David Einhorn Short Green Mountain Coffee Roasters (GMCR): Value Investing Congress Presentation

At the Value Investing Congress in New York today, David Einhorn of hedge fund Greenlight Capital revealed he is short Green Mountain Coffee Roasters (GMCR) in a presentation called "GAAP-uccino".

Be sure to check out our notes from the Value Investing Congress.


David Einhorn (Greenlight Capital): Short GMCR

Einhorn famously gave a presentation on shorting Lehman Brothers a few years ago and shorting St. Joe (JOE) last year at the same conference. This year he's back with a short of GMCR. Whitney Tilson of T2 Partners has been short GMCR for a while as well.

Embedded below is his full slideshow presentation:



Einhorn began with company background and the well-known bull case. Green Mountain Coffee is a K-cup company with a razor-razor blade model; 95% of business is at-home use.


Bull case: 64 million households drink coffee, 1/3 buy K-cup machines, 2 cups per day, 15.5B k-cups, 0.15 profit per cup, get $1.4B profit, on 160M shares is $8 eps. Recognized brands like Starbucks, Dunkin Donuts will grow installed base, and bring higher margins. Management calls itself the “iPod of coffee.” Great income statement growth in last few years, aided by acquisitions. And the stock has done very well: 57x P/E, 35.6x next year estimated eps. Up 185% this year, best stock in SPX 1500.

Einhorn then moved onto criticizing the company: Poor transparency. Doesn’t even report lbs shipped, k-cup units, or precise Keurig brewers units. GMCR has cut their amount disclosure over time, which is what companies usually do when metrics are deteriorating.


Bear case: The opportunity is smaller than bulls believe. Attachment rate is smaller than bulls believe and is declining. They already have widespread distribution and brand awareness. Machines are expensive, $250 vs. $80 Mr. Coffee, or cheap $20 brewers. K-cups are much more expensive compared to buying the bags of coffee yourself, 60 cents per serving vs. as cheap as 5 cent per serving. This limits the actual available market to about 20M households, not 64M. Growth in retailers selling Keurig is slowing.

Attachment rate is declining or flat, only about 1.3 per brewer per day. GMCR doesn't disclose the attach rate!

Starbucks deal: non-exclusive and multi-year, in stores and at SBUX. Deal does not apply to next generation brewer - SBUX keeping its options open? About $0.22 estimated profit per K-cup. How will they split it? Using Smucker’s deal, can estimate that GMCR only got .06 of .17 total profit, to make the k-cups. Therefore, SBUX should get 2/3 of the 22 cents, leaving GMCR only 7 cents. In fact, SBUX deal could cannibalize their other K-cup sales.

GMCR hasn't generated much FCF. In fact, it's been negative for 4 years. Due to acquisitions and CAPEX, they are burning cash and expect to continue. ROIC only 16.3%, yet high multiple, doesn’t justify current stock price.

Competition/Patents: Bulls say patent expiration unimportant due to large market share. However, patents that keep others from making k-cups for the existing brewers may be expiring in 2012. Competitors will be able to produce k-cups!

GMCR has been buying out licensees and paying too much. Usually allocates 95-104% of the purchase prices to good will when buying them. Goal may have been to avoid competing with licensees when patents expire. Big deals with SBUX, Dunkin are to mitigate competition when patents expire. Only advantage they have is contract manufacturing, which is a lousy business. GMCR may instead create a totally new system to stop others.


Bear Case Summary: GMCR will no longer have monopoly on making the K-cups next September. Others will gear up to enter the market with much cheaper alternatives- they already have the equipment to do it (Crystal Lite maker example). There is lots of branded competition: Kraft, Nestle, and Maxwell House.

Bear case, vs. the bulls $9 eps estimate. Cut attach rate to 1.25 K-cups per brewer, add 20% private label penetration, cut profit per cut to 0.12 from 0.15, gets you $3.50 eps, not $9.00.


CAPEX: Spending a lot on CAPEX that is “unexplained.” As much as $186M in 2011- where is this money going? Next year it looks even worse, $431M in unexplained CAPEX based on their guidance. CAPEX growing faster than the business, when the opposite should be happening.

Recent summer quarter revenue was $717M, 100M higher than Street, all upside on K-cup sales. Historically, they’ve been very predictable. What happened? Implies attach rate soared by 11%, no good answers on the conference call.


SEC inquiry: Revenue recognition practices. Internal investigation exonerated the company. “We believe there may be a material issue.” Something fishy with MBlock, the third-party fulfillment company that handles their distribution and inventory. 51% of accounts receivable were to them. Einhorn’s people have interviewed witnesses who spoke of phony transactions that had revenue recognition issues. Former workers may have been fired for asking too many questions! The company uses excel instead of stronger ERP software; open to abuse and mistakes. Keurig was shipping stuff to themselves according to an interview. Believes this may explain the excess K-cups sold in the quarter. Significant problems with expired coffee. His interviews with ex-employees showed astounding levels of inventory discrepancies- shipping to themselves, expiring coffee, sales that never happened.

