Balestra Capital on Gold and Inflation: Quarterly Commentary

James Melcher's hedge fund Balestra Capital focuses on thematic global macro investing and has seen a compound annual growth rate (CAGR) of 24.3%. They're out with their quarterly newsletter where they discuss gold, inflation, and the evolution of money.


On Gold

On the precious metal, Balestra writes that,

"While gold does not pay interest or a dividend, unlike fiat currencies, it cannot be created in infinite amounts ... Gold deposits have become harder to find and far more expensive to mine and process. Central banks have recently been building their gold reserves, instead of selling them. Gold is not substantially held across the worldwide spectrum of investors. Nevertheless, if for no other reason than that the global store of gold is limited while paper money is rapidly proliferating, gold's role as a store of value is expanding, and its investment profit potential is rising."

Gold has been a popular investment among numerous hedge funds, though John Paulson's gold fund probably got the most media attention, as betting against the US dollar was his 'next big wager' after his successful subprime short.

However, what's interesting is the rising number of long/short equity portfolio managers that have allocated a percentage of their portfolios to either physical gold, the SPDR gold trust (GLD), or various gold miners.

David Einhorn's Greenlight Capital owns both gold and gold miners. Dan Loeb's hedge fund Third Point continues to hold gold as its second largest position. Stephen Mandel's Lone Pine Capital just started a position in gold last quarter ...and the list goes on.

Balestra's macro focus has led them to own physical gold and gold derivatives since 2002 and it's been their single largest asset. The main difference between all these hedge funds that own gold is their rationale for doing so. Some are using it as a hedge against fear and uncertainty, while many others (like Balestra) are using it as a vehicle to bet on currency debasement and inflation.


Summary of Balestra's Viewpoints

The hedge fund has summarized their macro views as follows:

"
1. The developed world is overly indebted.
2. So far, there is little indication that heavily indebted countries will be able to grow their way out of debt.
3. Recent measures to cut government spending will create further headwinds to near-term economic growth.
4. Failure to provide added monetary stimulus will likely risk a fall into a debt deflation spiral (this risk is heightened by the Euro zone situation).
5. Central banks will continue to 'print money', as needed, to prevent debt deflation
"

All of these point to one main conclusion in Balestra's eyes: more monetary stimulus is on the way and gold prices are going higher.


Embedded below is Balestra Capital's commentary on gold & inflation courtesy of ValueWalk:




For more on the topics of gold & inflation, be sure to also check out:

- Gold versus gold miners

- Oaktree Capital's Howard Marks on gold

- Best investments during inflation


About Balestra Capital

James Melcher founded Balestra in 1979 and has had a long career in the hedge fund and asset management industry. He received his Bachelor of Arts degree from Columbia University. Since January 1999, the hedge fund has returned 1625.62% and has seen a CAGR of 24.3%. Balestra returned 1.71% in 2011, -3.18% in 2010, 4.22% in 2009, 45.78% in 2008, and 199.82% in 2007.

FREE Excerpt From the New Issue of Hedge Fund Wisdom

The brand new Q4 issue of our Hedge Fund Wisdom newsletter was just released. For a LIMITED TIME ONLY, we're offering a free excerpt from the new issue.

Included in this free 16-page excerpt:

- See the Latest Portfolios From: Warren Buffett's Berkshire Hathaway, Seth Klarman's Baupost Group, David Einhorn's Greenlight Capital, & Leon Cooperman's Omega Advisors

- Equity Analysis of United Rentals (URI)

To receive your FREE excerpt from the new issue, please click here to download.


We've also embedded the excerpt below:

Citadel Boosts Position in Ultrapetrol (ULTR)

Ken Griffin's hedge fund firm Citadel recently filed a 13G with the SEC regarding shares of Ultrapetrol (ULTR).

Citadel has disclosed a 4.9% ownership stake in Ultrapetrol (ULTR) with 1,550,689 shares. They've increased their position size by 185,833% over the past two months (they only owned 834 shares at the end of 2011). The SEC filing was made due to trading activity on February 15th.

In other portfolio activity, we also detailed how Citadel boosted its stake in Constant Contact (CTCT) as well.

