While in his most recent letter to investors, Greenlight’s David Einhorn took on a strictly apolitical tone, keeping his criticism centered on the “mesmerizing” Elon Musk, and his old nemesis, the Federal Reserve, in the just released letter by Thid Point’s Dan Loeb, the billionaire hedge fund manager decided to tackle a more sensitive topic: the US presidential election which he calls the “most disappointing and bizarre in our country’s history.”
But before we get there, first a quick snapshot of how Third Point performed in the Q3, in which it returned an admirable 5%, and is now up 7.2% YTD:
Third Point returned approximately 5% during the Third Quarter, outpacing the S&P 500 index by 1% and the CS Event-Driven index by 2%, with approximately half the net equity exposure. Results were driven by profits in each of our sub strategies – Equities, Sovereign and Corporate Debt, Structured Credit, Risk Arbitrage, and Privates – and also in each geographic area in which we invest globally. We generated alpha in each month of Q3. Despite a difficult year for hedge funds generally and a challenging start to the year for us, we have delivered positive returns for the year to date. Our results have been driven by a number of idiosyncratic opportunities that we have invested in over the past six months and we see more of the same types of ideas in our pipeline.
Loeb then focuses on how trading has changed in a time of what he has previously dubbed is a “haunted house” market, and how Third Point’s portfolio construction has shifted as a result:
Trading and portfolio construction have required a strong constitution this year. The “haunted house” market coined by the late JP Morgan legend Jimmy Lee over 18 months ago has continued throughout this year with a constant string of macro “surprises.” A significant share of our time is spent deciphering the chatter to identify the most relevant “key” that will tip market risk and adjusting positioning accordingly. This year, our research led us to transition away from the short China / long Dollar bet in mid-Q1 and go long energy credit and out-of-favor industrial commodities-related equities. Later in the year, we responded to Brexit by covering shorts during the post-vote panic and increasing long exposure.
Today, we are focused on a few key areas:
- Understanding the global shift from monetary to fiscal policy: monetary policy’s effectiveness is waning, which will impact bond yields. This influences our overall views of market valuation as well as sector allocation considerations.
- Will fiscal expansion become the new world order? While it seems logical and timely, it is challenging considering the very high debt to GDP levels globally. However, fiscal expansion could be an antidote to rising populism around the world which might smooth the way towards stimulatory infrastructure measures at home and abroad. One caveat is that not all countries have the flexibility to pursue such measures.
- While China has fallen temporarily off the radar screen, we still see reasons for concern. The stabilization in economic activity has come at the cost of increasing leverage and a potentially overheated housing market. Political change next year may also result in increased volatility.
- We are clearly in the late stages of a business cycle following an eight year (tepid) expansion. While we do not forecast a financial crisis or a recession, a clear path to growth seems elusive. Consumers have been reducing spending and businesses have never regained their pre-2008 capital investment levels. We might soon long for 2% GDP growth.
- Earnings have stalled for a few years and while this can be partially explained by falling oil prices, a strong dollar, weak global growth, and flat margins, earnings estimations may be inflated at these levels.
He then discusses the opporunties and challenges of investing in today’s world:
This last observation dovetails with both the opportunity and the challenge we face investing today. We have seen a return to a “stock-pickers” market this year. However, that term does not mean what it did fifteen or twenty years ago when we were in our infancy. Then, picking stocks could be done in a virtual bubble and all of our time was spent deep in financial statements. While our analyst team still spends the vast majority of its workday analyzing fundamentals, getting overall portfolio positioning right is equally essential to generating returns. The macro considerations discussed above must be interpreted correctly and applied successfully. When we add in the use of data sets and “quantamental” techniques that are increasingly important to remain competitive while investing in single-name equities, it is clear that our business is rapidly evolving.
A quick take on disruptions:
We often focus on disruption when generating investment ideas; just as Uber has disrupted the taxi and car rental industries, Amazon has changed retail, and Facebook and Google have altered the print media business, disruptions are also changing investing. While some doors have closed, others are opening. We believe that maintaining our opportunistic and nimble framework has allowed us to transition successfully into this next phase.
And finally, here is Dan Loeb’s discussion of the state of US democracy at this moment and the US presidential election:
Our democracy has also been meaningfully disrupted this year. Social media, primary processes built for the pre-internet era, and illegal foreign cyber-attacks have changed the trajectory of our political system. We try to analyze all of these political and economic events in a dispassionate manner, separating our feelings from what we think the impact will be on the economy, markets, and certain industries. Maintaining such emotional distance has been particularly difficult during the most disappointing and bizarre election in our country’s history. While many important issues affect the next president, from the appointment of a Supreme Court Justice to policies on education, healthcare, immigration, and the environment, we are focused on a few basic questions: What can we expect for economic growth in the coming years and do we face a recession? What is the prospect for monetary policy and where can we see long and short term rates? What impact will rates, productivity changes, and earnings expectations have on multiples?
It is too soon to have answers to these questions and we may see surprises on Election Day. Our short-term base case is for more of the same. This translates into a decent environment for Third Point to find special situations in equity and credit markets and make long-term bets on outstanding companies.
Which is the prevailing thinking in a nutshell: elect Hillary for “more of the same”, certainly on Wall Street. Elect Trump, and few if any have an idea of what comes next.
via http://ift.tt/2edAVg9 Tyler Durden