market folly

Courtesy of Dealbreaker, here's the latest from Bill Ackman's hedge fund, Pershing Square Capital Management. His second quarter correspondence is a bit tardy and he acknowledges that in the letter. Referring to their positions, Ackman discusses their stakes in Target (TGT), EMC (EMC), General Growth Properties (GGWPQ), Automatic Data Processing (ADP), and his return to shares of McDonald's (MCD). He also touches on their short exposure through credit default swaps (CDS) as well as mistakes and missed opportunities regarding their due diligence. In addition to the letter below, we want to make special note of an opportunity for you to hear Bill Ackman speak courtesy of the Value Investing Congress discount we've secured for readers. The VIC features presentations of actionable investment ideas from some of the most prominent hedge fund managers out there including Bill Ackman (Pershing Square), David Einhorn (Greenlight Capital), Julian Robertson (Tiger Management), Joel Greenblatt (Gotham Capital) and many more. In the mean time, his latest investor letter will have to suffice.

In his correspondence, we learn that Pershing's largest short position is a valuation hedge for their investment in General Growth Properties (GGWPQ) because their valuation is a large component of the equation that determines recoveries for the equity holders. Additionally, he mentions they are also short a REIT that trades at a high valuation, has weak underlying assets, and poor business prospects. Since he does not name names, you can obviously speculate as to what this short position is in.

We also see that his corresponding long position in General Growth is up substantially as the equity they owned has risen more than 12-fold since their buy at $0.34 per share and the unsecured debt they own has tripled in value over the same timeframe. They consider Simon Property Group (SPG) to be the most comparable REIT. Ackman argues that since SPG trades at a cap rate of 7% using trailing 12 month net operating income, a very similar General Growth under the same cap rate would have an enterprise value of $40 billion. This would then value shares of GGWPQ at around $40 per share.

Ackman goes on to provide updates on numerous other portfolio holdings but we'll let you read about those in the letter. One last paragraph we want to focus on is Ackman's brief mention of the risk to one's purchasing power. Due to quantitative easing and money printing by the Fed, he acknowledges that there are concerns about future buying power of the dollar. Ackman highlights that many investors have turned to gold to hedge these risks, but not Pershing Square. Instead, they have decided to fight this risk by owning "high quality businesses that have pricing power due to market position and/or business model, and/or that earn their profits globally."

This is interesting to see his stance on the matter as we can't really recall him addressing it before. You'll remember that David Einhorn and Greenlight Capital made a large gold investment and now are storing physical gold. Additionally, John Paulson's hedge fund Paulson & Co bought gold via GLD (the exchange traded fund) to hedge their share class denominated in gold. It's interesting to see each fund manager's individualistic approach and hedging vehicle of choice. However, the main thing to take away from all of this is the fact that they see inflation as a potential threat in the future and are trying to mitigate this risk accordingly.

Embedded below is Pershing Square Capital Management's Q2 investor letter. Additionally, make sure you check out our coverage of Pershing Square's portfolio here:




You can download the investor letter in .pdf form here. And of course make sure you check out the discount to the Value Investing Congress where you can hear Bill Ackman and numerous other prominent hedge fund managers present actionable investment ideas this coming October in New York City.

We'll leave you with a good quote from Ackman himself in the letter, "Trading is largely an art and not a science, a discipline in which you can always look back and conclude that you could have done it better. That is one of the reasons why portfolio managers hire traders (it enables the portfolio manager to shift the blame to others) and why being a trader is such a treacherous job."