market folly

Riches Among The Ruins By Robert P. Smith ~ Book Review

marketfolly@gmail.com (Market Folly) — Sat, 07 Nov 2009 15:45:00 +0000

We've finally had a chance to sit down and read many intriguing books before the next round of hedge fund filings and wanted to pen our thoughts while the content was still fresh in our mind. Without further ado...

Robert P. Smith's book, Riches Among The Ruins: Adventures in the Dark Corners of the Global Economy can be summed up in one word: Entertaining. We know that can be a cliché description often used in reviews, but it really is the truth. Smith's work focuses on the personal account of his 30 odd years of buying and selling debt in developing (and often rough) countries. Before reading the book, we had heard him characterized as Indiana Jones and upon reading, realized that it was the perfect description. Smith's fascinating adventures could even be considered James Bond-esque in some regards. After all, he dodges bullets in Iraq, sprints for his life in the streets of Nigeria and loses millions overnight on a Russian trade gone wrong. As we sat reading, we had to stop and remind ourselves that he is a trader and banker, not a spy. If you enjoy the stories of Indiana Jones or James Bond, then you'll definitely like this book. And as an added bonus, you get to learn about some important topics of finance.

Smith is the founder and managing director of Turan Corporation, a firm that focuses on emerging market sovereign debt. Back in the 1970's, he essentially pioneered the industry and Riches Among The Ruins details all of his ups and downs. His life has been the definition of a roller coaster as he made millions of dollars, lost it, and then made it back again. This book is quite different from some of the other titles we've recently read in that it was less about financial theory and more about experiential wisdom and advice in the world of business. While we wish it would have delved into more financial depth, the adventure component certainly makes for an insightful, adrenaline-filled read.

Apart from all the trading and thrills, there is an important message: the dangers of economic collapse are still very much real. And while Smith's stories center on countries abroad, he pays special note of the situation in the United States, citing massive international debt levels, among other problems. He has seen the perils of economic collapse first hand and hopes to bring further light to the situation in an attempt to prevent it from happening on our own shores. Overall, Riches Among The Ruins is a riveting adventure that takes you deep within the world of emerging market debt. It is an area not often focused on in the mainstream and we thoroughly enjoyed learning more through his roller coaster ride.

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Make sure to check out some of our other recent book reviews as well:

- The Greatest Trade Ever by Gregory Zuckerman
- The Murder of Lehman Brothers by Joseph Tibman
- Street Fighters: The Last 72 Hours of Bear Stearns by Kate Kelly
- The Ivy Portfolio: How To Invest Like the Top Endowments by Mebane Faber

And as always, you can head over to our recommended reading lists for other insightful books, segmented by topic.

Leon Cooperman Raises Given Imaging (GIVN) Stake

marketfolly@gmail.com (Market Folly) — Fri, 06 Nov 2009 15:01:00 +0000

In a 13G filed with the SEC, noted investor and hedge fund founder Leon Cooperman has disclosed a 5.4% ownership stake in Given Imaging (GIVN). The filing was made due to activity on October 28th, 2009 and he now own 1,588,409 shares. This is an increase from his 978,709 shares that he held back on June 30th, 2009 as reported in his last filing. Back in September we covered a brief hedge fund panel that he took part in where he shared his thoughts on the market.

Leon Cooperman is well known for founding Omega Advisors, a multi-billion dollar hedge fund. Before starting his fund, Cooperman spent 25 years at Goldman Sachs, notably serving as Chief Executive Officer of their Asset Management division. He attended Hunter College for undergrad and then received his MBA from Columbia University. His work has landed him on the prestigious Forbes billionaire list.

Taken from Google Finance, Given Imaging is "develops, manufactures and markets diagnostic products for the visualization and detection of disorders of the gastrointestinal tract. The Company product, the PillCam capsule endoscopy, offers a range of PillCam video capsules and related products. The PillCam capsules can be easily ingested by patients and move naturally through the gastrointestinal tract without discomfort while wirelessly transmitting to a portable recorder, enabling the gastroenterologist to view high quality video, images and data on a RAPID workstation, utilizing its RAPID software."

Philip Falcone Amends 13D on Zapata (ZAP)

marketfolly@gmail.com (Market Folly) — Fri, 06 Nov 2009 14:01:00 +0000

Recently, Philip Falcone's hedge fund Harbinger Capital Partners has filed an amended 13D on shares of Zapata (ZAP). They now show a 51.6% ownership stake in the company with 9,950,061 shares. The filing was made due to activity on November 3rd, 2009 and they ever so slightly boosted their stake by acquiring 61,377 more shares since their last disclosure back in June when we covered their initial 13D filing on Zapata. The most recent 13D also notes that the merger with the newly formed Harbinger Group is in full swing. Those interested in all the details of the deal can check out the full filing here, where you can head to Item 4 to read more. In terms of other recent portfolio activity, we've noted that Harbinger has also been dumping shares of Solutia (SOA).

Philip Falcone runs multi-billion dollar hedge fund Harbinger with a focus on credit, bankruptcies, and proxy fights. While we cannot see their positions in credit markets (the SEC does not require their disclosure), we do cover their equity moves whenever we can. We've detailed all of Harbinger's latest portfolio adjustments so you can get a broader view as to how they're re-tooling. Additionally, we've also compiled their holdings in UK markets as well.

Zapata "owns 98% of Zap.Com Corporation, a public shell company. The Company is focused on acquisition opportunities in the United States and also outside of the United States. Zap.Com does not have any existing business operations as of December 31, 2008. It is searching for assets or businesses that it can acquire, so that it can become an operating company and may also consider developing a new business. During 2008, the Company did not generate any operating revenues."

Paul Touradji Launches Counterattack Lawsuit

marketfolly@gmail.com (Market Folly) — Fri, 06 Nov 2009 13:55:00 +0000

Originally, Gentry Beach and then Robert Vollero sued former employer Touradji Capital claiming they were owed $50 million in unpaid bonuses. Well, Paul Touradji & hedge fund Touradji Capital have sued right back, seeking $250 million as they claim the two men were "responsible for the destruction of millions of dollars of investor capital through a pattern of fraud, breaches of fiduciary duty, mismanagement and utter disregard for the interests of the investors whose capital they were obligated to protect."

The Touradji counter-attack took a no holds barred approach visible even from the table of contents of the legal proceedings with some heated talking points referring to Beach and Vollero, citing their lackluster 2007 performance, construction and supervision of an 'abysmal' private equity effort, and of course the demotion back to analyst. Rather than writing all the details out, we figured you should just check out all the juicy stuff in the legal filing itself. All you need to read is the table of contents and first section to see how Touradji has come out swinging.

Embedded below is the legal document (RSS & Email readers come to the blog to read it):

Also, you can download the .pdf here.

In the original suit launched against Touradji, all counts but two were dismissed. Touradji of course is a 'Tiger Cub' as he previously worked for Julian Robertson at Tiger Management before launching his commodities hedge fund that is now ranked 16th in Barron's hedge fund rankings.

