The Deception & Reality of Earnings Season: Q1 2009 (Goldman Sachs, Wells Fargo, et al)

Before presenting Goldman Sachs' earnings release below, I want to touch on something we'll be witnessing in the coming weeks. Yesterday on twitter, I was joking that Goldman Sachs does everything with an implicitly silent "biiiatch!" at the end of every statement/action/filing/etc. (Definition/use of of "biiiatch" here). The headlines yesterday were "Blowout Earnings" and "Goldman Secondary Offering" and yadda yadda. Those headlines obviously didn't contain Goldman's sweet new tagline. So, just imagine a bunch of old bankers coming out and saying "Goldman Sachs biiiatch!" ... "Blowout Earnings biiiatch!" ... "Secondary offering at insane prices biiiatch!" It's cool though, we let it slide because after all, they're Goldman Sachs (GS) and they do what they want. This implicitly silent tagline let's them puff out their chest and show just how much better they are than everyone else.

But all joking aside, this earnings season will be littered with absolute dominance and absolute disaster. And, by dominance, we of course mean beating estimates by way of government help/intervention, accounting tricks, and other fun loopholes. *Cough* Wells Fargo (WFC) *Cough*. If you missed their tomfoolery, Wells Fargo basically came out and announced earnings that seem outright impossible given that they were getting their ass handed to them just a few quarters ago. This anomaly was made possible by various accounting sidesteps referenced in the article linked above. Yet, there seems to be no mention of the fact that they might need billions of dollars. Curiously enough, KBW comes out yesterday and claims that Wells Fargo (WFC) might need up to $50 billion in order to cover loan losses and pay back the government.

Wow, but they just came out and killed their numbers... why would they ever need that much money?!? /End sarcasm.

We bring this point up because in a normal world, earnings season is a field of land mines. Yet, given the circumstances specific to this past quarter, the field of mines has now quadrupled in size. So, you are now more likely than ever to step on a mine. There are two categories of companies reporting this earnings go-round: Firstly, there are those with accounting sidesteps and government ties due to help/intervention. Secondly, there are those without any of that... i.e. the rest of the companies reporting. The harsh reality is that both categories are equally as scary for different reasons.

Companies who "beat" estimates and "profit" all of a sudden will do so because of abnormalities unique to their reporting situation. Many of the financials will appear to "dominate" their numbers, when in reality they have only masked them by putting pretty flowers around them. So, this datapoint becomes essentially useless in gauging just how far along (or far behind) we are in this mess. Should we buy them now because they're doing "just great" with an asterisk next to their name? Should we sell them because they've rallied so much already? The reactions will be interesting to gauge. But, thus far, most companies in this category have been bid up. The problem with earnings season is you have just as much of a shot at hitting a land mine that instead of showering you with dollar bills, rips your face off.

There will also be companies out there who have not had as much government intervention and are lacking in the ability to mask their true faces. Those companies will miss earnings, will lower guidance, and will warn about impending doom. They will paint pictures of reality as they drop 30% in a single day. So, as you can see, we have some polar outcomes here. The companies who have been at the center of a lot of the crisis (financials, etc) are benefiting from their ability to sweep things under the carpet by way of the government or accounting changes. The companies that are not so fortunate, however, will not have such luck when it comes to reporting their earnings. So, while the tide (read: herd) rolls in directions that make absolute zero sense, you have to respect them. Because, if you don't, you'll be mauled. (Case in point: Financials spiking 20-30% off crazy earnings announcements). The problem with all this is that we're still left wondering, "What's changed?"

We're simply here to kick off what we have already deemed the Q1 '09 Earnings Season Clusterf*ck. You will most likely be deceived, tricked, and possibly even lied to. But, it's cool, because everyone is all of a sudden profitable out of NOWHERE. We just want to tell our readers not to place too much weight or emphasis on this earnings season simply because if the earnings already reported are any indication, this past quarter took place in Candyland, not recessionary America. So, keep on your toes and don't put on any big positions before these releases... you'll have better luck at blackjack or baccarat. As a matter of fact, Vegas & Atlantic City desperately need your money right now. So, go there and kill two birds with one stone: get better odds and help save the American past-time known as gambling.

The point of all this is merely a precautionary tale. Earnings of Q1 will be polar... to say the least. Just keep that all in mind as you are hit with a progressive barrage of earnings. In the end, it will be pretty clear who is being realistic and who is toying around in Candyland, accomplishing not much of anything. We're trying to take steps of progress forward. Unfortunately, we're most likely stepping sidways or even backwards.

To those destitute yet admirable companies that will tell it like it is (only to see your stock plummet instantaneously): we salute you. No, seriously. We are being 100% honest when we say thank you for providing some transparency to the macro environment and thank you for keeping it real. It has to get worse before it can get better.

And, on that final note: Let the games begin... Hiyo!


*Disclaimer I: Due to the recent Goldman Sachs legal tirade against a blogger, we are inserting this disclaimer to say that we have no affiliation with Goldman Sachs whatsoever. All 'taglines' in this article are fictional, are created solely by us, and are by no means a representation of Goldman's official slogan, mission, values, etc, etc, etc, etc. Everything in this post (well, mostly everything) is a satire and witty in nature. Please take this into account as you digest this delectably delicious derision.

*Disclaimer II (herein referred to as 'Disclaimer of the Disclaimer'): Please also note that while the aforementioned Disclaimer I is serious in nature, this aptly named Disclaimer of the Disclaimer is in and of itself a mockery of the Goldman Sachs proceedings referenced above as the 'legal tirade.' Those responsible for the sackings have been... well, sacked.

Market Folly biiiatch!

And now to the afore-promised and obligatory relevant content: Goldman Sachs' Q1 2009 Earnings Release:


Goldman Sachs Q1 2009 Earnings - Free Legal Forms

Goldman Sachs VIP List & Hedge Fund Trend Monitor: Stocks That Matter Most to Hedgies

Every quarter, Goldman Sachs releases a list of stocks predominantly owned by hedge funds. The aptly named Goldman Sachs VIP list (or 'Very Important Positions' list) aggregates positions held by hedge funds utilizing fundamental strategies. This is just one part of the data aggregation found in Goldman's quarterly Hedge Fund Trend Monitor and we'll detail the latest findings below.

These positions are derived from 13F filings that hedge funds file with the SEC and those of you with Bloomberg Terminals can find this compilation at: GSTHHVIP. First, some background performance of their VIP list. Goldman writes that the VIP list, "contains the 50 stocks that appear most frequently among the top 10 holdings of fundamentally-driven hedge fund portfolios. The basket of stocks that 'matter most' has outperformed the S&P 500 by 71 bp on a quarterly basis since 2001, with a Sharpe Ratio of 0.26. The VIP list underperformed the S&P 500 during 2Q 2010 by 268 bp (-14.1% vs. -11.4%). Since then VIP list has outperformed the S&P 500 by 247 bp (8.8% vs 6.3%)."

Last quarter, we posted up the previous iteration of the Goldman Sachs VIP list and for Q2 there are a few new additions to the list this time around including: Fidelity National Information (FIS), a stock many hedgies added after the company announced a leveraged recapitalization plan. Another new stock on the list, Comcast (CMCSA), has been a favorite of Columbia's University's value investing professor, Bruce Greenwald.

Two other stocks just added to the VIP list have been favorites of 'Tiger Cub' hedge funds as Andreas Halvorsen's Viking Global has a sizable position in Tyco International (TYC), and Stephen Mandel's Lone Pine Capital is bullish on Cognizant Tech Solutions (CTSH). Other stocks added to Goldman's VIP list in Q2 include: Barrick Gold (ABX), Viacom (VIA.B), Covidien (COV), Freeport McMoran (FCX), Covanta (CVA), Davita (DVA), Schlumberger (SLB), US Bancorp (USB), Halliburton (HAL) and General Electric (GE). These stocks previously did not have enough hedge fund ownership to make the cut, so it's apparent that hedgies were buying those names in Q2.

