Thursday, November 8, 2012

Notes From Invest For Kids Chicago 2012: Mandel, Peltz, Grant & More

Today we're posting up notes from the fourth annual Invest For Kids Chicago 2012 event that just concluded and was a great success raising money for charity.  17 of the 19 picks from last year were up, so we'll see how this year's do.  Click the links below for notes from each speaker's presentation.

Thanks to Kyle Mowery for taking notes on our behalf.  Kyle founded GrizzlyRock Capital in 2011 to provide clients exemplary investment services focusing on strong risk-adjusted investment return and preservation of capital regardless of market environments.  The firm utilizes a long/short approach in both corporate credit and equity securities.  You can contact Kyle at for further information or to be added to the firm's distribution list.

Notes From Invest For Kids Chicago

Steve Mandel's Latest Stock Pick (Lone Pine Capital)

Nelson Peltz's Presentation on Danone (Trian Fund Management)

Kyle Bass: Short Japanese Government Bonds (Hayman Capital)

Sam Zell: Invest in Black Swan Scenarios (Equity Group Investments)

James Grant's Two Ideas (Grant's Interest Rate Observer)

Frank Brosens: 3 Catalysts For General Motors' Repricing (Taconic Capital)

Alex Klabin's Investment Idea (Senator Investment Group)

Jeff Ubben's Two Picks (ValueAct Capital)

Steven Romick's Pitch on Renault (First Pacific Advisors)

David Herro's Two Investment Ideas (Harris Associates)

Kelly Cardwell: Long Nexstar Broadcasting (Central Square Management)

Ari Levy: Short InterOil (Lakeview Investment Group)

Steve Mandel's Pitch on VeriSign: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago is Steve Mandel of Lone Pine Capital.  His presentation focused on how "technological change creates winners and losers" and how there is "no bigger disruptive market force than the Internet."

Mandel's Pitch on VeriSign (VRSN)

•    Lone Pine owns 9% of the company.  We revealed Lone Pine's initial stake in VRSN that they took in August (back then they owned 5.5% of the company)
•    VeriSign is the registry operator for .com and .net & handles the queries of each day
•    Thesis is combo of 5% to 7% growth in domains and 5% increases in price
•    This should lead to 25x EPS growth over next few years
•    This business should not be trading at 13x
•    CEO built RSA before founding VeriSign.  The board brought founder back in 2008 to focus on the business after a handful of non-core acquisitions
•    Management has been divesting non-core operations and now the company has operating margins of 50%
•    15 years of strong operating performance
•    Defense community views VeriSign as important to national security
•    If no price increases are allowed by the government the downside is low even in draconian case

His last point is noteworthy mainly because recently shares of VRSN sold off when it was announced that the Commerce Department and Department of Justice have been reviewing VRSN's .com Registry Agreement pricing terms.  The government may not complete its review in time before the current agreement expires on November 30th.

The fear is that the contract might not allow for price increases or they'll have to re-negotiate.  However, Mandel still thinks this stock is appealing even if price increases aren't allowed.

VeriSign (VRSN) was analyzed in the most recent issue of our premium newsletter: Hedge Fund Wisdom. A new issue is only two weeks away so be sure to sign-up.

For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Kyle Bass: Short Japanese Government Bonds (Invest For Kids Chicago)

Next up in our notes from Invest For Kids Chicago is Kyle Bass of Hayman Capital.
•    Casual observation from Bass: He has heard the same sentiment as Zell that uncertainty is massive and they are buying tail protection from billionaires across the world
•    Hayman is a global event-driven fund which is 90% long in short duration things like mortgage backed securities etc.
•    Bass sees convexity in pricing and “all the convexity of world is in Japan.”
•    The next 18 months will set the stage for the Japan
•    Central banks have replaced traditional intermediaries – that is why global volatility is so low
•    Availability heuristic - people can only process data from readily available data
•    Accepting the logical conclusion is detrimental to many factors of our life

Bass: Short Japanese Government Bonds

•    3 false axioms of Japan

o    (1)  Can Japan run a current account surplus to self fund?  Bass says no.
o    (2)  Bank of Japan is not buying debt. Bass says false.  Monetization is occurring.
o    (3)  Retail investors will actually be able to hold all the debt.

This is largely in-line with what Bass presented at the Great Investors' Best Ideas conference recently as well if you want further thoughts from him.

