Crispin Odey of hedge fund firm Odey Asset Management is out with his latest commentary. Recently, we outlined Odey European's hedge fund outlook and this time around we're taking a look at the prominent UK manager's latest stance on the economy and markets. Crispin Odey's full current oulook:
"September has now almost repaired the damage done in August. Equities remain attractively priced but unloved. This makes share prices volatile, especially since investors remain very cautious on the outlook. I see nothing that can damage the excellent free cash flow outlook for the corporate sector. Where pessimists see governments spending cutbacks next year killing any GNP growth, I see pent-up capital spending plans and a little less paying back of debt taking up the running and more than compensating.
The performance of the fund has been disappointing. We were hurt by being short of governments bonds early on, we have been hurt by being naturally hedged back into the weakest currency, the Euro, and we have been hurt by some painful individual share price movements - Sky Deutschland, Connaught (in small way), Barclays and Ericsson.
The successful strategy this year would have been to opt for those companies serving emerging market- the growth stocks. Value stocks have had a bumpier ride. Investors have been scared by the cyclicality implied in owning high yielding shares, despite earnings yields being twice those of the growth stocks. It is an uneasy time being early, but nothing either at a macro level or at the corporate level has bid me to change my mind. Indeed managements seem to me to be entirely in the right place. Governments, like the UK coalition, are making the difficult decisions and only the politics in the USA remains uncertain. I personally welcome the Tea Party movement there - politicians need to connect with people - and the midterm elections, if they end the Democrat's majority in the House of the Representatives, can only be a blessing."
Odey touches on some of his firm's positions specifically so it's always interesting to see what they've got their eye on: Sky Deutschland, Connaught, Barclays, and Ericsson. Intriguingly, he also touches on how equities remain 'unloved.' As his commentary was penned on August 31st, this comment precedes the rally we've seen in equities as of late. But even then, he'd still most likely point to the massive exodus from equities by retail investors. Odey currently favors value stocks over growth as he feels they have high earnings yields and cheap valuation. In terms of position updates from Odey, we recently detailed that they increased their stake in Pendragon (LON: PDG).
For all our coverage of hedge funds based across the pond, scroll through our posts on UK managers.
Thursday, September 23, 2010
"Equities Remain Attractively Priced But Unloved": Crispin Odey's Latest Market Outlook
Warren Buffett & Jay-Z on Success: Forbes Interview
Forbes sat down for an interview recently with somewhat of an unlikely combination in investor Warren Buffett and entertainer/entrepreneur Shawn Carter (better known as Jay-Z). However, the duo is not so unlikely when you consider that the topic of discussion was success. Both gentlemen have found their niche and excelled in it. For a look at Buffett's success specifically, we've posted up a multi-decade look at Buffett's career.
On the subject of succeeding, Buffett attributes his triumph to getting started early on in his life. He essentially had a 15 year head-start over anyone else as he started rifling through investment books at age 7 due to his father's involvement in the investment industry. Jay-Z credits some of his success to starting almost in an opposite fashion, not entering the business until he was 26 and hitting the ground running.
Both men attribute passion and consistency as pillars of their success as well. They have been disciplined in their approaches as Buffett sticks to investments in industries he can understand and Jay-Z sticks to his own entertainment style rather than succumbing to new trends. As a value investor, Buffett stays away from the hottest new stock or industry that trades at astronomical P/E ratios.
Another commonality between the two men is the role of downplaying emotion. Jay-Z doesn't let emotion get in his way of making decisions in terms of his music production. He doesn't like to give in to what's "hot" in the industry. Buffett takes the same approach. He stays calm, buying when others succumb to their emotion and panic. The difference between the two businessmen here is that Jay-Z seems to just ignore the emotion altogether and stick with how his mind works. The Oracle of Omaha, on the other hand, exploits other people's emotion and uses it to his advantage.
On the topic of self-improvement, Buffett urges everyone to essentially invest in themselves by developing habits of success. He suggests that of the people you admire, list the characteristics about them you like and then learn to master those qualities. In investing, Buffett likes companies with wide moats and a competitive advantage. You can advance yourself he says if you "build your own moat around yourself." This type of advice is exactly what the Oracle of Omaha has divulged in Buffett's top 25 quotes.
So loosely speaking, what is the path to success?
According to these two businessmen, the answer lies in a few qualities that collectively assemble into the magical equation:
- Passion
- Drive
- Discipline
- Ability to ignore emotion
- Consistency
- Ability to learn from mistakes
- An element of luck
Embedded below is the video of Forbes' interview with Warren Buffett and Jay-Z (email readers: you'll have to come to the site to view the video):
To try and master financial markets like he has, head to Warren Buffett's recommended reading list.
