Friday, April 6, 2012

Passport Capital Sees "Major Retrenchment in Risk Assets": Latest Portfolio Changes

Passport Capital founder John Burbank recently sent out a letter to investors updating their macro views.

Despite being net short, their Passport Global fund is up 4.1% for the year. Their neutrally-exposed Long/Short fund has returned 7.5% and their net long Special Opportunities fund is up 12.9% for the year.

Burbank writes, "I have strong conviction about our current positioning - perhaps as strong as I have ever felt in the 11+ years that I have been running Passport Capital. Simply put, I believe that the current market environment is setting up for a major retrenchment in risk assets and we are well positioned to benefit from this."

Just a month ago, Burbank made an appearance and said that 2012 is a stockpicker's market.

Passport Capital's Main Views

They feel that Central Bank liquidity has merely boosted prices but has done nothing else constructive. Burbank believes that deflation is the real risk (see the best investments during deflation). The hedge fund also takes the stance that equity markets are misconstruing economic growth in the developed world.

Passport feels a recession is coming in 2012 or early 2013 in the US. They note that average equity declines during recessions is 40%, though even a 20% decline would take the market back to the October 2011 lows.

Burbank's Portfolio Changes

In late 2011, they reduced portfolio illiquidity and have been selling into strength in the equity markets as of late. They've also boosted hedges and shorts "less to reduce net exposure and more to add idiosyncratic risk aligned with our negative economic view."

Burbank's firm also bought more physical gold and also started a position in Brent Crude Oil. These are both plays on increasing Central Bank liquidity. You'll recall that John Paulson originally started his gold fund as a bet against the US dollar as well.

Passport has also started a position in mortgage backed securities which they believe to "have the potential to deliver high risk-adjusted yield irrespective of equity market valuations." Additionally, they initiated a positive-carry position in deflationary rates trade (3yr1yr) which they feel will benefit from either the Fed holding short-term rates low or a risk-off period.

Saudi Equities Most Compelling

Passport has their single largest equity allocation to Saudi equities. Even though that market is up 23% year-to-date, they feel that "Saudi equities constitute the best single asymmetric equity market we can find."

For more coverage on this hedge fund, we've highlighted why Passport likes Marathon Petroleum as well as their rational for owning Liberty Interactive.

Is Gamestop (GME) a Value Play or Value Trap? Quick Pitch

Market Folly has been adding a bunch of new features as of late. We started off with our stock of the week series and now we're going to begin a monthly 'quick pitch' on certain equities that hedge funds have been long or short.

Today's quick pitch focuses on Gamestop (GME): Value Play or Value Trap? The following is from Chris Lau, a SeekingAlpha contributor:

A major shake-up in the way games are distributed is unfolding. Activision (ATVI) and EA’s (EA) entrance in digital gaming is proving to be a winning strategy. EA’s online site, Origin, bypasses traditional sales channels. In the social networking space, Zynga’s (ZNGA) IPO showed investor willingness to take risks. Investors are putting money in the yet-to-be proven model of social networking games.

This leaves one major question: What does this mean for retailers like GameStop?

Hedge Fund Ownership (Or Lack Thereof)

The top holders of GME stock are largely vanilla mutual fund players like Vanguard and Fidelity. While Cliff Assness' quant firm AQR Capital owned a decently sized position as of 2011 year-end, there is practically no major hedge fund ownership in this stock (at least in the top 100 holders).

GameStop Backstory

GameStop has grown throughout the years, and especially after its acquisition of Electronic Boutique in 2005 for $1.44B. In the last few years as the digital downloading of games has proliferated, GameStop touted its knowledge of gaming and its consumers as a competitive advantage.

In recent months, investor pessimism has grown. Shares are 22.91% off from 52-week highs, closing recently at $21.70. The main concern lies in the rising shift to digital gaming from the traditional physical console games.

GameStop has tried to attack this shift head-on and saw over $450 million in digital sales last year. They've mainly offered access codes in stores that allow gamers to download content at home. GME was originally spun-off from Barnes in Noble (BKS) in 2002, yet another company battling digital distribution of content.

GME's management team has set aside money for further acquisitions in digital as they have cash and no debt.


At $21.95 per share, GME trades at a P/E of 7.63 (using 2011 EPS of $2.87 that excludes write-downs). By comparison, Best Buy (BBY) traded recently at $22.95 with a P/E of 6.30 (using 2011 EPS of $3.64).

Why the Bulls Own the Stock

Bulls point to fears over digital distribution as being overblown and argue that the digital transition will take longer to play out and won't cripple GME. They feel as though GME has a dominant market position in the industry.

Joel Greenblatt of Gotham Capital runs a Compustat screen to create a 'Value 1000' index for value investors. GME is one of the main companies on that list due to its cheap valuation. Other bulls might point to a cap structure strategy and its cashflow story as compelling reasons to own it. The massive repurchases could potentially place a floor on the stock that can keep shares buoyant even if things take a turn for the worse. And given the high short interest, there's also potential for various short squeezes as these buybacks reduce the float size.

