What do you believe?

Is good news, good news? Is good news, bad news? Is bad news, bad news? Or finally, is bad news, good news? Confusing, isn’t it? Maybe that explains the extreme market volatility not only day-to-day but intraday in the financial markets here and abroad. Don’t we all want good news!?

A long three-day weekend is a great opportunity to pause, reflect on all the data and review one’s investment posture. I listen closely to what the pundits say about the economy and the global markets and also listen closely when Lee Cooperman, head of Omega and someone that I admire, blamed the extended decline in good part to systemic/technical electronic traders like Bridgewater. I respect Lee tremendously and agree with his conclusion, as the facts simply don’t support the magnitude of the market decline and of certain stocks in particular. The market did not discriminate between technology stocks, drug stocks, foods, utilities, industrials and commodity companies and everything in between. Something was amiss.

I listened closely to the announcements out of the G-20 meeting held in Turkey over the weekend. IMF Chief Christine Lagarde is always a voice of reason. She reiterated that monetary policy is not the cure-all and there is a great need for regulatory and structural reforms to boost output and productivity. We agree. Clearly there was a lot of discussion on China’s recent yuan devaluation. China’s Finance Minister Lou Jiwei promised future currency stability and that government spending would be boosted to 10% growth this year up from an earlier estimate of 7%. The meeting concluded with a promise from all G-20 members to refrain from currency depreciation and that monetary policies would be coordinated among members. This was a clear message to the Fed not to raise rates in September.

There continues to be a lot of good news last week out of the United States: the unemployment rate dropped to 5.1%; payrolls rose 173,000 and prior months totals were revised upwards; average hourly earnings rose 0.3% from the prior month and 2.2% from last year; the labor participation rate held at 62.6%; the trade deficit fell to $41.8 billion despite a strong dollar as exports rose (yes rose) while imports fell; the ISM eased to 59 in August which still is a strong number, and productivity increased at a 3.3% annual rate in the second quarter, the fastest rate of change since 2003 (both output and hours worked rose).

The Fed’s Beige book came out on Wednesday and reported good growth in most of the Fed districts. The report indicated wage pressures in many regions as unemployment fell and there was a balance between input and output prices. Inflationary pressures were modest.

Clearly there remains a debate whether the Fed should raise rates in September or not. Quite frankly, I hope that it takes place so it gets behind us and we can move forward once again. Good news is good news in the United States.

The ECB met this week and President Draghi indicated that the bank stands ready to increase its stimulus programs as economic growth is below prior estimates for the Eurozone. He comments that risks to growth are on the downside and there may be periodic negative inflation in the near future. The ECB governing council raised its limits on given bond purchases to 33% from 25% previously mentioned to give them more firepower to add liquidity to the system.

I found the ECB actions interesting as most of the reports last week out of Europe were positive: the PMI rose to 54.3 in August from 53.9; business and consumer confidence continue to increase and consumer prices were up 0.2% year over year. Germany continues to be the standout in Europe with strong reported retail sales and industrial production. France is lagging and will implement tax cuts with cost savings from other areas of their budget. Even with expectations of additional stimulus, the Euro stayed flat for the week. Here bad news is considered good news, as the ECB will act more aggressively.

Despite the optimistic comments by the Chinese economic minister over the weekend, recent economic reports are disappointing: the manufacturing purchasing managers index fell to 49.7, a three month low, while the nonmanufacturing PMI fell to 53.4; exports fell by 8.3% in July; the Caxin Manufacturers PMI hit a six year low of 47.3 in August; forex reserves fell by a record $93.9 billion on yuan intervention last month and controls were put on too much money leaving the country. As I have mentioned earlier, the Chinese government and financial authorities are doing exactly what the Fed, the ECB and BOJ did to stimulate their economies but investors are impatient and unwilling to look out six to 12 months. Here bad news is bad news.

There was a lot of action in the energy and industrial commodities areas last week. First there was rumbling that OPEC, Russia and Venezuela were open to discuss potential steps to stabilize oil prices and then there were actions by major industrial commodity producers like Freeport and Glencore to sell stock, cut or eliminate dividends, reduce production and cut costs to sustain a basic level of profitability to cover fixed costs. Where do I stand on both of these news events? I don’t believe that there is ample trust between energy producers that a “real” agreement to mutually to cut production will ever really work. They all cheat! But I have a different view of industrial commodities like copper, iron and nickel. I turned bullish a few weeks ago and stated that we are near the bottom of prices as I saw companies cutting current production and drastically cutting future capital spending. I bought RIO and BHP as they are low cost producers, strong balance sheets and both yielded over 5.5%. I stand by that decision. Here bad news is good news for most commodity companies as it spells the beginning of the end and a coming trough in prices.

I want to conclude by making a few comments on two meetings that I had last week: the first was with my former partner and now Vice-Chairman of Blackstone, Byron Wien and the second meeting was with Nelson Peltz, a well known activist and much more. I have known and worked with both men for over 30 years and respect both tremendously.

Blackstone is a tremendous institution and I had the privilege of hearing from several of their people last week. Byron shared his pearls of wisdo. He believes that the second half of the year will be better than the first and fears over China are overblown. He sees tremendous value in the market here.

Nelson is a different story as he invests company-specific and does not hedge out the market risk. Trian, which manages close to $10 billion, holds less than a dozen positions. I have been the largest institutional investor in each of Nelson’s public companies, Triangle Industries and Triac. He managed for free cash flow while supporting growth initiatives. I made a lot of money with Nelson. I was interested if he saw as many opportunities today as 5 years ago since the market has doubled. He said “absolutely” and is limited only by his resources and time to commit to the boards of companies that he invests in. His record of success is unparalleled.

Clearly both see opportunities to make money in the future.

So where does all of this leave me. I agree with both Byron and Nelson that investing still can create wealth. I am sure that Warren Buffett agrees too, so I am in good company.

The market has a funny way of challenging your core beliefs but that is good. Never be complacent and always be willing to change as the facts may dictate.

Last week I was asked how my fund is up so much being over 90% net long. Included in that 90% are several long-put positions, which includes currencies, commodities, stock indexes like the DAX and the Nikkei and stocks. Owning puts limits risk and is good way to hedge your portfolio, which includes straight shorts.

I will be sending out by the end of the week information on my first webcast. I look forward to an open conversation on investing and whatever else comes up just like what used to occur in Larry Tisch’s former power breakfasts.

Thank you for your comments and support. And remember to review all the facts, pause and reflect, do in-depth research, manage risk and liquidity and finally to… Invest Accordingly!

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