David Einhorn Short Green Mountain Coffee Roasters (GMCR): Value Investing Congress Presentation

At the Value Investing Congress in New York today, David Einhorn of hedge fund Greenlight Capital revealed he is short Green Mountain Coffee Roasters (GMCR) in a presentation called "GAAP-uccino".

Be sure to check out our notes from the Value Investing Congress.


David Einhorn (Greenlight Capital): Short GMCR

Einhorn famously gave a presentation on shorting Lehman Brothers a few years ago and shorting St. Joe (JOE) last year at the same conference. This year he's back with a short of GMCR. Whitney Tilson of T2 Partners has been short GMCR for a while as well.

Embedded below is his full slideshow presentation:



Einhorn began with company background and the well-known bull case. Green Mountain Coffee is a K-cup company with a razor-razor blade model; 95% of business is at-home use.


Bull case: 64 million households drink coffee, 1/3 buy K-cup machines, 2 cups per day, 15.5B k-cups, 0.15 profit per cup, get $1.4B profit, on 160M shares is $8 eps. Recognized brands like Starbucks, Dunkin Donuts will grow installed base, and bring higher margins. Management calls itself the “iPod of coffee.” Great income statement growth in last few years, aided by acquisitions. And the stock has done very well: 57x P/E, 35.6x next year estimated eps. Up 185% this year, best stock in SPX 1500.

Einhorn then moved onto criticizing the company: Poor transparency. Doesn’t even report lbs shipped, k-cup units, or precise Keurig brewers units. GMCR has cut their amount disclosure over time, which is what companies usually do when metrics are deteriorating.


Bear case: The opportunity is smaller than bulls believe. Attachment rate is smaller than bulls believe and is declining. They already have widespread distribution and brand awareness. Machines are expensive, $250 vs. $80 Mr. Coffee, or cheap $20 brewers. K-cups are much more expensive compared to buying the bags of coffee yourself, 60 cents per serving vs. as cheap as 5 cent per serving. This limits the actual available market to about 20M households, not 64M. Growth in retailers selling Keurig is slowing.

Attachment rate is declining or flat, only about 1.3 per brewer per day. GMCR doesn't disclose the attach rate!

Starbucks deal: non-exclusive and multi-year, in stores and at SBUX. Deal does not apply to next generation brewer - SBUX keeping its options open? About $0.22 estimated profit per K-cup. How will they split it? Using Smucker’s deal, can estimate that GMCR only got .06 of .17 total profit, to make the k-cups. Therefore, SBUX should get 2/3 of the 22 cents, leaving GMCR only 7 cents. In fact, SBUX deal could cannibalize their other K-cup sales.

GMCR hasn't generated much FCF. In fact, it's been negative for 4 years. Due to acquisitions and CAPEX, they are burning cash and expect to continue. ROIC only 16.3%, yet high multiple, doesn’t justify current stock price.

Competition/Patents: Bulls say patent expiration unimportant due to large market share. However, patents that keep others from making k-cups for the existing brewers may be expiring in 2012. Competitors will be able to produce k-cups!

GMCR has been buying out licensees and paying too much. Usually allocates 95-104% of the purchase prices to good will when buying them. Goal may have been to avoid competing with licensees when patents expire. Big deals with SBUX, Dunkin are to mitigate competition when patents expire. Only advantage they have is contract manufacturing, which is a lousy business. GMCR may instead create a totally new system to stop others.


Bear Case Summary: GMCR will no longer have monopoly on making the K-cups next September. Others will gear up to enter the market with much cheaper alternatives- they already have the equipment to do it (Crystal Lite maker example). There is lots of branded competition: Kraft, Nestle, and Maxwell House.

Bear case, vs. the bulls $9 eps estimate. Cut attach rate to 1.25 K-cups per brewer, add 20% private label penetration, cut profit per cut to 0.12 from 0.15, gets you $3.50 eps, not $9.00.


CAPEX: Spending a lot on CAPEX that is “unexplained.” As much as $186M in 2011- where is this money going? Next year it looks even worse, $431M in unexplained CAPEX based on their guidance. CAPEX growing faster than the business, when the opposite should be happening.

Recent summer quarter revenue was $717M, 100M higher than Street, all upside on K-cup sales. Historically, they’ve been very predictable. What happened? Implies attach rate soared by 11%, no good answers on the conference call.


SEC inquiry: Revenue recognition practices. Internal investigation exonerated the company. “We believe there may be a material issue.” Something fishy with MBlock, the third-party fulfillment company that handles their distribution and inventory. 51% of accounts receivable were to them. Einhorn’s people have interviewed witnesses who spoke of phony transactions that had revenue recognition issues. Former workers may have been fired for asking too many questions! The company uses excel instead of stronger ERP software; open to abuse and mistakes. Keurig was shipping stuff to themselves according to an interview. Believes this may explain the excess K-cups sold in the quarter. Significant problems with expired coffee. His interviews with ex-employees showed astounding levels of inventory discrepancies- shipping to themselves, expiring coffee, sales that never happened.

He says there's been a lot of surprises with recent accounting and he accused management of "shenanigans" (SuperTrooper anyone?) After his presentation, GMCR stock was down as much as 12%.


Conclusion: Market is smaller and more penetrated than bulls believe. Attachment rates matter and they are falling. $3.50 eps is more likely than $9.00. The patent expiration is a real problem. The March quarter was such a surprise that it was suspicious, especially in light of conversations with workers. GMCR did a big stock deal, where insiders sold, right after the 19% jump in the stock after the quarter. The accounting is aggressive, transparency is limited, and controls seem to have material weaknesses. GMCR is a serial issuer of stock for acquisitions, while insiders have sold in droves. Limited FCF, large number of warning flags here.

It should be noted that GMCR has largely been labeled a "momentum stock" and some of the top holders include hedge funds like Philippe Laffont's Coatue Management, Steve Cohen's SAC Capital, and John Thaler's JAT Capital.


Q&A Session:

1. MBlock owners or relationship? Unclear.

2. NPD data shows evidence of good growth - how do you reconcile this with what you find? "No doubt they are selling a lot of coffee. We have seen an increase in expired or nearly expired coffee."

3. Will the SEC do anything here? They've been here for a year, there is some hope.

4. Vodafone? Says the thesis is playing itself out.

5. Sprint, any change in outlook? They're trying to do a lot of things at once. Still like the stock, despite high amount of debt, company still has access to funding without diluting shareholders. Strategic asset to a number of large players. What they are doing now makes a lot of sense, if we are sufficiently patient, if anything goes right, we have a chance at an asymmetrical return.

6. Japanese bonds, surprised they've rallied? Yes, but Japan is in a tough spot due to so much debt and budget deficit, bad demographics (Kyle Bass of Hayman Advisors has been short Japanese JGBs).



In our September hedge fund performance numbers post, we highlighted that Greenlight was -0.76% in September and -6.16% for the year at that time.


About David Einhorn: He manages the $7 billion hedge fund Greenlight Capital. He is the author of Fooling Some of the People All of the Time which is a great read. We've also posted up David Einhorn's recommended reading list for all aspiring fund managers.

Earlier this year we also posted up Einhorn's presentation on Microsoft (MSFT).



You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Larry Robbins' Glenview Capital Adds to Lincare Holdings (LNCR) Stake

Larry Robbins' hedge fund Glenview Capital filed a 13G with the SEC regarding its position in Lincare Holdings (LNCR). As of October 11th, Glenview owns 6.14% of LNCR with 5,731,403 shares.

