Last week, the Treasury Department announced that America’s budget deficit for the fiscal year ending September 30 will be roughly $500 billion, the smallest it’s been since 2008. This was hailed as good news in most quarters.
Considering that we’ve been running deficits closer to (or over) $1 trillion for the last five years, I suppose it is good news, relatively speaking. But I can’t buy into the optimism. For me, the fact that prominent people are praising our government for only spending $500 billion more than it is takes in is depressing–and scary. It’s a clear symptom of how warped our thinking on the issue has become.
If Warren Buffett is right (and he usually is) that the stock market is a short term popularity contest and a long term weighing machine, you could easily argue that the most popular stock on Wall Street over the last eighteen months has been Tesla (TSLA). Elon Musk’s battery-powered car manufacturer is barely cash flow positive, but bullish investors have lifted it to a market cap of over $25 billion. That’s more than a third of the value of a little mom and pop outfit called Ford Motors.
But this past week hasn’t been kind to Tesla. First, a report from the website The Street called the Audi A8 Diesel a “Tesla Killer.” Besides bashing Tesla’s limited range and likening its interior comfort to a “Burger King” compared to the Audi’s “Buckingham Palace,” the piece also showed that, due to battery depreciation and electricity costs, the Audi is cheaper to own and operate. Then, yesterday, another Tesla caught fire. Of course, your average Honda or Chevy is liable to go up in flames if you plow it into a light pole at 100 MPH, as the driver of the Tesla did in this case. But reports from the scene said the Tesla’s batteries were “popping like fireworks” in the middle of the street. For a car with a well-publicized history of mysterious fires, that’s the last kind of press Musk wants.
Personally, I like Teslas. I think they’re neat looking. I’ve even considered buying one, and I wish Musk the best in his attempts to revolutionize the auto industry. But I am a little weary of the hype surrounding the cars. Sure, they don’t burn gasoline, but they do suck up electricity–and in a lot of places in the United States and abroad, that’s about the dirtiest way you can power a car.
Last week, I finally got around to reading The Hedge Fund Mirage. It was published in 2012, so I’m only two years behind, and the book’s main message is just as valid today as it was when it was written. Namely, the average hedge fund is the last place you should even think about putting your money. The very first sentence of the book makes this point quite persuasively:
“If all the money that’s ever been invested in hedge funds had been put in treasury bills instead, the results would have been twice as good.”
Ouch. The book’s author, Simon Lack, goes on to explain this sorry record by proving and reproving an obvious yet little-acknowledged law of money management. I discuss it in my book, as well (available now for pre-order!): asset size is the enemy of return. Hedge funds produce much better investment results when they manage a relatively small amount of money, but those returns shrink toward mediocrity (or worse) as a fund’s assets increase.
Put simply: the more capital you’ve got under management, the poorer your investors are probably going to be.
I know I’ve been talking about the population boom in Texas quite a bit lately, and I promise to move to other subjects soon, but I really do feel like this is the biggest story nobody is talking about—especially if you’re on the lookout for stocks to buy.
Most investors like growth. I’m no exception. And in this era of the perpetual non-recovery recovery, the only place to find real growth (on this continent anyway) is deep in the heart of the Lone Star State.
Yesterday the Commerce Department reported that the US economy shrank one percent in 2014’s first quarter, surprisingly worse than its initial estimate in late April of .1 percent growth. Most people blame the brutal “polar vortex” winter weather for this decline. All morning, the talking heads on CNBC have been excitedly predicting that, with the weather improving, second quarter growth will rebound to two or even possibly three to four percent. The recovery, they say, is accelerating. To which I would reply: you call this a recovery?
When I seek new investments for my $100 million fund, I often research companies that benefit from secular changes, large shifts in society and business. Three epic secular shifts happening right now are: the rapid adoption of cloud computing platforms, the tidal wave of growth in Texas (almost a million people a year are moving to that state), and America’s booming energy renaissance. The last change is particularly breathtaking. We’re pulling up almost nine million barrels of oil a day now in this country. That’s almost double the amount we extracted ten years ago. Natural gas production is way up as well, causing some analysts to predict America will be a net exporter of fossil fuels sometime in the next decade.
This growth in domestic oil and gas production is obviously good for energy companies. But how those fossil fuels get from the ground to the gas pump will strongly benefit one, very old-school mode of transportation: railroads. That’s why one of my favorite stocks these days is Trinity Industries’ (TRN). Its products were last considered “high tech” in the 19th century. But they’re going to make the company a ton of money here in the 21st.
Yesterday, Toyota announced that it is relocating its North American headquarters from the LA suburb of Torrance to the Dallas suburb of Plano.
Toyota is far from the first company to leave California for Texas in recent months. In the last three years, public California companies Copart, Waste Connections, Primoris, Vermillion, Pain Therapeutics, and Tenant Healthcare have all joined the exodus. Many private companies have moved as well, including Santa Monica money manager Dimensional Fund Advisors, which moved to Austin three years ago. But these previous relocations have been minor tremors in terms of employment and tax revenue. Toyota’s move is a major earthquake. It’s the kind of shift that can remake a region.
Unless California gets its act together and rethinks how it treats the private sector that drives its economy, many more vital employers are going to move and the Golden State is going to wind up looking a lot less golden.
This isn’t about investing or the world of finance (though it is about one of the most profitable businesses in the world), but I’d like to take a moment to acknowledge the football players at my graduate alma mater, Northwestern. Tomorrow, they’ll be voting on whether to form a union. I hope they vote yes but no matter what happens, I admire their guts and the strength of their ideals.
Just in time for the release of Michael Lewis’s new book, Flash Boys, news came down this week that several high frequency trading firms have been subpoenaed by New York’s attorney general.
As Lewis writes about, HFT is a new variation on one of the oldest scams in the money management game: front-running. In simple terms, high frequency traders use sophisticated methods to detect and profit from tiny fluctuations in stock prices. They usually earn pennies a share or less on individual trades, but they execute huge numbers of transactions to earn huge (and largely risk-free) returns. One New York HFT shop recently acknowledged that it had made money on over 1000 consecutive trading days using this strategy.
Like all front runners, HFTs exploit advance information about a security that is unavailable to the wider markets. The losers in this and all other forms of front-running are Jane and John Q. Public–the poor schmoes who play by the rules and wind up paying more when they buy stocks and earning less when they sell them. In other words, HFT is yet another example of Wall Street insiders turning our financial markets into the equivalent of the 1919 World Series–a rigged game.
This past week’s sell-off might signal the beginning of the end to several recent manias, especially in the biotech, social media, and cloud computing sectors. But, to my amazement, one mania seems to be going strong. As just about every stock in the markets got eaten for lunch on Friday, a new restaurant company called Zoe’s Kitchen debuted—and jumped 65 percent.
I know a fair amount about the restaurant business, both the good and bad of it. I am lucky enough to own a restaurant that’s doing quite well (knock wood). A few years back, I owned another restaurant that didn’t do well. Like most eateries, it failed in less than three years. As a money manager, I’ve been studying the industry and investing in restaurant companies for thirty years, and I’ve never seen anything like this “fast casual” craze.