Bill Ackman of Pershing Square presented at the May 26, 2010 Ira Sohn Conference. In addition to opining on the ratings industry (see here), he spent 90 slides briefing the audience on why GGP is an attractive long investment. Long time TILB readers know that we have extensively covered Ackman, Hovde and Tilson's views on GGP and the resulting back and forth (and back and forth...and back...and forth...). Ackman lays out here why he thinks GGP still has a lot of value for shareholders.
Enjoy.
GGP - Ackman Presentation at Ira Sohn Monference - May 2010
Showing posts with label Bill Ackman. Show all posts
Showing posts with label Bill Ackman. Show all posts
Monday, June 07, 2010
Thursday, June 03, 2010
Pershing Square's Bill Ackman's Ira Sohn Presentation On The Ratings Agencies
Bill Ackman of Pershing Square Capital Management gave this presentation at the May 2010 Ira Sohn conference. He also gave an excellent presentation on General Growth Properties (GGP), though that presentation is not included here. This ratings agency pitch provides his assessment of how to "save" the ratings agencies (Moody's, S&P, Fitch) by modifying their incentive structure and limiting their ability to consolidate power. Having read Christine Richard's book on Ackman's justified holy jihad against the monolines (MBIA in particular), I understand why the man hates him some ratings agencies. Over and over, he gave the NRSROs detailed warnings that the monolines (which were misrated AAA) were ticking timebombs, and over and over the agencies listened and then promptly ignored him (largely due to their own perverse incentives).
Go get 'em, Bill.
Wait to Rate - Bill Ackman Presentation on Ratings Agencies - Ira Sohn - May 2010
Go get 'em, Bill.
Wait to Rate - Bill Ackman Presentation on Ratings Agencies - Ira Sohn - May 2010
Thursday, May 27, 2010
Ira Sohn Recap
We attended the Ira Sohn conference yesterday for the Tomorrow's Children's Fund. Klarman, Tepper, Arbess, Einhorn, Ackman, Dinan, Robbins, Zell, Eisman, Jacobson, S-Ratt, Grantham, and Niall Ferguson. In summary, this was by far the most macro oriented conference we've ever seen from a bunch of largely "bottoms up" investors.
Below are two sets of notes. One from your intrepid TILB author and the other from BTIG's Mike O'Rourke. O'Rourke writes BTIG's must read "Bedtime with BTIG" every night. While we are not much for technical trading, he provides technical insights and recaps that give a concise, useful review of the day past and preview of the day ahead. In any case, here are the notes. In both cases, these are not exact transcriptions. Also, sadly TILB had to leave in the middle of S-Ratt's brutal pack of lies, causing us to miss Larry Robbins, Bill Ackman, and Seth Klarman. Fortunately for you, O'rourke didn't leave and has complete notes. O'Rourke's notes are first, our's follow.
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BTIG Notes - Ira Sohn
Posted on Thu, May 27th, 2010 at 7:17 am
by Mike O'Rourke
This is a summary of ideas expressed at the 15th Annual Ira W. Sohn Investment Research Conference.
The Ira Sohn Research Conference Foundation is dedicated to the treatment and cure of pediatric cancer and other childhood diseases.
NOTE: The notes below were taken in real time, but we apologize in advance for any transcription errors. THESE ARE THE OPINIONS OF THE SPEAKERS, BTIG DOES NOT AGREE OR DISAGREE WITH ANY OF THE STATEMENTS.
Jonathon Jacobson, Highfields Capital Management
Highfields is a long term value investor. Jacobson is worried about the current investment environment. Despite all of the looming macro headwinds the biggest threat is the “Clowns & Climate in Washington D.C.” Several states are hovering on the edge of bankruptcy and we the taxpayers will wind up paying for those losses. The administration has embarked upon a process of rolling vilification of industry after industry, Health Care, financial Services, Energy, Cable, Soft Drink, etc. The perception in Washington is that if someone has done well in this country, it was done at someone else’s expense. Rather than address the issues politicians will continue to “kick the can down the road.” Fundamentals are hard to handicap when the rules are constantly changing.
Jacobson is bullish on Sallie Mae (SLM). The company is currently misunderstood by the market because it is in transition from being a lending based company to a fee based company. The key point is if Sallie Mae were strictly in a run off mode as the government ends cuts back the FFELP program (which they are not) it would be worth $15, even with a conservative 12% discount rate. It currently has a $5 Billion market capitalization and is trading 2x pre-tax, pre-provision earnings and is trading 4x pre-tax earnings. Most competitors have gone out of business or in the process of exiting the business. Jacobson believes Sallie Mae is worth somewhere between $15-$25 per share. In 2011 he is forecasting $0.80 -$1.00 in earnings power. Additionally the company is well positioned to acquire additional servicing rights as competitors exit the business. Sallie Mae is larger than the 3 other government approved student loan servicers combined. Management is acquiring stock and aligning their interests with shareholders. 87% of the balance sheet is funded to term. Credit losses peaked in Q3 2009. Main risk is regulatory, but if management believes the best move for shareholders is to liquidate the company, they will.
Sam Zell
The theme of the election was change. A major change has occurred within the American economy. One party political dominance is changing how investors will act in the future. It is an environment of survival of the fittest. Zell presented a music video that was an ode to Charles Darwin. Extinction is for those who do not adapt and evolve. The winner is the one who builds the better boat, not the one who rearranges the deck chairs. He who adapts succeeds.
Dan Arbess, Perella Weinberg Partners
The foundations of the global economy are shifting. Fiscal imbalance and sovereign risk are only symptoms of the problems that will fuels this change. The trend of deficit spending over-consumption in the west and the export driven production of the east needs to reverse. Consumption in the east must rise and the west must exercise restraint to bring a semblance of balance back. Macro squalls can wreak havoc on a portfolio, so effective hedging strategies are important. The key them Arbess proposed was “Shaking hands with China.” The way to play the theme is to be long those companies who sell China what it needs and short those who make products that the Emerging Markets can make better. Consumption is only 35% of GDP in China, half of what it is here and the Chinese save half of what they make. China alone will increase its urbanization rate from 46% to 58%, adding 210 million urban residents in 70 million households. They need a lot of stuff to urbanize 20 million people a year, and Arbess wants to be long the guys who will be selling it to them.
Arbess believes weaker currencies and weaker sovereign credits should be sold. He is bearish on the Euro and on EU sovereign debt. This is the endgame of the debt supercycle and confidence in fiat currencies will erode, as such he likes Gold. The deflationary economic environment will lead to monetary debasement. The irony today is post-Maoist China has no entitlements and needs to create some to boost domestic consumptions and the U.S. more entitlements than ever.
He likes commodities and the commodity nations in the G-20 and even Africa, both fundamentally and as a currency debasement hedge. He says own junior mining companies that own big assets close to their customers. These will often start out trading at discounts as much as 90% to their cash flow potential, and often show less downside beta than large caps.
Arbess likes Ivanhoe mines (IVN). Its vast copper and other mineral deposits in Mongolia are close to the same size as Manhattan. Noncore assets are worth half of the current market capitalization of the company. Rio Tinto is a key partner of Ivanhoe, and its presence reduces the risk for the investor. Rio recently purchased shares above the current price levels Backing out the coal business and other peripheral assets, the stock at its current price around $13 creates the copper mine at less than $2.5 billion, which is less than half of what it’s worth on an NPV basis, and a tiny fraction of inground metal value, assuming $2.50 long term copper and $1000 gold. At recent commodity prices, Arbess thinks the stock could be worth up to $30 to Rio.
Arbess also noted Solution (SOA) and Celanese (CE) as other ways to play his theme and believes both have 50% upside from current levels. Another name he likes is YUM Brands (YUM) who had 37% growth in China last year. China’s successes of the last 30 years are real and the country is fiscally strong with $2.5 Trillion in reserves and fiscal responsibility. Another play on his theme is shorting the Japanese Yen versus the Canadian Dollar. Japan is shrinking while its debt is growing, exactly the opposite of the urbanizing emerging markets. Canada, by contrast, has arguably the soundest economy in the G-7. No coincidence, they really don’t like leverage up there. And the country is rich in Shake Hands With China resources. This is the end of the buy now and pay later mentality. The global rebalancing process will be messy, but it will also be rife with opportunity.
David Tepper, Appaloosa ManagementTepper started with an anecdote about the horse “output” problem in 19th century New York City and forecast that city would be buried under horse excrement . The moral of his story was “don’t listen to the crap.” Tepper was highlighting that the world changes and evolves and people and societies adapt. Tepper noted that everyone of the “PIIGS” has instituted austerity programs, something many would not have believed would happen. He mentioned the ECB buying debt despite its conservative Bundesbank roots and the Spanish Government shutting down the largest Caja run by the Roman Catholic church. All of these things at one point seemed unthinkable, but this is society adapting to the situation.
Tepper likes the AIG-8.175% Junior Subordinated Debt. It is trading at $0.72 on the dollar giving it a current yield of 11%. Right now there is $73 Billion of capital structure below it $49 Billion in Preferred and $24 Billion in equity. He thinks those two combined are really only worth $40 Billion. He warned that this did not mean the equity is worth zero, there is some option value and a conversion of government preferred into common could distort a capital structure arbitrage if set up. Tepper says AIG has $9 Billion of EBIT and other assets worth $45 Billion.
Tepper noted there are opportunities in the CMBS market. He said what you should really care about in the CMBS market is “Can they make the coupon?” These are 10 year securities and if they can make the coupon you should ask what will the environment be in 2016? You should not be looking at today, you should be looking at the future.
Tepper still likes Bank of America (BAC). He believes normalized earnings are $2.65-$2.70 per share and has a $27 price target. He also likes Banco Santander (STD). it is one of a handful AA rated banks in the world (no major U.S. bank is as high as AA). Only 30% of the banks exposures are to Spain, it is really an Emerging Market/Global play. They will earn $1.50 and that has the potential to double. Tepper concluded noting that 2000 was the beginning of the end and that today we are at the end of the beginning.
Niall Ferguson, Harvard University
Ferguson proposed being “Long virtue.” Focusing on nations with good fiscal situations as opposed to the overly indebted Western governments. Citing Bank of International Settlements long term forecasts Ferguson highlighted Pigs “R” Us. Which means that the U.S. and the U.K. are in equally precarious fiscal situations as the “PIIGS.” Ferguson noted that 40% of U.S. Debt is short term and that type of duration leaves one open to roll risk. “U.S. Debt is a safe haven similar to the way Pearl Harbor was.” Ferguson highlighted the “good boys, ” nations with better fiscal situations. Topping the list was Norway with net debt of -140% of GDP due to the nations effective management of its oil reserves. Other good boys were Sweden, Denmark and Switzerland. The U.S. leaves itself at risk by being highly reliant upon foreign capital.
Steve Eisman, Frontpoint
Eisman’s theme was “Subprime goes to College.” After what transpired in the subprime mortgage market a few years ago, Eisman though he would never see a business with the capability to prey upon the underprivileged to those extremes again. Then he came across the For Profit Education industry. Despite only having 10% of the students these schools get 25% of the government aid. The industry is in bed with Washington due to serious lobbying efforts and the back and forth of executives from the companies to Government positions and back. Title IV loans offered by government programs comprise 90% of for profit education revenues.
ITT Educational (ESI) has higher margins than Apple (AAPL), and margins in the for profit education industry are 3-4 times those in other industries that deal with the government. For profit schools target poorer people, often leading them towards degrees that won’t get them jobs. The companies also maneuver to acquire small failing schools in order to get their accreditation. The loans the students take out for profit education have high default rates. ESI and Corinthian (COCO) often provision 50%-60% for the loans they privately offer, so the default rates overall are likely 50%. The companies in the industry are Education Management (EDMC), COCO, Apollo Group (APOL) and Washington Post (WPO). WPO, more than 100% of its EBITDA comes from for profit education. Eisman calculates there could be $300 Billion in defaults over the next 10 years. The key catalyst going forward is that the government will publish a rule for gainful employment , that threatens the companies. The government is also seeking to fix the accreditation process.
Jeremy Grantham, GMO
IN GMO’s 7 year forecast U.S. High quality names are aberrantly cheap and should provide 7.6% real return per year. In constructing a portfolio Grantham said it should be 40% U.S. Blue Chips, 20% Emerging Markets and 30% EAFE Blue chips. Grantham notes that bonds are “grotesquely” overpriced predicted to post a real return 1.7% per year. Grantham’s 3 choices or recommendations are Timber which has 7.5% forecasted real annual return. Then Grantham likes Emerging Markets which he believes will go to a premium P/E to the rest of the world. Finally he likes high quality U.S. blue chaps. They are trading at a 17% discount to fair value and 55% of earnings come from around the world.
The bedrock of Grantham’s thinking is that “Things regress to the mean.” Of the 34 bubbles GMO has identified it takes about 3.5 years for the bubble to run up and it comes back down to the trendline nearly as quickly. All bubbles reverse. Grantham believes both the U.K. and Australia are in housing bubbles. The risks to betting against bubbles are career risk and business risk. Grantham believes debt has nothing to do with growth, and debt has less influence than most think. Grantham concluded by noting the importance of the upward bias in the third year of the presidential cycle.
David Einhorn, Greenlight Capital
Einhorn’s theme was “Good news for the Grandchildren.” In essence the fiscal challenges of the United States are so severe that they will need to be dealt with before our grandchildren inherit them. Our own future is at risk. Average public sector pay is nearly double that of private sector pay. Public sector workers “Retire to rehire,” and fuel a system that is heading in the same direction as Greece. Einhorn wonders how long will the capital markets continue to let the U.S. keep borrowing. Nobody knows where the line is, not the Government nor the ratings agencies. A credible plan to avoid the debt trap is necessary. Europe is a prequel to what will happen here.
Einhorn is short the ratings agencies Moody’s (MCO) and McGraw-Hill (MHP). Credit rating agencies provide a false sense of security and are pro-cyclical. Einhorn also questioned the validity of the Government CPI data . Citing Shadowstats, Einhorn noted inflation calculated under the 1980 methodology would be 9%, as opposed to the less the 2% it is today. The lower real rates will fuel inflation and bad behavior and create bubbles. This easy policy of bubble bailouts is an unhealthy cycle.
