Birkoa Newsletter 46 (mid-July 2024 updates)
Dear Birkoa investors and prospective LPs:
As we navigate through an evolving financial landscape, our latest newsletter highlights key developments and strategic shifts that present tremendous opportunities for our portfolio and new investors alike. The resurgence in cryptocurrencies driven by the Trump trade, the positive performance of regional banks in response to anticipated Fed rate cuts, the early stages of capital rotation into small caps and software companies, and the strategic hedging through VIX via VIXY all point to a dynamic and promising market environment.
For prospective investors, this is an opportune moment to deploy capital. Our diversified and robust investment strategy is designed to capitalize on these market movements, ensuring that new investments can be put to work immediately to achieve substantial returns. The current market conditions are incredibly favorable, providing a unique window for both existing and new investors to benefit from our proactive and well-informed investment approach.
In the sections that follow, we delve into each of these developments, illustrating how our strategic positions and timely adjustments are poised to drive continued growth and resilience. Whether you are a seasoned investor or new to our hedge fund, the opportunities ahead are both significant and promising.
Cryptocurrencies and the Trump Trade: A Market Resurgence
In recent weeks, we have witnessed a notable resurgence in the cryptocurrency market, largely driven by what is being termed as the "Trump Trade." This term encapsulates the market's anticipation of Donald Trump's potential re-election as President of the United States, which is seen as a favorable outcome for various risk assets, particularly cryptocurrencies. The expectation is that a Trump presidency would continue to support deregulation, or at the very least maintain the current regulatory status quo, thus benefiting assets sensitive to regulatory changes.
Following the attempted assassination of Trump on Saturday, July 13th, the markets quickly responded to the increased probability of his re-election, resulting in a significant boost for cryptocurrencies. This development has not only revitalized the crypto market but also positively impacted crypto-related public equities and blockchain-related companies, including payments firms within the ecosystem.
In one of my recent newsletters, I highlighted the temporary downturn in cryptocurrencies from their recent all-time peaks, which had initially led to a substantial dip of approximately 7-10% in our fund's value. However, with the recent market rally, we have successfully recouped about 75% of those losses, contributing to a strong performance for the month of July.
Adding to this positive momentum, the Federal Reserve's recent communications indicate a readiness to acknowledge that inflation is coming under control, as evidenced by the latest CPI numbers for June. The Fed's forward guidance suggests a series of interest rate cuts starting in September, with further reductions anticipated in November and December. These anticipated rate cuts, aligning with our earlier predictions, are expected to provide additional support to risk assets, particularly cryptocurrencies.
Overall, the convergence of these factors—market optimism surrounding the Trump Trade and the Fed's dovish stance on interest rates—has created a favorable environment for cryptocurrencies and blockchain-related companies. This resurgence underscores the dynamic and responsive nature of the market, aligning with our strategic outlook and bolstering our fund's performance.
Regional Banks: Benefiting from Positive Fed Guidance
In recent weeks, regional banks have experienced a significant uplift, driven by a combination of factors similar to those influencing the cryptocurrency market. The Federal Reserve's recent acknowledgment that inflation is coming under control, supported by the June CPI numbers, has played a pivotal role in this positive trend. The forward guidance from the Fed, suggesting a series of interest rate cuts starting in September, with further reductions anticipated in November and December, has instilled renewed confidence in regional bank stocks.
These anticipated rate cuts, aligning with our earlier forecasts, have had a markedly positive impact on regional banks. The prospect of lower interest rates, combined with the decreasing inflationary pressures, has created a favorable environment for these financial institutions. Over the past couple of weeks, regional bank stocks have surged, approaching our target range at which we plan to begin taking profits.
Since March of last year, our strategic investments in regional banks have doubled in value, marking one of the most profitable trades in our portfolio. This impressive performance underscores the effectiveness of our investment strategy and our ability to capitalize on macroeconomic shifts. As we near the achievement of our full objective on this trade, we remain vigilant and prepared to execute our profit-taking strategy as planned.
The recent performance of regional banks reaffirms our confidence in the sector, driven by the positive developments in the broader economic landscape and the Federal Reserve's supportive stance. We will continue to monitor these trends closely, ensuring that our investment decisions remain aligned with evolving market conditions.
Small Caps and Software-Related Companies: Early Stages of a Promising Shift
In recent newsletters, particularly the penultimate one from the end of June, I emphasized our positions in small caps and software-related companies. Despite the overall positive performance of our fund, these positions had been underperforming, with some experiencing declines of up to 40%. However, I had maintained that these positions would eventually benefit once the Federal Reserve signaled readiness to cut interest rates.
We are now witnessing the beginnings of this anticipated shift. The Fed's recent guidance on potential rate cuts has initiated a rotational effect, moving capital from high-performing sectors such as big tech and semiconductors, into overlooked small caps and software companies. These sectors had been undervalued, primarily due to less robust earnings compared to their larger counterparts.