This marks an increase of 85% in their position size since the close of the second quarter. Glenview crossed the 5% regulatory threshold in Lincare shares on September 29th and continued buying up to a 6.14% stake.

Glenview was already one of the largest owners of LNCR shares and now they move into the top-5 stakeholders. For other portfolio activity from Robbins' fund, we also detailed Glenview's thesis on Clearwire (CLWR).

Taken from Google Finance, Lincare Holdings is "a provider of oxygen and other respiratory therapy services to patients in the home. Its customers suffer from chronic obstructive pulmonary disease (COPD), such as emphysema, chronic bronchitis or asthma, and require supplemental oxygen or other respiratory therapy services. Lincare also provides a variety of durable medical equipment (DME) and home infusion therapies in certain geographic markets."

Berkowitz's Fairholme Cuts Regions Financial Position in Half

Bruce Berkowitz's Fairholme Capital filed an amended 13G with the SEC regarding shares of Regions Financial (RF) and disclosed they now have a 4.8% ownership stake in RF with 60,568,917 shares.

The SEC filing was made due to activity on September 30th and marks a 51% reduction in Berkowitz's position. The last time we covered Berkowitz was at the Harbor Investment Conference where he said there was black box risk to owning banks but that after three years you can get an idea of who's going to do well.

Fairholme also owns stakes in other financials like AIG (AIG), Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), and CIT Group (CIT). In our Hedge Fund Wisdom premium newsletter, we outlined the investment thesis on AIG as Berkowitz has pressed his bet there and it is by far his largest position at over 20% of his portfolio.

Per Google Finance, Regions Financial is "a financial holding company. The Company operates throughout the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of investment banking, asset management, trust, mutual funds, securities brokerage, insurance and other specialty financing."

Steve Mandel's Lone Pine Buys More Esprit Holdings

Steve Mandel's hedge fund Lone Pine Capital recently raised its stake in Esprit Holdings (HK:0330) listed in Hong Kong. The hedge fund is now the second largest shareholder at 6.23% of Esprit Holdings. This is up from a 3.22% stake previously.

Lone Pine Capital purchased almost 39 million shares at around HK $9.50 on October 4th according to Hong Kong regulatory disclosures. Over the past month, shares of Esprit are down 45% as the company saw revenue from Europe decline again due to the debt crisis there.

In other activity from this hedge fund, last week we covered how Lone Pine added to its Oceaneering position as well as their new position in Williams Sonoma.

Per Google Finance, Esprit is "principally engaged in wholesale and retail distribution, and licensing of fashion and life-style products designed under its own Esprit brand name. The Company operates with 12 established product lines offering women’s wear, men’s wear, kid’s wear, edc youth, as well as shoes and accessories in over 800 directly managed retail stores and over 14,000 controlled-space wholesale point-of-sales internationally."

Steve Cohen's SAC Capital Buys More Forest Oil (FST) on Dividend Play

Steven Cohen's hedge fund firm SAC Capital just now filed a 13G with the SEC regarding shares of Forest Oil (FST).

As of October 10th, SAC owns 4.8% of Forest Oil with 5,457,851 shares. This marks an increase of 50% in their common stock position size since the end of the second quarter (though it should be pointed out that SAC also owned FST call options at the end of Q2).

Since then, SAC Capital has bought 1,829,850 additional shares of FST. However, in the footnotes of the SEC filing, it notes that SAC owned more than 5% of FST on September 30th. Yet over the past 10 days, their ownership stake has decreased down to 4.8%.

Forest Oil Special Dividend

The September 30th date is important here because Forest Oil executed a special dividend of 70 million shares of Lone Pine Resources (LPR) that are owned by Forest. That distribution was made to FST investors on September 30th and shareholders on record as of September 16th received 0.612 of a share of Lone Pine common stock for every share of FST owned.

In early September we covered how Jeffrey Altman's hedge fund Owl Creek started a Forest Oil stake, presumably playing this dividend catalyst just like SAC. So while these major hedge funds held a sizable position before the special dividend, it will be interesting to see if they will still hold a position going forward.

Per Google Finance, Forest Oil is "an independent oil and gas company engaged in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in North America."

Hedge Fund Manager Jonathan Ruffer Concerned About Inflation

UK hedge fund manager Jonathan Ruffer's third quarter letter highlights the UK economic and investment environment and outlines his concern regarding the potential for high inflation.

Ruffer LLP manages £12 billion and has seen annual returns of around 11.5%. Ruffer's well known for warning investors of the credit crisis as early as 2006. When markets tanked in 2008, Ruffer returned positive double digits. His next concern is inflation.

Ruffer writes, "Interest rates are welded to a near-zero rate. The central banks simply cannot put interest rates up, almost whatever happens to inflation. It is a gaping hole above the waterline, which could sink the ship if rates are raised to combat inflation. It leaves us all defenceless."

While the manager says inflation isn't violent yet, there are many catalysts that could make it so. He cautions that high inflation, low interest rate environments are horrible for savers. So how do you combat it?

Ruffer writes, "Inflation-linked government bonds (of surviving nations) are designed for exactly this economic climate. It is not a high inflation rate which makes them thrive – it is the differential between inflation and interest rates. They have the capacity to become enormously valuable – like Titanic lifeboats – in a world where the ordinary saver despairs of keeping his nest egg safe. We have a great deal of your assets in them because we are approaching what I’ve described before as an airless valley which we have to pass through."

It seems the hedge fund manager is advocating indexed linked Gilts in the UK - the equivalent of TIPS in the US. This is one of the recommendations for the best investments during inflation.

Embedded below is Ruffer's letter (email readers click the link to come read it):




We've also highlighted how hedge fund Kleinheinz Capital says inflation is the biggest threat to emerging markets.

Hedge Fund Lansdowne Partners Increase Prudential Plc Short

Paul Ruddock and Steven Heinz's UK-based equity long/short hedge fund Lansdowne Partners has increased its short position in London listed financial services group Prudential plc (LON: PRU).

According to a filing made on October 6th, Lansdowne now hold a short position equivalent to -1.6% of Prudential's outstanding shares. The hedge fund has actually held a short in this company since 2009. In February 2009, their short represented -0.45% of outstanding shares and that position was gradually increased throughout 2010 and 2011 (now at its highest point).

Prudential Plc is Lansdowne Partners only disclosed short position in a UK listed financial company at the moment. As we have reported previously, during 2010 and 2011 Lansdowne reduced their shorts in Old Mutual (LON: OML), Legal and General (LON: LGEN) and Aviva (LON: AV.) to below the regulatory threshold of -0.25%.

In our September hedge fund performance numbers post, we highlighted that Lansdowne's $8 billion UK equity fund was -1.59% in September and -15.16% for the year at the end of September.

In other UK hedge fund activity, we also just detailed how hedge fund manager Odey added to their RSM Tenon Group Position. You can also read Odey's market outlook as well.

Per Goodle Finance - "Prudential plc (Prudential) is an international financial services group, with operations in Asia, the United States and the United Kingdom. Prudential is structured around four business units: Prudential Corporation Asia, Jackson National Life Insurance Company (Jackson), Prudential UK insurance operations and M&G. Prudential Corporation Asia's core business is life insurance, health and protection, either attached to a life policy or on a standalone basis, and mutual funds. It also provides selected personal lines property and casualty insurance, group insurance, institutional fund management and consumer finance (Vietnam only). In the fund management business Prudential holds a 49% stake in a joint venture with ICICI, in the People’s Republic of China, it had a 49 % stake in a joint venture with CITIC and in Hong Kong it has a 36% equity stake in a joint venture with Bank of China International."

