Notes from Delivering Alpha, Part II

My coverage of CNBC and Institutional Investor Magazine’s third annual Delivering Alpha Conference will come in four parts today.

Part I, starring Jim Cramer, Richard Perry and Preet Bharara is here

Below, my notes from the late morning sessions, I hope you enjoy! – Josh

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Panel – The Great Rotation (investing during rising rates) moderated by Becky Quick

• Gregory J. Fleming, President, Morgan Stanley Investment Management
• Joshua S. Friedman, Co-founder, Co-chairman and Co-Chief Executive Officer, Canyon Partners
• Michael Hintze, Founder & Chief Executive Officer, CQS
• Andrew J.M. Spokes, Managing Partner, Farallon Capital Management

Greg Fleming of MS – overseas 4 million accounts, $1.9 trillion in AUM. No big deal. “Financial advisors are looking at a very complicated picture.” Asset allocation is still the key for most investors. Clients’ allocations to stocks is now back above 50%. At the lows it was 40%. “Not a huge rotation but definitely an acceleration into stocks.”

Andrew JM Spokes of Farallon – Amazing british boarding school accent. “Flows are following performance.” Risk versus rewards in ten-year bonds is not good.

Michael Hintz of CQS – Fed will keep buying bonds, they are “not the Titanic”. But the ten-year should be trading at 4% when things normalize (they won’t). Equities are the better bet.

Josh Friedman of Canyon Partners – “the world is littered with interest rate forecasts, they’re all wrong.”  Re: Rotation, “actions speak louder than words.”  He’s also not interested in bonds. He has been investing in bank debt and mortgage-related securities. But these are specific investments that involve research, not whole categories. One rotation now he’s seeing is out of high yield bonds and into bank loans.

Becky calls out for Lee Cooperman in the crowd. I’ll be brief – will give you six reasons not to buy bonds.”  Crowd cracks up. “Bonds are a short. Unless you think we’re going into a depression.”

“Not everything needs to be in US equities” – Josh Friedman. He’s talking about credit opportunities away from traditional bond markets. But the caveat is you need the right kind of capital.

Andrew Spokes: It’s a question of form or substance – there are things that are in the equity market that are really more like bonds and vice versa. Safe is not always safe. The obsession with “safe yield” has meant people considering unsafe assets to be safe because they had some of the right characteristics.

Hintz has some generic comments about the risks in Europe.

Fleming – If there’s enough traction in the US economy, we could see bond yields in the 3.5 – 4% range in the next 12 to 18 months. Volatility is going to be up, even if rates rise because things are getting better. “The genie is out of the bottle” and professionals are going to remain aware of that.

Spokes: “Over long periods of time, interest rates track changes in GDP growth, it’s important to stay aware of that. If rates are higher than GDP, capital ends up owning everything – until revolution.” That sounded mad ominous, especially with the accent, which has actually gotten richer and more beautiful as the panel’s progressed.

Josh Friedman: “You can protect against certain scenarios better than you can predict them. We don’t make macro bets, we try to protect against macro scenarios.” His idea is Ambac – a good / bad restructuring story, he likes the equity. Also likes impaired MBS that are backed by Ambac as part of the same trade.

Spokes is looking for credit opportunities in Europe. There is a shortage of capital in that space.

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Panel – My Best New Idea (top picks from top managers) moderated by David Faber

• Jim Chanos, President and Founder, Kynikos Associates
• Leon G. Cooperman, Chairman and Chief Executive Officer, Omega Advisors
• Chris Hohn, Founder, Managing Partner & Portfolio Manager, The Children’s Investment Fund Management
• Mark Kingdon, Founder and President, Kingdon Capital Management

 Lee Cooperman starts with an equity market outlook – 5 to 10% possible. He is less ebullient than last year but still constructive. 16 to 17 times $106 in earnings is reasonable, meaning an S&P 500 at between 1600 and 1700 or so.

Lee’s picking ten stocks today – has 90 positions in his portfolio and can’t choose one of them. Likes financials with high and growing dividends like KKR, Arbor Realty, Atlas Resources, Chimera. Picks Sandridge Energy (won’t go bankrupt). Also likes Qualcomm (too much pessimism, $31 billion in cash, no debt), Express Scripts (buying back lots of stock, growing).

“Goal number one is not to lose money, goal number two is beat the S&P 500 net of fees.”

Chris Hohn from Children’s Investment Fund says his picks are EADS (Airbus), Porsche and Aurizon

EADS $60 billion in euros of sales but only a 30 billion market cap – we think margin improvement, new orders and higher pricing will allow the stock to double.

Porsche has holding in Volkswagen – buying Porsche shares is like buying Volkswagen at a PE of 4. Volkswagen shares could go up by 50%. If there is a merger between the two this could be a double in two years. He thinks a share-for-share exchange can happen between the two once the hedge fund litigation from 2008 is dealt with.

Aurizon is an Australian mining company and a privatization story. That’s a little too far for me to reach for alpha.

Mark Kingdon – hedge fund manager for thirty years.

Theme: Japanese autos is his favorite theme. “Prime beneficiaries of Abenomics). He likes Mazda, Fuji Heavy (parent of Subaru) and Toyota. Real wages of workers will be improving in Japan, US – leads to increased sales.

Toyota is making a big comeback. Subaru focuses on safety and innovation, moving to higher margin cars. Mazda has the biggest upside but shakiest history. Mazda is “THE powertrain innovator”, new cars selling well. All have PEs of less than 10, Mazda less than 8. He thinks they should trade at 13 times.

Kingdon’s special situation stock is Aegerion Pharma (AEGR), which could get 15,000 global patients (1/3rd US) for its orphan drug treating ultra-high cholesterol. The market is underestimating patient population size.

Kingdon believes Abenomics is already working and will continue to work. The trickiest issue long-term, though, is the debt problem.

Jim Chanos of Kynikos Associates – “Good afternoon everybody, welcome to this part of the conference – Destroying Alpha” – big laugh line.

Chanos agrees with Hohn on the Japanese auto stocks bull call. Also mentions he still thinks Hewlett-Packard and Dell are f*cked – “there is no savior for these companies in the server business.” He is still short HPQ he says.

Big short idea revealed – Caterpillar ($CAT). iconic American company, Dow stock, but levered to the wrong products at the wrong place in the cycle.

Lee Cooperman asks Chanos how much he has to pay in dividend yield to remain short it. “High,” Chanos says, “three and a half percent.”

Thinks accounting charge for their Bucyrus acquisition is aggressive and that operating earnings can go much lower.

Caterpillar is up against serious headwinds in the commodity supercycle and China’s infrastructure buildout slowing.

Lee Cooperman chimes in on the markets – 70% of the volume on the New York Stock Exchange each day is not based on fundamental investing, it’s slicing and dicing for ETFs or what have you. I want the SEC to bring back the uptick rule already.

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 Stay tuned for Part III after lunch!