INVESTMENT THESIS SEPTEMBER 24th 2008 3Q-4Q
In the current financial crisis there exist a number of platinum opportunities to make outsized returns in this market. The theory is the same as it always is: you can make very large quantities of money when fear rules the reflecting herd.
This brief memorandum will outline both long and short opportunities. The ability to short is still available—what was stopped was the ability to short nakedly, which means not remotely having a security which was akin to betting without any money and having hopes of winning. I will outline securities to go long or BUY as well as securities to sell or go SHORT.
There are several instruments in the marketplace which will allow shorting over the breadth of the market, for specific shorts on companies—the investment management has access to borrow shares from mutual funds and broker dealers through hypothecation agreements –this type of shorting is legal – there are very specific companies that will not do well in this environment.
There will be a 90-120 day period in which rapid trading will allow superior returns to be generated. The focus will be to 30% returns for this period, which when annualized will equal over 60%. Leverage will be used by the broker dealer but small bets will be placed so that positions can be entered and exited very quickly and efficiently. Once these transactions and target points are achieved we will exit the positions.
- Hedge Fund Redemption September 30- 5000 hedge funds, Regulation will go up and so will the cost to do business with it.
- Inability to NAKEDLY short securities in the United States and the United Kingdom-borrowing shares from wire houses, brokerage firms and mutual funds will by sophisticated professionals will reap outsized returns for the professionals while others have their face pressed against the glass.
- Counter Party risk-this will be more prevalent for some firms and make the more liable therefore better shorting opportunities.
- Switch from ETN’s to ETF’s-advisors have begun increasing exposure to ETF’s and reducing ETN’s concurrently. The advantages are tax efficiency, flexibility, intraday trading without costs, no exit fee. There are currently 697 ETF’s that have 578B in assets. This represents a great long opportunity. ETF’s will increase in value, simultaneously ETN’s are a perfect shorting opportunity they will decrease in value.
SHORTING OPPORTUNITIES (short term):
- S+P 500 puts
- Borrowing specific shares of various companies that will not do well in this environment from mutual funds and brokerages.
- Short positions on financial stocks from the following perspective:
- Financial Stocks
- Services Providers to Hedge Funds
- Investment Banks unable to take deposits
- Prime brokerage firms focused on hedge funds
- Money Market Fund Stocks
LONG POSITIONS (short term):
- Long Positions on the following:
a.Goldman Sachs/Morgan Stanley-2 of the top white shoe firms/will restructure/powerful people have a significant interest/national pride
b. JP Morgan-cash rich/dealmaker at the helm who has carte blanche
c. ETF’s-advisors will poor into them/number of boomers have to ride out the crises
d.Credit Default Swaps-tremendous money from defaults in cash
e. LDI Investments-insurance on defaulted companies/tremendous payouts
f. Fixed Income Investment Managers-opportunities from reduced values and fire sales.
There will be medium term opportunities in the following for investment:
- Real Estate-this market will rival the hedge fund market’s growth on an institutional basis in the next (5) five years.
- Infrastructure-as the world builds out in the BRIC countries and then to Latin America, this will dominate as an asset class because it is tangible and will generate steady income that is annuity like. The institutional Investors will participate because they will to capture growth abroad and lower overall returns compiled with volatility here.
- Pharmaceutical royalties-this will represent a significant monetization strategy as Universities and Foundations sell their intellectual rights to drugs.
- Community Banks/Islamic banks-Community banks represent large, dis-intermediated pools of capital untainted by sub-prime with deposits. Islamic Banks are the fastest growing banks globally and will continue to expand in Europe and become profitable.
- Senior Housing/ Health Care-aging populations of well to do will create significant need and profits.
- Banks-they are discounted and the regulation to invest in them has been significantly reduced. Goldman and Morgan Stanley will innovate and generate profitable returns now that they are entities in this arena. Banks are a necessary component in the U.S. Economy and are bargain basement prices. Those with capital strength will only get stronger and have significant pricing power. The really smart money will run to this area. As the regulations to acquire them are lessened they will be gobbled up by opportunistic investors along with community banks as the ability to lend becomes more valuable. The over-arching theory to get really wealthy is that you buy when the blood runs in the streets and fear is in the air. This is that time.
Shawn D. Baldwin
Capital Management Group