Recent Hedge Fund Letters

Japanese Yen: 100, Wall Street: 0

May 19, 2013

In a recent article in The Wall Street Journal by Alex Frangos, “Top Banks Missed Call Y100 Level Soon,” it was reported that not a single Wall Street analyst from a hedge fund, bank, or any other financial entity predicted that the Japanese Yen would fall to 100 to a US Dollar so soon.  As detailed in a previous article on this site, many asset managers have been crushed in the foreign currency markets, as a result.  The same was true from the same economic forces for those in commodities, particularly gold, as also followed in an article on this site.

As reported by Frangos, “Who among Wall Street’s brightest currency minds predicted four months ago that the yen would get to 100 per dollar so soon? Nobody, that’s who. None of the currency analyst teams among the top 15 currency-trading banks surveyed by Dow Jones Newswires at the end of last year penciled in ¥100 to the dollar by the second quarter.”

The quantitative easing efforts of global central bankers have routed many in the financial community who did not adapt to the new paradigm.  While the almost three years since the introduction of Quantitative Easing III in August 2010 has witnessed the downgrade of the United States by Standard & Poor’s with continuing threats of similar actions, the US Dollar has soared.  The chart below shows how the exchange traded funds for the US Dollar (NYSE: UUP) has surged while that for the Japanese Yen (NYSE: YCL) has stumbled.

Wall Street analysts missed the shift in investors in moving from traditional safe haven assets such as gold (NYSE: GLD) and the Japanese Yen to the US Dollar.  It was too big to recognize, as it has involved trillions in currencies being created by global central bankers around the world.  This has taken place from expanding the balance sheets of the Federal Reserve, the Bank of Japan and across The Pond at the Bank of England (the chart below shows how the Pound (NYSE: FXB) has fallen against The Greenback in recent market action).  Asset swaps then help to balance out each central bank’s position to help quell the markets.

There is so much capital in circulation now that the US Treasury market is the only one capable of providing the needed liquidity.  The still struggling American economy combined with political scandals and trillion dollar deficits has not deterred foreign investors.  In March,  foreign demand for Treasuries securities increased.  Both the Japanese and Chinese were net sellers, however.

It is not like the direction of the Japanese Yen was more than subtlety signaled.

Prime Minister Shinzo Abe ran on a platform, as outlined in his speech to the legislature from this video, of stimulating the moribund Japanese economy which is now well into the second decade of “The Lost Decade.”  There was only one way to do that: massive intervention by the Bank of Japan, following in the path of the  Federal Reserve under Chairman Ben Bernanke.

It was resulted in the same set of odd circumstances.

The Yen is weak as the Japanese economy just posted record growth with the Nikkei Index hitting a 5-year high.  The same holds truye for the Dow Jones Industrial Average soaring with the American economy so anemic.  So much for what hedge fund legend Jim Rogers said about a weak currency being a sign of a weak economy, which is a sign of a weak government.

There is no end to quantitative easing in sight.  But the political leaders in the United States, Japan and Great Britain have openly conveyed their objectives: to utilize monetary policy to maintain a low interest rate environment to create jobs through greater investment.  The Federal Reserve continues to acquire $85 billion worth of Treasury bonds and mortgage-backed securities each month to revitalize the American economy.  That can be expected to continue, as will similar efforts in Japan and Great Britain.

There is a Chance for Hedge Funds to Buy Cheaper than Buffett on His Latest Acquisition

May 18, 2013

There is certainly no shortage of admirers of Warren Buffett, “The Oracle of Omaha,” in the hedge fund community, ranging from Seth Klarman, founder of the Baupost Group,  to Eddie Lampert, the founder of ESL Investments.

Klarman, as detailed in a previous article on this site, is known as the “Oracle of Boston as his investment strategy so resembles Buffett’s.  Reading every shareholder letter of Buffett’s, Lampert is regarded to have bought Sears Holdings (NASDAQ: SHLD) to replicate Berkshire Hathaway (NYSE: BRK-A) as an investment vehicle to fund other acquisitions from its cash flow. as reported in another article on this site.  But it is safe to assume that few expected Buffett’s recent investment in Chicago Bridge & Iron (NYSE: CBI).

That the share price of Chicago Bridge & Iron was up more than 8% for the week after the announcement of Buffett’s buying is testimony to that!

