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Value Investing Congress Presentations

Here are some of the best presentations from the NYC Value Investing Congress:

Field of Schemes: If You Build It, They Won’t Come (David Einhorn)

Neglected, Hated, & Feared: Investing in Out-of-Favor Industries (Zeke Ashton)

Go East: Value Investing in Europe (Francisco Garcia Parames)

Opportunities Amidst the Crisis (Michael Lewitt)

Clear Value Today (Alexander Roepers)

The Emerging Indian Investing Landcape (Amitabh Singhi)

Market Overview & Two Stock Ideas (Whitney Tilson/Glenn Tongue)

David Einhorn: St. Joe will need “substantial writedowns”

Just got back from the Value Investing Congress in NYC, where David Einhorn made his short case for JOE. Click below for presentation.

Guest Post: Sun Healthcare Group (SUNH)

Today’s guest pitch is Sun Healthcare Group (SUNH). The author considers himself a value investor and currently works in the financial services industry. He is also a CFA Level III candidate. He can be with questions or comments at

Warren Buffett: ‘Quite Clear Stocks Are Cheaper Than Bonds’

Warren Buffett says it is “quite clear stocks are cheaper than bonds” right now, but notes that relationship will change eventually when confidence in the economy is inevitably restored.

In an appearance at the Fortune Most Powerful Women Conference in Washington, Buffett said he “can’t imagine” choosing bonds over stocks at current prices, but concedes that’s what many investors have been doing because of a “lack of confidence” in the economy’s future.  “They’re making a mistake, the ones that are buying the bonds” at record low yields.

“It’s quite clear that stocks are cheaper than bonds. I can’t imagine anybody having bonds in their portfolio when they can own equities, a diversified group of equities. But people do because they, the lack of confidence. But that’s what makes for the attractive prices. If they had their confidence back, they wouldn’t be selling at these prices. And believe me, it will come back over time.”

It’s not a new opinion for Buffett.  Back in early 2009, he was writing about an “extraordinary” U.S. Treasury bond “bubble.”

Fortune’s Street Sweep blog points out that the 10-year Treasury yield has dropped to under 2.5 percent from 4 percent over the past six months.

FDIC Chairwoman Sheila Bair told CNBC there “a bit of a bond bubble now”, longtime bond bull Goldman Sachs believes bonds have peaked and will be heading lower from here, and Pimco’s Steve Rodosky tells Dow Jones today that “the best day in Treasurys is probably behind us.”  He hasn’t bought them since July.

Meredith Whitney: Federal Gov’t Will Bail Out States

The recent report released by Meredith Whitney regarding the dire financial conditions of states across is long overdue. Readers will recall an article we wrote last July regarding the possibility that the federal government may step in at some point to bail out struggling states.

While saying a bailout might not be politically viable, Whitney joined investor Warren Buffett in raising alarm bells about the potential for widespread defaults in the $2.8 trillion municipal bond market. She said state and local issuers have taken on too much debt and that the gap between public spending and revenue is unsustainable.

The Market War Between Traders and Investors

By Jason Zweig (WSJ)

They’re mad as hell, and they’re not going to take it anymore.

On Oct. 4, mutual-fund executives will convene in Washington at the Investment Company Institute, the trade association for fund managers. People familiar with the situation say a few attendees are determined to push for a plan to restrict high-frequency trading, the rapid market activity that lately has caught the attention of investors large and small.

Using powerful computers and data feeds, high-frequency trading firms typically hold stocks a few minutes and sometimes only a few seconds at a time, churning roughly half of total stock-market volume. Whenever you—and your mutual fund or pension plan—buy or sell a stock, one of these fast-trading firms is likely to be on the other side of the trade.

The problem? While some fund leaders have praised high-frequency trading for making markets more efficient, others contend that the profits earned by fast traders may come partly at the expense of ordinary investors.

