Greece is a mess. Since the first crisis over their fiscal situation began 18 months ago, Greece has hobbled along, trying to avoid a default. Last year, in May 2010, Greece accepted a 110BB Euro bailout package to refinance existing maturities of bonds, as well as to fund its yawning deficits. The bailout required austerity measures on the Greeks however, including huge spending cuts. Government wages were cut 15%, pensions curtailed and public services reduced. The economic hit has been meaningful, with GDP down 3-5% likely in 2011. And, only one year later, Greece again is on the brink of default. I wonder when people will realize that you cannot solve a debt crisis with more debt.
QUICK HISTORY
Greece joined the Euro currency in 2000. This enabled Greeks (the government as well as businesses) to borrow at extremely low interest rates. The following decade was marked by a huge credit binge, one that took GDP from roughly 100BB Euros, to a peak of 230BB Euros in 2008. When the liquidity crisis hit in 2008, Greece's economy got hurt badly, while at the same time its debt problems began to come to the fore.
While Greece reported sub 3% deficits for years, and total debt less than 60% of GDP, as required by the Maastrict Treaty (to be a member of the Euro), the reality was far worse. Thanks to unreported government expenditures in military spending, as well as in healthcare spending, real annual deficits were well north of 5% of GDP. And, in 2009, the Greek's number fudging was revealed, causing concerns about it's debt levels, and sparking the first sell off in Greek bonds. As a side note, Goldman Sachs had been designing currency swaps that enabled Greece to avoid reporting a cool $1BB of Greek public debt. At the same time, they began buying credit default swaps on Greece. That is, shorting their debt. Nice. I am amazed the regulators had nothing to say about that.
By 2009, Greek deficits spiked to an unwieldy 13% of GDP, far far north of the 3% required by Euroland. And, Greek government debt had accumulated to a hefty 300+BB Euros, which amounted to 127% of GDP. Typically, the tipping point is around 140-150% of Debt to GDP. Greece was basically on the verge of insolvency. At this level of debt, interest rates tend to skyrocket as investors demand far larger returns to invest in riskier bonds. And they have. Today we are seeing extremely high rates on Greek debt. The 2 year Greek note yields 29%. And Greek 10 year notes are around 18%. According to the WSJ, the CDS market implies a 75% chance of default on Greek debt. Personally, I think its higher.
CONTAGION?
What the Europeans, and the rest of the world, fear is contagion. This is why this mess is rattling markets everywhere. I know, how can an economy the size of Mississippi (no offense Mississippians), scare investors from Asia to the US? Well, the problem is that 150BB Euros of Greek debt is held internationally, mostly by big banks in Europe. French banks alone hold 57BB Euros of this debt, German banks 34BB Euros. What if you are a counterparty to, say, Credit Agricole in France?
Specifically, Credit Agricole has 71BB Euros of Tier 1 equity capital, against 1.6 TRILLION of assets. That is, its 21x levered - or $21 bucks of debt for every $1 in equity! Ridiculously high. Further, they own 22BB euros of Greek debt. If that debt becomes worth 50c on the dollar, then that's a 15% hit to their equity, 11BB euros. So if Greece defaults, then Credit Agricole would likely have to raise outside capital, which would dilute their equity further. Stock sells off. In fact, Moody's downgraded 3 French banks this week, citing Greek loan exposure on their balance sheets.
It gets worse. Credit Ag also has 1.5 Trillion of debt in the form of depositors, bonds, and loans from other banks. What happens when these 1.5 Trillion of lenders/depositors get scared as the stock craters? They obviously rush to withdraw their money as fast as possible. A meaningful % of their 500BB euros of depositors, 150BB euros of overnight/interbank loans could get called. That 60-70BB of capital would get eaten up very very quickly. Literally overnight. It's exactly what happened to Lehman Brothers in September 2008.
Admittedly this is a bit dramatic, but the contagion could spread because US investors in money market accounts have huge exposure to European banks. According to Fitch, 44% of assets at the ten biggest money market funds are invested in overnight loans to European banks. You likely have unknowingly lent money to Credit Agricole (or BNP Paribas or SocGen). And if it goes down, then your seemingly "riskless" money market account takes a hit. If US investors start pulling money out of their money market accounts, then the run on the entire financial system would begin again, just as it did in the Fall of 2008.
The worst off is obviously Greece itself. Or rather, their banks which hold 200BB euros of their own debt. Greek citizens are depositors at big Greek financial institutions too, and a default could jeopardize the entire Greek financial system. I merely point this out, not to frighten anyone, but to point out that the world's financial system is built on too much leverage. The holders of debt of an overlevered economy (Greece), are overlevered banks in Europe & Greece. And investors in European banks are money market investors all over the world. That is you and me. (well not me actually, just you.)
Part of the solution to the problem seems to be to get the solvent countries to provide enough in loans to keep Greece from defaulting. It's perhaps the only way to avoid another panic, this time starting in Europe and spreading worldwide. But a loan package to get them through 2011, will just have to be upped again in 2012 and 2013, etc. It can't go on forever, eventually Greece has to restructure.
THE GOOD NEWS
To sum up: you have 150BB Euros of Greek public debt owned in Euroland, that is worth 25-50c on the dollar. Net net that is a 100BB Euros of losses that have to be borne among European banks. Sure Greece itself gets smoked, but to some extent, they dug their own debt hole. They can dig themselves out of it. So, really, 100BB Euro's of losses is quite manageable given time to reserve for it, to announce some capital raises among banks to offset losses, and to create an orderly restructuring of Greek debt. I mean, the US housing bubble caused 1.2 TRILLION in bank losses. So why all the fuss over $140BB (USD) of Greek losses. Greece alone is very fixable.
THE (REALLY) BAD NEWS
The bigger contagion problem extends beyond Greece. If you let Greece default, then likely you kick them out of the Euro currency. Ok. But what about the other PIIGS? Portugal, Italy, Ireland, and Spain? And Belgium is also under mountains of debt, 330BB Euros about the same as Greece. While Greece carried "only" 120% Debt to GDP 3 years ago when the problem first came to light, now its around 152%. The PIGS (and Belgium) today are at:
Country Public Debt (Euros) Debt/GDP
Belgium 330MM 100%
Portugal 200MM 83%
Ireland 100MM 100%
Italy 1900MM 120%
Greece 330MM 142%
Spain 650MM 70%
TOTAL 3510MM
This is very scary. 3.5TT Euros of debt. If these bonds end up restructuring, the Euro then completely unravels. Recoveries on this debt would be 25-50% best case. That is at least a 1.7TT Euro hit to banks and holders of this debt worldwide. That is $2.4 TRILLION dollars of potential losses, at least. This is much bigger than the housing losses in the US, which almost brought down the entire system.
Of course a big part of the explanation was that housing losses were shifted from the private sector to the public's balance sheet. This debt has not gone away. We avoided a total meltdown by having US and European governments bail the banks out. What happens when the governments of Europe and the US need bailing out? As I pointed out from the Credit Agricole examples, banks holding this debt will potentially face a Lehman style outcome.
Greece is perhaps the canary in the coal mine. It's going to avoid a restructuring this year it seems, but what happens in 2-4 years, when not only Greece, but all of the PIIGS have a debt crisis?
