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  • Making Sense Of Year To Date Price Changes In Midstream Master Limited Partnerships [View article]
    The current distribution coverage ratio only gives you a snapshot in time. You need to assess the business model and the industry / macro environment to assess the safety of the distribution and/or its growth rate. Standard valuation metrics (EV/EBITDA, P/E (taking into account that depreciation may be overstated for some assets such as long-haul pipelines that have real estate-like characteristics, i.e. indefinite lifespans on the easements), FCF, FCF after maint capex but before growth capex, etc.) are also helpful in this regard.

    A classic mistake of "growth" investors in any industry is extrapolating recent growth trajectory and fundamentals indefinitely into the future (and pricing the stock accordingly) when such fundamentals/growth are not sustainable long-term. Remember how optical networking companies were growing at 100% y-o-y for a few years in the late 1990s? At the end of the day, high multiples are dangerous, whether in this industry or any other industry, and usually result in poor long-term returns. Perhaps that's even more true in this industry than in many others, as this is a capital-intensive industry with limited scaleability.
    Aug 30, 2015. 10:40 PM | 2 Likes Like |Link to Comment
  • Making Sense Of Year To Date Price Changes In Midstream Master Limited Partnerships [View article]
    I recall about a year or more ago that you mentioned in connection with high-growth, high-multiple MLPs/GPs, you're a "what have you done for me lately" kind of guy in evaluating MLPs. Well, how has that worked out with high-multiple, overvalued TRGP and PAGP?

    I sold all my MLPs last summer around the time of the KMI and WMB deals, as valuations were very high, and it was increasingly obvious that froth and financial engineering ("slap some more leverage on to pander to the yield-seekers") was at a fever pitch.

    I didn't foresee the oil collapse, but it doesn't really matter. The key is that you need to invest based on valuations (not the yield from financially-engineered and/or commodity price-exposed dividends) to provide yourself with a margin of safety because adverse developments will inevitably happen at some point.

    You seem to take comfort from collecting distributions and ignoring unit prices. Do you really think that all of these distributions are safe longer term? Chanos has come out observing that even the CVX dividend isn't safe and will likely be cut. If that's not safe, how can you believe these more leveraged, higher yielding MLPs are safe? Lots of risks to MLP cashflows and growth over time--re-contracting, higher interest rates, sustained lower commodity prices, growth pipeline drying up as capital flees the energy space, etc.
    Aug 30, 2015. 02:32 PM | 2 Likes Like |Link to Comment
  • Making Sense Of Gold's 'Fundamentals' And Future Prospects: A Case Study In Graphics [View article]
    The thesis about hedge funds / banks shorting gold as a hedge against China exposure seems very credible and likely explains the very recent bout of weakness.

    Taking it a bit further though, she also appears to believe in a dramatic blow-up / hard landing for the Chinese financial system which would ultimately pave the way for the gold shorts to pay off longer term (in a bigger way). I have a problem with that thesis--I think the "long landing" scenario outlined by Michael Pettis is far more credible. I believe the Chinese banking system would simply be re-liquefied by gov't fiat or otherwise--we have enough precedent in Japan and US to know that zombie banks can be kept alive indefinitely if the political will is there to do so. I don't think a gold long is a bet on "Chinese bank solvency" but rather a bet that there will be no catastrophic blow-up of the Chinese banks. It's interesting though that Bridgewater suddenly shifted gears on China the other day.

    I'm also critical of her tendency to trundle out these 100-yr inflation-adjusted price charts of gold, silver, etc. to argue for long-term mean reversion. In terms of big picture super-cycle metals/commodities price trends, the past 100 years, IMHO, is really just a collection of 3-4 data points (each a unique macro era) that doesn't really support any inferential pattern or mean reversion.

    If you pulled out a similar chart of oil (gold/silver/oil all correlate long-term), this would suggest that oil needs to go down to $30 and stay there long-term. I think it can go down there temporarily, but newer geological realities (peak cheap oil) in recent years suggest that such a price level is unsustainable even if recovery costs dip a bit. See also J. Grantham's views on resource depletion, etc.

    Nonetheless a provocative short-term thesis--shows the futility of trying to explain short-term asset price moves with fundamentals--technica... second-order drivers often explain the moves!

    I think we need a weaker USD and will ultimately get one along with a reflation of commodities prices and emerging markets (perhaps after one more leg down). Might not be for a year or two though.
    Jul 30, 2015. 10:41 PM | 1 Like Like |Link to Comment
  • Making Sense Of Gold's 'Fundamentals' And Future Prospects: A Case Study In Graphics [View article]
    The MFITZ thesis is thought-provoking, but ultimately, this thesis would seem to require a global melt-down to play out. I think this ultimately goes back to structural/economic imperatives--as you suggest, the world needs a weaker USD, and note that a number of fundamental measures suggest the USD is over-valued against foreign currencies. A weaker USD would also mean a weaker RMB as they are de facto pegged for the time being, and would help Chinese bank solvency.

    If we were to actually get Chinese bank failures / financial crisis (would be accompanied by a skyrocketing USD and a global deflationary earthquake), the solutions coming out the other end would ultimately involve creating global liquidity and knocking the USD down. Ultimately, gold would come roaring back.

    I think there's consistency between MFITZ / Rickards and yourself in this sense, and analyzing it in terms of structural imperatives is quite useful. Unless the US can roar forward with faster growth rates than the rest of the world, we need higher gold and a weaker USD, and we're likely to get them over time.
    Jul 30, 2015. 12:53 PM | Likes Like |Link to Comment
  • Making Sense Of Gold's 'Fundamentals' And Future Prospects: A Case Study In Graphics [View article]
    This is a really tremendous piece--sophisticated and objective and demolishes a lot of prevalent myths such as the notion that a hike in the Fed Funds rate is dollar bullish / gold bearish (you could have also mentioned the 2004-06 example--amazing how people fail to check history on simple correlations such as this).

    I will read the Fitzgerald article on your recommendation. In the meantime, what do you think of James Rickards' views that there are structural / economic imperatives ultimately requiring a weaker USD and higher gold (to ensure the US debt Ponzi and global/EM growth can continue)?
    Jul 30, 2015. 01:04 AM | 1 Like Like |Link to Comment
  • China's Gold Reserves: A Strong Dose Of Reality [View article]
    Great Britain and Japan are essentially client states of the US so not a great comparison. I think there's a legitimate geopolitical angle (though not as extreme as the gold bugs' view, which Rickards demolishes) that you're pooh-pooh-ing here--gold serves as one (but not the only) indicia of monetary / geopolitical power--that's what Rickards is saying by "the club". Obviously, there are other dimensions of this--China is a large economy and a major international creditor--that alone is also a very significant dimension of power which provides a further imperative to get China into the SDR and IMF mechanisms.

    The USD is not expressly backed by gold, but the US does maintain huge gold reserves as does the Eurozone. The Eurodollar markets are the bedrock of the global monetary system, so I do see some connection unless you think it's just a coincidence. I also think geopolitical arrangements play a significant role in shaping the current monetary system, and it's not something set in stone. Finally, Ray Dalio, Greenspan, Volcker and others do not seem to share your views on the insignificance of gold.

    Anyway, I don't think we can get much farther debating / speculating on these matters--not something that's easy to prove one way or another and ultimately not the crux of the gold price anyway. For me, gold ultimately comes down to USD real interest rates which are a function of endogenous economic growth.

    Shifting topics, I seem to recall your previous views were that gold would have another significant leg down but would ultimately go much higher. Any changes?

    Also, any update on your stock market correction (by July) forecast? Do you still see it happening, but perhaps over the next 3 months instead? Market feels very shaky to me here.
    Jul 22, 2015. 04:17 PM | 1 Like Like |Link to Comment
  • China's Gold Reserves: A Strong Dose Of Reality [View article]
    Here's a more nuanced view on this subject. What are your thoughts?
    Jul 21, 2015. 10:13 PM | Likes Like |Link to Comment
  • China's Gold Reserves: A Strong Dose Of Reality [View article]
    It's not the intelligent bull case, let's put it that way--those who believe this case and buy gold on such basis (and hold on) may ultimately do well, but it will be for other reasons. Hence, the old saying, "it's better to be lucky than good". It reminds me of a sophisticated banker contact who in 2012 believed that stocks would shoot up "because inflation is coming back". Well, he was right about stocks, but for completely wrong reasons--it was yield-chasing and return-chasing desperation (due to low interest rates) that drove them up.

    The reasons China would seek to become a gold power have been set out by others--Greenspan, prominent Chinese spokesmen, etc. Jim Rickards puts out the most persuasive analysis tying this stuff together.

    Anyway, China aside, for me, it all comes down to whether you believe the world of the '80s and '90s (King Dollar, with high real interest rates as a function of strong US organic economic growth, and emerging markets as an insignificant backwater) is coming back. I don't think it is, and I think there are major structural and political imperatives favoring a devaluation of the USD (and other currencies) against gold.