Taken from our post on 'Tiger Cub' biographies, "Paul Touradji is the President and Chief Investment Officer of Touradji Capital Management LP, a New York-based hedge fund specializing in fundamental research and active investment in commodities and related assets. The firm manages approximately $3.5 billion and invests in both the public and private markets. Mr. Touradji has well over a decade of experience investing in the commodity, equity, and macro markets. Mr. Touradji began his commodities career at Tiger Management in the mid '90s, where he managed the commodities team; it was at Tiger that he developed his fundamental approach to analysis and investment in commodities. Prior to Tiger, Mr. Touradji’s specialty was quantitative arbitrage, principally with O’Connor Partners. Mr. Touradji is a 1993 graduate of the McIntire School of Commerce at the University of Virginia and a Certified Financial Analyst."

We'll watch as this case develops as it is the first public response from Touradji after they were hit with the initial suit.

What We're Reading ~ 11/6/09

marketfolly@gmail.com (Market Folly) — Fri, 06 Nov 2009 13:50:00 +0000

The periodic table of finance bloggers ~ a great compilation of the best reads out there. [The Reformed Broker]

Hunter over at DistressedDebtInvesting.com launches the Distressed Debt Investors Club, definitely check it out [DDIC]

Investment banker at the World Series of Poker [Texas Holdem Investing]

Choo Beng Lee was insider trading while at SAC Capital [Dealbreaker]

The easy money's been made [Barron's]

Will swelling fund size crimp stellar performance? [Wall Street Journal]

What 100 Trillion Dollars Looks Like (Inflation? What Inflation?)

marketfolly@gmail.com (Market Folly) — Fri, 06 Nov 2009 13:49:00 +0000

With all the talk of inflation down the line as the US Dollar slowly but surely implodes, we thought we'd take a bit of a humorous Friday approach to the topic. Below is a picture of what 100 Trillion Dollars looks like.

Well, 100 Trillion Zimbabwean Dollars, that is.

(click to enlarge)

Inflation? What inflation?

One would think that 100 trillion dollars would be quite the spectacle, but it's really not when you have a ten trillion dollar bill. This just goes to show that things can always be worse-off somewhere else, so keep that in mind. Who cares about inflation when you've got hyperinflation to worry about. And to those unaware of the situation, no this is not a joke. A loaf of bread in Zimbabwe costs $16 million Zimbabwean Dollars... at least it did back in 2008. Who knows what it costs a year later.

The Greatest Trade Ever By Gregory Zuckerman: Book Review

marketfolly@gmail.com (Market Folly) — Thu, 05 Nov 2009 14:01:00 +0000

John Paulson is perceived as, for lack of a better term, a financial rock star. Young traders, analysts, and fund managers alike dream of the day they can emulate him, pocket billions, exclaim "F*ck you!" to the markets and then bask in the fame of those worshiping their every move. Many investors idolize him. Mainstream America now relishes his genius in predicting the crisis. This is the public perception. Gregory Zuckerman's new book, The Greatest Trade Ever, somewhat changes that.

In addition to detailing what the book's title deems, 'The Behind-The-Scenes Story Of How John Paulson Defied Wall Street And Made Financial History,' Zuckerman manages to humanize Paulson through his insider look. While this might imply that Paulson possesses some sort of villainous trait, one could argue the book showcases him as neither a financial deity nor a villain. Instead, he is portrayed as a diffident and practical human being that relentlessly pursued an idea and gained notoriety through success.

Let's first get to the facts: This is an intriguing book. So intriguing, in fact, that we read the entire thing in one sitting cover-to-cover. While we acknowledge that this could be in part due to the fact that we are enamored with tracking hedge funds at Market Folly, it is still a good read regardless.

The Greatest Trade Ever chronicles how hedge fund manager Paulson (and others) bet against subprime and reaped billions. The work of senior Wall Street Journal writer Zuckerman falls right into our niche and gives us an unprecedented look with exclusive access to Paulson through more than fifty hours of interview. It specifies how the thesis was formulated, how the idea was pursued, and most notably, how exactly the trade was put on. This book is the definition of insider access.

The remarkable thing about this story is the fact that Paulson's idea can be summed up by one simple chart: a plot of how much real estate prices had diverged from their historical norm. That chart, crafted by then Paulson & Co analyst Paolo Pellegrini, would serve as the glistening prize in their collective trophy case. What this book shows you though is just how complex of a journey it was to arrive at that simple piece of paper. While Zuckerman's work rightly showcases Paulson as the protagonist, it also details the journeys of other individuals pursuing the same historic trade. It details the investment timelines of Jeffrey Greene (an investor who knicked Paulson's idea and tried it on his own), Michael Burry (an investor who made the right call but was early to the play), and Andrew Lahde (the hedge fund manager who pursued his conviction in the play and later penned the infamous 'F*ck you' goodbye letter to Wall Street).

Zuckerman also rightly focuses on Paolo Pellegrini, the analyst who performed much of the legwork behind the idea. What's interesting about Pellegrini is his ruffled past. Before joining Paulson & Co, Paolo seemingly floundered in the investment industry and appeared to be on the brink. However, this match seemed destined to be, as the Paulson & Co team appeared a rather ragtag bunch sprinkled with 'grind-it-out' pasts. They weren't perfect and The Greatest Trade Ever highlights this, bringing this hedge fund deity (and envious readers) back down to earth. Just like you and me, the people behind this trade are human and struggled with tough times. Before his uprising, Paulson doubted himself and was essentially a run of the mill fund manager, nothing too out of the ordinary. Yet, all it took was an idea and a determined set of minds.

In short, The Greatest Trade Ever is a magnificent insider look at how Paulson and others profited off of subprime's demise, detailing both the formulation and implementation of such a trade. It chronicles the hedge fund's uprising and shows you how before this one idea, the ragtag bunch at Paulson & Co were far from deities. In the end, Zuckerman's work is both insightful and gripping. As for Paulson? He's back at it again. His latest bet? The demise of the US Dollar. As Paulson says, "It's like Wimbledon. When you win one year, you don't quit; you want to win again."

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The above is the latest addition to our growing list of book reviews. Make sure to check out our previous thoughts on these titles:

- The Murder of Lehman Brothers by Joseph Tibman
- Street Fighters: The Last 72 Hours of Bear Stearns by Kate Kelly
- The Ivy Portfolio: How To Invest Like the Top Endowments by Mebane Faber

And as always, you can head over to our recommended reading lists for other insightful books.

Warren Buffett Sells Moody's Shares Again (MCO)

marketfolly@gmail.com (Market Folly) — Wed, 04 Nov 2009 15:01:00 +0000

While the dominant headlines yesterday centered around Warren Buffett & Berkshire Hathaway's (BRK.A) acquisition of Burlington Nothern Santa Fe (BNI), we wanted to highlight one of his other recent moves. Having already trimmed his stake in Moody's (MCO) a few times prior, legendary investor Warren Buffett has sold even more shares of the ratings agency. On October 28th, 2009, Buffett sold 1,133,027 shares at a price of $24.8637. Additionally, he sold 19,600 shares the next day at a price of $25.2728 per share. This brings his total ownership to 38,066,685 shares. These sales are in addition to other transactions he completed back in the beginning of September where he sold 794,388 shares between $26-27. While he has obviously been selling shares, we need to highlight that he does still indeed own quite a sizable chunk of the company. We simply take note because he has now made multiple sales within a few months. Buffett is an iconic American investor and we've compiled some compelling resources on him for those interested. You can check out Warren Buffet's recommended reading list, as well as the top 25 Warren Buffett quotes.

