Pershing Square hedge fund manager Bill Ackman presented his latest short idea at the Great Investors Best Ideas conference in Dallas, TX where he spoke with other prominent hedge fund players such as David Einhorn of Greenlight Capital. At the conference, Ackman laid out a short thesis for Realty Income (NYSE: O).
The rationale behind his play is as such: He thinks Realty Income (O) will suffer because they have tenants with poor credit quality, many with junk ratings. Additionally, he cites the fact that many of their tenants are in the dreaded consumer discretionary segment. This sector has been notably hit due to the recession and many stores have closed down over the past 12+ months. He also mentioned that Realty Income also trades at a 7.5% cap rate or so, whereas the private market value is a 10-11% cap rate, a 40% premium.
Ackman's presentation also touched on the $26 share price level, as the stock can never seem to go all that much higher recently given the fact that they keep issuing shares around that level. They are essentially 'serial equity raisers' and their stock vesting program is a bit odd in that the older you are, the quicker your stock vests. We've certainly seen a massive wave of REIT equity dilutions over the past year, and Realty Income seems to be no different. If anything, they're even more aggressive in this regard.
Ackman also noted that the REIT is very levered to occupancy as they essentially doubled their asset base at the peak of the market during the years of 2005, 2006, and 2007. So, they certainly have their share of fundamental problems, as many other REITs in the space do. In the end, Ackman basically said that this company is appealing to your everyday retail investor due to the monthly dividend stream that they tout. He thinks this dividend will have to be cut and this would play out similarly to what we saw earlier in the year with many other major REIT players cutting dividends or paying dividends in the form of stock. And, he feels that once the dividend starts fading, so will all the retail investors. This is all the more interesting to note given that Realty Income just raised their monthly dividend to $0.1426875 per share, up from $0.142375 per share (hey Realty Income, can you guys squeeze anymore decimal places into that amount? Geez). They've now boosted their quarterly dividend each year for the past 15 years as the name currently yields 6.2%.
Pershing Square was already short in the REIT space to some degree in an effort to hedge their long position in General Growth Properties (GGWPQ). Their largest short position is a valuation hedge on this investment and they had also previously mentioned in their letter to investors that they were short a REIT that has weak assets, trades at a higher valuation, and has poor business prospects. So the question now becomes, was Realty Income the company he was talking about in his letter? It definitely appears as though it was. Once word of his presentation got out, shares were down over 7% at one point on Wednesday. We found this interesting given that Ackman typically doesn't short equities on the short side of his portfolio, preferring instead to use derivatives as a means to maximize the reward of their play, as we noted in our profile & biography on Ackman.
In the WSJ the other day, Analyst Andrew DiZio from firm Janney Montgomery Scott cited both the long and short cases for Realty Income, noting that shorts are centering in on a potential bankruptcy by some of their tenants. He says, "shorts believe large-scale vacancy from bankruptcies will reduce cash flow, necessitating a dividend cut and resulting in the exodus of [Realty Income's] large retail shareholder base." On the long side, he notes that "In the event of a Chapter 11 filing, a tenant will likely affirm the leases of profitable stores, closing those that are cash flow negative. Realty Income's due diligence process results in the REIT purchasing only those units that are cash flow positive, increasing the likelihood of lease affirmation in the event of a bankruptcy." He currently has a 'neutral' rating on the company, but has interestingly enough said that dips provide an opportunity.
Ackman has been pretty actively involved in real estate plays with his portfolio, most notably with his position in General Growth Properties debt and equity (GGWPQ). So far that position has done extremely well for him as he's up more than 12-fold on the equity since their buy at $0.34 per share and the unsecured debt they own has tripled in value over the same timeframe as noted in their latest investor letter. Additionally, he also has a large stake in Target (TGT), whom he proposed a REIT spin-off for earlier on that never panned out. Not to mention, his experience stems back to his former hedge fund Gotham Partners who closed two of their funds back in 2003 after a merger was blocked between one of his top holdings and a real estate player. Ackman certainly has ties to the sector though, as his father Lawrence D. Ackman is chairman of the Ackman-Ziff real estate advisory firm.
Overall, an interesting set of thoughts from Ackman and we'll be sure to cover more developments regarding his thoughts as we obtain them. Don't forget that you can hear more investment ideas from both Ackman and David Einhorn at the upcoming Value Investing Congress on October 19th and 20th and we highly recommend attending. We also wanted to mention that at the same Dallas conference, Einhorn mentioned that he was buying interest-rate options that he will make money on if yields head higher. This is likely a very similar to Julian Robertson's curve caps play, as we now see yet another prominent hedge fund player enter this trade. These plays are definitely inflationary in nature and Einhorn has set his sights on this outcome, as he also holds a lot of physical gold. We'll also watch developments in this regard and will post up further information as we obtain it.
You can view our coverage of Bill Ackman's Pershing Square portfolio here and David Einhorn's Greenlight Capital portfolio here. Lastly, make sure you check out our profile/biography on Ackman & Pershing Square.
Taken from Google Finance, "Realty Income Corporation, The Monthly Dividend Company, is organized to operate as an equity real estate investment trust (REIT). The primary business objective of the REIT is to generate dependable monthly cash distributions from a consistent and predictable level of funds from operations (FFO) per share. The Company’s monthly distributions are supported by the cash flow from the portfolio of retail properties leased to regional and national retail chains."
Friday, October 9, 2009
Given the breakout we've seen in the gold markets, the guys over at Market Club just put out a quick video on gold using the exchange traded fund: SPDR Gold Trust (GLD). By measuring the consolidation period right before gold's breakout, they've identified some price targets for both physical gold and the ETF that tracks it. Since retail investors typically can't/don't trade spot gold, they turn to GLD as their investment vehicle of choice. Check out their upside price targets here.
Here's a recent interview Ilene from Phil's Stock World recently did with the Mad Hedge Fund Trader. Enjoy:
Mad Hedge Fund Trader began his career in finance by moving to Japan and working at Dai Nana Securities as a research analyst in 1974. In 1976 he was named the Tokyo correspondent for The Economist magazine and the Financial Times, which then shared an office. He traveled the world interviewing famous people, such as Ronald Reagan and Margaret Thatcher. In 1982, he was named the US editor of Euromoney magazine, and in 1983 he built a new division in international equities for Morgan Stanley. After moving to London in 1985, Mad Hedge supervised sales and trading in Japanese equity derivatives. In 1989, he became a director of the Swiss Bank Corp, responsible for Japanese equity derivatives. A year later, he set up an international hedge fund which he sold in 1999.
I haven’t even covered all of Mad Hedge’s adventures, such as his latent movie star career (as an extra in the 1979 epic war film, Apocalypse Now), and who knows what else. But now, missing the adrenaline-surging excitement of active trading, Mad Hedge has returned to the hedge fund business, set up an educational website, and is busy keeping up with the demands of newsletter writing.. So let’s begin our interview with Mad Hedge by exploring his current thoughts on the markets.
Ilene: Hi Mad Hedge. You’ve had a fascinating career having little to do with your major in biochemistry. A brief review of your newsletter shows that your recommendations early in 2009 have appreciated by an average of around 400%. You’ve been writing your daily market thoughts and investment strategies at your website - www.madhedgefundtrader.com - which it’s terrific, by the way. What are your goals with this site?
Mad Hedge: This whole thing started out as a letter to investors in my hedge fund, to tell them my thinking behind my positions. Then I thought, why not post this on the web and see what happens? Six months later it is now going out to 50,000 readers a day, mostly to portfolio managers, financial advisors, and traders. The growth has been explosive.
Ilene: Who are your readers?
I seemed to have stumbled on a market that I describe as “semi-professionals.” If you are a big hedge fund, with a staff of 600 and a huge in-house research department, I’m not going to tell you anything you don’t already know. But there appear to be a few million people out there who trade their own accounts, or invest their own IRA’s. They have never worked on Wall Street, but have taught themselves a lot about markets and investing. My letter gives them the 30,000 foot view on global stock, bond, currency, commodity, and real estate markets which they can’t find at their online broker. About half of them are from abroad. When I get up in the morning now, there are five e-mails waiting for me from China and India asking what to do about natural gas. I also try to make the letter funny and entertaining. Not all financial publications have to be dreary reading. It’s not always about the next stock to buy.
Ilene: In a recent letter you wrote that one of your favorite ETF’s is the Proshares Ultra Short Treasury Trust (TBT). Why is that?
Mad Hedge: TBT is a 200% leveraged bet that long Treasury bonds will go down. While the Fed keeps short rates low, it doesn’t directly control long rates. As the supply of government bonds increases exponentially, their eventual collapse is inevitable. All Ponzi schemes must come to an end, and the US government is no exception. We currently have the greatest liquidity driven market of all time, and the ten year is eking out a mere 3.30% yield, pricing in near zero inflationary expectations. The average yield on this paper for the last ten years is 6.20%. If the yield goes back to 5%, that will take the TBT from $45 to $70. The TBT could perform even better if Treasuries lose their triple “A” rating, which I think is a real possibility.