He says there's been a lot of surprises with recent accounting and he accused management of "shenanigans" (SuperTrooper anyone?) After his presentation, GMCR stock was down as much as 12%.


Conclusion: Market is smaller and more penetrated than bulls believe. Attachment rates matter and they are falling. $3.50 eps is more likely than $9.00. The patent expiration is a real problem. The March quarter was such a surprise that it was suspicious, especially in light of conversations with workers. GMCR did a big stock deal, where insiders sold, right after the 19% jump in the stock after the quarter. The accounting is aggressive, transparency is limited, and controls seem to have material weaknesses. GMCR is a serial issuer of stock for acquisitions, while insiders have sold in droves. Limited FCF, large number of warning flags here.

It should be noted that GMCR has largely been labeled a "momentum stock" and some of the top holders include hedge funds like Philippe Laffont's Coatue Management, Steve Cohen's SAC Capital, and John Thaler's JAT Capital.


Q&A Session:

1. MBlock owners or relationship? Unclear.

2. NPD data shows evidence of good growth - how do you reconcile this with what you find? "No doubt they are selling a lot of coffee. We have seen an increase in expired or nearly expired coffee."

3. Will the SEC do anything here? They've been here for a year, there is some hope.

4. Vodafone? Says the thesis is playing itself out.

5. Sprint, any change in outlook? They're trying to do a lot of things at once. Still like the stock, despite high amount of debt, company still has access to funding without diluting shareholders. Strategic asset to a number of large players. What they are doing now makes a lot of sense, if we are sufficiently patient, if anything goes right, we have a chance at an asymmetrical return.

6. Japanese bonds, surprised they've rallied? Yes, but Japan is in a tough spot due to so much debt and budget deficit, bad demographics (Kyle Bass of Hayman Advisors has been short Japanese JGBs).



In our September hedge fund performance numbers post, we highlighted that Greenlight was -0.76% in September and -6.16% for the year at that time.


About David Einhorn: He manages the $7 billion hedge fund Greenlight Capital. He is the author of Fooling Some of the People All of the Time which is a great read. We've also posted up David Einhorn's recommended reading list for all aspiring fund managers.

Earlier this year we also posted up Einhorn's presentation on Microsoft (MSFT).



You can view our notes from the Value Investing Congress for the rest of the hedge fund manager presentations.

Larry Robbins' Glenview Capital Adds to Lincare Holdings (LNCR) Stake

Larry Robbins' hedge fund Glenview Capital filed a 13G with the SEC regarding its position in Lincare Holdings (LNCR). As of October 11th, Glenview owns 6.14% of LNCR with 5,731,403 shares.

This marks an increase of 85% in their position size since the close of the second quarter. Glenview crossed the 5% regulatory threshold in Lincare shares on September 29th and continued buying up to a 6.14% stake.

Glenview was already one of the largest owners of LNCR shares and now they move into the top-5 stakeholders. For other portfolio activity from Robbins' fund, we also detailed Glenview's thesis on Clearwire (CLWR).

Taken from Google Finance, Lincare Holdings is "a provider of oxygen and other respiratory therapy services to patients in the home. Its customers suffer from chronic obstructive pulmonary disease (COPD), such as emphysema, chronic bronchitis or asthma, and require supplemental oxygen or other respiratory therapy services. Lincare also provides a variety of durable medical equipment (DME) and home infusion therapies in certain geographic markets."

Berkowitz's Fairholme Cuts Regions Financial Position in Half

Bruce Berkowitz's Fairholme Capital filed an amended 13G with the SEC regarding shares of Regions Financial (RF) and disclosed they now have a 4.8% ownership stake in RF with 60,568,917 shares.

The SEC filing was made due to activity on September 30th and marks a 51% reduction in Berkowitz's position. The last time we covered Berkowitz was at the Harbor Investment Conference where he said there was black box risk to owning banks but that after three years you can get an idea of who's going to do well.

Fairholme also owns stakes in other financials like AIG (AIG), Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), and CIT Group (CIT). In our Hedge Fund Wisdom premium newsletter, we outlined the investment thesis on AIG as Berkowitz has pressed his bet there and it is by far his largest position at over 20% of his portfolio.

Per Google Finance, Regions Financial is "a financial holding company. The Company operates throughout the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of investment banking, asset management, trust, mutual funds, securities brokerage, insurance and other specialty financing."

Steve Mandel's Lone Pine Buys More Esprit Holdings

Steve Mandel's hedge fund Lone Pine Capital recently raised its stake in Esprit Holdings (HK:0330) listed in Hong Kong. The hedge fund is now the second largest shareholder at 6.23% of Esprit Holdings. This is up from a 3.22% stake previously.

