The Private Insight

Our angle is different from large legacy firms. We believe the largest players in the investment space leave so much on the table during their leaps into venture capital and private equity deals. They see only a single way to make money- through a larger buyer or public listing. What they leave out is the secondary value of information that these companies can yield. We harvest the information, patterns, and insights from our private portfolio of 13 companies, extrapolate this data to a higher level, and deploy our fund assets accordingly.

The relatively low-volume summer gave way to greater volatility in the month of September. September is historically a weaker month for US equity markets, and this September was no exception.

Key issues such as an exhausted global supply-chain and a semiconductor shortage have been hindering global growth for months. This, coupled with dangerous debt ceiling discussions in Washington, created a 5% sell-off in US equity markets in what is typically a weak month. Markets quickly bottomed, however, as Republicans granted a debt ceiling extension in early October. Simultaneously, markets began digesting hot inflation reports and corresponding moves in treasury markets.

Inflation has been a top-of-mind concern for our investment team for the majority of 2021. Negative real interest rates, fiscal stimulus, and a dovish Fed has fostered an inflationary environment for months. Interest rate markets were hesitant to move on inflation as many Fed officials claimed that it would be transitory. This narrative slowly began to change as prices on many consumer essentials, such as food and energy, increased at rates we have not seen in a decade.

Equity assets can be a great insulator against inflationary pressures. As discussed in our last letter, our team has positioned our portfolio into companies that can either take advantage of inflation or pass on inflationary forces to customers. Companies like JBHT have taken advantage of inflation in the trucking segment for months due to successful cost management.

Our investment committee built a sizable position in the largest energy sector ETF throughout the summer months to take advantage of inflation in a segment that typically sees inflation before others. The recent move in energy prices resulted in the XLE appreciating nearly 30% because of wider industry margins due to escalating commodity prices. We have recently reduced this position to take profits after significant appreciation.

There are also companies that perform better in inflationary environments because of what happens to interest rates. As inflation continues to be a problem, the Fed will have to raise interest rates to cool down the economy. Investors are less likely to flock to growth companies that are priced to earn money in the future and instead prefer stocks that earn money today.

Our largest holding today is GS because of its extremely low valuation. With a PE of less than seven while trading slightly above book value, our investment team believes this stock can perform well as interest rates continue to rise due to its earnings power today.

Earlier this year our team took positions in rail and on-road freight companies due to our knowledge of freight price increases from the private companies our investment committee operates. While not all earnings have been reported across the market, JBHT and UNP have seen healthy price appreciation in line with what our team had predicted in Q1. We expect to see continued price appreciation while the supply chain system slowly catches up with demand over the next 6 months.

As we look into the final months of the year, our investment team remains positive on US equity markets. September and October are traditionally weak months in equity markets while November and December have historically been stronger. Seasonal strength, coupled with low interest rates, strong consumer confidence, and recent underperformance of the largest market weights is leading to a strong set up into year-end.

Our current portfolio likely will not change much going into year-end as we are positioned to continue taking advantage of higher inflation and supply-chain struggles. Remaining in companies that have pricing power, strong balance sheets, and deep entrenchment within their industries is of extreme importance in this economic environment. We believe every position in our portfolio demonstrates these characteristics and can perform well in a variety of different environments.

Our team wanted to reach out to give a quarterly update on our investment thesis and where our portfolio stands. The first quarter of 2021 was an outstanding quarter for our portfolio. During our last letter, we discussed our strategy of selling calls 3%-5% out of the money to finance the purchase of puts to hedge a potential correction. While we did not see a correction on the market in a technical sense (a drop of greater than 10%), we did see this correction in technology. Our options overlay, mixed with our underweight positioning in technology led to outperformance of the index throughout the quarter.

