Friday, May 7, 2010

Dan Loeb's Third Point: Latest Exposure Levels & Portfolio Breakdown

Dan Loeb's hedge fund firm Third Point LLC has just recently disclosed their Offshore Fund's performance and we see that they were up 3.4% for the month of April and were up 19.2% for the year compared to the S&P 500 which was only up 7.1% for 2010 at the end of the month. Loeb's performance really speaks for itself as the Offshore Fund's annualized return is now 18.6% versus 5.2% for the S&P with a Sharpe Ratio of 1.31, a correlation to the S&P of only 0.39 and cumulative performance of 892%. We'll get into the latest portfolio metrics below, but if you wanted market commentary from Loeb, check out Third Point's investor letter.

In the latest portfolio breakdown, we get a glimpse as to Third Point's exposure levels as well. In equities, they were net long consumer names to the tune of 14.3% and net long financials 14.9%. They were net short the market indices & forex at -2.2%. Their total equity exposure levels were 64.5% long and -15.4% short leaving them 49.1% net long. This differs slightly from what we've seen from the majority of hedge funds who've been net long only 25% as they've been selling equities. We'll have to see if Loeb followed suit or not in next month's update.

On the credit side of things, Third Point Offshore was net long distressed to the tune of 30.3% and net long MBS at 18.9%. They have zero short exposure on the credit side of things. We've covered previously that Loeb was net long distressed debt and that trend clearly remains. In 'other' asset classes, Loeb's firm was net long risk arbitrage by 6.3% and net long privates by 5.7%. Lastly, looking at their geographic exposure, we see that Third Point's Offshore Fund is net long the Americas 103%, net long Europe 21% and net short Asia -1%.

Here are their current top positions and please keep in mind that they own multiple securities/asset classes in each name:

- Chrysler
- Delphi Corp
- CIT Group
- Dana Holding Corp
- PHH Corp

As you can see, there's a bunch of automotive names listed above and we highlighted back in August 2009 how Loeb favored select auto plays and obviously they've performed well over time. Third Point's top winners recently have been equity positions in Popular, Aspen Technology and Aveta. Their top losers have been equity stakes in WellPoint, HealthNet and Delta Lloyd NV. For more on their positions, we've also previously detailed Third Point's equity portfolio. That wraps up the latest monthly exposure levels and portfolio breakdown from Dan Loeb's Offshore Fund. To learn how to invest like this hedge fund manager, check out Dan Loeb's recommended reading.

Jim Rogers Shorting US & Emerging Market Indexes

A few months ago we detailed how Jim Rogers had started some short positions. At the time, he was pretty vague but we did get a market call from him. This time around, he was more specific and more bearish. Legendary investor and ex-Quantum Fund founder Jim Rogers recently disseminated some of his thoughts via the Economic Times in India and keep in mind that he actually made these comments on Wednesday, so they preceded the downward market spiral we saw yesterday. Rogers noted that, "I am shorting a stock market index in the US; I am shorting an emerging market index and I am shorting one of the large western international financial institutions."

He specifically mentions that he's not shorting a particular country in the emerging markets but rather a cumulative index. Thus, traders/investors wanting to piggyback his trade could simply short the Emerging Markets exchange traded fund EEM. He is currently short that index because he feels there are excesses developing there. While he does not name names regarding his western bank short, Rogers says that, "it is a bank which people think is extremely sound & if I am right, there are going to be more currency problems and more turmoil in the markets. It will have to come down." So, let the guessing game begin there.

Further elaborating on currencies, Rogers says that, "The currency crisis has been going on for a while. It did not start this week. It has been happening for a while. It started with, maybe depending on how you want to look at it, with Iceland or Latvia or many other countries who have been having problems. And the currency crisis is continuing and is going to get worse. This is not the end. Over the next year or more, we are going to see more, so prepare yourself." An ominous omen from Mr. Rogers there, certainly. You'll remember that hedge fund 'rockstar' John Paulson has designed a fund to bet against the US dollar as he clearly feels the currency is in trouble. He is obviously not alone as Rogers is also worried about various currencies as is Eric Sprott who said to beware of fiat currencies at the recent Value Investing Congress.

So, we know what Rogers is bearish on, but what is he bullish on? Well, we previously outlined how Rogers is bullish on commodities and he has been for some time. We'll have to see how all of his market calls turn out, but even he admits that he's not a great market timer.

Eric Mindich's Hedge Fund Eton Park Capital Discloses New Position in Cohen & Company (COHN)

Eric Mindich's hedge fund firm Eton Park Capital recently filed a 13G with the SEC disclosing a stake in Cohen & Company (COHN). In the filing, Eton Park has disclosed a 6.26% stake in with 647,701 shares. This is a brand new position for Mindich's firm as they did not show ownership when we detailed Eton Park's portfolio. However, while this new filing was made after market close on May 6th, 2010, it says it was filed due to activity on December 31st, 2009. So, it's unclear if they simply forgot to file it months ago or marked the wrong date on the document. Either way, it's a newly disclosed position.

In terms of other recent investment activity from the hedge fund, we saw that Eton Park acquired Sable Mining shares (SBLM) and we detailed a portfolio update on Mindich's firm as well. For more of our coverage on Mindich, we recommend checking out some of his thoughts from a hedge fund panel regarding whether or not there is alpha in asset allocation. He started the firm in 2004 with $3 billion and today manages well in excess of $10 billion. Before founding Eton Park, Mindich was Goldman Sachs' youngest partner in history at the age of 27 and focused on merger arbitrage.

Taken from Yahoo Finance, "Cohen & Company, an investment company, engages in the credit related fixed income investments business. It operates in two divisions, Asset Management and Capital Markets."

You can view all our previous coverage of Eric Mindich's hedge fund here.

