Friday, June 27, 2008

Hedge Fund Rankings

Alpha is out with the rankings of the top 100 largest hedge funds in the world for 2008. I'll list them by their 2008 ranking and will also show where they were this time last year so you can see who has moved where on the list. Here is the top 5 by their 2008 ranking:

1. JP Morgan Asset Management (ranked #1 in 2007 as well)
2. Bridgewater Associates (ranked #3 in 2007)
3. Farallon Capital Management (ranked #5 in 2007)
4. Renaissance Technologies (ranked #6 in 2007)
5. Och-Ziff Capital Management (ranked #7 in 2007)

And, I wanted to highlight some of the funds that I track in terms of where they fall on the list of largest hedge funds in the world for 2008:

#6 D.E. Shaw (#4 in 2007)
#13. Atticus Capital (#16 in 2007)
#17. Lone Pine Capital (#47 in 2007)
#18. George Soros (#25 in 2007)
#23 Tudor Investment Corp (#12 in 2007)
#24 SAC Capital (#28 in 2007)
#27 Moore Capital (#20 in 2007)
#38 Caxton Associates (#16 in 2007)
#50 Maverick Capital (#40 in 2007)
#53 Eton Park Capital (#70 in 2007)
#70 Viking Global Investors (#74 in 2007)
#79 Jana Partners (#80 in 2007)
#83 Icahn Partners ( not in the top 100 back in 2007)
#93 Blue Ridge Partners (not in the top 100 back in 2007)

Its very evident that three of the ex-Tiger management funds had great years. Lone Pine leapfrogged a ton of funds from 47th in 2007 all the way up to 17th in 2008. Blue Ridge was not even in the top 100 but now sit at 93rd. Viking moved up slightly from 74th last year to 70th now. But, in the end, you have to keep in mind that all the firms on this list could have either gained capital from new investors or they could have grown their capital through successful investments, or a combination of both.

None the less, interesting information. You can read through the whole list here.

Thursday, June 26, 2008

Dow Jones Lingering Around 5 Year Trend Line

Over on his site, Stewie has a great 5 year chart of the Dow Jones up. As he illustrates, we're right on the cusp of breaking convincingly through a major long-term trendline. Stochastics and various other signals are pointing to oversold so we should see some sort of a bounce here. But, still, scary stuff. I'll let the chart do the rest of the talking:

Then, combine that with the fact that we are seeing the largest net short position in the s&p in some time. This chart, courtesy of Bespoke Investment Group, illustrates that:

Fun times in the markets!

Wednesday, June 25, 2008

Some Purchases

- Walmart (WMT) @ 57.70. I added another quarter of a position a few days back (which I wrote about here) so now I have a half position in WMT (I typically add full position sizes in 4 incremental orders over time). Both purchases so far have been made at the touch of the 50 day moving average where WMT has also shown oversold stochastics.

- Qualcomm (QCOM) @ 46.10. This order of mine just triggered yesterday as QCOM hit the 50 day moving average and bounced off of it. It surged today which was encouraging. But, with the weak news out of Research in Motion (RIMM) and Oracle (ORCL), it will probably be heading lower with the rest of the Nasdaq/market tomorrow. No worries though, as I *finally* got to add to my position. It had been on such a run that I'd never had a chance to add. This name should continue to benefit from mobile phone growth/3G buildout and is easily one of the most common positions amongst the hedge funds I follow.

- Mosaic (MOS) @ 141.10. This was a limit order I'd had set for a while. I'm honestly probably a little early here, but I'm playing the chart from its past resistance/now support line at the previous highs. I wrote a post about entering just a few days ago here. So far the name has bounced off of the support right around where I got my order filled. We'll see if it holds up. My next buy will be at the 50 day moving average (if it gets that low). After taking profits the past few weeks, I now have half a position in MOS again.

- Potash (POT) @ 218.10. Along with MOS, this was the other order I had set at past resistance/future support (the previous highs). I will also be adding to this name at the 50 day moving average (if it gets that low). This brings my position size up to half a position in POT. Just like MOS, I had taken profits in this name the past few weeks on the recent highs and am now buying back the shares cheaper at support levels. I am executing the game plan I laid out here.

