Children's Investment Fund on Porsche & Japan Tobacco: Q3 Letter Excerpt

Christopher Cooper-Hohn's Children's Investment Fund was up 1.6% for the third quarter and up 18.26% year to date as of the end of Q3.  TCI runs a concentrated portfolio and their Q3 letter to investors provides updates on their positions in Porsche SE as well as Japan Tobacco, which we've excerpted below:

Porsche SE

Back in July, Volkswagen (VW) announced they would purchase the other 50% of Porsche that they didn't own yet for 4.5 billion euros.  The deal's closure makes Porsche essentially a holding company that has 2.5 billion euros in cash and 50% of the common stock of VW.

As to their thesis, TCI writes:

"Porsche currently trades at a large discount to NAV due to uncertainty regarding the outcome of several legal cases that have been brought against the company in Germany and the US, regarding alleged market manipulation in its failed attempt to take over VW in 2008. Porsche holds the view that these allegations are unfounded and without merit, and during the quarter it won a significant victory when a German court dismissed two of the cases. While the amount of damages being sought in these cases was small, at under €5 million, we think they should provide a precedent for the much larger claims of €4 billion that are still pending at the same court. Our view is that the amount Porsche will eventually pay to settle these cases will be much less than the market is currently pricing in. And once the litigation is settled, there is a good chance that VW and Porsche will merge and the discount to NAV will close completely."

Children's essentially believes they can make money in four ways:

1. "Strong underlying performance from the investment in VW"
2. "A successful and benign resolution to the legal cases"
3. "Large and increasing dividends from VW flowing to Porsche shareholders"
4. "Long-term potential for a merger between Porsche & VW"


Japan Tobacco

Children's points to Japan Tobacco's strong recent earnings and notes that VAT in Japan is rising which should allow for price increases. 

The company is also changing the name of its largest selling brand from 'Mild Seven' to 'Mevius'.  While such a move might seem odd at first glance, the company is doing so because this will allow them to sell the product in other countries where the use of the word 'mild' in product names is essentially prohibited. 

Here's why TCI sees Japan Tobacco as compelling:

"Dividend guidance is ¥12,000 per share which implies a payout ratio of approximately 36%. JT is expected to return an estimated ¥370bn to shareholders this year of which ¥250bn is through a share buyback exceeding their estimated profits. This should be a strong catalyst for the stock to re-rate in line with its global peers. Valuations are very attractive post the recent sell-off, JT trades on 10.5x P/E for the year ending March 2014 at a 30% discount to the average of BAT and PMI. We expect the stock to re-rate post the share placement by the Japanese government toward parity with BAT and PMI."


Children's Top 10 Positions (as of Q3 end)

1. Lloyds Bank Bonds: 20.1% of NAV
2. News Corp: 18.8%
3. Japan Tobacco: 16.8%
4. Porsche SE: 15.5%
5. QR National: 13.3%
6. CESP: 12.8%
7. Red Electrica: 10.9%
8. Coal India: 9.4%
9. Safran: 8.7%
10. Enagas: 8.0%


For more on this fund, we've previously posted Children's thesis on News Corp, Union Pacific & Walt Disney.

Hedge Fund Short Positions in Germany: Maverick, Tiger Global, Passport & More

Just yesterday, we posted up a ton of hedge fund short positions in the UK due to new regulations.  Continuing our coverage of EU markets, today we highlight hedge fund short positions in German markets.

More Short Selling Disclosures in EU Countries

What's interesting here is that with the new regulations in EU countries, there are theoretically going to be more filings on shorts than longs.  Public disclosure thresholds now start at -0.5% for shorts while public long disclosure is only required when an investor takes a stake greater than 3% of the company.

Some may argue that this might not be the case due to the fact that more investors go long than short, and typically long positions are sized much larger than short positions due to risk management.  We'll have to wait and see, but so far there's been an onslaught of short filings.


Hedge Fund Short Positions in Germany Revealed

Below is a breakdown of the short positions hedge funds have disclosed as of November 1st/2nd.  The percentage represents how much of the company's stock the fund is short:


Maverick Capital: Short -7.82% Aixtron SE, -0.47% Axel Springer Aktiengesellschaft

Passport Capital: Short -0.61% Nordex SE

Pennant Capital: Short -2.27% Aixtron SE, -0.68% Heidelberger Druckmaschinen Aktiengesellschaft, -0.95% Sky Deutschland, -0.90% TUI AG

Tiger Global: Short -1.99% Asian Bamboo AG, -0.70% SolarWorld Aktiengesellschaft, -0.63% Global PVQ SE

Tiger Management: Short -1.08% Powerland AG

Citadel Advisors:  Short -4.13% Aixtron, -1.82% SolarWorld Aktiengesellschaft, -1.60% Wacker Chemie AG

D.E. Shaw: Short - 0.97% Dragerwerk AG & Co, -.60% Leoni AG


As you can see, numerous funds are short Aixtron, a provider of deposition equipment to the semi-conductor sector.  Maverick's bet against the company is by far the largest we've seen thus far.  We'll continue to track short positions in the German market and will update when appropriate.

