TheChek News Flow

- China side said the two "acknowledged that different positions exist between them regarding the tensions."

His regular weekly market commentary is widely regarded as one of the best-researched, best-articulated publications available to money managers.

John's public appearances are rare, so we're especially grateful he made time to speak with us yesterday about the precarious state in which he sees global markets.

Based on historical norms and averages, he calculates that the ZIRP and QE policies of the Fed and other world central banks have led to an overvaluation in the stock market where prices are 2 times higher than they should be:

John Hussman: What's interesting here is that if you think about equities, they're not a claim on next year’s prediction of earnings by Wall Street analysts. A stock, in fact any security, is a claim on any long-term stream of cash flows that investors can expect to be delivered to them over a very long period of time.

When you look at equities you can calculate something called duration. It's essentially the effective life of a security over which you are collecting cash flows in return for the amount you pay. For the S&P 500 the duration is about 50 years. In other words it is a very, very long-term asset. The only reason you would want to price that asset based on your estimate of next year’s earnings is if you were convinced that next year’s earnings are actually representative of the very, very long-term stream — and I'm talking 50 years or so of earnings that you're likely to get — that those earnings are in a sense accurately proportional to the whole long-term stream.

What's amazing about that is that is it has never been true. It has never been true historically. If you look at corporate profits and especially corporate profit margins, they're one of the most cyclical and mean-reverting series in economics. Right now, we have corporate profits that are close to about 11% of GDP, but if you look at that series you will find that corporate profits as a share of GDP have always dropped back to about 5.5% or below in every single economic cycle including recent decades, including not only the financial crisis but 2002 and every other economic cycle we have been in.

Right now stocks as a multiple of last year’s expected earnings may look only modestly over valued or modestly richly valued. Really if you look at the measures of valuation that are most correlated to the returns that stocks deliver over time say over seven years or over the next 10 years the S&P 500 in our estimation is about double the level of valuation that would give investors a normal rate of return.

So right now, we've got stocks valued at a point where we estimate the 10 year prospective return on the S&P 500 will be about 1.6 to 1.7% annualized — talking right now with the S&P 500 at 2032 as of today’s close.

Chris Martenson: I guess 1.6 or 7% doesn’t sound bad if you are getting 0% on your risk-free money, I guess. But this says that any move by the Fed to normalize — which means rates have to go up — any move to drain liquidity from the system is going to have its own impact. If we held all things equal, a normalization effort is going to then basically expose that the stock market is roughly overvalued by 100%.

John Hussman: 100%, yes. I actually think the case is a little bit harsher than that; in fact, quite a bit harsher than that.

The idea that well, "1.7% isn’t so bad" or "1.6% isn’t so bad" ignores the fact that really in every market cycle and economic cycle we have had a point where stocks were fairly valued or undervalued.The only cycle in which we didn’t see that was actually the 2002 low where stocks actually ended that decline at an overvalued level on a historical basis. But valuations were still relatively high on a historical basis in 2002. They got slightly undervalued in 2009, but not deeply.

On a historical basis, what's interesting is that if you look at measures of valuation that correct for the level of profit margins, you actually get about a 90% correlation with subsequent 10 year returns. That relationship has held up even over the past several decades. It has held up even over the past 5 years where the expected return that you would have forecasted based on time-tested valuations turned out to be pretty close to what you would have forecasted 10 years earlier.

Right now, like I say, we are looking at stocks that have been pressed to long-term expected returns that are really dismal. But more important than that, in every market cycle that we've seen with the mild exception of 2002, we've seen stocks price revert back to normal rates of return. In order to get to that point from here, we would have to have equities drop by about half.

This is one of the highest-quality and deepest-diving podcasts we've recorded in the 3-year history of our series. Part 1 is publicly available below. Part 2 can be accessed here (enrollment required).

There's so much competition in the cloud industry that cloud companies keep cutting their prices, even while they increase their storage limits.

There's a couple of reasons for this. For one, computer storage keeps getting cheaper. A gigabyte's worth of storage on a hard drive in 1993 cost over $9,000, but it cost a mere 4 cents in 2013.

But you can really thank Amazon for making sure that cloud computing companies pass those savings along to customers. As its costs drop, Amazon cuts its prices for its cloud. Amazon Web Service had 44 price cuts in about the last six years, it says, thanks to a culture of "frugality."

