Kyle Bass on MBS, Housing & Gold: Bloomberg Interview

We wanted to quickly highlight Kyle Bass' appearance on Bloomberg TV from last week for some of his comments on housing, the mortgage-backed securities market, gold and other topics.  The Hayman Capital founder also talked about Japan, his longstanding topic of interest.


On residential mortgage-backed securities: “That investment is working…The various concentric circles surrounding housing not getting worse, which is how we think about it. We are not expecting it to get materially better, just not to get worse. The services sectors, the new mortgage insurance companies, the things that are actually asymmetric investments you can make around the housing market not worsening are where the majority of our long side of our portfolio is.”

Just yesterday, we highlighted a piece from hedge fund Prologue Capital on MBS and the housing market which featured bullish comments on the industry as they see a recovery happening.

Bass mentioned playing mortgage servicers and these related bets have been popular amongst hedgies.  Our Hedge Fund Wisdom newsletter in the past has flagged that many funds have been active in shares of Ocwen Financial (OCN) and the like.

Turning to other positions Bass might potentially be involved with, Hayman disclosed an ownership stake in Realogy (RLGY) at the end of the fourth quarter.  The residential brokerage house completed its IPO during Q4.


On the future of Fannie and Freddie: “I have no clue…We decided to just exit, thinking about them when you meet with both sides of the aisle, they both want a bullet in their head. Typically when that happens you get a bullet in your head. The second thing we were thinking about, if you remember there was a proposal to start raising the g-fees. There is a way for the U.S. Treasury to get paid back all of the money they've pumped into Fannie and Freddie if they start raising g-fees."


On gold: “We have always had a position in gold. When you think about the largest central banks in the world, they have all moved to unlimited printing ideology. Monetary policy happens to be the only game in town. I am perplexed as to why gold is as low as it is. I don't have a great answer for you other then you should maintain a position.”


Embedded below is Bass' latest Bloomberg TV interview where he talks about many other topics:



For more on this hedge fund manager, we've also posted up Bass' short of Japanese Government Bonds.

Jeff Saut: Housing Is Improving & Is The Key Driver

Strategist Jeff Saut is out with his weekly commentary in which he touches on drivers of the American economy in the private sector and how improvement in housing will be the key driver going forward.

Saut notes that we may be seeing a transition in the private sector, a changing of the guard per se.  He feels that exports and manufacturing have waned while housing and residential construction has surged.  He points to home prices rising and a resurgence in housing as the key to employment numbers.

While he argues that manufacturing and exports will regain strength once the fiscal cliff issue is resolved, Saut thinks that "housing looks to be an undiminished theme over the long run."

He doesn't like the homebuilders quite yet, but his real estate analysts have recommended Rayonier (RYN) as a play on housing, noting:

"We reiterate our Strong Buy rating on Rayonier following 3Q results, as we believe RYN shares offer one of the  most compelling risk/reward profiles in our REIT coverage universe.  We view Rayonier as a special situation  within REITs, driven by compelling growth prospects for its performance fibers business and a growing dividend  (+33% since 2009), which also offers investors a unique way to play improving residential construction activity."


Embedded below is Jeff Saut's weekly market commentary:




You can download a .pdf copy here.

For more from Saut, check out his piece on how investing performance is determined by how you manage losses.

Aaron Edelheit's Presentation on Housing Market: Value Investing Congress

Continuing our coverage, today we're posting up more notes from the Value Investing Congress.  Below are notes and the slideshow presentation from Aaron Edelheit of American Home Real Estate Company.  His talk was entitled, "Housing: The Foundation of the Next Bull Market."

He says the housing crisis crushed the middle class (loan qualifications really difficult).  Rental demand is surging +8.2mm since 2010.  Rental rates are climbing, Equity Residential raised rents 5.5% in Q1 2012.  Ivy Zelman expecting rents to rise 6% per year nationally.

98% of metro areas are cheaper to buy than rent (Per Trulia).  Implications: Residential REITs, Home Depot (HD) and Lowes (LOW), homebuilders will do well.


