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Opportunitie s in other people's failings

We don't mean to pick on the fund manager above (we hope our next ten years are as good as his first ten years) but his problems have offered us one opportunity. We have never much liked Sears Holdings. The retail business is truly dreadful and we are believers that we should own good retailers who accumulat e some of their real estate (e.g. Tesco, Target) rather than bad retailers on a liquidation premise. But we have never really had a case to go short the stock either. But Sears results have been particularly dreadful; its cr edit rating got downgraded to deep junk. Moreover, a short position in it i s negatively correlated to our remaining reflation bets (Citigroup, BofA) and negatively correlated to our one US property owning retailer (Target). This correlation is extremely strong through the balance sheet of the above-mentione d fund. They own 16.2 million Sears shares

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and average trading volume is only about 650 thousand. If the reflation bets continue s to fail then there is at least one huge forced seller of Sears stock. It would be very hard to liquidate a position so large. So our guess is that in that adverse scenario Sears stock would be hit very hard. So we shorted a l ittle Sears (now about 1 percent of the portfolio). If the American reflation bet succeeds we will lose money on the Sears position

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but we do not think we lose a lot because the retailer is truly dreadful. It looks like a good natural hedge in the event that we continue to be wrong on the reflation bet. We like natural hedges

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we collect them. And that is why

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even though we had a lot of things w rong in the last few months our performance has merely been bland. In general we would rather be right than wrong

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but we are well aware we will be wrong regularly

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and we want to manage the portfolio so when things do go wrong we are still here next month (and hopefully to get a few things right). We succeeded in at least that in the last couple of months. We hope to do better in the future.

What excites us?

We are getting increasingly chirpy about the bulk of our portfolio. Some of our large-cap stocks are now very cheap (especially the reflation-bet stocks on which we have been so wrong

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). Even Marc Faber (Mr. Gloomy himself) has pronounced

that US equities ar e “not terribly expensive”.

Despite that we are finding plenty of mid-cap frauds including frauds outside China

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. Alas

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we are reluctant to name the frauds we are shorting for all the usual and obvious reason. We have had particular fun finding really scumm y oil-and-resource stocks in the $1-2 billi on range. John is thinking of a blog post about the Swiss Private Banker, the red-necked oil driller, the Southern Preache r and the Slime-bag account ant which sounds more like the start of a very good

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John would love to increase the reflation bets as the stocks decline. Simon is

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as per usual

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more cautious. Good money-after-bad etc. Those arguments are largely won by Simon.

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Frauds outside China are most appreciated

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they are uncorrelated with our other shorts

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