Recent Interview

January 23, 2017 8:54 PM

I was recently interviewed by Chris Lowe at Bonner & Partners about my views on the market. Please click here to read it.

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Believe In America (Part III) Avoid Lobbyist Stocks

January 13, 2017 1:31 PM


With the stock market continuing to make new highs, it feels almost irresponsible for me to talk about things to buy without at least waiting for a pullback. Therefore, I think it makes sense to talk about what to sell.

One of the defining characteristics of the Trump administration will be “draining the swamp.” That means a lot of things to a lot of people, but as it relates to stocks, it means that if a company relies on subsidies, rebates, regulations and government meddling in the free market in order to succeed, you need to think very clearly about how a more honest government would impact your company. We’ve already seen how companies that are doing business directly with the US government have been warned to cut costs. Air Force One shouldn’t cost $4 billion. That’s silly. Profit margins for all companies doing business with the US Government are bound to drop. Some of this is priced in—a lot of it isn’t yet. However, many of these situations are obvious to investors already. They know that change is under foot and are watching closely. I’d like to talk about what I call “Lobbyist Stocks” and how the changes coming aren’t as obvious to investors yet. These are the stocks that need lobbying in order to succeed—or at least to earn excess profits beyond what the free market would give them. Here are a few examples;

-All of us pay taxes. At a certain level, we realize that they’re the price of civilization. In return you get roads, bridges and hospitals. While I think the system is being abused, I am willing to accept that some limited wealth should get transferred to those less fortunate. However, why should $7,500 of tax credits be allocated to a rich guy buying a $100,000 Tesla (TSLA)? Does that make sense to anyone? How does that benefit America? How would an elimination of this subsidy impact Tesla?Tesla is my favorite short—if I shorted—for many reasons. The potential elimination of this tax credit is yet another reason to believe it’s a zero. Will this rebate exist after the swamp is drained?

-I love getting packages from Amazon (AMZN), but the only reason that Amazon is competitive with Walmart (WMT) is that Amazon gets a massive government subsidy. You see, the post office makes money on delivering envelopes and those stupid advertising inserts that clog up your mailbox, but the post office loses globs on delivering packages. If the USPS priced package delivery at a level that guaranteed a break-even result, it would cost Amazon about $5 billion more. If the post office actually tried to earn a profit at it, Amazon would truly bleed money. It’s not like Amazon can turn to someone else to deliver its packages in less densely populated areas—that’s the reason that the USPS is delivering them in the first place. Is it any wonder that Bezos bought the Washington Post to be his soapbox? Is it any wonder he cozied up to the Democrats as blatantly as he did during the election? Imagine if each delivery cost $10 more—would you still order from Amazon?

-Murphy USA (MUSA) operates gas stations. You’d think that the business involves selling gasoline, soda and potato chips, but that’s not all there is to the business. In 2015, 53% of EBIT came from RINs. What the hell are RINs? Renewable Identification Numbers are funny credits the government gives you for selling fuel that is mixed with biofuels. Gas stations get them, but refiners don’t—unless they own or are partnered with gas stations. This law favors integrated refiners and blenders while penalizing non-integrated refiners. Carl Icahn has been complaining about the stupidity of this law for years and he certainly has Trump’s ear. Will RINs exist in a year? Is a normalized EBIT without RINs priced yet into MUR's share price?

drain the swamp

I can go on and on. My smart friends have told me of dozens of examples like this. I don’t short, but I don’t blame them for shorting these stocks. I am not saying that these companies did anything wrong, they simply set out to maximize their profits within a rather corrupt government system. Some of them weren't even the ones paying for the lobbyists, they just took advantage of existing lobbying efforts. I anticipate that Trump will at least partly “drain the swamp” and some of these "lobbyist stocks" will be penalized. The question is--which ones? With the market making new highs each day, my advice is to go through what you own and figure out which ones need lobbying to survive—if it needs lobbying, be weary. Fortunately, new highs are a great time to sell companies that you might not want for the long-term.

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Indexers Are Running Amok...

December 24, 2016 11:57 AM

So, this should be pretty easy to sort out. Crawford & Co has two classes of stock, A and B. The A shares pay a dividend that is 2 cents a quarter higher than the B shares. There are differences in voting rights, but as there’s a control shareholder, those are irrelevant. Therefore, a simple analysis says that the A shares ought to trade at a moderate premium to the B shares to account for the nearly 1% higher annual dividend yield. NOPE!! The B shares are in the Russell 2000 index and the B shares now trade at roughly a 35% premium to the A shares.

