investment


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>David Einhorn’s latest 13D filing shows that he loaded up on shares of Apple – raising his stake by 50% – just before bringing a lawsuit demanding some kind of convoluted preferred dividend scheme. I must have had the abridged version of Graham and Dodd because I can’t remember the chapter in ‘Security Analysis’ that teaches Lawyer Selection in value investing.

Actually it’s in Chapter XLIV. The 1940 Edition.

His favorite investment right now is natural gas. He says it’s like buying gold in 1997….
Buy stocks when they’re in the single digit PE range.
QE3 is already underway in operation twist.
Still worried about the national debt….
Europe remains the biggest risk to the equity markets.
The biggest risk to his funds and outlook is surging interest rates.
The Fed won’t raise rates unless inflation kicks up further.
Believes rates will remain low to stable.

If you’ve ever thought about trying to open a Hedge Fund, and why not if you have a good track record, here are some of the factors Hedge Fund investors look for.

Hat-tip

1. Carlos Slim ~ $53.5b
2. Bill Gates ~ $53b
3. Warren Buffett of Berkshire Hathaway ~ $47b
35. George Soros of Soros Fund Management ~ $14b
45. John Paulson of Paulson & Co ~ $12b
59. Carl Icahn of Icahn Partners ~ $10.5b
80. Jim Simons of RenTec ~ $8.5b
113. Steven Cohen of SAC Capital ~ $6.4b
171. Stephen Schwarzman of Blackstone Group ~ $4.7b
212. Ray Dalio of Bridgewater Associates ~ $4.0b
212. Daniel, Dirk & Robert Ziff of Och-Ziff ~ $4.0b
258. Bruce Kovner of Caxton Associates ~ $3.5b
258. David Tepper of Appaloosa Management ~ $3.5b
287. Daniel Och of Och-Ziff ~ $3.3b
297. Paul Tudor Jones of Tudor Investment Corp ~ $3.2b
316. Eddie Lampert of RBS Partners ~ $3.0b
374. David Shaw of DE Shaw Group ~ $2.5b
437. Julian Robertson of Tiger Management ~ $2.2b
488. Philip Falcone of Harbinger Capital Partners ~ $2.0b
488. Ken Griffin of Citadel Investment Group ~ $2.0b
488. Bill Gross of PIMCO ~ $2.0b
582. Izzy Englander of Millennium Partners ~ $1.7b
582. Charlie Munger of Berkshire Hathaway ~ $1.7b
655. Stephen Mandel of Lone Pine Capital ~ $1.5b
655. Louis Bacon of Moore Capital Management ~ $1.5b
655. Leon Cooperman of Omega Advisors ~ $1.5b
721. Marc Lasry of Avenue Capital ~ $1.4b
828. Peter Thiel of Clarium Capital ~ $1.2b
880. Nelson Peltz of Trian Partners ~ $1.1b
880. T. Boone Pickens of BP Capital ~ $1.1b

From The Economist

SELDOM has a school of thought fallen from grace as fast as that of “efficient markets”, the concept that asset prices already reflect all available information. Yet despite the crisis, the ideas of the Chicago School are still at the centre of a row over the management of the world’s second-largest sovereign-wealth fund.

The Norwegian Government Pension Fund Global, which is more commonly known as Norway’s petroleum fund, looks after some 2.6 trillion Norwegian krone ($444 billion) in savings from royalties on the country’s oil and gas reserves in the North Sea. The fund, which Norway is saving for a rainy day, is already about the size of the national economy and will probably double within about a decade.

For most of the past ten years it has hummed along happily. As Europe’s largest shareholder it has taken its ownership responsibility to heart with typical Nordic earnestness. It regularly writes letters to companies urging them to improve their corporate governance. It also blacklists firms that it thinks are not well-behaved. Among them are tobacco companies and arms producers.

