Two Reasons It's Time To Short Stocks

The following is a guest post by Martin Hutchinson, Contributing Editor of Money Morning.

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The stock market is up 51% from its March 9 lows. The leading economic indicators have turned sharply positive, showing gains for each of the last four months. Manufacturing is on the rebound. And banks are promising to pay record bonuses, as their earnings have rebounded.

With this recent rush of upbeat economic news, it’s no wonder commentators are trumpeting the rebound of the U.S. economy.

But I think it’s time to short U.S. stocks.

Shocked?

Don’t be.

What most experts see as a strengthening U.S. rebound, I see as an increasingly dangerous “false dawn” – for these two key reasons:

• An overly expansive monetary policy that’s almost certain to spawn inflation.
• And a record-level budget deficit that will cause interest rates to spike, crimping economic growth.

A Foundation for Trouble

U.S. policies that were intended to combat the financial crisis that broke last year – as well as the recession that’s been plaguing us since December 2007 – have actually inflicted a lot of weakness upon our economic system.

For instance, the federal government has made $11.6 trillion in financing commitments, many of which will saddle us with debt for generations – some of it forever. Outlays of that magnitude in a $14 trillion economy are bound to have lasting implications: Think of the consumer who has a series of maxxed-out credit cards – he’ll make the minimum payments, but the actual balance will never get paid down.

And the foundation for this financial fiasco was actually constructed several years ago.

After the bursting of the 1996-2000 “dot-com” bubble, the U.S. Federal Reserve re-inflated the money supply. That caused stocks to resume their upward march, and as we now know, also inflated a housing bubble of such enormous size that it caused a general financial-system crash when that real estate bubble burst in 2007-08.

This time around, the Fed has been even more expansive. The benchmark Federal Funds Rate was 1.0% in 2002-04. This time it is 0.25%. What’s more, this time around we’ve had a $2 trillion expansion of the Fed balance sheet, a doubling of the monetary base and $300 billion worth of direct central bank purchases of government debt. Given this orgy of Fed expansionism, it’s likely that the onset of inflation – whether it’s in consumer prices or asset prices – will be correspondingly worse. In fact, we’re already seeing that gold prices are once again making a run at their all-time high. And crude oil hovers at about $70 per barrel, a level that would have been unimaginable before 2004.

Now that he’s been nominated for reappointment, U.S. Federal Reserve Chairman Ben S. Bernanke says he will tighten monetary policy in good time. But why should we believe him? If he tries to tighten significantly, he will incur the wrath of the Obama administration and the Democrats in Congress.

Even back during the 2001-04 time frame – when there was an administration in place that claimed to believe in monetary stringency – the Fed didn’t tighten. Bernanke himself was among the most aggressive opponents of tightening. Back in 2002, in fact, when inflation was running at a perfectly respectable 2%, Bernanke actually spun myths about the imminent onset of “deflation.”

Given what we know, it seems that if the current economic bounce shows even the slightest signs of faltering, Bernanke won’t tighten – he’ll pump even more money into the U.S. financial system. Rest assured that the administration, Congress, and much of the media will be cheering his move.

Borrow Now, Hurt Later

If an overly expansive monetary policy was the only problem we faced, it might not be so bad. Unfortunately, there’s more.

Lots more.

Unlike in 2002 – in fact, unlike any other time in U.S. history – this country now has a budget deficit in excess of 10% of gross domestic product (GDP). For fiscal 2009, that was forgivable: We’ve had a major recession, and a shattering financial crisis, which the federal government has tried to battle with aggressive bailout programs.

Here’s the problem, however: The projected deficit remains above 10% of GDP for fiscal 2010, even though no additional bailouts are contemplated and the Obama administration is projecting a modest-but-steady economic recovery.

The result is harder to predict – this country hasn’t travelled down this particular path before. This strategy bears some resemblance to the position Japan found itself in during its so-called “Lost Decade” of the 1990s. But even Japan’s deficit never reached this 10% threshold.

In Japan, the effect seems to have been the gradual abandonment of small business finance, and the resulting starvation of the most critical factor in economic growth – entrepreneurship.

The small-business sector creates most of the new jobs in the U.S. economy. But in a challenging environment, it’s easy to see why this sector gets overlooked. Without political connections or large contracts to hand out, the small-business sector ends up being last in line in the financing queue when the economy faces strong headwinds. Why should banks or other people lend to small businesses when the U.S. government bond market stands as such as huge, safe parking place for their cash?

Interest rates will also become an issue. With the inflationary pressures we expect to see from the overly expansive monetary policy we’ve described, long-term interest rates are likely going to rise anyway. As was the case in Japan’s decade-long malaise, these forces will combine to spark high default rates in the banking system, low or zero economic growth, and a general downward trend in the stock market.

All of this will make it tough for small businesses to obtain the cash they need to grow, meaning this key job-creation engine will have to sputter along.

It’s still early in the game, and there are many factors to consider, so the future economic picture remains a bit murky right now. But my guess is that the bubble in asset prices will be largely confined to commodities, that economic growth after this current initial burst will relapse, and that U.S. stocks will prove to be the same generally unattractive investment that they were in 1970s – the era of the so-called “Nifty Fifty.” If the stock market bubble gets even more exuberant from here, the relapse will be correspondingly more painful.

Profitable Pockets

Despite this dour backdrop, three things are worth remembering:

• First, all U.S. stocks are not created equal. Although I’m saying it’s time to short U.S. stocks, and I see tough times ahead for the key indices, there will always be individual stocks worth consideration, such as the “Alpha Bulldog” stocks I highlight in the Permanent Wealth Investor service.
• Second, the best way to play this looming downdraft – either as a direct profit opportunity or as a way of hedging your current portfolio – is through the use of what I like to call “Stage 3″ investments. An example of one such investment is long-dated “put” options on the Standard & Poor’s 500 Index, which trade on the Chicago Board Options Exchange. If you buy these options when they are way “out of the money” with a strike price far below the current price, in a real bear market (like that of 2007-09), you will see them really zoom up in value as the S&P drops down closer to the strike price, or possibly even falls below it.
• And third, understand that my pessimism about the U.S. market doesn’t apply to every other market around the world. While the monetary problems are more or less global, the budget-deficit problems are not. For instance, you might want to consider investments in Japan, where a recent election should spawn the kind of economic changes that will benefit savvy investors. Germany, too, looks to have avoided the contagion of “stimulitus,” which is why its economy is now viewed as one of the healthiest in Europe. Consider the iShares exchange-traded fund (ETF) entry for each of those two markets: The iShares MSCI Japan Index Fund (NYSE: EWJ) and the iShares MSCI Germany Index Fund (NYSE: EWG). They each warrant a look.

