Saturday, November 28, 2009

Hoodwinked: An Economic Hit Man Reveals Why the World Financial Markets Imploded--and What We Need to Do to Remake Them by John Perkins (Book Review)

Is it just us, or are book titles getting longer and longer these days? That point aside, we're here today to review John Perkins' latest book, Hoodwinked: An Economic Hit Man Reveals Why the World Financial Markets Imploded--and What We Need to Do to Remake Them. In short, Hoodwinked details exactly what its title describes. It is really that plain and simple. Some of you may already be familiar with John Perkins because he is the author of the noteworthy book, Confessions of an Economic Hitman, a title that graced the NY Times bestseller list for a very long time. Perkins is back with his 'Economic Hitman' persona in tact, this time tackling how America has now fallen victim to an economic plague that has already swept the third world.

Let's face it, there have been many great books detailing episodes of the crisis. Some of them have focused on things on a macro level while others have detailed downfalls of specific institutions. We've even read and reviewed a few of them including Lawrence McDonald's NY Times bestselling book A Colossal Failure of Common Sense, as well as The Murder of Lehman Brothers. While many of the books centering on the crisis have done a great job of outlining what has happened and the reasons behind it, John Perkins' Hoodwinked takes things a step further and actually outlines what we can do to recover and rebuild. This is a refreshing and welcome change from other books on the great recession because it takes aim at learning from our mistakes and discussing just how we can turn things back around.

Perkins affixes much of the blame to corporations not for their poor risk management or bubble-creating tendencies, but rather for the fact that they possess all the power and control all the capital. The author uses the intriguing phrase, "predatory capitalism" to help describe all that is wrong with America. For a solution, Perkins centers his plan around responsible business actions and corporate leadership that acts in the best interests of their shareholders rather than for their personal pockets. Not to mention, he argues that the focus should be shifted in favor of what's right for society as a whole. While some may label his ideas a pipe dream and while he often writes in hopeful generalities, we applaud Perkins for passionately laying out a premise by which to change for the better. His work keeps you engaged, but we couldn't help but crave more detail and depth in regards to a concrete solution. Overall though, Hoodwinked is a very different take on what has passed and what is yet to come.

Below, we also wanted to highlight an interview with author John Perkins. Our buddy Misstrade has been cranking out some great videos with authors of noteworthy books and he recently sat down with the Hoodwinked author. (Email readers come to the blog to view the video):

Check out Hoodwinked: An Economic Hit Man Reveals Why the World Financial Markets Imploded--and What We Need to Do to Remake Them.


This joins our ever-growing list of book reviews & here are our thoughts on other compelling reads:

- Think Twice: Harnessing the Power of Counterintuition by Michael Mauboussin
- Riches Among The Ruins by Robert P. Smith
- The Greatest Trade Ever by Gregory Zuckerman
- The Murder of Lehman Brothers by Joseph Tibman
- 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

For more great books check out our various recommended reading lists too.

Wednesday, November 25, 2009

Market Folly Custom Portfolio: Rebalanced, New Positions

With the onset of the third quarter 13F filings upon us, our Market Folly custom portfolio has just been rebalanced with new positions. We rebalance our holdings four times a year (once each quarter) to coincide with the latest hedge fund SEC filings. Since 2000, our portfolio has a total return of 865.6% and an annualized return of 25.7%. These numbers reflect the most recent performance as we just looked at them this morning. To see the latest positions our portfolio is investing in, head over to Alphaclone and then pull up the Market Folly portfolio from the list of 'Clones of Fund Groups'.

Our hedge fund-esque portfolio invests in various stocks held by a group of hedge funds we've hand selected. Over time, we've used our hedge fund tracking expertise to identify funds that outperform the markets and are easily 'cloned' due to their equity strategy and long-term investment focus. By focusing on hedge funds that typically employ long/short equity strategies, we ensure that we can see the majority of their long portfolio in the SEC filings to that we are replicating their portfolio efficiently. While we cannot see the short positions in their portfolio, we run our clone with a 50% hedge (short SPY) in order to run a hedged investment vehicle. We created it all with ease by using Alphaclone, truly the best hedge fund replication tool we've come across.