He believe the lower real rates tempts the central bank to monetize debt. As a hedge against this Einhorn is long Gold as well as African Barrick (ABG LN) . ABG LN trades at ½ the value of its peers, 6x Ebitda and with a 10% free cash flow yield.
James Dinan, York CapitalDinan commenced by noting people adapt, markets adapt and animal spirits prevail. Dinan believes large companies are in good shape. Dinan likes Coca Cola Enterprises (CCE). The company is going through restructuring in which Coca Cola (KO) is giving CCE $10 per share and some European bottling assets in exchange for U.S. bottling assets. Dinan stated Europe is a better place than the U.S. for the bottling business, due to less competition. The deal also gives CCE the option to expand its European footprint. After the deal and receiving the $10 per share new CCE will be $15 and trade 10x earnings and 6x EBITDA. New CCE will have 20% gross upside.
Dinan’s next long idea was ING Groep (ING). ING has a global presence as a bank and insurance company. As part of the bailout the company received during the crisis the company must split its banking and insurance businesses by 2013. The company is currently trading at €6.25 which is .6x book value. Dinan believes it can go to 1x book which would make it worth €8.50-€9.20 per share. The life insurance divestiture could be used to pay back the Government bailout, or it could spin out the insurance business. An 8x-10x P/E multiple on the combined bank and insurance company would make it worth €14-€18.
Dinan also sees opportunity in post bankruptcy equities. Currently one he is investing in is Lyondell (LALLF). Currently the stock is trading below its reorganization plan value. Q1 earnings tracked well ahead of expectations especially in the companies commodity business. A sum of the parts valuation gives Dinan a $22-$28 price target.
Steve Rattner
The former advisor to Treasury on the Auto industry restructuring provided a defense for the Obama Administration’s handling of TARP, the Stimulus (EESA), the Stress Test (SCAP) and the Auto rescue. Rattner said the Administration sought the middle ground on most issues and gave examples of the extreme views in each case.
Regarding the Auto industry restructuring Rattner addressed the question of whether the UAW received more than it deserved. Rattner said that Labor was a critical creditor and all stakeholders received more than they would have in an outright liquidation. Rattner noted that in the Chrysler plan the UAW’s VEBA received 40%-50% of what they were owed. In the GM plan VEBA received 84%-92% of what it was owed. In both cases warranty holders, dealers and trade/suppliers all received 100 cents on the dollar. Rattner used this as an example that the plans sought to protect as much franchise value as possible.
Rattner offered what to expect from the Administration going forward. He said the government will remain involved in the Financial sector. He noted taxes are going up. The Administration has avoided protectionism and is leaving business in the industrial and manufacturing sector alone.
Larry Robbins, Glenview Capital Management
Robbins started asking the question of why is the market’s P/E so low. The 3 potential explanations he offered were the “E” is wrong and estimates could be too high, or “the bigger the D.C. the smaller the P/E.”The last reason and one he highlighted was that it is not a math problem, but it is a psychology problem. He note market participants are suffering from Post Traumatic Stress Disorder.
Robbins noted that individual stocks were one of the best ways to tackle an uncertain environment. He looks for stable earnings growth, potential for multiple expansion and positive optionality. Robbins likes McKesson (MCK). He notes earnings are growing at 18% and it is trading under 11x forward earnings. The company proved it is acyclical by posting growth in Q1 2009. Robbins highlighted he expects MCK to have $5.2 Billion of “Dry Powder.” This is a combination of cash and Free Cash Flow expected to be thrown off over the next 18 months. Robbins also likes Express Scripts (ESRX). Earnings are growing 35% and although that won’t be sustainable it will still continue fast growth. Management has been superior over the past decade in retiring stock. The company is trading 14x 2011 earnings and under 13x Free Cash Flow. Robbins next pick was Life Technologies (LIFE) which is in a consolidating and over capitalized industry. The company has a 80% consumable product mix and is trading 11.5x 2011 earnings. Robbins last pick was Fidelity National Information. The company rebuffed private equity takeover attempt because the price was not high enough and figured they could do the same thing Private Equity planned by doing a leveraged recapitalization. The company is tendering to buy $2.5 Billion of shares , or 22% of the outstanding. Robbins thinks they could have done $3.5 Billion but were being conservative. Earnings grow this 15%-23% and the company is trading under 12x 2011 and 10x Free Cash Flow.
Bill Ackman, Pershing Square
Ackman started by outlining how he believed the credit ratings business should be reformed. The short version is NRSRO’s should not be allowed to rate an issue until 60 days after it comes. That would create a buyside environment that would attempt to handicap what the rating should be using market forces. The underwriter would also need the instrument to hold up in the secondary market and therefore is incentivized to make sure it is a quality product. All relevant information should be disclosed to the market and the ratings agency should disclose its model.
From there Ackman went into GGP part two. GGP will be split into two companies GGP and GGO. GGP will have 200 regional malls. It will have a competitive advantage because 80% of the properties will be single property non-recourse financing . Company owns 31% of Aliansce (ALSC3 BZ) in Brazil. GGP is benefitting from the economic recovery. GGO is where GGP’s noncore assets will go. They include housing development land, land in Hawaii, land on the Las Vegas strip and South Street Seaport. Ackman referred to GGO, that he hopes it to be a mini Berkshire Hathaway. Ackman thinks new GGP will be worth $15 and new GGO will be worth $5. He finished by saying he bought 150 million Citigroup shares but did not give his thesis.
Seth Klarman, Baupost Group
Klarman delivered what would be his opening statement if ever called before Congress. Klarman noted that most people on Wall Street operate honestly, ethically and provide good service. It is the land of caveat emptor and transactions should be entered skeptically. When it comes to the complexity of derivatives, the purchaser should know they will wind up overpaying. There is a culture of compliance. He guides his firm with two rules. The Wall Street Journal Rule, don’t do anything you would not be willing to read about in the WSJ the next day. The second is the football field rule, if run to close to the sideline you increase the risk of running out of bounds, instead cut to the middle. Financial Transactions among consenting adults are an important part of the capitalist system. He has a fiduciary obligation to his clients, not his counterparties. Short sellers are the policemen of the financial markets.
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TILB Notes - Ira Sohn - these are in reverse order because we were emailing them one by one and I'm too lazy to cut and paste to reorder them.
Steve Rattner - ex Quadrangle, Treasury Car Czar, Lazard.
Reflections on crisis. Necessary and appropriate response to crisis. TARP was critically important. Stimulus package - not perfect but good. Stress Test for banks - restored confidence. Auto rescues (detail to come).
Believes Administration deserves credit for finding the middle ground.
Autos: no private capital available. Would have been chpt 9, not chpt 11. Labor was a critical creditor to these companies. Nothing abnormal about different stakeholders getting different recoveries. Believes every creditor received more than they would have in a liquidation. Doesn't believe they abrogated or changed law.
Put $50B into GM and believe it's investment worth $40B today on paper. Deems that 20% loss a success. [TILB: Conveniently left Chrysler out of that analysis]
I can't stand listening to him any further. No more notes on S-Ratt.
Jamie Dinon - York Capital
Don't think end is near. People adapt, societies adapt, etc. Equities are a good place to be if you're worried about that. Flexible, long duration, inflation resistant (albeit perhaps lagged).
Event driven:
CCE (Coke Bottling) - KO buying domestic bottling assets for $10/share. Left with European assets plus KO's Swedish and Norwegian bottlers. European macro for KO better than US - faster growing due to low penetration, better comptttv position vis a vie Pepsi and other bottling competitio, option to buy KO's Germany business as well as potential for other European assets. 6x EBITDA and <10x earnings for the stub. Comps trade at 8x ebitda and 13-15x. Stub at $15 vs comps implied $20-25. Dual listing catalyst. Safe business.
ING - Netherlands global bank. (All numbers in euro). Had Alt-A problems in crisis. Received Dutch bailout. Forced by EU to split insurance from banking. Sum of Parts: insurance - 30% in developed Europe (assume 0.7x bk in developed markets and 1-2x bk in EM, so overall 1x bk assume). Backing out insurance, €9.30 tangible book for bank. Trades today at €6. Deserves better than book, decent bank. Decent banks should trade > book.
Like post-bk equities. "Resurgence" phase.
Lyondell-Basel - ticker: LALLF came out of bk in April. $9.5B mrkt cap. Below plant value and below rejected bid from Reliance. Bk plan calls for 1.8B ebitda in 2010. Did $0.6B in Q1. Specialities business is rock solid and does 1B ebitda like clockwork and was on track in Q1. So the non-specialty business is crushing it if you back into the projections for that business. Apollo is biggest owner. Sum of Parts is $18-22B. Normalized ebitda $3.5B. Put 5-6x multiple on that and big upside.
Liquidation Play: Icelandic bank Keupthenk (spelling sorry). Claims trade at 23c. 25% Yield to Recovery. Base case 39c. Downside 22c. Upside mid 50s. 7th largest bk in history. 27% market price in cash. Most of the balance is performing loans.
David Einhorn: Greenlight
Title "Good News for the Grandchildren" [referring to passing budget debts to grandkids]
Obama knows what he wants to do on every issue in advance, but he wants to start a blue ribbon commission for dealing with debt w/o promising to actually do anything about it.
This won't be our grandchildrens' problem - it will be our generation's problem. The mount of debt is mind-numbing. Gov't acctng is done on a cash basis, so future promises (unfunded mandates/entitlements) aren't even counted yet.
Rails on average public sector worker situation vs private sector. Ridiculous skew of compensation and job security. Amount of gov't workers has now made them a critical voting block.
Questions: 1) how long will capital markets accept this? 2) how much liability can we pay via central bank monetization?
AAA financial instttns collapsed and nobody saw it coming, even as it became inevitable in retrospect. Think of the implication to gov't.
Using The Administration's 10 year forecast which assumes low rates and robust economic growth shows structural deficits through the whole period (just in time for unfunded mandate costs to kick in).
Should get rid of ratings agencies entirely or at least rid of their govt legislated position. Made fun of ratings agencies using their own quotes (especially the sovereign analysts).
Procyclical ratings agencies will cause problems at the worst moment. Ill-timed (from borrower's perspective) downgrade can serve as a coup de gras.
Zero risk weighting for banks to buy gov't debt will massively exacerbate the problem. Practically ensures the problem will spread fast.
Greenlight still short Moody's and McGraw Hill (S+P).
Monetization likely. May even show up in gov't statistics (sarcastically delivered). Recent bout of of QE not showing CPI ramp may have provided central bankers false confidence.
Shadow Stats says pre-1980 methodology would show 9% CPI today vs 2% govt reported. Lots of other stats on bad govt CPI stats.
[Summary from TILB so far - buy gold]
Low rates drives "wealth effect" by driving up capital market asset prices. This is fake.
Failed banks balance sheets most recent financial statements show solvency despite the huge losses fdic takes upon failure. This is almost certainly also true in "solvent" banks. Easy money policy used to bail them out.
Low rates creating an addiction. Japan can't even accept normalization.
If the emergency has passed, why still have 0% rate emergency policy? Negative consequences in addition to debasement/inflation: bubble inflation [malinvestment risk]. Rips Bernanke, etc.
Fed seems to want to create a new bubble. [Goes through history of Greenspan's bubble machine and into Bernanke's sov debt bubble...]
Gold, African Barrick Gold (ABG). ABG trades at half value on nearly every metric (6x ebitda). Believe catalysts include major index inclusion.
Patrick Wolfe (the guy that plays five people blindfolded simultaneously in chess at Berkshire). Announced the new Ira Sohn San Francisco Excellence in Investing in the Fall. Will be an annual event.
Next up, Einhorn
Jeremy Grantham - GMO
Got out of intense company analysis 20 years ago and into the bullshitting business. So here I am.
7 year forecast updated through May 21. S+P 1.5% pa real, high quality is "aborrently" cheap. Small cap expected return negative. [Long quality/short small crap anyone?]
Bonds grotesquely overpriced. EM 6.1% pa.
Timber is his top pick at 6% real. Didn't lose money through great depression. EM is his second place pick. US quality third. Combination "would make quite an interesting portfolio, I think".
US large high quality at cheapest value ever. "And right when we need them!"
Bubbles always make it back to trend. When you see one, it's time to cash in on some of your Career Risk chips. Avg bubble take 3.5 years to form and slightly faster to return to trends.
Took some time to taunt French and Fama. Made fun of Bernanke.
When you find a bubble, fighting it is incredible pain.
Today's bubble? UK Housing bubble is incredibly massive being supported by variable rate financing (Aussie too). UK housing needs to fall nationwide in price by 33%. Aussie needs to fall 42% to trend.
[TILB - Overall, one of most entertaining speakers]
Steve Eisman - Frontpoint
Subprime Goes to College (for profit education shorting)
Basic short thesis on for profit education. Bad companies, gov't in bed with for profit education, nasty selling habits, etc.
Often gov't grants/loans are 90% of revenue. ITT - 40% op mrgn vs 7-12% for typical gov't contractors. Title 4 has accntd for more than 100% of rev growth. Same for Apollo (growth more than 100% from gov't).
Historically, lower means families seek lower cost instttns. Title 4 inverts this needed relationship - hence the subprime analogy.
Further, the industry doesn't successfully educate their students (on average). Calls out CoCo, Apollo and ESI (ITT). Drop out rates 50-100% per year. Quite alarming, particulalry given student debt that accompanies this. Defaults of gov't guaranteed loans skyrocketing, despite industry obfuscation. When industry makes private loans, they provision 50-60% up front.
None of this matters until gov't cuts them off. Unregulated (loosely regulated) sales practices. Also, schools battle being cut-off by controlling accreditation process (akin to ratings agencies) to stay eligible for govt guarantee loans. BPI example shows how for-profits acquire distressed not for profit schools to get their accreditation.