Amazon is increasing revenue by gaining more customers and adding ever more services for which they are willing to pay, even though they'll pay less for each as time goes on.

They're treating computer services like their retail store. You're likely to stock up your cart with more stuff if you're getting a bargain on every item you buy.

Microsoft and Google have vowed to keep up matching Amazon's prices while beefing up their own selection of services.

And that means the whole cloud industry has to cut prices as time goes on, not raise them.

Aaron Levie, CEO of cloud storage company Box just told The Information, "We see a future where storage is free and infinite."

That's great news for those of us with a growing stash of documents, photos, and smartphone videos.

But it also means that companies like Box, Dropbox, Google, Microsoft, HP, IBM, and others have to come up with unique cloud services that people are willing to pay for.

For instance, Microsoft and Google have put Office apps in the cloud, and they toss in the cloud storage as part of that.

Box, which still hopes to go public one day, is doing a similar sort of thing. It offers extra security around files, something enterprises are willing to pay for to make sure they comply with all laws.

Box is also building other applications, things like a project management app. That's like a GitHub for documents, where all the files for the same project live in one place and people can collaborate, or a sales portal that lets salespeople see which customer has been given which bit of marketing materials.

Meanwhile, every new company in the cloud computing war is looking for ways to offer special services beyond renting apps or storing files.

When Cisco announced it would spend $1 billion on the cloud last summer, the executive leading the project, Nick Earle, was quick to declare, "Our strategy is not to follow AWS on the race to zero."

All the big players have declared much the same thing as they spending billions on their clouds: IBM, HP, Oracle.

But when push comes to shove, the price war is on, and Amazon is determined to keep it on.

Elliott says Vodafone may face €8bn fee over Kabel Deutschland

Elliott Management has claimed Vodafone may have to pay out €8bn in compensation for undervaluing its stake in Kabel Deutschland.

The activist hedge fund known for its aggressive style, which has included suing numerous governments, said in a letter to its investors seen by the Financial Times that Vodafone had failed to provision fully for the potential liability in its accounts.

Elliott is suing Vodafone in a German court to pay a higher price than the UK group paid in last year’s takeover of the German cable operator. The hedge fund owns 13 per cent of Kabel Deutschland shares but has held out from tendering them because it believes the company is worth over €250 a share compared to the €84.53 that was offered.

Vodafone says it has paid a fair price for Kabel Deutschland in an offer that was accepted by over 75 per cent of the company’s shareholders, and that it has no intention of paying any more.

Under German takeover law, Vodafone must pay Elliott a dividend of 5 per cent above the German base interest rate until the case is resolved in court. At the same time, the hedge fund retains the right to sell its stake using a so-called put option to the telecoms company at the €84.53 price with only five days notice.

If the court were to decide that Elliott’s valuation of more than €250 per share was valid, Vodafone would then be liable to make up the difference in both the price and the dividend payments.

“The put represents a potential contingent liability in excess of €8 billion, equivalent to roughly 12% of Vodafone’s market capitalisation,” Elliott wrote. “This liability has been only partially provisioned for in Vodafone’s accounts and is not adequately reflected in sellside research reports on the company.”

Vodafone dismissed Elliott’s claim, reiterating that it would not raise its offer for the German company which it said it already counted as a full subsidiary.

“Nobody should take this seriously,” the company said. “These assertions are wholly without foundation and bear no relation to the facts. Vodafone’s offer of €84.53 per Kabel Deutschland share has been approved as appropriate compensation by an independent court-appointed auditor, and a valuation conducted by two independent auditors attributed a value of €75.76 per Kabel Deutschland share.”

The acquisition was seen by analysts as a key step in Vodafone’s strategy to expand its range of services from a traditional mobile telecoms focus to offering bundled deals of broadband, telecoms and television.

Germany is Vodafone’s largest market in Europe, and the group subsequently followed the Kabel Deutschland purchase with a similar deal to buy Ono in Spain. Kabel was Germany’s largest cable operator by customer numbers.

Analysts have said that Elliott’s goal was always to press Vodafone into raising the bid, although many see the price as reasonable given Kabel was already trading at a high multiple at about 10x earnings.

Vodafone also had competition from Liberty Global for the German business, which forced it to raise an initial offer.

