@VIC: A Radically Different Context for Value Was Going On Outside

by: Philip Davis

Phil Davis attended this week's Value Investing Congress on behalf of Seeking Alpha. Here are Phil's notes from the conference.

I was, ironically, at the Value Investing Congress Tuesday where some of the best hedge fund managers in the world, such Bill Ackman, Jeffrey Schwarz and, Leon Cooperman, to name a few share with about 1,500 investors their thoughts on the market as well as giving us overviews of their portfolios. The investors I spoke to at the conference were definitely "shopping" as most of them see a great opportunity to deploy cash in the market, but I wondered how much of that was reflected by the fact that they had been sitting at a conference with a lot of rich people for two days and not watching the markets, like I had been until 11am.

So I was, perhaps, the least surprised delegate coming out of that conference to find the Dow was down yet another 5%. Let’s discuss value instead, as much of what I was hearing at the conference, given my negative outlook, sounded much like the shouts of people on the Titanic, telling passengers to head for the part of the ship that hadn’t sunk yet.

Whitney Tilson may have nailed it in his opening presentation when he said

In summary, today we are only seeing the tip of the iceberg: an enormous wave of defaults, foreclosures and auctions is just beginning to hit the United States. We predicted long ago that it would get so bad that it would require large-scale federal government intervention – which has occurred, and we’re likely not finished yet.

So great, brilliant analysis - especially since the presentations were due by last Tuesday and many of the PowerPoint slides we saw had 2-week old stats on them, an eternity in this market. So it is not with criticism of the selections but to illustrate a point that I will mention some of the speakers’ selections here.

Tilson’s lecture was titled: "An Analysis of the Mortgage/Credit Crisis - And How to Profit From It" and his first selection was DISH. He laid out a very compelling value analysis of the satellite TV company and I agree it is hugely undervalued but, at the time he submitted the slide last week, the stock was at $23.02. Just a week later, that compelling value closed at $16.93, down 26%.

Again, this is a function of the panic selling that is gripping the market, not an indictment of the selection. Fairfax Financial (FFH) was another excellent idea of Whitney’s, and I would love them if they come back down. His third pick was Berkshire Hathaway (NYSE:BRK.A), calling it a great deal at $138,500 (Oct. 3) -- but yesterday, even the mighty Buffett fell 5% and finished the day at $124,000. So what is "value?" I’m sure that in November of 1929, when the Dow was down 47% from its Aug 30th high of 380, there must have been a Value Congress held somewhere and great investing opportunities were discussed. The market did recover and headed up 50% by April of 1930 but, just 2 years later, in July of 1932, the Dow sat at 41, down almost 90% off its highs.

So, at what point do we find "value"? What is the value of a share of IBM stock to a person who needs to make a mortgage payment on Wednesday? It reminds me of something written a long time ago in Marginal Revolution about fiat currencies and Gilligan’s Island: "In early episodes, we see Mr. Howell hiring various services from other castaways. We eventually learn he’s been writing checks on a mainland (and therefore inaccessible) bank. This works while the group consider their condition temporary, but the checks are quickly devalued and eliminated when the castaways begin to prepare for the possibility of an indefinite stay on the island. In Episode 9, 'The Big Gold Strike,' Gilligan and Mr. Howell find a gold mine on the island, which Howell convinces Gilligan to keep secret from the others. By the time everyone learns about the mine, Howell has already taken the lion’s share of the most easily accessible gold. He’d like to hoard it for himself, but the other castaways begin charging him for their goods and services."

Stocks have "value" as long as investors believe that the economic conditions are temporary but, especially for the non-dividend payers, they are simply not worth the paper they are written on to someone who needs to eat. Gold is a slightly different story as we are not trapped on a desert isle and, as global currencies are falling fast, gold still holds its position as the one thing we can all agree on and there is plenty of room for it to run if the dominoes really start to tumble.

Bill Ackman, of all people, is seeing value in Wachovia (NASDAQ:WB) -- but that was off the $3.91 close on 9/29. Ackman does think the bank will, in the very least, get a higher price from Citigroup (NYSE:C) but gave a wide range for the bank’s "value" of between $4.02 and $15.26 a share. Under the premise that "Cash is King," Lance Helfert and Atticus Lowe like the balance sheets of QLTI (down 20% in 5 days), Contango Oil & Gas (NYSEMKT:MCF) (down 27% in a week) and ATP Oil & Gas (ATPG) (down 40% since 9/29) AND THEY ARE RIGHT! These prices are insane and the investors on Bernanke’s Isle are operating on the assumption that we will never get out of this mess. But when does it end?

Bear (oops, don’t say bear!) in mind that we had a huge "rally" after the initial sell-off of 1929 and everything looked better for about 6 months, but it is widely held that the government’s failure to increase the money supply is what led to the later, much worse, sell-off - along with a very unfortunate drout that hit the economy at the same time. Bank failures ground consumer spending to a halt. Recessions are a natural part of the market cycle; Depressions are a crisis of confidence.

We are going to get massive, coordinated action from the global central banks, and they will boost the market, but the question will be -- for how long? As long as we can change perception (maybe Cramer will stop telling people we’re going to 8,000) then we have a chance to arrest this crisis, but the cost of global action to prop up the markets is already staggering. I’m simply not sure we can turn these ships on a dime, so approach "values" with caution.