Friday, October 16, 2009

Eric Mindich's Hedge Fund Eton Park Files 13G on Verisk Analytics (VRSK)

Freshly public company Verisk Analytics (VRSK) has at least one major believer as Eric Mindich's hedge fund Eton Park Capital filed a 13G on the company with the SEC. In the filing, Eton Park disclosed that they now have a 7.15% ownership stake with 9 million shares. The filing was made due to activity on October 7th, 2009. This is obviously a brand new position for Eton Park given that shares of VRSK just recently IPO'd. You can view the rest of Eton Park's positions here.

Mindich started the fund back in 2004 with $3 billion under management with a $5 million minimum investment. Nowadays, Eton Park manages over $6 billion. Their investment strategy draws upon Mindich's time at Goldman Sachs where he focused on merger arbitrage. He was so good at his job that he became the youngest partner in Goldman Sachs' history at the age of 27. In addition to merger arbitrage, Eton Park focuses on long/short equity strategies and even invests up to 30% of their portfolio into private investments. Eton Park's solid track record has landed them in our Market Folly portfolio where we seek to replicate hedge fund holdings into a cohesive portfolio. We can do so with the help of Alphaclone and the backtested results are impressive as we've seen 20% annualized returns with our portfolio.

Taken from Google Finance, Verisk Analytics "enables risk-bearing businesses to better understand and manage their risks. The Company provides value to its customers by supplying data that, combined with its analytic methods, creates embedded decision support solutions. It is an aggregator and provider of detailed actuarial and underwriting data pertaining to United States property and casualty (P&C), insurance risks. It offers solutions for detecting fraud in the United Sates P&C insurance, healthcare and mortgage industries, and sophisticated methods to predict and quantify loss in diverse contexts ranging from natural catastrophes to health insurance. It organizes its business in two segments: Risk Assessment and Decision Analytics. It develops solutions, which its customers use to analyze the four key processes in managing risk, in what it defines as the Verisk Risk Analysis Framework: Prediction of Loss, Selection and Pricing of Risk, Detection and Prevention of Fraud, and Quantification of Loss."

Insider Trading: Raj Rajaratnam Of Hedge Fund Galleon Group Charged

Raj Rajaratnam, founder of hedge fund Galleon Group has been charged with insider trading in a $20 million case as he and five other people were allegedly involved, including a former Bear Stearns executive and an IBM executive. The charges say that the six accused used insider information in two schemes where they traded shares of Google (GOOG), Polycom (PLCM), Hilton Hotels, and Advanced Micro Devices (AMD).

This case is interesting in that it is the first time wiretaps have been used to target insider trading. The insider information apparently came from numerous sources, including other hedge funds, investor relations firms, and the companies listed above whose shares they traded. Rajaratnam faces 12 total fraud and conspiracy counts, many of which have up to a 20-year maximum sentence. Prosecutors had been investigating this case ever since 2007 when a non-named person began complying with the FBI. That person apparently had been using insider information and tipping off Rajaratnam since 2006.

The Wall Street Journal has dug into one particular case of the insider trading events regarding shares of now private Hilton Hotels. They write,

"The deal is the early July LBO of Hilton Hotels. According to the regulator, on July 2 at 2:20 p.m., Hilton executives called the lead analyst covering the hotel for Moody’s. The purpose of the 7-minute call isn’t detailed. The SEC does say that at some point in the call the Hilton executives informed Moody’s that their company was being taken private by Blackstone Group and that the deal likely would be announced sometime before the Fourth of July.

There are two Moody’s analysts mentioned in the complaint, a vice president and senior analyst that was the credit rater’s lead analyst on Hilton and an associate analyst “involved” in rating Hilton. The lead analyst took the Hilton call. One analyst then told someone identified as “the cooperating witness” of the pending deal. The SEC says it reviewed phone records for the Moody’s analyst’s cellphone that show the analyst made three phone calls to the cooperating witness from 3 p.m. to 3:15 p.m. that same day. The cooperating witness provided the Hilton information to Rajaratnam, saying that it was “a sure thing.” The SEC says trading records show that Galleon Technology Funds on the following day, July 3, bought 400,000 shares of Hilton at an average price of $35.13 a share.