What We're Reading ~ 5/7/10

Retail investors continue to move into stocks [Pragmatic Capitalist]

Tiger Management alum Steve Shapiro is returning outside investor capital from his Intrepid Capital Management [Absolute Return + Alpha]

An investment analysis of Penn Miller [Above Average Odds Investing]

Another great compilation of notes from Berkshire Hathaway's annual meeting [ValueHuntr]

Is the stock market cheap? [dshort]

Are the inflationistas right? [Pragmatic Capitalist]

Everything you know is wrong [Kirk Report]

Li Lu: Berkshire Hathaway's next CIO candidate? [Street Capitalist]

Previously thought of as possibly the next Warren Buffett, Sardar Biglari has angered value investors with his latest compensation proposal. Here's a letter to the board of Biglari Holdings re: executive compensation [Noise Free Investing] & then more thoughts on Biglari's compensation agreement [My Investing Notebook]

Where things stand in the market [Bespoke Investment Group]

A list of stocks Nasdaq is canceling trades in from yesterday's madness [Business Insider]

The best interest rate chart in the world [Trader's Narrative]

A great macro overview from Barry Ritholtz [The Big Picture]

A look at John Paulson's possible ownership of Bear Stearns CDOs [Zero Hedge]

John Mauldin on the future of public debt [Advisor Perspectives]

Top buys & sells from Morningstar's ultimate stock pickers [Morningstar]

The truth about 'Sell in May & Go Away' [WSJ]

An interview with hedge fund manager Hugh Hendry [Investment Week]

Bill Ackman: Let's have a public registry for stock opinion [Barron's]

Hedge fund Harbinger hires ex-Orange chief for wireless plan [Dealbook] & Deutsche Telekom has been in talks with Harbinger [FT]

Hedge funds begin to restructure fee system [FT]

Thursday, May 6, 2010

Ricky Sandler's Eminence Capital Favors High Quality Large Caps (Investor Letter)

Today we're detailing the first quarter 2010 investor letter from Ricky Sandler's $5.4 billion hedge fund Eminence Capital. Sandler immediately notes that the recent month has been rough for him as an investor because he seeks quality on the long side and low quality on the short side. As we all know, the market has seen an 'accelerated widening' between large caps and small caps and between low quality and high quality names. While the current market may not be treating them to their liking, Eminence certainly has solid performance figures returning 15.1% CAGR net of fees since inception, blasting the S&P 500 which has returned 1.3% CAGR over the same timeframe.

Here are Eminence Capital's current top 10 holdings:

1. Oracle (ORCL)
2. JP Morgan Chase (JPM)
3. US Bancorp (USB)
4. Thermo Fisher Scientific (TMO)
5. Fiserv (FISV)
6. Ebay (EBAY)
7. Aon (AON)
8. Walmart (WMT)
9. Google (GOOG)
10. Reed Elsevier (LON: REL)

Eminence's current gross exposure is 235% and they are 60% net long. This is interesting because it's different than what we've seen from the majority of hedgies who as of late are only 25% net long, well below the historical average as hedge funds have been selling equities. Even with their high net long exposure compared to other funds, Eminence has still been selling longs and adding/initiating short positions. Their latest position update is slightly different than what we saw when we previously covered Eminence's portfolio.

Sandler's hedge fund started new longs in:
Coca Cola Enterprises
TD Ameritrade
Research in Motion
Avon Products
Dollar Tree Stores
American Eagle Outfitters
Beckman Coulter

They also added to existing long positions in:
JPMorgan Chase
Charles Schwab
Fidelity National Information Services

They reduced their position size in:
Reed Elsevier
Ross Stores
Abbott Labs

And lastly, they sold completely out of:
General Mills
Northrup Grumman

Eminence was up 1.7% gross for the first quarter as noted in our hedge fund performances update. Portfolio winners for them this past quarter include: Nintendo (NTDOY), Hasbro (HAS), Carnival (CCL), US Bancorp (USB), and Ross Stores (ROST). They were hurt on the short side by a printing company, an aerospace & defense company, an apparel manufacturer and a media distribution company.

Embedded below is the first quarter investor letter from Ricky Sandler's hedge fund Eminence Capital where you'll find more detailed write-ups on Aon (AON) and Coca Cola Enterprises (CCE):

You can download a .pdf here.

We'll leave you with a quote from Sandler himself who writes, "Experience has taught us that markets like these are not sustainable, but we respect that predicting when it will end or how far it will carry is difficult." For more background on Sandler, head to our previous post on Eminence Capital. Make sure to also check out our ongoing coverage of various hedge fund letters as we posted up Jay Petschek's Corsair Capital earlier along with macro fund Prologue Capital and then David Einhorn's Greenlight Capital letter as well.

Value Investing Congress: Notes From Day 2

Thanks again to the Value Investing Congress who has been posting updates from the event on Twitter (make sure to follow us as well), we're able to present you with aggregated notes of the presentations. Yesterday we posted up notes from the first day of the Value Investing Congress and now we're covering day two of the event. Today we'll detail the investment ideas from Eric Sprott (Sprott Asset Management), Whitney Tilson & Glenn Tongue (T2 Partners), Lei Zhang (Hillhouse Capital Management), Tom Russo (Semper Vic) and David Nierenberg (D3 Funds).

Eric Sprott of Sprott Asset Management: Eric Sprott unsurprisingly gave a presentation on investing in precious metals. As we've covered on the site before, Sprott launched a physical gold trust and has stakes in various miners. He notes that we live in a world where governments continually spend money to boost GDP and that it is a race to the bottom in terms of currency devaluation. Currently the US dollar is winning that race but it 'may not win forever.' Overall, he says to beware of fiat currencies. You'll remember that fellow hedgie John Paulson started a gold fund as a way to bet against the US dollar. As a gold bull, Sprott's two favorite words are 'quantitative easing.' His specific investment idea was East Asia Minerals Corporation which he thinks could be a '10-bagger or more' due to gold reserves discovered. You can view all our past coverage on Sprott's firm here.

Whitney Tilson & Glenn Tongue of T2 Partners: These two gentlemen presented the case for their new long: Anheuser-Busch InBev (BUD) which is trading for 8.5x 2012 free cash flow. They note it is an addition to their ever-growing portfolio of undervalued blue-chip companies. Tongue says to look at BUD's free cash flow net of AmBev minority interests, synergies, deleveraging and 50% of Modelo's free cash flow. He thinks the market is also unfamiliar with the management story behind the company and equates it to the story of Rose Blumkin at Nebraska Furniture Mart.