POLITICS OF GREEK BAILOUT #2
The EU authorities apparently are close to putting together a second Greek bailout. The IMF has pledged money today, Germany is backing down on its tough "reprofiling" talks. (They wanted to extend maturities out by 7 years). While Greece has 30BB euros of maturities in 2011, and another 30BB in 2012, the European leaders have no other choice it seems but to try to keep it together.
The prospect of more government cuts is causing more rioting in Greece right now however. The headlines look identical to a year ago with tear gas being fired upon demonstrators in Athens. Since unemployment has spiked to 16%, more cuts just accelerates their death spiral economically speaking. This causes GDP to fall more, and Greece's Debt/GDP ratio to worsen.
WHAT SHOULD BE DONE
Greece should drop out of the Euro voluntarily. Restructure their bonds in a pre-arranged fashion. Offer a deal to give holders say 25c on the dollar. I still have not quite understood the Greek's rationale behind staying in the Euro. To stay in requires years of austerity, government budget cutting, and raising taxes. It can only result in a decade long depression, just to keep a common currency with your neighbors. Using the Euro does keep Greek inflation in check, but with a strong currency, Greece's economy will struggle to grow exports and compete with more productive, efficient countries (like Germany).
If Greece reduces debt by 75%, and goes back to using Drachma's instead of Euros, then the value of that Drachma will be awful. Horribly awful in fact, especially against any G7 currency. The cost of imports into Greece (think oil) will skyrocket, causing inflationary problems. But the benefits of inflation and restructuring are that it will fix their current account deficit problem, as well as their fiscal budgetary problems. The pain will be severe for 1-2 years, but then the bad debts are wiped away, Greece has a devalued currency, helping exports, which in turn helps the unemployment problem. To me, a decade of deflation and depression to maintain a currency whose benefits mostly go to Germany makes zero sense.
TRADES
Risk aversion will be paramount for the time when Greece actually does default. I think its out there, but I cannot even guess if it will be next year or 2014. Euro puts are potentially a decent trade, but you have to get the timing right. 135 strike Sept Puts on FXE cost 7.50. So you need a 127.50 Euro price to break even by September, with current exchange rates around 142. Seems expensive to me.
Clearly financials holding PIIGS sovereign debt will also suffer in Europe, as banks there are like banks here loaded with crummy mortgages. Hard to find places to hide, but I still like gold, big cap defensive names, shorter duration corporate bonds and cash. Good luck.
Friday, June 17, 2011
Monday, June 6, 2011
The "Sell in May" Phenomenon
I am not sure why this is true, but it is. If you had invested your money in the Dow Jones every year since 1950, but only during the months of November through April, you would have made 7.4% on an annualized basis. The May thru October returns of the Dow since 1950? Only up 0.4% per year. So, here we are and it's June, and the question comes up again. Should we have sold in May?
The truth is, there do seem to be valid seasonal anomolies that contribute to the "sell in May" theory. Vacations in the summer and lack of newsflow impact returns in the summer. Also, pension contributions, tax refunds, year end bonuses, all occur during the November thru April timeframe. So seasonally speaking its a tough few months until we get to November 1st.
So, this year, on top of the normal seasonality, we have a market that has run up 18% since September 1st last year. There is a fancy statistics phrase I love that describes the weather, and also the stock market: serial autocorrelation. That is, if its unusually hot on Monday, then its much more likely to be similarly hot on Tuesday, and even Wednesday. The market is the same way. Returns are correlated to the returns of the day before. It's not a random walk. Given that we are down for 5 weeks in a row, its more likely that we will continue down for the next 5 weeks. Knowing also that liquidity is a big driver of the market, you can ride the momentum a bit, that is until there is "game changing" news.
Last summer the market sold off 16% from peak to trough, beginning its decline in April and ending around September 1st. The announcement of QE2 at that time was the catalyst (ie the game changing news) that ended the downdraft. We might need a QE3 announcement to break out of our current weakness, but all indications are that QE3 won't happen for at least 3-6 months. I suspect that continued economic weakness (on top of more fiscal deficits), will ultimately give the Fed an excuse to restart easing. Or force them to.
Fundamentals
So that is the somewhat weak technical picture. The fundamentals aren't so great either.
- Unemployment ticked back up to 9.1% in May.
- The manufacturers ISM index fell by the most in May since 1984.
- Consumer confidence fell to 60.8 from 66, a pretty meaningful decline.
- GDP was revised to 1.8% growth for the first quarter of this year, down from 3.1% growth in Q4 2010.
- Housing continues to worsen, see prior blog on that.
- Leading Economic Indicators, designed to forecast economic activity 6-9 months out, declined in April by 0.3%, the first decline in the past 12 months.
- S&P earnings estimates for 2011 are hitting new highs. ie, with economic weakness, it makes it less likely that earnings will be able to match or exceed expectations.
This chart from the BLS below shows the employment problem in our country. While the unemployment rate is seemingly improved, if one adds in the "discouraged workers" (the ones that have given up looking for a job), then really we are pretty close to the lows.
This chart specifically shows that labor force participate rate through May this year. Only 58.4% of our population is working, pretty close to the bottom and way down from almost 64% in 2007. On the whole, we aren't creating new jobs in this country. We are bouncing along the bottom, and that is despite massive stimulus in the past 2 years. It's a little frightening to ponder what happens to this when the government reigns in its spending in an attempt to fix our deficit problems. (hint there are 2.2mm employees that work directly for the federal government, countless others indirectly).
So, here are some suggestions for ways to profit and protect your portfolio during the next 3-6 months.
- Sell calls on stocks you own that are up. I sold some Cigna 49 strike calls last month, essentially creating a covered call position. The stock has been a big winner over the past year, and I do still think its cheap. But if the market and the stock lag for the next couple months, I will get to keep the premium and effectively create a dividend on it while it lags. That is, as long as it stays below 49 through expiration. If it goes higher, my shares get called away so that I sold it effectively around 50.50. I am happy with that trade too.
- Short SPY. I almost always have a SPY short on, and its a good way to protect your longs. It's my biggest single position right now after adding to it last month.
- Sell your losers. Or sell half of your losers. I almost religiously follow a 10% stop loss, and you should too. Losers tend to stay losers, winners tend to stay winners. See above on serial autocorrelation. If you have a name down 20%, sell half of your position, which results in your owning 40% of your original position. Its future impact on your portfolio will be mitigated. And its likely to keep going down especially in a bad tape.
- Buy bonds. I don't really recommend US treasuries, but ETF's like CSJ or LQD are great. They benefit from lower rates, and declining yields, without taking on the balance sheet risk of the US government. CSJ is a high grade corporate bond ETF, very short duration. LQD owns the same high grade bonds, but is longer duration. It's up 3% YTD, and yields 4.7% still. CSJ is less risky, and yields 2.2%. Please please please do not own government bonds maturing more than 1-2 years out. I don't have a clue how much longer you can own them; if so you are just praying that this manipulated market continues to be manipulated.
- Sell some EM stocks/funds. Emerging markets tend to exhibit higher levels of autocorrelation than developed markets. So much risk aversion money leaves these countries, that they get especially hard hit. The diminished liquidity also makes for lower multiples, and bigger gap down risk.
