Bob Prince's Presentation: Capitalize For Kids Conference 2018

We're posting up notes from the Capitalize For Kids 2018 investment conference.  Next up is Bob Prince, co-CIO of Bridgewater Associates.


Bob Prince's Capitalize For Kids Presentation

•    Presentation title - “Outlook and Investment Strategy”
•    Look back over the past decade and present - distill to cash flows and discount rates = prices and returns
•    Beneath that is money and credit flows, which determine discount rates
•    These are below the surface primitives that drive the headlines
•    10 years ago high risk premiums, today low risk premiums. These have driven returns
•    Transitioned from long period of monetary easing to tightened
•    Flow of global money and credit is gradually rolling over
•    The pace of monetary tightening is moderate, mostly driven by the Fed via roll down and short rate, with impacts on USD
•    While unusual for this stage of the cycle, the global financial system is not over leveraged and is supporting growth. Typically expansion financed by leverage, but this expansion financed by money, not credit, as consumers have de-levered, banks financed by core deposits, banks are lending. Capital Markets seeing low credit spreads, no credit sell off despite stock market pullback. Money pull back, but economic growth is still booming, pushing up cash flows. Strong year on earnings still. When does monetary tightening impact credit, then we have impact on economy and earnings.
•    First stage of correction / recession is just a monetary pullback, but if credit and risk premiums are affected —> earnings and economic impact which leads to a recession
•    China policy is now of comparable importance as the US and Europe. As China’s labour gets more expensive, we see outsourcing of labour to adjacent countries, which is becoming an independent Asian economic bloc. China + Asian 8 country bloc roughly has a GDP of Europe or USA.
•    Expected returns of assets are low and the next downturn present unique risks
•    Pullback of liquidity is listing the yields of all assets,
•    First time since 90’s we have seen real monetary tightening
•    A chart with asset returns at different stages of the cycle
o    Late cycle, monetary tightening, shows everything suffers except commodities
o    Early and Mid cycle, traditional assets perform well.
•    Thinks we are approaching the later end of the cycle where inflation accelerates and commodities will benefit


•    Unique Risks in the next downturn
o    Central banks ability to reverse the downturn is more limited - need 500bps rate cut to turnaround, QE mostly spent
o    Political divisions will impact effective policy action
o    Deflation with interest rates near zero can trigger a self reinforcing rise in real interest rates and rising risk premiums
o    Lots of obligations out there to be kept - pensions obligations, etc
•    Look east


•    Asia bloc taking share of global output very quickly. Increasingly independent of the issues of the west, driven by Chinese policy, which leads to independence from west. So adds portfolio diverification due to independence of economic returns. 1 year growth of GDP > Mexico GDP, 5 year > Japan, 10 year > Europe
•    Balance a strategic mix, go to the beach, earn the risk premium, and diversify asset classes and macro exposures. Balance the risk allocation to growth and inflation, so when economy goes up or down, inflation goes up or down, still earn risk premium
•    50-60 long bonds, 20 equities, 10 energy equities, 10 gold equities. 7% a year since 2000, 10% since 1970. Diversify, balance exposure to growth and inflation. Not exposed to sustained inflationary or economic situation if you listen to that.


Be sure to check out the rest of the presentations from Capitalize For Kids 2018. 

Kyle Bass on Global Outlook Pitfalls and Opportunities

Hayman Capital's Kyle Bass recently gave a talk at the Dallas Fort Worth CFA Society for the Texas Investor Summit entitled "Global Outlook Pitfalls and Opportunities For 2014."  In it, he walks through monetary policy and the various scenarios that could unfold and their effects.

In the presentation, he touches on three main topics: the US and tapering, Japan and quantitative easing, as well as emerging markets and slowing growth.

Embedded below is Hayman Capital's .pdf presentation:





You can watch the video of his presentation by clicking here.  You can view recent portfolio activity from Hayman here.


H/T to ValueWalk for finding the video.

Prologue Capital on the US Housing & MBS Markets

Today we present some interesting commentary on the mortgage backed security (MBS) and US housing markets from hedge fund Prologue Capital.  Prologue is a $2.1 billion global macro fixed income manager that focuses on inflation-linked investments. 

Their latest commentary features thoughts from portfolio manager Noah Estrin and Chief Economist Tomas Jelf and they believe that the housing market will shift from a headwind to a tailwind.


Prologue writes that,

"A modest increase in home prices from current levels will translate into a large swath of credit impaired borrowers being able to refinance, significantly increasing mortgage supply. However, the doves at the Fed will be reluctant to step away from the assistance they are providing the economy until they are 100% certain that the recovery can stand on its own."

Prologue sees housing starts "increasing by around 60% to 1.5 million in the next 2-3 years, which brings it in line with natural rate of household formation."  They also highlight a shift in housing-related employment which is growing at an accelerated pace.

You can read the entirety of their thoughts below, but suffice it to say that they feel the "positives outweigh the negatives" in the US housing market and that Spring has sprung.

Embedded below is Prologue Capital's commentary on the MBS market and US housing market:

Ray Dalio on QE3, Gold, China, Europe, Economy & More (Interview)

Bridgewater Associates founder Ray Dalio appeared on CNBC this morning for a rare interview.  Bridgewater manages $130 billion and is listed as the top hedge fund by net gains since inception.  Here's a summary of Dalio's thoughts from this morning as well as the videos:

On QE3 and the US Dollar

Dalio said that QE3 was a good plan.  When you ease interest rates,  it stimulates private sector credit growth.  And then after that you utilize quantitative easing.  He feels the US dollar is squeezed due to lots of dollar denominated debt, but after this squeeze he says it's going to decline in the near-term.




On China

The hedge fund titan points out that China can have 6% growth and still think that's depressing all while the US has 2% growth.

Just yesterday we posted about how Jim Chanos is still short China.  And of course we've also highlighted the China hedge fund bear thesis.



On Gold

He says "it should be part of everyone's portfolio to some degree because it diversifies the portfolio."  He likens gold to an alternative version of cash and over the long term he says it's better than cash.  "Money can be produced, but gold is somewhat limited."



On Europe

Bridgewater's founder says there's going to be a "managed depression" in southern Europe in the next few years, and thinks we'll see both a combination of monetary policy (money printing) and a deleveraging and restructuring of debt over there.  He says the euro is "likely" to stay together and it is controlled by southern Europeans, though there's more risk for the currency in later years.



On His Biggest Worry

He worries about social distortion and another leg down in various economies causing them.  He notes that deleveragings can be painful and we've posted up Dalio's in-depth look at deleveragings before.


On a Possible Downturn in the US Economy

The Bridgewater founder said that the odds of an unmanaged downturn are "comparatively low."  He likens it to flying on a plane where you could hit an air pocket and that's when problems could arise. 


Dalio's Rules of Investing

He says, "I don't get caught up in the moment.  I think so many people are reactive and they see things in a very short-term way."  He goes on to say that, "almost all important events never happened in your life."  He looks at what's happened in the past and uses that as a template for rules for each scenario essentially saying 'if this happens, do that.'



Dalio is profiled in the new book The Alpha Masters which we recommend reading.  For even more thoughts from Bridgewater's leading man, check out this recent in-depth interview with Dalio from a few days ago.

Ray Dalio In-Depth Interview on a Myriad of Topics

Bridgewater Associates founder Ray Dalio recently gave an hour-long interview at the Council on Foreign Relations where he touched on a myriad of macro, economic, and investing topics. 

It's rare to get such an in-depth look from one of the world's top investors, so instead of summarizing we highly recommend watching the whole interview with Dalio below:



Hat tip to PragCap for finding this.


We've posted tons of other great resources on Bridgewater below:

- Ray Dalio interviewed in the book The Alpha Masters

- Dalio on deleveragings

- Bridgewater the top hedge fund by net gains since inception

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

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

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

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

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


Passport Capital's Main Views

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

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


Burbank's Portfolio Changes

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

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

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


Saudi Equities Most Compelling

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

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

Bridgewater's Ray Dalio on Deleveragings

Bridgewater Associates founder Ray Dalio recently put out a research paper entitled, "An In-Depth Look at Deleveragings." Given that Bridgewater is the top hedge fund by net gains since inception and that Dalio doesn't give his views in public that often, this 30+ page paper is surely a must-read.

In summary, the piece basically says that deleveraging in the purest sense of the word equals debt reduction and debt monetization. Dalio writes that "good" deleveraging stimulates economies via monetary stimulation and that "bad" deleveragings cause recessions and in turn, usually deflation.

To compare and contrast the two, he walks through six periods as examples of each: The Great Depression, Japan's lost decade, the UK from 1947-69, the US financial crisis, as well as Weimar Republic's hyperinflation.

Put your macro hat on via the full article below: Ray Dalio on Deleveragings




Those who have followed Dalio's scarce appearances also know that he has a dim view of the economy this year. For more from the legendary manager, head to Dalio's interview with Charlie Rose.

Be sure to also check out Ray Dalio on his principles.

Passport Capital's John Burbank: 2012 is a Stockpicker's Market

John Burbank of $4 billion hedge fund Passport Capital recently sat down with Bloomberg TV to discuss his outlook on the markets and oil, among other things.


On Why This is a Stockpicker's Market

The founder touched on his fund's strategy for those looking for more insight into his ways:

"We’re stock pickers. In fact, this is a great year to be long and short individual securities. In 2008, everything went down. In 2009, everything went up. In 2010, everything moved together and eventually ended up. Last year, things started separating. Our strategy is to be picking individual securities, companies that are not depending on economic growth.”

You can see Passport Capital's latest equity holdings in the brand new issue of our Hedge Fund Wisdom newsletter that was just released.


On Healthcare & Biotech

He also went on to say that, “Biotech and healthcare is one of those sectors. There hasn't been an obesity drug approved in over 30 years and we thought QNEXA would have a good chance of being approved…We were one of I think four big holders in the stock. We think it can double again because we think a large pharma would probably like to own the company at some point."

QNEXA is the drug made by VIVUS (VVUS). In addition to Passport, large holders of the stock at the end of Q4 were Caxton Associates, Citadel Advisors, D.E. Shaw & Co, and SAC Capital.


On Oil

Burbank also addressed some macro topics like oil. "[Oil] is up 16%, more than any of the indices. It's a big problem for the rest of the world - central bank easing and liquidity providing presents a lot of problems for the average consumer here but also for emerging markets around the world.”

