Just wanted to post up an updated list of the most popular articles on Market Folly from the past month or two. Here's some great reads you might have missed:
1. The Invisible Hands: Hedge Funds Off the Record by Steven Drobny (Book Review)
2. Latest investor letter from Louis Bacon's prominent global macro hedge fund Moore Capital Management
3. Jim Rogers is shorting US & emerging market indexes
4. First quarter investor letter from Ricky Sandler's $5.4 billion hedge fund Eminence Capital
5. Free 30-day trial to Alphaclone for MarketFolly readers (the hedge fund replicator we use)
6. Ten reasons to buy bonds
7. In-depth notes from the Value Investing Congress
8. Book review of Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff by Christine Richard
9. Hedge funds are very short 10 year treasuries
10. The smart money's been selling equities
11. Investor psychology illustrated: where are we in the cycle?
12. Key level to watch in the stock market
As always, thank you for reading! If you've enjoyed the content, please consider making a donation. And if you aren't already, make sure to receive our free daily hedge fund updates via email or via RSS reader.
Friday, May 14, 2010
Just wanted to post up an updated list of the most popular articles on Market Folly from the past month or two. Here's some great reads you might have missed:
We just wanted to highlight that FinViz is a great resource for free market screening & analysis if you hadn't heard about it already [FinViz]
The forthcoming golden age of stockpicking [Abnormal Returns]
Ray Dalio explains the principles of Bridgewater Associates [Dealbreaker]
Rail traffic continues to see gains [Pragmatic Capitalism]
A distressed debt analysis of Visteon (VSTNQ) [Distressed Debt Investing]
Finding capitulation with the McClellan Oscillator [Trader's Narrative]
Charlie Munger on wisdom as it relates to investment management [Ycombinator]
Jeremy Siegel on why stocks beat bonds [Kiplinger's]
Strikingly positive commodity outlook from Goldman Sachs [Pragmatic Capitalism]
Cornell endowment chief plans his own hedge fund [Business Week]
The Ira Sohn Conference has a ridiculously good list of speakers this year [Ira Sohn]
'Banging' the US stock market [Huffington Post]
50 essential online tools for investors [OnlineDegrees]
Wednesday, May 12, 2010
Earlier this morning we presented the first quarter investor letter from Broyhill Asset Management's Affinity hedge fund where we highlighted their contrarian bet on long-term treasuries. In a time when seemingly everyone is betting on inflation, Broyhill has taken a converse stance and thinks caution is warranted. They anticipate an acceleration away from risk assets and into fixed income. They recently posted up the rationale behind this position on their blog View from the Blue Ridge and we wanted to highlight the key takeaways from their deflationary wager. Thus, we continue our impromptu inflation versus deflation debate as we earlier cataloged how hedge fund manager Kyle Bass sees inflation & currency devaluation in store around the globe.
Believe it or not, Broyhill had previously been short treasuries and covered in March. They've since gone long and see the 10 year treasury as an effective hedge against deflation. They have been buying here and will continue to do so on any weakness. Investors wishing to jump on this seemingly contrarian bet can buy exchange traded fund IEF for 10 year treasuries, or TLT for 30 year treasuries if you wanted a longer duration. This investment of course is in stark contrast to the myriad of other hedge funds that have been shorting long-term treasuries. Hedge fund Broyhill's rationale for owning bonds is refreshingly presented with various research found via the financial blogosphere. You can of course keep up with Broyhill's latest thoughts on their blog, View from the Blue Ridge.
Before getting into the ten reasons, we'll first start with their chart of 10 year treasury yields that has been in a decisive downtrend for the better part of two decades. Various crisis events over the past twenty years have caused momentary spikes in treasury yields, only to later resume the trend of decreasing yields.
And now, without further ado, here are Ten Reasons to Buy Bonds:
1. "Core inflation historically falls after the end of a recession. In the 11 recessions from 1950 through July 2009, the end of recession was followed by declining inflation, with CPI bottoming on average, about 29 months after the recession ended. Longer term inflation concerns are warranted, but there are more immediate threats in front of us."
2. "With core inflation declining and nominal economic growth rates weak in the aftermath of financial crisis, bond yields should trend lower in coming quarters. Investors looking to purchase long-term inflation hedges, should see more attractive entry points in the period ahead. Be patient."
3. "The average long term Treasury rate since 1870 is 4.3% and the average annual CPI is 2.1%. If inflation trends toward zero (before moving much higher later in the decade), then long term bond yields could naturally fall toward 2%."
4. "A near term deflationary environment bodes very well for long term bonds. Long term Treasury rates dropped from 3.6% in 1929 to 1.9% in 1941. Interest rates in Japan fell from 5.7% in 1989 to 1.1% in 2008 while the Nikkei dropped 77.2% over the entire period."
