Here are the 2009 results from our Market Folly custom portfolio created with Alphaclone. The portfolio invests in equities held by specific hedge funds as we seek to replicate their portfolios. The overall goal is to generate alpha and outperformance over the long-term by utilizing their stockpicking skills.
December 2009
MF: +4.0%
S&P 500: +1.9%
Full Year 2009
MF: +13.8%
S&P 500: +26.5%
Total Return (Since 2000)
MF: +885.5%
S&P 500: -8.2%
Annualized Return (Since 2000)
MF: +25.7%
S&P 500: -0.9%
Over the life of the portfolio, we've seen Alpha of 22.7, Beta of 0.2, and a 0.2 correlation to the Index. The 2009 performance was disappointing and as we've pointed out before, a 50% portfolio hedge severely drags on performance when the market rallies 60+% from the lows in one year. To demonstrate just how much the hedge hurt the portfolio, we'll pull up the long-only version of the portfolio: It returned 28.6% for 2009, outperforming the S&P by 2%. We created the portfolio with Alphaclone and highly recommend checking it out as you can replicate tons of hedge fund portfolios.
While the hedge put a damper on performance this year, it has also shielded from massive drawdowns in previous bear markets and has helped generate long-term outperformance. Keep in mind that you can run long-only versions or hedged versions, it's completely up to you. We just prefer to run a hedged book in order to protect from drawdowns.
Take advantage of the free 14-day trial to Alphaclone to see what stocks our original MF portfolio is currently invested in.
Saturday, January 2, 2010
Market Folly Portfolio: December & 2009 Full Year Performance
Friday, January 1, 2010
Happy New Year From Market Folly!
Just wanted to wish everyone a Happy New Year and a warm welcome to 2010. Hopefully this year will be just as exciting as 2009 and then some. To prepare for this time around in the markets, check out the top ten investment themes for 2010, hedge fund manager Doug Kass' predictions for 2010, as well as market strategist Jeff Saut's 2010 outlook.
Happy New Year and here's to a prosperous 2010!
What We're Reading ~ 01/01/10
Hedge fund clones draw investors [Wall Street Journal] ~ subscription required to view (get an 80% discount here)
Why Buffett is betting on the railroads [Railway Age]
A great collection of thoughts from financial bloggers: "In 2009 I learned that..." [The Reformed Broker]
Interview with Charles Kirk from The Kirk Report [Wall St. Cheat Sheet]
A further look at the General Growth Properties situation [Distressed Debt Investing]
The worst SEC filing footnote of 2009 [footnoted]
An interesting banking idea, a call to arms [MoveYourMoney]
Hedge fund legend Julian Robertson knighted in New Zealand [Marlborough Express]
Thursday, December 31, 2009
Eric Mindich's Eton Park Capital Adds To A Position
As per a 13G just filed with the SEC, Eric Mindich's hedge fund firm Eton Park Capital has disclosed a 6.24% stake in Terex (TEX). The filing was made due to activity on December 21st and they now own 6,750,000 shares. This is a 25.5% increase in their position as they previously owned 5,375,000 shares back on September 30th. Over the course of the past three months, they've added 1,375,000 more shares. In terms of other recent portfolio moves, we saw in October that Eton Park had filed a 13G on Verisk Analytics (VRSK). Also, we recently saw they were expanding their UK positions as well.
Mindich started the fund back in 2004 with $3 billion under management (and a $5 million minimum investment). Nowadays, Eton Park manages over $6 billion. Their investment strategy draws upon Mindich's time at Goldman Sachs where he focused on merger arbitrage. Previously, Mindich was the youngest partner in Goldman Sachs' history at the age of 27. In addition to merger arbitrage, Eton Park focuses on long/short equity strategies and even invests up to 30% of their portfolio into private investments. Eton Park's solid track record has landed them in our Market Folly portfolio which is seeing over 26% annualized returns by replicating hedge fund holdings through Alphaclone.
Taken from Google Finance, Terex is "a diversified global manufacturer of capital equipment focused on delivering reliable, customer relevant solutions for the construction, infrastructure, quarrying, surface mining, shipping, transportation, refining and utility industries. The Company operates in five segments: Terex Aerial Work Platforms, Terex Construction, Terex Cranes, Terex Materials Processing & Mining and Terex Roadbuilding, Utility Products and Other."
Hedge Fund Farallon Capital: Portfolio Update (13F Filing)
This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.
Next up in our series is Thomas Steyer's hedge fund firm Farallon Capital. Thomas Steyer founded Farallon in 1986 and today it is a multi-billion dollar hedge fund that typically uses risk arbitrage strategies and invests in equities, private investments, debt, and real estate. Previously, he was an analyst for Morgan Stanley in their Mergers & Acquisitions department and also an associate on Goldman Sachs' risk arbitrage desk. Steyer graduated Summa Cum Laude from Yale University and also received his MBA from Stanford's Graduate School of Business. In the past, Farallon was ranked third in Alpha's 2008 hedge fund rankings. In terms of recent portfolio adjustments from Farallon, we saw they were just adding to their Beacon Roofing (BECN) stake. For more recent activity out of Farallon head to our post on their portfolio and internal firm adjustments.
Keep in mind that the positions listed below were Farallon's long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.
