Friday, December 11, 2009

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Marty Whitman & Third Avenue's Investor Letter (Q4 2009)

Embedded below is Marty Whitman and Third Avenue's Q4 2009 investor letter and market commentary for your perusal:

You can also download the .pdf here. Additionally, you can read Marty Whitman's Q2 letter here, as well as some more of Third Avenue's previous commentary here.

Warren Buffett Sells Moody's (MCO) Shares Again

In a Form 4 filed with the SEC, legendary investor Warren Buffett and his Berkshire Hathaway disclosed that they have sold more shares of Moody's (MCO). On December 7th they sold 2,004,946 shares at a price of $25.0381 per share. The next day they sold an additional 704,346 shares at a price of $24.8074. In total, they sold 2,709292 shares and they are now left owning 35,357,393 shares. As we mentioned before, Buffett previously sold Moody's shares in late October, and in months prior as well. (Head over to TickerSpy to see Warren Buffett's portfolio).

So while Buffett and Berkshire have been selling shares multiple times over the past few months, keep in mind that they still own a sizable chunk of the company. It's going to be interesting to watch if Buffett continues to sell completely out or if he is merely trimming his position down to avoid possible risks associated with this name. David Einhorn's hedge fund Greenlight Capital has been publicly short Moody's (MCO) and McGraw Hill (MHP) and you can see his short thesis in his presentation on the curse of the Triple-A. It's certainly a situation worth watching.

To learn to invest like one of the greatest ever, check out Warren Buffett's recommended reading list. For words of wisdom, check out our top 25 Warren Buffett quotes. And lastly, for more insight from Mr. Buffett on this economy, investing, and life then check out his recent talk at Columbia Business School with Bill Gates.

Taken from Google Finance, Moody's is "a provider of credit ratings and related research, data and analytical tools, quantitative credit risk measures, risk scoring software, and credit portfolio management solutions and securities pricing software and valuation models. The Company operates in two segments: Moody’s Investors Service (MIS) and Moody’s Analytics (MA)."

Tiger Management's Julian Robertson Interview With Charlie Rose From 1998

This is an excellent video from over a decade ago (feels funny to say that... time flies). Today we present you with Charlie Rose's interview of hedge fund legend Julian Robertson of Tiger Management from back in 1998.

Embedded below is the video, so RSS & Email readers come to the blog to view it:

It's kind of funny to look back on his thoughts. We've essentially taken a time machine to a different market environment following Robertson's ascension as one of the most widely regarded hedge fund managers with his Tiger Management (profile & background here). It's even more intriguing when you compare his thoughts from the video above to a Bloomberg interview Robertson did this past October, over a decade later. Robertson's legacy has obviously lived on with the spawning of Tiger Cub hedge funds that emulate Robertson's success and build their own legend.

Nowadays, Julian seeds various hedge funds and has been investing for himself. We've highlighted Robertson's portfolio and in particular his bet on rising interest rates that he has recently tweaked to doing so via constant maturity swaps (CMS). Whether it be the past or present, two things remain the same: Julian Robertson's sharp investing prowess and that good ole southern twang.

What We're Reading ~ 12/11/09

We want to remind everyone that if you want great market related links each day, Abnormal Returns is the best source for that and it's one of our daily reads.

Bob Farrell's ten rules for investing [Business Insisder]

Wall Street is looking at the wrong 60 years [Absolute Return + Alpha]

John Markman's predictions/thoughts on investing in 2010 [MSN Money]

"Robert Rodriguez ignores most rules of the mutual fund industry, an approach that's helped him beat all rival managers over the past 25 years." [Bloomberg]

Top 10 buys and sells from their 'ultimate stock pickers' portfolio [Morningstar]

A granular look into a $6 billion REIT - is it headed for danger? [zero hedge]

Return of the hedge fund [Investment News]

Gold isn't the best hedge against inflation [Bloomberg]

Career advice from John Paulson [eFinancialCareers]

New Stream Capital denies problems [HF Implode]

Thursday, December 10, 2009

S&P 500: Key Levels To Watch (Technical Analysis)

Adam over at MarketClub is back with a fresh look at the S&P 500 to decide whether or not the market is about to collapse or take off higher. You can check out his technical analysis video on the S&P 500 here. He pulls up a chart of the S&P and uses the fibonacci retracement tool to connect levels from 2008 to the lows in March of this year. Upon doing so, he notices that the 50% retracement level, often an important retracement, lands right where the market is currently and is serving as resistance for the S&P 500. Click the chart below to watch the video:

He also points out that there's been a divergence in the MACD for a long time as it has headed progressively lower while the market has headed higher. This divergence has been building over time and can be telling. He then zooms in to recent action and notes that the market has been rangebound lately and has been trading sideways. The 1,110 level has been serving as resistance for the market while 1,083 has been serving as support in the range. So, if it falls below that level, it could mean the market is going lower. And conversely, if the market breaks out above 1,110 then look for prices to head much higher. He says these are important because the market has become very technically-driven. Check out the video for Adam's full technical analysis of the S&P 500.

