In July 1994, Barron's ran an article on the newly independent bank, Lehman Brothers. The story was written by Cheryl Strauss Einhorn, an award-winning journalist and wife of David Einhorn.

The article, titled, "Lehman Brothers -- Regaining Glory" questioned whether Wall Street would ever come to respect the bank's gilt-edged reputation as an independent company after being spun off from parent, American Express, only a few months before.

13 years after Barron's published this piece on Lehman by Cheryl Strauss Einhorn, David Einhorn announced publically that he was short Lehman's stock after finding discrepancies between the firm’s latest financial filing and what had been discussed during its conference call about that filing. Around a year later Lehman Brothers filed for bankruptcy, and igniting the 2008 financial crisis.

Lehman Brothers -- Regaining Glory

"Can the fabled investment house Lehman Brothers ever regain its past glory? Lehman built up its gilt-edged reputation over the past century and a half by financing such American success stories as American Airlines, Campbell Soup and Hertz. But since Lehman was spun off by American Express a few months ago, Wall Street has clearly expressed doubts about the firm's prospects..."

Wall Street immediately turned its back on Lehman following the group's spin-off from American Express. From an IPO price of $15 per share, Lehman plummeted to $10 and missed second-quarter earnings expectations. A net income of $13 million or 11 cents per share for the second quarter of 1994 was far below the figure of $83 million reported the year before. Lehman had reported losses in three of the four years prior to the interview and was suffering from a downturn in bond trading.

The market has also pushed Lehman's shares down to around 0.6 times book while peers commanded a premium of 30%. Clearly, at the time Wall Street didn't think much of the newly independent Lehman Brothers.

The Barron's article quotes newly appointed Richard S. Fuld Jr., the now infamous chairman and CEO of Lehman. "I understand why people are skeptical of us...For all intents and purposes, we are a new firm. We've done a lot, but we have a lot left to do."  Barron's then goes on to take a look at Fuld's turnaround plan. A $200 million cost-saving drive and job cuts equal to 3% of the bank's workforce had taken place, but there was more to do. Lehman led the industry in high costs. During 1993, the bank spent 83% of revenues on compensation, marketing, and other corporate costs. Peers spent around 70%.

Lehman Brothers

Lehman Brothers: Internal battles

Fuld was also charged with rebuilding Lehman's investment banking team, which had been damaged by a number of high-level departures. Barron's notes that during 1993, Lehman's merger team slipped to 11th place amongst its rivals, from fourth position a year before. This performance was, in part, blamed on Lehman's association with Shearson, the American Express brokerage unit that was sold to Smith Barney the year before the Barron's article.

[buffett]

Lehman Brothers was also fighting internal battles:

"But Lehman still has some internal battles to cope with. One of the most often cited is the clash between Lehman's traders and its investment bankers, a rift that nagged the firm during its decade under American Express, and even before that."

"With the departure of Tom Hill and the naming of Dick Fuld as Lehman's chief executive, however, the traders are firmly in control. Today, investment banking is virtually unrepresented in the top echelons of Lehman's management."

According to Barron's, Fuld stood accused of pouring millions of dollars into Lehman's trading business, with little consideration for investment banking, something he denied:

"He knows that, in the long run, a narrow strategic approach wouldn't make much sense."

Fuld was well aware that Lehman's excessive exposure to trading left the firm vulnerable. So, in an attempt to re-balance operations, Fuld was looking to diversify into underwriting stocks and bonds, especially overseas.

As a result of Fuld's efforts, in the first half of 1994 Lehman was the second largest underwriter of debt and equity issues in the US and fourth worldwide. Lehman had a 60% share in the market for so-called Dragon bonds, securities sold to Asian investors.

And along with underwriting, Lehman Brothers was trying to boost its asset management arm, which at the time only managed $12 billion for investors, making it one of the smaller operations among major brokerages. A week before Barron's published the piece on Lehman, Fuld had pinched a Morgan Stanley's chief of global asset management to add to Lehman's team.

Lehman Brothers: Undervalued

"A lot hangs on Fuld's ability to meet Wall Street's earnings expectations. Lehman could earn around $2 per share this year and $2.50 next, analysts say. For now, most analysts are taking a wait-and-see approach...The Spin-Off Report's [Charles] Ronson has no such hesitation..."

Charles Ronson predicted that further cost-cutting efforts by Fuld, coupled with Lehman's size should persuade the market that the bank is worth at least book value, which was $25 per share.

"That theme is echoed by Seth Klarman, president of Baupost Group in Boston, who recently purchased more than a million shares of Lehman at $16-$18 apiece. Says Klarman "Lehman is a major player in many areas, and despite its spotty record, over time this is a company that will trade up to book value, possibly in the next six to 18 months."

Other buyers of Lehman stock at the time included Fidelity's $6.7 billion Equity Income II fund and Mike Price's Mutual Shares Corp.

The Barron's article ends by questioning Lehman's outlook. Would the firm be acquired by a larger peer, or did it have a bright future as an independent entity? Only time could tell.

For now, it's Fuld's game. One money manager wishes that the Lehman chairman had laid out his battle plan more clearly, including specifics on how much more fat needs to be cut and how various businesses will be developed. As this manager put it, "I keep asking myself, 'what kind of a firm will this become?'"

Despite such misgivings, the money manager bought 300,000 Lehman shares last week at about $15 each.

When a stock looks irresistibly cheap, even critics can't stay away.

The post [From The Archives] Cheryl Strauss Einhorn 1994 Article On Lehman Brothers appeared first on ValueWalk.

Warren Buffett's Capital Structure And Alpha; Greenlight Re by balajithinks, Beowulf Capital

[buffett]

Lots of work has been done trying to reverse engineer how Warren Buffett managed to build his $350B behemoth. Tons of books discuss about value investing as practiced by Buffett, while some of the smarter ones delve deeper into the insurance operations that Berkshire operated. When we look closely at the insurance operations, some of the key advantages of this structure are:

• Float generated by insurance offers good amount of leverage for the portfolio that Buffett manages
• Cost of float has been less than zero; Warren Buffett gets paid to manage the float; (see below table) Buffett can borrow cheaper than the U.S. government.
• Float is not directly connected to the markets but to events; the debt will not disappear overnight or cannot be called overnight and hence almost non-recourse
• As long as the insurance companies continues operations, a significant piece of this float will be available for long time (almost permanent capital)
• Insurance operations are exempt from the investment act of 1940 which place restrictions on operations; Berkshire could not have intervened in Geico, Salmon, special situations or own whole public companies; Berkshire would have been regulated as a mutual fund
• Insurance operations can buy whole public companies

Table from: Paper on Buffett’s Alpha (here)

So, float provided a cheap source of leverage and (almost) permanent capital. What would Berkshire look like if Warren Buffett had invested in S&P 500 instead of handpicking companies? Joseph Taussig of Taussig capital did do the work and reverse engineered the investments.

