We have recently obtained a 44 page letter from John Paulson’s hedge fund Paulson & Co.,  which provides a highlight of the quarter and gave an overview for the upcoming quarter.

Overall, the firm’s funds performed well in quarter but concerns linger over Europe.

Here’s a few highlights from the report.

First Quarter Performance

For the quarter, Paulson Funds appreciated on average 4.6 percent with a high of 13.3 percent for Paulson Enhanced Ltd. with a -6.5 percent low for its Gold Funds. This can be broken down as the Paulson Merger appreciating by more than 6.3 percent while its double-weighted added from 11.6 percent to 13.3 percent.

The quarter saw less deal volume as compared to the previous year’s numbers but gains came from bankruptcy exchange offers, possible takeover targets, spread deals and other merger event positions.

For the Paulson Credit Funds, it appreciated by more than than 5 percent, benefiting from increases in corporate bonds, bank debt, mortgage-backed-securities, convertible bonds and post-reorganization equities.

The Paulson Recovery Funds increased approximately 9.5 percent in the first quarter from gains in financials, insurance companies, restructurings and real estate services companies.

Looking at the quarter’s declines, the Advantage Funds dropped -1.1 percent while the Advantage Plus funds fell -2.9 percent. Contributing to the declines were negative performance from the gold event sector and hedges.

The Gold Funds ended the quarter off -6.5 percent. While the year got off to a good start with a rise of 13 percent in January, volatility in February and March contributed to a negative performance for the quarter. Adding to declines in gold equity positions was political turmoil in Mali.

But with gold prices having in a net increase in the first quarter, Paulson’s gold share classes in all the Funds outperformed their respective dollar share classes.

Macro Overview

The U.S. economy is doing better than expected and equity markets are moderately priced; risks still exist. At the global level, the Euro crisis is still the greatest risk to global activity and global markets.

In the short-term the ECB has stabilized European credit markets through liquidity injections but its actions do not address the Eurozone’s major flaw: a monetary union that doesn’t have a fiscal and political union. Should the Euro come undone, it would affect all markets that the firm operates in.

Paulson is monitoring additions risks including increasing Middle East tensions, rising oil prices, and a possible China slowdown.

Additional short-term risks include Greece, Portugal, France and Spain. Greek elections are a concern with a move toward an austerity opposition along with the country’s exit from the Eurozone.

As for Portugal, it’s an unresolved issue and a second bailout will probably be needed.

French presidential elections in May will pose challenges to the Franco-German alliance. There’s also new risks with a new French government that could differ from the current European policy.

The LTRO benefits are starting to going away with Spanish CDS spreads reaching all-time highs. Spanish banking stocks are also declining from worries on Spanish sovereign and private sector credit risk.

Looking at the intermediate term, Spain will probably need a bailout assistance with its high deficit, its shrinking economy, rising unemployment and climbing debt to GDP.

We will be providing further coverage on the letter in the coming days.

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David Einhorn, is the director  and Chairman of the Board, of Greenlight Capital Re, Ltd. (NASDAQ:GRLE), is a global, multi-line, broker market reinsurer. He has held this position since since July 2004.

Today, the re-insurer’s annual shareholder meeting was held in New York. According to reports, David Einhorn made some fairly bullish comments on the housing sector and general motors.

Interestingly, Einhorn spoke at the Ira Sohn Conference, and promised to take readers around the world. Einhorn gave his views on China, Japan, France, specific equities but did not mention anything about housing. We are not sure why he waited to give his views on the housing market.

At the shareholder meeting, Einhorn stated that the housing market is “pretty broadly-based.”

According to MoneyNews.com, Einhorn does not see signs of a housing boom but is more optimistic based on the demand for new home construction picking up.

Recent Government statistics released several days ago on new home construction, showed that for the month of april, construction started on new homes and apartments at a seasonally adjusted annual rate of 717,000 units. That was an increase of 2.6% improvement from March and 30% increase from April, 2011.

Einhorn also stated that General Motors “is a misunderstood and very cheap stock.”

The rationale for Einhorn’s statements were not available, but the auto industry has been one of the stronger segments coming out of the recession. The industry has seen a rebound and is now growing in the world’s largest car market, China.

General Motors’ specifically is trading at a forward price earnings ratio of less than six. The company has been thriving over the past few years, after a controversial Government bailout. GM is trading at less than 6x forward earnings and is eyeing emerging markets as an area of growth as the Euro-Zone economy remains in crisis.

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After causing the delay of Facebook Inc (NASDAQ:FB)’s trading last Friday, Nasdaq OMX Group (NASDAQ:NDAQ) said on Monday that it will put aside at least $13 million to make traders and investors whole after their trades were affected by the exchange’s order-cancellation issues.

Monday morning kicked off with Fox Business reporting that “technical snafus” contributed to the failure of Nasdaq systems to execute buy and sell orders for Facebook Inc (NASDAQ:FB)’s stock at different times on Friday; this initially led to a 30-minute delay for the start of trading.

