Ira Sohn Notes (Part 2/2)

A few weeks ago, after the 2011 Ira Sohn Conference, I put up our first series of Ira Sohn notes, promising the second installment "tomorrow." Better late than never?

Steve Feinberg - Cerberus Capital Management

• This is the first time, outside of Chrysler conference calls back in the day, that I have heard/seen Steven Feinberg speak. With that said, I have heard of other recent public appearances as well. For those that aren't aware, Feinberg was a trader at Drexal and Gruntal, before co-founding Cerberus at the age of 32 with $10M of seed capital (it now has $22B under management).
• Feinberg touted RMBS mortgages. We've been hearing a number of distressed funds (Canyon for instance at the Michael Milken conference) recommend certain non-agency pools of mortgages. The thesis is quite similar: No natural buyers of the assets, many forced sellers, incredibly large market. In effect, RMBS is much more of a credit game than a game of estimating prepayment speeds and interest rate movements
• For instance, historically average FICO scores were important metrics for understanding underlying collateral strength...now its things like loan size. Larger borrowers are defaulting less frequently than would be predicted under previous models.
• Another reason he likes mortgage: There is a high barrier of entry to getting into the business - its difficult and requires math wizards on your team. Before the investment banks did all the research and told clients what to buy ... no longer is that the case.
• He discussed in detail an Amhearst shelf. Under conservative assumptions on CPR, CDRs and severities, the bond should yield 14%

Peter May - Trian Fund Management

• Peter May is the other face of Trian (Nelson Peltz being the other). In his introductory comment, May noted that Trian is interested in great companies with low risk profiles because of a powerful brand / franchise. For his pitch, and as an example of such a company with potential for "enormous price appreciation", he touted Tiffany & Co (TIF)
• The three factors that will cause this appreciation: 1) new store growth ... the brand is very underpenetrated 2) SSS from the sale of new products in new and existing stores 3) vertical integration (I was confused at this one). The company is generating a massive amount of cash flow and is plowing that cash flow into high ROC new store builds and an newly authorized share buy back program.
• Despite a significantly increased store base and ROEs, the multiple is still lower than it was 5 years ago - using that same multiple gets you to a $100 stock
• Further upside comes from a precedent transaction in Bulgari sale at 30x

Steve Eisman - Frontpoint Partners- Are US Financials Dead Forever?

• Steve Eisman is all over the news recently. It's been reported by the WSJ that he is leaving Frontpoint where he ran their financials fund to start his own hedge fund with his existing team and new hires. Steve Eisman was a feature in Michael Lewis' Big Short. Last year his pitch was shorting "For-Profit" eduction - slaughtered much?
• At first, I was sure Eisman was going to tout the banks. But then he pulled a 180 (citing the fact that the glorious 2012 everyone expecting, where mortgage deliquencies normalized, isn't going to happen), and started talking about the one sector I've been allocating 50% of my time to since Tohoku - the insurance sector...specifically the property reinsurance carriers and brokers. He beat me to the punch!
• He started with a slide comparing the two sectors. Insurance trades less than the banks on a P/E and P/TBV basis, and Eisman thinks property reinsurers/brokers have top line growth coming from the increase in rates as losses from the ridiculous number of cats we've had this year has lowered excess capital in the industry - and it's not even hurrican season yet
• Eisman believes a hard market (i.e. a one where rates increase) is upon us. For the past few years, we've been in a soft market where premiums have declined and multiples have contracted. Eisman believes this is about to reverse
• He also noted that RMS 11 (a model of expected losses for certain events), is having the effect of increasing expected losses to both primary insurers and reinsurers. Because of this, everyone has to buy more insurance further reducing industry capacity.
• Eisman noted that P/C companies trade at ~90% of book value and in a hard market, multiple will trade above book value
• The safe way to play it before the hurrican season is through the brokers (MMC, AON, WSH)
• If you want to add a little spice to your life the Bermuda reinsurers like RNR, RE, PRE and a few others which could see losses in the event of large hurricanes
• I REALLY want to write a series of posts on analyzing insurance equities and credit (Life, P&C, Financial Guantors, Mortgage Insurers) as well as portfolio management strategies one can employ to augment certain risk factors (i.e. buy CDS on one name overexposed to the disaster that is Florida and sell CDS on another, buy CDS on one name while simultaneously going long the equity). It is by far my favorite sector to talk about.

