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Thursday Value Overview

A big rally today across the board as we heard another potential resolution with Greece, great news out of Morgan Stanley (MS), and since denied rumors of a debt ceiling deal. I have a link to some Chuck Royce commentary, news from Lee Ainslie, an announcement of the merger between Express Scripts (ESRX) and Medco (MHS), which actually may make sense, John Paulson comments to investors and some more skepticism on the debt deal.

On the Twitter Feed today I received a link to small cap legend Chuck Royce’s most recent commentary from earlier this month. He talks about volatility in the past quarter, and how he doesn’t view it as surprising. Royce said today’s period reminds him of the 1970’s because of the length and the pessimistic economic mood. Most notably, he says that his firm’s meetings with company managers are decidedly more optimistic than headlines suggest. According to Guru Focus, Royce’s largest holdings are Unit Corp, Reliance Steel, and Pan American Silver.

Guru and Tiger Cub Lee Ainslie of Maverick Capital has put together a fund to seed other hedge funds. A July 15 SEC filing indicated that the firm has put $22 million into an entity called Maverick Seed Partners LP. The Bloomberg article notes that has gone way up in the first half of the year.

This morning brought a new merger announcement with Express Scripts planning to buy Medco Health Solutions for $29.1 billion in cash and stock. In a sign that the merger may make sense, Medco was up nearly 15% on the day and Express Scripts was up more than 5%. This is a double winner for Steve Mandel. Express Scripts makes up 4.3% of his portfolio and Medco makes up 1.4%. Larry Robbins has a similar makeup as well.

John Paulson has apparently told investors that he was too bullish earlier this year, and he’s now more bearish. He’s now shorting the Euro as protection for what’s going on in Europe. He’s cutting his long exposure to 60% or less, and moving away from companies that overly rely on the problem mortgage market. That means less Bank of America and more Capital One. Could it have been Paulson’s selling that drove Bank of America to a bottom?

We’ve heard about how Wall Street thinks there will be a debt deal because they couldn’t believe that politicians would be that irrational, but it turns out that some large hedge funds are preparing for the worst and moving into cash. This may be the most telegraphed crisis in a long, long time, but whether there actually will be severe disruptions depends not on whether we saw it coming, but whether investors actually thought it would occur. I think there are many out there who can’t imagine it occurring, hence the recent rallies. I’m a bit more skeptical. Consider comments from former senator Judd Gregg, who is now with Goldman Sachs, "My gut tells me that we'll need a weekend of drama — maybe a weekend of the government not paying its bills — politicians need drama to make something happen. As soon as Social Security checks don't go out, the politics will change. I suspect it'll take artificial drama to get closure past the House." Don’t say you weren’t warned.

Disclosure: Long BAC

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

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