Eric Sprott's Presentation 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 Eric Sprott of Sprott Asset Management who presented "Investment Opportunity of Your Lifetime."


Eric Sprott's Presentation at Value Investing Congress Las Vegas

•    Eric talked about manipulation and various issues – such as high frequency trading and front running. 
•    Gold manipulation – BaFIN the SEC equivalent in Germany said it was going to investigate the London bullion market Association in Nov/Dec 2013. In Jan 2014, they found that manipulation in Gold is WORSE than LIBOR. 
•    Deutsche Bank left the association that day.
•    Gold Fix study by Stein Business School shows signs of decade of bank manipulation.
•    2013 saw 6-8 sigma events a likelihood of one in a quadrillion.
•    Canada shouldn’t sell their gold at these prices.
•    Sprott’s analysis is that western central banks have no gold left. A raid is effected over 1,300 tones leave ETFs.
•    China’s demand is such that it consumes almost all the world’s mine supply.
•    India cooperates with other Central Planners to eliminate gold imports.
•    Gold isn’t a current account item – it’s a capital account item.
•    Who is buying? Iraq, China, Russia, Switzerland is now providing data on monthly shipping and where it is shipped too.


•    Pitched Barrick Gold and Crocodile Gold. At 1,300 gold price, both would earn .71/-.11, at 2,000 per ounce 2.52/.19 and at 2,400 per oz, 3.56/.36. 
•    Current price is 18.60 for Barrick Gold/.19 for Crocodile – price targets range from 94% upside to 1000% upside.
•    Every gold company has a contingent asset not on their balance sheet (assuming he is talking about a potential settlement).

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

Eric Sprott's April Commentary: Caveat Depositor

Eric Sprott of Sprott Asset Management is out with his April commentary entitled, "Caveat Depositor."  In it, he delves into the Cyprus situation and the macro effects moving forward.


Caveat Depositor  

by Eric Sprott & Shree Kargutkar, Sprott Asset Management 

“If there is a risk in a bank, our first question should be: ‘Ok, what are you the bank going to do about that? What can you do to recapitalise yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders. We’ll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: ‘What can you do in order to save your own banks?’” – Jeroen Dijsselbloem, March 26, 2013 1 

A deal has just been struck with Cyprus. However, it was not the deal that Cyprus saw other countries receive. This was not the deal received by Greece, Italy and Spain. There were no bailed out banks in the aftermath. There was no transfer of risk from over-levered banks to the taxpayers. The risk was pushed back onto the banks. Their equity was wiped out. Their bondholders were wiped out. Their uninsured depositors saw their accounts raided for additional liquidity. It wasn’t just that the rules of the game had changed, the game itself changed. By raiding the depositors’ accounts, a major central bank has gone where they would not previously have dared. The Rubicon has been crossed. Going forward, this is expected to be the “template” for dealing with risky, over-levered banks and the countries which support them. 

For the first time since the crisis began, we are faced with a new paradigm, or a “template”, for how a major central bank will address weakness in the financial sector. While the old template involved “bailing out” through transfer of risk from the corporate sector to the taxpayer, the new template calls for “bailing in”, whereby the risk is contained within the affected institution at the expense of equity holders, bond holders and finally the depositor. 

How does the new template affect you?  

This “template” is already being applied to the “too big to bail” banks in other developed countries around the world. A statement in the joint paper published by the FDIC and the Bank of England in December 2012 reads: 

“An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailedin creditors would become the owners of the resolved firm…. Such a resolution strategy would ensure market discipline and maintain financial stability without cost to taxpayers”.2 

Note the lack of the phrase “uninsured depositors” in this context, which opens the doors for both insured and uninsured depositors to be affected. In a similar vein, Canada’s recently released budget addresses the same problem. Page 144 of Canada’s Economic Action Plan 2013 reads: 

“The Government proposes to implement a – bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers.”3 

Likewise, New Zealand’s Open Bank Resolution policy allows for a “bail in” of afflicted banks by wiping out the equity holders first, the bond holders second and finally forcing a haircut on the depositors.4 

Over-levered banks are not a recent development. We are faced with a banking crisis, seemingly once every generation. In a majority of cases, the bad banks were allowed to fail and newer, stronger banks took their place. However, the recent modus operandi of the central banks and policy makers allowed over-levered banks to get even bigger, rewarded risk taking with bailouts and let the inherent problem of unsustainability fester.

We carried out the exercise of taking the largest banks, or in other words, the “too big to fail” banks in the G7 countries and added up their assets in relation to the host country GDP. For the layperson, a typical bank’s assets are primarily composed of the loans they have originated while the liabilities are primarily composed of deposits they have accepted. With the exception of the US, all G7 countries have banking systems that have become larger and in some cases dwarfed their respective economies. 

Governments around the world are finally beginning to realize the gravity of the risk that exists in their banking sectors. The EU has decided to build upon the new template of the “bail-in” regime. The US, UK and Canada have all followed suit. This puts the onus squarely upon the depositor. The depositor is a lender to the financial institution that he banks with. However, most depositors naively assume that their deposits are 100% safe in their banks and trust them to safeguard their savings. Under the new “template” all lenders (including depositors) to the bank can be forced to “bail in” their respective banks. Several G7 countries already have provisions that allow troubled banks to be bailed in using depositor accounts. We have been vocal about our concerns over the state of the global financial system for the better part of the decade. The Greek tragedy is now being played out in Cyprus with a new twist as depositors have been unwillingly turned into sacrificial lambs. Given the size of the banking sector in most G7 countries and the burgeoning government debts, the ability of the governments to bail out their banks is severely constrained, especially considering the political headwinds that exist today. For this reason, we strongly believe that real assets trump a fiat currency in a “savings” account. It is not our intention to be alarmist here, merely to say, “caveat depositor”. "

Footnotes:
1     Import Export Stats – US Census Foreign trade: http://blogs.ft.com/brusselsblog/2013/03/the-ftreuters-dijsselbloem- interviewtranscript/
2     http://www.bankofengland.co.uk/publications/Documents/news/2012/nr156.pdf
3     http://www.budget.gc.ca/2013/doc/plan/budget2013-eng.pdf
4     http://www.centralbanking.com/central-banking/official-record/2257939/rbnzarticle- says-open-bank-resolution-helps-keep-banks-in-line

For more from this manager, we've also posted up how Sprott thinks the sell-off in gold is an opportunity to buy.

