Saturday, April 3, 2010

What We're Reading ~ 4/3/10

Steven Drobny's new hedge fund book: The Invisible Hands [Steven Drobny]

If you haven't read his first book, definitely check out his interviews with top hedge fund traders: Inside the House of Money [Steven Drobny]

The wisdom of short selling [NYTimes]

And on that note, many hedge funds have recommended reading The Art of Short Selling [Kathryn Staley]

Morgan Stanley thinks the rally is about to end [Pragmatic Capitalist]

Don't focus too much on the oil to natural gas ratio [Reformed Broker]

Analyzing insurance stocks: the income statement [StreetCapitalist]

The CRE time bomb [Humble Student of the Markets]

Jim Chanos is wrong on China [Eric Jackson, The Street]

We've previously posted up Chanos' thoughts on China [MarketFolly]

Why wine isn't an investment [Felix Salmon] (A long time ago we posted about a wine hedge fund.)

A sports betting hedge fund starts up [FINalternatives]

Inside the personal life of Steven Cohen [NYMag]

Americans back to the overconsumption norm [CreditWritedowns]

Ospraie's Dwight Anderson lures back commodities investors [Reuters]

And a past look at how Anderson got broadsided in 2008 [Fortune]

Is Paulson & Co now too big to succeed? [BusinessWeek]

Fannie/Freddie may fill Fed's mortgage void [Reuters]

Hedge fund manager pay roared back last year [NYTimes]

What March Madness teaches us about survivorship bias [AllAboutAlpha]

Thursday, April 1, 2010

MarketClub Free Trial for 2 Weeks

Occasionally, we'll post up insightful technical analysis from the guys over at MarketClub. They've just informed us that they're giving away their premium content for free for a bit, so we thought we would share. So, here's a free 2 week trial to MarketClub for those interested.

Through the freebies you'll have access to their trade school, chart analysis, smart scan and data center. It's a great way to refine your technical analysis skills for those interested. Take advantage of the free trial as we're not sure how long it will last.

Cazenove's Listed Hedge Funds Dispatch

Expanding further upon 'document dissemination' day here at Market Folly, we'll turn next to JPMorgan & Cazenove's listed hedge funds dispatch report. Earlier today we've already posted up Credit Suisse's monthly hedge fund report as well as QB Asset Management's shadow price of gold report. The below document was produced by JPMorgan Cazenove in London and hasn't been produced in the United States, so this particular piece might be of more relevance to our UK based readers.

An interesting takeaway from their research is that in 2009, out of all the publicly listed hedge funds in the UK, Dan Loeb's Third Point was the best performing fund. For 2009, Third Point's listed product was up 41% compared to a gain of 20% for the HFRI Fund Weighted Composite.

We've of course covered Third Point's portfolio in-depth and just recently posted up one of their recent portfolio maneuvers. (Additionally, we've also posted up Third Point's commentary for those interested as well). Other solid performers in 2009 included Cayenne as well as Boussard & Gavaudan. Cazenove's research is an intriguing look at the listed hedge fund space with some comprehensive data.

Embedded below is the full report:

You can directly download the .pdf here.

Overall, Cazenove concluded that there are plenty of quality names in the listed hedge fund space and that these solid names will be "the bedrock for the sector's survival and growth." Be sure to check out all the rest of the hedge fund research we've been posting up recently.

Credit Suisse Monthly Hedge Fund Commentary

Continuing document dissemination day here at Market Folly, we wanted to present you with Credit Suisse's monthly hedge fund commentary. Though the report is from February, it still does an excellent job of framing how hedge funds have positioned themselves from the year and where their gains or losses have been coming from. Additionally, you'll get a look at Credit Suisse's Tremont hedge fund index and its performance. This research joins the commentary we posted up yesterday where we saw hedgies were re-shorting the euro and buying equities.

In the report, they present findings relating to various fund strategies and we just wanted to quickly touch on some highlights. One of the interesting things we took away from their research was their data on managed futures funds. They note that from the period of 2007 to 2009, managed futures correlation to equities dropped. As such, these funds saw positive performance in the crisis but negative performance during the great equities rally in 2009.

Turning to event driven funds, they found that many managers in this arena felt that 2010 would be much more conducive to deal-making and as such would provide them with ample portfolio opportunity. Dan Loeb of hedge fund Third Point LLC certainly agrees with this and made special note of event driven opportunities in his recent investor letter. In regards to global macro funds, Credit Suisse actually found that many funds held fewer strategic positions as there was a range of uncertainty surrounding governments and central banks toward the beginning of the year. We've covered the thoughts of a few global macro funds on the site including Prologue Capital's recent commentary and some past thoughts from Woodbine Capital where they thought that the most important macro issue was global rebalancing.

Overall, the report is an interesting glimpse at how various fund strategies have been positioned in the first quarter of the year. Embedded below is monthly research from Credit Suisse and their Tremont hedge fund index:

You can directly download a .pdf here.

For more hedge fund research that we've covered, check out Bank of America Merrill Lynch's recent hedge fund trend report as well as Goldman Sachs' list of most important stocks for hedge funds.

The Shadow Gold Price: Research From QB Asset Management

Today is a bit of a 'document dissemination' day here at Market Folly and we wanted to highlight two pieces from Lee Quaintance and Paul Brodsky's QB Asset Management regarding gold. Below you'll find Nouriel Roubini's argument, "The New Bubble in the Barbaric Relic that is Gold" as well as QB's counterargument to Roubini's points. But first, we'll begin with QB's stance on the precious metal through their original research.

