Third Point

With Paulson's star long gone down, there are few remaining "new generation" hedge fund wunderkinds, especially in a world in which the best performing hedge fund is Federal Reserve Capital LLC - Onshore Fund. One among them is Third Point's Dan Loeb, who continues to be one of the best performing hedge fund managers for the 4th year in a row. He just filed his Q1 13F, amounting to $5.3 billion in disclosed long equity positions, which are summarized below. Of note are the following changes:

• New stakes in Virgin Media ($538MM), Tiffany ($188MM), Anadarko ($105MM), Thermo Fisher ($99MM), Cabot Oil and Gas ($84MM), Hess ($72MM) and others. Some of these overlap with the initiations of David Tepper and David Einhorn especially Hess: did some "idea dinners" take place in Q1 we were not aware of?
• Fully exited stakes in Tesoro, Morgan Stanley, Nexen, Symantec, Herbalife, Illumina, Coke, PVH, Abbott Labs and others.
• Reduced positions in Yahoo, AIG, New Corp, Murphy Oil, Delphi, Lyondell and others
• Added to stakes in International Paper, Abbvie, Dollar General, Constellation, and Ariad

• Controversies give Obama new governing headaches (Reuters)
• About that Capex... BHP to Rein In Investment, Chief Says (WSJ), considers returning cash to shareholders (FT)
• Bloomberg users’ messages leaked online (FT)
• Japanese mayor sparks China outrage with sex-slave remarks (Reuters)
• Economists Cut China Forecasts (WSJ)
• U.S. oil boom leaves OPEC sidelined from demand growth (Reuters)
• U.S. banks push back on change in loan loss accounting (Reuters)
• Fed’s Plosser Says Slowing Inflation No Concern for Policy (BBG)
• Watchdog probes 1m US swap contracts (FT)
• Used Gold Supply Heads for ’08 Low as Sellers Balk (BBG)
• Ex-BlackRock Manager Said to Be Arrested in U.K. Probe (BBG)

Can Sony repeat the magic of the Walkman, the Playstation and the Trinitron? Maybe, maybe not not, and judging by the stock price, soaring recently due to the plunge in the Yen which to many implies a ramp in future profitability (the jury is still out on that), it may not have to. However, activist investor Dan Loeb is not waiting. In a letter filed overnight, Third Point announced it has accumulated 64 million shares in the one time electronics and entertainment giant, making it the largest single shareholder of Sony. As a result, Loeb has a suggestion which is to partially (15-20%) spin off Sony Entertainment, in which Third Point would backstop a $1.5-$2 billion rights offering, with the resulting liquidity could go to boost Sony Electronics, as well as push off debt into the newly-created entity, reducing leverage at the parent company. Following this, the company could focus on restructuring Sony Eletronics, where Loeb believes there is untapped value, which could be as large as ¥725/share when factoring in for EURJPY moves. End result, Loeb sees 60% upside in Sony stock. We wish him the best of luck: other firms, such as Warren Lichtenstein's Steel Partners attempts to go activist in Japan in the past decade have largely crashed and burned. Perhaps for Loeb, the time of Abenomics will be different.

• Microsoft prepares U-turn on Windows 8 (FT), Microsoft admits failure on Windows 8 (MW), After Bumpy Start, Microsoft Rethinks Windows 8 (NYT)
• China reports four more bird flu deaths, toll rises to 31 (Reuters)
• Republicans shift stance on US budget (FT)
• NYC Tallest Condo Corridor Gets New Entrant With Steinway (BBG)
• U.S. Says China's Government, Military Used Cyberespionage (WSJ)
• China rejects Pentagon charges of military espionage (Reuters)
• Bank of China Cuts Off North Korean Bank (WSJ)
• Libya defense minister quits over siege of ministries by gunmen (Reuters)
• London Recruiter Says City Job Vacancies Rose 19% (BBG)
• Colleges Cut Prices by Providing More Financial Aid (WSJ)  or, said otherwise, loans
• Jeweler agrees to plead guilty in KPMG insider-trading case (LA Times)

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)

While the initial response to last week's YHOO earnings was afterhours euphoria all of which fizzled in the first hours of trading, sentiment on the firm which has yet to do more than merely promise may sour in the coming days even more following news late on Friday that the company's formerly staunchest advocate, Third Point's Dan Loeb sold some 15% of his stake, or 11 million of 73 million shares on Thursday and Friday at a price between $19.68 and $19.70. The remaining stake is now 62 million shares, which means Third Point is now longer the firm's largest institutional holder with a 6.17% stake, but drops to 4th place behind Capital Group and above Vanguard, who own 67 and 48.9 million shares respectively. The reason given for these opportunistic sales is that they were "motivated by Third Point`s desire to maintain a roughly consistent percentage holding of Yahoo`s outstanding shares as the company pursues its $5 billion buy-back authorization." Of course considering the $1.5 billion in shares that YHOO has actually bought back represent some 6.5% of the outstanding, one is a little confused how a 15% stake reduction is hedged relative to an actual buyback that is some 60% smaller. Does this mean another 15% stake cut in Q1 when YHOO, supposedly, buys back another $1.5 billion?

