Escalating fears of a double-dip recession have made “economically defensive stocks” the investment du jour. Although defensive stocks may make investors sleep better at night, they may also expose a portfolio to a risk not immediately obvious—the long-term Treasury bond!
Bond Yields & Economically Defensive Stock Performance
Exhibit 1 compares the 10-year Treasury bond yield (solid line) with the relative stock price performance of Morgan Stanley’s Consumer Stock Price Index (a proxy index for economically
defensive stock investments whose current composition is listed in Table 1). The relative stock price performance of defensive stocks is shown on an “inverted scale,” so when the dotted line rises (falls), it illustrates periods of underperformance (outperformance).
Exhibit 1
For the last three decades, there has been a close relationship between the 10-year Treasury bond yield and the relative stock price performance of defensive stocks. Indeed, the best defensive stock outperformances since the 1970s have occurred contemporaneously with the four major declines in the 10-year Treasury bond yield (i.e., mid-1984 to mid-1986, early-1989 to early-1993, early-2000 to early-2003, and mid-2007 to late-2008). By contrast, economically defensive stocks have at best been market performers and often have underperformed during periods when the 10-year Treasury yield has risen.
This clipping and video is courtesy of Tyler Durden, ZeroHedge.com
Below is an RT clip in which Hugh Hendry confirms just this: according to the Eclectica head man, a mark Greek debt to realistic market would wipe out E35-billion in French bank capital, “and it is questionable whether the French banking system would take such a hit.” Hendry’s solution, as has been the case from the solution, is for Greece to leave the euro, and points out that due to FX inflexibility, there will be no tourists in Greece this year as everything becomes painfully expensive, not in Drachmas but in Euros.
In typical fashion, Hugh dismembers Angela Merkel’s hypocrisy: “When the truth becomes unpalatable, what is the truth. Angela Merkel, when we say she is being generous, there is nothing generous about spending taxpayers’ money in another country, that is not generosity, that is merely trying to salvage a bankrupt set of political ideology. So to blame the messenger when it’s the truth that hurts, I find that inexcusable.”
[Hendry's huge bet against the euro has proven to be a terrific success.]
The testimony of a former Paulson & Co official, Paolo Pellegrini, could undercut the Securities and Exchange Commission’s fraud case against Goldman Sachs, CNBC has learned.
Pellegrini, testified that he told ACA Management, the main investor in a Goldman mortgage-securities transaction, that Paulson intended to bet against – or short – the portfolio of mortgages ACA was assembling.
“If true, the testimony would contradict the SEC’s claim that ACA did not know Paulson was hoping the mortgage securities would fail and weaken charges that Goldman misled investors by not informing ACA of Paulson’s position,” said the CNBC report.
Importantly, neither Pellegrini nor Paulson & Co has been accused of wrongdoing.
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Over the past twenty years, New York based Third Avenue Management has outperformed the US market by six percent annually. Third Avenue manages Manulife Investment’s newly acquired AIC Global Focused Fund.
Watch this manager discuss where he’s finding value today.
Ian Lapey discusses his firms “deep value” investment style pointing out that they like “safe” and “cheap.”
Safe – 1) Strong financial position, high quality assets, relative absence of liabilities. 2) Competent management team – impressive long-term track record, whose interests are aligned with outside passive minority shareholders, like ourselves. 3) Understandable business – our investment process is very document driven, we need to have very good disclosure, and we need to be able to understand after a review of the financials in order to invest.
Cheap – “A significant discount from the intrinsic value or private market value. What we try to do in valuing the company, we put on the business person’s hat, figure out a conservative valuation of the company as either a private entity or a takeover candidate, and then pay a significant discount to this private market value. We also want the business not only to be trading at a significant discount, but we want the business to have very attractive long term growth potential. So say, double digit long-term potential to compound net asset value.”
Where in the world is Third Avenue finding value?
Highest concentration in Hong Kong – investing in several Hong Kong Real Estate operating and investing companies, accounting for about 24% of the portfolio. About 20% of the portfolio is in the U.S. – a mix of high-tech companies with huge cash rich balance sheets, and a large investment in BNY Mellon a huge asset management custodian. 11% in Canada – Forest products company and a couple of energy names.
Hong Kong real estate companies represent the biggest bet in the portfolio – these companies all have extremely strong financial positions, net debt to capital ratios no higher than 15%, the management teams have impressive long term track records, and own between 30-50% of the outstanding shares of the companies, so their interests are very much aligned with ours – and the stocks trade at a significant discount to our estimate of NAV. So currently today, the best examples for us; the most fertile ground for safe and cheap, is in these Hong Kong real estate and investment companies.