Gov't looking at instituting new requirements. In particular, a Gainful Employment measurement for grads. Will crush APOL even if cut costs by 15% (40% hit to profit in two years), ESI 50%, COCO 40%, EDMC lose massive money due to debt, Washington Post would go from very profitable to overall loss making.
Believes if nothing is done, on the cusp of social disaster.
Niall Ferguson (Harvard).
No investment experience. Pure academic. Kept accidentally referring to David Tepper (prior speaker) as "Steve." Was an KC yesterday at a Kauffman Conference about Expeditionary Economics. Was hopeful it meant sending Paul Krugman to Somalia.
Believe we should be long "virtue". Even if PIGS cut to austere levels, still will be >100% debt to gdp. Guess what: same analysis shows worse for US and UK. PIGS R US.
Metrics of Doom. Shows cyclically adjusted primary balance: US, UK, Greece and Japan are absymal. Lots of other analysis that keeps showing US is "Out-pigging the PIGS" on all sorts of metrics. All his charts basically show is what won't happen. Problems will explode before them.
40% of US federal debt rolls in next 12 months. Treasuries are a safe haven in the same way Pearl Harbor was. Don't expect to hold a 10 year to maturity.
Shows a list of the Good Boys. Switzerland, Australia, NZ, Denmark, Czech, Australia, Canada, Sweden, Norway, etc.
Good way to diversify away from EM. Some of the same concepts but perhaps less China risk.
Don't argue with nasty fiscal arithmitic. Predicts US has Greece problem by 2012-13.
David Tepper: Appaloosa - 30%+ annualized since 1992.
Spoke at conf in 1998 to 75 people.
Was $13B of AUM last month. Now $12B. Oh well.
Wrote a song but not going to sing it.
Story from 1800s: tells story of horseshit problem that Hance also occasionally shares. Crisis from urban horse "output." Crisis happens, markets adapt, people adapt. Most likely won't be hyperinflation or deflation. The ECB bought govt bonds - the Bundesbank - "holy Christ. it's like the chastity belt is off and the girl is starting to play." The world adapts.
Investment ideas:
AIG - small insurance company (har, har). 8.175 jr sub debt. $4B issue. $24B of common equity. $12B of preferred. $9B of EBIT. Has another $40B of jr debt to his bonds which trade at 72c on dollar. So $70+B of jr securities. Maybe not worth $70B, but probably positive value. Govt owns 80% equity. Do your own work.
CMBS: started investing in late-08. Typical: 30% equity in a property (or 10 eq and 20 mezz). In the mortgage AAA 70%, jr AAAs 10% and then another 8% jr AAAs. Cap rate's not the thing. It's "can they make the payment"? No building going on. Bought an AJ the other day near 20% YTM likely to retire at par. Not looking at today, looking at future.
Equity Market: in 98, talked about Kospi and Samsung and Posco. Not bad ideas at that time period. If you want to make a lot of $ today, financials. BAC will make normalized $2.70. We say worth $27. Santandar (we know people hate it). One of 5-6 banks in world still AA. 30% Spain, majority EM, rest US. Double from here.
Thoughts on the world: thinking back to 97-98 period. History rhymes. Initial sov debt crisis. Lagged by Russia default. Then LTCM. Then Fed eased like crazy and market +50% (begining of end of bull mrkt). Maybe today is the end of the beginning. We know what our troubles are and we can attack them. Won't be that bad either way. Somewhere in the middle.
Sings a quick ditty then says, "I'm done."
Dan Arbess - Perella Weinberg Xerion (restructuring expert - (youngest partner ever at White and Case - led their restructuring group)).
Introduced his son who is a Leukemia survivor (6yrs ago). Loud applause.
Unsustainable global growth model of East lending to West for consumption of its production. World must rebalance. No quick fix. East must consume and West must save. This is bigger than 2008. Fear we and our politicians might not be up to the task. Placid macro backdrop may be gone for balance of our careers (he's probably 45). Success demands we be on the right side of global themes and hedged against dark side of those themes.
Themes we like: shake hands with China (buy what China needs). Short overleveraged Western producers. Hedge debasement (precious metals). Used an example of the West as a boiling frog.
Our nation alone owes China a trillion and a half dollars. Gov't taking over private debts through balance sheet contamination process. Every scenario bad for Euro. Bearish on Euro and Euro sov debt. US Treasuries perhaps short term safe haven, but beware. Confidence in fiat paper will erode. Gold and other precious metals. Prepare for stag-asset inflation.
We need to buy less, eat less and study more. Post Mao'ist China has no social entitlements and we have more than we can afford - it's ironic. Prepare for East to rise up and West to shrink down.
Gov't intervention growing and growing (took an explicit swipe at Rattner who is a speaker later in the day - referncing S-Ratt's pressure when Xerion led the Chrysler Holdouts [as a personal aside, hard to brlieve that was only a year ago]).
Like commodity rich nations (including Africa and jr miners).
Ivanhoe Mines ($13/sh). Owns largest undeveloped copper mine and huge met coal assets. Met coal and other non-core assets worth half market cap. Rio Tinto strategic partner that will own 47% of company. Has bought from $10-16. Down 30% this month. Believe copper mine is implied at half NPV value.
Look for good downstream businesses with big mrkt shares and EM presence. Solutia. Like it a lot.
Even further downstream - EM consumer businesses. YUM Brands. Explosive growth in China.
70% of all products sold in WMT made in China [TILB - wow]. Short high cost leveraged balance sheet G-7 producers.
Doesn't believe in China bubble. Formidable competitive advantage and resource base. True that latest stimulus is inefficient but believe urbanization trend and fiscal situation will drive them through that.
Short Yen vs CAD. Summary: Japan is totally f'd. Canada best G-7 economy.
2008 learned banks aren't safe. 2010 even sovereigns may not be. What's next? American innovation and EM globalization will drive the rest of our careers. Rebalancing will be messy and restorative. Loaded with invstmnt opps.
Sam Zell
No particular stock pitch. Here to tell you thoughts on the environment.
Post election theme of change. We have real change. No doubt. We are going to extremes that will impact investors in the future.
Every year since 1976, I've sent/issued an annual gift that has my thoughts on the next year. Here's what I sent this year:
The Survival of the Fittest (played
Extinction from inabikity to adapt. Shakes out weaker and benefits stronger. Ability to look around the corner and see what's coming. "Charlie...Charlie Darwin...sumpin' smells like fear" [autos, tbtf, swaps, etc. all addressed] "the pie got smaller, who will eat, who will be eaten". "The DNA that will endure is the DNA of the entrepreneur."
"So I guess the message, in less than subtle terms is 'he who adapts will succeed, he who doesn't adapt may not be here next year.'"
Short and to the point. Basically a video of his last music box and the song.
Jon Jacobson (Highfields) Went first because Sam Zell wasn't there yet.
20-30 core positions.
Very worried today. Primarily about the "clowns and the climate" in Washington. 50% of those filing tax returns in 2010 will not pay tax. We will be on the hook for state's liabilities. Administration that is fundamentally anti-business with a rolling antagonism and villification of business. There seems to be something wrong with earning acceptable returns and being successful. Worried about class warfare and social unrest down the road.
As excited about the discounts available today in good businesses as ever. But how do you trust the environment when the rules constantly change.
That said, talking about Sallie Mae. Good underlying biz fundamentals and we understand why it's disliked.
2x pre tax, pre provision earnings. 4x pre tax earnings.
6x net income.
Dealt with refinance concerns. Congress eliminated FFELP in the health care reform bill. Despite that loss, still #1 by far.
Worth $15-25/share. Liquidation/runoff vale $15. By 2011, $0.8 - $1 per share earnings. Potential to acquire servicing rights and improve balance sheet $0-$2+/share ($1/share of earnings power is possible). Biggest, most efficient student loan servicer. Dept of Education has SLM as one of four servicers for Fed direct student loans. Bigger than next 3 combined.
Dominates private student loans. Parents co-sign more than 80% of priv student loans.
Most effective collector of defaulted loans. Biggest mngr of 529 plans.
As FFELP goes away, many smaller student lenders will need to shed servicing as they lose scale. SLM well positioned to buy them.
Mgmt totally aligned. Love mgmt. Co. has retired $6B of unsecured debt at attractive prices in last 12 months. CEO buying with his own money, etc.
87% of balance sheet is term funded. Can easily retire maturities as needed. Appropriately capitalized.
SLM legislation risk. Hard to assess. Every company under attack.
Bank Tax risk. Bankruptcy reform. CFPA could become a regulator. Believe mgmt would literally liquidate if that's the best value per share opportunity.
Below are two sets of notes. One from your intrepid TILB author and the other from BTIG's Mike O'Rourke. O'Rourke writes BTIG's must read "Bedtime with BTIG" every night. While we are not much for technical trading, he provides technical insights and recaps that give a concise, useful review of the day past and preview of the day ahead. In any case, here are the notes. In both cases, these are not exact transcriptions. Also, sadly TILB had to leave in the middle of S-Ratt's brutal pack of lies, causing us to miss Larry Robbins, Bill Ackman, and Seth Klarman. Fortunately for you, O'rourke didn't leave and has complete notes. O'Rourke's notes are first, our's follow.
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BTIG Notes - Ira Sohn
Posted on Thu, May 27th, 2010 at 7:17 am
by Mike O'Rourke
This is a summary of ideas expressed at the 15th Annual Ira W. Sohn Investment Research Conference.
The Ira Sohn Research Conference Foundation is dedicated to the treatment and cure of pediatric cancer and other childhood diseases.
NOTE: The notes below were taken in real time, but we apologize in advance for any transcription errors. THESE ARE THE OPINIONS OF THE SPEAKERS, BTIG DOES NOT AGREE OR DISAGREE WITH ANY OF THE STATEMENTS.
Jonathon Jacobson, Highfields Capital Management
Highfields is a long term value investor. Jacobson is worried about the current investment environment. Despite all of the looming macro headwinds the biggest threat is the “Clowns & Climate in Washington D.C.” Several states are hovering on the edge of bankruptcy and we the taxpayers will wind up paying for those losses. The administration has embarked upon a process of rolling vilification of industry after industry, Health Care, financial Services, Energy, Cable, Soft Drink, etc. The perception in Washington is that if someone has done well in this country, it was done at someone else’s expense. Rather than address the issues politicians will continue to “kick the can down the road.” Fundamentals are hard to handicap when the rules are constantly changing.
Jacobson is bullish on Sallie Mae (SLM). The company is currently misunderstood by the market because it is in transition from being a lending based company to a fee based company. The key point is if Sallie Mae were strictly in a run off mode as the government ends cuts back the FFELP program (which they are not) it would be worth $15, even with a conservative 12% discount rate. It currently has a $5 Billion market capitalization and is trading 2x pre-tax, pre-provision earnings and is trading 4x pre-tax earnings. Most competitors have gone out of business or in the process of exiting the business. Jacobson believes Sallie Mae is worth somewhere between $15-$25 per share. In 2011 he is forecasting $0.80 -$1.00 in earnings power. Additionally the company is well positioned to acquire additional servicing rights as competitors exit the business. Sallie Mae is larger than the 3 other government approved student loan servicers combined. Management is acquiring stock and aligning their interests with shareholders. 87% of the balance sheet is funded to term. Credit losses peaked in Q3 2009. Main risk is regulatory, but if management believes the best move for shareholders is to liquidate the company, they will.
Sam Zell
The theme of the election was change. A major change has occurred within the American economy. One party political dominance is changing how investors will act in the future. It is an environment of survival of the fittest. Zell presented a music video that was an ode to Charles Darwin. Extinction is for those who do not adapt and evolve. The winner is the one who builds the better boat, not the one who rearranges the deck chairs. He who adapts succeeds.
Dan Arbess, Perella Weinberg Partners
The foundations of the global economy are shifting. Fiscal imbalance and sovereign risk are only symptoms of the problems that will fuels this change. The trend of deficit spending over-consumption in the west and the export driven production of the east needs to reverse. Consumption in the east must rise and the west must exercise restraint to bring a semblance of balance back. Macro squalls can wreak havoc on a portfolio, so effective hedging strategies are important. The key them Arbess proposed was “Shaking hands with China.” The way to play the theme is to be long those companies who sell China what it needs and short those who make products that the Emerging Markets can make better. Consumption is only 35% of GDP in China, half of what it is here and the Chinese save half of what they make. China alone will increase its urbanization rate from 46% to 58%, adding 210 million urban residents in 70 million households. They need a lot of stuff to urbanize 20 million people a year, and Arbess wants to be long the guys who will be selling it to them.
Arbess believes weaker currencies and weaker sovereign credits should be sold. He is bearish on the Euro and on EU sovereign debt. This is the endgame of the debt supercycle and confidence in fiat currencies will erode, as such he likes Gold. The deflationary economic environment will lead to monetary debasement. The irony today is post-Maoist China has no entitlements and needs to create some to boost domestic consumptions and the U.S. more entitlements than ever.
He likes commodities and the commodity nations in the G-20 and even Africa, both fundamentally and as a currency debasement hedge. He says own junior mining companies that own big assets close to their customers. These will often start out trading at discounts as much as 90% to their cash flow potential, and often show less downside beta than large caps.
Arbess likes Ivanhoe mines (IVN). Its vast copper and other mineral deposits in Mongolia are close to the same size as Manhattan. Noncore assets are worth half of the current market capitalization of the company. Rio Tinto is a key partner of Ivanhoe, and its presence reduces the risk for the investor. Rio recently purchased shares above the current price levels Backing out the coal business and other peripheral assets, the stock at its current price around $13 creates the copper mine at less than $2.5 billion, which is less than half of what it’s worth on an NPV basis, and a tiny fraction of inground metal value, assuming $2.50 long term copper and $1000 gold. At recent commodity prices, Arbess thinks the stock could be worth up to $30 to Rio.
