What We're Reading ~ 4/30/10

Hedge fund manager Bill Ackman's battle against the bond insurers: Confidence Game [Christine Richard]

Anthony Scaramucci of Skybridge Capital talks about the hedge fund industry [Pragmatic Capitalist]

The thing about selling stocks is that you have to buy something else [Reformed Broker]

Q&A with Herb Greenberg [The Kirk Report]

Moore Capital's Louis Bacon is the richest hedge fund manager in the UK [FINalternatives]

Mike Darda says the Fed is on hold for the next few quarters. What's this mean for all the hedgies with curve steepener trades on? [Pragmatic Capitalist]

Comparing Simon Property Group & General Growth Properties to mergers of past [ValuePlays]

The Kelly formula and event driven investing [Distressed Debt Investing]

Is the market being driven by technicals or fundamentals? [Big Picture]

Why you shouldn't worry about Green Mountain Coffee Roaster's patent expiration [Barbarian Capital]

Chanticleer's first quarter investor letter [MyInvestingNotebook]

Thoughts from David Winters of the Wintergreen fund [Business Week]

How Steven Cohen averaged 30% returns [Washington Post]

Fund of hedge funds: 1 & 10 and never again? [Economist]

20 signs that could mark a market top [TheStreet]

Hedge fund veteran Philippe Jabre sees value in Europe [Reuters]

From hedgie to hedges, a look at Michael Steinhardt [WSJ]

Does Prudential face a roadblock in its takeover? [BBC]

Investor Psychology Illustrated: Where Are We in the Cycle?

It's funny how cycles work. Exactly one year ago we posted up a chart illustrating investor psychology. As we now look back, April of 2009 marked a time when the market had just bottomed and was in the nascent stage of a comeback. Today, we find ourselves in a completely converse situation. Rather than watch the market decline and decimate, we're now faced with a seemingly never ending market rally that some would label an anomaly of an ascension. Ahh the market cycle, don't you just love it? Investors have certainly experienced a wide array of emotions over the past few years. Behavioral finance has long been a compelling topic and if you're interested in learning more, we defer to hedge fund Blue Ridge Capital's recommended reading list.

One year ago, for whatever reason, we were compelled to post up a chart illustrating investor psychology. Today, one year later, we felt compelled again. Below you'll find the 17 stages of investor psychology ranging from rage to disbelief to euphoria. Here is how investors feel during the peak-to-trough market cycle:

(click to enlarge)

As you can see, there are 19 stages in the cycle. By all accounts, it would seem that we are currently somewhere between points 15 and 19 on the chart. Are we past the "what the hell???" stage yet? Some would argue that we passed that point at around 1,100 on the S&P 500. Some would also argue that we are at point 17 in the cycle, the "more crazies who are going to get taken to the cleaners" stage. Who knows.

While it's uncertain where exactly in the cycle we are, the point is that we're still in a cycle. Given that we posted this chart up exactly one year ago, we found it fitting to remind everyone of the various levels of mania an investor can experience. We do know this though: many have turned cautious. While he admits market timing is not his forte, legendary investor Jim Rogers recently started some short positions. Additionally, over the past few weeks, hedge funds have drastically reduced long exposure as the smart money's been selling equities. Lastly, we covered how market strategist Jeff Saut summoned the old market adage, "sell in May and go away" and then said don't wait 'til then to do so. Many will deem this as rational thinking given the run the market's had. At the same time, this all reminds us of stage 18 in the cycle where everyone thinks the correction is coming but then the market actually heads higher. In this liquidity driven environment, it certainly wouldn't be the first time.

Couple the above chart with this additional one from Prieur du Plessis, and you've covered the full spectrum of investor psychology:

(click to enlarge)

For more on this topic, we recommend you check out the compendium that hedge fund Blue Ridge Capital has assembled via their behavioral finance reading list. Ahh the market cycle, don't you just love it? Round and round we go. Where we'll stop, nobody knows.

