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.

There is no question that Governments showed their panic this week. Monday morning was just awful in European markets and the Dow went down by 300 points in the morning. Perhaps, this action panicked the Governments. At least that is how it feels from the actions post-Monday.

First Euro Zone finance ministers invited Tim Geithner, America’s Secretary of Treasury. We do not recall a single instance of a US Treasury Secretary sitting at the table in a EuroFin meeting. To us, this is an indication of EuroFin panic.

Then on Wednesday morning, Mr. Geithner asked investors to “take (a European) Lehman off the table” in an  interview with Jim Cramer (see clip 1 below). Mr. Geithner told Jim Cramer that Angela Merkel was not  going to allow that. The Dow exploded up by over 250 points before giving up some gains in the last hour.

The next day, European Central Banks announced a 3-month swap using European Collateral for U.S. Dollars funding. An action rather than just words. Their panic must be real. The Dow rallied by another 186 points on Thursday. 

This week’s 5% rally in US stock markets seems to confirm the wisdom of the old adage.

2. Take ‘Lehman’ off the Table!

We remember the real Lehman vividly. It was the progression that really caused the calamity. When Bear Stearns went, they let the common stock go, but preserved preferreds and bonds of Bear.The saving of the Bear preferreds allowed all Investment Banks to issue new high coupon preferred issues to raise capital easily in the markets. We recall Bill Gross exhorting investors to buy the debt of the parent companies of Investment Banks. He believed in the message that Preferreds and Senior Debt was sacrosanct.

Then Paulson-Bernanke made the cardinal mistake. When they put Fannie Mae & Freddie Mae into conservatorship, they preserved bonds but killed the vast amounts of outstanding FNM & FRE preferreds. This wiped out investments of small banks and individual investors. This also wiped out any chance of Lehman raising 10-15 billion of capital with a new preferred issue. This doomed Lehman.

But none of these caused market mayhem because FNM, FRE debt was preserved. This may have fooled  Paulson-Bernanke into believing that markets had priced in a Lehman bankruptcy. So they allowed Lehman to file and refused to protect Lehman bondholders. That opened the gates of deluge.

No one wanted to hold bonds of Morgan Stanley, Goldman or any other financial. The financial destruction was so immense that three days later, Paulson-Bernanke bailed out AIG with $100 billion. The next day, they approached Congress with the TARP request.

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.

3. Smart European & Dumb, Arrogant Europeans

The smart European is Christine Lagarde, the new head of the IMF. In her interview with CNBC’s Maria Bartiromo, Ms, Lagarde reiterated that European Banks need to raise more capital (see the transcript of the interview on CNBC.com).

The arrogant & dumb Europeans are the couple of European ministers who dissed Secretary Geithner after inviting him to the EuroFin meeting. Basically they scoffed at him and sniffed about America’s deficits and debt problems being worse than Europe’s.

This suggests to us that these European “finance” ministers just don’t get the message of the markets and more seriously their level of panic is not high enough. If this is true, then perhaps investors should NOT stop panicking.

4. What if Greece Defaults?

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. 

5. The U.S. Stock Market

Last week, we listed opinions of several technicians about critical levels in the stock market. These opinions turned out to be very useful. Monday morning was just awful. European stock markets were in a free fall and the Dow was down 300 points. It was then that the critical level of 1136 (1135.91 actually) held. When this level held, confidence returned and amazingly, the US markets closed up on the day. The stock market then rallied every day this week.

This week the Dow was up nearly 5%, the S&P was up 5+% and the Nasdaq 100 closed up over 6.5%. A powerful rally and a beautiful one if you were long. The shorts were gored or squeezed depending on your choice of words. Option Expiration weeks often feature a bonfire of shorts and this was a big blazing one.

We congratulate Jon Najarian of Trade Monster, Lawrence McMillan of Option Strategist and Ed Ponsi (via Jim Cramer) of Barchetta Capital for their correct calls. But what next? To quote from Mr. McMillan’s Weekly Commentary on Friday, September 16,  “For now, $SPX is working its way higher — towards resistance at the 1240-1260 level.” Others suggest that the current area of 1211-1220 may provide resistance to the rally.

Some consider this rally to be a covering of massive short positions. Others like Jim Cramer think that this rally is due to the removal of the “Lehman risk” by Geithner. Does you broker or bank care whether your profits came from a real or a short-covering rally?

Remember on this coming Wednesday, the skies will part and the earth shall tremble. Why? The Bernanke Proclamation, of course (with apologies to Robert Ludlum).

