Don't panic

These guys are on it…


The vice president seems to a have a strong medical background.


I listened to two podcasts this week, available here.

The first was the one with the Scottish Mortgage fund manager. The name is a little confusing as the fund has nothing to do with Scotland or Mortgages. They invest in tech and growth stocks.

The objective of the trust (from HL)

The investment objective is to maximise total return from a portfolio of long term investments chosen on a global basis enabling the Company to provide capital and dividend growth. The equity portfolio is relatively concentrated and investments are chosen on their long term merits rather than with reference to geographical asset allocation or the composition of an index. The Company aims to achieve greater return that the FTSE All World Index (in sterling terms) over a five year rolling period.

It currently trades at a discount to its NAV, but some of the assets are non publicly traded equities which can be marked up by unscrupulous forces! Its got about 8.43% of its holding in Amazon at the moment though.

The second one, was the interview with Nick Train. I was particularly interested in Train’s Manchester United investment. If my memory of the interview serves, he states it was listed in London with a market cap of 20 million pounds in the early 90s and after the Glaziers bought it, it ended up listed on the NYSE with a market cap of around 2 billion dollars. Wow that’s some return!

He seemed very focused on brands as a strong concept. I liked the bit where they talked about Unilever. He said that Unilever had been thought of as a stodgy company for years, but its been a brilliant investment with increasing dividends every year.


Tesla shares has been on a wild ride the last couple of years. The CEO/founder Elon Musk announced he had the capital to take the company private but that failed to materialise and now the stock is up a lot and has a market cap of about 136 billion dollars at time of writing. I think they have reached some delivery targets and even made a profit but this is quite a jump. They’re raising money (apparently only 2 billion). I’d raise more than 2 billion in this position. I think a 20 billion raise wouldn’t affect the stock too much. They do make some nice cars. Are they going to completely own the autos market? Have the traditional car-makers been totally asleep at the wheel? Excuse the pun.

As a side note, though, the entire purpose of the equity markets is to raise capital to expand businesses. In common with the REITs I’ll mention below if the cash raised is deployed usefully by good management teams it really can be used to grow the business. The bears view though, that this is a massive fraud and he is promising the earth and will never deliver anything is probably a bit extreme.

The rockets seem good but there are a few competitors in that game. Now that Jeff has started playing things might get interesting.

Soros looks pretty smart with this bet

Michael Milken

A few weeks ago a guy called Michael Milken was pardoned by the Trump administration. He is an interesting guy. Known as the “Junk Bond King”.

There is an interview with him and David Rubenstein here.

Its worth a watch. I didn’t quite know what to think when I’d seen it.

Milken describes a moment in his early life that caused him to observe that there are people who have brilliant insights who were not able to access the capital they needed to envision whatever thing they wanted to do or had brilliant insights about. Hardly a novel thought, however, his solution was.

I am led to be believed that he pioneered the junk bond market. I think this is all the companies rated below CCC by the rating agencies.

He was jailed for 10 years but only served 2 and was fined 600 million dollars by charges that were brought against him by the US government. I think there is solid evidence that he was a crook and he does say he has regrets about what he did. However, the change on finance he began is staggering. Nowadays every year about 1 trillion dollars is raised by “junk” credits.

The thing is, often a group these “junk” bonds outperform a group of “investment grade” bonds. This is a little perverse but actually makes sense if you think about it. Credits rated as Junk are typically composed of two types of companies. The first group are profitable companies that are poorly ran. The second group is made up of unprofitable companies that are run by a random group of people. Also, sometimes the companies of the future are in there. At one point, Tesla, Netflix, WeWork (if it isn’t bankrupt yet) and Uber were classed as “junk”.

The great insight Milken had was that there was veracious appetite from debtors and creditors alike for junk bonds. Junk bonds are essentially loans to people or companies that have a low credit quality.

Of course with junk bonds you get paid more (higher yield) than “investment grade” or “risk free” government alternatives. Then investors, in theory can fund these businesses while getting better returns than holding other securities. To me this is the most important principle. According to Howard Marks (paraphrasing),

“There is no such thing in investing as a good or a bad idea without reference to price”

This is kind of obvious but is worthy of being pointed out. Also, people like to reach for yield!

You can get exposure to this market with an ETF called HYG. It has a yield of 5\% which sounds good.

I am unsure how well it tracks the underlying or what the mechanism is but I think its the only way for retail investors to get exposure to this asset class.

Milken has gone on to do great things. He has funded lots of medical research and runs the Milken Institute.

Apart from him being a crook there are a large number of people who think he is a genius. Firstly on his hiring, quoting from Matt Levine,

“Milken’s shop became the envy of Wall Street’s more conservative firms, whose denizens dubbed these bonds “junk.” Black still bristles at the word. “We were never accepted by the Goldmans and the Morgans and the Kidder Peabody’s and the First Bostons,” he says. “What Fred wanted to do was to put together a team who had that desire to prove themselves—us against the world.””

Also he annoys current Wall streeters by doing deals for free because he just loves junk bonds so much. Again quoting Matt Levine,

Now that he’s no longer a felon, do you think Michael Milken will be allowed to work in the financial industry again? Do you think he’ll want to? The answer in both cases seems to be “maybe but don’t count on it”:

David Boies, managing partner at the law firm Boies Schiller Flexner said the presidential pardon meant Mr Milken was now in a position to apply to the Securities and Exchange Commission to lift its ban on him working in the finance industry. “And I think that the SEC could very well take into account the same factors that led to the pardon,” Mr Boies said. The SEC declined to comment. Mr Milken’s spokesman would not say whether he plans to apply to have the ban lifted but said that returning to finance was “the farthest thing from his mind. He just returned from a two-week trip to nine cities on three continents where he hosted events with attendees from 40 countries. Main topic: how to accelerate medical research. That’s his focus.”

He carries on,

Oh well. “It’s a shame the world was denied his expertise on that score for so long,” says the Wall Street Journal’s editorial page. But actually that is not true! In fact, since his conviction, Milken has had several, uh, alleged brushes with financial advising. In 1998 he settled with the SEC over charges that he had taken $47 million of consulting fees for “offering advice to such financiers as Rupert Murdoch and Ronald O. Perelman on several transactions in recent years.” And in 2015 Guggenheim Partners settled a bizarre SEC case that seems to have been about Milken maybe structuring an investment for Guggenheim. The world has not been entirely deprived of Michael Milken’s financial expertise in the last few decades. And those are just the times he got in trouble. He was banned from the securities industry, which meant that he wasn’t allowed to give people advice on securities transactions (financings, mergers, etc.) in exchange for fees; when he did, or arguably did, the SEC would scold him and take the fees. But there was no law against him giving people financial advice for free, so he did, according to this terrific anonymous quote in the Financial Times:

While Mr Milken was banned from working in the financial services industry under the terms of his indictment, he has maintained close ties to his friends from his 11-year career[4] on Wall Street. … “He is already a trusted adviser to more CEOs than all the finance CEOs combined,” said one friend. “He just does it out of friendship and kindness and intellectual challenge.”

and finally

It does make things a little awkward for those finance CEOs, you know? Like Jamie Dimon has dinner with the CEO of a huge acquisitive company and asks about her family and listens thoughtfully to her problems and gives her sage advice and then when the check comes he is like “this reminds me, you still need to sign the engagement letter giving us a $50 million fee to do your merger.” And she is like “well I had dinner with Michael Milken last night, he gave me even sager advice about my merger, he invented junk bonds when you were still in college, and he’s doing it all for free just because we’re such good friends.” A crucial job of a senior investment banker is to persuade corporate CEOs that you are their trusted adviser, personal confidant and selfless friend, so that they’ll pay your bill. If a legendary financial genius gives them the same advice and friendship without sending them a bill, it kind of undermines your performance. I don’t know, I just sort of love stories like this. I think of the time that Andrea Orcel was between investment-banking jobs and wanted to fly to Davos anyway to do deals, not because he was getting paid for it but because all his friends were in Davos and what they did for fun together was deals. Michael Milken has been in legally enforced retirement from the securities industry for the last 30 years, with billions of dollars and complete leisure to pursue whatever hobbies he likes, and one of those hobbies just happens to be advising people on investing and financing transactions. He just loves junk bonds so much that he’d do them for free, and he did.[5]


Real Estate Investment Trusts (REITs) invest in property and typically rent it out to customers. Its an interesting asset class. With interest rates this low you would think these would do well. Many have but some haven’t. Typically the ones dealing with bricks and mortar retail. INTU, in particular is trying to stay afloat at the moment. I don’t think I’m brave enough to buy here. The Trafford centre is OK but not that great.

However, their are groups of REIT investors who have done well. Warehouse REIT which I have a very small position in is one of these (so far). Find out more here.

One thing to note is that the management team have a lot of experience (and pay themselves a lot) but are quite aggressive. They announced a possible placing recently and the shares haven’t sold off much, even with the corona virus fear gripping people.

Going back to the point I made above about Tesla, this is what the stock market is for, isn’t it? It doesn’t make me any less annoyed though that I’ll end up being diluted. If they allocate the capital they raise properly though I’ll forgive them. God knows they get paid enough!

Recent positions

I recently bought some shares of CRODA international. Well worth a look, its a good business from what I have learnt about it. I’ll put up another post in the future about it.

Idle speculation

I’m updating this, today, on the 10th of March. The european equity index futures opened down and drifted to a low of about 9.5\%. I’ve never seen that before, the guy on Bloomberg hadn’t either so its not just a generational thing. He said that last time was 9/11 (or the day after). Can’t find the exact clip but you can see the stress here!.

It may be a good idea to start thinking about buying some shares in good quality businesses and taking a little bit of risk. This isn’t saying things won’t get a bit, or a lot cheaper but over the long term these should do well.

Today was one of those days which happen far more than can be explained by coincidence alone. The oil price collapsed and there was fear present already about the corona virus.

Monetary conditions are incredibly easy with the 50bps reduction in the FED funds rate announced last week and probably more on their way around the world. This should pass through to cheaper debt repayments for good quality companies with the rush into investment grade bonds (eventually at least). That makes companies that grow steadily and/or pay a steady or consitent/increasing dividend very attractive if and when they get cheaper.

Where else do you go for yield? At one point today the entire US yield curve was below 1\%. Even for 30 year treasuries!

In the UK some yields are even negative. Who in their right mind would pay money to lend money to the UK government! I think bonds are in a bit of a bublle, but what do I know!

Property, maybe, and utility stocks will probably do well.

Obviously oil at these levels make oil companies losers, but it is good for consumers and may lower infation a bit. I think short to medium term we could even suffer deflation. Deflation benefits bonds (I think) and gold (although I’m not enitrely certain it does - worthy of future research). This challenges the bear case for bonds above.

The oil majors fell a lot today (BP, Shell both down by around 20\%). I’m not sure we should be tempted, even by these big names with lots of cash. How much oil will they be able to remove from their current assets and how long will it take to transition to green energy?

Potential positions

Cinewrold shares look interesting. I’m not sure I would rush in on this, more research is required as there are a lot of people betting against them. They have a lot of debt and are very aggressive in buying up screens, especially in the US.

A recent news article available on HL says

(Sharecast News) - Cineworld has agreed to buy Canadian cinema chain Cineplex for $2.1bn. Under the terms of the deal, Cineplex shareholders will receive CAD34 per share in cash. The acquisition is expected to be double-digit accretive to earnings and cash flow in the first full year after completion and will add 165 cinemas and 1,695 screens to Cineworld’s portfolio. Cineworld said it was a “highly synergistic” transaction, with about $130m of annual pre-tax combination benefits by the end of full-year 2021. Cineplex is the largest cinema operator in Canada by box office revenue and number of screens, with a market share of approximately 75% by box office revenue as at 30 September 2019. Cineworld chairman Anthony Bloom said: “The board of Cineworld believes that the acquisition of Cineplex is in the interests of its shareholders as it fits squarely within our strategic acquisition objectives and is expected to be strongly earnings and cash flow accretive. “Going forward our immediate post-acquisition objectives will be to combine Cineplex with our US business to create a leading North American cinema operator; maximise the synergistic combination benefits of the Cineplex acquisition; continue the currently successful refurbishment of the Regal chain in the US; and focus strongly on a structured debt reduction program targeting leverage towards 3x net debt/EBITDA by the end of 2021.” At 0900 GMT, the shares were down 3% at 199.95p.

Some commentary from an analyst,

Russ Mould, investment director at AJ Bell, said: “Making another large acquisition at a time when markets are already worried about debt levels is an extremely brave move by Cineworld. “Its purchase in 2018 of US cinema chain Regal Entertainments raised many eyebrows because it meant the company would have very large debts for a number of years until it generated enough cash from operations to reduce borrowings to more comfortable levels.

“The number of short sellers - people betting on its share price falling - has been increasing this year, primarily over concerns about a weak film slate in 2019 and sky-high debt levels.

Sounds scary,

“Therefore news that it is now buying Canada’s largest cinema operator, Cineplex, for US$2.1 billion would suggest management are very good at shrugging off market concerns or they don’t realise they are walking further into the lion’s den.”

I’m also interested in the owners of the Metro and Daily Mail group of newspapers, DMGT. Even though the newspaper industry is pretty dismal at the moment. Buffett recently got rid of his.

Talking about Buffett

On the subject of newspapers, the above article is good. This gem almost makes you feel sorry for him,

Warren Buffett is selling his newspaper business for $140 million — a fraction of the $344 million he spent acquiring 28 daily papers less than a decade ago.

However, maybe we can hold back the tears,

As part of the sale, Berkshire will provide Lee with $576 million in financing at a 9% annual interest rate for 25 years, allowing the publisher to pay off its existing debts and save about $5 million in interest each year. If Lee pays off the interest on the full amount each year, Berkshire could net close to $1.3 billion.

Apparently the Lee Organisation are a friend of Warrens’,

“We had zero interest in selling the group to anyone else for one simple reason: We believe that Lee is best positioned to manage through the industry’s challenges,” Buffett said in a press release on Wednesday. He added that he and his investment partner, Charlie Munger, “have known and admired the Lee Organization for over 40 years” and that the publisher had managed Berkshire’s papers exceptionally well.

If thats how he treats his friends…

Buffett is very good at this sort of loan-sharking and fond of it too recently it seems. He did a deal with Occidental petrolem recently. It included,

  • Berkshire receives 100,000 shares of cumulative perpetual preferred stock.
  • Each preferred share issued by Occidental has a value of $100,000.
  • The preferred stock issued by Occidental pays an 8% dividend.*
  • Berkshire also gets warrant to buy up to 80 million OXY shares at $62.50.
  • Investment is contingent on Occidental being winning bidder.

Nice little 8\% yield there on the preferred shares. The warrants are a bit (lot) underwater with OXY trading at around $14, having fallen 50\% today (10th March)!

The deal is maybe not so good for Occidental shareholders though, indeed, Carl Icahn said, said,

“Buffett figuratively took her [CEO Vicki Hollub] to the cleaners. The Buffett deal was like taking candy from a baby and amazingly she even thanked him publicly for it! But you can’t blame Warren, if Hollub was arrogant enough to negotiate a deal with Buffett of this magnitude despite her admittedly limited experience in M&A and the Board was misguided enough to rubber stamp it, then one might say in Warren’s defense that it was almost his fiduciary duty to Berkshire Hathaway to accept it.”

Tell us what you really think, wont you Carl.

Written on March 10, 2020