Tuesday, March 31, 2009

Bloomberg: Financial Rescue Pledges Now $12.8 Trillion

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I guess I am going to need to update this weekly; just last week it was $12 Trillion [Mar 25: Taxpayer Welfare to the System $3 Trillion Down, $9 Trillion to Go], now it appears to be up to $12.8 Trillion per Bloomberg. Numbing. And I was numb back in November 2008 when I said the Federal Reserve is now Atlas! [Nov 26, 2008: US Government on Hook for $8+ Trillion] I don't know how people can be cheering this; the rewards are short term in scope for the long term weight we are attaching around the necks of future generations. Sure some of this dollars are "investments" (surely AIG will pay us back!) and much of it is 'pledges' (just in case) but we have literally built a parallel economy of dollars to prop up the actual US economy. As I wrote last week

Just to put it into perspective the ENTIRE U.S. economy is $13-14 Trillion. Our federal deficit is now $11 Trillion (and we're now on pace to add $2 Trillion a Year with all the new spending/plans). The entire market capitalization of the Wilshire 5000 (the broadest measure of the stock market) was roughly $8 Trillion last I checked.... call it $9 Trillion if you wish. (which is why I am saying of late, sure if we throw enough worthless paper dollars at the stock market, yes stocks will rise - at a major long term cost)


I am left speechless, especially as I watch the cheerleading of this. We are creating an illusion of recovery and eventual prosperity. We still have Medicare and Social Security to deal with (??) Anyone??

Per Bloomberg
  • The U.S. government and the Federal Reserve have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.
  • New pledges from the Fed, the Treasury Department and the Federal Deposit Insurance Corp. include $1 trillion for the Public-Private Investment Program, designed to help investors buy distressed loans and other assets from U.S. banks.
  • The money works out to $42,105 for every man, woman and child in the U.S. and 14 times the $899.8 billion of currency in circulation.
  • “The president and Treasury Secretary Geithner have said they will do what it takes,” Goldman Sachs Group Inc. Chief Executive Officer Lloyd Blankfein said after the meeting. “If it is enough, that will be great. If it is not enough, they will have to do more.”
  • FDIC Chairman Sheila Bair warned that the insurance fund to protect customer deposits at U.S. banks could dry up because of bank failures.
  • The combined commitment has increased by 73 percent since November, when Bloomberg first estimated the funding, loans and guarantees at $7.4 trillion.
  • “The comparison to GDP serves the useful purpose of underscoring how extraordinary the efforts have been to stabilize the credit markets,” said Dana Johnson, chief economist for Comerica Bank in Dallas.

===========================================================
--- Amounts (Billions)---
Limit Current
===========================================================
Total $12,798.14 $4,169.71
-----------------------------------------------------------
Federal Reserve Total $7,765.64 $1,678.71
Primary Credit Discount $110.74 $61.31
Secondary Credit $0.19 $1.00
Primary dealer and others $147.00 $20.18
ABCP Liquidity $152.11 $6.85
AIG Credit $60.00 $43.19
Net Portfolio CP Funding $1,800.00 $241.31
Maiden Lane (Bear Stearns) $29.50 $28.82
Maiden Lane II (AIG) $22.50 $18.54
Maiden Lane III (AIG) $30.00 $24.04
Term Securities Lending $250.00 $88.55
Term Auction Facility $900.00 $468.59
Securities lending overnight $10.00 $4.41
Term Asset-Backed Loan Facility $900.00 $4.71
Currency Swaps/Other Assets $606.00 $377.87
MMIFF $540.00 $0.00
GSE Debt Purchases $600.00 $50.39
GSE Mortgage-Backed Securities $1,000.00 $236.16
Citigroup Bailout Fed Portion $220.40 $0.00
Bank of America Bailout $87.20 $0.00
Commitment to Buy Treasuries $300.00 $7.50
-----------------------------------------------------------
FDIC Total $2,038.50 $357.50
Public-Private Investment* $500.00 0.00
FDIC Liquidity Guarantees $1,400.00 $316.50
GE $126.00 $41.00
Citigroup Bailout FDIC $10.00 $0.00
Bank of America Bailout FDIC $2.50 $0.00
-----------------------------------------------------------
Treasury Total $2,694.00 $1,833.50
TARP $700.00 $599.50
Tax Break for Banks $29.00 $29.00
Stimulus Package (Bush) $168.00 $168.00
Stimulus II (Obama) $787.00 $787.00
Treasury Exchange Stabilization $50.00 $50.00
Student Loan Purchases $60.00 $0.00
Support for Fannie/Freddie $400.00 $200.00
Line of Credit for FDIC* $500.00 $0.00
-----------------------------------------------------------
HUD Total $300.00 $300.00
Hope for Homeowners FHA $300.00 $300.00
-----------------------------------------------------------
he FDIC’s commitment to guarantee lending under the
Legacy Loan Program and the Legacy Asset Program includes a $500
billion line of credit from the U.S. Treasury.


UK Times: George Soros Sees Global Meltdown

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It is interesting how the farther we go along the more negative George Soros gets, which is the opposite of many others. While he admits he was behind the curve at first, he retooled during 2008, and his bearishness is now growing by leaps and bounds each story I read about him. He must be talking a lot with his buddy Jim Rogers ;) (I'll have an extended Rogers video out tomorrow) Actually there are some themes below that were discussed in The Atlantic piece we posted this weekend; mostly denial by the powers that be of what exactly is going on.

One could dismiss Soros as an outlier at this time, but I guess we'll find out in a few years. I have been and remain in the camp *this* is a secular change, and the "new normal" will be a different animal ... just as those who first dismissed (a) a recession was even happening and then morphed into (b) believing it was the old school type of corporate led recession ala early 90s and early 00s - were eventually proven wrong.... I do believe those who believe this will be a typical rebound, will also be proven wrong. But just as I posed theories (a) and (b) were incorrect while the herd was running in the opposite direction, I'm in the same situation now with my ideas of what the recovery will be shaped like. [Dec 15, 2008: The Economic "Recovery"] Time will show if I am 3 for 3.

But in the interim, we'll trade some near term problems for even more epic long term problems - and get our sugar high from money (which we don't have) thrown from every direction by government...