- Arch Coal (ACI) @ 68.65. These coal names really are on fire, to say the least. Today, we finally saw a meaningful pullback. I'll be the first to admit that I'm probably early adding here. But, I literally have so little coal exposure after taking profits that I feel naked without them haha. So, when I saw ACI down 6+% today I pulled the trigger on a little bit just because in the past, when this name has been down that much in a single day, it has rebounded strongly. And, that's exactly what it did. After being down 6+% today, buyers came in around the middle of the day and it closed down only 3.8%. Again, I fully expect more downside to come. But, having seen how these names trade, I felt today was a compelling area to nibble on a few shares just in case it continues its march higher. Because, after all, these coal stocks are ripping higher, hardly ever selling off in meaningful fashion. Just look at the charts. The smallest of sell-offs have been buying opportunities. I'm ok adding here though just because I know that I'll be looking to really load up on shares on any meaningful correction.

I'm waiting on adding to Massey (MEE) because it has skied much higher than the other coal names and is due for more of a pullback in my mind. Honestly though, this was probably the chance to buy it considering strong buying came in the second half of the day and practically reversed all of the day's losses (It was down 7% at one point and closed down 2.4%). And, MEE seems to be the strongest coal name in terms of momentum... it just doesn't quit. This chart has the least amount of dips I've seen in a while.

That's it for now.

Mosaic (MOS) Looking to Sell Its Nitrogen Segment

Yesterday in the news we saw that Mosaic (MOS) was looking to unload the Nitrogen segment of their business. As per CNN, they are seeking the sale of Saskferco, "a private company primarily owned by Mosaic and Investment Saskatchewan, a provincial corporation that seeks to boost Saskatchewan's economy."

At first glance this might not be anything to scoff at. But, at the same time, part of me wonders if the Nitrogen segment of their business is not seeing the continued strong demand like their potash and phosphate segments. Mosaic said they are looking to sell this segment so that they can focus on expansion of their primary business in phosphate and potash.

Maybe Mosaic just wanted to separate themselves from the Saskatchewan investment company who represented the other half in the joint venture of Saskferco. Yet, part of me wonders if they have noticed a developing trend within the industry. Because, after all, they are right smack dab in the middle of fertilizer's secular growth. I'm going to go sort back through their earnings reports (along with other fertilizer companies) to see if the Nitrogen segments in any of these companies were showing signs of slowing or flat out hurting earnings. We know these companies are facing rising input costs. But, that has not been a detriment to them because their revenues are rising faster than their input costs. I'm wondering if possibly the input costs associated to Nitrogen specifically are finally starting to impact the bottom line in that segment.

Again, I might be reading into this too much. But, it almost seems as if they may be 'cashing out' at the top of the Nitrogen trade, while they think the underlying trend in potash and phosphates will continue. This would not surprise me one bit as they have a front row seat to the whole agricultural boom we are witnessing.

My bets all along have centered around potash; phosphate and nitrogen were just added bonuses. I'll report back with what I find, if anything. At any rate, good to see them focusing on what I believe to be the main secular growth trend here: the potash itself. That is the nutrient with the brightest future simply because it has the most pricing power. There is ridiculously strong demand for it and very low supply of it. And, additional supply is many years away from coming online (due to construction of mines etc). Most likely this is just a case of me over-analyzing things. But, hey, due diligence is my middle name!

"The Age of Scarcity" by Jeff Rubin (CIBC World Markets)

This one ought to get TraderMark over at all riled up. He has been over there pounding the table with his coined phrase "world of shortages" as an investment thesis for some time now. Then, Jeff Rubin over at CIBC World Markets comes out with a slideshow entitled "The Age of Scarcity." Hat tip to Paul Kedrosky, author of Infectious Greed who originally posted the link to the slideshow.

There's 31 slides in all, but I wanted to post up a select few of slides that really illustrate some macro themes we are seeing.

First, we'll look at Global GDP Growth. As you can see from the chart above, Emerging Markets are clearly the leader as an overall % of global GDP growth. And, this comes as no surprise, as pretty much everyone not living in a cave already knew that. What I am more interested in is the percentage that Central & Eastern Europe is accruing. If they are truly benefitting from Russia's emergence, then you would expect their share of global GDP to increase in the coming years as well. After all, they have already surpassed Japan (but I guess that's not much to brag about is it?). For my money I really think Russia has the best risk/reward setup in terms of Emerging Markets.

Next, let's look at the slide above depicting other regions' dependency on the US Market. And, surprisingly enough, Europe, Latin America, and Asia are all less dependent on America than they were back in 2000. Obviously, the world has become a true global economy and nations have diversified their dependency, which is a good thing. Although I do not want to get into a coupling/de-coupling argument here, I do think it is worth noting that the overall trend the past seven years has been that other markets are less dependent on exporting to the US market. But, at the same time, it must be noted that Emerging Asia easily is the most dependent on the US out of the 3 regions. There has been increasing chatter about how the US slowdown could be affecting China, and that chatter is warranted. The US market represents 16% of their exports and we will have to carefully monitor this situation as numerous investment theses hinge on China's continued growth.

