Berkshire Hathaway is "short" the bond market...
Investment conglomerate Berkshire Hathaway is selling $1 billion worth of new bonds at its lowest yields ever.
Half the offering was $500 million of five-year debt yielding 1.3%, just 0.57% over comparable Treasurys. The rest was in 30-year debt yielding 4.3%, 1.35% over comparable Treasurys.
During Saturday's Berkshire Hathaway annual meeting in Omaha, Nebraska, which I (Dan Ferris) attended, Buffett said he felt sorry for people holding on to fixed-dollar investments. He said holding cash and Treasurys has been "brutal."
Richard Cook of Cook & Bynum Capital Management in Birmingham, Alabama, told Bloomberg that "Berkshire issuing debt is effectively an efficient way [for Buffett] to short the bond market." If you don't understand the comment, think about it. Buffett isn't buying bonds, he's selling them. Shorting means selling.
The annual Ira Sohn Investment Research Conference was held yesterday in New York. Every year, some of the world's best investors present their latest stock, bond, or other investment recommendations at the event. And proceeds from admission fees are donated to help fight pediatric cancer.
I'm intrigued by a couple of the recommendations that were reported on this morning...
The first is well-known bond investor Jeffrey Gundlach's short-sale recommendation on Chipotle Mexican Grill (CMG). The quotes I've read from Gundlach's presentation were colorful, but don't offer much insight.
"I hate the chart, I like the products," he said. "I do not like the price-to-earnings (P/E) ratio. I am not impressed with earnings growth... I am not attracted to anything related to middle-class consumer discretionary income… All you need to compete with CMG's core business is a taco truck."
Those comments are silly. Chipotle trades close to 40 times earnings. That's too rich for me to buy, but it grows like a weed on steroids. Sales have doubled the last five years and earnings have risen 270%. Chipotle is consistently profitable, with double-digit net margins. The number of restaurants is up 30% in the last three years. If the P/E ratio were 90, that'd be really crazy. But at 40, it's just a little stretched.
And saying a taco truck can compete with it is just plain ridiculous. It's like saying all you need to compete with McDonald's is burger patties and a flattop grill.
So Gundlach is shorting a highly profitable company with rapidly rising sales and earnings. Chipotle was spun off from McDonald's. The people running it are some of the world's best in the quick-service restaurant industry. You can't short a fantastic business run by great people just because the P/E ratio is a little rich. Shorting stocks is hard, especially when the market is falling in love with them all over again…
The market is soaring, hitting new all-time highs. But it's not horribly overvalued with the S&P 500 stock index trading for around 18 times earnings. So it's hard to find anything to buy or sell short right now. My research partner, Mike Barrett, and I recently scuttled a couple of new ideas after several weeks of digging into them.
It's just plain hard to be an investor right now. The fact that it feels so easy to so many people is how you know that's true. Hedge-fund manager Seth Klarman said the same thing in yesterday's Digest. But I promise it's worth repeating, even if it takes years to realize that.
A presentation at Ira Sohn that made a lot more sense to me was the recommendation famed short-seller Jim Chanos, who heads the Kynikos Associates hedge fund, made on computer hard-drive maker Seagate Technologies.
Porter has been bearish on Seagate for some time. He sold it short in February 2010 and closed the trade out later that year for a 51% profit. The stock was at $10 a share when Porter exited the trade. It's at $40 today.
Chanos and Porter agree Seagate's products are growing increasingly obsolete. Seagate makes hard drives for PCs. Chanos chronicled the decline of PCs in his presentation and said the situation is even worse for hard-drive makers.
He told the Wall Street Journal that the best screen for short sales is a combination of wholesale insider sales and executive departures. That's exactly what's happening at Seagate, he said. The chief technology officer just left the company, and Chanos said several top officers are engaging in opportunistic sales of Seagate shares.
John Hempton of Bronte Capital Management offered some very wise insight on shorting at the Value Investing Conference earlier this week...
He said the risk is highest when you're right about shorting a fraudulent or overblown business. If you short a real company with a solid business and strong earnings, maybe the share price goes up a little and you take a 20% or 30% loss. But the earnings aren't going to rocket up overnight. So the stock is unlikely to soar irrationally out of sight on you.
But if a company's earnings are fake or its accounting is bad, its earnings can appear to soar. Or if they're not profitable at all but sales are doubling and tripling every few years, most investors will simply believe the story. They'll buy the stock as it soars out of sight. That's when short sales can get really crushed.
For example, revenue at Salesforce, which sells customer-relationship management software, is growing rapidly. But the company is unable to make a profit. Offerings from well-financed competitors like Microsoft and Oracle are competitive on price and performance. Yet the share price has soared almost 700% since its March 2009 bottom.
Chanos knows exactly what Hempton is talking about. Chanos shorted AOL many years ago. He got crushed, even though he eventually turned out to be right about it.
I've been there, too. I recommended shorting online restaurant-reservations company OpenTable at $76 a share. I closed that position painfully at $92 a share. Since then, it's climbed as high as $115 a share and cratered at $32. Today, it's recovered to about $60 a share.