In the years before the crisis, making the world a nicer place was not at odds with making money. The fund comfortably beat the investment benchmarks set for it by Norway’s government. But that all came to a crashing halt in 2008, when the fund’s value slumped by almost a quarter; its equity holdings dropped by around 40%. The absolute fall was no worse than those of many other large investors, yet it prompted soul-searching in Norway. This was partly because losses were far larger than expected for what was thought to be a low-risk investment strategy, and partly because the fund had made some ill-timed bets on banks, including Lehman Brothers.

Shocked, the government asked for a review of the fund’s active-management approach by Mercer, a consultancy, and for a report by three business-school academics—Andrew Ang, William Goetzmann and Stephen Schaefer from Columbia, Yale and London respectively. The three professors found that for all their stock-picking and do-gooding, the fund’s managers could just as well have thrown darts at a board. Taking the crash into account, the oil fund’s performance was essentially indistinguishable from that of a passively managed index fund. “The evidence points to the fact that over time, managers do not provide extra profits,” says Espen Sirnes of the University of Tromso.

How then did the fund manage to beat its benchmarks before the crisis? The professors argue that this was not because of clever share selection but because it took on extra risk by, for instance, investing in securities that are not easily traded or buying bonds of companies that might go bankrupt. They argue that instead of trying to beat the markets, the government should simply have the fund track an index tweaked to take on a bit more risk because of its very long investment horizon.

The fund’s managers have fired back with a 96-page rebuttal of passive investing. Among other things, they say that only fools would buy corporate bonds based on nothing more than their credit ratings. The fund bounced back sharply in 2009, posting a 22% gain in the first nine months of the year. That should help their cause when the Norwegian parliament debates the issue in the spring.

Year…………..P/E start/Finish……Inflation start/finish…..%gain in +…..%gain in -…..End
1901-1920……..23………5…………….[-2%]……..16%………………30%………[-17%]……….2%
1921-1928……..5……….22…………..[-11%]……[-2%]……………..24%………[-2%]………317%
1929-1932…….28………8……………….0%……..[-10%]…………..0%………..[-34%]…….[-80%]
1933-1936…….11……..19……………[-5%]……….1%…………….34%………….0%………..200%
1937-1941…….19……..12……………..4%…………5%…………….28%………[-16%]…….[-38%]
1942-1965…….9………23……………..11%………..2%……………..16%………[-8%]………774%
1966-1981……21……..9……………….3%…………10%……………13%………[-15%]…….[-10%]
1982-1999……7………42……………….6%…………2%……………..18%………[-4%]……..1214%
2000-2008…..42……..19………………3%…………5%………………………………………….[-37%]

What can easily be discerned is that for the market as a whole, starting P/E’s have historically been reliable indicators of likely returns to be enjoyed from buying the market and holding.

Currently, at a P/E of 19, the market is historically expensive, and would not be indicitive of attractive returns going forward. Rather, poor returns going forward would be the historical expectation.

All the various ratios provide similar metrics, dividend yields, book values, Q ratios, all tell a similar story, that this market is likely for a buy and hold strategy, to yield sub-par returns.

The business model as described in the previous post can make money. The two problems are excessive leverage combined with a nationwide fall in house prices that is creating defaults [in addition to loans that simply never should have been made]

Over a 10 year period FNM made an average [unadjusted] $4.03/share. These earnings [of the last 5 yrs] have in effect been lost. Thus the only realized profits came from the paid out dividends, $9.54/share over 5 years.

Why has FNM lost so much money?

Costs have spiralled out of control. This should be attributed to management. What are they getting paid for? Gross margins are 18% higher than average. When you run 65:1 leverage, that is not where you want to be. SG&A costs have exploded, they are 114% above average.

SG&A 5 year average ratios ran at 0.33. Currently they are at 3.34, simply out of control. The discretionary element of SG&A, directly under managements control = $4.26/share. That would have turned a [-$0.20/share] loss to a $2.19/share profit.

This metric is further confirmed via analysis of the cashflow statement. A 5 year average ratio of 13.07 was transformed into [-8.03] this year.