Sources said that Nasdaq’s Chief Executive Officer Bob Greifeld had thought about halting the trading in the social media giant’s shares on Friday to fix the problem, but declined to do so. At that time, Greifeld allegedly said losses would not be covered.

He said to The Wall Street Journal that the exchange thought about stopping the IPO and admitted that the order-cancellation issues had affected trading; Nasdaq had conducted pre-IPO testing but it didn’t find any problems.

He said, “This was not our finest hour.” Greifeld added that Nasdaq was “humbly embarrassed” by the issues, and that on Saturday, the exchange’s board met and reviewed improvements for the IPO process.

By Monday, The Wall Street Journal reported that Greifeld had a change of heart to cover the losses.

Financial Industry Regulatory Authority (FINRA) will watch over the arbitration and distribution of funds to the firms.

But will $13 million be enough?

Many on Wall Street don’t think it is. Knight Capital Group Chief Executive Officer Tom Joyce said to the Journal that total losses from the order-cancellation issues could hit $100 million and added, “Dozens of firms lost money.”

Morgan Stanley Hit with Unexecuted Trades

One firm especially hit hard with Nasdaq’s snag was lead underwriter, Morgan Stanley (NYSE:MS). On Friday, the firm had a number of Facebook orders entered by its financial advisers that “remain unexecuted,” according to MarketWatch.

On Monday, Morgan Stanley sent out an internal memo to its advisers of Morgan Stanley Smith Barney and said that it expects to “be able to obtain and process execution for those trades today.” These trades had been market orders.

For some firms, they were able to execute their market orders at prices from Friday but Morgan Stanley said a review of unexecuted limit orders was underway to “determine whether they should have been executed.” After the review is concluded and its results are out, the firm said it will “process any price adjustments and execution those firms provide.”

Morgan Stanley’s brokers also received instructions for the Facebook orders that included the moving of duplicate Facebook trades to the “branch error account;” those will “be covered by the office” reported MarketWatch. In addition, brokers were also told by the firm not to submit either challenges to prices or requests for the firm look at unexecuted limit orders.

Morgan Stanley said, “We will notify you once our trading partners complete their evaluation.”

The firm did not comment on Friday’s trades.

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In an Apple Inc. (NASDAQ:AAPL) research report released by Goldman Sachs Group, Inc. (NYSE:GS) on Sunday titled, “US carrier subsidy and upgrade policies” it reviews the stock’s recent under performance and factors affecting it.

As noted by the report, since Apple Inc. (NASDAQ:AAPL) reported its earnings in the March quarter, its stock price has dropped by 13 percent; this compares to the S&P 500′s seven percent drop during the same time. This decline comes from macro concerns and profit-taking by an increasing number of risk-averse investors but also concern for the momentum of iPhones in the short-term and the possible pressure placed on carrier subsidies for the ever-popular smartphones as further contributors.

Additional risks to Apple’s stock have included supply chain disruptions, increased platform competition, and potential legal and regulatory restrictions, according to the report.

Should these factors be causes of concern for Apple’s stock price? No, analysts remain positive.

The report further suggests that a decline in smartphone subsidies by US carriers probably won’t happen thanks to the competitive nature of the market–four player who all want a greater adoption of smartphones. Policies have been put in place that will lengthen smartphone upgrade cycles from the expansion of early upgrades and rising upgrade fees. Retail prices are not expected to rise for the phones and analysts believe that an iPhone is the best option for carriers as they shift their users from feature phones to smartphones.

In addition, Goldman also doesn’t see large incremental improvements on the upgrade windows after this year and that new upgrade policies may go to higher-end smartphones such as the iPhone. With fixed upgrade fees, customers are likely to gain from subsidies to buy higher-end devices. Therefore, this will further move market share to Apple and it is likely to happen in the December quarter when the iPhone5 has a wide availability.

Overall, the company remains positive on the stock and has a “Buy” rating on it with a target price of $850 for 12 months. Goldman Sachs said the target price is based on a 17X multiple of it’s 2012 EPS estimate.

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Market Levels

 

• US:  Dow: 12504.50 (1.09%), S&P 500: 1315.99 (1.60%), NASDAQ: 2847.21 (2.46%)
• Europe: CAC: 3027.15 (0.63%), DAX: 6331.04 (0.94%), FTSE: 5304.48 (0.69%).
• Asia-Pacific: Australia: 4073.60 (0.67%), China: 2348.08 (0.16%), Hong Kong: 18922.32 (-0.16%), India: 4906.05 (0.30%), Japan: 8633.89 (0.26%).
• Metals: Gold: 1588.70 (-0.20%), Silver: 28.32 (-1.37%), Copper: 3.50 (0.97%)
• Energy: Crude Oil: 92.57 (1.19%), Natural Gas: 2.61 (-4.85%)
• Commodities: Corn: 6.33 (-0.39%), Soya Bean: 13.06 (1.42%), Wheat: 7.04 (1.26%)
• Currency: Euro (€) / US Dollar ($) (EURUSD): 1.2819 (-0.45%), British Pound Sterling (UK£) / US Dollar ($) (GBPUSD): 1.5835 (-0.10%), US Dollar ($) / Japanese Yen (¥) (USDJPY): 79.3550 (0.44%)
• 10 year US Treasury: 1.741% (0.019)