Below is a teaser shot of the 9 positions our portfolio currently holds. Each row represents one stock and by looking at the share price you can start guessing as to what position each is. The portfolio has five brand new positions this quarter and retains four positions from the previous quarter. Ignore the column on the far right regarding the quarter over quarter change in shares held, as we instead equal-weight all of our holdings. Let the guessing games begin:

As referenced earlier, the portfolio performance has been amazing. To learn more about our portfolio, head over to our introductory post. The Market Folly Custom portfolio is ranked #1 on Alphaclone's leaderboard as the top performing portfolio. It has a Sharpe Ratio of 1.1, beta of 0.2 and a correlation to the index of 0.2. As always, we'll continue to provide performance updates on how our portfolio is faring every single month. For those of you trying to replicate our portfolio on Alphaclone, keep in mind that we are using a market cap screen that omits companies with a market cap of greater than $50 billion from our clone. Now that the replicator just rebalanced, click here to see the new positions our portfolio holds. Upon signing up for Alphaclone you can see our positions and invest right alongside our portfolio to generate these outstanding returns for your own account. We cannot stress enough that it is the best hedge fund replication tool out there.

Hedge Fund Managers & Poker - Texas Holdem Hedgies

The following is a guest post by John (aka The Masked Financier) who writes at


The hedge fund literature is full of references to the poker exploits of some of the great hedge fund managers. This part of hedge fund lore is one of the main inspirations for the Texas Holdem Investing theory. The comments of successful hedge fund managers often refer to the relevance of poker as useful training for investing. This provides a firm basis for the thesis that poker can teach investing.

The following examples of the poker connections of some well known hedge fund managers provide some background on the link between the two fields:

- David Einhorn (Greenlight Capital) – Einhorn (pictured right at the World Series of Poker) demonstrated the link between poker and investing in reverse. After setting up Greenlight and achieving extraordinary investment returns over a 10 year period, Einhorn decided to learn poker. Within a few years he had mastered the game and finished 18th in the World Series of Poker. After his victory, Einhorn outlined many of the similarities between investing and poker.

- James Simons (Renaissance Technologies) – Simons just retired from Renaissance (which he founded in 1977) and has one of the top hedge fund returns track records, resulting in Simons making some huge performance fee paychecks. Simons was an avid poker player at MIT, and according to Rachel Ziemba in the book Scenarios for Risk Management and Global Investment Strategies (The Wiley Finance Series) Simons started Renaissance with a focus on gambling related concepts which were retained in the trading models that underpinned Renaissance’s returns. To complete the link between poker, investing, and education in the case of Simons, apparently he started the “Math for America” program over a game of poker with some fellow investment heavyweights in New York. Math for America is focused on improving math education in America.

- Steve Cohen (SAC Capital) – Along with James Simons, Ken Griffin, and John Paulson, Cohen is one of the top hedge fund managers of the past 20 years. Cohen played poker frequently in high school, often playing through the night. According to his brother, Cohen excelled at poker and would have lots of cash stored at his desk. Cohen eventually quit his part time job to focus on poker and says that it taught him how to take risks. Cohen continued to play poker successfully at Wharton while earning his economics degree and developing a fascination with the stock market. One of SAC’s own investors was in awe of Cohen’s poker skills – perhaps it was a factor in making the investment in SAC. Cohen’s poker skill can be discerned in the few public comments he has made on trading. A notable example of his thinking appeared in Market Wizards: Interviews with Top Traders where he stated that 90% of trading is about containing losses – as is the case in poker where most of your time will be spent deciding why not to play a hand to avoid losses.

- Jeff Yass (Susquehanna) – Jeff Yass founded Susquehanna with some of his poker playing friends and has turned it into one of the largest options trading firms in the world. Susquehanna is effectively a hedge fund that specialises in options as its asset class. Poker is now infused throughout the entire hiring and education processes at Susquehanna. The firm has hosted poker tournaments to identify potential employees, and it uses poker as an education tool when training its traders.

- Andy Beal (Beal Bank) – Beal is a long time poker player who participated in one of the most epic games of poker with some of the greatest professionals in recent times. The game was immortalised in the book The Professor, the Banker, and the Suicide King: Inside the Richest Poker Game of All Time. Beal Bank, which is effectively a credit hedge fund that focuses on property loans, has generated extraordinary returns since the recent credit bubble burst. However, Andy Beal had to wait through “a very long run of awful pocket cards” while the banking world boomed around him for almost 5 years while he made no investments because no opportunities fit his criteria. However, when the bust hit Beal felt vindicated and it must have felt like he was being dealt a lot of full houses. Since the downturn Beal has moved into the Forbes 400 of wealthy Americans through the implementation of a poker-like attitude in the world of credit investing.

- Carl Icahn (Icahn Partners) – Icahn apparently generated his first investing stake by winning $4,000 playing poker while in the US Army after graduating from Princeton. He still plays poker at high stakes in Las Vegas. Icahn now uses the skills he learned whilst playing poker to make big activist bets with Icahn Enterprises on companies while looking to read the intentions of both management teams and other investors.

Daniel Strachman takes the comparison one step further in his book The Fundamentals of Hedge Fund Management: How to Successfully Launch and Operate a Hedge Fund. Strachman notes that tracing the explosive growth of the hedge fund industry is analogous to the growth in popularity of Texas Holdem poker over the last 25 years.

