Saturday, October 31, 2009

The Murder Of Lehman Brothers By Joseph Tibman: Book Review

This is now the second book we've read on the demise of failed investment bank Lehman Brothers and today we're here to review Joseph Tibman's The Murder of Lehman Brothers: An Insider's Look at the Global Meltdown. What's interesting about this read is that it provides you with a different viewpoint of the crisis from the inside. The first book we read on this topic was Lawrence McDonald's New York Times Bestseller list book entitled A Colossal Failure of Common Sense: The Insider Story of the Collapse of Lehman Brothers.

While McDonald's book focused on different viewpoints and sources, Tibman takes a different approach by almost exclusively using his own sole account of what occurred within those hallowed walls. There are both pros and cons to this approach. On the positive side, this account is fresh, opinionated, and truly has a tenured insider feel. The negative aspect of this, though, is the fact that the book leaves with you with a limited viewpoint.

One of the strongest focus points of the book is the notion of 'drinking the Kool-Aid' on Wall Street. Given that so much greed (and irrationality) often abounds on Wall Street, the fact that Tibman's work takes aim at this is laudable. The focus on greed is something that always has and always will exist on Wall Street and Tibman's work showcases just how such desire can ultimately send you down in flames. The book takes aim at Dick Fuld as it chronicles his 20 year rise and fall at the firm and is additionally laced with attacks at various members of the government. While other books on Lehman's demise will focus on the most recent events leading up to the crisis, The Murder of Lehman Brothers takes a slightly different (more elongated) approach. While the author of course covers the pressing issues relating to Lehman's recent collapse, he also details how they almost went under 10 years earlier had it not been for the US government's bailout of Mexico at the time.

Another highlight of the book is its tone. Many books on finance seemingly have an 'intellectual' or condescending feel to them given the subject matter and language used. Not this book. If you hate the typical snobby, academic approach to financial writing or if you don't consider yourself to be the most financially savvy person out there, then The Murder of Lehman Brothers is perfect for you. The tone provides a very easy to read 'everyday' style that is refreshing.

A somewhat problematic area though (at least in our eyes) is the fact that Joseph Tibman is not the name of the individual whose viewpoint we are reading, but rather a pen name. This fact slightly diminishes the authority of the book and leaves us wondering their true identity. However, we do know that he was a senior investment banker who worked at the firm from before it was spun off by American Express in 1994 until the day of its death on September 21st, 2008. Given the increasing focus on transparency in finance these days, a more 'full disclosure' approach would have been welcomed. At the same time though, we can understand the desire or need to remain anonymous for career purposes.

Overall, The Murder of Lehman Brothers is a compelling narrative of one insider's journey within the burning walls of the failed investment bank that provides a fresh account in a concise, easy to understand writing style worth checking out.


This latest review now joins a few other books we've posted up about and you can check out our past reviews here:

Street Fighters: The Last 72 Hours of Bear Stearns by Kate Kelly
The Ivy Portfolio: How To Invest Like the Top Endowments by Mebane Faber

We've been reading through a stack of books lately so look forward to multiple new book reviews coming up in the very near future. In the mean time, make sure to also check out some of our recommended reading lists where we have categorized lists of some of the best financial books out there:

Friday, October 30, 2009

Free Trading Course From MarketClub

If we've got any readers that are traders or are looking learn more, the folks over at INO have provided us with a free trading course which is a great resource. They cover technical analysis topics like fibonacci retracements, MACD, Bollinger bands and a whole slew of others. Here's a full list of topics covered:

1. The importance of psychology in price movement
2. How to spot mega trends
3. Understanding of technical price objectives
4. How to picture price objectives
5. How to trade with moving averages
6. How to use point and figure trading techniques
7. How to use the RSI indicator
8. How to correctly use stochastics in your trading
9. How to use the ADX indicator to capture trends
10. How to capitalize on natural market cycles.

Definitely check out their free trading course here if you're looking to learn more on those topics.

Make sure to also watch their latest technical analysis video on gold where they lay out support levels to buy at and price targets for the future, as they see gold staying in an uptrend going forward.

Hedge Fund News: Soros, Citadel, Atticus, Caxton & More

We're back with our latest compilation of the most recent news out of hedge fund land. Our goal here is to give you all of the major hedge fund news in quick little hits. If you've missed some of our previous updates, we highly recommend checking them out our September update, as well as our July hedge fund news. Let's dive right into the latest updates from some prominent players:

George Soros, Soros Fund Management

Legendary investor and hedge fund manager George Soros 'bought the dip' in financial markets as he saw it as a buying opportunity to make some money. This just goes to show that no matter your economic thoughts, you have to play the market for what it is, as irrationality often abounds. He still thinks we are facing structural long-term problems, but that has not stopped him becoming more bullish for the short-term. His main concern is the deleveraging of the US consumer over a longer period of time which will hurt consumer spending and thus growth going forward.

While he 'bought the dip,' Soros is now cautious as he notes the market to be very overextended and at the risk of another drawdown. While he thinks a downturn is coming, he says that the market will be fine for the rest of the year. The problems, he says, will come in 2010 once the reality of weak global growth hits. In terms of recent portfolio activity, we highlighted when Soros adjusted three of his positions. To check out Soros' thoughts on financial markets in their latest iteration, we recommend checking out his latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.

Ken Griffin's Citadel Investment Group

Investors can finally redeem their money out of Citadel's largest funds, Kensington and Wellington. After being locked up for almost an entire year, we wonder how many investors will pull their funds purely out of rage from being locked up so long. They probably will take at least a little consolation in the fact that after a horrendous performance in 2008, Citadel's funds have at least bounced back as they are up 57% this year. Citadel has $14 billion in assets under management and apparently Citadel's funds are positioned to "withstand a catastrophic market event" so they have learned from their mistakes. In terms of their recent activity, Citadel has been busy with their ETrade stake and we also noted their UK positions here. Bloomberg also has a recent in-depth profile of Griffin up here as well.