Via UK Times
  • George Soros was 13 when the Nazis invaded his homeland of Hungary. As a Jew, he was forced to adopt a false identity and live separately from his parents in Budapest. Instead of being traumatised by the experience, though, he found the danger exhilarating. “It was high adventure,” he says, “like living through Raiders of the Lost Ark.”
  • Sixty-five years later, he still thrives on danger. He famously made $1 billion on Black Wednesday by shorting the pound, earning him the label of “the man who broke the Bank of England”. Last year, as the world tipped into financial chaos, Mr Soros pocketed another $1.1 billion by correctly predicting the downturn. “I’m an expert in crises,” he says.
  • Since 1944 he has believed in what he calls “reflexivity” – the idea that people base their decisions on their own perception of a situation rather than on the reality. (I would have to agree with that) He has applied this both to investment and to politics: his skill has been to predict moments of seismic change by identifying a disjunction between perception and reality.
  • When everyone else was convinced that the markets would automatically correct themselves, the 78-year-old “old fogey”, as he calls himself, was one of the few warning of recession. He put all his chips on “the Barack guy” early on when all around him were still gunning for Hillary Clinton.
  • This recession, he explains, is a “once-in-a-lifetime event”, particularly in Britain. “This is a crisis unlike any other. It’s a total collapse of the financial system with tremendous implications for everyday life. On previous occasions when you had a crisis that was threatening the system the authorities intervened and did whatever was necessary to protect the system. This time they failed.”
  • The financial oracle does not know how long it will last. “That depends on how it’s handled. Allowing Lehman Brothers to fail was the game-changing event. That’s when the financial crisis went over the brink.” We could end up with a depression. “Unless we handle it well then I think we would. The size of the problem is actually bigger than in the 1930s.”
  • The problem in Britain, he believes, is in many ways worse than in America or Germany. “American memory is seared by the Depression, the German memory is seared by hyperinfla-tion but Britain has a pretty serious problem in many ways worse than America because the financial sector looms bigger and the overvaluation of real estate is bigger than in America.”
  • He is not worried that an auction of government bonds failed this week – “that was a blip”, he says. He would still buy British bonds – “it depends on the price” – but he agrees with Mervyn King, the Governor of the Bank of England, that debt is a real problem. It will, he says, put people off investing in Britain. “I think it will have an effect, yes. It is a matter of worry because effectively the hole in the banking system is replaced by increasing the national debt.” There has been some talk that Britain might have to go cap in hand to the International Monetary Fund. “It’s conceivable,” Mr Soros says. “You have a problem that the banking system is bigger than the economy . . . so for Britain to absorb it alone would really pile up the debt . . . if the banking system continued to collapse, it’s a possibility but it’s not a likelihood.”
  • Is the euro under threat? “There is stress in the euro because of the differential in the interest rate that the different countries have to pay,” he replies.
  • He does not, however, blame Gordon Brown. “He underestimated the severity of the problem, but then so did most people. Part of the perceived role of a leader is to cheerlead, so you can’t really blame him for that.”
  • He has always been something of an outsider. He thinks that this makes it easier for him to see through conventional wisdom. “I have always understood how normal rules may not apply at all times,” he says.
  • In recent years he has been arguing against “market fundamentalism” – “the accepted theory was that markets tend to equilibrium”. He believes that the credit crunch has proved him right. “It reminds me of the collapse of the Sovi-et system, events are always exceeding people’s understanding. The situation is out of control. There’s a shortage of time to adjust to the change. Change is accelerating.”
  • Like Warren Buffett, he thinks that the complex financial instruments used by the banks were economic weapons of mass destruction. If anything he expected the tipping point to come earlier. “Everybody who realised that this was unsustainable expected it to collapse much sooner,” he says. “It is so devastating exactly because it took so long.”
  • The urgent task now, he says, is to realise that the system that collapsed was flawed. “Therefore you can’t restore it. You have to reform it.He worries that politicians have not yet accepted the need for fundamental change and that “a lot of bankers have their head in the sand”.
  • The G20 summit in London next week is, he says, the last chance to avert disaster. “The odds would favour that it fails because there are such differences of opinion. It’s difficult enough to get it right in your own country let alone with 20 governments coming together, but if it’s a failure I think then the global financial and trading system falls apart.”
  • If the G20 is nothing but a talking shop then he thinks we are heading for meltdown. “That could push the world into depression. It’s really a make-or-break occasion. That’s why it’s so important.” The chances of a depression are, he says, “quite high” – even if that is averted, the recession will last a long time. “Look, we are not going back to where we came from. In that sense it’s going to last for ever.”
Allrighty then.

[Feb 23, 2009: George Soros - This is the End of the Free Market Era; Situation Similar to Disintegration of Soviet Union]
[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]

Doug Kass: The Death of Buy and Hold?

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Ironic timing since Doug Kass basically outlines in his article below exactly the strategy [Fund Performance Period 3] I've undertaken to adjust to this new day and age of "investing". As I wrote

While I've kept 35-45%ish of the portfolio in my core strategy, to take advantage of some of the hectic swings I've overlaid going short/long some of the levered ETFs with 5-10-15% of the portfolio relatively often. Some of the levered ETFs are held just for hours, some for a few days - but due to the construction of these ETFs they are horrible long term holdings, hence we cannot hold them for lengthier durations. But by doing this we can squeeze a bit more return out (if we are correct in the daily "mood swings") and compensate for keeping such a huge portion of the portfolio in cash.

But we're trying to adapt to the market we have, not what we wish for. I doubt we'll get the market we wish for anytime soon; but hope I am wrong.



And that does not even speak to the "Lost Decade" by American investors [Oct 7, 2008: 2000s Stock Market Worse than 1930s] and the "Lost Quarter Century" by Japanese investors. [Oct 27, 2008: Japan's Lost Quarter Century] I truly believe this "long only, cash is evil" mutual fund model which works great in primary bull markets needs to reinvent itself. While most blog readers are quite active investors, the typical person is passive - tossing their money into 401k plans, or IRAs dominated by two handfuls of mutual fund families, and simply must be throwing their hands in the air at what they received in return.

Doug calls this the instant gratification generation; I've called them the A.D.D. video game generation - same idea ;)

Article in blue shade below via TheStreet.com

If investors have cash on the sidelines, they should not wait too long to put it to use. There are good values out there in equities -- especially in financial stocks -- and you will be rewarded in the long run if you start dollar cost-averaging now.

-- Dr. Jeremy Siegel in an interview with TheStreet.com's Gregg Greenberg in August 2007

With all due respect to Dr. Jeremy Siegel (and though we are both out of Wharton!), I am now firmly in the camp that believes that the buy/hold strategy, which was almost universally accepted by the investment and academic community over the past several decades, is no longer the sole investment strategy to be employed in order to deliver superior investment returns.

A more balanced strategy might now be on the menu.

Glinda, the Good Witch of the North: Are you a good witch, or a bad witch?
Dorothy: I'm not a witch at all. I'm Dorothy Gale from Kansas.

