1. Memorandum
Date: October, 22 2012
To: Joseph Rinaldi
From: Alex Blum
Matya Magnezi
Jon Szakelyhidi
Justin Licameli
Re: Barron’s: Art of Successful Investing
This October, in New York City, Barron’s held the seventh annual “The Art of Successful
Investing” Conference. Ten of the world’s premier investors came together to share their
experiences and theories for the future of investing. Topics ranged from the United States’
fiscal cliff to global investment strategies, with an emphasis on the political environment.
The speakers included: Felix Zulauf, Daniel Fuss, Scott Black, Fred Hickey, Gregory Valliere,
David Herro, Meryl Witmer, Patrick Neal, William Priest, and Marc Faber.
In summary here are some of the major points that we feel are important to mention:
Felix Zulauf ­ Founding Partner, Zulauf Asset Management
• Mr. Zulauf, who focuses on macro and strategic issues, founded Zulauf Asset
Management in 1990 and has over 30 years of experience.
• The next fiscal crisis on a global scale will be in 2015‐2017
o Bond yields will rise
o It will be a great opportunity to buy stocks
• ECB will keep Eurozone together at any cost, and will weaken the Euro
o Politicians are trying to force a union that is against economic laws
o Recession will continue
o Greece will default for a third time
o Europeans will revolt against a subpar system
• United States’ position is better than Europe
o Growth of only 1.8% is expected
o Inflation will not go beyond 3 or 4 percent
o Even if Romney is elected, he cannot decrease debt sufficiently
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2. He will soften his stance on China, and will not pursue any
protectionist steps on a major scale
He should push for natural gas to achieve energy self‐sufficiency
within 5 years
o Hyperinflation is not expected in the near future
• Receiving little media attention, Japan is attractive
o An inflationary trend, stocks are down by a factor of 5 in terms of market
capitalization, and bonds are up by 3 or 4 percent.
o There is a reallocation from stocks to bonds
• The Chinese government will provide a stimulus package to calm pessimists and
encourage optimists
• Gold will reach new highs next year, especially is Obama is elected, as people search
for safe harbor
o However, it is due for a correction at some point before year end
o Gold mining stocks are currently very cheap and may begin to perform better
than physical gold
Daniel Fuss ­ Loomis, Sayles & Company
• Mr. Fuss has over 50 years of experience in the bond markets. Mr. Fuss is Vice
Chairman of Loomis Sayles & Co.’s Bond Fund, and in 2009 he won Morningstar’s
Fund Manager of the Year Award. He was named into the Fixed Income Analysts’
Society Hall of Fame in 2000 and has twice been President of the Boston Security
Analysts’ Society.
• A slow rising of nominal rates in the U.S. based interest rates will be much less
painful for bond markets than a sharp increase in interest rates
o It is important to distinguish between interest rates in the U.S. and U.S. based
interest rates
o A sharp increase in interest rates could be caused by a revolt in the bond
markets
• If the slow rising of interest rates occurs (base case) hard assets will slowly climb in
value
• It is important to look at fixed income indexes in a fundamentally different way than
equity indexes
o Equity indexes allocate towards the biggest winners
o Debt indexes allocate towards the biggest losers (borrowers)
• MBS are the wrong way to play hard assets
o They are expensive and hard to analyze
• Corporates are the most attractive debt class but credit spreads have narrowed
considerably
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3. Scott Black ­ Delphi Management
• Founder and President of Delphi Management, Mr. Black has been a key player in
the investment and finance industry for over 35 years.
• Mr. Black first outlined that the United States is seeing the highest Debt to GDP ratio
since World War 2 and that by continuing to print money our markets will have a
difficult time in fundamentally sustaining any kind of growth.
• Below is a list of a select stocks in which Mr. Black feels have a positive growth
outlook:
o BCEI ‐ Bonanza Creek Energy
Production is soaring
Leverage to liquids 65% oil approx. 8900 barrels per day
Hedged but has negative free cash flow due to expansion.
o MPW ‐ Medical Properties Trust
Develops healthcare facilities
EBITDA 6.5 and yield of 6.9%
Implicit cap rate: 8.4%
o MSFT ‐ Microsoft
7.85 of price is cash
Topline growth of 6%‐7%
o WFC ‐ Wells Fargo
Up 13% and is fully reserved
Fred Hickey ­ High­Tech Strategist
• Mr. Hickey is the editor and publisher of “The High‐Tech Strategist” newsletter and
has been a leading expert on technology stocks for over 23 years.