5. "The most common argument from Bond Bears is higher levels of debt must lead to higher yields. The reality is that the economic cycle still dominates intermediate swings in bond prices – a growing list of leading indicators are pointing to slowing economic growth ahead."
6. "The velocity of money is falling at the same time money growth has come to an abrupt stop. Monetary policy is effectively pushing on a string."
7. "Nearly 80% of money managers in Barron’s Big Money Poll say they are bearish on Treasuries. When everyone agrees that rates are headed higher, something else is bound to happen." As we here at Market Folly had posted up earlier, hedge funds had a record short position in 10 year treasuries, as illustrated below by Societe Generale:
8. "Similarly, retail investors are once again, near their highest allocation to equities at the market’s highs. I believe some call this Predictably Irrational. The last time bullish sentiment was this high was back in December 2007 when the S&P 500 was trading at 1500!" Bespoke Investment Group had in the past put out a graphic showcasing extreme levels of bullish sentiment found below:
Additionally, Pragmatic Capitalist charted out a survey of asset allocations that highlighted how everyone and their dog had moved out of cash and into stocks:
9. "Greek default and contagion risks across the Eurozone periphery. Cascading disruptions throughout the European banking system. This risk will not go away anytime soon. News will get worse before it gets better. Think back to how subprime was “contained” or how the Bear Stearns rescue marked the “panic lows” for the markets. Greece is a pebble in the Euro Pond. The ripples it causes will ultimately be very messy."
10. "Read number nine again."
Specifically regarding the recent implications of Greek default, we want to highlight that just this morning we posted how Kyle Bass' hedge fund Hayman Advisors is very concerned about currency devaluation and inflation around the globe. There's an interesting dynamic here because while Broyhill thinks the events in Greece will cause investors to 'flock to safety' in bonds, Hayman Advisors believes these sovereign defaults will only lead to inflation. The difference between these two stances is that Broyhill's position is based on a near-term reactionary move by investors while Hayman's thesis is centered on a theoretical long-term consequence.
An intriguing and well thought out set of reasons for a wager on bonds from Chris Pavese at Broyhill. They've definitely made a contrarian wager here and until yields on the 10 year treasury break out of that multi-decade downtrend, you can't really argue with their position in the near-term. Only time will tell whether we ultimately have inflation or deflation. But that certainly hasn't stopped hedge funds and investors from placing bets in the mean time.
Overall though, we've seen the vast majority of hedgies anticipating inflation. Howard Marks of Oaktree Capital laid out ways to play inflation. East Coast Asset Management came to the same conclusion of an inflationary stance in their deflation-reflation continuum research. And again as we noted this morning, Kyle Bass is now anticipating currency devaluation around the globe.
However, we do make note of a few select firms that are notably bullish on bonds and reside in the deflationista camp, including Hugh Hendry of the Eclectica Fund. Indeed, this is what makes markets great: a never-ending difference of opinion. Perhaps a compromise of views would be deflation in the short-term followed by longer-term inflation. We'll have to wait and see. For a primer on how to position portfolios for either outcome, head to our previous post on investment scenarios for inflation versus deflation.
Kyle Bass Sees Inflation & Significant Currency Devaluation Around the Globe (Hedge Fund Hayman Advisors)
Today via ARHedge we present you an excerpt from Kyle Bass' latest letter to investors of his Hayman Advisors firm. If you're unfamiliar with Bass, 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 and eventually turned $100 million into over $700 million based on his prediction of the crisis. This isn't the only major prediction he's been correct on, either. Bass was even predicting sovereign defaults back in May of last year. Needless to say, he's been right on the money. His latest missive is entitled, 'The Pattern is Set - Betting the Bank of a Keynesian Free Lunch'
Via ARHedge, here is an excerpt from Hayman Advisors' investor letter from May 11th:
He writes, "The ECB's monetary policy action simply adds to the moral hazard that was originally created on the fiscal side of the problem. The pattern is now set. This is exactly how very smart people meeting together in order to 'solve' a debt crisis frequently (and now permanently, it appears) mistake a solvency crisis for a liquidity crisis. From now on, it seems everything will be deemed to be a liquidity crisis that will be met with more 'bail-outs' and debt financed spending. This will eventually break traction in a violent way and facilitate severe inflation or even hyperinflation. The one thing the EU taught us this weekend is that paper money will be worth less (maybe much less) in the future."
Bass' notion of hyperinflation is intriguing because we haven't seen too many managers talk about the prospects for that outcome as most are fixated merely on the inflation versus deflation debate. However, we do recall black swan extraordinaire Nassim Taleb himself recently touching on how, from a portfolio construction point of view, it makes sense to allocate some capital to inexpensive insurance against possible hyperinflation. The wager doesn't cost you much and if you 'win', it pays off big. If hyperinflation doesn't come to fruition, then you haven't lost much capital. An intriguing thought certainly and Bass would probably agree with him on that notion.
