Livermore Partners Q4 Partners Report
January 17th, 2019 To Partners:The quarter and YTD performance took a hit in Q4. Mainly due to a seemingly hawkish Federal Reserve and slowing global economy. Thus, driving a global selloff that hit almost every asset class into year-end. For Livermore Partners and our value-based approach, we were not spared. Even with a degree of short exposure through opportunistic situations and defined value stocks, we couldn’t continue along with our winning ways that lasted most of 2018.
That said and even with the challenging Q4, I am pleased to share that as of December 31st Livermore Strategic Opportunities LP ended the year with a gain of 14.09%. In the quarter much weakness came from core holdings in oil and gas and other sectors. Notably, our core long positions in APAC focused oil-producer Jadestone Energy, and London luxury designer, Burberry. Crude buckled and sold off over 30% from Brent’s summer high of $85bbl to $55bbl and given China’s weakness, Burberry was under the gun. On the short side, we did profit handsomely as we allocated a 20% percent plus weighting to short positions. Made up of a basket of names including Goldman Sachs, Pacific Gas and Electric (more on this later in our letter), Tesla Inc, Weight Watchers, and a handful of others. see link: 1MDB Poses Reputational Risk to Goldman, Livermore’s Neuhauser Says https://www.youtube.com/watch?v=iA2YTLH5XEg
Our near 10% Gold exposure continued to outperform and insulate the portfolio. Mexican gold producer, Torex Gold, Russian miner Highland Gold, and our activist position in Toronto’s Detour Gold all did well in the Quarter. We continue to seek a defensive posture in the portfolio and gold serves that purpose well. Detour Gold was a compelling situation given Billionaire investor John Paulson’s drive for a complete overhaul of the company’s Board and executive team. Both Livermore and Paulson are founders in the newly launched Shareholders Gold Council (SGC). Livermore, embracing the opportunity to join forces with an astute investor, dove at the chance and pushed hard to help lever a blow to the entrenched DGC management team and Board. Through a series of letters calling out the company’s gross malfeasance and support of Paulson. In December, most of the DGC Board along with their CEO were ousted in a bruising proxy battle and replaced with Paulson and Co.’s selections. We felt the opportunity was strong and in the end we prospered, as did all Detour holders. DGC added to our gains as the year ended. see link: https://www.reuters.com/article/detour-gold-livermore/update-1-second-activist-targets-canadian-miner-detour-seeks-board-changes-idUSL2N1WW21N Livermore has accumulated a sizeable holding in select gold miners since Q3 2018 as we viewed the valuation disconnect too large to ignore. In the meantime, we felt gold as an asset class has been blown out given the strong rise of the stock market, an ever-strengthening US Dollar, as well as rising US interest rates. It was a very contrarian move and gold added to our returns mightily in the year. We view gold as a default currency. Its relationship with US Treasuries as a safe-haven asset has again come to light. Below is a graph reflecting such correlation.
Livermore believes as the global debt bubble has ballooned, fueled by years and years of artificial and unsustainable low interest rates, there will be a price to pay. US debt to GDP as well as corporate debt, continues to grow larger and larger in the face of decreasing growth and an aging population. Therefore, it is time to look to hard assets which hold value in the face of dollar debasement. Livermore continues to invest through select gold miners and when possible, will push for activism to unlock hidden value. Just like we did in the case with Detour Gold.
Our holdings in Burberry had another tough quarter. China worries along with the continued uncertainty surrounding Brexit came to the forefront. Even with a solid quarter and strong appetite for new designs by new creative director, the talented Riccardo Tisci. Tisci came from Givenchy and has a massive following and youthful appeal. Livermore believes in Burberry and its turnaround. It is a marque brand and moving quickly to alter its path in order to increase profitability. Livermore continues to remain supportive and believes the company is a ripe takeover candidate should the turnaround not gain traction. As I end this letter, I wanted to touch on our short position in Pacific Gas and Electric (PCG). The massive California utility making the news. Livermore began analyzing the equity and corporate structure in light of the devastating wildfires that plagued the region. The stock fell hard but it soon became apparent this would
have a lasting effect and permanent impairment to the equity. Much further than the initial knee jerk reaction when the fires first began. We started selling short the common stock of PCG in November and continued along with the position into 2019. On even further analysis, we added to that position and even again after the downgrade of Moody’s to “junk” status recently. Which served as the final dagger given the further liquidity drainage. Our view was not just based on the calculation of impending liabilities, but also on a firm view that unlike 10 years ago, the attitude towards bailing out this utility has been unequivocally altered. We do not feel customers and victims, many of which have lost their homes and loved ones, should fit the bill. The bond and stockholders should. As well as management and the Board who governed the disgraceful safety and service record for its customers for many years. They should feel pain and unfortunately, their investors did too. The stock of PCG has substantially declined from the mid $20’s (where we initially shorted the security) to only $7 a share. Livermore has crystalized our short position this week. The position added nearly 1% to our overall 2018 gain of 14.09%. And now in Q1 2019, with Livermore off to a strong start, it has added 2% to our overall performance. I am saddened by this event and don’t enjoy prospering when others are suffering and attempting to rebuild their lives. But the blame falls squarely on PCG, and their horrid historical record of safety. I love California and believe it will recover and rebuild. It always does. And PCG will need to get their house in order and do a better job providing service to their customers. This week, I personally made donations to several California charities raising money for the disaster victims including: The United Way of Northern California, North Valley Community Foundation, and the California Fire Foundation. Anyone interested in making a donation please contact our office and we will provide the details to the charities. In closing, I am hopeful 2019 will present great opportunities, just like in 2018. Livermore needs to remain nimble and focused on undervalued opportunities, especially where activism is possible. We are patient capital yet always looking to create alpha where we can add value. Whether passively, or in a proactive manner.
I want to thank everyone for their continued support and wish you all the very best in the new year. Sincerely Yours,
Legal Disclaimers This newsletter (this “Newsletter“) is (i) confidential and may not be reproduced or distributed without the express written consent of the particular Livermore fund to which it pertains (the “Fund”); and (ii) for informational purposes only, is intended solely for those recipients to whom it is delivered by the Fund, its affiliates, managers and/or representatives (together, the “Company”), and is not intended to market any product nor to be the basis for any investment decision. No reliance may be placed for any investment/advisory purposes whatsoever on the information or categorizations contained in this document or their completeness, and nothing herein should be considered a recommendation by the Company of any security, assets or investment. In the event of any conflict between the information contained herein and the offering memorandum or charter documents of the Fund, the terms of the latter shall take precedence. All investors and potential investors in the Fund face, accept and must be able to bear multiple liquidity and other risks inherent in the investments of this type, which risks are summarized in such offering memoranda. In preparing this Newsletter the Company has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to or reviewed by it. The information contained herein reflects prevailing conditions and beliefs as of this date, all of which are subject to change. The statements herein containing words such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “intend,” “continue” or “believe,” the negatives thereof, other variations thereon or comparable terminology are forward‐looking statements and not historical facts. Due to various risks, uncertainties and assumptions, including, without limitation, those set forth in “Risk Factors” and “Conflicts of Interest” in the Fund’s offering memorandum, the actual events, results or actual performance of the Fund may differ materially from those reflected in or contemplated by such forward‐looking statements.
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