- During the last quarter, GME grew market share to record levels.
- Its expertise allowed the company to create new business models to fill profitability gap
- PowerUp Rewards program (launched October 2010) now has over 17 million members
- Pre-owned digital and mobile business will add $800 million in revenue in 2012
- The company is debt-free
- $500 million stock buyback
- Cheap valuation
- Continued partnerships with publishers to sell DLC

Why the Bears Are Short

Bears will argue that a secular shift to digital distribution of games and the rise of social gaming will lead to the demise of GME ala Blockbuster.

Hedge fund manager Jim Chanos of Kynikos Associates is a notable bear on GME shares as he argues that game publishers like EA are increasingly becoming direct competitors with GME. You can view his bearish presentation on GME here.

He argues that GME looks cheap and will appear cheap all the way down. Just like movies and music, Chanos says that the value of their brick and mortar presence will collapse. GME's counterpart in the UK, Game Group, recently filed for protection from creditors.

And while GME currently thrives on used game sales, that revenue stream could be in jeopardy in the future. It's been rumored that future iterations of Microsoft's Xbox and Sony's Playstation will likely have some sort of "anti-used games measures" built in to the consoles.

One risk that short sellers are cognizant of is that GME could potentially take themselves private or be taken over by private equity. Additionally, the cost to borrow is quite expensive due to the crowded short.

- Fewer packaged game titles are being released
- Short interest has climbed to 41%
- In its recent quarter, GME said physical console category declined faster than projected
- Comparable store sales dropped 3.6% in the last quarter
- 20% decline in hardware sales

Further Talking Points

During the company's recent quarterly conference call, management said that digital receipts are ahead of schedule. They have a goal of $1.5b receipts by 2014.

GameStop's recommerce (buy-sell-trade) for mobile devices, electronics, and tablets started in 2011. The company believes it can resell items like Apple iPads, assuming 5% trade-ins annually and a 12-18 month upgrade cycle. Sales would account for $200m by 2012 and $600m by 2014 which you can read about here.

GME forecasts growth that is reliant on physical games, hardware, and software. The short-term problem for the company is that a lack of new consoles in 2012 will pressure margins. GME's loyalty program must attract a higher proportion of digital sales.

Hot titles like Grand Theft Auto, FIFA Soccer, Call of Duty, and Max Payne 3 may be a catalyst for higher growth. These catalysts aren't necessarily reflected in the current share price and management kept only a conservative forecast for these releases.


GameStop (GME) is a company that dominates in its traditional space of selling physical video games, but it needs to grow-up in the digital world and faces challenges in adaptation. The negative price action in its stock as well as competitors (BBY), suggests that there is further downside. If console makers implement anti-used game measures, GME would have a tough uphill battle. Weak retail sales in electronics and heavy competition make this a stock to avoid at this time.

Thanks to Chris Lau for his contribution to Market Folly in our new 'Quick Pitch' series. If you have an investment write-up you'd like to submit, please click here to email us

Submit Investment Ideas to Be Judged By Seth Klarman, David Einhorn & Bill Ackman: Ira Sohn Contest

For the second year in a row, the Ira Sohn Investment Idea Contest is back. Here's your opportunity to have an idea judged by some of the top investors in the game.

Judges for this year's contest include: Seth Klarman (Baupost Group), David Einhorn (Greenlight Capital), Bill Ackman (Pershing Square), Michael Price (MFP Investors), and Joel Greenblatt (Gotham Capital).

The winner will be selected based on the judges' determination of the most compelling investment idea.

How To Apply: Click here to submit your idea

Deadline: You must apply by Wednesday May 9th at 11pm EST.

Rules: You can choose any marketable security (long or short) with a market cap above $1 billion. The time horizon for the idea should be one-year.

Prize: The winner gets to present their investment idea in front of 2,000 people at the renowned Ira Sohn Investment Conference.

The Ira Sohn Investment Conference was founded in 1995 and proceeds from the event go to organizations dedicated to care and treatment of children with pediatric cancer and life-threatening illnesses.

At the conference, top hedge fund managers present their latest investment ideas and it's one of the best events each year. This year the conference will take place on May 16th from 12pm to 6pm at NYC's Avery Fisher Hall at Lincoln Center. More information can be found at

Don't forget to submit your investment idea before May 9th. Good luck!

Thursday, April 5, 2012

The Apple Conundrum: When To Sell?

John Goltermann of Obermeyer Asset Management has penned an interesting investment commentary simply titled, "The Apple Conundrum." In it, he shares his viewpoint as a manager that does not own AAPL.

Yes, you read that correctly... there are people out there who do not own AAPL. In a world where the stock is one of the most widely owned by hedge funds, this must be truly shocking news.

Apple a "Trillion Dollar Company"?

We thought it was prudent timing to feature this balanced view on the company. Yesterday, in our "what we're reading" post, we highlighted three articles on AAPL which mostly focused on $1000 price targets and "trillion dollar company" market caps. Contrarians will argue that this could signal at least a short-term top.

The company's future is something hedge fund managers and investors assess frequently given the fact that Apple is, after all, a technology company subject to an ever-changing landscape.

Goltermann's piece cites tech heavyweights Cisco (CSCO) and Microsoft (MSFT) as prime examples of technology companies that became the largest on earth and then saw vast share price declines.

Most, if not practically all hedge fund managers who have purchased AAPL shares are sitting on a hefty unrealized gain. David Einhorn's Greenlight Capital bought AAPL at $248. Today it trades north of $600.

This led us to ponder the true Apple conundrum: when will investors decide to sell? Or from an analytical standpoint: when will risk outweigh reward?

Many portfolio managers have been forced to continually trim their AAPL position sizes simply to manage portfolio weightings. In many cases, AAPL has become such a large percentage of their portfolio due to share price appreciation that they have to do something about it.

But these sales are due to risk management and position sizing rules rather than a change in the investment thesis. So again, the question is: what will cause them to exit AAPL entirely?

The Future Apple Case Study

Recently, we tweeted (follow us on Twitter) that Apple will make a fascinating business school case study one day, not only from an innovation standpoint, but also from a business culture and operational standpoint.

But perhaps the most intriguing case study is that from an investment standpoint. The company has been at the forefront of innovation and secular shifts in technology, but when do expectations become too high?

Sometime in the future, business school students will utilize hindsight bias and point out how 'easy' it was to spot when to get in and out of AAPL shares.

Back during Apple's rough patch, Michael Dell said the company should just shut down and return its cash to shareholders. The company then went on to create entirely new segments of computing.

We'd posture that the Apple conundrum of 'when to sell' could potentially come down to the exact same reason many investors bought in the first place: innovation.

Sure, the company can (and will) continue to sell millions of updated versions of iPhones and iPads. The company's product pipeline is already largely telegraphed with refreshed models usually released each year and redesigned versions every two years. But eventually, investors will wonder, "what's next?"

Apple revolutionized the smartphone and is riding that wave. They created the tablet category and are dominating it. It's rare when one investment offers a deeply entrenched position within a continually rising secular trend. And in this case, that trend is: mobile.

In a slidedeck on the future of mobile, Business Insider illustrates just how dominant AAPL is in that arena. They write that "in a few years, the number of mobile devices (smartphones & tablets) will dwarf the number of PCs ... tablets alone should pass PC sales in 2-3 years."

AAPL: Bulls Versus Bears

Bears will point to the fact that the company has to keep innovating to stay relevant. The late Steve Jobs was responsible for such great innovations that his vision will be hard to replace. Tim Cook, his CEO successor, is a hell of an operator. But he's not necessarily an innovator. That innovation will have to collectively come from Apple's ranks of talented individuals.

Apple created the iPhone, then the iPad, but what's next? There's been a lot of analyst speculation that they'll attack the TV next. But as Greenlight Capital's David Einhorn mentioned recently at the CIMA Conference, the company won't do it unless they can revolutionize it.

Arguing the bull case, Einhorn made a prudent point that the market thinks AAPL is a hardware company, while he believes that it's a growth company that has become a recurring revenue business.

Sell-side research certainly backs that up as well. Piper Jaffray's Gene Munster just put out a research note on AAPL that says "survey work last fall suggested 94% of existing iPhone owners in the US expect their next phone will be an iPhone." That certainly backs up Einhorn's point.

Apple 'Too Difficult?'

In his commentary, Goltermann characterizes the company as 'too difficult' for a myriad of reasons. The crux of his argument is that while he and his colleagues use and love Apple's products, the technological landscape shifts so frequently that it's hard to jump on and off the trend train safely.

He writes (emphasis ours), "Apple now comprises 4.4% of the S&P 500 index and, all by itself, is larger than the entire utilities industry. With 932 million shares outstanding, every dollar move in Apple's share price represents nearly $1 billion in net new capital flowing to its shares."

That's a lot of money flowing into AAPL. And as Aswath Damodaran, Professor of Finance at NYU's Stern School of Business points out, the company's recent dividend announcement has attracted a whole new set of investors: dividend aficionados. This, of course, comes in addition to the pre-existing momentum traders/investors who piled on over the past six months. The latter is one of the reasons he actually recently sold his longstanding AAPL position.

He mentions that he hopes he is wrong by selling too early and that the company's shares continue to skyrocket higher. But if you think about it, selling early is often a problem investors are faced with.

As detailed in the latest issue of our premium Hedge Fund Wisdom newsletter, John Griffin's hedge fund Blue Ridge Capital sold 70% of its longstanding AAPL position in the fourth quarter of 2011. Since then, AAPL is up an additional 54%. While they still held a small position, that's obviously a sizable gain left on the table. But that's the difficult choice investors have to make.

Technology Trends Create & Destroy Value

A few years ago, we posted a technology trends presentation by Coatue Management, Philippe Laffont's tech-oriented hedge fund. They identified AAPL as a potential beneficiary of the rising smartphone trend. Since then, AAPL has gone on to further entrench themselves in mobile by defining a new computing category (tablets) and then dominating every competitor.

At the end of 2011, Coatue disclosed in their 13F filing with the SEC that Apple (AAPL) was their top holding, a position that represented over 18% of their reported 13F assets (i.e. a percentage of their long US equity positions).

While this number is by no means a percentage of their overall assets under management, they still had almost $518 million in capital allocated to AAPL shares at the end of the year. Since then, AAPL's price appreciation means that their stake is now potentially worth over $798 million (assuming they haven't sold any shares, which is probably unlikely).

