Monthly Newsletter - August 2024

Greetings,

Where to begin! July 2024 was like a bad, made-for-TV movie that was forced into the drama category even though it was really a comedy. Between the failed attempt on a former President’s life, a sitting President dropping out of the Presidential race at the 11th hour, earnings season leading to some of the worst single-day declines for many blue-chip names, and an equity market that took a violent round trip from the 5,400s to a record-high 5,667 and back again – I want a refund.

The equity markets’ rapid ascent and equally turbulent drop in July was reminiscent of similar episodes for the S&P 500 in both October 2023 and April of this year. Both months saw declines that felt cataclysmic at the time but were followed by extended periods of advancement.

Senet Capital Enhanced Equity Fund, LP ended July with net gains of 1.26%, slightly outpacing the S&P 500’s gain of 1.1%. The Fund has net returns for the year of 21.17%, compared to 16.3% for the S&P 500.

While Senet Capital specifically avoids market timing, we did use the recent sell-off as an opportunity to acquire shares we would have liked to have purchased earlier in the year.

As the market sold off, we increased the Fund’s net equity exposure from 170% to 259%. Volatility has also been more pronounced in our portfolio, with intraday swings in July reaching over 5%. As a reminder, our portfolio experiences high levels of volatility in periods when the S&P 500 moves between gains of 7% and losses of 10%. Our hedges do not begin to pay off in any meaningful way unless the market is down more than 10% from where we began the hedging cycle.

The Fund is currently short call options at three different strike prices, as well as short put options at two strikes that are both significantly out-of-the-money. Lastly, we are long put options as a hedge to the portfolio, and all of our option contracts have the same expiration date in August.

Unlike his namesake from the infamous Lord of the Rings, “Gandolf”, otherwise known as Marko Kolanovic, turned out to be another scene in the cheap box office flop mentioned above.

Marko Kolanovic, JPMorgan Chase & Co.’s chief global market strategist and co-head of global research, is leaving the bank, according to an internal memo obtained by Bloomberg News last month.

Kolanovic, who has been at JPMorgan for 19 years, is “exploring other opportunities,” the memo stated.

According to Bloomberg, the move follows a disastrous two-year stretch of stock-market calls by Kolanovic. He was bullish for much of 2022 as the S&P 500 Index sank 19% and strategists across Wall Street lowered their expectations for equities. He then turned bearish just as the market bottomed, missing last year’s 24% surge in the S&P 500 as well as the 14% gain in the first half of this year.

At the time of the announcement, JPMorgan had the lowest 2024 target for the S&P 500 among banks tracked by Bloomberg at 4,200. The benchmark is trading near 5,200.

The strategist, once called “Gandalf” in the media after a series of prophetic forecasts, came to the US from Croatia in the 1990s to study at New York University and received a Ph.D. in theoretical physics in 2003.

Essentially, Mr. Kolanovic has the education of a rocket scientist and the experience of a Wall Street veteran, and yet the ability to predict the short and medium-term direction of the equity markets eludes him. We feel this supports our investment approach and is indicative of why we manage the Fund as we do.

Dr. Ed Yardeni, president of Yardini Research, says he prefers to be “usually bullish and usually right.” And as J.R.R. Tolkien’s Gandalf himself reminds us, “for even the very wise cannot see all ends.”

As a reminder, by their own admission, the best short-term traders have a success rate of less than 55%. If you stay long the S&P 500 on a monthly basis, you will be correct 66% of the time, based on monthly data going back at least 20 years. Add in any degree of downside protection to hedge your portfolio, and that number increases relative to your risk tolerance. Sorry Gandalf - no Middle-Earth wizardry required.

Happy Hunting,

David Jeffress and Jonathan Berkowitz