Thirdly, I want to stick with the China theme and glance at the Resource Demand Growth slide pictured above. As you can see, China consumes MANY more resources than we do, and they are seeing average annual resource demand growth of 30% for aluminum and 28% for nickel. This just goes to show that a) China is a hungry monster and b) they are a huge piece of the "age of scarcity" puzzle. Also, I just want to point out that this slide further reiterates my bullish stance on aluminum/Alcoa, as I mentioned here. Demand for these resources is unreal.

Lastly, I want to turn to the housing sector in the US. This slide above shows what we already know: the housing market sucks and prices are falling. What's interesting though is that so many people out there are calling for a '2nd half recovery,' yet they don't seem to realize that the housing market will STILL be in turmoil. In fact, it could very well be even worse by then considering that this summer another major wave of ARMs (Adjustable Rate Mortgages) are resetting back from their low teaser rates to sky-high interest rates. This reset window will obviously take a few months to truly affect the homeowner, as they soon discover their mortgage payments will increase substantially. And, as this plays out months down the road, these homeowners will face forclosure, guaranteeing the next leg down in the housing market. And, it will slap all those '2nd half recovery' pundits right in the face. Interestingly enough though, CIBC here predicts that housing prices and subprime mortgage delinquencies will in essence stabilize towards the beginning of '09. So, they seem to be calling for a early-mid '09 housing recovery cycle. What you cannot see from this chart though is prime mortgage delinquencies, which I anticipate will also see rising delinquencies as people who might have good credit were still baited into taking the teaser rate ARMs which will be resetting. So, while CIBC could theoretically be right in calling a stabilization of subprime delinquencies, you still have to take into account the various other types of mortgages (like prime) which will also undoubtedly see rising delinquencies due to the crazy mortgages people with various credit grades and people from all walks of life were signing up for.

Those are the main slides I wanted to highlight, as I felt they clearly depicted some macro themes we have been seeing and will continue to see. You can check out the entire CIBC World Markets "The Age of Scarcity" slideshow by Jeff Rubin and Avery Shenfeld here.

Tuesday, June 24, 2008

How To Play Energy in the Intermediate Term

Energy demand is quickly rising, while supply cannot keep pace. I read two interesting pieces yesterday: one in Forbes by Mark Mills and one in The Economist. Both have to do with alternative energy and the current energy situation. The thoughts in both pieces tie together a lot of my investments theses into a cohesive whole. I have been long natural gas, coal, and nuclear through various investment vehicles for a while now. They represent my energy plays for the intermediate term while the alternative energy wave gains momentum. While I'm in each energy name for a specific reason, there is an underlying macro trend that provides justification for investing in all those forms of energy: The rate at which we are consuming energy is far outpacing the supply. So, what does this mean? Higher prices across the board. And, I'm just talking about the U.S. here. (Throw China in the mix and you've got a big problem.). Then, on top of that entirely, I've been performing due diligence on possible investments in solar, wind, nuclear, and hydropower to 'spread my bets' and diversify within the alternative energy space for a longer term play, as these plays will undoubtedly require a longer time frame to come to scale. But for now, I really want to focus on the energy outlook in the intermediate term. To really frame things, I want to highlight a segment taken from the aforementioned Economist article which touches on some staggering statistics and estimations regarding energy:

"The market for energy is huge. At present, the world’s population consumes about 15 terawatts of power. (A terawatt is 1,000 gigawatts, and a gigawatt is the capacity of the largest sort of coal-fired power station.) That translates into a business worth $6 trillion a year—about a tenth of the world’s economic output—according to John Doerr, a venture capitalist who is heavily involved in the industry. And by 2050, power consumption is likely to have risen to 30 terawatts."

As you can see, the numbers are quite large and the trend is for power consumption to increase. In terms of using such power, the Forbes article states that "America uses just 15% more oil today than when the first modern energy crisis hit in October 1973. But electricity use is up 115% since then." The majority of electricity generated in the U.S. comes from coal, natural gas, and nuclear (all non-renewable sources). Now, recently we've seen a lot of hype around renewable sources such as wind, solar, and water. Don't get me wrong, I'm all for supporting these advancements. But, let's be real for a second. These energy solutions will take many years to be brought to scale. Five or Ten years down the road, they could have a very meaningful impact. But, in the mean time, what's the solution? Currently, wind is gaining ground in terms of stealing power generation 'market share' if you will. But, by supplying only a whopping 1% of power, it's not making a big dent by any means. The growth in energy demand will simply outpace what little supply that is coming to market. Longer term, the renewable sources should have some sort of an impact. But, in the near-term, this presents a real problem.

