Complimentary Equity Research From Boyar on CHTR, BEN, STKL

We wanted to give readers a head's up that Boyar Research is currently offering complimentary equity reports on three stocks.  They consistently put out high quality research and this time around they look at one popular hedge fund name, and two other names you might be less familiar with.

Boyar sees 60% upside in each of these companies. You can read the full write-ups for free here and we've excerpted some of the reports below with permission:


Charter Communications (CHTR)

"We view Charter as a best-in-class operator in the midst of multiple transitions that should unlock faster growth in the coming years. Charter ramped up investment in the TWC and Bright House assets it acquired in 2016, which should result in lower capital intensity, lower churn, and incremental cost savings/margin expansion going forward. We estimate that video will account for < 20% of Charter’s consolidated revenues, net of programming costs, by 2019. Meanwhile, Charter holds a near-monopoly on high-speed Internet over much of its footprint, and its commercial business continues to grow at or near double-digit rates.

We project that Charter can grow Adjusted EBITDA from $15.3 billion in 2017 to $20 billion by 2022. Assuming no expansion in Charter’s forward EV/EBITDA multiple, we estimate that Charter’s intrinsic value could exceed $500/share by year-end 2021. Charter already retired 12% of its shares in 2017 and could have the capacity for ~$28 billion (a third of the current market cap) in additional repurchases over the next 4 years. Finally, we believe that Charter and indeed cable companies generally are in a better position than wireless operators to support the development of 5G, and Charter remains a likely seller over the long term."

You can read their full analysis of CHTR here.


Franklin Resources (BEN)

"Following a decline of more than 25% in its share price from recent 52-week highs, BEN now trades at just 1.2% of its AUM (adjusted for its large cash hoard of ~$8.5 billion of net cash/investments, or ~50% of its current market cap), representing a significant discount to industry precedent transactions, which have occurred at 2.7% of AUM, on average, over the past ~10 years.

Since the beginning of FY 2007, BEN has returned $15.1 billion to shareholders via repurchases and dividends/special dividends, representing 87% of its current market cap and an astonishing 178% of its current enterprise value. Returns to shareholders will likely continue to be robust thanks to the Company’s newfound liquidity, the result of the new U.S. tax law, which offers lower federal tax rates and more favorable repatriation features. In the wake of the passage of the new tax law, Franklin has paid a special dividend, increased its regular dividend by 15% to $0.92 a share (yield: 2.9%), and accelerated the pace of its share buybacks.

Based on our assumption that the Company’s AUM will increase at just a 2.5% annual rate over the next 2 years, and valuing BEN at a discounted 2.5% of AUM, we derive an intrinsic value for the Company of $55 a share, representing 74% upside from current levels. Should the value versus growth pendulum or the active versus passive pendulum shift in Franklin’s favor, our intrinsic value estimate will likely prove extremely conservative.

We believe that Franklin represents an attractive target for a financial services firm given its strong brands, favorable long-term investment track record, and strong global distribution. Moreover, the Johnson family’s ~40% stake, coupled with BEN’s strong balance sheet, could help facilitate a management buyout." 

Click here for the rest of their complimentary BEN research.


SunOpta (STKL)

"SunOpta is in the early stages of a multi-year turnaround that is expected to drive growth, increase profitability, and unlock shareholder value. The Company’s turnaround is being overseen by a new chairman and CEO, both of whom have a proven track record of unlocking shareholder value in the consumer products industry. Notably, SunOpta’s chairman recently presided over the value creation at AdvancePierre Foods for Oaktree Capital (a 23-bagger for that firm).

The Company operates in the attractive market for organic and non-GMO ingredients and consumer products, which is growing at a high single-digit/low teens (%) rate. The increasingly important millennial generation is expected to be a key factor sustaining future industry growth, as millennial parents are the largest purchasers of organic products in the U.S.

The prospect for increased private label penetration bodes well for SunOpta, which has a low-cost advantage over its peers thanks to its integrated sourcing and manufacturing business model.

In late 2016, SunOpta received an $85 million investment from Oaktree Capital, which has continued to increase its stake in the Company, acquiring nearly $60 million in STKL shares via open market purchases during 2017 at an average price of $7.36 a share.

Applying a discounted multiple, relative to precedent transactions, to our 2020E EBITDA, we derive an intrinsic value of $12 a share, representing 65% upside from current levels. Management is heavily incentivized to unlock shareholder value, as the CEO holds ~750k of performance-based stock options/units that vest at various increments/stock prices between $11 and $18 a share."


Read the free report on STKL here.

Boyar Research Reports on Hanesbrands, Legg Mason, and Liberty Global

Barron’s recently ran a bullish story on Hanesbrands where they argued the stock could advance by 25%. The piece references extensively a recent report published by Boyar Research. Boyar was kind enough to provide our readers with this report as well as additional reports on Legg Mason and Liberty Global.

