Dan Loeb Sells Financials: Third Point's Investor Letter (Q1 2010) ~ market folly

Tuesday, June 15, 2010

Dan Loeb Sells Financials: Third Point's Investor Letter (Q1 2010)

Dan Loeb's hedge fund firm is now fifteen years old. They have a lot to celebrate too considering Third Point has grown assets under management from $3.3 million to now billions. And when we checked in on Loeb's firm back in May, we saw his Offshore Fund had annualized returns of 18.6% versus 5.2% for the S&P 500. With cumulative performance of 892%, Loeb has certainly found success. To get on track toward emulating such success we'd refer you to Dan Loeb's recommended reading list. So, what has he been up to lately? We'll dive into Third Point's first quarter investor letter below.

While Loeb notes that his firm started betting on a recovery in April 2009, he fixates on the fact that investor confidence is still not what it should be. He attributes this lack of pizazz to a continually shifting regulatory environment where the rules are rapidly and repeatedly revised. In his typically eloquent fashion, Loeb summons his famously penned CEO-bashing days of old. This time though, he has a different target. He writes, "The Administration appears unable, or unwilling, to let free-market capitalism resume. Indeed, it is neither health care nor financial reform which has stressed markets most in 2010, but rather the continued politicizing of the regulatory process and the abandonment of free market capitalist principles that have undermined investor confidence".

In fact, Loeb's confidence in the system has been shaken to the point where he has sold out of practically all of Third Point's positions in financial companies. Third Point has exited their Citigroup (C) and Bank of America (BAC) stakes. Additionally, Loeb sold mostly out of his Barclays (BCS) position and only holds a small residual position in a regional bank (to the tune of less than 1%). Loeb is now the perfect example of his own point on investor confidence. Most investors haven't been confident in the markets. Loeb, on the other hand, hasn't been confident in the administration and its actions. However, his lack of confidence in regulators has in turn caused lack of confidence in the ability to invest in financial companies.

In what will surely be labeled as a strange and potentially questionable maneuver, Loeb notes that he talked about his positions in BAC and C back on January 20th at Third Point's annual investor presentation. However, in his first quarter letter he reveals that he quickly sold out of those positions only days later. While he provides rationale for his abrupt exit, it certainly wreaks of oddity and might rub some investors the wrong way that he would essentially be 'pitching' them on the latest investments in financials, only to sell out of them in the days following the event. Loeb labels political action as part of his reason for exiting and so maybe more than anything he is using this as an example to showcase how much of an effect regulators are having on investor confidence.

It's truly intriguing to see the dynamic at play with financial stocks. While Third Point exited Citigroup in the first quarter, Bill Ackman's hedge fund Pershing Square just started a position in C. As always, this is the beauty of a market and the dichotomy of opinion. Loeb also reveals that Third Point has exited their position in Wellpoint (WLP), a health care company. He says his firm is no longer able to predict how legislation or regulation will affect the company and its industry and such unknowns present too much of a risk.

On the short side of the portfolio, Loeb reveals that they have increased shorts in the for-profit education sector. This theme is now running rampant through hedge fund land as Steve Eisman presented the short case for these companies at the recent Ira Sohn Investment Conference. This stock battleground becomes even more intriguing when you consider that some of the biggest hedge funds have also previously had long positions in these companies. We'll have to see if they have since caved in with their positions or whether they are standing strong. In the past though, we have noted certain hedge funds exiting long positions in the for-profit education space.

Loeb also mentions that Third Point has reduced gross and net exposure. We of course have already taken a recent look at Loeb's portfolio positioning with Third Point's latest exposure levels. In terms of other equity investments, Third Point still fancies post-bankrutpcy equities as they are still very cheap. In terms of new portfolio activity, we've highlighted how Third Point disclosed a stake in Xerium Technologies as well as a new position in Roomstore. And for more on Loeb's holdings from the first quarter, we've detailed Third Point's equity portfolio.

Embedded below is Third Point's first quarter letter to investors:

You can download a .pdf copy here.

For now, it certainly seems as though Loeb's confidence in regulators, financials, and the financial system is certainly shaken. We'll have to see what it means for his portfolio in the coming quarters, but it sounds as though he's still finding ample opportunities in his event-driven value niche. For more resources on Third Point, be sure to check out Dan Loeb's recommended reading list, as well as Third Point's latest exposure levels.

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