I realize the alternative energy space represents some great investment opportunities for the longer term and I will obviously be investing there too. But, let's focus on the here and now, where we can find some feasible investment theses poised to benefit in the next 1 year, 3 years & 5 years (ie: sooner rather than later). Consider the following paragraph from the Forbes article:

"Coal generates half of America's electricity. The U.S. is the world's second-largest producer. China is the largest, and used to be a net exporter. A year ago China became a net importer of coal. So U.S. coal exports are rising now, up 13% already this year. America has plenty of coal, but as exports grow its price will start tracking world coal prices. Those (world coal prices) have more than doubled in the past year to $100 per short ton, and Merrill Lynch forecasts another near doubling by year-end."

Then, add in the following quote from The Economist article:

"China is building coal-fired power stations at a blazing rate."

To those who doubt the reality of the coal story: get real. The main fact to take away here is that China used to export coal. But, now that they are growing so fast and consuming so much energy, they are now a net importer. As the second largest producer, the U.S. feeds China's hunger for energy. Add in the fact that the U.S. has to power half of its own electricity with coal, and you've got a big demand problem. Yet again we fall back on the fact that demand is rising faster than supply. Prices go up. This is all depicted by The Economist's chart that illustrates primary world energy consumption and primary electricity production:

As you can see, oil is obviously the top form of energy consumed. But, coal is a close second in terms of consumption. And, in terms of world electricity production, coal leads the pack. So, the commonality here is that not only does the world consume a lot of coal behind oil, but it is the leading source of electricity worldwide. In the intermediate term, coal is not going anywhere. Investing in it only makes sense. The world requires more energy. Therefore, the world requires more coal. Rising demand for coal equals rising coal prices. And, the same can be noted about natural gas (although on a slightly smaller scale).

On that note, let's turn to Natural Gas, the source from which both the U.S. and the world in general receive around 20% of their electricity. And, referring to the Forbes article, we see yet another problem:

"Demand is up, but supply is not. Natural gas is largely a domestic fuel (as oil was decades ago). But U.S. production is falling because of environmental restrictions on exploration and tapped-out existing gas fields."

Demand outpacing supply yet again. Prices go up. Add in the fact that natural gas can continue to ride oil's coat tails in terms of price appreciation and you've got a party.

Lastly, the article touches on nuclear power. This power source supplies 20% of American electricity as well. And, as you can see from this depiction from The Economist, nuclear power has been slowly but surely gaining energy 'market share' over the past 3 decades:

France has really led the pack in terms of fully committing to nuclear power and has thus set the standard for other nations to follow their lead, should others be willing. But, there are problems with this source of energy due to political/safety/you-name-it concerns. Add in the fact that getting these nuclear power plants approved and built takes forever and you've got some barriers. So, if it takes forever to build a plant, and existing plants could have problems keeping their licenses, how does nuclear help us address the energy demand in the near-term? The Forbes article asks the same question:

"So how will this scenario play out if more plants don't get built? The first thing is that utilities will burn more natural gas."

Oh ok, let's just burn more natural gas which we already don't have enough supply of. That's encouraging. /End sarcasm. So, as you can see, we have a problem here. No matter which way you really look at it, prices have to go higher. Demand is growing faster than new supply can be brought to market. The U.S. has to take care of its own coal situation since it accounts for a vast majority of power generation here. On top of that, you have China who is a net importer of coal now because they are even more energy hungry than we are. This equals higher prices. And, if the U.S. isn't willing to pay those higher prices for that coal, those coal producers will have an eager buyer waiting in China. Natural gas demand is surging, yet supply is not necessarily surging along with it. Yet again we see higher prices. Nuclear power could be a much longer term solution, but offers us nothing in the near-term due to the time it takes to even get a plant set up in the first place. Wind power, although gaining popularity, is still a ways away from making a significant impact in terms of servicing the rising demand. Wind power is indeed generating a percentage of power in America, but it's still nothing too meaningful... it's literally 1%. This, like nuclear, will take time to a) gain more popularity and b) actually be implemented in mass. Solar, probably the most 'hyped' of all possible solutions, only supplies 0.01% of power according to the article and is probably the furthest out from having a major impact. Lastly, the Forbes article mentions hydropower as another option that only generates 7% of power in America, but is losing 'market share' due to dams being dismantled. This option does not offer any near-term solutions either, because it still faces the challenge of adopt-a-bility and implementation. Not to mention, there is very limited hype/popularity around this option currently (although I'm sure that will change soon).

