• Martin Kollmorgen

DID YOU PANIC? YOU SHOULD THINK AGAIN - NOVEMBER NEWSLETTER

Updated: Sep 8


“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


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