Without further ado, here are the top 10 stocks on the VIP list ranked by the number of hedge funds with the stock as a top 10 holding:

1. Apple (AAPL): 75 funds
2. JPMorgan Chase (JPM): 42
3. Pfizer (PFE): 36
4. Bank of America (BAC): 34
5. Microsoft (MSFT): 34
6. Citigroup (C): 32
7. Alcon (ACL): 30
8. Google (GOOG): 24
9. Exxon Mobil (XOM): 23
10. Mastercard (MA): 22

In our brand new quarterly newsletter, hedge fund wisdom, we highlighted that many hedgies had been adding Alcon (ACL) in Q2 and the stock consequently has now garnered a place in the top 10 of Goldman's VIP list. What's interesting is that 8 out of the 10 stocks above have seen negative returns year-to-date. Despite Apple's solid performance this year, the weakness in other top holdings could potentially be why so many hedgies are struggling. Mastercard (MA) recently hit a new 52-week low and many hedgies were buying at higher levels in Q2. This stock just broke into the top 10 of the VIP list this quarter.

On a sector basis, hedge funds had their highest weighting in consumer discretionary at 17% followed by information technology at 16%. One interesting find in Goldman's data is that stocks with the least hedge fund ownership have actually outperformed stocks with the highest hedge fund ownership concentration. This just ties into the notion of the hedge fund herd mentality that we've discussed before. Sometimes it's best to head in the opposite direction of the pack.

Embedded below is Goldman Sachs' Hedge Fund Trend Monitor report in its entirety for the second quarter. It includes the VIP list and much more:



You can download a .pdf copy here.

Keep in mind that you can receive complete portfolio updates on 20 of the top hedge funds in the industry via hedge fund wisdom by market folly, our brand new quarterly publication. Readers can receive a free sample issue here.

Goldman Sachs' VIP List: Stocks That Matter Most to Hedge Funds

Each quarter, Goldman Sachs updates a list of stocks owned by an overwhelming majority of hedge funds. The aptly named VIP list details 'very important positions' to hedge funds that employ fundamental strategies (rather than trading oriented firms) and we like to cover it due to the obvious tie-ins with our hedge fund portfolio tracking series. Last quarter, we posted up the previous iteration of Goldman Sachs' VIP list and this time around there are a few notable changes to the basket of fifty stocks.

Goldman updates the list each quarter to reflect the most recent hedge fund holdings using the same 13F forms filed with the SEC that we use for our tracking here on Market Folly. Twelve new stocks appeared on the list, representing stocks hedge funds as a whole were buying in the first quarter 2010, including: CIT Group (CIT), Alcon (ACL), CF Industries (CF), Coca-Cola Enterprises (CCE), Kraft Foods (KFT), Xerox (XRX), Assured Guaranty (AGO), Baidu (BIDU), Equinix (EQIX), Gilead Sciences (GILD), Liberty Global (LBTYA), and News Corp (NWSA).

As we've already detailed in our selective hedge fund tracking, many funds have large stakes in CIT Group, such as David Einhorn's Greenlight Capital. Not to mention, many firms are bullish on shares of Kraft, like Bill Ackman's Pershing Square. The addition of Xerox is curious because we've slowly but surely started to see more hedgies adding shares to their portfolios but have yet to see anyone provide a thesis. It should come as no surprise that Baidu joins the list given the hoopla surrounding Google's exit from China, as Baidu has been the prime beneficiary there. And lastly, we make note of Equinix gracing the VIP list as we've seen numerous prominent hedge funds in and out of this name over the past few quarters.

Hedge fund returns are often dependent on only a few key stocks and a fund's top 10 holdings typically represent 60% of their assets. As such, it makes complete sense that the VIP list tracks stocks that most frequently appear in the top ten holdings of various fundamentally driven hedge funds. Goldman's VIP basket of 50 stocks has outperformed the S&P 500 by 67 basis points on a quarterly basis since 2001 with a Sharpe ratio of 0.24. Those of you with Bloomberg Terminal access can look it up via GSTHHVIP.

Here are the top 10 stocks from Goldman Sachs' VIP List ranked by the number of hedge funds that owned that specific stock as a top holding at the end of the first quarter:

1. Apple (AAPL): 72 hedge funds owned it as a top 10 holding
2. Bank of America (BAC): 46
3. Google (GOOG): 43
4. Microsoft (MSFT): 40
5. JPMorgan Chase (JPM): 39
6. Pfizer (PFE): 34
7. CIT Group (CIT): 31
8. Intel (INTC): 25
9. Qualcomm (QCOM): 25
10. Cisco Systems (CSCO): 22

And embedded below is the rest of the 50-stock basket that makes up Goldman Sachs' VIP List:



You can download a .pdf here.


Keep in mind that if you wish to replicate hedge fund portfolios via SEC filings like Goldman's VIP list, you can easily do so via Alphaclone (MarketFolly readers receive a free 30 day trial). It is by far the best replicator out there and we use it for all of our hedge fund tracking. And if you want to know what prominent hedge funds are up to specifically, head to our portfolio tracking series that is updated daily.

Doug Kass' Predictions For 2010

Hedge fund manager, noted short seller, and financial columnist Doug Kass is out with his annual list of predictions for the impending year. We covered his 2009 predictions at the beginning of last year so it's always interesting to see his picks.

One third of his surprises came true in 2003, nearly 50% of them were true in 2004, almost 50% were true for 2007, and 60% of his 2008 surprise predictions came true. Notably, Kass also pegged the bottom in this year's market back in March. However, he didn't truly capture all of the gains as his hedge fund was up 17% for the year last we heard.

Here are his predictions (surprises) for 2010 and keep in mind that he is 'swinging for the fences' here:

1. There is a glaring upside to first-quarter 2010 corporate profits: (up 100% year over year) and first-quarter 2010 GDP (up 4.5%). It grows clear that, owing to continued draconian cost cuts, coupled with a series of positive economic releases and a long list of company profit guidance increases in mid to late January and early February, there is a very large upside to first-quarter GDP (up 4.5%) and, even more important, to S&P profit growth (which doubles!). The upside on both counts is in sharp contrast to more muted growth expectations. While corporate managers, economists and strategists raise earnings per share, full-year growth and S&P target estimates, surprisingly, the U.S. equity market fails to respond positively to the much better growth dynamic, and the S&P 500 remains tightly range-bound (between 1,050 and 1,150) into spring 2010.
2. Housing and jobs fail to revive: An outsized first-quarter 2010 GDP (up 4.5.%) print is achieved despite a still moribund housing market and without any meaningful improvement in the labor market (excluding the increase in census workers) as corporations continue to cut costs and show little commitment to adding permanent employees.
3. The US dollar explodes higher: After dropping by over 40% from 2001 to 2008, the U.S. dollar continued to spiral lower in the last nine months of 2009. Our currency’s recent strength will persist, however, surprising most market participants by continuing to rally into first quarter 2010. In fact, the U.S. dollar will be the strongest major world currency during the first three or four months of the new year.
4. The price of gold topples: Gold’s price plummets to $900 an ounce by the beginning of second quarter 2010. Unhedged, publicly held gold companies report large losses, and the gold sector lies at the bottom of all major sector performers. Hedge fund manager John Paulson abandons his plan to bring a new dedicated gold hedge fund to market.
5. Central banks tighten earlier than expected: China, facing reported inflation approaching 5%, tightens monetary and fiscal policy in March, a month ahead of a Fed tightening of 50 basis points, which, with the benefit of hindsight, is a policy mistake.
6. A Middle East peace is upended due to an attack by Israel on Iran: Israel attacks Iran’s nuclear facilities before midyear. An already comatose U.S. consumer falls back on its heels, retail spending plummets, and the personal savings rate approaches 10%. The first-quarter spike in domestic growth is short-lived as GDP abruptly stalls.
7. Stocks drop by 10% in the first half of next year: In the face of renewed geopolitical tensions and reduced worldwide growth expectations, stocks drop as the threat of an economic double-dip grows. Surprisingly, though, the drop in the major indices is contained, and the U.S. stock market retreats by less than 10% from year-end 2009 levels.
8. Goldman Sachs goes private: Goldman Sachs stock drops back to $125 to $130 a share, within $15 of the warrant exercise price that Warren Buffett received in Berkshire Hathaway's late 2008 investment in Goldman Sachs. Sick of the unrelenting compensation outcry, government jawboning and associated populist pressures, Warren Buffett teams up with Goldman Sachs to take the investment firm private. The deal is completed by year-end.
9. Second half 2010 GDP growth turns flat: The Goldman Sachs transaction stabilizes the markets, which are stunned by an extended Mideast conflict that continues throughout the summer and into the early fall. While a diplomatic initiative led by the U.S. serves to calm Mideast tensions, flat second-half U.S. GDP growth and a still high 9.5% to 10.0% unemployment rate caps the U.S. stock market’s upside and leads to a very dull second half, during which share prices have virtually flatlined (with surprisingly limited rallies and corrections throughout the entire six-month period). For the full year, the S&P 500 exhibits a 10% decline vs. the general consensus of leading strategists for about a 10% rise in the major indices.
10. Rate-sensitive stocks outperform; metals underperform: Utilities are the best performing sector in the U.S. stock market in 2010; gold stocks are the worst performing group, with consumer discretionary coming in as a close second.
11. Treasury yields fall: The yield of the 10-year U.S. note drops from 4% at the end of the first quarter to under 3% by the summer and ends the year at approximately the same level (3%). Despite the current consensus that higher inflation and interest rates will weigh on the fixed-income markets, bonds surprisingly outperform stocks in 2010. A plethora of specialized domestic and non-U.S. fixed-income exchange-traded funds are introduced throughout the year, setting the stage for a vast speculative top in bond prices, but that is a late 2011 issue.
12. Warren Buffett steps down: Warren Buffett announces that he is handing over the investment reins to a Berkshire outsider and that he plans to also announce his in-house successor as chief operating officer by Berkshire Hathaway annual meeting in 2011.
13. Insider trading charges expand: The SEC alleges, in a broad-ranging sting, the existence of extensive exchange of information that goes well beyond Galleon’s Silicon Valley executive connections. Several well-known long-only mutual funds are implicated in the sting, which reveals that they have consistently received privileged information from some of the largest public companies over the past decade.
14. The SEC launches an assault on mutual fund expenses: The SEC restricts 12b-1 mutual fund fees. In response to the proposal, asset management stocks crater.
15. The SEC restricts short-selling: The SEC announces major short-selling bans after stocks sag in the second quarter.
16. More hedge fund tumult emerges: Two of the most successful hedge fund managers extant announce their retirement and fund closures. One exits based on performance problems, the other based on legal problems.
17. Pandit is out and Cohen is in at Citigroup: Citigroup’s Vikram Pandit is replaced by former Shearson Lehman Brothers Chairman Peter Cohen. Cohen replaces a number of senior Citigroup executives with Ramius Partners colleagues. Sandy Weill rejoins Citigroup as a senior consultant.
18. A weakened Republican party is in disarray: Sarah Palin announces that she has separated from her husband, leaving the Republican party firmly in the hands of former Massachusetts Governor Mitt Romney. An improving economy in early 2010 elevates President Obama’s popularity back to pre-inauguration levels, and, despite the market’s second-quarter decline, the country comes together after the Middle East conflict, producing a tidal wave of populism that moves ever more dramatically in legislation and spirit. With the Democratic tsunami (part deux) revived, the party wins November midterm elections by a landslide.
19. Tiger Woods makes a comeback: Tiger Woods and his wife reconcile in early 2010, and he returns earlier than expected to the PGA Tour. After announcing that his wife is pregnant with their third child, both the PGA Tour’s and Tiger Woods’ popularity rise to record levels, and the golfer signs a series of new commercial contracts that insure him a record $150 million of endorsement income in 2011.
20. The New York Yankees are sold to a Jack Welch-led investor group: The Steinbrenner family decides, for estate purposes, to sell the New York Yankees to a group headed by former General Electric Chairman Jack Welch.
    