Berkshire Hathaway Sells Moody's (MCO) Again
Warren Buffett's Berkshire Hathaway has sold shares of Moody's (MCO) for the second consecutive time in a week. Per a Form 4 filed with the SEC, Berkshire Hathaway sold 560,000 shares of MCO at an average price of $25.725 on September 20th. This comes right after Buffett sold Moody's last week. After the cumulative sales, Buffett is now left with 28,873,326 shares of the company.
As we detailed last week, it's very evident that any price over $25 is a price Buffett is willing to part with some of his shares. Keep in mind though that he still has a massive position, with over 28 million shares remaining. He has been patient with his sales and many months ago has demonstrated his willingness to sell MCO at around $25-30 per share.
On the other side of the coin, we've also cataloged how David Einhorn's hedge fund Greenlight Capital has been short Moody's. You can view his original thesis here: The Curse of the Triple A.
Taken from Google Finance, Moody's is "a provider of credit ratings; credit and economic related research, data and analytical tools; risk management software, and quantitative credit risk measures, credit portfolio management solutions and training services."
To learn how to invest like the legend himself, head to Warren Buffett's favorite investing books.
Wednesday, September 22, 2010
Bruce Berkowitz Goes Activist on AIG: Examining the Company's Road to Recovery
Bruce Berkowitz's Fairholme Capital has filed a 13D on shares of American International Group (AIG). Due to activity on September 16th, Fairholme has disclosed a 24.4% ownership stake in AIG with 32,909,500 shares. This is a very slight increase over Fairholme's previous AIG position. Berkowitz's most recent purchase came on September 15th, buying 1,000 shares at $36.04.
What's interesting here is that he had previously filed a 13G indicating a passive stake. With the filing of a 13D, he has signaled activist intent. Yet within the filing itself, he did not necessarily lay out a tentative plan of action. Typically, an investor filing a 13D will try to shake up the board, consult with management regarding strategy, or take some sort of action in an attempt to generate shareholder value.
Fairholme originally started an AIG position back in March of this year. He initiated his stake with 20% of some tranches of convertible debt, other AIG bonds, as well as 13 million shares of common stock. In other ownership, David Tepper's hedge fund Appaloosa Management had previously bet on AIG's 8.175 junior subordinated debt. Tepper argued that there was a mis-pricing due to a misunderstanding of AIG's capital structure. Berkowitz's credit positions give him additional layers of protection, but his equity stake is harder to fully understand. Some analysts have likened shares of AIG to spinning the roulette wheel while others have found value and believe AIG can earn $8 billion or so in 2011.
So, what's Berkowitz's investment thesis? He has previously argued that the government's involvement has 'cleansed' the company and that AIG can move forward as a free entity in 2011. In the past, Berkowitz opined that the company has the ability to pay back taxpayers and the Treasury, emerging as a smaller organization by selling off assets such as AIA and Alico. The overriding thesis in Berkowitz's portfolio overall has been 'recovery.' In terms of his firm's other positions, we've detailed Fairholme's MBIA stake, as well as their new position in Morgan Stanley (MS).
Berkowitz's investment could possibly be best served if AIG could offload AIA for more than 1x book value somehow down the road. In recent developments, it appears as though AIA will raise up to $15 billion in a Hong Kong IPO. Additionally, the troubled firm has neared a deal to sell two of its Japanese life insurance companies to Prudential for $4-5 billion combined. Selling assets and raising capital to payback taxpayers has been the CEO's number one priority. Also, AIG is said to be evaluating options regarding its Nan Shan Life Insurance ownership stake.
As if AIG wasn't a complicated mess to start with, you can't forget the fact that the government also has a massive stake in the company (ya know, from when they saved them). Apparently, AIG and the government are in talks to speedup the repayment of US taxpayers, allowing the company to gain independence again. This plan essentially converts the government's $49 billion worth of preferred shares into common shares. Such a scenario means that the government would own over 90% of the company (up from its current almost 80% stake). These common shares would then eventually be sold off to private investors.
Breaking down what is owed to taxpayers, it's clear there's still plenty of work ahead. The Federal Reserve of New York owns $26 billion worth of preferred interests in AIA and Alico. This amount is most likely to be repaid by the sale of the units. Further AIG asset sales will be required to pay back the $20 billion in secured debt owed to the New York Fed. Also, don't forget the $29 billion from Maiden Lane II and Maiden Lane III (financed by the New York Fed). This figure will most likely be repaid via the securities those companies own. Lastly (as mentioned above), the Treasury Department owns $49 billion worth of preferred shares, likely to be converted into common and then sold.
