201404 SYW Newsletter April 2014 (1)

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1. 1 Strategy Returns* In April, our two best performing themes were Touch Tech and Refineries. Our Touch Tech theme added nearly 4% and our Refinery theme added ~3%. Our…
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  • 1. 1 Strategy Returns* In April, our two best performing themes were Touch Tech and Refineries. Our Touch Tech theme added nearly 4% and our Refinery theme added ~3%. Our Refinery returns were broad-based, as all 6 names in the group were up just about ½% each. The highlight of our Touch Tech theme was our short in Amazon.com Inc. (NASDAQ:AMZN), which profited us ~2.3%. We have been quite early and vocal about our bewilderment at the market’s valuation and love of AMZN. Most recently, in our 2013 yearly newsletter, we highlighted 2014 as the year AMZN would fall from grace. The stock was the subject of some interesting trading activity around the last two earnings reports. In both cases the stock was up ~3% the day BEFORE the report on no news, just a pre-earnings goose. Then, after the release of the typically dismal earnings report, the stock traded up in the after-hours market (very strange). However, when the market opened the following morning sellers hammered the ~500 P/E stock, and we benefitted. More puzzling than this activity, is why this stock had rallied in the first place. Last year, as you can see in the table in Fig. 2. below, it missed earnings estimates every quarter, and as shown in the last column, the stock rallied after 3 out of the 4 reports, to finish the year up ~55%! Many bulls have argued that it’s a revenue story, but as you can see in Fig. 3. below, it also missed revenue expectations 75% of the time during 2013. In the most important report on 1/29/2013 (Q4 2012), it missed revenues by ~1 billion, and the stock rallied ~5% the next day! Apr 2014 YTD 2014 Since Inception (Sept 21, 2006) SYW LP +0.93% +3.02% +1,248.74% S&P500 (TR) +0.74% +2.56% +67.09% Commentary sywcapital April 2014 Newsletter Private and Confidential: Not for Redistribution. NOT AN OFFICIAL STATEMENT. *READ DISCLAIMER ON FOLLOWING PAGES Announcement Date Period Reported Revenue Consensus Estimate % Surprise % Price Change (1 day after announcement) 04/24/2014 Q1 2014 $19.741B $19.431B 1.60% -9.88% 01/30/2014 Q4 2013 $25.587B $26.083B -1.90% -11.00% 10/24/2013 Q3 2013 $17.092B $16.762B 1.97% 9.39% 07/25/2013 Q2 2013 $15.704B $15.735B -0.20% 2.84% 04/25/2013 Q1 2013 $16.070B $16.139B -0.43% -7.24% 01/29/2013 Q4 2012 $21.268B $22.253B -4.43% 4.77% Fig 1 AMZN stock price YTD as of 05/05/14 (Source: Bloomberg) Fig 2. AMZN Quarterly Earnings Per Share (Source: Bloomberg) Announcement Date Period Reported Earnings per share ($) Bloomberg Adjusted EPS Consensus Estimate % Surprise (Bloomberg adjusted vs. Consensus) % Price Change (1 day after announcement) 04/24/2014 Q1 2014 0.23 0.68 0.771 -11.80% -9.88% 01/30/2014 Q4 2013 0.495 0.96 1.232 -22.08% -11.00% 10/24/2013 Q3 2013 -0.09 0.31 0.357 -13.17% 9.39% 07/25/2013 Q2 2013 -0.02 0.4 0.554 -27.80% 2.84% 04/25/2013 Q1 2013 0.18 0.5 0.517 -3.29% -7.24% 01/29/2013 Q4 2012 0.21 0.43 0.793 -45.78% 4.77% Fig 3. AMZN Quarterly Revenues (Source: Bloomberg)