Some New Positions
Brand new positions that they initiated last quarter:
Aetna (AET) Calls
Yingli Energy Bond
Focus Media (FMCN)
Jones Lang Lasalle (JLL)
Capitalsource Bonds
Express Scripts (ESRX)
Monsanto (MON)
Crown Castle (CCI)
BMC Software (BMC)
Rockwell Collins (COL)
JB Hunt Transport (JBHT)
Eastman Kodak Bond
SBA Communications (SBAC)
Marvel Entertainment (MVL)
Beacon Roofing (BECN) ~ They've since updated their stake
Charles Schwab (SCHW)
Google (GOOG)
Old Dominion Freight (ODFL)
Linktone (LTON)
Hurray Holding (HRAY)
China Housing & Land Development (CHLN)
Some Increased Positions
Positions they already owned but added shares to:
Visa (V): Increased position by 144.4%
Sirius Satellite Note: Increased by 85.4%
Carrizo Oil & Gas Bond: Increased by 63%
Mastercard (MA): Increased by 42%
Apollo Group (APOL): Increased by 38.1%
MSCI (MXB): Increased by 22.3%
Some Reduced Positions
Stakes they sold shares in but still own:
AmericaMovil (AMX): Reduced position by 54.2%
Priceline (PCLN): Reduced by 52%
Capitalsource (CSE): Reduced by 37.8% ~ we covered these sales as they happened
Kendle International Bond: Reduced by 19.6%
Removed Positions
Positions they sold out of completely:
Lucent Technologies (convertibles)
Financial Select Sector ETF (XLF) Puts
Qualcomm (QCOM)
Moody's (MCO)
Fidelity National Information (FIS)
Metavante Tech (MV)
Arch Capital Group (ACGL)
Amdocs (DOX)
Conway (CNW)
Solutia (SOA)
Sherwin Williams (SHW)
CTC Media (CTCM)
Pinnacle Entertainment (PNK)
Top 15 Holdings by percentage of assets reported on 13F filing
- Aetna (AET) Calls: 9.38%
- Visa (V): 9.24%
- Capitalsource (CSE): 5.41%
- MSCI (MXB): 4.37%
- Apollo Group (APOL): 3.78%
- Burlington Northern Santa Fe (BNI): 3.62%
- Discovery Communications (DISCA): 3.49%
- Yingli Energy Bond: 3.36%
- iShares Russell 2000 (IWM) Puts: 3.11%
- Focus Media (FMCN): 3.1%
- Oracle (ORCL): 2.81%
- Knology (KNOL): 2.58%
- Jones Lang Lasalle (JLL): 2.51%
- Sirius Satellite Note: 2.44%
- Transdigm (TDG): 2.43%
The main talking point in Farallon's quarter over quarter changes was their brand new stake in Aetna (AET) calls. They ratcheted this up to over 9% of their reported 13F assets as the position was worth $139 million at the end of the third quarter. Other brand new positions in their top ten holdings include Yingli Green Energy bonds and shares of Focus Media (FMCN).
While their stake in Visa (V) is not a new position, they did double down and then some. This is easily one of the most popular hedge fund holdings we've seen in the select funds we track. Meaningful positions they no longer own include Lucent Technologies convertibles (previously a 4.8% stake), Qualcomm (QCOM - previously a 3.5% holding), and puts on the financial sector (XLF). They also completely sold out of Moody's (MCO) which is interesting seeing how Warren Buffett has been selling as well. Overall, Steyer's hedge fund firm increased their holdings in the services sector and reduced their holdings in financials and technology.
Assets from the collective holdings reported to the SEC via 13F filing were $1.4 billion this quarter compared to $1 billion last quarter. They were mainly out adding to positions across the portfolio. As a multi-billion dollar hedge fund, Farallon obviously has positions in other markets as well since their long US equities book is only comprised of a little over $1 billion. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Also, please again note that these positions were as of September 30th so two months have elapsed and they've undoubtedly shifted around their portfolio since then.
This is just one of the 40+ prominent funds that we'll be covering in our Q3 2009 hedge fund portfolio series. We've already covered Seth Klarman's Baupost Group Bill Ackman's Pershing Square, Stephen Mandel's Lone Pine Capital, Dan Loeb's Third Point LLC, David Einhorn's Greenlight Capital, John Paulson's firm Paulson & Co, Lee Ainslie's Maverick Capital, Andreas Halvorsen's Viking Global, Chase Coleman's Tiger Global, Brett Barakett's Tremblant Capital, John Griffin's Blue Ridge Capital and Shumway Capital Partners (Chris Shumway). Check back daily as we'll be covering new hedge fund portfolios.
Wednesday, December 30, 2009
Whitney Tilson's Response Re: General Growth Properties (GGWPQ)
We can't highlight enough how much we've enjoyed the back and forth between various hedge funds as it pertains to the equity valuation of General Growth Properties (GGWPQ). Yesterday, we posted up hedge fund Hovde Capital's latest presentation on GGP. Today, we present you with follow-up thoughts from T2 Partners hedge fund manager Whitney Tilson. Here are his thoughts:
Hovde Capital yesterday released its response (www.marketfolly.com/2009/12/
Our quick take is that it’s more of the same – like Hovde’s first report, there are a few good points (nothing we hadn’t already considered) mixed in with many arguments that are either factually incorrect or misleading, or with which we simply disagree. In short, there’s nothing new that changes our view regarding the attractiveness of GGP (it remains by far our largest position).
Before proceeding, we want to make clear how much we enjoy the debate and think our markets would be much healthier if there were a similarly detailed exchange of viewpoints for EVERY stock!
To some extent, the debate is now about different views of the future: Hovde believes that consumer spending will be terrible for an extended period and that bankruptcies among mall-based retailers will continue or worsen, which will translate into severely declining NOI for GGP over time. Pershing believes that the worst is behind us: that unemployment has peaked, consumer spending has stabilized and may even be picking up a bit, and that retailers are in remarkably good shape in light of what they’ve been through over the past 18 months, all of which will translate into approximately stable NOI. Whether Hovde or Pershing is right about GGP over time will, to some extent, depend on future macro factors, which are obviously impossible to predict with certainty.