- Reduce commodity exposure. I have some British Petroleum BP on the sheets, but have been long puts on CHK. Chesapeake was up over 50% in 6 months by April this year, and natural gas prices were roughly flat. Didn't seem to make sense to me. I bought some at the money puts that have been great in offsetting my BP losses. (CHK is down over 10%, and my math on their ROEs is 2.7%, pretty lousy).
- Own defensive industries, Food/Utilities. Food stocks have weak performers in the last six months, as many are grappling with higher input costs. Corn and coffee prices have doubled in the past year, suger is up 63%. These higher costs are not easily passed on to the consumer and pressuring margins at companies like P&G, Kraft KFT, Kellogg Co (K). I think they will likely see some relief from commodities if the market continues to weaken post QE2. I have owned KFT for about a year now, and not only will ag commodity declines help margins, but also their dividend yield (3.4%) becomes more attractive as overall yields fall.
Same can be said for utilities. XLU is a decent ETF holding utility stocks. It yields 3.9%, and has been exactly flat as the market has sold off 5% since April 29th. I own UTF which is a utility/infrastructure closed end fund, and its only off 1% or so vs the markets 5% decline. Swap out of consumers/cyclicals into these names.
- Gold/Silver? No clue. I lightened my GLD exposure, but really will never sell gold "as long as we have powerful fools running our central bank" in this country. Marc Faber quote. So far GLD has stayed near its highs. SLV I think is broken and riskier.
Conclusion
I have very little confidence in the markets this summer. If asset prices were cheap, it would be a different story. But almost anywhere one looks, prices are fully valued, or near so. Sure, a bubble could develop pushing prices higher, but I am not banking on it this time around.
As Howard Marks points out in his latest letter, "asset prices fluctuate much more than fundamentals." The emotional swings of fear and greed create far more changes in stock prices than is usually warranted. I have been keeping my exposure around 30% all year, but now probably am closer to low 20s% now in equities. Panic isn't here yet, but it may be coming. And it's panic that you want to buy.
The truth is, there do seem to be valid seasonal anomolies that contribute to the "sell in May" theory. Vacations in the summer and lack of newsflow impact returns in the summer. Also, pension contributions, tax refunds, year end bonuses, all occur during the November thru April timeframe. So seasonally speaking its a tough few months until we get to November 1st.
So, this year, on top of the normal seasonality, we have a market that has run up 18% since September 1st last year. There is a fancy statistics phrase I love that describes the weather, and also the stock market: serial autocorrelation. That is, if its unusually hot on Monday, then its much more likely to be similarly hot on Tuesday, and even Wednesday. The market is the same way. Returns are correlated to the returns of the day before. It's not a random walk. Given that we are down for 5 weeks in a row, its more likely that we will continue down for the next 5 weeks. Knowing also that liquidity is a big driver of the market, you can ride the momentum a bit, that is until there is "game changing" news.
Last summer the market sold off 16% from peak to trough, beginning its decline in April and ending around September 1st. The announcement of QE2 at that time was the catalyst (ie the game changing news) that ended the downdraft. We might need a QE3 announcement to break out of our current weakness, but all indications are that QE3 won't happen for at least 3-6 months. I suspect that continued economic weakness (on top of more fiscal deficits), will ultimately give the Fed an excuse to restart easing. Or force them to.
Fundamentals
So that is the somewhat weak technical picture. The fundamentals aren't so great either.
- Unemployment ticked back up to 9.1% in May.
- The manufacturers ISM index fell by the most in May since 1984.
- Consumer confidence fell to 60.8 from 66, a pretty meaningful decline.
- GDP was revised to 1.8% growth for the first quarter of this year, down from 3.1% growth in Q4 2010.
- Housing continues to worsen, see prior blog on that.
- Leading Economic Indicators, designed to forecast economic activity 6-9 months out, declined in April by 0.3%, the first decline in the past 12 months.
- S&P earnings estimates for 2011 are hitting new highs. ie, with economic weakness, it makes it less likely that earnings will be able to match or exceed expectations.
This chart from the BLS below shows the employment problem in our country. While the unemployment rate is seemingly improved, if one adds in the "discouraged workers" (the ones that have given up looking for a job), then really we are pretty close to the lows.
This chart specifically shows that labor force participate rate through May this year. Only 58.4% of our population is working, pretty close to the bottom and way down from almost 64% in 2007. On the whole, we aren't creating new jobs in this country. We are bouncing along the bottom, and that is despite massive stimulus in the past 2 years. It's a little frightening to ponder what happens to this when the government reigns in its spending in an attempt to fix our deficit problems. (hint there are 2.2mm employees that work directly for the federal government, countless others indirectly).
- Sell calls on stocks you own that are up. I sold some Cigna 49 strike calls last month, essentially creating a covered call position. The stock has been a big winner over the past year, and I do still think its cheap. But if the market and the stock lag for the next couple months, I will get to keep the premium and effectively create a dividend on it while it lags. That is, as long as it stays below 49 through expiration. If it goes higher, my shares get called away so that I sold it effectively around 50.50. I am happy with that trade too.
- Short SPY. I almost always have a SPY short on, and its a good way to protect your longs. It's my biggest single position right now after adding to it last month.
- Sell your losers. Or sell half of your losers. I almost religiously follow a 10% stop loss, and you should too. Losers tend to stay losers, winners tend to stay winners. See above on serial autocorrelation. If you have a name down 20%, sell half of your position, which results in your owning 40% of your original position. Its future impact on your portfolio will be mitigated. And its likely to keep going down especially in a bad tape.
- Buy bonds. I don't really recommend US treasuries, but ETF's like CSJ or LQD are great. They benefit from lower rates, and declining yields, without taking on the balance sheet risk of the US government. CSJ is a high grade corporate bond ETF, very short duration. LQD owns the same high grade bonds, but is longer duration. It's up 3% YTD, and yields 4.7% still. CSJ is less risky, and yields 2.2%. Please please please do not own government bonds maturing more than 1-2 years out. I don't have a clue how much longer you can own them; if so you are just praying that this manipulated market continues to be manipulated.
- Sell some EM stocks/funds. Emerging markets tend to exhibit higher levels of autocorrelation than developed markets. So much risk aversion money leaves these countries, that they get especially hard hit. The diminished liquidity also makes for lower multiples, and bigger gap down risk.
- Reduce commodity exposure. I have some British Petroleum BP on the sheets, but have been long puts on CHK. Chesapeake was up over 50% in 6 months by April this year, and natural gas prices were roughly flat. Didn't seem to make sense to me. I bought some at the money puts that have been great in offsetting my BP losses. (CHK is down over 10%, and my math on their ROEs is 2.7%, pretty lousy).
- Own defensive industries, Food/Utilities. Food stocks have weak performers in the last six months, as many are grappling with higher input costs. Corn and coffee prices have doubled in the past year, suger is up 63%. These higher costs are not easily passed on to the consumer and pressuring margins at companies like P&G, Kraft KFT, Kellogg Co (K). I think they will likely see some relief from commodities if the market continues to weaken post QE2. I have owned KFT for about a year now, and not only will ag commodity declines help margins, but also their dividend yield (3.4%) becomes more attractive as overall yields fall.
Same can be said for utilities. XLU is a decent ETF holding utility stocks. It yields 3.9%, and has been exactly flat as the market has sold off 5% since April 29th. I own UTF which is a utility/infrastructure closed end fund, and its only off 1% or so vs the markets 5% decline. Swap out of consumers/cyclicals into these names.