Before their investment idea, Whitney Tilson's talk focused on how the market is range-bound as the S&P trades at 20.4x inflation-adjusted trailing earnings, above the average of 16.3x. As he has touched on in the past, Tilson believes housing still has more pain ahead as 24% of homeowners who haven't made a payment in a year have still not been foreclosed on. This represents a large amount of inventory yet to hit the market. Tilson also notes that the mortgage market has essentially been nationalized and that housing prices are well below the peak but still above levels in year 2000. He also recently appeared on CNBC where he outlined his bullish thoughts on BUD and talked about his short position in the homebuilders and his short position in Palm. Embedded below is the video of his recent appearance (email readers will need to come to the site to view the video:

Keep in mind that we've detailed T2's short positions before for those of you wanting a closer look and Tilson recently explained his short in LULU as well. For more insight on Glenn Tongue & Whitney Tilson's portfolio, head to T2 Partners annual letter.

Lei Zhang of Hillhouse Capital Management: Zhang started his firm with $30 million and now manages $4 billion, the largest hedge fund in China. Hillhouse has seen extraordinary performance, returning 52% annualized since inception in August of 2005. Zhang typically runs a concentrated portfolio and uses a team based research process to perform fundamental bottom-up research on companies. Zhang likes to focus on the people and teams behind the business and usually holds long positions 3-5 years. Interestingly enough, Zhang is currently in 50% cash and only adds 3-5 positions each year.

Currently, Hillhouse is negative on the shipping industry. Overall, Zhang dislikes small cap plays and sees very common investment mistakes in China, including investors with very short-term timeframes and over-excitement regarding short-term growth. Ironically, Zhang thinks concentrated bets are often a common investing mistake in China, yet Hillhouse runs a concentrated portfolio of their own. Clearly that strategy has served them well though, just look at their returns. Zhang's specific investment idea was the B shares of Changyu Corporation, a Chinese wine company that had a return on equity of 35% in 2008. He notes that there is little regulation on alcohol in China and no license is needed. On the short side, he likes focusing on 'frauds' which is a pretty obvious statement.

Tom Russo of Semper Vic Partners: Russo's talk centered on global value investing and the premise that international markets are very attractive due to emerging market growth. He allocated a lot of capital there during the crisis in 2008 when everything collapsed. In particular, Russo mentioned that Nestle can invest large amounts of money in emerging markets and see high rates of return. Pernod Ricard is one of the leading brands around the globe and was the top shorted stock on the Euronext in 2008. He likes their leadership in China especially. Lastly, Russo touches on SABMiller commending them for their long-term focus as they have burdened EBITDA margins in Africa in order to make investments.

David Nierenberg of D3 Funds: Nierenberg's firm takes concentrated positions in microcap growth companies seeking to constructively work with management. He likes emerging markets as six of the nine public companies he owns have exposure there. In particular, D3 Funds holds RadiSys (RSYS), an embedded computing company that has a strong balance sheet with $3+ per share net cash and is only tracked by two analysts. While current revenues have been stagnant, 'next generation' revenue is growing rapidly. By Q2 of 2010, RSYS will have outsourced 100% of its production and sees a 3 year earnings compounded annual growth rate (CAGR) of 39%. Additionally, Nierenberg's partner Cara Denver mentioned that D3 owns 18% of Move Inc (MOVE) and that their thesis is still intact.

Thanks again to the VIC for posting their Twitter updates. Make sure to also check out Value Investing Congress notes from the first day and then stay tuned for more hedge fund portfolio tracking here on Market Folly daily.

Jonathan Auerbach's Hedge Fund Hound Partners Discloses Position

Jonathan Auerbach's hedge fund Hound Partners has filed a Form 4 and an amended 13D with the SEC regarding shares of Avantair (AAIR). In the filings, we see that Hound was merely re-shuffling their portfolio between their related investment vehicle entities. However, it did give us a glance as to their position sizing of a position they already held. Hound Partners now shows a 13.66% stake in Avantair with 3,977,714 shares. This means they practically kept their stake unchanged as they've only sold 3,846 shares since October 2009 when we saw their last disclosure regarding this position.

Their current stake includes 2,797,274 shares that may be acquired upon conversion of Series A convertible preferred stock into common stock. Those shares have a conversion price of $3.574909 and each share of Series A preferred can be converted into 27.973 shares of common. In terms of other recent activity out of this hedge fund we also updated you in April that Hound Partners disclosed two positions.

Hound is a New York based firm that Auerbach started with assistance from legendary hedgie Julian Robertson. He is one of the many 'Tiger Seeds' that Robertson has seeded in an attempt to sprout up talented new investment managers. Auerbach of course previously worked for Robertson at legendary hedge fund Tiger Management.

Taken from Google Finance, Avantair is "engaged in the sale of fractional ownership interests and charter card usage of professionally piloted aircraft for personal and business use and the management of its aircraft fleet. As of June 30, 2009, the Company operated 52 aircraft within its fleet, which is comprised of 46 aircraft for fractional ownership, five company- owned core aircraft and one leased and company- managed aircraft."

For more from Jonathan Auerbach's firm, you can view our previous coverage of Hound Partners portfolio.

Wednesday, May 5, 2010

Value Investing Congress: Notes From Day One

The Value Investing Congress has been posting updates of the first day of the event on Twitter (make sure to follow us as well) and we wanted to aggregate their brief updates into a comprehensive post here on Market Folly. Yesterday, the Congress heard investment presentations from the likes of Mohnish Pabrai (Pabrai Investment Fund), Bruce Berkowitz (Fairholme Fund), Paul Sonkin (Hummingbird Value), Richard Vogel (Alatus Capital), Lloyd Khaner (Khaner Capital), Amitabh Singhi (Surefin Investments), Carlo Cannell, Guy Spier (Aquamarine Capital), and Patrick Degorce (Theleme). We'll start first with Mohnish Pabrai's presentation:

Mohnish Pabrai of Pabrai Investment Funds: His presentation was entitled "Leveraging Checklists to Dramatically Improve Investing Results." He has developed this list based on mistakes other value investors have made and thus far he has 80 mistakes on the list. Pabrai notes that no companies will pass all of the 80 questions on his checklist but that his list has helped him determine position sizing. He also mentioned that had this checklist been in place before some of his prior investments, some of his decisions would have been different. In terms of investment ideas, Pabrai feels that the property & casualty market is very soft but that there is value to be found there. For those interested, we've also detailed Pabrai's portfolio in the past.

