T2 Partners Year-End Letter: Discussing Longs & Shorts

Whitney Tilson and Glenn Tongue's hedge fund firm T2 Partners released their year-end letter to investors. The letter is one of the most thorough we've seen as it is 27 pages long and includes assessment of both their long and short positions. If you want transparency in the hedge fund industry, here's your barometer.

For 2010, T2 finished up 10.3% net compared to an S&P 500 return of 15.1%. So while they trailed the indices last year, T2 has outperformed since inception, returning 9.1% annualized net versus 2.0% for the S&P. This past year, their pain came from various short positions and essentially 'missing' the quantitative easing round 2 rally.

T2 Partners' top 12 long positions at the end of 2010 were:

1. Grupo Prisa (PRIS & PRIS.B)
2. Microsoft (MSFT) ~ see their thoughts on MSFT here
3. Berkshire Hathaway (BRK.A/B)
4. BP (BP) ~ their thoughts on BP here
5. General Growth Properties (GGP)
6. CIT Group (CIT)
7. Kraft (KFT) and warrants
8. Seagate Technology (STX)
9. Iridium (IRDM) and warrants
10. Automatic Data Processing (ADP) ~ see their presentation on ADP
11. Resource America (REXI)
12. Anheuser Busch InBev (BUD)

While we've presented analysis on T2's longs before, we want to single out Seagate Technology (STX) and CIT Group (CIT) as we haven't seen Tilson talk about these before. He likes STX mainly because it is trading at an absurdly cheap valuation and he thinks fears over the hard drive (HDD) market (versus the solid state drive market) are overblown.

Tilson and Tongue fancy CIT due to the company's potential to capture financing-cost savings. Additionally Tilson writes, "Even more intriguing is the possibility that a healthy bank might acquire CIT, attracted by the enormous earnings leverage available in applying the acquiring bank's much lower borrowing costs to CIT's business model."


T2's top 10 short positions (in alphabetical order):

1. AIG (AIG)
2. Homebuilders (various individual companies plus XHB the ETF)
3. InterOil (IOC) ~ analysis of their short position here
4. ITT Educational (ESI), as well as other for-profit education plays
5. Lender Processing Services (LPS)
6. Lululemon Athletica (LULU)
7. MBIA (MBI)
8. Netflix (NFLX)
9. Salesforce.com (CRM)
10. St. Joe (JOE)

Tilson and Tongue highlight that their short book caused them much pain last year. Accordingly, they set aside a portion of their letter to address how they manage short positions that move against them. In short (no pun intended), they re-evaluate their analysis to determine whether to add to the position, do nothing, or trim/exit.

Specifically, they trimmed their position in Netflix (NFLX) and replaced part of it with put positions. (We posted why Tilson is short Netflix here). They've also done this with other short positions in order to better manage risk. After all, remember that these stakes are merely hedges to their long book as T2 is always net long (they are currently 40% net long).

Embedded below is T2 Partners annual letter to investors for 2010:



You can download a .pdf copy here.

It's great to see a manager with such transparency in an otherwise secretive and guarded industry. T2's portfolio overlaps with positions many other hedge fund managers own that we've highlighted as well.

T2 is short JOE and so is Greenlight Capital (see David Einhorn's short thesis on JOE). While T2 is short ESI, hedge fund Blum Capital is long ESI. And while Tilson and Tongue are short AIG, Bruce Berkowitz's Fairholme Capital is long AIG. It's fun to see hedge funds take different stances on various stocks because that's what makes a market.

Eton Park Starts New Vallar (LON:VAA) Position

Eric Mindich's hedge fund firm Eton Park Capital Management has started a brand new position in Vallar (LON: VAA). The London Stock Exchange has revealed that due to trading activity on the 22nd of December, 2010, Eton Park now controls 5.03% of Vallar's voting rights.

In terms of other recent Eton Park activity, we saw that the hedge fund supported Air Products' (APD) latest bid for Airgas (ARG) in one of their arbitrage trades. However, nothing has materialized there. Eton Park's most recent acquisition is a bit of a head-scratcher and you'll see why below in the company description:

Per Google Finance, Vallar is "a holding company formed to acquire a single company, business or asset that has operations in the global metals, mining and resources sector. The Company focuses on the Americas, Russia, Eastern Europe and Australia. It focuses on commodities, including base metals, coking coal, iron ore, thermal coal, gold, silver and uranium."

For other activity out of Eton Park, we also detailed an increase in their Lonrho (LONR) stake.