Corsair Capital: Is Negativity "Priced In" the Market? (Q3 Letter)

Jay Petschek and Steve Major's hedge fund Corsair Capital outline how their portfolio has performed in their third quarter letter. They pinpoint the notion that fear has been driving markets for the past few months. Instead of focusing on hindsight, they look to what investors should be doing today.

Simply put, Corsair does not believe this is a repeat of 2008. They point to better liquidity, solid corporate balance sheets, and insider buying. While they acknowledge that things are not "rosy," they wonder if all the negativity is now priced in the market.

Their letter goes on to talk about their positions in Globe Specialty Metals (GSM), Lyondell Basell (LYB), Neo-Material Technologies (TSE:NEM), Reader's Digest (RDA), and TNS (TNS). They also mention they sold their position in Keystone Industries (KYCN) in a negotiated transaction.

For some of the hedge fund's latest investments, we posted Corsair's investment thesis on Shaw Group (SHAW).

Embedded below is Corsair's letter (email readers click the link to come read it):




As noted in our September hedge fund performance numbers update, Corsair was -9.5% for the year at the end of September but has seen 14.2% annualized returns since inception in 1991.

Corsair Capital's Investment Thesis on Shaw Group (SHAW)

Jay Petschek and Steven Major's $749 million hedge fund Corsair Capital recently sent their third quarter letter to investors and attached a write-up of their new position in Shaw Group (SHAW). Below you'll find their investment thesis.

The hedge fund bought SHAW as shares have tumbled due to the nuclear disaster in Japan. SHAW currently trades just under $22 per share and Corsair writes,

"We believe SHAW is worth $37-$43 per share and will trade near that level over the next year. Several catalysts will drive the stock higher including reporting a simplified and cash-rich balance sheet, executing a buyback worth 30% of the current market cap (the 2nd such program in calendar year 2011), and earnings growth in FY 2012."

They also believe that if those various catalysts do not result in the stock trading higher, Shaw Group could potentially be a compelling takeover target for competitors who could use stock to finance the acquisition.

Embedded below is the letter. Email readers please click to come read Corsair's thesis on Shaw Group:



For more on Corsair, we covered their past letter where they anticipated increased market volatility as well as their investment thesis on Innophos.

Odey Add to RSM Tenon Group Position

Crispin Odey's UK based hedge fund Odey Asset Management have been adding to their position in London listed RSM Tenon Group (LON: TNO). Back in June we reported that Odey had purchased 5% of RSM Tenon's outstanding shares.

Fast forward to the recent disclosures on September 26th and October 3rd and you see that Odey have increased their position to 6.92% of RSM Tenon Group's shares initially, and then even higher to 8.19% of the company. It's clear they fancy TNO shares at recent levels.

For more from this hedge fund, you can read Crispin Odey's latest market outlook that we posted yesterday as well.

Per Google Finance, RSM Tenon Group PLC "provides a range of professional and business services. The Company has five segments: audit, taxation and advisory; turnaround and corporate recovery; risk management; financial management, and specialist tax. It provides solutions to clients that range from individuals and entrepreneurially-led owner-managed businesses to corporations and public sector organizations. In December 30, 2009, the Company completed the acquisition of RSM Bentley Jennison. Its subsidiaries include RSM Tenon Limited, RSM Tenon Corporate Finance Limited, RSM Tenon Financial Services Limited and Premier Strategies Limited."

What We're Reading ~ 10/7/11

Brand new biography on Apple's Steve Jobs [Walter Isaacson]

The future of hedge fund capital raising [FINalternatives]

Bear markets in DowJones Industrial Average 1899 - present [World Beta]

Value investing checklist [Old School Value]

Checking in on technology/media/telecom [Research Puzzle]

On hunting for value now [Distressed Debt Investing]

Is Eddie Lampert changing strategy with Sears? [Peridot Capitalist]

Clearwater (CLW): The little spin-off that could [Value Investing Letter]

Salida Capital feels pain from commodity bets [Globe & Mail]

Hedge fund mixes Ayn Rand & behavioral psych [Marketwatch]

Profile on financial author Michael Lewis [NY Magazine]

Why you shouldn't be disappointed in iPhone 4S [SplatF]

Why you *should* be disappointed in Apple's new phone [Slate]

Amazon: the company that ate the world [BusinessWeek]

The future of venture capital [Fortune]

Hedge Fund Performance Numbers: September 2011 (Updated)

During the month of September, the S&P 500 was -7.0% and it is now -8.7% for 2011. Hedge funds didn't necessarily fare too much better as a whole. The Hennessee Hedge Fund Index declined -3.7% in September as hedge funds suffered their worst quarter since the fourth quarter of 2008. However, a few funds outperformed.

The following comes from individual hedge fund investor correspondence and HSBC's Private Bank data. ***Update 10/7/11: tons of hedge fund performance numbers added below:


Lee Ainslie's Maverick Capital: Maverick Fund $1 billion
-7.91% in Sept, -16.92% ytd

Andreas Halvorsen's Viking Global: Equities III Fund $1.6 billion
-2.19% in Sept, +0.70% ytd

Paul Ruddock & Steven Heinz's Lansdowne Partners: (UK Equity Fund: $8 billion)
-1.59% in September, -15.16% year-to-date

Crispin Odey: Odey European: $2.3 billion
-3.43% in September, -17.8% ytd

Mark Kingdon's Kingdon Capital: $2 billion
-7.99% in September, -18.73% ytd

Ricky Sandler's Eminence Capital: $2.5 billion
-2.7% in Sept, -8.77% ytd

Curtis Macnguyen's Ivory Capital: $2.3 billion
-3.24% in Sept, -6.57% ytd

Leon Cooperman's Omega Advisors: $1 billion Overseas Partners
-7.58% in Sept, -12.36% ytd

Jim Simons' Renaissance Technologies: Institutional Equities $240 million
+0.76% in Sept, +24.37% ytd

Ron Gutfleish's Elm Ridge Partners: $2.4 billion
+1.5% in Sept, -2.84% ytd

David Einhorn's Greenlight Capital: $7.2 billion
-0.76% in Sept, -6.16% ytd

Jeffrey Altman's Owl Creek: $4.8 billion
-7.6% in Sept, -15.62% ytd

Richard Perry's Perry Partners International: $4.9 billion
-2.43% in Sept, -7.18% ytd

Jamie Dinan's York Capital: $2 billion
-4.74% in Sept, -9.06% ytd

Barton Biggs' Traxis Partners: $547 million
-3.8% in Sept, -2.11% ytd

Clint Carlson's Carlson Capital: $2.8 billion Double Black Diamond Fund
-1.09% in Sept, -2.23% ytd

Alexander Roepers Atlantic Investment Management: $445 million
-9.36% in Sept, -14.16% ytd

Wayne Cooperman's Cobalt Capital: $1.3 billion
-3.82% in Sept, -3.72% ytd

John Thaler's JAT Capital: $1.4 billion
-3.2% in September, +30.68% ytd

Dan Loeb's Third Point (Offshore Fund): $4.27 billion fund AUM
-3.5% in September, +0.2% year-to-date

Bill Ackman's Pershing Square Capital Management: $5.1 billion fund AUM, $8.8 billion firm AUM
-5.7% net in September, -15.8% year-to-date

John Paulson's Paulson & Co
Advantage Fund -6% in September, -28% ytd

Paul Tudor Jones' Tudor Investment Corp: $8.3 billion fund AUM
+4.9% in Sept, +5.45% ytd (BVI Global Fund)

