Thursday, December 23, 2010

Happy Holidays From Market Folly!

We just wanted to take this opportunity to say thank you to our readers for reading the site and to wish you a relaxing and enjoyable holiday season!

Merry Christmas, Happy Hanukkah, Happy Kwanzaa, Happy Festivus, Happy Holidays (and insert any others we might have left out here)!

Hedge Fund Carlson Capital Exits Portec Rail Products (PRPX)

Last week, we revealed that hedge fund Carlson Capital had filed an activist 13D on shares of Portec Rail Products (PRPX). In it, they disclosed a 5.2% ownership stake in a company that was subject to a tender offer. Due to an amended 13D filed with the SEC after market close yesterday, Carlson has completely exited its position in PRPX. And although we don't know for sure, the likely reason could be below:

According to Reuters, "As of the subsequent offering period's expiration time, approximately 8,662,078 shares had been tendered and not properly withdrawn pursuant to the tender offer, which represented approximately 90.20% of the outstanding shares. L.B. Foster and Foster Thomas Company accepted for payment all shares that were validly tendered and not properly withdrawn, and paid for these shares in accordance with the tender offer's terms. L.B. Foster intends to effect a short form merger of Foster Thomas Company with and into Portec, with Portec being the surviving corporation, as soon as practicable. As a result of the merger, Portec will become a wholly owned subsidiary of L.B. Foster."

If you're slightly confused as to the tender offer timeline and Carlson's involvement, head to our previous post on PRPX. But as of December 21st, the hedge fund no longer owns shares.

Taken from Google Finance, Portec "manufactures, supplies and distributes a range of rail products, including rail joints, rail anchors, rail spikes, railway friction management products and systems, railway wayside data collection and data management systems, and freight car securement systems."

What We're Reading ~ 12/23/10

A head's up interview with David Einhorn [Dealbreaker]

Talking investment strategy for 2011: a roundtable [Bespoke]

Elfenbein's buy list for 2011 [CrossingWallStreet]

Whitney Tilson's short thesis on Netflix (NFLX) [Market Folly]

Netflix CEO Reed Hastings responds to Tilson [SeekingAlpha]

Whitney Tilson responds to Netflix CEO's comments [zerohedge]

Investing fads and themes by year, 1996-2010 [ReformedBroker]

For activist funds, a long-term approach to investing [Dealbook]

RenTec's Medallion fund poised for two of its 'worst' years [Institutional Investor]

Interview with tech-focused hedge fund Thompson Peak Capital [BusinessInsider]

Top 10 hedge fund stories of 2010 [AbsoluteReturn+Alpha]

77% of RIA's are satisfied with their jobs [WSJ]

Discovery Communications market neutral pair trade [AboveAvgOdds]

Ten investment ideas for 2011 [Marketwatch]

Wednesday, December 22, 2010

Howard Marks on Gold

Howard Marks of Oaktree Capital has been on a writing spree as of late. Yesterday we posted Howard Marks' thoughts on the credit cycle. Today, we turn our attention to his memo, 'All That Glitters' which focuses on everyone's favorite precious metal: gold.

Reasons to Own Gold

He starts off his missive by examining the reasons to own gold. He lists the following as pluses: "It serves as a reliable store of value, especially in challenging and uncertain times. It's a hedge against inflation, since its price rises in sympathy with the general level of prices. It exists without the involvement of man-made constructs such as governments. And it's desired and accepted all around the world (and always has been)."

Why You Shouldn't Own Gold

On the contrary, Marks provides equal weight to the other side of the argument. Citing reasons not to own gold, Marks prudently highlights that, "gold is nothing but a shiny metal. Since its real-world applications are limited to jewelry and electronics, very little of its value comes from actual usefulness.

Marks' Take on Gold

While he uses the first half of his letter to cohesively outline the arguments both for and against gold, he uses the latter half to focus on his personal view of the metal. Marks has a problem with the precious metal in that he can't properly value it. He writes, "But there's no analytical way, in my opinion, to value an asset that doesn't produce cash flow ... and especially one that doesn't at least have the prospect of doing so." On this he further opines that, "In fact, that's true of all non-income-producing assets: they're only worth what buyers will pay for them."

He then goes on to summarize his view by writing, "My point here is the one I've held longest on this topic: that gold works as a store of value solely because people agree it will." In the end, he used to be a non-believer in gold but has since come around to some of its merits. He primarily sees its use as "a useful contributor to safety through diversification."

Embedded below is Howard Marks' memo, 'All That Glitters':

You can download a .pdf here.