Now, I’m not here to pass judgement on the investment merits of Crawford and the A or B shares. I have done no analysis on the company and have no opinion on if it is a good investment or not. However, I know that the A shares are better than the B shares as you get a higher dividend and there is no logical reason for the B shares to trade at a huge premium except that the Russell 2000 index has to keep buying them as more money is allocated to the index.

Two years ago, I noted how index funds and ETFs were warping asset valuations and creating opportunities for those who were willing to seek them out. This trend has only accelerated since then and has grown from something of a curiosity in certain asset classes into a true bubble that is doomed to eventually pop. There are now hordes of overvalued assets that have no justification for their overvaluation, except that index funds have to own them. Like all bubbles, this one too will burst.

In the interim, there will be huge opportunities created by how index funds misallocate capital. As I said earlier, I know nothing about Crawford, but if I wanted to own it, I sure as hell wouldn’t be buying the B shares when compared to the A shares. Additionally, I feel pretty confident in saying that at some point in my career, the A shares will trade at a premium to the B shares—as they deserve to. At the same time, I wouldn’t be betting that this spread collapses any time soon either. Shorting indexing has been a widow-maker for many in the hedge fund industry—it’s hard to fight against fund flows. In finance, when a trend gets in motion and the marketers start pushing it (indexing and ETFs today) you can expect it to go further than is logically possible, but the hangover will be pretty epic. Along the way, there will be a lot of money made by better understanding the flaws in these indexes and front running them—much as I front-ran the marketing department back in March.

As a final note, I’d like to share a chart with you from Passport Capital showing the median total returns of markets graduating to the MSCI EM since 1994. If you can’t beat the indexers, you might as well make money off of them by getting there first.


There will be more posts on this topic as it is a fertile place for opportunities.


Disclosure: No positions In CRD/A or CRD/B

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Believe In America (Part I)

November 17, 2016 12:16 AM

“The improbable is now possible!!!”

That is the last coherent sentence I remember a friend uttering on election night, as I finished off a flight of beers before switching to endless bottles of champagne. I then spent the better part of the next 36 hours roaming the streets of South Beach, yelling “FREEDOM!!” until my voice gave out and buying drinks for anyone who claimed to have voted for Trump. Over 2 nights and a day, I visited almost every watering hole on the beach, sprayed champagne on friends and celebrated America’s future.

I didn’t live through World War II, but I assume that victory celebration was equally epic. America has once again been saved by its citizens. Never before, or since, has something this serious been this close. We all dodged a meteorite with inches to spare. We now have a modernizer in office, controlling all three wings of the government, intent on fixing America. Only a few days ago, America’s future mostly resembled Venezuela’s. My outlook had been bleak and sour. Now we will once again be the America we have been missing out on for the past few decades (literally my entire life). The shackles will now come off and we will be allowed to flourish. Americans have become so numb to the idea that things can change for the better, that the coming prosperity will genuinely surprise people.

We’ve been mired in a no-growth economy for two decades—what happens when we hit 5% GDP growth?

We’ve been fighting “deflation”—what happens when demand comes back?

We’ve exported millions of jobs over the past two decades—what happens when there is genuine wage growth for all Americans?

Taxes have suppressed business. I cannot even fathom a 15% corporate tax rate here in America—what happens when it’s more efficient to run a business here, than offshore it?

Obamacare has destroyed jobs, strangled businesses and held America back—what happens when we’re freed of it?

Regulations have made small business too complicated to bother with—what happens when the American spirit is let loose to build?

I can go on and on. There is dramatic change coming. One of the ironies of the most recent election is that there was so little substance to the actual campaign. “She’s corrupt.” “He’s sexist.” The debates rarely got much further. What does Trump really stand for? No one is sure. I think this creates huge opportunity for those of us who can figure it out first. Sure; more infrastructure, less regulation, lower taxes, better relations with the international community, but I want companies that benefit—not bland pronouncements.


As I sobered up this weekend and chatted with my smartest friends, I have set about trying to discern what will happen. There are going to be huge winners and quite a few losers in Trump’s America. If you can figure it out before it happens, fortunes can be made. Over the next few pieces, I will tell you about some of those winners and losers. I promise—no more politics.

