Wednesday, November 21, 2012

Dear Jeff


Dear Mr Gundlach

First congratulations on Doubleline passing the $50 billion mark. I've been told by others that the "first 50" big handles are the tough ones, so you must be breathing easier now. I've yet to encounter such quality problems myself, but trust your growth will continue with your performance.

Secondly, I noticed from your Ira Sohn presentations that you have been attracted to rather off-the-wall serendipitous "pair trades" of assets that reside decidedly in the counter-trend side of recent performance. I don't know what your risk manager or VaR has to say about these trades, but I, for one, nonetheless admire your willingness to stick your errr ummm trading blotter out and position yourself contrary not only to momentum aficionados, and all manner of feedback-trading trend-followers, but famous fund managers, pundits, financial journalists, whinging academics, and so it would seem, the entire world. As a human being, this isolation is enough to make anyone uncomfortable and question the wisdom of one's actions, but as an investor, seeking contrarian return, it likely results in elation, and you must find it difficult to not do "more of the same" at each and every opportunity.

Thirdly, it has not escaped my notice that a number of these have paid rather well and rather quickly without the attendant spankings many contrarians are known to suffer at all-too-frequent intervals. This is quite an achievement as any bottom-smarting, blue-arsed contrarian can attest, and one which should be both acknowledged and admired.

Undoubtedly, you must now be on the prowl for additional trades that exhibit similar properties of assets trading at opposite ends of the relative value and performance momentum spectrums, and where potential short and long candidates respectively are almost, without exception, universally-loved and detested. And so in case you've overlooked it (or are still in the position of putting on the trade and therefore not yet interested in advertising the trade to a wider and now-more-attentive audience (despite all the academic momentum research), I would suggest you have a look at "Gold vs. Japanese Stocks" and "Gold vs. Softs".

It is not worth wasting too much of your precious time on the details that you undoubtedly will research yourself, but suffice to say that Gold is "expensive" to almost every asset and asset class, owned in spades by the largest and most fickle speculatibve investors, and that dissing Gold makes one more unpopular than an Orangeman marching down the Falls Road in West Belfast. On the other side, as and when the JPY trades back towards 125 vs. the dollar, company growth, income statements, balance sheets, and forecast revisions will look a lot different (and rather more attractive) than they have since JPY traveled FROM 125 to the silly levels its been inhabiting for the past few years. Few Japanese, let alone foreigners remain long Japanese equity, the equity brokerage business is almost non-existent, and even most large investors have moved their regional equity desks from Tokyo to Singapore or elsewhere in Asia. Of course I needn't tell you to insure you hedge the FX.

With regards to Gold vs. Softs, I would suggest looking more specifically at Cotton. Gold presently buys more cotton than it has for as long as the charts I can find represent. Cotton remains the benficiary subsidies. This cannot, nor will it, last. All the necessary supply-side inputs are up since the early to mid 1970 - most of them dramatically land prices; fertilizer prices, GMO seed stock, pesticides; diesel and fertilizer feedstock prices; transport, labour. Water has become scarcer and more precious. Yet Cotton remains the odd nail sticking out, hovering at mean avg prices prevailing thoughout the 1970s, (and 80s and 90s and most of noughties). There remains precious little in a human's present-day non-tech shopping basket that (in USDs) remains available for purchase at anywhere near 1970s prices and little as ubiquitious or important or utilizing inflated inputs. This ignores the imminent impacts of climate change, the increasingly-attractive substitution many farmers will be induced to make as higher prices make alternatives more attractive. And in the event of deflation, and convergence of everything else towards cotton stationary price-level, one need only imagine where the price of gold might end-up (Hint 2008 deflation scare = $650/oz = -63%). But check out the long term chart for yourself. Of course OJ, Sugar, Coffee and Cocoa are also attractive, but none as attractive as cotton I think.

Wishing you success in your investment endeavors and your boldly-imaginative and brave counter-trend pecadilloes, I am,

Yours truly,

Cassandra


NB Full Disclosure - I have interests in industrial-scale cotton properties

4 comments:

Christine Liao said...

Thanks for highlighting all these bullish, albeit slightly long-term, arguments on cotton.

I am constructive on cotton prices as well, but one main concern for me is its record level of stocks (which largely explained why prices plummeted). However, stocks held outside of China are only marginally higher - in other words, virtually all of the global stocks build-up after the crash has occurred in China in response to govt policy to support prices.

IMHO, the sharp drop of Chinese imports is the main reason that depressed cotton prices since Aug - otherwise, cotton prices would have risen like metals/HSCEI/rubber.

So the question is - will China release its reserves to the mkts should we see a sharp rise in cotton prices? Or, as you pointed out, producing cotton is water-intensive, Chinese govt reserve policy on cotton has a long-term buy&hold bias? Also, will the demand pick-up from the rest of the world sufficient to digest record stocks fast enough...

Christine

"Cassandra" said...

Christine, all valid points you make. But all softs are squishy (no pun intended), and all the softs are in the same very long-term vicinity in relation to their long-term prices vs a hunk of gold (my main point). The long-term environmental and malthusian pressures will ultimately drive the gold/softs terms of trade back to less divergent levels than the combined gold-bubble/softs bear has driven them.

vlade said...

Cassie, why do you beleve that JPY equities is a better trade than simply go short JPY? "Normalizing" (i.e. JPY goes to 120) will yields 50% profit - and I doubt that a broad basket of JPY equities would match that (especially after deducting the cost of the FX hedge). Of course you could get more for some research, but will the amount of research pay for itself compared to the pure currency crash?

You'll earn hardly any carry, but this is not a carry trade though..

"Cassandra" said...

Vlade-Good question.
(1) I was interested in long-term asset prices expressed in terms of each other. "Short Yen"I just don't think of as an asset. Cotton in terms of gold is easy to conceptualize.

(2) I think IF the JPYUSD moves towards 125 a lot of Japanese equities will double. I think they will do it quicker. I'd like to think I can pick more than few while avoiding the larger-cap future underperformers.

(3) Bass may be right and the world as we know it may end in Japan. That's not my central case. I don't see any reason why a move back to par and then a further move beyond back to a range 105-125 where it happily traded for nearly a decade before the crisis, and the flight to quality, and DGDF-meme repeatedly puked all the carry. The move to par is 25% - a big move for FX (and there WILL be a wall at 100-105!), but I think there is more juice in the equity.