Hedge Fund Tracking: Harbinger Capital's 13F Filing (Managed by Philip Falcone)

(Note: Before reading this update, make sure you check out the preface to the series I'm doing on Hedge Fund 13F's here).

It's time to continue the Hedge Fund tracking series. If you've missed them, I've already covered Jeffrey Gendell's Tontine Partners, Bret Barakett's Tremblant Capital, Peter Thiel's Clarium Capital, Stephen Mandel's Lone Pine Capital, Lee Ainslie's Maverick Capital, John Griffin's Blue Ridge Capital, Boone Pickens' BP Capital, Louis Bacon's Moore Capital Management, Paul Tudor Jones' Tudor Investment Corp, Bruce Kovner's Caxton Associates, and Timothy Barakett's Atticus Capital. And, if you want to hear some insightful thoughts from many of the hedge fund managers listed above, head over to my post on Hedge Fund manager interviews. This week, I'm taking a slightly different approach to the hedge fund tracking series. I'm doing so because the 13F SEC filings are filed on a quarterly basis, so these materials are time sensitive and the next ones are due out in November. I stated in my series preface that you need to treat these as a lagging indicator, because that's what they are. The holdings discussed below reflect portfolio holdings as of June 30th, 2008. So, since these forms are so tedious to sort through, I've condensed the rest of the hedge funds I track to summarize their major moves and top holdings.

Harbinger Capital is a $13.8 Billion firm ran by Philip Falcone. Taken from StreetInsider, Harbinger is "a disciplined, value investor with an emphasis on intensive credit research. Its focus is on middle market companies that tend to be misunderstood or under-researched by the market. Investment approaches include: Restructuring/Bankruptcy, Turnaround, Liquidation, Event Driven, Capital Structure Arbitrage, Short Sale and Special Situations." At one point during this year, they were up as much as 42% (more on that below). And, if you're interested in more on the manager of Harbinger, then head over to my post about Philip Falcone.

So, now that we've got a background on Harbinger Capital, let's take a quick look at their portfolio highlights. Keep in mind that this is merely a brief summary of their top holdings. Due to the time sensitive nature of the 13F material, I wanted to get this information posted before the next set of filings come out in November.

Top 20 Holdings by % of Portfolio
1. Freeport McMoran (FCX) - Added to position by 4.3%
2. Cleveland Cliffs (CLF) - Boosted stake by 127%
3. AK Steel (AKS) - Added to position by 12%
4. Mirant (MIR) - Added to stake by 7.5%
5. Sprint Nextel (S) - New position
6. Ultrashort Financials (SKF) - Decreased stake by 10%
7. Atlas Air Worldwide (AAWW) - Barely moved stake, literally only sold 4 shares
8. Leap Wireless (LEAP) - No change in position
9. Ashland (ASH) - Increased position by 17.4%
10. New York Times (NYT) - Sold literally only 12 shares
11. Owens Corning (OC) - Boosted stake by 4.8%
12. Cablevision (CVC) - New position
13. Corn Products International (CPO) - Increased stake by 168%
14. Williams Sonoma (WSM) - Sold literally only 3 shares
15. Yahoo (YHOO) - New position
16. TerreStar Corp (TSTR) - Boosted stake by 2.7%
17. Peabody Energy (BTU) - New position
18. RTI International Metals (RTI) - No change in position
19. Northwest Airlines (NWA) - Added only 46 shares
20. Hughes Communication (HUGH) - No change in position

Harbinger's top 3 holdings have undoubtedly increased the volatility in their portfolio. Those three stocks have been on a downward spiral to hell. Freeport McMoran (FCX), Harbinger's top holding, traded around $110-120 at the time of this SEC filing. Since then, FCX has sold off hard and currently trades around $53. Additionally, their position in Cleveland Cliffs (CLF), which they increased by 127% last quarter, has played out in similar fashion. (They basically bought additional CLF at the top). CLF traded around $120 at the time they disclosed their positions. Now, CLF trades around $48. How about some more? Let's move on to AK Steel (AKS), which traded around $70 at the time of this filing. Now, it trades around $23. Undoubtedly, you get the picture. Harbinger's metals and natural resource plays have really been a thorn in their side. And, if there is one 13F filing I am most looking forward to come November, Harbinger's would be it. Because, in that next filing, we will get to see their updated portfolio to see if they were "buying the dip" in these names, or whether they were puking them up with the rest of the market. Harbinger has massive positions in these names, as they are their top 3 largest portfolio holdings.

So, how much pain did those positions (among others) cause Harbinger? Well, a lot, as I recently noted in my performance update on Harbinger. Earlier in the year, they were up as much as 42%. And, nowadays, they find themselves up only 2% for the year. How's that for a swing? This is why I say that their next filing will be very interesting, because many of their top holdings have seen wild volatility. And, if you're interested in other hedge funds, then head over to my last hedge fund year-to-date performance update.

Other notable portfolio news includes new positions in Sprint Nextel (S), Cablevision (CVC), Peabody Energy (BTU), and Yahoo (YHOO). These are positions that Harbinger did not hold in the prior quarter and thus are new holdings. And, they were sinking a lot of money into these positions, as they brought all of these holdings all the way up to top 20 holdings in their portfolio.

One last thing I want to mention is their position in Corn Products International (CPO). Over the past quarter, they boosted their position in this company by 168%, bringing it up to their 13th largest holding. So, on one hand, you can highlight that they were buying with conviction and that maybe it's a name we should be paying attention to. On the other hand, they added to CLF with conviction and look where that got them. Point being, they were heavily adding to this name.

Also, since this 13F filing, we have seen additional activity by Harbinger. In a recent 13G filed with the SEC, Harbinger has disclosed a 6% ownership stake in Ashland (ASH). They now own 3,789,266 shares. Curiously enough, in the 13F detailed above, Harbinger held 5,871,426 shares of ASH. So, they've decreased their position substantially recently. A 13G filing signifies a passive investment in a company. But, as we are all too familiar with Harbinger's activist exploits in the coal/steel arena, there's always the option they could shift this position from a passive investment, to an activist one (which would require a 13D filing). But, for now, they've maintained it as a passive investment while decreasing their stake.

That sums up the details of Harbinger's filing. Overall, it's been the worst year for hedge funds in a long time, and Harbinger is a perfect example of such volatility.

You can view Harbinger's entire 13F filing over at the SEC.

Let the Bloodbath Begin: Hedge Fund Redemptions

September 30th was the final day (end of the quarter) that investors in most hedge funds could request to redeem their money in December. If you've been following my posts on this matter, you know we're in for a rough ride. There have already been reports of massive redemption requests by investors. As of right now, redemption estimates are in the hundreds of billions. Nouriel Roubini, respected Professor of Economics at NYU, recently predicted this and said the run on hedge funds could last up to 2 years.

Why are investors running to redeem their money you might ask? Well, maybe it's because Hedge Funds have had a rough year just like everyone else. While there are some standout performers, the majority of funds have been on the losing side of things. Overall, the performance of hedge funds and fund of funds this year has been the most widely dispersed in six years. And, such dispersion is bound to cause redemptions. These redemptions cause hedge funds to sell out of their positions and raise cash. Increased selling in the markets can create increased volatility, in a time when we are coming close to testing historical levels of volatility. Citigroup analysts already estimate that hedge funds have around $600 billion in cash reserves in anticipation of redemptions.

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FT Alphaville captures the possible severity of the situation,

"The bottom line, according to industry outfit hedge fund research, is that up to 2000 hedge funds can be expected to be liquidated in the coming months. Given the complexity of the market - the way hedge funds and their holdings so interlace the financial system, this is a potential massive shock. It almost makes the failure of Lehman pale into insignificance. The Lehman collapse will be worked out over years. Hedge fund redemptions and liquidations will take days or weeks."