Odey Shorts JJB Sports While Activists Remain Long

It looks like we might have another potential battleground stock on our hands. European hedge fund giant Odey Asset Management has disclosed a new short position in JJB Sports (LON: JJB), a sporting goods retailer. Due to portfolio activity on the 24th of December, Odey are short -0.61% of JJB's shares outstanding. Just yesterday we posted up that Odey remains optimistic on stock markets. But obviously, as a hedge fund, they will have short positions as well.

Crispin Odey's hedge fund had to declare this position under UK regulations because JJB is currently involved in a rights issue and Odey holds greater than a -0.25% short position. For more on these rules, see our primer on UK disclosures for more information. According to recent reports in the FT, JJB Sports is expected to ask investors for a further £50m cash injection, following £31.5m promised just before Christmas.

A number of activist hedge funds have taken the other side of the trade, though. Crystal Amber, managed by Richard Berstein, owns 15.4% of JJB's shares. Additionally, Bill Gates' Casecade Fund holds a 5.5% ownership stake.

Odey's short position is even more intriguing because back in the summer of 2010, a quarterly letter from Odey disclosed that their funds were long another UK sports retailer, Sports Direct (LON: SPD). Back then, they owned 0.84% of the voting rights. If that position is still open today, then Odey potentially have an interesting pair trade of long SPD, short JJB. You can scroll through our coverage of other hedge fund short positions here.

Per Google Finance, JJB Sports is "a sports retailer supplying branded sports and leisure clothing, footwear and accessories. JJB Sports is a high street sports retailer, with 250 stores in the United Kingdom and Eire. It provides a range of products covering United Kingdom sports."

For more from hedge fund Odey, be sure to see Crispin Odey's latest market commentary.

Second Curve Acquires Mercantile Bank (MBWM) Stake

Tom Brown's hedge fund firm Second Curve Capital have started a brand new position in Mercantile Bank (MBWM). Per a 13G filing with the SEC, the hedge fund reveals that due to trading activity on December 30th, Second Curve now owns 5.1% of MBWM with 442,707 shares.

This is a brand new position because the firm did not disclose owning shares in their previous SEC filings. Prior to founding Second Curve, Tom Brown headed the financial services group at Julian Robertson's Tiger Management. During the financial crisis, Brown was painfully early on his bullish call on the financials and it cost him dearly at the time.

Per Google Finance, Mercantile Bank "wholly owns Mercantile Bank of Michigan (the Bank). The Bank is a state banking company. The Bank’s primary service area is the Kent and Ottawa County areas of West Michigan, which includes the City of Grand Rapids in the State of Michigan. The Bank, through its seven offices, provides commercial banking services primarily to small- to medium-sized businesses and retail banking services in and around the Grand Rapids, Holland and Lansing areas."

For more on Tom Brown's hedge fund, we detailed yesterday that Second Curve acquired more CompuCredit (CCRT) as well.

What We're Reading ~ New Year Edition

If you missed it, Bespoke's 2011 roundtable [Bespoke]

Letter from Citadel's Ken Griffin [Dealbook]

Growth versus value [AbnormalReturns]

In 2010, we learned that... [ReformedBroker]

On an MBA versus CFA [ResearchPuzzle]

Interview with Alexander Roepers of Atlantic Investment Mgmt [Barron's]

Howard Lindzon interviews Mark Cuban [StockTwits]

Warren Buffett speaks about succession planning at Berkshire [Vanity Fair]

How Chipotle (CMG) is winning burrito wars [Bnet]

Six themes for 2011 [Pragmatic Capitalism]

On why Google (GOOG) is undervalued [TwistedValue]

Rising interest rates positive for equities? [ValuePlays]

How to come up with investment ideas [GannonOnInvesting]

Emerging hedge funds the belles of the ball [AllAboutAlpha]

Farallon receives mixed messages [Pensions&Investments]

From analyst to hedge fund founder in six years [Fortune]

On the respective Alcon (ACL) and Dynegy (DYN) deals [Dealbook]

Start the new year with an investment report card [Rational Walk]

The best economics blogs [WSJ]

New Year's hangover for stocks? [Barron's]

Bullish sentiment reaches historical extremes [Bespoke]

Hedge fund managers bullish on US stocks [Pensions&Investments]

Investors flocking to emerging market bonds [InstitutionalInvestor]

Municipal bond buyers on guard [BondBuyer]

Harbor Investment Conference: Ideas From Ackman, Berkowitz & More

Want to hear some investment ideas from top hedge fund managers? The Harbor Investment Conference will take place February 3rd, 2011 in New York City and provides the perfect opportunity. All proceeds from the event goes to the Boys and Girls Harbor, so it's a wonderful cause. At last year's event, the 8 stocks that were recommended were up an average of 39% at the end of 2010. There are only 331 seats available so act quickly!

