- Martin Kollmorgen
DID YOU PANIC? YOU SHOULD THINK AGAIN - NOVEMBER NEWSLETTER
Updated: Sep 8, 2022
“And now for something completely
different” – Monty Python
PERFORMANCE – Serenity Alternative Investments Fund I returned -0.76% in November net of fees and expenses. Year to date the fund has returned +36.7%.
THANKS FOR LODGING – Thanksgiving week was the best week for US RevPar since 2019.
SERVICES ANYONE? – The ISM services index just posted its best print EVER.
JOBS, JOBS, JOBS – Jobless claims have fallen below 200k, something that has not occurred since 1969.
PANIC! A NEW VARIANT! SHUT IT DOWN, CLOSE IT UP, RETURN TO YOUR BUNKER!
Did you receive this message on November 26th? The stock market was certainly sending it.
Hotel REITs fell 6.1%, Regional Malls fell 5.0%, small cap stocks fell 3.7%, even the bulletproof Nasdaq 100 fell 2.09%.
Within the span of 48 hours, an occasion for giving thanks and celebrating with family morphed into a veritable investing panic. The tenor of the news cycle did a 180 degree turn quicker than most investors could say “pass the turkey.”
But did the trajectory of the economy really change during that 24-hour period? Were the other 29 days in the month of November rendered totally irrelevant?
At this point some “good” news would be something completely different. Imagine the mainstream media giving as much airtime to the following data points as the less than 5,000 cases of the omicron variant that were known on Nov. 26th.
1) Hotel RevPAR over Thanksgiving week posted its best print since 2019
2) The ISM services index posted its best print EVER in November
3) Jobless claims fell below 200k, a number not seen in over 50 years
Apparently, a strengthening job market, record demand for services, and the best travel data in two years draw fewer clicks than the impending end of the world. This is why data dependence is increasingly important as an investor. There have been plenty of occasions/reasons to freak out in the past 18 months, but few have actually impacted economic data, and none have been able to keep the market from making repeated all-time highs. At Serenity, we remain data-dependent, and the data continues to suggest the cyclical recovery is underway in the USA. As soon as the data changes, we will change our mind. In the meantime, we will continue to not freak out…something that these days seems completely different.
PERFORMANCE: -0.76% IN NOVEMBER, +36.7% YTD
Serenity Alternative Investments Fund I returned -0.76% in November net of fees and expenses versus the FTSE NAREIT REIT index which returned -1.01%. The fund has now returned +36.7% for the year, versus the REIT benchmark at +28.9%. On a trailing 3-year basis Serenity Alternatives Fund I has generated annualized returns of +25.9% net of fees and expenses. Over the same time period, the REIT benchmark has returned +13.2% on an annualized basis. The fund’s Sharpe ratio over the past 3 years sits at 1.58, versus 0.73 for the REIT benchmark.
REVPAR: US CITIZENS THANKFUL TO BE TRAVELING AGAIN…
Topping the list of most under-the-radar economic data points released in 2021 has to be Thanksgiving week RevPAR data from Smith Travel Research (STR). For those that are un-familiar, STR provides the most widely consumed data in the Hotel industry, collecting occupancy, room rate, and revenue data for a large sample of hotel properties across the USA. They publish industry data on a weekly basis, giving investors high frequency insight into lodging trends. I cannot graphically make the headline on the chart below drip with irony, but during the same week that this data was recorded, Hotel REITs fell by more than 5% on Omicron variant fears.
Now, is it surprising that Hotel REITs sold off on news of a new COVID variant? No. But it is also important to note that prior to our knowledge of this new variant hotel data had surpassed 2019 levels for the first time on a completely clean comp. Americans are traveling, staying in hotels, and don’t seem to be rate sensitive (the majority of revenue gains are coming from higher average daily rates).
This is important because Hotel REITs are among the cheapest companies in the REIT universe. They also have the highest operating leverage, meaning that when RevPAR increases, Hotel REIT EBITDA increases RAPIDLY. Consensus is also still extremely conservative when estimating the EBITDA recovery path for these companies over the next few years.
Said another way, the bar for Hotel REITs is low, and better data has the potential to move the needle on fundamentals meaningfully. Are we selling everything and buying Hotels? Not currently, but the path of the data cannot be denied. As COVID fatigue increases, the willingness to attend events will increase, with the potential to push Hotel REIT EBITDA higher in 2022 and 2023.
ISM SERVICES: HIGH SCORE…IS THAT BAD…DID I BREAK IT?