For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Nelson Peltz's Presentation on Danone: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago is Nelson Peltz of Trian Fund Management.  Here are notes from his pitch of Danone as well as his slideshow presentation:

•    Peter May's been a partner at his firm for 35 years.  Trian “invests in and fix businesses with great risk profiles where they aren't getting it quite right.”
•    Start on the income statement.
•    If you find a dollar on income statement it's worth 15 or 20 as opposed to a dollar on balance sheet which is a dollar
•    Founded current fund in 2005 and think of himself as a "constructivist"
•    Focus on getting businesses to grow
•    Trian has had success with food companies including: Heinz, Cadbury, Dr. Pepper, and Kraft Foods.
•    These food co’s have irreplaceable brands, high dividends, liquidity, and great balance sheets and are currently trading at half the premium to the S&P 500 that they normally maintain 

Peltz's Pick: Danone

•    Cheap with 3% dividend & focus on health & wellness products including yogurt, water, baby food etc
•    Trian owns 1% of Danone  and informed company last night of the stake per French law
•    Trading at 7% FCF yield, 14.8x P/E, 9.3x EV / 2013 EBITDA, basically priced in-line with slower growing domestic peers
•    40% of EBIT comes from yogurt (Activa a dominant brand)
•    37% is baby food & medical
•    Bottled water 17 percent of EBIT (and margins can be improved in this segment)
•    Sales are geographically diverse with 52% in emerging markets. 94 percent of world pop growth will come from emerging markets.
•    Danone’s margins in their emerging markets are above margins in the developed markets.  This is very rare.

Peltz Sees Danone Worth €78 by the End of 2014
•    One of the bear cases is significant European exposure to Spain, Italy, etc
•    Geographies are not static.  W Europe has been shrinking as a percent of sales for 20 years
•    Compared to many fresh portfolio of brands (Activia) etc
•    Premium water is excellent business (Evian)
•    Nestle and Kraft have product portfolios that aren’t as friendly to health & wellness
•    Company is leveraged to births thouerhg baby food and aging demographics with adult diapers
•    Milk formula at 12.1% is the top growing food category.  Other growth rates put Danone in the 8% growth area for the intermediate term
•    NestlĂ© bought Pfizer infant formula business at 20x EBITDA.
•    Danone should trade at 17x EPS. Trading at current multiples
•    French corporate governance is issue – Trian believes this should be fine.
•    Saw that in international hotel group earlier this year which re-rated
•    Peltz is looking for both sales & EPS growth and does not want dilutive M&A (bought health co in 2007) at 22x EBITDA

Peltz's Slideshow Presentation

Embedded below is Peltz's .pdf with his analysis of Danone:

For more from this investor, we've also posted up past activity from Nelson Peltz here.

For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Sam Zell: Invest Some Capital in Black Swan Scenarios

Next up in our notes from Invest For Kids Chicago is Sam Zell of Equity Group Investments.  He gave a sobering talk and recommended putting some money in 'black swan scenarios.'

•    Zell was the most active real estate investor in US in 1974 through 1976 
•    Zell is just glad he “didn’t have to mark to market” 
•    Wrote an article in which he described his activities as a "grave dancer" (GrizzlyRock Note: Thus earning him one of the better moniker’s in the business!) 

•    How does Zell get the confidence or optimism to go forward in face of uncertainty?  
o    What he found was that he had the confidence because it was embedded in the belief that he was buying things inexpensively 

•    Same sort of situation in 1990 and 1991.  Zell was buying office buildings at less than replacement costs with no value being ascribed to the land

•    What does the world look like circa 2012? 
o    Europe with disintegrating currency and cross winds between parties, 
o    Demographic death spiral, attempt to create austerity 
o    Europe going into recession and maybe more than a recession 
o    Emerging markets growth slowing (China, India, etc) 

•    "Why are stocks so high?  Why are re prices sky high?" 
 •    Would seem to Zell that things would be cheaper that they are given the environment 
•    Middle market debt inefficiently priced and thus interesting 
•    There are "sand dunes of uncertainty" in the US. 
•    Solving uncertainty is better than flooding the world with dollars" 

Zell's Idea: Black Swan Scenarios

•    Zell's idea was to invest some capital in true black swan scenarios 
•    Long run certainty is lacking and a fundamental problem in the US.

This is interesting when you consider that Tiger Management's Julian Robertson (who has seeded tons of hedge funds) was recently interviewed where he said many hedge funds are overly hedged and poised for doomsday scenarios.  Robertson also cited this as a reason as to why hedge funds are underperforming.  Zell obviously agrees with those managers as he advocates some tail risk hedges.

For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Jeff Ubben's Presentation on Moody's & CBRE Group: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago is Jeff Ubben of ValueAct Capital.  He presented two ideas: Moody's (MCO) and CBRE Group (CBG).

