Friday, December 4, 2009

Holiday Wishlist: Gift Ideas For Those In Finance

It's time again for our annual recommendations of gift ideas for those of you involved in the wonderful world of finance. If you're in need of holiday gift ideas for colleagues, clients, bosses, friends, or just yourself, then we've got some items lined up below. Our first recommendation is a 40% discounted ticket to the Value Investing Congress in Pasadena California on May 4th & 5th where you can hear investment ideas from some of the smartest hedge fund managers out there. Here are some more suggestions:


Amazon Kindle: These 6-inch e-book readers are on fire right now as some hedgies we know can't stop raving about them. Instead of lugging around all those financial reads, just opt for the portable Kindle and have tons of books at your disposal.

Amazon Kindle DX: The same as the Kindle above, except it's 9.7 inches rather than 6.

Apple iPod Touch: Listen to music, watch movies, play games, download apps... you name it.

DVDs / Blu-ray:

Wall Street (Blu-ray): With Wall Street 2: Money Never Sleeps set to come out next year, brush up on the original storyline and see Gordon Gekko at his finest in high definition.

Wall Street (20th Anniversary DVD): "Greed is good." A nice commemorative edition of the epic movie on finance that is still being quoted to this day.

Boiler Room on Blu-ray and also on DVD: Another one of the movies focused on stock brokers and the finance industry.


Asus Black Netbook: 10.1 inch black netbook with Windows 7. These are great for 'on-the-go.' Enough said.

Dell Adamo Laptop: Dell's new 13.4" sleek laptop that looks unlike anything they've ever made.

Apple MacBook Air: Or if you/they prefer Mac to Windows, here's Apple's 13.3 inch laptop that's highly portable & is ideal for those who travel frequently.

Dell 22" Widescreen Monitor: Dell's UltraSharp monitors are great and are used at hedge funds and trading floors all over. Setup two or three of these badboys together and you've got quite the market command center.


Too Big Too Fail by Andrew Ross Sorkin: In his brand new book, The New York Times Dealbook Editor details the inside story of how Wall Street and Washington fought to save the financial system - and themselves.

Hedge Hunters by Katherine Burton: The Bloomberg author provides us with in-depth profiles on some of the hedge fund masters in the industry.

Bailout Nation by Barry Ritholtz: The popular financial blogger's take on how greed and easy money corrupted Wall Street and shook the world economy.

Market Wizards by Jack D. Schwager: One of our favorite reads because it interviews some of the top traders and hedge fund managers in the game.

The Sellout by Charlie Gasparino. In his brand new book, the CNBC reporter tells us how three decades of Wall Street greed and government mismanagement destroyed the global financial system.

Margin of Safety by Seth Klarman: If you can get your hands on a copy we highly recommend reading it because it is THE premier text on risk averse investing.

The Greatest Trade Ever by Gregory Zuckerman: Here's your chance to go inside hedge fund Paulson & Co as John Paulson devised and placed his trade against subprime that made him billions.

And as always, there are a ton of other great books out there that we've compiled in our recommended reading lists including picks from Warren Buffett, Dan Loeb of hedge fund Third Point, as well as selections from hedge fund Blue Ridge Capital.


Wall Street Journal: For someone who doesn't already have a subscription, you can now pick one up for an 80% discount.

The Economist: A 12 month subscription to one of the best reads left in financial print.


Practically everyone in the finance industry has a Blackberry in their pocket these days. Here's some of the popular models. The Blackberry Tour (Verizon) is one of their latest smartphones. You can also get the Tour with Sprint. Additionally, the Blackberry Curve Javelin is a big favorite these days. And if you want to go with the larger model in their smartphone lineup then check out the Blackberry Bold (AT&T).

HTC Droid Eris (Verizon): The latest phone with Google's Android system.

Motorola Droid (Verizon)
: Motorola's hardware combined with Google's software.

Palm Pre (Sprint): Palm's new creation for the smartphone market.


And that wraps up our list!

Philip Falcone's Harbinger Capital Trims Two Positions

Philip Falcone's hedge fund firm Harbinger Capital Partners just recently filed two separate amended 13D filings to detail changes to two of their portfolio positions. Firstly, we see that Falcone and his hedge fund have sold even more New York Times (NYT) shares. We just recently covered their NYT sale and it seems they are selling for the third time in the past four months. Most recently, they have sold 2,651,635 shares at a price of $8.35 according to Form 4 and amended 13D filings with the SEC. The transaction took place on December 1st, 2009 and they are now left with 18,386,799 shares in total which translates to a 12.79% ownership stake. So while they definitely still have a sizable stake in NYT, their two recent sales are notable.

