Whitney Tilson’s Conversation With His Legs; Bill Ackman Plays Defense On Valeant

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Whitney Tilson’s discusses activist Investor Bill Ackman plays defense; drugs, greed and a dead boy, short seller who took on ‘porn’s new king’ is still standing, dems undermine, sensible pricing comes to high-risk debt securities, The Big Short movie and a conversation with his legs. Excerpted from an email which Whitney Tilson sent to investors.

Whitney Tilson – Bill Ackman’s investment in Valeant

1) Below is an article about Bill Ackman and his investment in Valeant from the front page of today’s WSJ. I’m quoted briefly.

Every investor should analyze this case study to learn from Ackman’s experience, as every last one of us has had (and will have) to deal with a major investment going south. How do you collect more information, filter out the noise, analyze the situation, control your emotions, and ultimately make the right decision among four choices: dump it all, trim, hold, or buy? It is almost never obvious what the right answer is – rather, every option feels really crappy when you’ve lost a lot of money on an investment, especially if you’re in the hot glare of the public spotlight. I’ve been there and it’s no fun.

2) This op ed in today’s NYT by Nick Kristof adds a little perspective: in pursuit of higher profits, many, many pharma companies have done terrible things, some which may have actually killed people (at least Valeant hasn’t been accused of that)!

When Andrew was 15, the medications caught up with him and he suffered a rare complication from one of them, Seroquel. One Friday he was well enough to go to school; on Sunday he was brain-dead.

That’s the story that Steven Francesco, a longtime pharmaceutical industry executive and consultant, tells in “Overmedicated and Undertreated,” his harrowing memoir of raising Andrew, his son. He makes clear that the larger problem — even from his view as an industry insider — is a sector that sometimes puts profits above public well-being.

Here’s the central issue: Children with emotional or mental disorders have become a gold mine for the drug industry. Psychiatric medicines for children account for billions of dollars in sales annually, and the market has boomed.

Between the mid-1990s and the late 2000s, prescriptions of antipsychotics for children rose about sevenfold.

And now the industry is getting even greedier.

Whitney Tilson – Disadvantages to be an activist short seller

3) Re. my comment in my last email about how hard and dangerous it is to be an activist short seller, here’s an article in yesterday’s WSJ about one such case:

Keith Dalrymple says he probably wouldn’t do it again.

The financial analyst, who runs a small research firm with his wife in her native Bulgaria, in early 2011 published a report saying a Bermuda-based reinsurance firm was “likely fraudulent.”

In the bruising years that followed, the company, Gerova Financial Group Ltd., attacked the Dalrymples in the media and said it had hired a prominent investigative firm to probe their “possible market manipulation and collusion.” The couple was sued multiple times by individuals and firms linked to Gerova.

In the end, the Dalrymples appear to have come out on top. The lawsuits against the Dalrymples have all been withdrawn or dismissed. And U.S. prosecutors in September brought criminal charges against seven people tied to Gerova, including Jason Galanis, his two brothers and their serial con-artist father.

Whitney Tilson – Protecting retirement savers

4) What a total disgrace – these clowns should be ashamed of themselves:

Democrats Undermine Efforts to Protect Retirement Savers

NYT editorial, NOV. 5, 2015

Forty-seven House Democrats are threatening to derail the Obama administration’s effort to protect Americans from retirement advisers who put their own interest in earning commissions above their clients’ need for expert advice.

Last week, the lawmakers wrote to Labor Secretary Thomas Perez, who leads the effort, asking for a delay in the rule-making process to allow for more public comment. The request is disingenuous. The Labor Department has already held a long comment period on its proposed rules, including four days of public hearings. The next step is to review the comments and then issue final rules.

The Democrats’ request, if granted, would interrupt this process and very likely make it impossible to finalize the rules before the end of 2016, leaving the next administration to grapple with them anew (if a Democrat wins) or ditch them (if a Republican wins).

