World Markets 101

$50 Billion “Ponzi Scheme” Exposed

Remember the old saying “if it’s too good to be true it probably is?”  Well investors in Bernard Madoff’s hedge fund should have been asking themselves that very question since 2004.  The fund reportedly returned 7-9% consistently over the years purportedly using a strategy where they wrote options against the fund’s positions.  Mr. Madoff told employees on December 10^th that his fund had lost $50 billion and that it was essentially a ponzi scheme whereby old investors are paid out by finding new investors. 

Mr. Madoff’s fund supposedly managed $17 billion mainly for fund of funds and charitable organizations.  The fund of funds that were feeding the accounts that Madoff’s firm managed were leveraged to a factor of 3, which meant investors in the fund of funds were receiving steady returns of 21-30%, or so they thought.  One fund of funds mentioned on CNBC had raised questions about the legitimacy of the returns since the strategy that was being implemented typically yielded lower returns than what Madoff was reporting.  It is not yet clear where that $50 billion number is coming from that Mr. Madoff has referred too, but by any means a fraud measured in the billions is certainly going to be one of the biggest if not the biggest in history. Details will be released over the next few weeks as to how exactly Bernard "Made off" with the money.

Keeping Track of the Bailouts

The New York Times had a great one page breakdown of the commitments from the U.S. government that have resulted from the financial crisis. 

http://www.nytimes.com/imagepages/2008/11/26/business/20081126_FED_graph1.html

CNBC Portfolio Challenge: Fast Money Strategies

The CNBC trading challenge started this past week; want-to-be portfolio managers are given $900 thousand in phony cash for stocks and $100 thousand leveraged 20 times for currencies.  I must admit its not one of my favorite challenges simply because participants are given money for watching CNBC and referring other people, while that's great for CNBC it's not so great for participants with a life.  I used to play the Barron's Challenge each year until they canceled it.  Last year I was ranked 8th out of 2000 or so players until the final stretch when commodities blew out on me.

I love a challenge, and while the CNBC’s challenge is not quite fair, it is fun to play anyway.  So here is my strategy: I went ultra-long stocks, ultra-short stocks, ultra-long commodities, long commodity stocks and long/short.  I play the biggest winner and let the other ones ride.  You have to use leveraged ETFs to win; people that think they can just pick stocks are fooling themselves; you need to play the volatility.  As it stands, I am playing my ultra-short portfolio, which makes sense given that equities have been in a clear downtrend for some time now (the trend really is your friend).  So I’ve decided that I will only go ultra-short, but I will adjust the positions based on the VIX and equity put/call ratios.  This first week I am up 28%.  Despite the gain I still have 764 people in front of me, but there are over 300 thousand portfolios out there.  Below is a snapshot from CNBC (FYI I would never do this with real money).  I went flat on Friday morning and currently have no positions outside of currencies.

What the Picken’s Plan Man is Picking

BP Capital is Boone Picken’s investment firm and according to their latest 13F filing these are their most recent portfolio movements. 

BP Capital

Largest new positions (not all shown):

Name                                                   Position Value

Valero                                                               $44M

 

Previous positions that were added to (not all shown):

Name                                                   Position Value

Devon Energy                                                   $88M

XTO Energy                                                      $66M

Fluor Corp                                                        $51M

Tenaris SA                                                        $46M

Sandridge Energy                                             $39M

 

Boone was on CNBC recently and he stated that his firm is not long or short oil futures.  

What are some of the Best Hedge Fund Managers Doing?

Its 13F filing time again, what are 13F filings you might ask? Institutional money managers who oversee more than $100 million must report their holdings to the SEC each quarter in their 13F report.  These reports can be used to analyze the position movements of the best fund managers in the industry.  Sometimes they can even be used to figure out the manager’s current strategy, but keep in mind the funds that I am going to review are most likely hedged in some way.  Also keep in mind that not every position held is shown in these filings and many of these funds have high turnover; so don’t simply assume you can buy one of their positions and sit tight. 