Historically, bonds are not a good buy in a low interest rate, deflationary environment. If long rates move from 3% back to the 12% we saw in the early eighties, bond holders will get slaughtered, and the TBT could exceed $200. Even if inflation stays low, the sheer weight of supply and credit concerns will crater government bond prices.
Ilene: What’s the worst case scenario for the bond market?
Mad Hedge: Debt service is currently 11% of the budget. If interest rates rise sharply, that could double to 22%. Then you get a downward spiral like you saw in Latin America in the eighties, when higher debt service creates more borrowing, and more borrowing creates a higher debt service, until the whole thing blows up. At some point China, Japan, the Middle Eastern countries may stop buying our debt. There are only so many “greater fools” out there.
The only way out of this is for the economy to return to a long term 3%-4% growth rate. That’s obviously what Obama is hoping for with his programs. He’s taking big risks, but he doesn’t have much choice. He really did inherit a bad hand. If he did nothing, we’d be in a depression by now, with 25% unemployment. He understands what he’s doing and understands the risks. He has great economic advisors.
Obama couldn’t have allowed the banking system to collapse. We need banks as the economy’s lynchpin. A year ago we could have lost the entire financial system over a weekend. Ships were being turned around at sea and going back home because their letters of credit were failing. The freeze up in credit could have gone on for years.
The stock market is up 50% since Obama took office, so it likes the uneasy stability that we have now. Credit markets have recovered tremendously, and IPOs are coming to the market again. Junk bond funds are up, confidence is returning. There’s greater willingness to lend, though only at high interest rates. But it’s a big improvement over last year.
Ilene: What do you expect for mortgage rates in the next few months? Years?
Mad Hedge: You shouldn’t touch real estate, as I think it will be dead money for another decade. Rent, don’t buy. If you have to buy, then get a 30 year fixed rate mortgage now at 5%, because rates are going up a lot in the future. When I bought my first home in New York in the early eighties, I got nailed with a 17% interest rate on my mortgage. We may revisit those levels.
Houses will continue to move lower, maybe another 10% or so. We have another wave of foreclosures hitting the system soon, triggered by the option arm readjustments. I see support for prices when the cost of owning and the cost of renting are more in line. Home ownership may have to become cheaper than renting, because of perceived risk to the principle, for the real estate market sell-off to finish. However, expecting houses to drop a lot from here is like shorting Citibank at $3. We’ve basically had the big move already. Due to poor demographic factors, the demand for houses is going to take a long time to come back. While 80 million baby boomers are trying to sell their houses to 65 million gen Xer’s, don’t expect a recovery in prices, especially when the gen Xer’s are still living in your basement.
Ilene: You mentioned you missed the rally in financials, but still have concerns about the financial sector.
Mad Hedge: With financials, I knew they would rebound, but didn’t imagine the extensive move we’ve seen. It was the greatest dead cat bounce and short covering rally of all time. But the financial sector will have troubles for years. If I had to buy U.S. stocks, I’d buy big tech stocks like Microsoft (MSFT), Oracle (ORCL), Intel, (INTC) and Cisco (CSCO), because for the most part they have tons of cash and little debt. Tech stocks didn’t have the problems that were plaguing the other sectors. For example, they have no troubled assets, and no regulatory clamp down on their business. The credit crisis didn’t affect them directly because they finance their operations through cash flow and tend not to borrow. Of course, they’re hurt indirectly when the customers have credit problems.
Credit markets are now seeing a huge differentiation in terms. Lenders are much more discriminating about who they lend to. American consumers are very constrained, but foreign consumers are not as constrained. They are not returning to frugality as we are because they didn’t share our excesses in the first place. You don’t see many black Cadillac Escalades with chrome wheels in China. If I had to buy stocks, I would buy equity in foreign companies where the growth will be in the coming years. In March, you could have bought anything and had a great trade, as the rising tide lifted all boats. But stocks in emerging markets outperformed US stocks by over a two to one margin.
Ilene: Would you be buying stocks now?
Mad Hedge: No, I sold most of my positions in June. The risk was low in March, but not so low in June, and it’s even greater now. The PE multiple on the S&P 500 has just jumped from 10 to 20 in six months. Historically, a 20 multiple is a terrible time to enter the market. Markets are discounting a “V”-shaped recovery, which we are not going to get. I think we’ll get more of a “square root” shaped recovery, a “V” followed by sideways to a gradually upward sloping grind. We’ve already had the “V”. Markets are overpriced. I don’t see how we can have huge economic growth with capital-constrained banks, catatonic consumers, and commercial real estate troubles up the wazoo. One of the only positives is the weak dollar, which makes everything we sell to the rest of the world cheaper. This is good for our multi-national companies, good for our exporters. So far, the dollar is on a grinding, controlled move down, which is good. But if the dollar’s fall accelerates, it would not be good. A real dollar panic would lead to the widespread dumping of dollar assets, and commodity prices would explode. Then we’ll get to $2,000 for gold and $40 for silver very quickly.
Ilene: You spent several years wildcatting for natural gas in Texas and Colorado, which has given you a unique insight into the energy space. What are your current thoughts on natural gas and oil?
Mad Hedge: Stay away from natural gas. The volatility will kill you. If you are a masochist, then buy it only when it’s cheap, on big dips, in the $3/MBTU range. In the last three years, thanks to the new “fracting” technology used in oil shales, we have discovered a 100 year supply of natural gas sitting under the US, and the producers have not been able to cut back fast enough. So now we have a supply glut, and we are almost out of storage. This is what took us down from $13 to $2.40 in 18 months. The lack of hurricanes has not helped demand either. Producers have been cutting back like crazy, trying to balance supply and demand, with a breakeven point of $2. They need a cold winter to help bring things back into balance. If the industry gets organized, then gas can become the 20 year bridge we need, until energy alternatives kick in. That makes me a big supporter of the “Pickens Plan.”
Oil is much more interesting. It overshot to downside in January to $32. Crude is now at $70 climbing out of the recession. Imagine how high it will get when all economies are functioning again. The financial crisis hurt the ability of big oil companies to get financing for large development projects in oil. These projects can take five to ten years to bring online. That means we will get higher oil prices sooner. We may get a pull back to the $50s, but the $30’s would be a stretch. The $32 low was an artificial one caused by a complete absence of liquidity in all markets. I don’t think we’ll see those lows again.
Ilene: Where do you see the price of oil going in the distant future?
Mad Hedge: I think it may dip into the 50s, then up, perhaps skyrocketing to $300 before dropping back down to $3 after alternatives take over and demand vanishes. But that’s at best 20 years out. If we can wean ourselves off oil in 20 years, it would be a huge accomplishment.
Ilene: I noticed you speak a little about politics in your essays; do you have a leaning one way or another?
Mad Hedge: I’m politically neutral. I’m getting bashed by the right these days because I’ve said that the Republicans have no ability to affect the legislative process now. But we need to adjust our portfolios to reflect the current political realities. No matter how much you love Obama, you can’t dispute the fact that the massive issuance of government bonds he is proposing is terrible for the bond market and the dollar, but great for precious metals and commodities. Obama won by a big margin, so the Democrats will be around for a while. Of course, if my “square root” scenario doesn’t pan out, and we get a serious “W” recession instead, all bets are off. People will only give him the benefit of the doubt for so long.
Ilene: Where do you think the stock market’s going to go over the next few years?
Mad Hedge: I think there’s a 1 in 3 chance for new lows. That’s the “W” scenario. But with Lehman, Bear Stearns, Merrill Lynch, and Washington Mutual gone, we have run out of companies that can suddenly go under and trigger a new financial crisis. The big survivors are partially government owned, and of course zero interest rates help a lot. More banks are going under, but they will be smaller, regional banks with excessive exposure to commercial real estate.
Ilene: How does this affect your actions in the markets?
Mad Hedge: The best and least risky trades were in the early part of the year. Now, there’s a lot more risk in all markets. I’m neutral right now. If stocks dropped from here, I might be a buyer, but only in energy, commodities, and technology, and of course in emerging markets like Brazil, India, China, Korea, and Vietnam. Gold, silver and commodities have all had huge runs. My inner wimp has me in cash, waiting for better opportunities. I haven’t been playing the short side, because it’s a nightmare trying to short a liquidity driven market with interest rates at zero. There is no return on low risk investments now. Capital always moves to risky assets when interest rates are zero. Just look at Japan in the 1980s. There PE multiples soared from 10 to 100 purely driven by liquidity. For the last three years of that run the fundamental analysts were left twisting slowly in the wind. Artificially low interest rates boost asset prices to artificially high prices. It always ends in tears, but can play out for a while. You want to have an asymmetric risk reward metric in your favor, as we did in March of this year. Now, we don’t have that.
