Cooperman Shuns Treasuries; Favors Stocks (Transcript)
Leon Cooperman, chief executive officer of Omega Advisors Inc., talks about investment strategy and President Barack Obama’s policies.
Cooperman spoke with Bloomberg’s Erik Schatzker yesterday. (Source: Bloomberg)
(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)
ERIC SCHATZKER, BLOOMBERG TV: Everybody knows by now that you wrote to the President back in November. Your letter was widely circulated and in it, I think it’s fair to say, Lee, that you accused him of polarizing the nation by fomenting what you described as “class warfare between the haves and the have nots.” What I’d like to know, are you any more encouraged today by the tone of debate in American politics than you were back then?
LEON COOPERMAN, CEO, OMEGA ADVISORS: Not really. Not really. Let me just say this. I’m probably the most apolitical guy you know. I’ve not been involved in politics. Most of my financial resources, that I give back to the society, are given through non-profits - you know, inner city programs, health programs, etcetera - and I was motivated to write mainly because of the rhetoric - his dialog. You know, if the President had simply said that we’re in a very difficult economic environment and all of us have to do more, particularly those that can afford to do more, I never would have written that because I agree with that. I’m prepared to pay more in taxes, but it’s the class warfare that he’s invoked that really set me off - the attacking of wealthy people, the attacking of the energy industry. Very interesting, after the debt ceiling was raised he also threw in the private aviation industry for a source of attack. Now, I’ll just tell you that the manufacturers of aircraft, I think next to motion pictures, are one of the largest exporters of goods in the country. Their labor force is largely unionized, which is his constituency. Warren Buffett, who he’s a big fan of, has an airplane which he calls “The Indispensable,” so why would you want to attack an industry that creates a lot of employment for your constituency.
So, it really - I can understand the problems he’s facing. I just don’t understand the dialog. He’s got to be inclusive, bring people together. Maybe as we approach the election he’ll soften his dialog, but I think he’s revealed himself for what he is. He’s anti-business. He’s anti- wealth, and it’s a different philosophical viewpoint. I came across a quote that - with your permission - I’ve got to put on my spectacles - I’m - I won’t say blind, but I can’t see much without them, but basically - I’d like to read you something which I think very much summarizes the essence of my letter but in a much more articulate manner and it says, “You cannot help the poor by destroying the rich. You cannot strengthen the weak by weakening the strong. You cannot bring about prosperity by discouraging thrift. You cannot lift a wage earner up by pulling the wage payer down. You cannot further the brotherhood of man by inciting class hatred. You cannot build character and courage by taking away peoples’ initiative and independence. You cannot help people permanently by doing for them what they could and should do for themselves.”
And, this is the essence of my view, that I think the President was heading down a non-productive path and this class warfare never has a good end to it and so this is what incited me to write. I’ve heard from so many people around the world. I’ve gotten easily 500 emails and/or letters - 99.9% supportive. I’ve not heard from anybody in the administration or certainly the President. That doesn’t bother me. He’s busy doing other things, but I think we’re heading for a national referendum in this country and it’s very complex because you know almost half the country is on some form of public assistance and they probably are supportive of the President’s programs and the other half wants it the way it used to be. You know, reward for individual initiative, a meritocracy, etcetera, and I’m not a politician. I’m not politically oriented. I’m pretty sour on the whole political system but it’s probably the best one out there but, anyway, that’s kind of how I see things. I haven’t changed my view and I don’t think the President has changed his view.
ERIK SCHATZKER: Lee, when you say we’re headed for a national referendum, a referendum on exactly what?
COOPERMAN: Well, we’re going to head - whether we’re heading the way of Europe, a socialist state, or whether we’re going to be like America was where, like I said, there’s a reward for initial initiative, exceptionalism - I don’t want to sound like I’m waving a flag, but I am waving a flag. You know, I’m a perfect example. I had a very, very, very heavy dose of luck but I started in the tenements in the South Bronx, had a public school education. I went to public school. I went to public high school. I went to public college. I started my career at Goldman Sachs after getting an MBA at Columbia and I started with virtually nothing in the bank, actually negative net worth, and I became very wealthy, very successful. I have this moral imperative of giving back to the system, which I think most people who have achieved great wealth have that view. I don’t think I’m exceptional or different than anybody else and so I’m for the old way. Work hard, the harder you work the luckier you get, etcetera, etcetera. And, I think the President seems to be of a different orientation.