His Pick: Lender Processing Services (LPS)

- $2 billion market cap. Housing at bottom: service 50% of mortgages by volume.  Return to normal volumes will help them.  Spun out of Fidelity National (FIS) in 2008.  FCF "juggernaut" > $300mm FCF per year.  Repurchased 11% of stock in last year.  Could have $5 EPS and 12x multiple.  Risk is lawsuits, but manageable. The above notes are courtesy of Kyle Mowery from GrizzlyRock Capital.


Embedded below is Aaron Edelheit's presentation on the housing market:




Be sure to click here for other presentations from the Value Investing Congress.

Michael Burry of Scion Capital on Bloomberg's Risk Takers

Last night on Bloomberg TV's "Risk Takers", Michael Burry was profiled for his extraordinary subprime short. The former Scion Capital hedge fund manager is featured in Michael Lewis' excellent book, The Big Short.

While Burry is a value investor by nature, when he saw the warning signs of the impending housing bubble, he had to act. Bloomberg takes us through Burry's thinking and the pushback he received from investors upon straying from his equity value investing ways.

Embedded below is the profile on Burry from Risk Takers:



The video showcases blurbs from some of the letters Burry sent to clients before the crisis. We've posted up Burry's primer on credit default swaps & the subprime mortgage short for those interested.

At the end of the video, he mentions he's investing his own money now and doesn't have to deal with investors. Where exactly is he investing? We've posted up before that he's been buying farmland and gold.

For more great resources on Burry, we've posted up his recent subprime speech at Vanderbilt: Inside the Doomsday Machine.

Jim Chanos on China's Property Bubble & Renminbi Revaluation: Charlie Rose Interview

Noted short seller and Kynikos Associates hedge fund manager Jim Chanos recently sat down and had an interesting conversation with Charlie Rose regarding China and their impending property bubble (as he deems it). Previously, we'd covered Chanos' intriguing presentation on China overheating and this time around in his discussion with Rose, he focuses on China's currency, the Renminbi, as well as China's property market.

Turning specifically to the RMB, Chanos begins by saying that everyone expects this currency to be revalued upward. But he brings up an interesting point, wondering what will occur if the RMB actually *gasp* devalues? It's certainly food for thought as often times in markets when everyone is 'certain' something will go one way, it can have the tendency to head the opposite direction. If this devaluation were to happen, Chanos notes that the Chinese would actually then have an asset in all their US dollars. The hedge fund manager goes on to say, "well, they're going to need those dollars to in effect sterilize the banking system. And that was what we needed our currency reserves, by the way, in 1929, our pounds and gold reserves and what Japan needed in 1989."

So, it's definitely an intriguing notion to think about. But of course for this scenario to ultimately play out, you'll need some catalysts to pop the inherent bubble (i.e. RMB devaluation, etc). China is quite the hot topic these days in terms of global coupling/decoupling, property bubbles, and RMB revaluation among other talking points. We've also recently covered interesting research focused on the Asian powerhouse from Vitaliy Katsenelson in his presentation, China: The Mother of All Black Swans. But for thoughts on China's housing market, we defer to Chanos' recent conversation with Charlie Rose which you can watch below (click on the picture to be taken to the video clip):



And for those of you who may not be able to listen to audio at work, here is a transcript of the interview:



You can download the .pdf here.

A good conversation certainly. Be sure to also check out the original Jim Chanos China presentation that we posted up as well as Chanos' presentation on ten lessons from the financial crisis. All eyes are certainly on China now more than ever.

Housing Inventory Levels Are Still Too High

As we've mentioned numerous times on Market Folly, a large part of America's economic problems are tied to housing. Until the excess inventory is removed, we still have a situation. Below is a chart of housing inventory levels from 1999 to November 2009 as per data from the National Association of Realtors. As you can see, inventory is well above the historical average. And while a reduction in inventory from the recent peaks has occurred, there is still a need for further reduction.

