A Look At The Investment Opportunity In California Resources Corporation Across Its Capital Structure


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The last few months have been exceptionally hectic, and I have not been able to publish anything here for my readers as regular as I would like. I will try in the near future to write something about China, whose situation has not changed at all over the last year – actually, if you have been following our analysis on China over the last couple of years, you would arrive to the conclusion that the situation has actually worsened, given higher leverage levels.

But in the meantime, I have just published an article in Seeking Alpha about the investment opportunity in California Resources Corporation (CRC:US), an oil&gas company whose assets are in California. Because of a new reading policy in Seeking Alpha, the article will be available for free during the next couple of weeks and after that it will be protected behind a firewall. Overall, and given my bullish outlook for oil prices for the next 12 months (which I discussed here and that it is of course very bad news for the health of the global economy), the investment opportunity in CRC looks very attractive, both in equity and (2nd lien) bonds.

The article can be read here.

Investing in Sears Holdings’ secured bonds


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For those interested, I have just published in Seeking Alpha an analysis on Sears Holdings’ 2018 2nd lien bonds:


The takeaway is that the bonds are more than fully supported by the asset base of the company: a vast amount of real estate, inventories and receivables and the value of the iconic brands Kenmore and DieHard that I estimate in the base case to be worth more than $5.5bn, enough to cover the first and second lien debt.

The bonds have one year to maturity and they currently trade at around 13% yield to worst. In terms of duration and yield I think they offer a solid risk/reward vs. the high yield space. For instance, many ‘frackers’ pay for 5-year notes less than 6%, debt that should trade at distress levels in my opinion (but you know, yours is truly a bear on US frackers, but never mind).

The new darlings of Wall Street: The folly of oil fracking investing


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[Acknowledgment: Thanks to Edward Worsdell for helpful comments on an earlier draft of this post.]

In a recent post we took a deep dive into the debate over whether the US stock market is expensive or not. We concluded that i) the market is indeed quite expensive, ii) the market is not in a ‘bubble’ territory, but rather higher equity valuations on average should be considered the new normal (on the proviso that this new normal state of affairs should not be used to justify current equity valuations), and iii) historical standards can be a deceptive guide in predicting future equity returns and should be used with caution.

However, the market, taken as a whole, has a wide range of investment opportunities. We can find situations where a sector is cheap for a particular reason (e.g. the US retail sector) or situations where a company is trading at mind-blowing multiples because the market is discounting unrealistic expectations about future growth prospects, as in the case of Tesla, with a market capitalisation now higher than well established competitors like Ford or General Motors.

But this post is not about the fate of investors in a single company like Tesla or whether this is an attractive investment or not (we think it is not). Rather, this post will zero in on a sector that has been gaining increasing media attention, a sector that is considered to be the new pride of American industry, one that is highly leveraged and in which Wall Street investment banks have so much at stake in it. Continue reading

El indicador más importante a seguir de la economía china


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Acabo de publicar un artículo para Funds People, haciendo una pequeña actualización de la situación económica de China. Se puede leer pinchando aquí.

Un breve comentario aquí para nuestros lectores. Dado el elevado volumen reciente de noticias sobre la salud económica de China (que se unen a la rebaja de rating por Moody’s anunciada hoy), muchos analistas se preguntan en qué estado se encuentra la economía en estos momentos. Aunque nuestros lectores ya saben que, si hace falta, podemos presentar análisis algo más complejos (aquí y aquí, por ejemplo) sobre China, para seguir la evolución económica de China preferimos seguir el criterio de Ockham: cuanto más sencillo, mejor. Usando este criterio, el mejor indicador es el crecimiento en los volúmenes de inversión: volúmenes altos (en concreto, por encima de la tasa de crecimiento del PIB real) implicarán que la economía no se está reequilibrando y que la deuda total sigue creciendo. Dicha tendencia no ha cambiado recientemente, como se puede en el siguiente gráfico:

2017.05 China Investment Monthly Data

En otras palabras, monitorizando los crecimientos en la inversión se vigilan de manera implícita: i) los crecimientos en la deuda y ii) si realmente el PCC avanza con las prometidas “reformas desde el lado de la oferta” (supply side reforms). Parece que desde ambos puntos de vista, el proceso de reequilibrio no está teniendo hasta el momento el impulso suficiente desde Pekín.

The “New Normal”: Some reflections on the discussion on US current equity valuations


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[Acknowledgment: Thanks to Edward Worsdell for helpful comments on an earlier draft of this post.]