Buffett's actions will certainly be to David Einhorn's liking. Einhorn's hedge fund Greenlight Capital has been publicly short Moody's and McGraw Hill (MHP) and we've covered his short thesis in-depth with his presentation on the curse of the Triple-A. It will be interesting to see if Buffett is slowly but surely making his way toward the exit, or if he is merely reducing his stake to a more 'comfortable' level given the potential risks associated with this name.

Lastly, we'd be remiss if we didn't cover the recent news that Buffett will acquire Burlington Northern Santa Fe for $100 per share, a nice premium above $75 where shares had been recently trading. Berkshire Hathaway already owns 23% of BNI so this move obviously makes sense. After all, we noted way back in October of last year that Buffett was selling puts on BNI in an attempt to capture more shares. Speaking on the deal, Buffett said, "It’s an all-in wager on the economic future of the United States, I love these bets." He is definitely staying true to the piece he penned back in the market panic last year about buying American. This activity in the railroad sector instantly reminds us of the once hedge-fund-favorites Union Pacific (UNP) and CSX (CSX). While many hedge funds dumped these names in the wake of the economic crisis, it will be interesting to see if any of them flock back like vultures now that Buffett has snatched up one of the dominant players in an oligopoly of an industry.

Taken from Google Finance, Burlington Northern is "a holding company. The Company, through its subsidiaries, is engaged primarily in the freight rail transportation business. BNSF Railway Company (BNSF Railway) is the Company’s principal operating subsidiary. BNSF Railway operates various facilities and equipment to support its transportation system, including its infrastructure and locomotives and freight cars. It also owns or leases other equipment to support rail operations, including containers, chassis and vehicles. Support facilities for rail operations include yards and terminals throughout its rail network, system locomotive shops to perform locomotive servicing and maintenance, a centralized network operations center for train dispatching and network operations monitoring and management in Fort Worth, Texas, regional dispatching centers, computers, telecommunications equipment, signal systems and other support systems."

Moody's is "a provider of credit ratings and related research, data and analytical tools, quantitative credit risk measures, risk scoring software, and credit portfolio management solutions and securities pricing software and valuation models. The Company operates in two segments: Moody’s Investors Service (MIS) and Moody’s Analytics (MA). The MIS segment publishes credit ratings on a range of debt obligations and the entities that issue such obligations in markets worldwide, including various corporate and governmental obligations, structured finance securities and commercial paper programs. The MA segment develops a range of products and services that support the credit risk management activities of institutional participants in global financial markets. These offerings include quantitative credit risk scores, credit processing software, economic research, analytical models, financial data, securities pricing software and valuation models."

Soros Fund Management Amends 13D On Global Ship Lease (GSL)

marketfolly@gmail.com (Market Folly) — Wed, 04 Nov 2009 14:01:00 +0000

George Soros' hedge fund firm Soros Fund Management has just recently filed an amended 13G due to activity on October 29th, 2009. In the filing, they are now showing a 13.66% ownership stake in Global Ship Lease (GSL) with 6,847,753 shares. This total is actually calculated by 3,097,753 shares of common stock and then 3,750,000 shares issuable upon exercise of warrants held. To see other recent portfolio activity from legendary investor George Soros, head over to our post updating his positions.

As we noted in our hedge fund news update, Soros is cautious and thinks the market is overdue for a correction, so we'll have to see if that plays out like he and many other fund managers are expecting. For more of Soros' thoughts on the crisis laden financial markets, we recommend checking out his latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.

Taken from Google Finance, Global Ship Lease "acquires and charters vessels to container shipping companies. The Company was incorporated to acquire a fleet of containerships of diverse sizes."

Whitney Tilson & Hedge Fund T2 Partners: October Commentary

marketfolly@gmail.com (Market Folly) — Wed, 04 Nov 2009 13:50:00 +0000

Below is a lengthy and great read from Whitney Tilson's hedge fund T2 Partners. In addition to their investor letter update, they've provided an in-depth presentation on the overview of the housing and economic crisis. We can't stress enough what a comprehensive presentation it is so definitely check it out as they detail exactly why there is more pain to come.

Embedded below is the investor letter & presentation (RSS & Email readers come to the blog to view it):

Also, you can download the large .pdf here.

If you missed our previous post, we recently detailed T2 Partners' thoughts at the Value Investing Congress as well. Lastly, those interested can also check out their August letter too.

Dow Theory Sell Signal? Jeff Saut's Weekly Commentary (Raymond James)

marketfolly@gmail.com (Market Folly) — Wed, 04 Nov 2009 02:00:00 +0000

Our apologies for not posting this up sooner, but better late than never. Here's the weekly commentary from Raymond James chief investment strategist Jeffrey Saut. In this week's missive, he examines a possible Dow Theory sell signal.

Saut focuses on the fact that for a sell signal, you would need to see a secondary reaction and then confirmation by what happens after that reaction. So, first and foremost, Saut notes that "you need a downside reaction, which 'sets' the reaction lows, followed by a rally. If that rally fails to make a new reaction high, and subsequently breaks below the aforementioned reaction lows, then (and only then) will we have a Dow Theory sell signal, at least as I understand Dow Theory." This is somewhat similar to the scenario outlined by the guys at MarketClub in their video where they examine if the S&P 500 has topped out and broken its trendline.

In order for all of this to materialize, Saut says you would essentially need to see "a one-third 'give back' (that) would leave the Dow Jones Industrial Average at 8,910 and the Dow Jones Transportation Average at 3,412." This correction would then land the market in between the 50 day and 200 day moving averages. He notes his cautiousness since September as we have climbed a long way up, only to have a large gaping hole to potentially fall back down to should the market start to breakdown. He reiterates his cautiousness in his latest weekly commentary.

He concludes his piece by stating that while he senses we are into a secondary correction, the market is currently VERY oversold. As such, he feels it is a mistake to get too bearish and thinks the primary trend is still up until further evidence dictates otherwise. But, as mentioned earlier, he is still indeed cautious.

Embedded below is Saut's investment strategy (RSS & Email readers come to the blog to view it):

Also, you can download the .pdf here.

We've covered Saut's commentary each week for the past few weeks and you can check out his previous thoughts where he examined agriculture as a possible permanent investment. Additionally, he has previously re-iterated his skepticism over the never-ending market rally. Interesting thoughts as always from Saut and we'll continue to check in on what he's thinking each week.

Has The S&P 500 Broken Support?

marketfolly@gmail.com (Market Folly) — Tue, 03 Nov 2009 15:47:00 +0000

These next few days in the market will be pretty important given that the S&P 500 seems to have violated its primary trendline from the lows in March to the recent top. So, the question to ask is, does the market drop further from here? Or is this simply another tiny pullback like we have been seeing? MarketClub has analyzed the S&P 500 in this video and has identified potential areas the market could drop to if things got nasty. Additionally, they outline the potential for a head and shoulders top to take place where we could see yet another mini-rally before finally selling off.

