If you ignore their recent volatility, the financial markets are painting
a fairly happy picture. The S&P 500, for instance, is closer to its 12-month
high than its low, and investment grade bonds are behaving like next year should
be pretty much like this one.
But under the surface -- which is where big trends are born -- the scene is
chaotic, with brutally-disappointing earnings reports and company-specific
scandals combining to burn some legendary investors:
(MarketWatch) - Valeant Pharmaceuticals International Inc.'s stock tumbled
23% on heavy volume in midday trade Wednesday, after a bearish report from
a noted short-seller regarding questionable business practices made the rounds.
The drug company's stock has now plunged $64.36, or 36% this week, after
the company said early Monday that it was mulling a change in strategy, including
a possible spinoff of assets, as it faces government scrutiny over its pricing
and distribution practices.
If billionaire investor Bill Ackman's hedge fund, Pershing Square Capital
Management, still holds the 19.47 million shares the latest regulatory filings
said it owned as of June 30, it would be losing $1.25 billion on its Valeant
investment this week, and $2.12 billion since June 30. Pershing, which is
Valeant's third largest shareholder, declined to comment. The largest shareholder,
Ruane, Cunniff & Goldfarb Inc., owns 33.88 million Valeant shares, and
could be losing $2.18 billion this week, according to FactSet; T. Rowe Price
Associates, the second-largest shareholder with 20.46 million shares, could
be losing $1.32 billion this week.
(Forbes) - The hedge fund of billionaire David Einhorn continued to plunge
in September, falling 3.5%, further denting his returns in 2015. Einhorn's
Greenlight Capital hedge fund is now down by 16.9% for the year, an ugly looking
number for the noted stock picker and short seller.
Einhorn's returns, which were posted to the web site of his reinsurance
company, are among the worst of any major hedge fund run by a billionaire
this year. He came into September struggling and things got worst.
At 46, Einhorn has built a great reputation by making shrewd calls, like
when he shorted Lehman Brothers into bankruptcy. But in 2015 his returns
have been hurt by his hedge fund's exposure to stocks like SunEdison, the
solar and wind energy producer that was recently Greenlight's second-biggest
position. SunEdison's stock is down by more than 60% this year; it fell by
more than 30% in September alone. Investors this year have taken a dim view
of SunEdison's recent and expensive acquisition spree.
Another major holding that has stung Einhorn in 2015 is Greenlight's big
position in Micron Technology the semiconductor company. Early in the summer,
Einhorn told his investors that he believed Micron's stock would be worth
more than Netflix's stock in the next few years. But in the near term, Micron's
stock was down by nearly 9% in September. The company will report fourth-quarter
earnings on Thursday after the market closes and investors will be looking
for any positive signs after the chip maker reported terrible looking earnings
in the third quarter.
Einhorn's large position in Consol Energy has also continued to cause him
pain this year. The coal and natural gas company saw its shares fall by 36%
in September.
(Fortune) - Warren Buffett likely had a worse week in the market than you did.
It started off with Walmart. Last week, at a meeting with analysts, the
company predicted that sales would be flat this year and that earnings would
likely drop this year and next. Walmart's stock fell 10%, or $6.07. Buffett's
Berkshire Hathaway holds roughly 60.4 million shares of Walmart, so that
was a $360 million hit to the conglomerate's investment portfolio.
That same day, Wells Fargo reported earnings that were up a mere 1%. Banks
are supposed to do well when the economy is doing well. Its shares dropped
a modest $0.36. But to Buffett's Berkshire, which holds 40 million shares
of Wells Fargo, amounting to a $24 billion stake, that small drop meant another
$170 million shaved off the Oracle of Omaha's portfolio.
Then came IBM, which Buffett has bet heavily on over the past few years.
On Monday afternoon, the tech giant reported third quarter earnings that
were 14% below the same quarter's results last year. IBM's shares fell 6%,
or $8.58. The resulted in a $680 million hit to Buffett's Berkshire, which
owns nearly 79.5 million shares of IBM, a stake now worth just over $11 billion.
Three stocks, one week, $1.2 billion down the drain.
Taken together as a group, Buffett's five largest investments come across
as struggling giants with business issues that don't seem to be going away
soon, the kind that will be very hard for the companies to fix. Coke needs
to make a massive shift away from sugary drinks. Walmart still lags in e-commerce
at a time when retail is shifting online. And American Express, which has
lived off corporate expense plans, is struggling as companies cut back costs.
The end of its Costco deal will stymie efforts to reach new customers.
One year (and certainly a single week or month) does not a trend make. And
some of the stocks mentioned here are recovering as this is written. Still,
these investing legends, whose claim to fame is a deep understanding of the
dynamics of the businesses in which they invest, do seem have been caught flat-footed.
Which is exactly what you'd expect in the early stages of a financial/technological/political
phase change. If the debt binge ends, fiat currencies stop working, trade contracts,
jobs are automated, fossil fuels are crushed by solar and wind -- in short,
if the era of stable credit-driven growth is replaced by a series of existential
crises -- it shouldn't be surprising that these guys and most of their peers
will have to adapt or die.
