Britannia Radio

The Daily Reckoning U.S. Edition

Home . Archives . Unsubscribe

The Daily Reckoning | Monday, August 15, 2011 Obama’s rating sinks to new low as markets wipe out $6.8 trillion, The original “hedged fund” strategy at work during times of crisis, Plus, Bill Bonner on the day when the world’s money system headed to Hell... ------------------------------------------------------- Breaking News: New Gallup Poll Says Obama job rating sinks below 40% for first time The President’s Burning Shame Revealed Here... This is the unspoken, burning shame that could kill Obama’s presidency... It could spell the end of his short political career... It’s all revealed in this extremely urgent and controversial documentary report. The Fine Line Between Geniuses and Morons Finding the Best Buying Opportunities in Volatile Markets Eric Fry Reporting from Laguna Beach, California... Mr. Market spoke last week.... Unfortunately, no one could understand a word he was saying. Like a back-alley drunk, Mr. Market was mumbling about so much of everything that he wasn’t saying anything at all. Since July 26, Mr. Market has obliterated $6.8 trillion of global market capitalization. That’s fairly decisive. But last week, he seemed to be having second thoughts...and third thoughts. “The swings in US equities [last] week were unprecedented in the history of the American stock market,” Bloomberg News reported. “The S&P plunged 6.7 percent on August 8, its biggest slump since December 2008, in the first trading session after the US was stripped of its AAA credit rating by S&P. The index rebounded 4.7 percent the next day as the Federal Reserve said it would leave its benchmark interest rate at a record low through at least through the middle of 2013. The gauge then fell 4.4 percent on August 10 and rebounded 4.6 percent on [August 11]. Never before has the index reversed moves that large each day over four sessions, [according to Birinyi Associates].” For the moment, investors who snapped up stocks on the lows of last Tuesday or Wednesday are feeling like geniuses...and maybe they are. But tomorrow they may feel like morons. Last week’s buying opportunity may not be as compelling as next week’s buying opportunity. In fact, we’d be surprised if US stocks did not make lower lows during the next few weeks. Big problems remain...and big solutions remain MIA. The leaders of the European Union have next-to-no idea how to solve their enormous fiscal crisis. Likewise, the leaders of the US have next-to-no idea how to solve America’s life-threatening fiscal crisis. Pathetic is the word that comes to mind. Not surprisingly, consumer sentiment is plummeting. The University of Michigan’s consumer sentiment index tumbled from 63.7 in July to 54.9 this month. In the midst of the doom and gloom, however, opportunities emerge. Last week’s selloff certainly punished some stocks that did not deserve punishment. The selloff, in other words, created a buying opportunity for certain stocks. Volatile markets tend to throw the babies out with the bathwater. In the column below, Chris Mayer, editor of Capital & Crisis, identifies a baby that he thinks is worth rescuing. Chris Mayer’s Capital & Crisis Presents: The Biggest Retirement Scam In American History! Mad men drunk on power and driven by greed are robbing YOUR retirement! Most sickening of all, Washington fully endorses this bold-faced assault on your wealth. But Chris Mayer is exposing this scam in his brand new video presentation. PLUS, he’ll show you how you could protect and even grow your wealth in spite of this scam, virtually spitting in the face of these elitist thieves. Don’t be a helpless victim... Click here to act right now. The Daily Reckoning Presents Heirs to A.W. Jones Chris Mayer Last week, in The Daily Reckoning column entitled, Hedge Yourself!, I shared a few highlights from the investment philosophy of Alfred Winslow Jones, the “father of hedged funds.” Today, I’ll share some insights about some very smart guys who manage money in the style of A.W. Jones. In 1994, Daniel Och and the Ziff brothers started Och-Ziff Capital Management (NYSE:OZM). They wanted to earn consistent returns with low risk. In a sense, they were heirs to the ideas and techniques of A.W. Jones. And they have done him proud. The success of the OZ Master Fund, the main fund of the company, is one of the best in the business. Since inception in ’94, the OZ Master Fund returned 14.2%, versus 8.4% for the S&P 500. That’s huge outperformance. Even more impressive is how it did so with a lot less risk. This is the idea of being “hedged.” You can see it in the performance of the fund during down months. In all but four of the years, the OZ Master Fund actually made money during down months! And even when the fund fell, it fell far less than the market. With performance like that, it is no wonder Och- Ziff today manages $30 billion in assets, mostly institutional money such as endowments, pension funds and the like. In the world of money, Och-Ziff is known as an alternative asset manager, an option becoming increasingly popular post-crisis. Based on various surveys, institutions are likely to boost their allocations to alternative managers more than threefold from 2009. This is a good tail wind for Och-Ziff. So one catalyst for the stock is growing that $30 billion number. But what I really like about Och-Ziff is the people and the structure of the company. Successful money manager Martin Sosnoff was once asked how he invested in management teams. What did he look for? He answered: “I am always looking to buy owner-managers who want their stock to go up for solid reasons.” Och-Ziff has exactly that. Dan Och is CEO and head of the investment committee. Och and his partners own nearly an 80% economic interest in the same assets at OZM shareholders. The firm went public in 