The Hayman Advisors founder then ends his letter with a decisive analogy writing,
"This weekend, the EU and the IMF effectively went all-in with a bad hand in the highest stakes game of financial poker ever played with the world. We believe the agreement released was nothing more than a Potemkin agreement in order to placate bond investors. In the end (and there will be a reckoning for many countries) nations, including the United States, need to dramatically cut spending and get their fiscal balances in order. Unfortunately, our elected officials are on the hamster wheel of electoral cycles and are not able to make tough decisions like this as they would likely not be re-elected without a "sea change" in public opinion towards government spending and deficits. We are therefore on the path to significant currency devaluation around the world that will likely result in significant inflation. We increased our holdings of gold on Monday morning as well as taking other steps to position ourselves for the most likely outcome over the next few years. Interestingly enough, based upon the market reaction in the last 36 hours, it seems the law of diminishing returns applies to bailouts as well."
You can read the rest of his brief letter over at ARHedge.
So, we now see that Bass has increased his gold holdings and joins countless other hedgies who see gold as a safe haven and a way to hedge against currency devaluation. Lloyd Khaner of Khaner Capital last week gave an in-depth presentation on gold at the Value Investing Congress. And as we all know, John Paulson launched his gold fund as a bet against the US dollar. Not to mention, other prominent hedge funds like David Einhorn's Greenlight Capital as well as John Burbank's Passport Capital are storing physical gold.
It's very clear that number of prominent investing minds are concerned about currency devaluation and inflation going forward. Today seems to be inflation versus deflation day here on the site as earlier we posted up hedge fund Broyhill's contrarian bet on long-term treasuries and their ten reasons to buy bonds. Obviously this differs drastically from the vast amount of other hedge funds who have been short treasuries, wagering on rising rates and possible inflation. Well, the debate wages on, but we certainly know where Kyle Bass stands now, don't we?
In a continued effort to expand our hedge fund coverage, we're always on the lookout for intriguing insight from 'under the radar' investment managers. As such, today we present you with market commentary and investment ideas from Broyhill Asset Management's Affinity hedge fund. Broyhill started as a family office managed by Paul H. Broyhill and has developed a long-term investment philosophy focused on capital preservation first and foremost. In their first quarter investor letter, we see they were right on the money recommending a cautious stance. As we all know, last week marked a precipitous drop in the market via the flash crash. To arrive at such a viewpoint, Broyhill used contrarian indicators such as the CBOE equity put/call ratio as well as extreme magazine covers & headlines. These are some of the same signals we pointed out in Jeff Saut's sell in May and go away missive.
To get a better idea as to Broyhill's investment exposure, let's take a look at their latest portfolio. Do you like going against the crowd? Well then you've certainly come to the right place. While numerous hedge funds (a.k.a. the crowd) have been shorting long-term treasuries, Broyhill is bullish on long-term treasuries and it marks their largest exposure today. Chief Investment Officer of their Affinity hedge fund, Christopher Pavese, wrote in a past commentary that, "It is important to note that in the near term, the contraction in private section credit combined with the threat of fresh credit concerns ahead, will likely keep a lid on inflation pressures. This view is perhaps where we differ most from today's consensus thinking, where many expect an immediate and permanent increase in inflation levels. We aim to capitalize on this departure from consensus later in the year, but importantly, the difference is simply one of timing."
Well for them, 'later in the year' quickly became 'now'. Investors flocked to safety in US treasuries during the flash crash last week and Broyhill expects the move out of risk assets and into government bonds to accelerate. Again this marks a contrarian stance as we recently saw global macro hedge fund Prologue Capital outline why macro factors are positive for risk assets. Broyhill has clearly taken a converse view. We like to present both sides to a compelling argument and Broyhill has certainly helped us in that regard. Interestingly enough, Chief Investment Officer Chris Pavese notes that they were previously short treasuries but covered in late march and then became buyers. Keep an eye out later today as we'll be posting up a separate piece from Broyhill outlining ten reasons to buy bonds.
Turning to equities, we also got a recent look at their top ten holdings, listed below:
1. St. Joe Company (JOE): 4.3% of assets
2. Wal-Mart Stores (WMT): 4.2%
3. Vodafone (VOD): 4.1%
4. Microsoft (MSFT): 4.0%
5. Kraft Foods (KFT): 3.9%
6. Nintendo (NTDOY): 3.8%
7. Humana (HUM): 3.6%
8. iShares Silver Trust (SLV): 3.3%
9. Market Vectors Gold Miners (GDX): 3.3%
10. ConocoPhillips (COP): 3.1%
As you can see, Broyhill favors high quality names which is in line with numerous other hedge funds. As we've detailed before, David Einhorn of hedge fund Greenlight Capital is bullish on Vodafone, Bill Ackman of Pershing Square had assembled a large Kraft position, and numerous hedge funds have added Microsoft shares, citing undervaluation. So while Broyhill has gone against the crowd with their treasuries play, they are certainly with the crowd in the equity arena.