Another important but glossed over data point that emerged from November was the Institute for Supply Management’s Services PMI. This data series measures the sentiment of purchasing managers in the services industry and has one of the highest correlations with year over year GDP growth of any data point in the macro universe. As can be seen in the chart below, this index (along with its “New Orders” component) hit an all-time high in November. That’s right…all time high (for a data series that has been around since 1997). This is a series that rarely goes above 60, let alone 65, and it just printed at 69.1. But don’t take my word for it. Per the Institute for Supply Management’s website… “The Services PMI® of 69.1 percent was the fifth record reading in 2021, comfortably eclipsing the previous mark of 66.7 set in October; the earlier all-time highs were in March (63.7 percent), May (64 percent) and July (64.1 percent). Headlines about inflation and product shortages — and on Friday, a federal jobs report that did not meet expectations — have dominated news coverage, but the Services PMI® data isn’t lying, Anthony Nieves, CPSM, C.P.M., A.P.P., CFPM, Chair of the Institute for Supply Management® Services Business Survey Committee, told a conference call of reporters on Friday. “It goes back to the pent-up demand,” he said. “You can look at other tangible things such as mall traffic and online distribution increasing, which are contributing factors to business activity being up. Many people are going back to work, and consumer confidence is up.” Nieves continued, “(Services) is a labor-intensive sector, so it’s a positive picture and it doesn’t seem to be slowing down. For a time, I thought we would see some leveling off, with slight growth, but we’re still in strong expansion territory.” Nieves continued, “(Services) is a labor-intensive sector, so it’s a positive picture and it doesn’t seem to be slowing down. For a time, I thought we would see some leveling off, with slight growth, but we’re still in strong expansion territory.”
The record composite index number was powered by a 4.8-percentage point increase in the Business Activity Index to an all-time high of 74.6 percent. The New Orders Index remained the same at 69.7 percent, but that matches the record reading set in October. Robust U.S. consumer spending in October seems to have at least maintained that pace in November.” Robust consumer demand is music to a pro-cyclical portfolio manager’s ears. And did you catch the REIT tidbit contained in the quote above? “tangible things such as mall traffic and online distribution increasing.” In spite of our news media’s obsession with all things COVID, inflation, and supply bottleneck related, consumers are out and spending money. This was reiterated by Jeff Campbell of American Express this week at an investor conference. Per Bloomberg… “Consumer retail spending on the firm’s cards so far this quarter — AmEx’s best proxy for holiday results — has soared 30% compared to pre-pandemic levels, Chief Financial Officer Jeff Campbell told investors at a conference Tuesday. This quarter’s overall billings, which include other categories of spending such as services or travel and entertainment, have jumped about 11% so far on AmEx’s cards compared with the same period in 2019, Campbell said, adding that that’s also an improvement from the third quarter.” More activity, higher spending. That’s the message from one of the largest credit card companies in the world as well as from data representing the vast majority of the US Economy (services). It may sound like something completely different, but that is only because a healthy US consumer is not as click-worthy as a new COVID variant. For our part, we continue to gain confidence in cyclical exposures, while carefully watching the continued path of the pandemic.
JOBLESS CLAIMS: CRATERING
Another data series that rose to prominence in the investing community during the recovery from the great financial crisis is that of initial jobless claims. Tracked by the Department of Labor, initial unemployment claims “tracks the number of people who have filed jobless claims benefits for the first time during the specified period with the appropriate government office”. This series was monitored closely by economists following the GFC because it is reported on a weekly basis and can act as a leading indicator for the health of the labor market. Simply put, the fewer new unemployment claims that get filed, the healthier the job market is. During the 2008/2009 recession, jobless claims spiked to around 650,000 per week. They then slowly subsided, eventually falling to a low of 209,000 in early 2020 (11 years later). During the pandemic of 2020, claims again spiked, this time to never before seen levels above 5,000,000 per week at one point.
**All charts generated using data from Bloomberg LP, S&P Global, and Serenity Alternative Investments
DISCLAIMER: This document is being furnished by Serenity Alternative Investment Management, LLC (“Manager”), the investment manager of the private investment fund, Serenity Alternative Investments Fund I, LP (the “Fund”), solely for use in connection with consideration of an investment in the Fund by prospective investors. The statements herein are based on information available on the date hereof and are intended only as a summary. The Manager has been in operation since 2016 and the Fund commenced operations on January 14th. The information provided by the Manager is available only to those investors qualifying to invest in the Fund. By accepting this document and/or attachments, you agree that you or the entity that you represent meet all investor qualifications in the jurisdiction(s) where you are subject to the statutory regulations related to the investment in the type of fund described in this document. This document may not be reproduced or distributed to anyone other than the identified recipient’s professional advisers without the prior written consent of the Manager. The recipient, by accepting delivery of this document agrees to return it and all related documents to the Manager if the recipient does not subscribe for an interest in the Fund. All information contained herein is confidential. This document is subject to revision at any time and the Manager is not obligated to inform you of any changes made. No statement herein supersedes any statement to the contrary in the Fund’s confidential offering documents.