  • 2. 2 Why do we mention all of this? To show that with bubble stocks like AMZN, you never know when it will begin to deflate / pop. There are times last year when we were sure that the market would punish a 150bil market cap company for losing money, and missing on revenues, only to scratch our head in bewilderment as the stock rose sharply. This year by comparison both earnings reports seemed benign by AMZN standards and yet the stock has lost ~24%, with many bulls confused as to why the market has decided to punish the shares. We will continue to stick with our fundamental thesis, which may require us to weather some turbulent and volatile stock moves, but when the dust finally settles we think AMZN will be much lower. Moving on to our worst performing themes last month: our Alternative Asset Manager theme and our Shipping theme. Our Alternative Asset Manager theme suffered from a volatile decline in the major indexes, which pressured the relatively illiquid shares. It’s a longer term theme for us, and we have not made any changes. Similarly our shipping theme was hurt by Star Bulk Carriers Corp. (NASDAQ:SBLK), which lost just over 1% in illiquid trading. We have a longer term bullish view, and we are comfortable sticking with it. Both themes cost us ~1.3% each. We believe one of the most powerful changes this year will be the move China makes to reduce pollution. Pollution is no longer a problem of the poor; it is affecting the rich and political class as well. It is literally threatening their lives too, contaminating the air they breathe, the water they drink, the food they eat. As a result, we expect that this latest push in China to aggressively reduce pollution will be effective. One of the biggest offenders is the steel industry. We expect a slowing of the growth in steel production, leading to a weakening in iron ore prices. This would be the last nail in China's domestic iron ore producers, and might result in both a rising seaborne iron ore trade and lower iron ore prices. Some are expecting iron ore supply to exceed demand to the tune of 80 million tons in 2014, with an even greater surplus in 2015. Another area of pollution policy focus in China is auto emissions. China is already moving to implement stricter standards; starting in 2014, maximum sulfur content will drop from 350 parts per million to 50 ppm. Compliance with these standards should result in an increase in demand for Platinum and Palladium for catalytic converters. We expect a strong outlook for the metals for the rest of 2014. . Disclosure regarding positions in companies mentioned: Amazon.com Inc. (NASDAQ: AMZN) - Short through options Star Bulk Carriers Corp. (NASDAQ:SBLK) - Long through stock Any investments discussed herein are for illustrative purposes only and are not representative of the entire portfolio. It should not be assumed they were or will be profitable, and should not be used for the basis of making an investment decision. Chris Wang (Portfolio Mgmt.) chris@sywcapital.com / +1 (646) 867-6867 Hamed Anvari (Portfolio Mgmt.) anvari@sywcapital.com / +1 (646) 867-6861 Noel Sullivan (Operations. / Investor Relations) noel@sywcapital.com / +1 (646) 867-6866 sywcapital April 2014 Newsletter Private and Confidential: Not for Redistribution. NOT AN OFFICIAL STATEMENT. *READ DISCLAIMER ON FOLLOWING PAGES Looking ahead
  • 3. 3 sywcapital April 2014 Newsletter Rank Ticker GICS Sector GICS Industry DomicileIssuer Name 1 AMZN Consumer Discretionary Internet & Catalog Retail USAmazon.com Inc 2 AAPL Information Technology Technology Hardware, Storage & USApple Inc 3 VLO Energy Oil, Gas & Consumable Fuels USValero Energy Corp 4 GILD Health Care Biotechnology USGilead Sciences Inc 5 WNR Energy Oil, Gas & Consumable Fuels USWestern Refining Inc Top Gainers (Month To Date as of 4/30/2014)* Rank Ticker GICS Sector GICS Industry DomicileIssuer Name 1 SBLK Industrials Marine GRStar Bulk Carriers Corp 2 ISRG Health Care Health Care Equipment & Suppli USIntuitive Surgical Inc 3 TLT #N/A N/A #N/A N/A USiShares 20+ Year Treasury Bond 4 CG Financials Capital Markets USCarlyle Group LP/The 5 PNRA Consumer Discretionary Hotels Restaurants & Leisure USPanera Bread Co Top Losers (Month To Date as of 