market folly

McLane Cover's Mistral Capital Partners recently released their third quarter letter and in it we see they were up 9.81% net for September compared to 8.55% for the S&P 500. While Mistral is down 5.9% year to date compared to an S&P gain of 2.3%, they are still up over 121% over the past 10 years. McLane Cover, President and CIO, sees two important themes driving the markets in the fourth quarter:

First, the Republicans taking the House following the November elections as the country demands a more fiscally conservative approach from the US Administration. And second, the Federal Reserve will likely continue to flood the economy with liquidity by pursuing a second round of Quantitative Easing.

Sector & Economic Themes

Recently, Mistral Capital has taken profits in the technology sector given the significant appreciation in their portfolio, but they continue to believe the sector is attractive and well-positioned going forward. Additionally, they believe asset plays will out perform as the Fed (and other central banks) remain focused on reflating the economy.

Consumer

They expect US consumer spending to remain constrained but probably exceed extremely low investor expectations. Mistral expects auto sales to remain strong and thus are sticking with their core position in Ford Motors (F). In the past we've noted that Jim Chanos is short F. Mistral also believes that the emerging market consumer becomes an increasingly dominant force, as they note that more than 80% of the world’ s six billion people currently live in emerging economies with China and India representing one billion each. McLane highlights ChinaCast (CAST) has a player in this space. ChinaCast is a leading player in four year vocational universities and they believe that the Chinese government’ s support of vocational universities will propel future growth.

Energy

Mistral Capital continues to believe that natural gas becomes a key component of US energy policy, though they admit they have been “ long and wrong” on this call for quite some time. Natural gas is politically attractive because it is sourced in America and we have a lot of it (90 years of supply by some estimates). Furthermore, an expansion in the use of natural gas would stimulate job growth. Natural gas is carbon based but its carbon footprint is half of coal and thus more environmentally friendly. Natural gas represents a bridge to more eco-friendly alternatives as wind, solar and geothermal become scalable and more economically viable.

They believe in JA Solar (JASO) as a play off a comeback in solar. JA Solar is a low cost quality leader in the solar space and is the world’ s largest manufacturer of crystalline silicon cells based in China. JA Solar has tailwinds as industry solar demand have continued to rise for 2010 and 2011.

Other Plays

In healthcare, they like Volcano (VOLC) – A leading global provider of intravascular ultrasound (IVUS) and functional flow measurement (FFR) equipment and catheters. In telecom, Mistral favors American Tower (AMT), a dominate wireless tower provider in the US with an emerging market presence in India and Latin America. The company is considered to have the highest quality portfolio among its peer group in terms of location and tower size. AMT was one of the specific equities highlighted in-depth as a hedge fund favorite in our newsletter, Hedge Fund Wisdom.

Embedded below is Mistral Capital Partners Q3 letter:



You can download a .pdf copy here.

We're starting to post up a bevy of fund manager market commentary and outlooks, so be sure to scroll through our set of investor letters as we continue to highlight them.