Stan Druckenmiller: "I Basically Have a Large Bet on Economic Growth"

Duquesne Family Office founder Stan Druckenmiller appeared on CNBC today to give his thoughts on the markets and election. 

He noted that after the election a lot of regulation will be taken out of the system which should help get things going.  Other changes like tax reform, especially reducing the corporate tax rate encouraged him as he was "quite optimistic" on the economy.

Druckenmiller said that, "I have a large bet on economic growth ... I'm short bonds globally ... I'm short bunds, I'm short Italian bonds, I'm short US bonds.  I like sectors of the equity market that respond to growth, value, and materials, not things like staples and traditional growth stocks." 

He also added he likes the US dollar, with an emphasis against the euro.  And he has dumped his gold long (he actually sold during the night of the election).  He noted the reasons he previously owned it for 'might be ending.'

Druckenmiller also added, "If it wasn't for the messy conflict of rates rising with the stronger economic growth through fiscal policy, I would think there's so much low hanging fruit in terms of deregulation and tax reform, we could get a jolt of 4 percent growth for about 18 months."

That said, he's also cautious that interest rates rising could push that down to high 2, low 3 percent growth.  "I think the market is going to force this.  The market is going to push them to raise interest rates if my hopeful scenario turns out to be right."

He added that monetary policy essentially helped get Donald Trump elected as it caused a 'massive reallocation' of wealth from the middle class to the rich.

"Dr. Copper: have you seem him lately?  It's been rising.  Interest rates have been at stupid levels, they've been held down... they're like beach balls under water."

Embedded below are some of the videos from Druckenmiller's interview on CNBC

Video 1




Video 2

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: 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.

Hugh Hendry On Gold, Treasuries, Japan, China & More: Buttonwood Gathering

It's been a long time since we last checked in on Hugh Hendry of Eclectica Asset Management so today we're highlighting his recent talk at The Economist's Buttonwood Gathering.  He touched on hot topics such as gold, treasuries, China, Japan, hyperinflation and a myriad of other things.

Key Takeaways

Hendry continues to like gold, but not the gold miners.  While he has been an advocate of the precious metal for many years, he continues to like it (albeit with slightly less conviction than previously).

We've highlighted one hedge fund's view that miners are better than gold and Hendry obviously disagrees with that.  And recently at the Great Investors' Best Ideas conference, David Einhorn made a quip that one should have gold miners in their portfolio.  Clearly, this is a divisive topic.

Hendry is also worried about creditor nations.


Notable Quotes From Hendry

Hendry said that, "My community of global macro managers always wants to short the JGBs and short the yen, and yet they've gone the opposite direction ... If you want to be short JGBs for the ultimate response, you don't survive the journey."

We've pointed out Kyle Bass' negative views on Japan and JGBs in the past.  Hendry points to real problems coming in Japan should some of their major companies near bankruptcy (he mentioned Sharp).

Hendry on Treasuries:  "Don't tell me China will sell their US treasuries.  If they sell their treasuries, the renminbi goes higher and higher and higher.  And their companies that export go bust."


Embedded below is the video of Hendry's entire talk at The Buttonwood Gathering:



We've previously highlighted some of what Hendry was buying earlier this year.  And for further hedge fund commentary from the Buttonwood Gathering, head to David Einhorn's talk.

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.

With QE3, Some Interesting Facts About Gold

Given that Federal Reserve Chairman Ben "Helicopter Make it Rain Dollar Bills" Bernanke just announced QE3 (quantitative easing) that sent the price of gold higher yesterday, we were sent an interesting infographic with some facts on everyone's favorite precious metal.

For years now, we've highlighted how many prominent hedge fund managers have owned gold in some capacity (either physically, or via proxies like exchange traded funds GLD or IAU).

John Paulson started a gold fund as a bet against the US dollar.  Others bought gold as an uncertainty hedge.  Greenlight Capital's David Einhorn continues to own gold as a top holding.  And Third Point's Dan Loeb continues to own gold as his 2nd largest position.