We also got a recent look at some of Broyhill's short exposure. Like the majority of hedge fund land, they are keeping individual names close to the vest, but they have listed their top sector shorts:
Education (9.6)% of assets
Recreational Vehicles (3.9)%
Business Equipment (3.9)%
Global Financials (3.9)%
This information is intriguing because they clearly have a large bet against education related stocks, a sector many Tiger Cub hedge funds have been quite bullish on. David Stemerman's hedge fund Conatus Capital had been long education plays but then sold out of them. We'll have to keep an eye on that as it has become a sector ripe with difference of opinion. Overall, Broyhill is 75.3% long and 44.7% short, leaving them 30.6% net long. This falls directly in line with what we've seen recently as hedge funds have reduced equity exposure.
In currencies, Broyhill has been long the Renminbi and short the Euro and the Yen. This again coincides with what we've seen in terms of hedge fund currency exposure. In commodities, Broyhill is long gold 9.6%, long oil 4.6%, and short copper -4.4%. Embedded below you will find their latest market commentary via Broyhill's first quarter 2010 letter:
You can download a .pdf here.
Intriguing stuff from Pavese and Broyhill and we'll certainly keep an eye on their contrarian wager. We've been covering a lot of excellent hedge fund commentary as of late and we posted up the following investor letters which we highly recommend reading:
- Louis Bacon's global macro fund Moore Capital Management
- Ricky Sandler's Eminence Capital
- David Einhorn's latest Greenlight Capital commentary
- Jay Petschek's Corsair Capital investor letter
Check back each day as we continue to chronicle what some of the most prominent hedge funds are up to.
We recently got a glimpse at the latest portfolio activity out of Eric Sprott's firm Sprott Asset Management. Per recent regulatory filings, we see that Sprott no longer holds a 5% ownership interest in Medusa Mining (MML). As we detailed back in August 2009, Sprott had previously held a 5.4% ownership stake in MML.
It's unclear as to whether or not they simply reduced their position size by selling shares or if they exited the investment completely. Foreign regulatory disclosures only require investment firms to disclose when they no longer own 5% of the issued shares in a given company. As such, Sprott could just now be under that threshold while still holding a position, or they could have sold completely out. We won't know until we get some details from the firm itself, but it's safe to say that they have been selling shares. In terms of other recent portfolio activity, we recently detailed how Eric Sprott's firm also started a new position in Orsu Metals.
Sprott has been bullish on precious metals for some time now and recently said to beware of fiat currencies at the most recent Value Investing Congress. Sprott of course also launched a physical gold trust which has been trading at a premium to NAV as of late. Needless to say, he's bullish on gold and selective miners.
Taken from Google Finance, Medusa Mining is "an Australian based gold producer, focused solely on the Philippines. The Company’s principal activities include mineral exploration, evaluation, development and mining."
We've covered the rest of Sprott's various miner positions for those interested as well.
Tuesday, May 11, 2010
Jeff Saut, Chief Investment Strategist at Raymond James, is out with his latest market commentary where he comically deems last week's flash crash a "pornographic-plunge." Saut has long been cautious on this market, awaiting an anticipated pullback and his latest missive outlines how we finally got that correction he was looking for. Last time around, Saut outlined some of his latest investment recommendations and the writing was on the wall so to speak as he pointed out various contrarian signals in his sell in May and go away piece. Needless to say, he was patting himself on the back this time around for his nice cautious call to raise cash and hedge portfolios before the flash crash hit.
That said, Saut did advise investors to sell those hedges into the twilight last week as the market headed viciously lower as he believes that would be the low end of the correction. He doesn't think equity markets will spring right back up, but rather will take some time to digest the move before "resuming an upward march." This is a decidedly different stance that global macro hedge fund player Louis Bacon. In his latest Moore Capital investor letter, Bacon ponders a possible return to a bear market by year-end.
Saut, however, makes special note that his proprietary indicator still remains oversold and that the market simply experienced a correction. Also, he says it's time to buy some stocks, writing, "(I'd) advise using some of the cash raised over the past six weeks for selectively upgrading the stocks in your portfolio. One such name for your consideration is 7% yielding Enterprise Products Partners (EPD/$32.75/Strong Buy). Conveniently, we added this name to the Focus List last Friday."
Embedded below is the latest weekly investment strategy from Raymond James' Jeff Saut:
You can download a .pdf here.
