Buffett Slams Private Equity Over Inflated Returns, Debt

Include cash while tabulating fee amount but exclude cash when calculating returns? Yes, that is logically bad practice. But, it artificially bumps up perceived returns to make the fund manager look good. Buffett has called out private equity managers for following such practice.

When I report our Student Investment Fund at Sacramento State performance, I do not exclude cash (I.e., we remain Buffett compliant). In fact, the Bloomberg PORT tool gives a great view on how being over or underweight cash relative to the S&P 500 has helped or hurt returns (spoiler: we have perpetually held too much cash and this has detracted from returns during this long bull market).

To me, it makes no sense to exclude cash when calculating fund returns. If an investor provides cash to a fund manager to invest, the investor is not paying the manager to sit on cash. Thus, performance should be inclusive of every dollar provided by the investor.

Be mindful my friends…

-Dr. Moore

Buffett Slams Private Equity Over Inflated Returns, Debt
https://www.bloomberg.com/news/articles/2019-05-04/buffett-slams-private-equity-for-inflated-returns-debt-reliance

UPS’s $20 Billion Tech Bet Was Scorned by Wall Street. Now It’s Paying Off

Robots and stocks. That was the conclusion a local wealth manager and I had as we drove to San Francisco to listen to Ben Bernanke speak some years ago. Recently, as in a few weeks ago, my son spoke of applying to UPS and FedEx for work as a baggage handler. At that time I thought “I sure hope he does well in his computer science major because the baggage handler jobs he applied to will eventually be replaced by robots.” Will, it appears that pace is quickening.

Another person in town suggested that if my son applies to work at UPS and FedEx, he should apply to the driver position citing better benefits and union representation. Again I thought “I sure hope he does well in his computer science major because the driver job will eventually be replaced by robots.” Guess what? This morning I also read an article about Google gaining Federal Aviation Administration (FAA) clearance for drone deliveries: https://www.bloomberg.com/news/articles/2019-04-23/alphabet-s-drone-delivery-business-cleared-for-takeoff-by-faa
This is in addition to the prospect of driverless cars.

Robots and automation are coming. One might as well know how to design, use, and repair them as well as own stock in companies that do. But then again, one needs a job to earn enough money to purchase stock after paying for food, clothing, and shelter. Which job is the question – which job isn’t soon-to-be eliminated by robots? See this McKinsey article for some perspectives on that question: http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/where-machines-could-replace-humans-and-where-they-cant-yet

Hope you find these reads informative.

-Dr. Moore

UPS’s $20 Billion Tech Bet Was Scorned by Wall Street. Now It’s Paying Off
https://www.bloomberg.com/news/articles/2019-04-23/ups-sees-payoff-from-20-billion-tech-bet-scorned-by-wall-street

Guggenheim Says Chance of Recession in 24 Months Has Doubled

A question came up during the Student Investment Fund meeting this week: are we going to take some defensive position given the upcoming recession? At the meeting I showed how we are in a little better shape relative to our benchmark, the S&P 500, in terms of PE ratio, dividend yield, debt ratios, etc. However, the recession warning signs are increasing in number and magnitude. Perhaps we need to take other action such as protective puts. Another idea would be to “stay the course” but perhaps focus even more on value firms with a history of growing dividends. Or purchase high quality bonds in lieu of stocks this semester.

Hopefully the market holds up while we contemplate our strategy -or- our past picks prove resilient.

-Dr. Moore

Guggenheim Says Chance of Recession in 24 Months Has Doubled
https://www.bloomberg.com/news/articles/2019-04-09/guggenheim-says-chance-of-recession-in-24-months-has-doubled

Nope. There’s Still No Nominee for Secretary of Defense.

A multi-decade, multi-trillion dollar deficit-laden government budget proposal with increased defense spending in the absence of even a nominee for Secretary of Defense for over two months? Apologies for the run-on sentence. But, the number and combination of absurd factors is astonishing.

SMH

Nevertheless, I wonder if now is the time to overweight defense stocks or setup a bet on defense stock volatility?

-Dr. Moore

Nope. There’s Still No Nominee for Secretary of Defense.
https://www.bloomberg.com/view/articles/2019-03-12/trump-still-hasn-t-picked-a-mattis-successor-at-defense

The Gazillion-Dollar Standoff Over Two High-Frequency Trading Towers

I am not sure if “Gazillion” is a word, but this antenna war article is quite interesting. Read it if you care to gain perspective on how important locating a few hundred feet closer to an exchange is to increasing trading profits.

-Dr. Moore

The Gazillion-Dollar Standoff Over Two High-Frequency Trading Towers
https://www.bloomberg.com/news/features/2019-03-08/the-gazillion-dollar-standoff-over-two-high-frequency-trading-towers

Paul McCulley Sees Value in MMT; Larry Fink Calls It ‘Garbage’

“Results are mixed.” A refrain often heard in academia regarding widely debated theories. Is the stock market efficient, is the capital asset pricing model accurate, and what are the leading economic indicators? The answers to all these, perhaps with the exception of the CAPM, is “results are mixed.”

Now we can add the question, “is modern monetary theory correct?”, to the list of mixed result theories.

Perhaps MMT is another opportunity to apply dialectical reasoning:

Thesis: Modern monetary theory is correct.

Anti-thesis: Modern monetary theory is not correct.

Synthesis: modern monetary theory is not perfect but some aspects can be useful in guiding decisions for policymakers and investors.

The idea that deficit spending can continue unhindered without causing problems doesn’t sit well with me. In fact there is a book titled “This time is different eight centuries of financial folly ” that states every financial crisis was preceded by excessive levels of debt. The excessive debt, as referenced in that book with historical evidence, can be (has been) government debt corporate debt, and consumer debt.

So here we are today, in the United States cutting taxes but not necessarily cutting services to the same degree (which may be a good thing because the services may be needed), widening budget deficits, and increasing debt. Now, are we at the point of “excessive debt“? I don’t know but I hope that policy makers, corporations, and consumers proceed with caution.

-Dr. Moore

Paul McCulley Sees Value in MMT; Larry Fink Calls It ‘Garbage’
https://www.bloomberg.com/news/articles/2019-03-07/mmt-moment-pimco-veteran-mcculley-says-it-deserves-a-hearing

Bill Gross Is Right That It’s Tougher to Outperform

Making money (alpha), like other things, ain’t easy. This is yet another article that cites performance numbers of passive vs. active management in favor of passive management.

Perhaps it is the chase (for market-beating returns) and not the kill that excites active managers. This would be consistent with evolutionary psychology studies on dopamine levels in the brain before and after receiving a stimulus such as fruit juice.

On that note, may your stock picks “juice” your returns.

-Dr. Moore

Bill Gross Is Right That It’s Tougher to Outperform
https://www.bloomberg.com/view/articles/2019-03-04/bill-gross-is-right-about-alpha-getting-harder