Thursday, December 25, 2008

Happy Holidays From Market Folly!

Happy holidays from us here at Market Folly!

Oh, and Paul Tudor Jones of Tudor Investment Corp wishes you happy holidays as well. Below, courtesy of Greenwich Time, is his grandiose light display consisting of 15,000 lights synchronized to music. Not even joking.




Lastly, the stock market wanted to get in on the action and wish you happy holidays as well:





Merry Christmas, Happy Hanukkah, Happy Kwanzaa, Happy Festivus, Happy Holidays, and any others we may have left out!


Wednesday, December 24, 2008

What We're Reading (12/24/2008)

- The Federal Reserve's balance sheet (Econbrowser)

- Brazil needs $75 oil to support investment (Bloomberg)

- T2 Partners (Whitney Tilson's hedge fund) says more pain to come (.pdf housing analysis)

- Hedge Fund legend Steinhardt says now's a good time to buy stocks (Reuters)

- Profile on Jim Chanos, notable short-seller & hedge fund manager (NY Mag)

- Videos: Nouriel Roubini's predictions for 2009 (Value Plays)


Tuesday, December 23, 2008

Barry Rosenstein's Jana Partners: Hedge Fund Tracking - 13 F Filing Q3 2008

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


Next up is Jana Partners. Ran by Barry Rosenstein, Jana was recently ranked 79th in Alpha's Hedge Fund Rankings. Jana was founded in 2001 and typically employs activist, market neutral, and long/short equity strategies in public equity markets. Rosenstein received his BS from Lehigh University and his MBA from the Wharton School of Business at the University of Pennsylvania. Jana has returned 20.9% each year annualized from 2001 til 2007. Rosenstein sees Jana's future in a strategy that uses management adjustments to force change at companies, which in turn can send shares higher. A few months back in our hedge fund performance numbers update, we noted that Jana's piranha fund was -19.2% for October and was -21.7% for the year at that time. Additionally, their Nirvana fund fell 13.2% in October and was down 21.9% ytd at that time. Lastly, the Jana Partners fund had a much better October than their other funds, being down 6.6% for that month, but was still down 20.4% for the year at that time. As you can see, a big chunk of their losses came solely from the month of October. As we posted earlier, Jana has hit a rough patch this year and is on track for its first yearly loss ever. We've also recently covered some of Jana's big moves, including taking a 13.52% ownership stake in Convergys (CVG) and a 5.7% ownership stake in Hayes Lemmerz (HAYZ).

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):
Aetna (AET)
Wells Fargo (WFC)
Pfizer (PFE)
Marathon Oil (MRO)
Bank of America (BAC)
Ace (ACe)
Regional Bank Holdrs (RKH)
Cigna (CI)
Telephone & Data (TDS)
KBW Regional Banking ETF (KRE)
Select Sector Financial ETF (XLF) Calls
Quanex Building (NX)
Microsoft (MSFT) Calls
Medarex (MEDX)
Teletech Holdings (TTEC)
John Bean Tech (JBT)
T Rowe Price (TROW)
Holly (HOC)
McDonalds (MCD)
JDA Software (JDAS)
X-rite (XRIT)
Lehman Brothers (LEHMQ)


Some Increased Positions (A few positions they already owned but added shares to)
Hanover Insurance (THG): Increased position by 117%
Medicis Pharma (MRX): Increased position by 76%
Invitrogen (IVGN): Increased position by 62%
Williams Companies (WMB): Increased position by 33%
Commscope (CTV): Increased position by 32%
Graphic Packaging (GPK): Increased position by 28%
Convergys (CVG): Increased position by 50%
Health Net (HNT): Increased position by 29%
Corel (CREL): Increased position by 19.5%
Hayes Lemmerz (HAYZ): Increased position by 12%
Agilysys (AGYS): Increased position by 10%
Maximus (MMS): Increased position by 9%


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

Focus Media (FMCN): Reduced position by 73%
KBR (KBR): Reduced position by 68%
AK Steel (AKS): Reduced position by 62%
Shire (SHPGY): Reduced position by 61%
Xerium Tech (XRM): Reduced position by 51%
M&F Worldwide (MFW): Reduced position by 42%
Chubb (CB): Reduced position by 23%
MF Global (MF): Reduced position by 20%
HCC Insurance (HCC): Reduced position by 9%



