Hedge Fund Liquidation Sale

[Uncle Max]

Last week, Tontine Partners , a $10 billion global macro hedge fund, told its investors that it expected to show a loss of 65% for 2008. The fund, founded by former Smith Barney analyst Jeffrey Gendell, has been known for its concentrated portfolio and large sector bets.

In 2003 and 2005, the fund returned in excess of 100%.

Now there are substantial rumors that Tontine Partners is under complete liquidation, returning money back to its investors and closing its doors for good.

Here's a look at a few of its largest positions. These are names you may want to consider, given they are likely beaten down irrationally.

United States Steel (X): Tontine Partners owns 3,051,409 shares of United States Steel. U.S. Steel produces just under 30 million tons of steel and steel products each year. The company is vertically integrated, owning its own iron ore mill in the U.S., which gives it a substantial cost advantage over other domestic and international producers.

U.S. Steel is trading at $45, down from its $190 peak two months ago. Gendell thinks U.S. Steel can earn $18 per share in 2008; that would mean U.S. Steel is trading for 2.5 times earnings.

Cleveland-Cliffs (CLF): Tontine Partners owns 4,518,812 shares of Cleveland-Cliffs, the largest producer of iron-ore in the U.S. The company is in the process of changing its business as it completes its merger with Alpha Natural Resources, resulting in Cliffs Natural Resources. The combined company would have 8,900 workers and expected 2009 revenue of $10 billion, a reserve base of about 1 billion tons of iron ore and 1 billion tons of coal, with operations in Canada, Australia, Brazil, Michigan, Minnesota, West Virginia, Kentucky, Alabama, Virginia and Pennsylvania.

Shares of Cleveland-Cliffs are currently trading for $30 per share after hitting an all-time high of $122 a few months ago. Cleveland-Cliffs trades with a forward P/E of 1.98 and EV/EBITDA of 4.62

KBR (KBR): Tontine Partners owns 13,708,395 shares of KBR, a $15 stock with $9 cash per share on its balance sheet and zero debt. The company is expected to earn $1.70 this year, meaning, that shares of KBR are trading for less than three times current earnings. KBR currently has a market cap of $2.45 billion, with a backlog of $13.4 billion. 89% of KBR's revenue is internationally based, with 11% domestically based. KBR's backlog is broken up into six pieces: downstream, government and infrastructure, services, technology, upstream and ventures.

Shares of Quanta are currently trading for $19, down from its all time high of $35 just a few months ago.

AK Steel (AKS): Tontine Partners owns 5,869,744 shares of AK Steel, which produces flat-rolled carbon, stainless and electrical steel products. AK Steel has passed through large increases in its spot market prices for its carbon steel products by $70 per ton for all new orders. The company did $7 billion dollars in revenue in 2008.

AK Steel trades with a forward P/E of 2.11 and EV/EBITDA of 1.653. Its shares, which are currently trading for $11, saw a high of almost $80 just 2 months ago.

Standard & Poors Depository Trust (SPY): Tontine Partners owns 3,150,000 shares of Standard & Poors Trust. Gandell was betting on a market rally. Instead, he got the worst market since the great depression.

Exide Technologies (XIDE): Tontine Partners owns 23,705,133 of Exide Technologies. Exide is the world's independent producer of lead-acid batteries. Exide, which mainly produces batteries used in transportation, motive power, network power and military applications, is in the middle of a major turnaround. Its major input cost is the price of lead, which, like all commodities as of late, has dropped substantially in price.

Exide is currently trading near its 52-week low of $4.87 after hitting an all-time high of $19.66 just a few months ago.

Shaw Group (SGR): Tontine Partners owns 6,122,571 of Shaw Group. Shaw Group has a $1.5 billion dollar market cap, with a stated backlog of $16.5 billion dollars. Shaw Group's backlog is broken down into five main business segments: fossil and nuclear, maintenance, energy and chemicals, fabrication and manufacturing, and environmental and infrastructure.

Shaw Group is currently trading at $18.50, down from its all-time high of $78 per share just a few months ago. In fact, Shaw has repelled almost all of its five-year rally, trading at levels it saw in 2003. Shaw Group is currently trading with a forward P/E of 5.64.

 

[bob]

Thanks, Max. Good to know what to be short this month.

By the way, I'm tired of calling outfits like this "hedge" funds. Unless the rest of your portfolio is double-short the S&P 500, this isn't much of a hedge.

Or perhaps under a hedge is where Jeffrey Gendell will be living next month?

On a related note, did anybody else see this little article yesterday?

Citadel's main fund down over 25% so far this year

 

[Uncle Max]

Here's Jim Cramer's take on Citadel and hedge funds:

​

Will the U.S. government take the tough action that it needs to, giving $25 billion to Ken Griffin at Citadel to stop selling? Can't we just find out who the other hurting hedge funds are and given them each $25 billion and tell them to go home?​

When I read that Citadel is down 30% on one of its funds -- probably has a dozen of them, for all I know -- I get chilled. When you are down that much and you run almost $20 billion, you are going to do a ton of damage exiting and hedging and scrambling, kind of exactly what Doug Kass said would happen when hedge funds go wild. For all I know, the erratic trading from Monday, the huge upswing, was from some strategy gone bad by a guy like Griffin who was trying to get some protection from a market decline while he exited and then got caught and had to cover.​

Remember, no serious portfolio manager goes in and buys Exxon up 10 and sells Exxon down 10. No one who was trained as a professional -- no, not even a rank amateur -- would ever be that stupid. It just doesn't work like that.​