Worse, the request could be harmful even if it is denied. After final rules are issued, they will almost surely be challenged in court by opponents in the financial industry, who would most likely cite a refusal to allow more comment as evidence that they were not given enough time to weigh in.

The request is also duplicitous. Most of the signatories had voted earlier against a Republican bill to stop the rule-making, which allowed them to cast themselves as champions of the rules. But asking for a delay could achieve the same obstructionist goal.

The rules, proposed in April, would require financial advisers to act in a client’s best interest when giving advice and selling investments for retirement accounts. That would be a big improvement over current practice, which lets many advisers steer clients into high-priced products and strategies, even when comparable and cheaper alternatives are available. By conservative estimates, clients saving for retirement pay billions of dollars a year in excessive fees and commissions. Under a best-interest standard, those billions would stay in savers’ accounts.


5) This is good to see:

Sensible Pricing Comes to High-Risk Debt Securities

For the first time since the onset of the 2008 financial crisis — and the Federal Reserve’s response, which was to drive down the cost of money to near zero — some rational pricing seems finally to be seeping into the market for the riskiest debt securities. This correction in the price of bonds is good news for investors, for markets generally and for the rest of us who hope not to suffer another deleterious credit collapse fueled by fee-seeking underwriters and speculators on Wall Street.

…This is all good news. The time is long overdue for the insanity in the credit markets to come to an end. Investors need to be adequately compensated for the risks they are taking when they buy debt of tenuous credit quality. That’s the only way to make sure the credit markets operate smoothly.

It’s healthy to see that investors are starting to wise up after seven years of a Fed-induced high.

Whitney Tilson – The Big Short movie

6) The new movie, The Big Short, based on Michael Lewis’ book, hits theaters on Friday, Dec. 11th. Based on this trailer, https://www.youtube.com/watch?v=vgqG3ITMv1Q, it looks EPIC! I know most of the guys in the story, so I can’t wait to see it.

If you haven’t read the book (The Big Short: Inside the Doomsday Machine), it’s great! At the end of this email is an extended excerpt that begins:

In early 2004 a 32-year-old stock-market investor and hedge-fund manager, Michael Burry, immersed himself for the first time in the bond market. He learned all he could about how money got borrowed and lent in America. He didn’t talk to anyone about what became his new obsession; he just sat alone in his office, in San Jose, California, and read books and articles and financial filings. He wanted to know, especially, how subprime-mortgage bonds worked. A giant number of individual loans got piled up into a tower. The top floors got their money back first and so got the highest ratings from Moody’s and S&P, and the lowest interest rate. The low floors got their money back last, suffered the first losses, and got the lowest ratings from Moody’s and S&P. Because they were taking on more risk, the investors in the bottom floors received a higher rate of interest than investors in the top floors. Investors who bought mortgage bonds had to decide in which floor of the tower they wanted to invest, but Michael Burry wasn’t thinking about buying mortgage bonds. He was wondering how he might short, or bet against, subprime-mortgage bonds.

Every mortgage bond came with its own mind-numbingly tedious 130-page prospectus. If you read the fine print, you saw that each bond was its own little corporation. Burry spent the end of 2004 and early 2005 scanning hundreds and actually reading dozens of the prospectuses, certain he was the only one apart from the lawyers who drafted them to do so—even though you could get them all for $100 a year from 10kWizard.com.

The subprime-mortgage market had a special talent for obscuring what needed to be clarified. A bond backed entirely by subprime mortgages, for example, wasn’t called a subprime-mortgage bond. It was called an “A.B.S.,” or “asset-backed security.” If you asked Deutsche Bank exactly what assets secured an asset-backed security, you’d be handed lists of more acronyms—R.M.B.S., hels, helocs, Alt-A—along with categories of credit you did not know existed (“midprime”). R.M.B.S. stood for “residential-mortgage-backed security.” hel stood for “home-equity loan.” heloc stood for “home-equity line of credit.” Alt-A was just what they called crappy subprime-mortgage loans for which they hadn’t even bothered to acquire the proper documents—to, say, verify the borrower’s income. All of this could more clearly be called “subprime loans,” but the bond market wasn’t clear. “Midprime” was a kind of triumph of language over truth. Some crafty bond-market person had gazed upon the subprime-mortgage sprawl, as an ambitious real-estate developer might gaze upon Oakland, and found an opportunity to rebrand some of the turf. Inside Oakland there was a neighborhood, masquerading as an entirely separate town, called “Rockridge.” Simply by refusing to be called “Oakland,” “Rockridge” enjoyed higher property values. Inside the subprime-mortgage market there was now a similar neighborhood known as “midprime.”

