Because we never shared investors’ wild enthusiasm for Cerberus, its near-collapse in recent days hardly came as a shock. The once-huge private-equity firm specialized in distressed assets at a time when even the bluest of blue-chip companies – the name Lehman Brothers springs to mind – have fallen into mortal peril literally overnight. Cerberus’s biggest gambles were in GMAC and Chrysler. The latter company’s future looked as bleak to us five years ago as it did in May, when the automaker went belly-up. What could Cerberus CEO Stephen Feinberg have been thinking?
Chrysler’s death rattle coincided with the supposed comeback of the hemi-head engine, an older technology that made it possible to achieve higher fuel economy without re-inventing the engine. Just before the Big Three went careening off the road, Chrysler’s top sellers were big, powerful and, arguably, ugly. Is it possible Cerberus thought the well-hyped cachet of Chrysler cars with the hip-hop crowd would revive America’s love affair with muscle cars? In any case, $4 gas doomed the affair before it even warmed up. In fairness to Cerberus, it should be noted that someone even smarter than they, namely Kirk Kerkorian, got seduced by Chrysler. However, Kerkorian and his partner, Lee Iacocca, miraculously avoided losing their shirts after making an abortive $4.5 billion bid. Cerberus evidently thought it had the white knight role down pat, but instead found notoriety as a greater fool.
East Side Benchmark
The surprise is that Cerberus still has any assets left. Clients reportedly plan to withdraw $5.5 billion, or 71 percent of the company’s funds, but that will leave an estimated $2.2 billion to gamble with. We don’t envy Cerberus the task of picking winners from amongst the many investables available these days at seemingly attractive prices. If Cerberus does live to fight again, we wouldn’t be surprised to see the firm make the same mistake again, buying assets that have fallen in value by perhaps 30%-40% but which still have a great deal further to fall. Into this category we would put high-end residential real estate, mall-heavy REITs, and the shares of any retailer selling goods other than survivalist staples. We hold to our prediction that East Side co-ops that once sold for $10 million eventually will change hands for $250,000 or less. To any investor looking to buy the bottom, that is one possible benchmark we would suggest applying. By that time, the very idea of investing in anything is likely to induce nausea in the relative handful of potential stakeholders who remain. If they buy anyway, they’re the contrarians we’d bet on.
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I would suggest to Cerberus that they wait to go on a buying spree when a New York City taxi cab medallion is on par with a seat on the New York Stock Exchange in cost. Sure sign of a bottom in the past. There you go, Cerberus, and I won’t even charge you a consulting fee.