market folly

Today we present you with the May 2010 investor letter from David Gerstenhaber's global macro hedge fund Argonaut Capital. Although the letter is a couple of months old, we thought it worthwhile for our readers to be able to gauge their macro perspective. After all, this letter comes after the month of May where the majority of hedge funds suffered losses and many began to question the economic recovery.

Below you'll find Argonaut Capital's assessment as to "What Went Wrong in the Markets in May." Since that month was so turbulent, we thought it poignant to highlight these factors should investors start to become anxious again in the near future. So, what went wrong?

1. Evidence of the peak in economic growth
2. The impact of Europe's debt crisis
3. A policy-engineered slowdown in China

Given the turmoil of May and the fact that many hedge funds suffered losses (Argonaut included), you should note that Gerstenhaber's fund has materially changed their outlook and adjusted portfolio themes accordingly. In currencies, the hedge fund had been in predominantly long Asian currency positions as they thought the Chinese renminbi would appreciate. At the same time, they were short the Japanese yen. Due to their shift in stance, they have reduced the 'renminbi appreciation' theme on their books.

Also worth pointing out is the fact that they've reduced their longstanding U.S. yield curve steepener position. You'll recall that Julian Robertson (Gerstenhaber's former boss at Tiger Management) had held various curve steepener positions as well. Given the uncertainty surrounding the long-term viability of the euro, Argonaut feels that what is bearish for the euro should be positive for U.S. Treasuries. And speaking of the euro, the hedge fund has high conviction in their short of the currency. Additionally, they are assured in their long in gold. This of course coincides with many other hedge funds that are long gold including John Paulson (who has a separate gold fund) as well as David Einhorn (who holds physical gold).

In equities, Gerstenhaber's hedge fund has exuded concern as they feel earnings estimates are too high in many sectors. In particular, they feel that the consumer discretionary space will disappoint. Additionally, they feel expectations in the technology space might be a tad too aggressive. In the earnings cycle overall, Argonaut believes that top-line revenue estimates will be very hard to beat (or meet, for that matter).

Argonaut writes that, "one overwhelming conclusion from our read of the economic data is that the 'take-off' phase of the global recovery is now behind us, with economic growth at best leveling out, but more likely decelerating going forward." For more on this subject, we've previously detailed David Gerstenhaber's thoughts on the economy.

Lastly, the hedge fund has used the dreaded 'd' word. No, not depression... but close. Deflation. They feel the risk still runs high in the US and Argonaut has long been of the view that deflation, not inflation, is the bigger threat.

Overall, Argonaut Capital has painted a much less rosy picture than other managers we've covered. While this could be attributed to the droves of data they see due to their global macro bent, it also could partially be a function of the fast and furious way markets collapsed in that particular month. One thing's for certain: May certainly altered their views as they believe that there will be a continued rise in volatility and sales of risk assets.

Embedded below is the May 2010 commentary from David Gerstenhaber's global macro hedge fund Argonaut Capital:



You can download a .pdf copy here.

For more great hedge fund letters we of course recommend reading the latest investment ideas from Corsair Capital as well as Perry Capital's Q2 letter, T2 Partners' presentation on 3 stocks, and David Einhorn's Greenlight Capital commentary.