That said, good analysis matters and we think Hovde’s is sorely lacking, primarily in the following areas:
1) Hovde’s most serious mistake is misunderstanding (or misrepresenting) what will likely happen to GGP’s unsecured debt. Hovde assumes that it either remains outstanding (throughout its presentation, Hovde calculates GGP’s leverage and interest payments assuming that the debt remains outstanding, which is the main reason its analysis differs from Pershing’s and ours – see page 63, for example) or that it converts to equity, which will result in “significant dilution” (page 72). Hovde makes explicit this assumption when it claims that Pershing “does not use consistent assumptions” regarding what happens to the unsecured debt on page 35 of its report.
Hovde doesn’t appear to understand bankruptcy law and what will likely happen to the unsecured debt. There is almost no chance that it will remain outstanding: it will either be refinanced or, more likely, be converted into equity (this is what Pershing assumes – there is no inconsistency). But here’s the key: it will NOT BE DILUTIVE because it will convert AT FAIR VALUE, as determined by the bankruptcy judge. Of course, if the judge determines that fair value is $1/share, then it would be massively dilutive, but that’s not going to happen. The judge has a great deal of discretion in determining fair value, but will certainly take into consideration the current stock price, comps and the price of any equity offering(s) GGP might do.
For example, as soon as GGP exits bankruptcy and its stock is relisted (it currently trades on the pink sheets, which means most institutional investors can’t own it), it will be a must-own stock for every REIT fund (a big catalyst Hovde misses). To meet this demand and pay down some debt, GGP might issue equity – and the negotiated price at which this stock is sold would likely weigh heavily on the judge’s determination of fair value (and would not be dilutive). Of course, if someone like Simon were to buy GGP at, say, $20, the debt would convert at this price – and again, it wouldn’t be dilutive.
2) Hovde takes seven pages (6-12) arguing for its definition of NOI, but there’s no right answer here. NOI is like free cash flow: different people calculate it in different ways. But however one calculates it, it’s important to be consistent – which Hovde is not. It uses the most conservative assumptions to minimize GGP’s NOI, but then fails to do so for Simon, making its comp analysis deeply flawed.
3) Speaking of comps, Hovde writes: “to suggest GGP should trade at the LOWER cap rate than SPG is LAUGHABLE in our view” (pages 22-23). Hovde can laugh all it wants, but there are very good arguments for why Simon is, in fact, the best comp for GGP. For starter, both have very similar mall portfolios with a national footprint (unlike Macerich, which Hovde cites as a better comp on page 63; MAC also has debt issues that are more significant than what GGP will likely have post-bankruptcy). In addition, GGP will likely have a BETTER liability profile post-bankruptcy, with no maturities until January 2014. Finally and most importantly, GGP is for sale and Simon isn’t, so there should be a premium for GGP reflecting a possible sale of this strategic asset.
4) Hovde’s analysis treats GGP as a collection of assets, but it’s more than that. The fact that GGP is in bankruptcy has put it into play, so there is a once-in- a-lifetime opportunity for Simon, Brookfield or someone else to acquire a national platform, as highlighted in this quote from the WSJ (http://online.wsj.com/
The opportunity “is a potentially transformational event that doesn’t come along very often,” says Steve Sakwa, an analyst with International Strategy and Investment Group Inc.
5) Hovde dismisses the likelihood that GGP might be acquired (pages 51-55), focusing only on Simon and not even mentioning Brookfield, which may in fact be the more likely acquirer due to fewer anti-trust concerns and the need for a national platform (which Simon already has). As noted above, Hovde misses the value of GGP as a strategic asset – no doubt, there’s lots of distressed inventory out there, but only one national platform for sale like GGP.
Finally, Hovde finds it “telling” that Simon and Brookfield bought GGP’s unsecured debt, but not the equity, even when the equity was at a much lower price. But it’s not as telling as Hovde thinks for a number of reasons. First, it’s possible that Simon and/or Brookfield do in fact own the equity – if either bought less than 5% of GGP, it wouldn’t have to file (in any case, for anti-trust reasons, they couldn’t acquire more than 7.5%). Also, at the time they bought GGP’s debt it was very cheap and they might have reasonably concluded that it represented a better risk-reward than the equity.
6) Hovde argues that GGP’s rental rates and leasing spreads are very poor and will likely get worse (pages 15-18). They have indeed been under pressure, but Hovde is making the classic investing mistake of projecting the immediate past indefinitely into the future. What Hovde is missing is that GGP over the past year, knowing that it was in a poor negotiating position due to the macro environment and its own bankruptcy, has been renewing leases mainly on a short-term basis. These renewals have indeed been done at low rates, but this isn’t likely to be a permanent state of affairs. The macro environment has at least stabilized and may be improving and GGP will soon either be acquired or exit bankruptcy, so its negotiating position will strengthen and therefore rental rates and leasing spreads will likely improve.
7) On pages 28 and 33, Hovde repeats the charts from its first presentation (pages 33-34), showing that “Commercial Real Estate Prices Have Dropped 43% Since the Peak” and that cap rates are moving higher under the heading: “Despite Speculation to the Contrary, Cap Rates for All Property Types Are Moving Higher, Not Lower. Does Pershing Square Believe These Transactions Did Not Happen?” But the CRE chart doesn’t include mall real estate and the cap rate chart, while showing cap rates for virtually every other type of commercial real estate, is MISSING data for malls! (The cap rate for mall REITs has fallen dramatically from earlier this year.)
8) Hovde paints a very bearish picture of retail sales (page 61), but the latest data contradicts this – for example, an article in the NYT earlier this week www.nytimes.com/2009/12/28/
Over all, retail sales from November through Dec. 24 rose 3.6 percent from last year, according to SpendingPulse, an information service of MasterCard Advisors that estimates sales for all forms of payment, including cash, checks and credit cards.
That number — which does not include sales of automobiles and gasoline — was helped this year by an extra shopping day between Thanksgiving and Christmas. Adjusting the results for that extra day cuts the retailing industry’s sales increase to about 1 percent, in line with what many retailing professionals expected.
