Einhorn on the Economy

David Einhorn's comments on the market,from the GLRE conference call, are excerpted below:

...In the first quarter Greenlight Re’s investment portfolio had a better result than it did in the prior two quarters.

There are several factors that contributed to this. First, we enter 2009 with a very conservative posture, about 80% long and 40% short or about 40% net long. Although we are holding a good amount of cash, we became more concerned about the market as it sold off in January and became even more defensively positioned ending January at just 29% net long.

As things continue to dislocate through February, we used this as an opportunity to cover a number of short positions and entered the March slightly more a net long. We also added to our debt portfolio particularly in Ford Motor secured bank debt. At the beginning of the year our debt portfolio was about 12% of capital. We ended the quarter was about a 17% weighting in debt instruments.

Greenlight as always invested in debt instruments with that part of the corporate capital structures offered compelling unlevered returns. We started accumulating our debt portfolio in October of last year and have built our allocation in a patient fashion as markets begin further dislocated.

...

Our current debt portfolio is invested in US companies and we have been mindful of the liquidity in each of the issues of which we are invested.

In addition to moving up the corporate capital structure, we have also constructed a less concentrated portfolio and we have to start it. Although we have found many compelling investments that appear to be at bargain prices, this is temporary by the worst economy most of us have seen. It is very difficult to develop a high degree of confidence in corporate revenues in earnings even in well established profitable companies with conservative balance sheets.

So we have offset some of this idiosyncratic risk by holding a more diversified portfolio.

...

We continue to be cautious about the environment, especially in light of the market latest rally, and aren’t as convinces as some others to the government response to the prices to date will actually fix the problems in the economy. We think this take some time to play out as the normal forces of supply and demand exert themselves. We continue to be worried about monitory actions and the fiscal situation and continue holding some of our cash involved for the time being.

It's important to remember that Einhorn is speaking for GLRE and not for Greenlight Capital. (Though his thoughts in many cases will be the same, the nature of both investment vehicles can be expected at times to lead to different strategies.)

For the rest of the transcript, which Seeking Alpha provides free of charge, click here.

Ken Heebner's Macro View

This article on Ken Heebner in SeekingAlpha is short and doesn't say much, but it does have some decently cool graphs.

What's more, the article agrees with something I wrote a lot about before, mainly how this great investor achieves his (usually correct) mountain-top perspective:

Ken Heebner has a bottom-up driven investment process, but takes big macro bets as a result of his bottom-up analysis.

Despite recent bad returns, I continue to think that this is a valid approach to investing (as well as all areas of knowledge).

Coming to a macro viewpoint in investing is after all really no different than coming to the same in engineering or politics or medicine. If reached after applying logic to an exhaustive look at all the relevant facts, the conclusion reached is actionable.

One can of course be wrong, especially in the short term, as new circumstances arise, the relevancy of data used change, or whatever, but the only way to rise above the error is to apply the same method: applying logic to the new relevant data and reaching a conclusion based on it.

Who Will Take Over For Buffett?

Buffett shook another person's hand and the world is abuzz with speculation once more about his next successor. I was a guest poster at Wide Moat Investing today--posting on why there are far better questions to ask and far greater things to worry about than who will replace Buffett at some unknowable time in the future. You can read the article at WMI (a blog that we recommend) or at SeekingAlpha--where it also appeared.

Distressed Investing with 3 of the Guru 5

A lengthy but excellent article comparing Americredit to Clayton homes appeared in SeekingAlpha recently.

Written by Sumit Shah, a writer we've never heard of but hope to read more from, the article even used the term "outside passive minority investor"--which is how Marty Whitman refers to "regular" stock investors in two of his great but little-read books. (Call us impressed!) Here's the beginning of the article:

The goal of the value investor is to identify investments where there is a potential for earning outstanding returns over time with little to no risk of permanently losing one’s capital. Such investments are relatively rare when considering the entire universe of publicly traded equities, and outside passive minority investors usually have to scour the stock market to find companies that trade at deep discounts to intrinsic value and that have attractive risk profiles.

Usually, the securities that meet these criteria trade at such deep discounts because they are misunderstood or underappreciated by the marketplace, but sometimes securities that appear to be misunderstood are trading at depressed levels for legitimate reasons – because the underlying companies are at risk of going into default or, even worse, into bankruptcy.

Distressed equity securities are usually too difficult for most ordinary investors to handle, and the majority of outside passive minority investors would be well-advised to stay clear of such companies unless they are extremely confident that they will not lose their principal in the case of bankruptcy, run-off, or, in times like these, receivership or nationalization.

Deep-pocketed outside investors or control investors, on the other hand, enjoy quite a different position than ordinary investors, as they can try to influence a distressed company’s restructuring process, implement turn around plans, invest new capital into the company, or in some cases acquire the troubled company at an extremely low price.

Warren Buffett has often stated that he tries to purchase great businesses trading at fair prices, but Buffett, unlike many investors, also often has the opportunity to acquire distressed companies that could be great businesses under different circumstances, and that are trading at great prices.

Last year, for example, Berkshire’s MidAmerican Energy subsidiary made a bid for Constellation Energy (CEG) that was so low it would have effectively been stealing the company had another bidder not appeared. Buffett was able to make such a lowball bid because Constellation had severe liquidity issues, and Berkshire (BRK.A) was offering Constellation an immediate cash infusion that would have enabled the company to avoid filing for bankruptcy protection.

Deep-pocketed value investors such as Bruce Berkowitz’s Fairholme Fund and Leucadia National (LUK), the conglomerate run by Ian Cummings and Joseph Steinberg, are at their best when they are able to find distressed investment opportunities like the ones Buffett enjoys. Fairholme and Leucadia have found just such an opportunity in their investment in AmeriCredit (ACF), an auto finance company that operates primarily in the subprime space.

To understand what they see in AmeriCredit, it is important to recognize that Berkowitz, Cummings, and Steinberg – some of the shrewdest investors out there – are huge Buffett admirers and have probably learned a great deal from closely following his deal making.

Indeed, their investment in AmeriCredit has many similarities to Buffett’s acquisition of a manufactured housing company called Clayton Homes in 2003, which Buffett discussed at length in this year’s annual letter to the shareholders of Berkshire Hathaway. It would be instructive to discuss Buffett’s acquisition of Clayton Homes to understand the opportunity Fairholme and Leucadia see in AmeriCredit and also to learn some useful lessons about subprime lending and securitization along the way...

If you're not intrigued by that lead-in, you're in the wrong place. You can read the rest at SeekingAlpha or at Sumit Shah's website. (Note: I added a handful of paragraphs to make the above more readable in the different format.)

Leucadia Finds a Friend in Pabrai

Dave Bui, at Seeking Alpha, notes that Pabrai added eight new positions to his portfolio recently, one of which was Leucadia.

Pabrai's new positions can be summed up as a bunch of commodities with a hint of financials. New mining stakes include Horsehead Holding Corp (ZINC), Teck Cominco (TCK) and indirectly, Leucadia National (LUK). He also moved into the agriculture space with Potash (POT) and Cresud SA (CRESY). He also added a good-sized position in Goldman Sachs (GS), which received a well-publicized capital boost from Pabrai's acknowledged idol, Warren Buffett. Pabrai completely divested his WCG position and massively reduced stakes in Buffett's Berkshire, Cryptologic (CRYP), CompuCredit (CCRT) and Fairfax Financial (FFH).

The same link has information on the new picks by Berkowitz and Rodriguez, noted value investors. Well worth clicking over.