2007, and these insiders have a five-year lockup. That means they can’t sell until late 2012. I would expect the partners to cash out some of their stake at that time. They have every incentive to the get the stock price up before then. Moreover, they eat their own cooking. Of the $30 billion in assets under management, about 9% is money the partners and employees invested themselves. They have every incentive to do well in their funds because a good chunk of it is their own money. Plus, the partners take no salary or bonus. They get paid the way shareholders get paid – through distributions. Those distributions are fat. Och-Ziff pays out 80-90% of its earnings. In the past three years, distributions per share were $1.42, $0.19 and $0.88. The distributions reflect the performance of the year prior. They took a hit in the financial crisis in 2008, as you can see with the low distribution in 2009. But they have since recovered. For the last 12 months – which includes the first quarter of 2011 – the stock’s paid $1.01 per share, for a near-10% yield! In 2011, Och-Ziff should earn around $1.50 per share. Take 85% of that and you get $1.28. On $11.25 per share, that’s an 11.3% yield this year. The big dividend is always the last dividend, declared at the end of the year and paid in February. In 2012, the stock could earn $1.80, which would pencil out to yield of 13.6%, based on the current share price. Key risks? There are always at least a few. One is there is some discussion of raising taxes on publicly traded partnerships. If subject to full corporate taxes, Och-Ziff would suffer a 20-25% drop in net profits. However, this has been bandied about for a while, has gotten lots of press and is at least partially discounted already. Plus, such a rule would likely be phased in over a number of years, softening the blow. The other key risk is what we called “key man” risk in my banking days. If Dan Och got hit by a bus, that would have a big impact on the firm that bears his name. Let’s see if Och-Ziff meets my CODE criteria: Cheap? The stock market is a market of secondhand goods and it can help to think about why the shares are for sale at all. The insiders sold a piece of the business to the public at over $30 per share in an IPO in late 2007 (and invested 100% of the proceeds in Och-Ziff funds). Today, OZM is half that. Asset managers typically get valuations of 19 times management fees and 9 times incentive fees. The former fees are valued highly because they are very stable, and the latter less so because they are more volatile. Using the blended 14 times for Och-Ziff gives us a value of about $21 per share on $1.50 in earnings, which seems fair, if conservative. When you consider Och-Ziff has grown assets under management at a 19% clip since 2001, it looks cheaper still. Looked at another way, the stock trades for about 10 times 2011 earnings. A growth stock, yet you are not paying for growth. The high yield offered also protects the downside here. Owners? Och-Ziff aces this test, which forms a key part of our thesis, as I discuss above. Disclosures? One of the most transparent companies in the business. It’s also a simple business. Gather assets, get paid. Invest well, get paid. There is little mystery here. Excellent financial condition? Och-Ziff has few assets of its own, mainly cash, tax assets and some investments. What it has is $30 billion under management, a great brand name in the business and a team of talented and vested insiders. There is little debt, especially compared to its huge cash flows. Och-Ziff is in excellent financial condition. Asset management is one of the best businesses in the world. It generates a lot of cash and has little need to reinvest that cash in the business. (Hence those fat distributions.) I like Och-Ziff. Regards, Chris Mayer, for The Daily Reckoning America 2012...Wall Street in Ashes...Main Street in Ruins... Here’s SIX ways to protect yourself and profit from the biggest lies DC, Wall Street, the Fed and your banker are telling today... Click Here To Find Out How. Bill Bonner La Fete de l’Assomption and the Beginning of Faith-Based Money Bill Bonner Reckoning from Poitou, France... Today commemorates the day when the Virgin rose to Heaven. It is also marks the day when the world’s money system headed to Hell. As to the first, Dear Readers need no reminder or instruction. Everyone knows about the Assomption of the Virgin, though no one we know seems to know how it happened, exactly, or what is the significance of it. Looking it up in our Petit Larousse, we find that it is a miracle of recent vintage, only established in 1950. And now that we think of it, it seems unnecessary. Was there ever any doubt that the Virgin would go to Heaven? Why celebrate a victory that was in the bag from the get-go? So, let us turn our attention to the second great thing that happened on this date...precisely 40 years ago. Here is a story with a cast of thousands – protagonists, antagonists, nihilists and monetarists! With dramatic tension up the wazoo. And who knows how it might turn out? Detlev Schlicter, writing in The Wall Street Journal: Forty years ago today, US President Richard Nixon closed the gold window and ushered in, for the first time in human history, a global system of unconstrained paper money under full control of the state. Of course, we know exactly where we were and exactly what we were doing on that fateful day. We were watching television... Richard Nixon, President of All the Americans, had something terribly important to say to his people. But he was worried. He summoned his advisors together and posed the key question to them: “Should we interrupt Bonanza?” Bonanza was a very popular TV show, featuring a prosperous rancher, his three sons, and their Chinese cook. Since Bonanza was much more popular than Richard Nixon, the president