Removed Positions (Positions they sold out of completely)
Comstock Resources (CRK)
Cisco Systems (CSCO)
Anadarko Petroleum (APC) Calls
Taiwan Semi (TSM)
Conoco Phillips (COP) Puts
United Health (UNH)
Forest Oil (FST)
Nokia (NOK)
Devon Energy (DVN)
Hess (HES) Calls
National Oilwell Varco (NOV)
Equitable Resources (EQT)
First American (FAF)
Genentech (DNA)
Century Aluminum (CENX)
Oracle (ORCL)
Omnicare (OCR)
Sandridge Energy (SD)
Microsoft (MSFT)
Transocean (RIG)
Peabody Energy (BTU)
Consol Energy (CNX)
Anadarko Petroleum (APC)
Commercial Metals (CMC)
Cnet - inactive
Talisman Energy (TLM)
Hess (HES)
Calpine (CPN)
Select Sector Energy (XLE) Puts
iShares Russell 2000 index (IWM) Puts


Top 20 Holdings (by % of portfolio)

  1. Copart (CPRT): 12.3% of portfolio
  2. Convergys (CVG): 10.8% of portfolio
  3. Health net (HNT): 7.5% of portfolio
  4. HCC Insurance (HCC): 5.1% of portfolio
  5. Invitrogen (IVGN): 4.8% of portfolio
  6. Commscope (CTV): 4.6% of portfolio
  7. Williams Companies (WMB): 4% of portfolio
  8. Aetna (AET): 3.9% of portfolio
  9. Chubb (CB): 3% of portfolio
  10. Wells Fargo (WFC): 2.8% of portfolio
  11. American Italian Pasta (AITP): 2.3% of portfolio
  12. Pfizer (PFE): 1.9% of portfolio
  13. Ak Steel (AKS): 1.9% of portfolio
  14. Marathon Oil (MRO): 1.9% of portfolio
  15. Bank of America (BAC): 1.8% of portfolio
  16. MF Global (MF): 1.8% of portfolio
  17. Ace (ACE): 1.8% of portfolio
  18. Regional Bank Holdrs (RKH): 1.8% of portfolio
  19. NBTY (NTY): 1.7% of portfolio
  20. Maximus (MMS): 1.6% of portfolio


Assets from the collective holdings were $5.89 billion last quarter and were $2.14 billion this quarter. So, they definitely decreased their long US equity exposure by a good amount, like many other hedge funds we've covered. And, for the most part, they were selling entire positions rather than partial positions. 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, etc). This is just one of many funds in our hedge fund tracking series in which we're tracking 35+ prominent funds. The other funds we've already covered include:


Overall, its been one of the worst years ever for hedge funds, as we noted in our new 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 Rosenstein / Jana Partners:
- Jana has hit a rough patch this year
- Jana takes 13.52% ownership stake in Convergys (CVG)
- Jana discloses 5.7% ownership stake in Hayes Lemmerz (HAYZ)
- Hedge Fund Rankings
- November hedge fund performance numbers
- October hedge fund performance numbers


Interview With Seth Klarman of Baupost Group

Special thanks to Todd Sullivan over at Value Plays for finding and posting this great interview. Seth Klarman of hedge fund Baupost Group sits down to talk with Harvard Business School:


"While other money managers scrambled to survive the financial market meltdown, value investor extraordinaire Seth Klarman (MBA ’82), president of The Baupost Group in Boston, cautiously pursued buying opportunities. After sitting patiently on the sidelines with a mountain of cash — 40 to 50 percent of Baupost’s $14 billion–plus in assets — for several years, the firm’s recent investments have cut its cash stash in half. Distress selling, it seems, breeds the kind of bargains Klarman lives for.

Fresh out of HBS, Klarman didn’t hesitate when Adjunct Professor Bill Poorvu recruited him to help manage a $27 million pool of capital in the newly formed Baupost. While the starting salary was an underwhelming $35K, it turned out to be the opportunity of a lifetime. In 26 years, Baupost has racked up an enviable 20 percent annual compound rate of return, earning Klarman entry into the Alpha magazine Hedge Fund Hall of Fame. The firm has grown from 3 to 100 employees.