The point of highlighting Coatue's massive stake is to showcase the benefits of finding a secular winner and jumping on the wave. Surfing it is the easy part. As mentioned earlier, it's the exit that's much more difficult.

One of the slides in Coatue's presentation showcases the various trends seen in technology over the past fifty years. They highlight how IBM (IBM) dominated the mainframe era, Microsoft (MSFT) dominated the personal computing era, Cisco (CSCO) dominated the networking era, and how Google (GOOG)/Apple (AAPL) have dominated the internet/mobile era.

(click to enlarge)

Just as Goltermann compares AAPL to Microsoft (MSFT), Erik Swarts over at Market Anthropology does the same by posting up an interesting series of charts contrasting parabolic price action between MSFT at its peak to the current AAPL action.

Over the past 20 years, AAPL has now generated over a 4000% gain. Shares of MSFT at their peak yielded around a 2500% gain. He highlights now that "Apple has pulled up next to Microsoft's market cap high from 2000 of roughly $586 billion."

(click to enlarge)

However, Swarts also shrewdly notes that, "both previous successors to the title of World's Largest Market Cap (that went parabolic) certainly did not go bust, but maintained a leadership position within their respective industries. Their valuations simply matured and lost the enormous momentum drive that propelled them to unsustainable growth trajectories."

The Apple Conundrum

Years from now, it will certainly be interesting to see who was able to successfully time the entrance and exit from the secular trend of mobile, and specifically, shares of AAPL. But in the mean time, investors are watching a live case study on investing unfold before their eyes in the form of the Apple conundrum:

Can Apple keep innovating?

Is the secular tide strong enough to carry Apple's boat on its own?

When will growth expectations become unsustainable?

When to sell?

Embedded below is John Goltermann's 'The Apple Conundrum.' Be sure to read his entire commentary as it was the inspiration for this lengthy post.

What's your take on the Apple conundrum? Let us know in the comments section below.

Activist Investors Propose REIT Conversion For Corrections Corp of America (CXW)

Keith Meister's hedge fund Corvex Management just filed a 13D with the SEC regarding shares of Corrections Corporation of America (CXW). This activist filing signifies a brand new position for Corvex as they did not own it at the end of 2011 (the last disclosure).

Corvex has a 4.43% ownership stake in CXW with 4,410,000 shares. The 13D was filed due to regulatory thresholds being crossed on March 26th, 2012.

Longtime readers of Market Folly will recall that Bill Ackman's Pershing Square Capital previously owned a position in CXW (you can see their old thesis on CXW here). The hedge fund eventually sold out of the position entirely.

One of Pershing's former analysts, Mick McGuire, went on to form his own hedge fund: Marcato Capital Management. Marcato has actually joined Corvex in this activist endeavor as they own a 2.61% ownership stake in CXW with 2,596,023 shares.

Proposing a REIT Conversion

In the fine print of the 13D filing, the two hedge funds say that they think shares are undervalued and an attractive investment. They've had conversations with each other as well as management and the board to discuss various aspects of the business.

They've discussed enhancing shareholder value by converting the company into a real estate investment trust (REIT) for federal income tax purposes.

Corvex and Marcato believe that a REIT conversion would "result in a significantly lower cost of equity capital, increased growth prospects and a material increase in value for all the Issuer's shareholders based on current trading multiples of comparable publicly traded REITs."

This seems to be a trend as of late as American Tower (AMT) recently successfully converted to a REIT as well.

About Corvex

We've started covering Corvex because before founding the firm, Keith Meister was Carl Icahn's protege. He's now started his own event-driven firm and it's no surprise that he's taken an activist investment stance. It's been reported that Corvex was seeded with $300 million from Soros Fund Management.

Other senior managing directors at Corvex include Nick Graziano (formerly a portfolio manager at Leon Cooperman's Omega Advisors) and Michael Doniger (formerly a PM at SAC Capital's CR Intrinsic unit).

About Corrections Corp of America

Per Google Finance, CXW is "an owner and operator of privatized correctional and detention facilities and prison operators in the United States. As of December 31, 2011, the Company operated 66 correctional and detention facilities, including 46 facilities that it owned, with a total capacity of approximately 91,000 beds in 20 states and the District of Columbia."

Investing Lessons From Richard Rainwater

Eddie Lampert, founder of hedge fund ESL Investments/RBS Partners was on CNBC along with David Bonderman of TPG and Barry Sternlicht of Starwood Capital to talk about investment lessons they've learned from legendary dealmaker Richard Rainwater.

Rainwater helped run investments for the Bass Family in Fort Worth, Texas and eventually grew the fortune into $5 billion by taking a qualitative approach to investing.

Lampert on Greatest Investment Lessons Learned

Eddie Lampert says that, "You have to have a point of view, you have to have a belief that something's possible. And that you can see something that other people don't. And a lot of times, when you see something that other people don't, there's nothing there. But there are times where there are things there. And the question is 'is it worth it to invest your money and is it worth it to invest your time?' "

Another lesson Lampert said was important from Richard is to "invest in what you're familiar with, invest in what you're comfortable with. He'd go to the opportunities ... he'll be looking for where there's disruption, but something that he feels comfortable with. He understood his capabilities ... He wanted to get into business with great people and I think that was a great lesson as to how important people are to making businesses work."