The information contained herein does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential offering memorandum and only in those jurisdictions where permitted by law. Prospective investors should inform themselves and take appropriate advice as to any applicable legal requirements and any applicable taxation and exchange control regulations in the countries and/or states of their citizenship, residence or domicile which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. Before making an investment, prospective investors are advised to thoroughly and carefully review the offering memorandum with their financial, legal and tax advisers to determine whether an investment such as this is suitable for them.
There is no guarantee that the investment objectives of the Fund will be achieved. There is no secondary market for interests and none is expected to develop. You should not make an investment unless you have a long term holding objective and are prepared to lose all or a substantial portion of your investment. An investment in the Fund is speculative and involves a high degree of risk. Opportunities for withdrawal and transferability of interests are restricted. As a result, investors may not have access to capital except according to the terms of withdrawal specified within the confidential offering memorandum and other related documents. The fees and expenses that will be charged by the Fund and/or its Manager may be higher than the fees and expenses of other investment alternatives and may offset profits.
With respect to the present document and/or its attachments, the Manager makes no warranty or representation, whether express or implied, and assumes no legal liability for the accuracy, completeness or usefulness of any information disclosed. Certain information is based on data provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed and should not be relied upon as such. Performance information and/or results, unless otherwise indicated, are un-audited and their appearance in this document reflects the estimated returns net of all expenses and fees. Investment return and the principal value of an investment will fluctuate and may be quite volatile. In addition to exposure to adverse market conditions, investments may also be exposed to changes in regulations, change in providers of capital and other service providers.
The Manager does not accept any responsibility or liability whatsoever caused by any action taken in reliance upon this document and/or its attachments. The private investment fund described herein has not been registered under the Investment Company Act of 1940, as amended, and the interests therein have not been registered under the Securities Act of 1933, as amended (the “1933 Act”), or in any state or foreign securities laws. These interests will be offered and sold only to “Accredited Investors” as such term is defined under federal securities laws. The Manager assumes that by acceptance of this document and/or attachments that the recipient understands the risks involved – including the loss of some or all of any investment that the recipient or the entity that he/she represents. An investment in the Fund is not suitable for all investors.
This material is for informational purposes only. Any opinions expressed herein represent current opinions only and while the information contained herein is from sources believed reliable there is no representation that it is accurate or complete and it should not be relied upon as such. The Manager accepts no liability for loss arising from the use of this material. Federal and state securities laws, however, impose liabilities under certain circumstances on persons who act in good faith and nothing herein shall in any way constitute a waiver or limitation of any rights that a client may have under federal or state securities laws.
The performance representations contained herein are not representations that such performance will continue in the future or that any investment scenario or performance will even be similar to such description. Any investment described herein is an example only and is not a representation that the same or even similar investment scenarios will arise in the future or that investments made will be profitable. No representation is being made that any investment will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between prior performance results and actual Fund results.
References to the past performance of other private investment funds or the Manager are for informational purposes only. Other investments may not be selected to represent an appropriate benchmark. The Fund’s strategy is not designed to mimic these investments and an individual may not be able to invest directly in each of the indices or funds shown. The Fund’s holdings may vary significantly from these referenced investments. The historical performance data listed is for informational purposes only and should not be construed as an indicator of future performance of the Fund or any other fund managed by the Manager. The performance listed herein is unaudited, net of all fees. YTD returns for all indices are calculated using closing prices as of Jan 14th, the first day of the funds operation. Data is subject to revision.
Certain information contained in this material constitutes forward-looking statements, which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “target,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Such statements are not guarantees of future performance or activities. Due to various risks and uncertainties, actual events or results or the actual performance of the Fund described herein may differ materially from those reflected or contemplated in such forward-looking statements.
Our investment program involves substantial risk, including the loss of principal, and no assurance can be given that our investment objectives will be achieved. Among other things, certain investment techniques as described herein can, in certain circumstances, maximize the adverse impact to which the Fund’s investment portfolio may be subject. The Fund may use varying degrees of leverage and the use of leverage can lead to large losses as well as large gains. Investment guidelines and objectives may vary depending on market conditions.