Broyhill Linkapalooza

I’ve been told that my eyes are bigger than my stomach.  Today, I can barely see over the pile of paperwork on my desk set aside for “future” posts.  So rather than attempting to eat the short stack, what follows is a Smorgasbord of research digested recently, but yet to be expelled.  I hope this random collection of work is of some use to someone. If nothing else, it will provide some perspective into a few of the things we’ve spent time on recently.

Thinking Outside The Bottle is an essay excerpted from McKinsey’s recently published book titled Reimagining India.  Muhtar Kent’s perspectives and experiences are valuable nuggets as we spend an increasing amount of energy thinking through the implications of an emerging middle class, particularly as it relates to the largest bottlers in the world.  More on this emerging theme next year.

Assessing The Damage To European Telecom: As bad as it gets?  The team at Third Avenue thinks so.  We tend to agree and have expressed this view through a core position in Vodafone for some time, as we continue to work on other names in the sector.  Feel free to pass along any related work.  A summary of the thesis is presented by Third Avenue’s International Value Fund.

Results From The National Survey of Independent & Community Clinical Laboratories:  It would seem that this is another example where size matters. The rich get richer and the weak get weaker. Nearly half of independent community laboratories estimate their average profit margins are below three percent and likely to be pressured further with additional cuts to Medicare.  The market appears to be just as concerned with the low-cost and most efficient operator in the industry after this week’s reduced guidance. We smell an opportunity in the form of a defensive industry leader with a wide economic moat.

Turning Online Grocery Sales to Gold: Demand for online grocery shopping is fueling a market expected to reach $100 billion in sales by 2018, according to this study by the Boston Consulting Group.  Early movers have a significant competitive advantage over those that show up late to the party. Tesco is a pioneer in the UK’s leading online grocery market where experience shows that a strong market position drives profitability.  While consensus is fixated on short-term margin compression do to elevated levels of reinvestment, we think the shares are worth a look for more patient investors.

Why is China relaxing its one-child policy?  Whatever the reason, we smell opportunity.  Particularly with regard to the recent underperformance of a certain French company hit hard by the recall of infant formula which hit sales, profits and cash flow in the short term.  This isn’t the first recall in China, per The Telegraph, and it is unlikely to be the last.  But it is the first time in a while you’ve been able to buy these shares at a 15% discount to peers. More babies need more formula.  Trust me on this one.

How Quickly Should A New CEO Shift Corporate Resources?  McKinsey suggests that CEOs recruited from outside of the company find it easier to undertake the necessary nurturing and pruning of existing businesses.  Pay attention Microsoft.

No Silver Bullets in Investing.  Amen.  “No asset (or strategy) is so good that you should invest irrespective of the price paid.”  It’s always such a pleasure to read Montier’s thought pieces.

The Race Is On.  Move forward, but with caution.  Which is it, Howard?  The most recent perspective from Oaktree’s founder and chairman is well worth a few minutes of your day for consideration.

What If I Were To Tell You I Was Turning More Bullish?  Is that something you might be interested in?  “There is one reason for being long and one alone: sovereign nations are printing money and you can see that prices are trending.  That’s it.  Nothing else matters.”  For Hugh’s sake and his reputation, I hope he is right.  This is quite an abrupt change of heart after watching the market rally almost 3x off the bear market lows.  For our part, we aren’t willing to fight the fed here, but we sure as hell aren’t going to embrace it with open arms.

Don’t Mess With Texas.  The “Old” House of Money is one of my personal favorites. The New House of Money is unlikely to disappoint if Chapter One is any indication of what is in store.

My Top 10 Peeves, compliments of AQR’s Cliff Asness. “Volatility is for misguided geeks; risk is really the chance of a permanent loss of capital.” I consider myself a different kind of Geek than Cliff, but still appreciate the insight on offer from the quant’s of the world.

Distribution Effects And Risks of QE are growing with each passing day.  This discussion paper examines the consequences of ultra-low interest rates, not the least of which has been the increase in emerging market bond purchases from foreign investors to $264 billion from just $92 billion five years ago. “Emerging markets that have a high share of foreign ownership of their bonds and large current account deficits will be most vulnerable to large capital outflows if and when monetary policies become less accommodating in advanced economies and interest rates start to rise.” Investors would be well served by cutting that sentence out and pasting it to their Bloomberg.

The Effects of Quantitative Easing On Interest Rates: The authors of this NBER working paper find significant evidence that unconventional monetary policy has driven down yields on all bonds and that Federal Reserve purchases of “safe” bonds has increased the embedded premium for said safety.  No shit?

The Response Of Tail Risk Perceptions To Unconventional Monetary Policy . . . perceived risks decline significantly.  This BIS Working Paper finds that accommodative policy (i.e. asset purchases) drives down risk and leads to a pick-up of cross-border bank credit, in line with the a “risk taking channel” of monetary policy.  Naturally, this leads one to wonder what happens when said “accommodative” policy reaches its inevitable conclusion. Global equities have rallied over 50% over the past two years (while earnings remained largely unchanged), as central banks removed tail risk from capital markets.  You can only remove tail risk once.

China Bad Bank Cinda Raises $2.4 Billion to Buy Distressed Debts.  Does the timing of this deal raise any eyebrows?  It should.  Just saying.

The Psychopath Test: A Journey Through The Madness Industry. “They say one out of every hundred people is a psychopath. You probably passed one on the street today. These are people who have no empathy, who are manipulative, deceitful, charming, seductive, and delusional. The Psychopath Test is the New York Times bestselling exploration of their world and the madness industry.”  This is somewhat of a test to see if anyone actually made it to the bottom of this list.  Please don’t judge me and my new obsession with Dexter. Damn you Netflix!!