(click to enlarge)

It seems that government programs such as the first time homebuyer credit have certainly helped spur buying. However, the question remains: what happens when those programs end in May 2010? Many hypothesize that buying will dry up once those benefits cease.

Further complicating things is the Federal Reserve's actions in the mortgage markets. Their purchases of mortgage backed securities (MBS) and agency paper have filled a large hole. Besides them, who else has been buying those assets? No one really. At some point, they will have to stop their purchases. They've already delayed their exit once and are now looking to exit around the end of the first quarter of next year.

Come March of 2010, we could be facing a serious rise in mortgage rates due to the Fed's exit. While this may not stop transactions in their tracks, it certainly will impact potential buyer's monthly payments and could deter them. The combination of rising mortgage rates and the removal of government incentives for buying will most likely not help reduce the massive inventory overhang.

Not to mention, America still has the problem of many people looking to get out of their current homes as they owe more than what it is worth. Hedge fund manager Paolo Pellegrini long ago proposed a mortgage solution but we really have yet to see a true solution enacted. Then there's the whole situation of tons of homes being tied up in the court system, waiting to be repossessed, etc.

The main point of all of this is to remind everyone not to get too giddy. Sure, equity markets have rallied over 60% off the March lows and the economy has started to show some signs of recovery. However, on an economic level we still have fundamental problems to deal with... problems at the heart of the crisis. You have to keep in mind that the economy and markets don't always tell the same story. For true signs of economic recovery, keep your eye on the mortgage and housing markets. There will definitely be some fireworks in these arenas in the first half of the year.

John Paulson Buys Distressed Debt; Carl Icahn Buys Tropicana Casino

We recently learned of two major hedge fund transactions that we thought were worth highlighting here on the blog. Firstly, John Paulson is at it yet again. The prominent hedge fund manager has been in the media a lot recently given all the portfolio moves he has made. His latest move includes purchasing distressed mortgage securities.


Paulson & Co

This isn't necessarily new news from the Paulson camp, as he had mentioned before that he had been covering some of his mortgage related short positions and was getting constructive on the sector. He thinks that there is now possibly some value in the type of assets he was previously short. The major distinction though is that he was short sub-prime securitizations previously, but now is getting long jumbo and prime securitizations, which are typically of better quality. So, it appears he is getting constructive on a sector that he made so much money on the short side the last few years.

Sandra Lee, senior vice president at Paulson & Co said that, "We've been adding pretty steadily to our long distressed positions." Additionally, she said that they are buying debt of various financial institutions that received government help. This news comes after the fact that we saw Paulson start a real estate recovery fund. Additionally, Paulson gave his investor stamp of approval and bought $100 million worth of CB Richard Ellis shares. With his latest batch of moves, it seems that while Paulson is cautious on the economy near term, he definitely is starting to see some value in the real estate sector. His diversification within the asset types related to housing is very notable and we'll continue to track his movements. To see what else Paulson holds, you can check out the rest of Paulson & Co's portfolio here.


Carl Icahn

Meanwhile, notorious rabblerouser and activist campaigner Carl Icahn sees value in another sector: gaming. His Icahn Group has purchased the Tropicana Resort in Atlantic City for nearly 80% off. They landed the property by making their $200 million debt-swap offer which was accepted by a bankruptcy court judge. This marks the end of a long timeline as the casino/hotel has been on the market for a year and a half.

So far, Icahn doesn't have any plans for the casino so we'll have to see what he has in store. Along with Icahn in the purchase are partners in the creditor group Black Diamond Capital Management and Schultze Asset Management. Their discounted purchase has made them the proud owners of a $1.4 billion mortgage on the casino resort. However, Icahn is familiar with scooping up discounted casinos in bankruptcy courts, as he had previously bought the Sands in 2000 for $65 million which he later sold for $270 million. We'll see if he has the same golden touch this time around. Icahn isn't alone in spotting value in casinos, as we've seen a few other hedge funds here and there start to pick up debt and shares of various casinos. While we haven't had a whole lot to cover in terms of Icahn's recent portfolio activity, we have in the past noted his large Biogen Idec (BIIB) position.

