PORTFOLIO PERFORMANCE
Performance was negative for January. The portfolio fell 1.94% but still fared slightly better than the indexes. What I regret not doing was getting the put (short) portfolio up and running in the first place. I have the first two weeks of February off from work, so the put portfolio is the priority right now. This means that I expect to underperform the general indexes in February.
The put portfolio so far includes Adobe (ADBE, Financial) and CarMax (KMX, Financial), which I shorted in early to late January. The British holdings, DX Group (DX., Financial) and Game Digital (GMD, Financial), were the worst performers this month. All the international holdings were also hit by the strong dollar; the British pound and the Canadian dollar depreciated against the U.S. dollar. That also aided the negative return for the month. Game Digital will be paying a dividend later this month, so that helps. Christopher & Banks Corporation (CBK, Financial) was the largest holding and also the best performer for the month of January. Please note that the portfolio held 50% cash during this period, so the performance, assuming that I was fully invested, would have been -3.86%.
(click to enlarge)Updates
Christopher & Banks Corporation
Christopher & Banks reports earnings in March. My belief is that the strong dollar is going to be a headwind in Q4 earnings report in March. I really do not expect it to be stellar. Also, the plan is to trim some of the holding at $2 per share. Christopher & Banks currently makes up 11% of the portfolio.
Tilly's Inc.
No new news on Tilly's (TLYS, Financial). Earnings report coming in March. Tilly's store count is still a valid concern, and that is the number to watch in the March earnings report. If the CEO does not follow through on his word to curb store count, I'm selling.
DX Group
DX Group will report earnings on Feb. 29. We need to watch the DX Exchange segment, as that was management's focus in the profit warning in November.
Game Digital PLC
Game Digital reported earnings in January; the result, while stellar, was overshadowed by the global volatility we saw in early to mid-January. In December, management reported that Gross Total Value (GTV) was down 7%. GTV for the UK market was down 10%, and GTV for the Spanish market was up 8%. In January, management reported that the situation was not as bad as anticipated and reported that, for the last three weeks of 2015, GTV was down only 0.4%. And for those three weeks, the UK market was only down 5% while GTV for the Spanish market was up 10%. The stock shot up 5%, but then global volatility pulled it back down. Hopefully, we'll see a rally going forward.
Reitmans
Reitmans (RET.A, Financial)(RTMAF, Financial) paid a 1% dividend early in January. Management also announced a new cost-cutting strategy going forward. The strength of the U.S. dollar is still a headwind, but we have seen a small rally of the Canadian and U.S. dollars since oil started rallying. While I cannot comment on whether oil has bottomed, I mentioned that the Canadian dollar should gain momentum as oil rises. Hopefully this rally sustains itself.
I added two shorts (put options) in January: Adobe and CarMax. I will be discussing those in February's performance reports.
January economic news
Global markets were riddled with volatility from China to crude oil. ECB hinted at more stimulus, and Japan came out with a surprise Negative Interest-Rate Policy (NIRP). Zero Interest-Rate Policy (ZIRP) was not enough, apparently.
I was shocked when global markets rallied after the Japanese NIRP announcement. Forcing banks to lend money they would not otherwise lend and discouraging citizens from saving sounds great short term for "economic growth," but what happens when people are broke, levered to their necks, and can no longer borrow? If anything, this proves that the global economy is weaker than most think. If ZIRP did not work, why would NIRP work?
Citizens are also being forced to lend to bankrupt governments at obscenely low interest rates while conventional financial wisdom states that you lend to a riskier borrower at higher interest rates. As I mentioned in my Long Reitman's thesis:
So what happens when the Fed raises interest rates? It strengthens the U.S. dollar, making U.S. goods less attractive to the international markets. With almost every other central bank devaluing their currencies or lowering rates, this will likely increase the inventory pileup. Higher inventory levels means lower future profits. The U.S. will most likely go into a recession on some deflationary pressures, and with $18 trillion in debt and counting, the Federal Reserve will then be forced to pull back the rate hikes and revert to ZIRP. Negative interest rate, like the European Central Bank has chosen to have, is a possibility as well. Also, some of the rate-hike anticipation is already built in to the U.S. dollar. If the Federal Reserve, in the near future, decides to revert this decision and move rates back to ZIRP and start QE4 or something along those lines, it could bring the dollar back to earth. That is the best-case scenario for Reitmans.
Markets are hanging by a thread; the U.S. economy is basically the last man standing in this global rout. Q4 GDP numbers came in weak at 0.7% compared to the 2% we saw last year; ever rising wholesale inventory/sales hint at a recession. Corporate revenues are declining; the most overpriced companies are buying back shares to prop up their EPS. Could the U.S. be on the cusp of a recession? I don't know, but all signs are pointing to it. I say all of this to highlight the importance of staying hedged.
The Federal Reserve elected to hold rates steady in the face of a slowing global economy. If the Fed pushes rates higher, we're likely going to see a global recession. The higher refinancing costs will also send the state and municipal governments that have been addicted to ZIRP and have made careless financial decisions into bankruptcy. ZIRP has also left the yield-starved treasury dependent state and municipal pension funds underfunded. If the Fed decides to move to NIRP, then virtually all state and local pension funds in the U.S. will collapse. Basically, the states and municipalities need higher rates to fund their pensions, and they also need lower rates to keep afloat. Either way, the U.S. is headed toward a retirement crisis. Good luck, Mrs. Yellen.
Note: I don't run a hedge fund. "Mazi Ume Capital LLC" is what my hedge fund would be called if I did run one. Mazi Ume Capital LLC does not exist.
