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   Strategies & Market TrendsKen Heebner and CGM Focus Fund CGMFX


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From: Sam Citron7/21/2008 12:26:43 PM
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Portfolio manager casts an optimistic eye on economy
Boston Globe
July 6, 2008

Ken Heebner, a portfolio manager at Capital Growth Management in Boston, has delivered some of the best investment performances of any manager in America. He often operates as a contrarian, avoiding technology stocks in the late 1990s and betting early against mortgage companies several years ago. Heebner, 67, spoke last week to Globe reporter Ross Kerber on where the economy is heading.

There's a lot of pessimism about the economy. What's your take?

My view of the world is quite different. I think people are very concerned about our economy, they're starting to realize there could be higher inflation to come. The consensus is that we'll bring the rest of the world into our recession. But my view is we've probably seen the weakest period of economic activity. The economy may not be robust in the next year, but it's seen its low point and at some point will move higher.

That's reassuring, but how can this be?

I understand how serious the housing problem is. But it's not as broad a problem as widely perceived. It's reduced everyone's sense of financial well-being, but a third of homeowners don't have a mortgage, and the vast majority of people made down payments and have fixed-rate mortgages, so there's no financial strain. For them, the only impact is the psychological impact of declining housing prices. So therefore I don't think this is as big a deal as everyone else does. We've passed the point of maximum distress.

What evidence is there for that?


First, on manufacturing, the Institute for Supply Management's index seems to have reached a low of 49, and when this gets to 45, that's a recession. Additionally, the Fed started aggressive ly easing interest rates, and the impact of those eases will start to be felt. But I think the driver of the global economy is the developing countries, with a population of 3 billion. China, Russia, India, Brazil, and a lot of smaller countries. If you add up Japan, Europe, and the US, you're talking about a little less than 1 billion people, and you have 3 billion people going strong.

But those 3 billion have less money and less GDP. How will that drive the world economy?

These people don't have the roads, the airports, the infrastructure - and the building of these creates big demand for industrial raw materials and energy in all forms. In a nutshell, these foreign countries place a high priority on growth. The broad pattern is they're more concerned about maintaining growth than other factors, be it pollution or inflation.

Globe columnist Steven Syre has twice named you fund manager of the year, and Fortune magazine recently dubbed you "America's hottest investor." So can you talk about what you are buying and selling?

The only two stocks I've made references to [owning] in the last few months are Petrobas [Brazil's Petroleo Brasileiro SA] and Schlumberger [an oil-services company]. I'm changing the portfolios so frequently.

What do you expect US growth rates to be? And inflation?

Our economy will surprise us on the upside, growing between 2 to 4 percent over the next 12 months. I'm a bull on the US economy. Clearly housing has been a negative, but there's only four states where they walked housing prices to Never Never Land, and now it's coming back to a realistic level. Because of increasing demand from these developing economies, I can see, three years from now, inflation approaching 10 percent.

How can you be such a bull on the economy and say inflation could be such a potentially big problem?

I didn't say it's a big problem. In the 1970s and 1980s, when inflation was high - we made good money investing in stocks in that period. I'm running a portfolio. I'm not running the country. The challenge inflation presents is that price-to-earnings ratios tend to decline. So when you invest money, you want to have enough growth to offset that compression.

What impact will the outcome of the US elections have on the market?

[Barack] Obama says he wants to eliminate the Bush tax cuts and take the maximum marginal tax rates to 39.6 percent, then institute some Social Security taxes - and says he'll increase the capital gains rate, now 15 percent. That would tend to be a negative factor. It's hard to quantify, but when I think what effect the election could have on the investment world, taxation is where there's a clear difference [between the candidates]. But it would probably be easier for Obama to say, let's drill offshore for oil. That would be a huge benefit to oil-services company stocks. . . . I do think Obama's going to be elected president of the US, and the Democrats [will] win a huge victory in November.

What do you think has been the biggest surprise in the markets this year?

There was a general fear that we would fall into a recession and it hasn't done that. We've gone sideways. The big surprise is that the economy has held up as much as it has.
People are overlooking the fact that we're having a huge boom in the farm economy. Also, the energy area is very positive. And I further expect the weak dollar to energize our exports and manufacturing industries. Our natural competitive strengths, our innovation and creativity, remain unique skills in the global economy. We're going to start to export cars, we'll start to export steel.