Their research, entitled "The Shadow Gold Price" focuses on the hotly debated precious metal of ages. The first thing you'll notice about this piece is that it is dated November 2008, right in the heart of the crisis. What's intriguing here is that they take a look at the current monetary system and compare it to one anchored to gold. Elaborating on their research, they then go on to develop the shadow gold price (a hypothetical intrinsic value for money/gold). Lastly, they apply this shadow gold price to the US equities market to establish relative value. In the piece, they also made the case for buying equities "hand over fist" which obviously turned out to be an excellent market call.

Overall, QB concluded that there is extraordinary risk in holding paper money and long term bonds. (We've long noted how many prominent investors have at some point been short long term bonds in one form or another). Additionally, they felt that commodity markets were cheap across the globe in nominal terms back then. While the letter itself is dated, the fundamental research and theoretical framework are still very relevant and worth reading.

Embedded below is QB Asset Management's research, "The Shadow Gold Price":

You can directly download a .pdf here.

Then, turning to more recent research out of QB Asset Management, we see that Lee Quaintance and Paul Brodsky have penned a response to Nouriel Roubini's December 2009 report on "The New Bubble in the Barbaric Relic that is Gold." QB takes issue with Roubini's comments, arguing that "gold's terminal value in this cycle will be multiples higher than current pricing." Below you will find a document that both presents Roubini's argument on gold as well as QB's counter-argument in a fascinating 'back and forth' style debate which we highly recommend reading:

You can directly download this .pdf here.

No matter your viewpoint on this often talked about precious metal, you have to admit that there has been a massive amount of in-depth research and rational arguments made on both sides of the coin (no pun intended) from a fundamental standpoint. If you're looking for even more resources, we've posted up a plethora of gold related hedge fund research and below you'll find the archives:

- Societe Generale's research: gold as an insurance policy (& when to sell it)
- An in-depth look at John Paulson's new gold fund
- The dynamic between gold, the dollar & gold equities
- Global macro hedge fund Woodbine Capital's thoughts on gold
- John Burbank & hedge fund Passport Capital's rationale for owning physical gold

And if technical analysis is more your style, you can head to a recent video analysis of gold here as well.

Hedge Fund Harbinger Capital Consummates Skyterra Communications Merger

Just a few days ago we touched on how Philip Falcone's hedge fund Harbinger Capital Partners announced plans for a 4G wireless network as spectrum is apparently the hottest new asset class out there. They are doing so via their stakes in TerreStar (TSTR) and Skyterra Communications (SKYT) and yesterday after the market close we see that they filed an amended 13D and a Form 4 with the SEC, providing us an update as to what's going on behind the scenes. Simply put, Harbinger acquired 45,147,477 shares of stock and paid $5.00 in cash per share for each totaling $225,737,385. Upon the completion of this transaction, the stock was canceled and ceased to exist (i.e. merger complete). As such, the company is now privately held with no public market for stock.

Before we dive into the legal jargon, we'll just preface this in layman's terms by saying that all you really need to know is that the merger between SKYT and Harbinger was consummated. On March 29th, Harbinger acquired 23,042,077 shares of voting common stock at $5 per share and 22,105,400 non-voting shares at the same price. This transaction was part of Harbinger's acquisition of Skyterra through a merger and all shares of common stock not previously held by Falcone's hedge fund firm were "converted into a right to receive $5.00 in cash, subsequently canceled and ceased to exist." Additionally, all warrants were canceled and ceased to exist as well. So, this appears to be one of the first major steps towards their play on spectrum and make sure you head to their plans for a 4G wireless network.

Other recent activity out of hedge fund Harbinger includes selling some New York Times (NYT) shares and you can view the rest of Falcone's equity portfolio here.

Tom Brown's Second Curve Files Form 4 on Shares of Taylor Capital Group (TAYC)

We just wanted to post up a quick minor portfolio update from Tom Brown's hedge fund Second Curve Capital. In a Form 4 filed with the SEC, we see that they were adding shares of Taylor Capital Group (TAYC). Keep in mind that this transaction represents indirect ownership for Second Curve. As noted on the filing, the nature of this indirect ownership is "By advisory clients of Second Curve Capital, LLC." At any rate, we see they acquired 10,000 shares at a price of $12.46 on March 29th, 2010. After this transaction they now show ownership of 1,330,191 total shares. We recently also posted up some other position updates out of Tom Brown's camp for those interested and you can also view the rest of Second Curve's portfolio here. Brown of course runs a fund focused specifically on the financial services sector.

Taken from Google Finance, Taylor Capital Group "serves as the holding company for Cole Taylor Bank, primarily engaged in commercial banking. The Bank provides a range of products and services primarily to closely-held commercial customers and their owner operators in the Chicago metropolitan area."

Wednesday, March 31, 2010

Hedge Funds Buy Equities, Re-Short the Euro: Trend Report

Bank of America Merrill Lynch recently released the latest iteration of their hedge fund trend report. In it, we see that hedge funds in general were adding to equity positions and selling energy stakes. In last week's hedge fund trend report, we saw that hedgies were covering the euro & buying crude oil. Probably the most notable information this time around is the fact hedge funds reversed course on the euro. BofA notes that, "they resumed shorting the Euro back to the deepest crowded levels in over a decade." So, it appears that last time's euro covering bit was purely profit taking.