Arbess also noted Solution (SOA) and Celanese (CE) as other ways to play his theme and believes both have 50% upside from current levels. Another name he likes is YUM Brands (YUM) who had 37% growth in China last year. China’s successes of the last 30 years are real and the country is fiscally strong with $2.5 Trillion in reserves and fiscal responsibility. Another play on his theme is shorting the Japanese Yen versus the Canadian Dollar. Japan is shrinking while its debt is growing, exactly the opposite of the urbanizing emerging markets. Canada, by contrast, has arguably the soundest economy in the G-7. No coincidence, they really don’t like leverage up there. And the country is rich in Shake Hands With China resources. This is the end of the buy now and pay later mentality. The global rebalancing process will be messy, but it will also be rife with opportunity.
David Tepper, Appaloosa ManagementTepper started with an anecdote about the horse “output” problem in 19th century New York City and forecast that city would be buried under horse excrement . The moral of his story was “don’t listen to the crap.” Tepper was highlighting that the world changes and evolves and people and societies adapt. Tepper noted that everyone of the “PIIGS” has instituted austerity programs, something many would not have believed would happen. He mentioned the ECB buying debt despite its conservative Bundesbank roots and the Spanish Government shutting down the largest Caja run by the Roman Catholic church. All of these things at one point seemed unthinkable, but this is society adapting to the situation.
Tepper likes the AIG-8.175% Junior Subordinated Debt. It is trading at $0.72 on the dollar giving it a current yield of 11%. Right now there is $73 Billion of capital structure below it $49 Billion in Preferred and $24 Billion in equity. He thinks those two combined are really only worth $40 Billion. He warned that this did not mean the equity is worth zero, there is some option value and a conversion of government preferred into common could distort a capital structure arbitrage if set up. Tepper says AIG has $9 Billion of EBIT and other assets worth $45 Billion.
Tepper noted there are opportunities in the CMBS market. He said what you should really care about in the CMBS market is “Can they make the coupon?” These are 10 year securities and if they can make the coupon you should ask what will the environment be in 2016? You should not be looking at today, you should be looking at the future.
Tepper still likes Bank of America (BAC). He believes normalized earnings are $2.65-$2.70 per share and has a $27 price target. He also likes Banco Santander (STD). it is one of a handful AA rated banks in the world (no major U.S. bank is as high as AA). Only 30% of the banks exposures are to Spain, it is really an Emerging Market/Global play. They will earn $1.50 and that has the potential to double. Tepper concluded noting that 2000 was the beginning of the end and that today we are at the end of the beginning.
Niall Ferguson, Harvard University
Ferguson proposed being “Long virtue.” Focusing on nations with good fiscal situations as opposed to the overly indebted Western governments. Citing Bank of International Settlements long term forecasts Ferguson highlighted Pigs “R” Us. Which means that the U.S. and the U.K. are in equally precarious fiscal situations as the “PIIGS.” Ferguson noted that 40% of U.S. Debt is short term and that type of duration leaves one open to roll risk. “U.S. Debt is a safe haven similar to the way Pearl Harbor was.” Ferguson highlighted the “good boys, ” nations with better fiscal situations. Topping the list was Norway with net debt of -140% of GDP due to the nations effective management of its oil reserves. Other good boys were Sweden, Denmark and Switzerland. The U.S. leaves itself at risk by being highly reliant upon foreign capital.
Steve Eisman, Frontpoint
Eisman’s theme was “Subprime goes to College.” After what transpired in the subprime mortgage market a few years ago, Eisman though he would never see a business with the capability to prey upon the underprivileged to those extremes again. Then he came across the For Profit Education industry. Despite only having 10% of the students these schools get 25% of the government aid. The industry is in bed with Washington due to serious lobbying efforts and the back and forth of executives from the companies to Government positions and back. Title IV loans offered by government programs comprise 90% of for profit education revenues.
ITT Educational (ESI) has higher margins than Apple (AAPL), and margins in the for profit education industry are 3-4 times those in other industries that deal with the government. For profit schools target poorer people, often leading them towards degrees that won’t get them jobs. The companies also maneuver to acquire small failing schools in order to get their accreditation. The loans the students take out for profit education have high default rates. ESI and Corinthian (COCO) often provision 50%-60% for the loans they privately offer, so the default rates overall are likely 50%. The companies in the industry are Education Management (EDMC), COCO, Apollo Group (APOL) and Washington Post (WPO). WPO, more than 100% of its EBITDA comes from for profit education. Eisman calculates there could be $300 Billion in defaults over the next 10 years. The key catalyst going forward is that the government will publish a rule for gainful employment , that threatens the companies. The government is also seeking to fix the accreditation process.
Jeremy Grantham, GMO
IN GMO’s 7 year forecast U.S. High quality names are aberrantly cheap and should provide 7.6% real return per year. In constructing a portfolio Grantham said it should be 40% U.S. Blue Chips, 20% Emerging Markets and 30% EAFE Blue chips. Grantham notes that bonds are “grotesquely” overpriced predicted to post a real return 1.7% per year. Grantham’s 3 choices or recommendations are Timber which has 7.5% forecasted real annual return. Then Grantham likes Emerging Markets which he believes will go to a premium P/E to the rest of the world. Finally he likes high quality U.S. blue chaps. They are trading at a 17% discount to fair value and 55% of earnings come from around the world.
The bedrock of Grantham’s thinking is that “Things regress to the mean.” Of the 34 bubbles GMO has identified it takes about 3.5 years for the bubble to run up and it comes back down to the trendline nearly as quickly. All bubbles reverse. Grantham believes both the U.K. and Australia are in housing bubbles. The risks to betting against bubbles are career risk and business risk. Grantham believes debt has nothing to do with growth, and debt has less influence than most think. Grantham concluded by noting the importance of the upward bias in the third year of the presidential cycle.
David Einhorn, Greenlight Capital
Einhorn’s theme was “Good news for the Grandchildren.” In essence the fiscal challenges of the United States are so severe that they will need to be dealt with before our grandchildren inherit them. Our own future is at risk. Average public sector pay is nearly double that of private sector pay. Public sector workers “Retire to rehire,” and fuel a system that is heading in the same direction as Greece. Einhorn wonders how long will the capital markets continue to let the U.S. keep borrowing. Nobody knows where the line is, not the Government nor the ratings agencies. A credible plan to avoid the debt trap is necessary. Europe is a prequel to what will happen here.
Einhorn is short the ratings agencies Moody’s (MCO) and McGraw-Hill (MHP). Credit rating agencies provide a false sense of security and are pro-cyclical. Einhorn also questioned the validity of the Government CPI data . Citing Shadowstats, Einhorn noted inflation calculated under the 1980 methodology would be 9%, as opposed to the less the 2% it is today. The lower real rates will fuel inflation and bad behavior and create bubbles. This easy policy of bubble bailouts is an unhealthy cycle.
He believe the lower real rates tempts the central bank to monetize debt. As a hedge against this Einhorn is long Gold as well as African Barrick (ABG LN) . ABG LN trades at ½ the value of its peers, 6x Ebitda and with a 10% free cash flow yield.
James Dinan, York CapitalDinan commenced by noting people adapt, markets adapt and animal spirits prevail. Dinan believes large companies are in good shape. Dinan likes Coca Cola Enterprises (CCE). The company is going through restructuring in which Coca Cola (KO) is giving CCE $10 per share and some European bottling assets in exchange for U.S. bottling assets. Dinan stated Europe is a better place than the U.S. for the bottling business, due to less competition. The deal also gives CCE the option to expand its European footprint. After the deal and receiving the $10 per share new CCE will be $15 and trade 10x earnings and 6x EBITDA. New CCE will have 20% gross upside.
Dinan’s next long idea was ING Groep (ING). ING has a global presence as a bank and insurance company. As part of the bailout the company received during the crisis the company must split its banking and insurance businesses by 2013. The company is currently trading at €6.25 which is .6x book value. Dinan believes it can go to 1x book which would make it worth €8.50-€9.20 per share. The life insurance divestiture could be used to pay back the Government bailout, or it could spin out the insurance business. An 8x-10x P/E multiple on the combined bank and insurance company would make it worth €14-€18.
Dinan also sees opportunity in post bankruptcy equities. Currently one he is investing in is Lyondell (LALLF). Currently the stock is trading below its reorganization plan value. Q1 earnings tracked well ahead of expectations especially in the companies commodity business. A sum of the parts valuation gives Dinan a $22-$28 price target.
Steve Rattner
The former advisor to Treasury on the Auto industry restructuring provided a defense for the Obama Administration’s handling of TARP, the Stimulus (EESA), the Stress Test (SCAP) and the Auto rescue. Rattner said the Administration sought the middle ground on most issues and gave examples of the extreme views in each case.
Regarding the Auto industry restructuring Rattner addressed the question of whether the UAW received more than it deserved. Rattner said that Labor was a critical creditor and all stakeholders received more than they would have in an outright liquidation. Rattner noted that in the Chrysler plan the UAW’s VEBA received 40%-50% of what they were owed. In the GM plan VEBA received 84%-92% of what it was owed. In both cases warranty holders, dealers and trade/suppliers all received 100 cents on the dollar. Rattner used this as an example that the plans sought to protect as much franchise value as possible.
Rattner offered what to expect from the Administration going forward. He said the government will remain involved in the Financial sector. He noted taxes are going up. The Administration has avoided protectionism and is leaving business in the industrial and manufacturing sector alone.
Larry Robbins, Glenview Capital Management
Robbins started asking the question of why is the market’s P/E so low. The 3 potential explanations he offered were the “E” is wrong and estimates could be too high, or “the bigger the D.C. the smaller the P/E.”The last reason and one he highlighted was that it is not a math problem, but it is a psychology problem. He note market participants are suffering from Post Traumatic Stress Disorder.
Robbins noted that individual stocks were one of the best ways to tackle an uncertain environment. He looks for stable earnings growth, potential for multiple expansion and positive optionality. Robbins likes McKesson (MCK). He notes earnings are growing at 18% and it is trading under 11x forward earnings. The company proved it is acyclical by posting growth in Q1 2009. Robbins highlighted he expects MCK to have $5.2 Billion of “Dry Powder.” This is a combination of cash and Free Cash Flow expected to be thrown off over the next 18 months. Robbins also likes Express Scripts (ESRX). Earnings are growing 35% and although that won’t be sustainable it will still continue fast growth. Management has been superior over the past decade in retiring stock. The company is trading 14x 2011 earnings and under 13x Free Cash Flow. Robbins next pick was Life Technologies (LIFE) which is in a consolidating and over capitalized industry. The company has a 80% consumable product mix and is trading 11.5x 2011 earnings. Robbins last pick was Fidelity National Information. The company rebuffed private equity takeover attempt because the price was not high enough and figured they could do the same thing Private Equity planned by doing a leveraged recapitalization. The company is tendering to buy $2.5 Billion of shares , or 22% of the outstanding. Robbins thinks they could have done $3.5 Billion but were being conservative. Earnings grow this 15%-23% and the company is trading under 12x 2011 and 10x Free Cash Flow.
Bill Ackman, Pershing Square
Ackman started by outlining how he believed the credit ratings business should be reformed. The short version is NRSRO’s should not be allowed to rate an issue until 60 days after it comes. That would create a buyside environment that would attempt to handicap what the rating should be using market forces. The underwriter would also need the instrument to hold up in the secondary market and therefore is incentivized to make sure it is a quality product. All relevant information should be disclosed to the market and the ratings agency should disclose its model.
From there Ackman went into GGP part two. GGP will be split into two companies GGP and GGO. GGP will have 200 regional malls. It will have a competitive advantage because 80% of the properties will be single property non-recourse financing . Company owns 31% of Aliansce (ALSC3 BZ) in Brazil. GGP is benefitting from the economic recovery. GGO is where GGP’s noncore assets will go. They include housing development land, land in Hawaii, land on the Las Vegas strip and South Street Seaport. Ackman referred to GGO, that he hopes it to be a mini Berkshire Hathaway. Ackman thinks new GGP will be worth $15 and new GGO will be worth $5. He finished by saying he bought 150 million Citigroup shares but did not give his thesis.
Seth Klarman, Baupost Group
Klarman delivered what would be his opening statement if ever called before Congress. Klarman noted that most people on Wall Street operate honestly, ethically and provide good service. It is the land of caveat emptor and transactions should be entered skeptically. When it comes to the complexity of derivatives, the purchaser should know they will wind up overpaying. There is a culture of compliance. He guides his firm with two rules. The Wall Street Journal Rule, don’t do anything you would not be willing to read about in the WSJ the next day. The second is the football field rule, if run to close to the sideline you increase the risk of running out of bounds, instead cut to the middle. Financial Transactions among consenting adults are an important part of the capitalist system. He has a fiduciary obligation to his clients, not his counterparties. Short sellers are the policemen of the financial markets.
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TILB Notes - Ira Sohn - these are in reverse order because we were emailing them one by one and I'm too lazy to cut and paste to reorder them.
Steve Rattner - ex Quadrangle, Treasury Car Czar, Lazard.
Reflections on crisis. Necessary and appropriate response to crisis. TARP was critically important. Stimulus package - not perfect but good. Stress Test for banks - restored confidence. Auto rescues (detail to come).
Believes Administration deserves credit for finding the middle ground.
Autos: no private capital available. Would have been chpt 9, not chpt 11. Labor was a critical creditor to these companies. Nothing abnormal about different stakeholders getting different recoveries. Believes every creditor received more than they would have in a liquidation. Doesn't believe they abrogated or changed law.
Put $50B into GM and believe it's investment worth $40B today on paper. Deems that 20% loss a success. [TILB: Conveniently left Chrysler out of that analysis]
I can't stand listening to him any further. No more notes on S-Ratt.
Jamie Dinon - York Capital
Don't think end is near. People adapt, societies adapt, etc. Equities are a good place to be if you're worried about that. Flexible, long duration, inflation resistant (albeit perhaps lagged).
Event driven:
CCE (Coke Bottling) - KO buying domestic bottling assets for $10/share. Left with European assets plus KO's Swedish and Norwegian bottlers. European macro for KO better than US - faster growing due to low penetration, better comptttv position vis a vie Pepsi and other bottling competitio, option to buy KO's Germany business as well as potential for other European assets. 6x EBITDA and <10x earnings for the stub. Comps trade at 8x ebitda and 13-15x. Stub at $15 vs comps implied $20-25. Dual listing catalyst. Safe business.