Hellman & Friedman amasses $11bn for new fund

Overwhelming demand from investors has allowed West Coast private equity house Hellman & Friedman to amass nearly $11bn in four months for a new buyout fund – its largest in its 27-year history.

The fundraiser, the largest started and completed this year, underscores the abundance of liquidity seeking a home as state pension plans, insurers and sovereign wealth funds hunt for better yields amid record low interest rates. The San Francisco-based group also benefited from investors, in the aftermath of the financial crisis, concentrating their bets on the best performing and most consistent managers.

Hellman & Friedman, which mostly invests in the US and in Europe, received more than $17bn in subscriptions in total, according to two people with knowledge of the marketing effort. After scaling back some of its investors’ commitments to $10.3bn, the firm added its own contribution of $500m. Retired partners invested another $150m.

The fund – Hellman & Friedman’s largest since the firm’s inception in 1987 – is 25 per cent larger than its last fundraising in 2009. That pool of money fell short of an $10bn target when the financial crisis froze markets, dealmaking and fundraising activity.

Hellman & Friedman, headed by 49-year-old chief executive Philip Hammarskjold, is the latest of a string of buyout funds exceeding $10bn as investors reinvest returns and distributions from existing buyout funds. In January, Apollo Global Management closed an $18.4bn fund, the largest since the credit crash. Carlyle secured $13bn, Warburg Pincus $11.2bn and Luxembourg-based CVC Capital Partners amassed $15bn.

Investors have been attracted by the consistency of Hellman & Friedman’s returns and its record. It says that it has not lost money on any investment since 1997.

“They’ve consistently ‎been one of our top performing managers through both up and down cycles,” said John Morris, managing director at HarbourVest Partners, a backer. He also cited “a stable team and unique deal flow.”

Hellman & Friedman’s $8.8bn fund, closed in 2009 but invested after 2011, was posting an 8.6 per cent net internal rate of return and marked up a 10 per cent increase in value above cost as of March 31, 2014, according to Washington State Investment Board, a backer.

The previous $8.4bn pool, raised in 2007 at the peak of the buyout boom, returned 12.4 per cent a year after fees for a 60 per cent cumulative gain.

Recent distributions also helped the fundraiser: The group returned $8bn and spent about $3bn over the past 18 months. Disposals included a stake in Sedgwick, a Memphis-based provider of claims-processing services, to New York buyout group KKR, in a deal valuing the whole company at $2.4bn including debt.

Recent acquisitions include a majority stake in Scout24, a German cars-to-real estate online classifieds portal, from Deutsche Telekom, in a €1.5bn deal.

The eurozone has no mechanism to defend itself against a drawn-out depression

If there is one thing European policy makers agree on, it is that the survival of the euro is no longer in doubt. The economy is not doing great, but at least the crisis is over.

I would challenge that consensus. European policy makers tend to judge danger in terms of the number of late-night meetings in the Justus Lipsius building in Brussels. There are definitely fewer of those. But that is a bad metric.

I do not have the foggiest idea what the probability of a break-up of the euro was during the crisis. But I am certain that the probability is higher today. Two years ago forecasters were hoping for strong economic recovery. Now we know it did not happen, nor is it about to happen. Two years ago, the eurozone was unprepared for a financial crisis, but at least policy makers responded by creating mechanisms to deal with the acute threat.

Today the eurozone has no mechanism to defend itself against a drawn-out depression. And, unlike two years ago, policy makers have no appetite to create such a mechanism.

As so often in life, the true threat may not come from where you expect – the bond markets. The main protagonists today are not international investors, but insurrectional electorates more likely to vote for a new generation of leaders and more willing to support regional independence movements.

In France Marine Le Pen, the leader of the National Front, could expect to win a straight run-off with President François Hollande. Beppe Grillo, the leader of the Five Star Movement in Italy, is the only credible alternative to Matteo Renzi, the incumbent prime minister. Both Ms Le Pen and Mr Grillo want their countries to leave the eurozone. In Greece, Alexis Tsipras and his Syriza party lead the polls. So does Podemos in Spain, with its formidable young leader Pablo Iglesias.

The question for voters in the crisis-hit countries is at which point does it become rational to leave the eurozone? They might conclude that it is not the case now; they might oppose a break-up for political reasons. Their judgment is prone to shift over time. I doubt it is becoming more favourable as the economy sinks deeper into depression.

