Newsletter Volume 2, Issue 3



Investment Performance January



VOLUME 2, ISSUE 3: March 2019

Dear Friends!
For the month ending March 31, 2019, Mach 100 LP was down 0.54% Net. This compares to the S&P 500 that was up 1.79% for the month, the NASDAQ Composite which was up 2.61% and the Russell Microcap index which was down 2.95%. For the quarter ending March 31, 2019, Mach 100 LP was Up 2.86% Net. This compares to the S&P 500 that was up 13.07% for the quarter, the NASDAQ Composite which was up 16.49% and the Russell Microcap index which was up 13.10%. As we are a non-correlated fund, we do not expect our investment performance to parallel index performance; at least we hope not. I will discuss this further below in the “Portfolio Composition” section of the newsletter.

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

March equity markets continued to report positive investment performance across many indices. The exceptions were healthcare, REIT’s and energy, as those sectors were down. As I have been saying since mid-last year and contrary to the financial media pundits last fall, the economy is strong and remains strong. First quarter GDP recently reported, rose 3.2% versus the expectation of 2.3%. Interestingly enough, during the first quarter of 2019, consumer spending decelerated, to increase by only 1.2% vs. the fourth quarter of 2018, when it increased by 2.5 %. Business spending slowed, intellectual property spending increased and despite the accelerating economy, inflation cooled with personal consumption expenditures rising 1.3%, less than forecast. To make things more confusing regarding consumer behavior, the University of Michigan’s consumer sentiment increased recently to 97.2 from 96.9. Weekly unemployment claims rose at the end of April to 230k, representing the largest weekly increase since late 2017.

Cautionary words are now coming from the credit card industry. It seems that several card issuers which reported last week, noted charge-offs (losses from cardholders that are in permanent default) rose to 3.8%, the highest since mid-2012; and balances that are more than 30 days past due increased across all card issuers. If charge offs continue to increase, It may be telegraphing financial challenges for the card issuers; and a macro indicator as well.

EARNING SEASON

To date, 46% of the companies in the S&P 500 have reported actual results for Q1 2019. In terms of earnings, the percentage of companies reporting actual EPS above estimates (77%) is above the five-year average. In aggregate, companies are reporting earnings that are 5.3% above the estimates, which is also above the five-year average. In terms of sales, the percentage of companies (59%) reporting actual sales above estimates is equal to the five-year average. In aggregate, companies are reporting sales that are 0.3% above estimates, which is below the five-year average. On a quarterly basis, the S&P 500 is reporting a decline in earnings of -3.9% vs. estimates for the first quarter of 2019.

In terms of earnings from a sector standpoint, according to FACTSET, six of their eleven sector universe are reporting year-over-year growth in earnings, led by the Health Care and Utilities sectors. Five sectors are reporting a year-over-year decline in earnings, led by the Energy and Information Technology sectors. Looking at revenues, also according to FACTSET, nine of the eleven sectors are reporting year-over-year growth in revenues, led by the Health Care and Communication Services sectors. Two sectors are reporting a year-over-year decline in revenues, led by the Information Technology sector. The forward 12-month P/E ratio of the S&P 500 is now 16.8, which is above the five-year average and above the 10-year average. As a point of reference, during the Great Recession of 2008, the S&P 500 had a forward P/E ratio of 10, at the bottom of the market cycle.

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, other commodities and currencies); and volume is the fuel of price. Currently, the strongest sectors, measured by price performance, are: Energy (solar); Finance (mortgage and related services); semiconductors (fabless); computer software (enterprise and security); building (residential and commercial) and beverages (non-alcoholic). Weakest sectors: Retail (drug stores); Medical (wholesale drug suppliers); transportation (equipment manufacturing); commercial services (document management); steel producers. It is strange to me that steel producers are experiencing weak price performance when many (most) are reporting record operating results. I can only surmise that analysts are projecting flattish results for the second half of the year, implying peak earnings now. I am not sure I agree with their projections (I don’t), but one cannot argue with money flow. Money flow is a function of volume which consists of investors voting with their wallets. As I always say: “Volume is the fuel of price. Sentiment is the fuel of volume. Awareness is the fuel of sentiment.”

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 90% Long and 10% in cash. Therefore 90% Net Long.

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: artificial intelligence (energy savings and monitoring for buildings and renewable energy); beverage; electronics manufacturing (additive 3D Printing); energy storage (production of lithium ion batteries); fintech (financial technology); leisure gaming (transaction processing for sports betting); media (digital advertising and content distribution); medical device (fertility and robotics); and software (mobile social games).

