Some Summaries from week of 4/19/15 – $TSLA, $MSFT, $AMZN, $QCOM

Tesla Price Targets Pull Away From Profits: a classic example that momentum stocks really trade on fictional earnings reports. They’re irrelevant, til they’re not.  $TSLA (218)

Wall Street Journal graph of TSLA earnings projections


Amazon Reveals Just How Profitable the Cloud Can Be: by Tiernan Ray.  Ultimate conclusion is that Microsoft’s Azure is doing well too.  Which would you rather invest in, $MSFT (47) or $AMZN (445) a cloud provider in a hugely profitable if diminishing cash cow or one “trapped in a retailer.”  Unresolved: is Azure a function of that dying business of companies running on Windows?  Microsoft got other loving mentions in Barron’s as well from the usual spreadsheet watching crowd.

A Recharge for Qualcomm.  Can Jana partners get $QCOM (68) to split off the licensing from the chip business?  This is an article very related to the above MSFT & AMZN discussion so far as shareholders are concerned.

Let’s Take a Short Ride, a Heard on the Street Column from April 18-19 suggested the desirability of a strategy as follows:

bet against the 10% of stocks with the highest days-to-cover ratios, and bought the 10% with the lowest…it would have fared from the start of 1988 to the end of 2012.  The results: a return of 2,917%–almost double the total return of the [DJIA].


Shorting high-day-to-cover ratio WSJ chart


Notes on Ray Dalio on Global Financial Situation

Ray Dalio addressing the Council on Foreign Relations, interviewed by Maria Bartiromo:

History repeats itself in the cause-effect relationship machine of history, how do deleveragings work?  Thinks of 80-82/Latin American debt crisis when he sees the market today.  Credit cycle described: three positive effects of lower interest rates — lowering debt service costs, items cheaper to buy on credit and increasing net present value of cash flowing assets (which produces wealth which allows more borrowing.)  But debt can’t rise faster than income forever; then de-leveraging happens which is painful.  Depression is the phase of de-leveraging when austerity and debt restructuring happens.   Austerity, write downs, printing of money: two deflationary one inflationary — a balance between them is a beautiful de-leveraging.

Problems with VAR: borrow short lend long fine until volatility changes.

How he sees Europe: different countries so different dynamics between central banks and different fiscal policies.  Facing $2 trillion losses he estimates on the debt that exists (ECB debt?)  Solve this from either Germans & other northern europeans but that will fall short.   Could try austerity and debt write downs, but that’s a depression: a la 1933 Roosevelt.   Or print money.  Does the Euro look different in a year?  50-50 Greece leaves the Euro  in a year.  Classic lost decade similar to Latin America’s.  Big de-leveragings is a test of the character of the people (but social questions are emerging.)  Right now, Japan has total debt to GDP of 500%, Government debt of 275%.

Should we be worried about the debt here then knowing that the buyer (China) could have alternatives?  Dalio hedged this answer.  Can’t have a bad downturn due to social consequences; can’t have another 2008.

Stock market up 4% and major bull market after Nixon took dollar off gold (Dalio was on NYSE Floor in 1971.)  Mexico default 1982 (Dow 777) was the low of the market; market printing 1933 — all bottoms of the stock market.  China accounts for 1/3rd of growth globally since 2008.  More deflation than inflation risk short term, reverse longer term (five years+)

Is Gold a constraint on Fed printing?  Gold is a currency, but not effective for large scale funds.  But he owns gold (got audience laughter.)  Maria asks “how much exposure then as an asset class?”  Ray says you need a strategic asset allocation mix overall…Most people shouldn’t do this.  Cited website (presumably this?  Registration requires) for how to balance risk.  Slow absolute reduction in debt to GDP ratio in the US with positive growth right now and that’s good.  Not worried about imminent explosion in US — look at Japan.

No answer on risks in shooting war in Iran; would not buy oil right now.  “so many positions in so many markets” but no view on oil.  Movement towards reform coming in China but as always there will be tensions.  Will contribute to volatility.   Biggest worry is lack of broad expertise in monetary policy which could make us hit an air pocket.

Notes from Hank Greenberg’s Guest Lecture at Yale in 2010

Notes and quotes from Robert Shiller’s Econ 252: Financial Markets, guest lectured by Hank Greenberg

Corporate Culture:

“You have to surround yourself with people, who share the same values, the same aspirations that you do. You have to have a team that works hand in glove, and we did. The senior management of AIG was like a band of brothers. We saw things alike. We work well together. I mean, there wasn’t ever a palace revolution, anything like that. It was a great organization.”