6. The U.S. Treasury Market, Gold & the U.S. Dollar

Our comments last week about the tepid rally on Friday, September 9 seem valid in retrospect. Both Gold and Treasuries sold off this week and the U.S. dollar rallied. It really wasn’t much to behold. Perhaps, all these markets are waiting for the coming Bernanke Proclamation.

This week’s proclamation was by Bill Ackman at the CNBC Institutional Investor conference. His trade is to go long the Hong Kong dollar because it is destined to be revalued fairly soon (see clip 2 below). Will that be a trigger for a China bust or be a great signal for it? Why didn’t CNBC’s Melissa Lee ask this question of Jim Chanos? (see clip 6 below).

7. America, the only risk worth taking!

This is the title of the recent research report by Michael Hartnett of BAC-Merrill Lynch. He points out that US was the only region to see inflows this week while Europe, EM and Japan saw outflows. EM suffered the 7th straight week of outflows, the longest losing streak since Lehman in 2008. Japan saw the biggest outflows in 5 weeks and Japan saw the biggest outflows since September 2010.

8. Geopolitical Risks

Last week, we wrote about the escalating brawl between Turkey & Israel and between Egypt & Israel. This is one of our favorite subjects and we ourselves wonder whether we overdo it. But we were reassured by the comments of the famed Leon Cooperman of Omega Advisors (see clip 3 below). One of his critical assumptions for a bull market in stocks is that the Arab Spring is a benign one, based on desire of better jobs, freedom and prosperity and not one that escalates tension between Arab states & Israel. 

This week, we wish to report on another situation. As most readers know, China has declared its own “Monroe Doctrine” for the South China Sea. Specifically, China has forbidden Vietnam, Philippines among others from exploring for energy in South China Sea. A couple of weeks ago, a Chinese Ship tried to intercept an Indian Navy ship in the South China Sea.

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.

While readers might be aware of the South China Sea issues, we suspect most have not heard of Baltistan. They might want to read Baltistan – Where the World Meets for the Next Geo-Crisis.

Speaking of India,


8. Things on the Rise

 
This week, the Reserve Bank of India raised its key interest rates for the 8th time in this cycle to fight inflation. This cannot be good for India’s growth rate which is already slowing down. Strangely, the Indian rupee keeps going down despite the tightenings by the RBI.

We have said before that the media sector is in a secular bull market in India. This week,  Google predicted that India will add 200 million internet users in the next two years. According to the Wall Street Journal, Rajan Anandan, Google’s country head, expects India to reach 300 million Internet users by 2014, up from about 100 million now.

But this growth is not necessarily in English language media. This Wednesday, Twitter launched its Hindi portal in India. Actually Twitter is late to this trend. Facebook is available in several Indian languages and Google offers searches in seven different languages according to another article in India Real Time section of the Wall Street Journal.

And pretty soon, your knowledge of English might not suffice when you visit India. Read the Make Room for Hinglish article in the newly launched India Ink web site of the New York Times. It is a must read in our opinion. You will learn about “Mumbaiyya English”, an English adorned with slang unique to Mumbai. You will learn how core India is buying Hinglish books while the few ‘educated Indians’ tend to stay with books on India published in US. 

 
(IT Class for Mumbai’s lunchpail carriers – WSJ)        (College Street book market – Kolkata – NYT)

India Ink is the first country-specific site launched by the New York Times. It is different from the established India Real Time site of the Wall Street Journal. India Ink is more light, more fun while India Real Time is far more serious. Also, India Ink articles are free and exempt from the 20 free articles per month policy of the New York Times. Now why can’t the India Real Time section of the WSJ be free? 

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

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.

Here is something CNBC Squawk Box anchors might like about India Ink. Their club does not open until 9:30 am. 

Featured Videoclips

CNBC & Institutional Investor held their joint Delivering Alpha Conference this Wednesday. Institutional Investor was kind enough to invite us and we thank them. We are pretty much persona non grata for CNBC and we did not want them to run away from us at their own conference. Fortunately, they put the entire conference on CNBC.com. So we didn’t lose much by not attending.

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.

1. Geithner
with Jim Cramer – 

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:

  • CramerTake off the table Lehman?
  • GeithnerOf 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?
  • GeithnerAbsolutely 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?
  • GeithnerI’ve been hoping…..(Laughter)

We liked this interview. Mr. Geithner was at his best, we think. If the Susskind book is accurate about Mr. Geithner’s role in protecting Citigroup from President Obama’s order to dissolve it, then the nation owes Mr. Geithner enormous gratitude.

