Friday, February 20, 2009

Technical Analysis & Charts Books: Recommended Reading List

For the next installment in our series of recommended reading lists, today we're highlighting the best books for traders.  This list touches on the best books on technical analysis, charts, trader interviews, and methodologies.  Without further ado:

Technical Analysis of Financial Markets by John J. Murphy: Covers technical tools, indicators, and how to use them.

Market Wizards by Jack Schwager.  This book details interviews with top traders & hedge fund managers. It covers topics such as discipline, risk management, consistency, and capital preservation among others.

Encyclopedia of Chart Patterns by Thomas Bulkowski: This is simply one of the most complete books on chart patterns out there.

Getting Started in Technical Analysis by Jack Schwager: This book is by one of the most respected in the field. Schwager covers trends, patterns, price activity and more.

Chart Your Way to Profits by Tim Knight: Successful trader details watchlists, chart styles, indicators, and analysis methods.

Reminiscences of a Stock Operator by Edwin Lefevre.   This is a must-read for any trader. This story depicts the trials and tribulations of Jesse Livermore and takes you inside the mind of a trader to provide you with tons of insight, wisdom, and anecdotes. This book spawned legendary advice such as "the trend is your friend" and "let your winners run and cut your losses quickly."

For those of you who are investors, we've also posted up a recommended reading list for fundamental analysis & valuation so definitely check that out.

Washington Mutual's Failure

Very interesting piece on the rise and fall of Washington Mutual flagged to our attention by Barry Ritholtz. The Jacksonville Business Journal writes,

"But already by 2001 — long before the housing bubble stretched dangerously, before most Americans had heard the term “subprime loan” — Killinger (WaMu Chief Executive) had created the fractures that would cause Washington Mutual to collapse in the largest bank failure in U.S. history. The cracks, according to executives who were there at the time, would spread over the next 10 years, eventually rendering the 119-year-old bank that Killinger painstakingly built into the nation’s largest thrift too weak to withstand the greatest economic downturn of his career. “By the time you got to the last couple of years, pretty much the destiny of the company had been locked in,” said one former executive. Killinger declined repeated requests to be interviewed.


But, without exception, former and current executives interviewed for this article pointed to Killinger’s changes in the late 1990s as one of the chief causes of the company’s eventual downfall. One of the main reasons is that it gave much more power to the company’s mortgage division and the executives who ran it over the next 10 years, executives said. Under the new structure, the mortgage unit operated more on its own, and its independence grew when Killinger gave it its own IT and human resources departments, executives said. “The mortgage unit was responsible for its own bottom line,” said Lannoye. “The checks and balances were gone.” Ultimately, the changes paved the way for the mortgage unit to transform into a “culture of unmitigated greed,” according to a former executive team member, a view echoed by many former WaMu executives.


At the same time as he made the management shift in 1999, Killinger made an acquisition that seemed unremarkable. But Long Beach Financial was different. The California lender was a leader in a growing area of subprime mortgages, which were gaining popularity because banks could charge higher interest rates to those with poor credit, and reap more profit. Long Beach Financial was WaMu’s entry into the market. The highly profitable business made $752 million worth of loans in the first quarter of 1999 alone. Its 12,500 loan brokers were spread across all 50 states.


It marked the start of WaMu’s fateful foray into subprime loans, and its rapid, unchecked advance into risky mortgage lending — ultimately the chief cause of its collapse. Killinger had found a new growth strategy. After Long Beach, WaMu quickly snapped up three more mortgage banks. At the time, even many WaMu executives thought it was a good move. Home prices were rising, interest rates were low and banks earned sizable fees for originating loans. What’s more, the risk of default could be off-loaded by packaging the mortgages and reselling them to investors as securities.


Now the cracks at WaMu started to spread. The company began losing money on hedging — efforts to protect against movements in interest rates, a problem that was partially attributed to a failure to integrate a key mortgage system, according to executives who were present at the time. The bank also began losing money on home loans. Its profit, which had marched dramatically higher, plateaued at about $3.8 billion in 2003. Davis, who had led the home loan group since the late 1990s, left abruptly that year, executives said. The mortgage business, according to one executive, “became the Achilles’ heel of the bank.” The following year, the trouble deepened. Earnings tumbled by 25 percent, or more than $1 billion, the largest decline in annual earnings for at least a decade. More worrying, provisions for bad loans leapt fivefold, to $209 million. WaMu cut 13,450 jobs, closed 100 mortgage offices and closed 53 commercial banking operations.


In the desperate last months, Killinger was described as blindly optimistic and oblivious by those who worked with him. He had not in his career seen a market or a bubble like the one now engulfing Washington Mutual."

Read the entire piece.

What We're Reading

Playing chicken with the Fed (Reuters)

Doug Kass: Fear and Loathing (TheStreet)

Never forget the power of networking - James Altucher (FT)

Aladdin Capital launches debtor-in-possession fund (hedgemedia)

The case for TIPS (NY Fed)

Is Clear Channel edging towards Chp. 11? (zero hedge)

Profile on Perry Partners (CNN Money)

Thursday, February 19, 2009

Stephen Mandel's Lone Pine Capital 13F Filing: Q4 2008

This is the 4th Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings preface.

