Source: http://www.valuewalk.com
According to people familiar with the matter, Ray Dalio, CEO of Bridgewater Associates, has spoken at length about what makes countries competitive. The current issue under discussion is the ‘magic formula’ for economic success.
Ray Dalio notes that the most self-sufficient economies of the world are, surprisingly, the Asian emerging markets, whereas the most dependent are members of the Eurozone, Italy, and Spain. Economies like, India, Philippines and South Korea beat the USA by far on the self sufficiency scale. Bridgewater also concludes in their thesis that the self sufficient countries outperform in economic growth. Additionally, both developed and emerging economies have more or less equal correlation between their self sufficiency rating and the level of growth they achieve over long periods of time. The measure of being independent is based on indicators like the amount of hard work, government supports, and the number of hours worked.
Interestingly, countries with governments that provide a minimal welfare system and transfer very little to their people, find higher standing on the independence scale. Consequently, individuals keep their spending in range of their earnings (since support from government is absent), evolve into more independent economies, and thus achieve greater real economic growth per capita.
The governments of countries like France, Italy, and Sweden spend more than 50 percent of their GDP, while China and India spend very little (close to 20 percent). The ratio is small when compared with the size of the economy and governing bodies. As a result, the inference drawn from Bridgewater’s analysis is that people in these emerging economies kind of just live on their own and hence, are more self sufficient.
As support and redistribution of resources is limited in self sufficient countries, their people end up doing more hard work, so another point goes to their benefit. The correlation of hard work with future growth is 26 percent, individuals in developing countries spend more weekly hours working. China, Mexico, and India take the top position followed by Latin America, while US has good rating in the developed countries, while the most leisure-loving countries are in Europe. The relationship between weekly hours and economic growth has been 49 percent in the past decade according to Bridgewater’s calculations. Similarly, emerging nations take top honors in how much their people want to participate in the labor force. Therefore, we again see European countries taking the lower spots in labor participation. It is also fair to mention here that countries like, Greece, Italy, and Spain have a large portion of their labor force based on immigrants rather than locals.
Bridgewater’s thesis does find some noteworthy relationships and draws fair conclusions. But the indicators of self sufficiency, or the factors controlling it, are deeply inter-related, the presence of one (for example, reduced government spending) allows the other factor to thrive (higher participation in labor force and more weekly working hours). So the factors in themselves are not independent of one another. Moreover, the analysis does not include geographical elements, like natural resources. Therefore the scale defines only one kind of self-sufficiency and it does that very well. Bridgewater’s analysts think that their explanation of self sufficiency can help in devising policies for future, but it is of course, not the only factor that controls growth, as will be discussed in future posts.
Monday, November 19, 2012
Sunday, November 18, 2012
Ray Dalio: The Most Competitive Country in the World is
Source: http://www.valuewalk.com
I have talked about Ray Dalio and Bridgewater’s take on an economy’s self-sufficiency and the factors that control it, in a previous post. Ray Dalio and fellow analysts at Bridgewater concluded that countries that stand higher on an independence scale achieve greater real economic growth.
Based on the most influential of the above mentioned factors, i.e. competitiveness and indebtedness, their conclusion states that India, China, Mexico, and Russia have the highest potential for growth, while the least growth can be expected from Japan, France, Italy, and Spain. The US lies somewhere in the middle and is expected to grow 2 percent in the upcoming years.
Bridgewater’s unusual, but perceptive approach on how countries achieve growth circles psychology of people and luck as prime elements that control competitiveness and indebtedness. Based on them, countries achieve varying levels of wealth and power. Here is how the evolution of an economy takes place:
Logically, countries that lie low on the debt curve and high on competitiveness achieve faster growth. One of the things that influences a competitive environment is how ‘productive’ the education system is. The countries that have a higher payback on what they spend on their population’s education, achieve greater growth over time. Less trade and communication barriers and reduced cost on raw materials also help in building up the competition.
On indebtedness, Bridgewater Associates observes how spending from debt can paint a picture of economic prosperity which is not substantial. Debts eventually stop raising relative to incomes and these countries then experience stringent debt regulations and thus achieve slower growth. While those that are less indebted have far brighter prospects of achieving further growth. The analysis uses metrics, like weekly hours , investing, corruption and education, all weighted against relative income to assess competitiveness while debt service levels, debt flow, and monetary policy are used to judge the level of indebtedness. Together, competitiveness and indebtedness are 73 percent correlated to GDP growth for the next ten years. India tops as being the most competitive, with China coming at second place. The US has a weak position on the basis of competitiveness. In measure of indebtedness, India beats all others again, while Russia and Mexico take the next places. The USA falls in the middle, while Japan, Greece, Hungary, and Spain come at the lowest end.
I have talked about Ray Dalio and Bridgewater’s take on an economy’s self-sufficiency and the factors that control it, in a previous post. Ray Dalio and fellow analysts at Bridgewater concluded that countries that stand higher on an independence scale achieve greater real economic growth.
Based on the most influential of the above mentioned factors, i.e. competitiveness and indebtedness, their conclusion states that India, China, Mexico, and Russia have the highest potential for growth, while the least growth can be expected from Japan, France, Italy, and Spain. The US lies somewhere in the middle and is expected to grow 2 percent in the upcoming years.
Bridgewater’s unusual, but perceptive approach on how countries achieve growth circles psychology of people and luck as prime elements that control competitiveness and indebtedness. Based on them, countries achieve varying levels of wealth and power. Here is how the evolution of an economy takes place:
- In the early stages, people know they are poor and thus have limited resources and savings. The economy has reduced debt because they have no insurance.
- In the subsequent stage, the wealth is increasing, but psychology is still the same. They save, work hard, and maneuver cautiously. But investment and exports increase and their assets, like gold and real estate, expand.
- Now comes the part where they realize that they are actually rich. Their per capita income breaks records. The psychology shifts as the generation is replaced by new people who like to spend and enjoy more. Working hours go down, while expenditures on luxuries goes up.
- In the next phase, the economy gets poorer, but the psychology of people and governments does not budge. Debt to earning ratio increases, incomes are high but spending is even higher, payment and government deficit expands. Infrastructure weakens and productive investments lose steam.
- The bubble of being wealthy bursts and deleveraging and austerity measures come in play. They print more money and lower interest rates to help GDP growth. The previously powerful economies now start competing with developing and emerging economies.
Logically, countries that lie low on the debt curve and high on competitiveness achieve faster growth. One of the things that influences a competitive environment is how ‘productive’ the education system is. The countries that have a higher payback on what they spend on their population’s education, achieve greater growth over time. Less trade and communication barriers and reduced cost on raw materials also help in building up the competition.
On indebtedness, Bridgewater Associates observes how spending from debt can paint a picture of economic prosperity which is not substantial. Debts eventually stop raising relative to incomes and these countries then experience stringent debt regulations and thus achieve slower growth. While those that are less indebted have far brighter prospects of achieving further growth. The analysis uses metrics, like weekly hours , investing, corruption and education, all weighted against relative income to assess competitiveness while debt service levels, debt flow, and monetary policy are used to judge the level of indebtedness. Together, competitiveness and indebtedness are 73 percent correlated to GDP growth for the next ten years. India tops as being the most competitive, with China coming at second place. The US has a weak position on the basis of competitiveness. In measure of indebtedness, India beats all others again, while Russia and Mexico take the next places. The USA falls in the middle, while Japan, Greece, Hungary, and Spain come at the lowest end.
Saturday, November 17, 2012
Billionaire Ray Dalio’s Latest Stock Picks
Source: http://www.insidermonkey.com
Ray Dalio’s Bridgewater Associates is an extremely large, and extremely successful, hedge fund. Based in Westport and known for its extremely strong- some would say cultish- culture, it has grown to well over $100 billion in assets under management with little negative impact on its returns. Dalio himself has become a billionaire several times over due to the fund’s performance. We have gone through the fund’s recent 13F filing, which reports some of its equity positions from the end of September, and compared it to previous filings (see what Bridgewater has reported owning in the past) to get an idea of what Dalio and his team are thinking. Here are some themes that we’ve noticed in the fund’s portfolio:
Hardware. Hewlett-Packard Company (NYSE:HPQ) and Dell Inc. (NASDAQ:DELL) were among Bridgewater’s top five stock picks at the end of June, and even with both stocks down during the third quarter- HP by 14% and Dell by over 20%- they remained at the top of the hedge fund’s portfolio as the stake in HP was increased by over 10% and the stake in Dell grew by over 60%. These companies are both trying to move away from PCs into more services-oriented businesses, but the market has been dissatisfied with their progress. It looks to us like Bridgewater believes that HP’s and Dell’s hardware businesses won’t do as poorly in the future as the market expects. It’s possible that the fund is in fact more confident that these players will make a successful transition to software and services, but we’d note that while Bridgewater did also report a sizable position in Oracle it had sold shares in that company during the third quarter. A hardware play seems to be more likely. We'd looked at Dell and Hewlett Packard recently and hadn’t considered either to be a good stock to buy despite forward P/Es in the 4-5 range.
Retail. This one we may be stretching a bit, but Bridgewater did add shares to its position in Staples- vaulting that to the #6 slot in its 13F portfolio- as well as increasing its holdings of Safeway Inc. (NYSE:SWY) by about a third to make that the second largest stock holding by market value in its 13F portfolio. The trailing, and forward, P/E multiples at these two companies all come out to 8x, which normally represents value territory. Both stocks also pay dividend yields of about 4%. Staples seems to be struggling more in terms of its business, as competition with Amazon likely helped drive its earnings down 32% in its second fiscal quarter versus a year earlier, but it’s Safeway- where net income has actually been up- that is the more popular short selling target with 30% of the outstanding shares held short. Safeway looks like a good potential value play, and while we’re considerably more cautious on Staples we could see an investor looking at that as well.
Uncool tech companies. Apple and Google are favorites of hedge funds (they'd topped our list of the most popular stocks among hedge funds for the second quarter), tech watchers, and consumers, but neither of those companies were to be found in Bridgewater’s 13F at all, let alone in its top holdings. It did own Microsoft Corporation (NASDAQ:MSFT) (the fund’s largest equity position by market value; to be fair, it too had been a widely held stock by hedge funds) and Yahoo! Inc. (NASDAQ:YHOO) (a position that it significantly increased to 1.3 million shares). Microsoft and Yahoo carry forward P/Es of 8 and 16 respectively, with Microsoft’s multiple being artificially low due to the release of new versions of Windows and Office. As such we can’t really say that that they are cheap, especially compared to Apple.
Bridgewater, at least in terms of its 13F portfolio, seems to be quite contrarian here. That’s paid off in some ways- it’s missed the recent correction at Apple and Google- but not so much in others (as HP and Dell have continued to drop so far this quarter). Potentially the most interesting ideas for investors are its larger positions in Safeway and Staples.
Hardware. Hewlett-Packard Company (NYSE:HPQ) and Dell Inc. (NASDAQ:DELL) were among Bridgewater’s top five stock picks at the end of June, and even with both stocks down during the third quarter- HP by 14% and Dell by over 20%- they remained at the top of the hedge fund’s portfolio as the stake in HP was increased by over 10% and the stake in Dell grew by over 60%. These companies are both trying to move away from PCs into more services-oriented businesses, but the market has been dissatisfied with their progress. It looks to us like Bridgewater believes that HP’s and Dell’s hardware businesses won’t do as poorly in the future as the market expects. It’s possible that the fund is in fact more confident that these players will make a successful transition to software and services, but we’d note that while Bridgewater did also report a sizable position in Oracle it had sold shares in that company during the third quarter. A hardware play seems to be more likely. We'd looked at Dell and Hewlett Packard recently and hadn’t considered either to be a good stock to buy despite forward P/Es in the 4-5 range.
