Interesting Videoclips of the Week (September 10 – September 16)

Editor’s Note:  In this series of articles, we include important or interesting videoclips with our comments. This
is an article that expresses our personal opinions about comments made
on Television and in Print. It is NOT intended to provide any investment
advice of any type whatsoever.  No one should base any investing
decisions or conclusions based on anything written in or inferred from
this article. Investing is a serious matter and all investment decisions
should only be taken after a detailed discussion with your investment
advisor and should be subject to your objectives, suitability
requirements and risk tolerances.

1. When Governments Panic, Time for Investors to Stop Panicking?

This is a paraphrase of the old adage – When Central Banks Start to Panic, Investors Should Stop Panicking. The idea is that as they panic, central banks pour liquidity in to the financial system and that arrests the contagion.

No doubt Mr. Geithner, the head of the NY Fed at that time, remembers what happens when senior debt of a major financial goes gets wiped out. This is the lesson Geithner learned and that is why his emphatic statement “take Lehman off the table”. This is what Kyle Bass of Hayman Capital said on Wednesday at CNBC’s conference (see clip 4 below):

• when
  he (Geithner) said, no more Lehmans, what he is saying is that they are not going
  to let Senior Secured (debt) go and let everybody figure out how to mop up the
  mess…

Mr. Bass stated that the primary priority of a Prime Minister and Finance Minister is to maintain the structural stability of their banking system. He is right.

Last week, we expressed the ‘default already’ sentiment in the U.S. stock markets on Friday, September 9. This week, we report, in a serious vein, the opinions of smart distressed debt investors on this topic. These opinions were expressed in the Credit segment of CNBC Institutional Investor conference this week (see clip 4 below).

• Bruce Richards of Marathon Asset Management reminded investors that Argentina’s default in 2001, the largest sovereign default so far, was about $100 billion. In contrast, the default by the Red Light countries, Greece, Portugal & Ireland, will involve a trillion dollars in Sovereign debt, a mega event. 
• Marc Lasry of Avenue Capital opined that equity markets will go down by 10-15% or more if Greece defaults.
• Boaz Weinstein of Saba Asset Management pointed out that European Banks still mark Greek Sovereign debt at par even though it is trading in the markets at 20-30-40 cents on the dollar. This is why there is no confidence in European Banks. Then he told the audience that he bought 13-month Greek Sovereign bonds at 38 cents on the dollar that day.

This is why we said last week, a slow moving train wreck in Greece may be the better choice. 

This week, despite China’s objections, India & Vietnam announced joint ventures including exploration in two Vietnamese blocks in South China Sea by India’s ONGC Videsh Ltd. On Friday, China’s state run news agency Xinhua said:

• “Aggressive overseas explorations from the Indian side in the highly sensitive sea, over which China enjoys indisputable sovereignty, might poison its relationship with China, which has been v
  olatile and at times strained….The Indian government should be cool-headed and refrain from making a move that saves a little only to lose a lot..”.

For its part, India has objected to China’s energy projects in Baltistan, a part of Kashmir that is currently occupied by Pakistan. Last month, Pakistan’s President Zardari took the Chief Minister of Baltistan on a state visit to China’s Xinjiang province.

India Ink also features interesting business stories. Here are two that you should read:

• Lessons From the FlipKart Founders – India’s leading e-commerce firm
• In India, Online Retailers Take a New tack

We like India Ink. So far, with an exception or two, India Ink journalists have stayed away from the ‘educated Indian’ stereotypes. We wish India Ink and Heather Timmons, its ‘fearless leader’, all success.

Rarely do we get a chance to listen to so many experts on so many topics. So this week, we exclusively cover the videoclips from this conference on Wednesday, September 14.

1. Tim Geithner with Jim Cramer
2. Bill Ackman with his new big idea
3. Best Ideas & Alpha – Kyle Bass, Leon Cooperman, Philip Falcone, J. Tomlinson Hill, Anne Popkin
4. Credit & the Hunt for Yield – Peter Briger, Marc Lasry, Bruce Richards, Boaz Weinstein
5. Homes for Sale – Sam Zell, Barry Sternlicht, Bill Ackman
6. China, Bubble or Bonanza? – Jim Chanos, Daniel Arbess
7. Emerging Markets – Marko Dimitrijevic, Scott Kalb, Marvin Whitman
8. Commodities – Peter Gilbert, Jeff Scott, Paul Youradji
9. Solving the Deficit Problem – Jon Corzine, Damon Silvers, Emil Henry, Thomas Steyer
10. The End of America? – Larry Fink, Meredith Whitney, Pierre Lagrange, Jim Leech

We do not have the time to discuss every clip above or even provide key excerpts from each clip. We do provide brief comments on each clip. We intend to go back to these clips at later dates and fill in the details. In the mean time, we encourage you to listen to the clips about topics that interest you.