For more EU disclosures, head to yesterday's post on hedge fund short positions in the UK.

Hedge Fund Short Positions in the UK: Lone Pine, Greenlight, Kynikos & More

New EU rules that came into force at the beginning of November on short selling are leading to wider disclosure of shorts positions.  For example, the UK's Financial Services Authority (FSA) have implemented the EU's Short Selling Regulation and are now publishing a list of short positions on a daily basis.

New UK Short Selling Disclosure Rules

Before the implementation of the new Regulation funds and individuals only had to disclose short positions in UK financial companies and companies involved in a rights issues.  Now short positions have to be declared across all sectors.

The new rules require that where a fund's net short position reaches 0.2% of the issued share capital of a company they need to privately notify the FSA. Notification is also required again at each 0.1% increment after that. This is in relation to both increases and decreases of the position.   The obligation to privately report positions also extends to net short positions in sovereign debt and positions in uncovered sovereign credit default swaps (CDS).

ESMA has published a list of the different thresholds for each Member State in these instruments.   Public disclosure is required for net short positions of shares that reach 0.5% of the issued share capital of the company concerned and each 0.1% increment above that.  Additionally disclosure is required publically when the position subsequently falls below 0.5%.


Hedge Fund Short Positions in the UK Revealed

Today's list of short positions published by the FSA is provided below.  All of the following positions are disclosed as of November 1st, 2012 and represent the percentage of the company's shares the hedge fund is short:

Lone Pine Capital: Short -1.05% Home Retail Group

Greenlight Capital: Short -4.43% Daily Mail and General Trust

Kynikos Associates: Short -2.52% ASOS, -0.61% African Minerals

Maverick Capital: Short - 1.26% ITV plc, -4.45% Home Retail Group

Pennant Capital: Short -0.98% William Hill plc

Lansdowne Partners: Short -3.42% Weir Group, -3.27% APR Energy, -0.62% Tesco, -1.81% British Sky Broadcasting Group, -1.87% Petrofac, -2.28% Aggreko, -2.51% WM Morrison Supermarkets, -2.59% Provident Financial, -2.73% WH Smith, -1.09% Ophir Energy, -1.33% Tullow Oil, -1.71% Man Group, -0.85% Prudential plc,

Och-Ziff Management: Short -0.92% Lancashire Holdings, -1.20% International Consolidated Airlines Group, -0.82% Glencore International,

Elliott Management: Short -2.65% Stagecoach Grou, -1.65% First Grou, -0.71% Glencore International,-0.59% Reed Elsevier,

SAC Global Investors: Short -1.11% Electrocomponents

SAC Capital Advisors: Short -0.74% Ocado Group

Odey Asset Management: Short -1.43% Lonmin, -1.44% Dignity, -1.77% APR Energy, -0.84% Capital Shopping Centres Group, -0.59% Serco Group

Joho Capital: Short -4.03% CSR

Luxor Capital: Short -1.82% Blinkx, -1.32% WH Smith,

D.E. Shaw: Short -0.52% TUI Travel, -0.64% WPP

Marble Arch: Short -2.05% Dixons Retail, -1.79% Home Retail Group

Axial Capital: Short -0.55% TUI Travel


For all our other coverage of hedge fund short positions, click here.


This initial slew of disclosures is a bit overwhelming, but we'll continue to monitor the filings and post about notable changes and new short positions taken by prominent hedge funds on an individual basis.

You can track all other hedge fund activity in UK markets from what we've posted in the past via that link.

Eminence Capital Plays Vodafone / Verizon Pairs Trade: Q3 Letter Excerpt

Ricky Sandler's hedge fund firm Eminence Capital is having a great year, up 6.7% net in the third quarter and up 22.3% net for the year through September with AUM north of $3 billion.  Their third quarter letter to investors details a new trade they recently put on:

Long Vodafone / Short Verizon Pairs Trade

For those unfamiliar, a pairs trade is a bet made where an investor goes long one security and shorts another.  Some investors utilize this to make a market neutral bet, while others use it to bet on mean-reversion.

Some hedgies will undoubtedly be familiar with this specific pairs trade as various funds have had it on in the past.  The trade here is essentially an arbitrage on the valuation of an asset both companies share: stakes in Verizon Wireless ("VZW").  Vodafone (VOD) owns 45% of Verizon Wireless and Verizon (VZ) owns 55% of Verizon Wireless.

Eminence put on this pairs trade (long VOD, short VZ) in recent months and here's why according to Sandler:

"VOD trades at a significant discount to VZ for a number of reasons and thereby creates a unique opportunity where the same asset is being valued by two sets of investors very differently.