ERIK SCHATZKER: But -
COOPERMAN: He creates this impression -
ERIK SCHATZKER: So, as a self -
COOPERMAN: He creates this impression.
ERIK SCHATZKER: I was just going to say, Lee, as a self- made man - as the prototypical, if you will, self-made made - you just described your career history, you couldn’t be more self made. Do you agree, though, with some of the people who side with the President that the conditions in America today don’t allow for the same kind of social mobility that you enjoyed as a young man?
COOPERMAN: We have to correct that, but do you correct that by attacking the wealthy, or taxing the wealthy out of existence. And he basically makes the point - I find humorous. Nobody uses numbers. You know, I’m a numbers person. Nobody uses numbers. He says that the wealthy have to pay their fair share. What is their fair share? I have no problem with that. I’m for progressive income tax structure. What is the fair share? You know, right now the max-end tax at the federal level is 35% - it’s heading to, I think, 3.96%. You have a payroll tax. You have a Social Security tax. You have state income taxes, and then whatever you hold onto at the end of the road, you have a 55% inheritance tax. So, the notion that wealthy don’t pay their taxes is ridiculous.
ERIK SCHATZKER: Well, he’s -
COOPERMAN: Totally ridiculous. My guess is if -
ERIK SCHATZKER: He has - he had a number -
COOPERMAN: [CROSSTALK] he had one foot -
ERIK SCHATZKER: I’m sorry, he has put that number out there. Most recently in his budget, he proposed that that number be 30% - that anybody making over a million dollars a year should pay at least 30% tax. Is that fair?
COOPERMAN: I - let me tell you something. I’d sign on for that immediately. I checked with my accountant about a month ago. My effective tax rate was 28.3% and the only difference between the 30% and the 28.3% - or the 35% statutory level - was because I have capital gains. I’m an investor. I invest for the long term, and let’s face it, a lot of long-term capital gains are due to inflation. It has nothing to do with investment merits. So, yes, would I sign on for 30%? Absolutely. I have no problem with that. I believe, like I said, in a progressive income tax structure but the notion it creates is the wealthy don’t pay taxes. It’s just crazy. It just makes no sense.
ERIK SCHATZKER: Well, but -
COOPERMAN: I’m not a political analyst. I’m a stock jockey.
ERIK SCHATZKER: I understand. I understand. We’re going to move onto stocks in just one second but if you’re okay with 30%, do you believe that other people who are perhaps similarly wealthy, or wealthy but not quite as fortunate as you, should also pay 30%?
COOPERMAN: Yes, well, why should I and not them? Of course. I don’t think the wealthy people would object at all. Let’s face it, the super wealthy people, at the end of the road they’re going to give away their money. There are a few hedonists out there that are going to try and keep all their money but when they’re lowering you into the ground, where does your money go? It goes to Uncle Sam, to charity or your children. Okay? I think you don’t want to take away the incentive from your children to achieve on their own so you want to leave them a rational sum of money and then you’re left to decide between the government - again, we’re talking about people of great wealth. Then you’re left to decide between the government and charities. I would rather give my money to the charities of my choice where perhaps I could play some role or my descendants in that money being intelligently spent.
And that’s what Buffett has done. Warren, whom I have an enormous respect for. I know Warren reasonably well. I’m a student of his accomplishments, but at the end of the day Warren is leaving all his money to either his children in the form of foundations, where I think he set up three $1 billion foundations for his three children, and he’s giving the rest - almost $50 billion dollars - to the Bill and Melinda Gates Foundation. So, he made that judgment that he thinks Bill and Melinda Gates and their trustees can do a better job in allocating his resources than the U.S. government. Very rational. And, I think if you ask Warren Buffett what could the maximum tax rate be on wealthy people, I don’t think he would depart much from that 30% or 35% number, nor do I. So, what I’m most arguing for is now what we have to do is size the government to the level of revenue they’re likely to take in. This is the issue - we cannot - as a nation, our fiscal house is totally out of order and we’re heading down a very, very bad path. We’re running budget deficits consistently over $1 trillion. The federal debt now is roughly $15 trillion. Let me give you a statistic which to me is mind boggling. The average maturity of the U.S. government debt is less than 4 years. What company would run its financial affairs and have all its debt maturing in 4 years or less? Okay? And with piling on debt at this enormous rate - it’s about 8.5% of GDP. We’re all talking about Greece today. How many more years is it before the United States is in the same headlines as Greece? And so we have to pull together.