Hedge Fund Exposure Levels: Still Very Long Equities

Bank of America Merrill Lynch is out with some recent data on hedge fund portfolio positioning as of the first week of December. Per their hedge fund monitor report, we see that hedge funds were still very much long equities as they have overweighted that asset class as well as energy and precious metals. We also learn that they were covering shorts in 10-Year Treasuries and the US dollar index. Those two short positions have been widespread in hedge fund land for some time now as hedgies bet on inflation via rising rates and a weak dollar. While in the past we've covered specifics like what ten stocks are most popular amongst hedge funds, we're taking a step back today to highlight the broader picture.

Overall Exposure Levels

Long/Short Equity Hedge Funds: While most L/S funds typically have had 30-40% net long exposure historically, December kicked off with hedge funds net long by around ~45%. This comes after long/short funds had hit a multi-year high level of 50% net long in mid November. Some recent action by these funds suggest that their inflationary expectations are declining and they have been shifting from value and high quality names into small cap names.

(click to enlarge)

Market Neutral Hedge Funds: They note that market neutral funds have stuck to their name and have gone back to 'neutral,' having spiked in weeks prior. Overall, they are largely neutral on equities and have negative inflationary expectations.

Global Macro Hedge Funds: Additionally, global macro hedge funds have been in a 'crowded long' of the S&P 500 and have also been in an even more crowded long of emerging markets. Bank of America Merrill Lynch's readings on net long emerging market positions are at the highest they have been since August 2008. They also apparently have been selling 10-Year Treasuries and have been modestly covering shorts on the US dollar (a crowded trade).


We also now want to turn to commodity exposure levels as they have taken center stage again with Gold's parabolic rise.

Gold: Their research indicates that in the first week of December, large speculators were selling gold. However, this is still very much a crowded trade to the longside. They note that gold completed what they call a 'head and shoulders continuation pattern that projects up to $1300-1350.' So, interesting to see their price targets on the precious metal as those levels fall largely in line with technical analysis price targets on gold that we've seen. Also, we've recently covered the latest offering from hedge fund icon John Paulson. Those interested in gold should read his rationale in our in-depth post on his new gold fund.

Silver: They are noting that large speculators were buying silver somewhat at the beginning of December and that it is stuck in a trend channel. Their target upside is in the $20 area and they see support in the $14-15 range. The long-term upside target on silver is an old high of $50.

Copper: Well, Dr. Copper was holding steady as large speculators pretty much left their net long position unchanged. They note that copper has an upside potential to $350 while they are identifying support in two areas: $290 as well as $260.

Platinum: Large speculators mildly increased their bets on this metal in the first week of December. After falling off last year due to weak automotive demand, the metal has bounced back and has support at $1250 and resistance at $1500 according to Bank of America Merrill Lynch's research.

Crude Oil: In this commodity, large speculators held their steady net long positions as of the first week of December, having been selling at the end of November. They note that crude has been trading in a sideways range of around $65-75 since July and a breakout above this area would obviously prove to be bullish. They end their note saying that the "crowded long position remains a contrarian negative." We also recently highlighted a technical analysis video on crude oil that identified a potential pattern in this commodity as well.

Natural Gas: This commodity has been on a deathspiral for some time and it looks set to continue. As of the first week in December, large speculators were holding their deep net short position. Bank of America Merrill Lynch has commented on current action, saying it "appears to be in a broad base-building process."

Fixed Income

Moving lastly to fixed income, we thought it would be prudent to check in on hedge fund positioning as it relates to US Treasuries. As we've detailed on Market Folly before, there have been tons of prominent hedge fund managers involved on the short side of this trade. 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).

There are also managers playing the other side of the trade as bond vigilante Bill Gross of PIMCO is betting on deflation and has been buying treasuries. What's interesting here is that technically, both sides of the trade can win. One side of the trade could profit from short-term ebbs and flows, while the other side of the trade could win out in the long-run. It will arguably take years for the final verdict to play out, but that doesn't mean money can't be made in the mean time.
Here is the latest hedge fund positioning on 30-Year Treasuries, 10-Year Treasuries, as well as 2-Year Treasuries:

(click to enlarge)

That wraps up Bank of America Merrill Lynch's coverage of hedge fund exposure levels as of the first week of December. While it's good to see overall hedge fund exposure levels, those of you wanting more specific positions can head to our post on the top ten stocks owned by hedge funds. It's interesting to see how hedge funds are positioned heading into the close of the year and we're sure they'll be adjusting once the new year starts as well. To see how hedge funds might position themselves for next year, check out ten investment themes for 2010.

Wednesday, December 9, 2009

Seth Klarman's Baupost Group Sells More Syneron Medical (ELOS)

In an amended 13G just filed with the SEC, Seth Klarman's hedge fund Baupost Group has disclosed a 5.45% ownership stake in Syneron Medical (ELOS). The filing was made due to activity on November 30th, 2009 and they now hold 1,500,000 shares. This is a decrease from their prior holdings. As we detailed when we covered Baupost's portfolio, they've been selling shares of Syneron for a while now (even prior to September 30th). Back then, they owned 2,096,235 shares which means they have sold 596,235 shares (a 28% decrease) in the past two and a half months.