Bruce Berkowitz of Fairholme Fund: The main thing to take away from Berkowitz's talk is that he is now long Goldman Sachs (GS) in size. It's not exactly clear what type of investment he made, but we do know he has a new position now. Turning to his stake in General Growth Properties (GGP), he mentioned that he is not raising his bid. On his new position in AIG (AIG), he noted that GAO has terrific reports on the company (we previously detailed Fairholme's new AIG stake). Lastly, Berkowitz jokingly mentions that the only 'perfect hedge' is a Japanese garden as everything is correlated when things turn sour. You can view the rest of our coverage on Berkowitz here.

Richard Vogel of Alatus Capital: Vogel is focusing on companies with 8-10% free cash flow yields that also have an "inflection point" with some sort of catalyst (a new product launch or tapping into a new market, etc). His presentation focused on Europe as all the countries are 'in a sea of red ink' because they all have budget deficits, except for Switzerland. Vogel focused on a Swiss based company: Valora (SWF: VALN). It has an estimated free cash flow yield of 11% and is the largest kiosk operator in Switzerland and Luxembourg with 1,175 outlets. He mentions that new management is taking positive steps as they improve margins and restructure.

Lloyd Khaner of Khaner Capital: Khaner gave a presentation entitled, "Why Some of the Best Value Investors Own Gold." He mentioned that he had formerly 'shunned gold' until the mid 2000's but obviously has had somewhat of a change of heart. He mentions that the gold to oil ratio has typically been "1 oz of gold to 15 bbl of oil." In terms of rationale for owning gold, Khaner cites that gold supply is decreasing as production is around 2,500 tons per year and consumption bests that at 4,000 tons. Central Banks have also been net buyers of gold for the first time since 1980. Khaner specifically highlights gold as a safe haven because it holds value even if it does not appreciate. It is the last currency standing as you cannot print more.

If you were to use the same inflation trajectory as the last gold bubble and apply it to current times, the price would be near $5,000 an ounce. There is one main reason value investors own gold: currency devaluation. While not a value investor, this is exactly the reason that John Paulson launched his gold fund. He is using gold derivatives and gold mining stakes as a proxy for his wager on the US dollar being devalued.

Khaner did not specifically cite the best way to play gold (whether it be via exchange traded funds, physical gold, or mining companies). John Burbank's hedge fund Passport Capital prefers physical gold and David Einhorn's Greenlight Capital does as well. In fact, at the previous Value Investing Congress in October 2009, Einhorn's presentation centered on gold.

Khaner did say that if you go the mining companies route, you have to focus on good management teams that have skin in the game, a company with a good history, and one with low production costs. Back in the 1930's when deflation was prevalent, gold mining stocks were the place to be. Both John Paulson and George Soros bought a stake in the same gold miner recently as well. In the past we've posted up copious amounts of hedge fund research on gold so definitely check that out if you're looking for more insight on the subject.

Carlo Cannell of Cannell Capital: Focusing on small cap value plays, Cannell founded his firm in 1992. He has 18 years of investing experience and will take on an activist role when needed. During his talk, he mentioned that all of his funds are named after islands. The were not many updates posted about his talk but he did mention that Research in Motion (RIMM) does not particularly interest him as he prefers to buy companies trading at 1x EBITDA. He gave one example of a gem: Core-Mark (CORE).

Patrick Degorce of Theleme Partners: Degorce recently launched Theleme (his new firm) with $200 million and he was previously co-founder of The Children's Investment Fund. Investment timeframe is very important to Theleme as they typically focus on 4-5 year timelines. Degorce echoed Warren Buffett by noting that you should invest in businesses/companies that you understand and not pay attention to short-term gyrations in the market. In particular, Degorce values companies based on discounted cash flows. Turning to his specific investment idea, Degorce recommended Deutsche Boerse (ETR:DB1). He notes that they earn 45% of EBIT from European equity derivatives and fixed income. They recently announced cost cutting measures to the tune of $150 million and have a growing cash horde of 6.5 billion euros. In 2009, they generated 3.40 in free cash flow and it currently trades around 10 times FCF.

Amitabh Singhi of Surefin Investments: Singhi focused on opportunities in India and noted that while many industries are mature, some have exploded like real estate, telecom, and pharma. He thinks there is more opportunity in small cap names as there is little research coverage. In particular, he buys 'cigar butts' as he prefers contrarian plays, special situations, and even some GARP plays (growth at a reasonable price). One such 'cigar butt' play is Cheviot (BOM:526817), a producer of Jute (vegetable fiber) that is trading at cash and below its net current asset value. Additionally, it has a return on equity of 26% over the last 10 years. Overall, when investing in India, Singhi likes to have 'assets on the ground in (the) country.' He typically avoids the metals and oil & gas sectors.

Guy Spier of Aquamarine Capital: Spier focused on Fortescue Metals Group (FMG) and notes it could be trading at 1x EBITDA if the market starts to take a hit. He also noted an idea from Passport Capital's John Burbank: 'go long what China is short.' Spier also mentioned something that Warren Buffett has in his office: 'invest like a champion today.' Guy also recommends to increase productive relationships and reduce toxic ones in order to associate yourself with people who are better than you so that you may become better. In essence, that is one of the main goals here at Market Folly. By tracking successful and talented investment managers, we strive to learn from both their successes and their mistakes.

