- Kynikos's Chanos describes Nigeria as borderline failed state
- Glenview's Robbins likens industry criticism to dodgeball
As hedge fund managers including David Einhorn and Jim Chanos touted their trade ideas at one of the industry’s marquee events, the overriding message was clear: Go short.
Billionaire Stan Druckenmiller said the bull market in stocks is wearing itself out. Other speakers at the Sohn Investment Conference in New York on Wednesday recommended betting against targets ranging from machine maker Caterpillar Inc. to MTN Group Ltd., Africa’s largest wireless operator.
After a week when the $2.9 trillion hedge fund industry came under attack from billionaires Steven A. Cohen, Warren Buffett and Daniel Loeb over talent, fees and performance, some of the other biggest names in finance offered ammunition for skeptical investors in the Lincoln Center crowd. Druckenmiller, who has one of the best long-term track records in money management, said that while he’s been critical of Federal Reserve stimulus policy for the last three years, he had expected it would lead to higher asset prices.
“I now feel the weight of the evidence has shifted the other way,” Druckenmiller said. “Higher valuations, three more years of unproductive corporate behavior, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself.”
Druckenmiller, a former chief strategist for George Soros, said gold is his largest currency allocation as central bankers experiment with the “absurd notion of negative interest rates.”
Einhorn, who runs $9 billion Greenlight Capital, said shares of Caterpillar are set to topple along with the prices of natural resources like coal and iron ore, and its revenue from construction won’t save it. Einhorn said the Peoria, Illinois-based company’s earnings will fall to $2 per share, a little more than half what Wall Street analysts predict.
“The market thinks Cat’s business is at the bottom and poised for recovery, so the shares trade at a fancy multiple of perceived trough earnings," Einhorn said. “But is it really at or near trough?"
Chanos, famed for predicting the 2001 collapse of Enron Corp., recommended shorting Johannesburg-based MTN Group as demand for services in its largest markets is being hurt by falling commodity prices.
The company gets more than 60 percent of its sales from Nigeria and South Africa, where declining oil and metals prices have slowed economic growth, said Chanos, who runs Kynikos Associates. Subscriber numbers have fallen in both countries, exacerbated by outages ordered by the government in Nigeria, its No. 1 market, he added.
“Nigeria is a borderline failed state in our view,” Chanos said. Profits to MTN shareholders could be “eviscerated” by about 50 percent, he said.
PointState’s Zach Schreiber, an alumnus of Druckenmiller’s former hedge fund, said he’s pessimistic on oil in the longer term and betting against the Saudi riyal.
Saudi Arabia is economically unsustainable at current oil prices and is likely to be “structurally insolvent” in two to three years, according to Schreiber, who made a $1 billion profit shorting oil in 2014.
Jeffrey Gundlach, whose DoubleLine Capital is one of the fastest-growing mutual fund companies, suggested shorting utility stocks and buying mortgage real estate investment trusts, both through exchange-traded funds. With one turn of leverage, the trade should return 35 percent, he said.
Gundlach, whose firm is known for fixed-income investing, also told attendees at the conference to prepare for a Donald Trump presidency. The presumptive Republican nominee is “extremely comfortable with debt,” he said.
Carson Block of Muddy Waters Capital recommended shorting Bank of the Ozarks Inc., saying its earnings growth is unsustainable and its balance sheet may come under pressure.
Adam Fisher, chief investment officer of CommonWealth Opportunity Capital, offered a dim view on Japanese bonds. “The 30-year bond in Japan may be the most overpriced security on the face of the Earth,” he said.
Fisher wasn’t keen on betting against European sovereign debt, however, saying that trade would be a “widow-maker.”
Glenview Capital Management founder Larry Robbins set the tone when he kicked off the conference.
Robbins cited a dozen causes for “fear and doubt” in the global markets ranging from China to the U.S. presidential election, drug pricing to the Zika virus. He likened the increasing criticism of the hedge fund industry -- which is having its worst start to a year in terms of performance and client withdrawals since 2009 -- to a game of dodgeball.