Lone Pine Capital purchased almost 39 million shares at around HK $9.50 on October 4th according to Hong Kong regulatory disclosures. Over the past month, shares of Esprit are down 45% as the company saw revenue from Europe decline again due to the debt crisis there.

In other activity from this hedge fund, last week we covered how Lone Pine added to its Oceaneering position as well as their new position in Williams Sonoma.

Per Google Finance, Esprit is "principally engaged in wholesale and retail distribution, and licensing of fashion and life-style products designed under its own Esprit brand name. The Company operates with 12 established product lines offering women’s wear, men’s wear, kid’s wear, edc youth, as well as shoes and accessories in over 800 directly managed retail stores and over 14,000 controlled-space wholesale point-of-sales internationally."

Steve Cohen's SAC Capital Buys More Forest Oil (FST) on Dividend Play

Steven Cohen's hedge fund firm SAC Capital just now filed a 13G with the SEC regarding shares of Forest Oil (FST).

As of October 10th, SAC owns 4.8% of Forest Oil with 5,457,851 shares. This marks an increase of 50% in their common stock position size since the end of the second quarter (though it should be pointed out that SAC also owned FST call options at the end of Q2).

Since then, SAC Capital has bought 1,829,850 additional shares of FST. However, in the footnotes of the SEC filing, it notes that SAC owned more than 5% of FST on September 30th. Yet over the past 10 days, their ownership stake has decreased down to 4.8%.

Forest Oil Special Dividend

The September 30th date is important here because Forest Oil executed a special dividend of 70 million shares of Lone Pine Resources (LPR) that are owned by Forest. That distribution was made to FST investors on September 30th and shareholders on record as of September 16th received 0.612 of a share of Lone Pine common stock for every share of FST owned.

In early September we covered how Jeffrey Altman's hedge fund Owl Creek started a Forest Oil stake, presumably playing this dividend catalyst just like SAC. So while these major hedge funds held a sizable position before the special dividend, it will be interesting to see if they will still hold a position going forward.

Per Google Finance, Forest Oil is "an independent oil and gas company engaged in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in North America."

Hedge Fund Manager Jonathan Ruffer Concerned About Inflation

UK hedge fund manager Jonathan Ruffer's third quarter letter highlights the UK economic and investment environment and outlines his concern regarding the potential for high inflation.

Ruffer LLP manages £12 billion and has seen annual returns of around 11.5%. Ruffer's well known for warning investors of the credit crisis as early as 2006. When markets tanked in 2008, Ruffer returned positive double digits. His next concern is inflation.

Ruffer writes, "Interest rates are welded to a near-zero rate. The central banks simply cannot put interest rates up, almost whatever happens to inflation. It is a gaping hole above the waterline, which could sink the ship if rates are raised to combat inflation. It leaves us all defenceless."

While the manager says inflation isn't violent yet, there are many catalysts that could make it so. He cautions that high inflation, low interest rate environments are horrible for savers. So how do you combat it?

Ruffer writes, "Inflation-linked government bonds (of surviving nations) are designed for exactly this economic climate. It is not a high inflation rate which makes them thrive – it is the differential between inflation and interest rates. They have the capacity to become enormously valuable – like Titanic lifeboats – in a world where the ordinary saver despairs of keeping his nest egg safe. We have a great deal of your assets in them because we are approaching what I’ve described before as an airless valley which we have to pass through."

It seems the hedge fund manager is advocating indexed linked Gilts in the UK - the equivalent of TIPS in the US. This is one of the recommendations for the best investments during inflation.

Embedded below is Ruffer's letter (email readers click the link to come read it):




We've also highlighted how hedge fund Kleinheinz Capital says inflation is the biggest threat to emerging markets.

Hedge Fund Lansdowne Partners Increase Prudential Plc Short

Paul Ruddock and Steven Heinz's UK-based equity long/short hedge fund Lansdowne Partners has increased its short position in London listed financial services group Prudential plc (LON: PRU).

According to a filing made on October 6th, Lansdowne now hold a short position equivalent to -1.6% of Prudential's outstanding shares. The hedge fund has actually held a short in this company since 2009. In February 2009, their short represented -0.45% of outstanding shares and that position was gradually increased throughout 2010 and 2011 (now at its highest point).

Prudential Plc is Lansdowne Partners only disclosed short position in a UK listed financial company at the moment. As we have reported previously, during 2010 and 2011 Lansdowne reduced their shorts in Old Mutual (LON: OML), Legal and General (LON: LGEN) and Aviva (LON: AV.) to below the regulatory threshold of -0.25%.

In our September hedge fund performance numbers post, we highlighted that Lansdowne's $8 billion UK equity fund was -1.59% in September and -15.16% for the year at the end of September.

In other UK hedge fund activity, we also just detailed how hedge fund manager Odey added to their RSM Tenon Group Position. You can also read Odey's market outlook as well.