Burbank also mentioned where he has allocated a sizable portion of his capital:

“The one market it really helps is the Saudi market. We have 15% of our capital in the Saudi market - only about 1% is held by foreigners. It should be opening up this year. So we think unfortunately QE3, which is now being pursued in Europe and Japan, essentially in the U.S. with other programs, has negative feedback loops. And oil we think is the one. Gold goes up 10%, 20%, 50%, it doesn't cause any problems with people the way banking is done these days, but oil does… I don't think oil is going to stop until the economy breaks which is a real risk."

Embedded below is the video of John Burbank's interview with Bloomberg TV:

Bridgewater's Ray Dalio Interview With Charlie Rose

Late last year Ray Dalio, the founder of hedge fund behemoth Bridgewater Associates, sat down for his first interview with Charlie Rose. He talked about Bridgewater's culture, investment process, and more.

Embedded below is Ray Dalio's interview with Charlie Rose for those who may have missed it (email readers click the link to watch):



We've posted up other resources from Bridgewater such as Ray Dalio's principles.

East Coast Asset Management on Competitive Advantage: Quarterly Letter

East Coast Asset Management's quarterly letters have become one of our favorites for insight and timeless advice on the topic of compounding as well as variant perception. This time around, Christopher Begg focuses on competitive advantage and the ability of businesses to first become 'local champions'.

Begg writes that, "high quality businesses that can raise prices and whose products have localized advantages with a growing emerging market consumer will thrive." This point is exemplified by Warren Buffett & Berkshire Hathaway, whose latest purchase of Lubrizol was seemingly based on pricing power.

The main gist of the letter is that solid investments are found in businesses with solid competitive advantages that allow them to do something their competitors cannot.

East Coast's letter also goes on to quote Steve Mandel of Lone Pine Capital who said, "Our ability to identify businesses that have the market opportunity, product distinction, competitive advantage and management skill to grow earnings and cash flow for longer than is factored into consensus expectations has distinguished our investment effort over the years."

Lastly, Begg gives an example of misclassifying an investment in Cisco Systems (CSCO) and how he has learned from the mistake. Investors never stop learning and this is the perfect example of why many successful investors critically focus on competitive advantage.

Embedded below is East Coast Asset Management's latest letter:



You can download a .pdf copy here.

Begg has also accepted a position as an Adjunct Professor at Columbia Business School and will be teaching Security Analysis this summer. For more great insight from this firm, check out East Coast on gaining an investment edge.

10% Off Next Week's Global Macro Hedge Fund Event in New York

There are only a few seats left for next week's Global Macro Hedge Fund event in New York and Market Folly readers receive a 10% discount.

On March 23, FINforums brings together top hedge fund managers, investors, political scientists and economists to discuss geopolitical risk and its effect on investing in global macro funds. Topics include an emerging markets outlook, an in-depth look at the crisis in the Middle East, and a discussion about US and European fiscal policies and how they impact investment decisions.

Event: Global Alpha and Geopolitical Risk
Date: Wednesday, March 23, 2011
Venue: Princeton Club, New York City
Cost: $195 (use discount code FOLLY for an additional 10% off)
Organizer: FINforums
More Info: Click here for more info
Register: Click here to register

Highlights of the event include a one-on-one fireside chat between hedge fund legend Barton Biggs and award-winning broadcast journalist John Seigenthaler, and a keynote address by leading Middle East expert Gary Sick (see full agenda).

Speakers Include:

- Barton Biggs, Founder and Managing Partners, Traxis Partners
- Prof. Gary Sick, Adjunct Prof of Intl and Public Affairs, Columbia University
- Caroline Bentz, Managing Director, Parker Global Strategies
- Amer Bisat, Partner and Portfolio Manager, Traxis Partners
- Nicholas J. Colas, Chief Market Strategist, ConvergEx Group
- Bertrand Delgado, Senior Research Analyst, Roubini Global Economics
- Justin Dew, Sr. Managing Director, Welton Investment Corp
- Kenneth Kuhn, Managing Director, Global Capital Investments
- John Seigenthaler, Former NBC News anchor and current CEO of Seigenthaler PR-NY will serve as chair and moderator

For questions, please contact Deirdre Brennan at (212) 966-0047 or dbrennan@finalternatives.com

The event is sponsored by NorthPoint Trading Partners, Ambrose Group, Chivas, Hedge Fund PR, Seigenthaler Public Relations and FINalternatives.

David Gerstenhaber of Argonaut Capital on Risk Management (Interview)

David Gerstenhaber, founder of global macro hedge fund Argonaut Capital, recently sat down with Opalesque TV to discuss risk management, how global macro investing has changed over the years, as well as how he got his start in the business.

Gerstenhaber was interested in markets at an early age and pursued economics as a result of it. He was working at Morgan Stanley in London when he started helping Julian Robertson's Tiger Management with some macro-oriented trades. Robertson then offered him a job and he accepted. After working for three years at Tiger Management, Gerstenhaber went on to found Argonaut Capital.

Risk Management

At Argonaut, he argues that one of their key advantages is their internal psychology about using options. He says, "We love to have asymmetric risk/reward in our favor, but not against us. And so, when we see themes that we have determined are likely to prevail for an extended period of time, we will do our best to structure our investments through options so that we have significant upside but limited downside ... We have a longstanding history of using options to reflect our positions rather than just buy directional risk."