In terms of other recent activity out of hedge fund Baupost, we saw in November that they had started a new stake in Enzon Pharmaceuticals. For more on Baupost's portfolio, head to our post on Seth Klarman's holdings to see what else they are investing in.

We track Baupost Group for their 20% annual compounded return, long-term focus, and thorough investing methodology focused on value investing principles. They are one of the few hedge funds we have included in our Market Folly custom portfolio that is seeing 25.5% annualized returns. (Head over to Alphaclone to see the hedge fund portfolio replication in action). And if you want to learn how to invest like Seth Klarman, then we'd highly recommend picking up his hard to find book, Margin of Safety. In it, he lays out the premise for risk averse value investing.

For more resources of Klarman and Baupost, check out the following:

- Klarman's interview from the annual Graham & Dodd breakfast
- Thoughts from Seth Klarman
- And another interview with Seth Klarman

Balyasny Asset Management Filed 13G On Maguire Properties (MPG)

Dmitry Balyasny's hedge fund firm Balyasny Asset Management has filed a 13G with the SEC on Maguire Properties (MPG). In the filing, we see that Balyasny has disclosed a 5.35% ownership stake in the company. This was due to activity on November 3rd and they now hold 2,564,650 shares. This is an increase because as per Balyasny's 13F filing which detailed holdings as of September 30th, they owned 898,172 shares.

This is interesting because fellow hedge fund Dan Loeb's Third Point LLC had owned shares of MPG in the past. However, when we covered their portfolio holdings, we saw they had completely sold out of Maguire. (And, we had noted their selling back in July as well). As the saying goes, there's always two sides to a trade. Balyasny was buying shares of MPG and Dan Loeb was selling.

Our post today really marks the first time we've looked at portfolio movements over at Balyasny. For those of you who may be unfamiliar, Balyasny Asset Management (BAM) was founded by Dmitry Balyasny in 2001 and has over 100 employees with the main office in Chicago and other offices in Greenwich, Hong Kong, London, Mumbai, and New York. Their investment process involves fundamental research by sector as well as dynamic capital allocation. They place a heavy weighting on experience and organize their teams so that they can concentrate on any given idea. They like to "focus on misunderstood situations and companies/sectors undergoing turbulent change from different perspectives." Through their research process they seek to identify unique ideas with attractive risk return. We'll hopefully be covering them more frequently from here on out and will add them to our hedge fund portfolio tracking series.

Taken from Google reader, Maguire Properties is "a self-administered and self-managed real estate investment trust (REIT). The Company is the owner and operator of Class A office properties in the Los Angeles Central Business District (LACBD) and is primarily focused on owning and operating office properties in the high-barrier-to-entry Southern California market."

Philip Falcone's Harbinger Capital Sells More Calpine (CPN)

Philip Falcone's hedge fund firm Harbinger Capital Partners has recently filed two separate Form 4's with the SEC on Calpine (CPN). In the filings, we see that Harbinger has sold a total of 647,221 shares. On December 7th, they sold 85,600 shares at a price of $11.03. On December 2nd, they sold 336,000 shares at a price of $11.24. The next day on December 3rd, they sold 65,269 shares at a price of $11.19. Lastly, on December 4th, they sold 160,352 shares at $11.02. After all was said and done, Harbinger still owns 39,135,915 shares of CPN direct and 17,856,266 shares on an indirect basis. This comes after Harbinger executed their Calpine offering back in late September. Overall though, their stake in CPN is way down over the past few months as they previously had owned almost 70 million shares.

This news comes after Harbinger recently adjusted two positions as well and Harbinger has been one of the busier hedge funds in terms of SEC filings this year. 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 too.

Taken from Google Finance, Calpine is "an independent wholesale power generation company engaged in the ownership and operation of natural gas-fired and geothermal power plants in North America. The Company sells wholesale power, steam, capacity, renewable energy credits and ancillary services to its customers, including industrial companies, retail power providers, utilities, municipalities, independent electric system operators, marketers and others. The Company’s portfolio comprises two types of power generation technologies: natural gas-fired combustion turbines (primarily combined-cycle) and renewable geothermal conventional steam turbines."

Bill Ackman's Pershing Square: Mall REIT Presentation

Today we have the recent ICSC Mall REIT presentation from Bill Ackman's hedge fund Pershing Square Capital Management. The slideshow is entitled 'If You Wait For The Robins, Spring Will Be Over' and it addresses the macro environment as it pertains to real estate investment trusts, and in particular, mall operators. If you're unfamiliar with Ackman and Pershing, check out our profile/background post on them.

Those of you who have been reading Market Folly for a while know that Bill Ackman bought into equity and unsecured debt of General Growth Properties (GGWPQ) back when the equity was trading below $0.40 per share. Today, shares are up above $10.70 per share and the unsecured debt is trading near par. Needless to say, he has already won big time on this play. But, he's not done yet. Ackman recently detailed more in-depth thoughts about GGWPQ in his investor letter. Given that GGWPQ is emerging from bankruptcy, he believes that GGWPQ can either emerge as a standalone company and that the equity will still be valuable (even if the unsecured converts over) or it can serve as a prime takeover target. If you've been paying attention recently, you already know that Brookfield Asset Management (BAM) and Simon Property Group (SPG) have been buying GGWPQ's debt so things are getting interesting on a possible takeover or some other strategy.