Per Goodle Finance - "Prudential plc (Prudential) is an international financial services group, with operations in Asia, the United States and the United Kingdom. Prudential is structured around four business units: Prudential Corporation Asia, Jackson National Life Insurance Company (Jackson), Prudential UK insurance operations and M&G. Prudential Corporation Asia's core business is life insurance, health and protection, either attached to a life policy or on a standalone basis, and mutual funds. It also provides selected personal lines property and casualty insurance, group insurance, institutional fund management and consumer finance (Vietnam only). In the fund management business Prudential holds a 49% stake in a joint venture with ICICI, in the People’s Republic of China, it had a 49 % stake in a joint venture with CITIC and in Hong Kong it has a 36% equity stake in a joint venture with Bank of China International."

Corsair Capital: Is Negativity "Priced In" the Market? (Q3 Letter)

Jay Petschek and Steve Major's hedge fund Corsair Capital outline how their portfolio has performed in their third quarter letter. They pinpoint the notion that fear has been driving markets for the past few months. Instead of focusing on hindsight, they look to what investors should be doing today.

Simply put, Corsair does not believe this is a repeat of 2008. They point to better liquidity, solid corporate balance sheets, and insider buying. While they acknowledge that things are not "rosy," they wonder if all the negativity is now priced in the market.

Their letter goes on to talk about their positions in Globe Specialty Metals (GSM), Lyondell Basell (LYB), Neo-Material Technologies (TSE:NEM), Reader's Digest (RDA), and TNS (TNS). They also mention they sold their position in Keystone Industries (KYCN) in a negotiated transaction.

For some of the hedge fund's latest investments, we posted Corsair's investment thesis on Shaw Group (SHAW).

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




As noted in our September hedge fund performance numbers update, Corsair was -9.5% for the year at the end of September but has seen 14.2% annualized returns since inception in 1991.

Corsair Capital's Investment Thesis on Shaw Group (SHAW)

Jay Petschek and Steven Major's $749 million hedge fund Corsair Capital recently sent their third quarter letter to investors and attached a write-up of their new position in Shaw Group (SHAW). Below you'll find their investment thesis.

The hedge fund bought SHAW as shares have tumbled due to the nuclear disaster in Japan. SHAW currently trades just under $22 per share and Corsair writes,

"We believe SHAW is worth $37-$43 per share and will trade near that level over the next year. Several catalysts will drive the stock higher including reporting a simplified and cash-rich balance sheet, executing a buyback worth 30% of the current market cap (the 2nd such program in calendar year 2011), and earnings growth in FY 2012."

They also believe that if those various catalysts do not result in the stock trading higher, Shaw Group could potentially be a compelling takeover target for competitors who could use stock to finance the acquisition.

Embedded below is the letter. Email readers please click to come read Corsair's thesis on Shaw Group:



For more on Corsair, we covered their past letter where they anticipated increased market volatility as well as their investment thesis on Innophos.

Odey Add to RSM Tenon Group Position

Crispin Odey's UK based hedge fund Odey Asset Management have been adding to their position in London listed RSM Tenon Group (LON: TNO). Back in June we reported that Odey had purchased 5% of RSM Tenon's outstanding shares.

Fast forward to the recent disclosures on September 26th and October 3rd and you see that Odey have increased their position to 6.92% of RSM Tenon Group's shares initially, and then even higher to 8.19% of the company. It's clear they fancy TNO shares at recent levels.

For more from this hedge fund, you can read Crispin Odey's latest market outlook that we posted yesterday as well.

Per Google Finance, RSM Tenon Group PLC "provides a range of professional and business services. The Company has five segments: audit, taxation and advisory; turnaround and corporate recovery; risk management; financial management, and specialist tax. It provides solutions to clients that range from individuals and entrepreneurially-led owner-managed businesses to corporations and public sector organizations. In December 30, 2009, the Company completed the acquisition of RSM Bentley Jennison. Its subsidiaries include RSM Tenon Limited, RSM Tenon Corporate Finance Limited, RSM Tenon Financial Services Limited and Premier Strategies Limited."

What We're Reading ~ 10/7/11

Brand new biography on Apple's Steve Jobs [Walter Isaacson]

The future of hedge fund capital raising [FINalternatives]

Bear markets in DowJones Industrial Average 1899 - present [World Beta]

Value investing checklist [Old School Value]

Checking in on technology/media/telecom [Research Puzzle]

On hunting for value now [Distressed Debt Investing]

Is Eddie Lampert changing strategy with Sears? [Peridot Capitalist]

Clearwater (CLW): The little spin-off that could [Value Investing Letter]

Salida Capital feels pain from commodity bets [Globe & Mail]

Hedge fund mixes Ayn Rand & behavioral psych [Marketwatch]

Profile on financial author Michael Lewis [NY Magazine]

Why you shouldn't be disappointed in iPhone 4S [SplatF]

Why you *should* be disappointed in Apple's new phone [Slate]

Amazon: the company that ate the world [BusinessWeek]

The future of venture capital [Fortune]

Hedge Fund Performance Numbers: September 2011 (Updated)

During the month of September, the S&P 500 was -7.0% and it is now -8.7% for 2011. Hedge funds didn't necessarily fare too much better as a whole. The Hennessee Hedge Fund Index declined -3.7% in September as hedge funds suffered their worst quarter since the fourth quarter of 2008. However, a few funds outperformed.

