Landmark Links November 22nd – GOAT

ali

First off, I’d like to wish each and every one of you a very happy Thanksgiving.  I’ve really enjoyed writing this blog over the past year and a half or so and am very thankful to all of you for visiting it.  This is going to be my only blog post this week as I’m certain that you have better things to do on a long holiday weekend than surf the web as do I.  Enjoy the time with your loved ones and we’ll be back full time next week!

Lead Story… Every once in a while, I come across a profile that is so fascinating that it makes sense to feature it here even if it’s not real estate related.  Today’s lead story feature is a long-form Bloomberg profile of Renaissance Technologies (and the employees-only Medallion Fund  in particular), the world’s most successful and possibly most secretive hedge fund.  I found this particular story so intriguing because it gives the reader a great glimpse of what it takes to be the best in a deeply cutthroat industry and how adaptation is key, even if you are on top.  It’s a fairly long read so it’s perfect for the upcoming long weekend.

Anyone who follows financial media has heard that hedge funds have had a rough go of it lately.  The strategies that they employ are getting crowded with competitors making it hard to find an edge, leading to benchmark under-performance and pressure to cut fees or face redemptions.  However, there is at least one fund, run by a highly secretive team of PHD’s, mathematicians and scientists that hasn’t just beaten the market. It’s torched the market, it’s competitors and pretty much any asset class that you can imagine since the late 1980s…and that’s AFTER you account for it’s astronomical fee structure. That fund is Renaissance Technologies Medallion Fund (whose only investors are Renaissance employees) which was founded by Jim Simmons.  BTW, this is not a Madoffesque scheme just waiting to blow sky high once the market turns.  It’s very real.  From Bloomberg’s Katherine Burton (emphasis mine):

The fabled fund, known for its intense secrecy, has produced about $55 billion in profit over the last 28 years, according to data compiled by Bloomberg, making it about $10 billion more profitable than funds run by billionaires Ray Dalio and George Soros. What’s more, it did so in a shorter time and with fewer assets under management. The fund almost never loses money. Its biggest drawdown in one five-year period was half a percent.

“Renaissance is the commercial version of the Manhattan Project,” says Andrew Lo, a finance professor at MIT’s Sloan School of Management and chairman of AlphaSimplex, a quant research firm. Lo credits Jim Simons, the 78-year-old mathematician who founded Renaissance in 1982, for bringing so many scientists together. “They are the pinnacle of quant investing. No one else is even close.”

Few firms are the subject of so much fascination, rumor, or speculation. Everyone has heard of Renaissance; almost no one knows what goes on inside. (The company also operates three hedge funds, open to outside investors, that together oversee about $26 billion, although their performance is less spectacular than Medallion’s.) Apart from Simons, who retired in 2009 to focus on philanthropic causes, relatively little has been known about this small group of scientists—whose vast wealth is greater than the gross domestic product of many countries and increasingly influences U.S. politics—until now. Renaissance’s owners and executives declined to comment for this story through the company’s spokesman, Jonathan Gasthalter. What follows is the product of extensive research and more than two dozen interviews with people who know them, have worked with them, or have competed against them.

Renaissance is unique, even among hedge funds, for the genius—and eccentricities—of its people. Peter Brown, who co-heads the firm, usually sleeps on a Murphy bed in his office. His counterpart, Robert Mercer, rarely speaks; you’re more likely to catch him whistling Yankee Doodle Dandy in meetings than to hear his voice. Screaming battles seem to help a pair of identical twins, both of them Ph.D. string theorists, produce some of their best work. Employees aren’t above turf wars, either: A power grab may have once lifted a Russian scientist into a larger role within the highly profitable equity business in a new guard vs. old guard struggle.

For outsiders, the mystery of mysteries is how Medallion has managed to pump out annualized returns of almost 80 percent a year, before fees.

Fees, by the way are 5% on the AUM and 44% of the profits.  So, yeah it’s expensive but the after-fee returns are nothing short of spectacular.  By the way, this is an employees only fund so they are investing their own cash.  No outsiders allowed.