-- The Wizard of Oz

In the main, long-term (i.e., buy-and-hold) investors view opportunistic traders/investors as second-class citizens, at best, and as an expletive, at worst. This comes despite some of the most successful hedge-hoggers (e.g., SAC's Stevie Cohen, Michael Steinhardt and George Soros) having made billions of dollars by way of commodity, stock and futures trades.

Recent academic studies, such as Dr. Lubos Pastor (University of Chicago) and Dr. Robert Stambaugh's (Wharton) "Are Stocks Really Less Volatile in the Long Run?" raise questions about the uncertainty of long-term stock market returns and how risky long-term investing might be in the future.

A more violent and uneven corporate profit outlook, higher futures-implied market volatility and the instantaneous dissemination of news are changing the investment landscape and portfolio strategies.

"Lions and tigers and bears! Oh, my!"

-- Dorothy, The Wizard of Oz

Market and economic conditions change, and the keys to prospering and delivering superior investment returns are, as always, based on the ability of a money manager to perceive transformative secular and cyclical developments in companies and industries as well as changes in the broader markets and economy.

More leverage equates to uneven profit growth and greater share price volatility. A more leveraged financial system, by definition, provides an increasingly volatile stream of corporate profits; it seems more likely that an era of higher implied market volatility is here to stay. It holds that change will be more rapid in the future than in the past and that those who adapt to that change most quickly will do better than those whose investment holding period is "forever" -- as Berkshire Hathaway's (BRK.A) Warren Buffett has learned from the flooded moats that he believed would protect the business franchises of depreciated stocks such as American Express (AXP), Wells Fargo (WFC) and U.S. Bancorp (USB).

An instantaneous dissemination of information spells trading opportunity. The delivery of news and information has also changed the market landscape. When I was a kid on Long Island, back when there was no business news on television, I purchased the New York Post's late edition to get stock prices. Today, Bloomberg, CNBC and Internet sites like this one provide instant information (news and stock prices) to market participants. In an instant-gratification world populated by more instant-gratification investors (both individual and institutional), a premium is put on quick reaction time. Not only are individual stock moves rapid as news is swiftly disseminated but so is industry share movement. Anticipating sector rotation has become a more important determinant of portfolio performance in recent years and will continue for some time to come.

Scarecrow: I haven't got a brain ... only straw.
Dorothy: How can you talk if you haven't got a brain?
Scarecrow: I don't know. But some people without brains do an awful lot of talking, don't they?
Dorothy: Yes, I guess you're right.

-- The Wizard of Oz

The depth of the market and economic slump in the past 12 months has undressed many money managers who, similar to the Wizard of Oz, have hidden behind the curtain of a buy-and-hold strategy as they have failed to recognize the swift impact on many of the company franchises they admired. In many cases, their analysis was wrong, circumstances changed too quickly for them to react, or they were paralyzed by inertia -- and they paid the price in large unrealized losses.

A buy-and-hold strategy may not be dead, but a thoughtful balance between long-term investing and gaming short- to intermediate-term trades is likely the recipe for investment success in the years ahead.

Investors, we are not in Kansas anymore.




[Mar 24, 2009: Doug Kass - Why the Bears are Wrong]

[Feb 28, 2009: Doug Kass - Kill the Quants, Punish the ProBears]

[Dec 29, 2008: Doug Kass' 20 Surprises for 2009]

[Dec 2, 2008: Doug Kass - Harder than the Average Bear]

[Sep 15, 2008: Doug Kass - Under-Regulated , Overcompensated]

[Sep 5, 2008: Doug Kass - Hedgies Get their Comeuppance]

[Jan 2, 2008: Doug Kass 20 Predictions for 2008]


Bookkeeping: Rebuilding Lennar (LEN) on Bad Earnings

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Apparently there are still some people who actually believe new home builders will be reporting halfway decent earnings - Lennar (LEN) is down 13% today to the $7.50s. I am not really sure whom these people are but I assume they have red mustaches from the Kool Aid they are drinking. Again, for us - this is a trading vehicle; when Kool Aid is heavy in the air we sell it, when reality hits we buy it... and keep repeating it. A week ago we exited almost all our Lennar near $10, as we wrote here. Today, I will start rebuilding it at 25% off... once more as I keep repeating, stock movements that used to take weeks or months in the past now happen in 2-3 days. The stock fell below the 50 day moving average of low $8s today but this is not a chart type of stock; it's all about sentiment. I should be hedging this sort of stock, owning both a long and short position and playing it from both sides but the volatility is too intense.

I increased Lennar to a 1.8% stake and if we get a move down into the $6s, I will make it a much larger stake. Again, based on our high levels of cash in the portfolio, I've deemed we need to make our position sizes bigger for the stocks we do hold. So I am going to move in that direction - instead of adding in 0.8%-1.0% increments, I'll be making large partial position buys/sells.

Here is some flavor from the earnings report and once again the pundits see a clear future of recovery which the CEOs of these companies do not see. It's all about thesis in the stock market...
  • Lennar Corp.'s wider quarterly loss and a new promotion featuring rock-bottom interest rates to attract nervous buyers show that home builders are bracing for the tough times to continue through the rest of the year.
  • The company after Monday's closing bell reported a first-quarter loss of 98 cents a share, compared with a loss of 56 cents a share in the year-ago period. The latest quarter's results included charges of 35 cents a share related to valuation adjustments and other write-offs, and 36 cents for a non-cash deferred tax asset valuation allowance.
  • "The housing market continued its downward trend throughout our first quarter," said Stuart Miller, chief executive. (again, with historical lows in interest rates, and prices falling back to 2003 levels - if you are not buying a foreclosure or in a market that has been obliterated; this market still has a long way to go down)
  • "Despite historically low interest rates and some indicators pointing toward market stabilization, low consumer confidence, increased unemployment and growing foreclosure rates negatively impacted new home sales in most of our markets," the Lennar CEO said in the earnings release. (again the housing bust we've had THUS far has been a "bad mortgage" situation; the housing bust of the future will be the typical recession led, job loss fueled situation)
  • The builder said total revenue for the three months ended Feb. 28 slipped to $593.1 million from $1.06 billion in the year-earlier quarter. Lennar delivered 40% fewer homes while new orders fell 28%.
  • The results "illustrate the challenges builders face even as the rate of housing decline slows from the sharp retrenchment brought on last quarter by sudden economic dislocation," wrote Deutsche Bank analyst Nishu Sood in a research note.
  • Lennar recently began offering a 3.625% rate on certain 30-year fixed mortgages for qualified buyers. (remember, the solution to a country full of debt, is to offer debt at even cheaper prices - it worked wonders in the mid part of the decade. Those who don't learn from history.... well you know)
  • J.P. Morgan analyst Michael Rehaut said Lennar's order trends remain "solidly negative." "Although these results are more indicative of what we expected to see in the current operating environment, we expect the market will be disappointed," added Robert Stevenson at Fox-Pitt Kelton. On the positive side, he noted the cancellation rate dropped to 21% from 32% in the fourth quarter of 2008, and from 26% in the year-earlier quarter, while the balance sheet remains "solid." (the balance sheet is the key, we'll keep trading this name since we don't have fears of debt)
Free money for everyone; I eagerly await the 2% 30 year mortgage.

