Richard Lashley's Presentation on Bank Plays at Value Investing Congress Las Vegas

We've posted up notes from the Value Investing Congress in Las Vegas and next up in the series is Richard Lashley of PL Capital who pitched TARP Warrants, Metro Bank (METR), Horizon Bancorp (HBNC), and Intervest Bancshares (IBCA) .


Richard Lashley's Value Investing Congress Presentation

•    $200MM asset manager – 18 years of history, specialized in small cap banks. Shareholder activists in banks – which surprisingly is the third most active areas for activist investing. Former CPAs at KPMG – also did M&A at KPMG. One of the top ranked financial services hedge funds. Primarily long only.
•    Three crises in banking –early 90’s, LTCM and from 08-09. 
•    Average P/TBV – not back to the mid-point or average since 1992.  Believe we can get to 1.75x – 2.0x TBV average.
•    Average bank in their portfolio is at 1.09x – strategy is to sell their banks to a mid-cap bank at greater than 1.5x TBV.
•    A lot of acquisitions, generally one acquisition per day. M&A is going to happen in banking no matter what happens in the market.
•    Most banks sell for 10x post cost save earnings – as the acquirer can redeploy excess capital.


•    Idea 1: TARP warrants many are deep in the money. First warrant is JPM, strike at 42 - $18 in the money, and expire in 2018. What will happen? Book value will grow from earnings. JPM TBV today is 40, by FY18 will be around ~$64. Warrant trades for $20. Thinks it will trade for higher than 1.2x BV – should be at least a 16% IRR through 2018. Further, treasury has an anti-dilution clause, meaning the exercise price declines with a big dividend.
•    Capital One Warrants – 7% earnings growth, 30% payout, 20% IRR in the capital one warrants. For a 17% ROTCE business, thinks it is worth more than 12x PE.
•    Another warrant idea includes PNC warrants – minimum 25% IRR, with 7% earnings growth and assuming 13x PE multiple.


•    Small cap bank ideas: Metro Bank (METR) – filed a 13D, started buying a year ago, actively buying all three names. Has low cost deposits, 2.8B franchise, will benefit from higher rates. CEO is 73 years old – is going to meet with the CEO next week. The bank is located in PA. They are spending too much money, very expensive model being open 7 days a week. Efficiency ratio is 73% -very high, should be 60% - 65%. Value will grow regardless at $2 per share if nothing else happens. Assures us that the bank will be sold.


•    Horizon Bancorp (HBNC) – in the Russell 2000, located in Indiana and Michigan. Trading at 1.48x TBV, while peers trade much higher for high ROTCE banks. Stock is $22 – going to earn $2 per share. Filed a 13G but they like a CEO – could be a buyer or seller.


•     Intervest Bancshares (IBCA) in NYC/Rockefeller. It is a wholesale bank – gathers wholesale deposits. Very lean and mean, trading at 83% of TBV. Will benefit from margin expansion as high costs will run off. The Company may be booted off the Russell- will be buying hand over fist if that happens.
•    Generally buy MHC after the conversion occurs as it is difficult to set up deposits.
•    Look for second-step conversions- after the three years are up look for the sale of the business. 

Be sure to check out the rest of the Value Investing Congress presentations.

Viking Global's Thesis on Valero (VLO): Q2 Letter

Andreas Halvorsen's hedge fund firm Viking Global is out with their Q2 letter and in it they talk about their thesis on refiner Valero (VLO):


Viking's Thesis on Valero

"Valero is the largest independent oil refiner in the U.S. with over 50% of its capacity located around the Gulf of Mexico.  Over the past several years, Gulf-based refiners have been at a cost disadvantage because they had to buy expensive crude imports while their mid-continent competitors could source cheaper inputs domestically from shale oil developments.  We believe this cost advantage is shifting towards the Gulf as new pipelines carrying cheap domestic crude are completed, giving Valero the greatest benefit due to its strong presence there.  In a further boost to the company over the next couple of years, we think its access to discounted Canadian heavy crude also will improve.  These positive developments have been amplified by sound capital allocation by the management team, such as investing in crude transport logistics to gain access to cheaper inputs, acquiring two new hydrocrackers to improve production yields, spinning off a non-core retail operation, and allocating available cash to stock buybacks.  We find the current valuation attractive given the significant earnings potential once these factors start contributing to the bottom line."


