Will Danoff is manager of Fidelity's Contrafund and he recently sat down with Fidelity Viewpoints to share his outlook for 2013. He's bullish and so we wanted to highlight what stocks he's looking at.
On Why He's Bullish This Year
"I’m bullish. Stocks are relatively cheap, and U.S. companies have become much leaner. Management teams were worried about the environment, so they were conserving cash and allocating capital prudently. M&A activity was down about 20% in 2012. Boards were saying, 'We’re not going for the long ball. We’re going to focus on maintaining lean inventories, low capital spending, and tight expenses.' As a result, companies are nicely profitable and generating a lot of cash.
So looking forward, I’m hopeful that we’re going to have modest top-line growth that will lead to decent earnings-per-share growth, good free-cash-flow yields, and total returns that may be a lot better than what we will see from cash and bonds."
He also went on to say that,
"My guess is a year from now the economy’s going to improve and stocks are going to be a good place to be. I’m bullish. So, I think if you’re in cash, you have to really think hard about it and say, 'How much cash do I really need?'"
This is a concept that's been talked about by many managers, including Bridgewater's Ray Dalio who said cash will move into 'stuff' in 2013. David Tepper of Appaloosa Management has also been quite bullish.
What Stocks He Likes
Danoff notes that the key to his strategy has been identifying the best companies in each industry. There's a few themes/industries he likes this year, and they all seem hinged on an economic recovery: housing, manufacturing, and industrials.
In particular, the Contrafund manager says he's finding most opportunities that should benefit from more competitive US manufacturing (companies are moving plants back from overseas).
He also likes US companies with lots of international exposure, like Colgate-Palmolive (CL), Estee Lauder (EL), and Starbucks (SBUX).
In tech, he likes internet plays such as Google (GOOG), Facebook (FB), and Yahoo (YHOO). He also is bullish on the software as a service trend, fancying the likes of Workday (WDAY), Salesforce.com (CRM), and Concur (CNQR).
On Tech Giants Google (GOOG) & Apple (AAPL)
These two tech giants are some of his fund's largest holdings.
Danoff's take on Google: "The stock has done basically nothing since 2007, but the earnings have roughly doubled, and the company is generating a huge amount of free cash flow—we estimate the stock is producing roughly a 9% free-cash-flow yield. And net of the cash, the stock has been trading around 13 times earnings while core revenues have been growing almost 20% annually. So I have believed that Google could continue to grow and had the potential for P/E (price-to-earning multiple) expansion."
We've also highlighted how Ricky Sandler's hedge fund Eminence Capital has been bullish on Google as well as it's their largest position at around a 9% position for them.
Danoff also notes that AAPL has been a good holding for his fund as the company's been generating a ton of free cash flow. The problem is that most of it is overseas (and it's a massive amount of money too) and he also pointed out that competition has intensified in the smartphone and tablet markets. You can read more of Danoff's outlook here.
Thursday, January 31, 2013
Contrafund's Will Danoff Bullish For 2013: What Stocks He Likes
Wednesday, January 30, 2013
What We're Reading: Analytical Links ~ 1/30/13
Lessons from hedge fund market wizard Colm O'Shea [Finance Trends Matter]
The student loan bubble is 'simply unsustainable' [Zero Hedge]
Good read on upside risks [Reformed Broker]
What you can learn from the most popular finance films [Amazon Money & Markets]
5 reasons to remain cautious on US equities [SoberLook]
On insurance investing [Aleph Blog]
Wells Fargo (WFC) is cheap [Brooklyn Investor]
Predicting the next recession [CalculatedRisk]
Top 10 ways to deal with behavioral biases [Above the Market]
CRFN & ECBE: A look at an arbitrage opportunity [Whopper Investments]
Are you a value investor? Take the Apple (AAPL) test [Aswath Damodaran]
A look at Banco Popular (BPOP) [Corner of Berkshire & Fairfax]
All TV viewers pay to keep sports fans happy [NYTimes]
12 business lessons from Amazon founder Jeff Bezos [KissMetrics]
More homeowners are mortgage-free than underwater [Zillow]
Monday, January 28, 2013
Jack Schwager on Hedge Fund Market Wizards
Today we're pleased to present a guest post from David Shvartsman over at Finance Trends Matter where he has a lot of great posts about investing/trading process, behavioral finance, and more. You can subscribe to his RSS feed here. Without further ado:
Jack Schwager on Hedge Fund Market Wizards
If you're a fan of the Market Wizards books by Jack Schwager, then you've probably read (or are looking forward to reading) the latest in the series, Hedge Fund Market Wizards.
We'll be taking an in-depth look at this book and the insights of the "Hedge Fund Wizards" in an upcoming series of posts, but for now I'd like to share some key interviews and webinars with author Jack Schwager.
These videos will give you a great inside look at Schwager's writing process, as well as offering some key lessons found in this new collection of interviews with leading traders and hedge fund managers.
First, an Opalesque interview with Schwager in Manhattan: "15 Hedge Fund Market Wizard trading secrets and insights":
This discussion opens by noting that while markets have changed since the first Wizards books were published, the main principles behind the various traders' successes have not. Certain strategies and opportunities may have gone by the wayside, but successful traders have continued to hone in on what works for them as they strive for superior risk adjusted returns.
Of supreme importance, Schwager finds, is the need to find a trading method that suits your personality. He cautions young traders from trying to emulate their trading heroes, since top traders may have an approach or strengths that differ from those of the would-be apprentice. You need to develop your own approach.
If you enjoyed this interview and would like to dig further, check out Michael Martin's interview with Jack Schwager, as well as this Schwager Q&A webinar on the behaviors of Hedge Fund Market Wizards.
One recurring theme that runs through these discussions is the quote, "There is no single true path". The Market Wizards profiled in this book, and throughout the series, have all found success by managing risk and pursuing the methods that suit their personalities and strengths.
Join us next week, as we examine some key "Lessons from Hedge Fund Market Wizards" in our upcoming post series of the same name. See you then.
In the mean time, be sure to check out David over at Finance Trends Matter.
Market Strategist Jeff Saut: Best Stock Ideas For Next 3-5 Years
Given that markets have been ripping higher, we thought it a prudent time to check in with market strategist Jeff Saut. His latest investment outlook is entitled "For All the Sad Words of Tongue and Pen" where he looks at how market rallies can last longer than one would think.
He highlights how at around the 18th day of a typical 17-25 day buying stampede, certain investors will start to question whether or not they've missed "the bottom." This then leads to a new round of buying from people who don't want to miss the big move, and thus the rally extends.