On How Global Macro Investing Has Changed

In the interview, he emphasizes how making "big bets" was almost encouraged back in the day as investors were more tolerant of volatility in search of high returns. He also notes that risk management was not very developed and many investors didn't place a large emphasis on it. After shock events in 1998, the internet bubble, and housing bubble, it's very clear that risk management is very prevalent in global macro investing these days. Louis Bacon of Moore Capital has been known to place emphasis on risk first.

Practicing global macro investing now, Gerstenhaber identifies it as a four-asset class business: foreign exchange, fixed income, commodities, and equity indicies. Ideally, Argonaut wants to have positions in each asset class and offsetting value at risk (VaR) in each one of the asset classes so they aren't exposed to systemic risk. And interestingly enough, Argonaut's typical timeframe for holding an investment is identified as around "half a business cycle."

What is the future for global macro investing?

Gerstenhaber believes the global macro universe is expanding, rather than contracting like other strategies. For instance, he argues that the long/short US equity opportunity set is declining, yet there are more and more managers investing in that strategy each year.

One interesting quote from the interview is when Gerstenhaber said he sees a potential for a "muted rate of return for the long-only investor" in stocks or fixed income. While he's obviously biased since he is in the hedge fund industry and doesn't run long-only money, it's an interesting notion that investors shouldn't expect the same annual returns as they have seen in the past.

Embedded below is a video interview with David Gerstenhaber of hedge fund Argonaut Capital (RSS & Email readers may need to come to the site to watch it):



It's clear that Argonaut places a lot of emphasis on primary research and traveling the globe to craft and refine their investment theses. To see some of the hedge fund's thoughts from this year, check out Argonaut's thoughts on what went wrong in the markets. And for further global macro insight, we posted up Paolo Pellegrini's PSQR Capital last letter to investors before closing.

Soros Fund Management Updates Position in Verigy (VRGY)

George Soros' hedge fund firm has just filed a 13G with the SEC regarding shares of Verigy (VRGY). Per portfolio activity on November 18th, Soros Fund Management has disclosed a 7.24% ownership stake in VRGY with 4,681,790 shares. This is not necessarily a new position for Soros if you drill down the specifics.

The hedge fund disclosed ownership of Verigy 5.25% senior convertible notes due 2014 at the end of the third quarter in their 13F filing. This most recent SEC disclosure notes that Soros owns 6,100 common shares of VRGY and that the other 4,675,690 shares they 'own' are represented should Soros convert their senior notes. So, the hedge fund purchased new common shares recently but still owns convertible notes as well.

Interestingly enough, David Einhorn's Greenlight Capital disclosed a new position in Verigy (VRGY) in the most recent quarter as we already noted in the new issue of our newsletter that was released early last week. You can view the rest of Soros' portfolio in our new issue as well.

Lastly, keep in mind that while Soros Fund Management bears his name, George Soros has recently confirmed that he has no involvement in the day-to-day activity at the fund as those responsibilities fall to Chief Investment Officer Keith Anderson. Soros' sons, as well as other managers, are also responsible for the portfolio activity you see disclosed. For thoughts from George himself, we recommend reading one of his books: The Alchemy of Finance or his other title, The New Paradigm for Financial Markets.

According to Google Finance, Verigy "designs, develops, manufactures and sells advanced test systems and solutions for the semiconductor industry. The Company offers a single platform for each of the general categories of devices being tested: its V93000 Series platform, designed to test System-on-a-Chip (SOC), System-in-a-Package (SIP) and high-speed memory devices; its V6000 Series platform, which is the successor to the V5000 platform, designed to test both flash memory and dynamic random access memory (DRAM) devices, and its V101 platform, designed to test devices, such as 4, 8 and 16-bit micro-controller units (MCUs)."

Other recent portfolio activity from Soros includes boosting its stake in InterOil (IOC) and buying other positions as well.

Hedge Fund Prologue Capital's Latest Macro Outlook

It's been a while since we checked in on global macro hedge fund Prologue Capital, so let's get their latest economic assessment. We track the fund as they've shown solid performance through very rough waters, up 18.86% in 2008 and up 12.41% in 2009. Prologue was up 3.69% for the year as of the end of June (net of fees). In the fund's second quarter letter, Chief Economist Tomas Jelf echoes chairman Bernanke's declaration that the US economic outlook remains "unusually uncertain."

The $1.014 billion hedge fund points to strength abroad, notably accelerating economic output in India and Singapore as well as a strong recovery in Germany and the United Kingdom (following the earlier fiscal stresses). This comes after their previous commentary where Prologue saw cause for concern.

Jelf notes that the US saw mostly strong corporate earnings in Q2 yet key economic indicators (confidence, employment, housing and consumer spending) suggest a sluggish recovery ahead. The one bright spot was the improvement in capital expenditures. Second quarter GDP estimates have been reduced to 2.5% in light of the harsher economic reality. Jelf foresees continual deleveraging in the corporate sectors and the perseverance of low rates as the Federal Reserve becomes more cautious.

He argues that the picture in Europe is not nearly as bleak, as the markets have reacted favorably to numerous indicators surprising to the upside. Investor confidence has also benefited from the increased transparency following the completion of the bank stress tests. Weak credit growth and fiscal difficulties still pose challenges in the future.

Given all of the above, how is Prologue positioned? They plan to generate returns via the following core strategies:

- Structurally long duration, particularly in the US via forward swaps and higher yielding countries where appropriate.