Strachman also draws some interesting parallels between Texas Holdem and hedge fund management.

· The barriers to entry are low in both fields. A budding hedgie can have a fund set up and launched for $50,000 all-in (excuse the pun). Although theoretically a Texas Holdem player could start with far less, to start in the Texas Holdem arena aiming for success would require a reasonable bankroll - $10,000 would be a good starting point. Also, from a regulatory standpoint setting up a hedge fund is considerably easier than starting a mutual fund. As for the regulatory situation in Texas Holdem – well there is none unless you’re the person that wants to open a casino. And in some ways it is ironic that getting approved by the Nevada Gaming Board to run a casino may well be more difficult than becoming a market maker (the Wall Street equivalent of the “house” in the casino).

· Hedge fund management and Texas Holdem poker both offer great wealth to successful players in each field. The scales are different, because hedge fund managers can accumulate vast wealth by leveraging off their clients money (as Bruce Kovner said) but good Texas Holdem poker players can earn many millions of dollars.

· Both fields started to gain critical mass in the early 1990s and then took off into the stratosphere in the early 2000s.

The hedge fund industry benefited significantly from the crash of 1987 as many investment managers and support services personnel were laid off and then began to move into the hedge fund arena. The hedge fund concept was quite old at that point, given that Alfred Winslow had started the first hedge fund in 1957. However, clever individuals in Wall Street repackaged the concept with slick marketing and the perception of privileged access. And at the same time some of the best investors on Wall Street moved into the hedge fund space such as George Soros, Julian Robertson, and Bruce Kovner. But the supernova “moment” came after the dotcom crash occurred in early 2000. As general stock markets (and markets of many other kinds) tanked the hedge fund industry in general managed to either not lose money for investors, or even make money. Suddenly funds poured into the industry from 2002-3 onwards until the inevitable happened in 2007 and even the hedge fund industry found it hard to cope with the global recession.

The Texas Holdem market started to grow rapidly during the 1980s as the World Series of Poker got larger and larger. Then clever casino executives started to package the whole Texas Holdem experience with slick marketing, and moved it away from the backroom smoke filled rooms into bright casinos and onto popular TV properties such as the Travel Channel. Texas Holdem had its own “lift off” moment in 2003 that, like hedge fund performance during the dotcom crash, demonstrated the money that could be made from Texas Holdem. This occurred when the complete unknown Chris Moneymaker won the World Series of Poker and a $2.5 million payoff. New “fish” players swarmed to the offline and online casinos. But as with hedge funds even Texas Holdem’s popularity waned with the rest of the casino word in the face of the 2007 global downturn.

Having reflected on these similarities I have added some further points to Strachman’s list which emphasise the connection between the fields of investing and poker, albeit with a cautionary final point.

· Texas Holdem and the hedge fund arena are two of the most capitalistic activities in the world. The score is kept brutally in financial terms, and at the end of each day neither the Texas Holdem player nor the hedge fund manager can hide from the results.

· The capital preservation mindset of both fields is similar – avoiding losses is a vital element of success. With Texas Holdem one of the key objectives is to minimise losses during bad runs of cards and so have maximum bankroll to benefit from successful situations. Hedge funds don’t focus on the benchmarks that plague the mutual fund industry – the main objective is not to lose investors money, even if it means underperforming the broad market in good years.

· Although seemingly glamorous occupations in reality they are very difficult and stressful. It is easy for an outsider to look in and see the ease of sitting at a poker table or a Bloomberg terminal and speculating with large sums of money with the click of a mouse or flick of a chip. But mentally both professions exert tremendous strain on the participants. Human nature is such that the negative emotional effects of monetary losses are much greater than the positive effects of gains. The fortitude required to endure protracted periods of Texas Holdem or investing losses is immense.

· While the upside of both hedge fundery and Texas Holdem can be quick and massive, the downside can be equally fast and quite devastating. One year of a bad run of cards with poor money management will bankrupt even the most successful Texas Holdem player. One year of poor returns and mass client redemptions can hit even the best hedgies, as the impressive managers at Drake Management and Ospraie Management found out in 2008. Some of the fortresses of the hedge fund world also had scary moments in 2008 such as Ken Griffin at Citadel.

The strong connection between investing, trading, and poker is demonstrated by the examples cited in this article. And a final key similarity between both fields is the part played by luck. It is important, but over the long run the good investors and players can outperform the randomness of the market and the cards.


The above was a guest post by John (aka The Masked Financier) who writes at

If you're serious about your poker chips look no further than for the best poker chips on the web!