To receive these free reports, please visit:
http://boyarresearch.com/MF-Apr-2017

Boyar Research takes a private equity approach to public market investing by identifying securities trading at a substantial discount to their estimate of intrinsic or private market value. Since 2009, the average return for each company profiled in their flagship publication Asset Analysis Focus has been 83.7%, compared with an average return of 53.3% for the S&P 500.*

Hanesbrands Inc. (HBI)

- Hanesbrands, the world’s largest basic apparel company, boasts a portfolio of first-rate brands that hold the #1 or #2 market share position in underwear, intimate apparel, hosiery, and active wear in 12 countries.

- Several issues have weighed on HBI shares over the past two years, culminating in a sharp sell-off in the stock after the Company reported poor 4Q 2016 results. HBI’s innerwear segment, which comprises 43% of sales and nearly 60% of operating profit, exhibited surprising weakness during that quarter due to soft retail traffic not being fully offset by their rapidly growing online sales. However, we do not believe that this recent weakness represents a secular shift in the purchasing frequency of HBI’s products. Rather, we believe this is a temporary situation caused by a shift of customer purchasing behavior from brick-and-mortar establishments to online distribution channels.

- To see Boyar’s estimate of intrinsic value for HBI and to receive their complimentary full report, please click here


Legg Mason, Inc. (LM)

- Legg Mason, Inc. is a formidable player within the asset management industry, possessing impressive scale (~$710 billion of AUM) and a diverse line of well-established products catering to a full range of investment styles and asset classes.

- Approximately 70% of LM’s strategies are outperforming benchmarks from one-year and three-year perspectives, and the figure for the five-year and ten-year perspectives exceeds 80%.

- The Company has also reduced its shares outstanding by 40% and has raised its dividend seven times since 2010. However, LM shares have failed to achieve significant outperformance despite the Company’s strategic advances. In large part, this likely reflects the difficult fundamentals currently impacting the actively managed fund sector.

- LM is trading at approximately 0.7% of AUM, a substantial discount from how comparable firms have historically been valued in transactions.

- To see Boyar’s estimate of intrinsic value for LM and to receive their full report, please click here


Liberty Global plc (LBTYA / LBTYK)

- Liberty Global is the largest European cable systems operator.

- Liberty Global is underpenetrated in its existing network and has plans to expand its footprint by 6-7 million homes in the coming years.

- Liberty Global shares have de-rated to ~9x EV/OCF, below their longer-term average of ~10x—offering a bargain, in our view, for a high-margin, recession-resistant business best positioned to capitalize on the secular growth in internet data usage.

- To see Boyar’s estimate of intrinsic value for LBTYK and to receive their full report, please click here

Broyhill's Research Notes on Time Warner (TWX)

Broyhill Asset Management about a month ago penned research notes on shares of Time Warner (TWX).  With all the talk of the content bundle coming apart, Broyhill sees downside risk around $65-70 per share, while TWX trades around $72 currently.

They take a look at the company's Turner division, Warner Brothers, HBO, and subscriber losses to outline the various risks in the investment.

They conclude that, "Putting it all together, we see $40B of value at Turner even assuming that accelerating subscriber losses result in significant earnings shortfalls and continued multiple compression. We see $20B of value at WB backed by attractive intellectual property and broader distribution driving pricing for content. At almost any reasonable multiple for HBO, we have a very difficult time justifying today’s $80B enterprise value of Time Warner even under very challenging assumptions."

Embedded below are Broyhill's research notes on Time Warner:

Mark Yusko & Morgan Creek Capital's Q2 Review and Outlook

Today we present Mark Yusko's second quarter review and outlook from Morgan Creek Capital Management.

Embedded below is the Q2 review:




For more on this manager, we've also previously highlighted Mark Yusko's presentation on Japan from The Grant's Conference.

Impact of Size and Age on Hedge Fund Performance: PerTrac Study

PerTrac recently released an interesting study examining the impact of size and age on hedge fund performance.  Their study utilizes 15 global hedge fund databases and drew some key conclusions after examining things from 1996 to 2011.

Here's how they classify fund sizes:

Small: Less than $100 million in assets under management (AUM)
Mid-size: Between $100-500 million AUM
Large: Greater than $500 million AUM

Impact of Size & Age on Hedge Fund Performance: Key Takeaways


1. Large Funds Beat Small Ones in Down Years

- "Large funds dipped 2.63% on average in 2011, the least compared to the average small fund's 2.78%, and average mid-size fund 2.95% slides. Large funds also maintained lower annualized volatility statistics relative to small funds."


2. Small Funds Outperform Big Ones Over Time

"The average young fund has returned a cumulative 827%, since 1996 nearly double that of the 446% return for the average mid-age funds and well beyond the 350% posted by tenured funds."

This has been a popular conception among capital allocators for years as smaller managers can be more nimble and are hungry to prove themselves as they are often newer funds as well.


3. Seek Small Funds To Maximize Returns, Large Funds to Protect Wealth

Pertrac's managing director Jed Alpert concluded that, "The findings suggest that investors interested in exposure to hedge funds and seeking to protect their wealth should examine funds with over $500 million in AUM, since the average large fund has had lower losses in negative performance years and lower annualized deviation figures compared to the average small fund."


4. Impact of Fund Age on Performance

They classify young funds as ones with an inception date within the last two years, mid-age funds as being open between 2 to 4 years, and tenured funds as having operated greater than four years.