Long Lennar in fund; no personal position

Axsys Technologies (AXYS) Makes a Quick Appearance on 'Fast Money'

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Axsys Technologies (AXYS) has been a boggling stock to me as a fundamental investor. Despite an excellent story [Dec 5, 2008: An Outperfomer in Defense: Axsys Technologies] [Dec 12, 2008: Time to Buy Axsys Technologies?], solid results [Feb 18: Axsys Technologies Solid Quarter] and compelling valuation the stock has been obliterated. I am not sure if this is some hedge fund's personal plaything to short, as it only trades 400,000 shares a day, but the stock has simply not moved in line with its fundamentals, or at least our perception of said fundamentals.

Technically, this was in free fall and even when it fell a long way from its 200 day moving average (reversion to mean effect) it did not put in any serious bounce. Not until the company was first rumored (and then confirmed) to put itself up for sale did the stock show any signs of life [Mar 11: Bookkeeping: Starting Axsys Technologies as Company Puts Itself Up for Trade] [Mar 12: Axsys Technologies Confirms it has Put Itself Up for Sale] We took part in part of that trade but now the stock has saddled up to its 50 day moving average and is sitting underneath it. We've booked some profits and now I guess we just wait for some news or an improvement in the chart.

I do see that Axsys has made an appearance last night on Fast Money - a quick 2 minute blurb.













Long Axsys Technologies in fund; no personal position

Bookkeeping: Beginning Blackstone Group (BX) Position

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I started a new position in private equity firm Blackstone Group (BX) in the closing minutes yesterday at a price of roughly $6.85 (1.7% stake)

The Blackstone Group L.P., together with its subsidiaries, provides alternative asset management and financial advisory services worldwide. The company operates in four segments: Corporate Private Equity, Real Estate, Marketable Alternative Asset Management, and Financial Advisory.


Blackstone, as the long term chart below shows was quite possibly one of the worst IPO's in history, and much "smart money" piled into the stock (including the sovereign fund of China) on the back of the "magic" of private equity. That was still in the days of Kool Aid - with leverage, lax regulation, and innovation "we can make anything happen". They were called the new Masters of the Universe. Then came reality.


For all its faults, there is some merit to this sector and the management team - if nothing else - knows how to make a buck. And the government is now pledging as a fix to our era of opaque transparency & high leverage - well, a return to opaque transparency and high leverage! Let's do this folks! The stock, after plummeting to below $4 has now rebounded substantially and the new Tim Geithner taxpayer giveaway has lit a rocket fuse the past week and a half as the stock sprung to >$9. Effectively money will be taken out of your pocket and given to these type of firms...


Since no one listens to the peasants complaints in government, all we can try to do is spit in the wind on blogs, write letters to Congress people who could care less, and make some bucks on our own dollars by investing with those who get our largess.... i.e. as our money is given away, try to make some money on the back end by those who will be making super profits using our generosity. It sounds facetious but this was the same reason to invest in oil stocks latter 2007 to summer 2008 - if you were going to get taken to the bank at the pump you might as well hedge that with some gains on stocks that benefited from the rampant speculation. Same thesis here.

I've dropped a lot of individual names on the long side of our portfolio - culling weak charts, and looking for stronger charts like this. We now have one of my favorite set ups - a stock that broke out and now has pulled back (on light volume) to a support area. Nothing is fool proof and certainly this is one volatile stock - but I am willing to make a foray as we have multiple supports at both (a) the 20 day moving average in $6.60 range and (b) the 50 day moving average around $6. Below $6 the chart turns bad again and we have to re-evaluate.

Here are some recent fundamental developments

Reuters: Blackstone Fund written down 35%
  • Private equity firm Blackstone Group (BX) wrote down the value of its Buyout Fund V by 35 percent for 2008, a source who has seen a letter it sent to investors said on Monday. Blackstone reported a fourth-quarter loss of $827.1 million on Friday and said it wrote down the value of its private equity portfolio by 20 percent for the quarter.
  • Blackstone V was written down 35 percent, said the source. Fund V has investments including Nielsen Co, Michaels Stores, Biomet, Freescale Semiconductor, Hilton Hotels and Center Parcs, according to a press release issued by Blackstone at the time the fund finished raising money.
  • Blackstone is raising its sixth buyout fund, which it said on Friday it expects to start investing in late 2009 or early 2010.
Reuters: Blackstone CEO Takes 99% Pay Cut
  • Blackstone Group LP (NYSE:BX - News) Co-founder and Chief Executive Stephen Schwarzman's pay fell 99 percent in 2008, a year that saw the private-equity firm post a $1.33 billion loss.
  • ... did not receive any cash compensation for 2008 other than a base salary of $350,000.
  • Co-founder Peter Peterson, a former U.S. secretary of commerce who retired from Blackstone last year, also took a more than 99 percent pay cut and received a base salary of $350,000 for the year, according to a regulatory filing.
  • A revival in leverage is vital for the New York-based firm to be able to do deals of any significant scale and sell off current investments. (taxpayer funded, Geithner/Bernanke approved)
Fortune: Private Equity Soars on Geithner Plan
  • Reading between the lines of the government's plan to yank toxic mortgages off bank balance sheets, investors seem to have discerned two words that don't get much respect anymore: private equity.
  • Since the financial crisis ended their buying frenzy and turned their loans into toxic assets, there's been nary a peep from the buyout crowd. PE shops that went public at the height of the market--including masters of the universe Blackstone Group and Fortress Investment Group - have seen their share prices collapse. Without cheap money, you can't generate giant returns on mediocre companies.
  • Enter Treasury Secretary Timothy Geithner, who said Monday that the U.S. will match private investments one for one and then lend, or guarantee loans of, another six times that amount to purchase assets from banks that need to unload mortgages and other soured loans. The criteria seem tailored for the leveraged buyout industry.
A nice summary via Investopedia.com
  • Despite the financial hammering the company took in 2008, investors apparently are prepared to take management at its word regarding the prospects for this year. Chief Operating Officer Tony James declared that adjusted cashflow in 2009 would be more than sufficient to allow the company to reinstate the full annual distribution of $1.20 per share to shareholders. Given the March 3 closing price of $5.69, that amounts to a promised yield in excess of 21%.
  • As a result of the credit crunch, the private-equity deal pipeline has virtually shut down. One of the leveraged buyout (LBO) masters of the universe, the company only managed to place $9.2 billion into new deals in 2008, compared to the $169 billion it managed to place in 2006 and 2007. According to data compiled by Bloomberg, the total private equity market shrank by 60% last year to $211 billion.
  • One bright spot continues to be the company's fee-based business. For 2008, Blackstone still managed to earn more than $1.4 billion in management and advisory fees, down just over 5% from the previous year. This side of the business should benefit this year from Blackstone's current advisory role in helping American International Group (NYSE:AIG) dispose of certain assets and possibly effect a restructuring. Experience gained here could well be applied to future government-operated distressed situations.
  • While further asset writedowns could have a bearing on share value, they wouldn't impact cash flow. If the fee business holds up reasonably well this year, that would generate sufficent cash flow for the company to meet its stated dividend obligation. Moreover, with more than $767 million in cash on hand (net debt) at the end of January, ample funds are still available to meet the roughly $330 million payout requirement.
  • ss
Long Blackstone Group in fund and personal account