Market and Economy News Update

 

U.S. markets jump higher: U.S. markets recorded the best trading session of the month on Monday as investors picked up beaten-down stocks. The Dow Jones Industrial Average (INDEXDJX:.DJI) rallied 1.09 percent to close at 12,504.48. The S&P 500 (INDEXSP:.INX) jumped 1.60 percent to end at 1,315.99, while the NASDAQ Composite (INDEXNASDAQ:.IXIC) soared 2.46 percent to finish at 2,847.21.

Oil prices rise: Oil prices rose on Monday for the first time in seven days as China pledged to undertake more efforts to stimulate growth, and David Greely, head of energy research at Goldman Sachs, said the balance between the supply and demand of crude oil is tightening. Crude oil for June delivery jumped 1.2 percent, to settle at $92.57 a barrel on the New York Mercantile Exchange. Brent oil for July settlement increased 1.6 percent to $108.81 a barrel on the London-based ICE Futures Europe exchange.

 

Company News Update

 

• Facebook Inc (NASDAQ:FB) plunged close to 11 percent on its second day of trading, well below the company’s initial offering price of $38. The stock ended the day at $34.03.
• Jamie Dimon, Chief Executive Officer at JPMorgan Chase & Co. (NYSE:JPM), said today the bank is suspending its $15-billion share repurchase program, after suffering a shock $2 billion hedging loss, but intended to continue its quarterly dividend.
• Google Inc (NASDAQ:GOOG)’s Chrome edged past Microsoft Corporation (NASDAQ:MSFT)’s Internet Explorer last week to become the most popular Web browser in the world, according to data from website analytics company StatCounter.
• The Federal Deposit Insurance Corp. is suing JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE:C), Bank of America Securities and Deutsche Bank AG (USA) (NYSE:DB) for a cumulative $92 million in damages on securities backed by residential mortgages, alleging that the banks misrepresented the quality of mortgage loans packed into securities.
• US-based diversified industrial manufacturer Eaton Corporation (NYSE:ETN) has struck a deal to buy Irish electrical equipment supplier Cooper Industries plc (NYSE:CBE) for $11.8 billion in cash and stock, to expand it power management and electrical products businesses.
• Best Buy Co., Inc. (NYSE:BBY)’s board has hired headhunter Spencer Stuart, which specializes in recruiting for retail and digital companies, to conduct the search for a new chief executive, following the resignation of former CEO Brian Dunn.
• Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN) has reported positive results in a Phase 1b clinical trial of its experimental hepatitis C (HCV) drug ACH-1625.
• Radian Group Inc. (RDN) shareholder and asset manager Clinton Group has asked the mortgage insurer either to reveal more information about its legacy assets, or consider a sale.
• Fiber-optic cable provider General Cable Corporation (NYSE:BGC) has entered into a pact to buy Alcan Cable, the wire and aluminum cable business of mining company Rio Tinto plc (ADR) (NYSE:RIO), for about $185 million.
• Propane marketer NGL Energy Partners LP (NYSE:NGL) has agreed to acquire Denver-based High Sierra Energy LP for $533 million in cash and stock.
• Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) will replace Motorola Mobility Holdings Inc (NYSE:MMI) in the S&P 500 (INDEXSP:.INX) index after the close of trading on May 24.

 

Hedge Fund News Update     

• According to Michael Platt, co- founder and chief executive officer of the Geneva-based BlueCrest Capital Management LLP, JPMorgan Chase & Co. (NYSE:JPM)’s trading loss may widen if Europe’s debt crisis worsens. Jamie Dimon, Chief Executive at JPMorgan, has himself admitted that losses could increase by as much as $1 billion this quarter.
• Connecticut-based hedge fund firm Aesir Capital Management, formed by the former fixed income group of Diamondback Capital Management, will start a new fixed income hedge fund, Aesir Credit Master Fund Ltd. Aesir Capital is looking to raise as much as $500 million for the fund.
• Frederic Lasserre, the former head of Societe Generale SA (EPA:GLE)’s commodity research and strategy team, and Christophe Cordonnier, who headed the sales and structuring commodity investor business, are leaving the bank to start their Paris-based hedge fund, Belaco Capital, which is expected to launch in the fourth quarter of 2012. Also joining them would be Francois Beuzelin, the former head of metals trading at Societe Generale.
• According to a new report from advisory firm KPMG and the hedge fund lobby group Alternative Investment Management Association, the influx of institutional money into hedge funds has resulted in significant improvement in areas like investor transparency and regulatory compliance.
• London-based hedge fund Odey Asset Management has bought a multi-million pound stake in the personal tagging firm Buddi, according to media reports.

