Friday, November 14, 2008

Recommended Investing Books: Fundamental Analysis & Valuation

We've been getting some requests from readers for some good books to read when it comes to investing. So we're posting up a list of recommendations for learning fundamental analysis and valuation. Without further ado:


The Intelligent Investor by Benjamin Graham. If you had to own one book about fundamental investing, this would most likely be it. Benjamin Graham was a legendary investor who helped pioneer the ways of value investing and taught Warren Buffett a lot of what he knows today.  It is definitely number one on the list. If you haven't read it, pick it up immediately.

Security Analysis by Benjamin Graham. This is the second of Graham's must-read books. The book features the value investing philosophies of Graham and Dodd and a foreword by Warren Buffett. If you're lacking in understanding how to perform fundamental analysis, then this is the book for you. After you've finished reading, you'll be able to tackle balance sheets like none other.  It's a must-read for anyone interested in the fundamental analysis related to investing.

Margin of Safety by Seth Klarman.  Written by one of the greatest investors of all time, this book is nearly impossible to find a physical copy of since it's no longer being produced.  Click the link above to see if there's one available.

You Can Be A Stock Market Genius by Joel Greenblatt.  The title is cheesy, but the book's contents are not.  It will teach you catalyst-based investing techniques that exploit market inefficiencies such as risk arbitrage, spin-offs, etc.

The Art of Short Selling by Kathryn Staley.  While the above books teach you how to invest (go long), this book teaches you how to hedge/go short, an important tactic used by most hedge funds.



That concludes the fundamentals list.  For you traders out there, we've also posted up a recommended reading list for technical analysis and charts as well.


Further Reason to Own Deepwater Drillers

Just a quick video courtesy of WSJ that talks about oil and brazil. And, more importantly to me, it re-affirms just how bullish prospects for the deepwater drilling industry are longer-term.



Transocean (RIG) is still the best play in this sector, as they are the industry giants. Back in September, I wrote up a quick piece as to why you should own RIG.

(Note: E-mail readers you'll have to click on the post title and come to the blog to view the video.)


Mortgage Resets

Sure, we may be working our way through sub-prime, but we have this oh-so-fun wave of option ARMs just waiting patiently in the mist to reset to higher rates.

(click to enlarge)

Hat tip to Barry Ritholtz for the graphic.


Thursday, November 13, 2008

Hedge Fund Tracking Series: 3rd Quarter 2008 Edition

This post marks the first of a series I will be doing in the coming weeks that details what many prominent hedge funds have been up to in the last quarter.

Four times a year (once each quarter), hedge funds & asset managers with greater than $100 million AUM (assets under management) are required to report to the SEC their long holdings from the previous quarter. These filings do *not* show the funds' short positions and require them to disclose only their long holdings in equity markets. Additionally, they are required to file various puts or calls purchased in the options market. These filings do *not* cover commodities, currencies, or other markets. So, we just wanted to clarify that for people new to 13f filings. We check these 13F filings quarterly just to get a sense as to where these funds are putting their money sector wise. If you just sit down and do some simple number crunching between this quarter's 13F and the one prior, you can see exactly where these funds have been moving their money.

Please note that these 13F's should be treated as a lagging indicator simply because the 13F's that are being released currently (November 10th-20th 2008) show the funds' portfolio holdings as of September 30th 2008. So, in the past month and a half, they could have completely changed their portfolio. But, at the same time, its easy to see which sectors they are flocking to and what their concentrated positions are.

We like to specifically follow value based (or growth-at-a-reasonable-price) hedge funds in the hope that they won't experience ridiculously high turnover and thus allow us to somewhat track their movements as they build up concentrated positions. Specifically, I follow the 'Tiger Cubs' (otherwise known as the proteges of former hedge fund Tiger Management legend Julian Robertson). Many of these former proteges/right-hand men have started their own funds and here are the ones I've been following:

- Blue Ridge Capital (John Griffin)
- Lone Pine Capital (Stephen Mandel)
- Maverick Capital (Lee Ainslie)
- Viking Global (Andreas Halvorsen)
- Tiger Global (Chase Coleman)
- Touradji Capital (Paul Touradji)
- Shumway Capital Partners (Chris Shumway)

Additionally, we also like to follow the Commodities Corporation "offspring" which have gone off to start their own funds and typically employ a global macro strategy.