Soros Fund Management Discloses Westport Innovations Position

In a 13G filed with the SEC due to activity on April 26th, 2010, George Soros' hedge fund firm Soros Fund Management has disclosed a new position. We see that they now own a 5.26% ownership stake in Westport Innovations (WPRT) with 2,069,901 shares. This is a brand new position for them as they did not own any shares back on December 31st, 2009 when we took a look at Soros' equity portfolio. While they own common shares now, it could be possible that they exercised warrants as we've seen other investors in WPRT have recently done so. That's purely speculation on our part though

Other notable recent portfolio activity out of Soros' hedge fund includes buying NovaGold Resources shares (NG). Soros of course is famous for his stellar returns with his Quantum Fund and is remembered for 'breaking the Bank of England'. While many are often intrigued by the latest maneuvers from George Soros, keep in mind that his hedge fund firm is mainly run by his sons and other distinguished portfolio managers. In fact, we just recently saw that Neil Pegrum has joined Soros Fund Management from Cazenove Capital. George is involved very little in the day-to-day of the global macro hedge fund. For insight from Soros himself, head to his interview at Hong Kong University.

Taken from Google Finance, Westport Innovations is "involved in the research and development of environmental technologies, including high-pressure direct injection combustion technology that allows diesel engines to operate on cleaner burning gaseous fuels, such as natural gas without sacrificing performance or fuel economy."

You can view the rest of George Soros' investments here.

The Smart Money's Selling Equities: Hedge Funds Continue to Reduce Exposure

Bank of America Merrill Lynch is out with the latest iteration of their hedge fund monitor report and we get a glimpse at the latest exposure levels. If you like to follow the smart money, then you should highly consider selling equities because that's exactly what hedge funds are doing. Last week we posted that hedge funds had below average net long exposure and we see this trend continues. Long/short equity funds are now around 25% net long, which is definitely below their historical average of 35-40% net long. Of their long positions overall, hedgies favor small cap and low quality 'junk' stocks. Last week we also touched on how there is a divergence between l/s funds and market neutral funds. This divergence continues as market neutral funds are still net long equities (but they did reduce some beta exposure).

We also see that according to CFTC data, many hedgies have been adding to shorts in S&P futures. Whether they are simply selling longs to lock in some profit or making a market timing call, one thing is clear: hedge funds are definitely cautious in this market. We also got confirmation of this trend from David Einhorn's hedge fund Greenlight Capital. In their latest investor letter, Greenlight discloses that they were 100% long and 70% short, leaving them 30% net long for the first quarter. This is right along the lines of what we've seen across industry-wide data sets.

Turning now to other significant asset class moves from hedgies, we see that they were adding to longs in crude oil and pressing deep shorts in natural gas. Additionally, hedge funds continue to pound the euro short. In interest rates, we learn that for the third consecutive week, hedge funds have very crowded shorts in 10 and 30 year treasuries as they short the long end of the curve. Curve steepeners continue to be hedge fund land's favorite drug.

Lastly, we also get a performance update from BofA regarding their hedge fund generals list. This is a basket comprised of stocks widely owned by hedge funds. It is up 13% year-to-date for 2010 and for 2009, the HF generals index was up 69%. You can compare these figures against individual hedge funds in our first quarter performance numbers post.

Embedded below is Bank of America Merrill Lynch's latest trend report on hedge fund exposure levels:



You can download a .pdf here.

So, the trend remains much of the same across hedge fund land as of late. Hedgies are selling equities, shorting the long end of the yield curve, shorting the euro, and longing crude oil. You can view BofA's previous hedge fund trend report here and make sure to also check out their hedge fund generals list to see what stocks hedge funds love most.

