Birkoa Newsletter (end of December 2022)
Dear Birkoa LPs:
As the month of December ended, we remained pretty much flatline at the surface level for the entire month, with some interesting moves below the surface. I believe while the near-flatline performance for the month might be somewhat disappointing following last month's results, I think the below the surface part of it is immensely promising, and is setting itself up to repeat in other areas of the portfolio what Chinese equities did for us in November.
In summary, while inflation has been decreasing, it has not been met with a corresponding increase in jobless numbers, because of which the markets are reticent about accurately calling a terminal rate at which the Fed can feel comfortable to tame (demand-side) inflation longer-term. Much like what I had stated prior to the FOMC meeting, it is that terminal rate and not the 25 or 50 bps steps of rate hikes that count at this point. What's especially interesting is that this time the FOMC decision came 1 day after the lower inflation print, but even that didn't calm the markets.
In general, our holdings are completely uncorrelated to the markets, unless of course one of the "artificial dampeners" rears their ugly head. With the dismantling of COVID Zero in China, one of them has been lifted for good so we can continue to expect China to breathe freely and our equities positions to rise over the months ahead, even though they might be choppy at times. However, the 2nd dampener - artificial Dollar strength - is still on at least on-and-off until the terminal rate is fixed, hence we're seeing a synchronized pullback in all assets except for the Dollar (and except for Chinese equities even though they have come off their absolute highs this past month - understandable!).
Much like what I did when Chinese equities were suffering leg downs, I've been buying more of our existing holdings in semiconductors, cloud computing, including finally catching ASML in a local bottom. I had been eyeing ASML for quite a while and I believe that semiconductors in general, which have suffered a beating of 50-60% this year will roar back strongly by sometime next year. Same thing for cloud computing holdings of ours, which also provide a Quality factor despite being in tech, not being too sensitive to interest rate risks of the consumer unlike Big Tech stocks, which have suffered major drawdowns this year across the board. I think that our holdings in Atlassian, Snowflake, and recently, Baidu and Salesforce (Baidu also providing that Chinese reopening exposure which was a new position I opened this month), have in general suffered big tech like beatdowns, and given their enterprise value, I think that's a bit unwarranted.
On the commodities side, oil is stealthily regaining since being at $71/barrel two weeks ago. I still stand by my belief that commodities should see another leg up as we head towards a sustained supply side-driven inflationary environment, so we'll continue to hold on to our oil positions. Same thing with our metals and Uranium positions.
While the pace of Chinese stock recovery was obviously less compared to November, they did do decently enough that it kept a check on the pullbacks due to the other elements of our portfolio. I think we're able to assign true meaning to "hedge" in our hedge fund; and the silver lining despite an uneventful month is that we know the next leg up would be great, big enough to blow past our breakeven point and well into positive territory by the time our 1 year is over end of April. I remain confident in our profitability over our time horizon.
It is entirely possible that the absolute worst in crypto is over, but I shall still wait some more time before putting money back to work on the tokens themselves as they might stall for another year. On the other hand, our holdings in blockchain companies and crypto exchanges via their equities, might recover comparatively sooner once the terminal rate is finalized. Once they do, they'll certainly do quite well since some have gone down 90% this year. Our holdings have very little liquidation risks since they're regulated and have accountable balance sheets. I did dip into buying these during their leg down this past month, adding about 10-15% of our exposure.
Happy new year and remember our year has 4 more months to go. We are doing better than the rest of the markets right now, with this month of December being a prime example of what it means to have a set of uncorrelated assets. What we underwent back in September-October was a once-in-a-decade moment, and we'll be better off in the future because of it. At least from that point of view, the worst is behind us I think. At one point during this month, we were about 7.5-8% from breaking even, and although it is annoying giving back some of the gains, our trend within our portfolio has always been to go down from peaks prior to settling on a new local peak. It's never really a straight line up, which is frustrating but is also highly opportune. I have been busy trying to take advantage of that opportunity.
Sincerely,
Pranjit K. Kalita
Chief Investment Officer