ING - Netherlands global bank. (All numbers in euro). Had Alt-A problems in crisis. Received Dutch bailout. Forced by EU to split insurance from banking. Sum of Parts: insurance - 30% in developed Europe (assume 0.7x bk in developed markets and 1-2x bk in EM, so overall 1x bk assume). Backing out insurance, €9.30 tangible book for bank. Trades today at €6. Deserves better than book, decent bank. Decent banks should trade > book.
Like post-bk equities. "Resurgence" phase.
Lyondell-Basel - ticker: LALLF came out of bk in April. $9.5B mrkt cap. Below plant value and below rejected bid from Reliance. Bk plan calls for 1.8B ebitda in 2010. Did $0.6B in Q1. Specialities business is rock solid and does 1B ebitda like clockwork and was on track in Q1. So the non-specialty business is crushing it if you back into the projections for that business. Apollo is biggest owner. Sum of Parts is $18-22B. Normalized ebitda $3.5B. Put 5-6x multiple on that and big upside.
Liquidation Play: Icelandic bank Keupthenk (spelling sorry). Claims trade at 23c. 25% Yield to Recovery. Base case 39c. Downside 22c. Upside mid 50s. 7th largest bk in history. 27% market price in cash. Most of the balance is performing loans.
David Einhorn: Greenlight
Title "Good News for the Grandchildren" [referring to passing budget debts to grandkids]
Obama knows what he wants to do on every issue in advance, but he wants to start a blue ribbon commission for dealing with debt w/o promising to actually do anything about it.
This won't be our grandchildrens' problem - it will be our generation's problem. The mount of debt is mind-numbing. Gov't acctng is done on a cash basis, so future promises (unfunded mandates/entitlements) aren't even counted yet.
Rails on average public sector worker situation vs private sector. Ridiculous skew of compensation and job security. Amount of gov't workers has now made them a critical voting block.
Questions: 1) how long will capital markets accept this? 2) how much liability can we pay via central bank monetization?
AAA financial instttns collapsed and nobody saw it coming, even as it became inevitable in retrospect. Think of the implication to gov't.
Using The Administration's 10 year forecast which assumes low rates and robust economic growth shows structural deficits through the whole period (just in time for unfunded mandate costs to kick in).
Should get rid of ratings agencies entirely or at least rid of their govt legislated position. Made fun of ratings agencies using their own quotes (especially the sovereign analysts).
Procyclical ratings agencies will cause problems at the worst moment. Ill-timed (from borrower's perspective) downgrade can serve as a coup de gras.
Zero risk weighting for banks to buy gov't debt will massively exacerbate the problem. Practically ensures the problem will spread fast.
Greenlight still short Moody's and McGraw Hill (S+P).
Monetization likely. May even show up in gov't statistics (sarcastically delivered). Recent bout of of QE not showing CPI ramp may have provided central bankers false confidence.
Shadow Stats says pre-1980 methodology would show 9% CPI today vs 2% govt reported. Lots of other stats on bad govt CPI stats.
[Summary from TILB so far - buy gold]
Low rates drives "wealth effect" by driving up capital market asset prices. This is fake.
Failed banks balance sheets most recent financial statements show solvency despite the huge losses fdic takes upon failure. This is almost certainly also true in "solvent" banks. Easy money policy used to bail them out.
Low rates creating an addiction. Japan can't even accept normalization.
If the emergency has passed, why still have 0% rate emergency policy? Negative consequences in addition to debasement/inflation: bubble inflation [malinvestment risk]. Rips Bernanke, etc.
Fed seems to want to create a new bubble. [Goes through history of Greenspan's bubble machine and into Bernanke's sov debt bubble...]
Gold, African Barrick Gold (ABG). ABG trades at half value on nearly every metric (6x ebitda). Believe catalysts include major index inclusion.
Patrick Wolfe (the guy that plays five people blindfolded simultaneously in chess at Berkshire). Announced the new Ira Sohn San Francisco Excellence in Investing in the Fall. Will be an annual event.
Next up, Einhorn
Jeremy Grantham - GMO
Got out of intense company analysis 20 years ago and into the bullshitting business. So here I am.
7 year forecast updated through May 21. S+P 1.5% pa real, high quality is "aborrently" cheap. Small cap expected return negative. [Long quality/short small crap anyone?]
Bonds grotesquely overpriced. EM 6.1% pa.
Timber is his top pick at 6% real. Didn't lose money through great depression. EM is his second place pick. US quality third. Combination "would make quite an interesting portfolio, I think".
US large high quality at cheapest value ever. "And right when we need them!"
Bubbles always make it back to trend. When you see one, it's time to cash in on some of your Career Risk chips. Avg bubble take 3.5 years to form and slightly faster to return to trends.
Took some time to taunt French and Fama. Made fun of Bernanke.
When you find a bubble, fighting it is incredible pain.
Today's bubble? UK Housing bubble is incredibly massive being supported by variable rate financing (Aussie too). UK housing needs to fall nationwide in price by 33%. Aussie needs to fall 42% to trend.
[TILB - Overall, one of most entertaining speakers]
Steve Eisman - Frontpoint
Subprime Goes to College (for profit education shorting)
Basic short thesis on for profit education. Bad companies, gov't in bed with for profit education, nasty selling habits, etc.
Often gov't grants/loans are 90% of revenue. ITT - 40% op mrgn vs 7-12% for typical gov't contractors. Title 4 has accntd for more than 100% of rev growth. Same for Apollo (growth more than 100% from gov't).
Historically, lower means families seek lower cost instttns. Title 4 inverts this needed relationship - hence the subprime analogy.
Further, the industry doesn't successfully educate their students (on average). Calls out CoCo, Apollo and ESI (ITT). Drop out rates 50-100% per year. Quite alarming, particulalry given student debt that accompanies this. Defaults of gov't guaranteed loans skyrocketing, despite industry obfuscation. When industry makes private loans, they provision 50-60% up front.
None of this matters until gov't cuts them off. Unregulated (loosely regulated) sales practices. Also, schools battle being cut-off by controlling accreditation process (akin to ratings agencies) to stay eligible for govt guarantee loans. BPI example shows how for-profits acquire distressed not for profit schools to get their accreditation.
Gov't looking at instituting new requirements. In particular, a Gainful Employment measurement for grads. Will crush APOL even if cut costs by 15% (40% hit to profit in two years), ESI 50%, COCO 40%, EDMC lose massive money due to debt, Washington Post would go from very profitable to overall loss making.
Believes if nothing is done, on the cusp of social disaster.
Niall Ferguson (Harvard).
No investment experience. Pure academic. Kept accidentally referring to David Tepper (prior speaker) as "Steve." Was an KC yesterday at a Kauffman Conference about Expeditionary Economics. Was hopeful it meant sending Paul Krugman to Somalia.
Believe we should be long "virtue". Even if PIGS cut to austere levels, still will be >100% debt to gdp. Guess what: same analysis shows worse for US and UK. PIGS R US.
Metrics of Doom. Shows cyclically adjusted primary balance: US, UK, Greece and Japan are absymal. Lots of other analysis that keeps showing US is "Out-pigging the PIGS" on all sorts of metrics. All his charts basically show is what won't happen. Problems will explode before them.
40% of US federal debt rolls in next 12 months. Treasuries are a safe haven in the same way Pearl Harbor was. Don't expect to hold a 10 year to maturity.
Shows a list of the Good Boys. Switzerland, Australia, NZ, Denmark, Czech, Australia, Canada, Sweden, Norway, etc.
Good way to diversify away from EM. Some of the same concepts but perhaps less China risk.
Don't argue with nasty fiscal arithmitic. Predicts US has Greece problem by 2012-13.
David Tepper: Appaloosa - 30%+ annualized since 1992.
Spoke at conf in 1998 to 75 people.
Was $13B of AUM last month. Now $12B. Oh well.
Wrote a song but not going to sing it.
Story from 1800s: tells story of horseshit problem that Hance also occasionally shares. Crisis from urban horse "output." Crisis happens, markets adapt, people adapt. Most likely won't be hyperinflation or deflation. The ECB bought govt bonds - the Bundesbank - "holy Christ. it's like the chastity belt is off and the girl is starting to play." The world adapts.
Investment ideas:
AIG - small insurance company (har, har). 8.175 jr sub debt. $4B issue. $24B of common equity. $12B of preferred. $9B of EBIT. Has another $40B of jr debt to his bonds which trade at 72c on dollar. So $70+B of jr securities. Maybe not worth $70B, but probably positive value. Govt owns 80% equity. Do your own work.
CMBS: started investing in late-08. Typical: 30% equity in a property (or 10 eq and 20 mezz). In the mortgage AAA 70%, jr AAAs 10% and then another 8% jr AAAs. Cap rate's not the thing. It's "can they make the payment"? No building going on. Bought an AJ the other day near 20% YTM likely to retire at par. Not looking at today, looking at future.
Equity Market: in 98, talked about Kospi and Samsung and Posco. Not bad ideas at that time period. If you want to make a lot of $ today, financials. BAC will make normalized $2.70. We say worth $27. Santandar (we know people hate it). One of 5-6 banks in world still AA. 30% Spain, majority EM, rest US. Double from here.
Thoughts on the world: thinking back to 97-98 period. History rhymes. Initial sov debt crisis. Lagged by Russia default. Then LTCM. Then Fed eased like crazy and market +50% (begining of end of bull mrkt). Maybe today is the end of the beginning. We know what our troubles are and we can attack them. Won't be that bad either way. Somewhere in the middle.
Sings a quick ditty then says, "I'm done."
Dan Arbess - Perella Weinberg Xerion (restructuring expert - (youngest partner ever at White and Case - led their restructuring group)).
Introduced his son who is a Leukemia survivor (6yrs ago). Loud applause.
Unsustainable global growth model of East lending to West for consumption of its production. World must rebalance. No quick fix. East must consume and West must save. This is bigger than 2008. Fear we and our politicians might not be up to the task. Placid macro backdrop may be gone for balance of our careers (he's probably 45). Success demands we be on the right side of global themes and hedged against dark side of those themes.
Themes we like: shake hands with China (buy what China needs). Short overleveraged Western producers. Hedge debasement (precious metals). Used an example of the West as a boiling frog.
Our nation alone owes China a trillion and a half dollars. Gov't taking over private debts through balance sheet contamination process. Every scenario bad for Euro. Bearish on Euro and Euro sov debt. US Treasuries perhaps short term safe haven, but beware. Confidence in fiat paper will erode. Gold and other precious metals. Prepare for stag-asset inflation.
We need to buy less, eat less and study more. Post Mao'ist China has no social entitlements and we have more than we can afford - it's ironic. Prepare for East to rise up and West to shrink down.
Gov't intervention growing and growing (took an explicit swipe at Rattner who is a speaker later in the day - referncing S-Ratt's pressure when Xerion led the Chrysler Holdouts [as a personal aside, hard to brlieve that was only a year ago]).
Like commodity rich nations (including Africa and jr miners).
Ivanhoe Mines ($13/sh). Owns largest undeveloped copper mine and huge met coal assets. Met coal and other non-core assets worth half market cap. Rio Tinto strategic partner that will own 47% of company. Has bought from $10-16. Down 30% this month. Believe copper mine is implied at half NPV value.
Look for good downstream businesses with big mrkt shares and EM presence. Solutia. Like it a lot.
Even further downstream - EM consumer businesses. YUM Brands. Explosive growth in China.
70% of all products sold in WMT made in China [TILB - wow]. Short high cost leveraged balance sheet G-7 producers.
Doesn't believe in China bubble. Formidable competitive advantage and resource base. True that latest stimulus is inefficient but believe urbanization trend and fiscal situation will drive them through that.
Short Yen vs CAD. Summary: Japan is totally f'd. Canada best G-7 economy.
2008 learned banks aren't safe. 2010 even sovereigns may not be. What's next? American innovation and EM globalization will drive the rest of our careers. Rebalancing will be messy and restorative. Loaded with invstmnt opps.
Sam Zell
No particular stock pitch. Here to tell you thoughts on the environment.
Post election theme of change. We have real change. No doubt. We are going to extremes that will impact investors in the future.
Every year since 1976, I've sent/issued an annual gift that has my thoughts on the next year. Here's what I sent this year:
The Survival of the Fittest (played
Extinction from inabikity to adapt. Shakes out weaker and benefits stronger. Ability to look around the corner and see what's coming. "Charlie...Charlie Darwin...sumpin' smells like fear" [autos, tbtf, swaps, etc. all addressed] "the pie got smaller, who will eat, who will be eaten". "The DNA that will endure is the DNA of the entrepreneur."
"So I guess the message, in less than subtle terms is 'he who adapts will succeed, he who doesn't adapt may not be here next year.'"
Short and to the point. Basically a video of his last music box and the song.
Jon Jacobson (Highfields) Went first because Sam Zell wasn't there yet.
20-30 core positions.
Very worried today. Primarily about the "clowns and the climate" in Washington. 50% of those filing tax returns in 2010 will not pay tax. We will be on the hook for state's liabilities. Administration that is fundamentally anti-business with a rolling antagonism and villification of business. There seems to be something wrong with earning acceptable returns and being successful. Worried about class warfare and social unrest down the road.
As excited about the discounts available today in good businesses as ever. But how do you trust the environment when the rules constantly change.
That said, talking about Sallie Mae. Good underlying biz fundamentals and we understand why it's disliked.
2x pre tax, pre provision earnings. 4x pre tax earnings.
6x net income.
Dealt with refinance concerns. Congress eliminated FFELP in the health care reform bill. Despite that loss, still #1 by far.
Worth $15-25/share. Liquidation/runoff vale $15. By 2011, $0.8 - $1 per share earnings. Potential to acquire servicing rights and improve balance sheet $0-$2+/share ($1/share of earnings power is possible). Biggest, most efficient student loan servicer. Dept of Education has SLM as one of four servicers for Fed direct student loans. Bigger than next 3 combined.