Ackman has already presented his case specifically for GGWPQ in a previous presentation, so now Pershing Square has shifted to a more top-down look at the US economy, the US consumer, and REIT mall operators. Embedded below is Pershing Square's entire 68-slide presentation from the latest ICSC event. RSS & Email readers will have to come to the blog to view their presentation.

You can download the .pdf here. While the above presentation details an overview of the industry, make sure to check out Ackman's original presentation on GGWPQ as well for more detailed specifics. Pershing certainly has painted a bullish picture for mall REIT operators. Their conclusions are that mall REITs and their tenants have not only survived, but have been resilient in a time of trouble. In order for REITs to outperform going forward, Pershing argues that you don't need to see consumer spending at 2007 levels either. They believe that the closure of underperforming stores is a long-term benefit for these operators as it weeds out the weak (our words, not theirs). Lastly, their bullishness can also be attributed to the fact that tenant cash flows (and as such their balance sheets) are much improved over a year ago and that many retailers have substantial growth plans.

For more resources on Bill Ackman's hedge fund Pershing Square, check out their latest investor letter where they talk in-depth about GGWPQ and their other positions. Additionally, we've also covered Pershing Square's portfolio recently as well. Lastly, you can also check out previous presentations from Bill Ackman's hedge fund as they presented the case for a long of Corrections Corp of America (CXW), as well as their case for a short of Realty Income (O).

Analysts' Best Stock Picks For 2010

*Update: This post has been removed per the request of representatives from Raymond James. Our apologies for any inconvenience. In the mean time, we highly recommend checking out the top ten investment themes for 2010 as well as the most popular stocks owned by hedge funds.

If you wanted more research out of Raymond James, we've also detailed their chief investment strategist Jeff Saut's weekly market commentary. You can check out his stock market commentary from this week, as well as his previous market commentary where he feels a weak dollar will drive further market upside.

Tuesday, December 8, 2009

Value Investing Congress 40% Discount: Save $1,750

If you missed the Value Investing Congress in October, here's your chance to attend the next one and at a substantial discount. The Value Investing Congress will be taking place for the second time this year where you can receive great investment ideas from some of the best investors out there.

When: May 4th & 5th, 2010

Where: Pasadena, California at The Langham, Huntington Hotel & Spa

Discount: We are proud to present that Market Folly readers save $1,750 off the regular price! Click here to receive your 40% discount to the Value Investing Congress. Use discount code: P10MF2 and hurry because this offer expires on December 15th!

If you're unfamiliar with the VIC, it is the premier conference to hear presentations and investment ideas from prominent money managers. In the past, speakers have included notable hedge fund managers such as Julian Robertson, David Einhorn, Bill Ackman, Eric Sprott and many more. To see the fantastic turnout and amazing speakers from the October event, check out the slideshow here. Over 40% of the seats to the May event have already been reserved, so act quickly. The $1,750 discount for Market Folly readers expires on December 15th, so you have one week to receive the biggest discount to the VIC. The closer we get to the event, the less discount you will receive. So, it's definitely in your best interest to register early and take advantage of the big savings! Give yourself an early holiday present or have your firm foot the bill. Use discount code: P10MF2.

... Read more about the VIC in May & register at a 40% discount!

Ten Investment Themes For 2010

From Bank of America Merrill Lynch comes investment strategy in the form of '10 themes for 2010.' Keep in mind that these represent their opinion so take everything with a grain of salt. They feel that next year will be "a genuine watershed" in that it will reveal whether or not this 'recovery' is real or whether the fundamentally drawn out weakness typically associated with bear markets will rear its ugly head. Their Research Investment Committee thinks that the printing of money through quantitative easing and record budget deficits will help the country on the road to recovery but think inflation will remain low throughout 2010, thus providing a bullish environment for stocks and commodities. As with many other market pundits, they feel emerging market demand will fuel commodities (especially gold). On the contrary, they dislike government bonds. The 'top 10' theme seems to be prevalent out of Bank of America Merrill Lynch lately as we also recently covered the top ten stocks owned by hedge funds.

Here is Bank of America Merrill Lynch's Ten Themes For 2010:

  1. Government balance sheet risk
  2. Rising taxation
  3. Alternative yield strategies
  4. Financial sector rehabilitation
  5. Corporate cash flow beneficiaries
  6. Rising global growth
  7. The emerging market consumer
  8. Commodity price inflation
  9. The return of active management
  10. Alternative energy

So, an interesting set of themes with some arguably already taking place as we head into the end of this year. Let's now take a closer look at each individual theme to examine their rationale, possible investment ideas, and assets to avoid. Here we go:

Theme #1) Government balance sheet risk: For this theme, they cite IMF data that "total public debt as a % of GDP will exceed 100% in advanced economies in 2010." They think that 10 year Treasury yields will be above 4% by the end of 2010.