About Ultrapetrol (ULTR)

Per Google Finance, ULTR is "an industrial shipping company serving the marine transportation needs of clients in the geographic markets. It serves the shipping markets for grain, forest products, minerals, crude oil, petroleum, and refined petroleum products, as well as the offshore oil platform supply market through its operations in three segments of the marine transportation industry: River Business, Offshore Supply Business and Ocean Business. Its River Business, with 591 barges and 30 pushboats, is an owner and operator of river barges and pushboats that transport dry bulk and liquid cargos through the Hidrovia Region of South America, a region with growing agricultural, forest and mineral related exports. Its Offshore Supply Business owns and operates vessels that provide logistical and transportation services for offshore petroleum exploration and production companies, in the North Sea and the coastal waters of Brazil. Its Ocean Business operates nine ocean-going vessels."

Scout Capital Builds Sally Beauty (SBH) Stake

James Crichton and Adam Weiss' hedge fund Scout Capital filed a 13G with the SEC in regards to their new position in Sally Beauty (SBH).

Scout originally started a brand new position in Sally Beauty in the fourth quarter. And according to their most recent SEC filing, they've continued to buy SBH shares in the new year. Scout now shows a 5.9% ownership stake in SBH with 10,986,862 shares.

At the end of 2011, they owned just over 7 million shares. Over the past two months, they've increased their position size by almost 56%. The SEC disclosure was triggered due to portfolio activity on February 7th.

For more from this hedge fund, we've previously posted Scout's presentation on Williams (WMB) & Sensata Technologies (ST).

About Scout Capital

Scout was founded and is co-managed by James Crichton and Adam Weiss. Before founding Scout, Crichton worked at Zweig-DiMenna and received his MBA from Harvard. Weiss, on the other hand, worked at Dan Loeb's Third Point and received his MBA from Columbia.

About Sally Beauty

Per Google Finance, Sally Beauty is "an international specialty retailer and distributor of professional beauty supplies with operations primarily in North America, South America and Europe. The Company operates primarily through two business units: Sally Beauty Supply and Beauty Systems Group (BSG). Through Sally Beauty Supply and BSG, the Company sells and distributes beauty products through 4,128 Company-owned stores, 181 franchised stores and 1,116 professional distributor sales consultants. Sally Beauty Supply stores target retail consumers and salon professionals, while BSG exclusively targets salons and salon professionals."

New Hedge Fund Wisdom Newsletter Next Week: A Look at Last Quarter's Winners

A brand new issue of our Hedge Fund Wisdom newsletter is due out early next week. If you haven't yet, subscribe below to see what you're missing.

We also wanted to highlight how stocks featured in our equity analysis section have fared. Last quarter's issue featured equity analyses on Netflix (NFLX), Visa (V), and Lowe's (LOW). Since publication on November 21st, 2011, these stocks have outperformed:

- NFLX: +65.10%
- V: +25.03%
- LOW: +17.80%
- S&P 500: +12.89%


To see what stocks 25 top hedge fund managers have been buying and selling this time around, subscribe below to find out early next week:

1 Year Subscription (Save 20% with this option): $299.99 per year

Quarterly Subscription: $89.99 per quarter

P.S. - Check out a free sample by clicking here (.PDF)

Phil Falcone's Harbinger Capital Scooping Up Shares of Spectrum Brands (SPB)

Phil Falcone's hedge fund Harbinger Capital Partners has been on a buying spree as of late. Per an amended 13D with the SEC, Harbinger's various entities combined now own 55.9% of Spectrum Brands (SPB) with 28,988,997 shares.

While the Harbinger Capital Partners Master Fund only owns 180,189 shares, the overwhelming majority of the position is owned by Falcone's Harbinger Group (HGI).

Overall, Harbinger's entities have scooped up 768,850 shares since January 20th. This most recent disclosure was made due to trading activity on February 8th. The majority of Harbinger's recent purchases have come at a price of around $29.50 per share.

Harbinger's History With SPB

So while this offers investors a somewhat rare chance to buy at prices right alongside a hedge fund, just know that they've built their stake up over time and these most recent shares are just a drip in the their bucket full of shares.

We originally detailed Harbinger's original acquisition of SPB shares back in August 2009 when the company emerged from reorganization relief under Chapter 11.