For starters, my whole outlook as an investor has changed dramatically for the better. Before the election, all asset classes moved in unison to Central Bank printing. Now policy changes will bring back prosperity—the Central Bankers will matter less. For most of the past 6 years, I’ve owned gold, sat in cash, ventured overseas and waited for an apocalypse in order to buy bargains. Now, I want to own small American companies that are about to prosper like never before. Gold? I’ve owned it for over a decade. I’m not selling, but certainly not buying more. It’s a hedge that has become rather unnecessary as economic growth takes off. Sure, there will be some inflation, but I want to own stuff with returns on capital. I want to own stuff that is about to grow rapidly. I’m excited; I get to be an investor again and I’m in a country that suddenly has a very bright future.

Despite not being a fan of Trump, the individual, I suspect that he ends up being the best president in almost a century. For 18 months, everyone has underestimated him. They’re still underestimating what he can accomplish. Big picture, he gets it. Sometimes, it takes a jerk to solve problems. Buckle up; the next 4 years are going to be YUUUUUGGGEEEE for investors who believe in America.


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Stand Up To Hillary!!

November 6, 2016 4:24 PM

Over the years, I’ve been involved with businesses all around the world, yet America remains special for its unique “system” where multiple interlocking and counterbalancing forces, guarantee that you will be treated fairly. It doesn’t have corrupt civil servants or police extorting you. Instead, if someone does something illegal, you march yourself up the chain of command until you find someone who takes your side—if only because of the embarrassment and career penalties caused by you complaining to the media and exposing their shared crimes. For that matter, the media keeps officials in line by ensuring transparency and exposing scandals—as scandals drive their readership, ratings and revenues. The judiciary is relatively impartial and there’s a well-functioning appeals process to ensure that bad decisions are overturned—when not decided by a jury of your peers. This, in turn is all kept honest by the fact that America has transparent and legitimate elections where we get to select the officials—or at least those who will choose them. In summary, America has a “system” and it works.

During more than two centuries of evolution, we’ve successfully incorporated women and all races into this “system”, making it increasingly fair to everyone. I don’t want to make it sound like this “system” is the most efficient possible—government by its nature is inefficient. There are certainly mistakes and oversights. Occasionally, there is outright corruption and fraud, but our “system” of interlocking checks and balances roots out problems, usually, for the better.

However, there is one powerful clique that seems to think that they can circumvent more than two centuries of progress and self-empowerment for the people of America. This cloistered group of elites shares the same goals and group-think. They differ in name and party affiliation, but their ties to wealthy donors and corporations unite them in a form of political collusion intended to keep outsiders away from their game. Every election cycle, their power and influence grows—allowing them to more brazenly flout the law. Subsequently, their ability to distribute favors attracts the worst sycophants of society to do their bidding—while squeezing out the virtuous. No one symbolizes the upper echelons of this cloistered clique better than the Clinton family. The way that the Clintons have repeatedly disregarded the best traditions of our American “system” should be anathema to all Americans—regardless of your political leanings.

One of the basic tenants of American politics is that the media will expose the candidates’ flaws and air all dirty laundry so that voters can make an educated decision before the election. Trump has been repeatedly depicted as sexist. I congratulate the mainstream media for finding various tapes that show him at his worst—this is what an election is about—knowing your candidate. However, where is the unbiased reporting on the Clinton Foundation’s illegal transactions with offshore despots, pay-for-play with US businessmen, felonious cover-ups of various email scandals, abuses of campaign finance laws and blatant disregard for multiple US and international corruption laws? Almost everyone in Hillary’s inner circle—including her—is under some form of criminal investigation. She’s one of the most crooked people to ever run for President of this country, but where’s the reporting on this? Instead, the mainstream media makes vague allegations that Trump’s divisiveness is turning the FBI against Hillary. Unfortunately, as WikiLeaks has shown, the Clinton apparatus has co-opted the mainstream media, colluded with them and whitewashed the obvious.

Julian Assange is now doing the job of an American reporter—exposing the facts and letting the public decide on their meaning and merit. We’ve all grown so numb to combative political journalism that we’ve forgotten that not too long ago, the newspapers reported the news in a non-biased, factual way, in order to inform readers. Then, sometime about a week before the election, the paper would publish an op-ed telling you how they wanted you to interpret the data they’ve been reporting. You could then accept the conclusion or disagree—the facts were there for you to make an educated decision. Journalism should be fact-based—not the highly biased propaganda we are bombarded with today. What’s real news or fake anymore? It’s become difficult to tell.