If we assign a fair value to VZW for each of VOD and VZ we are left with the following valuation anomaly: the rest of VOD (after subtracting VZW at fair value) has an $82B Enterprise Value which values its best of breed European and Emerging Market wireless service business at 7x adjusted EBIT (EBITDA minus Capex) and 4.5x after-tax economic earnings. Simultaneously, the rest of Verizon (after subtracting VZW at fair value) has an $80B Enterprise Value for a structurally declining fixed line telephone business in the US that generates zero EBIT and trades at an infinite multiple of economic earnings because it burns free cash flow.

We think the time is right for this trade to play out because we have come to the point where VZW will need to pay out a lot of free cash flow to each of its owners over the next few years. VOD will increasingly appear to generate more free cash flow than it had been as investors begin to see these dividends from VZW. Alternatively, VZ’s free cash flow will appear to decline as it pays out cash from its consolidated position in VZW to VOD. We expect investors to more fully reward VOD for its look through cash flow since it will be receiving this cash regularly from VZW while investors will also come to realize that VZ can’t even afford to pay its corporate dividend when only 55% of the VZW cash flow is counted. It is also possible that VZ realizes its stock is overvalued and tries to use its currency to buy in the VZW it doesn’t own which would be a material positive for our position."


Given that numerous other funds have been in this pairs trade in the past, it's interesting that Eminence feels now is the right time to play it.  With some analysts expecting another VZW special dividend for VOD by year-end, we'll have to see how this trade plays out.  Vodafone is now Eminence's fourth largest long.

For more from this hedge fund, be sure to also check out why Eminence is bullish on Google.  While they reduced their position size a bit recently, it's still their largest holding.

Steve Mandel's Lone Pine Capital Starts New Positions in SemGroup & Informatica

Steve Mandel's hedge fund firm Lone Pine Capital filed two separate 13G's with the SEC yesterday after market close disclosing new positions:

SemGroup (SEMG)

First, Lone Pine has disclosed a 5.2% ownership stake in SemGroup with 2,172,935 shares.  This is a brand new position for them as they did not own any shares at the end of the second quarter.  This disclosure was filed due to trading activity on October 24th.

Per Google Finance, SemGroup "provide gathering, transportation, storage, distribution, marketing, and other midstream services primarily to independent producers, refiners of petroleum products, and other market participants located in the Midwest and Rocky Mountain regions of the United States of America, Canada and the West Coast of the United Kingdom."


Informatica (INFA)

Second, Mandel's firm has revealed a 5.2% ownership stake in Informatica with 5,624,068 shares.  This is also a brand new position as they did not report ownership at the end of the second quarter.  This position was also revealed due to trading activity on October 26th.

Per Google Finance, Informatica is "an independent provider of enterprise data integration and data quality software and services. The Company's software solutions enable a variety of complex enterprise data integration initiatives through the technologies, which include enterprise data integration, data quality, master data management, business to business (B2B) data exchange, application information lifecycle management, complex event processing, ultra messaging, and cloud data integration."


Earlier today we revealed one of Lone Pine's short positions as well.  You can also check out other recent long activity from Lone Pine.

Eric Sprott's Latest Commentary: Weakness Begets More Weakness

Playing catch-up with various market participants this week, we now turn to Eric Sprott's latest commentary from Sprott Asset Management.  Entitled "Weakness Begets More Weakness," the latest Sprott missive asks, how does the US achieve a sustained recovery if the 99% continues to suffer perpetual decline in real income?

Their full commentary is posted below, but they conclude that:

"The sad fact is that the economic reality for the average family is far worse today than it was ten years ago… even fifteen  years ago, and the trend of declining wealth is firmly in place. The youth need higher paying jobs and the retirees need  yield, and for all the trillions of dollars that the US government and other western governments have spent and printed,  none of it has addressed these key areas of weakness in a way that can reverse the long-term trend. As we approach  year-end and the finality of the US election, there will likely be numerous indicators implying a US recovery. Unless they  directly benefit the 99%, we would advise readers to take them with a large, bipartisan grain of salt. Weakness begets  weakness, until something dramatic reverses the trend’s course. The 99% are firmly stuck in a declining trend, and we  do not see it reversing any time soon."

On the same topic, earlier this morning we also posted up David Einhorn's comments on low interest rate policies and how they're now doing more harm than good.

Embedded below is Eric Sprott's latest commentary:




For more from this manager, we've in the past posted up Sprott's commentary on gold.

Hugh Hendry On Gold, Treasuries, Japan, China & More: Buttonwood Gathering

It's been a long time since we last checked in on Hugh Hendry of Eclectica Asset Management so today we're highlighting his recent talk at The Economist's Buttonwood Gathering.  He touched on hot topics such as gold, treasuries, China, Japan, hyperinflation and a myriad of other things.

Key Takeaways

Hendry continues to like gold, but not the gold miners.  While he has been an advocate of the precious metal for many years, he continues to like it (albeit with slightly less conviction than previously).

We've highlighted one hedge fund's view that miners are better than gold and Hendry obviously disagrees with that.  And recently at the Great Investors' Best Ideas conference, David Einhorn made a quip that one should have gold miners in their portfolio.  Clearly, this is a divisive topic.