S&P grew 9.7% CAGR for 40 years between 1969 and 2009. Warren Buffett’s investments grew at 12.4% CAGR.  If one had taken the taken all the money (close to $70M when Warren Buffett assumed Berkshire in 1969) and put it in S&P 500, one would have $2.5B and with Warren Buffett’s stock picks, one would have $4.3B. Around 2009, Berkshire’s market cap was about $150B. Why the difference? The study from Taussig capital does a great job of explaining this difference in simple terms,  for every $ of equity capital, Buffett used 2$ of reserves, with 12% return on investments, Warren Buffett earned 12% of equity plus 2 times 12% on reserves = 36% net of 4% cost of float (2% for every 1$ of leverage / reserves) and ended with a ROE of 32%. Since Berkshire is domiciled in the US, it has to pay taxes, and the post tax returns are 20% CAGR which takes us close to $150B. The difference between $4.3B and $150B (in 2010) came from the insurance structure.

So, a huge piece of the returns came for Berkshire because of the capital structure than from the investing alpha that Warren Buffett created. Warren Buffett did pick the right insurance companies to buy which mattered a lot. Buffett’s big alpha were from picking the right insurance vehicles that have created the massive conglomerate. As long as the insurance operations do fine and returns on incremental investments is decent, Berkshire will do fine in the future as well.

How does an investor starting today structure an operations with a capital structure better than Berkshire? Remember that Warren Buffett also defers taxes by not selling securities and compounding the float from the taxman. Also note that the ROE’s came down from 32% to 20% because of taxes.

Enter David Einhorn and Greenlight Re. David Einhorn started a re-insurer based in Bermuda (which is tax free) and re-directs all the cash to Greenlight capital to invest which creates better economics than Berkshire does. Although, as Warren often points, insurance as an industry runs at a net loss through the cycle. Greenlight Re has been struggling to keep the combined ratio low and there are additional headwinds for a shareholder. Einhorn charges 2% management fee and 20% of profits of every year (with watermark). It is a very lucrative deal for David Einhorn. With earned premiums close to 50% of capital, the portfolio is levered at 0.5X. If S&P returns 10% and David Einhorn invests to meet the market returns of 10%. With the leverage, it will be 15% minus the  2% management fee and 20% incentive fee, it will be worth 10%.  The effects of leverage are being eaten up by Einhorn and not flowing to the shareholders. However, if the unearned premium does go up, it might present interesting possibilities as he has returned 18.9% CAGR on investments in Greenlight Capital since inception in 1996. Einhorn’s ability to create alpha plus the fact that the stock is trading at a discount to book value offers additional possibilities if the unearned premiums go up.

For now, we are content just monitoring Greenlight Re and Third Point Re (Daniel Loeb’s version of the same structure) and watch it for more time.

The post Warren Buffett’s Capital Structure And Alpha; Greenlight Re appeared first on ValueWalk.

David Einhorn, in Greenlight Re second quarter conference call, blames the "challenging" market for Greenlight's worst monthly performance. Einhorn also discusses the affects of coal prices on Consol Energy stock, Micron affected by lower DRAM demand and SunEdison benefiting from it's stake in TerraForm. See his remarks below.

David Einhorn - Greenlight Capital Re, Ltd. - Non - Independent Chairman of the Board

Thanks, Bart and good morning everyone. The Greenlight Re investment portfolio lost 1.5% in the second quarter, bringing the six month returns to minus 3.2%. Losses in Micron and counsel energy cost us more than our gain in SunEdison are one significant winter during the quarter the short portfolio was flat and macro positions were slightly tractor.

Micron's earnings and powered projections were affected by lower than expected computer DRAM demand as well as manufacturing issues that arose when the Company began migrating capacity from computer DRAM to mobile and other components. The results surprised the market and led to lower forecast earnings and a lower stock price. Having reviewed our thesis, we continue to believe that the industry behaviors more rational to three players and still expect current trough earnings to be higher than in the past and peak earnings to be higher in the future.

Consol Energy stock price suffered as coal prices fell 10% during the quarter. Consol recently completed an IPO, CNX coal resources, a master limited partnership of this coal business. We took advantage of the market's tepid demand for coal assets and buy shares with a 25% discount to the proposed range. Consol has valuable coal and natural gas assets, a conservative balance sheet and the management team that is focused on creating shareholder value. We believe Consol's assets are worth about twice it's current stock price at prevailing commodity prices. The recovery in coal and gas would further enhance the value.

David Einhorn Greenlight capital historic returns

In the second quarter SunEdison stock price continued to benefit from progress and it's development business an ownership stake in TerraForm power. The market also rewarded the Company for the upcoming IPO of TerraForm global and emerging market yield. Unfortunately, the IPO was met with tepid reaction last week and SunEdison gave up all of the second quarter gains in July. In the second quarter, we added a few new small positions including Applied Materials in Bank of New York and exhibit a number of positions. We ended the quarter with 21% net exposure and continue to maintain our conservative portfolio positioning.

David Einhorn: Greenlight biggest losses come from SunEdison

In the month of July, our portfolio was 5.9%, our worst monthly performance since October 2008. The losses were broad-based, but the biggest loss is coming from SunEdison as I just mentioned, Consol Energy which continue to suffer from poor industry sentiment, gold, which had a rough month and the short bowel basket. The overall market environment has become a cutely unfavorable for our investment strategy. While we could have done better in a couple of spots, we don't expect to do well when investors shunned value stocks in favor of momentum stocks. We've experienced this type of dynamic a few times before and in each case, the short-term results been painful for us. As before, we expect that the environment will improve and we will recover.

In the meantime, we are actively managing the portfolio. In addition to looking for opportunities, we continue to scrutinize our current position. During the challenging environment in July, we feel our current portfolio is quite attractive. Our underwriting results were disappointing in the quarter the problems are concentrated in business written in 2010 and earlier the more recent underwriting years are performing well.

The post David Einhorn Blames Worst Month Since October 2008 On “Challenging” Market appeared first on ValueWalk.

Structural Advantages Of Greenlight Re And Third Point Re by balajithinks, Beowulf Capital

We had written about the structural advantages of re-insurers before here. We ran through some numbers and here is what we found.

Both Greenlight Re and Third Point Re are structured similarly with Greenlight Capital and Third Point LLC running the investment books. Both follow 2% management fee and 20% incentive agreements with high watermark. Currently unearned premium is around 50% of equity (actually close to 40% of equity) for both the insurers. We have assumed cost of float as 2% for both the insurers. We tried to model the returns to the shareholders under various circumstances of underlying returns from the hedge funds. The shareholder equity varying as a function of float net of the cost of float.

Over a period of time, if one assumes that the insurers grow their float to get a structure where they have $100 of float for $100 of equity (which is still conservative as reinsurers typically write 5X of capital) However, given the general risky nature of where the float is invested, 1X is a more proper allocation for this strategy.

One thing is very evident here, if the re-insurers are not prudent and conservative, it will wipe out equity fast as float functions exactly how leverage does. Companies like Berkshire own whole companies where earnings are less volatile compared to stock market instruments and they also own a lot of fixed income instruments. Third point returned -32.6% in 2008 and Greenilght Capital returned -22.6% in 2008. The above table clearly shows what would happen if another such year were to occur for these two insurers whose investment books are managed by the insurers. As the investments are starkly different from other insurers, it might be worthwhile to consider the volatility of the instruments.

How would Berkshire or Markel look with a similar capital structure? Remember, they do not charge 2% and 20%. However, they have taxes to drag them down and both of them have great historical performance to their back on running a reinsurer and its investment books. Markel lost 16% of their book value in 2008 which is remarkable considering that they were leveraged 2.2:1 on their float largely thanks for their fixed income instruments which was up 0.2% and equities were down 34%. Berkshire was down (9.6)% in 2008 thanks again to the fortress balance sheet and the fixed income securities that Berkshire owns.