The hedge fund manager also explained Harbinger's Spectrum Brands thesis at a hedge fund best ideas conference back in September of last year.

About Spectrum Brands

Per Google Finance, SPB is "a consumer products company. The Company manufactures and markets alkaline, zinc carbon and hearing aid batteries, herbicides, insecticides and repellants and specialty pet supplies. Its consumer products have positions in seven product categories: consumer batteries; pet supplies; home and garden control products; electric shaving and grooming products; small appliances; electric personal care products, and portable lighting."


While Harbinger certainly owns a huge stake in Spectrum, keep in mind that this hedge fund has made a much bigger bet on a 4G wireless venture: LightSquared.

Alan Fournier's Pennant Capital Buys More Huntington Ingalls Industries (HII)

Alan Fournier's hedge fund firm Pennant Capital filed an amended 13G with the SEC regarding its position in Huntington Ingalls Industries (HII). Per the new filing, Pennant now owns 8.91% of HII with 4,347,499 shares.

This marks a boost of almost 59% in their position size due to trading activity on January 31st, 2012.

Pennant started a new stake in Huntington Ingalls in late November of last year, originally purchasing 2,734,343 shares and they've clearly continued to build their position.

About Pennant Capital

Alan Fournier founded Pennant after working at David Tepper's Appaloosa Management where he was responsible for the global equity portfolio. He graduated from Wentworth Institute of Technology's Mechanical Engineering program.

About Huntington Ingalls Industries

Per Google Finance, HII "designs, builds and maintains nuclear and non-nuclear ships for the United States Navy and Coast Guard, and provides aftermarket services for military ships around the globe. HII’s business divisions are Ingalls Shipbuilding and Newport News Shipbuilding (NNS). Ingalls Shipbuilding has the development and production of warships for the surface Navy fleet, United States Coast Guard, United States Marine Corps, and foreign and commercial customers."

Seth Klarman's Baupost Group Drastically Reduces PDL BioPharma (PDLI) Stake

Seth Klarman's hedge fund firm Baupost Group filed an amended 13G with the SEC regarding their position in PDL BioPharma (PDLI). The new filing shows Baupost has a 2.15% ownership stake in PDLI with 3,000,000 shares.

This is a decrease of almost 81% in their position size since the end of the third quarter. This is obviously a drastic reduction and comes in stark contrast to the buying of PDLI shares they were doing last July.

Baupost made the filing due to trading activity on January 31st, 2012.

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

Bill Ackman & Pershing Square's Presentation on Canadian Pacific (CP)

Below is Bill Ackman & Pershing Square Capital's presentation on Canadian Pacific (CP), entitled 'The Nominees for Management Change.' As we've detailed, Ackman has gone activist on CP and is seeking to shake-up management.

In the presentation, the hedge fund highlights their past success with General Growth Properties (GGP), JC Penney (JCP), and more. Currently, CP is Pershing's second largest investment as they own 14.2% of the company.

With their proxy contest, they highlight how CEO Fred Green has underachieved and how Hunter Harrison would have been a better selection.

They also highlight the economic rationale for such a change: "Canadian Pacific is 70% the size of Canadian National, yet has an enterprise value 40% as large, due to its inferior profitability and asset utilization."

Embedded below is Ackman & Pershing's presentation on CP (email readers click to view):



For other investment theses from this hedge fund, you can view Pershing's presentation on Fortune Brands Home Security as well.

Bridgewater's Ray Dalio Interview With Charlie Rose

Late last year Ray Dalio, the founder of hedge fund behemoth Bridgewater Associates, sat down for his first interview with Charlie Rose. He talked about Bridgewater's culture, investment process, and more.

Embedded below is Ray Dalio's interview with Charlie Rose for those who may have missed it (email readers click the link to watch):



We've posted up other resources from Bridgewater such as Ray Dalio's principles.