Timothy Barakett, Atticus Capital

While Barakett may have left the hedge fund manager game, he has not ceased being an investor. Apparently, Barakett is set to invest in the various new fund launches by former Atticus employees. Atwater is a hedge fund being launched by Lee Pollock and Kris Green who formerly plied their trade at Atticus. Atwater is supposedly planning to raise $500 million by the end of next year and will focus on merger arbitrage and special situations.

Another fund Barakett is set to invest in is being launched by former Atticus Capital analyst Ed Bosek and Noam Ohana, who previously invested Atticus' partner money in other hedge funds. They have founded Beacon Light Capital, a hedge fund that will trade global equities. Bosek will be portfolio manager while Ohana will be the chief operating officer of the fund. Whenever the time comes, we'll check out whatever SEC filings may come out of both these new ventures.

Hugh Hendry, Eclectica Fund

Our resident deflationist is hedge fund manager Hugh Hendry of the Eclectica Fund. His latest media appearances have him noting that markets are crowded right now and are "all one trade." He thinks that stocks and gold now have a risk that everyone could all want to exit at the same time, saying that now investors are either in the market or not at all. One interesting point he does bring up is the fact that the rally has been ramping higher on questionable volume. He notes the absence of typical volume associated with healthy rallies in this video interview embedded below (email readers come to the blog to view it):

Hendry's commentary is always good reading and you can read some of his recent letters here as well as here.

Jeremy Grantham, GMO

The resident perma-bear and 'grumpy old man' (we mean that with respect) Jeremy Grantham is out with his latest commentary and it is a good read as usual. Here's a notable excerpt from his latest piece where he chimes in on the current market:

“Corporate ex-financials profit margins remain above average and, if I am right about the coming seven lean years, we will soon enough look back nostalgically at such high profits. Price/earnings ratios, adjusted for even normal margins, are also significantly above fair value after the rally. Fair value on the S&P is now about 860 (fair value has declined steadily as the accounting smoke clears from the wreckage and there are still, perhaps, some smoldering embers). This places today’s market (October 19) at almost 25% overpriced, and on a seven-year horizon would move our normal forecast of 5.7% real down by more than 3% a year. Doesn’t it seem odd that we would be measurably overpriced once again, given that we face a seven-year future that almost everyone agrees will be tougher than normal?"

It's always good to hear both sides of an argument and if you want your fair dose of pessimism, head Grantham's way (some his past commentary here). You can check out his full recent commentary via .pdf here.

Bruce Kovner's Hedge Fund Caxton Associates

Interestingly enough, we see that Caxton Associates has helped executives at the firm raise $500 million to launch new Lucidus Capital Partners. The new hedge fund will focus on high yield and will be managed by Darryl Green and Geoffrey Sherry. Caxton has taken a 25% stake in this new firm. What's interesting here is that Sherry will continue to run Caxton's $1 billion bond fund as well. We'll have to see if this new trend of hedge funds funding new funds spawned from inside their own walls continues. This can be quite successful, as evidenced by Julian Robertson's network of seeded 'Tiger Cub' funds. Back in our June performance update post, we noted that Caxton was barely up for the year at that time, at 2.21%.

Abu Dhabi Investment Fund (Aabar Investments)

This Abu Dhabi investment fund has taken a $328 million stake in a Spanish financial firm's new Brasilian arm, Banco Santander Brasil. Aabar has been one of the most active funds out of Abu Dhabi as they also have a 9.1% stake in Daimler, a 30% stake in Virgin Galactic, and a 4% stake in Tesla Motors. Aabar is controlled by the Abu Dhabi government through a majority stake in the International Petroleum Investment Company.

Paolo Pellegrini, hedge fund PSQR Management

We recently covered the ex-Paulson & Co hedge fund manager's trade ideas and we see that he is back in the media yet again. Pellegrini recently laid out the 'only attractive bet' for investors is to short long-term US debt. He says, "“I always like to think about assets that are likely to experience a breakdown; the only thing I’m pretty comfortable with right now is U.S. Treasury securities and U.S. agency mortgage-backed securities. I think that those are overpriced so they are attractive shorts ... The dollar has depreciated more than it should for the short term ... And if you ask me where am I putting my money now, I am on the sidelines.” Make sure to check out Pellegrini's recent thoughts on shorting treasuries and longing oil.

Bruce Berkowitz (Fairholme Funds)

Noted equity mutual fund manager Bruce Berkowitz of the Fairholme Fund (FAIRX) is launching a new bond fund that will invest over the entirety of the bond universe. While Berkowitz is unquestionably a good equity fund manager, it raises the question if he is also a good bond fund manager? His equity fund has an annual return of over 9% over the past 5 years. While many investors will undoubtedly jump on this fund due to the name recognition, be aware that it has a $25,000 minimum initial investment, over 10x his other fund. It will be interesting to see if Berkowitz can also prove his worth in the bond arena, as few managers out there can dabble successfully in both.

Stanley Fink, International Standard Asset Management

Former Man Group CEO Stanley Fink is releasing a new fund at his new firm. International Standard Asset Management will release a gold fund in December, even against Fink's liking, as he isn't fond of single commodity funds. However, you can never turn down an opportunity that investors clearly desire. Fink's fund will thus join a large cast of prominent hedge fund players in the gold trade including David Einhorn of Greenlight Capital and John Paulson of hedge fund Paulson & Co, amongst many others.

Thanks for checking out our latest edition of hedge fund quick-hits and make sure to check out our September hedge fund news as well.

Galleon Group's Historical Returns: Did They Gain Too Much Of An Edge?

It's been a little while since we checked in on the happenings at the current circus known as Galleon Group so we wanted to cover all the updates. Raj Rajaratnam's (R Squared) hedge fund is involved in one of the largest insider trading cases to rock Wall Street. But, of course, Raj says he is innocent in his letter to investors:

"October 21, 2009

Dear Galleon Employees, Clients and Friends,

I have decided that it is now in the best interest of our investors and employees to conduct an orderly wind down of Galleon’s funds while we explore various alternatives for our business. At this important time, I want to reassure investors of the liquidity of our funds and assure Galleon employees that we are seeking the best way to keep together what I believe is the best long / short equity team in the business.