The largest development this year has been the move in interest rates. With the 10-year treasury now hovering around 1.7%, the market has needed to digest what that means for growth stocks that typically have high borrowing rates and tend to underperform with GDP potentially reaching 10%in 2021. While in a historical sense 1.7% does not represent high interest rates, this was a significant move for growth stocks that had one of their best years on record. As a result, these equities have accrued extremely high multiples. However, with interest rates creeping higher and GDP having a sharp rebound, the rotation out of growth has led to a significant rotation into energy, financials, industrials, and materials. While this theme started to become apparent in the fourth quarter last year, it cemented itself as the dominating market driver during the first quarter of 2021.

As part of this bifurcated market climate between growth and value, our team has taken this opportunity to engage in select derivates positioning to enhance yield. With the value names that make up a large chunk of our portfolio such as GS and GM, we have been able to sell calls regularly as these equities hover at or near all-time highs. The record growth seen in value has allowed for significant appreciation and an opportunity to collect call premium far out of the money.

While we collected premium selling calls on value due to their outperformance this past quarter, we have been harvesting put premium in technology. We deployed several bull-put spreads on technology throughout this past quarter to collect the elevated put pricing. The selling seen in technology this year has allowed us to collect premium far out of the money on securities such as the QQQ.

Our latest conviction call is in the transports sector. Tony’s private companies came across a significant development in freight that seemed to surface this past quarter. Sea-bound freight demand is at an all-time high due to the pandemic. The United States’ West Coast ports cannot keep up with the number of containers that need offloading from ships. Hundreds of container ships are floating offshore waiting for an opportunity to unload in California. With ports at capacity and trucking at capacity, freight prices have risen significantly. The price increase has troubled many companies and given other companies immense opportunity. We began amassing positions in JBHT, ODFL, and UNP in early March.Prices have doubled, tripled, and sometimes even quadrupled for certain types of freight. So long as these companies keep costs in check, our investment team believes there will be record earnings reported throughout this year.

Stocks that our team will avoid throughout this freight development include any company that holds a lot of inventory. We currently hold a few big box retail giants in the portfolio like Home Depot and Walmart, however, these are companies that have proprietary logistics solutions that should give them a better chance to navigate this freight marketplace. Several companies that our fund does not hold such as Nordstrom’s and Lululemon have already released negative guidance citing inventory cost control issues tied to freight. Our investment team believes this is only the beginning of the inventory problems for companies across the country. Thus, our portfolio is positioned to both take advantage of the cost increase and avoid companies that are threatened by the developing inventory problem.

Another conviction our investment team made in the fourth quarter last year was in the chip space.As you know, Tony receives significantly important information in this segment because of his ownership in VisionTek. We learned in September of 2020 that supply could not keep up with demand. This is partially due to an anticipation in PC demand throughout 2021, but also from another explosion in crypto. However, unlike the chip shortage seen in 2017 due to the first explosion in crypto, automobiles are now a very large consumer of chips, which is driving chip demand even further this time around. This led to a significant investment in GM in early Q4 and is a continued conviction call of our investment team.

This past week, Micron reported earnings which beat expectations on both the top and bottom lines. The most notable story out of Micron’s shareholder meeting was their reiteration of the strength in the chip space and their forecasts for a strong chip market throughout the calendar year.

With the S&P 500 crossing 4,000 to begin the second quarter, we do believe the upside on the overall market will be somewhat limited through year-end. However, while the overall index might have limited upside, there will be companies that continue to do well. This stock-picker’s market is an excellent opportunity for active fund management. Our investment team believes the positioning in our fund will continue to benefit as interest rates rise and the economy continues to reopen. Additionally, our team will continue to collect call premium to enhance yield in an environment with elevated stock prices.

As of the close on April 1st, our fund is up approximately 9.5% YTD net of fees, compared to an S&P 500 return of 7% and an HFRX return of approximately 2%. As a reminder, our fund introduced the Hedge Fund Research Index(HFRX)as a secondary benchmark that tracks aggregate hedge fund performance.