hesitated to interrupt it...even though he was going to change the entire world’s monetary system...and, in fact, institute a bold new system of purely-paper money. In trials, run over the preceding two thousand years or so, this new system had always failed. But Richard Nixon seemed unaware. In fact, he seemed unaware that he was changing anything important at all...and didn’t even mention it to TV viewers that night. Instead, he directed his attentions to another experiment in central economic planning – another one that also failed every previous test – wage and price controls. Taking a page out of Emperor Diocletian’s book on “How to Screw Up an Economy,” Nixon announced that henceforth the authorities in Washington would decide how much a man should pay for a loaf of bread or how much his employer should pay him for his labors. Naturally, this effort was a failure too...and was quickly forgotten. But Nixon’s other initiative stuck. The world has suffered from it ever since. We are 4 decades into this latest experiment with paper money – the most successful effort so far; no doubt about it. People still use dollars with few complaints. Butchers take them in exchange for meat. Prostitutes take them in exchange for services rendered. Politicians take them in exchange for votes. As far as we know, nobody doesn’t want them. As far as we know nobody will not want them tomorrow either. But wait, while dollars are universally accepted as a medium of exchange, as a store of value – money’s other purpose – green paper has been a flop. It began losing value immediately after the Federal Reserve was set up to protect it. And then, when President Nixon cut the dollar’s last connection to gold, it lost value even faster. Today, a dollar will buy only about a penny or two as much as a dollar from 1913. And people are beginning to wonder. What’s wrong with the world’s financial system? How come so many economies – the US in particular – are in such a funk? And what or who is to blame? Could Richard Nixon’s new ‘funny money’ have something to do with it? That answer, as long-time Daily Reckoning sufferers know, is ‘yes.’ And more thoughts... What a week! Last week ended in a state of calm. After heavy shelling and a murderous cross-fire all week, the Dow rose 125 points on Friday. The 10-year T-note yielded 2.25%. And gold fell $8...after hitting a record of $1,800 earlier in the week. Whew! At a party last night, we were asked what we did for a living. Not having a simple explanation we resorted to a simple lie. “I’m an economist and a writer.” Well, it was only half a lie. The economist part. It turned out, we were sitting next to a woman with a Ph.D. in economics...and a man who taught economics at a university in Belgium. Unfortunately, it was a loud room, with about 50 different conversations going on at once, and the professor from Belgium had an accent with which we were unfamiliar, so we didn’t understand him as clearly as we would have liked. Still...a lively conversation ensued... “Well, you must be happy. You have so much to write about!” “Yes...” “But what can you say? The system is a mess. But how often can you say that?” “Every day.” “Oh...don’t your readers get tired of hearing the same thing?” “Yes.” “Oh my...perhaps you should become a juggler or an astronaut, or something.” “Yes...” “But seriously...this is a big problem. What can you do? The banks are insolvent because they lent to developers, who are insolvent...and governments are going broke because they are trying to keep the banks from going broke. “And that is in Europe...in America it is worse, because households are broke too...just as they are in Ireland... “The whole system is a terrible mess. But I see three different approaches evolving. The developing countries are booming...and they’re going to continue. They need to catch up. Sure, they will experience their own busts and blow ups...but they are basically societies where there are a lot of people working hard to increase their standards of living. They are young. They are dynamic. They want more wealth. “Europe is different. People don’t really care much about increasing their standards of living. They want to live better. That’s why they are so obsessed by the environment, for example. And their sausages. And their vacations. They want more free time. They want better views and better food. “They don’t really care about being richer...not in a traditional sense. “And Americans? They are the hardest to figure out. They are too busy. They worry me. They work hard but don’t get anywhere. And they don’t really have time to think about it. So, they end up doing silly things... You could look at US foreign policy that way. Trillions of dollars spent, for what? They never took the time to really think about it... “Anyway, I think that is the way most Europeans see it. The Americans are so busy...and so naïve. They don’t have time for much reflection. They are people of action. Not people of thoughtfulness or reflection. So they tend to act without really considering what they are doing or why they are doing it. “Don’t get me wrong... I know you’re an American...and I love America too... My husband and I spent several years in New York. We loved it. And we traveled all over the country. They were the happiest years of our lives, in many ways. “But I do notice a dark trend in America... People are too busy. They are barely keeping up with their bills. They seem to be more and more desperate...looking for a simple solution. But there’s no simple, painless solution. That’s the problem of debt. There’s no painless way out. “We all seem to be following in Japan’s footsteps in that regard. At least in the developed world. Here in Europe, people don’t seem to mind. In America, I don’t think it will go over so well.” Regards, Bill Bonner, for The Daily Reckoning