Greenlight

With sequesters and loopholes the only two words that seem to matter in Washington (the latter more than the former as far as action), we suspect the popularity of the so-called 'Bermuda Triangle' tax dodge may raise more than a few eyebrows. Put simply, hedge fund managers create a Bermuda-based re-insurance entity, their clients (high-net-worth individuals) funnel their hard-earned gains through this offshore entity and back to the US hedge funds - dramatically reducing their personal income taxes. The re-insurers do a minimum of business to create the appearance of legitimacy but are enabling hedge fund investors to avoid paying high-rate income tax on any gains from the funds and growing tax-free while in the fund. Of course this is defended as "good tax management." Funds such as Paulson's, Third Point, Greenlight, and SAC all use this vehicle according to Bloomberg as a handy way to funnel a US hedge fund investment through a tax haven. It truly is good to be king...

• John Kerry just got happier: Berkshire Hathaway, 3G Buying Heinz for $72.50 a Share, or $28 Billion - ~20% premium to last price (CNBC)
• US Airways, AMR to Merge (WSJ) - can thousands of workers spell "synergies"?
• Draghi, Carney show ascent of "whatever it takes" central bankers (BBG) ... to preserve the Goldman way of life
• Euro zone economy falls deeper than expected into recession (Reuters)
• Soros has made $1 billion betting against the Japanese Yen (WSJ)
• Ex-Analyst at SAC Felt Pressured for Tips  (WSJ)
• Desalination Seen Booming at 15% a Year as World Water Dries Up (BBG)
• China's 'Wall' Hits Business (WSJ)
• Israel publishes some details as Australian spy mystery deepens (Reuters)
• Tata Motors Profit Falls 52% (WSJ)
• AB InBev Will Sell Corona Unit to Salvage Modelo Takeover (BBG)
• "Blade Runner" Pistorius charged with murdering girlfriend (Reuters)
• In Ohio and beyond, Obama sees model for manufacturing revival (Reuters)

• The Man Who Killed Osama bin Laden... Is Screwed (Esquire)
• G7 fires currency warning shot, Japan sanguine (Reuters)
• North Korea Confirms It Conducted 3rd Nuclear Test (NYT)
• Italian Police Arrest Finmeccanica CEO (WSJ)
• Legacy, political calendar frame Obama's State of the Union address (Reuters)
• China joins U.S., Japan, EU in condemning North Korea nuclear test (Reuters)
• Wall Street Fading as Emerging-Market Banks Gain Share (BBG)
• Berlin Conference 2.0: Drugmakers eye Africa's middle classes as next growth market (Reuters)
• Barclays to Cut 3,700 Jobs After Full-Year Loss (BBG)
• US Treasury comment triggers fall in yen (FT)
• ECB Ready to Offset Banks’ Accelerated LTRO Payback (BBG)
• Fed's Yellen Supports Stimulus to Spur Jobs (WSJ)
• Libor Scrutiny Turns to Middlemen (WSJ)
• Samsung Girds for Life After Apple in Disruption Devotion (BBG)

Turning your growth trade into a value trade is the quintessential sign of a losing trader on Wall Street. 

• Rate-Rig Spotlight Falls on 'Rain Man' (WSJ)
• Blizzard Cancels U.S. Flights, Threatens Snow in New York (BBG)
• Monti says he did not know of bank probes (FT)
• Japan's Aso: yen has weakened more than intended (Reuters)
• Japan Pledges Foreign-Policy Response to Territorial Incursions (BBG)
• Paratroops mutiny in Bamako in blow to Mali security efforts (Reuters)
• China, Japan engage in new invective over disputed isles (Reuters)
• Asteroid to Traverse Earth’s Satellite Zone, NASA Says (BBG)
• EU leaders haggle over budget tightening (FT)
• China Trade Tops Forecasts in Holiday-Distorted Month (Bloomberg)
• Buffett’s Son Says He’s Prepared Whole Life for Berkshire Role (BBG)

"Apple's management team and Board of Directors have been in active discussions about returning additional cash to shareholders. As part of our review, we will thoroughly evaluate Greenlight Capital's current proposal to issue some form of preferred stock. We welcome Greenlight's views and the views of all of our shareholders."