I decided to look at several firms, which I feel are some of the best in the industry, but feel free to comment if you know of any other firms that I should list next quarter.   I’ve listed some of their largest new holdings and position movements for your convenience, but I am in no way giving any of their ideas a vote of confidence.  In fact most, if not all of these hedge funds, have suffered losses since last quarter just as many of you have.  I analyzed the 13F filings of the following funds:

·         Harbinger Capital Partners

·         Atticus Management

·         Renaissance Technologies

·         Soros Fund Management

·         Caxton Associates

·         Pequot Capital Management

·         SAC Capital

·         Eton Park Capital Management

·         Paulson & Co.

·         Passport Capital

 

Harbinger Capital Partners

Largest new positions (not all shown):

Name                                                   Position Value

Navistar International                                    $170M

United States Oil                                            $78M

Mirant Corp                                                      $45M

 

Previous positions that were added to (not all shown):

Name                                                   Position Value

Calpine                                                             $448M

Ultrashort financials                                       $210M

Solutia                                                               $145M

Sunoco                                                              $62M

Nicor                                                                  $41M

 

Harbinger seemed to be pretty well hedged by holding some substantial ultra short positions in financials and the indexes themselves.

 

Atticus Management

Largest new positions (not all shown):

Name                                                   Position Value

Companhia Vale Do Rio ADR                     $84M

 

Previous positions that were added to (not all shown):

Name                                                   Position Value

CSX                                                                   $90M

 

I not sure what is going on with Atticus, but the total value of their reported holdings shrunk significantly when compared to previous filings.

 

Renaissance Technologies

Largest new positions (not all shown):

Name                                                   Position Value

Emerson Electric                                            $168M

Air Products & Chemicals                             $165M

Visa                                                                    $139M

Celgene                                                            $108M

Praxair                                                               $93M

Bunge Limited                                                 $78M

CVS Caremark                                                $71M

TYCO International                                         $70M

Deere & Co.                                                     $66M

 

Previous positions that were added to (not all shown):

Name                                                   Position Value

Amgen                                                              $321M   

Linear Technology                                         $313M

Apple                                                                $288M

Dish Network                                                  $278M

Wrigley                                                             $261M

Forest Labs                                                     $215M

DirecTV                                                             $183M

General Dynamics                                         $178M

Novo-Nordisk                                                  $163M

Humana                                                           $151M

Freeport McMoran Copper & Gold               $146M

Credicorp                                                         $144M

Taiwan Semiconductor                                 $143M

Costco                                                              $137M

Eli Lilly                                                              $132M

 

James Simmons is notoriously secretive about his fund’s strategy, but it’s relies on a great deal of trading using mathematical theories from what I’ve read.  The fund didn’t seem to have the amount of turnover that I was expecting, which leads me to believe that he trades with many of the same positions very often.  The fund manages over $25 billion and manages to continually outperform the market handily, which is why James is able to charge a 5% management fee and a 44% incentive fee.

 

Soros Fund Management

Largest new positions (not all shown):

Name                                                   Position Value

Research in Motion                                        $110M

Arch Coal                                                         $95M

Whiting Petroleum                                         $26M

Global Ship Lease Inc.  A                             $24M

Suncor Energy                                                $21M                       

 

Previous positions that were added to (not all shown):

Name                                                   Position Value

Petroleo Brasileiro                                         $931M

Conoco Phillips                                              $125M

 

George Soros got burned on Petroleo Brasileiro last quarter, but he’s not giving up; he added almost ten million additional shares to his holding and like Buffet, he is a fan of Conoco Phillips as well.

 

Caxton Associates

Largest new positions (not all shown):

Name                                                   Position Value

JP Morgan                                                        $180M

Grey Wolf                                                          $100M

Ikon Office Solutions                                      $68M

Campbell Soup                                               $53M

Scripps Networks Interact                             $38M

 

Previous positions that were added to (not all shown):

Name                                                   Position Value

Metlife                                                               $86M

Service Corp International                            $61M

Ferro Corp                                                       $46M

Autozone                                                          $42M

Altria Group                                                     $40M

Walmart                                                           $40M

Wells Fargo                                                    $39M

XTO Energy                                                     $37M

Raytheon                                                         $37M

Coca-cola                                                        $37M

 

Bruce Caxton apparently likes Metlife, which Barron’s has been pounding the table on for sometime now.  The stock hit a new another low yesterday after declining over 20% in one day so it will be interesting to see if the position shows up in his next filing.  The $180 million stake in JP Morgan is a nice vote of confidence in Jaime Diamond’s management skills.