Here are the speakers at the event:

Bill Ackman – Pershing Square Capital Management
Bruce Berkowitz – Fairholme Capital Management
David Darst – Chief Investment Strategist, Morgan Stanley Smith Barney
Alex Klabin – Senator Investment Group LP
Mick McGuire – Marcato Capital Management, LLC
Craig Nerenberg – Brenner West Capital Advisors, LLC
Todd Sullivan – Rand Strategic Partners

Everyone of course knows Bill Ackman and Bruce Berkowitz. However, some of the other speakers should offer great insight as Mick McGuire previously worked at Pershing Square and Craig Nerenberg runs a similar strategy to Pershing Square with a concentrated portfolio. Also, our good friend Todd Sullivan from ValuePlays.net will be speaking as well.

Embedded below is an information and registration sheet for the conference:



You can download a registration .pdf here.

The event is coming up soon and there are only 331 seats available, so sign-up to hear some hedgie investment ideas and support a great cause at the same time.

Strategist Jeff Saut Cautious On Market, Still A Buyer On Dips

It's been a long time since we last checked in on market strategist Jeff Saut's commentary and figured the new year would be a perfect time to do so. In short, he is currently cautious on the stock market, wary of a repeat of January 2009. So, why is he cautious?

Saut writes, "in the short-term, the odds are not tipped decidedly in investors' favor, at least not by the metrics I use. Indeed, the Volatility Index (VIX/17.75) is down to 'complacency levels' last seen in April right before the 17% correction. Ditto, investors intelligence data shows advisory sentiment approaching the bullish extremes of October 2007."

Simply put, he feels that investors have become complacent and bullish sentiment has skied high, something he is using as a contrarian signal. But while the market strategist feels that stocks are due for a pullback, he is a buyer of those dips.

One thing we've noticed is that Saut has often been correct in his past calls, so kudos to him for utilizing timing signals such as volatility, sentiment levels, and overbought/oversold metrics. At the same time, he is often early with his calls and he freely admits this in his latest market commentary. After all, momentum and bullish sentiment can last much longer than many anticipate. It's a tough train to jump in front of.

For instance, back in late October, Saut called for a pullback (which he also saw as a buyable dip). What happened? The market saw a nice pullback... but not until a few weeks into November. Followers of Saut's prescient call (dip buyers) would have made a pretty penny on that trade.

Saut by no means is recommending a massive short position here, but it does seem as though he advocates taking some profits, raising cash, and preparing for a near-term correction that can eventually be bought as the new year begins. Embedded below is Saut's latest investment strategy piece entitled, 'The White Hurricane':



You can download a .pdf copy here.

For interesting past missives from the market strategist, check out Saut's businessman's risk portfolio, as well as his risk management principles.

Crispin Odey Remains Optimistic On Stock Markets: Latest Commentary & Outlook

Crispin Odey, founder of hedge fund firm Odey Asset Management, is out with his latest market commentary and outlook. Back in September, he noted that equities were attractively priced but unloved. Since then, equities have rallied furiously. So, what's his latest take? See below for his outlook penned on the 30th of November.

"Crispin Odey
Founding Partner | Portfolio Manager
Current Outlook

Easy money takes the pain out of hard knocks. In May, in August and again in November, markets have attempted to dissolve the Euro – to fracture it. Insolvency in Greece came about because their governments could not collect taxes. Insolvency in Spain and Ireland relates to banks lending against mortgages on margins of only 20 basis points over Libor whilst borrowing at 100-200 basis points above Libor.

These issues need addressing. Keynes wrote in the thirties that: “…the absolutists of contracts are the parents of revolution.”

Banks need to be allowed to reset lending margins; they need to be profitable. Who cares if this demands legislation to take effect?

It is odd that Merkel has been the instigator of the Euro wobbles. She is of course worried that German banks will need to be bailed out if these countries go down. She is right to be worried that German bankers might be foolish lenders: look at the history. Recently German banks’ net interest margins should have soared because in Germany there were no tracker mortgages, no teaser rates. Borrowers borrowed for 10-15 years at nominal rates. Two years ago those borrowers were borrowing at 4% and the bank was making nothing, today they are borrowing at 4% and the bank could be making 300 basis points of margin. Instead, by matching the duration risk and having to borrow at 100 basis points over Libor, German banks still make little money out of mortgage lending.