We've discussed Japan's stimulus program – which True Wealth editor Steve Sjuggerud has called "Abe's Revenge" – on several occasions. Prime Minister Shinzo Abe plans to double the country's cash supply to shake the world's third-largest economy out of its deflationary funk.
Abe and the head of the nation's central bank, Bank of Japan Governor Haruhiko Kuroda, are emulating Federal Reserve Chairman Ben Bernanke. They're holding down interest rates, buying up their own sovereign debt, and printing money to spur growth.
And just like in the U.S., private-equity companies in Japan have benefited…
As we've explained, private-equity firms thrive during periods of inflation. They can borrow at super-cheap rates to finance bigger and bigger deals. The situation in Japan is no different…
"Japanese financial institutions are seeking alternative investments because they can no longer rely on income from sovereign debt," Yasuo Sugeno of the Daiwa Institute of Research said in a Bloomberg article. "The megabanks, which were the first to turn to private equity, are now being followed by regional banks and trusts."
Japan represents "the No. 1 opportunity of 2013," Steve Sjuggerud wrote in January's True Wealth…
As you dig in, the situation appears unbelievably good.
You see, Japanese stocks are comically cheap... and they could very well travel all the way into bubble territory before this is all over. We're talking triple-digit gains, safely.
I say safely because there's very little downside in Japanese stocks. They are both 1) absurdly cheap, and 2) nobody owns them!
The yen just broke above 100 to the dollar for the first time in four years. And the Nikkei 225, Japan's benchmark stock index, has jumped 37% this year as of Thursday's close.
Two of Steve's True Wealth recommendations – the WisdomTree Japan Hedged Equity Fund (DXJ) and the WisdomTree Japan Smallcap Dividend Fund (DFJ) – have been hitting 52-week highs on a daily basis. To learn more about True Wealth and how to access all of Steve's research on Japan, click here.
New 52-week highs (as of 5/8/13): Advent Claymore Convertible Securities & Income Fund (AVK), Berkshire Hathaway (BRK), WisdomTree Japan Smallcap Dividend Fund (DFJ), WisdomTree Japan Hedged Equity Fund (DXJ), iShares Germany Index (EWG), iShares Singapore Index (EWS), Cambria Global Tactical (GTAA), iShares iBoxx High Yield Corporate Bond Fund (HYG), iShares Dow Jones U.S. Insurance Fund (IAK), SPDR International Health Care Sector Fund (IRY), iShares Dow Jones U.S. Home Construction Index Fund (ITB), SPDR Barclays High Yield Bond Fund (JNK), AllianzGI Equity & Convertible Income Fund (NIE), PowerShares Buyback Achievers Portfolio (PKW), Sequoia Fund (SEQUX), ProShares Ultra S&P 500 Fund (SSO), Targa Resources (TRGP), V.F. Corp. (VFC), Prestige Brands (PBH), Targacept (TRGT), Monsanto (MON), RPM International (RPM), American Financial Group (AFG), Chubb (CB), Loews (L), Travelers (TRV), Brookfield Asset Management (BAM), Becton-Dickinson (BDX), Medtronic (MDT), Chart Industries (GTLS), DCP Midstream (DPM), Superior Energy Services (SPN), Union Pacific (UNP), Wells Fargo (WFC), and Activision Blizzard (ATVI).
In today's mailbag… subscribers write in on Warren Buffett's "pontifications" and Fed Chairman Ben Bernanke's "wealth effect." Send your e-mail to feedback@stansberryresearch.com.
"Frankly, I am personally much more offended by Warren Buffet's pontifications that we don't pay enough taxes than Porter's stories about his relationships and great stuff. It is unfortunate than some people can't find their delete buttons or just skim past the so-called offensive narrative." – Anonymous
"You describe the original purpose of private equity firms clearly, but I'm sure you know David Stockman has a different view. In his book The Great Deformation, Stockman says Fed money printing and low capital gains tax rates have perverted private-equity incentives. All too often these firms yield to the temptation to bleed companies of cash to pay investors lightly taxed capital gains.
"This morning on CNBC I heard some fund manager say, 'I salute the genius of Ben Bernanke.' I immediately sent the following email to CNBC Squawk Box: 'The wealth effect Bernanke style means stealing from the middle class to enrich the already wealthy. People working two or three part-time jobs don't feel much wealth effect when the stock indices hit record highs.'
"I think we all have to be in stocks now as a matter of self-defense, but your advice is sound about keeping a weather eye and one foot out the door." – Paid-up subscriber Don Davis
Regards,
Dan Ferris
Medford, Oregon
May 9, 2013
It's called CityCenter. It's where I stayed during my visit. It's in the heart of Las Vegas. The casino-retail-housing complex encompasses 16.7 million square feet. It has something like 6,600 hotel rooms and another 900 condominiums. It was supposed to cost $4 billion and ended up costing about $8.5 billion.
Luxury companies also do great during inflation. People are desperate to find some value in their cash so they will buy watches and rings and jewelry. We discussed this on Friday. Also, people speculate and gamble. When those bets pan out, the winnings result in spending binges and things like that.
Some have argued that makes this a great time to buy shares of legendary jewelry company Tiffany & Co. But I'm not sure…