Bruce Kovner's Caxton Associates: $6.8 billion fund AUM
+0.28% ytd through September 30th (Limited Fund ran by Andrew Law)

Louis Bacon's Moore Capital Management: $7.6 billion fund AUM
-1.64% ytd through September 29th

Moore Capital Management (Greg Coffey's Emerging Fund): $1.5 billion fund AUM
-1.32% in September, -7% ytd

Chris Pia's Pia Capital: $215 million
-7.16% in Sept, -14.84% ytd

Brevan Howard (Flagship Fund): $24.3 billion fund AUM
+12.98% ytd as of September 23rd (run by Alan Howard)

Jay Petschek & Steve Major's Corsair Capital ~ $749 million AUM
-8.1% in September, -9.5% year-to-date

Whitney Tilson's T2 Partners
-9.5% in September, -29.6% year-to-date


*** This post will be continually updated as new numbers come in

Hedge Fund Manager Crispin Odey's Market Outlook

Odey Asset Management's founder Crispin Odey has released his most recent market outlook. Odey is a prominent UK fund manager and he believes that equities are attractive (yielding 5-6%) with earnings yields of 20-33%.

In particular, he singles out one stock he likes: BP (BP). We've highlighted in the past how David Einhorn's Greenlight Capital likes BP as well.

While Odey is constructive on equities, it should be noted that he has maintained this stance since before the most recent market turmoil. His previous commentary from back in May said that stockpicking is still working. So with the latest downturn, it seems he's gained even more conviction that equities are the right place to be but he's surely felt some pain along the way.

Below is Odey's latest commentary:

"Equities continue to trade badly, but this is no surprise. They have disappointed for 11 years; indeed most indices are where they were 15 years ago. However in a world where the geopolitical outlook is unresolvably bad, shareholders are not only being paid to be patient by high dividend yields but also pricing in a very high margin of safety.

The example I like is BP. When BP suffered from the Macondo rig disaster, the company's market capitalisation fell by $120 billion, the company set aside $30 billion in provisions and recently announced actual claims of about $5.5 billion. Has the share price recovered the missing $114.5 billion? Of course not. Presumably investors are pricing in more Macondos and, given that they actually cost just over $5billion each, they are expecting 20 such explosions. As an investor in the shares today this gives me a great deal of protection - a margin of error. It also convinces me that the stockmarket is a better historian than it is a forecaster or a mathematician.

So why are markets so depressed? Some European markets are down c. 27% this year. Firstly this is structural. Zero interest rates have an unusual effect in Europe. Compared to the Anglo-Saxon world, Continental European banks are funded through bonds and interbank lending, not deposits. Since interbank and bond borrowing rates have not fallen below 2%, corporate loans in Europe should be at 4.5% not at 2.5%. In fact corporate loan rates have failed to rise in Europe. Lending is therefore unprofitable. Banks are shrinking their loan books. The easiest loan books to shrink are the corporate loan books and that means rights issues for indebted companies as equity replaces debt. All this depresses equities, especially those with borrowings to roll.

The equity markets now act and behave like corporate bond markets. Equities yield 5-6% and many are on earnings yields of 20-33%. They are mouth-wateringly attractive because unlike debt they do not mature.

But the worries that look down on them from on high reflect the fact that whereas Continental European banks were not exposed to the excesses of America and the UK, they are over-exposed to the excesses of Southern Europe. At some point they will need recapitalising. Rather than dreading this, the default should lead to lending rates rising in Europe, even as banks are recapitalised.

Meanwhile this crisis has brought all shares down. It has brought down UK and US bank shares, despite the fact that since 2008, they have done much to improve their balance sheets. Loan to deposit ratios have fallen by 30% to around 120%, loan margins are up fivefold, provisions have risen sharply and, thanks to retained profits and rights issues, cash equity is up fourfold. They are all strong buys for me.

It may be confusing to find someone who believes that a crisis is on its way but is also happy to buy equities ahead of the crisis. My reason is that the worries have been there for so long, the causes are so obvious and the valuations are so cheap that this is a case of buying early. For me the crisis will bring resolution and with it higher prices.

Little wonder that volumes have been exceptionally light. Despite all of this volatility the only question that clients have been asking us is 'When should we buy the market?'

In the short term everything points to the fourth quarter of this year being strong in the USA. There is a restocking cycle taking place as the effects of the tsunami recede. Quantitative 'oil' easing and commodity price falls are helping consumption growth. The fall in bond yields is feeding through to refinancing of existing mortgages that could add 1.3% to GNP.

So yet again we may be entering a period when markets do not get a Greek default and the US economy strengthens. Cyclicals which have all been sold off will rally and banks, which have led the market down, will catch a bid.

I feel a bit like Sarah Bernhardt who said 'I eat myself to feed my work.' 31st August 2011"


And for more euro-centric commentary, head to the biggest fears of 15 European portfolio managers.

Craig Perry & Erez Kalir's Sabretooth Capital Trim Pain Therapeutics (PTIE) Stake

Craig Perry and Erez Kalir's hedge fund Sabretooth Capital just filed a Form 4 with the SEC regarding shares of Pain Therapeutics (PTIE). Per the filing, they disclose that they sold 382,000 shares of PTIE on October 3rd & 4th, with the bulk of the sale coming at a price of $4.5025.

After their sales, Sabretooth still owns 4,263,076 shares of Pain Therapeutics. As such, they've only reduced their position by around 8%. Shares of PTIE currently trade around $4.40.

Sabretooth Capital Background

Perry and Kalir co-founded Sabretooth Capital in March 2009 with $65 million in seed money from Tiger Management's Julian Robertson. As of mid-2011, they had raised around $700 million. Sabretooth returned 26.5% in 2009 and just over 14% for 2010.

In the past we've covered Erez Kalir's presentation on MBIA (MBI) from the Ira Sohn Conference. Sabretooth is a multi-strategy firm and starts by analyzing top down macro trends and then selects individual securities from bottom-up fundamental analysis.

Prior to founding their firm, Perry was a distressed debt analyst for King Street Capital and earned his economics degree from Princeton. Kalir previously worked at Eton Park Capital and earned an MSc in biology from the University of Oxford and a degree in literature from Stanford University.

Both Perry and Kalir were featured in Institutional Investor's "2011 hedge fund rising stars." And according to II, they named their fund Sabretooth after an extinct animal because they wanted to imitate the 'dinosaurs' of the hedge fund industry (like Robertson) who returned greater than 20% annualized.

Pain Therapeutics Company Background

Per Google Finance, Pain Therapeutics is "a biopharmaceutical company that develops drugs. The Company has four drug candidates in clinical programs, including REMOXY, abuse-resistant hydromorphone, abuse-resistant hydrocodone and a radio-labeled monoclonal antibody to treat metastatic melanoma. It is also working on a new treatment for patients with hemophilia. It has collaboration agreement with King Pharmaceuticals, Inc. (King) develops and commercializes REMOXY and other opioid painkillers."

John Paulson Sells Some American Capital (ACAS)

John Paulson's hedge fund Paulson & Co just filed a Form 4 with the SEC regarding transactions in American Capital (ACAS). Per the filing, Paulson's various hedge funds sold a cumulative 4,350,342 shares of American Capital.

The majority of the sales came at prices of $7.74, $7.27, $7.09, and $6.11. Paulson's various hedge funds were selling as early as September 27th and as recently as October 4th. Shares currently trade around $6.51. While this seems like a lot, keep in mind that at the end of the second quarter, Paulson owned over 43 million shares of ACAS.