Bill Ackman Thinks General Growth Properties Can Double Over the Next Several Years "If Done Correctly"

Pershing Square Capital Management founder and hedge fund manager Bill Ackman recently appeared on CNBC in an extended segment. In his interview, he talked about the Goldman Sachs fraud case, the benefits of short selling, and most notably, some of his investments. They segment also noted that Bill Ackman is the subject of Christine Richard's new book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. The book focuses on Ackman's campaign against bond insurer MBIA (MBI) and we will be reading & reviewing the book here shortly.

We're going to do things a bit backwards here and start with Ackman's closing thoughts from the interview because they deal with his investments. Pershing Square's founder updates us on his stakes in General Growth Properties (GGP) and Target (TGT). Readers will know that we've previously disclosed Pershing's economic exposure to GGP as they bet on the emerging-from-bankruptcy REIT player. Ackman notes that Pershing invested $50-60 million GGP equity when shares were seemingly on life support and that investment is now worth over $1 billion and was the "best investment (he's) ever made." He also hopes for the mall operator to emerge from bankruptcy, "hopefully come September or sooner." Lastly, Ackman thinks shares of GGP could double over the next several years if everything is "done correctly." Here's the video:

Regarding his Target position, Ackman notes that Pershing still owns over $1 billion of stock and it is one of their largest investments. Email readers please note that you'll need to come to the site in order to watch all these videos. Here's the video where Ackman discusses his investments:




In the next video, Ackman turns to financial reform and he is in favor of regulatory implementations. Here's his thoughts:




Turning to the last video interview, we get some commentary from Christine Richard, the author of the new book on Ackman, Confidence Game. Additionally, Ackman discusses the Goldman Sachs case:



Overall, an intriguing set of talking points as Ackman was a guest at CNBC for an extended period of time. While some readers will crave more investment specific conversation, he still chatted about relevant and important topics. While his General Growth Properties investment is the best he's ever made, he was also correct and successful in his past wager against MBIA. You can read about how his hedge fund manager mind works in the new book Confidence Game. We'll be reading it and reviewing it shortly.

For more of our coverage on hedge fund Pershing Square, we see that they recently sold their Sears Canada stake, and we detailed their newly disclosed Yum Brands position (YUM). Lastly, to learn more about Ackman and his hedge fund, head to our past profile of Pershing Square.

Phil Falcone's Harbinger Capital Still Owns Mercer International (MERC)

Philip Falcone's hedge fund firm Harbinger Capital Partners recently filed an amended 13G with the SEC due to activity on April 23rd, 2010. In it, we learn that they own a 6.11% stake in Mercer International (MERC) with 2,228,194 shares. This is the exact same amount of shares they held on December 31st, 2009 when we took a look at Harbinger's portfolio. So, there has been no change in their position. While not as exciting as a 'buy' or 'sell', we just wanted to update you on their 'hold' status since they filed a disclosure.

While Harbinger still owns shares of MERC, we just recently learned that David Einhorn's hedge fund Greenlight Capital recently sold their Mercer stake after holding it for many years so we see a little difference in opinion here. In their letter to investors, Greenlight Capital mentioned that they first purchased their stake in 1997 and sold most of their common shares in 2008. They continued to hold their debt position and Einhorn's fund just sold this in the first quarter. Greenlight said they were, "happy to move on."

Taken from Google Finance, Mercer International is "a producer of market northern bleached softwood kraft (NBSK), pulp in the world. The Company operates in the pulp business. It is a kraft pulp producer, and producer of pulp for resale, known as market pulp, in Germany."

If you've been following all of our coverage regarding Harbinger Capital Partners, you know it's been a bit of a zoo in terms of SEC filings. Falcone's fund recently sold New York Times shares (NYT), started a stake in Palm (PALM) and the hedge fund also interestingly planned a 4G wireless network. We'll continue to keep you updated on all their disclosed activity.

Eric Mindich's Eton Park Acquires Sable Mining (SBLM) Shares

We've just learned that Eric Mindich's hedge fund firm Eton Park Capital have acquired 42,000,000 shares of Sable Mining (LON:SBLM) due to a placing held on April 16th, 2010. Eton Park's stake is representative of a 4.53% stake in the company. Keep in mind that another prominent hedge fund, Phil Falcone's Harbinger Capital, also recently boosted their stake in Sable Mining. As we detailed previously, Harbinger owned a 23.35% stake in SBLM as of March 23rd, 2010.

