Sep 30/15 – Make no mistake – Icahn is a shark

2015-09-30 11am EDT  |  #bonds #gold #Icahn #Larry Fink #platinum #stocks #Yellen

Regular readers of the MacroTourist know I hold Carl Icahn in no great esteem. It all started when he made a fool of himself on CNBC arguing with Bill Ackman (here’s the link – go to minute 20). When Carl started losing and attacked the interviewer with a litany of profane sulks, my opinion of the revered “guru” collapsed. I have no doubt the guy makes money. He knows how to play the game exceptionally well. But nothing makes me madder than sharks who pretend they are minnows.

Carl portrays himself as man of the people. He thinks himself a champion of the little guy. Fighting for the rights of the downtrodden retail investors. What a load of crap.

Carl is out for Carl, and that’s it. Not only that, he is an overly sensitive complainer. Last year Blackrock’s CEO Larry Fink wrote an open letter to corporate America about the dangers of short-termism:

To meet our clients’ needs, we believe the companies we invest in should similarly be focused on achieving sustainable returns over the longer term. Good corporate governance is critical to that goal. That is why, two years ago, I wrote to the CEOs of the companies in which BlackRock held significant investments on behalf of our clients urging them to engage with us on issues of corporate governance….. Many commentators lament the short-term demands of the capital markets. We share those concerns, and believe it is part of our collective role as actors in the global capital markets to challenge that trend….. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks. We certainly believe that returning cash to shareholders should be part of a balanced capital strategy; however, when done for the wrong reasons and at the expense of capital investment, it can jeopardize a company’s ability to generate sustainable long-term returns.

Sounds like a reasonable concern, right? Hard to argue that Larry is doing anything but trying to ensure the long run healthy functioning of our markets and the economy.

Yet even though Larry did not mention Carl by name, according to Fink:

He did receive what he describes as “angry” calls from two activists-Carl Icahn and another Fink wouldn’t identify.

Let’s get this straight. Larry writes a thoughtful piece about focusing too much on short term gains and Icahn takes it as a personal affront that deserves an angry phone call? What a buffoon.

Yet people love ole’ crazy Uncle Carl. I guess it’s because he makes them money. During this cycle Icahn has been extremely successful at taking positions in companies, and then forcing management to lever up the balance sheet with cheap debt and share buy backs.

For the vast majority of the time since the 2008 credit crisis, equities have been cheap relative to bonds. After getting burned in the previous crisis, the public has been loathe to invest in equities. As a result, too much money has flowed into bonds. Icahn has exploited this monster arbitrage by buying companies whose equity is trading cheap relative to bonds, and then forcing a balance sheet shift. He has milked this phenomenon in a masterly fashion.

Take for example the world’s largest stock – Apple. Icahn has pressured CEO Tim Cook to issue bonds and increase buy backs. You would think that the world’s most powerful CEO would be able to tell Icahn to go pound sand (Lord knows Steve Jobs would have), but unfortunately Ichan has been able to exert a tremendous amount of influence.

For an old guy, Icahn is amazingly technologically media savvy. He was one of the first hedge fund managers to use Twitter to promote his holdings. I think there was an Icahn Apple tweet that added more than $50 billion of market cap in an afternoon. It was probably the most profitable tweet ever made.

Yesterday Ichan took his media presence to a new level. On his website, Carl released a polished video titled “DANGER AHEAD – A message from Carl Icahn”.

It is slick. No doubt about that. But it is unbelievably ironic that Carl Icahn is now warning about the dangers of an overheated, over leveraged market.

And he is pumping this theme hard.

Have a look at the titles of the posts on his website:

Carl Icahn: Dramatic pullback coming

Carl Icahn: 2007 all over again

Carl Icahn: Fink & Yellen pushing us over a cliff

Carl Icahn: Very concerned about the market

Carl Icahn: Market overheated, especially in junk bonds

Carl Icahn says the market is extremely overheated’

Carl Icahn: This market has a lot to be concerned about

You have to give him credit – he doesn’t hide behind “if’s” and “maybe’s.” Carl is warning of a big dislocation:

“it’s not a matter of if it will happen, it is when it will happen.” – Carl Icahn

Why is Carl doing this? Part of the video piece was Icahn’s endorsement of Donald Trump. Yet Carl didn’t need to include the dire warnings about a market meltdown.

