Morning Brief: Aurelius Capital Gets Pushback on Puerto Rico

The effort by Mark Brodsky’s Aurelius Capital to throw out Puerto Rico’s bankruptcy met a new obstacle this week when the U.S. Solicitor General defended the constitutionality of the Financial Oversight and Management Board for Puerto Rico.

Aurelius and other hedge funds owning Puerto Rico’s general obligations bonds, which are in default, had filed

a suit in August to toss the entire bankruptcy, claiming that the oversight board, created by Congress under the Puerto Rico Oversight, Management, and Economic Stability Act, was unconstitutional. Puerto Rico filed for bankruptcy in May.

In a court filing, the U.S. Solicitor General said that the special territorial status of Puerto Rico gave the U.S. the authority to create the Promesa board. “Congress enacted Promesa pursuant to its power under the Territory Clause, which provides that ‘Congress [shall have] power to dispose of and make all needful Rules and Regulations respecting the Territory or other Property belonging to the United States,’” the filing stated. “Accordingly, the Board is vested with extensive authority over Puerto Rico’s fiscal matters.”

Last month, the Puerto Rican government, creditors, and unions also filed briefs supporting the Board against the Aurelius lawsuit.

“We welcome the United States Solicitor General’s legal arguments in support of Promesa and the board’s constitutionality,” said Natalie Jaresko, the board’s executive director. “Promesa was enacted by Congress to give Puerto Rico the tools to address its unsustainable financial situation and establish a road to economic recovery. The devastation of Hurricanes Irma and Maria makes it even more important to have in place an orderly process for restoring the island’s finances, providing oversight and increasing confidence among residents and businesses while upholding equitable treatment for creditors.”

___

Hedge funds raised their equity holdings to record highs during the third quarter, a new report from Bank of America Merrill Lynch concludes.

Net stock exposure rose by 3.8 percent during the third quarter to reach $824 billion at the start of the fourth quarter, a record high. BAML’s analysis was based on the quarterly 13F filings for 951 hedge funds.

Cash holdings decreased from 3.5 percent to 3.4 percent, the lowest since mid-2015 and below the five-year average of 3.7 percent, the report said. It warned that weak capital flows could be a headwind for hedge funds come January redemptions, due to the low cash positions.

Hedge funds also bought a record amount of biotech stocks and hold the highest weighting of technology stocks since the U.S. presidential election a year ago, BAML said.

The top four holdings of hedge funds at the end of September were all tech stocks: Facebook, Google, Amazon and Microsoft.

___

The hot new London-based macro hedge fund backed by George Soros, Glen Point Capital, is opening a New York City office, Reuters reported, citing sources.

Glen Point, launched by former BlueBay fund managers Jonathan Fayman and Neil Phillips, now has $2.3 billion in assets, the report said, adding that Glen Point has gained 17.5 percent this year through October.

Fayman is moving to New York to staff the office, Reuters added.

___

Hedge fund manager Leon Cooperman, CEO of Omega Advisors, said the stock market is “reasonably fully valued” but not “overvalued.”

Speaking on CNBC Thursday, Cooperman said the conditions for a big drop, like “euphoric valuations,” are missing. Cooperman is long the pricey tech stocks that have been driving the market, with Google his largest holding, and Facebook another big one.

While many investors consider those companies growth stocks, Cooperman says he considers them value stocks.

“If we’re headed for a recession, I’m in trouble,” he admitted.

A week earlier, legendary activist Carl Icahn said he thought that the market “smells a little like euphoria.”