• The overall technology landscape has changed drastically. PC sales are down 2%
and are likely to continue to decrease while server business has also slowed.
• Although Microsoft and Intel have been negatively affected by the pause of Windows
8 release a cyclical upturn for the overall tech sector could positively affect these
stocks
• Currently a void in corporate business market for emerging technologies.
o Dell could branch in”corporate machine” providing enterprise and security
hardware and services.
o Windows 8, if successful, would positively impact Microsoft. Mr. Hickey was
generally bullish on Microsoft.
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4. • Due to unlimited money printing “Story Stocks” in the tech sector continue to rise.
Some key factors of “Story Stocks”
o There are not many places in the current marketplace to put your money,
making these higher returning, but extremely dangerous, investments
attractive.
o Story Stocks generally are not profitable essentially rendering earnings data
useless
• Notable stock in Workday Inc. (WDAY). Surged 74% after IPO and shows 100%
growth for next year.
o Currently has no earnings.
o Sells cloud‐based Human Resources software and is expanding into Finance
and Accounting applications.
o Key competitors are Oracle and SAP.
Gregory Valliere ­ Chief Political Strategist, Potomac Research Group
• Fiscal Cliff—We call it this because of several major factors.
o Tax Extenders Bill – will the extension of the Alternative Minimum Tax and
R&D tax credit be extended?
o Medicare – Will Reimbursement rate increase (doc fix) occur? Will we pay for
it?
o Debt Ceiling Debate – Will we “Kick the can down the road” again?
o Sequestration – Will Mandatory Cuts of over $ 100 Billion kick in.
o Bush Tax Cuts – will they extend the BTC, modify it or do nothing and let
them expire?
• Election Summary
o Obama favored to win election – 235 Electoral Votes, wide gender gap
Romney must win VA, NC, FL to have a chance but Ryan scares senior
citizens in FL with Medicare talk
o An Obama Win – John Boehner will remain Majority Speaker of the House,
more polarization senate with tea party growth, unlikely to get anything
passed in Congress, no tax reform and no deficit reduction. It will be near
impossible to take any meaningful action, and will result in them kicking the
can down the road, leading to a sluggish economy and capital markets.
o Romney Wins – John Boehner will remain as Majority Speaker of the House,
Senate will remain Democratic, House will remain Republican, Federal
Reserve Chairman Ben Bernanke will be replaced, Tax Reform and Deficit
Reduction will be attempted and Obama‐care will not be repealed. Two
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5. important web sites to track to stay informed are www.realclearpolitics.com
and www.gallup.com.
• Geopolitics ‐Israel & Iran
o US officials inside the beltway submit that it is only a matter of time until
Netanyahu moves on Iran. Since he is a friend of Romney from 25 years ago,
he may elect to strike after the election, since a strike before will help the
incumbent, US Generals predict strike in winter
o IAEA (International Atomic Energy Association) inspectors suggest that Iran
will have capability in six months to produce a Dirty Bomb although the
delivery is much more difficult
David Herro ­ CIO, Harris Associates
• As Chief Investment Officer for international equities at Harris Associates, Mr. Herro
manages three funds. He has been named Morningstar’s International Stock Fund
Manager of the Year in 2006 and International Manager of the Decade in 2010.
• Long‐term bull on China
o Economy has been held back due to one child policy and the artificially low
exchange rate, making foreign goods more expensive
o It is very difficult to pick specific companies because they are controlled by
the state, have poor accounting practices, and the only companies that meet
standards are overvalued
• There are many bottlenecks on Brazilian oil
o Difficult to know how far oil is below the surface
o Brazil also has requirements regarding local content
• Japan is the only industrialized country whose stocks are trading below book value
o Recommends several stocks:
Sugi, a company similar to Walgreens, as a result of Japan’s aging
population
Toyota, a good company will a more moderate management
philosophy
o Is not bullish on Sony, where earnings are tied too strongly to consumer
electronics
• Eurozone will survive but must find a way to devalue its currency. European
companies that have cash flow streams globally are safer investments.
o Credit Suisse has trimmed back on dividends because it did not have the
required capital. The company will retain profits until their capital
requirements are met, but afterwards they will distribute earnings
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6. o Volkswagen has terrible corporate governance
• Buying foreign stock means buying foreign currency. If it is overvalued by more than
20%, hedging is highly recommended.