Toward the end of the letter, Marks focuses on the US dollar's weakness and its potential role in gold's strength. This is the exact premise John Paulson has used. Paulson & Co's gold fund is a bet against the US dollar.

Longtime readers of Market Folly know we have posted copious resources on the topic of gold, including viewpoints from many top hedge fund managers. And as you'll see below, the majority are proponents of the metal:

- David Einhorn stores physical gold

- Passport Capital's John Burbank prefers hard assets

- Dan Loeb buys physical gold

- Gold miners, not gold, are the play

Third Point Trims Position in Nabi Biopharmaceuticals (NABI)

Dan Loeb's hedge fund firm Third Point LLC just filed an amended 13D with the SEC regarding its position in Nabi Biopharmaceuticals (NABI). Due to portfolio activity on December 16th, Loeb has disclosed a 9.4% ownership stake in NABI with 4,000,100 shares. They sold shares on dates ranging from the 13th of December to the 20th and at prices from $5.60 to $5.73.

Back in April we revealed that Third Point was selling NABI shares and this time is no different as they've reduced their position from a previous 10.7% ownership down to the current 9.4%. However, Third Point still retains a sizable stake. For more on this hedge fund's latest activity, we posted up Third Point's most recent investor letter.

A potential thesis associated with this investment was revealed by Seth Hamot of Roark, Rearden, & Hamot Capital. It is a play on curing addiction to smoking and Hamot likes the royalty stream as Nabi partnered with Glaxo Smith Kline (GSK) on this vaccine. You can read his NABI thesis here.

Per Google Finance, Nabi Biopharmaceuticals is "a biopharmaceutical company focused on the development of vaccines addressing unmet medical needs in the areas of nicotine addiction and infectious disease. As of December 31, 2009, the Company’s product in development is Nicotine Conjugate Vaccine (NicVAX), a investigational vaccine for treatment of nicotine addiction and prevention of smoking relapse."

To learn to invest like Loeb, check out his recommended reading list.

Second Curve Capital Buys More Tennessee Commerce Bancorp (TNCC)

Tom Brown's hedge fund firm Second Curve Capital just filed a Form 4 with the SEC on shares of Tennessee Commerce Bancorp (TNCC). Per a transaction on December 17th, advisory clients of Second Curve purchased 10,000 shares of TNCC at a price of $4.10. After this transaction, Second Curve reported beneficially owning 1,242,456 shares of the company. We originally covered it when Second Curve started a new position in TNCC back in August.

Per Google Finance, Tennessee Commerce Bancorp is "a bank holding company formed to own the shares of Tennessee Commerce Bank (the Bank). The Bank conducts business from a single location in the Cool Springs commercial area of Franklin. As of December 31, 2009, the Bank had total assets of $1.4 billion. The Bank offers a range of retail and commercial banking services."

For other recent activity out of this hedge fund, we saw that Tom Brown almost tripled his stake in Banner Corp (BANR).

Tuesday, December 21, 2010

Dan Loeb's Third Point Q3 Letter to Investors

Dan Loeb's hedge fund firm Third Point is finally out with its third quarter letter to investors. The first half of Loeb's letter focuses on Ben Bernanke and the second half focuses on Third Point's portfolio. The latter portion is what we'll highlight below.

Third Point recently received AR Magazine's award for event driven fund of the year. Third Point now manages $3.6 billion and at the end of the third quarter its Offshore Fund was up 19.2% for the year. The fund now has seen 18.2% annualized returns since inception, an obvious reason to track them. Recall that we've provided commentary and analysis of Loeb's investments in our newsletter. And if you desire to be a successful investor like Loeb, head to his recommended reading list.

Anadarko Petroleum (APC)

Turning to Loeb's recent commentary, he touches on his firm's position in Anadarko Petroleum. We originally revealed this position back in August and he purchased debt securities in June and July due to the opportunity presented as a result of the Gulf oil spill.

Of the investment he writes, "Our analysis was correct and in hindsight, investors could have generated similar returns by investing in anything 'Macondo-related (e.g. RIG, BP and Anadarko equities). However, Anadarko bonds offered similar upside to the aforementioned securities but with effectively zero downside in the event that either our thesis on the severity of the spill was incorrect or there was a material decline in oil and.or natural gas prices, and so we delivered excellent risk-adjusted returns."

In his commentary, Loeb mentions that all oil spill related securities have rallied furiously since the event. He doesn't mention whether or not Third Point still owns these securities and almost makes it sound like he has since exited the position (but that's speculation on our part).