John Paulson Files 13D On Conseco (CNO)

As we detailed in a previous post, hedge fund Paulson & Co has taken a stake in Conseco (CNO). John Paulson's firm just recently filed a 13D with the SEC on shares of CNO and we now get more details regarding his position. A 13D signifies an activist investment in a company so it will be interesting to see what happens here. As per the filing, Paulson now shows a 20,000,000 share stake, representing 9.9% ownership. On November 13th, 2009 Paulson & Co acquired 16,400,000 shares of common stock and warrants to purchase 5,000,000 shares at an exercise price of $6.50 per share, well above the current share price of around $5.

As we detailed previously, this arrangement was originally agreed upon back on October 13th and so one month later it has now been executed. The bulk of his shares are in the Paulson Recovery Master Fund and the Paulson Advantage Plus Master Fund. What's interesting about their warrants is that they will not be exercisable (except under limited circumstances) until June 30th, 2013. So, shares of CNO certainly have plenty of years to ascend from their current levels to $6.50 or above. The exercise date of 2013 is notable in order to preserve deferred tax assets.

Overall, the 13D filing is quite lengthy as they've attached a whopping 9 exhibits to it. In sorting through them all, we also see that under the terms of their forward purchase agreement, Paulson's Opportunity Master Fund and Recovery Master Fund, "agreed to purchase from Morgan Stanley up to $100,000,000 aggregate principal amount of the 7.0% Convertible Senior Notes due 2016 of the Issuer." For purposes of this 13D, the SEC does not consider the underlying shares of these notes to be beneficially owned yet. On June 30th, 2013, these notes will be convertible into shares of common stock based on a conversion rate of 182.1494 shares per $1,000 principal amount of Convertible Notes. This is equivalent to a conversion price of $5.49 per share. Those of you who wish to read the entire SEC filing can head here.

In the end, Paulson's built a nice longer term wager on Conseco (CNO) here as he has numerous years for the stock price to climb to levels above his execution prices on all of his notes and warrants. While we already knew of his position, we now have more clarity regarding how it is broken down. This certainly sticks with his meme of 'betting on a rebound' as he bought financials and started a real estate recovery fund. It will be interesting to see if he can time the upside recovery just as he did the downside with impeccable precision. His wager on the recovery though will technically not need as much pinpoint precision in terms of timing. He merely just needs to hold on to investments long enough for the recovery to occur. And, as evidenced by this position in CNO, he is banking on things turning around before 2013. And while he may be wagering on an economic recovery over time, he is certainly still bearish on one thing: the US dollar. Paulson has assembled a massive gold position to effectively hedge against what he thinks will be the dollar's continued devaluation.

One of Paulson's other recent big bets is on Cadbury (CBY). He has been betting on a takeover and has appropriately doubled down on his stake as he anticipates higher bids. Hedge fund Paulson & Co is of course famous for their bet against subprime which made them billions. For more on John Paulson and his hedge fund, we highly recommend checking out WSJ columnist Gregory Zuckerman's new book, The Greatest Trade Ever, where he had exclusive access to Paulson in order to pen the story behind his victorious subprime bet. And reportedly, Paulson is not necessarily happy with how the book turned out. You can read our book review here.

We'll be tracking Paulson & Co very shortly in a separate post as part of our hedge fund portfolio tracking series so stay tuned.

Taken from Google Finance, Conseco is "the holding company for a group of insurance companies operating throughout the United States that develops, markets and administers supplemental health insurance, annuity, individual life insurance and other insurance products. The Company focuses on serving the senior and middle-income markets. CNO sells its products through three distribution channels: career agents, professional independent producers (some of whom sell one or more of its product lines) and direct marketing."

What We're Reading ~ 11/25/09

Just wanted to take a second and say Happy Thanksgiving to our American readers who will be celebrating! Don't forget the market is closed tomorrow and then closes early Friday as well. On to the links...

Galleon's technology fund: a clipper or a barge? [zero hedge]

Hedgie John Paulson owns more gold than some countries [The Reformed Broker]

Hedge funds' 50 favorite stocks [Business Insider]

Looks like hedge funds will make billions from mall operator General Growth [FT]

Profile of star energy trader John Arnold of hedge fund Centaurus [Forbes]

Pequot Capital employee fired after supply of insider tips stopped, Senators say [Bloomberg]

The weak dollar vs. strong dollar dilemma [Inoculated Investor]

PIMCO's total return fund sells over $80 billion of mortgage securities [zero hedge]

How to write a hedge fund resume [HedgeFundBlogger]

Tuesday, November 24, 2009

George Soros' Hedge Fund Adjusts Three Holdings

Legendary investor George Soros has recently filed three updated positions with the SEC through his hedge fund firm Soros Fund Management. Firstly, Soros has filed a 13G on BPZ Resources (BPZ). The filing was made due to activity on November 10th, 2009 and they now show a 5.58% ownership stake in the company with 6,415,700 shares. This is an increase of 1,034,035 shares (a 19% boost). Back on September 30th, 2009 they owned 5,381,665 shares per their most recent 13F filing. So, within the past two months Soros has added a decent chunk to their pre-existing BPZ position.