Eric Sprott: Sell-off In Gold Is Opportunity To Buy "At An Artificially Low Value"

Eric Sprott of Sprott Asset Management has penned his latest commentary entitled "Do Western Central Banks Have Any Gold Left???"  In it, he examines the selling pressure in gold recently, arguing that it's a great time to buy the precious metal.

Sprott notes that the supply of gold has pretty much remained the same, and that demand has steadily increased (thanks to India and China).  He also points out how central banks have been net buyers (instead of net sellers) of the precious metal.

He writes,

"Much ado has been made about the recent sell-off in the yellow metal forcing certain  ETPs to liquidate, adding a supply of gold into the market in the process. Our work  reveals that the previous ETP sell-offs, (which occurred in January 2011, December 2011,  May 2012 and July 2012) have all coincided with gold finding strong price support and  rallying higher."

Sprott concludes that this sell-off in gold is an opportunity to buy it "at an artificially low value."  While he does make some prudent points, it is worth highlighting, however, that Sprott has been a gold bull for quite some time.

Embedded below is the latest commentary from Sprott Asset Management: Do Western Central Banks Have Any Gold Left?





For more from this manager, be sure to check out Sprott's previous commentary: ignoring the obvious.

Eric Sprott's Latest Commentary: Ignoring the Obvious

Eric Sprott, founder of Sprott Asset Management, is out with his latest 'markets at a glance' outlook.  Entitled "Ignoring The Obvious," the piece points out how the Fed's actions are just masking real problems such as high unemployment, exploding government liabilities, and how money printing doesn't achieve anything constructive.

Sprott writes:

"The purpose of asset purchases by the Fed might no longer be improvements in the real economy, but rather a more subtle financing of U.S. government deficits. However, in the long run, expanding the money supply inevitably leads to inflationary pressures. Luckily for the Fed and the U.S. government, there is so much slack in the labour market that inflation might be years away. And, if we are right about the long run unemployment rate being structurally higher, then the Fed has all the room it needs to continue Quantitative Easing (QE) to infinity. This might allow them to continue to hide the true financial position of the government for many years to come."

Concluding his piece, he simply asks if we're going to ignore the obvious?  Well, the market is certainly ignoring it for the time being as 2013 has begun with a ferocious rally.


Stock Market Ignores the Obvious

While Sprott points out economic realities, it's always worth noting that the market can remain irrational longer than you can remain solvent.  Sometimes you just have to ride the perception until it dissipates, a concept illustrated via George Soros' best investment advice.

As you've undoubtedly seen over the past few weeks, various hedge fund managers have paraded their bullish views like David Tepper and even Ray Dalio said that 2013 will be a year that "cash moves into stuff".

So instead of asking if we're going to ignore the economically obvious (the market already has), perhaps Sprott should re-phrase his question and ask when the Fed's mirage will disappear and when we'll stop ignoring the obvious?


Embedded below is Eric Sprott's latest commentary:




For more from this investor, be sure to check out Eric Sprott's previous commentary as well.

Eric Sprott's Latest Commentary: Weakness Begets More Weakness

Playing catch-up with various market participants this week, we now turn to Eric Sprott's latest commentary from Sprott Asset Management.  Entitled "Weakness Begets More Weakness," the latest Sprott missive asks, how does the US achieve a sustained recovery if the 99% continues to suffer perpetual decline in real income?

Their full commentary is posted below, but they conclude that:

"The sad fact is that the economic reality for the average family is far worse today than it was ten years ago… even fifteen  years ago, and the trend of declining wealth is firmly in place. The youth need higher paying jobs and the retirees need  yield, and for all the trillions of dollars that the US government and other western governments have spent and printed,  none of it has addressed these key areas of weakness in a way that can reverse the long-term trend. As we approach  year-end and the finality of the US election, there will likely be numerous indicators implying a US recovery. Unless they  directly benefit the 99%, we would advise readers to take them with a large, bipartisan grain of salt. Weakness begets  weakness, until something dramatic reverses the trend’s course. The 99% are firmly stuck in a declining trend, and we  do not see it reversing any time soon."

On the same topic, earlier this morning we also posted up David Einhorn's comments on low interest rate policies and how they're now doing more harm than good.

Embedded below is Eric Sprott's latest commentary:




For more from this manager, we've in the past posted up Sprott's commentary on gold.

Eric Sprott on the Recent Volatility in Gold

Seeing how gold has seen volatility as of late and numerous top hedge funds hold physical gold, we thought it would be prudent to check in with one of the most outspoken gold advocates: Eric Sprott of Sprott Asset Management.

After all, gold is one of Dan Loeb's top holdings at Third Point.  David Einhorn of Greenlight Capital has long held physical gold as a top stake.  And we highlighted in April how John Burbank's Passport Capital had been buying gold.