4/30/2014)* Rank Ticker GICS Sector GICS Industry DomicileIssuer Name 1 USD N/A N/A N/AUS Dollar 2 AAL Industrials Airlines USAmerican Airlines Group Inc 3 NTI Energy Oil, Gas & Consumable Fuels USNorthern Tier Energy LP 4 VLO Energy Oil, Gas & Consumable Fuels USValero Energy Corp 5 GLD N/A N/A USSPDR Gold Shares 6 CHL China Mobile Ltd Telecommunication Services Wireless Telecommunication Ser HK 7 SSNC SS&C Technologies Holdings Inc Information Technology Software US 8 AXLL Axiall Corp Materials Chemicals US 9 CG Carlyle Group LP/The Financials Capital Markets US 10 USG USG Corp Industrials Building Products US Top Long Exposures by Dollar Delta Exposure (as of Close of Business, 4/30/2014)* Rank Ticker GICS Sector GICS Industry DomicileIssuer Name 1 TLT N/A N/A USiShares 20+ Year Treasury Bond 2 AMZN Consumer Discretionary Internet & Catalog Retail USAmazon.com Inc 3 FXY N/A N/A USCurrencyShares Japanese Yen Tr 4 RIO Materials Metals & Mining GBRio Tinto PLC 5 IWM N/A N/A USiShares Russell 2000 ETF 6 PXD Pioneer Natural Resources Co Energy Oil, Gas & Consumable Fuels US 7 WLL Whiting Petroleum Corp Energy Oil, Gas & Consumable Fuels US 8 IYR iShares US Real Estate ETF N/A N/A US 9 GRMN Garmin Ltd Consumer Discretionary Household Durables CH 10 TSLA Tesla Motors Inc Consumer Discretionary Automobiles US Top Short Exposures by Dollar Delta Exposure (as of Close of Business, 4/30/2014)* Private and Confidential: Not for Redistribution. NOT AN OFFICIAL STATEMENT. READ DISCLAIMER ON FOLLOWING PAGES Top Gainers, Losers and Exposure Long and Short*
  • 4. 4 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Full year / YTD Since Inception 2014 SYW LP -3.63% 1.62% 4.24% 0.93% 3.02% 1,248.74% S&P500 TR -3.46% 4.57% 0.84% 0.74% 2.56% 67.09% SYW LP -7.14% 2.54% 0.64% -8.61% -8.73% -1.23% -7.16% -2.30% 3.72% 15.00% 25.63% 6.94% 14.76% 2013 S&P500 TR 5.18% 1.36% 3.75% 1.93% 2.34% -1.34% 5.09% -2.90% 3.14% 4.60% 3.05% 2.36% 32.16% 2012 SYW LP 15.48% 19.27% 1.59% 3.40% 2.96% -0.98% -0.10% 0.79% 4.62% -3.25% -2.44% -2.30% 43.18% S&P500 TR 4.48% 4.32% 3.29% -0.63% -6.01% 4.12% 1.39% 2.25% 2.58% -1.85% 0.58% 0.71% 16.00% 2011 SYW LP 9.96% 18.78% 3.79% 1.60% -7.24% -15.60% 16.98% -24.93% 39.78% -32.18% -2.56% 20.00% 4.96% S&P500 TR 2.37% 3.43% 0.04% 2.96% -1.13% -1.67% -2.03% -5.43% -7.03% 10.93% -0.22% 1.02% 2.11% 2010 SYW LP -9.27% -0.62% 9.24% 7.96% -15.67% 1.00% -16.34% -17.04% 38.31% 9.34% -2.38% 18.63% 10.10% S&P500 TR -3.60% 3.10% 6.03% 1.58% -7.99% -5.23% 7.01% -4.51% 8.92% 3.81% 0.01% 6.69% 15.06% 2009 SYW LP 7.91% 12.48% -23.52% 6.63% 1.48% -5.83% 2.44% 5.07% 4.86% -7.99% 8.42% 7.81% 14.81% S&P500 TR -8.43% -10.65% 8.76% 9.57% 5.59% 0.20% 7.56% 3.61% 3.73% -1.86% 6.00% 1.93% 26.46% 2008 SYW LP 3.45% 9.88% 5.41% 12.08% 23.99% 19.61% -18.34% -7.01% -28.28% 38.60% 31.37% -8.10% 81.49% S&P500 TR -6.00% -3.25% -0.43% 4.87% 1.30% -8.43% -0.84% 1.44% -8.91% -16.79% -7.18% 1.06% -37.00% 2007 SYW LP -0.92% 0.13% 13.02% 29.75% 25.54% -5.84% 35.62% 8.92% 2.92% 4.30% -7.62% 7.98% 172.04% S&P500 TR 1.51% -1.96% 1.12% 4.43% 3.49% -1.66% -3.10% 1.50% 3.74% 1.59% -4.18% -0.69% 5.49% 2006 SYW LP 1.88% 5.61% 9.16% 3.51% 21.56% S&P500 TR 0.85% 3.26% 1.90% 1.40% 7.60% AUM Monthly Analysis vs. S&P 500 (TR) Firm Level Assets under Management (As of 04/30/2014) $24.22mm Number of Months Outperforming S&P 500 (TR) 52/92 (57%) SYW LP outperforms during positive months for S&P 500 (TR) 34/60 (57%) Return Statistics SYW LP outperforms during negative months for S&P 500 (TR) 18/32 (56%) Compound Annualized Return 40.40% Average Monthly Outperformance vs. S&P 500 (TR) 11.94pp Number of Positive Return Months 59/92 (64%) Average Monthly Underperformance vs. S&P 500 (TR) -8.34pp Standard Deviation (Annual) 48.29% Annualized