Secondly, George Soros has also filed an amended 13G on Global Ship Lease (GSL). This was filed due to activity on November 13th, 2009 and they are now showing an ownership stake of 7.45% of the company with 3,750,000 shares. This means that Soros' hedge fund has sold a large portion of their position. As we covered in Soros' previous GSL stake, he used to own 13.66% of the company with 6,847,753 shares. What's interesting to note here is that of his previously stated position, 3,750,000 of those shares were represented by warrants. Seeing how Soros currently only holds 3,750,000 shares as per the updated filing, they have sold all of their common stock (3,097,753 shares worth) and now solely own warrants (with 3,750,000 shares issuable upon exercise of warrants held). The situation becomes more intriguing when you consider that he has sold shares at a substantial loss given that he was holding since before the reverse merger in this name and his cost basis is likely above $6 per share while it currently trades around $1.50. The warrants are more difficult to sell and aren't necessarily worth a whole lot, but we'll continue to watch to see what they do with the remainder of the position.

Lastly, we also see that Soros Fund Management has filed an amended 13G on Audiocodes (AUDC). The filing was due to activity on November 9th, 2009 and they now own 0% of the company with 0 shares. Taken direct from the filing we see that "As of November 9, 2009, the 2.00% Senior Convertible Notes due 2024 held for the account of Quantum Partners were tendered to the Issuer pursuant to the put option in that certain Convertible Note indenture and accepted for payment by the Issuer on November 10, 2009 and as such, each of the Reporting Persons may be deemed to be the beneficial owner of no Shares issuable upon conversion of the Convertible Notes." So there you have it, they no longer have a position in AUDC. For more activity from Soros, check out post detailing changes to three of his other positions.

As we mentioned in one of our hedge fund news updates, Soros cautiously believes the market is overdue for a correction. He and many other fund managers have been expecting this for a while, yet the market continues to rally higher. Investment strategist Jeff Saut recently attributed this factor to under-invested portfolio managers and performance chasing as the year-end approaches. We'll have to wait and see if we get the pullback that so many have been looking for. More of Soros' thoughts on the crisis laden financial markets are detailed in his latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.

While the above are individual position updates reflected by separate 13G filings with the SEC, keep in mind that we will also be penning a detailed post on their entire portfolio in our hedge fund portfolio tracking series, so check back to see what other positions George Soros owns.

Taken from Google Finance,

BPZ Resources is "an independent oil and gas company focused on the exploration, development, and production of oil and natural gas in Peru and Ecuador. The Company has rights and license agreements for oil and gas exploration and production covering a total of approximately 2.4 million acres, in four blocks, in northwest Peru."

Global Ship Lease "acquires and charters vessels to container shipping companies. The Company was incorporated to acquire a fleet of containerships of diverse sizes."

Audiocodes "designs, develops and markets enabling technologies and system products for the transmission of voice, data, fax and multimedia communications over packet networks, which it refers to as the new voice infrastructure. The Company’s products are sold primarily to original equipment manufacturers (OEMs), system integrators and network equipment providers in the telecommunications and networking industries."

Jeff Saut: Underinvested Managers & Performance Chasing Fuel Further Upside

Raymond James chief investment strategist Jeffrey Saut is back with his weekly market commentary. This week he takes a look back at their call many weeks ago to be cautious in the markets given that they felt things were melting up and were due for a pullback. He questions that call and wonders if they made a bad decision. Saut then goes on to note that he thinks the upside in markets actually continues.

In Saut's commentary last week, we noted hints of him 'giving in' to the rally and that many other portfolio managers were doing the same. Saut sticks with these thoughts again this week as he thinks the upside will be driven by a few factors. He mainly cites game theory in that under-invested portfolio managers have to get into the markets in order to catch up to their benchmarks before year end. Many managers right now have 'bonus risk,' and then ultimately 'job risk' as they can't be underperforming the markets after the large rally this year. So it seems he thinks the market melt up will continue based on performance chasing and cash on the sidelines coming back into the market.

In the end, Saut does not want to see the S&P 500 fall below 1083 as that would ultimately shift his view. He ends his note by mentioning the seemingly overlooked fact that the Japanese stock market is certainly breaking down now; something definitely worth paying attention to.