Paulson has had a rough year his Advantage Fund is -28% for the year as noted in our hedge fund performance numbers update.

Per Google Finance, American Capital is "an equity firm and global asset manager. It invests in private equity, private debt, private real estate securities and other investments, technology investments, special situation investments, alternative asset funds managed by it and structured finance investments. It invests in senior and mezzanine debt and equity in buyouts of private companies sponsored by it (American Capital One-Stop Buyouts) or sponsored by other private equity funds (Private Equity Buyouts) and provide capital directly to early-stage and mature private and small public companies."

For some of our past coverage on this manager, head to Paulson on risk arbitrage.

Steve Mandel's Lone Pine Capital Adds to Oceaneering (OII) Position

Steve Mandel's hedge fund Lone Pine Capital recently filed a 13G with the SEC regarding shares of Oceaneering (OII).

Lone Pine disclosed a 5.6% ownership stake in Oceaneering with 6,043,228 shares. They passed the 5% ownership threshold level required for disclosure on September 22nd.

This means they've increased their position size by a massive 1,149%. At the end of the second quarter, Mandel's firm only owned 483,693 shares.

Lone Pine Capital has done some buying during the recent sell-off. Last week we also revealed Lone Pine's new stake in Williams Sonoma (WSM). In other recent hedge fund positioning, John Thaler's firm has also been active in the markets recently. See what his JAT Capital has been buying.

Per Google Finance, Oceaneering is "an oilfield provider of engineered services and products to the offshore oil and gas industry, with a focus on deepwater applications. Through the use of its applied technology, the Company also serves the defense and aerospace industries. It is an underwater services contractor. The services and products the Company provides to the oil and gas industry include remotely operated vehicles (ROVs), built-to-order specialty subsea hardware, engineering and project management, subsea intervention services, including manned diving, nondestructive testing and inspection, and mobile offshore production systems."

John Thaler's JAT Capital Buys More Molycorp (MCP)

John Thaler's hedge fund JAT Capital has been busy buying during the recent market turmoil. In a 13G filed with the SEC, JAT disclosed a 6.0% ownership stake in Molycorp (MCP) with 5,067,129 shares as of September 30th.

This marks a 226% increase in their position size as they only owned 1.5 million shares at the end of the second quarter. Last week we detailed how JAT Capital bought Netflix in size as well. It will be interesting to see if anymore filings from Thaler's fund come through. As of September 16th, JAT's Offshore Fund was up 37.29% for the year.

Per Google Finance, Molycorp is "a rare earth oxide (REO) producer in the Western hemisphere and owns a rare earth project outside of China. The Company is in development stage. The Company focuses to be an integrated producer of rare earth products, including oxides, metals, alloys and magnets. The Company’s rare earth products are used in a range of applications, including clean energy technologies, such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including fiber optics, lasers and hard disk drives; numerous defense applications, such as guidance and control systems and global positioning systems, and advanced water treatment technology for use in industrial, military and outdoor recreation applications."

Dan Loeb's Third Point Reduces Equity Exposure For Fifth Straight Month

Dan Loeb's Third Point Offshore Fund finished -3.5% for September compared to -7% for the S&P 500. Third Point sits at 0.2% year-to-date. The Offshore Fund manages just over $4 billion and has seen annualized returns of 17.6% since 1996.


Third Point Reduces Equity Exposure For Fifth Straight Month

In what has been an ongoing theme, Third Point reduced equity exposure yet again in September. Earlier in the year, we highlighted Loeb's cautious stance as he began to reduce exposure. At the end of September, Third Point was only 15.6% net long equities, compared to 17.7% net long a month prior.

Obviously such positioning has led to Third Point's outperformance. Geographically, Third Point has been net long the Americas and net short the EMEA and Asia regions. Risk management has been the name of the game for the fund this year.

In September, Loeb's largest net long exposure came in the technology sector at 8.9% and energy at 3.4%. Third Point is net short industrials at -1.3% and utilities at -0.5%.

In credit, Third Point is 15.6% net long, down from 18.5% net long in August. They continue to have the largest exposure to asset backed securities and remain short government issues.


Third Point's Top Positions

1. Yahoo! (YHOO)
2. Gold
3. Delphi
4. El Paso (EP)
5. Technicolor (multiple securities owned)

We detailed Loeb's activist investment in Yahoo when he first took the position. He also presented his bull case for YHOO at the Delivering Alpha conference.

Third Point's biggest winners last month were commodity short A, energy short basket, SanDisk (SNDK), auto suppliers short basket, and short B. Obviously they don't name their short positions but it's no surprise that many shorts were their top percentage gainers. The hedge fund's biggest losing positions last month were gold, Mosaic (MOS), Delphi, CVR Energy (CVI), and Yahoo! (YHOO).

Assuming Third Point still owns Mosaic, you have an opportunity to purchase shares at prices lower than the hedge fund. They originally bought MOS at $65 on the Cargill family secondary and then subsequently bought the dip in June (presumably around $60). MOS shares now trade around $49.

Mandel's Lone Pine Capital Starts Williams Sonoma (WSM) Position

Steve Mandel's hedge fund Lone Pine Capital just filed a 13G with the SEC regarding shares of Williams Sonoma (WSM). They crossed the 5% ownership threshold on September 20th according to the filing and now 5.6% of the company with 5,824,323 shares.

This is a brand new position for the hedge fund as they did not report owning any shares at the end of the second quarter. In other activity from this manager, we detailed how Lone Pine doubled its SolarWinds position as well.

Per Google Finance, Williams Sonoma is "a specialty retailer of products for the home. The Company has two segments: direct-to-customer and retail. The direct-to-customer segment has six merchandising concepts Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma Home. The retail segment has four merchandising concepts, Williams-Sonoma, Pottery Barn, Pottery Barn Kids, and West Elm, operating 592 retail stores located in 44 states."

John Thaler's JAT Capital Loads Up on Netflix (NFLX)

John Thaler's hedge fund firm JAT Capital just now filed a 13G with the SEC regarding shares of Netflix (NFLX). The hedge fund now has a 7.6% ownership stake in Netflix with 4,017,691 shares as of September 29th.

This means they've ramped up their position size by a massive 768% since the end of the second quarter. The fine print of the filing also shows that of the 4 million shares they now own, 2,617,691 are common stock and 1,400,000 are represented by options. The options portion of their position is new because they only owned 467,812 shares of common stock at the end of Q2.

This position increase is interesting for a number of reasons:

1. NFLX shares have largely sold off because of CEO Reed Hastings' recent announcement that the company will be separating its streaming business (Netflix) and its DVD business (with the newly named Qwikster). Also, NFLX shares have been under pressure due to a subscriber exodus over a recently announced price increase.

It's clear that Hastings feels that the streaming business is the future (and he's right). By separating the businesses, he's allowed the company to focus on its long-term future. However, critics question whether or not the split has come too soon and they've lambasted Hastings for a public relations nightmare in the way he's handled everything.

Thaler's hedge fund has clearly identified the NFLX sell-off as an opportunity to increase their wager on the company's long-term positioning and future. Thaler himself has 10+ years of experience in the technology-media-telecom space. Before founding JAT, he managed the Omni Fund at Shumway Capital Partners.