In the past, we've taken a step back and wondered whether or not newspapers are a dying industry. Their business model uncertainty still continues and many are concerned. Yet again, Harbinger has sold shares at a loss. They initially acquired their stake between $15-20 per share almost two years ago when they invested over $500 million. Their current stake is down from their previous high of around 20% ownership of the company. We'll have to see if they continue to sell going forward, as in the past they had sought suitors for their NYT stake. We also note that Mexican billionaire Carlos Slim has a hefty position in NYT as well, so there are definitely some prominent players in NYT.

Secondly, Harbinger Capital Partners has again sold more shares of Solutia (SOA). This wind down has seemingly been in slow motion as they have been selling shares in SOA since back in June of this year. Their most recent sales were at the beginning of November and this time is no different. As per their recent amended 13D filing with the SEC, Philip Falcone's hedge fund now shows a 4.4% ownership stake in Solutia (SOA) with 5,391,200 shares owned. This means that within the past month, Harbinger has sold 2,867,853 more shares.

Philip Falcone runs his $6 billion hedge fund with a focus both on distressed and equity plays and often takes concentrated positions in companies. For more of their recent activity, we put up a post detailing a portfolio update and also covered the execution of their Calpine offering (CPN) as well. For more on Harbinger, you can check out some of their UK positions too.

Taken from Google Finance, The New York Times Company is a "diversified media company, including newspapers, Internet businesses, a radio station, investments in paper mills and other investments. The Company is organized in two segments: News Media Group and the About Group. Additionally, the Company owns equity interests in a Canadian newsprint company, a supercalendered paper manufacturing partnership in Maine, and Metro Boston LLC, which publishes a free daily newspaper in the greater Boston area."

Solutia is "a global manufacturer and marketer of a variety of chemical and engineered materials that are used in a range of consumer and industrial applications. The Company maintains a global infrastructure consisting of 25 manufacturing facilities, six technical centers and over 29 sales offices globally, including 14 facilities in the United States. The Company’s segments are Saflex, CPFilms and Technical Specialties."

Technical Analysis On Crude Oil & Apple (AAPL)

The team over at MarketClub just released two new technical analysis videos. You can check out the video on crude oil here and then the video on Apple (AAPL) here. Starting with crude oil first, Adam has identified a pattern where oil actually pulls back every 70-80 days or so. The gap of time between the last three lows is 70 days, 84 days, and 76 days. The current time elapsed since the last low is around 65 days. So, Adam has hypothesized that in 10 days or so, we'll see the next low in oil before it heads higher. After all, the gradual trend in crude since March has been up and all large dips have been buying opportunities Click the chart below to watch the crude oil video.

Secondly, they also look at the popular stock Apple (AAPL). And, things aren't looking all that rosy for this name. Many have pointed to Goldman Sachs (GS) to show the relative weakness compared to the market as it could be a warning sign. Apple could now be exhibiting similar signs as it could possibly have seen a double top and be headed lower. Normally, every big pullback in AAPL has been met with buying. While that still could potentially happen, their signals currently have them out of AAPL as they are worried it could head lower. So, if you're looking for possible 'tells' in the market, watch the action in some of the industry leaders of Goldman Sachs (GS) and Apple (AAPL). You can see how the guys at MarketClub have been trading AAPL throughout the year in their video.

What We're Reading ~ 12/4/09

Gold goes parabolic [Trader's Narrative]

On what was the biggest market call of the decade [The Reformed Broker]

A developing bull market [The Economist]

On Ray Dalio & Bridgewater's decision to enter 'depression mode' [Pensions & Investments]

Paulson is about performance [Eric Jackson's Breakout Performance]

Could Buffett earn 50% returns in today's market? [Value Investing Fundamentals]

A nice primer on managed futures funds [Lawrence G. McDonald, author of A Colossal Failure of Common Sense]

What do rising interest rates mean for equities [Trader's Narrative]

Thursday, December 3, 2009

Hedge Fund Paulson & Co's Latest Portfolio: 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 current hedge fund icon John Paulson. If you are unfamiliar with Paulson & Co, then here's what you need to know. Before the trade that made him famous in the investment world, John Paulson was a seemingly mediocre merger arbitrage fund manager. All of that changed when Paulson began shorting collateralized debt obligations and buying credit default swaps back in 2005 as he had conviction in his bet against subprime. His Credit Opportunities fund launched in 2006 with $150 million aimed to short subprime mortgage backed securities. This fund enjoyed immediate success, causing him to launch the Credit Opportunities II fund. At the end of 2007, the Opportunities fund was up 590% and his Opportunities II fund was up 353%. Such sterling performance led Paulson's hedge funds to be the #1 and #4 funds as ranked in Barron's hedge fund rankings (top 100). Paulson's funds earned this distinction due to their solid 3 year annualized performance metrics. Additionally, Paulson sits at #3 on Alpha's hedge fund rankings list for 2009, which is compiled based on assets under management (AUM).

