Birkoa Newsletter (2nd week December'22 updates)

Dear Birkoa LPs:

I wanted to provide you with a quick update at the end of last week, and prepare you for this week's double bonanza events - CPI inflation print for the month of November, and Fed's interest rate decision, on Tuesday & Wednesday, respectively and how they could affect our portfolio short-term.

From the end-of-month statement you received for November, our portfolio is up about 7.5-8% overall and ~5% for the past week. While it's always welcome to make money, this was also where we were at the end of Sunday night session/beginning of Monday morning session. So from what I saw, there was a bit of a tug of war going on.

Essentially the positive that's happening is China is continuing to move forward, with occasional drops along the way, whereas the rest of the positions are pretty uneven and mostly down. Most notably commodities and more specifically oil, due to a host of reasons. While I'm confident of China continuing to go up, with the continual easing of COVID curbs (which I had told you was one of the reasons artificially holding us down - a dampener), it might be the case that others might take some more time to recover. Crypto, thanks to the fraud that is Sam Bankman-Fried and FTX, is still down and even though we don't have any positions in crypto tokens right now, we're invested in crypto and blockchain companies. These have come down in the past month, even though their exposure to FTX is negligible to nil. That screams opportunity, because the way I look at it, it's a reason to buy more for cheap, which is what I did last week.

I have been building up some more positions in China due to a pullback on Tuesday, which I felt was unwarranted. Similarly, I also have been steadily building up positions in cloud companies and SaaS companies that I have owned for the past few months. My contention is that while it's not the time to get into U.S. tech highflyers just yet, like Amazons or Googles or Apples of the world, certain cloud computing platforms have been badly hit (in some cases more than high-risk tech names) due to the prevailing sentiment, which I think given the cheapness, is a good entry point. Sometimes, just like we saw with Chinese property developer Longfor (up 197% in less than a month after going down 24% in one day & 45% at one point during that day), they go down 15-20% in 2 days simply because some key executives have decided to leave the firm! I was able to find one such wrong reason that led to a selloff last week, due to which I increased my exposure to them.

Cloud computing and SaaS companies are like potatoes - they may not be as high flying as the "sexy" names like Amazon or Facebook or Apple, yet are needed at all times regardless of whether or not there's a recession. They're also less sensitive to interest rate risks unlike Apple/Amazon since they're not consumer but business-oriented companies. And businesses need these important platforms like Slack, CRM software, etc., and these are not necessarily the first areas of a firm they begin to cut from during a recession. For one thing, these companies have mostly beaten earnings estimates, yet their expectations for Q4 2022 have been lower, which is why they've gone down in terms of share prices. Until the time is right to finally get into U.S. big tech, these names are a decent proxy, and given the cheapness, could yield 50-60% themselves.

Right now, for those of you who invested in May, you're down ~8%, whereas for those who came after that, you're in the green. I certainly hope and think this will continue, and while commodities are going through a rough patch currently, China might continue to soar, hold the fort steady and even build on the overall gains. At some point we're going to lace the Chinese winnings over U.S. tech when I think the time is right (meaning when the market is certain about Fed's terminal rate being 5% or 5.5%). However, I wanted to prepare you for this week, much like I've done in the past. 

As highlighted above, the U.S. CPI for November (inflation numbers) are out this Tuesday. Last month they came in softer than expected, leading to a massive stock market rally which buoyed our positions in general, most notably semiconductors, which are in the green now by ~8%. While this month it's expected to be soft as well, sometimes they might surprise on the upside, and if that happens, then it is possible our rally might stall temporarily. I just wanted to prepare you for that.

Second, the Fed is announcing another interest rate hike on Wednesday. Although they've been signaling a 50 bps hike and the market has priced that in fully, in case they do a 75, once again the market might tank (possibilities are low but still it's important to note how traders make trades and why I can't just change positions in anticipation of short-term movements). Of late, the uncorrelation of Chinese tech/property stocks with the U.S. markets that I was yearning for in the past, on account of Chinese reopenings, have resurfaced, which is good news but I'd still be very cautious just in case if bad economic numbers come out this week, that they might halt their rally temporarily. Ultimately, it might not be a straight line up and we may give back some of our recent gains this coming week in the worst case short-term scenario.

Finally, since this is the end of the year, in certain names like oil, which has been beset with a lot of unknown variables (like Russian oil price caps), in the absence of stability, traders are closing their trades early and locking in their gains for the year. That might be yet another reason for the recent downward swing in oil. Still the fundamentals still don't dictate any change, I remain put and am not bothered by traders's short-termism. These things are obviously quite normal.

I hope this was helpful. 

Sincerely,

Pranjit Kalita
CIO