Keep in mind that this is by no means guaranteed as there are a lot of moving parts involved and it could take years to complete. This is obviously quite a large overhang but something that needs to be done in order for the company to fully recover. AIG seeks to simplify its capital structure for the future, allowing investors more clarity in valuing the company. The government will be more willing to reduce its ownership stake as long as AIG is able to raise new capital, most likely via issuing new stock.
Unfortunately, Berkowitz's most recent full portfolio disclosure is only as recent as May 31st, 2010. Back then, AIG was Fairholme Fund's second largest position at 6.86% of the portfolio. Given that this position is so large for him, one shouldn't necessarily be surprised that he wants to take a more hands-on approach with the 13D. While AIG's roadmap to recovery is essentially mapped out, it's unclear how Berkowitz plans to pave the road with his activist stake.
For an in-depth look at Fairholme's portfolio as well as the investments of top hedge funds, check out our new publication: Hedge Fund Wisdom.
Tuesday, September 21, 2010
Hedge Fund Carlson Capital Files Amended 13D on Hot Topic (HOTT)
Dallas based hedge fund Carlson Capital just filed an amended 13D with the SEC regarding their activist position in shares of Hot Topic (HOTT). As we previously covered, Carlson owns a 3.96% stake in HOTT and that figure remains unchanged. The reasons for the amendment are as follows:
- Removal of "group" filing status: Previously, Carlson had joined up with Becker Drapkin Management, filing as a group for the purpose of this activist investment. Their collective stake in Hot Topic totaled 9.042% of the company. They are no longer adjoined as a group.
- Addition of both Stephen R. Becker and Matthew A. Drapkin to Hot Topic's board: The exhibits attached to the amended 13D filing propose adding the two gentlemen to Hot Topic's board. Neither work for Carlson and they are both proprietors of Carlson's former "group" member, Becker Drapkin Management.
- Standstill period: As of September 19th, 2010, members of either Becker Drapkin or Carlson will *not* acquire any securities of the company, will not submit any shareholder proposals, will not solicit proxies, and will not seek acquisitions regarding the company.
Given the legal nature of these document, there's plenty of fine print that you can read here. The 13D filing is accompanied by two exhibits. In the end, the main thing to take away from all of this is that Carlson has not adjusted their position, has abandoned "group" status for filing purposes, and seeks to put two individuals from Becker Drapkin on Hot Topic's board. We'll continue to watch this activist investing situation unfold. View our original coverage of Carlson's activist position here.
Taken from Google Finance, Hot Topic is "mall and Web-based specialty retailer operating the Hot Topic and Torrid concepts, as well as the e-space music concept, ShockHound. It sells a selection of music/pop culture-licensed and music/pop culture-influenced apparel, accessories, music and gift items for young men and women principally between the ages of 12 and 22."
For more in-depth coverage of hedge fund portfolios, scroll through our coverage of the latest SEC filings.
Tom Brown's Second Curve Buys CompuCredit (CCRT) Shares
Tom Brown's hedge fund firm Second Curve Capital just filed a Form 4 with the SEC regarding trades made in shares of CompuCredit Holdings (CCRT). In the filing, Second Curve discloses that they purchased 25,000 shares of CCRT at $4.64 on September 16th, 2010. After this transaction, Tom Brown's firm now owns 4,118,630 shares.
Second Curve recently filed a 13G on this stock, disclosing ownership of 11.4% of the company. This latest purchase adds to that total. Prior to founding Second Curve, Brown headed up the financial services group at Julian Robertson's Tiger Management. Other recent portfolio activity out of this hedge fund includes a new position in Tennessee Commerce Bancorp (TNCC).
Taken from Google Finance, CompuCredit is "a provider of various credit and related financial services and products to or associated with the financially underserved consumer credit market."
To see what the top managers have been buying and selling, check out our detailed hedge fund portfolios.
Monday, September 20, 2010
Interview with Seth Klarman: Opportunities for Patient Investors
A while back we detailed thoughts from Baupost Group's Seth Klarman where the legendary investor was worried about inflation and the markets. His comments came from the CFA's annual conference in Boston on May 16th-19th. While we had posted notes from the event before, today we're highlighting the full interview that Klarman had with Jason Zweig. If you're unfamiliar with Baupost Group, you can check out their portfolio as detailed in a free sample issue of hedge fund wisdom, our new newsletter. Additionally, you can read a profile of Seth Klarman here.
In the interview, Klarman touches on numerous topics ranging from his evolution as an investor, the financial crisis, and his current concerns. Additionally, Klarman recommended a few books which we compiled into a list. But we wanted to highlight what he learned as an investor from his early days at Mutual Shares, working for Max Heine and Mike Price. Of this Klarman says,
"What I learned from Mike—and I worked most closely with him—was the importance of an endless drive to get information and seek value. I remember a specific instance when he found a mining stock that was inexpensive. He literally drew a detailed map—like an organization chart—of interlocking ownership and affiliates, many of which were also publicly traded. So, identifying one stock led him to a dozen other potential investments. To tirelessly pull threads is the lesson that I learned from Mike Price.
