Dan Loeb's Third Point Q2 performance • World Top Investors

Dan Loeb’s Third Point Q2 performance managed a modest +0.8% for the first half of 2018, according to Dan Loeb’s latest letter to his investors. But Dan Loeb’s Third Point Q2 performance is a far cry from the funds returns last year, in 2017 the money manager returns easily outperformed the S&P.

“Dan Loeb’s Third Point Q2 performance managed a modest +0.8% for the first half of 2018”

So let’s zero in on why Dan Loeb’s Third Point Q2 performance (whose AUM at June 30 was $17.7 billion) has gone from a Stella returns last year to mediocre returns in 2018.

Dan Loeb’s Third Point Q2 performance managed a modest +0.8% is primarily due to the fact that the funds top performing assets last year are its laggards in 2018.

Perhaps that is a reminder that the investing game is dynamic and to outperform the randomness of luck top investors tend to be intellectually agile, they tirelessly are reassessing their positions in a constantly changing environment.

These alpha investors are unique but they all share similar characteristics, brilliant intellects, humble and they also tend to have high energy levels, stamina.

“Dan Loeb’s Third Point Q2 performance has gone from a Stella returns last year to mediocre returns in 2018”

Dan Loeb’s Third Point Q2 performance was hit was primarily due to long exposures to Emerging Markets

“After generating strong returns in Argentine sovereign debt from 2014 to 2017, we recycled some of our realized profits into emerging markets equities, primarily Argentine banks. We overstayed our welcome in the region and took losses on those securities last quarter when EM currencies weakened dramatically.”

So like many other hedge funds, Dan Loeb’s Third Point Q2 performance was held back by a meltdown in EM currencies.

Indeed, the 2018 forecast I wrote back in December that the Fed tapering could cause an EM currencies crisis, similar to that experienced in 2013. Back then the Fed was talking about scaling back their highly accommodative monetary policy.

What was the outcome?
Some emerging countries experienced sharp reversals of capital inflows. Fast forward to today and we see that the Fed is well on their trajectory of monetary normalization. In June the Fed hiked its benchmark short-term interest rate a quarter percentage point from 1.75 percent to 2 percent.

The committee said two more rate hikes were appropriate. If so that would bring the 2018 total to four increases, bearing in mind the Fed’s first hike of the year was in March.

“Dan Loeb’s Third Point Q2 performance was held back by the under-performance of EM currencies and that trend is likely to continue”

Dan Loeb’s Third Point Q2 performance is likely to continue to be hit by a meltdown in EM currencies Capital will naturally gravitate wherever it can find the best rate of return at the lowest risk possible.

Think of the Fed as the moon and USD being their ocean When the Fed hikes it creates a gravitational force which pulls USD back to the US away from Emerging markets. But that also creates a USD liquidity drought outside the US, particularly in risky Emerging Markets and it is that lack of investments (due to capital outflows) which is what causes an economic downturn, a recession.

So Dan Loeb’s Third Point Q2 performance is likely to continue to be hit by a meltdown in EM currencies, bearing in mind that this trend of capital outflows from EM currencies is still in its early phase.

Despite all the talk Quantitative Tightening (QT), the Fed has yet to unwind its massive 4.2 trillion USD balance sheet. If they do, then we could see the mother of all dollar liquidity squeeze.

QTs impact on EMs (India, Argentina, Brazil) could be about to unfold.

So Dan Loeb’s Third Point Q2 performance was held back by the under-performance of EM currencies and that trend is likely to continue.

Dan Loeb’s Third Point Q2 performance suffered some realized losses also in a list of “mark-to-market” declines in names which he expects are temporary. These names include “Nestlé, our largest consumer position, and DowDuPont.”

Dan Loeb’s Third Point Q2 performance

A casual perusal of the results shows that Third Point is under performing the S&P with a 2018 year to date return of 0.8% compared with the S&P 500 2.6%.

So Dan Loeb’s Third Point Q2 performance was nothing spectacular.

“We believe the risk of recession in the next year remains low and, without this concern weighing heavily on markets and with the tailwinds we have described, we believe equities should go higher but at a moderate pace” – Dan Loeb

Looking ahead what does Dan Loeb see?
“While it is important to stay abreast of political events and shifts in economic policy, data, and forecasts, our performance is driven primarily by bottom-up, fundamental investing and only occasionally by our ability to read a macro crystal. Still, we spend time studying global market dynamics because, every few years, doing so gives us a chance to decisively shift positioning or asset classes when we recognize a turning point in extremely volatile markets” wrote Dan Loeb.

With Dan Loeb’s Third Point Q2 performance now in the rear mirror, what is the money manager’s take on the current economic backdrop?

“US growth will remain buoyed at a high level, Inflation to remain stable, the credit cycle can extend longer” wrote Dan Loeb

Moreover, Dan Loeb doesn’t think equities are not expensive at 16x forward earnings.

“We believe the risk of recession in the next year remains low and, without this concern weighing heavily on markets and with the tailwinds we have described, we believe equities should go higher but at a moderate pace.”

However, Dan Loeb notes that the environment is “more fragile than it was a year ago” and everything could change on a dime.

“The single most important factor to follow is Fed action. If the Fed is determined to “kill the patient” through aggressive intervention in the form of rate hikes then the current health of the patient is irrelevant. If the Fed continues at its current pace, it will have tightened by ~3% (or even ~4% if one includes its roll-off of quantitative easing measures) by the end of 2019. Tightening of that magnitude has almost always resulted in a recession”

Dan Loeb’s view is in lockstep with Bill Gross’s tightening could derail the economy.

Dan Loeb’s Third Point Q2 performance see the full letter.