Newsletter Volume 1, Issue 7

VOLUME 1, ISSUE 7: OCTOBER 2018

Dear Friends,
For the month ending October 31st, 2018, Mach 100 LP was Up 2.07% gross and Up 1.53% Net. This compares to the S&P 500 that was down 6.94% for the month; as well as the NASDAQ Composite which was down 9.20%. The Russell Microcap index was also down 10.90%. Year to date (YTD) through October, (beginning mid-April for inception of Mach 100 LP) Mach 100 LP is up 33.36% gross and 24.43% net. This compares to the YTD performance of the S&P 500 that is up 1.43%, the NASDAQ Composite up 4.96% and the Russell Microcap index which is down 0.54%.

MACH 100 LP INVESTMENT PERFORMANCE SUMMARY

Mach 100 LP Investment Performance Results are presented gross and net. Net results are for an investor since inception, net of 1% management fee and 25% performance allocation with a “high watermark” threshold. Individual investor’s performance may vary based on time of investment and class of investment. Since inception returns are from fund inception 4/2018.
See Important Performance Disclosures.

MACH 100 LP INVESTMENT PERFORMANCE COMPARISON

Mach 100 LP Investment Performance Results are presented net. Net results are for an investor since inception, net of 1% management fee and
25% performance allocation with a “high watermark” threshold. Individual investor’s performance may vary based on time of investment and class
of investment. Since inception returns are from fund inception 4/2018.
See Important Performance Disclosures.

EQUITY MARKET OBSERVATIONS

October equity markets’ performance, both domestic (as discussed above) and international were a financial avalanche. Even the MSCI All Country World Index fell 7.5%, with global equities flat for the year now and emerging markets down 12.2%. There was no clear catalyst for this multi-week sell-off which began during the first few sessions of October. Perhaps it was due to: fears of a slowing economy (which we cannot see definitively yet–though sector money flow out of construction and machinery may be a leading indicator, telegraphing a future slow down); very high valuations among mid cap and large cap equities; or worries about commodity price decreases eventually causing global asset deflation. Still, GDP numbers have been solid, consumer confidence is still strong, unemployment at record lows and earnings season kicked off with many companies reporting strong, if not record, operating results. Accordingly, there are fundamental reasons to remain optimistic about the economy and technical reasons to be concerned about the securities markets.

GRINDING MARKETS AHEAD

After this long, 9 year bull market which we have experienced, the equity markets don’t have to necessarily reverse to a protracted bear market; unless of course we experience a credit meltdown, asset bubble, global asset deflation [again] or other broad economic catastrophe. In fact, the correction we saw in October may occur a few (or even several) more times in the next few years after intermittent periods of again rising equity markets. Think of 1 month up and 1 month down for the next few years. Alternatively, the financial markets may just stay in a very tight trading range with daily swings of the indices up and down the same day and sometimes up and down two or three times during the same day, with no meaningful net progress up or deterioration down [I refer to this as a “choppy market”]. Another likely capital markets scenario is that the markets could experience abrupt sell offs with slow equity recoveries [This is what I refer to as a “grinding market”]. My belief is that there is a good chance we will experience a choppy or grinding market for the next few years. Many traders, including trend traders, swing traders or day traders can get “chewed up” in a grinding or choppy market, as they chase break outs, break downs, swings, momentum, with each time, the move that seems to be happening, is then stopping without warning, dead in its tracks, or reversing. Then frustrated traders begin vengeance trading (trading with aggression and desperation) to make their losses back, only to lose more money. Obviously, vengeance trading is the worst thing one can do. When an investor, trader or fund manager does not know whether to buy or sell, he/she should Hold; do nothing, until there are clear signals about how to proceed.