The next downward move in the markets will more likely be due to disappointing economic data, earning misses, etc., not due to a total collapse of the system. We may sell off, but I don’t think it will be to new lows. It’s hard to see new lows with interest rates at zero. Instead, I see the “square root” recovery scenario mentioned earlier. The market may start drifting lower as people start seeing this possibility. That might set up a trading range for the S&P 500 which could last for years, something like 800-1,200. During the nineties, Japan peaked at ¥39,000, then traded in a ¥20,000-¥25,000 range for five years, before the final collapse to ¥7,000. That’s one scenario for the US.
Ilene: You’ve had an amazing career. Let me ask you about some of the people you’ve interviewed. What was Ronald Reagan like?
Mad Hedge: Although I never agreed with him politically, you couldn’t help but like the guy. He always had a joke ready. He was a lot smarter than he let on.
Ilene: And Margaret Thatcher, the prime minister of Britain?
Mad Hedge: Her nickname as “The Iron Lady” was well deserved. She could stare holes right through you. She treated journalists like a disapproving school teacher, which of course, she was.
Ilene: How about the terrorist leader, Yassir Arafat, of the PLO?
Mad Hedge: His body guards almost shot me when I reached to turn over a cassette in my tape recorder. I always thought he was a terrible leader. That is why the Palestinians never got anywhere, and why the Israelis left him alone.
Ilene: Meeting China’s Deng Xiaoping must have been amazing.
Mad Hedge: I am 6’4” and he was only 4’9”, so of course there were plenty of opportunities for humor. I could never envision this guy going on the Long March. He had a tremendous wit. Someone asked him why China kept its borders closed, and wasn’t this an imposition on human rights. He said if he opened the borders, the surrounding countries would get flooded with people. He asked “How many Chinese do you want? 20 million? 30 million?” I also met Zhou Enlai during the Cultural Revolution. He was a brilliant man, the last man on a bell shaped curve of 500 million.
Ilene: I read somewhere that you interviewed four US Secretaries of the Treasury.
Yes, Miller Reagan, Schultz, and Brady. And I visited the French chateau of a fifth, C. Douglas Dillon. I keep a collection of dollar bills they signed.
My goal in life was always to get in the way of history, and let it run me over. It’s been an amazing life. I wouldn’t trade it for anything.
Ilene: What about Apocalypse Now?
Mad Hedge: I happened to be in town to interview Ferdinand Marcos, the president of the Philippines. If you look hard, I’m in the USO scene. Most of the other “GI’s” in that scene were European and Australian hippies rounded up from the Youth Hostels of Manila by Francis Ford Coppola’s agents. Good luck, though. I was a lot younger and thinner then.
Ilene: Thanks a lot. It’s been great talking to you.
The above was an interview with the Mad Hedge Fund Trader, courtesy of Ilene with Phil's Stock World.
An excellent read on the topic of hedge fund cloning [World Beta]
The alignment of asset reflation and a collapsed economy [Gregor.us]
Nine companies as potential activist investor targets (& more in the .pdf at the bottom of that page) [Manual of Ideas]
Do hedge fund managers have stock picking skills? White paper from the University of Chicago Booth School of Business [SSRN]
Gaming analogies to explain elements of investing [Texas Holdem Investing]
Bonds boom as investors flock back [NY Times]
Wall Street's near death experience [Vanity Fair]
Thursday, October 8, 2009
If you haven't already heard, Jim Simons, founder and CEO of legendary quant hedge fund Renaissance Technologies, will be stepping down at the end of the year to retire. Dealbreaker reported earlier that current co-presidents Robert Mercer and Peter Brown will assume the role of co-CEO's at the start of the new year. They also report that Simons will stay on as a non-executive chairman and will "keep sizable investments in RIEF and RIFF."
His actions will undoubtedly unleash a wave of speculation as to "why". But we ask, can't a guy just retire because he's ready to? Nonetheless, questions will be raised as to whether he has lost his passion for 'the game' or whether the poor performance of RIEF this past year has frustrated him (head here for explanation on their performance woes - the fund was down almost 9.5% through September). Back in August, we revealed that RenTec landed on a list of best & worst performers for 2009. And unfortunately for them, they weren't on the 'best' list. It will certainly be interesting to see if Simons' departure leads to redemption requests from investors. While the fund is obviously not just one man, the exit of the man in charge could potentially leave some investors wary.
Jim Simons is quite the accomplished fellow as his returns from his hedge fund's Medallion fund have been astonishing over the years. They have landed him on the list of the top 25 highest paid hedge fund managers of 2008. Additionally, he has graced Forbes' billionaire list. Simons is a secretive man and as such resources on him are a bit scarce. However, we did manage to stumble upon a lengthier interview he has done in the past.
We'll definitely keep tabs on any potential aftershock experienced at RenTec following his departure.
*Update: Here's the letter, courtesy of Dealbook.
The Letter From Mr. Simons:
Oct. 8, 2009
Dear Renaissance Investor,
As many of you know, for the past several years I have gradually stepped back from day-to-day operations of Renaissance. Six years ago, Bob Mercer and Peter Brown became co-executive vice presidents, with all research and production reporting to them, and two years ago, they became co-presidents, assuming a broader set of responsibilities. The time has now come for me to take one further step back.
As of Jan. 1, 2010, Bob and Peter will become co-C.E.O.’s of Renaissance, with all areas of the firm reporting to them. I will remain the company’s principal shareholder and chair of the board. As such I will regularly attend monthly meetings of the executive committee and meetings of the board whenever scheduled, participating in all major corporate decisions. Consistent with best practices, Paul Broder, our chief risk officer, and Mark Silber, our chief financial officer, will report to the board on a dotted-line basis.
I am confident that this transition is best for the firm. I have led the organization and its predecessor for 31 years, and it is definitely time to pass the torch. We are very fortunate to have such able people as Bob and Peter to take the reins. Behind them and Paul and Mark is an outstanding cadre of senior management in all areas of the company, and behind them is a wonderful group of knowledgeable and hard-working individuals. Renaissance is a marvelous firm, dedicated to its investors and its employees. I have every expectation that under the new leadership this tradition will brilliantly carry on.
Wednesday, October 7, 2009
Chase Coleman's hedge fund Tiger Global has recently amended their 13D filing on Longtop Financial Technologies (LFT) and they now show a 6.8% ownership stake. They now are left holding 3,491,928 shares as the filing was amended due to activity on September 22nd, 2009. This is vastly lower than their previous total of 6,313,181 shares when we previously detailed that Tiger was selling shares of LFT. Their sales can date back to July and beyond as they have amazingly reduced their position from a greater than 14% stake now down to only 6.8%. If past trend is any indicator for the future, we'll continue to see hedge fund Tiger Global dump shares of LFT. Here is a graphic extracted from the SEC filing where you can see the dates and prices of their sales:
Coleman attended Williams College and his focus in the markets has always been on smaller cap names and on technology, though he has since expanded his horizons with time. An interesting fact about Coleman is that he is a descendant of Peter Stuyvesant, the man who built the wall that gave Wall Street its name. He was clearly born for Wall Street. In 2007, Tiger Global returned 70%, and from 2001-2007, Coleman bolstered an average return of 47%. They have a great historical track record and that's why we track them here on the blog. In fact, Tiger Global is one of the hedge funds that comprises the Tiger Cub Portfolio created with Alphaclone where you can replicate their positions and enjoy 15.5% annualized returns since 2000. For more on Coleman and Tiger Global, check out their background and focus in the middle of the linked post.
Taken from Google Finance, Longtop Financial Technologies "provides a range of software solutions and services to the financial institutions in the People’s Republic of China (PRC), including the development, licensing and support of software solutions, the provision of maintenance, support, and other services, and system integration services related to the procurement and sale of third party hardware and software. The software solutions provided by the Company are classified into four categories: channel, business, management and business solutions."
We're posting up Jeffrey Saut's weekly commentary again on the blog and this week's insight is entitled, "Octobered?!" Saut is the chief investment strategist at Raymond James and you can also view his commentary from last week where he compared portfolio managers to zebras just waiting to be eaten by lions. This time around, Saut highlights that while September is historically the worst month in the markets, October isn't all that great either as "more than 40% of the Dow's biggest daily declines have come in October."
Saut also highlights a prudent point that many funds were positioned with a bearish posture going into the historically weak months and essentially got killed by the continuing rally. As such, these funds scrambled to buy stocks into the end of the quarter so as to not fall behind the pack. After all, Wall Street is a performance game and underperformers die hard. Saut says that Raymond James currently has a "cautious, but not bearish" strategy.
Embedded below is Jeff Saut's latest investment strategy piece:
Alternatively, you can download the .pdf here.
Hat tip to My Investing Notebook for stumbling upon this video. Who will be Warren Buffett's successor? It is a very interesting question indeed. There have been many postulations and the like, but most likely no one will know until the day itself comes. That certainly won't stop speculation in the mean time though. Fact: the most discussed item on the agenda at Berkshire Hathaway board meetings is the succession plan. One particularly hot topic is how Buffett is essentially irreplaceable in his dual role as chief investment officer and chief executive officer. So, it only makes sense that you will most likely see one person handle CEO duties and another individual with investing prowess handle the portfolio in the future.