Unlike two years ago, we now have a clearer idea about the long-term policy response. Austerity is here to stay. Fiscal policy will continue to contract as member states fulfil their obligations under new European fiscal rules. Germany’s “stimulus programme”, announced last week, is as good as it gets: 0.1 per cent of gross domestic product in extra spending, not starting until 2016. Enjoy!

What about monetary policy? Mario Draghi said he expected the balance sheet of the European Central Bank to increase by about €1tn. The president of the ECB did not set this number as a

formal target, but as an expectation

– whatever that means. The most optimistic interpretation is that this implies a small programme of quantitative easing (purchases of government debt). A more pessimistic view is that nothing will happen and that the ECB will miss the €1tn just as it keeps on missing its inflation target. My expectation is that the ECB will meet the number – and that it will not make much difference.

And what about structural reforms? We should not overestimate their effect. Germany’s much-praised welfare and labour reforms made it more competitive against other eurozone countries. But they did not increase domestic demand. Applied to the eurozone as a whole, their effect would be even smaller as not everybody can become simultaneously more competitive against one another.

Two months ago Mr Draghi suggested the eurozone fire in three directions simultaneously – looser monetary policies, an increase in public sector investments and structural reforms. I called this the economic equivalent of carpet-bombing. The response looks more like an economic equivalent of the Charge of the Light Brigade.

These serial disappointments do not tell us conclusively that the eurozone will fail. But they tell us that secular stagnation is very probable. For me, that constitutes the true metric of failure.

The Swiss lender is one of a group of banks including Barclays, Citigroup, HSBC, JPMorgan and Royal Bank of Scotland that are set to announce an agreement of at least £1.5bn on Wednesday to settle forex rigging allegations with the UK’s Financial Conduct Authority.

Several US authorities are also expected to be part of the settlement, including the Office of the Comptroller of the Currency and the Commodity Futures Trading Commission in the US, while Switzerland’s Finma may also take part. Bank of America Merrill Lynch is also expected to settle but only with US authorities.

UBS is expected to strike a settlement over alleged trader misbehaviour at its precious metals desks with at least one authority as part of a group deal over forex with multiple regulators this week, two people close to the situation said. They cautioned that the timing of a precious metals deal could still slip to a date after the forex agreement.

Regulators around the world have alleged that traders at a number of banks colluded and shared information about client orders to manipulate prices in the $5.3tn-a-day forex market.

UBS has previously disclosed that it launched an internal probe of its precious metals business in addition to its forex investigation. It declined to comment for this article.

Unlike at other banks, UBS’s precious metals and forex businesses are closely integrated. The business units have joint management and the bank’s precious metals staff – who mainly trade gold and silver – sit on the same floor as the forex traders.

One person familiar with UBS’s internal probe said that the bank found a small number of potentially problematic incidents at its precious metals desk.

André Flotron, the head of UBS’s gold desk in Zurich, has been on leave since January for reasons unspecified by the lender.

Mr Flotron has not been accused of wrongdoing and has never responded to any requests for comment. He has labelled his professional status on his LinkedIn profile as being “on leave, keen to return in due time”.

The precious metals market has this year become the latest trading area to be subjected to heavy regulatory scrutiny and allegations of price rigging. The FCA fined Barclays £26m in May after an options trader was found to have manipulated the London gold fix.

BaFin, Germany’s financial regulator, has launched a formal investigation into the gold market and is probing Deutsche Bank, one of the former members of a tarnished gold-fix panel that will soon be replaced by an electronic fixing.

UBS’s top management has pushed hard to speed up its internal forex and precious metals probes. It has sought to get ahead of rivals in securing immunity agreements as it wants to leave behind its legacy problems as soon as possible.

In a global forex-rigging probe against at least 15 banks, UBS has the highest numbers of suspended traders – at least seven – across London, New York, Singapore and Zurich.

It is said to have fired several forex traders in recent months, some of whom had earlier been suspended.

UBS is also in separate talks over a forex settlement with the US Department of Justice’s criminal division. It is expected to get leniency from the DoJ’s antitrust team in return for handing over information early on and co-operating.