Next up we have Lone Pine Capital, managed by Stephen Mandel Jr. His $7 Billion fund has returned over 25% annually since its inception in 1997. But obviously, last year was rough on them and many others, as noted in our list of 2008 year end hedge fund performance numbers. Why is Mandel worth following you might ask? Well, he served as a consumer/retail analyst for Tiger Management back in the day for legendary investor Julian Robertson. Robertson's proteges/right-hand men have been nicknamed the "Tiger Cubs" and many have started their own funds. So, not only has Mandel learned from one of the best, but he has put up some very solid returns himself. Mandel is well versed in the ways of finding undervalued companies and his funds typically like to sniff out solid companies with good management that are trading below their intrinsic value. Before checking out this 13F, we recommend looking over their last portfolio update so you can put things in perspective.

The following were their long equity, note, and options holdings as of December 31st, 2008 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions (Brand new positions that they initiated in the last quarter):
Activison (ATVI)
Abercrombie & Fitch (ANF)
Carnival (CCL) paired certificate
Coach (COH)
Fomento Economico (FMX)
Google (GOOG)
JP Morgan Chase (JPM)
Las Vegas Sands (LVS)
Monsanto (MON)
SPDR Gold Trust (GLD) Calls
Charles Schwab (SCHW)
Union Pacific (UNP)

Some Increased Positions (A few positions they already owned but added shares to)
Sears Holdings (SHLD) Puts: Increased position by 11,172%
Bunge (BG) Puts: Increased position by 9,900%
Mastercard (MA): Increased position by 197%
Visa (V): Increased position by 81%
Precision Cast Parts (PCP): Increased position by 45%
America Movil (AMX): Increased position by 33.3%
Teradata (TDC): Increased position by 15.9%
Qualcomm (QCOM): Increased position by 12.5%
Dolby Labs (DLB): Increased position by 9.8%
Lorillard (LO): Increased position by 6.1%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)
XTO Energy (XTO): Decreased position by 66.7%
Sandridge Energy (SD): Decreased position by 52%

Removed Positions (Positions they sold out of completely)
Crown Castle (CCI)
Dicks Sporting Goods (DKS)
Eagle Materials (EGLE)
Fastenal (FAST)
First Horizon (FHN)
Hansen Natural (HANS)
National City (NCC)
Weatherford (WFT)

Top 20 Holdings (by % of portfolio)

  1. America Movil (AMX): 12.13% of portfolio
  2. Qualcomm (QCOM): 11.84% of portfolio
  3. Visa (V): 7.21% of portfolio
  4. Mastercard (MA): 6.81% of portfolio
  5. JP Morgan Chase (JPM): 6.34% of portfolio
  6. Union Pacific (UNP): 5.37% of portfolio
  7. Monsanto (MON): 4.85% of portfolio
  8. Priceline (PCLN): 4.33% of portfolio
  9. Google (GOOG): 4.23% of portfolio
  10. Precision Cast Parts (PCP): 3.53% of portfolio
  11. Lorillard (LO): 3.34% of portfolio
  12. Carnivall (CCL) paired certificate: 3.14% of portfolio
  13. MSC Industrial (MSM): 2.96% of portfolio
  14. Activision (ATVI): 2.85% of portfolio
  15. Dolby Labs (DLB): 2.6% of portfolio
  16. SPDR Gold Trust (GLD) Calls: 2.48% of portfolio
  17. Teradata (TDC): 2.42% of portfolio
  18. XTO Energy (XTO): 2.29% of portfolio
  19. Coach (COH): 2.09% of portfolio
  20. Sears (SHLD) Puts: 2.01% of portfolio

Its interesting to note that while Lone Pine was selling National City (NCC), John Paulson's firm was adding it last quarter. Additionally, Lone Pine's removal of HANS from their portfolio is intriguing seeing as the shares have run up a lot recently and we had seen a large hedge fund presence in this name. If we were to guess, we'd say they deemed it 'too rich' for the time being, as they had ridden shares from the 20's up to the 30's. They added heavily to their various put positions, but they are still a small position relative to their total portfolio. They started new positions in names like GOOG, COH, ATVI, and UNP and brought them in as large positions in the portfolio. Assets from their long US equity, options, and note holdings were $5.2 billion last quarter and were $6.1 billion this quarter. These assets do not reflect collective firm holdings, but rather the sum of the holdings filed with the SEC. They obviously have short and cash positions as well (which aren't required in the filings). This is just one of many funds in our hedge fund portfolio tracking series where we're tracking 35+ funds and have already covered Paulson & Co (John Paulson), Carl Icahn, and Warren Buffett. We'll be covering a different fund each day so stay tuned.

Coverage Ratio Scan: Companies With Debt That Can Survive the Recession

Wanted to pass along this interesting scan I saw on Seeking Alpha. Basically, it takes the cash flow to debt coverage ratio to show a company's ability to cover total debt with operational cash flow. Thus, the higher the ratio is, the more likely a company can carry its total debt.

