It isn’t too late to learn important lessons from the surprising resurgence of American oil and gas. It is also not too late to profit from it.
The experts keep getting it wrong. And the oddballs keep getting it right.
Over the past five years of business history, two events have shocked and transformed the nation. In 2007 and 2008, the housing market crumbled and the financial system collapsed, causing trillions of dollars of losses. Around the same time, a few little-known wildcatters began pumping meaningful amounts of oil and gas from U.S. shale formations. A country that once was running out of energy now is on track to become the world’s leading producer.
What’s most surprising about both events is how few experts saw them coming—and that a group of unlikely outsiders somehow did. Federal Reserve chairmen Alan Greenspan and Ben Bernanke failed to foresee the financial meltdown. Top banking executives were stunned, and leading investors such as Bill Gross, Jim Chanos and George Soros didn’t fully anticipate the downturn.
March 4, 2014
The U.S. is experiencing a remarkable energy revolution, and exchange-traded funds that focus on energy stocks may seem an obvious way to benefit. But selecting the right ETFs to tap a gusher of profits isn’t as simple as it seems.
U.S. oil and natural-gas production have surged. More than eight million barrels of crude are pumped a day, up from five million barrels a day a few years ago, thanks to newfangled techniques such as horizontal drilling and multistaged hydraulic fracturing in rock once deemed too challenging.
Many analysts and advisers say the U.S. energy renaissance will last for many more years and note that there are few other areas of impressive growth in the economy.
One challenge for investors, though, is that companies discovering huge amounts of oil and gas aren’t always the ones seeing their shares soar. Natural-gas prices collapsed in recent years, thanks to a glut resulting from improved production methods. And while “the industry is undergoing a revolution,” says John Gabriel, an analyst at fund tracker Morningstar Inc., “that doesn’t mean that all firms will make the right capital-allocation decisions and succeed.”
An added complication is that ETFs tend to track groups of companies or indexes. That provides helpful diversification but it also makes it challenging for those searching for a “pure bet” on a particular theme, such as the rise of “unconventional” drilling, the kind responsible for the U.S. energy resurgence.
Some advisers recommend SPDR S&P Oil & Gas Exploration & Production,partly because this ETF includes some midsize energy producers, like SandRidge Energy Inc., the kinds of companies responsible for the biggest leaps in U.S. production. But this ETF includes companies that don’t focus on unconventional drilling.
A more concentrated bet is Market Vectors Unconventional with the fitting symbol of FRAK. This fund invests in companies that employ hydraulic fracturing—or fracking—to unlock oil and gas from shale formations. Shale is a type of rock packed with oil and gas but until recently considered too difficult to drill. Among the fund’s recent holdings are EOG Resources Inc. and Pioneer Natural Resources Co., among the big winners from Texas’ booming Permian Basin.
The fund has about $50 million in assets and sees under 50,000 shares traded some days. Companies in the fund must have the potential to generate at least 50% of revenue from unconventional oil and gas, but that still means an investor is exposed to traditional drilling.
Companies in the ETF generate earnings “from sources other than just fracking and shale,” says Scott Miller Jr. a managing partner of Blue Bell Private Wealth Management LLC in Blue Bell, Pa. But “I would still advise investors who really want to invest in fracking and shale companies to buy FRAK over individual stocks as they would be buying a portfolio of the dominant players in the space,” he says. (His firm isn’t using the fund because its clients haven’t asked for this focused exposure.)
Though natural-gas prices have jumped lately, amid a frigid winter for much of the country, it isn’t clear where they’ll be going from here or how leading gas producers will fare. Ryan Issakainen, ETF strategist at ETF sponsor First Trust Advisors LP, says fundamentals look good for natural gas over the long term. More electricity is coming from gas, rather than coal, and manufacturers are moving to the U.S. to take advantage of natural-gas prices that remain lower than those around the world. As the U.S. begins exporting natural gas that also will help push prices higher. His firm’s First Trust ISE-Revere Natural Gas Index is among the ETFs that aim to track an index of companies involved in natural-gas exploration and production.
The Market Vectors Oil Services is recommended by some advisers as a safer wager on companies providing services to oil and gas producers. The service business can be more stable than searching for oil and gas. This ETF tracks the performance of 25 of the largest U.S.-listed, publicly traded oil-services companies. But these companies, such as Schlumberger Ltd and Halliburton Co., do conventional and unconventional drilling, a reminder that it’s hard to find a perfect way to play the U.S. energy revolution.
Matthew Tuttle, president of Tuttle Tactical Management LLC in Stamford, Conn., favors iShares Global Infrastructure, which tracks 75 companies that profit from building the infrastructure necessary for energy to be shipped, such as Enbridge Inc. ENB -0.89% But the ETF includes companies active abroad and non-energy companies, such as toll-road operators.