For whatever reason, the two names that pop up most frequently in the discussion are David Sokol and Byron Trott. Sokol is currently the CEO of one of Berkshire's companies, MidAmerican Energy. Trott, on the other hand, was a longtime banker at Goldman Sachs who has worked with Buffett on numerous deals in the past, including Buffett's recent investment in GS last year. Trott has since started his own venture fund backed by Buffett, making the ties that much more interesting.
Buffett and board member Bill Gates chatted with Bloomberg about Berkshire and the potential succession plan in a 20-minute video interview embedded below. Additionally, they interviewed Sokol and Trott as well on the same topic.
Here's the video:
For more on Buffett, we recently detailed his recommended reading list and don't forget to check our Buffett's top 25 quotes.
Courtesy of Dshort, here's an updated chart comparing the bear markets of 1929, 1973, 2000, and the present. We had previously looked at a chart earlier on in the crisis that compared the market returns during each respective decline and they all looked pretty similar. This time around though, there are some notable differences popping up.
Here's the chart:
Tuesday, October 6, 2009
George Soros' hedge fund Soros Fund Management has recently filed three separate 13G filings with the SEC with regards to positions in Emdeon (EM), Interoil (IOC), and Headwaters (HW). Firstly, we'll start with their brand new stake in Emdeon. Soros Fund Management filed this particular 13G due to activity on September 23rd, 2009 and are now disclosing a 7.09% ownership stake in EM with 6,274,000 shares. Again, this is a brand new position for them as they previously did not show a stake in their 13F filing which detailed their portfolio positions as of June 30th, 2009. They have assembled their EM position over the last 3 months.
Secondly, Soros has filed a 13G on Interoil (IOC) due to activity on September 22nd, 2009. They now show a 6.81% ownership stake with 2,918,350 shares. This is an increase of their previous total of 1,860,000 shares back on June 30th. Over the past 3 months they have boosted their holding by 1,058,350 shares.
Lastly, we also see that Soros Fund Management filed a 13G on Headwaters (HW) due to activity on September 22nd as well. Their stake in HW is now 5.31% of the company with 3,200,000 shares. They have increased this position substantially as they previously only held 750,000 shares back on June 30th. In the last 90 days, Soros has added 2,450,000 shares to his position as he seems to have some conviction with this name as of late. All of this activity comes right after we saw Soros start a new position in Exar (EXAR). Check out our post on Soros' portfolio to see what other positions he holds in his hedge fund as well.
We follow Soros' portfolio movements due to his macro sense and his solid track record. We like to see what sectors he is flocking to and these filings are the perfect example of possible themes his firm might be seeing. Soros Fund Management is a true global macro player as they dabble in pretty much any asset class they desire, so just keep that in mind. Soros' thoughts on the current financial landscape are detailed in his latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. If you want to get a better sense as to how Soros formulates his investment theses, we highly recommend reading his first book, The Alchemy of Finance. This book is a staple in our recommended reading list and you'll quickly know why.
Taken from Google Finance,
Interoil is "an integrated energy company operating in Papua New Guinea. The Company operates in four business segments: Upstream, Midstream, Downstream and Corporate."
Headwaters is "a diversified company providing products, technologies and services in three industries: building products, coal combustion products (CCPs) and energy. In the building products segment, Headwaters designs, manufactures, and sells architectural stone and resin-based exterior siding accessories (such as window shutters) and other products. In the CCP segment, the Company is a player in the management and marketing of CCPs, including fly ash used as a substitute for portland cement. In the energy segment, Headwaters is focused on reducing waste and increasing the value of energy feedstocks, primarily in the areas of low-value coal and oil. In coal, Headwaters owns and operates several coal cleaning facilities that remove rock, dirt, and other impurities from waste or other low-value coal, resulting in higher-value, marketable coal."
Taken from Yahoo Finance, Emdeon "provides revenue and payment cycle management solutions that connect payers, providers, and patients in the United States healthcare system."
Courtesy of Bloomberg, here's a transcript of the latest interview hedge fund legend and Tiger Management founder Julian Robertson did with them. Just a few weeks ago we also covered Robertson's interview with CNBC where he talked about his inflationary bet. His moves have become all the more interesting now that fellow guru Bill Gross of PIMCO has come out with a deflationary bet. So we now have a battle of two gurus pitted against one another in the epic inflation versus deflation debate. Winner? To be determined.
Here is the transcript of the most recent Julian Robertson interview:
"TIGER MANAGEMENT CHAIRMAN JULIAN ROBERTSON ON BLOOMBERG
OCTOBER 2, 2009
SPEAKERS: JULIAN ROBERTSON, CHAIRMAN, TIGER MANAGEMENT
MATT MILLER, BLOOMBERG NEWS ANCHOR
TOM KEENE, BLOOMBERG NEWS ANCHOR
(This is not a legal transcript. Bloomberg LP cannot guarantee its accuracy.)
MATT MILLER, BLOOMBERG NEWS ANCHOR: He is known as one of the most successful fund managers of all time. Julian Robertson started Tiger Management in the early '80s with $8 million and built it to over $22 billion at its peak in 1998. Now though, all eyes are on Tiger Management 2.0., a unique structure he created housing dozens of independently run hedge funds that Julian financed in his offices at 101 Park Avenue. Julian has been described as the greatest identifier, backer, encourager, and developer of talent that the hedge fund business has ever seen. He joins me now onset along with Tom Keene, the host of "BLOOMBERG SURVEILLANCE."
Julian, thanks so much for coming on.
I find that the new structure that you have developed very interesting. And I'm wondering, you don't just find them at the Ivy Leagues, you get a lot of your talent at the University of Virginia and UNC. And you do not just go with the tried and true, you've given, apparently, money to guys as young as 26. What is it that you see in a young manager that proves to you, that shows you that he's going to be talented and make money?
JULIAN ROBERTSON, CHAIRMAN, TIGER MANAGEMENT: Well, we look very hard at being sure that everyone will partner with are thoroughly honest. We want them to be intelligent. And we have found through the tests that we give that very competitive people are very good in this business.
Oftentimes, people who are excellent athletes of some sort make great fund managers.
I think also, there is a very good probability, although we have not measured this in tests, that there is a great change by the best hedge fund managers, a strong feeling that they should change the world. And I think that shows up on the people on Wall Street.
TOM KEENE, BLOOMBERG NEWS ANCHOR: That means Matt's going to be a great hedge fund manager, because he walks in here every day ready to change the world.
But it's an asymmetric view. When you go to, say, UNC, you're beloved UNC, or that evil empire down the street at Duke University, and you're looking for someone, there's asymmetric challenge here. You're looking for someone that can protect capital in challenging times much more than you are that they can make money, right?
ROBERTSON: That's right.
KEENE: When you do that and you recent time, and you haven't been actively investing, but how do you grade the young Turks given the financial crisis we've had, the economic contraction, that upsilon off the end of the equations, the systemic risk that is out there? Have they done a good job?
ROBERTSON: They have done a superb job, particularly through the break. We have not performed as well as I would like once the break is over. But I think that's one of the things you can see in the tests, is the man risk averse. And then, almost by definition, in the bad times, he will outperform the markets.
MILLER: It's interesting that your leadership approach has kind of changed. During the first Tiger Management, until 2000, you basically were the man. You made all of the stock picks, you made all of the rules, everyone did what you said. And now, you preside over a biweekly meeting, you give advice, you listen as well, but they can make, your managers, all their own decisions, they hire and fire on their own. Why the change in management?
ROBERTSON: Well, it's not -- it's even more clear than that actually.
They own their own companies and I am an investor, but it is their company.
I mean I had a man come today, one of our funds, and one of the employees came in and said what is 9x up? And I said, you know, that is not something that I can answer. That is something you have to get from the man who owns your partnership.
MILLER: But you've become a lot more bullish on hedge funds. I mean, you started out with four guys in the beginning of the decade, slowly seeded them. By 2004, you had it 10 hedge funds that you were investing in. And this year, it has exploded. You have added 10 funds, eight in one month. Why are you so contrarian here and investing so heavily in hedge funds?
ROBERTSON: Well, in the past, if you work for Soros and Stan Druckenmiller, you could send up a shingle and it said, worked for 10 years for George Soros thorough, waiting for $2 billion and then I'm closing.
You can't do that now. You need some sponsorship. And we have given that.
We are finding tremendous talent right now and that's why we have been so expansive this year.
MILLER: All right, hang on one second, Julian. We are going to take a quick break. We'll come back and talk more with you about Tiger, more about the kind of investors you choose and the kind of investments you're looking at.
Stay with us, more with Julian Robertson and Tom Keene in two minutes.
MILLER: All right, we are back with Julian Robertson, chairman and CEO of Tiger Management.