Intriguing picks from Kass as always as many of you are already shaking your head in disbelief or nodding in agreement with certain predictions of his. For some more pertinent ideas, check out the top ten investment themes for 2010. There are a few predictions concerning hedge funds on Kass' list and we'd agree that insider trading charges are certain to expand. When you have Raj Rajaratnam's Galleon Group being taken down and questions surrounding Steven Cohen's SAC Capital, you know the SEC isn't messing around anymore.

Kass also opines that more hedge fund 'tumult' will emerge and we could agree with that premise as well, given all the insider trading hoopla as of late. He also feels a major fund will shut down due to poor performance too. There are always funds shutting down each year due to poor performance, but we'll have to wait and see if any major players fall victim. Lastly, Kass mentions that the SEC could possibly restrict short selling, a decision that would wildly impact the hedge fund industry no doubt.

For more from Kass, here's the Barron's article outlining his predictions in-depth. For more on Kass' hedge fund, including his decision to introduce long investments at his previously short biased fund, head over to his interview with Barron's. Make sure to also see how well Kass did with his surprises for 2009 now that the year is coming to an end and also his list of signs needed for a market recovery.

Goldman Sachs Conviction Buy List Updates: May 2009

We used to cover Goldman Sachs' Conviction Buy & Sell lists pretty frequently on the blog, but then we became so inundated with hedge fund tracking that we never had the time. But now, with the 4th quarter 2008 hedge fund portfolio tracking behind us, we've got some spare time before the Q1 2009 portfolios are released and we're swamped again.

Here's the caveat with this coverage: we don't normally place a ton of weight on individual analyst calls and upgrades/downgrades. That said, we are very cognizant that they often move markets and have to at least be monitored. As such, we've covered Goldman Sachs' list because for whatever reason, everyone loves a "V.I.P." or "Best of" and "Worst of" list. So, Goldman's lists are essentially the cream of the crop in either direction. If they add it to their Conviction Buy List, they love it, and if they add it to the Conviction Sell List, they (at least for the moment) hate it. That much is self-explanatory but we just wanted to give a preface for those unaware. Now, to the changes:

Conviction Buy List

The bulk of their recent changes were made to their Conviction Buy List. As the month of May begins, Goldman has decided to ambush everyone with a ton of changes.

Here are the names they have just recently added to their Conviction Buy List: Liz Claiborne (LIZ), Massey Energy (MEE), Joy Global (JOYG), and Research in Motion (RIMM).

And, here are the names that Goldman has removed from their Conviction Buy List: Mastercard (MA).

Their addition of Claiborne to the list is interesting given that they have doubled their price target on the stock from $3.30 to $7.20. Is it just us, or did the economy NOT get 100% better overnight? Apparently all the Wall Street wives and girlfriends who had cut back on their purchases of make-up are rampantly buying again. Previously, Claiborne was rated as neutral but now graces their Conviction Buy List. This seems to stick with the market theme of the past few months of what we crassly call "sh*t rallies." Essentially, all the horribly beaten down stocks with poor fundamentals and poor outlooks are rallying for hardly any reason other than that they are oversold and are hopeful that the economy will rebound a.s.a.p.

Goldman removed Mastercard from the Conviction Buy List, but still retains a 'buy' rating on the name. More than anything, this is due to a combination of the recent earnings release, valuation, and taking some profits off the table after the rally. Interestingly enough, Mastercard (and Visa too) are holdings currently present in our Market Folly portfolio that we created based on hedge fund cloning. Our portfolio has seen a total return of over 190% since mid-2002 and has annualized returns of 17%. Year to date for 2009, our portfolio is outperforming the S&P by a handsomely wide margin, and Mastercard and Visa are certainly to thank for part of that.

We don't have a problem with this Goldman removing MA from the Buy List, as we recently sold some of our Visa (V) into the earnings release pop, as shares have rallied over the past few months. We post all of our portfolio updates in our Twitter stream, so definitely follow us on Twitter if you're not already. Again, MA is still rated a buy, but no longer graces the Conviction List.

Massey Energy (MEE) was also added to their Conviction Buy List as Goldman sees shares more than doubling from their previous $12 price target to a new target of $26. Massey was previously rated as Neutral and now graces the Buy List. And, as we'll touch on below, this upgrade was a part of a sector-wide coal upgrade on Goldman's part. But, it definitely appears as if Massey is their favorite at the moment.

Sticking to the energy and raw material meme, we see that they also added Joy Global (JOYG) to their Conviction Buy List. Joy provides the equipment and servicing related to the mining industry and since Goldman is bullish on the Coal industry, they're projecting somewhat of a trickle-down effect where Joy will see more action as the Coal companies ramp up. Goldman had just recently upgraded Joy from neutral to buy back in late April. But, they've now essentially upgraded it again by adding it to their Conviction List. Also, interestingly enough, we had noted that in Q4 2008, numerous hedge funds had sold out of Joy Global. We'll have to see if they have reversed course when they release their Q1 '09 holdings.

Last, but not least, they've also added Research in Motion (RIMM) to the list and have only mildly adjusted the price target to $85, up from $82. We're not quite sure what exactly has changed or what merited this move, but oh well. We've noted that previously RIMM was hedge fund Maverick Capital's 9th largest holding.

