Whitney Tilson’s in his email discusses documents undercut U.S. case for taking mortgage giant Fannie Mae’s profits; hedge-funder Bill Ackman is a star at Tribeca Film Festival; LL; lessons from consolidating industries; Insys; The Unraveling of a Wall St. Scion (the addictiveness of trading); Kase Fund 2015 annual letter and attending the 18th consecutive Berkshire Hathaway annual meeting.

Whitney Tilson: Documents Undercut U.s. Case For Taking Mortgage Giant Fannie Mae’s Profits

1) Fannie Mae (in which I have a ~3% position) was up 34% yesterday and is up another 12% today because, at long last, the truth is coming out: the government seized all future profits of the GSEs (via the 2012 “net worth sweep”; note that this was not the original bailout, which nobody is challenging) not because they feared ongoing losses, but precisely the opposite: because they realized Fannie and Freddie were about to become massively profitable.

The testimony by the former CFO of Fannie is so damning to the government’s case:

In a deposition taken last July, for example, Susan McFarland, Fannie’s former chief financial officer, said she told high-level officials at the Treasury on Aug. 9, 2012, that the company was, in fact, “now in a sustainable profitability, that we would be able to deliver sustainable profits over time.”

…In addition to telling Treasury officials in early August 2012 that Fannie would be able to sustain profits, Ms. McFarland said that Fannie could soon reap about $50 billion in income because of the reversal of an accounting entry, known as a deferred tax asset, required under accounting rules when the company began earning profits again.

In her deposition, Ms. McFarland said that she believed her conversation with the Treasury propelled the government to change the terms of the bailout to seize Fannie’s and Freddie’s profits. “When the amendment went into place,” Ms. McFarland testified, “part of my reaction was they did that in response to my communication of our forecasts and the implication of those forecasts, that it was probably a desire not to allow capital to build up within the enterprises and not to allow the enterprises to recapitalize themselves.”

By acting quickly (and then lying about it to hide their true intent), they would achieve two goals: a) solve a political problem (shareholders, especially big hedge funds, profiting from entities bailed out by the government; though this was no different from AIG); and b) get access to a ton of cash flow that could be allocated for the government’s purposes rather than rebuild the GSE’s depleted capital bases (with some to shareholders).

Mark my words: this is the turning point. Now that the lie has been exposed, the courts will overturn this illegal seizure and the stocks of the GSEs will be multi-baggers from here.

PS—Here’s a good article today about the latest news, which concludes:

Now the world is beginning to see what really has been going on behind the veil of conservatorship. Let’s not kid ourselves, the words in these deposition transcripts merely put exclamation marks on the fact that since conservatorship has begun, over $100B has flowed away from the GSEs to Treasury, making the GSEs the most successful nationalization in world history so far.

These deposition transcripts support plaintiff arguments that the conservatorship’s third amendment was a backdoor nationalization. I’m really looking forward to listening to oral arguments this Friday. It would be amazing if Judge Sweeney ruled on the motion to compel before then, but I’m not expecting a miracle.

The government coverup is starting to lose traction and shares have begun their heroic march higher. This is just the beginning…If you think shares aren’t cheap now because they are up somewhere around 40% from my last one outlining that how goes HERA also goes the FDIA, feel free to reference this article in 12 months and we’ll see about that.

Whitney Tilson: Bill Ackman is a star at Tribeca Film Festival

2) Ackman has been counted out before – but Chapman is right:

“I don’t think Ackman is ‘done,’ just maimed,” Chapman said in an email. “That dude is RESILIENT!”

Herbalife is an obvious pyramid scheme (albeit one carefully and cleverly wrapped in the veneer of a legitimate business), so he will eventually be proven right on this – just as he will be proven right on the GSEs (which just became a lot more likely).

Whitney Tilson: Lumber Liquidators; lessons from consolidating industries

3) On his TV show on Monday (which has nearly two million viewers), Dr. Oz interviewed a women who installed Lumber Liquidators’ Chinese-made laminate in her home, which made her two kids sick, so she had the flooring removed and they got better – but of course LL refused to take the flooring back, much less compensate her for the removal costs, much less for her childrens’ sicknesses.

Here’s what aired: http://www.doctoroz.com/episode/toxic-laminate-wood-floors-are-they-making-you-sick (3:21). Here’s my transcript (starting at 1:12):

Anna: …and we picked out wood flooring from Lumber Liquidators. It was beautiful. We had it installed, it was gorgeous. It did have a smell to it, a chemical smell, but it was beautiful.

Dr. Oz: So after you install, uneventfully, these floors, the health of your family started changing?

Anna: Yes. My daughter immediately started exhibiting symptoms of, like, raspy voice, sore throat, her eyes were watering… My son, whose room is directly across the hall from her, he was exhibiting the same exact symptoms, just watery eyes, sore throat, but he was also getting nose bleeds.

Dr. Oz: Nose bleeds?

Anna: Yes, they were pretty bad. And I was thinking maybe seasonal allergies… I didn’t know what was going on.

Dr. Oz: Had they ever had those symptoms before?

Anna: No. No.

Dr. Oz: Oh my goodness. So you pay to get this flooring put in, you’re proud of it. Your kids are sick. Did you rip it up, I guess?

