‘Is that it? Wow. OK.’
That was the incredulous response of famed short-selling investor Jim Chanos.
Chanos owns and runs Kynikos Associates. He made his name by famously short selling Enron in the early 2000s.
I’d just stepped away from the Grant’s Interest Rate Observer Fall Conference. There was a cocktail evening, but to be honest, that’s not my scene.
Most of the presentations were top notch. There were a couple of hucksters ‘selling their wares’ (their investment fund), but that’s fine. It’s part of the territory.
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The best presenters at these gigs are those who have a compelling story to tell. By the time they’ve finished, you’re hooked on the story and then you decide for yourself how to play it.
That’s how I felt after listening to Cullen Thompson from Bienville Capital Management. His focus is Argentina. He explained in detail why investors should keep a close watch on Argentina.
I’ll admit that I was already predisposed to the idea. So I’m biased. Saying that, the guy who made the case for investing in Russia wasn’t nearly as convincing. But that won’t put me off — I have a predisposition there too!
(Actually, the guy speaking about Russia wasn’t convincing at all. When even those who are trying to put the bullish case highlight more negatives than positives, it should be a good sign for contrarian investors.)
New York is a long way to come from Australia. I’d hoped to walk away from the conference with at least one realistic investment idea.
The good news for Tactical Wealth subscribers is that I’m walking away with half a dozen or more investment ideas.
The first of those ideas should be in the November issue. Unfortunately, unless you already subscribe to Tactical Wealth you won’t see it. That investment advisory isn’t currently accepting new memberships.
This month I recommended that subscribers buy two oil stocks. Oil stocks are the hot sector right now. It’s a sector firmly on resource analyst Jason Stevenson’s radar too.
Jason lays out the case here why it’s time to buy a select handful of oil stocks.
So anyway, what was it that caused Jim Chanos to raise his arms in incredulity?
‘He looked me in the eye’
It’s rare that you get to stand next to an investing legend. It’s even rarer to hear an investing legend’s unscripted and under-the-breath remarks about an answer they’ve just heard.
Jim Chanos is an investing legend.
However, Chanos wasn’t presenting at Jim Grant’s Conference here in New York. Chanos was one of the attendees. And he was standing directly at my right shoulder as he asked the luncheon speaker a pointed question.
The answer is what led to his incredulous comment.
The speech was from corporate lawyer Marty Lipman.
The title of his speech was ‘Activist interventions and the destruction of long-term value.’
It was a good presentation. In fact, it was a withering attack on ‘activist investors’. These are big investors (usually hedge funds or private equity), that quickly build up a stake in a company and then agitate for change.
But what made the presentation especially engrossing was the fact that Bill Ackman sat at a table barely 20 feet in front of him.
Bill Ackman is the modern day embodiment of the ‘activist investor’. When Lipman criticised activist investors for making a big song and dance about what they’re doing — by appearing on TV, by attacking boards and management — he was directly talking to Bill Ackman.
If you don’t like confrontational environments, this wasn’t the place to be. If you like the sight of a seasoned Wall Street lawyer going head-to-head with an activist heavyweight, you would have loved every minute of it.
Lipman’s argument is that ‘activist investors’ don’t add long term value to companies. He says the activist is only interested in short term gains. And that once they’ve made their song and dance to control the company, they make short term decisions to boost the stock price and then sell.
As for my take on shareholder activism? To be honest, I’m reasonably indifferent to it. In fact, I wonder why the activists bother. As Ackman later pointed out, there are around 20,000 stock listings in the US.
If that’s true, why bother searching for a company that you think is terrible in order to cause a fuss and perhaps never achieve the intended goal? The goal of the activist is to challenge the board by voting them off, voting in new guys, changing management, and then revitalising the company.
That sounds like a lot of hard work to me. Personally, I prefer an easier approach — companies the market has beaten down or where a new trend is emerging.
But hats off to Ackman. He’s made good money from his approach. Enough money to stump up a share of US$90 million to buy a penthouse apartment in the 75-story One57 development overlooking Central Park. (I can see the building from my hotel backing onto West 58th Street.)
His shareholder activism helped grow the shares of Canadian Pacific Railway Ltd [NYSE:CP] from one of the worst North American railroads, to one of the best.
But back to Lipman. Another one of his claims was that during 2008, hedge funds had short sold stock in banks and other companies, and had then short sold collateralised debt obligations (CDOs) that were on those banks’ balance sheets. The charge was that this had a compounding impact on the banks causing the share prices to fall and reaping profits for the hedge funds.
Chanos challenged Lipman to prove it. Chanos said that such tactics would have been against New York state and federal law. He also said that the SEC in the US, and the FSA in the UK had thoroughly investigated those allegations and found no evidence of it.
Lipman’s reply? ‘I’ll pass on that.’
That’s when Chanos raised his hands and said ‘Is that it? Wow. OK.’
He looked me in the eye, muttered something, and then turned on his heels and left, dumbfounded at Lipman’s reply.
You can hardly blame him. Short sellers take enough flak as it is from the government for their so-called ‘destruction’ of companies. The least they deserve is evidence backing up allegations of impropriety.
They will never stop
If you’ve read my commentary, you’ll know I’ve said that the US Federal Reserve will never stop printing money.
In the latest issue of Grant’s Interest Rate Observer, Jim Grant makes the same point:
‘We once more lay down the prophesy that the Fed will finally decline to halt its money-printing purchases of Treasurys and mortgages. Or, if the FOMC does announce a final suspension of QE (it next sits on Oct. 28–29), it will presently resume that program, or something just as liable to make the wrong kind of monetary history.’
It’s also pleasing to see that I’m not the only one baffled by the mainstream worrying about deflation and falling prices.
As Grant writes:
‘Never before — as far as our reading of financial history carries us — have so many worried so much about prices that won’t race higher. Two Wednesdays ago, the Financial Times produced a sentence that could only have been written in the 21st century: “The absence of accelerating inflation normally associated with a stronger recovery remains a dark cloud over the economy’s prospects.” Dark cloud?’
It is baffling. Who would have thought that higher prices would be the solution for America’s woes…during a period when American household income hasn’t risen in about 30 years?
But then, not everyone has suffered. As one of the other speakers, Ken Langone noted, the past six years has been amongst the best he has ever experienced.
Why? Because he’s rich. As the wealth gap has grown over the past few years, the rich have gotten richer. The rich already have plenty of assets. They can leverage those assets at record low interest rates to build even more assets.
Meanwhile, banks haven’t been so keen to lend money out to folks who don’t already have an asset base…that’s too risky.
If anyone thinks the Fed really will stop printing money, they don’t understand how those at the Fed think. The Fed is in ‘crash prevention mode’ at the moment.
No Fed chairman or board member wants the market to crash on their watch. Money printing won’t stop…it can’t stop. Take note of Ken Langone, he knows what he’s talking about.
Langone cofounded The Home Depot [NYSE:HD], and has an estimated net worth of US$2.1 billion. He has grown his wealth by investing in growth assets. That’s why he’s rich and he’s stayed rich.
If you want to be on the right side of the wealth gap, follow what the rich folks do with their money. That means buying growth assets that should rise as the money printing scam continues.
Some think resources and commodities investing is dead. If the Fed does as I expect, it’s about to get the kiss of life. Go here to find out how to play it.
Kris Sayce+
Contributing Editor, Money Morning
Editor’s Note: This is an edited excerpt of an article that first appeared in the Port Phillip Insider.
The post Among Investing Giants appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
