Stanphyl Capital commentary for the month ended August 31, 2016. Friends and Fellow Investors: For August 2016 the fund was up approximately 6.8% net of all fees and expenses. By way of comparison, the S&P 500 was up approximately 0.1% while the Russell 2000 was up approximately 1.8%. Year to date the fund is up approximately 20.2% net while the S&P 500 is up approximately 10.2% and the Russell 2000 is up approximately 8.3%. Since inception on June 1, 2011 the fund is up approximately 108.4% net while the S&P 500 is up approximately 80.7% and the Russell 2000 is up approximately 57.4%. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends.) As always, investors will receive the fund’s exact performance figures from its outside administrator within a week or two.
We continue to maintain large short positions in both the S&P 500 (via the SPY ETF) and the Vanguard Total International Bond ETF (ticker: BNDX), the latter comprised of dollar-hedged non-US sovereign debt with ridiculously low yields; i.e., what I believe to be the “root cause” of the stock market bubble. As of this writing, BNDX has an average duration of 8.2 years and an “SEC yield” of less than 0.5%, representing what may be the greatest asset bubble in history considering that Europe and Japan (which comprise most of its holdings) are printing massive amounts of money (over $180 billion a month!) yet are long-term insolvent due to their retiree liabilities. What will force the central bank bond buying to stop and thus pop the bubble? For Europe I suspect it will be pressure from banks, insurance companies, savers & pension funds, none of which can continue to stomach negative rates, as well as the very real threat of additional “Brexits” for the same reasons the UK left (immigration and resentment of centralized bureaucracy). Japan I think can never stop printing (its ratio of debt to GDP is too huge and growing too quickly) but will eventually crash the yen into oblivion (we’ve been short yen since 2012 and added a lot recently) and with that its bonds will crash too. When will the bond bubble break? I don’t know, but the borrow cost for BNDX is less than 2% a year (plus the yield) and as I see around 5% potential downside to this position (plus the cost of carry) vs. at least 30% upside, I think it’s a terrific place to sit and wait for the inevitable denouement.
As noted above, we also continue to be short SPY, as I believe the stock market remains hugely overvalued, as despite negative revenue growth…
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…sliding global trade …awful intermodal rail freight data that isn’t being offset by increased trucking and corporate debt defaults that have reached their highest level since 2009, the S&P 500’s price-to-sales ratio (courtesy of multpl.com) continues to set new highs…
…while its GAAP trailing PE ratio = 24.9. The only thing that tempers my bearishness is that Q2 GAAP earnings came in slightly better both sequentially and year-over-year: Q2 2016: $23.35 (w/96% reporting) Q1 2016: $21.72 Q4 2015: $18.70 Q3 2015: $23.22 Q2 2015: $22.80 It’s thus plausible that S&P earnings may have at least stabilized-- possibly fueled by share reductions thanks to buybacks enabled by the aforementioned bond bubble (but maybe not for long)-- and with bond yields in the bubble they’re in, I’m not certain that the multiple placed on those earnings can’t become more generous to the point of even greater absurdity. Thus as noted in last month’s letter, in July I somewhat reduced the size of our SPY short concurrent with implementing the “root cause” bond short via BNDX.
Stanphyl Capital - Long Positions
And now for the longs…
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