If Markel or Berkshire had a similar structure, this is how they would look.

With $100 of Float to $100 of equity

Markel at the end of 2014 had $145 of float to $100 of equities. Remember the fixed income securities and why Markel will not be very volatile and probably the returns will not exceed 10% on assets invested.

When one takes a closer look at the economics of the business models, it looks like third point and Greenlight re have managed to replicate a capital structure that replicates similar economics to Berkshire or Markel while getting much much better deals for themselves in the process instead of the taxman.

However,  things get interesting further. Greenlight Re is trading at 0.87 book and Third Point Re at 1.07 times book. Berkshire is trading at 1.46 book and Markel at 1.64 times book.

If the re-insurers grow the book to have float to 1X of capital.

A good comparison would be Markel today. I have just included what Berkshire would do with a similar capital structure.

Chinese-focused hedge funds continue to exhibit stamina and are well represented in the top ranks of HSBC’s weekly hedge fund performance ranking. Nearly ¼ of all funds in the top twenty performers have a Chinese market focus.

Quam still performing well in HSBC listing, as Bio-themed hedge funds continue on performance tear

Chris Choy’s Quam $118 million China Focus Segregated Portfolio, which was in the top spot on June 1, sporting 59.71 percent year to date returns back then, is still nonetheless holding strong with 25.76 percent year to date performance as of the July 31 reporting, landing it in fourth place.  While Quam is holding up, the fund had a rough month, down 16.5 percent in July making it the biggest lower in the equity diversified / Asia category. The $226 million Zeal China Fund was down 11.69 percent on the month as the only winner in the category was the $166 million Nezu Cyclicals Fund. The Chinese stock market lost almost half its value from June to July.

Following a theme ValueWalk had reported on earlier in the year, the biotech sector remains the hot hand, with the category average up 22.06 percent on the year. Joseph Edelman’s $1 billion Perceptive Life Sciences Offshore Fund, up 5.44 percent on the month, is now on top performer on the HSBC list with a 42.48 percent year to date return, which should make its investors, which is said to include Altin, which operates a fund of funds. In a July 28 research note, RBC connected biotech dots that Allergan's reported acquisition spree could not only acquire smaller niche firms, as was the case in the Naurex deal. RBC analyst Michael Lee thinks the real meaning, the scope could be a game changer for larger firms biotech firms. “Based on our numerous conversations with investors it is increasingly evident that some investors legitimately believe that the Allergan deal and commentary on doing transformative branded deals is a sign that it is theoretically possible that large-cap biotech companies (could be in play) -- namely Amgen, Inc. (NASDAQ:AMGN),” he wrote.

In HSBC equity diversified hedge funds, Einhorn has difficulity in July, while BTG up nicely

In the equity diversified / USA category, the $550 million Elm Ridge Capital Partners fund was hard hit in July, down 8.50 percent and down 20.12 percent on the year. In the same category, David Einhorn’s $4 billion Greenlight Capital Offshore fund was down 6.3 percent on the month and is lower by 9.32 percent on the year. Larry Robbins $4.9 billion Glenview Capital Partners fund was down 2.02 percent on the month but is still positive by 4.9 percent on the year, well above the category average, which is up 1.29 percent on the year.

In the diversified / global category, the $4.4 billion BTG Pactual Global Macro fund had a strong month, up 4.05 percent, which represents nearly 80 percent of the firm’s yearly gain. Similarly the $832 million MLM Macro Peak Partners fund was up 4.99 percent on the month, representing more than 90 percent of the gains on the year.

In HSBC managed futures, currencies working well for AHL Man, while Blackrock systematic offerings look good year to date

In managed futures the Man AHL Currency Fund road trends higher on the month, posting a 9.62 percent gain in July, while the Bluetrend fund put up 6.19 percent monthly numbers, erasing a year to date lost and is now positive by 3.06 percent. Other notable performers in was the $3.2 billion Cantab Capital Partners Quantitative Fund, up 5.84 percent on the year, and ISAM Systematic, now with $443 million under management, was up 7.02 percent in July . The Welton Global Directional Portfolio was up 4.27 percent in July.

The Blackrock EOS fund, with Robert Fisher and Simon Weinberger operating a systematic strategy in Europe with $423 million, is up 9.31 percent year to date while Blackrock’s global systematic offering, with Raffaele Savi and Ken Kroner running $1.2 billion under management, is up 7.42 percent year to date after posting 3.25 percent monthly performance in July.

Another fund worth watching is the $777 million Pimco Multi-Asset Volatility fund, run by Josh Thomas, up 5.24 percent year to date.

The post Chinese Hedge Funds Still Holding Up Well in HSBC Rankings appeared first on ValueWalk.

The David Einhorn Misstep by StockPucker

David Einhorn, Greenlight Capital founder, manages some $10 billion, having started out with just $900,000, half of which was borrowed from his parents. Greenlight is now a mammoth in the industry and is particularly famous for some timely shorts, including the Lehman Brothers short in mid-2007. With that, the fund has managed to generate 20% annualized returns since inception in 1996. I have a feeling that be about to change.

The current market have not been kind to Einhorn.

His big bet on gold, to take advantage of quantitative easing, hasn’t worked out, to say the least. The trade started out profitable enough and has since gone to hell in a handbasket.

If only that were it. There’s a number of other dark spots in Einhorn’s portfolio, all of which, I would argue, are somewhat commoditized companies. The semiconductor devices company, Micron Tech, and coal company, Consol Energy, are leading losers.

Last month was the second worst monthly performance we’ve seen from Greenlight since October 2008.

Now, back then, Greenlight rebounded to generate massive gains. David Einhorn, once the specialist in shorting weak financial firms, is a bit out of his league with gold and energy. Greenlight’s concentrated equity portfolio has only further added to the pain - with its top five holdings making up 40% of the long-only part of the fund.

His largest long bet is on Apple, a company I’m not a huge fan of. His second biggest position is SunEdison [previous thoughts here], which looks like a heck of a value trap. However, Einhorn added to Micron and Consol Energy [Einhorn’s Consol thesis here] last quarter. General Motors and Time Warner are a couple big companies that are among his biggest holdings. Other notable holdings David Einhorn has been adding to include Bank of New York Mellon (an activist target), Applied Materials and Michael Kors.

Now, something that Einhorn took a lot of flack for is his short Pioneer Resources thesis, which he called the “mother fracker” at the Sohn Investment Conference [Sohn recap here]. On the other side of that trade is Seth Klarman [Klarman’s performance is also hurting], who has a $500 million bet on Pioneer. Pioneer shares are down 25% since Sohn.

[klarman]

Many people call David Einhorn an activist, but he’s far from it. Einhorn has filed four 13Ds, two in 2007 and two within the last two years. The most recent ones being Civeo and CNX Coal Resources - both the result of spinoffs of other holdings of his.

The writing was on the wall - Near the start of 2015, Greenlight was ranked 53rd out of 58 hedge funds, with a D grade, in the Institutional Investor’s Alpha Hedge Fund Report Card. Einhorn's portfolio looks to be one the best value traps among major funds.

The post Not Just Sunedison: The David Einhorn Misstep appeared first on ValueWalk.