Retail. This one we may be stretching a bit, but Bridgewater did add shares to its position in Staples- vaulting that to the #6 slot in its 13F portfolio- as well as increasing its holdings of Safeway Inc. (NYSE:SWY) by about a third to make that the second largest stock holding by market value in its 13F portfolio. The trailing, and forward, P/E multiples at these two companies all come out to 8x, which normally represents value territory. Both stocks also pay dividend yields of about 4%. Staples seems to be struggling more in terms of its business, as competition with Amazon likely helped drive its earnings down 32% in its second fiscal quarter versus a year earlier, but it’s Safeway- where net income has actually been up- that is the more popular short selling target with 30% of the outstanding shares held short. Safeway looks like a good potential value play, and while we’re considerably more cautious on Staples we could see an investor looking at that as well.
Uncool tech companies. Apple and Google are favorites of hedge funds (they'd topped our list of the most popular stocks among hedge funds for the second quarter), tech watchers, and consumers, but neither of those companies were to be found in Bridgewater’s 13F at all, let alone in its top holdings. It did own Microsoft Corporation (NASDAQ:MSFT) (the fund’s largest equity position by market value; to be fair, it too had been a widely held stock by hedge funds) and Yahoo! Inc. (NASDAQ:YHOO) (a position that it significantly increased to 1.3 million shares). Microsoft and Yahoo carry forward P/Es of 8 and 16 respectively, with Microsoft’s multiple being artificially low due to the release of new versions of Windows and Office. As such we can’t really say that that they are cheap, especially compared to Apple.
Bridgewater, at least in terms of its 13F portfolio, seems to be quite contrarian here. That’s paid off in some ways- it’s missed the recent correction at Apple and Google- but not so much in others (as HP and Dell have continued to drop so far this quarter). Potentially the most interesting ideas for investors are its larger positions in Safeway and Staples.
Friday, November 16, 2012
5 Big Buys By Ray Dalio
Ray Dalio's Bridgewater Associates has approximately $7.435 billion of assets under management in the latest quarter. The hedge fund manager has ranked in the previous 2 years as the largest and best-performing hedge fund manager in the world. Its 1,200-strong work force had generated $122 billion worth of assets under management by 2011. Its investment strategy is much like Soros' global macro style. The manager believes that the financial system plays a key role in macroeconomics.
In the latest quarter, the hedge fund made 95 new stock purchases and sold 52 out. I discuss the biggest buys of Bridgewater Associates in this article. They are BCE Inc. (BCE), Dollar Tree Inc. (DLTR), Nucor Corporation (NUE), Microchip Technology Incorporated (MCHP), and Rogers Communications Inc. (RCI). I briefly show the past trading activities of the hedge fund with respect to these stocks and the stock's most recent performance and margins.
BCE Inc. is a provider of communications and television services to Canadian customers. It operates under the brands Bell TV, Bell Home Phone, and Bell Fibe TV. The Verdun-based company has over 55,000 employees. Its third-quarter earnings of 76 Canadian cents per share slightly missed the estimate of 78 cents. Nonetheless, the company has met expectations with its $5.06 billion revenue. Last month, BCE's Bell was one of the World's Greenest Companies. It is the only Canadian company that made it in such a prestigious list.
Bridgewater bought 426, 937 shares of BCE in the third quarter; this is equivalent to 0.26% of its total holdings. The purchase's value was $19 million. This amount represents the highest investment so far that the fund manager had poured in BCE in at least within the last 9 quarters. It is noted that Bridgewater had sold all its previous holdings of the company in the first quarter of the current year. BCE's profitability is impressive with a margin of 14.10%. Finviz.com shows the long-term annual growth estimate of 3.15%. The P/E ratio is currently at 13.69, a bit lower than its forward P/E of 13.18. It is top dividend stock of Bridgewater with a yield of 5.37%. The stock has inched up in the year by about 5%.
Dollar Tree Inc.
Dollar Tree Inc. is an operator of discount variety stores, which offer products at a fixed price of $1.00. The company operates in the U.S. and Canada under the brands Dollar Tree, Deal$, and Dollar Bills. The company is soon to report its third-quarter earnings. A report shows that the company expects to beat analyst estimates for the third straight time. Bridgewater initiated a position in the company yet again. The purchase has amounted to $7.25 million and represents 0.10% of the hedge fund's total portfolio. The company has been a constant item in the 13F Filing of the hedge fund. Bridgewater had sold it out a couple of times in the last two years.
Currently, the stock is at a downward trend losing 9.26% compared with that of the previous year. However, current estimates show that earnings are likely to grow within the next 5 years at a remarkable rate of 17.45% per year. The company's sales had been growing in the previous 5 years at 10.81% per year. The company's forward P/E is 13.37, which is significantly lower than the current ratio at 16.83. Meanwhile, its profit margin is 7.57%.
Nucor Corporation
Nucor Corporation is a manufacturer and seller of steel and steel products in the U.S., Canada, and other countries. Its business lines are Steel Mills, Steel Products, and Raw Materials. The Charlotte-based steelmaker has recently entered into an agreement with Canada's Encana Oil & Gas for the development of onshore natural gas drilling program in the U.S. This program aims to develop a reliable and low-cost supply of fuel in the next 20 years.
Dalio's team has poured a significant 0.17% of its total portfolio on Nucor. Whalewisdom.com reported that the purchase has amounted to $12.624 million. This amount is about 10 times the position it opened in the first quarter of 2012, which it later sold in the quarter that followed.
The stock's performance had grown by 4.29% from last year. Its forward P/E ratio is 13.47, which is much lower than the current ratio of 25.4. The company's EPS of $1.58 is expected to jump to $2.98 next year. Nucor's sales had been growing on the average 6.30% each year within the previous 5 years. It also has a respectable dividend yield of 3.64%.
Microchip Technology Incorporated
Microchip Technology Incorporated is a semiconductor company based in Chandler, Arizona. The company has just signed a definitive agreement in the second quarter of 2012 to acquire Standard Microsystems Corporation. It is also said to make a remarkable move into mobile devices with a new technology to allow for interpretation of gestures. Ray Dalio has just bought MCHP shares amounting to $13.828 million at the end of the third quarter. The last time the company appeared on its 13F Filing was in the last quarter of 2011 where it sold all its holdings. The previous trading activities of Bridgewater on the company were all valued above $10 million.
Estimates at finviz.com show that Microchip's EPS will grow in the next 5 years at a decent annual rate of 8.70%. Its profit margin is above the 10 percent mark at 15.37%. MCHP's forward P/E is at 14.08, much lower than the prevailing one at 28.7. The stock, however, is currently sliding. In fact, it has lost 15.20% from last year.
Rogers Communications Inc.
Rogers Communications Inc. is another communications company that Bridgewater has favored in the latest quarter. The Toronto-based company operates wireless, cable and media segments. The company will soon deliver a world-leading internet experience through increasing speeds to 150 Mbps across its internet tiers. To date, this will be Rogers' fastest internet speed.
The hedge fund initiated a large position in the company in the latest quarter. The purchase was worth $11.7 million and was equivalent to 0.16% of the fund's total holdings. Aside from this, the most recent activity of Bridgewater in the company was that in the first quarter where it sold all its 275,200 shares. This third quarter investment was by far the largest within at least the previous two years.
The stock performance is on the rise. Compared with last year, the stock has grown by 16.40%. Its profitability makes it an attractive portfolio addition with a margin of 12.34%. The long-term annual growth of the EPS is 8.27% within the next 5 years. The P/E ratio is 14.98 while the forward ratio is 12.7. The stock is also one of Bridgewater's top dividend stocks with a yield of 3.67%.
Sources: http://seekingalpha.com & whalewisdom.com & finviz.com
In the latest quarter, the hedge fund made 95 new stock purchases and sold 52 out. I discuss the biggest buys of Bridgewater Associates in this article. They are BCE Inc. (BCE), Dollar Tree Inc. (DLTR), Nucor Corporation (NUE), Microchip Technology Incorporated (MCHP), and Rogers Communications Inc. (RCI). I briefly show the past trading activities of the hedge fund with respect to these stocks and the stock's most recent performance and margins.
| Shares Held | Market Value | % of Portfolio | Change in Shares | % Change | Profit Margin | EPS Growth (next 5 years) | |
| BCE Inc. | 436,937 | $19,199,011 | 0.26% | 436,937 | New | 14.10% | 3.15% |
| Dollar Tree Inc. | 150,146 | $7,250,550 | 0.10% | 150,146 | New | 7.57% | 17.45% |
| Nucor Corporation | 329,712 | $12,614,781 | 0.17% | 329,712 | New | 2.98% | 5.50% |
| Microchip Technology Incorporated | 422,376 | $13,828,591 | 0.19% | 422,376 | New | 15.37% | 8.70% |
| Rogers Communications Inc. | 289,700 | $11,703,880 | 0.16% | 289,700 | New | 12.34% | 8.27% |
BCE Inc. is a provider of communications and television services to Canadian customers. It operates under the brands Bell TV, Bell Home Phone, and Bell Fibe TV. The Verdun-based company has over 55,000 employees. Its third-quarter earnings of 76 Canadian cents per share slightly missed the estimate of 78 cents. Nonetheless, the company has met expectations with its $5.06 billion revenue. Last month, BCE's Bell was one of the World's Greenest Companies. It is the only Canadian company that made it in such a prestigious list.
Bridgewater bought 426, 937 shares of BCE in the third quarter; this is equivalent to 0.26% of its total holdings. The purchase's value was $19 million. This amount represents the highest investment so far that the fund manager had poured in BCE in at least within the last 9 quarters. It is noted that Bridgewater had sold all its previous holdings of the company in the first quarter of the current year. BCE's profitability is impressive with a margin of 14.10%. Finviz.com shows the long-term annual growth estimate of 3.15%. The P/E ratio is currently at 13.69, a bit lower than its forward P/E of 13.18. It is top dividend stock of Bridgewater with a yield of 5.37%. The stock has inched up in the year by about 5%.
Dollar Tree Inc.
Dollar Tree Inc. is an operator of discount variety stores, which offer products at a fixed price of $1.00. The company operates in the U.S. and Canada under the brands Dollar Tree, Deal$, and Dollar Bills. The company is soon to report its third-quarter earnings. A report shows that the company expects to beat analyst estimates for the third straight time. Bridgewater initiated a position in the company yet again. The purchase has amounted to $7.25 million and represents 0.10% of the hedge fund's total portfolio. The company has been a constant item in the 13F Filing of the hedge fund. Bridgewater had sold it out a couple of times in the last two years.
Currently, the stock is at a downward trend losing 9.26% compared with that of the previous year. However, current estimates show that earnings are likely to grow within the next 5 years at a remarkable rate of 17.45% per year. The company's sales had been growing in the previous 5 years at 10.81% per year. The company's forward P/E is 13.37, which is significantly lower than the current ratio at 16.83. Meanwhile, its profit margin is 7.57%.