They've also noted the divergence in the MACD for some time as it has turned negative a while ago and is downtrending while the S&P continued to slowly head higher. Needless to say, they are cautious and are watching these next few days to see how the market reacts to breaking through this primary trendline. Watch their S&P 500 thoughts here. Lastly, don't forget they are offering a free trading course via email for those interesting in learning more about technical analysis. As we always like to say, you can never have too many tools in the investment arsenal.

Market Folly Custom Portfolio Ranked #1 On Alphaclone Leaderboard

marketfolly@gmail.com (Market Folly) — Tue, 03 Nov 2009 14:03:00 +0000

We have some fantastic news to report in that our very own Market Folly custom 'hedgefundesque' portfolio is ranked #1 on Alphaclone's leaderboard for all fund strategies! Upon checking out their leaderboard, we discovered that if you select the 'max' date-range and search for 50% hedged strategies, our clone is ranked #1 out of all the various funds they track with a total return of 878.3%, an annualized return of 26.1%, and Alpha of 23.4 all since January of 2000. This of course is the portfolio we post updates on each month. The portfolio takes positions from 3 handpicked hedge funds we've selected and combines them into a cohesive hedgefundesque clone by taking the top 3 holdings of each fund, equal weighting them, and then employing a 50% market hedge.

What's even more impressive to us is the fact that not only is our MF clone ranked #1, we have 5+ more iterations of our clone ranked in the top 25 of Alphaclone's leaderboard. These other MF clones simply take our portfolio and use different strategies such as 'top 2 holdings,' 'top 5 best ideas,' etc. If you have an Alphaclone account, head over there and click on 'leaderboard' on the top and play around to see what funds have the best returns in the cloning universe. Our clones make an appearance in almost every category you select and we're quite proud of this feat. If you don't have an Alphaclone account, take advantage of their 14-day free trial to check our portfolio out and to see the leaderboard.

Here's a screenshot we took of the current leaderboard:

(click to enlarge)

And as always, here's our latest performance update from the month prior:

October 2009
Market Folly clone: -3.0%
S&P 500: -1.9%

YTD 2009
MF: +11.9%
S&P 500: +17.0%

Total return since January 2000
MF: +878.3%
S&P 500: -15.1%

Annualized return
MF: +26.1%
S&P 500: -1.6%

And here is a screenshot of the current performance overview:

(click to enlarge)

Our Market Folly 'hedgefundesque' portfolio is now up 11.9% year-to-date versus 17% for the S&P500, continuing its role as a hedged instrument that captures some, but not all of major upward moves and protects from downside risk. Head over to Alphaclone to see the positions our portfolio is currently holding and make note that here in the next 2 weeks our clone will rebalance with new holdings to reflect the latest 13F filings.

If you're unfamiliar with the MF portfolio, check out our introductory post here. We'll continue to post up monthly performance an ongoing basis. Definitely stay tuned in the next two weeks when our portfolio rebalances with new positions. Not to mention, we'll be *updating* our fund to better position it going forward in an effort to select fund managers we think will outperform over the long-term. Stay tuned to see what up and coming hedge fund we add into the mix.

Does Vanguard Feel Threatened By Tactical Asset Strategies?

marketfolly@gmail.com (Market Folly) — Tue, 03 Nov 2009 14:01:00 +0000

Thanks to a reader for bringing this back to our attention. Today we want to highlight an intriguing research piece from back in 2006 from index-fund giant Vanguard. Back then, they put out an interesting white paper on evaluating tactical strategies entitled, "A Primer on Tactical Asset Allocation." The fact that they would publish such a thing in the first place speaks volumes as they could possibly perceive a threat to their bread and butter business of low-cost buy and hold index investing. And while the piece was written nearly 3 years ago, it becomes all the more interesting given the events that have transpired since its publication.

The adage of 'buy and hold' has come into question with the recent jaw-dropping market declines of 2008 and many investors are re-evaluating their strategies and methodologies. As such, talk of other strategies (including tactical asset allocation) has begun to pick up and the argument has intensified.

While we highly doubt Vanguard would ever openly admit they perceive this to be a threat, it is curious. Did they publish a 'cautionary advocacy' paper in an attempt to cut this argument off at the pass? It almost seems as if they published such a piece because they were beginning to feel some heat. The question now is, has that heat intensified? We'll have to look around to see if they've released any follow-ups or additional research on the subject matter given the rough year the indexes had in 2008. While it's only natural for Vanguard to come defend their turf, this debate could very well be just beginning and could wage on for many years.

The introduction to the paper reads as follows,

"Many pension funds, endowment funds, and other institutional investors are concerned that equities - typically their largest asset allocation - will have lower average returns over the next decade. In this environment, many investors have questioned the wisdom of thinking about asset allocation solely in strategic terms and have shown renewed interest in tactical approaches.

Tactical asset allocation (TAA) is a dynamic strategy that actively adjusts a portfolio's strategic asset allocation (SAA) based on short-term market forecasts. Its objective is to systematically exploit inefficiences or temporary imbalances in equilibrium values among different asset or subasset classes. Over time, strategic long-term target allocations are the most important determinant of total return for a broadly diversified portfolio. TAA can add value at the margin, if designed with the appropriate rigor to overcome significant risk factors and obstacles unique to the strategy. Our results show that while some TAA strategies have added value, on average TAA strategies have not produced statistically significant excess returns over all time periods."

Interesting premise indeed. They then go on to address these issues in a 12-page white paper where they examine tactical asset allocation and the pros & cons. In the end, their paper then concludes the following: "As we have highlighted, consistently predicting systematic risk is challenging at many levels. SAA is the critical decision, while a well-designed TAA strategy can add value at the margin. However, successful TAA requires rigorous methodology. Understanding the TAA investment process, using quantitative performance-evaluation metrics to distinguish luck from skill, and minimizing costs are essential to the success of TAA strategies."

Embedded below is the entire Vanguard presentation:

Alternatively, you can download the .pdf here.

In the end, we're sure this isn't the last we'll hear of this discussion/debate and we look forward to further research to be presented by both sides of the argument. While Vanguard wouldn't openly admit that they are wary of a threat, we certainly see how this paper could be perceived as such... especially now.

For more reading on the subject, we highly suggest checking out various resources from Mebane Faber. In particular, his book The Ivy Portfolio details the endowment model of investing and even examines hedge fund portfolios, much like we do here at Market Folly on a daily basis (see our review of the book here). Additionally, Mebane covers various strategies on his well-known blog World Beta. Lastly, he is also a portfolio manager at Cambria Investment Management and co-founder of Alphaclone, a hedge fund replication tool we have used extensively to create the Market Folly custom portfolio that since January 2000 has seen a total return of 878.3%, annualized returns of 26.1%, and Alpha of 23.4.