 

Brokerage Upgrades and Downgrades on Monday, May 21, 2012

 

• The Boeing Company (NYSE:BA) was upgraded to “buy” from “hold” at Argus with a target price of $85.
• Servicesource International Inc (NASDAQ:SREV) was raised to “buy” from “hold” at Feltl & Co. with a target price of $17.
• Supervalu Inc. (NYSE:SVU) was upgraded to “buy” from “neutral” at Longbow Research with a target price of $8.
• Waters Corporation (NYSE:WAT) was raised to “buy” from “neutral” at Mizuho with a target price of $92.

• Avon Products, Inc. (NASDAQ:AVP) was cut to “sell” from “neutral” at UBS AG with a target price of $13.
• Bank of America Corp (NYSE:BAC) was downgraded to “market underperform” from “market perform” at JMP Securities with a target price of $5.5.
• Citigroup Inc. (NYSE:C) was cut to “market underperform” from “market perform” at JMP Securities with a target price of $23.
• JPMorgan Chase & Co. (NYSE:JPM) was downgraded to “market underperform” from “market perform” at JMP Securities with a target price of $28.
• Morgan Stanley (NYSE:MS) was cut to “market underperform” from “market outperform” at JMP Securities with a target price of $11.
• Goldman Sachs Group, Inc. (NYSE:GS) was downgraded to “market underperform” from “market outperform” at JMP Securities with a target price of $77

 

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Michael Platt of BlueCrest Capital Management spoke with Bloomberg Television’s Stephanie Ruhle and Erik Schatzker today and said that “Greece will never give back” money that has been lent to it by Europe.  He also said that a Greek exit from the euro would prompt more departures and that Spanish banks are probably “evergreening” their mortgage books.

On JPMorgan Chase & Co.(NYSE:JPM)’s $2 billion trading loss, Platt said, “I think it’s a trading loss. They deliberately put the positions on” and “they’re not out of those positions.”

 

On Europe’s crisis and whether the euro is a failed experiment:

“I think we need to look at the situation country by country. If you take the situation of Greece, in the opinion of the markets, Greece should have should never have been allowed into the euro in the first place. They have already defaulted on their debts. They nearly defaulted again on a whole currency bond last week. They are not in a position to pay their bills. They have a primary deficit still. They will continue to be excluded from the funding markets. I think at this point in time, as the market increasingly calls into credibility the Troika, they are continuing to put money into a situation which has clearly become hopeless. “

 

On why the Troika continues to put money in:

 

“Greece will never give it back. We’re got some pretty clear evidence that this is the case. They are not in a position to pay the money back. The situation in Greece has gone from mainstream politics to now communism being the likely dominant party at the next round. The communist party has promised chocolate cake with no calories to the population – they can stay in the euro but abandon the  program of austerity, which will not be the case. The market now is openly speculating that Greece will exit the euro. “

On when Greece will exit the euro:

“I think it revolves around what happens to the Greek banks. We have seeing a gradual movement of money out of Greek banks. The deposit base has reduced from about 240 billion euros to 140 billion euros. We saw the pace of that stepping up recently. The big worry would be a stampede out of Greek banks, which precipitates an earlier crisis while the country has no government. That could move that way. If we go to a world where there’s an election and Switzer gets a 30% share in the votes, and then forms a coalition, I think they will leave almost immediately. “

On the total financial impact of a Greek exit:

 

“I think the order of events would be Greece exits, shock wave across Europe, massive stress in banks, Spain turns into the battleground for the euro because of distresses in their own banking system, and then we either get a very swift and strong European solution or we get a hugely disorderly meltdown in Europe. “

 

On what a swift and orderly solution would look like:

“Let’s look at the problem. In Spain at the moment, the estimate of the amount of money required to take Spanish banks to a proper 10% tier 1 capital ratio is around 90 billion euros. There is no effective federal deposit insurance scheme in Spain. It used to be eight billion euros, now it’s at 300 million euros. It has forward losses of between 15 and 20 billion euros as a result of two caja deals. So the risk is that people focus on the Spanish banking sector and we witness strong outflows or runs out of Spanish banks.”

On whether Spanish banks are acknowledging their real estate positions:

“No, they are not. In a country with 24% unemployment, they have a 3% provision against their mortgage book…The mortgage book of Ireland has a 10% provision. What is going on in Spain is that 22% of Spanish mortgages have been reworked, half of them more than twice. In other words, there’s evidence that the banks have been evergreening loans.  In which case, 7% of it, you have to take another allowance of 7% to get it to Irish levels against 650 billion euros. That’s another 50 billion euros there. And the same is going on in the loans to small and medium enterprises.”

On who has enough money to backstop Europe from a disorderly meltdown:

“On the day that Greece leaves, in order to circumvent bank runs and market mayhem, there would need to be an enormous announcement from the EU, there are two things that could be effective. I think we can rule an enormous money printing operation by the ECB. But I think the announcement of a eurobond for Europe would be something that would buy an enormous amount of time. It would have to be massive. The problem is, issuing a eurobond, I do not see that a hasty and ill-conceived monetary union can be solved by a hasty and ill-conceived fiscal union. Governments would need to cede sovereignty over their domestic spending to a central European entity, and I just can’t see that happening.”

