It’s been quite some time since Investorazzi.com has gotten wind of something in the pipeline for Colony Capital’s Tom Barrack. However, last Friday Zoe Hughes wrote a piece for London-based Private Equity Real Estate about the famous real estate investor. According to Hughes:

Colony Capital has closed its distressed real estate debt fund on $900 million (€587 million) of commitments after spending just one month fundraising , PERE has learned…

PERE reported in April Los Angeles-based Colony was quietly lining up $1 billion in equity to take advantage of the current market dislocation. Founder and chairman Tom Barrack led efforts to raise the fund, which is expected to start investing in distressed property debt and operating companies with strong real estate components. The fundraise took around 30 days, sources told PERE.

In his latest “Chairman’s Corner” newsletter on Colony’s website, Barrack predicted commercial real estate would continue to suffer from the credit crisis, with commercial loan spreads continuing to widen and North American developers suffering a string of defaults. In housing, he forecast, the “real problems [were] just beginning and [there is] no clear solution in sight.”

He went on: “The best place to prospect for ‘long’ emerging opportunities is most likely at home. It contains all the ingredients of an intriguing opportunistic investment: volatility, lack of transparency, confusion, over-leverage abound, lack of homogeneity in products, long-term stability, and government intervention.”

Source:

“Colony closes debt fund on $900m”
Zoe Hughes
Private Equity Real Estate (UK), August 8, 2008

It’s here. Jeremy Grantham, chairman of GMO LLC of Boston and a well-known money manager whose clients have included U.S. Vice President Dick Cheney and 2004 presidential candidate John Kerry, has finally released his latest quarterly letter, along with a “special topic” letter to boot. The following are some notable excerpts:

U.S. Stock & Housing Markets

Where does this leave me? Believing that asset prices will come down to fair price and below by about 2010, a belief I have held since 1999. This means about a 10% to 15% decline in the S&P by then (to about 1100) and a similar percentage decline for EAFE; about another 10% decline in U.S. housing and perhaps a 40% decline in U.K. housing, which is likely to take quite a while longer than 2010 to bottom out. Critically, overruns on the downside for all asset prices after a bubble breaks are much more the rule than the exception!

Commodities

The prices of commodities are likely to crack short term (see first section of this letter), but this will be just a tease. In the next decades, the prices of all future raw materials will be priced as just what they are: irreplaceable. Oil, for example, will never again be priced on the marginal cost of pumping a marginal barrel from some giant Saudi oil field, as has been the practice for most of the last 100 years of oil production. Real cost is always replacement cost and oil, a precious feedstock for chemicals and fertilizers, simply cannot be replaced. Using marginal cost as a substitute was ignorant and conducive to wasteful consumption of scarce energy resources. It also enabled us to put our collective head in the sand and ignore the growing need for an enlightened long-term energy and climate policy.

Relatively quickly, in 100 years or so, we will run out of oil, underground water, and most non-fully-renewable resources. At current rates, we will do it very, very fast. A major complication now, though, is that we have been brainwashed by repetition to reject this whole idea as irretrievably pessimistic and defeatist, and just well… thoroughly un-American.

Summary & Recommendations

Due to a combination of spectacular mismanagement by the authorities that resulted in very excessive and dangerous speculation and very bad luck in the timing of commodity problems and over-rapid expansion of China, the fundamental global outlook is substantially worse than expected. These problems lower long-term asset values by a little and increase the chances of deeper overruns and perhaps a faster trip to the lows. Our advice until now was very simple: take as little risk as possible except for emerging markets. Now it is even simpler: take as little risk as possible.

The more complex issues, as always, involve timing. Both emerging markets and commodities (especially oil) have a creative tension between the negative and risky short term (1-2 years) and the attractive long-term (5-10 years) prospects. In the short term, slowing world economic growth combines with credit, currency, and inflation problems to dominate the outlook and offer poor prospects for emerging markets and commodities. Longer term, the reverse is true and they look like the assets to own. But for those who can keep some of their powder dry, there are likely to be much better investment opportunities in a year or two (or three) than we have seen for 20 years. Our motto should be:

Don’t be brave, run away.
Live to fight another day.

