Dan Loeb's Third Point Goes Activist on Yahoo! (YHOO)

Dan Loeb's hedge fund firm Third Point LLC has just filed a 13D with the SEC signaling their activist investment in Yahoo! (YHOO). This is a brand new position for the hedge fund.


Specifics of Third Point's Stake

Third Point started buying on August 8th and were buying as recently as September 7th. They now own 5.15% of the company with 65,000,000 shares. 45,000,000 of those shares are common stock where they have a cost basis of $12.7x.

He's already up on his position, as shares currently trade around $14. Last week we noted how Third Point is outperforming, but had reduced exposure for four consecutive months.

The other 20,000,000 shares Third Point owns are represented by call options. The majority of Loeb's call options are at the $12.50 strike price. He also bought $13 and $14 calls, though no expiration month was specified.


Loeb's Activist Plan

Earlier we posted up Loeb's letter to Yahoo! which we recommend you read in full, as his letters are always classic. But in summary, Loeb desires a "reconstituted board with new directors who will bring fresh eyes, relevant industry experience and increased investor alignment to the table."

Yahoo fired its CEO Carol Bartz two days ago, so a management shake-up is inevitable. Ironfire Capital's Eric Jackson suggests taking things a step further by breaking up the company into 3 segments. As to who could replace Bartz, he offers up Peter Chernin (former President of News Corp).

Jackson thinks YHOO is worth up to $31. Loeb thinks shares of YHOO have an intrinsic value "in excess of $20 per share."


Investment Thesis

The main thesis investors have bought shares of Yahoo! under is sum-of-the-parts based. Basically, YHOO has an ownership stake in a ton of unique Asian assets. Loeb thinks Yahoo's 40% stake in Alibaba Group and their stake in Yahoo Japan are key. He writes,

"Our analysis suggests that at a share price of $13.61, with $2.49 per share in tax adjusted net cash, $3.10 per share and $5.24 per share of after-tax values for the Yahoo! Japan and Alibaba Group stakes respectively, core Yahoo is left at an implied value of $2.78 per share or 2.2x 2012 EBITDA. With more effective and focused management, one could realistically envision a re-rating to at least 7.0x 2012 EBITDA, driving a target of over $19.00 per share."

Investors feel these assets are not being valued appropriately and that they've been mismanaged. We've detailed the full investment thesis on YHOO in a past issue of our Hedge Fund Wisdom newsletter.


Yahoo an Event Driven Investor Graveyard?

Earlier in the year, David Einhorn's Greenlight Capital bought YHOO, only to abandon it weeks later out of frustration with developments surrounding the company's stake in Alipay. Corporate raider Carl Icahn had also owned YHOO in the past, only to exit his position.

Curtis Macnguyen's Ivory Capital, on the other hand, continues to hold a large YHOO position. And at the end of the second quarter, other large YHOO shareholders included hedge funds Perry Capital and Maverick Capital.

Numerous other investors have put capital to work in YHOO, only to see shares slide or trade sideways. While Einhorn exited with a small loss on his position, Loeb currently has a small gain. It will be interesting to see if other hedgies follow Loeb's new activist charge.

To see what else Loeb has been up to, head to Third Point's investor letter.

Dan Loeb's Letter to Yahoo! (YHOO)

Today Dan Loeb's hedge fund Third Point went activist on Yahoo! (YHOO). The hedge fund manager is well known for his eloquently penned letters that often attack his targets with brutal honesty.

Below is Dan Loeb's letter to Yahoo! (YHOO):

"September 8, 2011

Board of Directors
Yahoo! Inc.
701 First Avenue
Sunnyvale, CA 94089
Attention: Mr. Roy Bostock, Chairman

Dear Ladies and Gentlemen:

Third Point LLC (“Third Point”) is a registered investment adviser with approximately $8 billion under management. We are writing to inform you that certain investment funds we manage have acquired a 5.1% interest in Yahoo! Inc. (the “Company” or “Yahoo”), bringing our holdings of common stock and currently-exercisable equity options to 65,000,000 of the outstanding shares, and positioning us as the Company’s third largest outside shareholder.

This letter details our principled demands for sweeping changes in both the Board of Directors (the “Board”) and Company leadership, and outlines the hidden value of Yahoo, which has been severely damaged – but not irreparably – by poor management and governance.

The Failures of Yahoo’s Board of Directors Necessitate a Significant Infusion of Fresh Board Talent

Yahoo’s current Board of Directors has made a number of decisions that have directly harmed the Company and resulted in a stock price far below the Company’s intrinsic value. While we are focused on the future for Yahoo under new management, it is instructive to understand how this Board’s many mistakes have created the current conditions at an asset and talent rich company. Among others:

1) It is now widely accepted that the Board made a serious misjudgment in approving the hiring of Carol Bartz as Yahoo’s Chief Executive Officer, given her inexperience in the consumer-oriented internet space. Although we are pleased that the Board has terminated Ms. Bartz’s employment, we fail to understand why this decision was so long in coming given her abysmal performance over the last two and a half years. During this period, Ms. Bartz’s poor decision-making and communication skills publicly alienated the Company’s highly respected Asian partners, as well as its shareholders, sell-side analysts, bloggers, customers and employees.

While the decision to hire her alone is grounds for questioning the Board’s competence, its willingness to turn a blind eye to these serious problems and inexplicably remain supportive of Ms. Bartz notwithstanding the negative impact she was having on the Company is even more troubling. As recently as June 23, 2011, at the Company’s annual meeting, Chairman Bostock reportedly stated that the Board remained “very supportive of Carol and this management team” and that they were “confident that Yahoo [was] headed in the right direction." These comments demonstrate that this Board lacks the courage to urgently make the difficult decisions required by the situation today.

2) It is also now widely recognized that the Board made a gross error in turning down the $31 per share Microsoft bid in 2008, which would have generated significant returns for Yahoo’s shareholders. This mistake is all the more frustrating given Yahoo’s current depressed stock price of $13.61 per share — far below the Company’s intrinsic value, which we currently place in excess of $20 per share, as detailed below.

From the failed Microsoft sale negotiations, to a subsequent bungled and disappointing search deal with Microsoft, through a series of misguided CEO selections, and most recently the Alipay debacle, this Board’s failures have destroyed value for all Yahoo stakeholders. Ms. Bartz’s exit and Mr. Morse’s elevation to interim CEO makes him Yahoo’s fourth CEO in four years and further demonstrates the poor corporate governance Yahoo investors have been saddled with for too long. Even before Ms. Bartz’s hire, Yahoo’s shares materially underperformed the market and their peer group, as graphically evidenced in the Company’s most recent 10-K. Against this background, it is evident that merely replacing the Company’s CEO – yet again – will not be enough to alter the direction of the Company. Instead, a reconstituted Board with new Directors who will bring fresh eyes, relevant industry expertise and increased investor alignment to the table is immediately necessary.

Yahoo’s website states the Company’s values, among them: “We foster collaboration while maintaining individual accountability.” It is time that certain members of this Board were held accountable for its past failures and their individual roles. Accordingly, we insist that Mr. Bostock, who championed Ms. Bartz’s hiring and led the charge against the Microsoft deal, promptly resign from the Board. We also demand that fellow Directors Arthur Kern and Vyomesh Joshi, who have stood by silently during these last five years of woeful performance, join Mr. Bostock in resignation. Finally, we can only assume that Director Susan James, the President of Tri-Valley Animal Rescue, will also resign, given her close relationship with Ms. Bartz. If she does not do so voluntarily, the Board should request her resignation as well.

