Wednesday, July 14, 2010

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Latest Hedge Fund Positioning: Exposure Monitor Report

Bank of America Merrill Lynch is out with the latest rendition of their hedge fund monitor report. Last week we took note that hedge funds had increased short exposure yet were still suffering poor performance. The May performance numbers for many hedge funds were terrible, and June wasn't a ton better for many. In June, distressed credit funds were down 1.66% and long/short equity funds lost 1.09%. So, how have hedge funds positioned themselves lately after such poor performance?

Long/short equity hedge funds continue to have low net long equity exposure at around 27% net long. This continues to be well below the historical average of 35-40%. L/S funds still slightly favor growth stocks over value at the moment. And while these hedge funds have favored high quality stocks for quite some time, this exposure is volatile and some funds have reduced exposure in this regard recently. Market neutral funds, while as of late they've taken opposite positions of L/S funds, are now flat in terms of equity exposure. Global macro hedge funds on the other hand have reduced emerging markets exposure and covered their short position on US indices. You'll recall previously that we highlighted how global macro funds were net short equities and they certainly banked on that trade.

Based on CFTC data, however, other hedge funds (large speculators) have added to their short positions in both the S&P and Russell 2000. Bank of America Merrill Lynch highlights two recent hedge fund portfolio moves of note. Firstly, they point out that hedgies are now in a crowded long in the Japanese Yen. Secondly, they highlight the net short position in Nasdaq futures that many speculators have put on.

To see the latest hedge fund exposure levels, view the full monitor report from BofA embedded below:

You can download a .pdf copy here.

You can also view previous exposure reports where we saw hedgies increasing short exposure. So while hedge funds clearly are having a hard time with this tape, market strategist Jeff Saut says that the answer is in risk adjusted stock selection and risk management, two solutions he lists as keys to portfolio success in 2010. We'll continue to monitor the latest hedge fund exposure levels to see who is able to generate some alpha out there.

Tom Brown's Second Curve Capital Boosts Western Alliance Stake (WAL)

Tom Brown's hedge fund firm Second Curve Capital recently filed a 13G with the SEC due to portfolio activity on July 8th, 2010. Per the filing, Brown's firm discloses a 5.07% ownership stake in Western Alliance Bancorp (WAL) with 3,710,383 shares. This is an increase in Second Curve's position as they previously owned 2,340,000 shares as of March 31st, 2010. Over the past four months, Brown's hedge fund has boosted its WAL stake by over 58% (adding 1,370,383 additional shares). For more from this hedge fund we've detailed some of Second Curve's previous portfolio shuffling. And if you're interested in what other prominent investment managers are up to lately, head to our hedge fund portfolio tracking series updated daily.

Taken from Google Finance, Western Alliance Bancorp is "a bank holding company. The Company provides a range of banking and related services to locally owned businesses, professional firms, real estate developers and investors, local non-profit organizations, high net worth individuals and other consumers through its subsidiary banks and financial services companies located in Nevada, Arizona, California and Colorado".

Hedge Fund Third Point Files 13D on Emmis Communications (EMMSP)

Dan Loeb's hedge fund firm just filed a 13D with the SEC regarding shares of Emmis Communications (EMMS / EMMSP). The activist filing was made due to portfolio activity on July 9th, 2010 and Third Point has disclosed a 2.3% ownership stake in Emmis Communications with 783,379 shares. This share total is reflective of their ownership of 321,057 shares of 6.25% Series A Cumulative Convertible Preferred Stock, traded on the Nasdaq under ticker EMMSP. (Emmis' regular common stock trades as EMMS). This is the latest activity from Dan Loeb's hedge fund firm, but you can of course view the rest of Third Point's portfolio and exposure levels as well.

Since this is a 13D filing, this means Loeb and his firm are back to their usual activist ways. On June 24th, 2010 Third Point purchased 10,000 shares of preferred stock at $22.00 per share. On July 9th, 2010 Third Point purchased a whopping 105,057 shares of preferred at a price of $21.7484 per share. Their stake results in ownership of 11.4% of the preferred stock and 2.3% of common stock if they were to convert their shares.

In order to understand why Third Point purchased this stake and has filed an activist 13D, let's first detail some background. Back on May 25th, 2010 Emmis Communications planned a merger that would result the company being taken private by Jeffrey H. Smulyan, the company's chairman and CEO. This transaction would result in a cash tender offer for the common stock, an offer to exchange the preferred stock for new 12% PIK Senior Subordinated Notes due 2017, and a proxy to amend certain terms of the preferred stock.

