Friday, April 15, 2011

Michael Burry's Subprime Speech at Vanderbilt: Inside the Doomsday Machine

We wanted to post up a recent speech by subprime short-selling legend Michael Burry. His now defunct Scion Capital saw outsized returns as the value investor turned subprime expert saw the housing crisis coming and profited handsomely. His story is chronicled in Michael Lewis' bestselling book, The Big Short.

His speech is entitled, "Missteps to Mayhem: Inside the Doomsday Machine with the Outsider who Predicted and Profited from America's Financial Armageddon."

While the investor walks us through his past line of thinking, he is curiously hesitant to answer questions about his current investment portfolio. In late 2010, we learned that Burry bought farmland and gold.

Embedded below is Michael Burry's speech (email readers come to the site to view it):

For more on Burry's amazing trade, definitely read Michael Lewis' chronicle in The Big Short. Additionally, we'd recommend reading Burry's primer on credit default swaps & the subprime mortgage short which he originally penned back in 2006.

Third Point Focused on Spin-Outs & Closes to New Investors

Dan Loeb's hedge fund Third Point returned 8.6% in the first quarter of 2011 and manages $6.7 billion. Most recently, we noted Third Point's reduced net long exposure. Last time around, Loeb mentioned he would no longer be penning the letter to investors, but we still get some color on their portfolio construction and where they're finding value.

In particular, Third Point is focused on spin-outs as the Q1 letter details:

"At our annual Investor Day in January, we told you that we were enthusiastic about equities in a market poised for a wave of corporate transactional activity on a scale not seen since 2007. A combination of factors including record high levels of cash on corporate balance sheets, highly incentivized LBO firms, the return of cheap debt financing, and anemic top line growth is conspiring to make this an ideal period for the kind of special situation equity opportunities that are a core part of our strategy."

Loeb's hedge fund has focused specifically on the energy sector, owning positions in Williams Companies (WMB), El Paso (EP), and CVR Energy (CVI). We highlighted that Third Point started a position in El Paso in February.

Regarding Williams Companies (WMB), Third Point originally invested in November and has since added to the position as the company announced plans to split itself via an IPO of its E&P business in the second half of the year and a full spin of the remaining business in early 2012.

This is the type of event-driven investing Third Point loves. Besides Third Point, numerous other prominent hedge funds own a position in Williams Companies. You can read an in-depth analysis of WMB by subscribing to our Hedge Fund Wisdom newsletter as we featured the stock in our most recent issue.

Also of note is the fact that Third Point will close to new investors effective June 1st. They believe this is a prudent time and this is not the first time they've done so.

Embedded below is Third Point's first quarter letter to investors (email readers come to the site to read it):

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

What We're Reading ~ 4/15/11

A recent John Paulson interview [Zero Hedge]

Latest investor letter from macro fund QB Partners [The Big Picture]

How to protect yourself from rising interest rates [Reuters]

See also the best investments during inflation [Market Folly]

The market leaders keep falling [Reformed Broker]

The easiest way to succeed as an entrepreneur [James Altucher]

Five things financial advisors are doing to make more money [New Rules of Investing]

Chartin consumer confidence: where do we go from here? [Research Puzzle]

How safe is your Roth IRA? [The Atlantic]

On the QE2 trade & more [Pragmatic Capitalism]

Apple doesn't have iPad strategy, has post-PC strategy [Forbes]

Google (GOOG) hurt by trying to stay competitive [WSJ]

Wednesday, April 13, 2011

Joel Greenblatt's New Book: The Big Secret for the Small Investor

Just wanted to give everyone a head's up that value investor and hedge fund manager Joel Greenblatt's new book just came out yesterday. It's called The Big Secret for the Small Investor: A New Route to Long-Term Investment Success.

The book details a new approach to investing based on value investing, common sense, and quantitative discipline. Basically, it intertwines his value investing style with an indexing approach. Greenblatt is the founder of Gotham Capital and has seen 40% annualized returns from 1985-2005. He is also an adjunct professor at Columbia Business School.

Greenblatt has authored numerous other books and they each cater to specific investors, including:

You Can Be a Stock Market Genius - Though the title is somewhat cheesy, this book has been recommended by hedge fund legends like Seth Klarman and David Einhorn. It is the definitive text on spin-offs, restructurings, and special situation investing.

The Little Book That Still Beats the Market
- Teaches readers how to find good businesses when they're trading at bargain prices.

Greenblatt's newest book, The Big Secret for the Small Investor, is seemingly aimed at the broadest audience since it looks to be a quick read (150 pages) and details value-weighted indexing as an applicable investment style.

Don Coxe: Risk of Stagflationary Bond Bear Has Arrived (Latest Investment Recommendations)

It's been a longtime since we checked in on market strategist Don Coxe. He publishes the 'Basic Points' each month and his latest rendition is entitled "Slouching Towards Stagflation?"

At the end of his commentary, Coxe lays out his latest investment recommendations, including a market weight position in Japan. Just this morning we touched on how investment manager Ruffer is seemingly overweight Japan.