- Tudor Investment Corp (Paul Tudor Jones)
- Moore Capital Management (Louis Bacon)
- Caxton Associates (Bruce Kovner)

We follow a core of value funds in depth and then we also follow a core of global macro funds in depth. Over the next few weeks, I will be going into detail as to what those specific funds were up to this past quarter. Additionally, we like to follow other "whales" well known for their investing prowess. These include:

- Warren Buffett (obviously)
- Carl Icahn (rabblerousing at its best)
- George Soros (Soros Fund Management LLC)

Next, there is an assortment of funds which employ various strategies and often run concentrated portfolios. We track these funds due to their solid returns over the years, as well as the spotlight that has been cast on a few of them in this turbulent market.

- Atticus Capital (Timothy Barakett)
- Tremblant Capital (Bret Barakett)
- Clarium Capital (Peter Thiel)
- Pequot Capital Management (Art Samberg)
- Harbinger Capital (Philip Falcone)
- BP Capital (Boone Pickens)
- Paulson & Co (John Paulson)
- Jana Partners (Barry Rosenstein)
- Eton Park Capital (Eric Mindich)
- SAC Capital (Stevie Cohen)
- D.E. Shaw (David Shaw)
- Farallon Capital Management (Thomas Steyer)
- Citadel (Ken Griffin)
- Renaissance Technologies (Jim Simons)
- Galleon Group (Raj Rajaratnam)

A few deep value & activist funds:

- Third Point (Daniel Loeb)
- Pershing Square (Bill Ackman)
- Greenlight Capital (David Einhorn)
- Baupost Group (Seth Klarman)
- T2 Partners (Whitney Tilson)
- Tontine Associates (Jeffrey Gendell)

And, a few newer funds on the scene:

- Conatus Capital (David Stemerman, ex-Lone Pine)
- Highliner Investment Group (Anand Parekh, ex-Citadel)

Over the coming week we'll touch on some of the important position moves these funds and whales have made (new positions, removed positions, etc). That list of funds brings our coverage to around 35 prominent hedge funds. If you would like to see a specific hedge fund covered here on MarketFolly.com, post up a comment in the comments section below. We're always looking to add more funds that readers would like to see, so please drop in your suggestions!

The hedge fund tracking series 3rd quarter 2008 edition starts in the next few days, so spread the word.


Linkfest: Some Good Reads

Portfolio.com: The End [of Wall Street] by Michael Lewis (author of Liar's Poker, which is a must-read for any market junkie)

Portfolio.com: The Hedge Fund Collapse by Jesse Eisinger

Fortune: Fears are Overblown (Hedge Funds won't ignite another sell-off) by Barton Biggs, manager of hedge fund Traxis Partners and author of Hedgehogging, a book I highly recommend


Quick Goldman Sachs Conviction Lists Update

Yesterday, we saw that Goldman Sachs made a few changes to their Conviction Lists. Notably, they added Wyeth (WYE) to the buy list, giving the stock a breakup value of $50 a share. They currently have a price target of $46 on the shares. Additionally, Autoliv (ALV) was removed from the conviction buy list. But, they still retain a normal 'buy' rating on the name. You can check out the rest of the recent updates to the GS conviction buy and sells lists here and here.

Taken from Google Finance, Wyeth (WYE) is "engaged in the discovery, development, manufacture, distribution and sale of a line of products in three primary businesses: Wyeth Pharmaceuticals (Pharmaceuticals), Wyeth Consumer Healthcare (Consumer Healthcare), and Fort Dodge Animal Health (Animal Health)."

Autoliv (ALV) is "a supplier of automotive safety systems with a range of product offerings, including modules and components for passenger and driver-side airbags, side-impact airbag protection systems, seatbelts, steering wheels, safety electronics, whiplash protection systems and child seats, as well as night vision systems and other active safety systems."


