For this article it would be useful to reference the slide, which Whitney Tilson gave me to post.
The unemployment rate only looks for people who have only looked for a job in the last three or four weeks, but we use a different metric, and you can see relative to peak number of jobs what percentage has been lost; all previous recoveries have recovered by now. Today we lost about 6% of all jobs disappeared from 2007, unlike the sharp recovery from previous recoveries it was much quicker even though the recession.
Jeremy Grantham — 10 Negatives from Last Year:
Grantham predicted seven years for global American economy due to 10 factors:
1.Over-indebtedness of consumers in certain countries, including the US, the US, and several European countries.
2.Dangerously excessive financial system debt was moved across, with additions, to become dangerously excessive government debt
3.We have lost a series of artificial stimuli that came out of the steady increases in debt levels and the related asset bubbles.
4.Very bad things may lie ahead in Europe, and banks in general are undercapitalized and reluctant to lend.
5.Runaway costs in the public sector, particularly at the state and city levels, have run into a brick wall of reduced taxes.
6.Unemployment is high and will also suffer from the loss of those kickers related to asset bubbles.
7.Trade imbalances and the explosion of domestic sovereign debt levels.
8.Incompetent management in Spain, Greece, Portugal, Ireland and Italy allowed the local competitiveness of their manufactured goods to become 20% or more uncompetitive with those of Germany.
9.The general rising levels of sovereign debt and the particular problems facing the euro bloc and Japan are leading to the systematic loss of confidence in our faith-based currencies.
10.Widespread over-commitments to pensions and health benefits.
In the middle of 2008 we gave a lecture titled more mortgage meltdown, which predicted housing bubble, which later became our book, "More Mortgage Meltdown: 6 Ways to Profit in These Bad Times."
The housing prices have bounced around without any real recovery. Every single year for six years houses kept going up 1% a year until July 2006, and then every single month housing prices declined; sometimes up to 3% a month, then we had a bump with some seasonality, combined with govt. taking over Fannie and Freddie, and then a strong recovery.
Strong during summer months, weak during winter months, everything is just bouncing around. But the trend is weak.
There are 54 million homes with mortgages; it is world’s largest market. Seventy-three percent of mortgages never missed payment and over-water, which are fine.
People only focusing on the non-performing loan which is only 9% of loans, but you can apply an estimated default rate and get a total of 11.2 million homes or 20.5%, are in danger of default.
Fifty percent of people who never missed a payment who are prime borrowers will default: aka, strategic default.
This problem is still out there after three years of recovery, so we are not looking for home builders, who are competing with 11.2 million homes likely to default.
Vitaliy Katsenelson — stealing his idea here:
If you look at the Dow Jones over the past 100 years, you see the market goes up for a long time, then goes down for a long time, and then stays stagnant.
So where are we today? Is this like the US in the 80s where there will be 17-year bull market?
Bubbles usually occur with low rates, and stocks are bid up. That 17-year recovery was due to the decreased interest rates going down from 17% to 4 - 5%, whereas today interest rates are at zero and Shiller P/E at 23.1x is not cheap.
If you look at forward P/E the market is cheap, but we might have margin compression, and interest rates are at rock bottom levels.
However, stocks are not super expensive either; so what do we do? We got the housing bust pretty right, and we are not pounding the table like three years ago, there is a much wider range of outcomes.
When we are not sure we like to buy defensive stocks: We like BP (BP), Microsoft (MSFT) and Berkshire (BRK.A)(BRK.B); they all have gone up and are still cheap even though they have not outperformed the market.
Berkshire Hathaway is safe, defensive, and should do very well. We have owned this stock for 13 years. We are presenting it today because it is the safest and cheapest today.
Everyone knows the stock portfolio and tons of consumer goods companies, 75 operating companies. Going back past seven years you can see reinsurance was hit by Katrina, but made huge profits as pricing went up afterwards; however, now pricing got low and has been producing lower earnings.
They have been buying operating companies.
BNI-11% of US rail traffic, which brings in $4 billion to the company a year.
Other businesses have been very volatile like net jets, but profits have becoming roaring back. Total operating income his increasing, and value in growth is now being driven by buying operating holding companies, and not stock picking in the past.
Earnings fluctuate because insurance is very volatile.
We come out with 7k per share, and apply a multiple below the 10x multiple that Warren Buffett uses (Buffett uses a 12x multiple). We are being conservative, especially since he has acquired a lot of low growing businesses like lately. Take investments of 97k, and add 7k times 10 and now you get a stock value of 170k.
BRK.A is at 120k. Good time to buy was after tech bubble and after Lehman Brothers, and after Berkshire being added to S&P500. Now is another good time to buy. The discount on Berkshire stock is 33% relative to its intrinsic value.
We also believe that due to growth in earnings the intrinsic value of Berkshire will...
They only own air rights but it should be worth $500 million.
This company is a great inflation hedge, and there is non-recourse leverage.
Whitney Tilson talked briefly about his shorts (he also answered some questions about Howard Hughes, which Glenn Tongue did a phenomenal presentation on — to be posted shortly):
We are not going into thorough detail about our shorts.
St. Joe (JOE) down $10 bucks since a month, but think it has more room to go down.
Lots of over-valued companies right now.
MBIA (MBI) we presented a couple of years ago, but they could escape their well-deserved price of zero.
Simon Properties (SPG) is more of hedge as a market crash, since it is similar to Howard Hughes Corp (HHC).
Interoil we think is worth zero.
Ralph Lauren, cotton prices is increasing COGS, margins will come down.
Boyd Gaming (BYD) is too over levered.
Q: Market can remain irrational longer than you can remain solvent? We size it small; our short book is much more diversified. Once something leaves reality it can go double times reality, and we have not have much success. We want to avoid the overvalued companies in general. We own tons of longs and only have a Sales Force (CRM) makes up a very small percentage of our short book.