After the market closed that day, Hilton announced it had agreed to be acquired by Blackstone for $20.1 billion, or $47.50 a share. On July 5 and July 16, Galleon sold all 400,000 shares at prices ranging from $45.25 to $45.63. The SEC says the trades reaped Galleon a profit of $4 million. For passing along the tip, the Moody’s analyst received $10,000."

Very interesting stuff as this will undoubtedly lead to further questions as to possible other instances of insider trading across hedge fund land. In the past, insider trading cases had caught 'small' culprits, but this one is quite the opposite. Rajaratnam is the head of a major hedge fund that had $7 billion in assets under management at their peak. Galleon Group will certainly have quite the overhang of dark clouds now as their founder undergoes charges. We recently saw another large hedge fund shut down due to such a cloud of negativity as Art Samberg's Pequot Capital could not shake the bad image that had been bestowed upon them for past allegations. It will be interesting to see if Galleon suffers the same fate.

We haven't covered Galleon's holdings for some time, but those interested can view their portfolio from Q1 2009. Galleon was founded by Raj Rajaratnam in 1997 and currently manages in excess of $5 billion. Raj previously worked for Needham & Company and when he left was responsible for a compounded rate of return of 37% over 4 years while overseeing $250 million. Raj received a Bsc in Engineering and then an MBA in Finance from the University of Pennsylvania. Raj's work had also recently landed him on Forbes' billionaire list. His firm's track record landed two of their funds on Barron's top 100 hedge funds rankings list. But obviously with all of this news being uncovered, his success and track record will certainly be called into question. You can see Galleon's positions as of June 30th as filed with the SEC here. For more on the insider trading case, head to articles from the WSJ here and here.

Photo courtesy of NYDailyNews

Pick 1 Stock For 5 Years: Results

First off, sincere thanks to everyone who submitted a pick via the blog, our twitter page, or email. It was a great response as we received hundreds of replies and have been busy sorting through them. The question was simple: If you had to own only 1 stock for the next 5 years, what would it be? Since many of the hedge funds we track on the blog are centered around stockpicking, we thought it would be fun to see what readers had in mind for long-term picks of their own.

As you can imagine, we received the full gamut in terms of answers but definitely noticed a few themes in the responses. Firstly, when it comes to 'buy and hold,' blue chip stocks are the name of the game. By far and away, the largest amount of entries centered around well established blue chip companies that have a proven brand and often pay a dividend. Secondly, two sectors received the most votes and those were: technology and energy. Readers definitely see those two arenas as areas of long-term growth and sustainability it seems.

Without further ado, onto the results. We'd first like to toss out a few honorable mentions that received a lot of votes, but not quite enough to land in the top 10. Some of those stocks include: Cree (CREE), Exxon Mobil (XOM), Leucadia (LUK), Range Resources (RRC), Johnson & Johnson (JNJ), Monsanto (MON), Transocean (RIG), Berkshire Hathaway (BRK.B), FPL Group (FPL), and Verisk (VRSK).

And here are the TOP 10 PICKS, with the #1 pick being the stock that received the most entries:

10. A123 Systems (AONE)

9. BHP Billiton (BHP)

8. JPMorgan Chase (JPM)

7. Google (GOOG)

6. BYD Company (Hong Kong: 1211)

5. General Electric (GE)

4. Philip Morris International (PM)

3. Walmart (WMT)

2. Goldman Sachs (GS)

1. Apple (AAPL)

So there you have it, Apple easily had the most votes as many think this technology giant has become the next Microsoft (MSFT) in terms of dominance. Sticking with technology, there were also a lot of votes for Google (GOOG). The blue chip names that received a lot of entries as we referenced earlier were WMT, GE, and PM. It was also interesting to us to see heavy support for some recent IPO's in Verisk (VRSK) and A123 (AONE). Readers definitely think these freshly public companies have bright futures. Also, while energy was a strong theme with picks like RIG, XOM, we also saw strong voting for plays in the 'green' energy category like BYD and AONE. Lastly, the theme of financials was strong as many people decided that they wanted to own Goldman Sachs (GS) as they've emerged through the crisis as heavyweights, with votes also trickling in for JPM.