Throughout these crises I have remained bullish and I still remain more optimistic for stock markets than for a long time.

Why? Because the markets are too cautious about the strength of the economic cycle. In previous quarterly calls I have outlined how the USA is now successfully encouraging economic growth and inflationary pressures to grow in the emerging market economies. But what is not understood is that Germany in this regard looks exactly like an emerging market. Thanks to the problems of the Euro, German exporters are not only enjoying a massive boom, they are also enjoying a currency advantage of around 30% over their Japanese competitors. Couple this with a tax rate which, since the last boom in 89-90, has fallen from 52% to 30%, and shareholders – for the first time – will almost certainly enjoy an unheralded boom.

In a country where individuals spend more on cut flowers than equities, these profits will come to us – yes to the foreigners. This is not going to be popular in Germany, and quite quickly I expect profits to be commuted into wage increases, but this will do something which is not expected. It will mean that from next year the boom in consumption in Germany will help to lift all of these bankrupt southern economies out of recession. The Euro will work as it was intended. German inflation will be higher than others, German competitiveness will suffer and yes we will stop having Euro crises. Of course Germany will not enjoy this boom and if it was down to their authorities, interest rates would rise and their currency would strengthen but they are going to find their feet being unable to reach the pedals as Ireland et al found this year.

Bernanke, who I think is much maligned, wrote this recently in ‘Rebalancing the World Economy?’

As currently constituted, the international monetary system has a structural flaw: its lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new. In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.’

So like Simeon, are we about to say; ‘today this prophecy is fulfilled’? Could there have been a more perfect Christmas tale than this? Yes, in a way.

Bernanke is wrong. The mechanism is starting to work. It will shower profits upon those fortunate enough to see the opportunity. It may well start the beginning of the bear market in government bonds but it will also lead to a much more balanced global economy – balanced but inflation prone and inflation bound."

The key takeaway here is that he is constructive on the markets and remains bullish and optimistic, flying right in the face of caution and pessimism. Odey thinks there could potentially be a bear market in government bonds and we've highlighted that numerous other hedge fund managers agree with him. Odey sees inflation in the world's future as well and if you concur, here are the best investments during inflation.

It's been a while since we last covered this hedge fund as back in October we noted their new short position in Provident Financial (LON: PFG). You can also read Odey's previous market commentary here.

Dan Loeb & Third Point's Latest Exposure Levels

Dan Loeb's Third Point Offshore Fund finished 2010 up 33.5%, compared to an S&P 500 return of 15.1%. Since inception in December of 1996, Third Point has returned an impressive 18.6% annualized. The hedge fund manager recently released its latest December exposure levels so we wanted to provide readers with an update.

Here are Third Point's top holdings as of year end:

1. Gold
2. Delphi Corp (multiple securities held)
3. Chrysler (multiple securities held)
4. Potash (POT)
5. Lyondell (LYB)

You can learn about more of Third Point's investments in our newsletter. Physical gold continues to be a massive position for Loeb and he potentially could be using the precious metal as some sort of tail risk hedge. Interestingly enough, Third Point continues to own Potash (POT) even after BHP Billiton's bid for the company failed. It appeared as though the hedge fund originally purchased POT as a arbitrage trade but maybe they like the natural resource exposure as an inflation play. Or maybe they still see the company as a viable takeover target, who knows.

Lastly, Lyondell finally shows up as a top holding for Third Point as the company exited bankruptcy. The chemical maker's equity now trades under ticker symbol LYB. Back in the second quarter we noted Loeb's fondness for post re-organization equities, and that portfolio theme continues.

Exposure Levels

Third Point has its highest net long equity exposure in basic materials and financials. In total, they are 60.1% long, -8.4% short, leaving them 51.7% net long equities. One geographic note is that Third Point had previously been net short the Asia region, but are now net long ever so slightly.

In terms of credit exposure, Third Point has its highest net long exposure in mortgage backed securities (MBS) at 19.4%, followed by distressed at 14.2% net long. Third Point is also net short government securities at -10.9%. Overall in credit the hedge fund is 32% net long.

Top Winners

In Loeb's portfolio, big winners include Delphi (multiple securities held), NXP Semiconductor (NXPI), Lyondell (LYB), Chrysler (multiple securities held), and Accuride (ACW). He highlighted NXPI in his recent letter to investors as Third Point participated in the IPO and sees upside in the name. Shares of Accuride also recently started trading in late December after re-listing on the New York Stock Exchange.

