Throwing Darts at the Greek Crisis?

Greeks are heading back to the polls after talks failed and the markets don't like it. Risk assets got slammed on Tuesday following the announcement and investors are now fearing the worst, an implosion in Europe.

I will say this from the onset: remain calm and start loading up on financials, technology, basic materials and energy. Top funds are buying this pullback and for good reason, the world isn't coming to an end and risks assets are oversold here.

Had a chat with Fred Lecoq, the former Canadian equity portfolio manager at PSP Investments. Fred and I used to work together and he is now an independent trader. He has his Bloomberg set up at home and he's doing very well for himself. In the last few years, he has shifted from a pure fundamentalist to an expert market technician.

Love talking to people who have actual positions on in this crazy market. Fred plays both sides, he's been making money shorting gold shares lately. We discussed gold, financials, energy and basic material. I told him that there is a capitulation (total washout) going on in U.S. coal shares following Patriot Coal's lower outlook.

"Don't bother catching falling knife, wait to some bottoming and signs of stability and reversal before buying." Admittedly, he's absolutely right, but I think things are way overdone and as 13-F quarterly filings come out, I'm honing in on what top funds were buying in Q1 2012, and it's pretty much concentrated in the sectors I mentioned, ie. financials, tech, energy, and basic materials.

For example, while some hedge funds are gaining on JPMorgan's woes, big investors bought JPMorgan in Q1 and you can be sure they bought more after it plunged last week. Moreover, top funds are betting on AIG and scooping up shares of financials and selling Apple at these levels (at these levels, I prefer Amazon and Google over Apple):

Big U.S. hedge fund managers showed a lot for love for financial stocks in the first quarter of this year, regulatory filings reveal.

David Tepper's Appaloosa Management added shares of Bank of America. Daniel Loeb's Third Point accumulated big stakes Capital One Financial Corp and Wells Fargo & Co. And Bruce Kovner's Caxton Associates increased his stake in Bank of America Corp by 6 million shares.

Meanwhile, so-called 13-F regulatory filings from other managers showed they had good timing in getting out of stocks that have been pilloried in the markets during the past few weeks.

For instance, Coatue Management's Philippe Laffont, who used to be one of the biggest bulls on Green Mountain Coffee Roasters Inc, appears to have bailed out on the once high flying stock at just the right time.

In the first quarter, Laffont's fund unloaded some 2 million Green Mountain shares, according to a regulatory filing. It proved to be a shrewd move as the price of the shares has been cut nearly in half since the start of the second quarter.

Laffont, like other managers, disclosed his fund exited Green Mountain in a 13-F filing with the U.S. Securities and Exchange Commission. Roughly 45 days after the end of each quarter, money managers are required to give investors a glimpse of their holdings of U.S. stocks. Tuesday was the filing deadline.

By contrast, Steven Mandel's Lone Pine Capital added over 3 million shares of Green Mountain in the first quarter, bringing the fund's total position to 5.99 million.

It is important to remember that 13-F filings are notoriously backward looking - a lot of trading can happen in the 45 days after a quarter ends. But the filings do provide investors with some insight into which managers were ahead of the curve in foreseeing potential good or bad news with a company.

The filings, however, do not reveal short positions - bets that a stock price will fall. And there is also little disclosure on bonds and other securities that do not trade on exchanges.

Still, even this incomplete picture can give investors who want to trade like the rich and famous of the hedge fund industry an idea about what sectors and stocks top managers favor or are going cold on.

FINANCIALS

Tepper's Appaloosa added 7.5 million shares of Bank of America and 6.1 million shares of Citigroup Inc in the first quarter. Yet the shares of both banks have declined more than 20 percent since the end of the first quarter.

Leon Cooperman's Omega Advisors more than doubled his stake in JPMorgan Chase & Co in the first quarter, bringing the fund's holding to 2.2 million shares. Over the past week, JPMorgan shares have fallen about 10 percent since the bank disclosed a $2 billion trading loss.

Eric Mindich's Eton Park, which held 20 million shares of Bank of America at the end of 2011, revealed it no longer had any of the shares by the end of the first quarter.

MEDIA

Eton Park increased its stake in Rupert Murdoch's News Corp to 43 million shares at the end of the first quarter, up from 25.9 million. Mindich's hedge fund upped its stake in the company, even as it was announced that a former editor will be prosecuted in a widely publicized telephone hacking case.