Lastly, regarding the US dollar, Saut outlines how the greenback could be entering new bull market territory. Still though, he likes commodities and "stuff stocks" for the long-term despite possible future dollar strength which is interesting and something to keep an eye on.
Saut ends his note with a brief quote that, "Crisis = Danger + Opportunity." Regardless of whether or not you're in the bull or bear camp, it's advisable to keep an eye on a key level in the stock market. The market will ultimately decide for you if it rallies through that level or fails at it. For more insight from market strategist Jeff Saut, you can see some of his latest investment recommendations.
A big hat tip again to the Inoculated Investor who has been cranking out very in-depth notes from the latest investment conferences. Earlier, we posted up his summary of Berkshire Hathaway's annual meeting and today we're posting up his 18 page summary of the Value Investing Congress.
From the VIC, we've already posted up Whitney Tilson's bearish presentation on housing, as well as a set of notes from the event. But if you really want the investment ideas drilled down to the specific thesis, then this is the set of notes for you.
Embedded below is the Inoculated Investor's summary of the Value Investing Congress:
You can download a .pdf here.
For more great hedge fund commentary and investment insight, we've covered a ton of great investor letters as of late. Be sure to check out Louis Bacon's letter from global macro giant Moore Capital, the Q1 letter from Ricky Sandler's Eminence Capital, market commentary from David Einhorn's Greenlight Capital, as well as Jay Petschek's latest commentary from Corsair Capital. Make sure to also check out the Inoculated Investor's site.
Today we present you with the first quarter 2010 investor letter from hedge fund Moore Capital. Louis Bacon's commentary details the 20 year history of his hedge fund and provides an update as to the current financial market landscape. Moore Capital is of course one of the most prominent hedge funds out there and Louis Bacon recently appeared on Forbes billionaire list. It's been a while since we covered this global macro hedge fund giant, but we previously detailed how Moore added to an insurance play in their portfolio.
Moore's Remington Investment Strategies fund was up 21.58% for 2009 and was up 2.3% for the first quarter in 2010. We noted last month that thus far in 2010, global macro funds have lagged. Moore's Global fund was up 20.6% for 2009 as outlined in our list of hedge fund performance numbers. Outlining today's risks for hedge funds, Bacon feels that there are two major headwinds: investor risk and regulatory risk. But first, we'll outline his stance on the markets.
Moore Capital has been playing the cyclical economic bounce caused by the inventory cycle and various stimulus packages. Bacon then goes on to write, "I expect there are a number of positives in the markets and economies that will start to turn retrograde and we should see a resumption of a bearish market amid the secular softening of U.S. economic might. Markets could well be worrying about 'stall speed' by the end of the year."
He also made it clear that there are a large number of uncertainties out there right now and that he is wary of committing long-term capital. However, he sees ripe opportunity for global macro trading as there are divergences a plenty within the global investment landscape as each country and region deals with fiscal and monetary reactions to the crisis. Focusing specifically on Europe, Bacon sees "long-term disastrous consequences for the (European) Union and Europe."
Focusing next on investor risk, Bacon prudently notes that, "There are times an almost unlimited amount of assets can be put to work - as in the second half of 2009 - but these are normally the times that the flow of clients' funds are redeeming, as happened last year." Moore Capital only saw limited losses in 2008 (down only 4.8%) as they did a good job of protecting investors compared to most hedge funds. However, in a time where everyone seemingly needed liquidity, even those with solid performance were hit by redemptions. For 2010, Bacon feels like the investment landscape is more divided and highlights that Moore proprietary capital represents by far their largest investor. He feels they've made successful adjustments in order to mitigate the risk of investors fleeing en masse should a liquidity crisis occur again in the future.
Turning to regulatory risk, Bacon focuses on the increasing divergence between the US and European financial systems. The US has been reducing systemic risk while 'too big to fail' money-center banks have now become 'too big to bail out.' While increased regulation regarding hedge funds in the US seems inevitable, Bacon thinks it will be 'on the benign side.' Conversely in Europe, legislation is being proposed that could decidedly shift the alternative asset management industry.
Bacon then turns the topic of his letter to an insightful archive of his firm's past. For the entirety of Moore's 20 year history, we defer to the investor letter itself. However, we wanted to point out two intriguing lessons that Bacon learned in 1994, his fund's worst year. Bacon learned that, "a huge positive year does not absolve you of the collateral damage of much smaller losses in the following; being right in the long run, making money, and surviving can be exclusive and non-reinforcing outcomes."
Embedded below is Louis Bacon's latest market commentary from Moore Capital's first quarter investor letter:
You can download a .pdf here.