Investment ideas for this theme: Materials equities and emerging market stocks. Also, intermediate term investment grade corporate bonds.

They think you should avoid long duration US Treasuries. Many prominent investors and market gurus have advocated avoiding treasuries in one form or another, including hedge fund legend Julian Robertson whose inflationary wager we've covered before.

#2) Rising taxation: They again cite the US budget deficit here as well as health care reform and a second stimulus package as the rationale for higher income taxes on both the state and local level in 2010.

Investment ideas: They like general obligation municipal bonds and muni bond ETFs as well as closed end funds. (Specifically: NUV, MYD, NPI, and NPM).

Avoid: Private purpose muni bond issues.

#3) Alternative yield strategies: Next, Bank of America Merrill Lynch's focus turns to the possibility of higher taxes chasing people out of typical dividend plays and they see tax deferred strategies benefiting here.

Investment ideas: Tax advantaged strategies and also large cap plays such as KMP, EPD, PAA, and ETP.

Avoid: Stocks with rising yields due to their decreasing stock price. Be wary of high yield 'traps.'

#4) Financial sector rehabilitation: Fourthly, we see that they think financials will benefit from low rates here in the US with steep yield curves elsewhere in the world. They also believe that the normalized earnings power of many financials has been underestimated.

Investment ideas: Mega cap financials in global markets (particularly in Brazil, China, and Europe).

Avoid: Regional financials and small cap plays. We've seen this trade many times before as many hedge funds have been long money center banks and short regional banks. Whitney Tilson's T2 Partners has been short Regions Financial (RF) as a perfect example. Not to mention, Bank of America (BAC) was one of the most widely owned stocks amongst hedge funds we track in our portfolio tracking series.

#5) Corporate cash flow beneficiaries: BofA Merrill thinks that large cash piles will be deployed in the form of M&A, dividends, and capital spending.

Ideas: Companies that will benefit from capital spending, including temporary staffing companies and the industrial sector. They also like small caps in the sectors of health care and technology.

Avoid: Auto and airline industry equities. Also be wary of corporate bonds of lower-rated issuers.

#6) Rising global growth: For this theme they cite global policy stimulus as well as higher capex obviously and feel the growth will be led by emerging markets.

Investment ideas: Exchange traded funds (ETFs) with exposure to both US and European cyclical plays (large cap industrials and materials). They also suggest mega cap multinational companies.

Avoid: They say to avoid domestic industries/sectors such as telecom, healthcare, as well as consumer discretionary.

#7) The emerging market consumer: This potential theme can be attributed to higher savings rates in other countries as well as the revaluation of the RMB in China which they claim will make the Chinese "5% richer."

Ideas: Asian banks, mega-cap multinational plays as well as emerging market forex versus the US dollar.

Avoid: Discretionary stocks in developed markets.

#8) Commodity price inflation: While we have already seen strong signs of this occurring, they feel the theme plays into 2010 due to emerging market demand strength as well as supply constraints. As far as gold is concerned, they argue that diversification in reserve currency by other central banks (particularly in emerging markets) should yield higher gold prices. Gold has been a hot topic as of late with its notable price ascension. Famous hedge fund manager John Paulson is now banking on inflation and betting against the US dollar via his new gold fund which we examined in-depth.

Investment ideas: Exchange traded funds (ETFs) with exposure to gold or global energy stocks; High quality diversified miners, commodity exporters.

Avoid: Automakers, airlines, and consumer durables.

#9) The return of active management: They feel a decrease in market volatility will see "greater differentiation in asset price performance."

Ideas: Actively managed funds and high quality stocks.

Avoid: Benchmark weightings.

#10) Alternative energy: Apparently this theme will be back with a vengeance after falling out of the spotlight when oil prices crashed down from record highs. Bank of America Merrill Lynch believes that this is a long-term secular theme and that emerging market trends will help fuel this growth. Obviously, higher oil prices will drive further investment into alternatives as well.

Investment ideas: Exchange traded funds (ETFs) that give you exposure to the vast spectrum of alternatives (wind, solar, nuclear, etc).

Avoid: Utilities and 'old energy' equities.

So there you have it, quite an interesting list of potential themes. We'll have to see if the vast majority of them play out, because we've already seen signs of a few of them. For more 'top 10' lists worth checking out, head over to our post on the top ten stocks owned by hedge funds.

More Market Upside Says Jeff Saut Of Raymond James

"Buy on the cannons and sell on the trumpets." Jeffrey Saut, chief investment strategist at Raymond James focuses on this phrase in his latest weekly market commentary. He notes that investors were buying the first week of March this year and the ensuing rally has proceeded until the present. He then goes on to highlight a possible outlier event in the recent employment report. Last week the market gapped higher but then gave back gains. Market weakness is obviously evident in situations where a market rises substantially in the morning, only to leak out those gains over the course of the day.