Given that we track long/short equity hedge fund portfolios the most, let's check in on what they were up to. Their exposure levels dropped from 37% net long down to 30-32% net long and this is below average levels. In terms of specifics, l/s funds were reducing their growth plays relative to value (i.e. they like value stocks). In recent weeks we had seen them aggressively favor small cap names and that trend reversed course back to neutral. Overall though, they still favored high quality names.

Market Neutral funds, on the other hand, increased exposure and went net long. Bank of America estimates that global macro hedge funds also increased US equity exposure last week. Additionally, they were aggressively buying emerging markets. Embedded below is BofA's latest hedge fund trend monitor report in its entirety:

You can directly download a .pdf here.

For more hedge fund related research from BofA, we recommend checking out their list of most concentrated hedgie positions: the hedge fund generals list.

Falcone's Harbinger Sells New York Times (NYT) Shares

Philip Falcone's hedge fund Harbinger Capital Partners just recently filed an amended 13D and a Form 4 with the SEC in regards to shares of The New York Times (NYT). As per the Form 4, we learn that they sold 1,500,000 shares of NYT on March 26th at a price of $11.20. After the sales, Harbinger is left with 16,886,799 shares remaining. As per the amended 13D, we now see that this totals a 11.68% ownership stake in the company. This is obviously a decrease from the last time when we saw their NYT stake in Harbinger's portfolio. These recent sales come after Falcone's hedge fund reduced their NYT stake back in December and in November as well. So, the selling continues at a very controlled pace and we'll keep our eyes peeled for any future hints of just position size adjusting or a turn in sentiment.

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. While no one can deny the NYT is a tremendous brand and there is an asset there, we've wondered whether or not newspapers are a dying industry. They certainly have some business model problems to address in the near future. While Harbinger has sold shares numerous times, it appears as though they are still confident in the name as they still own a large stake.

Harbinger of course is a multi-billion hedge fund focused on both distressed debt and equity plays. They often take large, concentrated positions in companies and this NYT stake is the perfect example. Other recent news out of the hedge fund includes word that Harbinger plans to build a 4G wireless network. Additionally, last week we found out they had boosted their stake in Sable Mining.

Taken from Google Finance, The New York Times is "a diversified media company that includes newspapers, Internet businesses, investments in paper mills and other investments. The Company is organized in two segments: News Media Group and the About Group." For other investments Falcone's hedge fund has made, you can view the rest of Harbinger's portfolio here.

Carl Icahn Dumps a Ton of Blockbuster (BBI)

Notorious shareholder activist Carl Icahn recently filed a Form 4 with the SEC regarding shares of Blockbuster (BBI). Icahn, through his various investment vehicles, recently dumped a ton of both Class A and Class B shares of Blockbuster. On March 25th he owned 19,905,190 shares and as of March 30th, he now owns only 4,358,223 shares. The majority of sales took place on March 29th and 30th at prices of $0.24 and $0.25 per share. In total, Icahn's various entities sold 14,362,708 and the picture below depicts the breakdown of sales:

(click to enlarge)

So, as you can see, he's unloaded quite a hefty amount of shares here and apparently is moving on. We'll continue to watch to see if he dumps his remaining 4.3 million shares. Other recent activity out of Icahn's camp includes buying more Take Two Interactive (TTWO) and trying to acquire Lions Gate Entertainment (LGF).

Taken from Google Finance, Blockbuster is "operates and franchises entertainment-related stores in the United States and a number of other countries. The Company also operates an online service offering rental and sale of movies delivered by mail and digital delivery through"

For more from everyone's favorite corporate raider, head to Icahn's investor letter as well as the rest of his portfolio.

Dan Loeb's Third Point Reduces a Position

Dan Loeb's hedge fund Third Point LLC has filed an amended 13D with the SEC in regards to shares of Nabi Biopharmaceuticals (NABI). Due to activity on March 29th, Third Point now shows a 12.1% ownership stake in NABI with 5,914,100 shares. This is a decrease in their position as they sold shares on March 24th, 25th, and 29th. When we previously looked at Third Point's portfolio, we noticed that it was their 11th largest US equity position. The bulk of their sale came at a price of $5.75 per share. In total, Third Point sold 975,900 shares of Nabi Biopharmaceuticals and you can see a chart with the breakdown of their exact transactions below:

(click to enlarge)

So for now, they've reduced their position size in this name. To learn how to invest like this hedge fund manager, check out Dan Loeb's recommended reading list. And for more insight we've also posted up Third Point's commentary as well as their performance figures. Lastly, we've also covered other recent portfolio transactions out of Third Point for those interested as well.

Taken from Google Finance, Nabi Biopharmaceuticals is "a biopharmaceutical company focused on the development of products in the areas of nicotine addiction and infectious disease. The Company’s products in development are Nicotine Conjugate Vaccine (NicVAX) and Pentavalent S.aureus Vaccine (PentaStaph)." For more from Dan Loeb's hedge fund, check out Third Point's portfolio.

Gold: Rangebound Before Its Next Big Move?

Adam from MarketClub recently penned an in-depth article with his thoughts on gold. He also put out an accompanying video analysis of gold so you can follow along there. Basically, before gold makes its next large move (in either direction), he argues it needs to consolidate and form an 'energy field.' Click the graphic for his video and then the rest of his thoughts follow below:

MarketClub: "Gold has had some dramatic moves in the last eighteen months and we expect it will have some equally dramatic moves in the future, but not right now. While I recognize that gold is one of the few commodity markets that people are really passionate about, the purpose of this article is not to take sides either with the gold bugs or those who reject the argument that gold is forever. Rather, I want to discuss my interpretation of the markets cycle.

