Hedge Fund

ESG Blacklisted portfolio

ESG (Environment, Social Responsibility & Governance) blacklisted stocks. We all know deep in our hearts that vices are far more fun than virtues. Real Coke tastes better than Diet Coke. Full cream is better than skim. McDonald’s fries are tastier than mashed potato. CM made this point in yesterday’s piece on the irresponsibility of socially responsible investing for building a retirement nest-egg given the long term underperformance.

When all of this politically correct ESG investing meets a recession, these oversold anti-ESG darlings, many with gobs of free cash will look like total bargains. Suffice to say in a downturn, vices tend to be what people resort to.

All CM cares about is the G in ESG. Governance is a must for investing. E & S are merely subjective views which don’t automatically convert to shareholder value. Good governance goes without saying.

So perish the thought that CEOs, like Harvey Norman’s Katie Page are being attacked by the likes of Ownership Matters which thinks putting in a shareholder activist who has failed 49 times out of 49 to be appointed to ASX listed boards is a better bet? As Janet Albrechtsen of The Australian wrote,

A copy of the report obtained by The Australian reveals Ownership Matters has recommended that Stephen Mayne be elected to the board of the retailer, even though the 50-year-old has no corporate experience in retail or property, no corporate board experience and no corporate management experience…Harvey Norman has a market capitalisation of $5.2bn, and shares in the retailer have gained more than 32 per cent over the past year, outperforming the 16.4 per cent gain in the benchmark S&P/ASX 200 over the same period…The advice sent out on Monday has baffled Ms Page’s husband, the business’s billionaire co-founder Gerry Harvey, who remains its largest shareholder, retaining ­direct ownership of almost a third of the company. “I have been on a public company board as chairman since 1972, and I have never seen anything as bizarre as the fact that the best ­retail executive in Australia is to be replaced by a ratbag called ­Stephen Mayne who has been a proven failure … every time he’s run for a board seat,” Harvey said.


Forget the return “ON” your money. Just look to the return “OF” it

CM knew a lot of passive indices existed but not to this crazy extent. Probably explains why there is so much stupid money tied up in me too commoditised investment products. 4 years ago CM wrote a piece on the dangers of ETFs (especially leveraged)  and passive products in a downturn. These products predominantly follow the market, not lead it. So if these products end up stampeding toward the exits in a market meltdown, the extent will be amplified, especially those levered funds potentially making market panic look worse than it really might otherwise be. Don’t be surprised to see the mainstream media sensationalise the size of any falls in the market.

According to Bloomberg, 770,000 benchmark indexes were scrapped globally in 2019…however  2.96 million indexes remain around the world, according to a new report from the Index Industry Association…There are an estimated 630,000 stocks that trade globally, including c.2,800 stocks on the NYSE and c. 3,330 on NASDAQ or 5x as many indices as there are securities globally.

CM wrote back in October 2015,

ETFs are hitting the market faster than the dim-sum trolley can circle the banquet hall. Charles Schwab, in the 12 months to July 2015, saw a 130-fold preference of ETF over mutual funds given their relative simplicity, cost and transparency….

…ETFs, despite increasing levels of sophistication, have brought about higher levels of market volatility. Studies have shown that a one standard deviation move of S&P500 ETF ownership as a percentage of total outstanding shares carries 21% excess intraday volatility. Regulators are also realising that limit up/down rules are exacerbating risk pricing and are seeking to revise as early as October 2015. In less liquid markets excess volatility has proved to be 54% higher with ETFs than the actual underlying indices. As more bearish market activity has arrived since August 2015 we investigate how ETFs may impact given a large part of recent existence has been under more favourable conditions…

CEO Larry Fink of Blackrock, the world’s largest ETF creator, has made it clear that
leveraged ETFs (at present 1.2% of total ETF AUM) have the potential to “blow up the whole industry one day.” The argument is that the underlying assets that provide the leverage (which tend to have less liquidity) could cause losses very quickly in volatile markets. To put this in perspective we looked at the Direxion Daily Fin Bull 3x (FAS) 3x leverage of the Russell 1000 Financial Services Index. As illustrated in the following chart FAS in volatile markets tends to overshoot aggressively