Overall, very interesting results and thanks again for participating! Hopefully in five years we'll be able to check back in on this post and see who had the magic crystal ball to pick the right stock. After all, the point of this exercise was stockpicking for the long-term. Who will win? We'll have to wait and see. In the mean time, make sure you check back with us for our constant coverage of hedge fund portfolios and the like.

What We're Reading 10/16/09

Are gold and treasuries in conflict? []

A great interview with a buy-side bank analyst [Street Capitalist]

8 investment themes from JP Morgan [Pragmatic Capitalist]

How to start a hedge fund [Business Insider]

The best investment in history [Big Picture]

The Game - Part 1: Queen of Hearts (inflation vs. deflation) [iTulip]

Thursday, October 15, 2009

Notes From Great Investors' Best Ideas Symposium (Einhorn, Ackman, Grant & More)

This is part 1 of our post, so check back in tomorrow for part 2! Last week the Great Investors' Best Ideas symposium took place in Dallas, Texas and some prominent hedge fund managers presented actionable investment ideas which we wanted to cover. Notable presenters included David Einhorn of Greenlight Capital, Bill Ackman of Pershing Square Capital Management, Mario Gabelli of Gamco Investors, and James Grant of Grant's Interest Rate Observer, amongst others. We've already detailed a separate post on Bill Ackman's latest short position which he revealed at this conference. So this time around we also wanted to touch on what other hedge fund players presented.

David Einhorn, hedge fund Greenlight Capital

Since we cover David Einhorn's Greenlight Capital fairly extensively on Market Folly, we figured he would be an appropriate place to start. Einhorn's presentation centered around his worry over Japan and the potential for a global currency crisis, noting that Japan has too much debt and an aging population. Specifically, he says, "Should the market reprice the Japanese credit risk, it's hard to see how Japan would avoid government default or a hyperinflationary currency death spiral." Well, 'death spiral' certainly sounds pleasant, doesn't it?

As such, Einhorn recommended buying gold, options on gold, and gold stocks in order to reduce risk to this potential calamity. This is by no means new advice from him, as we've covered Einhorn's physical gold investment much earlier on. It does seem though that his conviction in this play has steadily grown over time. Einhorn also mentioned that he was buying interest-rate options that he will profit from should yields head higher on US Treasuries. This is very likely a similar inflationary bet to that of hedge fund legend Julian Robertson's curve caps play. We have seen a lot of hedge funds in this type of bet over the past 6 months, although some funds have recently lightened up on the play as noted in our recent post on what hedge funds are buying & selling.

In terms of other positions Greenlight Capital has on, we've detailed their short thesis on the ratings agencies here. Lastly, make sure you check out the Value Investing Congress where you can hear Einhorn present more investment ideas next week.

James Grant, Grant's Interest Rate Observer

Grant focused on his forecast of inflation. He said, "The Fed is in the business of price-fixing. It fixes interest rates and then tries to predict the future. Well, price-fixing doesn't work, and the future cannot be predicted. Other than that, I love the business model." Grant went on to add that he is only mildly enthused by gold, at best. He does, however, see the eventual recovery as a bountiful one and is bullish on the stock market as a whole.

Bill Ackman, hedge fund Pershing Square Capital Management

As cited in the introduction, we detailed Ackman's presentation in more detail last week so check out the specifics there. However, for the sake of cohesion in this article, we note that Ackman presented a short thesis on REIT player Realty Income (O). His case is largely contingent upon Realty Income's poorer credit quality tenants. He also notes that the company continually engages in equity raises and he thinks that eventually they will have to cut their dividend, which will send the large retail investor base fleeing. Head here for the rest of the specifics on this play.

For more on Ackman and Pershing Square, check out their Q2 investor letter. In addition to Einhorn, you can also hear more investment ideas from Ackman at the upcoming Value Investing Congress, which we highly recommend attending.