The following comes from individual hedge fund investor correspondence and HSBC's Private Bank data. ***Update 10/7/11: tons of hedge fund performance numbers added below:


Lee Ainslie's Maverick Capital: Maverick Fund $1 billion
-7.91% in Sept, -16.92% ytd

Andreas Halvorsen's Viking Global: Equities III Fund $1.6 billion
-2.19% in Sept, +0.70% ytd

Paul Ruddock & Steven Heinz's Lansdowne Partners: (UK Equity Fund: $8 billion)
-1.59% in September, -15.16% year-to-date

Crispin Odey: Odey European: $2.3 billion
-3.43% in September, -17.8% ytd

Mark Kingdon's Kingdon Capital: $2 billion
-7.99% in September, -18.73% ytd

Ricky Sandler's Eminence Capital: $2.5 billion
-2.7% in Sept, -8.77% ytd

Curtis Macnguyen's Ivory Capital: $2.3 billion
-3.24% in Sept, -6.57% ytd

Leon Cooperman's Omega Advisors: $1 billion Overseas Partners
-7.58% in Sept, -12.36% ytd

Jim Simons' Renaissance Technologies: Institutional Equities $240 million
+0.76% in Sept, +24.37% ytd

Ron Gutfleish's Elm Ridge Partners: $2.4 billion
+1.5% in Sept, -2.84% ytd

David Einhorn's Greenlight Capital: $7.2 billion
-0.76% in Sept, -6.16% ytd

Jeffrey Altman's Owl Creek: $4.8 billion
-7.6% in Sept, -15.62% ytd

Richard Perry's Perry Partners International: $4.9 billion
-2.43% in Sept, -7.18% ytd

Jamie Dinan's York Capital: $2 billion
-4.74% in Sept, -9.06% ytd

Barton Biggs' Traxis Partners: $547 million
-3.8% in Sept, -2.11% ytd

Clint Carlson's Carlson Capital: $2.8 billion Double Black Diamond Fund
-1.09% in Sept, -2.23% ytd

Alexander Roepers Atlantic Investment Management: $445 million
-9.36% in Sept, -14.16% ytd

Wayne Cooperman's Cobalt Capital: $1.3 billion
-3.82% in Sept, -3.72% ytd

John Thaler's JAT Capital: $1.4 billion
-3.2% in September, +30.68% ytd

Dan Loeb's Third Point (Offshore Fund): $4.27 billion fund AUM
-3.5% in September, +0.2% year-to-date

Bill Ackman's Pershing Square Capital Management: $5.1 billion fund AUM, $8.8 billion firm AUM
-5.7% net in September, -15.8% year-to-date

John Paulson's Paulson & Co
Advantage Fund -6% in September, -28% ytd

Paul Tudor Jones' Tudor Investment Corp: $8.3 billion fund AUM
+4.9% in Sept, +5.45% ytd (BVI Global Fund)

Bruce Kovner's Caxton Associates: $6.8 billion fund AUM
+0.28% ytd through September 30th (Limited Fund ran by Andrew Law)

Louis Bacon's Moore Capital Management: $7.6 billion fund AUM
-1.64% ytd through September 29th

Moore Capital Management (Greg Coffey's Emerging Fund): $1.5 billion fund AUM
-1.32% in September, -7% ytd

Chris Pia's Pia Capital: $215 million
-7.16% in Sept, -14.84% ytd

Brevan Howard (Flagship Fund): $24.3 billion fund AUM
+12.98% ytd as of September 23rd (run by Alan Howard)

Jay Petschek & Steve Major's Corsair Capital ~ $749 million AUM
-8.1% in September, -9.5% year-to-date

Whitney Tilson's T2 Partners
-9.5% in September, -29.6% year-to-date


*** This post will be continually updated as new numbers come in

Hedge Fund Manager Crispin Odey's Market Outlook

Odey Asset Management's founder Crispin Odey has released his most recent market outlook. Odey is a prominent UK fund manager and he believes that equities are attractive (yielding 5-6%) with earnings yields of 20-33%.

In particular, he singles out one stock he likes: BP (BP). We've highlighted in the past how David Einhorn's Greenlight Capital likes BP as well.

While Odey is constructive on equities, it should be noted that he has maintained this stance since before the most recent market turmoil. His previous commentary from back in May said that stockpicking is still working. So with the latest downturn, it seems he's gained even more conviction that equities are the right place to be but he's surely felt some pain along the way.

