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Minyans in Manhattan Recap: Part 2


...some of the sharper minds in finance gathered to discuss their outlooks and opinions.


Last Friday, at our Minyanville conference benefit, some of the sharper minds in finance gathered to discuss their outlooks and opinions. The event, which raised funds for The Ruby Peck Foundation for Children's Education, was a stunning success, with panels and presentations in the afternoon and a snazzy soiree shortly thereafter. In an effort to tie it all together, I wanted to chew through some of the thoughts offered by the savvy seers. I would also like to extend a special thanks to Michael Santoli of Barron's for his most excellent moderation.

Click here to see Part 1 of the Minyans in Mahattan Recap.

Second Keynote: Steve Galbraith, Limited Partner at Maverick Capital

  • For the first time in history, there are more hedge funds than stocks.

  • The growth in hedge funds is not without precedent. We've seen this movie before in the mutual fund arena.

  • The result isn't imminent doom, it's more likely mediocrity.

  • Over 60% of hedge funds are less than five years old. Less than 20% survive more than eight years.

  • Where else are you going to put your money with real interest rates negative?

  • We've seen an unprecedented string of double digit earnings growth and all-time high profit margins.

  • There's been a stunning large cap underperformance.

  • Historic "tails" (distribution of returns) have thinned massively.

  • Individual investors have reacted rationally. Corporate America, however, is hoarding cash.

  • Themes: Volatility will rise, the dollar should rally, "big cap over small," the US is the most attractive major market, valuation spreads between "good" and "bad" will rise, the catalyst (for a potential decline) might be a busted LBO.

Panel Discussion Two:

Jonathan Golub, US Equity Strategist, JP Morgan:

  • I take more of a bottom up approach rather than a top down approach as many here on the panel do, so from our standpoint there are certainly problematic areas, but also opportunities out there.

  • It may be true that the U.S. remains the best house in a bad neighborhood.

Bennet Sedacca of Atlantic Advisors:

  • I am worried about the $370 trillion notional in outstanding derivatives.

  • The imbalances are so large that I openly wonder what the impact would be if a financial accident were to occur.

  • The economy, any way you slice it, is weakening. As such, I continue to believe that the Fed will cut interest rates at some point in 2007, mostly because of the presidential cycle.

  • What every first-term President wants is a second term and what every second term President wants is a good legacy and his party to be re-elected.

  • With the Republicans having just lost both Houses to the Democrats, I fully expect the Fed and administration to push rates lower to reinvigorate a sluggish economy.

John Roque of Natexis Bleichroeder:

  • I am neither a bull nor a bear, but a technician interested in identifying long opportunities and short opportunities.

  • I believe there are definitely areas of the market that can be bought.

  • I have been a metals bull since 2001 and continue to believe that there is an underlying secular bull market taking place within metals.

  • But there are other stocks that I believe investors are ignoring that seem bullish to me.

  • Large cap stocks, such as DuPont have done almost nothing for six years. I think these stocks can be bought.

John Succo of Vicis Capital:

  • I was intrigued by Steve Galbraith's point on the rationality of investors and real rates (Steve Galbraith said "investors have reacted rationally to free money (negative real interest rates). They borrow it. Debt is good when rates are negative."

  • This sounds right when you look only at return. It's rational to take money at a negative interest rate and lend it back out at a positive one but there are increasing risks associated with this and I don't think people understand the risks they are taking on to pick up these returns.

Other Thoughts:

  • When participants want to take on more risk in the various markets, they take out additional loans and buy assets with the money. When they want to assume less risk, they sell assets and buy Treasury Bills. That is the real driver of asset prices.

  • This is not an unimportant point for it suggests there is no need for an increase in money supply to drive asset prices, but rather a shift in "risk preferences" by participants.

  • How this "more risk" preference will end is anyone's guess, but history suggests it will not be with a whimper.

  • Almost 2% of the NYSE's entire market capitalization has been taken private (read: LBO'ed) since the beginning of this year.

  • So much money is sloshing around in private equity funds that we now have the Jessica Simpson model of investing – "I don't know what it is, but I want it!"

  • Private equity funds are looking to "lever" corporate America's under-leveraged balance sheets and exploit them accordingly.

  • There are now more hedge funds than there are stocks and 60% of those funds are less than 5-years old. This trend will end with mediocre performance by most hedge funds.

  • Gold is going up against most assets. And, foreign energy stocks are making new all-time highs and "pulling" U.S. energy stocks higher.

  • The U.S. has the highest "real" (inflation adjusted) interest rates in the developed world, implying capital should continue to flow here.

  • If current profit margins and free cash flows are sustainable, then the equity markets can continue to levitate. However, a "mean reverting" world suggests we are long-of-tooth in this trend.

  • Sam Zell is not stupid! Therefore, the recent sale of his flagship REIT Equity Office Properties Trust (EOP) should be viewed as a watershed event.

  • Bank indices are deteriorating against the S&P 500 Index (SPX). Since the Financials have roughly a 22% weighting in the SPX, this is troublesome.

  • If the rumors about a Home Depot (HD) LBO were for real, the long-dated call options on HD should have collapsed and that just didn't happen.

  • Volatility and Risk are currently being way under-priced by the markets.

For a glimpse of the Critters Choice Award's Benefit, pleased click here.

No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at

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