Also, we wanted to touch a major move by Goldman that undoubtedly help shake up the Coal industry yesterday (5/4/09). We couldn't help but notice that coal stocks were all rallying hard, and Goldman is partially responsible for this as they upgraded the entire American coal sector to 'Attractive' from 'Neutral.' And, as we mentioned above, Massey Energy in particular was even added to the Conviction Buy List. Stocks in the specific sector who were all seeing action include: Patriot Coal (PCX), Arch Coal (ACI), Consol Energy (CNX), Alpha Natural Resources (ANR), Peabody Energy (BTU), and Foundation Coal (FCL) among others.

Other Recent Moves

The names mentioned above all were added/subtracted from the list here in the first few days of May. But, in fairness of playing catch-up, we also wanted to quickly list which names Goldman also added/subtracted from their Conviction Lists at the end of April and on the 1st of May.

Further additions to the Conviction Buy List: Brinker (EAT), Activision (ATVI), Och-Ziff (OZM), & CVS Caremark (CVS).

Further removals from the Conviction Buy List: DR Horton (DHI) and ITT (ITT).

So, there you have it. You are now all caught up with Goldman Sachs' Conviction Buy & Sell Lists. (That is, until they release the next batch of changes). From here on out we'll try and update these lists, provided that our hedge fund tracking doesn't get in the way.

Goldman Sachs Very Important Short Positions For Hedge Funds: Q1 2012

Goldman Sachs is out with its Q1 2012 Hedge Fund Trend Monitor and we've already posted up Goldman's VIP list of most important stocks to top funds.  Now we're posting a new addition to their research: the very important short position list.

This tracks short exposure of hedge funds as an equal-weighted basket that "consists of 50 S&P 500 constituents with the highest total dollar value of short interest outstanding."  It can be accessed on Bloomberg via < GSTHVISP >.

Goldman emphasizes that this list is not based on 13F holdings (because hedge funds are not required to disclose shorts).  They also note that it's not a basket of stocks most held short.


Goldman Sachs Very Important Short Positions For Hedge Funds

Stock, value of short interest (in $ billions)

1. Johnson & Johnson (JNJ): $2.9
2. Exxon Mobil (XOM): 2.8
3. Intel (INTC): 2.6
4. International Business Machines (IBM): 2.4
5. Amazon.com (AMZN): 2.4
6. AT&T (T): 2.3
7. Chevron (CVX): 2.1
8. Verizon (VZ): 1.8
9. Duke Energy (DUK): 1.7
10. Walt Disney (DIS): 1.5
11. Abbott Laboratories (ABT): 1.4
12. Coca Cola (KO): 1.4
13. General Electric (GE): 1.4
14. Walmart Stores (WMT): 1.3
15. Caterpillar (CAT): 1.2
16. ConocoPhillips (COP): 1.2
17. Walgreen (WAG): 1.2
18. Time Warner (TWX): 1.1
19. Lockheed Martin (LMT): 1.1
20. Home Depot (HD): 1.1
21. Dell (DELL): 1.1
22. Bristol Myers Squibb (BMY): 1.1
23. Oracle (ORCL): 1.1
24. Schlumberger (SLB): 1.0
25. United Parcel Service (UPS): 1.0


Of the above. David Einhorn recently made comments about Amazon.com (AMZN) at the Ira Sohn conference.  While he seemed to be skeptical of the company during his talk, he did not say he was short.  He highlighted that the company has destroyed other businesses, taking market share, but criticized their weak profit growth.

Jim Chanos is short Dell (DELL) and he points to the decline of personal computing in favor of tablets and other mobile devices.  He's been correct in that regard as Dell recently reported declines in those segments in their latest earnings release.  But of course the bull case points to Dell's other business lines as they shift toward the enterprise. 


Here's the rest of Goldman's Very Important Short Positions List:

26. Amgen (AMGN): 1.0
27. AvalonBay (AVB): 1.0
28. Chipotle Mexican Grill (CMG): 1.0
29. Boston Properties (BXP): 1.0
30. Union Pacific (UNP): 0.9
31. Simon Property Group (SPG): 0.9
32. Procter & Gamble (PG): 0.9
33. Cerner (CERN): 0.9
34. Host Hotels & Resorts (HST): 0.8
35. Kohl's (KSS): 0.8
36. Waste Management (WM): 0.8
37. CenturyLink (CTL): 0.8
38. Carnival (CCL): 0.8
39. Philip Morris (PM): 0.8
40. American Express (AXP): 0.8
41. DuPont (DD): 0.8
42. McDonalds (MCD): 0.8
43. MetLife (MET): 0.8
44. Fastenal (FAST): 0.8
45. Merck (MRK): 0.7
46. Comcast (CMCSA): 0.7
47. Sysco (SYY): 0.7
48. Freeport McMoran (FCX): 0.7
49. Alcoa (AA): 0.7
50. Staples (SPLS): 0.7


Be sure to also check out Goldman Sachs VIP list of most important stocks to hedge funds for Q1 2012.

Goldman Sachs' VIP List: Most Important Stocks For Hedge Funds

Given our focus on following hedge fund movements, we thought it would be prudent to post up Goldman Sachs' VIP list. The 'VIP' stands for 'Very Important Positions' for hedge funds that employ fundamental strategies rather than technical or trading. In essence, these are the 50 stocks that most frequently appear among the top ten holdings of hedge funds. In our hedge fund portfolio tracking series you may have noticed various stocks popping up over and over again in their top 10 holdings. This is simply an aggregation of a larger set of data and stems from our previous coverage of the top ten hedgie holdings.

This basket of stocks returned 40% in 2009 versus 27% for the S&P 500. Goldman also notes that this list has, "outperformed the S&P 500 by 81 bp on a quarterly basis since 2001, with a Sharpe Ratio of 0.29." Quarterly turnover on this list is typically around 15 positions out of the 50. Those of you with Bloomberg Terminal access can look it up via GSTHHVIP.

Goldman has aggregated data from 487 funds based on the recent slew of 13F filings so these were the most popular stocks owned as of December 31st, 2009. Again, they focus on fundamentally focused hedge funds but have taken a much broader view of hedge fund land than we typically have. We instead focus on a select list of funds to track that are ideal due to their strategy and portfolio concentration. What's most interesting about the data Goldman has assembled is that many of the positions have actually been down year-to-date for 2010. We found that intriguing given that these are essentially 'groupthink' or consensus picks.

Below you will find Goldman Sachs' VIP List with the name of the stock followed by the number of hedge funds that own that stock in their top ten holdings.

1. Apple (AAPL): 67 hedge funds hold it as a top ten holding
   
2. Pfizer (PFE): 45
3. Bank of America (BAC): 37
4. Google (GOOG): 37
5. JPMorgan Chase (JPM): 36
6. Microsoft (MSFT): 36
7. Mastercard (MA): 29
8. DirecTV (DTV): 27
9. Wells Fargo (WFC): 27
10. CVS Caremark (CVS): 24
11. Citigroup (C): 23
12. Hewlett Packard (HPQ): 23
13. Monsanto (MON): 23
14. Visa (V): 23
15. Cisco Systems (CSCO): 21
16. Walmart (WMT): 21
17. Oracle (ORCL): 18
18. Qualcomm (QCOM): 18
19. Exxon Mobil (XOM): 18
20. Ebay (EBAY): 17
21. Wellpoint (WLP): 17
22. Intel (INTC): 16
23. Mead Johnson Nutrition (MJN): 16
24. Merck (MRK): 16
25. Johnson & Johnson (JNJ): 15
26. Liberty Media (LSTZA): 15
27. Amazon (AMZN): 14
28. Apache (APA): 14
29. EMC (EMC): 14
30. Express Scripts (ESRX): 14
31. Ford Motor (F): 14
32. IBM (IBM): 14
33. Lear (LEA): 14
34. Teva Pharmaceutical (TEVA): 14
35. Yahoo (YHOO): 14
36. Crown Castle (CCI): 13
37. McDonald's (MCD): 13
38. Transocean (RIG): 13
39. Barrick Gold (ABX): 12
40. SBA Communications (SBAC): 12
41. US Bancorp (USB): 12
42. Anadarko Petroleum (APC): 11
43. Berkshire Hathaway (BRK.B): 11
44. Philip Morris International (PM): 11
45. Transdigm Group (TDG): 11
46. Target (TGT): 11
47. Thermo Fisher Scientific (TMO): 11
48. American Tower (AMT): 10
49. Comcast (CMCSA): 10
50. Freeport McMoran (FCX): 10
    

Of the stocks mentioned, there are a handful that are brand new additions to Goldman's VIP list. This means that enough hedge funds have brought their stakes in the company up to a top 10 position in their respective portfolios. Positions that hedgies added largely to in the fourth quarter include: Wells Fargo (WFC), Mead Johnson (MJN), Merck (MRK), Liberty Media (LSTZA), Amazon (AMZN), Apache (APA), IBM (IBM), Lear (LEA), Crown Castle (CCI), SBA Communications (SBAC), US Bancorp (USB), Anadarko Petroleum (APC), Target (TGT), American Tower (AMT), and Freeport McMoran (FCX).