A consummate team player, Klarman rarely uses his private office, choosing instead to sit at the trading desk where he works closely with analysts on investment decisions. But work isn’t all-consuming. He makes time for family and outside pursuits. As his three children grew, he coached his daughters’ soccer teams and attended his son’s recitals. And he is deeply committed to a number of philanthropic causes. Klarman recently took time to discuss investing, the credit crisis, and his approach to philanthropy.

When you started with Baupost at age 25, did you already consider yourself a value investor?
Yes. After my junior year in college and right after graduating, I worked for Mutual Shares Corporation, which was run by a wonderful gentleman named Max Heine. I learned a huge amount about value investing. It turns out that value investing is something that is in your blood. There are people who just don’t have the patience and discipline to do it, and there are people who do. So it leads me to think it’s genetic.

Did you ever waver in your investment style?
Never once.

What gave you the resolve to say no to all the other investment approaches?
There are several answers. First, value investing is intellectually elegant. You’re basically buying bargains. It also appeals because all the studies demonstrate that it works. People who chase growth, who chase highfliers, inevitably lose because they paid a premium price. They lose to the people who have more patience and more discipline. Third, it’s easy to talk in the abstract, but in real life you see situations that are just plain mispriced, where an ignored, neglected, or abhorred company may be just as attractive as others in the same industry. In time, the discount will be corrected, and you will have the wind at your back as a holder of the stock.

Do you set an annual return target?
We think it’s madness to target a return. Return lies in some relationship to risk, albeit there are moments when it’s out of whack, when you can make a high return with very limited risk. My view is that you can target risk versus return. So you can say, I’ll take the very safe 6 percent, I’ll take the somewhat risky 12, or I’ll take the enormously risky 20, knowing that 20 might actually be minus 20 by the time the actual results are known. We just don’t think targeting a return is smart.

You are lead editor of the new edition of Security Analysis, the bible of value investing by Benjamin Graham and David Dodd, first published in 1934. Is their advice still relevant 75 years later?
At no time since 1934 has it been so relevant given the financial turmoil and distress in the world and the possibility that we could be reliving some sort of serious economic downturn. What’s wonderful about Graham and Dodd is that their advice is timeless. And it is not just about investing; it’s also about thinking about investing. It basically teaches you the questions that you should ask, and it makes endless references to the foibles of human nature in the markets.

Given the recent credit market meltdown, have we made much progress in figuring out how to avoid the pitfalls pointed out by Graham and Dodd?
No. What happens is that people always want to believe that this time is different, that there’s something new under the sun, and that through their own ingenuity they can wish away risk. The idea that risk premiums would go to zero, that we’re somehow overcoming human nature, is absurd. The whole reason that our capitalist system works the way it does is because there are cycles, and the cycles self-correct. With too much excess, eventually you get a downturn.

So the explosion in securitized assets was a ticking time bomb?
It’s not amazing that securitized products were created. There are huge financial incentives for the people involved. What’s amazing is that anybody actually bought them. That’s because they’re created with a one-dimensional idea of what the economy and the world are going to do. If you have nothing but good times, then securitization makes tremendous sense. But securitization, for all of the commingling and diversification it gives you, also gives you a lack of transparency. So if you have an environment like the one we have now, the assets that have been securitized actually make you worse off than if they were just held as whole loans.

The unanswered question is how did the smartest people in the world who run the major Wall Street firms not understand that these products were toxic and end up getting caught with them on their books?

As Fed chairman, did Alan Greenspan have a hand in creating the current credit market crisis?
Until recently, Greenspan seemed unaware of his role in influencing markets. As Fed chairman, when he advised people not very many years ago to take out variable rate mortgages, he aided and abetted the housing market excesses. When he said there was irrational exuberance in the market [in 1996], he was basically right. But then he didn’t act even though he had plenty of levers he could have pulled that didn’t have to do with changing interest rates. He could have raised margin requirements, for example. But instead, he came up with the ridiculously lame idea that bubbles need to be allowed to run and that the Fed can clean up the mess afterward, which only had the effect of inflating subsequent bubbles, most notably the housing bubble that came as a result of the easy money. So he’s just been unaware of the impact of his encouragement, and his inaction got us into the terrible mess we’re in today. It’s not all his fault, but I hold him largely responsible for it.