They scanned for companies with a ratio of 0.75 or more and cross-referenced it with the S&P500 for a final result of 23 stocks. In no particular order:

  1. Aflac (AFL)
  2. Bard (BCR)
  3. CF Industries (CF)
  4. Coach (COH)
  5. Gap (GPS)
  6. Jacobs Engineering (JEC)
  7. Altria Group (MO)
  8. Occidental Petroleum (OXY)
  9. Robert Half (RHI)
  10. Southwestern Energy (SWN)
  11. Stryker (SYK)
  12. Titanium Metals Corp (TIE)
  13. MEMC Electronic (WFR)
  14. Exxon Mobil (XOM)
  15. Adobe (ADBE)
  16. Amazon (AMZN)
  17. Apollo Group (APOL)
  18. Autodesk (ADSK)
  19. Citrix Systems (CTXS)
  20. Juniper Networks (JNPR)
  21. Microsoft (MSFT)
  22. Qualcomm (QCOM)
  23. Yahoo (YHOO)

A lot of companies on the list are very cash-rich. Companies with large cash stock piles and no debt, like Apple (AAPL), do not make the list because they have no debt to service. So, you could run an additional scan for companies with high cash levels and no significant debt in order to find some more gems. OXY is interesting because we have seen a ton of hedge fund buying in that name over the past few quarters. It is easily one of the most popular oil names among hedge funds. QCOM is another hedge fund favorite and is easily one of the most widely held stocks. Additionally, we know that Carl Icahn and many others have been rabblerousing in YHOO. Lastly, we see that WFR makes the list. David Einhorn has recently been buying this one as he thinks it is cheap (and they have a ton of cash too). The underlying theme here is to find companies that have an abundance of cash in an environment where cash and liquidity is king. And conversely, you could even put on a pairs trade by shorting companies that will have problems servicing their debt due to overleverage or lack of capital. Long deleveraging, short leverage.

Doug Kass Market Indicators: Signs Needed for Market Recovery

Doug Kass' recent piece, 'Fear and Loathing on Wall Street,' highlights some excellent points. In it, he creates a list of things the markets need to see to begin their return to normality:


  • Bank balance sheets must be recapitalized. We await a bank rescue package in the week ahead.
  • Bank lending must be restored. Bank lending standards remain tight. For now, we are in a liquidity trap.
  • Financial stocks' performance must improve. We are not yet there. Financials' performance is still drek.
  • Commodity prices must rise as confirmation of worldwide economic growth. There has been some recent evidence of higher commodities, but it's still inconclusive.
  • Credit spreads and credit availability must improve. While credit spreads are improving, the yield curve is rising and interest rates have rebounded, the transmission of credit remains poor. Time will tell whether monetary and fiscal policies will serve to unclog credit.
  • We need evidence of a bottom in the economy, housing markets and housing prices. The economy's downturn continues apace. Months of inventory of unsold homes are declining and so are mortgage rates, but home prices have yet to stabilize despite an improvement in affordability indices.
  • We also need evidence of more favorable reactions to disappointing earnings and weak guidance. We are not yet there, but this will tell us a lot about the state of the stock market's discounting process.
  • Emerging markets must improve. China's economy (PMI and retail sales) and the performance of its year-to-date stock market have turned decidedly more constructive.
  • Market volatility must decline. The world's stock markets remain more volatile than a Mexican jumping bean.
  • Hedge fund and mutual fund redemptions must ease. While I am comfortable in writing that most of the forced redemptions have likely passed, we will find out more over the next few months. Regardless, the disintermediation and disarray of hedge funds and fund of funds have a ways to go.
  • A marginal buyer must emerge. Pension funds seem to be the likely marginal buyer as they reallocate out of fixed income into equities, but we have not yet seen the emergence of this trend."

Read the entire piece.

Comparing Job Losses During Recessions

(click to enlarge)

(From Time)

And expanded:

(click to enlarge)

And condensed:

(click to enlarge)

(From Big Picture)

See also our post on comparing historical unemployment rates during recessions.

How Much Money the US Government Has Printed

Print that money, inflation ahoy.

[hat tip to Sun's Financial]

Wednesday, February 18, 2009

Warren Buffett Berkshire Hathaway Portfolio Update: 13F Filing Q4 2008

Warren Buffett, the legendary investor and oracle from Omaha, has filed Berkshire Hathaway's 13F and we get a glimpse as to what he's been up to in these tumultuous markets. The man needs no introduction, but if you want to learn more about him: read his biography, its very insightful. The man is known for his buy and hold strategy and he has amassed some large stakes in great brands and great companies. This crisis has presented numerous opportunities in his eyes, as he has started buying American. He most recently bought bonds in Tiffany's and Harley Davidson. Earlier on, he got involved with Goldman Sachs and General Electric with large multi-billion dollar preferred purchases. Do you notice a theme yet? He sees opportunity in America. He sees opportunity in American brands and American companies. Heck, he had even mentioned possibly buying back Berkshire stock, which is the Warren Buffett brand in and of itself. But, enough about all his recent purchases that everyone already knows about. Let's get to the info revealed in the 13F.

To be honest, the changes to his portfolio were kind of lackluster. After all the Buffett activity we've seen lately, there's nothing massive to report. But, there have been some changes indeed. A while ago, we had mentioned that Buffett was selling puts on Burlington Northern. He was clearly drawing a line in the sand as to where he wanted to add to his already large position in BNI. And, that strategy worked out as he was assigned more BNI shares to add to his large pile.