Since our last letter, the market has had the opportunity to digest the election results coupled with an ever-worsening COVID environment. Investor confidence is only creeping higher as the market took a huge sigh of relief on the heels of decisive election results. As it turned out, the old narrative of divided government being great for the stock market has resulted in one of the best intra-month performances for the stock market this year.

In our election letter, we discussed the possible outcomes of the election and what that would mean for our portfolio. As we discussed in that letter, results that led to split government would be a great environment going into year-end as the market had been coiled up awaiting a potentially disruptive election to the country’s economic recovery. We also discussed we were raising significant cash going into the election. In fact, we raised 50% cash to preserve capital going into an event in which stock markets were pricing in significant volatility. We raised this cash amount during the final ten trading days of October, selling 5% of our portfolio per day. This resulted in our fund topping market performance during October as the market sold off violently during the month’s final week. In addition to the 50% cash level, we deployed an option spread position in the event the market traded higher in the immediate trading days after the election.

We deployed our cash swiftly in the immediate days following the election and cashed out on our option spread position that compensated for our large cash position as the market moved higher. During our swift allocation of cash, we remained overweight in technology and big box retail. The reason being that without a blue wave, there will be less than anticipated government spending, which means interest rates won’t skyrocket. Higher interest rates bode well for value, while lower interest rates bode better for the stocks that have outperformed all year such as technology and big box retail.

However, when the vaccine was announced the world changed. We all expected the vaccine to arrive before year-end. Not only did a vaccine arrive on time, it arrived with much better than anticipated efficacy. This is a game changer. The efficacy rates we have seen out of Pfizer and Moderna show that the vaccine won’t just be a tool to combat the lingering virus, it should eradicate the virus in time.

This narrative has led us to our post-vaccine investment thesis: have an equal weight towards “reopening”stocks and “shutdown”stocks. The market is at an interesting place right now with COVID ripping through the globe, all while there is a light at the end of the tunnel. The market is doing its best to discount the idea that the masses should have access to a vaccine this time next year. However, there is a long time between then and now. Given this, we believe the best approach is to spread our risk across companies that do best in a higher interest rate, reopening environment, along with the same names that have worked throughout the pandemic.
In addition to the mixed portfolio weightings, we will actively deploy option spreads to capture premium. We believe the key to a market at or near all-time highs, with the mixed backdrop of a vaccine and rising COVID cases, is utilizing option premium. As stocks begin to find resistance or continue making all-time highs, we will sell calls on those companies. This, coupled with put option spreads, will allow us to capture premium into year-end as the market digests this rapidly fluid environment we are in.

At the time of writing this letter, our fund is up 10.3% YTD net of fees with an intra-month performance of approximately 5.7% net of fees in November. We are bullish on equities going into year-end because companies that do well during COVID will continue doing well, while forward-looking investors will begin bidding up “reopening”stocks in the process on vaccine timelines.

As you are aware, the US election is just around the corner and the market is beginning to reflect this in volatility. Volatility before an election is very common and we are seeing just that in the weeks leading up to a high-stakes election for both sides of the aisle. This can complicate the US stock market as both political parties outline their plans for the economy moving forward. However, regardless of what happens during this election, our portfolio needs to be ready to take advantage of the outcome, whatever that might be.

Currently, the biggest thing propping up the US stock market from downside volatility is the idea that the Speaker and the Treasury Secretary are getting close on stimulus. And even if stimulus does not come before the election, the market is pricing in that stimulus will come at some point. Should stimulus not get done prior to the election, the size and scale of stimulus will largely depend on the election outcome. There are many different outcome scenarios that the CEA team has taken into account when constructing our portfolio leading into the election.

The first outcome is some combination of gridlock inWashington. The market has historically done well in gridlock because the markets love certainty. Gridlock will result in very few different policies, tax plans, or regulations. Markets usually take the idea that nothing will get done in stride because there will likely be no curveballs to valuations.