You can access both Grantham letters via the GMO site here.

Sources:

“Meltdown! The Global Competence Crisis”
GMO Quarterly Letter, July 2008
Jeremy Grantham
GMO, August, 2008

“Living Beyond Our Means: Entering the Age of Limitations”
Letters to the Investment Committee XV
Special Topic, July 2008
Jeremy Grantham
GMO, August, 2008

Yesterday, a piece appeared on The Economist (UK) website which showed that the American global investment management firm Grantham, Mayo, Van Otterloo & Co., or GMO, made some terrific long-term calls regarding levels of returns from ten separate asset classes. Then again, what else would you expect when the firm is headed by legendary investor Jeremy Grantham? According to the well-known financial publication, Grantham and his cohorts are not so keen on the U.S. stock market and the housing markets of both the United States and United Kingdom. From the piece:

GMO has a very gloomy outlook for the American and British housing markets at the moment. By using the ratio of the median house price to the median family income, GMO reckons that prices in America need to fall by 17% instantly or stay flat for four years to return value. In Britain, prices need to fall by 38% or stay flat for seven years. And of course, there is no guarantee they will stay at fair value; in the mid-1990s, they dropped well below it.

More generally, Jeremy Grantham, GMO’s chairman, thinks that the equity bear market will continue for another couple of years, with the S&P 500 dropping by around 10-15% from here. But he warns that the chance of a meltdown—a drop well below fair value—has increased.

Source:

“The long and short of it”
The Economist (UK), August 3, 2008

Money managers from around the world gathered in Chicago last week for the CFA Institute’s annual investment seminar. Yesterday, the Chicago Tribune’s Gail MarksJarvis talked about two of the speakers- Jeremy Grantham and Marc Faber. The personal finance columnist wrote:

“I am officially scared,” GMO investment manager Jeremy Grantham told professionals from as far away as Abu Dhabi and Malaysia. “In 2000, we had a technology bubble. But this is massive, a massive credit crisis and a bubble in global housing, global equity and global land.”

Grantham, whose clients have included Vice President Dick Cheney and 2004 presidential candidate John Kerry, warned that the world is working its way through the “first truly global bubble.”

The British money manager shared his investment outlook with seminar participants. MarksJarvis wrote:

When asked by a money manager what he would buy now, Grantham said, “long mattresses” — jesting about the stereotypical nervous behavior of hoarding cash. He seriously suggested: “Put money into something incredibly safe, like a high-quality hedge fund.”

Grantham said rather than buying stocks for the long run now, he would only “short” them, or bet that they will decline in price. He sees “nothing interesting in quality corporate bonds,” and he has been shorting oil. “Commodities had a good run, but that’s over,” he said.

Although downtrodden mortgage-related bonds might be a good deal now because some are selling for 59 cents on the dollar, he said he wonders if the price will seem compelling if home prices fall another 20 percent or 25 percent.

He confessed to the group that “I bought my first gold last week, and I hate gold. It doesn’t pay a dividend. I would only do it if I was desperate.”

MarksJarvis noted:

Generally, when bubbles burst, the asset prices stay down for lengthy periods. Grantham isn’t expecting the stock market to hit its low until 2010.

The Tribune columnist also talked about Marc Faber, who publishes the monthly investment newsletter The Gloom Boom & Doom Report. She quoted the Swiss-born investor as saying:

The Fed has created a bubble in everything — stocks in emerging market, real estate everywhere in the world, commodities, art. The only asset class that is down is the U.S. dollar…

It is quite likely that the current synchronized global economic boom and the universal, all-encompassing asset bubble will lead to a colossal bust.

MarksJarvis also noted:

And with commodity prices so inflated, he expects an “increase in international tensions” over resources.