Julian, I want to ask you, you know, a year ago, a lot of people, including Jeremy Grantham, we're saying maybe half of hedge funds would shut down. We look back now and the industry contracted by only about 10 percent. What do you think hedge funds have done? Have they evolved?
Have they adapted better ways to succeed, to survive through this crisis?
ROBERTSON: I think hedge funds have always had the huge advantage that they are the best way of paying the best money managers. And so the best money managers have matriculated to hedge funds. And I think that's why they are doing better than the rest of the crowd and I think that's why they'll continue to.
KEENE: Well, Bill Donaldson said this once, I believe when he was at the SEC. I remember, I was at the meeting and he said, look, it's a brain drain on Wall Street. Are hedge funds still a brain drain on Wall Street?
It pulls the elite talent away from the rest of institutional investment?
Essentially, is the institutional Street dumber than it was 20 years ago cause you took all of the talent?
ROBERTSON: Well, I did not take it all, but a lot has left. And I think that has happened to great extent. I know that we would far rather compete with a investment bank or a commercial bank than another hedge fund.
KEENE: Let's talk about that, your days with Kidder years ago. You see this discussion of a utility bank versus non-bank, et cetera. Can we really make a bifurcation between some form of dream from the 1960s, a conservative institutions versus shadow banking? Are you optimistic that the government can get it right?
ROBERTSON: No, I'm not optimistic about the government getting anything right. And I think that they are very much responsible for the situation which we are in and which, to me, the most damning part of it is the dependence on the Chinese and Japanese lenders for our very existence.
And I think it is a tragedy that that is happened to the United States.
And I think that has been done by a group of politicians over long period of time, you know, 30 years. And they've encouraged leverage. They thought it was a good idea for everybody to own a great home.
KEENE: How do you manage leverage within a hedge fund complex? We see so often it gets people into trouble. Is it a day-to-day management?
Is it a contractual management? Or is it just about leadership?
ROBERTSON: I think it is a great deal about leadership. And I think that exposure is so much more important to monitor than leverage. For instance, I think I could make a very good argument that a portfolio that was 150 percent invested, where it was 100 percent long and 50 percent short, is far more conservative than another portfolio which would be 90 percent long and 10 percent invested.
MILLER: Let me ask you about leadership. I mean, you've always stressed, according to Lee Ainslie, the importance of integrity in your personal conduct and how you represent the firm in evaluating management teams -- that's a direct quote from him there. How can you reconcile that with that with the sort of gun-slinging, entrepreneurial, hedge-fund culture that we have today?
ROBERTSON: I think that that gun-slinging approach.
MILLER: The competitiveness that even you have.
ROBERTSON: Well, that's right, but I do not think that necessarily leads to a gun-slinging approach. I think that if you really look at how to do a good record over the years, it's not to make the huge amounts of money. It's to avoid big losses. That's the way to really make money over the years. And I think that's really what hedge funds do. I think that, for instance, our funds far outperform the markets in bad times. And we've had trouble. We haven't kept up since the market changed.
MILLER: What are doing now to protect yourself? I mean I know you're fairly concerned about the economy as it is, especially considering the fact that you're concerned about the Chinese stop buying our debt. What are you doing to protect yourself against the repercussions of that?
ROBERTSON: Well, if they do, all these people who are worried about inflation or not, they can just not worry about it anymore because it's a matter of supply and demand. I mean, who will buy those bonds and what will the bonds have to yield in order to attract people to buy them? And I think they're going to have to -- if those buyers are gone, I think they're going to really have to pump the rates up to get them sold.
MILLER: All right, hang on a second. We're going to take a quick break. I want to come back, though, and ask you what you're actually doing to protect your money in the case that Armageddon actually happens, as you said could possibly happen.
More on where to invest your money when we continue our conversation with Tiger Management's Julian Robertson.
MILLER: All right we are back with Julian Robertson, the legendary founder of Tiger Management, and Tom Keene, Bloomberg editor at large.
Julian, let me ask you, we were talking about what happens if the Chinese and Japanese stop buying U.S. debt; we see interest rates soar, we see inflation soar, it's complete Armageddon. What are you in financially to protect yourself against that?
ROBERTSON: Well we have bought some very long options called curve caps. And essentially, they are puts on long-term bonds and the leverage is probably more than what you can get in a put on this thing.
Now, you buy them as an insurance policy. One, you know what you can lose. If you go short, the bonds, as you know, the risk is unlimited. But if you buy puts, the risk is limited to the price of the puts. But we have bought a lot of those and I think that would insure us in the event of a massive rate increase
KEENE: I want to get in one question here on your beloved New Zealand. We've got a lot of first-order effects we could sort of sort through. What dollar dynamics would be, or interest dynamics would be.
Too often, we in the media, we are in a cocoon here. We don't worry about what the rest of the world's second-order effects will be.
How is New Zealand for that matter or China going to respond to the deficit we have, to the dynamics of slow growth, to the job report that we saw this morning? How do you perceive a nation like New Zealand or a larger player is going to respond to all this?
ROBERTSON: Well, let me say first, New Zealand they're even more profligate than we are. They really spend more than they earn.
KEENE: Well, when you move down there, you moved to the GDP, didn't you?
I mean, you tilted the needle on the GDP, right?
ROBERTSON: We just brought love, that was all.
But it's amazing to have picked the two most profligate countries in the world to live in.
KEENE: How's a guy from North Carolina do that? I don't know how that happens.
ROBERTSON: I don't know how it happened either.
MILLER: How do you take your message down there? How do you present your message here in the U.S.? I mean, you are concerned about the trade deficits that Tom was talking about. You are concerned about the economic implications of what we're going through here. How do we work off this debt? What should we do? What should the administration do?
ROBERTSON: Well I think we really have to almost be Margaret Thatcheresque about it. When she took over Great Britain, she told the press they would have a long time before things got good again. And our government is trying to do quick fixes, stimulus packages, this, that and the other. And basically, what we're going to have to do, we've spent too much as a nation. We've spent too much as a people. And like anybody else who gets over indebted, we've got to cut back until we get back in shape again.
MILLER: All right, Julian. Thanks so much for spending time with us.
KEENE: He's got to get that voice better. He's sounds way too much like me.
MILLER: I'm going to give him some of my special herbal tea here.
Julian, thanks. Julian Robertson.
MILLER: Tom Keene, appreciate you joining us as well.
***END OF TRANSCRIPT***
For more from Robertson, make sure to check out our in-depth post on his curve caps play where he is essentially buying puts on long-term treasuries. Don't forget you can also hear Julian and many other prominent hedge fund managers present actionable investment ideas at the Value Investing Congress coming up here in two weeks time. If you're unfamiliar with Robertson, check out the profile/biography we did on him here.
Here's a video interview from WealthTrack with Whitney Tilson (hedge fund manager of T2 Partners), David Winters (Wintergreen Fund), and Michael Hartnett (Chief Global Equity Strategist at Merrill Lynch). Tilson has said that he has been trimming a lot of his longs and has been adding to his short portfolio, citing valuation and concerns of a "long, grinding recession." Back in the early part of the year, he says his hedge fund was on offense and now they are playing defense. He continues to believe that the problems in the housing sector are not quite solved just yet and this will present further problems going forward. Hartnett, on the other hand, says that we could see enough data from retail sales and consumer activity to complete the cyclical bull we're in. Lastly, Winters is focused outside of the United States as he think future trends play toward international themes. Here's the video embedded below:
We've covered Tilson on the blog before and you can read his August letter here. Additionally, Tilson has provided thoughts on Berkshire Hathaway (BRK.A) in the past too. To hear more insight from Tilson and tons of other prominent hedge fund managers, check out the Value Investing Congress which will be taking place October 19 & 20 in New York City.
Today we've got a lot of interviews lined up and we'll kick things off with everyone's favorite short seller and hedge fund manager Jim Chanos. The Kynikos Associates fund manager recently sat down with New Deal 2.0 for a lengthy interview to talk about a wide variety of topics. This comes fresh off of Chanos' interview with CNBC which we also detailed.
Embedded below is the 12-page transcript of the interview:
Additionally, you can also download the .pdf here.
For more insight from Chanos, check out his other recent interview as well. Lastly, Chanos had previously presented some of his investment ideas at the Ira Sohn Investment Conference. Chanos graduated from Yale and is well known for his short selling prowess where he puts a large focus on identifying fundamental flaws in valuation due to underestimated or unearthed problems within a given company. After working for various firms, he went onto found Kynikos which is Greek for "cynic" and has had success with his strategy, most notably for his prowess in uncovering the issues at Enron.
