John Paulson, the hedge fund manager who gained fame betting on the mortgage crisis, sees big opportunities to wager on price discrepancies in banking stocks, according to his most recent letter to investors.
Mr. Paulson and his team follow 70 banks internationally and have analyzed whether they need to raise additional capital by forecasting earnings and aggregating estimated losses. The 139 percent surge in financial sector stocks since March 9 has led to â??inefficient valuations creating what we believe are opportunities on both the long and short side,â? he said in his third-quarter letter.
The Paulson fundâ??s largest position continues to be Bank of America, which it believes can post annual returns of 34 percent for the funds through 2011 as the bank returns to profitability. (See a related article from Bloomberg News.) The New York firm has recently taken a large stake in Citigroup and shed its stake in Goldman Sachs.
Mr. Paulson is also seeing early gains on the firmâ??s stake in OneWest Bank, formerly known as IndyMac. He wrote in the letter that OneWest was improving better than expected from tightening spreads in the mortgage portfolio and the ability to put new assets on the balance sheet at attractive yields. The bank is also benefiting from growth in deposits, he wrote.
The firm also said it expected significant opportunities in restructuring overleveraged corporate balance sheets. It identified the insurer Conseco and the German concrete giant HeidelbergCement as potentially lucrative restructuring plays. To its portfolio of leveraged loans, the firm also added mortgage-backed securities and defaulted bonds in the third quarter.
Merger arbitrage, the strategy Mr. Paulson has employed since beginning his firm, has paid off as the spreads narrowed on big takeover deals like Pfizerâ??s purchase of Wyeth and PepsiCoâ??s deal for Pepsi Bottling Group and PepsiAmericas, he said in the letter.
More recently, his firm has added to its position in Cadbury, the British confectioner, which is being courted by Kraft and facing a possible bid from a team led by Hershey. The firm recently reopened its Merger Funds, currently with $4 billion under management, as it forecasts deal activity picking up from historically low levels last year.
Mr. Paulson is also bullish on gold and has taken a substantial position in five gold mining stocks, including AngloGold Ashanti and Gabriel Resources, based in Romania. He said that the funds did not have any forward positions in gold itself and were not invested in any gold E.T.F.â??s.
Mr. Paulson is said to be starting a new fund dedicated to gold miners and other bullion-related investments, according to an article in the Wall Street Journal.
Paulsonâ??s credit funds, with about $7.8 billion under management, have posted returns of about 23 percent this year, and his flagship Advantage Funds, with $16.3 billion under management, have risen 26 percent this year. The Paulson Advantage Plus Fund, which uses borrowed money to amplify profits, has posted gains of about 41 percent so far this year, according to the letter.
â?? Zachery Kouwe
Paulson & Co. 3Q Letter
E-mail This Print Share Close Linkedin Digg Facebook Mixx My Space new_york_times:http://dealbook.blogs.nytimes.com/2009/11/18/john-paulson-gives-third-quarter-investor-update/ Permalink Financial Services, Hedge Funds, Top Headline, Bank of America, Citigroup, John Paulson Related Posts From DealBook Paulson Puts Money on Citi, Ditching GoldmanPaulson Fund Buys 168 Million Shares of BofABanking Group Warns Congress on Breakup PowerFeinberg Will Consider Competitive Pay OffersWindfall Seen as Bank Bonuses Are Paid in Stock Previous post Wells Fargo Settles Lawsuit Over Auction-Rate Securities Next post Pathology of a Financial Crisis 3 Comments 1. November 18, 2009 4:07 pm LinkI found that fact that Paulson thinks BofA will earn $3 eps by the end of 2011 the most alarming news in this story. Dealbreaker is reporting he actually thought the stock would tripple by the end of 2011.
â?? Paulie 2. November 18, 2009 5:18 pm LinkI didnâ??t read the $3 eps in Zachâ??s story. But then realized itâ??s becuase no one seems to get thatâ??s the important part of Paulsonâ??s long view. I see now that Dealbreaker was the only one to get this. So that could mean that if you were agressive and thought a new BofA CEO could offload all that govt dept and some how improve consumer spending in the next two years that BofA would be worth even more than $30.
â?? Griffin 3. November 18, 2009 5:21 pm LinkThis headline says the story is about John Paulson going long on banks so why are we reading about gold? I would have like to have seen that in another story.
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