So, what I would do is I would start from the bottom line. The bulk of the taxes paid in this country are paid by wealthy people. Decide what the maximum marginal tax rate should be on wealthy people, determine what your revenue yield is, and size the government to that revenue yield rather than having this constant program of kicking the can down the road where you know you’re heading to an ultimate crisis and that’s when you get leadership. We have a system of government in the United States - and I don’t blame this on President Obama, by the way. This is a problem for both parties. We have a system of leadership in this country that is leadership at a crisis and it’s just a damn shame. My pet peeve is that in 1973 we had an energy crisis. What is it? Almost 40 years have gone by. I can’t see an energy policy articulated. We have this enormous blessing of a huge supply of natural gas. Why don’t we have natural gas cars, electric cars? We don’t have policies that are intelligent and it’s not the fault of the Democrats. It’s not the fault of the Republicans. The system is breaking down because they basically dislike each other. The guy that had it right - I don’t know. Maybe I’m dating myself but 3 or 4 years ago - you can get the exact date - Evan Bayh resigned from the Senate, and he resigned from the Senate because he said he’s “never seen a more dysfunction body. They genuinely dislike each other. They can’t negotiate. They can’t compromise. I don’t want to be part of a system like that,” and he moved on. And boy, he wrote that 3 or 4 years ago. He was really ahead of his time. I give him tremendous credit. And so we would all like to come together and try to resolve our problems in an intelligently, friendly-like manner and whether that’s possible or not, I don’t know.
ERIK SCHATZKER: Lee, is there a candidate out there whom you think can do that?
COOPERMAN: Well, I’ve publicly said I support Romney. I’m disappointed that he can’t seem to traction. I was listening to some comments that Jack Welch made, of GE fame, but Jack made the observation that he was extraordinarily impressed with Romney’s organization abilities, and managerial abilities. You know, GE had put I think something over $1 billion for the Olympics. It was floundering. Romney came in on a volunteer basis and fixed it. It was a big success, and Jack worked very closely with him and I have a lot of respect for Jack Welch, and he made these comments and everything I see about him is positive. I think religion, in my view, doesn’t play a role. I worked at Goldman Sachs with many members of the Mormon faith. These are clean cut, hard working, accomplished, good people so I don’t see the issue. So, yes, at this point in time I support Romney and the only thing that disturbs me is that he’s having so much difficulty getting his message across but I’m supportive of Romney. And I have supported Democrats in the past. I’m a registered independent. I just want the best things for the country and I think, as I said earlier in my remarks - and again, this is something outside of my area of expertise - I’m getting to be a political analyst - is I think we’re heading for a national referendum. There is tremendous dissatisfaction on both sides of the aisle and I think we have to come to some common good. We have to work this out and I think the people express themselves, whether they want a European style government, more socialist in orientation, or they want a government that adheres and advocates free markets and we’ll have to wait and see. I don’t know what the outcome is going to be. Right now [In Trade] says the President’s probability of being re-elected is almost 60%. So, and I would say that even where I’m coming from, that’s not a good thing.
ERIK SCHATZKER: Let’s move onto investing. At the end of 2010, you wrote to your investors outlining the conditions for an optimistic view of U.S. stocks in 2011, that the U.S. wouldn’t have a Japan-loss decade, that the ECB would fall in line and start to provide some monetary stimulus along the lines of what the fed was doing, that the President would become more pro business, and you later added that oil couldn’t top $130 a barrel or else we’d head into a recession. You might say that many of those conditions have been met. The President may not be as pro business as you would like but he is perhaps a little less anti-business than he was at one point in time and a number of those other things, especially the ECB, have been met, so does that make 2012 -
COOPERMAN: Yes, well, actually -
ERIK SCHATZKER: A year to be optimistic when it comes to the stock market?