It would be not be unreasonable to attribute the rally on Wednesday to this interview. The entire transcript can be read at CNBC.com. The key excerpts are below:

• Cramer – Take off the table Lehman?
• Geithner – Of course….There’s no chance of that. I remember the
  Chancellor of Germany saying in front of the United States, repeatedly,
  in private meetings but she said this in public. She said: We are not
  going to have a Lehman Brothers. We’re not going to do it….Obviously, I think she recognizes they’ve got to do some work and make sure they make that commitment credible to the world.
• Cramer – Should we outlaw credit default swaps on things that we do not own?
• Geithner – Absolutely not. 
• Cramer – Why?
• Geithner – Because I think — you know, a lot of debate about this, of
  course, a lot of ambivalence and fear about it. But what you don’t want
  to do is get in the way of the market’s ability to hedge against risk.
  If you do that, you’ll have people take less risk. That’s bad for
  growth, bad for investment, bad for economic activity. Now that comes
  with risk, of course, and comes with challenges to the system like we
  saw. But the best way to deal with those challenges are to make sure the
  system has enough capital against risk. So the guys that are writing
  the protection hold enough capital against the commitments they make. If
  you do that, you can successfully mitigate all the concerns people have
  about — not all, but most the concerns people have about all types of
  innovative financial instruments.
• Cramer – People are afraid of getting fired. Are you afraid of getting fired?
• Geithner – I’ve been hoping…..(Laughter)
  

2. Buy the Hong Kong Dollar – Ackman’s Idea – (43:01 minute clip)

Mr. Ackman begins by describing the context.

• The Hong Kong economy has recovered massively from the global recession, its GDP is well above the peak of 2008, house prices have risen 90% since 2006, inflation has accelerated to 6% and yet, the monetary policy is identical to that of the USA, 0% interest rates with lots of QE. They share the monetary policy with the US because the HK dollar has been pegged to the US Dollar for 28 years.

Then he goes in to the history, which he says is very important:

• The HK currency was linked to Silver in the mid 1800s with China. In 1935, it was pegged to the Sterling. In the early 1970s, it got fixed to the US Dollar for two years. Then it floated for 9 years and it has been pegged to the US Dollar for the past 28 years.

The point of the history is to presumably demonstrate that Hong Kong authorities tolerate pressure up to a point and then they change their peg quickly and aggressively. Mr. Ackman believes that a 0% interest rate policy is utterly idiotic (our characterization) to an economy growing strongly with accelerating inflation.

Readers of these articles or ours will recall the comments of Mr. Bass made before on CNBC Strategy Session (clip 1 on August 17, 2010, clip 4 on February 16, 2011 & clip 2 on August 8, 2011).

• His Best Investment Idea – Options on Japanese Government Bonds, Rate Call Options or Price Put Options.

The bet is that Japanese interest rates will explode upwards and Japanese Government Bond prices will plummet.

Mr. Cooperman is convinced that the US equity market will be higher at the end of the year than now and stocks are the best asset in the financial neighborhood. His core assumptions:

• No recession in 2011 or in 2012;
• ECB steps up to the plate and does for European Financial Institutions what Fed did for US Financial Institutions,
• Obama softens his anti-business stand and
• Middle East instability is not sinister and price of Oil remains steady.

With these assumptions,

• His Best Investment Idea – He wouldn’t own a US Government Bond. It
  is ridiculous. Don’t short it yet, he says. The two stocks he mentioned are SLM, APPLE,

3.3 Phillip Falcone – Harbinger Capital

Mr. Falcone’s assumptions are that mosquitos are still biting you, your dog and cat still eat and your batteries still die. So what does Mr. Falcone recommend?

• His Best Investment Idea – Spectrum Brands.

Mr. Falcone then lays out his case for SPB.

Mr. Hill first talks a bit about their definition of risk – probability of loss and magnitude of loss over a given period of time. Then he presents their best risk-adjusted opportunity.

• His Best Investment Idea – Non-Performing Loans segment

There are 50 million first mortgage liens in the US. About 9% of these are non-performing defined as 60 days delinquent or foreclosed. His discussion of what it takes to analyze each pool of non-performing loans is scary.
 

• His Best Investment Idea – Yahoo (YHOO)

Mr. Loeb goes through his case for buying Yahoo. Generally , he said, you want to buy a great company with great management. In the case of Yahoo, Mr. Loeb said “… great assets with great opportunities but with one of the most horrendous managements and one of the worst governance structures that I have ever seen in my 16 years of history in the business.” Then Mr. Loeb said that they have taken a 5% position in the company and made his case.

