Transcript The Year in Review

The Year in Review - 2011
A Pre-Occupied Wall Street waits.
Distressed Investing 2011 Conf. – Steve Gidumal, Virtus Capital, LP
November 28, 2011
A Pre-Occupied Wall Street
• A Tough Year for Investors worldwide;
• The default of Greece and the potential collapse of the Euro
weigh over world economies;
• The debt ceiling negotiations and hyped fears of a US debt
default send US markets reeling in August/Sept.;
• Energy scandals in Washington – Solyndra, etc. signal to Wall
St. not only that connections matter but that this
Administration wants high energy and gas prices (ie, low growth).
• The MF Global collapse comes just 2+ months after MF
issues $325mm of 6¼% high yield bonds.
Pre-Occupied Investing 2011:
Comparison of Returns (YTD thru 11/25/11)
•
•
•
•
•
•
•
Dow Jones Index (ex dividends)
S&P 500 Index (ex dividends)
Nasdaq Comp.
10 year Treasuries
HY Index
Distressed Funds
Gold
+
+
+
3.3 %
8.7 %
8.8 %
16.9 %
1.0 %
5.0 %
18.5 %
(3.3% to 1.95%)
The Macro Environment
World Economies: Fragile signs of Recovery
(Economists are watching the 2nd Derivative – rate of change)
GDP % Q3
GDP % Q2
Δ Q3/Q2
China
9.1 %
9.5 %
- 4.2 %
India
7.7 %
7.8 %
- 1.3 %
Russia
4.8 %
3.4 %
+ 41.2 %
Canada
3.4 %
2.9 %
+ 13.9 %
U.S.
2.0 %
1.3 %
+ 53.8 %
Japan
1.4 %
- 1.5 %
+193.3 %
Mexico
1.34 %
1.28 %
+ 4.7 %
Germany
1.1 %
0.3 %
+266.7 %
U.K.
0.5 %
0.1 %
+400.0 %
Source: Bloomberg.
The Macro Environment
The PIGS: Dragging down Europe
(No Growth here)
GDP % Q3
GDP % Q2
Δ Q3/Q2
- 1.7 %
- 1.0 %
- 70.0 %
Italy
0.8 %
1.0 %
- 20.0 %
Ireland
2.06 %
2.15 %
-
Portugal
4.2 %
Greece
- 5.5 %
- 7.4 %
+ 25.7 %
Spain
0.8 %
0.8 %
+ 0.0 %
Source: Bloomberg.
A Pre-Occupied Wall Street
Where does the Needed Wealth Come From?
Three Words: “Efficiency, Efficiency, Efficiency”
• Historically, “wealth” is created when humans are freed up
from the mundane; wealth stems from greater efficiency;
greater efficiency of natural resources, of time, of intellect.
• Wealth can not be created from taxing citizens, as that is a
transfer of wealth (in an economics sense). So a Gov’t can not
really put “equity” into a business.
• Cutting transfer payments allows more wealth to be put
towards wealth creating activities.
• Public spending (pensions, bureaucracies, non essential
services) has become front & center on investor’s minds.
• If pension obligations are not going to be reduced, then that
country’s currency will need to inflate. Inflation could reduce
pension obligations if voters will not.
Update on the Corporate Cash Hoard
Two years ago we focused on this topic; Now the press routinely talks about
the $1 Trillion sitting on Corp Balance Sheets (here’s $700 B in just 30 Co’s)
All dollars in Billions.
30 Dow Jones Stocks
Bank of America
9/30/08
9/30/10
9/30/11
Change*
$ 51.1
$ 150.1
$ 101.2
+$ 50.1
GE
16.3
78.4
91.4
75.1
Pfizer, J&J and Merck
47.7
55.2
75.5
27.8
IBM, CSCO, MSFT, INTC, HPQ
53.2
88.8
97.3
44.1
T, CAT, BA, KFT, 3M, HD
13.3
26.0
32.6
19.3
DuPont, Coke, PG, WMT, UTX
25.2
37.8
37.0
11.8
7.0
34.2
17.8
10.8
216.2
105.6
(17.8)
Alcoa, VZ, DIS, MCD
AXP, JPM, TRV
Exxon & Chevron
Total All 30
110.6
82.2
49.4
26.8
31.6
$ 373.8
$ 557.2
$ 700.5
* - Change from Sept. ’08 to Sept ‘11.
$ 326.7
A Pre-Occupied Wall Street
Govt. as Venture Capitalist
Gov’t picks Winners
… and by Implication: Losers
↓
↓
Electric Cars, Solar Panels
US Car Mfgrs, LNG producers
↓
↓
Key Gov’t Agencies ease path or create hurdles
[ EPA, DOE, DOJ, NHTSA ]
↓↓
* Raise MPG standards; * reduce drilling permits; * Sue competitors …
↓↓
No demand for electric cars; Only subsidized demand for solar
No LNG and Coal plants power the Chevy Volt (in 15 states)
A Pre-Occupied Wall Street
A Question for BK Professionals
Q: Is Failure Constructive for an Economy
or Must Industries/Companies be Subsidized
and/or Shielded from Failure?
• Does the Bankruptcy Code encourage Rehabilitation?
• Must we protect Industries so workers never lose a good
job?