Examining the first metric. The cost of capital, driving the Gross margin. This is obviously driven via the spreads in the money markets. This is influenced by perceptions within the market with regards to the safety. With the Treasury assuming liability, these spreads should now facilitate a cheaper cost of capital, thus dramatically increasing the earning power [due to leverage]

The second metric, SG&A expenses is a little more difficult. While the evidence in the numbers convicts the management of poor financial management, I have not yet identified the reason, or where the money actually went. Should it turn out that [so often the case] management enriched themselves, then those cashflows under [hopefully] the more watchful eye of the Treasury should again flow to the capitalization.

A third area that displays serious deterioration; Accounts Receivable. The ratio jumping from a 5 year average of 0.28 to 0.52 indicates a serious deterioration. This [most probable] relates to the default rates within the housing sector rising. Payments that should be collected, are falling into arrears, thus bulging A/R

This will [A/R] have no quick fix, and will fall upon the ultimate resolution and bottoming within the housing market, which may be 24mths away currently.

In addition, dividends, the only real return provided to investors, currently does not exist, and may never be returned. This should be considered, and adds a very speculative element to the operation.

Adjusted Valuation. After adjusting for the dilution, and assuming a return of average earning power, I have a value in the range of $13.85 to $37.81. At a purchase price of $1.23 this represents at the low end a 975% return against a potential 100% loss.

Investment themes, a way to make money in the market. Not a market timer’s methodology, but a valuation methodology. The current market has foxed many, here is one example, from a “professional money manager”;

Theme-less
by The Fly on May 2nd, 2008 at 3:50 pm

I’m sure “The Fly” is making most of you scratch your heads, thinking “what the fuck is this asshole doing”?

One day I hate stocks, the next they’re grrrreat!

Frankly, I am running, without reason. Currently, I am theme-less. I’m just walking around the forest of fucktards, with rifle in hand, picking off game.

Right now, I am long (NILE: 46.16 +2.17%), (WB: 29.62 -1.53%), (LAZ: 37.11 +4.65%), (FMCN: 39.69 -3.74%), (CTRP: 65.00 -2.72%), (NVDA: 22.23 -1.33%), (HD: 29.1019 -0.61%), (JOE: 41.0999 -1.67%), (RIG: 158.174 +0.21%), while having short exposure in (SMN: 30.524 +0.17%), (SRS: 82.90 +1.91%), (SKF: 96.01 +2.15%), (FXP: 64.72 +8.41%), (POT: 201.73 +1.52%) and (LEH: 45.81 -1.08%).

By the way, “The Fly” is Master and Commander of the putrid shares of LEH, just like (HANS: 35.90 +1.61%).

Basically, I don’t have the slightest clue, regarding the near term direction of the market. I’m just trying to be in as many plays as possible, taking gains where I can.

I’ll be utilizing my “time machine” this weekend, in order to get a better feel for the near term direction of this God forsaken market.

I highlight this individual for a couple of reasons. The first is that the “Fly” is anonymous, no-one knows who he is, save as a presence on the internet.

The second reason, is that this individual personified the “Theme investing” style. I followed various themes from his blog on a valuation basis, BWLD [fat people] MVIS [innovative tech] and a few others that escape the memory currently.

As can be ascertained from the quote, “Fly” has either lost, or given up his niche in the market. So, a post on themes.

When credit creation is the rule, and it has been for almost 100yrs now, money will flow to a sector, eventually in excess creating first a bull market, and then, eventually, a bubble.

This rule, by the Law of Opposites, dictates that other sectors will be deprived, relatively, and then absolutely, of new money flowing in, possibly exacerbated by money flowing out, creating a bear market.

Thus, we can state: When the investment community is fascinated by a major investment theme, outstanding opportunities are developing, or are already available elsewhere.

Currently, commodities of all shapes and colours are the investment theme, steel, fertlizer, grains, coffee, and cooling somewhat…Gold/Silver and other precious metals

Second, the timing thereof, will always be fraught with difficulty. The keys to successful theme investing are valuation, total returns and patience.