- Active participation in the underwriting process of government bonds.

- Exploiting dislocations between futures, cash, swaps and mortgages.

- Relative value strategies within core country yield curves.

- Short Europe vs. the US and the UK.

Definitely an interesting approach by the global macro firm given all the uncertainty out there. For more insightful commentary from hedge fund Prologue, they previously detailed why macro factors are positive for risk assets. In terms of other hedge fund manager commentary, Crispin Odey also recently said that equities remain attractively priced but unloved.

Paolo Pellegrini & PSQR Capital's Last Insight Before Returning Capital

As many of you are already aware, Paolo Pellegrini's hedge fund PSQR Capital is returning outside investor capital. He is winding down because he believes that "substantial additional work" will be needed to profit from his global macro strategy. The investment vehicle will continue to manage Pellegrini's own money in the mean time. Through the end of July, PSQR was down over 10% for the year.

Pellegrini of course gained his claim to fame by calling the housing bubble while working with John Paulson at hedge fund firm Paulson & Co. Their collective story is chronicled in Gregory Zuckerman's enticing book, The Greatest Trade Ever. Afterward, Pellegrini struck out on his own, founding PSQR Capital. While he's currently closing to outside investors, he may re-open at some point in the future.

Given PSQR's abrupt closure to outside investors, we thought it would be prudent to examine Pellegrini's most recent thoughts via his last market commentary and analysis. Since we may not see his thoughts for an extended period of time, global macro enthusiasts are encouraged to soak this all in. Pellegrini's second quarter letter focuses on his brief notion that "equities will retrace further". On the policy side of things, he feels the government is digging the hole deeper and that using sovereign debt instead of private debt is the wrong move.

In terms of scanning the economy, Pellegrini highlights that workers' pay still lags and since consumer spending makes up such a large part of our economy, we're in for continued rough waters. This ties into his past concern that so few people are saving money these days. He goes on to write, "While some feel that the economy has stabilized and can only go up - and all the faster because it is rebounding from such a low level - the reality is that the exceptional amount of government borrowing has failed to add up to final demand sufficient to spur economic activity to anything approaching the cyclical upswings typical of post-war recoveries."

Embedded below is PSQR Capital's second quarter letter to (now former) investors:



You can download a .pdf copy here.

You can view the rest of Pellegrini's past commentary here. To see what other prominent hedge funds have been buying and selling, check out our brand new quarterly newsletter: hedge fund wisdom.

Kyle Bass Betting Against Japanese Government Bonds (JGBs)

Kyle Bass of hedge fund Hayman Advisors has a very dim outlook on parts of the world. In a recent interview with CNBC, Bass laid out his themes his hedge fund is playing and positions they've taken as a result. Remember that Kyle Bass will be presenting ideas at the Value Investing Congress in October as well. Market Folly readers can receive a discount here.

Hayman is positioned to benefit from a Japanese restructuring that will likely take place over the next few years. Bass defines the Keynesian end-point as, "when your debt service excedes your revenue". And, he thinks Japan is there. Japan's tax receipts in nominal terms are the same as they were back in 1985, whereas their expenses are 200% higher. He argues that Japan is in secular decline and they're spending roughly twice what they make. Japan has funded themselves by selling bonds to their citizens at low rates and he doesn't feel they'll be able to do this anymore.

As you can see, he has outlined tail risk plays. At the same time, he is trying to earn nominal returns while he waits for these tail events to pay off. As such, 35% of Hayman's investments are in US Mortgages, 25% are in bank debt, 17% are in U.S. distressed positions, and 23% are in high yield. Now these are some of Hayman's 'core' positions but it sounds as though Bass thinks his tail positions could possibly generate quite a return.

In particular, he's focused on Japanese Government Bonds (JGBs). Of them, Bass notes, "At a time at which the bond I think is the most risky asset (or one of them) in the world, the pricing of that asset using the Black-Scholes model is the best it's ever been. So you have this huge convex moment that you can put enormous positions on in Japanese interest rates very cheaply."

Overall, in terms of tail risk plays, he's positioned 10-15% of his portfolio betting against European sovereigns and Japan. Given his view of the world, Bass doesn't know how you can be long stocks. If you want to become instantly depressed, he's the guy to talk to. And Bass isn't the only well known investor betting against Japanese JGBs. In a recent interview, Passport Capital's John Burbank has been short Japanese Government Bonds as well.

Embedded below is a video of Kyle Bass' recent television appearance (email readers will have to come to the site to watch it):



To hear both John Burbank (Passport Capital) and Kyle Bass (Hayman Advisors) present investment ideas, register for the upcoming Value Investing Congress (special discount here).

David Gerstenhaber's Hedge Fund Argonaut Capital: What Went Wrong in the Markets

Today we present you with the May 2010 investor letter from David Gerstenhaber's global macro hedge fund Argonaut Capital. Although the letter is a couple of months old, we thought it worthwhile for our readers to be able to gauge their macro perspective. After all, this letter comes after the month of May where the majority of hedge funds suffered losses and many began to question the economic recovery.

Below you'll find Argonaut Capital's assessment as to "What Went Wrong in the Markets in May." Since that month was so turbulent, we thought it poignant to highlight these factors should investors start to become anxious again in the near future. So, what went wrong?