While the numbers do not suggest a turnaround for the industry, they signal an improvement over last year’s 2.3 percent sales decline…
… “Last year was just a storm and retail was all about dropping prices to get rid of inventory,” said Mr. Katz of AlixPartners. “This year it was much more of a planned strategy: low inventories and tight expenses. And controlled promotions.”
That means most stores did not erode their profit margins the way they did in 2008, though in the days before Christmas, Mr. Katz said, some chains discounted more deeply than they should have.
Perhaps the best news is that the double-digit declines that plagued nearly every retailing category last year are gone.
9) Hovde spends many pages (38-43) questioning whether GGP’s Master Planned Community Segment has any value – but Pershing already assigns no value to it so it’s not clear who Hovde is disagreeing with. Another note: on page 39, Hovde makes this ominous statement: “The heirs of the Hughes estate hold a contingent claim related to the valuation of these assets. If there is significant value in these assets, the resolution of this claim could result in a substantial unfunded liability, which Pershing Square has failed to include in its analysis.” This is a red herring: the only claim by the Hughes estate is for half of any profits. Thus, the only way there could be a claim, leading to a “substantial unfunded liability”, is if there are profits, which would be wonderful for GGP (even if GGP only received half of the profits, this is more than zero, which is what both Hovde and Pershing expect).
This is a great debate and it will be very interesting to see how this plays out.
Housing Inventory Levels Are Still Too High
As we've mentioned numerous times on Market Folly, a large part of America's economic problems are tied to housing. Until the excess inventory is removed, we still have a situation. Below is a chart of housing inventory levels from 1999 to November 2009 as per data from the National Association of Realtors. As you can see, inventory is well above the historical average. And while a reduction in inventory from the recent peaks has occurred, there is still a need for further reduction.
(click to enlarge)It seems that government programs such as the first time homebuyer credit have certainly helped spur buying. However, the question remains: what happens when those programs end in May 2010? Many hypothesize that buying will dry up once those benefits cease.
Further complicating things is the Federal Reserve's actions in the mortgage markets. Their purchases of mortgage backed securities (MBS) and agency paper have filled a large hole. Besides them, who else has been buying those assets? No one really. At some point, they will have to stop their purchases. They've already delayed their exit once and are now looking to exit around the end of the first quarter of next year.
Come March of 2010, we could be facing a serious rise in mortgage rates due to the Fed's exit. While this may not stop transactions in their tracks, it certainly will impact potential buyer's monthly payments and could deter them. The combination of rising mortgage rates and the removal of government incentives for buying will most likely not help reduce the massive inventory overhang.
Not to mention, America still has the problem of many people looking to get out of their current homes as they owe more than what it is worth. Hedge fund manager Paolo Pellegrini long ago proposed a mortgage solution but we really have yet to see a true solution enacted. Then there's the whole situation of tons of homes being tied up in the court system, waiting to be repossessed, etc.
The main point of all of this is to remind everyone not to get too giddy. Sure, equity markets have rallied over 60% off the March lows and the economy has started to show some signs of recovery. However, on an economic level we still have fundamental problems to deal with... problems at the heart of the crisis. You have to keep in mind that the economy and markets don't always tell the same story. For true signs of economic recovery, keep your eye on the mortgage and housing markets. There will definitely be some fireworks in these arenas in the first half of the year.
Tuesday, December 29, 2009
Hedge Fund Hovde's General Growth Properties Response (GGWPQ)
In what is turning into a public analytical clash, hedge fund firm Hovde Capital Advisors has issued a counter-argument to the recent rebuttals. If you're just now jumping in on this, here's a timeline with links to the various presentations on the bullish and bearish cases on emerging-out-of-bankruptcy mall operator General Growth Properties (GGWPQ). No matter which part of the argument you side with, you have to agree that a public debate like this is a great thing to see. This is THE definition of 'two sides to any trade.'
Here's the timeline:
- May 27, 2009: Bill Ackman's hedge fund Pershing Square Capital initially presents a bullish case for GGWPQ
- October 7, 2009: Pershing Square later issues a macro look at the mall REIT industry
- December 15h, 2009: Hedge fund Hovde Capital Advisors issues their case for a short position in GGWPQ, entitled "Fool's Gold"
- December 15, 2009: Todd Sullivan of Valueplays.net issues a rebuttal to Hovde
- December 16, 2009: Whitney Tilson of hedge fund T2 Partners also issues a Hovde rebuttal
- December 22, 2009: Bill Ackman's Pershing Square issues a follow-up presentation as well
Now, that brings us to today's presentation (December 29th): Hovde's new piece on the short case for General Growth Properties, entitled "Setting the Record Straight." Below you'll find their 70-slide counter-argument against all of the claims made by the aforementioned hedge funds and investors:
You can download the .pdf here.
Will another wave of rebuttals emerge from the bulls? We'll have to wait and see. Right now though, it seems that Hovde is alone in presenting the short case for GGWPQ (publicly at least). We'll see if any other bears start to come out of the woodwork.
This is escalating into quite the analytical battle and we can only hope that more healthy debates amongst hedge funds emerge in the future. After all, analytical evaluations like all of the above ensure that investors are constantly keeping their theses in check.
Jeff Saut: Cautious Heading Into New Year
Jeff Saut, chief investment strategist of Raymond James is back with his weekly investment strategy. This week's commentary is entitled "The Telegraph Market." While Saut and his team have been bullish since the March lows and reversal (with a few scattered fits of caution), he has altered his stance as we head into the new year. In terms of other recent commentary from Saut, we also covered his 2010 market outlook as well as his prior market commentary.
Saut has turned cautious again "because the Treasury bond market is breaking down (read: higher interest rates) and the U.S. dollar is rallying." He notes that the dollar carry trade that had become popular as of late will be unwound if the dollar continues to head higher. His Raymond James team feels that it's best to "bank" some profits heading into the new year and to hedge your books.