Carl argues he is doing it for the love of his country:

“I want to speak out now because I know this may sound corny, but I grew up in the streets of Queens, I love this country, and I feel so strongly about the disfunction that is going on in both Washington and the board rooms of corporate America… if more respected investors had warned about the market in ’07, then we might have avoided the crisis in ’08.”

I agree with Carl’s assessment of the disfunction in Washington and the boardrooms of America. I also think that many of the tax policies that Icahn advocates, like getting rid of the carried interest loophole and bringing back offshore earnings, are sound ideas whose time has come. We all know the system is corrupt with abuse from those in power.

But to think Carl is making this video out of the warmth of his heart is just naive. Icahn is like the Grinch, except his heart might be three sizes too small instead of two.

Let’s not forget Larry Finks’ transgression of insinuating corporate raiders are not good for the long run health of the economy. That thoughtful piece has put Fink’s firm Blackrock in the cross hairs of Icahn’s fury. A significant part of the video is spent blaming Fink for the current precarious economic position.

“I will say what I mean – I am too old to not say what I mean. Blackrock is an extremely dangerous company. Blackrock is there to make money. That’s what Larry does, and he does a great job at it… People are buying junk bonds not understanding what they are buying. Wall Street does what Wall Street does best. It sells securities. I used to laugh when some of these guys sell these bonds. I used to say, ‘you know, the mafia has a better code of ethics than you guys.’ You know you are selling this crap, and you keep selling it. And in fact you are shorted some of it. And that is what is really going on. And it’s just deja vu…. Blackrock is sort of a name on it. And that’s sort of the problem you had in ’07 when you had brand names of these housing things. We are going to a cliff. You get this party mobile. You are all having a drink and having fun. And you know who is pushing that thing? It’s Larry Fink and Janet Yellen. And they are pushing the god damn thing. Every now and then Janet wants to put the brakes on it. And Larry says, no – let it go. People in the party are yelling – no, no, no – don’t touch those brakes. This is fun! And they are moving towards this cliff. And this thing is going to go over this cliff, and you know what is going to destroy it? They are going to hit a black rock.”

To think Larry Fink responsible for the overly easy monetary policies of the past two decades is ridiculous. To even suggest Larry is somehow responsible for the currently easy policy is ludicrous. Yellen and the Federal Reserve don’t answer to Fink. After the 2008 credit crisis the Fed is busy trying to regulate funds like Blackrock and banks like JP Morgan even further. If anything, they probably should listen to Fink a little more than they do.

Yet this is what happens when Icahn doesn’t like you. You are blamed for the whole decades-in-the-making economic mess.

Let me tell you what I think is driving Carl Icahn. None of these points he made are new. He could have argued all of this a year or two ago.

I will tell you what has changed – the market is now going down. Liquidity is being withdrawn out of the system. The music is stopping and there aren’t enough chairs. But good ole’ Uncle Carl has already got himself a chair – in fact he has plenty of them, so he is screaming for everyone to sit down and for the Fed to stop playing the music.

Carl has admitted he is long CDS swaps betting on credit spreads blowing out. He has been increasingly vocal about his growing equity short hedge position. If I had to guess, he has the full bear suit on in his portfolio. Just like he used twitter to promote his Apple position, he is now using his video to boost his short book:

“I seen this before in ’69. 74 79 I can tell you 87, then 2000 wasn’t pretty, and I think a time is coming that is going make some of those times look pretty good….”

Carl is a masterful trader. There is no denying that fact. He has put his ear down to the tracks and realized which way the train is heading. But he is not warning to help the little guy. If he were, he would have been doing it on the way up. He would have been creating videos about the dangers of investing in QE fuelled bubbles instead of making Apple twitter posts.

I have no problem with Carl being short and making some money from a dislocation. I just don’t buy for one second that Carl is doing it for anyone but himself. I don’t mind sharks – you know when you are dealing with guys like Dan Loeb they are out for themselves. It’s when the sharks try to convince you they are friendly that it pisses me off. Make no mistake, Icahn is a shark – a big huge mean great white.

Platinum/Gold Ratio signalling a bond bull move?

I stole this next chart from fellow Canadian David Rosenberg. The ratio of the price of platinum to gold strangely followed US treasury yields, tick for tick, since most of the period after the 2008 credit crisis.

In 2015 the correlation broke down. The platinum/gold ratio sank, but yields have yet to follow. I am not sure if it is the end of the correlation, or a signal that bonds should be bought, but I am keeping my eye on it.

Thanks for reading,

Kevin Muir

the MacroTourist