The second (and arguably biggest) change to his portfolio would be the large position he picked up in Nalco (NLC). This is a brand new position for him and he has over 8.7 million shares. Nalco does a lot of water treatment among other things, so its interesting to see him step into this arena. We've been reading a lot recently about the impending clean water problems worldwide, and its safe to say that Buffett has as well.

The third most noticeable change would be in regards to his Johnson & Johnson (JNJ) position. He sold over half his position in this name from over 60 million shares down to around 28 million shares. If we were to wager a guess, we'd say that Buffett did so in a "selling when its the hardest to" kind of move. The right plays are usually the hardest to make. And, if you think about it, selling a consumer staples name in the heart of the recession is probably a tough play. But, it could very well be the right play, as more names could be attractive once we emerge from these difficult times. Who knows though, as that's just pure speculation on our part. For all we know, Buffett could simply be trading his 'safe' portfolio plays for a solid income stream of 10-15% interest, which he has garnered in some of his most recent deals. And, who wouldn't take that? Those were some sweet terms, so that would also make perfect sense. Additionally, he sold some of his Procter & Gamble (PG), another well known consumer staples name.

Buffett is the third name we've covered in our fourth quarter 2008 hedge fund portfolio tracking series. We're tracking a ton of prominent names and we invite you to check out what John Paulson and Carl Icahn were up to recently, as we've already covered their movements. Look for 35+ more hedge funds in our daily coverage.

Bottom line in all things Buffett: He started a new position in Nalco (NLC), and he picked up some more Burlington Northern (BNI), & NRG Energy (NRG) among others. He sold some Johnson & Johnson (JNJ), Procter & Gamble (PG), US Bancorp (USB), & Wells Fargo (WFC), among others.

What Would Benjamin Graham Buy Today?

What would Benjamin Graham buy today? Well, nothing really.

We thought it would be interesting to try and figure out what Benjamin Graham himself would be buying in the current environment. But, we quickly realized that there's not much that comes close to meeting his standards. If you're unfamiliar with Benjamin Graham (shame on you), then all you need to know is that he was a legendary investor who helped pioneer the ways of value investing. And, he taught Warren Buffett a lot of what he uses today. To become more familiar with Graham's investing methods, we highly suggest checking out The Intelligent Investor by Benjamin Graham. If you had to own one book about fundamental investing, this would most likely be it. Additionally, Security Analysis by Benjamin Graham is another excellent resource. This is the second of Graham's must-read books. The book features the value investing philosophies of Graham and Dodd and a foreword by Warren Buffett. After you've finished reading, you'll be able to tackle balance sheets like none other.

Very few stocks would pass Graham's original stringent requirements in the current environment. And, that in and of itself surprised us. (Guess everything isn't quite as 'cheap' as many thought). But, to be fair, Graham's criteria are very strict. So, we made some changes to establish these value inspired criteria. We set up some scans using a combination of:

  • P/E Ratio less than 10 for strict scans, and less than 15 for more lenient scans.
  • Book Value > 0.01 (Price to book ratio of 1.2 or less for strict scans, and 2 or less for more lenient)
  • Current Ratio > 1.5
  • Return on equity > 15%
  • EPS growth > 3% (5 years)
  • Dividend growth over 5 years
  • Low debt/equity ratio
  • Insider ownership

We fiddled with the criteria on numerous scans to generate more ideas. In no particular order, we came up with:

  1. Ameron International (AMN)
  2. American Eagle Outfitters (AEO)
  3. Checkpoint Systems (CKP)
  4. Rowan Companies (RDC)
  5. Kennametal (KMT)
  6. Reliance Steel (RS)
  7. Forest Laboratories (FRX)

Keep in mind that all of these companies are on the lists for different reasons. Some met the majority of the criteria, but others made the list due to the fact that they kept appearing on multiple broader or more lenient scans. Again, maybe things aren't as "cheap" as people have argued. A possible problem could be the fact that Graham emphasizes the P/E ratio, and we're in an environment where the 'E' part of the equation (earnings) keep falling. We've posted before about how earnings estimates were too high and that they need to come down.

We're not currently advocating a position in any of these names and do not currently hold any. We merely wanted some names to poke around. For what it's worth, Ameron (AMN) was the most frequent return in all the different scans we did. Just thought we'd toss out ideas for people to investigate. After all, value investor Warren Buffett has said that its time to start buying American.

Also worth noting is the list that Jim Grant's Interest Rate Observer came out with back in December. Their Graham list included names such as Tiffany's (TIF), Radio Shack (RSH), Pfizer (PFE), Cooper Industries Inc (CBE), Nucor Corp (NUE), Cintas Corp (CTAS), Archer Daniels Midland (ADM), & Molex (MOLX). So, research away.

I think the main point here is that Graham's criteria are so strict that it really would take a depression for ideas to pop up on the legitimate Graham scans. Instead, we've opted for a hybrid value scan combining criteria from Graham, Buffett, and Dodd to create a slightly more lenient scan to generate ideas to keep an eye on. If you find any names that can pass Graham's strict tests, do let us know. Otherwise, I guess we'll just have to wait for a depression.