NXP Semiconductor (NXPI)

Loeb also reveals a new position in his letter as Third Point participated in NXPI's IPO. He notes that, "the company is in the final stages of completing a substantial operational and capital structure restructuring, which is driving free cash flow, rapid deleveraging and attractive new opportunities like a leadership position (>50% market share) in Near Field Communications, a fast emerging mobile payment technology being adopted by Google Android, Nokia and Blackberry." The most interesting thing here is that despite the rally in shares, Loeb sees "substantial upside" in this stock.

Top Positions

While not specifically listed in the letter below, we have since seen Third Point's November portfolio update where they list the following as their top positions:

- Gold
- Delphi (multiple securities held)
- Potash (POT)
- Chrysler (multiple securities held)
- Lyondell (LYB)

Of note are the fact that Loeb owns physical gold, not the exchange traded fund. Fellow hedge fund manager David Einhorn of Greenlight Capital stores physical gold and John Burbank of Passport Capital also prefers the physical metal.

Embedded below is Third Point's third quarter letter to investors:

You can download a .pdf copy here.

To see what else Dan Loeb has invested in, be sure to check out our Hedge Fund Wisdom newsletter. And to learn to invest like this hedge fund manager, head to Loeb's recommended reading list.

Oaktree Capital's Howard Marks on the Credit Cycle

Howard Marks of Oaktree Capital is out with his latest memo entitled 'Open and Shut.' This refers to the credit cycle, one which Marks believes is the "most volatile of cycles and has the greatest impact." This is particularly interesting since many people don't seem to be focusing on the credit cycle these days. He takes a walk through his past commentary on the subject matter and provides investors with ample words of wisdom.

He then shifts his focus to quantitative easing and the Federal Reserve's actions. Simply put, he feels that such a low-rate environment has caused investors to reach for yield. And in a sense, Marks argues that many assets are overvalued. He writes that, "In 2006-07, the most appreciated assets were real estate, mortgages, and buyout companies. This year they're Treasury securities around the world, gold, commodities, currencies (versus the U.S. dollar) and real estate and stocks in emerging markets."

With many appreciated assets, where should investors put their money then? You'll recall that back in October, Marks advocated high quality large cap stocks. It would be interesting to see if he still feels those assets are 'cheaper' than most other options.

Marks is leery of the return of risk. He points out that it was the time to buy in 2008 when Lehman Brothers had failed and asset sales abounded. Marks goes on to say that, "Today some assets are fairly priced and others are high, but there are no bargains like those of 2008. Capital and nerve can't hold the answers in such an environment. We're no longer in a high-return, low-risk market, especially in light of the inability to know how today's many macro uncertainties will be resolved. Instead of capital and nerve, then, the indispensable elements are now risk, control, selectivity, discernment, discipline and patience."

It's interesting that he notes there are no bargains like 2008. While maybe not yet reaching panic levels like 2008, the Municipal bond market sure has taken a beating lately and it'd be interesting to hear Marks' thoughts on that asset class. Since he did not mention them specifically, we'd assume he doesn't view them as 'on sale' quite yet.

Embedded below is the Q3 letter to investors from Oaktree Capital's Chairman, Howard Marks:

You can download a .pdf copy here.

As always, leave it to Howard Marks to provide us with a bevy of wisdom that will most likely be quoted years from now. For more of his commentary, we looked at his recommendation to buy high quality large-cap stocks. And for other market thoughts from fund managers, scroll through our collection of hedge fund letters.

Bridger Management Boosts Stake In Ironwood Pharmaceuticals (IRWD)

Roberto Mignone's hedge fund Bridger Management just filed a 13G with the SEC regarding shares of Ironwood Pharmaceuticals (IRWD). Due to portfolio activity on December 9th, Bridger has disclosed a 5.1% ownership stake in the company with 2,390,679 shares.

This marks an increase in Mignone's position size to the tune of 483%. Bridger Management previously owned only 410,000 shares at the end of the third quarter. Roberto Mignone worked at Blue Ridge Capital and Tiger Management before founding Bridger and earned both his undergraduate degree and MBA from Harvard. You can scroll through all our previous coverage of Bridger Management here.

Per Google Finance, Ironwood Pharmaceuticals " formerly Microbia, Inc. is an entrepreneurial pharmaceutical company that discovers, develops and focuses to commercialize medicines targeting important therapeutic needs. The Company operates in two segments: human therapeutics and biomanufacturing."