The latest from Dan Loeb below:
California sunlight, sweet Calcutta rain
Honolulu starbright the song remains the same. . .
Sing out Hare Hare, dance the Hoochie Koo
City lights are oh so bright, as we go sliding, sliding, sliding through.
— Led Zeppelin, “The Song Remains the Same”
For everything there is a season, and a time for every matter under heaven . . . a time to cast away stones, and a time to gather stones together; a time to embrace, and a time to refrain from embracing.
— Ecclesiastes 3:1?8
Hope is not a strategy.
— Rigo Durazo (Combat Instructor, Craft International)
Review and Outlook
The budget is not the only thing in deficit today, as a paucity of leadership 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. There has been much said about who is allegedly the “adult in the room,” but President Obama has yet to speak to Americans as adults, insisting instead on his preferred technique – stirring up class warfare. Scaring senior citizens about the possibility of not receiving their Social Security and Medicare checks, lambasting the corporate jet industry, and 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.
In remarks on the House floor this week, Representative Paul Ryan (R?WI) neatly characterized the perils of the present moment: “I keep hearing . . . .’ The President’s got a plan. The President’s offering balance.’ The President hasn’t offered a thing yet. Nothing on paper. Nothing in public.
The President did inherit a tough problem. No two ways about it. What did he do with this problem? He drove us deeper into debt. One trillion dollars of borrowed money for a stimulus that was promised to keep unemployment below 8 percent and went up to 10 percent and now it’s at 9.2 percent. A stalled economy. A budget the President gave us that doubles the debt in five years and triples it in 10 years. That’s not leadership.”
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. 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.
Meanwhile, on the other side of the Atlantic, limited progress has not been able to outweigh fears that the EMU runts may topple the strongmen in the end. Our concerns over the European situation have increased during the past few weeks, and we believe 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. Fear of being carried out is quickly overridden by fear of missing out, and the schizophrenic swings we are continuing to witness make investing treacherous. Until we see solutions for the twin perils facing the United States and Europe – and with our existing leadership focused on scoring political points and Europe’s problems increasingly complex, we cannot say with any certainty when that will be – we are inclined to be cautious with your capital.
Generally, we are “bottom?up investors.” However we are living in a climate where these economic and political considerations are at least as – if not more – important than underlying fundamentals in forecasting investment outcomes. Given the great uncertainty described above and sentiment levels that reflect it, I can foresee scenarios where securities could trade much higher – or much lower. Happily, as Warren Buffet has pointed out, we operate in a “no strike” game, which is to say that we can let many pitches pass us by before swinging at the ball that comes right to our sweet spot.
As such we’ve chosen to take a step back from the plate. We reduced our net exposures throughout the second quarter. Beginning in April, we concluded that the equity market no longer offered compelling upside considering the S&P was up ~9% YTD despite the heightening of the issues noted above as well as the Japanese earthquake and tsunami disasters. Towards the end of the quarter, we started to increase our single name short equity portfolio, largely because we saw that the market had started to reward individual stock picking for the first time in months, as correlations finally started to fall.
Our single name short portfolio is now ~$1.6B or approximately 23% of AUM. Our equity long/short net exposure declined from 42% on March 31 to 31% on June 30. The entire portfolio’s net exposure declined from 90% at the beginning of the quarter to 62% at quarter end, and on a beta?adjusted basis, portfolio exposure decreased from 64% to 36%.
Notwithstanding our continued cautious outlook, we have a number of significantly?sized event?driven positions which we are confident have upside drivers 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. New areas of focus include Latin America, Healthcare and Materials/Industrials, where we have recently added analyst capabilities.
Set forth below are our results through June 30, 2011 and a brief discussion of selected positions that impacted the portfolio during the quarter.
Third Point Offshore Fund Ltd. S&P 500 HFRI 2011 Second Quarter ?1.6% 0.1% ?0.5% 2011 YTD Performance 6.8% 6.0% 2.9% Annualized Return Since Inception 17.7% 4.1% 9.6%
The top five winners for the period were El Paso, ABS Index Short 1, Delphi, ABS Index Short 2, and Gold. The top five losers for the second quarter were NewPage, Technicolor, Barrick Gold, Big Lots, and Turanalem Finance BV.
Firm assets under management at June 30, 2011 were $7.1 billion.
Select Portfolio Positions
Long Equity: Mosaic
We initiated a significant position in the equity of Mosaic, a US?based fertilizer company, during the second quarter. We purchased our stock through an opportunistic entry point via a secondary offering of shares by the Cargill family, its long?term owners. In January, the family announced plans to sell its 64% stake, a decision we understood to be driven partially by estate planning and tax considerations. At the time, shares were trading at ~$85. The sale of 64% of the company at those levels resulted in a $7.5B transaction, which created an overhang for the stock and for the fertilizer space in general. In the weeks leading up to the secondary in May, grain and fertilizer fundamentals continued to improve, but Mosaic sold off significantly. The secondary was ultimately priced