ALTAIR MANAGEMENT PARTNERS
October 2014 Commentary
October was a month of extremes. During the first half of the month, the S&P 500 fell by nearly 10%
while the VIX spiked to over 30 on Ebola fears, lower IMF forecasts, and negative economic news from
Europe. On October 15, the market’s low-point for the month, the yield on the benchmark 10-year
Treasury fell to an astounding 1.86% -- a full 75 basis points lower than the prior month. As oil prices plunged and investor fear seemed at a peak, St. Louis Fed President Jim Bullard was
quoted as saying that “bond purchases should be data dependent: and that the “Fed should consider
delay in ending QE.” The idea that the Fed would consider further quantitative easing resurrected the
market’s animal spirits. Then, on the last trading day of the month, the Bank of Japan injected the
markets with some phenomenal monetary steroids. BOJ announced that the Japanese Pension Fund
would increase its allocation to stocks from 12% to 35% and cut its bond allocation from 60% to 35%.
Further (and perhaps more stunning), BOJ announced it would increase its purchase of Japanese
government bonds (QE) to 80 trillion yen and triple its purchases of stock funds to 3 trillion yen annually.
Naturally, these announcements had a significant impact on stock prices as Japan’s Nikkei Index leapt
1,700 points (+5.8%) that day and the S&P 500 added 1%. By the end of the month, the S&P 500 erased all of its losses and closed the month up 2.4%. Internationally, however, the results were not as ebullient, as the MSCI EAFE lost 1.5% for the month;
dropping its year-to-date return to -5.1%. A few side-points about BOJ’s Halloween pronouncements… David Stockman points out that, if scaled to
GDP, the new BOJ bond-buying program would equate to the US buying $3 trillion of bonds per year.
This, for a country whose debt has just reached the 16th digit in local currency. Japan’s national debt is
now 1 quadrillion yen. That’s a “1” followed by 15 zeros. Within Altair Partners II there were transactions in five securities. First, we sold Hertz Global at a loss.
We continue to believe in our thesis regarding the value that can be unlocked by breaking up the
company, but the stock was adding too much negative volatility in the short-run to be retained. Since our
sell, the stock has fallen another 8.7%. We continue to monitor developments within Hertz, including the
new CEO search and hedge fund Jana Partners taking a 7% stake in the firm. Should its price stabilize,
we may add it to the portfolio once again. We also removed CONSOL Energy, Delek, and Ensco from the portfolio due to extreme downward price
momentum in oil, gas, and generally anything in the energy space. To put this weakness in perspective,
the broadly diversified Energy Select Sector Index fell 9.9% during the first 14 days of the month. We also tactically traded our short position (inverse ETF) on the Russell 2000 Index, exiting the position
at a gain mid-month and re-entering it after the Bullard-induced spike in equities. Upon the BOJ
announcement of October 31, we exited all of our short exposure in anticipation of another QE-initiated
stock market rally and the likelihood of positive momentum coming out of the mid-term elections. As
always, we remain prepared to re-apply our short exposure should conditions warrant. We executed one options position, we sold January 2015 Calls on our Cisco Systems holding yielding
nearly 5% in premium while pushing the capital gain implications of the transaction (should Cisco be
called away) into 2015. While the headline indexes continue to show strength, we are finding many value opportunities
developing below the surface. These areas include deeply-discounted fixed income closed-end funds,
gas liquefaction, tankers, and mid-stream refiners.