CVNA - LRT Capital Management July 2023 Investor Update
2023-08-06 10:25:00 ET
Summary
- LRT Capital is a fundamental investment hedge fund. Our sole aim in crafting our investment program is to maximize long-term investment returns.
- During the month, the LRT Global Opportunities strategy returned an estimated +3.35%, bringing year-to-date returns to +36.57%, net of fees.
- We believe that the economy has been stronger than expected due to extremely large U.S. budget deficits which act as economic stimulus.
Dear Friends & Partners,
Our investment returns are summarized in the table below:
| Strategy |
| Month |
| YTD |
| 12 Months |
| 24 Months |
| 36 Months |
| Inception |
| LRT Global Opportunities |
| +3.35% |
| +36.57% |
| +10.62% |
| -5.62% |
| +9.44% |
| +21.73% |
| Results as of 7/31/2023. Periods longer than one year are annualized. All results are net of all fees and expenses. Past returns are no guarantee of future results. Please see the end of this letter for additional disclosures. |
July was a good month for our strategy, with our long holdings performing well, partially offset by our hedges. Year-to-date we have kept up with the broad Nasdaq index and outperformed the S&P500 ( SP500 , SPX ) significantly. More importantly, we have done this with net exposure of under 50% and beta adjusted exposure of less than 30%. I expect that if market conditions deteriorate and broad indexes perform poorly, our strategy should deliver low but still positive results.
The market overall continues to be incredibly challenging for stock pickers, with a tiny number of companies accounting for most of the gains. The macroeconomy keeps defying expectations of a slowdown, with a “soft landing” scenario recently becoming the consensus. Short term interest rates in the United States are at twenty-two-year highs (5.25%), but the economy appears as strong as ever. The United States budget deficit is expected to be $1.4 trillion this year (over 5.5% of GDP) 1 , despite record low unemployment of 3.6% 2 .
The ratings agency Fitch just downgraded the US credit rating – citing partisan brinkmanship over the debt ceiling. 3 Despite all of this, stock market indexes are near all-time highs, the Nasdaq 100 is on track for its best year since 1983, 4 and near bankrupt used car dealer Carvana ( CVNA ) is up over 900% year-to-date.
Are you confused yet? If so, you are in good company, with the many Wall Street “strategists” who have been calling for weakness in stocks since the beginning of the year. 5 The reality is that short term market returns have almost nothing to do with economic or company fundamentals, but rather are driven by sentiment, positioning and fund flows. Trying to outperform the market based on macroeconomic forecasting is a fool’s errand in my opinion.
We continue to believe that the economy will fall into a recession sometime in the next few quarters, a so-called “hard landing” scenario. However, we make no attempt to time the market or alter our investment strategy based on macroeconomic predictions, the news cycle or Wall Street “strategists”. At LRT, we invest in a well-diversified and well-hedged portfolio of high-quality companies: those possessing a competitive advantage, the ability to grow and reinvest capital, and led by management teams with a decent track record of capital allocation. We hold a portfolio which we believe will deliver good results in any future economic scenario.
Having said that, I am always on the lookout for things that could create significant market volatility. One area of interest and concern that we believe may soon come into focus is the issue of persistent U.S. budget deficits. We believe that the economy has been stronger than expected due to extremely large U.S. budget deficits, which act as economic stimulus. With interest rates rising, the interest payment burdens are rising rapidly and will likely exceed $1 trillion annual in the next year.
It is amazing that the U.S. budget deficit is at over 5.5% of GDP in a time of the lowest unemployment we have seen in a generation. If the economy weakens, tax receipt decline, and the deficit explodes to double digits, U.S. fiscal sustainability may be called into question. What’s more, both political parties, love deficit spending – it remains one of the only “bipartisan” issues in Congress.
As of this writing, the U.S. deficits don’t seem to matter, and I don’t mean to sound alarmist, but markets can change their views very quickly and in unexpected ways. Should this happen, it could spell trouble for financial markets all around the world, as the U.S. dollar serves as a backbone of global economic stability, and any threat, real or perceived, to this status could have major negative ramifications for financial markets. If the interest rates on U.S. debt, especially long-term debt, increases substantially, I expect downside risk in broad market indexes ahead.
As always, I look forward to hearing from you and answering any questions you might have. Thank you for your continued interest and support.
Lukasz Tomicki
Footnotes
Disclaimer and Contact InformationLRT Capital Management, LLC is an Exempt Reporting Adviser with the Texas State Securities Board, CRD #290260. Past returns are no guarantee of future results. Results are net of a hypothetical 1% annual management fee (charged quarterly) and 20% annual performance fee. Individual account returns may vary based on the timing of investments and individual fee structure. This memorandum and the information included herein is confidential and is intended solely for the information and exclusive use of the person to whom it has been provided. It is not to be reproduced or transmitted, in whole or in part, to any other person. Each recipient of this memorandum agrees to treat the memorandum and the information included herein as confidential and further agrees not to transmit, reproduce, or make available to anyone, in whole or in part, any of the information included herein. Each person who receives a copy of this memorandum is deemed to have agreed to return this memorandum to the General Partner upon request. Investment in the Fund involves significant risks, including but not limited to the risks that the indices within the Fund perform unfavorably, there are disruption of the orderly markets of the securities traded in the Fund, trading errors occur, and the computer software and hardware on which the General Partner relies experiences technical issues. All investing involves risk of loss, including the possible loss of all amounts invested. Past performance may not be indicative of any future results. No current or prospective client should assume that the future performance of any investment or investment strategy referenced directly or indirectly herein will perform in the same manner in the future. Different types of investments and investment strategies involve varying degrees of risk—all investing involves risk—and may experience positive or negative growth. Nothing herein should be construed as guaranteeing any investment performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. For a more detailed explanation of risks relating to an investment, please review the Fund’s Private Placement Memorandum, Limited Partnership Agreement, and Subscription Documents (Offering Documents). Indices are unmanaged, include the reinvestment of dividends and do not reflect transaction costs or any performance fees. Unlike indices, the Fund will be actively managed and may include substantially fewer and different securities than those comprising each index. Results for the Fund as compared to the performance of the Standard & Poor’s 500 Index (the “S&P 500”), for informational purposes only. The S&P 500 is an unmanaged market capitalization weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance. The investment program does not mirror this index and the volatility may be materially different than the volatility of the S&P 500. This report is for informational purposes only and does not constitute an offer to sell, solicitation to buy, or a recommendation for any security, or as an offer to provide advisory or other services in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. Any offer to sell is done exclusively through the Fund's Private Placement Memorandum. All persons interested in subscribing to the Fund should first review the Fund’s Offering Documents, copies of which are available upon request. The information contained herein has been prepared by the General Partner and is current as of the date of transmission. Such information is subject to change. Any statements or facts contained herein derived from third-party sources are believed to be reliable but are not guaranteed as to their accuracy or completeness. Investment in the Fund is permitted only by "accredited investors" as defined in the Securities Act of 1933, as amended. These requirements are set forth in detail in the Offering Documents. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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LRT Capital Management July 2023 Investor Update