After spot gold made an all-time high against the dollar on December 2 at $1,226.37, gold has been in retreat mode. For the for the past several months gold has been in a broad trading range, seemingly unable to move one way or another. This process has created frustration from bulls and bears alike. Here is the dirty little secret about the gold market... it can be a horrible investment and here's why: Gold first started trading in the 80's while I was on the floor of the Chicago Mercantile Exchange in Chicago as a member of the International Monetary Market, (IMM) which was at that time a division of the CME (now the CME Group). When gold opened up the public clamored to buy into the gold futures market and guess who sold it to them? That's right it was the pros- the guys who made their living trading. As a result, gold hit an all-time high of around $850 an ounce back then and it took almost 25 years for gold to move over that level, at least in dollar terms. I don't know what your timeline is, but 25 to 30 years is an awful long time to get even again.

So what is really happening in this market? Everyone is aware of the problems in Europe with Greece, Portugal and a host of yet to be named countries. We all know that the huge amount of money being printed, coupled with the bank failures abroad contribute to the dollars declining value. These events, in conjunction with the American governments actions, also contribute to the devaluation of the dollar. The government claims that this is beneficial to exports, but the bottom line is that the purchasing power of the American dollar continues to erode in world markets.

Based on the declining value of world currency against gold you might ask- why isn't gold trading at $2,000 or even $3,000 an ounce? What is wrong with this market? This is because a great deal of what goes into the gold market is psychological and reacts to cyclic trends driven by both psychological and economic factors. Here is what I've been able to observe in the last several years in gold and seems to be holding true. It is something that you should pay attention to if you're interested in the next big move in the gold market.

Before gold can move higher it needs to create what I call an "energy field". The most recent energy fields in gold were between May 12, 2006 and September 20, 2007. This 17 month energy field saw gold prices oscillate between a broad trading range bound by $730.08 (upside) and $541.80 (downside). That energy field produced enough power to propel gold to the new high of $1,012.40 on March 17, 2008. This marked the first time gold exceeded, in dollar terms, the highs set in the early 80's mentioned earlier. The energy fields I have observed for gold are taking somewhere between 17 and 18 months to complete. If the energy field holds, then the December 3rd 2009 high of $1,226.37 should remain in place for quite some time. If the same cycle remains true then the recent lows that we witnessed, at $1,050, should also remain intact as they represent the 15 to 16 month cycle low.

With the lows in place the next question becomes when is the next cyclical high in gold? Based on the existing cycle, we can expect the next major gold high in 2011. To summarize: I expect gold to be locked in a broad trading range for the next 12 months bounded by the December 09 highs of 1,226.37 and the lows of $1,050.00. If the gold cycle holds true, we expect that gold tops the $1,226.37 marker by April or May of 2011. On the upside we will also be looking for gold to make a nature cyclic high in October or November of 2011. It's impossible to predict the future with any degree of accuracy; however when we look at the cycles in gold this reads as a pretty good bet. No matter what happens we expect gold will offer some great trading opportunities that investors and traders should be able to take advantage of." You can view the rest of Adam's thoughts in his video on gold here.

While this covers the technical look at gold, keep in mind that we've posted various fundamental research on gold as well, including:

- Societe Generale's research: gold as an insurance policy (& when to sell it)
- An in-depth look at John Paulson's new gold fund
- The dynamic between gold, the dollar & gold equities
- Global macro hedge fund Woodbine Capital's thoughts on gold
- John Burbank & hedge fund Passport Capital's rationale for owning physical gold

Tuesday, March 30, 2010

David Einhorn's Vodafone (VOD) Thesis Coming to Fruition?

In the past we posted up David Einhorn and hedge fund Greenlight Capital's investor letter. In it, we learned that he was bullish on shares of Vodafone (VOD) as it represented one of the larger positions in their portfolio. Greenlight Capital of course has an impressive track record, returning 22% annualized. Einhorn's thesis on Vodafone argues that VOD's most valuable asset is its 45% ownership stake in Verizon Wireless. (Verizon Communications (VZ) owns the other 55%).

Previously, Vodafone had received a dividend from Verizon Wireless. However, they haven't received one in quite some time as Verizon Wireless' cashflow was being used to pay back debt to Verizon Communications. Verizon Wireless is expected to be debt-free by the end of next year and this is where the catalyst component of this investment comes in. Einhorn believes the restoration of this Verizon Wireless dividend or some other transaction is highly likely. And as you'll find out below, this may very well be the case.

Greenlight's average cost of their position was £138 per share. At the time of their purchase, they estimated that VOD was trading at "less than 3x estimated 2010 EBITDA, versus in excess of 5x for the peer group average in Europe." And while they wait for the catalyst to come to fruition, they still capture a nice 6% dividend. Einhorn purchased the regular VOD shares traded on the London Stock Exchange, but US investors can still purchase the ADR shares traded on the Nasdaq (ticker VOD as well).

Vitaliy Katsenelson of Investment Management Associates and ContrarianEdge also previously elaborated on reasons to own Vodafone. In the past he has labeled it a 5.5% inflation protected bond with a free non-expiring call option because of its solid dividend and large potential catalyst. If you pull out VOD's Verizon Wireless stake, he points out that the company is trading at an enterprise value to EBITDA (EV/EBITDA) of 5.5 and a price to free cashflow of 8.2, deeming it cheap on valuation.