The study found that, "the cumulative return for the average young fund is 827%, since 1996, nearly double that of the 446% return for mid-age funds and well beyond the 350% posted by tenured funds. The report further shows that it has been an uneven journey. The average young fund has had 144 positive and 48 negative months since 1996, mid-age funds have had 136 positive and 56 negative, while tenured funds have had 129 positive and 63 negative."



Overall, when selecting a hedge fund (as with any investment), the study concludes that it's important for investors to identify their portfolio goals and risk tolerances as each fund type possesses different attributes.  You can check out the full study here.

Analysts' Best Stock Picks For 2011

Raymond James is out with its Analysts Best Picks for 2011 report. We highlighted their picks from 2010 and those performed pretty well with a 22.3% return. In fact, their annual selections have a 10 year average return of 12.4%.

The report details analysis of the fundamentals, growth prospects and risks associated with each stock. They've selected 13 stocks again this year and in alphabetical order, here are the Analysts' Best Stock Picks for 2011:

- Allscripts Healthcare (MDRX)
- Bank of America (BAC)
- CONSOL Energy (CNX)
- Covidien (COV)
- Digital Realty Trust (DLR)
- Equinix (EQIX)
- Halliburton (HAL)
- HealthSouth (HLS)
- Lincoln National (LNC)
- NVIDIA (NVDA)
- Panera Bread (PNRA)
- Pioneer Natural Resources (PXD)
- Stanley Black & Decker (SWK)

There are some pretty familiar names in that bunch and a few prevalent themes. They've included multiple plays in the health space with MDRX, HLS, and COV. Also, technology is represented with two names in NVDA and EQIX. Also, energy/natural resources are abundant via PXD, CNX and HAL. We wanted to highlight a few of their selections below:

Bank of America (BAC): This name is interesting because it was also on the analysts' best picks list for 2010. However, over the course of last year the stock declined. Raymond James sees the price depreciation as further opportunity and is again a buyer of shares this year. Not to mention, some of the largest hedge funds in the game have sizable stakes in BAC, including John Paulson.

Halliburton (HAL): Arguably, the time to buy this name was during the Gulf oil spill when uncertainty abounded and the stock price was depressed. Yet, RJ feels the company will see near-term earnings momentum and a rebound in international activity. We've talked about how hedge funds are betting on higher oil prices as well.

Equinix (EQIX): This tech name is intriguing because it saw some volatility last year. And as we detailed in our Hedge Fund Wisdom newsletter months ago, a large shareholder (Shumway Capital) was reducing its position size and could be partially responsible for the volatility. Raymond James likes the company's dominant market position in the colocation market and data center industry.


Keep in mind that obviously with the market rally, a lot of these names have been bid up significantly already. Some strategists would obviously advocate waiting to purchase some of these names given that they're extended and knowing that the market doesn't go straight up forever. RJ's Chief Investment Strategist Jeff Saut expects a buyable pullback.

Embedded below is the full research on Analysts' Best Picks for 2011:



You can download a .pdf copy here.

For further research from this shop, head to the previous best stock picks for 2010 as well as Jeff Saut's risk management principles.

Hedge Funds Net Short 10 Year Treasuries: Societe Generale Research

Societe Generale is out with their monthly hedge fund watch and we thought we'd highlight some of the takeaways of what they're seeing. Their research indicates that on a whole, hedge funds are very long the US dollar against the euro, UK pound sterling, and Japanese yen. Additionally, they are seeing funds long the Nasdaq and short bonds. This comes after we just recently saw Bank of America's research that hedgies were aggressively selling the yen.

One of the main talking points as of late has been that hedge funds have increased net shorts against 10 year treasuries. Curve steepeners have been a favorite trade of alternative investment managers and we've covered in the past how hedge fund Prologue Capital likes curve steepeners and how you can replicate legendary fund manager Julian Robertson's constant maturity swap play. As we just covered earlier this morning in Byron Wien's ten surprises for 2010, we saw that The Blackstone Group's Senior Managing Director sees yields on the 10 year rising to 5.5% or above. Below is a chart illustrating just how much short exposure hedgies have right now in long-term bonds:

(click to enlarge)

In currencies, hedgies continued to aggressively sell the euro and again this falls right in line with previous research we posted up that concluded that hedgies were re-shorting the euro. SocGen opines that hedgies are now net short 80,000 contracts. Turning to energy, we see that funds are long commodities and are very long oil, a commodity that has been looking to breakout. Hedge funds are also apparently still bullish on gold, despite reducing their net long positions it appears. You can view all of the hedge fund research on gold we've covered in the past as there's a plethora of resources.

Embedded below is Societe Generale's monthly hedge fund watch report in its entirety where you can examine their exposure levels across various asset classes:



You can directly download a .pdf here.

So, hedge funds in general seem to really be gravitating (i.e. crowding) three main trades right now: shorting long-term treasuries, shorting the euro, and going long oil. To see what other movements big hedge funds are making, head to our post on how they aggressively sold the Japanese yen and an in-depth look at how they had previously been re-shorting the euro. And for more market research specifically from Societe Generale, we've posted up their thoughts on gold as an insurance policy as well.

