What We're Reading ~ Hedge Fund Links 4/5/13

Some stock picks from David Einhorn [Portfolios With Purpose]

Lee Cooperman: stocks are the only place to be [HFIntelligence]

Latest interview with short seller Jim Chanos [Salon]

To use a fund of funds or go direct? [HFIntelligence]

Half of hedge funds think their competitors are cheating [WSJ]

Whitebox's Andy Redleaf on surviving to trade another day [HFIntelligence]

Hedge funds are too big to beat the market [CBS]

New launches from ex-Maverick Capital partners [Reuters]

Notes from a panel of respected credit hedge fund managers [UnstructuredFinance]

Boaz Weinstein: don't get too comfortable [HFIntelligence]

Tiger Cubs report a rough Q1 [Institutional Investor]

Ray Dalio's Bridgewater is number 1 in earnings [Institutional Investor]

A hedge fund has been active in LightSquared debt [WSJ]

Investor activism gone wild [NYTimes]

The hedge fund rebound could be short-lived, or not [Quartz] 

Big public pension funds trump hedge fund benchmarks [Pensions & Investments]

Dell buyout was Southeastern's idea [WSJ]

Hard times for Harbinger's Phil Falcone [Alpha]

Some portfolio activity from Danoff's Contrafund [Reuters]

SEC's new social media policy falls short [TermSheet]

Eric Sprott's April Commentary: Caveat Depositor

Eric Sprott of Sprott Asset Management is out with his April commentary entitled, "Caveat Depositor."  In it, he delves into the Cyprus situation and the macro effects moving forward.


Caveat Depositor  

by Eric Sprott & Shree Kargutkar, Sprott Asset Management 

“If there is a risk in a bank, our first question should be: ‘Ok, what are you the bank going to do about that? What can you do to recapitalise yourself?’ If the bank can’t do it, then we’ll talk to the shareholders and the bondholders. We’ll ask them to contribute in recapitalising the bank. And if necessary the uninsured deposit holders: ‘What can you do in order to save your own banks?’” – Jeroen Dijsselbloem, March 26, 2013 1 

A deal has just been struck with Cyprus. However, it was not the deal that Cyprus saw other countries receive. This was not the deal received by Greece, Italy and Spain. There were no bailed out banks in the aftermath. There was no transfer of risk from over-levered banks to the taxpayers. The risk was pushed back onto the banks. Their equity was wiped out. Their bondholders were wiped out. Their uninsured depositors saw their accounts raided for additional liquidity. It wasn’t just that the rules of the game had changed, the game itself changed. By raiding the depositors’ accounts, a major central bank has gone where they would not previously have dared. The Rubicon has been crossed. Going forward, this is expected to be the “template” for dealing with risky, over-levered banks and the countries which support them. 

For the first time since the crisis began, we are faced with a new paradigm, or a “template”, for how a major central bank will address weakness in the financial sector. While the old template involved “bailing out” through transfer of risk from the corporate sector to the taxpayer, the new template calls for “bailing in”, whereby the risk is contained within the affected institution at the expense of equity holders, bond holders and finally the depositor. 

How does the new template affect you?  

This “template” is already being applied to the “too big to bail” banks in other developed countries around the world. A statement in the joint paper published by the FDIC and the Bank of England in December 2012 reads: 

“An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company into equity. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailedin creditors would become the owners of the resolved firm…. Such a resolution strategy would ensure market discipline and maintain financial stability without cost to taxpayers”.2 

Note the lack of the phrase “uninsured depositors” in this context, which opens the doors for both insured and uninsured depositors to be affected. In a similar vein, Canada’s recently released budget addresses the same problem. Page 144 of Canada’s Economic Action Plan 2013 reads: 

“The Government proposes to implement a – bail-in regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers.”3 

Likewise, New Zealand’s Open Bank Resolution policy allows for a “bail in” of afflicted banks by wiping out the equity holders first, the bond holders second and finally forcing a haircut on the depositors.4 

Over-levered banks are not a recent development. We are faced with a banking crisis, seemingly once every generation. In a majority of cases, the bad banks were allowed to fail and newer, stronger banks took their place. However, the recent modus operandi of the central banks and policy makers allowed over-levered banks to get even bigger, rewarded risk taking with bailouts and let the inherent problem of unsustainability fester.

We carried out the exercise of taking the largest banks, or in other words, the “too big to fail” banks in the G7 countries and added up their assets in relation to the host country GDP. For the layperson, a typical bank’s assets are primarily composed of the loans they have originated while the liabilities are primarily composed of deposits they have accepted. With the exception of the US, all G7 countries have banking systems that have become larger and in some cases dwarfed their respective economies. 