Other Notable Q2 Moves

Viking also added or re-entered positions in Capital One (COF), Valeant Pharmaceuticals (VRX), and Thermo Fisher (TMO) during Q2.  All are were sizable top-10 positions at the end of the quarter, with COF being the largest as their #2 holding.

Lastly, it's worth highlighting that Viking is exploring the impacts of a potential slowdown in the Chinese economy.  While such effects have led to lower metals prices, a weak Australian dollar and luxury goods companies weakening, Viking is looking for consequences beyond those listed above.  In particular, they're focused on exploring potential unwinding of the leverage in the banking system.

For more on this fund, we've detailed some of Viking Global's recent portfolio activity here.  Additionally, we posted up a rare interview with Andreas Halvorsen.

Julian Robertson on What Stocks He Likes Now: Interview

Tiger Management founder Julian Robertson made his rare television appearance for the year on CNBC yesterday and talked about how now is a time to put money to work in the market.

He thinks the economy and overseas worries are having a big effect on investors.  So many investors are frightened about Asia and Europe that they've almost "lost their way" without realizing that many great companies are trading at great prices.

He feels that this market is good for hedge funds because their namesake allows them to hedge against uncertainty and these potential risks.  However, he worries that some managers have hedged too much and they won't benefit unless there's a big fallout in the world economy.


What Stocks Robertson Likes

Robertson cited Apple (AAPL) as great company trading at a great value, something he says rarely happens.  He said, "Apple is now probably somewhere around 14-15 times next year's earnings, it's very, very reasonable for the kind of growth you can get."

Facebook (FB) was another stock Robertson mentioned as he likes the social media exposure and admires Mark Zuckerberg.  However, he does not "really know enough about the stock" to own a position.  He cited "younger people" that he's in partnership with as having owned Facebook early on back when it was private.  We'd assume he's referring to Chase Coleman's Tiger Global.

Robertson says he's looking for great companies and he's invested in a European airway company: Ryanair (RYAAY) as they're the low-cost provider.  He also likes Rolls Royce (LON:RR or RYCEY on the pink sheets) because many people see it as a luxury automobile when in reality it is a great supplier to the aerospace and other industries.  Steve Mandel's Lone Pine Capital has been an owner of Rolls Royce.

In terms of financials, Robertson cited Capital One (COF) and Ocwen Financial (OCN).  The latter, he says,  is a mortgage servicing company that he thinks has a lot going for them.

Robertson argues that steel companies AK Steel (AKS), US Steel (X), etc are overvalued and we'd need to see the economy really takeoff to warrant those multiples.


Embedded below is the video of Julian Robertson's interview:



For more on this legendary investor, head to Julian Robertson's thoughts on the hedge fund industry past & present as well as his past extensive interview with Columbia Business School.

Delivering Alpha Best Ideas Panel: Cooperman, Chanos, Feldstein & More

CNBC and Institutional Investor's Delivering Alpha Conference is going on today and we wanted to aggregate the highlights.  The "best ideas" panel included Omega Advisors' Leon Cooperman, Kynikos Associates' Jim Chanos, BlueMountain Capital's Andrew Feldstein, Queen Anne's Gate Capital's Kathleen Kelley, and BlackRock's Robert Kapito.

From the conference, we've also posted up the global opportunities panel as well as the chasing yield panel.


Leon Cooperman (Omega Advisors):  He pitched going long US stocks and called them the best house in the financial neighborhood, a tune he has been singing for well over a year.  However, he did make an excellent point that the maximum "pain trade" is going higher as tons of people are sitting on large sums of cash earning nothing. 

As for specific names he likes: Capital One (COF), Express Scripts (ESRX), Halliburton (HAL), Gannett (GCI), Kinder Morgan (KMI), MetLife (MET), Qualcomm (QCOM), Watson Pharma (WPI) and Western Union (WU).  He also likes AIA Group (1299.HK) traded in Hong Kong.

The Omega Advisors founder also continued to bash bonds, saying "buying US bonds right now is like walking in front of a steam roller and picking up dimes.  It's just not a good policy."

