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  • More To Come?
    Since the latest news regarding the SEC allegedly charging Goldman Sachs (NYSE:GS) for defrauding its clients, we have come to the conclusion that there will be more to come.

    What is interesting is that this particular scenario was well laid out in Gregory Zuckerman’s book The Greatest Trade Ever.  In the book, Zuckerman describes in detail how Paulson’s team formed its opinions on the current status of the mortgage market and figured out how to profit from their views. 

    Because the mortgage securitization market was still relatively new, there were not many ways to profit from the demise of real estate or the defaulting of loans other than taking long positions in Credit Default Swaps (which are essentially an insurance product in which a participant can pay a premium in advance to secure full coverage over a pool of assets, in this case mortgages).

    The book also describes how in order to increase the size of their bearish position, Paulson and his team approached larger investment banks to ask for their cooperation on packaging pools of mortgages they believed would be the first to fall as soon as the real estate bubble burst.  Based on their research they believed mortgages with the latter vintage years of 2005 & 2006 were the most likely to fail.  By essentially hand picking each of these types of mortgages and encouraging investment banks to package them and sell the CDO’s to clients, Paulson & Co. was then able to take the other side of the trade and buy the Credit Default Swap(Insurance) on that specific pool.

    So far Goldman Sachs (GS) is the only investment bank accused of “defrauding investors”, because they did not disclose to clients who purchased these CDO’s that other parties took part in creating the CDO’s: specifically parties that were betting against what they had a hand in creating.

    Our view is that Goldman Sachs (GS) was not the only bank participating in this sort of practice.  Investment banks are set to receive boatloads in commissions when facilitating these types of transactions, and if others noticed Goldman Sachs (GS) making money off of it, they too would participate.

    Because the SEC has been so late to the party throughout the course of this financial meltdown, they are very likely to drag this out and attempt to make a name for themselves.  European regulators are likely to do the same in the coming weeks, as they begin to learn that their investment banks may have very well participated in this process.  We believe a series of events related to this topic could become a catalyst for pessimism/fear to enter the marketplace and will set the stage for a long needed correction. 

    We continue to be bearish on the S&P 500 and Deutsche Bank (NYSE:DB) in the near term.  After a healthy correction, we will begin to build positions in companies whose valuations have come back to reality and futures look poised for growth.

    Disclosure: None
    Tags: GS, DB
    Apr 19 1:27 PM | Link | Comment!
  • Borders Group: Takeover Revival?
    Since the summer of 2006, vast speculation had surrounded the potential marriage between Borders Group (BGP) and its direct competitor Barnes and Noble (NYSE:BKS). Along the way, numerous hedge funds have participated in the speculation, only to find themselves selling at a loss or selling the stock short as the rumors of a buyout/merger faded and anticipation of bankruptcy came about.
    Since reporting its first quarterly profit amidst its worst ever holiday sales season, Borders Group (BGP) has proven to effectively manage through its troubles and position itself as a strong brand/household name in the book retail environment. They have managed to prove their worthiness to creditors and obtain financing on reasonable terms. They have also strengthened their efforts to get in tune with their customers and employees by initiating new programs/incentives to help employee retention/satisfaction as well as customer loyalty/service.
    As Borders Group (BGP) works to ensure its success as a standalone company, we believe they will be acquired while they are still in the process. The case is simple: There were many eyes on Borders Group (BGP) going into 2008, as they begin to show signs of improvement; the most prudent of the potential buyers will begin to emerge and potentially take action before the company’s full value realizes and market prices reflect it.
    The list for potential buyers has not really changed. The book retail sector is one that will be consolidating, and for the companies that remain, the best option for growth will be through strategic acquisitions.
    Furthermore, Borders Group’s (BGP) largest shareholder Bill Ackman has made it clear he is very open to, if not interested in a potential sale of the company. Borders Group (BGP) has been a long and drawn out holding for Ackman, and he will likely see it through at a profit. 

    Disclosure: Long BGP
    Tags: BGPIQ, BKS
    Apr 13 12:48 PM | Link | Comment!
  • We NEED a Correction:

    As the Dow Jones Industrial Average fulfilled its month long mission and breached 11,000 for the first time since 2006, we began thinking: Is the market’s rally really sustainable?  Is it backed by fundamental macro-economic reasons?  Is the giddy sentiment between the media and market commentator’s fully rationale?  Can they all be correct at the same time?  Are future corporate earnings really going to support the current P/E ratios of their stock prices? 


    Over the past few days, we here at have become slightly bearish for the near term.  By constantly paying attention to market price action, sifting through countless economic and company specific data, scouring the internet for as much information as possible, and keeping up with the content distribution by the mass financial media outlets, we have taken notice of the ultra positive market sentiment and have began to question it’s validity.


    Although it is extremely difficult to be bearish, specifically in a period of free liquidity and extremely low interest rates, we believe that the last 5-10 percent of gains have been brought on by performance chasers buying in fear of being left out.  These types of buyers are of the least conviction as they buy simply to ride the wave ignoring any intuition or fundamentals, they are also the first to head to the exits as soon as the tide turns.


    We broke out our top three reasons for pessimism into each of two categories: Fundamental & Sentiment 




    1.) Current P/E of the S&P 500 are 21, long term average is 16 (mean reversion)


    2.) As the S&P 500 approached 1200 in 2004, the Trailing Operating Earnings Per Share were $68 and today it is $58


    3.) Consumer confidence has not rebounded near as strongly as it is being represented by the price action in the market.




    1.) As we entered the week, nearly every financial news front page had a reference to the Dow Jones Industrial Average nearing 11,000


    2.) The VIX has signaled nothing but complacency.


    3.) Recently on CNBC’s Fast Money, Robert Prechter was verbally shut down by the show’s wildly bullish commentators as soon as he began to share his pessimistic view.


    For these and other reasons, we believe the markets may be headed toward a near term pullback.  A 5-10% correction would be nothing but healthy as we enter the 1Q earnings season.  Results will most likely be mixed as some businesses will surprise while other miss.  All in all, the long term prospects will most likely be bullish as long as unemployment begins to trend lower.

    Apr 10 5:45 PM | Link | Comment!
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