Hendry is also worried about creditor nations.


Notable Quotes From Hendry

Hendry said that, "My community of global macro managers always wants to short the JGBs and short the yen, and yet they've gone the opposite direction ... If you want to be short JGBs for the ultimate response, you don't survive the journey."

We've pointed out Kyle Bass' negative views on Japan and JGBs in the past.  Hendry points to real problems coming in Japan should some of their major companies near bankruptcy (he mentioned Sharp).

Hendry on Treasuries:  "Don't tell me China will sell their US treasuries.  If they sell their treasuries, the renminbi goes higher and higher and higher.  And their companies that export go bust."


Embedded below is the video of Hendry's entire talk at The Buttonwood Gathering:



We've previously highlighted some of what Hendry was buying earlier this year.  And for further hedge fund commentary from the Buttonwood Gathering, head to David Einhorn's talk.

David Einhorn On Negative Effects Of Low Interest Rates & QE: Buttonwood Gathering

Greenlight Capital's David Einhorn recently spoke at The Economist's Buttonwood Gathering and gave his thoughts on the Federal Reserve's policies and their effects.  Einhorn said that,

"The assumption is that if we want the economy to improve, if we want more jobs, if we want more consumption, what we need are ever easing monetary policy ... 1 jelly donut is a fine thing to have, 35 jelly donuts is not a fine thing to have.  It gets to a point where it's not a question of a diminishing return, but it actually turns out to be a drag ... we're past the point where incremental easing of the Federal policy actually acts as a headwind for the economy and it's actually slowing down our recovery.

Einhorn drilled down the effect of low interest rates on consumers in particular, stating:  "Lower rates drive up the costs of commodities."  He says it doesn't help and it takes income out of people's pockets that they could normally spend otherwise.

Additionally, he says that not being able to earn a return on your savings means that people are now hoarding savings instead of spending because now those people feel they need more for retirement because they're not going to be able to earn as much from those savings.

In addition to Einhorn's talk, he's also expressed similar sentiment in a piece he wrote in the Huffington Post talking about the Fed's "Jelly Donut Policy."

Embedded below is David Einhorn's entire talk from The Buttonwood Gathering (fast forward to minute 56 for his portion):




For further hedge fund commentary from the same Buttonwood event, head to thoughts from Hugh Hendry.

Jeff Saut: Housing Is Improving & Is The Key Driver

Strategist Jeff Saut is out with his weekly commentary in which he touches on drivers of the American economy in the private sector and how improvement in housing will be the key driver going forward.

Saut notes that we may be seeing a transition in the private sector, a changing of the guard per se.  He feels that exports and manufacturing have waned while housing and residential construction has surged.  He points to home prices rising and a resurgence in housing as the key to employment numbers.

While he argues that manufacturing and exports will regain strength once the fiscal cliff issue is resolved, Saut thinks that "housing looks to be an undiminished theme over the long run."

He doesn't like the homebuilders quite yet, but his real estate analysts have recommended Rayonier (RYN) as a play on housing, noting:

"We reiterate our Strong Buy rating on Rayonier following 3Q results, as we believe RYN shares offer one of the  most compelling risk/reward profiles in our REIT coverage universe.  We view Rayonier as a special situation  within REITs, driven by compelling growth prospects for its performance fibers business and a growing dividend  (+33% since 2009), which also offers investors a unique way to play improving residential construction activity."


Embedded below is Jeff Saut's weekly market commentary:




You can download a .pdf copy here.

For more from Saut, check out his piece on how investing performance is determined by how you manage losses.

What We're Reading ~ 11/2/12

There's always something to do: The Peter Cundill Investment Approach [Christopher Risso-Gill]

David Einhorn & Greenlight Capital's Q3 Letter [Dealbreaker]

In-depth summary of Warren Buffett's recent appearance [BrooklynInvestor]

Profile of Buffett's new PM: Ted Weschler [Bloomberg]

The death of PC's? [Barrons]

Excerpt from Seth Klarman's recent letter [Business Insider]

Investors' 10 most common behavioral biases [Above the Market]

Notes from meeting with value investor Mohnish Pabrai [Perfect Research]

Blackstone targets stakes in hedge fund managers [Reuters]

Och-Ziff looks to exit the landlord business [Reuters]

Hedge fund Edoma Partners to shutter [Reuters]

Maverick Capital to launch concentrated fund [WSJ]

Thomas Steyer to step down from Farallon Capital [BusinessWeek]

Coatue preps private equity fund [HedgeFundIntelligence]

Activist investor Rosenstein sends ripples to make waves [WSJ]

How not to run a hedge fund [Forbes]

John Burbank's Passport Capital Boosts VIVUS Stake

John Burbank's hedge fund Passport Capital has filed a 13G with the SEC regarding shares of VIVUS  (VVUS).  Per the filing, Passport has disclosed a 8.5% ownership stake in VVUS with 8,552,929 shares.