Monday, October 5, 2009
Hat tip to the PragCap for posting this gem up. Kyle Bass, Managing Partner at Dallas based hedge fund Hayman Advisors LP has sent out his latest investor letter and as always, it is another long (23 pages) and detailed piece that provides macro insight. This is Bass' first letter since almost 6 months ago when he wrote his March letter equally full of juicy thought. When last we checked in on Hayman's performance, they were up over 340% since inception. Regretfully, we don't have anymore up-to-date information but we'll certainly pass it along if we receive it. Bass & Hayman are also well known for predicting the subprime crisis along with fellow hedge fund Paulson & Co. As we've followed Bass, we've noted his decisively bearish stance on the economy as a whole as he has even gone as far to predict sovereign defaults, something he again touches on in this letter below.
This time around, Bass summarizes his stance by cementing the following viewpoints. He thinks inflation will take its toll, or as he calls it, "currency debasement." He notes that inflation typically takes 1.5 years to come to roost but he feels it will arrive quicker than normal due to the severity of the stimulus that has been necessary to prop up the economies of the world. Obviously, he is also not bullish on the macro environment in general. In fact, he is downright bearish, particularly on the US consumer. And, as the US consumer goes, often goes the US economy.
Based on his stance, he has positioned Hayman's portfolio as follows. He has invested in credit but takes a cautious stance, investing in mortgage backed securities that are very high in the capital structure. About 50% of their assets under management are now in mortgage positions, which shows you his conviction here. He likes mortgages that have short average lives and have nice risk adjusted yields. He writes, "Our underwriting standards take into consideration a range of macro variables including further home price depreciation, maintained stress on consumer balance sheets and a prolonged downturn in the labor market." Hayman, named after the island where Bass honeymooned, also now has corporate credit positions in the form of bank loans and high-yield bonds to the tune of 25% of assets now. Interestingly enough, we also see that Hayman has allocated part of their portfolio to precious metals and they are also evaluating other natural resource plays. Lastly, Bass also believes that rates will start to head higher over the next 1.5-2 years and that Japan has the "best convexity for rates."
Embedded below is the October letter from Kyle Bass & hedge fund Hayman Advisors (or download the .pdf here):
Kyle Bass attended Texas Christian University (TCU) in Fort Worth, TX and now runs his firm Hayman Advisors. He launched his hedge fund in 2006 with $33 million in initial capital. In August of 2006, he began shorting around $4 billion of subprime securities through various derivatives. He eventually turned $100 million into over $700 million based on his prediction of the crisis. He previously has worked at Bear Stearns' event-driven and special situations unit and he has also in the past headed an office of Legg Mason. His first major prediction was centered around leverage. We'll have to see if his second leverage-based prediction plays out.
If you still aren't negative on the economy and/or markets yet after reading the above letter, then sampling a bit of Hayman's March letter might very well make you reconsider your opinion, at the very least. It's definitely thought provoking stuff and is highly recommended as well.
While you may not be familiar with Paolo Pellegrini, you should be. The 52-year old used to work for John Paulson's hedge fund Paulson & Co and played an integral part in the research and investment ideas that led to Paulson's astonishing 570%+ return in 2007. As we covered on the blog before, Pellegrini has since left Paulson and started his own fund PSQR Management LLC with $100 million of his own money and will open to outsiders in 2010. PSQR's name has meaning for two reasons. Firstly, it is Paolo's initials squared (Paolo Pellegrini: P Squared). Secondly, it is an anagram for SPQR, or Senatus Populusque Romanus (Senate and the People of Rome). Pellegrini is a Rome native and this highlights the initials of the ancient Roman Republic as a tribute to his background.
In 2006 Pellegrini, a Harvard MBA, decided that the housing bubble was about to burst after he sifted through tons of housing data. In Spring of 2008, Pellegrini saw the severity of the situation and knew that massive government assistance would be needed which would send both stocks and the U.S. dollar down. Needless to say, he's been spot on both with his economic calls and his execution of a trading strategy that would profit from the crisis.
Strategy, Portfolio & Performance
Upon starting his fund, he shorted exchange traded funds (ETFs) that were loaded with financial stocks (most likely ticker XLF or some similar ETF), as well as S&P500 index ETFs (SPY, etc). In late 2008 he shifted his bets to the Treasuries market by shorting long-term treasuries. This is a trade we saw many hedge funds put on in the past and we recently detailed Julian Robertson's curve cap play that bets on rising long-term Treasury yields. And, Pellegrini expects the fall in Treasury prices (and rise in yield) to continue. He is taking a global macro approach by trading anything and everything he pleases, as long as it will help him make money off his theses. He has an uncanny ability to take an economic situation and turn it not only into a trade, but a profitable one.
Pellegrini is also bullish on commodities, especially those that are scarce or of daily necessity. In particular, he likes oil and has been buying oil futures. He likes commodities since he sees global competition for them elevating. Given this commodity thesis, he also likes the Australian Dollar as the country benefits from their natural resources. Pellegrini also has owned the Norwegian kroner which is interesting, as we saw Julian Robertson also recommended this currency. In a way, Pellegrini's theses here are also similar to that of legendary Quantum fund manager Jim Rogers. Rogers likes commodities and various currencies of commodity producing countries as we noted when we detailed Rogers' portfolio & positions.
Performance wise, Pellegrini has kept up the great numbers he helped generated at Paulson & Co. From April 2008 until December 2008, PSQR was up over 52%. Year-to-date through July for 2009, PSQR was up 80% largely on the heels of success in the Treasury market.
Thoughts on the Market
Given the sour economic situation he uncovered while at Paulson, Pellegrini still has a gloomy outlook for the economy. He sees the market essentially trading sideways and could even generate negative returns once you adjust it for inflation as he calls for "anemic real returns." The point is, he doesn't really see things going up by much as he cites budget deficits, household debt, and increased regulation amongst other things. As mentioned earlier, Pellegrini has been shorting long-term Treasuries and going long crude oil in a wager that was formulated on the basis of dollar devaluation. He cites massive stimulus programs, huge corresponding deficits, and the fact that the US is now a debtor nation as reasons for the currency's value dropping. While Pellegrini takes a long-term view in formulating his theses and putting on his trades, he does note that due to policy shifts and the market volatility, that his positions can (and will) change with the ebbs and flows of all the intertwined parts.
Pellegrini recently sat down for an interview on Bloomberg TV and we've embedded the video below. He discusses his strategies and his view on the economic trends we're seeing these days:
Obviously, Pellegrini paints a rosy picture... /sarcasm. He thinks fiscal stimulus and quantitative easing are not the solution and has been critical of the move the Federal Reserve has made. Pellegrini has been vocal in the past as he looks to solve the mortgage and housing crisis since it is at the root of much of America's problems. You can read some of Pellegrini's mortgage solutions here. He also sees a real decline in economic activity and some asset inflation as well.
John Paulson has called his former colleague "extremely smart and capable" as they previously met at Bear Stearns before moving on to Paulson & Co. Paulson has made a wager of his own when we saw that Paulson was buying financials. While this could have just been a trade, it is still interesting to see the difference of opinion. As you undoubtedly already know, hedge fund Paulson & Co also has a large gold position as they look to hedge their fund share class denominated in gold. But interestingly enough, they also have stakes in numerous gold miners. We'll continue to track the differences in thought and strategy between Paulson and PSQR as the economy meanders along.
Pellegrini parted ways with his former colleague because he always desired to run his own show and to run a true macro fund. Currently, PSQR is a smaller firm that recently hired Alex Patelis away from his position as Chief International Economist at Merrill Lynch in London. While he may run a smaller firm for now, you better believe that he has the credentials and the track record to succeed. The one question mark surrounding him is his ability to operate in futures markets, as he is relatively inexperienced there. We're sure he'd be quick to point to his winning Treasuries trades to refute that point though. But in the end, the majority of his experience lies in mortgage related markets and it will be interesting to see if he can continue to translate his economic theses into profitable macro trades. For more on Pellegrini, check out this in-depth profile of him from Bloomberg.
Hedge Fund Tudor BVI Global Eyes Sustainable Development & Africa
As always, we're continuing our tracking series where we are looking at positions prominent hedge funds hold in UK markets. If you've missed some of our previous posts, make sure you check out the positions of Harbinger Capital Partners, Stephen Mandel's Lone Pine Capital, and Citadel's positions too. If you're unfamiliar with our new series tracking UK positions, check out our preface here. Today, we're covering Paul Tudor Jones' hedge fund Tudor Investment Corp. The positions listed below are taken from their main BVI Global Fund. Keep in mind that tracking Tudor is a bit trickier since they are a global macro fund and can trade all asset classes under the sun. Not to mention, they typically move in and out of positions much faster than the majority of funds we track on the blog in our hedge fund portfolio tracking series. We've already covered one global macro fund's UK positions as we previously examined Louis Bacon's Moore Capital Management. We find it prudent to track global macro funds to see if we can get a glimpse as to what sectors they are flocking to or what macro themes they may be playing. In reviewing Tudor's UK positions, two themes standout: sustainable development and Africa.
|symbol||date||shares||% issued equity|
|Africa Opportunity Fund||AOF||10/06/2009||13,750,229||32.3|
Tudor bought into the African Opportunity Fund (AOF) through a tender offer held in May of this year. AOF is an interesting fund as its objective is to earn capital growth and income through value, arbitrage, and special situation investments in the continent of Africa. Earlier in the year, the managers were focused on investing in companies with minimal debt and little need to access the capital markets with a particular emphasis on goods and services in short supply in Africa.