Wednesday, November 12, 2008

Prominent Hedge Fund Managers to Testify Before House Oversight Committee

From Paul Kedrosky's blog:

"There is some must-see bailout TV tomorrow. Hedge fund managers John Paulson, Jim Simons, George Soros, Phil Falcone, and Ken Griffin will all be testifying tomorrow (11/13/08) before the House Oversight Committee. I genuinely hope it doesn't turn into a blame game and shouting match, but I don't have a lot of confident that it won't. The most interesting thing will likely be whatever prepared material they submit, so watch for that early tomorrow.

Here is the full list of guests on the Henry Waxman Power Hour, which should be streamed from the House site, as well as over C-Span, starting at 8:30am EST.

* John Alfred Paulson, President, Paulson & Co., Inc.
* George Soros, Chairman, Soros Fund Management, LLC
* James Simons, President, Renaissance Technologies, LLC
* Philip A. Falcone, Senior Managing Partner, Harbinger Capital Partners
* Kenneth C. Griffin, Chief Executive Officer and President, Citadel Investment Group, LLC
* Professor Andrew Lo, Director, MIT Laboratory for Financial Engineering, Massachusetts Institute of Technology, Sloan School of Management
* Professor David Ruder, Northwestern University School of Law, Former Chairman, U.S. Securities and Exchange Commission
* Professor Joseph Bankman, Stanford University Law School
* Houman Shadab, Senior Research Fellow, Mercatus Center, George Mason University"


Thanks to Paul for flagging that for everyone. We've been covering a lot of the aforementioned prominent hedge fund managers here on the blog. We've covered Citadel's recent woes here, Paulson's activity here, Soros' latest interviews here and here, and Harbinger's Wachovia short here and rest of their portfolio here. Will be interesting to hear what some of these folks have to say. Make sure to tune in!


UPDATE*** Live stream HERE.


Tontine Associates to Close Two Hedge Funds

As I twittered out yesterday, Tontine Associates LLC, ran by Jeffrey Gendell, is said to be liquidating 2 of its hedge funds: Tontine Capital LP and Tontine Capital Partners LP. Taken from Bloomberg,

"Gendell gave no timetable for unwinding the funds, Tontine Capital Partners LP and Tontine Partners LP, during a conference call yesterday with clients, according to the people, who asked not to be named because the information is private. Options for raising cash include selling the funds' investments privately or pushing the companies in which they are the biggest shareholder to sell themselves. `The combination of falling commodity prices, massive anticipated hedge-fund redemptions and the seizing up of the credit markets cause an enormous dislocation in our portfolios,'' Gendell, 49, wrote in a letter to clients last month. The firm managed $7 billion at the end of 2007."


The good news, if you want to call it that, is that 2 of Tontine's funds will remain open: Tontine-25 and Tontine Financial. As we noted in our October hedge fund performance update, Tontine was -65.7% in October and now down an astonishing 76.8% for the year. You can view the long-side of their portfolio here, which lists many of the positions they'll have to liquidate. And, all of this news comes as they had just taken a 6.16% ownership stake in Myr Group (MYRG).

We also get word that they're exploring options for the possible liquidation of positions.

"For eight companies in which Tontine is the largest holder, the firm may try to sell its stake privately to another buyer, or push the company to put itself on the block, according to documents filed yesterday with the Securities and Exchange Commission. The eight companies are: Miscor Group Ltd (MIGL), Broadwind Energy (BWEN), Exide Technologies (XIDE), Neenah Enterprises Inc (NENA), Integrated Electrical Services Inc (IESC), Patrick Industries (PATK), Innospec Inc (IOSP), and Westmoreland Coal Co (WLB). Tontine may also transfer its shares in these companies to investors, the filings said."



