FT : Hedge funds’ bets on strengthening dollar pay off

Hedge funds’ bets on strengthening dollar pay off

Hedge funds have enjoyed their best quarter relative to US equities in four years as big bets on the rise in the US dollar paid off for some of the world’s best known managers, helping the industry break years of mediocre returns.
Funds including Ray Dalio’s Bridgewater, Louis Bacon’s Moore Capital and Alan Howard’s Brevan Howard have all enjoyed strong starts to 2015, after making the correct call that the US dollar would rise sharply against other major currencies.

Managers said the trade will remain a cornerstone of macro hedge fund portfolios in the coming months, despite a recent run of poor economic data from the US, because the Federal Reserve continues to edge towards tighter monetary policy while Europe and Japan are in the midst of quantitative easing.
“We all know the US economic story, we all know the European economic story and we all know that monetary policies are out of sync,” said Ray Nolte, chief executive of SkyBridge Capital, a fund of funds with stakes in many of the largest hedge funds.
The widely held bet on the dollar meant hedge funds enjoyed their best quarter of performance relative to the US S&P 500 index since 2011, according to the data provider Hedge Fund Research.
Mr Dalio’s Bridgewater, the world’s largest hedge fund with $169bn of assets under management, saw its Pure Alpha fund rise about 14 per cent up to the end of March, said people familiar with the fund.
Louis Bacon’s Moore Global fund is up about 4 per cent, while Brevan Howard’s Master Fund has rebounded from its first losing year in 2014 to be up close to 3 per cent.
Other managers that enjoyed strong starts to 2015 include Andrew Law’s Caxton, up almost 7 per cent and Paul Tudor Jones’s Tudor Global fund, up almost 5 per cent.

Managers of so-called macro hedge funds — those that make bets across currencies and interest rates based on the direction of the global economy — have gone from cursing central banks to celebrating their diverging policies, which have opened up the chance to profit from big investment shifts across the world.
“Divergent monetary policies in Asia and Europe versus the US are more constructive for macro trading than convergent policy and asset classes all moving together,” said Ken Tropin, founder of Graham Capital Management, which runs both computer-driven and discretionary macro funds.

“We are expecting to see continued dollar strength, although we do think it is possible we will see a couple of corrections as we move closer to parity [between the dollar and the euro].”
Mr Tropin’s Graham’s trend-following fund rose 9 per cent in the first quarter thanks in large measure to the stronger dollar, said people who have seen a report to clients.
The Newedge Trend Indicator, an index designed to match trend-following funds, is up 9.2 per cent year to date.
Paul Tudor Jones, chairman and chief executive officer of Tudor Investment Corp
Paul Tudor Jones of Tudor Global
Mr Nolte said that both active managers and trend-following funds were still positioned for a rising dollar, but active managers may reserve part of the fund to hop in and out of currencies. Greater volatility is expected over the next few months, because the exact timing of Fed tightening depends on economic data.

(ZeroHedge) Red Flags (M. El Erian)



Red Flags

The Real Value Of Cash

Earlier this week I discussed the recent interview with Mohamed El-Erian and his valuation call and holding of cash in his portfolio.
Not surprisingly, that topic recent a good bit of push back due to the current "zero" rate of return and the impact of inflation over time. I understand that argument and do not disagree. However, as I stated, there is a huge difference between the loss of future purchasing power and the destruction of investment capital.
I have written previously that historically it is relatively unimportant that the markets are making new highs. The reality is that new highs represent about 5% of the markets action while the other 95% of the advance was making up previous losses. "Getting back to even" is not a long-term investing strategy.
SP500-RecordHighs-022315
In regards to El-Erian, his comments were a valuation call on the financial markets suggesting that currently having capital invested was likely to yield substantially lower or negative return in the future. This is an extremely important concept in understanding the "real value of cash."
The chart below shows the inflation adjusted return of $100 invested in the S&P 500 (using data provided by Dr. Robert Shiller). The chart also shows Dr. Shiller's CAPE ratio. However, I have capped the CAPE ratio at 23x earnings which has historically been the peak of secular bull markets in the past. Lastly, I calculated a simple cash/stock switching model which buys stocks at a CAPE ratio of 6x or less and moves to cash at a ratio of 23x.
I have adjusted the value of holding cash for the annual inflation rate which is why during the sharp rise in inflation in the 1970's there is a downward slope in the value of cash. However, while the value of cash is adjusted for purchasing power in terms of acquiring goods or services in the future, the impact of inflation on cash as an asset with respect to reinvestment may be different since asset prices are negatively impacted by spiking inflation. In such an event, cash gains purchasing power parity in the future if assets prices fall more than inflation rises.
Stocks-Bonds-Cash-ValueOfCash-040915-2
While no individual could effectively manage money this way, the importance of "cash" as an asset class is revealed. While the cash did lose relative purchasing power, due to inflation, the benefits of having capital to invest at low valuations produced substantial outperformance over waiting for previously destroyed investment capital to recover.
While we can debate over methodologies, allocations, etc., the point here is that "time frames" are crucial in the discussion of cash as an asset class. If an individual is "literally" burying cash in their backyard, then the discussion of loss of purchasing power is appropriate. However, if the holding of cash is a "tactical" holding to avoid short-term destruction of capital, then the protection afforded outweighs the loss of purchasing power in the distant future. 
Of course, since Wall Street does not make fees on investors holding cash, maybe there is another reason they are so adamant that you remain invested all the time.  