- Gold/Silver? No clue. I lightened my GLD exposure, but really will never sell gold "as long as we have powerful fools running our central bank" in this country. Marc Faber quote. So far GLD has stayed near its highs. SLV I think is broken and riskier.
Conclusion
I have very little confidence in the markets this summer. If asset prices were cheap, it would be a different story. But almost anywhere one looks, prices are fully valued, or near so. Sure, a bubble could develop pushing prices higher, but I am not banking on it this time around.
As Howard Marks points out in his latest letter, "asset prices fluctuate much more than fundamentals." The emotional swings of fear and greed create far more changes in stock prices than is usually warranted. I have been keeping my exposure around 30% all year, but now probably am closer to low 20s% now in equities. Panic isn't here yet, but it may be coming. And it's panic that you want to buy.
Wednesday, June 1, 2011
Ira Sohn Conference 2011
I ventured to NY last week, to partake in the Ira Sohn Conference. Put on by my old boss Dan Nir and his colleague Doug Hirsch, its a great buyside event with a dozen or so top quality hedge fund presenters. Carl Icahn, David Einhorn and a dozen other moguls presented, including Marc Faber who is always one of my favorites too. The format is that these normally secretive hedge fund gazillionaires discuss their favorite stock idea, all for a great kids charity. The event has become so big, that within seconds of a hedge fund presentor identifying which stock he likes, it immediately pops in the open market. So, read this. These ideas cost $4,000 a ticket.
Erez Kalir, Sabretooth
Very smart speaker, Kalir discussed the macroeconomic environment in the US under the heading "Economic Death." It was a nice way to jump start things. His focus was how investors tended to overestimate, or underestimate probabilities of binary events. Ie, the market is currently underestimating the chance of US financial death, by which he means default, or defacto default via hyperinflation. In 2002, Argentina defaulted on $132BB in bonds, at the time the largest in history. The dollar peg was removed, investors got scorched not only in the bonds, but also in Argentine stocks because of the currency devaluation.
However, today Argentina is still "widely hated" and "uninvestable." That makes it attractive, as default is unlikely to re-occur, and its in the early stages of a land grab, improved infrastructure and energy deregulation. He specifically likes Argentine E&P companies, as energy deregulation likely will drive oil & gas prices back to market levels. His top idea here was YPF SA (YPF), also mentioning CWV CN, BOE CN, MVN CN, RPT CN.
As for the US, he says that the US fiscal situation is heading "toward an accident." Gold can be confiscated, even internationally owned gold, which happened in 1961. He recommended not shorting treasuries either, however. History suggests that the best assets to own in a financial system meltdown is farmland. Namely, INTERNATIONAL farmland. Good luck buying acreage in Tuscany was all I could think. Stocks with pricing power also could provide inflation protection, which clearly the Fed is indicating it intends to create.
Finally, he also recommended buying MBIA, which is another name "left for dead." Its humongous legacy structure product liabilities have been separated legally from the remaining business (which challenges will fail he believes). That means its remaining muni guarantee business is undervalued; its trading 1/3 of book today. This was a huge hedge fund short throughout the crisis in 2007-2009. Ticker is MBI, personally I would be careful owning this, its a total spec. I loved the YPF idea though.
Dinaker Singh, TPG-Axon Capital
Dinaker Singh recommended 3 stocks:
ORKLA, a Norwegian holding company with solar assets, aluminum assets, and cash & investments. Stock trades in Oslo, around 50 Kroner per share, and is worth 65-79 a share he believes. With anticipated special dividends on the way, and high likelihood of it splitting into several pieces, he believes you could realize this value soon. Without any restructuring however, you are still holding a nice stock with a >5% dividend yield, at 9-10x earnings, indicating that the downside is low.
Zhongpin, US ticker HOGS. This Chinese pork processing company has underperformed the market by 15-30% in the last 6 months. Asia has been de-rated (ie multiple compression), inflation has hurt earnings, and there are fears that the Chinese government will not let Zhongpin raise prices to offset higher input costs. However, it trades at 7-8x forward earnings, they continue to gain market share, and he expects earnings to grow by 50% by 2013, to $3.00 a share. At $15, he thinks it could be a double.
Sprint Nextel, ticker S. Also a recent name purchased by David Einhorn, Singh believes that the tide is finally turning for Sprint. Churn, net subscriber adds, customer service, ARPU, are all finally trending in the right direction. The merger of AT&T and T-Mobile is a good thing for the industry. His research shows that fewer players in an industry equates to better margins. Sprint needs to spend $2BB to consolidate its Nextel legacy network, but in a couple years he thinks the stock could be worth $8 to $13 a share. Today its at $5.75. My take: a long term play, wait for a better entry point, chart is extended.
Jeff Aronson, Centerbridge
Formerly the head of distressed at Angelo Gordon, Jeff pitched CIT Corp. A name that I consider a somewhat old distressed name, its still owned by a pile of hedge funds, and is somewhat a hedge fund hotel. That said, he gave a compelling pitch. He listed its various finance businesses (aircraft, office equipment, factory equipment, etc), and suggested that real book value needs to be adjusted from its stated $45/share value. Accounting adjustments and deferred tax assets on top of its stated book gets you $59/share. With the stock at $41 today, its trading at a mere 0.7x book.
Further, it has a 2010 asset yield of 8.0%, vs banks asset yields of 4.6%. Its cost of funds is very high, at 7.2%. That means its only earning 0.8% (80bps) in spread. Commercial banks have a cost of funds of 1.0%, implying that there is massive synergy to CIT either acquiring commercial deposits via a bank acquisition, or similarly huge synergy for a bank to buy CIT. Its tier one capital ratio is also very high at 20%, better than the bank average of 12% today.
While Aronson thinks EPS standalone will be $1.76 in 2012, (making the stock look expensive), a CIT merger with a commercial bank could equate to a combined $5.83 in EPS. Hypothetically speaking. Net net, CIT at $41 today could be worth $58-65 a share. My take: expensive on current earnings which clearly are impossible to predict, book value adjustments that I question, but sure lots of upside if they get bought.
Bob Howard, head of KKR Equity Strategies Group
Howard liked 2 stocks:
Wabco, ticker WBC. Wabco is a $4.5BB market cap auto supplier, including electronic and mechanical components. WBC invented anti-lock brakes. The stock has been penalized for potential litigation overhangs, which now are behind them. While the market feared a $1BB fine, it turned out to be $400mm, which they reserved for in Q4 2010. 60% of revenue in western Europe also scares investors, however he noted that 1/2 of this is Germany, and the other half is exported outside of Europe.
With the stock at $67 today, Howard believed it should be worth $100 a share today. 40% of the business is cyclical, 40% a secular growth story. Using appropriate multiples for each, he finds that the stock trades on par with industry peers, but is a far better company. ROE's are top notch at 22%, EPS has grown 38% in the last 5 years, and finally the CEO owns $200mm of stock. I liked this one.