Saut was trying to evaluate as to whether or not this represented a one-day reversal event and whether it meant more weakness was set to come. After all, he points to how certain economic indicators have shown strength one month, only to show weakness again the next. So, it seems the cycle plays on. This was interesting seeing how his commentary from last week focused on how dollar weakness will fuel stocks higher. It seems as if he is looking for reasons to challenge his previous conclusions. And, in a market and economic environment where things are constantly changing, it makes sense to re-examine theses and to constantly evaluate the other side of the argument.

Saut ends his note by laying out some interesting datapoints. He writes, "Since November 16th the S&P 500 (SPX/1105.98) has had a difficult time attempting to rally above the 1115 level. Interestingly, that level represents a 50% recovery of the SPX’s price decline from October 2007 (1554) into its March 2009 low (676). It also approximates the downtrend line formed by connecting the S&P’s October 2007 peak with the peak that occurred in May 2008." And while the majority of his commentary this week focuses on whether or not we should expect more weakness, he actually falls back on his conclusions from the past two weeks that the market upside will continue into year-end as managers are still underinvested compared to their typical 70-75% net long levels.

Embedded below is the weekly investment strategy from Jeff Saut at Raymond James in its entirety. Email readers come to the blog to view the document:

You can download the .pdf here. While Saut continues to examine the market on a weekly basis, it appears as if he's searching for reasons for the market not to rally. However, as per his notes last week, he still arrives at the conclusion that we'll end the year higher. For more thoughts from Saut, you can check out his commentary from last week as well.

Monday, December 7, 2009

Roberto Mignone's Bridger Management Files 13G On Cardiome Pharma Corp (CRME)

This is the first time we've detailed portfolio changes of hedge fund Bridger Management so we felt it necessary to provide a bit of background first. Bridger Management is the hedge fund firm founded by Roberto Mignone in 2000. They currently have around $4 billion in assets under management and run a long/short equity and event driven strategy focused on intensive fundamental research. Before Bridger, Mignone actually co-founded Blue Ridge Capital with John Griffin in 1996. And before that, Mignone (like Griffin) worked at Julian Robertson's Tiger Management and as such joins the ranks of other prominent 'Tiger Cub' hedge funds. Mignone attended Harvard for both undergrad and his MBA.

In a 13G filing with the SEC, hedge fund Bridger Management has disclosed a 5.1% ownership stake in Cardiome Pharma Corp (CRME). The filing was made due to activity on November 23rd, 2009 and they now own 3,096,709 shares. They've boosted their holdings because back on September 30th, 2009 they owned 2,837,246 shares as per their 13F filing. This means in the past two months they've added an additional 259,463 shares, a 9% increase. We will be covering Bridger's entire long US equity portfolio in our hedge fund portfolio tracking series so stay tuned.

Taken from Google Finance, Cardiome Pharma is "a life sciences company focused on developing drugs to treat or prevent cardiovascular diseases. The Company’s drug development efforts are focused on the treatment of atrial arrhythmias, a Phase I program for GED-aPC, an engineered analog of human activated protein C, and a pre-clinical program directed at improving cardiovascular function. As of December 31, 2008, Cardiome had five wholly owned subsidiaries: Rhythm-Search Developments Ltd., Cardiome, Inc., Artesian, Cardiome Development AG, and Cardiome UK Limited"

Bill Ackman & Pershing Square Enter Nestle (Investor Letter)

If you haven't seen it already, here's the latest investor letter out of Bill Ackman's hedge fund Pershing Square Capital Management courtesy of Dealbook. In it, we learn that Pershing has started a new position in Nestle as they previously did not own it. They think the company will boost margins going forward and has possible catalysts ahead. This all comes in addition to Pershing's recent entrance into Landry's Restaurants (LNY). (For the rest of Pershing's positions, we covered their portfolio earlier as well).

Arguably, the most important part of Ackman's investor letter is the section on General Growth Properties. Since it is no longer a reportable security for SEC filing purposes, it did not appear on Pershing Square's 13F filing. However, they still own unsecured debt and are also one of the largest equity holders in the name. Ackman overall provides very positive commentary and his position on the board of GGWPQ means he has been very much in the loop regarding all the bankruptcy emergence activity.

Ackman writes, "Once GGP has extended the substantial majority of its secured debts, the company will be well positioned to emerge from bankruptcy as an independent company. Alternatively, it might be sold to a strategic buyer or a private equity firm, or a U.S., foreign or other investment consortium, if a sale would achieve a higher value for GGP stakeholders. Despite this dynamic, we believe the stock trades at a substantially lower valuation than Simon Property Group because many market participants and other analysts have incorrectly assumed that GGP's unsecured creditors will meaningfully dilute shareholders' ability to achieve a substantial recovery ... We expect that GGP will be the second or third largest REIT by market cap once it emerges from bankruptcy and will therefore be a must-own company for all of the various REIT funds and index portfolios."

Pershing was up 12% for the third quarter of 2009 and is now up 24% as of the end of September. Embedded below is the entire investor letter from Bill Ackman's hedge fund firm Pershing Square Capital Management. Email readers you have to come to the blog to view the document:

As always, a nice in-depth look at the latest portfolio developments from Ackman's hedge fund and close followers of the General Growth Properties situation will be glad to see their positive comments on the ongoing situation. While Ackman is very upbeat overall, he does mention that there are still risks involved (obviously).