Source:

“Even the pros may be stuffing the mattresses”
Gail MarksJarvis
Chicago Tribune, July 29, 2008

It appears the “King of Bonds” likes debt issued by U.S. mortgage giants Fannie Mae and Freddie Mac. Bloomberg’s Daniel Kruger wrote yesterday:

The fastest inflation in 17 years and a fourth straight quarter of U.S. profit declines are turning debt sold by Fannie Mae and Freddie Mac into the favorites of the world’s biggest bond investors.

Pacific Investment Management Co., T. Rowe Price Group Inc., RiverSource Institutional Advisors and U.S. Bancorp’s FAF Advisors, which oversee more than $1 trillion, say the government’s decision to stand behind the beleaguered U.S. housing finance companies and their yields compared with Treasuries make the bonds a buy. The Senate approved legislation on July 26 allowing the U.S. to inject capital into Fannie and Freddie. President George W. Bush plans to sign it into law.

“We like it,” said Bill Gross, who oversees the $128 billion Total Return Fund, the largest bond fund in the world, for Newport Beach, California-based Pimco. “This legislation has indicated to investors that Fannie and Freddie are not implicitly guaranteed, not explicitly guaranteed, but we’re close to that point.”

Source:

“Mortgage Debt Least of Bad Bets as Investing Sinks (Update2)”
Daniel Kruger
Bloomberg, July 28, 2009

Bloomberg caught up with Marc Faber, aka “Dr. Doom,” at an investment forum in Sydney earlier today. Reporter Shani Raja wrote:

Marc Faber, who told investors to bail out of U.S. stocks before 1987’s so-called Black Monday crash, said oil prices may fall to $100 a barrel as demand slows in a global economy at the “tail end” of its expansion.

Accelerating inflation and rising interest rates worldwide are likely to dent the value of commodities including oil, said Faber, who publishes the Gloom, Boom & Doom Report, at an investment forum in Sydney today.

“Global liquidity is under some relative tightening, and that is unfavorable for all asset classes,” said Faber, 62. There will be “sharp corrections’” in commodities prices.

According to the Swiss-born investor, the global economy has experienced a synchronized boom since 2001. Dr. Faber noted:

In the history of capitalism this is most unusual. When it comes to an end it should affect all countries.

Bloomberg’s Raja pointed out global stock markets losses have amounted to nearly $12 trillion so far this year, while financial institutions have been hit with $447.6 billion in credit-related losses.

Dr. Faber told the forum that he prefers holding physical commodities rather than shares or futures, and that real estate in India and Cambodia were among his favored Asian investments, according to Raja.

Cambodian Beach

Such pessimism extends to the financial sector as well. According to India’s Moneycontrol.com (home of CNBC-TV18):

Marc Faber, Editor & Publisher, The Gloom, Boom & Doom Report said, “We had expanding credit growth in the period 2001-2007. We had this credit bubble built up after 1982.” So in other words, for 25 years now credit growth is slowing down and the fundamentals of the financial sector have worsened and they will stay unfavourable for a very long time, he added.

The peak earnings of finance companies ain’t going to come back. “I don’t think that Citigroup, or UBS or any other finance stock will go back to their peak level they had reached in 2007.”

Sources:

“Faber Says Oil May Decline as Global Growth Weakens (Update3)”
Shani Raja
Bloomberg, July 21, 2008

“See long-term negative cues for fin sector: Marc Faber”
Moneycontrol.com (India), July 21, 2008

Looks like legendary investor George Soros went on a shopping spree in the Indian stock market recently. According to The Economic Times (India) website:

Billionaire global investor George Soros has turned contrarian on the Indian stock market, which has seen stocks being beaten down over the past few weeks. His hedge fund Quantum, which was reported to have posted earnings of over 30% last year, went on a buying spree at a time, when most funds were dumping stocks in a sliding market.

On July 4, Quantum Fund bought a 3.8% equity in Jain Irrigation Systems, and close to 1% of the holding of Jai Corp for a value consideration of Rs 167 crore. Since February, the fund has made investments valued at close to Rs 600 crore, or $ 140 million, in various companies, including Indiabulls Financial Services, Indiabulls Real Estate and Kalindee Rail Nirman.

