Whitney Tilson on the market is misunderstanding Lumber Liquidators’s announcement; Berkshire meeting notes; Munger on interest rates; Baby Buffett: Will Bill Ackman resurrect the ghost of Howard Hughes; Weinreb; Twinkie’s Comeback; Stocks vs. bonds since 1997; Sheryl Sandberg’s tribute Some really great notes on Berkshire meeting see them below
Whitney Tilson on Lumber Liquidators
1) I published my 15th article on Lumber Liquidators this afternoon – see below. Here’s a summary:
- Lumber Liquidators announced three pieces of news this morning that are being misinterpreted by the market as positive developments, but they’re not.
- What we have witnessed in the past 67 days has, I believe, been a frantic attempt to engineer a massive cover-up – and today’s announcement means that this has failed.
- The company needs to immediately take a number of steps to do right by customers.
- I view the stock’s rise today as a gift, so I materially increased my short position this morning.
A pdf file with all 15 articles (plus a table of contents) is posted at: www.tilsonfunds.com/LLTilsonarticles.pdf
Notes from Berkshire meeting
2) After my last email, a bunch of folks sent me their notes from the Berkshire meeting (thank you!), plus here is a link to the notes on the WSJ blog: http://blogs.wsj.com/moneybeat/2015/05/02/live-analysis-the-2015-berkshire-hathaway-annual-meeting/
I haven’t had a chance to go through them, so I’ve posted all of them – you’ll have to figure out which one(s) you want to read (in alphabetical order):
Whitney Tilson: Munger’s comments from The Daily Journal 25th annual meeting
3) Here’s what Munger had to say at the annual meeting of The Daily Journal on March 25th about “persistent negative interest rates on certain government bonds”:
Q: One of the more peculiar things that we see in the markets today is the existence of persistent negative interest rates on certain government bonds. I’m wondering if you just have any thoughts around that.
Mr. Munger: This has basically never happened before in my whole life. I can remember 1½ percent rates. It certainly surprised all the economists. It surprised the people who created the life insurance industry in Japan, who basically all went broke because they guaranteed to pay a 3% interest rate. I think everybody’s been surprised by it, including all the people who are in the economics profession who kind of pretend they knew it all along. But I think practically everybody was flabbergasted.
I was flabbergasted when they went low; when they went negative in Europe – I’m really flabbergasted. How many in this room would have predicted negative interest rates in Europe? Raise your hands.
[No hands go up]
That’s exactly the way I feel. How can I be an expert in something I never even thought about that seems so unlikely. It’s new territory….
Q: Are there any specific unintended consequences that you are concerned about now that we’ve had such a prolonged period of low interest rates, which are clearly altering folks’ risk behavior?
Mr. Munger: I think something so strange and so important is likely to have consequences. I think it’s highly likely that the people who confidently think they know the consequences – none of whom predicted this – now they know what’s going to happen next? Again, the witch doctors.
You ask me what’s going to happen? Hell, I don’t know what’s going to happen. I regard it all as very weird. If interest rates go to zero and all the governments in the world print money like crazy and prices go down – of course I’m confused. Anybody who is intelligent who is not confused doesn’t understand the situation very well.
If you find it puzzling, your brain is working correctly.
Whitney Tilson on Bill Ackman
4) Bill Ackman is on the cover of the latest issue of Forbes, out today, in an article about how he and David Weinreb (Chariman and CEO, respectively) are building a powerhouse at Howard Hughes Corp. (HHC). I certainly agree, as it’s my largest position – I’ve owned it since the day it first started trading on Nov. 9, 2010 as a spin-off from General Growth Properties when it emerged from bankruptcy, and it’s more than quadrupled since then. Here’s an excerpt from the article:
because of Gotham’s failures, Pershing Square pledged to its partners not to invest directly in private companies–including real estate.
This created a dilemma because real estate has always been his sweet spot. “It is an asset class I understand, and we have made a fortune in it,” says Ackman, who isn’t known for modesty. “I don’t know that I’ve ever made a bad real estate investment.”
The financial crisis of 2008 presented the solution that led to Howard Hughes. As markets were descending into turmoil, Ackman bought up 25% of struggling mall REIT General Growth Properties at a fire sale, helped steer it into a managed bankruptcy and then cherry-picked certain undeveloped assets from the carcass, an unwanted hodgepodge that rivals dubbed “Sh-tco.” General Growth turned out to be his greatest investing triumph, with a 130-fold gain on his stock, amounting to a $3.7 billion profit for his hedge fund. “Sh-tco” turned into the Howard Hughes Corp., a $6 billion vehicle that has seen its stock climb 300% since it was spun off–and allowed Ackman back into the real estate game unfettered.
One of Howard Hughes’ most valuable assets is on Bill Ackman’s home turf: Manhattan’s South Street Seaport…
…In 2002 he reconnected with Ackman via a cold call. Seven years later, with the real estate market languishing, Weinreb began talking to Ackman about launching a fund to buy up distressed properties. The discussion eventually morphed into Weinreb taking charge of Ackman’s plan for Howard Hughes.
Weinreb’s background in turnarounds is what made the Las Vegas project so enticing. The mall was abandoned in 2007, as the real estate market began to sicken. Until a year ago it was fallow, with concrete and rusting steel columns sitting atop wasteland purchased by reclusive business tycoon and aviator Howard Hughes in the 1950s to avoid taxes (see sidebar). “We’re the largest landholder in a constrained market,” says Weinreb. “It was self-evident that Downtown Summerlin would have a bright future when the market recovered.”
More tantalizingly, Howard Hughes owns 200 acres of barren desert to the east, which is slated for 4,000 residential units and 1.4 million square feet of office space. And another 5,600 acres to the west and south, which will become increasingly valuable if Ackman’s projections, which call for Summerlin’s 100,000 population to double, come to fruition.