How have Ben Bernanke and Henry Paulson (MBA ’70) done in managing the financial crisis?
They have been dealt an unimaginably bad hand. If any of us were in their shoes, we would be doing similar things, although it is reasonable to assume that part of the problem we are facing today is a result of previous government actions, and today’s government actions will give rise to future problems as well.


The lesson should be that we need to get to a point where we don’t need to intervene in the future, because we realize that intervention also delivers incredibly dangerous messages and creates a giant moral hazard. Bernanke and Paulson have to realize that if we’re going to intervene when things are bad, we’re also going to intervene when things are good and take away the punch bowl before the party gets too far along. One-sided intervention is even more dangerous. It will create an ever bigger bunch of excesses that will require an even bigger bailout next time.

Was the $700 billion federal rescue package, sold as a plan to buy toxic mortgage-backed securities from banks, the right way to go?
Defining the problem you are trying to solve is critical in knowing whether this plan will solve it. The bailout does almost nothing to solve the specific problem of declining housing prices. If the government really wants to tackle that problem, making capital available so that banks can make safe loans is crucial. Injecting $250 billion into the nation’s banks is a big step in that direction.

How do you approach philanthropy?
I’m a big believer in giving back. We all have an obligation to leave things better than where we found them.

I have more than I’ll ever need, and more than my family will ever need. I’m only working now for philanthropy. So everything I do is about giving back. In fact, one of the things we did at Baupost when we recently took on some additional clients was to accept only educational endowments and foundations. We figured we would further benefit the world by helping these organizations rather than individuals. That decision was very important for me and for all the firm’s partners.

Also, given the extremely difficult financial environment we are in, I expect charities will be greatly affected. That’s why it’s incumbent on those who can to step up and help fill the void."




Monday, December 22, 2008

Eton Park Capital (Eric Mindich): Hedge Fund Tracking - 13F Filing Q3 2008

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


Next up is Eric Mindich's Eton Park Capital, who was ranked 53rd in Alpha's hedge fund rankings. Mindich received an Economics degree from Harvard and then worked at Goldman Sachs' risk-arbitrage desk. After becoming the youngest partner in the history of Goldman Sachs at the age of 27, it was clear he had a bright future. In 2004, he started his hedge fund Eton Park Capital with a record $3 billion in assets and a $5 million minimum investment required of investors. Today, Mindich manages over $6 billion. Typically, Eton Park invests in long/short equity and convertible arbitrage strategies. Additionally, as much as 30% of the fund can be invested in private investments. Back in September, Eton Park was only -1% for the year, as noted in our hedge fund performance numbers compilation. Recently, Mindich said he sees opportunity in the current markets in an excerpt from a recent investor letter.

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):
Spdr Gold Trust (GLD) Calls
Genentech (DNA)
Comcast (CMCSK) Calls
Potash (POT) Puts
Barr Pharma (BRL)
Alpha Natural Resources (ANR)
Alpharma (ALO)
UST (UST) Calls
Ikon Office (IKN)
Vale (RIO) Calls
Mobile Telesystems (MBT)
Deere (DE) Puts
VimpelComm (VIP)
Cisco (CSCO) Calls
AK Steel (AKS)
Newmont Mining (NEM)
News Corp (NWS)
Kinross Gold (KGC)
Ralcorp (RAH)


Some Increased Positions (A few positions they already owned but added shares to)
Comcast (CMCSA): Increased position by 131%
Wells Fargo (WFC) Puts: Increased position by 117%
Qualcomm (QCOM) Calls: Increased position by 100%
Merrill Lynch (MER): Increased position by 94%
Ishares Emerging Markets (EEM) Puts: Increased position by 75%
Qualcomm (QCOM): Increased position by 70%
Walter Industries (WLT): Increased position by 64%
Verisign (VRSN): Increased position by 48%
Ebay (EBAY): Increased position by 46%
Lorillard (LO): Increased position by 40%
Starbucks (SBUX): Increased position by 38%
News Corp (NWS-A): Increased position by 35%
Gold Fields (GFI): Increased position by 28%
Hansen Natural (HANS): Increased position by 26%
Beckman Coulter (BEC): Increased position by 23%


Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)
Lamar Advertising (LAMR): Reduced position by 34%
Cemex (CX) Puts: Reduced position by 29%
Kraft Foods (KFT): Reduced position by 8%
Goodyear Tire (GT): Reduced position by 6%