David Einhorn's Greenlight Capital revealed that its fund was down 5.5 percent in August, bringing the year to date loss to 14 percent, according to its web site. Looking for the silver lining, the hedge fund, known for its activism and finding value in the stock market with strong recent years past performance, did slightly outperform the S&P 500 stock index at least on a monthly basis, which was down 6.3 percent in August.

Greenlight Re performance

Greenlight under-performing on a yearly basis

The August losses come as other hedge fund strategies had performed to various levels. Daniel Loeb's Third Point hedge fund was down -5.1 percent in August, but remains higher on the year by a slim 0.02 percent. Balyasny Asset Management, meanwhile, adjusted its strategy parameters to hedge what they saw as the logical potential for volatility and were said to be near flat in August and up from 3 to 7 percent on the year, according to people familiar with the matter. (Additional report to come.)

According to the most recent HSBC Hedge Weekly performance ranking, through August the Equity Diversified / USA hedge fund category was up 0.88 percent year to date. The Multi-Strategy / Global category was up 1 percent while the Equity Diversified Long / Short category, which includes John Burbank’s Passport Special Opportunities Fund, was up 7.51 percent. It should be noted that some of the funds in the HSBC report had not reported their August performance. The Newedge CTA index, an benchmark of the largest algorithmic traders which requires firms to report performance on a daily basis, looked to close out August near a 1 percent loss.

Greenlight asks questions, but likely not the questions that matter

The sharp, unhedged losses come as the fund’s founder, David Einhorn, sent out a survey to his nearly 700 investors, according to a report in the New York Times. It is unclear It is unclear what the questions were, but below are a few questions that would have been most interesting for institutional investors to answer:

• When you invest in a “hedge” fund, do you expect that the fund will consistently “beat the market” on a multi-year basis, or do you expect that the fund will provide noncorrelated returns to a certain degree, help hedge a portfolio against negative stock market events?
• If a hedge fund consistently underperforms the S&P 500 on a multi-year basis and delivers a returns stream highly correlated to the stock market, what is the fee level you feel is justified?
• Do you anticipate a manager to look at both the investment on an individual level as well as consider macro factors that are known on the horizon to have a high probability to impact market volatility (Fed rate hike, China known slowing)?

These are the questions that should be asked, but likely won’t be.

The post Einhorn’s Greenlight Reports August, Down Badly appeared first on ValueWalk.

All great traders, even the likes of Greenlight Capital’s David Einhorn, experience negative periods of performance. One of the only fund manager to operate seamlessly during all market environments was Bernie Madoff, which is to say that hedge fund investors should anticipate loss at some point. The question becomes: should one invest in a fund after they have experienced significant losses?

Investing in a solid hedge fund after a drawdown is a concept that has been debated pro and con, particularly among some in the algorithmic trading community. Among this group the concept of mean reversion is a method that not only applies to traders, but also to hedge fund investors. As such, a recent Wall Street Journal article points out now might be a good time to invest in Einhorn and Greenlight. One real issue is determining the best method to do so, which might not be his hedge fund.

Slide from a recent Einhorn presentation

Investing in a hedge fund on a drawdown requires selecting resilient hedge funds

Investing in a hedge fund strategy on a drawdown can be a risky proposition, particularly if the institutional investor does not ask the appropriate questions that help determine if the hedge fund is liquid and has logical potential to return to their previous former glory. A hedge fund such as Greenlight Capital has proven itself and is said to have a disciplined method for evaluating value: buying select stocks at a discount and simultaneously selling shares when they reach an overvalued level.

This leads to the first of many criteria: Does the hedge fund have a strong systematic method, a repeatable process that has potential to produce results consistent with past glory? Or is the method clouded with “feel” discretionary judgments and other non-mathematically based logic that is difficult to repeat? Can he get off the ground after being knocked down? In this case, Journal reporter David Reilly writes that while Einhorn “may be down,” but the man with the illustrious track record “isn’t out.”

“…Einhorn has run into trouble before, only to pick himself up,” Reilly wrote, noting that during the subprime housing crisis he invested in, and he sat on the board of, New Century, a generally subprime mortgage lender that went bankrupt. Einhorn has the fortitude to have made it in the past, as he learned from this experience and bounced back to make what may be his most noteworthy call against Lehman Brothers, selling before the firm went bankrupt.

Investing in a drawdown is best done when beta market performance drivers are understood

During a recent conference call, Einhorn made a comment that indicates he is aware of his beta performance driver correlations. He quoted as saying the momentum-driven environment in today’s market is “acutely unfavorable” to Greenlight’s strategy.

This is significant because hedge fund managers who are aware of the environments in which their strategies succeed and when they might be expected to fail are interesting indeed. The ability to correlate a beta to performance and then monitor various market environments helps set expectations. Beta market environments can and do change. Thus, if a hedge fund is in the midst of a negative market environment, this is a factor which can turn around. As one might expect in the current market volatility, a long only-based strategy will not perform positively. While Einhorn is said to have short exposure in his portfolio, like many traditional hedge funds the ratios are kept at high levels and are not dialed up and down to match macro market environments, as is the case with certain noncorrelated fund managers.

Liquidity is a key concern when investing in a drawdown

When investing in a hedge fund on a drawdown, the liquidity of their positions is a significant concern, which from a larger perspective is one component that speaks to the ability to exit that which is the causation of the drawdown. Those hedge funds who invested in illiquid real estate, distressed debt, non-exchange traded SWAPs, for instance, may have difficulty exiting their trades under tight market conditions. Such situations are typically governed on a situation by situation basis and in not all instances does a lightly traded and unregulated SWAPs trade mean that one might not be easily to exit during difficult circumstances.

Greenlight Capital is best known for his investing in liquid exchange traded stocks.  In fact, some of his value plays are a mixture of themes and he is known to keep his investors generally well informed of positions, all positive attributes.

Invest in Einhorn re-insurance fund if you can't invest in the hedge fund itself

When investing in Einhorn on a drawdown, however, the fund’s high investment minimum and qualified investor limitations make it generally an institutional play. The Journal’s Reilly says when the fund is unavailable to general investors, a potential alternative could be Greenlight Capital Re, a publicly traded reinsurance company owned and operated under the Einhorn umbrella.

Greenlight Capital Re insurers property-and-casualty risks, which is typically operated on a mathematical basis using probability tables built from past performance. The insurance company invests its fund’s in Greenlight Capital’s hedge fund.  The company is trading at 85 percent of book value and might be a play on Einhorn’s future hedge fund performance as well as the re-insurance business. Assuming the risks in the insurance portfolio are well diversified and logical based on a systematic formula, such an investment can be liquid so long as the risk exposures do not overwhelm capital. If the risk exposures are correlated and black swan events hit, however, this could prove risky, particularly if the firm does not actively hedge risk on an ongoing basis.

Investing in Greenlight’s re-insurance business, a probability orientated, mathematically driven firm, might not be that different from investing in a noncorrelated quantitative hedge fund, for that matter. The best time to enter such investments is when the beta of the market has diverted from the mean and is likely to revert.

