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2020 Q1 Investor Letter

By January 21, 2020October 28th, 2021Fund Updates

With the beginning of 2020 now underway, we are taking note of the low volatility seen to wrap up 2019 that could continue into the new calendar year. This is a stark difference as compared to investor sentiment a year ago. Investors began 2019 with sentiment guided by Fed rate hikes, hawkish trade policy spewing out of the White House, and uncertainty coming off of one of the worst Decembers in US market history. Despite the noise a year ago, the market was able to return one of its best years in modern market history. It is important to remember how quickly the market was able to contrast the sentiment in the beginning of last year as another sentiment contrast could be on the horizon.

There are some big-ticket items that our investment team will follow closely over the course of 2020 as there are some events and periods that could lead to a contrast in sentiment that carried markets through the end of 2019. The first of which is the next earnings season of the calendar year. The market’s multiple inflated over Q4’s melt-up, which will eventually need to be justified this next earnings season. Should earnings disappoint, and more importantly, should guidance disappoint, we could see some volatility and downside pressure.

Of course, the major events of 2020 relate to politics. The political climate in the US will undoubtedly lead to volatility as we inch closer to November. We can expect volatility in events such as Super Tuesday, the Democratic National Convention, and the election. The CEA team is completely apolitical when it comes to running a portfolio, so we must understand what potential policy shakeups in Washington could mean to the earnings of the companies of which we are invested. The thesis our investment team holds when trading on politics is that we must make decisions based on the market’s perception of the likelihood certain market moving policy might actually be enacted.

Despite the risks above that will inevitably lead to volatility, our investment team remains positive on our 2020 outlook. We continued to invest more of our allocation throughout the final months of 2019. One difference in the portfolio your team likely noticed was our use of covered calls. When Liu He and his delegation came to Washington for meetings in mid-November our investment team believed we might see a melt-up and potential for covered calls to get in the way. Thus, we reduced covered call positions and eventually had no covered calls in the portfolio.

With the melt-up likely on its last legs, we will soon begin entering short call positions on the stocks we own. We will do this to collect premium on some names, and to take profits on others by allowing ourselves to get called-away. Selling covered-calls on names we eventually want to rotate out of is a common way we take profits and collect some premium in the process.

One company in our portfolio that led to disappointment after announcing earnings in the final weeks of the calendar year was Carmax. The stock corrected as a result of an earnings miss and

a revenues beat. The country’s largest used automobile retailer cited higher than anticipated advertising and compensation expenses. The stock seemed to have bottomed out and is currently up 10% from its lows established ten days ago. We will continue to hold Carmax as we believe in their fundamentals and believe these are expenses that can be corrected going forward.

As for the rest of the portfolio, we are confident in the companies’ ability to exceed expectations for 2020’s first earnings season. This upcoming earnings season will be essential to performance and could likely lead to a divergence in the market between companies that can exceed on expectations and those that do not. Thus far, we have seen extremely positive earnings from companies in our portfolio like Goldman Sachs and Citigroup. While we are confident in our portfolio heading into the remainder of this earnings season, we will continue to review our positions and rotate accordingly.

I have attached a portfolio report which includes your open position summary as of today, along with graphics demonstrating exposure.

Should you want to further discuss our outlook on 2020 or how your portfolio looks today, we would be more than happy to schedule a meeting. Thank you for your continued support and we look forward to a great 2020.