This marks a 5% increase in the amount of shares owned since the end of the second quarter.  The disclosure was filed due to portfolio activity on October 23rd.

Burbank's Thesis

We've heard rumblings that Burbank pitched VVUS at the Excellence in Investing conference in San Francisco the week prior and he believes it is a takeout candidate for big pharma.  He's pointed to the company's obesity drug which he thinks will be very important.   VVUS is said to represent around a 5% position for his fund.

Per Google Finance, VIVUS is "a biopharmaceutical company. The Company is engaged in the development and commercialization of therapeutic drugs for underserved markets, including obesity and related morbidities, such as sleep apnea and diabetes, and men's sexual health."

In the past, we've also pointed out how Passport likes Saudi equities.

Dan Loeb's Third Point: October Exposure Report & Top Holdings

Dan Loeb's Third Point Offshore Fund is out with its latest exposure report for October and in it we see that they were up 2.6% for the month and are up 13.8% for the year.


Net Exposure Levels

Their equity exposure continues to rise as they are now net long 44.1%, an increase of 2.4% in net long exposure from the month prior.  This looks to mainly be attributed to a reduction in their short exposure. 

Their largest net long equity exposure continues to come from the technology sector (largely due to their Yahoo position) at 18.8% net long, followed by financials at 8.7% net long (mainly due to their AIG stake).

In credit, they were 26.7% net long at the end of October, down from 30.4% the month prior.


Top Winners & Losers

Their stake in Dolphin Capital Investors was a top winner during the month.  We were the first to reveal that Third Point was set to buy a stake in the Greek property & land company.

Other winners for Third Point include their new stake in Greek Government Bonds as well as Yahoo, AIG, and Murphy Oil.  Murphy recently announced it would spin off its US downstream subsidiary.

Their top losers in the month were Apple, gold, and Overseas Shipholding Group, a new name we've not seen listed in their reports previously.


Third Point's Top Positions

1. Yahoo! (YHOO)
2. American International Group (AIG)
3. Greek Government Bonds (GGB)
4. Gold
5. Murphy Oil (MUR)

You can read Loeb's thesis on AIG, GGB & Murphy in Third Point's Q3 letter.

Notes From Great Investors' Best Ideas Conference 2012: Einhorn, Bass, Cooperman, Carlson & More

The 6th annual Great Investors' Best Ideas Investment Symposium in Dallas, Texas just concluded and we've compiled notes from the event below.

The event was another great success raising money for The Michael J. Fox Foundation for Parkinson's Research and the Vickery Meadow Youth Development Foundation.


Notes From Great Investors' Best Ideas Conference

David Einhorn (Greenlight Capital): Short Iron Ore

Kyle Bass (Hayman Capital) on SuperMedia debt & Japan

Lee Cooperman's Macro Outlook & 3 Stock Ideas (Omega Advisors)

Clint Carlson's 2 Investment Pitches (Carlson Capital)

Boone Pickens on Natural Gas & His 2 Stock Picks (BP Capital)

Mick McGuire (Marcato Capital Management) on Cincinnati Bell, Corrections Corp & NCR

Susan Byrne's Investment Outlook: Case for Kapstone Paper & Media Nusantara

Rusty Rose (Cardinal Investment Company): Avoid Major Banks

David Einhorn: Short Iron Ore (Great Investors Best Ideas Conference)

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is David Einhorn of Greenlight Capital.  Einhorn made a presentation entitled 'If you give a miner a dollar..." and said to short dirt.  And by dirt, what he means is to short iron ore.

While Einhorn said that everyone "should have gold miners in their portfolio," it became clear he was less sanguine about other types of miners.


Iron Ore Supply/Demand

Einhorn started his presentation with the supply/demand dynamics of iron ore, noting that the infrastructure to get ore out of the ground is not cheap.  He pointed out that it's cheaper for China to import ore from Australia than to dig it out of their own ground.  Einhorn put up a chart showing iron ore prices from 1981-2011, peaking in the most recent year.

He went on to say that, if you give miners dollars, they dig holes.  Higher prices attracted new supply and new players.  It takes years to bring new supply online and he points out that there's a massive amount of supply about to hit the market.

He points out the Chinese investment binge as the driver of demand and notes that "something that's unsustainable persists... until it doesn't."

Einhorn then shifted to steel and noted that 2010 was the last year where steel saw double-digit demand growth.  Supply now exceeds demand and they're in the midst of expansion.  Big projects from 2010/2011 are coming online and the cost of stopping development is too high.
 
Einhorn argues that you can't contain the near-term situation since it's so expensive to halt projects.  He feels that ore prices will head below 100/ton and could get as low as 80/ton.  He even said that by 2014 it could go as low as the 60's.  He opined that the iron ore situation could soon reflect the same situations that took place in polysilicon and LEDs.