A great historical look at one of the most prominent global macro hedge funds in the game. We're always fascinated with the wide range of reasons as to how hedge funds are named, so we'll leave you with the origination of Moore Capital Management directly from Bacon himself. "The Moore moniker was arrived at partly due to my brother, Zack Bacon, having already taken up the Bacon name in his company and to another of my mentors, Paul Jones, who used his middle name - Tudor - for his own company. And 'Moore' acknowledged my mother's name in that my slim inheritance from her of some $25,000 was the genesis of my track record around which I raised my first fund."
It's a rare treat to see Bacon's insight and clearly the investment landscape is littered with opportunity on both the long and short sides in numerous asset classes. His fund has generated obscenely good performance so when Mr. Bacon talks, you listen (or in this case, read). We've covered numerous other prominent hedge fund investor letters as of late and we also highly recommend reading Ricky Sandler's letter (Eminence Capital), the latest letter from David Einhorn's Greenlight Capital, as well as Jay Petschek's latest commentary from Corsair Capital.
Fund manager of the decade Bruce Berkowitz and his Fairholme Fund recently increased their stake in American International Group (AIG). We had previously revealed his new AIG stake and then posted up when SEC filings confirmed his position size. Fairholme recently filed an amended 13G with the SEC disclosing that they now have an 18.9% ownership stake in AIG representing 25,467,800 shares due to activity on April 30th, 2010. This is quite a sizable increase as Berkowitz previously had an 11.1% stake in the company. This means that over the past month and a half, Fairholme has added 10,429,700 more shares, a 69.4% increase in their position size.
Additionally, we see that Berkowitz has filed another regulatory disclosure with the SEC regarding his position in Americredit (ACF). In the filing (which was also made due to activity on April 30th), we see that Fairholme has reduced its ownership stake in ACF to 21.0%, down from 26.4%. We'll continue to track his latest investment activity.
It's clear that Berkowitz's portfolio theme revolves around betting on financials & turnarounds. Recent portfolio activity out of Fairholme Fund includes a brand new stake in Goldman Sachs (GS) that was revealed by Berkowitz last week as mentioned in a summary of the Value Investing Congress.
Taken from Google Finance, AIG is "a holding company, which through its subsidiaries, is engaged primarily in a range of insurance and insurance-related activities in the United States and abroad. AIG's four reportable segments include: General Insurance, Domestic Life Insurance & Retirement Services, Foreign Life Insurance & Retirement Services, and Financial Services."
Americredit is "an auto finance company operating in the automobile finance business. The Company purchases auto finance contracts for new and used vehicles purchased by consumers from franchised and select independent automobile dealerships in its dealership network."
You can view all of our past coverage of Berkowitz's Fairholme by scrolling through our posts via that link.
Monday, May 10, 2010
Today we're covering in detail the recent presentation from Whitney Tilson and Glenn Tongue of hedge fund T2 Partners from the Value Investing Congress. Since inception, T2 is up 184.4% compared to an S&P 500 return of 17.7% over the same timeframe. Earlier in the week we detailed notes from the Value Investing Congress and briefly touched on T2's presentation. Below we'll take an in-depth look as their speech centered on a duopoly of investment ideas: one long and one short. We'll start with T2's bearish stance on the housing market and their short position in homebuilders.
Hedge fund T2 Partners gave a bearish presentation on housing two years ago at the Value Investing Congress and they were back this time around with continued skepticism. In the near term, they felt that the government tax credit and the fear of rising rates has spurred buying activity in the marketplace. However, they are quick to point out shadow inventory that lurks in waiting. The current housing overhang is around 7 million homes, and that doesn't include the 300,000 new defaults that occur each month.
Of the defaulters who haven't made a payment in a full year, 23.6% still have yet to be foreclosed on. Interestingly enough, T2 also notes that homes with negative equity are a much bigger driver of defaults than those affected by unemployment. The mortgage crisis is now being driven by underwater borrowers. This differs from the previous scenario where default was driven by resets. They also present a hypothetical scenario that if house prices were to drop an additional 10%, we'd see an increase of 56% more underwater homeowners.
It's clear we're still not out of the woods here yet. While most wouldn't argue with that statement, the numbers are pretty frightening. A weak housing market was ultimately one of the main contributors to the weak economy. As such, the American economy can't truly be repaired until the housing market itself is repaired. Thus, T2 Partners is short the industry via the iShares Dow Jones US Home Construction Index, ticker ITB. You can read more specifics regarding their short in the presentation at the bottom of the page. T2's presentation is a stark contrast to that of hedge fund Ellington Management's who as we covered earlier are bullish on housing.
Whitney Tilson and Glenn Tongue also presented an investment idea on the long side: Anheuser-Busch InBev (BUD). Their presentation entitled, 'Return of the King' focuses on how the merger between the two previous entities has created the largest global brewer which is seeing huge beer volumes, revenues, and EBITDA. Their hedge fund's investment thesis on BUD centers on the fact that this is a best of breed business with pricing power and high margins in major markets. On the valuation side of things, BUD trades at 8.5x 2012 free cash flow.