1. Evidence of the peak in economic growth
2. The impact of Europe's debt crisis
3. A policy-engineered slowdown in China

Given the turmoil of May and the fact that many hedge funds suffered losses (Argonaut included), you should note that Gerstenhaber's fund has materially changed their outlook and adjusted portfolio themes accordingly. In currencies, the hedge fund had been in predominantly long Asian currency positions as they thought the Chinese renminbi would appreciate. At the same time, they were short the Japanese yen. Due to their shift in stance, they have reduced the 'renminbi appreciation' theme on their books.

Also worth pointing out is the fact that they've reduced their longstanding U.S. yield curve steepener position. You'll recall that Julian Robertson (Gerstenhaber's former boss at Tiger Management) had held various curve steepener positions as well. Given the uncertainty surrounding the long-term viability of the euro, Argonaut feels that what is bearish for the euro should be positive for U.S. Treasuries. And speaking of the euro, the hedge fund has high conviction in their short of the currency. Additionally, they are assured in their long in gold. This of course coincides with many other hedge funds that are long gold including John Paulson (who has a separate gold fund) as well as David Einhorn (who holds physical gold).

In equities, Gerstenhaber's hedge fund has exuded concern as they feel earnings estimates are too high in many sectors. In particular, they feel that the consumer discretionary space will disappoint. Additionally, they feel expectations in the technology space might be a tad too aggressive. In the earnings cycle overall, Argonaut believes that top-line revenue estimates will be very hard to beat (or meet, for that matter).

Argonaut writes that, "one overwhelming conclusion from our read of the economic data is that the 'take-off' phase of the global recovery is now behind us, with economic growth at best leveling out, but more likely decelerating going forward." For more on this subject, we've previously detailed David Gerstenhaber's thoughts on the economy.

Lastly, the hedge fund has used the dreaded 'd' word. No, not depression... but close. Deflation. They feel the risk still runs high in the US and Argonaut has long been of the view that deflation, not inflation, is the bigger threat.

Overall, Argonaut Capital has painted a much less rosy picture than other managers we've covered. While this could be attributed to the droves of data they see due to their global macro bent, it also could partially be a function of the fast and furious way markets collapsed in that particular month. One thing's for certain: May certainly altered their views as they believe that there will be a continued rise in volatility and sales of risk assets.

Embedded below is the May 2010 commentary from David Gerstenhaber's global macro hedge fund Argonaut Capital:



You can download a .pdf copy here.

For more great hedge fund letters we of course recommend reading the latest investment ideas from Corsair Capital as well as Perry Capital's Q2 letter, T2 Partners' presentation on 3 stocks, and David Einhorn's Greenlight Capital commentary.

Jim Rogers Sees Opportunity in Silver and Palladium

From time to time, we like to check in on investment guru Jim Rogers to catch up on his thoughts on the markets and global economy. We do so of course due to his past success with the Quantum Fund he previously ran with George Soros. Nowadays, Rogers invests his money under Rogers Holdings and he has some pretty staunch viewpoints. Rogers himself proclaims he is a poor market timer. So while he may be early on an investment theme, he often finds and rides macro trends. To some, his views seem repetitive. But you must keep in mind that he very frequently appears in the media and is seemingly asked the same questions over and over. The last time we checked in on Jim Rogers we saw that he was shorting market indices. From all of these interviews, one of his stances has become abundantly clear: he loves commodities and in particular, precious metals.

In his recent slew of interviews, Rogers has proclaimed that he is fond of gold and still owns it. However, he is not buying more nor is he selling. In the end, he actually thinks gold will be a bubble in the distant future. For some reason he tosses out the year 2019 as his estimate, and it seems he thinks gold's reign will last a decade or so. He thinks this bubble top is a ways off because governments have been debasing their currencies at a rapid rate. Historically, he points out, this has always led to higher prices for real assets and he thinks this time will be no different.

Speaking on the subject of gold, Rogers says that, "I know the old (gold) high, adjusted for inflation, is over a couple thousand dollars an ounce. I know it'll get over that in the next decade. It depends on how much they debase the currencies. It's all part of the same picture... most governments everywhere only know one thing and that's to print and spend money that they don't have. Whenever you do that, it debases currency, always has, and until I see some governments realize that they have to do something else, then I plan to own gold and other precious metals and other real assets."

This of course is not the first time we've detailed a prominent investor's fascination with gold. John Paulson's hedge fund Paulson & Co started a gold fund mainly to bet against the US dollar and the currency debasement that Rogers centers his thesis around. We've also seen John Burbank's hedge fund Passport Capital lay out the rationale for owning physical gold. Not to mention, David Einhorn's Greenlight Capital has owned physical gold for some time now. Inflation is a very legitimate future concern for some of the top minds in the investment industry. Rogers is no different.

His main rationale here stems from the fact that many long-term bull markets end in hysteria and bubbles. He doesn't like to buy things at all time highs and that's pretty much where gold is trading these days. As such, Rogers' interest has been piqued by other metals.

If he had to buy a metal right now, he said he would focus on depressed metals such as silver or palladium. Rogers points out that silver is 60-70% below its all-time high while palladium is around 50-60% below its all-time high. He already owns all four metals: gold, silver, palladium, and platinum. Throughout all his interviews, he was very adamant that he was not selling his gold, but he was not buying more either.

