DAN LOEB: These 5 fears have 'overwhelmed' the market

Activist investor Daniel Loeb, the founder of Third Point LLC, laid out five fears that have "overwhelmed" the market in his third-quarter investor letter.

1. "A weakening China, where the new question is not whether but how severe the slowdown of the world's foremost growth machine will be. In August, we saw for the first time the limits of the Chinese government's ability to manipulate the economy as animal spirits triumphed over central planning. While the situation has stabilized somewhat since, the downside scenario for China seems more intimidating than ever before;"
2. "Janet Yellen may have inadvertently checked herself and the Fed into the Hotel California. It is increasingly difficult to see how the Fed can justify raising rates in 2015, particularly considering recent employment weakness in the U.S. (an unwelcome surprise) and similar softness in manufacturing figures. Unlike the concerns that weighed on the Committee earlier in the year - that a rate hike might damage the fragile environment outside of the U.S. - recent data undermining consensus U.S. growth assumptions requires different analysis. If the U.S. consumer is weaker than had previously been believed, the Fed needs to be careful not to push the world into a recession. Ms. Yellen cannot afford to get this wrong;"
3. "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. None of this increases market confidence;
4. "The Middle East is in shambles; a situation spilling over increasingly into Europe with potentially far-reaching consequences for both regions;
5. "Investors feel 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 instead of tailwinds."

Third Point fell 8.9% in the third quarter, while the S&P 500 fell 6.4%. Third Point was down 4.5% for the first nine months of the year, while the S&P fell 5.3% in that same period.

As a group, activist investors - who take large positions in companies and agitate for shareholder-friendly changes - were among the most publicized losers in the third quarter with names such as Greenlight Capital, Glenview Capital, Pershing Square, and Marcato getting bruised, according to performance data from HSBC.

In the letter, dated October 30, Loeb noted that short selling has become more attractive. He has more single short names than longs in his portfolio currently. He still has significant positions in the fund's "highest conviction, event-rich names."

"The conviction to keep and add to our core healthcare names during the selloff enabled us to re-establish ourselves on positive footing this month."

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