Ms. Popkin made the case that levered credit, especially the higher end of it, is now at a significant discount to the long term averages.

• Her Best Investment Idea – First Lien Corporate Loans, followed by Short dated Secured Bonds in the High Yield Sector followed by short dated Convertibles.

We urge readers to listen to her discussion of these ideas.

We provide some key excerpts from this discussion:

• Richards – this will provide the mother lode of distressed opportunities in Europe, – .Sovereigns, Financial Corporates. Six countries represent real risk. Italy, Spain and Belgium are Yellow Light countries – these will not default or restructure debt . Three countries are Red Light countries – Greece, Portugal & Ireland. These countries will restructure or default …..Trillion dollars of sovereign debt in these countries. Compare that with Argentina, so far the biggest sovereign restructuring we have seen – that was only $100 billion in 2001. This is a mega risk factor and opportunity.  Italy can be contained but we need political will and the EFSF needs to be a couple of trillion dollars to hold.
• Faber – Marc what happens if Greece defaults?
• Lasry – If Greece defaults, then equity markets are probably down 10-15%, may be more. Lehman brothers could have been saved for 10-20 billion dollars – yet they provided the greatest recession we have had, trillions of dollars were lost…and you are talking about an Investment Bank not about a Sovereign country ..It is a huge issue if a sovereign country defaults. The impact that you are going to have… it is an absolute nightmare if that ends up happening…I don’t think we will be able to deal with it that easily…so I think you have to contain it….
• Briger – When I look at Europe….I see workout periods that extend to 3-7 years in places that have civil law.. There is a significant credit crisis in leverage financial institutions leveraged nominally 12;1 – 30:1 … Big problems exist in these financial institutions that are intractable in the short term….. this problem exists through out the banking system…
• Weinstein – plenty of European banks have Greece debt marked at or near par when it is trading openly in the market place in the 20s-30s- 40s….Banks have not come clean…these lack of marks is why there is no confidence in the banking system…..
• Richards – we think banking system is under-capitalized by about 500 billion dollars today..that is if things don’t get worse…..they need to sell a lot of assets and they need to raise a lot of equity,…we think the most equity they can raise in the capital markets in the next 12-18 months is at most 100 billion…which means what is really required is a TARP for Europe… which means the EFSF 400 billion gets pumped into Banks and then 3 things happen, 1) everyone gets $25 billion…2) to keep the run on deposits, we see a little rip in the fabric every day..they guarantee all deposits..3) have banks debt guaranteed for 2-3 years by their governments…a line in the sand, we are not going to let contagion reach Italy Spain or Belgium,.. we are going to restructure Greece and Portugal… to me that is the Brady Bonds plan in which 17 countries got restructured under the Brady plan…stablilize the banks and isolate the countries ..but you need a big enough war chest..of capital and we think that is a 2-3 trillion dollar number at the EFSF…at 400 billion…It will have to come from Germany, France, the IMF will have to pony up…but the cost of failure is way too huge…relatively to the cost of fixing the problem
• Lasry – Banks need capital, they need to delever…no one wants to do it… we didn’t want to put money in Lehman, we put 100 billion in AIG…the costs of not doing it is huge….
• Faber – give us your ideas…
• Weinstein – Banks are trading at same spread as to Sovereigns – Go long the Sovereign Debt And Short the Bank Debt.
• Briger – the biggest theme we see is price gap… where banks have expectations of selling and where buyers like us are prepared to buy — today it is the biggest gap I have seen in my career…
• Lasry – huge opportunities in the credit market today……prices are implying a 7% default rate in the US – don’t think that will happen…so 3 months ago no one would have talked is US going to recession…but today that is the question…so in US you have far more liquidity but prices have come in 10-20% so that is a huge opportunity for us…
• Weinstein – credit vs equity – what is more attractive…in May 2011, we got to 6.6% in the high yield index, and that includes the interest rate component from Treasuries,,,,,,there was not much left to go…..so when we came in to Q3 2011 we had almost no high yield bonds in our portfolio, we thought equities were more attractive…high yield stopped going with the stocks, when stocks went up 1%, high yield would go up.30cents where as in 2010 they moved up 1 for 1….such a pernicious decline in high yield that valuations are really attractive, but high yield tends to go from cheap to very very cheap…
• Richards – i Am not sure how cheap it is… it is sort of at fair value,.,,high yield has sgone from 104 to about 97, yield has gone from 6.6 to 8.4% …and if we get a recession and default rates get to 7%, we would be back to 900bps or may be wider to where Treasuries are today….
• Richards – if someone wants to buy high yield, I would buy leveraged loans right now ,,,they have cheapened from 95 to 87.5…first time loans have become cheap to bonds…leveraged loans offer very good relative value to bonds…..
• Faber then asked for predictions: Is Greece going to default? Yes or No?
• Briger – I think it will restructure – with a big discount to the bondholders
• Lasry – restructuring but limited in scope
• Richards – Contagion – yes, Greece will default and it won’t stop at Greece..You got to add Portugal and Greece in that mix too…Something between a hard restructuring for Greece and a burden sharing losses,whether it is 20 or 30 point discounts required for Portugal and eventually Ireland…
• Weinstein – We actually purchased some 1-year Greek bonds today at a price of 38, year and one month bonds..looking at this as an option, so we think low 30s for 2-3 year bonds and high 30s for one-year bonds offer interesting odds.

