May 1, 2020 Update

COVID-19 continues to dominate the news flow this month, while global central banks go all out in providing liquidity to the markets. Congress has already passed two emergency funding measures for a total of $2.4 Trillion aimed at small/medium and large businesses as well as the U.S. consumer. Its effectiveness in buffering the economy from this global shock is yet to be seen. More assistance will be needed, some are even discussing a USA Jobs Act similar to what FDR did during the great depression.

The economic data continues to show us we are far from having reached a bottom. Countries will begin in May the delicate task of reopening for business. We know at some point we will get a second wave. The hope is that it will be smaller than the first wave. Visibility remains very limited and is likely not to improve before well into Q3 of this year. It is earnings season now and reports thus far have given little surprises with earnings estimates for the future not much more than a guess due to the lack of visibility. Some sectors have been hit very hard such as airlines, entertainment, travel and leisure. It will take some time for recovery in this space with airline industry executives stating they expect no return to “normal” for a minimum of two years. On the positive side early indications are corporates have been ramping up investment in technology. With hard work, discipline and a bit of luck I would hope to see the global economy functioning at 80% by the end of 2020. We have to accept the fact that risks of a setback do exist.

While all the data is clearly bearish (see ISM and Jobs links) this is a difficult market to short. With (literally) Trillions of dollars being thrown by the Fed and the fiscal stimulus by congress shorts are finding it very difficult to hold on. While I remain very bearish of equity markets and believe we will eventually see new lows fighting the Fed is a difficult proposition. Short positions must be actively managed. Better longer term positions are found in the fixed income space as well as with gold.

ISM LATEST REPORT:  

Look at bottom of first page March summary. Most important are the rate of change direction.

HTTPS://WWW.INSTITUTEFORSUPPLYMANAGEMENT.ORG/ISMREPORT/MFGROB.CFM?SSO=1

JOBLESS DATA:

30 million and growing

https://www.cnbc.com/2020/04/30/us-weekly-jobless-claims.html

The key for surviving these markets and generating returns is to be nimble and maintain a cash cushion. As I have always said, “we are married to our spouses not our portfolios”! Stay within your discipline and respect the market. Our returns thus far this year comes from three areas: Long Treasuries, long volatility and gold. This does not mean I bought and held all positions YTD. For example, I had a decent short SP500 position in late January that I traded out of late March. I cut our long volatility three weeks ago booking good profits, and recently reinitiated the position. In markets with such extreme volatility, one must book profits to protect gains. I am maintaining our long Treasuries, gold and gold equity as core positions as I still see rates falling further. Though it may still be difficult to believe that U.S. rates will go negative it certainly is possible considering the economic outlook. With a deficit of $3.7 Trillion and growing for this year the U.S. deficit will surpass 100% of GDP.  We are not alone as all major developed countries are facing the same difficulties. The result is that all major currencies are trying to devalue their currencies at the same time. With the US$ as the global reserve currency it will fall last. But the dislocation to occur will be very damaging. Predicting when and how this will happen is a fools’ game, but a regime change is in the cards with all the liquidity/debt being created out of thin air. This very possibility has led me to initiate a position in Bitcoin. It is small for now but believe it will grow in size.

We have good returns YTD, which is owed in part to my cautious approach in 2019. I firmly believed the market valuations were unsustainable with a global economy in slowdown since the second half of 2018.

I am not all doom and gloom, as I am a firm believer that in times like these there are more opportunities to generate positive returns. It will take hard work and attention to detail to succeed. We will come out the other side of Covid-19 having learned many lessons and hopefully be wiser for it. Most of all my wish is that this time will help us realize that we have more in common than any differences. It is by working together on common goals, that will make us stronger. In the meantime, stay safe and remember “change” is the only thing that is constant.

ACWI ALL

DLA RETURN      World SP500

2016: 9.19%            8.48%           11.96%

2017: 17.07%          24.62%           21.83%

2018: 5.99%           -8.93%          -4.48%

2019: 15.79%           27.30%          31.49%

2020 YTD 15.66% -11.86%        -9.85%      

Un-audited Returns

Average annualized returns for DLA: 12.83% vs ACWI All World USD of 5.61% 

Since 2016 the strategy has been used on family SMA accounts. While leverage is used, it is limited to 130%. Now that the process has been proven we are now open to outside SMAs. Please contact us for details.

Information contained herein is not intended to be a source of advice or credit analysis with respect to the material presented, and the information and/or documents do not constitute investment advice. Performance figures noted here are historical figures and are not indicative of future results.  The information set forth herein is being furnished by DLA Advisors on a confidential basis to recipient and does not constitute an offer, solicitation or recommendation to sell or an offer to buy any securities, investment products or investment advisory services. Such an offer may only be made to eligible investors by means of delivery of a confidential private placement memorandum or other similar materials that contain a description of the material terms relating to such investment. DLA Advisors will communicate ONLY with “qualified investors” as defined by the SEC or FCA. The information and opinions expressed herein are provided for informational purposes only.