Michael Price, MFP Investors LLC

In a very contrarian play, Michael Price recommended buying beaten down newspaper stocks, as his $1.6 billion firm has a large stake in The Washington Post. The vast majority of money he manages is his own, so he has certainly done well for himself. For his thesis, Price hopes that newspapers will turn to foundations, hopefully luring some brave souls (Bill Gates or Warren Buffett?) to the rescue who can absorb the losses newspapers are seeing. Then, the newspapers could give these foundations a percentage of their online revenue. What's interesting is that he thinks this all plays out over the next few years. If so, the ball better start rolling. In the past, we've discussed whether newspapers are a dying industry as it seems they are in desperate need of saving. Price is not alone in his play as Philip Falcone's hedge fund Harbinger Capital Partners also has a large stake in a newspaper: The New York Times (NYT). However, Harbinger has recently sold some of their stake.

Overall, a great symposium with some interesting investment ideas. Lots of general investing advice was given out as well, including to know the management team you're investing in. So many investors often pay attention to the financials and valution, but you need to make sure to also hone in on the management team to ensure the company is headed in the right direction. Also, some presenters noted that it pays to be contrarian. When everyone is already leaning one way, trends tend to start heading in the opposite direction. One presenter noted that a contrarian play can be "like a mudslide after a heavy rain. The more it rains, the more unstable the hillside becomes; eventually a landslide ensues." Lastly, we'll end on an interesting fact that Mario Gabelli presented, as he noted that almost all major market indexes are now almost back where they were a year ago. Imagine that.

Note that we wanted to get this out quickly so it's not as in-depth as we'd like. We'll be posting up an addendum to this post tomorrow so stay tuned.

Carl Icahn: Opportunity To Short Real Estate

Legendary 'corporate raider' and hedge fund manager Carl Icahn recently sat down and divulged his thoughts on the current markets. He basically said that the stock market is 'schizophrenic,' and could swing in either direction in a major way. However, he feels that there is a risk of a double-dip recession and that people could really get burned should this occur.

Specifically, Icahn sees real estate as a prime short candidate, citing an overhang in the office and mall sectors. He spoke about the exchange traded fund (ETF) of IYR, the iShares US Real Estate Index, and wondered why anyone would want to sit and collect a measly 4.5-5% dividend for all the inherent risk it carries with all of that commercial property. He is worried about the underlying REITs being able to liquidate the value of their buildings should things get really bad. He goes on to say, "I think there's overcapacity in the office market and in shopping centers because you have a secular change in the way retailers are behaving and the way consumers are behaving." For another hedge fund manager's take on some of the real estate market, check out Bill Ackman's latest short position.

He also sees opportunities in bankruptcies, but notes that those obviously aren't for amateurs to tackle. In addition, the hedge fund manager sees opportunities in secular trends like consumer behavior, advertising, the internet, and mobile. Regarding this, he said, "We're quite involved in the secular change in the way advertising is going to be done. Obviously the cell-phone business is a growth business." Readers will remember that Carl has a hefty stake in internet darling Yahoo (YHOO). Obviously the legendary investor likes playing secular themes at this juncture. Icahn finished by reiterating his point that should we see a double-dip recession, there will be a bloodbath in the aforementioned areas.

Embedded below is the video of Icahn's recent interview:

For more on Carl Icahn, check out some of his recent portfolio activity here and as well as here too.

Activist Investing Interview With Eric Jackson

Our buddy Misstrade is out with another installment of his interview series and this time he's brought on Eric Jackson of activist investment firm Ironfire Capital LLC. Eric also writes for and publishes his blog, Breakout Performance. In the 2 videos below, they discuss the topic of activist investing. (RSS & Email readers, come to the blog to view the videos).

Here's part 1:

And here's part 2:

Great conversation from those two guys on the topic of activist investing and our thanks for that. Don't forget we've covered Misstrade's other interview with Lawrence McDonald, author of the New York Times Bestseller book, A Colossal Failure of Common Snese: The Insider Story of the Collapse of Lehman Brothers. You can check out that previous interview here.

Lastly, if you're on Twitter, make sure to check both of those guys out, @misstrade and @ericjackson. And of course, make sure you follow @marketfolly too.