Katsenelson also highlights some of Vodafone's other valuable ownership stakes. It owns 3.2% of China Mobile (CHL) and 44% of Societe Francaise du Radiotelephone (SFR), both of which it receives dividends on. Lastly, he points out that VOD's debt is not a problem as it can be paid off with cashflows. Below is Katsenelson's slide outlining the bullish case for Vodafone:

(click to enlarge)

Turning to the catalyst portion of the thesis, let's now focus on the recent article from the FT where we learned that Vodafone will be pressuring Verizon Communications to pay up. The article highlights that there's really three scenarios here that would please Vodafone (VOD) shareholders:

- Verizon Wireless resumes its dividend payments to Vodafone
- Vodafone and Verizon merge
- Vodafone sells its stake in Verizon Wireless

Many will argue that the resumption of dividend payments is the most likely, but event-driven stakeholders wouldn't mind any of the above. After all, we've heard that many hedgies have a long VOD, short VZ trade on.

A potential merger or sale though could prove problematic. As the FT article notes, "The UK group's willingness to countenance an all-share merger with Verizon Communications is partly based on legal advice that any sale of Vodafone's Verizon Wireless stake would attract a large tax liability. However, one person familiar with Vodafone said a merger was not attractive, partly because of a lack of synergies between the US and UK groups."

What's interesting though is that Verizon Communications' finance director John Killian did note that, "we are a long way away from when I really need to seriously think about that particular issue," referring to a potential scenario where they would restore Verizon Wireless' dividend in 2012. So, perhaps this catalyst is further off than people thought.

For now, nothing is decided. While these on and off discussions have seemingly been going on forever, it does appear as if VOD has gained some leverage at the negotiating table as Verizon Communications struggles to compensate for their declining fixed-line phone business. We'll have to see if the ball starts rolling now and if Einhorn's VOD thesis could eventually come to fruition. After all, the article's informant claims that VOD has the upper hand in negotiations. In the mean time, many investors seem content to wait and pocket the dividend.

For more on Greenlight Capital, head to our coverage of the rest of David Einhorn's portfolio as well as their prior investor letter.

Hedge Fund Harbinger Capital Plans 4G Wireless Network

Philip Falcone's hedge fund firm Harbinger Capital Partners recently unveiled quite a plan. They have thrown their hat into the ring of next generation wireless build-out as they've planned a 4G wireless network that will cover the majority of the country by 2015. This announcement comes right after Harbinger received approval from the Federal Communications Commission (FCC) to take control of SkyTerra (SKYT) on March 26th. Falcone will be assembling a network utilizing the LTE (Long Term Evolution) format, a technology that mainstream wireless providers like AT&T and Verizon have already invested heavily in.

In order to do so, Falcone plans to use his satellite investments, SkyTerra (SKYT) and TerreStar (TSTR). Readers of MarketFolly will already know that we've covered Harbinger's investment in these two companies for quite some time. We first mentioned Harbinger's TerreStar stake back in October of 2008. We then also posted about Harbinger's SkyTerra stake in February of 2009 and noted how they were ramping up their position in TerreStar in April of 2009. So, this is something that has been in the works for quite some time and Falcone seems confident that LTE is the way of the future.

Others might be intrigued to find that Harbinger also started a sizable position in Sprint Nextel (S) in the fourth quarter of 2009. Wireless connoisseurs will already know that both Sprint and Clearwire have been working on a high-speed network of their own, WiMax. So, regardless of which format wins out (WiMax versus LTE), Falcone has bets in both wireless 4G arenas. It does seem, however, that his larger bet is on LTE. You can view the rest of Harbinger's portfolio here.

For the specifics of Harbinger's LTE plan, we defer to GigaOm's summary as well as analyst Tim Farrar's take, both of which we highly recommend you read.

After all this, one thing's for certain: hedge funds love the play on wireless spectrum, data & smartphones. It's quite clear they see a bright and profitable future there. What's most interesting is the dynamic of how they each are making slightly different bets. As evidenced above, Harbinger is playing spectrum. We've also seen plenty of managers invest in the smartphone theme via Apple (AAPL) and a plethora of hedgies invest in wireless tower stocks such as American Tower (AMT), Crown Castle (CCI), and SBA Communications (SBAC). Many hedge funds, like Matt Iorio's White Elm Capital, have invested in both. We also make note that many of those stocks grace Goldman Sachs' VIP list of the most important stocks to hedge funds. While the investments vary, the theme is consistent: increased demand for wireless transmission of information, be it voice, data, or both.

Roberto Mignone & Bridger Management Disclose New Position

Roberto Mignone's hedge fund firm Bridger Management has filed a 13G with the SEC in regards to shares of Centene Corporation (CNC). The filing was made due to activity on March 18th, 2010 and they now disclose a 5.4% ownership stake in Centene with 2,784,800 shares. This is a brand new position for them as they previously did not own shares when we looked at Bridger's portfolio that reflected their positions as of December 31st, 2009. So, they've assembled their new holding over the course of the past three months.

Bridger is a $2.8 billion long/short equity hedge fund currently closed to new investors and are known for their sleuthing prowess on the short side of the portfolio. Prior to founding Bridger, Mignone co-founded Blue Ridge Capital with John Griffin in 1996, another hedge fund we track here on the site. For investment insight from Roberto Mignone, we've previously detailed some of his thoughts for 2010 from a hedge fund panel. Additionally, we've previously covered Bridger's new position in Casella Waste Systems (CWST) as well.

