Friday, January 7, 2011

T2 Partners Year-End Letter: Discussing Longs & Shorts

Whitney Tilson and Glenn Tongue's hedge fund firm T2 Partners released their year-end letter to investors. The letter is one of the most thorough we've seen as it is 27 pages long and includes assessment of both their long and short positions. If you want transparency in the hedge fund industry, here's your barometer.

For 2010, T2 finished up 10.3% net compared to an S&P 500 return of 15.1%. So while they trailed the indices last year, T2 has outperformed since inception, returning 9.1% annualized net versus 2.0% for the S&P. This past year, their pain came from various short positions and essentially 'missing' the quantitative easing round 2 rally.

T2 Partners' top 12 long positions at the end of 2010 were:

1. Grupo Prisa (PRIS & PRIS.B)
2. Microsoft (MSFT) ~ see their thoughts on MSFT here
3. Berkshire Hathaway (BRK.A/B)
4. BP (BP) ~ their thoughts on BP here
5. General Growth Properties (GGP)
6. CIT Group (CIT)
7. Kraft (KFT) and warrants
8. Seagate Technology (STX)
9. Iridium (IRDM) and warrants
10. Automatic Data Processing (ADP) ~ see their presentation on ADP
11. Resource America (REXI)
12. Anheuser Busch InBev (BUD)

While we've presented analysis on T2's longs before, we want to single out Seagate Technology (STX) and CIT Group (CIT) as we haven't seen Tilson talk about these before. He likes STX mainly because it is trading at an absurdly cheap valuation and he thinks fears over the hard drive (HDD) market (versus the solid state drive market) are overblown.

Tilson and Tongue fancy CIT due to the company's potential to capture financing-cost savings. Additionally Tilson writes, "Even more intriguing is the possibility that a healthy bank might acquire CIT, attracted by the enormous earnings leverage available in applying the acquiring bank's much lower borrowing costs to CIT's business model."

T2's top 10 short positions (in alphabetical order):

1. AIG (AIG)
2. Homebuilders (various individual companies plus XHB the ETF)
3. InterOil (IOC) ~ analysis of their short position here
4. ITT Educational (ESI), as well as other for-profit education plays
5. Lender Processing Services (LPS)
6. Lululemon Athletica (LULU)
8. Netflix (NFLX)
9. (CRM)
10. St. Joe (JOE)

Tilson and Tongue highlight that their short book caused them much pain last year. Accordingly, they set aside a portion of their letter to address how they manage short positions that move against them. In short (no pun intended), they re-evaluate their analysis to determine whether to add to the position, do nothing, or trim/exit.

Specifically, they trimmed their position in Netflix (NFLX) and replaced part of it with put positions. (We posted why Tilson is short Netflix here). They've also done this with other short positions in order to better manage risk. After all, remember that these stakes are merely hedges to their long book as T2 is always net long (they are currently 40% net long).

Embedded below is T2 Partners annual letter to investors for 2010:

You can download a .pdf copy here.

It's great to see a manager with such transparency in an otherwise secretive and guarded industry. T2's portfolio overlaps with positions many other hedge fund managers own that we've highlighted as well.

T2 is short JOE and so is Greenlight Capital (see David Einhorn's short thesis on JOE). While T2 is short ESI, hedge fund Blum Capital is long ESI. And while Tilson and Tongue are short AIG, Bruce Berkowitz's Fairholme Capital is long AIG. It's fun to see hedge funds take different stances on various stocks because that's what makes a market.

Eton Park Starts New Vallar (LON:VAA) Position

Eric Mindich's hedge fund firm Eton Park Capital Management has started a brand new position in Vallar (LON: VAA). The London Stock Exchange has revealed that due to trading activity on the 22nd of December, 2010, Eton Park now controls 5.03% of Vallar's voting rights.