The rebound in global equities since mid October once again leaves markets in nosebleed territory. The likelihood of an imminent sell-off depends on the economic cycle, the central banks, and temporary extremes in valuation. All of these factors are the staple diet of this blog.

But today I would like to reflect on whether we can expect the much longer up-trend in risk assets, which started in the early 1980s, to continue into future cycles. (Warning: some of this is a bit technical; skip to the end for the bottom line for investors.)

Thomas Piketty’s work has shown that a rising wealth/income trend is not a “natural” state of affairs in the very long run. He argues that, in many economic growth models, the wealth/income ratio is broadly stable in equilibrium, and his data suggest that this has been the case in the UK and France for several centuries [1].

The opposite has been true in recent decades. Two factors are primarily responsible: the long term decline in the global real rate of interest, and the continuous rise in the share of profits in national income.

This combination has led to rising expectations of future profits, discounted at ever lower real interest rates, a recipe for surging equity prices. Lower inflation has also reduced the inflation risk premium, which has further exaggerated the gains in both bond and equities.

That much is fairly obvious. But in an interesting new paper, Charles Goodhart and Philipp Erfurth at Morgan Stanley suggest that these factors are directly linked. All of them are basically caused by a long term decline in the ability of labour to maintain the growth of real wages in line with productivity. Until this is reversed, the very long run trends in asset prices may survive intact.

It is obvious that the inability of workers to maintain their previous trend growth in real wages would tend to increase the share of profits in GDP, and therefore be beneficial for equities, but why has this also led to a decline in real interest rates? The reason given in the Goodhart/Erfurth paper will be familiar to readers of recent work by Lawrence Summers and Paul Krugman on secular stagnation.

Essentially, the argument is that lower real wages have increased inequality in the western economies, and this has depressed aggregate demand by redistributing real income and wealth away from the relatively poor towards the rich. Since the poor have a higher propensity to consume than the rich, this redistribution reduces consumer demand.

The decline in demand is then addressed by policy makers, either by fiscal expansion (reducing taxes and increasing subsidies on the poor) or by reducing interest rates set by the central banks. Since the fiscal response results in bigger budget deficits and higher public debt/GDP ratios, more and more of the burden of policy adjustment eventually falls on the monetary authorities. It is likely that this feedback loop will tend to increase both asset prices and inequality from one cycle to the next.

A pernicious additional consequence of this loop is that private sector debt/GDP ratios are also likely to rise through time. Falling real interest rates increase the incentive to borrow, while rising asset prices, especially in the housing market, increase credit worthiness and therefore the ability to borrow.

Debt ratios rise until they cause a crash, which of course is what occurred in 2008. This causes even greater and more permanent declines in real interest rates, which adds another twist to the cycle.

As the BIS has pointed out, what appears to be a sensible response by the monetary authorities to a downturn in any individual cycle in fact simply exacerbates the long term problem. But it is extremely difficult to step off the monetary policy escalator without causing an almighty crash. No central banker is ever willing to allow that to happen on their watch.

This neat amalgamation of the Keynesian secular stagnation view with the Austrian theory of excess debt seems capable of explaining how the western economies reached their present predicament with surprisingly high asset prices, along with surprisingly low levels of real and nominal GDP, and worryingly high debt. None of this reasoning is original, but it is interesting to piece it all together into a single narrative.

What does this narrative mean for investors?

It certainly does not rule out a bear market, of the variety seen in 2000 and 2008.

But in the very long run, investors should also be looking at the fundamental driving force for the entire long term process of rising wealth, i.e. the drop in the labour share in national income. If this were to reverse, demand would rise more rapidly and real interest rates could be allowed to increase, bringing down the rate of growth in private debt. Although this would be healthy from many points of view, it would also deliver a double blow to equities by reducing expected profits growth and raising discount rates.

So will the inexorable fall in the share of wages in GDP be reversed?

This may have been caused by the increase in the supply of unskilled workers into the world marketplace as a result of globalisation, or by technical progress which has displaced low paid workers, or by legal and other attacks on trade unions.

None of these three factors seems to be fundamentally changing direction in the developed economies today. In the absence of strong evidence to the contrary, it seems odd to assume that a trend which has manifested itself so strongly for 35 years will suddenly reverse itself.

A major shift in economic policy could of course change the picture. In particular:

A sharp rise in the minimum wage could alter the climate in the labour market.

