Dan Loeb remains wary of many factors that have been driving the longest bull market in stocks for a generation.
Daniel Loeb is an activist investor hedge fund manager and the founder and chief executive of Third Point, a New York-based hedge fund with $10.8 billion in assets under management, as of March 2016.
“Dan Loeb remains wary of many factors that have been driving the longest bull market in stocks for a generation”
Third-Point-Q4 letter to investors lays out why Dan Loeb remains wary of this Goldilocks stock market
Dan Loeb remains wary due to several factors such as the coronavirus spreading which could derail US/China trade negotiations. Middle East tensions and political uncertainty in November’s US Presidential elections were other reasons why Dan Loeb remains wary of the Goldilocks economy keeping the bull market running.
“We are wary of many factors that can upset the current Goldilocks environment, chief among them the further spread of the coronavirus, derailment of further Chinese trade negotiations, a political upset from the far left in the US Presidential election, or further escalation of tensions in the Middle East,” said Dan Loeb.
Dan Loeb remains wary because a sudden and unexpected upturn in inflation could lead to a series of rate hikes
“The Fed has said it would be patiently waiting for inflation to overshoot, which makes the current case for equities compelling, but a sudden turn in inflation could lead to a backup in rates and cause market pain” said Dan Loeb.
“The Fed has said it would be patiently waiting for inflation to overshoot, which makes the current case for equities compelling”
Dan Loeb’s Third Point fund focuses on activist investing, which is now over 50% of equity exposure. Stock exposure in companies in which the firm was taking an activist role help the fund achieve alpha, above indices return since 2011. The investment strategy has become a more profitable in a changing market environment.
The challenging macro, geopolitical environment is why Dan Loeb remains wary, nevertheless, he has also had a few big wins in 2019
Dan Loeb’s Campbell soup bargain view, which he put forward in 2018, is one such stock that achieved over 50% gain in 2019.
“Daniel Loeb’s Campbell soup bargain view might be an investor’s appetizer for the food and beverage sector” as I wrote in 2018.
So a little over a year later Dan Loeb’s Third Point biggest winner in Q4 and 2019 was Campbell, which gained over 6% in Q4 and 55% overall in 2019.
“A compelling multi-year turnaround is now underway to return the company to sustainable sales and earnings growth” according to Dan Loeb’s Third Point Q4 letter.
“The rest of 2019 proved excellent for Sony” – Dan Loeb
Dan Loeb remains wary, but his flagship Third Point fund picked another stock winner, Sony
“The rest of 2019 proved excellent for Sony” wrote Daniel Loeb.
“Fears around cloud gaming were overblown. Sony’s semiconductor business has grown from ~15% of profits to ~25% and analysts expect semis to be a core driver of Sony’s growth going forward. Gaming profits were down only slightly ahead of a major product launch this holiday season, the PS5, after which most analysts expect Sony gaming to return to growth,” added Daniel Loeb.
Dan Loeb remains wary about the overall market, but he is upbeat about Sony’s prospects going forward
While business performance has been stellar, we believe true value maximization at Sony is only beginning. Dan Loeb explains his reasoning.
“We invested in Sony in Q1 2019 when shares traded down on market fears that cloud gaming posed a substantial threat to the company’s PlayStation franchise and overall gaming business. While the market saw only risks, we saw an incredible collection of media assets: the world’s largest video game platform, a top-three music label, and a top-five Hollywood film studio. Hidden behind the media empire was an underappreciated, best-in-class semiconductor business,” wrote Dan Loeb.
Good management is another reason why Dan Loeb remains upbeat about Sony.
We also saw a capable management team open to improving shareholder value and willing to listen to our suggestions about how the company could reach its full potential. As is often the case with conglomerates” he added.
“Sovereign debt losses due to oversized position in Argentine government debt more than offset gains in Pacific Gas & Electric corporate debt and detracted from overall fund profits” – Dan Loeb
But non-prime sovereign government bonds are where Dan Loeb remains wary going forward
Dan Loeb’s Third Point clocked significant losses in Argentine government debt last year.
“Sovereign debt losses due to oversized position in Argentine government debt more than offset gains in Pacific Gas & Electric corporate debt and detracted from overall fund profits” wrote Dan Loeb’s Third Point.
“We took our guard down a bit too much and did a poor job of calculating both the political risk and the reflexive reaction of the dollar-denominated debt to the collapse of the local currency” he wrote. Dan Loeb’s Third Point miscalculated that the “market-unfriendly” Fernandez would defeat President Mauricio Macri.
Argentine notes generated “significant profits” for Dan Loeb’s Third Point from 2014 to 2016. Third Point said it expects debt restructuring negotiations to begin. While that will result in greater volatility, Dan Loeb’s Third Point believed over optimistically that bonds would recover as much as 50%
Emerging market sovereign bonds, government US dollar-denominated loans are highly sensitive to a hike in Fed fund rates and a US dollar appreciation.
Dan Loeb also noted that shorting was challenging in 2019 due to the Fed’s trio rate cut and liquidity injections.
“Shorting was challenging in 2019 given the market’s sharp rise. Factor moves in the fall evaporated alpha generated earlier in the year. Our losses in shorting were rough as expected considering market performance” wrote Dan Loeb’s Third Point.
Dan Loeb remains wary, but he also notes friendly monetary conditions to cushion shocks going forward
“The conditions remind us of 2016 when the PMI reaccelerated due to Chinese stimulus. This year, it is the US Fed’s rate cuts that are delivering substantial easing that should boost growth,” wrote Dan Loeb’s Third Point. So the Fed’s trio rate cuts will be felt in 2020 due to monetary policy time lag.
Third Point’s Funds also invested $40 million in the IPO.
In January 16, 2020, the fund acquired Swiss-based Global Blue, the world’s leading provider of tax-free shopping and payment solutions.