Scaramucci Opens the 2017 SALT with a Cheer for Trump

May 18, 2017   Amanda Cantrell, Stephen Taub

The founder and former head of SkyBridge Capital delivered an impassioned vote of confidence for the president at the firm’s annual hedge fund gathering.

As the Dow Jones industrial average plummeted more than 370 points on Wednesday following a string of shocking headlines about President Donald Trump’s administration, SkyBridge Capital founder Anthony Scaramucci kicked off the 2017 SkyBridge Alternatives Conference in Las Vegas with a vote of support for the embattled president — even after his promised White House job ultimately failed to come to pass.

"I didn’t expect to be here, to be honest," Scaramucci began, explaining that while he is disappointed that he didn’t get the job that offered in January — prompting him to sell SkyBridge to a consortium including Chinese conglomerate HNA Capital and RON Transatlantic a few weeks later — he still supports what he sees as President Trump’s mission. The declaration came as Trump faced fresh allegations, following his firing last week of FBI director James Comey, that he had asked Comey to stop investigating Michael Flynn, Trump’s former National Security Adviser, over his alleged ties to the Russians.

Trump loomed large in Wednesday’s discussions, with former Federal Reserve chairman Ben Bernanke declaring that fears over the quality and stability of leadership in the White House is "a reasonable concern" and that the market didn’t appear to be pricing in this risk (although he spoke well before the market close). "It’s always puzzled me-markets are very blase about political risk until the last moment," he said. Meanwhile, managers on a credit panel later that morning declared that the U.S. is now more politically unstable than Europe, which had been rocked last year by the Brexit decision and a wave of populist candidates.

But Scaramucci remained steadfast. "I remain loyal to the president and to the cause, which is very necessary to the American people," he said. "We have to fix the lower-income and middle-income problem in the United States."

Scaramucci touched on his middle-class Long Island upbringing, a topic he has often discussed in the past, and how he realized when he hit the campaign trail with Trump that these were the people the then-candidate was pledging to help.

"They weren’t white nationalists; they weren’t xenophobic; they weren’t homophobic," he said. "It was a blend of economic desperation." Scaramucci recounted how had he talked to one man who had lost his factory job and was now working at big-box retailer Lowe’s during the week, while delivering pizzas on the weekend. The man, he said, faced a 40 percent decline in his disposable income. "It dawned on me, 'My god, these are the people I grew up with,’" he said. "I spent 28 years of my life trying to get into the global elite, insulated myself [by] going to Goldman Sachs and building two hedge fund businesses, and I started to shield myself form the people I grew up with. It took a billionaire who lives in a tower on Fifth Avenue next to Tiffany’s jewelry store to show me something that I missed from my old neighborhood."

Scaramucci said he is still interested in a White House job and that he is "ready to serve" should a position become available. After this week, he may want to be careful what he wishes for. In the meantime, he has retained an ownership stake in the SALT conference.

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Speaking of the SkyBridge sale, the deal is expected to close at the end of this quarter, Ray Nolte, chief investment officer and managing partner of SkyBridge, tells Alpha. He says once the once the new owners are in charge, it will be "close to business as usual," stressing that everyone will pretty much be performing the same functions after the deal closes as they were beforehand. Nolte will remain CIO.

Nolte also says the new owner plans to expand SkyBridge’s product offerings to other alternative products such as private equity, clean energy, and real estate and expand its markets. This includes branching out to other mass affluent markets such as registered investment advisors (RIA) and broker-dealers. It also means expanding geographically, especially in the region HNA knows well, such as China and other parts of Asia.

"I view them as a Chinese version of Berkshire Hathaway," says Nolte, given HNA’s diversified holdings, which including an airline, a major aircraft leasing company, and lodging, all of which continue to be run autonomously. Nolte also provided interesting insight into how exactly SkyBridge wound up in the clutches of HNA. It turns out RON Transatlantic is a minority investor in SkyBridge, and it knew the HNA people through its logistics business. So, RON Transatlantic in effect played investment banker and brought the two parties together.

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As for investment themes, credit investing ideas dominated, with two separate panels focusing on the asset class. A morning panel featuring Marc Lasry of Avenue Capital, Bruce Richards of Marathon, and Michael Hintze of CQS revealed that managers are investing in Europe (particularly non-performing loans, special situations, and private lending) and are looking to the retail sector as the next interesting distressed opportunity.

An afternoon panel of more niche-focused managers including Boaz Weinstein of Saba Capital Management, Jack Ross of Waterfall Asset Management, and Brett Jefferson of Hildene Capital Management highlighted idiosyncratic opportunities such as Jefferson’s play on trust preferred securities (TruPS) and Weinstein’s strategy of buying discounted closed-end bond funds as a way to get excess yield and then working with the managers to narrow the discount. Jack Ross of Waterfall Asset Management said he likes precrisis-era commercial mortgage-backed securities as well as shorting retail commercial real estate, namely malls.