So what do investors make of the latest volatility?  Eric Sprott and Shree Kargutkar put out an interesting note on the precious metal on June 8th:

Sprott on Gold

"There have been key devel­op­ments in the phys­i­cal gold mar­ket over the last few weeks which we feel are worth highlighting:

1) The Chi­nese gold imports from Hong Kong in April, 2012 surged almost 1300% on a YoY basis. Total gross imports for the month of April were 103.6 tonnes and the net imports were 66.3 tonnes1. It is not the data for April alone which has caught our eye. There has been a stun­ning increase of gold imports through Hong Kong for export into China over the past 2 years. Between May 2010 and April 2011, China imported a net 66 tonnes of phys­i­cal gold through Hong Kong. Between May 2011 and April 2012, that num­ber jumped to 489 tonnes. This rep­re­sents an increase of 640%. 

2) Cen­tral banks from around the world bought over 70 tonnes of gold in April, 2012. Data from the IMF showed devel­op­ing coun­tries such as the Philip­pines, Turkey, Mex­ico and Sri Lanka were sig­nif­i­cant buy­ers of gold as prices dipped.

3) Iran pur­chased $1.2B worth of gold in April, 2012 through Turkey. As the devel­oped nations con­tinue devalu­ing their cur­rency at the expense of devel­op­ing nations, coun­tries such as Iran, China and Mex­ico are forced to look at alter­na­tive stores of value.

4) After twenty years of lack­lus­ter returns and stag­nant bond yields, Japan­ese pen­sion funds have finally dis­cov­ered the value of invest­ing in gold. The $500M Okayama Metal and Machin­ery pen­sion fund placed 1.5% of its assets into gold bullion-backed ETFs in April in order to "escape sov­er­eign risk"4.

5) Bill Gross writes, "Soar­ing debt/GDP ratios in pre­vi­ously sacro­sanct AAA coun­tries have made low cost fund­ing increas­ingly a func­tion of cen­tral banks as opposed to pri­vate mar­ket investors. Both the lower qual­ity and lower yields of pre­vi­ously sacro­sanct debt there­fore rep­re­sent a poten­tial break­ing point in our now 40-year-old global mon­e­tary sys­tem. […] As they (investors) ques­tion the value of much of the $200 tril­lion which com­prises our cur­rent sys­tem, they move mar­gin­ally else­where — to real assets such as land, gold and tan­gi­ble things, or to cash and a fig­u­ra­tive mat­tress where at least their money is read­ily acces­si­ble". Is the bond king rec­om­mend­ing gold? YES, YES YES!

6) The Gold Min­ing ETF, GDX, has seen strong inflows in the past 3 months. The num­ber of units out­stand­ing have increased from 162.5M to roughly 187M between March 1, 2012 and May 31, 2012. This rep­re­sents an increase in assets of almost $1.2B in a span of 3 months. It is worth point­ing out that for a major­ity of this three months period, GDX, and by exten­sion the gold min­ing com­pa­nies were expe­ri­enc­ing sig­nif­i­cant declines in their mar­ket values.


We believe there has been a mate­r­ial change in the gold invest­ing land­scape. The HUI, which is the Gold Bugs Index, is now up over 20% from its lows since May 16th, 2012. The slide in gold equi­ties seems to be sub­sid­ing as a foun­da­tion for a strong move upwards is set. New buy­ers, rep­re­sented by the Chi­nese, cen­tral banks, Japan­ese pen­sion funds and the Ira­ni­ans, bought almost 140 tonnes of gold in April alone. To put this into per­spec­tive, the annual gold pro­duc­tion is approx­i­mately 2600 tonnes. China and Rus­sia pro­duce around 500 tonnes of gold annu­ally, which never makes it to the open mar­ket. This leaves about 2100 tonnes of gold pro­duc­tion annu­ally for the rest of the world.


When buy­ers rep­re­sent­ing 140 tonnes of new demand enter a mar­ket which only has 175 tonnes of monthly sup­ply, we are left won­der­ing about two things:

1) In a bal­anced mar­ket, where is the source of sup­ply to the new buy­ers going to come from?

2) How can a new buyer of size get into the gold mar­ket, which is already bal­anced, with­out sig­nif­i­cantly impact­ing the price of gold? The answer is fairly obvi­ous. When demand out­strips sup­ply, prices move higher. These sig­nif­i­cant macro changes in the sup­ply­de­mand dynamic of the gold mar­ket should pro­pel the price of gold to new highs."  


For more from this fund manager, we've also highlighted Sprott's previous commentary on how 2012 is the year of the central bank.

Notes From SALT Conference Risk Panel: Falcone, Sprott, Rieder & Ivascyn

At the Skybridge Alternative Conference (SALT) in Las Vegas yesterday, a panel on risk featured Harbinger Capital's Phil Falcone, Sprott Asset Management's Eric Sprott, Blackrock's Rick Rieder, as well as PIMCO's Daniel Ivascyn. The talk was entitled, "Risk On, Risk Off: How to Generate Profits in a Macro Driven World."


Phil Falcone of Harbinger Capital Partners essentially referenced his Lightsquared venture when he made comments regarding investors being too fixated on liquidity.  He argues that people are passing on solid long-term opportunities because they want access to their capital.  The Harbinger man believes regulation has hurt the free market.

He also went on to say that because of the market's risk on/risk off mentality, there are many who aren't even paying attention to fundamentals out there.  The manager labeled the market one of the most difficult to time investments.


Eric Sprott of Sprott Asset Management is yet again pounding the table on gold due to the problems in Europe.  He also commented on the "post-Lehman" world and mentioned that there can't be liquidity events as that could bring down the whole system.


Rick Rieder talked about how investing strategies are shifting from beta to idiosyncratic. He also believes that contagion isn't as big of an issue in Europe.


Daniel Ivascyn stressed the importance of aligning the right vehicle with the investment opportunity.  Long term opportunities need to be placed in the right structure, he says.