As many of you know, we have built our business on the fundamental belief in rigorous investment analysis combined with active trading around core positions. We have encouraged and invited our investors to attend our daily research morning meetings. Many of you have done so and got a first hand look at our process. This research process is the core of our investment and trading strategy.

The privilege of managing investors’ capital is a responsibility that I have always taken very seriously. I want to reiterate that I am innocent of all charges and will defend myself against these accusations with the same intensity and focus I have brought to managing our investors’ capital.

For those who have been my partners and supporters over the last 17 years, I sincerely thank you. I also want to thank you for the innumerable expressions of support I have received from you over the past few days.


Raj Rajaratnam"

So, he says he is innocent yet he is winding down the funds... hmm. That probably has something to do with the fact that over the course of 3 days, he received $1.3 billion in redemption requests. On that note, it looks like he was trying to head off redeemers at the pass, given the inevitable. After all, many pension funds can't be doing business with alleged felons. Their largest fund had $1.3 billion in assets and typically wouldn't pay redeeming investors until the new year, but they are obviously trying to hand out payments before then. Their $350 million technology fund on the other hand allows monthly redemptions with 45 days notice.

What's also interesting here is that apparently, over $1 billion of the firm's assets is money from insiders of the firm, including Rajaratnam. We heard just a few days ago that Galleon has already liquidated 90% of their $3.7 billion portfolio. Some of their largest positions had been Yahoo, Tyco, Amazon and various other technology names. (But do keep in mind that those holdings were as of June 30th, 2009). So, maybe the recent market drop was everyone trying to get out of the way of Galleon's liquidation? Either way, that certainly seemed like a rather painless unwind.

Galleon's history has now become very questionable given the fact that news has surfaced regarding them 'badgering and bullying' brokers for information on what firms were trading what shares. They were essentially trying to front-run firms who were dumping large amounts of shares. Raj wove a massive web of contacts throughout Silicon Valley and Wall Street given that he operated a hedge fund often focused on technology stocks. Galleon was conducting hundreds of trades a day, generating some nice commissions for brokers. Raj even mentioned one time that Galleon dished out $250 million in commissions to brokerage firms each year. That would easily put them in the top echelon of broker spending. It's said that Galleon would use this dominant client position to then garner handfuls of shares of upcoming IPO's, where apparently a lot of their profits came from. And reports suggest that Galleon tried to use their status to bully information out of people so they could benefit. To Galleon's credit though, they were also very research intensive and did plenty of due diligence. They just apparently wanted so much information that they crossed boundaries. Raj always liked to get an 'edge' on any given company.

While at first glance it appeared this might be a one-off insider trade, it is now becoming more clear that this sort of activity was much more frequent. As such, it calls into question their entire performance history. Thanks to the Pragmatic Capitalist, we see a table of Galleon's historical returns and the results are quite astonishing, which makes you wonder even more.

(click to enlarge)

(click to enlarge)

We'll continue to monitor the developments but this certainly has the potential to get more interesting as the digging gets deeper. If you've somehow missed out on this circus, check out the initial insider trading charges. And for those curious, we've posted up Galleon's September commentary and exposures sheet that they sent out to investors before the scandal emerged.

Thursday, October 29, 2009

Paul Tudor Jones Favors Gold & Curve Flatteners (Investor Letter)

In his latest letter to investors, hedge fund manager and legendary trader Paul Tudor Jones outlines his firm's thoughts on the topics of equities, bonds, and currencies. Tudor's letter is one of those 'must reads' as his macro sense is phenomenal and he is one of the greatest traders of all time (performance returns summary here). What's interesting about his latest letter is the fact that they included a special section addressing the all too talked about precious metal.


The macro perspective section of their letter notes how gold is not consumed but rather accumulated as a store of value as it has been a 'medium of exchange for over 5,000 years.' What's interesting is that they plot out inflation-adjusted gold prices and note that we are still far off from the highs seen over 2 decades ago. Tudor puts the inflation-adjusted peak price of gold to be between $1,600-$2,400, with the previous high coming in at $2,422. While Tudor says he has never been a gold bug, he says all assets have a time and a place. And conveniently enough, he says now is gold's time. Tudor joins an army of other prominent hedge fund managers bullish on the precious metal including David Einhorn of Greenlight Capital who has gone as far as storing physical gold. Additionally, John Paulson of Paulson & Co has $4 billion in gold investments, among many other managers.

Tudor's econometric model has determined that gold is 20% undervalued over the next 24 months. This takes into consideration real rates on the price of gold, inflation, and M2 growth. Tudor expects the velocity of money to rise over the next two years, enhancing the bullish case for gold. Additionally, they also cite the supply/demand equation and prudently bring up the fact that a new class of investors has arrived: retail investors gaining access to the metal through exchange traded funds (most notably GLD). Tudor then presented these amazing facts: "The trailing 12-month ETF accumulation has "bought" the equivalent of 25% of new mine production consistently since the beginning of the year. By year-end 2009, the total ETF gold position will hold 3% of global available supplies, making ETFs the sixth largest holder of gold in the world." Tudor expects inflows into these vehicles to continue, furthering the case for a position. Lastly, Tudor highlights another important factor in the gold equation: central banks. He notes that in the second half of this year, the 'official sector will become a net buyer of gold.' We also yesterday posted up an excellent technical analysis video on gold which concurs that gold is in a long-term uptrend. The video outlines $1000 as a key level to stay above and outlines buy points at support as well as price targets going forward (watch it here).

Curve Flatteners

Turning to the bond markets, Tudor has found it difficult to find good risk/reward setups with only the curve flattener seen as appealing. This is very interesting to note given that we've covered prominent hedge fund player Julian Robertson had previously been in the opposite trade, a curve steepener. It's always great to see two prominent minds in hedge fund land differ in this ongoing debate. (Interestingly enough, Robertson also disagrees with Tudor in regards to gold, as he favors gold miners instead). Tudor notes that curve flatteners provide 'tail risk insurance' against the trades of long gold, short the US dollar, and long equities. Tudor writes, "As deflation recedes to the background, market participants will start expecting a removal of policy accommodation. If the markets begin to price early, fast and large tightening before inflationary expectations are allowed to take hold, then curves could bear-flatten significantly from current historically high levels."