Nucor Corporation
Nucor Corporation is a manufacturer and seller of steel and steel products in the U.S., Canada, and other countries. Its business lines are Steel Mills, Steel Products, and Raw Materials. The Charlotte-based steelmaker has recently entered into an agreement with Canada's Encana Oil & Gas for the development of onshore natural gas drilling program in the U.S. This program aims to develop a reliable and low-cost supply of fuel in the next 20 years.
Dalio's team has poured a significant 0.17% of its total portfolio on Nucor. Whalewisdom.com reported that the purchase has amounted to $12.624 million. This amount is about 10 times the position it opened in the first quarter of 2012, which it later sold in the quarter that followed.
The stock's performance had grown by 4.29% from last year. Its forward P/E ratio is 13.47, which is much lower than the current ratio of 25.4. The company's EPS of $1.58 is expected to jump to $2.98 next year. Nucor's sales had been growing on the average 6.30% each year within the previous 5 years. It also has a respectable dividend yield of 3.64%.
Microchip Technology Incorporated
Microchip Technology Incorporated is a semiconductor company based in Chandler, Arizona. The company has just signed a definitive agreement in the second quarter of 2012 to acquire Standard Microsystems Corporation. It is also said to make a remarkable move into mobile devices with a new technology to allow for interpretation of gestures. Ray Dalio has just bought MCHP shares amounting to $13.828 million at the end of the third quarter. The last time the company appeared on its 13F Filing was in the last quarter of 2011 where it sold all its holdings. The previous trading activities of Bridgewater on the company were all valued above $10 million.
Estimates at finviz.com show that Microchip's EPS will grow in the next 5 years at a decent annual rate of 8.70%. Its profit margin is above the 10 percent mark at 15.37%. MCHP's forward P/E is at 14.08, much lower than the prevailing one at 28.7. The stock, however, is currently sliding. In fact, it has lost 15.20% from last year.
Rogers Communications Inc.
Rogers Communications Inc. is another communications company that Bridgewater has favored in the latest quarter. The Toronto-based company operates wireless, cable and media segments. The company will soon deliver a world-leading internet experience through increasing speeds to 150 Mbps across its internet tiers. To date, this will be Rogers' fastest internet speed.
The hedge fund initiated a large position in the company in the latest quarter. The purchase was worth $11.7 million and was equivalent to 0.16% of the fund's total holdings. Aside from this, the most recent activity of Bridgewater in the company was that in the first quarter where it sold all its 275,200 shares. This third quarter investment was by far the largest within at least the previous two years.
The stock performance is on the rise. Compared with last year, the stock has grown by 16.40%. Its profitability makes it an attractive portfolio addition with a margin of 12.34%. The long-term annual growth of the EPS is 8.27% within the next 5 years. The P/E ratio is 14.98 while the forward ratio is 12.7. The stock is also one of Bridgewater's top dividend stocks with a yield of 3.67%.
Sources: http://seekingalpha.com & whalewisdom.com & finviz.com
Wednesday, October 17, 2012
Review of “A Conversation with Ray Dalio”
Source: danielstrading.com
The Council on Foreign Relations sponsored “A Conversation with Ray Dalio” last week. The hour long discussion is a great explanation of what is going on in the global economy today. For anyone who has not seen it, click here to watch Ray Dalio discuss global economics.
For those of you who don’t have the time or much patience for economics, I’ll provide a summary and my interpretation of what he said below. However, please note that this summary based on my understanding of macroeconomics is no substitute for actually watching the CFR event with Ray Dalio, Founder of Bridgewater Associates, the world’s largest hedge fund and arguably the most successful.
According to Dalio, and many economists, the world economy is in the midst of a great deleveraging. The deleveraging of a nation’s economy (or a global economy) refers to the reduction of debt across government and private sectors as the “Total Debt/GDP” ratio decreases. The deleveraging is unavoidable as the United States has been spending at higher amounts than income earned for decades. There is a tipping point when debt to income becomes too high and the debts need to be reduced. The last time we had a deleveraging to this magnitude was the Great Depression of the 1930s.
In the United States, we have seen a reduction in the Total Debt to GDP ratio. While Government debt is still growing, private debt from individuals and corporations have been decreasing. The greatest risk during a deleveraging is slipping into an economic Depression.
During a deleveraging, the economy faces both deflationary and inflationary pressures. According to Dalio, the best deleveragings, which he calls a “beautiful deleveraging”, brings down the debt to income ratio and includes all of these four necessary actions:
Debt write downs are also deflationary because one man’s debt is another man’s asset. Once you write down debt, you are also destroying wealth. Not only is the amount of wealth reduced, but the ability to borrow and credit creation is also reduced. The best example of this has been with the real estate market since the bubble popped. Defaults and foreclosures in the residential home sector are a big part of the debt write downs. Debt restructuring as we are seeing with Greece is also a prime example of write downs.
The problem with Austerity and Debt Write Downs is that they cause deflation and can lead us into an economic depression. During the deleveraging (which is now unavoidable), Austerity and Debt Write Downs will happen. There is no way to prevent it.
If the government and/or central banks do not want to be in a depression, they have the option to buy assets and provide the market with much needed liquidity. This is what many refer to as “printing money”. This is what Bernanke and the Federal Reserve are doing. They are buying assets and providing the system with enough liquidity to counter the depression forces. The printing of money is inflationary but the goal is to create enough inflation to balance the deflation from Austerity and Debt Write Downs.
These three combined forces (Austerity, Debt Write Downs and Printing Money) lead to the Transfer of Wealth effect. Wealth is effectively transferred from the creditors to the debtors. Wealth is also transferred from monetary inflation policies and debts become worthless in real money terms.
Eventually, the economic system is saved as debt to income levels come back to normal, asset valuations stabilize, the credit/debt system functions normally, and economic growth is achievable and lasting.
Finally, inflation in the long term is a concern, but it is trumped by the near term threat of deflation. As the US and world economy deals with the deflationary risks, central banks will have to be very concerned with inflation. Time will tell how they combat the inflation risks in the future.
The Council on Foreign Relations sponsored “A Conversation with Ray Dalio” last week. The hour long discussion is a great explanation of what is going on in the global economy today. For anyone who has not seen it, click here to watch Ray Dalio discuss global economics.
For those of you who don’t have the time or much patience for economics, I’ll provide a summary and my interpretation of what he said below. However, please note that this summary based on my understanding of macroeconomics is no substitute for actually watching the CFR event with Ray Dalio, Founder of Bridgewater Associates, the world’s largest hedge fund and arguably the most successful.
According to Dalio, and many economists, the world economy is in the midst of a great deleveraging. The deleveraging of a nation’s economy (or a global economy) refers to the reduction of debt across government and private sectors as the “Total Debt/GDP” ratio decreases. The deleveraging is unavoidable as the United States has been spending at higher amounts than income earned for decades. There is a tipping point when debt to income becomes too high and the debts need to be reduced. The last time we had a deleveraging to this magnitude was the Great Depression of the 1930s.
In the United States, we have seen a reduction in the Total Debt to GDP ratio. While Government debt is still growing, private debt from individuals and corporations have been decreasing. The greatest risk during a deleveraging is slipping into an economic Depression.
During a deleveraging, the economy faces both deflationary and inflationary pressures. According to Dalio, the best deleveragings, which he calls a “beautiful deleveraging”, brings down the debt to income ratio and includes all of these four necessary actions:
- Austerity (Deflationary)
- Debt Write Downs (Deflationary)
- Printing Money (Inflationary)
- Transfer of Wealth (Inflationary)
Debt write downs are also deflationary because one man’s debt is another man’s asset. Once you write down debt, you are also destroying wealth. Not only is the amount of wealth reduced, but the ability to borrow and credit creation is also reduced. The best example of this has been with the real estate market since the bubble popped. Defaults and foreclosures in the residential home sector are a big part of the debt write downs. Debt restructuring as we are seeing with Greece is also a prime example of write downs.
The problem with Austerity and Debt Write Downs is that they cause deflation and can lead us into an economic depression. During the deleveraging (which is now unavoidable), Austerity and Debt Write Downs will happen. There is no way to prevent it.
If the government and/or central banks do not want to be in a depression, they have the option to buy assets and provide the market with much needed liquidity. This is what many refer to as “printing money”. This is what Bernanke and the Federal Reserve are doing. They are buying assets and providing the system with enough liquidity to counter the depression forces. The printing of money is inflationary but the goal is to create enough inflation to balance the deflation from Austerity and Debt Write Downs.
These three combined forces (Austerity, Debt Write Downs and Printing Money) lead to the Transfer of Wealth effect. Wealth is effectively transferred from the creditors to the debtors. Wealth is also transferred from monetary inflation policies and debts become worthless in real money terms.
Eventually, the economic system is saved as debt to income levels come back to normal, asset valuations stabilize, the credit/debt system functions normally, and economic growth is achievable and lasting.
Finally, inflation in the long term is a concern, but it is trumped by the near term threat of deflation. As the US and world economy deals with the deflationary risks, central banks will have to be very concerned with inflation. Time will tell how they combat the inflation risks in the future.
Plans For Bridgewater Associates' New Headquarters Call For a Helipad And A Floating Recreational Barge
The Stamford Advocate's Elizabeth Kim reports
that hedge fund god Ray Dalio's Bridgewater Associates' new
headquarters in Stamford, CT will include a helipad, a floating
recreational barge and a marina, according to zoning documents.
According to the report, the $750 million project calls for a five-story, 850,000 square-foot office to be built a 14-acre peninsula on the water.
The new campus will have enough room for 3,500 people and 3,000 cars will be able to park there.
What's more is the office building is being designed by Cutler-Anderson, the same architects that designed Bill Gates' home in Medina, Washington.
According to the report, the $750 million project calls for a five-story, 850,000 square-foot office to be built a 14-acre peninsula on the water.
The new campus will have enough room for 3,500 people and 3,000 cars will be able to park there.
What's more is the office building is being designed by Cutler-Anderson, the same architects that designed Bill Gates' home in Medina, Washington.
Top Dividend Stocks Favored By Ray Dalio
Source: http://seekingalpha.com
Bridgewater Associates is one of the most well-known asset management companies in the U.S. The famous hedge fund was founded by Ray Dalio in 1975. In 2010 and 2011, it was ranked as the largest and best-performing hedge fund manager in the world. Like Soros, it employs a global macro style of investment. The company currently has 1,200 employees. In 2011, it was reported to have $122 billion worth of assets under its management.
The top dividend stocks favored by Ray Dalio and Bridgewater are shown in this article. My selection criteria for screening is based on a dividend yield of above 3%, stable dividend payments, and recent positive performance of the stock. I picked Microsoft (MSFT), Walgreen (WAG), Johnson & Johnson (JNJ), Eaton Corporation (ETN), and Verizon Communications (VZ).
Microsoft Corporation
Microsoft, the proud maker of Windows, is soon to unveil its Surface Tablet this month along with Windows 8. Microsoft is one of the world's largest software companies. It is the producer of operating systems for various platforms and devices as well as hardware. The brainchild of Bill Gates and Paul Allen currently has a huge market capitalization of $261.5 billion and a 94,000-strong workforce. The company's Chief Executive Steve Ballmer recently put forward the company's future direction as something that will focus more on hardware and online services, in an effort to level up in competition with rival Apple.