Bombay Stock Exchange
Mumbai, India

The Times’ Vijay Gurav discussed the Fund’s latest acquisitions in detail. Gurav wrote:

Among his latest acquisitions in India, Mr Soros bought a fresh stake of 3.8% in Jain Irrigation for Rs 121 crore. The stocks were bought at Rs 442.9 per share against the current market price of Rs 483…

Mr Soros also picked up a small stake of 0.9% in Jai Corp at Rs 282 against Friday’s closing of Rs 372. The scrip, in fact, has vaulted 27% in one week, outperforming the market by a wide margin…

Two Indiabulls group companies — Indiabulls Financial Services and Indiabulls Real Estate — are notable examples of Quantum’s recent acquisitions. The fund held 2.2% and 3.6%, respectively, in the two companies as of March 31, 2008. It also owns a 7.1% stake in Kalindee Rail Nirman, of which 6.8% was bought for Rs 32 crore in February.

Source:

“George Soros’ hedge fund Quantum on buying spree”
Vijay Gurav
The Economic Times (India), July 14, 2008

Recently, Macleans (Canada) got the chance to speak to billionaire hedge fund manager George Soros about his new book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. Here are some notable excerpts from the conversation:

MACLEANS: You’ve come to some grim conclusions about the market in the book. For example, you write that the bottom of the housing market is still “further than people think.”
SOROS: Behind the housing bubble, there’s a super bubble which has been growing for the last 25 years. Every bubble has an element of reality and an element of fantasy, of misinterpretation. The reality has been a trend of ever-increasing use of credit, of credit expansion. The misconception is that markets tend toward equilibrium and can be left to their own devices, to take care of their excesses. In the boom phase, it’s very pleasant because you enjoy credit creation and, with that, comes wealth creation. In the bust phase, it’s very unpleasant because you have credit contraction, a reduction of leverage, a decline in the value of collateral, etc. and that involves wealth destruction. I’m afraid that I am a prophet of doom. I don’t like it and I don’t think I’m predicting anything unconditional because I think that how the situation will evolve depends on how the authorities respond to it. But, unfortunately, we are in that phase of the super bubble.

Later on in the interview, the co-founder of the Quantum Fund with Jim Rogers shed some light on where he thought we were in the financial crisis:

MACLEANS: According to your book, “We are in the midst of a financial crisis the likes of which we haven’t seen since the Great Depression” and that “the entire financial system is on the brink of a breakdown.” Can you give me an idea of what that’s going to feel like?
SOROS: I actually think the acute phase is behind us. We had a pretty serious breakdown. The very core of the system was malfunctioning, and it’s still sputtering pretty badly. But the full effect of the damage is yet to be felt, both for the financial institutions and for the real economy. As far as the financial institutions are concerned, they’ve recognized a lot of losses. But they perhaps haven’t fully recognized all the losses they may incur from holding mortgages if the decline in housing prices hasn’t run its course, which I believe is the case. We are probably halfway in the decline and that decline is going to be quite steep—steeper than currently anticipated because housing prices are going to overshoot on the downside as they overshot on the upside. How far they overshoot depends on how the authorities react to the problem, because what causes the overshoot is foreclosures. It unbalances the supply. In my estimation, there could be something like two million foreclosures in the foreseeable future, half of it from subprime sector and half of it from option adjustable rate mortgages. So you need to take steps to try to reduce the number of defaults and the number of foreclosures. It’s possible to do something about it.
MACLEANS: There’s very little discussion about widespread reform of the credit sector. Instead, the authorities seem more inclined to argue about whether or not there’s a recession looming. Is the recession argument a red herring? Is it diverting attention from a more fundamental crisis?
SOROS: No, it’s not a red herring. For the moment, the economy is actually showing considerable resilience and people think the worst is over. I’m afraid that that is not the case; we are heading for a recession, but we are not there yet.