Source: CNBC's David Faber & Bloomberg


Rationale Behind Shorting Treasuries

For all intents and purposes, U.S. Treasuries are setting up to be a great short opportunity. Last week, I laid out a basic thesis for shorting treasuries. We may be early in this call, but present and future actions are sending us signals we simply cannot ignore. The presently increasing and future supply of treasuries is simply too large. As Martin Hutchinson over at Money Morning has highlighted,

"The U.S. Treasury Department announced Nov. 3 that it intended to borrow a record $550 billion in the fourth quarter. That represents a staggering $408 billion increase over Treasury's borrowing estimate from early August and includes $260 billion for the recapitalization of U.S. banks. Make no mistake about it: There will be enough U.S. Treasury bonds to choke on, as the government tries to finance this debt."


All signs point to this trend continuing. In the quarter prior, the government borrowed $530 billion. Now, with the recent news out that they will borrow an additional $550 billion, the question becomes, when does it end? The current flooding of the market with treasuries is reason enough to get short them. But, with the impending tsunami of future government borrowing still to hit, it just makes the bet that much sweeter. Hutchinson goes on to say that,

"Inevitably $800 billion to $900 billion of additional money flowing from domestic investors into Treasury bonds will do three things:
  • It will drive up interest rates on Treasury bonds.
  • It will tend to crowd out other financings, making finance difficult to obtain for medium-sized and smaller companies and more expensive even for the behemoths.
  • And finally, it will increase inflation, as the Fed is forced to expand money supply to give investors enough money to buy all the Treasuries."

So, we can see that the consequences of their actions definitely plays right into our shorting thesis. The main point we're focused on here is the fact that interest rates on Treasury bonds will rise. When the yields increase, prices will drop, thus benefiting our short position. And, the case can easily be made that the longer dated treasuries will suffer the most. After all, do you want to loan the government money for 20 years at a paltry interest rate? We didn't think so.

Warren Buffett was even out mentioning the under-performance of cash equivalents in his latest comments. He wrote,

"Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts."


Now, although Warren was using that argument to make the case for buying equities in his piece, his point is that cash and cash equivalents will underperform and are thus not desireable. And, a basic principle of investing is to go long outperformers and short underperformers. Cash and cash equivalents (treasuries) are set to underperform and thus make a delicious short for you to sink your teeth into.

The actions of the government not only lay out the premise for shorting treasuries, but also the US Dollar. As inflationary pressures will weigh heavily on the Dollar in the future, eventually something has to give. The only problem here is that other forces are at work on the US dollar as the world continues to deleverage and hedge funds are forced to sell assets and continue to face redemptions. So, this play could ultimately take even longer to play out. But, we will address shorting the US Dollar in a separate post further devoted to that rationale.

The main thing to take away here is that the government has demonstrated that they have and will continue to borrow money by the hundreds of billions. As yields on treasuries rise, prices will drop, especially on longer-dated treasuries. Now, the question becomes how exactly do we play this? Not everyone has access to shorting the 10 year and 20 year treasuries outright, so I am here to offer some other alternatives. As I laid out in my first post on shorting treasuries, there are a few vehicles in the stock market that one can turn to, such as tickers PST and TBT.

PST is the ETF for UltraShort the 7-10 year treasury. An Ultrashort ETF seeks twice the daily inverse of the underlying security. So, buying PST gives you twice the inverse of the performance of the 7-10 year treasury (effectively a double-short). Additionally, TBT is the ETF for UltraShort the 20+ year treasury. This ETF seeks twice the inverse daily performance of the 20+ year treasury (also a double-short). So, those are two very easy ways for people to get short treasuries by buying those tickers in the stock market. Additionally, Hutchinson suggests the Rydex Inverse Government Long Bond Strategy (Juno) Fund, ticker RYJUX as another way to play it. That fund takes various short positions in treasury bond futures and thus will also rise as treasury prices decline.

* 1/12/09 Author's note: Please be advised that since publication, we have further researched the PST and TBT trading vehicles are are NO LONGER recommending them as proper vehicles for shorting longer-dated treasuries due to their poor correlation to their underlying indexes over time. Instead, we are recommending a straight short of TLT. Expect a follow-up post soon.


