Back From the Inferno

It was crazy being in NYC as the markets continued to burn. I was on the Deutsche Bank trading floor located on Wall St for awhile. Just nuts. I sent out this email to several of you of thoughts from the Value Investing Congress. There are all kinds of articles and blogs that cover what everyone talked about.

Email:

Below is some thoughts that came from the Value Investing Congress. In general the first day was pretty negative but the second day was pretty positive. Most there (including myself) think in the next 36 months we are going to have a buying opportunity of a lifetime. Short selling wasn't mentioned at all except for the last 30 minutes of the conference. There was some talk of the horrendous policy decisions by the FED and the Treasury. Alot of hard core value investors run long only funds. Not surprising everyone there I ran into was getting killed. I have included the most macro presentation entitled An Overview of the Housing/Credit Crisis, Why There is More Pain to Come by Whitney Tilson and Glenn Tongue. This presentation was first given about 9 months and is updated. It is by far the most complete presentation I have seen on housing. They have pricing data on every single mbs transaction going back to 2004. Below is just some interesting macro comments from a few presentations. As a side note I think we are getting set up for a huge counter rally.

Whitney Tilson and Glenn Tongue of T2 Partners

* Mortgages used to be made on a 3 to 1 income ratio while putting down 20%. The peak went to 9 to 1 and on average putting 10% down. Only currently back down to 5 to 1 income ratio. Borrowing power has tumbled 39%

* Everyone was calling it a subprime crises but not really a subprime crises. Prime is a huge problem.

* To many homes created. Over 10% of homes built this decade stand vacant (slide 15)

* 42% of homes sold in August in California were in foreclosure. You had a 54% decline in regular sales in August as homeowners anchor to old prices just like investors. (slide 16)

* Home prices are halfway finished going down. (slides 18 to 23)

* The only data point contrary to this and pointing to the fact that homes prices may have bottomed is home prices compared to income (slide 23)

* Contrary to popular belief mortgages guaranteed by Fannie and Freddie are running much higher (more of them being made) helping the housing market.

What does the future hold *Getting passed the balloon of arm resets (slide 33)

* Much bigger and much more scary is the option arm resets. These will be much more painful for housing and the banks for many reasons. (slides 34 through 40). They spent alot of time talking about this. It is a 2009 story and something that really scares them.

* On Alt A's, It is estimated that 70% of Alt A mortgages were made with exaggerated income.

*In March the IMF was talking about 30 billion of losses in prime loans as part of their 1 trillion estimate. Whitney said months ago he thought WAMU alone would have 30 billion of losses in prime mortgages. (slide 69).

* I can't overemphasize the data they have on every loan securitization going back several years. Slides 46 though 68 walk through several securitizations and the resulting outcomes showing how the mortgage origination's standard fell off and then disappeared. Those red data point were loans never made in the history of man. There is no data to be able to predict at all how bad the non performing loans will be. Slide 68 walks through a full securitization with their estimated potential losses.

* Slide 78 on talk about 3 stock ideas they like. They like SATS, Fairfax Financial, and Berkshire Hathaway

John Burbank of Passport Capital

Another who focused on macro issues. Thinks biggest policy errors in the history of the United States are happening right now. Believes there was secret massive intervention to get the dollar up and oil down. The current policies demonstrate a remarkable lack of understanding of what is going on (what I have been saying) and foresight. Believes a huge withdrawal from the dollar is coming if policy decisions get on board with the actual problems. The only way out is massive inflation. According to him it is unthinkable that the Treasury hasn't printed 2 trillion to put directly into the banking system. If the government doesn't get on board quickly a depression is coming. We are on the precipice. His contention was that alot of hedge funds were positioned correctly for proper policy decisions but the government went down a route that was unthinkable. Currently he says the economy has had a cardiac arrest and the policy decisions by the government is prescribing vitamins and exercises to the cardiac arrest patient. Believes if they wait over a month for the TARP to work that the cardiac arrest will be terminal. Stock ideas. He likes the idea of longing Monsanto and Potash and shorting Vulcan. Likes longing EFG Hermes (the Goldman Sachs of the middle east)

Bill Ackman of Pershing Square

Bought a huge amount of Wachovia when the CITI deal was announced (I have to say that took guts). Walked through the analysis (incredible insight) of that trade. Has also bought AIG though small position because it is high risk high reward position.

Think Paulson should take the 750 billion and don't buy CDO's or other toxic paper derivatives etc. Instead buy any and all actual delinquent mortgages for say $.50 on the dollar. Just buy the actual mortgages. This will be far more effective because all the derivatives and cdos will gain in considerable value because the assumptions going into the recovery assumptions will change dramatically. Most of the losses in the financial system are in these derivatives and if the loss assumptions are adjusted in the models because all of a sudden the actual delinquent loans are getting back more than was expected it has a huge impact on all the derivatives of these mortgages and hence the financial system.

Carl Ichan (fill in speaker)

*Thought the real problems were are at the board level. The boards are not making these guys accountable.

*Created an environment where many years the most aggressive and reckless gobbled up the more conservative.

*Said we made tulip bulbs and in our case it was houses.

* Thinks the accounting should be loosened now but doesn't think it caused the problem or will help the problem much.

* Very cautious about the current market

* Loves the asset class of bank debt. 15% IRR now. This was echoed by several speakers and I agree and an area I have been talking about. I just don't have the tools needed to research bank debt.

Leon Cooperman

*By far he was the biggest bull speaker (he was last year also)

* Climate chilly but not as bad as some assume

* 1957 was the year of reversals. Prior to 57 you got higher yield in stocks than bonds. Approaching this switch again. Bearish view is that growth opportunities are limited (like Japan), bullish view is the market is cheap.

*Cash acquisition activity suggest the market isn't overvalued

*Best news will be when stocks don't go down on earnings disappointments. Not seeing it yet.

* Eight things to be watching 1)credit markets 2) home prices 3) oil and commodity prices 4) The dollar 5) leading indicators of economy and employment 6) new fiscal stimulus package 7) financial stocks 8) individual stock prices response to disappointing earnings.

* Likes ATLS,ATN, APL, and AHD There were many more speakers but those above where the ones who had macro stuff. All the other ones talked exclusively about stock ideas.