Lincoln National (LNC) Implodes ; Principal Financial (PFG) Cutting Salaries

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It was a quite excellent day to be short insurers yesterday as news from Lincoln National (LNC) sunk the sector. We have been focused on Prudential (PRU) which we went short in the teeth of Kool Aid, suffering for a day or two [Mar 25: Short Prudential] but said it was really a coin toss over Hartford Financial (HIG) ... MetLife (MET) was not in very good shape either. (we did cover some Prudential short yesterday) The hilarity of last week was watching Prudential continue to rise despite downgrades in its debt... but when you have shorts on the run, stocks can go up, up, up. Principal Financial (PFG) also was downgraded last week, and late Friday took the steps of cutting pay (oooh, salary deflation) across the board to save costs. I always love those late Friday night announcements when public firms pull these stunts...
  • Principal Financial Group will temporarily reduce salaries of employees, the management and the board by 2%-10% as part of the company's cost-saving effort, according to a company statement sent to MarketWatch on Monday. The company will also scale back personal time off, not fill open positions and suspend some corporate benefits. "These actions are designed to help offset decreased revenues caused by the markets' unprecedented impact on our asset based businesses," Principal Financial said.
  • The pay cuts come two days after Moody's Investors Service cut the company's ratings saying Principal likely will face greater pressure on liquidity and earnings as the economic downturn affects its business.
This is going to be one very interesting sector since the regulators are at the state level, and I believe we have a potential federal level bailout coming (yes dear reader, even MORE of your tax money has a collision course with this sector) Right now the federal government is stalling on this end [Mar 12: WSJ - The Next Big Bailout Choice - Insurers] but if you can imagine the panic nationwide if people suppose the insurance companies don't have the funds necessary to make payments. So while its not within the bounds of federal government to step in, if capital markets don't boom and right quick... they will overstep their bounds (again) since its a "national emergency". But not yet.

This quandry is in fact what caused Lincoln to implode yesterday; it is getting to the point of humor when we hear folks say things are turning back to normal because of an economic report here, or a Citigroup CEO memo there... yet the minute companies fall outside the perceived wingpsan of Nanny State - their fortunes crumble. That sounds like a return to normal to me...
  • Shares of Lincoln National Corp (LNC) lost more than one-third of their value on Monday after the large life insurer withdrew an application for funding guarantees from the U.S. government.
  • Late Friday, Lincoln disclosed it no longer believed it would qualify under the provisions of the Temporary Liquidity Guarantee Program (TLGP) and was voluntarily withdrawing from consideration, according to a filing with the U.S. Securities and Exchange Commission. The TLGP is overseen by the Federal Deposit Insurance Corp (FDIC).
  • Lincoln and a dozen other life insurers applied months ago for government aid, hoping to get help stabilizing balance sheets badly hurt by losses on investments in the last two quarters.
  • "This tension is manageable at present, but could become more challenging if equity and credit markets weaken substantially," Gallagher wrote in a research note.
  • Earlier this month, Moody's Investors Services downgraded Lincoln National, citing concerns over little liquidity at its holding company and current conditions that have made it difficult for the company to issue debt to refinance $500 million in debt that matures in April.
And then after we are done with bailing out the insurers sometime in the next 12 months; we can move on to bailing out the pension benefit guarantee fund. After we're done with that we can begin thinking about the gaping holes in next year's state budgets. Then we can find a home for your tax dollars bailing out.... wait, what am I saying here. The economy will be recovering broadly in "6 months".

Never mind.

Short Prudential in fund and personal account


Monday, March 30, 2009

Fund Performance Period 3

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Please note all data is through last Friday's closing prices....

For those who read the content of the website via email or RSS reader, you can come to the website at any time and click on 'Performance/Portfolio' tab in the menu bar to get updated positions (weekly) and performance.

Total Portfolio Value, as maintained by 3rd party, can be checked here each day with 20 minute delay vs real time (starting value $1,000,000 or $10.00 NAV)

I will post an update of performance versus Russell 1000 every 4 weeks; we've moved over to a new tracking this year as the old system would not allow shorting of individual stocks, among other "technical issues" that often came up. Hence we're "starting over" in terms of performance with portfolio "B" as of early 2009. Detailed history on on the first year and a quarter can be found on the above mentioned tab.

Under the new tracking system, our third 4 week period is now complete.

(click to enlarge)


This four week period differed from the first two in that it was the complete inverse. In period 1 the Russell 1000 was down 11.6%, and in period 2 down 10.7%; this period it was up 11.0% so in our "student body left, or right" horde trading world - we experienced a completely different dynamic. This was a great test for us. As a "mutual fund manager" I am extremely pleased with how things turned out.

For the third "four week" period we booked a +17.3% return, versus the market's +11.0%, so an outperformance of +6.3% during the past four weeks. On a cumulative basis we are now +15.2%, versus the Russell 1000's -12.4%, so an outperformance of +27.6% for our "year to date" if you will. (thus far 12 weeks)

Please note we did not start on Jan 1st... so this is not an apples to apples "year to date" performance but close.

Two things pleased me the most: (a) in both the downtrend periods and uptrend period we were able to outperform the market and (b) our "risk adjusted" return is off the charts; that being due to the fact about half the portfolio [or more] has been in cash for all 3 periods. So we have been able to provide an absolute return of +15.2% using roughly half our capital, and even in a strong upward move we were able to keep pace with the market with half our cash stashed. With this very cautious portfolio positioning my goal was to try to stay "flattish" in return during a downturn, and yet be able to turn and capture 50-66% of the gain on the upside when we reversed - expectations were exceeded by a long shot.