The managers, Francis Daniels and Robert Knapp, adopt a deep value approach and sprinkle their annual reports with quotes from Graham and Dodd and Warren Buffett. In June the portfolio was invested: 50% equities, 40% debt equity and 10% cash. The fund pays a dividend yield of 4.8% and in September of this year the fund was trading at a discount to net asset value of approximately -14%. As of June 2009, the two fund managers collectively owned over 23% of the issued stock.
One drawback for potential investors is that AOF is listed on AIM. While it is denominated in US Dollars, it clears through Euronext which will make it hard to trade through many brokers. It’s an offshore fund that is incorporated in the Cayman Islands. One of the portfolio managers, Robert Knapp, is also the managing director of Ironsides which runs a managed account for Millennium Partners, a multi-billion dollar hedge fund based in New York City.
Taken from Google Finance - Camco International Limited is engaged in identifying and developing greenhouse gas emission reduction projects, and providing carbon and sustainable development consultancy services, including emissions assessment, carbon management and strategy and policy work. The Company is a climate change business in the carbon and sustainable development markets. It offers a range of carbon-related services to public and private organizations worldwide. Among its clients are the World Bank, the European Commission, Land Rover, BP and industrial, power and utilities companies throughout China and Russia. On April 30, 2007, the Company acquired ESD Partners Ltd., the holding company for the Energy for Sustainable Development Group of companies (together ESD), which is engaged in the provision of consulting services in the field of climate change science and technology. On May 10, 2007, it acquired Bradshaw Consulting Limited. In May 2008, the Company acquired ClearWorld Energy Ventures Limited.
Modern Water Plc is a United Kingdom-based company. The principal activities of the Company is sourcing, developing and deploying technology-based solutions for fresh water and treatment of wastewater. The Company’s has 53% interest in its subsidiaries include Cymtox Limited. The Company also has 45% interest in joint venture, AguaCure Limited.
|Renewable Energy Group||REH||05/02/2008||5604333||8.63||na|
Taken from Google Finance - Renewable Energy Holdings plc owns and operates the Kesfeld and Kirf windfarms in Germany, and the Bryn Posteg Landfill Gas site in Wales. The Company’s subsidiaries include Seapower Pacific Pty Limited, REH Verwaltung GmbH, Windpark Kesfeld Heckhuscheid GmbH & Co KG, Windpark Kirf GmbH & Co KG, REH Global Limited and Gwynt Cymru Limited. The principal activity of Seapower Pacific Pty Limited is research and development for the purposes of developing technology to capture energy produced by ocean waves to generate electricity and produce, as a by-product, desalinated water. The principal activity of Windpark Kesfeld Heckhuscheid GmbH & Co KG and Windpark Kirf GmbH & Co KG is the ownership and operation of the Company’s windfarms in Germany. The principal activity of Gwynt Cymru Limited is the operation of the Company’s landfill gas site. During 2008, it purchased 49% interest in CETO Development Company Limited. In August 2009, the Company completed the acquisition of Gamar GL.
That wraps up this edition of hedge fund UK position tracking. It was definitely interesting to see the possible themes Tudor might be playing considering their status as one of the premier global macro funds in the world. As of the end of August, Tudor was up 12.5% for the year. To see further performance figures, you can see Tudor's historical returns here. As noted in early August, Tudor was out saying that the recent action in US markets was nothing more than a bear market rally. Now that we've started to see some weakness in the markets, it will be interesting to see if selling intensifies or not. Make sure you check out Paul Tudor Jones in true action as he trades in the scarcely available 1987 PBS Film, "Trader: The Documentary" that we've embedded for readers to watch. For more resources on Tudor Investment Corp, we've covered their US equities portfolio here. And lastly, you can read an excellent compilation of quotes from Paul as well as his hedge fund manager interview.
Here's the latest from Mr. Bond a.k.a. Bill Gross of PIMCO. His October market commentary is interestingly enough entitled, 'Doo-Doo Economics.' We recently learned that Gross was swapping out of corporates and buying long-term treasuries. He now leans toward the deflation side, at least for now, in the ongoing debate of inflation versus deflation. We have also previously posted up his September commentary and his insight shifts this month to the ongoing problems in California and you can read the latest edition of his Investment Outlook commentary below, courtesy of PIMCO: The world is turning “green” – global warming or not. Electric cars, free-range chickens, and White House vegetable gardens are the wave of the future, but the defining badge of environmentalists may be none of those and might, in fact, be colored blue, as opposed to green. Dog owners would be the first to acknowledge it. Having converted reluctantly to felines nearly ten years ago, I myself am only forced to humble myself by emptying the litter box once or twice a year when Sue is visiting the relatives. But dogs? Well, Bowser has to be walked, and Bowser owners these days are being forced to subserviently follow in step, holding those little blue “doo-doo” bags at the ready that keep the neighbors’ grass green instead of brown and minimize the number of summer flies to a billion per square mile. No longer will the current generation be allowed to use pooper-scoopers; they must in fact be pooper “stoopers,” bending down, turning the bag inside out to form a glove, and then – EEECH – making the grass environmentally friendly again by picking it up, reversing the bag and hurriedly looking for the nearest neighbor’s garbage can who might conveniently be at church or shopping at the grocery store. One can only hope that Fido is mildly constipated, if you get my drift. I can recall the diaper days with my three kids. It wasn’t a pleasant experience, but those non-environmentally friendly Pampers at least afforded one-stop dropping – easy on, easy off – no touchy, no feely. In those days, a doggie bag was something you asked for in a fine restaurant to take home the steak bones. Now it’s a blue plastic reminder that the world is changing and in many respects our daily routine is becoming a dog’s life. A similar metaphor could be applied to the 45 million citizens of the State of California. Once “golden” and the land of entrepreneurial opportunity, the state has turned from filet mignon to ground chuck and its residents are now on a short leash as opposed to masters of their own universe. Unemployment at 12.2% is near the nation’s highest and its Baa bond rating is the country’s lowest. Its schools are abysmal, competing with Louisiana and Mississippi for the lowest rating in the federal government’s National Assessment of Educational Progress. While the air is much cleaner than it was 20 years ago, the freeways are stereotypically jammed and increasingly less free – the age of the toll road serving the exasperated (or simply the Mercedes owners) is upon us. Our canine existence has many fathers. Perhaps more than any other state, California has been affected by its perverted form of government, requiring a two-thirds vote by state legislators to effectively pass a budget. In addition, the state’s laws are almost tragically shaped by a form of direct democracy more resemblant of the Jacksonian era, where the White House furniture was constantly at risk due to unruly citizens, high on whisky, and low on morals and common sense. Propositions from conservatives and liberals alike have locked up much of the budget, with Proposition 13 in 1978 reducing property taxes by 57% and Prop. 98 in 1988 requiring 40% of the general fund to be spent on schools. Recently, much of any excess has been gobbled not only by teachers, but unbelievably by a prison lobby that would be the envy of any on Washington’s K Street. The result has been a $26 billion deficit that was supposedly “closed” in recent weeks, but which largely was a “kick the can” accounting scheme that postponed the pain, or better yet, pled for a federal solution to self-inflicted wounds. State budgets of course are required to be balanced each year, but that has long been a fiction throughout most of the country. Still, California’s 2009 fix was perhaps the longest kick of the can in history, refusing effectively to raise taxes, superficially cutting expenses, and shaming its fading image by refusing to disburse required billions to local counties and communities, as well as using accounting tricks that couldn’t fool a grade-schooler. In the process, they managed to reinvent the IOU, paying bills in virtual scrip that then traded at substantial discounts on eBay of all places. They have issued tax anticipation notes of all sorts with a multitude of lettered configurations that anagram aficionados would revel in. Just last week the state extended its begging bowl for $8 billion of “RANs” (Revenue Anticipation Notes) at an onerous money market rate of 1 1⁄2%. Previously they had issued “RAWs” (Revenue Anticipation Warrants). “BAGs” might be next – blue BAGS, that is, full of the doo-doo that California citizens have grown used to picking up. There are signs that California voters are ready to make some tough choices, having recently refused to pass five propositions that would have extended tax hikes and failed to address spending. Whether or not Governor Schwarzenegger and legislators will agree to a constitutional convention to address the poisonous proposition plebiscite itself is a larger question that will likely be affirmatively answered only if the state economy continues to remain in the tank, which it likely will. But California’s problems, while somewhat unique and self-inflicted, are really America’s problems, and not just because the California economy is 15% of national GDP. While California’s $26 billion deficit is not directly comparable to the federal gap of $1 trillion-plus, they both reflect a lack of discipline and indeed vision to perceive that the strong growth in revenues was driven by the same excess leverage and the same delusionary asset appreciation that was bound to approach cliff’s edge. California’s property taxes, income taxes, and sales taxes were all artificially elevated by national and indeed global imbalances as the U.S. manufactured paper, and Asia manufactured things in mercantilistic exchange. Total tax revenues have actually fallen 14% over the past 12 months in California and substantially more in other states. At some point, that Fantasyland merry-go-round had to stop and whether the defining moment was marked by Bear Stearns, Lehman Brothers, or the tumultuous week that followed in September of 2008 is really not the point. What is critical to recognize is that both California and the U.S., as well as numerous global lookalikes such as the U.K., Spain, and Eastern European invalids, are in a poor position to compete in a global economy where capitalism is morphing from its decades-long emphasis on finance and levered risk taking to a more conservative, regulated, production-oriented system advantaged by countries focusing on thrift and deferred gratification. The term “capitalism” itself speaks to “capital” – the accumulation of it and the eventual efficient employment of it – for growth in profits and real wages alike. What California once had and is losing rapidly is its “capital”: unquestionably in its ongoing double-digit billion dollar deficits, but also in its crown jewel educational system that led to Silicon Valley miracles such as Hewlett Packard, Apple, Google, and countless other new age innovators. In addition, its human capital is beginning to exit as more people move out of the state than in. While the United States as a whole has yet to suffer that emigration indignity, the same cannot be said for foreign-born and U.S.-educated scientists and engineers who now choose to return to their homelands to seek opportunity. Lady Liberty’s extended hand offering sanctuary to other nations’ “tired, poor and huddled masses” may be limited to just that. The invigorated wind up elsewhere. Now that our financial system has been stabilized, one wonders whether California’s “Governator” and indeed the Obama Administration has the capital, the vision, and indeed the discipline of its citizenry to turn things around. Our future doggie bags can hold steak bones or doo-doo of an increasingly familiar smell. For now investors should be holding their noses, their risk orientation, as well as their blue bags, until proven otherwise. Specifically that continues to dictate a focus on high quality bonds and steady dividend paying stocks that can survive, if not thrive, in our journey to a “new normal” economy of slower growth, muted profit gains, and potential capital destruction via default, abrogation of property rights, and dollar devaluation. William H. Gross "
For thoughts from Bill more-so related to the markets, check out our latest post on him that details how he's betting on deflation.