Readers will take note that all three major tower stocks are included as we've been harping on this for some time now. We've highlighted how hedgies had increased exposure to AMT, CCI, and SBAC as demand for wireless data service continues to grow. Overall, an insightful list and now you can easily follow the smart money with these consensus plays. For more research from Goldman Sachs, head to our other post which covers an extensive look at the top hedge fund holdings. And don't forget that you can also get specific hedgie portfolio updates by heading to our tracking series where we specifically focus on bottom-up stockpickers.

Citadel Investment Group (Ken Griffin): Hedge Fund Portfolio Tracking - 13F Filing Q3 2008

This is the 3rd Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the preface to the series we're doing on Hedge Fund 13F filings here.

Next up is Citadel Investment Group. Citadel was founded in 1990 by Ken Griffin and is a market maker as well as a hedge fund, employing investment strategies through multiple asset classes. They are responsible for nearly 30% of US equity options volume, and 8% of NYSE and Nasdaq volume. Griffin has recently noted that the market madness has provided some of the greatest opportunities he’s seen in a long time. Citadel was -13% in November and was -47% for the year at that time. Their flagship $10 billion combined Kensington and Wellington funds had been the hardest hit, due to losses from convertible bonds, and bank loans, among others. Citadel recently announced they'd be opening a new fund.

The following were their long equity, note, and options holdings as of September 30th, 2008 as filed with the SEC. All holdings are common stock unless otherwise denoted.


Some New Positions (Brand new positions that they initiated in the last quarter):
Google (GOOG) Calls
Google (GOOG) Puts
Research in Motion (RIMM) Puts
Goldman Sachs (GS) Puts
Goldman Sachs (GS) Calls
General Electric (GE) Puts
IBM (IBM) Puts
General Electric (GE) Calls
Potash (POT) Puts
Liberty Media (LMDIA)
IBM (IBM) Calls
Exxon Mobil (XOM) Puts
Legg Mason (LM)
Research in Motion (RIMM)
JPMorgan Chase (JPM)
PepsiCo (PEP) Calls
Potash (POT) Calls
Exxon Mobil (XOM) Calls
Microsoft (MSFT) Puts
Walmart (WMT) Calls
Mastercard (MA) Calls
JPMorgan Chase (JPM-PA) Preferred
Microsoft (MSFT) Calls
Research in Motion (RIMM) Calls
Viacom (VIA-B) Class B
Google (GOOG)
Mastercard (MA) Puts
Walmart (WMT) Puts
Newmont Mining (NEM) Calls
First Solar (FSLR) Puts


Some Increased Positions (A few positions they already owned but added shares to)
CMS Energy (CMS) : Increased position by 58,909%
Capital One (COF) Calls: Increased position by 2,391%
Caterpillar (CAT) Calls: Increased position by 2,174%
Cisco Systems (CSCO) Calls: Increased position by 1,834%
Caterpillar (CAT) 2nd set of Calls: Increased position by 1,495%
CME Group (CME) Calls: Increased position by 880%
Cisco Systems (CSCO) : Increased position by 605%
Cisco Systems (CSCO) : Increased position by 488%
CME Group (CME) Puts: Increased position by 345%
Cisco Systems (CSCO) 2nd batch of Puts: Increased position by 337%
Apache (APAHP) Calls: Increased position by 328%
Bank of America Preferred (IKJ) Calls: Increased position by 323%
Conoco Philips (COP) Puts: Increased position by 221%
Apple (AAPL) Calls: Increased position by 127%
Chesapeake Energy Preferred (CHKDO) : Increased position by 108.5%
Amazon (AMZN) Calls: Increased position by 101%
Apple (AAPL) : Increased position by 88%
Apple (AAPL) Puts: Increased position by 73%
Bank of America Preferred (IKJ) Puts: Increased position by 55%
Conoco Philips (COP) Calls: Increased position by 50%


Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)
n/a


Removed Positions (Positions they sold out of completely)
Cephalon (CEPH)
Amgen (AMGN)
Chesapeake Energy (CHKDO) Preferred
Amylin (AMLNL)
Alpharma (ALO)
Biomarin Pharma (BMRN)
Alexion Pharma (ALXN)
Ciena (CIEN)
Charles River Labs (CRL)
Agco (AG)
ADC Telecom (ADCT)
Ace (ACE)
Blackrock (BLK)
Anixter (AXE)
Regis B Bonds
Advanced Micro Devices (AMD)
Blackboard (BBBB)
American Equity Investment (AEL)
Arvin Meritor (ARVML)
Alliant Techsystems (ATK)
AAR Corp (AIR)
Cadence Design (CDNS)
Actuant (ATU)
CBIZ (CBZ)


Top 20 Holdings (by % of portfolio)

1. Apple (AAPL) Puts: 1.2% of portfolio
2. Google (GOOG) Calls: 1.03% of portfolio
3. Apple (AAPL) Calls: 0.98% of portfolio
4. Google (GOOG) Puts: 0.94% of portfolio
5. Research in Motion (RIMM) Puts: 0.72% of portfolio
6. Goldman Sachs (GS) Puts: 0.68% of portfolio
7. Goldman Sachs (GS) Calls: 0.6% of portfolio
8. General Electric (GE) Puts: 0.57% of portfolio
9. CME Group (CME) Calls: 0.57% of portfolio
10. Apple (AAPL): 0.53% of portfolio
11. IBM (IBM) Puts: 0.47% of portfolio
12. General Electric (GE) Calls: 0.47% of portfolio
13. Potash (POT) Puts: 0.46% of portfolio
14. Liberty Media (LMDIA): 0.45% of portfolio
15. IBM (IBM) Calls: 0.43% of portfolio
16. Exxon Mobil (XOM) Puts: 0.42% of portfolio
17. Legg Mason (LM): 0.42% of portfolio
18. Research in Motion (RIMM): 0.42% of portfolio
19. JPMorgan Chase (JPM): 0.41% of portfolio
20. Bank of America (IKJ) Preferred Puts: 0.41% of portfolio


Assets from the collective long US equity, options, and note holdings were $10.4 billion last quarter and were $38 billion this quarter. Ever since this filing though, Citadel has had some tough times, seeing their flagship funds drop 47% for the year as of November. Please note that we have not detailed changes to every single position in this update, but we have covered all the major moves. Also, keep in mind that these filings only include long equity, notes, and options holdings. They do not reflect their cash, short portions, or holdings in other markets (currency, commodities, debt, foreign markets, private equity, etc). This is just one of many funds in our hedge fund portfolio tracking series in which we're tracking 35+ prominent funds. The other funds we've already covered include:

• Timothy Barakett's Atticus Capital
• Whitney Tilson's T2 Partners
• Peter Thiel's Clarium Capital
• Bill Ackman's Pershing Square
• Bret Barakett's Tremblant Capital
• John Paulson's Paulson & Co
• David Einhorn's Greenlight Capital
• Dan Loeb's Third Point
• Paul Tudor Jones' Tudor Investment Corp
• Louis Bacon's Moore Capital Management
• Bruce Kovner's Caxton Associates
• George Soros Soros Fund Management
• Chase Coleman's Tiger Global
• Stephen Mandel's Lone Pine Capital
• Lee Ainslie's Maverick Capital
• John Griffin's Blue Ridge Capital
• Andreas Halvorsen's Viking Global
• Chris Shumway's Shumway Capital Partners
• Touradji Capital (Paul Touradji)
• Eric Mindich's Eton Park Capital
• Barry Rosenstein's Jana Partners
• Seth Klarman's Baupost Group
• Art Samberg's Pequot Capital Management
• Ricky Sandler's Eminence Capital
• Thomas Steyer's Farallon Capital Management
• Harbinger Capital Partners (Philip Falcone)
• Jeffrey Gendell's Tontine Associates
• Jim Simons' Renaissance Technologies
  

Overall, its been one of the worst years ever for hedge funds, as we noted in our November hedge fund performance number update. Thus, the recent moves they've made in their portfolios become all the more interesting given the way the market has played out.