Pequot Capital Management

Largest new positions (not all shown):

Name                                                   Position Value

XTO Energy                                                      $186M

Chesapeake Energy                                      $143M

Microsoft                                                           $43M

Exxon Mobil                                                      $36M

Petrohawk Energy                                          $23M

 

Previous positions that were added to (not all shown):

Name                                                   Position Value

Short MSCI Emerging Markets                    $308M                 

SPDR Gold Trust                                           $298M

Qualcomm                                                      $74M

Onyx Pharmaceuticals                                  $56M

Wells Fargo                                                     $47M

 

Based on the largest new positions Arthur Samberg is looking to take advantage of the weakness in energy.  Of all of the funds that I reviewed he had one of the largest short position against the emerging markets.  I am viewing the almost equally sized position in gold as a hedge against that short position given the high correlation between the two.

SAC Capital

Largest new positions (not all shown):

Name                                                   Position Value

Genentech                                                       $278M

Navistar International                                     $146M

Barr Pharmaceuticals                                    $135M

Newmont Mining                                             $102M

Freeport-McMoran Copper & Gold               $89M

 

Previous positions that were added to (not all shown):

Name                                                   Position Value

EMC Corp.                                                        $36M                 

NRG Energy                                                     $29M

Genzyme                                                          $27M

Alparma                                                            $25M

Microsoft                                                           $19M

 

Steve Cohen has always been one of my idols ever since I read the book Market Wizards years ago.  He uses industry specialized groups of traders to trade in and out of securities and it shows in the amount of turnover he has had since his last filing.  His group has some of the best traders in the world, while also having some of the most bizarre trading strategies, such as using men dressed as women on estrogen (Google it if you missed the story on CNBC back in October of 2007).

 

Eton Park Capital Management

Largest new positions (not all shown):

Name                                                   Position Value

Verisign                                                            $245M

SPDR Gold Trust                                            $223M

Genentech                                                       $198M

Short Potash Corp                                          $159M

Barr Pharmaceuticals                                    $100M

Alpha Natural Resources                              $79M

Alpharma                                                          $72M

UST Inc.                                                             $66M

Ikon Office Solutions                                       $66M

Spirit Aerosystems                                          $60M

Companhia Vale Do Rio                                $57M

Mobile Telesystems                                        $56M

Short Deere & Co.                                            $45M

 

Previous positions that were added to (not all shown):

Name                                                   Position Value

SPDR Gold Trust (calls)                               $851M

Short MSCI Emerging Markets                    $478M

Merrill Lynch                                                    $436M

Short Wells Fargo                                          $325M

Qualcomm                                                       $216M

Goodyear Tire                                                 $188M

Comcast                                                          $177M

Hansen Natural                                              $171M

Hospira                                                            $162M

SLM Corp                                                         $103M

EBAY                                                                 $90M

Short Lorillard                                                 $71M

Calpine                                                            $55M

Beckman Coulter                                           $54M

 

Eton Park seems to be another fund that is playing the market by shorting emerging markets and going long gold.  What I thought was interesting was that unlike some of the other funds that have gone long Wells Fargo, they have chosen to take a sizable short position using puts against Wells Fargo.  Only time will tell who is right.

 

Paulson & Co.