The world is turning “green” – global warming or not. Electric cars, free-range chickens, and White House vegetable gardens are the wave of the future, but the defining badge of environmentalists may be none of those and might, in fact, be colored blue, as opposed to green. Dog owners would be the first to acknowledge it. Having converted reluctantly to felines nearly ten years ago, I myself am only forced to humble myself by emptying the litter box once or twice a year when Sue is visiting the relatives. But dogs? Well, Bowser has to be walked, and Bowser owners these days are being forced to subserviently follow in step, holding those little blue “doo-doo” bags at the ready that keep the neighbors’ grass green instead of brown and minimize the number of summer flies to a billion per square mile. No longer will the current generation be allowed to use pooper-scoopers; they must in fact be pooper “stoopers,” bending down, turning the bag inside out to form a glove, and then – EEECH – making the grass environmentally friendly again by picking it up, reversing the bag and hurriedly looking for the nearest neighbor’s garbage can who might conveniently be at church or shopping at the grocery store. One can only hope that Fido is mildly constipated, if you get my drift. I can recall the diaper days with my three kids. It wasn’t a pleasant experience, but those non-environmentally friendly Pampers at least afforded one-stop dropping – easy on, easy off – no touchy, no feely. In those days, a doggie bag was something you asked for in a fine restaurant to take home the steak bones. Now it’s a blue plastic reminder that the world is changing and in many respects our daily routine is becoming a dog’s life.
A similar metaphor could be applied to the 45 million citizens of the State of California. Once “golden” and the land of entrepreneurial opportunity, the state has turned from filet mignon to ground chuck and its residents are now on a short leash as opposed to masters of their own universe. Unemployment at 12.2% is near the nation’s highest and its Baa bond rating is the country’s lowest. Its schools are abysmal, competing with Louisiana and Mississippi for the lowest rating in the federal government’s National Assessment of Educational Progress. While the air is much cleaner than it was 20 years ago, the freeways are stereotypically jammed and increasingly less free – the age of the toll road serving the exasperated (or simply the Mercedes owners) is upon us.
Our canine existence has many fathers. Perhaps more than any other state, California has been affected by its perverted form of government, requiring a two-thirds vote by state legislators to effectively pass a budget. In addition, the state’s laws are almost tragically shaped by a form of direct democracy more resemblant of the Jacksonian era, where the White House furniture was constantly at risk due to unruly citizens, high on whisky, and low on morals and common sense. Propositions from conservatives and liberals alike have locked up much of the budget, with Proposition 13 in 1978 reducing property taxes by 57% and Prop. 98 in 1988 requiring 40% of the general fund to be spent on schools. Recently, much of any excess has been gobbled not only by teachers, but unbelievably by a prison lobby that would be the envy of any on Washington’s K Street.
The result has been a $26 billion deficit that was supposedly “closed” in recent weeks, but which largely was a “kick the can” accounting scheme that postponed the pain, or better yet, pled for a federal solution to self-inflicted wounds. State budgets of course are required to be balanced each year, but that has long been a fiction throughout most of the country. Still, California’s 2009 fix was perhaps the longest kick of the can in history, refusing effectively to raise taxes, superficially cutting expenses, and shaming its fading image by refusing to disburse required billions to local counties and communities, as well as using accounting tricks that couldn’t fool a grade-schooler. In the process, they managed to reinvent the IOU, paying bills in virtual scrip that then traded at substantial discounts on eBay of all places. They have issued tax anticipation notes of all sorts with a multitude of lettered configurations that anagram aficionados would revel in. Just last week the state extended its begging bowl for $8 billion of “RANs” (Revenue Anticipation Notes) at an onerous money market rate of 1 1⁄2%. Previously they had issued “RAWs” (Revenue Anticipation Warrants). “BAGs” might be next – blue BAGS, that is, full of the doo-doo that California citizens have grown used to picking up.
There are signs that California voters are ready to make some tough choices, having recently refused to pass five propositions that would have extended tax hikes and failed to address spending. Whether or not Governor Schwarzenegger and legislators will agree to a constitutional convention to address the poisonous proposition plebiscite itself is a larger question that will likely be affirmatively answered only if the state economy continues to remain in the tank, which it likely will. But California’s problems, while somewhat unique and self-inflicted, are really America’s problems, and not just because the California economy is 15% of national GDP. While California’s $26 billion deficit is not directly comparable to the federal gap of $1 trillion-plus, they both reflect a lack of discipline and indeed vision to perceive that the strong growth in revenues was driven by the same excess leverage and the same delusionary asset appreciation that was bound to approach cliff’s edge. California’s property taxes, income taxes, and sales taxes were all artificially elevated by national and indeed global imbalances as the U.S. manufactured paper, and Asia manufactured things in mercantilistic exchange. Total tax revenues have actually fallen 14% over the past 12 months in California and substantially more in other states. At some point, that Fantasyland merry-go-round had to stop and whether the defining moment was marked by Bear Stearns, Lehman Brothers, or the tumultuous week that followed in September of 2008 is really not the point.
What is critical to recognize is that both California and the U.S., as well as numerous global lookalikes such as the U.K., Spain, and Eastern European invalids, are in a poor position to compete in a global economy where capitalism is morphing from its decades-long emphasis on finance and levered risk taking to a more conservative, regulated, production-oriented system advantaged by countries focusing on thrift and deferred gratification. The term “capitalism” itself speaks to “capital” – the accumulation of it and the eventual efficient employment of it – for growth in profits and real wages alike.
What California once had and is losing rapidly is its “capital”: unquestionably in its ongoing double-digit billion dollar deficits, but also in its crown jewel educational system that led to Silicon Valley miracles such as Hewlett Packard, Apple, Google, and countless other new age innovators. In addition, its human capital is beginning to exit as more people move out of the state than in. While the United States as a whole has yet to suffer that emigration indignity, the same cannot be said for foreign-born and U.S.-educated scientists and engineers who now choose to return to their homelands to seek opportunity. Lady Liberty’s extended hand offering sanctuary to other nations’ “tired, poor and huddled masses” may be limited to just that. The invigorated wind up elsewhere.
Now that our financial system has been stabilized, one wonders whether California’s “Governator” and indeed the Obama Administration has the capital, the vision, and indeed the discipline of its citizenry to turn things around. Our future doggie bags can hold steak bones or doo-doo of an increasingly familiar smell. For now investors should be holding their noses, their risk orientation, as well as their blue bags, until proven otherwise. Specifically that continues to dictate a focus on high quality bonds and steady dividend paying stocks that can survive, if not thrive, in our journey to a “new normal” economy of slower growth, muted profit gains, and potential capital destruction via default, abrogation of property rights, and dollar devaluation.
William H. Gross