As the Company sets out to recruit a new CEO and evaluate strategic alternatives, we are adamant that reconstituting the Board is crucial to provide any serious CEO candidate or strategic counterparty with a stable and responsive governance structure. There is much work to be done and time is of the essence. Even after the Company announced Ms. Bartz’s dismissal and the pursuit of strategic alternatives, Yahoo shares rose only 5%. We believe the muted market reaction to Ms. Bartz’s dismissal represents a recognition that this management change is a necessary, but not sufficient, step towards unlocking Yahoo’s actual value. Investors’ reluctance to embrace the stock and their lack of confidence in this Board’s ability to lead the franchise is understandable given the current Board’s track record.

Third Point has held discussions with many highly respected entrepreneurial executives active in technology, internet, media and consumer-related businesses. From these discussions we have distilled an All-Star team of potential Director candidates, who would be indispensable in working with the reconstituted Board to pursue the three paths outlined in the recent company announcement: CEO search, business review and strategic options. We look forward to sharing our candidates with you shortly.

The Obscured Value in an Iconic American Technology Asset

We firmly believe that there is much to be gained from a successful and rapid transition in management, as we are convinced that Yahoo is grossly undervalued. We have followed Yahoo for many years, and our analysis suggests that at a share price of $13.61, with $2.49 per share in tax adjusted net cash, $3.10 per share and $5.24 per share of after-tax values for the Yahoo! Japan and Alibaba Group stakes respectively, core Yahoo is left at an implied value of $2.78 per share or 2.2x 2012 EBITDA. With more effective and focused management, one could realistically envision a re-rating to at least 7.0x 2012 EBITDA, driving a target of over $19.00 per share. When coupled with tax efficient outcomes for its Asian assets, an additional $3.00-4.00 per share stands to be realized. Continued share count reduction via buybacks and other potential capital structure optimization alternatives would further bolster the Company’s stock price. In addition, based on our discussions with industry experts and entrepreneurs, we believe that with new management, there is significant further value in leveraging Yahoo’s globally trusted franchise and platform for a range of new products and innovations.

Focusing specifically on the Alibaba Group, the mid-term value potential for this stake alone could represent another $5.00 per share of upside. The e-commerce interests housed under the Alibaba Group umbrella hold the dominant positions in the “B2B” (63% of 2010 market share according to Marbridge Consulting), “C2C” (85% share) and “B2C” (51% share) Chinese e-commerce markets. Alibaba Group’s Taobao business is essentially Ebay and Amazon on steroids in terms of market share and revenue growth. According to Goldman Sachs, the Chinese e-commerce market was $75 billion in 2010, with a 3 year forward compound annual growth rate of 43% compared to the $193 billion U.S. market with compound annual growth of 14% over the same period. We currently estimate a pre-tax value for Alibaba Group of $25 billion. Given Alibaba Group’s growth potential and market share, it is entirely conceivable that Yahoo’s 40% fully diluted stake in Alibaba Group could double in value over the next 2-3 years, highlighting its tremendous value.

Looking deeper into core Yahoo, it is clear that the Company possesses unique scale and scope as the Internet’s premier digital media company. The near completion of significant platform transitions and increasing ad format creativity and client engagement translate to exciting prospects for 2012. These compelling Yahoo initiatives were sadly lost in the chaos surrounding Ms. Bartz’s tenure as CEO. Hidden by Yahoo’s senior management drama is a franchise benefitting daily from tremendous investment in resources and new platforms successfully built by Yahoo’s corps of talented, committed engineers, product development team and salespeople.

Finally, the Company’s leadership needs to rebuild relationships with its valued Asian partners in Yahoo Japan, Softbank and the Alibaba Group. These are important sources of value for Yahoo, and the Company needs to enter a new, constructive era with these critical allies and friends of the Company.

In conclusion, we are eager to present to the Board our candidates and thoughts on the Company’s future. We hope that the Board will take our proposals seriously and move towards the leadership overhaul that we are championing. While the decision to undertake Board turnover initially rests with individual directors, ultimately, shareholders like Third Point have other means to effect changes necessary to protect their investment. We are prepared to propose a slate of directors at the Company’s annual meeting next year should it become necessary. Such proxy disputes are burdensome, and we sincerely hope that one will not be necessary here. Shareholders have already suffered enough.

It is time for new leadership at Yahoo. Yahoo’s investors, employees, clients and users deserve it. We look forward to having what is great about Yahoo make headlines, encouraged and communicated by new CEO and Board leaders.

Sincerely,

/s/ Daniel S. Loeb

Daniel S. Loeb
Chief Executive Officer
Third Point LLC

CC: Ms. Patti Hart
Ms. Sue James
Mr. Vyomesh Joshi
Mr. David Kenny
Mr. Arthur Kern
Mr. Brad Smith
Mr. Gary Wilson
Mr. Jerry Yang
"

Be sure to read more about Third Point's activist bet on YHOO.

Find Out What Hedge Funds Are Buying in This Volatile Market

Warren Buffett is famous for saying, "look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." In fact, this quote is where MarketFolly.com got its name.

It's no secret that market volatility creates opportunity. So here's your chance to find out what top hedge funds have been buying (or shorting) during the recent market turmoil. Market Folly readers receive the early bird discount that expires in 7 days, so register for the Value Investing Congress.

Top managers will share their latest investments October 17th & 18th in New York City. A bunch of additional speakers were just announced, so here's the full list:

- Bill Ackman, Pershing Square
- Leon Cooperman, Omega Advisors
- Jim Chanos, Kynikos Associates
- Adam Weiss & James Crichton, Scout Capital
- Joel Greenblatt, Gotham Capital
- Alexander Roepers, Atlantic Investment Management
- Guy Gottfried, Rational Investment Group
- Bernard Horn, Polaris Capital Management
- Timothy E. Hartch, Brown Brothers Harriman
- Whitney Tilson & Glenn Tongue, T2 Partners

This is your last chance to save $1,500 off the regular price before the early bird rate expires. Click here for the discount.

Dan Loeb's Third Point Outperforming, Reduces Exposure Yet Again

In early August, we noted how Dan Loeb's Third Point reduced equity exposure for the third consecutive month. That decision has certainly paid off as Loeb's fund was only down 2.8% in August compared to the S&P 500 which was down 5.4%. Year-to-date as of the end of August, Third Point is up 3.9% while the S&P is down 1.8%.


Reduced Exposure for Fourth Straight Month

At the end of August, Third Point was only 17.7% net long equities, down even further from their 23.3% net long exposure back in July. Their largest net long exposure comes in technology at 6.5% and basic materials at 3.5%. Third Point is net short industrials (-1.5%) and utilities (-0.6%).

In credit, Loeb's Offshore Fund is 18.5% net long, a slight decrease from last month. They continue to be net short government securities (-10.3%) and have their largest net long exposure in asset backed securities (+17.3%).

Geographically, Third Point is net long the Americas at 50%, net short EMEA at -4% and net short Asia at -2%.


Third Point's Outperformance

So while decreased exposure to risk certainly has helped Loeb outperform in this volatile market, his winners the past month include gold, short A, CVR Energy (CVI), Barrick Gold (ABX), and short B.