Top Losers

Third Point's portfolio saw weak performance from the following plays: three undisclosed short positions (undoubtedly due to the market's large rally), Fortis (multiple securities held), as well as State Bank of India (BOM:500112), a name we have previously not seen disclosed.

That wraps up our summary of Third Point's end of year exposure levels. You can check out more of Third Point's portfolio in our newsletter. And to learn to invest like Dan Loeb, check out his recommended reading list here.

Second Curve Capital Files Form 4 on CompuCredit (CCRT)

Tom Brown's hedge fund firm Second Curve Capital recently filed multiple Form 4's with the SEC regarding transactions in shares of CompuCredit (CCRT). These filings represent indirect ownership and were made by advisory clients of Second Curve. In total, Second Curve reported acquisition of 81,000 shares during the last 10 days of December.

Second Curve acquired their shares through various lots ranging in price from $6.59 to $6.95. Shares of CCRT are currently trading around $6.72. After all purchases were made, they owned 4,260,630 shares of CompuCredit. We noted Second Curve reported transactions in CCRT back in September as well.

Also, in a separately filed Form 4, advisory clients of Second Curve Capital have purchased 29,000 shares of Tennessee Commerce Bancorp (TNCC). The purchases were made in the last three days of December in various lots at prices of $4.84, $4.82, and $4.91. After all was said and done, Second Curve reported owning 1,271,456 shares of TNCC. We detailed Second Curve's recent addition of TNCC shares and this marks a subsequent recent purchase after originally purchasing shares in August.

Per Google Finance, Tennessee Commerce Bancorp is "a bank holding company formed to own the shares of Tennessee Commerce Bank (the Bank). The Bank conducts business from a single location in the Cool Springs commercial area of Franklin. As of December 31, 2009, the Bank had total assets of $1.4 billion. The Bank offers a range of retail and commercial banking services."

CompuCredit is "a provider of various credit and related financial services and products to or associated with the financially underserved consumer credit market."

Scroll through all of our coverage of the latest SEC filings made by prominent hedge funds.

Happy Holidays From Market Folly!

We just wanted to take this opportunity to say thank you to our readers for reading the site and to wish you a relaxing and enjoyable holiday season!



Merry Christmas, Happy Hanukkah, Happy Kwanzaa, Happy Festivus, Happy Holidays (and insert any others we might have left out here)!

Hedge Fund Carlson Capital Exits Portec Rail Products (PRPX)

Last week, we revealed that hedge fund Carlson Capital had filed an activist 13D on shares of Portec Rail Products (PRPX). In it, they disclosed a 5.2% ownership stake in a company that was subject to a tender offer. Due to an amended 13D filed with the SEC after market close yesterday, Carlson has completely exited its position in PRPX. And although we don't know for sure, the likely reason could be below:

According to Reuters, "As of the subsequent offering period's expiration time, approximately 8,662,078 shares had been tendered and not properly withdrawn pursuant to the tender offer, which represented approximately 90.20% of the outstanding shares. L.B. Foster and Foster Thomas Company accepted for payment all shares that were validly tendered and not properly withdrawn, and paid for these shares in accordance with the tender offer's terms. L.B. Foster intends to effect a short form merger of Foster Thomas Company with and into Portec, with Portec being the surviving corporation, as soon as practicable. As a result of the merger, Portec will become a wholly owned subsidiary of L.B. Foster."

If you're slightly confused as to the tender offer timeline and Carlson's involvement, head to our previous post on PRPX. But as of December 21st, the hedge fund no longer owns shares.

Taken from Google Finance, Portec "manufactures, supplies and distributes a range of rail products, including rail joints, rail anchors, rail spikes, railway friction management products and systems, railway wayside data collection and data management systems, and freight car securement systems."

What We're Reading ~ 12/23/10

A head's up interview with David Einhorn [Dealbreaker]

Talking investment strategy for 2011: a roundtable [Bespoke]

Elfenbein's buy list for 2011 [CrossingWallStreet]

Whitney Tilson's short thesis on Netflix (NFLX) [Market Folly]

Netflix CEO Reed Hastings responds to Tilson [SeekingAlpha]

Whitney Tilson responds to Netflix CEO's comments [zerohedge]

Investing fads and themes by year, 1996-2010 [ReformedBroker]

For activist funds, a long-term approach to investing [Dealbook]

RenTec's Medallion fund poised for two of its 'worst' years [Institutional Investor]

Interview with tech-focused hedge fund Thompson Peak Capital [BusinessInsider]

Top 10 hedge fund stories of 2010 [AbsoluteReturn+Alpha]

77% of RIA's are satisfied with their jobs [WSJ]

Discovery Communications market neutral pair trade [AboveAvgOdds]

Ten investment ideas for 2011 [Marketwatch]

Howard Marks on Gold

Howard Marks of Oaktree Capital has been on a writing spree as of late. Yesterday we posted Howard Marks' thoughts on the credit cycle. Today, we turn our attention to his memo, 'All That Glitters' which focuses on everyone's favorite precious metal: gold.