Here are Coxe's latest recommendations:

1. His main advice ties into the title of his commentary regarding stagflation. Coxe writes, "Just because Stagflation of Seventies proportions is only a remote possibility doesn't mean that meaningful stagflation-style damage won't be inflicted on bond portfolios - particularly those denominated in currencies of grossly overindebted countries. We think the risk of a real stagflationary bond bear has now arrived, and have therefore reduced recommended bond durations. Unless the stagflation risks recedes, we shall be reducing those durations further in coming months. So should you."

This is a big talking point because Warren Buffett himself has reduced the duration of Berkshire Hathaway's bond portfolio as well. There is a slight difference in the reasoning, though, as Buffett was concerned about inflation whereas Coxe is concerned about stagflation.

2. Cease underweighting Japan and move to market weight (with special attention to buying global brands).

3. Underweight European financials and euro-denominated debt. Emphasize exposure to Swiss francs and Canadian dollars.

4. Overweight precious metals in commodity-focused portfolios and include exposure in balanced portfolios.

5. "Agricultural stocks remain the commodities group with the best balance of risk and reward among all the possible outcomes of the current crises in the Mediterranean region and the Arabian peninsula."

6. Overweight the oil sands companies and emphasize coal and oil names in North American energy portfolios. Fellow market strategist Jeff Saut of Raymond James was also out singing the praises of the oil sands this week. Industrial clients, Coxe says, should hedge against remote risk of catastrophe in the Middle East by purchasing far out of the money calls on crude oil.

7. Overweight offshore oil companies that "do not face continued litigation risk from Macondo." This means avoid the likes of BP (BP), Transocean (RIG), Anadarko Petroleum (APC), Halliburton (HAL), etc.

8. Continue to avoid uranium stocks (Cameco (CCJ) is a major player there).

9. Pay heed to food and fuel inflation, which are working together to dent consumers' discretionary incomes.

10. Underweight base metal stocks despite their near-term benefit of rebuilding in Japan.

For more insight from strategists, check out their market commentary we've posted up recently.

Tremblant Capital Reduces Rightmove Position

This is the second major hedge fund to reduce a position in UK-traded Rightmove (LON: RMV) in the past month. Brett Barakett's Tremblant Capital Group have reduced its previous 3.97% ownership stake in RMV below the 3% disclosure threshold.

Tremblant actually owned as much as 14.22% of the company back in September 2008 but has steadily reduced its position size since that peak. Before founding Tremblant, Barakett was a portfolio manager for Louis Bacon's global macro hedge fund Moore Capital. Also, Brett's brother, Timothy, used to run fellow hedge fund Atticus Capital.

Just last month, we highlighted that Lee Ainslie's hedge fund Maverick Capital had reduced its position in Rightmove below the 3% ownership stake as well.

Both hedge funds could either retain a small position in the name (<3% of shares each) or they could have sold out of the name completely; it's impossible to discern. We won't know anything further regarding these positions unless they breach the 3% threshold again.

Per Google Finance, Rightmove is "a United Kingdom-based company that operates in a residential property industry, connecting people to properties. The Company is principally engaged in the operation of the Rightmove Website,, which is the residential property portal. Its customers include estate agents, rental agents and home developers, who pay fees for the right to display properties on the Rightmove Website, which provide home hunters with property details to search."

Scroll through all our coverage of hedge fund activity in UK companies here.

Ruffer Investment Company Overweight Japan: Market Commentary

Continuing our expanding coverage of hedge fund managers, today we focus on Jonathan Ruffer and Ruffer Investment Company. Ruffer is headed to be on par with other talented UK managers that we've covered like Odey Asset Management and Lansdowne Partners. Ruffer has returned approximately 16% per year since inception in 2004.

Jonathan Ruffer starts his most recent commentary by pointing out that the financial press has become more interested in his firm's views as his firm has grown. Though not part of the press, Market Folly is jumping on the bandwagon as his commentary is intriguing and pertinent.

Main Takeaways

Ruffer has almost one-third of their equity exposure in Japan. Clearly, they favor the country and see it as a compelling opportunity. Ruffer writes, "while in the short term the direction of the markets is anybody's guess (and may well be frighteningly volatile), this is a turning point which will introduce the structural changes in Japan and, in turn will lead to a sustained bull market for lasting years. There is, frankly, no other market for which this is a remotely possible outcome."

The investment firm expects the Bank of Japan to pump liquidity into the system. They note that this will be bad for the yen (but good for the country overall). In past months, we've pointed out how some hedge funds have shorted the yen.

Some of Ruffer's investments in this arena have included Prospect Japan Fund (PJF) and Japan Residential Investment (JRIC). Ruffer actually owned some of these names in 2010 before the crisis even hit. He is unwavering in his conviction, it seems.

Embedded below is the latest market commentary and investment review from Jonathan Ruffer:

You can download a .pdf copy here.

For more coverage of UK-based managers, we've posted Odey's thoughts on agriculture & commodities, as well as Lansdowne's portfolio activity.