“ I think that there’s a misconception also in the markets that Germany can ultimately pay for everything. The truth is that the European area is an economy as big as the United States. And Germany is 78% smaller than the United States.”

On whether Germany would exit the euro if the country doesn’t have the money to support the rest of Europe:

 

“I think an elegant solution, and I know it’s not politically acceptable, will be for Germany to manage an exit for itself from the euro, control its currency versus the euro, and then the remaining euro region could then print money, buy bonds, and instantiate a Fed mandate for the ECB, which have a mandate to minimize the loss of the economy versus inflation and unemployment.”

 

On how he’s trading Europe right now:

 

“The problem is you can make a pretty sensible argument for almost any outcome in Europe. It could be a run on the banks very quickly. The Greeks could end up staying in for a little bit longer. They could vote to take themselves out. There could be a eurobond. The whole situation could be overtaken by events. We could have bank runs in Spain. We could have LTRO. We could have a concerted bond-buying action from the ECB. You can make a sensible argument for almost any outcome it’s in such a state of flux right now. I think that when you get into these sorts of situations, the first thing you want to do is you want to ensure that your money is in a place where you like the credit so that if there is a major banking problem you’re not going to lose money on credit…The reason why the treasury market’s doing so well. Treasuries, and the short end of Europe with German government bonds, for two years now yield being essentially zero.”

On France and Italy:

“I think Spain is the battleground. I think that [France and Italy] come after. I think it will all be resolved

in terms of where we end up with Spain, honestly. If Spain leaves, I think if Spain comes to a position where it has to leave, I think you’ll end up in a situation where either Spain leaves or Germany leaves.”

On whether a run on banks has already begun:

“I think that it’s been a crawling, slow run for a long period of time. 650 billion euros via the target two system has found its way into Germany, and that has come from the deposit base elsewhere in

Europe. And as the stress has increased and we go towards a situation where Greece might actually – you’ve come to the realization that a euro in a Spanish bank and a euro in a Portuguese bank are not worth as much as a euro in a German bank.”

On JPMorgan’s 2 billion trading losses:

“I think JPMorgan – it’s well known in the Street – and I want to be very kind to JPMorgan as my biggest trader and former employer… My first job was at JPMorgan on Wall Street when I was 23. So I’ve got a very good disposition towards that bank. But I would say that if a bank in its normal course of its business has exposure to mortgage markets, has exposure to corporate accounts parties and the activities that they undertook in their chief investment office just increased them. So I don’t think they could be described in any way as a hedge. They’re not out of those positions. And if we end up with a catastrophe in Europe in the short run, they’re probably not positions that anyone would want to have.”

On whether the loss is broader than a trading loss:

“I think it’s a trading loss. They deliberately put the positions on. The London whale, who has subsequently been harpooned, put positions on and yeah, other people in the Street – BlueCrest and our credit fund, in the normal course of our business in a small way, not in any way looking to try and cause them any problems, we found some anomalies in the market. And I think that a number of credit funds found anomalies caused by these very large transactions, and possibly have taken the other side to provide market liquidity.”

On whether there’s any way for JPMorgan to elegantly extract itself from the situation:

“There’s always a price. There’s always a price to get out of anything. It might not be a price you like, but there’s always a price. So that’s true. It is in very high grade credit in the United States, so I think that they would ultimately be able to exit this position, yes.”

On whether he’d do the same thing as Jamie Dimon, maximizing the economic value of the trade over the long-term even if it’s going to come with some serious mark-to-market pain:

“Absolutely I would. There are other hedges. If corporate American credit really blows out, it’s likely that there are much bigger problems elsewhere. There are other instruments to hedge in. So yeah, I would be looking, if I was in that position, creatively at finding other avenues to reduce the value of risk of the book.”

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The closer Google Inc (NASDAQ:GOOG) gets to acquiring Motorola Mobility Holdings Inc (NYSE:MMI), the closer they are to reaching a decision on whether or not they’re going to lay off Motorola employees. This report comes from TechCrunch and their unidentified sources. At press time, it’s unknown how many employees would be affected by the layoffs.

Last August, Google announced their decision to acquire Motorola Mobility for $12.5 billion. That was about 63% off their shares. The United States Justice Department and the European Union officially approved the deal last winter but Google just gave their approval to seal the deal this weekend because China’s regulators said it was okay.

The acquisition should be official by Wednesday.

This wasn’t the first-time Google has been involved in mass layoffs. Four years ago when the search company bought up advertising agency Double Click and laid off 300 of their employees. The company then released a statement that the merger would lead to transitioning employees and laying off many others.

Google is currently involved in a few patent lawsuits and many speculate that this acquisition is a move to enhance their portfolio and work in their favor. Larry Page(chief executive officer) even announced that this company deal would benefit them two-fold: it would help strengthen their portfolio of patents and fight up patent lawsuits.