•    Describes firm’s style as “strategic block investing” 
•    Expert is someone who has made & learned from many mistakes 
•    ValueAct looks for 12 companies that can flourish 
•    Join a board about half the time usually a couple years into the investment 
•    Motorola Solutions (MSI) = top holding 
•    ValueAct looks for companies with small cost of customers product but are valuable inputs 
•    Don't like traditional financials as its hard to analyze banks 

Ubben on Moody's

•   Moody's: Investment is in the 5th inning  and is a 9% position for ValueAct (they run a concentrated portfolio) 
•    Maintenance fees are 60% of revenue and is very critical 
•    Moody’s rating are a de minims cost of debt 
•    Transaction revenues provide huge growth potential 
•    European growth in credit markets as banks fall away as source of funds is highly probable 

Ubben on CBRE Group

•    CBRE Group (CBG): Investment is in the 2nd  inning 
•    Scale & cross sales 
•    Real estate is the last bastion of outsourcing as companies have already done HR etc. 
•    CBRE essentially now a partner to companies instead of a broker 
•    Scrapping bottom of property sales 
•    "Ridiculously cheap cyclical" with tons of transaction volume coming (2/3rds of commercial wave expected to trade hands with 1/3rd refinancing) 

Jeff Ubben also pitched MCO & CBG and other stocks at the Value Investing Congress if you want more color.

For the rest of the hedge fund presentations from the event, check out our notes from Invest For Kids Chicago.

James Grant Likes Gold & Metropolitan Life: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago is James Grant of Grant's Interest Rate Observer.

•    Grant founded his firm is 1983 and called Japanese bubble and housing bubbles
•    Tongue in cheek legal disclaimer is that “Congress shall make no law abridging the freedom of the press”

Grant's First Idea: Metropolitan Life

•    Metropolitan Life
o    Japanese life insurers died out in long run.
o    825 billion of assets - a great franchise
o    Long due to potential for dividend.

Grant's Second Idea: Gold

•    Gold: is a “legacy monetary asset”
•    1920 there was a depression (not Great Depression). 18 months after peak then industrial production jumped significantly
•    "I'm a professional interest rate observer.  There are none"
•    Grant notes interest rates move in generational cycles

Grant is obviously not alone in his fondness for the precious metal as numerous hedge funds own gold for a myriad of reasons.  Some own it as a hedge against inflation or currency debasement, while others view it as an uncertainty hedge.

For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Frank Brosens: 3 Catalysts for Repricing of General Motors (Invest For Kids Chicago)

Next up in our notes from Invest For Kids Chicago is Frank Brosens of Taconic Capital.

Brosens' Thesis on the 'New' General Motors

•    There are 3 catalysts for the repricing of GM

•    (1) New management team 
o    Better capital allocation since going public in November 2010 with new CEO Dan Akerson (Private equity background)
o    Better capital allocation will lead to resurgence

•    (2) Administration willing to sell post election
o    Treasury stake (mid 40s cost basis) is goings to come to market
o    Overhang of would be gone.  Institutions would come back to the stock (including being added to indices)
o    32 billion cash until treasury sells stake (only need 20bn to run company) and have $10bn revolver.
o    Company could buy back half of treasury stake. (Boosts EPS 16%)

•    (3) Valuation is currently overly conservative assumptions (Brossens notes the stock could triple).
o    SAAR is improving and could hits 15 MM next year
o    30% of GM’s 2013 line-up is re-engineered and the refresh cycle is driver of profitability and market share
o    The 2013 GM lineup has many trucks (GM makes ~10K per truck sold).  This is significantly in excess of the last truck refresh cycle in which GM made $2 to 3K per truck. Overall, a $3.5 billion dollar incremental opportunity
o    Average car age on road is beyond 11 years
o    GM trades at a discounts on EBITDA basis to Ford, Toyota, and VW
o    By 2015 if the current EV to EBITDA multiple stays flat the equity price will be $67 and if the FCF multiple stays flat the stock could be worth $89

It's also worth pointing out that Greenlight Capital's David Einhorn pitched GM at the Value Investing Congress as well.

For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Alex Klabin's Thesis on Rayonier: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago is Alex Klabin of Senator Investment Group.  His presentation was cleverly entitled 'Pulp Friction.'

Klabin's Thesis on Rayonier (RYN)

•    Company has two main business lines:
•    7th largest of US timberland "TimberCo" worth around $4 billion
•    Performance fiber business "FiberCo"
•    Value realization event is potential spin-off of FiberCo in 2013
•    FiberCo #1 provider of cellulose specialties (ether)
•    FiberCo has no true public comps.  It's comped against commodity pulp players such as Tembec but this drastically undervalues the business due to the value added nature of FiberCo’s business vis a vis other commodity pulp businesses.
•    Rayonier has a lack of buy side following due to disparate nature of asset (both FiberCo and TimberCo)
•    Has ether bulking agent for foods
•    Wood chips could go into a MLP which would be worth $7 per share
•    As fiber business grows, the current REIT structure may be untenable which would force the spin-off of FiberCo (Perhaps in 2014)
•    Rayonier is 30% to 60% undervalued currently

Market strategist Jeff Saut also recently recommended Rayonier in his weekly commentary.

