A “market shift occurred in Q1,” according to Dan Loeb, Billionaire hedge fund manager and founder of Third Point which has approximately $17 billion AUM.

Dan Loeb’s market shift suggests that the hedge fund manager has become more risk-averse, in other words, the billionaire hedge fund manager is rotating his portfolio towards prime sovereign bonds, particularly US paper, (Treasuries).

Dan Loeb was one of the few hedge fund managers, along with Carl Icahn who bet on a Trump rally and profited handsomely but Dan Loeb’s market shift now implies that the hedge fund manager is less bullish on stocks.

Dan Loeb wrote in his latest investors letter that “a shift in markets occurred in Q1”. The gist of Dan Loeb’s investor’s letter is that stocks are in a late bull cycle. Put another way the near nine-year-old aging stock bull market is running out of steam in a backdrop of central bank monetary tightening and worsening economic fundamentals.

A “market shift occurred in Q1” according to Dan Loeb, Billionaire hedge fund manager and founder of Third Point which has approximately $17 billion AUM.

 

So for Dan Loeb’s market shift occurred in Q1 following a quarter in which his fund posted a drop in profits, leaving Third Point unchanged for the year. Market timing is no easy business.

Dan Loeb writes,
“After a two-year period where growth surprised positively and inflation was benign, we began to see volatility in each of these areas”.

But Dan Loeb’s market shift view (Stock bearishness) doesn’t jive with the best earning season in decades. So why has the S&P been unable to turn green for the year?

Dan Loeb’s market shift view and a surge in volatility are based on the “increased uncertainty around appropriate multiples” because investors are sure what benchmark interest rate. Moreover, investors have another low-risk alternative (and it is not precious metals) that provides yields with relatively little risk. “There is finally an alternative to equities in the form of relatively riskless two-year money” according to Loeb.

 

“After a two-year period where growth surprised positively and inflation was benign, we began to see volatility in each of these areas”

DAN LOEB

Dan Loeb’s market shift into Treasuries is real to the tune of $320 billion in 2Y Treasury in just four months of 2018 and it probably explains why the USD is moving upwards.

Dan Loeb’s market shift view out of equities into Treasuries in underway and those betting that it was the market’s last dance in Treasuries have been caught offside.

Moreover, with all the best indicators pointing to an imminent emerging market turmoil investor demand for Treasuries is likely to grow as investors batten down the hatches into safe-haven assets. Maybe also the Fed will unload its balance sheet to prevent the USD from overheating.

 

“As manufacturing indices (PMI’s) cool from elevated levels, there is a real question about just which inning of the late cycle we are in. While we don’t believe a recession is close, there is definitely a concern that it is getting closer” – Dan Loeb

But keeping with the theme Dan Loeb’s market shift out of risky growth assets like stocks is due to “ how late in the credit/business cycle the US currently find itself” wrote Loeb.

“As manufacturing indices (PMI’s) cool from elevated levels, there is a real question about just which inning of the late cycle we are in. While we don’t believe a recession is close, there is definitely a concern that it is getting closer” wrote Dan Loeb.

And here is the zinger;
While earnings are stellar, there are growing questions about the other part of valuation, namely multiples.

“Each of these considerations is weighing on multiples. For investors, this means the S&P is effectively range-bound and so, to generate profits, investors will need to adjust exposures more aggressively and successfully choose winners and losers across sectors.”

“We have responded to this regime shift in several ways. First, we have reduced net exposure by over 20% this year. We have taken about 15% exposure out of our long book and boosted shorts to about 25% of fund AUM” – Dan Loeb

So what action has Dan Loeb taken in view of this market shift?

“We have responded to this regime shift in several ways. First, we have reduced net exposure by over 20% this year. We have taken about 15% exposure out of our long book and boosted shorts to about 25% of fund AUM. Last year’s focus on short selling after several years away from the strategy was a return to our early success as short sellers. We intend to further increase exposure to fundamental single names and quant-derived baskets in 2018 and rely less on market hedges to dampen volatility and reduce net exposure,” wrote Dan Loeb.

How does the billionaire hedge fund manager view relative valuation of equities vs credit?

“We are spending more time evaluating opportunities in risk arbitrage. While credit strategies performed well in Q1, we find most corporate credit markets are too richly valued relative to equities and so we have modest exposure to the asset class. As we discuss below in our structured credit update, we have been finding fewer opportunities in RMBS after selling most of our portfolio at a profit and are currently focusing on marketplace lending deals instead,” wrote Dan Loeb.

So in short Dan Loeb’s market shift view has resulted in his fund boosting shorts in equities, steering clear of over overpriced corporate bonds and a dive into “riskless” Treasuries so as to benefit from their corresponding yields.

Dan Loeb’s new position included United Technologies Corporation.

Read Third Point’s letter.

TRADING SOFTWARE

Dan Loeb targets Sony. Dan Loeb is an activist investor and founder of Third Point, which oversees about $14.5 billion in assets.

Last year the activist investor viewed Campbell soup as a bargain when Third point reported that the soup maker could fetch a takeover value of $52 to $58 per share.

A year later and the activist investor Dan Loeb targets Sony

Dan Loeb's activist hedge fund Third Point is raising an investment vehicle to generate between $500 million and $1 billion so it can continue to buy Sony shares, according to a recent report in Reuters.