So when might this rally cease? Saut mentions rallies can typically last up to 30 sessions while today is session 18. He points out some of the cautious signals he is seeing:
"The S&P 500 (SPX/1502.96) remains overbought with 92.6% of its stocks above their respective 50-day moving averages (DMAs), as well the NYSE McClellan Oscillator is still overbought in the short-term. However, the stock markets can remain overbought for longer than most think in a bull move. Further, the Volatility Index (VIX/12.89) is not confirming the renewed stock strength and some of the hitherto leading stocks are not acting well."
Raymond James' Best Stock Ideas For 3-5 Years
Saut recalls Ray Dalio's recent interview where the legendary manager said that "the shift of that massive amount of cash is what will be a game changer." If it moves into stocks (from pension funds and other large institutions), he wants to be prepared.
As such, Saut has highlighted his analysts' best stock ideas for a 3-5 year holding period with the following criteria:
- Recurring revenue stream
- High barriers to entry
- Not as dependent on economy/financial markets
- Can grow EBITDA at 5-10% annually
- Competitive edge in its sector
- Strong management
His analysts recommended the following stocks: Altera (ALTR), Conceptus (CPTS), Denbury Resources (DNR), NIC Corp (EGOB), Equinix (EQIX), EV Energy Partners (EVEP), IDEXX Labs (IDXX), Iridium Communications (IRDM), LKQ (LKQ), National Oilwell Varco (NOV), Verisk Analytics (VRSK), and Wabtec (WAB).
Embedded below is Saut's weekly commentary:
For more from this strategist, we've highlighted how Saut has been short-term conflicted and long-term bullish and how he's focused on housing as the key driver.
Eric Sprott's Latest Commentary: Ignoring the Obvious
Eric Sprott, founder of Sprott Asset Management, is out with his latest 'markets at a glance' outlook. Entitled "Ignoring The Obvious," the piece points out how the Fed's actions are just masking real problems such as high unemployment, exploding government liabilities, and how money printing doesn't achieve anything constructive.
Sprott writes:
"The purpose of asset purchases by the Fed might no longer be improvements in the real economy, but rather a more subtle financing of U.S. government deficits. However, in the long run, expanding the money supply inevitably leads to inflationary pressures. Luckily for the Fed and the U.S. government, there is so much slack in the labour market that inflation might be years away. And, if we are right about the long run unemployment rate being structurally higher, then the Fed has all the room it needs to continue Quantitative Easing (QE) to infinity. This might allow them to continue to hide the true financial position of the government for many years to come."
Concluding his piece, he simply asks if we're going to ignore the obvious? Well, the market is certainly ignoring it for the time being as 2013 has begun with a ferocious rally.
Stock Market Ignores the Obvious
While Sprott points out economic realities, it's always worth noting that the market can remain irrational longer than you can remain solvent. Sometimes you just have to ride the perception until it dissipates, a concept illustrated via George Soros' best investment advice.
As you've undoubtedly seen over the past few weeks, various hedge fund managers have paraded their bullish views like David Tepper and even Ray Dalio said that 2013 will be a year that "cash moves into stuff".
So instead of asking if we're going to ignore the economically obvious (the market already has), perhaps Sprott should re-phrase his question and ask when the Fed's mirage will disappear and when we'll stop ignoring the obvious?
Embedded below is Eric Sprott's latest commentary:
For more from this investor, be sure to check out Eric Sprott's previous commentary as well.
Friday, January 25, 2013
What We're Reading ~ Hedge Fund News Links 1/25/13
We're posting linkfests twice a week now. Earlier we posted up analytical links and today we have hedge fund/finance industry updates:
Hedge Fund News Links
Dan Loeb short Nu Skin [NYPost]
Einhorn profited from bet against Herbalife [WSJ]
Ackman vs Icahn CNBC battle [Reformed Broker]
Why the world's biggest hedge fund missed in 2012 [Fortune]
JANA takes Agrium breakup case to Canadian investors [Hedgeworld]
Kyle Bass warns of Japanese financial collapse... again [Absolute Return]
Small hedge funds top big ones in 2012 [Reuters]
Yale may buy more hedge fund assets [Bloomberg]
Hedge funds find that activism pays [BusinessWeek]
Hedge fund managers at conference forecast stock gains [Reuters]
Profile of Steve Cohen: Edge and the art collector [nplusone]
Profile of hedgie Crispin Odey [Bloomberg]
Examining Benjamin Graham's record: skill or luck? [Greenbackd]
Visual history of the S&P 500 [ETFdatabase]
Valiant Capital's Chris Hansen to buy Sacramento Kings [HedgeFundIntelligence]
Thursday, January 24, 2013
East Coast on Transformation Investments: Union Pacific, Colfax & WABCO (Q4 Letter)
Christopher Begg's East Coast Asset Management is out with their Q4 letter. Last time, we highlighted their letter on investment process and this time around, they focus on examples of 'transformations' that they invest in.
East Coast defines transformations as businesses that often have average or below-average economics and they are focused on seeking the cause that will produce a 'meaningful inflection point of change' on the economics of the business.
Begg writes,
"Our investment process becomes considerably more important when we try to ascertain if a business is truly transforming and emerging toward greatness. Every business is either getting better or worse with change, and we feel the market tends to value businesses on a one-point perspective by inferring the status quo. This can lead to mispricings for those transformations that we identify prior to change agents being reflected on businesses' financial statements."
3 Types of Transformations & Investment Examples
They've broken this down into 3 categories:
Secular: Prolonged positive inflection point in a business' economics (often after industry consolidation). Examples that East Coast owns include Union Pacific (UNP) and Burlington Northern Santa Fe (via Berkshire Hathaway ~ BRK.B)
Systemic: A business that adopts new companywide operational and cultural methods that drive change. Ex: Colfax Corp (CFX), which East Coast purchased in the fourth quarter.
Separation: Often a result of spin-offs, these businesses weren't operating at full potential within the context of a larger organization. Ex: WABCO (WBC), which they also purchased in Q4.
To read East Coast's thesis summary on each security, read their Q4 letter embedded below:
For more from this manager, head to East Coast's thoughts on what defines a great business and a look at IBM.
Ray Dalio: Cash Will Move Into 'Stuff' in 2013
Ray Dalio, founder of Bridgewater Associates, spoke with CNBC at Davos about a myriad of topics. Dalio started Bridgewater with $5 million and now manages $130 billion. His Pure Alpha hedge fund ended 2012 up 0.8% though his long-term returns are much more impressive.
Cash Will Move Into 'Stuff'
The Bridgewater founder thinks 2013 will be a year of transition as
cash moves into 'stuff' like goods, services, financial assets
(equities, gold, etc).
He points out that there's so much cash in the system due to central bank action. Since cash has a negative real return, he argues that it has to go somewhere as risks are being reduced. The desire to hold cash is being reduced.
