Whitney Tilson’s email to investors discussing Fannie/Freddie have tripled; Alphabet pitched on VIC; a financial crisis with Chinese attributes; Dairy farming is dying.
1) The GSEs (government-sponsored entities, Fannie Mae and Freddie Mac), which were long-time holdings in my hedge fund, have TRIPLED this year on hopes that a deal might finally be struck to get them out of government control. Here’s an article in today’s WSJ about this: Lawmakers Promise Fresh Push to Overhaul Housing Finance. Excerpt:
Q4 hedge fund letters, conference, scoops etc
Lawmakers from both parties plan to take a fresh crack at getting Fannie Mae and Freddie Mac, two companies that underpin nearly half of U.S. mortgages, out of government control.
Bill Ackman laid out the most sensible plan I’ve seen to resolve this situation in this 111-slide presentation, It’s Time to Get Off Our Fannie, at the May 2014 Ira Sohn Conference.
2) Someone posted a spot-on pitch for Alphabet a few days ago on ValueInvestorsClub. It’s a members-only site so I can’t link to it, but here’s the opening summary:
While my broader thesis is below, I want to highlight the three reasons I believe this company will appreciate sharply (+100-160% to $2,200-$2,900/share) from current prices:
1. Android is the single largest and most important “hidden asset” in the world. At present, it is only monetized indirectly through Play Store purchases. GOOG is going to, for the first time, begin charging smartphone manufacturers to pre-install Play Store, Gmail, YouTube and Maps via one license, and Search and Chrome browser through a second license, on its European phones. Ostensibly, this is to comply with European regulators and replace potentially lost ad revenue, but let's be realistic - every manufacturer is going to have to buy these licenses if they want to sell their phones. https://www.nytimes.com/2018/10/16/technology/google-android-europe-apps.html
a. Android has more than 2 billion monthly active devices and about 1.2 billion are sold annually right now. https://www.statista.com/statistics/266219/global-smartphone-sales-since-1st-quarter-2009-by-operating-system/
b. I could easily see GOOG adopting this new charge for pre-install policy globally, after all, in July, Sundar said they may begin charging for Android, writing "So far, the Android business model has meant we haven't had to charge phone makers for our technology, or depend on a tightly controlled distribution model." https://www.blog.google/around-the-globe/google-europe/android-has-created-more-choice-not-less/
c. If this policy becomes a backdoor way to charge for Android, and say GOOG were to charge $5-10 per device for these pre-installs, on 1.2 billion device sales annually that works out to $6-12 billion, which would essentially be 100% incremental pre-tax cash flow.
d. This may even be conservative, as Google management has been thinking of this as a recurring revenue stream on the full base of users. In 2010, Eric Schmidt said “If we have a billion people using Android, you think we can’t make money from that?” and said all it would take is $10 per user per year. With 2 billion current users, that would be a $20 billion annual cash flow stream. https://blogs.wsj.com/digits/2010/07/28/eric-schmidt-on-google%E2%80%99s-next-tricks/
2. YouTube is probably the best (and most widely loved) business in the world, and eventually probably becomes worth more than the current enterprise value of Alphabet. Google Maps and Waymo may turn out to be second and third over time, but we're not paying for that now.
3. If Alphabet were ever to separate into 3, 4, 5 or more pieces, I believe the equity value creation would be both instantaneous and massive. The market is making a big mistake by treating break-up headlines negatively.
3) Here are two articles about China, which I sent earlier to my China-specific email lis
a) WSJ Heard on the Street: China Risks Real Hard Landing This Time. Excerpt:
Beijing’s crackdown on shadow banking has gone overboard. Some backtracking looks necessary.
b) Bloomberg: Forget the Trade War. China Is Already in Crisis. Excerpt:
What goes widely unnoticed is that China is already in crisis.
4) A very poignant article about a lifelong Wisconsin dairy farmer who was forced out of business by industrial-scale factory farms. Dairy farming is dying. After 40 years, I’m done. Excerpt:
After 40 years of dairy farming, I sold my herd of cows this summer. The herd had been in my family since 1904; I know all 45 cows by name. I couldn’t find anyone who wanted to take over our farm — who would? Dairy farming is little more than hard work and possible economic suicide.
This reminds me of a good book I read last fall, The Meat Racket: The Secret Takeover of America's Food Business, about how our meat supply system has been taken over by the likes of Tyson Foods, to the detriment of both the animals’ and consumers’ health, countless individual farmers who have been reduced to little more than sharecroppers, and entire states/regions.
