Performance and Allocation Update (March)

Performance and Allocations

As of 3/20/20

Dear all,

Wow. What a chaotic week. The market went from up 3% on Friday to down nearly 5% by the end of the day, capping off a -15% week. The VIX is sitting at 62 (double uninvestable levels for equities), and currently, as of Monday, the S&P 500 is down another ~3% despite news of unlimited Quantitative Easing from the Federal Reserve to back bond markets, mortgage securities, and support US corporations in order to calm markets. This response is not good. Safer US Treasuries are rallying. Gold is rallying. However, these assets continue to whipsaw around with high volatility as uncertainty for the impacts of the latest shutdowns continue to shudder markets.

Also, Democrats have now blocked two Republican attempts to allocate $2 trillion from the Treasury department because of disagreements over who should receive the aid. The Fed doesn’t have much ammunition left, so fiscal stimulus is the only other avenue they must try to stop this economic gravity.

How we are responding

Because of such developments (and other issues laid out to you in my last letter), our allocations are as shown below:

As you can see, cash makes up 95% of our portfolio, as the $USD continues to rip higher in this Quad 4, rush to safety/liquidity environment (up over 4% last week). The British Pound, Euro, and other major world currencies continued to decline is value against the greenback. We also have 3.78% of the portfolio in US Treasuries of multiple durations, but mostly short-term treasuries as this is what the Fed is buying. Other than that, we are short -3.5% in stocks, mostly in the areas of technology, energy, and financials as high amounts of debt hurts tech in a bear market, crashing oil prices hurts energy, and the flattening of the yield curve/drop in rates and cyclical nature of the business hurts financials.

Sector Performance

Below is sector performance (and relative performance) for the past day (Friday), month, quarter to date, and year to date:

Most of our Quad 4 allocations are outperforming the broader index (Health Care, Consumer Staples, and Utilities are all in the green on a relative basis) but are still down big for the year and from their peaks in mid-February. The most surprising outperformer, though, has been technology. Some of this outperformance can be attributed to short-term tailwinds for companies such as Netflix and other tech companies as more people are quarantined and looking for ways to entertain themselves. However, as the economy begins to slow and consumer demand decreases, companies like Netflix whose use of massive debt funding for new streaming titles will most likely cost them big when subscription growth dwindles (or declines). Also, our Quad 4 shorts are heavily underperforming the broad index, as Financials (-37.65% YTD) and Energy (-60.06%) lead the way.

Portfolio Performance

Week:

Month-to-date:

3 month:

Year-to-date:

*the blue line is our portfolio performance and the orange line is broad US Stock market performance.

Along with outperformance of the US Stock Market in every given timeframe, you can also see that we outperformed every other index given (Foreign Stock, US Bond, Foreign Bond, Blended, etc.). This outperformance has come from a top-down allocation approach (moving to a Quad 4 allocation in early February) and diversification across those Quad 4 asset classes. We were long Gold and Treasuries of all durations through most of February and the beginning of March, but we took profits and moved to cash as gold and bond market volatility ramped up.

We have missed a current bounce in bond prices (drop in yields) and gold, but missed most of the down move because we grossed down the position before the major spike downward (see below). I’m now looking for a good entry point back into both of these assets once volatility calms down and we get another correction to the low end of the range. Until then, I’m comfortable sitting on cash.

*Above is the chart of Gold (blue, right) and Gold Volatility (yellow, left) over the past month. We began selling some gold once GVZ broke through the 30 barrier and will be looking to buy more once volatility settles.

*The above chart is the price of US 10Y Treasury Notes (blue, right) and Treasury Volatility (red, left) over the past month. We began bringing down our gross exposure to long-term treasuries when the TYVIX first spiked March 9-11. We will likely be buyers again when volatility settles as well.

Again, let me know if there are any questions on anything I’ve discussed in the past two letters. Hopefully this gives you all a better understanding of how we are positioned and why.