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2020 COVID Letter

By March 17, 2020October 28th, 2021Fund Updates

In these trying times we would like to provide an update on our investment thesis, thought process, and recent portfolio action given the extraordinary volatility seen in the global markets. As you may be aware, many of our decisions are made based on primary industry insight at our disposal from my various business ventures. Many of the actions we have taken reflect what we have seen in our various businesses. We began raising substantial cash during the week of February 24th based on information we have been receiving regarding global demand, global supply chains, and market movements in what seemed like a very strong market during the melt-up. Year-to-Date, our fund is down approximately 18% as of March 17th. Of course, we are never happy to print negative returns. The market down nearly 30% this year. We believe our minimal exposure to market volatility given our cash levels gives us the opportunity to deploy capital at extremely cheap levels once the carnage stabilizes.

Our factories and processing facilities are now 80% back online in China, but we are very skeptical of our Asian supply-chain consistency in the coming months. For years, our factories have built up inventories prior to the Chinese New-Year to ensure a smooth return to work. However, as the inventory reserves deplete, we could see a supply-chain gap in either April or May. We have also been told by many sources in various Chinese cities that while people are returning to work, weekend behavior in China has changed dramatically, even with the virus plateauing in the global epicenter. The fear of the Chinese citizen is leading many to only expose themselves to public places so they can go to work yielding weekend traffic that remains near the lows seen throughout the virus. Thus, the Chinese Consumer, from whom many US companies derive growth, are spending less throughout their weekly activities. This logic is what led us to raise cash amid the first volatile week of the sell-off, dubbing this market swing more than your typical 10% correction.

Chinese economic patterns in late January and early February are beginning to reflect the US response to the virus. As restaurants, schools, and public places shut down, economic activity in the US will likely come to a standstill until the virus subsides. This will lead to continued market volatility as uncertainty weighs on the markets. This is why we remain comfortable with a significant cash position. Specifically, we currently are holding 85% cash. These cash levels were raised February 24th through February 28th. Thus, much of the market losses from February were absorbed by our fund. However, the market volatility in March only reflects marginal moves in our portfolio which remains 15% invested.

We will never be able to pick a bottom, but we do feel like the market is not quite done selling off. There are too many unknowns to the global economy, to earnings, and now to the confidence of the US consumer. Recession risk is now real in the US, though that is not our base case. We do believe that there will be a sharp move upward in the market once a bottom is found. Our logic dictates such because interest rates around the globe make US equities even more favorable than before the bear market. Finally, the market is approaching levels seen in Q1 of 2017. As the market is a forward-looking discounting mechanism, positive 2021 earnings

growth will eventually guide the market. These positive attributes are not quite ready to take over market sentiment, which is why we are not ready to exit our substantial cash position. When the earnings outlook begins to give clarity, and 2021 earnings become more of a focus, we expect to be fully invested once again. Our current plan is to re-enter the market gradually as things calm down.

Virus news in the US will only get worse in the near future, leading to more volatility. Once the daily volatility subsides from current levels, we will feel more comfortable redeploying capital. We would be happy to have a phone call to discuss further. Thank you for your continued confidence in the CEA investment team during these trying times.