Dalio laid out his framework as essentially a scenario where US investors pile into stocks driving markets higher which will then give the Fed confidence to start to tighten, which will then cause a pullback across risk assets.
Bearish on Europe
However, he's quite bearish on Europe it seems noting that there's a terrible economy with a gradual restructuring. He says there will be a depression there or a 'lost decade'.
Wisdom From Dalio
Dalio also had a some fantastic quotes about approaching investing, saying that,
"The way to look at any market... is to look at the buyers and sellers and to understand who's buying and who's selling and what the motivations are behind that."
He went on to note that,
"Too many investors are reactive decision makers... if something has gone up, they say 'ah, that's a good investment,' they don't say 'that's more expensive.' It's the most common mistake in investing. You have to look ahead and say what is the transaction? What will determine the buyer or seller?"
Dalio also points out:
"So much of the driver of any asset class returns is based on how events actually transpire relative to expectations. So there's a certain discounted growth rate in equities."
Lastly, Dalio made an excellent analogy comparing investing to poker:
"The bets are zero sum. In order for you to beat me in the game, it's like poker, it's a zero sum game. We have 1,500 people that work at Bridgewater, we spend hundreds of millions of dollars on research, and so on. We've been doing this for 37 years and we don't know that we're going to win. We have to have diversified bets. So it's very important for most people to know when not to make a bet. Because if you're going to come to the poker table, you're going to have to beat me, and you're going to have to beat those who take money. So the nature of investing is that a very small percentage of the people take money essentially in that poker game away from other people who don't know when prices go up whether that means it's a good investment or if it's a more expensive investment."
This analogy is not a new concept and there are actually many similarities between poker and investing/trading. Numerous hedge fund managers play poker (like David Einhorn) and we've highlighted the link between hedge fund managers and poker.
Embedded below are the videos of Dalio's interview from Davos:
Video 1
Video 2
For more on this legendary investor, Dalio is profiled in the book The Alpha Masters. You can also check out Dalio's other in-depth interview on QE3, gold and other topics.
Robert Karr's Joho Capital Adds to Yelp, Reduces 21Vianet Group Stake
Robert Karr's hedge fund firm Joho Capital recently filed a few amended 13G's regarding their positions in Yelp and 21Vianet Group.
Yelp (YELP): Joho bought more YELP per a 13G filed with the SEC and now own 974,795 shares as of December 31st. This marks around a 9% increase in their position size since the middle of December, when they originally initiated their YELP stake.
Per Google Finance, Yelp is "operates a directory services and social networking website. Its online community provides information on urban city guide. The Company is based in the United States and its information helps people to find places to eat, shop, drink, relax, and play."
21Vianet Group (VNET): Per an amended 13G filed with the SEC, Karr's firm now owns 1,799.206 shares of VNET. The filing was made due to portfolio activity on December 31st and marks only a slight decrease in their overall position size (around -16%).
Per Google Finance, 21Vianet Group "operates as an Internet Service Provider (ISP). The Company operates as an ISP service supplier in China. Its main business includes Internet Data Center (IDC) service, Content Delivery Network (CDN), Enterprise Data Center (EDC) service and Data Center based industry solutions."
Wednesday, January 23, 2013
What We're Reading ~ Analytical Links 1/23/13
Continuing our new "what we're reading" format of posting linkfests twice a week, the analytical links are below and hedge fund news links will be posted on Friday.
Analytical Links
Removing emotion from investing [Amazon Money & Markets]
Barron's 2013 roundtable [Barron's]
Analysis of Sears Hometown & Outlet (SHOS) [ValueInvestingLetter]
Post re-org equity: Tribune (TRBAA) [Distressed Debt Investing]
Comparing Sony to Apple [FT]
A look at Cash America (CSH) [Stone Street Advisors]
Marissa Mayer trying to repair Yahoo image [MarketingLand]
CBS putting deals under construction [NYpost]
Google, mobile search & the paradox of competition [SearchEngineLand]
Samsung: How the Korean firm became biggest tech company [Slate]
Intel's hangover continues in 2013 [Techinsidr]
US household deleveraging: a smoother ride ahead [BCA Research]
10 best stocks for 2013 [InvestorPlace]
Is this the end of the soft drink era? [WSJ]
Wake up call: free refi boom almost over [The Basis Point]
Jim Chanos on Shorting PC's, Herbalife, China & More: Interview
Kynikos Associates' founder Jim Chanos recently sat down with Reuters to talk about why he's shorting the personal computer industry, China's debt load, and other topics. He started by talking about what he's looking for as a short seller:
Chanos points to reading SEC filings as a must, saying that "it's
amazing how many investors don't do that... it's a must. Those
documents exist for a reason." He looks for an exodus from a company, a
large amount of stock sales, companies impacted by technological change
(citing the internet as a perfect example).
Why Chanos Is Short PC's
Hewlett Packard (HPQ) is one of his largest shorts and Chanos says that the company has a lot of 'baggage' due to mistakes made by previous management (acquisitions etc). He also points to the company's lack of investing in research & development as they've missed mobile and just cutting costs to create value isn't enough.
"while we look at financials in the rear view mirror, you can't forget to look out the windshield."
On Herbalife (HLF)
Chanos hasn't publicly commented on Herbalife (HLF) but notes he's studied multi-level marketing and that the important thing to focus on is, "How much of a product is sold through? Is the customer actually using the product?"
Bill Ackman is short Herbalife and then Dan Loeb is long HLF so this has been a highly active situation. As to who will ultimately be right, Chanos believes that it will be whomever can prove whether the business proposition is good.
On China
Kynikos has been short since 2009 and they haven't changed their thinking. Chanos says the thing to worry about is how China keeps adding more debt to keep the growth going.
He's short Chinese banking companies, property developers, cement companies and the like. He notes that the other way to play it is via shorting materials like iron ore companies. We've posted David Einhorn's short thesis on iron ore as well.
Chanos' Equities Outlook
He says that he's "a little less sanguine than I was two years ago... now we've had a pretty good run and things aren't so cheap anymore. We're getting a little bit more cautious on prospects for US equities."
On His Biggest Mistake
Chanos remembers his biggest mistake as shorting AOL, saying that "it underscores the need to monitor risk on the short side. You have to be much more aware because of the unlimited and un-ending nature of the liability on the short side. We were short AOL at $8 and covered our last share at $80. We were short it for accounting reasons."
Chanos went on to note that "you have to be very careful of not shorting concepts and being short companies."
Embedded below is the video of Chanos' interview:
For more on this noted short seller, see also Chanos' 2 short ideas from the Sohn London conference.