Jeff Gundlach - DoubleLine

• Before I get to the notes, and I apologize for being such a fanboy, but Jeff Gundlach is a genius. I think people think he's crazy - Have you looked at DBLTX recently? And you know who seeded him? Howard Marks...
• Gundlach started off the presentation noting that the key to investing is accounting for policy and behavioral changes. Two of the most important variables a mortgage investor needs to model/make an assumption on is prepayment speeds (especially when you are invested in IOs) and treasury rates (especially when you are invested in inverse IOs).
• Gundlach believes that as housing inventory stays in foreclosure longer, severities will increase (it's essentially a linear relationship), and losses will accrue into higher and higher tranches of MBS ... in fact he thinks the 2007 ABX AAA is worth zero but is trading at 40 - the correlation betwen the ABX 2007-1 AAA and BAC stock is very close because BAC is really just Countrywide that had a bunch of subprime in it
• He also noted that, the Fed / Congress is playing a game of "Wheel of Fortune" where everyone is trying to thread the needle. He was skeptical it would happen especially given the fact that we can't raise taxes right now but need to given the deficit
• Gundlach advocated a diversified approach: natural gas, dollars (flight to quality), gem stones (gold and silver are heavy), artwork, and a hedged bond portfolio
• Here is the slide from the presentation, where he advocated this hedged portfolio:

Bill Ackman - Pershing Square - Family Dollar Stores

• Instead of giving you summary thoughts on the speech from Bill Ackman, here is a transcript of the speech: http://www.insidermonkey.com/blog/2011/06/06/transcript-of-bill-ackmans-super-fast-speech-at-the-ira-sohn-conference/

Joel Greenblatt - Gotham Asset Management

• Joel Greenblatt founded Gotham in 1985. Since then he's seeded hedge funds (Scion Capital for instance), wrote a number of incredible books, and taught at Columbia. Rumor is he put up 40% annually for a number of years...
• Greenblatt spoke about "value weighted indexing" the subject of his most recent book (he gave out copies after the conference) - I expect in the future Greenblatt's new firm Formula Holdings, will launch these sorts of indexes - and I will buy them for all my friends and family.
• At the end of his presentation he noted a number of stocks which meet his characteristics of high free cash flow, low multiple: JWN, WLP, CVH, AGF, MET, HUM, GME, WAG, MRK, ABT, MHP, INTC, BBBY and WSM (I am personally long WAG & ABT)
• I think my biggest takeaway from his speech was his discussion on time arbitrage. David Einhorn has spoken about it in the past, but one of the key advantages a value investor has on his side right now is time. With funds so focused on short term (month to month) performance, many incredible bargains can be had for the patient. I will write a post about this and how it relates to distressed debt investing shortly

Mark Hart - Corriente Advisors

• I had never heaed Mark Hart of Corriente Advisors speak up until this point. Here is his bio from the conference website: "MARK HART III is chairman and chief investment officer of Corriente Advisors, which Mr. Hart formed in 2001. Corriente advises the Corriente Master Fund, a global macro hedge fund, the European Divergence Funds, which were formed to capitalize on rising European sovereign credit spreads, and the Corriente China Opportunity Funds, which are designed to profit from a slowdown in China. Mr. Hart also launched and co-managed the Subprime Credit Strategies Funds from 2006 to 2008 with Kyle Bass, which were formed to capitalize on the subprime mortgage market dislocation. Mr. Hart earned a B.A. in the Plan II Honors Program from the University of Texas at Austin in 1994."
• Hart's entire presentation was his thesis on why China is a bubble and the RMB is a short...the short takeaway: China is a credit fueled bubble where 50% of loans can't be serviced out of cash flow...It's a ponzi scheme
• The short stems from the fact that the devaluation to the RMB is the "path of least resistance"
• Corriente is long puts (you can buy at the money puts with very little money down and a massive upside given the skew