The company has a very wide moat with attractive returns on capital and they are able to generate high EBITDA margins through regional economies of scale. Not to mention, in Anheuser-Busch InBev's top 31 markets, they are #1 or #2 in 25 of them, as they have effectively gobbled up tons of market share. And, one intriguing fact about the company: they are also the largest bottler of Pepsico products outside of the US. Overall, Tilson and Tongue think shares are worth anywhere between $79 and $91 over the next two years. This position joins T2's ever growing portfolio of undervalued blue chip stocks.
Embedded below is hedge fund T2 Partners' entire presentation from the Value Investing Congress:
You can download a .pdf here.
In terms of their general stock market stance, Tilson and Tongue feel that the market is likely range bound as interest rates are low but P/E multiples are high. They don't necessarily see how a sustained bull market can occur in the near future. For more coverage of the Value Investing Congress, be sure to check out notes from day one as well as a summary of day two's presentations as well. Lastly, check back here daily as we'll be posting up more in-depth research from the event.
Overall, a well-illustrated set of ideas from Tilson and Tongue. For more on their hedge fund, we've covered T2 Partners' short positions, Tilson's explanation of their short in LULU, as well as T2's annual letter.
Ken Griffin's investment firm Citadel recently disclosed a new short position via regulatory filings in the UK. Per the disclosure, we see that Citadel Advisors has a short position in Legal & General Group Plc (LON: LGEN) to the tune of -0.4361% of the shares outstanding. This filing was due to activity on May 4th, 2010 and is a brand new short stake. Citadel isn't the only firm with a short position in this company either. Marshal Wace LLP also recently disclosed they are short -0.2% of LGEN shares as of the 4th of May.
Additionally, we recently saw last week that Ken Griffin's firm disclosed a 5.3% stake in Photronics (PLAB) with 2,966,579 shares. This is a massive increase in their position as they only owned a few thousand shares back on December 31st, 2009, the last time we saw a disclosure relating to this position. It's been a while since we last covered activity from Ken Griffin's firm, but last month we detailed Citadel's increased stake in Leap Wireless (LEAP) as well.
We've been detailing short disclosures from various hedge funds and prominent investors as of late and noted that Jim Rogers is short various indexes, London based Lansdowne Partners has been increasing their short in Prudential, and Whitney Tilson's T2 Partners has been short Lululemon Athletica. While short positions are typically kept closely guarded to the vest, it's a refreshing change for us to be able to present you these various disclosures.
Taken from Google Finance - "Legal & General Group Plc is a provider of risk, savings and investment management products in the United Kingdom. It operates in four segments: Risk, Savings, Investment management and International."
To learn more about Ken Griffin, we recommend checking out Scott Patterson's new book The Quants as Citadel's founder is featured in it.
Phil Falcone's hedge fund Harbinger Capital Partners have disclosed yet another stake via regulatory filings in the UK. Harbinger now owns 41.89% of the ordinary shares in African Medical Investments (LON: AMEI). They own 86,501,000 shares in the company and this marks a brand new position for them. African Medical recently issued a secondary offering on April 30th, 2010 for 12,500,000 shares.
Falcone's hedge fund has seen a flurry of portfolio activity as of late. Their latest AMEI position comes after we recently saw that Harbinger still owns shares in Mercer International (MERC) and also sold shares of New York Times (NYT). Additionally, Falcone's hedge fund started a new stake in Palm prior to the buyout from Hewlett Packard. Not to mention, the hedge fund even announced its ambitious plans for a 4G wireless network.
Taken from Google Finance, "African Medical Investments plc (African Medical Investments) is engaged in the healthcare sector in Africa. The Company, through VIP Healthcare Solutions Limited (VIP Healthcare), manages the Dar es Salaam Trauma Centre and Well Woman Clinic, the Trauma Centre in Harare and Airport Medical & Travel Vaccination Centres at Johannesburg International Airport and Cape Town International Airport. The Company has two further facilities in development: the Maputo Trauma Centre and Well Woman Clinic in Mozambique and the Airport Medical & Travel Vaccination Centre at Kilimanjaro International Airport. On December 9, 2009, the Company acquired VIP Healthcare Solutions Limited (VIP Healthcare)."
For more on our coverage of Falcone's hedge fund, head to Harbinger's recent portfolio activity.
Sunday, May 9, 2010
Confidence Game: How A Hedge Fund Manager Called Wall Street's Bluff by Christine Richard (Book Review)
We've covered hedge fund manager Bill Ackman extensively here on Market Folly so it's always intriguing when a book is released on an investor we've seemingly tracked forever. As such, we were eager to dive into Bloomberg News reporter Christine Richard's new book, Confidence Game: How A Hedge Fund Manager Called Wall Street's Bluff. For those of you unfamiliar with the backstory, it centers on Ackman's short position in bond insurer MBIA and the ensuing battle he waged against the company, regulators, and seemingly anyone who thought he was wrong.