Based in The Netherlands, Chicago Bridge & Iron is a construction company with a global presence and a focus on the energy sector.  It operates in three segments: Lummus Technology, Steel Plate Structures, and Project Engineering and Construction.  None of those businesses are exactly glamorous, which is what Buffett seeks for his investing.

The returns and margins are hardly stellar, either: the profit margin for Chicago Bridge & Iron is 4.57%.

That is about half the average for a member company of the Standard & Poor’s 500 Index.  But that has never been the most important indicator for Buffett as the profit margin for Heinz (NYSE: HNZ), a recent acquisition, is just 9.20%.  Wal-Mart (NYSE: WMT), another major holding of Berkshire Hathaway’s, has a profit margin of only 3.78%.  Along with disclosing the investment in Chicago Bridge & Iron, it was also reported that Buffett bought more shares of Wal-Mart for the holdings of Berkshire Hathaway.

What Chicago Bridge & Iron does have is a wide economic moat that Buffett values so highly.  According to Buffett, “ In business, I look for economic castles protected by unbreachable moats.”    Simply described, an economic moat is what protects a business against time and competition.  That is why Buffett invests so heavily in railroads (Burlington Northern Santa Fe), utilities (Mid-American), and companies with brand names such as Wal-Mart and Coca Cola (NYSE: KO) that are virtually  impossible to challenge.  As Buffett said in an article in Fortune, “If you gave me $100 billion and said, ‘Take away the soft-drink leadership of Coca-Cola in the world’, I’d give it back to you and say it can’t be done.”

The economic moat for Chicago Bridge & Iron is evinced by its founding in 1889, and its soaring sales growth of today.  For the last quarter,  the sales growth is up more than 80% for Chicago Bridge & Iron.    According to the analyst community, it is projected to increase by an average of 21.63% over the next five years.  With a projected forward price-to-earnings ratio of just 12.06, down from the present 22.06, Chicago Bridge & Iron is poised for growth.  As the chart below shows, Chicago Bridge & Iron is up 33.36% for 2013 (some of that can be attributed to The Buffett Effect, when the stock prices rises as it is disclosed he has invested in the company).

Where the opportunities lie for other hedge fund managers to imitate Bufett is that Chicago Bridge & Iron is a very volatile stock with a modest market capitalization.   The market capitalization for Chicago Bridge & Iron, after the recent Buffett Effect surge, is just 6.61 billion; with a beta of 2.31.  That means that the stock price of Chicago Bridge & Iron moves more than twice as much as the stock market as a whole

By contrast, the market capitalization of Coca-Cola is over $190 billion with a beta of around 0.50.  It is a similar story with Wal-Mart: a market cap of over $256 billion for the world’s largest retailer with a beta of just 0.34.  For the other hedge funds, the volatility of Chicago Bridge & Iron could allow for buying on the dips and getting in on a better price than Buffett.

Hedge Funds Should Not Expect Central Bankers To Make The Red Metal Shine

May 17, 2013

In a recent article on this site, “Do Hedge Funds like ‘Helicopter Ben,’” hedge fund managers such as David Einhorn of Greenlight Capital and Stanely Drukenmillar of Duquense Capital expressed their concerns about the monetary policies of Federal Reserve Chairman Ben Bernanke.  Misreading these quantitative easing efforts have resulted in massive losses for currency investments and gold hedge funds managed by John Paulson and many others, as detailed in other articles on this site.  Hedge fund managers should not expect central bankers to allow easy profits in trading copper, as happened with “The Red Metal” during the earlier rounds of quantitative easing.

Due to the massive amounts of fiat currencies being created by expanding the balance sheets of central banks rather than from greater economic production in countries, commodities such as gold, copper, oil and others soared in the early rounds of quantitative easing.  This was particularly true after Quantitative Easing II was announced by Federal Reserve Chairman Ben Bernanke in a speech at Jackson Hole in August 2010.  Quantitative Easing II consisted of the Federal Reserve buying about $700 billion in Treasury securities from November 2010 through June 2011.

This was part of Federal Reserve Chairman Ben Bernanke’s effort to maintain a low interest rate environment to revitalize the housing and stock markets, which would hopefully lower unemployment in the United States and around the world.  As this was impossible to do by relying on global capital markets as there was no demand for these securities at such low interest rates, the Federal Reserve was forced to expand its balance sheet from around $700 billion in 2007 to about $3.35 trillion now, as recently reported.  These purchases that are increasing the balance sheet of the Federal Reserve are growing at a rate of $85 billion a month, from buying of Treasury bonds and mortgage-backed securities.