Simply put, hedge funds are deleveraging. Not to mention, you've got the added threat of hedge funds straight up liquidating and closing up shop. We've already seen evidence of this with the closing of Dwight Anderson's Ospraie Fund. And, rumors started swirling as to who was next. Then, on top of all that, numerous funds are close to shutting down simply because all their assets are tied up in the prime brokerage operations of the now defunct Lehman Brothers. Hedge funds who used Lehman's prime brokerage services have seen their accounts frozen as Lehman filed for bankruptcy protection a few weeks back. Here are some excerpts from Bloomberg illustrating how many funds are affected by this:

"

• London-based MKM Longboat Capital Advisors LLP said last week it will close its $1.5 billion Multi-Strategy fund in part because of assets stuck at Lehman
• Lehman Brothers Holdings Inc.'s bankruptcy probably means the end of hedge-fund manager Oak Group Inc. after 22 years in business.
• Diamondback Capital Management LLC, a Stamford, Connecticut-based hedge fund, told investors that it had assets of $777 million stranded in Lehman
• Managers with a smaller percentage of assets in Lehman limbo include Harbinger Capital Partners, Amber Capital LP and Bay Harbour Management LLC, which are each based in New York, and RAB Capital Plc and GLG Partners Inc., both in London
• Darden Capital Management, an investment club run by students of the University of Virginia's business school, has about $6 million in four funds that are stranded.

"

As you can see, investors aren't the only ones threatening hedge funds' livelihood. Counterparty risk is very much a problem as well. The collapse of numerous Wall Street institutions has sent a shock wave through the entire investment community.

As I recently wrote, this has been the worst year for hedge funds in a long time. Heck, Boone Pickens' funds are down $1 billion. The market volatility has affected everyone, and it could get even worse.


For more on redemptions, liquidations, and the deleveraging of hedge funds, check out some of my recent articles:
Worst Year for Hedge Funds in a Long Time
VIX: Historical Volatility Comparison
Crisis and Deleveraging of Hedge Funds
Boone Pickens Funds Down Big
Run on Hedge Funds is Next Step



Sources:
FT Alphaville
Bloomberg

Improve Market Folly: Vote in Our Polls!

Hey everyone, I've just tossed a few quick polls up to get an idea what readers like/dislike. Feel free to fill in the "other" category, post up comments, or email me. I'd love any and all feedback!

Hedge Fund Tracking: Atticus Capital's 13F Filing (Managed by Timothy Barakett)

(Note: Before reading this update, make sure you check out the preface to the series I'm doing on Hedge Fund 13F's here).

It's time to continue the Hedge Fund tracking series. If you've missed them, I've already covered Jeffrey Gendell's Tontine Partners, Bret Barakett's Tremblant Capital, Peter Thiel's Clarium Capital, Stephen Mandel's Lone Pine Capital, Lee Ainslie's Maverick Capital, John Griffin's Blue Ridge Capital, Boone Pickens' BP Capital, Louis Bacon's Moore Capital Management, Paul Tudor Jones' Tudor Investment Corp, and Bruce Kovner's Caxton Associates. And, if you want to hear some insightful thoughts from many of the hedge fund managers listed above, head over to my post on Hedge Fund manager interviews. This week, I'm taking a slightly different approach to the hedge fund tracking series. I'm doing so because the 13F SEC filings are filed on a quarterly basis, so these materials are time sensitive and the next ones are due out in November. I stated in my series preface that you need to treat these as a lagging indicator, because that's what they are. The holdings discussed below reflect portfolio holdings as of June 30th, 2008. So, since these forms are so tedious to sort through, I've condensed the rest of the hedge funds I track to summarize their major moves and top holdings.

Atticus Capital is a $13 billion hedge fund ran by Timothy Barakett. In 2005, Atticus' funds were up a combined 45%. And, they finished well over 30% for 2006. Barakett founded the firm at age 26 in 1995 and focuses on taking large, concentrated positions in companies. One of Atticus' most famous investments was Phelps Dodge, a miner which was bought out by Freeport McMoran (FCX). At one point, Atticus owned more than 9% of Phelps. And, they continue to hold their position in what is now the combined FCX. Barakett received his BA in Economics from Harvard and his MBA from Harvard as well. Its very evident that Barakett employs macro based investment theses. Once he has decided on what the trend is, he will find the best company within that trend and he will place a big bet. And, when needed, he will step in and take an activist role, ensuring the company is performing to his liking.

You may have heard about Atticus over the past few weeks because they have not been performing well at all this year. In my last hedge fund year-to-date performance update, we noted that Atticus was -25% for the year. And, consequently, Atticus was a victim of liquidation rumors, which have since been denied. We previously analyzed Atticus' portfolio holdings back in June and noticed that they had significant natural resource and mining positions at the time. I'll get into the details below, but you can take a guess as to where a lot of their losses are coming from this year. Overall, it's been one of the worst years for hedge funds in a long time.

So, now that we've got a background on Barakett and Atticus Capital, let's take a quick look at his portfolio highlights. Keep in mind that this is merely a brief summary of Atticus' top holdings. Due to the time sensitive nature of the 13F material, I wanted to get this information posted before the next set of filings come out in November.

Top 20 Holdings by % of portfolio
1. Union Pacific (UNP) - Increased position by 61%
2. Conoco Philips (COP) - Stake rasied by only 0.3%
3. Mastercard (MA) - Decreased position by 13%
4. Burlington Northern (BNI) - Decreased stake by 6%
5. Freeport McMoran (FCX) - Decreased position by nearly 52%
6. NYSE Euronext (NYX) - Sold off 9.3% of their position
7. Occidental Petroleum (OXY) - Decreased stake by 7%
8. Crown Castle (CCI) - Decreased by only 0.4%
9. Peabody Energy (BTU) - New position
10. Baidu (BIDU) - Increased stake by 65%
11. Norfolk Southern (NSC) - Increased position by 36%
12. Canadian Natural Resources (CNQ) - Decreased stake by 16.6%
13. Visa (V) - New position
14. Boeing (BA) - Boosted stake by 440% (no, not a typo)
15. Praxair (PX) - New position
16. Focus Media (FMCN) - New position
17. Unibanco (UBB) - Sold off 36% of position
18. Amerco (UHAL) - Decreased stake by 32%
19. Conseco (CNO) - Sold off 8.8% of position
20. Vale (RIO) - New position

So, if you didn't already notice, Atticus definitely favors positions in the rails. And, you can't blame them. Those investments have paid off significantly over the course of the year. Atticus has large positions in most of the majors: Burlington (BNI), Norfolk (NSC), and Union Pacific (UNP). Atticus also holds a position in CSX Corp (CSX), but it just isn't a top 20 holding. Atticus boosted their stake in UNP by 61%, propelling it all the way up to the fund's top holding. Numerous other hedge funds have very large positions in the rails as I've noted before. Not to mention, Warren Buffett has some pretty large stakes in some of the rails as well.

Next, I noticed that Atticus was selling off a chunk of their Mastercard (MA). This position could potentially be another one that has been causing them some pain lately. Although they sold 13% last quarter when the share price was trading around $270-300, MA has since plumetted, and is currently hovering around $185. And, considering it was/is their 3rd largest holding, it has to be causing them some pain.

Freeport McMoran (FCX) comes in at the fund's 5th largest holding and could equally be responsible for the fund's poor performance this year. As I noted earlier, they gained these FCX shares through their purchase of Phelps Dodge (who was acquired by FCX). And, up until now, they had pretty much held onto the shares of the new company. But, this past quarter, we saw Barakett unload nearly half his position. At the time of this sale, FCX was trading anywhere from $100-120. But, recently, FCX has traded way down to $63. This name has seen brutal selling over the past few months and you have to think that either Atticus was getting mauled by the sell-off, or they were partly responsible for it. We'll see what the verdict is come November when the next 13F filings are released.