Like fund managers Tepper and Einhorn, Microsoft is likewise favored by Ray Dalio. Bridgewater has been increasing its position in the company in the last two quarters. Currently, Microsoft comprises 0.70% of the hedge fund's total portfolio. It is noted that Bridgewater sold almost all of its position in the Windows maker during the last quarter of 2011.
Microsoft is a good dividend payer. Its annualized dividend has been rising consistently. The positive growth prospect in the future is seen through the higher EPS estimate for next year of $3.30 compared with the trailing EPS of $2.00. The net margin of 23.03% suggests that the company is highly profitable. My FED+ fair value estimate for Microsoft is about $36 to $44. The stock has at least 25% upside potential to reach its fair value.
Walgreen
Walgreen's business involves operating a drugstore chain the U.S. It was incorporated in 1909. The company sells its products and services not only through drugstores but also various channels. The products include prescription and nonprescription drugs, household products, personal care, and beauty care among others. The pharmacy services it offers include retail, medical facility, infusion, care services, and mail services. Walgreen is the country's largest drugstore chain with total sales of $72 billion in the fiscal year 2012. Recently, the company announced that it will be a part of preferred pharmacy networks of four national Medicare plan sponsors (Part D). The plans offered aim to deliver cost savings for Medicare beneficiaries. The inclusion of Walgreen as a provider will improve access to pharmacy services.
Bridgewater has increased its position in the stock six-folds in the second quarter. During the first quarter, the hedge fund sold over three-fourths of its holdings. It is remembered that the fund initiated its position in the company four quarters ago.
WAG has a spotless record in dividend payment. It continuously pays its investors, and with a rate that has been increasing through the years. The August payment amounting to $0.275 is 20% higher than that for August last year at $0.225. Walgreen is showing robust performance. A higher EPS of $3.72 is expected next year. The current EPS is $2.42. The long-term annual growth estimate for the next 5 years is four times (12.77%) that for the past 5 years (3.57%). Based on this estimate, my FED+ fair value estimate for the company is about $44 to $64. The stock has at least 24% upside potential to reach its fair value.
Johnson & Johnson
Johnson & Johnson is a New Jersey-based healthcare conglomerate that has a 117,900-strong workforce. JNJ produces and sells a wide range of healthcare products in baby care, oral care, wound care, and women's health. JNJ's diversified products range from nutritionals and medical devices to drugs, both over-the-counter drugs and prescription. It is the maker of prescription drugs Edurant, Xarelto, and Zytiga. JNJ is also behind brand names like Tylenol, Listerine, Clean & Clear, Neutrogena, and Band-Aid, among others. JNJ's Janssen Research & Development, LLC recently presented encouraging data on its phase III trial on canagliflozin, a type II diabetes treatment candidate, at the European Association for the Study of Diabetes annual meeting. The diabetes market is one that JNJ shares with a number of rivals but which has a significant commercial potential.
The hedge fund has augmented its shares in JNJ during the second quarter. The company currently makes up 0.33%, amounting to $22 million, of the fund's total holdings. It has been on the 13F file of Bridgewater for the last six quarters.
JNJ has a dividend yield of 3.57%. It has not failed to pay its investors, and the amount has been rising continuously for many years. For instance, the August payment of $0.61 is an improvement from that for the same period last year of $0.57. The growth prospect for JNJ is good. The estimated EPS for next year is $5.47, higher than the current one, which is $3.24. My FED+ fair value estimate for the stock is about $54 to $76. The stock is fairly valued at the moment.
Eaton Corporation
Eaton Corporation is a power management company founded in 1916 that truly has a global reach. With a market capitalization of $15.14 billion, ETN sells directly or through various channels its products in around 150 countries. It is a provider of electrical components and systems for a diversified set of industries that include industrial, commercial, utility, automotive, construction, oil and gas, and agriculture, to name just a few. TheStreet Ratings has recently reiterated a buy for Eaton with a rating score of B. The report mentioned the company strengths in a number of areas including a solid stock performance, impressive EPS growth, reasonable debt levels, and good cash flow.
Bridgewater has drastically increased its holdings in the Cleveland-based firm in the second quarter. From a mere 0.01% share, the company now comprises 0.23% of the fund's portfolio. Prior to the second quarter, Bridgewater has been selling large chunks of its shares in ETN.
Eaton's dividend yield based on Finviz.com data is 3.28%. It has been consistently paying dividends to its shareholders for years now. The stock is expected to grow to an EPS of $4.77 next year, slightly higher than the current EPS of $4.18. My FED+ fair value estimate for the stock is about $66 to $90. The stock has at least 48% upside potential to reach its fair value.
Verizon Communications Inc.
Verizon Communications was founded in 1983 as Bell Atlantic Corporation. It is a provider of communications, information, and entertainment products and services to a wide clientele worldwide. The company has a market capitalization of $130.42 billion. In 2000, Bell Atlantic changed its name into Verizon Communications. The New York-based communications giant is now serving over 94 million retail customers. Recently, Verizon announced the launching of its 4G LTE service on Oct. 18. It will become available in 417 markets across the US. The service is said to be a blazing fast mobile broadband service.
Bridgewater Associates has decreased its holdings in VZ in the second quarter. It is noted that last quarter the fund renewed its position in VZ by purchasing $17 million worth of shares. Toward the end of the 2011, the hedge fund sold its position in the company.
The company has a huge dividend yield of 4.47%. Verizon is one of the companies that have a great track record in dividend payments. It does not only pay regular but also incrementing dividends. The earnings of the company are likewise expected to grow as shown by a higher EPS next year of $2.83 that is almost three-folds the EPS of $1.00. My FED+ fair value estimate for the stock is about $26 to $40. The stock looks a bit expensive at the current valuation. However, this is mostly due to one-time losses experienced by Verizon.
Bridgewater Associates is one of the most well-known asset management companies in the U.S. The famous hedge fund was founded by Ray Dalio in 1975. In 2010 and 2011, it was ranked as the largest and best-performing hedge fund manager in the world. Like Soros, it employs a global macro style of investment. The company currently has 1,200 employees. In 2011, it was reported to have $122 billion worth of assets under its management.
The top dividend stocks favored by Ray Dalio and Bridgewater are shown in this article. My selection criteria for screening is based on a dividend yield of above 3%, stable dividend payments, and recent positive performance of the stock. I picked Microsoft (MSFT), Walgreen (WAG), Johnson & Johnson (JNJ), Eaton Corporation (ETN), and Verizon Communications (VZ).
Microsoft Corporation
Microsoft, the proud maker of Windows, is soon to unveil its Surface Tablet this month along with Windows 8. Microsoft is one of the world's largest software companies. It is the producer of operating systems for various platforms and devices as well as hardware. The brainchild of Bill Gates and Paul Allen currently has a huge market capitalization of $261.5 billion and a 94,000-strong workforce. The company's Chief Executive Steve Ballmer recently put forward the company's future direction as something that will focus more on hardware and online services, in an effort to level up in competition with rival Apple.
Like fund managers Tepper and Einhorn, Microsoft is likewise favored by Ray Dalio. Bridgewater has been increasing its position in the company in the last two quarters. Currently, Microsoft comprises 0.70% of the hedge fund's total portfolio. It is noted that Bridgewater sold almost all of its position in the Windows maker during the last quarter of 2011.
Microsoft is a good dividend payer. Its annualized dividend has been rising consistently. The positive growth prospect in the future is seen through the higher EPS estimate for next year of $3.30 compared with the trailing EPS of $2.00. The net margin of 23.03% suggests that the company is highly profitable. My FED+ fair value estimate for Microsoft is about $36 to $44. The stock has at least 25% upside potential to reach its fair value.
Walgreen
Walgreen's business involves operating a drugstore chain the U.S. It was incorporated in 1909. The company sells its products and services not only through drugstores but also various channels. The products include prescription and nonprescription drugs, household products, personal care, and beauty care among others. The pharmacy services it offers include retail, medical facility, infusion, care services, and mail services. Walgreen is the country's largest drugstore chain with total sales of $72 billion in the fiscal year 2012. Recently, the company announced that it will be a part of preferred pharmacy networks of four national Medicare plan sponsors (Part D). The plans offered aim to deliver cost savings for Medicare beneficiaries. The inclusion of Walgreen as a provider will improve access to pharmacy services.
Bridgewater has increased its position in the stock six-folds in the second quarter. During the first quarter, the hedge fund sold over three-fourths of its holdings. It is remembered that the fund initiated its position in the company four quarters ago.
WAG has a spotless record in dividend payment. It continuously pays its investors, and with a rate that has been increasing through the years. The August payment amounting to $0.275 is 20% higher than that for August last year at $0.225. Walgreen is showing robust performance. A higher EPS of $3.72 is expected next year. The current EPS is $2.42. The long-term annual growth estimate for the next 5 years is four times (12.77%) that for the past 5 years (3.57%). Based on this estimate, my FED+ fair value estimate for the company is about $44 to $64. The stock has at least 24% upside potential to reach its fair value.
Johnson & Johnson
Johnson & Johnson is a New Jersey-based healthcare conglomerate that has a 117,900-strong workforce. JNJ produces and sells a wide range of healthcare products in baby care, oral care, wound care, and women's health. JNJ's diversified products range from nutritionals and medical devices to drugs, both over-the-counter drugs and prescription. It is the maker of prescription drugs Edurant, Xarelto, and Zytiga. JNJ is also behind brand names like Tylenol, Listerine, Clean & Clear, Neutrogena, and Band-Aid, among others. JNJ's Janssen Research & Development, LLC recently presented encouraging data on its phase III trial on canagliflozin, a type II diabetes treatment candidate, at the European Association for the Study of Diabetes annual meeting. The diabetes market is one that JNJ shares with a number of rivals but which has a significant commercial potential.
The hedge fund has augmented its shares in JNJ during the second quarter. The company currently makes up 0.33%, amounting to $22 million, of the fund's total holdings. It has been on the 13F file of Bridgewater for the last six quarters.
JNJ has a dividend yield of 3.57%. It has not failed to pay its investors, and the amount has been rising continuously for many years. For instance, the August payment of $0.61 is an improvement from that for the same period last year of $0.57. The growth prospect for JNJ is good. The estimated EPS for next year is $5.47, higher than the current one, which is $3.24. My FED+ fair value estimate for the stock is about $54 to $76. The stock is fairly valued at the moment.
Eaton Corporation
Eaton Corporation is a power management company founded in 1916 that truly has a global reach. With a market capitalization of $15.14 billion, ETN sells directly or through various channels its products in around 150 countries. It is a provider of electrical components and systems for a diversified set of industries that include industrial, commercial, utility, automotive, construction, oil and gas, and agriculture, to name just a few. TheStreet Ratings has recently reiterated a buy for Eaton with a rating score of B. The report mentioned the company strengths in a number of areas including a solid stock performance, impressive EPS growth, reasonable debt levels, and good cash flow.
Bridgewater has drastically increased its holdings in the Cleveland-based firm in the second quarter. From a mere 0.01% share, the company now comprises 0.23% of the fund's portfolio. Prior to the second quarter, Bridgewater has been selling large chunks of its shares in ETN.