With Max Heine, I learned a bit of a different lesson. Max was a great analyst and a brilliant investor—and he was a very kind man. I was most taken with how he treated people. Whether you were the youngest analyst at the firm, as I was, or the receptionist or the head of settlements, he always had a smile and a kind word. He treated people as though they were really important, because to him they were."
Embedded below is Klarman's full interview from the CFA conference:
You can download a .pdf copy here.
You can find out what Klarman is investing in via a free sample issue of hedge fund wisdom, a brand new quarterly publication by marketfolly.com.
Steven Cohen's SAC Capital Boosts Carter's (CRI) Stake
Steven Cohen's hedge fund firm SAC Capital filed a 13G with the SEC regarding shares of Carter's (CRI). Due to portfolio activity on September 7th, the filing states that SAC Capital now has a 5.4% ownership stake in CRI with 3,212,093 shares. This figure includes 452,200 shares represented by call options. Overall, this is a massive increase as SAC has boosted its position size in Carter's by 21,684%. Back on June 30th, they only held 14,745 shares of the company.
In terms of other recent activity from Cohen's firm, we detailed their stake in Genco Shipping (GNK) as well. Remember that due to SAC's frequent trading, you can't necessarily read too much into these filings. As such, take it with a grain of salt since they move in and out of positions much quicker than other hedge funds. We simply cover their activity because readers want to know what good ole Stevie Cohen is up to.
Make sure to check out our coverage of Goldman Sachs' VIP list where we identify what stocks matter most to hedge funds.
Taken from Google Finance, Carter's is "a branded marketer of apparel for babies and young children in the United States. The Company owns two brand names in the children’s apparel industry, Carter’s and OshKosh."
Pat McCormack's Tiger Consumer Adds to Medifast (MED)
Patrick McCormack's hedge fund Tiger Consumer Management just filed a 13G with the SEC regarding shares of Medifast Inc (MED). Per the filing, Tiger Consumer has disclosed a 5.11% ownership stake in MED with 788,790 shares due to portfolio activity on September 7th, 2010. This marks an increase in their position as they previously held 553,191 shares back on June 30th. As such, Tiger Consumer has boosted its position size by 42.6%, buying 235,599 additional shares over the past two and a half months.
In terms of other portfolio activity from McCormack's fund, we detailed back in July that they started a position in Sonic Automotive (SAH). Tiger Consumer is one of the many funds seeded by Tiger Management founder Julian Robertson and you can view the proverbial Tiger family tree here.
Taken from Google Finance, Medifast is "engaged in the production, distribution, and sale of weight management and disease management products and other consumable health and diet products."
To see the other stocks that matter most to hedge funds, head to our coverage of Goldman Sachs' VIP list.
Best Shorting Opportunity of 2010 Says Technical Strategist Robin Griffiths
Today we're presenting commentary from Cazenove Capital's technical strategist Robin Griffiths. In an interview on CNBC a few weeks ago he said that we are approaching the best shorting opportunity of 2010. Given that last week we covered the bullish case for equities, we wanted to present the other side of the coin.
Technically speaking, Griffiths feels that April 2010 marked the "top" of the year-long rally that began in March 2009. As such, he is cautious, simply stating "do not put risk on." Ever since this top, the market has been in a downtrend and he feels the only way he would switch his stance is if the market blasts through the April 2010 high. He also points out that the next four months are typically the weakest of any in a year. He doesn't think that the market will break through its early August highs either (around current levels at 1125 on the S&P 500).
He feels the market will break the July low and can see a 10-15% fall. Specifically, he is targeting 940 on the S&P 500. If you were looking to trade around his comments, it would seem that shorting and placing a stop at the April 2010 high would mirror his take. Now, do keep in mind that it has been two weeks since he made this commentary. However, his stance is still relevant given that the market is sitting at levels that still sit within his parameters. It appears as though to the two main levels to watch on the S&P 500 are 1020 for possible support (July low) and 1220 for resistance (April high).
Embedded below is the video of Robin Griffiths' commentary at CNBC. Email readers will need to come to the site to watch the clip:
So, a bearish argument based on technical levels of support and resistance. For a completely converse look, last week we presented the bullish case for equities.
George Soros ~ Quote of the Week
Market Folly's quote of the week this time around comes from the founder of the legendary Quantum Fund, George Soros:
"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."
