Has Dan Loeb — who over the summer fretted over Obama administration policies and actions poisoning the investment environment — turned bullish?
Yes and no.
Although Washington policies have not really changed much since Loeb — known for his vitriol and acerbic tongue — laid out his deep concerns in his second-quarter letter to investors, the founder of New York–based hedge fund Third Point recently articulated a more upbeat view of the markets — at least for now.
In his year-end letter sent earlier this week to clients, Loeb, who this week turned up the heat even more on Yahoo, said he is warming up to equities. He said this year he has steadily increased capital to event-driven situations in equities, corporate credit and mortgages. More significantly, he is taking on more risk overall. He said his long exposure is now 120 percent and gross exposure is 170 percent while his equity beta is 40 percent — the highest it has been since July 2011.
While these levels are not where they would be if Loeb were an unapologetic bull, back in August he told clients in his second-quarter letter that gross and net exposures dropped to their lowest levels since March 2009, and were decreasing all summer.
So what has changed since then?
Global economic growth has picked up and is exceeding expectations. “In the United States, we have shifted from a middling minor recessionary to a moderate growth environment,” he adds. He also credits the European Central Bank’s December long-term refinancing operation with quelling concerns about a meltdown in Europe. And in China, he says fears of a hard landing have disappeared amid confidence that growth will remain robust. “The Year of the Dragon is off to a bullish start everywhere, and we see favorable sentiment and positive conditions continuing for the time being,” Loeb proclaims.
Loeb is especially happy to see a decline in correlations, making it more of a stock picker’s environment.
Happy days are here again? Not so fast.
Loeb also stresses that while he is “more constructive” and “finding many interesting situations,” he is also focused equally on shorts and longs and building what he calls an all-weather portfolio. “Although general market conditions are favorable, we have not simply strapped ourselves onto a raging bull,” he emphasizes.
In fact, he attributes some of the market euphoria to the presidential election year, a historical friendly time for investors since economic indicators seem to magically improve for the incumbent during this period. So Loeb tells clients that while he is “constructive” over the near-term, he sees danger lying ahead in 2013 and beyond.
“Regardless of one’s political beliefs, it is hard to deny that the unabated policies of a second Obama administration would lead the country down an unsustainable path of exploding deficits and marginal private sector growth,” he asserts. “While our concerns about a second Obama term are muted by the fact that much of his agenda will be stymied by a Republican House and most likely a Republican Senate, gridlock is not an effective way to run the country.” He says, however, this is preferable to what he deems to be “out-of-control entitlement spending and deficits,” which will result from another Obama administration if he also retains control of both houses of Congress.
“Sadly, concerns about tax increases, haphazard regulation, and further redistributive policies will hold private capital and market participants in check for as long as Mr. Obama remains president,” Loeb adds.
However, it is still more than seven months away from Election Day, which is an eternity for both hedge fund investors and politicians.