Both Icahn and Paulson are interesting investors to follow, given their prowess in different areas. Icahn is notable due to his activist investing style where he seeks change at public companies. On the other hand, Paulson is well-known for his ability to spot trends and his familiarity with the housing sector, after profiting handsomely from the crisis the past few years. For recent performance, Paulson & Co's flagship fund is up 8.75% for the year, while Carl Icahn's fund is faring slightly better, up 7.3% for May and up 16% for 2009 as noted in our May hedge fund performance numbers post.

Paolo Pellegrini Proposes Mortgage Solution

Over on Dealbook, there is a fascinating piece up by Paolo Pellegrini. "Who's that?" And, "why should I care?" you ask. Well, Pellegrini was previously a co-portfolio manager at John Paulson's hedge fund Paulson & Co. Pellegrini has since started his own fund, PSQR Management. Needless to say, he is very familiar with the housing and mortgage crisis, as he has been playing it from the investment side with precision. We thought that today would be the perfect day to post up Pellegrini's thoughts, as we've just covered Paulson & Co in our quarterly hedge fund portfolio tracking series.

Pelligrini proposes a market solution complete with bidding and aid from government financing, wherein homeowners and institutions alike can benefit. He writes,

"With more than a fifth of United States homes worth less than their mortgages, restructuring residential debt is the most important step to restore our country to prosperity and economic growth ... The government can assist struggling homeowners, remove bad loans from bank balance sheets and free up credit while utilizing a transparent, competitive process to minimize the taxpayer subside required."

His proposal is lucid and almost a no-brainer. However, such a simple system would ultimately require some complexities in its infancy. While the government searches for solutions, many close to the heart of the matter are voicing their opinion. Hopefully the government is listening. After all, if they should be listening to anyone regarding this matter, it's Pellegrini and Paulson. Those two have played the market pretty much perfectly thus far. And, suggesting an alternative mortgage solution in market form plays directly into their fortes.

Make sure you check out his entire proposal over at Dealbook.

Housing Market & Unemployment Rate: Back to Reality

Fresh off of the Wall Street bailouts and short-selling bans, I'm here to remind everyone that while things slowly are being resolved on Wall Street, there is still a whole nother set of problems on Main Street. The unemployment rate is 6.1%. Not to mention, the economy lost 100,000 jobs in June, 60,000 in July, and 84,000 in August. We're now at eight consecutive months of job losses. And, we also have a housing market that seems far from bottoming, as evidenced by existing home sales falling 10.7% in August, and August new home sales falling to the lowest levels since 1982.

Case in point: Professor Robert Shiller believes the decline in housing prices could be worse than that of the Great Depression. Courtesy of Barry Ritholtz at The Big Picture, we see that Shiller sums up the situation with 3 main points:

• Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.

• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).

• The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

Then, also take into consideration the fact that the majority of any real 'demand' for housing currently could be artificial. Notable Calls mentions that the down payment assistance program is set to expire October 1st 2008. So, people may be in a hurry to buy a home to get that down payment assistance. But, after that expires, real estate veterans are saying that there is no other real demand outside of that program. So, the housing sales data coming up should be pretty positive. But, proceed with caution. We'll have to see if the demand was artificially swollen due to the assistance program expiring. If there really is no demand in the pipeline after October as those in the industry suggest, we could be in for a doozy. Just when people will have thought things are starting to improve, the demand could taper off yet again, as buyers continue to watch prices fall.


Sources: The Big Picture, Notable Calls, & Fixed Income Advisor

Fannie/Freddie Bailout & Unemployment Rate

Undoubtedly, you've heard this news already. But, I am simply re-posting it to stress the type of environment we are in. The Unemployment rate has now hit 6.1%, the highest in five years. While the Fannie/Freddie saga has ended, people seem to have already forgotten about the unemployment rate and the fact that we still have tough times ahead. But, the market likes to get all giddy on any glimmer of hope. The root of the "pooring of America" stems from the horrid housing market. And, until it corrects, we are in for tough times. So, while the indexes are up big and we should start off this week in positive territory, I'm still cautious in the near-term. I still believe this is merely a small rally within the context of a broad bear market. The credit crisis is a whole nother animal, which only complicates the situation.

