2009 Outlook from John Paulson: Expect More Pain, says Hedge Fund King

轉載自blog Creative Capital . John Paulson 於現今金融環境下, 對2009的經濟看法及其投資策略.

A big bank invited Paulson on the call with wealth managers to offer his thoughts on the economy and his detailed investment strategy for profiting from today’s financial chaos. With $36 billion under management, Paulson & Co. is one of the 10 largest hedge fund managers in the world, and he recently testified before Congress.

Among the highlights:
- He thinks the housing market won’t bottom until 2010, with housing prices to falling another 10% to 20% from current levels before they bottom.
- The financial sector has only written off half of the toxic assets on its balance sheet, so avoid investing in financials for now.
- He sees no threat of inflation in the short term but it will be hard to contain once the economy rebounds.

Here are the notes:

We believe it will be the worst recession since WWII and possibly the Great Depression.

Reasons:
1. The decline in housing that shows no signs of stabilization. We expect housing prices to fall another 10% to 20% from current levels before they bottom.
2. Consumer: the consumer can no longer borrow to the extent they have in the past.
3. Global crunch: pressuring economy. Global stocks down 50%

We think the headwinds are very strong.

We don’t believe we are through the crisis in the financial area.
Total write-downs will approach $ 1.8 trillion.We are about halfway through the writedown process.
Most investors who invested capital in banks have lost money.
Hence the government increasing its role in recapitalizing the banks.

The terms are going to become increasingly onerous, which will put pressure on the equity of financial institutions.

We are very bullish on the investment opportunities available.

The best opportunities for us in 2009 and 2010:
* Distressed mortgages. We’ve been buying the triple AAA tranches of these securities. Quite aggressively buying them at yields in the 20% to 25% range. We like mortgage securities because they self liquidate.

* Distressed debt, both leveraged loans and high yield debt; we’ve started to allocate money to that area. It’s very tricky. Targeting companies that will not go bankrupt. Yields north of 30%. There are thousands of issues out there.

* Bankruptcies: defaulted debt securities of bankrupted companies. i.e. Tribune Co. Those bonds went from 80 cents to 27 cents on dollar for senior secured loans. $110 billion in bankrupt bonds. There is a tremendous amount of supply but limited buyers. We are finding attractive opportunities. 2 to 4 times multiple

* Merger arbitrage: a lot of money has come out of the sector. We focus on the corporate strategic deals for all stock. i.e. Merrill Lynch and BofA. We buy Merrill and short BofA to lock in the spread. 31% return currently. Arbing National City/PMC, Wachovia/Wells Fargo. Returns are in 30% to 60% range. 3-6 month time frame. These are some of the highest spreads we’ve seen. Most successful deal we’ve seen was Budweiser/InBev.

* Debt restructuring: GMAC, we buy the old bonds and swap them for new bonds.

* As we get further on in the cycle investing in financials that are recapitalizing will be an attractive area. It is premature to make those investments today. After most of the writedowns are done. That will represent a highly attractive long-term investment opp.

Factors driving home prices down:
* high percent of foreclosures; banks must sell homes quickly. Current inventory of homes is 11 months. Banks have to lower prices to sell homes. Takes 12 months to foreclose home. The backlog of homes is enormous.
* Limitations on financing: 40% of mortgages made during boom would not get made today. Need income and down payment. The pool of potential acquirers is more limited

Why buy these securities?
We factor these declines as much as 25% into our analysis. We then estimate default percentages. Then estimate losses in pools and cash recoveries.

I don’t think we’ll hit the bottom until 2010.

How much will the bold moves by Washington help?
There’s a limit to what you can do. You can’t help people who can’t afford their mortgages.

How much leverage do your funds use?
Generally our funds don’t use leverage. There’s a thing called Reg T. It calls for 50% margin. That’s the only type of leverage our base funds use.
Over last 5 years our base fund equity to capital under management was 90%. Peak was 33%.

Inflation?
The economy is unlikely to see inflation in the short term.
But once the economy returns to moderate growth that’s when it becomes an issue.
It will be hard for the government to contain inflation at that point.
Raising interest rates or lowering gov spending could slow the economy.