Losers Singled Out By Einhorn

While Einhorn did not explicitly come out and say he was short any of these names, he put up a list of companies that will lose in this scenario:

Iron Ore Miners (huge projects that will come online into declining markets): Vale (VALE), BHP Billiton (BHP), Rio Tinto (RIO), Fortescue (FMG), Cliffs (CLF)

Equipment Makers (already have seen growth into infrastructure build): Caterpillar (CAT), Joy Global (JOY)

Integrated Steel Companies: US Steel (X), Arcelor Mittal (MT).


Einhorn pointed out that X and MT have had an advantage because they own their ore supplies while their competition purchases ore in the markets.  However, he says this competitive advantage erodes as the price of ore falls.  The price of steel is also falling.  These integrated steel companies are also facing competition from irrational Chinese steel mills that are willing to operate at a loss.

Last week we also highlighted that Tiger Management's Julian Robertson said to avoid steel stocks as well.

Einhorn argues that the equities of the above companies reflect resumption of Chinese demand but that seems dubious.  He feels like companies are investing a lot at the top.  For more from this hedgie, also check out Einhorn's presentation on 3 ideas from the Value Investing Congress.


For the rest of the GIBI presentations, head to notes from the Great Investors' Best Ideas conference.

Kyle Bass on SuperMedia Debt & Japan

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Kyle Bass from Hayman Capital.

Bass mentioned that 90% of what he owns is in bonds (he has a ton of RMBS/subprime exposure).  He joked that he's constantly a contrarian since many other speakers at the event expressed disdain for bonds (though to be fair, the others were negative on treasuries, not RMBS).  He presented two ideas:


SuperMedia Debt

Before presenting his ideas, Bass noted that he pulled an 'audible' so this idea wasn't as in-depth.  Bass points out that bankruptcy wiped out billions for the company and that the debt trades at 66 cents while equity has fallen into obscurity.  He notes it's paying a 20% coupon and he thinks it's worth par in 2-3 years.  He also pointed out how SuperMedia is trying to merge with fellow competitor DexOne.


Bass: Don't Own Japan

Bass said that there's 80-200 trillion in global debt. In 18 months Japan will structurally fall apart.  "There's no chance at Japan repaying their debt."

He says psychology is important so look at anchoring bias.  It's important to think about how others think about debt.  Japan's debt to GDP is the worst in the world.  Their debt is 25x their revenues.  (David Einhorn was checking out Bass' slideshow).


Bass said there's 3 axioms that are actually false:

1. Positive current surplus, Japan not self-funding:  This is flat false he says.

2. Bank of Japan not monetizing the debt: Bass says they're already buying 2/3rds of the bonds today.

3. Retail investors will always support JGB's: Bass says Japan has a secular population decline.


We highlighted how in the past Bass has said that Japan would be selling more adult diapers than kids' ones and that's now the case.  He also pointed out how the country is having "adult diaper fashion shows."

He also illustrated how Japan is trying to sell JGB's by showing advertisements of a schoolgirl band selling them and sumo wrestlers pitching JGBs.

Touching on the Softbank/Sprint deal since it was mentioned earlier in the panel by Lee Cooperman, Bass noted that Softbank paying 20 billion yen to buy broken telecom is Softbank exporting yen as investors are starting to flee the currency.

Bass says that Japan has one of the "largest structural fiscal deficits in the world."  He doesn't know when exactly this collapse happens as this could go on for a few years?  He notes the timing on this sort of thing is very hard to peg, but it will "absolutely happen."

He wrapped up talking about playing options on this scenario because if it happens, you get paid a ton.  But in the mean time while you wait for it to happen, you only lose a little (we assume he's referring to price put options on Japanese JGBs, a trade he's talked about in the past).  For more on this manager, we've also recently posted up Bass on Europe and how he's investing.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Lee Cooperman's Macro View & Thesis on McMoran Exploration, Sprint Nextel & Tetragon Financial

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Lee Cooperman of Omega Advisors.  He talked about his overall macro view and then drilled down on three stock picks.


Cooperman's Macro Takeaways

He says he's been optimistic the last three years, but is indifferent about markets now.  He thinks we'll see slow growth and no recession (a 1 in 5 chance it happens).  He points to the ECB succeeding in kicking the can down the road and China avoiding a hard landing as keys going forward.

Cooperman argued that the Fed has created an environment that's best for equities.  Valuation is attractive when you compare it historically, though he later said that the valuation for the market now is "about right."  He says investors have de-risked and many managers are running low exposure.  Therefore, the max-pain trade is a move higher.

He believes that a peak in corporate profits in this business cycle is coming and that the fiscal cliff is a formidable issue for the market.  While the economy is not great, we need to see a bigger dent in unemployment.  We recently posted up another great presentation from Cooperman on hedge funds and life.

The Omega founder singled out high yield bonds as they yielded 20%+ in the crisis and now that yield is down to 6%.  There's been a dramatic re-pricing in high yield, but not so much in equities.  He again pointed out his disdain toward US government bonds, pointing out a contrarian signal that pensions have their third lowest equity exposure since 1997.

He thinks that investors will sell investments before the tax rates go up.  As far as the election goes, he's also pro-Romney.