As far as the election goes, he thinks that if Romney wins, the market will spike by 150 points, but if Obama wins, it drifts lower. For more from the Omega man, we just posted up Leon Cooperman on 14 attributes that make a good portfolio manager.


Jim Chanos (Kynikos Associates):  The noted short-seller was out again negative on tech companies.  He mainly pitched the bear case on Hewlett Packard (HPQ), calling it a value trap.  We just recently highlighted Chanos' presentation on global value traps where HPQ was highlighted among other names.

He says that "when you lose the paradigm shift, you spend an awful lot of money defending what you have."  He compared HPQ to Eastman Kodak as the company is in declining businesses.

Chanos also touched on how instead of giving cash back to shareholders, companies will make value-destroying acquisitions.  He cited HPQ's buy of Autonomy last year.  The Kynikos man argues that HPQ has overspent on acquisitions and they're hiding research & development expenditures through them.

He's also negative on Dell (DELL) saying that the company finances its subprime customers (financing their revenue growth).  For more on Chanos we just recently posted up his thoughts on the psychology of short selling.


Andrew Feldstein (BlueMountain Capital):  He likes less liquid credit, angling for 8-12% returns over a 3-7 year time horizon.  He says you have to be patient as this opportunity is available due to everyone's obsession with liquidity (i.e. don't put your money here if you don't have an appropriate time horizon).  He mentioned bonds such as Prospect Medical if you can buy and hold.  Feldstein also mentioned he's less excited about legacy distressed assets in Europe.


Kathleen Kelley (Queen Anne's Gate Capital):  Formerly of Tudor and Kingdon, she pitched two ideas: short the British pound (against long US dollar) as well as short platinum, targeting 20-30% moves to the downside.  She wants to be long the USD against the sterling because the USD can be a commodity currency.

She also likes shorting platinum as there's an oversupply due to slowing Euro auto sales.  At the Ira Sohn conference two months ago, Ospraie's Dwight Anderson pitched going short platinum as well (in addition to going long palladium).


Robert Kapito (BlackRock):  He's going for the "income hog" approach by focusing on equity dividend funds, dividend stocks like AT&T (T), Verizon (VZ), Merck (MRK), Johnson & Johnson (JNJ), high yield bond funds (or individual issues from Sprint, Ally) and municipal bonds such as the San Francisco Airport, New Jersey Tolls.  He thinks that default worry surrounding munis is "overrated."


Sources: Notes sent by readers, II's blog, @iimag,  @ldelevingne, @footnoted, @aarontask

For more from Delivering Alpha, head to the global opportunities panel (featuring Richard Perry) as well as the hunt for yield panel (featuring Marc Lasry)

Eddie Lampert's Hedge Fund RBS Partners: Portfolio Update (13F Filing)

(This post is part of our series on tracking hedge fund portfolios. If you're unfamiliar with tracking investments they disclose via SEC filings, check out our series preface on hedge fund 13F filings.)

Next up is RBS Partners, the parent company of Eddie Lampert's hedge fund ESL Investments. Prior to forming ESL, Lampert worked with Robert Rubin at Goldman Sachs risk arbitrage department. Prior to that, Lampert graduated from Yale where he was a member of the skull and bones secret society, as well as Phi Beta Kappa. Lampert runs highly concentrated portfolios and his focus has long been on the retail sector. He has graced Forbes' billionaire list but was one of the top hedge fund losers in 2008.

Recently, we posted up some interesting activity out of Lampert's investment vehicles. And in the past, we've also covered Eddie's 2009 annual letter. Interestingly enough, Richard Rainwater has dubbed Lampert "the greatest investor of his generation."

The positions listed below were RBS Partners' long equity, note, and options holdings as of December 31st, 2009 as filed with the SEC. All holdings are common stock unless otherwise denoted.