For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Steve Romick's Pitch on Renault: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago is Steve Romick of First Pacific Advisors.

•    “We are circumspect” and “invest across the capital structure”
•    Real GDP is declining and are now at a Keynesian endpoint
•    Romick anticipates tremendous 2nd order effects of QE-Eternity and is thus “investing in a nervous fashion"
•    Large cap stocks are relatively inexpensive with especially low values in Europe

Romick's Pitch on Renault

•    Renault: Operating cash conversion from EBITDA of 104%
•    Half of sales are from outside US where the cost of labor is 50 to 90% less
•    “Entry level cars are more profitable”
•    Carlos Ghosn CEO of both companies Nissan and Renault and sees synergistic opportunities
•    Renault has no net debt including off-balance sheet liabilities
•    Sum of Renault’s publicly traded assets are €54.4 with the Renault stub is worth $5 billion currently
•    Romick is short Nissan and Volvo against Renault
•    CarCo could pay a dividend
•    Debt could be upgraded

Romick also recently touched on his favorite stock picks in an interview.

For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

David Herro Likes Daiwa Securities & Publicis: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago is David Herro of Harris Associates.

•    Value investors focus own low price and high quality.  Mr. Market is an exogenous variable.
•    Negative macroeconomic problems.  Positive impact on valuation.
•    Recommends investors get more exposure to stocks
•    Japan still attractive
•    Weak macroeconomic conditions in western world
•    Judge value of business as cash stream
•    Often co is located in weak environment and are thus irrationally cheap

Herro's First Idea: Daiwa Securities

•    Daiwa Securities (same idea he presented at Invest for Kids Chicago two years ago with the added benefit of being cheaper now)
•    Operating performance improved
•    Trading at half book value

Herro's Second Idea: Publicis

•    Publicis: Global ad agency focused on digital   (World’s leading digital agency)
•    Digital ad spending not going away
•    Flexible cost structure dampens margin attrition in period of declining margins
•    Trading at 8.6x EV / 2013 EBITDA

For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Ari Levy: Short InterOil (Invest For Kids Chicago)

Next up in our notes from Invest For Kids Chicago is Ari Levy of Lakeview Investment Group.

Levy Says Short InterOil (IOC)

Lakeview was founded in February 2005 and the fund has compounded at 12% since inception

 •    Short InterOil: Firm has geological and market uncertainty
•    Management has made materially inaccurate misstatements to investors which have caused the stock to be overvalued
•    Natural gas does exist in their area of Papua New Guinea
•    Well test in 2009 was strong but InterOil has declined to do this test
•    Tipping point is now

We've also highlighted in the past how T2 Partners' Whitney Tilson has been short IOC as well.

For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Kelly Cardwell Pitches Nexstar Broadcasting: Invest For Kids Chicago

Next up in our notes from Invest For Kids Chicago is Kelly Cardwell of Central Square Management.  He was part of the emerging manager panel.

Cardwell's Pitch on Nexstar Broadcasting (NXST)

•    Stock could double based upon increasing retransmission revenues among others
•    Balance sheets in good position with small and middle markets
•    45% of revenue are from local content generated by the stations
•    18% of revenue are retransmission fees
•    Firm just bought Newport TV
•    Can go on offense now with better balance sheet

For the rest of the hedge fund presentations from the event, head to notes from Invest For Kids Chicago.

Wednesday, November 7, 2012

What We're Reading ~ 11/7/2012

Hedge funds are the rock stars of the investment world... for now [Abnormal Returns]

Hedge fund analysis: in-depth guide to evaluation return potential & risks [Frank Travers]

Stocks for an Obama victory [StreetInsider]

On predicting a recession and reducing portfolio risk [Reformed Broker]

Bridgewater's macro play: long gold oil & euro [Hedge Fund Intelligence]

On the irrational behavior of investors [Psy-Fi]

David Einhorn's comments on GLRE conference call [Santangel's Review]

Investors seemingly always under-diversify [Jason Zweig]

Most important question for investors: when do you need the cash? [Aleph Blog]

Howard Marks established Oaktree as leader in distressed [P&I]

Hedge fund industry returning to its tiny roots [Barrons]

Do fund managers manipulate prices? [Turnkey Analyst]

Julian Robertson seeds Tiger Pacific Capital [Reuters]

Greenlight Re shows benefit of hedge fund reinsurer strategy [Artemis]

