Bill Ackman Just Broke an Unwritten Rule of the Business

Ackman
© REUTERS/Eduardo Munoz

On Thursday, the Financial Times published an op-ed written by hedge fund billionaire Bill Ackman.

It was an endorsement of Michael Bloomberg for president, and it was the talk of the industry.

It’s not that people on Wall Street didn’t like what Ackman said. As a former Wall Streeter himself, Michael Bloomberg is respected in the community, and his centrist policies sit well with the generally fiscally conservative, socially liberal ethos.

But Ackman’s timing couldn’t be worse.

At this point in 2016, Ackman’s fund, Pershing Square, is getting slammed. Its publicly traded vehicle has fallen 18.6% year to date. Last year, his fund was down 20.5%.

To the people on the Street I spoke with that means he shouldn’t have time to be writing op-eds about politics. They think it looks bad to investors who want him to be thinking about dollar returns, not election returns.

A spokesman for Ackman declined to comment.

To these executives, who are at hedge funds of their own, politics are a hobby. Hobbies are something investors have when they have time. Investors do not have time when they are losing money. That means when investors are losing money, they don’t have hobbies — not charity, not dodgeball, not poker, not collecting stamps.

At least not in public.

Ackman’s focus ought to be on turning his ship around, not Mike Bloomberg’s potential campaign. In times like these, investors want to see action, they want to see change. They want to see contrition.

For example, when Larry Robbins of Glenview Capital lost 13% in 2015, he basically wrote an ‘I’m sorry letter’ to his clients and peers.

“The last 90 days have been exceedingly disappointing and frustrating,” Robbins wrote. ” I’ve failed to protect your capital, and mine, from a significant drawdown, despite a flat market.”

Ackman, however, has shown no signs of changing his strategy. He said as much in his letter to investors at the end of the year.

“Ackman is failing on the number one rule,” one executive at a New York based hedge fund said. “He’s getting attached to his book like he’s a child with a lost toy. Be a man, let the teddy bear go, this is people’s money. This is real life.”

Written by Linette Lopez of Business Insider 

(Source: MSN)

Oil’s Drop Below $50 May Be Just the Start as Demand Slumps

© Provided by Bloomberg
© Provided by Bloomberg

Oil has fallen to a six-month low, and hopes of a quick rebound are fading as demand heads into an autumn swoon.

Brent crude tumbled below $50 Monday for the first time since January. Gasoline fell the most in almost three years.

The slump may have further to go. U.S. refineries, which turned a record amount of crude into gasoline during July, typically slow down from August through October for maintenance.

“We still have a lot of global oversupply,” Michael Wittner, head of oil-market research at Societe Generale SA in New York, said on Bloomberg TV Monday. “We’re getting close to the autumn where demand for crude and products hits a seasonal low point, so it’s hard to see where the uplift is going to come from.”

Also, demand for gasoline typically eases after summer as the seasonal workforce shrinks and families stop vacationing.

Hedge funds are growing more pessimistic. Money managers cut bets on rising Brent prices last week by the most in more than a year, and are the least bullish on U.S. crude since 2010.

Written by Dan Murtaugh of Bloomberg

(Source: Bloomberg)

Investors Scramble to Avoid Puerto Rico Losses

© Provided by CNBC
© Provided by CNBC

Once seen as a golden opportunity, big-money investors are now scrambling to keep their bets on Puerto Rico whole.

Hedge funds, mutual funds and other investors piled in over the last two years, thinking others had overreacted to the island’s fiscal problems by dumping local bonds.

But the value of their debt holdings fell sharply early this week on a string of bad news.

The U.S. territory’s governor surprised observers by saying its $72 billion in debts weren’t payable. The White House explained that it was not contemplating a bailout. Ratings agencies cut their assessments of Puerto Rican bonds. And a report by a group of former International Monetary Fund officials detailed just how bad the island’s fiscal problems are.

“The coming weeks will bring showdowns between … the governor and bondholders, and out of the rubble, we expect the PR government to emerge leaner, having shed some debt and restructured some operations,” Height Securities said in a report Monday.

In other words, more observers think that hedge funds and other creditors should expect to accept less than face value for the bonds they own. Some Puerto Rico bonds were trading at 68 cents on the dollar Tuesday.

The bad news doesn’t mean investors are giving up.

Two bands of mostly hedge fund bondholders continue to put pressure on local officials. They still hope to come up with a deal that gives Puerto Rico the money it needs to fund its operating budgets and, at the same time, provide a profit for investors. The negotiations are now more urgent giving looming deadlines: a total of $1.9 billion in various bond payments, including general obligation debt, are due on July 1, according to a market participant.

The largest band of investors owns different types of government-backed bonds.

A year old, the so-called Ad Hoc Group is made up of 35 members and represents $4.5 billion in Puerto Rican debt holdings such as GO bonds, seen as having the best chance of a full payment. Not all the investors in the group are disclosed, but its steering committee—those that actively negotiate with the government—are Fir Tree Partners, Centerbridge Partners, Davidson Kempner Capital Management, Stone Lion Capital Partners, Brigade Capital Management and Monarch Alternative Capital.

