatment.

I've been busy going to hospitals doing tests and I need to treat this as soon as possible so forgive me if I haven't been publishing my usual daily comments, I am wiped and don't feel well. Hopefully, once I get my thyroid under control, I will be back to my normal (less irritable) self.

I thank those of you who checked in on me and especially thank those of you who continue to support my blog through donations and subscriptions. I need to think about my next steps because blogging is a lot of work which is grossly underpaid and once I get my health under control, I am ready to do something else.

I have contacted a few organizations in Montreal and I would appreciate your help.

That's all from me, remember to always check your thyroid, and always take care of your health first and foremost.

Below, Barry James warns a correction is 'inevitable', even as the market looks happy on its surface. A 'herd mentality' has driven up valuations, and he warns there’s a 'supervolcano' waiting to erupt beneath a seemingly 'beautiful' market.

Also, I embedded a clip where a registered nurse discusses the differences between hypothyroidism and hyperthyroidism, including the causes, signs and symptoms, and treatments. Once again, if you think you have thyroid issues, get a blood test to be sure and get treated for it as soon as possible.