More on Griffin, Citadel, & hedge funds:
- Griffin testifies before Congress
- Hedge Fund manager interviews
- Hedge Fund investor letters
- Hedge Fund Rankings
- November hedge fund performance numbers
- October hedge fund performance numbers

Hedge Fund Trend Monitor: Goldman Sachs Report

Here's an excellent in-depth read from Goldman Sachs that ties directly into our tracking of hedge fund movements. And we say this because the majority of their data was taken from SEC filings and public disclosures, exactly what we track here on Market Folly. In the report, they specifically focus on hedge fund re-risking and the fact that these funds now have net long exposure near levels unseen in a long time.

Some interesting tidbits we took away from the piece are as follows:

- Hedge funds now own 3.7% of the financial sector's market capitalization.

- Hedge funds boosted ownership in financials by 55% on a quarter over quarter basis, to $70 billion.

- They favored Bank of America (BAC) as the number of funds owning it doubled (quarter over quarter). JPMorgan Chase (JPM) was the second favorite. This echoes what we have been seeing in our 13F analysis. Notable fund managers like Dan Loeb (Third Point) and John Paulson (Paulson & Co) loaded up on shares of BAC, among many other prominent managers. It really is almost astounding how many big names piled into this play over the last quarter.

Those are just a few of the major talking points, but there is a ton of great information in this report and if you enjoy reading our posts on a daily basis then you'll love this report, hands down. Email readers please come to the blog to view the embedded document below.

Here's Goldman Sachs' Hedge Fund Trend Monitor:

Goldman Sachs Hedge Fund Monitor


If you would like to download the .pdf, you can easily do so via this link. Please be aware that Market Folly is not the one hosting this document and hat tip to that individual for doing so. And as always, make sure to check out our hedge fund portfolio tracking series as we update it daily.

Possible Current Long & Short Hedge Fund Strategies

There has been some interesting work coming out of Goldman Sachs as of late and we wanted to take a moment to highlight the latest piece we've stumbled across. If you missed it, make sure you check out their hedge fund trend monitor where they identify portfolio holdings across the hedge fund universe as well. Turning now to another recent report, we examine their piece entitled 'State of the Markets.' Members of Goldman Sachs' sales/trading desk have compiled possible current long & short strategies they are seeing in the markets. They touch on tradable themes and various other market opportunities. In particular, they focus on the topics of commercial real estate, balance sheets of public companies, Japan, the consumer and retail, as well as commodity and event-driven opportunities. Keep in mind that these thoughts do not reflect an official view of Goldman Sachs and are solely those of the sales/trading authors.

Drilling down those talking points, the main trading and hedging opportunities they see are derived from a notion that the combination of the housing bubble and equity market decline have essentially destroyed wealth (we touched on this theme way back in December). This leads to consumer debt repayment and a higher savings rate. Due to the economic malaise, elevated and prolonged unemployment becomes a real source of problems. In turn, you then see lower consumer spending. They've also identified a second theme to take advantage of: risk shifting to public balance sheets. Based on all of these notions, various members of Goldman Sachs' sales/trading desks have highlighted the following strategies as opportunistic within the context of the current market landscape:

- Short REIT Equities
- Buy AAA CMBS
- Buy FX Options on commodity linked currencies
- Buy Equities of non-US commodity producers
- Sell Caps on the US Tax Index
- Short JPY
- Buy Yen CMS Caps
- Short US consumer and retail companies (via equities or CDS)
- Sell Aluminum Caps
- Long crude oil vs short heating oil (short the crack spread)
- Engage in market neutral strategies (event-driven, etc)

As you can see, some of these strategies are obviously not executable by your average retail investor and that is why the piece is deemed possible hedge fund strategies. As such, we insert the necessary note of caution here: Don't trade anything you aren't familiar with. Nothing herein is a recommendation and we won't be responsible for your acts of stupidity when you decide to go leverage-happy trading FX options when you've barely even traded equities. Use your head with this stuff. More so than anything, we found their report to be intriguing and figured it was good food for thought. Acting like a lemming and just following whatever you read on the internet is not a smart investment strategy (in fact, it's not one at all). Just keep all this in mind when reading and do note our disclaimer at the bottom of the site.

Overall, this is definitely an interesting mix of possible hedge fund strategies being pursued in the current markets. (These strategies were compiled in August 2009). Since we typically focus on equity holdings of various hedge funds, we'll leave all the macro trades for another day and will instead focus on the equity strategies presented.

Firstly, we'll turn our attention to the proposed strategy of shorting REIT equities. This has already been widely discussed before as the collapse in commercial real estate intensifies by the day. Yet through equity dilutions-a-plenty, REIT equities have managed to stay afloat. The fundamental problems and macro picture duly noted, members of Goldman's team have identified an opportunity to capitalize on the divergence in commercial real estate price estimates between REIT equity and CMBS markets. They identify possible trade ideas as follows: short REIT equity, long CMBS through buying AAA CMBS or selling protection on AAA CMBX.

According to S&P's rating stress for CMBS, CRE values have apparently dropped 26% from their peak and could potentially drop another 20-30%. A few recent transactions have sold around 60-65% below the peak in 2007 prices. Not to mention, you have the awesome problem of store closings that could shut down numerous regional malls over an extended timeframe. It is all a domino effect as the consumer has been wounded from the economy. As the consumer goes, so does the retail sector. As retail slowly ceases to bask in their former profitable glory, commercial real estate property owners start to suffer from lost tenants, amongst other problems.

While US REITs have raised almost $13 billion in capital year to date (mainly courtesy of the equity dilutions we referenced earlier), they still might need $40-60 billion more to stay afloat and meet impending debt maturities. Despite property values falling and equity dilution, REIT share prices have continued to ramp up. REIT indices are up well over 50% since the lows in March, yet the problems in commercial real estate seem to be accelerating to the downside.

(click to enlarge)

If there is indeed a 25% mis-pricing in loss expectations for CRE, there could be further trouble ahead.

(click to enlarge)

An example of putting on the short portion of the trade would be to buy puts or put spreads on a REIT equity index or a basket of various REITs (they highlight retail and office REITs). You can either buy the put outright or sell a further out of the money put to create a put spread (and cheapen your cost). With put options, you define the amount you are willing to lose as opposed to shorting common where a stock can rally > 100%, compounding your losses. While this could potentially be an effective short strategy, you also have to keep in mind that they have also presented a long strategy that retail investors can't pursue. But, for those of you interested, the idea as referenced earlier is a long of AAA CMBS. Obviously the risk there is that if the loans cease to pay their mortgage payments, the value of the bond price could be impaired. In the past, we've covered how various hedge funds have been short REITs as this theme definitely looks to be in play. That about sums up the CRE play for now, and you can bet we aren't done hearing about the problems in this industry.


Secondly, we'll shift the focus to public balance sheet conditions. Goldman's team has identified strength in emerging market balance sheets as developed countries increase their public debt. As such, they have proposed shorting developed countries overloaded with debt and going long select emerging market economies. They also highlight the possibility to buy equities of non-US commodity producers or inflation proxy commodity indices.

(click to enlarge)

And another idea:

(click to enlarge)

While we don't typically cover currencies here, you could implement a makeshift version of this trade using currency baskets created with ETFs such as the Australian Dollar (FXA) and the Canadian Dollar (FXC). We've seen this theme (longing commodity producers) mentioned numerous times and we would venture a guess that hedge funds like John Burbank's Passport Capital have executed some form of this trade (we've also covered their curve steepener play in the past too). Commodities definitely have piqued the interest of many this year (especially Jim Rogers) so we'll continue to keep track of that trend.


Lastly, we want to cover the theme of lower consumer spending as it pertains to the retail sector. This theme is relatively straightforward as a weaker economic outlook will impact the consumer. This obviously hurts participants in the retail sector and Goldman's team highlights a possibility of buying 6 month or 1 year put spreads on the S&P Retail Select Index (you could also sell a Call to cheapen the option). Buying protection on an individual retailer or basket of names would make sense should consumer spending drop off due to continued weakness in the economy.

They postulate that we could be seeing a structural ( rather than cyclical) change as it relates to consumer spending. While many will argue that the American consumer is the engine that somehow miraculously keeps on chugging, it's tough to argue with the fact that the US household has lost 23% in net wealth over the past 18 months (totaling over $14 trillion).