At the same time, Saut feels we are still on the proverbial economic road to recovery. The problem is, how do you know how much company earnings upside has already been priced in due to the monstrous rally from March until present? Their call for now is to be cautious and to protect gains by locking in profits or hedging your books.
Embedded below is Jeff Saut's weekly investment strategy:
You can also download the .pdf here.
For more thoughts from Saut, check out his 2010 stock market outlook as well as his previous week's commentary.
Sprott's December Commentary: "Is It All Just a Ponzi Scheme?"
Hedge fund firm Sprott Asset Management sent out their December market commentary a while back and we wanted to make sure everyone has seen it because it's quite a strong piece entitled, "Is It All Just a Ponzi Scheme?" in reference to the Fed. This piece comes after we learned that Sprott would be launching a physical gold trust for investors that will compete with the popular exchange traded fund, GLD. Their December commentary is also somewhat of an add-on from their October piece entitled, "Dead Government Walking." Their viewpoints on the government and their actions have become quite clear.
Embedded below is Sprott's 'Markets at a Glance' piece by Eric Sprott and David Franklin:
You can also download the .pdf here.
We've been posting up other great market commentary from hedge funds such as Woodbine Capital with their piece Gold: The Anti-Goldilocks. Sprott is more bullish on precious metals as evidenced by their research, Gold: The Ultimate Triple-A Asset so as you can see it's always interesting to check out the varying viewpoints amongst money managers. Sprott have clearly outlined their point of view and have positioned their portfolio accordingly, taking a defensive posture.
Monday, December 28, 2009
Baupost Group Dumps RHI Entertainment (RHIE)
As per documents just filed with the SEC, Seth Klarman's hedge fund Baupost Group has updated their stake in RHI Entertainment (RHIE). According to an amended 13D and a Form 4, Baupost Group has sold 3,043,551 shares of RHI Entertainment (RHIE) on December 24th, 2009. They sold at prices ranging from $0.278 to $0.428 and are left with 0 shares of common stock. Below is a list of the transactions:
(click to enlarge)As you can see from the chart from Google Finance, shares of RHIE dropped severely during the holiday week and Klarman was selling during the massive drop. Many were speculating that Klarman was selling on the 24th as there were some large blocks trading that day. And, that speculation proved to be correct.
(click to enlarge)Baupost's exit comes amidst RHI Entertainment's announcement that a subsidiary entered into a Forbearance Agreement. Klarman certainly lost a bundle on this play and this will be a chink in his otherwise strong armor. No one is perfect... even some of the greatest investors like Buffett and Klarman (and they'll be the first to admit that). Even with Klarman's loss on this position, all you have to do is examine the broader picture and remember that he has seen 20% annualized returns. But still, he certainly took a bath on this one.
Klarman received his MBA from Harvard and then went on to work for Baupost at age 25. Nowadays, he runs the show. Baupost is one of the select few funds we have included in our Market Folly custom portfolio that is seeing over 26% annualized returns by replicating hedge fund portfolios. Head over to Alphaclone to see the hedge fund portfolio replication in action.
We've seen a lot of activity out of Baupost recently, especially on the selling side of things. Seth Klarman's hedge fund has sold shares of Syneron Medical (ELOS) and they've also sold shares of Capitalsource (CSE). On the buying side of things, we just learned they will be buying more Facet Biotech (FACT) and rejecting Biogen Idec's takeover offer. They've also revealed a new stake in Enzon Pharmaceuticals (ENZN) over a month ago.
Taken from Google Finance, RHI Entertainment is "develops, produces and distributes new made-for-television movies, mini-series and other television programming worldwide. The Company provides long-form television content, including domestic made-for-television (MFT), movies and mini-series. It also selectively produces new episodic series programming for television. In addition to its development, production and distribution of new content, it owns an library of existing long-form television content, which the Company licenses primarily to broadcast and cable networks worldwide."
Shumway Capital Partners Adds Long Exposure Via Blue Chip Stocks
This is the third quarter 2009 edition of our hedge fund portfolio tracking series. If you're unfamiliar with tracking hedge fund movements or SEC filings, check out our series preface on hedge fund 13F filings.
Next up in our series is Chris Shumway's hedge fund firm, Shumway Capital Partners. Chris Shumway runs an $8+ billion hedge fund and is best known for intensive fundamental research to create long/short equity portfolios. He is a 'Tiger Cub' because he formerly served as Julian Robertson's right-hand man while at Tiger Management. Taken from our post on 'Tiger Cub' biographies, "Chris Shumway is the Founding Partner of Shumway Capital Partners (“SCP”), an investment management firm founded in 2001. SCP, which manages a multibillion dollar group of private investment funds, uses a private equity-like research model for public market investment on a global basis. Prior to forming SCP, Mr. Shumway was a Senior Managing Director at Tiger Management (1992-1999), an Analyst at Brentwood Associates (1990-1991), and an Analyst at Morgan Stanley & Co. (1988-1990). He received an M.B.A. from Harvard Business School (1993) and a B.S. from the McIntire School of Commerce at the University of Virginia (1988)."
Shumway has an solid performance record since inception and a rolling 3-year annualized return of 28+%. Shumway's performance at this metric landed them at #11 in Barron's top 100 hedge funds for 2009. Shumway's portfolio is one of the hedge funds included in our Market Folly portfolio that replicates hedge fund portfolios. It was created with Alphaclone and has over 25.5% annualized returns.
Keep in mind that the positions listed below were their long equity, note, and options holdings as of September 30th, 2009 as filed with the SEC. We don't cover every single portfolio maneuver, as we instead focus on all the big moves. All holdings are common stock unless otherwise denoted.