Eaton's dividend yield based on Finviz.com data is 3.28%. It has been consistently paying dividends to its shareholders for years now. The stock is expected to grow to an EPS of $4.77 next year, slightly higher than the current EPS of $4.18. My FED+ fair value estimate for the stock is about $66 to $90. The stock has at least 48% upside potential to reach its fair value.
Verizon Communications Inc.
Verizon Communications was founded in 1983 as Bell Atlantic Corporation. It is a provider of communications, information, and entertainment products and services to a wide clientele worldwide. The company has a market capitalization of $130.42 billion. In 2000, Bell Atlantic changed its name into Verizon Communications. The New York-based communications giant is now serving over 94 million retail customers. Recently, Verizon announced the launching of its 4G LTE service on Oct. 18. It will become available in 417 markets across the US. The service is said to be a blazing fast mobile broadband service.
Bridgewater Associates has decreased its holdings in VZ in the second quarter. It is noted that last quarter the fund renewed its position in VZ by purchasing $17 million worth of shares. Toward the end of the 2011, the hedge fund sold its position in the company.
The company has a huge dividend yield of 4.47%. Verizon is one of the companies that have a great track record in dividend payments. It does not only pay regular but also incrementing dividends. The earnings of the company are likewise expected to grow as shown by a higher EPS next year of $2.83 that is almost three-folds the EPS of $1.00. My FED+ fair value estimate for the stock is about $26 to $40. The stock looks a bit expensive at the current valuation. However, this is mostly due to one-time losses experienced by Verizon.
What Ray Dalio Said About The Rise Of Hitler Is His Most Worrisome Observation Yet
Source: businessinsider.com
Hedge fund god Ray Dalio was on CNBC this morning, giving a long-ranging interview to Andrew Ross Sorkin.
In it he talked about the dollar, gold, QE3, the European depression and so forth.
But his most worrisome observation was on something that few people really want to discuss, which is the connection between economic weakness and social unrest, and what happens historically when depressions drag.
This is from the partial transcript sent to us by CNBC.
In other, richer countries this doesn't seem to be a trend at all, but it's one reason to recognize that dealing with short-term economic crises (like unemployment) is also a good long-term move (if it keeps a functioning system of democracy in check).
And for a refresh on the connection between unemployment and the rise of the Nazis, here's a great chart from SocGen:
Hedge fund god Ray Dalio was on CNBC this morning, giving a long-ranging interview to Andrew Ross Sorkin.
In it he talked about the dollar, gold, QE3, the European depression and so forth.
But his most worrisome observation was on something that few people really want to discuss, which is the connection between economic weakness and social unrest, and what happens historically when depressions drag.
This is from the partial transcript sent to us by CNBC.
RAY DALIO: I don't know whether we're
beyond the point of being able to successfully manage this. And I worry
then about—social disruption. I worry about—another leg down in the
economies—causing—social disruptions. Because deleveraging—can be very
painful, it depends how they're managed.
But when people—get at each other's
throat, the rich and the poor and the left and the right and so on, and
you have a basic breakdown,that becomes very threatening. And for
example, Hitler came to power in 1933, which was the depth of the Great
Depression because of the social tension between the factions. So I
think it very much is dependent on how the people work this through
together and worry about the social elements.
The fact that the Neo-Nazi party is on the rise on Greece does
indicate that the connection between the rise of radical elements and
depression remains a phenomenon, even in 2012.In other, richer countries this doesn't seem to be a trend at all, but it's one reason to recognize that dealing with short-term economic crises (like unemployment) is also a good long-term move (if it keeps a functioning system of democracy in check).
And for a refresh on the connection between unemployment and the rise of the Nazis, here's a great chart from SocGen:
Monday, August 20, 2012
Ray Dalio Buys More Emerging Markets and Other New Stocks
Ray Dalio
was the hedge fund world's most successful investor in 2010 and
2011, with his $120 billion Bridgewater Associates LP. His firm
invests based on his understanding of macroeconomic principles.
In his second-quarter letter , Dalio said he believed global equity markets were pricing in "fairly pessimistic" long-term earnings growth rates and the worst real earnings growth rate in 100 years, while companies still "retain plenty of ability to protect their operating margins and profitability by keeping labor costs down," despite global financial conditions posing a headwind to top-line revenue growth. He also noted that the dividend yield of U.S. non-financial corporation is higher than U.S. government note yields for only the second time in the past 50 years, and companies had ample liquidity to cover their dividends.
These are Dalio's biggest new stock purchases in the second quarter: iShares MSCI Brazil Index ( ETF ) ( EWZ ), Cliffs Natural Resources ( CLF ), Honeywell International ( HON ) and Las Vegas Sands ( LVS ).
Dalio's firm bought 2,002,700 shares of the largest new buy, iShares MSCI Brazil Index ( EWZ ) at an average price of $56 in the second quarter. The holding now has a 1.5% weighting in Bridgewater's portfolio. The stock dropped more than $20 from its year-to-date peak in the first quarter to its year-to-date trough in the second quarter, when Dalio bought it.
The top stocks within the MSCI Brazil Index Fund are Petrobras ( PBR ), Itau Unibanco ( ITUB ) and Vale ( VALE ). Its last year's return was a loss of 26.85%, and its three-year return was 3.08%.
Dalio commented in his second quarter letter that the quarter was negative for most emerging market debt, and that declines in commodity prices, particularly oil, "contributed to the slight underperformance in Indonesia, Brazil and Russia." He also said Japan and emerging markets underperformed the world equity markets during the period, with returns well below the global average.
In his second-quarter letter , Dalio said he believed global equity markets were pricing in "fairly pessimistic" long-term earnings growth rates and the worst real earnings growth rate in 100 years, while companies still "retain plenty of ability to protect their operating margins and profitability by keeping labor costs down," despite global financial conditions posing a headwind to top-line revenue growth. He also noted that the dividend yield of U.S. non-financial corporation is higher than U.S. government note yields for only the second time in the past 50 years, and companies had ample liquidity to cover their dividends.
These are Dalio's biggest new stock purchases in the second quarter: iShares MSCI Brazil Index ( ETF ) ( EWZ ), Cliffs Natural Resources ( CLF ), Honeywell International ( HON ) and Las Vegas Sands ( LVS ).
Dalio's firm bought 2,002,700 shares of the largest new buy, iShares MSCI Brazil Index ( EWZ ) at an average price of $56 in the second quarter. The holding now has a 1.5% weighting in Bridgewater's portfolio. The stock dropped more than $20 from its year-to-date peak in the first quarter to its year-to-date trough in the second quarter, when Dalio bought it.
The top stocks within the MSCI Brazil Index Fund are Petrobras ( PBR ), Itau Unibanco ( ITUB ) and Vale ( VALE ). Its last year's return was a loss of 26.85%, and its three-year return was 3.08%.
Dalio commented in his second quarter letter that the quarter was negative for most emerging market debt, and that declines in commodity prices, particularly oil, "contributed to the slight underperformance in Indonesia, Brazil and Russia." He also said Japan and emerging markets underperformed the world equity markets during the period, with returns well below the global average.
Ray Dalio's Bridgewater Plans To Build A New $750 Million Headquarters In Stamford And Is Expected To Add 1,000 More Jobs
Billionaire hedge fund god Ray Dalio, who is considered one of the best hedge fund managers in the world, plans to build a brand new headquarters for Bridgewater Associates in Stamford, Connecticut Gov. Dannel Malloy said in a release.
The $750 million project, which will be located on the waterfront, should be good news for Wall Streeters looking for a job.
That's because Dalio has agreed to create up to 1,000 high-level jobs in the next decade in addition to Bridgewater's current headcount of 1,225 employees.
Here's the governor's release (emphasis ours). We've also included a statement from Bridgewater on the matter.
The $750 million project, which will be located on the waterfront, should be good news for Wall Streeters looking for a job.
That's because Dalio has agreed to create up to 1,000 high-level jobs in the next decade in addition to Bridgewater's current headcount of 1,225 employees.
Here's the governor's release (emphasis ours). We've also included a statement from Bridgewater on the matter.
(STAMFORD, CT) – Governor
Dannel P. Malloy today announced that Bridgewater Associates, one of the
world’s leading hedge funds, intends to build a state-of-the-art
corporate headquarters in Stamford. The $750 million project
will be built along the waterfront in the Harbor Point development. To
fully maximize the benefits under the agreement Bridgewater will create
up to 1,000 high-level jobs within 10 years and also retain its current
workforce of 1,225 employees.
Thursday, June 7, 2012
Ray Dalio and Warren Buffett Own Both Own These Three Stocks
As investors, they could not be more different. Warren Buffett famously assesses the strength of companies' fundamentals when researching stocks, looking for good but cheap businesses. Ray Dalio is a macro investor who hunts for companies poised to benefit from macro events he predicts based on his unique economic model. Yet, in the intersection of their views lie several stocks they both embrace. The largest on the list are: General Electric ( GE ), Johnson & Johnson ( JNJ ) and Davita ( DVA ).
These results were found using GuruFocus' Aggregated Portfolio Screener, which finds the stocks that two or more investors like.
General Electric ( GE )
Ray Dalio owns 886,750 shares of GE, valued as $18 million as of March 31, 2012, which accounts for 0.28% of his equity portfolio. Warren Buffett owns 7,777,900 shares of GE, valued as $156 million as of March 31, 2012, which accounts for 0.21% of his equity portfolio.
General Electric matches Buffett's "buy and hold forever" type of company. He bought his holding over five years ago, and it is one of the largest and most diversified industrial corporations in the world. From 2002 to 2008, its revenue increased annually except for one year, and it has produced steady cash flow over $20 billion for the last decade. In the fourth quarter of 2011, GE generated record cash from industrial operating activities of $5.5 billion.
Revenue at GE declined 2 percent in 2011 over 2010, and was up 7 percent excluding the impact of NBC Universal. General Electric sold its majority stake in NBCUniversal to Comcast in January 2011.
The company, which was hit hard by the financial crisis, had to slash its dividend from $1.24 a year in 2008 to $0.61 a year in 2009. In December 2011, it was able to increase its quarterly dividend for the fourth time in two years as its financial situation improved. The raise was $0.02 to $0.17.
Ray Dalio has also bought and sold shares of GE for over five years. Most recently, he sold 218,600 shares in the first quarter at an average price of $19. Last year, he bought and sold shares in each quarter as the stock vacillated between a broad 52-week range of $14 to $21, reflecting his shorter-term strategy.
General Electric has a market cap of $196.29 billion; its shares were traded at around $18.65 with a P/E ratio of 13.5 and P/S ratio of 1.3. The dividend yield of General Electric stocks is 3.7%.
Johnson & Johnson ( JNJ )
Ray Dalio owns 222,093 shares of JNJ, valued as $15 million as of March 31, 2012, which accounts for 0.23% of his equity portfolio. Warren Buffett owns 29,018,127 shares of JNJ, valued as $1.9 billion as of March 31, 2012, which accounts for 2.5% of his equity portfolio.
Warren Buffett had been holding Johnson and Johnson for a long-term period, but recently began reducing his stake, selling a total of 13,606,436 shares in 2011.
In March 2012, Buffett said that he would consider selling his stake in the company because of its recent problems. "J&J obviously has messed up in a lot of ways in the last few years," he said on a CNBC interview. "You know, my friend Jim Burke used to run that and it does not have the reputation now that it had, you know, a few years back. It's still got a lot of wonderful products and it's got a wonderful balance sheet and all of that, but there have been too many mistakes made at Johnson & Johnson."