 

Markets Might Be Over Valued

Continuing a bit further with El-Erian's valuation call, my new friends at 720 Global just released a very interesting research report on market valuations. 
I have discussed a variety of valuations in the past from market capitalization to GDP, CAPE ratios and Tobin's Q in relation to their current levels as compared to previous secular bull market peaks. (See here for latest update)
However, in the report authored by Michael Lebowitz, he takes a different angle showing where the S&P 500 is currently priced versus where these valuation measures suggest it should be priced. To wit:
"Corporate earnings and thus stock prices are driven by the economy. Despite the state of the economy and economic concerns we harbor, investors are investing hand over fist in assets whose valuations are predicated on strong economic growth in the future. As a result, most major U.S. stock indices are currently at or near all-time highs.
A sizeable percentage of the gains are a result of an expansion in the price/earnings multiple. In other words, investors are willing to pay more today, than they did yesterday, for the same amount of historic earnings and or forecasted earnings. The graph below shows five popular gauges of valuation, including those used by the Federal Reserve and investing icon Warren Buffett. The colored circles show where the S&P 500 would be if investors valued earnings today as they did historically.

 

Based on these five measures the S&P 500 is adding a 20% to 50% premium over what decades of history suggest is fair. These readings range from the 80th percentile to the 100th percentile in each case. Not unlike the rhetoric of the late 1990’s or mid-2000’s, there is no shortage of rationalizations for why such extraordinary valuations are reasonable and justifiable. The fact remains firmly in place, stocks are expensive."
StockValuations-Prices-040915
"The all-important link between stock prices, economic and productivity growth, and true corporate earnings potential are being ignored. Stock prices and many other investment asset prices are indirectly supported by the actions and opinions of the central banks. Investors have become dangerously comfortable with this dubious arrangement despite the enormous market disequilibrium it is causing. History reminds us time and again that a state of disequilibrium is highly unstable and will ultimately revert to equilibrium – often violently so."

Warning Flags

Jeff Saut, Raymond James' Investment Strategist, has been a raging stock market bull for quite some time. He is also firmly of the belief that the U.S. markets have re-entered into a secular bull market that still has years left to run. However, despite his ongoing bullishness, he did pen some very interesting points on some "red flags" that currently exist in the market. To wit:
"... as I stared at a chart of the D-J Transportation Average last week, which looks like it is making what a technical analyst would term a giant broadening top. The chart pattern begins in November with a false upside breakout (to ~9310) that is followed by a decline into mid-December (to ~8581). Those high and low points set the stage for the parallel channel the Trannies have been locked in for going on six months. Interestingly, the chart formation also shows a spread quadruple bottom (four low points). Therefore, if 8580 is decisively broken to the downside, it is going to look pretty ugly in the charts. While it would not be a Dow Theory 'sell signal,' it certainly would raise a red flag, at least on a short-term basis.

 

Another 'uncle point,' I wrote about last Thursday is the 2060 level for the S&P 500. Hereto, a close below that level would not look good to me. Meanwhile, the MACD indicator is currently flashing the same type of warning signals it did in 1Q00 and 4Q07, not that I expect similar downside results.
Then there is what Jason Goepfert, of SentimenTrader fame, wrote about last week. To wit,
“Buying power available to investors is near an all-time low. The NYSE Available Cash figure has dropped to one of its lowest levels, and the last two times it was near this level, stocks struggled in the months ahead. According to the American Association of Individual Investors, mom-and-pop investors have their highest exposure to stocks since 2007, and nearly their lowest cushion of cash since 2000.”
Cash-Asset-Ratio-SentimentTrader-040915
Mr. Saut goes on to ignore these warning signs as he continues with his new secular bull market thesis.
What's the worse that could happen?