Shifting to Rogers' views on currencies, he is particularly fond of the renminbi. While it is not his favorite overall investment due to liquidity concerns, it is the long-term investment he is most certain of. Rogers mentioned this last week in talking with Bloomberg. And on CNBC that same week, Rogers reaffirmed that he is still long commodities and short stocks due to the withdrawal of government stimulus and his anticipation that central banks will keep the printing presses rolling. This is directly in line with what we saw from Rogers' portfolio in early May.

Lastly, we wanted to highlight that Rogers has been eyeing the events surrounding the oil spill as well. We've already detailed how Whitney Tilson's T2 Partners has bought BP, citing valuation and extreme circumstances. Rogers hasn't quite gone that far yet, but it has definitely caught his eye. On the topic Rogers ponders, "Is it the end of BP? I doubt it. Somewhere along the line I expect that I will buy BP. But I'm not buying it now - just watching to see what happens." In his experience, he notes that disasters are usually a great time to buy. On that same note, he also cautions that there's usually plenty of time to buy into the opportunity presented by the problem. For the time being, Rogers is more than comfortable to wait and watch the proverbial knife drop before jumping in the (oil coated) water.

Embedded below is one of his recent television interviews with CNN Money where he talks about various topics of interest (email readers will need to come to the site to view it):



That wraps up the latest views and portfolio positioning from investment guru Jim Rogers. For more of his thoughts and to learn from this investment guru, check out Rogers' books, Hot Commodities: How Anyone Can Invest Profitably in the World's Best Market as well as A Gift to My Children: A Father's Lessons for Life and Investing.

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Global Macro Hedge Fund Prologue Capital Sees Cause For Concern

Global macro hedge fund Prologue Capital is out with their most recent letter to investors. They immediately address the most volatile month in the markets this year wondering, "Was it all just a storm in a teacup? And if so, will the economic recovery continue unabated? We don't think so. Rather, recent events are symptomatic of economic and financial vulnerabilities that will remain for some time." This is an interesting stance and we'll detail how they've positioned their portfolio below.

While May was a brutal month for hedge funds, Prologue did well to avoid carnage as they were up 0.85% through May 28th. This brings their year-to-date performance to 2.80%. Prologue now manages over $1 billion and were up 18.86% in the crisis-ridden 2008 and up 12.41% in 2009.

In assessing the global macro scene, Prologue's Chief Economist Tomas Jelf evaluates the US, Europe, and UK. Economically speaking, Jelf feels that there are still two main concerns. He writes, "The fiscal accounts of most developed countries create two immediate problems. First of all, the need for fiscal consolidation is a drag on economies at a time when recovery attempts to morph into an expansion. Furthermore, governments' indebtedness limits their ability to provide the type of backstop we have seen in recent years. Second, banks have yet to clean up their balance sheets to a degree that removes solvency concerns."

Overall, Jelf notes that repairing balance sheets and fiscal consolidation takes time. As such, Prologue expects some sort of turmoil to return in future quarters/years. It's obviously hard to peg the timing of such turmoil, but they are more concerned here than they have been in recent months certainly. They are concerned that this could "create more drawn out risk asset deflation and potentially halt the recovery." This isn't the first time we've seen such concern from a global macro hedge fund. Louis Bacon's Moore Capital Management pondered a return to a bear market in their past commentary. At the same time though, Prologue fully acknowledge that this turmoil could amount to nothing more than just 'hiccups' on the road to recovery.

Focusing specifically on the US, Prologue highlights the slowdown in discretionary spending. They are also concerned by an assumed rollover in housing now that the home buyers credit has expired. Overall, Prologue expects "declining year over year inflation figures throughout 2010. That, coupled with the worsening growth momentum, may lead to a decline in inflationary expectations. Suffice to say that the Federal Reserve will keep rates on hold for a long time."

In the UK, Prologue thinks there will be ample opportunities to take advantage of given that the monetary policy outlook is quite uncertain. While inflation expectations there have risen, the Bank of England's models have led them to a continued dovish stance. In Canada, Prologue favors flatteners but also thinks that bonds are cheap relative to US Treasuries. In Australia, they've reduced their exposure to the currency until the monetary path is more lucid.

Given their macro assessment, let's see how Prologue is positioned. In their last commentary, they detailed why macro factors are positive for risk assets. This time around, they are certainly more cautious as the month of May seems to have given them cause for concern. Here are their latest positions:

- Tactically long duration in the US and Eurozone

- Continued active participation in the underwriting process of government bonds

- Cross market Fixed Income - long US vs UK

- Exploiting dislocations in futures versus cash and swaps caused by flight to quality fears

- Volatility in FX options

Unfortunately, we can't post up the actual letter due to revealing watermarks. It's always interesting to see how global macro hedge funds are positioned given the fragile nature of many economies and the constantly morphing economic landscape. Those of you interested in this macro hedge fund's views can see their past commentary. For more global macro research, we have previously detailed investment commentary from John Brynjolfsson's Armored Wolf. And to learn from some of the most knowledgeable global macro fund managers around, we highly recommend Steven Drobny's new book The Invisible Hands: Hedge Funds Off the Record.

Gold Is Good, But Gold Mining Is Better

Prominent hedge fund manager John Paulson started a gold fund as a bet against the US dollar. While he invests in some gold derivatives, he is mainly placing his bet by taking stakes in various gold miners. Conversely, we've covered how John Burbank's hedge fund Passport Capital owns physical gold. So while many hedge funds agree that precious metals deserve some allocation of capital, the dispute comes down to whether you buy the actual metal or those who mine it.