Empirical characteristics of mega hedge fund firms [SSRN]

Trader's journal: 7 attributes to give you the edge [Stockcharts]

Profile on Anheuser Busch InBev [BusinessWeek]

Children's Investment Fund on Porsche & Japan Tobacco: Q3 Letter Excerpt

Christopher Cooper-Hohn's Children's Investment Fund was up 1.6% for the third quarter and up 18.26% year to date as of the end of Q3.  TCI runs a concentrated portfolio and their Q3 letter to investors provides updates on their positions in Porsche SE as well as Japan Tobacco, which we've excerpted below:

Porsche SE

Back in July, Volkswagen (VW) announced they would purchase the other 50% of Porsche that they didn't own yet for 4.5 billion euros.  The deal's closure makes Porsche essentially a holding company that has 2.5 billion euros in cash and 50% of the common stock of VW.

As to their thesis, TCI writes:

"Porsche currently trades at a large discount to NAV due to uncertainty regarding the outcome of several legal cases that have been brought against the company in Germany and the US, regarding alleged market manipulation in its failed attempt to take over VW in 2008. Porsche holds the view that these allegations are unfounded and without merit, and during the quarter it won a significant victory when a German court dismissed two of the cases. While the amount of damages being sought in these cases was small, at under €5 million, we think they should provide a precedent for the much larger claims of €4 billion that are still pending at the same court. Our view is that the amount Porsche will eventually pay to settle these cases will be much less than the market is currently pricing in. And once the litigation is settled, there is a good chance that VW and Porsche will merge and the discount to NAV will close completely."

Children's essentially believes they can make money in four ways:

1. "Strong underlying performance from the investment in VW"
2. "A successful and benign resolution to the legal cases"
3. "Large and increasing dividends from VW flowing to Porsche shareholders"
4. "Long-term potential for a merger between Porsche & VW"

Japan Tobacco

Children's points to Japan Tobacco's strong recent earnings and notes that VAT in Japan is rising which should allow for price increases. 

The company is also changing the name of its largest selling brand from 'Mild Seven' to 'Mevius'.  While such a move might seem odd at first glance, the company is doing so because this will allow them to sell the product in other countries where the use of the word 'mild' in product names is essentially prohibited. 

Here's why TCI sees Japan Tobacco as compelling:

"Dividend guidance is ¥12,000 per share which implies a payout ratio of approximately 36%. JT is expected to return an estimated ¥370bn to shareholders this year of which ¥250bn is through a share buyback exceeding their estimated profits. This should be a strong catalyst for the stock to re-rate in line with its global peers. Valuations are very attractive post the recent sell-off, JT trades on 10.5x P/E for the year ending March 2014 at a 30% discount to the average of BAT and PMI. We expect the stock to re-rate post the share placement by the Japanese government toward parity with BAT and PMI."

Children's Top 10 Positions (as of Q3 end)

1. Lloyds Bank Bonds: 20.1% of NAV
2. News Corp: 18.8%
3. Japan Tobacco: 16.8%
4. Porsche SE: 15.5%
5. QR National: 13.3%
6. CESP: 12.8%
7. Red Electrica: 10.9%
8. Coal India: 9.4%
9. Safran: 8.7%
10. Enagas: 8.0%

For more on this fund, we've previously posted Children's thesis on News Corp, Union Pacific & Walt Disney.

Hedge Fund Short Positions in Germany: Maverick, Tiger Global, Passport & More

Just yesterday, we posted up a ton of hedge fund short positions in the UK due to new regulations.  Continuing our coverage of EU markets, today we highlight hedge fund short positions in German markets.

More Short Selling Disclosures in EU Countries

What's interesting here is that with the new regulations in EU countries, there are theoretically going to be more filings on shorts than longs.  Public disclosure thresholds now start at -0.5% for shorts while public long disclosure is only required when an investor takes a stake greater than 3% of the company.

Some may argue that this might not be the case due to the fact that more investors go long than short, and typically long positions are sized much larger than short positions due to risk management.  We'll have to wait and see, but so far there's been an onslaught of short filings.