Cazenove's Listed Hedge Funds Dispatch

Expanding further upon 'document dissemination' day here at Market Folly, we'll turn next to JPMorgan & Cazenove's listed hedge funds dispatch report. Earlier today we've already posted up Credit Suisse's monthly hedge fund report as well as QB Asset Management's shadow price of gold report. The below document was produced by JPMorgan Cazenove in London and hasn't been produced in the United States, so this particular piece might be of more relevance to our UK based readers.

An interesting takeaway from their research is that in 2009, out of all the publicly listed hedge funds in the UK, Dan Loeb's Third Point was the best performing fund. For 2009, Third Point's listed product was up 41% compared to a gain of 20% for the HFRI Fund Weighted Composite.

We've of course covered Third Point's portfolio in-depth and just recently posted up one of their recent portfolio maneuvers. (Additionally, we've also posted up Third Point's commentary for those interested as well). Other solid performers in 2009 included Cayenne as well as Boussard & Gavaudan. Cazenove's research is an intriguing look at the listed hedge fund space with some comprehensive data.

Embedded below is the full report:



You can directly download the .pdf here.

Overall, Cazenove concluded that there are plenty of quality names in the listed hedge fund space and that these solid names will be "the bedrock for the sector's survival and growth." Be sure to check out all the rest of the hedge fund research we've been posting up recently.

Dynamics of Gold, US Dollar & Gold Equities

Since many hedge funds have exposure to gold in some fashion, we're posting up some interesting research from Raymond James on the topic of precious metals. Their commentary was published amidst the massive rally in the US dollar that definitely impacted the performance of gold. Given the action early in the year, they took advantage of the opportunity to look at the dynamic between gold, the US dollar, and gold related companies.

Maybe the most intriguing bit of research was their focus on equity stakes of gold miners and how they performed during the various swings in the price of gold. We note this correlation because while John Paulson's new gold fund will invest in derivatives on the price of gold, the main strategy is to acquire equity stakes in gold miners. Paulson is actually using these equity stakes as a wager against the US dollar. So, while many will examine the dynamic between the US dollar and gold, it is also worth taking a look at how shares of gold miners are affected as well.

If Paulson thinks the US dollar will decline, then he is essentially wagering that the price of gold will increase. More importantly though, it appears as if he thinks equity stakes in gold miners will produce greater returns based on the correlation. But, as you will see from the research below, you also have to look at company specific risk. This comes after Paulson & George Soros recently bought shares of a gold miner.

At any rate, you can examine Raymond James' research below. Of the companies they cover in the space, Aura, Osisko, Great Basin Gold, and San Gold performed the best "on average, across all three post 'risk aversion' rallies." The companies that suffered most over the big gold sell-off were Lake Shore, Golden Star, Aurizon and Yamana. Based on their research, Raymond James favors developers Anatolia and Detour, mid-tier producers San Gold and Crocodile, and large producers Agnico-Eagle and Eldorado.

Embedded below is Raymond James research on the dynamic between gold, the US dollar & gold related companies:



You can directly download a .pdf here.

Raymond James' gold research joins a bevy of other publications that we've posted on the topic of everyone's favorite precious metal. Resources include: global macro hedge fund Woodbine Capital's research on gold, Passport Capital's rationale for owning physical gold, as well as our in-depth look at John Paulson's new gold fund.

Overweight Equities, Underweight Bonds

Bank of America Merrill Lynch is out saying to overweight equities and underweight bonds. Their Research Investment Committee (RIC) says that long-term investors should buy 'humiliation' and sell 'hubris,' noting that equities are currently a 'humiliated' asset class. They attribute this classification to the past ten year performance of large cap equities, a period where these assets performed worse than in the 1930s. They write, "on a relative basis they have clearly suffered the greatest ignominy over the past 10 years and despite the rally of the past nine months remain the most unloved and undervalued asset class." Hedge funds would certainly agree with the notion to get long equities as they've had considerable net long exposure for some time now.

Why To Buy Stocks

In BofA's allocations, they are beefing up equities holdings from 60% of the portfolio to 65%, while reducing bonds from 35% down to 30%. They argue that stocks are cheap relative to both government bonds and corporate bonds, citing equity risk premium ("a measure of excess return of the S&P 500 earnings yield minus the yield of 10-year TIPS"). See the chart below for an illustration of this measure:

(click to enlarge)

Additionally, they cite that investors are clinging on more to fear than greed in regards to sentiment toward equities. This is evidenced by massive inflows into bond funds in 2009 and selling of US equity funds over the course of last year.

Lastly, Bank of America Merrill Lynch argues that equities should see more favorable returns than bonds in 2010 because there has been a transfer of balance sheet risk from corporations to the government. Specifically speaking on equity strategies, they are overweight energy and industrials. Additionally, they favor large financials (market caps > $20 billion).


International Equities Versus US Equities

In their report (focused on asset allocation strategies), we see that they recommend more international exposure because investors have what they call "investor home bias," a condition where investors often have considerable home-country holdings and only modest amounts of foreign exposure.