There are a couple of points in the article that describe what makes Renaissance different different from most funds.  The first was that they are looking to hire mathematicians, coders and PHD’s, not your typical Wall Street folks:

Encouraged by Medallion’s success, Simons by the mid-’90s was looking for more researchers. A résumé with Wall Street experience or even a finance background was a firm pass. “We hire people who have done good science,” Simons once said. The next surge of talent—much of which remains the core of the company today—came from a team of mathematicians at the IBM Thomas J. Watson Research Center in Yorktown Heights, N.Y., who were wrestling with speech recognition and machine translation.

If you want to outperform, you have to be different from everyone else.  In a highly competitive field, there isn’t much of an edge to be had by doing the same thing as your competitors and trying to be better at the margins.  To truly bring performance to the next level, it’s sometimes imperative to go about doing things in a completely different way.  The second thing that caught my eye was the focus on data.  Not just gathering data but rather compiling it in such a way that it’s usable in testing an investment thesis:

Renaissance also spent heavily collecting, sorting, and cleaning data, as well as making it accessible to its researchers. “If you have an idea, you want to test it quickly. And if you have to get the data in shape, it slows down the process tremendously,” says Patterson.

The business that Renaissance is in is possibly the most data intensive of any field and they have mastered gathering and use of that data in a way that few have.  The third, and perhaps most critical success factor highlighted in the article was the willingness to constantly adapt, despite perpetually outperforming their peers:

In the early days, anomalies were easy to spot and exploit. A Renaissance scientist noted that Standard & Poor’s options and futures closing times were 15 minutes apart, a detail he turned into a profit engine for a time, one former investor says. The system was full of such aberrations, he says, and the scientists researched each of them to death. Adding them all up produced serious money—millions at first, and before long, billions.

But as financial sophistication grew and more quants plied their craft at decoding markets, the inefficiencies began disappearing. When Mercer and Brown joined they were assigned to different research areas, but it soon became apparent they were better together than apart. They fed off each other: Brown was the optimist, and Mercer the skeptic. “Peter is very creative with a lot of ideas, and Bob says, ‘I think we need to think hard about that,’ ” says Patterson. They took charge of the equities group, which people say was losing money. “It took them four years to get the system working,” says Patterson. “Jim was very patient.” The investment paid off. Today the equities group accounts for the majority of Medallion’s profits, primarily using derivatives and leverage of four to five times its capital, according to documents filed with the U.S. Department of Labor.

If you’re on top, it’s fairly easy for stagnation to take hold.  After all, why change things if you’re outperforming all of the time?  The ability and willingness to constantly evolve without allowing performance to slip is easier said than done.  If you have time this weekend, you won’t regret reading the entire piece.

Economy

It’s a Long Way Down: A protracted bond bear market is not a sure thing.  That being said, a lot investors searching for yield in long duration instruments are doing the equivalent of picking up nickels in front of an oncoming bulldozer.

Of Broken Clocks: The perennial cycle of “experts” predicting recessions is a complete joke.

The Void: Vocational training was once the norm in high schools.  In the era of hyper-competitive college prep it’s fallen by the wayside.  Here is why we desperately need it to return.

Commercial

Cookie Cutter: You can thank banks and their insistence on credit retail tenants in order to get project financing for the chain stores that are taking over much of America.

Residential

Please Make it Stop: A 157 unit condo project in San Francisco’s Mission District proposed by Lennar got shot down in a massive way last week.  That, in and of itself isn’t news.  What I do find incredible is these two quotes from an excellent synopsis of the NIMBY shit show (it was extreme even by SF’s incredibly low standards) from CurbedSF:

Many of reasons were given, but the one that stands out most is the frequent references to President-elect Donald Trump, who may well have clinched the decision against developer Lennar.

Some called the development racist, and the sitting supervisors racists too. One referred to rich homeowners as an “invasive species.” Another delivered his argument with a Bernie Sanders puppet.

I haven’t a clue how a building could possibly be racist nor what Donald Trump has to do with a proposed development in a city where probably a dozen-or-so people actually voted for him.  Combine that with the absurdity of a sock puppet speaking at a public hearing and that, kids, is why we can’t have nice things at least when it comes to housing in California.