On the negative side, the "trader" in me felt like I left gobs of money on the table. I've missed some excellent trades on both the long and short side, and even in winning trades my position sizes have been poor - my % gains have been very good, but with 1-2% type of allocations it has not affected the overall portfolio enough. I see I need to offset this high cash position with larger position sizes with what positions I do carry. So I'll slowly try to adjust that. To offset that I've kept dollar losses manageable, and have not yet woken up to the invariable -35% overnight loss due to earnings miss that will hit us sooner or later.

***** Long/Short Discussion below

While I am pleased with performance we've had to turn away from our preferred style of investing as described in the "About Me" tab. At heart, I like to buy good stocks (and short bad ones) - build a core position and trade around, harvesting profits after nice runs and try to buy back on pullbacks. This market moves so violently and is so news driven - with such an absence on individual company specifics specific stock selection has lost a lot of meaning. Most stocks in a sector move together nowadays, and "thesis" driven "in and out" quick action is the dominant situation. At the heart of it, my job is to try to make money or at minimum try not to lose a lot of it; so I've adapted to this situation but it's a world of trading, not investing. Anyone who says otherwise is just lying to you.

While I've kept 35-45%ish of the portfolio in my core strategy, to take advantage of some of the hectic swings I've overlaid going short/long some of the levered ETFs with 5-10-15% of the portfolio relatively often. Some of the levered ETFs are held just for hours, some for a few days - but due to the construction of these ETFs they are horrible long term holdings, hence we cannot hold them for lengthier durations. But by doing this we can squeeze a bit more return out (if we are correct in the daily "mood swings") and compensate for keeping such a huge portion of the portfolio in cash. Until we return to a primary bull market, I don't see myself unleashing the cash horde. My main hope is we return to more periods like December 2008 where violent daily actions become less common and individual stock fundamentals matter more rather than "buy anything; the market is flying" or "dump everything; the market is crashing". But we're trying to adapt to the market we have, not what we wish for. I doubt we'll get the market we wish for anytime soon; but hope I am wrong.

We'll check back in four weeks with a new update.

[Jan 30, 2009: Fund Performance Period 1]
[Mar 2, 2009: Fund Performance Period 2]

******************
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  1. [Jan 7, 2008: Reader Pledges Toward Mutual Fund Launch]
  2. [May 26, 2008: Frequently Asked Questions]
  3. Our story in Barron's [A New Kind of Fund Manager]
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Bookkeeping: Covering Freeport McMoran (FCX) and Most of Capital One Financial (COF), Pulte Homes (PHM)

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Once more, horde trading dominates - everyone sell everything, or everyone buy everything. The gap up or downs in the morning are 2/3rds of every day's move and guessing which way it goes is just random casino action.

I am going to cover my Freeport McMoran Copper & Gold (FCX) short here in the $38.30s. My goal was $38... [Mar 19: Short Freeport McMoran Copper & Gold]

I am entering around $41.70 (4% allocation) and my target is $38 at least... no stop loss on this as its nowhere near any support level and believe it or not, the market does go down every so often ...


....but it's close enough. I've stayed away from shorting "strong charts" of late - even if overbought - and tried to focus on weak charts below key moving averages which has worked out quite well. But this was an exception - perhaps more for show than dough. Although dough was claimed as well ;). I do believe there could be more downside as everyone's favorite group (or one of them) last week - commodities - now gets obliterated. And in a few days it will be everyone's favorite sector again as the student body rushes back into the sector. I got a terrible fill on this; I thought I shorted at $41.70s but it was in the $41.20s so it's just a 7% gain when it should of been over 8%. But for a week and a half's "work" I'll take it. Again, I do think there is potentially more downside here but I want to focus on other charts - so I am completely out of this short. Again, I don't really believe in the whole "commodities are back as global growth returns around the corner" thesis but this is where hot money goes each time we bounce, hence my long exposure in this space and the relative strength it shows. But FCX just got out of hand and overextended so I could not resist taking a quick pound of flesh. There is a nasty gap down there below $30 which in the next bear raid I expect to get filled.

I am also covering the vast majority of Capital One Financial (COF) in the $11.30s but keeping a small holding position, as she is back to her old tricks, down a cool 20% in 1 session. Much of last week's Kool Aid seems to have disappeared. I do still own American Express (AXP) as a short which is also working and still gives me exposure to the space if tomorrow is another bad day in credit cards. COF is a "permanent short" and on the next rally we'll be buying this exposure back and keep playing this trade over and over.

I covered most of my Pulte Homes (PHM) for a tiny profit, until I figure out the trading pattern...it could be ready to rollover so I'll jump back in if the current pattern continues


All the names I stopped out of last week in the consumer discretionary space are of course falling today, but you need to have a discipline and not let 7,8,9% losses turn into 25% losses. That said, of the names the Kool Aid drinkers chased me out of, Whirlpool's (WHR) chart turned from "good" to "bad" immediately. I will see how the stock reacts on the next rally - if it does what it should do, I'll be right back into this short. $28 is important for WHR to hold if you are a bull. I guess refrigerator sales must of leveled off this weekend. Whole Food Markets (WFMI) and Harley Davidson (HOG) are still holding up above key support levels.


Short Capital One Financial, American Express in fund; no personal position

Barron's: The Pleasure of Plastic - Mastercard (MA) & Visa (V)

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I am going to attempt to mix in some talk about specific companies again like we used to do, before everything turned into government, bailouts, economics, and bailouts. Did I mention bailouts?

Below is a mention of one of the best business models on Earth - that of Mastercard (MA) and Visa (V). Visa (V) is probably a bit better business based on its dominance in debit - and better international reach; but since Mastercard came public first and I've had good results with it - it has generally been my choice in the space. While there are some headwinds due to weak global economy in the short run, over the very long run as we move away from a cash based society and to plastic (worldwide) both should do well. I usually don't deal with such high market capitalization stocks but these names have as much growth as many stocks in the small and mid cap area. The article focuses on a misperception many people unfamiliar with their businesses seem to have.


