Billionaire Carl Icahn on Investments, CMBX 6 Short, Oil Buy

Carl, when we were on the phone the other day, you told me you'd lost money in this coronavirus recession and sell-off. And I thought to myself, how's that possible? This is Carl Icahn, but not everybody is completely infallible. Tell me what's been going on with you, with your portfolio over the past seven to eight weeks.

Yeah, well, we keep it pretty well hedged. And, but even the hedges couldn't stop us from losing some money. But we still have quite a bit, so I'm not crying about it. And we have, as I've always kept, a large amount of cash or cash equivalents for a stormy day. So I think there's going to be very interesting times ahead. And while you have to be extremely careful in this market, and we can discuss that, I think there will be also some good opportunities. But I can't talk about it short term. You know, in the short term, I think you may have some big downdrafts. So that's where I am with that.

you've given me a couple of provocative openings there let's start with the last one big down drafts do you think Carl that we've seen the bottom put in on March the 23rd or could we test or possibly even go through those lows well you know if you could tell me what the virus is going to do you know what when people start going back out and I tell you that I don't think it's going to be

as good as some people think. You mean the recovery? Yeah, well, the optimism, the optimism that, you know, it's not like turning on a spigot. So I think you may see recurrence of that virus. You know, I, several years ago, I donated the hospital, or at least I gave enough money to have my name on it. I can't medical school at Mount Sinai, so I have the honor of being able to, I don't micromanage it at all, but speaking to some of the really smartest guys in this area, and there is concern that it's not gonna be just let's go out and let's go have fun. I think this virus is the most contagious Contagious one that I think they've ever seen. To give you a comparison, in SARS, one person would infect 1.2 people.

Here, you infect five people because you infect people even if you're asymptomatic. So, I mean, I'm not going to get into that. That's not what you need me on for. But I don't think it's—I think this thing is going to be in spurts. But I do think eventually it's a great country and—you know, with a lot of different misgivings I have, I think that you will see some great opportunities ahead. But mostly, I think, rather than in these technology stocks and high-multiple stocks, I think they're going to be more in the Graham and Dodd-type stocks.

Yeah, so that's basically it.

Carl, given what you've just said, which I wouldn't call pessimistic, I would call cautious, maybe, careful.

Yeah.

You look at the S&P 500 right now. The S&P 500 is at 2,825. And if you, you know, look at what that's based on, it suggests a 17 times multiple on earnings of 165 next year. Does any of that make sense to you, given the uncertainty around the outlook? Can anybody possibly forecast what earnings are going to be, and even if you could, is 17 times the right multiple?

No, I agree with you. I think you could not really justify that multiple at this time in many of the companies. I mean, these technology companies that have these great multiples, I think the real problem there is that a lot of that, I think, in many businesses is not needed as much as they sell you. I mean, I mean, you know, we have this company, Hertz, and I'm not going to go into that. We're on the board and all. But, you know, we spent over a billion dollars—not us, but before we got in there. You know, management just goes in, and you spend over a billion dollars, and we really don't get that much for it. I mean, it used to be at home. Take your home. You used to go, and you put the light.

You had a switch. You put the light on. You turned it off. It was nice. And sometimes, okay, it was great because you could maybe make the light less bright or more bright. Now you have all these scenes they put in and all that stuff. So that's just a microcosm of what these tech companies sell you. Now you do need the cloud and all that. But I really think that all that stuff and all that software and all those software companies, I mean, the multiples they have, I don't believe are justified. But that's me, you know. Hey, look, I've... Are you short, Carl?

Are you short Amazon? Or are you short Netflix, for example?

I'm really not short Amazon or those. But, you know, I have a hedge on with the S&P and what have you. But my... Actually, my biggest position, Eric, my biggest position today is a short sale, in a way. And that's in the CMBX sixes, where... I mean, you know, I look at risk-reward. I never... and i i i i i i i i i i i i i i i i i i i i i You know, these people that invest in funds, it's almost 08 all over again. You know, it's the little guy and the people that just come in, and they get sold a bill of goods. And it's sort of a sad commentary. And, you know, hey, look, I'm in the business to make money, and I don't deny that. But it sort of outrages you to see some of the stuff that they're selling.