Ever since the publication of the book Triumph of the Optimists: 101 Years of Global Investment Returns by Dimson, Marsh and Staunton (already 15 years ago!), it is basic knowledge that equities, as an asset class, outperform other asset classes in the long-run, in particular fixed income (both bills and bonds). As you can see in the following graph from the Credit Suisse Global Investment Returns 2017 edition, equities on a global basis (and not just US equities) have outperformed both bills and bonds by very wide margins – although this historical advantage seems to have faded away in the last 15 years:

Global Equity Returns vs

Source: Credit Global Investment Returns 2017, p.47

From a theoretical perspective, however, the fact that equities should outperform both bills and bonds over the long-run has a long and distinguished lineage. It was Lawrence Smith, in 1924, in his classic book Common Stocks as Long-term Investments, who was the first to advance the idea (which for many was counterintuitive at the time) that stocks should deliver healthy returns for investors, with the proviso that you should hold them for several years – and over several business cycles. And as it happened, Keynes, who read Smith’s book as soon as it came out, was the first institutional investor (through the King’s College’s portfolio) to introduce stocks as a permanent, core asset in his portfolio allocation (and replacing the core role that real estate had played up to that point). And since then, the rest of the story is better known: from the Buffett’s investment success thanks to his patient approach at the helm of Berkshire Hathaway, to the books by Jeremy Siegel popularising the idea that equities, if bought at reasonable valuations, will do fine in the long-run. Continue reading

A financial balances comment on the US trade balance and Trump’s economic proposals (Part I)


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[This post was co-written with Rafael Wildauer, lecturer at Kingston University Business School, who is doing research on the links between income and wealth distribution, credit, growth and financial stability].

It has been almost one year ago from our latest comprehensive report on the US economy, and although we are currently writing our second report which will be published soon (it took us longer than expected, given that our model has undergone several modifications, the most important one being a private sector split between households and businesses), we wanted to share a couple of thoughts with our readers on the current state of the US economy, especially since the election of president Donald Trump in November. The economic proposals the incoming Trump administration are supposed to bring are important, and if eventually fulfilled, we think they will have a clear impact on the economy over the medium-term. In this first part of a two-post series, we will review the recent evolution of the balance of payments and, in the second one, we will go through the effects of Trump’s economic proposals on the future path of the US sectoral financial balances.

While many observers are bewildered by the first steps of the Trump administration, economically the US seems to be doing fine, with GDP growth around 2.5 in 2014 and 2015 and an improving current account. A closer look however shows that the recovery of the current account was strongly driven by an improving oil balance. The trade deficit ex-oil increased over the last three years. A likely explanation is that the US grew faster than some of its main trading partners (notably Europe), which led to a deterioration of the trade balance. Thus, under the economic proposals by the incoming Trump administration and not much further room for an improving oil balance, the current account might deteriorate again. Continue reading

La balanza comercial, el dólar y Trump: principales desafíos para la economía estadounidense en 2017


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[Artículo publicado originalmente en El Confidencial]

El 2016 pasará a la historia como un año interesante para la economía estadounidense. Después de un comienzo de año intenso debido a la crisis de las materias primas en febrero y a la subida de los tipos de interés de la Reserva Federal en diciembre de 2015 (que como comentamos en este mismo medio hace un año, y como se ha visto a posteriori, no fue una buena idea), el cierre de año nos deparó la victoria contra todo pronóstico de Donald Trump, que trajo consiguientemente un sentimiento de euforia en los mercados de renta variable, y otra subida adicional de tipos por parte de la FED – cuyos efectos, a pesar de lo que creen muchos analistas, están aún por ver.

Todos estos temas han recibido ya una dosis alta de atención tanto en la prensa especializada como en la blogosfera. Mi propósito aquí no es volver a reproducirlos y repetir tópicos manidos, sino más bien articularlos de tal modo que nos puedan servir como resumen del 2016 y, lo que es más importante, como guía analítica de los principales desafíos de la economía estadounidense en 2017.

Para ello, me gustaría empezar por un hecho poco mencionado pero de vital importancia para el devenir de la economía americana, y que no es otro que la evolución de la balanza comercial (exportaciones menos importaciones de bienes y servicios). Es bien conocido que desde la década de 1980, EEUU ha sufrido de manera permanente un déficit comercial en sus transacciones con el resto del mundo, déficit que además ha aumentado de manera progresiva en las últimas décadas. El déficit comercial alcanzó un 6% justamente antes de la crisis de 2007 (aproximadamente 700 mil millones de dólares), y desde entonces se ha estabilizado en torno al 3% del PIB, una magnitud lejos todavía del equilibrio en las cuentas exteriores pero que no es tan alarmante como los niveles que se alcanzaron hace ya una década. Dicha estabilización aparente, junto con el hecho de que el dólar ha ido apreciándose progresivamente en los dos últimos años sin mayor efecto en la balanza comercial, ha provocado que muchos análisis lleguen a la conclusión de que el sector exterior estadounidense no debería representar motivo de preocupación a corto plazo. Continue reading

Our reading of Pettis’ reading of the FT article ‘glimpse of China’s economic future’


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Michael Pettis has recently published a post discussing an article that appeared in the FT some weeks ago, authored by Gabriel Wildau, Yuan Yang and Tom Mitchell, which discussed the economic dilemmas China will have to face in the (near) future given the current high levels of corporate debt and (still) high levels of corporate investment. We found both Pettis’ post and Wildau et al. article very interesting and quite similar in spirit to what we have written several times (here and here), and because we have not published anything on China for several months, we thought it could be a good time to provide a brief update of our views.

