Dan Loeb’s Q3 letter is out – see an excerpt below
Dan Loeb on macro
Over the past few months, S&P volatility exacerbated by sector rotation has taken investors on a harrowing round trip. The consensus view of the cause of the correction has been well-mapped by now; a maelstrom of fears overwhelmed the market during Q3, including:
A weakening China, where the new question is not whether but how severe the slowdown of the world’s foremost growth machine will be. In August, we saw for the first time the limits of the Chinese government’s ability to manipulate the economy as animal spirits triumphed over central planning. While the situation has stabilized somewhat since, the downside scenario for China seems more intimidating than ever before;
Janet Yellen may have inadvertently checked herself and the Fed into the Hotel California. It is increasingly difficult to see how the Fed can justify raising rates in 2015, particularly considering recent employment weakness in the U.S. (an unwelcome surprise) and similar softness in manufacturing figures. Unlike the concerns that weighed on the Committee earlier in the year – that a rate hike might damage the fragile environment outside of the U.S. – recent data undermining consensus U.S. growth assumptions requires different analysis. If the U.S. consumer is weaker than had previously been believed, the Fed needs to be careful not to push the world into a recession. Ms. Yellen cannot afford to get this wrong;
With 2016 looming on the horizon, market participants see some inexperienced, unserious candidates leading on the GOP side and economically unfriendly Democrats on the other. Republicans in the House are now also deeply divided and relying on Paul Ryan’s leadership to pull them back from the brink. None of this increases market confidence;
The Middle East is in shambles; a situation spilling over increasingly into Europe with potentially far-reaching consequences for both regions;
Investors feel there is no longer a monetary safety net, as a tidal shift in fund flows from central banks has removed the “Fed put”, creating headwinds instead of tailwinds.
While many of these issues were already on investors’ radars, this particular combination of concerns caused S&P multiples to de-rate sharply in Q3 and, despite the recent rally, most companies are trading lower than where they started the year.
Despite a difficult quarter for our portfolio, we are optimistic about what we own: a mostlyU.S.-centric, concentrated portfolio of event-driven names and structured credit. We understand the macro and market challenges to the overall investment environment. We do not see indicators of a looming U.S. recession and so, while volatility is likely here to stay and multiples may be capped, we are seeing some compelling value opportunities in stocks. The environment for short selling is also attractive and we have more single short names than long positions in our book today. We have reduced our net exposure by nearly a third through sales and new shorts over the past few months while maintaining significant positions in our highest conviction, event-rich names. The conviction to keep and add to our core healthcare names during the selloff enabled us to re-establish ourselves on positive footing this month
Dan Loeb on Baxter
Dan Loeb Equity Position: Seven & i Holdings (the “Company”)