Anna: Well, first I contacted Lumber Liquidators and asked, you know, if I could bring the product back to them, and they said “Absolutely not.” The store manager said, “No way, you’ve installed it, it’s your flooring.” And then I called corporate and corporate told me the same thing – they said it’s absolutely not harmful. So I just took it upon myself to tear out the flooring, have it taken out. We took it out through the window of the bad room. We sealed off the room, and I took them to small claims court.

Dr. Oz: But what happened to your kids? How soon…did they get better after…?

Anna: Oh yeah. Within a day of the flooring being out of the house, all symptoms disappeared. It was about 24 hours, maybe a little bit more. But all the symptoms were gone.

Dr. Oz: Do your kids got sick from the floor that you paid for. Kids got better when you took the flooring out. There’s some correlation there.

Anna: Um huh.

Dr. Oz: You go to court over this. What do you have to say to the manufacturer?

Anna: When you purchase a product and you’re putting it into your home, you expect it to be not harmful to your family. Lumber Liquidators, they completely lied. It did not meet CARB standards. And I basically put poison in my home unknowingly, and they should really just do something about it. And instead they were just all about the money.

4) An interesting question to ponder: 2-3 years ago, I invested in three crappy industries, airlines, car rentals and semis, that I felt were going to improve to be at worst mediocre and maybe even decent thanks to consolidation. Airlines worked, but the other two didn’t. Why? Yes, low fuel prices helped, but it’s more than that. I see two big differences:

1) In car rentals and semis, there’s an industry hegemon with ~50% market share that controlled the fate of the two smaller players – and in both cases, they behaved fairly aggressively; and

2) Technology shifts. In car rentals, I think the entire industry is being hit by Uber, but especially Hertz and Avis, who depend much more on business travelers. I used to always rent a car when I traveled to, say, LA – now, I almost never do. And in semis, Micron always seems to be playing catchup to Samsung’s technology lead.

Whitney Tilson: Insys; The Unraveling of a Wall St. Scion (the addictiveness of trading)

5) Kudos to Roddy Boyd for nailing Insys Therapeutics, a truly dreadful company (see his five articles starting a year ago here). From today’s WSJ:

Insys Therapeutics shares dove Monday after the company said first-quarter sales of its flagship product, the cancer-pain treatment Subsys, were slightly more than $60 million. That was down from a year earlier and well below analyst expectations of $86 million.

Insys said in a release that “heightened publicity surrounding the national opioid epidemic has resulted in a sensitivity by some health-care providers to prescribe opioids.”

 

PS—I’m halfway through reading (listening to) Dreamland: The True Tale of America’s Opiate Epidemic. Here’s a summary:

The rise of OxyContin addiction and subsequent heroin use has been much in the news lately as we try to make sense of what is happening in suburban and small town America. Sam Quinones’ Dreamland takes a multifaceted approach to the subject, profiling people from all walks of life, ranging from citizens of impoverished Mexican ranchos to young affluent white athletes, all cogs in the wheel of the latest drug epidemic. Unlike the crack cocaine phenomenon of the 1980s, today’s widespread opiate addiction has roots in the prescription pads of certified physicians and the marketing machine of Big Pharma. When the addict, forced by availability and economics, transitions to heroin he is met by a new breed of entrepreneurial drug dealers who are only too happy to take calls and make deliveries. The changing landscape of small town America, along with science, opportunity, shame, and of course greed, all play a role here and to see the puzzle come together, one comprehensible piece at a time, is as fascinating as it is unsettling.

It’s a shocking tale – and it boggles my mind that, though this epidemic has been ravaging families and entire regions of the country for well over a decade, basically nobody did anything about it until very recently. For more, see this Frontline documentary, Chasing Heroin, and this article, Dying to Be Free, that won a Polk Award for investigative reporting.

Whitney Tilson: The fall of Andrew Caspersen

6) Speaking of addiction, it’s stunning and scary to see how addictive trading, especially options trading, can be, as shown by the fall of Andrew Caspersen:

The scandal, which unfolded even though some investors detected that things seemed amiss, marks a stunning fall from grace for a man who seemed to have everything going for him, including a family name that was once synonymous with Wall Street privilege.

Some people who know Mr. Caspersen well now say they believe he was feeding an addiction, not to drugs or casino gambling, but to market speculation. To those close to him, it went beyond aggressive trading and became a compulsion that consumed a personal fortune that once stretched well into the eight figures.

… Although he thrived at work and struck colleagues as strait-laced, Mr. Caspersen harbored a secret: He had developed what he would later describe to acquaintances as an unhealthy fixation on placing big wagers on the market. Among his instruments of choice were stock options, which allowed him to make high-stakes bets with limited capital.

Unbeknown to his family and close friends, Mr. Caspersen’s speculative trading had largely depleted his personal fortune by last summer—and put him on an even more self-destructive path.

It’s a major reason why, in 17+ years of professional investing, I’ve never once done a trade myself – I just send an email to an outside broker I trust, usually with some very basic instructions (e.g., a price limit, “try to get it done today”), and he emails me a report at the end of the day.

 

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Whitney Tilson