Global Macro Trading Journal

[Daal]

Not sure I agree with that...

Here's the relevant indenture:
http://www.sec.gov/Archives/edgar/data/885590/000119312515109400/d900048dex41.htm

My read of it (section 4.3) is that they're in default, but they have a 60 day grace period to cure it.

Well, technically you are right but the bottom line is that D day is like 40 days away and that's what I mean. Its actually further than that because VRX has 1.2B in cash and 1.4B in revolver debt, they could pay off that just with an asset sale and only have to deal with bond holders. Then D day goes out even further. Then if by some off chance, there is still no 10-K by then, they can negotiate an amendment and they are likely to get it. Bondholders won't want to roll the rice on bk without knowing what is up with the ad hoc comittee, looking at the 10-k etc

Ultimatetly, for things to go wrong, the short thesis has to be right about the cashflows and that's where I believe they are likely to be wrong

But the Ackman hate train has gotten to such a ridiculous level that I don't even have to be right about VRX anymore. PSH has been trading at a 15% discount to NAV (up from ~5%) recently. 10% is what they own in VRX these days, so effectively, VRX can go to $0 and I still wont lose anything (assuming the discount will come back in, which in the long-term I believe is pretty likely, they will also do buybacks if that gets out of line as written in the prospectus). I increased my stake by 25% and I'm looking to increase more

At $28 is just makes sense to fade the short thesis. If they are right, sure, its a $0, but if they are wrong (and Pearson's "cash EPS" is real), the stock is at 3 times earnings and the cashflows WILL be there to service debt. when people realize that, the stock will be at $100+. So from a r/r basis, its attractive. When the discount on PSH, then its just downright a nobrainer

 

[Martinghoul]

Well, I have made my feelings on Ackman known, so...

Best of luck!

 

[Daal]

About VRX
There are 4-5 guys who are good/decent value managers who met with Pearson who thinks he is a good manager and his non-GAAP guidence is legit. Hempton, never met with him and says it is not. So far the debate has not settled because it will take years to see if the cashflows from the buyouts will be there or not. Whether Pearson is a good drug picker who gets more out in cash than he put in. At $28, its just makes sense to think the due dilligence of the longs is right, because if it is, the reward is gigantic. If, its not, sure, its a $0. but as I said, Hempton never met with anyone from VRX. he has been right about the price but his thesis ("this 'cash eps' is phony") has not been proven. The stock is a pinada for the media, its not hard to get it down on bad news. specially if it takes time to find out who is right

Time will tell

 

[Daal]

I know you are not a fan of Ackman but I believe he does a good job at due diligence and he has a good investing method. I wish he was a better risk manager (another reason to 'fix' things with hedges, sending him emails. In fact, blasted 6-7 emails for the next PSH conf call)

He has an advantage over hempton that I believe makes him more likely to be right: he's got a lot of money. When VRX started to implode Hempton came out saying 'philidor might cost VRX $10b, liability could be unlimited!'. Well, Ackman hired a specialist and she said the worst settlement in history was $3b. That's based on hundreds of cases, with companies with far worse mistakes. Hempton is running a garage hedge fund with 4-5 people. Ackman can pay lawyers, experts, all day long, he's got over 50 people on payroll. Plus Ackman has a stronger track record, in terms of money made in the markets. Does that mean Hempton is wrong? No, but I do believe that makes it likely that he is

 

[Martinghoul]

About VRX
There are 4-5 guys who are good/decent value managers who met with Pearson who thinks he is a good manager and his non-GAAP guidence is legit. Hempton, never met with him and says it is not. So far the debate has not settled because it will take years to see if the cashflows from the buyouts will be there or not. Whether Pearson is a good drug picker who gets more out in cash than he put in. At $28, its just makes sense to think the due dilligence of the longs is right, because if it is, the reward is gigantic. If, its not, sure, its a $0. but as I said, Hempton never met with anyone from VRX. he has been right about the price but his thesis ("this 'cash eps' is phony") has not been proven. The stock is a pinada for the media, its not hard to get it down on bad news. specially if it takes time to find out who is right

Time will tell

Sure thing, although, honestly, I have absolutely no idea why you would rely on other peoples' views in your thesis. I mean look at the bank analysts. They possibly have even more access to management than the investors (with maybe the exception of ValueAct and Pershing). How did they do throughout all this? Personally, I am not a pension fund or an FoF, which means I don't have to give money to others to manage. Therefore, I will draw all my own conclusions (which is, incidentally what Hempton has done all along). If I am not certain, I stay away. It's simple and it's what the margin of safety for me is all about.