On the topic of currencies, Tudor shares the views of many other hedge fund managers in that they feel currencies of commodity producing nations should benefit, specifically citing the Australian Dollar. And, of course, we would be remiss not to mention that Tudor thinks the dollar will continue its decline.


Turning his focus to equities in the letter, we found this paragraph on the technicals to be intriguing: "Technical considerations can be characterized as suggesting that near-term risk should be limited at worst. Market breadth has remained mostly favorable, even rendering a third "thrust" signal of the rally in early September. These are noteworthy not only because they are rare, but more importantly, because they indicate a level of demand that typically proves sustainable. Within the half-year following such signals it is unusual to see corrections of even 10%. Seasonally, equity markets will soon exit a period of traditional weakness to enter one flattened by the impulse to chase performance and generate returns by year-end. While many of our surveys of aggregate hedge fund positioning would say net long exposure has rebounded to late 2007 percentages (though on a smaller base), and mutual fund cash/asset ratios have come in significantly, markets continue to trade as if most are not satisfied with their current commitment to equities." Great insight from Tudor and we'll have to see if that pans out. As far as their equity selections go, they favor emerging markets and in particular Brazil and Taiwan.

Overall, great insight and it's definitely interesting to see an in-depth presentation on gold from the global macro specialists. In the letter, we also find out that Tudor is up 14.88% year to date for 2009 and currently has over $11 billion in assets under management. Jones has somehow managed to perfectly summarize the market action, labeling it "The Great Liquidity Race: Wall of Money Climbs Wall of Worry."

Embedded below is Tudor's Q3 letter, courtesy of Dealbook where we recommend using the full-screen option for reading:

For more on Paul Tudor Jones' hedge fund firm Tudor Investment Corp, check out our post where we covered their UK positions. Also, you can see Tudor's historical returns here as well as their August commentary where they deemed action in US markets a bear market rally. As always, we'll continue to track the movements and insight from one of the greatest traders and hedge fund managers in the business, Paul Tudor Jones.

The Future of Energy: New Technologies, New Opportunities & Crude Oil's Role

While we normally don't cover these topics since our time is consumed by hedge fund activity, we welcome a guest post courtesy of MoneyMorning. Since energy will undoubtedly be a big talking point now and into the future, it makes sense to start to examine things.


Renowned Oil Expert Dr. Kent Moors details shortages of oil, the impact of higher prices, the promise of new technologies and the opportunities for investors. Dr. Kent Moors is one of the world’s foremost experts on oil, energy policy, finance, risk management and new technologies. Moors advises the leaders of six oil-producing countries, including the United States, as well as global corporations and banks operating in 25 countries.

Moors is the founder and director of the Energy Policy Research Group, which conducts analyses and makes recommendations on a range of energy-related issues. He is also the president of ASIDA Inc., a worldwide advisor on the oil-and-natural-gas markets.

In an interview with Money Morning Executive Editor William Patalon III this week, Dr. Moors detailed the top current energy challenges in the global economy, and also provided investors with a look at some of the looming new technologies, as well as a future in which China is a dominant global energy player.

Some of these issues are already at work. Although oil prices remain well below the all-time record of $147 a barrel set in July 2008, crude prices have been on the march of late. Just yesterday (Wednesday), in fact, supply concerns pushed oil futures up above $81 a barrel, their highest level in more than a year.

“If you think the run up to July 2008 was a wild ride, you haven’t seen anything yet,” Dr. Moors told Money Morning. “In the next five years, investors who focus on medium- to small-sized producers and oil-field-service companies having a well-developed specialty niche will outperform the overall energy sector.”

Money Morning (Q): In an earlier discussion, you said that the successful energy investor of the future wouldn’t be a person who just goes out and invests in ExxonMobil Corp. (NYSE: XOM). Can you explain?

Dr. Kent Moors: We are entering a period of rising prices. There is still some play left in the large verticals (vertically integrated oil companies or VIOCs) such as ExxonMobil, but the primary profits will be made with smaller, leaner exploration-and-production (E&P) outfits, field-service companies and specialized producers (unconventional gas producers – shale gas, coal bed methane, tight gas, hydrates – heavy oil and biodiesel).

(MM): How will investors have to play this future? What types of companies should they be looking for, and where should they look?

Moors: The market rapidly approaching will be more volatile with valuation often more difficult to determine than in the past, even with prices increasing. How much of the increases result from actual product margins and how much results from oil becoming a financial asset rather than just a commodity is a major concern. It requires some careful homework. The types of categories mentioned above – smaller producers, new developments in field services and technology (especially those providing ways to decrease wellhead and operational costs, increase productivity, use associated gas, treat and utilize produced water, increase efficiency per barrel … there is a long list here) as well as the specialized producers and providers of their technical needs are the main targets.

(MM): When we look at the U.S. economy, you said that investors would be stunned to discover how much of our oil is produced by small players. In that discussion, in fact, you even described the type of firm that could be the “savior” of the U.S. energy sector, and perhaps even the economy. Could you take a moment to describe that situation and explain what that means for the economy?

Moors: The United States remains one of the top five producers of crude and will shortly ramp up production of natural gas (once the current glut has moved through the system). Sixty percent of crude produced in the U.S. market is at stripper wells providing less than 10 barrels of crude a day, but more than 20 barrels of water, a major byproduct. As America enters an accelerating field maturity curve (and an intensifying decline in well debit – well production), the efficiency of production declines. Therein lies a significant area for innovation and leaner companies. And that spells greater profitability at lower entry prices. Some offshore and Alaskan National Wildlife Refuge (ANWR) production will be done at scale, but that is not where the future of U.S. production will be. It will be the result of greater profitability at existing depleting wells with the new technology rolled out (on the oil side) and unconventional gas production.

(MM): Let’s take a look at the global markets, too. China’s global shopping spree has been well chronicled. As China locks up suppliers and supplies of oil and natural gas, what are the chances there could end up being what’s almost a two-tiered market, where China has access to oil and natural gas at lower prices levels, creating a shortage of non-captive supplies and leading to Western countries having to pay much higher prices?