Fast forward to a few days ago and we see that on July 9th, Loeb's Third Point and numerous other investment firms entered into a lock-up agreement pursuant to which each of them agreed to "(1) vote or cause to be voted any and all of its preferred stock against the proposed amendments; (2) restrict dispositions of preferred stock; (3) not enter into any agreement, arrangement or understanding with any person for the purpose of holding, voting or disposing of any securities of the Issuer, or derivative instruments with respect to the Issuer; (4) consult with each other prior to making any public announcement concerning the Issuer; and (5) share certain expenses incurred in connection with their investment in the preferred stock, in each case during the term of the lock-up agreement."

So, the wheels are in motion for a bit of a stand-off in Emmis Communications' proposed takeover. Those of you looking to read an enthralling legal document can find the lock-up agreement as filed with the SEC here. We'll continue to watch the developments here and will update as necessary. For more from Loeb's hedge fund, we recently detailed Third Point's portfolio breakdown as well as Third Point's first quarter letter.

Taken from Google Finance, Emmis Communications is "a diversified media company, principally focused on radio broadcasting. It owns and operates seven fort minor (FM) radio stations serving New York, Los Angeles and Chicago".

For more from Dan Loeb, check out his recommended reading list. And be sure to check Market Folly daily for the latest hedge fund portfolio moves.

Tuesday, July 13, 2010

Bruce Berkowitz's Fairholme Capital Starts MBIA Position, Raises AIG Stake

Bruce Berkowitz's investment firm Fairholme Capital Management recently filed two 13G's with the SEC regarding two of its positions. Firstly, Fairholme has filed a 13G regarding shares of MBIA (MBI). Due to portfolio activity on June 30th, 2010, Fairholme now shows an 11.1% ownership stake in the bond insurer with 22,736,200 shares. The vast majority of these shares are owned by Berkowitz's mutual fund vehicle, the Fairholme Fund (FAIRX). This is a brand new position for his firm as it did not own shares back when we looked at Fairholme's portfolio from the first quarter.

While Berkowitz is now long MBIA, we've detailed how Whitney Tilson's hedge fund T2 Partners has been short MBIA. This is definitely somewhat of a battleground stock as there are many company naysayers still out there. In the past, hedge fund manager Bill Ackman had also been short the company. The saga surrounding his position is detailed in Christine Richard's book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. Overall though, Berkowitz's stake in MBIA sticks with his contrarian bent theme.

Secondly, we see that Berkowitz's firm has disclosed a 24.3% ownership stake in the American International Group (AIG) with 32,789,000 shares. The amended 13G filing was made due to portfolio activity on June 30th, 2010. This is an increase in their position as they previously owned an 18.9% ownership stake back in May. So, over the course of the past two months, Fairholme has raised its stake in AIG by a sizable margin and you can see Berkowitz's AIG thesis here. Keep in mind that if the government were to convert its 80% ownership stake in AIG into common shares, Fairholme's ownership position would obviously be diluted. Shares of both AIG and MBIA are up sharply today after this news. In addition to these two portfolio updates, we previously covered Berkowitz's new position in Goldman Sachs (GS) as well.

Taken from Google Finance, MBIA is "provides financial guarantee insurance, as well as related reinsurance, advisory and portfolio services for the public and structured finance markets, and investment management services, including advisory services, on a global basis".

AIG is "a holding company, which through its subsidiaries, is engaged primarily in a range of insurance and insurance-related activities in the United States and abroad. AIG's four reportable segments include: General Insurance, Domestic Life Insurance & Retirement Services, Foreign Life Insurance & Retirement Services, and Financial Services".

For the latest investments from top managers, keep up to date with our hedge fund portfolio tracking series.

David Einhorn's Hedge Fund Greenlight Capital Buys Ensco (ESV)

David Einhorn's hedge fund Greenlight Capital just filed a 13G with the SEC regarding shares of Ensco (ESV). The filing discloses activity on June 30th, 2010 and reveals a 5.2% ownership stake in ESV with 7,416,880 shares. This is a brand new position for Einhorn's firm as we previously did not see it in Greenlight's portfolio last quarter. However, this is not the first time the hedge fund has owned Ensco. They last owned shares of ESV back in the fourth quarter of 2008. To hear Einhorn's latest investment ideas, keep in mind he's presenting at the upcoming Value Investing Congress in October (discount here).

