Letter #152: Steve Eisman, Danny Moses, Vincent Daniel, and Porter Collins (2024)
Letter #152: Steve Eisman, Danny Moses, Vincent Daniel, and Porter Collins (2024)
Investors at FrontPoint Partners | Four 'Big Short' traders on why they're not so short these days
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Earlier this week, Steve Eisman, Danny Moses, Vincent Daniel, and Porter Collins sat down together for a public panel for the first time ever. After the panel, they joined panel host Melissa Lee on CNBC’s Fast Money to discuss everything from The Big Short movie, the financial crisis and investment strategies, investing and short selling in the financial industry, short selling strategies and underperforming stocks, and the US economy, credit quality, potential risks, and more.
Now, you may be wondering why I highlighted it was the first time they’ve ever sat on a public panel together, why they discussed The Big Short, and why their names may sound familiar—that’s because Steve, Danny, Vincent, and Porter were investors/traders at FrontPoint Partners (Morgan Stanley Investment Management) during the financial crisis, and were profiled by Michael Lewis in The Big Short. For those who have seen the film adaptation, they were portrayed by Steve Carrell (Eisman), Rafe Spall (Moses), Jeremy Strong (Daniel), and Hamish Linklater (Collins). Eisman’s character was renamed Mark Baum whereas Danny’s, Vincent’s, and Porter’s characters had their respective names.
While most known for its portrayal in The Big Short, FrontPoint Partners itself has a fascinating history. After Julian Robertson shut down Tiger Management in 2000, COO Phil Duff and Head Trader Gil Caffray re-teamed to found FrontPoint Partners alongside a third founder, Paul Ghaffari, who had previously been a manager for George Soros (this was an interesting pairing, as Julian is known for value/growth and Soros for macro).
The firm employed a multimanager model and grew quickly, managing over $5bn after five years. They were subsequently acquired by Morgan Stanley, who took an ownership stake for $400mn in 2006. Four years later, in 2010 (after the events of The Big Short), Morgan Stanley handed back control to the firm’s managers while maintaining a minority position. At the time, the fund managed $7bn.
However, things quickly took a turn. While the multimanager model helped them scale quickly, it also led to their downfall. In April 2011, the SEC filed a complaint against one of FrontPoint’s partners, accusing him of insider trading. While no one else at the firm was accused of any wrongdoing, a cascade of redemptions came in, with investors ultimately redeeming $3bn from the main fund. Just a month later, in May 2011, FrontPoint announced they would be shutting down most of their funds.
After leaving FrontPoint in 2011, Steve started a fund called Emrys Partners while Danny, Vincent, and Porter set up SeaWolf Capital.
Steve shut down Emrys in 2014, stating that he believed “making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy.” He then joined Neuberger Berman as a Managing Director and a Portfolio Manager for the Eisman Group within Neuberger’s Private Asset Management Division.
Danny, Vincent, and Porter ran SeaWolf for 12 years before closing up shop. Danny is now an investor and advisor to private companies and co-hosts the podcast “On The Tape,” while Vincent and Porter started SeaWolf Master Fund, a family office.
I hope you enjoy this conversation as much as I did! I personally preferred this conversation over the panel because while it was much shorter, it was more pointed, had more memorable one-liners, and the group’s rapport shined through better. If you’d rather watch the panel, you can do so here.
[Transcript and any errors are mine.]
Relevant Resources
Morgan Stanley Investment Management
Tiger Ecosystem
Soros Ecosystem
Transcript
Host: With us now, Danny Moses, Steve Eisman, Vincent Daniel and Porter Collins. And by the way, this is a TV first, to have all these guys here at the same time at the same table. So thank you guys for being here. We showed a clip in the movie. So I got to ask you, and I asked you this in the panel, how much of it was true?
Steve Eisman: You can take that. What do you think?
Danny Moses: The book was 100% accurate. I would say the movie was 75, 85% accurate. But the way that Adam McKay was able to explain CDOs to people the way he did with the fourth wall was amazing. There was no alligator technically coming out of the pool, but all the other stuff I would say was pretty good.
Steve Eisman: Now, the strip club scene never happened.
Host: Of course not, of course not.
Porter Collins: It was 20 years ago, almost, that we came down here to Florida. And there was all this building, and there was no people. And so that's when that scene where Steve came back, "It's a problem."
Host: When you went there and you saw the foreclosed properties, they were empty, and the bills were piling up, etcetera, you knew you were on to something?
Porter Collins: It was pretty obvious. [Others express agreement.]
Host: Are there any trades today that you have as much conviction in as you did back then?
Steve Eisman: I mean, the one I have that is a long is infrastructure. The government is going to be spending about $1.2 trillion over the next 10 years. So there are a lot of things to do. I mean, I wouldn't call that as big a conviction story as The Big Short, I mean, the big show was taking on basically Western civilization, and everybody telling us we were lunatics. This is a more relaxed investment story. But I think it's a great one.
Host: Things have changed a lot in the financial system. Have they changed to the point where there won't be a trade like that?
Vincent Daniel: Well, right now, the Fed's on the case. Whereas when we think about what happened during the Great Recession, there was the famous line by Michael Burry, "I knew more than Alan Greenspan." He wasn't lying. He did. The Fed has wisened up. And now the ability to have the price discovery, adverse price discovery, like we did back then, would be very, very difficult.
Steve Eisman: It won't be allowed. I mean, Silicon Valley lasted 24 hours. That was it.
Porter Collins: The only other time where the Fed was offsides was in 21-22, where they were way behind the curve on inflation. And that was a time where short sellers could really profit because they knew the Fed was offsides. And that's not the case today. The Fed has 400-500 basis points of cuts in their back pocket if something bad happens. So that's what, as a short seller, you're fearful of that. So if something bad happens, they just cut rates, pretty quickly.