At first, commodities soared as speculators fled paper money for hard assets.

But this has not been the case since Quantitative Easing III was announced by Bernanke in September 2012.  While there was an initial run up in the price of copper, as show by the chart below of the exchange traded fund for The Red Metal, (NYSE: JJC), it has since fallen.  Just as the increase was due to the actions of global central bankers, so has been the decline.

Due to the efforts to keep interest rates as low as possible, assets that pay yields have become more in demand.  That is not commodities such as The Red Metal.  While there are some companies such as BHP Billiton (NYSE: BHP) that are active in copper and have healthy yields, the lack of demand for industrial metals has kept investors away.  For 2013, BHP Billiton is down 12.38%, as an example.

The falling price of gold, oil, copper, and other metals play into the hands of global central bankers.  Every dollar that buys an ounce of gold is one less dollar that could go into a job creating investment.  By crushing these assets, the Federal Reserve and others make needed productive investments more appealing.

In addition to diverting investment capital away from companies, speculators drive up the price of copper and oil.  These commodities, unlike gold, are needed for the factories and farms of an economy to produce.  If speculators drive up the price of oil and copper, it is much for expensive for the businesses who need it create goods and services.  That reduces economic growth, keeps unemployment high, and creates crippling inflationary conditions.

It has been a difficult year for The Red Metal.

While the Dow Jones Industrial Average and Standard & Poor’s 500 Index are both up in double figures, the JJC is down 10.68%.  For the last week of market action, the JJC is down by 2.05%.  Hedge fund managers long on copper hoping for speculative gains should not expect any assistance from central bankers.

Do Hedge Funds like ‘Helicopter Ben’?

May 17, 2013

Scrutiny over the Federal Reserve’s liquidity program and the degree, to which inflation could become uncontrollable, had had little impact on equity market sentiment and consumer demand. Although the economy is still in a fragile space, the rocketing returns of the S&P have led many to believe that the bond purchasing programs have been a complete success. Such a statement comes in contrast to the views of a number of prominent hedge fund managers including Stanley Druckenmiller, Paul Singer and Greenlight Capital’s David Einhorn.

The ‘Helicopter Ben’ analogy continues to follow Bernanke and the Fed, even as they restructure the liquidity program. As you may remember, the tag was given to Ben Bernanke when he jokingly offered to throw money from a chopper to induce spending. Still contentious, the almost toxic relationship with hedge funds has crystallised into a love hate affair in 2013. Is this down to the politics or can these managers see something that the rest of the market is missing?

Stanley Druckenmiller – Duquesne Capital

A vocal advocate to the feds quantitative easing program, Druckenmiller was quoted as saying:

“Bernanke is running the most inappropriate monetary policy in history.” (Stanley Druckenmiller)

His long term opinion of the market comes in stark contrast to much of the current sentiment, with the Duquesne supremo highlighting the potential for an explosion in inflation and interest rates. On a short term basis, he has cited that the liquidity in the market has given rise to quick investment opportunities.

Paul Singer – Elliott Management

Strong in his condemnation of the steps taken by the Fed, Singer is forecasting an adjustment in the first world economies. In essence he has cited the two speed economy, with large corporations benefiting from excess liquidity and the consumer struggling to adjust to new prices and living costs. Rising CPI and the disparity of balance sheet debt has led to Singer voicing his disgust for Bernanke and the Fed’s decisions.

David Einhorn – Greenlight Capital

In late 2012, Einhorn was pressed on quantitative easing and its long term ramifications. He was quoted as saying:

“One jelly doughnut is a great snack. Two is indulging. Six is an eating disorder. Twelve is a fraternity hazing. You can have far too much of a good thing; that’s where we are now with monetary policy.” (David Einhorn)

With a view that falls in line with Singer and Druckenmiller, the Greenlight Capital chief identifies a problematic inflationary disparity in the coming years. Unlike the other two hedge fund managers, Einhorn is politically affiliated to the democrats, with a contrasting view to Bernanke, the Fed and Administration.

Dan Arbess – Xerion

One such manager that professes to support an injection directly into the economy by the Fed is that of Xerion’s Dan Arbess. Recently in a speech to the Milken Institute, he highlighted the need for direct investment into companies rather than through the banking system. In essence the printing of money. Some suggest that the limited spending and reduced investment by banks could be the reason that inflation has been manageable to date.