Now, in this one... the CMBX and the funds that have the biggest position, hey, look, they know I'm short, so they wrote about me so I could write about it. I could tell you it's Putnam and AllianceBernstein have these very large positions, and they put people in them, and what they really are, what they really are doing are selling, these people are really selling insurance.

Yeah, they're really selling... I don't think the people understand it. I mean, these derivatives are, a Ph.D. in business wouldn't understand what these derivatives are telling you and what they're doing. But we're on the other side of it. In other words, we buy the insurance. And Putnam and AllianceBernstein, for instance, tell their investors that their investments should, you know, I'm sort of quoting them, should be compared to Treasuries, meaning that they're very safe, right? But it's completely misleading. It's disingenuous. A good part of their investments are in these complex derivatives. I mean, it would take a PhD to decipher them. Basically, these derivatives, like we said, are insurance policies on Triple-Bs and Double-B bonds that are in that CMBX index.

To explain it would be hard to do, but it's just simply what happened to AIG in 2008. So these small investors are putting money into these funds. By the way, they pay Putnam 4% just to get into the fund. And what's happening is they could lose. They don't understand that they could lose 80% to 100% of their money when they put money into that Putnam fund.

into those uh... diversified funds so so as to have the straight they've bought into these you say that putnam alliance bernstein sold retail investors the little guys so to speak a yield the vehicle offering them some high mid you know mid single-digit yield six seven percent better than treasuries better than corporate bonds maybe and they could stand to lose a lot of money if the commercial real estate market falls apart and it is falling apart so i've seen indexes i've seen i've seen where they're trading i know that the cmbx triple b is down to 65 or 67 cents and the double b is down into the 40s that suggests to me carl given that you said you bought in you you put this trade on last summer you made a lot of money

Yet we would do it, would do it quite well. It, I, I, I mean, and, uh, we, we, uh, what is quite well, we started at the bottom, but we added to it. But, but, uh, CMBX was a ridiculous trade in the summertime because you take a different order of risk for, uh, but, but, but, but, but, but, but, but, but, but, but, but, but, but, but, but, but, but, it really sounds corny, but you get outraged by what they write. You know, they tell everybody, oh, it's similar to Treasury bonds, or you compare us to Treasuries. So, in other words, you get the guy who says, 'Well, look, I could get you 6%.'

Carl, CMBX is pretty complicated, and I think it's complicated, and it's probably not, I mean, it's probably not worth getting into too much more of the mechanics. But I would like to know, if you don't mind, can you give us a sense how big this position is and how much you've made on it over the course of holding it and adding to it over that period? But, yeah, look, I, I'm not going to get into what we have. Billions and billions of dollars on the short side of this.

You know, because it really is a beautiful trade on a risk-reward basis. I was brought up in the old Graham and Dodd philosophy, and, you know, you look at risk-reward. That's what I look at. You look at risk-reward, and that's what, as you pointed out before, Eric, the risk-reward in this market isn't the greatest right now. The risk is too high for the reward in many, many companies. But here, I'd never seen anything where the risk-reward was so bad, because here you could risk. When you sell this, because AIG learned, and you would think a lesson should be learned and you shouldn't be pushing this stuff, you could lose really all of your money. I mean, now I don't think that investors are going to lose all their money doing this insurance through Putnam or through Allianz, but you could lose 80% of it, 70% of it, and indeed you've already lost about 30% or 40%.

And people don't realize it. They go out and tell you, oh, you're getting 6%, 7%, compare it to Treasuries, because you buy an investment-grade, because that CDS, for some reason, is investment-grade. I think now it's lost the investment-grade rating. So they're pushing that on that basis, and I really think it's unconscionable. But I'm not going to be sanctimonious. I mean, look, I... I look for these things.