Referencing a specific Rainwater investment, Lampert says that, "Sometimes you make investments and they if don't work out, what you learn are applicable to other situations."

Lampert also went on to say that "Investing can be very lonely, especially if you're contrarian." Barry Sternlicht highlighted how this applies to Eddie, saying that "you make very few, very large, concentrated bets and you've been very patient."

Bonderman on What He's Learned

David Bonderman, founding partner of Texas Pacific Group (TPG), talked about Richard Rainwater's "courage of convictions," a trait he admires.

He also talked about Rainwater's ability to focus on the obvious and to invest in things that simply made sense to him. Bonderman said of Rainwater's approach: "if you couldn't pencil it out on the back of an envelope, it wasn't worth doing... it wasn't obvious enough. If it took spreadsheets and computer programs, you shouldn't do it."

Embedded below is the video of lessons learned from Richard Rainwater:

You can view more of Eddie Lampert's rare interview here.

Stanford MBA Classmates on What They Learned From Rainwater

In a separate video compilation, many of Richard Rainwater's MBA classmates also chimed in on what they've learned from him and provided nuggets of investing wisdom.

One mentioned Rainwater's propensity to essentially quote Warren Buffett by saying that rule number one in investing is not to lose money, and rule number two is to pay attention to the first rule.

Classmates also touched on Rainwater's approach to examining potential outcomes. He would examine scenarios A through Z whereas most people will only look at probable outcomes. He would say you've got to focus on 'friggin Z' which could have the most profitable outcome.

Another classmate mentioned that Rainwater would say 'Whenever there is chaos, there is opportunity. When everyone is running away, there's opportunity - there's got to be a nugget in there somewhere."

Embedded below is the video of further lessons from Richard Rainwater:

For more investing wisdom, head to lessons Dan Loeb has learned as an investor.

Wednesday, April 4, 2012

Jonathan Ruffer's Latest Investment Commentary

Jonathan Ruffer of UK's Ruffer Investment Company is out with his latest investment commentary. In it, he notes that 2012 is off to a good start but "government reflation, combating a deflationary economy - makes for uncertainty in investment strategies."

We've noted in the past how Ruffer has been concerned about inflation. The manager's latest missive is full of potent quotes. Regarding the economy, Ruffer writes,

"The conclusion: a battle on the one hand between the forces of deleverage and uncertainty, which keep the risk of recession (or worse) one misstep away, and, on the other, the response of governments and central banks to combat this force with virtually nil interest rates, and massive injections of cash."

He then ends his letter with a prudent observation on market timing:

"The moral of this is that we view the 'timing' element in the investment mix in an almost diametrically opposite way to the consensus view, that market timing is everything ... so the moral is to make timing as irrelevant as one possibly can."

Embedded below is Jonathan Ruffer's latest market commentary:

For more investment manager letters, be sure to head to:

- Oaktree Capital's Howard Marks on Contrarian Signals

- Trian Fund Management on its positions

- Bridgewater's Ray Dalio on deleveragings

Bill Ackman's Justice Holdings to Buy Burger King Stake

Bill Ackman's specialty purpose acquisition company (SPAC) is Justice Holdings (LON:JUSH). Today, we get word that Ackman's SPAC will pay $1.4 billion to 3G Capital for a 29% stake in fast food company Burger King.

This gives Burger King a valuation of around $4.8 billion. The company was taken private in 2010 by 3G Capital (they originally paid around $3.3 billion for Burger King and have tried to implement a new menu and remodel stores).

Once the deal is complete, Justice Holdings will cease trading in London and Burger King will start trading on the New York Stock Exchange (NYSE).

Ackman founded Justice Holdings along with Martin Franklin and Nicolas Berggruen by raising around $1.4 billion in the IPO in London.

John Phelan of MSD Capital on the Economy & Markets

John Phelan runs MSD Capital, the family office of Michael Dell (of DELL computer fame). The firm has grown from $400 million to $10 billion.

He gave a rare interview on CNBC this morning and talked about his experience with legendary dealmaker Richard Rainwater. Rainwater ran the Bass Family Office in Texas and Phelan took a lot of lessons from him and put them into place at MSD.

On the Economy & Markets

Phelan said that, "the micro is reasonably good, it's the macro that's bad. We're fairly optimistic over the 6-8 months and five years out ... it's the in-between that's very hard to call."

The family office managing partner is looking forward when it comes to investments, as far as 8 years out. He likes to look for trends, what they mean, and how to take advantage of them.

In this regard, he referenced an energy analyst's report on how the US could become a net exporter of oil and the potential pipeline implications as one example.

On Working With Michael Dell

Phelan only has one investor to answer to (Michael Dell) and notes that the dynamic is different in that Phelan has full discretion in their investments. He actually wishes Dell was more involved given that he thinks he'd be an astute investor. However, Dell's passion is obviously his company, DELL.