For more notes from the SALT Conference, check out:

- Identifying opportunities in emerging markets with John Burbank

-  Notes from panel with Kyle Bass, Dmitry Balyasny & Steven Tananbaum


- Barry Rosenstein, Leon Cooperman & Joel Greenblatt's panel on stocks






The above was compiled from notes sent in along with help from live tweets from: @ldelevingne , @pdmckenna ,  @AttainCapital & @realrobcopeland

Eric Sprott's Latest Commentary: 2012 is Year of the Central Bank

It's been a while since we've covered Eric Sprott and his Canadian firm Sprott Asset Management. He's out with his February 2012 commentary entitled, "Unintended Consequences." In it, Sprott discusses how 2012 is shaping up to be the year of the Central Bank.

He writes,

"There is unfortunately no economic textbook to guide us through these strange times, but common sense suggests we should be extremely wary of the continued maneuvering by central banks. The more central banks print to save the system, the more the system will rely on their printing to stay solvent – and you cannot solve a debt problem with more debt, and you cannot print money without serious repercussions.

The central banks are fueling a growing distrust among the creditor nations that is forcing them to take pre-emptive actions with their currency reserves. Individual investors should take note and follow-suit, because it will be a lot easier to enjoy the “Year of the Central Bank” if you own things that can actually benefit from all their printing, as opposed to things that can only be destroyed by it."

One of the main 'things' he is referencing there is obviously gold. Sprott has long been an advocate of the precious metal and has called gold the ultimate Triple-A asset.

We've also highlighted how Sprott started a physical gold trust (ticker: PHYS) back in 2009 that competes with the popular exchange traded fund SPDR Gold Trust (GLD).

Embedded below is Sprott's February 2012 commentary, Unintended Consequences:

Eric Sprott's Firm Sells Medusa Mining Shares

We recently got a glimpse at the latest portfolio activity out of Eric Sprott's firm Sprott Asset Management. Per recent regulatory filings, we see that Sprott no longer holds a 5% ownership interest in Medusa Mining (MML). As we detailed back in August 2009, Sprott had previously held a 5.4% ownership stake in MML.

It's unclear as to whether or not they simply reduced their position size by selling shares or if they exited the investment completely. Foreign regulatory disclosures only require investment firms to disclose when they no longer own 5% of the issued shares in a given company. As such, Sprott could just now be under that threshold while still holding a position, or they could have sold completely out. We won't know until we get some details from the firm itself, but it's safe to say that they have been selling shares. In terms of other recent portfolio activity, we recently detailed how Eric Sprott's firm also started a new position in Orsu Metals.

Sprott has been bullish on precious metals for some time now and recently said to beware of fiat currencies at the most recent Value Investing Congress. Sprott of course also launched a physical gold trust which has been trading at a premium to NAV as of late. Needless to say, he's bullish on gold and selective miners.

Taken from Google Finance, Medusa Mining is "an Australian based gold producer, focused solely on the Philippines. The Company’s principal activities include mineral exploration, evaluation, development and mining."

We've covered the rest of Sprott's various miner positions for those interested as well.

Value Investing Congress: In-Depth Summary of the Presentations

A big hat tip again to the Inoculated Investor who has been cranking out very in-depth notes from the latest investment conferences. Earlier, we posted up his summary of Berkshire Hathaway's annual meeting and today we're posting up his 18 page summary of the Value Investing Congress.

From the VIC, we've already posted up Whitney Tilson's bearish presentation on housing, as well as a set of notes from the event. But if you really want the investment ideas drilled down to the specific thesis, then this is the set of notes for you.

Embedded below is the Inoculated Investor's summary of the Value Investing Congress:



You can download a .pdf here.

For more great hedge fund commentary and investment insight, we've covered a ton of great investor letters as of late. Be sure to check out Louis Bacon's letter from global macro giant Moore Capital, the Q1 letter from Ricky Sandler's Eminence Capital, market commentary from David Einhorn's Greenlight Capital, as well as Jay Petschek's latest commentary from Corsair Capital. Make sure to also check out the Inoculated Investor's site.

Value Investing Congress: Notes From Day 2

Thanks again to the Value Investing Congress who has been posting updates from the event on Twitter (make sure to follow us as well), we're able to present you with aggregated notes of the presentations. Yesterday we posted up notes from the first day of the Value Investing Congress and now we're covering day two of the event. Today we'll detail the investment ideas from Eric Sprott (Sprott Asset Management), Whitney Tilson & Glenn Tongue (T2 Partners), Lei Zhang (Hillhouse Capital Management), Tom Russo (Semper Vic) and David Nierenberg (D3 Funds).


Eric Sprott of Sprott Asset Management: Eric Sprott unsurprisingly gave a presentation on investing in precious metals. As we've covered on the site before, Sprott launched a physical gold trust and has stakes in various miners. He notes that we live in a world where governments continually spend money to boost GDP and that it is a race to the bottom in terms of currency devaluation. Currently the US dollar is winning that race but it 'may not win forever.' Overall, he says to beware of fiat currencies. You'll remember that fellow hedgie John Paulson started a gold fund as a way to bet against the US dollar. As a gold bull, Sprott's two favorite words are 'quantitative easing.' His specific investment idea was East Asia Minerals Corporation which he thinks could be a '10-bagger or more' due to gold reserves discovered. You can view all our past coverage on Sprott's firm here.


Whitney Tilson & Glenn Tongue of T2 Partners: These two gentlemen presented the case for their new long: Anheuser-Busch InBev (BUD) which is trading for 8.5x 2012 free cash flow. They note it is an addition to their ever-growing portfolio of undervalued blue-chip companies. Tongue says to look at BUD's free cash flow net of AmBev minority interests, synergies, deleveraging and 50% of Modelo's free cash flow. He thinks the market is also unfamiliar with the management story behind the company and equates it to the story of Rose Blumkin at Nebraska Furniture Mart.