David Einhorn - Greenlight Capital - Two Longs: Two Different Types of Overhangs

• One of my favorite speach of the conference, especially since I am very long MSFT (time arbitrage?), and the fact that Einhorn started with $500,000 of capital given to him from his parents and turned it into ~$5B fund. If you haven't read his book, stop reading this right now, and pick it up.
• Again instead of notes, here is the transcript: http://www.insidermonkey.com/blog/2011/06/02/transcript-of-david-einhorns-speech-at-the-ira-sohn-conference/
• My biggest takeaway: I want to be like David Einhorn when I grow up

Note, I haven't included my notes from Carl Icahn, Eike Batista, Michael Price, or Marc Faber here). The first three I have individual posts coming up in the next few weeks. Stay tuned.

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Comprehensive Ira Sohn Notes (Part 1/2)

Yesterday, Distressed Debt Investing attended the Ira Sohn Conference. We were updating from the conference live at @DDInvesting - hopefully you were following along. We hope this will be some of the more comprehensive notes out there in regards to the 2011 Ira Sohn Conference. Enjoy!

(Note: After writing this monster, I split it into two as it was getting aggressively long)

Erez Kalir, Sabretooth Capital - "Economic Death as a Special Situation"

• For those not familiar, Sabretooth Capital was formed by Erez Kalir and Craig Perry. Perry used to work at King Street Capital, followed by CSFB's credit prop group, and then starting a prop distressed trading effort at Swiss Re. Kalir worked at Eton Park and then a Julian Robertson seeded 'Tiger Cub'. Eventually Julian himself seeded the two with $65M in 2009.
• Sabretooth's portfolio, in my opinion, looks very little like most Tiger Cubs' ... which makes sense given the pedigree of the founders: Distressed / Event Driven funds. Here is their 3/31 holdings as reported in their 13F:

• “Economic Death as a Special Situation” was the title of the presentation. Economic death is broader than you think. General theme was that in dealing with situations that seem to have a binary outcome small changes in probabilities can mean large changes in expected value. Cited 3 Examples
• MBIA – Thinks rumors of its demise are greatly exaggerated. Advocates going long equity, selling 2 year subsidiary CDS and selling 5 year parent CDS. Think challenges to separation (good co/bad co) will fail, and in reality no one incentivized to force MBIA into receivership due to the second order effects it would cause. Further, market not giving them credit for $49bn in commutations. Erez noted Ackman’s open source model is dated, and was flawed because it didn’t take into account the present value of the CF streams. In the "Good bank", muni risk is not that bad. At today’s price, market is pricing the Company at 1/3rd of Adjusted BV. Depending on the outcomes, book value is $5-$20/share. Think upside is 100-200% and downside 30%, and the Company has the right leadership under Jay Brown. Given the possibility of being wrong, however, size your position accordingly
• Argentina. Sabretooth is involved in Argentina's E&P sector. Argentina, on the whole, suffers from the biggest sovreign default in 2002. Has a history of politicians making the wrong bets, using the wrong models. CDS spreads sill twice as wide as rest of LatAm ex Venezuela and in Erez’s opinion way too high. The reason for the tilt to the Argentinian E&P sector: Argentina has proven resources and a very robust energy infrastructure. In addition, Argentina has become a net importer of energy for the first time requiring significant energy investment for self reliance. The stocks he advocates are CWV CN, BOE CN, MVN CN, RPT CN and YPF
• Hedging Economic Death as it relates to the US Financial System. When countries's GDP falls below interest rates, the term "Doom Loop" should be thrown around. Thinks owning gold is flawed as risk of confiscation is high. Has actually happened in the US before, and don’t think that storing it in Switzerland is a panacea, as US Gov’t sought out foreign gold for confiscation back then as well (He noted rumors Paulson has done this). Thinks shorting Tsys (as his mentor, Julian Robertson is doing) is flawed as well – just a legal construct, the Fed can pin the long bond @ a certain yield. Thinks Buffets strategy of buying high quality stocks of dominant franchises with pricing power (e.g J&J, Coke, Amex) also flawed - in hyper inflation everything gets crushed. Advocated for owning farm-land outside of the US because its a "replenishing asset" that wins in a secular growth theme as well.

