Icahn Reminds Shareholders That Excess Liquidity, Not Fundamentals, Are Driving Asset Prices
20 April 2010
ST. LOUIS (Alpha Found) — Veteran activist investor Carl Icahn joined Steve Wynn in warning that the US government’s stimulus plans are akin to a buy-now-pay-later policy.
In a quarterly letter sent to investors in mid February covering the fourth quarter of 2009, Icahn offered “perspectives” on the extreme contrast between 2008 and 2009. “2008 was defined by an utter lack of liquidity, while 2009 came to be a year of excess liquidity,” he wrote.
And, as always, it’s a case of follow the yield. And yield is going to be hard to come by, says Icahn, noting, “the days of easy yield in the credit markets have come and gone.”
Icahn and his partners have contributed $400 million to the Icahn Capital funds on 1 February 2010.
“With cash yielding close to nothing last year, yield-hungry investors felt that they could no longer sit on the sidelines. They plunged head first into both equity and credit, aggressively driving up the markets.”
Stressing that he doesn’t see fundamental justification for the market rebound, Icahn warns his investors that a double-dip recession may be at hand.
He’s waiting for employment to pick up before he’s satisfied that housing and the overall market can mend as consumers and companies continue to deleverage.
Icahn Capital has just one fifth of its capital exposed to equities according to the quarterly report. Assets under management were $5.8 billion at the start of 2010. The company appears set to maintain a defensive posture with most of its new funds being allocated to credit.
Icahn, like Wynn, warned that government has little idea what it has unleashed. “As a country, it would be foolish for us to continue to print money and run up the deficit while turning a blind eye to the potential consequences. I can’t say whether we’re in for full blown inflation or merely a weak economy for a prolonged period of time, but I do feel sure that there will be consequences,” he wrote.
Icahn is not sitting the recession out though. He tells investors he’ll be feeding on overleveraged companies using his firm’s specialist knowledge of distressed debt, distressed for control situations, and bankruptcy processes.
However, Icahn lost the bankruptcy roulette involving Trump Entertainment Resorts. Competing bondholders won the right last week to keep the firm running whilst they prepare a rights offering related to a $225 million takeover of the Trump casinos.
The firm’s flexibility will allow it to be “agnostic” in the securities it deals in, which should give it some advantage in the current market. The company is eyeing the merger and acquisition frontier for additional opportunities. Icahn is especially interested in biotech, noting that “Big Pharma is notoriously cash-rich.”
Biotech holdings accounted for half of Icahn’s total long equity exposure at the end of last year.
Icahn is playing hard in the pharma space at the moment with a proxy battle against Genzyme [GENZ], and one set aside against Biogen Idec [BIIB] after winning a third seat on its board.
Biogen is one of Icahn Capital’s core holdings along with Motorola [MOT], CIT Group [CIT] and Amylin [AMLN].
Icahn has succeeded in closing his hostile offer for Lion’s Gate Entertainment [LGF] after raising the takeover price to $7 per share from $6.
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