David Einhorn's Q4 Letter: Greenlight Buys More Apple & Vodafone
David Einhorn's Greenlight Capital is out with their Q4 letter to investors via ValueWalk. Greenlight returned 7.9% in 2012 and 19.4% annualized.
The key takeaways from Greenlight's fourth quarter activity include:
- Bought more Apple (AAPL): They originally trimmed their position size in the third quarter, but as shares fell in Q4, they bought back some of their stake. Einhorn has held AAPL for quite some time as he originally purchased around $248 and this seems to be the only other time he's added to the position.
- Bought more Vodafone (VOD): This has also been a longstanding position for Einhorn under the thesis that VOD's ownership stake in Verizon Wireless is being undervalued. We've also posted Eminence Capital's long Vodafone short Verizon pair trade thesis as well.
- Covered Pitney Bowes (PBI) Short: Greenlight labeled this company a 'melting ice cube' due to facing secular challenges of declining US mail volumes. Many hedgies have been short this name and we've also posted up how hedge funds have been shorting competitor Neopost as well.
- Sold Huntington Ingalls Industries (HII), Humana (HUM), Wellpoint (WLP), bought other managed care organizations (undisclosed).
Greenlight's top five positions at the end of the year were (in alphabetical order): Apple (AAPL), Cigna (CI), General Motors (GM), gold, and Vodafone (VOD).
Embedded below is Greenlight Capital's Q4 letter to investors:
For more on this investor. be sure to also check out Einhorn's short thesis on iron ore.
Tuesday, January 22, 2013
David Tepper Says Be Long Equities
Continuing his round of rare recent media appearances, Appaloosa Management's David Tepper was on Bloomberg today telling people "to be long equities" as he's bullish. Last month we highlighted his other interview where he said there's a lot of upside in equities,
Bullish on Equities
Valuation is part of the reasoning for his bullish call on equities as a whole: "If you look at the markets, they are trading at a really low multiple. 13 handle this year, 11 handle next year on the S&P."
Additionally, he simply points to the vast money creation across the globe as a reason to continue to ride the equity train.
He drew attention to an incredibly underweight equities stance by retail investors, pensions and more. He feels that eventually there will be a shift. Inflows to equity funds at the start of the year were at higher levels than they have been in quite some time.
Tepper gave a memo to long/short managers too, saying "good luck, because you can't get long enough" in this environment as he feels there will be a 'party like the 90's.' Arguing potential for 20-30% returns in equities, he feels you don't want to be long risk averse assets like Treasuries, the yen, or the swiss franc. He says to be long equites and 'equity-like' things.
His most notable soundbite was probably when he said that the US is on
the "verge of an explosion of greatness." Regarding Europe, Tepper
feels that the tail risk there is a non-issue, at least for this year.
Likes Citigroup (C)
He pointed out his fondness for shares of Citigroup (C), arguing that it
potentially has 50% upside from here, saying the company's foreign
business is very valuable.
Bullish on Airlines
Tepper highlights the reasons to like airline stocks: a potential strong dollar scenario and oil remains largely flat (due to potential new discoveries etc), you have an industry that will do will in that scenario, and you have a consolidating industry, and you have capacity down this year. He's looking for some airlines to start returning capital as well.
Our Hedge Fund Wisdom newsletter flagged Tepper's fondness for airlines a few quarters ago. He owns US Airways (LCC) and Delta Airlines (DAL).
On Position Sizing & Liquidity
While everyone will focus on Tepper's bullish comments, he made a good point regarding position sizing and tracking his hedge fund's holdings. While Citigroup is one of his larger positions, he mentioned it's only a 1.5% or 2% position compared to his firm's overall AUM.
Tepper says that instead of looking at the position size of the investment relative to his firm's AUM, look at how much of a given company that they own if you're tracking their positions.
He notes that he sizes positions accordingly to how easily they can get in and out. He says that, "I value liquidity a lot." So he's a long-term investor but he likes stocks like Apple (AAPL) that are extremely liquid. He learned a very valuable lesson in 1998 regarding liquidity in Russia and that obviously shapes his decisions to this day.
He also touched on how he started Appaloosa, something that's explained in more detail in the book The Alpha Masters. We've highlighted an excerpt from the book in the past that touches on why his firm is named Appaloosa.
Below is the video of David Tepper's interview with Bloomberg:
If you missed it, be sure to also check out Tepper's other recent interview on CNBC as well.
Friday, January 18, 2013
What We're Reading ~ Hedge Fund & Finance Links 1/18/13
If you missed the news yesterday, we're now posting linkfests twice a week:
- 1 set of news links focused on hedge fund/finance updates
- 1 set of analytical links focused on security analysis, investment process, etc.
You can view yesterday's analytical links here, and without further ado, below are the hedge fund links:
Hedge Fund Links
10 lessons from investing in small & start-up hedge funds [CFA Institute]
Bridgewater's best and worst trades revealed [ZeroHedge]
Baupost Group profits from Madoff claims [Forbes]
Insight from some great people: in 2012 I learned that... [ReformedBroker]
Top hedge fund industry trends predicted for 2013 [All About Alpha]
2013 investor outlook from SkyBridge, MorganCreek & more [HFIntelligence]
10 trends to watch in finance for 2013 [Washington Post]
Jeff Gundlach's predictions for 2013 [AdvisorPerspectives]
Top 100 finance blogs [SuitPossum]
Icahn takes stake in Transocean (RIG) [Yahoo]
Hedge funds squeezed with shorts beating S&P 500 [Bloomberg]
Returns at hedge funds run by women beat the industry [Dealbook]
Doug Kass' 15 surprises for 2013 [TheStreet]
Private equity: it's not a bubble, it's a pyramid scheme [PEHub]
Thursday, January 17, 2013
What We're Reading ~ Analytical Links 1/17/13
By popular demand from readers, we're expanding the "what we're
reading" linkfests to twice a week, starting now. To differentiate the
lists, we'll be posting:
- 1 set of news links focused on hedge fund and finance industry updates
- 1 set of analytical links focused on security analysis, investment process, etc.
If
you come across (or have written) something interesting, please don't
hesitate to email it over: marketfolly (at) gmail (dot) com. Today
we'll post the first installment of the 'analytical links' and tomorrow
will feature the 'hedge fund links.' Enjoy!