HSNI, Home Shopping Network. 32% owned by Liberty Interactive, HSNI competes against QVC in home shopping. Its a $1.8BB market cap company, with debt of 1.2x EBITDA. At $32/share, its important to note that 1/3 of HSN sales are online, the company has only 1% retail market share, and sales are up 6% CAGR since 1994. At 5.7x EBITDA, it's worth 7.0x, in line with comps. Its ROE is huge at 29%, and you can buy it for only a 12.0x P/E multiple on 2012 numbers. Other retailers generate 15-17% ROEs. Since Liberty also owns QVC, there is merger potential here. I liked this pitch, but stock jumped to $35 in 3 days of trading since.
Phil Falcone, Harbinger
The famously successful, then famously unsuccessful hedge fund investor pitched his biggest investment, LightSquared. Which isn't even public. He believes their spectrum is worth a fortune, despite the fact that he needs some $5 or 10 BB in additional capital to deploy the network. He insists it's a terrestrial network, not a satellite network.
Phil also pitched Crosstex, XTXI. A classic distressed guy, he outlined the legal structure, showed how you were buying 100% of 3 different assets, including the GP of XTEX as well as LP units in XTEX. XTEX owns natgas pipelines and processing facilities. The GP entitles you to incentive distribution rights, or IDRs. Any hedge fund employee knows the value and leverage that IDR's provide you. Given the XTEX stock that XTXI owns, and its GP structure of XTEX, a 30% increase in dividends at XTEX imply a 90% increase in dividends at XTXI. With XTEX organically growing 10-15%, net net XTXI could be an $18-20 stock in a couple years, from $9.50 today.
Note that XTEX (and XTXI) is essentially a long oil/short gas trades. As a processor, XTEX makes money buying natgas, then processing and selling a spread of that in the form of NGLs and gas. Natgas volume is also very important. So, make sure you know which way both oil and gas are going. (hopefully, oil up, gas down.). Stock has spiked to $11.30 since last week.
Jim Chanos, Kynikos
Chanos is perhaps the best known shortseller out there, famously calling Enron a short back in 2001. His theme was the overvaluation of green energy stocks, titled "Solar + Wind = Hot Air". Solar and wind energy are highly unreliable, need backup, and pose major grid issues. They could never be a sub for baseload power. Both require huge subsidies to work, they are not efficient, with wind 50% more expensive than natgas, and solar 4x more expensive.
2010 wind installations were down 40% vs 2009, while at the same time competition is heating up with new Chinese entrants. Particularly, he likes shorting Vestas (VWS DC). Business is down, 3000 layoffs were recently announced, it changed its accounting recently, pulling forward revenue and deferring costs, and it lost 600mm Euros in FCF.
First Solar (FSLR) was his favorite short here. Spain in 2008 represented 40% of total solar demand worldwide, Germany was 50% in 2009, and Italy was 25% in 2010. [unsaid was how unstable govt subsidized demand would be in these countries]. Demand will likely decline while competition increases. FSLR also uses thin film technology, which is inferior to poly technology. They will be negative FCF in 2011, spending more and more capex to generate less and less earnings. The balance sheet is deteriorating, they pay no taxes, management is selling stock, and the former CEO sold 75% of his shares. The new CEO and CFO are inexperienced in solar.
Michael Price, MFP Investments
The famous value investor introduced a contest winner. Before the winner presented his stock however, Price mentioned that GS and C and BAC are all trading below tangible book, at low multiples, and reminds him of the environment in 1991, when financials were beaten up back then and trading cheaply. He also threw out ITT, JCP, and Becton Dickenson (BDX). All good stocks to own in the face of a weak dollar. Goldman, GS, he suggested was worth $100 more than today ($135 now). "Tremendous businesses, honest people, a good value."
Then Sunjay Gorawara, a student at the U of Indiana, presented Bridgepoint Education (BPI). GM's are 74%, revenue has been growing 30%, 31% of the stocks market cap is in cash, and it trades at 4.3x earnings. 58% of the earnings float is short the stock, despite its low valuation. Education stocks were presented as a short last year by Steve Eisman (Apollo, Strayer, et al). Perhaps its time to get long?
Steve Feinberg, Cerberus
Perhaps a guy I have admired more than anyone in the last 10 years, I was honestly disappointed by his presentation. Lacking slides, a coherent presentation, or anything interesting to say about the world at all, Steve discussed in a rambling way why he liked non-agency mortgage bonds. I swear at one point he said, "Loan size is now more important than it used to be. Large balance pools are performing better than smaller sized pools of mortgages." or "Regional differences are important to loan pools." Awesome. Next.
Peter May, Trian Fund Management
Peter made a compelling pitch why retail analysts in the US inappropriately value Tiffany's. TIF should be likened to global luxury conglomerate brands, not department retailer in the US. Margins are higher, growth is continuing via 1) new stores, 2) increases in same store sales, and 3) vertical integration like offering Tiffany brand watches to other retailers. They have 233 stores today, up from 167 stores five years ago. Its trading at 17.5x 2012 EPS, and international growth will continue to drive earnings growth. One acquisition was for over 30x earnings (I think it was Bulgari).
The day after the conference, TIF reported earnings, which were fantastic, and the stock was up $6, to $76 per share. Guess I should have bought some during his pitch.
Steve Eisman, Frontpoint Partners
Eisman was one of the guys profiled in Michael Lewis' The Big Short. A very astute financials analyst, Eisman discussed financials and banks in the US. He outlined why the bullish case on banks was likely not to work out by 2012. That is, Fed Funds will likely stay low, pressuring net interest margins (NIM). Credit quality is perhaps improving some, but loan growth is nil. Without topline growth, there is little reason to buy the banks.
So, Eisman outlined why he likes the P&C sector, particularly on the commercial side. Trading at similar multiples to book value and P/E as banks, insurers aren't burdened with residential mortgages on their balance sheets. Most importantly, he likes property & casualty stocks because the soft pricing environment is about to end. Tragedies in New Zealand, Japan, the US (tornadoes), have created lots of losses this year (85BB), that insurers now need to compensate for. He expects prices to be up 5-10% for 2011, and this "hard" pricing environment to last for some time. Stocks to buy: ACE, ARCH, AXS, ENH, MRH, PRE, PTP, RE, RNR, XL. These trade at 9.3x 2012 EPS on average. Brokers to buy: AON, MMC, WSH.
Jeff Gundlach, Double Line
Jeff is a well known fixed income mutual fund manager, sometimes likened as a young Bill Gross. His sordid breakup from TCW has hurt his reputation and ability to raise capital, but he's not lacking smarts. He discussed the bleakness of our macro environment, particularly the US' Debt/GDP ratio at 353%. He described our fiscal policy as one of "hope and pray", suggesting that we are doomed even if we somehow froze gov't spending and grew GDP at 6% a year for 10 years. Housing also he was bearish on, suggesting supply is very high, as is home ownership rates. He does not like gold, preferring instead gems, which you can fit $25mm of gems in your shoe and still wear it. Gold & silver present storage difficulties, but perhaps only if you have $25mm of it worry about.
His fund, DLTNX, hasn't been around very long, but I think its worth a buy. Especially vs Pimco's Total Return Fund, which is 250BB. Double Line is running a "mere" 7BB, far easier to generate better returns.