Via Barron's
  • IT IS UNCOMMON WHEN the chief executive of a company with a $50 billion market value and a globally ubiquitous brand feels compelled to explain to investors the rudiments of its business. Yet this is the position Joe Saunders, CEO of Visa, sometimes finds himself in. The first slide of an investor presentation given by the company last month states "What we are," which is the "largest payments-network company in the world." As for "what we are not," that includes "credit-card issuer, lender, exposed to consumer-credit risk."
  • Persistent misapprehensions about Visa's (ticker: V) business, a year after the company completed the largest-ever initial stock offering in the U.S., have created an opportunity for investors seeking a financially stable mega-cap growth stock as a core holding.
  • Visa brands debit and credit cards issued by banks, and earns fees on payments that move over its proprietary network. As such, it stands in the vanguard of a burgeoning secular trend: the use of plastic for everyday and big-ticket transactions.
  • U.S. payments via debit card, in which the money is drawn directly from a purchaser's bank account, grew at an 18% annual rate between 2002 and 2007, according to McKinsey. Even though that pace is expected to slow to about 9% through 2012, the public's increasing reliance on cards of both sorts could provide a powerful lift to Visa's earnings and shares, which trade around $55.50. Some fans think the stock could trade up to the $70s, even in a difficult economy.
  • Visa has about 75% of the U.S. debit-card market, compared with 25% for MasterCard International (MA), its principal global competitor. While the rivalry between them is spirited, they jointly compete against a bigger foe: cash and checks. In the U.S., cash is used in 57% of transactions, and most countries are even more cash-centered. (that is all future upside for these companies)
  • Plastic's long-running encroachment on cash and check usage could create an attractive tailwind for Visa and MasterCard for years to come. With pretax profit margins exceeding 40%, steady top-line growth easily translates for both into earnings-growth rates exceeding 15%.
  • Visa has some sensitivity to consumer-spending activity, but even after the Sept. 11, 2001, terrorist attacks, when the consumer largely froze, revenue grew at a high-single-digit rate. In 2008's fourth quarter, when U.S. consumers snapped their wallets shut, San Francisco-based Visa posted double-digit top-line growth. A planned price increase will help boost revenue this year, while lapping last year's results, hurt by high gasoline prices, will lead to better comparisons.
  • Visa trades at 20 times 2009 forecasts of $2.70 a share for the fiscal year ending in September. The company posted a profit of $1.7 billion, or $2.25 a share, in fiscal 2008, on total revenue of $6.26 billion. The stock's multiple may appear rich relative to the Standard & Poor's 500, which trades at less than 14 times future earnings. Yet Visa's profit, based on its guidance and analysts' forecasts, will rise by almost 20%, a rare distinction in a growth-starved market. (probably too aggresive in this environment but still should be able to do 15%+)
  • MasterCard is more modestly valued at 16 times calendar 2009 forecasts, and is attractive as an investment as well. The valuation discount is due to Visa's greater exposure to debit, and the continued overhang of some merchant-pricing litigation involving MasterCard. Visa has cut a deal that shifts this liability to the issuing banks.
  • Bill Sheedy, Visa's president for North America, notes the business "isn't very capital intensive. The main costs are marketing the brand and running the network."
[Jan 16, 2009: Mastercard, Visa Weak as Democrats Look to Move Up New Regulations]
[Nov 4, 2008: Mastercard Trounces Earnings]
[Jul 30, 2008: Visa Rings Up Very Good Earnings - Should Bode Well for Mastercard]
[Jun 9, 2008: Mastercard, Visa see Gold in PrePaid]
[Apr 29, 2008: Mastercard Continues to Impress]
[Feb 4, 2008: Visa IPO Seeks Mastercard Riches]
[Jan 31, 2008: Mastercard Continues to be Priceless]
[Dec 7, 2007: Mastercard to Benefit from Visa IPO Hype]
[Oct 31, 2007: Bravo Mastercard]

Long Mastercard in fund; no personal position

DryShips (DRYS) Gets Going Concern Note from Auditors; Manitowec (MTW) - Eww

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This is an ironic story because in the comments section last week, reader Keith P asked why I trade in Excel Maritime (EXM) rather than everyone's favorite dry bulk shipper - DryShips (DRYS). Today's news which has been a long time coming explains why. [Oct 31, 2008: Credit Tsunami Swamps Trade] [Nov 3, 2008: UK Telegraph - Investors Shun Greek Debt as Shipping Crisis Deepens] While DryShips is the daytraders / speculators favorite stock it is not for me, or my timeframe - not with the potential to wake up any morning and seeing banks pulling the plug. Back in January we posted how DryShips was breaching covenants and in talks with another bank about more covenants to be broken

DryShips Inc (DRYS) said two of its banks notified the Greek dry bulk carrier that it is in breach of certain financial covenants and it is currently in discussions with its lenders for waivers and amendments to loan covenants.

The company
added that it is in talks with another lender that currently holds $650 million of its debt regarding breach of loan covenants.


Speculators seem to ignore these things and as long as it is hot money they like to play... which makes it difficult to short because this type of stock moves 20% in any random direction based on which way the wind is blowing.

Now again, we are in an era where individual stocks mean very little and sectors trade together - the tarnish of one stock stinks up the entire sector. That is illogical on many fronts but it is what it is. Other stocks in dry bulk are being hammered today ... even those that have no covenant issues. Hence we were able to pick up some EXM this AM at nearly 20% off Friday prices.

Via Reuters
  • Greek dry bulk carrier DryShips Inc (DRYS) said it got a going concern notice from its auditors as the company reclassified $1.8 billion of long-term debt as current.
  • Last week, DryShips said it was in discussions with its some of its lenders concerning current breaches of loan covenants, and pending the outcome of such discussions it has reclassified about $1.8 billion in debt as short-term. In a regulatory filing with the U.S. Securities and Exchange Commission, the company said it may not be successful in obtaining covenant waivers or modifications or its lenders may accelerate its indebtedness.
  • "If our indebtedness is accelerated, it would be very difficult in the current financing environment for us to refinance our debt or obtain additional financing and we could lose our vessels if our lenders foreclose their liens," the company said in a regulatory filing.
  • However, DryShips said it will generate sufficient cash from operations and proceeds from new equity to satisfy its liquidity needs for the next 12 months.
Via TheStreet.com
  • "As discussed during our latest conference call, the going concern explanatory paragraph is the result of the previously announced reclassification of $1.8 billion of long-term debt as current," said DryShips CEO George Economou in a news release. "With the proactive approach already taken to reduce $2 billion in capital expenditures, the confidence of our three main lenders with whom we are in close ongoing discussions, secured revenues of over $2.4 billion in the next three years from drybulk time charters and offshore drilling contracts and the recent equity infusion of $380 million through the ATM Equity Offeringsm share issuance program, we have repositioned DryShips for the long-term and remain ahead of the curve."
  • In its filing with the SEC, DryShips outlined key reasons for the drybulk shipping market's deterioration in general and DryShips revenue specifically, citing: A lack of trade financing for purchases of commodities carried by sea, causing a sharp drop in cargo shipments. An excess of iron ore in China, leading to lower iron ore prices and increased stockpiles in Chinese ports.
The last point speaks to the hilarity of this market and its drive to create a thesis; after all - all things commodities and China are booming because of anecdotal reports of iron ore (and other metals) being shipped to China. Apparently to sit in ports ;) Thesis baby - thesis.
  • The company said that continued low charter rates in the drybulk market would harm its revenue, cash flows and ability to comply with covenants in its loan agreements. Should lenders not agree to waive or modify covenants, the filing continued, lenders could accelerate the payments of some debt, and the company could lose vessels.
As an aside, for an example of what happens when covenants are fully breached with no give from the banks - see Manitowec (MTW) (thanks to reader Thomas) Again, another stock that rocketed upward in the Kool Aid of the past 3 weeks, and would of inflicted much pain on the short side ... but that darn reality keeps interjecting itself onto the bulls landscape.
  • Manitowoc Co (MTW) said it was likely to violate some debt covenants in the second half of 2009 as the proceeds from sale of its ice business were lower than expected.
  • The diversified manufacturer, which currently meets all covenant requirements, also withdrew its outlook for 2009 expects lower earnings to further increase the risk of covenant violation.
On the latter point, only pundits can somehow see clearly 6 months into the future - they assure us once again brighter times are ahead. I continue to scratch my head at how they keep reaching for the Magic 8 Ball which has failed them for a year +... yet somehow they continue to believe they know better than company after company which has rescinded guidance due to lack of visibility. Pundits rule.