It’s a bad thing whenever company layoffs are imminent. It’s bad for the employees who lose their jobs but it’s bad for the companies who end up losing some of their best talent. Perhaps Google should revaluate their company goals to accommodate growth and retain their top employees. Over the day or so, we should hear more about the merger. Then in the following weeks, we should find out whether Google actually lays off Motorola employees. It’s possible that they may not lay off many people after all.

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Dialectic Capital Management, LLC is a hedge fund, based in New York. Although not well known, the fund has a very interesting way of uncovering shorts. Sources familiar with the CEO tell us that he has a very good way of uncovering frauds. The latest fraud that the fund has a short position has recently been delisted.

First more on the CEO….

Part of his method’s to uncover frauds consisted of the following (in short):

He used to go to Las Vegas and go to tech shows. He would look for the most unscrupulous CEO’s and investigate the companies the companies. He would also look at the ceo’s past careers and hone in one companies that had gone bankrupt under their helm.

The fund is short several interesting names:

Chinacast Education Corporation (NASDAQ:CAST) was a company that the hedge fund was concerned about management, but the more the dug in the worse the situation was.

A group of investors gained seats on the board but were preventing from entering corporate headquarters in Shanghai by management. The court fired the CEO, only to have the office raided, and a few employees beat up. This shows how corporate Governance and investing in China itself is an issue.

In June, the SEC goes to trial with Deloitte Touche Tohmatsu, also known as DTT. A different division of the SEC sued DTT. If the SEC wins, no US listed companies would be allowed to use DTT. Additionally, it would force a restatement of all DTT’s previous audits.

Multi-Level Marketing – is a sector the fund has been short. Many are scams which prey on the most vulnerable people. The fund compares MLMs to publicly traded Ponzi schemes.

An example is Herbalife Ltd. (NYSE:HLF) shake; the company had billions in revenue, despite the fact that few people have ever drunk those shakes. Additionally, no-one can find distributors; the drink is gross and the company is a scam, setting up a quasi-pyramid scheme.

The MLM stocks have a common theme: stock prices increase despite fundamentals, until something some catalyst comes in to change the public’s perception.

In this case, the catalyst was David Einhorn, CEO of Greenlight Capital’s question on the company conference call. The question got to the key of what the company does; regulations require 70% of sales to be made outside that network, the company has been labeling customers as distributors to avoid this scrutiny.

Brookfield Asset Management Inc. (NYSE:BAM) and Canadian Housing are another short. Brookfield to using aggressive assumptions for the cross ownership in the underlying assets. Brookfield Residential Properties has a large percentage of their developments in Alberta Canada. Brookfield Residential Properties changed its revenue recognition policy recently to include loans to developers as revenue. This caused DSO’s to spike. While researching Alberta, the fund noticed the high exposure of Brookfield to the Canadian housing market, and it appears to be overvalued.

Canada recently has allowed the Canadian Mortgage Housing Corp (CMHC) to guarantee high Loan LTV loans. The total number currently stands at $600 billion, which could be a big problem for Canada going forward.

China is another short. Recent sales and remarks by companies like Caterpillar, show clear evidence of a slowdown. Shorting Australian miners are a way to profit off of this.

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According to the reports, Windows Phone Apollo, better known as Windows Phone 8 will be announced at a developer conference in June. There are already many rumors floating around on Windows Phone platform, like it happens everytime when a phone is near to its announce date.

Microsoft Corporation (NASDAQ:MSFT) is trying to unify the looks of its platforms and with Windows Phone 8, we will see how closely the user interface (UI) of mobile platform resembles to Windows 8 OS. As we already know that Windows 8 features Metro UI, therefore it would be worth watching to see how closely the new Windows Phone 8 resembles to Windows 8 desktop OS.

No doubt we can say that the phone’s OS is taking the smartphone interface more closer to Windows 8. Amidst all this hype, a DeviantArt user RVanhauwere has designed a concept which features the interface of Windows Phone 8.

Looking closely at this concept, we can see that it looks like as if Windows 8 Metro Start Screen is integrated in the phone’s OS. This looks as if the Start Screen clearly fits in the phone and ties both the platforms together. Users can swipe left or right to bring up new set of tiles, which is similar to Android’s multiple screen or iPhone’s homescreen. We can call this as a mini version of Metro start screen, built specially for the phone.

This concept indeed looks good but is Microsoft headed this way or are we going to see something new with Windows Phone 8? We’ll need to wait for the answer as of now.

Note that this is just a concept and not the actual or the official interface.

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Gilead Sciences Inc (GILD) is an innovative healthcare company with a strong record of historical earnings growth and expectations for above-average growth into the future.  Nevertheless, Mr. Market seems unwilling to recognize the past and future earnings power of this niche pharmaceutical growth stock.  Consequently, the company trades at a single digit PE ratio that we believe significantly undervalues both the company’s past and future potential.  Therefore, investors seeking high growth at a reasonable level of risk might want to look further into this undervalued growth opportunity.

