First of all, it appears that Loeb is concerned about Chinese economic growth slowing. Due to his concerns, he shorted copper last quarter.
While we do not do this often, we will occasionally identify attractive discrete macro trades, which are more often short opportunities than long. A recent example of this was our decision to short copper prices during the last quarter due to weakness in Chinese demand.Copper was one of the worst performing commodities last quarter. Copper peaked at $4.50 per pound but has plummeted to $3.50 per pound today.
Loeb also seems to favor keeping his "powder dry" as he patiently waits for further market dislocations.
"The main question on every investor’s mind is when we will start to significantly increasemarket exposure. As in past macro‐driven periods of unusual market volatility, it isimpossible to predict precisely when we will feel it is safe to get back in the water, althoughwe have taken small advantage of the optimism regarding the European situation that drove October markets sharply higher. We remain patient and cautious for the moment until we determine it is time to deploy our dry powder decisively."
One can conclude that Loeb most likely sees no imminent resolution of the European debt crisis. Thus, he has fled to the safety of the sidelines.
Finally, Loeb commented that the credit markets had some parallels with 2008 when private equity shops gobbled corporate credit at the peak.
"It appears that credit focused funds (and perhaps funds with broader mandates but too much capital) may have repeated the mistakes of the last credit cycle and traded down in terms of credit quality and liquidity in pursuit of yield. We are seeing early signs of potential stressed selling that we surmise are emerging from these and other sources. We are gratified that our discipline and patience in maintaining low corporate credit exposure will be rewarded. If past credit cycles are any guide, continued patience is advisable. We remember quite well how seemingly savvy and elegant the early prints in 2008 appeared – when certain private equity firms purchased with leverage bridge loans at 10 and 20 point discounts – only to see these investments wiped away when the other shoe dropped. We are looking forward to increasing our exposure as absolute value emerge."
Again, the theme of Dan Loeb's letter might be that it is best to keep "powder dry" and remain patient.
2011 Third Point Q3 Investor Letter Prospect Version