(click to enlarge)

The descending channel (green lines) tells the story. Watch the tape. Barry Ritholtz has an excellent post up over on his blog where he talks about weekend bailouts and the subsequent reactions. He asks,

"How many Sunday press releases is it going to take to save the financial system from ruin? If you’re are keeping score at home, this is now the sixth Sunday night/Monday morning press release in 14 months aimed at saving the financial system. Consider the recent history of these weekend rescues:

• August 2007, when the credit crunch was officially recognized by the Fed, when they cut the discount rate.

• December 2007, with the announcement of the TAF and other credit facilities;

• January 2008 Soc Gen panic, and a 75 bps emergency cut;

• March 2008 with the Bear Stearns bailout.

• July 2008 the first Fannie/Freddie rescue attempt

• September 2008 the actual Bailout of Fannie/Freddie."

Head over to The Big Picture to check out his thoughts/takeaways from the situation. Lastly, I will leave you with an excellent quote from David Moenning, President of Heritage Capital Management:

"All rallies over the past year have been based on the idea that we had seen the worst in whatever was ailing the market at the time – I.E. the credit crisis or the oil spike or the economic slowdown in the U.S. But unfortunately, after the requisite rallies, the light at the end of the tunnel has more often than not turned out to be an oncoming train."

Unemployment Data: CNNMoney
Weekend Bailouts: The Big Picture
David Moenning's Thoughts: StreetInsider

The Economy Sucks, the Housing Market Sucks, and the Consumer Sucks Too

Okay, I know the title seems pretty morbid. But, it's more realistic than you might want to believe. I want to point readers to a well-written piece that assembles some great data regarding the state of the American Economy. The article is aptly titled The Great Consumer Crash of 2009. It is written by James Quinn, a senior director of strategic planning at the Wharton School, University of Pennsylvania (one of the most respected business schools in the country). I originally tried to pick out select parts of the article to present to you here. But, after re-reading his work, I've decided that you simply have to read the entire article. Check it out: The Great Consumer Crash of 2009.

And, if you find the article remotely intriguing, I highly suggest checking out some of Quinn's other articles found on his author's page on the same site.

The Long and Winding Road (of Foreclosures)

Taken from Credit Suisse, we see just how long and winding the path of destruction really is. Adjustable Rate Mortgage Resets will be an ongoing source of pain for many Americans. Americans who signed up for ARM mortgages did so because of the low teaser interest rates they were receiving. And, eventually, these teaser rates revert back to much higher rates. Many Americans will not be able to afford their new mortgage rates sparking yet another round of foreclosures. This is not 'new' news by any means. But, it seems to me that some people have yet to truly grasp just how far from 'safety' we are. Keep in mind that even after these resets take place, it could take many months before the homeowners finally hit rock bottom and have to foreclose. ARM's will continue to reset in mass up until December 2011. Then factor in the many months afterwards that Americans will be defaulting on their new, higher mortgages. Sometimes I feel like I'm a "doom & gloom-er." But, then I take a step back and realize I'm just keeping it real(istic). Fun times ahead here in the United States of Foreclosure.

(click to enlarge)

"The Age of Scarcity" by Jeff Rubin (CIBC World Markets)

This one ought to get TraderMark over at Fundmymutualfund.com all riled up. He has been over there pounding the table with his coined phrase "world of shortages" as an investment thesis for some time now. Then, Jeff Rubin over at CIBC World Markets comes out with a slideshow entitled "The Age of Scarcity." Hat tip to Paul Kedrosky, author of Infectious Greed who originally posted the link to the slideshow.

There's 31 slides in all, but I wanted to post up a select few of slides that really illustrate some macro themes we are seeing.