Embedded below is Jeff Saut's investment strategy for the week of November 23rd, 2009 (RSS & Email readers come to the blog to view it):

You can download the .pdf here.

Check out more of Saut's investment strategy where he examines whether or not this is the beginning of a new secular bull market as well as some of his past market commentary.

Monday, November 23, 2009

David Einhorn's Greenlight Capital Likes Health Plays: 13F Filing

This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.

Next up in our series is David Einhorn's hedge fund Greenlight Capital. Around the end of October, Einhorn's fund was up 30% year-to-date and had recouped all losses from last year. Greenlight is a $6 billion hedge fund that focuses on value investing with a focus on spin-offs. They have seen solid annual returns of over 20% and are a great fund to track. To get a better idea as to how Greenlight constructs and researches their investment themes, we highly recommend checking out Einhorn's book Fooling Some of the People All of the Time: A Long Short Story. Greenlight typically approaches things by identifying mispricings in the markets and then proceeding from there. 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.

Keep in mind that the positions listed below were Greenlight's long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.

Some New Positions (Brand new positions that they initiated last quarter):
Listed with their largest new stakes first and descending down
Carefusion (CFN)
Travelers (TRV)
Automatic Data Processing (ADP)
Validus Holdings (VR)
Barrick Gold (ABX)
Novatel Wireless (NVTL)

Some Increased Positions (Stakes they already owned but added shares to)
HealthNet (HNT): Increased stake by 433%
Microsoft (MSFT): Increased by 240%
Cardinal Health (CAH): Increased by 67.5%
Everest Re Group (RE): Increased by 51.3%
URS Corp (URS): Increased by 7.8%

Some Reduced Positions (Names they sold shares in)
Echostar (SATS): Reduced stake by 97.2%
Ticketmaster (TKTM): Reduced by 75.6%
MEMC Electronics (WFR): Reduced by 71.4%
Health Management Associates (HMA): Reduced by 35%
ATP Oil & Gas (ATPG): Reduced by 23.9%

Removed Positions (Positions they sold out of completely)
Allegheny Energy (AYE) - we saw this in their investor letter already earlier
IPC Holdings (PCR)
Harman (HAR)
Helix Energy (HLX)
Dana (DAN)
Max Capital (MXGL)
Guaranty Financial (GFGFQ)
KKR Financial (KFN)
Energy Partners (EPL)
Liz Claiborne (LIZ)

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

  1. Pfizer (PFE): 7.64%
  2. CareFusion (CFN): 7.32%
  3. Cardinal Health (CAH): 6.86%
  4. Teradata (TDC): 6.56%
  5. URS (URS): 5.78%
  6. Gold Miners ETF (GDX): 5.58%
  7. Wyeth (WYE): 5.35%
  8. Einstein Noah Restaurant (BAGL): 4.97%
  9. EMC (EMC): 4.75%
  10. Aspen Insurance (AHL): 4.22%
  11. Travelers (TRV): 4.04%
  12. Microsoft (MSFT): 3.39%
  13. Everest Re (RE): 3.22%
  14. McDermott (MDR): 3.17%
  15. MI Developments (MIM): 2.93%

Please note that the portfolio percentages listed directly above for their 15 largest US equity holdings do not take into consideration their positions in other markets, cash holdings, or short positions. Greenlight is notable for often holding large overseas stakes in addition to their US equities listed above and we just wanted to remind everyone that the longs listed in this article are not representative of their entire hedge fund portfolio. SEC filings only require them to disclose long positions held in American markets.

Turning to the data we just examined, we see that Greenlight Capital actually left a lot of their portfolio positions unchanged as they neither bought nor sold shares in many names. Not to mention, a lot of their portfolio changes were already detailed in their recent investor letter. However, we do have a few changes to touch on based on their latest 13F filing. Firstly, they boosted their stake in Cardinal Health (CAH) to a much higher portfolio allocation. Additionally, they added in size to their HealthNet (HNT) position. This one is interesting because we recently saw hedge fund colleague Dan Loeb and his Third Point add HNT shares to their portfolio as well. Couple all of this with the fact that they started a brand new position in CareFusion (CFN) which was recently spun off from Cardinal Health. Greenlight is playing the healthcare and medicine theme quite heavily here. Not to mention, their largest holding is Pfizer (PFE) which means their top 3 holdings are all related to medicine in one form or another.

Stakes they sold completely out of that were notable include Allegheny Energy, Harman, and Helix Energy. They also took some profits and sold some shares in ATP Oil & Gas (ATPG) as this name has been on a tear, up over 170% year-to-date for 2009. In terms of positions Greenlight already owned but added heavily to, we see that they boosted their stake in Microsoft (MSFT) significantly.