Here's some notable recent facts about gold:

- Current market value of all gold is $8 trillion

- All available gold is equal to approximately half of the public debt of the USA

- US gold reserves amount to 77% of the national foreign exchange reserves

- China's gold reserves account for only 1.8% of its total reserves

- Annual gold consumption for investment: 1,640 tonnes (about 50 million gold coins)


And here's the infographic:

Source: Trustable 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.

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.

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:

Balestra Capital on Gold and Inflation: Quarterly Commentary

James Melcher's hedge fund Balestra Capital focuses on thematic global macro investing and has seen a compound annual growth rate (CAGR) of 24.3%. They're out with their quarterly newsletter where they discuss gold, inflation, and the evolution of money.


On Gold

On the precious metal, Balestra writes that,

"While gold does not pay interest or a dividend, unlike fiat currencies, it cannot be created in infinite amounts ... Gold deposits have become harder to find and far more expensive to mine and process. Central banks have recently been building their gold reserves, instead of selling them. Gold is not substantially held across the worldwide spectrum of investors. Nevertheless, if for no other reason than that the global store of gold is limited while paper money is rapidly proliferating, gold's role as a store of value is expanding, and its investment profit potential is rising."

Gold has been a popular investment among numerous hedge funds, though John Paulson's gold fund probably got the most media attention, as betting against the US dollar was his 'next big wager' after his successful subprime short.

However, what's interesting is the rising number of long/short equity portfolio managers that have allocated a percentage of their portfolios to either physical gold, the SPDR gold trust (GLD), or various gold miners.

David Einhorn's Greenlight Capital owns both gold and gold miners. Dan Loeb's hedge fund Third Point continues to hold gold as its second largest position. Stephen Mandel's Lone Pine Capital just started a position in gold last quarter ...and the list goes on.

Balestra's macro focus has led them to own physical gold and gold derivatives since 2002 and it's been their single largest asset. The main difference between all these hedge funds that own gold is their rationale for doing so. Some are using it as a hedge against fear and uncertainty, while many others (like Balestra) are using it as a vehicle to bet on currency debasement and inflation.


Summary of Balestra's Viewpoints

The hedge fund has summarized their macro views as follows:

"
1. The developed world is overly indebted.
2. So far, there is little indication that heavily indebted countries will be able to grow their way out of debt.
3. Recent measures to cut government spending will create further headwinds to near-term economic growth.
4. Failure to provide added monetary stimulus will likely risk a fall into a debt deflation spiral (this risk is heightened by the Euro zone situation).
5. Central banks will continue to 'print money', as needed, to prevent debt deflation
"

All of these point to one main conclusion in Balestra's eyes: more monetary stimulus is on the way and gold prices are going higher.


Embedded below is Balestra Capital's commentary on gold & inflation courtesy of ValueWalk:




For more on the topics of gold & inflation, be sure to also check out:

- Gold versus gold miners

- Oaktree Capital's Howard Marks on gold

- Best investments during inflation


About Balestra Capital

James Melcher founded Balestra in 1979 and has had a long career in the hedge fund and asset management industry. He received his Bachelor of Arts degree from Columbia University. Since January 1999, the hedge fund has returned 1625.62% and has seen a CAGR of 24.3%. Balestra returned 1.71% in 2011, -3.18% in 2010, 4.22% in 2009, 45.78% in 2008, and 199.82% in 2007.

Third Point Reveals Technicolor Position: Latest Exposure Levels

Dan Loeb's hedge fund Third Point returned 1.4% in April and is now up 10.1% for the year. His Offshore Fund has returned 19% annualized, manages $6.8 billion, and recently closed to investors.


Equity Exposure

As of the end of April, Third Point's largest net long equity exposure was in the consumer sector at 10% and energy at 9.5% according to their latest monthly factsheet. Their overall equity exposure is 60.2% long, -13.4% short, leaving them net long 46.8%. This marks a slight increase in net long exposure from last month, up 4.6%. In this arena, Third Point is largely focused on spin-outs.