Below is Odey's latest commentary:

"Equities continue to trade badly, but this is no surprise. They have disappointed for 11 years; indeed most indices are where they were 15 years ago. However in a world where the geopolitical outlook is unresolvably bad, shareholders are not only being paid to be patient by high dividend yields but also pricing in a very high margin of safety.

The example I like is BP. When BP suffered from the Macondo rig disaster, the company's market capitalisation fell by $120 billion, the company set aside $30 billion in provisions and recently announced actual claims of about $5.5 billion. Has the share price recovered the missing $114.5 billion? Of course not. Presumably investors are pricing in more Macondos and, given that they actually cost just over $5billion each, they are expecting 20 such explosions. As an investor in the shares today this gives me a great deal of protection - a margin of error. It also convinces me that the stockmarket is a better historian than it is a forecaster or a mathematician.

So why are markets so depressed? Some European markets are down c. 27% this year. Firstly this is structural. Zero interest rates have an unusual effect in Europe. Compared to the Anglo-Saxon world, Continental European banks are funded through bonds and interbank lending, not deposits. Since interbank and bond borrowing rates have not fallen below 2%, corporate loans in Europe should be at 4.5% not at 2.5%. In fact corporate loan rates have failed to rise in Europe. Lending is therefore unprofitable. Banks are shrinking their loan books. The easiest loan books to shrink are the corporate loan books and that means rights issues for indebted companies as equity replaces debt. All this depresses equities, especially those with borrowings to roll.

The equity markets now act and behave like corporate bond markets. Equities yield 5-6% and many are on earnings yields of 20-33%. They are mouth-wateringly attractive because unlike debt they do not mature.

But the worries that look down on them from on high reflect the fact that whereas Continental European banks were not exposed to the excesses of America and the UK, they are over-exposed to the excesses of Southern Europe. At some point they will need recapitalising. Rather than dreading this, the default should lead to lending rates rising in Europe, even as banks are recapitalised.

Meanwhile this crisis has brought all shares down. It has brought down UK and US bank shares, despite the fact that since 2008, they have done much to improve their balance sheets. Loan to deposit ratios have fallen by 30% to around 120%, loan margins are up fivefold, provisions have risen sharply and, thanks to retained profits and rights issues, cash equity is up fourfold. They are all strong buys for me.

It may be confusing to find someone who believes that a crisis is on its way but is also happy to buy equities ahead of the crisis. My reason is that the worries have been there for so long, the causes are so obvious and the valuations are so cheap that this is a case of buying early. For me the crisis will bring resolution and with it higher prices.

Little wonder that volumes have been exceptionally light. Despite all of this volatility the only question that clients have been asking us is 'When should we buy the market?'

In the short term everything points to the fourth quarter of this year being strong in the USA. There is a restocking cycle taking place as the effects of the tsunami recede. Quantitative 'oil' easing and commodity price falls are helping consumption growth. The fall in bond yields is feeding through to refinancing of existing mortgages that could add 1.3% to GNP.

So yet again we may be entering a period when markets do not get a Greek default and the US economy strengthens. Cyclicals which have all been sold off will rally and banks, which have led the market down, will catch a bid.

I feel a bit like Sarah Bernhardt who said 'I eat myself to feed my work.' 31st August 2011"


And for more euro-centric commentary, head to the biggest fears of 15 European portfolio managers.

Craig Perry & Erez Kalir's Sabretooth Capital Trim Pain Therapeutics (PTIE) Stake

Craig Perry and Erez Kalir's hedge fund Sabretooth Capital just filed a Form 4 with the SEC regarding shares of Pain Therapeutics (PTIE). Per the filing, they disclose that they sold 382,000 shares of PTIE on October 3rd & 4th, with the bulk of the sale coming at a price of $4.5025.

After their sales, Sabretooth still owns 4,263,076 shares of Pain Therapeutics. As such, they've only reduced their position by around 8%. Shares of PTIE currently trade around $4.40.

Sabretooth Capital Background

Perry and Kalir co-founded Sabretooth Capital in March 2009 with $65 million in seed money from Tiger Management's Julian Robertson. As of mid-2011, they had raised around $700 million. Sabretooth returned 26.5% in 2009 and just over 14% for 2010.

In the past we've covered Erez Kalir's presentation on MBIA (MBI) from the Ira Sohn Conference. Sabretooth is a multi-strategy firm and starts by analyzing top down macro trends and then selects individual securities from bottom-up fundamental analysis.

Prior to founding their firm, Perry was a distressed debt analyst for King Street Capital and earned his economics degree from Princeton. Kalir previously worked at Eton Park Capital and earned an MSc in biology from the University of Oxford and a degree in literature from Stanford University.

Both Perry and Kalir were featured in Institutional Investor's "2011 hedge fund rising stars." And according to II, they named their fund Sabretooth after an extinct animal because they wanted to imitate the 'dinosaurs' of the hedge fund industry (like Robertson) who returned greater than 20% annualized.