Meryl Witmer ­ General Partners, Eagle Capital Partners
• Not seeing a lot of cheap opportunities lately
• SPB ‐ 50M shares 46 $/share
o Held by HRG (PE Firm)
HRG’s recent mistakes is one reason why stock is cheap
o Diversified Consumer Products Company
o Downsides
Concentrated Customer Base
If they run into financing issues
• After‐Tax Free Cash Flow is the most important number for a company
• CFX $35.50 per share
o Welding, Industrial Fans, Pumps/Valves
o 1.1B Debt; 5B EV
• Tips for investing in Value
o Assume Nothing
Don't assume that if its true in your life its happening for everyone
Rates can always go higher
o The big things matter most
Don’t get caught up in accounting and smaller details
If you get caught up in the small things a major trend of the world can
hit you without notice
Patrick Neal ­ CEO, TreePoint Capital Management
• Mr. Neal is CEO and CIO of TreePoint Capital Management. Prior to leading
TreePoint he was MD at Jefferies, Head of Equity Derivatives at Banc of America
Securities, and had multiple trading positions at Susquehanna and BNP Paribas.
• Gave multiple options trades including:
o Play the Euro weakening against the dollar by buying the FXE January $127
put and selling the FXE $122 put
This is called a Bear Put Spread
o Make some extra income from owning gold in a bullish market
Own GLD (underlying) and sell January $175 calls
This is called a Buy‐Write
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7. o Play the financial sector on their correlation to Europe (US financial sector
performance is 70% correlated to Europe)
Sell XLF January $16 put and sell XLF $17 call, while owning the
underlying
This is called a Short Straddle
o Own WMT as it is a very defensive company and he expects the market to go
down before year end, in the meantime make some extra money by selling
January calls
This is called a Buy‐Write
o For Apple, sell the underlying, and buy January $645 calls & sell January $695
call
This called a Bull Call Spread
William Priest ­ CEO, Epoch Investment Partners
• We have traded a liquidity issue for a solvency problem
• Debt to GDP of 90% is a key number we must stay below
o It would take years to recover from this sized deficit
• Austerity won’t fix our issue; our economy is too delicate now
o QE is a necessary evil
It has prevented catastrophe to this point
• 3 Drivers of Returns
o Earnings, Dividends & PE’s
3 Drivers of PE
Interest Rates (Can’t go any lower)
Volatility
Slowing Growth Rates
• If you see a lot of accruals on financial statements this is a key indicator that they
are using accounting tricks to hide the truth
• If you don’t have a positive spread (ROIC above WACC) then you should give money
to shareholders instead of reinvesting in into your company and acquisitions
o Only invest in positive NPV projects that pass the hurdle rate
Marc Faber, Mark Faber LTD
• Well known from his Gloom, Boom & Doom report, Dr. Faber publishes a monthly
newsletter for unusual investment opportunities. Dr. Faber holds a Ph. D. in
Economics, manages his own fund, and his book, Tomorrow’s Gold ­ Asia’s Age of
Discovery, is an Amazon bestseller.
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8. • It is very likely that China could continue slowing and 7% growth becomes the “New
Normal” of the emerging market growth
• Although the debt situation in the U.S. is already bad, it becomes especially bad
when unfunded liabilities are included in the overall number
• It is likely that “well to do” people will lose 50% of their wealth sometime in the
near future
o U.S. government has to minimize the debt somehow and will likely do so by
confiscating it
o Government policies will make it harder and harder for driven people to
succeed
o As such, people do not adequately value the custody of their assets, such as
gold and property which can be confiscated by the government
• Protectionist policies have unforeseen consequences
o Pegging the Swissie to the Euro has caused great appreciation in Swiss real
estate
o In the U.S. prices have not been lifted evenly by easy money policies
Commodities have appreciated greatly
• Marc suggested that everyone should read Capitalism and Freedom by Milton
Friedman
Overall, these investment experts are skeptical about the global economy in light of fiscal
and political issues. They suggest investing in emerging economies such as China and
Japan, hedging against foreign currency risks, and using the economic downturn to an
advantage.
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