He added that the company was "still an attractive business at its price," but if he needed money it would be on his sell list.
J&J has had several product recalls in recent years and most recently, in the first quarter of 2012, it had a suspension of manufacturing at its McNeil Consumer Healthcare facility in Pennsylvania that significantly impacted U.S. sales of over the counter medicines.
Ray Dalio also sold about half of his much smaller holding in the first quarter and has made numerous short-term trades of the company for over five years.
Johnson & Johnson is engaged in the manufacture and sale of a broad range of products in the health care field in many countries of the world. Johnson & Johns has a market cap of $169.62 billion; its shares were traded at around $62.53 with a P/E ratio of 12.3 and P/S ratio of 2.6. The dividend yield of Johnson & Johns stocks is 3.9%. Johnson & Johns had an annual average earnings growth of 7.2% over the past 10 years. GuruFocus rated Johnson & Johns the business predictability rank of 4-star.
Davita ( DVA )
Ray Dalio owns 151,263 shares of DVA, valued as $14 million as of March 31, 2012, which accounts for 0.21% of his equity portfolio. Warren Buffett owns 6,000,000 shares of DVA, valued as $541 million as of March 31, 2012, which accounts for 0.72% of his equity portfolio.
It is speculated that newly purchased Davita was a stock chosen by one of Buffett's new investment managers. The company has an outstanding balance sheet with a 10-year annual revenue growth rate of 18.6%, 17.8% for EBITDA and 10.8 percent for free cash flow. It bears $1.9 billion in cash and about $5 billion in long-term liabilities and debt.
Davita provides kidney dialysis treatment to patients with chronic kidney failure and end state renal disease. It has 1,841 outpatient dialysis centers in the U.S. serving about 145,000 patients each week. There are almost 400000 kidney patients who undergo dialysis in the U.S. in every year. Davita has a small international presence with 15 dialysis centers in three countries outside the U.S. It also leads the nation in many areas measuring quality of care.
In the first quarter of 2012, Davita acquired 28 centers and opened 13 in the U.S. It also opened four centers outside the U.S. It raised its operating income guidance for 2012 to $1.23 billion to $1.31 billion, from its previous estimate of $1.2 billion to $1.2 billion.
Though the industry is quite consolidated which will limit future acquisitions, the company expects to achieve growth also through an expected increase in the number of patients each year, de novos and same-store growth and financial leverage possible in the form of additional debt or buying back stock, Davita CEO Kent Thiry said on the first quarter conference call.
The company is also expecting pricing pressure on the cost of care per patient due to higher pharma expense, wage and benefit costs and travel costs.
Davita Inc. has a market cap of $7.52 billion; its shares were traded at around $83.83 with a P/E ratio of 14.2 and P/S ratio of 1.1. Davita Inc. had an annual average earnings growth of 17.8% over the past 10 years. GuruFocus rated Davita Inc. the business predictability rank of 3.5-star.
Texas Teachers' Harris Taking Alternative Investing to New Risk
June
6 (Bloomberg) -- After working for almost two decades as a money
manager, Britt Harris at age 45 was what most people would consider a
success. Bridgewater Associates LP's Ray Dalio and Bob Prince had just
tapped him to be chief executive officer of the world's largest hedge
fund.
A father of four, Harris also found time to coach his
kids' baseball teams and teach Bible classes at his church. Still,
something was gnawing at him. "I didn't sleep for one night," the Texas
native recalls. "I didn't sleep for a week. Then, after not having slept
for three months, I told Bob and Ray I wanted to resign."
Although Prince and Dalio urged Harris to remain, he
quit Bridgewater in June 2005 after just six months, Bloomberg Markets
magazine reports in its July issue. Harris says he felt that he wasn't
contributing enough to the firm or the wider world, so he embarked on an
18-month-long search for meaning. He traveled to Asia and New Zealand.
He tried teaching, setting up a class on investing at Texas A&M
University, his alma mater.
Then, in late 2006, a headhunter approached him about taking the top investing job at the Teacher Retirement System of Texas.
It was a place where he could make an impact. With
$110.3 billion under management as of March 31, TRS is the fifth-
largest public pension plan in the U.S.
When Harris joined in 2007, the teachers fund wanted
someone who could boost returns without making risky bets that could
jeopardize the pensions of its 1.3 million public school teachers and
state university employees. "It's a plan I really care about," says
Harris, who's now 54. "It's my home state, a place I love."
Double Squeeze
Pension funds across the U.S. are facing an
unprecedented double squeeze: Baby boomers entering retirement are
placing growing demands on resources, while investment returns during
the past decade have dropped. Nationwide, public pensions faced more
than $4 trillion in unfunded liabilities as of October, according to
Joshua Rauh of Northwestern University.
At TRS, Harris is reacting by ramping up stakes in so-
called alternative assets ranging from private equity to real estate to
hedge funds. The Texas fund had about a third of its money in these
investments at the end of March -- more than any of the 10 largest
public pension funds, according to London researcher Preqin Ltd. The
California Public Employees' Retirement System has 25 percent of its
$237.6 billion of assets in such investments.
Bridgewater Stake
Harris, a devout Christian with a taste for Texas
barbecue, is also forming partnerships with Wall Street firms. He has
pledged $3 billion each to two private-equity joint ventures, with
Apollo Global Management LLC and KKR & Co. He'll be investing in
individual deals with them rather than solely placing money in their
funds, as other pension plans do. And in February, the Texas fund bought
a 2.5 percent private- equity stake in Bridgewater, Harris's former
employer, for $250 million.
The moves are controversial. "Are they in the business
of managing employee pensions or are they in the business of running
hedge funds on Wall Street?" says Edward Siedle, a former Securities and
Exchange Commission attorney who's now in the private sector
investigating pension fraud. "When you look at public pension
partnerships with Wall Street, generally they end up bad for the public
pensions and good for Wall Street."
Returns Improve
Harris, who recused himself from decision making on
the Bridgewater investment, says the hedge fund has consistently made
high returns and is an attractive investment.
Why Correlations Are Unreliable Risk Indicators
I just finished reading Maneet Ahuja’s new book, The Alpha Masters: Unlocking the Genius of the World’s Top Hedge Funds.
It’s a great book, packed with investing insight. I have no idea how
she got all these guys to talk on the record: Ray Dalio, Tim Wong,
Pierre Lagrange, John Paulson, Mark Lasry, Sonia Gardner, David Tepper,
Bill Ackman, Daniel Loeb, James Chanos and Boaz Weinstein, plus an
introduction by Mohamed El-Erian and an afterword by Myron Scholes.
Unlike some profiles that focus on lifestyles or dramatic events, these concentrate on how the subject built a world-class hedge fund and how he or she invests. These topics are not as closely connected as you might think. You obviously need to be a great investor to found a hedge fund that succeeds in the long run, but it’s far from the only requirement. The book is fun to read and contains important advice on almost every page.
I’m not going to review the book here. Instead I want to expand on a great point made by Ray Dalio of Bridgewater Associates. “To create the proper balance and diversification is even more important than any particular bets, which is the opposite of how most investors operate.”
He gives a simple example of an investor with 15 different uncorrelated bets, each with an expected return of 3% and a standard deviation of return of 10%. If you combine two bets, your standard deviation falls 29% to 7.1%. If you take all 15 bets, your standard deviation falls to 2.6% (the book inexplicably claims the reduction from the second bet is 15% and that 15 bets reduces your risk 80%, in fact that takes 25 bets). This is basic statistics, with equal volatility uncorrelated bets the standard deviation declines with the square root of the number of bets.
Then Dalio makes a less familiar point. “The most important rule is not to compare the correlations against each other in a quantitative sense, but according to their drivers.”
One problem with using correlations in risk analysis is you may misestimate them; things you think are uncorrelated may not be. A common way to misestimate is to assume correlations from the recent past will continue into the future. But it is possible to form moderately reliable correlation estimates by combining careful study of history with fundamental analysis. I believe portfolios constructed from these estimates can deliver long-term superior performance.
There is a more subtle problem, one that can hurt you even if your estimates are perfect. Suppose Dalio’s bets above are coin flips, heads you win 13%, tails you lose 7%. These bets have the required 3% expected return and 10% standard deviation of return. If you make one bet, there is a 50% chance you will lose money. If you make 15 bets, you might think you reduce your probability of losing money by the square root of 15, to 13%. If you think that, you’re wrong. Correlation tells you what happens to your standard deviation, which is not necessarily what happens to your risk.
The key problem is correlation is only a pairwise concept. Since the bets are uncorrelated, we know that if we pick any two, the chance is 1 in 4 that both will lose 7%, 1 in 4 that both will make 13%, and 1 in 2 that one will lose and one will win. Knowing that all the pairwise bets are uncorrelated tells us very little about how 15 bets will turn out. That is what Dalio means by understanding the drivers.
This next part gets a bit mathematical, but it’s worth following because it’s so important. Suppose there are two possibilities: the economy will do well and nine of the 15 bets will pay off, or the economy will do badly and only five of the 15 bets will pay off. The probability of a good economy is 5/8, and the probability of a bad economy is 3/8.
The expected number of bets that win is (5/8)*9 + (3/8)*5 = 60/8 = 7.5, so there is the required 50% chance for each bet to win. Suppose we are told that one bet paid off. This increases the probability that we are in the good state from 5/8 to 3/4, by Bayes Rule. If we are in the good state, the probability is 8/14 that any given other bet will win. If we are in the bad state, the probability is 4/14. The unconditional chance that any given other bet will win is (3/4)*8/14 + (1/4)*4/14 = 28/56 = 1/2. This is all “uncorrelated” means: that the chance of any bet winning is the same whatever I learn about the outcome of any other bet.
If this is the situation, the chance of losing money making all 15 bets is 37.5%, almost three times the 13% naïve calculation that was done above. The problem is that although there were 15 uncorrelated bets, there was a single driver (whether the economy was good or bad).
This may seem like a technicality that is not important for real investing. Nothing could be farther from the truth. It is easy to find uncorrelated bets, thousands of them. Take any stock, for example, and hedge it with its industry index. The result will be close to uncorrelated with some other stock hedged with its industry index. But a diversified portfolio of 100 stocks hedged with their respective industry indices will not have 10% of the risk of any single position. It may have 10% of the standard deviation, but the probability of a tail event may be almost as great as holding a single position.
If there are too many numbers in that explanation, here is a less quantitative example. Suppose you wanted to bet on the percent of the vote the winning candidate got in the 2010 US congressional election. The median was 63%. If I told you the incumbent was a Republican, the median is still about 63%, the incumbent’s party is uncorrelated with your bet. If I told you the winning candidate was a Democrat, the median is still about 63%. The winning candidate’s party is also uncorrelated. But if I told you the incumbent was a Republican and the winning candidate was a Democrat, the median drops to 53% (there were only three such races), and you will lose all the time if you bet the winning candidate will get over 63% of the vote. Two pieces of information are individually uncorrelated with the bet, but when combined they have a high correlation with the bet.
Here is one final example that illustrates another good way to think about correlation. Suppose Dalio’s bets are all bonds that cost $100 and are supposed to pay $1 per quarter interest and $101 at maturity in one year. The bonds will all make their three quarterly interest payments but may default if the issuer cannot refinance at maturity. The probability of that is 1/101 for each bond, and the defaults are uncorrelated.