FT : European M&A will test the soaring dollar

European M&A will test the soaring dollar

Bankers in the City of London sound more upbeat than they have for years, writes Patrick Jenkins

Fred Smith, boss of FedEx of the US, said last week he would pay $4.8bn for Dutch courier TNT Express. That is 30 per cent less than the dollar amount that US rival UPS was prepared to stump up for TNT three years ago (before regulators got in the way).
But the Dutch company’s shareholders have good reason to bite Mr Smith’s hand off.

TNT’s earnings and share price have been weak for some time. In addition, this is a better offer than the dollar valuation would suggest. In euro terms, investors will receive only 15 per cent less than they would have done from UPS, thanks to the alchemy of the exchange rate. One dollar back in early 2012 was worth only 75 euro cents; now it buys more like 93 cents.
Sure enough, Mr Smith cited the dollar’s appreciation against the euro as a primary driver of the deal. The broader question is whether a 12-year high in the dollar’s buying power will make 2015 a peak year for European mergers and acquisitions by US companies.
Merger and acquisition activity is clearly resurgent in general. The FedEx-TNT deal was dwarfed within hours by Royal Dutch Shell’s £47bn planned takeover of the UK’s BG — a transaction with little or no currency driver. And in the US, another giant pharmaceuticals acquisition was unveiled, with a bid for Perrigo by Mylan for $29bn.
Until now, the M&A boom has left Europe behind. In the first three months of the year, M&A transactions in the US were up 30 per cent to $399bn — accounting for nearly half of all dealmaking — while volumes in Europe fell 4 per cent to $168bn, according to data from Thomson Reuters.
But those numbers hide an interesting sub-theme in Europe. The value of inward bound deals from the US more than doubled over the 12 months to the end of March, hitting an eight-year high.
Separate research from Deloitte, a consultancy, suggests more than a quarter of all European deals last year were inbound acquisitions by US or Asian buyers — the highest proportion in more than a decade. The weak euro not only drew American buyers but many from China, too.
Bankers in the City of London, where many of these European takeovers are masterminded, certainly sound more upbeat than they have for years. For them, the strong dollar is just the cherry on an already appetising cake.
European targets, they argue, are fundamentally attractive because the worst of the eurozone crisis is over and a growth rebound is imminent. In addition, so their bullish pitch to potential buyers goes, cash resources are plentiful after years of steady profit accumulation and limited dealmaking. For a prospective US buyer, the M&A argument is all the more compelling because many such companies are sitting on cash piles outside the US that, for tax reasons, it makes no sense to repatriate.
The low oil price is another spur. It is already prompting the kind of defensive opportunism evident in the Shell-BG deal. More broadly it makes any company with significant exposure to oil and energy prices, such as TNT, look that much more attractive.
But there is a fine line between being bullish and being reckless. Mr Smith is perhaps best known for saving FedEx from bankruptcy years ago by betting the company’s last few thousand dollars on a game of Las Vegas blackjack. If the TNT deal is really rooted in a currency punt, that should worry investors.
There are, after all, plenty of uncertainties hanging over Europe, undermining prospects for good M&A. The threat of Grexit and broader eurozone chaos, though mitigated, is firmly back on the agenda. A lot of European companies look expensive, too. Stock markets in Europe are not as inflated as those in more obviously thriving parts of the world, but they have still hit record highs in recent months.
Electoral uncertainties in seven European countries this year, most significantly the UK and Spain, should be an additional deterrent, particularly for potential buyers in highly regulated sectors such as utilities and media. To see off all the dangers hanging over European M&A, the power of the dollar will need to be truly Herculean.

>>> International Paper working on EUR 36 per share bid for Smurfit Kappa, Deuts

International Paper working on EUR 36 per share bid for Smurfit Kappa, Deutsche Bank advising 

International Paper, a listed Memphis, Tennessee-based paper and packaging manufacturer, has hired Deutsche Bank to advise on a potential takeover offer for listed Irish rival Smurfit Kappa, Sky News reported. The report cited one City source who said International Paper had been mulling an offer at around EUR 36 (USD 38.17) per share for Smurfit.

Sources this weekend added the caveat that International Paper had yet to make a formal approach to Smurfit s board, and that International Paper might yet decide against proceeding with an offer, according to the report.