But as early as 2004, if you looked at the numbers, you could clearly see the decline in lending standards. In Burry’s view, standards had not just fallen but hit bottom. The bottom even had a name: the interest-only negative-amortizing adjustable-rate subprime mortgage. You, the homebuyer, actually were given the option of paying nothing at all, and rolling whatever interest you owed the bank into a higher principal balance. It wasn’t hard to see what sort of person might like to have such a loan: one with no income. What Burry couldn’t understand was why a person who lent money would want to extend such a loan. “What you want to watch are the lenders, not the borrowers,” he said. “The borrowers will always be willing to take a great deal for themselves. It’s up to the lenders to show restraint, and when they lose it, watch out.” By 2003 he knew that the borrowers had already lost it. By early 2005 he saw that lenders had, too.

Whitney Tilson’s conversation with his legs

7) I’ve posted my marathon tale at: www.tilsonfunds.com/TilsonNYCMarathon.pdf. Here’s the intro:

As I woke up last Thursday morning, three days before my 49th birthday, I was having a dream about running the NYC Marathon on my birthday. It seemed very real, so I checked my calendar and, having nothing going on, thought, “Why not?” A few emails later (plus a $2,620 donation to the NY Road Runners’ charity), I was registered!

A few more emails later with my great friend, David Saltzman, the co-founder and Executive Director of the Robin Hood Foundation, one of my favorite charities, and I was signed up for the 100+ person team raising money for Robin Hood.

Then I had three days to: 1) raise as much money as I could for Robin Hood; and 2) contemplate the fact that I had done no training and, in fact, having never run more than six miles in my life! If I failed at this, I was going to cost Robin Hood a lot of money – and it would be a very public embarrassment.

Fortunately, my legs held up and I’m pleased to say that I completed the marathon in 4:03:10 – and, much more importantly, raised more than $75,000 for Robin Hood!

The whole experience – before, during and after the race – was an epic adventure (and one that was so emotionally, physically and mentally draining that I was in tears right after I finished)!

Below are the emails and pictures that I sent to my friends and family before and after the race. Enjoy! (And join me next year on the Robin Hood team!)

PS—It’s not too late to donate to Robin Hood – here’s the link: https://www.crowdrise.com/whitneytilson

Here’s my favorite part:

The conversation I had with my legs went something like this:

Me (the first seven miles of the race), speaking to my legs: “Hey you guys are doing great! We’re averaging 8:34 miles, which would have us finished in 3:44.”

My legs: “Thanks boss. We’re feeling great. This isn’t any worse than one of your long Spartan or Tough Mudder races.”

Me (the next six miles of the race, up to the halfway point): “Hey guys, what are these nine-minute miles?”

Them: “We’re trying!”

Me (miles 14-22): “OK, now I’m getting pissed – you slackers are down to 9:30 miles and, at this pace, I’m at risk of not breaking four hours!”

Them: “Hey, shut the f**k up! We’ve already carried your sorry ass 3x as far as we ever have – and the pounding we’re taking from this pavement sucks! Let’s go back to the grass, dirt and mud at the Spartan and Tough Mudder races!”

Me (miles 23-26.2): “OK, boys, now we’re in the home stretch – let’s break four hours!”

Them: “F**k you! We’re toast – you’re lucky we don’t quit on your altogether!”

Whitney Tilson

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