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The above was a guest post by Martin Hutchinson, Contributing Editor of Money Morning.

Jeffrey Saut Investment Strategy (Raymond James) - 9/28/09

It's been a long while since we last covered the investment strategy of Jeffrey Saut from Raymond James and we thought we'd pick it up again. Here is his latest piece just released yesterday entitled, 'Zebras!?' While the title is a bit strange, it makes sense once you read his piece where he likens portfolio managers to Zebras just waiting to be eaten by the Lions. Saut is Raymond James' chief investment strategist and managing director.

Embedded below is his weekly note.




Additionally, you can download the .pdf here.

Crude Oil Breaks Trendline (Technical Analysis)

We haven't looked at crude oil in a while from a technical perspective so we figured it'd be worth a look as the guys at MarketClub analyze it in this crude oil video. They highlight a trendline in crude from the lows in March until September. They note a trend break here just recently which signals crude could trade lower in the near-term.

They also pull up a fibonacci retracement on crude oil from the lows of March until the highs in August and notice that the 50% retracement could be a pivot point for crude as it has already acted as support for the commodity once before back in July. Check out their analysis here. And if you're unfamiliar with fibonacci, learn about it in this video as it's a useful technical analysis tool).

Hedge Fund News Summary: September Edition

Welcome to the latest iteration of our hedge fund and market guru news summary. We've made habit of compiling odds and ends in hedge fund land as of late in order to present them in easy to digest quick hits. You can check out our August hedge fund news here as well as our July update here. Moving on now to September, we see some interesting bits presented below.

Hedge funds: In general, we saw about $19 billion flow into hedge funds for the month of August. This is an increase of 2.56% as total hedge fund assets are now around $1.89 trillion. Also, according to hedge fund research, the number of liquidations declined in the second quarter, as only 292 funds closed (a decrease of 22%). It is cited that strong performance is a main contributor to this number dropping, which obviously makes sense. However, as evidenced with some other news items below, some funds are still having problems with redemptions. Some of the most notable closures include William von Mueffling's Cantillon Capital who will be converting to a long-only shop, Satellite Asset Management, as well as Art Samberg's Pequot Capital, all of whom we've covered on the blog before. Yet some of the major names have been receiving inflows including Steven Cohen's SAC Capital, Och-Ziff Capital Management, and Louis Bacon's Moore Capital Management. We also got word that Paul Tudor Jones' hedge fund Tudor Investment Corp has paid off some of its redeeming investors after suspending redemptions last year when they split the fund into two, to separate the illiquid assets. However, they still have more redemptions to meet. Lastly on the hedge fund news-front in terms of regulation, we see that the SEC will urge more public disclosure if Congress can push through plans to make sure all register with the regulatory body.

Peter Thiel's Clarium Capital: Tough times continue at this global macro hedge fund as we see they were down 8% for the month of September as of the first two weeks. Year to date as of that timeframe, Clarium has lost 15.6%. They recently cut leverage down from 4.2 : 1 to 1.4 : 1. We recently presented their August market commentary entitled, 'Save Now, Invest Later.' In that article we noted the continuing theme we see with Clarium: lack of performance. They have great research and seemingly interesting ideas, but they don't translate well into trading strategies. Their assets under management, which previously topped $6 billion, are now well below $2 billion. However, Clarium is still up 270% since inception. We'll continue to watch the developments with interest.

Goldman Sachs: They were out a bit ago with a report on possible strategies being used by hedge funds in this current market landscape. The report was dubbed 'best current long & short strategies' as they proposed shorting REIT equities, shorting the Japanese Yen, and shorting the crack spread amongst other ideas. We covered the entire set of strategies in our post on possible long & short strategies.

Sticking with Goldman for a second, they also released their hedge fund trend monitor report which examines the same thing we do here at Market Folly: hedge fund portfolios. They took a gander across hedge fund land and presented the most widely held stocks amongst hedge funds. A lot of the typical names like Apple (AAPL), Wyeth (WYE), Qualcomm (QCOM) appeared, but you'll be surprised at some of the other names that made the list. They also highlight the massive flux of hedge funds into financials over the second quarter, particularly into Bank of America (BAC).

Endowments: Big name endowments had a rough year as both Harvard and Yale reported losses over the past fiscal year. Harvard cited private equity and hedge fund problems as they lost 27.3% and now manage $26 billion. Yale lost almost 30% and now manages around $16 billion, as they were still finishing their tally. Harvard's decline is the biggest in 40 years and manager Jane Mendillo plans to use less outside managers and instead run more money internally. Matching up to their benchmarks, Harvard did well with their equity and real estate assets as those beat their benchmark. However, their allocations to private equity and hedge funds underperformed benchmarks significantly. University of Pennsylvania's endowment was down less than Harvard and Yale, but still lost 15.7%. While they have struggled like the majority of the market, endowments seemed to have outperformed over the long haul. As a primer on endowment investing, we highly recommend Mebane Faber's book, The Ivy Portfolio if you haven't yet checked it out.

Oaktree Capital Management: One of the widely monitored distressed debt firms out there previously sent out an investor letter in which they detailed their fondness for senior loans. Here is the letter embedded below:




Carl Icahn: We haven't covered him as much lately due to the influx of other activity we've seen so here's a good chance to take a brief look at recent moves. We see that Icahn has sold 12.7 million shares of Yahoo (YHOO) in the last few days of August and his ownership stake now sits at 4.5%. He sold the shares at prices of $14.74 and $14.93 and he originally bought his YHOO stake at around $25 per share. Icahn cited the sales as 'portfolio rebalancing' in terms of his technology holdings. He has also said that he remains optimistic about his YHOO position due to the Microsoft partnership and the managerial guidance of Ms. Bartz. For our previous coverage of Mr. Icahn, we've noted his purchase of Tropicana casino.