Moors: Price rises for Westerners will occur anyway, and not just because of China (where a rising energy bubble resulting from the recent acquisitions is a concern). The competition for available energy sources will usually result in those regions prepared to pay more, increasing the overall aggregate price for most others. China, India, a resurgent East Asia, Japan and even regions such as West Africa will occupy important positions moving forward in this regard. Also, rising demand will center in places other than OECD countries. The new oil market emerging can hardly discount the developed countries, but the primary demand spikes are going to come from elsewhere.

(MM): After some significant turmoil in recent years, you said that Russia is finally opening up to foreign investment. Will that last, and what effect will that have on global energy prices?

Moors: To offset a more rapidly declining traditional production base (primarily Western Siberia), Russia must move north of the Arctic Circle, into Eastern Siberia and out on the continental shelf. These moves are technologically sensitive and very expensive. Moscow needs the outside investment and that will remain. However, projects must be carefully structured. Foreigners cannot own 50% of “strategic fields” under new laws or anything on the shelf. This means watch out for the smaller, focused operators and oilfield service companies. They will include companies currently trading on the Alternative Investment Market (AIM) in London: The AIM and London Stock Exchange (LSE) are the sources of the new external investment phase in Russia.

(MM): From a global perspective, which markets show promise? And which ones – either because of overly restrictive investment policies, or because of the risk of nationalization – are markets to be avoided?

Moors: Many markets show promise or telegraph restraint. Let’s look at some of the more noticeably promising markets, organized by energy category:

  • Conventional Oil: Sub-Saharan Africa, Brazil, Kazakhstan, Russian Eastern Siberian and Far East smaller fields.
  • Conventional Natural Gas: Turkmenistan (if recent government overtures to outside investment remain genuine), Uzbekistan, Northwestern Australia (region of the Gorgon project) and New Guinea.
  • Unconventional Oil: Tatarstan (Russia) for bitumen and heavy oil, Alberta for oil sands (assuming an average and multi-year sustainable crude price of $72 [USD] a barrel or above).
  • Unconventional Gas: The United States for shale (especially Marcellus Shale) and coal bed methane (Powder River Basin, Wyoming, also basin into Montana – if that state reduces regulations), Poland, Turkey and Germany for shale, south central Russia and Ukraine for coal bed methane. If Baghdad and Erbil can finalize central Iraqi and regional Kurdish oil legislation – and if security is maintained – Iraq will become a major play in both oil and gas.
  • TO BE AVOIDED: Iran (sanctions and buyback contract frustrations), Mexico (collapsing infrastructure and nationalization), Venezuela (significant technical shortcomings, concerns over productivity assessments, and absence of Western operators).

(MM): If an investor were to divide the energy market into short/intermediate/and long-term segments, what will be the dominant energy plays (oil, natural gas, solar, coal-bed methane, for example) in each of those three time segments? What time periods would you tack onto the short-term, intermediate-term, and long-term segments? And which energy plays will be the real winners?

Moors: To make this easier to see, let’s divide this into short-term, intermediate and long-term segments and look at the key players, issues and technologies in each category.

  • Short-Term (five years out): Here we’ll see an increasing efficiency at existing oil wells; Marcellus Shale natural gas; an extension of large fields into known deeper production layers – for example, BP-led (NYSE ADR: BP) multinational plays such as the Azeri-Chyrag-Guneshli and Shah Deniz deposits offshore Azerbaijan. Other developments to watch are the huge Chevron-led (NYSE: CVX) Tengiz field in Western Kazakhstan, initiatives in the central Gulf of Mexico and all satellite fields operated by other companies.
  • Intermediate-Term (five to 15 years out): All U.S. and Canadian shale plays, Wyoming, Montana, New Mexico and Russian coal bed methane, selected wind power Western U.S. and Baltic Sea region (Denmark, Germany, Poland).
  • Long-Term (20 years or more): All alternative and renewable energy (by this point, crude oil will be too volatile with supply problems and natural gas from whatever source will be the main power source both for conventional applications and for new technologies – fuel cells will obtain most of their price-sensitive hydrogen from natural gas).

Moors: Here’s the bottom line. Looking forward, successful energy investors will be those who: (1) weigh volatility as well as opportunities; (2) understand the rapidly changing supply/demand balance; (3) hedge within a focused time-frame; (4) watch the development of new technology to improve production, processing or transport; and (5) have a flexible approach to the market.

(MM): Spotlighting and providing detail and in-depth analysis of the specific winners would require a much-more-detailed category breakdown than we have here. But stay tuned: Dr. Moors will delve into these topics in future issues of Money Morning.


Thanks to MM for the guest post on what surely will be a hot topic going forward.

Hedge Fund Tontine's Rebirth? (Guest Post Over On Zero Hedge)

Hey everyone, just wanted to let you know that we had a guest post published over at yesterday regarding the latest out of Jeffrey Gendell's hedge fund Tontine Associates. In it, we cover their latest SEC filings and investor letter so click here to check it out.

Wednesday, October 28, 2009

What We're Reading - 10/28/09

Our apologies as we've been a bit behind in posting up some articles of note we've been reading. As such, we'll post up our list a few days early and in an extended form:

The 100 best blogs for future investors - MarketFolly is honored to be included on this list in the 'hedge fund' section []

Following the smart money in hedge fund land [World Beta]

What kind of inflation? [Humble Student of the Markets]

Great interview of value investor/blogger Greenbackd [Simoleon Sense]

Goldman Sachs on the topic of money on the sidelines [zero hedge]

Successful market timing [World Beta]

Carl Icahn should hang it up [Eric Jackson's Breakout Performance]

Hedge funds need a new fee structure [Fortune]

How Moody's sold its ratings [McClatchy]

Great new site for charting fundamentals [ycharts]

Damien Hoffman touches a Jim Cramer nerve [zero hedge]

Has Gold Topped Out?

The guys over at MarketClub don't think so. They take a look at the gold chart and highlight why the recent dip is just a normal course of action for the longer-term uptrend. Here's their video on gold where they highlight support levels to buy at and identify price targets going forward. They note that gold clearing the psychological and technical resistance area of $1000 was a big deal (duh). However, even more important could be the fact that it has been able to remain above that threshold for over a month.