Before the Gulf oil spill, ESV was trading around a 52-week high at above $50 per share. Since the spill, shares hit a low of $33 and are now trading around $40. While Ensco is not directly involved in anything regarding the Gulf of Mexico tragedy, its shares have been sold off as worries have mounted regarding the drilling moratorium. Many hedge funds and investment managers have argued that ESV has unjustly been sold off and Einhorn has certainly joined in the mix as his filing speaks for itself. In the past, we've noticed that John Burbank's Passport Capital and Johnathan Auerbach's Hound Partners both held positions in ESV as of the first quarter of this year. What they've done with those stakes, though, remains to be seen.

For more investment ideas from David Einhorn and other top hedge fund managers, be sure to check their presentations out at the Value Investing Congress in October in New York City. Market Folly readers can receive a discount to the event here. In terms of other recent coverage of Greenlight Capital, head to our coverage of Einhorn's Ira Sohn presentation as well.

Taken from Google Finance, Ensco is "an offshore contract drilling company. As of February 15, 2010, Ensco’s offshore rig fleet included 42 jackup rigs, four ultra-deepwater semisubmersible rigs and one barge rig. Additionally, it had four ultra-deepwater semisubmersible rigs under construction. Ensco’s operations are concentrated in the regions of Asia Pacific, which includes Asia, the Middle East and Australia, Europe and Africa, and North and South America".

And for further elaboration on the potential thesis behind this Ensco investment, check out Manual of Ideas' in-depth analysis of ESV.

Pasco Alfaro's Miura Global Management Buys Crude Oil Via United States Oil Fund (USO)

Pasco Alfaro's hedge fund Miura Global Management recently filed a 13G with the SEC regarding shares of the United States Oil Fund (USO). Due to activity on June 29th, 2010 Miura now shows a 7.5% ownership stake in the exchange traded fund with 4,241,000 shares. This is a brand new position for Alfaro's hedge fund as they did not own shares back on March 31st, 2010 when first quarter portfolio disclosures were made.

What's interesting here is the fact that the fund has used an exchange traded fund as a proxy for investing in oil rather than directly playing oil futures. Before assessing further, remember that since this is a commodity related investment rather than a stock, the rationale behind the pick might not be what it seems. This could simply be a bullish directional bet on crude oil (in part possibly spurred on by the Gulf oil spill). At the same time, Miura could be using this vehicle as a hedging instrument as they often have various alternative energy plays in their portfolio.

Either way, the fact that they hold such a concentrated position in this crude oil exchange traded fund (USO) is intriguing in and of itself. This is by far the largest pure crude oil position we've seen from the equity focused hedge funds we cover. In the past, we've detailed how to invest in crude oil via exchange traded funds. While that comparison highlights the pros and cons of the various vehicles available to investors, it's surprising to see a prominent hedge fund investing such a large sum in a somewhat flawed exchange traded fund. There are numerous negative aspects to using USO as a proxy for oil, many of which we outlined via an in-depth piece, how contango affects crude oil ETF's. Needless to say, the fact that USO merely buys front month crude oil contracts over and over leaves much to be desired.

So while we don't quite know the exact rationale behind Alfaro's investment for his hedge fund, we do know that USO is a vehicle more-so suited for near-term trading rather than investing longer term. Maybe more than anything they might have selected USO purely for its liquidity as other oil funds are far less liquid on a daily trading basis. We'll have to see if we can glean further information regarding their investment purpose (directional versus hedge) and their investment timeframe.

This is the first time we've detailed portfolio maneuvers from this hedge fund so let's get some background. Miura Global Management is a long/short equity hedge fund founded in 2004 by Pasco Alfaro and Richard Turnure. While Alfaro still manages the firm, Turnure left to pursue an alternative energy endeavor after spearheading many of Miura's investments in that space. Miura grew from $5 million in assets under management to upwards of $3 billion. The hedge fund focuses on cutting edge research, multifaceted risk management, and non-correlated returns. Miura Global is a 'Tiger Seed' hedge fund because it was seeded by legendary Tiger Management hedge fund manager Julian Robertson. As such, the fund is a part of the 'Tiger hedge fund family tree'.