After massive returns on that trade he become a hedge fund and investor icon. His latest wager involves starting a brand new gold fund which we examined in-depth earlier in the week as he has turned his sights to now betting against the US dollar. In terms of notable portfolio activity in addition to what you'll find below, we saw that Paulson & Co has a large Cadbury stake (CBY) as they believe they will receive a higher takeover bid. Additionally, they've filed a 13D with the SEC in regards to their new stake in Conseco (CNO). You can see more of Paulson's insight and commentary on their portfolio in their Q3 investor letter.

Keep in mind that the positions listed below were their 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):
Citigroup (C)
Varian (VARI)
Cemex (CX)
Starwood Hotels (HOT)
Hartford Financial Services (HIG)
Sunstone Hotel (SHO)
Starwood Property Trust (STWD)
Conseco (CNO)
Old National Bancorp (ONB)
Felcor Lodging Trust (FCH)
Ashford HOspitality Trust (AHT)

Some Increased Positions (Positions they already owned but added shares to)
First Horizon National (FHN): Increased position by 137%
Liberty Media (LMDIA): Increased by 123.8%
Pepsi Bottling Group (PBG): Increased by 19.4%
PepsiAmericas (PAS): Increased by 2.7%

Some Reduced Positions (Some positions they sold shares in)
JPMorgan Chase (JPM): Reduced position by 71.4%
Bank of America (BAC): Reduced by 4.9%

Removed Positions (Positions they sold out of completely)
Petro Canada (PCZ)
Goldman Sachs (GS)
Market Vectors Gold Miners (GDX)
Humana (HUM)
Embarq (EQ)
AT&T (T)
Data Domain (DDUP)
Centennial Comm (CYCL)
State Street (STT)
Centex (CTX)
Kimco Realty (KIM)

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

  1. Gold Trust (GLD): 15.22%
  2. Bank of America (BAC): 13.21%
  3. Wyeth (inactive): 12.27%
  4. AngloGold Ashanti (AU): 8.54%
  5. Schering Plough (inactive): 7.95%
  6. Citigroup (C): 7.1%
  7. Liberty Media (LMDIA): 6.8%
  8. Boston Scientific (BSX): 5.13%
  9. Sun Microsystems (JAVA): 3.29%
  10. Kinross Gold (KGC): 3.26%
  11. Capital One (COF): 2.97%
  12. Philip Morris International (PM): 2.14%
  13. Pepsi Bottling Group (PBG): 1.78%
  14. Gold Fields (GFI): 1.55%
  15. Mirant (MIR): 1.46%

The last time we looked at Paulson & Co's long equity portfolio, they were buying financials. This time around, they were selling a few of them as they sold some JPMorgan Chase (JPM), slightly trimmed their Bank of America (BAC) stake, and sold completely out of Goldman Sachs (GS). One financial they did add as a new position was Citigroup (C). We actually covered Paulson's rumored purchase of C earlier and so Market Folly readers knew about this back in August. Additionally, they added to their First Horizon (FHN) stake.

Hedge fund Paulson & Co's largest holding continues to be gold via GLD. Don't read too much into that because that entire position is purely a hedge for their fund share class denominated in gold. Paulson's inflationary outlook is reflected in his new gold fund, but we want to make sure everyone realizes that his GLD position is purely a hedge for a his gold share class in his other hedge fund. He is betting on inflation with his new fund via gold related equity stakes and derivatives on the price of gold.

Some other notable changes in his portfolio include new positions in Starwood Hotels and the August IPO of Starwood Property Trust. John Paulson's entrance into those as well as Ashford Hospitality Trust and Felcor Lodging Trust is interesting, although we must point out that they make up a very small portion of his portfolio. He also started a stake in Conseco (CNO) but we had already detailed this on the blog. Paulson & Co's background in merger arbitrage is evident in their positions of Wyeth and Schering Plough as those were both taken out in mergers/buyouts and are no longer actively traded.

We've assembled quite a few resources on hedge fund Paulson & Co so make sure to check out their:

- Q3 investor letter
- An in-depth look at Paulson's new gold fund
- Their recent 13D filing on Conseco (CNO)
- Paulson's stake in Cadbury (CBY)
- 2008 annual letter
- The Greatest Trade Ever by Gregory Zuckerman (WSJ Columnist): a detailed account of Paulson's winning bet against subprime that made him billions. See our review here.

Assets from the collective holdings reported to the SEC via 13F filing were $20.4 billion this quarter compared to $17.4 billion last quarter, so an increase of $3 billion. 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, Dan Loeb's Third Point LLC, and David Einhorn's Greenlight Capital so check back daily as we'll be posting up a new hedge fund each morning.