Marc Faber, Gloom Boom & Doom
Faber as usual railed against the Fed. His basic thesis was that Federal Reserve monetary policy creates frequent and unintended consequences. Excess credit from the Fed = bubbles. At our current level of Debt/GDP, the US will be able to do nothing except "print and print and print" dollars. Their monetary philosophy is strangely that they cannot identify bubbles, ignoring them at our peril. Commodity prices tend to go ballistic in easy credit regimes, he also defended gold as something that is more likely to be used to pay for goods than gems.
Bill Ackman, Pershing Square
Gave a very concise, quick pitch on FDO, Family Dollar. A $54 stock, he sees 35-70% upside, primarily from improving operations and margins to make it comparable to Dollar General, a KKR owned competitor. For years, both DG and FDO operated at similar margins, similar top line growth rates. After KKR took over DG in July 2007, it began to outperform. Global sourcing of product, providing more private label goods (which are higher margin) would close the gap. EBIT margins at FDO are 7.6% v 10.5% at Dollar General. A buyer could pay $75+ for the stock, and upside could be as high as $95 a share from $54 today.
Mark Hart, Corriente Advisors
Perhaps the most eye-opening presentation of the day, Hart detailed why China is a credit fueled bubble that is very likely to pop. He noted several misconceptions about China: 1) it is not an economic miracle as most believe. Huge increases in Money Supply M2 have fueled credit growth that is unsustainable. M2 there is greater than the M2 of the US, despite the fact that the economy is only 40% as big as the US. Lending has increased by 70% since 2008 alone, and now is 125% of GDP. On top of that, NPL (non-performing loans) are reportedly DOWN since then. Not likely.
Also, look at prior Asian bubbles that blew up, notably Korea, Thailand and Malaysia. These countries' Fixed Asset Investments (FAI) as a % of GDP peaked between 40-45% leading up their busts in 1998. China today is spending 60% of GDP on infrastructure, or FAI. Local government borrowing is also out of control. Only 65% of local spending is affordable with cash inflows, the rest comes from asset sales.
Misconception #2: China's foreign currency reserves are savings. Truth is, there are corresponding liabilities. M2 = 12 TT (liabilities). Compare that to their FX reserves, and the ratio is only 25%. This ratio was 28% in prior Asian crises.
Misconception #3: The yuan will continue to appreciate. Hart believes that devaluation is actually the path of least resistance here. The only bull case for the yuan is capital flows into the country. But as soon as the bubble of infrastructure spending stops, these capital flows will also stop. The exit will lead to outflows and the yuan devaluing.
Trade: Buy 1 year at the money puts on RMB (yuan). Cost is 25bps, upside could be 100x your capital.
David Einhorn, Greenlight Capital
Always the best presenter, Einhorn outlined the bull case for Delta Lloyd, DL NA. Its a Dutch insurer trading at 15.50 Euro / Share with a 2.6BB market cap. Its trading at 6x EPS, with a 6% dividend yield. Its a life and pension company, 80% invested in Fixed Income, 20% equities. Its highly levered to the economy, and a 1% move in stocks equates to 20c in EPS. While TTM EPS is 3.75 (6x P/E), likely they'll do 2.25 EPS in 2010, as market returns decline.
Einhorn then revisited his pitch on Microsoft, MSFT. Five years ago he pitched MSFT at around $25/share, when the stock was doing $1.25 in EPS. Today, its doubled its EPS to $2.50, but the stock is flat. That is, P/E ratio has fallen from 15.6x to 7.3x. He outlined the misses that the company has suffered: social media, search, tablets, phone operating systems, application hosting, etc etc. Its success in office and enterprise software is overcome by its "miserable capital allocation plan." Case in point, trying to buy Yahoo! for $30+ a share. Only managers crazier than MSFT kept them from doing a terrible deal.
Then Einhorn began to systematically take apart Steve Ballmer. He compared him to Charlie Brown trying to kick a field goal with Lucy holding the football. He showed quotes of Ballmer back in 2008 saying things like, "Am I worried about the iPhone? No, maybe they'll get 2% or 3% market share." He listed all of the top senior managers who have left Microsoft under his Windows/Office only culture. Finally, he suggested change is needed, "someone else needs a turn at Quarterback." Great speech, I personally have tried to own MSFT, and not really made money. The cheap get cheaper, but at some point, there is a bottom.
Carl Icahn, Icahn Partners
I left just as Carl began to speak. He always rambles about how he shakes up boards, how his activism enhances shareholder value. He supposedly pitched his own stock, IEP after detailing why he gave back his investors money. The reason? He didnt want to be responsible for the losses that are likely in the market in a year or two. A stellar ending!
Erez Kalir, Sabretooth
Very smart speaker, Kalir discussed the macroeconomic environment in the US under the heading "Economic Death." It was a nice way to jump start things. His focus was how investors tended to overestimate, or underestimate probabilities of binary events. Ie, the market is currently underestimating the chance of US financial death, by which he means default, or defacto default via hyperinflation. In 2002, Argentina defaulted on $132BB in bonds, at the time the largest in history. The dollar peg was removed, investors got scorched not only in the bonds, but also in Argentine stocks because of the currency devaluation.
However, today Argentina is still "widely hated" and "uninvestable." That makes it attractive, as default is unlikely to re-occur, and its in the early stages of a land grab, improved infrastructure and energy deregulation. He specifically likes Argentine E&P companies, as energy deregulation likely will drive oil & gas prices back to market levels. His top idea here was YPF SA (YPF), also mentioning CWV CN, BOE CN, MVN CN, RPT CN.
As for the US, he says that the US fiscal situation is heading "toward an accident." Gold can be confiscated, even internationally owned gold, which happened in 1961. He recommended not shorting treasuries either, however. History suggests that the best assets to own in a financial system meltdown is farmland. Namely, INTERNATIONAL farmland. Good luck buying acreage in Tuscany was all I could think. Stocks with pricing power also could provide inflation protection, which clearly the Fed is indicating it intends to create.
Finally, he also recommended buying MBIA, which is another name "left for dead." Its humongous legacy structure product liabilities have been separated legally from the remaining business (which challenges will fail he believes). That means its remaining muni guarantee business is undervalued; its trading 1/3 of book today. This was a huge hedge fund short throughout the crisis in 2007-2009. Ticker is MBI, personally I would be careful owning this, its a total spec. I loved the YPF idea though.
Dinaker Singh, TPG-Axon Capital
Dinaker Singh recommended 3 stocks:
ORKLA, a Norwegian holding company with solar assets, aluminum assets, and cash & investments. Stock trades in Oslo, around 50 Kroner per share, and is worth 65-79 a share he believes. With anticipated special dividends on the way, and high likelihood of it splitting into several pieces, he believes you could realize this value soon. Without any restructuring however, you are still holding a nice stock with a >5% dividend yield, at 9-10x earnings, indicating that the downside is low.
Zhongpin, US ticker HOGS. This Chinese pork processing company has underperformed the market by 15-30% in the last 6 months. Asia has been de-rated (ie multiple compression), inflation has hurt earnings, and there are fears that the Chinese government will not let Zhongpin raise prices to offset higher input costs. However, it trades at 7-8x forward earnings, they continue to gain market share, and he expects earnings to grow by 50% by 2013, to $3.00 a share. At $15, he thinks it could be a double.