Wednesday, October 14, 2009

What Stock Would You Buy For The Next 5 Years?

It's a simple question, yet it really takes a bit more thought if you're forced to pick just one. Over on our twitter account, we posed a question: If you had to buy and hold only one stock for the next 5 years, what would it be? We're talking individual companies here, not ETFs, not indices, just straight up stockpicking.

We thought it would be a fun exercise to gather everyone's responses and then compile the results in a post. So, out of sheer curiosity, let's have it. You can click the 'comments' link below this post, you can email us, or you can @marketfolly us if you're on Twitter. We'll keep track of all the answers and will reveal the results on Friday. You've got 2.5 days to come up with the perfect stock for the next 5 years. Go!

Seasonality Of Crude Oil

The guys over at MarketClub came out with a new video on crude oil yesterday that examines how seasonality typically effects the price of oil. And, their findings are interesting in that crude oil seasonally heads a bit lower this time of year, yet the market seems to want to head higher. The chart on crude oil has been pretty similar to that of the stock market in that it made lows in February/March and has trended higher. The main difference is that while the overall stock market has continued to head higher, crude oil has kind of traded sideways in a consolidation pattern since June.

There is a clear area of resistance around $75 a barrel and a nice triangle-like formation is setting up so that you can easily draw the lines to identify a breakout to the upside or a breakdown to the downside and trade it either way. Since the market just jumped up on the $75 level for the first time in over a year, it definitely seems like it wants to breakout to the upside as it has setup in a similar pattern to what gold was in before breaking out to above $1000. Also, if you run fibonacci retracements on crude oil from the highs in July of last year to the lows in February of this year, the retracements identify $83 a barrel and $95 a barrel as potential upside targets. You can check out their technical analysis video here.

Hedge Fund Lone Pine Capital Starts New Position In MSCI Inc (MXB)

Stephen Mandel's hedge fund firm Lone Pine Capital LLC filed a 13G with the SEC yesterday after the market close. In the filing, they disclosed a 5.5% ownership stake in MSCI Inc (MXB). They now own 5,476,525 shares and the disclosure was made due to activity on October 1st, 2009. This is a brand new position for them as they did not previously own shares back on June 30th, 2009 as per their 13F filing which detailed their portfolio.

In terms of other recent SEC filings from Mandel's hedge fund, we've noted that they filed a 13G on Green Mountain Coffee Roasters (GMCR) and boosted their stake in Vistaprint (VPRT). Lone Pine is a $7 billion hedge fund and gets its name from fund manager Mandel's days at Dartmouth College where the school has a historical lone pine tree. His fund has returned over 25% annually (leading up to the crisis) since inception in 1997. Last year was rough for them though and put a chink in their armor. Overall though, Lone Pine is certainly one fund worth tracking as they seek out companies trading below their intrinsic value that also have good management teams. To see Lone Pine's positions, check out our coverage of their US portfolio, as well as our post on their UK positions.

Taken from Google Finance, MSCI Inc is "a provider of investment decision support tools, including indices and portfolio risk and performance analytics for use by institutions in managing equity, fixed income and multi-asset class portfolios. The Company’s principal products are its international equity indices marketed under the MSCI brand and its equity portfolio analytics marketed under the Barra brand. Its products are used in many areas of the investment process, including portfolio construction and optimization, performance benchmarking and attribution, risk management and analysis, index-linked investment product creation, asset allocation, investment manager selection and investment research. The Company’s primary products consist of equity indices, equity portfolio analytics and multi-asset class portfolio analytics."

Ken Griffin's Citadel Sells ETrade Shares (ETFC)

We haven't covered the activity from Ken Griffin's hedge fund firm Citadel Investment Group for a bit because it's been a tornado of SEC 13D and Form 4 filings on their stake in ETrade Financial (ETFC) and we didn't want to bombard you with posts on it every other day. After the dust settled (for the moment at least), we thought we'd survey the damage in total to provide an overall look after the fact. This comes after our previous post that disclosed some of Citadel's sales. This time around was no different as the selling continued.