Top Ten Stocks Held By Hedge Funds

Thanks to the fine folks at FINalternatives, we see the latest quarterly Hedge Fund Monitor Report out of Bank of America Merrill Lynch. These quarterly reports are along the same lines of what we do here at Market Folly in that they examine hedge fund portfolios. Rather than focus on a unique set of funds like we do, they survey the majority of the industry landscape to frame a 'top hedge fund holdings' list.

This data is very useful for those of you wondering which stocks are most widely held amongst hedge funds and we presented the hedge fund data from Q2 earlier on the blog. In the third quarter, hedge funds increased their long equity holdings as gross exposure was up 14% and net exposure was up a whopping 130%.

The ten most popular stocks held by hedge funds include:

  1. Bank of America (BAC)
  2. Pfizer (PFE)
  3. JPMorgan Chase (JPM)
  4. Microsoft (MSFT)
  5. Citigroup (C)
  6. Apple (AAPL)
  7. Google (GOOG)
  8. Qualcomm (QCOM)
  9. Cisco Systems (CSCO)
  10. Walmart (WMT)

Embedded below is Bank of America Merrill Lynch's Q3 Hedge Fund Monitor Report. RSS & Email readers you will have to come to the blog to view the report & as always we recommend using 'full screen' mode to read the document:

Additionally, you can view the hedge fund trend monitor report from last quarter here.

Wednesday, December 2, 2009

George Soros Adds Big To One Position, Sells More Of Another

George Soros' hedge fund firm has recently filed two separate 13G's with the SEC to update some of their positions. Firstly, we see that Soros Fund Management has disclosed a 5.26% ownership stake in Dana Holding Corp (DAN) with 7,331,132 shares. The filing was made due to activity on November 20th, 2009 and represents a massive increase in their position in DAN. As per their last 13F filing where they disclosed their positions as of September 30th, Soros owned only 1,500,000 shares of DAN. This means they have heavily boosted their equity stake in the past two months.

Additionally, we see that George Soros has also continued to sell down his stake in Global Ship Lease (GSL). His hedge fund now owns a 1.82% ownership stake in GSL with 864,500 shares as per an amended 13G filing with the SEC on November 24th, 2009. Do note that these shares are represented by warrants they own on GSL. Most recently, Soros Fund Management had a 7.45% ownership stake and before that a 13.66% ownership stake. They first sold their common shares and have now begun to sell the vast majority of their warrants. And as you can see, with only a 1.82% stake left, they are all but out of this name as they continue to sell down their position. You can check out our initial coverage of Soros' GSL position from back in early November.

This recent activity comes right after a portfolio update we did on Soros where he had adjusted three positions in his portfolio. As we've noted in 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. More of Soros' thoughts on the financial markets are detailed in his latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.

Taken from Google Finance,

Dana Holding Corp is "a supplier of axle, driveshaft, structural, sealing and thermal products for global vehicle manufacturers. The Company designs and manufactures products for vehicle producer. It operates 113 major facilities worldwide. Dana serves three primary markets: automotive market; commercial vehicle market, and off-highway market. "

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

Check back in as we'll soon be detailing George Soros' entire portfolio in our hedge fund portfolio tracking series.

Market Folly Custom Portfolio: November 2009 Performance

If you're unfamiliar with our portfolio, check out our introduction here. Today we're back with the latest performance metrics from our Market Folly custom 'hedgefundesque' portfolio created with Alphaclone:

November 2009
MF: -2.2%
S&P 500: +6.0%

YTD 2009
MF: +9.4%
S&P 500: +24.1%

Since Inception (1/03/00)
Total Return
MF: +848.6%
S&P 500: -10.0%

MF: +25.5%
S&P 500: -1.1%

(click to enlarge)

The clone had a horrible month comparatively speaking. Not to mention, the hedge continues to drag on portfolio performance for the year as the never-ending rally continues. The long-only version of our portfolio is +25.2% year-to-date, compared to the hedged version which is +9.4%. So, you can see the vast majority of the underperformance is due to the hedge this year. In our mind, it has always been imperative to first: protect from losses, and second: to outperform over the long-term. The clone has definitely succeeded in those regards, but we're obviously disappointed with this year's performance.

Needless to say, a rally of over 60% from the lows in one year is quite abusive to our hedge. When you get a rare and vicious rally like that, the hedge will always drag you down. We of course will continue to run our strategy as designed because its long term outperformance speaks for itself. And after all, we're in this for the 3-year, 5-year, and inception metrics. (Keep in mind that you can also run a long-only version of the portfolio).