Brand New Positions
CIT Group (CIT)
Wells Fargo (WFC)
Bank of America (BAC)


Increased Positions
Sears Holdings (SHLD): Increased by 27.8%
Acxiom (ACXM): Increased by 22.1%
Citigroup (C): Increased by 14%
Autozone (AZO): Increased by 8.1%
Autonation (AN): Increased by 5.9%
Capital One (COF): Increased by 5.3%


Reduced Positions
SLM (SLM): Reduced by 12.1%
Genworth Financial (GNW): Reduced by 5%


Removed Positions (Sold out completely):
n/a


Top Holdings by percentage of assets reported on 13F filing

1. Sears Holdings (SHLD): 49.9%
   
2. Autozone (AZO): 28.9%
   
3. Autonation (AN): 13.8%
   
4. Capital One (COF): 3.3%
   
5. CIT Group (CIT): 1.1%
   
6. Citigroup (C): 0.9%
   
7. Genworth Financial (GNW): 0.9%
   
8. Wells Fargo (WFC): 0.4%
   
9. Acxiom (ACXM): 0.3%
   
10. SLM Corp (SLM): 0.3%
    
11. Bank of America (BAC): 0.1%
    

Eddie Lampert's hedge fund is the definition of a concentrated portfolio. But, that's what happens when you effectively takeover a company (in this case Sears). Many compared Lampert to Warren Buffett a few years ago, but those comparisons have gone by the wayside as Lampert has struggled to generate the returns many thought he was capable of. While he has definitely helped engineer Sears' recovery, the job is by no means done.

They sold a slight amount of SLM and added modestly to their Sears, Acxiom, and Citigroup stakes. Citigroup has made a lot of headlines as of late on our site, mainly due to the fact that lots of hedge funds have been adding C. Additionally, Eddie Lampert shows a new stake in CIT Group. But, just as we've noted with all the other hedge funds that now show this stake, it is most likely due to a debt to equity conversion. Lampert also shows new (small) stakes in Wells Fargo (WFC) and Bank of America (BAC).

That about wraps up his portfolio because as Sears goes, Lampert goes. All data used for this article comes from Alphaclone. It's by far the best hedge fund replicator we've ever used and they of course pull data directly from the SEC filings so that you can backtest tons of strategies. RBS Partners' assets reported on the 13F filing were $11 billion this quarter compared to $9.3 billion last quarter. As you can see, that's almost a $1.7 billion increase in assets invested long in US equities. Remember that these filings are not representative of the hedge fund's entire base of AUM.

We'll be tracking 40+ prominent funds in our fourth quarter 2009 hedge fund portfolio tracking series. We've already covered Seth Klarman's Baupost Group, Mohnish Pabrai's Investment Fund, Carl Icahn's hedge fund Icahn Partners, David Einhorn's Greenlight Capital, Stephen Mandel's Lone Pine Capital, John Griffin's Blue Ridge Capital, David Tepper's Appaloosa Management, Warren Buffett's portfolio, John Paulson's hedge fund Paulson & Co, Lee Ainslie's Maverick Capital, and Dan Loeb's Third Point. Check back daily for our new updates.

Whitney Tilson's Hedge Fund T2 Partners: Annual Letter

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners has put out their annual letter. In this latest letter to investors, they address the macro environment, talk about how their portfolio fared, and discuss their largest long and short positions.

Since hedge funds often do not reveal their short positions, we wanted to make special note of this glimpse we get into their short book. We had previously seen some of their shorts, but the list below is more expansive. Whitney Tilson and many other prominent hedge fund managers will be presenting investment ideas at the Value Investing Congress May 4th & 5th in Pasadena and we highly recommend attending. We've secured a discount to the event for our readers so make sure to use discount code: P10MF5.

T2 Partners' ten largest short positions heading into this year were (in alphabetical order):

1. Capital One (COF): In T2's letter, Tilson and Tongue mention that this is a hedge to their long of American Express (AXP).

2. Dow Chemical (DOW): This is a hedge to their long position in Huntsman (HUN).

3. Homebuilders (various plus an ETF): T2 Partners has been bearish on the housing market.

4. InterOil (IOC): Tilson has been bearish on this name for a while and argues that all their press releases (there's a lot of them) have artificially lifted the stock higher on no substantial news.

5. iShares Barclays 20+ Year Treasury Bond (TLT): We now see yet another hedge fund shorting long-term treasuries as a bet on rising interest rates, inflation, etc. This was one of Howard Marks' main recommendations in his recent plays for inflation. One of the original hedgies Michael Steinhardt himself has called treasuries foolish. Legendary investor and ex-Quantum fund manager Jim Rogers shares this sentiment and dislikes treasuries. Hedge fund legend Julian Robertson is betting on higher interest rates and is doing so via constant maturity swaps (CMS).