Dead Government Walking: Hedge Fund Sprott's October Commentary

marketfolly@gmail.com (Market Folly) — Tue, 03 Nov 2009 13:53:00 +0000

We wanted to post up hedge fund Sprott Asset Management's October market commentary entitled, 'Surreality Check Part Two... Dead Government Walking" penned by Eric Sprott and David Franklin.

Embedded below is the document:

Also, you can download the .pdf here.

We've covered a lot of Sprott's research on the site before, including some of their September commentary, as well as their special report on how gold is the ultimate triple-A asset. Additionally, you can also check out fund manager Eric Sprott's recent thoughts at the Value Investing Congress.

Trading Setups Weekly Watchlist (Technical Analysis)

marketfolly@gmail.com (Market Folly) — Tue, 03 Nov 2009 13:50:00 +0000

Courtesy of the Option Addict, here's the latest weekly watchlist of trading ideas. He takes a look at names to 'buy on the dips' as well as names to 'sell on the rips.' He also uses technical analysis to identify various patterns that could make some nice swing trades. At the very least, it's a good place to build a watchlist for some names to keep an eye on.

Embedded below is the video (RSS & Email readers come to the blog to view it):

Hedge Fund Farallon Capital: Position Update & Internal Adjustments

marketfolly@gmail.com (Market Folly) — Mon, 02 Nov 2009 15:01:00 +0000

Due to activity on October 14th, 2009, Thomas Steyer's hedge fund Farallon Capital Management filed an amended 13D on Capitalsource (CSE). They are now showing a 3.9% ownership stake in the company with 12,582,795 shares, which is a decrease from their previous holdings. (As we covered in their previous filings with the SEC, Farallon has been selling CSE shares). Back in late September they owned a 5.7% ownership stake and obviously have since reduced their holdings down to their current 3.9% stake by selling 5,993,546 shares over the past month or so. You can view the rest of Farallon's holdings here, but keep in mind that they are set to update their disclosures here in the next few weeks with a new 13F filing.

We also got some news recently out of Farallon as it pertains to their future. They plan to make co-managing partner Andrew Spokes their 'key man' going forward, enabling a succession plan should Steyer ever depart (he has no plans to leave at this point). If both Steyer and Spokes were to leave, then the funds would be liquidated, giving investors complete transparency as to the firm's operating procedures going forward. Spokes previously was an executive director at Goldman Sachs and oversaw portfolio management for Noonday Global Management, a Farallon affiliate.

Farallon is a multi-billion dollar hedge fund founded by Thomas Steyer in 1986 that typically invests in equities, private investments, debt, and real estate. While they have a solid track record, 2008 was definitely a chink in the armor. After receiving redemption requests for almost 25% of their main fund's capital, they suspended withdrawals. Their poor 2008 also landed them on the dreaded list of the top 10 asset losers. Read more about Farallon in our post covering their background and positions.

Taken from Google Finance, Capitalsource is "a commercial lender that provides financial products to middle market businesses. Through its wholly owned subsidiary, CapitalSource Bank, the Company provides depository products and services in southern and central California. It operates through three segments. The Commercial Banking segment comprises the Company’s commercial lending and banking business activities. The Healthcare Net Lease segment comprises its direct real estate investment business activities. The Residential Mortgage Investment segment comprises the Company’s remaining residential mortgage investment and other investment activities, in which it formerly engaged to optimize its qualification as a real estate investment trust."

David Einhorn Sells More Punch Taverns (LON: PUB)

marketfolly@gmail.com (Market Folly) — Mon, 02 Nov 2009 14:58:00 +0000

A few weeks ago, the London Stock Exchange (LSE) news service announced that David Einhorn's hedge fund Greenlight Capital has reduced its position in Punch Taverns (LON: PUB) from a 3.7% ownership stake down to 2.57%. Unfortunately, this maneuver means that we will no longer be able to see his adjustments with this position as the LSE only requires hedge funds to report their positions in companies when they hold a 3% stake or greater. So, unless Einhorn re-ups his stake in Punch, we won't see anymore movements in this regard. We don't think that will happen as Einhorn has been selling down this position over time. This has been a bit of a crowded trade per se in hedge fund land as noted colleagues D.E. Shaw & Co and Citadel Investment Group also had stakes in Punch. We simply wanted to detail this information for Market Folly readers that enjoy updates regarding various hedge funds' UK positions.

We have tracked Einhorn extensively over the past few weeks at his various investment conference appearances. You can read over his Value Investing Congress presentation where he further presented the case for gold, as well as in his appearance at the Great Investors' Best Ideas symposium. Additionally, Einhorn gave us an update to some of his portfolio positions in his most recent investor letter. All of the above provide great reading and we highly recommend checking them out.

Taken from Google Finance, Punch Taverns is "a pub company in the United Kingdom, with over 8,400 pubs across its leased and managed portfolio. The Company is engaged in the trading activities in the operation of public houses either under the leased model or as directly managed by the Company. The leased model involves the granting of leases to tenants who operate the pub as their own business, paying rent to the Company, purchasing beer and other drinks from it and entering into profit sharing arrangements for income from leisure machines. Pubs that are directly managed involve the employment of a manager to operate each managed pub and the Group receives all revenues generated by the pub and is responsible for costs."

Lastly, make sure to also check out these other resources from Einhorn's Greenlight Capital:

- The Curse of the Triple-A (short the ratings agencies)
- Greenlight stores physical gold

Hedge Fund Harbinger Dumps More Solutia (SOA)

marketfolly@gmail.com (Market Folly) — Mon, 02 Nov 2009 14:01:00 +0000

Yet again we find ourselves notified of more SEC filings from Philip Falcone's hedge fund Harbinger Capital Partners. As we've detailed numerous times on the blog before, Harbinger has been bustling with portfolio re-shuffling. This time around, they've filed an amended 13D on their position in Solutia (SOA). Due to activity on October 21st, 2009, they are now showing a 6.9% ownership stake with 8,259,053 shares. This is down from their previous total of 8.1% of the company and they have sold 1,342,065 more shares over the past few weeks. As we've noted numerous times, Harbinger has been selling down their stake in SOA and this time is no different.

Philip Falcone runs multi-billion dollar hedge fund Harbinger with a focus on credit, bankruptcies, and proxy fights. While we cannot see their positions in credit markets (the SEC does not require their disclosure), we do cover their equity moves whenever we can. We've detailed all of Harbinger's latest portfolio adjustments so you can get a broader view as to how they're re-tooling.

Taken from Google Finance, Solutia is "a global manufacturer and marketer of a variety of chemical and engineered materials that are used in a range of consumer and industrial applications. The Company maintains a global infrastructure consisting of 25 manufacturing facilities, six technical centers and over 29 sales offices globally, including 14 facilities in the United States."

What We're Reading ~ 11/2/09

marketfolly@gmail.com (Market Folly) — Mon, 02 Nov 2009 13:50:00 +0000

If you do not have a Barron's subscription, we'll teach you a little trick to view this article for free. In Google, copy and paste this phrase which is the title of the article: 'Post-Apocalypse Hedge-Fund Strategies'. Click the first link that pops up in the search results, and voila, you've got the free article. If you've already got a Barron's subscription, you can just go here to read Post-Apocalypse Hedge-Fund Strategies. [Barron's]

Excerpts from The Greatest Trade Ever, an upcoming book detailing hedge fund manager John Paulson's big win [Wall Street Journal]

And don't forget you can get discounts on both those publications.