Largest new positions (not all shown):

Name                                                   Position Value

Anheuser Busch Cos                                     $1.83B

Rohm & Haas Co                                            $1.05B

Barr Pharmaceuticals Inc                              $653M

Applied Biosystems Inc                                 $346M

Genetech Inc                                                    $304M

Philip Morris Intl Inc                                         $289M

BCE Inc                                                              $191M

Merrill Lynch & Co Inc                                     $88M

NRG Energy Inc                                               $50M

Brocade Communications                            $41M

 

Previous positions that were added to (not all shown):

Name                                                   Position Value

Mirant Corp                                                      $336M

 

Paulson made himself famous with his big bets against subprime and it looks like he is still making a mint by performing takeover arbitrage.  You’ll notice that most of the companies that he holds are being taken over in preannounced deals that close in the near future.  With a position of almost $2 billion in Anheuser, he must have profited nicely when the deal was closed today given that the stock was selling 17% below the takeover price in the most recent quarter. 

 

Passport Capital

Largest new positions (not all shown):

Name                                                   Position Value

SPDR Gold Trust (calls)                                $681M

Potash Corp (calls)                                        $535M

Bank of America (puts)                                  $228M

Mosaic                                                               $215M

Amazon (puts)                                                  $158M

Apple (puts)                                                      $136M

Mosaic (calls)                                                   $136M

Petroleo Brasileiro (calls)                              $133M

Harley Davidson (puts)                                  $94M

 

Previous positions that were added to (not all shown):

Name                                                   Position Value

Monsanto (calls)                                             $426M

 

Most of Passport Capital’s positions are held in options rather than stock positions and the firm seems to have very high turnover.  The firm manages about $3 billion and was one of the firms that bet against subprime last year and won big. 

 

You too can perform this same analysis on any funds that you are interested in reviewing.  Simply go to www.sec.govand search based on the fund’s name.  Once you locate the fund that you are looking for and their 13F filing, just copy and paste the results into Excel.  Using the “text to columns” feature separate the results based on the columns shown in the SEC data (make sure you’re using Excel 2008 because the older versions don’t have the enhanced “text to columns” character recognition, which is imperative to accurately and efficiently separate the data).  Once you have the previous quarter and the most recent quarter’s results in place, use the “VLOOKUP” function to compare particular columns.  If that process doesn't sound like fun to you than just check out my blog or keep an eye on my submissions to SeekingAlpha.com.

 

Guardian Investment Management, LLC (“GIM”) does not make any representations or warranties as to the accuracy, completeness, or relevance of any information or opinion prepared by any unaffiliated third party provider. All such information is provided solely for convenience purposes and all users thereof should be guided appropriately. Inherent in any investment is the risk that the investor will lose his or her entire investment, prices will fluctuate, and dividends, rates of return and yields will change. Investment results cannot be predicted or projected with any certainty and gain or income realized on past investments may not necessarily be an indicator of future results or be repeated in the future. None of the information contained in this article constitutes a recommendation by Keith Robison or GIM, that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. You must make your own independent decisions regarding any security, portfolio of securities, transaction, or investment strategy mentioned in this article. Before acting on any information contained in this article, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.

Going Long Money Printing Machines and Taxes

Bernanke & Co. are going to make sure that the U.S. does not become the next Japan, which was plagued by deflation for years.  If there is one thing we can count on, our government will do everything possible to reflate our economy from cutting taxes to lowering interest rates, buying assets, and even buying companies, which in the long run will result in higher taxes for everyone, an increase in the money supply and higher inflation.

Ben Bernanke is an expert on the great depression and he also has a great understanding of the financial crisis that occurred in Japan.  His nickname, Helicopter Ben, was given to him after a speech in 2002 regarding deflation where he mentioned a statement made by Milton Freidman about using a "helicopter drop” of money into the economy to fight deflation.  He has made it clear that he believes deflation can be prevented when the government controls the money since the government can simply issue more money.  With the recent talk of deflation, it doesn’t take a genius to figure out what Bernanke will likely do to avert a crisis.

Expect the bailouts to continue, especially under the new democratic leadership. The cost of bailing out AIG, and Fannie and Freddie has resulted in a growing price tag that will likely top $250 billion by the end of the year. The big three will help continue that trend as the poorly run automakers join the line of companies deemed “to big to fail.” The U.S. has $13 trillion in debt and that number is increasing by $1 trillion every 15 months.  Someone has to pay for this debt at some point, which will result in higher taxes in the long run.