Its just finding that exact moment to buy that is often the cause of consternation, but the key is to take a long term view on investing in a hedge fund on a drawdown. Studies as to the typical length of a beta market environment drawdown can help -- measuring the length and duration of price persistence, the beta market environment driving momentum trading strategies, for instance -- is one way. Sometimes when entering into volatility hedging regimes people chronicle the depth, duration and magnitude of a market volatility event to determine exposures. These are all acceptable guidelines, but at the end of the day investing in a hedge fund on a drawdown is an inexact science that is best managed through a hedge fund allocation portfolio diversification strategy.

The post Is Now Time To Invest in Einhorn On A Drawdown? appeared first on ValueWalk.

Delta Lloyd NV has slumped to a record low today after it emerged that David Einhorn, one of the insurer's largest shareholders, has been reducing his stake in the troubled company.

At time of writing, Delta Lloyd is trading at €8.89 in Amsterdam after to falling to an all-time low of €8.75 earlier in the day. Year to date, the company's shares have lost 51.1% and are on course to close at their lowest level since Delta Lloyd's initial public offering in 2009.

David Einhorn: Selling as Delta Lloyds plunges

David Einhorn: Time to sell

Delta Lloyd's shares have been hit today by the news that David Einhorn, who runs investment firm Greenlight Capital, has cut his interest in the insurer to 2.98% from 4.84% as previously reported.

David Einhorn's Greenlight Capital has been a shareholder of Delta Lloyd since the company's IPO, which took place more than five years ago. However, it looks as if Einhorn has now decided that it is time to sell

Last month, Delta Lloyd reported a surprise first-half loss totalling €533 million after interest-rate hedges backfired and bonds declined. Further, the company lost its Chief Financial Officer, Emiel Roozen and supervisory board Chairman Jean Frijns last month after it was revealed that Delta Lloyd had misused central bank information for trading purposes during 2012.

And Delta Lloyd is currently trying to bolster its finances ahead of the introduction of a stricter regulatory regime for European insurers next year. The company has already warned that its financial headroom under the new rules would be tighter than previously disclosed. Although, until the new regime takes effect in four months, insurers across Europe are being kept in the dark as to how much capital they will need to hold under the new rules.

Delta Lloyd is particularly concerned. After raising €340 million from shareholders during March, the company could be forced to conduct another rights issue after the new regime takes effect. This could be the reason behind David Einhorn's sale.

Delta Lloyd told its shareholders after raising additional cash earlier this year that it held at least 70% more capital than the minimum required under the new solvency regime. But last month the company warned that, due to rising losses, the ratio had dropped to less than 40%. Most companies target surpluses of at least 60%.

The post David Einhorn Reduces Stake In Delta Lloyd As Insurer Drops To Record Low appeared first on ValueWalk.

As Bridgewater Associates flagship $80 billion “All Weather Fund” strategy found difficulty in August, falling by 4.2 percent, while the macro fund was reported down 6.9 percent on the month, the hedge fund is out with a document explaining their approach to risk parity and how long term exposure to risk, not short term market cycles, is a key consideration.

Get The Full Ray Dalio Series in PDF

Get the entire 10-part series on Ray Dalio in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

With the S&P 500 index down 6.3 percent in August, many investors struggled to various degrees. Hedge fund managers such as David Einhorn, down 5.3 percent in August, and Lee Cooperman, down from 9 to 11 percent in his various funds, all found significant difficulty. What has surprised some is the degree to which normally noncorrelated fund managers, such as Cantab Capital and Winton Capital, have taken a dive in August as well. While they didn’t engage in a risk parity strategy, volatility targeting was equally a subject of examination by a widely read JPMorgan quantitative research report. It is in this environment that Bridgewater explained its strategy in detail in what appears to be a new white paper on its web site.

Bridgewater: "Risk parity is about balance" and managing growth and inflationary expectations

“Risk Parity is about balance,” Bridgewater Associate’s Co-Chief Investment Officer Bob Prince proclaimed in the title of a new public document that explains their strategy in detail. The concept behind risk parity is to diversify risk exposure among different market environments. The four market environments are rising and falling inflation and economic growth. When bonds are rising in value stocks may be falling, is the core logic. "The All Weather approach exploits these reliable relationships by holding similar risk exposure to assets that do well when (1) growth rises, (2) growth falls, (3) inflation rises, and (4) inflation falls (all relative to expectations), through four sub-portfolios which are designed to capture these four risk exposures,” the report explains.

As a result, having stocks as the primary component of a portfolio is not the ideal. In fact, as previously noted in ValueWalk, one of the most significant mistakes an investor can make is to overweight stocks.

Bridgewater: Don't get lazy about correlation analysis, as crisis correlation can be different during non-normalized market conditions

To achieve “reliable diversification” Bridgewater acknowledges that, while asset classes offer a risk premium that can be similar to various degrees, “their inherent sensitivities to shifts in the economic environment are not the same.”  To judge diversification an investor might depend on correlation analysis, but Bridgewater notes this is not enough. “Correlations are unstable and unpredictable, and tend to change in the worst way at the worst possible time.” What might not correlate during “normalized” market periods might “correlate to one” during crisis, as many, but not all, investments tend to do.

With such correlation considerations in mind, the concept is that one risk rises another risk falls. “The result of this balance is that the underperformance of a given asset class relative to its risk premium in a particular environment (e.g., nominal bonds in higher than expected inflation) will automatically be offset by the outperformance of another asset class with an opposing sensitivity to that environment (e.g., commodities), leaving the risk premium as the dominant source of returns, and producing a more stable overall portfolio return,” is the goal.

Bridgewater explains that the correlation between stocks and bonds as opposing one another is instable. “While asset prices incorporate expectations about a wide range of economic factors, growth and inflation are the most important,” the report notes. “As a result, asset class returns will be largely determined by whether growth comes in higher or lower than discounted and whether inflation comes in higher or lower than discounted, and how discounted growth and inflation change. The relationships of asset performance to growth and inflation are reliable — indeed, timeless and universal — and knowable, rooted in the durations and sources of variability of the assets’ cash flows.”

Overlay this analysis with the current market environment. The concern is not inflation, but deflation as commodities, led by oil, considered a precursor of future economic growth, have been trending lower. With deflation and growth a concern – particularly growth in China. Bridgewater addresses this near the end of the document. “By and large, rising growth/inflation assets responded similarly in magnitude but opposite in direction to falling growth/inflation assets. So balancing rising assets against falling assets would have reliably mitigated the impact of these environmental shifts.”

Risk parity has become the trendy strategy among institutional investors, but be careful when people over-engineer systems

Risk parity as an investment strategy “is catching on” due to investors making the realization that “balance is a superior approach to asset allocation,” the report said, making an oblique reference to the competition that has begun to sprout up mimicking the Bridgewater approach. “It is not safe to blindly assume that all Risk Parity approaches are the same or will perform reliably through all environments,” the report said. “We would be wary of approaches that are overly engineered, or that depend on estimating future correlations and volatilities.”

But overall the biggest risk isn’t in selecting an improper risk parity strategy, it is in following the long-only all the time mantra that drives too many on Wall Street. “Most institutional portfolios are badly out of balance,” the report concludes, noting that “most institutional portfolios are 90+% driven by the return of equities.” This isn’t balance and it will not generate all weather performance. In fact, it exposes investors to “a single adverse event which could last for decades, a poor performing equity market.”

In the end it’s all about balance. “Given the current choices available, not balancing the portfolio is so risky as to be imprudent,” Prince ended the piece.