Embedded below is John Phelan's interview (email readers come to the site to view it):

There were a bunch of rare appearances on CNBC this morning, so don't miss:

- Eddie Lampert on risk coming back to markets


Eddie Lampert: Risk Coming Back to Markets (Interview)

This morning on CNBC, Eddie Lampert was interviewed on a myriad of topics. The chairman of Sears Holdings (SHLD) and hedge fund manager of ESL Investments/RBS Partners says that risk is 'coming back' to markets.

On Risk & the Markets

With the low interest rate environment, Lampert tosses out a quote we've heard a lot over the past few years: "They (investors) want a return on their money rather than just a return of their money."

David Bonderman, founding partner of Texas Pacific Group (TPG) also joined the conversation and argued that "the economy is better than you think it is ... the US is not in trouble in the short-term, maybe the long-term is another story."

On Bricks & Mortar Retail

Lampert notes that the "world is very different" and certain great iconic American brands like Disney (DIS) have had success, while there's others that need reinvention (JC Penney, Sears, etc).

The Sears chairman mentions that both retail and media are in re-invention mode, saying some companies will have "profitless prosperity."

He also argues that another one of the businesses he owns in size, Autozone (AZO), is a great retail business because it's less affected by internet competition. If something's wrong with your car and you need a new part, you need it now rather than waiting a few days for it to arrive via shipping.

Embedded below are the videos of Eddie Lampert's interview (email readers click to come view):

Video 1:

And Video 2:

There were a bunch of rare appearances on CNBC this morning, so don't miss:

- John Phelan of MSD Capital on the economy & markets

What We're Reading ~ 4/4/12

List of good market links [Abnormal Returns]

Piper Jaffray: Apple (AAPL) will be first trillion dollar co [Notable Calls]

AAPL & the return of gimmicky price targets [Reformed Broker]

AAPL: know when to hold em & fold em [Aswath Damodaran]

The SEC's gift to hedgies [Forbes]

Slidedeck: The future of mobile [Business Insider]

Groupon (GRPN) now offering 50% off its own shares [Slope of Hope]

A look at Sears (SHLD) [Institutional Imperative]

Would you want Carl Icahn to run your company? [Harvard Biz Review]

Q&A session with Carl Icahn [Reuters]

Lauren Templeton on generating alpha from value investing [AAAlpha]

Due diligence from a distance [Advisor Perspectives]

Study says keep an eye on stock liquidity [Institutional Investor]

Greatest investor you've never heard of [Investment News]

Warren Buffett circa 1979 [Value Plays]

Yong rises to top of Asia hedge funds [Bloomberg]

7 signs China's headed for a recession (or already there?) [Wall St Daily]

Is Best Buy following CompUSA & Circuit City? [Cnet]

Changing of the guard for hedge funds [Forbes]

Mobile payments: on Google Wallet, Square, and NFC [GigaOm]

Muppets vs Goldman Sachs [FunnyOrDie]

Final Four bracket for worst company in America [Consumerist]

Tuesday, April 3, 2012

Dan Loeb Likes Portuguese Sovereign Debt: Latest Exposure & Positioning

Dan Loeb's Third Point Offshore Fund was up 1.5% for March and is up 6.5% for 2012. In the hedge fund's latest March exposure report, we see that Dan Loeb likes Portuguese Sovereign Debt, a position that had previously not been revealed.

Just last week we highlighted Loeb's comments at a distressed investing panel at Columbia Business School where he briefly mentioned he liked Portugal.

In March, that sovereign bond position was one of his top winners, along with Yahoo (YHOO), Family Dollar (FDO), Aveta, and Apple (AAPL). Loeb also recently engaged in a proxy fight with Yahoo and launched a website to raise investor awareness.

Third Point's Top Positions

1. Yahoo (YHOO)
2. Gold
3. Delphi
4. Eksportfinans ASA
5. Ally Financial

The fund's top holdings continue to be of distressed origination. Some of Third Point's losers from the month include: Barrick Gold (ABX), Genel Energy (LON:GENL), Gold, Volkswagen, and Ivanhoe Mines (IVN).

Latest Exposure Levels

Loeb's firm continues to enter 'risk on' mode as they are 38.5% net long equities (54.2% long, -15.7% short). This is slightly up from February's 36.7% net long exposure and way up from January when they were only net long 28.2%.

Their largest sector exposure continues to be technology via their activist YHOO stake. They are ever-so-slightly net short utilities.

In credit, Third Point is net long distressed by 7.6%, net long performing at 8.7%, net long asset backed securities at 14.5% and net short government at -13%. In total, they are 17.8% net long credit.

To read the investment theses behind some of their positions, head to Third Point's investor letter.

For more from Third Point's founder, head to lessons Dan Loeb has learned as an investor, our most popular post this year.

March Madness Contest Winners

March Madness has come to an end with Kentucky defeating Kansas in the finals in a battle of blue blood programs. You can view the final standings of the contest here.

Winners (Score):

1. Tommy M. (138) wins a 1-year subscription to our premium Hedge Fund Wisdom newsletter.

2. Brian M. (136) wins a copy of Bethany McLean & Joe Nocera's book: All the Devils Are Here: The Story of the Financial Crisis.

