It’s early May, meaning that it’s time for those of us with allergies to stock up on Kleenex and for most of us to make sure we’re prepared for Mother’s Day. Oh, and for the investors in our midst, it’s time to dial in to the annual Ira Sohn conference in Manhattan, a one-stop shop for hedge fund managers to trumpet their “Big Ideas” – or at least, to get the rest of us to help inflate their egos still further by following their lead.
Need evidence? Shares of Seagate Technology (NYSE: STX) were doing very nicely for most of the day Wednesday, trading in a narrow range until it was Jim Chanos’s turn to take the podium at the one-day conference. The veteran short seller and hedge fund manager, best known for identifying problems at Enron long before they were disclosed, used his 15 minutes to voice anxiety about the outlook for the disk drive company and its peers, and to point out that Seagate insiders have been selling some of their holdings. Result? Seagate’s shares tumbled nearly 5 percent on Thursday.
In the very short term, the market tends to punish those stocks the hedge fund managers identify as short-sale candidates and bid up the prices of the ones that they favor. That’s only logical behavior: The market is expecting that some of the general public and even some slow-moving institutions will read about these picks online or in the newspapers and decide to follow Chanos, David Einhorn or Stanley Druckenmiller; the traders are trying to position themselves ahead of that buying or selling, and profit by taking the opposite side of any further trades that materialize.
About the only thing you can be sure of is that being named as a buy or sell candidate by someone at the Sohn Investment Conference is a recipe for this kind of short-term volatility (especially in less liquid stocks) rather than lasting investment returns. Firstly, these gurus aren’t going to be tipping the world as a whole off to their very best, newest ideas. That would be irrational. They want to build up their own positions, and only then do they want to share the news of their discovery. It’s called “talking your book”: by bringing enough other investors around to their point of view, whether bullish or bearish, it’s possible to make money in the short term as well as (potentially, if the long-term scenario pans out) over the longer haul.
Sadly, not all hedge fund managers are really gurus, nor do they have infallible crystal balls hidden in wall safes behind that Richard Prince painting picked up for a song at Sotheby’s last auction. True, David Einhorn of Greenlight Capital did identify the factors that led to the demise of Lehman Brothers at an Ira Sohn conference. But one of Einhorn’s favored stocks last year was Apple (enough said), while Martin Marietta Minerals (NYSE: MLM) – a recommended short candidate – has jumped 36.4 percent over the last 12 months. John Paulson last year urged investors to snap up a gold mining company, only to be blind-sided by the slump in the price of bullion that has left virtual all mining companies struggling to produce at a profit.
The moral of this column is not to follow the recommendations of these speakers blindly. Nonetheless, some of the suggestions they made are worth pondering as you shape your own investment strategy in the coming weeks and months.
Watch out for commodity-dependent economies: This theme surfaced a few times. Commodities, broadly speaking, have been in the doldrums for a while now, with gold leading the way lower and base metals not far behind. (Oil has been more volatile, and agricultural products may fare better if only because of crop failures last year.) But Stanley Druckenmiller, former manager of George Soros’s funds, has called an end to the commodities supercycle, and he just may be right. If so, that will have implications for countries whose economies depend significantly on commodity exports, such as Australia, Brazil and Canada. Druckenmiller suggests avoiding resource-producing companies, logically enough, but also advises selling short the Australian and Canadian dollars and the Brazilian real. If you’re not into short selling, well, just avoid assets denominated in those currencies.
Steve Eisman of Emrys Partners takes this a step further by warning against Canadian banks, which he argues are over-leveraged and vulnerable to any downturn in spending power on the part of the country’s citizens. Eisman’s concerns focus squarely on Canada’s real estate market, which he says may feel the pain of any commodity-linked economic downturn.
New ways to play the homebuilding story: Companies like Lennar (NYSE: LEN) and PulteGroup (NYSE: PHM) are familiar names for investors who have been trying to profit from the rebound in the housing industry. Eisman tossed out a few more companies to ponder. Forestar Group (NYSE: FOR) owns a wacky array of real estate-related assets: 136,000 acres of land, lots of water rights and timberland, and even some oil and gas properties. The stock trades at a discount to its net asset value, Eisman pointed out. He argues the stock is worth about $30; surely it’s not a coincidence that after Eisman spoke, the company’s share price soared nearly 6 percent. Colony Financial (NYSE: CLNY), a REIT, has potential, Eisman argues, as does Ocwen Financial (NYSE: OCN), a mortgage servicing company that he referred to as “perhaps the most powerful yet most counterintuitive play on housing” around. Wow.
Opportunities are all around you, including the obvious places: If only, Procter & Gamble (NYSE: PG) could get its act together, Bill Ackman sighed, it could be a behemoth. Right now, it’s a laggard, and Ackman wasn't so much pounding the table about the stock as he was critiquing its management, but he was enthusiastic that P&G does so much business in high-growth emerging markets. And he knows whereof he speaks: He told the audience he has used Crest toothpaste as long as he can remember, and is a devotee of Gillette razor blades.
The alternative to quantitative easing could be worse: A number of speakers took aim at Ben Bernanke and quantitative easing, with Druckenmiller blasting the Fed's strategy as a “nuclear weapon” that is “warping” asset prices worldwide. True – but while a decision by the Fed to remove this accommodative approach could enable investors to capture higher interest rates on their fixed income investments, it could also trigger a market selloff that will damage the value of most investors’ portfolios. “Were the Fed to signal the end of QE," Jeffrey Gundlach said, "the bull market would end." For now, Gundlach grumbled, quantitative easing is “making investors comfortable amid huge risks.”