Two days ago we presented the complete hedge fund performance for 2012, in which it was clear that David Einhorn's Greenlight had a Q4 that did not go quite as expected, primarily as a result of AAPL plunging in the quarter, and his hated GMCR soaring, leaving his fund with a 8% return for the year (and -5% for the quarter), well below the general market and some of his far more vocal hedge fund peers. Those curious just what it is that caused this underperformance, here is the complete Greenlight Q4 letter discussing not only why Einhorn is doubling down in AAPL, why he still likes Marvell, Computer Sciences and Vodafone, as well as his continuing negative outlook on Iron ore, and the Yen. He closed out positions in WLP, MCO, DIA, ITX and PBI. In summary: "At quarter end, the largest disclosed long positions in the Partnerships were Apple, Cigna, General Motors, gold and Vodafone Group. The Partnerships had an average exposure of 114% long and 70% short."

The tension over the Greek buyback, which was supposed to be completed on Friday with satisfactory terms, i.e., holders of more than EUR30 billion of new bonds tendering, is rising following a report from Kathimerini that roughly EUR25-26 billion has been accounted for, short of the formal target needed to hit the deleveraging goal. Confirming that the biggest beneficiary from the buyback are foreign (mostly US-based) hedge funds, while the biggest loser are Greek banks, is the participation rate which has seen a majority of the tenders, EUR16 billion, come from hedge funds happy with a 100-200% return in a few months as explained previously. For the banks the pain of writing down debt by two thirds once more after doing the same in March is far greater and explains why only EUR10 billion (of a total of EUR15 billion held by the sector) have been tendered into the buyback, by official Greek financial institutions who are also fearing retribution from shareholders despite official promises by the Greek FinMin they would be shielded from the fury of the people. That said, insolvent Greek banks have no choice if they wish to receive the billions in Troika funds used to replenish their underwater capital base and like it or not have to agree to the debt deal.

• Rough start for fiscal cliff talks (Politico)
• Europe Fails to Seal Greek Debt-Cut Deal in IMF Clash (Bloomberg)
• Japan’s Exports Reach Three-Year Low as Recession Looms (BBG)
• Beggars can be angry: Greek leaders round on aid delay (FT)
• More financial blogs launching soon: Financial Times Deutschland closing (Spiegel)
• China's backroom powerbrokers block reform candidates (Reuters)
• BOE Voted 8-1 to Halt Bond Purchases as QE Impact Questioned (Bloomberg). In the US the vote is 1-11
• UK heads for EU budget showdown (FT)
• Eurodollars - another epic scam: How gaming Libor became business as usual (Reuters)
• Clinton Shuttles in Mideast in Bid for Gaza Cease-Fire (Bloomberg)
• Fed Still Trying to Push Down Rates (Hilsenrath)

This is what the most brand name US hedge funds bought and sold in the third quarter.

With the star (and legend) of John Paulson long dead and buried, and his Disadvantage Minus fund an embarrassment, wrapped in a monkeyhammering, inside a humiliation, there are few "groupied" HF managers left. One of them is Dan Loeb, who still manages to generate positive Alpha regardless of how Beta does, another one used to be William Ackman (not so much anymore, especially not with the whole JCP fiasco), some others are David Tepper, Seth Klarman, and a few others, but nobody has quite the persistent clout and following of young master, and poker maestro, David Einhorn, and his fund Greenlight. Below we breakdown his latest just released 13F, which as a reminder shows, his holdings as of September 30. Key changes: Einhorn cut his holdings in Best Buy, Carefusion, Compuware, Expedia, Hess and UnitedHealth, and started new, small, positions in Yahoo, Babcock and Wilcox, Aecon and Knight Capital. More importantly, he cut his top position, Apple, by nearly 30% from 1.45 million to 1.09 million shares, cut modestly his second biggest position Seagate, added materially to GM, making it his third position, added to Cigna at #4 and added modestly to the GDX Gold Miners ETF. Sad to say, unless he has changed his portfolio dramatically since September 30, Einhorn is likely not doing too hot, especially in the last week or two.

Somewhere deep in the bowels of the world’s Western central banks lie vaults holding gargantuan piles of physical gold bars… or at least that’s what they all claim.