Analytical Links
The Success Equation: Untangling Skill & Luck in Business, Sports and Investing [Mauboussin]
A checklist to qualify and disqualify ideas [SimoleonSense]
Curating your financial life [Abnormal Returns]
AIG downgraded as shares appreciate [ValueWalk]
Finding value in HMO's [Contrarian Edge]
Notes on visiting Herbalife (HLF) [Bronte Capital]
12 cognitive biases that prevent you from being rational [io9]
Don't go to business school unless it's a top school [Daily Beast]
Bargain hunting at JC Penney (JCP) [Contrarian Edge]
Ensco (ESV): Drilling deep for value [Barrons]
Indecent proposal for SuperValu (SVU)? [Stone Street Advisors]
Actually worth a read: Jim Cramer's 10 themes for 2013 [TheStreet]
Michael Dell's grand plan? [Term Sheet]
Why console gaming is dying [CNN]
How America drinks: water and wine replace cheap beer and soda [Atlantic]
Mohnish Pabrai on Checklist Investing: Learning From Mistakes
Value investor Mohnish Pabrai sat down for an interview with The Motley Fool to talk about his approach and how he uses checklists in his investment process.
Checklist Investing & Learning From Mistakes
Pabrai had an epiphany after learning from concepts discussed in Atul Gawande's book The Checklist Manifesto. Essentially, he tries to learn from his mistakes by figuring out what went wrong with certain investments and how he could have prevented losses/a specific outcome.
But he also looked at some of the best investors in the world and incorporated their mistakes as well (looking at Warren Buffett, Charlie Munger, LongLeaf Partners, Third Avenue, etc).
Pabrai's Investment Checklist
Pabrai says that, "And what was stunning to me is that in almost all cases where I could figure out the reason for the loss, it was very apparent before the investment was made, number one. And the second is the reason was very basic. It wasn't some esoteric reason that you had to do some higher math to the fifth decimal to figure out this wasn't going to work. It was very basic."
While Pabrai has never revealed his checklist, he notes that there's about 98 questions on it that examines before making an investment. He does drop a few hints as to what he looks for though:
"So for example, we have a set of questions which relate to leverage. Debt covenants, how levered and all kinds of different issues related to leverage, because that has caused a lot of investments to go south. We have another set which relates to moats, the lack thereof, right? And so all kinds of things. There's another set of questions which relate to things like unions and labor relations. There's another whole set of questions on management and ownership. Just all kinds of nuances of whether they own stock, do they act like owners and all those sorts of things that come up. And then there are a few miscellaneous ones."
Since applying the checklist, Pabrai feels that his investment error rate has dropped significantly. Embedded below is the video of Pabrai's interview on checklist investing:
For more from this value investor, be sure to also check out what Pabrai learned from lunch with Charlie Munger and Warren Buffett.
Lee Cooperman's Omega Advisors Discloses Monitise Stake
Leon Cooperman’s hedge fund, Omega Advisors, has disclosed a new position in London listed Monitise (LON: MONI). Due to trading on January 10th, Omega Advisors now holds 5.65% of Monitise’s voting rights.
Following other hedge fund activity in the name, we detailed how Louis Bacon’s Moore Capital recently disclosed a new position in Monitise as well.
Per Google Finance – “Monitise plc is a United Kingdom-based holding company. The principal activity of the Company is as a technology company delivering mobile banking, payments and commerce networks worldwide. The Company’s segments include Live Operations, Investment in future operations and Investment in technology platform. Live operations include both territory deployments and development contracts, which consist of Monitise United Kingdom, Monitise Americas and Global accounts. Investment in future operations segment represents the Company’s operations which are not live operations covering both pre-sales and start-up period. Investment in technology platform segment comprises the ongoing development, enhancement and maintenance costs of the Monitise technology platform.”
Wednesday, January 16, 2013
Position Sizing Utilizing the Kelly Growth Criterion
Investing is a continual education and from time to time we like to highlight concepts on refining investment process. Today we present a piece on position sizing utilizing the Kelly Growth Criterion.
The following is a guest post from Kyle Mowery, who founded GrizzlyRock Capital in 2011 as a long / short manager investing in corporate debt and equity securities. He can be reached at kyle@grizzlyrockcapital.com or at www.grizzlyrockcapital.com.
Position Sizing Utilizing the Kelly Growth Criterion
One of the more vexing tasks for investment allocators is position sizing. Regardless whether allocators select investment managers or individual securities, optimal position sizing is paramount to portfolio success. Small allocations to prescient investments minimize their impact while large allocations to poorly performing investments leads to underperformance.
Some allocators elect to equal-weight investments given uncertainty regarding which investments will perform best. This strategy creates a basket of attractive investments that should profit regardless of which investments in the basket succeed. This method benefits from simplicity and recognizes the future is inherently uncertain. Drawbacks of the strategy include underweighting exceptional investments and overweighting marginal ideas.
Another strategy is to allocate large amounts of capital to the investment ideas with the most potential. This methodology suggests investors should invest proportionally according to their ex-ante return expectations. The advantage of this methodology is matching prospective return to investment size. However, this strategy breaks down when allocators are incorrect about future investment return or risk prospects.
Investment allocators determine their methodology through a combination of portfolio mandate, risk tolerance, and confidence level in investment assessments. While the various approaches implemented are directionally helpful, most are mathematically sub-optimal. There is a better way - the Kelly Growth Criterion.
Kelly Growth Criterion
The Kelly Growth Criterion is a simple formula that determines mathematically optimal allocations to maximize long-term portfolio performance given each investment’s probability of success (“edge”) compared to the amount gained or lost (“odds”). The formula assumes a bimodal outcome of success (“base case”) or failure (“stress case”) over a single time period:
Ok, How Can the Formula be Applied to Investing?
When applied to investing, the Kelly Growth Criterion formula has six inputs. First is simply portfolio size. Second is the amount of capital the portfolio will risk in the pursuit of gain. This amount is also called the maximum tolerable drawdown. For a venture capital group this number will be high while a conservative pension plan would be willing to risk much less. Portfolio size and maximum tolerable drawdown remain constant for each portfolio analyzed regardless of specific investment opportunities.
Next comes four factors regarding the investment itself: the probability of gain in a base case, probability of loss in a stress case, percent of projected gain in the base case, and percent of projected loss in the stress case. The formula is below:
We believe General Electric is attractive but are not sure how to size the position within our portfolio. Our team has agreed that our projected gain in the base case is 12% while we would lose 8% in the stress case. Further, the team has agreed the probability of gain to be 55% (base case) and a 45% probability of loss (stress case). Ok, so how much capital do we allocate to General Electric stock?
(click to enlarge)
Given both a strong “edge” (55% probability of success) and advantageous “odds” (12% projected gain in the base case is greater than 8% projected loss in the stress case), the formula suggests we allocate 3.75% of our portfolio to GE. If the “edge” was even, the formula would recommend a 2.50% allocation – again due to the disproportionate odds of success (12% vs. 8%).