Mutual funds and other giant investors are often forced buyers and sellers. When money comes in they must buy stocks; when it goes out they must sell. Their typical buy or sell order is roughly 185,000 shares. Yet the average trade size on U.S. exchanges is only about 100 to 300 shares.

So institutions trade in dribs and drabs. A giant buy order would push up a stock; a huge sell order would knock it down. “Would you leave $100 in cash on the street corner and hope nobody takes it, or would you hide it in your pocket?” asks Andrew Brooks, head of U.S. equity trading at T. Rowe Price. “Information about our order flow is valuable, and we need to protect it.”

Any institutional order for a couple hundred shares can have thousands or even millions of shares behind it. A fast trader that can infer which orders were placed by a big institution gains an insight into how stock prices may be about to change. Whoever gets there first stands to make a tiny profit on each of those trades.

Direct data feeds supplied to fast traders by several major exchanges have customarily included an “order ID”—a kind of tag that, according to several traders, may assist a fast trader in deducing whether a large institution lurks behind a small order. Starting Oct. 4, the NYSE Arca exchange will give customers the option of having these IDs removed from its direct data feeds on orders they don’t want displayed to the whole market.

Traders say the absence of the ID may itself alert rapid traders to the presence of a large, hidden order. “Without the order ID, we don’t think anyone could map the order to any other information to divine that it is part of something larger,” responds Ray Pellecchia, an NYSE Euronext spokesman.

Or consider a type of trading order called a “partial post only at limit.” Here, if a fast trader’s small buy order is rejected instead of executed, the firm can deduce that a large block of shares may lie hidden in reserve, poised to sell at a given price. Thus a trader may be able to get information without executing the trade. Clever use of this order type can increase the trader’s odds of being in the right place at the right time—capturing a splinter-thin, lightning-fast profit before the institution can move.

Chris Isaacson, chief operating officer at BATS Exchange, the third-largest U.S. stock market, downplays such concerns. “This order type is rarely used and would be very complex to implement for the purpose of detecting a large order on the other side,” he says. Such a trader “would have to be willing to take considerable risk.”

“There are aspects of the market structure which give [fast traders] an unfair advantage,” says Manoj Narang, chief executive of Tradeworx, a high-frequency firm in Red Bank, N.J., that trades about 200,000 times a day, turning over roughly 50 million shares. “And those should be changed.”

One such practice: 1,000 shares are offered for sale at $20, and someone wants to buy 2,000 shares at $20. The buyer should be able to purchase the 1,000 shares immediately, while the other 1,000 shares should instantly show as the new “best bid” at $20.

Instead, says Mr. Narang, while the 1,000-share purchase goes through right away, the open order to buy another 1,000 is displayed to the entire market at a slight delay. Traders that can place orders faster can jump ahead, putting them in the best position to buy more shares at $20, in hopes of reselling them at a higher price. Mr. Narang says this occurs “at least tens of thousands of times per day.”

Whom should the market be designed to serve: Short-term traders or long-term investors? Is it serving both fairly?

Hawaiian Airlines (NYSE: HA)

We recently put together an investment presentation where we recommend buying Hawaiian Airlines (HA) and shorting American Airlines (AMR). While HA is one of the best run airlines in the world, AMR is likely to be at a competitive disadvantage for years to come given the latest consolidation in the industry.


Bond Markets Get Riskier

By Carrick Mollenkamp and Mark Gongloff (WSJ)

Bond markets are growing riskier as investors seeking steady returns bid up prices and ignore some early warning signs similar to those that flashed during the credit bubble.

Last week, prices on high-yield, or junk, bonds hit their highest level since 2007, nearly double their lows of the credit crisis. Nine months into the year, companies have sold $172 billion in junk bonds, already an annual record, according to data provider Dealogic.

To some extent, the bull case for junk bonds is based on a declining rate of corporate defaults lately and a belief that, as long as the economy doesn’t relapse into recession, default rates will continue to decline. The financial crisis purged many weak borrowers from the system, and corporate balance sheets are generally stronger today than before the crisis. However, a double-dip recession could hurt another, albeit smaller, wave of borrowers.