In terms of other activity out of Mindich's hedge fund, we recently detailed a portfolio update on Eton Park. For more of our coverage on Mindich, we recommend checking out some of his thoughts from a hedge fund panel regarding whether or not there is alpha in asset allocation. Lastly, we've also covered how Eton Park has expanded their UK positions recently as well. Their addition of a Sable Mining stake of course bolsters these actions even further.

Sable Mining Africa Ltd is small company listed on the AIM market in London. It was re-named in November 2009 and used to be called BioEnergy Africa. Sable changed in 2009 with a move away from bio-ethanol related assets into mining related energy assets. Sable Mining is now focused on the acquisition or investment in early stage coal and uranium with a particular emphasis on Namibia, Botswana, Zimbabwe and Zambia.

Sable Mining intends to be an active investor in an attempt to add value both operationally and strategically to the businesses it acquires or invests in. The company’s objective is to own entire or majority interests in suitable businesses or assets rather than holding minority investments. To facilitate the new strategy, the company undertook a fundraising via a placing of new ordinary shares in December 2009. It is likely that Harbinger bought shares in the placement at a price below the quoted market share price. Sable’s Chairman is ex-England cricketer and slow left arm bowler, Phil Edmonds.

Head here for a recent portfolio update on Eton Park to see what else they've been up to.

Steven Cohen's SAC Capital Raises Inspire Pharmaceuticals (ISPH) Stake

Steven Cohen's hedge fund firm SAC Capital recently filed a 13G with the SEC regarding shares of Inspire Pharmaceuticals (ISPH). According to the filing, SAC Capital now shows a 4.9% ownership stake in Inspire Pharma with 4,033,829 shares. This is a massive increase in their position as back on December 31st, 2009 they owned 3,932 shares of ISPH. Keep in mind though that SAC Capital is a trading oriented firm and as such moves in and out of positions much more swiftly than the hedgies we normally track here at Market Folly.

We've covered other recent activity out of Cohen's hedge fund such as their updated stake in The Talbots (TLB) as well as their newly disclosed position in InterMune (ITMN) and lastly their stake in Psychiatric Solutions (PSYS).

SAC Capital finished 2009 up over 28% as noted in our post on hedge fund 2009 performance numbers. Famed manager Stevie Cohen of course was recently featured in Forbes' billionaire list as well. Again, please remember that SAC is a trading oriented firm and typically has much shorter holding periods than the other hedge funds we track.

Taken from Google Finance, Inspire Pharmaceuticals is "a biopharmaceutical company focused on researching, developing and commercializing prescription pharmaceutical products for ophthalmic and pulmonary diseases."

For more on Steven Cohen, check out all our coverage on hedge fund SAC Capital.

Roberto Mignone's Bridger Management Starts 2 New Positions

Roberto Mignone's hedge fund Bridger Management recently filed 13G's on The Princeton Review (REVU) and Medifast (MED). Due to activity on April 15th, Bridger Management has disclosed a 6.3% ownership stake in The Princeton Review (REVU) with 3,000,000 shares. Secondly, due to activity on April 16th, Roberto Mignone's hedge fund has disclosed a 5.1% ownership stake in Medifast (MED) with 787,144 shares. This position is interesting because back in March we revealed that Steven Cohen's hedge fund SAC Capital started a new position in MED. So, we now have two prominent hedge funds invested in this company.

The Princeton Review and Medifast are both brand new positions for Mignone's hedge fund as they did not own shares on December 31st when we detailed Bridger Management's portfolio. Somewhere in the last three and a half months they've assembled these stakes. In terms of other recent portfolio activity, we made note a few weeks ago of Bridger's new stake in Centene (CNC) as well.