It should come as no surprise that their gold related investments have helped them outperform as the precious metal rocketed higher as market volatility increased. Not to mention, gold has been one of Third Point's largest positions for some time now.


Top Positions

- gold
- Delphi
- CIT Group (multiple securities held)
- Technicolor (multiple securities held)
- El Paso (EP)

The most notable change in Third Point's top positions since last month is the absence of Mosaic (MOS). There's no way to know exactly why because they could have reduced their position size, other positions could have appreciated more, or they could have bought more of some of their top holdings.

Third Point originally bought MOS on the secondary when the Cargill family unloaded shares at $65 per share. The hedge fund subsequently 'bought the dip' in MOS when it traded down to around $60. During August, MOS traded as low as $55.70, and currently trades around $69.50.

Either way, Third Point's top holdings have largely been what you see above as they wait for Delphi to go public and El Paso to split up.

Chasing Madoff Trailer: Documentary About Harry Markopolos Exposing Bernie Madoff's Ponzi Scheme

Below is the trailer for the new documentary Chasing Madoff which was released on August 26th, 2011. It details the story of Bernie Madoff's $18 billion ponzi scheme and how Harry Markopolos spent ten years trying to expose the fraud.

Directed by Jeff Prosserman, it seems that the documentary is based on Harry Markopolos' book, No One Would Listen: A True Financial Thriller. You can also read our review of the book here.

The trailer for Chasing Madoff is embedded below (email readers come to the site to watch):



For more financial film trailers, check out the Margin Call movie trailer.

John Thaler's JAT Capital Buys More IMAX Corp (IMAX)

John Thaler's hedge fund JAT Capital just filed a 13G with the SEC regarding shares of IMAX Corp (IMAX). Per portfolio activity on August 22nd, JAT has disclosed a 4.6% ownership stake in IMAX with 2,979,280 shares.

Since the end of the second quarter in June, this marks a 349% increase in their position size as they've gobbled up shares. Since the end of June, shares of IMAX are down 48%.

Some managers have had somewhat of a '3D' pairs trade on by going long IMAX and short RealD (RLD), but we obviously can't see JAT's shorts.

Thaler's Background

Before he founded JAT, Thaler worked at Shumway Capital Partners (which returned capital this year). Chris Shumway himself invested in JAT's launch. Thaler covered technology, media and telecom and managed the internal Omni fund while at Shumway. Before that, he worked at Spectrum Equity Investors in private equity.

Due to his background, you'll see an emphasis on the TMT sectors in his portfolio. Thaler earned his BA in Economics from the University of Chicago. In 2008, JAT returned -5.9% and in 2009 returned 23.2% gross. This isn't the first time we've covered Thaler's fund as we've also detailed JAT's bet on social media via SINA.

Per Google Finance, IMAX is "is an entertainment technology companies, specializing in motion picture technologies and presentations. The Company’s principal business is the design and manufacture of digital theater systems (IMAX theater systems) and the sale or lease of IMAX theater systems."

Bill Ackman's Pershing Square Buys $600 Million of Investments During August Volatility

Bill Ackman's hedge fund Pershing Square Capital utilized the market volatility in early August as an opportunity to buy stocks, according to their recent letter to investors. So what did they buy?

Ackman writes,

"We have often described stock market volatility as an opportunity for Pershing Square. Since the beginning of the month, the market, and to an even greater extent, most of our holdings went on sale. We took advantage of this favorable pricing to invest more than $600 million in existing investments including Fortune Brands, Kraft, Family Dollar, Citigroup, and two new commitments. In each case, the businesses continue to make progress that meets or exceeds our expectations making our additional investments that much more compelling. Unfortunately, for most of our remaining holdings we were restricted in purchasing more by virtue of our insider status, or other regulatory or corporate charter provisions that limit our ability to increase our ownership percentage."

After writing the letter (dated August 17th), Pershing Square received permission to increase its ownership stake in J.C. Penney (JCP) to 26.1% of the company, up from the 18.2% they currently own as well.

Pershing's New Investments

Ackman did not disclose the names of his two new investments, most likely because they were/are still acquiring their position. His letter states that they should be able to share more details about one of the positions in the upcoming months.

It would make sense that he could reveal one of them at the upcoming Value Investing Congress where he will be presenting investment ideas along with many other hedge fund managers (Market Folly readers: today is the LAST day for substantial savings to the event, click here for the discount).

Ackman's investor letter drops a hint that they bought an investment that broadly falls into the category of their old General Growth Properties (GGP) investment: i.e. a situation where they were able to buy GGP for less than a dollar per share and enhanced the probability of recovery for shareholders with their active intervention. Let the guessing games begin.

In early August we detailed how Pershing Square bought more Fortune Brands (FO), but now we know they were buying more than one stock.

For more excerpts from Pershing Square's recent letter to investors, we've outlined why Ackman bought more Citigroup, as well as Pershing's hedging strategy in this crazy market.

Why Bill Ackman Bought More Citigroup (C)

In his recent letter to investors, Pershing Square founder Bill Ackman revealed he bought $600 million worth of investments during the recent market volatility. One stock that garnered such capital was Citigroup (C).

Ackman outlines why the stock has been selling off:

"In the second quarter, the share price of Citi and its peers declined primarily due to three concerns: (1) the requirement that systemically important financial institutions will need to hold additional capital (commonly referred to as the SIFI buffer), (2) concerns about exposure to potential losses resulting from the issues surrounding the troubled Eurozone sovereigns, and (3) worries about weakness in the U.S. economy."

In the brand new issue of our Hedge Fund Wisdom newsletter, we pointed out an interesting dichotomy between shares of two financial giants. While many funds like Paulson & Co and Appaloosa Management were selling shares of Bank of America (BAC) in the second quarter, numerous contrarians stepped up to buy Citigroup as shares tumbled.

Ackman was one of those contrarians, along with Lee Ainslie's Maverick Capital. We've also detailed how Curtis Macnguyen's Ivory Capital owns a sizable C stake. The Pershing Square manager goes on to outline his rationale for why C is a good investment:

"Citi recently provided disclosure about its exposure to the troubled Eurozone sovereigns and the corporations and consumers that are domiciled within those countries. Based on this disclosure, we believe that Citi is adequately capitalized to withstand the losses that may result from adverse outcomes from the Greek and other Eurozone debt crises. On July 15 th , Citi reported its second quarter results which highlighted the growth in its emerging markets franchise, the continued improvement in credit costs, and further strengthening of its capital ratios. At current share price levels, Citi trades at less than five times our estimate of normalized EPS before including any benefit for the present value of excess capital and tax assets, and less than three times normalized EPS after including these benefits."

We originally covered why Ackman bought Citigroup back in April 2010. At the time, they purchased shares at nearly 1.1x tangible book value. Ackman notes that now, "tangible book value has grown by nearly 20%, yet the Company's tangible book value multiple has declined to 0.6 times."

Overall, the hedge fund thinks the bank has enough liquidity to weather the current economic environment. Ackman believes that C will command a higher multiple once market uncertainty declines.

For more from Pershing Square, check out Ackman's purchase of $600 million worth of investments during August's volatility, as well as Ackman's hedging strategy.

Bill Ackman & Pershing Square's Hedging Strategy

While many of the hedge funds we track on Market Folly employ a long/short equity strategy, Bill Ackman's Pershing Square Capital takes a slightly different approach, typically preferring credit default swaps (CDS) to shorting equities.