Growth stocks are defined as companies with high rates of change of earnings growth of 15% to 20% or better.  Growth stocks offer the potential for share prices to rise in lockstep with their profit growth in the long run.  Therefore, the PEG ratio formula (price equals growth rate) tends to be the most appropriate formula used to value growth stocks. However, due to the exponential nature of compounding large numbers, PEG ratio forecasts are capped at 40%.

Because of the higher valuation typically awarded to fast growth, growth stocks offer the potential for greater capital appreciation.  On the other hand, they also offer higher risk.  First of all, they tend to command much higher than average PE ratios, and second, achieving very high levels of growth is very difficult to sustain. Consequently, forecasting future earnings growth is more important with high growth stocks than any other class of stock. Also, the average growth stock typically ploughs all of its profits back into the company to fund its future growth, instead of paying dividends.

Gilead Sciences Inc:  Large-cap Growth at an Attractive Price

About Gilead Sciences Inc:  Directly from their website

“Gilead Sciences is a biopharmaceutical company that discovers, develops and commercializes innovative therapeutics in areas of unmet medical need. The company’s mission is to advance the care of patients suffering from life-threatening diseases worldwide. Headquartered in Foster City, California, Gilead has operations in North America, Europe and Asia Pacific.”

Earnings Determine Market Price:  The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.  Here is a link to a live and fully functioning graph on Gilead Sciences Inc.  We suggest running graphs over numerous time frames as part of a more comprehensive fundamental analysis.

Gilead Sciences Inc:  Historical Earnings, Price, Dividends and Normal PE Since 2004.

Performance Table Gilead Sciences Inc

The Two Keys to Long-Term Performance

Years of research and experience have taught us that there are two critically important keys to achieving above-average, long-term shareholder returns at reasonably controlled levels of risk. The first key is earnings growth, or what we like to call the rate of change of earnings growth. The faster a company can grow its business (i.e. earnings), the larger the income stream it can produce with which to reward shareholders. This is because of the power of compounding, which Albert Einstein was alleged to have called “the most powerful force on earth.” Ultimately, both capital appreciation and dividend income will be a function of a company’s ability to grow its profits.

The second key is valuation. When a company can be purchased at its intrinsic value based on earnings and cash flow generation, the shareholders’ rate of return or long-term capital appreciation will inevitably correlate to and/or equal its earnings growth rate. Overvaluation will lower that rate of return and conversely, undervaluation will increase it. Consequently, paying strict attention to the valuation you pay to buy a stock is a critical component of both greater return and taking lower risk to achieve it. Because, ironically, when you overpay for even the best business, you simultaneously lower your return potential while increasing your risk of achieving the lower return.

The associated performance results with the earnings and price correlated graph, validates the above discussion regarding the two keys to long-term performance.  Notice the impact that valuation (black line above or below orange earnings justified valuation line) had on the following performance results.

The following graph plots the historically normal PE ratio (the dark blue line) correlated with 10-year Treasury note interest.  Notice that the current price earnings ratio on this quality company is as low as it has been since 2004.

A further indication of valuation can be seen by examining a company’s current price to sales ratio relative to its historical price to sales ratio.  The current price to sales ratio for Gilead Sciences Inc is 4.33 which is historically low.

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1.            The rate of change (growth rate) of the company’s earnings

2.            The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance.

Therefore, it logically follows that measuring performance without simultaneously measuring valuation is a job half done. Gilead Sciences Inc is clearly an industry leading superior business, which based on the consensus estimates from leading analysts, appears to be capable of growing earnings at an above-average rate for the foreseeable future.  At its current price, which is attractively aligned with its True Worth™ valuation, Gilead Sciences Inc represents an opportunity for growth at a reasonable price. The important factor is that Gilead Sciences Inc, with its strong balance sheet and potential for future earnings growth, has real assets and cash flow underpinning its stock price. This solid economic foundation offers shareholders the potential for both a strong margin of safety and an opportunity for outsized future returns.

The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 28 leading analysts reporting to Capital IQ forecast Gilead Sciences Inc’s long-term earnings growth at 17%.  Gilead Sciences Inc has medium long-term debt at 53% of capital. Gilead Sciences Inc is currently trading at a P/E of 13.4, which is below the value corridor (defined by the five orange lines) of a maximum P/E of 20.4. If the earnings materialize as forecast, Gilead Sciences Inc’s True Worth™ valuation would be $139.05 at the end of 2017, which would be a 20% annual rate of return from the current price.