As to Valeant, well, I didn't want to get into it, but if I were long the equity the main thing I'd be worried about is the creditors deciding to cut and run. If, for whatever reason, they feel that VRX is a sinking ship (doesn't matter if true or not), they could use this opportunity as an excuse to screw the equity holders (given there's still some money there) in order to get the hell out of dodge. Now it's probably unlikely, given the current state of things. However, the whole point is that the creditors (mostly asset managers, from what I've seen) currently have the means and the opportunity and have the equity investors by the balls. These asset managers are also relatively risk-averse. So it's going to be tricky and, in my opinion, Ackman's involvement is not helpful, especially since he seems to be getting overruled recently. As a result, he just creates a lot of volatility.

 

[Martinghoul]

I know you are not a fan of Ackman but I believe he does a good job at due diligence and he has a good investing method. I wish he was a better risk manager (another reason to 'fix' things with hedges, sending him emails. In fact, blasted 6-7 emails for the next PSH conf call)

He has an advantage over hempton that I believe makes him more likely to be right: he's got a lot of money. When VRX started to implode Hempton came out saying 'philidor might cost VRX $10b, liability could be unlimited!'. Well, Ackman hired a specialist and she said the worst settlement in history was $3b. That's based on hundreds of cases, with companies with far worse mistakes. Hempton is running a garage hedge fund with 4-5 people. Ackman can pay lawyers, experts, all day long, he's got over 50 people on payroll. Plus Ackman has a stronger track record, in terms of money made in the markets. Does that mean Hempton is wrong? No, but I do believe that makes it likely that he is

Well, firstly, I don't buy this argument at all, since even the cleverest of people, all those lawyers and experts and specialists, occasionally turn out to be wrong. Paulson with his unmatched resources invested in Sino Forest; Ackman in JCP; Eddie Lampert in Kmart; etc. Warren Buffett piled into Tesco, for god's sake. This idea that your resources make you 100% accurate is just not borne out by reality whatsoever.

That brings us to the key observation about Ackman. IMHO, in his particular case, all this money and access to people actually produces an extremely significant downside, which more than outweighs the upside. It appears to make him feel invincible and infallible, which is why he doesn't do "risk management". Like I said, I think he's a terrible investor and I would run, not walk as far away as possible from anything he gets involved in. That's regardless of his past performance and the outcome of the VRX saga.

Incidentally, have you gotten any responses to your questions from Ackman or Pershing?

 

[Daal]

Well, firstly, I don't buy this argument at all, since even the cleverest of people, all those lawyers and experts and specialists, occasionally turn out to be wrong. Paulson with his unmatched resources invested in Sino Forest; Ackman in JCP; Eddie Lampert in Kmart; etc. Warren Buffett piled into Tesco, for god's sake. This idea that your resources make you 100% accurate is just not borne out by reality whatsoever.

That brings us to the key observation about Ackman. IMHO, in his particular case, all this money and access to people actually produces an extremely significant downside, which more than outweighs the upside. It appears to make him feel invincible and infallible, which is why he doesn't do "risk management". Like I said, I think he's a terrible investor and I would run, not walk as far away as possible from anything he gets involved in. That's regardless of his past performance and the outcome of the VRX saga.