In fact, Ackman's approach is more akin to Seth Klarman's approach at Baupost Group. Klarman typically hedges against outlier events such as hyperinflation. These hedges typically cost very little and often expire worthless, but if the outlier event does occur, they can payout over 50x.

In fact, we've detailed Ackman's strategy briefly before in our profile of Ackman & Pershing Square. Given the recent market volatility, Ackman took this opportunity to outline his hedging strategy in his recent letter to investors to remind them that they don't attempt to manage short-term volatility.

Ackman purchased $600 million worth of investments recently and so let's take a look at the other side of the coin: hedging. Ackman writes,

"Unlike as we did in the past, we don’t own investment grade CDS because we believe these credits are mispriced. Rather, we continue to own approximately $7 billion of index CDS which serves as a form of disaster protection, but one that is unlikely to pay off in a material way unless and until there is another major systemic crisis.

We own almost no single-name CDS other than to hedge a modest amount of uncollateralized exposure we have to financial institution counterparties. We have been unable to identify large single-name, standalone CDS investments since 2009. This is largely due to the rapid improvement in corporate creditworthiness over the last two years."

And then turning back to Ackman's tail-risk protection, he goes on to note that the hedge fund has committed capital to asymmetric payoffs that won't protect the fund unless there is a very large market decline. He writes,

"Since the inception of the funds, we also have purchased options which offer asymmetric payoffs in the event of the occurrence of low-probability catastrophic or otherwise unanticipated negative events. These events could include large movements in interest rates, currencies, or other asset prices that we believe may occur during periods of market stress."

As such, it sounds like Pershing will underperform in times of mild market stress (like recently) but is more-so hedged against extreme outlier events. According to their investor letter, Pershing was up 1.7% for the year at the end of the second quarter. However, HSBC Private Bank data says that Pershing is now -10.5% through mid-August.

For more from the hedge fund, head to our post on why Ackman bought more Citigroup.

Lone Pine Capital Nearly Doubles SolarWinds (SWI) Stake

Stephen Mandel's hedge fund Lone Pine Capital filed a 13G with the SEC regarding shares of SolarWinds (SWI). Due to portfolio activity on August 19th, Lone Pine now shows a 5.2% ownership stake in the company with 3,766,081 shares.

This is an increase in their position size of 97.5% as they've almost doubled their stake since the end of the second quarter on June 30th.

Mandel's hedge fund has been busy buying lately and we've detailed how Lone Pine likes information technology plays and their SWI purchase falls right under that theme.

Per Google Finance, SolarWinds "designs, develops, markets, sells and supports enterprise information technology (IT) infrastructure management software to IT professionals in organizations of all sizes. The Company’s offerings ranges from individual software tools to software products, which solve problems faced every day by IT professionals and help to enable management of networks and IT environments."

New Issue of Our Hedge Fund Wisdom Newsletter Now Available!

The brand new Q2 2011 issue of Market Folly's premium newsletter is now available. Current subscribers please login at hedgefundwisdom.com to download it.

Free Sample: If you haven't had a chance to check out our newsletter, you can download a full past issue by clicking here (.pdf)


Included in our brand new 83-page issue:

- Equity analysis: Written by hedge fund analysts, this issue details the investment thesis summaries on American International Group (AIG), Sensata Technologies (ST) and First Solar (FSLR) ~ all stocks that saw intriguing buying during the quarter

- Consensus List of the top buys and sells from hedge funds

- Updated Portfolios of 25 prominent hedge fund managers
(see the full list of managers here)

- Expert Commentary and analysis of each fund's moves


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What We're Reading ~ 8/26/11

Our guest post: takeaways from recent hedge fund activity [BigPicture]

Paulson, Tepper, Loeb & other hedgies all bought this stock [Forbes]

Icahn makes $120 million on falling S&P [FINalternatives]

Jeff Ubben buys big during the chaos [Institutional Investor]

Bernanke's speech from today [The Big Picture]

Gold at $1800 is a fool's bet [AR + Alpha]

On getting long Bank of America (BAC) [Bronte Capital]

Interview with George Soros [Der Spiegel]

BlackRock's Fink says buy dividend stocks instead of treasuries [Barron's]

Interview with 105 year old banker Irving Kahn [Daily Beast]

Hedge funds most bearish since 2009 [Bloomberg]

Tudor's new fee structures [WSJ]

Buffett has been buying during downturn [LATimes]

Michael Lewis' latest article [Vanity Fair]

Morning with Charlie Munger transcript [My Investing Notebook]

JANA Partners' Presentation on McGraw-Hill (MHP): Reasons to Split Up the Company

Earlier today we posted up about hedge fund JANA Partners' activist push against McGraw-Hill (MHP). Barry Rosenstein's hedge fund (along with the Ontario Teachers' Pension Plan) owns 5.6% of the company and is pushing for MHP to split up into four separate entities.

JANA just met with the company on Monday (August 22nd) to present their case. Here's the hedge fund's rationale for splitting up MHP:

"
- MHP's conglomerate structure acts as a significant constraint on each of its businesses, hampering operational performance, strategic flexibility in allocating capital and share price valuation

- MHP has much more meaningful and beneficial opportunities to improve operating performance and clarify the underlying value of its assets than the actions taken to date (such as seeking to sell broadcasting, which accounts for only ~2% of total EBIT)

- A wide ranging, transformative and comprehensive resolution of the corporate structure and cost structure is essential for MHP to improve operating performance and shareholder return

- Separating MH Education, Information & Media and the S&P Index business would position these businesses to improve performance and participate in consolidation, thus unlocking value

- Collapsing MHP's corporate cost structure and eliminating duplicative overhead costs would enhance this value creation

- Accelerated share buybacks would multiply the value creation impact of these changes

- Bolstering S&P Ratings with an independent oversight figure would help the business navigate an increasingly complex global regulatory environment and heightened public focus

- The real question is why would MHP not promptly take these steps to improve operating performance and unlock shareholder value?
"

JANA's recent slideshow presentation to the company is embedded below (email readers need to come to the site to view it):



In response to JANA's presentation, McGraw-Hill issued a statement that their review of the company's options for splitting up is "well advanced and expected to result in significant actions in the next few months to accelerate global growth, align appropriate cost structures and build shareholder value."

The question is whether McGraw-Hill opts for the more aggressive four-pronged break-up or if they are eyeing the smaller split up as they are said to be considering.

Roberto Mignone's Bridger Management Buys More United Rentals (URI)

In a 13G filed with the SEC, Roberto Mignone's hedge fund Bridger Management has disclosed a 5.2% ownership stake in United Rentals (URI) with 3,241,704 shares.

This marks a 60% increase in their position size since the end of the second quarter. Bridger Management now owns just over 3.2 million shares of URI due to portfolio activity on August 8th.

Per Google Finance, United Rentals "is an equipment rental company and its network consists of 531 rental locations in the United States and Canada. United Rentals offers approximately 2,900 classes of equipment for rent to customers that include construction and industrial companies, manufacturers, utilities, municipalities, homeowners and government entities."

To see the rest of this hedge fund's investments, head to the brand new issue of our premium newsletter.

JANA Partners Pushes For McGraw-Hill (MHP) Split Up

Ah, the smell of activist investors in the morning. Barry Rosenstein's hedge fund JANA Partners recently filed an amended 13D with the SEC in conjunction with the Ontario Teachers' Pension Plan regarding shares of McGraw-Hill (MHP). The activist investment disclosure revealed that they now own 5.6% of the company.