We're providing monthly performance updates on the Market Folly clone in the interest of full transparency. After all, that word has taken centerstage in the industry as of late. While we aren't focused on month-to-month gyrations, many readers like to see how it is faring near-term and we're happy to oblige. As always, head over to Alphaclone to see our portfolio in action and to see what positions it is currently invested in. We're proud to be ranked #1 on Alphaclone's leaderboard despite this year's poor showing. Create your own hedge fund portfolios over there and let us know how your results look.

Carl Icahn Guest Lecture At Yale University

In a recent video courtesy of AcademicEarth, Yale University's renowned Professor of Economics Robert Shiller welcomed Carl Icahn to his classroom for a guest lecture.

Embedded below is the video of Carl Icahn's lecture on his career in finance, shareholder activism, and the economies and markets of today. RSS & Email readers come to the blog to view the video:

Carl Icahn runs hedge fund Icahn Partners and focuses on activist investing where he seeks to implement change at various companies. We've covered his movements in-depth here on the blog and in October he laid out the idea to short real estate. In addition, we've also detailed some of his portfolio activity. There have been some recent developments out of the Icahn camp and we'll present those in a separate post shortly.

Paulson & Co's Hedge Fund Investor Letter: Q3 2009

Dealbook has the latest investor letter from John Paulson's hedge fund firm Paulson & Co. In their third quarter 2009 letter, they give us an inside look at some of their portfolio holdings as well as a performance update on their hedge funds.

Unfortunately, the tools for the document have been disabled so you have to view it via the embedded version below (we recommend using the 'full screen' option). RSS & Email readers: you have to come to the site to read the Paulson letter.

As per the letter, Paulson executed many arbitrage and event driven plays given their background in that strategy. In particular, they reference the Wyeth/Pfizer deal which we've noted as a play that was ripe with hedge funds. Interestingly enough, Paulson & Co also had been playing arbitrage with Pepsi (PEP) and Pepsi Bottling Group (PBG). We highly recommend reading the letter above. And if you're looking for more material out of John Paulson's hedge fund, check out their 2008 annual investor letter as well.

Just two days ago, we took an in-depth look at Paulson's new offering, a gold fund. This is his latest wager and we'll have to see if he can win big twice in a row. In terms of other recent portfolio moves, we saw John Paulson beef up his stake in Cadbury (CBY), as well as file a 13D on Conseco (CNO). Stay tuned later this morning as we'll be doing our quarterly 13F analysis on Paulson & Co and will update all of their long equity portfolio holdings.

Tuesday, December 1, 2009

Most Popular Articles On

We haven't updated our list of the most popular articles on Market Folly so we figured we should list the current favorites now that a new month is upon us. Since it's the holiday season, make sure to also check out our Holiday Wishlist: Gift Ideas For Those In Finance.

1. Warren Buffett's Recommended Reading List

2. John Paulson's Gold Fund: Betting Against the US Dollar

3. Market Wizards: Advice From 15 Top Hedge Fund Managers & Traders

4. MarketFolly's Custom Portfolio Ranked #1 On AlphaClone's Leaderboard

5. David Einhorn & Greenlight Capital's Portfolio Holdings

6. Review of Gregory Zuckerman's The Greatest Trade Ever, the Story of John Paulson's Subprime Play

7. Stephen Mandel's Hedge Fund Lone Pine Buys a Basket Full of Apple (AAPL)

8. Jim Chanos' Presentation: Ten Lessons From the Financial Crisis

9. Hedge Fund Lansdowne Partners Favors Large Caps In Developed Countries

10. The Third Quarter Edition Of Our Hedge Fund Portfolio Tracking Series


Thank you as always to our readers. If you enjoy our work, please consider making a donation (via PayPal or credit card). It's definitely very time consuming to run a site on the side and we appreciate your support! If you aren't already, make sure you're getting our daily hedge fund updates for free via email or for free via RSS reader.

Key Levels In the S&P 500

MarketClub just posted up a new video examining the S&P 500 and in it they've outlined two key levels in the market. They highlight that while the trend is up, you still have to be cautious and know when to switch from long to short. So, they've identified a level at which to exit longs (S&P 1072) and then they've identified a separate level which would signify a trend break where you would want to then get short (S&P 991). These are obviously important areas to watch because the trend is your friend... until it's not. Hear what they have to say in their S&P 500 video.

Use those levels to help you place your stops or know when to exit your longs as the market continues to melt up higher. It's never a bad thing to have an exit strategy in place.

Dan Loeb Sees Favorable Investing Environment: Third Point's Investor Letter

Dan Loeb's hedge fund firm Third Point LLC recently sent out their third quarter 2009 investor letter and we're here to provide you with the highlights. Third Point currently manages $2.4 billion and was up 19.8% for Q3 and year-to-date as of September 30th was up 27.6%, outperforming the S&P 500 over the same timeframes.