To read the full white paper click here.

The post Bridgewater Defends Risk Parity Strategy That It Developed & Nurtured appeared first on ValueWalk.

Pershing Square, Third Point, Greenlight Suffer A Painful August  by Stock Pucker

In August, per HFR, the average fund lost 2.2% (versus the S&P 500’s 6% fall) and is down 1% for the year. Some big name funds aren’t so lucky.

Bill Ackman’s Pershing Square was down 9.2% in August, putting the fund down 0.1% for the year.

Top holding Mondelez was down 6% for the month of August, no. 2 holding Valeant was off 10.5%, no. 3 Air Products was down 2%, no. 4 Canadian Pacific (CP) was down 10%, no. 5 Zoetis (ZTS) down 8% and no. 5 Restaurant Brands (QSR) off 11%. Collectively, eight make up the bulk of the long-only portfolio.

David Einhorn’s Greenlight Capital was down 5.3% in August and now down 13.8% for the year.

Top holdings Apple and General Motors were down 7% and 6.6%, respectively, in August. Everyone wants to talk about SunEdison, which was off 55% for the month, with Micron Tech and CONSOL also being down 11% and 8%, respectively, for the month. Einhorn was cutting some of his long and short bets in August, though.

Dan Loeb’s Third Point was off 5.2% last month, but still up 1.2% for the year.

Third Point’s top holding, Baxter (BAX) was off 4% in August, no. 2 holding Amgen was down 14% and no. 3 Allergan (AGN) was down 8.2%.  Collectively, the three make up about 40% of the long-only portfolio.

Barry Rosenstein’s JANA Partners was down 4.3% in August and down 2.9% for the year.

JANA’s top holding, Qualcomm, was down 12% in August. Other top holdings off big in August were Walgreen, down 10.4%, and ConAgra (CAG), down 5.4%.

Other activists down in August were Cliff Robbins’ Blue Harbour, off 2.6% for the month, and Scott Ferguson’s Sachem Head Capital, down 2%.

Jeff Ubben’s ValueAct Capital, up 1.6% in 2Q, the standout of sorts - although it remains to be seen how he did in August. YTD through June, ValueAct is up 8%.

Learn More about activist strategy

By all accounts, it wasn’t a pretty August for ValueAct either, however. Top holding Valeant was down 10.5% in August, no. 2 holding Microsoft took a 7% hit during the month, no. 3 Halliburton (HAL) was off 6%, no. 4 Fox (FOX) off 17.5%, no. 5 Adobe down 4%. Collectively, the top 5 holdings make up 60% to 65% of its long-only portfolio.

That’ll be 2 and 20.

Don't forget - sign up for our free daily newsletter to stay in the activist investing know.

The post Pershing Square, Third Point, Greenlight Suffer A Painful August appeared first on ValueWalk.

It's not easy being a billionaire hedge fund manager. Just ask famous hedge fund guru John Paulson, who had to admit to investors last week that his hedge funds were seriously hammered last month when global financial markets sold off.

According to a source with knowledge of the matter, Paulson & Co's flagship Paulson Partners fund was down by dropped 4.2% in August, slicing its 2015 gain to just 6.52%. The well-known Advantage Fund has lost 4.9% for the month and is off 3.6% for the year. The worst performer is the Special Situations Fund, which saw its portfolio lose 8.35% of its value in August, and now stands at an extremely disappointing -11.6% for 2015.

Analysts point out that the losses in Paulson & Co's funds in August are in the same ball park as those in other large hedge funds, but the losses are especially painful for the once-$20 billion firm, as until a few weeks ago, it was in position for a nice rebound from a difficult 2014.

More on John Paulson hedge funds

Paulson did not go into into detail with specific explanations for the losses, but large investments in healthcare stocks, including Shire and Valeant among others, dragged the hedge funds down.

Worries about Chinese currency devaluation and a hard landing in China, uncertainty regarding the anticipated Fed interest rate increase as well as collapsing commodity prices all played a role in the recent stock market rout, which led to losses for other hedge fund managers Nelson Peltz, David Einhorn and William Ackman.

Paulson typically makes a specific "bet" and then rides it out, for example, when he bet against the overheated housing market in 2007 and then again shorting gold when it got above $1800 in 2009. He had done well this year riding the pharma sector merger trend.

Over the last few years, Paulson has been making investments in Puerto Rico. He is totally rebuilding the historic San Juan Beach Hotel and also has stakes in several other tourism-related developments on the island.

Paulson & Co already operates a number of funds, and at least two more are scheduled to launch by the end of the year, but analysts point out that Bank of America and UBS ended access to the Paulson Advantage fund to high net worth clients earlier this summer given concerns about recent poor performance.

The post John Paulson Funds Pounded In August appeared first on ValueWalk.

About Those August Hedge Fund Returns by Activist Stocks

Just a quick rundown of how some of the bigger funds did in that brutal August.

First, let’s remember that the S&P 500 was down more than 6% in August.

• Bill Ackman’s Pershing Square down 9.2 percent
• Marcato Capital down 9.1 percent
• Larry Robbins’ Glenview Capital down 5.5 percent
• David Einhorn’s Greenlight Capital down 5.3 percent
• Dan Loeb’s Third Point down 5.2 percent
• Nelson Peltz’s Trian Partners down 4.8 percent
• Barry Rosenstein’s JANA Partners down 4.3 percent
• John Paulson’s Paulson Partners down 4.2 percent
• David Tepper’s Appaloosa Management down 1.8 percent

Of note - the HFRI Fund Weighted Composite Index experienced its biggest drop since May 2012, falling 1.9 percent for the month.

The HFRI Equity Hedge Index experienced a decline of 2.6 percent. Short bias funds led sub-strategy performance, gaining 5%, while high beta growth strategies brought up the rear after falling 4.1%.

Event-driven strategies fell by 1.7%. Shareholder activist funds were the weakest area of event-driven performance, with the sub-index declining by 3.5%.

The post About Those August Hedge Fund Returns appeared first on ValueWalk.

The Most Dangerous Trade: How Short Sellers Uncover Fraud, Keep Markets Honest, and Make and Lose Billions

The Most Dangerous Trade: How Short Sellers Uncover Fraud, Keep Markets Honest, and Make and Lose Billions

Of all the ways to make money in the financial markets, being a short seller is one of the toughest. The short seller is fighting the upward bias of the equity markets as well as the wrath of deep-pocketed, litigious individuals with vested interests in the stocks he is targeting. He has to be both a sleuth and a promoter; after all, what good is all his detective work if other investors don't know what he uncovered and don't join him in putting downward pressure on the stock?

In he Most Dangerous Trade: How Short Sellers Uncover Fraud, Keep Markets Honest, and Make and Lose Billions (Wiley, 2015), Richard Teitelbaum, a financial journalist, has written illuminating profiles of ten top short sellers, complete with their investing strategies. Combining interviews with well-researched back stories, he explores the highs and lows (and there are a lot of lows) of short selling.

Bill Ackman, Manuel Asensio, Jim Chanos, David Einhorn, Carson Block, Bill Fleckenstein, Doug Kass, David Tice, Paolo Pellegrini, and Marc Cohodes are the featured investors. We learn about their early years, how they ended up being short sellers, even the significance of their fund names. Why Muddy Waters, for instance? Block, trying to find a good name for his nascent firm, recalled a Chinese proverb: “Muddy waters make it easy to catch fish.”

