Amit Kumar's  Instablog

Concern about the future of dollar was very topical at Value Investing Congress as veteran fund managers made a case for Gold and other dollar hedges. Julian Robertson believed that Norwegian Krone (oil reserves), New Zealand dollar, and Czech koruna were strong currencies. David Einhorn pointed out that the Fed is buying long dated assets and Treasury is shortening the duration of government debt, which would result in both fiscal and monetary issues from higher rates. Julian Robertson has been buying curve caps (liquid puts on 30 year bonds out 5 years) to protect against high rates and Einhorn finds Gold an attractive hedge.

Sean Dobson touched upon impending threats in CMBS Market, which was characterized by adverse selection in the bubble years as the riskiest Hospitality/Retail loans Exploded more than 10x from 2000-2005. Most CMBS loans are simply extended upon maturity without recognizing any loss. On the other hand, delinquencies continued to rise in the residential mortgage, with 1-4 family homes topping 10%. While wave of resets from subprime are mostly behind us, delinquencies in prime and Alt-A mortgages are soaring. Whitney Tilson pointed out that the wave of prime loan losses, jumbo loans, and commercial real estate are mostly ahead of us. Banks might be able to plug these holes if the losses happen over an extended period and banks earn their way out. However, any sudden shock from defaults could crack the system again.

Value Investing Congress is a great platform to ask questions from high-profile managers such as Bill Ackman and David Einhorn, and to gain access to an array of interesting investing ideas. Ideas in this year’s conference spanned across sectors and market cap, from small-mid cap bank ideas by M3 funds to natural resource stocks by Sprott Asset Management, and from Waste Management (WM) by Paul Issac to Corrections Corp (CXW) by Bill Ackman. Following are some of the ideas/ historical investments presented by this year’s speakers:
 

David Nierenberg. D3 Family Funds – BRKS, MOV, HPY

Lloyd Khaner – long SBX, and historical turnaround cases (MOLXA, PX, CPB)

Candace King Weir/ Amelia F. Weir – WTSLA

Paul Issac – WM

Jason Stock, M3 Funds – Mutual banks (long FXCB, long BNCL)

Kian Ghazi, Hawkshaw Capital – long CORE

Alexander Roepers, Atlantic Investment Management – SJM

Glenn Tongue, T2 Partners – long IRDM

Zeke Ashton, Centaur Capital Partners – long Y, long LH, long MVC

Bill Ackman, Pershing Square LP – long CXW, short O

Amid the current global slump, government investments in infrastructure, from $48.1b provision for transportation in $787b US stimulus bill to $586b Chinese stimulus bill, present interesting investment opportunities and the recent Infrastructure Investment World Americas 2009 provided some good insights into recent trends and signals in private sector infrastructure investments. US public pension funds have shown growing interest in such investments, with about 49 funds currently investing with a combined capacity of $38.1b and another 28 indicating preference with a combined capacity of $27.2b (Source: Brian Chase’s presentation). Recently, P3 Investment in the US has been focused outside highway sector, on shorter contract P3 terms as annuity focused assets seem to be priced too high to achieve a profit.

While OECD/ US markets have matured, the World Bank estimates that emerging markets will present a $20T investment opportunity by 2030.  Emerging markets panel highlighted some of the pure play opportunities in transportation, water, electricity, and communication. India, for example, plans to increase infrastructure investments to 4.8% of GDP this year up from 3.3% in 2003. As Indian government steers away from fully financing infrastructure to partnering with private sector, it is introducing measures to support private sector participation for $500b investment need in power and transport infrastructure over the next five years.

Clean tech and renewable energy panels showed optimism about the long term future, as United States renewable energy use is forecast to grow more than 60% during the next ten years to $60 billion in new investment within biomass, geothermal, hydroelectric, solar, and wind technologies. Conventional energy assets are also priced attractively (equities down 30-60% since early 2008) providing high cash margin producing inflation-linked income, and have a low risk profile. Natural gas midstream, MLPs, and electric transmission especially smart grids to support intermittent renewable energy have drawn investor interest in both acquiring assets as well as participating in debt/ equity financing.  However, major investment banks have reduced their tax equity participation in renewable projects due to their increasing losses.

Since Lehman collapse, infrastructure investments have experienced capital constraints, higher funding costs, tighter financial covenants, lower leverage, wider spreads, and fewer banks in the sector having an impact on the syndication risk which is lending to more club deals, as pointed by Geoff Haley. With monoline business model questioned as they were stripped of AAA ratings, project finance bond market has plummeted, however, project finance loans market is still continuing to grow. However, government commitments show hope for infrastructure investments, which would pickup quickly once the credit markets return to normalcy.