John Paulson: Long Financials 30 comments
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John Paulson's hedge fund Paulson & Co has disclosed long positions in numerous financial stocks, most notably Bank of America (BAC). In their 13F filing released Wednesday (detailing their positions held as of June 30th, 2009), they reveal a massive $2.2 billion stake in shares of BAC which they received at a nice price of around $10 per share.
BAC shares now trade well north of $15, so they've already profited handsomely on that play. And, more importantly, Paulson sees fair value at around $30 within the next 2 or 3 years. We actually noted that we had been hearing Paulson had a large BAC stake earlier on in our recent piece on Dan Loeb's hedge fund Third Point. And, the release of this 13F obviously confirms that. (Dan Loeb's Third Point also owns BAC around $10 and put on a similar play to Paulson). While Paulson's entrance into financials is by no means new, it is definitely more emphatic this time around. Paulson is definitely focused on the recovery meme for now, as he also will be starting a real estate recovery fund.
When we covered Paulson's portfolio last quarter, we noted that he had picked up stakes in Capital One (COF) and JPMorgan Chase (JPM). This time around though, he has expanded his arsenal of financials and has also added Bank of America (BAC), Goldman Sachs (GS), Fifth Third Bancorp (FITB), Regions Financial (RF), First Horizon National (FHN), Marshall & Ilsley (MI), State Street (STT), Suntrust Bank (STI), and People's United Financial (PBCT).
In order of size, Paulson's top 5 largest financial plays are:
1. BAC: $2.2 billion
2. COF: $372 million
3. GS: $295 million
4. JPM: $238 million
5. RF: $141 million
We also would be remiss if we didn't mention the fact that Paulson has picked up an $83 million stake in the exchange traded fund (ETF) ProShares Ultrashort Financial (SKF), presumably as a hedge to his position. His election to use this vehicle as a hedge is quite curious, as its flaws as an investment vehicle have been well chronicled. Ultrashort funds are leveraged and carry more inherent risk. At the same time, they seek to replicate 2x inverse the *daily* performance of their underlying index (in this case, the financial index). Since it resets performance daily, the fund experiences compounding issues over time. So, the longer you hold the vehicle, the potentially further you drift from accurately tracking the index. While the vehicles do a good job of tracking on a *daily* basis, they are simply better suited for trades, not holding positions.
Daytraders galore will swear by SKF as it minted many of them a pretty penny last October and November when financials were tanking on a daily basis and SKF was soaring. So, it strikes us as very odd that Paulson would use this as his hedging mechanism. You'd think a hedge fund of their reputation and research ability would know the mathematical flaws inherent in the vehicle they've selected. Maybe they are completely aware of it and decided to use it anyways, rather than shorting an index, buying puts on the index, or buying puts on their individual holdings. Who knows... it is all speculation on our part. The main thing to take away here though is still Paulson's large exposure to financials, namely through Bank of America.
At the same time, they undoubtedly have short positions in the sector as well. We have been hearing that Paulson is complementing their long moneycenter banks play by going short select regional banks that have major exposure to commercial mortgage-backed securities (CMBS) and commercial real estate (CRE) in general. This falls under the thesis that these firms would not have to write it down until later this year or until next year and do not have sufficient loan loss reserves set aside. Additionally, we've heard they have shorted select European financials as well. Back in June, we detailed how Paulson had covered their Barclays (BCS) short. We now wonder which institutions they may be targeting, since they had previously been short Lloyds (LYG) too.
Overall though, the 'recovery' theme plays on for Paulson. Over the past few months, we've seen Paulson go long financials, buy distressed debt he was once shorting, start a real estate recovery fund, and more. One other notable thing to point out about Paulson's portfolio is their massive gold position as they continue to hold a large stake in the SPDR Gold Trust (GLD). However, we want to make sure everyone realizes that this has been labeled a hedge for their fund share class that is denominated in gold. At the same time though, one has to wonder why they also have large positions in gold miners too.
This is not our usual in-depth look at the hedge funds we report on when covering a 13F filing. So, rest assured that we will still be covering Paulson in our upcoming second quarter 2009 edition of our hedge fund portfolio tracking series. We just wanted to cover this major point for now as mainstream media will undoubtedly run like the wind with this development. Stay tuned for more!
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This article has 30 comments:
There is no flaw in those ETFs,they perform exactly as they are supposed to,all depends on his expectations:
If he expects XLF to move in an uptrend without too much volatility,SKF will lose him less than a similar short position or put options,while he is still protected against an unexpected sharp drop in XLF,if this is what he is hedging for.
Cause when he sells it will signal the coming disaster that is bearing down on us.
Too bad he isn't forced to release his positions daily.
Then we all might have a chance in hell of avoiding the brunt of the next crash.
According to this article, the 13F came out on Wednesday, Aug. 19th, and is as of June 30th, and I think it can safely be assumed the positions weren't put on in a matter of a day, or two. I think that tracking the hedgies, while interesting from an intellectual standpoint, isn't terribly helpful to the average small investor/trader.
While not doing it myself, I suspect those who similarly track Buffet's investments, via BRK, probably have better luck profiting from the activity, given his longer time horizon (typically speaking). I will say, from what I've read about Paulson's big win in shorting the subprime lenders, he will stay with a position for some time, if convinced of his premise/reasoning. Evidently, he was somewhat "early" with his shorts.
On Aug 15 09:11 AM TeresaE wrote:
> How long between his actual trades and reporting?
>
> Cause when he sells it will signal the coming disaster that is bearing
> down on us.
>
> Too bad he isn't forced to release his positions daily.