Henderson Land
Our biggest position is Henderson Land, a Hong Kong based company with very high quality assets primarily in the form of income producing real estate in Hong Kong, and a small but growing presence in mainland China. They also have a huge agricultural land “bank” in Hong Kong which should be a huge driver of growth for the company, and they own 39% of Hong Kong and China Gas, the sole provider of piped gas to Hong Kong, also with a presence in mainland China. The Chairman and CEO, Li Shau-Kee owns 54% of the common stock, so his interests are very much aligned with ours, and he has a great long term track record.
BNY Mellon
BNY Mellon is extremely well financed, and though they were battered a bit by the financial crisis, they weathered the storm quite well because they have very significant cash generative core businesses, i.e. asset custody, where they’re the leading global custodian, with $22-trillion under custody, and asset management, where they have over $1-trillion in AUM. These businesses have performed very well, in the bear market and financial crisis, and in fact, their assets under management were up over 20% in the first quarter of the year, and assets in custody were up over 10%.
Hugh Hendry, CIO, Eclectica Asset Management, writes in the Telegraph UK today, cautioning investors that China’s $1.4 trillion credit expansion and $586-billion domestic spend is a white elephant bet on a global recovery in consumption of its exports that remains to be seen.
“In China, investment spending has tripled since 2001 and the consequences are staggering. A country that represents just 7pc of global GDP is now responsible for 30pc of global aluminum consumption, 47pc of global steel consumption and 40pc of global copper consumption. The overriding problem is that the Chinese model leads to a deflationary spiral that is perpetual in nature. Domestic consumption never grows fast enough to absorb the supply, prompting the planners to commit to ever-higher levels of investment. Over-capacity inevitably plagues many sectors of the economy and Chinese profitability is already low.”
It seems the world is in the midst of a love-hate relationship with the dollar. Dow Jones Newswires reporter Shelly Banjo speaks with Jonathan Lewis, principal of Samson Capital Advisors, about the ups and downs of the greenback and Lewis’ outlook for 2010.
The long-term investment trend is definitely pointing toward Asia, but China may not be the best opportunity in the region – India could be a safer bet, Robin Griffiths, technical strategist at Cazenove Capital, told CNBC.
“Everybody talks about China, China, China, which is good and I believe in the China story … but some other markets are slightly less vulnerable than China,” Griffiths said.
Barry Ritholtz shares an interesting note on the rally in the dollar. The MACD has turned up and crossed over, signalling that traders and U.S. dollar carry-traders are nervous about their short positions in the dollar. With the Japan-easing underway, its possible that during the course of the year, the yen will replace the dollar as the primary funding currency. Time to bet on a return of volatility in risk assets.
On another note, the Canadian dollar is set to weaken relative to the greenback, should the rally in the dollar gain traction.
We know that “Short the US Dollar” has been a crowded trade for some time now. And, after falling 41% from 2001 to 2008, the fat part of the collapse has already happened.
Will it continue? That’s what today’s chart looks at.
How likely is it that the rest of the world will stand idly by and allow: a) US manufacturing competitiveness a huge advantage via weak currency?; 2) Massive US debt to be inflated away through dollar weakness?
Quite possibly not, as other currencies engage in a race to the bottom. The chart below suggests a dollar rally is in the offing: >
Adam Hewison strikes again with the ten-thousand-foot-view of the market with three new technical analysis videos on the Dollar Index (DXY), Crude Oil, Gold – These are relevant analyses given that crude and gold are both priced in US dollars:
The above chart is Adam showing the declining trend of the US Dollar Index along with the positive (standard) MACD Divergence… and the recent positive trendline break. As such, his video is entitled:
“The crude oil market continues to soften and is now close to some important levels that I think we should look at. In my new video we look at what is happening in this market right now and what we expect to happen in the future.
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As we have indicated in our earlier posts, we are now in the official “silly season” for trading. What I mean by that is the markets will be very thin, choppy and can be moved by a relatively small amount of money.”
Finally, Adam posts a quick 3-min update on Gold strangely titled:
We are already in the “silly season” and what I mean by that is after December 15 most traders are not serious about the markets and they’re not committed to any large positions for the balance of the year.
As you will see in the video, gold has fallen back to an area that should provide support, however it will remain choppy and thinly traded for the balance of the year.”
Thanks to the work of MarketFolly.com, we can get a glimpse into the dealings of some of the most prominent and successful hedge funds. These are useful as they point to tactical opportunities and sometimes, when hedge funds take short positions, they provide lucid guidance pointing to areas or stocks in the market that should be sold or avoided, or for those with the stomachs, to follow short.
Below, MarketFolly.com details the trading activities of John Paulson’s, $36-billion hedge fund, Paulson & Company. Paulson is famed for having bet massively against subprime mortgages, and earning returns for his partners over the past 2 years which at one point, were in excess of 1,000%.