Sometime in the future, the appetites that foreign buyers have for our debt will dry up.  In fact, the $586 billion investment that China is making in it’s own country may affect demand for our debt down the road.  As rates start to rise as a result of a lack of demand for our debt issues, I wouldn’t be surprised to see our monetary leaders begin to monetize our debt.  With our trade and budget deficits, money printing, low savings rates and our overall need to print our way out of the crisis, I don’t think you can go wrong going long printing presses and long taxes.

Is Oil Cheap?

That is the question I have been pondering lately with all of the so-called experts pounding the table stating that energy stocks are a screaming buy.  However it is unlikely that energy stocks will move higher without a move up in oil.  So if oil needs to go up before energy stocks gets moving again than it is worth determining whether oil is undervalued or overvalued.  Since it has come down from $147 to the low sixties, it must be a bargain right?  Not really. 

I built a model that determines whether or not oil is undervalued or overvalued based on the economies of the four largest oil consumers: the United States, China, Japan and Germany.  In addition to taking into account the economies of these four nations it also takes into account the strength in the dollar, which has an extremely high correlation to the price of oil. 

So what did I find?  Obviously hindsight is 20/20, but the model would have told you back at the end of June 2008 that oil prices were around 40% overvalued.  As oil was trading close to $150, this model says that it should have been trading at $90 based on the strength of the world economies and where the dollar was trading.  Interestingly enough, oil was undervalued for most of 2007, as much as 30%, finally reaching fair value in November of 2007. 

Where are we today?  According to the model, yesterday we were very close to fair value, but we were not undervalued.  If the world stock markets turn, that will obviously help oil, but I would like to see a situation where oil is undervalued based on the strength of the dollar and the world’s largest economies before I begin to look at energy compared to other industries.

The top 20 oil consuming nations:

Courtesy of http://www.nationmaster.com/graph/ene_oil_con-energy-oil-consumption

S&P to Rate Securities Issued by a Group of Cows

In a shocking, or not so shocking, testimony today in front of congress, S&P discussed internal emails that had floated around the company basically saying that their ratings models were flawed.  But we’ve all known these guys couldn’t predict the probability of an outcome if their life depended on it and that they didn’t care about anything, but increasing their revenue, so why should we care?  Because the emails were classic!

One analyst wrote that the complex mortgage deals were “ridiculous” and that S&P should “not be rating it” referring to the security.  His co-worker replied, “we rate every deal, it could be structured by cows and we would rate it.”

In another email by an S&P manager the manager says they were helping to create an "even bigger monster -- the CDO (collateralized debt obligation) market.”  Then he says “Let's hope we are all wealthy and retired by the time this house of cards falters."

The weakness in the ability of the ratings agencies to adequately rate securities due to the major conflict of interest that exists in their business model has caused billions of dollars in collateral damage around the world. 

 

Who Will Be Left Holding The Bag?

Tomorrow payments are due from the 350 banks and investors that insured Lehman Brothers’ debt through credit default swaps.  These insuring parties will have to come up with a cool $365 billion dollars or approximately 9c on the dollar of the total outstanding debt.  According to the London times some of the largest investors include PIMCO, Citadel, and AIG.  JP Morgan also released some names that are expected to take substantial hits.  The list included Deutsche Bank, Barclays and UBS among other investment banks.  It’s been rumored that some of the parties that wrote the contract have been selling assets in the open market to prepare for tomorrow.  Keep in mind the CDS market is an unregulated market without capital requirements.

Do you think anyone will be unable to come up with the funds? 

“Be greedy when others are fearful and fearful when others are greedy”

Warren Buffet wrote an op-ed piece for the New York Times last week telling readers that he has been buying American stocks.  It's important to point out that CNBC reported that he was buying when the Dow was under 8500, then when the Dow started to rally above that level he stopped buying, at least that day.  Either way it's a great piece from the world's best investor.

http://www.nytimes.com/2008/10/17/opinion/17buffett.html?_r=1&dbk&oref=slogin