There was no comment Monday or Tuesday, but the group wrote in a letter on June 24 that it wanted to meet with government officials and “be part of the solution to the Commonwealth’s fiscal challenges.” The Government Development Bank for Puerto Rico, which represents the other side, declined to comment.

The other investor alliance is holders of bonds from the Puerto Rico Electric Power Authority, or PREPA. Also called an ad hoc group, it includes hedge funds Knighthead Capital Management, Marathon Asset Management, Goldman Sachs Asset Management, D.E. Shaw Group, BlueMountain Capital Management, Angelo, Gordon & Co. and large mutual fund investors Franklin Templeton and OppenheimerFunds.

Together the group holds about 40 percent of the utility’s bonds, or around $3 billion worth. Insurers such as MBIA  (MBI) and Assured Guaranty  (AGO) also have significant exposure to PREPA bonds and their stocks were hammered this week as a result.

The group negotiated with PREPA officials Monday, according to a person familiar with the situation, but no solution had been reached. PREPA owes about $400 million in a bond payment Wednesday, and a short-term deal could push the negotiating deadline forward in the hopes of a more comprehensive restructuring. Past extensions have been for 30 days.

A spokesman for PREPA bondholders declined to comment, and a representative for PREPA did not respond to a request.

Written by Lawrence Delevingne of CNBC

(Source: CNBC)

How the US is Helping to Sink Puerto Rico

© REUTERS/Ana Martinez
© REUTERS/Ana Martinez

As creditors in Europe look with trepidation at the increasing probability that Greece will default on its debts, investors in the United States are watching a similar situation play out in Puerto Rico, where decades of borrowing and a stagnating economy have, according to the commonwealth’s governor, made default on general obligation bonds all but inevitable.

The government announced over the weekend that banks would be closed on Monday and capital controls would be put in place to prevent investors from taking money out of the island’s economy.

In an alarming report that leaked over the weekend, a team of economists headed by Anne O. Krueger, former chief economist for the World Bank and more recently first deputy managing director of the International Monetary Fund, issued dire warnings.

“Puerto Rico faces hard times,” the authors found. “Structural problems, economic shocks and weak public finances have yielded a decade of stagnation, outmigration and debt. Financial markets once looked past these realities but have since cut off the commonwealth from normal market access. A crisis looms.”

The Krueger report found that the government’s fiscal deficit is “much larger than assumed” and said the only way forward involves massive restructuring of both the government’s debts and those of major public enterprises.

Any move to restructure the commonwealth’s obligation will likely meet stiff resistance from the bond markets. Puerto Rico’s debt is widely held by U.S. hedge funds, mutual funds and other investment vehicles. It has been particularly popular because a special provision of U.S. law for years made it exempt from federal, state and local taxes.

That allowed Puerto Rico to fund large amounts of deficit spending for well over a decade, resulting in a debt load that has placed an enormous fiscal burden on an economy that has begun shrinking. As recently as 2013, Puerto Rico’s Government Development Bank could borrow at between 5 and 6 percent interest. Today, that rate has rocketed to more than 15 percent, essentially shutting the island out of the bond markets.

The combination has left Puerto Rico unable to pay its debts, Gov. Alejandro Garcia Padilla admitted in an interview with The New York Times. “The debt is not payable,” he said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”

The Krueger report notes that Puerto Rico’s close association with the United States is both a benefit and a curse when it comes to the island’s economy.

For example, employers are subject to federal minimum wage laws, despite the fact that the federal minimum of $7.50 per hour is much higher relative to per capita income on the island than it is on the mainland. A mainland U.S. worker earning the minimum wage is making about 28 percent of per capita income in the country as a whole. A worker earning the same in Puerto Rico earns 77 percent of the island’s per capita income. This means that even entry-level workers are much more expensive to hire in Puerto Rico.

Additionally, the report found, social safety net benefits are, given the cost of living on the island and the relative earnings of minimum wage, more generous than on the mainland.

“Workers are disinclined to take up jobs because the welfare system provides generous benefits that often exceed what minimum wage employment yields; one estimate shows that a household of three eligible for food stamps, AFDC [Aid to Families with Dependent Children], Medicaid and utilities subsidies could receive $1,743 per month — as compared with a minimum wage earner’s take-home earnings of $1,159.”

One result is that only 40 percent of the adult population is gainfully employed, versus more than 60 percent in the mainland.

The report paints a picture of an island trapped in a vicious cycle. Poor economic growth, the result of past fiscal mismanagement, has led to an increasing need for deficit spending, which further depresses growth, perpetuating what Garcia Padilla has called a “death spiral.”

With a population greater than that of 22 states, Puerto Rico has economic significance for the U.S., and its extensive use of the bond markets in the past decade means that a widespread default could be a major shock to the markets. (The island’s per capita debt load would also, as the Krueger report points out, involve an unprecedented request for relief from creditors.)

The report posits a “voluntary exchange of old bonds for new ones with a later/lower debt service profile.” That essentially means bondholders would have to take a haircut.

“Negotiations with creditors will doubtlessly be challenging,” the report said. “There is no U.S. precedent for anything of this scale and scope, and there is the added complication of extensive pledging of specific revenue streams to specific debts. But difficult or not, the projections are clear that the issue can no longer be avoided.”

Written by Rob Garver of The Fiscal Times

(Source: The Fiscal Times)