Before their investment idea, Whitney Tilson's talk focused on how the market is range-bound as the S&P trades at 20.4x inflation-adjusted trailing earnings, above the average of 16.3x. As he has touched on in the past, Tilson believes housing still has more pain ahead as 24% of homeowners who haven't made a payment in a year have still not been foreclosed on. This represents a large amount of inventory yet to hit the market. Tilson also notes that the mortgage market has essentially been nationalized and that housing prices are well below the peak but still above levels in year 2000. He also recently appeared on CNBC where he outlined his bullish thoughts on BUD and talked about his short position in the homebuilders and his short position in Palm. Embedded below is the video of his recent appearance (email readers will need to come to the site to view the video:



Keep in mind that we've detailed T2's short positions before for those of you wanting a closer look and Tilson recently explained his short in LULU as well. For more insight on Glenn Tongue & Whitney Tilson's portfolio, head to T2 Partners annual letter.


Lei Zhang of Hillhouse Capital Management: Zhang started his firm with $30 million and now manages $4 billion, the largest hedge fund in China. Hillhouse has seen extraordinary performance, returning 52% annualized since inception in August of 2005. Zhang typically runs a concentrated portfolio and uses a team based research process to perform fundamental bottom-up research on companies. Zhang likes to focus on the people and teams behind the business and usually holds long positions 3-5 years. Interestingly enough, Zhang is currently in 50% cash and only adds 3-5 positions each year.

Currently, Hillhouse is negative on the shipping industry. Overall, Zhang dislikes small cap plays and sees very common investment mistakes in China, including investors with very short-term timeframes and over-excitement regarding short-term growth. Ironically, Zhang thinks concentrated bets are often a common investing mistake in China, yet Hillhouse runs a concentrated portfolio of their own. Clearly that strategy has served them well though, just look at their returns. Zhang's specific investment idea was the B shares of Changyu Corporation, a Chinese wine company that had a return on equity of 35% in 2008. He notes that there is little regulation on alcohol in China and no license is needed. On the short side, he likes focusing on 'frauds' which is a pretty obvious statement.


Tom Russo of Semper Vic Partners: Russo's talk centered on global value investing and the premise that international markets are very attractive due to emerging market growth. He allocated a lot of capital there during the crisis in 2008 when everything collapsed. In particular, Russo mentioned that Nestle can invest large amounts of money in emerging markets and see high rates of return. Pernod Ricard is one of the leading brands around the globe and was the top shorted stock on the Euronext in 2008. He likes their leadership in China especially. Lastly, Russo touches on SABMiller commending them for their long-term focus as they have burdened EBITDA margins in Africa in order to make investments.


David Nierenberg of D3 Funds: Nierenberg's firm takes concentrated positions in microcap growth companies seeking to constructively work with management. He likes emerging markets as six of the nine public companies he owns have exposure there. In particular, D3 Funds holds RadiSys (RSYS), an embedded computing company that has a strong balance sheet with $3+ per share net cash and is only tracked by two analysts. While current revenues have been stagnant, 'next generation' revenue is growing rapidly. By Q2 of 2010, RSYS will have outsourced 100% of its production and sees a 3 year earnings compounded annual growth rate (CAGR) of 39%. Additionally, Nierenberg's partner Cara Denver mentioned that D3 owns 18% of Move Inc (MOVE) and that their thesis is still intact.


Thanks again to the VIC for posting their Twitter updates. Make sure to also check out Value Investing Congress notes from the first day and then stay tuned for more hedge fund portfolio tracking here on Market Folly daily.

Sprott Asset Management Disclose New Position in Orsu Metals (LON:OSU)

Eric Sprott’s Canadian based firm Sprott Asset Management have opened a new position in UK gold miner Orsu Metals (LON: OSU). Sprott purchased 11,400,000 shares which represents 7.2% of the outstanding shares. It looks as though Eric Sprott's firm obtained their stake via Orsu’s offering on April 16th, 2010 where they were also granted 5,700,000 warrants with a strike price of C$0.5, exercisable on or before the 16th of April 2012. Orsu appears to be a bit of a recovery play as its share price has been decimated over the last few years and now trades at pennies on the dollar. Keep in mind that Sprott Asset Management's principal, Eric Sprott, will be presenting investment ideas at the upcoming Value Investing Congress along with many other hedge fund managers.

Sprott has also invested in other positions across the pond and we've detailed some of their UK holdings here. In particular, Sprott also has stakes in various other London listed gold mining stocks. They own 17.6% of Vatukoula Gold Mines (LON: VGM) as of January 19th, 2010. Additionally, they own 12.6% of Norseman Gold (LON: NGL) as of the 19th of January 2010. Needless to say, Sprott is very bullish on precious metals and has even started their own physical gold trust.

Taken from Google Finance, "Orsu Metals Corporation (Orsu) is a mineral exploration and development company holding interests in mineral projects in Kazakhstan and Kyrgyzstan. It is a precious and base metals exploration and development company exploring gold and copper deposits in the Tien Shan gold belt in the Kyrgyz Republic and Rudny Altai belt in the Republic of Kazakhstan. In addition, it operated the Varvarinskoye Project in the Urals belt in northern Kazakhstan. The Company's property in northwest Kyrgyzstan comprises four licence areas within the Tien Shan gold belt of north western Kyrgyzstan, including the Taldybulak, Barkol, Korgontash and Kentash licences (the Talas Project). The Company's other material exploration project is the property comprising a 47.3 square kilometers licence area in eastern Kazakhstan (the Karchiga Project), which is part of the Rudny Altai polymetallic belt. On October 30, 2009, the Company completed the disposition of its Varvarinskoye Project to to JSC Polymetal."