They originally disclosed the stake earlier this month and have since bought over 1 million more shares. While JANA also focuses on event-driven investments, they're well known for making activist pushes to generate change in companies they invest in.

JANA's Split Up Plan

The hedge fund wants McGraw-Hill to split up into four entities: Standard & Poor's ratings agency, the indexing business of S&P, the information & media business, and the education unit.

It seems that this is a much more detailed and ambitious plan compared to what MHP was considering. The company was looking into divesting its educational publishing business and its broadcasting unit.

So why is JANA interested in MHP in the first place? In their filing, they write, "(MHP) has consistently underperformed its potential and traded at a sizable discount." So as always, the hedge fund wants to make money on their investment and think a split-up/spin-off is the ideal way to generate shareholder value.

The only potential 'hurdle' going forward (if you want to call it that), is that McGraw-Hill is largely a family business, though Mr. McGraw owns only around 4% of the company. It will be interesting to follow the activist saga unfold.

In recent portfolio disclosures, JANA has 24% of its reported US equity long investments allocated to one stock. Find out which one it is and see the rest of 25 hedge fund portfolios in the brand new issue of our premium newsletter.

Update: We've also posted JANA's presentation on McGraw-Hill.

Stephen Mandel's Lone Pine Capital Buys the Dip in VanceInfo Technologies (VIT)

Stephen Mandel's hedge fund firm Lone Pine Capital has been busy buying lately. In an amended 13G just now filed with the SEC, Lone PIne has disclosed a whopping 17.6% ownership stake in VanceInfo Technologies (VIT) with 7,862,536 shares.

Per portfolio activity on August 19th, Mandel's hedge fund has ramped up its position size by buying an additional 7.5% of the company. We recently covered how Lone Pine bought VIT in late July and back in late 2010 as well.

Lone Pine Likes Information Technology

Since Lone Pine's additional buy just three trading days ago, shares of VIT are down a little lower around $11.84. VIT operates in the information technology sector and some investors seem to think that the company's underlying business could be slowing down at a rapid rate, given that more than half their business is in China.

Lone Pine also has a large position in another information technology company. The hedge fund has long held a stake in Cognizant Technology Solutions (CTSH) and it's their second largest US equity long position as detailed in our brand new issue of Hedge Fund Wisdom.

A solid portion of Lone Pine's position in VIT is in its Lone Dragon Pine fund, which focuses on emerging markets. For other buys from this hedge fund, yesterday we posted up their position in Michael Page International.

Per Google Finance, VanceInfo "is an information technology (IT) service provider and an offshore software development company in China. The Company’s range of IT services includes research and development services, enterprise solutions, application development and maintenance (ADM), testing, as well as globalization and localization."

Last Chance For Substantial Discount to the Value Investing Congress

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Alexander Roepers of Atlantic Investment Management just committed to speak at the event. He manages a $1.5 billion global equity hedge fund.

He joins an all-star hedge fund line-up of speakers including Pershing Square's Bill Ackman, Kynikos Associates' Jim Chanos, Scout Capital's Adam Weiss & James Crichton, Gotham Capital's Joel Greenblatt, and many more.

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Why Strategist Jeff Saut Thinks There Isn't a Recession

Market strategist Jeff Saut recently said to buy select stocks even though that Dow Theory registered a sell signal. He's received lots of questions as to why he did so and addressed this in his recent market commentary.

Mainly, his bullish stance (at least in the short-term), stems from massively oversold levels in the markets. He also bases this on the backdrop that the economy is not headed to a recession. He writes,

"My controversial non-recession 'call' is driven by the fact that industry analysts are still bullish on earnings with the S&P 500's consensus estimate approaching $114 for 2012. Corporate insiders are clearly bullish as they have been buying their own company's shares at the highest rate since the bottom in March 2009. Layoffs have slowed and while the economy is certainly slowing, metrics like L.A. seaport traffic, railcar loadings, etc. are not falling off a click like they did prior to the 2008 recession."

We pointed out massive insider buying two weeks ago as well. More than anything, Saut is convinced that a confluence of indicators reinforce his belief that select stocks are cheap. You can view Saut's favorite stocks here.

Embedded below is Saut's recent investment strategy where he outlines how the current market action is somewhat parallel to that of October 1978 and 1979:



You can download a .pdf copy here.

Lone Pine Capital Discloses Michael Page International Position

Stephen Mandel's hedge fund Lone Pine Capital has just disclosed a potentially new (more on that below) position in Michael Page International (LON: MPI).

Due to trading on July 16th, Lone Pine breached the UK regulatory disclosure threshold with a 3.21% ownership stake. You can view Lone Pine's latest US equity holdings in the brand new issue of our Hedge Fund Wisdom newsletter.

Lone Pine has actually owned Michael Page stock before. Back during the tumultuous credit crisis, they increased their stake all the way up to 6.37% of outstanding shares.

However, when the panic was seemingly at its height during March 2009, Lone Pine reduced its stake below the 3% threshold ~ perhaps a reminder that even the best hedge funds were forced into uncharacteristic maneuvers during the crisis.

UK Disclosure Rules

The UK's disclosure rules only require funds to disclose when they go above or below a 3% ownership stake in a company (think of it as a line in the sand.) While we get to see more positions this way (compared to a 5% threshold in the US), the downside is we don't really ever know when a fund completely sells out of a position.

In Lone Pine's case in particular, they could have held a small stake in the company all this time only to recently start buying enough to trigger the filing. Or, they could have exited the name back in 2009 and are starting a new position now. There's no way to tell.

But what we do know is that Lone Pine now has a 3.21% ownership stake in the company.

Company Background

Per Google Finance, Michael Page International plc is a specialist recruitment consultancy. The Company operates in Continental Europe, Middle East and Africa (EMEA), and the United Kingdom. Clients ranging from global multi-nationals to small and medium enterprises (SMEs) source permanent, contract, temp and interim talent in accounting, tax and treasury; actuarial, consultancy, strategy and change; design, education, engineering and manufacturing, financial services and banking, health and social care, hospitality and leisure, human resources, information technology, legal, marketing, policy, procurement and supply chain, property and construction, retail, sales and secretarial."

View the rest of Lone Pine's portfolio.

Insider Buying: CEO's Buying Stock En Masse

There has been an increased amount of insider buying over the past few days. But what caught our eye in particular was the vast amount of CEO's that were buying.

To pull all this data, we used Insider Trade Reports who says that "over four decades of academic research has shown that by following in the footsteps of company insiders and buying the stocks that they are buying, you can outperform the market by 6% to 10.2% per year."

As CEO's bought into the recent market sell-off, it's clear they believe the market was undervaluing their companies.

List of Recent CEO Insider Buying

- Six Flags Entertainment (SIX) CEO buys $2,499,189 worth

- Morgan Stanley (MS) CEO buys $2,062,070 worth

- Fifth Street Finance (FSC) CEO buys $2,014,323 worth

- Huntsman (HUN) CEO buys $1,137,270 worth

- WMS Industries (WMS) CEO buys $1,000,224 worth

- General Growth Properties (GGP) CEO buys $856,489 worth

- Kinder Morgan (KMI) CEO buys $679,621 worth

- First Industrial Realty Trust (FR) CEO buys $642,000 worth

- Winthrop Realty Trust (FUR) CEO buys $589,550 worth

- Tupperware Brands (TUP) CEO buys $507,045 worth

- Life Technologies (LIFE) CEO buys $420,000 worth

- Greenbrier Companies (GBX) CEO buys $268,705 worth

- Kansas City Southern (KSU) CEO buys $253,050 worth

- AK Steel (AKS) CEO buys $199,030 worth


We're proud to announce that Market Folly readers receive a special 33% discount on Insider Trade Reports' annual subscriptions and a 25% discount on monthly & quarterly subscriptions.

