Dialectic Capital’s latest letter details the performance of the fund in the last quarter, and as usual, gives a bearish outlook on several sectors and stocks. The Dialectic Antithesis Offshore, Ltd. is down 7.42 percent for the quarter ending on Sep 30, which is Dialectic’s first quarter for FY2013. To sum up, the fund incurred losses in shorts on China Fraud, European Banks, European Sovereigns, Canadian Real Estate, and in entities held by Brookfield Asset Management Inc. (NYSE:BAM) (TSE:BAM.A). The negative performance marred Dialectic profitable short bets in US financials, Technology, Gold, and cyclical stocks. Dialectic is a fundamental based hedge fund with a unique method of shorting.
Dialectic believes that the technology sector is at the verge of a significant slowdown, as most of the sectors have become fully saturated and the big techs, including Apple Inc. (NASDAQ:AAPL), Google Inc (NASDAQ:GOOG), Microsoft Corporation (NASDAQ:MSFT), EMC Corporation (NYSE:EMC), International Business Machines Corp. (NYSE:IBM), Hewlett-Packard Company (NYSE:HPQ), Amazon.com, Inc. (NASDAQ:AMZN), and Oracle Corporation (NASDAQ:ORCL), reported quarterly earnings that missed expectations.
In the tech sector, Dialectic presents its thesis on Tellabs, Inc. (NASDAQ:TLAB). The fund was involved in activist efforts with the management of Tellabs, who they believe have a tendency to go for unnecessary spending and step into areas that the company is not particularly good at. Tellabs has since appointed a new CFO and CEO, balanced its spending and generated $40 million in cash flow in the first two quarters. Dialectic expects more growth in the future for Tellabs, Inc. (NASDAQ:TLAB)..
Dialectic calls Brookfield Asset Management Inc.(NYSE:BAM) (TSE:BAM.A) the most confusing and fascinating company that they have ever looked into. BAM’s network expands to nine public equities in which the company has a controlling stake, this includes shares in General Growth Properties Inc (NYSE:GGP). One of the inconsistencies that Dialectic noted in BAM’s quarterly earnings report was how Brookfield Asset Management Inc.(NYSE:BAM) (TSE:BAM.A) reported gains worth $1 billion from the acquisition of GGP, when the stock was basically flat after BAM acquired a stake in the company.
At another time, BAM has claimed that the GGP stake was worth $12 billion to BAM, when GGP’s total market cap is $16 billion (BAM owns 40 percent of GGP). This is where Dialectic ties the link between BAM’s reluctance to a buyout of GGP by Simon Property Group, Inc (NYSE:SPG) (One has to know about Bill Ackman’s misgivings about BAM’s intentions and his activism at General Growth Properties Inc (NYSE:GGP) to understand the background here). Dialectic suspects that Brookfield Asset Management Inc.(NYSE:BAM) (TSE:BAM.A) booked up its position in General Growth Properties Inc (NYSE:GGP), using some skilled IFRS accounting and are therefore are not accepting an offer below that mark.
In the investor letter, Dialectic also tries to comprehend what went into General Growth Properties Inc (NYSE:GGP)’s spin-off of Rouse Properties Inc (NYSE:RSE). Before the IPO, Brookfield Asset Management Inc.(NYSE:BAM) (TSE:BAM.A) owned 37 percent of RSE and later put up a rights offering at $15, which was above the market price. As rights offerings are usually below market price, BAM was able to contribute $170 million out of the total $200 million raised. RSE then transferred $150 million back to Brookfield Asset Management Inc.(NYSE:BAM) (TSE:BAM.A) in a checking account. Dialectic points out the strangeness of the whole process when BAM is not a bank and RSE is borrowing at higher interest rate (LIBOR plus 850 bps), but lending or depositing at a far lower rate (LIBOR plus 100 bps), both from the same party, i.e. Brookfield Asset Management Inc.(NYSE:BAM) (TSE:BAM.A).
Dialectic also thinks that BAM’s episode of profits in their property investments is nearing the end, with interest rates near zero, the investments are going to be of less worth going forward.