What We're Reading ~ 2/9/12

Paulson & Co pushes for Hartford breakup [FINalternatives]

Credit Suisse global investment returns yearbook 2012 [Abnormal Returns]

8% annual return target? Try 4% [World Beta]

How to pick mutual funds [World Beta]

No one is ever wrong anymore [Reformed Broker]

Performance for pay: Is your CIO cost effective? [Skorina Letter]

Tepper protege forges new fund [Absolute Return/Alpha]

Warren Buffett on why stocks beat gold & bonds [Fortune]

Successful short selling: an effective but rare skill [FT]

Endowments slow to recover from 2008 crisis [BostonGlobe]

Goldman says L/S equity should not be ignored [COOConnect]

Estimize: new platform providing buy-side analyst estimates [IBD]

The housing bottom is here [Calculated Risk]

The value trap of deeply cyclical stocks [Institutional Investor]

10 reasons why investing in actively managed funds is a losers game [Stockopedia]

The restaurant investor [MaxCapital]

T2 Partners January Letter: Portfolio Update

It's been a while since we've checked in on Whitney Tilson and Glenn Tongue's hedge fund T2 Partners so here is their January letter to investors. While they had a horrible year last year (-24.9%), they were up 12.6% in January.

The letter mentions some of their longs: Pep Boys (PBY), Goldman Sachs (GS), Iridium (IRDM), Resource America (REXI), Dell (DELL), Howard Hughes (HHC), Citigroup (C), and Microsoft (MSFT).

Also, they mention they are long SanDisk (SNDK) and bought more after the company provided weak guidance.

T2 Partners also revealed some more of their shorts: Lululemon (LULU), Interoil (IOC), ReachLocal (RLOC), First Solar (FSLR), Green Mountain Coffee Roasters (GMCR), ITT Educational (ESI), and Salesforce.com (CRM).

Their letter also provides more in-depth updates on their positions in Netflix (NFLX) and J.C. Penney (JCP) which you can read below: T2 Partners January letter



For more from this hedge fund, you can view T2's presentation on Berkshire Hathaway and JCP.

And then for presentations from other funds, we posted up Bill Ackman on Canadian Pacific today too.

Ken Griffin's Citadel Boosts Constant Contact (CTCT) Stake

Ken Griffin's hedge fund firm Citadel recently filed a 13G with the SEC on shares of Constant Contact (CTCT). Citadel now shows a 3.8% ownership stake in CTCT with 1,138,617 shares.

This is an increase in their position size by 1,543% since the end of the third quarter when they only owned 69,271 shares. The regulatory filing was made due to portfolio activity on January 31st, 2012.

Per Google Finance, Constant Contact is "is a provider of on-demand e-mail marketing, social media marketing, event marketing and online survey solutions for small organizations, including small businesses, associations and non-profits. The Company’s e-mail marketing product allows customers to create, send and track e-mail marketing campaigns. Its social media marketing features allow customers to manage and optimize their presence across multiple social media networks."

Balyasny Asset Management Starts Shaw Group (SHAW) Position

Dmitry Balyasny's hedge fund firm Balyasny Asset Management just filed a 13G with the SEC regarding shares of Shaw Group (SHAW). Per the filing, they now own 5.5% of SHAW with 3,583,894 shares.

This is a brand new position for the hedge fund firm as they did not own shares as of the close of the third quarter. Their 13G filing was made due to trading activity that breached the regulatory threshold on January 19th, 2012.

Per Google Finance, Shaw Group is " is a provider of technology, engineering, procurement, construction, maintenance, fabrication, manufacturing, consulting, remediation and facilities management services to a diverse client base that includes multinational and national oil companies and industrial corporations, regulated utilities, independent and merchant power producers, and government agencies."

Hedge Fund Viking Global Discloses New TripAdvisor (TRIP) Stake

Andreas Halvorsen's hedge fund firm Viking Global just now filed a 13G with the SEC regarding shares of TripAdvisor (TRIP).

Viking has disclosed a 6.0% ownership stake in TRIP with 7,200,112 shares due to portfolio activity on January 23rd. It seems that a sizable portion of their position is held in their Viking Global Equities III investment vehicle.

We've examined the bull and bear investment theses for Expedia (EXPE) and TripAdvisor (TRIP) in a prior issue of our Hedge Fund Wisdom newsletter.

New Position... But How New?

It's particularly difficult to say when and by how much Viking was adding to this position due to a few factors. Firstly, TripAdvisor completed its spin-off from Expedia (EXPE) on December 20th, 2011. Right before this, EXPE completed a one-for-two reverse stock split and then shareholders became entitled to receive one share of TRIP and one share of EXPE for every two shares of the old EXPE entity owned.