~ George Soros
The global macro aficionado's quotation quickly brings to mind the old adages of, "let your winners run" and "cut your loses quickly." He hints that some of the best attributes of successful traders/investors are those who can recognize their winners and losers. It doesn't matter if you're "wrong." Everyone has been wrong before. Successful traders and investors recognize when they've made a mistake, admit their error, swallow their pride, and cut their losses quickly.
George Soros' portfolio is profiled in our brand new quarterly newsletter: hedge fund wisdom by market folly. You can also check out his insight in his book, The Alchemy of Finance.
Friday, September 17, 2010
Goldman Sachs VIP List & Hedge Fund Trend Monitor: Stocks That Matter Most to Hedgies
Every quarter, Goldman Sachs releases a list of stocks predominantly owned by hedge funds. The aptly named Goldman Sachs VIP list (or 'Very Important Positions' list) aggregates positions held by hedge funds utilizing fundamental strategies. This is just one part of the data aggregation found in Goldman's quarterly Hedge Fund Trend Monitor and we'll detail the latest findings below.
These positions are derived from 13F filings that hedge funds file with the SEC and those of you with Bloomberg Terminals can find this compilation at: GSTHHVIP
Last quarter, we posted up the previous iteration of the Goldman Sachs VIP list and for Q2 there are a few new additions to the list this time around including: Fidelity National Information (FIS), a stock many hedgies added after the company announced a leveraged recapitalization plan. Another new stock on the list, Comcast (CMCSA), has been a favorite of Columbia's University's value investing professor, Bruce Greenwald.
Two other stocks just added to the VIP list have been favorites of 'Tiger Cub' hedge funds as Andreas Halvorsen's Viking Global has a sizable position in Tyco International (TYC), and Stephen Mandel's Lone Pine Capital is bullish on Cognizant Tech Solutions (CTSH). Other stocks added to Goldman's VIP list in Q2 include: Barrick Gold (ABX), Viacom (VIA.B), Covidien (COV), Freeport McMoran (FCX), Covanta (CVA), Davita (DVA), Schlumberger (SLB), US Bancorp (USB), Halliburton (HAL) and General Electric (GE). These stocks previously did not have enough hedge fund ownership to make the cut, so it's apparent that hedgies were buying those names in Q2.
Without further ado, here are the top 10 stocks on the VIP list ranked by the number of hedge funds with the stock as a top 10 holding:
1. Apple (AAPL): 75 funds
2. JPMorgan Chase (JPM): 42
3. Pfizer (PFE): 36
4. Bank of America (BAC): 34
5. Microsoft (MSFT): 34
6. Citigroup (C): 32
7. Alcon (ACL): 30
8. Google (GOOG): 24
9. Exxon Mobil (XOM): 23
10. Mastercard (MA): 22
In our brand new quarterly newsletter, hedge fund wisdom, we highlighted that many hedgies had been adding Alcon (ACL) in Q2 and the stock consequently has now garnered a place in the top 10 of Goldman's VIP list. What's interesting is that 8 out of the 10 stocks above have seen negative returns year-to-date. Despite Apple's solid performance this year, the weakness in other top holdings could potentially be why so many hedgies are struggling. Mastercard (MA) recently hit a new 52-week low and many hedgies were buying at higher levels in Q2. This stock just broke into the top 10 of the VIP list this quarter.
On a sector basis, hedge funds had their highest weighting in consumer discretionary at 17% followed by information technology at 16%. One interesting find in Goldman's data is that stocks with the least hedge fund ownership have actually outperformed stocks with the highest hedge fund ownership concentration. This just ties into the notion of the hedge fund herd mentality that we've discussed before. Sometimes it's best to head in the opposite direction of the pack.
Embedded below is Goldman Sachs' Hedge Fund Trend Monitor report in its entirety for the second quarter. It includes the VIP list and much more:
You can download a .pdf copy here.
Keep in mind that you can receive complete portfolio updates on 20 of the top hedge funds in the industry via hedge fund wisdom by market folly, our brand new quarterly publication. Readers can receive a free sample issue here.