The expected return from each bond is (100/101)*$4 - (1/101)*$97 = $303/101 = $3, as required. The standard deviation is $10. Because the bonds are uncorrelated, the probability of any two defaulting is one in 101 squared, or 1/10,201. This leads some people to assume the probability of more than two bonds defaulting must be negligible.
Imagine I have a hat with 10,201 slips of paper in it. Some of the papers have the names of bonds written on them. I’m going to draw one slip to see which bonds default. Since I know each bond has 1/101 chance of default, each bond must be on 101 different slips of paper. Since I know the defaults are uncorrelated, each pair of bonds must be on exactly one slip of paper. But that’s all I know. There are many ways to write the bond’s names on papers to satisfy these conditions.
For example, I could write all 15 bonds on one piece of paper, then each bond alone on 100 other pieces of paper each, leaving 8,700 blank slips. That makes the chance that all 15 bonds default 1 in 10,201. That’s low, but if you take risks like this every day, sooner or later one will catch up with you. When it does, someone half-trained in mathematics will say the probability of the event was 1 in 101 to the 15th power, something that should never have happened in the history of the universe. They will be wrong because they do not understand correlation. Uncorrelated bets are no guarantee that you will not have extreme tail events. As in the first example, you have 15 uncorrelated events, but only one driver.
Another thing I can do is write three bonds on 35 pieces of paper. Each individual bond is on seven of these slips, each time with a different pair of other bonds. Then I write each bond by itself on 94 slips of paper and leave 8,756 blank slips. Now the probability of more than two defaults is 35/10,201, or 0.3%. It’s low, but it’s not negligible.
This raises the question of how many drivers there are in the world, on which you can bet enough money to be meaningful to a portfolio. I don’t know the answer, but I’d guess it’s something like Dalio’s 15. Call it five that are available to any investor in low-cost, simple vehicles, five that are for professionals, and five that are cutting-edge hedge fund strategies. In fact, one important economic purpose of hedge funds is to seek out new drivers, which eventually become well-understood and liquid enough to be offered in cheaper form to less sophisticated investors, and eventually to be incorporated in index funds for everyone at minimal cost.
Fifteen drivers doesn’t mean you only make 15 investments. Finding uncorrelated bets that depend on the same driver still reduces your risk, just not all the way to zero, and perhaps not your extreme tail risk at all. Correlation is a powerful tool for building portfolios, but never confuse a tool with a driver.
Unlike some profiles that focus on lifestyles or dramatic events, these concentrate on how the subject built a world-class hedge fund and how he or she invests. These topics are not as closely connected as you might think. You obviously need to be a great investor to found a hedge fund that succeeds in the long run, but it’s far from the only requirement. The book is fun to read and contains important advice on almost every page.
I’m not going to review the book here. Instead I want to expand on a great point made by Ray Dalio of Bridgewater Associates. “To create the proper balance and diversification is even more important than any particular bets, which is the opposite of how most investors operate.”
He gives a simple example of an investor with 15 different uncorrelated bets, each with an expected return of 3% and a standard deviation of return of 10%. If you combine two bets, your standard deviation falls 29% to 7.1%. If you take all 15 bets, your standard deviation falls to 2.6% (the book inexplicably claims the reduction from the second bet is 15% and that 15 bets reduces your risk 80%, in fact that takes 25 bets). This is basic statistics, with equal volatility uncorrelated bets the standard deviation declines with the square root of the number of bets.
Then Dalio makes a less familiar point. “The most important rule is not to compare the correlations against each other in a quantitative sense, but according to their drivers.”
One problem with using correlations in risk analysis is you may misestimate them; things you think are uncorrelated may not be. A common way to misestimate is to assume correlations from the recent past will continue into the future. But it is possible to form moderately reliable correlation estimates by combining careful study of history with fundamental analysis. I believe portfolios constructed from these estimates can deliver long-term superior performance.
There is a more subtle problem, one that can hurt you even if your estimates are perfect. Suppose Dalio’s bets above are coin flips, heads you win 13%, tails you lose 7%. These bets have the required 3% expected return and 10% standard deviation of return. If you make one bet, there is a 50% chance you will lose money. If you make 15 bets, you might think you reduce your probability of losing money by the square root of 15, to 13%. If you think that, you’re wrong. Correlation tells you what happens to your standard deviation, which is not necessarily what happens to your risk.
The key problem is correlation is only a pairwise concept. Since the bets are uncorrelated, we know that if we pick any two, the chance is 1 in 4 that both will lose 7%, 1 in 4 that both will make 13%, and 1 in 2 that one will lose and one will win. Knowing that all the pairwise bets are uncorrelated tells us very little about how 15 bets will turn out. That is what Dalio means by understanding the drivers.
This next part gets a bit mathematical, but it’s worth following because it’s so important. Suppose there are two possibilities: the economy will do well and nine of the 15 bets will pay off, or the economy will do badly and only five of the 15 bets will pay off. The probability of a good economy is 5/8, and the probability of a bad economy is 3/8.
The expected number of bets that win is (5/8)*9 + (3/8)*5 = 60/8 = 7.5, so there is the required 50% chance for each bet to win. Suppose we are told that one bet paid off. This increases the probability that we are in the good state from 5/8 to 3/4, by Bayes Rule. If we are in the good state, the probability is 8/14 that any given other bet will win. If we are in the bad state, the probability is 4/14. The unconditional chance that any given other bet will win is (3/4)*8/14 + (1/4)*4/14 = 28/56 = 1/2. This is all “uncorrelated” means: that the chance of any bet winning is the same whatever I learn about the outcome of any other bet.
If this is the situation, the chance of losing money making all 15 bets is 37.5%, almost three times the 13% naïve calculation that was done above. The problem is that although there were 15 uncorrelated bets, there was a single driver (whether the economy was good or bad).
This may seem like a technicality that is not important for real investing. Nothing could be farther from the truth. It is easy to find uncorrelated bets, thousands of them. Take any stock, for example, and hedge it with its industry index. The result will be close to uncorrelated with some other stock hedged with its industry index. But a diversified portfolio of 100 stocks hedged with their respective industry indices will not have 10% of the risk of any single position. It may have 10% of the standard deviation, but the probability of a tail event may be almost as great as holding a single position.
If there are too many numbers in that explanation, here is a less quantitative example. Suppose you wanted to bet on the percent of the vote the winning candidate got in the 2010 US congressional election. The median was 63%. If I told you the incumbent was a Republican, the median is still about 63%, the incumbent’s party is uncorrelated with your bet. If I told you the winning candidate was a Democrat, the median is still about 63%. The winning candidate’s party is also uncorrelated. But if I told you the incumbent was a Republican and the winning candidate was a Democrat, the median drops to 53% (there were only three such races), and you will lose all the time if you bet the winning candidate will get over 63% of the vote. Two pieces of information are individually uncorrelated with the bet, but when combined they have a high correlation with the bet.
Here is one final example that illustrates another good way to think about correlation. Suppose Dalio’s bets are all bonds that cost $100 and are supposed to pay $1 per quarter interest and $101 at maturity in one year. The bonds will all make their three quarterly interest payments but may default if the issuer cannot refinance at maturity. The probability of that is 1/101 for each bond, and the defaults are uncorrelated.
The expected return from each bond is (100/101)*$4 - (1/101)*$97 = $303/101 = $3, as required. The standard deviation is $10. Because the bonds are uncorrelated, the probability of any two defaulting is one in 101 squared, or 1/10,201. This leads some people to assume the probability of more than two bonds defaulting must be negligible.
Imagine I have a hat with 10,201 slips of paper in it. Some of the papers have the names of bonds written on them. I’m going to draw one slip to see which bonds default. Since I know each bond has 1/101 chance of default, each bond must be on 101 different slips of paper. Since I know the defaults are uncorrelated, each pair of bonds must be on exactly one slip of paper. But that’s all I know. There are many ways to write the bond’s names on papers to satisfy these conditions.
For example, I could write all 15 bonds on one piece of paper, then each bond alone on 100 other pieces of paper each, leaving 8,700 blank slips. That makes the chance that all 15 bonds default 1 in 10,201. That’s low, but if you take risks like this every day, sooner or later one will catch up with you. When it does, someone half-trained in mathematics will say the probability of the event was 1 in 101 to the 15th power, something that should never have happened in the history of the universe. They will be wrong because they do not understand correlation. Uncorrelated bets are no guarantee that you will not have extreme tail events. As in the first example, you have 15 uncorrelated events, but only one driver.
Another thing I can do is write three bonds on 35 pieces of paper. Each individual bond is on seven of these slips, each time with a different pair of other bonds. Then I write each bond by itself on 94 slips of paper and leave 8,756 blank slips. Now the probability of more than two defaults is 35/10,201, or 0.3%. It’s low, but it’s not negligible.
This raises the question of how many drivers there are in the world, on which you can bet enough money to be meaningful to a portfolio. I don’t know the answer, but I’d guess it’s something like Dalio’s 15. Call it five that are available to any investor in low-cost, simple vehicles, five that are for professionals, and five that are cutting-edge hedge fund strategies. In fact, one important economic purpose of hedge funds is to seek out new drivers, which eventually become well-understood and liquid enough to be offered in cheaper form to less sophisticated investors, and eventually to be incorporated in index funds for everyone at minimal cost.
Fifteen drivers doesn’t mean you only make 15 investments. Finding uncorrelated bets that depend on the same driver still reduces your risk, just not all the way to zero, and perhaps not your extreme tail risk at all. Correlation is a powerful tool for building portfolios, but never confuse a tool with a driver.
Tuesday, May 29, 2012
Alpha Masters: Great Book, Better Insight Into the Lives of the Most Powerful Money
Mr. Dalio is one of the nine case studies of the new book, The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds
,
by Maneet Ahuja, and he is one of the more interesting. Now in his
60's, he has stepped down as Co-CEO but remains one of three Co-CIO's of
the company. The investing strategy that has been successful for
Bridgewater since the 1990's is still in place and has driven the firm
to be the largest hedge fund in the world. Bridgewater has a portfolio
of alpha-generating positions, normally around 15 or so. Bridgewater is
able to tailor risk to each client by investing a portion of the assets
in this alpha portfolio, and then the rest in a passive, index portfolio
that only has beta. Thus, each investor can achieve optimum levels of
risk and still have exposure to alpha. Monday, May 28, 2012
Insight: U.S. hedge funds find ways to trade euro misery
But it's unlikely the current European monetary crisis and worries about Greece's potential exit from the euro zone will give rise to an investing legend like Soros, who made $1 billion in 1992 by betting on a decline in the price of the pound.
Instead, there are a multitude of strategies to play Europe's troubles, and many different participants, according to U.S. hedge fund managers.
"There is not room for one player to have such impact," said John Brynjolfsson, whose California-based Armored Wolf hedge fund has been betting against the euro for quite some time. "Financial markets are so much bigger today."
A spokesman for Soros, who last year converted his Soros Fund Management to a family office and stopped managing money for outside investors, could not be reached for comment.
Brynjolfsson and several other U.S. money managers who are trying to profit from Europe's misery say they expect the current crisis to produce a lot of winners.