Cost of the Crisis

In our world of never-ending and awing statistics, the Bank of England is out claiming that paper losses from the global crisis are at a staggering

$2,800,000,000,000

And, for those of you counting zeros at home, that's $2.8 trillion. Displaying it with all the zeros certainly has a more powerful effect I feel. After hearing about billions and billions of write-downs, losses, and bailouts, the numbers don't really "feel" all that big anymore, when in reality they are. It seems I've become comfortably numb with 'billion,' almost as if its no big deal. When, of course, its a very big deal.

And, as the Guardian puts it,

"Think of it like this: it (the paper losses) could pay for 46 bail-outs of the kind the Treasury handed to the banks RBS, HBOS group and Lloyds TSB; or pay off the last quarter's public debt 45 times. It is more than three times the sum of UK annual public spending, and also equivalent to the wealth of 100 Oleg Deripaskas - before the credit crunch anyway. It's equal to 138m bottles of 1947 Petrus Pomerol, the bankers' favourite vintage; or, if it's your turn in the coffee round, 773bn lattes - nearly 13,000 each for every UK citizen."


Tuesday, November 11, 2008

Hedge Funds: October Performance Numbers

We have been anxiously awaiting the numbers from various hedge funds to see just how poorly (for the most part) many of them did in the abysmal month of October. If you'll recall, the indexes fell 10% or so in the month alone. Undoubtedly, the swift move caught a lot of people off-guard. Below, I've assembled a collection of performance numbers from various funds sourced from anonymous investors, hedge fund investor letters, and various media publications. If you missed it, you can check out our September hedge fund performance update to get a feel for how these funds were doing before the month of October struck. So, let's get right to it.


  1. Maverick Capital's Maverick Fund was -6.34% for October and is now -26.47% ytd. Lee Ainslie's fund is off the beaten path this year, as they are accustomed to solid annual returns. You can see their most recent investor letter here, and their portfolio holdings here.
  2. Viking Global's Global Equities III Fund was -1.10% for October and is -2.41% ytd. Their Global Equities LP is -3.92% for the year and was down 1.10% in October. Andreas Halvorsen and company seem to be faring alright this year, all things considered. You can view their month by month performance breakdown here.
  3. Barry Rosenstein's Jana Partners had a rough month. Their Piranha fund was -19.2% for October and is now -21.7% for the year. Additionally, their Nirvana fund fell 13.2% in October and is down 21.9% ytd. As you can see, a big chunk of their losses came solely from the month of October. You can check out some recent Jana portfolio updates here and read about their recent rough patch here.
  4. Steven Cohen's SAC Capital was -12% for October and now find themselves -18% year-to-date. Those performance numbers angered ole Stevie and he moved SAC to cash. Also, Cohen is said to be closing his CR Intrinsic fund, which is comprised of mainly his own personal money. [Dealbreaker]
  5. Farallon Capital was -9% for October and -23% ytd.
  6. Tontine Capital Partners was -65.7% in October and now down an astonishing 76.8% for the year. We recently detailed that they had revealed a 6.16% stake in Myr Group (MYRG). You can also find out where their pain was coming from by checking out Tontine's portfolio holdings.
  7. Peter Thiel's macro fund Clarium Capital was -18% for October and now find themselves -2.8% for the year. The month of October was disappointing for them, as they basically gave up the solid gains they had posted from earlier in the year. This was in part due to their shift to equities right before the carnage hit in October. We posted about Clarium's recent performance here and detailed their portfolio holdings here.
  8. Passport Capital's Global Strategy Fund was -38% for October and is now -44% for the year. We had previously written about Passport's performance here.
  9. Ken Griffin's Citadel continues to feel the pain as their Wellington fund was -38% for October and sits -44% for the year. We recently detailed Citadel's pain here.
  10. Bruce Kovner's Caxton Associates is faring decently this year. Their Global Investment fund was up 2.6% for October and sits up 7.25% year-to-date. They recently boosted their stake in Ferro (FOE). Here's the rest of Caxton's portfolio.
  11. Daniel Loeb's Third Point was -10.3% for October and is -26.9% ytd. Our most recent coverage of Third Point's portfolio can be found here.
  12. Paulson & Co's dominance continues. Their Advantage Plus fund is up 29.4% for the year after posting a +3.8% gain in October. Paulson & Co recently took a large stake in Cheniere Energy (LNG) and we previously saw them shorting UK banks.
  13. Philip Falcone's Harbinger Capital was -5% for October and finds themselves down only 13% for the year. The fund has had a wild ride this year, being up 42% in June and now -13% for the year. This can partially be attributed to the fact that their portfolio was previously littered with natural resource equities that had been obliterated such as Cleveland Cliffs (CLF) and Freeport McMoran (FCX). Check out how Harbinger profited from shorting Wachovia (WB) and view the rest of their portfolio here.
  14. David Einhorn's Greenlight Capital sees themselves -13% for October and now -26% for the year. We've covered Einhorn's portfolio activity here.
  15. Shumway Capital Partners' Ocean Fund was up 0.85% in October but is still down 8.24% for the year. The fund is ran by Chris Shumway, one of the many 'Tiger Cubs' we cover here on the blog. 'Tiger Cubs,' if you're not familiar, are pupils of legendary Julian Robertson's Tiger Management hedge fund. Shumway recently detailed some investment ideas at a 'Tiger Cub' hedge fund panel.