Third Avenue: Marty Whitman's firm is shifting its focus partially to the distressed arena as they look to open a Focused Credit Fund. The fund will focus on credit, as well as distressed and value equity investing and will be run by Jeff Gary (former head of high-yield and distressed investments at BlackRock). Additionally, we've embedded below Third Avenue's latest shareholder letter where Whitman addresses market outlook, lessons learned, as well as the best places to invest in 2009. Here is Third Avenue's latest letter:




Alternatively, you can download the .pdf of the letter here. Hat tip to Todd Sullivan's ValuePlays.net for bringing this to our attention. Additionally, you can see Third Avenue's previous letter here.

Bill Hwang's Tiger Asia: One of the 'Tiger Cub' funds has been facing some insider trading accusations according to a Hong Kong regulator back in late August. Bill Hwang's hedge fund Tiger Asia was accused of insider trading and market manipulation as the regulators sought to freeze 29.9 million HK Dollars worth ($3.9 million) of Tiger Asia's assets. This is the amount equivalent to their gains from trading shares of China Construction Bank Corp. Apparently Tiger Asia was notified about a planned sale of Construction Bank shares by Bank of America and were told the size and discount rage of the share offering. Tiger then shorted 93 million shares of Construction Bank before this placement occurred. The courts were seeking to freeze these assets of Tiger's and we'll continue to update as court hearings dictate. While we don't track Tiger Asia in particular, we do track numerous other of these funds on the blog and you can see a 'Tiger Cub' family tree here.

Vicis Capital: Ex-Lehman trader John Succo has had it rough recently. He has halted withdrawals from his $2.9 billion fund after they received more than $540 million in redemption requests. What's shocking is that this still comes after they've already seen $2.7 billion redeemed back in the hedge fund redemption crisis. They are down 12% year to date and focus on volatility strategies.

Touradji Capital: Here's something you don't see everyday. Hedge fund Amaranth has sued Paul Touradji's hedge fund for what they claim to be 'breath of contract and misappropriation of trade secrets.' Amaranth of course blew up 3 years ago after a massive trading loss on natural gas, losing well over $6 billion. You can see Amaranth's previous investor letter on the blog as well.

Och-Ziff Capital Management: As we mentioned above, Och-Ziff has begun receiving inflows this year. This also comes on the heels of the news that the $22 billion firm has surpassed their high water mark and can now start earning their performance fee again. As of the end of August, their Master Fund was up 17.6% for the year after finishing 2008 down 15.9%. They received $200 million in inflows in August and received praise last year for not halting redemptions like many of their colleagues were forced to. Och's European fund was up 11.78% for the year as of August and their Asian fund was up 24% over the same timeframe.

Rothschild: They are planning on raising a $700 million (500 million euros) investment fund that will be run by managing director Marc-Olivier Laurent. They will seek to invest in companies valued between 100-500 million euros.

Stephen Feinberg's Cerberus Capital Management: While this is slightly older news (end of August), we never touched on it on the blog and wanted to make sure we highlighted it. Cerberus saw massive redemption requests over the past few months as over 71% of their investors in 2 of their funds wanted their money moved to a new vehicle that could liquidate hard-to-sell positions as the market moves along. It is understood that the vast majority of these requests came from fund-of-funds. Cerberus was down 24.5% last year, most notably due to its position in Chrysler as they manage almost $20 billion and focus on distressed investments. Clients who keep money with Cerberus won't have to pay performance fees until all the losses are recouped.

Julian Robertson: The Tiger Management founder and hedge fund legend was back on TV for his once-a-year marquee appearance and he was out talking about inflation and curve steepeners again. However, this time around, he has tweaked his play to focus only on long-term rates as he sees curve caps as the best way to play this. This brief paragraph is obviously too short to detail the extent of the investment and as such we've done so in an entire post on Julian Robertson's play here.



That wraps up this September edition of our hedge fund news summary. Be sure to also take a glance at our other post today on some hedge fund performance numbers too. And as always, check back daily for our hedge fund portfolio tracking series.

Hedge Fund Performance Numbers: August 2009

Pardon the tardiness of this post, but we've been so consumed by the influx of current SEC filings that we seemingly never found time to update the August 2009 performances of some prominent hedge fund players. And, seeing as how we'll be posting up the September numbers here in a few weeks time, we figured we should get an update up so we know how everyone stands. Let's get right to it:

Renaissance Technologies: Jim Simons' Rentec has had an interesting year, to say the least. As of the end of August, their RIEF had underperformed the S&P by 26%. Something is definitely off in quant-land this year and we'll see if they can somehow turn around the ship by year end. Earlier on, we posted up a rare lengthy interview with Jim Simons.

Tudor Investment Corp: Paul Tudor Jones' hedge fund was up 0.5% for August and finds themselves up 12.5% for the year as of the end of that month. Also, courtesy of the fine folks over at Dealbreaker, we see a historical spreadsheet of Tudor's returns for their main fund, BVI Global. Recently, Tudor was out saying that they thought this recent market action was nothing more than a bear market rally.

(click to enlarge)

SAC Capital: Steven Cohen's hedge fund has been doing pretty well themselves after a weak year last year. For August they were up 1.9% and for the year they were up 20.3% as of that timeframe. Again courtesy of Dealbreaker we see a spreadsheet of SAC's historical returns below. We've also got a lot of portfolio updates to cover on SAC, so stay tuned for that tomorrow.

(click to enlarge)

Glenview: They were up 7.6% for August and are up a whopping 67.6% for fiscal year-to-date 2009 as of the end of that month.

Third Point LLC: Dan Loeb's hedge fund find themselves up 6.4% for August and up 21.5% for the year as of the end of that month in their main fund. Their Ultra fund is performing the best thus far, up 25.5% for the year. For some highly interesting books, make sure you check out our recently added 'Dan Loeb's recommended reading.'

Greenlight Capital: David Einhorn's firm was up 0.8% for August and was up 24.7% year-to-date for the same timeframe. This performance has surely continued into September as their shorts in Moody's (MCO) and McGraw Hill (MHP) have paid off nicely thus far. If you missed it, we detailed Einhorn's rationale behind this short position in 'The Curse of the Triple A.' To hear more of Einhorn's investment ideas, check him (& many more hedge fund managers) out at the Value Investing Congress coming up in October. We secured a discount for readers (use code: N09MF3) and highly recommend checking it out.

That wraps up this quick catch-up edition of hedge fund performance numbers. For more on the subject, check out the best & worst performers of 2009. Additionally, for a more comprehensive look at various funds' performance breakdown reports, check out our June update. And last, but certainly not least, you can sift through Barron's Top 100 hedge funds for 2009.

Hedge Fund Sprott's September Market Commentary

Here's the latest from Eric Sprott and the camp over at hedge fund Sprott Asset Management. Their September market commentary is entitled, 'Safe Harbour No More' as they turn their focus to the US Dollar and its negative prospects. Sprott of course are big advocates of gold and precious metals as we've seen when examining their portfolios and reading their past market commentary. Eric Sprott's hedge fund firm definitely has taken a defensive posture and that sentiment continues to be echoed in the most recent edition of their market commentary.

Embedded below is Sprott's September commentary:




You can also download the .pdf here. Also, do note that you have a prime opportunity to hear Eric Sprott himself speak at the Value Investing Congress coming up this October 19th & 20th in New York City. We've secured a discount for our readers to the event (code: N09MF3) and we highly recommend taking advantage of it while it lasts. At the conference you'll hear actionable investment ideas from some of the most prominent hedge fund managers in the game.

Julian Robertson Shifts From Curve Steepeners To Curve Caps

Yesterday on CNBC, the wizard of Wall Street and hedge fund legend Julian Robertson was on what seems to be his once-a-year CNBC appearance. The Tiger Management founder talked about inflation expectations and a theoretical scenario if China and Japan stopped purchasing US bonds. He also talked about some of his investment plays which we were interested to hear about. It's tough to track him since he generally likes to keep out of public's eye, but we have a prime opportunity to hear his investment ideas through our discount to the Value Investing Congress (discount code: N09MF3). Julian will join prominent hedge fund managers David Einhorn of Greenlight Capital, Bill Ackman of Pershing Square, Joel Greenblatt of Gotham Capital and many more to present actionable investment ideas at the 2-day event. If you want to learn from some of the best in hedge fund land like Julian Robertson, this event is a must-attend.

Julian's Updated Position

As we covered a long while ago, Julian Robertson's favorite play at the time was essentially an inflationary bet as he liked curve steepeners. Since then, he says he has refined his play and has turned to the curve cap. He says, "The curve steepener was a measurement of the differential between short and long term rates and we figured short term rates would go down and long term rates would go up. We didn't do well on the long term part, but the short term part worked out so well that actually we made a little money on the trade. Short term rates are nothing, so they can't really go below nothing. We've shifted the curve steepeners, which are basically long-term puts on long-term bonds... highly leveraged and they're like puts in that you know what your risk is, it's measured by what you paid for the put. I think (long term rates) can go to 15, 20 percent." He then also went on to focus on the economy and the situation we are presently in by saying, "I really do think the recession is at least temporarily over. But we haven't addressed so many of our problems and we are borrowing so much money that we can't possibly pay it back, unless the Chinese and Japanese buy our bonds."

Curve Steepeners Versus Curve Caps

Robertson had been in various forms of a curve steepener for a few years now and it appears that he keeps adjusting and tweaking the play as the market and economy shifts. We've heard about curve steepeners, steepener swaps, and now curve caps as well. We thought it would be prudent to quickly touch on these instruments for those less familiar with them as they are in fact highly leveraged institutional play. The closest thing we can compare them to is put options on long-term interest rates.

Let's start with the main focus of the curve steepener. Taken from eFinancialNews, "Steepeners are a type of interest rate swap, where one party agrees to pay the other a fixed rate in exchange for a floating rate, which is derived from the difference between long and short term rates. Many of these products also use high leverage, where the difference between the two rates is multiplied by up to 50 times to produce a higher return." This seemed to have previously been the most commonly used play amongst hedge funds. However, as Robertson noted in his interview, this vehicle is less desirable now that short-term rates are at zero and can't really go below zero. As the market shifts, so does Robertson.

Seeing how he doesn't want to play the differential between the rates anymore, he has moved on to CMS rate caps, or curve caps. In an interview with Value Investing Insight back in their May/June 2009 edition, Julian Robertson says, "The insurance policy I would buy is called a CMS [Constant Maturity Swap] Rate Cap, which is the equivalent of buying puts on long-term Treasuries. If inflation happens the way it could, long-term Treasuries are just going to explode. Less than 30 years ago, long-term interest rates got to 20%. I can envision that seeming like a very low interest rate compared to what might occur in the future." As he says himself, the closest thing you can equate this play to is long-dated puts on long-term treasuries. However, the curve caps he is in are obviously more of an institutional play and are highly leveraged. The curve cap tries to capture the move in long-term rates whereas the steepener tries to capture a differential between short-term and long-term rates. For a more in-depth look at constant maturity swaps (CMS) we recommend reading the embedded document below from Eric Benhamou, a former Senior Quantitative Analyst for Goldman Sachs.

Swaps Cms Cmt


You can also download the .pdf here.

Placing the Bet

For the sake of 'looking out for the little guy,' we also wanted to briefly show how a retail investor can play it. This is by no means an identical way, but it's really as close as you can get as a retail player. We of course must preface this by saying to do so at your own risk because this is a slightly riskier and more speculative play that involves leverage (stock options) and falls outside the normal realm of just stocks and bonds. To replicate his play, one can buy puts on long-term treasury exchange traded funds (ETFs). The main vehicles in this realm are the iShares Barclays 20+ Yr Treasury (TLT) for the 20 year bonds, the iShares Barclays 10-20 Yr Treasury Bond (TLH) for the 10-20 year spectrum, or the iShares Barclays 7-10 year Treasury (IEF) for the 10 year bonds. So, which bond you play is up to your discretion. For the purpose of our example, we'll use the 20+ year treasury, TLT.

To execute the play, you then have to buy puts on the exchange traded fund. The key here is to buy long-dated puts, or options that won't hit expiration for quite some time, in order to most accurately replicate Julian's play. By using options, there are both risks and benefits involved. Firstly, there is the risk of leverage as each put is representative of 100 underlying shares of TLT. Secondly, since you would be using options, you have to be wary of time decay, as this works against you with each day that passes. However, the good thing about using puts is you can limit your downside risk. The absolute most you can lose on the trade is the value of the put you purchase. This is in contrast to a short common stock position where you can technically lose an infinite amount.

Having identified the risks, we'll look at the options table courtesy of Yahoo Finance. The option you select is up to you, but the absolute minimum we'd consider using would be options 6 months out. To best replicate the play, you'd want to use puts that are 1 year or even 2 years away. Just for fun, we've pulled up a list of the put options that expire in January 2011:

(click to enlarge)

We also want to mention that when looking at the puts you have to be wary of premium as some investors have already piled into various strike prices and expirations over the course of the past year. Not to mention, many investors are not fond of using LEAPs (long-dated puts) for various reasons, but if you want to make this play you don't have much of a choice. That's a whole 'nother debate but we just wanted everyone to be aware. You could always just sell short the ETF outright instead of using options, but there are pros and cons to doing that too. For the purpose of this article, we're focused on how best to replicate Julian's play in the retail arena, where options are a better representation than the shares themselves.

We also wanted to toss out another idea by playing the exchange traded fund: ProShares Short 20+ Year Treasury (TBF). Instead of buying puts on this ETF, you would be buying calls on it since the ETF itself is already short the long-term bonds. This is not a leveraged ETF so you don't have to worry about extreme compounding skews from the underlying index. However, do note that it still seeks to replicate the daily performance of its index so there is still potential for slight tracking error. So you can really play it two different ways in the options markets, dependent on which ETF you select. Last but not least, we want to make sure you know that this is not investment advice and make note of the disclaimer at the bottom of our site.

Interview

Embedded below is the interesting 30 minute interview with Julian Robertson:




Other Hedge Fund Legends Bearish On Long-Term Bonds

So he clearly is still fixated on the long-term bond portion of the play where he thinks rates are headed much higher due to quantitative easing and the printing of money by Helicopter Ben & the Federal Reserve, amongst other factors. There have been many hedge funds in some form of this trade as we also detailed John Burbank & Passport Capital's curve steepener play. Robertson sees rates potentially skyrocketing in an 'armageddon' scenario where China and Japan cease buying US bonds. Other hedge fund legends bearish on these bonds include Michael Steinhardt, who has labeled treasuries a foolish play. Steinhardt ran one of the first successful hedge funds (Steinhardt Management) and earned 23% a year for almost 30 years. We've also seen ex-Quantum fund manager Jim Rogers speak out against long-term treasuries as he has been short them in the past. There is definitely a confluence of smart minds here as they share similar sentiment.

We track Julian because he is a hedge fund legend in his own right for his work with Tiger Management. Not to mention, he has spawned a huge network of 'Tiger Cub' hedge fund managers that have gone on to start their own funds, many of whom we also track. (You can see a 'Tiger Cub' family tree here). Last, but not least, Robertson also called the downturn back in 2007 as he proclaimed we would be in for a doozy of a recession. He has built up quite the track record and so is at the very least worth paying attention to. It has been reported that his investors received a compound rate of return of 32% during the 1980s and 90s.

Outside of his curve caps play, he did mention a few other plays he was considering. While he hasn't put it on yet, he is considering shorting copper. This play is interesting because 'Tiger Cub' Paul Touradji of hedge fund Touradji Capital had previously advocated shorting copper. During a previous hedge fund manager panel, Touradji advocated shorting copper as the world deleveraged and the velocity of money dropped. Robertson had already shorted copper last year unsuccessfully, but got out of the trade. As we've noted on the blog before, many of the Tiger Cubs end up putting on the same positions and undoubtedly still keep in contact with each other. In terms of currencies, Robertson says the only currency worth being in is the Norwegian krone. And lastly, in terms of equities, he said he is still in Mastercard (MA), Visa (V), and Apple (AAPL) but is not as enthusiastic about being long stocks as he is about being short bonds. Those stocks are the ones he suggested buying in his last media appearance on CNBC almost a year ago and he is up substantially in those investments. He had also recommended Baidu (BIDU) back then, but has since sold out of it.

As always, we'll continue to keep track of Robertson's scarce media appearances. In the mean time though, we highly recommend hearing Julian speak through our discount to the Value Investing Congress where he and numerous other prominent hedge fund managers will present actionable investment ideas. Make sure to use code: N09MF3 to receive the discount. If you're unfamiliar with Robertson, you can always check out our profile/biography on him here.

For more on 'smart money' investment plays, check out Goldman Sachs' list of possible long & short strategies in the current market, as well as their hedge fund trend monitor that lays out hedge fund portfolio holdings. We'll of course continue to track all the latest positions and strategies that prominent hedge funds are pursuing.

Hedge Fund Compliance & Regulation Podcast

Hedge fund compliance is a growing topic these days and we've stumbled upon an interesting informational podcast for those interested. Kelly Moll, a partner at Schulte, Roth and Zabel, specializes in advising on registration and compliance issues. She has teamed up with IntraLinks to create a podcast series on the subject. Their first installment just became available and we've embedded the transcript below. The first episode is entitled, "What you need to know about U.S. and EU proposed legislation: New regulation requirements and assessing systemic risk."

Given all the recent scandals and ponzi schemes, further hedge fund regulation seems inevitable. Various proposals in both the United States and European Union address various requirements for fund manager communication to regulators, counterparties, and investors. Establishing transparency between hedge funds and their investors is key given that trust is essential in this relationship now more than ever due to all the fraudulent schemes that have surfaced. The podcast below helps to breakdown the proposed regulations and how a hedge fund firm can prepare for these possible new requirements.




You can listen to the podcast here or download the .pdf transcript here.

What We're Reading 9/25/09

10 Free trading lessons [MarketClub]

Why I am short the ratings agencies [Aiki14 - Stocktwits]

Medal of Honor For Excellent Service to top analyst Josh Rosner for nailing the crisis [Wall St Cheat Sheet]

Interview with hedge fund manager Peter Lupoff [Distressed Debt Investing]

Check out Todd Sullivan's new ValuePlays.net, now part of Stocktwits [ValuePlays]

Warren Buffett's desert island indicator - rail car data [The Manual of Ideas]

Speaking of which - The decline in US railroad carloading accelerates [My Investing Notebook]

Brief look at putting on a synthetic short position [Daily Options Report]

Role of Eton Park's Eric Mindich as chair of The Asset Managers' Committee Of The President's Working Group? [zero hedge]

Deja vu all over again; stocks already overvalued? [Business Insider]

A look at starting a hedge fund in these interesting times [The Globe and Mail]

Hedge Fund Harbinger Capital Portfolio Update: Selling Large Chunk of Calpine (CPN) & Other Moves

If you're getting tired of reading about Philip Falcone's hedge fund Harbinger Capital Partners, we don't blame you. It's just that they've adjusted their portfolio so much recently that we've got a never ending flow of SEC filings. Earlier this morning we noted that one of their holdings, SkyTerra, was going private in a transaction that involved Harbinger in a new entity. Then earlier this week we also noted that they were selling shares of The New York Times (NYT) and Leap Wireless (LEAP). This time around, we're covering their activity in Calpine (CPN) and Complete Production Services (CPX).

Firstly, we see some big news that Harbinger is putting a chunk of their Calpine (CPN) stock up for sale. While Harbinger has been a believer in Calpine's business model, there apparently have been some clashes ever since Philip Falcone picked up shares of CPN when it emerged from Chapter 11 bankruptcy. Apparently Falcone was upset firstly that they shunned an $11 billion takeover from NRG Energy (NRG) and secondly that Calpine was searching for a CEO, something he felt would hinder a deal. According to an amended 13D filing with the SEC, Philip Falcone's hedge fund now shows a 19.7% ownership stake in CPN with 86,980,047 shares. The filing was made due to activity on September 22nd, 2009.

Their transactions in CPN are a bit more complex so let's break it down really quick. On July 29th, 2009 Harbinger received 2,784,430 shares due to various claims within the reorganization of the Issuer and related debtors. Of those shares, 2,120,959 went to their Master Fund and 663,471 went to their Special Situations Fund. In addition to this transaction, Harbinger bought 328,046 shares in their Master Fund spread out on August 14th and August 20th at prices of $12.52, $11.98, and $12.26. However, their Special Situations Fund has been selling shares as they dumped 2,672,426 shares between July 9th and 13th at prices ranging from $10.31 to $10.58. Also, they have just recently sold another 965,800 shares in the Special Situations Fund at a price of $12.66. If you net out all of these transactions from July until present, Harbinger as a whole has sold 625,750 shares.

Most importantly and in addition to the above transactions, here are the details regarding the portion of its stake that Harbinger has put up for sale, as taken directly from the SEC filing, "On September 22, 2009, the Issuer, the Master Fund and the Special Fund entered into an underwriting agreement with Morgan Stanley & Co. Incorporated, as underwriter. Pursuant to the underwriting agreement, the Master Fund agreed to sell, and the underwriter agreed to purchase, 13,333,334 shares, and the Special Fund agreed to sell, and the underwriter agreed to purchase, 6,666,666 shares in each case at a price of $11.40 per share. In addition, the Master Fund granted the underwriter a 30-day option to purchase up to 2,000,000 additional shares and the special fund granted the underwriter a 30-day option to purchase up to 1,000,000 additional shares. The public offering contemplated by the underwriting agreement has been registered under the Securities Act of 1933 and will be completed on or about September 28, 2009." Harbinger has been selling shares of CPN in the past and obviously that trend continues as they now sell a large chunk of shares. We'll post up and further updates as we receive them in this regard.

Secondly, Philip Falcone's hedge fund has also filed a 13G on Complete Production Services (CPX). In the filing, we see that Harbinger holds a 5.6% ownership stake with 4,301,200 shares due to activity on September 21st, 2009. This is a new position for them as they did not own it in their last 13F filing that disclosed positions as of June 30th, 2009. They have since acquired their stake over the past 3 months.

We also wanted to note that they filed another amended 13D on Leap Wireless (LEAP) just days after their previous filing. In the new 13D, they disclose they have sold another 1 million shares. Their ownership stake now sits at 4.5% with 3,451,000 shares remaining due to activity on September 18th, 2009.

Lastly, Philip Falcone's hedge fund also filed another amended 13D on SkyTerra where they disclosed a a 70.7% ownership stake with 61,346,518 shares due to activity on September 22nd, 2009. But as we reported earlier this morning, SkyTerra is going private with a new entity that involves Harbinger.

That sums up the changes in this particular update but be aware they've been very active as of late and we have been covering their moves. We've noted their sales of NYT & LEAP, as well as their 13D on Spectrum Brands (SPEB). Additionally, we've covered Harbinger's long US equity portfolio in the past for those interested. If you're unfamiliar with Harbinger, they're a $6 billion hedge fund ran by Philip Falcone. While Harbinger deals in equity markets, Falcone's roots are in distressed investing and his investment style focuses on bankruptcies, proxy fights, and intensive research on credit.


Taken from Google Finance,

Calpine is "an independent wholesale power generation company engaged in the ownership and operation of natural gas-fired and geothermal power plants in North America. The Company sells wholesale power, steam, capacity, renewable energy credits and ancillary services to its customers, including industrial companies, retail power providers, utilities, municipalities, independent electric system operators, marketers and others."

Complete Production Services is "provides specialized services and products focused on helping oil and gas companies develop hydrocarbon reserves, reduce costs and enhance production. The Company focuses on basins within North America, and delivers services and products required by its customers within each specific basin. Complete operates in three business segments: completion and production services, drilling services and product sales."

Leap Wireless is "a wireless communications carrier that offers digital wireless service in the United States under the Cricket brand."

SkyTerra is "operates its business through its subsidiary, SkyTerra LP, which focuses to develop, build, and operate a next generation mobile satellite system. The Company has five subsidiaries: SkyTerra GP Inc., SkyTerra LP, SkyTerra (Canada) Inc., SkyTerra Holdings (Canada) Inc., and SkyTerra Finance Co. SkyTerra LP offers mobile satellite services using two nearly identical geostationary satellites that support the delivery of data, voice, fax, and dispatch radio services."

Harbinger's Holding SkyTerra Going Private

Taken from SkyTerra's website, we see the announcement regarding Philip Falcone's hedge fund Harbinger Capital Partners and their underlying position in the name. The statement reads, "SkyTerra (OTCBB: SKYT) today announced that it has entered into a definitive merger agreement for SkyTerra to be acquired by a new corporation formed and indirectly wholly-owned by Harbinger Capital Partners Master Fund I, Ltd and Harbinger Capital Partners Special Situations Fund, L.P. Under the terms of the agreement, the new corporation will pay $5.00 in cash per share for each of SkyTerra's outstanding shares of common stock not held by Harbinger or its affiliates. The purchase price represents a premium of approximately 56% over the average closing price of SkyTerra’s common stock for the thirty days ended September 22, 2009, the last day before the announcement of the proposed transaction. Harbinger and its affiliates together hold approximately 48% of SkyTerra's outstanding voting common stock and approximately 49% of SkyTerra's voting and non-voting common stock combined.

The transaction is the culmination of a thorough evaluation of SkyTerra's strategic alternatives by a special committee of SkyTerra's Board of Directors composed solely of independent directors. The merger agreement has been approved by the special committee as well as the full Board of Directors of SkyTerra. The transaction is subject to approval by the holders of a majority of SkyTerra's outstanding voting common stock, and to regulatory approvals, including approval of the Federal Communications Commission, and other closing conditions. It is anticipated that the transaction will be consummated in late 2009 or early 2010.

Harbinger has agreed to vote its shares in favor of the merger. Since Harbinger has approximately 48% of the voting power of SkyTerra's voting common stock, approval of the merger by stockholders is virtually assured if Harbinger so votes in favor of the merger."

Bill Ackman's Pershing Square Q2 Investor Letter

Courtesy of Dealbreaker, here's the latest from Bill Ackman's hedge fund, Pershing Square Capital Management. His second quarter correspondence is a bit tardy and he acknowledges that in the letter. Referring to their positions, Ackman discusses their stakes in Target (TGT), EMC (EMC), General Growth Properties (GGWPQ), Automatic Data Processing (ADP), and his return to shares of McDonald's (MCD). He also touches on their short exposure through credit default swaps (CDS) as well as mistakes and missed opportunities regarding their due diligence. In addition to the letter below, we want to make special note of an opportunity for you to hear Bill Ackman speak courtesy of the Value Investing Congress discount we've secured for readers. The VIC features presentations of actionable investment ideas from some of the most prominent hedge fund managers out there including Bill Ackman (Pershing Square), David Einhorn (Greenlight Capital), Julian Robertson (Tiger Management), Joel Greenblatt (Gotham Capital) and many more. In the mean time, his latest investor letter will have to suffice.

In his correspondence, we learn that Pershing's largest short position is a valuation hedge for their investment in General Growth Properties (GGWPQ) because their valuation is a large component of the equation that determines recoveries for the equity holders. Additionally, he mentions they are also short a REIT that trades at a high valuation, has weak underlying assets, and poor business prospects. Since he does not name names, you can obviously speculate as to what this short position is in.

We also see that his corresponding long position in General Growth is up substantially as the equity they owned has risen more than 12-fold since their buy at $0.34 per share and the unsecured debt they own has tripled in value over the same timeframe. They consider Simon Property Group (SPG) to be the most comparable REIT. Ackman argues that since SPG trades at a cap rate of 7% using trailing 12 month net operating income, a very similar General Growth under the same cap rate would have an enterprise value of $40 billion. This would then value shares of GGWPQ at around $40 per share.

Ackman goes on to provide updates on numerous other portfolio holdings but we'll let you read about those in the letter. One last paragraph we want to focus on is Ackman's brief mention of the risk to one's purchasing power. Due to quantitative easing and money printing by the Fed, he acknowledges that there are concerns about future buying power of the dollar. Ackman highlights that many investors have turned to gold to hedge these risks, but not Pershing Square. Instead, they have decided to fight this risk by owning "high quality businesses that have pricing power due to market position and/or business model, and/or that earn their profits globally."

This is interesting to see his stance on the matter as we can't really recall him addressing it before. You'll remember that David Einhorn and Greenlight Capital made a large gold investment and now are storing physical gold. Additionally, John Paulson's hedge fund Paulson & Co bought gold via GLD (the exchange traded fund) to hedge their share class denominated in gold. It's interesting to see each fund manager's individualistic approach and hedging vehicle of choice. However, the main thing to take away from all of this is the fact that they see inflation as a potential threat in the future and are trying to mitigate this risk accordingly.

Embedded below is Pershing Square Capital Management's Q2 investor letter. Additionally, make sure you check out our coverage of Pershing Square's portfolio here:




You can download the investor letter in .pdf form here. And of course make sure you check out the discount to the Value Investing Congress where you can hear Bill Ackman and numerous other prominent hedge fund managers present actionable investment ideas this coming October in New York City.

We'll leave you with a good quote from Ackman himself in the letter, "Trading is largely an art and not a science, a discipline in which you can always look back and conclude that you could have done it better. That is one of the reasons why portfolio managers hire traders (it enables the portfolio manager to shift the blame to others) and why being a trader is such a treacherous job."

Investment Trusts Trading At Discounts In The UK: Hedge Funds Ready To Pounce?

The Financial Times ran an interesting story on Monday entitled “Activist Minnows Eye Investment Trusts”. The article suggested that many UK investment trusts (closed-end investment funds that trade like equities) offer great value because they are on sale at substantial discounts of up to 50% of their net asset value. The FT article also suggested that hedge funds are excited by the value that they see in the sector with one fund, Charlemagne Capital, set to raise $100m specifically to take advantage of the discounts. We initially found this intriguing, but still wanted to know more. Firstly, are there really investment trusts selling at a 50% in the UK? Secondly - given our main preoccupation at Market Folly - which hedge funds already have holdings in the investment trusts that are trading at large discounts?

We focused on investment trusts (ITs) that primarily hold publicly traded equities and disregarded those that primarily invest in property, venture capital or private equity. Some of the funds in the table contain a mix of assets but we have tried to limit inclusion to those ITs that hold predominantly publicly traded equities. We also focused on ITs that have some institutional ownership to some extent as we thought this might provide some insight into where the so-called “smart money” was already allocated (e.g., investment banks, hedge funds, investment advisors, mutual funds). A list of ITs meeting these criteria is provided in the table.

Investment Trust	Discount to NAV	Large shareholders	% equity
Majedie Investments	-20.1	Barclays Global Investors	1.42
		Smith & Williamson Investment	3.6
		Rathbone Investment Management	2.04
Strategic Equity Capital	-22.3	Midas Capital Partners Ltd.	7.19
		Schroder Investment Management	5.37
		Advance UK Trust	unknown
Herald Investment Trust	-23.1	Insight Investment Management	8.94
		Asset Value Investors Ltd.	7.43
		Rathbone Investment Management	5.25
		Advance UK Trust	unknown
Value and Income Trust	-26.7	Brewin Dolphin Ltd.	6.45
		Smith & Williamson Investment	4.98
		Barclays Global Investors Ltd.	3.94
North Atlantic Sml Comps	-28.5	Insight Investment Management	9.59
		Findlay Park Partners LLP	4.01
		CG Asset Management	3.55
Principle Capital IT	-34.3	CG Asset Management	3.64
		QVT Financial LP	2.99
		Invesco Asset Management	21.12
Equity Partnership Cap	-49.5	Midas Capital Partners	1.5
		Brewin Dolphin	1.28
		Cayenne Asset Management	0.47

Discount to net asset value data: Trustnet.com

Large shareholders data: ft.com

The table shows that there are several predominantly equity based ITs trading at a greater than 20% discount to NAV. Readers that are interested in other sectors such as venture capital, property or private equity will find that trusts in these sectors on average trade at even bigger discounts.

In terms of institutional involvement, we are a bit disappointed in that very few large hedge funds are involved. Only two of the large shareholders are hedge funds: Barclays Global Investors (BGI) and QVT Financial. BGI is London based and is one of the world’s largest hedge funds. It has medium-sized stakes in Majedie Investments and Income and Value Trust. QVT Financial is a New York-based multi-strategy hedge fund with a reputation for confrontational activism. Last year QVT were involved in a bloody spat with Principle Capital IT (see table) which for the time being it appears to have lost. It was an interesting contest not least because Principle Capital which is led by Brian Myerson, is also an activist. In recent months QVT have reduced their stake in Principle substantially.

This territory is not limited to hedge funds, as there are other activists that specialize in exploiting the pricing inefficiencies of the closed-end funds. Cayenne Asset Management, for example, is an independent investment manager. Cayenne argue that their approach tends to be constructive, rather than aggressive. They have a small stake (0.47%) in Equity Partnership. Additionally, Advance UK Trust is another small activist in the sector. It is a fund of funds that focuses on out of favor ITs trading at wide discounts. Like Cayenne, they are proactive and often work with boards, managers and advisers in an attempt to recognize shareholder value. A commonly used strategy by activists is to try to get ITs to buy their own shares in order to narrow the discount. Advance UK have holdings in Herald IT and Strategic Equity Capital (see table). For those interested their top 10 holdings can be viewed here.

Two factors are likely to be very important in determining whether the large discounts will be closed. Firstly, IT discounts tend to narrow in bull markets and widen in bear markets. Those who don’t believe that we are going to stay in a bull market for some time should steer clear of this sector. At best, the discounts will take time to narrow. In addition, some IT shares are fairly illiquid which can make them difficult to exit if you're in a hurry. The spreads are, at the best of times, eye-wateringly wide and potentially shocking to US investors. Secondly, will the activists show up to speed things up? At face value there certainly do appear to be opportunities for proactive funds. Market Folly looks forward to keeping you posted on any exciting developments regarding hedge fund activism in this sector during the coming months.

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).

Market Folly Interviewed By BehindTheSpread.com

We recently did an interview with Hiro, the author behind both BehindTheSpread.com and My $10000 Dollars and just wanted to let everyone know who might be interested in reading it. In it, we talk about our background, investment style, as well as the journey we've been on in creating Market Folly.

Check out our interview here, thanks!

Joel Greenblatt At The Value Investing Congress

Just wanted to let everyone know in addition to all the fantastic speakers at the Value Investing Congress, Joel Greenblatt of Gotham Capital will now be speaking as well. So in the span of 2 days, you can hear investment ideas from literally some of the most prominent players in the hedge fund industry. In addition to Greenblatt, you'll hear from Julian Robertson (Tiger Management), David Einhorn (Greenlight Capital), Bill Ackman (Pershing Square), Eric Sprott (Sprott Asset Management), Whitney Tilson (T2 Partners) and many more excellent fund managers. We can't exclaim enough how unique and insightful this event is. You can literally hear investment ideas and learn from some of the exact managers we track on a daily basis here on Market Folly. As we get nearer to the event each week, the discount we've secured drops. Currently, Market Folly readers can save $500 off regular registration and use discount code: N09MF3. Next week that discount will drop to $300 so the faster you register, the more you save.

It doesn't matter if you are a finance professional or an individual investor, the event is for all walks of investors. Get your firm to pay the bill and the insight you'll receive and networking you do will be well worth the price of admission. If you're an investor, some of the actionable investment ideas you receive will most likely cover the cost of your ticket and more. Register now before our discount expires. The Congress was created by and for those interested in the investment methods similar to Benjamin Graham and Warren Buffett. At the event, you'll learn how to perform thorough due diligence in the current markets. Simply put, you'll learn strategies from some of the best hedge fund managers out there and receive actionable investment ideas. How often can you say that you got some picks from the best in hedge fund land? Not to mention, it's a fabulous networking opportunity as there will be a ton of people there from the industry.

We cannot stress enough how this is event is a must attend. We've managed to secure a discount for Market Folly readers so click here to save $500 off the Value Investing Congress regular price while it lasts by using discount code: N09MF3.

Interview With Lawrence McDonald, Author Of Book On Lehman Brothers' Demise

A few weeks ago we posted up a great interview with Lawrence McDonald, the author of New York Times Bestseller book, A Colossal Failure of Common Snese: The Insider Story of the Collapse of Lehman Brothers. Our buddy Misstrade interviewed Larry regarding his background and his experience during Lehman's demise. Today we have the follow-up interview where Larry gives us insight as to how things operated at Lehman on a day to day basis with a focus on the trading floors. (You can check out the first interview here). And now embedded below is the second interview courtesy of Misstrade.

(RSS & Email readers come to the blog to view the video interview):



A quote from Lawrence McDonald from the interview stuck with us. He says, "The story of Lehman Brothers comes down to this one sentence: There's 24,992 people making money and 8 guys losing it." This just goes to highlight how eight people can run amuck and go crazy with credit and ultimately lead to the demise of the firm. Lehman Brothers survived the Civil War, numerous World Wars, 9/11 and then was brought down by a combination of a poor board of directors, leverage, and a lack of risk understanding by CEO Dick Fuld, claims Larry in his book.

Very interesting stuff as we get to see how Lehman operated in its day to day operations. The shocking thing here is that at one point they had almost 40% of their net tangible assets in essentially 3 commercial real estate transactions. They had essentially become a hedge fund and private equity firm that was running 40:1 leverage at one point. For more in-depth insight, of course make sure you check out Lawrence's excellent book, A Colossal Failure of Common Sense: The Insider Story of the Collapse of Lehman Brothers. This is definitely a great inside look at what went down as Lehman went down.