Companies Possibly Bound for Bankruptcy

Yahoo Finance recently had an interesting piece in which they named 15 companies that 'might not survive 2009.' The list has both private and public companies, but since we focus on equities here on the blog, we'll stick to the public ones. Here are some of our favorites/ones we think could possibly be likely (in no particular order):

"Blockbuster. (BBI; about 60,000 employees; stock down 57%). The video-rental chain has burned cash while trying to figure out how to maximize fees without alienating customers. Its operating income has started to improve just as consumers are cutting back, even on movies. Video stores in general are under pressure as they compete with cable and Internet operators offering the same titles. A key test of Blockbuster's viability will come when two credit lines expire in August. One possible outcome, according to Valueline, is that investors take the company private and then go public again when market conditions are better.

Landry's Restaurants. (LNY; about 17,000 employees; stock down 66%). This restaurant chain, which operates Chart House, Rainforest Café, and other eateries, needs $400 million in new financing to finalize a buyout deal dating to last June. If lenders come through, the company should have enough cash to ride out the recession. But at least two banks have already balked, leading to downgrades of the company's debt and the prospect of a cash-flow crunch. (Note: they were able to sell $295 million in senior secured notes recently though).

Trump Entertainment Resorts Holdings. (TRMP; about 9,500 employees; stock down 94%). The casino company made famous by The Donald has received several extensions on interest payments, while it tries to sell at least one of its Atlantic City properties and pay down a stack of debt. But with casino buyers scarce, competition circling, and gamblers nursing their losses from the recession, Trump Entertainment may face long odds of skirting bankruptcy. (Note: Since publication, this one has already begun to play out).

Six Flags. (SIX; about 30,000 employees; stock down 84%). This theme-park operator has been losing money for several years, and selling off properties to try to pay down debt and get back into the black. But the ride may end prematurely. Moody's expects cash flow to be negative in 2009, and if consumers aren't spending during the peak summer season, that could imperil the company's ability to pay debts coming due later this year and in 2010."

Check out the rest of the list.

York Capital Management Letter to Investors

Here's York Capital's letter to investors (RSS & Email readers you may have to come to the blog to read it):

Tuesday, February 17, 2009

Carl Icahn Portfolio Update: 13F Filing Q4 2008

While we don't normally cover Carl Icahn's movements in-depth on the blog (maybe we should?), we do generally like to keep tabs on him and cover all of his major moves. If you're unfamiliar with Icahn, he is a hedge fund manager, but more well-known as a 'corporate raider' and 'rabblerouser' for his activist ways. He takes on such a role trying to incite change within companies to unlock shareholder value. And, last year, he even started a blog to discuss numerous topics.

With the most recent 13F filings out disclosing his holdings as of December 31st, 2008, we see some noticeable changes.

Some companies he sold out of completely: Advanced Micro Devices (AMD), Lear Corp (LEA), JC Penney (JCP), Temple Inland (TIN), and Time Warner (TWX), among others.

Some companies where he added to his position: Williams (WMB), & Yahoo (YHOO), among others.

Some companies where he sold off part of his position: Anadarko Petroleum (APC), Motorola (MOT), among others.

He has a massive position in Biogen Idec (BIIB) and the theory here is that they could be bought out by another company in biotech/biopharma land. His other large holding in this sector is Amylin Pharmaceuticals (AMLN).

Yahoo (YHOO), Biogen (BIIB), and Motorola (MOT) were his top 3 holdings respectively at the time of filing. Keep in mind we're in the midst of our hedge fund portfolio tracking series to keep an eye on some of the big money. We've already covered hedge fund Paulson & Co and will be covering a different fund each day.

Harvard Endowment Cuts Holdings

If you missed it, Harvard has reduced its holdings and I thought it was worth highlighting, since so many people are interested in what the Ivy endowments are up to,

"Harvard University's endowment, the largest in higher education, cut by two-thirds its direct holdings of publicly traded stocks and funds during the market plunge in last year's fourth quarter.

As of Dec. 31, Harvard Management Co., which oversees the endowment, held about 70 stocks and publicly traded funds that were valued at $571 million, according to a filing with the Securities and Exchange Commission. Three months before, the endowment held about 200 stocks and other vehicles valued at just under $2.9 billion."

Link: WSJ

Ray Dalio's Take on the Markets (Bridgewater Associates)

Ray Dalio of Bridgewater Associates recently sat down with Barron's and gave his take on numerous subjects. Here is his take on various asset classes/investment ideas:

"Are you a fan of gold?


Have you always been?

No. Gold is horrible sometimes and great other times. But like any other asset class, everybody always should have a piece of it in their portfolio.

What about bonds? The conventional wisdom has it that bonds are the most overbought and most dangerous asset class right now.

Everything is timing. You print a lot of money, and then you have currency devaluation. The currency devaluation happens before bonds fall. Not much in the way of inflation is produced, because what you are doing actually is negating deflation. So, the first wave of currency depreciation will be very much like England in 1992, with its currency realignment, or the United States during the Great Depression, when they printed money and devalued the dollar a lot. Gold went up a whole lot and the bond market had a hiccup, and then long-term rates continued to decline because people still needed safety and liquidity. While the dollar is bad, it doesn't mean necessarily that the bond market is bad.

I can easily imagine at some point I'm going to hate bonds and want to be short bonds, but, for now, a portfolio that is a mixture of Treasury bonds and gold is going to be a very good portfolio, because I imagine gold could go up a whole lot and Treasury bonds won't go down a whole lot, at first.