Reasons to Own Gold

He starts off his missive by examining the reasons to own gold. He lists the following as pluses: "It serves as a reliable store of value, especially in challenging and uncertain times. It's a hedge against inflation, since its price rises in sympathy with the general level of prices. It exists without the involvement of man-made constructs such as governments. And it's desired and accepted all around the world (and always has been)."


Why You Shouldn't Own Gold

On the contrary, Marks provides equal weight to the other side of the argument. Citing reasons not to own gold, Marks prudently highlights that, "gold is nothing but a shiny metal. Since its real-world applications are limited to jewelry and electronics, very little of its value comes from actual usefulness.


Marks' Take on Gold

While he uses the first half of his letter to cohesively outline the arguments both for and against gold, he uses the latter half to focus on his personal view of the metal. Marks has a problem with the precious metal in that he can't properly value it. He writes, "But there's no analytical way, in my opinion, to value an asset that doesn't produce cash flow ... and especially one that doesn't at least have the prospect of doing so." On this he further opines that, "In fact, that's true of all non-income-producing assets: they're only worth what buyers will pay for them."

He then goes on to summarize his view by writing, "My point here is the one I've held longest on this topic: that gold works as a store of value solely because people agree it will." In the end, he used to be a non-believer in gold but has since come around to some of its merits. He primarily sees its use as "a useful contributor to safety through diversification."

Embedded below is Howard Marks' memo, 'All That Glitters':



You can download a .pdf here.

Toward the end of the letter, Marks focuses on the US dollar's weakness and its potential role in gold's strength. This is the exact premise John Paulson has used. Paulson & Co's gold fund is a bet against the US dollar.

Longtime readers of Market Folly know we have posted copious resources on the topic of gold, including viewpoints from many top hedge fund managers. And as you'll see below, the majority are proponents of the metal:

- David Einhorn stores physical gold

- Passport Capital's John Burbank prefers hard assets

- Dan Loeb buys physical gold

- Gold miners, not gold, are the play

Third Point Trims Position in Nabi Biopharmaceuticals (NABI)

Dan Loeb's hedge fund firm Third Point LLC just filed an amended 13D with the SEC regarding its position in Nabi Biopharmaceuticals (NABI). Due to portfolio activity on December 16th, Loeb has disclosed a 9.4% ownership stake in NABI with 4,000,100 shares. They sold shares on dates ranging from the 13th of December to the 20th and at prices from $5.60 to $5.73.

Back in April we revealed that Third Point was selling NABI shares and this time is no different as they've reduced their position from a previous 10.7% ownership down to the current 9.4%. However, Third Point still retains a sizable stake. For more on this hedge fund's latest activity, we posted up Third Point's most recent investor letter.

A potential thesis associated with this investment was revealed by Seth Hamot of Roark, Rearden, & Hamot Capital. It is a play on curing addiction to smoking and Hamot likes the royalty stream as Nabi partnered with Glaxo Smith Kline (GSK) on this vaccine. You can read his NABI thesis here.

Per Google Finance, Nabi Biopharmaceuticals is "a biopharmaceutical company focused on the development of vaccines addressing unmet medical needs in the areas of nicotine addiction and infectious disease. As of December 31, 2009, the Company’s product in development is Nicotine Conjugate Vaccine (NicVAX), a investigational vaccine for treatment of nicotine addiction and prevention of smoking relapse."

To learn to invest like Loeb, check out his recommended reading list.

Second Curve Capital Buys More Tennessee Commerce Bancorp (TNCC)

Tom Brown's hedge fund firm Second Curve Capital just filed a Form 4 with the SEC on shares of Tennessee Commerce Bancorp (TNCC). Per a transaction on December 17th, advisory clients of Second Curve purchased 10,000 shares of TNCC at a price of $4.10. After this transaction, Second Curve reported beneficially owning 1,242,456 shares of the company. We originally covered it when Second Curve started a new position in TNCC back in August.

Per Google Finance, Tennessee Commerce Bancorp is "a bank holding company formed to own the shares of Tennessee Commerce Bank (the Bank). The Bank conducts business from a single location in the Cool Springs commercial area of Franklin. As of December 31, 2009, the Bank had total assets of $1.4 billion. The Bank offers a range of retail and commercial banking services."