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

The main event at the conference was the revelation of the new trade idea by Bill Ackman, founder & CEO of Pershing Square. Fortunately for us, CNBC has provided a summary transcript om CNBC.com. 

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.

Therefore he is convinced that one day Hong Kong monetary authorities will revalue the Hong Kong Dollar up by 30% or so. Indeed, they will have no choice but to do so, according to Mr. Ackman.
So Mr. Ackman has put on a large position in the Hong Kong dollar by a mix of strategies including leveraged longs and options. His stance is that this offers asymmetric rewards – high return with very low risk.

The above is a mediocre summary at best. Those who are interested in the trade should watch the entire clip.



3. Best Ideas & Alpha – Single Best Investment Ideas – 

This is a one -hour videoclip that features the best investment ideas from six hedge fund managers. Each manager has seven minutes for the single best idea for investment. We suggest you listen to this entire clip.

3.1
Kyle Bass – Hayman Advisors – His scenario is hundreds of billion dollars of AIG happening in the Sovereign Space – That is Japan.

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.

Philip Falcone asked what has changed in the last couple of years? Readers will recall the long case Bass made on August 17, 2010. Our humble suggestion to Mr. Falcone – please read our weekly articles. That might help you be better prepared in the future.


3.2
Leon Cooperman – Omega Advisors

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.


3.4 J. Tomlinson Hill –  Blackstone Marketable Alternative Asset Management

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.
 

3.5 Daniel S. Loeb – Third Point, LLC

  • 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.

3.6 Anne B. Popkin – Symphony Asset Management

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.

The next clips is about European Debt.

4. Credit & the Hunt for Yield(43 minute clip)

In this clip, CNBC’s David Faber speaks with four managers – Peter L. Briger of Fortress Investment Group, Marc Lasry of Avenue Capital, Bruce Richards of Marathon Asset Management and Boaz Weinstein of Saba Capital Management.

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)

The experts are Sam Zell, the legendary Chairman of Equity Group Investments, Barry Sternlicht, Chairman & CEO of Starwood Capital group and Bill Ackman, founder & CEO of Pershing Square Capital Management.

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)

Jim Chanos, President & Founder of Kynikos Associates and Daniel J. Arbess of Perella Weinberg Partners are the experts. CNBC’s Melissa Lee is the moderator.

This is the best investment debate of the entire conference. The two guests have diametrically opposite viewpoints. The discussion is purely intellectual. If you have any interest at all in China or in the impact of China on your investments, this clip is a must watch.

7. Emerging Markets – The Consensus View – (27:25 minute clip)

The experts are Marko Dimitrijevic founder of Everest Capital, Scott Kolb, CIO of Korea Investment Corporation and Martin J. Whitman, chairman of Third Avenue Management. The moderator is Tom Buerkle of Institutional Investor.

With respect, this is the least useful clip of the conference. The guests are experts and know their topic. The moderator does a good job. But the discussion is nothing but a rehash of the consensus view about Emerging Markets.  We include this clip for the sake of completeness.

The only interesting comment is from Marko Dimitrijevic who said his fund has investments in 17 frontier emerging markets and he is less enthusiastic about the BRIC countries.

8. Commodities(26:53 minute clip)

The experts are Peter Gilbert, Lehigh University CIO, Jeff Scott, Wurts & Associates CIO and Paul Touradji, Touradji Capital CIO. The moderator is CNBC’s Kate Kelly.

This clip is only slightly better than the Emerging Markets clip above. Given that it covers Gold, Oil, Industrial Metals and Agricultural commodities, it should have been much more interesting and helpful than it is. Again, we include it for the sake of completeness.

9. Solving the Deficit Problem (40:52 minute clip)

The experts on the panel are Jon Corzine, MF Global CEO, Damon Silvers, AFL-CIO director of policy and special counsel, Emil Henry of Henry Tiger, LLC and Thomas F. Steyer, Farallon Capital Management.

Frankly, we have not listened to this clip for want of time. It is included here because of the importance of the topic and for completeness.


10. The End of America?
(51:22 minute clip)

The experts are Laurence Fink, Chairman & CEO of BlackRock, Pierre Lagrange,co-founder of GLG Partners, Jim Leech of Ontario Teacher’s Pension Plan and Meredith Whitney, CEO of Meredith Whitney Advisory group. The moderator is CNBC’s Mario Bartiromo.

This is a dumb but provocative title. The clip is much better than the title. We do intend to complete the discussion of this clip later.

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