Winners please send us an email to claim your prizes. Thanks to everyone for participating and the contest will be back next year.

Whitney Tilson's Presentation at Stern's Hedge Fund Association Summit

Whitney Tilson of hedge fund T2 Partners recently presented at the Stern Hedge Fund Association Summit and talked about the US economic overview, what worries his fund, as well as an analysis of his three largest positions: Berkshire Hathaway (BRK.A), Iridium (IRDM & warrants), and Howard Hughes (HHC).

On The Economy: He notes that it appears the recovery has gradually picked up steam and that job creation has been positive for 24 consecutive months. And while unemployment continues to be high, it has fallen some.

What Worries Them: Further downturn in the US housing market, the European banking system entering another crisis, a sharp slowdown in China, and/or a sovereign debt crisis in Japan. On the market, they say that "based on inflation-adjusted 10-year trailing earnings, the S&P 500 at 21.9x is trading at a 13% premium to its 50-year average of 19.4x."

The full presentation is embedded below and details analysis of his 3 top positions BRK.A, IRDM, & HHC:

Tilson will be presenting his latest investing ideas at the Value Investing Congress in Omaha right after the annual Berkshire Hathaway meeting next month. Market Folly readers can receive a discount here.

To see more thoughts from T2 Partners, you can also check out a long/short equity investing panel from the CIMA Conference.

Monday, April 2, 2012

Jeff Saut: "Dilution of Our Currency Causing Money to Flow Into Assets of All Kinds"

Market strategist Jeff Saut's latest investment strategy piece is entitled 'Shrugging Off Bad News' and focuses on how stocks don't seem to care about negativity.

Saut has advocated being cautious as of late as he anticipates either a 5-8% pullback or sideways market action to work off the overbought condition. Given that the market hasn't declined, Saut outlines what to possibly expect in the second quarter (emphasis ours):

"Investors should be prepared for further policies designed to stimulate the economy, which should allow stocks to travel higher even if they do pause, or stumble, in the near-term on concerns the fundamentals are turning squirrelly.

Nevertheless, what many investors don't understand is that in the short/intermediate-term there is not a linear relationship between the fundamentals and the stock market's directionality.

Manifestly, it is the dilution of our currency, with a concurrent decline in its value due to a massive increase in the money supply, which is causing money to flow into assets of all kinds, including stocks. And that, ladies and gentlemen, is the natural reaction to the flood of liquidity injected into the system by the world's central banks. I don't think it will end anytime soon."

Embedded below is Jeff Saut's market commentary for this week:

You can download a .pdf here.

For more from the strategist, check out Saut's recommended portfolio positioning.

Three Sources of Alpha: Informational, Analytical & Behavioral

We're compiling more articles on the timeless educational aspects of investing and thought this was worth highlighting. The three sources of alpha is a concept explained in a paper by Russell Fuller of the asset management firm, Fuller & Thaler.

In an old interview with Morningstar, Pat Dorsey of Sanibel Captiva Trust talked about the three sources of alpha and provides a brief overview.

1. Informational: "Knowing more than the other guy" (legally, of course) can provide quite an advantage. He references small caps where sell side coverage is scarce as a prime example. In the digital age of quickly disseminated information, these advantages are harder to come by outside of lesser known companies.

2. Analytical: This is the quantitative side of things and comes down to modeling out scenarios and the various conclusions drawn. Over time, these advantages can dissipate as others copy models etc.

3. Behavioral: The third advantage is the one Dorsey argues is where the most money can be made. He says it's not how you process the information, but it's what you do after you've processed it. If you can act more rationally than others, this can be a more achievable source of alpha over out-thinking others. As Warren Buffett says: "Be fearful when others are greedy. Be greedy when others are fearful."

For more on this topic, be sure to check out hedge fund Blue Ridge Capital's recommended reading on behavioral finance.

The video interview on the three sources of alpha is embedded below:

H/T PragCap

Third Point's "Value Yahoo" Website (Proxy Contest)

Dan Loeb's hedge fund Third Point has launched a proxy contest against Yahoo! (YHOO). A while back, we detailed when they initiated an activist position in YHOO and have also posted up Loeb's original letter to Yahoo. Now, the hedge fund has launched a website "for shareholders who support change and a better future for Yahoo."

The URL is simply: and it features detailed sections on the following categories:

- Failed Leadership: The hedge fund outlines how YHOO has lost ground in US display ad revenue, lost market share in U.S. search, had 5 CEO's in 5 years, and has guided below Wall Street estimates in 13 of the last 21 quarters. Third Point plans to "work with fellow shareholders to promote improved corporate governance, provide a strong strategic vision, and unlock value for Yahoo! shareholders."

- Their Proposed Slate of New Directors: Third Point recommends Dan Loeb (its founder), Harry Wilson (Chairman and CEO of MAEVA Group), Michael Wolf (Founder and CEO of ACTIVATE), as well as Jeff Zucker (Executive Producer of 'Katie').

- The Under-appreciation of Alibaba: Loeb's hedge fund says that "Alibaba Group Holdings is Yahoo's largest and most dynamic asset. (It) is one of the most valuable internet companies in the world, with an implied valuation of roughly $35 billion based on recent investments by some of the world's leading private equity and venture capital firms."