Ideally, creditor countries that don't have dollar-debt problems are the place you want to be, like Japan. The Japanese economy will do horribly, too, but they don't have the problems that we have -- and they have surpluses. They can pull in their assets from abroad, which will support their currency, because they will want to become defensive. Other currencies will decline in relationship to the yen and in relationship to gold.

And China?

Now we have the delicate China question. That is a complicated, touchy question.

The reasons for China to hold dollar-denominated assets no longer exist, for the most part. However, the desire to have a weaker currency is everybody's desire in terms of stimulus. China recognizes that the exchange-rate peg is not as important as it was before, because the idea was to make its goods competitive in the world. Ultimately, they are going to have to go to a domestic-based economy. But they own too much in the way of dollar-denominated assets to get out, and it isn't clear exactly where they would go if they did get out. But they don't have to buy more. They are not going to continue to want to double down.

From the U.S. point of view, we want a devaluation. A devaluation gets your pricing in line. When there is a deflationary environment, you want your currency to go down. When you have a lot of foreign debt denominated in your currency, you want to create relief by having your currency go down. All major currency devaluations have triggered stock-market rallies throughout the world; one of the best ways to trigger a stock-market rally is to devalue your currency.

But there is a basic structural problem with China. Its per capita income is less than 10% of ours. We have to get our prices in line, and we are not going to do it by cutting our incomes to a level of Chinese incomes.

And they are not going to do it by having their per capita incomes coming in line with our per capita incomes. But they have to come closer together. The Chinese currency and assets are too cheap in dollar terms, so a devaluation of the dollar in relation to China's currency is likely, and will be an important step to our reflation and will make investments in China attractive.

You mentioned, too, that inflation is not as big a worry for you as it is for some. Could you elaborate?

A wave of currency devaluations and strong gold will serve to negate deflationary pressures, bringing inflation to a low, positive number rather than producing unacceptably high inflation -- and that will last for as far as I can see out, roughly about two years.

Given this outlook, what is your view on stocks?

Buying equities and taking on those risks in late 2009, or more likely 2010, will be a great move because equities will be much cheaper than now. It is going to be a buying opportunity of the century."

Make sure to read the rest of the interview at Barron's.

25 People to Blame for the Financial Crisis

Time has an interesting list of they think is to blame for the Financial Crisis. Here's their list:

  1. 1. Angelo Mozilo – Co-founder and former head of Countrywide
    2. Phil Gramm – Chairman of the Senate Banking Committee from 1995 through 2000
    3. Alan Greenspan – Former chairman, Federal Reserve
    4. Chris Cox – Former chairman, Securities and Exchange Commission
    5. American Consumers
    6. Hank Paulson – Former Secretary of the Treasury
    7. Joe Cassano – Founding member, AIG’s financial-products unit
    8. Ian McCarthy – CEO, Beazer Homes
    9. Frank Raines - Former chairman and CEO, Fannie Mae
    10. Kathleen Corbet – Former CEO, Standard & Poor’s
    11. Dick Fuld – Former CEO, Lehman Brothers
    12. Marion and Herb Sandler – Former heads, World Savings Bank
    13. Bill Clinton – Former U.S. President
    14. George W. Bush – Former U.S. President
    15. Stan O’Neal – Former CEO, Merrill Lynch
    16. Wen Jiabao – Premier, China
    17. David Lereah – Former chief economist, National Association of Realtors
    18. John Devaney – Hedge fund manager
    19. Bernie Madoff – Ponzi scheme orchestrator
    20. Lew Ranieri – Father of mortgage-backed securities
    21. Burton Jablin – Programmer at Scripps Networks, which owns HGTV
    22. Fred Goodwin – Former chairman and CEO, Royal Bank of Scotland
    23. Sandy Weill – Former chairman and CEO, Citigroup
    24. David Oddsson – Former Prime Minister, Iceland
    25. Jimmy Cayne – Former chairman and CEO, Bear Stearns

Read the article here.

Monday, February 16, 2009

John Paulson's Hedge Fund Paulson & Co 13F Filing: Q4 2008

This is the 4th Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings preface.

Next up is Paulson & Co ran by John Paulson. His hedge fund has generated massive returns over the past two years, as he bet against financials and all things subprime. One of his funds was even up 589%. Most recently, he has profited by shorting UK banks. Although Paulson is obviously one of the main brains behind the operation, there are also many talented individuals. One of their co-portfolio managers has left to start his own fund, and we'll be keeping an eye on that. At the end of 2008, his Advantage Plus fund ended the year +37.58%, as detailed in our year end 2008 hedge fund performance post. For more info on how Paulson performed in 2008, be sure to check out their year end letter & report.

Paulson began shorting collateralized debt obligations and buying credit default swaps back in 2005 as he had conviction in his bet. His Credit Opportunities fund launched in 2006 with $150 million aimed to short subprime mortgage backed securities. This fund enjoyed immediate success, causing him to launch the Credit Opportunities II fund. At the end of 2007, the Opportunities fund was up 590% and his Opportunities II fund was up 353%.