    Just to be clear, I agree with most of your points in the article--China certainly has no interest in backing the RMB with gold, but this whole topic is largely a red herring anyway. However, I'm sympathetic with the gold bugs that the recent disclosure likely understates their true reserves. (Can't directly prove it, of course!) I wouldn't conflate this point with the gold-linked RMB thing or take the disclosure at face value.
    Jul 21, 2015. 05:52 PM | 2 Likes Like |Link to Comment
  • China's Gold Reserves: A Strong Dose Of Reality [View article]
    The bull case for gold isn't really about China or anyone else going back on a gold standard. It's rather the case that: (i) all fiat currencies need to be depreciated against gold to deal with global debt burdens (note Greenspan recently suggested the same thing) and (ii) over time, there will be a gradual shift away from the USD toward a more multi-polar global currency regime (this is both logical given how the US relative share of global GDP has declined over time, and also constructive given that a USD-centric system creates substantial imbalances and is highly destabilizing).

    The result will ultimately be higher inflation in USD terms given high US deficits and the need to close them (deficits historically resulting, via accounting identity, from the current system that treats the USD as the global reserve currency). Countries that are not the global reserve currency but run big deficits tend to have weak local currencies and higher inflation rates.

    That said, I'm also skeptical of the accuracy of the Chinese gold update and its value in interpreting China's intentions / interest in gold. I would expect them to ultimately be seeking rough parity with the US and Europe in terms of gold / GDP ratio (why wouldn't they?). This suggests that they still need to acquire a great deal (and/or are under-reporting their current reserves for ulterior motives).
    Jul 21, 2015. 03:02 PM | 1 Like Like |Link to Comment
  • Signs Of A Stock Market Correction Developing [View article]
    On the subject of chart patterns, if you pull up a two-year chart, this year's choppy side-ways action looks identical to last year's action--this "triangle pattern" stuff is voodoo nonsense, and the "channel" stuff would have incorrectly suggested a pending correction in late 2012--just the time to get aggressively long. I say the next big move is up, not down. A big summer rally is on the way, and I suspect that it will persist right through year-end much like in 2013.

    John Burbank of Passport Capital was on Bloomberg on Thursday noting that the recent stock market softness / choppiness connected to the bond sell-off is likely a wave of forced liquidation from the big risk parity funds who have to lighten up their VAR. PIMCO out today thinks it's almost over, and Gundlach also doesn't think rates rise too much.

    That makes sense to me--we have a global reflationary industrial rebound just starting, and a market that's been flat all year--not a set-up for any type of stock correction. If the taper tantrum (much bigger back-up in rates) couldn't cause a stock correction and in fact devolved into a big stock rally, this recent back-up in rates certainly won't either.

    Best way to play the rebound is through industrials (which have been flat and mildly out-of-favor for a year and trade at 2-3 turns lower than the S&P)--try XLI and RGI.
    May 12, 2015. 10:20 PM | 2 Likes Like |Link to Comment
  • Signs Of A Stock Market Correction Developing [View article]

    I'm curious, as your article focuses on "technicals" why you don't discuss things like market internals, breadth, new highs/lows, etc.--these are cited by other prognosticators like Hussman as technical evidence of market deterioration. I would say that there's also a bit more substance to them than the chart pattern stuff you've dredged up.

    On the chart patterns, two ways to skin a cat--we keep testing this 2117 area on the S&P--if we pierce it next week, could very well lead to a breakout-driven melt-up.
    May 9, 2015. 08:42 PM | 1 Like Like |Link to Comment
  • Signs Of A Stock Market Correction Developing [View article]
    Well, the window is closing fast, and it seems very unlikely from my perch absent a Grexit or an exceedingly disorderly move in the bond markets. I also don't think the "earnings recession" (which is mostly oil sector, and note the mild decline in other sectors is likely to be reversed in the 2nd half with better growth and weaker dollar) will be strong enough to hurt stock prices--note it had no effect this past quarter.

    I would say the correction risk is actually lower than normal as the markets have gone nowhere all year, and early leading indicators clearly suggest a global rebound. The risk would be higher than normal if we had just experienced a strong rally to start the year, particularly if coupled with signs of slowing economic activity and widening junk spreads (e.g. early last summer would have been a good time to flag this warning, as would spring/summer of 2011 after ECRI flagged that global industrial growth cycle peaked in April).

    Note that bond yields have only started to rise--historically, we're not primed for a correction until the bond yields have topped out and moved sideways for several months (to give the tightening effect of the higher rates enough time exercise its choke collar effect on the economy and markets).