Atticus also added some new holdings this past quarter, and they were adding with conviction. They initiated a position in Peabody (BTU) and brought it up to the fund's 9th largest holding. Additionally, they initiated Visa (V) as their 13th largest holding, Praxair (PX) as their 15th, and Focus Media (FMCN) as their 16th largest. Also, although they already owned Boeing (BA), they boosted their stake by a whopping 440%, bringing it way up to the fund's 14th biggest position.

Overall, it's easy to see where some of Atticus' pain may be coming from this year. Barakett runs a smaller, highly concentrated portfolio. And, when it wins, it wins big. But, as you're seeing now, it can also lose big as well. To see all of Atticus Capital's holdings, you can view their entire 13F filing with the SEC.

Stanley Shopkorn (ex-Moore Capital Management) Opens Hilltop Park Fund LP

Today, Hilltop Park Fund LP will begin trading. This new hedge fund was started by Stanley Shopkorn, former head of equities trading at Louis Bacon’s Moore Capital Management LLC. Hilltop opens up in a sour environment, where protecting and growing capital will undoubtedly be a tedious affair. But, I'm sure with Mr. Shopkorn's experience and knowledge that they will try their best to not start off on the wrong foot.

Hilltop is of particular interest to me because Shopkorn comes from Louis Bacon's Moore Capital Management, a prominent global macro hedge fund. And, since Shopkorn used to head the equities trading department at Moore, you can bet he will be using equities at his new fund. So, look forward to November, where we will get a glimpse of the "global macro" thought process when it comes to equities they are investing in. We'll then compare them to Moore's equity holdings to see where Shopkorn is differing with his strategy. If you want to see Moore Capital Management's most recently portfolio holdings, you can find them here.


Source: HedgeCo

Warren Buffett Buys Stake in Chinese Battery Co

Well, as the markets suffered a loss of nearly 7% yesterday, you might have missed this piece of information that seemingly slipped under the radar. Warren Buffett has acquired a 9.89% stake in BYD Company, a Chinese battery manufacturer. This battery company plans to sell electric cars by 2010 in the US. Buffett bought the stake through his Berkshire Hathaway holding MidAmerican Energy Holdings (Berkshire owns 87% of MidAmerican) and the stake cost around $230 million.

Purchasing a stake in a battery maker makes a great deal of sense here, given the squeeze in the automotive industry. Numerous manufacturers have already produced hybrids or electric cars and one can assume that the trend will continue, as consumers worry about miles per gallon and rising fuel costs. The automotive landscape is changing and Buffett looks to capitalize on the upcoming trend/shift in the industry. BYD makes lithium-ion batteries that will be found in electric vehicles. So, while this may be the worst year for hedge funds in a long time, Buffett is sticking to business as usual.



Source: NYT

Wall Street Plunge Illustrated

Great picture illustrating how I'm sure a lot of people felt on Monday September 29th, 2008, the day the market fell 777 points.

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Marketfolly.com Back Online

Okay, it finally looks like www.marketfolly.com is back online. I want to apologize to readers regarding our downtime, but I had no control over the matter, as it was hosting related. They are still working on the problems and the site might flicker in and out in the next few hours, but they assured me everything would be back to normal very soon.

I have re-scheduled all posts from today to post tomorrow, to ensure that no content was lost in the mix. Thanks for your patience and sorry again. Frustrating stuff!

VIX : Historical Volatility Comparison

Many people were quick to note the Volatility Index surging as the market plummeted. So, where do current VIX levels compare to other crises? Maoxian has a great chart up illustrating just that.

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Now, the ultimate question becomes: where does the current crises fall on the list in terms of severity? Worse than the '87 crash?

Source: Maoxian

Wall Street Bailout Versus Wall Street Market Loss

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Today, the U.S. market lost nearly 7%. The market cap wiped out today was more than the proposed bailout plan that failed to pass.



Source: EconomiPic Data

2009 Earnings Estimates Are Too High

I wanted to pull an excerpt off of Chad Brand's blog because he illustrates a simple point here: 2009 Earnings estimates are too high.

He writes,

"Below is the breakdown of earnings from 2006 through current 2009 estimates: Notice what while S&P 500 earnings will be down this year, for the second straight year, eight of the ten sectors are expected to have earnings gains for the third consecutive year in 2008, as well as further gains in 2009. This data shows exactly how much impact the financial sector's woes are having on the market. The consumer discretionary sector is an obvious casualty of such fallout, but everything else is fairly strong. Personally, I think 2009 earnings estimates remain too high, though they have come down some already. Although I think the odds are remote, it is easy to see that, when one assumes the financials will rebound sharply, such a high S&P earnings number is possible in 2009 because the other sectors remain on firm footing."

As you can see from his graphic, earnings estimates indeed seem way too high for 2009, considering the fact that the crisis has elevated in recent months. There is really a trickle down effect at work here. Financials will stink it up, we all know this. But, what so many people have seemingly written off (no pun intended), is the spillover effect into other sectors. Not to mention, you've got 2 separate crises at the same time. On one hand, you've got the credit crunch, and on the other hand you've got a decelerating consumer environment and a horrible housing market. While some aspects of each are intertwined, the spillover effect is still underestimated when you consider all the problems facing the economy as a whole. So, while we may just be starting to work through the majority of the credit crisis problems, we've got a whole nother set of issues to tackle with the housing market and debt-ridden, struggling consumer. Estimates will come down.

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Source: Chad Brand's Peridot Capitalist

Crisis and Deleveraging of Hedge Funds

Two must-read articles for the weekend:

Deleveraging of Hedge Funds over at Barron's

and

Observation on a Crisis over at Investor Insight

Worst Year for Hedge Funds in a Long Time

Well, that's stating the fairly obvious, now isn't it? But, here are the cold hard facts. Hedge funds who we all adored for their dominating performance figures over the past few years are now struggling to stay positive on the year. It's no longer a question of "How much will we dominate this year?" But, instead, "Can we scrape by?"

Case in point: We've already seen the closure of Ospraie's $3 billion commodities fund after it lost 40% this year, which I wrote about here. This just goes to show that even those who had learned from some of the best can be brought to their knees. Dwight Anderson, manager of Ospraie, had learned from both Julian Robertson and Paul Tudor Jones, legends in their respective strategies.

Next, we've got word that even more typically dominant funds are struggling now more than ever. Ken Griffin's Citadel has seen their Kensington fund down 15% for the year, as of a week ago. This multistrat fund hasn't had a losing year since 1994. All this comes at a time when I noted that Citadel is trying to start a $1 billion macro fund. And, I can't blame them. Although many macro funds have had a rough summer, they are still up on the year. And, I think you'll see that macro funds will be the longer term winners as we continue to see an evolving financial landscape.

Stevie Cohen's SAC Capital is also down 3.5% this year. Well, at least his multistrat fund is. This is his fund's worst year since 1992.

I recently wrote that Boone Pickens' BP Capital has lost nearly $1 billion so far this year. I also wrote about Harbinger Capital being up 42% at one point earlier this year, only to find themselves up only 2% for the year. Then there's TPG-Axon, who hasn't had a losing year since 2005. They're down 18% year-to-date as of last week.

I could go on and on, but you get the picture. Take all the performance figures I've divulged above and compare them to my hedge fund performance update written at the beginning of September.

Hedge funds are struggling, 401k investors are struggling, and the economy is struggling. The financial landscape is changing and look for numerous hedge fund redemptions and possible liquidations to sprout up in the coming months. There has already been a massive outflow of cash from the hedge fund space as investors become nervous. I expect this trend to continue, and so do the hedge funds. After all, why else would they have set aside an estimated $600 billion in cash accounts to cover these outflows?