A Step in the Right Direction: Housing starts surged in October but still have a long, long way to go.

Assembly Line: A shortage of construction workers in many US markets has builders turning to a potential solution that they have traditionally derided: prefab production.

Profiles

Best Shot: Why this is probably our last best chance to fix our infrastructure and refinance America’s debt into longer maturities at low rates.

Just in Time for Black Friday: I have a much better idea for you than standing in line at your local mall or Walmart waiting to do battle with fellow shoppers over a toaster oven.  Instead, check out Honey, the browser add-on that automatically applies coupon codes to your online order and finds the lowest price on Amazon.  Whoever invented this deserves a Nobel Prize if only for doing something to reduce some of the chaos early this Friday morning.  You’re welcome.

Beyond Just Texting: Cars are safer than ever but we just experienced the biggest spike in traffic deaths in 50 years.  The likely reason?  Apps that encourage driver interaction and serve as a distraction to drivers.  See Also: Tech-distracted drivers are turning parking lots deadly.  And: Rain triggers 570% increase in LA freeway crashes because LA drivers suck.

Chart of the Day

Source: CNBC.com

WTF

Just When You Thought The Election Was Over: A mall Santa Claus in Florida (of course) was recently relieved from his duties for telling kids that Hillary Clinton was on the naughty list.

Extra Sausage:naked man was caught breaking into a pizza parlor in Maryland on a surveillance camera.  He caused several thousand dollars in damage but only got away with some change and is still at large.

Pole Position: Someone apparently thought that it was a good idea to have a pole dancing float in a North Carolina holiday parade.  The entire state of Florida is pissed that they didn’t think of it first.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 22nd – GOAT

Landmark Links November 4th – Who’s On First?

funny-baseball-player-falling-picture

Lead Story…. It seems like nearly everyone in the real estate industry likes to use the baseball analogy to describe the real estate cycle.  There’s a little known rule that every home builder/developer conference has to have a panel where participants are asked what inning the current cycle is in by a moderator.  I suppose that this was considered either novel or informative at some point but today it’s neither.  The problem is that it’s difficult to classify real estate, especially real estate development in such broad and generalized terms.   Whenever I’m asked such a question, I answer the same way: what asset class and what market?  Another important clarification is the time frame of the recovery that began the cycle in question.  Most people consider our current cycle to have begun in June of 2009 which was when the National Bureau of Economic Research (NBER) marked the end of the last recession.  However, when it comes to home building and by extension the economy as a whole, it’s not that simple as Bloomberg’s Conor Sen wrote this week (emphasis mine):

The National Bureau of Economic Research marked the end of the last recession at June 2009. Similarly, the stock market hit bottom in the first half of 2009. The four-week moving average of initial jobless claims peaked in April that year. And the unemployment rate peaked in October. All of these suggest a broad-based trough at some point during 2009, making the economic expansion at least seven years old by now.

But given the severity of the financial crisis and the shock to the economy, the beginning of the recovery was not like moving from recession to expansion. It was more like moving from depression to recession. Rather than a normal business cycle in which four steps forward are followed by two steps back, the Great Recession was more like five steps back. Should the ensuing first two or three steps count as part of the next expansion, or something else?

The growth in the early part of this recovery was abnormal. Part of it was caused by government fiscal stimulus, which proved to be inadequate and was then followed by federal, state and local austerity. Part of it was caused by a “dead cat bounce,” as output fell so hard, below consumption in industries like the auto sector, that a certain amount of recovery was inevitable as producers had to increase output merely to match consumption. And then some part of the recovery was caused by the energy sector and the boom in fracking, a localized boom that eventually went bust.

So what went missing in those first few years of “recovery”?  The answer is home building which is the reason that I think much of the current cycle’s math is a bit off.  More from Sen (emphasis mine):

The missing piece was housing, the bread and butter of the American economy. The Housing Market Index from the National Association of Home Builders didn’t begin to increase from depressed levels until October 2011. Similarly, single-family-building permits didn’t begin to increase from depressed levels until 2011. It’s here, in late 2011, that I would claim the current expansion began, making it barely five years old, quite young in the context of a downturn that lasted four or five years rather than just two.