2. Hedge funds only have to file a 13G with the SEC when they cross the 5% ownership threshold of a given company's shares. JAT's filing indicates they crossed that level on September 20th. The only problem here is you don't know exactly when they were doing the bulk of their buying. As of September 29th, they own 7.6% of the company. On the 20th, NFLX was trading around $130 and shares currently trade around $113.


3. On Thursday, the internet was flooded with rumors of a hedge fund liquidating, mainly due to large price declines in "momentum stocks" such as NFLX. Some rumors even recklessly tossed out JAT's name as a fund that could potentially be "blowing up" since some of their other large positions were trading down sharply like Baidu (BIDU) and Sina (SINA).

However, those rumors were quickly quashed once people actually looked at JAT's numbers. As of September 16th, JAT Capital's Offshore fund was up 37.29% for the year. These performance figures of course don't include the week's most recent volatility, but we've been hearing they're still up big.


In the end, just focus on the facts. The SEC filing shows JAT was buying Netflix and they crossed the 5% ownership threshold on September 20th. And as of September 29th, they own 4 million shares via common stock and options.

For the time being, it appears as though Thaler's fund is betting on NFLX still having a bright future. In other coverage of this hedge fund, we detailed JAT's buy of IMAX in early August.

What We're Reading ~ 9/30/11

Notes from DoubleLine lunch with Jeff Gundlach [Reformed Broker]

The big difference between Apple & Amazon [Abnormal Returns]

Is Apple the new Microsoft? [Abnormal Returns]

Hedge fund redemptions not like 2008 [Barrons]

30 most influential finance sources [BigPicture]

Meet the institutional investors [FT Alphaville]

Notes from Bloomberg dealmakers summit [Distressed Debt Investing]

The road from depression [George Soros]

Yandex (YNDX): careful when you talk to hedgies [Barrons]

SEC registration plan may apply to midsize hedge funds [WSJ]

Slamming short selling restrictions [COO Connect]

Mohawk Industries (MHK): sum of parts analysis [FrankVoisin]

How the AMZN Kindle Fire changes digital media landscape [ContentMatters]

Netflix co-founder says company didn't screw up [Fortune]

Endowment & foundation investing today [John Bogle]

David Einhorn, Ricky Sandler & Boykin Curry to Speak at Value Investing Congress

The Value Investing Congress just announced three new speakers that will be presenting at the event. The big headliner here is David Einhorn of Greenlight Capital.

In 2007 at the Value Investing Congress, Einhorn presented his case to short Lehman Brothers before the company collapsed. Hear what his latest idea is: use discount code N11MF10 and click here to register for the event. This final discount expires tomorrow!

The event is taking place on October 17th & 18th in New York City. Other new speakers announced include Ricky Sandler of hedge fund Eminence Capital, as well as Boykin Curry of Eagle Capital, who has returned 15.1% annualized since 1988.

Here's the full list of speakers for the Value Investing Congress:

- David Einhorn, Greenlight Capital
- Bill Ackman, Pershing Square Capital
- Jim Chanos, Kynikos Associates
- Leon Cooperman, Omega Advisors
- James Crichton & Adam Weiss, Scout Capital
- Joel Greenblatt, Gotham Capital
- Ricky Sandler, Eminence Capital
- Boykin Curry, Eagle Capital
- Alexander Roepers, Atlantic Investment Management
- Guy Gottfried, Rational Investment Group
- Bernard Horn, Polaris Capital Management
- Timothy Hartch, Brown Brothers Harriman
- Vladimir Jelisavcic, Longacre Fund Management
- Whitney Tilson & Glenn Tongue, T2 Partners


To hear the latest investment ideas from these prominent hedge fund managers, click here to register with a discount. This final discount expires tomorrow, so take advantage before it's too late.

Andreas Halvorsen's Viking Global Buys Oncothyreon (ONTY)

Andreas Halvorsen's hedge fund Viking Global filed a 13G with the SEC regarding shares of Oncothyreon (ONTY).

Viking has revealed a 7.1% ownership stake in the company with 2,960,650 shares. This is a brand new position for the hedge fund as they did not report owning a stake at the end of the second quarter.

Remember that all SEC filings are made on a delayed basis, so while their filing says this activity occurred on September 14th, they weren't required to file with the SEC until yesterday.

This is the only 13G or 13D filing we've seen from Viking since we detailed they ramped up their position in Universal Health Services (UHS) back in April.

Per Google Finance, Oncothyreon is "a clinical-stage biopharmaceutical company. The Company focuses primarily on the development of therapeutic products for the treatment of cancer. Oncothyreon’s cancer vaccines are designed to stimulate the immune system to attack cancer cells, while its small molecule compounds are designed to inhibit the activity of specific cancer-related proteins.

The Company’s lead product candidate under clinical development is a vaccine it calls Stimuvax. Stimuvax incorporates a 25 amino acid sequence of the cancer antigen MUC1, in a liposomal formulation. Stimuvax is designed to induce an immune response to destroy cancer cells that express MUC1, a protein antigen widely expressed on many common cancers, such as lung cancer, breast cancer and colorectal cancer. Oncothyreon has granted an exclusive, worldwide license to Merck KGaA of Darmstadt, Germany (Merck KGaA), for the development, manufacture and commercialization of Stimuvax."

Owl Creek & Cyrus Capital Active in YRC Worldwide (YRCW)

Hedge funds have been active in shares of YRC Worldwide (YRCW) recently. Jeffrey Altman's hedge fund Owl Creek Asset Management and Stephen Freidheim's Cyrus Capital Partners recently filed various forms with the SEC regarding the company. There are a lot of moving parts to their positions, so let's dig in.

Owl Creek Asset Management's Position

The 13G shows the latest activity as of September 16th and reveals Owl Creek has a 17.4% ownership stake in YRC Worldwide. This is based on 75,011,292 shares of common stock, 218,570,388 shares of common stock issuable upon conversion of Series B notes ($13,507,650 in aggregate principal amount), and finally 94,284,663 shares of common stock issuable either as make-whole shares or upon conversion of the PIK notes.

Digging into the footnotes, we see that Altman's hedge fund holds $17,573,269 in aggregate principal amount of 10% Series A Notes. These notes are not convertible until July 22, 2013 and the current conversion price is $0.1134.

Their Form 4 filed with the SEC shows they sold common stock in YRCW in the latter half of September, reducing their position from 110.5 million shares down to the current 75 million shares. The majority of their sales came at $0.07x.

For all the particulars of Owl Creek's position in YRCW, head to their 13G here. We also recently detailed how Altman's firm started a position in Forest Oil (FST).


Cyrus Capital Partners' Position

Stephen Freidheim's hedge fund Cyrus Capital actually filed an activist 13D on the company compared to Owl Creek's passive 13G. Cyrus revealed a 20.3% ownership stake in YRCW with 447,860,113 shares. This includes 289,738,036 shares of common stock issuable upon exercise of the Series B notes. For all the fine print of Cyrus' filing, head here.


YRC's Reorganization

YRCW is currently trading around $0.059 and underwent a charter amendment merger on September 16th, "whereby a wholly-owned subsidiary of the Issuer merged into the Issuer and the certificate of incorporation of the Issuer was amended and restated to increase the number of common stock authorized."

Due to this, the above hedge funds' preferred stock automatically converted into common stock and the Series A notes became convertible two years from the date of issuance (as detailed above). The Series B notes became immediately convertible at a fixed price into shares of common stock.

The company recently announced that Jeff Rogers will be YRC President and Mike Naatz will be Holland President, both reporting to YRC Worldwide CEO James Welch. Some analysts, though, haven't ruled out a bankruptcy filing for the trucking company.