I Cahn Buy Dell

May 16, 2013

The proposed management buyout of Dell by its founder Michael Dell hit a snag in March, when Carl Icahn voiced his concern over the transaction. Holding an estimated 6% of the stock, the billionaire hedge fund manager is synonymous with shareholder activism.  Right from his early investment days, Icahn has modeled his portfolio on discounted companies with top heavy or weak management. TWA in 1985 was one of the more infamous examples of corporate raiding by Icahn, with the airline going through a significant restructuring process in the 90s.

Dell in no sense can be compared to TWA, with the tech giant posting relatively solid Sales and Revenue figures in 2011 and 2012. For Carl Icahn, the strong financial base coupled with an oversold stock price meant the company fell in line with his investment universe.

Other Players

Media speculation surrounding Dell in March also unearthed other interested parties which included Blackstone Private Equity, and Silver Lake. Michael Dell’s bid to privatize the company has been backed by private equity firm Silver Lake.  Current shareholder Southeastern Asset Management came into the fray late in April, after chastising the founder and his board for undervaluation of the stock value.

Deal Specifics

According to reuters, the private equity giant Blackstone was looking to outbid Dell’s $24.4 billion offer by 10%. This never materialised with the company pulling out of the race in mid-April. In May, two of the largest institutional stock holders; Southeastern Asset Management (SAM) and Icahn Partners disputed the proposed privatization, with both parties indicating that the stock value was considerably higher than the $13.65 a share offer. Setting a $20 valuation, Southeastern Asset Management wrote to the board, reiterating the current shareholder and asset value that existed in the company. In a move to block Michael Dells’ proposal, Carl Icahn offered shareholders a cash stock deal, which would put the valuation past the $20 mark. Such a move would also lead to a board restructuring with the hedge fund manager confirming a possible exit for Michael Dell. This would also translate into a seat relinquished on the board.

Opportunities & Risks

The transaction size is somewhat opportunistic and risky for both suitors. Dell’s assets coupled with strong revenues from its pc division are an attractive option for any buyer; however the degree to which the company can manage its debt obligations and adapt to the changing tablet environment will be critical to bottom line revenues. Icahn’s offer, although providing value to shareholders translates into more debt and a shortfall in cash. This could hinder future takeover opportunities and put adverse strain on the balance sheet.

What Does Klarman See in BP?

May 16, 2013

Seth Klarman, founder of the Baupost Group, is sometimes referred to his generation’s Warren Buffett.  Called “The Oracle of Boston” in an article in The Economist, it was recently disclosed that Klarman has added to an already sizable  position in BP (NYSE: BP), the embattled oil giant based in London.  While two of the largest positions of Berkshire Hathaway (NYSE: BRK-A) are ConocoPhillips (NYSE: COP) and Chevron (NYSE: CVX), Buffett has not acquired any shares of BP.

What attracts Klarman to BP that Buffett does not find as alluring?

While many other oil companies have surged with the rest of the stock market, BP is up only 5.24% for 2013.  By contrast, Chevron is higher by 14.41% for the same period.  Over the same time segment, ConocoPhillips has risen by 8.88%.

When buying the shares of an oil company, an investor is buying into economic growth around the world.  As detailed in a recent article on this site, hedge funds are heavily invested in oil assets.  The largest oil consumers are also the largest economies, which is certainly no surprise.  For the United States and China, economic growth is down considerably from the pre-Great Recession era.

But there are signs that growth is picking up around the world.  Japan just posted 3.5% gross domestic product growth for the first quarter.  Its stock market, the Nikkei Index, is now at a five year high.  If the economic stimulus policies of the Bank of Japan can revitalize the economy so that the island nation emerges from the over twenty years of the “Lost Decade,” than the global demand for oil will increase.

The economic stimulus measures of the central bankers around the world also increase the price of oil.  When fiat currencies fall in value, commodities such as oil rise as speculators pile into hard assets.  Rex Tillerson, the Chief Executive Officer of ExxonMobil (NYSE: XOM), the world’s biggest oil company, testified before Congress back in 2010that a barrel of crude was trading at a 50% premium due speculators driving up the price.

According to Tillerson’s testimony, a barrel of oil, based on the fundamental of basic economic demand, should be trading around $60.  At that time, it was about $90.  It is still in that range.