At the time, this was one of his most successful investments as it earned his firm $1.1 billion, a figure few can scoff at. Since then, Ackman has bested his performance with his investment in General Growth Properties which he has labeled the "best investment he's ever made." Still though, we'd argue that he deserves more praise for his work on MBIA because of the endless amount of obstacles he faced in proving his thesis ultimately correct. Not to mention, he dared to question the unquestionable triple A rating. Everyone knows that short selling is a whole different ballgame when it comes to investing. There are more risks involved and you have to cover every possible angle of your assessment. Being short a company is one thing. Publicly voicing your short position is quite another, as you immediately are labeled an enemy. This book details the multitude of trials and tribulations Ackman faced on his quest to prove his thesis and in the process silence his doubters.
Richard's Confidence Game chronicles a six year long epic battle between Ackman and MBIA, the regulators, the media and more. Think about that for a second. While he was ultimately proven correct, this took six years to play out. Buying and holding a stock long is one thing, but going against the crowd week in and week out for over half a decade to prove your point has to be draining. That's the crazy thing here, Ackman didn't get discouraged. He was not only making a contrarian wager, he was going up against the 'holy grail': a company wielding the coveted AAA rating. MBIA apparently thought they were untouchable. They were wrong.
Ackman faced an uphill battle from the start as he was labeled a fraud by the media and was even investigated by Eliot Spitzer and the SEC. This only added fuel to Ackman's fire and it's almost as if he started to take things personally as he worked even harder to prove that his thesis indeed was correct. As we all know, short sellers get a bad rap as they risk ridicule and harassment immediately upon going public with their crusade against a given company. Simply put, this book shows you what it's like to be a short seller. It takes you inside the research process, inside the trials and tribulations, and most importantly, inside the short seller's head. This book sets itself apart with a behind the scenes look at the process and all the baggage that comes with the territory of betting that something will fail.
Some of the more intriguing facets of Confidence Game are the exchanges between Ackman and MBIA's management team. In fact, the book starts immediately with a confrontation between the two where executives essentially try to bully Ackman. Even more impressive though is the book's ability to tell a story of perseverance and determination. This narrative covers all the proverbial bumps in the road as you watch Ackman transform from a perceived 'villain' into a hero. Before beginning the book, we knew he had conviction in his pick. (Let's face it, he stuck with it for so many years). What the book illustrates though is a detailed account of how Ackman first started buying credit default swaps on MBIA at a cost of $16,000 (per each $10 million of MBIA debt insured) and his hedge fund was still buying when the same protection cost upwards of $580,000. He hit many roadblocks along the way and had many opportunities to exit the position entirely. Instead, he upped his conviction and upped his wager.
Richard's book also brings to light a few pertinent issues that still seem to bluff Wall Street itself. Richard does an excellent job underlining just how over-reliant the markets are on financial models. Not to mention, she draws attention to the fact that many individuals on the Street place waaay too much blind faith and trust in credit ratings as if they are the end-all be-all of financial markets. Clearly, that's a recipe for disaster. And as we all know, it was.
One thing that struck us were the vast similarities between Confidence Game and David Einhorn's book, Fooling Some of the People All of the Time. Both detail arduous battles between companies and short sellers. In both cases, the hedge fund managers ultimately emerge victorious. Generally, we prefer to hear the tale direct from the horses mouth (ala how Einhorn wrote his own story). However, that's not to take anything away from Richard at all. There's no denying she did a masterful job chronicling the events and taking you inside Ackman's head and all his past encounters. The level of detail and research in Confidence Game is impeccable.
In the end, this book typifies what a grueling road short selling can be. Christine Richard's Confidence Game shines a light on issues that Wall Street still needs to address further. While the book won't all of a sudden teach you how to be a successful short seller (we'd recommend The Art of Short Selling for that), it does walk you through various steps in the process, all while telling a tale at the exact same time. A tale, we might add, that centers around one of the hedge fund managers we've tracked extensively on the site for some time. As such, it is the perfect combination of recent history, education, and entertainment. If you want to learn more about Bill Ackman as an investor, the strenuous short selling process, and the human trait of unbridled perseverance, then Confidence Game is obviously for you.
As mentioned above, we've covered hedge fund manager Bill Ackman extensively on the site so for those of you seeking even more information, be sure to check out our profile on his hedge fund Pershing Square Capital, Ackman's recent media appearance, as well as our coverage of Ackman's portfolio.
For more great books, be sure to head to our recommended reading lists.