Taken from Google Finance, Centene is "a multi-line healthcare company. The Company operates in two business segments: Medicaid Managed Care and Specialty Services. The Medicaid Managed Care segment provides Medicaid and Medicaid-related health plan coverage to individuals through government subsidized programs. The Specialty Services segment provides specialty services, including behavioral health, individual health insurance, life and health management, long-term care programs, managed vision, telehealth services, and pharmacy benefits management."

As you can see, this company falls right in Bridger's health niche. For more on Mignone's hedge fund, head to our coverage of Bridger Management's portfolio.

Monday, March 29, 2010

Michael Vranos & Ellington Management Bullish On Housing

Earlier this morning, we posted up hedge fund Ellington Management's 2010 equity outlook. Now that you've had a chance to digest their overall stance on things, we wanted to shift focus to one of their specific theses. Brace yourself: Ellington Management is bullish on housing (gasp). Now, why should you care? Well, Ellington Management is the hedge fund founded by Michael Vranos that primarily focuses on mortgage backed securities (MBS). Not to mention, Vranos was previously head of MBS trading at Kidder Peabody. So, they're pretty experienced in the arenas of MBS & housing and we thought we'd use this post to outline their views with an attached slide-deck at the bottom.

Firstly, a broad overview. Focusing specifically on the US, Ellington believes that a 'new normal' or 'jobless recovery' are unlikely. They see excess growth for sectors with cyclical or secular tailwinds (housing, smartphones, infrastructure) and in-line growth from the consumer sector with high-end consumer names outperforming low-end consumer names. That helps frame their overall stance, but let's dig into the specifics.

Vranos' hedge fund argues that foreclosures are only ownership transitions and that they do not create new houses. As such, they believe that these foreclosures (and shadow inventories) are already baked into the various numbers you see floating around. Additionally, they argue that the supply/demand dynamic in housing is dependent on the number of houses versus the number of households (instead of who owns the houses). This is contrary to our assertion in December of '09 that housing inventories were still too high. Ellington then goes on to graph out the absorption of foreclosures and argues that demand for said foreclosures is likely to grow.

So, their overall conclusion is that inventories are declining despite foreclosure activity. Total inventories declined 13% in 2009. Ellington argues that in order for inventories to increase further from here, you have to see an increase in foreclosures. But they then point out that "foreclosures flat with the prior year do not lead to an increase in inventories." Ellington actually expects distressed sales to increase in 2010 by 500,000 to 1 million units and thinks foreclosures are likely to peak in 2010, a move that would mean a further decrease in inventories in 2011. At the same time, they point out that distressed sales will continue for the next 3 to 4 years as various borrows continue to default. There's no denying we're not out of the woods yet, but they see encouraging signs in the sector.

Their main argument here is that housing inventories are declining despite foreclosure activity. Overall, here's the summary of their stance in an embedded slideshow. RSS & Email readers will need to come to the site in order to view it:

So, definitely an intriguing position. But then again, we can't say that we're surprised. In Ellington's 2010 equity outlook we noted that they seem to be contrarian in their approach as they prowl for crowded trades just begging to unwind. Throughout 2007 and 2008, housing was the mother of all shorts. While many argue that there is still more downside to come, Ellington has taken a different stance. Fellow hedgie Dan Loeb and his Third Point share this constructive approach (at least to some extent) as they have been net long mortgage backed securities. So, only time will tell what truly happens, but an interesting argument nonetheless.

Hedge Fund Ellington Management's Equity Outlook 2010

Hedge fund Ellington Management recently delivered their 2010 equities outlook and we wanted to touch on some of the talking points from their presentation. But first, some background. Ellington Management Group is a hedge fund founded by Michael Vranos in 1994 that specializes in mortgage backed securities (MBS) and equities. Before founding Ellington, Vranos was head of MBS trading for Kidder Peabody. In a separate post today we'll also cover Ellington's bullishness on housing.

To frame their portfolio strategy, Ellington first starts with a recap of their previous outlook where they expect that the US economy will significantly outperform. They see domestic US assets outperforming and international stocks underperforming. Also, they believe the 'short the US dollar' trade has been wildly crowded and could potentially see a massive unwind. The following joins our ever growing compendium of hedge fund investor letters and attached at the bottom of this post is an accompanying slide-deck.

What was interesting to us is the fact that they actively check 13F filings to see what trades other funds have on. While undoubtedly many funds do this, it was cool to see them reference this candidly in a presentation and confirms that despite the timelag from the filings, the information can prove to be resourceful. We enjoyed this because, of course, a large part of Market Folly's existence stems from our coverage of hedge fund 13F filings to get a glimpse into their portfolios.

Back to Ellington's notion of a crowded trade that they originally outlined in December '09, we've already seen signs of a stronger dollar throughout 2010 so they've been correct there. This brings us to their other fundamental views where they believe that the US should outperform all other European nations and that this viewpoint does not rely on crisis in the troubled countries such as Greece, Spain, Portugal, etc. Possibly their most intriguing point was their observation that, "Productivity differentials between US and Europe are a secular not a cyclical trend." And additionally, "Correlations between US$ and risk asset markets are less negative, but still significant. Crowded trade likely partially, but not fully unwound."

As such, Ellington believes that US multinationals will face currency headwinds in the second half of 2010, as well as pressure from Obama's tax proposals. This point is intriguing because many other hedge funds have argued the bullish case for US multinationals as they are undervalued, often have solid dividends, and their multinational exposure will help you hedge anticipatory inflation. Ellington also believes that the risk of a short-term market correction remains higher than normal. Just last week we highlighted how Jim Rogers was starting short positions and noted some other contrarian indicators as well.