Loeb mentions that their biggest gainers were Delphi (now inactive), Dana Holding (DAN), Bank of America (BAC), Fortis, Popular (BPOP), and RMBS securities in their mortgage portfolio. We've long known of their BAC position as he detailed it in his past letter to investors. Interestingly enough, we see that Loeb saw nice gains from Dana Holding (DAN) and we also make note that George Soros' hedge fund recently filed a 13G on that company which we'll detail in a separate post.

Just recently we covered Loeb's portfolio and noted Popular (BPOP) was a large new position. His letter provides more clarity on their position as they bought preferred shares around $0.64 per share and converted them into common at an implied cost of $1.50 per share. They believe it is undervalued relative to its peers and is positioned well in Puerto Rico.

Given that Loeb and Third Point often focus on event driven and arbitrage plays, it's interesting to see them currently have close to no risk arbitrage positions. They had previously had in excess of 20% of their capital invested in these strategies. This is mostly due to the fact that the Pfizer/Wyeth and Merck/Schering mergers closed, two arbitrage situations that hedge funds were playing heavily.

Loeb's investment outlook for the next six to twelve months is 'favorable' in both the equity and debt markets. He thinks that interest rates will remain low as the government continues to fight unemployment and get us on the road to recovery. On a corporate level, he expects to see "anemic revenue growth but continued margin expansion, increased corporate restructuring activity (spin-offs, mergers, and the like), and earnings that will frequently surprise to the upside. Thus, for equity investors, it is a stock picker's market on both the long and short sides." To see what equity positions Third Point is currently investing in, we recently checked out their portfolio.

We've covered hedge fund Third Point in-depth in the past and have compiled some nice resources including Dan Loeb's recommended reading, a recent video speech by Dan Loeb, and Third Point's second quarter letter.

Embedded on this page below courtesy of Dealbreaker is Dan Loeb & Third Point's third quarter 2009 investor letter:

You can also download the .pdf here.

Weak Dollar Offset By Rising Stocks Says Jeff Saut

Raymond James' chief investment strategist is back with his weekly market commentary and this time he is focused on the weak dollar. Jeff Saut outlines that early in his career he had been concerned about a weak dollar, but then he learned a valuable lesson: stocks go up to offset it. So while some of you may be worried about the dollar for economic reasons, his argument is you shouldn't be worried from a market perspective. We do know one thing though, hedge fund icon John Paulson is worried about the dollar because he's betting against it with his new gold fund. Saut points out that a weak dollar has been very helpful to precious metals and commodities positions, a situation that plays right into Paulson's theme and strategy.

Based on the weak-dollar infused rally and the charts, Saut's team has outlined a price target on the S&P 500 of 1200 to 1250 so we'll have to see how it plays out. At the same time though, Saut points out again that we are still not out of the woods as we begin the road to recovery. They have been cautious recently in the past but have admitted they were wrong by trying to fight the trend. He quotes Lowry's services who says, "no major market top has formed without being preceded by at least several months of rising selling pressure. But, currently, selling pressure has been recording new lows in a downtrend dating from the index's peak in March. Therefore, absent a sustained rise in selling pressure, the probabilities are against the formation of a major top and favor the continuation of the primary trend higher." As such, Saut's team is playing the tape and has laid out the price targets set forth above. And interestingly enough, Saut has also exchanged a few quips with fellow strategist David Rosenberg which is in the letter below. It seems the investment industry is ripe for debate these days.

We've been posting Jeff Saut's thoughts each week and last week he was out claiming that he thinks performance chasing will propel the market higher. He attributes this to underinvested portfolio managers who have underperformed this year and as such are at risk. After all, your track record is your identity and PM's don't want to have two bad years in a row.

Embedded below is Jeff Saut's latest weekly investment strategy (RSS & Email readers click here to read it):

You can also download the .pdf here.

For more from Raymond James' Jeff Saut, check out how he thinks underinvested managers will fuel further upside and some more in-depth thoughts about what exactly the never-ending market rally means.

Monday, November 30, 2009

John Paulson's Gold Fund: Betting Against the US Dollar

By now you are undoubtedly aware that John Paulson's hedge fund firm Paulson & Co is set to launch a gold fund. We wanted to take a minute to investigate things on a deeper level and examine why he is doing so and why now. Simply put, Paulson & Co is betting on the devaluation of the US dollar. They see inflation in the cards for the future and are positioning themselves accordingly. The fund is set to launch in January and John Paulson will personally invest $250 million into the fund.