What We're Reading ~ 9/17/10
Time weighted versus absolute dollar returns [AbnormalReturns]
10 get-paid-to-wait Dow stocks [YCharts]
Great site for up-to-the-minute financial links [eWallstreeter]
Agriculture plays: the beans or the business? [ReformedBroker]
Contrarian value portfolio update [Greenbackd]
Buffett's article on Geico: a template for growth stock investing [Greg Speicher]
Video on Steve Eisman's latest thoughts on the for-profit education space [CNBC]
If you missed it, we posted Eisman's original thesis: Subprime Goes to College [MarketFolly]
Buy & hold, asset allocation and rebalancing [Capital Spectator]
Buffett rules out double-dip recession amid growth [Bloomberg]
Five pieces of advice from the top 5 financial advisors in the world [FINS]
Falcone making coin on distressed credit trading [Teri Buhl, Forbes]
Citadel opens Boston seeding office [FINalternatives]
Credit Suisse to take stake in hedge fund York Capital [Dealbook]
Hedge fund stars shine above the crowd [FT]
PIMCO makes $8.1bn bet against lost decade of deflation [Bloomberg]
An interview with Bill Fleckenstein [MadHedgeFundTrader]
How Goldman Sachs makes (& unmakes) its partners [Dealbook]
Renaissance will keep RIEF and RIFF funds open [WSJ]
Thomson Reuters launches next-gen desktop to rival Bloomberg Terminal [NYT]
Entrepreneurship as disease [Harvard Business Review]
Richard Branson's 5 secrets to business success [Entrepreneur]
Thursday, September 16, 2010
Stocks vs Bonds & Risk vs Reward: Value & Risk in the Eye of the Beholder
Herbert Abramson and Randall Abramson's Trapeze Asset Management is out with their second quarter market commentary and in it they touch on two choices that often confound investors: stocks versus bonds and risk versus reward. They argue that both stocks and bonds involve risk but given the current potential reward each offers, the choice is a no-brainer: stocks. Given the low rates associated with bonds these days, they believe these vehicles are more akin to cash than investments.
In particular, Trapeze (like many other value investors) have shifted their focus to undervalued large-cap stocks. The interesting dynamic here is that this is essentially the first time investors have been able to purchase such high quality companies at what many are deeming cheap prices. You'll recall that during the panic, cyclical and leveraged businesses declined the most and then subsequently rallied the most during 2009. High quality stocks were seemingly left behind and this theme has been highlighted by numerous managers and strategists including Jeremy Grantham, Legg Mason's Bill Miller, hedge fund manager Whitney Tilson, and many more.
Trapeze interestingly intertwines compelling valuations with contrarianism by highlighting the current investor distaste for equities. Just yesterday we highlighted how market strategist Jeff Saut viewed massive equity fund outflows as a possible contrarian indicator. Investors are fearful of numerous economic factors ranging from unemployment, to a double-dip recession, to deflation. This resulted in a stampede into bonds. Such positioning requires a dose of macro outlook and Trapeze's viewpoint appropriately falls in line with the "no double-dip" crowd.
Trapeze writes, "It has been argued that, if one takes a longer term horizon to smooth out the fluctuations, equities can be viewed as long-term bonds with an earnings yield in lieu of a bond yield and often with a fixed dividend yield, mostly reliable, mostly growing. In the current environment if one takes, say, a 5-year horizon to even allow for the possibility of an interim double-dip recession with a lower stock market from a poorer outlook for earnings, stocks should still be the preferred asset class in that extended period."
Many investors have often quoted Warren Buffett in saying, "Be greedy when others are fearful." Investors certainly seem more fearful of equities than they have been in quite some time. While equities haven't experienced extreme declines in absolute value, many investors have traded in their stocks for the supposed safety of bonds. And the problem with that, Trapeze argues, is that cash is desperately searching for return and yield; something that is currently better found in stocks than bonds. They feel that eventually all of the cash and fixed income parked on the sidelines will seek higher returns, eventually ending up back in equities.
In terms of specific stocks, Trapeze offers Clorox (CLX), Aflac (AFL), Kroger (KR), Aetna (AET), Hewlett Packard (HPQ) and Jack in the Box (JACK) as some of the large-cap stalwarts that they've been playing. Additionally, they also continue to hold positions in Oracle (ORCL), IBM (IBM), Walgreens (WAG), Wal-Mart (WMT), Mastercard (MA) and more.
For the bullish case on equities, we highly recommend reading Trapeze Asset Management's second quarter letter to investors in its entirety, embedded below:
You can download a .pdf copy here.
In the end, it's an epic and ongoing debate: stocks versus bonds, risk versus reward. Add in your stance on the macro environment and the decision is essentially made for you. However, what Trapeze is trying to illustrate is that such extreme pessimism (among other factors) can be interpreted as an opportunity for contrarian optimism. We'll end with another quote from Trapeze's letter: "Like beauty, value and risk too are often in the eye of the beholder."
To see what stocks prominent hedge funds have been investing in, head to our brand new quarterly newsletter, hedge fund wisdom by market folly (receive a free sample here). And if the above article is just too bullish on equities for you, last month we presented the opposite side of the coin with David Gerstenhaber's hedge fund Argonaut Capital who thinks that deflation is the greater risk.
Hedge Fund UK Positions Update: Eton Park, Lansdowne, & Odey
While Market Folly typically focuses on that of equities traded on US exchanges, we also like to track the UK holdings of the top hedge funds. Today we'll summarize the latest moves in the UK from some of the biggest managers due to regulatory filings.