Another outcome is a “blue wave”that many on Wall Street believe is being priced in. This outcome would lead to massive stimulus in the short-term and a sizable tax hike in the medium-term. The market would likely cheer the idea of a massive stimulus package being imminent during this outcome but would eventually need to discount whatever combination of corporate tax hikes and capital gains tax hikes we could see out of a blue sweep during election season.

The last outcome we could see is a wild Republican victory that would consist of retaining the Presidency and the Senate. Our team currently does not see a Red wave coming that takes back the House in addition to the GOP retaining the White House and the Senate. While anything is possible and we cannot rule this out, history tells us that this is unlikely to happen. Nonetheless, if the government maintains some version of its current self, the market would see this as an opportunity to continue enjoying the deregulation and tax cuts passed during President Trump’s first term.

All three outcomes I have outlined have spelled out a rather bullish case for the market, at least in the short-term after we know the election results. However, the key to that statement is when we know the election results. The markets hate uncertainty. There is nothing more we can learn from history than markets never trade upwards while there is tremendous uncertainty. Market’s do tend to rally after the uncertainty has been resolved and the degree of the rally largely depends on the degree of uncertainty.
This election could possibly set up some of the greatest uncertainty we have ever seen post-election while America awaits the outcome. We do not know when results will be finalized, if either party will concede should they lose, or whatever the outcome could be that leads to uncertainty. But the bottom-line is if the election is contested in anyway, there will be uncertainty. If there is a sweep for either side and the results don’t come down to waiting on certain states to finalize their mail-in tallies, then you could see the market trade upwards very soon after the election.

Because our team is wary of a contested election and what that could mean for our portfolio, we are going to raise at least 50% cash prior to the election. We have already raised 30% cash as of today, and plan on getting to 50% by trimming every day leading up to the last trading day of October. We believe that if there is volatility immediately after the election, we will be able to take advantage of such a situation with our cash. Additionally, if there is a clear winner immediately known to the markets soon after the election, we may allocate our cash swiftly.

Should our team decide to enter into a cash position larger than 50%, we may consider deploying an options position on the cash in excess of 50% so that we can participate in an immediate rally should there be one. And if there is not an immediate rally November 4th through the 6th, we will liquidate that options position.

Our team is more interested in preserving and protecting our investors’ capital entering into a volatile event such as this upcoming election rather than trying to participate in a day the market trades up a percent or two in the off chance there are immediate election results available to the public with no disruptive events.

CEA has never managed our portfolio based on who we think will win an election. Additionally, we have never tried to time the market or claimed we can time a market. What our team tries to do instead during times like these is take risk off the table when there is uncertainty. When the downside potential of the market doesn’t align with the upside premium baked into the market, we have historically raised large cash positions.

No one knows what the next few weeks will hold. Will we see a sweep for either side? Or will we have a contested election that leads to disruptive economic activity? No one knows and the CEA team does not know. But what we do know is the market is baking in extreme volatility in the options markets around the election date, on a market that is already trading at historically high multiples. During a time with what seems to be a COVID resurgence around the world, less confidence in the vaccine being a binary event, and a looming election process, raising cash is the prudent thing to do to protect the capital of the fund.

During our last correspondence we discussed our team’s outlook on the market coming into the summer months. The portfolio consisted of a 30% cash position and our plan to deploy that cash was predetermined based on market movements during much of June. We discussed three different possibilities back in late May, one of which included the melt-up we saw on the backs of ever-improving economic data and continued monetary stimulus. With a current cash position of about 4%, we consider ourselves to be fully invested, and have been fully invested since late June. Despite COVID cases increasing throughout much of the summer, we believed Wall Street would pivot to economic recovery data over virus case numbers when determining the market’s path.