Cooperman's 3 Stock Picks


1.  McMoran Exploration (MMR): He really loves the leadership of this company and thinks they're poised to do great things with their wells.  Currently trading at just over $11.75, he thinks the stock is worth $33 and points to Chevron and Freeport McMoran also being involved in their projects.


2.  Sprint Nextel (S):  He talked about how Softbank is putting $8 billion into the company and thinks the stub is worth $3.67 at 3x EBITDA.  He says the company is growing better than people give them credit for and many investors gloss over the name due to the poor Nextel deal.  Cooperman also pointed out past success by Softbank with telecom in Japan and Vodafone, noting vast improvement post-involvement of Softbank.  In 12-18 months, he thinks S is worth $6.50.


3.  Tetragon Financial (TFG):  He labeled this company as "too complicated" and blasted management at the beginning of his pitch, but then still managed to make the case for the company.  He said that you "go to bed with dogs, you wake up with fleas" and pointed out that the company hasn't had a conference call for 5 years so it's tough to get questions answered.

We're pretty sure he said his cost basis is around 2-3 in the name.  He pointed out the company's 20% return on equity, a book value of between 14-25 and the fact that a large portion of the company's market cap is in cash and it trades at a big discount to book.  It's also worthwhile that Cooperman has also held a longstanding position in similar company KKR Financial (KFN).


Perhaps the most telling statement from Cooperman was that he's sitting on a lot of cash now because there's a lot that can happen in the coming months.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Clint Carlson Says Avoid 10 Year Treasuries, Take a Chance With PostNL

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Clint Carlson of Carlson Capital.  He focuses on multi-strat in order to reduce volatility and said that "what you don't own is just as important as what you do."  Here are his two picks:


Carlson Says Avoid 10 Year Treasuries

His first play was to not own 10 year government bonds in any currency.  We've highlighted how Lee Cooperman strongly dislikes treasuries at this juncture and Carlson echoed those sentiments.  He said that many people are overlooking the fact that rates could jump higher.  While the Fed Funds rate will remain low, the 10 year doesn't necessarily follow that.  Carlson also does not believe we go the way of Japan.

He says that treasuries are not a good risk/reward and event co-founder Shad Rowe quoted Jim Grant, saying that these bonds offer return-free risk.  Carlson, however, said that you can't short treasuries now because the Fed can buy longer than you can remain solvent.  He dislikes corporate bonds as well and says to keep that exposure to a minimum for diversification.


Carlson's 2nd Pick: PostNL

His second idea was probably the most 'true hedgie' play at the conference.  What we mean by that is that it's a cheap option on risk arbitrage but also a fundamental investment.  His pick was PostNL (AMS:PNL or PNYLL via ADR).  The Dutch delivery company represents the "perfect storm" he says.

PostNL owns almost a 30% stake in TNT Express, which is set to be taken over by UPS (pending deal closure).  Carlson argues there's a range of outcomes which is why it's compelling.

Scenario 1: The deal does not close and downside is 20%.
Scenario 2: The deal does not close but significant upside remains if the market values PNL's TNT Express stake
Scenario 3: The deal closes, PNL gets 1.5bn and the stock doubles

Carlson thinks the deal closes, but points out this is a risky bet.

On the fundamental side of the investment, he points out how operating margins have tanked from 14% down to 7% and they're modeling an improvement up to 8-9%.  He points out how mail volumes in the Netherlands have dropped 10% per year and so that's a risk.  Carlson thinks that it's close to the trough, but that Europe doesn't improve for 4-5 years.

In order to compete, the company either has to raise prices otherwise they'll shut down.  He thinks it's also a potential leveraged buyout (LBO) candidate and that "this will be a volatile trade."  Right now there's a big percentage of owners that are event-driven or risk arbitrage funds.  If the deal falls through, there will be an ownership shift.

Carlson is focused on the end-game here and sees this as a 6 month - 1 year holding.  He says you could buy 1/2 a position now and buy another 1/2 to "double down" if the chance presents itself at lower levels.  We also took notice that Lee Cooperman (also on the panel) was taking notes on this pitch.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Boone Pickens Says Natural Gas Heading Higher, Likes National Oilwell Varco & Pioneer Natural Resources

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Boone Pickens of BP Capital Management.  The legendary energy man focused on, you guessed it, energy.

Pickens started his presentation talking about how the oil industry has changed over the past 10 years and how he thinks we can rebuild the economy off of cheap energy.  In politics, he thinks Romney will win the election and says he has the first true US energy plan (though it's not complete and he'd like to see more natural gas used).


Pickens on Natural Gas

One of the bolder calls of the conference was made when T. Boone argued that natural gas prices would rise to $4.50 or $5 in the next year and could see $6 by 2015.


Pickens' Stock Picks

At GIBI, Pickens recommended two stocks.  His first pick was National Oilwell Varco (NOV).  It currently trades at just under $74 and he thinks it will see $100.  He points to the company's huge shale opportunity for development and that there's still support for oil domestically and internationally.