"Jesse Litvak arranged trades for customers as part of his job as a managing director on the MBS desk at Jefferies.  Litvak would buy a MBS from one customer and sell it to another customer, but on many occasions he lied about the price at which his firm had bought the MBS so he could re-sell it to the other customer at a higher price and keep more money for the firm.  On other occasions, Litvak misled purchasers by creating a fictional seller to purport that he was arranging a MBS trade between customers when in reality he was just selling MBS out of his firm’s inventory at a higher price.  Because MBS are generally illiquid and difficult to price, it is particularly important for brokers to provide honest and accurate information. The SEC alleges that Litvak generated more than $2.7 million in additional revenue for Jefferies through his deceit.  His misconduct helped him improve his own standing at the firm, as his bonuses were determined in part by the amount of revenue he generated for the firm." 

• Obama Picking Lew for Treasury Fuels Fight on Budget (BBG)
• Deutsche Bank Bank Made Huge Bet, and Profit, on Libor (WSJ)
• Spain Beats Maximum Target in First 2013 Debt Sale (BBG) - In other news, the social security fund is now running on negative?
• "Icahn is also believed to have taken a long position in Herbalife" (NYPost) - HLF +5% premarket
• Lew-for-Geithner Switch Closes Era of Tight Fed-Treasury Ties (BBG)
• Turkey Beating Norway as Biggest Regional Oil Driller (BBG)
• Greek State Firms are Facing Closure (WSJ)
• Draghi Spared as Confidence Swing Quells Rate-Cut Talk (BBG)
• China’s Yuan Loans Trail Estimates (BBG)
• SEC enforcement chief steps down (WSJ)
• CFPB releases new mortgage rules in bid to reduce risky lending (WaPo)
• Japan Bond Investors Expect Extra Sales From February (BBG)

Update: this is just getting better and better: flashing headlines that the SEC has opened an inquiry into Herbalife. Dow Jones adds that inquiry may not result in action. Stock slides on the news, however following speculation that the SEC may (or rather should) be investigating the various massive puts in HLF stock before the Ackman presentation in mid-December, it bounces. Total chaos, and all very exciting.

One guy (whose positive P&L in 2012 was primarily thanks to the gap lower in HLF in the last two weeks of 2012, since filled entirely and then some), says $0. Another guy, whose nearly $10 billion hedge fund was up 30% in 2012, says over $60. Whom do you trust? As far as we are concerned, the second Tilson goes long, we dump everything.

As we warned on December 26, when the stock was trading in the mid 20's the pain for shorts is horrible and getting worse (courtesy of the best and always absolutely certain contrarian signal - the involvement of Whitney Tilson) and is about to send the stock into the stratosphere following a very surprising announcement by none other than Bill Ackman buddy Dan Loeb, who just filed a 13F reporting a 8.24% passive stake in Herbalife sending the stock surging. In other news: this may be Herbadeath for Whitney Tilson, who may well be on track to blow up a second fund in under a year.

The IMF’s Il Houng Lee, Murtaza Syed, and Liu Xueyan have published a very interesting and widely noticed study called “Is China Over-Investing and Does it Matter?” In it they argue that there is strong evidence that China is overinvesting significantly. China’s investment rate is so high, that even ignoring the tremendous evidence of misallocated investment, unless we can confidently propose that Beijing has uncovered a secret formula that allows it to identify high quality investment in a way that no other country in history has been able, there is likely to be a systematic tendency to wasted investment. The extent of Chinese overinvestment – even if we assume that it has not already caused significant fragility in the banking system and enormous hidden losses yet to be amortized – requires a very sharp contraction just to get back to a “normal” which, in the past, was anyway associated with difficult economic adjustments. It is hard to imagine how such a sharp contraction in investment will itself not lead to a sharp drop in GDP growth.

On October 22, we alone asked a very relevant question, which apparently nobody was able to answer:

Does anyone in Europe realize that a Greek distressed debt buyback is yet another event of default?

— zerohedge (@zerohedge) October 22, 2012

Well, one entity did. S&P.

• GREECE CUT TO SD FROM CCC BY S&P
• S&P CUTS GREECE'S LONG-TERM DEBT RATING TO 'SELECTIVE DEFAULT'

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.