(click to enlarge)

Yet, similar to REIT equities, retail equities are up massively from their lows.

(click to enlarge)

Unemployment continues to rise and the economy is by no means 'in the clear' yet. Many macro hedge funds (Clarium Capital, Tudor Investment Corp) will be quick to highlight unemployment as a main contributor to continued pain. Can consumer spending go back to normal at the drop of a hat? We'll have to wait and see if the giant American consumption machine will be fettered by the continued effects of the recession.


Overall, very relevant propositions as it pertains to possible hedge fund strategies in the current markets. Keep in mind that these are not recommendations and do not represent the views of Goldman Sachs (or Market Folly either for that matter). If you missed the previous hedge fund report out of Goldman, it is definitely worth reading. Their hedge fund trend monitor surveys the hedge fund portfolio landscape much as we do here at Market Folly. For more on hedge fund holdings, make sure to check out our hedge fund portfolio tracking series as well.

Top Hedge Fund Long & Short Positions: Goldman Sachs Report

Goldman Sachs is out with their latest hedge fund trend monitor report and they've highlighted some key takeaways from the slew of fourth quarter SEC filings and portfolio disclosures. Focusing on hedge fund exposure to equities, they note a broad trend of rotation into industrials and out of information technology. Goldman interestingly notes that this is the first time since 2005 that hedge funds are underweight IT.

Now, let's dive into the good stuff.

Here's a list of Ten Stocks That Most Frequently Appear In Hedge Funds' Top Holdings:

1. Apple (AAPL)
2. Pfizer (PFE)
3. Bank of America (BAC)
4. Google (GOOG)
5. JPMorgan Chase (JPM)
6. Microsoft (MSFT)
7. Mastercard (MA)
8. DirecTV (DTV)
9. Wells Fargo (WFC)
10. CVS Caremark (CVS)


Also, we wanted to highlight the Top 10 Stocks Added Most By Hedge Funds In Q4:

1. Mead Johnson Nutrition (MJN)
2. Wells Fargo (WFC)
3. Citigroup (C)
4. Amazon (AMZN)
5. 3Com (COMS)
6. Hewlett Packard (HPQ)
7. Wellpoint (WLP)
8. Black & Decker (BDK)
9. CVS Caremark (CVS)
10. Jefferies (JEF)


This is pretty much right in line with what we've seen when we've detailed hedge fund portfolios as we've noticed prominent managers picking up shares of MJN, WFC, and CVS in particular.

Based on various short disclosures, Goldman has also estimated what short positions a 'typical' hedge fund would employ. This hypothetical portfolio would be short the likes of Haverty Furniture (HVT), Lifeway Foods (LWAY), Great Southern Bancorp (GSBC), Travelzoo (TZOO) and many other names.

In their trend monitor report, Goldman concludes the same thing we've detailed previously: that hedge funds have recently de-risked, having spent the vast majority of 2009 re-risking before that. Some other research we've looked at has even indicated that hedge funds have their lowest net long equities position since May 2009. Also, an interesting tidbit from Goldman's research: they conclude that hedge funds use exchange traded funds (ETFs) as a hedging tool, rather than for directional bets.

Probably the most intriguing thing to note from Goldman's research is their conclusion regarding the impact of timelag in these position disclosures. Goldman writes, "Importantly, we believe our analysis of December 31 hedge fund holdings based on filings made in mid-February is probably more reflective of actual current holdings than many market participants are inclined to believe. Hedge fund holdings turnover is lower than most expect, as highlighted previously. Most securities (68%) that were in hedge fund portfolios on September 30, 2009 also appeared in portfolios on December 31, 2009. Because the overall holdings picture was surprisingly constant, it is reasonable for us to believe the most recent holdings data is not so 'out-of-date' as some might suggest."

They also draw attention to an obvious fact: hedge fund returns are largely reliant on the performance of a few stocks, usually their top holdings. This is why we like to track concentrated funds on the site even more, as their holdings are typically higher conviction plays. There are many investors out there in hedge fund land, and when it comes to equities, you have to know who to track. This is something we strive for on a daily basis as we've compiled a great list of hedge funds to track.

Below you will find Goldman Sachs' entire hedge fund trend monitor report as an embedded document. RSS & Email readers will need to come to the site in order to read it:



Overall, an impressive set of in-depth research well worth the read. And, importantly, their conclusions and findings fall directly in line with what we've discovered in our constant hedge fund coverage. The essential non-issue of the timelag between the portfolio disclosure date (12/31/09) and the date when the filings are released to the public (2/15/10) is very notable. When following hedge fund movements, you have to focus on their core positions and ideally you want to trail equity funds that have long-term time frames, typically employ value strategies, and run concentrated portfolios. To see what specific positions prominent hedge funds are buying, head to our hedge fund portfolio tracking series and our coverage of hedge fund investor letters.

David Gallo's Valinor Management Adds Heavily to Goldman Sachs, Iconix Positions: 13F Filing

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is David Gallo's Valinor Management. Gallo founded Valinor after previously working at Roberto Mignone's Bridger Management. He received his MBA from Harvard Business School and the hedge fund is named after lands often inhabited by immortal souls from the books of J.R.R. Tolkien. We just started covering Valinor's portfolio, and in the past have detailed their recent position adjustments.

The positions listed below were Valinor's long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. All holdings are common stock unless otherwise denoted.


Brand New Positions
Check Point Software (CHKP)
Education Management (EDMC)
Cardinal Health (CAH)
Amedisys (AMED) Puts
PHH (PHH)
Bank of America preferreds (BAC-S)
Schweitzer mauduit (SWM)
Graphic Packaging (GPK)
Lear (LEA)
Boston Scientific (BSX)


Increased Positions
Goldman Sachs (GS): Increased by 457.4%
Gymboree (GYMB): Increased by 304.3%
Iconix (ICON): Increased by 132.7%
Popular (BPOP): Increased by 82.4%
Qualcomm (QCOM): Increased by 78.6%
Regions Financial (RF): Increased by 72.3%
Bank of America (BAC): Increased by 68.2%
Assurant (AIZ)): Increased by 44.8%
Dr. Pepper Snapple Group (DPS): Increased by 42.3%
Morgan Stanley (MS): Increased by 38.2%
Yahoo (YHOO): Increased by 33.8%
LM Ericsson (ERIC): Increased by 28.7%
Jarden (JAH): Increased by 19.4%
Covanta (CVA): Increased by 19.1%


Reduced Positions
DSW (DSW): Reduced position by 33.6%
Monsanto (MON): Reduced position by 21.5%


Removed Positions (Sold out completely):
People United Financial (PBCT)
Allegheny Energy (AYE)
International Speedway (ISCA)
Ecolab (ECL)
Hertz Global (HTZ)
Exterran (EXH)
Royal Caribbean (RCL)
Allergan (AGN)
United Community Banks (UCBI)
Eclipsys (ECLP)
MSC Software (MSCS)
YRC Worldwide (YRCW)


Top 15 Holdings by percentage of assets reported on 13F filing

1. Wyndham Worldwide (WYN): 4.29%
2. American Water Works (AWK): 3.18%
3. LM Ericsson Telephone (ERIC): 3.15%
4. Popular (BPOP): 3.10%
5. Goldman Sachs (GS): 3.06%
6. Covanta (CVA): 3.06%
7. Assurant (AIZ): 3.04%
8. Transdigm Group (TDG): 2.97%
9. Jarden (JAH): 2.96%
10. Iconix (ICON): 2.92%
11. Qualcomm (QCOM): 2.92%
12. Dr. Pepper Snapple (DPS): 2.92%
13. Yahoo (YHOO): 2.91%
14. Regions Financial (RF): 2.78%
15. Monsanto (MON): 2.49%
    

Wyndham Worldwide is their largest holding and this is certainly the first time we've seen a hotel at the very top of a hedgie's portfolio. In fact, Valinor's portfolio as a whole doesn't resemble many of the other hedge funds we've looked at as it seems they take the road less traveled. Some examples of this would be positions in Yahoo, Regions Financial, and American Water Works. However, Valinor does join the plethora of other hedge funds betting on Transdigm Group (TDG).

Of the positions they added the most to, Goldman Sachs takes the cake as they boosted their position by over 450%. Other large additions include Popular (BPOP) and Iconix Brand (ICON). There weren't many reductions in their portfolio at all, especially when you consider their reported assets rose 28% on a quarter over quarter basis. Overall, Valinor increased their long US equity portfolio via consumer goods and financials exposure and they reduced services exposure.