Hedge Fund Short Positions in Germany Revealed

Below is a breakdown of the short positions hedge funds have disclosed as of November 1st/2nd.  The percentage represents how much of the company's stock the fund is short:

Maverick Capital: Short -7.82% Aixtron SE, -0.47% Axel Springer Aktiengesellschaft

Passport Capital: Short -0.61% Nordex SE

Pennant Capital: Short -2.27% Aixtron SE, -0.68% Heidelberger Druckmaschinen Aktiengesellschaft, -0.95% Sky Deutschland, -0.90% TUI AG

Tiger Global: Short -1.99% Asian Bamboo AG, -0.70% SolarWorld Aktiengesellschaft, -0.63% Global PVQ SE

Tiger Management: Short -1.08% Powerland AG

Citadel Advisors:  Short -4.13% Aixtron, -1.82% SolarWorld Aktiengesellschaft, -1.60% Wacker Chemie AG

D.E. Shaw: Short - 0.97% Dragerwerk AG & Co, -.60% Leoni AG

As you can see, numerous funds are short Aixtron, a provider of deposition equipment to the semi-conductor sector.  Maverick's bet against the company is by far the largest we've seen thus far.  We'll continue to track short positions in the German market and will update when appropriate.

For more EU disclosures, head to yesterday's post on hedge fund short positions in the UK.

Tuesday, November 6, 2012

Hedge Fund Short Positions in the UK: Lone Pine, Greenlight, Kynikos & More

New EU rules that came into force at the beginning of November on short selling are leading to wider disclosure of shorts positions.  For example, the UK's Financial Services Authority (FSA) have implemented the EU's Short Selling Regulation and are now publishing a list of short positions on a daily basis.

New UK Short Selling Disclosure Rules

Before the implementation of the new Regulation funds and individuals only had to disclose short positions in UK financial companies and companies involved in a rights issues.  Now short positions have to be declared across all sectors.

The new rules require that where a fund's net short position reaches 0.2% of the issued share capital of a company they need to privately notify the FSA. Notification is also required again at each 0.1% increment after that. This is in relation to both increases and decreases of the position.   The obligation to privately report positions also extends to net short positions in sovereign debt and positions in uncovered sovereign credit default swaps (CDS).

ESMA has published a list of the different thresholds for each Member State in these instruments.   Public disclosure is required for net short positions of shares that reach 0.5% of the issued share capital of the company concerned and each 0.1% increment above that.  Additionally disclosure is required publically when the position subsequently falls below 0.5%.

Hedge Fund Short Positions in the UK Revealed

Today's list of short positions published by the FSA is provided below.  All of the following positions are disclosed as of November 1st, 2012 and represent the percentage of the company's shares the hedge fund is short:

Lone Pine Capital: Short -1.05% Home Retail Group

Greenlight Capital: Short -4.43% Daily Mail and General Trust

Kynikos Associates: Short -2.52% ASOS, -0.61% African Minerals

Maverick Capital: Short - 1.26% ITV plc, -4.45% Home Retail Group

Pennant Capital: Short -0.98% William Hill plc

Lansdowne Partners: Short -3.42% Weir Group, -3.27% APR Energy, -0.62% Tesco, -1.81% British Sky Broadcasting Group, -1.87% Petrofac, -2.28% Aggreko, -2.51% WM Morrison Supermarkets, -2.59% Provident Financial, -2.73% WH Smith, -1.09% Ophir Energy, -1.33% Tullow Oil, -1.71% Man Group, -0.85% Prudential plc,

Och-Ziff Management: Short -0.92% Lancashire Holdings, -1.20% International Consolidated Airlines Group, -0.82% Glencore International,

Elliott Management: Short -2.65% Stagecoach Grou, -1.65% First Grou, -0.71% Glencore International,-0.59% Reed Elsevier,

SAC Global Investors: Short -1.11% Electrocomponents

SAC Capital Advisors: Short -0.74% Ocado Group

Odey Asset Management: Short -1.43% Lonmin, -1.44% Dignity, -1.77% APR Energy, -0.84% Capital Shopping Centres Group, -0.59% Serco Group

Joho Capital: Short -4.03% CSR

Luxor Capital: Short -1.82% Blinkx, -1.32% WH Smith,

D.E. Shaw: Short -0.52% TUI Travel, -0.64% WPP

Marble Arch: Short -2.05% Dixons Retail, -1.79% Home Retail Group

Axial Capital: Short -0.55% TUI Travel

For all our other coverage of hedge fund short positions, click here.

This initial slew of disclosures is a bit overwhelming, but we'll continue to monitor the filings and post about notable changes and new short positions taken by prominent hedge funds on an individual basis.

You can track all other hedge fund activity in UK markets from what we've posted in the past via that link.

Eminence Capital Plays Vodafone / Verizon Pairs Trade: Q3 Letter Excerpt

Ricky Sandler's hedge fund firm Eminence Capital is having a great year, up 6.7% net in the third quarter and up 22.3% net for the year through September with AUM north of $3 billion.  Their third quarter letter to investors details a new trade they recently put on:

Long Vodafone / Short Verizon Pairs Trade

For those unfamiliar, a pairs trade is a bet made where an investor goes long one security and shorts another.  Some investors utilize this to make a market neutral bet, while others use it to bet on mean-reversion.