Bridger is a $2.8 billion hedge fund focused on long/short & event driven strategies and often focus on healthcare related names. Prior to founding Bridger, Mignone co-founded Blue Ridge Capital with John Griffin in 1996. For more insight from Bridger, head to Mignone's thoughts at a previous hedge fund panel.

Taken from Google Finance, The Princeton Review is "a provider of classroom-based, print and online education products and services targeting the high school and post-secondary markets."

Medifast is "engaged in the production, distribution, and sale of weight management and disease management products and other consumable health and diet products. The product lines include weight and disease management, meal replacement, and vitamins. "

You can view the rest of Bridger Management's portfolio here.

David Einhorn Dumps Boston Scientific (BSX): Greenlight Capital's Investor Letter

David Einhorn recently sent out hedge fund Greenlight Capital's first quarter investor letter. In it, we learn that the fund has exited their position in Boston Scientific (BSX). Readers will remember that Einhorn had just started this position and mentioned it in his fourth quarter investor letter. They purchased shares of BSX for $8.42 and sold them for $7.57. So, Greenlight has cut their losses quickly on this one and moved on to the next investment.

The Greenlight team writes, "We had bought BSX based on the view that new management had been brought in to execute a significant turnaround plan, which after careful study, it would detail contemporaneously with fourth quarter results. Instead, management decided not to provide any meaningful targets, raised new operating issues, and seemed to say that turning the company around would be harder than they thought and would take a long time. We re-assessed our thesis and forecasts, and limited our loss by selling the position."

Overall, Greenlight notes that they didn't have much portfolio turnover to report. Greenlight's Offshore fund was down 1.3% for the year as of the end of March as noted in our hedge fund performances post. However, keep in mind that Greenlight has also returned 22% annualized since inception.

Einhorn's five largest positions as of the first quarter were:

1. CIT Group (CIT)
2. Gold
3. Lanxess (LXSG)
4. Pfizer (PFE)
5. Vodafone Group (VOD)

Remember that if you want a peak inside Greenlight's investment research process, we recommend reading David Einhorn's book: Fooling Some of the People All of the Time. In regards to his recent VOD position, we recently examined Einhorn's Vodafone thesis for those of you seeking their investment rationale. Keep in mind also that their gold position is in physical gold, as they were one of the first major hedge funds to use this rather than proxies for gold like exchange traded funds.

Possibly the most notable thing to take away from Greenlight's investor letter are their exposure levels. Excluding credit derivatives, gold and foreign currencies, Greenlight Capital had an average exposure to equities and fixed income of 100% long and 70% short. This 30% net long level coincides with what we've seen lately from various hedge fund research outlets that have indicated hedgies currently have below average net long exposure. Hedge funds have definitely become more cautious as of late.

Embedded below is Greenlight Capital's first quarter investor letter:



You can directly download a .pdf here.

In the letter we also learned that Greenlight closed out various longs in BJ Services (BJS), McDermott (MDR), LiveNation (LYV), MEMC Electronics (WFR), and Mercer (MERC). Additionally, we saw that they covered shorts in Abercrombie & Fitch (ANF), Federal Realty Investment Trust (FDR), and HSBC (HBC). While Einhorn and company exited Live Nation, we've made note recently that Jay Petschek's hedge fund Corsair Capital started a new position in LYV and Stephen Mandel's Lone Pine Capital started a stake as well, so it's intriguing to see the divergence of opinion here.

That about wraps things up on Greenlight's end. To learn how to invest like Einhorn, we highly recommend reading his book: Fooling Some of the People All of the Time. And for more insight, you can also read David Einhorn's previous investor letter here.