Secondly, their Research Investment Committee argues that emerging markets have not yet reached 'hubris' status. They would be worried about emerging markets once multiples start to climb as high as 48x forward earnings like we saw during the tech bubble. (The MSCI Emerging Market Index is only trading at 13x P/E ratio). Turning to implementation, they recommend investing in Asia and emerging market consumer stocks. Additionally, they are overweight 'best of breed' global financials (and in particular those in Brazil, China, and Europe). Below you'll find a breakdown sheet outlining their global equity market convictions and ideas:

(click to enlarge)

As you can see, they are taking a bit of a contrarian approach to the investing public's moves in 2009. Last year, investors flooded into bond funds and out of stocks. They clearly feel that valuation and potential returns favor equities in this year and are looking for investors to move to the other end of the teeter-totter, balancing things out. This wraps up the recommendations from Bank of America Merrill Lynch's Research Investment Committee. We just recently covered BofA's hedge fund investment trends report as well as their research on the top ten stocks held by hedge funds, so make sure you check those out too.

For more investment ideas for this year, we've compiled plenty of resources including:

- Analysts' best stock picks for 2010

- Ten investment themes for 2010

- Market strategist Jeff Saut's 2010 outlook

- Hedge fund manager Doug Kass' 2010 predictions

Top Ten Stocks Held By Hedge Funds

Thanks to the fine folks at FINalternatives, we see the latest quarterly Hedge Fund Monitor Report out of Bank of America Merrill Lynch. These quarterly reports are along the same lines of what we do here at Market Folly in that they examine hedge fund portfolios. Rather than focus on a unique set of funds like we do, they survey the majority of the industry landscape to frame a 'top hedge fund holdings' list.

This data is very useful for those of you wondering which stocks are most widely held amongst hedge funds and we presented the hedge fund data from Q2 earlier on the blog. In the third quarter, hedge funds increased their long equity holdings as gross exposure was up 14% and net exposure was up a whopping 130%.

The ten most popular stocks held by hedge funds include:

1. Bank of America (BAC)
2. Pfizer (PFE)
3. JPMorgan Chase (JPM)
4. Microsoft (MSFT)
5. Citigroup (C)
6. Apple (AAPL)
7. Google (GOOG)
8. Qualcomm (QCOM)
9. Cisco Systems (CSCO)
10. Walmart (WMT)
    

Embedded below is Bank of America Merrill Lynch's Q3 Hedge Fund Monitor Report. RSS & Email readers you will have to come to the blog to view the report & as always we recommend using 'full screen' mode to read the document:






Additionally, you can view the hedge fund trend monitor report from last quarter here.

Dead Government Walking: Hedge Fund Sprott's October Commentary

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

Embedded below is the document:



Also, you can download the .pdf here.

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

What Hedge Funds Are Buying & Selling: Trend Monitor Report

Embedded below is an interesting report from Bank of America Merrill Lynch regarding hedge fund position adjustments and performance for the prior month. The report touches on the fact that many funds have been buying S&P and NDX futures and have covered shorts in the Russell 2000. They also note that many funds are in the now crowded gold trade while some also bought platinum. Other moves in precious metals include selling silver and adding to shorts in copper. On the energy front, hedge funds were selling crude oil and reducing longs in heating oil. In the forex markets, hedge funds have been steadily pressing their short on the US Dollar and the market seems to have held on to a crowded long Japanese Yen position.

The report also delves into interest rate trades which was of particular interest to us given the large amount of funds we've tracked that have positions on in this regard. The report notes that there are very deep short positions in the 10 Year Treasuries & 30 Year Treasuries but they were starting to modestly cover. They also apparently reduced some of their long 2 Year Treasury positions. These latest moves seem to indicate that hedge funds as a whole are scaling back a bit from the curve steepener trade. You'll remember that we've noted hedge fund legend Julian Robertson has put on a curve cap play which bets on rising interest rates on the long-term bonds. On the other side of this argument, we've also seen bond connoisseur Bill Gross of PIMCO wager on deflation by buying long-term treasuries recently. This debate will surely wage on throughout the end of this year and well into next year, so we'll continue to track what side of the trade prominent hedge funds are taking.

Overall, a very intriguing report as it examines the hedge fund landscape as a collective whole as it pertains to portfolio adjustments. Here is the hedge fund trend monitor report from Bank of America Merrill Lynch embedded below:



Alternatively, you can download the .PDF here.

For more on current hedge fund strategies, we've covered a wide variety of reports from Goldman Sachs that we highly recommend checking out. They recently issued their 'Best Long & Short Strategies' in the current markets where they examine some of the trades hedge fund might be putting on. Additionally, they also have a hedge fund trend monitor of their own, similar to the one above. Lastly, they've also released a report on 'Where To Invest Now'. All are great additional reading on the topic of current hedge fund strategies. We'll continue our hedge fund portfolio tracking as always and will keep you updated as to what the smart money is up to.