PORTFOLIO COMPOSITION

Mach 100 LP often takes an activist role with our small cap and microcap portfolio companies. This is a positive, supportive role; not an adverse one, with no desire for a change in control, board consternation and without undue publicity. Our activism is generally in four main areas: Capital structure; Financing; Investment Community Visibility; and Business development. These are the areas where small cap and microcap companies require the most assistance and support. We work closely supporting the CEO, executive management and board to effect major positive change, specifically to create more shareholder value in a shorter period of time and to maximize long term shareholder value; more so than if we were merely passive.

While we recognize that our Fund, Mach 100 LP is currently significantly underperforming the indices during the 1st quarter of 2019, we believe our portfolio is very well positioned to perform during the second half of this year. The market capitalization tiers in which we invest, consist of small capitalization companies ($300 million-$2 Billion) and micro-capitalization companies ($50 million to $300 million). Because these market capitalization tiers do not correlate to the broad market indices, the distribution of returns is not linear. Meaning that during some months and quarters the portfolio will outperform the indices. During others it will not; as positive returns are not generated every month. However, historically, during the last ninety (90) years, small capitalization and micro-capitalization equities have significantly outperformed the broad market indices and micro-capitalization equities during the past 90 years have produced annualized returns of twenty percent (20%), twice the returns of the S&P 500. That is the reason we focus upon small and micro cap equities, seeking non-correlation and absolute returns. Mach 100 LP is an absolute return vehicle. We are not seeking to just perform slightly above the indices. While there are no guarantees, on an annual basis we are seeking to produce returns in excess of the returns generated by microcap securities during the last 90 years. In order to achieve our investment return objective, we conduct deep due diligence, take an activist role in many of our portfolio companies and take concentrated positions. We look forward to the second half of 2019 and we think that with the Fund’s portfolio well positioned, now is the time to invest in Mach 100 LP.

FUND DESCRIPTION

Mach 100 LP is a non-correlated, activist, small and micro-capitalization ($50 MM-$2B) long/short, equity focused fund, possessing concentrated positions and capitalizing on discovery premium and information arbitrage. The Fund utilizes fundamental quantitative and qualitative analysis, technical analysis, assessment of securities and broad market behavior, trading psychology and return risk profiling to determine security selection and portfolio exposure across asset classes, instrument types, industry sectors and geographies. The Fund’s objective is to generate absolute returns with lower correlations than typical equity market benchmarks.

Activism: Mach 100 LP often takes an activist role with our small cap and microcap portfolio companies. This is a positive, supportive role; not an adverse one, with no desire for a change in control and without undue publicity. Our activism is generally in four main areas: Capital structure; Financing; Investment Community Visibility; and Business development. These are the areas where small cap and microcap companies require the most assistance and support. We work closely supporting the CEO, executive management and board to effect major positive change, specifically to create more shareholder value in a shorter period of time and to maximize long term shareholder value; more so than if we were merely passive.

Portfolio Structure: The Fund is structured such that its portfolio composition seeks non-correlation to equity benchmark indices with high return-risk profiles and balance in terms of instruments, liquidity, volatility, sector weighting and their corresponding method to be effectively hedged. The Fund invests both long and short and executes its hedged strategy in the portfolio in several ways, with the goal of keeping its hedging as simple as possible while maintaining significant flexibility to pursue its investment objectives. The Fund may also participate in structured transactions. The Fund invests primarily in the United States in securities that are traded on U.S. markets and U.S. dollar denominated, but occasionally some securities may represent foreign companies or trade on a foreign exchange (e.g. Canada, Europe and Asia).

Structured Transactions: We have deep and broad experience with structured transactions and have been investing in them successfully for the last 25 years, since our first fund, DNB Fund Partners LP, in 1994. Accordingly, a component of our portfolio consists of structured transactions, including but not limited to: PIPE’s (private investments in public equity); hybrid securities; equity linked notes (ELN’s); convertible debentures with equity and equity linked derivatives; and unregistered common stock with warrants. These structured transactions have several advantages over buying straight equity. Advantages vary by instrument purchased and include: Significantly enhanced returns; Principal protection (until call, conversion or maturity); Creditors preference (until call, conversion or maturity); reduced volatility; ability to earn a positive return in low-yield or flat equity environments; and tax efficient access to fully taxable investments. In terms of portfolio construction, these instruments provide the potential for high alpha with low beta. Applying our deep experience with forensic diligence and comprehensive analysis, enables us to navigate the complexities (e.g. instrument characteristics, credit quality, initial limited liquidity, valuation, registration process, deposit method) of structured equity transactions and capitalize upon their high return-risk profiles and other advantages.

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 |2019-06-19T15:31:02+00:00June 19th, 2019|Unaccredited Newsletters|0 Comments