Governments around the world are finally beginning to realize the gravity of the risk that exists in their banking sectors. The EU has decided to build upon the new template of the “bail-in” regime. The US, UK and Canada have all followed suit. This puts the onus squarely upon the depositor. The depositor is a lender to the financial institution that he banks with. However, most depositors naively assume that their deposits are 100% safe in their banks and trust them to safeguard their savings. Under the new “template” all lenders (including depositors) to the bank can be forced to “bail in” their respective banks. Several G7 countries already have provisions that allow troubled banks to be bailed in using depositor accounts. We have been vocal about our concerns over the state of the global financial system for the better part of the decade. The Greek tragedy is now being played out in Cyprus with a new twist as depositors have been unwillingly turned into sacrificial lambs. Given the size of the banking sector in most G7 countries and the burgeoning government debts, the ability of the governments to bail out their banks is severely constrained, especially considering the political headwinds that exist today. For this reason, we strongly believe that real assets trump a fiat currency in a “savings” account. It is not our intention to be alarmist here, merely to say, “caveat depositor”. "

Footnotes:
1     Import Export Stats – US Census Foreign trade: http://blogs.ft.com/brusselsblog/2013/03/the-ftreuters-dijsselbloem- interviewtranscript/
2     http://www.bankofengland.co.uk/publications/Documents/news/2012/nr156.pdf
3     http://www.budget.gc.ca/2013/doc/plan/budget2013-eng.pdf
4     http://www.centralbanking.com/central-banking/official-record/2257939/rbnzarticle- says-open-bank-resolution-helps-keep-banks-in-line

For more from this manager, we've also posted up how Sprott thinks the sell-off in gold is an opportunity to buy.

Whitney Tilson's Kase Capital Q1 Letter: Pitch on Deckers, Sears Hometown & Outlet Stores

The hedge fund duo of Whitney Tilson and Glenn Tongue split up last year and now Tilson is managing his Kase Capital solo.  He just sent out his first quarter letter to investors where he outlines two of his new investments: Deckers (DECK) and Sears Hometown & Outlet Stores (SHOS), which you can read in the letter below.

Kase Capital's Top Holdings

In Kase Capital's letter, Tilson also lists his largest positions:

1. AIG (AIG)
2. Berkshire Hathaway (BRK.A)
3. Howard Hughes (HHC)
4. Deckers (DECK)
5. Citigroup (C)
6. Goldman Sachs (GS)
7. Netflix (NFLX)
8. Canadian Pacific (CP)
9. dELiA*s (DLIA)
10. Iridium (IRDM)
11. Grupo Prisa (B Shares)
12. Sears Hometown & Outlet (SHOS)
13. Spark Networks (LOV)


Tilson's Shorts & Exposure Levels

Tilson also reiterated a few stocks that he's short: InterOil (IOC), K-12 (LRN), and Nokia (NOK).  He's also holding a large cash balance, waiting for better opportunities to deploy capital.  His equity exposure comes in at 66% long and 22% short currently.


Embedded below is Whitney Tilson's Kase Capital first quarter letter to investors for 2013:

Bill Gross on How To Be a Better Investor: PIMCO Investment Outlook

PIMCO's Bill Gross is out with his monthly investment outlook for April.  Entitled "A Man in the Mirror," Gross examines himself as a market participant and provides wisdom by outlaying how others can learn from his mistakes.

One interesting part he raises is how all investors of this generation have benefited from a period of credit expansion.  He writes,

"But let me admit something. There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne. All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience."

Later, he goes on to emphasize how investors may be forced to adapt and to make a change, an important thing to keep in mind as we approach the potential of a rising interest rate environment in the future.

Embedded below is Bill Gross' April commentary:




You can download a .pdf copy here.

For more from this bond kingpin, head to Gross' previous investment outlook: rational temperance.

What We're Reading ~ Analytical Links 4/3/13

A sweet spot for equities: opportunity and dangers [Aswath Damodaran]

How much of stock market's growth is caused by its shrinking? [Dealbreaker]

Rally on fumes [Capital Observer]

Greed + confirmation bias = disaster [Kid Dynamite]

A little perspective on the markets [Market Anthropology]

How to find high quality stocks [Greenbackd]

Use Benjamin Graham's investing checklist to invest like him [Old School Value]

Presentation on student debt [NewYorkFed]

Cummins (CMI): should you chase it? [CFA Institute]

Dell (DELL) outlines the death of the PC [Forbes]

The next big catalysts for Blackberry (BBRY) [Yahoo Finance]

Apple (AAPL): is it different this time? [Fusion Investing]

eBay (EBAY): estimates rising on upbeat analyst day [Barrons]

A.H. Belo (AHC): hidden value or value trap? [Seeking Alpha]

Altisource Residential (RESI): spin-off with growth ahead [Seeking Alpha]

Insider buying of gold stocks surges to multi-year highs [Globe and Mail]

How to make a stock pitch [Business Insider]

Dan Loeb's Third Point Discloses Porsche & Volkswagen Stakes: March Exposure Report

Dan Loeb's Third Point Offshore Fund finished March up 2.9% and is now up 9% for 2013.  Managing $11.7 billion, the fund has current net long equity exposure of 45.1%, down around 2% from February.


Top Positions

1. Yahoo! (YHOO)
2. Virgin Media (VMED)
3. Gold
4. American International Group (AIG)
5. Ally Financial (multiple securities held)

Third Point's top holdings remain unchanged from the month prior.  Their position in Virgin Media was a new addition to the portfolio in 2013.