Source:

“The Macleans.ca Interview: George Soros”
Philippe Gohier
Macleans (Canada), June 13, 2008

Looks like billionaire hedge fund manager Eddie Lampert thinks the U.S. housing bust is almost over. According to the Wall Street Journal this morning, Lampert has been acquiring shares in beaten-up home builders, mortgage lenders, and a home-improvement retailer. The Journal’s Gary McWilliams wrote:

Recently, the Greenwich, Conn., hedge fund, which controls investments it valued at about $11.6 billion in its most recent government financial report, began picking up shares in hard-hit housing-related stocks. ESL acquired small stakes in U.S. home builders Centex Corp. and KB Home, according to its latest Securities and Exchange Commission filings. At recent prices, the stakes in the two home builders are valued at $10.4 million and $10.8 million, respectively.

ESL also is tip-toeing into mortgage origination and servicing, acquiring about four million shares of CIT Group Inc., a struggling subprime home and commercial lender, as well as 1.4 million shares of PHH Corp., a mortgage originator and mortgage-service company. The shares are valued currently at about $35.5 million and $25.2 million, respectively. ESL spokesman Steve Lipin declined to comment on the investments.

McWilliams also noted that Lampert, who is also the chairman of Sears Holding Corp., added to his holdings of home-improvement retailer Home Depot. His hedge fund now owns about 22.7 million shares (valued at $590 million), up from 16.7 million shares in 2007.

Source:

“Lampert Puts Money On Housing Rebound”
Gary McWilliams
Wall Street Journal, June 12, 2008

Marc Faber spoke to Bloomberg Television by phone earlier today and had the following to say:

Obviously, the economy is already in recession. Corporate profits will disappoint. In particular, the consensus earnings for 2009 are still far too high. And after jobs creep downward, obviously valuations look less compelling.

Well, I would say, what we are in, is kind of a water-torture bear market. A lot of stocks peaked out already in 2005, like to homebuilders. And in 2006, the subprime lenders. Then in 2007, all financial stocks… And I think the cyclicals, and the energy, and the materials stocks, like steel and iron ore companies, they will now all come under pressure… but I think other sectors of the market that have held up well are now vulnerable.

On what investors should be buying, Dr. Faber, who is known for advising clients to get out of the U.S. stock market one week before the October 1987 crash, said:

I think the question should be, what sector should you sell… I don’t see any compelling value in equities. I also don’t see any compelling value, in say, real estate, or in the commodity market. I think asset markets are still inflated. And we are in an environment, contrary to the last 25 years, during which leverage increased. We are in a period of deleveraging.

Responding to the question of whether or not investors should park their money in cash, the editor of the Gloom Boom & Doom Report said:

Well, cash is not desirable in the sense that it loses its purchasing power because you have a money printer at the Fed, Mr. Bernanke… His monetary policy inevitably is inflationary, and as a result, leads to a lower dollar.

When Bloomberg asked if high oil prices were unjustified, the Swiss-born investment adviser said:

My view would be that commodities will rather ease, as some have already done…

(On oil) The big upside is now gone. And so I would be a little bit careful about blindly buying commodities. I think they’re on the high side, the way real estate was on the high side, the way stocks were on the high side. I would not short commodities, but I would be careful about buying them here.The dollar has some upside potential here. But of course, if Mr. Bernanke continues to print money and push down the Fed funds rate to zero, then the dollar won’t go anywhere. As of today, I believe the dollar is relatively undervalued with the euro. I still like gold (transmission garbled)…

Finally, Dr. Faber had this to say when asked to pick one investment for next 6 to 12 months:

Well, I would take a holiday and forget about the speeches of Fed governors, because their economic knowledge, is in my opinion, is extremely limited. And each time they speak, they actually confuse the issues. And so, there is very little sincerity, at the present time.

You can listen to the 8 minute 21 second Bloomberg interview here.

Source:

Marc Faber Interview
Bloomberg, June 9, 2008