market folly

At the end of last week, the market ripped higher presumably from hedge fund manager David Tepper's comments when he said he likes equities here. Now add to the mix another well known manager in John Paulson. His hedge fund Paulson & Co of course made billions from his bet against subprime as detailed in the book, The Greatest Trade Ever. Given his success, everyone now latches onto his every word, hoping for advice.

Paulson did divulge some of his latest views at a lecture for New York's University Club. Simply put, he said to buy stocks and sell bonds. His favorite stocks are blue-chips with dividends such as: Johnson and Johnson (JNJ) and Coca Cola (KO). Playing on his 'recovery' theme, he also continues to like Bank of America (BAC), Suntrust Banks (STI), and Regions Financial (RF). To see what he's been buying and selling, check out Paulson's portfolio in our newsletter: Hedge Fund Wisdom.

Equities

He says to simply replace low yielding bonds with higher yielding stocks. A 10 year Treasury yields around 2.6% and so stocks with earnings yields of 7-8% are much better options. While Paulson did not mention these names, a quick scan pulls up companies with even higher earnings yields such as Medtronic (MDT) at 9.43%, ConocoPhillips at 10.52%, and Microsoft at 8.53%.

Gold

We've examined John Paulson's gold fund in-depth in the past, and so it should come as no surprise that the hedge fund manager thinks the precious metal is headed higher. He says that gold (currently around $1,200) could hit $2,400 on monetary expansion alone and even $4,000 with significant inflation. His hedge funds offer a fund share class denominated in gold and Paulson himself has 80% of his assets in this class. Additionally, given his inflationist bent, Paulson thinks the US Dollar will fall and that yields on Treasuries will rise. He has been buying 5 and 7 year calls on the 30-year bond yield. We've seen numerous hedge funds put on this type of trade before.

Housing

Lastly, Paulson thinks this is the best time to buy a home in fifty years, exclaiming that, "If you don't own a home, buy one. If you own one home, buy another one, and if you own two homes buy a third and lend your relatives the money to buy a home." Great, isn't that just the type of mentality that created the housing bubble in the first place? We realize he is using hyperbole to illustrate his point, but still. Given his prominence in the investing world these days, some people might actually take him literally. For more notes on Paulson's talk, head to Zero Hedge and to Forbes.

In terms of recent position movement from hedge fund Paulson & Co, we detailed their activist position in NovaGold Resources (NG) and sale of Centamin Egypt position.