While many funds have found it difficult out there, others have gained footing. Obviously, in such a market environment, one would expect bearish funds to do well. And, that's exactly the case with $7 billion short-seller Jim Chanos. His Kynikos long-short fund is up 11% through the year. His Ursus short only fund is up 53% through October. And, he's done even better than his numbers last year, in which he returned 30%. And, in a comment with the NY Post, Chanos refused to name names, but revealed that, "We are short all of the satellite and most of the cable companies in the US."

Additionally, others have found a way to profit off the gloom and doom. Drury Capital is up 60% for the year with the help of their proprietary computer models. Conquest Capital, a $611 million macro fund ran by Marc H. Malek, is up 44% year-to-date. The scary part about his fund? Even with his stellar performance, he is still seeing redemption requests. That just goes to show that everyone simply needs cash. And, when in times of duress, sell your winners.

This has easily been the worst year for hedge funds in quite some time, thanks to yet another horrible month in October. As evidenced above, even some of the historically brightest managers in the game are stumbling. Such struggles will lead to even more investor redemptions and continued deleveraging. For more information and background on some of the prominent hedge funds mentioned above, head over to my posts on hedge fund manager interviews and Alpha's hedge fund rankings.

Make sure to check back with us here at MarketFolly.com as the new 13F filings start to pour in this week and next week. We'll examine these latest SEC filings that reveal the updated portfolio holdings of the hedge funds mentioned above.



Sources: Anonymous investors, hedge fund investor letters, (2), NY Post, NY Times, & Bloomberg


Eric Bolling: Still Patient

Overall, Eric Bolling has been patient lately, and that's been the right play. Protecting capital in this volatile environment is essential and you've got to pick your spots. Here's his latest commentary from his column,

"While doing due diligence scouring stocks, investments, bonds, etc. for the big thing, I have added some positions to my portfolio. I re-entered the SPDR Gold Trust (GLD) trade and U.S. Oil Fund (USO) trade. I am buying these exchange-traded funds and will add to them if the prices of gold and oil start to firm.

My thinking is that after the dust settles and the world realizes that the Democrats in the U.S. Congress, Senate, and White House will spend substantially more than promised during their campaigns, we will reflate. The beneficiaries of reflation are gold and oil as well as other physical commodities. I am steering clear of equities that produce the oil and mine the gold because I am concerned about the tax treatment they may be burdened with in a new era of Washington tax-and-spend politics.

Right now is a time of capital preservation. There will be a time to invest more aggressively, but not yet, in my humble opinion."