6. iShares Dow Jones Transportation Average (IYT): This appears to be another macro hedge.

7. Moody's (MCO): T2 Partners joins hedge fund colleague David Einhorn & Greenlight Capital who are also short MCO. In Einhorn's recent investor letter, he mentioned how this short position has been causing them pain, but they still feel Moody's faces headwinds.

8. Netflix (NFLX): Shares are up sharply on this name after they just reported earnings. This stock had been heavily shorted by hedge funds and looks to be causing everyone on the short side some pain.

9. Retail HOLDRs (RTH): This seems to be another macro hedge/short as they wager against consumer spending, and in particular discretionary spending. This gives them exposure to a basket of names.

10. Vistaprint (VPRT): This short position is intriguing because we've known many other hedge fund managers to be short. However, a few prominent hedgies also have long positions, so it's interesting to to note the difference in opinion. When we looked at the portfolio of Stephen Mandel's Lone Pine Capital, we noticed they had a large Vistaprint stake. Additionally, fellow hedgie Matt Iorio and his White Elm Capital had been long. We'll have to see which side of hedge fund land wins this battle.


Moving on, we also got to see their twelve largest long positions as of 12/31/09 and they are as follows:

1. General Growth Properties (GGWPQ): We recently covered their thoughts on GGWPQ.

2. Berkshire Hathaway (BRK.A/BRK.B): Tilson was recently out talking about how he thinks Berkshire is undervalued and how it could be added to the S&P 500. His latter point just recently came to fruition as BRK.B replaced Burlington Northern in the index. This creates a ton of buyers as index funds will need to buy $38 billion worth of BRK.B, around 23% of the total shares outstanding.

3. Iridium stock/warrants: They note that it is growing very rapidly and has taken market share from competitors.

4. Microsoft (MSFT): They think this name is cheap, safe, and rapidly growing.

5. American Express (AXP): While they have been trimming their long position as it has risen, they deem it currently at 'reasonable valuation' and continue to hold.

6. Huntsman (HUN): They believe the company is now well poised to ride out the economic crisis after their net debt declined by almost $3 billion and they have no more meaningful maturities until 2012.

7. Pfizer (PFE): We've started to see a lot of smart investors pile into this name. Fairholme Fund manager Bruce Berkowitz has a large Pfizer position. Also, we recently noted that Pfizer was the second most popular stock held by hedge funds. Berkowitz is certainly not alone in his fondness for this name. John Griffin's hedge fund Blue Ridge Capital had Pfizer as their third largest US equity holding when last we checked.

8. dELiA*s (DLIA): T2 Partners likes this name because it has a low probability of permanent loss of capital and a good chance of making multiples on their money.

9. Sears Canada (TSE: SCC): Tilson notes, "This stock trades at 4.2x trailing EV/EBITDA, around half the valuation of comparable retailers."

10. Yahoo! (YHOO): This is definitely a contrarian play in the tech space as most of the hedge funds we follow are long Google (GOOG). T2 believes that Yahoo's intrinsic value is nearly double its current price.

11. Fairfax Financial (FRFHF): They feel this is a "diverse collection of high-quality insurance businesses at a discount to intrinsic value."

12. Wendy's Arby's Group (WEN): They are confident Nelson Peltz and his team can turn Wendy's around just like they did with Arby's.


So, there you have their long and short positions. Embedded below is hedge fund T2 Partners' annual letter in its entirety (RSS & Email readers will need to come to the site to see it):





For more great investment ideas from hedge fund managers, make sure to check out the Value Investing Congress May 4th & 5th in Pasadena. We've secured a discount to the event for our readers so make sure to use discount code: P10MF5.

For more insight from Tilson & T2, head to our coverage of hedge fund T2 Partners.

Credit Card Squeeze

I wanted to post up an excerpt from a piece in Fortune a while back which discussed the next Credit Crunch. In it, Geoff Colvin hints at what could be a difficult time for credit card companies. Some of this information sets up a broad backstory as to why one might short the likes of Capital One (COF), American Express (AXP), Discover Financial (DFS), or even banks like Citigroup (C) who have large credit card businesses.