As previously reported, Smurfit’s share price gained earlier this week on talk of an approach from International Paper or Australian rival Amcor.

An offer at EUR 36 per share would represent a valuation exceeding GBP 6bn (EUR 8.27bn) for Smurfit. However, adding in Smurfit’s debt and a takeover premium could push the value of any deal to more than GBP 8bn, the item said.

The article noted that some analysts had this week downplayed the chances of an offer for Smurfit. The Financial Times’ Lex column on Friday, 10 April suggested that the rise in Smurfit’s share price this year could be due to momentum alone.

Smurfit refused to comment on Saturday, 11 April, the item said. International Paper did not reply when asked for comment, the report added.

Smurfit Kappa’s share price closed EUR 0.14 down at EUR 28.91 in Dublin on Friday, giving the company a market capitalisation of EUR 6.78bn.

Sky News, previously reported intelligence, Financial Times

>>> Vivendi says has not made any bid for Lagardere and has no plans to do so

Vivendi says has not made any bid for Lagardere and has no plans to do so - press - The comment comes in response to questions and speculation about what Vivendi plans to do with the €15B in cash raised from selling off non-core assets

Le Figaro - Vivendi ne fera pas d'offre sur Lagardère

Le groupe de médias Vivendi, qui cherche des acquisitions, a déclaré samedi ne pas avoir l'intention de faire une offre de rachat du groupe Lagardère.

Une source proche du dossier avait déclaré à Reuters que Vivendi avait fait il y a quelques semaines une offre de 3,3 milliards d'euros pour le rachat de Lagardère, un intérêt également rapporté en début de mois par L'Express.

"Il n'y a pas eu d'offre de Vivendi pour Lagardère et il n'y en aura pas", a déclaré à Reuters Simon Gillham, un porte-parole du groupe.
"Lagardère est un groupe ami de Vivendi", a-t-il ajouté.

Les projets d'acquisitions par Vivendi font l'objet de vives spéculations après une cascade de cessions qui lui ont permis d'accumuler un trésor de guerre représentant potentiellement 15 milliards d'euros, selon des estimations d'analystes.

>>> Skyepharma might be bid target for rival

Skyepharma might be bid target for rival 

Skyepharma, a listed UK-based pharmaceuticals group, might attract a takeover bid from a larger rival, according to a Daily Mail market report. The newspaper did not cite a source for the rumour.

The item mentioned market chatter that one of Skyepharma’s partners, such as GlaxoSmithkline of the UK, France’s Sanofi or the Swiss pharmaceuticals group Roche might be keen to acquire Skyepharma. Alternatively, a US-based rival could make an offer, the article added.

Skyepharma’s share price closed 3p up at 304p in London yesterday, 10 April, giving the company a market capitalisation of GBP 318m (EUR 438m).

Daily Mail

>>> Gulf Keystone likely to be subject of reverse takeover by T5 Oil and Gas

Gulf Keystone likely to be subject of reverse takeover by T5 Oil and Gas

T5 Oil and Gas, an Anglo-Irish oil and gas exploration company, is likely to take control of listed UK-based counterpart Gulf Keystone via a reverse takeover, the Irish Examiner reported. The report cited one industry source who said that although oil companies such as Exxon Mobil had been tipped as possible buyers for Gulf Keystone, T5 and Genel Energy were more likely buyers, with T5 the most likely acquirer.

Gulf Keystone will likely pay USD 50m (EUR 47.1m) of its own shares to acquire T5, with T5 using that stake to effectively take control of Gulf Keystone, the item said. T5 would then install its own executives and board at the enlarged group, according to the report.

The source suggested that a tie-up between Gulf Keystone and T5 could be completed before the summer.

T5 head Pat Plunkett yesterday, 10 April refused to say if he thought a deal would be agreed, the article said. Plunkett said there is no progress towards a deal at the moment, but added that T5 is keen to agree a deal. The chairman said the structure of the putative deal would give Gulf Keystone’s current shareholders the opportunity to retain their interest in the enlarged group, which would not be the case in a straight takeover deal. A tie-up would also expand Gulf Keystone’s portfolio, he added.

Gulf Keystone’s non-executive Chairman Andrew Simon earlier this week said the company is continuing to hold talks with potential buyers and is also considering other ways to secure additional funding, the item noted.

As previously reported, Gulf Keystone this week posted a loss after tax of USD 248.2m in FY14, with revenues of USD 38m.

Separately, Plunkett said T5 intends to acquire licences and is looking at companies and assets that require investment. T5 has identified about six potential targets with operations in Africa and the Middle East, Plunkett said.