Host: We know that it's a much more difficult business to be a short seller these days. So I'm wondering, Danny, in terms of finding that trade, how have you changed your approach?
Danny Moses: Well, the four of us traded pre financial crisis, during financial crisis, and we've all traded post--not necessarily together. Porter and Vinny more than the four of us. But I think there's still bits and pieces of it alive. What do I mean? Back then, there was glimpses of tech companies--there were companies posing as tech companies that were just consumer finance companies. You see those pieces today. You see Upstart and Affirm and those--we've seen that game before. We know how that ends. These are specialty finance companies. And when credit comes back to haunt them, their balance sheeting now the same way the mortgage companies did, they couldn't get it off their balance sheet. Those are the things that I look for. And yes, these are smaller companies that maybe not the rest of the investment community can get on, but these are things. So I see glimpses of it, always.
Steve Eisman: So I have a different approach. I was born Jewish and I've converted too long-only. I literally just made that up right here. That was my epiphany about that question.
Host: But it's true. Your life has changed. And people were remarking about this, how Zen you are, how happy you are.
Steve Eisman: I know, it's kind of shocking.
Host: You're not the guy in the movie, that's for sure.
Steve Eisman: No, no, no. That guy was very, very, very angry. And I think the movie accurately captured--totally captured--
Danny Moses: I kind of miss that guy a little bit.
Steve Eisman: I don't miss him.
Porter Collins: Steve can go zero to bear, as we all can, pretty quickly. And that's the thing. If times change, we change.
Host: Let's get to some of the highest conviction trades you do have right now. And I'll toss the question to you guys.
Porter Collins: Well, as a short seller, you're loath to mention shorts. But one of our best shorts this year has been Tesla. Even over the past three years, Tesla's has been a big underperforming stock. I think they really have problems with sales. One of our best traits is calling BS on a company, and I think eventually the market will come around to the fact that it's a really an auto company with not great tech, everyone else is catching up to them. And so I think that's--has been an underperformer, will continue to be an underperformer.
Host: For so many people, though, they want to short Tesla and they've gotten just their shirts ripped off. So how did you manage that trade to make that a profitable one?
Porter Collins: But over the last three years, it's been a great short. And it got crushed and 22 And yes, it bounced back last year, and bad Q4 earnings help that.
Vincent Daniel: It really started working when the TAM, the amount of cars that they could sell, or the growth rates that people were expecting--it's just not coming to fruition. And so, as a result, you have to ask yourself the question, Why do I own this thing that trading at such high multiples that don't have the growth rates that commensurate to back it up?
Host: You're also short UPS, which is in the news today. Did you cover that? Or is there more to come?
Porter Collins: There's more to come. You could see it with the labor costs, and the weak volumes. I think that's gonna take time to play out here. So, yeah.
Host: Your biggest short is in FinTech. It's the companies that you mentioned, Affirm—.
Danny Moses: Upstart. [crosstalk - unclear if Danny is adding Upstart or correcting host on Affirm.]
Host: And Upstart. Upstart.
Danny Moses: Almost five times book. Again, it's a specialty finance company. So they turned into a storage company, instead of a moving company. They're no longer able to sell all the loans that they're originating, and cloud based, AI, all that stuff, they could put any name they want on it, it's a lending company. And so, eventually, these things will underperform. They don't make money, so I think it's gonna be really good short from here. Old Steve would have loved that. [Everyone laughs and agrees.]
Steve Eisman: But I've converted, so... no.
Host: But you're now happy, Steve.
Steve Eisman: I'm happy. I have nothing against that company. Not for it, but nothing against it.
Host: But are there pockets in the market that concern you, where the old Steve, you can feel him coming back, rising from within?
Steve Eisman: I mean, look, I very simple view of the US economy. 70% of the US economy is consumer driven. As long as the consumer is healthy, it's fine. And as credit quality, while it deteriorated for a while, seems to have stopped. Capital One said that they think delinquencies have peaked. Consumers still has money, consumers has jobs, wages are still going up. Don't worry, be happy. I mean, until it changes. But as of now, it's not changing.
Porter Collins: I guess the one concern is, people are pretty euphoric. Like universally. Like go around this conferences. There's a lot of people who are bullish. And so that's the one thing that concerns me. No one's really that scared.
Vincent Daniel: That's the big risk, at least in the near term, is complacency. There's a tremendous amount.
Host: But in terms of another big short, that--I mean, you can believe that people are too euphoric.
Vincent Daniel: That's different. That's a short term--
Steve Eisman: I mean, look, our our expertise is credit, the financial system. And as long as credit quality is okay, there's no big drama coming.
Danny Moses: Think about though, the whole issue with commercial real estate. We've seen bits and pieces of it. And it's an issue. There's over a trillion dollars coming due to be refinanced over the next couple years. For some reason, the moral hazard in the world believes the fed will bail us out. And they probably will. They'll have some other [TALF] 2.0 They'll have a program for commercial real estate loans. And they probably will, but that, I think people are too complacent in that as well, because we've seen fits and starts.
Porter Collins: The markets weren't able to clear, like they were in the past, Nothing traded last year. There was no volumes in commercial real estate. And so that's one of the reasons you haven't seen problems.
Vincent Daniel: I think all of us will be more concerned if and when-- and it's real big of an if--if the Fed all of a sudden has to pivot once again, to being in the tightening bias. Then everyone here starts to freak out.
Host: We got to leave it here. Thank you so much, guys. That was fun.
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