For other recent activity out of this hedge fund, we saw that Tom Brown almost tripled his stake in Banner Corp (BANR).

Dan Loeb's Third Point Q3 Letter to Investors

Dan Loeb's hedge fund firm Third Point is finally out with its third quarter letter to investors. The first half of Loeb's letter focuses on Ben Bernanke and the second half focuses on Third Point's portfolio. The latter portion is what we'll highlight below.

Third Point recently received AR Magazine's award for event driven fund of the year. Third Point now manages $3.6 billion and at the end of the third quarter its Offshore Fund was up 19.2% for the year. The fund now has seen 18.2% annualized returns since inception, an obvious reason to track them. Recall that we've provided commentary and analysis of Loeb's investments in our newsletter. And if you desire to be a successful investor like Loeb, head to his recommended reading list.


Anadarko Petroleum (APC)

Turning to Loeb's recent commentary, he touches on his firm's position in Anadarko Petroleum. We originally revealed this position back in August and he purchased debt securities in June and July due to the opportunity presented as a result of the Gulf oil spill.

Of the investment he writes, "Our analysis was correct and in hindsight, investors could have generated similar returns by investing in anything 'Macondo-related (e.g. RIG, BP and Anadarko equities). However, Anadarko bonds offered similar upside to the aforementioned securities but with effectively zero downside in the event that either our thesis on the severity of the spill was incorrect or there was a material decline in oil and.or natural gas prices, and so we delivered excellent risk-adjusted returns."

In his commentary, Loeb mentions that all oil spill related securities have rallied furiously since the event. He doesn't mention whether or not Third Point still owns these securities and almost makes it sound like he has since exited the position (but that's speculation on our part).


NXP Semiconductor (NXPI)

Loeb also reveals a new position in his letter as Third Point participated in NXPI's IPO. He notes that, "the company is in the final stages of completing a substantial operational and capital structure restructuring, which is driving free cash flow, rapid deleveraging and attractive new opportunities like a leadership position (>50% market share) in Near Field Communications, a fast emerging mobile payment technology being adopted by Google Android, Nokia and Blackberry." The most interesting thing here is that despite the rally in shares, Loeb sees "substantial upside" in this stock.

Top Positions

While not specifically listed in the letter below, we have since seen Third Point's November portfolio update where they list the following as their top positions:

- Gold
- Delphi (multiple securities held)
- Potash (POT)
- Chrysler (multiple securities held)
- Lyondell (LYB)

Of note are the fact that Loeb owns physical gold, not the exchange traded fund. Fellow hedge fund manager David Einhorn of Greenlight Capital stores physical gold and John Burbank of Passport Capital also prefers the physical metal.

Embedded below is Third Point's third quarter letter to investors:



You can download a .pdf copy here.

To see what else Dan Loeb has invested in, be sure to check out our Hedge Fund Wisdom newsletter. And to learn to invest like this hedge fund manager, head to Loeb's recommended reading list.

Oaktree Capital's Howard Marks on the Credit Cycle

Howard Marks of Oaktree Capital is out with his latest memo entitled 'Open and Shut.' This refers to the credit cycle, one which Marks believes is the "most volatile of cycles and has the greatest impact." This is particularly interesting since many people don't seem to be focusing on the credit cycle these days. He takes a walk through his past commentary on the subject matter and provides investors with ample words of wisdom.

He then shifts his focus to quantitative easing and the Federal Reserve's actions. Simply put, he feels that such a low-rate environment has caused investors to reach for yield. And in a sense, Marks argues that many assets are overvalued. He writes that, "In 2006-07, the most appreciated assets were real estate, mortgages, and buyout companies. This year they're Treasury securities around the world, gold, commodities, currencies (versus the U.S. dollar) and real estate and stocks in emerging markets."

With many appreciated assets, where should investors put their money then? You'll recall that back in October, Marks advocated high quality large cap stocks. It would be interesting to see if he still feels those assets are 'cheaper' than most other options.

Marks is leery of the return of risk. He points out that it was the time to buy in 2008 when Lehman Brothers had failed and asset sales abounded. Marks goes on to say that, "Today some assets are fairly priced and others are high, but there are no bargains like those of 2008. Capital and nerve can't hold the answers in such an environment. We're no longer in a high-return, low-risk market, especially in light of the inability to know how today's many macro uncertainties will be resolved. Instead of capital and nerve, then, the indispensable elements are now risk, control, selectivity, discernment, discipline and patience."