Control is important in all of the duo’s master plans. Besides its Las Vegas real estate and planned community, Howard Hughes also owns the Woodlands, a 28,400-acre planned community on the outskirts of Houston conceived in the 1960s by shale gas pioneer George Mitchell, as well as parts of James Rouse’s planned community in Columbia, Md. It also owns Ward Village, a 60-acre plot of coastal land in Honolulu, where the company has already broken ground on two luxury towers that are more than 80% sold.
Instead of pawning off projects to joint venture investors, Ackman and Weinreb are doubling down. One of Weinreb’s first moves, in fact, was spending $118 million on a deal in 2011 to buy out the 48% interest Morgan Stanley held in the Woodlands. They also decided to retain the 25 million square feet of strategic development Howard Hughes owns on all of its properties. Just as Buffett counts on steady cash flow from Berkshire Hathaway’s insurance holdings, Ackman is trying to position Howard Hughes as a real estate cash machine. Cash flow is expected to triple by 2016 to over $500 million per year, according to Compass Point analyst Wilkes Graham.
“Howard Hughes management isn’t concerned with meeting a quarterly estimate,” says James Davolos, portfolio manager at Horizon Kinetics, the firm’s largest outside shareholder. “They’re concerned with compounding the value of the investment over the next five, seven or ten years.”
5) In addition to being a great guy and brilliant CEO, David Weinreb is an incredible singer/performer. Long ago, he was a child star – some called him a young Frank Sinatra – with his own band, performing at resorts in the Catskills, doing commercials, etc. In an odd coincidence, he and Vanessa Williams (Grammy-nominated singer, actress, model and, in 1983, the first African-American woman crowned Miss America) were good friends and classmates at Horace Greeley High School in Chappaqua, NY, where they traveled with the school orchestra to perform in places like Venezuela and the Bahamas. They’re still close friends and they haven’t lost their touch as performers, as you can see from the video I took of them last night at the charity gala at the Plaza to benefit the Boys & Girls Harbor: https://youtu.be/6D0ugB-b3k8 (4 min)
And in an even more odd coincidence, you’ll never guess who was two years behind them at Horace Greeley: Bill Ackman!
Whitney Tilson on Twinkie’s turnaround story
6) What an incredible turnaround story:
But while you wouldn’t find Twinkies on Whole Foods’ shelves or in Gwyneth Paltrow’s pantry, Hostess had something you can’t find in a locally sourced, chia–seed snack–millions of nostalgic fans. “The brand awareness was unbelievable,” says Jhawar. “It’s not every day you have an opportunity to acquire a brand that is ubiquitous, that had $1 billion in revenue before the bankruptcy and 80–plus years of legacy.”
Acquire they did, plunking down $410 million for the cake brands and promising to inject another $250 million to rehabilitate the business. Now, just two years after buying the shuttered company, they sit atop what will likely be a $2 billion win. “They’ve worked magic with their business concept and have made Hostess one of the most efficient and effective companies in the entire food industry,” says Joseph Gatto, a partner at Perella Weinberg, who brokered the sale to Metropoulos and Apollo.
How they’d do it? Cherry–picking top assets, modernizing manufacturing and distribution, doubling the shelf life of products and capitalizing on the rare place in pop culture Hostess products still held. “People walk up and thank me for bringing back Twinkies,” says Metropoulos, who has previously rebuilt brands like Bumble Bee Tuna, Chef Boyardee and Pabst Blue Ribbon. “No one ever thanked me for saving Vlasic pickles.”
Whitney Tilson on the 30-year US treasury in 1997
7) What an interesting chart: if you bought the 30-year US treasury in 1997 and held it to today, you would have outperformed the S&P 500 – with a lot less volatility and heartache. Over this period, pretty much all of the “smart” money has always hated bonds – and they are sure to reverse – but you have to give them their past due.
Whitney Tilson: Sheryl Sandberg’s tribute to her late husband
8) What a beautiful tribute to her late husband Sheryl Sandberg posted on her Facebook page:
Sheryl Sandberg added 2 new photos.
I want to thank all of our friends and family for the outpouring of love over the past few days. It has been extraordinary – and each story you have shared will help keep Dave alive in our hearts and memories.
I met Dave nearly 20 years ago when I first moved to LA. He became my best friend. He showed me the internet for the first time, planned fun outings, took me to temple for the Jewish holidays, introduced me to much cooler music than I had ever heard.
We had 11 truly joyful years of the deepest love, happiest marriage, and truest partnership that I could imagine… He gave me the experience of being deeply understood, truly supported and completely and utterly loved – and I will carry that with me always. Most importantly, he gave me the two most amazing children in the world.
Dave was my rock. When I got upset, he stayed calm. When I was worried, he said it would be ok. When I wasn’t sure what to do, he figured it out. He was completely dedicated to his children in every way – and their strength these past few days is the best sign I could have that Dave is still here with us in spirit.
Dave and I did not get nearly enough time together. But as heartbroken as I am today, I am equally grateful. Even in these last few days of completely unexpected hell – the darkest and saddest moments of my life – I know how lucky I have been. If the day I walked down that aisle with Dave someone had told me that this would happen – that he would be taken from us all in just 11 years – I would still have walked down that aisle. Because 11 years of being Dave Goldberg’s wife, and 10 years of being a parent with him is perhaps more luck and more happiness than I could have ever imagined. I am grateful for every minute we had.
As we put the love of my life to rest today, we buried only his body. His spirit, his soul, his amazing ability to give is still with us. It lives on in the stories people are sharing of how he touched their lives, in the love that is visible in the eyes of our family and friends, in the spirit and resilience of our children. Things will never be the same – but the world is better for the years my beloved husband lived.