In terms of other recent Eton Park activity, we saw that the hedge fund supported Air Products' (APD) latest bid for Airgas (ARG) in one of their arbitrage trades. However, nothing has materialized there. Eton Park's most recent acquisition is a bit of a head-scratcher and you'll see why below in the company description:

Per Google Finance, Vallar is "a holding company formed to acquire a single company, business or asset that has operations in the global metals, mining and resources sector. The Company focuses on the Americas, Russia, Eastern Europe and Australia. It focuses on commodities, including base metals, coking coal, iron ore, thermal coal, gold, silver and uranium."

For other activity out of Eton Park, we also detailed an increase in their Lonrho (LONR) stake.

Odey Shorts JJB Sports While Activists Remain Long

It looks like we might have another potential battleground stock on our hands. European hedge fund giant Odey Asset Management has disclosed a new short position in JJB Sports (LON: JJB), a sporting goods retailer. Due to portfolio activity on the 24th of December, Odey are short -0.61% of JJB's shares outstanding. Just yesterday we posted up that Odey remains optimistic on stock markets. But obviously, as a hedge fund, they will have short positions as well.

Crispin Odey's hedge fund had to declare this position under UK regulations because JJB is currently involved in a rights issue and Odey holds greater than a -0.25% short position. For more on these rules, see our primer on UK disclosures for more information. According to recent reports in the FT, JJB Sports is expected to ask investors for a further £50m cash injection, following £31.5m promised just before Christmas.

A number of activist hedge funds have taken the other side of the trade, though. Crystal Amber, managed by Richard Berstein, owns 15.4% of JJB's shares. Additionally, Bill Gates' Casecade Fund holds a 5.5% ownership stake.

Odey's short position is even more intriguing because back in the summer of 2010, a quarterly letter from Odey disclosed that their funds were long another UK sports retailer, Sports Direct (LON: SPD). Back then, they owned 0.84% of the voting rights. If that position is still open today, then Odey potentially have an interesting pair trade of long SPD, short JJB. You can scroll through our coverage of other hedge fund short positions here.

Per Google Finance, JJB Sports is "a sports retailer supplying branded sports and leisure clothing, footwear and accessories. JJB Sports is a high street sports retailer, with 250 stores in the United Kingdom and Eire. It provides a range of products covering United Kingdom sports."

For more from hedge fund Odey, be sure to see Crispin Odey's latest market commentary.

Second Curve Acquires Mercantile Bank (MBWM) Stake

Tom Brown's hedge fund firm Second Curve Capital have started a brand new position in Mercantile Bank (MBWM). Per a 13G filing with the SEC, the hedge fund reveals that due to trading activity on December 30th, Second Curve now owns 5.1% of MBWM with 442,707 shares.

This is a brand new position because the firm did not disclose owning shares in their previous SEC filings. Prior to founding Second Curve, Tom Brown headed the financial services group at Julian Robertson's Tiger Management. During the financial crisis, Brown was painfully early on his bullish call on the financials and it cost him dearly at the time.

Per Google Finance, Mercantile Bank "wholly owns Mercantile Bank of Michigan (the Bank). The Bank is a state banking company. The Bank’s primary service area is the Kent and Ottawa County areas of West Michigan, which includes the City of Grand Rapids in the State of Michigan. The Bank, through its seven offices, provides commercial banking services primarily to small- to medium-sized businesses and retail banking services in and around the Grand Rapids, Holland and Lansing areas."

For more on Tom Brown's hedge fund, we detailed yesterday that Second Curve acquired more CompuCredit (CCRT) as well.

What We're Reading ~ New Year Edition

If you missed it, Bespoke's 2011 roundtable [Bespoke]

Letter from Citadel's Ken Griffin [Dealbook]

Growth versus value [AbnormalReturns]

In 2010, we learned that... [ReformedBroker]

On an MBA versus CFA [ResearchPuzzle]

Interview with Alexander Roepers of Atlantic Investment Mgmt [Barron's]

Howard Lindzon interviews Mark Cuban [StockTwits]

Warren Buffett speaks about succession planning at Berkshire [Vanity Fair]

How Chipotle (CMG) is winning burrito wars [Bnet]

Six themes for 2011 [Pragmatic Capitalism]

On why Google (GOOG) is undervalued [TwistedValue]