Earnings Yield Estimates

Discounted Future Cash Flows:  All companies derive their value from the future cash flows (earnings) they are capable of generating for their stake holders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any perspective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in Gilead Sciences Inc to an equal investment in 10 year Treasury bonds, illustrates that Gilead Sciences Inc’s expected earnings would be 9.7 times that of the 10 Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

Summary & Conclusions

This report presented essential “fundamentals at a glance” illustrating the past and present valuation based on earnings achievements as reported.  Future forecasts for earnings growth are based on the consensus of leading analysts.  Although, with just a quick glance you can know a lot about the company, it’s imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

At its current quotation, Gilead Sciences Inc appears to offer significant upside based on several factors.  First of all, the company is trading at a below average PE ratio even though it offers above-average growth.  Therefore, the aggressive investor could be rewarded with significant PE expansion in addition to above-average growth.  Furthermore, since the stock is trading art a single digit PE ratio, we believe there is little downside assuming the company’s fundamentals do not significant deteriorate. Therefore, this may be an ideal research candidate for the aggressive investor seeking maximum capital appreciation at controlled levels of risk.

Disclosure:  No position at the time of writing.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

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On Monday, Apple Inc. (NASDAQ:AAPL)’s chief executive officer Tim Cook meets with Samsung’s CEO Choi Gee-sung for a court-mediated session in San Francisco in order to reach a mutual agreement over a patent-litigation. Both companies have accused each other of copyright infringement and they’re also in several other lawsuits with other companies from all over the world.

Apple  has accused Samsung of “slavishly” copying their products. The Cupertino-based company is known for creating cutting-edge electronics like iPhones and iPads. Samsung is a South Korean multi-national corporation that makes consumer electronics including smartphone and tablet computers as well as some of the components that make the products.

Unlike some mediation settlements, this one won’t involve attorneys. This time, they’re hoping for executives to work together and hopefully find a resolution faster. Magistrate Judge Joseph Spero will oversee the mediation. Should the companies not come to an agreement during the mediation session, the companies will go to a trial in San Jose later on this summer. Apple wants to start the trial as soon as possible in hopes of ending Samsung’s alleged selling of infringed products.

One executive of Samsung explained to Reuters that there is still a large gap with their competitor Inc. (NASDAQ:AAPL) and that there is still a number of possible negotiation option with the most notable one being cross-licensing of patented inventions.

This mediation case could get interesting in the next few days. Apple isn’t likely to back down on an infringement litigation but since they’re trying to make a settlement with a company that’s one of their key suppliers, anything is possible. It’s too early to make a speculation, but since Apple has a strong history, it’s a real possibility that they’ll come out as a winner. Samsung had a number of injunctions filed in the past and that probably won’t work in its favor.

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The new week kicked off with news that JPMorgan Chase & Co. (NYSE:JPM)’s trading loss my widen even more thanks to the crumbling Europe situation. A second report has losses estimated up to $5 million.

In comments by one of the hedge funds that took the opposing side to some of JPMorgan’s questionable trades, Michael Platt, co- founder and chief executive officer of BlueCrest Capital Management LLP, made some gloomy predictions on Bloomberg Television’s “Inside Track” on Monday. He said, “They’re not out of those positions. If we end up with a catastrophe in Europe in the short run, they’re probably not positions that anyone would want to have.”

The Geneva-based BlueCrest manages $32 billion. Platt explained that a credit fund managed by his firm took a “small” position against JPMorgan after discovering “anomalies” in the pricing of certain credit derivatives. As prices corrected, BlueCrest would then make money.

JPMorgan is trying to stop the losses in its London-based chief investment office as other hedge funds take advantage of its money-losing positions; they are trading indexes related to credit-default swaps, according to Bloomberg.

On May 10, the firm announced its $2 billion loss but a few days later, it had been estimated to grow $1 billion in the quarter.

Platt added on Monday that he questioned whether Dimon’s explanation that the trades were from hedges on credit including corporate loans.

He said, “I don’t think they could be described in any way as a hedge. I think it’s a trading loss. They deliberately put the positions on. The London whale, who has subsequently been harpooned, put the positions on.”

Platt noted that Europe’s crisis could quickly advance if Greece leaves the euro–an option currently under discussion by politicians.

He said, “The order of events would be Greek exit, shock wave across Europe, massive stress in banks, Spain turns into the battleground for the euro, because of the stresses in their own banking system. Then we either get a very swift and strong European solution or we get a hugely disorderly meltdown in Europe.”

Loss to Hit $5 billion?

Meanwhile, in a separate story by The Wall Street Journal, the losses may even hit $5 billion. Chief Executive Officer Jamie Dimon supposedly approved the strategy for the trades but he did not monitor their execution, according to unnamed sources. By failing to regulate the trades, animosity from executives who face greater oversight for their departments has grown.

Adding fuel to the fire, JPMorgan did not have a treasurer during the time of the trades, which was a five month period, was also reported by The Wall Street Journal.

Joseph Evangelisti, a JPM spokesman, wouldn’t comment on the $5 billion estimate.

Suspension of Share Repurchases

And in additional news on Monday, Dimon said at an investor conference that the firm would suspend its share repurchases in response to the trading losses but dividends would continue.

Earlier in the year, JPMorgan increased its quarterly dividend to $0.30 cents per share from $0.25 cents along with the announcement of a $15 billion buyback program.

Dimon said the the buyback program will be restarted but no date has been set.

 

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