Some New Positions
Brand new positions that they initiated last quarter:
Yum Brands (YUM)
Pepsico (PEP)
Colgate Palmolive (CL)
Procter & Gamble (PG)
Walt Disney (DIS)
JPMorgan Chase (JPM)
Zimmer Holdings (ZMH)
Google (GOOG)
Google (GOOG) Calls
Cemex (CX)
Bard (BCR)
Time Warner (TWX)
PNC Financial (PNC)
CTrip (CTRP)
Charles Schwab (SCHW)
Laboratory Corp (LH)
Weatherford International (WFT)
Nordstrom (JWN)
Omnicom (OMC)
BB&T (BBT)
American Tower (AMT)
Quest Diagnostic (DGX)
Ingersoll-Rand (IR)
CSX (CSX)
Some Increased Positions
Positions they already owned but added shares to:
Visa (V): Increased position by 400%
Juniper Networks (JNPR): Increased by 242.4%
Las Vegas Sands (LVS): Increased by 183.8%
Wyeth (WYE): Increased by 173.9%
Qualcomm (QCOM): Increased by 147.7%
Goldman Sachs (GS): Increased by 140.9%
Walgreen (WAG): Increased by 36.2%
Equinix (EQIX): Increased by 35.5%
Waters (WAT): Increased by 30.5%
EMC (EMC): Increased by 26.4%
Some Reduced Positions
Stakes they sold shares in but still own:
SBA Communications (SBAC): Reduced position by 58.8%
Bank of America (BAC): Reduced by 38.4%
Wells Fargo (WFC): Reduced by 28.1%
Mastercard (MA): Reduced by 21.2%
Urban Outfitters (URBN): Reduced by 19.7%
Removed Positions
Positions they sold out of completely:
Priceline (PCLN)
CVS Caremark (CVS)
Pfizer (PFE)
Research in Motion (RIMM)
RenaissanceRe (RNR)
Entergy (ETR)
Annaly Capital Management (NLY)
Bank of America (BAC) Calls
D&B (DNB)
Crown Castle (CCI)
Partnerre (PRE)
Arch Capital Group (ACGL)
Covance (CVD)
Nii Holdings (NIHD) Bonds
Cisco Systems (CSCO) Calls
Netease (NTES)
Citigroup (C)
Blackboard (BBBB) Bonds
Top 15 Holdings by percentage of assets reported on 13F filing
- Cisco (CSCO): 4.62%
- Equinix (EQIX): 4.29%
- EMC (EMC): 4.08%
- Mastercard (MA): 3.93%
- Teva Pharmaceutical (TEVA): 3.88%
- Visa (V): 3.87%
- Apple (AAPL): 3.68%
- Bank of America (BAC): 3.37%
- Juniper (JNPR): 2.96%
- Yum Brands (YUM): 2.81%
- Pepsico (PEP): 2.74%
- Colgate Palmolive (CL): 2.73%
- Procter & Gamble (PG): 2.71%
- Qualcomm (QCOM): 2.47%
- Walgreen (WAG): 2.46%
The main thing to takeaway from Shumway Capital Partners' portfolio update is that they increased long US equities exposure. And, the interesting thing is that it was mainly via brand new positions, many in large cap, blue-chip names including Yum Brands, Pepsico, Colgate Palmolive, Procter & Gamble, and more.
Shumway's top three holdings are very concentrated in the tech trade and in particular, data. They increased their positions in EMC and EQIX by over 25% each. One name they really boosted was Visa (V) as they added to it by a whopping 400%. Additionally, they increased stakes in Juniper Networks and Las Vegas Sands by sizable amounts. They sold completely out of Priceline (PCLN), CVS Caremark (CVS), Pfizer (PFE), and Research in Motion (RIMM) all positions that had previously been over 2% of their reported 13F assets.
They decreased their holdings in technology and increased their stake in services. Below you'll find graphical representations of the recent shifts in Shumway Capital Partners' portfolio courtesy of Drew Robertson at Financial Research Station:
(click to enlarge)
(click to enlarge)Assets from the collective holdings reported to the SEC via 13F filing were $7.4 billion this quarter compared to $4.4 billion last quarter, so a substantial amount of capital was deployed on the long side. Please keep in mind that when we state "percentage of portfolio," we are referring to the percentage of assets reported on the 13F filing. Since these filings only report longs (and not shorts or cash positions), the percentages are skewed. Also, please again note that these positions were as of September 30th so two months have elapsed and they've undoubtedly shifted around their portfolio since then.
This is just one of the 40+ prominent funds that we'll be covering in our Q3 2009 hedge fund portfolio series. We've already covered Seth Klarman's Baupost Group Bill Ackman's Pershing Square, Stephen Mandel's Lone Pine Capital, Dan Loeb's Third Point LLC, David Einhorn's Greenlight Capital, John Paulson's firm Paulson & Co, Lee Ainslie's Maverick Capital, Andreas Halvorsen's Viking Global, Chase Coleman's Tiger Global, Brett Barakett's Tremblant Capital, and John Griffin's Blue Ridge Capital. Check back daily as we'll be covering new hedge fund portfolios.
2010 Outlook: A Tale Of Two Economies
The following is a guest post from Phil's Stock World:
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way–in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.” – Charles Dickens, 1859
It is said that the French Revolution was sparked by outrage over a statement by the Queen Mary Antoinette who, when told that the peasants had no bread to eat, supposedly replied (she never actually said this) “Qu’ils mangent de la brioche” or “Then let them eat cake.” It’s hard for us to imagine the impact of this statement in modern times but “peasants” were 90% of the population at the time and bread was 90% of what they ate, consuming 50% of the average family’s income (people weren’t silly enough to pay for housing back then – they just found a bit of land, bought some wood and nails and built their own homes). Brioche was a luxury combination of bread enriched with flour and butter so the statement ”Qu’ils mangent de la brioche” implies both lack of caring and cluelessness on the part of the Queen.