What strikes many allocators initially is the magnitude of the size. Is 3.75% really optimal under a scenario with only a 55% probability of success? Mathematically speaking, yes. Why does this seem high?
The recommended 3.75% investment in GE seems high due to the commonality of diversification by funds and investment allocators. Let’s again work an example with our $100 million fund with a 15% maximum tolerable drawdown. Let’s further assume this fund has 100 investments therefore averaging 1.0% per investment. If an allocator takes the view that the “edge” is a coin flip (i.e. probability of success is equal to probability of failure). What would an allocation of 1.00% imply about the expected “odds”?
As shown above, a 1.00% allocation to a position implies just an 11.54% gain in the base case versus a 10.00% decline in the stress case assuming equal odds. These odds are hardly the makings of a scintillating investment.
Why is the Kelly Growth Criterion Rarely Used for Investment Allocation?
Given the formula is mathematically optimal and simple to implement, one might think allocators would embrace the tool. However, investment allocators are not aware of this tool primarily because academic finance has not fully embraced the tool. Secondly, there are a few key weaknesses of the tool.
How Can Inherent Limitations of the Kelly Growth Criterion Formula be Overcome by Investment Allocators?
(1) Ex-ante input assumptions are inherently precise: As with any model, the formula is only as good as its inputs. How can allocators know beforehand whether an investment has a 50% or 55% chance of success? This input must be estimated without an ability to determine the efficacy of the estimate ex-post facto.
The simplicity and power of the formula is a double-edged sword. If investment allocators systematically overestimate the probability of success, long run return will be hampered. The offset of this risk is to estimate projected gains and success probability conservatively. If allocators error on the conservative side, the model will allocate smaller amounts to each investment. This is perfectly acceptable given the model’s proclivity to encourage substantial position sizes.
(2) The formula cannot account for correlation: The Kelly Growth Criterion accounts for an investment’s specific edge and odds. As such, the formula cannot address the relationship between portfolio investments and thus does not account for correlation.
Ask anyone who invested during 2008, correlations rise during a stress environment. If the probabilities of investment success (“edge”) in a given portfolio are correlated, a portfolio allocated strictly according to the Kelly Growth Criterion would be susceptible to risk factors which increase correlation.
There are two mitigants for this risk: (1) Invest in securities with divergent risk factors. If your edge in each investment is not correlated, the formula will provide a strong outcome at a portfolio level. (2) Akin to the mitigants for imprecise input assumptions, estimating a conservative edge and odds for each investment will decrease position sizing in any one security. By avoiding the weaknesses of the Kelly Growth Criterion, the robustness of the formula is enhanced.
(3) The formula assumes a single time period while portfolios are managed more frequently: The Kelly formula assumes a bimodal outcome, success or failure. Portfolio managers often confront prices that meander towards their eventual outcome over time. As prices change, positions sizing will be suboptimal at various times. To compensate for the model’s simplicity, allocators should specify time horizons before entering a position. For example, if hiring a private equity fund manager with an investment horizon of 10 years your Kelly Growth formula will utilize a much longer time frame than if you manage a trading book.
My firm, GrizzlyRock Capital, utilizes long-term, fundamental value methodology. As such, we utilize a period of multiple years when applying the Kelly Growth Criterion. We calculate the value of a business using an upside, base, and stress case and then utilize the base and stress case forecast in the Kelly formula. This conservatism allows the investment to trend towards our base case without our needing to reassess position sizing using the formula.
Conclusion
The Kelly Growth Criterion is valuable to investment allocators given the systematic, repeatable process and mathematically optimal portfolio structure. While a practical tool, the formula is not a silver bullet. When used conservatively, the formula will maximize portfolio growth by allocating capital to the most advantageous investments given both prospective return and risk.
Bill Miller of Legg Mason and Ed Thorp of Princeton Newport Partners (now closed) are investors with stellar track records over decades who embrace and advocate the use of the Kelly Growth Criterion in portfolio allocation. In his recent treatise, Antifragile, Nassim Taleb lavishes praise on the Kelly Growth Criterion: “Kelly’s method requires no joint distribution or utility function. In practice one needs the ratio of expected profit to worst-case return – dynamically adjusted to avoid ruin.”
For more detail on the Kelly Growth Criterion, I recommend reading Fortune's Formula by William Poundstone or the Ed Thorp chapter (Chapter 6) in Jack Schwager's Hedge Fund Market Wizards.
At GrizzlyRock, we have found utilizing the Kelly formula eliminates our emotional biases towards certain aspects of investing and provides a stable, repeatable investment allocation of capital. Please drop me a line at kyle@grizzlyrockcapital.com if you wish to discuss further or be added to our distribution list.
Best of luck implementing the formula at your firm!
Friday, January 11, 2013
Charlie Munger & Warren Buffett's Secrets To Investing Success
Value investor Mohnish Pabrai recently sat down for an interview with The Motley Fool and he talked about what he learned from his lunches with Charlie Munger and Warren Buffett.
Charlie Munger's 3 Secrets To Investment Success
Pabrai talked about how Munger revealed 3 things investors can do to be successful:
1. Carefully watch what other investors are doing
2. "Look at the cannibals" - look at businesses buying back huge amounts of stock
3. Carefully study spin-offs
Point number one is quite interesting as Munger flat out tells you to watch other investors (i.e. 13Fs, 13G's, public appearances, etc), something Market Folly's expanded on in our premium newsletter. Rather than blindly copying their picks, we'd assume Munger means to use this as a source of idea generation and a starting place to do more work.
The second point (stock buyback) is something that numerous hedge funds take into consideration when evaluating ideas. Steve Mandel of Lone Pine Capital is said to be a fan of 'share count shrinkers'.
Lastly, the third point (spin-offs) is an excellent place to source ideas and Joel Greenblatt talks about spin-offs in his book. In fact, many hedge funds buy companies that announce a spin-off and then once the split is complete, hold onto one piece of the company that they like most.
An example that many hedge funds played was Expedia (EXPE) spinning off TripAdvisor (TRIP). We'd assume Charlie also meant 'split-ups' and a recent example of that would be Tyco splitting up into PentAir (PNR), Tyco (TYC), and ADT (ADT).
Warren Buffett's Words of Wisdom
Pabrai relayed a story Warren Buffett told him about his former partner Rick Guerin, who fell off the map so to speak. Buffett, Guerin, and Munger used to all invest together but Guerin was in a hurry to get wealthy whereas Munger and Buffett weren't. Buffett's outlined two lessons:
1. Avoid leverage
2. Be patient
Guerin was levered with margin loans in the 1973/74 downturn and received tons of margin calls, so he was forced to sell his Berkshire Hathaway (to Buffett).