One last thing caught our eye in their investor letter and it pertains to their exposure levels. We found it worth pointing out that Pershing Square listed their long exposure at 93% and short exposure at 9%. While they typically have high net long exposure, we still found it interesting that they did not include credit default swaps (CDS) in their short exposure figures. As we've mentioned in our profile on Ackman & Pershing, they typically like to put on their short positions via CDS and their omission of CDS from their exposure levels throws us for a bit of a loop. In the letter, Ackman cites improving credit markets as a reason for CDS being less attractive and that they've seen a "substantial reduction in (their) CDS notional exposure." However, he also makes special note that this is not a macro bet and this is just how things have played out currently.

For more on Ackman's hedge fund Pershing Square, you can read up on how they've boosted their stake in McDonald's (MCD), you can check out their presentation on Corrections Corp of America (CXW), as well as their case for a short of Realty Income (O).

Whitney Tilson's T2 Partners Reveals Some Short Positions

The latest investor letter out of Whitney Tilson's hedge fund T2 Partners gives us a nice in-depth look at their portfolio. In particular, we're interested to learn of some of their short positions because let's face it, this kind of information is often scarce in hedge fund land. In their letter, we see that T2 Partners has been short Herbalife, InterOil, Regions Financial, VistaPrint, PMI, Radian, MBIA, and Palm. They also note that as the market has headed higher practically all year, they've begun to trim their longs and expand their short book. So, those of you looking for some possible short candidates might examine those listed above to do some due diligence on. And, for more thoughts from Tilson and company, we've posted up their October letter and their thoughts from the Value Investing Congress as well.

Here's the November commentary from Whitney Tilson's hedge fund T2 Partners courtesy of the great folks over at MyInvestingNotebook:

"December 2, 2009

Dear Partner,

Our fund declined 1.4% gross and 1.2% net in November vs. 6.0% for the S&P 500, 6.9% for the Dow and 4.9% for the Nasdaq. Year to date, our fund is up 31.0% gross and 24.8% net vs. 24.1% for the S&P 500, 21.5% for the Dow and 37.0% for the Nasdaq. If the year ended with these numbers, it would be our best year ever and nearly all of our investors would earn 30.0% net, reflecting the benefit of the high-water mark.

We made money during the month on the long side, led by General Growth Properties (up 59.8%), American Express (20.1%), Huntsman (19.7%), Pfizer (6.7%) and Microsoft (6.1%), offset by Borders Group (-27.8%), dELiA*s (-22.2%), Helix Energy (-14.3%), and Iridium stock (-8.0%) and warrants (-4.9%).

Not surprisingly in such a strong month for the markets, our short book dampened our returns, thanks mainly to Herbalife (up 24.6%), InterOil (22.6%), Regions Financial (21.1%) and VistaPrint (11.7%). Partially offsetting these positions were PMI (-24.0%), Radian (-22.8%), MBIA (-14.8%) and Palm (-6.0%).

In his 2004 letter to Berkshire Hathaway shareholders, Warren Buffett wrote that investors “should try to be fearful when others are greedy and greedy when others are fearful.” We believe in this maxim and have had ample opportunity to implement it over the past year: we started getting greedy a year ago after Lehman’s collapse and the resulting market panic, buying ever-cheaper stocks all the way down to the market’s final capitulation in early March. Since th then, during one of the biggest, fastest rallies in history (the S&P 500 rose 64.6% from March 9 through the end of November), we have steadily become less greedy and more fearful by doing three things: trimming our longs, adding to our shorts, and repositioning our long portfolio toward more defensive, big-cap stocks such as Berkshire Hathaway, Microsoft and Pfizer.

Today, our net long position is down to approximately 20%, the lowest it has ever been, reflecting both our top-down macro concerns (outlined in our August and September letters) as well as our core bottoms-up analysis, which is uncovering many great shorts and a paucity of attractive longs. That said, we like our long positions a great deal and are still net long, so we’re certainly not perma-bears and aren’t predicting Armageddon.

Speaking of our long positions, we wanted to share brief thoughts on a few of them.

General Growth Properties
The stock soared during the month for two reasons: first, rival mall giant Simon Properties Group announced that it had hired both Lazard and Wachtell, Lipton to “help it formulate a strategy for possibly bidding for all or part” of General Growth (see article in Appendix A). Then two days later, General Growth announced that (quoting from the article attached in Appendix B): had reached a deal with lenders and servicers to restructure $8.9 billion of mortgages on 77 malls in hopes of removing them from bankruptcy by year end.” The pact is the first step for General Growth in extracting from bankruptcy court the 166 malls it put under Chapter 11 bankruptcy protection in April. The company still must strike similar pacts with lenders on another $6 billion of secured debt as well as $6.5 billion of unsecured debt.

"This moves up the entire timetable for getting out of bankruptcy," said Kevin Starke, an analyst with CRT Group LLC, which monitors distressed securities. "These guys could be out [in entirety] in the April-June timeframe."

General Growth appears to have won on some key points in the restructuring, of which details were outlined in a bankruptcy court hearing in New York.