Per Google Finance, YRC Worldwide is "a holding company. YRC Worldwide, through wholly owned operating subsidiaries offers its customers a range of transportation services. These services include global, national and regional transportation, as well as logistics."

Strategist Jeff Saut Says 1,100 = Key Level on S&P 500

Given the recent volatility, we thought it would be prudent to check in on market strategist Jeff Saut. His weekly investment strategy note reiterates how he has pointed to 1,100 on the S&P 500 as a key technical level if the market were indeed in the midst of a bottoming process. He still maintains this stance as the market currently trades above it.

We've noted for a while now how many hedge funds have low net exposure to the market. Under the notion that cash is a position, Saut says that "we have still been pretty circumspect in recommitting capital to the broad stock market until it is apparent THE bottom has been recorded."

This raises an interesting point. Everyone seems to have a lot of cash on the sidelines now, afraid to be the first one to jump back into the pool. It's clear any future rally could be a fierce one as cash comes rushing back from the sidelines. But the question is, will there be a bottom and what will cause it?

Saut says that if the market breaks S&P 1,100, the next downside level he would target would be 1020-1030.

Embedded below is Jeff Saut's market commentary:



You can download a .pdf copy here.

Check out more thoughts from Jeff Saut on why this isn't a recession as well as Saut's favorite stocks.

Pershing Square Buys Total Return Swaps on J.C. Penney (JCP)

Bill Ackman's hedge fund Pershing Square Capital Management just filed a Form 4 with the SEC regarding shares of J.C. Penney (JCP).

The filing indicates that Pershing Square bought total return swaps on September 22nd with a conversion price of $26.14 and an expiration date of 9/22/2016, representing 15,969,239 shares of J.C. Penney.

Here's the fine print of the SEC filing:

"Under the terms of the cash settled total return swaps (i) certain of the Pershing Square Funds will be obligated to pay to the bank counterparty any negative price performance of the 15,969,239 notional number of shares of Common Stock subject to the swap, plus interest at the rates set forth in the applicable contracts, and (ii) the bank counterparty will be obligated to pay certain of the Pershing Square Funds any positive price performance of the 15,969,239 notional number of shares of Common Stock subject to the swap. Any dividends received by the bank counterparty on such notional shares of Common Stock during the term of the swap will be paid to the Pershing Square Fund. All balances will be settled in cash."

Additionally, the hedge fund recently amended their activist 13D filed with the SEC. This now shows Pershing's ownership stake in JCP as 18.3% of the company with 39,075,771 shares. They've only added to their common stock position by 360,200 shares since the end of the second quarter. We've of course detailed how Ackman bought $600 million worth of various investments during the August volatility.

Late last month, Pershing disclosed their intention to own exposure equal to 26% of JCP's outstanding stock via a "synthetic long position." In the agreement with the company, Ackman reduced his voting rights to 15% of shares outstanding and made it so that any additional shares purchased require written consent from JCP.

For recent activity from this hedge fund manager, check out Bill Ackman's presentation on the Hong Kong dollar.

Philippe Laffont's Coatue Management Buys Universal Display (PANL)

Philippe Laffont's hedge fund Coatue Management just filed a 13G with the SEC regarding shares of Universal Display (PANL). In the filing, Coatue reveals they now own 6.3% of PANL with 2,881,463 shares.

This is a brand new position for the hedge fund as they previously did not own any shares at the end of the second quarter. Given that Coatue is fixated on technology, this investment plays right into their focus on the theme of mobility. PANL provides essential display parts to smartphones, tablets, etc.

Per Google Finance, Universal Display is "engaged in research, development and commercialization of organic light emitting diode (OLED), technologies and materials. OLEDs are thin, lightweight devices that emit light, making them highly suitable for use in full-color displays and as lighting products."

For more activity from this hedge fund, we've detailed how Coatue was buying SINA earlier this summer, a name that has been hit recently due to increased fears of regulation in China.

Soros Fund Management Adds to ClickSoftware (CKSW) & Ciena (CIEN) Positions

Soros Fund Management recently filed two 13G's with the SEC. First and most recently, filed a 13G on ClickSoftware (CKSW). Due to portfolio activity on September 20th, Soros has disclosed a 5.12% ownership stake in the company with 1,580,040 shares. This marks only a 14.6% increase in their position size as they owned 1,378,666 shares at the end of the second quarter.

Second, the hedge fund firm also disclosed a a 5% ownership stake in Ciena (CIEN) with 5,102,085 shares due to trading activity on September 13th. At the end of the second quarter, Soros only owned 1,100 common shares of CIEN. However, they also owned senior convertible notes representing 74,934,000 shares at that time.

If you haven't already heard, Soros Fund Management will be returning outside investor capital and morphing into a family office to manage George Soros & family's wealth.

Per Google Finance, Ciena is "a provider of communications networking equipment, software and services that support the transport, switching, aggregation and management of voice, video and data traffic."

ClickSoftware is "a provider of software products and solutions for workforce management and optimization for the service sector. The Company derives revenues from the licensing of its software products and the provision of consulting and support services. ClickSoftware’s solutions are grouped into four main suites which together comprise its Service Optimization Suite: Field Service Daily Suite, Mobility Suite, Roster (Shift Planning) Suite and Forecasting and Planning Suite."

For more recent hedge fund activity, we posted up how Philippe Laffont's Coatue Management just bought Universal Display (PANL).

What We're Reading ~ 9/23/11

The Warren Buffetts next door [Matt Schifrin]

Excerpts from Seth Klarman & Baupost Group's Q2 letter [ValueWalk]

Third Point's presentation on Yahoo! [Dealbreaker]

Ten market crash commandments [Reformed Broker]

The fall of FrontPoint Partners [AR+Alpha]

The rise & fall of Yahoo! (YHOO) [BigPicture]

Third Point raises $500m for reinsurer [FINalternatives]

Hedge funds offering more separate account options [OnWallStreet]

John Paulson loves stocks [WSJ]

Has Paulson lost his touch? [BusinessWeek]

Good take on the Netflix (NFLX) situation [Splatf]

Meet Warren Buffett's new hire [Fortune]

Does the euro have a future? [George Soros]

Gaining by betting against Chinese reverse mergers [WashingtonPost]

Copper leads commodities downward [Barrons]

Activist investors finding more targets [Reuters]

Harvard endowment rises 21% on hedge fund gains [Bloomberg]

Asking the right & wrong questions [Dan Ariely]

Oldie but goodie: Wall St trader tells all [Independent]

Lone Pine Capital Says Euro is Doomed & China's Debt Will Lead to a Crisis

Steve Mandel's hedge fund Lone Pine Capital says there are major concerns for global financial markets going forward.

*Update: excerpt removed per request from representatives of Lone Pine



Their point on China is not the first time we've heard this cautious approach. Grandmaster Capital's Patrick Wolff has called China a debt-fueled investment bubble. Kleinheinz Capital also believes that inflation is the biggest threat to emerging markets. And lastly, hedge fund manager Jonathan Ruffer also put out commentary that he's worried about China.

But at the same time, there are other prominent investment managers that take the other side of the argument. We've covered previously how Maverick Capital is focused on China's importance and how Warren Buffett has said China will be a big driver of growth for the next 10-20 years. At the Delivering Alpha Conference, Xerion fund's Dan Arbess debated against Kynikos Associates' Jim Chanos as to whether China is a bubble or bonanza.

While big names stand on either side of the argument, only time will tell who is ultimately proven correct.