…The point Mr Fink is driving at is more obvious with the following chart which shows in volatile markets, the average daily return is closer to 10x (in both directions) than the 3x it is seeking to offer. This is post any market meltdown. On a daily basis, the minimum and maximum has ended up being -1756x to 1483x of the index return, albeit those extremes driven by the law of small numbers of the return of the underlying index. Which suggests that in a nasty downturn the ETF performance of the leveraged plays could be well outside the expectations of the holders.”

CM has said for many years, where CDOs and CDSs required the intelligence of a mystical hermit atop a mountain in the Himalayas to understand the complexities, ETFs are the complete opposite. Super easy to understand which inadvertently causes complacency. Unfortunately, as much as they might try to do as written on the tin, the reality could well turn out to be the exact opposite.

Hence CM continues to believe that stocks with low levels of corporate social responsibility (CSR) scores like tobacco companies such s Philip Morris, JT and Imperial Tobacco, as well as gold/silver bullion,  look the places to be invested. Cash won’t necessarily be king because the banks are already in a world of pain that hasn’t even truly started yet. Aussie banks look like screaming shorts at these levels. The easiest way for the plebs – without access to a prime broker – to do this is to buy put options on individual bank names. Out of the money options are dirt cheap.


Forget the return ONyour money. Just look to the returnOFit.

NB, none of this constitutes investment advice. It is a reflection of where CM is invested only. 


Obama endorses mutiny


In his final days as President, Obama has still not learnt that he shouldn’t talk down to people. He did it at Brexit. He did it to an audience of African Americans telling them they’d insult his legacy if they didn’t vote for HRC when it was indeed him insulting them for forgetting they probably voted him in twice. As much as liberals love to praise him as the “best ever” or “without scandal” can they look themselves in the mirror and endorse his words effectively suggesting the military disobey Trump if they feel compelled? Yes, in short – mutiny appears to be ok in Obama’s books.

Obama said to a group of soldiers at MacDill Air Force Base, in Tampa, Florida on Tuesday that,

“each of us has…the universal right to speak your minds and to protest against authority; to live in a society that’s open and free; that can criticize our president without retribution.”

Now for a lame duck president who made Jimmy Carter look like Superman to be throwing the next POTUS under the bus shows yet again the ultimate vanity of the man.

The military despises Obama. Not least for cutting spending but for turning the US forces into a laughing stock. For allowing them to be bullied by Putin in Syria in a way that would upset generals in Luxembourg. He allowed China to build man made military bases in hotly contested waters. Remember when Beijing snubbed Obama?  Arriving at Hangzhou Xiaoshan airport, the receiving China delegation made sure there was no staircase with red carpet for Obama to exit the plane and descend. No, the president of the world’s most powerful nation was forced to use an emergency exit of Air Force One for his final state visit. Obama was more interested in spending millions on changing military titles to non gender specific ones, lowering the fitness criteria to join the military and push the military to host LGBT pride days. All a military force should be is a well drilled gnarly toothed group of effective fighters that no one dare mess with. Well it was a rout but at least some were captured and we are working with our enemy to ensure their minority rights are protected inside the POW camp.

America has had its fair share of mutiny.

In 2013 as the Obama Administration continued to make its case for war in response to Bashar al-Assad’s use of chemical weapons, photos surfaced of American military personnel hiding their faces behind signs denouncing the proposed military action.

During the latter years of American involvement in Vietnam, opposition to the war within the armed forces had become a major problem for the Pentagon. Soldiers deserted in huge numbers and in some cases, sailors sabotaged their own vessels to prevent troop deployments.

During the Christmas bombings of North Vietnam in late 1972, B-52 crews flying from bases in Guam and Thailand refused to participate in further missions. While some pilots reportedly opposed taking part in the raids on moral grounds, more protested the appalling casualty rates being suffered by the American bomber crews. As many as 34 Stratofortresses were lost to enemy air defences during the 11-day campaign along with nearly 50 other aircraft. Eventually a dozen officers were disciplined for dissenting, however mission planners eventually suspended the campaign.