INCREDIBLE MICROCAP MERGER ACTIVITY

As my friend Chris Lahiji of LD Micro pointed out in his newsletter (and it’s still worth mentioning here): Merger and acquisition activity has occurred at a Torrid pace over the last 3-4 weeks. Almost all of it being acquisitions (not mergers). We have observed literally tens ( yes tens!) of acquisitions during this four week period. It is logical that most of the target company acquisitions have been micro-capitalization companies (companies whose market capitalization is between $50-300 million). The reason? Because over the last several years during significant economic expansion and the bull market, mid cap and large cap companies have smartly taken advantage of the capital markets to conduct large financings in order to raise piles of cash. Together with their elevated equity prices they have plenty of financial fire power to move their businesses forward, by accretion, not just organically. They work down the food chain, first buying equals, then buying smaller companies and then finally (at the end of the large cap equity market cycle), buying micro cap companies. As for our micro-cap brethren, these companies have also been moving their businesses forward during this 9 year long expanding economic cycle. If a micro-cap company has made significant fundamental progress over the last several years and its stock has not been significantly rewarded (due to a lack of investment community visibility, lack of money flow into the sector, insufficient institutional sponsorship or a variety of other non-fundamental reasons), this makes it a very attractive take out [read acquisition] target. As micro cap companies continue to make significant fundamental progress (both operating results and target markets) without being rewarded in the financial markets, they become a greater and greater target for a large or at least larger, suitor. This phenomenon is exactly what is happening today. In fact, unless there is strong money flow back into micro cap companies in the near term, driving their equity prices to new highs, we expect merger and acquisition activity, independent of what happens in the financial markets, to accelerate during the next 12-18 months; and could be one of the strongest periods of acquisition activity for micro cap companies in the history of the financial markets.

GROUP AND SECTOR ROTATION

Group and sector rotation is an important part of a comprehensive investment process, as it is a direct reflection of money flow and therefore supply and demand (in the form of trading volume) of various investment instruments (e.g. stocks, bonds, ETF’s, metals, currencies, etc.); and volume is the fuel of price. Currently, the strongest sectors are: Telecom (wireless services); Retail (discount and variety, drug stores and auto parts); Telecommunication Services-Cable/Satellite; Healthcare (hospitals); Media (radio and tv); and Food. The weakest sectors consist of: Medical (generic drugs); Energy (solar); Chemicals (plastics); Machinery (construction and mining); Auto/truck (original equipment manufacturers); Building (cement and concrete, wood products, mobile mfg. & RV); and Oil & Gas (exploration & Production). While we have stated previously that we believe the economy may be slowing down, to be clear, we think the economy’s rate of growth is slowing, but the economic data still shows that the economy is still growing.

LONG/SHORT PORTFOLIO EXPOSURE

Currently, (approximately as of this writing) the Fund’s long/short portfolio exposure (which is always subject to change without notice or obligation), is 94% Long, 5% short and 1% in cash. Therefore 88% Net Long. Our long exposure is higher than of recent because we just closed out a very profitable 10% short position.

SECTOR ALLOCATIONS

Currently (approximately as of this writing) the Fund has positions (which are always subject to change without notice or obligation), long and short, in the following industry sectors and subsectors: agriculture; automotive; electronics manufacturing (additive 3D Printing); fintech (financial technology); leisure (transaction processing for sports betting); media (digital advertising and content distribution); medical device(fertility); software (mobile gaming and social apps and cloud based SasS and logistics apps);

PORTFOLIO COMPOSITION

As a result of current market conditions and the expected choppy and grinding markets, on the long side of the Mach 100 LP portfolio (as opposed to the short side), we are seeking investment opportunities that are known as “special situations.” These investment opportunities do not depend upon merely improving operating results or a rise in the equity markets or even money flow into a group or sector. They are, as they are called. special situations. Examples of special situations include: Investments in companies [small cap and micro cap] that participate in secular trends (long term trends, e.g. expansion of a potentially ubiquitous technology across a global market, e.g. Netflix) such that short-term economic trends have minimal lasting impact on their long term performance; those with a truly disruptive technology (innovation that few or no other companies possess); a uniquely compelling, merger or acquisition candidate; a company conducting a spinoff where the sum of the parts is worth more than the whole, a capital structure dislocation; or even a company that is compelling, but its structural [read-capital structure] or operational complexity or market position, causes the market to not understand. For Mach 100 LP we have just invested in one such special situation company. It is a technology company that, putting aside its constant, increasing, sequential, growth in operating results, has a technology that no other company in the world possesses, an arguably impenetrable intellectual property portfolio surrounding its technology, a multi-billion dollar total available market; and as awareness grows, an acquisition target to many suitors across many industries. For this company to grow and generate shareholder value, it does not need the equity markets to go up, or the economy to stay stable. It does not need money flow into the sector. It just needs to continue to execute and tremendous value will be brought to its stakeholders. The future investment returns that this company generates will be non-correlated [consistent with the goal of Mach 100 LP’s returns] and its equity value will be a function of the supply/demand of its security and over the intermediate to long term, its creation and penetration of its total available market; a market so big that the Company will never be able to saturate it; at least not before being acquired.