You can choose how often you receive insider buying/selling alerts (daily, weekly, high conviction reports) which is a great feature. They also have a proprietary scale that measures the significance of each transaction with commentary to provide context.

We've been using Insider Trade Reports for months now and it's a very useful resource for investors so take advantage of the discount.

Bill Ackman's Pershing Square Buys More Fortune Brands (FO)

Bill Ackman's hedge fund firm Pershing Square Capital has taken advantage of the recent market sell-off to add to their position in Fortune Brands (FO).

Per a Form 4 filed with the SEC, Pershing acquired 3,648,512 additional shares at prices ranging from $52.67 to $54.47 on August 5th, 8th, and 9th.

After this series of buys, Pershing Square now owns 20,818,545 shares of Fortune Brands. The majority of their purchase came at $52.67 and $52.78 and FO now trades around $53.95. This is the second time Ackman has purchased FO in the past three months.

This is an activist investment for Pershing as they've pushed for Fortune to break-up its three distinct businesses: spirits/liquor, home finishes, and they've already sold their golf segment.

For more from Ackman, head to notes from the leaders in investing summit. Ackman will also be presenting his latest investment ideas at the upcoming Value Investing Congress in New York on October 17th & 18th along with many other hedge fund managers. Be sure to sign-up here.

Seth Klarman's Baupost Group Adds to PDL BioPharma Stake

Seth Klarman's hedge fund Baupost Group has acquired more shares of PDL BioPharma (PDLI) per a 13G just filed with the SEC.

Due to portfolio activity on July 31st, Baupost has disclosed a 10.53% ownership stake in PDLI with 14,718,814 shares. This marks a 40% increase in their position size as they only owned 10,495,225 shares at the end of the first quarter.

Notorious for holding large cash positions when he doesn't see opportunity, Klarman has used the recent market decline to deploy some of that cash into one of his very few equity positions. Last month, we detailed other activity from the fund as Baupost doubled its Syneron Medical stake.

To see the rest of Baupost's updated equity investments, we'll have a brand new issue of our Hedge Fund Wisdom newsletter out in a week and a half.

Per Google Finance, PDL BioPharma is "engaged in the management of its antibody humanization patents and royalty assets, which consist of its Queen et al. patents and license agreements with pharmaceutical and biotechnology companies. The Company receives royalties based on these license agreements on sales of a number of humanized antibody products marketed and also may receive royalty payments on additional humanized antibody products launched before final patent expiry in December 2014."

David Tepper's Appaloosa Sells Bank of America (BAC) and Wells Fargo (WFC)?

David Tepper's hedge fund Appaloosa Management filed their 13F early with the SEC and in it are some noteworthy moves. The filing reflects portfolio activity as of June 30th, but it does give us a glimpse as to what he was up to in the second quarter.

The big talking point here is that in the second quarter, Tepper sold 41% of his position in Bank of America (BAC), selling over 7.2 million shares. He also sold 5% of his position in Wells Fargo (WFC) and 6% of his position in Citigroup (C), his top equity holding at the end of Q2.

However, David Faber at CNBC is hearing that Tepper has since sold completely out of BAC and WFC in recent weeks. He also apparently sold a chunk of his stake in C too. Tepper has not confirmed this though.

Turning back to the factual information from the 13F we do have though, Tepper also sold 54% of his stake in Hewlett Packard (HPQ).

In terms of new positions, Appaloosa started new stakes in Mosaic (MOS), Western Refining (WNR) and Google (GOOG). It's likely that Appaloosa took advantage of the MOS secondary as Dan Loeb's Third Point also bought MOS. Tepper also bought more CVR Energy (CVI) which we already highlighted back in June.

On the long side, refining seems to be a big theme for Appaloosa as they ramped up their stake in Valero (VLO) by 202% in the second quarter in addition to starting their stake in WNR. To see what other top hedge funds have been buying & selling, subscribe to our Hedge Fund Wisdom newsletter as a new issue is due out in just a week and a half.

Jeff Saut A Buyer of Select Equities During Weakness

Back in July, market strategist Jeff Saut was worried about market action and rightfully so. This time around, he makes two major points in his latest commentary:

1. The Dow Theory sell signal that was registered last week is concerning.

2. Stocks are ridiculously oversold and surely a relief rally is in sight?

With those conflicting viewpoints, which side did he take? Well, he has concluded that buying *select* equities makes sense here. Why?

Saut backs up his decision by rattling off points such as: "there is no economic evidence the country is sliding into recession -- slow growth, yes; recession, no. That view is reinforced by the Yield Curve, which has been one of the most reliable predictors of recessions. To wit, every recession for the past 50 years has been preceded by an inverted Yield Curve (short-term interest rates above long-term interest rates). Currently, the Yield Curve is very steeply sloped."

The market strategist also moves on to highlight that 68% of companies beat revenue estimates during the recent earnings season. He is looking for a reflex rally off the massively oversold conditions. During this theorized rally, he instructs readers to 'prune' portfolios of underperforming stocks.

The only question we're left with is which *select* stocks is Saut referring to? He advocates buying "fundamentally sound stocks with decent dividend yields." And even though this list is from May, here are Saut's favorite investment ideas. Do with that what you will.

Embedded below is Jeff Saut's latest market commentary:



You can download a .pdf copy here.

Calling All Contrarians: What Signals Do You See?

Since every site on the internet seems to be spewing venom about how the government sucks, the ratings agencies suck, and the markets suck, we thought we'd head a different direction and start compiling a list of any contrarian signals out there.

First, a disclaimer: this isn't some batshit bottom-calling bonanza post. We don't engage in the X-Games sport of chainsaw juggling. This is merely an exercise similar to the one we penned back on March 8th, 2009 in our post: ranting, raving & contrarian signals that outlined just how crazy things were at the time.

This past Sunday night before markets opened to trade for the first time since the US debt downgrade, some people were exclaiming that it felt like the eve of Lehman Brothers' demise.

On Twitter, we opined that such a claim seemed ridiculous. Maybe the financial crisis made us numb to volatility, but it didn't feel nearly as extreme as 2008; not even close. Lehman was a forced deleveraging while this seems to be an unwind of QE2 excesses.

Comparisons aside, we thought it would be a prudent exercise to rationally process and analyze what we're seeing rather than spit out another article of doom that you've already read ten times. Legendary investor Jim Rogers once said, "I sell euphoria and buy panic." So today we look for signs of panic.

Current Contrarian Signals?


1. The Volatility Index (VIX) has surged from 17.5 in late July to 48 currently. The last time it was this high? Summer 2010 during the market's pullback. Since inception 25 years ago, the volatility index has only been above 44 on 9 different occasions. While it can still undoubtedly go higher (it touched 80 during the financial crisis), there has been a dramatic ramp in volatility.

