Birkoa Newsletter 10 (end-September)

Dear LPs:

This month, you'll see some underwhelming performance. I'm not here to make any excuses, but please do not take your eye off the ball. Birkoa strategy is not optimized for short-term fluctuations and in fact, I have consistently utilized these shorter-term pullbacks to lever up with the expectation that it'd pay more dividends in the long run. This is a buying opportunity of a lifetime, and owing to the liquidity driven selloff that persisted last month, while still fundamentally sound, our portfolio has taken a hit. In this email, I wanted to go over each element of our portfolio and explain how we're positioned.

Shorter-term volatility movements are sometimes common (and obviously hard to capture for positions that have a time horizon in years like ours) and while unpleasant, it is important to not panic sell anything and always keep track of the fundamental reason for each position's utility within our portfolio. 

I'm working around the clock to ensure that the technical aspects of our portfolio, such as, liquidity ratios, margin requirements, etc., are all sufficiently maintained to allow us to ride this volatile period. So long as we ride it out, we'll be fine. Patience is key, and while annoying at times, there is no substitute to being true to the strategy. If anything on the ground changes, I will be sure to change our positioning accordingly, but thus far, that hasn't been the case.

Chinese Equities - 

Chinese equities are still underperforming, with the Hang Seng Index (Hong Kong market) breaking below the lowest mark achieved since 2011 last month. It's been quite a long recovery process, but it is largely anticipated that the end is near us with Spring 2023 being the consensus starting point of the upswing in Chinese markets. Following the Communist Party Congress this month after Xi Xinping's re-election, there is expected to be widespread phasing out of the COVID zero policy, which is the main reason for the depressed behavior in Chinese equities. Hong Kong reopened its gaming resorts, casinos and redefined quarantining rules for incoming travelers, which signals that we're closer than not to the mainland doing the same. Furthermore, 3 of our 4 Chinese positions have a consensus Buy rating by analysts (I don't look at analyst ratings to make decisions but I do receive unsolicited reports from brokerage and if relevant it is definitely reassuring which is why I mention here), which suggests that while we might have been early, we're on the right track to eventually make some healthy returns.

Semiconductors & Misc. Tech - 

Semiconductors have fallen with the rest of the markets last month. Our position on them is a longer-term position that'll make use of the supply chain imbalances currently underway owing to continuing macro changes.

Same thing with some other specific tech names that I brought since their prices seemed extremely valuable. (Coincidentally, after I brought them, like aforementioned Chinese equities, I received unsolicited analyst reports from the brokerage stating they had a Buy rating on them all!) It's very difficult to go bottom fishing in a bear market, so as long as it fits into the overall picture and it's cheap, buying assets now and waiting on them for the next 2-3 years will pay us major dividends in the future.

Uranium - 

I had taken a stake in Uranium last month intending to profit off of what I think will be a very tough winter for Europe, exacerbated by Russia completely shutting down natural gas exports via its Gazprom pipelines. In the absence of natural gas for heating, there's a chance of other sources of fuel, ranging from coal to clean energy like uranium, becoming more valuable. It is almost a bygone conclusion that the Russian gas is not coming back anytime soon or even ever, so I'll continue to hold Uranium as the winter approaches. There are furthermore some technical indicators that suggest a bull case for Uranium, so although our position is largely macro-driven and structural, an upswing is likely.

Palladium - 

Palladium prices have been holding near our buy point for the past month or so, sometimes going into positive territory followed by giving back the gains, and so forth. Specifically, in the past few weeks, accelerated in the past couple of trading sessions, Palladium has rallied. Remember, our price target for Palladium is $3000/ounce. Right now it stands at ~$2200/ounce. In the past few days alone, it has rallied pretty hard from $1900 to $2250/oz., finally settling around $2000 during the weekend. 

The macro forces behind our bullish position in Palladium not only remain, but have begun to show tangible movements. The London Metals Exchange (LME), recently announced it would levy sanctions against metals trading from Russia. Russia is the world's largest Palladium producer and exporter, therefore this particular supply crunch is something that I had been hoping for a while to be quite honest.

My bullish thesis persists since I don't see any end to the war in Ukraine; if anything, the consequences have only gotten more dire now that Putin is actively threatening to use nukes. From history, anytime a dictator's back is up against the wall, that's when they're most dangerous. Even without the war supply side constraints and bottlenecks remain amidst the geopolitical disorder and disarray, which will continue to give credence to our Palladium bullish thesis. Staying put.

Crude Oil - 

Crude oil prices have left a bit more to be desired, especially lately. It has been steadily coming down the past 3 months after initially peaking at $122/barrel since our fund launched, and now it's sitting at ~$80. However, what's not changed is the conditions on the ground that I've stated multiple times before. Supply side constraints still remain like before, with producers running at peak capacity with almost little-to-no room for spare capacity, with Saudi Arabia running production at a 14 year high. At some point this will all break. Like last time when I had suggested OPEC would support oil prices, there's a large expectation that OPEC+ will cut crude production by 500000-1M barrels/day on October 5. They have continually discussed this dislodging from on-the-ground fundamentals of Supply & Demand (S&D) when it comes to crude oil, and they're seemingly ramping up their actions to support the price of oil.

As we head into the winter, there's an expectation that oil demand will only rise, with it being a replacement for natural gas shortages in Europe. The European sanctions on Russian oil will kick in on December 5th, with no real replacement proposed for that oil. Even if that oil gets redirected, there will still be a significant supply shock for the roughly 7M barrels per day of Russian oil that was earmarked for Europe (that's 12% of the world's daily oil requirement). Russia will probably also cut oil production and there's a high likelihood that China is finally reopening, thereby accelerating 25% of the world's oil demand. The Iran Nuclear Deal revival didn't pan out as I had suggested would be the case, which is great for our thesis.

Thus, all these structural elements point to an upside risk for crude oil, and while right now the oil markets are getting spooked by the incoming recession concerns reiterated by low-volume trading activity, eventually the fundamentals of S&D should work themselves out. Thus, I will just stay put and ride this wave out. 

As of Sunday evening breaking now, OPEC+ is considering cutting production this coming week by over 1 million barrels per day. Oil is jumping for now, let's hope it lasts. The point is in no way do I think oil won't make it back, and I remain confident of the end result although it's been pretty jittery along the way thus far. 

In general, just be reassured that I will never dump a position simply because the current price action is going against me. Just as long as the actual reason still holds, I will maintain it. And if it gets too cheap, which is the case with most of our holdings currently, I will buy more at the bottom so as to accentuate our eventual profits. This is a once in a generation buying opportunity, and sometimes you have to be able to pull the trigger when a situation presents itself no matter how uncomfortable. Eventually we'll be up 2.5-3x all said and done on the initial capital invested.

Once again, I remain fully confident in our eventual target while being cognizant of the day-to-day. If at any time you have any questions, please do not hesitate. I think the job of a fund manager is to answer any question of their investor at any time, especially at rough moments. Understanding that the previous month might have constituted one such rough moment, I'd like nothing more than to answer your questions to provide you some peace of mind in the meantime. 

Regards,

Pranjit Kalita 
CIO