What We're Reading ~ Analytical Links 1/22/14

Trading in the Zone: Maximizing Performance with Focus and Discipline [Ari Kiev]

On the 180 rule and shorting stocks [Dasan]

The bull case on Delta Airlines [SPBaines]

Shinzo Abe on Abenomics 2014 [Reformed Broker]

On why EV/EBITDA is the most effective measure [Greenbackd]

Expert argues now is the time to invest in Europe [FINalternatives]

On the correlation between returns and ridicule [AVC]

Where to find the biggest ideas for your business [Forbes]

Retail store traffic has fallen & may just stay that way [WSJ]

Old Warren Buffett article: the security I like best [Base Hit Investing]

The complete history of Warren Buffett [Dividend]

Report on food and beverage industry in Latin America [ECLAC]

Why Bitcoin matters [Marc Andreessen]

Warren Buffett will give you $1 billion if you fill out a perfect March Madness Bracket [BI]

Third Point Short Japanese Yen, Long Liberty Global & International Paper: Q1 Letter 2013

Dan Loeb's hedge fund Third Point has released its Q1 2013 letter to investors.  In it, we see that Third Point finished the first quarter up 9%.  There were three main takeaways from Third Point's activity: a short position in the Japanese Yen, as well as long positions in Liberty Global (LBTYA) and International Paper (IP).

Liberty Global (LBTYA)

 Loeb's firm bought when shares swooned in Q1 after announcing a takeover of Virgin Media (VMED), a company Third Point also has a large stake in.  Third Point likes the company's impending buyback and sees "Liberty's strategic value as the primary alternative to the incumbent telecom operator's fixed infrastructure in its markets is overlooked." 

Third Point also thinks shares could compound at around 20% per year after closing of the VMED deal.  As of the end of 2012, numerous other hedgies had stakes in LBTYA including Coatue Management, Blue Ridge Capital, Eton Park Capital, and Maverick Capital.


International Paper (IP) 

They like the company's pricing power in North American Containerboard and see numerous catalysts for the company, including finding out whether the industry's price increase has been sanctioned.  We also recently highlighted that Senator Investment Group added to their IP position.


Third Point has also been short the Japanese Yen, in what has been almost a consensus hedge fund trade recently.  You can read the rationale behind their position in Third Point's Q1 2013 investor letter, embedded below:




For more from this hedge fund manager, be sure to also check out Dan Loeb's recommended reading list.

Kyle Bass on SuperMedia Debt & Japan

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Kyle Bass from Hayman Capital.

Bass mentioned that 90% of what he owns is in bonds (he has a ton of RMBS/subprime exposure).  He joked that he's constantly a contrarian since many other speakers at the event expressed disdain for bonds (though to be fair, the others were negative on treasuries, not RMBS).  He presented two ideas:


SuperMedia Debt

Before presenting his ideas, Bass noted that he pulled an 'audible' so this idea wasn't as in-depth.  Bass points out that bankruptcy wiped out billions for the company and that the debt trades at 66 cents while equity has fallen into obscurity.  He notes it's paying a 20% coupon and he thinks it's worth par in 2-3 years.  He also pointed out how SuperMedia is trying to merge with fellow competitor DexOne.


Bass: Don't Own Japan

Bass said that there's 80-200 trillion in global debt. In 18 months Japan will structurally fall apart.  "There's no chance at Japan repaying their debt."

He says psychology is important so look at anchoring bias.  It's important to think about how others think about debt.  Japan's debt to GDP is the worst in the world.  Their debt is 25x their revenues.  (David Einhorn was checking out Bass' slideshow).


Bass said there's 3 axioms that are actually false:

1. Positive current surplus, Japan not self-funding:  This is flat false he says.

2. Bank of Japan not monetizing the debt: Bass says they're already buying 2/3rds of the bonds today.

3. Retail investors will always support JGB's: Bass says Japan has a secular population decline.


We highlighted how in the past Bass has said that Japan would be selling more adult diapers than kids' ones and that's now the case.  He also pointed out how the country is having "adult diaper fashion shows."