Dominates private student loans. Parents co-sign more than 80% of priv student loans.
Most effective collector of defaulted loans. Biggest mngr of 529 plans.
As FFELP goes away, many smaller student lenders will need to shed servicing as they lose scale. SLM well positioned to buy them.
Mgmt totally aligned. Love mgmt. Co. has retired $6B of unsecured debt at attractive prices in last 12 months. CEO buying with his own money, etc.
87% of balance sheet is term funded. Can easily retire maturities as needed. Appropriately capitalized.
SLM legislation risk. Hard to assess. Every company under attack.
Bank Tax risk. Bankruptcy reform. CFPA could become a regulator. Believe mgmt would literally liquidate if that's the best value per share opportunity.
Monday, April 19, 2010
Private Prison Operator Cornell Companies Agrees To Acquisition By Competitor Geo Group
Long time readers know that Bill Ackman's Pershing Square pitched Cornell Companies' competitor Corrections Corp of America (CXW) last fall (see pitch here). Today, one of Correction Corp's biggest direct competitors Cornell Companies agreed to be taken out by another comp, Geo Group, for a 35% premium, further consolidating the private prison industry (link to press release). TILB views this as very positive for the private prison industry as it further improves the oligopolistic characteristics of an industry that already has reasonable competitive dynamics.
While municipal financial difficulties are a cyclical headwind to any and all budgetary items, our view is the secular tailwind is intact as their scale, expertise and flexibility make them an attractive alternative to states investing huge capital in their own public systems.
Wednesday, December 30, 2009
Tilson's Response To Hovde's Response To Pershing Square's Response To Hovde's Response To Pershing Square's Views On Mall REITS And GGP Specifically
Whitney Tilson (T2 Partners) re-inserts himself into the Pershing Square vs. Hovde debate on GGP. To be fair, Hovde did take a shot at Tilson's GGP analysis on page 63of its Dec. 29th presentation. For those wondering, T2's analysis is largely a derivation of Pershing Sqaure's, which is not surprising given the two firms' histories of sharing research and investment ideas (and Tilson and Ackman's long friendship).
Tilson emailed the following to his regular distribution list:
Tilson emailed the following to his regular distribution list:
Hovde Capital yesterday released its response (link here) to Pershing Square’s rebuttal (link here) (and, to a minor extent, and our rebuttal (link here)) of Hovde’s initial report on GGP (link here).TILB is on record as saying we love to see the debate. It's healthy for markets and educational.
Our quick take is that it’s more of the same – like Hovde’s first report, there are a few good points (nothing we hadn’t already considered) mixed in with many arguments that are either factually incorrect or misleading, or with which we simply disagree. In short, there’s nothing new that changes our view regarding the attractiveness of GGP (it remains by far our largest position).
Before proceeding, we want to make clear how much we enjoy the debate and think our markets would be much healthier if there were a similarly detailed exchange of viewpoints for EVERY stock!
To some extent, the debate is now about different views of the future: Hovde believes that consumer spending will be terrible for an extended period and that bankruptcies among mall-based retailers will continue or worsen, which will translate into severely declining NOI for GGP over time. Pershing believes that the worst is behind us: that unemployment has peaked, consumer spending has stabilized and may even be picking up a bit, and that retailers are in remarkably good shape in light of what they’ve been through over the past 18 months, all of which will translate into approximately stable NOI. Whether Hovde or Pershing is right about GGP over time will, to some extent, depend on future macro factors, which are obviously impossible to predict with certainty.
That said, good analysis matters and we think Hovde’s is sorely lacking, primarily in the following areas:
1) Hovde’s most serious mistake is misunderstanding (or misrepresenting) what will likely happen to GGP’s unsecured debt. Hovde assumes that it either remains outstanding (throughout its presentation, Hovde calculates GGP’s leverage and interest payments assuming that the debt remains outstanding, which is the main reason its analysis differs from Pershing’s and ours – see page 63, for example) or that it converts to equity, which will result in “significant dilution” (page 72). Hovde makes explicit this assumption when it claims that Pershing “does not use consistent assumptions” regarding what happens to the unsecured debt on page 35 of its report.
Hovde doesn’t appear to understand bankruptcy law and what will likely happen to the unsecured debt. There is almost no chance that it will remain outstanding: it will either be refinanced or, more likely, be converted into equity (this is what Pershing assumes – there is no inconsistency). But here’s the key: it will NOT BE DILUTIVE because it will convert AT FAIR VALUE, as determined by the bankruptcy judge. Of course, if the judge determines that fair value is $1/share, then it would be massively dilutive, but that’s not going to happen. The judge has a great deal of discretion in determining fair value, but will certainly take into consideration the current stock price, comps and the price of any equity offering(s) GGP might do.
For example, as soon as GGP exits bankruptcy and its stock is relisted (it currently trades on the pink sheets, which means most institutional investors can’t own it), it will be a must-own stock for every REIT fund (a big catalyst Hovde misses). To meet this demand and pay down some debt, GGP might issue equity – and the negotiated price at which this stock is sold would likely weigh heavily on the judge’s determination of fair value (and would not be dilutive). Of course, if someone like Simon were to buy GGP at, say, $20, the debt would convert at this price – and again, it wouldn’t be dilutive.
2) Hovde takes seven pages (6-12) arguing for its definition of NOI, but there’s no right answer here. NOI is like free cash flow: different people calculate it in different ways. But however one calculates it, it’s important to be consistent – which Hovde is not. It uses the most conservative assumptions to minimize GGP’s NOI, but then fails to do so for Simon, making its comp analysis deeply flawed.
3) Speaking of comps, Hovde writes: “to suggest GGP should trade at the LOWER cap rate than SPG is LAUGHABLE in our view” (pages 22-23). Hovde can laugh all it wants, but there are very good arguments for why Simon is, in fact, the best comp for GGP. For starter, both have very similar mall portfolios with a national footprint (unlike Macerich, which Hovde cites as a better comp on page 63; MAC also has debt issues that are more significant than what GGP will likely have post-bankruptcy). In addition, GGP will likely have a BETTER liability profile post-bankruptcy, with no maturities until January 2014. Finally and most importantly, GGP is for sale and Simon isn’t, so there should be a premium for GGP reflecting a possible sale of this strategic asset.
4) Hovde’s analysis treats GGP as a collection of assets, but it’s more than that. The fact that GGP is in bankruptcy has put it into play, so there is a once-in- a-lifetime opportunity for Simon, Brookfield or someone else to acquire a national platform, as highlighted in this quote from the WSJ:
The opportunity “is a potentially transformational event that doesn’t come along very often,” says Steve Sakwa, an analyst with International Strategy and Investment Group Inc.
5) Hovde dismisses the likelihood that GGP might be acquired (pages 51-55), focusing only on Simon and not even mentioning Brookfield, which may in fact be the more likely acquirer due to fewer anti-trust concerns and the need for a national platform (which Simon already has). As noted above, Hovde misses the value of GGP as a strategic asset – no doubt, there’s lots of distressed inventory out there, but only one national platform for sale like GGP.
Finally, Hovde finds it “telling” that Simon and Brookfield bought GGP’s unsecured debt, but not the equity, even when the equity was at a much lower price. But it’s not as telling as Hovde thinks for a number of reasons. First, it’s possible that Simon and/or Brookfield do in fact own the equity – if either bought less than 5% of GGP, it wouldn’t have to file (in any case, for anti-trust reasons, they couldn’t acquire more than 7.5%). Also, at the time they bought GGP’s debt it was very cheap and they might have reasonably concluded that it represented a better risk-reward than the equity.
6) Hovde argues that GGP’s rental rates and leasing spreads are very poor and will likely get worse (pages 15-18). They have indeed been under pressure, but Hovde is making the classic investing mistake of projecting the immediate past indefinitely into the future. What Hovde is missing is that GGP over the past year, knowing that it was in a poor negotiating position due to the macro environment and its own bankruptcy, has been renewing leases mainly on a short-term basis. These renewals have indeed been done at low rates, but this isn’t likely to be a permanent state of affairs. The macro environment has at least stabilized and may be improving and GGP will soon either be acquired or exit bankruptcy, so its negotiating position will strengthen and therefore rental rates and leasing spreads will likely improve.
7) On pages 28 and 33, Hovde repeats the charts from its first presentation (pages 33-34), showing that “Commercial Real Estate Prices Have Dropped 43% Since the Peak” and that cap rates are moving higher under the heading: “Despite Speculation to the Contrary, Cap Rates for All Property Types Are Moving Higher, Not Lower. Does Pershing Square Believe These Transactions Did Not Happen?” But the CRE chart doesn’t include mall real estate and the cap rate chart, while showing cap rates for virtually every other type of commercial real estate, is MISSING data for malls! (The cap rate for mall REITs has fallen dramatically from earlier this year.)
8) Hovde paints a very bearish picture of retail sales (page 61), but the latest data contradicts this – for example, an article in the NYT earlier this week www.nytimes.com/2009/12/28/business/28shop.html) noted:
Over all, retail sales from November through Dec. 24 rose 3.6 percent from last year, according to SpendingPulse, an information service of MasterCard Advisors that estimates sales for all forms of payment, including cash, checks and credit cards.
That number — which does not include sales of automobiles and gasoline — was helped this year by an extra shopping day between Thanksgiving and Christmas. Adjusting the results for that extra day cuts the retailing industry’s sales increase to about 1 percent, in line with what many retailing professionals expected.
While the numbers do not suggest a turnaround for the industry, they signal an improvement over last year’s 2.3 percent sales decline…
… “Last year was just a storm and retail was all about dropping prices to get rid of inventory,” said Mr. Katz of AlixPartners. “This year it was much more of a planned strategy: low inventories and tight expenses. And controlled promotions.”
That means most stores did not erode their profit margins the way they did in 2008, though in the days before Christmas, Mr. Katz said, some chains discounted more deeply than they should have.
Perhaps the best news is that the double-digit declines that plagued nearly every retailing category last year are gone.
9) Hovde spends many pages (38-43) questioning whether GGP’s Master Planned Community Segment has any value – but Pershing already assigns no value to it so it’s not clear who Hovde is disagreeing with. Another note: on page 39, Hovde makes this ominous statement: “The heirs of the Hughes estate hold a contingent claim related to the valuation of these assets. If there is significant value in these assets, the resolution of this claim could result in a substantial unfunded liability, which Pershing Square has failed to include in its analysis.” This is a red herring: the only claim by the Hughes estate is for half of any profits. Thus, the only way there could be a claim, leading to a “substantial unfunded liability”, is if there are profits, which would be wonderful for GGP (even if GGP only received half of the profits, this is more than zero, which is what both Hovde and Pershing expect).
This is a great debate and it will be very interesting to see how this plays out.
Happy new year to all!
Tuesday, December 29, 2009
Hovde's Response To Pershing Square's Response To Hovde's Response To Pershing Square's Views On Mall REITS And GGP Specifically
Well, Hovde seems to be enjoying the publicity that Bill Ackman's Pershing Square is providing them. They have crafted a response to Ackman's response to Hovde's response to Ackman's views (Ackman's prior response linked here).
Whew.
In any case, we think this is one of the healthier debates that exists. Two thoughtful participants going back and forth in a public forum on their in depth views on a business. We honestly look forward to the next volley in the debate - Pershing Square, it's your turn.
Enjoy. [HatTip: BobBob]
General Growth Properties - 2 - Hovde
------------------------------------------
Updated with this Hat Tip video pick from Max Headroom. Cat Fight! Is Hovde the blonde in the pink bra?
Whew.
In any case, we think this is one of the healthier debates that exists. Two thoughtful participants going back and forth in a public forum on their in depth views on a business. We honestly look forward to the next volley in the debate - Pershing Square, it's your turn.
Enjoy. [HatTip: BobBob]
General Growth Properties - 2 - Hovde
------------------------------------------
Updated with this Hat Tip video pick from Max Headroom. Cat Fight! Is Hovde the blonde in the pink bra?
Tuesday, December 22, 2009
Bill Ackman's Pershing Square Rebuts Hovde's Short GGP Thesis
Many of you know that we are fans of Bill Ackman and his firm Pershing Square. We brought you his prior presentation on the attractive economic merits of mall REITS. In response to that presentation and Ackman's prior discourse on why Pershing Square is long General Growth Properties (GGP), Hovde published a bearish response.
Today, we bring you Pershing Square's dismantling of Hovde's response. Enjoy.
As an aside, this has all the makings of a classic cat fight. Purrrrrrr.
A Detailed Response to Hovde's Short Thesis on GGP (12!22!2009)
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Updated with this Hat Tip from Max Headroom. Cat Fight! Is Hovde the blonde in the pink bra?
Today, we bring you Pershing Square's dismantling of Hovde's response. Enjoy.
As an aside, this has all the makings of a classic cat fight. Purrrrrrr.
A Detailed Response to Hovde's Short Thesis on GGP (12!22!2009)
------------------------------
Updated with this Hat Tip from Max Headroom. Cat Fight! Is Hovde the blonde in the pink bra?
Tuesday, December 08, 2009
Bill Ackman Of Pershing Square Presents His Bullish View On Mall REITS To The ICSC
Below is a presentation from December 7th, 2009 by Pershing Square's Bill Ackman to the International Counsel of Shopping Centers (ICSC) on the current state of mall REITs. Suffice it to say, he's bullish across the board: GGP, Simon, Macerich.
As always, brought to you first by TILB. Please spread the good work. As you know, we are big Ackman fans and always have respect for his views. The man can produce Powerpoint like nobody's business.
ICSC Mall REIT Presentation 12-7-2009
As always, brought to you first by TILB. Please spread the good work. As you know, we are big Ackman fans and always have respect for his views. The man can produce Powerpoint like nobody's business.
