“I have no money, no resources, no hopes. I am the happiest man alive.”
-Henry Miller
One of the more interesting things about being involved in running Hedgeye for almost a decade now, is getting to know professionally and personally some of the more prominent money managers on the planet. In particular, over the years, I’ve gotten to know probably the most iconic activist investor.
Like most Wall Street icons, this gentleman, who shall remain unnamed, is a total character and genuinely good guy. Among other interesting adornments in his office is a coffee mug that reads, “Money is power. Everything else is rented power.” In the activist world, that is certainly an accurate statement.
Most of us have the luxury of not having to overly worry about money. Or if we do, it is likely because we are outspending our means. But in reality we all make much more than the national median income of ~$50,000. In fact, it is likely fair to say that everyone reading this letter makes many multiples of the median income (if not many, many, many multiples).
More money certainly leads to more security. But what about happiness? To a point, money does buy happiness. According to a well-known study from the Case Western University, each incremental dollar in income from the 20th percentile onwards makes a big difference in reducing negative emotions. Those returns peak by the time you reach the 80th percentile and disappear around $200,000 in annual income.
So money does make you happier to a point, but there are also negative implications to having money and power. The social-psychologist Paul Riff recently undertook a number of experiments centered on the game of monopoly. These experiments involved the secret recording of “rigged” games of monopoly in which one randomly selected player was given a priori advantages: twice the money, greater ability to move around the board, and access to higher resources (higher bonuses for passing “go”).
The goal of the experiment was to study “how a privileged player in a rigged game behaves.” Within just 15 minutes of play in most games, the researchers noticed “dramatic” behavioral changes in advantaged players. These changes ranged from the players being louder, moving their pieces more forcefully, and even something seemingly benign as eating more pretzels.
Riff’s conclusion from this experiment, which was corroborated by other experiments he’s undertaken, is that wealth and hierarchical status tend to increase ones sense of entitlement, while simultaneously decreasing one’s empathy and concern for others. Now, the caveat of course is that monopoly is just a game...
Back to the Global Macro Grind…
In the game of activist investing, we may be close to hitting a peak. According to Value Walk, companies publicly subjected to activist demands hit 806 in 2016, an all-time high, but based on the 385 through the first half of 2017 that number should decline year-over-year. Assets under management of activist funds have also flat-lined at around $180 billion.
Trian Partners' recently launched proxy battle with Proctor & Gamble is of specific note. At a market capitalization of $225 billion, PG is the largest company that has ever been subject to a proxy battle. Naturally, as there are fewer targets, activists need to hunt bigger game and in more diverse regions.
In as much as the media likes to, at times, vilify activists, they do have an enviable track record. According to a study from Harvard Business School:
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“We studied the universe of about 2,000 interventions by activist hedge funds during the period 1, examining a long time window of five years following the intervention. We find no evidence that interventions are followed by declines in operating performance in the long term; to the contrary, activist intervention are followed by improved operating performance during the five-year period following the intervention.” |
The downside of taking a large public, and often illiquid, position is that getting out is sometimes more difficult than getting in. That said, and not withstanding signs of peaking activism, our view of a transition to #Quad1 (accelerating growth and decelerating inflation) into the back half of 2017 should continue to provide a favorable tailwind for activists and equity investors in general.
Yesterday’s report from the National Association of Realtors provided another supporting data point for #Quad1. While existing home prices fell 1.8% in June from the prior month, prices hit a record median high of $263,800 (5x times median income but who is counting), up more than 6.5% year-over-year. Both accelerating home prices and strong equity markets (S&P500 is now up 14.1% y-o-y) certainly aren’t negative for the consumer component of GDP.
The biggest challenge to the #Quad1 thesis may come on Wednesday with Federal Reserve’s policy decision. According to a WSJ survey, 93.2% of economists expect the Fed to raise short term rates on Wednesday. Given that consensus, the question will be what the Fed signals about future rates. We don’t expect this, but language that implies an acceleration of interest rate hikes would be negative for the #Quad1 outlook.
The more significant looming negative catalyst may be the potential for a government shutdown in October. According to our research team in Washington, the likelihood of a government shutdown increased this week with House Republicans moving forward with a $788bn spending bill that is in line with President Trump’s desires to increase military spending, reduce clean-energy programs, and fund that dastardly wall on the Mexican border.
At least we are likely to have a summer of strong equity markets before the politicians can rain on the parade!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.21-2.36% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
VIX 9.02-10.48 (bearish)
EUR/USD 1.13-1.17 (neutral)
Oil (WTI) 45.06-47.52 (bearish)
Gold 1 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