He also illustrated how Japan is trying to sell JGB's by showing advertisements of a schoolgirl band selling them and sumo wrestlers pitching JGBs.

Touching on the Softbank/Sprint deal since it was mentioned earlier in the panel by Lee Cooperman, Bass noted that Softbank paying 20 billion yen to buy broken telecom is Softbank exporting yen as investors are starting to flee the currency.

Bass says that Japan has one of the "largest structural fiscal deficits in the world."  He doesn't know when exactly this collapse happens as this could go on for a few years?  He notes the timing on this sort of thing is very hard to peg, but it will "absolutely happen."

He wrapped up talking about playing options on this scenario because if it happens, you get paid a ton.  But in the mean time while you wait for it to happen, you only lose a little (we assume he's referring to price put options on Japanese JGBs, a trade he's talked about in the past).  For more on this manager, we've also recently posted up Bass on Europe and how he's investing.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Greenlight Capital's Q1 Letter: David Einhorn Defends Apple, Still Short St. Joe

David Einhorn's hedge fund Greenlight Capital is out with its first quarter letter to investors.  In it, the hedge fund details why they're long Apple (AAPL), why they're still short St. Joe (JOE), as well as updates on Seagate Technology (STX) and the Japanese Yen.


Net Exposure & Top Positions

Greenlight's average net exposure during the quarter was 36% net long (95% long & 62% short).  Their top five largest disclosed long positions were (in alphabetical order): Apple, Arkema, General Motors, gold, and Seagate Technology.  The hedge fund opened up to new money for the first time since 2008 which is also worth pointing out.


Refuting Apple Concerns

Greenlight presents the 'bear case' concerns often highlighted by investors and then refutes them.  They write,

"1. Too many hedge funds own AAPL.  It's not clear what the objection is here.  We suppose the worry is that there is a herd mentality among hedge funds, and that when one fund sells, there could be a cascade of hedge funds selling shares and the stock price will collapse.  Moreover, if everyone already owns AAPL, who is left to buy it?  Collectively, hedge funds currently hold less than 5% of AAPL's outstanding shares, and no hedge fund ranks among the top 40 holders of the stock.  The average hedge fund has less than 2% of its equity assets in AAPL versus AAPL's 4% weighting in the S&P500, which means hedge funds are actually underweight AAPL."


Einhorn's fund also points out that while many detractors view Apple as a hardware company potentially subject to decline, Apple is actually a software company that has repeated sales of high margin hardware. 

This is a perfect characterization that many seem to miss.  After all, many users bought Mac computers to get away from various viruses and "blue screens of death" often associated with Microsoft Windows.  In order to get the software, though, consumers have to buy the expensive hardware.

For more from this hedgie, head to David Einhorn's presentation at Ira Sohn as well as his slideshow on preferreds.

Embedded below is David Einhorn & Greenlight Capital's Q1 letter to investors:




Einhorn will be presenting his latest stock pick at the Value Investing Congress in NYC in October.  Market Folly readers can receive a discount to the event by clicking here and using code: N12MF3

Kleinheinz Capital: Inflation is Biggest Threat to Emerging Markets

John Kleinheinz's hedge fund Kleinheinz Capital recently sent out its year-end market commentary and 2011 outlook. The focus? Emerging markets and why inflation is the biggest threat to the belief that those countries can rebalance global growth.


Emerging Markets / Developing Economies

In the hedge fund's third quarter commentary, Kleinheinz said Russia is the cheapest emerging market. Their commentary this time around focuses on developing nations in general. They feel that food inflation is a large threat as it causes social unrest. However, the most important reason inflation is a concern is because,

"if developing economies cannot grow at above trend levels in a non-inflationary way then the whole proposition that these economies can gently rebalance the world economy may be untrue. The above average rates of growth in markets like China may simply be the result of trade surpluses that arise from lower cost of labor and fast monetary growth spurred by large domestic and foreign investment in capacity. Without real productivity advances and a migration to higher value-added products and services, which would allow higher incomes, the citizens of those countries cannot be expected to upgrade to a Western lifestyle that favors consumption over savings."