The U.S. high-yield default rate fell to 5.1% in August from 13.2% a year ago, Moody’s Investors Service reported recently, adding it expected the rate to fall to less than 3% by the end of the year.

Interest rates paid by companies with strong credit ratings have tumbled this year, falling to 1.8 percentage points above the yields on comparable U.S. Treasury bonds, which themselves are among the lowest yields in decades. Companies with weak credit ratings are paying 6.2 percentage points above Treasurys, down from nearly 20 percentage points in 2008, according to Barclays Capital indexes.

Treasurys have already seen their weaknesses exposed after a recent sell-off. Since the start of September, 10-year Treasurys have lost 2.2% and 30-year government bonds are down 6.9%, compared with a 5.6% gain for the Dow Jones Industrial Average.

The demand for bonds has allowed some of the riskiest borrowers to sell bonds with fewer protections for investors. These provisions, or covenants, prevent companies from taking actions that would hurt bondholders and would protect investors if companies are sold.

The bond boom has so far been a positive for the economy, allowing the U.S. government and major corporations to borrow at cheap rates and giving weaker companies financial breathing room until business picks up.

But continued strong demand by investors can have unintended consequences. Cheap, plentiful debt fueled the housing and leveraged-buyout booms, both of which collapsed after buyers who borrowed too much couldn’t repay loans.

“Bondholders got burned” buying deals in 2005 through 2007 because indentures, or the contracts that govern the bonds, didn’t protect them, said Adam Cohen, founder of Covenant Review LLC, a New York credit research firm. “They said ‘never again,’ but now in a hot bond market, people are buying into those covenant loopholes all over again, and they’re going to get burned again.”

One reason why bond yields keep falling is lack of supply. Despite nearly two years of heavy borrowing by the federal government and nonfinancial corporations, the total amount of debt outstanding in the U.S. is still nearly $700 billion lower than it was at its peak in the first quarter of 2009, according to Federal Reserve data released on Friday.

Still, few analysts say the bond market is anywhere near as risky as it was several years ago.

“It’s more accurate to say that we’re still disgorging the last credit bubble than that we’re starting a new one,” says Harvard economics professor Kenneth Rogoff, who has studied financial crises with Carmen Reinhart of the University of Maryland and notes that new credit bubbles don’t typically form immediately in the aftermath of old ones.

While most analysts don’t think the bond market is in a bubble, they are seeing a repeat of some behavior from the last run-up. “In 2001-2003, clients were desperate for yield and were willing to invest in stuff you could tell was risky because it promised a higher return,” says George Feiger, CEO of Contango Capital Advisors. “You see the same pressure today.”

One of the worrisome developments is occurring in the junk-bond market, where companies are taking advantage of strong demand to sell bonds that have fewer protections for investors than similar bonds sold by the companies in years past.

Some have watered down covenants, which are supposed to protect investors if a company is sold and prevent companies from loading on too much other debt or paying out their cash, which would cause a drop in value of the bonds or make it less likely the bonds they hold would get paid off.

Fifty-seven percent of junk-bond issuers had less-stringent covenants than their previous junk deals, according to an analysis for The Wall Street Journal by Covenant Review which analyzed 58 junk bonds issued in 2010 by companies that previously had issued debt. Just one deal had stronger covenants for investors. Some 41% of the deals had the same covenants.

A decline in investor rights was a marker of a rising bubble in the years leading up to the market collapse of 2008. Just like then, investors are scrambling to invest in deals, some of which are completed in a day in what are called on Wall Street “drive-by” offerings.

“It reflects a weakening in covenant protections even below those existing at the peak of the market, in 2006 and 2007,” Alexander Dill said in a May report from Moody’s.