December is off to a good start for General Growth, as it announced this morning (see Appendix C) that 92 of its properties, representing $9.7 billion of restructured debt (up from $8.9 billion less than two weeks ago), will exit bankruptcy by the end of the year, a remarkably quick timetable. This announcement also puts pressure on the remaining debtholders to accept similar terms.

When we first purchased the stock earlier this year at under $1/share, we thought there was upside potential of $20-$30, but we kept it a small position, reflecting the high risk that the equity could be worthless. Today, the best-case scenario appears to be playing out and the risk of a catastrophic outcome for the equity is far lower, but the stock price doesn’t reflect all of the positive developments in our opinion, so this is now among our largest positions

dELiA*s recently reported a mildly disappointing third quarter and gave conservative guidance for the critical fourth quarter, which triggered a sell-off of the stock. Since the company doesn’t communicate with Wall Street as frequently as most retailers and doesn’t report monthly comps, the stock is often volatile around its earnings releases.

Netting out the projected year-end cash balance of $1.50 per share, the core retail business is today essentially being valued at zero. We believe that dELiA*s business is worth at least $3 per share (plus an additional $1.50/share in cash), and would expect this value to be recognized over the next year as the company turns the corner to profitability. In the meantime, we are comfortable that the cash balance makes a further stock price decline unlikely. In addition, based on recent transactions, we have little doubt that the company could be easily sold for at least double its current share price of $1.68, but we actually hope the company remains independent because we believe there’s far more upside if management executes on its growth plan.

While dELiA*s has not yet been a profitable investment, it represents today exactly what we like in a stock: a low probability of permanent loss of capital and a good chance of making multiples of our money.

Borders Group
Speaking of sub-$100 million market cap retailers, we have recently been buying Borders Group, a stock we’ve had a very up and down experience with over the years. Initially it was a disaster, falling well below $1 earlier this year, at which point we bought quite a bit more and were quickly rewarded, as it rose dramatically in less than five months to $4.34. We sold most of our position, but are now getting another bite at this apple as the stock has tumbled anew (it closed yesterday at $1.29).

This is a tough business and the odds appear stacked against Borders in light of threats from Barnes & Noble,, and discounters like Wal-Mart. That said, we like the current management and believe that Borders can succeed.

At today’s price, Borders has a market cap of a mere $77 million, a tiny fraction of annual revenues, which exceed $3 billion. We view this stock as a mispriced option: the company could go bankrupt and wipe out our investment, but if it merely survives – which is likely, we believe – the stock should rise many-fold.

Iridium reported a strong quarter recently, but this wasn’t enough to offset the poor trading conditions that the SPAC structure created nor mitigate concerns about the risks associated with funding the new generation of satellites, Iridium Next. Based on conversations with management and the primary sponsor, Greenhill, we are confident that the company will be able to access the capital necessary for Iridium Next via existing cash on the balance sheet, operating cash flow, shared payload fees, vendor financing, and external debt and/or equity.

We continue to believe that this is an excellent company and that the stock is extremely undervalued. Comparable businesses are trading at 10x EV/EBITDA, while Iridium, which is growing significantly faster than and taking share from its competitors, trades at under 5x EBITDA. Finally, we are encouraged by the recent large insider purchases by both the CEO and Chairman of the company.

Berkshire Hathaway
In last month’s letter, we wrote that “Berkshire Hathaway reports earnings on Friday and we are confident that it will be a blowout quarter.” Sure enough, Berkshire reported strong operating earnings and an unprecedented 10.1% increase in book value during the quarter.
The other big news during the month was the acquisition of Burlington Northern Santa Fe, which is by far Buffett’s biggest investment ever. At $100/share, equal to 19x trailing earnings, he paid a full price for the 77.4% of the company that Berkshire didn’t already own, so this was a good deal for BNI shareholders – but it’s a good deal for Berkshire shareholders as well.
Paying a full price for this business makes no sense for most buyers, but we think the acquisition makes sense for Berkshire – and only for Berkshire – because of the company’s low cost of capital, in the form of float ($62 billion worth as of the end of Q3) from Berkshire’s vast insurance operations.

The correct way to think about this acquisition, in our opinion, is that Buffett bought a business with utility-like characteristics. Burlington Northern generates consistently decent (but not spectacular) mid-teens returns on equity and will likely grow a bit more than the overall economy, basically forever. There will be no new competitors and this business won’t go offshore. If anything, as energy prices rise over time, railroads will become more competitively advantaged vs. trucking.

Our view of Berkshire’s intrinsic value is unchanged: we continue to believe it’s worth approximately $135,000/share, a 34% premium to the current price of $100,600."

So, interesting thoughts from hedge fund T2 as they clearly have upped their cautionary stance to the markets. The fact that their net long position is at the lowest it has *ever* been stuck out to us. While many fund managers have been skeptical of the monster rally continuing, Tilson has definitely joined the ranks as they believe fundamental problems still remain unsolved. To see more thoughts from hedge fund T2 Partners, you can read their October letter to investors and their remarks from the Value Investing Congress.