First, Crispin Odey's hedge fund firm Odey Asset Management has increased their position in Pendragon (LON: PDG) two times in recent months. Due to portfolio activity on August 8th, Odey boosted their stake from a 14.56% stake to 16.35%. Then, on the 9th of September, Odey again raised their stake, this time to the current 17.79% ownership level. Pendragon is a UK car dealer and Odey has actually been involved in this sector/industry for much of the year.
Back in February, we posted up an investor letter from their flagship Odey European fund in which Odey disclosed a position in another UK car dealer, Lookers (LON: LOOK). We can't confirm whether or not Odey still have the Lookers stake as they've not crossed above the UK"s mandated 3% disclosure threshold. However, Odey has revealed their thesis behind the car dealer play writing,
"I have bought well managed businesses, where management have taken the necessary action to live in a world in which demand remains excessively weak. Where management have demonstrated the ability to take advantage of further dislocation - for instance if interest rates were to rise, they would be able to exploit this as an opportunity to buy their rivals. In the UK this has put me into the likes of Lookers and Pendragon, both car dealers. Current new car sales are running 1.8 million cars a year, some thirty per cent below the replacement rate of 2.8 million cars. Money is being made in used car sales and servicing, both of which are benefitting from the ageing of the fleet. On a P/E for this year of 5x, I find shares that are on discount to a level of profitability which already discounts the worst. That double discount gives me a great deal of comfort."
For more thoughts from this hedge fund, head to Crispin Odey's recent market outlook.
Second, we see that Eric Mindich's Eton Park Capital has disclosed a brand new position in Goldenport Holdings (LON: GPRT). They own 5.57% of the shares outstanding and this was due to portfolio activity on September 8th, 2010. Taken from Google Finance, Goldenport Holdings is "an international shipping company that owns and operates a fleet of container and dry bulk vessels that transport cargo worldwide." In terms of other activity from Eric Mindich's hedge fund, we revealed their new stake in Doral Financial (DRL) in August and also detailed some of Eton Park's portfolio as well.
Third, we'll turn to portfolio activity from Steven Heinz and Paul Ruddock's Lansdowne Partners. The major UK hedge fund reduced their position in Petropavlovsk (LON: POG) below the regulatory threshold of 5% ownership in a company. Petropavlovsk is involved in the development and mining of gold. Previously, the hedge fund owned greater than a 5% stake but now we no longer can view their stake due to portfolio activity on August 5th. Conversely, Lansdowne increased their position in RGI International (LON: RGI) to a 4.76% ownership stake due to portfolio activity on August 20th. RGI is involved in property development in Russia. Other past portfolio activity from Lansdowne includes covering their Old Mutual short position.
Last, we wanted to touch on a few merger arbitrage related plays. Eric Mindich's Eton Park has been in Dana Petroleum (LON: DNX), a company in takeover talks with a Korean company. Also, John Paulson's hedge fund Paulson & Co has been in SSL which is in takeover talks with Reckitt Benckiser.
For all our other coverage of stocks in this market, head to our posts on UK positions taken by hedge funds.
Wednesday, September 15, 2010
Equity Risk Premium 'Exceptionally Large' & Investors Shun Stocks: Jeff Saut
It's been a while since we've checked in on what market strategist Jeff Saut has to say so let's examine his latest commentary. In his weekly investment strategy, Saut points out the high correlation in markets these days, as pair trades don't seem to be working. He also highlights somewhat of a contrarian signal in the fact that money flows out of equity mutual flows are quite gargantuan. Everyone favors bonds and 'safety' these days as retail investors haven't been this unwilling to talk about stocks since the fourth quarter of 1974. As evidenced in the chart below, investors have shunned stocks and the equity risk premium (ERP) has been exceptionally large.
(click to enlarge)Given the increased fear and pessimism in equity markets over the past few weeks/months, Saut believes that many people are ignoring corporate profitability. He feels the S&P 500 will climb to around 1120 (current market levels) and then stall out/ pause before rallying even higher. Needless to say, this is the most bullish we've seen him in quite a while.
So, what stocks to buy? The Chief Investment Strategist at Raymond James feels that technology is the sector to be in. He likes Intel (INTC) here as the company has taken steps to gain exposure to the booming cellular market. Interestingly enough, Saut also likes smartphone plays American Tower (AMT) and Crown Castle (CCI). We actually featured an in-depth analysis of one of these companies in our brand new quarterly newsletter: hedge fund wisdom. Hedgies have definitely favored the wireless tower operators and we examined the investment thesis to take you inside the head of a hedge fund manager. Lastly, Saut also offers CA Technologies (CA) as a play.