Darren Schuringa, managing partner at Yorkville Capital Management LLC, notes recent estimates that as much as $900 billion in new infrastructure investments will be required to transport this new production in the years ahead. His firm’s Yorkville High Income Infrastructure MLP ETF invests in master limited partnerships, or MLPs, which are companies that own and operate pipelines, primarily for natural gas and oil. This fund has less than $40 million in assets, but has an annualized yield of 6.3%.
Marc Andreessen Is Betting on Wide Adoption of Digital Currency Bitcoin
March 21, 2014
Internet pioneer Marc Andreessen is doubling down on bitcoin amid turbulence in the virtual-currency world, in a bet that widespread adoption of the currency will fuel the growth of new businesses and technologies.
Venture-capital firm Andreessen Horowitz, where Mr. Andreessen is a co-founder and partner, has made about $50 million of investments in the area—believed to be more than any other firm—from a $1.5 billion fund, the firm says. The Palo Alto, Calif., firm plans to invest hundreds of millions of additional dollars over the next few years from other funds, people familiar with the firm say.
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Feb. 24, 2014
NEWPORT BEACH, Calif.—Tension increased at Pacific Investment Management Co.’s headquarters here last summer. The bond market was under pressure, losses grew and clients pulled billions of dollars from the firm.
Bill Gross, who co-founded Pimco in 1971 and is largely responsible for building it into a behemoth overseeing almost $2 trillion in assets, struck some of his colleagues as testier than usual. He argued openly with Mohamed El-Erian, Pimco’s chief executive—something employees say they rarely had seen.
Mr. Gross—by his own admission, a demanding boss—had long showed respect for Mr. El-Erian and indicated that the younger man eventually would take over the world’s biggest bond firm. But one day last June, the two men squared off in front of more than a dozen colleagues amid disagreements about Mr. Gross’s conduct, according to two people who were there.
“I have a 41-year track record of investing excellence,” Mr. Gross told Mr. El-Erian, according to the two witnesses. “What do you have?”
“I’m tired of cleaning up your s—,” Mr. El-Erian responded, referring to conduct by Mr. Gross that he felt was hurting Pimco, these two people recall.
Later, after Mr. El-Erian told Mr. Gross he needed to change the way he interacted with employees, Mr. Gross, 69 years old, agreed to make adjustments, several Pimco employees say. But last month, Pimco announced that Mr. El-Erian, 55, would leave the firm—a surprise to both employees and investors.
In a note to clients, Pimco said Mr. El-Erian will leave in March but will remain on the management committee of Pimco’s parent company, German insurer Allianz SE. Mr. Gross later said Mr. El-Erian wanted to write a second book and spend more time with his family.
Interviews with nearly two dozen individuals close to both men and to the firm suggest more-important factors in the departure: a high-pressure work environment that turned less collegial over the past year, a deteriorating relationship between the two senior executives and certain decisions by Mr. Gross that confused some employees.
In a prepared statement, Mr. Gross said: “For more than 40 years, Pimco has delivered superior results for our clients, consistently and during periods of extraordinary market volatility. We hold ourselves to the highest standards of excellence and performance, and I ask of others only what I demand of myself: hard work, dedication and intense focus on putting our clients first.”
In an earlier interview with The Wall Street Journal in January, Mr. Gross denied tension with Mr. El-Erian was a factor in his departure. “It had nothing to do with friction,” he said, although he acknowledged he can be difficult to work with. “Sometimes people will say ‘Gross is too challenging,’ and maybe so. I would say if you think I’m challenging now, you should have seen me 20 years ago.”
Mr. El-Erian’s abrupt departure raises questions about the leadership-succession plan at Pimco, a largely autonomous unit of Allianz. In late January, Pimco designated a new chief executive, Douglas Hodge, a new president and six deputy investment officers. The firm has yet to choose a new heir apparent for Mr. Gross.
“Pimco needs to avoid becoming an upside-down pyramid balanced only on Bill Gross,” says Alex Friedman, global chief investment officer of UBS Wealth Management. “We’re hoping others emerge to replace Mohamed.”
Mr. Gross said in a recent interview that he would be stepping back from some investment duties, but others at the firm are skeptical he will give up any control.
“I’m ready to go for another 40 years!” Mr. Gross posted on Twitter after Mr. El-Erian’s departure.
Messrs. Gross and El-Erian, fixtures on business television and in the press for their views on global markets, were always something of an odd couple. Mr. Gross is a former blackjack player and a trader at heart. Mr. El-Erian is an economist with a more methodical approach.
Mr. Gross’s management style has produced stellar results. His Total Return Fund now manages $237 billion. In 2010 he was named the fixed-income manager of the decade by Morningstar Inc. In recent years, Mr. Gross was paid more than $200 million annually, according to employees.