With the Fed's dovish stance and the prospect of a lower interest rate environment, the earnings outlook for smaller software companies is improving. This has attracted new capital, and we are beginning to see the early stages of the rotational shift I predicted. While we are not yet at the conclusion of this transition, it is clear that the market is starting to recognize the potential in these overlooked sectors.
The current environment presents a significant opportunity for new capital to benefit from this shift. The runway ahead for small caps and software companies is substantial, offering more growth potential compared to already high-flying companies like Nvidia, which has seen a remarkable run over the past two years.
Additionally, it is important to note the substantial amount of retail capital still parked in checking deposits and money market funds, yielding around 4.75% to 5% due to high short-term interest rates. As these rates begin to decrease, we expect a wall of liquidity to flow from these funds into the market. This influx of capital will further support the aforementioned positions, with small caps and software companies standing to gain the most.
In conclusion, the early stages of this shift are validating our strategic outlook, and we anticipate continued positive developments as we move forward.
Volatility in High-Flyer Stocks: Navigating the Recent Downturn and Strategic Opportunities
In the context of the rotational effect discussed in the previous section, it is essential to address the recent volatility experienced by high-flyer stocks such as NVIDIA, other semiconductors, and AI chip manufacturers. This rotational effect, which has directed capital towards small caps and software companies, is a healthy and expected market behavior. It naturally leads to some capital outflow from sectors that have previously experienced significant gains.
Recent geopolitical and policy developments have exacerbated this volatility. Comments by Donald Trump regarding Taiwan's independence and the necessity of protecting Taiwan have created uncertainty. Concurrently, the Biden administration imposed further restrictions on ASML, limiting its ability to sell equipment to China. This combination of factors has contributed to a notable downturn in semiconductor stocks, with NVIDIA experiencing a decline of approximately 15% from its peak just ten days ago.
While this downturn may seem significant, it is important to contextualize it within the broader market dynamics. NVIDIA and similar stocks have seen substantial gains over the past two years, and a period of consolidation or a slight pullback is not only understandable but also healthy for the market.
Given the structured nature of our hedge fund and our diversified investments across almost uncorrelated and distinct asset categories, we are well-positioned to take advantage of these temporary downturns. As we approach the conclusion of achieving our objectives for regional banks, we have begun to liquidate some of our profits from these holdings. On Friday of this past week, I initiated the process of redeploying profits from regional banks into the temporarily depressed chip manufacturers.
Over the coming days and weeks, I will continue this strategy as regional banks get closer to our targets. This approach allows us to compound our winnings by capitalizing on temporary downward moves, which are often driven by technical factors. As the anticipated pool of liquidity enters the market, not only will small caps benefit, but high-flyer stocks like NVIDIA and other major chip manufacturers will also see substantial gains, setting the stage for the next leg up.
Moreover, the recent CrowdStrike-related incident, involving terminals crashing into the cyber hub on Friday, led to a significant drop in CrowdStrike's stock. Despite this temporary setback, CrowdStrike had already achieved gains of over 75% for us in less than a year. We have strategically redeployed some of the profits from regional banks to take advantage of this dip, reinforcing our commitment to maximizing returns for our clients through robust and dynamic investment strategies.
In conclusion, while recent comments and policy actions have introduced some turbulence in the semiconductor sector, our overall strategy remains sound. The recent volatility presents opportunities for strategic repositioning, and our diversified approach enables us to navigate these fluctuations effectively. We remain vigilant and adaptive, ensuring that our investment decisions continue to align with evolving market conditions.
VIX and VIXY: Strategic Hedge Against Market Risks
In my last newsletter, I specifically mentioned our expectations for increased volatility heading into the U.S. presidential election. This prediction has started to materialize, particularly due to the recent Trump trade and the assassination attempt that occurred last weekend. The decline in high-flyer stocks has also contributed to an uptick in the VIX (the volatility index).
Recent developments, including speculation about Joe Biden potentially dropping out of the 2024 election, may have further intensified market volatility. This added uncertainty surrounding the election is likely to contribute to increased fluctuations in the market, making our hedge positions in VIX via VIXY even more critical.
Our hedge position in the VIX via VIXY has provided crucial support during this period of heightened volatility. As high-flyer stocks faced downward pressure, the rise in volatility has helped offset some of the losses, leveraging the pricing inefficiencies in how VIX and VIXY are measured. This strategic approach, as highlighted in my earlier newsletters, allows us to navigate turbulent market conditions effectively.
By maintaining our focus on volatility and our VIXY hedge, we continue to ensure that our portfolio remains resilient, capable of withstanding market fluctuations while capitalizing on emerging opportunities. This plays a vital role in our overall strategy, supporting our objective of delivering consistent returns for our clients.
In conclusion, the recent developments across various sectors underscore the dynamic and responsive nature of our investment strategy. As we continue to adapt to changing market conditions, our proactive approach positions us well to capitalize on emerging opportunities and manage risks effectively. For both existing and prospective investors, the current market environment presents a compelling opportunity to achieve substantial returns through strategic investments.
Sincerely,
Pranjit K. Kalita
Chief Investment Officer