Turning to commodities and emerging markets, it was good to see a hedge fund arguing that gold has long-term bearish fundamentals. After all, we've seemingly been inundated with a wave of bullish sentiment toward gold on the site. You can head to our post on gold as an insurance policy to see all the various hedge funds that are bullish on gold. Ellington believes that the 'doomsday trade' can help gold in the short-term (i.e. sovereign crisis) but point out that it is one of the most crowded trades out there. If you hadn't noticed yet, Ellington likes to go against the grain here as they've identified multiple crowded trades as possible plays for explosive unwinds.

Focusing specifically on the US, Ellington believes that a new normal or jobless recovery are unlikely. They see excess growth for sectors with cyclical or secular tailwinds (housing, smartphones, infrastructure) and in-line growth from the consumer sector with high-end consumer names outperforming low-end consumer names.

Ellington also outlined a few sectors that they believe will lag due to structural overcapacity: commercial real estate and traditional fixed income investment. The commercial real estate mention caught our eye because literally tons of hedge funds have tried to short CRE companies to no avail. Even some of the most prominent managers out there got burned by commercial real estate shorts in 2009. No one will deny there is a ton of empty commercial space going un-leased. The problem is, REITs keep rallying right in everyone's faces and hedgies have had a tough time executing a profitable trade that capitalizes on the struggles in the CRE sector.

They then move on to outline their portfolio strategy which includes a focus on stockpicking, a low correlation to the indices, and an opportunistic increase in exposure at the beginning of the year. Here are Ellington's thoughts in a slide-deck. RSS & Email readers will need to come to the site in order to view it:

So, a different (and potentially highly profitable) approach from Michael Vranos' hedge fund. This is the first time we've really looked at them in-depth and plan to track them in the future. It's refreshing to see a 'road less traveled' approach as often times you'll see hedge funds fall victim to groupthink. This type of action often results in lists like the most popular stocks held by hedge funds and the hedge fund generals index.

For 2009, Ellington Equity Investment Partners was up 21.9% gross and 16.4% net of fees. Later this morning we outlined Ellington's bullish stance on housing in a separate post (yes, you read that correctly: bullish on housing). And as always, head to our posts on hedge fund market commentaries for more insight from prominent investment managers.

Hedge Fund Prologue Capital: Bullish on Canada, Sweden & Switzerland (Investor Letter)

Last month, we detailed Prologue Capital's commentary where they noted that the US recovery was playing out. We're now back with the hedge fund's March 2010 letter and we find that they still anticipate bullish news as the US cycle continues to progress. For 2008, Prologue finished up 18.86% and for 2009 they were up 12.41%. Year-to-date for 2010, they were up 1.64% and currently have around $990 million in assets under management. Head to our post on hedge fund performance numbers to see how they stack up against other hedgies.

One of the main things we took away from Prologue's commentary was their conclusion that US fixed income presents near-term downside risk. For this they cite a weak seasonal period and the conclusion of the Fed's purchases of mortgage backed securities. At the same time, Prologue is less worried about inflation as it decelerates. Later in the letter, Prologue also mentions that, "Our view of falling inflation is one reason why we still expect the Fed to increase rates later than market pricing currently suggest." They also note that their concerns about upside risk to inflation in the UK have been mitigated by recent data.

Overall though, Prologue is increasingly positive on "smaller open economies with healthy fiscal balances and functioning monetary transmission mechanisms." They see policy tightening coming in Canada, Switzerland and Sweden and think the currencies of those nations are likely to appreciate. Some of Prologue's strategies now include:

- Short duration in the US
- Short the Euro and the Yen, long the Renminbi
- Flatteners in Canada, Australia and Sweden

Embedded below is the full commentary from Prologue's Chief Economist Tomas Jelf:

You can directly download a .pdf here.

Always insightful stuff from Prologue as we get a glimpse into their strategic macro mind. For more insight from this fund, head to our previous coverage of Prologue Capital's commentaries. And for great market insight from various other hedge funds, head to our ever-growing collection of various hedge fund letters.

A Look at Forex Hedge Funds

Liquidity Continues to Attract More Investors to Forex Hedge Funds

While our focus at Market Folly is typically on long/short equity hedge funds, we thought we'd mix it up today and look at an ever-growing segment of the industry. Forex trading is a twenty four hour market that has an enormous amount of the flexibility and liquidity incorporated into its DNA. Forex hedge funds continue to attract investors who want to expand their portfolios, increase leverage, and have better control over risk management. There are different strategies and forex hedge funds can be designed differently, but there is a basic structure that they all adhere to. Some investors enjoy the challenge of only trading the major currencies, while others want to delve into the somewhat uncharted worlds of emerging economies and expanding nations. Other investors like the decentralization that different forex hedge funds offer, as well as the monthly liquidity.

There are several types of forex hedge funds. A Spot Forex hedge fund is not regulated by the SEC or the CFTC, and it offers investors a two day transaction time. A Forward hedge fund is a fund where money is not traded until the specified future date has passed. Another popular forex hedge fund is the Swap Forex fund. Swap fund transactions are done between two parties that agree to trade two currencies with each other for a specific period of time. These currency transactions are not traded through an exchange, and standardized contracts are not used. Another basic forex hedge fund concept is the carry trade, which is one of the oldest strategies in finance. Carry trades occur when an investor borrows money in a currency with low interest rates, and invests it in another currency with high interest rates. Currency brokers realize that past trading patterns show that higher-yielding currencies maintain their exchange rate against lower-yielding currencies, and may even appreciate slightly, which allows the broker to pocket the difference in yields or what is known as the “carry.”