When Tenet Healthcare Corp. sold $600 million in junk bonds in August, investors had fewer protections than they had in previous Tenet bonds. The bond deal from the Dallas hospital operator and health-care company lacked an asset-sale covenant, which would have forced the company to use proceeds from the sale of a material asset to buy another asset, make capital expenditures or repay bond investors.

Those covenants also prevent companies from using cash from asset sales to pay salaries. The recent Tenet deal also lacks a restricted payment covenant, which blocks dividend payouts.

In an email statement, Tenet spokesman Rick Black says the recent debt sale was a private placement to sophisticated investors who understand credit markets and are “extremely well-informed about prevailing market terms” including covenants.

He added: “‘The market’ dictates the terms, condition and pricing of debt offerings.”

Two junk bonds issued by Chesapeake Energy Corp., an Oklahoma City company that is the second-largest U.S. natural-gas producer, illustrate how new bonds are being sold. In an August sale, Chesapeake sold $2 billion worth of junk bonds maturing in eight and 10 years. Chesapeake is using the bond sales to pay down existing debt and for general corporate use, the company said in an August news release.

According to Covenant Review, neither bond offers a “change-of-control” covenant. When that protection is included and a company is sold, bondholders can sell back their bonds at 101% of par value. In an Aug. 9 report to clients, Covenant Review said Chesapeake “is yet another issuer trying to take advantage of a hot market by quickly passing off a materially worse covenant package.” Mr. Cohen says that analysis reflects both the lack of a change of control provision and weak covenants that protect how assets can be pledged.

In an interview, Chesapeake Treasurer Jennifer Grigsby says investors didn’t want the covenant in the recent sale. “We were advised by our underwriters that we did not need to add a change of control” covenant in the deals “in order to achieve a successful sale of the bonds,” says Ms. Grigsby.

Ms. Grigsby acknowledges the sale took place quickly, but notes the offering was three-times oversubscribed and if investors had concerns after having more time to review the bond documents, they would have been selling the bonds. Instead, the bonds now are trading at 104 cents on the dollar. She also says the covenants limit Chesapeake’s ability to use its oil and gas properties to secure financing.

A spokesman for lead underwriter Credit Suisse Group said in a statement, “Chesapeake is viewed by investors as a high-quality issuer and has not included a Change of Control put provision in any of the bonds they have offered to U.S. high-yield investors for several years.”

Klarman: Opportunities For Patient Investors

At the CFA Institute 2010 Annual Conference in Boston (held 16–19 May), Jason Zweig sat down with legendary investor Seth Klarman to gain insights into Mr. Klarman’s successful approach to investing. The complete transcript can be found HERE. 

Update: QXM Gets Much Awaited Catalyst, Jumps 40%

A month ago, we wrote an article highlighting Qiao Xing Mobile Communication (QXM), a small Chinese company which traded below its net cash value (QXM was the last stock added to the ValueHuntr Portfolio) At the time, we indicated our willingness to wait for a catalyst to unlock this value, as the company’s cash was worth between $4 and $5 per share, but the company was mysteriously trading at the depressing level of $2.6 per share. We referred to this as “an opportunity with asymmetric payoff with the odds of a positive return extremely tilted towards shareholders”. A month later, the much waited catalyst seems to have arrived in the form a private takeover proposal.

The company recently announced that it has received a proposal from its parent company, Qiao Xing Universal Resources, Inc. (Nasdaq: XING) regarding the acquisition of all outstanding ordinary shares of QXM that XING does not currently own. The proposed transaction, if completed, would result in QXM becoming a privately-held company. XING has proposed to offer 1.9 shares of its common stock plus US$0.80 in cash for each QXM share held by persons other than XING. XING filed its letter of intent with the Securities and Exchange Commission on Form 6-K on September 8, 2010. The letter of intent is available on the SEC’s website at: .

Strategically, this deal is headed for failure. Previously, XING was engaged in telecommunication terminal products business and changed its focus to the resources industry in 2007. The idea of a miner buying out a mobile handset business is a big warning sign to me. Therefore, taking profits at this level seems reasonable.