Notes from the 2016 Ira Sohn Conference, Part III


Ira Sohn Conference 2016

Welcome to the final part of my notes from today. Check out Part I (Druckenmiller) and Part II (Gundlach!) in case you missed them.

Here’s the conclusion: 



Dan Ariely, James B. Duke Professor of Psychology & Behavioral Economics, Duke University

OK, this is hot. Ariely is a genius academic who wrote a very popular book they’re giving away here, Predictably Irrational.

Opens with a great joke where a woman is asked by her son to guess which of four women he is about to marry. She gets it right. The son says how did you know which girl it was? The mother says “She’s the only one I hate.” LOL

“Trust is a tremendous lubricant in our society.” He talks about how important trust is, and asks how do we get more of it for the sake of doing business in a better economy.

It only takes one person deviating from trusted behavior, in a system with a fragile equilibrium, for the whole system to break down.

He explains that when trust breaks down, we start doing negative things, like seeking revenge. Revenge produces a pleasurable response in the brain. It is also a good check and balance in the system. “It is true altruism” he jokes, because your willingness to punish someone with revenge helps to keep the system honest when trust is not apparent.

Long term relationships, the preservation of our reputations and the possibility of revenge are the three things that increase trust among players in a system.

David Einhorn, President, Greenlight Capital, Inc.

Greenlight placed its first trade 20 years ago. The fund has produced a 1750% cumulative return versus 350% for the S&P 500. That doesn’t sound right, but I’m too far from the stage (and too sober) to yell out for a clarification. But whatever, David’s done very well for investors over the last two decades.

First stock he brings up, CAT – Caterpillar. Notes the high multiple and says the market thinks they’re at trough earnings. He says you need to bet on a huge comeback for their mining business to believe the stock’s valuation makes sense. He is skeptical. Coal and iron ore are CAT’s big drivers. Coal is in a secular decline, maybe no comeback ever.

He pops a supercycle chart and then a mining capex chart. These were anomalous booms that are not returning and CAT’s resource biz will get worse, not better.

On to CAT’s construction business – far from a trough, David says. Rental equipment capex was also a bubble and we’ve not not returned back down to trend yet.

Re: industrial business at CAT, it’s basically an oil business in disguise. Lots of their equipment is sitting idle as well drilling is not what’s poppin in the hood right now. Nat gas pipeline spend is high, but it’s going to fall off soon, for decades perhaps. Rail capex is healthy, but is probably close to a peak.

All told, he thinks CAT is mid-cycle and not at a trough across the entire business. Einhorn says the company is more likely to bottom in 2018, at $2 in earnings. Not the current $3 and change.

Einhorn pivots to GM, which he likes.

He doesn’t believe we’re at peak SAR (auto sales), but that is the big fear keeping the stock cheap.

This was great too:

He thinks China is still a growth market for GM and the company is making the right restructuring moves in Europe. In LatAm, they’ve cut costs and exited bad businesses. It’s a cash flow breakeven.

Bottom line, GM is midcycle but on the way up. CAT is the opposite – midcycle on the way down. David says we’ve got our multiples backwards on these two. They should be reversed.

James Chanos, Founder and Managing Partner, Kynikos Associates LP

He opens with a shot at Elon Musk. “I gotta tip my hat to the guy, he’s amazing.” Talks about how he’s pulling production two years forward – Jim is a big bear on Tesla.

Today’s presentation is about China’s exposure to Africa. “A Sub-Saharan Saga” is the name of his deck.

He talks about how China came in after a previous commodities bust to the last one. China’s direct fixed investment into Africa is all going in reverse now. China is pulling back and a lot of the projects are complete.

South Africa (China is their biggest trading partner) is encountering “a storm on two fronts” – commodity problem and political problem. Corruption, monstrous debt load, massive youth unemployment, corruption from the very top down.

The great promise of Nelson Mandela’s party is being wrecked by Jacob Zuma, current leader under fire.

Nigeria “is in even worse shape.” The whole economy is based on oil export. Terror threats, a war in part of the country, rapidly running out of FX reserves, endemic inflation. “Anything you might think about Saudi Arabia applies here, in greater magnitude.” It’s a failed state.

His short idea is MTN Group, which derives 60% of its revenue from Nigeria and South Africa. It’s a telecom stock that Wall Street thinks will see a resumption of growth. “Nope,” says Jim.

He says margins are unsustainable and margin declines will wipe out a lot of the earnings expected. Declining subs and ARPU (revenue per user) bakes this in for the next few years. “It’s peers will be growing, it will be shrinking.”

He thinks it could easily have a big drop. “But there’s more…” The country Nigeria needs money, they’ll extract it from MTN. It’s also having trouble collecting the money its owed in many markets.

Chanos: “Okay, the bar is open.”

Prince’s Let’s Go Crazy comes on and all the suits file out. What a day!

I’m out of here too. Hitting up PJ Clarke’s across the street from the Met with some friends. Thanks for reading!



That’s all for me today. I hope you’ve gotten some interesting things to think about from my notes today. Thanks for reading!

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