“But we also had some basic principles. We would never, never be involved in a bribe. Anybody in our company that got involved in anything like that would be fired instantly. We understood what the Foreign Corrupt Practices Act meant, before they even had such a Corrupt Foreign Practices Act.”

“Our overseas people, we had what we called an MOP, Mobile Overseas Personnel. It was like our own state department. You can be working in Nigeria today as a manager, and then six months later you might be in Singapore, or some other country. And so, you have to be mobile, and you have to be prepared to move, and not be reluctant because of one thing or another. And becoming an MOP was a very high honor. Everybody couldn’t get that designation. You had to earn it. And it was a great group of people.”

“Nobody could earn more than $1 million in salary. I put that rule in. Two, nobody would have a contract. You stayed in AIG because you loved it, and you didn’t have to have a contract. And I refused a contract any number of times. But you got bonuses based on performance, and performance was fairly rigid. We tried to grow our business close to 15% a year, and for many, many years we achieved that growth.”

“At the end of every two years, if we hit the goals that we had established, they’d have a certain number of AIG shares [I think he means CV Starr shares here] set aside for them that they would get at retirement. So, it was golden handcuffs. If you left the company, you left behind the shares that were set-aside for you. And these were worth an awful lot of money. Very few people left the company. I can assure you that it was a great incentive to stay. The people we wanted to stay are the ones that got allocated shares obviously. It cost AIG nothing. The public shareholders of AIG had no cost allocated to that, so the shareholders of AIG benefited from that, and, obviously, the company overall benefited because they did so well. So, it was a great organization.”

Getting AIG into China:

“China, it took me from 1975, the first time I visited China, to 1992, to get the first life insurance license ever granted to a foreign company. Moreover, while other foreign companies afterwards could only get a license where they could only own 49%, we owned 100%. And to date, still, it’s the only foreign company in China, a life insurance company,that owns 100% of the company. It wasn’t easy. As I say, it took from ’75 to ’92. And I visited China every year, a couple of times a year, to make that happen. But we did a lot of things for China. At the same time, we helped China. I lobbied very hard for China’s entry into WTO, which was very important for our country and for China, and really for the world.”

Reasons for the Bubble:

Clinton admin pushing home ownership via Fannie/Freddie, “whether you could afford it or not”, increasing leverage to 40x from normal 5, and creation of products [abstracted from reality.]

Also criticized Robert Rubin as Treasury Secretary: “That was, strangely enough, during the Clinton administration, the Treasury Department, then run by Bob Rubin, turned down the question of having an exchange and regulating credit default swaps.”

Spitzer & the AIG board

“…On the other hand, when Spitzer threatened the company, many of them just folded. Not Carla Hills and not Bill Cohen, but many others.”  I remember Ken Langone coming to AIG’s defense and John Whitehead (in two editorials, April 22, 2005 and December 22, 2005) but the mention of these two board members is intriguing.

On Goldman and others v. AIG in the crisis Greenberg gives a nudge to the vampire squid theory of history:

[In addition, consider that Rubin was also ex-Goldman] “Goldman Sachs and Morgan Stanley, both of which were going to have a problem, were given a bank holding company license. That gave them access to the Fed window, and they could borrow money at virtually no costs at all, practically. The Hartford Insurance Company, here in Hartford, a medium-sized company, was also given a bank holding company license. And AIG was denied one. So, AIG was left to really find a solution. So, they went to the Fed, the New York Fed, which I had chaired, incidentally, for about seven years before. So, I knew the people in the Fed quite well.

They borrowed $85 billion from the New York Fed at 14.5% interest. And the Fed took 79.9% of the equity of the company. So, they essentially nationalized the company. Now, the money that AIG got, the $85 billion, at these terms, which is outrageous, they then had to pay the CDOs that you couldn’t tell what the real price was, because there was no price discovery. You could have negotiated the value of those at about 40 to 60 cents on the dollar, but the Fed made them pay 100 cents on the dollar.

So, AIG borrowed the money, paid Goldman Sachs and others 100 cents on the dollar, and had to pay that money back to the Fed. So, things began to unravel very quickly after that.

…The real story of what happened has not been printed yet. After all, it’s very common knowledge that Paulson, who was then Treasury Secretary, was surrounded by Goldman Sachs people. I’m not making that up. That happens to be a fact. And so, how objective were they in what they were deciding to do and not to?”

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