Thursday, December 13, 2007 0 comments ++[ CLICK TO COMMENT ]++

Sam Zell: Things Not As Bad As Believed has a good summary of Sam Zell's comments during a luncheon in Chicago. I hate quoting almost the whole article but all the points in the article are worth considering. Sam Zell thinks the situation won't be as bad as the general consensus seems to think.

He told those in attendance that "we're not in a liquidity crunch," but instead that the economy is going through "a significant repricing of risk."

Zell has said this before and I find it interesting that he sticks with that view (i.e. market repricing risk, and not a liquidity risk) when the consensus is the opposite. As for me, I'm not sure what to make of all this. I definitely believe the market is re-pricing risk but am not sure if that is all there is to it.

And he had harsh words for the way some asset holders are treating their mortgage assets, saying "accounting is taking over for reality."

Pointing out that the mark-to-market process has produced huge writeoffs, not cash losses, Zell said he'd been offered some assets that had been discounted to zero value on balance sheets, even though they were still paying out income.

What Sam Zell points out is a very important thing to remember. Companies have an incentive right now to mark everything down based on market pricing (that's the simplest thing for accountants and auditors to do, and for CEOs to start with a clean slate). But some of the market prices may be due to irrational pricing of some assets. If one can find something that fits Zell's characterization of what is happening (i.e. asset worth almost zero even though cash flow is positive) then it's likely worth purchasing.

What Zell says reminds me of what Benjamin Graham was saying in the 40's, when companies with positive net current asset value were being valued as if they were worth nothing. Now, instead of asset value, the "discrepancy" seems to be with cash flow versus market price. The reason things like this happen is obvious. Essentially, the market thinks that there are going to be future losses that will wipe out the seemingly positive situation. In the 40's, the market obviously felt that future operating losses will wipe out the positive net current asset value; presently the market obviously thinks that the cash flow from the asset (whether it is MBS, CDO, or credit card debt, or land, or house, or whatever else) will turn into zero when people default. The difficulty for investors is that one needs to discriminate between the good and the bad. Unfortunately, newbies like me don't know what we are doing and have a hard time pinning a reasonable value to an asset.

If one is looking at bond insurers, Zell's comments should provide some support. It is quite possible that some assets are being marked down severely even though the asset may produce cash flow. I doubt that Zell was looking at CDOs (CDOs are a huge risk for anyone right now) but what he says may very well apply to RMBS.

When it comes to real estate, he figures the recovery in housing will come in early 2009, and he predicts that current commercial real estate owners will benefit from the fact that the crunch has halted many developments, cutting into future supply.

I quoted him in prior posts where he has said that 2009 may be the start of the recovery for real estate. If he is right, and if you link that with John Neff's view that you should be 6 to 8 months (or something like that) before the turn, then mid to late 2008 is a good time to investigate real estate.


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