Among Paulson’s holdings are some notable Canadian companies, Kinross Gold, and BCE. Among the financials, Paulson is long Wachovia, National City, Wells Fargo, and Merrill Lynch; at the same time, Paulson is also long Proshares Ultrashort Financials (SKF). Among the defensive consumer non-durable companies Paulson likes tobacco majors Philip Morris, and UST.
More recently, Paulson appears to be initiating an effort to compel Dow, by sending the company a letter, urging its management to close the acquisition of Rohm. This could get interesting. Paulson reported in a 13G filing that it held 9.24% of Rohm. Who knows what additional interest Paulson owns in Rohm via swaps.
This is the 4th Quarter 2008 edition of our ongoing hedge fund portfolio tracking series. Before reading this update, make sure you check out the Hedge Fund 13F filings preface.
Next up is Paulson & Co ran by John Paulson. His hedge fund has generated massive returns over the past two years, as he bet against financials and all things subprime. One of his funds was even up 589%. Most recently, he has profited by shorting UK banks. Although Paulson is obviously one of the main brains behind the operation, there are also many talented individuals. One of their co-portfolio managers has left to start his own fund, and we’ll be keeping an eye on that. At the end of 2008, his Advantage Plus fund ended the year +37.58%, as detailed in our year end 2008 hedge fund performance post. For more info on how Paulson performed in 2008, be sure to check out their year end letter & report.
The following were their long equity, note, and options holdings as of December 31st, 2008 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):
At&t (T)
Embarq (EQ)
iStar Financial (SFI)
Liberty Media Corp (LMDIA)
National City (NCC)
Northern Trust (NTRS)
Peoples United Financial (PBCT)
St Jude Medical (STJ)
Teva Pharmaceutical (TEVA)
Centennial Communication (CYCL)
UST (UST)
Proshares Ultrashort Financial (SKF)
Wells Fargo (WFC)
Wachovia (WB)
Some Increased Positions (A few positions they already owned but added shares to)
Merrill Lynch (MER): Increased position by 327%
BCE (BCE): Increased position by 308%
Genentech (DNA): Increased position by 242%
NRG Energy (NRG): Increased position by 163%
Cheniere Energy (LNG): Increased position by 60%
Philip Morris International (PM): Increased position by 50%
Rohm & Haas (ROH): Increased position by 20.5%
Boston Scientific (BSX): Increased position by 18%
Some Reduced Positions (Some positions they sold some shares of)
Brocade Communications (BRCD): Reduced position by 28.6%
Removed Positions (Positions they sold out of completely)
Anheuser Busch (BUD)
Barr Pharmaceuticals (BRL)
Applied Biosystems (inactive)
Hercules Offshore (HERO)
Macrovision (MVSN)
Wrigley (WWY)
Top 20 Holdings (by % of portfolio)
Rohm & Haas (ROH): 18.36% of portfolio
Boston Scientific (BSX): 12.64% of portfolio
UST (UST): 11.31% of portfolio
Kinross Gold (KGC): 8.66% of portfolio
BCE (BCE): 7.7% of portfolio
Wachovia (WB): 7.62% of portfolio
Philip Morris International (PM): 6.45% of portfolio
Mirant (MIR): 5.72% of portfolio
Genentech (DNA): 4.68% of portfolio
Merrill Lynch (MER): 2.68% of portfolio
National City (NCC): 2.54% of portfolio
NRG Energy (NRG): 2.02% of portfolio
At&t (T): 1.41% of portfolio
Ultrashort Financials (SKF): 1.36% of portfolio
Embarq (EQ): 1.18% of portfolio
Northern Trust (NTRS): 0.79% of portfolio
Peoples United Financial (PBCT): 0.72% of portfolio
Liberty Media (LMDIA): 0.68% of portfolio
Centennial Communications (CYCL): 0.66% of portfolio
St. Jude (STJ): 0.54% of portfolio
Assets from the collective long US equity, options, and note holdings were $7 billion last quarter and were $6 billion this quarter. Keep in mind that many of Paulson’s holdings are not listed in these filings because they aren’t equities, but rather securities in other markets. However, as evidenced above, he does hold a decent amount of equities due to merger arbitrage and other strategies. We’d be remiss if we didn’t also point out that Paulson’s team has been hard at work, as they recently filed 13Gs on Rohm & Haas (ROH) and Boston Scientific (BSX). This is just one of many funds in our hedge fund portfolio tracking series in which we’re tracking 35+ prominent funds. Look for our updates everyday over the next few weeks.
Portfolio.com’s February 2009 issue profiles John Paulson, the now legendary hedge fund manager whose record payday in 2007-’08 came as a result of doing what can only be described in its entirety as “shorting Subprime.” What’s remarkable about his feat is that there was no simple way to do so at the time 2 years ago. No subprime instruments existed that one could short, and no representative futures or other derivatives were available to make this a strategy that others, no less, Paulson, could employ in order to facilitate his gigantic bet against subprime mortgages and housing.