Viking Global did not own shares of Expedia as of the end of the third quarter (September 30th, 2011). Also, due to the fact that SEC filings are made on a delayed basis, Viking won't have to disclose their 2011 year-end positions until February 15th. As such, it's entirely possible that they bought shares of EXPE in December and received TRIP shares in the spin-off.

However, something also worth considering is the fact that Viking did not cross a regulatory threshold required to file with the SEC until January 23rd. At the very least, that means that they purchased some TRIP shares recently. And theoretically, they could have simply bought their entire position of the separate TRIP entity post spin-off.

Either way, Viking's position in TripAdvisor is a new holding for them because they hadn't disclosed a position in Expedia or TripAdvisor prior to now.

But given the opacity surrounding the situation, it's impossible to know exactly when they were buying. And that certainly makes a difference given the fact that shares of TripAdvisor began trading at around $24 and are currently trading 43% higher.


TripAdvisor Company Background

Per Google Finance, TripAdvisor is "is an online travel research company, enabling users to plan and have a trip. TripAdvisor features reviews and advice on hotels, resorts, flights, vacation rentals, vacation packages and travel guides. TripAdvisor’s travel research platform features reviews and opinions from its community of travelers about destinations, accommodations (hotels, bed and breakfasts, specialty lodging and vacation rentals), restaurants and activities worldwide, through its TripAdvisor brand."

To see the bull and bear case on Expedia and TripAdvisor, sign-up for our premium Hedge Fund Wisdom newsletter and download the old issues.

Dan Loeb's Third Point: Top Holdings & Latest Exposures

Dan Loeb's hedge fund firm Third Point LLC returned 3.8% in January to start off 2012. Their offshore fund currently manages $4.59 billion and has seen an annualized return of 17.5%.

Third Point's Top Holdings (as of 1/31/12)

1. Yahoo! (YHOO)
2. Gold
3. Eksportfinans ASA
4. Delphi Corp (DLPH)
5. Ally Financial

There are some notable changes to the upper echelon of this hedge fund's portfolio since we last looked. Eksportfinans ASA has emerged as a meaningful position and Ally Financial (the former GMAC entity) has entered their top 5 stakes. Gold and Yahoo remain top holdings and you can see Third Point's bull case for YHOO here.

One former top holding now notably absent from their top positions list is Sara Lee (SLE). While one could assume they still own it given their 'attractive assets' thesis, it's hard to say if they reduced exposure to the name or if they merely added to other positions.

Also worth highlighting: They've held a stake in Delphi post bankruptcy and the company began trading again in the fourth quarter of 2011 with numerous prominent hedge funds as owners. However, one notable holder (Paulson & Co) has apparently reduced its position size substantially.

In terms of attribution, Third Point saw gains from their stakes in Delphi, gold, UniCredit Spa, Technicolor, and Eksportfinans. They lost money last month from positions in Yahoo, and four undisclosed short positions (2 consumer shorts, 1 communications short, and 1 healthcare short).


Third Point's Net Exposure

After spending much of last year with low net exposure to equities (as low as 15% net long), Third Point has slightly ramped exposure back up. They are now 44.8% long and -16.6% short, leaving them 28.2% net long equities. Their largest exposure comes via technology where they are 12.6% net long (most of which is their activist stake in Yahoo).

In credit, Third Point is 15.6% net long the asset class via 9.6% net long exposure to distressed, 8.7% net long exposure to performing, 14.5% net long exposure to asset backed securities (ABS) and -17.2% net short government securities.

Geographically speaking, Loeb's hedge fund is 58% net long the Americas, -4% net short EMEA, and -3% net short Asia.

For thoughts on their portfolio, head to Third Point's Q3 letter. We'll be sure to post up their Q4 letter when it is released.

Confidence Game Trailer: Documentary About Bear Sterns' Final Week

Below is the Confidence Game movie trailer, a documentary about the final week of Bear Stearns before its collapse during the financial crisis.

The film is directed by Nick Verbitsky and features interviews with former employees, whistleblowers, as well as Bryan Burrough, William D. Cohan, and Andrew Ross Sorkin.

Here's the Confidence Game trailer video (email readers click on the link to come watch):




Be sure to also check out previews of other financial films like the Margin Call movie trailer and the Chasing Madoff trailer.