You can view more of our coverage of Eric Sprott's firm here. And you can also check out his latest investment ideas at the upcoming Value Investing Congress which we highly recommend attending.

Sprott's December Commentary: "Is It All Just a Ponzi Scheme?"

Hedge fund firm Sprott Asset Management sent out their December market commentary a while back and we wanted to make sure everyone has seen it because it's quite a strong piece entitled, "Is It All Just a Ponzi Scheme?" in reference to the Fed. This piece comes after we learned that Sprott would be launching a physical gold trust for investors that will compete with the popular exchange traded fund, GLD. Their December commentary is also somewhat of an add-on from their October piece entitled, "Dead Government Walking." Their viewpoints on the government and their actions have become quite clear.

Embedded below is Sprott's 'Markets at a Glance' piece by Eric Sprott and David Franklin:




You can also download the .pdf here.

We've been posting up other great market commentary from hedge funds such as Woodbine Capital with their piece Gold: The Anti-Goldilocks. Sprott is more bullish on precious metals as evidenced by their research, Gold: The Ultimate Triple-A Asset so as you can see it's always interesting to check out the varying viewpoints amongst money managers. Sprott have clearly outlined their point of view and have positioned their portfolio accordingly, taking a defensive posture.

Dead Government Walking: Hedge Fund Sprott's October Commentary

We wanted to post up hedge fund Sprott Asset Management's October market commentary entitled, 'Surreality Check Part Two... Dead Government Walking" penned by Eric Sprott and David Franklin.

Embedded below is the document:



Also, you can download the .pdf here.

We've covered a lot of Sprott's research on the site before, including some of their September commentary, as well as their special report on how gold is the ultimate triple-A asset. Additionally, you can also check out fund manager Eric Sprott's recent thoughts at the Value Investing Congress.

Value Investing Congress: Notes From Day 2 (Ackman, Sprott, T2 Partners)

Yesterday we posted up a collection of notes from the first day of the Value Investing Congress where we detailed investment ideas from David Einhorn, Julian Robertson, and more. Today, we're back with notes from the second day of the conference with picks from Pershing Square's Bill Ackman, Eric Sprott of Sprott Asset Management, and Whitney Tilson's hedge fund T2 Partners. Let's get to the ideas:

Bill Ackman, Pershing Square Capital Management

Ackman has been focused a lot on REITs lately. Readers are well aware of his position in General Growth Properties (GGWPQ) and just recently he presented his short position in Realty Income (O). This time around, Ackman presented the long case for private prison operator Corrections Corp of America (CXW) as 'one of the best real estate businesses around.' And while he didn't structure it this way initially, he said that going long Corrections Corp and short Realty Income sets up as a good pairs trade. He likes CXW because there is strong demand for prison space coupled with limited supply. Not to mention, having the government as a major customer is always a good thing. Humorously, Ackman also said, "It's also a hedge against your hedge fund business, because as the SEC ramps up... *laughter* we shouldn't joke about that."

Delving into specifics, Ackman's presentation highlighted numerous points. Ackman says that private prison companies are able to build their jails cheaper than the state and federal governments, making them the more popular choice. "As long as people commit crimes and as long as we punish them" CXW should be just fine. Obviously then the catalysts for this play include higher crimes in a recession as well as the fact that governments are strained budget-wise and cannot build new facilities. Obviously then the catalysts for this play include higher crimes in a recession as well as the fact that governments are strained budget-wise and cannot build new facilities. Further catalysts include stock buybacks and the fact that gaining incremental prisoners leads to high operating leverage.

Occupancy is currently high in the industry as new facilities can't be built and the number of prisoners continues to increase. The supply/demand equation certainly seems to be in their favor with current industry occupancy at 94%. Ackman noted that only a slim margin of inmates are in private prisons (7.8% of the nation). This leaves them plenty of room for growth and the trend is in their favor as that has already started to occur as private prisons took 50% of the industry expansion in 2007. Other positives in the investment highlighted by Ackman include the fact that 5% of the equity is held by the Board, there is long-term secular growth, the government is a huge customer, it is basically an oligopoly, it has low maintenance capital expenditures, and there is a high return on invested capital.

In the end, Pershing Square thinks that the supply/demand equation outweighs any regulatory risk and they own 9.5% of the company at around $24.50 per share. Lastly, while Ackman can't trade in General Growth due to his position on the board, he did comment that he would be a buyer here, not a seller (obviously). For more ideas from Ackman, make sure to check out his recent presentation on Realty Income as well.


Eric Sprott, Sprott Asset Management

In the past, we've seen that Sprott likes gold and has taken a defensive portfolio posture. He continued on that meme at the congress as he presented Norseman Gold Plc (ASX: NGX) as his investment idea. Also, on a macro level, Sprott made interesting comments on the notion that if there is no tax credit extension we could see a 30% drop in home sales in January of next year. Sprott also warned that once quantitative easing ends, the world could be in for further trouble. He cited previous government programs like cash for clunkers that had a temporary positive impact but upon expiration led to further declines. Sprott then hypothesized that a similar outcome would arise once quantitative easing disappears. Like many of his other hedge fund manager colleagues, Sprott warned against the implications of the Federal Reserve's actions, particularly as it relates to Treasury bonds.

He also shifted his focus to banks as he pointed out that if they are leveraged 20:1, they have about 5% of equity supporting merely paper assets. If those assets were to fall in price even by the slightest bit, that would create a huge problem for these institutions. He proclaims that these banks should not be running such high leverage. He also cited the recent large bank failures of Colonial, Guaranty, and Corus which involved writedowns ranging from 11-25%. Clearly he has retained his pessimistic view and defensive portfolio positioning.