This is this weeks must-read piece. Here are a few excerpts to whet your appetite:
Hedge fund manager John Paulson has profited more than anyone else from the financial crisis. His $3.7 billion payday in 2007 broke every record, and he made it all by betting against homeowners, shareholders, and the rest of us. Now he’s paying the price.
By scoring returns of this magnitude, Paulson has dwarfed the success of George Soros, whose currency trades in the 1990s made him so much money that he has spent much of the rest of his career atoning for them.
Paulson makes no apologies. During our conversation in his conference room, he describes in detail how he pulled off the greatest financial coup in recent history—a two-year bet that the calamity we are now experiencing would take place. It was a megatrade involving dozens of financial instruments, along with prescient wagers that banks like Lehman Brothers would eventually go under.
The article also features an eye-opening conversation between Jim Chanos and Bear Stearns’ Alan Schwartz:
Chanos, for one, is tired of the blame-the-shorts litany, and he recalls a conversation with Bear Stearns’ Schwartz to make his point.
The day before the Fed’s rescue of Bear Stearns, Chanos says he was walking to the Post House restaurant in New York City, when, at 6:15 p.m., his cell phone rang. He saw the Bear Stearns exchange come up on his caller I.D. and took the call.
“Jim, hi, it’s Alan Schwartz.”
“Hi, Alan.”
“Well, Jim, we really appreciate your business and your staying with us. I’d like you to think about going on CNBC tomorrow morning, on Squawk Box, and telling everybody you still are a client, you have money on deposit, and everything’s fine.”
“Alan, how do I know everything’s fine? Is everything fine?”
“Jim, we’re going to report record earnings on Monday morning.”
“Alan, you just made me an insider. I didn’t ask for that information, and I don’t think that’s going to be relevant anyway. Based on what I understand, people are reducing their margin balances with you, and that’s resulting in a funding squeeze.”
“Well, yes, to some extent, but we should be fine.”
“This is now 6:15 on Thursday night, the night before the collapse,” Chanos says. “It was after a meeting with Molinaro”—Bear Stearns C.F.O. Sam Molinaro—“who basically told him at that meeting, ‘We’re done. We’re gone. We need money overnight we don’t have.’ So here he is, calling one of his biggest clients to go on CNBC the next morning to say everything’s fine when clearly it’s not. And he knew it wasn’t.”
Chanos refused to go on CNBC. By 6:30 the next morning, word was out that the Fed was engineering the rescue of Bear Stearns. Chanos realized that he could have been on CNBC while that was announced. “I thought, That f*cker was going to throw me under the bus no matter what.”
Then, Paulson’s outlook:
Paulson is astounded that some optimists continue to expect that somehow the formerly unsinkable economy will remain afloat, at least long enough for the government’s rescue boats to arrive. “Now that we’re in a recession, they’re probably admitting, ‘Okay, we’re in a recession, but it will probably last just two to three quarters.’ So they’re always underestimating the severity of the magnitude,” he says.
Paulson’s own view of the current situation is much darker. He predicts that the recession will last well into 2010 and that unemployment will reach 9 percent, a sharp increase from its current perch just below 7 percent. “We have a long way to go before we reach the bottom,” he says.
About his recent presentation:
Slides in Paulson’s presentation declared that the U.S. had slipped into its deepest recession since World War II. His charts displayed the usual parade of bad tidings: a steep decline in home prices, soaring mortgage delinquencies, credit contracting, and hemorrhaging in the financial sector. The 14th chart showed his strategy. It read, “How do we benefit near-term?”
Paulson’s answer came in four bullet points: Cut leverage and build cash, eliminate exposure to the equity markets, maintain only short-term securities, and prepare for bargains in debt securities of distressed companies—a “$10 trillion opportunity,” another chart pointed out
Advice in old age is foolish; for what can be more absurd than to increase our provisions for the road the nearer we approach to our journey’s end. — Cicero
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WSJ What's News Midday Edition, September 3, 2010by The Wall Street Journal 3 Sep 2010 at 1:32pm
The U.S. economy lost 54,000 jobs in August as census workers continued to exit payrolls, but the private sector added 67,000 jobs. The unemployment rate rose to 9.6%. The Institute for Supply Management's non-manufac...
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Among Paulson’s holdings are some notable Canadian companies, Kinross Gold, and BCE. Among the financials, Paulson is long Wachovia, National City, Wells Fargo, and Merrill Lynch; at the same time, Paulson is also long Proshares Ultrashort Financials (SKF). Among the defensive consumer non-durable companies Paulson likes tobacco majors Philip Morris, and UST.
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