Panelists across both panels for the most part are avoiding high-yield debt, which is trading at very narrow spreads to comparable Treasuries. Experts blame retail investors seeking yield, who have piled into high-yield exchange-traded funds."This will end poorly," predicted Hildene’s Jefferson.

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Emerging markets specialist Teresa Barger made a strong case for investing in these markets now. She said market sentiment shifted last summer and there have been net inflows into emerging markets for the past four months. Speaking on a panel called "Alternative Alchemy: An Investor’s Guide to Shifting Global Paradigms," the chief executive officer of Cartica Management expects companies in emerging markets to generate earnings per share growth in 2017 that is nearly double the rate in the U.S. Yet valuations don’t currently reflect this outperformance. She estimates that U.S. companies are trading, on average, 2.5 times the EPS that emerging markets stocks are trading at.

"That’s one helluva risk premium," said Barger, who spent 21 years at the International Finance Corporation investing in emerging markets companies. She follows 24 countries, but currently is only invested in eight of them. Of those eight, India accounts for roughly one-third of her assets. She cites two themes she claims no one is talking about that drive her bullishness in India. First there is what she calls "formalization." Until recently, she says, many industries were driven by mom-and-pop businesses that don’t play by the rules, such as not paying taxes or meeting environmental rules. Now, thanks to trackable payments through things like debit cards, she says the jig is up for many of these companies, which are likely to go bankrupt or become much less competitive. These big changes toward basically playing by the rules will boost established companies that trade on stock exchanges.

The other factor is what she calls "financialization." She says new policies are wooing money to banks that was previously held under the mattress. She noted that 30 percent of its population are millennials, who generate 70 percent of the income. They are the prime savers who will invest in mutual funds, buy insurance, participate in pension funds. "These people are going more into the stock market," she says. This could help boost the equity market, which she thinks will results in the doubling its share of GDP in the next few years.

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What do you do when you’re a conference organizer and your lunchtime keynote speaker suddenly can’t make it due to a conflict? If you’re SALT, you pull a Tupac Shakur. That’s how attendees ended up with Hologram Jeff Gundlach, a virtual version of the DoubleLine Capital founder and famed bond fund manager. Gundlach — speaking from the stage in Hollywood once used by Charlie Chaplin and beamed into the Bellagio’s Spa Tower ballroom — delivered an address that covered several of the same themes as his remarks at the Sohn Investment Conference last week (index funds are bad, emerging markets are good, active management is not dead). The presentation went off with virtually no technical glitches. Still, here’s hoping the rest of the event’s speakers can actually appear in person.

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There aren’t many long-short stock pickers on the SALT agenda this year and very few — if any — known for the popular hedge fund holdings in TMT (technology, media, and telecommunications stocks) and the internet. On Wednesday, hedge fund veteran Morris Mark of Mark Partners was the only one to talk up these stocks—often called the economic disrupters.

He pointed out that he has held shares of Apple since 2007, invested in Google at its 2004 IPO, and three years ago invested in Facebook when it expanded into mobile. "I see digital technology applied to more and more sectors," Mark stressed. He said most of these types of companies are growing earnings per share faster than 20 percent yet trade at lower price-to-earnings multiples than stable brand name companies like Procter & Gamble and Coca-Cola.

Mark also is invested in other key themes. They include housing, infrastructure, and consumer-related businesses. "Most of the major disrupters are world-class businesses that operate throughout the world," he told the audience.

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Douglas Rachlin is bullish on energy, especially master limited partnerships. The managing director and senior portfolio manager for the Rachlin Group within Neuberger Berman says President Trump’s executive order paving the way for the Keystone Pipeline and Dakota Access Pipeline underscores new administration’s strong support for domestic energy. Rachlin asserted that for the first time, the U.S. is exporting energy, especially ethane and propane. "Technology is transforming the energy business," he told the audience, driven heavily by the oil shale revolution. "Saudi Arabia and OPEC no longer control oil prices."

For the first time in years, petrochemical plants are being built in the U.S., including several along the Gulf Coast as well as at least one major one outside Pittsburgh near the Marcellus Formation.

"Coal is not coming back no matter what Trump says," Rachlin stressed. "Nuclear is in decline. Many plants will be shut down. Natural gas is gaining the most."

So, he is playing this big bullish bet with several MLPs. He said his favorite is Energy Transfer Equity. It has an export terminal outside Philadelphia from where it exports natural gas to Mexico. It is also building the Dakota pipeline. It pays out $1.14 in distributions for a yield of 6 percent, and Rachlin expects the company to aggressively boost this payout over the next several years. He also likes Western Gas Equity Partners, which he says benefits from its relationship with Anadarko Petroleum. It is yielding 4.35 percent and Rachlin expects to grow its distributions by 18 percent to 19 percent per year.


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