Dinakar Singh, TPG-Axon

• Dinakar Singh formerly ran the Principal Strategies Department at Goldman Sachs before starting TPG-Axon. His letters to investors are some of the best out there. I remember one he wrote in late 2008 that was absolutely remarkable. From speaking to a number of people there, they do not limit themselves to long-short equity - and will play in a variety of asset classes.
• "Beta trade is over." We are in a stock-picker’s market. Valuations and margins recovering, but when the stimuli is pulled away we get to see what the real economy looks like. Look for companies with structural growth and separately, companies that are undergoing internal restructuring. He wants to buy stocks when margins and valuations are already at cyclical/secular peaks (i.e. truly improving stories)
• ORKLA (ORK NO). Norwegian conglomerate. Thinks upside is 65-80 (30-60%). Overcapitalized. Change is underway. 3 Key segments: premier consumer staples biz, legacy alumni-related biz, and high quality investment portfolio. “Bell has rung” – separation of businesses is on the horizon, will look to return money to shareholders. Major shareholder Canica. Trading at 9/10 PE; 1x Book, 5% yield, and has a good balance sheet. In general, Europe was slower to cut costs in this most recent downturn, so more upside from here. In addition, 22% shareholder is fed up with performance and is now on the board.
• Zhongpin (HOGS); US-listed, Chinese pork processor. In the last 6 months there has been significant underperformance of Asia stock versus US. Chinese P/Es are below that of the S&P. HOGS is a good example. Basically now the growth-in-Asia stories are on the clearance aisle. The industry in which HOGS participates is consolidating (50-80% of capacity is coming out of the market by 2015). HOGS has inflation risk to it, but has the ability to pass that on to the Chinese consumers. Margins will be sustainable, as the Chinese government, which is sensitive to price increases to the end consumer, is even more sensitive to rural Chinese, and will always choose farmer over urban dweller. Buying it today 7-8x earnings and will be 4-5x in a couple of years
• Spring Nextel. Basically thinks it is super-cheap. The company has both low margins and a low valuation which will make returns explosive to the upside if things turn around. US cell market is attractive and being #3 in tri-opolgy ain’t bad. Will get chance to buy cheap assets because of forced divestitures on ATT/Tmobile (also T Mobile is their weakest competitor). Also they are fixing their networks and will have the opportunity to pursue a number of good JV deals due to consolidation in the market. There is upside here as Sprint's strong network is an attractive acquisition candidate for CTL, AMX or CMCSK. Stock currently trades at 5x EBITDA. Should trade at 6.0x-7.5x implying a value of ~$8.50 to ~$14.00/share.

Jeff Aronson, Centerbridge Partners - "CIT Group: An Event Waiting to Happen"

• Jeff Aronson is the Managing Partner of Centerbridge Partners. Centerbridge will be family to regular Distressed Debt Investing readers as they are quite active in the distressed space. They have played in cases such as Champion Enterprises, BKUNA, Wamu, Istar, Extended Stay, Dana, and many others. Before Centerbridge, Aronson was a Partner at Angelo Gordon.
• Centerbridge manages $14bn. Aronson noted they are not traditional stockpickers. With that said, they have been buying CIT, a post-reorg equity, of late. They started buying the pre-Chapter 11 bonds and have been buying since.
• Think stock’s intrinsic value today is $59; $45 3/31/11 BV plus $7 in future accretion from fresh start accounting (FSA) write-down, plus $7 in NPV of $2.1bn of DTA which they have taken a valuation allowance on gets them to $59. Will reverse the VA after they lower their cost of funding and start making more money. Using a 10% discount rate assumption in PV calc. So, cheap on an as is basis versus $41 share price.
• Thinks value if they acquire a deposit-funded institution, or vice-versa is ~$64-65. Value creation comes from marrying higher yield assets at CIT (8% vs, 4.6% for commercial banks) with cheap funding (7.2% cost for CIT versus 1.0% for banks). Thinks stand-along 2012 EPS is $1.76, can pick up another $3.03 by putting the 60% of their assets that are bank eligible (Corp, Vendor, Trade) in a bank, plus $1.04 in operating synergies gets you to Adj. 2012 EPS of $5.83. At 10x comp multiple get $58 stock plus $7 in NPV of DTA = $65 stock. If instead is the acquirer, thinks they could pay up 15% for VLY, combine the two, and at 1.1x BV = $64 stock.
• Listed US Bankcorp, WF, HSBC, and TD Bank as potential acquirors of CIT.
• His concluding comments were short and to the point: At 0.7x book value, and a normalizing funding environment, CIT is completely misunderstood by the market.