Some hedgies will undoubtedly be familiar with this specific pairs trade as various funds have had it on in the past.  The trade here is essentially an arbitrage on the valuation of an asset both companies share: stakes in Verizon Wireless ("VZW").  Vodafone (VOD) owns 45% of Verizon Wireless and Verizon (VZ) owns 55% of Verizon Wireless.

Eminence put on this pairs trade (long VOD, short VZ) in recent months and here's why according to Sandler:

"VOD trades at a significant discount to VZ for a number of reasons and thereby creates a unique opportunity where the same asset is being valued by two sets of investors very differently.

If we assign a fair value to VZW for each of VOD and VZ we are left with the following valuation anomaly: the rest of VOD (after subtracting VZW at fair value) has an $82B Enterprise Value which values its best of breed European and Emerging Market wireless service business at 7x adjusted EBIT (EBITDA minus Capex) and 4.5x after-tax economic earnings. Simultaneously, the rest of Verizon (after subtracting VZW at fair value) has an $80B Enterprise Value for a structurally declining fixed line telephone business in the US that generates zero EBIT and trades at an infinite multiple of economic earnings because it burns free cash flow.

We think the time is right for this trade to play out because we have come to the point where VZW will need to pay out a lot of free cash flow to each of its owners over the next few years. VOD will increasingly appear to generate more free cash flow than it had been as investors begin to see these dividends from VZW. Alternatively, VZ’s free cash flow will appear to decline as it pays out cash from its consolidated position in VZW to VOD. We expect investors to more fully reward VOD for its look through cash flow since it will be receiving this cash regularly from VZW while investors will also come to realize that VZ can’t even afford to pay its corporate dividend when only 55% of the VZW cash flow is counted. It is also possible that VZ realizes its stock is overvalued and tries to use its currency to buy in the VZW it doesn’t own which would be a material positive for our position."

Given that numerous other funds have been in this pairs trade in the past, it's interesting that Eminence feels now is the right time to play it.  With some analysts expecting another VZW special dividend for VOD by year-end, we'll have to see how this trade plays out.  Vodafone is now Eminence's fourth largest long.

For more from this hedge fund, be sure to also check out why Eminence is bullish on Google.  While they reduced their position size a bit recently, it's still their largest holding.

Steve Mandel's Lone Pine Capital Starts New Positions in SemGroup & Informatica

Steve Mandel's hedge fund firm Lone Pine Capital filed two separate 13G's with the SEC yesterday after market close disclosing new positions:

SemGroup (SEMG)

First, Lone Pine has disclosed a 5.2% ownership stake in SemGroup with 2,172,935 shares.  This is a brand new position for them as they did not own any shares at the end of the second quarter.  This disclosure was filed due to trading activity on October 24th.

Per Google Finance, SemGroup "provide gathering, transportation, storage, distribution, marketing, and other midstream services primarily to independent producers, refiners of petroleum products, and other market participants located in the Midwest and Rocky Mountain regions of the United States of America, Canada and the West Coast of the United Kingdom."

Informatica (INFA)

Second, Mandel's firm has revealed a 5.2% ownership stake in Informatica with 5,624,068 shares.  This is also a brand new position as they did not report ownership at the end of the second quarter.  This position was also revealed due to trading activity on October 26th.

Per Google Finance, Informatica is "an independent provider of enterprise data integration and data quality software and services. The Company's software solutions enable a variety of complex enterprise data integration initiatives through the technologies, which include enterprise data integration, data quality, master data management, business to business (B2B) data exchange, application information lifecycle management, complex event processing, ultra messaging, and cloud data integration."

Earlier today we revealed one of Lone Pine's short positions as well.  You can also check out other recent long activity from Lone Pine.

Monday, November 5, 2012

Eric Sprott's Latest Commentary: Weakness Begets More Weakness

Playing catch-up with various market participants this week, we now turn to Eric Sprott's latest commentary from Sprott Asset Management.  Entitled "Weakness Begets More Weakness," the latest Sprott missive asks, how does the US achieve a sustained recovery if the 99% continues to suffer perpetual decline in real income?

Their full commentary is posted below, but they conclude that:

"The sad fact is that the economic reality for the average family is far worse today than it was ten years ago… even fifteen  years ago, and the trend of declining wealth is firmly in place. The youth need higher paying jobs and the retirees need  yield, and for all the trillions of dollars that the US government and other western governments have spent and printed,  none of it has addressed these key areas of weakness in a way that can reverse the long-term trend. As we approach  year-end and the finality of the US election, there will likely be numerous indicators implying a US recovery. Unless they  directly benefit the 99%, we would advise readers to take them with a large, bipartisan grain of salt. Weakness begets  weakness, until something dramatic reverses the trend’s course. The 99% are firmly stuck in a declining trend, and we  do not see it reversing any time soon."