Data used for this article comes from Alphaclone, our source for backtesting strategies and sorting through all the hedge fund portfolio maneuvers with ease. Assets reported on the 13F filing were $1.2 billion this quarter compared to $956 million last quarter, almost a 28% increase. Remember that these filings are not representative of the hedge fund's entire base of AUM.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, Warren Buffett's portfolio, John Paulson's hedge fund Paulson & Co, Lee Ainslie's Maverick Capital, Dan Loeb's Third Point, Eddie Lampert's RBS Partners, David Ott's Viking Global, and Chris Shumway's hedge fund Shumway Capital Partners, Chase Coleman's Tiger Global, Philip Falcone's Harbinger Capital Partners, Roberto Mignone's Bridger Management, Thomas Steyer's Farallon Capital, John Burbank's Passport Capital, Brett Barakett's Tremblant Capital, George Soros' hedge fund Soros Fund Management, and Philippe Laffont's Coatue Management Charles Anderson's Fox Point Capital, Bill Ackman's Pershing Square Capital Management, Jonathan Auerbach's Hound Partners, Lee Hobson's Highside Capital, David Stemerman's Conatus Capital, and Matt Iorio's White Elm Capital. Check back daily for our new updates.

Hedge Fund Shumway Capital Partners Adds Large New Stakes in Kraft Foods, Comcast (13F Filing Q1 2010)

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund filings.)

Next up is Chris Shumway's hedge fund Shumway Capital Partners. Prior to founding his firm, Shumway was previously one of Julian Robertson's right-hand men at legendary hedge fund Tiger Management. As such, he joins the other successful Tiger Cubs and is included in the Tiger Cub portfolio created with Alphaclone for hedge fund replication. Shumway Capital Partners focuses on intensive fundamental research to drive their long/short equity strategy. Back in 2009, Shumway was listed in Barron's top 100 hedge funds for 2009 with a rolling 3-year annualized return of 28%. However, 2010 has proven difficult for the firm as their Sakkonet Fund was down 10% in May after they had gained 4.3% through April. Shumway received his MBA from Harvard Business School and his undergraduate degree from the University of Virginia.

The positions listed below were their long equity, note, and options holdings as of March 31st, 2010 as filed with the SEC. All holdings are common stock unless otherwise denoted:


Brand New Positions
Kraft Foods (KFT)
Comcast (CMCSA)
Air Products & Chemicals (APD)
Bank of America (BAC)
General Dynamics (GD)
Bard (BCR)
Staples (SPLS)
Liberty Global (LBTYA)
CME Group (CME)
Comcast (CMCSK)
TD Ameritrade (AMTD)
Illumina (ILMN)
Lowe's (LOW)
Discovery Communications (DISCA)
Cablevision (CVC)
Hartford Financial (HIG)
Sigma Aldrich (SIAL)
Waters (WAT)
Annaly Capital Management (NLY)
Credit Suisse (CS)
Liberty Global (LBTYK)
Illinois Toolworks (ITW)
SBA Communications (SBAC) Notes


Increased Positions
Novo (NVO): Increased position size by 413.8%
Goldman Sachs (GS): Increased by 275.4%
Baidu (BIDU): Increased by 85.4%
Apple (AAPL): Increased by 62.4%
Cisco Systems (CSCO): Increased by 57.2%
Disney (DIS): Increased by 47.6%
PNC Financial (PNC): Increased by 32.2%
Ingersoll-Rand (IR): Increased by 28.5%
Pfizer (PFE): Increased by 21.1%


Reduced Positions
Wells Fargo (WFC): Reduced position by 74.7%
Omnicom Group (OMC): Reduced by 70.8%
Juniper Networks (JNPR): Reduced by 62.4%
Pepsico (PEP): Reduced by 61.4%
Las Vegas Sands (LVS): Reduced by 60.2%
Urban Outfitters (URBN): Reduced by 57.9%
St Jude Medical (STJ): Reduced by 54.8%
Ctrip (CTRP): Reduced by 53.7%
JPMorgan Chase (JPM): Reduced by 45.8%
Gap (GPS): Reduced by 41.9%
Mastercard (MA): Reduced by 36.4%
Johnson & Johnson (JNJ): Reduced by 24.7%
Quest Diagnostics (DGX): Reduced by 22.9%
Visa (V): Reduced by 22.6%
Salesforce.com (CRM): Reduced by 15.4%


Positions They Sold Out of Completely
Qualcomm (QCOM)
Qualcomm (QCOM) Calls
Select Sector Financials (XLF) Calls
EMC (EMC)
Freeport McMoran (FCX)
Brocade Communications (BRCD)
Colgate Palmolive (CL)
CVS Caremark (CVS)
Radioshack (RSH)
Memc Electronics (WFR)
Fifth Third (FITB)
Allstate (ALL)
AOL (AOL)
Monsanto (MON)
Research in Motion (RIMM)
NII Holdings (NIHD) Notes
Kinross Gold (KGC) Notes
BioMarin Pharmaceutical (BMRN) Notes


Top 15 Holdings (by percentage of assets reported on 13F filing)

1. Apple (AAPL): 9.5%
2. Disney (DIS): 5.8%
3. Cisco Systems (CSCO): 5.3%
4. Kraft Foods (KFT): 5.3%
5. Teva Pharmaceuticals (TEVA): 5.3%
6. Pfizer (PFE): 4.6%
7. Equinix (EQIX): 4.5%
8. Goldman Sachs (GS): 3.9%
9. Time Warner (TWX): 3.7%
10. Johnson & Johnson (JNJ): 3.5%
11. Comcast (CMCSA): 2.7%
12. Visa (V): 2.5%
13. Baidu (BIDU): 2.4%
14. Mastercard (MA): 2.2%
15. JPMorgan Chase (JPM): 2.1%

Shumway's biggest portfolio change was their new position in Kraft Foods (KFT) as it is now their fourth largest US equity long. Numerous other hedgies like KFT these days, including Bill Ackman who previously detailed his investment thesis on Kraft. Additionally, Shumway started quite a sizable stake in Comcast (via CMCSA and CMCSK). They were also out adding to some of their mainstay holdings such as Apple, Cisco Systems, Disney, and Pfizer.

We also wanted to point out that their Equinix (EQIX) position listed above is only their equity stake. Shumway also holds various notes and their aggregate exposure to EQIX actually makes it one of their largest positions (slightly smaller than the size of their CSCO stake). And if you hadn't already noticed, many stocks in their portfolio are those on Goldman Sachs' VIP list of stocks most important to hedge funds. Maybe that helps explain their poor performance in the month of May.

On the selling side of things, Shumway Capital Partners was also somewhat active. In the fourth quarter of 2009, we saw that Shumway was betting big on Wells Fargo (WFC). Well, that certainly changed quickly as they dumped almost 75% of their position in the first quarter of 2010. However, in the financial sector they added to their stakes in Goldman Sachs and PNC Financial. Additionally, they sold completely out of hedge fund favorite stocks Qualcomm, EMC, Research in Motion and Freeport McMoran. It was also interesting to see Shumway sell out of CVS Caremark as we've seen some other hedge fund managers bullish on CVS shares as of late.

Assets reported on Shumway's 13F filing were $7.9 billion this quarter. Data from the SEC is aggregated and sorted automatically by Alphaclone, our source for hedge fund tracking, replicating, and performance backtesting (Market Folly readers can receive a special free 14 day trial). Remember that these filings are not representative of the hedge fund's entire base of AUM.

This post is part of our daily hedge fund portfolio tracking series. We've already detailed activity from numerous managers so click the links below to be taken to the respective portfolio updates: Seth Klarman's Baupost Group, Warren Buffett's Berkshire Hathaway, Stephen Mandel's Lone Pine Capital, and Bill Ackman's Pershing Square, David Einhorn's Greenlight Capital, Eddie Lampert's RBS Partners, David Tepper's Appaloosa Management, Mohnish Pabrai's Investment Fund, John Griffin's Blue Ridge Capital, Lee Ainslie's Maverick Capital, Bruce Berkowitz's Fairholme Capital Management, Andreas Halvorsen's Viking Global, Dan Loeb's Third Point, John Paulson's hedge fund Paulson & Co, Chase Coleman's Tiger Global, Roberto Mignone's Bridger Management, Phil Falcone's Harbinger Capital Partners, and David Stemerman's Conatus Capital. Be sure to check back daily for new hedge fund updates.