Where I made all my money is looking for that risk-reward thing.

I want to talk a little bit more about those risk-reward calculations. Where else you've found opportunities to make money in this kind of an environment, which, admittedly, isn't that easy? I gather you bought some oil on Monday. I want you to tell me about that.

Oh, yeah, well, but that's a much smaller item. When oil went down to—you know, we own a refinery. We own a really, what I think is a very good refinery, CVI, it's called. And we own 70% of it. And when oil started sinking like that, I called them up. Usually I don't micromanage to get involved, but I call them up and say, hey, we got some storage space. Everybody's going crazy for storage space. And they said, yeah, but it's hard for us to get the trade through and whatever. But I will say they did a great job because they set it up real quickly, and we set up an account. And believe it or not, I mean, you never see this. And we made some money on it, but relatively speaking, it's nothing like the CMBX or something like that that we're making money on.

But it was really fascinating. You'll never see that again in history, I don't believe, where they have to pay you. They have to pay you to take their oil, which was up to $35 a barrel. I mean, it was just an interesting point in history because, again, you've got to look at risk-reward. And sometimes when you do those futures, and, you know, they have funds that do the futures, and the same darn thing, again, as you have in '08 or in any of these times before the market really breaks. And, you know, playing in the futures market, the oil game, or any commodity for that matter, is not for the faint of heart. And it's really not for people that don't have a lot of capital.

What's that? Certainly not on a day like Monday. It's not for the faint of heart. Carl, CVR, your company, between its refineries, has some six million barrels of storage capacity. Were you able to fill up all six million barrels? How much oil were you able to buy? No, no, no.

I wish we were. I have to tell you, I wish we were set up for it a day or two earlier. Now, we only did a small fraction of that. Anyway, we couldn't have done anywhere close to that because we already had a lot of oil in our storage capacity. But we were lucky that we could make room for a million or two million, but we never even got that much. So I'm just saying that it was just an interesting period.

So you were able to buy a fair amount. We did get a fair amount of it, but, you know, I believe that, theoretically, that opportunity might come again if this market continues. And, you know, you mentioned oil. You mentioned these commodities. I mean, those are one of the risks that you face in the future. So if you're looking at this market, I really think that there's going to be great opportunities in some of these very mundane, what I call Graham and Dodd-type companies. I mean, you take the refineries, for instance. I mean, they got their problems. You have that political football going on with the RINs, and I think that'll be sooner or later cleared up. I stay out of it now. I don't get involved with Washington in any way, shape, or form in that.

But if you look at a refinery, for instance...

...and you look at the value of—this is what kind of investment, or what, what I do. I'd like to win at Icahn Enterprises, but you don't always win. Can I ask a question about, about the refineries, Carl? You may have seen—you, in fact, may know more, more about this than I do—that, um, Harold Hamm, who owns Continental Resources, declared force majeure on deliveries to a refinery. Was that your refinery, CVR, by any chance?

No, no, I haven't even followed that. I know Harold a little bit. You're telling me something I didn't even know. He didn't want to deliver the oil.

Continental is not delivering on at least one contract because it declares the coronavirus situation and the impact it's had on prices force majeure. Now, I'm sure you can be as cynical as me or anybody else, if you like, and say, "Well, that's just the market, right? Negative prices, we've never seen them before, but we've never seen a situation like this before, and that's just the market." Do you think it's fair to declare force majeure, or should, even under these circumstances, should people have to honor their contracts? Because you're going to want, yeah, the people you bought oil from to honor their contracts. Yeah, you're getting me into an area that I—

I don't know the situation, I don't know the facts, so I don't want to get into that discussion

...without understanding. That's fair enough. Back to the—could we still talk to—stay with oil for just a minute? Because, as some people are aware, you're exposed to oil in a number of other ways, too. You've got a very large position in Occidental Petroleum. You've got a significant position in Tenneco, which I understand relates back to the Federal-Mogul sale. Uh, you, you mentioned that you've got CVR.

