PVS Quarter Ending June 2010 Investor Letter
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Transcript of PVS Quarter Ending June 2010 Investor Letter
8/9/2019 PVS Quarter Ending June 2010 Investor Letter
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PV Strategies LLC June Quarter Update 2010
1 Contact: Bill Miller, Managing Partner, Email: [email protected], Phone: (719) 473-6876
Equities prices were pressured again in June by investor’s concerns with slowing growth, the
weight of sovereign debts, the possibility of a double-dip recession, and the risk that deflation
could take root. The second quarter produced the first full quarter of declining stock prices in
the past five, and the decline was substantial. The S&P 500 Index fell (11.9%) in the second
quarter; finishing down (7.6%) year to date. PV Strategies suffered a bit less than the Index,down (8.1%) in the second quarter and finishing down (3.6%) year to date; or roughly half of
the loss suffered by the Index.
Figure 1
The market’s focus on Europe’s sovereign
default risk softened a bit in June, but was
replaced with concerns that the recovery might
be stalling, which were fueled by disappointing
economic data. There is increasing talk about
deflation risk and the possibility of a “double
dip” recession. Job growth, consumersentiment, and manufacturing activity data
came in below expectations. The CBOE
Volatility Index remained elevated, surging
again as stock prices tumbled at month end.
Figure 2 - CBOE Volatility Index
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PV Strategies LLC June Quarter Update 2010
2 Contact: Bill Miller, Managing Partner, Email: [email protected], Phone: (719) 473-6876
Many of the bottom-up forecasts of forward corporate earnings were revised lower in June as
analysts took account of slower than expected growth, as well as foreign exchange rate effects
due to the short term appreciation in the relative value of the US Dollar. Even given these
downward revisions, the S&P 500 continues to trade below historical multiples based on
current forward earnings outlooks. It can be argued that higher levels of uncertainty created bythe unwinding of unprecedented levels of government stimulus, unsustainable government
debts and structural deficits, and new government regulations do warrant lower than
historically average multiples on earnings. Even so, given my expectation of a slowing yet
sustained global recovery, I continue to think that the probabilities are weighted to equities
prices moving higher rather than lower. Our portfolio was somewhat better hedged against
further declines in equities prices in June versus May, although not enough to prevent suffering
further losses. Given the significant, unprecedented, and complex risks that the global
economy is facing, and given that the recovery and the markets remain fragile, I think we would
be better served with more insurance than I currently have in place; even though this maycause us to under-perform the equities indices should markets again move higher. I have
exposed us to somewhat more risk than is likely prudent in the current environment by waiting
for better entry points to open hedge positions. I have actually closed some short positions that
help protect the portfolio during June; because my short target exit prices were reached.
Despite investor fears of a stalling recovery, I expect July’s second quarter earnings reports will
continue to show strong business performance and perhaps fuel a market bounce; which may
provide those better entry points for building planned hedges. A further discussion of my
outlook and forward strategies appears in the “Outlook” section below.
Second Quarter 2010 Fund Performance Metrics
The value of the Fund - net of capital contributions and distributions, fees, and expenses – fell
($186,564) or (2.5%) during June versus a (5.4%) decrease in the value of the S&P 500 Index.
For the full second quarter the net value of the Fund fell ($646,918) or (8.1%) versus a full
quarter decrease of (11.9%) in the S&P 500 Index. At quarter end the net value of the Fund had
fallen (3.6%) year to date versus a decline of (7.6%) for the S&P 500 Index. The Fund’s average
net contributed capital during June was $6,478,793; resulting in a net loss on contributed
capital of (2.9%). The total value of the Fund at month end was to $7,919,295 with total net
contributed capital of $6,798,793 and total gains net of fees, expenses, and distributions of $1,120,502.
We closed the month with $4,841,187 of net long equities and ETFs (61.1% of the Fund’s
capital), $330,723 of foreign currency denominated bonds, and $2,747,385 of cash and
equivalents. The market value ratio of long to short positions was 11 to 1. At quarter end
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PV Strategies LLC June Quarter Update 2010
3 Contact: Bill Miller, Managing Partner, Email: [email protected], Phone: (719) 473-6876
$1,553,027 of our cash was reserved to back options contracts and short exposure. The net
value at risk in our investment operations at quarter-end was $6,051,147 (76.4% of the Fund’s
capital) with unallocated cash reserves of $1,771,963 (22.3% of the Fund’s capital).