Rising interest rates positive for equities? [ValuePlays]

How to come up with investment ideas [GannonOnInvesting]

Emerging hedge funds the belles of the ball [AllAboutAlpha]

Farallon receives mixed messages [Pensions&Investments]

From analyst to hedge fund founder in six years [Fortune]

On the respective Alcon (ACL) and Dynegy (DYN) deals [Dealbook]

Start the new year with an investment report card [Rational Walk]

The best economics blogs [WSJ]

New Year's hangover for stocks? [Barron's]

Bullish sentiment reaches historical extremes [Bespoke]

Hedge fund managers bullish on US stocks [Pensions&Investments]

Investors flocking to emerging market bonds [InstitutionalInvestor]

Municipal bond buyers on guard [BondBuyer]

Thursday, January 6, 2011

Harbor Investment Conference: Ideas From Ackman, Berkowitz & More

Want to hear some investment ideas from top hedge fund managers? The Harbor Investment Conference will take place February 3rd, 2011 in New York City and provides the perfect opportunity. All proceeds from the event goes to the Boys and Girls Harbor, so it's a wonderful cause. At last year's event, the 8 stocks that were recommended were up an average of 39% at the end of 2010. There are only 331 seats available so act quickly!

Here are the speakers at the event:

Bill Ackman – Pershing Square Capital Management
Bruce Berkowitz – Fairholme Capital Management
David Darst – Chief Investment Strategist, Morgan Stanley Smith Barney
Alex Klabin – Senator Investment Group LP
Mick McGuire – Marcato Capital Management, LLC
Craig Nerenberg – Brenner West Capital Advisors, LLC
Todd Sullivan – Rand Strategic Partners

Everyone of course knows Bill Ackman and Bruce Berkowitz. However, some of the other speakers should offer great insight as Mick McGuire previously worked at Pershing Square and Craig Nerenberg runs a similar strategy to Pershing Square with a concentrated portfolio. Also, our good friend Todd Sullivan from will be speaking as well.

Embedded below is an information and registration sheet for the conference:

You can download a registration .pdf here.

The event is coming up soon and there are only 331 seats available, so sign-up to hear some hedgie investment ideas and support a great cause at the same time.

Wednesday, January 5, 2011

Strategist Jeff Saut Cautious On Market, Still A Buyer On Dips

It's been a long time since we last checked in on market strategist Jeff Saut's commentary and figured the new year would be a perfect time to do so. In short, he is currently cautious on the stock market, wary of a repeat of January 2009. So, why is he cautious?

Saut writes, "in the short-term, the odds are not tipped decidedly in investors' favor, at least not by the metrics I use. Indeed, the Volatility Index (VIX/17.75) is down to 'complacency levels' last seen in April right before the 17% correction. Ditto, investors intelligence data shows advisory sentiment approaching the bullish extremes of October 2007."

Simply put, he feels that investors have become complacent and bullish sentiment has skied high, something he is using as a contrarian signal. But while the market strategist feels that stocks are due for a pullback, he is a buyer of those dips.

One thing we've noticed is that Saut has often been correct in his past calls, so kudos to him for utilizing timing signals such as volatility, sentiment levels, and overbought/oversold metrics. At the same time, he is often early with his calls and he freely admits this in his latest market commentary. After all, momentum and bullish sentiment can last much longer than many anticipate. It's a tough train to jump in front of.

For instance, back in late October, Saut called for a pullback (which he also saw as a buyable dip). What happened? The market saw a nice pullback... but not until a few weeks into November. Followers of Saut's prescient call (dip buyers) would have made a pretty penny on that trade.

Saut by no means is recommending a massive short position here, but it does seem as though he advocates taking some profits, raising cash, and preparing for a near-term correction that can eventually be bought as the new year begins. Embedded below is Saut's latest investment strategy piece entitled, 'The White Hurricane':

You can download a .pdf copy here.

For interesting past missives from the market strategist, check out Saut's businessman's risk portfolio, as well as his risk management principles.