Here, from the flyonwallst blog site from November 2007, was my post regarding a theme. You will also note the inclusion of said security within the portfolio. I am going to purposely contradict myself, as currency, is almost impossible to value, save on one metric alone, Interest rates, so here is the article;

OPPORTUNITY
The US market and emerging markets are ranging from marginally overvalued with catalysts to the downside, to, grossly overvalued speculative time bombs.

I now offer you a quote from Horace and “Ars Poetica”, for those of you who possibly visited my blog, you will remember it;

“Multa renascentur quae iam cecidere cadentque quae nunc sunt in honore”

The moral being that bull markets invariably create bear markets, and that eventually, the bull markets revert to bear markets, while bear markets grow to bulls.

True bear markets offer very low risk entry points with huge potential upside reward potential. True bear markets are reviled by investors as they have underperformed for long periods of time, frequently teasing with cyclical bull rallies in a secular bear trend.

I have emphasized, at least for those paying attention the importance of a catalyst within investment decisions. This is not an area that I have particularly emphasized within my own investments or trading. It is however an attribute that has been on prominent display on this blog for those who were attentive.

The catalyst in this particular opportunity is particularly important as the quantitative valuation is pretty much useless. The numbers themselves provide only the merest hint and they are difficult in any case.

Thus, we are left with an almost pure qualitative play.

Japanese Yen

Japan has been in a deflationary spiral for some 20yrs now. The stock market, the real estate market, the currency have all been in a secular downtrend.

Why now?

A number of qualitative factors and one quantitative factor; I shall dispense with the quantitative factor first.

Japanese interest rates are slowly working their way upwards, from 0.25% to 0.5% currently, with further rises planned. Higher interest rates will strengthen, in time the currency.

Let’s now move to the qualitative factors; interest rates around the rest of the world have been slowly rising, faster in New Zealand, Iceland and Australia. As the world economy slows, so these rate rises will slow, freeze, or start to reverse.

Bankruptcy proceedings, both business and consumer are accelerating here in New Zealand. As the US economy slows, so the exponential growth in China will start to slow. The Chinese economy is addicted to export led growth, internal consumption is anaemic.

Thus, a closing of the interest rate spread and thus the carry trade, successful for the last 20yrs will come under increasing pressure.

Further, overpriced assets, that find themselves correcting will also find themselves if purchased with cheap Yen, under pressure to reverse.

Real estate values have again started to rise in Tokyo and other cities. Goldman Sachs, Morgan Stanley and Citibank have been purchasing commercial property in the last couple of months, positioning themselves for the end of the great Japanese bear market.

Rising real estate prices, in time force a rise in the interest rate, which for the purpose of this trade is a good thing.

Currencies trend for very long periods of time and the potential for this trade due to the massive undervaluation engendered by the carry trade is large.

Who are you trading against?

In manias, the last people to get sucked in tend to be the amateurs, seduced by the idea that markets only ever move in one direction. That easy money can be made, that the leverage available via margin can make them very rich, very quickly.

Some time ago, possibly 2 months, an article appeared detailing the extraordinary story that Japanese housewives were dominating the Fx market, engaged in the carry trade. Thus, you are trading against the leveraged Japanese housewife.

It is easy to take an unleveraged position within the Japanese Yen via FXY an ETF that has previously been mentioned on this blog.

In summary, we have some quantitative data via interest rates and numerous qualitative underpinnings to catch a secular bull market in its infancy.

I shall be adding this security to the portfolio on Monday.

BUSINESS SUMMARY
Putnam High Income Securities Fund is a closed-ended balanced mutual fund launched and managed by Putnam Investment Management, LLC. The fund invests in the public equity and fixed income markets of the United States. It makes its investments in stocks of companies operating across diversified sectors. The fund seeks to invest in high yield convertible securities. For its fixed income portfolio, it looks for convertible, high yield, lower rated securities to make its investments. The fund benchmarks the performance of its portfolio against the Merrill Lynch All-Convert. Speculative Index and JP Morgan Dev. High yield Index. It was formerly known as Putnam High Income Bond Fund. Putnam High Income Securities Fund was formed on July 9, 1987 and is domiciled in the United States.

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