The Case For Agriculture From Hedge Fund Passport Capital

John Burbank's hedge fund firm Passport Capital has put out numerous interesting research pieces in the past and we've tried to detail some of their intriguing investment plays, such as their curve steepener. This time around though, they have taken an in-depth look at the agricultural sector as an attractive investment going forward. Their bullishness on the sector is noted through their newly opened Agriculture fund that debuted in March of this year and has seen solid performance. Additionally, they have large agricultural stakes in their portfolio, as some of their top holdings include the likes of Potash (POT) and Mosaic (MOS). Their research piece is entitled, "The Case For Agriculture" as they provide a compelling case from how you go from dirt to the dinner table. The overall meme of investing in agriculture is by no means new and is largely contingent on global growth, expanding populations, and increased consumption of product. That said, Passport expands on these arguments below in their exclusive look.

The hedge fund's specific view is that "growing global demand for agricultural commodities and food products with constrained supplies, processing capacities, and distribution channels provides an attractive investment opportunity." While they cite the typical arguments of global population increase and increased demand for crops, they also delve into the cycles as illustrated below:

(click to enlarge)

As you can see above, they've laid out the secular trends with cyclical influences to lay out four stages in the global food cycle. There are two extremes in which you see supply destruction and/or demand stimulation where prices obviously are most likely to rise and then you see demand destruction and/or supply stimulation where crop prices are most likely to fall. They also highlight the fact that demand for food has not historically declined as significantly as demand for other goods during times of economic constraint. After all, people have to eat to survive.

As middle class workers around the world begin to accumulate wealth, they are able to enjoy a more protein rich diet that they were previously not used to. Passport identified this trend and has also noticed demand for agricultural products is rising. They cite those two reasons as major growth drivers and also note the fact that agricultural demand has outpaced production, thus limiting inventories and raising prices.

Overall, they believe a unique opportunity has arisen due to tight credit conditions and reduced asset values. They are particularly focused on fertilizer producers, sugar producers, as well as companies that produce proteins through various dairy or meat products. They think the agricultural industry is set for a shift and is in the early part of a metamorphosis. We've already touched on the rising demand for agricultural products, but they believe this is set to rise even further as the global population is predicted to "increase by more than one-third, to a staggering 9 billion people by 2054."

(click to enlarge)

If you're looking for a solid long-term trend to play, this could very well be a nice place to look. Don't forget that there are also a few other strong proponents of the agricultural sector in addition to Passport. Ex-Quantum Fund manager and noteworthy investor Jim Rogers has been bullish on agriculture for a while now. Additionally, market Strategist Don Coxe also likes the sector. While we saw the stocks of fertilizer producers and various ag companies run rampantly higher preceding the crisis, they too were hit in the equities downturn. While they have rallied back with the rest of the market, it will be interesting to see if they can outperform over the long-term as this investment idea is focused on capturing the trend shift. Passport has compiled an excellent presentation on the sector and you can access their excellent in-depth look below.


CLICK HERE to view & download Passport Capital's presentation entitled, "The Case For Agriculture."




For more on John Burbank's hedge fund Passport Capital, make sure you also check out their curve steepener play, an overall bet on inflation. Additionally, you can check out our post covering Passport's portfolio to see what other ideas they're playing.

Where To Invest: Research From Goldman Sachs

Below is an intriguing presentation from Goldman Sachs regarding the topic of where to invest your money in the current markets. This is a great tie-in with another one of their recent pieces that we also covered on the blog where Goldman examined the best long & short strategies in the current markets.


Embedded below is Goldman's piece entitled, "Where To Invest Now: Sustainability Of Rally Depends On Final Demand":



Additionally, you can download the .pdf here.


Make sure to also check out the other recent Goldman research we've posted up:

- The Best Long & Short Strategies Currently
- Market Structure Overview

The Next Financial Mania - BCA Research Special Report

Embedded below is an interesting special report from BCA Research. This particular global investment strategy piece is authored by Francis Scotland who is currently Director of Global Macro Research at Brandywine Global Investment Management LLC, a boutique multi-product investment fund. Before Brandywine, Francis founded the publication you'll find below and was its editor from 1996 to 2005 where he provided investment ideas and strategy recommendations.

This 'Next Financial Mania' special report focuses on bubbles and tries to carve out possible candidates for the next bull market. After all, we've seen historically that new bulls arise from the bear market ashes. Francis goes on to depict that there have been various bubbles throughout certain decades such as gold in the 1970's, Japan in the 1980's, the Nasdaq in the 1990's and most recently, crude oil. (Make sure you check out the recent technical analysis video on crude oil we posted up a few days back). Focusing on what possibly could be the next bull market, Francis identifies a few candidates. Firstly, he starts with ideas that are not necessarily the best candidates as he singles out the 'Electrification Of Transport,' 'Gold and Inflation,' and 'Energy and Commodities'. However, he disregards them for the time for a tentative conclusion of possible bull markets in emerging market equities and real estate. This piece is macro thinking and research at its finest as speculators attempt to identify and profit from the next major shift in the world and subsequent markets. We highly enjoy reading macro research and have often posted up the thoughts of hedge fund Clarium Capital, including their most recent research commentary, 'Save Now, Invest Later.' This is the first time we've posted up anything from BCA Research, so hopefully you enjoy the document embedded below:

*Update, the report was removed per request of representatives from BCA Research

However, persistent readers can attempt to download the .pdf here or potentially find a copy of it on Scribd. While there is some prudent research included within the report, the idea of emerging market equities as the next bull market is by no means a new theme. However, Francis builds up his rationale nicely so it's an interesting read. Overall, it's intriguing to speculate what trends will arise from this bear market's remains when it is all said and done. While Francis has focused on future trends, we also posted up a report for those of you who might be interested in current trend and strategies. Head to our post on Goldman Sachs' current long & short strategies to check those out.

Hedge Fund D.E. Shaw & Co's Market Insight: The Basis Monster That Ate Wall Street

In continuing with our coverage of hedge fund D.E. Shaw's Market Insights, we want to bring you another installment, this time focusing on 'The Basis Monster That Ate Wall Street.' Over the past few days, we've also covered D.E. Shaw's look at tracking asset class returns through the crisis, as well as their piece that focused on common trading mistakes and the consequences that follow.

This time they focus on the 'basis' between cash financial instruments and their derivative based equivalents. They note that this "cash-synthetic" basis has shifted drastically which has created both opportunity and risk. In the piece, they examine the various risks as well as how this basis can lead to distorted perceptions of the market.

Download this edition of D.E. Shaw's Market Insights here (.pdf).

Hedge Fund D.E. Shaw's Market Insight: Tracking Asset Class Returns Through the Crisis

In keeping with our theme of interesting hedge fund reports, here's an excellent 15 page report from hedge fund D.E. Shaw & Co entitled "Is It Better Yet? Charting the Course of Various Asset Classes Through a Global Financial Crisis." Just yesterday, we also posted up a theoretical and applicational piece from D.E. Shaw that focused on common trading mistakes and the consequences associated with them.

This time around, we're posting up a piece specific to this financial crisis as the 15 page document examines how various asset classes have performed in these hectic times. While the report was released back in July, it is obviously still timely given that we're not out of the woods yet. You can download D.E. Shaw's Market Insights here (.pdf).

Market Insights From Hedge Fund D.E. Shaw & Co: Common Trading Mistakes

This is a first for Market Folly in that we've been able to track down some market insight from none other than hedge fund firm D.E. Shaw & Co. While the commentary is from July of this year, it is theoretical and applicational in nature so it's still very relevant. Not to mention, it's probably worth your time regardless, considering it is coming from a firm who has their hand in all different types of markets. After all, they are a hedge fund, a private equity firm, and technology development shop all rolled up into one.

This particular research report focuses on intuition versus reason. Additionally, it deals with analyzing trades and what they call the "time-portal" fallacy. It makes for interesting reading so definitely check it out as they delve into the topic of common trading mistakes and the consequences that follow. You can download the .pdf here. For more on DE Shaw, check out our recent portfolio coverage on them.

Possible Current Long & Short Hedge Fund Strategies

There has been some interesting work coming out of Goldman Sachs as of late and we wanted to take a moment to highlight the latest piece we've stumbled across. If you missed it, make sure you check out their hedge fund trend monitor where they identify portfolio holdings across the hedge fund universe as well. Turning now to another recent report, we examine their piece entitled 'State of the Markets.' Members of Goldman Sachs' sales/trading desk have compiled possible current long & short strategies they are seeing in the markets. They touch on tradable themes and various other market opportunities. In particular, they focus on the topics of commercial real estate, balance sheets of public companies, Japan, the consumer and retail, as well as commodity and event-driven opportunities. Keep in mind that these thoughts do not reflect an official view of Goldman Sachs and are solely those of the sales/trading authors.

Drilling down those talking points, the main trading and hedging opportunities they see are derived from a notion that the combination of the housing bubble and equity market decline have essentially destroyed wealth (we touched on this theme way back in December). This leads to consumer debt repayment and a higher savings rate. Due to the economic malaise, elevated and prolonged unemployment becomes a real source of problems. In turn, you then see lower consumer spending. They've also identified a second theme to take advantage of: risk shifting to public balance sheets. Based on all of these notions, various members of Goldman Sachs' sales/trading desks have highlighted the following strategies as opportunistic within the context of the current market landscape:

- Short REIT Equities
- Buy AAA CMBS
- Buy FX Options on commodity linked currencies
- Buy Equities of non-US commodity producers
- Sell Caps on the US Tax Index
- Short JPY
- Buy Yen CMS Caps
- Short US consumer and retail companies (via equities or CDS)
- Sell Aluminum Caps
- Long crude oil vs short heating oil (short the crack spread)
- Engage in market neutral strategies (event-driven, etc)

As you can see, some of these strategies are obviously not executable by your average retail investor and that is why the piece is deemed possible hedge fund strategies. As such, we insert the necessary note of caution here: Don't trade anything you aren't familiar with. Nothing herein is a recommendation and we won't be responsible for your acts of stupidity when you decide to go leverage-happy trading FX options when you've barely even traded equities. Use your head with this stuff. More so than anything, we found their report to be intriguing and figured it was good food for thought. Acting like a lemming and just following whatever you read on the internet is not a smart investment strategy (in fact, it's not one at all). Just keep all this in mind when reading and do note our disclaimer at the bottom of the site.

Overall, this is definitely an interesting mix of possible hedge fund strategies being pursued in the current markets. (These strategies were compiled in August 2009). Since we typically focus on equity holdings of various hedge funds, we'll leave all the macro trades for another day and will instead focus on the equity strategies presented.

Firstly, we'll turn our attention to the proposed strategy of shorting REIT equities. This has already been widely discussed before as the collapse in commercial real estate intensifies by the day. Yet through equity dilutions-a-plenty, REIT equities have managed to stay afloat. The fundamental problems and macro picture duly noted, members of Goldman's team have identified an opportunity to capitalize on the divergence in commercial real estate price estimates between REIT equity and CMBS markets. They identify possible trade ideas as follows: short REIT equity, long CMBS through buying AAA CMBS or selling protection on AAA CMBX.

According to S&P's rating stress for CMBS, CRE values have apparently dropped 26% from their peak and could potentially drop another 20-30%. A few recent transactions have sold around 60-65% below the peak in 2007 prices. Not to mention, you have the awesome problem of store closings that could shut down numerous regional malls over an extended timeframe. It is all a domino effect as the consumer has been wounded from the economy. As the consumer goes, so does the retail sector. As retail slowly ceases to bask in their former profitable glory, commercial real estate property owners start to suffer from lost tenants, amongst other problems.

While US REITs have raised almost $13 billion in capital year to date (mainly courtesy of the equity dilutions we referenced earlier), they still might need $40-60 billion more to stay afloat and meet impending debt maturities. Despite property values falling and equity dilution, REIT share prices have continued to ramp up. REIT indices are up well over 50% since the lows in March, yet the problems in commercial real estate seem to be accelerating to the downside.

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If there is indeed a 25% mis-pricing in loss expectations for CRE, there could be further trouble ahead.

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An example of putting on the short portion of the trade would be to buy puts or put spreads on a REIT equity index or a basket of various REITs (they highlight retail and office REITs). You can either buy the put outright or sell a further out of the money put to create a put spread (and cheapen your cost). With put options, you define the amount you are willing to lose as opposed to shorting common where a stock can rally > 100%, compounding your losses. While this could potentially be an effective short strategy, you also have to keep in mind that they have also presented a long strategy that retail investors can't pursue. But, for those of you interested, the idea as referenced earlier is a long of AAA CMBS. Obviously the risk there is that if the loans cease to pay their mortgage payments, the value of the bond price could be impaired. In the past, we've covered how various hedge funds have been short REITs as this theme definitely looks to be in play. That about sums up the CRE play for now, and you can bet we aren't done hearing about the problems in this industry.


Secondly, we'll shift the focus to public balance sheet conditions. Goldman's team has identified strength in emerging market balance sheets as developed countries increase their public debt. As such, they have proposed shorting developed countries overloaded with debt and going long select emerging market economies. They also highlight the possibility to buy equities of non-US commodity producers or inflation proxy commodity indices.

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And another idea:

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While we don't typically cover currencies here, you could implement a makeshift version of this trade using currency baskets created with ETFs such as the Australian Dollar (FXA) and the Canadian Dollar (FXC). We've seen this theme (longing commodity producers) mentioned numerous times and we would venture a guess that hedge funds like John Burbank's Passport Capital have executed some form of this trade (we've also covered their curve steepener play in the past too). Commodities definitely have piqued the interest of many this year (especially Jim Rogers) so we'll continue to keep track of that trend.


Lastly, we want to cover the theme of lower consumer spending as it pertains to the retail sector. This theme is relatively straightforward as a weaker economic outlook will impact the consumer. This obviously hurts participants in the retail sector and Goldman's team highlights a possibility of buying 6 month or 1 year put spreads on the S&P Retail Select Index (you could also sell a Call to cheapen the option). Buying protection on an individual retailer or basket of names would make sense should consumer spending drop off due to continued weakness in the economy.

They postulate that we could be seeing a structural ( rather than cyclical) change as it relates to consumer spending. While many will argue that the American consumer is the engine that somehow miraculously keeps on chugging, it's tough to argue with the fact that the US household has lost 23% in net wealth over the past 18 months (totaling over $14 trillion).

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Yet, similar to REIT equities, retail equities are up massively from their lows.

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Unemployment continues to rise and the economy is by no means 'in the clear' yet. Many macro hedge funds (Clarium Capital, Tudor Investment Corp) will be quick to highlight unemployment as a main contributor to continued pain. Can consumer spending go back to normal at the drop of a hat? We'll have to wait and see if the giant American consumption machine will be fettered by the continued effects of the recession.


Overall, very relevant propositions as it pertains to possible hedge fund strategies in the current markets. Keep in mind that these are not recommendations and do not represent the views of Goldman Sachs (or Market Folly either for that matter). If you missed the previous hedge fund report out of Goldman, it is definitely worth reading. Their hedge fund trend monitor surveys the hedge fund portfolio landscape much as we do here at Market Folly. For more on hedge fund holdings, make sure to check out our hedge fund portfolio tracking series as well.