In summary, Saut acknowledges that the economy is slowing but he thinks we avoid the dreaded 'double-dip'. Given the recent encouraging market action, Saut thinks we're headed above the early August highs of 1130 after the market pauses to catch its breath first. He would turn negative if the market found a way to break below its 50 day moving average at around 1085.
Embedded below is Jeff Saut's latest market commentary:
You can download a .pdf copy here.
For previous commentary from the market strategist, you can head to his piece on how he thinks the March 2009 lows will hold. For more theoretical and application based discussions, Saut outlined his risk management principles as well as the businessman's risk portfolio.
Warren Buffett's Berkshire Hathaway Sells More Moody's (MCO)
Warren Buffett's Berkshire Hathaway just recently sold shares of Moody's (MCO). Per a Form 4 filed with the SEC, we see that Berkshire sold 1,350,550 total shares at prices ranging from $25.1006 to $25.193 on September 10th, 13th, and 14th. After their sales, Berkshire was left holding 29,433,326 shares of MCO.
Buffett's company has sold Moody's shares numerous times this year. And as we've previously pointed out, it seems that Buffett and company are keen to sell MCO shares anytime they reach $25 per share or higher. In terms of other portfolio activity from the Oracle of Omaha, we saw in July that Buffett bought more Tesco. To view a complete summary of Buffett's latest investments as well as the portfolios of prominent hedge fund managers, head to our brand new publication: hedge fund wisdom by market folly.
Taken from Google Finance, Moody's is "a provider of credit ratings; credit and economic related research, data and analytical tools; risk management software, and quantitative credit risk measures, credit portfolio management solutions and training services."
To learn how to invest like the legend himself, head to Warren Buffett's recommended reading list.
Lee Ainslie of Maverick Capital ~ Quote of the Week
Continuing our 'quote of the week' series here at Market Folly, we turn this time to Lee Ainslie of hedge fund Maverick Capital on the topic of buy/sell/hold:
"There are no 'holds.' Everyday you're either willing to buy more at the current price, or, if you aren't, you should redeploy the capital to something you believe does deserve incremental capital."
~ Lee Ainslie
The topic of incremental capital is one Ainslie has repeatedly focused on over the years. Essentially, he wants Maverick to always be allocating capital to investments trading at compelling prices. Ainslie will be presenting investment ideas on October 12th at the Value Investing Congress in New York City. You can save on registration by clicking here. Also, if you want to take an in-depth look at Maverick Capital's portfolio, we've detailed their positions in our brand new quarterly newsletter: hedge fund wisdom.
Friday, September 10, 2010
Jeffrey Ubben's Hedge Fund ValueAct Capital Sells Some Gartner (IT)
Jeffrey Ubben's hedge fund firm ValueAct Capital recently filed a Form 4 with the SEC regarding shares of Gartner Inc (IT). According to the filing, ValueAct sold 4,000,000 shares at a price of $28.00 on September 7th, 2010. After the sale, they are left with 16,790,013 remaining shares of the company. ValueAct runs a concentrated portfolio with a focus on intensive due diligence and activism in an effort to create value.
This is the first time we've really covered ValueAct Capital and we'll be doing so from here on out due to reader demand. ValueAct was founded by Jeffrey Ubben in 2000. Prior to that, he was a managing partner at Blum Capital Partners and before that a manager of the Fidelity Value Fund. He received his B.A. from Duke University and his MBA from Kellogg at Northwestern University.
Taken from Google Finance, Gartner is "an information technology (IT) research and advisory company. The Company is a partner to 60,000 clients in 10,000 distinct organizations in over 80 countries. The Company’s principal products and services are delivered through its Research, Consulting and Events segments."
For the latest in hedge fund maneuvers, be sure to scroll through our latest SEC filing coverage.
Hedge Fund T2 Partners: Latest Investor Letter
Whitney Tilson and Glenn Tongue's hedge fund T2 Partners is out with their August letter to investors. In it, we see that they're up 12.3% net for the year compared to the S&P -2.1%. Some of their long positions that have performed well include: Osteotech, Resource America, Liberty Acquisition (warrants), and Wesco. On the short side of the portfolio, they found success in homebuilders, for-profit education plays, Ambac, and Lululemon Athletica (LULU).
Tilson's hedge fund has been positioned conservatively as they see an unfavorable economic outlook. Their letter takes a closer look at their position in Liberty Acquisitions warrants which you can read below. Tilson then confirms that they've added to their bearish bet against InterOil (IOC) after the company reported second quarter earnings. He also goes into detail about his rationale behind this short in the embedded letter below:
You can download a .pdf copy here.
Tilson and Tongue will be presenting their latest investment ideas at the upcoming Value Investing Congress in New York City on October 12th & 13th. Market Folly readers can receive a discount to the event here.