The mix of exponential virus growth and a roaring market made us believe that tracking virus cases and hospitalizations were not the most important thing to analyze when constructing the portfolio. Rather, the response to the virus became the most important thing to track in the various hotspots. We saw that hotspot economies slowed but did not shut down completely. Instead, we saw states remained largely open for business, but with stricter policies that can allow for the respective economies to stay open as compared to closures seen this past spring. The idea that this will be the strategy going forward, mixed with increasingly better news on a vaccine and treatment, makes us believe relatively low volatility can coexist with the virus. In addition, the likely continuation of federal stimulus and Fed policies will build a bridge into a post-pandemic world for equity prices.

As discussed during our last dialogue, we raised cash early-on in the COVID crisis as data started to come in from the various private companies Tony owns out of his family office. This data gave us ahead start on the market and our Q1 returns showed that. We took our head start on the market recovery as an opportunity to preserve capital in the event the economy dipped to a shutdown induced depression. Considering we did not see such an outcome; we began deploying capital steadily until the portfolio became fully invested. So long as the market proves to be stable, we will continue on our current path.

However, we cannot ignore the valuations of today’s market. As we started to rebuild our portfolio in the midst of the crisis, we didn’t give much consideration to valuations due to unknown earnings. Instead we tailored the portfolio in large part around companies that would perform during the crisis. This led us to an overweight portfolio in large cap technology. Now that there have been two quarter’s worth of earnings and guidance from these companies, we can better understand their valuations. While valuations do indeed look high, we believe this will be cause for a plateau in stock prices more so than a sell-off so long as the virus is a threat to the economy. Keep in mind, these are some of the only companies in the world that are built for a pandemic.
That is not to say we won’t see a rotation into value or quality over the coming months. In fact, that would likely be an area where we can invest further as the market plateaus. As we have done the past several months, we will sell covered calls against all positions that are at or near all-time highs. When doing so, we look to capture an additional 1.5% return per month on each position by selling out-of-the-money covered calls on a weekly basis. Where we will not be selling calls is on positions that still have room for recovery before hitting their pre-COVID highs. Selling calls consistently against the portfolio’s all-time high positions will ensure that there is still yield being earned on names that seemed to have peaked. Not selling calls on names that haven’t hit their pre-COVID peak will ensure we do not miss those parts of the recovery.

The CEA team is forecasting that the S&P 500 will remain relatively flat to slightly positive throughout the remainder of the calendar year barring a vaccine approval. We believe that there is enough of a financial bridge being provided by the federal government and the Fed, giving the market enough confidence to avoid another threat of extreme volatility. Moreover, we do believe a range-bound scenario for the market is the likely case given a federal financial lifeline of stimulus to the economy is no reason for the market to continue surpassing pre-COVID highs by a large degree.

This largely flat market climate is one that is ideal for harvesting premium. The CEA team will continue selling covered calls and deploying put spreads to earn a large portion of this year’s yield.The premium exposure in the event the market finds a ceiling somewhere near its current price level will only help should the market plateau.

The election is a calendar event fast approaching that we cannot ignore. With so many potential outcomes, it’s nearly impossible to position the portfolio based on our team’s bets on what could happen. Additionally, the possibility of not knowing who will be President on election night only adds to the uncertainty. This of course will likely result in volatility leading up to the election and until we do know who the President will be.

During events like an election, it is very common that we decide to raise cash and utilize hedged premium positions in place of what was larger long equity positioning. This allows for us to participate in the immediate market actions following these events to some degree, but without the entire risk associated with these events.

To conclude, we want to give you insight as to where the portfolio sits today. As of the time writing this letter, the fund is up approximately 11.5% for the year compared to the S&P 500 being up 8% YTD. The portfolio remains largely invested in a mixture low-beta recession proof companies, along with high-beta growth technology. All investments must fit our “COVID narrative” in that they are poised to either benefit from a pandemic or are positioned to capture market share post-pandemic. An example that fits the “COVID narrative” would be KMX. Due to many people fleeing dense urban environments, we have seen a shift to intense auto sales.

