Einhorn’s Greenlight Capital: Large S&P500 Puts Position (13F)

Tuesday, August 18th, 2009

MarketFolly.com reports, according to 13F filings, David Einhorn’s $6-billion hedge fund Greenlight Capital (no relationship to us) has loaded up on S&P500 (SPY) PUTS, building a 24.25% position, most likely portfolio insurance, betting the market is due for a big blow-off. Previously, Einhorn reportedly built up large positions in gold, both physical and paper. Now it appears he has opted for physical gold because its cheaper to store and is using GLD (SPDR Gold Trust) PUTS as downside insurance on his physical (long-term) gold.

Hedge Fund managers are worth watching because their directional votes (positions) often constitute stringently researched decisions, that are beyond the grasp and willingness of most investors.

Here is an excerpt:

The following were their long equity, note, and options holdings as of June 30th, 2009 as filed with the SEC. We have not detailed the changes to every single position in this update, but we have covered all the major moves. All holdings are common stock unless otherwise denoted.

Some New Positions (Brand new positions that they initiated in the last quarter):
SPDR Gold Trust (GLD) Puts
Cardinal Health (CAH)
General Electric (GE) Puts
Transatlantic Holdings (TRH)
ATP Oil & Gas (ATPG) - position is less than 0.45% of their overall portfolio
Endurance Specialty Holdings (ENH) - position is less than 0.30% of their overall portfolio
US Natural Gas Fund (UNG) - position is less than 0.02% of their overall portfolio

Some Increased Positions (A few positions they already owned but added shares to)
Everest Re (RE): Increased position by 598%
IPC Holdings (IPCR): Increased position by 132%
Pfizer (PFE): Increased position by 102%
Wyeth (WYE): Increased position by 100%
Aspen Insurance (AHL): Increased position by 74%

Some Reduced Positions (Some positions they sold some shares of)
MEMC Electronics (WFR): Reduced by 50%
EMC (EMC): Reduced by 44%
Echostar Corporation (SATS): Reduced by 37%
Helix Energy (HLX): Reduced by 34%
Harman International (HAR): Reduced by 31%
URS (URS): Reduced by 28%

Removed Positions (Positions they sold out of completely)
SPDR Gold Trust (GLD)* (there is a big asterisk next to this one, so read our summary below to find out why). Target (TGT), Hess (HES), Commscope (CTV), Dow Chemical (DOW), Conway (CNW), Rohm & Haas (ROH), Discover Financial (DFS), Jones Apparel (JNY), Western Digital (WDC), American Eagle Outfitters (AEO), Patriot Coal (PCX), Cadence Design (CDNS), Williams Sonoma (WSM), JA Solar (JASO), Focus Media (FMCN), Carpenter (CRS), Corning (GLW), Supervalu (SVU), Sunstone Hotel (SHO), Bradywine Realty Trust (BDN)

Top 15 Holdings (by % of portfolio)

1. SPDR S&P500 (SPY) Puts: 24.25% of portfolio
2. Pfizer (PFE): 6.32% of portfolio
3. URS (URS): 5.56% of portfolio
4. Teradata (TDC): 5.11% of portfolio
5. Wyeth (WYE): 4.56% of portfolio
6. Cardinal Health (CAH): 4.27% of portfolio
7. Market Vectors Gold Miners (GDX): 4.25% of portfolio
8. Allegheny Energy (AYE): 3.75% of portfolio
9. EMC (EMC): 3.34% of portfolio
10. Einstein Noah (BAGL): 3.27% of portfolio
11. Aspen Insurance (AHL): 3.25% of portfolio
12. Health Management Associates (HMA): 2.49% of portfolio
13. McDermott (MDR): 2.33% of portfolio
14. MEMC Electronic (WFR): 2.29% of portfolio
15. IPC Holdings (IPCR): 1.77% of portfolio

We’ve got a lot of technicalities to cover here so let’s dive right in. Firstly, Einhorn did not get out of gold. Last go-round, we saw Greenlight had amassed a large gold position via the SPDR Gold Trust (GLD). Although GLD no longer is being reported on his 13F filing (they sold out of it), they still own a large gold position. They have started storing physical gold due to cost savings as noted when we looked at Greenlight’s recent investor letter. This is the perfect example of why you can’t blindly follow SEC filings.