    Also, your assertion on an econ acceleration was way too early; it really didn't become apparent before March/April. It could have gone the other way too.
    May 9, 2015. 08:35 PM | Likes Like |Link to Comment
  • Signs Of A Stock Market Correction Developing [View article]

    Recent fundamental developments no longer support the call for a correction this year (though I would have agreed with it earlier in the year). Namely, we're on the cusp of a global industrial upturn (note recent ECRI call) with yield curves steepening all over the world, junk spreads tightening, commodities prices firming and have entered into technical uptrends; Brazilian stocks bottomed and have entered uptrend, USD strength is reversing, etc. (I don't completely agree that fundamentals have no role in determining non-bear 10-20% corrections--1997, 1998 and 2011 had fundamental catalysts as did the Oct. 2014 dip.)

    Also, the market has been flattish YTD--historically, that is not a precursor to a seasonal correction--see 2004, 2005, 2006, 2007, 2014. Rather, it suggests that the next significant move is likely to be up rather than down. I'm not aware of a single correction in the past two decades that was preceded by a flattish market for several months (rather than a multi-month upward move)--think 1998, 2010, 2011, 2012 and Oct. 2014 corrections.

    Some of this chart monkey stuff (e.g. long-term trend channel) would in late 2012 have suggested a correction ahead. I think we could actually get a melt-up, led by industrial cyclicals and large-cap "value". But, I'm guessing the next big move is +8-10% rally on the S&P that carries through the end of the year and then continues into next spring.

    People like Julian Robertson and Druckenmiller have also noted recently the set-up for a melt-up. In fact, I believe the recent cautionary statements by Yellen and Fischer on stock prices represent a feeble attempt to "jaw-bone" down the market as they don't intend to raise rates this year and are worried the markets will "boil over" (i.e. melt-up) to use Robertson's colorful phrase.

    The only plausible trigger for a correction (outside of a Grexit, etc.) would be the upside growth surprises (that will come in due course this year) shocking the bond markets. Yet, the bond market tanked in mid-2013, and the stock correction was very minor and focused on bond proxy names, and was succeeded by a huge up move in stock prices. The first leg of a sharp bond correction has already started and has had no effect on stock prices. Stock multiples never really priced in the ultra-low long bond yield so still have quite a cushion in that sense.
    May 9, 2015. 07:22 PM | Likes Like |Link to Comment
  • Did Ben Graham Understand The Difference Between Active And Passive Investing? [View article]
    I consider many of the diversified "rules-based" funds and ETFs to be a form of indexing. Most people think of the S&P 500, but research has demonstrated that market-cap weighted indices provide sub-optimal performance as they overweight the more expensive stocks (and hot sectors) and underweight stocks and sectors that are out-of-favor and have asymmetric risk/reward to the upside. The late 1990s and 2000 market top would be an extreme example of this phenomenon. 2000 and 2001 were fantastic years, and the 2000s were not a lost decade at all, provided that you had a broad portfolio of reasonably valued stocks rather than the tech/pharma/financials... large-cap "growth"-oriented S&P 500.

    Value-weighted, sector-diversified funds such as the long-short funds run by Gotham Capital make a lot of sense, IMHO. Greenblatt magic formula long-only portfolios (value + quality), which could also be considered a form of indexing, have also been shown to consistently trounce the averages (and by definition, most active managers) over time. Research from AQR (Cliff Asness) supports this and also suggests that all Warren Buffett has really done historically was build reasonably diversified portfolios based on value with a tilt toward quality. He pick stocks, but it's not completely idiosyncratic--it's mostly value and quality factors--avoiding the garbage, and avoiding whatever is over-loved.

    So, I think indexing makes perfect sense, but not market-cap weighted indexing with no sector concentration caps and no value/quality tilt. The "quality" is particularly important in this era given all of the low ROIC, capital-destroying garbage floating around the markets these days, although much of that is in the Russell 2000.
    Apr 6, 2015. 01:40 AM | 2 Likes Like |Link to Comment
  • Celldex: An Immuno-Oncology Play With Monster Potential [View article]
    There's nothing wrong with that, but what will your total return be when the other 10 small-cap biotechs you bought 12 months ago crash and burn down 40-60% from where you bought them, and don't come back for many years (or never come back at all).

    If you're a brilliant enough biotech stock-picker that PCYC is the only one you bought, then more power to you.
    Apr 1, 2015. 02:17 PM | 2 Likes Like |Link to Comment