Loeb's Third Point slashed its position in Dish Network in half to 2 million shares.

TECH

Andreas Halvorsen's Viking Global Investors dramatically cut its position in Apple Corp, its biggest holding in the fourth quarter. At the end of the first quarter it owned 173,300 shares, down from 1.29 million shares in the previous quarter.

Meanwhile, Viking significantly added to its position in Cisco Systems Inc. The fund held 32.3 million shares at the end of the first quarter, up from 7.4 million shares.

Thomas Steyer's Farallon Capital Management increased its stake in Yahoo by 646,000 shares to 1.57 million shares.

Perella Weinberg Partners Capital Management reduced its Apple shares to 152,000 from 200,000.

CONSUMER

George Soros' family office, Soros Funds Management, developed a taste for cake in the first quarter. The billionaire investor's firm increased its stake in Sarah Lee Corp to 7.4 million shares from 928,000 shares.

Warren Buffett and his Berkshire Hathaway boosted its position in Wal-Mart Stores Inc by 20 percent in the first quarter, just before news broke of a bribery scandal involving the company's Mexican unit. Buffett recently defended Wal-Mart, saying the scandal did not change his opinion of the company.

John Paulson's Paulson & Co. slashed his stake in homebuilder Beazer Homes USA Inc by nearly 53 percent to 2.3 million shares.

AUTOS

Buffett also showed a liking for automobiles in the first quarter. Berkshire Hathaway opened a new position in General Motors Co valued at $256.6 million.

Why are top funds betting on financials and a housing recovery? The two go hand in hand. Data on quarterly filings is slowly seeping through but I will post my "ultimate spying on top funds" to give my readers a detailed breakdown of what top hedge funds, mutual funds and even pension funds were buying in Q1 2012 (stay tuned).

As for Greece, had dinner over at a friend's house last night and we got into a heated discussion with our parents on Greek politics as we broke bread. To be honest, I hate talking Greek politics because it makes my blood boil watching these power hungry fools shaming a great country with a rich history.

My friend started the dispute by saying "if he was a poor, unemployed and desperate Greek, he would have voted for Alexis Tsipras, the leader of SYRIZA." And he added: "You can't reward the two parties that brought Greece to the brink with one scandal after another."

I understand his point and believe that many who voted for extreme right and extreme left parties did vote out of frustration and desperation. But as my friend's dad reminded us, when a country faces a crisis, you can't put a "political clown" in power. And that's exactly what Alexis Tsipras is, a political clown whose divisive rhetoric is dangerous. If he wins, God help Greece.

But I seriously doubt Tsipras will muster more votes the second time around. He's been exposed as a power hungry fool who basically killed any chance of a coalition government. This will hurt his chances of winning the clear majority he needs to win as most Greeks want to stay in the eurozone and most wanted a coalition government. Also, my hunch is the 35% who didn't vote last time, are going to come out in droves to support pro-European parties.

As far as the Germans are concerned, their frustration is building, but we discussed this over dinner last night. My friend said in a family there are always richer members and poorer members: "Alberta is rich and supporting Ontario and Quebec right now." I reminded him that for decades it was the opposite, and that Ontario and Quebec transfer payments helped Alberta and Newfoundland build their mega energy infrastructure, allowing them to prosper.

The same thing has to happen in Greece and the other peripheral countries. One way austerity measures are a recipe for disaster. As "Merllande' form a new and testy alliance, saying they want Greece to stay in the eurozone, they have to back it up with mega investments. But they need to get the governance right or the Greek crooks (politicians) will eat them alive.

I was happy to hear that Hollande said he was prepared to "put everything on the table" at a forthcoming informal summit of EU leaders in Brussels on May 23, including the topic of eurobonds, which creates friction with Germany. Someone is paying attention to what George Soros and others have been calling for as the definitive solution to the euro crisis.

Finally, Landon Thomas Jr. of the NYT reports, Bet on Greek Bonds Paid Off for ‘Vulture Fund’:

When Greece announced on Tuesday that it had made a €436 million bond payment to the hold-out investors who rejected the country's historic debt revamping deal in March, the decision came as no surprise. After all, with the Athens government in disarray and investors wary of having anything to do with Greece, now would be a bad time to make things worse by defaulting on a bond payment.

What’s news is where most of that money went. Almost 90 percent was delivered to the coffers of Dart Management, a secretive investment fund based in the Cayman Islands, according to people with direct knowledge of the transaction.