Tags: Ahl, Aspen Insurance, Atpg, Cah, Cardinal Health, Common Stock, David Einhorn, Endurance Specialty Holdings, ETF, GLD, Greenlight Capital, Hedge Fund Manager, Hedge Fund Managers, Ipc Holdings, Major Moves, Memc Electronics, oil, P500, Pfe, Pfizer, physical gold, Portfolio Insurance, Transatlantic Holdings, Trh
Posted in Gold, Markets | 1 Comment »

Does Deflation Lead to Depression? Who Sold Us This Theory?

Tuesday, August 18th, 2009

In a well written article at Bloomberg.com, Matthew Lynn challenges the notion of price deflation risk, and the widely held belief that deflation leads to economic depression.

First, is there really a risk of deflation anymore?

U.K. Chancellor of the Exchequer Alistair Darling said in a speech earlier this year that the Bank of England must be “prepared to act” to prevent price deflation.

“We are very keen on avoiding deflationary risk,” said European Central Bank President Jean-Claude Trichet in an interview this month. Much the same message has been pumped out around the world by economic leaders.

Nor have they been slow to put their freshly minted money where their mouth is. The Bank of England has embarked on a program of “quantitative easing,” or creating new money, to stave off the threat.

The trouble is, the theory doesn’t stack up.

Deflation, after all, has already arrived.

Is deflation killing the Eurozone?

So the “deflating” euro area is disappearing over an economic precipice, right? Not quite. It is leading the world out of recession. Figures released last week showed Germany and France were hauling the region out of the global decline — both expanded 0.3 percent in the three months through June after four consecutive quarters of contraction.

Not much sign of the dangers of deflation there.

Deflation did not prevent some of the most expansionary periods in history, e.g. the Industrial Revolution:

In other words, there were plenty of deflationary years. Yet over that period, the U.K. became the greatest economic power in the world: Its relative decline only started once inflation took hold. Deflation didn’t stop the Industrial Revolution, one of the most sustained times of economic creativity ever seen.

Likewise, a 2004 study by the Federal Reserve Bank of Minneapolis looked at the data on deflation across 17 countries over 100 years. It found that although the Great Depression of the 1930s was linked with falling prices, that wasn’t true of any other historical period. There was, it said, “virtually no evidence” that deflation caused a depression.

Why should it? We are constantly told that deflation is bad because it makes consumers hold off from buying things, thinking they will be cheaper tomorrow. But that is just silly.

The Bottom Line: Matthew Lynn is arguing that there are numerous times in history when deflation and depression were mutually exclusive c0nditions and only one time, The Great Depression, when the two were linked. Therefore the consensus that deflation leads to depression may be flawed. Lynn is not saying that a depression is not possible, just that it is not necessarily preceded by deflation. In addition, another important point Lynn makes is that we should not fear deflation, when in fact, we are already in a deflationary economic period.

Read the complete article here.

Source: Deflation Theory is a Lemon We Have All Been Sold, Matthew Lynn, Bloomberg, August 17, 2oo9

Tags: Alistair Darling, Bank Of England, Bank President, Bloomberg, Chancellor Of The Exchequer, Consecutive Quarters, Economic Creativity, Economic Depression, Economic Leaders, Economic Power, ETF, Eurozone, Federal Reserve Bank, Federal Reserve Bank Of Minneapolis, Global Decline, Great Depression, Industrial Revolution, Jean Claude Trichet, Matthew Lynn, New Money, Relative Decline
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Roubini’s Canada Outlook: Supported by Easier Credit and Commodities Recovery

Tuesday, August 18th, 2009

Nouriel Roubini’s RGE Monitor recently published “Are There Bright Spots Amid the Global Recession?,” which provides a comprehensive global economies roundup, and says that Canada’s economy will lag that of the US, though it is supported by easier credit conditions, stronger banks, and the commodities recovery.

Canada

Despite relatively sound finances that helped it outperform the rest of the G7 in 2008 and early 2009, Canada’s exposure to the U.S. for trade and investment suggests its recovery may lag that of the U.S. (a trend that Q2 2009 data seems to support).  However, a more consolidated financial sector with lower leverage, lower default rates, as well as a revival of domestic demand, should support recovery in 2010, albeit one characterized by below- potential growth.  Canadian households and corporations still have more access to credit than their U.S. counterparts, a factor that helped buffer Canada from a more severe property market correction. Yet the nascent revival in consumption may be weaker than the Bank of Canada expects. The rebound in commodity prices is mixed news. Higher commodity prices and greater demand for metals, if not yet for oil and cheap natural gas, should contribute to an expansion of mining and energy output–but too strong a surge could boost the Canadian dollar, exacerbating Canada’s manufacturing weakness as it boosts labor costs.