• If out-dated or inefficient Industries are to be supported
(subsidized) where does the capital come for new
Industries?
The Solar Energy Industry
Stocks hit hard in 2011 as Europe pulls back on Subsidies.
12/31/10
11/25/11
% IRR
Solar Millennium (SMLNF)
$ 25.00
$ 2.40
-
90 %
Conergy
(CETHF)
$ 3.60
$ 0.41
-
89 %
Suntech
(STP)
$ 8.40
$ 2.29
-
73 %
Q-Cells
(QCE GR)
$ 2.51
$ 0.74
-
71 %
First Solar
(FSLR)
$130.14
$ 40.32
-
69 %
MEMC Elec Material (WFR) $ 11.26
$ 3.92
-
65 %
Solarworld
$ 9.70
$ 3.91
-
60 %
$ 12.83
$ 6.61
-
48 %
$ 92.00
$ 49.80
-
46 %
SunPower
(SRWRF)
(SPWR)
SMA Solar (SMTGF)
A Brief Review on Your Personal Investment
in Solar Energy (courtesy of the DOE)
12/31/10
11/25/11
0
% IRR
Solyndra
$ 535 mm
$
Beacon Power
$ 43 mm
$ 12 mm
Severstal Steel (Russian Co)
$ 730 mm
$ 730 mm
0%
Tesla Motors ($100k roadster)
$ 465 mm
$ 465 mm
0%
Ener1 Inc.
$ 55 mm
$
Fisker Automotive ($85k car)
$ 529 mm
$ 265 mm
-
50 %
Tatith Energies (Solarworld)
$ 19 mm
$
5 mm
-
74 %
Western Area Transmission
$ 161 mm
$ 80 mm
-
50 %
Page Totals
$2,537 mm $1,557 mm
-
39 %
Total Program
$36 billion
0
- 100 %
-
72 %
- 100 %
Winners 2011
Stressed Situations
12/31/10
11/25/11
Meritor Savings (MSVP)
$ 2.34
$ 4.28
+
83 %
Syms (SYMSQ)
$ 7.23
$ 9.40
+
30 %
NCO Group 11⅞ %
84.00
95.00
+
25 %*
Sterling Chemical 10¼ %
95.00
104.00
+
20 %*
* - IRR includes interest.
% IRR
Losers of 2011
(A partial list)
12/31/10
MF Global
11/25/11
% IRR
$ 8.36
0.14
- 98 %
General Maritime (GMR)
3.25
0.04
- 98 %
Beacon Power (BCONQ)
$ 2.20
$ 0.09
- 96 %
Great A&P 6.75% ‘12
29.00
1.50
- 95 %
General Maritime 12% 11/17
99.00
10.25
- 90 %
MF Global 6.25% issue 8/3/11
100.00
32.00
- 68 %
NetFlix (NFLX)
$180.00
$ 63.85
- 64 %
Jefferies (JEF)
$ 26.63
$ 10.65
- 60 %
71.00
29.00
- 59 %
Dex One 12% due 1/17
Fueling Problems?
Airlines are having bad years again.
Company
12/31/10
11/25/11
% IRR
American AMR
$ 7.79
$ 1.61
- 79 %
US Air
LCC
$ 10.01
$ 4.02
- 60 %
Jet Blue
JBLU
$ 6.61
$ 3.48
- 47 %
Southwest LUV
$ 13.00
$ 7.50
- 42 %
United
$ 23.82
$ 15.90
- 33 %
UAL
Industry Bell Weathers of 2011
A sense of how Industries are Reacting
Industry Sample
12/31/10
11/25/11
% IRR
Oil: XOM
$ 73.12
$ 73.90
+ 1.1 %
Nat Gas: CHK
$ 25.91
$ 22.42
- 13.5 %
Fertilizer: MOS
$ 76.36
$ 49.30
- 35.4 %
Radio Broadcst: ETM
$ 11.58
$ 4.72
- 59.2 %
Lumber: IP
$ 27.24
$ 25.89
- 5.0 %
Homebuilder: TOL
$ 19.00
$ 18.55
- 2.4 %
Steel: X
$ 58.42
$ 22.27
- 61.9 %
Retail: WMT
$ 53.93
$ 56.89
+ 5.5 %
Hospitals: CYH
$ 37.37
$ 17.41
- 53.4 %
Insurance: ALL
$ 31.88
$ 24.70
- 22.5 %
What to Watch For:
• World markets will watch the US Presidential election closely. If Romney is
the Republican nominee, markets could rally immediately.
• Markets will rally strongly by November absent some gaff by the Republican
nominee. Interest rates, expecting a return to growth and some defense of
the US dollar will increase.
• We expect 10-yr rates to move from 1.95% to above 2.50%.
• Corporate profits of established companies have been rising and likely will
continue to rise in 2012. When will P/E multiples go up? (A: post Nov. ’12)
• Expect ObamaCare to be overturned by the US Supreme Court; could lead to
a rally in healthcare stocks.
• Investing in 2012 is all about the US Presidential election.
In Conclusion:
As the Presidential election season
heats up, Investors will be watching
closely and are expecting a change in
Washington.
We expect 2012 to be a year of optimism,
transition and a good year for investors.
Best wishes for Good Investing, Steve Gidumal