ICSC Mall REIT Presentation 12-7-2009
Thursday, October 22, 2009
Corrections Corporation Of America - Value Investing Congress Presentation By Bill Ackman Of Pershing Square
As with many other things, TILB is the first or one of the first to bring interesting investment related documents to the public internet. Mr. Ackman's firm, Pershing Square, often circulates his presentations a few days after the actual public talk with the tacit acknowledgement of its subsequent public dissemination. We hold Bill in high regard and believe his case for CXW is compelling (as disclosed earlier: we have been owners of CXW at various times over several years including now and the past few months).
You can find some of our prior discussions of Ackman here.
See below for his Corrections Corp. thesis.
Prisons' Dilemma - FINAL (10!21!09)
[link to our scribd in case the embedding doesn't work]
You can find some of our prior discussions of Ackman here.
See below for his Corrections Corp. thesis.
Prisons' Dilemma - FINAL (10!21!09)
[link to our scribd in case the embedding doesn't work]
Tuesday, October 20, 2009
Bill Ackman's Value Investing Congress Pitch: Corrections Corp. of America (CXW)
Pershing Square's Bill Ackman is in the middle of a presentation entitled: Prisons' Dilemma about CXW. Details to follow.
-----------------------
Update with more detail from the presentation:
Long CCA (Ticker "CXW")
Rehashing the same ole private prison thesis:
Only 7.8% of nationwide inmates are housed in private facilities.
CCA does it cheaper, and "better".
In 2007, private prisons took ~50% of incremental industry "growth". (Trend is sloping up and to the right).
Currently industry (public + private) is operating at 94% occupancy. Doesn't see that declining as states can't afford to build new, current are overcrowded, and nationwide # of prisoners trends up and to the right [not sure why I'm channeling Dennis Gartman right now].
Catalysts:
1) Recession is good for prison operators • More Crimes • States/Munis constrained to build new facilities
2) Operating Leverage from incremental prisoners is very high
3) Stock Buyback
Bought 8% of stock back in Feb / March (at $10.61, now trading at $24.50)
After-tax ROIC are 20-30% (low/high case). # of beds has increased from 46k to 61k in last 3 yrs, should be very accretive as occupancy on new beds increases.
5% of equity held by the Board.
##Bill made the point that he views this as a passive investment.
VALUATION
13x FCF, 12.2% Cap Rate (above where he thinks Realty Income will trade - Bill thinks its a good pair trade - see prior TILB post on Ackman's O short here)
Key Qualitative Investment Factors:
CRE Business
Govt is sole tenant
Triple-Net Lease (sorta)
LT Secular Growth
Low Maintenance Capex (~2%)
High ROIC
Local Monopoly/Nationwide Oligopoly
Best comp is a Healthcare REITs (trade at 7% cap rate)
From 1997 to 1999 operated as a REIT. Had to give up REIT status as a result of a large acquisition at the time. But at least it created a lot of NOLs.
Company makes much higher margins on owning & operating than just management contracts. Recently expanded # of beds in owned facilities. Increasing margins. 25-
33% of contracts roll each year, so decent predictability [TILB note: also allows for replacing in an inflationary environment].
All in all very simple.
Clearly a lot of regulatory risk, but Bill thinks its mitigated by supply / demand dynamics in incarceration industry.
Pershing owns 9.5% of company.
-----------------------
Update with more detail from the presentation:
Long CCA (Ticker "CXW")
Rehashing the same ole private prison thesis:
Only 7.8% of nationwide inmates are housed in private facilities.
CCA does it cheaper, and "better".
In 2007, private prisons took ~50% of incremental industry "growth". (Trend is sloping up and to the right).
Currently industry (public + private) is operating at 94% occupancy. Doesn't see that declining as states can't afford to build new, current are overcrowded, and nationwide # of prisoners trends up and to the right [not sure why I'm channeling Dennis Gartman right now].
Catalysts:
1) Recession is good for prison operators • More Crimes • States/Munis constrained to build new facilities
2) Operating Leverage from incremental prisoners is very high
3) Stock Buyback
Bought 8% of stock back in Feb / March (at $10.61, now trading at $24.50)
After-tax ROIC are 20-30% (low/high case). # of beds has increased from 46k to 61k in last 3 yrs, should be very accretive as occupancy on new beds increases.
5% of equity held by the Board.
##Bill made the point that he views this as a passive investment.
VALUATION
13x FCF, 12.2% Cap Rate (above where he thinks Realty Income will trade - Bill thinks its a good pair trade - see prior TILB post on Ackman's O short here)
Key Qualitative Investment Factors:
CRE Business
Govt is sole tenant
Triple-Net Lease (sorta)
LT Secular Growth
Low Maintenance Capex (~2%)
High ROIC
Local Monopoly/Nationwide Oligopoly
Best comp is a Healthcare REITs (trade at 7% cap rate)
From 1997 to 1999 operated as a REIT. Had to give up REIT status as a result of a large acquisition at the time. But at least it created a lot of NOLs.
Company makes much higher margins on owning & operating than just management contracts. Recently expanded # of beds in owned facilities. Increasing margins. 25-
33% of contracts roll each year, so decent predictability [TILB note: also allows for replacing in an inflationary environment].
All in all very simple.
Clearly a lot of regulatory risk, but Bill thinks its mitigated by supply / demand dynamics in incarceration industry.
Pershing owns 9.5% of company.
Friday, October 16, 2009
Bill Ackman Of Pershing Square Presentation On Shorting Realty Income (O)
"O" No!
As we did with Ackman's long GGP presentation, we are the first to bring you Bill Ackman's short "O" presentation. His PowerPoint speaks for itself. Enjoy:
O No! - October 6, 2009 _Final Distribution Copy
[link to our Scribd in case it's not working]
As we did with Ackman's long GGP presentation, we are the first to bring you Bill Ackman's short "O" presentation. His PowerPoint speaks for itself. Enjoy:
O No! - October 6, 2009 _Final Distribution Copy
[link to our Scribd in case it's not working]
Tuesday, June 16, 2009
Kirchner Rebuts Bill Ackman Of Pershing Square Re: GGP (General Growth Properties)
Thomas Kirchner of Pennsylvania Avenue Event-Driven Fund (PAEDX) has written a rebuttal to Bill Ackman's presentation on the merits of GGP that he gave at the recent Ira Sohn charity conference.
The crux of Kirchner's rebuttal is: NOI will be worse than Ackman expects, Ackman uses a flawed cap rate, Pershing uses faulty assumptions about the likely cost of GGP's debt (if it's successfully extended), and that dilution is likely which Ackman does not account for. Here is Kirchner's statement on Ackman's 7.5% cap rate:
In the end, Kirchner agrees that GGP equity likely has some value, though limited. In the footnote it is disclosed that Kirchner owns "securities" in either or both of GGP and Rouse (a wholly owned GGP subsidiary) which implies that Kirchner is a creditor.
So it seems that at least one creditor is laying the grounds for a battle over who will receive the economics of GGP. Obviously others are like-minded, despite Ackman's wishes that they simply obey his commands. We certainly look forward to an enjoyable fireworks display.
Hat tip: Manual of Ideas
-----------------------------
What do you think? Green shoots for GGP equity or zombie equity?
The crux of Kirchner's rebuttal is: NOI will be worse than Ackman expects, Ackman uses a flawed cap rate, Pershing uses faulty assumptions about the likely cost of GGP's debt (if it's successfully extended), and that dilution is likely which Ackman does not account for. Here is Kirchner's statement on Ackman's 7.5% cap rate:
Like most valuations, Pershing Square’s lives and dies with its cap rate assumption. Ackman contends that GGP should trade at a 7.5% cap rate, 100 bps better than Simon Property Group (SPG). 7.5% cap rates are not what malls trade at these days, if they trade at all. SPG itself trades at an implied 8.5% cap rate, and Pershing Square thinks that this cap rate discounts the risk of bankruptcy of SPG. Therefore, reasons Pershing Square, GGP should trade at a lower cap rate, resulting in a higher valuation. The problem with this argument is that it can be applied to GGP as well: if the maturity of the debt is extended by 7 years as proposed, the market will discount a potential liquidity squeeze at the new maturity date of the debt. In addition, we believe that an 8.5% cap rate for SPG only shows that SPG is overvalued. If we apply a more realistic cap rate (9%, in our humble opinion) to GGP, then the upside for the equity looks much less appealing. And we haven’t even mentioned dilution yet, which we will address in a moment. After dilution, the equity looks pretty close to fair value to us.We at TILB think Kirchner was kind not to simply laugh at Pershing's 7.5% cap rate assumption. In fact, to rely on Simon's 8.5% cap in a market in which Simon has issued sub notes that were priced to yield 10.75% is lunacy.
In the end, Kirchner agrees that GGP equity likely has some value, though limited. In the footnote it is disclosed that Kirchner owns "securities" in either or both of GGP and Rouse (a wholly owned GGP subsidiary) which implies that Kirchner is a creditor.
So it seems that at least one creditor is laying the grounds for a battle over who will receive the economics of GGP. Obviously others are like-minded, despite Ackman's wishes that they simply obey his commands. We certainly look forward to an enjoyable fireworks display.
Hat tip: Manual of Ideas
-----------------------------
What do you think? Green shoots for GGP equity or zombie equity?
Saturday, May 30, 2009
Long GGP: Bill Ackman's Ira Sohn Presentation
Bill Ackman of Pershing Square presented at the Ira Sohn Conference on why GGP is a great probabalistic investment.
I have no idea how the man pumps out 70 page Powerpoints like this so easily, but it never ceases to amaze me. Every time I read/see one, I want to obey its message.
By far, his most convincing presentation ever was "Is MBIA AAA?" at last year's Ira Sohn. While I'd seen his arguments against MBIA over the years, adding in the step by step tutotial on the insured structured finance assets and the mortgage reset waves were phenomenally descriptive. I went home and shorted it and ABK the next day.
The first time I met Ackman, just prior to publicly launching Pershing Square, I walked away thinking he was one of the best investors I'd ever met. While he's made some mistakes, I stand by that initial impression.
In any case, here is his presentation on why GGP may be a multi-bagger. He presented this a few days ago at Ira Sohn.
GGP Presentation 5.27.2009
I have no idea how the man pumps out 70 page Powerpoints like this so easily, but it never ceases to amaze me. Every time I read/see one, I want to obey its message.
By far, his most convincing presentation ever was "Is MBIA AAA?" at last year's Ira Sohn. While I'd seen his arguments against MBIA over the years, adding in the step by step tutotial on the insured structured finance assets and the mortgage reset waves were phenomenally descriptive. I went home and shorted it and ABK the next day.
The first time I met Ackman, just prior to publicly launching Pershing Square, I walked away thinking he was one of the best investors I'd ever met. While he's made some mistakes, I stand by that initial impression.
In any case, here is his presentation on why GGP may be a multi-bagger. He presented this a few days ago at Ira Sohn.
GGP Presentation 5.27.2009
Thursday, May 28, 2009
Ira Sohn Best Ideas
The Ira Sohn Conference is a wonderful annual charity event hosted by a few huge fund luminaries that benefits a childrens' cancer center at a hospital near NYC. At the dinner, a number of big name hedge fund and long only investors pitch a small handful of their best ideas. Past conferences have had Bill Ackman present his famous "short MBIA" idea and David Einhorn his "short Allied Capital" and "short Lehman" ideas (much to Erin Callan's dismay!).
This year's conference includes presenters (among others):
- David Einhorn
- Bill Ackman
- Jim Chanos
- David Sokol (Mid American CEO - BRK subsidiary)
- Peter Thiel (Clarium Capital, but also founder of PayPal and investor in Facebook)
- Steve Mandel
- Paul Singer
Anyway, here are notes from today's presenters that I received by email from a Wall Street dealer:
This year's conference includes presenters (among others):
- David Einhorn
- Bill Ackman
- Jim Chanos
- David Sokol (Mid American CEO - BRK subsidiary)
- Peter Thiel (Clarium Capital, but also founder of PayPal and investor in Facebook)
- Steve Mandel
- Paul Singer
Anyway, here are notes from today's presenters that I received by email from a Wall Street dealer:
This is a summary of ideas expressed at the Ira W. Sohn Investment Research Conference today. The Ira Sohn Research Conference Foundation is dedicated to the treatment and cure of pediatric cancer and other childhood diseases.
NOTE: The notes below were taken in real time, but we apologize in advance for any transcription errors. THESE ARE THE OPINIONS OF THE SPEAKERS, BTIG DOES NOT AGREE OR DISAGREE WITH ANY OF THE STATEMENTS.
Peter Thiel, Clarium Capital
Thiel is taking a long term time horizon and contrarian perspective as to whether this is a financial crisis at all. He asserted that productivity growth is the key to increasing the standard of living. Thiel explained that there are 3 ways to create productivity: Additional Leverage, Globilization and Science & Technology. We are witnessing the results of the Additional Leverage. Thiel believes the virtuous effects of Globalization are behind us. Instead of the disinflationary influence it has had over the past two to three decades, inflationary forces will take hold as nations compete for resources. In the area of Science and Technology, Thiel believes that things are not healthy in the ever expanding universe of human knowledge. Major research is turning out to be fraud and there is actually less progress than there appears to be in science. Technology, the application of science and also has not made much progress. Examples include the venture capital community, which has not made money in 10 years, there is no money being made in IPOs and the poor conditions of the State of California.
Thiel believes this is not a new problem and this has been going on for a very long time. 1969 may be the year that progress died. Innovation has been barely enough to keep up with global constraints. Thiel referred to the Tech boom of the late 1990s as a fraud. He questioned how you get high returns in a world with such little innovation. You get the high returns through high leverage. High leverage is a symptom and cause of failed innovation of the past 40 years.
Thiel believes there will be no V shaped recovery until the productivity issue fixed. He also noted that he believes the U.S. Government is nowhere near being on the right track. And he would fade the recovery trade, we will see inflation in assets we need (commodities) and deflation in assets we own. He believes the U.S. is radically misdiagnosing the problem. Washington is dominated by lawyers and economists and not the scientists that are necessary to correct the problem. Thiel referred to the situation as the myth of technological progress and asserted that most innovation we have received is hype. He discussed large cap tech names in a pejorative manor stating that betting on established Technology companies like Cisco, Microsoft and Intel is a bet on no innovation. He thinks we should be looking for companies that are truly innovating, of which there are only a handful.