The following were their long equity, note, and options holdings as of December 31st, 2008 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions (Brand new positions that they initiated in the last quarter):
At&t (T)
Embarq (EQ)
iStar Financial (SFI)
Liberty Media Corp (LMDIA)
National City (NCC)
Northern Trust (NTRS)
Peoples United Financial (PBCT)
St Jude Medical (STJ)
Teva Pharmaceutical (TEVA)
Centennial Communication (CYCL)
Proshares Ultrashort Financial (SKF)
Wells Fargo (WFC)
Wachovia (WB)

Some Increased Positions (A few positions they already owned but added shares to)
Merrill Lynch (MER): Increased position by 327%
BCE (BCE): Increased position by 308%
Genentech (DNA): Increased position by 242%
NRG Energy (NRG): Increased position by 163%
Cheniere Energy (LNG): Increased position by 60%
Philip Morris International (PM): Increased position by 50%
Rohm & Haas (ROH): Increased position by 20.5%
Boston Scientific (BSX): Increased position by 18%

Some Reduced Positions (Some positions they sold some shares of)
Brocade Communications (BRCD): Reduced position by 28.6%

Removed Positions (Positions they sold out of completely)
Anheuser Busch (BUD)
Barr Pharmaceuticals (BRL)
Applied Biosystems (inactive)
Hercules Offshore (HERO)
Macrovision (MVSN)
Wrigley (WWY)

Top 20 Holdings (by % of portfolio)

  1. Rohm & Haas (ROH): 18.36% of portfolio
  2. Boston Scientific (BSX): 12.64% of portfolio
  3. UST (UST): 11.31% of portfolio
  4. Kinross Gold (KGC): 8.66% of portfolio
  5. BCE (BCE): 7.7% of portfolio
  6. Wachovia (WB): 7.62% of portfolio
  7. Philip Morris International (PM): 6.45% of portfolio
  8. Mirant (MIR): 5.72% of portfolio
  9. Genentech (DNA): 4.68% of portfolio
  10. Merrill Lynch (MER): 2.68% of portfolio
  11. National City (NCC): 2.54% of portfolio
  12. NRG Energy (NRG): 2.02% of portfolio
  13. At&t (T): 1.41% of portfolio
  14. Ultrashort Financials (SKF): 1.36% of portfolio
  15. Embarq (EQ): 1.18% of portfolio
  16. Northern Trust (NTRS): 0.79% of portfolio
  17. Peoples United Financial (PBCT): 0.72% of portfolio
  18. Liberty Media (LMDIA): 0.68% of portfolio
  19. Centennial Communications (CYCL): 0.66% of portfolio
  20. St. Jude (STJ): 0.54% of portfolio

Assets from the collective long US equity, options, and note holdings were $7 billion last quarter and were $6 billion this quarter. Keep in mind that many of Paulson's holdings are not listed in these filings because they aren't equities, but rather securities in other markets. However, as evidenced above, he does hold a decent amount of equities due to merger arbitrage and other strategies. We'd be remiss if we didn't also point out that Paulson's team has been hard at work, as they recently filed 13Gs on Rohm & Haas (ROH) and Boston Scientific (BSX). This is just one of many funds in our hedge fund portfolio tracking series in which we're tracking 35+ prominent funds. Look for our updates everyday over the next few weeks.

Paulson & Co Profits From Lloyds Short

Paulson & Co has made a ginormous (yes, ginormous) amount of money from the financial carnage over the past 2 years. Here is yet another example:

"Feb. 13 (Bloomberg) -- Paulson & Co., the hedge fund run by billionaire John Paulson, may have made as much as $67 million in 25 minutes today as Lloyds Banking Group Plc lost about 5.9 billion pounds ($8.5 billion) in market value.

Lloyds fell the most in 20 years after saying HBOS Plc, the U.K. lender it took over last month, would report a 10 billion- pound pretax loss. The shares plunged as much as 43 percent in less than 25 minutes of London trading.

Paulson, who made billions from betting against the subprime mortgage market, held a Lloyds short position representing 0.79 percent of the bank, or 129.3 million shares, as of Jan. 20, according to a regulatory filing. "

We had noted in the past that Paulson was shorting UK financials. That was revealed back in September and had you piggybacked his play, you'd have made a pretty penny. Do note though, that he has started to slowly become constructive in the distressed segment, eyeing holdings on the long-side that he had previously shorted. In addition to being handsomely short most things financial, Paulson & Co have been active on the merger arbitrage side of things, filing a 13G on Rohm & Haas recently. For more on Paulson's badassedness, check out their 2008 year end report.

Hedge Fund Viking Global Investor Letter

Here's the latest letter from Andreas Halvorsen & Co:

Warren Buffett Buys Tiffany's and Harley Davidson Bonds

Somehow our post on this never got published, so we're going through and attaching the recent Tiffany's news as well. If you've missed it, Warren Buffett earlier was buying $300 million of Harley Davidson's (HOG) bonds in a private transaction. And, yet again, Buffett has secured an awesome deal for himself with ridiculous interest rates.

Now, much more recently, via ZeroHedge, we see that Buffett has bought $250 million worth of 10% Notes in Tiffany's (TIF) that mature in 2017 and 2019. Buffett has been busy buying American icon brands and if I were a wagering man I'd say that trend is likely to continue as he puts money to work in a time when he sees great opportunity. Hell, he had even mentioned possibly buying back Berkshire stock.