Greater reliance on equity funding, rather than debt funding, in housing and corporate investment could hit current equity holders through dilution of their existing holdings.

A shift towards fiscal rather than monetary expansion could change the path for real interest rates, and change the distribution of income.

But any of these changes is fraught with political difficulties. Last week’s mid term elections in the US certainly point in entirely the opposite direction.

The future behaviour of wages is of course critical. A modest up tick in wages growth might be enough to trigger a hostile Fed, causing a peak in the current market cycle.

But it would take a very large rise in wages, much larger than we have seen in the last three economic recoveries, to suggest that the 35 year up trend in the profits share in GDP, and therefore in global equity prices, is finally being reversed.

These Airlines Could Fly High

International Consolidated Airlines, Ryanair, and Aer Lingus boost profit guidance, as fuel costs fall and passenger traffic rises.

This sometimes turbulent sector has generated a spate of solid financial results as many airlines benefit from falling oil prices and some nab passengers from strike-bound rivals. French flag carrier Air France-KLM (ticker: AF.France) and Germany’s Lufthansa (LHA.Germany) have both suffered financially damaging strikes recently.

International Consolidated Airlines Group (IAG.UK), which owns British Airways, and Spain’s Iberia and Vueling, appears to be among the winners, along with Ireland’s Ryanair Holdings (RYA.Ireland) and Aer Lingus Group (EIL1.Ireland).

Budget airline Ryanair recently reported that higher fares and growing passenger numbers had pushed net profit up 32%, to 795 million euros ($992.47 million), in its crucial first fiscal half, when it generally makes all or almost all of its profit. Based on its expected passenger gains and further cost savings, the airline now expects full-year net profit of €750 million to €770 million, versus previous guidance of up to €650 million. The airline has moved slightly away from its no-frills, low-fare focus and is doing more to keep customers happy.

Cantor Fitzgerald transport analyst Robin Byde has Ryanair at Buy with a €10 target price, estimating its potential upside at 22%. Says Byde: “This winter, Ryanair will add more new bases and routes, including restarting services between London Stansted and Glasgow and Edinburgh to attract more business passengers. Germany, Italy, and France should also present ample opportunity for share gain….” The stock closed Friday at €8.30.

IAG’S THIRD-QUARTER OPERATING profit jumped more than 30%, to €900 million before exceptional items. It generated impressive profit gains on all three of its airlines. Like Ryanair, it was helped by falling fuel costs and the introduction of more fuel-efficient aircraft. It now expects full-year operating profit, before exceptional items, to be €550 million to €600 million above 2013’s €770 million. It previously had forecast that it would beat last year’s figure by €500 million.

Morgan Stanley analyst Penelope Butcher rates IAG Overweight, with a €6.25 price target. “IAG is striving to exploit changing demand through its cost structure, capacity planning, and supplier relationships. This nimbleness should allow it to ride the wave of cyclicality, rather than be swept under, and extract adequate profit,” she predicts. She adds that IAG is the first major European airline group to show the cost, capital and capacity discipline long practiced by low-cost carriers, such as Ryanair. AIG closed Friday at €4.03.

Aer Lingus’ third-quarter adjusted operating profit rose to €112.9 million from €94.9 million a year earlier. The carrier now expects 2014 operating profit, excluding one-off items, to exceed last year’s €61.1 million. It’s the second time the airline raised its guidance since issuing a profit warning in June. Back then, it reckoned that profits would be hurt by a threatened strike. The walkout, focused on pensions, was brief, and led to a pension-funding plan approved last week by the unions and likely to be cleared by shareholders in December.

Investec Securities analyst Gerard Moore has Aer Lingus at Buy with a €1.70 price target and notes that the quarterly results were the airline’s strongest since the financial crisis. Aer Lingus closed Friday at €1.61.

The Favorite Picks of Top-Performing Hedge Funds

Chicago’s annual Invest For Kids charity program lured record crowds–and strong opinions.

The conference has had many market-beating picks and pans in its six-year history though last year wasn’t one of those years. Its 19 selections last year were down an average of 7% while the S&P 500 returned 17% over the same time.

Nevertheless, hope springs eternal, and this year’s event provided plenty of star power, and grist for the mill with occasional touches of dark humor. Larry Robbins, who runs New York hedge fund Glenview Capital Management, compared one of his picks, the online marketplace eBay (ticker: EBAY), to a divorce in which one party faces a lifetime of shopping while the other gets stuck with years of making payments. Both will end up happy though.