On New Years Day in 1781, much of Pennsylvania’s 2,400-man army stationed at Jockey Hollow, New Jersey staged a mass walk out after serving without pay in unbearable conditions for more than three years. Commanders tried to rein in the dissidents with threats of violence, but troops sent to suppress the mutiny joined it themselves. The disgruntled soldiers claimed that their enlistments, which stipulated only three years of service, had expired. Sensing an opportunity to split the rebels, the British general Sir Henry Clinton promised to compensate the Pennsylvanians for their back wages if they quit the rebellion and sat out the war at home. The soldiers refused the offer. They were eventually placated when general Anthony Wayne and George Washington’s aide de camp Joseph Reed granted all mutineers formal discharges with special cash bonuses if they’d re-enlist for the duration of the war.

I only pray Obama doesn’t become like Greenspan after leaving and pontificate about what the current person in charge should do. I’m afraid that Obama will comment ad nauseum to the mainstream media to undermine Trump at every possible opportunity.

President Trump wins the “Go to Hell” vote


Call it what you will but the underdog won. I always held Trump had closet voters uneasy about admitting it in public for fear of retribution. Never has someone in US politics had so much stacked against him -the mainstream media, Democrats, many Republican Party elites, Wall St and self-inflicted gaffes. Throughout the entire campaign most people wrote him off yet his biggest Trump card was “Make America Great Again” which resonated with those who had been suffering under the veil of ill guided economic policy and political correctness under Obama and to be fair previous administrations. Sure people screamed he awoke the racists and bigots but there aren’t c.60mn that voted for him. Hillary lost fair and square, her second loss.

Trump, as Michael Moore said, “was the Molotov cocktail”for disaffected voters. It is not only a massive shock to the Democrats but a true reflection of how hollow Obama’s achievements actually were viewed by voters today. Had his legacy been so untouchable  the people would show him love and Hillary Clinton could have sat in Obama’s golf cart instead of campaigning for 12 months. Yes he was left with a mess after Bush but his constant dodging of due process, using the DoJ to deliberately mislead multiple supreme courts forcing mandatory ethics training for its members. His liberal policies failed voters – that’s why his party was beaten in the popular vote and the electoral vote.

While some may rattle on about the glass ceiling and this being a sexist vote against Clinton, I say it wasn’t.  America voted a black man into the Oval Office twice. They’ve passed the diversity test. Clinton carried decades of scandal, baggage, Clinton Foundation pay for play, FBI investigations, an alleged rapist for a husband and potential health issues to weigh her cause down. I also thought Tim Kaine was awful (he was thumped by Pemce in the VP debate) and never forget his line that “I’ve never lost in 9 elections” Such ‘Titanic is unsinkable’ chatter was a confirmation for me that the Dems drowned in hubris.

Another problem was the media believing their own BS. They were so stuck in their own echo chamber which invited the disaffected to sign up to vote. I wrote a report on social media showing how much it was weighing in Trump’s favour. How many 10s of thousands saw after fed his rallies.

The Republican Party will also get a massive kick in the arse. Many repudiated Trump. They did in the hope he’d lose so they could retain their core and act as true Republicans. That will be their downfall.

As to what a Trump presidency holds it will be unpredictable. Although Pemce will be a steadying hand.

Of course the bleating begins. The elites will choke on their Michelin star filet mignon steaks at their 5-star hotels wondering what went wrong. I said that this election was about poverty. 8 years of Obama made it worse. Many Democrat supporters shoved economic record after record in my face and I disproved it saying the people experiencing hardship are going through it in real time while you live behind your gated compound. The left has often resorted to name calling the deplorables as idiots and unintelligent. One suggested was genocide or education required to turn them? I queried why do people who support a party like the Democrats have an issue with democracy? People tried to belittle people at Brexit comparing leavers to morons. To turn the argument on its head those criticizing them could be accused of blind ignorance.