Credit Exposure

Third Point is overall 29.4% net long credit with their largest exposure coming from mortgage backed securities at 17.1% and distressed at 11.9%. These levels remain largely the same from last month. They also remain short government credit at -4.7%.

Top Positions

- Gold
- Delphi Corp
- El Paso (EP)
- NXP Semiconductor (NXPI) ~ multiple securities held
- Technicolor (TCH) ~ multiple securities held

This is the first time we've seen a mention of Technicolor in their portfolio. Notably absent from their top positions this time around is Chrysler, which was their third largest holding last month. Delphi continues to be a top holding for Third Point and a few days ago we highlighted that David Einhorn's Greenlight Capital bought Delphi recently as well.

Third Point's winners in the past month include gold, LyondellBasell (LYB), NXPI, Delphi, and El Paso (EP). Losing positions in April include short A, Icelandic Banks (debt), CVR Energy (CVI), Sunoco (SUN), and NewPage.

You can read Third Point's theses on CVR Energy and El Paso here.

Howard Marks on Gold

Howard Marks of Oaktree Capital has been on a writing spree as of late. Yesterday we posted Howard Marks' thoughts on the credit cycle. Today, we turn our attention to his memo, 'All That Glitters' which focuses on everyone's favorite precious metal: gold.


Reasons to Own Gold

He starts off his missive by examining the reasons to own gold. He lists the following as pluses: "It serves as a reliable store of value, especially in challenging and uncertain times. It's a hedge against inflation, since its price rises in sympathy with the general level of prices. It exists without the involvement of man-made constructs such as governments. And it's desired and accepted all around the world (and always has been)."


Why You Shouldn't Own Gold

On the contrary, Marks provides equal weight to the other side of the argument. Citing reasons not to own gold, Marks prudently highlights that, "gold is nothing but a shiny metal. Since its real-world applications are limited to jewelry and electronics, very little of its value comes from actual usefulness.


Marks' Take on Gold

While he uses the first half of his letter to cohesively outline the arguments both for and against gold, he uses the latter half to focus on his personal view of the metal. Marks has a problem with the precious metal in that he can't properly value it. He writes, "But there's no analytical way, in my opinion, to value an asset that doesn't produce cash flow ... and especially one that doesn't at least have the prospect of doing so." On this he further opines that, "In fact, that's true of all non-income-producing assets: they're only worth what buyers will pay for them."

He then goes on to summarize his view by writing, "My point here is the one I've held longest on this topic: that gold works as a store of value solely because people agree it will." In the end, he used to be a non-believer in gold but has since come around to some of its merits. He primarily sees its use as "a useful contributor to safety through diversification."

Embedded below is Howard Marks' memo, 'All That Glitters':



You can download a .pdf here.

Toward the end of the letter, Marks focuses on the US dollar's weakness and its potential role in gold's strength. This is the exact premise John Paulson has used. Paulson & Co's gold fund is a bet against the US dollar.

Longtime readers of Market Folly know we have posted copious resources on the topic of gold, including viewpoints from many top hedge fund managers. And as you'll see below, the majority are proponents of the metal:

- David Einhorn stores physical gold

- Passport Capital's John Burbank prefers hard assets

- Dan Loeb buys physical gold

- Gold miners, not gold, are the play

Dan Loeb Discloses Gold Bullion and Potash (POT) Positions

For September, Dan Loeb's hedge fund Third Point was up 3.9%. Year to date for 2010, their offshore fund is up 19.1%. Third Point's annualized return now sits at 18% with a correlation to the S&P 500 of 0.41 and a Sharpe Ratio of 1.27. To follow in his successful footsteps, check out Dan Loeb's recommended reading.

In a monthly disclosure to investors, Loeb's portfolio reveals some interesting new plays. At the end of September, Third Point's top positions were:

1. Chrysler (multiple securities)
2. Gold Bullion
3. Delphi Corp (multiple securities)
4. Potash (POT)
5. CIT Group (multiple securities)

The most notable change right off the bat is the listing of gold bullion as Third Point's 2nd largest position. As far as we're aware, Loeb has not owned gold since around the beginning of 2009 when he utilized it as an uncertainty hedge. This position was not present in the previous monthly disclosures from the hedge fund so its fresh appearance is duly noted.