Another example is PYPL, which has been the best performer in the S&P 500 YTD.
With the pandemic forcing businesses to adopt digital platforms, we have seen explosive growth in the payments space. Specifically, PYPL is positioned to not only take advantage of a pandemic environment, but a more-digital world post pandemic. PYPL was one of our early pandemic investments that has paid off and was our largest position until we trimmed a few weeks ago. Additionally, we have allocated large investments to retail names such as LOW, HD, and TGT due to the “COVID narrative.” LOW and HD have never seen stronger quarters than their most recent as people renovate the space they are spending more time in: their homes. The PRO businesses of HD and LOW have also boomed as contractors are seeing the best market they have ever seen with housing starts at decade highs. Moreover, TGT is a name that fits the narrative because they built a delivery and pickup platform that suited the COVID environment just before the country shut down. In fact, many of the costs associated with developing TGT’s omni-channel platform were absorbed in 2018 and 2019, setting up 2020 to be a home run year of not only implementation, but explosive demand for said services in a pandemic. Additionally, TGT is poised to capitalize on a post-pandemic world. When governments closed the economy, many small businesses were deemed unessential and forced to close while TGT was designated essential. The consequence was many small businesses closed forever while TGT gobbled up the market share leftover. This was seen in online order-pickup numbers surging by 700%YoY.

The CEA team cannot extend our appreciation enough for having the confidence in us to manage your money.

In these trying times we would like to provide an update on our investment thesis, thought process, and recent portfolio action given the extraordinary volatility seen in the global markets. As you may be aware, many of our decisions are made based on primary industry insight at our disposal from my various business ventures. Many of the actions we have taken reflect what we have seen in our various businesses. We began raising substantial cash during the week of February 24th based on information we have been receiving regarding global demand, global supply chains, and market movements in what seemed like a very strong market during the melt-up. Year-to-Date, our fund is down approximately 18% as of March 17th. Of course, we are never happy to print negative returns. The market down nearly 30% this year. We believe our minimal exposure to market volatility given our cash levels gives us the opportunity to deploy capital at extremely cheap levels once the carnage stabilizes.

Our factories and processing facilities are now 80% back online in China, but we are very skeptical of our Asian supply-chain consistency in the coming months. For years, our factories have built up inventories prior to the Chinese New-Year to ensure a smooth return to work. However, as the inventory reserves deplete, we could see a supply-chain gap in either April or May. We have also been told by many sources in various Chinese cities that while people are returning to work, weekend behavior in China has changed dramatically, even with the virus plateauing in the global epicenter. The fear of the Chinese citizen is leading many to only expose themselves to public places so they can go to work yielding weekend traffic that remains near the lows seen throughout the virus. Thus, the Chinese Consumer, from whom many US companies derive growth, are spending less throughout their weekly activities. This logic is what led us to raise cash amid the first volatile week of the sell-off, dubbing this market swing more than your typical 10% correction.

Chinese economic patterns in late January and early February are beginning to reflect the US response to the virus. As restaurants, schools, and public places shut down, economic activity in the US will likely come to a standstill until the virus subsides. This will lead to continued market volatility as uncertainty weighs on the markets. This is why we remain comfortable with a significant cash position. Specifically, we currently are holding 85% cash. These cash levels were raised February 24th through February 28th. Thus, much of the market losses from February were absorbed by our fund. However, the market volatility in March only reflects marginal moves in our portfolio which remains 15% invested.

We will never be able to pick a bottom, but we do feel like the market is not quite done selling off. There are too many unknowns to the global economy, to earnings, and now to the confidence of the US consumer. Recession risk is now real in the US, though that is not our base case. We do believe that there will be a sharp move upward in the market once a bottom is found. Our logic dictates such because interest rates around the globe make US equities even more favorable than before the bear market. Finally, the market is approaching levels seen in Q1 of 2017. As the market is a forward-looking discounting mechanism, positive 2021 earnings

growth will eventually guide the market. These positive attributes are not quite ready to take over market sentiment, which is why we are not ready to exit our substantial cash position. When the earnings outlook begins to give clarity, and 2021 earnings become more of a focus, we expect to be fully invested once again. Our current plan is to re-enter the market gradually as things calm down.