I agree with his call on oil as well, which I noted here in my last post of Bolling's commentary. We both may be (and most likely are) early, but I think its setting up as a great position to slowly accumulate over time. Buy some oil here at $60, buy some if it dips to $50, and heaven forbid if it drops all the way down to $40, I'm loading up. I'll have a more detailed post on oil coming here in the next few days, so keep an eye out for that.


You can view the article in its entirety here.


Monday, November 10, 2008

Lee Ainslie's Maverick Capital Sells Entire Under Armour (UA) Stake - 13G Filing

In a 13G filing made with the SEC after the close today, hedge fund Maverick Capital has sold off their entire position in Under Armour (UA).  Maverick Capital is a $10 billion hedge fund ran by the notoriously great stock picker Lee Ainslie.  The filing shows that the transactions were completed as of October 31st, 2008.  Previously, Maverick owned 3,629,460 shares, around a 10% stake in the company, as was detailed in their last 13F filing.


Maverick's performance this year has definitely been sub-par by their standards.  Their Maverick Fund was -6.34% for October and is now -26.47% year-to-date.  You can check out their most recent investor letter here and learn more about Maverick and their portfolio holdings here.  Their updated portfolio will soon be available with the release of the next 13F filing with the SEC here in the next week or two.  So, make sure you keep an eye out at MarketFolly.com for that.  It will be interesting to see what else Maverick has been busy doing besides dumping all of their UA.

Taken from Google Finance, Under Armour (UA) is "engaged in the design, development, marketing and distribution of branded performance products for men, women and youth. The Company designs and sells an offering of apparel and accessories that utilize a variety of synthetic microfiber fabrications. Its active wear and sports apparel, footwear and accessories are designed to wick perspiration away from the skin, help regulate body temperature, enhance comfort and mobility and improve performance regardless of weather condition."


Activision (ATVI): A Bright Light in the Dark Consumer World?

I am long a specialty retail play. I had to slap myself out of the stupor for owning one in an environment I have dubbed as a consumer recession. What am I long? Well, how about some Activision Blizzard (ATVI). I was fortunate/unfortunate enough (we'll know later) to get filled on some of my orders in the $10.xx region and I had a few more orders down in the $9.xx that did not get filled.

So, why am I long a retail name, much less a specialty retail name. Well, first and foremost, it is mainly as a hedge to some of my other retail shorts. So, let's make that abundantly clear. I am bearish on the consumer and the economy. But, such bearishness must be given protection to any rampant rallies that might occur and I've selected ATVI, as they are currently dominating competitors such as Electronic Arts (ERTS) and THQ (THQI).

Secondly, I would propose that video games are by no means recession resistant, but they are less affected by a recession than other types of specialty retail. Why? Gamers are hardcore. Many are addicts. A game costs a measly $40-60 bucks and gives you hours upon hours of entertainment. And, ATVI has some of the best titles out there right now, including the Guitar Hero franchise, Call of Duty (4th installment out for the holidays), World of Warcraft (new expansion pack out for the holidays), among many others. They offer relatively cheap products and this benefits them in an environment where the consumer is struggling. When that new game hits, most people gotta have it, especially if its an installment in an already proven franchise such as the games mentioned above.

Thirdly, in addition to the strong products set to hit for the holiday season, ATVI has some very highly anticipated games in the pipeline for the future as well. If anyone is a fan of Blizzard's games (now a part of Activision Blizzard), then you already know what I'm talking about: Diablo 3 and Starcraft 2. These are highly proven franchises and are long awaited sequels (especially Starcraft 2). The entire nation of Korea will probably pick up a copy of SC2, I'm not even kidding. The game's prequel, Starcraft, was that big of a hit over there. So, future revenue streams are well in place.

Fourthly, even in a weak consumer environment, ATVI was still able to deliver solid earnings and stick to their forecast. And, they even announced plans to buy-back $1 billion of stock. After all, they have $3 billion in cash. Some takeaways from the quarter,

"For the September quarter, Activision Blizzard had two of the top-10 titles in dollars on all console platforms in the U.S., according to The NPD Group. For the September quarter, Activision Blizzard had two of the top-five PC titles worldwide -- Blizzard Entertainment's World of Warcraft: Battle Chest(R) and Call of Duty 4: Modern Warfare, according to Charttrack, Gfk and The NPD Group."

