Hedge Fund Titan John Paulson Bullish on Bonds and Equities, Inflation Concerns Remain

By: Trader_Mark

John Paulson... super bull? Goodness.  To some degree I find "whale watching" a bit overrated, but after being the most obvious winner of the mortgage meltdown, and then piling into gold ahead of a huge run ... Paulson's moves are watched by the investment world very closely.

One of the hottest investors on the planet is now chock full of bonds - especially the moral hazard kind (i.e. backstopped by US government).  And has his highest net long exposure in "a long time".  No one will be correct forever, but it does make you stand notice...especially since his success is based on actually making big macro calls rather than building an army of computers co-located as close as possible to a stock exchange, so he can surge ahead of your order by 4/1000ths of a second to make mad money. Via Reuters:

• Billionaire hedge fund manager John Paulson said on Tuesday he still sees compelling long-term returns in equities even after their sharp run-up this year, while holding no short positions in the credit markets.
• "Today our net long exposure is perhaps the highest it has ever been in our portfolio," Paulson said during a luncheon presentation at the Japan Society.
• Paulson, who has run his own hedge fund since 1994, has become a star investor after correctly predicting the sub-prime credit crisis in 2007. That reaped him a $3 billion profit.

• "We still find a lot of compelling long investments on the equity side," he said, citing specifically Bank of America (BAC), U.S. cable-television giant Comcast Corp (CMCSA), and Germany's HeidelbergCement AG (HEIG.DE).
• Paulson said that at the end of 2008 he viewed the credit correction as having run its course. By April he had poured cash back into the sector.  "That is why we don't have any shorts in credit," he said.
• Based on his estimates of the company's (BAC) earnings potential and the expectation that loan loss provisions will start to drop in 2010, Paulson remained upbeat on the beleaguered bank.  "I think the worst is behind us in terms of provisioning," Paulson said, adding: "I would expect provisioning expense to be considerably lower in 2010 versus '09 and again much lower in 2011 versus 2010."

• Given his prescient bearish call on mortgage credits, Paulson's views are widely watched for what he has in his $33 billion investment portfolio.
• He highlighted the attractive yields on credit issued by GMAC due in Sept 2011, the former General Motors automotive financing company that the U.S. government propped up at the end of 2008.
• By Paulson's thinking, the government involvement is equivalent to an explicit guarantee on GMAC's finances.  (you cannot disagree with that)  "So instead of buying (a) Treasury bond which yields 84 basis points, I can buy GMAC which is almost, I consider equivalent to a government bond and I can get 11 percent. That is why we have allocated so much money to this particular security," he said.

• Even as credit and equity markets looked attractive, he did reiterate his concerns that over the long-term inflation will be a problem because the government's mountain of stimulus cash will be difficult, politically, to withdraw from the economy.
• "Therefore we are concerned about high rates of inflation in the future. As an investor I became very concerned about having my assets denominated in U.S. dollars," he said.
• "So I looked for another currency in which to denominate my assets in. I feel that gold is the best currency."  "An increase in the monetary base leads to an increase in the money supply, which then leads to inflation." ('output gap' be damned... the return of the late 70s, ealry 80s only this time no Volcker in charge - only ever easy Ben)
• Paulson's combined gold and gold-related investments made up more than 46 percent of his firm's holdings at the end of the second quarter of this year.  (staggering... just staggering)

• "There are lots more long opportunities than short opportunities in the market. Zero interest rates are a huge tonic," he added.
• "The amount of quantitative easing has stimulated financial markets and will start to appear in the real sector," he said.  This is what the US Federal Reserve hopes will happen: that easy money will lead to asset price reflation, lifting confidence and fueling a recovery in the real economy.
• ... other large positions are in Heidelberg Cement and Renault, an indirect bet on consumer demand in emerging markets.

By Trader Mark

http://www.fundmymutualfund.com

Mark is a self taught private investor who operates the website Fund My Mutual Fund (http://www.fundmymutualfund.com); a daily mix of market, economic, and stock specific commentary.

See our story as told in Barron's Magazine [A New Kind of Fund Manager] (July 28, 2008)

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