“The culture is intense” because the firm manages the retirement savings for millions of people, says Neel Kashkari, who ran Pimco’s equity business from late 2009 until departing in early 2013 to run for governor of California. “People work hard, and expectations are high. I had a terrific experience there.”
The Pimco complex, located about a mile from the Pacific Ocean, is called “the Beach” on Wall Street trading desks. Mr. Gross has talked about how he has taken time off during the day to do yoga. But employees say the work environment is charged.
Most Pimco investment professionals arrive at the office around 4:30 a.m.—well before trading opens on Wall Street—and stay until 5 p.m. or later. The firm encourages internal competition, current and former employees say.
On the trading floor, Mr. Gross doesn’t like employees speaking with him or making eye contact, especially in the morning, current and former employees say. He prefers silence and at times reprimands those who break it, even if they’re discussing investments, these people say.
Mr. Gross, who served as a naval officer during the Vietnam War, has strict requirements for presentations to Pimco’s investment committee. He has scolded employees for forgetting to number the pages in their presentations and has given them “communication demerits” that an assistant to Mr. Gross tracks to help determine year-end bonuses, according to people who have worked at Pimco.
Some at Pimco have been told to leave the firm but stuck around instead, waiting for Mr. Gross’s anger to ebb and for him to change his mind, according to these people.
Bill Powers, a former Pimco senior executive who left in 2010, says Mr. Gross “routinely grew tired and wary of those closest to him who had assumed significant responsibility, power, and compensation. After a four to five-year honeymoon period, the chosen one’s halo would turn into a crown of thorns where interactions with Bill would turn adversarial, short, and unpleasant.”
When Mr. Gross establishes an investment thesis, he usually doesn’t appreciate dissenting views, employees and former Pimco traders say. Once, when a senior investment manager said a bond in Mr. Gross’s fund appeared to be expensive, Mr. Gross responded: “OK, buy me more of it,” according to a Pimco executive. The purchase was made.
In 2005, Eric Flamholtz, a consultant and then a professor at the UCLA Anderson School of Management, was hired to advise the firm, he says. Mr. Flamholtz says he spent three years with Pimco employees and shared his results with the firm in 2008.
“You had a lot of very talented people who were, in effect, nervous about their positions,” Mr. Flamholtz says. “It was an unhealthy atmosphere for Pimco in the long run, and they needed to address the issues.”
Mr. Flamholtz says he doesn’t know whether the firm took any steps in response. “The feedback did not make me very popular at Pimco,” he says.
One day about 10 years ago, recalls John Brynjolfsson, at the time a Pimco portfolio manager, Mr. Gross criticized him for not standing when a visiting client toured the trading floor. He recalls Mr. Gross telling him there would be “consequences.”
Mr. Brynjolfsson says Mr. Gross suggested that he write a $10,000 check to Pimco’s charitable foundation. Mr. Brynjolfsson, who says he considered the situation a misunderstanding, made the donation. Less than a year later, Mr. Brynjolfsson was named a Pimco partner.
“I knew he wouldn’t have tested me if I couldn’t handle it,” says Mr. Brynjolfsson, who now runs a hedge fund. “He’s a great motivator of top talent.”
The prestige of working at Pimco has long attracted talented traders. The company pays among the highest compensation in the investment world. Mr. El-Erian earned more than $100 million each year in recent years, according to several current and former employees, while other senior executives made $20 million or more annually.
Mr. El-Erian, the son of an Egyptian diplomat, worked at the International Monetary Fund before joining Pimco in 1999 and rising to managing director. In 2006, he left Pimco to become the chief executive and president of Harvard Management Co., which manages Harvard University’s endowment. He returned to Pimco in late 2007 to become the firm’s co-chief executive officer and co-chief investment officer, along with Mr. Gross.
Colleagues say Mr. El-Erian traveled the world meeting Pimco clients while also helping to run the firm and manage some money. He hardly took a vacation and flourished in the firm’s demanding environment, they say.
Mr. El-Erian favored a more structured approach to management than Mr. Gross’s informal style, but the men rarely clashed in front of the staff, employees say.
Last summer, bonds came under pressure because investors were worried the Federal Reserve would reduce its bond purchases. In June, investors withdrew $9.6 billion from Mr. Gross’s fund. “Don’t jump ship now,” Mr. Gross wrote clients that month.
But more investors cashed out, adding to the stress. Disagreements between Mr. Gross and Mr. El-Erian became common over trading strategy, personnel decisions, new products and more, employees say.
