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.