His second pick was Pioneer Natural Resources (PXD), which he likes due to their great assets, pointing to 900,000 acres (of which he specifically mentioned the Permian basin assets).  He says they'll be drilling for a while.  The stock currently trades at just under $106 and he thinks it sees $150.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Mick McGuire on Cincinnati Bell, Corrections Corp & NCR Corp

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Mick McGuire of Marcato Capital Management.  He focuses on companies with market caps between $1-5 billion and employs activism where needed.  He previously worked for Bill Ackman's Pershing Square.  He pitched 3 ideas:


Long Cincinnati Bell (CBB)

Trading around an EV of 3.8bn, McGuire highlights that Cincinnati Bell is actually two companies in one: a legacy telecom company that generates cashflow but is declining and a data center/colocation business that is seeing 20% growth year over year.

Currently, CBB uses free cash flow to fund the data center growth.  The stock is disliked by both growth and yield investors so the solution is to split the businesses.

The company will be spinning off its data center business as a REIT.  Then the telco business can de-lever, pay a dividend and repurchase shares.  McGuire is looking for a December or Q1 initial public offering (IPO).  His sum of the parts yields a target price of $8.30.

We just posted yesterday how Marcato Capital Management filed a 13G on CBB and are now one of the largest owners.


Corrections Corp of America (CXW)

This is an oldie but goodie as McGuire's previous employer, Pershing Square, had also owned Corrections Corp in the past.  Marcato Capital Management says this is a name with a hard catalyst in the form of a REIT conversion.

McGuire has been working with Corvex Management on this one (Keith Meister's activist firm) and CXW is waiting on approval.

The fundamental thesis on this name is that there's an "acute overcrowding problem in public prisons."  McGuire argues that private prisons like CXW are a better option and there's significant barriers to entry here.  The average cost per bed is 80k+ for government versus 55-65k for private.  He also points to incremental margins being high.

Given the theme of REIT conversions this year in the markets, McGuire highlighted why it's beneficial to be a REIT: free cashflow by tax savings, superior credit rating, and cap rates.  He says CXW trading at 15x AFFO would be worth $50/share.


NCR Corp (NCR)

McGuire's last idea is National Cash Register (NCR).  They supply ATM's and point of sale (POS) devices.  They have an incumbent position in the market and ATM's are their primary focus.  He likes that they have high barriers to entry due to the frequent servicing requirements of ATMs (Diebold is their main US competitor).

He pointed out that emerging markets are driving growth and that there are often regional duopolies in the segment.  In North America, we're in the midst of a big upgrade cycle for money center banks but it's just begun for smaller banks.  The thought here is that banks pay up for advanced ATMs to reduce in-branch spending.

McGuire also points out that NCR is #2 in self-checkout point of sale, behind IBM.  This has been a big trend popping up around the country.

He points out that the growth is obscured by the company's underfunded pension.  The company issued $600mm in debt at 5% to help fund it.  Marcato Capital Management originally built their position in the spring.  He likes the 11% free cash flow yield and sees 35% upside.  He sees $3.80 in EPS in 2015.

For more from this hedgie, we've previously posted McGuire's 3 ideas from the Value Investing Congress.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.

Susan Byrne's Investment Outlook: Likes Kapstone Paper & Media Nusantara

We're posting up notes from the Great Investors' Best Ideas Investment Symposium in Dallas and next up is Susan Byrne of Westwood Holdings.  Westwood serves various institutional clients and manages $15 billion.


Byrne's Investment Outlook

She started by focusing on Westwood's outlook that in the next 1-3 years we'll see slow below potential GDP growth.  She disagrees with Lee Cooperman a little bit. She's more positive on corporate earnings and likes playing high quality names globally.

Byrne thinks we'll see rising but tame inflation and she likes to play companies that have yields higher than the S&P 500.  She said that the "ultimate risk instrument is stocks" so you need some insulation/protection in the form of a dividend.

She likes companies that grow dividends and put up a chart of the likes of Microsoft (MSFT), Exxon Mobil (XOM), Honeywell (HON), Johnson & Johnson (JNJ), General Electric (GE), and Automatic Data Processing (ADP).  She points out that all of these have equity yielding more than their bonds.

Byrne feels the S&P is "somewhat undervalued" by 10-12% and she wants to beat inflation with dividend yields.  She said to look at emerging markets, in particular Indonesia.


Byrne's Stock Picks

And speaking of Indonesia, she had a stock pick from that country via shares of Media Nusantara (PTMEY via ADR), an advertising company there.  She points out that they're growing advertising by 22% a year and you can play it in the domestic market or via ADR.  The company has a 2% dividend and a mid-teens multiple.


Byrne also pitched a domestic small-cap play via Kapstone Paper (KS).  It trades at 5x EV/EBITDA, has a 10% free cash flow yield and the company's price increases for their products are holding.


For the rest of the presentations, head to notes from the Great Investors' Best Ideas conference.