Thursday, July 9, 2009

WSJ: Latest Picks and Pans from George Soros and John Paulson

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Two names we like to keep our eyes on are George Soros and John Paulson (both of hedge fund world). Ironically the last piece I did on either, was a combined piece as well. [May 16, 2009: John Paulson Continues to Pile into Gold; George Soros Sells some Petrobras and Potash] If you are not familiar with their histories we've outlined them in posts linked at the bottom of this entry. The Wall Street Journal has a piece on some of their latest thoughts and positions, and there is also a 2 part video on this link specifically for any Soros fans.

There are 2 other fellows (I am not familiar with) who did well during this epic period in history so I put some of their comments at the very bottom.
  • As the historic market collapse felled many investors, a handful set themselves apart by scoring big profits. Now, several of these money managers expect more bad times ahead, including struggles for consumers, limp earnings and a possible surge of inflation. They also see pockets of opportunity.
SOROS
  • George Soros is bullish on China, India and Brazil.
  • "Maybe we're making the same mistake again by thinking that China and India will decouple from the developed world," Mr. Soros says. But "China is the major beneficiary of the collapse of the financial system. For them it was an external shock," he says. "Because China is in a position to stimulate its economy, it will be a motor for the global economy," partially replacing the U.S. consumer.
  • As for Brazil, Mr. Soros likes state-owned Brazilian oil giant Petroleo Brasileiro SA, for example. But the firm trimmed some of its position earlier this year in the company, known as Petrobras, which has seen a run-up in the share price.
  • The renowned 78-year-old investor and philanthropist calls the current terrain a "trading market," saying in a recent interview that investors should take profits when shares surge, even if they look promising long term.
  • "I'm not bearish but I don't see how we can have the kind of growth in profits that we had during the superbubble," says Mr. Soros, who these days leaves most day-to-day trading decisions at his $24 billion fund to Keith Anderson, a former BlackRock portfolio manager.
  • The fund scored gains of 32% for 2007, 8% in 2008 and 17% so far in 2009. "He's the player, I'm the coach," Mr. Soros says. (translation: I'm the player and the coach) ;)
PAULSON
  • John Paulson is investing in distressed debt, residential mortgages, even companies in bankruptcy proceedings.
  • Mr. Paulson, who scored collective profits of more than $17 billion in 2007 and 2008 by betting against subprime mortgages and financial shares, sat a huge pile of cash at the outset of 2009 -- some $19 billion of his hedge funds' $30 billion, his investors say. (again, displaying cash is an asset class, not trash as is popular in the mutual fund world)
  • But as Mr. Paulson and his team spent weeks combing through the rubble of the credit markets, they concluded that beaten-down prices assumed a rash of defaults that were unlikely to materialize. "We completely shifted our focus on the credit markets from one which had a short bias starting in 2006 to one that is aggressively long," Mr. Paulson said in a recent interview.
  • The posture has its risks, especially if credit woes spread among better borrowers. But over the past four months, Mr. Paulson bought top-rated residential mortgage-backed bonds, commercial mortgage-backed securities, distressed debt and leveraged loans. Mr. Paulson even purchased shares of some big banks and financial companies, the kinds of companies he wagered against in 2008.
  • As the market rebounded, Mr. Paulson's funds scored gains of between 4% and 15% for the year, through the end of May, investors say.
Here is an interesting one...
I'm still not a fan of Capital One (COF) at these levels, although we now own a small stake in somewhat competitor Discover Financial (DFS). Discover and American Express (AXP) at least have "transaction network fees" to fall back on, as opposed to pure plays on "transactions" (all 3 of course have credit risk). JPMorgan (JPM) is now "America's bank" so no surprise there. CB Richard Ellis Group (CBG) is the one that really caught my eye... this is basically the "Century 21" of commercial real estate. This name was absolutely obliterated but it is one way to be bullish on commercial real estate without having the exposure to the actual firms (and their increasing vacancy rates, with dropping rental rates) I sniffed around that name a month ago but did not pull the trigger. I'll need to revisit this one and do more homework.