Steve Cohen's SAC Capital Boosts Positions in American Eagle Outfitters (AEO) & Peet's Coffee (PEET): 13G Filings

Steve Cohen's hedge fund SAC Capital filed two 13G's with the SEC regarding transactions in American Eagle Outfitters (AEO) and Peet's Coffee & Tea (PEET) this month.

American Eagle Outfitters (AEO)

Per their 13G filing, SAC increased its position size by 1056% since the close of the third quarter. SAC Capital now owns 9,418,880 shares of AEO, or 4.9% of the company.

This is up massively from the 814,560 shares they owned at the end of Q3. This 13G filing was triggered due to activity on January 18th.

Per Google Finance, American Eagle Outfitters is "is an apparel and accessories retailer that operates more than 1,000 retail stores in the United States and Canada, and online at ae.com. Through its family of brands, American Eagle Outfitters, Inc., offers clothing, accessories and personal care products. Its online business, AEO Direct, ships to 76 countries worldwide. The Company operates under the American Eagle, aerie by American Eagle, and 77kids by american eagle brands."


Peet's Coffee & Tea (PEET)

SAC Capital owns 740,074 shares of PEET according to their latest filing. They've increased their position size by 32,516% since the end of the third quarter as they only owned 2,269 shares back then. Now, SAC owns 5.7% of the company due to portfolio activity on January 13th.

This stake is intriguing because Cohen mentioned that fellow beverage brewer Green Mountain Coffee Roasters (GMCR) was one of his favorite plays at this time last year. However, over the course of 2011 his firm gradually cut exposure to the name. Additionally, shares of GMCR have been attacked by Greenlight Capital's David Einhorn (see his short thesis on GMCR here). So it will be interesting to watch shares of PEET in the future.

Per Google Finance, Peet's Coffee & Tea is "is a specialty coffee roaster and marketer of fresh roasted whole bean coffee and tea. The Company sells its Peet’s brand coffee through multiple channels of distribution, including grocery stores, home delivery, office, restaurant and foodservice accounts and Company-owned and operated stores in six states."

Corsair Capital's Investment Thesis on Aperam

Earlier today we posted up hedge fund Corsair Capital's Q4 letter. We're also posting up an addendum from their letter: their investment thesis on Aperam (AMS:APAM), a core holding.

In summary, the hedge fund likes this stainless steel manufacturer as it "offers investors over 200% potential upside with limited downside given its low leverage with no near term maturities, high dividend yield, strong cross-cycle earnings power, and credible cost-cutting program."

The company was spun-off from Arcelor Mittal (MT) and Corsair thinks APAM could trade between $38 and $63, and in an extreme scenario as high as $88.

Embedded below is Corsair's investment thesis on Aperam (email readers click to come read it):



And if you missed it earlier, be sure to read Corsair's Q4 letter.

We've also posted up other hedge fund letters recently: Greenlight Capital and East Coast Asset Managment.

Corsair Capital Talks Lyondell Basell, Six Flags & Innophos: Q4 Letter

Jay Petschek and Steve Major's hedge fund Corsair Capital is out with their Q4 letter. For 2011, the hedge fund finished -3.7% and since inception in January 1991, the firm has seen a compound net annual return of 14.4%.

They note that 2011 was a difficult year because, "correlations between stocks and most asset classes were near record highs, seemingly subject to the whims of investors choosing to either put 'risk on' or to take 'risk off.' "

Corsair also touches on some of their positions noting that Lyondell Basell (LYB) saw strong insider buying during the stock's dip. They continue to also like Neo-Material Technologies (TSE:NEM) as think it's worth $15+ (it currently trades around $8.30).

The hedge fund likes that Six Flags (SIX) has refinanced its debt and announced a new $250mm buyback plan. Lastly, Corsair fancies Innophos Holdings (IPHS) as "the company trades at under 10x our cash estimate for 2012 and we continue to believe it is worth 15x given the quality of its business model and clean balance sheet." We've previously highlighted Corsair's thesis on Innophos.

Embedded below is Corsair Capital's Q4 letter (email readers click the link to come view it):



We've also posted up their new write-up of a core investment: Corsair's thesis on Aperam (APAM NA).