Dart is one of the best known of the so-called vulture funds, which have a track record of buying the distressed bonds of nearly bankrupt countries — and if they do not get paid, suing the governments for the money. Dart and another big vulture fund, Elliott Associates, perfected that strategy during the various Latin American debt crises in years past.

By accumulating the bulk of these bonds at prices that traders estimate to be from 60 to 70 cents on the dollar, Dart stands to make a hefty profit, having received 100 cents on the dollar — an outcome likely to be especially galling to the Greek banks and other local institutions that were forced to take a 75 percent loss on their Greek bond holdings.

The big winning bet by Dart could presage a more aggressive tack by vulture funds, if Greece is forced to restructure its bonds a second time.

Lynn Smith, a spokeswoman for Dart, said that the firm does not comment on market speculation.

Dart’s payday may well offer encouragement to other holdouts among investors now in possession of about €6 billion, or $7.6 billion, in Greek bonds. Another payment is due in September, although for a lesser amount.

Greek officials insisted Tuesday that the reason to pay largely had to do with the fact that Greece was lacking a government. But there was also evidently fear that Dart, or smaller holders of the same bonds, might immediately sue Greece — something that could potentially tie up the European bailout funds on which the country is counting on to stay in business.

“They caught us at the weakest possible time,” said Gikas Hardouvelis, a senior economic adviser to Prime Minister Lucas Papademos who was involved in the decision making process. “But it does not prejudice future judgments on this matter.”

Greece is scheduled to hold elections next month. And under a new government, especially one that may include the leading left-wing vote-getter, Alexis Tsipras, the attitude toward holdout investors is sure to harden. Not to mention the fact that Greece could default on a broader level if Europe finally cuts off funds.

Indeed, concerns are mounting about coming payments that Greece is obliged to make on the €50 billion or so of its bonds held by the European Central Bank.

On May 18, for example, the country must make such a payment, worth €3.3 billion. For now, bailout funds are set to cover such obligations. But if those funds were cut off, Greece would be in no position to make future bond payments.

Already, the decision to pay Dart and the other holdouts is being attacked in Greece, not just by left-leaning politicians, but by market experts who predict it will enrage the thousands of small Greek investors who took haircuts on their own holdings of the government’s bonds.

“I think it was a huge mistake to pay these guys,” said Jason Manolopoulos, a Greek hedge fund investor and author of a book on Greece's debt burden. “This will just give the left more ammunition to attack the pro-European parties.”

The Dart fund’s founder is Kenneth Dart, heir to a billion-dollar Styrofoam cup business and a U.S. tax exile who lives in the Cayman Islands. The Dart fund has been investing in sovereign debt since the 1980s. Dart, along with Elliott Associates, is also suing Argentina, which defaulted on its debt in 2002. The funds are seeking up to $2 billion in payments from the country via U.S. courts.

Now you know why I titled this post "throwing darts at the Greek crisis". I am a bit surprised that Greece paid these hedge fund holdouts. I would have told them in no uncertain terms to "fuck off" and dragged them through court.

There is a lot of rubbish surrounding this Greek crisis. Europe is not about to implode and a lot of short-sellers betting on a Greek exit and implosion of Europe might be in for a major surprise in the next year.

Importantly, I believe the consensus is way off when it comes to Greece, Europe and even the U.S. and global recovery. I am extremely bullish and if I were running a major hedge fund or bank prop desk, all my models would be in extreme RISK ON mode.

The big report I am waiting for comes out in the first Friday of June, the U.S. jobs report. The market could go lower till then but watch out, that report might be a major catalyst for a HUGE leg up.

I might end up wrong but that's the way I feel. I see what is going on in terms of a German recovery and housing recovery in the U.S., see how much liquidity is being pumped into the global financial system, and truly believe that those shorting this market or sitting on the sidelines, adopting a stay-liquid-and-wait strategy, are going to get whipped hard. The Mother of all risks in 2012 remains the 'risk-free' bond market.

Finally, a friendly reminder to follow me closely on Twitter (@PensionPulse) as I am tracking a lot of news, including 13-F filings of top funds. Below, Bloomberg's Dominic Chu reports on portfolio moves by Berkshire Hathaway's Warren Buffett, Paulson & Co.'s John Paulson and SAC Capital Advisors' Steve Cohen. He speaks on Bloomberg Television's "Inside Track."