COOPERMAN: We were in 2011 as you said - optimistic. You said we pointed out one’s assumptions but the truth of the matter that was our forecast and I don’t take any victory laps because it’s a very humbling business, but things have unfolded pretty much as we’ve anticipated. We did not have a recession, number one, and the ECB is doing what they had to do. In other words, what I said almost 9 months ago - excuse me - was that when a problem - there were two groups of thought on this whole EBC issue and one school of thought said the problem is so complex, so difficult to understand, it’s beyond my bandwidth. I’m not going to invest. And the other school of thought - which I consider myself part of - is historically when a problem is perceived to have been so catastrophic in its impact if it hits, the problem doesn’t hit. And so that was my assumption, that the ECB, the IMF, the World Bank - the IMF with a 70% funded by the United States basically - China, Japan - they would all coalesce around the problem and do what they have to do, which is what’s happening. In terms of Obama, it would be nice if he’d move to the center. I don’t think that’s happening in all honesty, and on the price of oil that is an issue and the way I wrapped it around at that time was about the events in the Middle East.
ERIK SCHATZKER: Right.
COOPERMAN: What I said was, is what’s going on in the Middle East about democracy or something more sinister - I don’t know the answer. I’m dubious. I’m questioning. I’m not relaxed about it but the only way to monitor it is through the price of oil and I’d say that more recently the price of oil has become troublesome again. We’re approaching $4.00 a gallon at the pump and that’s going to be a depressing influence on the economy. I don’t remember exactly all the numbers but I think we’re something like 18 million barrels of oil per day we’re consuming and a certain number of gallons per barrel and you wind up that this is a significant issue. So, I would say oil is back on the table and I think, you know [Brent] $130/$135 is going to be a problem. I think it’s currently around $122 and so it has to be watched very, very carefully. But, I think things are unfolding in the manner that we anticipated and I would say that when I look at kind of the pluses and minuses - and whenever I kind of try to come up with a forecast I always pull out a yellow pad of paper and I write down what I think the assets or pluses for the market are, what the minuses are. On the plus side we have a very friendly fed, and that really is a global phenomena. There is easings all over the world, most recently by the Japanese Central Bank. The economy is moving ahead, albeit at a slow rate but it’s moving ahead, somewhere in the 2-3% zone. Corporate earnings are rising. Dividend payments are rising. Investors have de-risked. People are so fearful of what happened to them in 2008 that they’re coming back into the market at a very slow pace and that’s a plus, and valuation is quite reasonable.
Again, I don’t want to sound like a statistician but for the last 50 years the S&P 500 multiple averaged around 15 times. In that 50-year period where the S&P multiple averaged 15, the 10-year U.S. government bond rate averaged 6.67%, whereas we sit here today, the S&P is about 13.5 times earnings, which is roughly 10% below the historical average but it is occurring at a time where the 10-year government bond rate is hovering around 2%.
ERIK SCHATZKER: Right.
COOPERMAN: Okay? And short-term interest rates are zero. Now, I have great confidence that the Fed is ultimately going to get their way. The Fed is trying to elevate asset prices.
ERIK SCHATZKER: Sure.
COOPERMAN: To help consumption, to help the economy, and I think in 2 or 3 years time we’ll be worrying about inflation and interest rates will be materially higher, and an instrument that I have absolutely no interest in - and it’s the most widely traded instrument in the world - are U.S. government bonds. I don’t think people understand how risky a U.S. government bond is at 2% return. I understand the arguments of those that are liking it, but a 2% government bond - if we’re talking about marginal tax rates, all-in, state and local, federal 40% - you’re keeping 60% of your 2% - you’re keeping 1.2%. The rate of inflation is somewhere in the range of 2-3% so your capital is being confiscated. Makes no sense. If you look at the history of the 10-year government bond normally - normally - and we’re not in normal times now. We’re in a world of financial repression because of weak economic conditions - but in normal times, a 10-year U.S. government bond yields in line with nominal GDP. Nominal GDP is the summation of inflation plus real growth, so if inflation is raising 2- 3%, let’s say, and real growth is 2-3%, that would mean nominal GDP would be growing normally between 4-6%. So, if I told you the 10-year government bond was going to go to 4% or 5% over the next couple or three years, you wouldn’t think that that’s a very bold or unusual forecast. Well, that’s an enormous capital loss for the person that holds that 2% government bond. So, amongst the panoply of financial assets I think U.S. government bonds are the least attractive and I think equities - and where I’ve been saying this - and I’ve been a little premature in all honesty.
