Kvedarna (96.44)

Kvedarna's Five Strategies

January 14, 2008 – Comments (1) | RELATED TICKERS: BWINB , MNC , CVP

By the time you have begun to read this, you must already have looked through the portfolio positions in my entry.  While this must be obvious, in my mind they are grouped into several strategies:

 1.  Short a group of home builder shares:  I have come to the conclusion, not all that rare amongst CAPS players, that the residential construction business is going to take longer rather than shorter periods of time to turn profitable.  Without going into great detail, I don't believe the book values most home builders have been reporting;  this is because of the accounting they have been using to describe inventories of land inventories.  Especially when the inventories are in the form of options to purchase buildable land, or joint ventures onto which new homes will be built.

2.  Short a group of financial companies whose expected cost of funds exceeds what I think they can reasonably expect to earn on funds over the next few years. 'These include mortgage lenders and brokers, a special subset of financials.  I was an institutional salesman a couple years ago when someone whose acumen I value pointed out that several things were wrong with the mortgage business:  a) the yield curve had changed, eliminating some of the carry trade, meaning it was no longer so ridiculously easy to borrow short and lend long;  b) gain on sale accounting for mortgage origninations was disappearing;  meaning that the value of say $500 million in mortgages was no longer so easily worth a significant premium over the $500 million par amount; and c) related to (b), it was getting tougher and tougher to sell the bottommost tranches in securitizations. 

 3.  Long the survivors.  To this I have added only two firms:  Leavitt Corp (LEV) which has already chaptered its homebuilding subsidiary but may be able to go on with out it; and a formerly 'insolvent' insurance company, QNTA, which is in run off, is not and will never be bankrupt, and could be liquidated for significantly more than market value.  Interestingly, one of the better performing hedge fund groups, QVT Management, has 13-D positions in both of them.  I found them independently of QVT but am pleased to have such rarified company.

 4.  Short Retailers:  I have tried to identify a list of marginal and not-so-marginal retailers whose shares should come down even more.  I am particularly focused on shoe stores, as this is an extremely competitive aspect of retail.  I am not sure how loong I will stick with this, but it has begun to add incremental value.

 As an adjunct to 4), I noticed that O, a REIT which leases to restaurant and retail companies, had just found itself facing the restructuring of a large number of restautants.  Without doing much else, and since this is just a game, I sold O short, and have in just over a week booked in a nice profit.

5.  Short industrial metals producers.  This group of positions includes BHP, RTP, RIO and a number of ofther metal companies.  My theory is not original, but derived from the work of Frank Veneroso, a brilliant economist.  Veneroso believes that the current bubble in industrial metals is:  a) of historic proportions, exceeding even that in most wars;  b) overdone in part because expansion of the world's economy is not as significant as the statistics indicate (this is because reporting GDP based on Purchasing Power Parity is not identical to reporting it in traditional forms); c) the amount of leverage involved in commodity positions is on a scale as large or larger than the realty bubble. 

 Hedge funds, bank trust departments, others who in normal times would not be long commodities have seriously overdone this trade.  When metals prices come in, and I believe they will, these shorts should work.  It may take longer than the immediate gratification which has been possible in short the housing/mortgage/subprime lender story.

6. Special situations, gleaned from other CAPS players and friends who are professional and semi professional (read: retired) fund managers.  This is not a strategy, but rather a catchall.  Into this basket I have put long Monaco Coach, long Centerplate, Baldwin and Lyons, and Repros Therapeutics.

 I probably could have handled some of the earlier transactions a bit better but am becoming more conversant in the CAPS way of doing things.

This is about enough for today.  If there is anything you disagree with, let me know.  Otherwise, best wishes on your own positioning.