Our options trading operations produced income of $51,420 on positions closed during June
with net exposure of $1,199,750 for a nominal return of 4.3%. The average exposed period on
closed positions was 39 days for an IRR of 40.4%.
Fund Performance History
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PV Strategies LLC June Quarter Update 2010
4 Contact: Bill Miller, Managing Partner, Email: [email protected], Phone: (719) 473-6876
Fund Allocation History
Options Trading Operations Performance History
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PV Strategies LLC June Quarter Update 2010
5 Contact: Bill Miller, Managing Partner, Email: [email protected], Phone: (719) 473-6876
Current Equities Portfolio Sector Allocations as of 7/7/2010
Top Ten Long Equity Holdings as of 7/7/2010 (symbol, % of the Fund’s capital)
Blackstone Group LP BX 3.6%General Electric Co GE 3.2%
Enterprise Products Partners LP EPD 2.7%
Verizon Communications Inc VZ 2.6%
Hewlett-Packard Co HPQ 2.6%
Halliburton Co HAL 2.6%
AT&T Inc T 2.4%
Analog Devices Inc ADI 2.3%
Pfizer Inc PFE 2.0%
Occidental Petroleum Corp OXY 2.0%
Top Short Equity Positions as of 7/7/2010 (symbol, % of the Fund’s capital)
Sprint Nextel S (2.7%)
Boston Scientific BSX (0.5%)
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PV Strategies LLC June Quarter Update 2010
6 Contact: Bill Miller Manager PV Strategies, LLC 719.473.6876 [email protected]
Outlook
The S&P 500 Index is now priced at about 12x forecast next twelve months earnings for
component stocks; even after forecasts have been revised downward in recent weeks as
analysts accounted for slower growth and the foreign exchange rate effects of a stronger US
Dollar and weaker Euro. The current P/E appears low relative to its long term ten-year movingaverage of about 15x. The lower multiple may be appropriate given the uncertainty of a
turbulent backdrop; however it has generally trended higher during periods of lower interest
rates. In any case, it points to probabilities being weighted toward stocks trading higher rather
than lower; barring “black swan” or “tail risk” events. I continue to expect that the most likely
case in the mid-term is a slowing but continued economic recovery and generally rising
markets; punctuated with periods of significant volatility given greater risks (a “fatter tail”).
I often re-read some of my earlier editions as I write these monthly reports, which helps me to
internalize the lessons of past misjudgments; which is sometimes a little painful. What I findmost painful is having made the right call, but failed to act on it; at least failed to act quickly
enough or with sufficient resolve. In the March 2010 edition I wrote:
While there is likely a bit more room to the upside, gains from equities may soon become
harder to come by. Should the market reach yet higher, I anticipate adding more
hedging strategies into our mix; likely by increasing use of market neutral long-short
paired asset strategies.
With the benefit of hindsight, I called it right but acted too slowly and with too little resolve;causing the value of our portfolio to suffer more than it should have as markets fell.
In my May 2010 letter I included a discussion of some of the risks and headwinds facing a
continued recovery. The market’s sell-off has been largely driven by investor focus on these
macro risks. Government policies play a significant role here. While oversimplified, the
possible outcomes might be viewed as:
Too much government stimulus and debt (“too hot”) - If concerns about the growing the
debt loads in the US and Europe result in slowing demand for sovereign debt and risingrates while the economy continues to struggle with slow growth and high
unemployment, it is possible that the Federal Reserve and the European Central Bank
will increase use of “quantitative easing”, effectively printing money to purchase debt, or
“monetizing the debt.” Too much of this could push private buyers from the markets and
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PV Strategies LLC June Quarter Update 2010
7 Contact: Bill Miller Manager PV Strategies, LLC 719.473.6876 [email protected]
ultimately produce rising inflation, slower real growth, and ultimately higher rather than
lower interest rates.