Our analysis of the physical gold market shows that central banks have most likely been a massive unreported supplier of physical gold, and strongly implies that their gold reserves are negligible today. If Frank Veneroso’s conclusions were even close to accurate back in 1998 (and we believe they were), when coupled with the 2,300 tonne net change in annual demand we can easily identify above, it can only lead to the conclusion that a large portion of the Western central banks’ stated 23,000 tonnes of gold reserves are merely a paper entry on their balance sheets – completely un-backed by anything tangible other than an IOU from whatever counterparty leased it from them in years past. At this stage of the game, we don’t believe these central banks will be able to get their gold back without extreme difficulty, especially if it turns out the gold has left their countries entirely. We can also only wonder how much gold within the central bank system has been ‘rehypothecated’ in the process, since the central banks in question seem so reluctant to divulge any meaningful details on their reserves in a way that would shed light on the various “swaps” and “loans” they imply to be participating in. We might also suggest that if a proper audit of Western central bank gold reserves was ever launched, as per Ron Paul’s recent proposal to audit the US Federal Reserve, the proverbial cat would be let out of the bag – with explosive implications for the gold price.... We realize that some readers may scoff at any analysis of the gold market that hints at “conspiracy”. We’re not talking about conspiracy here however, we’re talking about stupidity. After all, Western central banks are probably under the impression that the gold they’ve swapped and/or lent out is still legally theirs, which technically it may be. But if what we are proposing turns out to be true, and those reserves are not physically theirs; not physically in their possession… then all bets are off regarding the future of our monetary system.

George Soros more than doubled his shares in the SPDR gold trust ETF. He increased his position in SPDR Gold to $137.3 million in the second quarter from $52 million previously. SEC filing for the second quarter showed Soros Fund Management more than doubled its investment in the SPDR Gold Trust from 319,550 shares to 884,400 shares at the end of June. In September 2010 (see chart), Soros called gold "the ultimate bubble" and largely dumped his stake in the ETF before gold recorded annual gains in 2010 and 2011 and rose to a nominal high of $1,920.30 per ounce in September.  There was speculation at the time that he may have sold the SPDR trust in order to own far safer allocated gold bars. Another billionaire investor respected for his financial acumen is John Paulson and Paulson & Co increased its holdings by 26% by purchasing an additional 4.53 million shares of the SPDR Gold Trust to bring entire holding to 21.8 million shares.  It was the first time Paulson & Co had increased its position in the SPDR Gold Trust since the first quarter of 2009, when the investment firm initially acquired 31.5 million shares. It means that Paulson's $21 billion hedge fund now has more than 44% of the company's assets allocated to gold.

Q2 hedge fund reporting season has come and gone. Below is a summary of the key funds, and who held what at the end of June.

Update: they are making it up as they go along:

TURKISH PM SAYS HAS NO FIRM INFORMATION ON ANY APOLOGY FROM SYRIA, WILL MAKE FURTHER STATEMENT AFTER SECURITY MEETING
TURKISH PM SAYS CANNOT SAY WHETHER TURKISH WARPLANE SHOT DOWN OR CRASHED, NO NEWS ON PILOTS - TURKISH TV

Looks like everyone is trying to position appropriately.

Update from Al Jazeera: Turkish PM says cannot say whether Turkish warplane shot down or crashed, no news on pilots.

Just when the geopolitical tensions in the middle east appeared to be abating, and Brent was on a gentle glideslope to whatever price will greenlight the NEW QE now that fears of an Iran war have been very much silenced, things change. Reuters reports that Syria shot down a Turkish warplane on Friday, according to Lebanon's al-Manar television reported, "risking a new crisis between Middle Eastern neighbours already at bitter odds over a 16-month-old revolt against Syrian President Bashar al-Assad." "Syrian security sources confirmed to a Manar correspondent in Damascus that Syrian defence forces shot down the Turkish fighter jet," the Hezbollah-owned channel said." Here is the rub: Turkey is a NATO member, and by definition the alliance will have to come to Turkey's aid if requested. Syria, however is not just any country as has been made quite clear over the past several months of UN impotence: it is a critical staging ground for both Russia (which has a very critical regional naval base in the city of Tartus) and China, and according to the Jerusalem Post, the three countries are in preparation to conduct the "largest ever" war game. As such Syria, already gripped by fierce local fighting, where just like in Egypt and Libya the presence of US-based flipflop on the ground can be smelt from across the Atlantic, is merely a symbol. The real implication is how far can little escalations push until finally the showdown begins, with NATO on one side and Russia and China on the other?