2. Capitulation? This term is extremely overused. The word 'capitulation' was thrown around 396 times on CNBC last week with their octaboxes of people all talking over each other. On August 4th we tweeted that capitulation usually comes AFTER those calling for it piss themselves and reverse course. You need true panic. One example follows:

3. Hedge Fund Manager Barton Biggs: While this is only one example of 'capitulation', it does give hope to the contrarians out there. Last week $1.4 billion hedge fund Traxis Partners head Barton Biggs called stocks a "strong buy." Only a week later, he himself has capitulated (or made a smart move, depending on your view) by taking "some risk off," saying he hated to be doing so. This is merely one example of people throwing in the towel, but this is the type of behavior seen during true capitulation.

4. Retail Investors Freaking the F Out: You all probably have that one retail investor friend that doesn't pay attention to markets all that often but still wants to make money. You are their "go-to" market guy. When they start calling you wondering what the f*ck is going on, that might be a contrarian signal. When they call you saying they sold everything, that's usually a contrarian signal. Don't know about you, but we received these phone calls yesterday.

5. Bank Charges For Holding Cash: This is somewhat an outlier given it applies to accounts holding $50 million or more, but it's still worth mentioning. Instead of being invested, there is so much cash sitting around in accounts at Bank of New York Mellon that they began charging clients to hold cash in their accounts. One-month Treasury bills traded at a negative yield and indicated that investors were willing to *pay* the government to take their money.

5. ZeroHedge Crashes: The popular market website with a cult-like following crashed on Sunday night due to insane traffic as bears tried to congregate in victory and scared bulls looked for answers.

5. Dow Posts Sixth-Largest Point Loss: The market saw its worst day since the financial crisis as it tumbled 634 points. Stocks have fallen 15% in just over two weeks and such outlier events can be contrarian signals.

6. ??? What other contrarian signals (if any) are you seeing? On the flip side, what bearish confirmations are you seeing? We're looking for both sides of the argument so let us know your thoughts in the comments below.

Again, the disclaimer for those who forgot: bottom-calling is for schoolboy bitches and this post is merely surveying the carnage.

David Gallo's Valinor Management Adds to Popular (BPOP) Position

David Gallo's hedge fund firm Valinor Management recently filed a 13G with the SEC due to portfolio activity on July 26th in shares of Popular Inc (BPOP). Per the filing, Valinor has revealed a 5.12% ownership stake in BPOP with 52,300,172 shares.

This marks a 52% increase in Valinor's position size in Popular since the first quarter. While this recent trading took place in late July, it's impossible to guess if the hedge fund has done anything with the position since then during August's tumultuous market decline. Since July 26th, shares of BPOP are down 16% and hit a new 52 week low today.

In other activity from the hedge fund, we've detailed Valinor's stake in Swift Transportation (SWFT).

Per Google Finance, Popular is "a diversified, publicly owned bank holding company. The Company operates in two markets: Puerto Rico and Mainland United States. In Puerto Rico market the Company provides retail and commercial banking services through its principal banking subsidiary, Banco Popular de Puerto Rico (BPPR), as well as auto and equipment leasing and financing, mortgage loans, investment banking, broker-dealer and insurance services through specialized subsidiaries. In Mainland United States market, the Company operates Banco Popular North America (BPNA), including its wholly owned subsidiary E-LOAN, Inc. (E-LOAN)."

Eric Mindich's Eton Park Capital Buys More MSCI

Eric Mindich's hedge fund Eton Park Capital just filed a 13G with the SEC on its position in MSCI Inc (MSCI ). Per portfolio trading on July 29th, Eton Park has disclosed a 5.81% ownership stake in with 7,000,000 shares.

This activity represents a 18.6% increase in the hedge fund's position size because at the end of the first quarter, they owned 5,900,000 shares. Per data from the first quarter, Eton Park is now the fourth largest shareholder of MSCI shares.

MSCI is very visible in markets as popular indexes (and exchange traded funds) bear its name, such as the iShares MSCI Emerging Markets Index (EEM).

Of other funds we track, Stephen Mandel's hedge fund Lone Pine Capital had previously owned MSCI back in 2009 but sold it in 2010. Thomas Steyer's Farallon Capital held a sizable position at the end of Q1, but we won't know their recent Q2 position size until next week.

In other activity from Eton Park, we detailed their new position in 3Leg Resources.

Per Google Finance, MSCI Inc is "a provider of investment decision support tools, including indices, portfolio risk and performance analytics and corporate governance products and services. The Company consists of two segments: the Performance and Risk business and the Governance business."

Larry Robbins' Glenview Capital Buys Clearwire (CLWR): Investment Thesis

Larry Robbins' hedge fund firm Glenview Capital just filed a 13G with the SEC regarding shares of Clearwire (CLWR). Due to portfolio activity on July 28th, Glenview has disclosed a 6.53% ownership stake in CLWR with 16,228,264 shares.

This activity marks a 76.5% increase in their position size since the end of the first quarter. So while they were buying as recently as the end of July, the crazy market volatility that has followed in August makes it hard to know if they've battened down the hatches and held onto these recently acquired shares, or if they instead chose to reduce risk. We've also detailed how Glenview bought Flextronics (FLEX) as well.

Glenview's Thesis on Clearwire

Glenview's previous letter outlined their thesis on Clearwire (CLWR) as they own equity and debt. The company owns 45 billion MHz of wireless spectrum and was the first true '4G' wireless network. They like CLWR under the notion that capex was behind the company ($20 billion) and growth was ahead. The stock currently trades around $1.52.

Robbins goes on to say that the main backdrop for investing in CLWR is that, "over the next four years, mobile traffic growth is expected to increase 40 times, driven by increased video usage and data plans on PCs/tablets/smartphones ... The appeal of Clearwire is therefore simple; Clearwire has aggregated an unmatched amount and a sufficient quality of spectrum to be a viable 4G offering for a wireless carrier."

The hedge fund likes Clearwire because: "a) there is significant downside support from asset value, b) the investment to build those assets is substantially behind them, and c) the wireless industry is at an inflection point in terms of demand for these assets."

Another bit worth noting: CLWR is owned mainly by strategic investors (~84%), primarily by Sprint (S). Glenview hypothesizes that should the AT&T (T) and T-Mobile merger be approved, Sprint could compete by moving to purchase the rest of Clearwire. Either way, Glenview likes the risk/reward of CLWR.

To see the rest of Glenview's investments, be sure to subscribe to our Hedge Fund Wisdom newsletter, as a new issue will be released in the next two weeks that updates top hedge fund portfolios.

What We're Reading ~ 8/8/11

Dreman's contrarian investment rules [World Beta]

What concerns Passport Capital [Distressed Debt Investing]

On bond management [Aleph Blog]

Let's face it, market correction makes sense [Peridot Capitalist]

Why this is not 2008 [Capital Observer]

Paulson's flagship fund down 21.6% [FT]

Profile of Lansdowne's Paul Ruddock [Bloomberg]

Andy Beal becomes billionaire with FDIC assets [Bloomberg]

Are hedge funds too big to fail? [WSJ]

Steven Cohen's forbidden transcript [Reuters]

Introduction of the social web index [StockTwits]

Web 2.0: how to spot the top [Reformed Broker]

Don't call it the next tech bubble yet [Fortune]

Social networks: are real names required for real socializing? [AVC]

An inside look at the rise and fall of Research in Motion (RIMM) [Boy Genius Report]

Depressing but nonetheless: 25 documents you need before you die [WSJ]

E-Trade Baby Loses Everything - Fake Commercial

This fake commercial titled, 'E-Trade Baby Loses Everything' is pretty appropriate given the torrential wave of selling the stock market has seen over the past week. If you're at work, be warned that there's lots of cursing/bleeping.

Email readers will need to come to the site to watch the video:

Perry Capital's Investment Thesis on Iron Mountain (IRM)

Hedge fund Perry Capital's recent letter to investors outlines why they added to their existing position in Iron Mountain (IRM) in the second quarter. We also posted up Perry's thoughts on credit in another post. Regarding their equity stake in IRM, Perry writes,

"The company’s main business is physical document and data tape storage where it has the #1 market share. In part due to the urging of a shareholder, the company is engaging in a series of changes that should unlock value and drive returns to shareholders. We believe management’s commitment to the shareholders, new board appointments, reductions in capital expenditures, the recent sale of its non-core digital business, rationalization of its international operations, and potential conversion to a REIT all bode well for shareholder value creation. Along with the defensive nature of the business model, management has committed to return $2.2bn of cash to shareholders by 2013 (equal to one third of its market capitalization). This should provide adequate downside protection in an uncertain market environment."

Perry Capital 767 Fifth Avenue New York, NY 10153
212-583-4000 investorrelations@perrycap.com

Perry Capital: European Markets to Provide Credit Opportunity in Coming Months

Richard Perry's hedge fund firm Perry Capital returned -0.93% in the second quarter and is up 2.69% for the year. The firm now manages $8.6 billion and has used the market volatility to add to their positions in their highest conviction names.

In a past investor letter, we highlighted how Perry saw a growing amount of event-driven opportunities. Their second quarter letter to investors outlines why they sell existing positions:

1. more compelling opportunities are created by the markets
2. a position reaches value
3. our original thesis is refuted based on newly uncovered data.

Perry also writes, "we are comfortable holding higher cash levels when we see potential opportunities on the horizon. The European sovereign debt crisis could be the cause of the next market dislocation."


Credit Positions

The hedge fund's letter mentioned their position in preferred securities of government sponsored enterprises (GSE's) such as Fannie Mae and Freddie Mac. As 90-day delinquencies have been steadily declining, Perry feels the US taxpayers could recoup the $164 billion preferred investment. In the past we've pointed out how Michael Kao's Akanthos Capital Management likes GSE preferreds as well.

Perry also believes that peripheral European markets will be a 'robust' credit opportunity over the upcoming months. Additionally, Perry utilized the June sell-off to add "a small amount of structured credit to the portfolio with a particular focus on asset-centric instruments."


Equity Positions

The hedge fund sold their position in Equinox Minerals as Barrick Gold (ABX) purchased the company and after Zambian approval, Perry tendered its shares into the offer. They also exited their position in Swiss pharmaceutical company Actelion (ETR:ACT) after a failed attempt by an activist shareholder and a disappointing jury verdict.

They also added to their existing position in Iron Mountain (IRM). You can view Perry Capital's thesis on Iron Mountain here.


For more recent hedge fund letters, we've also posted up:

- Ivory Capital's thoughts on why value investing isn't working in this market

- Dan Loeb & Third Point's Q2 letter

- Oaktree Capital & Howard Marks' thoughts on the US debt ceiling

- Corsair Capital's Q2 letter

- David Einhorn & Greenlight Capital's letter

FINforums Annual Hedge Fund Summit: 10% Discount

On September 14th, 2011 in New York City, join FINforums, the events arm of top hedge fund news site FINalternatives, as distinguished experts from the hedge fund industry speak candidly about the biggest issues affecting managers today.

Topics covered include: The global macro outlook for Q4 and beyond; The best investment strategies for finding alpha; Techniques for successful marketing and capital raising; Regulatory and compliance updates; Alternative hedge fund structures (managed accounts, UCITS, investible indices); An institutional investor roundtable, and more.

Registration Discount for Market Folly Readers:

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Service Providers / Others = $695

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Register Today, Space is Limited

Speakers Include:

Frank Ahimaz, CIO, Museum of Modern Art (MoMA)
Michael Alexander, Director, Smarsh Inc.
David Asman, Anchor, Fox News and Fox Business Network
Peter Carey, Managing Director, SkyBridge Direct
Jack Flaherty, Investment Manager, GAM
Simon Fludgate, Principal, Aksia
Bruce Frumerman, CEO, Frumerman & Nemeth
Ibrahim Gharghour, Managing Partner and CIO, Pulse Capital Partners
Todd Groome, Chairman, AIMA
Deepak Gurnani, Head of Hedge Funds, Investcorp
Constance Hunter, Chief Economist, Aladdin Capital Management
Jeremy Kroll, Co-founder and CEO, K2 Global Consulting
Joseph McAlinden, CIO, Catalpa Capital Advisors
Michelle McCloskey, Head of Hedge Fund Research, Man Investments
Eric Munson, Managing Director, Stride Capital
Vinod Paul, Managing Director, Eze Castle Integration
Cathleen Rittereiser, Dir. Of Investor Relations, Concordia Advisors
Larry Smith, Chairman and CIO, Third Wave Global Investors
Don Steinbrugge, Managing Partner, Agecroft Partners
Lisa Vioni, President and CEO, Hedge Connection
Christopher Vogt, Global Head of Hedge Funds, Allstate Investments
Ezra Zask, Founder and President, SFC Associates

Hedge Fund Third Point Reduces Equity Exposure For Third Consecutive Month

For the month of July, Dan Loeb's hedge fund firm Third Point offshore fund was up 0.3%. Year to date, they are up 6.9% versus 3.9% for the S&P 500. Seeing 18.4% annualized returns, it's no wonder that Third Point is closed to new investors.

Net Exposures Down Yet Again

Loeb's hedge fund is only 23.3% net long equities (39.7% long and -16.4% short). In June, we detailed how Third Point reduced equity exposure again. July marks the third consecutive month in which Loeb's firm has reduced risk.

In July they ratcheted down exposure from 30.7% net long down to only 23.3% net long. Caution is the name of the game for Loeb's firm and he outlines the rationale in his quarterly letter.

Their largest net long equity exposure comes in the energy sector at 6.1%, as well as consumer and basic materials each at 5.7%. They are net short technology and utilities.

In credit, Third Point is 20.9% net long (32.2% long and -11.3% short). They continue to be net short government issues and their largest net long exposure comes in asset backed securities (ABS).


Third Point's Top Positions

1. Gold
2. Delphi Corp
3. El Paso (EP)
4. CIT Group (CIT ~ multiple securities held)
5. Mosaic (MOS)

Loeb's stake in MOS is brand new and the thesis on Mosaic is detailed in Third Point's Q2 letter. They also continue to hold Delphi, a position numerous hedgies like.

In the past month, Third Point's top winners include gold, Peregrine Metals (PGM), CVR Energy (CVI), Delphi, and an interest rate hedge. Their top losers included NXP Semiconductor (NXPI), CIT Group (CIT), Pall Corp (PLL), Health Net (HNET), and Brenntag AG (BNR).

Shares of NXPI have traded down almost 43% in the past 3 months. Many see this company as a play on the future 'mobile wallet' due to its near field communications (NFC) chip that allows transactions between phones. Third Point has been able to offset the negative performance of this company with gains in other areas.