And while Sprott did not make these next specific comments at the Value Investing Congress, we thought they were worth mentioning. A few weeks ago in a speech at a University in Canada, Sprott said he was short Research in Motion (RIMM) due to increased competition in the smartphone industry and thinks it will be difficult for them to maintain and grow current profit levels. Also, Sprott said that he thought gold could reach $2,000 having recently breached the $1,000 level. Since inception, Sprott's hedge fund is up over 400%. For more from Sprott, check out their September commentary as well as their presentation on how gold is the ultimate triple-A asset.


Whitney Tilson/Glenn Tongue, T2 Partners

The presentation from T2 Partners centered on their extensive research on the housing crisis. They said another wave of losses is coming down the pipeline in the form of prime, jumbo prime, HELOCs, second lien, and commercial real estate as well. They noted that the giant wave of defaults has already occurred and so the worst is over. However, it will still be a painful process to work off the rest of the losses and they likened it to 'drip torture.' Most other loans are still defaulting and they see this taking place for the next 5 years or so. They said to be wary of the near-term stabilization as it is nothing more than a head fake. As such, their recommendation was to short homebuilders through the exchange traded fund ITB, the US Home Construction Index. For more insight from T2, you can check out one of their recent investor letters, as well as a recent interview Whitney Tilson did.

We also wanted to quickly mention that fellow value player Zeke Ashton of Centaur Capital Partners had three ideas: Allegheny, Lab Corp of America, and MVC. Make sure to also check out notes from day one of the Value Investing Congress as well where you can get investment ideas from David Einhorn, Julian Robertson and more.

Lastly, we also wanted to highlight excellent coverage on Wall Street Media from Todd Sullivan of ValuePlays.net where he sits down and talks about the various speeches from the congress. Here are some of the videos summarizing Joel Greenblatt's presentation, the speech from David Einhorn, as well as the powerful real estate presentation from Amherst Securities. Thanks to those guys for their added coverage.

Hedge Fund Sprott's September Market Commentary

Here's the latest from Eric Sprott and the camp over at hedge fund Sprott Asset Management. Their September market commentary is entitled, 'Safe Harbour No More' as they turn their focus to the US Dollar and its negative prospects. Sprott of course are big advocates of gold and precious metals as we've seen when examining their portfolios and reading their past market commentary. Eric Sprott's hedge fund firm definitely has taken a defensive posture and that sentiment continues to be echoed in the most recent edition of their market commentary.

Embedded below is Sprott's September commentary:




You can also download the .pdf here. Also, do note that you have a prime opportunity to hear Eric Sprott himself speak at the Value Investing Congress coming up this October 19th & 20th in New York City. We've secured a discount for our readers to the event (code: N09MF3) and we highly recommend taking advantage of it while it lasts. At the conference you'll hear actionable investment ideas from some of the most prominent hedge fund managers in the game.

Sprott Asset Management: Beyond the Stimulus (Market Commentary)

Here's the latest commentary from Eric Sprott's hedge fund Sprott Asset Management. Their August market commentary is entitled 'Beyond the Stimulus.' As always, great insight from them and recommended reading. Last week we also posted up another piece of theirs entitled 'Gold: The Ultimate Triple-A Asset.'

And if you can't get enough Sprott, then also check out their July market update, their market commentary (highly recommended) and the list of their positions in UK markets. Email readers will need to come to the blog to view the embedded document below:

Sprott Comment August 2009


And you can try downloading the .pdf here.

Gold: The Ultimate Triple-A Asset, Says Sprott Asset Management

Thanks to a reader in Toronto for more great commentary out of Sprott Asset Management regarding their favorite precious metal. This firm has long liked gold so they're obviously talking their book here. However, we always enjoy reading their insight. We also recently posted up their July market update, their market commentary (highly recommended) and detailed their positions in UK markets.

RSS & Email readers will need to come to the blog to view the embedded document regarding Gold:

Gold the Ultimate Triple-A Asset


Alternatively, you can try to download the .pdf here if it will work.

Sprott Asset Management Playing Defense In the UK

Thanks to a reader's help we are continuing our coverage of the UK positions that various prominent hedge funds hold. This time around we're focusing on Sprott Asset Management (Eric Sprott). Of all the funds tracked here on Market Folly recently, Sprott Asset Management has surely been the most circumspect. This caution is reflected in both their gloomy analysis of the economy's prospects and their defensive portfolio positioning. Whilst Sprott are currently focused on playing defense, it’s important to remember that their track record shows that in the past they have also been able to go on the offensive. They were ranked 49th in Barron's top 100 hedge funds for 2009.

Here is a quick recap of Sprott's analysis of the current economic situation. In their report of July 2009 entitled “It’s the Real Economy Stupid” they argued that we are in the early stages of a depression. They suggest the current bear market may be similar in magnitude to the great depression of the1930s. Back in July, they pointed out that we were in week 90 of 149 in comparison to the 1930’s bear market.

Sprott’s view is that the only thing propping the market up is investor sentiment. They are particularly worried that investors might turn their backs on stocks, thus sending the market lower. Using Robert Shiller’s S&P 500 historical data and P/E ratios they set out three scenarios for the future. It is interesting to note that in all three scenarios they expect the S&P 500 to trade below the March 2009 low of 666.