Pain Therapeutics Company Background

Per Google Finance, Pain Therapeutics is "a biopharmaceutical company that develops drugs. The Company has four drug candidates in clinical programs, including REMOXY, abuse-resistant hydromorphone, abuse-resistant hydrocodone and a radio-labeled monoclonal antibody to treat metastatic melanoma. It is also working on a new treatment for patients with hemophilia. It has collaboration agreement with King Pharmaceuticals, Inc. (King) develops and commercializes REMOXY and other opioid painkillers."

John Paulson Sells Some American Capital (ACAS)

John Paulson's hedge fund Paulson & Co just filed a Form 4 with the SEC regarding transactions in American Capital (ACAS). Per the filing, Paulson's various hedge funds sold a cumulative 4,350,342 shares of American Capital.

The majority of the sales came at prices of $7.74, $7.27, $7.09, and $6.11. Paulson's various hedge funds were selling as early as September 27th and as recently as October 4th. Shares currently trade around $6.51. While this seems like a lot, keep in mind that at the end of the second quarter, Paulson owned over 43 million shares of ACAS.

Paulson has had a rough year his Advantage Fund is -28% for the year as noted in our hedge fund performance numbers update.

Per Google Finance, American Capital is "an equity firm and global asset manager. It invests in private equity, private debt, private real estate securities and other investments, technology investments, special situation investments, alternative asset funds managed by it and structured finance investments. It invests in senior and mezzanine debt and equity in buyouts of private companies sponsored by it (American Capital One-Stop Buyouts) or sponsored by other private equity funds (Private Equity Buyouts) and provide capital directly to early-stage and mature private and small public companies."

For some of our past coverage on this manager, head to Paulson on risk arbitrage.

Steve Mandel's Lone Pine Capital Adds to Oceaneering (OII) Position

Steve Mandel's hedge fund Lone Pine Capital recently filed a 13G with the SEC regarding shares of Oceaneering (OII).

Lone Pine disclosed a 5.6% ownership stake in Oceaneering with 6,043,228 shares. They passed the 5% ownership threshold level required for disclosure on September 22nd.

This means they've increased their position size by a massive 1,149%. At the end of the second quarter, Mandel's firm only owned 483,693 shares.

Lone Pine Capital has done some buying during the recent sell-off. Last week we also revealed Lone Pine's new stake in Williams Sonoma (WSM). In other recent hedge fund positioning, John Thaler's firm has also been active in the markets recently. See what his JAT Capital has been buying.

Per Google Finance, Oceaneering is "an oilfield provider of engineered services and products to the offshore oil and gas industry, with a focus on deepwater applications. Through the use of its applied technology, the Company also serves the defense and aerospace industries. It is an underwater services contractor. The services and products the Company provides to the oil and gas industry include remotely operated vehicles (ROVs), built-to-order specialty subsea hardware, engineering and project management, subsea intervention services, including manned diving, nondestructive testing and inspection, and mobile offshore production systems."

John Thaler's JAT Capital Buys More Molycorp (MCP)

John Thaler's hedge fund JAT Capital has been busy buying during the recent market turmoil. In a 13G filed with the SEC, JAT disclosed a 6.0% ownership stake in Molycorp (MCP) with 5,067,129 shares as of September 30th.

This marks a 226% increase in their position size as they only owned 1.5 million shares at the end of the second quarter. Last week we detailed how JAT Capital bought Netflix in size as well. It will be interesting to see if anymore filings from Thaler's fund come through. As of September 16th, JAT's Offshore Fund was up 37.29% for the year.

Per Google Finance, Molycorp is "a rare earth oxide (REO) producer in the Western hemisphere and owns a rare earth project outside of China. The Company is in development stage. The Company focuses to be an integrated producer of rare earth products, including oxides, metals, alloys and magnets. The Company’s rare earth products are used in a range of applications, including clean energy technologies, such as hybrid and electric vehicles and wind power turbines; multiple high-tech uses, including fiber optics, lasers and hard disk drives; numerous defense applications, such as guidance and control systems and global positioning systems, and advanced water treatment technology for use in industrial, military and outdoor recreation applications."

Dan Loeb's Third Point Reduces Equity Exposure For Fifth Straight Month

Dan Loeb's Third Point Offshore Fund finished -3.5% for September compared to -7% for the S&P 500. Third Point sits at 0.2% year-to-date. The Offshore Fund manages just over $4 billion and has seen annualized returns of 17.6% since 1996.


Third Point Reduces Equity Exposure For Fifth Straight Month

In what has been an ongoing theme, Third Point reduced equity exposure yet again in September. Earlier in the year, we highlighted Loeb's cautious stance as he began to reduce exposure. At the end of September, Third Point was only 15.6% net long equities, compared to 17.7% net long a month prior.

Obviously such positioning has led to Third Point's outperformance. Geographically, Third Point has been net long the Americas and net short the EMEA and Asia regions. Risk management has been the name of the game for the fund this year.