Many investors will be curious as to his rationale for the position. In Third Point's latest letter, Loeb outlined how the firm had put on numerous "asymmetrical trades using derivatives, options and debt securities to hedge against extraordinary global events." They are allocating 1% of fund assets per annum to this protection. In late 2008 and into the first quarter of 2009, Third Point utilized gold (among other things) as 'doomsday and fat tail risk' trades. Gold bullion could again be a part of that basket, but they might have purchased for other reasons too, there's no clear answer.

The second notable portfolio change is Third Point's addition of Potash (POT) to the portfolio in size. As their fourth largest holding, this stock is an arbitrage play. Potash received an unsolicited buyout offer of $130 per share from BHP Billiton (BHP). Shares currently trade above the offer at $141 as speculation grows a bidding war will emerge or BHP will raise their offer.

Third Point's recent winning positions include: Lyondell (LALLF), a post-reorganization equity that many hedge funds have been fond of, including Jamie Dinan's York Capital. In Loeb's second quarter letter to investor, he asserted his fondness for post-reorganization equities and mortgage exposure. Loeb's fund also saw positive performance from their Anadarko Petroleum (APC) stake, a position we revealed after the unfortunate Gulf oil spill. Other winning stakes for Third Point include NewPage Corp and Liberty Media Corp Interactive (LINTA). Losing positions for the firm consist of four undisclosed short positions.

Back in the second quarter, we noted that Third Point reduced equity exposure. That theme is largely still prevalent as the hedge fund is only 26.3% net long equities. They are net short energy at -0.3% and their largest net longs are consumer at 7.9% and financials at 5.9%. In credit, we see a new position as Third Point is net short Government at -14.4%. They are net long mortgage backed securities (MBS) at 19.5% and distressed at 15.8%. In terms of other portfolio positions, we noted how both Loeb's Third Point and David Einhorn's Greenlight Capital recently provided a bridge loan to BioFuel Energy (BIOF).

John Paulson Says Buy Stocks, Sell Bonds

At the end of last week, the market ripped higher presumably from hedge fund manager David Tepper's comments when he said he likes equities here. Now add to the mix another well known manager in John Paulson. His hedge fund Paulson & Co of course made billions from his bet against subprime as detailed in the book, The Greatest Trade Ever. Given his success, everyone now latches onto his every word, hoping for advice.

Paulson did divulge some of his latest views at a lecture for New York's University Club. Simply put, he said to buy stocks and sell bonds. His favorite stocks are blue-chips with dividends such as: Johnson and Johnson (JNJ) and Coca Cola (KO). Playing on his 'recovery' theme, he also continues to like Bank of America (BAC), Suntrust Banks (STI), and Regions Financial (RF). To see what he's been buying and selling, check out Paulson's portfolio in our newsletter: Hedge Fund Wisdom.

Equities

He says to simply replace low yielding bonds with higher yielding stocks. A 10 year Treasury yields around 2.6% and so stocks with earnings yields of 7-8% are much better options. While Paulson did not mention these names, a quick scan pulls up companies with even higher earnings yields such as Medtronic (MDT) at 9.43%, ConocoPhillips at 10.52%, and Microsoft at 8.53%.

Gold

We've examined John Paulson's gold fund in-depth in the past, and so it should come as no surprise that the hedge fund manager thinks the precious metal is headed higher. He says that gold (currently around $1,200) could hit $2,400 on monetary expansion alone and even $4,000 with significant inflation. His hedge funds offer a fund share class denominated in gold and Paulson himself has 80% of his assets in this class. Additionally, given his inflationist bent, Paulson thinks the US Dollar will fall and that yields on Treasuries will rise. He has been buying 5 and 7 year calls on the 30-year bond yield. We've seen numerous hedge funds put on this type of trade before.

Housing

Lastly, Paulson thinks this is the best time to buy a home in fifty years, exclaiming that, "If you don't own a home, buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home." Great, isn't that just the type of mentality that created the housing bubble in the first place? We realize he is using hyperbole to illustrate his point, but still. Given his prominence in the investing world these days, some people might actually take him literally. For more notes on Paulson's talk, head to Zero Hedge and to Forbes.

In terms of recent position movement from hedge fund Paulson & Co, we detailed their activist position in NovaGold Resources (NG) and sale of Centamin Egypt position.

Is It Time To Buy Gold?

MarketClub recently took a technical look at gold and given that everyone is talking about the metal, we wanted to highlight their analysis. Pulling up a chart of the precious metal, Adam points out a potential double top at around 1,264 that took place in June. Since then, gold has sold off in a substantial manner, down to 1,179. He then pulls up the fibonacci retracement tool to identify very important levels in gold. Both the 50% retracement and the 61.8% retracement levels are important in the metal and here's why: both reside around previous support levels of 1,157 and 1,132. While gold could still possibly fall below these levels, he looks for those two areas to provide price support.

In their technical analysis video of gold, MarketClub also points out a previous bearish divergence in the MACD as it turned negative while gold still headed higher in May and early June. That divergence provided an early signal as gold began to decline in late June. Adam thinks a divergence to the upside is about to take place and an entry point into a gold long should be coming. Keep in mind, though, that he still feels gold will trade down/sideways in the very near-term. The buy level he is looking for is between 1,132 and 1,157, which implies some further downside. Those levels, coupled with confirming indicators, could provide an excellent entry he feels. Click the video below to watch his analysis on gold:

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.

Kyle Bass Sees Inflation & Significant Currency Devaluation Around the Globe (Hedge Fund Hayman Advisors)

Today via ARHedge we present you an excerpt from Kyle Bass' latest letter to investors of his Hayman Advisors firm. If you're unfamiliar with Bass, he launched his hedge fund in 2006 with $33 million in initial capital. In August of 2006, he began shorting around $4 billion of subprime securities through various derivatives and eventually turned $100 million into over $700 million based on his prediction of the crisis. This isn't the only major prediction he's been correct on, either. Bass was even predicting sovereign defaults back in May of last year. Needless to say, he's been right on the money. His latest missive is entitled, 'The Pattern is Set - Betting the Bank of a Keynesian Free Lunch'

Via ARHedge, here is an excerpt from Hayman Advisors' investor letter from May 11th:

He writes, "The ECB's monetary policy action simply adds to the moral hazard that was originally created on the fiscal side of the problem. The pattern is now set. This is exactly how very smart people meeting together in order to 'solve' a debt crisis frequently (and now permanently, it appears) mistake a solvency crisis for a liquidity crisis. From now on, it seems everything will be deemed to be a liquidity crisis that will be met with more 'bail-outs' and debt financed spending. This will eventually break traction in a violent way and facilitate severe inflation or even hyperinflation. The one thing the EU taught us this weekend is that paper money will be worth less (maybe much less) in the future."

Bass' notion of hyperinflation is intriguing because we haven't seen too many managers talk about the prospects for that outcome as most are fixated merely on the inflation versus deflation debate. However, we do recall black swan extraordinaire Nassim Taleb himself recently touching on how, from a portfolio construction point of view, it makes sense to allocate some capital to inexpensive insurance against possible hyperinflation. The wager doesn't cost you much and if you 'win', it pays off big. If hyperinflation doesn't come to fruition, then you haven't lost much capital. An intriguing thought certainly and Bass would probably agree with him on that notion.

The Hayman Advisors founder then ends his letter with a decisive analogy writing,

"This weekend, the EU and the IMF effectively went all-in with a bad hand in the highest stakes game of financial poker ever played with the world. We believe the agreement released was nothing more than a Potemkin agreement in order to placate bond investors. In the end (and there will be a reckoning for many countries) nations, including the United States, need to dramatically cut spending and get their fiscal balances in order. Unfortunately, our elected officials are on the hamster wheel of electoral cycles and are not able to make tough decisions like this as they would likely not be re-elected without a "sea change" in public opinion towards government spending and deficits. We are therefore on the path to significant currency devaluation around the world that will likely result in significant inflation. We increased our holdings of gold on Monday morning as well as taking other steps to position ourselves for the most likely outcome over the next few years. Interestingly enough, based upon the market reaction in the last 36 hours, it seems the law of diminishing returns applies to bailouts as well."

You can read the rest of his brief letter over at ARHedge.

So, we now see that Bass has increased his gold holdings and joins countless other hedgies who see gold as a safe haven and a way to hedge against currency devaluation. Lloyd Khaner of Khaner Capital last week gave an in-depth presentation on gold at the Value Investing Congress. And as we all know, John Paulson launched his gold fund as a bet against the US dollar. Not to mention, other prominent hedge funds like David Einhorn's Greenlight Capital as well as John Burbank's Passport Capital are storing physical gold.

It's very clear that number of prominent investing minds are concerned about currency devaluation and inflation going forward. Today seems to be inflation versus deflation day here on the site as earlier we posted up hedge fund Broyhill's contrarian bet on long-term treasuries and their ten reasons to buy bonds. Obviously this differs drastically from the vast amount of other hedge funds who have been short treasuries, wagering on rising rates and possible inflation. Well, the debate wages on, but we certainly know where Kyle Bass stands now, don't we?

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.

Crude Oil & Gold Trading Ranges: Key Levels to Watch

MarketClub recently analyzed two of everyone's most favorite commodities: crude oil and gold. Adam just took a technical look at crude oil and wondered if it has topped out for the year. He draws a fibonacci retracement from the peak during oil's epic rise down to the trough and notes that the commodity is currently trading right around the 38.2% retracement level. In his oil video, Adam concludes that it is currently stuck in a trading range and could be for some time. But he does note that after trading ranges often come explosive moves. He highlights that the $72 level as an absolutely key level for support. If crude oil breaks that level to the downside, then he thinks it sets new lows for the year. One thing their analysis does not take into consideration, however, are the seasonal factors at play with crude. Typically, summer months command higher prices in oil so we'll have to see what happens there. Click below to watch Adam's video:



MarketClub also cranked out a technical analysis video on gold where they wonder whether or not gold is setting up for its next big move. Obviously, the longer term trend has been up and they illustrate how the metal continues to make a large move higher and then consolidate and trade sideways for a while to digest the move. It has repeated this pattern on a large scale numerous times over the past few years as you can see in their gold video. So, similar to crude oil, Adam feels there's really no trend right now and it will continue to trade sideways. He outlines $1,165 as the key level for the metal as it won't be able to start any move higher until it breaches that level to the upside. You can check out their technical look at gold below:

Jim Rogers Still Bullish on Commodities

Wait for it. Jim Rogers is... *gasp* bullish on commodities still! Now, who would have ever guessed that?! On a serious note, he still is adamant that 1999 was the start of the commodity bull market and he is bullish on the prospects. What's interesting is that he fully admits it will be a bubble at some point, but he's not worried about that right now as that's a 'way's off.' This interview comes after we saw Rogers recently start some short positions as he wagers the market is overdue for a correction.

Of course he also thinks gold is going up and he expects it to be at $2,000 at least by the end of this decade, if not higher. In the past we've posted up plenty of hedge fund research on gold, all of which we recommend checking out. He recently sat down with Bloomberg to discuss his most recent thoughts on April 7th. If you come to the site, below you'll find an embedded video of his quick interview:



So, he'll continue to ride the longer term trend that he feels is in-tact here. Rogers isn't a big believer in market timing and he'll gladly wait out the trend over the long-term. We check in on Rogers from time to time just to see what he's saying, but he appears in the media quite often, re-iterating a lot of his views anyways. Keep in mind that Rogers and George Soros previously managed the highly successful Quantum Fund and have since gone their separate ways. Head over to see Rogers' recent rationale for starting short positions as well as our coverage of George Soros' hedge fund portfolio.