- Third Point's Latest Letter to the Company:

Embedded below is the latest letter Loeb sent to Scott Thompson, the CEO of Yahoo:

You can check out all the resources on

Why David Einhorn Owns Dell (DELL): Stock of the Week

Continuing the stock of the week feature here at MarketFolly, this week's focus is on why David Einhorn of hedge fund Greenlight Capital owns Dell (DELL). If you've missed them, be sure to scroll through all the previous stocks of the week.

The following is written by Tsachy Mishal, Portfolio Manager of TAM Capital Management:

If I could only view a single 13-F, it would be David Einhorn's. His long ideas are value oriented, common sense, and simple to understand. In Greenlight Capital's latest investor letter he makes the case for Dell. I excerpted a portion of his argument for Dell below:

"DELL is a large seller of computer and technology products ... While the computer business is mature, DELL has broadened its offerings over the last few years, so that about half its sales and more than half of its gross profits come from other products. DELL has roughly $7 per share in net cash and investments and currently earns about $2 per share (up from $1.50 in 2010). Accordingly, DELL’s P/E multiple is about 7x, and net of the cash and investments, it is less than 4x *(my note: now 5 times due to price appreciation). This reflects a valuation usually associated with collapsing businesses. We expect DELL to continue to grow its earnings per share, albeit at a modest rate."

Greenlight's average purchase price on DELL was $15.53 and shares currently trade around $16.70.

It is difficult to argue with the attractive valuation of Dell at 5 times earnings, net of cash. Although I would make one adjustment to David Einhorn's analysis. The vast majority of the $7 in cash (+investments+short term finance receivables) is either tied up in their financing operation or stuck overseas. Therefore, for valuation purposes I would credit them for a maximum of $6 in cash (and possibly $5 on the more conservative side). Even after this adjustment the company trades for an attractive 5.5 to 6 times earnings and they generate more free cash than earnings.

I view Dell's business as less attractive than David Einhorn does. Even though Dell may no longer be a PC company, it is still largely a boxmaker. A server or storage solution is still a box with other people's hardware components and other people's software.

While Dell has some intellectual property (IP) due to recent acquisitions, they are still largely assembling boxes and loading software onto them. They sell additional services, expertise, and related peripherals with these boxes. I view Dell's assets as: their scale, their relationships with clients, and their trusted brand name. They are trying to transform themselves into more of an IP company but the transformation has risks.

Even though I don't view the business as attractively as does David Einhorn, that does not mean that the business does not have value. Dell probably should trade at a below market multiple but it likely should trade somewhere north of the current 5.5 to 6 times earnings. Customers want to deal with somebody they can trust and Dell has earned that trust; there is value to that.

What I Like:

- Dell is one of the cheapest stocks in the S&P 500, if not the cheapest.

- Dell's business generates more cash than earnings.

- Dell's management is the best operationally of its competitors.

- Dell has strong relationships with its enterprise customers and a trusted brand name.

What I Don't Like:

- Dell is benefiting from a corporate PC upgrade cycle. The server business is likely benefiting somewhat from this as well. Normalized earnings are likely lower than current results.

- I would not be surprised if in ten years enterprise hardware becomes commoditized just as consumer hardware has been.

- Most of Dell's cash is stuck overseas and the valuation is highly dependent on that cash being used wisely.

- Dell only plans to return 10%-30% of free cash to shareholders unless there is a repatriation tax holiday. The amount is even less after one considers employee stock option dilution.

- Dell is planning a transformation via acquisitions. While it could solidify their earnings power, there are risks.

I had a very difficult time deciding whether to purchase Dell or not. It is not the type of business I prefer to own, but the valuation is ridiculously cheap. The fact that they are barely returning cash to shareholders was the deciding factor in not purchasing the shares. At lower prices or if a repatriation holiday became more likely, I would reconsider.

Last month, David Einhorn also provided some comments on Dell in an extensive Q&A session at the CIMA Conference.

For more stock of the week features, head to:

- Why Phil Falcone likes Spectrum Brands

- Why Maverick Capital owns Amdocs

- Why George Soros owns Comverse Technology

- What Carl Icahn sees in WebMD

Viking Global Raises Carter's (CRI) Stake

Andreas Halvorsen's hedge fund Viking Global filed a 13G with the SEC regarding its stake in Carter's (CRI). Per the filing, Viking now owns 5.5% of the company with 3,246,600 shares.

This marks a 32% increase in their position size since the end of 2011. The disclosure was required due to the regulatory level being crossed on March 20th.

Andreas Halvorsen was recently listed as one of the top 25 highest earning hedge fund managers for 2011.

Per Google Finance, Carter's is "a branded marketer of apparel for babies and young children in the United States. The Company owns two brand names in the children’s apparel industry, Carter’s and OshKosh. Its Carter’s brand provides apparel for children sizes ranging from newborn to seven. OshKosh brand provides its line of apparel for children sizes newborn to 12. Its Carter’s, OshKosh, and related brands are sold to national department stores, chain and specialty stores and discount retailers."

We've also posted some other recent portfolio activity from Viking.