Ira sohn Investment Conference Notes
For those that are new, the idea is this: You buy a pretty expensive ticket and some of the smartest minds on Wall Street give you some of their best ideas for the coming year. The money gets donated to the charity. Each year I put out a synopsis of the event. I try to get as much of the content as I can; however, I am no reporter and I am certain that I miss a few things. So, this may not be complete and this is NOT a Cantor Fitzgerald research piece. I’m just a guy reporting what I heard.
The scheduled line-up for this year: Bill Ackman-Pershing Square, Daniel Arbess – Perella Weinberg, James Dinan-York Capital, David Einhorn-Greenlight Capital, Steve Eisman, Niall Ferguson-Harvard Professor , Jeremy Grantham- Grantham, Mayo, von Otterloo, Jonathan Jacobson, Seth Klarman-Baupost Group, Steve Rattner, Larry Robbins- Glenview Capital, David Tepper-Appaloosa Mgt. , and Sam Zell-of the Kingdom of Sam.
This year’s conference was heavy on macro-calls. We got wide variety of opinions on where we were going.
Sam Zell gave his normal speech. This means he spoke in parables. He mentioned the recent election of President Obama and said that we definitely have change. He sees EXTREME changes on the horizon and warns that only those willing to adapt will survive. His investment thesis is basically Darwinism. Survival of the fittest.
Jonathan Jacobson- Highfields Capital. They are a fundamental analysis/event driven fund that concentrates their investments on 20-30 names. He is worried about the clowns in Washington DC. He thinks the Obama administration is fundamentally anti-business. They keep changing who they go after but basically if you have succeeded in business in the past 20 years that you are evil.
His Pick is SLM. The stock trades at 2 times earnings and many of its competitors are either gone or are going to have trouble staying in business. SLM has been slammed for a perceived gross leverage issue and worries over their ability to refinance their debt. Also, many think their future prospects are bleak. His reasoning is that they are one of only four that service college loans and their book is larger than the other three combined. The credit quality of the loans is getting better. They enjoy economies of scale. They refinanced when they had the opportunity earlier this year. He cited insider buying, as well. He thinks SLM is worth $15-$25/share depending on how some of its newer businesses mature.
Daniel Arbess - Perella Weinburg
Daniels main theme was that we are in an unsustainable paradigm. The West borrows and consumes and the East lends and produces. He claims this must change but it doesn’t seem likely soon. He claims the basis of the global finance and currency system is at stake. The days of investing in individual securities without considering the macro-economy, are over. We must find hedges that are not in the stock and bond markets. His investment theme is “shake hands with China”. Daniel asserts that China will be the world leader in manufacturing. He suggests being long China and short any US company that competes with China. He likes gold and other precious metals.
Daniels ideas: Long IVN for many reasons but he likes that they have a huge copper mine on the border of China. He likes gold but not as a safe haven against inflation. He likes it because it has tangible value and the fiat currency that we print will eventually devalue. He likes a short yen long Canadian dollar trade. He is bearish on the Euro and European sovereign debt. He is convinced that we need to take the pain and stop the intervention. Otherwise, our kids are screwed
David Tepper – Appaloosa. David’s funds in general are 70% debt and 30% Equity. Right now his debt is 50% Corporate and 20% asset backed. He is not as fearful as some of the pundits. He thinks the investing world is resilient and will adapt to the new environment. He discussed the world summit in the late 1800’s about what to do with all the horse manure in the streets. It was estimated that by 1950 the streets would be covered in three stories of manure. Obviously we adapted.
His picks: AIG 8.175 Jr Subordinated debt. He thinks it is fairly safe given the fact that the US Government owns such a huge % of the company. He says it may look like easy money to play the capital structure arbitrage here but be careful because you can get really hurt. The government might change the rules at any time. He said to look at the CMBS market in the commercial end. They recently bought some of these instruments at .20 on the dollar that they think will mature near par. In Equity he likes BAC and STD (Banco Santander) which does a good majority of its business outside of Spain.
Niall Fergusson – Academic extraordinaire who speaks at and teaches for many of the world’s top Universities. Now, he just needs to learn how we spell “Neil” here in the USA. Niall said the Debt to GDP ratios are getting scary. On our current path in 2040 we will need 100% of all tax revenue just to pay the INTEREST on our debt. He suggests being long “virtue”. He says the PIIGS nations are getting all the grief and the USA is worse off. He predicts that by 2013 that the USA will be Greece. He suggests that we cannot just print our way out of this mess.
Steve Eisman. Steve made his name and his fortune shorting the sub-prime mortgage market a few years back. Steve claims he never thought he’d ever see a market as dysfunctional at the Subprime market was in 2006. He claims the “for-profit” education stocks are just that dysfunctional. He claims this industry takes advantage of the government Title 4 loan program and gets away with it because they spend giant money on lobbyists.
Jeremy Grantham- GMO, llc. They use several metrics to and look at a 7 year time horizon. He would suggest to allocate your portfolio into 1. Timber 2. Emerging Markets. 3. US High quality stocks. He says you should always “bet against the bubble” He says the record is 32-0 since the early 1900’s. All have bursted. Every time someone says “ it’s different this time” or “ this is a new paradigm” Jeremy gets more convinced he is right. He says everything regresses back to the norm and the 2 or 3 sigma “bubbles” always come back. He says Bernanke is too much an academic and wouldn’t agree there was a bubble in real estate. Jeremy says the two current bubbles are UK housing and Australian housing markets. He says the variable rate mortgages have given the UK a stay of execution but it’s only a matter of time. He laughs and says the nasty calls and emails he got from Australians when he said their housing market was a bubble were “encouraging”. As with many other speakers Jeremy thinks the debt to GDP ratio in the USA is a big problem. He calls the “Greenspan Experiment” of holding rates low for an extended period, dangerous.