Sunday, February 15, 2009

Hedge Fund Portfolio Tracking: Q4 2008 13F Filings

This post marks the first of a series we will be doing in the coming weeks that details what many prominent hedge funds have been up to in the last quarter.

Four times a year (once each quarter), hedge funds & asset managers with greater than $100 million AUM (assets under management) are required to report to the SEC their long holdings from the previous quarter. These filings do *not* show the funds' short positions and require them to disclose only their long holdings in equity markets. Additionally, they are required to file various puts or calls purchased in the options market as well as notes. These filings do *not* cover commodities, currencies, or other markets. So, we just wanted to clarify that for people new to 13f filings. We check these 13F filings quarterly just to get a sense as to where these funds are putting their money sector wise. If you just sit down and do some simple number crunching between this quarter's 13F and the one prior, you can see exactly where these funds have been moving their money.

Please note that these 13F's should be treated as a lagging indicator simply because the 13F's that are being released currently (February 10th-20th 2008) show the funds' portfolio holdings as of December 31st, 2008. So, in the past month and a half, they could have completely changed their portfolio. But, at the same time, its easy to see which sectors they are flocking to and what their concentrated positions are.

We like to specifically follow value based (or growth-at-a-reasonable-price) hedge funds in the hope that they won't experience ridiculously high turnover and thus allow us to somewhat track their movements as they build up concentrated positions. Specifically, we follow the 'Tiger Cubs' (otherwise known as the proteges of former hedge fund Tiger Management legend Julian Robertson). Many of these former proteges/right-hand men have started their own funds and here are the ones we've been following. (Note that all the links below are to the respective holdings from Q3 2008 & will be replaced with the Q4 links as we go along).

- Blue Ridge Capital (John Griffin)
- Lone Pine Capital (Stephen Mandel) *Q4 updated*
- Maverick Capital (Lee Ainslie) *Q4 updated*
- Viking Global (Andreas Halvorsen) *Q4 updated*
- Tiger Global (Chase Coleman)
- Touradji Capital (Paul Touradji)
- Shumway Capital Partners (Chris Shumway)

Additionally, we also like to follow the Commodities Corporation "offspring" which have gone off to start their own funds and typically employ a global macro strategy.

- Tudor Investment Corp (Paul Tudor Jones) *Q4 Updated*
- Moore Capital Management (Louis Bacon) *Q4 Updated*
- Caxton Associates (Bruce Kovner) *Q4 Updated*

We follow a core of value funds in depth and then we also follow a core of global macro funds in depth. Over the next few weeks, I will be going into detail as to what those specific funds were up to this past quarter. Additionally, we like to follow other "whales" well known for their investing prowess. These include:

- Warren Buffett *Q4 updated*
- Carl Icahn *Q4 updated*
- George Soros (Soros Fund Management LLC) *Q4 updated*

Next, there is an assortment of funds which employ various strategies ranging from activist to global macro and often run concentrated portfolios. We track these funds due to their solid returns over the years, as well as the spotlight that has been cast on a few of them in this turbulent market.

- Atticus Capital (Timothy Barakett) *Q4 updated*
- Tremblant Capital (Bret Barakett) *Q4 updated*
- Clarium Capital (Peter Thiel) *Q4 updated*
- Pequot Capital Management (Art Samberg)
- Harbinger Capital (Philip Falcone)
- BP Capital (Boone Pickens)
- Paulson & Co (John Paulson) *Q4 updated*
- Jana Partners (Barry Rosenstein)
- Eton Park Capital (Eric Mindich)
- Farallon Capital Management (Thomas Steyer)
- Galleon Group (Raj Rajaratnam)
- Citadel (Ken Griffin)

A few deep value & activist funds:

- Third Point (Daniel Loeb)
- Pershing Square (Bill Ackman) *Q4 updated*
- Greenlight Capital (David Einhorn) *Q4 updated*
- Baupost Group (Seth Klarman) *Q4 updated*
- T2 Partners (Whitney Tilson)
- Tontine Associates (Jeffrey Gendell)

For our readers, we also track some quant and highly active trading funds. We do not track these firms to gain insight for portfolio investing ideas. Instead, its merely for fun as for whatever reason, people like to see what they are doing. It's basically useless to track Renaissance due to their quant nature, since none of us could tell you the rhyme or reason behind any one of their positions. SAC, on the other hand, simply trades in and out of positions far too often for us to really gain valuable insight for longer term positions.

- SAC Capital (Stevie Cohen)
- D.E. Shaw (David Shaw)
- Renaissance Technologies (Jim Simons)

And, a few newer funds on the scene:

- Conatus Capital (David Stemerman, ex-Lone Pine) *Q4 updated*
- James Pallotta's Raptor Capital Management (ex-Tudor) *Q4 updated*
- Highliner Investment Group (Anand Parekh, ex-Citadel)

Over the coming week we'll touch on some of the important position moves these funds and whales have made (new positions, removed positions, etc). That list of funds brings our coverage to 35+ prominent hedge funds. If you would like to see a specific hedge fund covered here on, post up a comment in the comments section below. We're always looking to add more funds that readers would like to see, so please drop in your suggestions!

The hedge fund tracking series 4th quarter 2008 edition starts tomorrow, so spread the word.