5. Homes For Sale – Sam Zell, Barry Sternlicht & Bill Ackman – (28:10 minute clip)

This is the most candid clip of the entire conference. Besides their candor, the guests offer great insight into the real estate market. We were particularly impressed by the comments of Barry Sternlicht. An absolute must watch clip in our opinion.

• Sternlicht – I think the Government by keeping rates where they are, now thinking about a Twist is telling everyone that these are extreme measures for extreme times, that in of itself is destroying confidence…there is actually demand for single family houses, we should know, we own 18,000 lots in our funds,..you got to figure out how to stabilize these housing markets, people want to buy a house… but they don’t want to buy a falling knife..… it is real problem because the housing market is the backbone of the American consumer’s confidence…you are going to need 650,000 single family homes in three years, the supply of standing finished inventories is plummeting..the housing market will come back, it will help the economy, it will create jobs and things will get better…
• Sternlicht – we are growing as a nation, that is the biggest difference between us and Japan, we add 3 million people a year, you need a million units plus what is destroyed..150,000-175,000 multi-family apartments being built..now 350,000 single family homes, the lowest in my lifetime, not sustainable…people are actually clearing land to lay new infrastructure , build houses in Orlando because there is a big hospital facility coming up…there is job creation and that is the way the system is supposed to work..
• Sternlicht– the interesting thing about real estate is after we wind up with Europe down the road…yield is going to be valuable..property is gonna have a bid..there is a lot of sovereign wealth funds in the world that have enough Treasuries, we keep producing more of them and they are looking at prime office buildings globally – they are under-weighted to the United States, they look at a 4% yield compared to the 5-year which is 88bps and 2-years that is 0.2% and why wouldn’t you buy a building? they are an inflation hedge…from the pools of capital that are being assembled in the world today are looking for yield…you can lever real estate and hit the 8% bogey that these pension plans need fairly reliably…you know that’s true because the cross-over capital that we compete against today is not coming from real-estate dedicated funds like ours..it is coming from hedge funds which are laying in some of their money into levering Reits, direct assets or buying distressed debt at, we think, sometimes too high prices, …because it is a stable 8, o
  r 10, a levered 12…investors will give them a lot of money if they can produce consistent returns
• Sternlicht– there are 3 green lights for real estate, Carl to invest when you know you are not too late in the cycle:
  
• 1) in the US, when you can buy way below investment costs,
  
• 2) positive leverage – we can buy yields that are higher than the costs of debt so we get a higher cash-on-cash yield and we can wait.
• 3) no new supply. there is nothing being built in almost any asset class in the US and the fourth point is we have this little devil in the closet called inflation.
• Zell – in the multi-family area, it has never been better, the demand has never been better..a lot of that has to do with people don’t want to make commitments and they are almost willing to pay, in the rent vs. buy formula, they are almost willing to pay more for the first time in my career, pay a premium to be able to rent  so that they don’t get any tail liabilities..in the commercial real estate, there is no supply, there has been no supply since July 2007 ..which means that everything that exists is filling. That’s the good news. The bad news is the markets are resisting raising rents. The only place in commercial real estate where there is significant elasticity is multi-family.
• Quintannia – Will the market be changed by a shift in the administration?
• Zell – How about our whole life would be better? You couldn’t do worse. You really couldn’t. I mean I thought Jimmy Carter was bad.
• Sternlicht – I am a Democrat, right! You have to treat the disease and not the symptom. Our unemployment rate is 4% for College grads and 14% if you haven’t gone to College….Our education system is in shambles…we have a problem with our labor force and it is a long term problem…you need leadership..we have elected a community organizer that is acting like a community organizer and not a leader.

6. China, Bubble or Bonanza – Jim Chanos & Daniel Arbess – (24:03 minute clip)