So Pabrai described the lesson from Buffett as, "if you're even a slightly above-average investor who spends less than they earn, over a lifetime you cannot help but get rich if you are patient. And so the lesson was, don't use leverage, right? And be patient. These are attributes he's talked about plenty, but I would say that it got seared in pretty solidly after hearing the format in which he put it."
Embedded below is the video of Pabrai sharing what he learned:
For more from these great investors, head to Warren Buffett's recommended reading list as well as Charlie Munger on the psychology of human misjudgment.
Glenview Capital Reduces Spirit Pub Stake
Larry Robbins’ hedge fund, Glenview Capital, has been steadily reducing its position in London listed Spirit Pub Company (LON: SPRT). When Spirit was spun off from Punch Taverns (LON: PUB) in May of last year, Glenview held 18.37% of Spirits voting rights. Due to selling in July, August, November and now January, Glenview now hold only 11.7%.
Despite the selling, Glenview are still Spirit’s largest shareholder. Glenview has not sold any of their Punch Taverns stake though, which stands at 18.77%. It seems Robbins prefers the Punch Taverns side of the business.
Also worth noting: Glenview has a large holding in rival London listed pub group, Enterprise Inns (LON: ETI) where they hold 12.27% of voting rights.
Glenview had a big year in 2012 as they returned almost 30% in their main fund. Robbins has made a big bet on many hospitals and we've highlighted his other recent portfolio activity here.
Per Google Finance – “Spirit Pub Company is a United Kingdom-based company. As of July 1, 2011, the Company’s business comprised the managed pub business and the leased pub business comprising, 803 managed pubs and 549 leased pubs, which were carried on within the Punch Group by Spirit Pub Company (Holdco) Limited and its subsidiaries. In April 2011, Punch Taverns plc announced its plans to demerge its Managed business to create a business, Spirit Pub Company.”
Ross Turner's Pelham Capital Buys Vesuvius Stake
Ross Turner’s hedge fund, Pelham Capital, has disclosed a new position in London listed Vesuvius (LON: VSVS). Turner, previously the youngest partner at London hedge fund Lansdowne Partners, established his long/short fund in 2007, raising $500m.
Due to trading on December 19th, Pelham now holds 5.9% of VSVS’s voting rights. Vesuvius and Alent , both FTSE 250 midcap companies, were formed by a de-merger of Cookson Group in December last year.
Per FT.com – “Vesuvius PLC is engaged in metal flow engineering, developing, manufacturing and marketing ceramic consumable products and systems to the global steel and foundry industries and in industries that require refractory materials for high temperature, abrasion resistant and corrosion resistant applications such as the aluminium, cement, glass and solar industries. It has three business segments: the Steel and Foundry businesses, both of which are providers of engineered ceramics, and Precious Metals Processing business. Its products are specialised ceramics, including shrouds, stoppers, nozzles, slide gates, lining refractories and fluxes for the steel production industry and filters, feeding systems, coatings and binders for the foundry industry. On May 1, 2012, the Company disposed the United States business of the Precious Metals Processing business to Richline Group Inc. In November 2011, SERT was acquired by the Company. On March 29, 2012, it acquired Metallurgica.”
Wednesday, January 9, 2013
Dan Loeb Buys Herbalife, Morgan Stanley & Tesoro: Third Point Q4 Letter
Let the battle begin. Dan Loeb's hedge fund Third Point has started a long position in Herbalife (HLF), he revealed in his Q4 letter to investors. He also filed a 13G with the SEC disclosing that Third Point owns 8.24% of the company as of January 3rd.
Loeb Long Herbalife
Readers will recall that we recently posted up Bill Ackman's short presentation on HLF where he called it a pyramid scheme. Brian Sullivan tweeted that Andrew Ross Sorkin spoke with Third Point, who believe there's no evidence HLF is a pyramid scheme in their research.
Third Point believes in the compounder thesis that the stock was trading at an attractive discount (after Ackman's short presentation). Third Point writes,
"Applying a modest 10-12x earnings multiple suggests Herbalife's shares are worth $55-68, offering 40-70% upside from here and making the company a compelling long investment ... Given that the company has historically traded more in the 12-14x range (and traded at 16-20x earnings through much of 2011 and early 2012), the opportunity for the company to tell its side of the story tomorrow at its Analyst Day in New York, and the significant short interest, we believe shares could even trade well about our current price target."
So, you now have two hedge fund heavyweights: 1 long, 1 short. Who wins? Only time will tell. Now all we need is David Einhorn to toss his hat in the ring as well. After all, in May of this year Einhorn popped up on a HLF earnings call and started asking questions. However, he has not disclosed a position long or short.
Third Point Starts Morgan Stanley & Tesoro Positions
While the HLF position will get all the focus, we also wanted to highlight that Third Point disclosed a new position in Morgan Stanley in their Q4 letter as well. They feel the company is a turnaround story and point to the stock trading at a 20% discount to tangible book, down from the 35% discount when they acquired shares at an average price of $16.77 per share.
The hedge fund also bought shares of refiner Tesoro (TSO). They write, "we see Tesoro generating about $9 per share in annual excess FCF on a normalized basis and our expectation is that shares can double from the current price of $40. We believe the Q3 story was only the beginning, and are happy to own Tesoro for its next few chapters."
Embedded below is Dan Loeb & Third Point's Q4 2012 letter to investors:
For more on this hedge fund manager, we just yesterday posted up how Third Point ramped up net long equity exposure.
Odey Discloses Regus Stake
Crispin Odey’s hedge fund, Odey Asset Management, has disclosed a new position in London traded Regus (LON: RGU). Due to trading on January 4th, Odey now own 5.15% of Regus’s voting rights.
Odey hold the equivalent of 1.88% of Regus’s voting right via contract for difference (CFD), something we've explained in the past via that link for those unfamiliar.
In terms of shorts positions in the UK property sector, Odey also has a -0.91% short in Capital Shopping Centres (LON: CSCG). CSCG is a real estate investment trust (REIT) that owns 14 regional shopping centres in the UK.
For more information on Odey’s recent activity in UK markets see our posts on their stakes in Shanta Gold (LON: SHG) and fellow hedge fund, Man Group (LON:EMG).
Per Google Finance – “Regus plc is a provider of global office outsourcing services. Its primary activity and business segment is the provision of global workplace solutions. There are three parts to the Company’s business: Mature, New and Third Place. The Company’s products and services include outsourcing, workplace recovery, business lounges, businessworld, meeting rooms, video communications, offices and virtual offices. It offers bespoke packages for starting a business, home based business, mall and medium business, international business and corporate workspace solutions. It has some 1,203 locations across 550 cities in 94 countries serving more than a million customers. Its principal geographical segments include Americas; Europe, Middle East and Africa (EMEA); Asia Pacific; and the United Kingdom. During the year ended December 31, 2011, it opened 139 locations, and added 62 centers, including a center in Omaha, Nebraska. In September 2012, it opened a new business center in Rwanda, Kigali.”