There is still much to like about BP as a company.  It has appeal to the value school of investing that Buffett embraces as the price-to-sales ratio is just 0.34.  That means that each dollar of sales for BP is priced at a 66% discount.  By contrast, the price-to-sales ratio for Chevron is 1.00.  For ConocoPhillips, it is 1.26.

Both ConocoPhillips and Chevron are trading so rich no doubt due to “The Buffett Effect” that takes a stock price higher when it is known that “The Oracle of Omaha” has bought shares as the price-to-sales ratio for ExxonMobil is only 0.89.

It also pays dividend income to the owners that Buffett also favors.  The dividend yield of BP is 5.05%.  For Chevron, it is 3.26%.  Conoco Phillips pays a 4.23% income stream to its shareholders.

As the chart below shows, BP has not soared like Chevron in the new year.

The same holds true for the stock performance of Conoco Phillips, as revealed by the following chart.

BP is very attractively priced as a major oil company.  Based on the price-to-sales ratio, it is undervalued.   The price-to-earnings growth ratio is equally tempting as it too is priced much lower than that for Exxon Mobil, ConcoPhillips, and Chevron.  Increasing his position in BP has Klarman moving more into value investing than Buffett, widely regarded as the premier investor from that school of securities analysis.

No Apple a Day for Appaloosa

May 16, 2013

Apple shares rounded out a weaker session on Tuesday with news that prominent hedge fund Appaloosa Management had divested a large holding in the tech giant. According to a 13F released, the fund reduced their stake by 41%, leaving their total value at 540,000 shares. This followed on from a Bloomberg report that cited a sell down by Soros funds Management. Is Apple losing its lustre among the hedge funds, or is this just a short term portfolio reweighting? Speculation certainly has surrounded the stock recently, with reports that competitor Samsung has been outselling on the handset front. Google’s gaming platform announcement has also put the cat amongst the pigeons, indicating that a software war could be preeminent.  Interestingly enough, not all hedge funds managers see these moves as an attack on Apple’s dominance. Greenlight Capital increased their holding in AAPL to 2.39 million shares whilst divesting their Google holding.

Appaloosa’ move comes at a time when Apple is still adjusting to the Tim Cook era. Investor sentiment is mixed with some analysts citing the Steve Jobs factor as the key to the company’s success. Is this the only reason hedge funds are exiting the stock, or has the fact that the company valuation and earnings outlook triggered selling?

Distressed Debt

David Tepper’s Appaloosa pre 2010, had a considerably different outlook on distressed debt, with stakes in the near bankrupt financial sector making up a large percentage of holdings. His recent confidence in the S&P500 and his disdain for the Federal Reserve liquidity program, could herald a return to the distressed space. In April according to the Financial Times, Appaloosa invested in the corporate debt of power company Energy Future Holdings. With a face value of half a billion, the investment equated to $100 million and a 15% yield. Although only a small stake, the investment could give a glimpse into the investment focus of Appaloosa and how bullish they are on certain sectors.

Tech Sector Opportunities

Another reason for the recent exit in Apple, could be the opportunistic nature of the tech sector. According to the 13F filed, Tepper increased his stake in Google at the same time of his divestment of AAPL. This came days after the hedge fund manager was quoted as saying that he was bullish on equities and was unsure as to whether Apple could deliver a new innovative product.  Google’s recent launch of a number of new offerings to their suite of products has spurred some interest in the stock. Streaming music services, cross game platforms could be some of the innovative approaches that could spur further buying in the tech giant.

Higher Retail Sales Boost Hedge Fund Positions in Sector

May 15, 2013

Retail sales came in higher by 0.1% in April, beating the Wall Street analyst consensus of an expected drop of 0.3%.  The jump in sales from stores and restaurants also topped the amount rung up at registers from April 2012 by 3.7%.  While investors greeted the news warmly, taking the Dow Jones Industrial Average higher by more than 100 points, these higher sales were embraced even more by the hedge fund community as Warren Buffett, George Soros, Eddie Lampert, Bruce Berkowitz and Bill Ackerman have major positions in retail stocks.

Investing in the retail sector has been a mixed experience for these billionaire investors.  Bill Ackerman of Pershing Square Capital, as reported in another article on this site, has lost heavily on paper with JC Penney (NYSE: JCP).  This has not deterred legendary investor George Soros from recently taking a major position in JP Penney.  As reported on this site, Soros Fund Management now owns 17 million shares of the embattled mid-market retailer, which is down almost 45% for the last year of market action.