You know, give me a sense, Carl, if you don't think oil is going negative again, where's it going? And how do you hedge that exposure that you've got? Well, the short answer is, with stuff like that, you have to have enough capital to withstand, you know, withstand the storms. It is extremely hard, I would say, in the oil area. It's hard, unless you play that futures game, to hedge. But we do hedge sometimes against the crack spread. It gets real complicated, where you think the crack spread widens too much, which is the crack spread, which is your diesel against the heating oil price, against what you pay for the oil, very simplistically. And you can't do it. But the point I'm trying to make is a little different.

I'm saying that where I really learned to make money and see it, I'd look for something that sort of hits you over the head, and you say, "This is great." And it is hard to find them now. And sometimes you're going to be wrong. But you do find situations where if you look at the whole thing, well, the short, the short of CMBX, I mean, the risk-reward is ridiculous. You take it, if you do it the other way, not the way Putnam is selling it to their account. Putnam is telling people, "Look, I'm getting you 6%, isn't that wonderful? If you invested with another fund, you're only getting two." So here you got a very limited risk when we did it, when we set it up, a great reward. Do you see anything else like that in the market right now?

If you're still taking that investment you really are taking a tremendous risk and maybe you'll make money. I mean listen, you take risks sometimes. You know, a ten-to-one shot comes in. But my point to you is the same idea. So you take a refinery, for instance. Now, I'm not selling the refinery here. I'm not telling people to buy refineries, because I think there is so many questions coming up, so many hurdles coming up in a short-term basis. But if you look long-term, I mean, this is how I look at stuff. You look at – and I'm not only saying refineries, even the oil, even the oil. If you really look out ahead, there's still going to be a need – for gasoline in this country now going to have ten fifteen years the electric cars coming environmentalist for coming in and making you clean up the stuff and and and and and possibly refining it uh... that we we already got out every fighter is really we can we kept up with all for the people so there are not going to carl there are a lot of people but there are there are a lot of people who would agree even in the long term

five ten fifteen years from now there's going to be a need for oil but right now let's just turn our attention back to the coronavirus and the pandemic right now it is wreaking havoc i mentioned occidental petroleum the company is so cash-strapped that it's having to pay warren buffett in stock effectively for the financing deal that you oppose that must make you boiling mad yeah well listen

and I've said it, and I'm not going to, I'm not going to belabor it anymore because, you know, the board's changed. We have three people on that board. I can't really freely speak about it. So I respectfully disagree a little bit with what you're saying, "cash-strapped." In other words, I think Occidental has a lot of great assets there, okay? Being that said, I can't argue with you that it was one of the most ridiculous deals that I've ever seen, and I've said that publicly. But those days are over. You know, we are now on the board. We're working together, okay? So you feel, uh, hopefully, hopefully, I think that there are things where I think the shareholders will eventually be rewarded there. I think so. The risk-reward's in your favor there, I believe.

I believe that. However, I'm not here to sell Occidental, and I'm on the board, and I'm not going to go any further. So let me ask you about... And by the way, you might be right. If oil stays bad...

And, and, and there is risk in all this stuff. I think there's no question about it, that the risk... Carl, what about, what about Hertz, for example? Again, a coronavirus situation. Nobody's traveling, nobody's renting cars. Hertz has hired restructuring advisers. The debt maturities start piling up next year. What's gonna happen there? Well, look, Hertz is different than Occidental. I own a lot of Hertz, a lot of Occidental. You're, you're, you, you're... Boy, there, there...

People are just not using, renting cars—very small amount of renting cars.

Correct.

And you have, at Hertz, an embedded leverage with the ABS.

So does that—do you think that company survives? Does that company survive without a restructuring?

You know something, because we're on the board, I really can't get into that. Okay? I'm, you know, I have confidentiality with the board, so I—I mean, you know, you read the newspapers and all that, but I cannot really comment on that at this time, Eric. You know, I mean, so I'm not going to go into that one.