Kass: The Smart Guys Continue to Lose

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1. Date: 2008-11-27 02:26:09
Subject: Kass: The Smart Guys Continue to Lose
From: Don Tiberone <s...@m...com> Search message by this author

http://www.thestreet.com/print/story/10450171.html

Kass: The Smart Guys Continue to Lose
Doug Kass
11/26/08 - 11:59 AM EST
This blog post originally appeared on RealMoney Silver on Nov. 26 at
8:01 a.m. EST.

I am particularly struck by the recent series of high-profile investor
blunders by the "smart guys" -- namely, large corporations,
entrepreneurs (especially of a real estate kind) and savvy investment
and hedge fund managers -- which are proof positive how difficult 2008
to 2009 might end up being for investors.

-- Doug Kass (Jan. 7, 2008)

Back in January, I wrote that smart guys were losing their shirts, a
sign for us mere mortals that the going was getting tough this year
and next.

Below are some examples that I cited 10 months ago of large investment
boners made by some smartypants, even before the credit market
disaster spilled over and doomed equities (with updates in
parentheses):

* In August 2007, Bank of America (BAC Quote - Cramer on BAC - Stock
Picks) acquired a $2 billion minority stake in Countrywide Financial
at $18 per share. (Countrywide no longer trades as Bank of America
acquired the company at less than $5 a share.)

* In late November 2007, the Abu Dhabi Investment Authority acquired
$7.5 billion of Citigroup (C Quote - Cramer on C - Stock Picks) stock
convertible at $37 and higher. (Citigroup's shares now trade at $6.)

* During the course of the past six months, entrepreneur Joe Lewis has
acquired nearly 10% of Bear Stearns. It is not clear what his average
cost is -- around $100 is a reasonable guess -- but he is believed to
have a paper loss of at least $250 million. (Bear Stearns has since
filed for bankruptcy.)

* Real estate developer Harry Macklowe acquired a number of trophy
midtown Manhattan office properties from Equity Office Properties at
the height of the market's values and before the seizure in the credit
markets. An inability of rolling over the debt could crush the
Macklowe real estate empire. (It almost did bankrupt him.)

* In May 2007, ESL's Ed Lampert announced that it acquired an initial
stake worth about $800 million in Citigroup. At that time, the shares
traded about $53. He is generally believed to have substantially added
to his holdings in Citigroup since then. (Again, Citigroup's shares
now trade at $6.)

* Pershing Square's William Ackman acquired 10% of Target (TGT Quote -
Cramer on TGT - Stock Picks). Ackman first disclosed his position in
July 2007, when the shares traded at about $65. (Target's shares now
are priced at $32.)

* Former SEC commissioner and now hedge fund activist Richard Breeden
has raised his stake in Zale (ZLC Quote - Cramer on ZLC - Stock Picks)
to almost 6 million shares -- he first filed with about 4 million
shares in September 2007 -- or over 13% of outstanding common stock.
SAC's Steve Cohen, the very best hedgie extant, also made a 13D filing
back in September 2007. Back then, Zale shares traded in the mid-$20s.
(Zale's shares closed at $5 yesterday, and more on that below.)

* Less than one month ago, Warburg Pincus acquired $1 billion of MBIA
(MBI Quote - Cramer on MBI - Stock Picks) at $31 per share. (MBIA's
shares now trade at $5.)

For those reasons and others, in late November 2007, I suggested that
we had entered "The Hardest Stock Market to Navigate Ever."

The next five years in the capital markets seem destined to be unlike
the last five years. The most significant difference is that the
egregious use, generation and packaging of debt will not be repeated
-- and the consequences of that leverage will be adversely seen in
areas of the world economies that we had never contemplated.

From my perch, the bulls continue to think very linearly and seem to
be missing how significant the role of credit was to past growth and
how significant a pullback in credit will be on future growth.
Significantly, the markets continue to underestimate the consequences
of leverage and are overestimating the prospects for corporate profit
growth.

-- Doug Kass (Oct. 22, 2007)

As such, I had consistently offered some rare advice in late 2007 that
bears repeating: Keep investing/trading positions small as volatility
and fundamental disappointment will occur with greater regularity. I
went on the suggest that a more hostile economic environment, at best,
will lead to substandard stock market returns; at worst, it will lead
to large losses. And I cautioned that the next shoe to drop could be
disintermediation (outflows) and closures in the hedge fund industry,
which also came to pass.

Since my column on the smart guys losing appeared on these pages in
January, many more previously well-regarded hedge funds and
acquisitive smart guys in the chase for superior investment
performance and concentrated ownership positions, with the most
conspicuous example perhaps being Ed Lampert in his ownership of Sears
Holdings (SHLD Quote - Cramer on SHLD - Stock Picks), have lost a
boatload of money.

Yesterday, I was especially struck by the news that the shares of Zale
dropped by 40%, to a multidecade low.

My long held view has been that the jewelry market's competitive
landscape had changed with the emergence of formidable online
competitors, such as Blue Nile (NILE Quote - Cramer on NILE - Stock
Picks) and others, and that Zale's business model would be challenged
and its secular profit growth diminished.

Former SEC Commissioner Richard Breeden apparently didn't agree with
me. As mentioned previously, his Breeden Capital Management
established an 8-million-share position (25% of the outstanding) in
Zale. Since the initial 6-million-share stake was established in 2007,
Breeden Capital acquired another 3.45 million shares in late December/
early January between $13.42 and $16.21 per share. Zale's shares
closed at $5.38 a share yesterday.

The smart guys are continuing to lose big.

Berkshire Hathaway's (BRK.A Quote - Cramer on BRK.A - Stock Picks)
Warren Buffett might be one of the only exceptions to the rule whereby
an investment manager prospered by taking concentrated invested
positions; most just don't.

Indeed, the bear market of 2008 has brought many of them to their
knees, uncovering some naked emperors in their faulty company analyses
and far too aggressive acquisitions of shares at overvalued price
levels.

Learn from their mistakes.

Stay diversified, keep investing/trading positions small, and be
opportunistic.