The United States had what passes for a revolution between 2006 and 2008 as we threw out the Republicans and went with a Democrat-controlled government. While the Bush administration, the Republican Congress and Fox News may have been as clueless as a French Queen to the plight of the people – the fact of the matter is that the base pay of top management rose 78% from 2002-2007 while the pay for workers went up just 24%. The top 10% of executives and professional workers drew 33% of all income paid in the US ($2.1Tn) and that does not take into account stock options and bonuses that more than doubled that figure.
Despite the change in leadership, 2009 has not been kind to the American proletariat. There has been a $539Bn decrease in real income and, since 2006, Americans have lost $3.7Tn housing value (15%). Homes represent 42% of the average family’s total net worth but it’s worse than that because home mortgage debt is at $10.4Tn, which is 57% of total home worth. US home equity has dropped from 58% in 2003 to 43% this year, a loss of over 25% in 6 years. This is reality for American peasants, the 300M people who aren’t in the top 10% and don’t read the Wall Street Journal (as they have nothing to invest) and don’t shop at WSM or TIF or SKS or JWN – all stocks that have been off to the races in the second half of 2009 as the rich grow far, far richer.
Since 1979, the hourly earnings for 80% of American workers (those in private-sector, nonsupervisory jobs) have risen by just 1 percent, after inflation. The average hourly wage was $17.71 at the end of 2007. For male workers, the average wage has actually slid by 5 percent since 1979. Worker productivity, meanwhile, has climbed 60 percent. If wages had kept pace with productivity, the average full-time worker would be earning $58,000 a year; $36,000 was the average in 2007. The nation’s economic pie is growing, but corporations by and large have not given their workers a bigger piece but have instead, kept that 60% gain almost entirely for themselves.
The typical American worker toils 1,804 hours a year, 135 hours more per year than the typical British worker (3.5 weeks), 240 hours more than the average French worker (6 weeks), and 370 hours (or nine full-time weeks) more than the average German worker. No one in the world’s advanced economies works more for less. A 2007 report by the Congressional Budget Office found that the top 1 percent of households had pre-tax income in 2005 that was 140% larger than that of the bottom 40 percent so let’s not kid ourselves, America, we have effectively re-created a slave-driven economy but we’ve wrapped it in the flag and keep the slaves in line by providing them with cheap beer, happy meals and 200 channels of corporate entertainment while drumming into their heads that all they need is a dollar and a dream and they too can step right over the fallen bodies of their fellow workers to join us at the top of the pyramid.
The cure for all this revolutionary nonsense in the Western World was Capitalism, which was embodied by another writer in the late 1800s called Horatio Alger, who became famous for writing over 100 books along the lines of “rags to riches” stories. By leading exemplary lives, struggling valiantly against poverty and adversity, Alger’s protagonists gain both wealth and honor, ultimately realizing the American Dream. The characters in his formulaic stories sometimes improved their social position through auspicious accidents instead of hard work and denial but the bottom line is the myth of upward mobility that lets us all aspire to be modern economic heroes like Rockefeller, Hughes, Buffett, Gates, Oprah, Soros and Pickens – sure there’s only 1,000 of those guys on the planet but we all like to believe it could be us too, right?
Capitalism is so good at keeping the masses in line that even China and Russia have now adopted our model as it turns out you can effectively squeeze much more out of your workers with carrots than with sticks. The dream of modern capitalism also has the added benefit of relieving the wealthy of the burden of guilt by envisioning a level playing field in which they have triumphed through their own hard work and perseverance making it poor people’s own damn fault if they can’t be motivated enough to improve their lot in life. It is necessary to engender this feeling amongst the rich lest the conscience of some may lead them to “overpay” their workers, which makes their fellow entrepreneurs look bad so we have devised a system (the stock market) in which only the most ruthless practices of capitalism are rewarded over time.
OK, liberal rant over now – I feel better having indulged my Dickensian side and identifying with the plight of the workers but workers don’t buy stock market newsletters so f*ck them, right? We are investors and we shouldn’t be worried about if it’s FAIR or RIGHT that we have established an economic engine that funnels the wealth of the nation to the top – if you are reading this article, then chances are you are on or near the top and our job is to figure out how to maintain or improve our position and my biggest failing of 2009 has probably been worrying about the long-term repercussions of impoverishing 295M people when really it’s just us (me and my 9,999,9999 economically close friends) that we need to worry about and we have jobs and money and assets and stocks so, once again – F*ck those people!
What does it matter if the capital allocation to the great, unwashed masses barely keeps up with their population growth when our cut grows by leaps and bounds? We only need them to have just enough to eat and to be able to dress and transport themselves to a place where we can get that 1,800 hours of highly-productive work out of them. This makes good, economic sense. If we give money to the world’s 6Bn poor people, they’re only going to go and buy bread (or dare I say cake) and maybe shoes or clean shirt and mostly they will buy them at Wal-Mart or, even worse, make it themselves and there’s little profit for us in that. By keeping the vast global wealth “in the family,” so to speak, we can sell IPods and Hummers and luxury homes and diamonds and gold and other high-margin, unnecessary items to each other that allow the corporations we invest in to make obscene profits which, in turn, makes us EVEN RICHER! Isn’t that fantastic?
So let’s not kid ourselves that anything in this country is being done for the benefit of the 90% who serve us. We provide the basics and there are even many fine companies who can make money selling those basics like KO, MCD, JNJ, WMT… that we can invest in. One of the big issues we had been facing the past few years is that the damned poor people kept dying because they didn’t have adequate health care as they squandered their meager wages on cheap Chinese treats from the dollar store or whatever it is poor people do when you let them have money. Now we have taken a great step towards mandating that a portion of their meager wages goes towards health care and, in doing so, we have created 40M new patients for our wonderful medical industry to exploit.
We’ll be doing a lot of these articles in the coming year as health care looks to be the most exciting sector for long-term growth, especially with the aging baby boomers lining up to join the poor to be diagnosed and medicated in the 2nd decade of the century.