This is notable not for the wager on inflation, but for the vehicle they have selected to hedge their exposure. Many prominent hedge funds and market gurus have previously warned of inflation and have shorted long-term US treasuries. One of the original hedgies Michael Steinhardt himself has called treasuries foolish. Legendary investor and ex-Quantum fund manager Jim Rogers shares this sentiment and dislikes treasuries. Hedge fund legend Julian Robertson is betting on higher interest rates and is doing so via constant maturity swaps (CMS). We also note that John Paulson's former colleague Paolo Pellegrini has also taken an inflationary stance. Instead of playing gold, Pellegrini's hedge fund PSQR had previously been shorting treasuries and longing oil. We could go on and on but the main point is that there are some prominent and smart minds betting on inflation. While many of them share the same ideas on the topic of inflation, they've used a myriad of investment vehicles to execute their call. John Paulson has taken a slightly different approach to his inflationary bet and here's why.

The Introduction

Paulson's wager on gold is by no means new information. After all, Paulson's current hedge funds hold over $4.3 billion of gold related investments. And as we have pointed out in the past, this exposure is purely to hedge their US dollar exposure as one of their other hedge funds has a share class denominated in gold. Paulson's conviction in gold related investments has undoubtedly risen. After all, why else would he be launching a hedge fund dedicated to investing solely in gold related entities? The creation of Paulson's fund traces an eerily similar pattern to one of his prior hedge fund launches where he crafted an idea, launched a hedge fund based on that idea, and then made billions. (We're talking of course about his large bet against subprime). Paulson has made his next large bet and his new gold fund is the vehicle by which you can join him on the ride. His gold fund's objective "is to outperform gold price in a rising gold price environment." They will pursue this by investing in gold equities that are levered to the price of gold, as well as derivatives on the price of gold. Can Paulson be successful on two big bets back to back? We'll have to wait and see.

The Gold Thesis

According to recent presentations from Paulson & Co, their thesis for gold is threefold. Firstly, they believe that the printing presses of money that have been working overtime in America and other countries will cause depreciation in paper currency. Secondly, they believe that demand for gold will increase, particularly as a reserve currency. In fact, they think gold could become the primary reserve currency again as they have been looking at gold as currency, not a commodity. Thirdly, their belief is that demand for gold in general will be far greater than supply, causing prices to head higher. Overall, they see a very high probability of inflation in America's future and have selected gold related investments to hedge against this.

Ben Bernanke's Printing Presses

Looking further, Paulson & Co highlights that the monetary base has expanded to an absolutely exponential degree. According to the Federal Reserve, typical year over year changes in monetary base were under 20%. When the crisis occurred, that year over year change skyrocketed to 128%. Additionally, the correlation between the monetary base and money supply is very close, almost 1:1 as the monetary base finds its way to the money supply. In turn, unit money supply then is also highly correlated to the GDP price index, nearly a 1:1 correlation again. Paulson & Co's main argument here is that the monetary base has expanded dramatically, yet the money supply growth hasn't yet expanded. This is due to the fact that the velocity of money dropped furiously after the collapse of Lehman Brothers. Once money supply expands, look out for inflation.

Bolstering their argument, Paulson has also cited inflationary outlooks issued by the likes of former St. Louis Fed President William Poole, Harvard Professor of Economics and President Emeritus Dr. Martin Feldstein, and many more. Obviously they are not alone in their fears here. While America has taken center stage for their Central Bank balance sheet expansion, other countries' balance sheets have become just as bloated. From late 2008 until Q2 2009, the US Federal Reserve has expanded their balance sheet by 119%, the Bank of England's has expanded by 127%, the Swiss National Bank's has increased by 80%, and the European Central Bank's balance sheet has seen a 39% increase.

In the end, the crux of this part of their argument for inflation centers around money supply. Historically, inflation has lagged money supply growth by 2 to 3 years. So the lesson is that when you have money supply growth, inflation is just around the corner. And, gold has historically held its value and/or appreciated in times of inflation.

Rising Demand

To those pointing toward gold as a crowded trade or bubble, Paulson & Co argue that there has been vast appetite for gold, particularly in the popular exchange traded fund GLD. While the holdings of this ETF were only recently around $57 billion, the total pool of US money market reserves was a massive $3,850 billion. They imply that this leaves a vast amount of room for savers to shift away from paltry money market rates and into gold. Not to mention, Paulson's hedge fund actually expects central banks to turn into net buyers of gold in 2010. We've already seen signs of this as India's appetite for gold has heartily increased lately. It seems that the central banks have concluded they should not sell assets that are appreciating (gold) in order to buy assets that are depreciating (US dollar).

Gold has been on a rampage the past few months, breaking above the $1,000 technical and psychological level and heading even higher. The question now becomes, what's next for gold? Check out this video on gold to see logical pullback areas, price targets for gold's move higher, as well as where to place your stops. One thing's for certain: investors have definitely had more of an appetite for the precious metal as of late.

