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:

1. Austerity (Deflationary)
2. Debt Write Downs (Deflationary)
3. Printing Money (Inflationary)
4. Transfer of Wealth (Inflationary)

Austerity is the reduction of spending. The government is not doing its part right now but individuals and corporations are. One of the best arguments for better stock valuations since 2008 is that corporate balance sheets are infinitely better now. The reduction of spending is best when it is gradual and not instantaneously severe.
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.

Read more: http://www.businessinsider.com/bridgewater-associates-new-offices-2012-10#ixzz29ZIFBbcS

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.

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.

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: