Friday, March 13, 2009

Poll: MarketFolly Needs Your Feedback!

Hey everyone, help us make MarketFolly more enjoyable for you! We'd really appreciate it if you took a second of your time to vote in these 2 poll questions we've got setup. Feel free to write-in your own answers in "other" on the polls, write comments on this post, or email us. We would sincerely love hearing your suggestions, criticisms, etc. (RSS & Email readers: if you can't see the polls, please come to the blog to vote!)

The first question: What do you want to see more of on MarketFolly?

And, secondly, we're just checking in to see who our readers are. If you don't mind us asking anonymously, are you: a retail trader, a retail investor, a hedgie, a financial advisor/money manager, or institutional?

Thanks very much for all your help and please feel free to drop us comments or emails! We're always looking for ways to make MarketFolly better.

Passport Capital's Suggested Reading List

Recently, in an email to investors, John Burbank's $2 billion investment firm Passport Capital sent out a few links of suggested reading. If you're unfamiliar with Passport, their investment process "uses a combination of macroeconomic analyses to develop major themes and rigorous fundamental research on individual companies to create global portfolios" (as per their website). Since we here at Market Folly have Recommended Reading Lists (books) and "What We're Reading" posts (articles), we thought it would be interesting to post up what Passport is suggesting. Here are their recommendations, with the underlined titles as links to the original articles:

Current US Situation

Beyond the age of leverage: new banks must arise
Niall Ferguson, 2/03/09
"Two things must happen. First, banks that are de facto insolvent need to be restructured - a word that is preferable to the old-fashioned "nationalization". Existing shareholders will have to face that they have lost their money. Too bad; they should have kept a more vigilant eye on the people running their banks. Government will take control in return for a substantial recapitalisation after losses have meaningfully been written down. Bond-holders may have to accept either a debt-for-equity swap or a 20 per cent "haircut" (a reduction in the value of their bonds) - a disappointment, no doubt, but nothing compared with the losses when Lehman went under."

We can do better than a bad bank
George Soros, 2/04/09
"Although the amount needed to recapitalize the banks would be more than $1 trillion, it would be possible to mobilize a significant portion of the required total amount from the private sector. In the current environment, a good bank would enjoy exceptionally good margins. Margins would narrow as a result of competition, but by then the banking system would be revitalized and nationalization avoided."

Nationalized Banks Are "Only Answer," Economist Stiglitz Says
Interview with Joseph Stiglitz, 2/06/09
"I think many governments of emerging nations actually have a much better central banking system than the United States. They realized the risks of excessive leverage, excessive dependance on real estate lending and so they took much more prudent actions. Many developing countries also built up large reserves and are in a better position to meet this crisis than they were a decade ago."

IMF Outlines Dire Consequences if World Fails to Act on Banks
IMF Survey, 2/07/09
"The United States and Western Europe could learn from the previous experience of countries like Korea, Malaysia, Thailand, and also Sweden, which set up public resolution agencies, and often recovered a lot of public money. Even with these measures, it will take time to restore credit growth. They will also be expensive for governments. But you know very well that the costs of banking crises increase if problems are not addressed quickly. This is not the time for hesitation," Strauss-Kahn said."

Why Obama’s new Tarp will fail to rescue the banks

Martin Wolf, 2/10/09
"The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets."

How Washington can prevent ‘zombie banks’
James Baker, 3/01/09
“This is not a call for nationalisation but rather for a temporary injection of public funds to clean up problem banks and return them to private ownership as soon as possible. As president Ronald Reagan’s secretary of the Treasury, I abhor the idea of government ownership – either partial or full – even if only temporary. Unfortunately, we may have no choice. But we must be very careful. The government should hold equity no longer than necessary to restructure the banks, resume normal lending and recoup at least a portion of taxpayer investment.”

Former Banking Crises

Bank Failures, Danish Style
Randall Podenza, 8/03/90
"An institution that fails to meet Danish capital standards is subject to rapid sanctions. For losses which cause an institution's capital-to-asset ratio to fall below six percent, the bank must immediately seek additional capital in the marketplace. At most, the bank has until its next shareholders meeting to raise at lease 75% of the capital shortfall. If necessary capital is not provided, closure is immediate."

The Swedish Experience
Governor Urban Bäckström, 8/29/97
"The Swedish Bank Support Authority had to choose between two alternative strategies. The first method involves deferring the reporting of losses for as long as is legally possible and using the bank's current income for a gradual write-down of the loss making assets. One advantage of this method is that it helps to avoid the bank being forced to massive sales of assets at prices below long run market values. A serious disadvantage is that the method presupposes that the bank problems can be resolved relatively quickly; otherwise the difficulties compound, leading to much greater problems when they ultimately materialise. The handling of problems among savings and loan institution in the United States in the 1980s is a case in point. With the other method, an open account of all expected losses and writedowns is presented at an early stage. This clarifies the extent of the problems and the support that is required. Provided the authorities and the banks make it credible that no additional problems have been concealed, this procedure also promotes confidence. It entails a risk of creating an exaggerated perception of the magnitude of the problems, for instance if real estate that has been taken over at unduly cautiously estimated values in a market that is temporarily depressed. This can lead, for instance, to borrowers in temporary difficulties being forced to accept harsher terms, which in turn can result in payments being suspended. The Swedish authorities opted for the second method: disclose expected loan losses and assign realistic values to real estate and other assets."

Stopping a Financial Crisis, the Swedish Way
"A banking system in crisis after the collapse of a housing bubble. An economy hemorrhaging jobs. A market-oriented government struggling to stem the panic. Sound familiar? It does to Sweden. The country was so far in the hole in 1992 — after years of imprudent regulation, short-sighted economic policy and the end of its property boom — that its banking system was, for all practical purposes, insolvent. But Sweden took a different course than the one now being proposed by the United States Treasury. And Swedish officials say there are lessons from their own nightmare that Washington may be missing."

The Asian Crisis: A View from the IMF
Stanley Fischer, First Deputy Managing Director of the International Monetary Fund, 1/22/98
"Likewise, we have been urged not to recommend rapid action on banks. However, it would be a mistake to allow clearly bankrupt banks to remain open, as this would be a recipe for perpetuating the region's financial crisis, not resolving it. The best course is to recapitalize or close insolvent banks, protect small depositors, and require shareholders to take their losses. At the same time, banking regulation and supervision must be improved."

The Aftermath of Financial Crises
Carmen Reinhart and Kenneth Rogoff, 12/19/08"Reinhart and Rogoff (2008a) included all the major postwar banking crises in the developed world (a total of 18) and put particular emphasis on the ones dubbed “the big five” (Spain 1977, Norway 1987, Finland, 1991, Sweden, 1991, and Japan, 1992). It is now beyond contention that the present U.S. financial crisis is severe by any metric."
Worse than Japan?
The Economist, 2/12/09
"A similar dynamic will surely play out in America’s over-indebted households. With their assets worth less and credit tight, people will be forced to save much more than they used to. The household saving rate has risen to 3.6% of disposable income after being negative in 2007. For much of the post-war period it was around 8%, and in the short-term it could easily exceed that. But, whereas dis-saving by Japanese households countered the corporate balance-sheet adjustment, American firms are unlikely to invest more while consumers are in a funk. Propping up demand may therefore require more persistent, and sustained, budget deficits than in Japan."


Special thanks to Passport Capital for sharing their suggested reading list. And, as always, if you have any articles you think are essential reads, feel free to contact us.

Jon Stewart's Daily Show Makes Fun of CNBC

Thought it would be good to add in some humor here. Here's Jim Cramer's appearance on Jon Stewart's Daily Show.

If you've missed it, here's Comedy Central's Jon Stewart making fun of CNBC on his Daily Show. He goes through past clips of various CNBC commentators predicting things and then compares their predictions to present day. It's downright hilarious. (RSS & Email readers might need to come to the blog). Check it out:

What We're Reading (3/13/09)

Hedge Funds: The Road Back (TheStreet, Eric Jackson)

Crash course on all things Benjamin Graham (Morningstar)

Dark future for Evergreen Solar (10Q Detective)

Exposing Apollo's (APOL) Dirty Secret (Citron Research)

Video (caution, strong language): The New F*cking Citibank (funnyordie)

Thursday, March 12, 2009

John Griffin's Blue Ridge 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 John Griffin's Blue Ridge Capital. Now, Griffin is similar to Stephen Mandel at Lone Pine Capital, Andreas Halvorsen at Viking Global, and Lee Ainslie at Maverick Capital in that they all are 'Tiger Cubs' (a.k.a. pupils of Julian Robertson while at Tiger Management). Griffin though, is more well known because he was Julian Robertson's right hand man. So, needless to say, he knows his stuff. Blue Ridge seeks absolute returns by investing in companies who dominate their industries and shorting the companies who have fundamental problems. Do note that the 13F filing only requires funds to disclose long positions (unless they are short via puts, we can see those). In the past, we have, however, gotten one sneak peek at what Blue Ridge has been shorting. Both Griffin at Blue Ridge and Lee Ainslie over at Maverick Capital like to effectively hedge with a solid balance of both long and short positions (like a true hedge fund... not like some of the crazy funds these days that aren't truly hedged).

Griffin attended the University of Virginia for undergrad and received his MBA from Stanford. Recently, the University of Virginia hosted a hedge fund panel which consisted of many of the 'Tiger Cubs' as well as the founder of Tiger Management, Julian Robertson. At the panel, numerous hedge fund managers laid out some of their investment theses. Additionally, we noted that in the past, Blue Ridge has disclosed a 5.47% stake in Millipore (MIL).

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):
Microsoft (MSFT)
National Oilwell Varco (NOV)
Mastercard (MA)
Genentech (DNA)
Petrobras (PBR)
XTO Energy (XTO)
Agnico Eagle Mines (AEM)
Discovery Communications (DISCA)
Devon Energy (DVN)
American Express (AXP)
Yamana Gold (AUY)
Market Vectors Gold Miners (GDX)
Monsanto (MON)
Discovery Communications (DISCK)
Newmont Mining (NEM)
Goldcorp (GG)
Crown Castle (CCI)
Dell (DELL)
Ishares Biotech (IBB)
Calpine (CPN)
Blackrock (BLK)
Google (GOOG)
Valero (VLO)
Marathon Oil (MRO)
EOG Resources (EOG)
Wynn Resorts (WYNN)
iShares Mexico (EWW)
VimpelComm (VIP)
General Growth Properties (GGP)

Some Increased Positions (A few positions they already owned but added shares to)
Amgen (AMGN): Increased position by 182%
Greenlight Capital Re (GLRE): Increased position by 150%
Amazon (AMZN): Increased position by 26%
Berkshire Hathaway (BRK-A): Increased position by 18%
SPDR Gold Trust (GLD): Increased position by 16%
Goodrich Petroleum (GDP): Increased position by 15.9%
Millipore (MIL): Increased position by 11.9%
Covanta (CVA): Increased position by 8%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)
Compton Petroleum (CMZ): Reduced position by 94.8%
Grupo Televisa (TV): Reduced position by 80.9%
Target (TGT): Reduced position by 71%
Anadarko Petroleum (APC): Reduced position by 51%
Exterran Holdings (EXH): Reduced position by 43%
Thermo Fisher Scientific (TMO): Reduced position by 42%
Fomento Economico (FMX): Reduced position by 33.9%
Visa (V): Reduced position by 30%
Grupo Aeroportuario Pacifico (PAC): Reduced position by 14%

Removed Positions (Positions they sold out of completely)
Washington Mutual (WM) Puts
Perfect World (PWRD)
Elong (LONG)
Gold Reserve (GRZ)
Wachovia (WB-PT) Preferred T
Foster Wheeler (FWLT)
Las Vegas Sands (LVS)
Lululemon (LULU)
Goldman Sachs (GS)
Illumina (ILMN)
American Express (AXP) Calls
Eagle Materials (EXP)
Discovery Holdings (DSY)
Martin Marietta (MLM)
Hansen Natural (HANS)

Top 20 Holdings (by % of portfolio)

  1. Microsoft (MSFT): 6.3% of portfolio
  2. Covanta (CVA): 5.63% of portfolio
  3. Berkshire Hathaway (BRK-A): 5.58% of portfolio
  4. National Oilwell Varco (NOV): 4.99% of portfolio
  5. Mastercard (MA): 4.94% of portfolio
  6. Amgen (AMGN): 4.68% of portfolio
  7. Millipore (MIL): 4.58% of portfolio
  8. Amazon (AMZN): 4.42% of portfolio
  9. Genentech (DNA): 3.67% of portfolio
  10. SPDR Gold Trust (GLD): 3.22% of portfolio
  11. Petroleo Brasileiro (PBR): 2.78% of portfolio
  12. XTO Energy (XTO): 2.57% of portfolio
  13. Broadridge Financial (BR): 2.47% of portfolio
  14. Agnico Eagle Mines (AEM): 2.36% of portfolio
  15. Discovery Communications (DISCA): 2.21% of portfolio
  16. Devon Energy (DVN): 2.18% of portfolio
  17. American Express (AXP): 2.16% of portfolio
  18. Yamana Gold (AUY): 1.9% of portfolio
  19. Market Vectors Gold Miners (GDX): 1.78% of portfolio
  20. Monsanto (MON): 1.68% of portfolio

They added Microsoft in a big way last quarter, starting it as a new position and bringing it all the way up to their top holding. Like Maverick, we also see that Blue Ridge sees value in Berkshire Hathaway here. And, like David Einhorn and Greenlight, they also like Gold and Gold Miners here. Assets from the collective long US equity, options, and note holdings were $2.6 billion last quarter and were $3.39 billion this quarter. This is just one of many funds in our hedge fund portfolio tracking series in which we're tracking 35+ prominent funds. We've already covered Paulson & Co (John Paulson), Carl Icahn, Warren Buffett, Stephen Mandel's Lone Pine Capital, George Soros, Bill Ackman's Pershing Square, Andreas Halvorsen's Viking Global, Timothy Barakett's Atticus Capital, David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, Peter Thiel's Clarium Capital, Bret Barakett's Tremblant Capital, David Stemerman's Conatus Capital, James Pallotta's Raptor Capital Management, and Lee Ainslie's Maverick Capital. Look for our updates as we will be covering a new fund each day.

Nouriel Roubini & Robert Shiller's S&P 500 Price Targets

Well, you guessed it. I'm here to post up even more bullish news! And, by bullish news, I obviously mean bearish news. After all, its Nouriel Roubini and Robert Shiller. Here's the deal, Shiller has a set of S&P earnings and P/E ratios available in spreadsheet format here. Big hat tip to Cliff Küle for flagging this Schiller data and graphs to our attention. Cliff posts up some historical info, illustrated below. First, real S&P composite earnings:

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And secondly, historical P/E ratios and interest rates.

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By that historical data, you'd think that a 5 P/E could be achieved given the severity of everything that's happened. But, if you're not that apocalyptic, then maybe somewhere around 10x would be more appropriate. And, 'Dr. Doom' himself, Nouriel Roubini thinks that the S&P500 will see 600, which could be somewhat close to 10x by his measurement. Taken from Bloomberg,


The benchmark index for U.S. stocks would have to slump 12 percent from last week’s closing level to meet his forecast. Roubini is assuming that companies in the S&P 500 will report profit of $50 a share this year and investors will pay 12 times that for equities.

'My main scenario is that it’s highly likely it goes to 600 or below,' Roubini said today in an interview at the Chicago Board Options Exchange Risk Management Conference in Dana Point, California. A level of '500 is less likely, but there is some possibility you get there.'


S&P500 Companies: Pension Deficits and EPS Impact

Just wanted to highlight some great lists via Zero Hedge of companies who are going to be facing some problems when it comes to pension underfunding.

This first list is just a broad overview of who could potentially be the most affected.

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And this second list looks at possible EPS impact due to pension expense going forward.

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Make sure to head to Zero Hedge for the rest of the commentary.

Eric Hovde Says We're in a Depression

Eric Hovde of $1 billion long/short Hovde Capital says we're in a depression. He sees commercial real estate defaults hitting as high as 25%. His commentary on the CNBC video below:

Wednesday, March 11, 2009

Lee Ainslie's Maverick 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 Maverick Capital. Lee Ainslie started Maverick Capital back in 1993 with $38 million. Nowadays, the fund is worth $4 billion. Ainslie, like many of the other fund managers we've profiled, has a background rooted in learning from legendary great Julian Robertson at Tiger Management. These proteges (nicknamed 'Tiger Cubs') learned from the best and have had great success running their own funds. Some of the other Tiger Cubs include Stephen Mandel's Lone Pine Capital and Andreas Halvorsen's Viking Global. Maverick's strategy is straight up stock picking, both long and short. While they focus on both the long and short sides of the book, they do not employ pairs trades.

They try to hedge their positions like the true definition of a hedge fund. Maverick uses a value approach (obviously learned from Julian) and one of their most popular metrics is finding companies and comparing their enterprise value to sustainable free cash flow. Their Maverick Fund finished -26.2% for 2008, as noted in our year-end hedge fund performance numbers post. Some of their notable past activity includes selling out of their entire Under Armour (UA) position via a 13G filing.

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):
Qualcomm (QCOM)
Staples (SPLS)
Carnival (CCL)
Pfizer (PFE)
JPMorgan Chase (JPM)
Eaton (ETN)
Biogen Idec (BIIB)
Macys (M)
Genentech (DNA)
Cummins (CMI)
Renaissance Holdings (RNR)
Discovery Communications (DISCA)
Discovery Communications (DISCK)
State Street (STT)
American Tower (AMT)
Xenoport (XNPT)
Chico Fas (CHS)
The Finish Line (FINL)
Petroquest (PQ)
Gymboree (GYMB)
Healthnet (HNT)
Interval Leisure (IILG)

Some Increased Positions (A few positions they already owned but added shares to)
DirecTV (DTV): Increased position by 92.6%
Berkshire Hathaway (BRK-A): Increased position by 73%
XTO Energy (XTO): Increased position by 36%
Cognizant (CTSH): Increased position by 33.9%
Fidelity Information (FIS): Increased position by 18.8%

Some Reduced Positions (Some positions they sold some shares of - note not all sales listed)
Netapp (NTAP): Reduced position by 77.8%
Apollo Group (APOL): Reduced position by 64.2%
ThermoFisher Scientific (TMO): Reduced position by 64%
Lorillard (LO): Reduced position by 61%
Citrix (CTXS): Reduced position by 53.6%
First Solar (FSLR): Reduced position by 51.5%
Gilead (GILD): Reduced position by 46.5%
America Movil (AMX): Reduced position by 40.7%
Marvell (MRVL): Reduced position by 38%
Priceline (PCLN): Reduced position by 37.7%
Dicks Sporting Goods (DKS): Reduced position by 37.5%
Baxter (BAX): Reduced position by 31%
Infinera (INFN): Reduced position by 30%
DeVry (DV): Reduced position by 28.9%
Amgen (AMGN): Reduced position by 28.6%
Apple (AAPL): Reduced position by 25.96%
Berkshire Hathaway (BRK-B): Reduced position by 35.5%
Research in Motion (RIMM): Reduced position by 21.3%
Raytheon (RTN): Reduced position by 19.6%

Removed Positions (Positions they sold out of completely)
First Marblehead (FMD)
Comscore (SCOR)
Salesforce (CRM)
Hudson City Bancorp (HCBK)
JCrew (JCG)
VMWare (VMW)
Las Vegas Sands (LVS)
Leap Wireless (LEAP)
Freeport McMoran (FCX)
Lamar Advertising (LAMR)
Goldman Sachs (GS)
Yingli Green Energy (YGE)
Digital River (DRIV)
Potash (POT)
Cardinal Health (CAH)
Morgan Stanley (MS)
MetroPCS (PCS)
UnderArmour (UA)
Resmed (RMD)
Dish Network (DISH)
Western Union (WU)
Marsh & McLennan (MMC)
Schering Plough (SGP)
Burlington Northern (BNI)
Activision (ATVI)
Cigna (CI)
Monsanto (MON)
Advanced Micro Devices (AMD)

Top 20 Holdings (by % of portfolio)

  1. CVS Caremark (CVS): 4.25% of the portfolio
  2. Raytheon (RTN): 4.17% of the portfolio
  3. Qualcomm (QCOM): 3.85% of the portfolio
  4. Amgen (AMGN): 3.7% of the portfolio
  5. Apple (AAPL): 3.37% of the portfolio
  6. XTO Energy (XTO): 3.13% of the portfolio
  7. Gilead Sciences (GILD): 2.84% of the portfolio
  8. Staples (SPLS): 2.56% of the portfolio
  9. Research in Motion (RIMM): 2.5% of the portfolio
  10. Apollo Group (APOL): 2.5% of the portfolio
  11. Baxter International (BAX): 2.4% of the portfolio
  12. Marvell Technology (MRVL): 2.4% of the portfolio
  13. Fidelity Information (FIS): 2.4% of the portfolio
  14. Liberty Media (LMDIA): 2.37% of the portfolio
  15. DirecTV (DTV): 2.35% of the portfolio
  16. Wyeth (WYE): 2.34% of the portfolio
  17. Carnival (CCL): 2.25% of the portfolio
  18. America Movil (AMX): 2.21% of the portfolio
  19. Berkshire Hathaway (BRK-A): 2.11% of the portfolio
  20. Priceline (PCLN): 2.1% of the portfolio

Right from the start we notice common holdings with that of other Tiger Cub hedge funds. Apollo Group, America Movil, Qualcomm, and Carnival are all favorites of these various funds. And, its no surprise really, as they all come from the same school of thought. And, undoubtedly, they all stay in touch. Its also worth noting that they started new positions in some names and brought them up in size to the top 20 holdings. Some of these include Carnival, Qualcomm, and Staples. Other than that, they were doing a lot of selling across the board. Assets from the collective long US equity, options, and note holdings were $8.2 billion last quarter and were down to $4.8 billion this quarter. This is just one of many funds in our hedge fund portfolio tracking series in which we're tracking 35+ prominent funds. We've already covered Paulson & Co (John Paulson), Carl Icahn, Warren Buffett, Stephen Mandel's Lone Pine Capital, George Soros, Bill Ackman's Pershing Square, Andreas Halvorsen's Viking Global, Timothy Barakett's Atticus Capital, David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, Peter Thiel's Clarium Capital, Bret Barakett's Tremblant Capital, David Stemerman's Conatus Capital, and James Pallotta's Raptor Capital Management. Look for our updates as we will be covering a new fund each day.

Citadel Starting New Hedge Funds

Ken Griffin's Citadel has plans to roll out a few more funds, even after their flagship funds had a rough year in 2008. One will focus on currencies and interest rates, one will focus on stocks, and another will focus on convertible bonds. They're trying to roll out lower fee funds in an effort to attract more investors. Additionally, they're hoping to raise $2-5 billion for the Global Macro Fund. We'd mentioned this fund back in September, as it will be ran by Kaveh Alamouti. Additionally, back in December, we noted that they had opened their Tactical Trading fund to investors. Lastly, Citadel also amended their redemption 'policy' and readers can read about it in one of their recent letters to investors.

Money On the Sidelines Is the Key to Next Market Rally

Just wanted to post up this excellent graphic, courtesy of Todd Sullivan's Value Plays. This depicts just how much money is on the sidelines right now as people are scared to get back into the market. If and when this money decides to return, there could be quite a violent rally. But, of course, that actually requires people to dip their toe back in. Make sure to read Todd's write-up as well.

(click to enlarge)

What One Trillion Dollars Looks Like

Wow, this is insane. With what seems like a bailout every month in this crazy crisis, we thought it'd be interesting to find an illustration of just how much money is being tossed around like chips in a poker game. Seriously though, isn't everyone just numb when the terms "billions" and "trillions" get tossed around now? We've been talking about such large sums for so long that it doesn't even faze me anymore, which is concerning. Billion is the new million, and trillion is the new billion.

With the help of PageTutor, we can put this into perspective. First, for a frame of reference. This is a pallet of some dollar packets. This pallet below represents $100 million.

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So, now that you know what $100 million looks like. Here's what One Trillion Dollars looks like.

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Notice the little person in the bottom left hand corner for a frame of reference. Also note that each little stack in the picture is actually 2 pallets. So, each little stack is $200 million. Add up that field of double-stacked pallets and you've got a grand total of $1 trillion. No big deal. Make sure to head to Page Tutor for the full pictorial.

Tuesday, March 10, 2009

James Pallotta's Raptor Capital Management 13D & 13G Filings

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 James Pallotta's Raptor Capital Management. This update is slightly different than the majority of our 13F tracking posts simply because they haven't filed a 13F yet, as they are a newer fund. We've actually been tracking this development since back in August. However, they have filed a few 13D and 13G's back in mid January. So, we're going to go ahead and start coverage on them considering that we will be watching them going forward. We're tracking newly formed/spun-off Raptor simply because it is ran by James Pallotta, who previously ran Tudor Investment Corp's equity fund for many years. The fund was actually called the Raptor fund and as such, Pallotta has spun it off as his own fund and kept the name. So, in all the prior updates of Tudor Investment Corp's 13Fs, we were tracking Pallotta. We'll monitor Pallotta's Raptor now and then we'll continue to monitor Tudor's equity holdings as well.

Pallotta places global macro style bets on equities and is somewhat similar to a few other concentrated portfolio funds we follow. While at Tudor, Pallotta helped generate 14% annual returns ever since 1993. So, let's cover the developments thus far. All of the filings discussed below were filed on January 12th, 2009. In a 13D filed with the SEC, Raptor Capital Management has disclosed a 43.1% stake in Uni-Pixel (UNXL) with 17,343,760 shares beneficially owned. Additionally, they also filed a 13G, disclosing a 7.12% stake in BigString Corp (BSGC) with 4,004,288 shares beneficially owned. Lastly, they also show a 13G disclosing a 6% stake in Enherent Corp (ENHT) with 3,142,826 shares beneficially owned. All of the filings were made due to activity on January 1st, 2009.

We'll continue to monitor any filings and activity from Raptor from here on out as we bring them into the mix. This is just one of many funds in our hedge fund portfolio tracking series in which we're tracking 35+ prominent funds. We've already covered Paulson & Co (John Paulson), Carl Icahn, Warren Buffett, Stephen Mandel's Lone Pine Capital, George Soros, Bill Ackman's Pershing Square, Andreas Halvorsen's Viking Global, Timothy Barakett's Atticus Capital, David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, Peter Thiel's Clarium Capital, Bret Barakett's Tremblant Capital, and David Stemerman's Conatus Capital. Look for our updates as we will be covering a new fund each day.

Kyle Bass Hayman Capital Letter to Investors

The latest from Kyle Bass, who's Hayman is up over 340% since inception due to profiting off of subprime and other things. He also finished 2008 up 6%. See a past letter of his in our investor letters post. (RSS & Email readers may need to come to the blog to see it).

[hat tip to Zero Hedge who seemingly has an endless supply of these]

Gap Between Tangible Common Equity and Tier 1 Capital

Since yesterday we took a glance at tangible book/asset ratios, we'll today take a glance at tangible common equity and tier 1 capital ratios courtesy of Paul Kedrosky. Keep in mind, obviously, that you need to take all of these ratios that we've been throwing at you with a grain of salt. (Taking things with a grain of salt seems to be the theme this week, slash this entire crisis). Because, of course, a few ratios here and there are not even close to being able to sum up a financial institution's situation. Note that tangible common equity is typically the more 'stringent' of the two measurements.

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Possible Drug Company Mergers, Buyouts, & Takeovers

Hot off the heels of the Wyeth (WYE) and Pfizer (PFE), as well as the Merck (MRK) and Schering-Plough (SGP) deals, we thought it would be fitting to post up this graphic hypothesizing possible mergers in the drug industry. (Keep in mind that this was released before the MRK bid). Courtesy of the NYT, we see a great graphic depicting the current landscape where it hypothesizes that Crucell, Bristol Myers Squibb, and Gilead would have the most plausible suitors.

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Monday, March 9, 2009

David Stemerman's Conatus 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 is David Stemerman's Conatus Capital. This is the first time we've covered Conatus and it is a new addition to the group of funds we cover. They filed their first 13F this past quarter and so we finally get to see what they've been up to. David Stemerman left Stephen Mandel's Lone Pine Capital to run his own fund, as we noted here. The result is Conatus Capital which raised $2.3 billion and started trading last year. Numerous other prominent funds have seen managers leave to start their own funds and we're also monitoring those as well.

While 13F filings do not show cash or short positions, they do show the long positions. Conatus' filing shows them owning only a little over $621 million worth of long equity. Since this is literally the first 13F filed by them, we'll do things a little differently here. There are no 'changes' to report since we don't have a previous 13F to compare this to, so we'll simply just outline their entire long portfolio below.

The following were their long equity, note, and options holdings as of December 31st, 2008 as filed with the SEC. All holdings are common stock unless otherwise denoted.

Conatus' Entire Portfolio (by % of portfolio)

  1. People's United Financial (PBCT): 9.19% of portfolio
  2. Walmart (WMT): 7.75% of portfolio
  3. Apollo Group (APOL): 6.51% of portfolio
  4. Medco Health (MHS): 6.27% of portfolio
  5. Covidien (COV): 6.24% of portfolio
  6. Baxter (BAX): 6.14% of portfolio
  7. Cisco (CSCO): 5.94% of portfolio
  8. Visa (V): 5.93% of portfolio
  9. American Tower (AMT): 5.59% of portfolio
  10. C H Robinson (CHRW): 5.1% of portfolio
  11. Qualcomm (QCOM): 4.75% of portfolio
  12. Discovery Class C (DISCK): 4.36% of portfolio
  13. Express Scripts (ESRX): 4.19% of portfolio
  14. Carnival Paired Certificate (CVC1): 3.98% of portfolio
  15. Dicks Sporting Goods (DKS): 3.26% of portfolio
  16. Cognizant (CTSH): 3.26% of portfolio
  17. Strayer Education (STRA): 3.2% of portfolio
  18. Bed Bath & Beyond (BBBY): 3.09% of portfolio
  19. SBA Communications (SBAC): 3.07% of portfolio
  20. Discovery Class A (DISCA): 2.17% of portfolio

And, since this is their first ever filing, here is the 13F in its entirety for those curious:

(click to enlarge)

Overall, you can see hints of a Tiger Cub portfolio here. Obviously, Conatus is somewhat similar to Lone Pine in methodology since that's where Stemerman plied his trade. Conatus has a position in Visa (V) and Qualcomm (QCOM), like many of the other Tiger Cub hedge funds. Additionally, their large position in Apollo Group (APOL) is shared by Andreas Halvorsen's Viking Global. But, there are definitely some differences between their portfolios now that Stemerman runs Conatus. For instance, Conatus has a large position in People's United Financial (PBCT) and Walmart (WMT), two names not found in other similar portfolios. So, while their portfolio has hints of a Tiger Cub background, it is still unique in its own right.

This is just one of many funds in our hedge fund portfolio tracking series in which we're tracking 35+ prominent funds. We've already covered Paulson & Co (John Paulson), Carl Icahn, Warren Buffett, Stephen Mandel's Lone Pine Capital, George Soros, Bill Ackman's Pershing Square, Andreas Halvorsen's Viking Global, Timothy Barakett's Atticus Capital, David Einhorn's Greenlight Capital, Seth Klarman's Baupost Group, Peter Thiel's Clarium Capital, and Bret Barakett's Tremblant Capital. Look for our updates as we will be covering a new fund each day.

A Look At Financial Instutions' Tangible Book / Asset Ratio

We recently read some very interesting research courtesy of Pali Capital that examined the tangible book/asset ratio of various financial institutions. They looked at this ratio of institutions all over the world and so we wanted to highlight some of the major ones we saw. For instance, we see that Washington Mutual, who already essentially 'went under' by nature of forced acquisition, has a tangible book/asset ratio of 3.66. And, that number is on the higher end of the scale/list. So, the thinking would be that many of the institutions with ratios lower than that could potentially be in trouble as well. Because, after all, their ratios would be categorically 'worse' than that of an institution that's already had problems. Of course, we do realize that each institution is an individual entity and should be treated as such; its situational. But, as we run through the list, you'll start to notice that the lower the ratio, the more troubled banks we run into. Let's have a look, noting that those listed in bold have either already failed, been forcibly acquired, or are known to have major problems.

First, the US banks & their tangible book/asset ratios:

BB&T (BBT) 6.86
PNC (PNC) 5.87
Northern Trust (NTRS) 5.51
Goldman Sachs (GS) 4.86
Morgan Stanley (MS) 4.35
JPMorgan (JPM) 3.83
Washington Mutual (WM) 3.66
Wells Fargo (WFC) 3.50
Merrill Lynch (MER) 2.84
Bank of America (BAC) 2.83
US Bancorp (USB) 2.74
Lehman Brothers (LEHMQ) 2.39
Citigroup (C) 1.52

And now the Internationals & their tangible book/asset ratios:

Mediobanca (MB:IM) 8.35
Unione di Banche Italiane (UBI:IM) 5.1
Intensa Sanpaolo (ISP:IM) 4.5
Banco Santander (STD) 3.76
Unicredit (UCG) 2.82
Societe Generale (GLE) 2.68
Credit Agricole (EPA:ACA) 2.38
Lloyds (LLOY) 2.26
BNP Paribas (BNP) 2.12
Credit Suisse (CSGN) 1.94
Barclays (BCS) 1.28
ING Groep (ING) 1.18
Deutsche Bank (DB) 1.17
Northern Rock (NRK:LN) 1.07
UBS (UBS) 1.06
RBS (RBS) 0.95

Again, note that those listed in bold have either already failed, been forcibly acquired, or are known to have major problems. You'll also notice that the international banks seem to be in worse shape by examining this ratio alone. So, that should be interesting to watch. It's no surprise to see Citigroup at the bottom of the US list, considering how much trouble they're in and how much government assistance they've needed. And, similarly, RBS has been in a world of hurt on the international side and has the overall lowest ratio of all the institutions measured, regardless of region.

We've noted in the past that hedge fund Paulson & Co has made a fortune by betting against all things sub-prime. Additionally, they've profited from shorting UK financials and in particular, they've focused on Lloyds. Also, in our hedge fund tracking series, we recently covered Paulson's portfolio, which you can view here, along with his year-end letter & report. He's been quite successful, having made correct bets against Barclays, RBS, and Lloyds (which all conveniently fall at the lower end of the list above). We would be remiss though if we didn't point out the fact that John Paulson has become slightly constructive on some other destroyed assets he had been previously short, and is looking to slowly start buying them. It remains to be seen though if he would reverse such a bet against the institutions themselves.

Obviously, not all institutions are listed here. We noted back in January that many people thought HSBC needed capital as well. But then again, who doesn't need capital these days? And, back in October, we had examined the leverage ratios of financial institutions. But then again, who doesn't need to delever these days?

Keep in mind this is simply one aspect of an enormously big picture in a gorge of an industry right now. You cannot even begin to unravel the woven complexities of a financial institution from a few ratios here and there. We just thought the information was interesting and highlighted that even institutions with ratios perceived to be of 'better quality than others' did not escape unscathed (i.e. WaMu). Which, by the way, is pushing the definition of 'quality' to an extreme for sure. Everyone should, of course, take all these ratios and measurements with a grain of salt. For instance, if you look at Bank of America's (BAC) tangible common equity at the end of last year, you'll note that it was a positive $35 billion before acquiring Merrill Lynch (MER), but then falls to a negative number once everything is marked at fair value and adjusted. Jonathan Weil at Bloomberg notes that if you use these fair value numbers, Bank of America needs a ton more common equity. He also examines Wells Fargo (WFC) and finds the same underlying problem. Their tangible common equity was a positive $13 billion at the end of last year. But, if you adjust everything to fair value, it also becomes negative.

This obviously highlights the recurring problems of the abyss known as a financial institution's balance sheet. So many balance sheets essentially have artificial values in place and its impossible to gauge just how well or poorly positioned they might be. We will just go out on a limb (not much of a limb, really) and assume that everyone's just simply going to need more capital. End of.

And now back to your regularly scheduled implosion.

World's Biggest Hedge Funds

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Great updated graphic showing the world's current largest hedge funds by assets under management. Also, check out Alpha's hedge fund rankings for 2008 if you've missed it.

[hat tip to Zero Hedge for the graphic]

Clarium Capital February 2009 Performance

Here's the latest from Peter Thiel and gang.

  • February: -2.3%
  • YTD: 4.3%
Make sure to also check out our recent look at Clarium's tiny equity portfolio.

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Sunday, March 8, 2009

Ranting, Raving, & Contrarian Signals

Ranting, Raving, & Contrarian Signals
A Sunday Night Satire by market folly

Let me preface this post with a bold disclaimer. I do not engage in the new ESPN X-games sport of 'bottom-calling,' which seems to be so prevalent with CNBC guests these days. Hell, even if this in actuality was 100% 'the bottom,' I wouldn't even bother staking that claim for fear of being mocked on YouTube for years to come. So, do I think this is even remotely close to the bottom? I really don't even give a damn. Is this the bottom? To that question I'll simply refer you to and they probably have an answer for you. Point being, we're not getting all hopped up on 8balls, scoobydoo's, or whatever the kids are into these days and rushing out to buy stocks. After all, you only need to take a swig of KoolAid to realize that everything is just dandy! (Graphic courtesy of TraderMark). But, we did recently encounter something that made us sit down and go 'hmm.'

Here's the ultimate crux of the matter: market timing is a b*tch. It has been and always will be. Anyone who tells you 5 or 10 years from now that they "nailed that bottom" of this de-cession/recession-pression/Roubini-thon is either a liar, on acid, or possibly named Jim Cramer. No one is that good. And, if they are... they're more lucky than anything. In fact, I'd be willing to wager that the same person ballsy enough to claim they "nailed that bottom" is probably the same type of person that woos your mother (yes, your dearest mother), takes her out for a nice seafood dinner, and then never calls her again. That same person also probably enjoys going to Seaworld and taking their pants off. (Ron Burgundy: Anchorman, anyone?)

Don't just do something because someone told you to. As Jon Stewart of the Daily Show put it so brutally, "Wow, if I had only followed CNBC's advice, I'd have a million dollars today... provided I'd started with a hundred million dollars!" Instead, I'd simply recommend you take The Wall Street Journal up on their massive discount offer and sit back, relax, and read about the world's implosion. At least that way you can get some amount of news and facts, rather than asinine opinions from eight different narcs in an 'octabox' on television all yelling at each other at the exact... same... time.

If you've been reading this blog for a while, you've known I've been pretty bearish on a macro level and on the economy in general. You also know that I've been short... heavily. But, today, in the midst of this multi-year recession, I had a contrarian moment (shocking, I know). Let me walk you through my epiphany. I'm sitting here reading through my RSS feed when I was confronted with literally post after post of just sheer death and despair. Buffett and other market pundits say 'buy when there's blood in the streets.' Well, they should know, considering how they got their face ripped off and are sitting on the corner bleeding profusely, hurling obscenities the government's way. And, just from my reading, I would say there is definitely blood in the streets and we are damn near the apocalypse. Let me walk you through the post after post sequence I literally have just read. I'm not even kidding here.

  1. "Gold bullion trading on ebay increased 95% from the same time a year ago."
  2. "The S&P500 had its worst start to a year ever in its history."
  3. "Unemployment hits 25 year high."
  4. "Kyle Bass of hedge fund Hayman Capital predicting massive sovereign defaults."
  5. "Dr. Doom." "Doom here, doom over there." "The doom bunker."
  6. "3 prominent short-sellers have been covering shorts and see less opportunity on the short side. Some are getting constructively long and one has even called a bottom."
  7. "I'm short AAPL." "I just shorted some AAPL last week." "My AAPL short is printing me money."
  8. "Gun sales at new highs."

Ok, let's recap here for a second. First, people are buying gold on ebay... ebay. They're so desperate and are hunting for bricks and coins of gold as if they're playing Super Mario Brothers. Now, don't get me wrong. A lot of very smart people have been buying gold over the past few months for various reasons. But, still. When the greater public is out en masse bidding on gold on ebay, it makes me wonder if we're all about to die.

Secondly and thirdly, the S&P is off to its worst start to a year... EVER. Period. End of. That's nuts. Unemployment is the worst many people have seen in their lifetime. Things just keep getting deeper.

Fourthly, Sovereign defaults sound fun, right? No big deal, just the end of the civilized world and the finance as we know it. Pretty low on the pessimism scale.

Fifth, Nouriel Roubini. Don't even get me started. Look up 'doom' in the dictionary and his picture has now been inserted.

Sixth, well-known bears who stop ravaging campsites and suddenly cease the desire to eat honey and fish scare me.

Next: Everyone is shorting Apple (AAPL). Can you believe that? The nerve! I look back the past few years and think about how this stock was a godsend. Everybody and their dog owned it. Literally, people were putting shares in their dog's name and getting stock certificates printed up with "Fufu," "Sparky," and "Thrash" on them. If you didn't have it on your books, no one was investing with you. So, now, for people to actually be shorting it? The nerve! Things must really be bad out there! Seriously though, think about it. When is the last time you knew this many people short this name. Maybe it's just me, but I cannot even recall such a time.

Lastly, gun sales are off the charts. People are buying firearms and ammo as if they've got a Civil War going on in their living room. Smith & Wesson (SWHC) is all of a sudden the new Crocs (CROX)... their products are all the rage! Sure, some of this frenzy can be attributed to worry of Obama's stance on guns. But, at the same time, when you hear about money managers' clients pulling out large sums of money from their accounts solely to buy firearms, ammo, and canned goods... it makes you wonder. Either people are vastly overreacting or we really are headed for the apocalypse.

Again, I want to reiterate that I have been and am pretty bearish on a macro level. Things are bad out there and could very well get worse. Yet, for the very first time in all of this, I was finally given a reason to pause and evaluate just how ridiculous things are right now. After all, markets are forward looking mechanisms. Its documented that in recessions, markets bottom before unemployment peaks. Markets bottom before things reach their absolute worst. And right now, its a clusterf*ck out there. Here's some examples:

Warren Buffett has lost two legs and an arm. This sort of thing would only happen to him if we found ourselves in the ninth circle of hell. He's perceived as an investing God amongst men, right? Nope. Apparently we're right in the middle of Dante's Inferno.

Practically every major financial institution out there has been chopped down to some degree.

The other day, my friend who has never invested a dollar in his life and knows literally jacksh*t about markets wanted me to help him invest a ton of his money in, "these cool things in the stock market he heard about that make triple the money when the market goes down!!!" (i.e. triple inverse ETFs). I told him to go punch a shark in the face and try to swim away. The experiences would probably be pretty similar. Sure, my friend could possibly end up like that one guy who actually got away with punching a shark in the face, but the odds are against him.

A website called even popped up where people list one liners about how f*cked their life is right now. (That one isn't necessarily related to all this and is more-so just funny than anything).

Donald Trump is filing for bankruptcy... again. Ok, that was a bad example. But, I think you get the point.

Literally just wave, after wave, after wave of pessimism. Things are getting morbid out there right now. The economy is getting thrashed and unemployment is skyrocketing. (That doesn't mean it won't get even higher though). The point is, that this is constructive. This is just a necessary part of getting out of this big mess, as outlined in the stages of a bear market. Its most likely still going to get worse before it gets better. But, for the first time in all of this, I feel as if I just had a contrarian epiphany and wanted to share my experience. I'm not acting on it because like I said earlier, I'm not ESPN X-games material. Not to mention, I use the charts as one of many tools in my investment arsenal to gauge market action. And, right now, they're telling me that I'd be trying to catch falling knives. But, I guess that's what a contrarian is after all, right? They buy when literally no one else in the world wants to.

All I can really say is to stick to what you know. You know what you're comfortable with in regards to your risk tolerance, investment timeframe, etc. Take everything you hear with a grain of salt. Hell, you should even take this article with a grain of salt too. Do us all a favor, don't try to call a bottom. The market will bottom once everyone stops trying to call one. Don't act like you can time your buys perfectly, because you can't. I know it sounds like a cool story to be able to tell your grandchildren when you're 80 years old. But, think about it. When, as a child, your grandparents told you about how they walked 10 miles to school in 30 feet of snow in negative 12 degree weather, you didn't really give a damn. Decades from now, your grandkids won't care about your gunslinging, 'bottom calling' badassedness either. So, quit while you're ahead (or way behind).

Yes, things are bad. Yes, things can get worse. Pessimism is high and all of this undoubtedly means something; but what, we're not entirely sure. In the end, all we're trying to say is that this is solid progress in the bear market cycle. Now we just have to hope that this isn't actually the end of the modern world.