-David N. Baker and Steven Shum

FUND DESCRIPTION

Mach 100 LP is a small and micro-capitalization, non-correlated, equity focused hedge fund possessing concentrated positions and capitalizing on discovery premium and information arbitrage (disparities from publicly available information). The Fund’s investment objective is to generate absolute returns that are largely alpha (the active component of investment returns that are in excess of the financial markets’ movement as a whole). The Fund utilizes fundamental quantitative and qualitative analysis, assessment of securities and broad market behavior, trading psychology and return risk profiling to determine portfolio exposure and select investments across asset classes, instrument types, industry sectors and geographies. Managed by industry veterans, the Fund is designed to generate consistent, positive investment returns with low net portfolio exposure and lower correlations than typical equity market benchmarks. As a pooled investment vehicle, the Fund may employ a diverse combination of equity, equity arbitrage, equity linked derivatives, debt, spot metals and other investment and hedging instruments (including cash) in order to achieve its objectives. The Fund’s long portfolio focuses upon emerging growth companies across the small and micro-capitalization tiers (~$50 million to $2 billion). Its short portfolio focuses upon fundamentally flawed companies and management teams. Our strategy presents both the opportunity to achieve higher gains, as well as creating unique challenges that require significant skill, as well as deep and broad experiences within these volatile capitalization tiers; and of paramount importance, the right trading psychology. Mach 100 LP believes it has the right team, strategy and tactics to successfully capitalize on these opportunities to produce superior investment returns.

DISCLAIMER


Mercadyne Funds, LP (“Mercadyne”) is not currently registered in any capacity in the financial services industry, and the information that accompanies this disclosure, as well as any other information provided by Mercadyne, should not to be construed as financial advice, investment advice or a solicitation to buy, sell or hold any particular security. Mercadyne makes no warranty, expressed or implied, as to the accuracy or completeness or fitness for a purpose (investment or otherwise), of the information provided in its publications, including its websites and social media posts, including video, audio or text. The published information has been sourced from publicly available sources, but Mercadyne does not guarantee the accuracy, timeliness, completeness or correct sequencing of the information, and does not warrant any results from use of the information. Readers are encouraged to consult their personal financial adviser before making any decisions to buy, sell or hold any securities mentioned in any materials from Mercadyne. Investing in securities of emerging growth companies or emerging growth economies is highly speculative and carries an extremely high degree of risk. It is possible that all of an investor’s invested capital may be lost or impaired due to the speculative nature of the companies profiled. In addition, Mercadyne’s personnel and/or investment vehicles may have or take long or short investment positions in the companies discussed in the accompanying information (the existence of any such positions will be disclosed when applicable). Mercadyne encourages readers to invest carefully and to read the investor information available at the websites of the Securities and Exchange Commission (“SEC”) at www.sec.gov and/or the Financial Industry Regulatory Authority, Inc. (“FINRA”) at www.finra.org/investors. Mercadyne is not responsible for any error, mistake or shortcoming that may be occasioned at the time of publishing of the information in this publication, any other Mercadyne publication, or its web site(s) and is not obligated to, and undertakes no duty to, update and/or correct any information. No liability is accepted by Mercadyne for any direct, indirect or consequential loss arising from the use of the information that accompanies this disclosure. Mercadyne expressly disclaims any fiduciary responsibility or liability for any consequences, financial or otherwise arising from any reliance placed on the information provided. The information that accompanies this disclosure is subject to change without notice. While the accompanying information may include details relating to Mach 100, LP (the “Fund”), a private investment fund managed by Mercadyne that relies to SEC Rule 506(c) to maintain a “private placement” of its securities, an offer of such securities may be made only by the delivery of the Fund’s Confidential Private Placement Memorandum specifically addressed (either on the cover page or in an electronic mail message) to the intended recipient.

By |2018-12-17T19:46:56+00:00December 7th, 2018|Unaccredited Newsletters|0 Comments