So, what we do know is that all of the renewable sources of energy will not be able to meaningfully service rising demand in the near or intermediate-term. So, for the next few years, it is clear that the reliance on coal and natural gas will continue. While I don't doubt that meaningful inroads will be made in the areas of solar, wind, nuclear, and hydropower, we're still a long ways away from any major increase of energy supply. So, we use what we have: coal and natural gas. And, due to rising demand, the prices of these energy sources will go up. Add in a short supply scenario to either or both of those, and you have a recipe for sky high coal and natgas prices. No matter the scenario, you need to be playing energy. Wind, nuclear, solar, and hydropower are worth a look with a longer investment time frame, while coal and natgas seem poised to benefit in the immediate future.

And, on that note, here are some plays best positioned to benefit from this intermediate scenario. For coal, I like Arch Coal (ACI), Massey (MEE), and Alpha Natural Resources (ANR). I like these names for both the energy thesis as well as the metallurgical coal/steel demand we are seeing. For natural gas I like Chesapeake (CHK) and Sandridge (SD) for their shale prospects, heavy insider buying, and management teams that have vast experience in the industry. I also like playing the United States Natural Gas Fund (UNG) that tracks the price of natural gas itself, which I anticipate will continue to appreciate. As I mentioned in the beginning of this piece, I'm in numerous energy names for varying secular theses. But, rising energy demand/dwindling supply is the underlying thesis that ties them all together.

Note: All these names are quite extended and due for a pullback, so enter here at your own risk. I know I'll be waiting for the next major pullback to re-load. I've been in these names for a while now and even though they have seen massive run-ups, I still believe the street is underestimating the underlying trend here. I'm long ACI and MEE and have been taking profits along the way. I'm also long CHK and UNG, but have smaller positions than normal due to recent profit taking. I'm waiting for a pullback on SD as it continues to blast towards the stratosphere. I will continue my strategy of taking profits on new highs and buying back on dips, assuming nothing has fundamentally changed at that time. Obviously, it is essential to monitor the ongoing situation to make sure the thesis hasn't become flawed. Because, if that were to occur, these names would come crashing back down.

Make sure to check out the Forbes article I referenced, as I think it brings up some interesting points. Also, check out The Economist article I cited, which also is a very thought provoking piece.

Monday, June 23, 2008

U.S. Steel (X) added to Goldman Sachs Conviction Buy List

Fresh off my post on steel the other day, Goldman Sachs comes out today and adds U.S. Steel (X) to its Conviction Buy List, boosting its price target to $228, up from $210, noting that higher steel prices should obviously benefit them. The stock is up 3% or so today at $190 and is breaking out to new highs. This could very well be the catalyst needed to really kick the steel names into another gear. Or, it could very well be the near term top haha. The action in steel has been puzzling the past few days. I had started a position in SID because I wanted more steel exposure, but was quickly stopped out a day later as it broke through the 50 day moving average. I am now playing X as its chart is holding up quite nicely and is the stereotypical momentum trade setup. Again, I'm not trying to trade steel, I want to own some of these companies. But, at the same time, the market is shoddy at best and the technicals are not all that great. So, I've got to pick my spots. X, MTL, and SID are all steel plays worth monitoring. I'd rather be in the emerging market steel names, but the charts are telling me to play X at the moment. And, this is exactly why incorporating technical analysis into your investment style is beneficial.

So, today on the Goldman Conviction Buy List add, I'm in X with a protective stop just under $185. That was the overhead resistance that had been causing X problems and so if it breaks back down below that, its heading lower. Again, I want to highlight that you have to treat this as a momentum trade because that's what it is and that's why its breaking out. I want exposure to steel as an investment, but most of the charts suck right now, except for X. So, in the mean time, I'll play X as my steel play until the other stocks in the sector start to show signs of life. This type of market is all about adaptability and playing what's working and shorting what's not.

Peter Thiel / Clarium Capital

Peter Thiel is the co-founder and former CEO of PayPal. Now, besides this endeavor, you might not know that he now runs a hedge fund, Clarium Capital. They are a macro based fund and have been doing quite well for themselves. 1440WallStreet had a great post about him the other day, including a video with some of his macro thoughts. The video is older, but is a must watch if you employ any sort of macro approach to investing. He's a smart guy and has been making tons of money by simply identifying trends.

Make sure you check out 1440WallStreet's write-up on Clarium and the vid of Thiel here.