Too little government stimulus withdrawn too soon (“too cold”) - Concerns about the
rising debt and shifting political winds might result in governments pursuing significant spending cuts too soon. While getting government spending under control would be a
good thing in the long run, too much austerity implemented too soon, or reluctance to
step in to prop up the credit markets if they again begin to seize, might produce enough
of a headwind to result in a double-dip recession, deflation, and a long period of
economic stagnation.
A Goldilocks scenario (“just right”) - Policies which enable a continued recovery followed
by well timed and managed reductions in government entitlements and debts might
produce low and steady inflation, low or slowly rising interest rates and sufficient credit availability, a slow decline in relative value of the U.S. Dollar versus emerging market
currencies so as to enable rising exports and falling imports in the U.S. and Europe while
emerging markets also increase consumption, and producing steadily accelerating global
growth and slowly declining deficits and debt burdens in developed nations.
So, too hot? Too cold? Or, just right? While oversimplifying what is in fact a very complex set
of policy questions, this summarizes the big question facing the markets.
I am maintaining net long exposure to equities using a “total return” strategy that combines abasket of high dividend-yield equities with selling covered calls to boost returns. I also plan to
add more hedging into our strategies by increasing use of market neutral long-short pairings.
The few long/short pairings that I had added earlier helped to limit the losses on our equities
portfolio during the market’s recent sell-off.
I am resolved to act more aggressively in adding hedges to our portfolio as markets again move
higher, including strategies that provide “tail risk” insurance against unusual market-disrupting
events. The current uncertainty and turbulence likely increases the probability of such events.
Hedges that provide portfolio insurance come at a cost, no matter what ingenious and efficient
strategies are invented and employed to implement them. These costs will likely cause us to
underperform the S&P 500 Index in periods of strong gains, but should allow us to suffer far
less when markets fall; and I suspect that we will outperform the markets when measured over
longer periods of time given expected continued volatility.
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PV Strategies LLC June Quarter Update 2010
8 Contact: Bill Miller Manager PV Strategies, LLC 719.473.6876 [email protected]
I also plan to continue to hold a significant allocation of cash for use in options trading
operations, writing puts on a target basket of equities and ETFs during periods of higher
volatility; and have resolved to be more patient in committing that cash to trades than I was in
late April and early May. The markets will very likely continue to provide opportunities for this
strategy to produce good returns.
Finally, I continue to believe that some combination of a weakening US Dollar and higher US
interest rates are necessary outcomes to the rebalancing that must take place between
emerging and developed economies, and to the need for the US to eventually deal with its
structural deficit and growing debt. The recent appreciation in the Dollar is actually a headwind
that only delays this necessary transition. The longer that government policies and market
dynamics delay this necessary transition, the more painful it is likely to be. I am continuing to
slowly add to investment positions that I believe will benefit from the eventual course of global
rebalancing while providing current income; including allocations to bonds denominated in aselection of emerging market and emerging market proxy currencies, which now account for
about 5% of the value of our portfolio.
There is an archive of these monthly updates on our web site at www.pvstrat.com, as well as a
blog containing some of my day to day thoughts, ideas, and research.
We did some research at the request of an investor into the requirements and mechanisms for
establishing Self-directed IRA accounts that can be invested in our Fund. If interested, contact
us and we’ll get you that information. As always, feel free to call me with any questions or if you wish to further discuss anything covered.
Bill Miller
719 473-6876 or [email protected]
PV Strategies, LLC
PV Strategies, LLC is an open-ended hedge fund that employs a multi-strategy approach intended to
achieve long term capital appreciation and income while limiting the risks of market exposure. In order
to contain risk to capital, the fund does not employ significant leverage. The fund invests globally,
primarily in liquid, exchange traded securities, including long and short equities, options, Exchange
Traded Funds (ETFs), and bonds. The Fund began investment operations in September, 2008. In the
intervening period, during which the S&P 500 index has suffered a (20.8%) loss and fell to a month-
ending low of a (43.5%) loss, the fund’s strategies have achieved a 31.0% gain, for a 16.9% Annual Rate
of Return, while the fund’s month-ending value at no time fell below 93.4% of contributed capital. PVS
is open to new investments from accredited investors.