Here's an excerpt from the article,

"Last year, just as the subprime crisis happened, credit card debt took off. The home-equity ATM had been shut down, so people turned to the last source of easy money they had left, the most expensive debt on the menu, credit card borrowing.

Since credit card debt has been growing much faster than the economy - more than 8% in last year's third and fourth quarters and over 7% in May (the most recent month reported)- people are apparently using it as a substitute for income. Thus, for the past year or so we have still maintained the standard-of-living illusion.

But a big crunch is coming - and here's why. Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup (C), one of America's largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. That happens when the buyers of those securities observe rising delinquency rates and rising interest rates, and decide the debt is worth less than Citi thought. More generally, the amount of credit card debt that is securitized nationwide has plunged by more than half in the past five months because it's getting riskier. That means credit card issuers will be charging customers higher interest rates, and since the banks can't offload as much of the debt as before, they'll have less money to lend to cardholders.

The squeeze has already started, which is why Congress is in the process of passing the Credit Cardholders' Bill of Rights, which would prevent issuers from changing rates and terms without warning, among many other provisions. But bottom line, the credit card money window is going to start closing - and soon.

So now what? It's hard to see where consumers can turn next. Home prices seem highly unlikely to start rising again soon. Stocks? You never know, but the Great Bull Market looks like a once-in-a-lifetime event. Homes and stocks are households' biggest asset classes by far. There isn't much else to borrow against.

It may be that the standard-of-living bubble finally has to deflate. Sustainable increases in living standards have to be earned, not borrowed, and that means performing ever higher value work that can't be outsourced. We haven't been meeting that challenge very well; doing so will probably require much more and better education for millions of Americans, which takes time and money."

I agree with the overall theme of this article and truly believe that the strapped consumer is going to be facing larger headwinds than anyone anticipates (which I partly touched on here). Credit card debt is piling up for the average American, and many are having a very hard time paying it off. This simple concept was illustrated in a nice graph I posted earlier, showing how delinquencies are rising. Capital One (COF) is the perfect example of a company being impacted by this. It has been piling up each quarter and their most recent earnings/conference call gave us a further glimpse, as noted by Forbes' Melinda Peer, who writes

"Credit card and banking company Capital One (COF) said its net charge-off rate, or measure of soured loans, for its U.S. card business jumped to 6.34% in September, from 5.96% in August. Internationally, charge-offs rose to a rate of 5.87%, from 5.31%, in the same period.

Delinquencies, considered signs of troubled accounts, were also on the rise in the U.S. and abroad during September. Domestically the McLean, Va.-based company's 30-day delinquency rate inched up to 4.20%, from 4.07%, in August, and internationally the rate inched up to 5.24%, from 5.15%."

Calculated Risk also took the liberty of transcribing key comments from the conference call, which you can read here. Basically, the company is taking positive steps to reduce credit lines and try to limit their risk. But, they still won't be able to completely protect themselves from the impending tsunami.

Additionally, this WSJ article seems to imply that credit card companies and banks are going to face historic headwinds in the credit card arena. Overall, I truly believe this is going to be an over-arching theme that stems from the current crisis as things continue to bleed over to main street. The ultimate question becomes, how much of this is already priced into banking and credit card equities, if at all?


Full disclosure: At the time of publication, MarketFolly was short COF
Source: Fortune

Monthly Performance: June 08

Paul Kedrosky posted up this lovely breakdown of the worst "June" returns on the Dow in History. And, although the month indeed was bad, it didn't necessarily feel that way. We never saw true panic, we never saw capitulation. Instead, we saw stocks slowly bleed it out. And, that led us to a month where the S&P500 was -8.60%. And, halfway through the year, the S&P sits at -12.5% YTD. But, for those of us with some sense and a solid gameplan, the month wasn't so bad. Why, might you ask? Well, because we saw this coming a mile away. We know the U.S. is still in a recession, we know the housing sector is accelerating to the downside, we know oil is setting record highs, and we know that the financials are still sorting through the rubble of the credit crisis. We are by no means out of the woods yet and my portfolio has been based on that for quite some time. I figured I would start posting up my monthly performance here, to stick with my theme of complete transparency. (Well that and the fact that I had a pretty damn good month and this seemed like an ideal time to brag, er I mean start logging my results on the blog haha). For the month of June, MarketFolly's portfolio was up 5.56%. And, year to date, the portfolio is up 10.5%.