Some of Mr. Gross’s decisions struck some employees as unusual. Last summer, during a rough time in the market, Mr. Gross limited the firm’s trading, restricting it mostly to sales aimed at raising cash to meet client withdrawals, according to three Pimco employees. Some employees complained to Mr. Gross and Mr. El-Erian that they couldn’t buy inexpensive investments and that Mr. Gross didn’t seem to trust their abilities. Mr. Gross didn’t budge. He had restricted trading during rough patches before. These restrictions were longer, lasting for several weeks, according to the three employees.
A Pimco spokesman said the firm’s investment committee told employees to limit “nonessential” trading—as it sometimes does during market stress—and that overall trading volume didn’t decline during those weeks.
Mr. El-Erian told Mr. Gross to be less combative with employees and to give others more leeway in investment decisions. In the late summer, Mr. Gross agreed to be less confrontational, but the change didn’t last, according to senior Pimco executives.
During investment committee meetings, when Mr. El-Erian or others discussed stocks or other topics not related to bonds, Mr. Gross often looked bored, say people who attended the meetings. Sometimes he walked out of the room, effectively ending the discussions, they say, and he became more dismissive of Mr. El-Erian’s views.
Late last year, in front of a number of traders, Mr. Gross said, “if only Mohamed would let me, I could run all the $2 trillion myself…I’m Secretariat,” referring to the famed thoroughbred. “Why would you bet on anyone other than Secretariat?”
Pimco’s performance added to strains. Mr. Gross’s $237 billion Pimco Total Return fund lost 1.9% in 2013, the first year the fund posted a negative return since 1999, although it narrowly beat the benchmark Barclays U.S. Aggregate Bond Index, which fell 2.02%. Investors yanked a net $41.1 billion from Mr. Gross’s fund—more withdrawals in a year, in dollar terms, than any fund in history, according to Morningstar, although it remained the world’s largest bond fund.
Mr. El-Erian saw his own efforts to help build a stock-fund business falter and two funds he helped manage weaken.
In November, Pimco’s executive committee tried to address the growing discord, establishing a task force to meet with both men, according to two Pimco executives. A month later, Mr. El-Erian was offered more power. Instead, he told Mr. Gross he was leaving.
“You can’t resign,” a Pimco executive recalls Mr. Gross telling Mr. El-Erian. “We need you.”
Colleagues figured the men would find a way to patch up their relationship. Early this year, Mr. El-Erian agreed to work with a mediator to find a new way to operate the firm. Mr. Gross rejected the concept of bringing in a mediator, according to a Pimco executive.
Later in January, Mr. El-Erian told Mr. Gross he had made up his mind: He was leaving.
Since the announcement, Mr. Gross has expressed disappointment and bewilderment over Mr. El-Erian’s departure, telling colleagues that Mr. El-Erian was offered whatever he wanted to entice him to stay.
Earlier this month, the firm began removing Mr. El-Erian’s pictures from Pimco’s walls and placing copies of a book he wrote in boxes for storage. They also moved Mr. El-Erian’s office to a building far from Pimco’s trading floor.
Last Tuesday, Pimco posted a question-and-answer session on the company website in which Mr. Gross extolled the new leadership structure, which he said “gives others the opportunity to lead…it will be great!”
Q: Are there ways to protect a portfolio from a bear market in bonds?
A: There’s growing concern in bond land. The stock market is firming, some investors are shifting cash from bonds to equities, and interest rates, still near all-time lows, likely will move higher over the next few years if the economy keeps improving, analysts say. That would push bond prices, which move in the opposite direction of rates, lower.
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By GREGORY ZUCKERMAN
The market is surmounting a wall of worries to approach all-time highs. The best news: There are reasons to think the good times will continue.
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By DAN FITZPATRICK, GREGORY ZUCKERMAN and SCOTT PATTERSON
The J.P. Morgan Chase JPM +0.79%& Co. trader known as the “London whale” tried to alert others at the bank to mounting risks months before his bets ballooned into more than $6 billion in losses, according to people familiar with emails reviewed by J.P. Morgan and a U.S. Senate panel.
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By GREGORY ZUCKERMAN
John Paulson still believes in gold.
That has been a painful stance lately. But Monday finally brought some good news for the well-known hedge-fund manager and other gold bulls.
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By GREGORY ZUCKERMAN
Some of the biggest U.S. hedge-fund investors have made billions betting against the yen, exploiting Japan’s determination to weaken its currency and boost its economy.
Wagering against the yen has emerged as the hottest trade on Wall Street over the past three months. George Soros, who made a fortune shorting the British pound in the 1990s, has scored gains of almost $1 billion on the trade since November, according to people with knowledge of the firm’s positions. Others reaping big trading profits by riding the yen down include David Einhorn’s Greenlight Capital, Daniel Loeb’s Third Point LLC and Kyle Bass’s Hayman Capital Management LP, investors say.
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