First, we'll look at Global GDP Growth. As you can see from the chart above, Emerging Markets are clearly the leader as an overall % of global GDP growth. And, this comes as no surprise, as pretty much everyone not living in a cave already knew that. What I am more interested in is the percentage that Central & Eastern Europe is accruing. If they are truly benefitting from Russia's emergence, then you would expect their share of global GDP to increase in the coming years as well. After all, they have already surpassed Japan (but I guess that's not much to brag about is it?). For my money I really think Russia has the best risk/reward setup in terms of Emerging Markets.



Next, let's look at the slide above depicting other regions' dependency on the US Market. And, surprisingly enough, Europe, Latin America, and Asia are all less dependent on America than they were back in 2000. Obviously, the world has become a true global economy and nations have diversified their dependency, which is a good thing. Although I do not want to get into a coupling/de-coupling argument here, I do think it is worth noting that the overall trend the past seven years has been that other markets are less dependent on exporting to the US market. But, at the same time, it must be noted that Emerging Asia easily is the most dependent on the US out of the 3 regions. There has been increasing chatter about how the US slowdown could be affecting China, and that chatter is warranted. The US market represents 16% of their exports and we will have to carefully monitor this situation as numerous investment theses hinge on China's continued growth.



Thirdly, I want to stick with the China theme and glance at the Resource Demand Growth slide pictured above. As you can see, China consumes MANY more resources than we do, and they are seeing average annual resource demand growth of 30% for aluminum and 28% for nickel. This just goes to show that a) China is a hungry monster and b) they are a huge piece of the "age of scarcity" puzzle. Also, I just want to point out that this slide further reiterates my bullish stance on aluminum/Alcoa, as I mentioned here. Demand for these resources is unreal.



Lastly, I want to turn to the housing sector in the US. This slide above shows what we already know: the housing market sucks and prices are falling. What's interesting though is that so many people out there are calling for a '2nd half recovery,' yet they don't seem to realize that the housing market will STILL be in turmoil. In fact, it could very well be even worse by then considering that this summer another major wave of ARMs (Adjustable Rate Mortgages) are resetting back from their low teaser rates to sky-high interest rates. This reset window will obviously take a few months to truly affect the homeowner, as they soon discover their mortgage payments will increase substantially. And, as this plays out months down the road, these homeowners will face forclosure, guaranteeing the next leg down in the housing market. And, it will slap all those '2nd half recovery' pundits right in the face. Interestingly enough though, CIBC here predicts that housing prices and subprime mortgage delinquencies will in essence stabilize towards the beginning of '09. So, they seem to be calling for a early-mid '09 housing recovery cycle. What you cannot see from this chart though is prime mortgage delinquencies, which I anticipate will also see rising delinquencies as people who might have good credit were still baited into taking the teaser rate ARMs which will be resetting. So, while CIBC could theoretically be right in calling a stabilization of subprime delinquencies, you still have to take into account the various other types of mortgages (like prime) which will also undoubtedly see rising delinquencies due to the crazy mortgages people with various credit grades and people from all walks of life were signing up for.

Those are the main slides I wanted to highlight, as I felt they clearly depicted some macro themes we have been seeing and will continue to see. You can check out the entire CIBC World Markets "The Age of Scarcity" slideshow by Jeff Rubin and Avery Shenfeld here.

Housing Market Still Sucks... What Else is New?

In the spirit of my post below reminding everyone that we're still in a downtrend, I wanted to point out a post at The Big Picture by Barry Ritholtz. He posts up some staggering statistics taken from RealtyTrac, an aggregator of foreclosure data. In the month of May:

one in every 483 U.S. households received a foreclosure filing during the month of May. This is the highest monthly foreclosure rate since they began tracking foreclosures in January 2005.

And then accompany that info with the following chart. Obviously California, Nevada, Arizona, Colorado, and Florida continue to feel the pain. What's interesting to see is that the problems in Michigan seem to be slowly oozing into neighboring states Indiana and Ohio as well.



To everyone trying to call bottoms: give it a rest. The housing sector is accelerating to the downside. All you have to do is look at the data.