Virus news in the US will only get worse in the near future, leading to more volatility. Once the daily volatility subsides from current levels, we will feel more comfortable redeploying capital. We would be happy to have a phone call to discuss further. Thank you for your continued confidence in the CEA investment team during these trying times.

With the beginning of 2020 now underway, we are taking note of the low volatility seen to wrap up 2019 that could continue into the new calendar year. This is a stark difference as compared to investor sentiment a year ago. Investors began 2019 with sentiment guided by Fed rate hikes, hawkish trade policy spewing out of the White House, and uncertainty coming off of one of the worst Decembers in US market history. Despite the noise a year ago, the market was able to return one of its best years in modern market history. It is important to remember how quickly the market was able to contrast the sentiment in the beginning of last year as another sentiment contrast could be on the horizon.

There are some big-ticket items that our investment team will follow closely over the course of 2020 as there are some events and periods that could lead to a contrast in sentiment that carried markets through the end of 2019. The first of which is the next earnings season of the calendar year. The market’s multiple inflated over Q4’s melt-up, which will eventually need to be justified this next earnings season. Should earnings disappoint, and more importantly, should guidance disappoint, we could see some volatility and downside pressure.

Of course, the major events of 2020 relate to politics. The political climate in the US will undoubtedly lead to volatility as we inch closer to November. We can expect volatility in events such as Super Tuesday, the Democratic National Convention, and the election. The CEA team is completely apolitical when it comes to running a portfolio, so we must understand what potential policy shakeups in Washington could mean to the earnings of the companies of which we are invested. The thesis our investment team holds when trading on politics is that we must make decisions based on the market’s perception of the likelihood certain market moving policy might actually be enacted.

Despite the risks above that will inevitably lead to volatility, our investment team remains positive on our 2020 outlook. We continued to invest more of our allocation throughout the final months of 2019. One difference in the portfolio your team likely noticed was our use of covered calls. When Liu He and his delegation came to Washington for meetings in mid-November our investment team believed we might see a melt-up and potential for covered calls to get in the way. Thus, we reduced covered call positions and eventually had no covered calls in the portfolio.

With the melt-up likely on its last legs, we will soon begin entering short call positions on the stocks we own. We will do this to collect premium on some names, and to take profits on others by allowing ourselves to get called-away. Selling covered-calls on names we eventually want to rotate out of is a common way we take profits and collect some premium in the process.

One company in our portfolio that led to disappointment after announcing earnings in the final weeks of the calendar year was Carmax. The stock corrected as a result of an earnings miss and

a revenues beat. The country’s largest used automobile retailer cited higher than anticipated advertising and compensation expenses. The stock seemed to have bottomed out and is currently up 10% from its lows established ten days ago. We will continue to hold Carmax as we believe in their fundamentals and believe these are expenses that can be corrected going forward.

As for the rest of the portfolio, we are confident in the companies’ ability to exceed expectations for 2020’s first earnings season. This upcoming earnings season will be essential to performance and could likely lead to a divergence in the market between companies that can exceed on expectations and those that do not. Thus far, we have seen extremely positive earnings from companies in our portfolio like Goldman Sachs and Citigroup. While we are confident in our portfolio heading into the remainder of this earnings season, we will continue to review our positions and rotate accordingly.

I have attached a portfolio report which includes your open position summary as of today, along with graphics demonstrating exposure.

Should you want to further discuss our outlook on 2020 or how your portfolio looks today, we would be more than happy to schedule a meeting. Thank you for your continued support and we look forward to a great 2020.