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Categorized | Capital Markets

Money piled too deep in too few places

Posted on December 31, 2015

SolarCity Corp. employees install solar panels on the roof of a home in Kendall Park, New Jersey, U.S., on Tuesday, July 28, 2015. SolarCity Corp. is scheduled to release earnings figures on July 29. Photographer: Michael Nagle/Bloomberg©Bloomberg

For to everyone who has will more be given, and he will have an abundance. But from the one who has not, even what he has will be taken away.

Matthew 25:29, New Testament,
English Standard Version

    Not to apply what was supposed to be spiritual guidance to current trends in the investment world, but it does seem that money is being piled too deep in too few places. Over the past year there has been much more talk of contrarian thinking than of actual contrarian position taking.

    And it has become even more difficult than usual to raise money unless your institution already has more than it can sensibly deploy.

    For the most part, the fiduciaries or real-money clients want easy-to-understand, sustained trends that will work from one calendar year and annual conference to the next. In other words, they would like to own a reliable perpetual motion machine, which cannot exist.

    That is why success in accumulating assets under management would appear to have more to do with adroit showbiz and good marketing than with the consistency of one’s analytic approach.

    Still, there was some value to be added by good methodology. I have tried to see what worked in my own published opinions, which, fortunately do not have to be passed through a compliance officer or investment committee.

    One surprise to me is how often you could have avoided losses, or even made some money, by being informed in detail
    about the political environment and legal framework of investible securities. Anyone should be able to understand the documents I study. But most people do not take the trouble to read beyond the frequently misleading executive summaries.

    Take one example of a vehicle for speculation: Greek government bonds. There was a common belief at the beginning of last year that the election of a Syriza-led government would have no consequences for Greek government bond prices.

    Yet if you had read what the Syriza coalition had promised its constituencies, you would have seen that it was publicly committed to flying the country’s external finances into a ground loop.

    Which it did. Then the Syriza-istas imposed the capital controls I had been told were an impossibility. Then the coalition had to call new elections, and subsequently give in to the euro-cracy, despite their new election promises, because their own voters would otherwise not get pensions or state-paid salaries. You could have ridden the Greek government bond prices up and down and up again at each predictable turn.

    If the European investors were willing to deceive themselves about Greece, their US counterparts were equally obtuse about what had to happen in Puerto Rico. When the governor of Puerto Rico used a newspaper interview in late June to inform the world that the commonwealth’s debt was “unpayable”, you would have thought he had revealed a shocking state secret.

    While it is effectively impossible to directly short sell Puerto Rico’s $70bn of bonded debt, it would have been quite possible to dump the shares of municipal bond insurance companies who guaranteed some commonwealth

    Last year, the price of the Municipal Bond Insurance Association’s shares plunged by about a third, as the company’s management and their lawyers kicked, screamed and, finally, started to acquiesce in what will be a federally led bailout (in all but name) of the island’s government.

    The best bang for your political contribution buck, though, would have come from knowing the inside story of the negotiations between the Washington Republicans and Democrats over the tax treatment of renewable energy projects. SolarCity, the child of Elon Musk, the celebrity green entrepreneur, was one of the best ways to play the climate investing game.

    At the end of December 2014, SolarCity shares were at $52.92, amid much complacency about the indefinite extension of renewables’ favourable treatment by the taxation and electricity rate authorities. Over the course of the next eleven months, as the hostility of the Congressional Republicans and the scepticism of the state regulators became more evident, the shares drooped to a low of $25.85 in mid-November.

    Right at that point, without a Washington insider on retainer, you could have missed your chance to cash in on the deals made

    between pro-renewables Democrats and Republican climate sceptics. From mid-November to the end of December, SolarCity’s shares approximately doubled, to a touch over $50 a share. You can see the value of what some might call inside information and others just good research.

    The dead cat bounce at the beginning of last year in oil prices and the shares and bonds of energy companies and countries was also a good opportunity to go against the sellside recommendations.

    Yes, it can be proved by analysts that oil and natural gas prices are below their replacement cost. But who says producers are not allowed to go broke? Prices of commodities never hit their lows before inventories are liquidated, and that is only just beginning to happen with the energy complex.

    You are not required to lose money just because your peers are losing. Just be a bit sceptical, not cynical.