Paulson & Co.'s Largest Transactions Suggest Continued Dollar Weakness, Commodity Strength

by: Zvi Bar
John Paulson, hedge fund manager of Paulson & Co., is well known for betting against subprime mortgages before they collapsed and buying banks after their collapse. Then, last year, Paulson earned a record amount of money for managing a hedge fund on the back of large bets on gold and some of those banks.

Many of you may want to know what Mr. Paulson is buying in 2011. The company recently filed its 13F, giving us a glimpse into the fund’s maneuvers. Do keep in mind that the 13F does not show all transactions, but merely those that are in publicly traded equities. It does not show cash or private positions, and it does not show purchases of debt. Still, filings with the U.S. Bankruptcy Court in the Southern District of New York last month showed that Paulson & Co. may be interested in acquiring Lehman Brothers bankruptcy debt-assets. Values on this debt are not yet determined. Nonetheless, the 13F is available and the choices show a fund that is making investments in commodities and other positions that exhibit a relatively high margin of safety.

Paulson & Co.'s Main Equity Transactions

Well, for starters, Paulson & Co. is not yet selling its gold. I know that isn’t a transaction, but it is the fund's largest and arguably most controversial position. Paulson's position in the SPDR Gold Trust (NYSEARCA:GLD) was unchanged at 31.5 million shares, valued at about $4.4 billion, and is his largest known position. Contrast that with his bank stock positions, where Paulson & Co. sold 80,000 shares of Citigroup (NYSE:C), 2 million shares of CIT Group (NYSE:CIT) and 226,000 shares of Bank of America (NYSE:BAC). He did, additionally, sell some shares in some gold companies such as Barrick Gold (NYSE:ABX) and Gold Fields, though not the GLD.

As for his larger positions taken, the fifth largest was in Smurfit-Stone Container (NYSE:SSCC), maker of paperboard and paper-based packaging, such as corrugated cardboard. Paulson purchased more than 9 million shares of SSCC during the quarter, which had a value of $353 million as of March 31. SSCC is up over 50% within 2011, since Rock-Tenn (RKT) announced it was buying SSCC, seven months after SSCC emerged from Chapter 11 protection. This position appears to be a merger arbitrage position, where the fund has chosen a safe M&A position, but it occurred prior to the announcement

Alpha Natural Resources (ANR), a supplier of metallurgical coal for use in steel-making and thermal coal for utilities and manufacturing, was Paulson & Co.’s fourth largest purchase. The company is also a major supplier of thermal coal to electric utilities and manufacturing industries. The fund bought 12 million shares of ANR during the first quarter, valued at $712 million as of March 31 and has since declined after its earnings release.

Weyerhaeuser (NYSE:WY) was Paulson & Company’s third largest purchase. WY is a timber REIT. It recently converted to a REIT from a corporation, after selling certain paper divisions. WY primarily grows and harvests trees for timber, and has reduced itself of interests other than that acreage. Paulson & Co. purchased almost 32 million shares of WY during the first quarter, valued at approximately $780 million as of March 31. It is unclear whether the REIT conversion will work out for WY. The REIT conversion theory is sound for a timber company that owns large acreage, but there is no history from which to determine the competency of management.

Lubrizol (LZ) was Paulson & Co.’s second largest position taken. Lubrizol is a specialty chemical company that makes distillates for engine oils, lubricants, coatings and medical products. Paulson & Co. bought 6 million shares of Lubrizol during the first quarter, valued at $803 million as of March 31. Lubrizol has been in the media since Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) announced a buyout and then that David Sokol had to resign due to undisclosed personal investments in LZ. This also looks like a merger arbitrage investment, though it could have occurred before the announcement.

Paulson & Co.’s largest new investment was in Hewlett-Packard (NYSE:HPQ), one of the world's leading computer and electronic device manufacturers. The fund purchased 25 million shares of HPQ during the first quarter, valued at about $1 billion as of March 31. HPQ is considered by many to be a value option in the high technology computer industry, and it appears Paulson & Co. agrees with that assumption.


Paulson & Co.’s top five positions appear very conservative and of the mindset that inflation is coming. LZ and SSCC were either brilliant acquisition predictions or are merger arbitrage plays. In either case, they are conservative investments in basic products such as lubricants and boxes. ANR is a coal investment and WY is a timber and land investment. Both of these appear to be levered commodity plays that assume future dollar weakness. HPQ, Paulson’s largest new investment, is his purest growth oriented investment, but even HPQ may be a value investment to Paulson & Co.
All in all, Paulson & Co.’s largest new investments, when combined with the decisions to continue to hold a large position in gold while reducing his financial exposure, appears to indicate strong belief on the hedge fund’s behalf that inflation is coming. HPQ is less of an inflation investment than the others, but many will probably deem it a value play (opinions will vary on the value there). Paulson’s timberland and coal investments, while primarily having industrial, electrical and housing uses, are also first resources that tend to appreciate in real terms during times of inflation. LZ and SSCC appear to be similar investments, as basic products that are derivative of resources, but are more likely merger-arbitrage positions in deals believed certain to conclude smoothly.
Generally speaking, Paulson & Co.’s public equity investments indicate a low-risk appetite, with the continued assumption that the dollar will devalue in the coming years. This has certainly been the continued expectation of many that predicted the subprime crisis, and who continue to predict dollar weakness.

Disclosure: I am long C.