David Einhorn- Greenlight Capital. David was his normal self. Amusing and insightful. He sarcastically started by saying he had “ Good news for our grandchildren” He said he was tired of hearing how our deficit spending was piling a mountain of pain on our grandchildren. He says that WE are the one that are screwed. It’s so bad now that we are only a few years away from disaster. He claims the government has learned nothing from our recent mess and is making things worse. The government continues to lend to those that can’t repay. He says the stimulus has PERMANENTLY upped the level of government spending. Where’s the line when it all goes south? No one know, especially the government. It all depends on two things. How long will the markets continue to buy US debt and how long can we print money? David pokes fun at the way the US Government calculates CPI. Basically, they change the way they calculate it to serve their interest. One example, healthcare is 20% of our economy but only 6% of the CPI.
His picks: Short MCO and MHP. Long Gold and ABG. He still thinks the rating agencies should go away. They give false assurance and exacerbate losses when things go really bad.
James Dinan-York Capital James thinks markets will adapt to our current mess. Equities are a decent place to be. He likes CCE. There is a deal happening where KO is buying the US bottling operations from CCE. CCE will continue their other operations. CCE will get $10/ share and bottling in Sweden, Norway and Sweden. James like the free cash flow. He likes ING. They have to divest their insurance group. He thinks they will either sell it or spin it off. If they sell it they will use the money to pay back their government bailout loan. If they are able to use their free cash flow to pay back the loan they could spin off the insurance unit to holders. He likes Lyondell (LALLF). Its coming out of bankruptcy with a good business and an incentivized management. He thinks its worth $22-$23 and it trades at $17. His last pick was a bank liquidation in Iceland. I apologize but I didn’t hear the name.
Steve Rattner - Wall Street financier that worked with the Obama administration on the auto bailout. Steve called the government actions over the past year or so “Necessary and Appropriate” he defended TARP, the Stimulus Package, the “stress test” for banks and the Auto rescue. He said they were all necessary and handled well. He drew the first ever heckles at the Ira Sohn conference when he said something had to be done about income inequality in America. That the top .01% now “got” something like 6% of the nations income. ( Larry Robbins later corrected him to say “ earned” 6% of the income.) He said the government took a “ hands off” approach to business other than the financials. He said Congress is like a war. He said there is “ no appetite in Washington to do anything about the deficit. HE said higher taxes are coming and that the next thing in line is taxing carried interest.
Larry Robbins – Glenview. He compared current market multiples to historic ones and said the current ones should be higher. Why ? 1. Maybe earnings estimates are wrong. 2. Government getting too big? 3. Psychology. He said it’s a psychology problem at the moment. He said we are in Post Traumatic Stress. That the definition in the psych manuals includes being exposed to a situation that causes fear, hopelessness or horror. Larry Likes ESRX, MCK, LIFE and FIS. ESRX stable earnings, Multiple expansion and cash on hand to buy back stock or make good acquisitions. MCK has a pile of cash, good FCF and is 11x earnings. LIFE he like the organic growth, 11.5 times earnings, defensive business mix and thinks the industry will consolidate. FIS has great free cash flow, margin expansion, diverse customer base. They recently passed on a takeover and recapitalized. They took on some debt and will buy back $2billion in stock.
Bill Ackman- Pershing Square. Bill said the ratings agencies can be saved but the entire process has to be changed to get rid of corrupting incentives. He basically subjects them to all the same rules as the rest of Wall Street. He picks GGP again. ( He picked it last year at $1 and it went to $13 so he said he gets to pick it again). Their restructuring will create 2 entities. One (PFGGP) will hold the “ cash flow generating” malls and the other (GGO)will hold the “ land assets”. PFGGP will have the same NOI with less debt and still have the high quality malls. He thinks this part is worth $15 and the GGO land assets are worth $5 conservatively. Also, Bill just bought a big position in Citicorp – C.
Seth Klarman- Baupost. Seth gave no stocks but read what he said he would say if called in front of Congress to discuss Wall Street. It was lengthy, but he made several good points. This is a capitalistice, free market and the stock market is and always has been a “caveat emptor” game. People who hedge or short sell are not evil. Short sellers are the policeman of the financial markets. The government should let the markets take care of themselves. No bailouts. Let the strong survive. The other side of the trade should not matter. Anyone in a stock transaction thinks the other side is wrong, its what makes a market. He says Congress should question Bernanke about the zero rate policy and what is on the balance sheet. They should ask him what he thinks is a bubble (because he has apparently never seem one). Seth thinks they should do something about the ratings agencies. He says no lessons are learned when the government bails companies out. He is fearful that the government is not managing the people’s money with any margin of safety.
I hope this is helpful.
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Jeremy Grantham (Updated on 05/18/2013)
David Einhorn (Updated on 05/18/2013)
Bill Ackman (Updated on 05/18/2013)
Seth (Updated on 05/18/2013)