Crispin Odey Remains Optimistic On Stock Markets: Latest Commentary & Outlook

Crispin Odey, founder of hedge fund firm Odey Asset Management, is out with his latest market commentary and outlook. Back in September, he noted that equities were attractively priced but unloved. Since then, equities have rallied furiously. So, what's his latest take? See below for his outlook penned on the 30th of November.

"Crispin Odey
Founding Partner | Portfolio Manager
Current Outlook

Easy money takes the pain out of hard knocks. In May, in August and again in November, markets have attempted to dissolve the Euro – to fracture it. Insolvency in Greece came about because their governments could not collect taxes. Insolvency in Spain and Ireland relates to banks lending against mortgages on margins of only 20 basis points over Libor whilst borrowing at 100-200 basis points above Libor.

These issues need addressing. Keynes wrote in the thirties that: “…the absolutists of contracts are the parents of revolution.”

Banks need to be allowed to reset lending margins; they need to be profitable. Who cares if this demands legislation to take effect?

It is odd that Merkel has been the instigator of the Euro wobbles. She is of course worried that German banks will need to be bailed out if these countries go down. She is right to be worried that German bankers might be foolish lenders: look at the history. Recently German banks’ net interest margins should have soared because in Germany there were no tracker mortgages, no teaser rates. Borrowers borrowed for 10-15 years at nominal rates. Two years ago those borrowers were borrowing at 4% and the bank was making nothing, today they are borrowing at 4% and the bank could be making 300 basis points of margin. Instead, by matching the duration risk and having to borrow at 100 basis points over Libor, German banks still make little money out of mortgage lending.

Throughout these crises I have remained bullish and I still remain more optimistic for stock markets than for a long time.

Why? Because the markets are too cautious about the strength of the economic cycle. In previous quarterly calls I have outlined how the USA is now successfully encouraging economic growth and inflationary pressures to grow in the emerging market economies. But what is not understood is that Germany in this regard looks exactly like an emerging market. Thanks to the problems of the Euro, German exporters are not only enjoying a massive boom, they are also enjoying a currency advantage of around 30% over their Japanese competitors. Couple this with a tax rate which, since the last boom in 89-90, has fallen from 52% to 30%, and shareholders – for the first time – will almost certainly enjoy an unheralded boom.

In a country where individuals spend more on cut flowers than equities, these profits will come to us – yes to the foreigners. This is not going to be popular in Germany, and quite quickly I expect profits to be commuted into wage increases, but this will do something which is not expected. It will mean that from next year the boom in consumption in Germany will help to lift all of these bankrupt southern economies out of recession. The Euro will work as it was intended. German inflation will be higher than others, German competitiveness will suffer and yes we will stop having Euro crises. Of course Germany will not enjoy this boom and if it was down to their authorities, interest rates would rise and their currency would strengthen but they are going to find their feet being unable to reach the pedals as Ireland et al found this year.

Bernanke, who I think is much maligned, wrote this recently in ‘Rebalancing the World Economy?’

As currently constituted, the international monetary system has a structural flaw: its lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new. In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.’

So like Simeon, are we about to say; ‘today this prophecy is fulfilled’? Could there have been a more perfect Christmas tale than this? Yes, in a way.

Bernanke is wrong. The mechanism is starting to work. It will shower profits upon those fortunate enough to see the opportunity. It may well start the beginning of the bear market in government bonds but it will also lead to a much more balanced global economy – balanced but inflation prone and inflation bound."

The key takeaway here is that he is constructive on the markets and remains bullish and optimistic, flying right in the face of caution and pessimism. Odey thinks there could potentially be a bear market in government bonds and we've highlighted that numerous other hedge fund managers agree with him. Odey sees inflation in the world's future as well and if you concur, here are the best investments during inflation.

It's been a while since we last covered this hedge fund as back in October we noted their new short position in Provident Financial (LON: PFG). You can also read Odey's previous market commentary here.

