Third Point Q3 Letter: Long Amgen, eBay; Sells Sony, AIG, HertzVW Staff
Third Point's letter to investors for the third quarter 2014.
Third Point: Review and Outlook
The Third Quarter was moderately volatile for the markets and Third Point's portfolio. In a quarter in which it was difficult to gain traction, July’s losses offset August’s gains, while September was essentially flat. Equities produced profits, mortgages continued their impressive outperformance, and credit suffered primarily from losses in a single investment, Banco Espirito Santo. Throughout the Quarter, we continued to optimize position sizes to increase portfolio concentration, which has been a key focus this year. We also took advantage of stronger tapes to exit or reduce positions including AIG, Hertz, Softbank, LNG, LNG AU, and Sony, which is discussed in more detail below.
Before October, both market corrections and rallies back had been quick and dramatic this year. We feared that there had been a paradigm shift until the last few days, but it now seems the market may be continuing this established pattern. Pinpointing the cause of the initial sharp market movement downward is conjecture at best. Daniel Kahneman, the Nobel Laureate Economist and expert in heuristics, has written extensively about the dangers of our tendency to attribute causation to associated events. Keeping his research in mind, we caveat our explanations for October’s correction and volatility.
In early October, a confluence of events transpired in relatively short order, including weaker economic data, political uncertainty, a potential global plague, and bureaucratic meddling, which caused fear to spike, sentiment to decline, and investors to de?leverage. The month got off to an especially rocky start for hedge funds when a court dismissed a claim in connection with the Fannie Mae/Freddie Mac GSE complex. Many investors were oversized in this trade and their forced selling kicked off the “de?risking” cycle. Next, oil prices declined sharply and many funds who had large positions in E&P companies suffered enormous losses. Then last week, AbbVie halted its announced inversion transaction with Shire, inflicting great pain on the arbitrage community. Opaquely blaming mysterious “meetings with the Treasury Department”, AbbVie walked away from an entirely lawful deal that it had touted as enormously accretive and strategic as recently as two weeks ago, incurring a substantial $1.6 billion break?up fee. A rational conclusion is that instead of a legislative solution that might require comprehensive tax reform, this Administration has decided to unilaterally curb inversions using whatever means are available.
Needless to say, this regulatory uncertainty (along with prior detours from the rule of law) will be a wet blanket on top of investors until transparency and a level playing field are restored to the markets.
See full letter here.