Bill Ackman's Pershing Square Sells Sears Canada Stake to Eddie Lampert's Sears Holdings

Bill Ackman's hedge fund Pershing Square has sold its 17.3% stake in Sears Canada (TSE:SCC) for around $560 million to Sears Holding (Nasdaq:SHLD), the company owned by Eddie Lampert and his hedge fund RBS Partners. Upon completion of the transaction, Sears Holdings will own around 90% of Sears Canada. This is not the first time that Lampert has tried to buy Ackman's stake in Sears Canada either. Back in 2006, Lampert attempted to purchase shares at around $16 per share and Ackman declined, deeming the offer too low. This time around, Ackman accepted an offer of CAD 30 per share (Canadian Dollars). With this, it seems as though Sears Holdings will possibly look to buy out the remaining shares of Sears Canada.

For more of our coverage on Ackman's hedge fund, we recently covered their newly disclosed position in Yum Brands (YUM) and their economic exposure to General Growth Properties (GGP). Turning to Eddie Lampert's recent activity, we noted that he recently bought AutoNation shares (AN).

Taken from Google Finance, Sears Holdings is "the parent company of Kmart Holding Corporation (Kmart) and Sears, Roebuck and Co. (Sears). The Company is broadline retailer with 2,235 full-line and 1,284 specialty retail stores in the United States operating through Kmart and Sears, and 402 full-line and specialty retail stores in Canada operating through Sears Canada Inc. (Sears Canada)."

You can view Bill Ackman's portfolio here and you can view Eddie Lampert's portfolio here.

Hedge Fund Farallon Capital Still Shows Energy Partners (EPL) Stake

Thomas Steyer's hedge fund firm Farallon Capital recently filed a 13G with the SEC regarding Energy Partners Ltd (EPL). As of April 15th, 2010 Farallon Capital shows a 7.1% ownership stake in the company with 2,859,337 shares. This is the exact same amount of shares they owned back on December 31st, 2009 when we covered Farallon's portfolio so there is no adjustment to their position. While nothing major has happened with their stake, we do learn that they at least still hold their position and so we thought we'd pass that information along for those interested.

The hedge fund filed the amended 13G to adjust the managing members of their firm listed as beneficial owners of the stock. As we've detailed in the past, it's extremely likely that Farallon received their equity position in EPL from a debt-to-equity conversion. Thomas Steyer founded Farallon in 1986 and today it is a multi-billion dollar hedge fund that invests in equities, private investments, debt, and real estate. Typically, they focus on risk arbitrage strategies. Taken from Google Finance, Energy Partners is "an independent oil and natural gas exploration and production company."

Hedge Fund Lansdowne Increase Short Position in Prudential (LON:PRU) Again

While we realize this is the third such update in a short span of time, it's rare you see public disclosures of short positions by hedge funds so we figured we'd provide as much detail as possible when we get the chance. Late last week we disclosed that UK based hedge fund Lansdowne Partners was short Prudential plc (LON:PRU - traded in London. It's not the American insurer that goes by the same ticker symbol). Then, we saw that they increased their short position from -0.32% of the company's shares to -0.42%.

We now see that Steven Heinz and Paul Ruddock's hedge fund firm have increased their short position in PRU a second time. Lansdowne Partners are now short -0.84% of the company's stock, essentially doubling their short position from the last time we detailed their position. This most recent disclosure represents their position as of April 22nd, 2010.

We've heard from contacts in the UK that shares of PRU on the London exchange are now hard to borrow with brokers wanting 3% interest if/when they locate the shares to short. So, Lansdowne have definitely created a stir here and there are obviously a few people piggybacking this trade. Keep in mind that this position is apparently a hedge to Lansdowne's long positions in UK banks. Last week we disclosed that Ruddock's hedge fund was also long Lloyds Banking Group (LON:LLOY, NYSE:LYG).

Performance wise, Lansdowne's UK Equity fund was up 8.28% through the end of March as we mentioned in our hedge fund performance numbers post from the first quarter. Additionally, in the past we've seen that their flagship fund has returned 19.37% annualized since 2001. When we took a look at Lansdowne's portfolio late last year, we also saw that they favored large cap plays in developed countries.