Paul Sonkin of Hummingbird Value: Sonkin focuses on micro and nano cap value plays and looks for a discount to intrinsic value. He seeks internal and external catalysts and notes that certainty of outcome and timeline are essential as well. Interestingly enough, he sometimes competes with companies buying back their own stock due to the low liquidity. Sonkin's investment idea was Steinway Musical Instruments (LVB) citing three assets: real estate, piano business, and band business. Like many other companies, he anticipates growth in Asia over the next ten years as well as a recovery in the US for their piano business. He estimates their properties in New York might be worth $50-75 million. Additionally, Sonkin feels LVB has pricing power as they've raised prices on pianos 4% each year for quite some time. Lastly, a fun fact from Sonkin: he feels the Proxy statement is the most underrated tool out there and he also won't invest in a company if a CEO wears a lot of jewelry (guess he won't be investing in rapper mogul "Birdman's" new oil company).

That wraps up the summary of the first day of presentations. Thanks again to the Value Investing Congress for posting their Twitter updates and keep in mind you can follow us on Twitter as well. Hopefully readers have found this aggregation useful. Stay tuned as we'll also post up summaries from day two of the event here at Market Folly as well as more in-depth research regarding some of the investment ideas. In the mean time, head to our coverage of the latest hedge fund portfolio movements.

David Einhorn & Hedge Fund Greenlight Capital Update Two Positions

David Einhorn's hedge fund Greenlight Capital recently filed amended 13D's and Form 4's with the SEC regarding two of their positions. Firstly, due to activity on May 1st, 2010, Greenlight shows a 65.2% ownership stake in Einstein Noah Restaurant Group (BAGL) with 10,733,469 shares. There has been no adjustment to their position size since December 31st, 2009 when we detailed Greenlight's portfolio. So while this news is not an exciting 'buy' or 'sell,' it is still informational as they continue to 'hold' BAGL shares. The filings were mainly made to shuffle ownership interests between Einhorn's various investment vehicles. The vast majority of their Einstein Noah position is in their Greenlight Qualified Fund.

Secondly, we see that Einhorn's hedge fund completed a similar portfolio shuffle with their Biofuel Energy Corp (BIOF) stake. Due to the disclosures, Greenlight shows a 39.8% ownership stake in BIOF with 11,853,500 shares. This is actually an increase in their position as they previously owned 7,542,104 shares when we previously saw Einhorn's holdings. This marks a 57.16% increase in their position size over the past four months. Keep in mind that they own both Class A and Class B stock.

This latest portfolio activity comes after we saw Einhorn dump shares of Boston Scientific (BSX) in Greenlight's latest investor letter. Additionally, we've previously examined Einhorn's thesis on Vodafone (VOD). To get a glimpse at Greenlight's research process, check out David Einhorn's book: Fooling Some of the People All of the Time.

Taken from Google Finance, Einstein Noah Restaurant Group is "operates under the Einstein Bros. Bagels (Einstein Bros.), Noah’s New York Bagels (Noah’s) and Manhattan Bagel Company (Manhattan Bagel) brands. The Company operates in three business segments: the Company-owned restaurants segment, the manufacturing and commissary segment, and the franchise and license segment."

Biofuel Energy Corp is "produces and sells ethanol and its co-products (primarily distillers grain), through its two ethanol production facilities located in Wood River, Nebraska and Fairmont, Minnesota."

For the most recent investment update from David Einhorn's team, make sure to check out Greenlight's investor letter.

Berkshire Hathaway Annual Meeting Notes 2010: Thoughts From Warren Buffett & Charlie Munger

Previously, we'd covered to Berkshire Hathaway's annual letter and today we wanted to cover Berkshire's latest annual meeting. A huge hat tip goes out to the Inoculated Investor who managed to transcribe nearly every word that Warren Buffett and Charlie Munger said at Berkshire Hathaway's 2010 Annual Meeting. These are by far the most comprehensive set of notes we've come across and we're grateful to him for sharing. Embedded below you will find his notes from the annual 'Woodstock of capitalism':

You can download a .pdf copy here.

Thanks again to the Inoculated Investor for his great notes! We've constantly covered the Oracle from Omaha so make sure to also check out some of the latest portfolio activity out of Berkshire as well as Warren Buffett's recommended reading list.

Tuesday, May 4, 2010

Macro Hedge Funds Net Short US Equities?

Bank of America Merrill Lynch is out with their latest hedge fund monitor report which examines exposure levels across asset classes. This comes after yesterday when we examined Societe Generale's research that concluded hedge funds were very short 10 year treasuries. Turning back to BofA's publication, we saw last week that the smart money was selling equities. This remains the case as hedgies continued to reduce net long exposure. Long/short equity funds in particular are now around 25% net long, well below their historical average of 35-40% net long. Hedgies now favor high quality stocks, having previously favored low quality. Additionally, we see they are now "moving into growth relative to value."

BofA also estimates that global macro hedgies are now net short US equities and still buying emerging markets. This seems to fit hedge fund Armored Wolf's thesis that emerging market countries will 'step up to the plate' so to speak as they continue to grow and flourish while developed countries see tepid growth. This also marks the first time we've really seen macro funds net short US equities in a while. It's clear that many fund strategies are all becoming more cautious on the long side and starting to lean to the short side. Market neutral is the only strategy that remains very long equities.

In energy, hedge funds reduced some of their crowded long position in crude oil and 'modestly' covered their short position in natural gas. This is the first time we've really seen them 'let up' on this short as it has been a very deep position for many. In forex, hedgies continued to add to shorts in the euro. Turning lastly to interest rates, we see that hedge funds are still quite short the long end of the curve "but look to be favoring safety momentarily."

Embedded below is Bank of America Merrill Lynch's hedge fund monitor report in its entirety:

You can download a .pdf here.

For more on investment manager exposure levels, we just yesterday detailed how hedge funds are very short 10 year treasuries and you can view BofA's previous research detailing how the smart money was selling equities.