Keep in mind that while Einhorn has disclosed his position in the gold miners via GDX, we cannot see his massive gold position because he moved away from the gold trust ETF ticker GLD a while ago and he is now storing physical gold. Einhorn recently sung the praises of gold in his presentation at the Value Investing Congress as well as in his remarks from the Great Investors' Best Ideas symposium. In addition to his position in the gold miner exchange traded fund, Einhorn also started a brand new stake in specific miner Barrick Gold (ABX). We just want to make sure everyone is still aware that physical gold is by far and away one of Greenlight's largest portfolio positions even though we cannot see it in the filings.

Turning to companies Einhorn is negative on, we got a glimpse at one of his prized short positions when he detailed why he is short the ratings agencies. Additionally, in a recent investor letter we saw that Greenlight's short portfolio contains 'credit-sensitive financial institutions and REITs'. Specifically citing the REITs, Einhorn says that most of their shorts in this space have cap rates of around 6% and have dividend yields under 5%. Time to start taking guesses as to which financials and REITs he's short.

In terms of overseas positions, we know that Einhorn had been selling shares of Punch Taverns (LON: PUB) as well. Assets from the collective holdings reported to the SEC via 13F filing were $2.6 billion this quarter compared to $2.8 billion last quarter, so a slight downtick in assets invested in long US equities. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Realistically, the position percentages are more watered down in their actual hedge fund portfolio.

This is just one of the 40+ prominent funds that we'll be covering in our Q3 2009 hedge fund portfolio series. We've already covered Seth Klarman's Baupost Group Bill Ackman's Pershing Square, Stephen Mandel's Lone Pine Capital, and Dan Loeb's Third Point LLC so check back daily as we'll be posting up a new hedge fund each morning.

Pershing Square Enters Landry's Restaurants (LNY), Opposes Proposed Buyout

Bill Ackman's hedge fund firm Pershing Square Capital Management, along with Richard McGuire, chairman of Borders Group, has filed a 13D filing with the SEC disclosing a 9.9% ownership stake in Landry's Restaurants (LNY). The filing was made originally due to activity on November 3rd, 2009. The 13D has since been amended on November 20th, 2009 and they now own 1,604,255 shares. In the fine print, we also see that they have economic exposure to 2,404,126 more shares through cash-settled total return swaps which then brings their aggregate economic exposure to 4,008,387 shares. This represents 24.8% of all shares outstanding. The swaps they entered have a price range of $14.57 to $19.37 and have expiration dates between June 30, 2011 and December 9, 2011. This is a brand new position for Pershing Square as they did not hold it when we covered their portfolio.

Keep in mind that a 13D signifies an activist investment and you'll see exactly why Ackman has gone activist below. Currently, Landry's is involved in a potential management takeover as chief executive Tilman Fertitta tries to acquire the remaining shares for $14.75 per share. Given that Pershing's swaps have a reference price higher than Fertitta's offer, it is clear they are up to something here and they have said they will oppose the proposed buyout by Fertitta, who currently owns 55.1% of the shares. So it seems Fertitta currently has two options in that he can either raise his bid or stop trying to acquire shares for the mean time. This potential buyout becomes a little more complex given that Fertitta has agreed to a 'majority of the minority' condition where it requires the minority shareholders to also approve of the transaction. So, with whatever shares he cannot acquire he still has to convince the shareholders of those shares to approve the transaction. Given that Ackman will not support this buyout, we'll have to wait and see whether or not Pershing is simply waiting for a higher bid or if they have other plans in mind.

Bill Ackman's Pershing Square Capital Management. Ackman is a well known value oriented and activist hedge fund manager who often takes large stakes in companies. For a more in-depth look at Bill Ackman, head to our profile of Pershing Square here. We've detailed a lot of Pershing's positions lately, including their boosted stake in McDonald's (MCD), their long of Corrections Corp of America (CXW), and their short of Realty Income (O).

Taken from Google Finance, Landry's Restaurants is "a diversified restaurant, hospitality and entertainment company principally engaged in the ownership and operation of full-service, specialty location restaurants, with 175 locations in 27 states and Canada, as of December 31, 2008. The Company is a full-service restaurant operator in the United States, operating primarily under the names of Rainforest Cafe, Saltgrass Steak House, Landry’s Seafood House, Charley’s Crab and The Chart House. Its concepts range from upscale steak and seafood restaurants to theme-based restaurants, and consist of an array of formats, menus and price points that appeal to a range of markets and consumer tastes."

Emerging Market Debt ~ Robert P. Smith (Guest Post)

Market Folly readers we have quite a treat for you today. Recently, we reviewed a book by Robert P. Smith, Riches Among The Ruins. Today we are honored to present you with an exclusive guest post by the author on the topic of emerging market debt. Robert P. Smith has been a pioneer in this industry and as we wrote before, his book details a wild adventure as this market has grown and matured. Please enjoy the following guest article from Robert P. Smith.