Sharpe Ratio (5%) 0.84 Annualized Sortino Ratio (5%) 1.11 12 Month Period Analysis vs. S&P 500 (TR) Highest Monthly Return 39.78% Total number of 12 month periods (calendar and non-calendar periods) 81 Lowest Monthly Return -32.18% Profitable 12 month periods 65/81 (80%) Longest Winning Streak / Losing Streak 7 months / 5 months Average gain for profitable 12 month periods 61.60% Largest Drawdown (Peak: June 08, Valley: Sept 08) -45.54% Average loss for unprofitable 12 month periods -15.75% Length of largest drawdown (in number of months) 5 Largest 12 month period gain (vs. S&P 500 (TR) largest 12 month period gain) 215.05% (vs. 53.62%) Recovery from largest drawdown (in number of months) 2 Largest 12 month period loss (vs. S&P500 (TR) largest 12 month period gain) -31.50% (vs. -43.32%) No. of 12 month periods where SYW LP outperformed S&P 500 (TR) 49/81 (60%) Alpha / Beta vs/ S&P 500 (TR) Average 12 month period outperformance of SYW LP vs. S&P 500 (TR) 78.72pp Correlation to S&P500 (TR) -0.07 Average 12 month period underperformance of SYW LP vs. S&P500 (TR) -22.79pp Beta vs. S&P500 (TR) -0.20 SYW LP outperforms during positive 12 month period for S&P 500 (TR) 27/59 (46%) Annualized Alpha vs. S&P500 (TR) 58.84% SYW LP outperforms during negative 12 month period for S&P 500 (TR) 22/22 (100%) Terms & Administration Minimum Investment $500,000 Custodian / Prime Broker JPMorgan Clearing Corp Management Fee (Annual, billed monthly) 2% of assets 2nd Custodian / Prime Broker Goldman Sachs Execution & Clearing Incentive Fee (% of annual profits) 20% Introducing Broker Wells Fargo Prime Services High Water Mark Yes Administrator SS&C Technologies Inc. Subscriptions Monthly US Legal Counsel Sadis & Goldberg LLP Redemptions Quarterly US Auditor McGladrey LLP Lockup 12 month (soft lockup) Cayman Legal Counsel Appleby Early Redemption Fee 3% penalty Cayman Auditor RSM Cayman Ltd. Strategy Returns, Portfolio Statistics, Terms & Administration* sywcapital April 2014 Newsletter Private and Confidential: Not for Redistribution. NOT AN OFFICIAL STATEMENT. READ DISCLAIMER ON FOLLOWING PAGES
  • 5. 5 This document is being furnished by SYW Capital Management LLC (“SYW” or the “Investment Manager”), the investment manager of SYW LP (the “Onshore Fund”), SYW (Cayman) Ltd. (the “Offshore Fund”) and SYW Master LP (the “Master Fund,” and collectively, with the Onshore Fund and the Offshore Fund, the “Funds”) solely for informational purposes, upon request. The statements herein are based on information available as of the date hereof and are intended only as a summary. SYW and the Onshore Fund have been in operation since 2006. The Master Fund has been in operation since November 2012 and the Offshore Fund became operational in January 2013. 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. All information herein is for informational purposes only and should not be deemed as a recommendation to buy or sell. The information contained herein does not take into account the particular investment objectives or financial circumstances of any specific person who may receive it. Prospective investors are advised to thoroughly and carefully review the offering memorandum with their financial, legal and tax advisers to determine whether an investment in the Funds is suitable for them. An investment in the Funds will be illiquid. The distribution of this document may, in some countries or jurisdictions, be restricted by law or regulation. Accordingly, persons who come into possession of this document should inform themselves of and observe these restrictions. The Funds have not been registered under the Investment Company Act of 1940, as amended, and the interests or shares therein have not been registered under the Securities Act of 1933, as amended, or in any state or foreign securities laws. This document may not contain certain material information about the Funds. Interests or shares of the Funds will be offered and sold only to those who meet the applicable investor qualifications, generally those who are “Accredited Investors” as such term is defined under federal securities laws. 