1. In the first scenario, they see earnings staying constant; P/E ratios hit cycle lows: We (Sprott) assume a scenario where investors are nervous, people need to sell stocks to pay for lost wages, or for retirement, but the companies continue to perform as of June 2009. Assuming a P/E of 6, which is close to the all time low, and using an earnings value of $63.04 for the S&P 500 Index, we derive an S&P 500 Index value of 378.16

2. In the second scenario, earnings get halved; P/E stays constant: Earnings have been half of their current value three times over the last 30 years – so it is entirely within the realm of possibility that they could be halved once again. In the late 1970’s, early 1980’s and early 1990’s the S&P 500 Index generated half the earnings per share that it did this year in 2009 dollars. Using today’s P/E multiple of 16.08 results in an S&P 500 value of 506.

3. In the third outcome, earnings get halved; P/E ratios hit cycle lows: double trouble. If we combine these cases where earnings are cut in half from today and the P/E ratio drops to a cycle low, it implies an S&P 500 Index value of 189 (depression territory).

Let’s now briefly review Sprott’s portfolio. If you believe the stock market could fall in the way that Sprott do, it’s unsurprising that they have few if any of the growth stocks beloved by many hedge fund managers. In fact, they have very few stock positions in sectors other than basic materials at all. As of March 2009, Sprott had a huge 42.9% of their net asset value invested in gold and silver bullion. They then followed this up by continuing the theme with another 22.2% in mining stocks and precious metal plays. In addition, they had 33.5% of their NAV in cash and short-term investments. It will be interesting to see whether they have made changes to this Armageddon portfolio when the next round of filings is received. In the mean time, we can provide some details of two positions in the UK market that we have not reported before. There are no prizes for guessing what the holdings are in. Because, if you've followed them at all... you already know. Drumroll please...

Cluff Gold Plc – On 4/21/09 (U.S. date format for our European readers) the London Stock Exchange reported that Sprott owned 6,900,000 shares in Cluff Gold Plc, representing 5.9% of the ordinary shares issued.

Cluff Gold plc is focused on the identification, acquisition, development and operation of gold deposits in West Africa that are amenable to open-pit mining and low cost production techniques. The Group has assembled a portfolio of mineral interests at various stages of development in Côte d’Ivoire, Burkina Faso, Sierra Leone and Mali. The Company is incorporated in England and Wales and its ordinary shares are dual listed on the AIM market of the London Stock Exchange and the Toronto Stock exchange.

Medusa Mining Limited – On 05/09/09 it was reported by the London Stock Exchange that Sprott owned 8,955,395 ordinary shares in Medusa which represents 5.4% of the shares outstanding.

Medusa has been a gold miner in the Philippines since 2003. Medusa's gold production operations focus on producing high grades at low production costs. Medusa produce approx 40,000oz of gold per annum although they hope to expand this as new mines open. The Company’s ordinary shares are dual listed on the AIM market of the London Stock Exchange and in Australia.

That wraps up their UK positions for now. And, as you can see, they've continued with their precious metals theme and overall defensive stance. This article is a part of the new series we are doing where we track prominent hedge funds' positions in the UK. Our hedge fund portfolio tracking series typically focuses on SEC filings that detail holdings in American markets. And, in an effort to cover all things hedge fund, we are now also focusing on positions in other markets. In this series we've already covered the UK positions of Stephen Mandel's Lone Pine Capital as well as Timothy Barakett's Atticus Capital. Check back daily as we expand our coverage thanks to a reader's help.

For more resources on Sprott Asset Management, we've started covering them more in-depth and just yesterday posted up their July market update. Additionally, you can also peruse their insightful yet gloomy market commentary. And last but not least, we have also covered the long and short positions of their Canadian Equity Fund for those interested.

Sprott Asset Management Market Update: July 2009

Thanks as always to a reader in Toronto for the latest from the Sprott Asset Management camp. Their hedge fund was -7.89% for the month of July and they are now -9.32% for the year. The past 2 months have not been their best and have swung them back to negative for the year. However, we should also quickly point out the long-term track record of Sprott. They are seeing a compound rate of return of 21.37% annualized and a cumulative return of 442.63% since inception. For whatever reason, everyone is so focused on near-term performance these days. "A bad 2 months in a row? Oh, we're pulling our money out." We here at Market Folly are trying to shift the focus back towards outperformance over the long-term. While it is obviously prudent to monitor your investments in the near-term, a long-term focus can generate some serious Alpha and some solid returns.

Included below is the performance breakdown of Sprott's hedge funds, including their LP, LP II, Bull/Bear RSP Fund, Opportunities Fund, Opportunities RSP Fund, and Small Cap Fund. RSS & Email readers will need to come to the blog to view the embedded documents. (Or you can try downloading the .pdf here however long the link lasts).

Sprott-7 09 Hedge Funds


Additionally, we've got the summary of performances drilled down into one convenient document:

Sprott-7 2009 Performance Summary

(Try to download the .pdf here).

We've started to cover Sprott in more detail on the blog now and just a few weeks ago featured their July Market Commentary. Additionally, we've also covered their long and short positions within their Canadian Equity Fund. We're not kidding when we say we've posted a lot of Sprott stuff up recently as we seek to play catch-up in adding them to the list of 40+ prominent hedge funds that we track.

Some other resources worth checking out are some articles featuring members of the Sprott team that are scattered about online. Here is the list below:

• July 24, 2009 - Morningstar's "Veteran manager is back on top after last year's 'humbling experience' " featuring Allan Jacobs, Director of Small Cap Investments
• June 26, 2009 - The Gold Report interviews Charles Oliver & Jamie Horvat, Senior Portfolio Managers in "Keep the Faith—Higher Gold Price Will Come"
• July 25, 2009 - Peter Hodson, Senior Portfolio Manager, submission to the Financial Post entitled "Where to be when inflation strikes"
• July 24, 2009 - John Embry, Chief Investment Strategist, submission to Investor's Digest entitled "Ontario Heading in same direction as California"

Stay tuned as we continue to cover Sprott Asset Management going forward.