Third Point’s Dan Loeb has become more cautious and he blames the budget impasse and President Obama specifically for creating uncertainty and skittishness in the market.
The eclectic investor who is best known for his vitriolic attacks on management, tells investors in his recent quarterly letter he reduced his net exposures throughout the second quarter after concluding in April the equity market no longer offered compelling upside with the S&P up 9 percent for the year at the time.
He adds that towards the end of the quarter, he started to increase his single name short equity portfolio, largely because the market had started to reward individual stock picking for the first time in months, as correlations finally started to fall.
Loeb, whose Third Point Offshore Fund Ltd. lost 1.6 percent in the second quarter, is still up 6.8 percent for the year through June 30. This slight.ly exceeds the S&P 500, which was up 6 percent through the first six months of the year.
In his letter, Loeb tells investors his single name short portfolio now stands at $1.6 billion, or about 23 percent of his $7.1 billion in assets under management as of June 30. He now has $7.9 billion under management, which accounts for new money taken in on July 1. Even so, he has instituted a “hard close” for the funds.
His equity long/short net exposure declined from 42 percent on March 31 to 31 percent by the end of the second quarter.
The entire portfolio’s net exposure declined from 90 percent at the beginning of the second quarter to 62 percent at quarter end. “On a beta‐adjusted basis, portfolio exposure decreased from 64 percent to 36 percent,” Loeb adds in his letter.
Loeb is not totally bearish. He also says he took a number of significantly‐sized event‐driven positions, which he is confident will do well regardless of the macro environment. “While we are currently looking for areas to increase our gross exposure through attractive value‐oriented ideas, we expect to keep net exposures quite low by historical terms,” he adds.
In his letter, Loeb heavily blames President Obama for the country’s fiscal problems and political impasse in Washington.
He acknowledges that budget deficit is a problem, but decries what he calls “a paucity of leadership” that has left the country without a stable framework in which businesses can conduct business, investors can invest, and consumers can consume without a high degree of uncertainty and fear. “Politically charged statements and brinkmanship have served to deepen divisiveness between the parties and led to confusion and fear among citizens,” he adds.
He accuses President Obama of stirring up class warfare and scaring senior citizens about the possibility of not receiving their Social Security and Medicare checks and criticizes him for lambasting the corporate jet industry. He also asserts that calling for higher taxes on managers of private partnerships is not a constructive approach to handling a complex multi‐trillion dollar problem that will have a multi‐generational impact.
“It is increasingly difficult to avoid the conclusion that while Washington burns, President Obama is fiddling away by insisting that the only solution to the nation’s problems –whether unemployment, the debt ceiling, or deficit reductions – lies in redistribution of wealth,” Loeb adds. “Perhaps the difference between President Obama and many Americans is that the President sees prosperity as a sign of ‘unfairness’ that needs to be corrected by government via higher taxes and increased regulation. Perhaps a plan that led the way forward by expanding opportunities rather than redistributing outcomes and emphasized growth and prosperity for all would be met with less political resistance.”
In his letter, the hedge fund manager also tells clients that his concerns over the European situation have increased during the past few weeks, adding it is becoming more likely that Europe will experience a painful slowdown. “The confluence of unresolved first order economic issues and an absence of authoritative, credible global leadership have rendered markets perpetually anxious,” Loeb adds.
Loeb concedes that schizophrenic swings in the markets over whether the global problems will be resolved are making it treacherous to invest. However, he says until we see solutions for the “perils” facing the United States and Europe–and with leadership focused on scoring political points—he is remaining cautious.
Speaking from the standpoint of a “bottom‐up investor,” Loeb says he can foresee scenarios where securities could trade much higher or much lower. In the meantime, he says he is embracing the Warren Buffet notion that he can let many pitches pass him by before swinging at the ball that comes right to his sweet spot.
In any case, his top winners for the second quarter were El Paso, a short position on the ABS Index, Delphi, a second short position on the ABS Index, and gold.
The top five losers for the second quarter were NewPage, Technicolor, Barrick Gold, Big Lots, and Turanalem Finance BV.
As for current position, he says in the second quarter Third Point initiated a significant position in the equity of Mosaic, a fertilizer company. He says he purchased shares “through an opportunistic entry point” via a secondary offering of shares by the Cargill family, its long‐term owners, which in January announced plans to sell its 64 percent stake for estate planning and tax reasons, among others.
“While we were drawn to Mosaic by the catalytic event of the Cargill sale, our position is now largely sustained by two main drivers,” Loeb explains. He thinks grain and corn fundamentals are extremely positive, and potash fertilizer has yet to recover to trendline levels of demand.
Loeb also says he added to his holdings in Sara Lee equity during the second quarter after taking an initial stake earlier this year when the company decided not to sell itself.
Loeb also told investors he has unwound about two‐thirds of his short position in the CMBX Index but continues to keep a small position in place as a protection hedge in his long CMBS book. “While our long bond portfolio was down for the second quarter, we are still optimistic about the opportunities in mortgage credit. We believe that the technical pressure in the sector should abate by the end of the third quarter,” he adds.