In late September, Citadel engaged in a debt-for-equity swap where they converted $87.9 million worth of Class A debentures. This yielded them 84.9 million shares with an exercise price of $1.03 per share. Citadel then also sold around 85 million shares ranging from prices of $1.70 to $2.08 and netted over $160 million from the transactions. After it was all said and done, Citadel was left holding 166.2 million shares of ETFC, or around $941 million worth at the time. They made the sales in order to manage their exposure levels in their portfolio. Citadel had previously planned to sell a bunch of shares under a pre-arranged trading schedule but then abandoned that plan. Their equity stake in ETrade was down to a 9.9% ownership stake, having previously been as high as 14.9%. We fully expect more SEC filings to come down the line if the past is any indication. To see the rest of Citadel's holdings, head to our post on their portfolio.

Ken Griffin started his career trading options from his dorm room at Harvard his freshman year. He then launched a convertible bond arbitrage fund his sophomore year and by his senior year, he had $1 million from investors. Since then, Citadel has seen average annual returns of around 20%. The year of 2008 was a difficult one for them though, as their flagship Wellington and Kensington funds were down big. In fact, they were among the top 10 hedge fund asset losers. They have bounced back this year though as their funds are up by quite a healthy margin. For some of Citadel's positions in UK markets, head to our post here.

Taken from Google Finance, ETrade is "a financial services company, that provides online brokerage and related products and services primarily to individual retail investors, under the brand E*TRADE Financial. The Company’s products and services include investor-focused banking primarily sweep deposits and savings products and asset gathering. The Company’s subsidiaries include, E*TRADE Bank, which provides investor-focused banking services to retail customers nationwide and deposit accounts insured by the Federal Deposit Insurance Corporation (FDIC); E*TRADE Capital Markets, LLC (ETCM), which is a registered broker-dealer and market-maker; E*TRADE Clearing LLC, which is the clearing firm for the Company’s brokerage subsidiaries and is a wholly-owned operating subsidiary of E*TRADE Bank, and E*TRADE Securities LLC, which is a registered broker-dealer and the primary provider of brokerage services to the customers."

Tuesday, October 13, 2009

What Hedge Funds Are Buying & Selling: Trend Monitor Report

Embedded below is an interesting report from Bank of America Merrill Lynch regarding hedge fund position adjustments and performance for the prior month. The report touches on the fact that many funds have been buying S&P and NDX futures and have covered shorts in the Russell 2000. They also note that many funds are in the now crowded gold trade while some also bought platinum. Other moves in precious metals include selling silver and adding to shorts in copper. On the energy front, hedge funds were selling crude oil and reducing longs in heating oil. In the forex markets, hedge funds have been steadily pressing their short on the US Dollar and the market seems to have held on to a crowded long Japanese Yen position.

The report also delves into interest rate trades which was of particular interest to us given the large amount of funds we've tracked that have positions on in this regard. The report notes that there are very deep short positions in the 10 Year Treasuries & 30 Year Treasuries but they were starting to modestly cover. They also apparently reduced some of their long 2 Year Treasury positions. These latest moves seem to indicate that hedge funds as a whole are scaling back a bit from the curve steepener trade. You'll remember that we've noted hedge fund legend Julian Robertson has put on a curve cap play which bets on rising interest rates on the long-term bonds. On the other side of this argument, we've also seen bond connoisseur Bill Gross of PIMCO wager on deflation by buying long-term treasuries recently. This debate will surely wage on throughout the end of this year and well into next year, so we'll continue to track what side of the trade prominent hedge funds are taking.

Overall, a very intriguing report as it examines the hedge fund landscape as a collective whole as it pertains to portfolio adjustments. Here is the hedge fund trend monitor report from Bank of America Merrill Lynch embedded below:

Alternatively, you can download the .PDF here.

For more on current hedge fund strategies, we've covered a wide variety of reports from Goldman Sachs that we highly recommend checking out. They recently issued their 'Best Long & Short Strategies' in the current markets where they examine some of the trades hedge fund might be putting on. Additionally, they also have a hedge fund trend monitor of their own, similar to the one above. Lastly, they've also released a report on 'Where To Invest Now'. All are great additional reading on the topic of current hedge fund strategies. We'll continue our hedge fund portfolio tracking as always and will keep you updated as to what the smart money is up to.