The 295,000,000 that share 28% of this nation’s wealth in 95M households are normally supported by about 140M non-farm jobs but that was down to just 120M jobs as of Nov 17th so, as a group, we’re sure not going to be counting on the poor to be splurging next year as even record job growth (6M) would only replace about 1/3 of all jobs lost. What do the poor do when times are hard? Mainly they shift their spending so we can expect more money spent at MCD and BKC with less money spent on “casual dining.“ We can expect pasta and bread to do well and meat to do worse because those items depend on large numbers of buyers.
The disposable income of the poor this year will depend very much on the price of oil and other commodities and that’s going to be one of the year’s trickier issues. To some extent, the price of oil is based on consumption but, since speculators took over the market, it’s been fairly disconnected from reality and speculation is a rich man’s game so it’s really a question of how much pain can be inflicted on the working classes before they change their habits so much that it spurs actual price competition among the oil producers - something that is also avoided through the formation of cartels. Consumption of oil fell 5% this year yet the price of oil is up nearly 100% from last winter – go figure.
While the commodity pushers can charge us (the top 10%) whatever they wish for oil, gold, copper, food and lumber – it seems they have already squeezed the bottom 90% to the breaking point. The $3.5Tn that was overcharged for commodities in the last few years was withdrawn from household wealth and without an expansion of household values, increases in lending or (gasp) higher wages – I just don’t see that they have any room to push the commodity train. Even inflation and dollar devaluation doesn’t work until you get those dollars into the hands of the bottom 90% so they can trade them for gas or bread. That’s the great joke about the inflation pundits – they seem to think it can magically appear just because the banks are hoarding our increased money supply. Unless the banks start buying a few million barrels of oil per week, we’re going to have to wait for the citizens to catch up.
And keep in mind that our poor people are the richest poor people in the world. Over 4Bn people in this world get by on less than $2,000 a year while our welfare recipients get a whopping $12,000 a year – enough to be considered upper class in many of the World’s nations. So our nation’s poor can actually afford to eat cake, as well as many other foods loaded with delicious and relatively inexpensive polyunsaturated fats (that are leading to those health problems that are killing them). Keep in mind that, in the above chart, you are looking at the percentage of the AVERAGE US household but imagine how that changes for households on the bottom half of that $48,000 average income, especially for the 34M homes that make less than $20,000 a year yet still need to eat as much as the average family of 4 and probably still want things like heat, clothing and maybe a bed to sleep in – it simply doesn’t leave a lot of room for “other.”
Financial services will do well as we shuffle our money around through various investments but don’t look for banks who rely on lending to the masses as they are all tied too tightly together to separate the good from the bad and that makes the whole sector a bit too dodgy although we continue to like XLF and UYG as the sector in general should recover over time.
Another problem with the banking sector is the probable end to the free money train that’s been supporting them since last November. While there are 30M of us who are ready, willing and able to borrow money for our various endeavors, banks need volume and it’s not very likely the other 275M Americans will be filling out successful loan applications in 2010. That limits the amounts of homes that can be bought and the total volume of credit that can be extended and also runs up the risk of default as we are now spreading our risk over a smaller borrowing pool.
With global debt piling up at a rate of over $10Bn a day, we are rapidly reaching the end of the game where we pretend interest rates can stay this low (especially if the economy really does heat up and creates a demand for money) and that brings us back to our favorite ETF: TBT, the ultra-short on the value of a 20-year treasury note. The higher rates go, the lower the value of the fixed-rate notes that suckers have been buying for less than 3% interest this past year. We’ve been in TBT since the low 40s but we are very confident rates have only one way to go in 2010, good for another 20% from the current 50 at least.
Travel should do well next year as many of us put off vacations while waiting to see how the economy shakes out. As we get more confident the world is not ending in 2010. PCLN is out of control but I still like OWW as a value play and CCL should perform well long-term as high fuel prices are not likely to return as fast as passengers. CAL is still an airline stock I like and MAR is the place to stay as business travelers once again venture out of the office. IHG is also a good pick in the luxury travel area.
GE should do well on infrastructure building. My big concern with them remains Commercial Real Estate but no one else seems worried about that sector. GE is also big on solar projects, which should do well and my favorite pure play on Solar remains SPWRA, who are the quality leader but I also like STP and, of course, WFR on the chip side. Also in the chip space is AMAT and INTC while GLW should have a great year supplying glass for all the new electronic devices us top 10%’ers love to buy.
I wouldn’t go so far as to stick my neck out on luxury retail as some of that is affected by aspirational buyers, of which there are far fewer these days as aspirations have been crushed into dust by the latest downturn. My main concern for the US and the global economy is that rising rates and other credit risks, reflected in various CDS rates, will begin to bring down some of the marginal global economies like Spain, Greece and anything ending in “stan” or “ia.” Also, 20M unemployed in the US and 400M globally is nothing to sneeze at. Will we, the top 10%, bear the cost of taking care of them or shall we, like old Scrooge, wish them to die quickly and help decrease the surplus population?
2010 is going to be an interesting year and it seems the majority of investors believe that we can keep living on this harshly divided planet and keep squeezing productivity gains out of the working masses even as we continue to hold wages down and drive the cost of their basic necessities higher. Even the slave owners had to provide food, clothing, shelter and medical care to their workers although I suppose we can feel good about the fact that slave owners outlawed education while we simply provide a very poor quality one – not enough for true upward mobility but certainly enough to hammer home the message that all they need is a dollar and that great American dream.
As long as we can keep the peasants from revolting we can keep partying like it’s 1999 but I do have reservations (obviously) and we will continue to exercise a degree of caution in our investing but history has taught us that the rich can indeed get richer and we have plenty of good places to focus our bullish attention as we begin this centrury’s second decade.
For more posts on the 2010 outlook as it pertains to markets and the economy, check out the top 10 investment themes for 2010, Jeff Saut's 2010 outlook, and Doug Kass' 2010 predictions.