Joseph Healey, HealthCor
Healey outlined the great demographics behind the Health Care industry while analogizing the current Health Care reform movement to the Hillary Care movement of the early 1990’s. Healey noted that Health Care is projected to become 20% of GDP by 2018. Advances in Health Care have increased life expectancy from 47 years in 1900 to 78 years today. Uncertainty about the Administration’s push for Health Care reform is creating an overhang in the group, similar to Hillary Care overhang in the early 1990’s. From the time Clinton took office to the time Hillary Care was quashed in 1994, Health Care underperformed the market and when Hillary Care was quashed, Health Care drastically outperformed. Once reform begins to take shape and there is clarity to the situation the stocks will improve. He believes the overhang created by this uncertainty creates a good investment opportunity.
Healey discussed 3 companies that he believes have significant upside potential. First, he discussed Valeant Pharmaceuticals (VRX). The cornerstone for Healey’s thesis was the potential for its epilepsy drug, retigabine. Glaxo has partnered with Valeant on the drug. Wall Street has significantly underestimated the upside potential for the drug. Healey noted it is his belief that if Glaxo does not acquire or take over the company, then the stock has potential to rise to the $40 to $50 range. The second stock Healey discussed was Hologix (HOLX), which he believes has potential to double from current levels. He described it as one of the most compelling new product stories in the MedTech group. The business is 70% consumables with a razor-razor blade model and has a Free Cash Flow yield of 10%. Healey’s final idea was Life Technologies (LIFE), where he noted the 8% Free Cash flow yield and upside potential of 60% from current levels.
Mark Kingdon, Kingdon Capital Management
Mark Kingdon opened up with a slide on Bank of America titled “An extraordinary opportunity?” Kingdon noted that Bank of America (BAC) is trading 5x normalized earnings. He discussed the severity of the Government’s SCAP (Stress Test), which he noted was rigorous. Kingdon noted his firm’s analysis arrives at a Tangible Book Value of $11 per share for BofA. Kingdon noted the franchise businesses of BofA and its position as the largest Commercial and Retail bank. Kingdon arrives at Normalized Earnings per share is $2.24 using inputs of 1.2% for the loan loss provision and net interest margin of 2.75%. The loan loss provision is quite high based upon net charge offs over the past 20 years, with the exception of a short period of time around the S&L crisis and the current environment. Kingdon believes the net interest margin of 2.75% is conservative and should expand since the Fed has created a steep yield curve and there is less completion in banking industry. His firm’s analysis leads Kingdon to believe that BofA has potential to rise above $20 in a year.
Steve Mandel, Lone Pine Capital
Mandel started by noting the two components he looks for when seeking a margin of safety: price paid and strength of business franchise. If given a choice of one or the other, Mandel’s preference is strength of the business. In the current market, great franchises have been stagnating while cyclical rally is occurring. Mandel believes that Strayer Education (STRA) is one of those companies with a superior franchise. There is a huge, underserved demand for working adult secondary education and traditional universities not set up to serve these customers. Strayer’s graduation rate is above community colleges and its student loan default rate is low. The Company has partnerships with corporations to educate employees. Strayer’s operating margins are in the mid-30% range. The company needs little capital to operate and grow its business. In 2008, only 20% of $100 million in cash flow was necessary to grow business and the balance was returned to shareholders through various means. Mandel believes sales and profits should grow 8x over the next 10 years. Currently, the company is trading 25x this year’s earnings and 20x next year’s earnings. Those multiples should contract quickly as the company grows. The $2.5 billion market should be much larger by the time STRA is a fully national company.
Jim Chanos, Kynikos Associates
Chanos’ presentation was titled “For profit social services from the trough to the slaughter house.” Following the 30 year deregulation boom in Health Care, Education, Financial Services, Defense and Government Services, the Government will be looking for payback. Health Care faces significant reform. Education is becoming a right and not a privilege and that will cut into margins. Investors find themselves questioning the very foundations of society. The Administration believes Health Care and Education are civil rights and part of its legacy. Chanos refers to the groups at risk of seeing their profit margins cut by Government reform as Capital Offenders.
Chanos highlighted For Profit Education where federal funding represents 73% of revenues at the top 4 companies. The margins for the group are 27% much higher than the 12.5% of the S&P 500. Instructional costs as % of revenues declining, not reinvesting in educating the students. Government funding has fueled double digit student growth. Students at these proprietary schools are saddled with more than 58% than students at traditional school. The companies valuations leave no margin for error.
Chanos also highlighted the challenges to Health Care. Margins in the group are approximately 50% greater than that of the S&P 500. Big pharma spends 3x more on advertising than they do on R&D.
Currently Health Care represents 16%-17% of GDP that is 2x that of the rest of world with worse outcomes. There are 45 million Americans without health insurance the administration’s attempts to insure these individuals will cut into margins. Health Care gross margins range from 30%-70% and operating margins are 50% better than the S&P 500. Government will look to take these actions to contract margins. Chanos is shorting Lincare (LNCR) where margins are still among the highest in the industry. He believes it will be poster child for what is about to happen to the Health Care industry.
Peter Schiff, Euro Pacific Capital
The U.S. Government is interfering with the free market forces trying to fix the economy. We lived in a phony “bubble” economy. The Government is trying to reflate the bubble. Americans are trying to rebuild their balance sheets and save to build wealth. As any drug addict knows if you stop using drugs you will go through withdrawal. Government is making the situation worse. We don’t need any more stimulus, we are suffering from the stimulus we have already been given. Alan Greenspan and Federal Reserve got everyone drunk on easy credit. Government has created moral hazard, i.e. Fannie and Freddie. The housing bubble was Fed and nurtured by the government. America is broke and our creditors are acknowledging that.
What is going on in the global economy will not last and is beneficial to the rest of the world. Foreign nations will retool factories and create products for themselves. Our ride on the global gravy train has come to the end. The whole service sector economy has to go away. If companies are not profitable they need to go out of business. Nobody talks about the productive jobs the Government destroys by saving jobs at GM or AIG. The damage this time around can be far greater than Hoover and Roosevelt created during the Depression. Hoover attempted to bail out the economy and business, Roosevelt only followed his failed policies on a much larger scale. Bush has followed bailout policies like Hoover, now Obama’s is following Bush’s failed policies only on a much larger scale.
Japan was in a good position when they busted, we are in the opposite position. We can’t solve a crisis that is the made of borrowing and spending by more borrowing and spending. Our creditors will stop lending to us. Inflation is going to run out of control. Ultimately that inflation is going to cause prices to go through the roof. We will not be able to purchase items to go on store shelves. This not a major collapse, it is a restructuring. The decoupling concept is here, but the US is not the engine it is the caboose.
You need to own assets in countries where economies will thrive and prosper like Asia, and stay away from US assets. This is the beginning of an inflationary depression.
Lee Hobson, Highside Capital Management
Lee Hobson of Highside Capital presented two straight forward investment ideas, one long and one short. Hobson cited the opportunity in emerging markets where low (wireless) telecom penetration = high growth potential. Hobson noted countries who introduced wireless technology later have faster growth curves and adoption rates thanks to cheaper technology. Hobson like Millicon International (MICC) to play this trend. Cellular service in emerging markets proven trend that offers affordability and high utility to the consumer. He equates it Coca cola 50 years ago. Building a strong internationally recognized brand among consumers who crave the product. MICC sells their service internationally under the Tigo brand. The product is accessible, affordable , available (strong networks) and serves the consumers need to communicate. Millicom has a 25 year emerging market history. They serve growing less developed countries with a total of 290 million people. Wireless penetration ranges from 10% to 80% in their markets –in developed markets penetration is above 100% (multiple phones). The company trades 3.6x forward EBITDA and is growing cash flows at 20%. The companies growth can be self funded an it can grow secularly for a long time with consistency.
Hobson suggested betting against auctioneer Ritchie Bros. The company is an auctioneer of used industrial equipment. It earns a 10% commission rate on what the auction price. To grow earnings they need to grow revenues. The company is trading 29x earnings and 16x EBITDA. Earnings growth accelerated over the past 5yrs transitioning from from single digits before to high teens. Company has a 15% market share and company claims it will grow through market share gains.
Hobson states the real growth driver for the company has been equipment price inflation (as a result of the building boom). The company also did a significant amount of capital intensive site builds, but their “same store sales” only grew at a rate of 2%. The volume trends of the business are not likely to be countercyclical as the company suggests. Company had to spend 90% of cash flow to grow revenues but in both the slow and fast growth environments their capacity increase CAGR was 6%. Commercial Construction lags the economy, non residential orders and are backlog collapsing. Management is selling stock and made sales as recently as last week. EPS likely peaked in 2008
Paul Singer, Elliott Associates
Investor have become accustomed to the post war solid growth model. It is likely the solid growth, stable inflation model is gone. There will be a period of deleveraging in an environment of high inflation with areas of deflation. Certain elements of current environment concern Singer. Singer discussed regulation and fears this era of anti capitalistic behavior. He expects a global scheme on the limitations of leverage. Hedge funds did not blow up the world, regulated entities did. Singer is concerned about the treatment of investors in the secondary market for debt. He fears restrictions on the ability for investors to exercise their rights will prevent the flow of capital to markets.
Singer discussed the rule of law. He noted it is devilishly hard to preserve private capital for a long time. Rule of law is a necessary but not sufficient condition. The color of money can change over time. Capital will flow to where it is treated best. Arbitrary actions that circumvent the law for the purpose of achieving a short term government objective will have long term consequences. Rule of law needs to win over the rule of enlightened elite. The government is elephant in the room- hope it the government cares what the room looks like after it is done stomping around the room. It is important to get through this challenging time with our time tested principles intact.
Bill Ackman, Pershing Square Capital Management
Bill Ackman laid out an in depth case as to why the equity shares of General Growth Properties (GGWPQ) are a good investment despite being in bankruptcy. It all breaks down to the company’s assets are greater than their liabilities. Through several potential workout agreements or a court appointed “cram down” the equity should greatly benefit from the likely scenarios. As far as a business General Growth’s malls have over the country 24,000 tenants. The company has 73 “Class A” malls, and high profile names like Faneuil Hall and South Street Seaport do not even garner that high rating. At General Growth 50 of the 200 malls create 50% NOI. Malls historically generate high stable cash flows. General Growth has fixed rates on 83% of debt. This is a business where inflation is an asset. In losing Circuit City the company lost a tenant paying below market rents. The company’s problems result of the CMBS market collapsing. The credit market shutdown prevented them from rolling their debt. They have the second highest occupancy of any mall company. The NOI is actually from the levels where the company’s market capitalization peaked.
Ackman made the analogy between General Growth and the stuations that occurred at Alexanders and Amercao (U-Haul). These were bankruptcies where assets are greater than liabilities. During bankruptcy a creditor entitled to their claim but no more, and in this case the equity will be left with value. Ackman suggests two potential options- either an extension of current debt 7 years or a debt for equity swap. He notes either scenario would create approximately a per share value emerging from bankruptcy $20 go to $35. Another option would be if the bankruptcy court forced a “cram down.” In this event Ackman exhibited precedents where the company’s interest rates would be lowered creating a better scenario for the company. Ackman notes the likelihood of forced liquidation by the court is minimized because of the extreme pressure it will place on the commercial real estate market and other REIT’s.
David Sokol, MidAmerican Holdings Company (Berkshire Hathaway)
Sokol is not seeing the Green sprouts- but that is not surprising to them. Government intervention can draw this out longer than necessary, but is useful in some circumstances. Unemployment will rise north of 10%. They are not seeing much improvement in housing. 92% of loans they have seen this year are all conforming. Although there are in excess of 1 million household formations per year Sokol believes the backlog of 10-12 months is actually 2x that amount of yet to be foreclosed homes. Sokol expect it to be mid-2011 before a balanced home sales (6 month inventory) environment emerges.
In regulated energy the headwinds are greater than any time in his 30 year experience. Inflation and rising borrowing costs are challenging headwinds. The utility industry can handle carbon emissions restrictions, but the Cap & Trade legislation as currently written will drive up energy prices for consumers to levels that will be hard to digest.
David Einhorn, Greenlight Capital
The theme of Davd Einhorn’s presentation was the curse of the AAA. Obama administration is following the same policies of the Bush Administration. The administration is reflating the economy back to 2006 levels. For the economy to recover underwater entities need to restructure their debt. The willingness for banks to negotiate in this environment depends upon where the positions are marked. The Obama loan modifications lack the most important aspect of restructuring –debt reduction. The debate in the banks was too narrow with only two options discussed - Nationalizing versus Taxpayer Bailout. There is a 3rd option, debt or preferred equity conversion to common equity. Attempt to induce debt of equity conversions without creating a downdraft in the group. Banks are not materially more solvent today than they were two months ago. Regulatory forbearance has created this rally in banks. We should be overcapitalizing the banks and direct them to restructure the debt of their borrowers. The Government spending and guarantees put the U.S. AAA credit rating at risk. US debt need s to be managed responsibly.
Einhorn took to task Chairman Bernanke’s assertion that AIG failed because there was a hedge fund at the top of an insurance company. AIG failed because it was not a hedge fund, but a AAA rated highly rated regulated insurance company. This status gave false security to investors and counterparties. Hence the curse of the AAA, most of the institutions that ran into major trouble were AAA rated entities. Fannie, Freddie, AIG, Monolines , GE all were AAA rated. Einhorn says he is betting against Moody’s (MCO). He describes the situation as such if your highest rating is a curse of those who have it what value do you have? If your goal is to destroy the brand would you do anything differently than Moody’s has done. Why reform them if we can get rid of them? Ratings system is inherently pro-cyclical and destabilizing. Regulators can improve the stability of the financial system by eliminating the ratings agencies. Company is 19x estimated earnings, balance sheet is upside down with negative shareholder equity.
Einhorn and his colleagues at Greenlight announced they were donating $7 Million of their profits from the Allied Capital short to charity.
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