Jeffrey Saut Weekly Investment Strategy (Raymond James): Direction Dictates

Raymond James' chief investment strategist Jeffrey Saut is back with his weekly Investment Strategy. Last week, his piece 'Octobered?!' looked at returns during some of the market's historically worst months. This week's piece definitely caught our eye because Saut calls the passage below "two of the most important paragraphs I have ever encountered in more than 40 years studying markets."

Taken from Stock Profits Without Forecasting by Edgar S. Genstein, here are the two paragraphs he is referring to, started with the following quotation:

"The absolute price of a stock is unimportant. It is the direction of price movement which counts.”

“During major sustained advances in stock prices, which usually occupy from five to seven years of each decade, the investor can complacently hold a list of stocks which are currently unpredictable. He doesn’t worry about the top because he knows he is never going to sell at the top. He knows that the chances are overwhelming in favor of the assumption that he will get far better prices by waiting until after the top is passed and a probable reversal in trend can be identified than he will ever get by attempting to anticipate the top, and get out on the nose.

In my own experience the largest profits we have ever taken have come from stocks purchased while they were making a new high in a market which was also momentarily expecting the top. As I have already pointed out the absolute price of a stock is unimportant. It is the direction of the price movement that counts. It is always probable, but never certain, that the direction of the price movement will continue. Soon after it reverses is time enough to sell. You should sell when you wish you had sold sooner, never when you think the top has arrived. That way you will never get the very best price – by hindsight your individual transactions will never look daring. But some of your profits will be large; and your losses should be quite small. That is all that is necessary for a satisfactory, enriching investment performance.”

Definitely food for thought and especially relevant given the massive rally we've seen from this year's March lows. Embedded below is Saut's market commentary for this week, "Direction Dictates":

Alternatively, you can download the .pdf here.

If you're interested, you can also check out Jeff Saut's commentary from last week where he examined historical stock market performance in the month of October.

Monday, October 12, 2009

The Case For Agriculture From Hedge Fund Passport Capital

John Burbank's hedge fund firm Passport Capital has put out numerous interesting research pieces in the past and we've tried to detail some of their intriguing investment plays, such as their curve steepener. This time around though, they have taken an in-depth look at the agricultural sector as an attractive investment going forward. Their bullishness on the sector is noted through their newly opened Agriculture fund that debuted in March of this year and has seen solid performance. Additionally, they have large agricultural stakes in their portfolio, as some of their top holdings include the likes of Potash (POT) and Mosaic (MOS). Their research piece is entitled, "The Case For Agriculture" as they provide a compelling case from how you go from dirt to the dinner table. The overall meme of investing in agriculture is by no means new and is largely contingent on global growth, expanding populations, and increased consumption of product. That said, Passport expands on these arguments below in their exclusive look.

The hedge fund's specific view is that "growing global demand for agricultural commodities and food products with constrained supplies, processing capacities, and distribution channels provides an attractive investment opportunity." While they cite the typical arguments of global population increase and increased demand for crops, they also delve into the cycles as illustrated below:

(click to enlarge)

As you can see above, they've laid out the secular trends with cyclical influences to lay out four stages in the global food cycle. There are two extremes in which you see supply destruction and/or demand stimulation where prices obviously are most likely to rise and then you see demand destruction and/or supply stimulation where crop prices are most likely to fall. They also highlight the fact that demand for food has not historically declined as significantly as demand for other goods during times of economic constraint. After all, people have to eat to survive.

As middle class workers around the world begin to accumulate wealth, they are able to enjoy a more protein rich diet that they were previously not used to. Passport identified this trend and has also noticed demand for agricultural products is rising. They cite those two reasons as major growth drivers and also note the fact that agricultural demand has outpaced production, thus limiting inventories and raising prices.

Overall, they believe a unique opportunity has arisen due to tight credit conditions and reduced asset values. They are particularly focused on fertilizer producers, sugar producers, as well as companies that produce proteins through various dairy or meat products. They think the agricultural industry is set for a shift and is in the early part of a metamorphosis. We've already touched on the rising demand for agricultural products, but they believe this is set to rise even further as the global population is predicted to "increase by more than one-third, to a staggering 9 billion people by 2054."