Sprint Nextel, ticker S. Also a recent name purchased by David Einhorn, Singh believes that the tide is finally turning for Sprint. Churn, net subscriber adds, customer service, ARPU, are all finally trending in the right direction. The merger of AT&T and T-Mobile is a good thing for the industry. His research shows that fewer players in an industry equates to better margins. Sprint needs to spend $2BB to consolidate its Nextel legacy network, but in a couple years he thinks the stock could be worth $8 to $13 a share. Today its at $5.75. My take: a long term play, wait for a better entry point, chart is extended.
Jeff Aronson, Centerbridge
Formerly the head of distressed at Angelo Gordon, Jeff pitched CIT Corp. A name that I consider a somewhat old distressed name, its still owned by a pile of hedge funds, and is somewhat a hedge fund hotel. That said, he gave a compelling pitch. He listed its various finance businesses (aircraft, office equipment, factory equipment, etc), and suggested that real book value needs to be adjusted from its stated $45/share value. Accounting adjustments and deferred tax assets on top of its stated book gets you $59/share. With the stock at $41 today, its trading at a mere 0.7x book.
Further, it has a 2010 asset yield of 8.0%, vs banks asset yields of 4.6%. Its cost of funds is very high, at 7.2%. That means its only earning 0.8% (80bps) in spread. Commercial banks have a cost of funds of 1.0%, implying that there is massive synergy to CIT either acquiring commercial deposits via a bank acquisition, or similarly huge synergy for a bank to buy CIT. Its tier one capital ratio is also very high at 20%, better than the bank average of 12% today.
While Aronson thinks EPS standalone will be $1.76 in 2012, (making the stock look expensive), a CIT merger with a commercial bank could equate to a combined $5.83 in EPS. Hypothetically speaking. Net net, CIT at $41 today could be worth $58-65 a share. My take: expensive on current earnings which clearly are impossible to predict, book value adjustments that I question, but sure lots of upside if they get bought.
Bob Howard, head of KKR Equity Strategies Group
Howard liked 2 stocks:
Wabco, ticker WBC. Wabco is a $4.5BB market cap auto supplier, including electronic and mechanical components. WBC invented anti-lock brakes. The stock has been penalized for potential litigation overhangs, which now are behind them. While the market feared a $1BB fine, it turned out to be $400mm, which they reserved for in Q4 2010. 60% of revenue in western Europe also scares investors, however he noted that 1/2 of this is Germany, and the other half is exported outside of Europe.
With the stock at $67 today, Howard believed it should be worth $100 a share today. 40% of the business is cyclical, 40% a secular growth story. Using appropriate multiples for each, he finds that the stock trades on par with industry peers, but is a far better company. ROE's are top notch at 22%, EPS has grown 38% in the last 5 years, and finally the CEO owns $200mm of stock. I liked this one.
HSNI, Home Shopping Network. 32% owned by Liberty Interactive, HSNI competes against QVC in home shopping. Its a $1.8BB market cap company, with debt of 1.2x EBITDA. At $32/share, its important to note that 1/3 of HSN sales are online, the company has only 1% retail market share, and sales are up 6% CAGR since 1994. At 5.7x EBITDA, it's worth 7.0x, in line with comps. Its ROE is huge at 29%, and you can buy it for only a 12.0x P/E multiple on 2012 numbers. Other retailers generate 15-17% ROEs. Since Liberty also owns QVC, there is merger potential here. I liked this pitch, but stock jumped to $35 in 3 days of trading since.
Phil Falcone, Harbinger
The famously successful, then famously unsuccessful hedge fund investor pitched his biggest investment, LightSquared. Which isn't even public. He believes their spectrum is worth a fortune, despite the fact that he needs some $5 or 10 BB in additional capital to deploy the network. He insists it's a terrestrial network, not a satellite network.
Phil also pitched Crosstex, XTXI. A classic distressed guy, he outlined the legal structure, showed how you were buying 100% of 3 different assets, including the GP of XTEX as well as LP units in XTEX. XTEX owns natgas pipelines and processing facilities. The GP entitles you to incentive distribution rights, or IDRs. Any hedge fund employee knows the value and leverage that IDR's provide you. Given the XTEX stock that XTXI owns, and its GP structure of XTEX, a 30% increase in dividends at XTEX imply a 90% increase in dividends at XTXI. With XTEX organically growing 10-15%, net net XTXI could be an $18-20 stock in a couple years, from $9.50 today.
Note that XTEX (and XTXI) is essentially a long oil/short gas trades. As a processor, XTEX makes money buying natgas, then processing and selling a spread of that in the form of NGLs and gas. Natgas volume is also very important. So, make sure you know which way both oil and gas are going. (hopefully, oil up, gas down.). Stock has spiked to $11.30 since last week.
Jim Chanos, Kynikos
Chanos is perhaps the best known shortseller out there, famously calling Enron a short back in 2001. His theme was the overvaluation of green energy stocks, titled "Solar + Wind = Hot Air". Solar and wind energy are highly unreliable, need backup, and pose major grid issues. They could never be a sub for baseload power. Both require huge subsidies to work, they are not efficient, with wind 50% more expensive than natgas, and solar 4x more expensive.
2010 wind installations were down 40% vs 2009, while at the same time competition is heating up with new Chinese entrants. Particularly, he likes shorting Vestas (VWS DC). Business is down, 3000 layoffs were recently announced, it changed its accounting recently, pulling forward revenue and deferring costs, and it lost 600mm Euros in FCF.
First Solar (FSLR) was his favorite short here. Spain in 2008 represented 40% of total solar demand worldwide, Germany was 50% in 2009, and Italy was 25% in 2010. [unsaid was how unstable govt subsidized demand would be in these countries]. Demand will likely decline while competition increases. FSLR also uses thin film technology, which is inferior to poly technology. They will be negative FCF in 2011, spending more and more capex to generate less and less earnings. The balance sheet is deteriorating, they pay no taxes, management is selling stock, and the former CEO sold 75% of his shares. The new CEO and CFO are inexperienced in solar.
Michael Price, MFP Investments
The famous value investor introduced a contest winner. Before the winner presented his stock however, Price mentioned that GS and C and BAC are all trading below tangible book, at low multiples, and reminds him of the environment in 1991, when financials were beaten up back then and trading cheaply. He also threw out ITT, JCP, and Becton Dickenson (BDX). All good stocks to own in the face of a weak dollar. Goldman, GS, he suggested was worth $100 more than today ($135 now). "Tremendous businesses, honest people, a good value."
Then Sunjay Gorawara, a student at the U of Indiana, presented Bridgepoint Education (BPI). GM's are 74%, revenue has been growing 30%, 31% of the stocks market cap is in cash, and it trades at 4.3x earnings. 58% of the earnings float is short the stock, despite its low valuation. Education stocks were presented as a short last year by Steve Eisman (Apollo, Strayer, et al). Perhaps its time to get long?
Steve Feinberg, Cerberus
Perhaps a guy I have admired more than anyone in the last 10 years, I was honestly disappointed by his presentation. Lacking slides, a coherent presentation, or anything interesting to say about the world at all, Steve discussed in a rambling way why he liked non-agency mortgage bonds. I swear at one point he said, "Loan size is now more important than it used to be. Large balance pools are performing better than smaller sized pools of mortgages." or "Regional differences are important to loan pools." Awesome. Next.