In September, Loeb's largest net long exposure came in the technology sector at 8.9% and energy at 3.4%. Third Point is net short industrials at -1.3% and utilities at -0.5%.

In credit, Third Point is 15.6% net long, down from 18.5% net long in August. They continue to have the largest exposure to asset backed securities and remain short government issues.


Third Point's Top Positions

1. Yahoo! (YHOO)
2. Gold
3. Delphi
4. El Paso (EP)
5. Technicolor (multiple securities owned)

We detailed Loeb's activist investment in Yahoo when he first took the position. He also presented his bull case for YHOO at the Delivering Alpha conference.

Third Point's biggest winners last month were commodity short A, energy short basket, SanDisk (SNDK), auto suppliers short basket, and short B. Obviously they don't name their short positions but it's no surprise that many shorts were their top percentage gainers. The hedge fund's biggest losing positions last month were gold, Mosaic (MOS), Delphi, CVR Energy (CVI), and Yahoo! (YHOO).

Assuming Third Point still owns Mosaic, you have an opportunity to purchase shares at prices lower than the hedge fund. They originally bought MOS at $65 on the Cargill family secondary and then subsequently bought the dip in June (presumably around $60). MOS shares now trade around $49.

Mandel's Lone Pine Capital Starts Williams Sonoma (WSM) Position

Steve Mandel's hedge fund Lone Pine Capital just filed a 13G with the SEC regarding shares of Williams Sonoma (WSM). They crossed the 5% ownership threshold on September 20th according to the filing and now 5.6% of the company with 5,824,323 shares.

This is a brand new position for the hedge fund as they did not report owning any shares at the end of the second quarter. In other activity from this manager, we detailed how Lone Pine doubled its SolarWinds position as well.

Per Google Finance, Williams Sonoma is "a specialty retailer of products for the home. The Company has two segments: direct-to-customer and retail. The direct-to-customer segment has six merchandising concepts Williams-Sonoma, Pottery Barn, Pottery Barn Kids, PBteen, West Elm and Williams-Sonoma Home. The retail segment has four merchandising concepts, Williams-Sonoma, Pottery Barn, Pottery Barn Kids, and West Elm, operating 592 retail stores located in 44 states."

John Thaler's JAT Capital Loads Up on Netflix (NFLX)

John Thaler's hedge fund firm JAT Capital just now filed a 13G with the SEC regarding shares of Netflix (NFLX). The hedge fund now has a 7.6% ownership stake in Netflix with 4,017,691 shares as of September 29th.

This means they've ramped up their position size by a massive 768% since the end of the second quarter. The fine print of the filing also shows that of the 4 million shares they now own, 2,617,691 are common stock and 1,400,000 are represented by options. The options portion of their position is new because they only owned 467,812 shares of common stock at the end of Q2.

This position increase is interesting for a number of reasons:

1. NFLX shares have largely sold off because of CEO Reed Hastings' recent announcement that the company will be separating its streaming business (Netflix) and its DVD business (with the newly named Qwikster). Also, NFLX shares have been under pressure due to a subscriber exodus over a recently announced price increase.

It's clear that Hastings feels that the streaming business is the future (and he's right). By separating the businesses, he's allowed the company to focus on its long-term future. However, critics question whether or not the split has come too soon and they've lambasted Hastings for a public relations nightmare in the way he's handled everything.

Thaler's hedge fund has clearly identified the NFLX sell-off as an opportunity to increase their wager on the company's long-term positioning and future. Thaler himself has 10+ years of experience in the technology-media-telecom space. Before founding JAT, he managed the Omni Fund at Shumway Capital Partners.


2. Hedge funds only have to file a 13G with the SEC when they cross the 5% ownership threshold of a given company's shares. JAT's filing indicates they crossed that level on September 20th. The only problem here is you don't know exactly when they were doing the bulk of their buying. As of September 29th, they own 7.6% of the company. On the 20th, NFLX was trading around $130 and shares currently trade around $113.


3. On Thursday, the internet was flooded with rumors of a hedge fund liquidating, mainly due to large price declines in "momentum stocks" such as NFLX. Some rumors even recklessly tossed out JAT's name as a fund that could potentially be "blowing up" since some of their other large positions were trading down sharply like Baidu (BIDU) and Sina (SINA).

However, those rumors were quickly quashed once people actually looked at JAT's numbers. As of September 16th, JAT Capital's Offshore fund was up 37.29% for the year. These performance figures of course don't include the week's most recent volatility, but we've been hearing they're still up big.


In the end, just focus on the facts. The SEC filing shows JAT was buying Netflix and they crossed the 5% ownership threshold on September 20th. And as of September 29th, they own 4 million shares via common stock and options.

For the time being, it appears as though Thaler's fund is betting on NFLX still having a bright future. In other coverage of this hedge fund, we detailed JAT's buy of IMAX in early August.