Wall Street Journal: 75% discount
Barron's: 40% discount

The Murder Of Lehman Brothers By Joseph Tibman: Book Review

marketfolly@gmail.com (Market Folly) — Sat, 31 Oct 2009 14:40:00 +0000

This is now the second book we've read on the demise of failed investment bank Lehman Brothers and today we're here to review Joseph Tibman's The Murder of Lehman Brothers: An Insider's Look at the Global Meltdown. What's interesting about this read is that it provides you with a different viewpoint of the crisis from the inside. The first book we read on this topic was Lawrence McDonald's New York Times Bestseller list book entitled A Colossal Failure of Common Sense: The Insider Story of the Collapse of Lehman Brothers.

While McDonald's book focused on different viewpoints and sources, Tibman takes a different approach by almost exclusively using his own sole account of what occurred within those hallowed walls. There are both pros and cons to this approach. On the positive side, this account is fresh, opinionated, and truly has a tenured insider feel. The negative aspect of this, though, is the fact that the book leaves with you with a limited viewpoint.

One of the strongest focus points of the book is the notion of 'drinking the Kool-Aid' on Wall Street. Given that so much greed (and irrationality) often abounds on Wall Street, the fact that Tibman's work takes aim at this is laudable. The focus on greed is something that always has and always will exist on Wall Street and Tibman's work showcases just how such desire can ultimately send you down in flames. The book takes aim at Dick Fuld as it chronicles his 20 year rise and fall at the firm and is additionally laced with attacks at various members of the government. While other books on Lehman's demise will focus on the most recent events leading up to the crisis, The Murder of Lehman Brothers takes a slightly different (more elongated) approach. While the author of course covers the pressing issues relating to Lehman's recent collapse, he also details how they almost went under 10 years earlier had it not been for the US government's bailout of Mexico at the time.

Another highlight of the book is its tone. Many books on finance seemingly have an 'intellectual' or condescending feel to them given the subject matter and language used. Not this book. If you hate the typical snobby, academic approach to financial writing or if you don't consider yourself to be the most financially savvy person out there, then The Murder of Lehman Brothers is perfect for you. The tone provides a very easy to read 'everyday' style that is refreshing.

A somewhat problematic area though (at least in our eyes) is the fact that Joseph Tibman is not the name of the individual whose viewpoint we are reading, but rather a pen name. This fact slightly diminishes the authority of the book and leaves us wondering their true identity. However, we do know that he was a senior investment banker who worked at the firm from before it was spun off by American Express in 1994 until the day of its death on September 21st, 2008. Given the increasing focus on transparency in finance these days, a more 'full disclosure' approach would have been welcomed. At the same time though, we can understand the desire or need to remain anonymous for career purposes.

Overall, The Murder of Lehman Brothers is a compelling narrative of one insider's journey within the burning walls of the failed investment bank that provides a fresh account in a concise, easy to understand writing style worth checking out.

-----

This latest review now joins a few other books we've posted up about and you can check out our past reviews here:

Street Fighters: The Last 72 Hours of Bear Stearns by Kate Kelly
The Ivy Portfolio: How To Invest Like the Top Endowments by Mebane Faber

We've been reading through a stack of books lately so look forward to multiple new book reviews coming up in the very near future. In the mean time, make sure to also check out some of our recommended reading lists where we have categorized lists of some of the best financial books out there:

Stay tuned for more upcoming book reviews on some of the latest financial releases.

Free Trading Course From MarketClub

marketfolly@gmail.com (Market Folly) — Fri, 30 Oct 2009 14:03:00 +0000

If we've got any readers that are traders or are looking learn more, the folks over at INO have provided us with a free trading course which is a great resource. They cover technical analysis topics like fibonacci retracements, MACD, Bollinger bands and a whole slew of others. Here's a full list of topics covered:

1. The importance of psychology in price movement
2. How to spot mega trends
3. Understanding of technical price objectives
4. How to picture price objectives
5. How to trade with moving averages
6. How to use point and figure trading techniques
7. How to use the RSI indicator
8. How to correctly use stochastics in your trading
9. How to use the ADX indicator to capture trends
10. How to capitalize on natural market cycles.

Definitely check out their free trading course here if you're looking to learn more on those topics.

Make sure to also watch their latest technical analysis video on gold where they lay out support levels to buy at and price targets for the future, as they see gold staying in an uptrend going forward.

Hedge Fund News: Soros, Citadel, Atticus, Caxton & More

marketfolly@gmail.com (Market Folly) — Fri, 30 Oct 2009 14:01:00 +0000

We're back with our latest compilation of the most recent news out of hedge fund land. Our goal here is to give you all of the major hedge fund news in quick little hits. If you've missed some of our previous updates, we highly recommend checking them out our September update, as well as our July hedge fund news. Let's dive right into the latest updates from some prominent players:

George Soros, Soros Fund Management

Legendary investor and hedge fund manager George Soros 'bought the dip' in financial markets as he saw it as a buying opportunity to make some money. This just goes to show that no matter your economic thoughts, you have to play the market for what it is, as irrationality often abounds. He still thinks we are facing structural long-term problems, but that has not stopped him becoming more bullish for the short-term. His main concern is the deleveraging of the US consumer over a longer period of time which will hurt consumer spending and thus growth going forward.

While he 'bought the dip,' Soros is now cautious as he notes the market to be very overextended and at the risk of another drawdown. While he thinks a downturn is coming, he says that the market will be fine for the rest of the year. The problems, he says, will come in 2010 once the reality of weak global growth hits. In terms of recent portfolio activity, we highlighted when Soros adjusted three of his positions. To check out Soros' thoughts on financial markets in their latest iteration, we recommend checking out his latest book, The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means.

Ken Griffin's Citadel Investment Group

Investors can finally redeem their money out of Citadel's largest funds, Kensington and Wellington. After being locked up for almost an entire year, we wonder how many investors will pull their funds purely out of rage from being locked up so long. They probably will take at least a little consolation in the fact that after a horrendous performance in 2008, Citadel's funds have at least bounced back as they are up 57% this year. Citadel has $14 billion in assets under management and apparently Citadel's funds are positioned to "withstand a catastrophic market event" so they have learned from their mistakes. In terms of their recent activity, Citadel has been busy with their ETrade stake and we also noted their UK positions here. Bloomberg also has a recent in-depth profile of Griffin up here as well.

Timothy Barakett, Atticus Capital

While Barakett may have left the hedge fund manager game, he has not ceased being an investor. Apparently, Barakett is set to invest in the various new fund launches by former Atticus employees. Atwater is a hedge fund being launched by Lee Pollock and Kris Green who formerly plied their trade at Atticus. Atwater is supposedly planning to raise $500 million by the end of next year and will focus on merger arbitrage and special situations.