Peter May, Trian Fund Management
Peter made a compelling pitch why retail analysts in the US inappropriately value Tiffany's. TIF should be likened to global luxury conglomerate brands, not department retailer in the US. Margins are higher, growth is continuing via 1) new stores, 2) increases in same store sales, and 3) vertical integration like offering Tiffany brand watches to other retailers. They have 233 stores today, up from 167 stores five years ago. Its trading at 17.5x 2012 EPS, and international growth will continue to drive earnings growth. One acquisition was for over 30x earnings (I think it was Bulgari).
The day after the conference, TIF reported earnings, which were fantastic, and the stock was up $6, to $76 per share. Guess I should have bought some during his pitch.
Steve Eisman, Frontpoint Partners
Eisman was one of the guys profiled in Michael Lewis' The Big Short. A very astute financials analyst, Eisman discussed financials and banks in the US. He outlined why the bullish case on banks was likely not to work out by 2012. That is, Fed Funds will likely stay low, pressuring net interest margins (NIM). Credit quality is perhaps improving some, but loan growth is nil. Without topline growth, there is little reason to buy the banks.
So, Eisman outlined why he likes the P&C sector, particularly on the commercial side. Trading at similar multiples to book value and P/E as banks, insurers aren't burdened with residential mortgages on their balance sheets. Most importantly, he likes property & casualty stocks because the soft pricing environment is about to end. Tragedies in New Zealand, Japan, the US (tornadoes), have created lots of losses this year (85BB), that insurers now need to compensate for. He expects prices to be up 5-10% for 2011, and this "hard" pricing environment to last for some time. Stocks to buy: ACE, ARCH, AXS, ENH, MRH, PRE, PTP, RE, RNR, XL. These trade at 9.3x 2012 EPS on average. Brokers to buy: AON, MMC, WSH.
Jeff Gundlach, Double Line
Jeff is a well known fixed income mutual fund manager, sometimes likened as a young Bill Gross. His sordid breakup from TCW has hurt his reputation and ability to raise capital, but he's not lacking smarts. He discussed the bleakness of our macro environment, particularly the US' Debt/GDP ratio at 353%. He described our fiscal policy as one of "hope and pray", suggesting that we are doomed even if we somehow froze gov't spending and grew GDP at 6% a year for 10 years. Housing also he was bearish on, suggesting supply is very high, as is home ownership rates. He does not like gold, preferring instead gems, which you can fit $25mm of gems in your shoe and still wear it. Gold & silver present storage difficulties, but perhaps only if you have $25mm of it worry about.
His fund, DLTNX, hasn't been around very long, but I think its worth a buy. Especially vs Pimco's Total Return Fund, which is 250BB. Double Line is running a "mere" 7BB, far easier to generate better returns.
Marc Faber, Gloom Boom & Doom
Faber as usual railed against the Fed. His basic thesis was that Federal Reserve monetary policy creates frequent and unintended consequences. Excess credit from the Fed = bubbles. At our current level of Debt/GDP, the US will be able to do nothing except "print and print and print" dollars. Their monetary philosophy is strangely that they cannot identify bubbles, ignoring them at our peril. Commodity prices tend to go ballistic in easy credit regimes, he also defended gold as something that is more likely to be used to pay for goods than gems.
Bill Ackman, Pershing Square
Gave a very concise, quick pitch on FDO, Family Dollar. A $54 stock, he sees 35-70% upside, primarily from improving operations and margins to make it comparable to Dollar General, a KKR owned competitor. For years, both DG and FDO operated at similar margins, similar top line growth rates. After KKR took over DG in July 2007, it began to outperform. Global sourcing of product, providing more private label goods (which are higher margin) would close the gap. EBIT margins at FDO are 7.6% v 10.5% at Dollar General. A buyer could pay $75+ for the stock, and upside could be as high as $95 a share from $54 today.
Mark Hart, Corriente Advisors
Perhaps the most eye-opening presentation of the day, Hart detailed why China is a credit fueled bubble that is very likely to pop. He noted several misconceptions about China: 1) it is not an economic miracle as most believe. Huge increases in Money Supply M2 have fueled credit growth that is unsustainable. M2 there is greater than the M2 of the US, despite the fact that the economy is only 40% as big as the US. Lending has increased by 70% since 2008 alone, and now is 125% of GDP. On top of that, NPL (non-performing loans) are reportedly DOWN since then. Not likely.
Also, look at prior Asian bubbles that blew up, notably Korea, Thailand and Malaysia. These countries' Fixed Asset Investments (FAI) as a % of GDP peaked between 40-45% leading up their busts in 1998. China today is spending 60% of GDP on infrastructure, or FAI. Local government borrowing is also out of control. Only 65% of local spending is affordable with cash inflows, the rest comes from asset sales.
Misconception #2: China's foreign currency reserves are savings. Truth is, there are corresponding liabilities. M2 = 12 TT (liabilities). Compare that to their FX reserves, and the ratio is only 25%. This ratio was 28% in prior Asian crises.
Misconception #3: The yuan will continue to appreciate. Hart believes that devaluation is actually the path of least resistance here. The only bull case for the yuan is capital flows into the country. But as soon as the bubble of infrastructure spending stops, these capital flows will also stop. The exit will lead to outflows and the yuan devaluing.
Trade: Buy 1 year at the money puts on RMB (yuan). Cost is 25bps, upside could be 100x your capital.
David Einhorn, Greenlight Capital
Always the best presenter, Einhorn outlined the bull case for Delta Lloyd, DL NA. Its a Dutch insurer trading at 15.50 Euro / Share with a 2.6BB market cap. Its trading at 6x EPS, with a 6% dividend yield. Its a life and pension company, 80% invested in Fixed Income, 20% equities. Its highly levered to the economy, and a 1% move in stocks equates to 20c in EPS. While TTM EPS is 3.75 (6x P/E), likely they'll do 2.25 EPS in 2010, as market returns decline.
Einhorn then revisited his pitch on Microsoft, MSFT. Five years ago he pitched MSFT at around $25/share, when the stock was doing $1.25 in EPS. Today, its doubled its EPS to $2.50, but the stock is flat. That is, P/E ratio has fallen from 15.6x to 7.3x. He outlined the misses that the company has suffered: social media, search, tablets, phone operating systems, application hosting, etc etc. Its success in office and enterprise software is overcome by its "miserable capital allocation plan." Case in point, trying to buy Yahoo! for $30+ a share. Only managers crazier than MSFT kept them from doing a terrible deal.
Then Einhorn began to systematically take apart Steve Ballmer. He compared him to Charlie Brown trying to kick a field goal with Lucy holding the football. He showed quotes of Ballmer back in 2008 saying things like, "Am I worried about the iPhone? No, maybe they'll get 2% or 3% market share." He listed all of the top senior managers who have left Microsoft under his Windows/Office only culture. Finally, he suggested change is needed, "someone else needs a turn at Quarterback." Great speech, I personally have tried to own MSFT, and not really made money. The cheap get cheaper, but at some point, there is a bottom.
Carl Icahn, Icahn Partners
I left just as Carl began to speak. He always rambles about how he shakes up boards, how his activism enhances shareholder value. He supposedly pitched his own stock, IEP after detailing why he gave back his investors money. The reason? He didnt want to be responsible for the losses that are likely in the market in a year or two. A stellar ending!
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