The market didn’t do as well as I thought it would do last year. It’s slightly ahead of schedule this year, but it’s on schedule - but a little ahead of schedule I should say - but, when I look at the alternatives in financial assets, cash earned zero and Bernanke has promised us it’s going to be zero for a couple more years. You got to keep some of that for security and safety purposes. You’ve got U.S. government bonds, about 2%, zero interest. I don’t own one in my portfolio. The third alternative is high yield - excuse me - that’s had an enormous rally. That’s down a little over 7%. So selectively you could find individual issues that make sense but collectively high yield has kind of got itself fully priced, and then you’re left with the S&P which is 13.5 times earnings - you have a bit over 2% and that’s 10% below the historical multiple at a time when interest rates are well below historical, and you can find lots of cheap stocks out there that are yielding more than bonds today that are good companies that will grow over time. So, I think by default stocks went out and they’re the best house in the financial asset neighborhood and it’s not to say, we’re not without problems.
When I look at my yellow pad and I talk about the problems. We have Iran, big issue - the price of oil, the uncertainty about the political outcome this coming November. We have the structural imbalances that we have to deal with, and we don’t seem to have a - if we wind up with an election where the President gets re-elected and Republicans control the Senate and the House, which it seems to be what the pundits are saying - we wind up with another 4 years of gridlock. We don’t need gridlock, we need leadership. We all got to come together and do a little bit more to resolve this problem and subjugate our ideology for the common good to move things ahead.
So, we have these structural imbalances that trouble me and then lastly, we’ve set for an enormous amount of fiscal drag in 2013. I read somewhere that higher taxes to the order of magnitude of $500 billion are legislated to take place in fiscal 2013, which is going to be a hit to economy unless we start doing things about that. So, I think there are issues out there but by and large we started the year thinking somewhere in the 1,400-1,450 as a target in the S&P. As we speak, I don’t know, we’re 1,375-1,380 - so we’re up 8%. I wouldn’t be surprised if the market slowed down but then again, nobody really knows. People have de- risked. There’s a lot of liquidity inside. There’s trillions of dollars sitting on the sidelines. People have been busy buying bonds the last few years and it’s going to turn out that bonds were the worst place to put your money for the next 3 years. And I’m trying to forward look, not backward look.
ERIK SCHATZKER: So, clearly you’ve made a very strong case for equities, Lee. I look at your portfolio. I see that you are - at least only the stuff that’s publicly disclosed. I see that you like financials, broadly speaking. Obviously you’ve got some picks within financials - energy, technology, and a mix of say content, distribution and creation. What does that say? Is there a unifying thesis in those choices?
COOPERMAN: Yes, we’re saying basically we’re a value- oriented operation. We’re very bottom up. We look at the top down to try and set a framework for the market. What we’ve told our investors for the 20 years I’ve been in Omega, and my 25 years before that at Goldman Sachs, is we try to make money in five different ways, and in any one year each way plays a role, okay? The first way is, let’s face it, stocks are high-risk financial assets. Short-term bonds and cash are low-risk financial assets, so we at Omega and my vice-chairman, Steve [Ian], who is a terrific resource for the firm - we work in association basically. We spend a lot of time studying the economy, the Fed, market valuation and to try to determine whether the stock market is undervalued going up, overvalued going down - or it could be overvalued, getting more overvalued - and that determines our exposure to risk assets so that’s the first way we make money. And right now we’re about 80% net long, which is probably higher than most hedge funds. We tend to be more long oriented. The second way we make money is on asset allocation. We look at U.S. stocks versus U.S. bonds, high-grade bonds, government bonds, high-yield bonds, trying to - and we do this domestically and internationally - and the way I phrase it is we’re looking for the straw hat in the winter. Where’s the mispriced asset? People don’t buy straw hats in the winter. They’re on sale, so we’re looking for the mispriced asset and frankly I would say the mispriced asset today is U.S. government bonds but because of the weakness in the economy we don’t have a short trade on at the present time but that is my orientation.