Robert Howard, KKR Equity Strategies

• In 2011, Robert Howard joined KKR to build out its public market equity initiative. Most recently he was Global Chief Operating Officer of Goldman Sachs and head of Principal Strategies Americas equities / credit division.
• KKR Equity Strategies looks for situations that are not well understood by the market (he cited lack of history as a main culprit) that "fly under the radar"
• Pitched WABCO (WBC), a global supplier of electronic and mechanical components to the commercial vehicle industry. Spin-off with a long history (invented ABS brakes). Play on cyclical recovery in Europe and US truck production, tightening safety and emission requirements and EM growth. The company also has a dominant market share in China and India. $100 share PT. The CEO is eating his own cooking, owning $200M of economic exposure
• Second pitch was HSNI. Howard sees 40% of upside here. The company trades a little less than 6.0x, which is well below the retail universe that the street usually compares the company to. The company is under levered AND overcapitalized and could pay a $950M dividend. Margins here are well below HSNI's larger competitor QVC and a consolidation makes sense. In fact QVC's parent, Liberty Media Interactive, owns 32% of HSNI. 65-90% upside in a merger.

Phil Falcone, Harbinger Capital Partners

• As expected, Falcone started off the presentation giving an overview of Lightsquared. While equity investors cannot play it (yet), there is debt out there. The 12% Term Loan trades at 102-103 as of today. Thesis is 50% increase in data form 2009 to 2014, Not enough spectrum in the mkt. He is acquiring spectrum and has a terrestrial network with a satellite overlay. All about "building the pipe"
• Falcone then went on to discuss one of their larger holdings Crosstex Energy (XTXI)
• XTXI is one of the only publicly traded General Partner interests in a C Corp structure. Crosstex owns 100% of the GP interest and 32% of a publicly traded entity XTEX (Crosstex Energy LP) and 100% of the distribution rights. There are no corporate level income taxes at the LP.
• The publicly traded entity is expected to increase its distribution by 30% which, because of leverage, could increased the GP distribution 3x higher than that
• Falcone sees at least a double to a 2.5x return on this position

Jim Chanos, Kynikos Associates - "Does Solar + Wind = Hot Air?"

• Before crushing alternative energy, Kynikos founder, Jim Chanos went on about how he was "NOT" going to talk about a particular country in Asia that he is short. The country turned out to be Japan. He is bearish on China as well (of course) and India (didn't want to piss off a billion people like he did last year)
• Bearish on Alternative Energy; Solar + Wind = Hot Air. Unreliable baseload power, geographically limited sources of power. Intermittent power generation creates significant issues. Not the job growth provider the politicians like Obama want you to believe it is – Installation, not Innovation. Low R&D, putting people to work in the construction industry basically. Environmental benefits are questionable: marginal impact on CO2, NIMBY, noise pollution, wildlife impact.
• Wind is 50% more expensive than natural gas and solar is even more expensive. In addition, we have a ton of coal.
• Short Vestas Wind Systems (VWS DC ). Accounting is gimmicky (that's how they first found it), pulling revenues forward and deferring costs. Have changed auditors = red flag. Low ROIC, and increased competition in both US and China. $600M of cash has burned in the last 6 months.
• Solar mkt fundamentals are deteriorating. Feed-in tariff policy is not sustainable particularly in Spain and Italy. Capacity growth is relentless, driven by easy credit in China (solar cell production capacity increasing 30-50% while installations are down 40-90%).
• Short First Solar (FSLR) – Uses think film technology instead of next generation poly technology. The company is burning cash this year. Management has been selling stock - Chanos LOVES when management sells stock. New management team is new to the solar business.