The following is a contribution from Vedant 'VK' Mimani, founder of Atyant Capital, a macro fund focused on precious metals. The below article focuses on why tomorrow's fortunes will be made investing in companies that excavate the yellow metal. Here is Mimani's rationale which originally appeared on Absolute Return + Alpha:

With gold currently trading around $1200 per ounce - an increase of almost five fold from 2001 - it is only natural to wonder how much gas is left in this tank. The fact is, we don't know and we sort of don't care. We've said it before and we'll say it again: the real opportunity for wealth creation in the years ahead lies in the business of gold mining.

The world is in the midst of a credit contraction, of the kind that always follows credit expansions. We have found from historical study that these contractions in credit tend to run about twenty years. During every single prior credit contraction, the real price of gold, as measured against all commodities and assets, had increased. This increase in the real price of gold represents expansion in profit margin for the gold mining industry.

The last major credit contraction occurred during what we now refer to as the Great Depression. During that time, gold miners such as Homestake Mining were among the few companies to reward its shareholders. The Financial Crisis of 2008 stayed true to form. Starting September 2008, gold once again has started to outperform all commodities and assets.

It may seem counterintuitive that gold mining represents the best wealth creation opportunity over the next several years. After all, in 1971, the price of gold was $35 per ounce. An investor could have bought gold bullion in 1971, buried it in the backyard, and have a thirty-five fold return and counting as of today. Yet despite the price of gold increasing thirty-five fold over the last four decades, gold mining itself has been mostly a crummy enterprise in terms of all basic business metrics during that period. This is simply because the input costs increased faster than the price of gold, resulting in little to no profit margin for the industry as a whole.

That all changed in September 2008 when private credit growth peaked. Since then, the price of gold has increased steadily, while the costs of mining gold have decreased significantly; the real price of gold, as measured against all commodities and assets, has increased. Today large cap miners have robust 40%+ operating margins as they are benefiting from the increase in gold prices relative to the costs to mine gold. A quick glance at the last two quarters of operating results for the major miners shows that the increase in the real price of gold is resulting in strong financial performance. As far as we are concerned, we are only two years into a twenty year trend. It's not late; it's early early early.

Are gold miners cheap right now? Examination of gold miners on traditional metrics such as price to net asset value or price to book value, reveals that the miners as a whole are not underpriced on an as-is basis. This is not a "buy $1 for $0.80" type story. Gold mining today is a value creation play in which the macro variables, increased real price for gold and decreased input costs, have aligned and the sector is now experiencing a tailwind instead of a headwind. When the real price of gold increases linearly, mining profits are likely to increase exponentially. (MarketFolly sidenote: This is the main question at hand in the precious metals complex. Can mining stocks outperform the actual price of gold over time? Investing in individual miners entails taking on company specific risk. But of course some of that risk can be mitigated by taking stakes in a basket of miners.)

From March 2009 through mid-April 2010, gold and gold miners have underperformed most other asset classes. In the second half of April 2010, we witnessed a turn from relative weakness to relative strength in gold and gold mining shares. Gold miners are the new leaders and have once again started to outperform all asset classes. In May alone, gold miners outperformed the S&P 500 by 9.5% (as measured by the Gold Miners ETF, GDX, versus S&P 500 SPDRs, SPY). The real price of gold is now never looking back; but from a technical perspective, in the short term, gold's relative strength is overbought and may need some time to work this off. (MarketFolly sidenote: Their highlight of gold miners' performance in May is relevant since it shows outperformance in a period of market volatility. But then again, aren't precious metals seen as an asset class that moves independently of equities, sort of acting as a volatility dampener or hedge in the first place? To play devil's advocate, we'd point out that the gold miners ETF, GDX, underperformed the S&P 500 throughout much of 2010 up until May.)

In conclusion, whether we have deflation, inflation, or pick your favorite 'flation, we ought to remember history's record that in a credit contraction, the real price of gold increases relative to all commodities and assets. This increase in the real price of gold results in margin and profit expansion for gold miners as the spread expands between the price of gold and the cost to mine gold. Gold mining will be one of the few, if not only, sectors to enjoy this type of tailwind in the years ahead.

The last cycle's mega fortunes were made mostly in real estate, computer technology and finance. Tomorrow's mega fortunes will be made mostly in gold mining. Of course, the road from here to there will continue to be volatile and laden with pitfalls, but the trend remains our friend.

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So, interesting thoughts from Mimani and Atyant Capital. Their thoughts continue to highlight the debate between owning gold versus gold miners. We've long detailed this debate through copious amounts of hedge fund resources. As we touched on in the introduction, we've taken an in-depth look at John Paulson's gold fund. Additionally, we've covered how prominent investor David Einhorn favors physical gold and John Burbank likes physical gold as well. Lastly, Eric Sprott launched a gold trust but has also taken stakes in various gold miners as well. So while many fund managers disagree on the particular investment vessel, they all seem to agree in principle that capital should be allocated to the precious metals complex.

The above article was a contribution from Vedant 'VK' Mimani, founder of Atyant Capital. If you or other investment managers you know would be interested in contributing an article or latest investor letter to MarketFolly.com, please send us an email.