Source: RGE Monitor, August 5, 2009

Tags: Bank Of Canada, Banks Canada, Canada, Canadian Dollar, Canadian Households, Commodities, Commodity Prices, Counterparts, Default Rates, Energy Output, Financial Sector, G7, Global Economies, Global Recession, Leverage, Natural Gas, oil, Rebound, Recovery Canada, Revival, Roubini, Roundup
Posted in Commodities, Markets | No Comments »

Nouriel Roubini: The Phantom Economic Recovery

Tuesday, August 18th, 2009

The following article is a guest contribution from RGE Monitor, and Nouriel Roubini’s Project Syndicate, August 16, 2009.*

Where is the US and global economy headed? Last year, there were two sides to the debate. One camp argued that the recession in the US would be V-shaped—short and shallow. It would last only eight months, like the two previous recessions of 1990-1991 and 2001, and the world would decouple from the US contraction.

Others, including me, argued that given the excesses of private sector leverage (in households, financial institutions and corporate firms), this would be a U-shaped recession—long and deep. It would last about 24 months, and the world would not decouple from the US contraction.

Today, 20 months into the US recession—a recession that became global in the summer of 2008 with a massive recoupling—the V-shaped decoupling view is out the window. This is the worst US and global recession in 60 years. If the US recession were—as is most likely—to be over at the end of the year, it will have been three times as long and about fives times as deep—in terms of the cumulative decline in output—as the previous two.

Today’s consensus among economists is that the recession is already over, that the US and global economy will rapidly return to growth and that there is no risk of a relapse. Unfortunately, this new consensus could be as wrong now as the defenders of the V-shaped scenario were for the past three years.

Data from the US—rising unemployment, falling household consumption, still declining industrial production and a weak housing market—suggests that the US recession is not over yet. A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close, but it has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential.

Moreover, for a number of reasons, growth in the advanced economies is likely to remain anaemic and well below trend for at least a couple of years.

The first reason is likely to create a long-term drag on growth: Households need to deleverage and save more, which will constrain consumption for years.

Second, the financial system— both banks and non-bank institutions—is severely damaged. Lack of robust credit growth will hamper private consumption and investment spending.

Third, the corporate sector faces a glut of capacity, and a weak recovery of profitability is likely if growth is anaemic and deflationary pressures still persist. As a result, businesses are not likely to increase capital spending.

Fourth, the releveraging of the public sector through large fiscal deficits and debt accumulation risks crowding out a recovery in private sector spending. The effects of the policy stimulus, moreover, will fizzle out by early next year, requiring greater private demand to support continued growth.

Domestic private demand, especially consumption, is now weak or falling in over-spending countries (the US, UK, Spain, Ireland, Australia and New Zealand, etc.), while not increasing fast enough in over-saving countries (China, other Asian countries, Germany and Japan, etc.) to compensate for the reduction in these countries’ net exports. Thus, there is a global slackening of aggregate demand relative to the glut of supply capacity, which will impede a robust global economic recovery.

There are also now two reasons to fear a double-dip recession. First, the exit strategy from monetary and fiscal easing could be botched, because policymakers are damned if they do and damned if they don’t. If they take their fiscal deficits (and a potential monetization of these deficits) seriously and raise taxes, reduce spending and mop up excess liquidity, they could undermine the already weak recovery.

But if they maintain large budget deficits and continue to monetize them, at some point—after the current deflationary forces become more subdued—bond markets will revolt. At this point, inflationary expectations will increase, long-term government bond yields will rise and recovery will be crowded out.

A second reason to fear a double-dip recession concerns the fact that oil, energy and food prices may be rising faster than economic fundamentals warrant, and could be driven higher by the wall of liquidity chasing assets, as well as by speculative demand. Last year, oil at $145 a barrel was a tipping point for the global economy, as it created a major income shock for the US, Europe, Japan, China, India and other oil-importing economies. The global economy, barely rising from its knees, could not withstand the contractionary shock if similar speculative forces were to drive oil rapidly towards $100 a barrel.