As the chart below shows, the Soros buy has been responsible for the research surge in the share price of JC Penney.

Eddie Lampert and Bruce Berkowitz are heavily invested in Sears Holding (NASDAQ: SHLD), a merger of Sears & Roebuck and K-Mart.  This stock dominates both the portfoloies of Lampert’s hedge fund and his personal wealth.  It is also the second largest position in Berkowitz’s Fairholme Fund.  While Sears Holding has posted a strong quarter, it is down more than 8% for the last months, however.  Over the last year, though, Sears is up by 3.95%.

Wal-Mart (NYSE: WMT) is the sixth largest holding of Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A).  Buffett just increased the position in Wal-Mart by 1.4 percent in the fourth quarter of 2012.  For the last twelve months of trading, Wal-Mart is higher almost 40%.

Obviously, Buffett, Ackerman, Lampert, Berkowitz, and Soros did not get to become billionaires by telling the world why they buy what they do.  But there are certain features in the retail sector that are very attractive to hedge fund managers.  A major component that is alluring is the cash flow generated by the operations.

When the inventory is selling at a retail store, a float, much like that for an insurance company is produced.  That allows for the store to have “free money” to invest in other areas.  As Buffett wrote about this in a Berkshire Hathaway shareholder letter, remarking that, “Insurers receive premiums upfront and pay claims later. … This collect-now, pay-later model leaves us holding large sums — money we call “float” — that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. …”

In addition to the cash flow, some retail stores have solid dividend incomes.  Wal-Mart is a “Dividend Aristocrat.”  That means that it has increased its dividend annually for at least the last 25 years.  At present, Wal-Mart pays a dividend of 2.39%, which is above the average for a member company of the Standard & Poor’s 500 Index and much higher than would be earned in a bank account.

There are also value investing aspects, too.  JC Penney and Sears are touted for having real estate assets that are tremendously undervalued by their major investors, as reported in another article on this site.  According to these sources, the real estate is worth more than the entire market capitalization for the companies!

With the economy recovering from The Great Recession, there should be more growth ahead for the retail sector.  April’s sales numbers certainly support that position.  For hedge fund managers, the retail sector offers, in one form or another, growth, value, and income gains.  That certainly explains why it has attracted investors as diverse as Warren Buffett, George Soros, Eddie Lampert, Bruce Berkowitz and Bill Ackerman.

Loeb Jets to Tokyo as Sony Stock Price Takes Off

May 14, 2013

While shareholders of Sony Corporation (NYSE: SNE), the Japanese consumer electronics and entertainment giant, have benefited from the fall in the value of the Yen which has directly raised the stock price, there could be more gains ahead now that hedge fund manager Daniel Loeb of Third Point LLC is pushing to break the company up to maximize value.

For 2013, Sony Corp is up more than 85%.  Today it jumped over 9% on the news of Loeb’s intentions.  Sony has almost doubled in price over the last six months.  A great deal of this has to do with the declining Japanese Yen: as much as a currency for a nation plunges, its exported goods trade at that much of a discount with imported goods priced that much higher.

As the chart below shows, Sony has soared as the Yen has fallen in value.

Now owning 6.5 percent of the company, Loeb is hoping to take the stock price higher by forcing management to spin off part of its entertainment division.  Included in this are a Hollywood movie studio and music business, as detailed in a letter to Sony President Kazuo Hirai, that was first published in The New York Times.  According to reports, Loeb has flown to Tokyo to hand deliver the letter to Hirai  listing his demands to enhance stockholder value.

Loeb proposes that the proceeds of the sale be used to revitalize the manufacturing arm of Sony.  This unit should benefit the most from the falling Yen, as Japanese exports are more competitively priced with a cheaper Yen.   At present, Sony, even after the huge share rise, trades at a price-to-sales ratio of just 0.31 (every dollar of sales goes for a 69% discount in the stock price).  By contrast, the price-to-sales ratio for Apple (NASDAQ: AAPL) is 2.46.

Loeb has been active in these moves.  He is highly regarded for forcing out the chief executive and then bringing in a new one of his choice (Marissa Mayer) at Yahoo (NASDAQ: YHOO).  He was also successful in doing the same at Murphy Oil (NYSE: MUR).  With Murphy Oil, Loeb pushed for spinning off divisions, too.  He was rewarded as a stock owner in this: the share price of Murphy Oil is up more than 40% for the year.