So beyond that expect two things in the investment world – buy defense and fossil fuel stocks and sell renewable energy. Buy gold because the world economy is already at breaking point.

For Japan, the US won’t abandon them in defense. On the contrary. Under Obama defense spending has sunk to 3.7% of GDP and I’m guessing under Trump it will head back to 4.5%+ range. I think he’ll unite Russian interests with regards to Syria. His protectionist policies will have ramifications but as the worlds largest economy there is a prerogative to do it. TPP is dead

On balance I know many Democrats will be borderline suicidal but Trump will be nowhere near as bad as the group think media has made him. The economy is already on the ropes. Therefore hard choices will be easier to make. The American people have given him the keys to the Oval Office to make change and the best part of it will be “political correctness” will be buried deep into the White House garden.

The fat lady hasn’t sung yet. Trump leading early voting in Florida


Early voting results are in for the key state of FlorIda and Trump leads Clinton by 120,000 votes — the first Republican candidate to EVER lead in early voting in Florida. 43% plays 37% in the Trump vs Clinton battle on 2mn votes so far. Forget polls, which if anything have revealed media bias trying to pervert the course of outcomes.

I’ve repeated til blue in the face that this election will be a reflection of the growing state of poverty in America. The growing divide between the haves and the have nots. That decades of neglect followed by 8 years of failed progressive politics has left the gap at unprecedented levels. One thing that has continued to strike me is the turnouts to Trump rallies. 20-30,000 people at a time fed up with the corruption in the political system, last but not least exposed by the FBI’s intention to reopen the Hillary Clinton email server case.

Markets slumped on Friday post the revelation from the FBI. Perhaps more ironic was the release from Clinton’s campaign bigwig John Podesta demanding to know the contents of Weiner and Huma computer. I am almost humored to think that such a request is equivalent to a suspected murderer asking an attorney general to divulge all his evidence and questions to the defendant before the trial. Perhaps there is a downside to deleting emails afterall in that it goes to that saying – tell the truth as it’s far easier to remember.

What many Democrats fail to absorb is this. If Trump loses they can’t sit idly by thinking they’ve won. The disaffected hordes have grown. Many of the so called middle class have seen that status turn south. 4 more years of Obama would exacerbate that number of deplorables.

We can point fingers at the clear mainstream media bias but I’m guessing that those that have seen no change to their desperation over the last 8 years don’t need some flaky journalism to sugarcoat statistics to tell them that life is much better than it is. They’re living flat wages, rising healthcare, the lowest home ownership in 50 years and working more low paid jobs to survive. That isn’t the American dream. They know it so mainstream media bias is just infuriating. They’re not as stupid as oft made out.

Now we have a 3Q GDP print which looks good on the surface but belies inventory build of a scale that if the economy rolls from here corporate earnings will be thumped. This election is not even close to being over despite being less than two weeks out. I just have that feeling that the Republican can do this.



Apparently sales of Halloween masks depicting presidential candidates has proved auspiciously accurate in picking the winner since 1980. Trump mask sales are outselling Secretary Clinton by 30%. I guess one should put as much faith in that as the octopus picking winners in World Cup football.

Would you trust a Tsukiji fish trader or the government to forecast the tuna market?


Believe all the propaganda from governments and central banks you want. This letter from Perry Capital tells us all we need to know. The fish smells off. This fish trader has had enough. They’re essentially saying the amount of manipulation in markets is too high and they can’t conscionably manage people’s money within that environment. Essentially they’re not prepared to advertise fresh deep ocean tuna to clients when it’s fished from a farm located downstream from a sewage plant and an oil tanker spill. At the same time we see Deutsche Bank shares make new lows and more clients ask for their money back. The run has started.