It's beyond obvious at this point, but only the strongest will survive.

Peter Thiel's Clarium Capital Shifts to Equities

Recently, we got word of what Clarium Capital is doing to navigate the rough waters. Clarium is a $6 billion global macro hedge fund run by Peter Thiel, the co-founder of PayPal. Assets under management had recently ballooned to the highest amount in Clarium's history and I noted that it would be interesting to see how effective Clarium would be at deploying this new capital. And, with his most recent investor letter, we see that he actually was adding to his leverage, rather than decreasing it. In the week prior to September 19th, he was borrowing 40 cents for every dollar. This past week though, he was borrowing $1.40 for every dollar. Although Thiel undoubtedly changes his leverage on a daily/weekly basis, it is still worth pointing out, given the massive deleveraging we've seen over the past months and most likely will see in the coming months.

As I wrote about in my August performance update of Clarium, we had heard Thiel was shifting out of commodities. And, it looks as though that is exactly what he has done. We now see that he actually has short positions in commodities, to the tune of about 14% of assets. Also, in my analysis of Clarium's portfolio holdings, I noted that he only had a very small percentage of assets invested in equities at the time. But, this time around, he's beefed up his equity positions. Around 71% of his assets are now in equities. And, it looks as if he has been incrementally adding to equities, as he had invested 36% of assets in equities just the week prior. And, year-to-date, he is still up 27.8%. If you want a little more background on Thiel & his investment style, I first wrote about him here.

Also worth noting, according to Morningstar, hedge funds in general saw nearly $12 billion of outflows in July. And, given the recent market activity/volatility, you'd expect that number to have increased in August and/or September.


Source: Bloomberg

Housing Market & Unemployment Rate: Back to Reality

Fresh off of the Wall Street bailouts and short-selling bans, I'm here to remind everyone that while things slowly are being resolved on Wall Street, there is still a whole nother set of problems on Main Street. The unemployment rate is 6.1%. Not to mention, the economy lost 100,000 jobs in June, 60,000 in July, and 84,000 in August. We're now at eight consecutive months of job losses. And, we also have a housing market that seems far from bottoming, as evidenced by existing home sales falling 10.7% in August, and August new home sales falling to the lowest levels since 1982.

Case in point: Professor Robert Shiller believes the decline in housing prices could be worse than that of the Great Depression. Courtesy of Barry Ritholtz at The Big Picture, we see that Shiller sums up the situation with 3 main points:

• Home price declines are already approaching those in the Great Depression, when they plunged 30% during the 1930s. With prices already down almost 20%, it's not a stretch to think we might exceed that drop this time around.

• There are about 10 million homeowners whose debt is higher than their home value, which has broad implications for how Americans feel about their wealth and spending habits (read: more pressure on consumer spending).

• The current hopeful consensus -- that house prices will bottom soon and then begin to recover -- is most likely a dream. Housing markets don't usually have "V-shaped" recoveries. And even if house prices stabilize in nominal terms, after adjusting for inflation, most homeowners will continue to lose money.

Then, also take into consideration the fact that the majority of any real 'demand' for housing currently could be artificial. Notable Calls mentions that the down payment assistance program is set to expire October 1st 2008. So, people may be in a hurry to buy a home to get that down payment assistance. But, after that expires, real estate veterans are saying that there is no other real demand outside of that program. So, the housing sales data coming up should be pretty positive. But, proceed with caution. We'll have to see if the demand was artificially swollen due to the assistance program expiring. If there really is no demand in the pipeline after October as those in the industry suggest, we could be in for a doozy. Just when people will have thought things are starting to improve, the demand could taper off yet again, as buyers continue to watch prices fall.


Sources: The Big Picture, Notable Calls, & Fixed Income Advisor

Zecco.com Offers Free Trades All of October!

Well, looks like Zecco.com continues to expand their reputation as the brokerage that offers free trades. Their latest promotion is free trades (both equity and options) for the entire month of October. Yep, that's right. Trade all you want for free in any account type. I'm a long time user of Zecco, and have to say I'm quite impressed with this. Traders can save a bunch of money on commissions with this promotion.

Here's the message from the CEO regarding the promotion,

"To show our appreciation for your loyalty, we have decided to make October a 100% unlimited free trading month. This means that between October 1st and October 31st you can make unlimited equity and options trades commission-free. As far as I know, this has never been done in the history of the brokerage industry, until now. But then again, we are seeing things in the market we never would have believed, until now."

And yes, for those of you without an account, this applies to new accounts as well. Taken from their FAQ,

"If I open a new account, can it get free trades too?

Yes, once your new account is funded, it will receive unlimited stock and options no-commission trades in the month of October."

So, sign up for an account now to get free trades. And, to those of you wondering what happens after the October promotion is over? Well, you still get 10 free trades a month thereafter, as long as you've got $2500 in your account. And, after you've used up your 10 free trades, its only $4.50 per trade after that, which is easily still one of the cheapest rates in the business. Zecco is really pushing hard to be the lowest-cost brokerage in the industry. It's tough to beat 10 free trades per month, not to mention free trades (equity and options) for ALL of October. I'm impressed.

Go get yourself 100% free trades for all of October, and then 10 free trades a month thereafter!

Full Disclosure: Zecco.com is an advertiser on this site, but they did not pay for this post. I am already a Zecco user and am making this post voluntarily to let readers know of this damn good deal.

Hedge Fund Tracking: Caxton Associates 13F Filing (Bruce Kovner)

(Note: Before reading this update, make sure you check out the preface to the series I'm doing on Hedge Fund 13F's here).

Time to continue the Hedge Fund tracking series! If you've missed them, I've already covered Jeffrey Gendell's Tontine Partners here, Bret Barakett's Tremblant Capital here, Peter Thiel's Clarium Capital here, Stephen Mandel's Lone Pine Capital here, Lee Ainslie's Maverick Capital here, John Griffin's Blue Ridge Capital here, Boone Pickens' BP Capital here, Louis Bacon's Moore Capital Management here, and Paul Tudor Jones' Tudor Investment Corp here. This week, I'm taking a slightly different approach to the hedge fund tracking series. I'm doing so because the 13F SEC filings are filed on a quarterly basis, so these materials are time sensitive and the next ones are due out in November. I stated in my series preface that you need to treat these as a lagging indicator, because that's what they are. The holdings discussed below reflect portfolio holdings as of June 30th, 2008. So, since these forms are so tedious to sort through, I've condensed the rest of the hedge funds I track to summarize their major moves and top holdings.

Additionally, the majority of the rest of the funds I follow are macro funds. And, since 13F filings only detail equity holdings, we're left with a bit of a problem. Macro funds typically employ strategies that encompass many financial markets. Be it commodities, currency, futures, foreign markets.... you name it. So, these funds are much harder to track. Since they are not required to disclose positions held in those markets, we only get to see their equity holdings. But, at the same time, I still find the information useful because many of these funds have numerous large equity positions which give you a broad sense as to what their strategies may be.

So, next in the macro hedge fund tracking series we have Caxton Associates, ran by Bruce Kovner. Taken from Wikipedia, Kovner's bio is as follows: "Kovner's first trade was for $3,000, borrowed against his MasterCard, in soybean futures contracts. Realizing growth to $40,000, he then watched the contract drop to $23,000 before selling. He later claimed that this first, nerve-racking trade taught him the importance of risk management. In his eventual role as a trader under the legendary Michael Marcus at Commodities Corporation (now part of Goldman Sachs), he purportedly made millions and gained widespread respect as an objective and sober trader. This ultimately led to the establishment of his current company, Caxton Associates, in 1983, which today manages over $10 billion in capital and has been closed to new investors since 1992." Year-to-date, Caxton Associates was up 5% as of a few weeks ago, as I wrote in my hedge fund year-to-date performance update.

If you want to hear some insightful thoughts from Bruce Kovner himself, head over to my post on Hedge Fund manager interviews. So, now that we've got a background on Kovner and Caxton Associates, let's take a quick look at his portfolio highlights. Keep in mind that this is merely a brief summary of Caxton's top holdings. Due to the time sensitive nature of the 13F material, I wanted to get this information posted before the next set of filings come out in November.

Top 20 Holdings by % of portfolio
1. Compania Cervecerias Unidas (CCU) - Increased position by 72934%, from 25,000 shares to 18,233,668 shares
2. Electronic Data Systems (EDS) - New Position
3. Activision (ATVI) - New Position
4. Monsanto (MON) - Increased position by 41 %
5. Rockwood Holdings (ROC) - Increased position by 68.8%
6. W-H Energy Services (WHQ) - Increased stake by 195%
7. Occidental (OXY) - Increased stake by 65%
8. ChoicePoint (CPS) - Decreased position by <>
9. DirecTV (DTV) - Decreased stake by 25%
10. W.R. Grace (GRA) - Boosted stake by 8%
11. Qualcomm (QCOM) - Boosted stake by 44.6%
12. Coca Cola (KO) - Decreased position by 12.5%
13. Rural Cellular (RCCC) - Increased stake by 12.4%
14. Research in Motion (RIMM) - Boosted stake by 8.7%
15. Service Corporation (SCI) - Increased position by 32%
16. Nucor (NUE) - Boosted position by 37%
17. (ANST) - New position
18. XTO (XTO) - Boosted stake by 150%
19. Stewart Enterprises (STEI) - Increased position by 12%
20. Gilead (GILD) - Decreased position by 26.7%

Kovner's Caxton Associates definitely disassociate themselves from the rest of the macro pack when it comes to the equity side of their portfolio. While their portfolio does hold typical energy and technology names often seen in other hedge fund portfolios, they also hold seemingly obscure names that I have yet to see pop up in any other funds I track. So, Kovner and his team may have discovered some diamonds in the rough here. In particular, I want to focus on his top holding: Compania Cervecerias Unidas (CCU). In the quarter prior to the filing, he held just 25,000 shares of this name. Then, over this past quarter, he ratcheted up his holdings in the name big time. He increased his position by 72,934%, bringing it all the way up to his firm's top holding, with a market value of over $642 million at the time of the filing. Needless to say, they bought this name with conviction. And, although I've seen numerous other funds buying up shares of Latin & South American beverage companies, this is the first fund I've seen pick up this name. So, definitely keep an eye on it.

Additionally, I want to point out his holdings in Rocwood Holdings (ROC), W-H Energy Services (WHQ), and Service Corporation (SCI). These are three other names I am seeing for the first time amongst the hedge funds I track. And, he was adding across the board to all three names. Caxton added to WHQ the most, increasing their position by 195%.

Now, turning to the 'hedge fund favorite' names that tend to pop up in numerous hedge fund portfolios that I track, we see Caxton holds positions in Qualcomm (QCOM), Research in Motion (RIMM), XTO Energy (XTO), Occidental (OXY), and Gilead (GILD). Caxton was out adding pretty moderately to all these names. OXY and XTO are easily two of the favorite equity energy plays amongst various hedge funds. And, you have to wonder how they affected their portfolio, given the volatile ride energy stocks have seen as of late. Turning to tech, we see that Caxton, like so many other funds, enjoy large positions in both QCOM and RIMM. As I've noted before, QCOM is easily a top five most common equity holding among the hedge funds I track. And, just like energy, technology stocks have been whipsawed around a lot recently. So, although Caxton was out adding this past quarter, we'll have to see if they were still adding to these names come the next 13F filing.

We already knew hedge funds (and macro funds in particular) had a rough July, as I noted here. And, it's easy to see why, with the heavy commodity exposure many of them had. What we don't yet know is how they've rebounded (if at all). Lastly, I just want to re-emphasize that since Caxton is a macro fund, they obviously have the majority of their positions in the commodity, currency, futures, or other markets. But, at the same time, they still have a sizable chunk of money in the equity markets.

Caxton Associates' full 13F filing listing every position can be found at the SEC.

Hedge Funds Reveal Short Positions (Blue Ridge Capital, Paulson & Co)

To comply with new UK regulations, hedge funds are being forced to disclose financial short positions. Two very well known hedge funds whom we've covered a lot here on Market Folly have already disclosed their positions. Firstly, Blue Ridge Capital is ran by John Griffin, a 'Tiger Cubs' (a.k.a. pupil of Julian Robertson while at Tiger Management). Griffin is well known because he was Julian Robertson's right hand man. So, needless to say, the dude knows his stuff. Blue Ridge seeks absolute returns by investing in companies who dominate their industries and shorting the companies who have fundamental problems. I've covered Blue Ridge's latest long positions here, but now we finally get to see some of what he's shorting. According to a disclosure made in the UK, Blue Ridge is short 0.95% of the shares of Alliance & Leicester PLC. Additionally, they have a short position in Anglo Irish Bank.

Another fund we're seeing some short positions from is John Paulson's Paulson & Co. Paulson is famous for the fortune he made by betting against subprime at the beginning of the crisis. And, now, it looks as if he's ready to turn his focus to some UK financials. Taken from StreetInsider, we get a solid breakdown of what Paulson is shorting: "Paulson & Co. yesterday disclosed short positions in four of the five largest British banks. The bet now makes Paulson the largest short seller of UK banks. According to the filing, Paulson's hedge fund has taken a $650 million bet against shares of Barclays (BCS), a $542 million bet against Royal Bank of Scotland (RBS), and a $483 million bet against Lloyds TSB (LYG)."

If you're interested in seeing how Paulson and various other hedge funds have performed year-to-date, check out my hedge fund performance update posts from July here and from September here.


Sources: WSJ, StreetInsider, & investEgate

Harbinger Capital Update (Performance & 13G Filing)

In a recent 13G filed with the SEC, $13.8 billion hedge fund Harbinger Capital, ran by Philip Falcone, has disclosed a 6% ownership stake in Ashland (ASH). They now own 3,789,266 shares. Curiously enough, in their last 13F filing disclosing their portfolio holdings as of June 30th, 2008, Harbinger held 5,871,426 shares of ASH. A 13G filing signifies a passive investment in a company. But, as we are all too familiar with Harbinger's activist exploits in the coal/steel arena, there's always the option they could shift this position from a passive investment, to an activist one (which would require a 13D filing).

Taken from Google Finance, Ashland Inc "is a global diversified chemical company that consists of four wholly owned divisions: Ashland Performance Materials, Ashland Distribution, Valvoline and Ashland Water Technologies."

Now, turning to Harbinger's recent performance, we see that they've had a pretty rough second half of the year. They were -12% for the month of September as of September 19th. This brings their year-to-date performance to 2%. So, the pain continues for Harbinger. I previously wrote about how many hedge funds were having a rough July. And, it looks like August and September were no different. The market has been a rollercoaster this year and I don't think anyone exemplifies this more than Harbinger. Earlier in the year, they were up as much as 42%. But, with a tumultuous turn of events, they now find themselves barely above break-even for the year. Don't get me wrong, they are still outperforming the indexes; but, it is by a much slimmer margin than it was just a few months prior. How's that for volatility?

In his letter to investors, Falcone had assured investors that they are adequately positioned to stave off any further volatility the markets may bring their way, noting that the firm had reduced exposure to some of their higher volatility holdings (both on the long and short side). Additionally, Falcone mentioned that they were not employing leverage anymore; at least as of August. His portfolio had been 52% long and 48% short. Some of Harbinger's largest positions include Calpine (CPN), Freeport McMoran (FCX), and Cleveland Cliffs (CLF). All three have seen massive sell-offs as of late, which would easily explain Harbinger's poor recent performance.

If you missed my earlier post, I've covered Harbinger's recent SEC filings here. Additionally, if you want to know about the man behind Harbinger Capital, you can read about Philip Falcone here.

Source: BBerg

Boone Pickens' BP Capital Funds Down Big

If you are unfamiliar with T. Boone Pickens, he is an energy maverick and his fund returned 300% in 2005. He is a big advocate of Peak Oil Theory and runs an energy-centric hedge fund (BP Capital) based in Dallas, Texas. His energy stock fund has a compounded annual return of 37% over seven years. Although he typically holds numerous positions in oil, he is also big on alternative energy (except ethanol) and has numerous holdings there as well. He most recently advocated a large natural gas position and has additionally made a big bet on wind energy. Some of his thoughts can be seen here from one of my posts. And, if you live under a rock, he's pushing for energy independence with his Pickens Plan.

But, it seems as if the maverick himself has had a rough last few months. We already knew that BP Capital had a rough July, where he was down almost 35%. And, it gets even worse. His hedge fund that focuses on energy stocks is down 30% through August. Additionally, his commodity fund is down 84% and is a poster child of leverage gone bad. (His commodity fund relies heavily on leverage, hence the larger losses). Ouch. All things considered, he has lost around $1 billion this year, $270 million of which is his own money.

Pickens said,

"It's my toughest run in 10 years.... We missed the turn in the market, there's nothing fun about it. I'm not willing to accept that [the downturn] was due to a global slowdown. When there's deleveraging in markets it will affect everything."

Additionally, he thinks oil prices will climb again due to oil demand outpacing supply and will maintain this view until he sees evidence of a true global slowdown. But, in a cautious move, he has shifted his portfolios to a more neutral stance. Curious as to what BP Capital had in their portfolio that was causing them so much pain? Well, then check out my analysis of their most recent portfolio holdings, found in their latest 13f filing. We'll have to see if ole Boone can turn his ship around in the next few months.

Source: WSJ

Hedge Fund Tremblant Capital Group Discloses 9% Stake in PharmaNet Development Group (PDGI) in 13G Filing

In a 13G filing with the SEC, Tremblant Capital Group on Tuesday disclosed they own 1,758,311 shares of PDGI - PharmaNet Development Group, (formerly SFBC International). This represents a 9.0% ownership stake in the company. A 13G filing indicates passive ownership. This is a brand new position, as it was nowhere to be found in their most recent 13F filing where they disclosed their complete equity portfolio holdings as of June 30th, 2008. And, if you missed it, you can check out the rest of Tremblant's holdings from that most recent 13F which I analyzed in full here.

Tremblant Capital Group is managed by Bret Barakett. If his last name sounds familiar, its because his brother, Timothy Barakett, manages fellow macro fund Atticus Capital, whom I also track. Taken from their site, Tremblant Capital Group's objective is "to achieve superior risk adjust returns for our investors through our focused and disciplined investment process." Tremblant is a $4.1 billion hedge fund based in New York and is run by Bret Barakett, who is a former portfolio manager at Moore Capital Management (the hedge fund run by the great Louis Bacon, whom I've also tracked here). So, as you can see, despite having a great mind of his own, Barakett has worked with some of the best in the macro game. And, that's why he's worth tracking. But, this year has proven difficult for Bret Barakett (and many other fund managers for that matter). As I noted in one of my hedge fund performance updates, Tremblant was down 8.96% as of the beginning of August.

Taken from Google Finance, PharmaNet Development Group Inc. (PDGI), formerly SFBC International, Inc., "is a global drug development services company providing clinical development services, including consulting, Phase I and bioequivalency clinical studies, and Phase II, III and IV clinical development programs to pharmaceutical, biotechnology, generic drug and medical device companies around the world. The Company conducts its operations in two segments: early stage and late stage clinical development."

You can view the 13G filing at the SEC.

Hedge Fund Tracking: Tudor Investment Corp's 13F Filing (Paul Tudor Jones)

(Note: Before reading this update, make sure you check out the preface to the series I'm doing on Hedge Fund 13F's here).

Time to continue the Hedge Fund tracking series! If you've missed them, I've already covered Jeffrey Gendell's Tontine Partners here, Bret Barakett's Tremblant Capital here, Peter Thiel's Clarium Capital here, Stephen Mandel's Lone Pine Capital here, Lee Ainslie's Maverick Capital here, John Griffin's Blue Ridge Capital here, Boone Pickens' BP Capital here, and Louis Bacon's Moore Capital Management here.

This week, I'm taking a slightly different approach to the hedge fund tracking series. I'm doing so because the 13F SEC filings are filed on a quarterly basis, so these materials are time sensitive and the next ones are due out in November. I stated in my series preface that you need to treat these as a lagging indicator, because that's what they are. The holdings discussed below reflect portfolio holdings as of June 30th, 2008. So, since these forms are so tedious to sort through, I've condensed the rest of the hedge funds I track to summarize their major moves and top holdings.

Additionally, the majority of the rest of the funds I follow are macro funds. And, since 13F filings only detail equity holdings, we're left with a bit of a problem. Macro funds typically employ strategies that encompass many financial markets. Be it commodities, currency, futures, foreign markets.... you name it. So, these funds are much harder to track. Since they are not required to disclose positions held in those markets, we only get to see their equity holdings. But, at the same time, I still find the information useful because many of these funds have numerous large equity positions which give you a broad sense as to what their strategies may be.

So, next up in the macro hedge fund tracking series we have Tudor Investment Corp, the brainchild of Paul Tudor Jones. Taken from Wikipedia, the bio of PTJ is as follows: "In 1980 he founded Tudor Investment Corporation which is today a leading asset management firm headquartered in Greenwich, Connecticut. The Tudor Group, which consists of Tudor Investment Corporation and its affiliates, is involved in active trading, investing and research in the global equity, venture capital, debt, currency and commodity markets. One of Jones' earliest and major successes was predicting Black Monday in 1987, tripling his money during the event due to large short positions. Jones uses a global macro strategy when trading in some of his funds. This strategy can be seen in the 1987 PBS film "TRADER: The Documentary". The film shows Mr. Jones as a young man predicting the 1987 crash. Jones' firm currently manages$17.7 billion (as of June 1, 2007). Their investment capabilities are broad and diverse, including global macro trading, fundamental equity investing in the U.S. and Europe, emerging markets, venture capital, commodities, event driven strategies and technical trading systems." So, as you can see, PTJ is quite an accomplished gentleman, earning him the title of THE macro trader.

(If you want to hear some insightful thoughts from Paul Tudor Jones himself, head over to my post on Hedge Fund manager interviews. Also, you can check out some additional thoughts from Paul here.)

So, now that we've got a background on Jones and Tudor Investment Corp, let's take a quick look at his portfolio highlights. Keep in mind that this is merely a brief summary of Tudor's top holdings. Due to the time sensitive nature of the 13F material, I wanted to get this information posted before the next set of filings come out in November.

Top 20 Holdings by % of portfolio
1. Plains Exploration and Production (PXP) - Added to his position by $160 million
2. Anadarko Petroleum (APC) - Nearly doubled his stake
3. Mirant (MIR) - Increased position by 21%
4. Elan (ELN) - Decreased position by 22%
5. SPDR Trust (SPY) - New position
6. Entergy (ETR) - New position
7. Occidental Petroleum (OXY) - New position
8. NRG Energy (NRG) - Added to his position very slightly
9. Alcoa (AA) - Increased stake by nearly 33%
10. Mastercard (MA) - Increased stake by 12%
11. Wellpoint (WLP) - New position
12. Williams Companies (WMB) - Decreased position by 34%
13. Qualcomm (QCOM) - Decreased position by 30%
14. DirecTV (DTV) - Literally added only 3 more shares
15. Marvell Technology (MRVL) - Increased stake by 3.6%
16. Allegheny Energy (AYE) - Decreased stake by 26%
17. Fidelity Information Services (FIS) - Increased position by 76%
18. Verisign (VRSN) - Increased stake by 49%
19. CSX Corp (CSX) - Decreased stake by 18.6%
20. Heinz (HNZ) - Decreased position by 20.7%

At the time of the filing, Tudor Investment Corp's total equity portfolio totalled around $5.7 billion. So, I just want to re-emphasize that since they are a macro fund, they obviously have additional positions in the commodity, currency, futures, or other markets. But, at the same time, they still have a sizable chunk of money in the equity markets.

Paul Tudor Jones was out adding brand new positions to his portfolio in a big way. He established new positions in: The Spiders (SPY), Entergy (ETR), Occidental (OXY), and Wellpoint (WLP). Not only did he start new positions in these names, but he brought them all up to top 10 holdings within one quarter. I want to highlight his stakes in Entergy and Occidental, as they are both energy related. I'm slowly but surely starting to see ETR pop up in numerous hedge fund portfolios, so it's definitely worth keeping any eye on. These funds could be establishing this as one of their ways to play the nuclear energy space, as the alternative energy train picks up steam. We'll see if he adds to this position in the next round of 13F filings. At the time of filing, his stake in ETR was worth a bit over $201 million. Secondly, Occidental (OXY) is another 'hedge fund favorite' energy play. This integrated energy producer has definitely been firing on all cylinders fundamentally. But, with the recent volatility in the commodities markets, one would have to assume that PTJ has felt some pain with this position. He had this position as of June 30th (the time of the filing), and around then OXY was trading around $87.50. In the coming months, OXY would drop to as low as $65, before rebounding to current levels of around $80. So, we'll wait and see next time if he bailed ship or if he stuck with this name. At the time of filing, his position in OXY was worth $181 million. If I were to bet, I would say that he did not add to this position, because one of his rules is never to average down on a loser.

Interesting to see that Paul Tudor Jones decreased his position in Qualcomm (QCOM) by 30%. QCOM is by far one of the most common names in hedge fund portfolios these days. So, whether he was taking profits or saw something he fundamentally disliked remains to be seen. We'll have to monitor this next quarter to see if he continues to sell down his position. It's always interesting to see how various funds handle a position they have in common with numerous other well-respected funds. Tudor's decision to sell off 30% comes while fellow global macro manager and friend Louis Bacon was adding to his QCOM position, as I wrote about in Moore Capital Management's 13F analysis.

I also want to point out his decision to add to his Verisign (VRSN) position. He upped his stake by nearly 50%, bringing it up to his 18th largest position. I haven't seen this name pop up in too many funds' portfolios, so I was intrigued to see him beef up his stake pretty substantially.

Lastly, just wanted to point out that, like his colleague Bacon, Tudor had pretty significant exposure to natural gas. In fact, Tudor's top 2 positions were both natural gas plays: PXP and APC. So, those positions undoubtedly forced him to make some decisions as they tanked over the past few months. It will be interesting to see how this potentially affected him, because his fund was up 3% year to date as of just a few weeks ago, as I wrote about in my hedge funds year-to-date performance update.

So, while last quarter's glimpse inside Tudor's portfolio is interesting, it will be much more interesting to see what they've done with these holdings come November. We already knew hedge funds (and macro funds in particular) had a rough July, as I noted here. And, it's easy to see why, with the heavy commodity exposure many of them had. But, as of a few weeks ago, Tudor was still up on the year, in a year when many funds are seeing red from all the whipsawing.

Tudor Investment Corp's full 13F filing listing every position can be found at the SEC.

Potash (POT) Poised to Benefit Should Hedge Fund Worries Subside

If you want to understand why Potash (POT) has been such a solid performer over the past year or so, all you have to do is look at simple supply and demand. And, Potash (POT) has done just that in their Market Analysis Report released on August 29th, 2008. They've assembled a slideshow of charts that illustrate the very pricing power they are seeing in their industry. Demand is rising and supply is falling. This industry is easily one of the strongest groups fundamentally right now because of secular trends. But, due to hedge fund redemptions/liquidations and the commodity sell-off, this name has been inexplicably sold off along with any and all energy or commodity related names. In a market where logic and fundamentals have been thrown out the window, it may be best to stand aside and let the chaos pass. But, when/if/should normalcy return to the financial markets, POT is poised to benefit simply because they actually have a strong fundamental story behind them.

Such strong fundamentals have been illustrated with charts extracted from Potash's latest Market Analysis Report:

Firstly, we see Global Grain production and fertilizer use increasing.

(click to enlarge)

Secondly, we see worldwide fertilizer demand growth: "Recognizing that without sufficient potash they cannot raise their yields – no matter how much N and P they apply – farmers have raised their potash consumption an average 5.6% per year for the past five years. This compares to 2.7% for N fertilizer and 3.8% for P. Over the past five-year period cumulative world fertilizer growth has been greater than adding a market the size of the US or India, the second and third largest fertilizer markets."

(click to enlarge)

Thirdly, we see that potash ending inventory has decreased each year for the past 3 years.

(click to enlarge)

Additionally, commentary from their Market Report reads,

"Potash is used on a diverse group of agricultural commodities. Wheat, rice, corn, soybeans and sugar cane consume roughly 50% of the world’s potash. This diversity means that global potash demand is not highly dependent on the market fundamentals for any single crop or growing region. US use of corn for ethanol has grown in recent years but this segment of market accounts for only 2% of world potash consumption. The global potash industry is operating at historically high rates to meet the significant growth in potash demand. With the industry running at or near full capability, world production in 2008 is expected to be limited to an increase of only 2.0-2.5%. This (production) is well below the 5.6% demand growth rate of the past 5 years."

So, simply put, fertilizer demand is outpacing supply.

In addition to the supply/demand equation tilting in Potash's favor, they are also seeing more favorable input costs. Natural Gas is one of the main agricultural input costs. And, as you've witnessed this summer, prices of natural gas have fallen hard 40%. So, this can only further POT's bottom line. And, if for some reason you still need further reassurance that the agriculture boom is still in play, just turn to analyst comments from Morgan Stanley. They say that the selloff in these names is "unfounded" and that they expect peak earnings around 2011. They rate Potash (POT) "Overweight" with a $297 price target (POT is trading around $180 now).

Additionally, as NotableCalls mentions (re: Morgan Stanley analyst comments),

"Fertilizer prices will stay higher for longer: i) A global economic slowdown is unlikely to affect fertilizer demand; ii) US farmers are still earning a ~60% ROIC on fertilizer purchases and are thus unlikely to reduce fertilizer application; iii) Emerging market farmers are very low on the yield response curve (i.e., increased application pays for itself); iv) NPK prices have yet to catch up to commodity prices (i.e., record US farmer profits despite higher NPK prices); and v) They believe capacity increases will simply meet underlying demand rather than flood the market and force lower prices. Valuation extremely compelling: 2009e EV/EBITDA of 2-5x; FCF yields of 10% to 20%. Minimal balance sheet leverage (in some cases none) should allow for substantial share repurchases and dividend payments. POT has the most leverage to potash, the nutrient with the greatest pricing power and barriers to entry."

So, the real dilemma here is trying to decide whether to enter POT at these levels given the market uncertainty. Hedge funds closing their doors like the Ospraie Fund are forced to sell their positions. And, if they are heavily invested in fertilizer/energy/commodity names (as many of them are), you can guess what that means for the stocks. Given the fact that we have seen numerous commodities and macro hedge funds negatively affected by the commodities sell-off, one would have to think that further hedge fund redemptions or liquidations are in store, as I wrote about here. Additionally, Nouriel Roubini seems to think the next step of the crisis will be the de-leveraging of hedge funds. But, it would still be hard to envision a commodities selloff as great in magnitude as the one we recently saw, given the already vast depreciation in equity prices.

Trading at just an 8.37 forward PE, POT is very compelling here. The bulk of the gains come from solid operating margins of 41.29% and return on equity of 37%. They are seeing year over year quarterly revenue growth of 102.30% and year over year quarterly earnings growth of 216.80%, both massive figures to say the least. The only major negatives would be their $2.27 billion in debt, compared to $269 million in cash. But, one could easily argue that since POT is essentially printing cash with their business, that their debt is not worrisome at all. In the end, their debt/equity ratio comes in at around 0.34. Lastly, we see that around 77% of shares are held by institutions. And, among those institutions are numerous hedge funds we track here at Market Folly. Firstly, $10 billion global macro hedge fund Moore Capital Management (ran by Louis Bacon) owns POT, as we noted in our recent hedge fund tracking piece. Additionally, POT is owned by $10 billion Maverick Capital (ran by Lee Ainslie), whose portfolio holdings we analyzed here. And, last, but not least, we also noted that George Soros had been purchasing Potash (POT). Now, I don't believe these funds are in jeopardy of massive hedge fund redemptions/liquidations as I referenced earlier. But, at the same time, anything can happen these days and there are undoubtedly numerous highly leveraged funds out there waiting to explode/de-leverage.

So, we really are at a crossroads here. On one hand, the fundamentals are screaming "buy," as the supply and demand picture only gets further squeezed, since new potash cannot be brought online for years. But, at the same time, you run the inherent risk of POT being sold off ridiculously hard again should a bunch of hedge funds face redemptions or liquidations as many are forecasting. So, the inherent risk here is not company specific, nor sector specific, but rather financial market specific. The fundamentals are in-tact and that's all that matters. But, with some hedge funds teetering on edge, things can swing either way. Value investors and deep fundamentalists will tell you that even if you have to go down through a valley before getting to the mountain top, it's still worth going through for the opportunity. But, given the recent market volatility and unpredictability, exercising some caution can never be a bad thing. If the saying holds true that fundamentals trump all, then buying POT now could payoff large come 2010 and 2011. This must be what it feels like to be a value investor, huh?

Sources: NotableCalls & Potash Market Analysis Report

Nouriel Roubini Thinks Run on Hedge Funds is Next Step

Nouriel Roubini this weekend talked about the next step of the crisis:

"The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years."

Source: FT

Eric Bolling's Latest Thoughts

I know a lot of people out there are fans of Eric Bolling. Hell, I'll admit that I was/am too. After all, he was the only reason I used to watch CNBC's Fast Money. In any event, I like to check in to see what he's up to and what his market commentary is whenever I can.

His positions at the time of writing his latest articles were: Goldman Sachs (GS), Chesapeake (CHK), dollar index, Gold, Toll Brothers (TOL), Hovnanian (HOV), CME (CME), Exxon Mobil (XOM), Devon (DVN), and Chevron (CVX). And, he said he is also waiting patiently for an entry to Natural Gas futures. I, on the other hand, apparently was not so patient (seeing how my limit order triggered and I bought UNG last week on the test of support, which I illustrated here). So, with that in mind, I figured I'd link up his most recent piece over at TheStreet.com here. Oh, and if you've got no idea who I'm talking about, read about Eric Bolling here.

Hedge Fund Industry: Linkfest

Here are a few articles detailing activity swirling around the Hedge Fund Industry at the moment.

A Dark Mood Among Hedge Funds in London [NYTimes]

SEC May Require Hedge Funds to Reveal Short Positions [Bloomberg]

Regulators Try to Change Rules to Match the Need [NYTimes]

Hedge Funds May Fund New Disclosure Rules Unpalatable [NYTimes Dealbook]

Hedge Fund Equity Exposure (Long/Short) [The Big Picture]

Financial Losses Illustrated

Cool graphic showing who has lost the most in this financial mess: NYTimes

Nasdaq 1999 Versus Shanghai 2007

Chris Perruna has a great chart up that I wanted to share, comparing the Nasdaq bubble of 1997-2002 to the current China bubble from 2004-2008. Eerily similar charts. But, that's what happens when you've got a bubble.

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Source: Chris Perruna

Market Update

Wanted to take a second to post up a few things I'm seeing in the market and around the financial blogosphere. Firstly, Apple (AAPL) has reached its second major level of $120. Earlier, I wrote about AAPL at a critical juncture when it was trading $150. If you caught the break to the downside, you made a quick and easy 30 points. Now, I want to put it on your radar screens again as it has reached an even more important support level of $120. You can buy the dip and stop out below the lows of $115, or whatever your rules say about placing stops. The market is extremely oversold and the fear indicators are starting to head higher. But, that's not to say we can't go even lower. I'd say try to play AAPL from the long side here. But, if it takes out your stop, swing it to the shortside because AAPL will have violated a major support level. The technicals are really your only guide to the market right now as fundamentals and logic have been thrown out the window a long time ago.

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Secondly, I want to again highlight the great work my man Stewie is doing over on his site. In addition to the fear indicators I wrote about yesterday, he's got an update posted today, comparing fear levels to the last bear market we saw in 2002. As you can see from the chart, tradeable bottoms have been put in when the VXO has hit 50 or so. And, as he effectively points out, the VXO can get as high as 50 on numerous occassions. So, don't necessarily expect this to be our only trip to levels this high as the credit crisis and lagging economy continue to play out. Addditionally, he points out that the 52 week low list is now extreeeemely long. Check it out.

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Thirdly, I want to point out an opportunity in Natural Gas (UNG). Commodities have been hit hard, we all know that. But, with the chart sitting where it is, I think its worth a play here because it offers some solid risk/reward and a very clearly defined stop. Plus, I still think natural gas is poised to benefit in the future as I wrote about in my piece about how to play energy for the intermediate and longer term. The Pickens Plan has been gaining ground and even if it does not succeed, it certainly has helped at least raise awareness about natural gas as an alternative. Turning to the chart (brought to my attention by Steve Puri), we see a very clear level of support at $33 in the United States Natural Gas fund (UNG). Now, in the past, I've stated that there is no such thing as a triple bottom. So, we'll see if that statement holds true as this will be the 3rd time UNG has tested support in the $33 region. The horizontal line drawn below represents your line in the sand. If it stays above the line, you get long. If it breaks the line to the downside, its time to get short. The market is crazy right now so make sure you use a tight stop whichever way you decide to play it.

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Lastly, I want to point out an excellent study by Rob Hanna over at Quantifiable Edges. Basically, he's looked at huge market selloffs/tradeable bottoms in order to identify which names typically benefit the most from the rally that results from the tradeable bottom. And, since I feel we're getting closer to that event, I thought it was relative to point out. Rob has noted that basically, the stocks/sectors that held up the most in the downturn typically do not benefit the most in the ensuing rally. His study from the January selloff/bounce indicates that names which survived the selloff such as Walmart (WMT) or Johnson and Johnson (JNJ) only rallied modestly in the ensuing bounce. But, as he points out, names/sectors that were beaten down hard such as Home Depot (HD) and General Motors (GM) rallied substantially when the time came. Now, that's not to say that the consumer staples like WMT and JNJ didn't rally as well, because they did. But, in the context of the rally, they underperformed. So, simply put, think of it as a role reversal. Once the market capitulates and then rallies, the past underperformers become the outperformers and the previous outperformers now become the laggards. Make sense? I highly recommend checking out Rob's January study here and follow up here.

Sources: Stewie, Steve Puri, & Quantifiable Edges