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Dan Loeb: 5 Reasons Why You Should Short the Market
Aspire | 30 November 2015
By: Lim Si Jie
Articles (169) Profile

In his recently published investor letter, activist investor and founder of Third Point LLC Daniel Loeb spoke of five fears which he believes will overwhelm the financial markets.

Loeb and his hedge fund are growing disenchanted with the outlook for the broader equity market.

1. A Weakening China

Dan Loeb believes that the question that investors should be asking is not whether but how severe the slowdown of the world’s foremost growth machine will be. In August, the world saw for the first time the limits of the Chinese government’s ability to manipulate the economy, contrary to the Chinese government’s confidence in its own ability. While the situation has somewhat stabilised since then, the downside scenario for China seems more intimidating than ever before.

2. Rate Hike Delay

According to Dan Loeb, it is increasingly difficult to see how the Fed can justify raising rates in 2015, particularly considering recent employment weakness in the US (an unwelcome surprise) and similar softness in manufacturing figures. While the October nonfarm payroll exceeded consensus by a huge margin, other important data remains weak. If the US consumer is weaker than had previously been believed, the Fed needs to be careful not to push the world into a recession.

3. Potentially Inexperienced (Republicans) Or Economically Unfriendly (Democrats) President

With 2016 looming on the horizon, market participants see some inexperienced, unserious candidates leading on the GOP side and economically unfriendly Democrats on the other. Republicans in the House are now also deeply divided and relying on Paul Ryan’s leadership to pull them back from the brink. Loeb sees none of this as capable of leading to an improvement of market confidence.

4. Middle East in Shambles

The Middle East is in shambles; a situation spilling over increasingly into Europe with potentially far-reaching consequences for both regions.

5. Lack of Monetary Safety Net

Loeb believes that investors fear there is no longer a monetary safety net, as a tidal shift in fund flows from central banks has removed the ‘Fed put’, creating headwinds on the market instead of tailwinds.

“More Short Positions Than Long”

This toxic cocktail was to blame for the Standard & Poor’s 500-stock index’s third-quarter losses, according to the fund. Third Point believes that volatility is here to stay and the possibility for PE multiple expansion may be limited.

As such, Dan Loeb’s Third Point hedge fund has increasingly looked to bet against companies. The hedge fund now holds more bets on stock price declines than gains, making Loeb one of the first hedge fund managers to outline a new strategy following a turbulent third quarter.

According to Dan Loeb, “the environment for short selling is also attractive and Third Point have more single short names than long positions in its books”.

Investors Takeaway: Short The Market With Inverse ETFs

Inverse ETFs are ETFs that perform inversely to the performance of the indices that it tracks. This means that if the S&P 500 falls by two percent, the inverse ETF will see an increase of two percent. Vice versa, if the S&P 500 increases by four percent, the inverse ETF will fall by four percent.

One of the inverse ETFs listed on SGX is the DBX S&P500 INV, which tracks the inverse performance of the S&P 500. Investors who wish to short the index can simply buy DBX S&P500 INV (note: if you want to short the index, you buy the inverse ETF, NOT sell the inverse ETF).

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.


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