The Strategy

Curiously enough, it appears that Paulson's gold fund will actually not buy any physical gold. Instead, they will play inflation via gold equities as well as derivatives on the price of gold. The derivatives portion of their book has not been put on yet but they will target it to be slightly over 15% of their portfolio by using long-dated options. So, the vast majority of their gold fund will be comprised of gold equities. Some of Paulson & Co's other hedge funds already have large exposure to specific gold miners such as Anglogold Ashanti. They've selected this strategy for greater potential upside as they think gold equities will actually benefit most should gold prices stay flat or continue to rise.


As with any trade, there are always risks. Paulson's hedge fund has identified volatility, timing, price, and confiscation as potential risks to this play. In regards to timing, there is seemingly always a lag in when exactly inflation hits. It is usually a domino effect as the monetary base expands, then the money supply expands, and then you see inflation. The risk from their perspective is that it could take three to five years before we see any true signs of inflation. In regards to potential deflation in the price of gold, they identify the risks of a decline in industrial demand (jewelry etc), sales by central banks, and an increase in supply. Lastly, they identify confiscation by central banks as a threat. However, this scenario would essentially require the presence of hyperinflation and at that point the price of gold would be sky high.

A Winning Trade For Paulson

Regardless of gold's potential price appreciation, Paulson has already won on this trade. Why, you ask? Well, nowadays John Paulson is an investment icon and everyone wants to invest with him. He is already in the trade in some of his other hedge funds and soon will be with his gold fund. Not to mention, numerous other prominent hedgies are singing the praises of gold as of late. As others begin to filter into the trade and warm up to its potential, Paulson's play benefits. As our friend on Twitter mojakus puts it, Paulson can "ride the wave of wider recognition of the trade's merits. (It) doesn't really need to work out for him to mint it."

Paulson & Co don't necessarily need the trade to be realized, but rather they just need others to recognize the risk. They don't need gold prices to go higher, they only need others to recognize the potential for prices to head higher. After all, Paulson will charge a 1.5% management fee and a 20% performance fee in his gold fund with a $10 million minimum investment. As we posted on our Twitter, a massive rush of investors into gold funds could signify a top, but Paulson & Co obviously won't turn down receiving a nice set of fees for investing your cash into gold equities and derivatives.

This all comes on the heels of Paulson's huge bet against subprime over the past few years. Wall Street Journal columnist Gregory Zuckerman has detailed Paulson's amazing play in The Greatest Trade Ever, his new book (see our review here). Can Paulson do it again with his wager against the US dollar? It certainly would be quite the feat to nail two major trades in such a short span of time.

Hedgies Like Gold

As we've covered previously, hedge fund colleague David Einhorn of Greenlight Capital is positioning himself to benefit from the printing presses of the US and other governments. Einhorn is bullish on gold as well and has actually shifted from using the exchange traded fund GLD for his position to storing physical gold. So while Einhorn prefers physical gold instead of gold miners ala Paulson, the bottom line is they both have identified quantitative easing as a major inflationary threat going forward. As such, they are positioning themselves to benefit by what they deem to be the most beneficial way.

The Debate Continues

The inflation versus deflation argument rolls on and is shaping up to be quite the investment battlefield. With his gold hedge fund launch, John Paulson has planted himself firmly in the inflation camp. In the other corner, PIMCO's bond vigilante Bill Gross is betting on deflation. While the outcome could still be a few years away, it's interesting to see the wagers and investment vehicles selected by various notable investors. Slowly but surely the prominent names in the industry are placing their bets. Which side are you on?

For more on John Paulson's hedge fund firm, check out The Greatest Trade Ever as well as Paulson's recent position updates.

Paolo Pellegrini's PSQR Capital: Investor Letter & Performance Update

Big hat tip to Zerohedge for posting this one up recently. Paolo Pellegrini, John Paulson's former colleague who helped him craft his large bet against subprime, is now out on his own. PSQR Capital is his discretionary global macro fund that invests all over the world and across the full spectrum of asset classes. When we last checked in on Pellegrini, we saw he had been shorting treasuries and longing oil. Below we get an update as to what he's been up to via his quarterly investor letter and hedge fund performance report. Given Pellegrini's essential role in hedge fund Paulson & Co's big bet that netted them billions, we found it prudent to track him and we started covering him right as he started his own hedge fund.

To get an update as to what he's been up to, embedded below is PSQR Capital's investor letter (RSS & Email readers come to the blog):

Also, below is PSQR's performance report:

You can download the letter .pdf here and the report .pdf here. For more insight from the hedge fund manager, head to our most recent post on Pellegrini's positions & thoughts.