Lots of focus on gold over the past few months with hedge fund managers like David Einhorn singing its praises so we thought it prudent to examine how gold has been shaping up, so make sure to check out the most recent technical analysis video on gold.

Hedge Fund Activity In Norway: Passport Capital, Landsdowne Partners & QVT Financial

Hedge Fund Activity in Norway

Given that Market Folly covers hedge fund positions in US equities and in UK equities, we're always seeking to expand our hedge fund portfolio tracking coverage. Today we take you to the north European country of Norway. Every time noted hedge fund manager Julian Robertson has spoken in public recently he has sung the praises of Norway. We've covered Julian in-depth on the blog with his recent investment ideas from the Value Investing Congress, as well as his curve cap trade. In his recent FT interview he said that “It’s quite an amazing little country of great companies, great people and the proper type of, I’d say, spending by government.” Robertson pointed out that Norway also benefits from large oil resources and high per capita income.

With Robertson’s positive view on Norway in mind, we thought that it would be interesting to investigate whether hedge funds have significant holdings in companies that trade on Norway's stock market, the Oslo Borse. Large shareholdings of greater than 5 percent in companies registered on the Oslo Borse can be tracked through the Oslo Borse news service which is available in English and is free of charge. Readers that want to do further research on companies registered in Norway will find information on large shareholders can be accessed easily by entering the company name and selecting the “disclosure of large shareholdings” category.

So let’s get down to business and take a look at some of the companies that hedge funds are investing in via Oslo Borse.

Hedge Fund Company Ticker Date Shares %
Cheyne Capital Codfarmers COD 13/10/2006 858706 5.57

23/11/2007 n/a 10.58

15/05/2009 1,540,706 9.97

London based Cheyne Capital Management specialise in convertible bonds, credit and asset-backed securities, equities, and event-driven investing. As well as holding nearly 10 percent of Codfarmers outstanding equity, Cheyne also hold 20,000,000 convertible bonds which convert to an additional 492,610 shares. Taken from Google Finance - Codfarmers ASA is a Norway-based company primarily engaged in the cod farming industry. Its principal activities comprise the production and sale of cod and related byproducts. The Company has licenses for cod farming in different locations in two clusters, the Gildeskal cluster south of Bodo and the Kjerringoy cluster north of Bodo, Norway. The Codfarmers ASA sales and administration departments are located in Oslo. In addition, the Company is engaged in fingerlings production, fish production, packing, and filleting, among others. The Company provides its own marketing with employees in Norway, France and Spain that have direct contact with the customers. The Codfarmers ASA operates through two wholly owned subsidiaries, Cod Juveniles AS, Bodo and Cod Processing AS, Meloy.

Landsdowne Partners Ltd Cermaq ASA CEQ 14/03/2008 4,863,000 5.26

London based Landsdowne Partners are primarily focused on UK and European long-short equities, although they have branched out a bit in recent years into global macro and long-only products as well. Taken from Google Finance - Cermaq ASA is a Norway-based company active in the field of aquaculture. It is mainly engaged in the production of feed for and farming of salmon and trout. The Company operates through three business areas: EWOS, comprising the fish feed business; Mainstream, for the fish farming business, and EWOS Innovation, for the research and development (R and D) activities. In addition, Cermaq ASA has a number of investments in non-aquaculture companies, such as Norgrain AS, a trading company that sells raw materials for the Norwegian feed and meal industry and provides logistic services, its subsidiary Denofa AS, delivering soy bean meal, oil and lecithin, Hordafor AS, which processes bi-products from the salmon industry and Uniol AS, responsible for building biodiesel plant in Fredrikstad, Norway. Cermaq ASA is present through its subsidiaries in Norway, Chile, Canada and Scotland.

Passport Management Seajacks International SEAJ 20/12/2007 807590 6.16

13/06/2008 1,614,890 12.32

22/08/2008 2,425,490 18.5

QVT Financial Seajacks International SEAJ 22/08/2009 923,000 7.04

Both John Burbank’s Passport Capital and QVT Financial hold large stakes in Seajacks. We cover Passport in-depth, recently noting their research on agriculture, as well as their curve steepener play. We haven't however covered QVT Financial, a New York-based multi-strategy hedge fund. Launched in 2003, the fund was born from a proprietary trading group at Deutsche Bank. They invest globally across multiple strategies, including various relative value-driven equity strategies. Taken from Google Finance - Seajacks International Ltd (Seajacks) is a Bermuda-registered company engaged, together with its subsidiaries, in the marine services and operations in the offshore oil and gas industry. The Company owns and operates offshore lift-boat vessels in the area of Southern North Sea. It owns two harsh environment installation vessels, Seajacks Kraken and Seajacks Leviathan. The Company operates through five wholly owned subsidiaries: Seajacks UK Limited, a vessel chartering company; Seajacks 1 Ltd and Seajacks 2 Ltd, which are shipbuilding contractors; Seajacks Merman Marine Ltd, a crew recruitment services provider, and Seajacks Crewing Services Limited that provides consultancy services.

QVT Financial Scandinavian Property Development SPDE 06/02/2008 8668826 10.83

15/07/2009 137,776,826 17.66

QVT also have a large stake in Scandinavian Property Development ASA. Taken from Google Finance - SPDE is a Norway-based real estate company that focuses on the investment and development of residential and commercial properties. As of December 31, 2008, its property portfolio was comprised of three principal property projects in Norway and Denmark: Fornebu, Hinna and Odense. Fornebu is an area outside Oslo in Norway with a previous history as an international airport. It consists of residential and commercial properties, such as the Fornebu Senter shopping mall, as well as the K2 and Bilia office buildings. Hinna Park is a property project in the Stavanger region in Norway, including new infrastructure with railway station, Viking Football Stadium, approximately 600 houses and apartments and approximately 25,000 square meters of office buildings, among others. Odense is a part of a transformation in connection to Odense Harbor and Odense city center in Denmark, encompassing a total development potential of approximately 91,225 square meters.

That wraps up our glance at prominent hedge fund portfolio holdings in Norway. We'll continue to scour the globe for notable activity and in the mean time make sure you check out our coverage of hedge fund positions in
US equities and in UK equities.