Newly Disclosed Positions

In their March "top winners" and "top losers" columns, Third Point discloses a few positions we haven't seen before.  In their "top losers" column from last month, they show holdings in Volkswagen AG, Porsche Automobil Holding SE, and Bond Street Holdings.  Porsche is notable because as of 2012 year-end, it was the top holding at Children's Investment Fund (see TCI's Porsche thesis from a conference late last year).

Additionally, Third Point shows positions in Cheniere Energy (LNG) and DE Master Blenders in their top winners category.  The latter was spun-off from Sara Lee, a position Third Point previously owned (and most likely where those shares came from).

Embedded below is Third Point's March exposure report:




For more on this hedge fund, head to Third Point's Q4 letter.

Senator Investment Group Adds To International Paper Position

Alex Klabin and Douglas Silverman's hedge fund Senator Investment Group recently filed a 13G with the SEC regarding shares of International Paper (IP).  Per the filing, Senator has disclosed a 5.2% ownership stake in IP with 23,088,500 shares.  The filing was required due to portfolio activity on March 28th.

This marks a 452% increase in the number of shares they own.  At the end of 2012, Senator owned 4,179,065 shares, but they also owned call options representing 3,500,000 shares as well.

Per Google Finance, International Paper is "a global paper and packaging company, with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. The Company operates in four segments: Industrial Packaging; Printing Papers; Consumer Packaging, and Distribution."

About Senator

Alex Klabin and Doug Silverman founded the hedge fund firm in February 2008 with a focus on global long/short investing in distressed assets and equities. They were originally seeded by Blackstone Strategic Alliance Fund with $150 million and at the end of 2012 reported holdings worth $4.5 billion on their 13F filing (which isn't indicative of their entire AUM total).  Prior to founding Senator, both worked at Jamie Dinan's York Capital.

For more on this hedge fund, we've also posted up Senator's pitch on Rayonier (RYN) as well.

Corsair Capital Management Boosts Wausau Paper Holdings

Jay Petschek and Steven Major's hedge fund Corsair Capital Management recently filed a 13G with the SEC regarding shares of Wausau Paper (WPP).  Per the filing, Corsair disclosed a 5.6% ownership stake in WPP with 2,774,724 shares.

This marks an increase of 1,920% in the number of shares they own.  At the end of 2012, they only owned 137,323 shares.  The 13G was required due to portfolio activity as of March 13th.


Starboard Value Involved Too, Pushing For Change

Investment firm Starboard Value has been involved with shares of Wausau for some time.  Starboard had increased its stake in WPP, owning 14.8% of the company as of March and recently gained two seats on the board of directors.

Starboard has been fighting for Wausau to divest all its operations except for the tissue segment.  A few weeks ago, the company announced it planned to sell its specialty paper business for $130 million.  Wausau looks to be repositioning itself by turning focus to the tissue business.

Per Google Finance, Wausua Paper "manufactures, converts, and sells paper and paper products.  The Company operates in two principal segments: Tissue and Paper, with both business segments marketing their products under the Wausau Paper brand name. The Tissue segment produces a complete line of towel and tissue products that are marketed, along with soap and dispensing systems, for the away-from-home market."

For more on this hedge fund, we've also posted up Corsair's thesis on Acacia Research (ACTG).

Marcato Capital Management Discloses CyrusOne (CONE) Stake

Mick McGuire's hedge fund firm Marcato Capital Management recently filed a 13G on shares of CyrusOne (CONE) with the SEC.  Per the filing, Marcato has revealed an 11.8% ownership stake in CONE with 2,592,394 shares.  The filing was originally required due to portfolio activity on February 21st.

Per an additional Form 4 filed with the SEC, we see that McGuire's firm was out buying some of their shares on various dates between February 28th and March 12th, at prices ranging from $21.25 up to $22.02 per share.  Cyrus One shares currently trade just below $23.


Interest Stems From Cincinnati Bell Stake

While Marcato Capital Management has disclosed CONE as a new position, it's important to realize that the hedge fund also owns a stake in Cincinnati Bell (CBB).  CONE is a subsidiary of CBB.  CBB completed an initial public offering of 16,500,000 CONE shares back on January 18th.  After the IPO, CBB expected to effectively own 71.6% of CyrusOne.

A few months ago, McGuire pitched CBB at the Great Investors' Best Ideas symposium and highlighted the compelling angle of the CONE spin-off IPO.  And now that CONE is a separately traded entity, Marcato has revealed a sizable stake in it.

Per Google Finance, CyrusOne is "a owner, operator and developer of enterprise-class, carrier-neutral data center properties. The Company provides mission-critical data center facilities that protect operation of information technology (IT) infrastructure for approximately 500 customers. As of September 30, 2012, the Company’s property portfolio included 23 operating data centers in nine markets: Austin; Chicago; Cincinnati; Dallas; Houston; London; San Antonio; Singapore, and South Bend providing approximately 1,630,000 net rentable square feet (NRSF) and powered by approximately 125 megawatts of utility power."

For more from this hedge fund, head to Marcato's recent portfolio activity.