Stay tuned tomorrow for the rest of the post!

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Quick Reminder

I will be at Ira Sohn tomorrow, running a live update (@DDInvesting) and will have notes tomorrow / Thursday evening. Looking forward to it!

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Reminder: Ira Sohn Investment Contest due this Friday

I've gotten a number of emails asking about the Ira Sohn Conference and Competition I discussed here last week. We will be at the conference taking notes and with live updates via Twitter (@DDInvesting).

With that said, I wanted to remind everyone that the Ira Sohn Investment Contest submissions are due by Friday at 5PM. EVERYONE should be entering this ($100 for entries, $25 for students). Dust off an old piece if you must - the chance to speak at this conference is remarkable to say the least. Truly an honor. Really hoping to see one of us on that stage next Wednesday.

Again, here is the website for the contest entries: Ira Sohn Investment Contest

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Ira Sohn Conference and Competition

On May 25th, 2011 the legendary Ira Sohn Conference will take place at the Lincoln Center with an amazing lineup of speakers. In my humble opinion, this year's slate of presenters is arguably the high quality in the history of this fantastic event. The 2011 speakers include:

• Bill Ackman
• Jeff Aronson
• Eike Batista
• Jim Chanos
• David Einhorn
• Steve Eisman
• Dr. Marc Faber
• Philip Falcone
• Steve Feinberg
• Joel Greenblatt
• Jeffrey Gundlach
• Mark Hart III
• Robert Howard
• Carl Icahn
• Erez Kalir
• Peter May
• Dinakar Singh
• And comments from Michael Price and Ken Langone

The Ira Sohn Research Conference Foundation's mission is the treatment and cure of pediatric cancer and other childhood diseases. Ira Sohn, from who the foundation takes its name, was diagnosed with cancer in 1989 at the age of 24. He succumbed to cancer four years later. In 1995, Doug Hirsch (Seneca Capital), Lance Laifer, Daniel Nir (Gracie Capital), and Sohn's mother Judith Sohn created the Ira Sohn Research Conference Foundation, a miraculous organization that has invested over $20M in research to fight cancer and fund pediatric care. For more information, please check out their brochure.

Maybe even more exciting than the actual conference: This year, the first ever Ira Sohn Investment Contest will be taking place. Here are some details:

• Participants submit their best investment idea (long or short) with a market cap over $1 billion
• The winner will be selected by a panel of judges for the "most compelling investment idea with a one-year horizon
• The judges (wait for it...): Michael Price, Bill Ackman, David Einhorn, Joel Greenblatt, and Seth Klarman!
• The winner of the contest will present the investment idea, in a ten minute presentation at the Ira Sohn Conference...talk about exposure!
• The entry fee is $100 ($25 for students), fully tax deductible

Detailed rules can be found here: Ira Sohn Investment Contest Official Rules

I, for one, have already started thinking about an investment (s) to present to the judges. I am excited about the opportunity to have some of the most elite portfolio managers in the world look at, ponder on, and debate an original investment idea of mine. EVERYONE should be applying - not only because it's a world-class cause, but because if you win, and you are up there presenting your investment idea, my hunch is things are going to look pretty good in your professional career going forward no matter whether you are still in school, raising capital for a fund, already managing a book, etc

For more details about the Ira Sohn Conference, please visit the conference webpage: http://www.irasohnconference.com/ ... Distressed Debt Investing will be there taking notes conference notes, and dare I say it, tweeting in real time all the action. Hope to see you there.

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