Livermore 2019 Q1 letter to LPs
I’LL TAKE THE FED PIVOT FOR $200 ALEX”.
Federal Reserve in abrupt policy reversal.
Livermore gains 38% to start Q1 2019.
April 9th, 2019 To Partners:
First Quarter and YTD performance is off to an extremely strong start, adding to our solid 2018 gains. The Federal Reserve, after implementing nine consecutive interest rate rises and suggesting even more lie ahead, executed a complete pivot in February. Suddenly, new Chairman Jay Powell sees a slowing global economy and slams the brakes on the up-trending dot plot.
The FED has essentially and unequivocally stopped dead in its tracks and threw gasoline to the markets historic run ever since hitting the December low. This dovish move typically suggests risk assets should be bought and defensive names sold off. But for Livermore Partners and our value-based approach, we maintain a disciplined strategy and adhere to the viewpoint that we are nearing an ‘end-game” to the long-running bull market. Thus, squeezing out that extra gain will ultimately be ill-timed. Our focus as always is to invest in special situations where investment themes and mispriced securities can meet one day and profit from our timing, opportunistic nature, and sometimes very proactive approach.
The fact remains global growth (including in the United States) is slowing. Investors must be focused and not get sucked into an asset bubble. Low interest rates won’t magically serve all corporations given cost inflation and higher borrowings which will crimp growth and valuation. Productivity gains have been helpful but are getting more difficult to manifest. Pricing pressures will ultimately hurt a consumer which is extremely reliant on low borrowings for autos, homes, and credit. The chart below is a strong reflection of just how quickly US growth has stalled and again shows just why the FED acted. One needs to ask themselves, “How should I be positioned?”
In the face of this slowdown, markets have been strong. And even though we held a higher defensive portfolio in Q1, I am pleased to share that as of March 31st Livermore Strategic Opportunities LP ended the quarter with a gain of 38.06%. Our gains like many other funds, were derived from a bounce in an oversold condition from the late December 2018 sell-off. Although we added even further to the performance and are now outperforming every benchmark. Additionally, unlike most stock markets in the world (or many hedge funds for that matter), we made money in 2018. It’s still early in the year and overall I am satisfied with our performance to date. Livermore’s gains centered on special situations within our core portfolio including APAC-focused oil-producer Jadestone Energy, UK luxury designer Burberry, short positions in Tesla Inc and Pacific Gas and Electric. Other smaller positions such as oversold oil producers Frontera Energy and Ophir Energy (which was acquired in Q1 by Medco) also contributed to the fund’s performance. Additionally, we profited from short positions in Goldman Sachs, Weight Watchers, and a handful of others.
Below is a link to a recent Bloomberg interview we gave in the Quarter. Centering on the TSLA, GS, and PCG shorts. http://livermorepartners.com/david-neuhauser-interview-bloomberg-january-2019/
Additionally, our near 10% Gold exposure continued to outperform and insulate the portfolio. Mexican gold producer, Torex Gold, led by CEO Fred Stanford, re-gained its lost luster of the past. Since our initial stake in the Fall of 2018, Livermore has nearly doubled our return on investment in the name. Our initial position was near the lows at $8.60 a share last August. Torex closed Q1 at $16. Other gold miners helping our performance were Russian-based Highland Gold, as well as our activist position in Detour Gold. Both did well in the Quarter. We continue to seek a defensive posture in the portfolio and gold serves that purpose.
Jadestone Energy (JSE.LN) is a large holding of the fund and one that we continue to watch grow. The equity has been on a tear since its IPO (up 37%) in London last summer and has continued into the new year. Jadestone is unique and well-positioned given its strong free-cash flows, FCF yield, and management team.
The newly acquired Montara asset has already shown early signs of strong asset rationalization with major upside. JSE management, led by Paul Blakeley, recently provided guidance of 13-15,000 BPD of production for Jadestone in 2019. With the potential for further bolt-on acquisitions to further strengthen the asset mix and leverage cash flows. We feel Jadestone can become a solid $1B company Brent oil producer with scale. One to watch.
Our holdings in Burberry had a rebound in the first quarter. Up 14% since the start of the year. China worries subsided a bit allowing the stock to gain on the back of strong international sales and thoughts of consolidation in the industry. Livermore believes in Burberry and its turnaround with Marco Gobbetti. There is now a great focus on sales per sq. foot and increasing higher margin products such as leather goods. Though no longer a cheap stock anymore, the company generates good cash flows and maintains a solid balance sheet. We continue to remain supportive and believe the company is a ripe takeover candidate when the opportunity presents.
Tesla (TSLA) remains the largest short position within Livermore Partners portfolio. We continue to be bearish on the business model and outlook for the company. We are not a fan of the execution, financials, or governance of the Board and management team led by visionary Elon Musk. We have discussed the position at length in our letters and in many interviews with Bloomberg. It seems everyone has a viewpoint on the name. Livermore sees the car company’s best days now behind it. Its “first mover” advantage now dying off just like the demand for their automobiles. The newly launched Model 3, as well as the S and X are witnessing a major falloff in sales. As this occurs, the financial debt burden (over $10 billion in net debt) and overall cost structure will bring great pressure down on the stock price. We continue to monitor the situation closely to see if our thesis fully plays out. As of the end of the Quarter, Tesla’s stock is down well over 10% on the year and is helping add to Livermore’s overall performance. In closing, 2019 is again presenting great opportunities for our event-driven hedge fund. The outlook continues to be steady yet fragile as the market seems focused on China and the FED. Both seem to be the driving forces behind this spectacular market rally and that can easily change on a dime. Therefore, Livermore will be nimble and focused on undervalued opportunities, especially where activism is possible. We remain patient capital and always on the hunt for alpha. Thank you again for the continued support. Sincerely Yours,
This article first appeared on ValueWalkPremium