Another fund Barakett is set to invest in is being launched by former Atticus Capital analyst Ed Bosek and Noam Ohana, who previously invested Atticus' partner money in other hedge funds. They have founded Beacon Light Capital, a hedge fund that will trade global equities. Bosek will be portfolio manager while Ohana will be the chief operating officer of the fund. Whenever the time comes, we'll check out whatever SEC filings may come out of both these new ventures.

Hugh Hendry, Eclectica Fund

Our resident deflationist is hedge fund manager Hugh Hendry of the Eclectica Fund. His latest media appearances have him noting that markets are crowded right now and are "all one trade." He thinks that stocks and gold now have a risk that everyone could all want to exit at the same time, saying that now investors are either in the market or not at all. One interesting point he does bring up is the fact that the rally has been ramping higher on questionable volume. He notes the absence of typical volume associated with healthy rallies in this video interview embedded below (email readers come to the blog to view it):

Hendry's commentary is always good reading and you can read some of his recent letters here as well as here.

Jeremy Grantham, GMO

The resident perma-bear and 'grumpy old man' (we mean that with respect) Jeremy Grantham is out with his latest commentary and it is a good read as usual. Here's a notable excerpt from his latest piece where he chimes in on the current market:

“Corporate ex-financials profit margins remain above average and, if I am right about the coming seven lean years, we will soon enough look back nostalgically at such high profits. Price/earnings ratios, adjusted for even normal margins, are also significantly above fair value after the rally. Fair value on the S&P is now about 860 (fair value has declined steadily as the accounting smoke clears from the wreckage and there are still, perhaps, some smoldering embers). This places today’s market (October 19) at almost 25% overpriced, and on a seven-year horizon would move our normal forecast of 5.7% real down by more than 3% a year. Doesn’t it seem odd that we would be measurably overpriced once again, given that we face a seven-year future that almost everyone agrees will be tougher than normal?"

It's always good to hear both sides of an argument and if you want your fair dose of pessimism, head Grantham's way (some his past commentary here). You can check out his full recent commentary via .pdf here.

Bruce Kovner's Hedge Fund Caxton Associates

Interestingly enough, we see that Caxton Associates has helped executives at the firm raise $500 million to launch new Lucidus Capital Partners. The new hedge fund will focus on high yield and will be managed by Darryl Green and Geoffrey Sherry. Caxton has taken a 25% stake in this new firm. What's interesting here is that Sherry will continue to run Caxton's $1 billion bond fund as well. We'll have to see if this new trend of hedge funds funding new funds spawned from inside their own walls continues. This can be quite successful, as evidenced by Julian Robertson's network of seeded 'Tiger Cub' funds. Back in our June performance update post, we noted that Caxton was barely up for the year at that time, at 2.21%.

Abu Dhabi Investment Fund (Aabar Investments)

This Abu Dhabi investment fund has taken a $328 million stake in a Spanish financial firm's new Brasilian arm, Banco Santander Brasil. Aabar has been one of the most active funds out of Abu Dhabi as they also have a 9.1% stake in Daimler, a 30% stake in Virgin Galactic, and a 4% stake in Tesla Motors. Aabar is controlled by the Abu Dhabi government through a majority stake in the International Petroleum Investment Company.

Paolo Pellegrini, hedge fund PSQR Management

We recently covered the ex-Paulson & Co hedge fund manager's trade ideas and we see that he is back in the media yet again. Pellegrini recently laid out the 'only attractive bet' for investors is to short long-term US debt. He says, "“I always like to think about assets that are likely to experience a breakdown; the only thing I’m pretty comfortable with right now is U.S. Treasury securities and U.S. agency mortgage-backed securities. I think that those are overpriced so they are attractive shorts ... The dollar has depreciated more than it should for the short term ... And if you ask me where am I putting my money now, I am on the sidelines.” Make sure to check out Pellegrini's recent thoughts on shorting treasuries and longing oil.

Bruce Berkowitz (Fairholme Funds)

Noted equity mutual fund manager Bruce Berkowitz of the Fairholme Fund (FAIRX) is launching a new bond fund that will invest over the entirety of the bond universe. While Berkowitz is unquestionably a good equity fund manager, it raises the question if he is also a good bond fund manager? His equity fund has an annual return of over 9% over the past 5 years. While many investors will undoubtedly jump on this fund due to the name recognition, be aware that it has a $25,000 minimum initial investment, over 10x his other fund. It will be interesting to see if Berkowitz can also prove his worth in the bond arena, as few managers out there can dabble successfully in both.

Stanley Fink, International Standard Asset Management

Former Man Group CEO Stanley Fink is releasing a new fund at his new firm. International Standard Asset Management will release a gold fund in December, even against Fink's liking, as he isn't fond of single commodity funds. However, you can never turn down an opportunity that investors clearly desire. Fink's fund will thus join a large cast of prominent hedge fund players in the gold trade including David Einhorn of Greenlight Capital and John Paulson of hedge fund Paulson & Co, amongst many others.

Thanks for checking out our latest edition of hedge fund quick-hits and make sure to check out our September hedge fund news as well.

Galleon Group's Historical Returns: Did They Gain Too Much Of An Edge?

marketfolly@gmail.com (Market Folly) — Fri, 30 Oct 2009 13:01:00 +0000

It's been a little while since we checked in on the happenings at the current circus known as Galleon Group so we wanted to cover all the updates. Raj Rajaratnam's (R Squared) hedge fund is involved in one of the largest insider trading cases to rock Wall Street. But, of course, Raj says he is innocent in his letter to investors:

"October 21, 2009

Dear Galleon Employees, Clients and Friends,

I have decided that it is now in the best interest of our investors and employees to conduct an orderly wind down of Galleon’s funds while we explore various alternatives for our business. At this important time, I want to reassure investors of the liquidity of our funds and assure Galleon employees that we are seeking the best way to keep together what I believe is the best long / short equity team in the business.

As many of you know, we have built our business on the fundamental belief in rigorous investment analysis combined with active trading around core positions. We have encouraged and invited our investors to attend our daily research morning meetings. Many of you have done so and got a first hand look at our process. This research process is the core of our investment and trading strategy.

The privilege of managing investors’ capital is a responsibility that I have always taken very seriously. I want to reiterate that I am innocent of all charges and will defend myself against these accusations with the same intensity and focus I have brought to managing our investors’ capital.

For those who have been my partners and supporters over the last 17 years, I sincerely thank you. I also want to thank you for the innumerable expressions of support I have received from you over the past few days.

Sincerely

Raj Rajaratnam"

So, he says he is innocent yet he is winding down the funds... hmm. That probably has something to do with the fact that over the course of 3 days, he received $1.3 billion in redemption requests. On that note, it looks like he was trying to head off redeemers at the pass, given the inevitable. After all, many pension funds can't be doing business with alleged felons. Their largest fund had $1.3 billion in assets and typically wouldn't pay redeeming investors until the new year, but they are obviously trying to hand out payments before then. Their $350 million technology fund on the other hand allows monthly redemptions with 45 days notice.