Opportunities in Forex Hedge Funds Strategies?

On March 24, 2010 John Taylor, the chairman of the world largest currency hedge fund FX Concepts LLC, dropped a hint on Bloomberg Television about the future of the Euro’s value against other currencies. It’s no secret that Greece is on the steps of bankruptcy and Portugal is approaching a similar fate. Germany and France's reaction to Greece’s financial debacle has been slow; Germany’s Chancellor said any aid would require help from the International Monetary Fund. The Chairman of the Monetary Fund said that seemed unlikely, so that news put a confidence dent in the European Union, which resulted in the Euro hitting a ten month low of $1.33 against the dollar on March 24th.

The interesting point that Taylor made was that he expected the Euro to fall to $1.20 by August 2010, and the Euro will be the dollar’s weakest counterpart over the next three to six months. Taylor, who manages over nine billion dollars in the FX Concepts Hedge Fund, also noted that some countries in the Eurozone may even be expelled from the currency union in order to bring some sense of stability to the Euro. The EUR/USD trading pair offers forex hedge fund investors some immediate profits if Taylor’s predictions materialize. What's interesting is that while he has many months for this call to play out, we recently saw evidence of hedge funds covering the euro.

The dollar continues to gain strength against the Yen, the British Pound, and the Euro. If that trend continues, forex hedge fund investors can enjoy the benefits of a stronger dollar unless the US economy experiences a set back in terms of increasing unemployment, uncontrolled inflation, or further banking and housing issues. You can also check out a technical analysis video of the dollar here. One of the other opportunities that certain hedge funds are taking advantage of is the appreciation of Asian currency against other currencies. Asia is coming out of the recession faster than other parts of the world, and that fact prompted Taylor to promote selling Euros, and buying Asian currency over the next twelve to eighteen months. This is contrary to what we saw recently as legendary investor Jim Rogers was long the euro.

Other Forex Hedge Fund Alternatives

In the future, we'll look into highlighting some of the prominent forex hedge fund managers. But in the mean time, there are several forex investment vehicles that have attracted investors' attention thanks to their innovative currency hedge fund replication strategies. One interesting forex alternative vehicle is the PowerShares DB G10 Currency Harvest (DVB). This fund uses a quantitative strategy based on academic research which builds a long-short portfolio and uses the carry trade as part of a long term portfolio. Another fund is the iPath Optimized Currency Carry ETN (ICI) backed by Barclays that only invests in G10 currencies. That strategy kept it from losing large amounts in 2008. However, the returns in 2009 were not as great as other forex hedge funds replicators that used other strategies. Another alternative forex fund for investors looking for forex exposure is the commodity managed future fund ELEMENTS S&P CTI ETN (LSC). That fund uses a long-short type momentum strategy and profits from macroeconomic trends but invests across the commodities spectrum and is not limited to just forex like the other funds mentioned.

Keep in mind that two of the funds listed above are exchange traded notes (ETN's) and as such bear counter-party risk. We've touched on the comparison between ETNs and ETFs in the past using oil funds as an example for those interested.

The recent wave of hedge fund replication products has been intriguing and we've criticized hedge fund ETFs in the past. We've also examined mutual funds using hedge fund strategies as well. Those products leave something to be desired and that is a whole 'nother topic for discussion. Only time will tell if the currency funds above will fall under the same category. In mentioning those funds above we just wanted to highlight the various risks associated with them. And as always, this is not an investment recommendation by any means.

That wraps up a brief look at forex hedge funds. This is divergent from our normal coverage as we typically focus on long/short equity hedge funds but we wanted to try and spice things up per some readers' requests. For more on hedge fund forex exposure, head to our recent post that actually showed hedge funds were covering the euro. And for more of our coverage of global macro hedge funds, stay tuned for Prologue Capital's recent commentary that we'll post later this morning.

Technical Look at Nike (NKE) & the US Dollar

Adam over at Marketclub recently put out a technical analysis video on Nike (NKE) and he notes an interesting pattern. NKE recently broke out of a trading range and 'energy field' as he calls it. Nike consolidated in early 2009 and formed almost a reverse head and shoulders that helped propel it to new highs recently. Adam points out that the stock should technically have a price target of $90 now based on its move. With Nike currently trading in the mid $70's, that's some impressive upside.

In the video, he thinks shares have compelling risk reward currently as he outlines $72 as a nice level for your stops. If it falls below that level, exit and look for a better opportunity. We'd actually go a step further and put stops right below the gap at $70 as gaps often seem to fill on charts. So, it would make sense for NKE to consolidate back down to that level before resuming its trend higher. You can watch the video here.

Next, Adam examined the US Dollar index and wondered if it is going higher. In his US dollar video analysis, he notes that the dollar has been heading higher overall since 2010 began. He also draws out the pattern of a stair-stepping move where the dollar is exuding cyclical action. Applying that pattern to current dollar trading action, Adam hypothesizes that the dollar has an $83.90 target price, implying further upside to come. He notes that all of his signals are currently bullish (MACD, trade triangles, trend, etc) and to look for the dollar index to hit that price target relatively soon. You can watch the video by clicking the chart below: