Susan Byrne's Investment Outlook: Likes Kapstone Paper & Media Nusantara

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Susan Byrne of Westwood Holdings.  Westwood serves various institutional clients and manages $15 billion.


Byrne's Investment Outlook

She started by focusing on Westwood's outlook that in the next 1-3 years we'll see slow below potential GDP growth.  She disagrees with Lee Cooperman a little bit. She's more positive on corporate earnings and likes playing high quality names globally.

Byrne thinks we'll see rising but tame inflation and she likes to play companies that have yields higher than the S&P 500.  She said that the "ultimate risk instrument is stocks" so you need some insulation/protection in the form of a dividend.

She likes companies that grow dividends and put up a chart of the likes of Microsoft (MSFT), Exxon Mobil (XOM), Honeywell (HON), Johnson & Johnson (JNJ), General Electric (GE), and Automatic Data Processing (ADP).  She points out that all of these have equity yielding more than their bonds.

Byrne feels the S&P is "somewhat undervalued" by 10-12% and she wants to beat inflation with dividend yields.  She said to look at emerging markets, in particular Indonesia.


Byrne's Stock Picks

And speaking of Indonesia, she had a stock pick from that country via shares of Media Nusantara (PTMEY via ADR), an advertising company there.  She points out that they're growing advertising by 22% a year and you can play it in the domestic market or via ADR.  The company has a 2% dividend and a mid-teens multiple.


Byrne also pitched a domestic small-cap play via Kapstone Paper (KS).  It trades at 5x EV/EBITDA, has a 10% free cash flow yield and the company's price increases for their products are holding.


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

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

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

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


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

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

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

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


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

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

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

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


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


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

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


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


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

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

Strategist Jeff Saut: Same Recession "Head Fake" Third Year in a Row

Market strategist Jeff Saut is out with his weekly commentary entitled "Cognitive Dissonance."  He titled his piece as such due to certain economic readings softening while others strengthened.  Saut also addresses how it can often pay to go against the crowd, likening the current market action to that of the past two years.

He argues that just like the past two years, the markets have peaked in May/June and will decline for a few months before surging higher into year-end as no evidence of a recession emerges.

However, Saut isn't sure if the current decline is over yet.  He won't be completely comfortable until the S&P 500 breaks 1366 to the upside and holds it (it's currently around 1358).

In the mean time, he's been recommending slow accumulation of select stocks such as decent dividend payers like Allstate (ALL), Covanta (CVA), Johnson & Johnson (JNJ), Plum Creek Timber (PCL), Rayonier (RYN) and Stonemor (STON).

And on the topic of cognitive dissonance Saut writes, "in order to reduce the anxiety of decision making, people perceive things in ways that may or may not be logical.  Simply stated, people talk the way they bet.  From a stock market perspective this means that the interpretation of economic and market news varies in direct relationship to the investor's bullish, bearish, or cautious market position."

Embedded below is Jeff Saut's latest commentary where you can read why he thinks this year is just like the past two:



You can download a .pdf copy here.

For more from the strategist, we've also highlighted some of his rules for position sizing as well as profit-taking and loss prevention.

Goldman Sachs Very Important Short Positions For Hedge Funds: Q1 2012

Goldman Sachs is out with its Q1 2012 Hedge Fund Trend Monitor and we've already posted up Goldman's VIP list of most important stocks to top funds.  Now we're posting a new addition to their research: the very important short position list.

This tracks short exposure of hedge funds as an equal-weighted basket that "consists of 50 S&P 500 constituents with the highest total dollar value of short interest outstanding."  It can be accessed on Bloomberg via < GSTHVISP >.

Goldman emphasizes that this list is not based on 13F holdings (because hedge funds are not required to disclose shorts).  They also note that it's not a basket of stocks most held short.


Goldman Sachs Very Important Short Positions For Hedge Funds

Stock, value of short interest (in $ billions)

1. Johnson & Johnson (JNJ): $2.9
2. Exxon Mobil (XOM): 2.8
3. Intel (INTC): 2.6
4. International Business Machines (IBM): 2.4
5. Amazon.com (AMZN): 2.4
6. AT&T (T): 2.3
7. Chevron (CVX): 2.1
8. Verizon (VZ): 1.8
9. Duke Energy (DUK): 1.7
10. Walt Disney (DIS): 1.5
11. Abbott Laboratories (ABT): 1.4
12. Coca Cola (KO): 1.4
13. General Electric (GE): 1.4
14. Walmart Stores (WMT): 1.3
15. Caterpillar (CAT): 1.2
16. ConocoPhillips (COP): 1.2
17. Walgreen (WAG): 1.2
18. Time Warner (TWX): 1.1
19. Lockheed Martin (LMT): 1.1
20. Home Depot (HD): 1.1
21. Dell (DELL): 1.1
22. Bristol Myers Squibb (BMY): 1.1
23. Oracle (ORCL): 1.1
24. Schlumberger (SLB): 1.0
25. United Parcel Service (UPS): 1.0


Of the above. David Einhorn recently made comments about Amazon.com (AMZN) at the Ira Sohn conference.  While he seemed to be skeptical of the company during his talk, he did not say he was short.  He highlighted that the company has destroyed other businesses, taking market share, but criticized their weak profit growth.

Jim Chanos is short Dell (DELL) and he points to the decline of personal computing in favor of tablets and other mobile devices.  He's been correct in that regard as Dell recently reported declines in those segments in their latest earnings release.  But of course the bull case points to Dell's other business lines as they shift toward the enterprise. 


Here's the rest of Goldman's Very Important Short Positions List:

26. Amgen (AMGN): 1.0
27. AvalonBay (AVB): 1.0
28. Chipotle Mexican Grill (CMG): 1.0
29. Boston Properties (BXP): 1.0
30. Union Pacific (UNP): 0.9
31. Simon Property Group (SPG): 0.9
32. Procter & Gamble (PG): 0.9
33. Cerner (CERN): 0.9
34. Host Hotels & Resorts (HST): 0.8
35. Kohl's (KSS): 0.8
36. Waste Management (WM): 0.8
37. CenturyLink (CTL): 0.8
38. Carnival (CCL): 0.8
39. Philip Morris (PM): 0.8
40. American Express (AXP): 0.8
41. DuPont (DD): 0.8
42. McDonalds (MCD): 0.8
43. MetLife (MET): 0.8
44. Fastenal (FAST): 0.8
45. Merck (MRK): 0.7
46. Comcast (CMCSA): 0.7
47. Sysco (SYY): 0.7
48. Freeport McMoran (FCX): 0.7
49. Alcoa (AA): 0.7
50. Staples (SPLS): 0.7


Be sure to also check out Goldman Sachs VIP list of most important stocks to hedge funds for Q1 2012.

Howard Marks: Buy High Quality Large-Cap US Growth Stocks

“History doesn’t repeat itself, but it does rhyme.” Today we are exploring the venerable Howard Marks' current view on the markets after his last commentary focused on the Greek tragedy. The themes of Oaktree Capital Management's most recent letter to investors are the recurring patterns that permeate capital markets, and what Marks believes is the most useful of all investment adages - “What the wise man does in the beginning, the fool does in the end.”

Equities

Quickly becoming one of the most quotable men in financial markets, Marks starts with a brief history of equities. Stocks were largely believed to be a speculative asset classes prior to the 1950s until the advent of brokerage firms like Merill Lynch began to espouse the merits of equity ownership. The growth stock investing craze soon followed in the 1960s and investors witnessed the birth of the “nifty-fifty”.

This group of stocks soon traded at multiples between 80x and 90x earnings, signaling that logic had succumbed to ballyhoo of growth investing mania. When the tide went out in the 1970s, timid investors sought shelter in the form of bonds as prosperity shifted to recession. In August 1979, BusinessWeek published a cover a story entitled “The Death of Equities” as the PE ratio of the formerly lionized growth stocks fell to 8 or 9.

It was during this nadir of investment psychology that Marks became a portfolio manager. As sentiment surrounded stocks rebounded, the S&P saw an annual return of 15.4% from 1979-1990 before improving even further between 1991-99, returning an unprecedented 20.6% a year without a single down year. As we know, this overzealous sentiment propped up the tech bubble. Marks summarizes his main point as follows: “But investors consistently fail to recognize that past above average returns don’t imply future above average returns; rather they’ve probably borrowed from the future and thus imply below average returns ahead, or even losses.”

Such market extremes are propagated by the investor’s (and all humans for that matters) tendency toward gullibility rather than skepticism. According to Marks, the pivotal question investors must continually ask themselves is not “What has been the normal performance of stocks?” but rather “What has been the normal performance of stocks if purchased when the average p/e ratio is 33?”

Bonds

According to Marks, over the past 60 years the story of bonds can be viewed as the mirror opposite of what happened to stocks. Bonds were the bedrock of most investment portfolios for the better part of the 20th century. During the roaring 90s, bonds were seen as anchors hindering performance. The decline in bond popularity can also be attributed to the policy of the Greenspan Fed to stimulate the economy by keeping interest rates low for a prolonged period of time. Accordingly, bond allocations reached all-time lows at the most inopportune time, 2008, when treasuries, gold, and cash were the only asset classes that performed well.

Current Outlook

Marks is surprised that investors have suddenly “awakened” to bonds’ attraction after missing the boat during the credit crisis, and questions whether this is another example of investing while looking in the rear view mirror. Citing Bloomberg, he notes that roughly $33 billion has left equity funds while investors have sent about $185 billion into bond funds. These inflows and outflows are indicative of the trends in investor psychology.

Marks believes that investors are currently extrapolating the recent poor performance of stocks (following the great hype of the 90s) into the future, despite the lower prices. Such behavior is congruent with the tendency to expect trends to continue rather than regress toward the mean (Marks is betting on the latter). History confirms this tendency, as investors following their herd mentality appear to systematically buy high and sell low.

The proverbial pendulum has swung, as it always does, because investors are still not asking the fundamental question, “At what price?” If investors asked themselves this question they wouldn’t succumb to the blanket statements that have previously brought so much pain, i.e. “internet stocks will always outperform the market” or “home prices can only go up”.

The Oaktree Capital Chairman believes the economic recovery will be lackluster and has recently recommended buying solid, non-levered and non-cyclical companies, and owning more bonds than stocks. However, now that stock prices have fallen so low while bonds have surged, he finds himself reconsidering. In his words, Marks is not an “equity guy” yet he sees substantial merits in the stock market currently.

First, companies are leaner than ever after the massive layoffs and have become increasingly efficient. Second, corporations are piling up the cash on their balance sheets, which adds greatly to their financial security and allows for dividend increases and share buybacks. Third, stocks currently trade at very attractive valuations, as PE ratios are lower than the historical average and annual free cash flow of American corporations (excluding banks) is currently at 6.8% of their market value. When juxtaposed with the current yield on bonds, this “cash flow yield” becomes very attractive. Legendary investor John Paulson just highlighted this too, proclaiming you should buy stocks and sell bonds.

Marks summarizes the issue plainly: “The bottom line is that, as bond prices rise (reducing yields) and p/e ratios fall, the chances increase that stocks will outperform bonds. Thus the benefits high grade bond investors feel they’re gaining through what they’re buying can be undone by what they’re paying. I’ll say it another way: the attractiveness of one investment relative to another doesn’t come from what it’s called or how it’s positioned in the capital structure, but largely from how it’s priced relative to the other.”

The letter finishes by recommending investors “assemble a portfolio of iconic, high quality, large-cap U.S. growth stocks that will provide appreciation in a strong environment, a measure of protection in a weak environment, and a meaningful dividend yield regardless.” This is the same advice we've seen numerous other hedge fund managers dole out. Other investors have recommended the likes of Johnson & Johnson (JNJ), Microsoft (MSFT), Pfizer (PFE), and Kraft (KFT). Market strategist Jeremy Grantham has also favored high quality stocks.

Embedded below is Oaktree Capital's latest commentary from Howard Marks:



You can download a .pdf copy via this link.

For some ideas on what stocks to buy, check out what prominent hedge funds own in our newsletter: Hedge Fund Wisdom. And to read more great insight from top investment managers, head to our compilation of hedge fund investor letters.

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.

Market Strategist Jeff Saut Thinks March 2009 Lows Will Hold

The Chief Investment Strategist at Raymond James is out with his latest market commentary and there are a few bold assertions in it. Jeff Saut is of the belief that the market will be in a very wide trading range akin to the period between 1966-1982; a period where swings of more than 20% occurred 13 times with an end result of hardly any progress. He also bluntly calls for the March 2009 lows to hold. In a past commentary, he also advocated buying on weakness. But if you think about it, he's not exactly taking a huge leap of faith here considering that the S&P is currently around 1,082 and the March lows are way down around 666 on the S&P. Even if those levels were to hold, that's still over a 38% drop to get there.

So, how has the market strategist positioned his portfolio? Saut remains ardent in his stance that buying high quality dividend paying stocks is the way to go. Numerous market participants agree. Jeremy Grantham favors high quality and hedge fund T2 Partners is bullish on undervalued large-caps, just to name a few.

Additionally, Saut notes that, "The earnings yield (E/P) on the S&P 500 is currently 6.6%, which is the highest in 15 years, while the spread beween the earnings yield and the 30-year Treasury Bond is the widest in 30 years." As such, he feels that risk adjusted stock selection is the key to portfolio success currently and he tosses out some stocks for your consideration.

The companies on his list have the following attributes: a market cap greater than $5 billion, a return on equity greater than 15%, a dividend yield greater than 2%, a debt-to-assets ratio of less than 35%, and a price-to-earnings ratio of less than 15. Here are the stocks that made the cut:

Exxon Mobil (XOM)
Walmart (WMT)
Johnson & Johnson (JNJ)
Intel (INTC)
Abbott Labs (ABT)
Aflac (AFL)
Chubb (CB)
Diamond Offshore (DO)
Darden (DRI)

Lastly, turning to the inflation versus deflation debate, Saut highlights that except for the 1930s, deflation has been a bad bet. In fact, Saut isn't buying into the current hype surrounding deflation and has actually planted himself in the inflationary camp. He feels that the economic recovery will surely be slow, but a double-dip won't come to fruition. Following this recovery, he believes inflation is the likely scenario given the government's policy of trying to stimulate an economic response. And since Saut has declared himself a staunch inflationista, be sure to check out the best investments for inflation. And if you disagree, conversely head to the best investments during deflation.

Embedded below is Jeff Saut's latest investment strategy from Raymond James:



You can download a .pdf copy here.

For more from the market strategist, you can check out Jeff Saut's businessman's risk portfolio as well as his assertion that it's time to re-balance portfolios.

Jeff Saut: Buying on Weakness

Jeff Saut, Chief Investment Strategist over at Raymond James, is out with his latest commentary entitled 'Don't Worry, Be Happy.' In it, he opines that while money does not equate to happiness, the stock market was certainly happy last month as it increased 7.0% after being down 8.2% in May and losing an additional 5.4% in June. Last time around, Saut argued that it might be time to re-balance portfolios and laid out a theoretical businessman's risk portfolio.

Saut pats himself on the back for 'calling the rally' that he expected due to oversold conditions at the beginning of July. Recently, a Dow Theory Buy Signal was registered according to the market strategist as both the Dow Jones Industrial Average and Dow Jones Transportation Average closed above their previous June highs. However, this signal comes after an already powerful rally has taken place and numerous other theorists do not think a signal has been registered in the true sense of the definition. This would require a close above 11,204 on the Dow Jones and above 4,806 on the transports.

That said, Saut is now a buyer on weakness. He issues a caveat with that statement saying he will use fairly close stop loss triggers to manage the risk. As we've detailed recently, Saut has outlined his risk management principles and has also argued that risk adjusted stock selection is the key to success.

So, what stocks to buy on weakness? The Chief Investment Strategist feels that the following stocks are solid choices:

Value Picks:
Microsoft (MSFT)
Intel (INTC)
Wal-Mart (WMT)
Allstate (ALL)
Johnson & Johnson (JNJ)

Growth Plays:
McAfee (MFE)
Iridium (IRDM)
NII Holdings (NIHD)
Nuance (NUAN)
Parexel (PRXL)

As you can see, Saut favors many high quality blue chip names on the value side. This is exactly what we saw this morning as Jeremy Grantham favors high quality US stocks. Additionally, we've detailed hedge fund T2 Partners' bullish presentation on 3 large cap stocks.

Overall, Jeff Saut thinks that the 200-day moving average (overhead resistance) will be taken out. And as of this second, that's exactly what's happening. We'll have to see if the market can hold and close above that level. He ends by quoting Lowry's who writes,

"In summary, as the major price indexes have moved sideways since the May 25th low, market conditions have showed clear signs of strengthening, not weakening. While overbought readings on short-term indicators suggest the potential for a near-term pullback, any decline should act only as a temporary setback in the rally from the July 2nd low and is unlikely to represent the next leg of a more prolonged move lower."

Embedded below is Jeff Saut's latest investment strategy from Raymond James:



You can download a .pdf copy here.

Here's the rest of our 'market-strategist-Monday' pieces if you missed any of them:

- Oaktree Capital's Howard Marks on the greek tragedy
- PIMCO's Bill Gross: latest investment outlook
- GMO's Jeremy Grantham favors high quality US stocks

Jeremy Grantham Favors High Quality US Stocks: Market Commentary

Today we're doing a bit of 'market-strategy-Monday' here on Market Folly and will kick things off with the often-read missive of GMO's Jeremy Grantham. He is now a deflationista as he thinks it has trumped inflation as the biggest concern in the near-term. While Grantham doesn't seem too anxious to be a buyer of many asset classes, there are three areas he has deemed compelling. GMO's asset allocation portfolios are built on a seven-year forecast and here are his thoughts:

Firstly, Grantham sees value in high quality large cap US companies. The main argument? Valuation. Just last week, we highlighted hedge fund T2 Partners' bullish presentation on 3 large cap stocks. The 'buy high quality large cap' theme has been long underway in hedge fund land as a plethora of managers have now sung the praises of this opportunity. Pershing Square's Bill Ackman went long Kraft (KFT) on this notion (among other reasons) and East Coast Asset Management likes quality names as well. Grantham's GMO colleague Edward Chancellor echoes these thoughts. He says,

"When we look through the various classes of equities, we find in the U.S. that companies that are so-called quality have high expected returns relative to the market; in other words, companies that tend not to go bust, and tend to maintain their positions—the sorts of businesses that Warren Buffett made his fortune investing in and are trading at a P/E of about 14. Johnson & Johnson (JNJ) and Pfizer (PFE) are key companies—the sort that your grandmother had in her portfolio or are typically owned by trust companies. Normally they trade at premiums to market, but right now they’re not."

Chancellor also sees opportunities in the European high quality equivalent. In particular, he mentions Nestle (NSRGY), Novartis (NVS), and Unilever (UN). Last week we also pointed out how hedge fund Viking Global has a large stake in Unilever as well.

Secondly, Grantham believes that emerging market equities are the next best play. This is mainly attributable to the fact that the fundamentals in these countries are so much better than our own markets. While EAGE equities are slightly expensive, they are a much better option than say, fixed income.

Lastly, Grantham remains staunch on his view of forestry (i.e. timber). He has long advocated a place in portfolios for timber as it serves as a good diversification tool during the good times. And, during periods of uncertainty, it is a "brilliant store of value should inflation unexpectedly run away, and a historically excellent defensive investment should the economy unravel."

Embedded below is Jeremy Grantham's latest market commentary from GMO:



You can download a .pdf copy here.

For more excellent commentary be sure to head to the latest hedge fund letters where prominent managers share their thoughts on the markets.

Shumway Capital Partners Bets Big On Wells Fargo (WFC): 13F Filing

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

Next up is Chris Shumway's hedge fund Shumway Capital Partners. Shumway uses intensive fundamental research to create long/short equity portfolios from the bottom-up. Chris Shumway was previously Julian Robertson's right-hand man at Tiger Management before launching his own fund. He received his B.S. from the University of Virginia and his MBA from Harvard Business School.

Shumway's returns are outstanding as they have a rolling 3-year annualized return of 28% according to Barron's top 100 hedge funds for 2009. We've long been an admirer of Shumway's intense due diligence. They are included in our Market Folly portfolio where we have combined various hedge fund portfolios to generate a unique replication strategy that has backtested over 25% annualized returns with the help of Alphaclone.

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


Brand New Positions
Bank of America preferreds (BAC-S)
Johnson & Johnson (JNJ)
Pfizer (PFE)
Freeport McMoran (FCX)
Brocade Communications (BRCD)
Gap (GPS)
Salesforce (CRM)
Amazon (AMZN)
CVS Caremark (CVS)
Radioshack (RHS)
MEMC Electronics (WFR)
Fifth Third Bancorp (FITB)
Dollar General (DG)
AOL (AOL)
Research in Motion (RIMM)
Biomarin Pharma (Notes 1.875%)
Kinross Gold (Notes 1.750%)


Increased Positions
Wells Fargo (WFC): Increased by 305%
Time Warner (TWX): Increased by 180%
Quest Diagnostics (DGX): Increased by 179%
JPMorgan Chase (JPM): Increased by 78.5%
Ingersoll Rand (IR): Increased by 69%
Pepsico (PEP): Increased by 54%
Qualcomm (QCOM): Increased by 50.5%
Universal Health (UHS): Increased by 48.7%
Las Vegas Sands (LVS): Increased by 43%
Laboratory Corp (LH): Increased by 40%
Walt Disney (DIS): Increased by 33.5%
Apple (AAPL): Increased by 32%


Reduced Positions
Monsanto (MON): Reduced by 77.8%
Allstate (ALL): Reduced by 75%
Baidu (BIDU): Reduced by 57.5%
Union Pacific (UNP): Reduced by 49%
Community Health (CYH): Reduced by 39.4%
Goldman Sachs (GS): Reduced by 39%
Colgate Palmolive (CL): Reduced by 37.6%
Urban Outfitters (URBN): Reduced by 34.2%
Visa (V): Reduced by 33.6%
Cisco Systems (CSCO): Reduced by 30%
Yum Brands (YUM): Reduced by 27.3%
Mastercard (MA): Reduced by 25.2%
Juniper Networks (JNPR): Reduced by 24.8%
EMC (EMC): Reduced by 21%


Removed Positions (Sold out completely):
Bank of America (BAC)
Procter & Gamble (PG)
Walgreen (WAG)
Zimmer Holdings (ZMH)
Google (GOOG)
Cemex (CX)
Bard (BCR)
Waters (WAT)
Charles Schwab (SCHW)
Weatherford International (WFT)
Nordstrom (JWN)
BB&T (BBT)
Wyeth (inactive ~ merger completed)
American Tower (AMT)
SBA Communications (SBAC)
CSX (CSX)
Williams (WMB)
Federal Realty (FRT)
XL Cap (XL)
Unilever (UL)
Lazard (LAZ)
SLM (SLM)
Genworth Financial (GNW)
Washington Fed (WFSL)
Melco Crown (MPEL)


Top 15 Holdings by percentage of assets reported on 13F filing

1. Bank of America preferreds (BAC-S): 5.97%
2. Apple (AAPL): 5.4%
3. Wells Fargo (WFC): 5.3%
4. Johnson & Johnson (JNJ): 4.7%
5. Teva Pharmaceutical (TEVA): 4.7%
6. Equinix (EQIX): 4.6%
7. Pepsico (PEP): 4.3%
8. Pfizer (PFE): 4.1%
9. Walt Disney (DIS): 3.8%
10. Time Warner (TWX): 3.8%
11. Qualcomm (QCOM): 3.8%
12. JPMorgan Chase (JPM): 3.7%
13. Mastercard (MA): 3.7%
    
14. EMC (EMC): 3.2%
15. Freeport McMoran (FCX): 3.2%

Of Shumway's top holdings, four of them were brand new stakes: Bank of America preferreds, Johnson & Johnson, Pfizer, and Freeport McMoran. Take note that they completely dumped their BAC common stock and bought the Bank of America preferred on the offering, a trend we've seen many hedge funds take advantage of.

Looking over their portfolio though, it has a multinational blue-chip feel to it. What's interesting is that in the quarter prior they had purchased blue-chip stocks as well. This time around though, they were largely selling off those blue-chips and buying new blue-chip names. Shares of JNJ, PEP, and PFE find a place in Shumway's portfolio and are the definition of these 'safer' plays that are seemingly undervalued on a relative basis. We've seen this mantra out of numerous other hedge funds as they note 'junk' high beta stocks rallied the most during 2009, leaving solid blue-chip companies behind. As such, many hedgies have rotated into these multinational stocks for 2010, a year in which many think we'll see tepid growth.

It's also interesting to see hedge funds return to old favorite Freeport McMoran. Hedgies loved this play pre-crisis but dumped shares in a hurry once the global economy started heading south. It looks like some funds are starting to dip their toe back in the water with this name. Turning to financials, we also saw Shumway massively boost their holdings in Wells Fargo (WFC), something we've started to see more and more hedge funds do as of late as well.

Shumway dumped stakes in SBA Communications and American Tower, a move we found intriguing solely because tower stocks have been some of the most popular stocks amongst Tiger Cub hedge funds. Additionally, Shumway's sale of Google made us take notice as shares of the internet giant slowly seem to have fallen out of favor with many hedgies.

Data used for this article comes from Alphaclone. Using their hedge fund replicators, you can backtest strategies and sort through all the hedge fund portfolio maneuvers with ease, we highly recommend it. Assets reported on Shumway's 13F filing were $8.6 billion this quarter compared to $7.4 billion last quarter, so quite a noticeable uptick in assets. Remember that these filings are not representative of the hedge fund's entire base of AUM.

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

Lehman Brothers Liquidation Looks Likely

Undoubtedly, you already know this news. Lehman Brothers (LEH) will file for bankruptcy protection, as they couldn't seem to sell themselves this weekend. Additionally, Merill Lynch looks like it will be bought out by Bank of America for around $25-30 a share ($29 a share offer being voted on). Lastly, AIG will be restructuring. If you want more info on all this than you can handle, just head to any major financial publication, as the news is all over the place. I'm not here to regurgitate this news. Instead, I want to turn my focus to a way to possibly play this madness. In the event that LEH does liquidate, the following stocks will undoubtedly trade lower. Why, do you ask? Well, because they are some of LEH's top holdings.

The List

• General Electric (GE)

• Pfizer (PFE)

• Target (TGT)

• UBS (UBS)

• Linn Energy (LINE)
  

• GLG Partners (GLG)
  

• Merck (MRK)

• Microsoft (MSFT)

• Chicago Mercantile Exchange (CME)

• Bank of America (BAC)

• Apple (AAPL)

• Flagstone Reinsurance (FSR)

• Wellpoint (WLP)

• Walmart (WMT)

• Exxon Mobil (XOM)

• United Health Group (UNH)

• Google (GOOG)

• Johnson & Johnson (JNJ)

• Baidu (BIDU)

A few names from the list I want to highlight: Firstly, Bank of America (BAC) has been actively involved in all the talks this weekend and for all intensive purposes it looks as if they'll pick up Merrill Lynch (MER). I think the market sells off BAC simply because MER is not in the best of shape, and it looks like they'll be overpaying for the deal. If MER needs to be rescued, BAC could surely pick them up for much cheaper than where they're trading now. So, BAC could trade lower for this reason (along with the fact that oh yea, they've still got the whole Countrywide Mortgage mess to worry about). Then, if Lehman Brothers liquidates their BAC shares, you can guess where that name is headed: lower.

Secondly, as I wrote about here, Apple (AAPL) isn't looking too hot on the technicals right now. It looks about ready to really breakdown, since it hasn't responded well to support levels. If LEH needs to liquidate their large AAPL position, this only presents more headwinds for AAPL.

Thirdly, Walmart (WMT) appears on this list and I want to point this out for investors who have wanted to get in this name. If LEH liquidates its WMT position, this will present an opportunity for those who want to get long WMT on the thesis of the American consumer trading down for cheaper items, which WMT supplies. I've written about this thesis numerous times, notably here and here. So, watch that name for any major dips. Also, I'd throw Johnson & Johnson (JNJ) as a possible name to buy off of any LEH liquidation weakness. They are firing on all cylinders and their consumer staples line-up works well in this mess of an economy. Keep in mind though, that things undoubtedly will be crazy this week. So, don't rush out and do something stupid. And, if you feel the need, keep it small. There will undoubtedly be opportunities from this. But, this is a huge mess just waiting to unravel. Watch the Volatility Index (VIX), and watch for panic and capitulation. Special thanks to "The Fly" over at ibankcoin.com for posting up this list of LEH top holdings.