So far this year, the euro is down 3.3 percent against the U.S. dollar.
U.S. money managers say it's hard to swing for the fences the way Soros did because institutional investors are far more squeamish about having too much money riding on any single trade. There is also heightened sensitivity from pensions and endowments to taking an investment strategy that might spark political outrage from European leaders.
Another thing working against the rise of a new Soros is that trading the euro zone, or even the fallout from a Greek exit, is a much more complicated than betting against a single currency.
Money managers are playing the euro zone crisis by trading currencies, wagering on the direction of bank stocks or using derivatives like credit default swaps to bet on potential corporate and bank failures. Greenlight Capital's David Einhorn recently said he is bullish on gold and gold miners, in part because of concern about the fallout from a euro zone meltdown.
Some managers are even going both short and long on different European sovereign debt, depending on their views of the financial stability of different countries.
Adam Fisher, manager of the $320 million Commonwealth Opportunity Capital hedge fund, noted that Soros faced a "single country, not 17 different countries, one decision maker, not 17."
Fisher's fund, which has more than 80 percent of its money invested in Europe, is taking a somewhat contrarian position by owning the European sovereign debt of Germany, the Netherlands, Italy and Spain.
Hedge fund managers point out that given the up-and-down nature of the euro zone crisis, most hedge funds have been in and out of trades or forced to adjust positions depending on the changing political winds.
Earlier this year, for instance, it looked like concern about Greece exiting the euro had passed. But with the recent results of the Greek election at odds with the austerity measures demanded by its currency partners, the risk of a Greek departure from the euro zone has risen dramatically.
Recently, Fisher said his Los Angeles-based fund had reduced the size of some of its more bullish sovereign debt trades because he believes there will be "violent" market swings this summer.
"It is going to be incredibly difficult to manage risk through that environment," said Fisher, whose fund was up 8.8 percent through April. "I don't think hedging will do anything. The way you hedge, is you sell. You don't subtract risk by adding risk."
Brynjolfsson, a former top portfolio manager for bond mutual fund firm Pacific Investment Management Co, is betting on Greece exiting the euro. He said it will be hard for European leaders to take the necessary steps to appease the Greek government without infuriating politicians in other euro zone countries.
"As the wheels began falling off the bus, we adjusted to have a short bias and that has worked out," said Brynjolfsson, whose $750 million hedge fund is up 2 percent this year, largely on its short bet against the euro.
Axel Merk, president and chief executive officer of Merk Investments, an investment advisory firm that specializes in currencies, said the growing problems with Greece and the euro zone led him recently to dump all the euros in his $517 million Merk Hard Currency Fund, which is up 2.29 percent for the year.
Merk now favors the Singapore dollar, which has climbed 1.34 percent since January.
Ray Dalio's $120 billion Bridgewater Associates gained 23 percent in 2011 in part because of profits made from a series of European bets, said a person familiar with the Westport, Conn.-based fund who declined to discuss specifics of the strategy. In a recent interview with Barron's, Dalio said European banks "are now over-leveraged and can't expand their balance sheets" and European nations "don't have enough buyers of their debt."
Dalio may be the U.S. money manager who comes closest to rivaling the Soros of two decades ago. His hedge fund is the industry's largest and he widely regarded as one of the most successful managers.
Among the ways funds are playing the European turmoil, some are betting against the fortunes of Spanish and Italian banks instead of simply focusing on sovereign debt.
John Paulson, among others, bets against European sovereign debt as way to hedge the overall portfolio of his Paulson & Co hedge fund firm.
Daniel Loeb's Third Point fund put on a long position in Portuguese sovereign bonds in the first quarter because the New York-based manager believed the nation is in better shape than others in the euro zone.
"Portugal's debt profile is more consistent with Italy's than Greece's, its banks are substantially healthier than Spain's, and its government has enacted more aggressive labor reforms and is more stable than regimes in both countries," Loeb wrote in a May 16 investors' letter seen by Reuters.
If nothing else, the European crisis is forcing managers to keep coming up with new strategies to trade. One might say it's almost become an incubator for hedge fund managers to stretch their investment acumen.
Merk said he might look again at Europe if the political and financial situation gets more clarity. But he would likely do it a bit differently.
"If there is clarity in the process again, then we will certainly look at Europe again," he said. "But not through Greek debt, but through German bills."
(Reporting By Svea Herbst-Bayliss and Katya Wachtel; edited by Matthew Goldstein, Jennifer Ablan, Martin Howell)
Friday, May 25, 2012
Ray Dalio Bets on Telecom and Miner in Top First-Quarter Picks
The biggest trend in Dalio's top stock picks is their connection to 4G and smart phone growth in telecommunications, except for the fifth largest, a miner.
Verizon Communications ( VZ )
Bridgewater bought 451,400 shares of Verizon at an average price of $39.
Verizon Communications, formed by the merger of Bell Atlantic and GTE, is one of the world's providers of high-growth communications services. Verizon Comm has a market cap of $116.72 billion; its shares were traded at around $40.97 with a P/E ratio of 18.4 and P/S ratio of 1.1. The dividend yield of Verizon Comm stocks is 4.9%. Verizon Comm had an annual average earnings growth of 2.3% over the past 10 years. GuruFocus rated Verizon Comm the business predictability rank of 4-star .
In the first quarter, Verizon reported 4.6% quarter over quarter revenue growth and 15.7% earnings per share growth, driven by strong demand for its FiOS services and strategic services. The company added 193,000 net new FiOS Internet connections and 180,000 net new FiOS video connections in the quarter. Revenues grew year over year across all strategic areas: wireless services, wireless data, FiOS and strategic services.
Qualcomm Inc. ( QCOM )
Bridgewater bought 226,465 of new holding Qualcomm Inc. at an average of $62 per share.
Qualcomm Inc. develops and delivers innovative digital wireless communications products and services based on the company's CDMA digital technology. Qualcomm Inc has a market cap of $104.63 billion; its shares were traded at around $59.38 with a P/E ratio of 20.2 and P/S ratio of 7. The dividend yield of Qualcomm Inc stocks is 1.4%. Qualcomm Inc. had an annual average earnings growth of 18.2% over the past 10 years. GuruFocus rated Qualcomm Inc. the business predictability rank of 3.5-star .
Qualcomm in its second quarter ended March 25, 2012, reported record quarterly revenue of $4.9 billion, up 28% year over year, and record earnings per share of $1.28, up 123% year over year. The record results were driven by demand for 3G and 4G-enable devices. In the December quarter, estimated 3G and 4G device shipments were approximately 239 to 243 million units, at an average price of approximately $211 to $217 per unit, compared to 191 million to 195 million the prior quarter. Device sales were up 29% year over year and 25% sequentially.
AT&T ( T )
Bridgewater bought 460,100 shares of AT&T at an average price of $31.
AT&T Inc. is a premier communications holding company. AT&T Inc. has a market cap of $199.17 billion; its shares were traded at around $33.28 with a P/E ratio of 15.1 and P/S ratio of 1.6. The dividend yield of AT&T Inc. stocks is 5.2%. AT&T Inc. had an annual average earnings growth of 3.3% over the past 10 years.
In AT&T's first quarter, the company reported diluted EPS of $0.60 compared to $0.57 in the prior-year period, and revenues increased 1.8% to $31.8 billion, compared to the prior-year period. Wireless, wireline, data and managed services accounted for 78% of AT%T's total revenue in the quarter, and grew 6.2%, compared to year-ago quarter. The largest increase was seen in consumer U-verse (TV and high speed internet) revenues, which increased 38.2%, followed by wireless data revenues which grew 19.9% and strategic business services revenues which grew 19%.
AT&T also sold a first-quarter record 5.5 million smartphones. Approximately 30 percent of its postpaid smartphone subscribers were on 4G-capable devices.
Royal Bank Canada ( RY )
Bridgewater bought 248,000 shares of Royal Bank of Canada ( RY ) at an average of $55.
Royal Bank of Canada is Canada's largest bank and operates under the master brand name of RBC. Royal Bank of Canada has a market cap of $77.61 billion; its shares were traded at around $52.36 with a P/E ratio of 12.3 and P/S ratio of 2.2. The dividend yield of Royal Bank of Canada stocks is 4.2%. Royal Bank of Canada had an annual average earnings growth of 15.1% over the past 10 years.
In the bank's first quarter ended Jan. 31, 2012, it reported almost $1.9 billion earnings, down 6% from the prior-year quarter, and return on common equity of 20%, down from 24.4% in the prior-year quarter. The bank also announced a 6% increase in its quarterly dividend on March 1, 2012. Net income in its Canadian Banking sector reported record net income of $994 million, increased 5%, driven by growth in home equity products, personal and business deposits and business loans.
Dalio's Royal Bank Canada investment also has a tie to the mobile industry. It is one of the six largest lenders in Canada to agree to voluntary guidelines to develop mobile payments in Canada that will allow Canadians to pay for things with their mobile devices. "While voluntary, the financial institutions that developed the guidelines are committed to these principles in the mobile market, and these guidelines are intended to create a path to help all market participants move forward in developing mobile payment solutions," the Canadian Bankers Association said in a statement.
Newmont Mining ( NEM )
Bridgewater bought 279,106 shares of Newmont Mining ( NEM ) at an average of $59. The stock is down 27.5% year to open at $43.37 on Wednesday, near its 52-week low of $43.23.
Newmont Mining Corp., the largest gold producer in the U.S., is engaged in the production of gold, the exploration for gold and the acquisition and development of gold properties worldwide. Newmont Mining has a market cap of $22.24 billion; its shares were traded at around $43.51 with a P/E ratio of 10.1 and P/S ratio of 2.2. The dividend yield of Newmont Mining stocks is 3.1%. Newmont Mining had an annual average earnings growth of 12.7% over the past 10 years. GuruFocus rated Newmont Mining the business predictability rank of 2.5-star .
Newmont's stock price began declining in February when it announced a fourth-quarter loss of $1.03 billion due to a $1.61 billion writedown of its Hope Bay project in Canada. Net income the previous year was $812 million. The same day, it announced a 6% increase in its gold reserves to a record 98.8 million ounces and a record 9.7 billion pounds of copper in 2011.
In Newmont's first quarter, it reported net income of $517 million, compared with $513 million the prior-year quarter. Consolidated revenue increased 9% to $2.7 billion, and gold operating margin expanded 29%, slightly more than the 22% increase in the average price of gold.
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Ray Dalio: Europe Today is Like Post-Revolutionary America
In 1776, the colonies declared independence from Great Britain. We didn’t have a country. We had independent states that had a treaty with each other, called the Articles of Confederation, and it was similar to the Maastricht Treaty that created the European Union and the euro currency. The independent states had debt problems and they had tariffs with each other. It wasn’t until 13 years later, 1789, that those states started to form a central government, largely because of their debt problems. There was a constitutional convention, and we formed a country and we chose a president. We formed a treasury and imposed central taxation. That gave us the ability to produce revenue for the country and restructure our debts. There was the ability to have taxation and to issue bonds and to borrow. Europe does not have an ability to borrow. It doesn’t have central taxation, that’s material, and it doesn’t have a treasury. It is a collection of countries operating for their own individual needs.
Read the whole thing (this one’s free) for more of Dalio’s thinking, including his current investing outlook. He’s the sort of highly articulate broad macro investor from whom anyone can learn.
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