What are the biggest areas of problems for the US economy?

The brokerage firms were enjoying huge profitability because of the boom in private equity and hedge fund trading, and they won't have that. Higher inflation is always bad for insurance companies, and the banking system still has all the bad mortgage loans eroding its base. It may be a year more of that. They still have a lot more mortgages to write off.

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To: Sam Citron who wrote (11)10/4/2008 1:00:46 AM
From: Condo
   of 37
 
I'll jump into both CGMFx and CGMRx when the long-term market trend improves. But that could be awhile coming.


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To: Condo who wrote (12)10/4/2008 11:01:38 AM
From: Sam Citron
   of 37
 
Amble,

I am curious why you would want to own both these funds. What do you get from CGMRX that CGMFX doesn't provide, except for a preordained bias toward "real-estate", which KH has cleverly redefined to include such things as mines?

Sam

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To: Sam Citron who wrote (13)10/4/2008 1:22:38 PM
From: Condo
   of 37
 
What do you get from CGMRX that CGMFX doesn't provide..?

CGMRx moves more calmly than CGMFx most of the time, so CGMRx will go into the wife's IRA.

The two portfolios do always seem to overlap some.

CGMRx Top Ten Holdings as of 6/30/08:
6.3% Arch Coal, Inc. (ACI)
6.2% PEABODY ENERGY CORPORATION (BTU)
6.0% CONSOL ENERGY, INC. (CNX)
5.9% Cleveland-Cliffs Inc. (CLF)
5.2% FREEPORT-MCMORAN COPPER & GOLD B (FCX)
5.1% Digital Realty Trust, Inc. (DLR)
4.9% Boston Properties, Inc. (BXP)
4.9% Annaly Capital Management, Inc. (NLY)
4.8% Federal Realty Investment Trust (FRT)
4.8% Ventas, Inc. (VTR)

CGMFx Top Ten Holdings as of 6/30/08:
6.5% Weatherford International, Inc. (WFT)
6.3% Schlumberger, Ltd. (SLB)
6.3% United States Steel Corporation (X)
6.3% PEABODY ENERGY CORPORATION (BTU)
6.3% Brazilian Petroleum Corporation ADR (PBR)
6.2% FREEPORT-MCMORAN COPPER & GOLD B (FCX)
6.2% Nabors Industries, Ltd. (NBR)
6.2% CONSOL ENERGY, INC. (CNX)
6.0% Hess Corporation (HES)
5.9% Wachovia Corporation (WB) [short]

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To: Condo who wrote (14)10/6/2008 11:40:43 AM
From: Sam Citron
   of 37
 
Calmness is good most of the time but I wouldn't want to put KH in a straight-jacket. He was able to wrangle out of it in creatively redefining real-estate in order to participate in the commodities boom, but now that commodities AND real estate are in a bust, it might be difficult for CGMRX to perform.

Do you happen to know whether shorting is permitted in CGMRX's charter?

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To: Sam Citron who wrote (15)10/6/2008 11:51:33 PM
From: Condo
   of 37
 
Calmness most of the time...
During the last market uptrend from the summer of 2003 through the end of 2007, CGMRx had a -19% price drop along the way, nearly matching a CGMFx worst of -20%. That means the 2 funds carry the same potential for heartburn (maximum adverse excursion) even if the day-to-day price movement differs (e.g., standard deviation). So FWIW, I was probably wrong to give "calmness" as an argument for CGMRx.

The CGMR charter says KH can invest 20% in anything he pleases (more if he gives notice of adverse conditions) but no short-selling allowed. The 80% in "real estate related" includes areas such as mining, fertilizer, materials of all kinds, international real estate, and companies whose business is 50% not real estate.

Recently the CGMRx and CGMFx portfolios have been about 70% different, so it seems like owning both would add overall diversification as long as the 2 funds deliver similar returns during market uptrends. But I take your point that KH is far more constrained in CGMRx than in CGMFx, and if commodities and real estate remain in a worldwide slump his choices for CGMRx are more limited.

Since Ken Heebner does run both funds, I wonder how much coordination is involved between the two. Obviously he does all his shorting in CGMFx. But does he pursue ideas in CGMRx whenever possible and do the rest in CGMFx? Both funds have done relatively well over the past 10+ years. How can that be, given the vagaries of the real estate market, unless he's been treating the two as one conjoined fund? Even if so, I take it you think that strategy has "run out of real estate". (<g>)
.:.