Tuesday, October 27, 2009

What's The Commodities Index Telling Us?

You can watch the latest technical analysis video on the commodities index here. Like the overall stock market, commodities seem to have topped out in July of 2008 and bottomed in March of 2009. Since then, the commodities index has slowly but surely been rising, with a recent surge upwards. The video examines fibonacci retracements and identifies 304 and 336 as possible resistance areas up and coming for that particular index, which is a basket of a ton of various commodities. The guys at MarketClub have identified this index as one of the major indicators for inflation versus deflation, so it's always prudent to keep an eye on it. Check out what the commodities index is telling us in the video.

Great Investors' Best Ideas Symposium: Notes Part 2

If you missed our first post, we've already covered our first set of notes from the Great Investors' Best Ideas Symposium. In that particular post, we detailed investment ideas from prominent hedge fund players Bill Ackman of Pershing Square & David Einhorn of Greenlight Capital amongst many others and we highly recommend checking it out. This post is a continuation of those notes as we wanted to post up some other notable investors' ideas that weren't covered in the first article.

Mario Gabelli, GAMCO Investors

Gabelli thinks the stock market will center around 7-9% returns for the next decade but thinks that talented managers will outperform that. His investment idea was National Fuel Gas (NFG). They are a major natural gas player and have a large holding in the Marcellus Shale, something he feels is not reflected in the stock price. Gabelli said that their business has a value of $42 per share and if it's trading around $46, you are getting around a million acres in the Marcellus shale for only a 'few bucks.'

Karen Finerman, Metropolitan Capital Advisors

Some of you may recognize this name from her frequent appearances on CNBC's show Fast Money. If you're unfamiliar, Finerman runs a long/short equity hedge fund. At the conference, Finerman focused on Golar LNG Limited (GLNG), a liquid natural gas carrier. She has presented this pick numerous times on television before and clearly has conviction in this play. Her thoughts were that GLNG is the premier player in the space and that they would eventually pay up to a 10% dividend based on the companies they own.

James Grant, Grant's Interest Rate Observer

We already covered some of James Grant's thoughts in our first set of notes, but we wanted to cover his insight in more detail. He presented two stock picks that are essentially options on inflation, citing that the Federal Reserve is 'late to arrive and late to leave.' He focused on UTS Energy (UTS) a Canadian company focused on the Canadian oil sands and he mentions this is a speculative play as they do not yet have income. If inflation rises, his thesis is that oil prices should rise and the hard-to-reach oil sands region will become more lucrative. Grant's second pick was Fidelity National Financial (FNF), an insurance company. He is not wagering on an increase in house prices here, but rather an increase in the number of transactions. Grant notes that the title insurance business is essentially an oligopoly and is controlled by 4 players where FNF controls 46%.

Mark Hart, Corriente Advisors

He focused on the trade of long the US dollar and short the Chinese Renminbi. He feels that the short US dollar is the most crowded trade in the history of financial markets and is set to explode. On the other side of the trade, he thinks that the practices in China are generating essentially the same outcome as if the central bank had been diluting the Renminbi. He cites the fact that often foreigners bring foreign currency into China and convert it at a bank who then takes it to the central bank and deposits them into their reserves and prints up Renminbi in order to repay the original bank.

Michael Price, MFP Investors

We touched on Price's thoughts briefly in our first article on the GIBI conference, but we wanted to add some more of his thoughts. In addition to his bullishness on the Washington Post (WPO) cited in our earlier article, Price also likes Smithfield Foods (SFD), a supplier of ham. The 'swine flu' name has caused shares to be beaten down and he feels the government now calling it H1N1 should help the tarnished 'image' of pork products. He also mentioned Vornado Realty Trust (VNO) as 'one of the best run REITs in the world.' However, he thinks it is overpriced and that they will likely come out with an equity offering, diluting shareholders like we have seen with many other REITs do this year. As is the case with much of the industry, VNO is facing a massive debt load and needs to pay it down.

Jim Barrow of Barrow, Hanley, Mewhinney & Strauss

He thinks there is a potential bubble in speculative raw materials and Asian markets. His picks included Cooper Industries (CBE) and Sysco (SYY). He likes CBE as a play on energy savings and also for their strong balance sheet and 3% dividend. He likes SYY, a food distributor, as a play on the economic recovery and for their 4% dividend.

Rusty Rose, Cardinal Investment Company

He feels that there will be a reversion to the mean in housing and expects an 18% further drop, citing that the Case Schiller Index is still 18% above the historical average.

So there you have it, some more thoughts from the various speakers at the Great Investors' Best Ideas symposium. Check out our first set of notes from the conference as well, where we covered what other hedge fund managers presented. These past few weeks have been ripe with investment conferences and have provided us with many potential investment ideas to sort through. If you've missed any of our coverage, it's well worth your time to check them out as they have been some of our most popular articles. You can read up on the following:

- Notes from prominent hedge fund managers at the Value Investing Congress Part 1

- Notes from the Value Investing Congress Part 2

- Bill Ackman's presentation on his short of Realty Income (O)

- Pershing Square's presentation on Corrections Corp of America (CXW)

- Our first set of Great Investors' Best Ideas conference notes

Thanks for reading and be sure to check back daily as we sort through the portfolio moves of prominent hedge funds.

Hedge Fund Tiger Global Continues Selling Longtop Financial Technologies (LFT)

In an amended 13D filed with the SEC, Chase Coleman's hedge fund Tiger Global has disclosed a 5.0% ownership stake in Longtop Financial Technologies (LFT) with 2,540,566 shares. The filing was made due to activity on October 15th, 2009 and marks the fact that Tiger continues to sell shares of this name. We've been covering their sales for quite some time now, most recently with their late September sales of LFT.

Just a month ago, they had a 6.8% ownership stake and now they are down to an even 5.0%. And, in the past, their stake had been as high as 14%. While their filing says they own 5% of shares at the top, you have to dig into the footnotes to see that in reality, Tiger ceased being a 5% owner of LFT on October 20th, 2009. Hedge funds and financial institutions are not required to disclose or update their stakes in companies unless they hold a 5% or greater stake. Once Tiger fell below that level, they didn't need to update any further with the SEC. We will no longer see updates from them regarding this position unless they bring it back up to a 5% stake. But for all intents and purposes, they have been selling this one for many months now.