  • "While we don't believe bank stocks in general are undervalued, we do believe many represent compelling investment opportunities over the cycle," he says.
  • His team is buying selectively, as they fear lower growth ahead as consumers struggle. And Mr. Paulson is concerned that all the money that the U.S. and other governments are shoveling at various problems eventually will lead to a surge in inflation. (we can tell that by his massive forays into gold) The stance is controversial—others say it will be years before inflation becomes a problem. But Mr. Paulson is buying protection now; more than 10% of his holdings are in gold, his investors say.
Earlier Paulson pieces

[Mar 17, 2009: John Paulson Joins David Einhorn as Gold Bug with Stake in AngloGold Ashanti (AU)]
[Jan 31, 2009: Dealbook - John Paulson's Year End Review]
[Nov 18, 2008: Paulson Buying Mortgage Backed Securities]

Earlier Soros pieces

[Apr 7, 2009: George Soros on Yahoo Tech Ticker]
[Mar 31, 2009: UK Times: George Soros Sees Global Meltdown]
[Feb 23, 2009: George Soros - This is the End of the Free Market Era; Situation Similar to Disintegration of Soviet Union]
[Feb 18, 2009: George Soros Increases Stakes in Potash & Petrobas]
[Jan 28, 2009: Roubini & Soros on Bad Bank]
[Apr 9, 2008: Soros Believes Global Subprime Costs to Reach $1 Trillion]
[Jan 22, 2008: Soros Says World Faces Worst Financial Crisis Since World War II]

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FOURNIER & MELCHER
  • Alan Fournier, a lesser-known investor with a strong track record, likes some health-care shares, while James Melcher, also successful lately, likes corporate bonds.
  • We're trying to make hay while the sun's still shining," says Mr. Fournier, who runs $2.8 billion Pennant Capital. "Maybe we can rally through the summer, perhaps for another year, but there are a lot of difficult issues that we're going to have to deal with."
  • Like Mr. Paulson, Mr. Fournier was among the first investors to turn gloomy on housing. Mr. Fournier, who once worked for prominent hedge-fund manager David Tepper, operates under the radar in suburban New Jersey. His hedge fund, Pennant Capital, is up about 9% this year, thanks to gains from commercial and residential mortgages.
  • Now he is bullish on an area that others are beginning to warm to: health care. Mr. Fournier argues that WellPoint Inc., the big managed-care company, is a bargain. Though some are concerned that President Obama's health-care plan will put a lid on earnings of WellPoint and other health-care firms, policy changes "won't be as much of a threat to public HMOs as people fear," says Mr. Fournier, who regularly consults with lobbyists working in the Capitol. (that's one way to find out the 4-1-1; lobbyists make the rules so what better source? We've come a long way since the Peter Lynch method of finding good investments - instead of looking around at what you know, now you should have lobbyists on your speed dial. That pretty much sums up a lot of what is wrong in the country)
  • "WellPoint is a very cheap stock," he says, and can generate the cash flow to buy back as much as 40% of its outstanding shares, he estimates. He likes the stock even though it has outpaced the market in recent months.
  • Mr. Fournier also likes coal and utility stocks, such as Foundation Coal Holdings Inc. He recently succeeded in helping to push out chief executive and chairman at mortgage and fleet-management company PHH Corp., where he sees big upside.
  • The danger: These companies get caught in a downdraft that Mr. Fournier is sure is down the line. "I just don't know if the market can sustain itself past this brief window, when the stimulus impacts the economy," Mr. Fournier says. "It's only a matter of time before stimulus effects fade, the economy rolls over, deficits hurt bond yields and the dollar gets hurt." (regular readers will realize these words have been echoed on these virtual blog pages many times)
  • Mr. Melcher's team at Balestra Capital is finding even fewer ripe investments. Balestra is relatively small -- just under $1 billion -- but the hedge fund has racked up stellar returns for several years, including gains of 199% in 2007, 46% last year, and 7% so far in 2009, according to investors. It owns top-rated corporate bonds with yields of about 6.5%, investments that found popularity in recent weeks.
  • But Mr. Melcher has become increasingly concerned that the stock market is beginning to look expensive again, and that investors are overlooking problems. "The economy is still deteriorating, job losses are still huge, I really don't see where earnings will come from to drive valuations," Mr. Melcher says. "Just because things are getting worse at a slower pace doesn't mean they're getting much better." (again, these exact quotes could of been ripped off the pages of FMMF)
  • To profit from coming problems in rash of countries, Balestra has been loading up on derivatives, known as credit-default swaps, that insure the debt of Latvia, Bulgaria and Romania, his investors say. The firm also has taken positions against the debt of Sweden, Ireland and Greece. Behind the trade: It can cost less than $5,000 annually to insure $1 million of this debt, making it a low-risk but potentially high-paying bet, the Balestra team has argued.
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So you can see the themes here, all of these gentlemen are trying to "thread the needle" - recognizing some money can be made while we artifically create prosperity (I call it PPP = paper printing prosperity) while duress continues under the surface. All are worried about what happens when we exit this government created "eye" of the storm.

As the market continued ever upward and we heard the dogma (once again) of "the market knows all" (even though it knew nothing in October 2007, or January 2000) I felt like the crazy guy sitting on the park bench mumbling to himself. As I read the investors above, and see some quotes taken almost verbatim from our website - I feel a little less crazy, or make more crazy like a fox....

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