Long Excel Maritime in fund and personal account

Bookkeeping: Restarting Gafisa (GFA) as Sam Zell Continues to Increase Stake

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It has been very difficult to stick with any mid cap or smaller international names as they have been completely bludgeoned. Emerging market stocks seem to all trade in one big horde - and in a country like Brazil when commodities are in favor any stock in the country moves with it. It makes little sense to me, but that is the market.

Gafisa (GFA) is a Brazilian homebuilder we've owned in the past... but at much higher prices. Thankfully we escaped in September 2008 without much damage, but it's been a free fall the past year. I'm still a bit flabbergasted at just how far this name fell. It is profitable and earnings well over $1 EPS...


Lately the chart has been firming up as risk taking has begun to return to the market. That said, if fear returns this type of stock can drop 30% in 3 days... so one has to tread with caution. But we can see there appears to finally be a floor in the $7s and it made higher lows during the February swoon that the Oct-Dec 2008 swoon. A good sign.


Sam Zell has a large stake in Gafisa via Equity International [Oct 22, 2008: Sam Zell Increases Stake to Gafisa to 18.7%] which he recently has increased even further - in fact he is buying up a lot of stakes in the Brazilian homebuilder market via different entities. His continued holding in Gafisa is impressive considering its drop some 80% the past year on him. Zell has had one rought year [Dec 8, 2008: Tribune Files for Bankruptcy] but generally is considered an extremely shrewd man. For my purposes I want to find some exposure in stocks who still have growth and whose charts are decent; we've culled a lot of non performing long positions of late so looking for new candidates - our old portfolio is a good place to begin. Mercadolibre (MELI) is another candidate and former holding who has really perked up of late.

But back to Gafisa, I am beginning with a 1.2% stake in the $9.40s area, and I'd like to see the stock hold the $9.20s level... I'll add if I see strength there. If we break through we have to wait for a more stable period.

[Aug 17, 2008: Gafisa Earnings]
[Nov 19, 2007: Initiated a Position in Gafisa - Brazilian Homebuilder]

Per the Wall Street Journal
  • Real estate tycoon Sam Zell, trying to restore his stature as an astute investor after his disastrous buyout of Tribune Co., has surfaced as an unlikely player in a controversy in Brazil over affordable housing.
  • Mr. Zell has been focusing much of his time on his global real-estate investments since the bankruptcy filing by Tribune late last year. His real-estate private-equity firm, Equity International Properties, is trying to capitalize on what many analysts say is a pent-up demand for housing in Brazil through its 19% stake in homebuilder Gafisa SA.
  • That's put Mr. Zell in the middle of a debate in Brazil over a $15 billion program launched by the government of President Luiz Inacio Lula da Silva to help build one million new houses for low-income families. The plan includes loan subsidies to expand the country's tiny mortgage sector, which could stimulate demand for affordable houses like the ones built by Gafisa's Construtora Tenda SA. The government also is providing more than $1 billion in low-interest financing to homebuilders.
  • Some Brazilian critics say the government has been working too closely with the private sector, and that social concerns haven't been fully addressed. They say the plan will increase urban sprawl without doing anything about as many as six million vacant homes across Brazil.
  • Even Mr. Zell is skeptical. "I have learned from being around for a really long time that I won't believe anything governments say until they actually do it," he said in an interview.
  • Over the years, Mr. Zell has been much more successful in real estate. He made a fortune buying distressed assets in the early 1990s, earning a nickname as a "grave dancer." In 2007 he sold his U.S. office building company, Equity Office Properties Trust, to Blackstone Group LP in a $39 billion transaction that came to mark the peak of the commercial property boom.
  • Since then, many of his real estate holdings have suffered along with the rest of the industry. Capital Trust, which invests in commercial real estate loans, has seen its shares tumble to less than $2. Shares of Equity Residential, which owns or invests in more than 500 apartment properties around the U.S., have lost more than half their value in a year.
  • Equity Lifestyle Properties, which runs manufactured-home communities, has held up a bit better because of what some analysts say is a relatively healthy balance sheet and a business model that could hold up in a recession. Mr. Zell's net worth was cut in half to $3 billion in the past year, according to Forbes.
  • Unlike his real estate investment trusts, Equity International is privately held. It has invested about $1.5 billion around the world, from warehouses in China to retirement villages in New Zealand. Half of the company's invested capital and 70% of its investments' market value is in Brazil, a nation that appealed to Mr. Zell because of its size and relative stability.
  • Gary Garrabrant, chief executive of Equity International, said some investments in China have proved challenging in part because of austerity measures by the government there.
  • Mr. Zell said: "We're doing OK, we're not doing great. ...Some of our positions have been marked down as you would expect. But we're very comfortable because we really understand the businesses and where they're going."
  • Mr. Zell said in Brazil, Mexico, and China there's "enormous pent-up demand for low-income housing." (don't forget the US, Sam!)
  • In Brazil, Equity International has staked the most on Gafisa. The fund first bought into the company in 2005, paying roughly $50 million for a 30% stake. Equity International bought another $50 million in Gafisa shares in October, after the company's stock price had fallen to about half of its $50 peak. It's now trading below $10 on the New York Stock Exchange.
  • Equity International has been active behind the scenes. Last year it pushed Gafisa to acquire an affordable homebuilder, eventually settling on Construtora Tenda SA. And more recently, the American company has been counseling Gafisa Chief Executive Wilson Amaral on what arguments to make as he urges the country's political leaders to expand assistance to the housing industry.
Long Gafisa in fund; no personal position


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