We read about positions that worked and those that didn't—and what these investors learned from the latter. We learn how they construct their portfolios (including long positions) and how they try to mitigate risk (sometimes with options).

Each short seller has his own style, but the investors profiled in this book share some common traits. They are passionate, they work exceedingly hard, and they are resilient—even those who ultimately didn't make it. They scour the equity markets looking for stocks whose price significantly overstates their value. Some have macro theses, some are more akin to microbe hunters. But they are all looking for stocks that should, if they are correct and if other investors embrace their research, fall. Even in a rising market, though that is sometimes too much to hope for.

The Most Dangerous Trade is a book that's hard to put down. Teitelbaum knows how to keep his reader involved. Whether you just like a good story or are thinking about starting a hedge fund, whether you are an individual investor who wants to learn how to pick stocks or an institutional investor debating portfolio construction, Teitelbaum's book will speak to you. If you don't come away with at least one or two good ideas, you didn't read it carefully enough.

The post Teitelbaum, The Most Dangerous Trade appeared first on ValueWalk.

August Hedge Fund Numbers by StockPucker

Just a quick rundown of how some of the bigger hedge funds did in that brutal August.

First, let’s remember that the S&P 500 was down more than 6% in August.

• Bill Ackman’s Pershing Square down 9.2 percent
• Marcato Capital down 9.1 percent
• Larry Robbins’ Glenview Capital down 5.5 percent
• David Einhorn’s Greenlight Capital down 5.3 percent
• Dan Loeb’s Third Point down 5.2 percent
• Nelson Peltz’s Trian Partners down 4.8 percent
• Barry Rosenstein’s JANA Partners down 4.3 percent
• John Paulson’s Paulson Partners down 4.2 percent
• David Tepper’s Appaloosa Management down 1.8 percent

Of note - the HFRI Fund Weighted Composite Index experienced its biggest drop since May 2012, falling 1.9 percent for the month.

The HFRI Equity Hedge Index experienced a decline of 2.6 percent. Short bias funds led sub-strategy performance, gaining 5%, while high beta growth strategies brought up the rear after falling 4.1%.

Event-driven strategies fell by 1.7%. Shareholder activist funds were the weakest area of event-driven performance, with the sub-index declining by 3.5%.

The post August Hedge Funds Returns appeared first on ValueWalk.

As the Morningstar ETF conference contemplated methods to replicate hedge fund strategies and generally worshiped at the altar of Alpha, making efforts to distinguish market beta from manager performance, a factor that can be more easily replicated, one might logically ask the question: why even bother to replicate hedge fund alpha?

Einhorn's "alpha" is down 14.2 percent year to date

Such was a thought when the third quarter performance of David Einhorn’s Greenlight Capital hit the Internet and first reported by ValueWalk.

Einhorn September 2015: (3.5)% -17% YTD ouch! http://t.co/QZdg5W8HYu pic.twitter.com/wtXcT8M4kH

— ValueWalk (@valuewalk) September 30, 2015

The hedge fund is down 16.9 percent year to date as of September, after losing 3.5 percent during the traditionally volatile month.  Compare this with the S&P 500, which is down 5.29 percent on the year and ask the question: what is the point of replicating certain hedge fund alpha? In fact alpha, it can be argued, is the most difficult returns stream to replicated.

As of 30-September-2015, the largest disclosed long positions in the investment portfolio are Apple, CONSOL Energy, General Motors, gold and Resona Holdings; our investment portfolio is approximately 92% long and 66% short.

The promise of a “hedge” fund is that it provided a noncorrelated returns stream. Greenlight Capital along with other hedge funds, such Daniel Loeb’s Third Point, which outpaced the S&P 500 to the downside in September, shedding 4.8 percent, don’t make the explicit promise of noncorrelated performance. There promise is enhanced alpha, buttressed by expert stock selection and what is often an aggressive and sometimes very public activist attempts at “encouraging” the desired corporate behavior, does not focus on risk management.

Einhorn's performance shows hedge fund alpha is the most difficult to replicate -- and to repeat

In reality, however, do Loeb and Greenlight shine a light on the fact that alpha is the hardest hedge fund element to replicate? It is hard to replicate because it's discretionary nature is so unpredictable. Alpha is akin to a roller coaster: tremendous highs and accolades that denote genius when market beating returns cause a manager to consider himself invincible. But then a terrifying crash when the reality is understood. The truth, of course, is that no fund manager is invincible and that the real promise of a hedge fund manager, the talent that matters most, might be found in their ability not to predict the correct number on a roulette wheel but rather to manage winnings during the down periods. Crisis risk management puts the "hedge" into hedge fund.

What's happening with medical / pharma roll-ups? Supply and demand in too much alpha chasing too few targets

Two of Third Point’s long holdings should be put into perspective. Amgen and Allergan, which have been down significantly recently, might be negatively impacted by a growing competition among medical and biotech roll-up firms. As reported in ValueWalk, Allergan’s public display of affection for the medical roll-up game, a wake-up slap in the corporate face it learned from Valiant, has great long potential – so long as free-market competition doesn’t come in and drive up the prices of the desired target. Buying the rumor on Allergan was better than the actual news.

That’s risk management that can be understood not only through a fundamental lens but also a systematic one. A volatility and price trigger in a well-integrated hedge fund strategy might have determined that putting the word “hedge” back into the definition of the hedge fund might have been most appropriate.

The post Einhorn Has Brutual Q3, Down 16.9 Percent Year To Date appeared first on ValueWalk.

David Einhorn Greenlight Historical Investment Returns - rough yr - more on that topic here

The post David Einhorn Greenlight Historical Investment Returns appeared first on ValueWalk.

Deep Value Investing: How The World’s Best Investors Beat The Market by Tay Jun Hao LLB Law (Hons), The Asia Report

Get The Timeless Reading eBook in PDF

Get the entire 10-part series on Timeless Reading in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

BP PLC

Why not learn adopt the strategies and habits of people who’ve already succeeded?

The Timeless Value Approach

• Leon Cooperman $3.7 Billion
• Edward Lampert $2.9 Billion
• Bill Ackman $2.5 Billion
• Howard Marks $2.0 Billion
• David Einhorn $1.9 Billion
• Seth Klarman $1.5 Billion

What is Deep Value?

Is it better to buy cheap companies at good prices, or wonderful companies at fair prices?

Results of Deep Value

Deep Value in Emerging Markets

Results of Deep Value

We must have earned an average of some 20 per cent per year from this source.... - Graham on buying stocks selling below liquidation value

Is Buffett a Deep Value Investor?

“You have to turn over a lot of rocks to find those little anomalies.

You have to find the companies that are off the map –way off the map.

You may find local companies that have nothing wrong with them at all…

Having a lot of money to invest forced Berkshire to buy those that were less attractive.

With less capital, I could have put all my money into the most attractive issues and really creamed it.”

The Heart of Deep Value Investing

If we avoid the losers, the winners will take care of themselves. - Howard Marks, Oaktree Capital

Annualized Gains of Funds –19% per annum net fees

Case Study: Popular Holdings

• Suffered a "loss" in 2009, mainly non cash charge
• Deleveraged balance sheet since 2009
• Core business was producing significant free cash flow

What’s Our Downside? - 2010 Annual Report

• Market Capitalization at 2011:

$130 Million, $0.16 per Share

See full slides below.