>
> Then we all might have a chance in hell of avoiding the brunt of
> the next crash.
That said I wonder about timing of the disclosure on going long on the financials. Is this to comply with regulation or sort of leaked?
How nimble of trader is he? It has been 45 days since his disclosure and he may have liquidated some holdings.
As another SA commenter stated:
"My final thought is that it would be foolish to assume that just because he accumulated such large positions as of the end of Q2 that he is still long these stocks and is bullish on the sector as a whole."
I doubt he committed $3 billion with the thought of pulling it out in a month or two. The Fed doesn't plan on raising rates for at least a few months. With the decreased competition in the banking industry, the spread in interest rates and a bottoming of the RE market, Paulsen made a very smart move. Too bad the doom and gloomers are missing out.
And reading most of the comments, it wouldn't help you guys to get what I'm laying down.
No one was prepared for the nightmare last fall, winter and early spring. Looks like many have learned nothing from either the past couple years or the Great Depression.
That is sad
A couple month's holding and raking it in would look really good after the fact. Genius even.
In reality it would just prove how cooked both the books, and our butts, are.
On Aug 15 01:58 PM jdl51 wrote:
> "How long between his actual trades and reporting? Cause when he
> sells it will signal the coming disaster that is bearing down on
> us. Too bad he isn't forced to release his positions daily. Then
> we all might have a chance in hell of avoiding the brunt of the next
> crash."
>
> I doubt he committed $3 billion with the thought of pulling it out
> in a month or two. The Fed doesn't plan on raising rates for at
> least a few months. With the decreased competition in the banking
> industry, the spread in interest rates and a bottoming of the RE
> market, Paulsen made a very smart move. Too bad the doom and gloomers
> are missing out.
I love his comment about BAC being worth $30 in 2-3 years...........
financial company is a smart risk for Paulson utilizing the govt
as security or lessening the risk for his bank speculations:
It's conservative risking, and have thought similarly
since TARP began. If Paulson has AIG, then he's doing ok with that non-taxpayer owned twenty percent as since its reverse split
AIG common has been up.
The book value of BAC is said to be approximately double it's current price quote.
Plus Paulson as a long should be able to victoriously lead the squeezing of shorts too.
No wonder BAC is up almost everyday now, and re-covering
in the afternoon as did BAC (I think) did.
There are not a few stodgy, name stocks selling under book, and Paulson is probably nibbling at the sleepers, as contrarians
are known for quietly doing.
When Capital one tripled my interest rate , with near perfect credit . I told them " you're nuts , killing your best customers ".They can't kill me as I have Zero balance , pay in full q month , no car note , bought a 4 cylendar Toyota 6 years ago for cash . The dealer neally dropped over when they realised I wasn't financing it . House nearly paid for . Again , financed very little . STARVE THE BEASTS ! These suckers care NOT for you !
It's good to be Paulson.
But another leg down in the market, and it will be harder politically to save the big boys, as voters rebel.
Owning financials seems like walkign on thin ice to me.
What was released is based on what he had bought. Paulson has "already" made money in those investments.
What is idiotic is how the media has been using this as "another marketing tool" to convince mom and pop americans that they have to be in the market.
For God's sake what it wrong with average Americans? Are they really falling for this total bulls*it? Have they sunken that low in their intelligence that they not only need CNBC to tell them what they want to hear but now they are simply going to follow the moves of someone like Paulson who bought the stocks 50% ago?
I apologize for my comments but I guess that explains why the average American's net worth is still back at 1999 levels.
Until average American investors take it upon themselves to either start thinking for themselves or at the very least listen to people like myself who tell them what they "need" to hear not what Wall Street "wants" them to hear, they are going to continue to lose money in their investments.
compdivplan.com
The pessimists have all been faked out of their shorts (the kind you wear) by all the hysterical discussion of bank mark-to-market asset valuations, the values of which are completely fictitious, when compared to actual performance of underlying loans. The huge disparity in book values versus "mark-to-manipulation" values owes itself almost entirely to the excessive naked shorting of debt indices, married perfectly with the unregulated CDS market, which was the perfect money machine on the downside.
Now, the very same investors/traders who destroyed the mark-to-market valuations are now feverishly buying distressed debt and bank stocks because they know only too well that the valuations were the direct result of their handiwork and don't in any manner represent intrinsic values.
raylopez99.blogspot.com/
The US government, via the Federal Reserve and US Treasury, caused the financial meltdown in September 2008.
No this is not a conspiracy theory. No less than John Taylor of the Taylor Rule of economics subscribes to it, as do many conservative economists.
Everyone is sooooo bearish (and i was at 12k last summer, but now the downside is limited to 10% in most sectors); i love the counting of failed banks. Yes, 77. Yes, it will reach 100 or even 200. Thats immaterial. those banks failed long ago. This has nothing to do with BAC, GS, JPM....these big boys have been saved by uncle sam, have huge spreads to work with, and are increasing market share as others fail. In 5 years BAC will be at $35 to 40. Good return if you ask me. Have been long since gov bailed them out near 5 bucks. will stay long.
and, for those of you who think a hedge fund like paulsons gets into and out of a 3 billion position in 1Q, try doing some home-work.
hedge funds typically have share classes denominated in US dollars, euros, or pounds sterling. Paulson also has a share class that is denominated in gold rather than a fiat currency. As such, they have hedged that by buying a lot of GLD. Hope this helps.
On Aug 16 08:33 AM User 404977 wrote:
> I don't understand what the author means about the GLD holdings beining
> a hedge against their fund share class?