Removed Positions (Positions they sold out of completely)
Turkcell (TKC)
Bank of America (BAC)
Republic Services (RSG)
Weyerhauser (WY)
Yahoo (YHOO) Calls
BB&T (BBT) Puts
Ford (F)
America Movil (AMX) Puts
Wachovia (WB) Calls
Grey Wolf (GW)
Ebay (EBAY) Calls
Liberty Media (LCAPA)
Yahoo (YHOO)
American Express (AXP)
Encore Acquisition (EAC)
American Express (AXP) Calls
Harris (HRS)
WH Energy (WHQA) - inactive
Philip Morris International (PM)
DRS Technologies (DRS)
Mastercard (MA) Puts
Anheuser Busch (BUD)
Anheuser Busch (BUD) Calls


Top 20 Holdings (by % of portfolio)

  1. Spdr Gold Trust (GLD) Calls: 14% of portfolio
  2. Ishares Emerging Markets (EEM) Puts: 7.9% of portfolio
  3. Merrill Lynch (MER): 7.2% of portfolio
  4. Wells Fargo (WFC) Puts: 5.4% of portfolio
  5. Verisign (VRSN): 4.1% of portfolio
  6. Spdr Gold Trust (GLD): 3.7% of portfolio
  7. Qualcomm (QCOM): 3.6% of portfolio
  8. Genentech (DNA): 3.3% of portfolio
  9. Goodyear Tire (GT): 3.1% of portfolio
  10. Comcast (CMCSK) Calls: 2.9% of portfolio
  11. Hansen Natural (HANS): 2.8% of portfolio
  12. Hospira (HSP): 2.7% of portfolio
  13. Potash (POT) Puts: 2.6% of portfolio
  14. Cemex (CX) Puts: 2.1% of portfolio
  15. SLM (SLM): 1.7% of portfolio
  16. Barr Pharma (BRL): 1.7% of portfolio
  17. Ebay (EBAY): 1.5% of portfolio
  18. Qualcomm (QCOM) Calls: 1.4% of portfolio
  19. Alpha Natural Resources (ANR): 1.3% of portfolio
  20. Alpharma (ALO): 1.2% of portfolio


Assets from the collective holdings were $6.08 billion last quarter and were $6.04 billion this quarter. In contrast to numerous other hedge funds who were decreasing long US equity exposure across the board, Eton Park was pretty much flat in terms of exposure. In terms of positions they sold out of, Eton Park barely sold out of partial positions. Instead, they had a tendency to remove positions entirely. 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, etc). This is just one of many funds in our hedge fund tracking series in which we're tracking 35+ prominent funds. The other funds we've already covered include:


Overall, its been one of the worst years ever for hedge funds, as we noted in our new 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 the Eton Park:
- Eric Mindich sees opportunity (excerpt from investor letter)
- Hedge Fund Rankings
- November hedge fund performance numbers
- October hedge fund performance numbers


Put/Call Ratio, Volatility Index (VIX), and 50 Day Moving Average

Over on his blog, Stewie has pointed out that the put/call ratio has leveled off and implies a level of comfort from the bulls.

(click to enlarge)


But, we are also seeing a decline in volatility (VIX). Typically, such a move triggers a rise in stocks. But, instead, you have a market which is basically churning sideways.

(click to enlarge)


So, the combination of a declining put/call ratio, a declining VIX, and sideways market action could actually be a bad sign for the bulls. Not to mention, you've got the end of a year, the holidays, and typically light volume in the markets. Lastly, don't forget that we're also trading right around an area of resistance as many stocks and indexes run right into their 50 day moving averages.


(click to enlarge)

We've noted that as everything trades up into their 50 day moving averages and overall levels of technical resistance, we think it sets the market up for another leg down. And, as always, we would love to be proved wrong by some catalyst or spike above resistance with volume. But, until we see that, we will continue to await the next drop. Overall, we think this is a very key point in the markets. We are in an overall downtrend, and have seen a counter-trend rally up into resistance. If the market can break through, it could really change the game up. We are weighted slightly to the short-side as it is our inclination that resistance will hold. We would normally be more heavily weighted to the short side here, but we don't feel comfortable "anticipating" a move due to the circumstances (holidays, light volume, new administration, & crazy market in general). Instead, we'll wait for miss market to tip her hand, and then play in that direction.