But first, it may be useful for our readers to explain briefly the main arguments posed by Wildau et al. and Pettis, respectively. The main goal of the FT article is to go through three different counterfactual rebalancing scenarios, discussing also the extent to which they could happen or not. Although the hypothetical scenarios are discussed in a heuristic way and the article does not crunch any numbers in detail (as we usually do, or for that matter, Pettis), we cannot but agree on the importance of that approach. Because several economic variables are, in principle, politically determined by Beijing, the dynamics of the Chinese economy are more ‘deterministic’ than in any other economy of the world, so the paths that the rebalancing process can take can be reduced to a handful of possible scenarios.

The first possible scenario proposed by the FT article (the most optimistic one by any standard), which we can dub ‘the conventional wisdom up to now’, posits that because consumption and the needs of the Chinese population (holidays, healthcare, education, and so on) are growing, there is an ‘unlimited demand’ for everything. According to this scenario, we are told that the growth in consumption will fill the void left by investment, and that the rebalancing process will proceed smoothly with high GDP growth rates and no major financial disruption. Continue reading

Las finanzas conductuales, el (casi) único secreto común a todos los inversores value


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[Artículo publicado originalmente en FundsPeople]

Hace unas semanas, el sector más lector de las finanzas españolas estaba de enhorabuena. Francisco García Paramés, ex gestor de Bestinver, actual gestor de Cobas Asset Management y uno de los mejores gestores (no sólo a nivel nacional) de renta variable de las últimas décadas, publicaba Invirtiendo a largo plazo: mi experiencia como inversor, un libro a mitad de camino entre la autobiografía y una sencilla introducción al estilo de gestión value. Y digo de enhorabuena porque, aunque el libro pase a engrosar la (ya) larga literatura del value investing, es el primer libro escrito por un gestor español de reconocimiento internacional.

Invirtiendo a largo plazo, al igual que la mayoría de los libros sobre value investing (por no decir todos), tiene un carácter eminentemente didáctico. Como explicó Paramés en la presentación del libro, el principal objetivo del texto es elevar la educación financiera del gran público español para que pueda tomar decisiones de ahorro más sensatas. Sin embargo, el libro es también una muy buena excusa para reflexionar, una vez más, sobre las características que definen a un inversor value, y cómo el estilo de gestión de Paramés y sus compañeros en Bestinver contrasta con el de otros inversores value bien conocidos. Para los que prefieran pasar a las conclusiones: la única herramienta que aparece de manera consistente en el arsenal de todos estos inversores (y Paramés) son las finanzas conductuales (behavioural finance), a las que Invirtiendo a largo plazo dedica un capítulo completo. Continue reading

Del superávit fiscal alemán al desequilibrio en la economía global: ¿cómo solucionarlo?


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[Artículo publicado originalmente en El Confidencial]

Después de un verano tranquilo en los mercados (más allá de la publicación de los inventarios de crudo a principios de agosto que animaron el mercado del petróleo durante unos días), las turbulencias han vuelto para el nuevo curso. Y no es para menos. Los desequilibrios macroeconómicos globales que estuvieron en todas las portadas a finales del 2015 y principios del 2016 no se han corregido, sino más bien lo contrario, han aumentado.

Uno de esos desequilibrios es la posición fiscal superavitaria del gobierno alemán, al tiempo que es uno de los más importantes del mundo y peor entendidos. A finales de agosto se dio a conocer el número del saldo fiscal alemán, que ascendió a 18,5 billones de euros, en torno al 1,2% sobre el PIB, superando así el ya elevado dato de 2015 (0,6%) y también las conservadoras proyecciones que presentó el FMI antes de verano en un informe detallado sobre la economía alemana, en donde el organismo presidido por Christine Lagarde esperaba para todo el 2016 un déficit del 0,1%.

Incluso el FMI, una institución abiertamente conservadora en cuanto al debate fiscal se refiere, recomendaba en el citado informe (p.22) que “es apropiado el uso del espacio fiscal disponible para financiar inversión pública y políticas fiscales pro-crecimiento, con el fin de elevar el crecimiento a largo plazo y ayudar también a reducir el superávit en la cuenta corriente”. Continue reading