But if you are running billions and you put on a short for a couple of billion dollars and your longs aren't running, you will be squeezed and the instruments you are using have so much heft and can so overwhelm the market that when you come in and say, "Sell those puts," you move the market incredibly.​

I never thought it would happen again like in 1987, but then there was a firm, Leland O'Brien, that was guaranteeing performance using "dynamic hedging" that was supposed to be able to lock in gains for funds. The stuff didn't work because the market got overwhelmed and it went down so fast that the hedges didn't work.​

The market right now is being overwhelmed by hedge funds using instruments that are way too powerful for the market when used in the size they are being employed. That's how you get big stocks torn asunder like this.​

Like everything else that seems to go wrong in this era, we can't stop this madness.​

You see when the hedge funds lever up as they do, when a $17 billion fund becomes a $170 billion fund, it can overwhelm the whole market. If two or three have the same strategy -- which they often do -- of shorting the market because their longs keep going down, if something good happens -- the bank bailout plan -- then a rally becomes a monstrous event to the upside. Perhaps the market should have gone up a percent or two; instead it goes up 10. Same thing on the downside: Perhaps the market should be down 2% on a bad forecast from a couple of companies. Instead because of the magnification factor, it goes down 10. When you add in the liquidations, it gets exacerbated even more.​

In other words, it is possible, given the power and size of these funds, that we could have 5% to 10% swings until we get a handle on the leverage or make funds put down more money when they buy or sell these instruments.​

Of course that won't happen. It is like credit default swaps. The government either doesn't understand the power these hedge funds have to move the market or it doesn't want to know, and the exchanges have little interest in stopping it because volatility is good business.​

In the 1980s, lots of companies decided to initiate buybacks to protect their stocks from this volatility, and the collars were put in to cool the market down.​

The collars, which became irrelevant as we got higher in points (as they were done by points and not by percentages) might help again. We need to be able to find sellers and buyers in time to meet the other sides of these trades, and we can't because no one can think fast enough or act fast enough.​

In the interim, what you need to do is protect yourself from hedge funds gone wild, and the only way I know to do that is with dividends. Then, at least, there is some fundamental grounding. We will hit bottom here when so many stocks yield such high amounts that we are at last at a level where when the stocks are forced down they simply aren't worth selling.​

But make no mistake about it, if you want to see the volatility end and the situation get better, you need to see all of the Citadels blown up or bailed out, and believe me -- as bailout-happy as we have become, Ken Griffin's going to have to come back on his own.​

 

[Eddie]

Sometimes it's really ironic for me to see the "hedge" funds touting their returns, like 10% for the past 5 years, now 60% wiped out; i think Plumber Joe probably can do better at Atlantic city in terms of annualized return , hahaha,
oh wait, wait, from a bench mark perspective, like comparing to S&P, they're really not down that much, hahahah, how comforting!

 

[luso]

I think for the rest of the year those funds’ redemption will be a major contributor to the market movement. At this moment the overall financial system has been stabilized, it is fair to say there won’t be anymore bank or financial institution failure. If anything else happens, the result will be just adding a few more government owned entities.

A number of the funds won't survive for the redemption wave.

 

[swindler]

Why are they continuing to blame it all on hedge funds? The IBanks and Freddia/Fannie were/are way more leveraged than the hedge funds.

Why do you want the gov to take over more companies? They should be allowed to fail and we come out with a clean slate.

Hopefully people will realize many of the shortcomings in their models, but probably they will not...

PS Thank you Federal Reserve for creating this and making it worse.

 

[doug reich]

There's a simple reason to 'blame' hedge funds and not FNM and FRE: hedge funds are in the equity markets and those companies are not. FNM and FRE also have their debt backstopped by the government at this point; hedge funds are the open sore that are draining bank reserves.

 

[Uncle Max]

It's all speculation at this point, but it seems highly likely we'll find out that one or more major hedge funds imploded this week, especially given the dramatic moves in currencies, commodities and emerging markets.

Other than John Paulson, whose funds are up 15% to 25% this year, the WSJ says, it's been a brutal year for hedge funds, including many well-respected names, as the Times U.K. reports:

• Investors redeemed about $31 billion of global hedge fund assets in the third quarter and a further $179 billion was wiped off the value of their holdings by falling markets, according to Hedge Fund Research.
• Hedge funds lost 4.6% in September, according to EurekaHedge, another research firm, which said that the investment class was on course to post annual losses for the first time since 1998.
• Several legendary funds have suffered heavily this year, including Toscafund, which is down 55% year to date, and Citadel, which has lost an estimated 27%.

While few tears are being shed for the "pirates of finance", forced selling by hedge funds is having a direct affect on the portfolios of "average" investors, especially those overweight emerging markets and commodities.

 

[Andy Nguyen]

The hedge fund rumor you talked about turns out to be Citadel whose founder had to schedule an emergency conference call to ease the fear.
http://www.nytimes.com/2008/10/25/business/25hedge.html?scp=2&sq=citadel&st=cse

 

[Uncle Max]

Citadel is down 35% now. Nobody ever came back after being 35% down. They have a lot of great people working at Citadel, but basically the game is over for them. None of the investors feels good about being 35% down.

Dow is down 37% for the year. What's a point then to pay management fees, if this management cannot perform better than the market? The whole point of a hedge fund is to hedge, which will allow it to make money during bad times. However, instead of hedging, all this funds are placing leveraged bets. I think we won't see many hedge funds around within next 5-10 years, when the new game will begin.