Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | YTD | |
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2022 | 1.15 | 1.02 | .93 | .10 | -1.61 | .82 | -1.61 | -0.33 | 0.43% | ||||
2021 | 3.40 | 3.99 | 3.75 | 1.27 | 1.30 | 1.54 | 0.22 | 1.51 | 4.89 | 3.70 | 0.50 | 1.20 | 30.78% |
2020 | 0.41 | -.20 | -1.91 | .74 | 1.66 | 2.25 | 1.26 | 3.13 | 1.10 | 0.57 | 2.04 | 3.15 | 15.02% |
2019 | 1.72 | 1.79 | 3.13 | 1.15 | 1.35 | -0.75 | -1.54 | -1.34 | 0.04 | -1.45 | -2.57 | 1.39 | 2.76% |
2018 | 6.36 | 4.81 | 0.95 | 0.71 | -0.85 | -1.07 | 2.50 | 1.69 | 3.53 | 0.67 | 0.02 | -0.18 | 20.58% |
2017 | 0.27 | 0.05 | 0.35 | 0.25 | 1.39 | 1.45 | 1.77 | 0.12 | 3.27 | 3.61 | 13.96 | 1.96 | 31.51% |
2016 | 1.59 | 3.30 | 1.53 | -0.82 | 5.67% |
Month Return | YTD Return | Volatility | Sharpe | Sortino | Beta | Best Month | Worst Month | Annualized | |
---|---|---|---|---|---|---|---|---|---|
Caravel | -0.33% | 0.43% | 7.94% | 1.6 | 5.32 | 1.00 | 13.96% | -2.57% | 17.28% |
S&P 500 | -4.08% | -16.15% | 16.09% | 0.59 | 0.83 | 0.08 | 12.82% | -12.35% | 12.53% | S&P/TSX | -1.5% | -7.11% | 13.61% | 0.37 | 0.37 | 0.07 | 10.79% | -17.38% | 7.99% |
Where are we, and where are we heading?
Where are we?
For the month of August, the Caravel Capital Fund was down -0.33%, bringing the total net return for 2022 to 0.43%.
Since mid-2021, we have warned our partners that we saw trouble ahead for stock valuations.
We have tried our best to take sufficient evasive actions to protect the Partners’ capital while pursuing marginal opportunities for upside. While stock and bond markets’ performances have been consistent with our forecasts, bear market rallies are tough to predict and even more challenging to trade. We mentioned in our June letter that we anticipated a violent bear attack. We covered as many vital areas as possible, as quickly as possible, then we stayed very still and hoped it would pass, which it did. But we got roughed up a bit. What we didn’t do was get tricked into believing it was a new bull. By the end of August, the markets had rallied 20% from the June lows and then gave back almost half of it in the last two weeks of August. We got a scratch; others got mauled. We are okay with that.
Where are we headed?
At this point, none of the earnings forecasts for 2023 have been adjusted downward.
Like the ever-rising valuations from 2018 to 2021 (excluding a temporary drop in valuations for two quarters at the beginning of the pandemic), we cannot understand why investors don’t heed what is as clear as day to us. Still, we are content to let emotional and irrational behavior get schooled by Mr. Market.
From the last time we put out a forecast in May’s letter, some very telling inflation data has been released. Specifically, the driving forces of inflation have shifted from commodity prices to rising wages and cost of living. In the most recent economic data, we gained the following information.
We see interest rates moving to 4% for government borrowing, maybe even higher. With those interest rates and slow-to-no earnings growth, you pay at most 17 times forward earnings for the North American stocks. Here comes the math… we are almost done.
The current earnings forecast for 2023 is $243 for the SP500, which is a fantasy as far as we can see. We would bet the Winnipeg Jets take the Stanley Cup this year in a 16-game sweep before we bet on those earnings, and at least we’d be compensated fairly for that risk.
2022 earnings will come in around $220, maybe a bit less. So, we see 2023 earnings at $210 to $215, and the markets trade a maximum multiple of 16 to 17 times those. Which means…
We currently forecast the S&P 500 will trough out somewhere around 3360. It closed yesterday at 3900, down 18% for the year and 10% from the top of the summer bear market rally. We are basically flat so far this year...Literally. Nothing to hold a parade about, but we are doing precisely what we endeavour for our Partners – provide above-market returns with below-market risk.
However, we are not overly content to sit flat for the year and have a reasonably good portfolio of opportunities. Our capital allocation in our merger arbitrage book is the highest it’s been in years and looks very promising. We recently finished meeting with companies in the oil and gas market, and we LOVE what we heard. We continue to own puts on Oil and have made substantial gains there, which have protected our exposures to various high-quality producers. We have been doing significant due diligence in the natural gas sector and will likely add natural gas stocks to the portfolio. We use options to provide protection and enhance risk-adjusted returns. We have tried hard to repeat the returns we earned from bank stocks last year but realize the market doesn’t currently care what is cheap and we substantially reduced those positions. We continue to be short on anything related to the shadow mortgage market. We are VERY CONCERNED about the level of leverage and ability of the borrowers to afford 300% increases in loan payments. We own securities that will pay handsomely if defaults rise on investment-grade credit. We have methodically traded our green energy names but have found it just as paradoxical as the banks. Our pairs portfolio, which relies on quantitative and fundamental factors, continues to generate gains, and we are trying to increase the number of opportunities we can trade there. So, we will persevere and continue to go forward. We know if we use our skills and trust our experience, we will continue to create wealth and offer peace of mind to our Partners.
In summary, we see downward pressure of another 8-14% from September 16th closing levels. Not pretty, but at least you know where our heads are. Check the stats above; if we have missed something you feel is of relevance, please reach out to us.
If you would like to discuss anything or just say hi, we love catching up with our Partners any time.
We thank you for your continued confidence and capital,
Jeff and Glen.