What's also interesting here is that apparently, over $1 billion of the firm's assets is money from insiders of the firm, including Rajaratnam. We heard just a few days ago that Galleon has already liquidated 90% of their $3.7 billion portfolio. Some of their largest positions had been Yahoo, Tyco, Amazon and various other technology names. (But do keep in mind that those holdings were as of June 30th, 2009). So, maybe the recent market drop was everyone trying to get out of the way of Galleon's liquidation? Either way, that certainly seemed like a rather painless unwind.

Galleon's history has now become very questionable given the fact that news has surfaced regarding them 'badgering and bullying' brokers for information on what firms were trading what shares. They were essentially trying to front-run firms who were dumping large amounts of shares. Raj wove a massive web of contacts throughout Silicon Valley and Wall Street given that he operated a hedge fund often focused on technology stocks. Galleon was conducting hundreds of trades a day, generating some nice commissions for brokers. Raj even mentioned one time that Galleon dished out $250 million in commissions to brokerage firms each year. That would easily put them in the top echelon of broker spending. It's said that Galleon would use this dominant client position to then garner handfuls of shares of upcoming IPO's, where apparently a lot of their profits came from. And reports suggest that Galleon tried to use their status to bully information out of people so they could benefit. To Galleon's credit though, they were also very research intensive and did plenty of due diligence. They just apparently wanted so much information that they crossed boundaries. Raj always liked to get an 'edge' on any given company.

While at first glance it appeared this might be a one-off insider trade, it is now becoming more clear that this sort of activity was much more frequent. As such, it calls into question their entire performance history. Thanks to the Pragmatic Capitalist, we see a table of Galleon's historical returns and the results are quite astonishing, which makes you wonder even more.

(click to enlarge)

We'll continue to monitor the developments but this certainly has the potential to get more interesting as the digging gets deeper. If you've somehow missed out on this circus, check out the initial insider trading charges. And for those curious, we've posted up Galleon's September commentary and exposures sheet that they sent out to investors before the scandal emerged.

Paul Tudor Jones Favors Gold & Curve Flatteners (Investor Letter)

marketfolly@gmail.com (Market Folly) — Thu, 29 Oct 2009 14:01:00 +0000

In his latest letter to investors, hedge fund manager and legendary trader Paul Tudor Jones outlines his firm's thoughts on the topics of equities, bonds, and currencies. Tudor's letter is one of those 'must reads' as his macro sense is phenomenal and he is one of the greatest traders of all time (performance returns summary here). What's interesting about his latest letter is the fact that they included a special section addressing the all too talked about precious metal.

Gold

The macro perspective section of their letter notes how gold is not consumed but rather accumulated as a store of value as it has been a 'medium of exchange for over 5,000 years.' What's interesting is that they plot out inflation-adjusted gold prices and note that we are still far off from the highs seen over 2 decades ago. Tudor puts the inflation-adjusted peak price of gold to be between $1,600-$2,400, with the previous high coming in at $2,422. While Tudor says he has never been a gold bug, he says all assets have a time and a place. And conveniently enough, he says now is gold's time. Tudor joins an army of other prominent hedge fund managers bullish on the precious metal including David Einhorn of Greenlight Capital who has gone as far as storing physical gold. Additionally, John Paulson of Paulson & Co has $4 billion in gold investments, among many other managers.

Tudor's econometric model has determined that gold is 20% undervalued over the next 24 months. This takes into consideration real rates on the price of gold, inflation, and M2 growth. Tudor expects the velocity of money to rise over the next two years, enhancing the bullish case for gold. Additionally, they also cite the supply/demand equation and prudently bring up the fact that a new class of investors has arrived: retail investors gaining access to the metal through exchange traded funds (most notably GLD). Tudor then presented these amazing facts: "The trailing 12-month ETF accumulation has "bought" the equivalent of 25% of new mine production consistently since the beginning of the year. By year-end 2009, the total ETF gold position will hold 3% of global available supplies, making ETFs the sixth largest holder of gold in the world." Tudor expects inflows into these vehicles to continue, furthering the case for a position. Lastly, Tudor highlights another important factor in the gold equation: central banks. He notes that in the second half of this year, the 'official sector will become a net buyer of gold.' We also yesterday posted up an excellent technical analysis video on gold which concurs that gold is in a long-term uptrend. The video outlines $1000 as a key level to stay above and outlines buy points at support as well as price targets going forward (watch it here).

Curve Flatteners

Turning to the bond markets, Tudor has found it difficult to find good risk/reward setups with only the curve flattener seen as appealing. This is very interesting to note given that we've covered prominent hedge fund player Julian Robertson had previously been in the opposite trade, a curve steepener. It's always great to see two prominent minds in hedge fund land differ in this ongoing debate. (Interestingly enough, Robertson also disagrees with Tudor in regards to gold, as he favors gold miners instead). Tudor notes that curve flatteners provide 'tail risk insurance' against the trades of long gold, short the US dollar, and long equities. Tudor writes, "As deflation recedes to the background, market participants will start expecting a removal of policy accommodation. If the markets begin to price early, fast and large tightening before inflationary expectations are allowed to take hold, then curves could bear-flatten significantly from current historically high levels."

Currencies

On the topic of currencies, Tudor shares the views of many other hedge fund managers in that they feel currencies of commodity producing nations should benefit, specifically citing the Australian Dollar. And, of course, we would be remiss not to mention that Tudor thinks the dollar will continue its decline.

Equities

Turning his focus to equities in the letter, we found this paragraph on the technicals to be intriguing: "Technical considerations can be characterized as suggesting that near-term risk should be limited at worst. Market breadth has remained mostly favorable, even rendering a third "thrust" signal of the rally in early September. These are noteworthy not only because they are rare, but more importantly, because they indicate a level of demand that typically proves sustainable. Within the half-year following such signals it is unusual to see corrections of even 10%. Seasonally, equity markets will soon exit a period of traditional weakness to enter one flattened by the impulse to chase performance and generate returns by year-end. While many of our surveys of aggregate hedge fund positioning would say net long exposure has rebounded to late 2007 percentages (though on a smaller base), and mutual fund cash/asset ratios have come in significantly, markets continue to trade as if most are not satisfied with their current commitment to equities." Great insight from Tudor and we'll have to see if that pans out. As far as their equity selections go, they favor emerging markets and in particular Brazil and Taiwan.

Overall, great insight and it's definitely interesting to see an in-depth presentation on gold from the global macro specialists. In the letter, we also find out that Tudor is up 14.88% year to date for 2009 and currently has over $11 billion in assets under management. Jones has somehow managed to perfectly summarize the market action, labeling it "The Great Liquidity Race: Wall of Money Climbs Wall of Worry."

Embedded below is Tudor's Q3 letter, courtesy of Dealbook where we recommend using the full-screen option for reading:

For more on Paul Tudor Jones' hedge fund firm Tudor Investment Corp, check out our post where we covered their UK positions. Also, you can see Tudor's historical returns here as well as their August commentary where they deemed action in US markets a bear market rally. As always, we'll continue to track the movements and insight from one of the greatest traders and hedge fund managers in the business, Paul Tudor Jones.