Well, I never said 100% accurate. but it does make one more accurate than not. All good stock pickers will have bad picks but he has had a pretty good battling avg over the years

Also, let me ask you this, can someone be a 'terrible investor' and still be on the all-time money earned to clients HF list? Because recently he was and even after the drawdown, I'm sure he is still is in the top 50. Yes has had a significant drawdown but its the first time he has ever had this, its likely he will learn and probably never go through that again (that is, unless the SPX takes a huge nose dive). so going forward, its unlikely he will repeat the mistakes that lead him to this. And honestly, most of this "issue" has had more to do with his NON-VRX picks than VRX, VRX has cost him plenty of money but its the fact that the other plays have gotten beaten down as the shorts speculated and followers dumped longs that has made the drawdown worse than it was supposed to be. Yes, its his fault, but thats a temporary anomaly and presents an opportunity for an investors (a discount of discount)

And as far as 'why follow someone else'. Well, I'm a day trader primarely, I can't spend countless hours doing research in order to extract 1-2% over a risk parity type approach. So I rather delegate that task to people that I believe that can do that and ocassionally put trades that believe in that I came up with myself

 

[Daal]

Incidentally, have you gotten any responses to your questions from Ackman or Pershing?

Yes, to my VRX suggestions he said I was free to short it if I didn't like it. To my questions for the calls he took all of them in the VRX call marathon

 

[Martinghoul]

Well, I never said 100% accurate. but it does make one more accurate than not. All good stock pickers will have bad picks but he has had a pretty good battling avg over the years.

Yeah, and, like I said, it's not his picks that I'd be concerned about.

Also, let me ask you this, can someone be a 'terrible investor' and still be on the all-time money earned to clients HF list? Because recently he was and even after the drawdown, I'm sure he is still is in the top 50. Yes has had a significant drawdown but its the first time he has ever had this, its likely he will learn and probably never go through that again (that is, unless the SPX takes a huge nose dive). so going forward, its unlikely he will repeat the mistakes that lead him to this. And honestly, most of this "issue" has had more to do with his NON-VRX picks than VRX, VRX has cost him plenty of money but its the fact that the other plays have gotten beaten down as the shorts speculated and followers dumped longs that has made the drawdown worse than it was supposed to be. Yes, its his fault, but thats a temporary anomaly and presents an opportunity for an investors (a discount of discount)

Absolutely, emphatically yes to your question. Statistically speaking, you need a much longer sample to argue for presence of skill. Given the sort of things I have observed during my time in the industry, I can tell you that this sort of thing is not that uncommon. Moreover, these lists have obvious issues. Finally, the whole point with Ackman is precisely that it's NOT the first time he has done this. Gotham Partners, based on what I have read, imploded in a somewhat similar way. I don't detect any evidence of Ackman having learned from that. As to the other plays, that is precisely the purpose of risk management. The mkt can f*ck you over in ways you could have never imagined, no matter how many specialists and experts tell you that you're right.

And as far as 'why follow someone else'. Well, I'm a day trader primarely, I can't spend countless hours doing research in order to extract 1-2% over a risk parity type approach. So I rather delegate that task to people that I believe that can do that and ocassionally put trades that believe in that I came up with myself

I understand...

 

[Daal]

Yeah, and, like I said, it's not his picks that I'd be concerned about.

Absolutely, emphatically yes to your question. Statistically speaking, you need a much longer sample to argue for presence of skill. Given the sort of things I have observed during my time in the industry, I can tell you that this sort of thing is not that uncommon. Moreover, these lists have obvious issues. Finally, the whole point with Ackman is precisely that it's NOT the first time he has done this. Gotham Partners, based on what I have read, imploded in a somewhat similar way. I don't detect any evidence of Ackman having learned from that. As to the other plays, that is precisely the purpose of risk management. The mkt can f*ck you over in ways you could have never imagined, no matter how many specialists and experts tell you that you're right.

I understand...

Well, Gotham Partners (contrary to what the media says) was a success. I wrote about that in the article I posted earlier. 20% compound returns all the way to the last year where it was liquidated at a ~25% loss, according to my math thats 14.5% compounded returns. If you got out of that and jumped into PSH, you did kept doing pretty darn well. And I do detect plenty of evidence that he learned from that. First, he avoided illiquid investments, second he secured a stable capital case. The PSH IPO, the bond offering and the 1/8 withdraw limitation in the LP fund are all part of that. Without that he would having a real problem now. All the people betting against his fund seem to be missing that but fundamentals will win out

And as far as statistics/skill goes, the amount of excess returns over the S&P500 has been so large for so long that its probably easier to kill a lion with your bare hands under acid rain than to produce that through luck. Its not like he got lucky in a black swan like Paulson