Ultimately, housing is the driver of the U.S. economy, which is why any understanding of the recovery of the economy must factor in the recovery of housing. Single-family-building permits peaked in the second half of 2005. Subprime mortgage originators started going bankrupt in 2007, the same time that housing prices started falling significantly. Outside of globally attractive real estate markets like San Francisco, New York and Miami, housing prices and activity continued to fall well into 2011.

The early years of the housing recovery, from 2010 to 2012, were more driven by investors and institutions buying foreclosures and investment properties with cash than by owner-occupiers coming back to the market. In the past few years, housing demand has been soaking up inventory created during the bubble years and pushing home prices back toward their mid-2000s levels. First-time home-buying remains below normal.

Only now are we seeing tertiary markets like exurban areas start to expand again, and construction remains below the level of household formation. One of the metro areas that was a poster child of the housing bubble, the Riverside-San Bernardino metro area in Southern California, is still building 80 percent fewer single family homes than it was at the peak of the last cycle.

That last highlighted section is something that I’ve written about frequently.  Although LA, Orange County and San Diego get a lot of attention for their great weather, beautiful beaches and affluent communities, it’s actually the Inland Empire that is the engine of growth in Southern California.  Especially when it comes to creating new housing for first time buyers and blue-collar workers that can’t afford to live closer to the coast.  That this region is still building 80% fewer units than it was at the peak of the last cycle is nothing short of shocking.  IMHO, it can’t be classified as much of a recovery at all.  As Sen points out in his article, every economic sector doesn’t necessarily recover in unison.  Just because tech has boomed or energy has boomed then busted doesn’t mean that other sectors are doing the same.  When it comes to a traditional growth sector like housing, this can have a massive impact on a regional (or even national) economy.  For some traditional growth markets like the Inland Empire, perhaps the appropriate question isn’t what inning of the cycle we are in but rather when the recovery will actually begin in the first place.

Economy

Even Keeled: Calculated Risk’s Bill McBride is still not on recession watch.

Setting the Stage: The Fed didn’t raise rates at their November meeting but certainly indicated that they are open to doing so in December.  See Also: The Fed’s latest statement indicates that they are not going to target inflation rates above 2%.

Commercial

Going Strong: Chinese investment in US commercial real estate is still on the rise.

Residential

Put a Lid on It: Low FHA limits are killing home building in California’s secondary markets.

Imagine That: San Francisco home sales surged in September thanks to a large supply of newly-completed condos.

The Oracle of Home Building? Berkshire Hathaway just purchased the largest home builder in Kansas City.  It’s the just the latest purchase for Warren Buffett who has been buying up builders in the south and Midwest.

Profiles

Ain’t No Free Lunch (Or Shipping): Why the free shipping that you love so much from online retailers is mostly a lie.

Shocker: This years Black Friday deals will probably be exactly the same as last year’s Black Friday deals.

Subprime Redux: Rising automobile repossessions show the dark side of the car buying boom.

SMH: The University of California at Irvine, which is in Landmark’s back yard wants to be the Duke basketball of online gaming (aka video games).  Ok, fine but can they please stop calling it a “sport”?

Chart of the Day

ie-permits

WTF

Hero: A woman sustained burns after causing a fire by farting during a surgery, igniting a laser.  Pain is temporary but glory lasts forever.  See Also: Ten people who were arrested for farting.

Guaranteed Contract: Former NBA star and certified crazy person Gilbert Arenas just received the final check from the $111MM contract that he signed in 2008. If you’re not familiar with Arenas, he once got into a locker room altercation with a teammate that involved a firearm and hadn’t played in the NBA in nearly 5 years. Great investment. (h/t Tom Farrell)

That’s Going to Leave a Mark: A drunk 28-year old Florida man fell out of his pickup truck on the way home from a strip club and immediately ran his leg over before it crashed into a house.  He’s apparently still at large.

Landmark Links – A candid look at the economy, real estate, and other things sometimes related.

Visit us at Landmarkcapitaladvisors.com

Landmark Links November 4th – Who’s On First?