"Tracking Bruce Berkowitz’s Fairholme Portfolio – Q4 2011 Update"
"This series of articles are an ongoing analysis of the changes made to Fairholme’s US stock portfolio on a quarterly basis. Bruce Berkowitz’s Fairholme US stock portfolio size dropped ~25% during Q4 2011. Given that a majority of his large positions increased in value during the quarter and the fact that a lot of his positions have been trimmed or disposed, it is obvious the fund saw a significant amount of redemptions during the quarter. Large scale redemptions are an ongoing problem for Fairholme following the underperformance of the fund since the credit crisis – it made huge bets on American International Group (AIG), Bank of America (BAC), and a horde of other companies in the financial sector that continued to lose value.New stakes:JP Morgan Warrants:  JPM WTS (expiry – 10/28/2018, strike price - $42.42) is a very small (~0.07% of the US stock portfolio) position that was initiated in Q4 2011. The warrants traded between $8.20 and $11.66 during the quarter. It is currently trading at $10.34 compared to a share price of $37.92 for a leverage of 3.67-times. Berkowitz is using these warrants as a leveraged long-bet on JPM shares. The warrants will expire worthless if the stock price is below $42.42 at expiry and the entire capital will be lost. Before considering this position note that: 1. there is no strike price readjustment for annual dividends of $1.52 or below, and 2. there is no compensation based on time value, if a catalyst (acquisition) reduces the life of the warrant.Stake Disposals:Brookfield Asset Management (BAM): BAM was a significant ~1% position initiated in Q1 2011 when the price-per-share varied between $31.48 and $33.29. BAM share price varied between $25.87 and $29.45 in Q4 2011. Hence, even in the best case scenario Berkowitz exited this position at a loss. The about-turn within three quarters indicates a strong bearish bias.AT&T (T), Banco Santander (STD), Royal Dutch Shell PLC (RDS.A), Telefonica (TEF), Verizon Communications (VZ), Vodaphone (VOD), and Winthrop Realty (FUR):  All of these positions were very small and each accounted for less than 0.1% of the US stock portfolio value. As such, those disposals do not represent a clear bearish bias – most probably they were liquidated to fund redemption requests.Stake Increases:American International Group Warrants: AIG WTS (expiry – 01/19/2021, strike price - $45) is a 2.2% of the US stock portfolio position that was increased marginally in Q4 2011. The warrants traded between $4.66 and $7.95 during the quarter. It is currently trading at $7.14 compared to the current stock price of $26.60 for a leverage of 3.7 times. Berkowitz is using these warrants as a leveraged long-bet on AIG shares. The stake is significant and implies a very strong bullish bias as he already has a humungous 35% position in AIG common stock. The warrant will expire worthless if the stock price is below $45 at expiry and the entire capital will be lost. Before considering this position note that: 1. there is no strike price readjustment for annual dividends of $0.67 or below, and 2. there is no compensation based on time value, if a catalyst (acquisition) reduces the life of the warrant.Bank of America class A Warrants: BAC WTS (expiry – 01/16/2019, strike price - $13.30) is a small 0.28% of the US stock portfolio position that was marginally increased in Q4 2011. The warrants traded between $2.04 and $3.60 during the quarter. It is currently trading at $3.65 compared to the current stock price of $8.10 for a leverage of 2.2-times. Berkowitz is using these warrants as a leveraged long-bet on BAC shares. The stake is significant and implies a strong bullish bias as he already has a sizable ~1% position in BAC common stock. The warrant will expire worthless if the stock price is below $13.30 at expiry and the entire capital will be lost. Before considering this position note that: 1. there is no strike price readjustment for annual dividends of $0.04 or below, and 2. there is no compensation based on time value, if a catalyst (acquisition) reduces the life of the warrant.Stake Decreases:Citigroup Inc (C): C was a fairly large ~1% position that was significantly reduced this quarter. Clearly this represents a bearish bias. The position was initiated in Q4 2009 when the price-per-share varied between $33.10 and $46.30. In Q4 2011, the price-per-share varied between $23.11 and $34.16 and hence even in the best-case-scenario Berkowitz could have exited only with very modest gains. Over 90% of the position was liquidated during the quarter.Regions Financial (RF), Goldman Sachs (GS), and Jefferies (JEF): RF, GS, and JEF were large positions at the time they were initiated. Over the last few quarters, the positions have been trimmed significantly and now they account only for a very small portion of the overall portfolio. As such, the trades indicate a clear bearish bias.American International Group (AIG), Bank of America (BAC), Berkshire Hathaway (BRK.A and BRK.B), CIT Group (CIT), Leucadia National Corp (LUK), MBIA Inc (MBI), Sears Holdings Corp (SHLD), and St Joe Companies (JOE): These are large positions that were trimmed slightly during the quarter. The liquidations were most probably done to fund redemptions. Also, with AIG and BAC, although the long positions were trimmed, Berkowitz added more warrants thereby adding to his leveraged long bets on them. Those trades indicate a very strong bullish bias toward those two companies. The large stake remaining in the other companies indicate a bullish bias in spite of the slight trimming.The remaining three positions have remained unchanged during the quarter – Assured Guaranty Ltd (AGO), Wells Fargo (WFC), and WFC Warrants. All three stakes are minute (<~0.1%) and as such do not indicate a bullish or bearish bias.The spreadsheet below highlights changes to Fairholme’s US stock holdings in Q4 2011:Please visit our Tracking  article for an idea on how his holdings have progressed over the years."