Gulf Keystone's market capitalisation stood at GBP 381.4m (EUR 526.2m) at the close of trading in London yesterday.

Irish Examiner

>>> Barrons summary: positive on NEM; cautious on GE

Barrons summary: positive on NEM; cautious on GE 

Cover story: In-depth story reports on long-term care insurance, which can be a smart way for elderly people to preserve wealth and provide medical care; poor people can qualify for Medicaid, but those with $500K to $5M in assets should consider long-term care insurance. 

Features: 1) Cautious on GE: Investors welcomed conglomerate's move from real estate and consumer and commercial lending, but "shares look fully priced after a 14% jump"; 2) Positive on ADT, CFG, KLXI, POST, RSE: Among a range of recent spinoffs, these five are particularly promising, and each could be takeover targets; 3) Positive on NEM: Shares of mining company are down 70% from a November 2011 peak, but the world's No. 2 gold producer should see higher earnings this year even if gold falls further. 

Tech Trader: Cautious on TC, STX, ARMH, MSFT: Tiernan Ray says it's likely all companies will miss consensus estimates when they report March-quarter revenue--providing a good opportunity to buy. 

Trader: Uncertainty stemming from the Fed's guessing game about raising rates is weighing on investors; Study by Bespoke Investment Group finds that the stocks most hated by analysts tend to do better over long periods of time than the most-loved ones; Cautious on GWW: Shares are down because maintenance, repair, and operating-supplies distribution sector suffers in a low inflationary climate, but these headwinds won't matter for long-term investors looking for a high-quality business.

Small Caps: Positive on HRG: "Investment vehicle started by former hedge fund chieftain Phil Falcone looks like a good bet, notwithstanding Falcone's departure as CEO last December to run a smaller investment outfit." 

Profile: Marc Dummer, manager, Principal Global Diversified Income, spends most of his time on portfolio construction, seeking the right mix of assets (allocation in descending order of size: U.S. high-yield bonds, commercial mortgage-backed securities, emerging market debt, global infrastructure, global value equities, preferred securities, global REIT, master limited partnerships, non-U.S. developed high yield). 

Follow-Up: Positive on ACN: Consulting arm is benefiting from the push to digitize corporate operations, while outsourcing side has seen a boost as clients cut costs and improve productivity; Cautious on AVP: Despite a 40% drop in shares since last spring, company has made progress in reducing its cost structure, and earnings could potentially double as it moves past current pressures; Positive on CNK: Shares of world's largest movie-theater chain by attendance remain the best way to play Hollywood's ongoing strength as more blockbusters are released; 

European Trader: Positive on BG Group: Energy company's tie-up with Royal Dutch Shell "looks more appealing than the stand-alone alternative"; Positive on FDX: Deal for TNT Express should work, since its European business is smaller than UPS's and it has a track record of successfully integrating acquisitions. 

Asian Trader: The rally in Hong Kong seems to have legs, with Hong Kong-listed Chinese stocks 23% cheaper than their Shanghai clones. 

Emerging Markets: Malaysia "has become the forgotten market in Asia for good reason" as it contends with dropping oil prices and a range of other problems that aren't likely to be resolved soon; 

Commodities: Lead prices are on the rebound amid expectations of limited supplies of the metal; 

Streetwise: "The market could bounce higher if first-quarter results come in above reduced targets."

(BFW) *FABIUS: FRANCE MAKES NUCLEAR ENERGY PROPOSAL TO SAUDI OFFICIALS


BN 04/12 11:28 *FABIUS COMMENTS IN RIYADH AIRED ON SAUDI TV VIA TRANSLATOR
BFW 04/12 11:27 *FABIUS SAYS ASSAD CAN'T BE INCLUDED IN SYRIAN GOVERNMENT
BFW 04/12 11:27 *FABIUS: SYRIA GOVT COULD INCLUDE MEMBERS OF ASSAD'S REGIME
BFW 04/12 11:27 *FRANCE'S FABIUS CALLS FOR SYRIAN NATIONAL UNITY GOVERNMENT
BFW 04/12 11:17 *SAUDI-LED OPERATION IN YEMEN IS `GOING WELL': PRINCE SAUD
*FABIUS: FRANCE MAKES NUCLEAR ENERGY PROPOSAL TO SAUDI OFFICIALS
2015-04-12 11:31:18.465 GMT

--ALAA SHAHINE

-0- Apr/12/2015 11:31 GMT