It's interesting that he notes there are no bargains like 2008. While maybe not yet reaching panic levels like 2008, the Municipal bond market sure has taken a beating lately and it'd be interesting to hear Marks' thoughts on that asset class. Since he did not mention them specifically, we'd assume he doesn't view them as 'on sale' quite yet.

Embedded below is the Q3 letter to investors from Oaktree Capital's Chairman, Howard Marks:



You can download a .pdf copy here.

As always, leave it to Howard Marks to provide us with a bevy of wisdom that will most likely be quoted years from now. For more of his commentary, we looked at his recommendation to buy high quality large-cap stocks. And for other market thoughts from fund managers, scroll through our collection of hedge fund letters.

Bridger Management Boosts Stake In Ironwood Pharmaceuticals (IRWD)

Roberto Mignone's hedge fund Bridger Management just filed a 13G with the SEC regarding shares of Ironwood Pharmaceuticals (IRWD). Due to portfolio activity on December 9th, Bridger has disclosed a 5.1% ownership stake in the company with 2,390,679 shares.

This marks an increase in Mignone's position size to the tune of 483%. Bridger Management previously owned only 410,000 shares at the end of the third quarter. Roberto Mignone worked at Blue Ridge Capital and Tiger Management before founding Bridger and earned both his undergraduate degree and MBA from Harvard. You can scroll through all our previous coverage of Bridger Management here.

Per Google Finance, Ironwood Pharmaceuticals " formerly Microbia, Inc. is an entrepreneurial pharmaceutical company that discovers, develops and focuses to commercialize medicines targeting important therapeutic needs. The Company operates in two segments: human therapeutics and biomanufacturing."

Why Whitney Tilson is Short Netflix (NFLX)

Whitney Tilson has gotten his ass handed to him in his short of Netflix (NFLX). And, he'll be the first to tell you that. However, that hasn't rattled his conviction as he thinks the company is now trading at ridiculous valuations. In support of his argument, he's recently released an in-depth bear case for NFLX entitled, you guessed it: "Why We're Short Netflix."

We've covered T2 Partners' portfolio in-depth before and Netflix is now one of their main short positions. NFLX is the definition of a momentum stock. It has made the longs copious amounts of money and ripped the collective faces off of short sellers. Given the beating Tilson and his hedge fund T2 Partners have taken, why persist? He writes,

"We acknowledge that the company offers a useful, attractively-priced service to customers, is growing like wildfire, is very well managed, and has a strong balance sheet. So why on earth would we be betting against this stock? In short, because we think the valuation is extreme and that the rapid shift of its customers to streaming content (vs. mailing DVDs to customers) isn’t the beginning of an exciting, highly-profitable new world for Netflix, but rather the beginning of the end of its incredible run. In particular, we think margins will be severely compressed and growth will slow over the next year."

Valuation

Tilson's main short thesis here is valuation. On that subject he argues, "By any measure, Netflix’s valuation is extremely rich. Based on yesterday’s closing price, it trades at 67.4x trailing EPS ($2.65), 63.1x the high end of the company’s EPS guidance for the full year 2010 ($2.83), and 46.7x consensus analysts’ estimates for 2011 ($3.82). It also trades at 4.6x sales. In short, the stock is priced for perfection and any misstep would likely trigger a huge selloff."

Other Reasons for Shorting NFLX

While valuation is often a logical place to start when searching for a short thesis, Tilson also hints at various other reasons to be skeptical of the company. Of these, he points out the company's business model shift, potential new competitors, the sudden resignation of the CFO, and a large potential impact on margins. Regarding the latter, the T2 Partners manager says,

"The biggest impact on margins, we believe, will come from Netflix having to pay increasing amounts for streaming content. Unlike renting DVDs, in which Netflix is protected by the First Sale Doctrine (for now, anyway – see discussion below), the laws around streaming content require that Netflix must have an agreement with the content owner to stream it. This is very bad news for Netflix because content owners are generally very savvy and are seeking to carefully control their content to maximize revenues."

In-Depth Report

Tilson elaborates on his short thesis in the in-depth report embedded below:



You can download a .pdf copy here.

While Tilson has gotten roughed up by this stock, his conviction is unwavering and it is currently T2 Partners' largest bearish bet (via short common stock and owning put options). We'll have to see if he continues to get beat up in this name (and if so, at what point he cries "Uncle") or whether his thesis comes to fruition over time. For more from this hedge fund, we've detailed T2's largest positions as well as their bullish stance on Automatic Data Processing (ADP).