Having returned 5.9% in Q1, or just shy of the overall market's 6.1% return, it was not surprising to find the mood in Dan Loeb's just released Third Point letter to be far more uplifting than in the recently posted David Einhorn letter (whose punchline was "The Longs Say Stocks Can Only Go Up, Seemingly To Infinity And Beyond. We Have Seen This Before").
Looking back at the quarter, the Third Point head said that "during the First Quarter of 2017, volatility declined and most markets rose in anticipation of global reflation. Third Point generated returns across credit and equity strategies and most sectors through successful security selection and portfolio repositioning."
Again, contrary to Einhorn, Loeb says that he expects the "favorable environment for our investing style to continue for three reasons":
1) Corporate activity should pick up as President Trump’s tax plans are detailed and enacted;
2) Opportunities for activist and constructivist investing are robust; and
3) Combining security selection with a reasonable interpretation of the macro continues to be critical.
Loeb also notes that while we recognize that we are in the late stages of an economic cycle, "experience has taught us not to miss the end of an expansive period. This is especially true following Trump’s election. Animal spirits matter in markets and despite the obstacles that the new administration will face in passing legislation, the overall pro-business environment is in sharp contrast to the last “you didn’t build it” administration’s attitude towards business, enterprise, and free markets."
In other words, unlike many other hedge fund managers, Loeb does not believe that the Trumphoria is over, and is trading accordingly.
Or maybe not: as Loeb also says, "we have been more focused on improving global growth than on the “Trump trade”. The Goldman Sachs global GDP forecast for 2017 is +4.2% vs. +2% a year ago. We are seeing more opportunities in Europe because of strong and improving economic data, a trend that will likely continue now that the French elections have passed without incident. Although S&P earnings were flat over the past three years, we are expecting earnings growth to drive gains and cyclical names to get a tailwind from US policy shifts this year."
To be sure, Loeb highlights several risks, and writes that "while we think legislative failure on tax reform could be negative in the back half of this year, we are encouraged that BAT seems to be off the table."
Some other risk factors listed:
There is a risk of inflation catching the Fed flat-footed, but we see this surfacing later in 2018 or 2019, if at all. Recent dampening of data in the US, particularly in consumer spending, has raised a red flag and we will know more when we see Q1 GDP. Chinese nominal GDP growth has potentially peaked, but the main event there will be the change of government this fall and so we expect a muted status quo until then."
Loeb writes that if and when the "modest selloff comes", he will BTFD with both hands: "We have actively positioned our portfolio to absorb modest S&P sell-offs in order to remain aggressive buyers at appealing prices."
What we found most interesting in the entire letter, however, is just how liquid Loeb's portfolio is, to wit: "we were able to temporarily reduce over 20% of our equity exposure in advance of the French election at a relatively inexpensive cost of about 20 basis points." Few other hedge funds can put trades on and off so quickly and so cheaply. The reason is because "we continue to maintain the bulk of our exposure in equities, including in several new initiatives where we believe the environment is ripe to take actions to remedy poor performance."
Next, for anyone wondering why Honeywell is spiking afterhours, the reason is that Third Point has just disclosed a stake in the company. It also took stakes in Italian bank UniCredit and German utility operator E.On.
Finally, contrary to others, Loeb is not a fan of the conventional frac sand miner thesis, and is instead betting on Tier 2 sand:
Equity Position: FRAC Sand Miners
Is sand the new gold? In early Q1, the combined market capitalization of frac sand miners had reached $11 billion, pricing in an average Enterprise Value per ton of over $300 or over 15x replacement value. An army of consultants, sell-side analysts, and speculators were confidently pointing to the exponential rise in demand for frac sand as rig counts and company budgets turned a corner, drilling activity was on the upswing, and proppant intensity was rising. The frac sand industry’s cheerleaders were certain they could continue to outwit the laws of supply and demand.
Our field work identified an important shift from the use of northern white to abundant in-basin brown sand. In addition to a large and growing number of greenfield projects that are creating new capacity, we uncovered significant overhang that has been sitting on the sidelines and is now being reactivated.
As sand pricing starts to decline in summer or fall at the latest as a consequence of the outsized supply we have seen, we expect many of the publicly-listed frac sand miners to end up with little if any equity value.
His full letter below (link)