Tuesday, August 07, 2012
New Deals Despite Predictions of Equity End
Last week PIMCO’s founder and principal, Bill Gross, pronounced “the cult of equity is dead.” His words - offered in the context of a television interview regarding his firm’s second (or is it the third?) attempt to break into equity investment management - were immediately seized upon by any number of pundits. Was he serious? Could a bond fund manager such as Gross know anything about equities? Was he suggesting that companies stop issuing equity and use debt alone as a capital resource? Or was this just a bit of sour grapes because PIMCO, a bond house, is struggling to win clients for its new equity funds?
I skipped past Gross’s motives in making the statement and wondered why, if the equity cult is over, PIMCO would choose this year to start an equity investment fund. I also wondered how anyone could consider his remarks…well…that remarkable. He called the equity market a Ponzi scheme by pointing out a basic economic concept. Basically, long-term equity returns above the economy’s average growth imply that equity owners share disproportionately in wealth creation compared to the other two principal participants in an economy - workers and government.
U.S. equities have returned 10.5% on average over the last twenty-five years and 9.5% since the beginning of the last century. By contrast the U.S. economy grew an average 3.3% annually since 1947. It is pretty clear that shareholders have made out like bandits. This is probably why some have viscerally realized something has been amiss in our economy and took to the streets last year chanting “down with greed” and threatening to “Occupy Wall Street.” It is also why some politicians have said enough is enough; it is time to raise taxes on capital gains. At the most basic economic level these actions are aimed at reclaiming some of the value creation in our economy for labor and government.
Fortunately for Bill Gross, no one is advocating an abandonment of equity ownership and the entrepreneurship that goes hand in hand with business. Gross will have any number of opportunities in the future to foray into the equity markets. Eventually he will get the timing right.Just to make certain the equity market is still around I checked the initial public offering calendar. There are deals on the calendar and at least two of them might be of interest to energy investors. Earlier this year Marathon Petroleum (MPC: NYSE) formed MPLX, LP to take over its pipeline line operations in the Midwest and Gulf Coast. After completing the $365 million offering the new distribution manager will trade under the MPLX symbol. Delek US Holdings (DK: NYSE) executed the same type of spin-off to own and operate it oil pipelines in West Texas and the southeastern U.S. Delek Logistics Partners, LP will trade as DKL after the $135 million offering. Both deals make it possible for investors to participate in the renaissance of the U.S. domestic fossil fuel industry.
With its ample tax subsidies, the U.S. oil and gas sector has certainly been among the winners in Gross’ Ponzi scheme, delivering outsized returns and attracting large amounts of capital. With ample political contributions and public relations campaigns, it is not likely oil and gas will fade into the wood work despite the Bond King’s pronouncement of the end of equities.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.