The third way we make money - which is kind of - I’ll get into it at the moment - is our bread and butter business and that’s undervalued stocks on the long side, and it’s very, very eclectic. We’re trying to find growth at a reasonable price and oftentimes we find ourselves involved in a lot of takeovers because one of our touchstones in our approach is the belief that publicly traded companies - most of them - have two values, the so-called auction market value which is the price you and I pay for 100 shares or 1,000 shares - maybe you buy 100,000 shares - and the so-called private market value, which is the price a strategic or financial investor would pay for the entire business. So, what we look for is companies in the public market that are selling at a discount to their private market value where we can identify catalyst for change. So, that’s the third area we try to make money.
The fourth area, which has not been predictably productive for us historically is overvalued stocks on the short side, and then finally we take a few percent of our capital and will make macro trades and macro to us is non-equity so it could be long or short fixed income -
ERIK SCHATZKER: Gold, or something like that?
COOPERMAN: Sure, currency - exactly.
ERIK SCHATZKER: Now - and what’s the fifth one?
COOPERMAN: We do 3% of the fund in gold. Well, the fifth is the macro. So, the first is market direction.
ERIK SCHATZKER: Okay.
COOPERMAN: Second is asset allocation. Third is undervalued stocks, long. Fourth is overvalued stocks, short, and fifth is the occasional macro trade.
ERIK SCHATZKER: And what you think is going to - I guess -
ERIK SCHATZKER: My question to you, Lee, is what is going to work this year?
COOPERMAN: I would think gold will work. I think the S&P will work. I think a whole bunch of stocks will work. They’ve already worked somewhat this year. The S&P, I think, is up about 8% and we find a lot of cheap stocks around - in technology. I hate to buy things that are up a lot so forgive me if I mention things that are up, but we own them and we would not own them if we didn’t like them, but I would like to put new money to things that have not moved. But we like in technology Apple and Qualcomm.
ERIK SCHATZKER: You, Lee, actually -
COOPERMAN: In financial areas -
ERIK SCHATZKER: Since you mentioned it, I want to ask you a question about Apple. Apple - north of $500 - is there really that much value left in that stock?
COOPERMAN: Yes, we think it’s worth something north of $600. It’s funny, by the way. I’m surprised. You’re being a real gentleman. You’re being so nice to me. You didn’t ask me about RIM.
ERIK SCHATZKER: I could ask you about RIM, too.
COOPERMAN: Funny - yes, well, you know, it’s funny. It was really like a mass hysteria. We put about a half of 1% of our assets into RIM late last year on a theory that they had a revenue base that was being mispriced by the market, which was 20% of what we had in Apple. We’ve owned Apple now for a long time and we continue to own a big position. So, I had five times more Apple investment than I had RIM and I guess kept on getting calls from the press about RIM. We’ve sold RIM because we have a discipline of taking stop losses. Still think it might be intriguing. You know, they have 75 million subscribers that are paying down on average almost $5.00 a month for the email service but we’re out of it, but yes, I wouldn’t say Apple would be the leading candidate for new money. We’re not putting new money into Apple but we’re riding the trend. We think they have a unique position, have a couple more years of very good runway ahead of them. Qualcomm - they have the dominant chip in smart phones. In the financial area we own JP Morgan. We own a little bit of Citicorp, Bank of America, and we have a very unique company called [Auto Source Portfolio Solutions] which basically helps manage the foreclosure process for banks. In the healthcare area, we liked the HMOs, United, WellPoint, Boston Scientific. In the media area we like EcoStar, DISH. There’s just no shortage of attractive stocks and we just control our overall exposure by determining how much exposure we want to have. Right now, as I said, we’re about 80% net long. We like Sallie Mae in financials.
ERIK SCHATZKER: Yes.
COOPERMAN: In the energy area we have Halliburton, Kinder Morgan.
ERIK SCHATZKER: Lee, I think we have to end it there but I did want to say thank you very much for taking the time to talk to me this morning.
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