It is certainly a propitious time to own shares of major Japanese exports such as Sony.  The Yen has fallen in value due to the quantitative easing measures of the Bank of Japan.  The new leadership in Japan is moving fast and hard to pull the country out of “The Lost Decade,” now in its 25^th year.

To do this, the Yen has to fall even more in value.

That makes Japanese exports cheaper and foreign imports more expensive.  Even though Japan just pledged at the G7 meeting that it would not engage in currency manipulation to revitalize the economy, the fall in the price of the Yen along with the rise in the stock price of Sony and other exporters says otherwise.  More of the Yen plummeting in value should be expected.

Loeb’s actions will almost certainly take the share price of Sony much higher.  Asset prices in Japan have not come close to recovering from the impact of The Lost Decade.  The combination of additional capital and a lower Yen should make Sony’s manufacturing operations much more profitable.  At present, the profit margin for Sony is just 1.53%.  The profit margin for Apple (NASDAQ: AAPL) is 23.46%.

The rapid decline of the Yen due to the aggressive moves of the Bank of Japan has caught many hedge funds unprepared, as detailed in other articles on this site.  Loeb’s move should concentrate investor attention on undervalued Japanese stocks, particularly with the Dow Jones Industrial Average and Standard & Poor’s 500 Index cruising into record territory.

Are Hedge Funds Becoming the Market in Real Estate?

May 13, 2013

In a recent article, a reporter for the Atlanta Journal-Constitution detailed how his family had visited 80 houses before finally buying one.  Several of the houses were snapped up by hedge funds, despite full price offers or better from the couple.  What J Scott Trubey wrote about in his first person piece, “80 trips to find the perfect house” is what many others have been experiencing as hedge funds have come to dominate the housing market.

Trubey tells how one bid was well over the asking price.  “We knew the house was hot, and we made an audacious bid-$8,000 above the asking price,” he wrote.  “But we lost.  Our Realtors said it was likely to a hedge fund, private investors scooping up homes.”

There are many reasons for hedge funds buying heavily into real estate markets across the country.  While housing prices have started to recover, many are still below the peaks before The Great Recession.  That cannot be said of equities with the Dow Jones Industrial Average and Standard & Poor’s 500 Index moving into record territory.

The chart below shows the rise in the exchange traded funds for home-builders (NYSE: XHB), the Dow (NYSE: DIA), and the S&P (NYSE: SPY).

That has also increased the amount of capital available for hedge funds to invest.  With so much more cash to deploy, the depressed housing market is a natural target.  Prices are still low with demand starting to increase.  That is an ideal situation for an investor. As Warren Buffett, who could easily be considered the greatest hedge fund manager in history, stated in an interview in February of this year,

“If I had a way of buying a couple hundred thousand single-family homes… I would load up on them… it’s a very attractive asset class now. I could buy…them at distressed prices and find renters and … [take a] mortgage, it’s a leveraged way of owning a very cheap asset and I think that’s as attractive of an investment as you can make.” 

Hedge funds have moved where Buffett has not…yet.

As Trubey describes about the struggle to buy a house with bids above asking price as, “There’s also another dynamic at play: Wall Street.  Big-name funds backed by millions of dollars are not only buying foreclosures hawked from county courthouses across the region, they’re also bidding against traditional buyers for single-family homes they plan to fix up and rent.” 

The allure of housing for hedge funds is combined by the dearth of other attractive investment opportunities that produce income, as detailed in other articles on this site.  Rental income generated by a property should easily top what is being paid by a stock or a bond.  The tax breaks for rental properties are also very attractive for increasing cash flow.

This massive buying of housing serves other purposes for hedge funds not mentioned by Trubey.

As real estate is about one-sixth of the American economy, it bolsters the recovery from The Great Recession.  That augments the returns from other hedge fund investments, particularly stocks.  Sector that prosper from a robust housing market include banks, consumer goods, retail stores, and home builders, among others,

In particular, a strong real estate market raises the value of mortgage-backed securities.  With the houses being bought, mortgage-backed securities are no longer sitting on classic “dead money.”   Assets written off that were grossly undervalued during The Great Recession are now becoming much more attractive with housing being sold.

With hedge funds investing in housing in the United States rather than gold or some other asset that does nothing to revitalize the American economy, there is reason to be much more bullish about recovery from The Great Recession.  As Buffett noted, “It’s a very attractive asset class now.”  For hedge funds, a rising housing market also lifts the value of other investments focused on the economy of the United States…with benefits for all!