(click to enlarge)

If you're looking for a solid long-term trend to play, this could very well be a nice place to look. Don't forget that there are also a few other strong proponents of the agricultural sector in addition to Passport. Ex-Quantum Fund manager and noteworthy investor Jim Rogers has been bullish on agriculture for a while now. Additionally, market Strategist Don Coxe also likes the sector. While we saw the stocks of fertilizer producers and various ag companies run rampantly higher preceding the crisis, they too were hit in the equities downturn. While they have rallied back with the rest of the market, it will be interesting to see if they can outperform over the long-term as this investment idea is focused on capturing the trend shift. Passport has compiled an excellent presentation on the sector and you can access their excellent in-depth look below.

CLICK HERE to view & download Passport Capital's presentation entitled, "The Case For Agriculture."

For more on John Burbank's hedge fund Passport Capital, make sure you also check out their curve steepener play, an overall bet on inflation. Additionally, you can check out our post covering Passport's portfolio to see what other ideas they're playing.

Hedge Fund D.E. Shaw & Co Updates Two Positions

Hedge fund D.E. Shaw & Co has recently updated its stakes in two companies. Firstly, we see that they have acquired a call option on Kid Brands (KID) with an exercise price of $6.63 to the tune of 15,000 shares. The option has an expiration date of 9/22/2019 and was purchased on September 22nd, 2009. Following this purchase, they now have nominal exposure to 30,000 shares in KID.

Secondly, we also see that D.E. Shaw has adjusted their stake in Spectrum Brands (SPEB). On September 17th, 2009, they sold 131,143 shares at a price of $23 per share. Following this transaction, they now hold 4,069,995 shares. This is the second round of selling D.E. Shaw has done in SPEB as we covered their previous Form 4 filing as well. Also notable is the fact that fellow hedge fund Harbinger Capital Partners has in the past disclosed a stake in Spectrum as well.

In terms of other recent activity from D.E. Shaw, we noted their increased stake in Priceline (PCLN). David E. Shaw founded the hedge fund and still oversees strategic maneuvers at the firm, but no longer is active in the day to day operations. In Alpha's hedge fund rankings, D.E. Shaw was ranked 6th in the world. We recently posted up some interesting newsletters direct from the hedge fund firm and you can check them out on the topics of:

- Common Trading Mistakes
- Tracking Asset Class Returns Through the Crisis
- The Basis Monster That Ate Wall Street.

Taken from Google Finance, Kid Brands is "a designer, importer, marketer and distributor of infant and juvenile and gift consumer products. The Company’s operations consist of Kids Line, LLC (Kids Line), Sassy, Inc. (Sassy), LaJobi, Inc., (LaJobi) and CoCaLo, Inc., (CoCaLo), each direct or indirect wholly owned subsidiaries, design, manufacture through third parties and market products in a number of categories including, infant bedding and related nursery accessories and decor (Kids Line and CoCaLo); nursery furniture and related products (LaJobi); and developmental toys and feeding, bath and baby care items with features that address the various stages of an infant’s early years (Sassy). The Company’s products are sold primarily to retailers in North America, the UK and Australia, including national retail accounts and independent retailers (including toy, specialty, food, drug, apparel and other retailers), and military post exchanges. "

Taken from their company website, Spectrum Brands includes brands such as 8 in 1, Cutter, Jungle Labs, Rayovac, Remington, Schultz, and more.

Where To Invest: Research From Goldman Sachs

Below is an intriguing presentation from Goldman Sachs regarding the topic of where to invest your money in the current markets. This is a great tie-in with another one of their recent pieces that we also covered on the blog where Goldman examined the best long & short strategies in the current markets.

Embedded below is Goldman's piece entitled, "Where To Invest Now: Sustainability Of Rally Depends On Final Demand":

Additionally, you can download the .pdf here.

Make sure to also check out the other recent Goldman research we've posted up:

- The Best Long & Short Strategies Currently
- Market Structure Overview