Given all the discord and innuendo, I decided to educate myself before voting. I’ve never been to a political rally, but decided to attend a Trump rally this Wednesday in Miami. Based on biased media reporting, I expected a discordant crowd of uneducated, white, males—the media’s current definition of society’s dregs. Instead it was a packed crowd of 5,000 with at least half female attendees. Was it a diverse crowd?? I was one of the few who didn’t speak Spanish—this genuinely surprised me. People were friendly and rather well-informed on the issues. However, you wouldn’t know this from reading local or international coverage of the event. As the mainstream media tells it; it was a mostly empty arena with some crazies milling about, harassing people trying to walk past the event. I didn’t comprehend biased reporting until I literally saw it in action. Then again, it’s no secret that the mainstream media is rapidly losing its consumers, as it’s no longer serving them with the information they want. When you lie to people, they figure it out quickly.

I remember going to Zimbabwe a few years ago. They had elections and lawyers. The judges even wore white wigs and robes. They essentially kept the British traditions alive, but everything was rotten to the core. It was described to me as “a house with all the plumbing intact, but only sewage could go in or out.” The lynchpin of the Zimbabwean system is its blatant election manipulation, designed to keep Mugabe in power. There is no freedom of the press. Opposition candidates are beaten or arrested and the voting itself is deliberately rigged. Given the contempt that the Clinton’s have shown for America’s “system,” should it be any surprise that she’s co-opted Black Lives Matter (BLM) from a grass-roots advocacy for changes in policing policies, into an army of Brown Shirts to attack her opponents. Do you see many Trump bumper stickers and banners in front of houses? Of course not. Trump supporters have been attacked at rallies by hooligans paid for by the Clinton campaign. Vehicles with bumper stickers have been destroyed. Houses with placards have been vandalized. A Trump campaign office was fire-bombed in North Carolina. Police are literally getting assassinated by Hillary’s BLM friends. Who wants to publicly acknowledge support for Trump and risk the consequences? This is institutionalized intimidation at its worst.

Nearly every day, there’s widespread reporting on election tampering with dead people voting and forged early voting ballots. For the first time in American history, surveys repeatedly show that the majority of voters believe that the actual vote counting will be rigged. With voting machine contracts given out to loyal Hillary contributors, why should anyone trust the process? What’s happened to our elections? This isn’t America. This isn’t our “system”—it is becoming Zimbabwe. The one thing that we always counted on in America was that the actual voting process was fair, honest and free from intimidation—now that certainty is under attack.

Fortunately, the American “system” still stumbles forward in its traditional form, despite the attacks upon it. Julian Assange has to hide in the Ecuadorian embassy for his own safety, but he can still publish the truth. Despite obvious obstruction from the DOJ, the FBI is now actively investigating Hillary’s crimes. Voting fraud is being exposed and people are becoming less scared to speak the truth about intimidation. As my friends speak amongst themselves about the election, they realize that they share a common goal and dream for America. It’s no longer awkward to support Trump, since we are no longer immediately branded as; racist, sexist, divisive, poor or uneducated—that straw man has finally been quashed by brave men like Peter Thiel who have faced down the accusers and declared the obvious. More and more are now joining from the shadows. Fortunately, there’s strength in numbers. It isn’t racist to want strong borders. It isn’t “deplorable” to oppose high taxes and crippling bureaucracy.

I am not a Republican or a Democrat—I have voted for candidates from each party, yet, I genuinely despise both parties. Trump clearly has rather numerous and serious character flaws. However, I fear that a Clinton victory could firmly tip America in a direction that will be impossible to reverse. No country has ever gotten wealthy by raising taxes, while allowing a chosen group of paid-up oligarchs to loot the middle class. We have more than two centuries of successful and evolving traditions. Americans do not put up with those who undermine the “system” for personal gain—we root them out as the “system” is more important than any individual. A subverted media along with election violence have no place in America—rigged elections are even worse. Repeated and blatant disregard for the law cannot be countenanced for a Presidential candidate. I truly fear for America’s “system,” as Hillary has flagrantly tried to discard it. Never before in my voting life has a choice been this obvious or serious.

As I learned Wednesday at the Trump rally, Americans of all ages, races, religions, genders and parties support Trump. They support America. They know that we must stand up to Hillary—or we will forever lose our country. This isn’t a Republican or Democrat thing. This is an American thing. I have never used this website for political purposes, but November 8th is simply too important to all of us. If America makes the wrong choice, we will not be able to take our freedom back. Join me in standing up to the corrupt class and the queen corruptor. Join me in standing up to Hillary!!


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