Paolo Pellegrini and the Conviction to Benefit from Market Dislocation

Pretty amazing story on someone who appears to be one of the driving forces in the rise of Paulson and their amazing returns through this crisis and the last 24 months.

There are two valuable traits that once can have:

1) Recognizing a change in trend in a timely way (if you are too early, you'll be out before your bet plays out)

2) Assembling a strategy that effectively takes advantage of the change in trend. A lot of people see it coming, but only make minor adjustments to their strategy.

I usually see people with one trait, or the other...the two together not so much. It requites foresight along with conviction/execution skills.

This guy seems to have both in abundance. Is it possible this guy's success was a fluke? Possibly, but he is someone to watch.

More Via Bloomberg:

Paolo Pellegrini has a nose for trouble. He saw it in rising housing prices in early 2006, when he cranked through decades of home price data and concluded the bubble was poised to burst. Pellegrini then helped engineer a massive bet against subprime mortgages that catapulted Paulson & Co. hedge funds to 2007 gains of as much as 590 percent -- and firmwide profits of more than $3.5 billion.

Pellegrini, 52, pocketed tens of millions of dollars, allowing him to buy a couple of what he laughingly calls “entry- level supercars”: a silver Ferrari F430 with a base price of $168,000 and a black $109,000 Audi R8.

By April 2008, the Rome native smelled danger again. Nearly six months before the collapse of Lehman Brothers Holdings Inc. and the bailout of American International Group Inc., he and his colleagues saw that the unfolding crisis would trigger U.S. government intervention: bank rescues, a stimulus plan and yawning deficits. That move would eventually undercut the dollar and U.S. stocks, unleashing market havoc, Pellegrini reasoned.

“The losses would be massive,” he says. “I knew the policy response would be commensurate.”

So, after wowing the investment world with Paulson & Co.’s subprime bet, Pellegrini is proving he is no one-hit wonder. While still working for Paulson, Pellegrini plowed a chunk of his personal winnings from the subprime bet into PSQR LLC, a private fund he created to protect his newfound riches. He began shorting exchange-traded funds that held financial stocks and, later, those that track the Standard & Poor’s 500 Index.

There is a corollary to that imbalance in the global economy, Pellegrini says. Massive consumption has turned the U.S. into a debtor nation, which will ultimately lead to the devaluation of the dollar, a scenario PSQR is betting on through its long-term short position on Treasury futures and its long position on commodities.

The massive stimulus programs and the resulting deficits will only make matters worse, Pellegrini says.

It’s not a bright outlook for the U.S. Yet Pellegrini’s meteoric rise is proof that bad news can produce a lucrative bounty for those with the foresight to predict it.

Comments

[One Eyed Guide:]

Pellegrini is almost certainly right. The economic theories that predicted the crisis also predict inflation (but not how much) and a devaluation of the dollar to balance the trade deficit (but again, not how much or against all currencies.)
The question is when? Pellegrini makes his bets and waits. In the short term, the market almost always moves against him. You have to the courage of your convictions to play like Pellegrini.

Oct 04 11:20 AM

[untrusting ...:]

Good Bloomberg article. Thanks for the link. Think that he is probably correct in his big picture view. However, one has to have the resources and timeframe to be able take advantage of it. Many do not have either of these.

Oct 04 05:19 PM

[JG Savoldi:]

I hate to bet against someone with a track record like Mr. Pellegrini but we have a strict discipline of following our model and it happens to be very bullish the US Dollar Index currently.

Remember, fundamentals need not make sense at turning points--especially in a mkt as one-sided as the dollar. (not many bulls at this point)

I remember clients mailing us back in the summer of 2007 when our model was very, very bullish the YEN as it was trading into it's lows.

They all told me the fundamentals of the YEN were terrible and that although it might bounce, there was no reason for it to "spike higher" in a multi-month, multi-year rally" as we were forecasting.

We all know how that story ended.

We're long the US Dollar and expecting a sharp spike as it moves up into the 80-82 area during October/November.

This also fits our call for a stock market crash.

Oct 05 12:22 AM

[Michael Clark:]

No sign of dollar bullishness in the charts yet. With Bernanke gobbling up TBonds, US taking of more and more debt, I'm not sure what impetus will push Dollar higher. I'm not so sure about commodities rising either. As global deflation sets in, there won't be much demand for global commodities. Oil is heading back down toward March lows. Stocks have topped for the time being. A crash? It's possible. Precious metals will soon be the only game in town since gold comes in to play when the markets turn chaotic -- and deflation drives the price of all other assets down.

Stock market 'bear trap' rally over? See below:
seekingalpha.com/insta...

Oct 05 02:23 AM