The post Deep Value Investing: How The World’s Best Investors Beat The Market [Slides] appeared first on ValueWalk.

St. Joe Company, a real estate development and operating company, agreed to settle the charges filed by the Securities and Exchange Commission (SEC). The company’s former top executives and two former accounting department directors also agreed to settle the charges against them.

The company was accused of practicing improper accounting for the declining value of its residential estate developments during the financial crisis.

Einhorn shorted St. Joe Company in 2010

In 2010, David Einhorn of Greenlight Capital shorted the shares of St. Joe Company. The hedge fund manager said the company is similar to a “moonscape” rather than a luxury development. He noted that the company overvalued its real estate holdings.

The following year, the SEC launched an investigation against the company. St. Joe Company announced that its Board of Directors decided to explore financial and strategic alternatives to boost shareholder value. The company hired Morgan Stanley to help in its comprehensive and thorough review of alternatives.

At the time, Bruce Berkowitz, the portfolio manager of Fairholme Fund, was the largest shareholder of St. Joe Company. He defended St. Joe Company against the attacks of Einhorn.

Berkowitz’ Fairholme Capital Management owns 32.3% of St. Joe Company based on its 13D filing earlier this month.

St. Joe Company violations

According to the SEC, St. Joe Company overstated its earnings and assets in 2009 and 2010. The findings of the Commission proved that Einhorn was right.

St. Joe Company failed to include all the necessary costs in impairment testing including all cash outflows in 2009 until the second quarter of 2010.

The company failed to consider alternative courses of action related to its Victoria Park Project. The Commission found that the company considered only one single course of action—fully developing the property until 2029. If the company considered that likelihood of a potential sale of the property by the end of 2009, it would have been required to impair Victoria Park by at least $55 million in its 3Q 2009 filing, which is a significant amount.

The SEC also found that the company’s, COO Britton Greene, CFO William McCalmont, CAO Janna Connolly, Manager of Finance Brian Salter, andAccounting Director Phillip Jones failed to identify or correct any errors in St. Joe Company’s financial before 2010, when it was accused of overvaluing its real estate development assets and failing to take material impairment charges.

The Commission found that Salter used assumptions generated in conducting the impairment testing after the quarter ended September 30, 2010.
St. Joe Company’s executives failed to review or effectively cause a review of its accounting for its previous financial statements and correct the errors. They also failed to use existing approved assumptions for the Q3 2010 impairment testings.

They applied unreasonably high beachfront pricing for impairment purposes and failed to disclose a significant change in strategy. Furthermore, St. Joe Company failed to maintain adequate books-and-records concerning its impairment testing of real estate developments.

St. Joe Company deprived investors of critical information

In a statement, Andrew Ceresney, Director, SEC Enforcement Division emphasized that it is important for those responsible for the accounting and financial reporting of a company to be familiar with the specialized accounting rules and properly apply it.

According to him, “St. Joe and its senior executives failed to do” their obligations, and “deprived investors of critical information with which to make informed investment decisions.”

On the other hand, Stephen L. Cohen, associate director, SEC Enforcement Division said, “St. Joe’s financial statements repeatedly failed to accurately reflect the declining value of its most important assets during the financial crisis.”

Settlement agreement

St. Joe Company agreed to pay a civil penalty of $2.75 million to settle the charges of the SEC.

Mr. Greened agreed to pay a $120,000 fine and disgorge ill-gotten gains of $400,000 plus prejudgment interest. Mr. McCalmont agreed to pay a $120,000 penalty and disgorge $180,000 plus prejudgment interest. Connolly agreed to pay a $70,000 penalty and disgorge $60,000 plus prejudgment interest. Mr. Salter agreed to pay a $25,000 fine.

The three executives also agreed to be suspended from appearing or practicing before the SEC as an accountant. They have the right to apply for reinstatement after two years (in the case of McCalmont and Jones), and after three years (in the case of Connolly and Salter).

Furthermore, they agreed to cease and desist from committing or causing any future violations of the provisions for which each was charged.

The post Einhorn Wins As St. Joe Company Settles With The SEC appeared first on ValueWalk.

David Einhorn, despite a 14.2% portfolio loss in the third quarter, thinks that the SunEdison stock sell-off is overdone, expects CONSOL will be cash flow breakeven and continues to be long in gold. See his remarks from the Greenlight Re conference. Audio and transcript below.

Also make sure to check out David Einhorn‘s Q3 letter here.

David Einhorn – Greenlight Capital Re, Ltd. – Chairman

Thanks, Bart, and good morning everyone. The Greenlight Re investment portfolio lost 14.2% in the third quarter, bringing the year-to-date return to minus 16.9%. Our biggest detractors in the quarter were long investments in CONSOL Energy and SunEdison. We continue to hold positions in both companies and believe that each was traded at a price that severely understates the fundamental value of the business.

A number of our other longs including Apple, AerCap, Chicago Bridge & Iron and General Motors also sold off during the quarter on worries about the impact of a slowdown in emerging markets.

CONSOL Energy’s stock price dropped 55% in the third quarter, far outpacing the drop in coal and natural gas prices. The market remains [rapidly] focused on the near-term prospects for Appalachian coal and natural gas and is overly discounting the Company’s long-term resource value. CONSOL’s management is taking measures to improve operational efficiency while growing its production. Even at current depressed commodity prices, we expect the company will be cash flow breakeven or better from here as the management team is focused on cost cutting and reducing CapEx without sacrificing production.

A number of factors contributed to SunEdison’s stock price collapse in the third quarter. Just as investor appetite for energy dividend flow through structures began to vain, SunEdison launched the IPO of TerraForm Global, a yield-co created to purchase emerging markets’ projects. As the share price of both SunEdison and its related yield vehicles fell, the company effectively lost access to the capital markets and the market worried that SunEdison could run out of money in the absence of a natural buyer for its projects. We think the sell-off is overdone; SunEdison management has adjusted its strategy in response to the falling stock price. The company has raised additional equity, identified a third party to buy its projects, and slowed its development pipeline. We think the situation has stabilized and we see the potential for a significant recovery in the stock price from current levels.

Our short book contributed 7.5% in the third quarter and helped offset some of the negative performance in our long portfolio. The winners include Mallinckrodt in Keurig Green Mountain.

During the quarter we added two new medium-sized positions in Michael Kors and UIL Holdings. Michael Kors’ shares fell after a disappointing first quarter. But we believe the fall product line has much improved and the company has multiple avenues of growth going forward. The company has a net cash balance sheet in trades at a single-digit multiple of expected earnings.

UIL Holdings is as an owner and operator of regulated utility assets and announced a merger with Iberdrola USA in February that we believe will result in a less levered entity than its peers with a large tax asset and attractive renewables cash flows that are not fully reflected in the current stock price.

We reduced our gross exposure by 30 points in the quarter. Our net exposure increased slightly from 21% to 26% as we covered several shorts during the market sell-off in August. We continue to hold macro positions including gold, short Asian currencies and short French sovereign bonds. Overall, it’s been a challenging environment. We are optimistic that we should get some recovery from our beaten down long portfolio.

The post David Einhorn Still A Believer In Gold, SunEdison, CONSOL appeared first on ValueWalk.