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To: Condo who wrote (16)10/7/2008 11:39:41 AM
From: Sam Citron
   of 37
 
I assume KH simply tries to maximize returns in each fund subject to the constraints imposed by their charters. I expect CGMFX to continue to outperform CGMRX based mainly on its more liberal charter combined with KH's personality, which needs the freedom to take the bold contrarian initiatives that have been the hallmark of his career.

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From: Sam Citron10/28/2008 1:32:52 PM
1 Recommendation   of 37
 
Out of energy and into financials as he awaits the next theme

Heebner says the fund lost ground when he sold off big holdings in energy, metals, and other commodity-oriented stocks over the summer. Once market favorites, these holdings were losing ground fast. He says those positions, which had dominated the CGM Focus portfolio, are all but gone now. Financial stocks, the market sector that terrifies investors, now rank as the fund's biggest portfolio category today.

Heebner declined to name any financials stocks purchased for the fund. He said most were bought when selling pressure made the shares irresistibly cheap, not because they fit into any new economic theme.


boston.com

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From: JakeStraw11/11/2008 3:48:04 PM
   of 37
 
What's Next for Ken Heebner and CGM?
biz.yahoo.com

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To: Sam Citron who wrote (18)11/15/2008 1:30:39 AM
From: Condo
   of 37
 
"Bigfoot" steps in.

bloomberg.com

Heebner Buys Financials, Abandons Top Energy Stakes (Update2)

By Sree Vidya Bhaktavatsalam

Nov. 14 (Bloomberg) -- Kenneth Heebner, the fund manager who beat all peers last year by buying energy stocks and selling financials, reversed course in the third quarter, snapping up Citigroup Inc., Wells Fargo & Co. and Bank of America Corp.

Heebner's Capital Growth Management LP, based in Boston, bought 15.4 million shares of Wells Fargo, 27 million shares of Citigroup and 15.6 million shares of Bank of America in the three months ended Sept. 30, according to a regulatory filing today. The combined stakes equal about 15 percent of the U.S.- listed stocks reported in the filing.

The firm sold all its shares of Schlumberger Ltd., along with those of Freeport-McMoran Copper & Gold Inc., Peabody Energy Corp., and Consol Energy Inc. The four companies were four of the money manager's top five holdings as of June 30, Bloomberg data show.

Heebner, 68, known for his rapid movements in and out of stocks, exited banks in the second quarter of 2007 after saying that the credit crisis would hobble earnings. He put more than three-fourths of the fund into natural resources and energy, helping his CGM Focus Fund to an 80 percent gain in 2007, the best performance by a U.S. stock fund.

The $7.4 billion CGM Focus has dropped 46 percent this year, lagging behind 99 percent of rival funds, according to Bloomberg data. The fund has been hurt by plunging prices of oil and commodities. Crude oil prices have tumbled 62 percent since reaching a record $147.27 on July 11, as a global economic slowdown cut demand.

Heebner wasn't available for comment on the filing with the U.S. Securities an Exchange Commission, spokeswoman Martha McGuire said.

`Bigfoot'

Nicknamed ``Bigfoot' by industry professionals for his large and sudden trades, Heebner had almost half of the firm's portfolio in financial companies as of Sept. 30, Bloomberg data show. Wells Fargo is the largest holding owned by Capital Growth, while Citigroup and Bank of America rank third and fourth.

Energy and materials companies accounted for 13 percent of Capital Growth's assets, the data show. The firm held 13 million shares of Petroleo Brasileiro SA, the Brazilian oil company. Petrobras is the firm's second-biggest holding.

Heebner also purchased shares of Wal-Mart Stores Inc. and McDonald's Corp. in the quarter, as the companies drew cash- strapped customers looking for cheaper prices. Capital Growth bought 7.95 million shares of Wal-Mart, a new position, and 7.68 million shares of McDonald's.

Wal-Mart shares have risen 13 percent this year, while those of McDonald's have fallen 5.1 percent. The Standard & Poor's 500 Index has declined 40 percent.

Heebner is the co-founder of Capital Growth, which manages more than $10 billion in assets. Besides CGM Focus, Heebner manages the $2.3 billion CGM Realty Fund and the $674 million CGM Mutual Fund.

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