Michael Metz Discussion Notes
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By BenGrahamMan
January 26, 2007

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January 10, 2007    Notes from Conference given by Michael Metz.  He is chief investment strategist for Oppenheimer. This was an AAII NYC presentation.

Please understand that notes below are not my views. This was generated from notes I took during his discussion. It was a fun time, interesting, and I caught up with a friend from the investment community. I'm not sure which was more fun; hearing Mr. Metz speak, or the sushi and sake with my friend afterwards ;-).

1. Plenty of worldwide liquidity today. Much of this is being generated by private equity, hedge funds and is being exaggerated by leverage. This ample supply of money is fueling high asset prices and hence created a boom in almost all investment vehicles. Savings rate went less than zero. This is due to spending on retail and construction, which in turn created jobs in construction and retail. Metz believes these days are over, at least in the USA. Internationally, in certain countries, the boom may just be beginning. As a side note, there was an article in January 22, 2007 WSJ. Many in the financial community are saying that the reason for rising markets, almost everywhere is liquidity. This has certainly been my observation for some time now. The article discusses that liquidity certainly isn't helping prices rise in Florida. "Money, too, is flowing more freely globally. Low interest rates in countries like Japan are helping to finance investments around the world. "Liquidity is an ex-post justification for why markets are going up." That was said by Albert Edwards, Dresdner Kleinwort strategist. He also said, "There's lots of liquidity around- well, there always is until there isn't, and then it just disappears."

2. No asset class is cheap. Real estate and bonds seem very expensive. In regards to stocks, proper selection could be worthwhile. Stocks have the best claim to "not that cheap, but not overly expensive."

3. He envisions prolonged difficulty in the USA economy. This includes jobs, growth and real estate (commercial and residential).

4. Thinks international economies will accelerate. He specifically likes investments in Germany and Japan. In Germany he likes real estate. Claims private equity is buying up real estate, similar to the fashion that major NYC real estate is being bought up. He claims the difference is the cap rate is 8 - 10% in Germany, versus 4% in USA. He feels the 4% cap rate he discussed was being overly generous, and could be as low as 1%. Feels job growth will occur in Germany and Japan.

5. US bonds both mid and long term at 4% are merely risky speculation. He mentioned that long duration bonds are the riskiest instrument. He does like 2 year treasuries. He feels 2 year has no downside and possible upside. He claims that historically, Junk bonds present an 8% spread, hence returns are 300bp greater than short term quality bonds. He mentions the spread is narrower today, and just not worth the additional risk.

6. He discussed something called "The Carry Trade Phenomena." A hedge fund goes to Japan and borrows Yen at less than 1%. Hedge fund then leverages that to borrow Icelandic bonds at a much greater rate. Japan shortly after tightens the money supply, then there is an outflow of capital from Japan. This happens because Japan called in the Yen, and lowered available liquidity. This caused great stress. I really didn't fully comprehend what Mr. Metz was saying, but figured I would put it in this note anyway, just in case I can find future clarity.

I asked how Japan decreased their liquidity, and how would one notice that happening here in the States. He claimed that Bank of Japan withdrew its reserves. He indicated to watch the reserves and the balance sheets. He said the USA is a different world, and that money aggregates were not significant to watch. He said to read Milton Friedman. He mentioned the Goldman Sachs' of the world were the ones to watch. I need to watch the major Brokers balance sheets for hints ( good luck on that.). I also need to see if one can monitor their reserves. I think this is way beyond my core competences.

7. He doesn't think the markets are sending rational smoke signals.

8. In regards to Tishman buying up NYC real estate, he says that "Tishman is speculating, not investing, as the real estate is accompanied by a maximum cap rate of 4%. He mentioned that Sam Zell is a seller with 4.5% cap rates. He claims that commercial real estate is no longer a viable alternative. He says residential is the same, not a viable alternative.

9. He discussed the Stock Market, and pondered if that were an attractive alternative.

a. Look internationally, USA as world leader is over.

b. Consumption boom in USA is over. Might begin internationally. Specifically Germany and Japan. India and China have great potential. Claims that China had cultural revolution in 1977, and they have had no missteps in 30 years. Yet, corporate governance is certainly a problem in China. As a side note, I have studied this somewhat. It appears that great strides are being met in Chinese corporate governance. He claims you can "play China via Germany." Germany is the major exporter to China. Two American beneficiaries (and I imagine there are plenty) would be Procter Gamble (PG) and Colgate (CL). He mentioned to invest in any of the "non-Anglo Saxon" countries.

c. Secular decline in growth.

d. "Cash is an attractive asset class."

10. "Ironically today, public companies are selling for less than private companies.

11. Banks are lending to the privates in mass. There have been "no real accidents in private equity." He thinks there will be accidents within a year or so.

What do you do?

12. Major growth outside of USA.

13. Energy - long term bull

14. "oil supplies more precarious than ever before." OPEC and Russia control over 40% of world oil. He claims those are unsafe hands. Thinks that a conservative investor should be in US companies with proven reserves. He says they have limited downside with upside potential. He mentioned Andarko (APC - 41), says they are heavy in gas. Chesapeake Energy (CHK - 27.59), Devon Energy (DVN - 64.67). He also mentioned taking positions in various Canadian MLP's. They have taken a recent fall, supposedly because of Canadian Tax Law changes. He feels the price reduction in these Canadian MLP's is more than discounting the tax law changes. He mentions the risk is lower oil and gas prices. He said he loves Canetic Resources Trust (CNE - 12.77) and Pengrowth Energy Trust (PGH - 16.13), for their yields. He claims they are "real opportunities."

15. He discussed commodities, and thinks that agricultural commodities are an investment play. He claims supply is going down, while demand is going up. He says the winter has been erratic, and said that the mild winter so far is not isolated to Westchester. He suggests investing in grain futures ( I will pass, only based on totally out of my core competence). He mentioned soy, corn, wheat and sugar. Incidentally, you can read a commodities discussion by Jim Rogers at this link .

16. Big caps "will have their moment in the sun." He likes them because they are typically multinational. He mentions that they are typically underleveraged, and thinks that will change.

17. "REITs on all historic criteria are terribly overpriced."

18. Do not invest in companies that have to fight for market share in a contracting market. I think he was discussing consumer retail as an example. I agree.

19. He likes German ETF - iShares MSCI Germany Index (EWG - 26.36) And Japan ETF - iShares MSCI Japan Index (EWJ - 13.94).

20. Look at Fortress for German Real estate. Here is a link to their site I would have no way of knowing how to invest in them. Nevertheless, one could find a company that invests in German real estate. I have a note to myself to look for a German agriculture company.

More miscellaneous discussion

21. He discussed the inverted yield curve. "Typically inversion started because of tighter credit. Spreads have not widened. He is not concerned with inversion. Yet, if my memory serves me correctly, a recession has always followed inversion. I think it has taken somewhere between 6 - 18 months. I could be very wrong on that memory.

22. "Frankly, silver mining is one of the worst investments in the world."

23. He discussed hedge funds. He said their is no incentive to regulate hedge funds. Claims that Long Term Capital Management was rescued by Greenspan. He said that Greenspan was "jawing the major investment banks." At the time there was a regulation scare, now it has halted. Now the major investment banks, like Goldman Sachs and Bear Stearns want the hedge money, and because of their political pull, there is no regulation. He labeled this an atrocity.

24. He likes Pharma. Claims that Pfizer will be positive to the shareholders.

25. Thinks ethanol "is one of the biggest scams in the world."

Thanks for reading.

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