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 funds described in this document. SYW 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 by the recipient or the entity that he/she represents. The investment program of the Funds is not suitable for all investors. This document is intended only for the person to whom it has been delivered. This document may not be reproduced or distributed to anyone other than the identified recipient’s professional advisers without the prior written consent of SYW. All information contained herein is confidential. This document is subject to revision at any time and SYW is not obligated to inform you of any changes made. No statement herein supersedes any statement to the contrary in the Funds’ confidential offering documents. There is no guarantee that the investment objectives of the Funds will be achieved. There is no secondary market for interests and none is expected to develop. An investment in the Funds is speculative and involves a high degree of risk. Opportunities for withdrawal and transferability of interests and shares are restricted. As a result, investors may not have access to capital except according to the terms of withdrawal or redemptions specified within the confidential offering memorandum and other related documents. The fees and expenses that will be charged by the Funds and/or SYW 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, SYW makes no warranty or representation, whether express or implied, for the accuracy, completeness or usefulness of any information disclosed herein. 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. 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. INVESTMENT PERFORMANCE: These performance calculations have been prepared internally and have not been audited or independently verified. The use of a different methodology for calculating performance returns may lead to different results and such differences may be material. The performance representations contained herein are not representations that such performance will continue in the future or that any investments or performance will even be similar to such description. Please note the investments discussed herein are not representative of the entire portfolio. 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 results achieved by a particular trading program. The performance shown is unaudited, is net of all fees and expenses and assumes reinvestment of all distributions. The Funds generally charge an annual 2% management fee assessed monthly in advance and a 20% performance allocation assessed annually in arrears. Performance shown for SYW LP (which until November 1, 2012 was a stand-alone fund) for Sept 2006 through May 2007 is based on the performance of SYWs seed capital, net of a theoretical 1.5% management fee and 20% performance allocation. Actual performance for the period was higher, as the Investment Manager’s seed capital was not charged any management fee or performance allocation. Performance shown from June 2007 through December 2008 is based on an actual investor, and is net of a 1.5% management fee and a 20% performance allocation. In June 2008, the management fee for new investors was changed to 2%. Performance shown from January 2009 through the current month is based on an a
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