So, the end of this severe global recession will be closer at the end of this year than it is now, the recovery will be anaemic rather than robust in advanced economies, and there is a rising risk of a double-dip recession. The recent market rallies in stocks, commodities and credit may have gotten ahead of the improvement in the real economy. If so, a correction cannot be too far behind.

©2009 / PROJECT SYNDICATE

Nouriel Roubini is chairman of Roubini Global Economics and a professor at the Stern School of Business, New York University.

Tags: Commodities, Consensus, Contraction, Economic Recovery, Economists, Eight Months, Emerging Economies, Emerging Markets, Excesses, Financial Institutions, Global Economy, Global Recession, Household Consumption, Households, Housing Market, India, Leverage, Nouriel Roubini, oil, Private Sector, Project Syndicate, Recessions, Relapse, RGE Monitor
Posted in Emerging Markets, Markets | No Comments »

Global Stock Markets - Pop ‘n’ Drop

Tuesday, August 18th, 2009

I have written a fair bit over the past few days about the overbought level of most global stock markets and also how China - a leading market on the way up - could be the catalyst for triggering a reversal of fortune. It would seem the expected downward correction is now squarely under way with the MSCI World Index down by 3.4% and the MSCI Emerging Markets Index 5.2% lower since their respective highs of August 13 and August 3.

A summary of the movements of major global stock markets since the recent highs, as well as various other measurement periods, is given in the table below. Interestingly, none of the indices in the table have been able to withstand the downdraught, with the Chinese Shanghai Composite Index (-17.3%) and the Russian Trading System Index (-10.0) leading the way down - in not dissimilar fashion to how these indices blazed a trail to record rally returns of 90.7% and 95.4% respectively.

Click here or on the table below for a larger image.

I have discussed valuation levels and technical sell signals in my recent posts, but another factor that will come into play is seasonality turning negative. Focusing on the S&P 500 Index and the Dow Jones Industrial Index, I have done a short analysis of the historical pattern of monthly returns for these indices from 1957 to mid-2009. The results are summarized in the graph and table below.

Source: Plexus Asset Management (based on data from I-Net Bridge)

If one looks at the average return per month and in which months the most market declines have occurred, it seems as if the months of June, August and September are traditionally bad for stock markets. Although June this year played according to script, with the S&P 500 showing a zero return and the Dow Jones declining by 0.6%, July excelled with 7.4%/8.6% gains. Given the overbought level of markets, it is conceivable that the “bad” months of August and September might conform to the historical pattern. September, specifically, has over time been the month with the lowest average monthly return.

The much-needed correction of the summer rally could take the form of either a pullback or a consolidation (i.e. ranging). I suspect we may see at least some degree of reversion to the 200-day moving averages in a number of instances, but will be watching closely to ascertain whether we are dealing with a normal short-term correction or a more significant move threatening the primary trend. In the meantime, sit tight and be cautious as markets hopefully realign with the reality on the ground.

Tags: August And September, Catalyst, Dow Jones, Dow Jones Industrial Index, Emerging Markets, Excelled, Global Stock Markets, Leading Market, Leading The Way, Market Declines, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Pop N Drop, Reversal Of Fortune, Russian Trading System, Seasonality, Shanghai Composite Index, System Index, Valuation Levels, Zero Return
Posted in Emerging Markets, Markets | No Comments »

WealthTrack’s Great Investors: A Conversation with Mark Headley

Tuesday, August 18th, 2009

This week in WealthTrack’s series on Great Investors, Consuelo Mack features Mark Headley, chairman of the board of Matthews International Capital Management, which runs a family of Asia-focused mutual funds.

Headley discusses the impact of the financial crisis in Asia as well as potential opportunities in the region. (If there is no sound, click on “unmute” by scrolling over the bottom of the image.)

Note: The transcript of this interview is not available yet, but will be posted here as soon as it arrives.

Source: WealthTrack, August 14, 2009.

Tags: Cape Town, Capital Management, Chairman Of The Board, Ffffff, Financial Crisis In Asia, Image Note, International Management, Investment, Investors, Mack, Matthews International, Mutual Funds, Postcards, Sound Click, Target, Wealthtrack
Posted in Markets | No Comments »