And, some data from the recent quarter courtesy of Barron's Tech Trader Daily,

"For the quarter, the video game company posted non-GAAP revenue of $770 million, well ahead of the company’s previous forecast of $620 million. ATVI posted non-GAAP EPS of 7 cents a share, better than the company’s forecast of 4 cents. For Q4, the company sees non-GAAP revenue of $2.2 billion, with profits of 29 cents a share."

So, as you can see, the company is holding up fine so far in this environment. Yes, the consumer should theoretically weaken as we move forward, but ATVI has solid titles, is selling cheaper items, and is selling to a consumer who is not likely to give up their products, despite the recession. If you want any evidence that ATVI has a comparative advantage in titles, then simply compare ATVI's most recent quarter to rival THQ's quarter. Yea, that wasn't pretty.

Lastly, I want to highlight that $10 billion hedge fund Caxton Associates ran by Bruce Kovner was out adding ATVI as a new position in their portfolio last quarter. And, not only did they just 'add it,' they really loaded up. They brought it up all the way to their 3rd largest portfolio holding. I wrote about Caxton's purchase earlier, where I detailed their portfolio holdings. Caxton is one of the many hedge funds I track on Marketfolly.com.

ATVI is best of breed in the gaming space and I am happy to be long the name as a hedge to my other specialty retail shorts. (See my post on the deteriorating consumer environment for short ideas). But, more importantly, the company definitely has a bright near-term future with all the anxiously awaited titles they have lined up.

I would be remiss if I did not end this piece with a 'proceed with caution' label. Specialty retail is easily going to be the hardest hit in the retail space. This is simply going to be a case of "who loses the least." If you do not want to take on the risk involved with this name, I would highly suggest checking out cheap retail plays on the "trading down" of the consumer to cheaper alternatives. These names include the masters of the cheap domain: Walmart (WMT) and McDonalds (MCD). And, you can read my thoughts about MCD's dominance here. Apart from those, playing retail names from the long side will be a very uphill battle.


Bear Stearns Risk Officer Joins Fed

I'll come out and say the obvious: This has got to be one of the stupidest things I've seen in a while. If you haven't already heard, Michael Alix, former chief risk officer at Bear Stearns, was just hired by the Federal Reserve. First of all, the words 'risk officer' and Bear Stearns should not even be put in the same sentence. Taken from Today's Financial News,


"In one of the latest what-were-you-thinking moves, the Federal Reserve just announced it has hired Michael Alix as a bank regulation advisor. Who the heck is Michael Alix, you ask? He is the former chief risk officer at Bear Sterns, a company that thought risk-management was an oxymoron. Essentially, he is the guy that allowed Bear Sterns to get so over-leveraged, it collapsed under its own weight. Now, he is an advisor for the Federal Reserve. At the very least, he can tell us what not to do. Frankly, I believe the Fed’s hiring of one of the executives at the center of today’s market fiasco proves that the “good-old boy” system remains alive and well in Washington. It is a disgrace."


Astonishing.


Leveraged ETFs

I find it highly ironic that in a time where the markets are looking to de-leverage and crank down the ridiculous amounts of risk, that soon ETFs will be coming to market that offer 3x the leverage. Currently, we're limited to ETFs with 2x the leverage such as the SSO for Ultra Long the S&P, and SDS for Ultra Short the S&P. Those things already see ridiculous intraday swings, so I can only imagine what 3x the leverage will look like. The 3x funds could make great trading vehicles, but could be very risky for investors; especially the ones who don't understand the risks or how exactly leveraged ETFs work. I highly recommend you read The Case Against Leveraged ETFs, a very good article which highlights some common misunderstandings surrounding these leveraged ETF's performance. They often are not simply 2x the performance on a yearly basis.

Courtesy of AlphaTrends, here is the graphic depicting the new funds coming to market.

(click to enlarge)