On the same topic, earlier this morning we also posted up David Einhorn's comments on low interest rate policies and how they're now doing more harm than good.

Embedded below is Eric Sprott's latest commentary:

For more from this manager, we've in the past posted up Sprott's commentary on gold.

Hugh Hendry On Gold, Treasuries, Japan, China & More: Buttonwood Gathering

It's been a long time since we last checked in on Hugh Hendry of Eclectica Asset Management so today we're highlighting his recent talk at The Economist's Buttonwood Gathering.  He touched on hot topics such as gold, treasuries, China, Japan, hyperinflation and a myriad of other things.

Key Takeaways

Hendry continues to like gold, but not the gold miners.  While he has been an advocate of the precious metal for many years, he continues to like it (albeit with slightly less conviction than previously).

We've highlighted one hedge fund's view that miners are better than gold and Hendry obviously disagrees with that.  And recently at the Great Investors' Best Ideas conference, David Einhorn made a quip that one should have gold miners in their portfolio.  Clearly, this is a divisive topic.

Hendry is also worried about creditor nations.

Notable Quotes From Hendry

Hendry said that, "My community of global macro managers always wants to short the JGBs and short the yen, and yet they've gone the opposite direction ... If you want to be short JGBs for the ultimate response, you don't survive the journey."

We've pointed out Kyle Bass' negative views on Japan and JGBs in the past.  Hendry points to real problems coming in Japan should some of their major companies near bankruptcy (he mentioned Sharp).

Hendry on Treasuries:  "Don't tell me China will sell their US treasuries.  If they sell their treasuries, the renminbi goes higher and higher and higher.  And their companies that export go bust."

Embedded below is the video of Hendry's entire talk at The Buttonwood Gathering:

We've previously highlighted some of what Hendry was buying earlier this year.  And for further hedge fund commentary from the Buttonwood Gathering, head to David Einhorn's talk.

David Einhorn On Negative Effects Of Low Interest Rates & QE: Buttonwood Gathering

Greenlight Capital's David Einhorn recently spoke at The Economist's Buttonwood Gathering and gave his thoughts on the Federal Reserve's policies and their effects.  Einhorn said that,

"The assumption is that if we want the economy to improve, if we want more jobs, if we want more consumption, what we need are ever easing monetary policy ... 1 jelly donut is a fine thing to have, 35 jelly donuts is not a fine thing to have.  It gets to a point where it's not a question of a diminishing return, but it actually turns out to be a drag ... we're past the point where incremental easing of the Federal policy actually acts as a headwind for the economy and it's actually slowing down our recovery.

Einhorn drilled down the effect of low interest rates on consumers in particular, stating:  "Lower rates drive up the costs of commodities."  He says it doesn't help and it takes income out of people's pockets that they could normally spend otherwise.

Additionally, he says that not being able to earn a return on your savings means that people are now hoarding savings instead of spending because now those people feel they need more for retirement because they're not going to be able to earn as much from those savings.

In addition to Einhorn's talk, he's also expressed similar sentiment in a piece he wrote in the Huffington Post talking about the Fed's "Jelly Donut Policy."

Embedded below is David Einhorn's entire talk from The Buttonwood Gathering (fast forward to minute 56 for his portion):

For further hedge fund commentary from the same Buttonwood event, head to thoughts from Hugh Hendry.

Jeff Saut: Housing Is Improving & Is The Key Driver

Strategist Jeff Saut is out with his weekly commentary in which he touches on drivers of the American economy in the private sector and how improvement in housing will be the key driver going forward.

Saut notes that we may be seeing a transition in the private sector, a changing of the guard per se.  He feels that exports and manufacturing have waned while housing and residential construction has surged.  He points to home prices rising and a resurgence in housing as the key to employment numbers.

While he argues that manufacturing and exports will regain strength once the fiscal cliff issue is resolved, Saut thinks that "housing looks to be an undiminished theme over the long run."

He doesn't like the homebuilders quite yet, but his real estate analysts have recommended Rayonier (RYN) as a play on housing, noting:

"We reiterate our Strong Buy rating on Rayonier following 3Q results, as we believe RYN shares offer one of the  most compelling risk/reward profiles in our REIT coverage universe.  We view Rayonier as a special situation  within REITs, driven by compelling growth prospects for its performance fibers business and a growing dividend  (+33% since 2009), which also offers investors a unique way to play improving residential construction activity."

Embedded below is Jeff Saut's weekly market commentary:

You can download a .pdf copy here.

For more from Saut, check out his piece on how investing performance is determined by how you manage losses.