Emerging Market Debt

By Robert P. Smith

Led by explosive economic growth and rising commodity prices, emerging market debt has climbed out of the dark corners of the global economy and into the spotlight. Countries such as Brazil, which once conjured the specter of default and runaway inflation, now lend money to the International Monetary Fund. Russia, whose default and devaluation in 1998 helped trigger the Long Term Capital Management crisis, has foreign reserves of US$ 434 billion and is expected to return successfully to the bond markets next year. Though a few countries, such as Argentina and Ecuador, remain in the shadows, the long term outlook for emerging market sovereign debt is much more stable than it has been historically.

When I began dealing in emerging market debt (EMD) in the 1970s, it was a tributary of a backwater. Few investors conceived of opportunities in Turkey – “the sick man of Europe” – or in war-torn El Salvador. I traded my first EM debt instruments by placing want ads in local newspapers, and I repatriated my capital via black-market money-changers.

Now it’s possible to buy EMD via ETFs and derivatives on major stock exchanges. Investors worldwide have gone on a shopping spree that has pushed the JP Morgan EMBI Total Return Index, which measures the price of hard currency EMD, to record levels.

Of course, there have been major improvements to justify the optimism. Brazil, for instance, a country that used to stumble from crisis to crisis, has weathered the global economic storm admirably. This country that once experienced inflation of almost 2500% was one of the first to emerge from recession. Surging demand for commodities and raw materials from China has helped national champions like Vale and Petrobras soar. More importantly, perhaps, President Lula has defied initial expectations that he would follow in the footsteps of Venezuelan President Chavez, adhering instead to the liberal, responsible policies of his predecessor Cardoso, which focused on fighting inflation.

However, huge financial stimulus packages and 0% interest rates in developed nations have created a “wall of money” effect; billions of dollars seeking returns have flooded emerging markets, compressing yields in countries often regarded as basket-cases. There is no comparison, of course, to my early days in the EMD market; back then, low confidence in countries like Russia and Brazil meant that you could pick up their sovereign debt at a huge discount. Current investors in Russian or Brazilian bonds could lose money if the US decides to raise rates and some of that liquidity drains out of emerging markets. There is less of a concern that these governments, now sitting on sizable foreign reserves, will default on their debts anytime in the foreseeable future.

Now that the world has cottoned on to the opportunity, it’s a lot harder to make a killing. Sovereign EM yield spreads over US Treasuries have slimmed down to about 300 basis points, a far cry from the 700 bp spreads of eight months ago at the recent bottom of the market. Since then, emerging market sovereigns have issued $72 billion in bonds, according to Dealogic, an international analytical firm. Investors should ask themselves if improved conditions justify these valuations, or whether bubbles are forming in global markets. I believe value is scarce in this environment. Perhaps it may only be found hiding in a few dark corners.

Robert P. Smith is the founder and managing director of the Boston-based Turan Corporation. A noted authority on emerging market debt, he is the author of RICHES AMONG THE RUINS: Adventures in the Dark Corners of the Global Economy. Visit for more information.


The above was a guest post from Robert P. Smith and we sincerely thank him for taking the time to pen the article for our readers. You can read our review of his book here and you can order it from Amazon here.

Does The Market Go Higher Or Lower This Holiday Week? (Market Overview & Trading Ideas)

As always, Kevin has been doing some great technical analysis on his blog and recently he's noticed a pattern in the S&P 500 (SPY). As you can see from the chart below, the market seems to sell off towards the end of the month and rally at the beginning of the month. This pattern is pretty structured and would imply near-term downside for stocks before resuming the trend of stair-stepping higher.

(click to enlarge)

While this potential pattern seems negative for the near-term, it conflicts with another pattern. Seasonally, the Thanksgiving holiday week typically has an upward bias if you look at it over the past 10 years. So, it will be interesting to watch and see which trend takes precedence here. *Update: As of this morning it certainly seems as if the Thanksgiving trade is on with markets up sharply higher and has the SPY hitting a new 52-week high.

Heading into the short holiday week in the markets, the OptionAddict has pumped out his weekly watchlist video full of some nice technical analysis. He hits up the charts to identify patterns to give you a list of actionable trade ideas for the near-term.

Embedded below is the video (Email readers come to the blog to watch it):

For some more trade ideas, check out his watchlist from last week as well as many of these setups take some time to unfold. And if you want to learn more about technical analysis to add it to your financial arsenal of tools to use, check out our technical analysis recommended reading list or this free trading course via email.