Lone Pine Capital's Current Investment Themes

Today we're covering the current investment themes from Steve Mandel's hedge fund Lone Pine Capital.


*Update: excerpt removed per request by representatives of Lone Pine


In more recent portfolio activity, we've detailed how Lone Pine nearly doubled its SolarWinds (SWI) stake and has been buying the dip in VanceInfo Technologies (VIT).

Mark Massey's Hedge Fund AltaRock on Domino's, Mohawk Industries, & Carter's

Today we present an update from Mark Massey's hedge fund AltaRock. Since his inception as portfolio manager, Massey has seen a compound annual growth rate of 11.9%. And through the end of July, AltaRock was up 17.6% net for the year. While that obviously doesn't include the August volatility, it's certainly impressive.

Last year we posted up AltaRock's investing principles and received a ton of positive reader feedback about the piece. Since their letter was theoretical and practical in nature, the one question readers kept asking was: what are they invested in and why? Clearly everyone wanted to see these principles in practice.

Well today we're happy to share AltaRock's mid-year 2011 letter which walks you through their rationale with very in-depth write-ups on the following new additions to their portfolio: Domino's Pizza (DPZ), Mohawk Industries (MHK), and Carter's (CRI).

Massey writes that, "we invest with the mindset of a long-term business owner, and we seek superior businesses with durable competitive advantages."

Embedded below is the update (email readers please click this link to come read it: AltaRock's 2011 letter):



Be sure to also check out AltaRock's investing principles as it truly is an excellent piece.

Bridgewater's Ray Dalio on His Principles & Investment Outlook

Bridgewater Associates' founder Ray Dalio was at the Bloomberg Markets 50 Summit recently and gave his thoughts on an array of topics. Bridgewater topped the list of the top 10 biggest hedge funds in 2010 and now manages an estimated $122 billion as the biggest hedge fund in the world.

Through the end of August, Bridgewater was up an astonishing 25.3%. How did they generate such outperformance? Dalio takes a diversified approach to investing, saying that "you're playing the role of the casino rather than the gambler in the casino, that's how you're going to make money I believe"

Bridgewater's August gains were at least somewhat attributed to their long positions in gold, Treasury bonds, and the Swiss franc.

It's clear that Bridgewater has been "long safety" and as the global macro hedge fund examines all asset classes around the globe on a daily basis.

Dalio is pessimistic overall, especially on the Eurozone. However, he does think the US is better positioned than Europe. Dalio also believes the Federal Reserve is the key to any equity rally: "if the markets are going to rally, and things are going to be good, it is going to be the Fed that will come in to save us." QE3 anyone?


Embedded below is Dalio's video interview (email readers click the link to come to the site to watch):



And if you can't listen to audio at work, here's the full transcript of the interview embedded below:




Dalio sparsely appears in the media, so those of you looking for more insight from the zen master himself, head to a rare interview with Dalio from earlier this year.

We'll end with one of our favorite all-time quotes from Ray Dalio: "Alpha is zero sum. In order to earn more than the market return, you have to take money from somebody else."

Omega Advisors' Leon Cooperman Likes Apple, Boston Scientific, KKR Financial, & Sallie Mae

At the Delivering Alpha conference, hedge fund founder Leon Cooperman of $6 billion Omega Advisors sat down with Maria Bartiromo to talk about the markets and what stocks he likes.

While Cooperman feels the market will be higher by the end of the year, he said that on a short-term tactical approach, he's found that hedge funds have low exposure. We've highlighted this as Dan Loeb's Third Point had reduced exposure for four consecutive months.

Cooperman thinks the fact that investors are underinvested could be a catalyst as money flows back into stocks and his focus is on a nine to twelve month timeframe. As to where the hedge fund manager is seeing value, he points to:

- Apple (AAPL): He says you can buy it at 10x next year's earnings.

- Boston Scientific (BSX): It generates over $1 per share in free cashflow annually (a 15% free cashflow yield) as the company looks to use that cash to buyback 10% of the company.

- KKR Financial (KFN): The stock yields over 9%, sells at a discount to book value, and the dividend is covered twice by earnings. He expects the yield to even go higher.

- Sallie Mae (SLM): Cooperman says that the $13 stock will earn $1.90 next year and he says the assets are worth $19-20.


In order to be bullish on equities (which he is), Cooperman says you have to invest under four assumptions:

1. The US is not like Japan and we will have a growing economy

2. The ECB will step up for European financial institutions

3. The President softens his anti-wealth, anti-business stance

4. Stability in the Middle East


Embedded below is the video of Leon Cooperman's interview from the Delivering Alpha conference:



We also detailed Leon Cooperman's appearance on the hedge fund best ideas panel at the conference as well. He will also be presenting his latest investment ideas at the Value Investing Congress.

Phil Falcone & Harbinger's 4G Wireless Network Bet: LightSquared

Philip Falcone's hedge fund Harbinger Capital Partners has invested $2.9 billion into private 4G wireless network: LightSquared. We've detailed Harbinger's 4G bet before, but Falcone yesterday was interviewed by Maria Bartiromo from the Delivering Alpha Conference.

His whole goal with this venture is to bring powerful wireless broadband to rural areas in an attempt to essentially blanket America with coverage. He says that the future is all about smartphones and tablets, and those devices need access to wireless networks.

Too Big of a Bet?

Critics have said that Harbinger has essentially morphed into a private equity fund or venture firm by allocating so much capital to one private investment. Falcone addresses this by saying that there's "a real asset here" as he first started looking at it five or six years ago.

He thinks the venture will change the wireless market. While he acknowledges that this single bet is quite large for one fund, he believes people would understand how valuable this is from both a capital and social perspective if they were around the everyday workings like he is.

GPS Interference?

Regarding the claims that LightSquared interferes with GPS, Falcone says that GPS is actually using their spectrum as they were given the right to build on that spectrum and the GPS manufacturers knew it. Falcone says that, "they're interfering with us, we're not interfering with them."

Embedded below is the video of Falcone's interview from the Delivering Alpha conference:



Falcone also presented his idea of going long Spectrum Brands (SPB) at the conference on the hedge fund best ideas panel which we also covered.

Bill Ackman's Presentation on the Hong Kong Dollar: Linked to Win

Yesterday we covered Pershing Square hedge fund manager Bill Ackman's latest investment: long the Hong Kong dollar. Today we present the slideshow presentation he gave at the Delivering Alpha conference entitled: Linked to Win.

In summary, Ackman thinks that the Hong Kong dollar (HKD) is headed for massive inflation and a real estate bubble. He argues the country can effectively mitigate this by allowing the Hong Kong Dollar to appreciate.

Ackman says there are four principal revaluation alternatives:

1. Allow the HKD to float
2. Repeg the HKD to a trade-weighted basket
3. Repeg the HKD to the RMB
4. Keep the USD peg, but revalue to an appropriate exchange rate

The Pershing Square manager feels that the Hong Kong government will repeg the HKD at a stronger exchange rate to the USD and believes a 30% revaluation to 6:1 is likely. As such, he says there are 3 ways to make money on the trade: buy HKD outright, buy HKD with USD leverage, and buy HKD call options.

Embedded below is Ackman's presentation on the Hong Kong dollar (email readers click the link to come read it):



To read more on Pershing Square, head to our posts on Ackman's recent portfolio activity as well as Pershing's hedging strategy.

For more hedge fund insight from the Delivering Alpha conference, check out the hedge fund best ideas panel featuring Kyle Bass, Dan Loeb, Leon Cooperman, and Phil Falcone.