End of Bull Market in Treasury Bonds?

Another interesting focus of Kleinheinz's year-end letter is the notion that the three decade long bull market in US Treasuries is over. In the past, Kleinheinz held some bonds as a hedge. However, they sold out of those positions in the third quarter of last year.

Since then, they've begun "tactically shorting bonds ... until we become more certain about the timing and magnitude of a secular decline in longer dated bonds."


Japanese Yen

On the other side of the spectrum, the hedge fund has also started short positions in the Japanese Yen and Japanese government bonds. The rationale behind the play?

"Simply put - because Japan cannot afford to let its interest rates go higher, its currency will likely go lower to adjust interest rate differentials, slowing trade surplus and dwindling savings."

Readers will recall that hedge fund colleague Kyle Bass is short Japanese government bonds as well.


At the end of 2010, here were Kleinheinz's Top Holdings:

1. Apple (AAPL)
2. Research in Motion (RIMM)
3. China Mobile (CHL)
4. Veeco Instruments (VECO)
5. Monsanto (MON)
6. Hong Kong Exchange & Clearing (HK:0388)
7. LUKoil Holdings
8. Google (GOOG)
9. Major Drilling Group (MDI)
10. Yahoo! (YHOO)

From the third quarter to the fourth quarter, the most notable change in the upper echelon of their portfolio was Baidu (BIDU) falling just outside of the top 10 and their position in VECO ramping up a few spots.

Since inception, the fund has seen a compound annual growth rate of 26.6%. Intriguingly, you can replicate Kleinheinz's portfolio via Alphaclone. Investing in Kleinheinz's top 10 US equity holdings returned 19.5% 2010 compared to the hedge fund's actual performance of 22.86% (get free access to Alphaclone here).

To conclude, we'll leave you with a quote from John Kleinheinz's letter that stuck out the most: "A broad correction in stock market multiples will only occur if ten year U.S. government bond rates exceed 5% and corporate earnings growth slows to low single digit levels."

Market Strategist Jeff Saut Still Cautious, Highlights Negative Indicators

Raymond James' Chief Investment Strategist Jeff Saut is out with his weekly missive and there's honestly not much new from him in terms of commentary. Last week, we covered how Jeff Saut was decisively cautious and his stance stands seemingly unchanged this time around. While he still advocates caution, he notes that such extreme pessimism can often be seen as a contrarian signal. As such, it would not surprise him to see a rally as stocks have been compressed on a short-term basis.

Of the negative signs, Saut cites:

- Dow Theory sell signal
- His proprietary trading indicator flashing 'sell' (for the first time since December 2007)
- Negative readings on the monthly stochastic indicator
- Downside violation of the 12-month moving average in stocks (most stocks have broken 'triple-bottoms')
- A death cross (where the 50 day moving average crosses below the 200 day moving average)

You can't really argue with the fact that all of those indicators are indeed quite ominous. Saut notes that as of the month of June of the asset classes he follows, only gold, silver, fixed income and the Japanese yen were higher for the month and year-to-date. It's no coincidence that these are often areas where investors flee to safety when volatility ramps up and uncertainty reigns. A few weeks back, the Raymond James strategist argued that the market was in a bottoming process. However, as the negative indicators began to pile on, he was quick to adapt to the change in trend and advocated caution. Saut presumably has a portion of his accounts sitting in cash given his stance and the fact that he removed market hedges into the turmoil.

In summation, Saut believes that the first duty of investors at this point should be to protect capital (and in particular the gains from the March 2009 lows). At the same token, he would not be surprised to see a rally (at least in the near-term) given the abounding pessimism. Embedded below is Jeff Saut's weekly investment strategy publication:



You can download a .pdf copy here.

If you haven't already, definitely read Saut's commentary from last week where he was decisively cautious as it is much more in-depth than this week's note. And for more recent market commentary, we recently highlighted Crispin Odey's market outlook from hedge fund Odey Asset Management which is worth examining.

Hedge Funds: Very Short 10 Year Treasuries

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

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



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

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

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

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



You can download a .pdf here.


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