Dan Loeb & Third Point's Latest Exposure Levels

Dan Loeb's Third Point Offshore Fund finished 2010 up 33.5%, compared to an S&P 500 return of 15.1%. Since inception in December of 1996, Third Point has returned an impressive 18.6% annualized. The hedge fund manager recently released its latest December exposure levels so we wanted to provide readers with an update.

Here are Third Point's top holdings as of year end:

1. Gold
2. Delphi Corp (multiple securities held)
3. Chrysler (multiple securities held)
4. Potash (POT)
5. Lyondell (LYB)

You can learn about more of Third Point's investments in our newsletter. Physical gold continues to be a massive position for Loeb and he potentially could be using the precious metal as some sort of tail risk hedge. Interestingly enough, Third Point continues to own Potash (POT) even after BHP Billiton's bid for the company failed. It appeared as though the hedge fund originally purchased POT as a arbitrage trade but maybe they like the natural resource exposure as an inflation play. Or maybe they still see the company as a viable takeover target, who knows.

Lastly, Lyondell finally shows up as a top holding for Third Point as the company exited bankruptcy. The chemical maker's equity now trades under ticker symbol LYB. Back in the second quarter we noted Loeb's fondness for post re-organization equities, and that portfolio theme continues.

Exposure Levels

Third Point has its highest net long equity exposure in basic materials and financials. In total, they are 60.1% long, -8.4% short, leaving them 51.7% net long equities. One geographic note is that Third Point had previously been net short the Asia region, but are now net long ever so slightly.

In terms of credit exposure, Third Point has its highest net long exposure in mortgage backed securities (MBS) at 19.4%, followed by distressed at 14.2% net long. Third Point is also net short government securities at -10.9%. Overall in credit the hedge fund is 32% net long.

Top Winners

In Loeb's portfolio, big winners include Delphi (multiple securities held), NXP Semiconductor (NXPI), Lyondell (LYB), Chrysler (multiple securities held), and Accuride (ACW). He highlighted NXPI in his recent letter to investors as Third Point participated in the IPO and sees upside in the name. Shares of Accuride also recently started trading in late December after re-listing on the New York Stock Exchange.

Top Losers

Third Point's portfolio saw weak performance from the following plays: three undisclosed short positions (undoubtedly due to the market's large rally), Fortis (multiple securities held), as well as State Bank of India (BOM:500112), a name we have previously not seen disclosed.

That wraps up our summary of Third Point's end of year exposure levels. You can check out more of Third Point's portfolio in our newsletter. And to learn to invest like Dan Loeb, check out his recommended reading list here.

Second Curve Capital Files Form 4 on CompuCredit (CCRT)

Tom Brown's hedge fund firm Second Curve Capital recently filed multiple Form 4's with the SEC regarding transactions in shares of CompuCredit (CCRT). These filings represent indirect ownership and were made by advisory clients of Second Curve. In total, Second Curve reported acquisition of 81,000 shares during the last 10 days of December.

Second Curve acquired their shares through various lots ranging in price from $6.59 to $6.95. Shares of CCRT are currently trading around $6.72. After all purchases were made, they owned 4,260,630 shares of CompuCredit. We noted Second Curve reported transactions in CCRT back in September as well.

Also, in a separately filed Form 4, advisory clients of Second Curve Capital have purchased 29,000 shares of Tennessee Commerce Bancorp (TNCC). The purchases were made in the last three days of December in various lots at prices of $4.84, $4.82, and $4.91. After all was said and done, Second Curve reported owning 1,271,456 shares of TNCC. We detailed Second Curve's recent addition of TNCC shares and this marks a subsequent recent purchase after originally purchasing shares in August.

Per Google Finance, Tennessee Commerce Bancorp is "a bank holding company formed to own the shares of Tennessee Commerce Bank (the Bank). The Bank conducts business from a single location in the Cool Springs commercial area of Franklin. As of December 31, 2009, the Bank had total assets of $1.4 billion. The Bank offers a range of retail and commercial banking services."

CompuCredit is "a provider of various credit and related financial services and products to or associated with the financially underserved consumer credit market."

Scroll through all of our coverage of the latest SEC filings made by prominent hedge funds.