Hedge Fund Prologue Capital Outlines Why Macro Factors Are Positive For Risk Assets

Global macro hedge fund Prologue Capital is out with their latest market commentary and we get a look at what themes they're playing. In Prologue's previous investor letter, we learned that they were bullish on Canada, Switzerland, and Sweden. This time around, their Chief Economist Tomas Jelf outlines that there are four broad macro forces in play currently:

1. Strong Global Growth Momentum
2. Close to Zero Percent Policy Rates
3. Disinflation
4. Fiscal Stress

As Jelf notes, "The first three are positive for risk assets and have so far outweighed the negative impact from fiscal stresses. The last three are positives for core fixed income markets and have, to a greater extent than we thought, neutralized the negative impact from positive growth developments. Thus we have been in an environment which is positive for risk assets and neutral for fixed income."

This obviously is quite straight forward as investors yield chase in an environment where interest rates are at the lowest of the low. As such, market participants are willing to take on more risk in exchange for potential return. Not to mention, as a reactionary response to the crisis, bond funds saw massive inflows. And now, capital that was previously on the sidelines has made its way into the equity markets in search of returns. A lot of the year-long market rally has been driven by liquidity as money seeks out a home. Prologue's macro summary outlines just why the environment is positive for risk assets. And while the environment is currently 'neutral' for fixed income, it will eventually shift to 'negative' once interest rates start to (eventually) rise.

Then you compare the above synopsis with Prologue's latest portfolio strategy. They have assembled positions in curve flatteners in small developed countries, are short duration in AUD, and are short the euro and the yen versus the US dollar. Additionally, they've employed relative value strategies "that take advantage of the supply calendar in Europe" and Prologue continues to also underwrite government bonds. Lastly, they are also long the Renminbi and gold. Does this look familiar? It should. As we've detailed countless times, hedge funds are aggressively short the yen and have also been short the euro in size. Of course many prominent hedgies have been long gold for quite some time as well and we've detailed their extensive fundamental research.

Prologue Capital has fared like many fellow global macro funds over the past few years. They avoided losses in 2008 and in fact were up an impressive 18.86%. Then, they returned 12.41% in 2009 and are up 1.88% thus far in 2010. So, while they've underperformed the markets in general recently, they certainly protected from losses when it mattered most. They currently manage just under $1 billion.

Embedded below is global macro hedge fund Prologue Capital's April letter to investors:

You can download a .pdf here.

As always, an interesting macro take from Jelf and the Prologue Capital team. For more global macro research, we also just yesterday posted up investment commentary from John Brynjolfsson's Armored Wolf which also presented a current look at where we stand. To learn from some of the most knowledgeable global macro fund managers around, we highly recommend Steven Drobny's new book The Invisible Hands: Hedge Funds Off the Record.

Technical Analysis Weekly Watchlist

OptionAddict is out with the latest edition of his weekly watchlist. In it, he provides some technical analysis and trading setups for those of you looking to play the increased swings in the market over the short-term.

Embedded below is the video of his weekly watchlist:

And then MarketClub also recently outlined a key level to watch in the stock market as well.

Monday, May 3, 2010

Jeff Saut Still Cautious But Not Bearish; His Latest Investment Recommendations

Raymond James Chief Investment Strategist Jeff Saut is out with his latest weekly market commentary. Saut begins his weekly investment strategy by pointing out that the Dow Jones has run an impressive "44 sessions without anything more than a one-to-three-session pause/correction." He reiterates his stance that he is cautious on this market, but not bearish. In fact, he believes we are in a profit-recovery cycle that drives inventory rebuild. Stephen Mandel of hedge fund Lone Pine Capital also focused on inventory rebuilding in a previous commentary. Previously, Saut has advised to abide by the old market adage to sell in May and go away.

Shifting to portfolio allocations, Saut feels now may be the time to take some profits in distressed debt, especially if you followed his 'buy' call 18 months ago. Turning to equities, he feels a shift from small cap names into high quality large caps is advisable. We've seen this advice now from countless investment managers and strategists. It seems everyone is favoring large cap companies with solid balance sheets, lots of international exposure, and often ones that pay a sizable dividend. Many managers currently favor companies like Pfizer (PFE), Microsoft (MSFT), McDonald's (MCD), etc.

In terms of particular names, Saut recommends Noble (NE) as it is trading at 5x cash flow and has a ton of cash on its balance sheet. Shares have been negatively affected due to the oil spill. Additionally, Saut recommends Archer Daniels Midland (ADM) 7.8% yielding convertible preferred shares. Lastly, Saut and his Raymond James team anticipate an increase in volatility and have recommended buying the iPath S&P 500 VIX Short-Term Futures exchange traded fund VXX or Mid-Term futures in VXZ. As volatility rises, the value of those ETF's should appreciate. Essentially, it is a market hedge. And yes, like many other prominent hedge funds, Saut is also still bullish on gold.

Embedded below is the full weekly investment strategy from Jeff Saut:

You can download a .pdf here.

So, Saut remains cautious rather than bearish and is still expecting a market pullback of some size. Those of you interested in the latest technicals can examine a key level to watch in the markets. He is not alone in his cautious stance as we've noted hedge funds selling equities as well.

Hedge Funds: Very Short 10 Year Treasuries

Societe Generale is out with the latest edition of their hedge fund watch and in it we see that they've found hedge funds to have the "shortest position ever on bonds." That language is slightly misleading as they've only been tracking these exposure levels since 2005, but still. The fact that hedge funds have more than 270,000 short contracts on the 10 year treasury bond certainly speaks volumes. This comes a few weeks after SocGen initially published research that hedgies were net short 10yr Treasuries. It's very evident that hedge funds are concerned about inflation and the impending Federal Reserve rate hike (whenever it may eventually come). As we've covered numerous times in the past, many hedge funds have put on curve steepener trades in order to play this.

As you'll see from the chart below, hedgies certainly are short bonds:

In their research, SocGen also found that hedge funds still had large short positions in 30 year treasuries as well. They've been net short all year to the degree of around 100,000 contracts on average. So, they are certainly short the 10 year to a larger degree than the 30 year. Retail traders/investors who want to piggyback this play can short the exchange traded fund IEF for the 10 year and TLT for the 30 year. And as always, keep in mind that this should not be construed as a recommendation to buy/sell various securities.

Societe Generale's other main conclusion regarding hedge fund exposure levels was that hedgies are "strong net sellers of the yen (50,000 contracts net short)." Additionally, we see that hedge funds are buying US dollars in spades against all the other major currencies. This falls in line with what we've seen recently as hedge funds were aggressively short the yen. Interestingly enough, after re-shorting the euro recently, we now see that short positions on the euro have been reduced over the past few weeks. If you don't have access to forex markets, you can play the yen via exchange traded fund FXY. You can also play the US dollar via UUP and the euro via FXE.

Lastly, turning to equities, we see that their research comes to similar conclusions as the Bank of America research we typically cover. In that report, we saw that the smart money was selling equities. SocGen confirms this writing, "even though index price is rising, the percentage of non commercial positions on total open interest on the S&P 500 has decreased significantly." Their research shows that hedge funds are now net sellers of the S&P 500 while still slightly net long the Nasdaq.

Embedded below is Societe Generale's latest hedge fund watch document:

You can download a .pdf here.

So, the trend remains in tact. Hedge funds are pushing the limits on a steep yield curve as this is certainly a crowded trade. Hedgies are massively short the 10 year treasury but also have quite a trade against the 30 year treasury as well. While some agree that inflation is not a near-term problem and instead is a long-term concern, it's very apparent that hedge funds anticipate interest rates to rise in the future. For more on the latest hedge fund exposure levels, head to our post on how hedgies are selling equities.

John Brynjolfsson's Hedge Fund Armored Wolf: Global Macro Investor Letter

In an effort to provide readers with more global macro coverage here at Market Folly, today we present you the latest investor letter from John Brynjolfsson's new hedge fund Armored Wolf. They employ a macro strategy fixated on asset classes most influenced by inflationary/deflationary pressures. Their fund focuses on real return strategies and dabbles in the following asset classes: commodities, inflation linked bonds, liquid emerging market bonds, equities, and currencies. While the primary focus of this site is long/short equity funds, we do love us some global macro insight. Those of you looking to learn from top global macro hedge fund managers will benefit from reading Steven Drobny's new book, The Invisible Hands. If that does not satiate your global macro thirst, we don't know what will.

Since we've never covered Armored Wolf before, we'll first start with some background. Hedge fund Armored Wolf was founded back in the fourth quarter of 2008 by John Brynjolfsson. (Talk about a historic time to launch a fund!) Prior to founding his firm, Brynjolfsson worked at PIMCO and grew their Real Return platform to $80 billion. During his time there, he gained experience managing the world's largest inflation linked bond and commodity funds. And, an interesting fact about Brynjolfsson: in 1996 he helped the US Treasury design the TIPS market. Needless to say, he has a solid background.

Armored Wolf's first quarter global macro commentary centers on imbalances. They believe that Ben Bernanke's reappointment means an easy monetary policy well into 2011. They also pay close attention to the tug-of-war between the deflationary forces at roost in the US and UK and the policy makers' desire to reflate. They've identified a link between inflation, policy, growth and imbalances. They write, "a deleveraging in the developed world would correct global imbalances in a deflationary way. However, we see how attempts to reflate will lead to further imbalances and inflationary tendencies in some, if not all parts of the globe."

Armored Wolf's letter is divided up into four sections examining potential investment themes for the future including:

I. Imbalances, Exit Strategies & Growth
II. Sovereign Risk
III. The Commodity Price Boom
IV. Geo-political risk

Overall, Armored Wolf feels that the world is seeing a shift from the developed world to the developing world and the economic crisis has only accentuated and accelerated this fact. They believe that emerging markets are moving "from periphery to core on the global stage." This is similar to what we saw recently out of fellow macro fund Woodbine Capital as they are focused on the dispersion between industrialized and developed worlds.

Embedded below is the first quarter 2010 investor letter from John Brynjolfsson's hedge fund Armored Wolf which we highly recommend reading:

You can download a .pdf here.

While our global macro fund coverage is scarce compared to our long/short equity focus, we have in the past covered how global macro funds have struggled this year. Additionally, we've also previously covered thoughts from Woodbine Capital who believe that global rebalancing is the most pressing macro issue at hand. For more in-depth insight from global macro managers, we defer to Steven Drobny's new book The Invisible Hands: Hedge Funds Off the Record.

Sprott Asset Management Disclose New Position in Orsu Metals (LON:OSU)

Eric Sprott’s Canadian based firm Sprott Asset Management have opened a new position in UK gold miner Orsu Metals (LON: OSU). Sprott purchased 11,400,000 shares which represents 7.2% of the outstanding shares. It looks as though Eric Sprott's firm obtained their stake via Orsu’s offering on April 16th, 2010 where they were also granted 5,700,000 warrants with a strike price of C$0.5, exercisable on or before the 16th of April 2012. Orsu appears to be a bit of a recovery play as its share price has been decimated over the last few years and now trades at pennies on the dollar. Keep in mind that Sprott Asset Management's principal, Eric Sprott, will be presenting investment ideas at the upcoming Value Investing Congress along with many other hedge fund managers.

Sprott has also invested in other positions across the pond and we've detailed some of their UK holdings here. In particular, Sprott also has stakes in various other London listed gold mining stocks. They own 17.6% of Vatukoula Gold Mines (LON: VGM) as of January 19th, 2010. Additionally, they own 12.6% of Norseman Gold (LON: NGL) as of the 19th of January 2010. Needless to say, Sprott is very bullish on precious metals and has even started their own physical gold trust.

Taken from Google Finance, "Orsu Metals Corporation (Orsu) is a mineral exploration and development company holding interests in mineral projects in Kazakhstan and Kyrgyzstan. It is a precious and base metals exploration and development company exploring gold and copper deposits in the Tien Shan gold belt in the Kyrgyz Republic and Rudny Altai belt in the Republic of Kazakhstan. In addition, it operated the Varvarinskoye Project in the Urals belt in northern Kazakhstan. The Company's property in northwest Kyrgyzstan comprises four licence areas within the Tien Shan gold belt of north western Kyrgyzstan, including the Taldybulak, Barkol, Korgontash and Kentash licences (the Talas Project). The Company's other material exploration project is the property comprising a 47.3 square kilometers licence area in eastern Kazakhstan (the Karchiga Project), which is part of the Rudny Altai polymetallic belt. On October 30, 2009, the Company completed the disposition of its Varvarinskoye Project to to JSC Polymetal."

You can view more of our coverage of Eric Sprott's firm here. And you can also check out his latest investment ideas at the upcoming Value Investing Congress which we highly recommend attending.

Quants: The Alchemists of Wall Street

If you haven't seen it yet, embedded below is the video entitled Quants: The Alchemists of Wall Street. It's really an interesting almost hour long segment regarding the most mysterious players in financial markets. Email readers will need to come to the site to watch the video:

And if you fascination with quantitative managers doesn't end there, we highly recommend checking out Scott Patterson's The Quants which focuses on the likes of Jim Simons (RenTec), Ken Griffin (Citadel), Cliff Asness (AQR) and more.

Sunday, May 2, 2010

Free 30 Day Alphaclone Trial for Market Folly Readers

Just wanted to remind everyone that Market Folly readers have an exclusive extended free 30 day trial over at Alphaclone if you're interested. It's the best hedge fund portfolio replicator out there and we use it for all of our 13F filing updates and backtesting various strategies. The most unique feature is that you can assemble multiple hedge fund managers into one cohesive portfolio to find their most popular positions. AC also just implemented a new feature where you can receive alerts when a specific hedge fund files a 13G or 13D so that way you can stay up to date on the latest movements. We've said numerous times in the past that if you enjoy Market Folly, you'll find Alphaclone beyond resourceful for tracking the best investment managers out there. We're not sure how long this extended freebie will last, so definitely take advantage of Alphaclone's free trial.

Tom Brown's Second Curve Acquires Primus Guaranty Shares

Tom Brown's hedge fund firm Second Curve Capital just filed a Form 4 with the SEC in regards to shares of Primus Guaranty (PRS). In the filing, we see that advisory clients of Second Curve acquired 35,000 shares of PRS at prices of $4.40 & $4.37. The transaction took place on April 27th & 28th, 2010 and Second Curve now owns 5,825,266 shares. As you can see, they added relatively few shares compared to their overall position. However, this is somewhat of a peculiar transaction because just two weeks ago we detailed that Second Curve sold PRS shares at a price of $4.42. So, we're not quite sure what's going on here but that's what the SEC filing states.

For more portfolio activity out of Tom Brown's hedge fund, we recently saw they filed a Form 4 on shares of Taylor Capital Group (TAYC) and we've also covered some other position updates as well. Brown's hedge fund focuses exclusively on the financial services sector. Prior to founding his own fund, he was in charge of the financial services group for Julian Robertson's Tiger Management. During the crisis, Brown was painfully early on his bullish call on the financials and it cost him dearly at the time.

Taken from Google Finance, Primus Guaranty is "a holding company, which conducts business through two operating subsidiaries, Primus Asset Management, Inc. and Primus Financial Products, LLC. Primus Asset Management is an investment manager to affiliated companies and third-party entities. Primus Financial Products, LLC is a credit derivative product company (CDPC)."

Those interested can also take a past look at Second Curve's portfolio.

Hedge Fund Paulson & Co Files 13G on American Capital (ACAS)

Due to activity on April 19th, 2010, John Paulson's hedge fund firm Paulson & Co has filed a 13G with the SEC regarding shares of American Capital (ACAS). John Paulson's fund has disclosed a 15.5% ownership stake in American Capital (ACAS) with 43,725,000 shares. The vast majority of shares are held in the firm's Recovery Fund and Advantage Plus Fund. Regular readers of Market Folly will already be aware of this position because we previously reported that Paulson would be acquiring a new ACAS stake. This is not new information, but it does confirm what we already knew.

Paulson added shares of ACAS via a $295 milion stock offering from the company where he paid $5.06 per share. ACAS now is trading and Paulson & Co appears to be the largest investor in American Capital. ACAS will use this much needed capital infusion to help restructure debt.

In other news relating to Paulson & Co, you of course know that they've been put in the spotlight as of late due to the accusations surrounding Goldman Sachs and the subprime mortgage trade. John Paulson set out to clear the air in his recent letter to investors. In terms of his hedge fund's recent execution, you can also view Paulson & Co's recent performance numbers here.

Taken from Google Finance, American Capital is "an equity firm and a global asset manager. The Company invests in private equity, private debt, private real estate investments, early and late-stage technology investments, special situation investments, alternative asset funds managed by the Company and structured finance investments."

For more on John Paulson's hedge fund, head to Paulson & Co's portfolio.

Key Level to Watch in the Stock Market

Adam over at MarketClub just recently put out his latest technical analysis video on the Dow Jones. In it, he identifies a key level to watch in the market as we've started to see a few distribution days. While he is by no means saying the market will crater from here, he is definitely cautious. Drawing a fibonacci retracement from the highs in 2008 to the lows in 2009, he starts to outline a clear area to watch out for. The Dow Jones recently traded around 11,254, right at the 61.8% retracement level, an area Adam feels the market is bound to find as resistance. Thus far, the market has failed at that level and declined to the present 11,000 region. You can hear his latest analysis in the video below:

Simply put, he feels it's time to protect some capital by reducing some long exposure as there's nothing wrong with taking some profits. Head to MarketClub's latest look at the stock market to hear his thoughts.

This technical look coincides with a few other heedful stances as we noted hedge funds were selling equities and market strategist Jeff Saut recommended caution. Not to mention, we also saw legendary investor and former manager of the Quantum Fund Jim Rogers start some short positions and we also started to see emotional reactions often found in the investor psychology cycle as the market booms from peak to trough and back again. Overall, it seems many are becoming more cautious on the stock market in the near-term and the technicals seem to agree according to Adam.