Taken from Google Finance, the United States Oil Fund is "a limited partnership. USOF is a commodity pool that issues limited partnership interests (units) traded on the NYSE Arca, Inc. (the NYSE Arca). The Company’s general partner is United States Commodity Funds LLC (the General Partner) and is responsible for the management of USOF. The investment objective of USOF is for the changes in percentage terms of its units’ net asset value (NAV) to reflect the changes in percentage terms of the spot price of light, sweet crude oil delivered to Cushing, Oklahoma, as measured by the changes in the price of the futures contract on light, sweet crude oil traded on the New York Mercantile Exchange (the NYMEX)."

For the latest investments from top managers, head to our daily hedge fund portfolio tracking series.

Pat McCormack's Tiger Consumer Initiates Sonic Automotive (SAH) Position

Patrick McCormack's hedge fund Tiger Consumer Management recently filed a 13G with the SEC regarding shares of Sonic Automotive (SAH). The disclosure was made due to portfolio activity on June 29th, 2010 and Tiger Consumer now shows a 5.13% ownership stake in SAH with 2,081,757 shares. This is a brand new position for the hedge fund because they did not own any Sonic Automative in the first quarter (as of March 31st, 2010). Shares of SAH are trading at $8.50, a level where they temporarily bottomed back in November 2009. In the throngs of the crisis, Sonic Automotive traded as low as $0.72. We've previously covered Tiger Consumer's other new position as well.

This is the second time we've detailed portfolio activity from Pat McCormack's hedge fund. For those unfamiliar, Tiger Consumer was seeded by Julian Robertson, the legendary manager and founder of Tiger Management. McCormack's fund offices at the same Park Avenue address as Robertson's former fund. Tiger Consumer reported $919 million in assets invested on the long side as of March 31st, 2010. As its name implies, the fund focuses on the consumer sector and is one of the 'Tiger Seed' hedge funds (you can view the entire Tiger hedge fund family tree here).

Taken from Google Finance, Sonic Automotive "operates as an automotive retailer in the United States. As of January 31, 2009, the Company operated 145 dealership franchises at 122 dealership locations, representing 29 different brands of cars and light trucks, and 26 collision repair centers in 15 states."

For the latest investments from top managers, head to our hedge fund portfolio tracking series updated daily.

Monday, July 12, 2010

Jeff Saut: Risk Adjusted Stock Selection & Risk Management Are Keys to Portfolio Success in 2010

Raymond James' Chief Investment Strategist Jeff Saut has penned his weekly market commentary and in it he examins the possibility of the dreaded double-dip recession. Many economists argue that the recession ended around this time last year. Saut proceeds to examine the possibility that these economists are wrong in an effort to gauge the possible worst case scenario. He outlines the fact that 3 out of 38 recessions have qualified as double-dips since 1880. In practically all of those cases, the first recession was 'mild' and then the double-dip was quite harsh. Saut argues that we aren't in for the dreaded DD because the recession we just experienced was anything but mild.

Pursuant to his take on the markets, Saut is not bearish, but he is quite cautious. Last week, he pointed out that there were so many negative indicators that he wouldn't be surprised to see a contrarian stock market bounce. And, that's exactly what happened. You have to hand it to the market strategist as he's correctly removed his market hedges into the turmoil and then correctly called the rally. So, where does he stand now? Since that transgression of events, he has reverted back to his cautious stance for the intermediate term. He thinks any pullback will be contained in the 1040-1050 zone on the S&P 500.

In order to find success in these cautionary times, Saut points to risk adjusted stock selection and risk management as the keys to portfolio success. This is interesting because Lee Ainslie of hedge fund Maverick Capital previously opined that 2010 would be a stockpicker's market. Yet, when you examine the performance of many long/short equity hedge funds, that doesn't seem to be the case at all. Maybe 2010 is truly setting apart the best stockpickers from the rest of the pack. While 2010 has been rough on many big name investors, Abnormal Returns has dubbed the next decade the forthcoming golden age of stockpicking. In the near-term, Saut agrees that stockpicking is key.

A few weeks ago, Saut advised investors to protect gains from the March 2009 rally and his stance remains unchanged there. To help investors with their stockpicking prowess, he has recommended a few names: Microsoft (MSFT), Intel (INTC), Enterprise Product Partners (EPD), Allstate (ALL) and Walmart (WMT).

Specifically on Microsoft, Saut highlights its $3.50 per share in cash, 2% dividend yield, and cheap valuation. Regarding Walmart, he thinks its valuation is low here and sees the company growing revenues in the high single digits and buying back a lot of shares. Lastly, Saut puts in a plug for Putnam's Diversified Income Fund (PDINX) as it has the possibility to generate equity-like returns without the same risk profile as equities. Embedded below is Jeff Saut's entire investment strategy piece for this week:

You can download a .pdf copy here.

Overall, Saut remains cautious longer term. He currently favors growth over value stocks and has highlighted numerous technology sector names in his missives. While he thinks the selling will be contained near-term in the market, he points out the S&P 500's 50 day moving average as a key level of resistance at around 1,100. For more on Saut's market rationale, head to his commentary where he outlined his decisively cautious stance.

Buy When There's Oil In The Water: Bullish Case for The St. Joe Company (JOE)

Below you'll find an in-depth presentation from Broyhill Asset Management on an intriguing way to play the Gulf oil spill from an investment standpoint. Hedge funds like Whitney Tilson's T2 Partners are buying oil giant BP (you can see their in-depth analysis of BP here). Others are buying drilling companies such as Transocean (RIG), Noble (NE), and Ensco (ESV). Broyhill, however, takes a slightly different approach. Their presentation "Buy When There's Oil In The Water" presents the bullish investment case for The St. Joe Company (JOE).

As you'll see in the presentation, the case for St. Joe starts with the fact that they own numerous real estate assets along the Gulf coast of Florida (assets that unfortunately could possibly be in danger from the oil spill). Christopher Pavese, Chief Investment Officer of Broyhill outlines St. Joe's competitive advantage in their near-zero cost of land. He writes, "Its massive scale and low-cost basis is impossible for other developers to replicate, making JOE the partner of choice for all development activity in Northwest Florida."

Broyhill is a Family Office that was started to manage the assets of Paul H. Broyhill and has since evolved into a multi-pronged investment firm. We've previously detailed commentary from Broyhill's Affinity hedge fund with their contrarian bet on long-term treasuries. Additionally, we've covered their ten reasons to buy bonds. And now below, we'll detail their hedge fund's latest investment idea.

Aside from its real estate assets, JOE has a pristine balance sheet with tons of cash and practically no interest-bearing debt, a much 'leaner' cost structure compared to prior years. A true investor often models and examines the worst case scenario for a given company. Broyhill has done just that, outlining a scenario where no one is really ever interested in JOE's land. In such a case, they estimate the stock is worth $15 (JOE currently trades above $25), assuming the land is sold for a paltry $2,000 an acre. To put this in context, consider that Leucadia recently paid $80,000 per acre in the same region.

The key for this company is monetizing their assets and the assumption that they will be able to do so. This play obviously requires patience on the investing end and Pavese highlights that St. Joe already has some near-term catalysts already lined up. However, as the oil spill nears St. Joe's properties, the stock has become more volatile. Broyhill argues that JOE's volatility leads to opportunity. Embedded below is the full in-depth presentation on The St. Joe Company (JOE) from Broyhill Asset Management:

You can download a .pdf copy here.

So while many other hedge funds and investment managers target oil companies as a proxy for oil spill plays, Broyhill has taken a roundabout approach. And, they aren't alone in this investment either. Bruce Berkowitz's Fairholme Fund has St. Joe as one of their largest positions and has for some time. So while Pavese fully acknowledges that JOE is a slow and boring story, he is confident this unfortunate oil spill has presented a fantastic opportunity for the long-term. For more from Broyhill's Affinity hedge fund, head to their contrarian bet on long-term treasuries as well as their ten reasons to buy bonds. Stay tuned tomorrow as we'll be covering their latest market commentary as well.

Seth Klarman ~ Market Folly Quote of the Week

The Market Folly Quote of the Week is back in full force. Last week's quotation came from the Oracle of Omaha himself, Warren Buffett. So it's only fitting that our second quote comes from arguably Buffett's biggest competition in the 'best investor ever' category: Seth Klarman of Baupost Group.

Quote of the week:

"Here’s how to know if you have the makeup to be an investor. How would you handle the following situation? Let’s say you own a Procter & Gamble in your portfolio and the stock price goes down by half. Do you like it better? If it falls in half, do you reinvest dividends? Do you take cash out of savings to buy more? If you have the confidence to do that, then you’re an investor. If you don’t, you’re not an investor, you’re a speculator, and you shouldn’t be in the stock market in the first place."

~ Seth Klarman

For more from Baupost Group's manager, check out Seth Klarman's recommended reading list as well as an in-depth profile of Klarman.