Howard Marks: Fixed Income Returns Not Worth The Risk (Latest Memo)
Longtime readers will know we're big fans of Howard Marks' commentary mainly because he often tackles investment process and other key concepts of investing. The latest memo from the Oaktree Capital chairman is entitled "Ditto" outlines how history doesn't repeat itself but it does rhyme and he outlines some of these repeating themes in financial markets:
- Importance of risk and risk control
- Repetitiveness of behavior patterns and mistakes
- Role of cycles and pendulums
- Volatility of credit market conditions
- Brevity of financial memory
- Errors of the herd
- Importance of gauging investor psychology
- Desirability of contrarianism and counter-cyclicality (we've highlighted an excerpt from Marks' book on contrarianism in the past)
- futility of macro forecasting
As you'll notice, many of the above are related to behavior/emotion (see recommended reading on the topic here). Because while fundamentals, technicals, or whatever metrics you follow matter, you also have to worry about the two factors that seemingly move markets the most: greed and fear.
He goes on to write, "The good news is that today's investors are painfully aware of the many uncertainties. The bad news is that, regardless, they're being forced by the low interest rates to bear substantial risk at returns that have been bid down. Their scramble for return has brought elements of pre-crisis behavior very much back to life."
The key here, is that he's referring mainly to fixed income securities. After the financial crisis, everyone was looking for "safety." And then during the low interest rate years, everyone began to stretch for yield.
Marks reiterates something he said in 2004 by saying that, "there are times for aggressiveness. I think this is a time for caution. Here as 2013 begins, I have only one word to add: ditto."
Marks' latest memo "Ditto" is embedded below:
You can download a .pdf copy here.
For more wisdom from this manager, be sure to check out Marks' previous letter.
What We're Reading ~ 1/9/2013
Fund manager search and selection tips [CFA Institute]
Remembering what's important when it comes to investing [Abnormal Returns]
Latest interview with Jim Chanos [Barrons]
Irving Kahn: The 107-year old stock picker [WSJ]
A profile on fund manager Don Yacktman [Fortune]
Interviews with Marc Lasry & Thomas Wagner [Distressed Debt Investing]
Smart money has many forms [Invanoff]
Leading investment indicators [Above the Market]
How would Buffett invest if he started over today? [Geoff Gannon]
When is a hedge fund not a hedge fund [Market Safari]
On implementing the Peter Lynch approach to stocks [Guru Investor]
Hedge funds going nowhere fast [Economist]
Profile of Ryan Morris, a 28-year old activist investor [BusinessWeek]
A rare interview with Google's Larry Page [Fortune]
A qualitative look at Apple (AAPL) [Brooklyn Investor]
Why Bill Ackman is wrong about Herbalife [Kid Dynamite]
A look at Abbott Labs spinoff Abbvie [Stock Spinoffs]
Amazon: The hidden empire [Scribd]
How TV still made money off the internet [The Atlantic]
Mortgage rates won't get much lower [Fortune]
Tuesday, January 8, 2013
What We're Reading ~ 2013 Predictions Edition
Our normal weekly linkfest will be published tomorrow (Wednesday) as usual. But today we wanted to highlight a set of links focused on picks and predictions for the new year. Enjoy 2013:
10 new, must-read investing blogs for the new year [Marketwatch]
Crowd-sourced 2013 stock and market picks [Forbes]
The 2013 buy list [Crossing Wall Street]
Stories to watch for in 2013 [Marginal Revolution]
Byron Wien's 2013 predictions [Zero Hedge]
Walt Mossberg's 2013 tech predictions [WSJ]
Top 10 predictions for 2013 [FirstAdopter]
The 10 best stocks for 2013 [Old School Value]
10 favorite stocks and trends for 2013 [Leigh Drogen]
And looking back on 2012:
Wall Street geniuses and their favorite charts of 2012 [Business Insider]
At the end of the year, a time for reflection [Adam Grimes]
Market Strategist Jeff Saut: Short-Term Conflicted, Long-Term Bullish
It's been a while since we checked in on market strategist Jeff Saut, so now that the new year is upon us, let's see how he's positioned and approaching this market. His latest commentary, entitled "White Noise?" talks about how investors need to filter out the daily noise they hear from media.
As far as his positioning goes, Saut notes that "I am currently short-term conflicted. While the long-term case remains strongly bullish based on a more collegial Congress, a continuation of the housing boom, strengthening auto sales, improving employment, low inflation, liquidity, etc, the short-term is becoming suspect."
The reasons for his short-term concern stem from the McClellan Oscillator remaining overbought and the fact that highly shorted stocks rallied profusely (implying a massive short squeeze in some of these popular shorts).
He thinks the rally will stall at certain technical levels (1475) and pullback in February, a dip he thinks should be bought. He likes all sectors except for Consumer Staples, saying they're too expensive currently.
Embedded below are Jeff Saut's latest investment strategy comments:
You can download a .pdf copy here.
Third Point Ramps Up Net Long Equity Exposure in December
Dan Loeb's Third Point Offshore Fund finished 2012 up 21.2%, managing just over $5 billion. In the hedge fund's most recent December report, we see their exposure levels and latest top holdings:
Exposure Levels
The main takeaway from Third Point's latest exposure report is their sizable increase in net long equity exposure. They went from being 27.7% net long at the end of November to 43.1% net long at the end of December.
They are slightly net short healthcare and their largest net long exposure comes in the TMT (tech, media & telecom) and industrial sectors.
In credit, Loeb's firm is net long 29.5% and their largest allocation there continues to be asset backed securities.
Third Point's Top Positions
1. Yahoo! (YHOO)
2. American International Group (AIG)
3. Gold
4. Ally Financial (multiple securities held)
5. Murphy Oil (MUR)
Compared
to the month prior, there are two notable changes. First, their
position in Greek Government Bonds (GGB's) falls out of their top
holdings. We posted an article about them trimming this position in our weekly linkfest. The second change is that Ally Financial has climbed
up the position sheet.
Top winners for Third Point in
December included GGB's, AIG, Delphi (DLPH), and Nexen (NXY). The
government exited its stake in AIG, one of the many catalysts Third Point
outlined in their thesis on AIG.
NXY has been a big arbitrage play among hedge funds as their merger deal was approved by Canadian authorities. This stock was flagged as a consensus buy among hedge funds in our November Hedge Fund Wisdom issue.