Since I've now turned to focusing on absolute return rather than relative return, I'll leave you to do the math in terms of outperformance. And, as a matter of fact, after having some discussions with numerous absolute return portfolio managers, I've come to the conclusion that people still pay attention to the indexes no matter what. Even if absolute return technically has no metric for comparison, you still want to be outperforming the next best alternative (ie: stocks, bonds, cash, or other alternatives). And, the next best alternative could very well be the indexes on certain months, you never know. In the end, its all about semantics and just depends on the portfolio managers absolute return goals. There will always be people who will want to compare results to the indexes just because that is what has been ingrained in everyone's mind to begin with. As long as I know my goals in running an absolute return portfolio, then relevant return is meaningless and is just a moot talking point. I'm very happy with my results thus far, but I can merely attribute it to creating a gameplan and sticking with it. I didn't panic and I stayed disciplined. That is one of the most valuable lessons you can learn when dealing with financial markets.

The macro themes we've seen have continued to play out. Housing sucks, financials suck, the dollar sucks, the economy sucks, and commodities are roaring. Many of the gains for me this month are attributed to taking a strong round of profits in my Natural Gas (UNG, CHK) and Coal (ACI, MEE) names. Additionally, I locked in profits in the fertilizer plays at the new highs (POT, MOS) and then am starting to buy them back here down at these levels. Additionally, I have been shorting the market itself through SDS, which is the etf for Ultrashorting the S&P500. It seeks twice the inverse performance of the S&P. So, if the index goes down 1%, SDS should theoretically go up 2%. I usually use this (and a few other etf's) as a 'hedge' in my portfolio, layering in and out when the market makes drastic moves one way or the other. For instance, in the bear market rally we saw leading up to this recent decline, I was adding heavily to the SDS, seeing as I knew we were still in a bear markets and the charts showed this clear as daylight. And, I posted this chart a few weeks back reminding everyone we were still in a downtrend here :
And, if we pulled up that same chart now, you would see we have fallen another 50 points on the S&P. The green circle below shows what happened to the S&P in the few weeks after I posted the original chart above. Here's what things look like currently:
In the end, everything played out like we anticipated and locked in some nice gains. I have now been taking profits in SDS as I feel we are due for an oversold bounce (and apparently everyone else feels this way too, which is concerning.... but that's a whole different conversation).

The rest of the gains this month were due to some shorter term moves I had made, most notably with Capital One (COF). I have been in and out of this name on the short side, as I feel they truly have the most exposure to the 'next leg' of problems in the financials: increasing credit card receivables/rising delinquincies & bad auto loans. COF has exposure to both and is having problems. This name has been a major component of the short side of my portfolio, to ensure I'm truly hedged. And, what better way to reap the gains than to short a financial, right? My thoughts exactly. (Note: I've covered the last of my position last week and I am no longer short this name, but I will be looking to re-short on any major pops). I didn't actually blog post about this name in my portfolio, but I did 'tweet' about it numerous times on twitter (here's an example and here's another). So, this just goes to show why you should be following me on twitter! Or at the very least, reading the twitter posts that stream as I post them on the upper right hand corner of my blog. Here's a chart outlining my entry and exit from this name:So, as you can see, all I did was stick to the gameplan and watch the charts for excellent entry/exit points in terms of risk/reward. I realize that these plays could have easily gone against me and continued to rally. But, if they did, I would have been stopped out right above the moving averages, and no harm done. It's all about knowing your risk/reward before even entering a position. For me, this month can be summed up by patience. The whole rally in the indexes from the middle of March until May was simply a rally in the midst of a bear market. I waited patiently until it found resistance, and then entered some short positions in financials (COF) and the market in general (through SDS). I continued to hold my fertilizer, coal, natural gas, and resource plays as they continued to benefit while the overall market struggled. Now, having taken profits in these names, I'll be waiting for pullbacks to re-enter the strong sectors of the market.

Next up: July. Will we see an oversold bounce? Will we continue to bleed it out slowly? Who knows. All I know is I'll be monitoring things closely, waiting patiently to set up my next move based on what happens at this test of support/the March lows on the indexes.