Chase Coleman's hedge fund sold shares on October 14, 15, 19, and 20 at prices ranging from $30.15 to $30.21 per share. Here is the table taken directly from the SEC filing:

(click to enlarge)

Tiger Global has seen an average return of 47% from 2001-2007 and in 2007 they returned as high as 70%. You can replicate Tiger's success by investing in the Tiger Cub Portfolio created with Alphaclone where you can replicate their positions and enjoy 15.5% annualized returns since 2000. A fun fact about fund manager Chase Coleman is that he is a descendant of Peter Stuyvesant, the man who built the wall that gave Wall Street its name. Clearly, he was born for this. For more on Coleman and Tiger Global, check out their background and focus in the middle of the linked post.
Taken from Google Finance, Longtop Financial Technologies "provides a range of software solutions and services to the financial institutions in the People’s Republic of China (PRC), including the development, licensing and support of software solutions, the provision of maintenance, support, and other services, and system integration services related to the procurement and sale of third party hardware and software. The software solutions provided by the Company are classified into four categories: channel, business, management and business solutions."

Jeff Saut Of Raymond James Asks, 'What Is A Permanent Investment?'

In his latest commentary, Chief Investment Strategist Jeff Saut of Raymond James poses this very question. He begins his investment strategy with a quotation that focuses on gold versus other investments through the years. He then shifts his focus to both gold and farmland as being possible 'permanent investments,' citing their bullishness on both assets. Definitely an interesting read from Saut this week as we continue to cover his commentary here on the blog.

If you've missed his past excerpts, definitely check out his skepticism on the ever-lasting market rally, as well as his other previous commentary.

Embedded below is Raymond James' weekly investment strategy from Jeffrey Saut:

Also, you can download the .pdf here.

Monday, October 26, 2009

Ackman's Corrections Corp of America (CXW) Presentation From The Value Investing Congress

Bill Ackman's hedge fund Pershing Square Capital Management recently revealed their long position in shares of Corrections Corporation of America (CXW). At the Value Investing Congress, Ackman labeled CXW as 'one of the best real estate businesses around.' He also said that it could potentially make a nice pairs trade. While he didn't intend it to be this way upon execution, his short position in Realty Income (O) was also recently revealed a few weeks ago and he thinks it makes a nice short to complement the CXW long. (You can also view Ackman's presentation on Realty Income).

Embedded below you will find the presentation Ackman gave on CXW at the Value Investing Congress:

Also, you can download the .pdf here.

We also wanted to note that Pershing Square filed a 13G with the SEC on Corrections Corp of America (CXW) recently as well. They filed due to activity on October 20th, 2009 and have disclosed a 9.5% ownership stake with 10,936,672 shares. And obviously this is a brand new position for them as they did not show ownership on their previous 13F filing when we examined Pershing's portfolio. For more on Ackman & Pershing, make sure to check our in-depth profile. While Ackman presented his long case for CXW at the Value Investing Congress, numerous other prominent hedge fund managers also presented investment ideas which we covered. It was definitely an interesting mix and we'll have to see how each manager's pick pans out.

Taken from Google Finance, Corrections Corp is "an owner and operator of privatized correctional and detention facilities, and a prison operator in the United States. The Company operates 64 correctional and detention facilities, including 44 facilities that it owns, with a total design capacity of approximately 85,000 beds in 19 states and the District of Columbia. Corrections Corporation of America also owns three additional correctional facilities that it leases to third-party operators. The Company specializes in owning, operating, and managing prisons and other correctional facilities, and providing inmate residential and prisoner transportation services for governmental agencies. In addition to providing the fundamental residential services relating to inmates, its facilities offer a variety of rehabilitation and educational programs, including basic education, religious services, life skills and employment training and substance abuse treatment."

David Einhorn & Greenlight Capital's Investor Letter Q3 2009

Fresh off David Einhorn's presentation at the Value Investing Congress, it's time for the quarterly investor letter from his hedge fund Greenlight Capital. In it, we learn that they have recouped all their losses from 2008 and they are up 30%, 26.2%, and 22.9% in their various funds year to date thus far. Einhorn makes interesting note of the market rally as eleven of their fifteen largest gainers were long equity positions. And, unsurprisingly, their ten top losing positions were all short equity stakes. He highlights that their short portfolio contains 'credit-sensitive financial institutions and REITs'. Specifically citing the REITs, he says that most of their shorts in this space have cap rates of around 6% and have dividend yields under 5%, so let the guessing game begin as to what names he is short.

Greenlight added a few new longs that we want to highlight, including: Cardinal Health (CAH), CIT Group (CIT) debt, and Rheinmetall AG (RHM on German exchanges). In terms of positions they sold out of, Einhorn reveals that they dumped the following longs: Allegheny Energy, Clear Channel term loan, First Data term loan, Harman International, Oesterreichische Post. Additionally, they also covered the following shorts: Aloca and China Life Insurance. That covers the major portfolio moves for Greenlight (at least the ones they've disclosed). We have also recently covered some of their other moves, such as their short position in the ratings agencies as well as their investment in physical gold.

Embedded below is hedge fund Greenlight Capital's Q3 investor letter for this year:

Also, you can download the .pdf here.

We cover Einhorn's hedge fund extensively on the blog and have detailed their recent movements, so make sure you also check out Einhorn's presentation at the Value Investing Congress, as well as his insight from the Great Investors Best Ideas conference.

Technical Analysis Trade Setups: Weekly Watchlist Charts

The OptionAddict is back with his latest weekly watchlist of various technical analysis patterns to watch for. He checks out the charts of various stocks as to whether it's time to buy on the dip, sell on the rip, etc. Check out all the patterns and trading setups he has identified for this coming week/month. If nothing else, it serves as a great watchlist of names to keep an eye on if you're looking for some swing trades.

Embedded video below:

Last week we also highlighted another technical analysis video that takes a step back and checks out the broader picture of how the S&P500 is rallying into resistance.