The fast-talking Robbins exceeded his 15 minute time allotment by firing off three other picks— Tenet Healthcare (THC) for its merger and acquisition expertise, favorable trends in health insurance and operational skill; semi-conductor test equipment maker Teradyne (TER), and chip designer Cadence Design Systems (CDNS). The crowd didn’t care about the added minutes, given Robbins’s luminous performance.

Celebrated value investor Mason Hawkins of Southeastern Asset Management who has been plying his trade for some four decades in Memphis, recommended Level 3 Communications (LVLT) with its giant global fiber-optic backbone of 200,000 route miles. Bandwidth traffic is growing exponentially over a network that cost $45 billion to build. Free cash flow is now burgeoning. And the company gets no credit on Wall Street for the dark fiber and empty conduit it already has in place. Likewise, investors are ignoring its large net operating losses from the years of overcapacity that will shelter earnings for years to come.

Steve Kuhn of Minneapolis’ Pine River Capital Management sees enormous promise in the 400 or so Japanese stocks that the nation’s Government Pension Investment Fund can trade. The shares recently soared when the GPIF boosted its target allocation for Japanese equities. These companies were accorded special status because of their embrace of return on investment goals, shareholder-friendly policies such as stock buybacks, and the inclusion of more independent directors. They’ve also removed takeover defense barriers. These companies are in the vanguard of Prime Minister Shinzo Abe’s corporate reform effort.

Distressed debt and credit is the specialty of Redwood Capital Management maven Jonathan Koltach, and he recommended Puerto Rico Electric Power Authority bonds, which in the aftermath of Puerto Rico’s recent debt crisis are selling at just 50 cents on the dollar. Koltach sees a number of positives. The commonwealth’s other utilities, its water and highway units, have been allowed to raise their funding while Prepa hasn’t enjoyed any increase since 1989. There are a number of ways that the electric utility can cut costs and become economically viable including switching to natural gas from oil, collecting on the estimated 18% of production that’s pirated, and eliminating government-mandated subsidies to various municipalities. Ultimately Puerto Rico can’t let Prepa go bankrupt without setting off a contagion that would imperil the remainder of the island’s general obligation and public corporate debt.

TWO OF JOHN MALONE’S progeny got the nod from Wally Weitz of Omaha’s Weitz Investment Management. Liberty Media (LMCA) last week split off its U.S. cable operations—mostly its 26% piece of Charter Communications (CHTR)—from the remainder of the company, which includes Sirius XM Holdings (SIRI) and part of Live Nation Entertainment (LYV). Weitz likes Liberty and Charter despite their vintage-Malone complexity because of the latter’s consummate deal-making ability, usually in building significant value for fellow shareholders.

Interestingly, another presenter, Nehal Chopra of the Tiger Ratan Capital fund, praised cable operator Charter both for Malone’s financial sophistication and the operating abilities of Charter CEO Tom Rutledge. Charter will grow from around four million to eight million subscribers if the government approves the Comcast-Time Warner Cable deal, and Chopra expects Rutledge will be able to work his magic cutting costs and boosting revenues-per-user on the new customers.

A new program facet featured two chats with two presenters and interlocutors. Chicago real estate player Sam Zell noted that many people were excited by U.S. stocks at record levels. But he worries about economic woes in the rest of the world including Europe, Russia, and Japan (apparently unpersuaded by Kuhn’s bullish take). Valuations in some U.S. tech stocks like Amazon.com (AMZN) remind him of the insanity of the dot-com era.

Bill Ackman, whose Pershing Square Capital Management’s main fund is up about 35% year to date, delivered his own fireworks during his chat. He mocked botox maker Allergan (AGN) and its management for their contortions in trying to fend off the takeover bid that has teamed his Pershing with suitor Valeant Pharmaceuticals (VRX). As for U.S. railroad CSX (CSX), which rebuffed the takeover bid by Pershing-backed Canadian Pacific Railway (CP), Ackman insisted that CSX wasn’t its only target for a “pro-competitive” merger partner in the U.S. He didn’t name names, but the market bid up the shares of CSX rival Norfolk Southern (NSC) in response