Dear Investors

Over 28 years ago, Paul Leff and I started a money management firm. Our catalyst oriented value approach combined financial analysis and active engagement with management teams to create attractive opportunities with asymmetric risk/reward. During this time, we provided capital to many companies and countries facing stress and distress. Our style worked well for many years and we had the pleasure of hiring, training, and working alongside some of the best people in this business who have significantly contributed to the success of Perry Capital. Although I continue to believe very strongly in our investments, process and team, the industry and market headwinds against us have been strong, and the timing for success in our positions too unpredictable.

As a result, we have decided to wind down Perry Partners LP. We will manage the Fund’s wind down in the most effective way possible. We have been raising cash and plan to return a substantial amount of the fund’s capital in the beginning of October. The rest of the portfolio will be monetized in an orderly fashion and will be categorized by expected liquidation horizon: short term (2-3 months), medium term (6-12 months) and longer term (greater than I year).

We will prudently manage the remaining investments down over time. The short and medium term investments will be sold opportunistically but efficiently so as not to move markets or harm investment value. The longer term investments, for example the GSEs and some of the RMBS putback securities, will take time and energy to successfully realize an appropriate result. Our core team remains in place so that no effort or diligence will be compromised. We are committed to these investments and to you, our partners.

Going forward, we intend to return your capital quarterly. I am completely dedicated to making sure this process goes as smoothly as possible and have no other plans. Our interests are aligned — the Perry funds represent almost all of my liquid capital.

Over the next few weeks, I hope to speak with many of you. I want to personally tell you how much I have valued your support and trust. Thank you for your partnership over the years.

All my best,

Richard Perry

Frightened Children – clinging on to the Mother of Guidance

Guidance huggers

As the regulators in Europe look to clamp down on the division of payment between research and trading, it seems the sell side is becoming self regulating. Since the collapse of Lehman and the ensuing GFC, the aggregate forecasts for analysts across all rated stocks in Japan (compared to company guidance within a +/-5% range) is over 50% vs around 30% in 2008. For forecasts in a +/-10% range to company guidance that figure is around 70%. What this means is that for buy-side firms looking to pay sell-side analysts for leading edge value added research is diminishing because the majority believe that hugging the company is the most prudent action. So perhaps in the reverse therein lies the opportunity for the few brokers that do think outside the box to do deep dive analysis.

Perhaps there is a correlation to the hollowing out of experienced hands on the sell-side in a quest to cut expensive overhead. One firm has recently put on a  replacement strategist in his 20s which seems at odds with a firm seriously attempting to get to grips with uncharted territory. One would think that having a wealth of real time experience would carry significant advantages over someone who has read  Harvard MBA case studies

Finance sector analysts saw a surge to over 70% now vs around 25% at the time of Lehman’s collapse. Industrial and Materials sector analysts show a similar lack of willingness to move away from the safety of company guidance.

In any event the inputs from the sell-side seem highly consistent with revenue output. It should hardly surprise those in the industry however if the regulator truly understood the industry better we wouldn’t be in the mess we’re in.

I note that the analysts in Korea had 3 buys, 8 holds with the lone foreigner from HSBC the only sell recommendation on bankrupt Hanjin Shipping. While Korean analysts are notoriously bullish and a “hold” rating essentially a sell, they stuck together to protect the national interest.


Hedge fund closures accelerate


The easiest thing about understanding trends in markets is following the money. 291 hedge funds closed their doors in Q1 2016, up from 217 in Q1 2015.

As I’ve said repeatedly and in today’s report, the markets are heavily manipulated by authorities. Whether in Japan it is buting 58% of the ETF market or c. 100% of bond auctions, these distortions make it harder to make money. Not to mention hedge funds now are saddled with so much red tape that to run one requires so much legal & compliance without $1bn assets under management you wouldn’t cover costs. So these figures probably represent ‘too hard basket’ than just poor performance.

As an old industry hack, many acquaintances still in the industry know the writing is on the wall. They are drifting in their corporate driftwood waiting to be thrown a lifeboat package. That is a bigger signal. There is no real money left in a lot of financial services companies as we traditionally know it.

While many may cheer at the death of many banksters, note among the bad ones, we also lose a lot of creative, intelligent and smart people the world really could do with. We should be careful of what we wish for.