Stanphyl Capital December 2023 Commentary

Stanphyl Capital’s commentary for the month ended December 31, 2023. Friends and Fellow Investors: For December 2023 the fund was down approximately 8.5% net of all fees and expenses. By way of comparison, the S&P 500 was up 4.5% and the Russell 2000 was up 12.2%. For the full year 2023 the fund was down approximately 26.2% net.

By way of comparison, the S&P 500 was up 26.3% and the Russell 2000 was up 16.9%. Since inception on June 1, 2011 the fund is up approximately 121.2% net while the S&P 500 is up 353.0% and the Russell 2000 is up 184.2%. Since inception the fund has compounded at approximately 6.5% net annually vs.

12.8% for the S&P 500 and 8.7% for the Russell 2000. (The S&P and Russell performances are based on their “Total Returns” indices which include reinvested dividends. Investors will receive exact performance figures from the outside administrator within a week or two. Please note that individual partners’ returns will vary in accordance with their high water marks.) Following our best year ever (+76% in 2022) this fund’s 2023 was, as Queen Elizabeth II said about r 1992, an .

The recession that I (and many leading indicators) predicted didn’t arrive, and thus our large SPY short position slammed us. However, not arriving isn’t the same as arriving, and I strongly believe (as do many of those indicators) that a recession appear in 2024 and the expensive stock market suffer severely from it.

Also in 2023, while I predicted crashing margins & earnings for our other large short position, Tesla, its stock defied fundamentals and was 102%, thus becoming what I thought was impossible: an $800 billion market cap “meme stock.” Yet in 2023 nearly all “meme stocks” collapsed under the inevitable force of “fundamental gravity” and I believe that in 2024 Tesla will do the same.

This fund has been considerably further below its high water mark than it is now and climbed back above it, and I firmly believe that it shall do so again. Please read on for much more about our positioning and the reasons behind it, starting with one chart that perfectly captures the stock market’s 2023 decoupling from “reality”… The is now for either “no landing” or a “soft landing,” yet before even the recessions the consensus is nearly for a “soft landing”—for example, here’s just one headline of many from 2007: In fact, for reasons I clearly lay out below, I still strongly believe that the U.S.

economy is headed for a landing. Yet this year the stock market rallied fiercely in response to lessening inflation and—in November and December—rapidly declining bond yields and dovish Fed speak, Meanwhile, despite myriad lurking dangers—both economic and geopolitical—the stock market is now extremely overbought and investor sentiment is extremely bullish: Why do I believe so strongly that we face a “hard landing”? For the same reasons I’ve been stating for a while: There’s an “everything bubble” built on over a decade of 0% interest rates and trillions of dollars of worldwide “quantitative easing” can implode when confronted with 5% rates and $95 billion/month in U.S.

quantitative plus tighter money from the ECB, BOJ and other central banks. Contrary to the belief of equity bulls with short memories, when an asset bubble unwinds, lower inflation and lower interest rates don’t immediately ride to the rescue. When the 2000 bubble burst and the Nasdaq was down 83% through its 2002 low and the S&P 500 was down 50%, the rates of CPI inflation were just 3.4% in 2000, 2.8% in 2001 and 1.6% in 2002, and the Fed was rates almost the entire time.

Yes, a nasty recession has been delayed due to a combination of “interest rate lag effects,” leftover “Covid cash” (which the San Francisco Fed ), and , but a hard landing will soon arrive for the following reasons: Keep in mind that even with the Fed now “on hold” with modest anticipated rate cuts in 2024, current stock market index valuations are unsustainable, as stocks are still .

According to Standard & Poor’s, Q3 2023 annualized run rate operating earnings for the S&P 500 came in at around $209 A 16x multiple on those earnings (generous for the current environment) would put that index at only around 3345 vs. its December close of 4770, while 15x would put it at around 3135.

And again, those Q3 earnings occurred during a quarter of unrepeatable growth, so earnings in future quarters are quite possible. Also, just as in bull markets PE multiples usually overshoot to the upside, in bear markets they often overshoot to the downside. Meanwhile, although the high current year over year rates of 4% core CPI and 3.2% core PCE are slowly trending down, I believe we’re in for a new core “inflation floor” of around 3% as the U.S.

government racks up while . In fact, because of Powell’s extremely dovish December comments those underlying inflation pressures, the fund now holds a substantial amount of gold (via the GLD ETF) for the first time in quite a while. Portfolio Overview Here then is some commentary on some of our additional positions; please note that we may add to or reduce them at any time… (via its OTCMKTS:VWAPY ADR, which represent “preference shares” that are identical to “ordinary” shares except they lack voting rights and thus sell at a discount).

In October VW solid financial results for the first nine months of 2023, with revenue up 15.9% vs. 2022 (+11.6% for Q3 alone) and a 6.9% operating margin. VW currently sells for only around 3.7x its 2023 earnings estimate and controls including recently IPO’d Porsche, of which it owns 75% at a current market cap (for Porsche) of €73 billion, thus making VW’s €55 billion stake worth only €1 billion less than the €56 billion market cap of VW; in other words, at current prices you’re paying just €1 billion to own all these other brands: I believe Audi is worth €30 billion, while an or may be next.

Additionally, the stock yields around 8% and VW has a full bore commitment to EVs. , a seller of air and water pollution control technologies, which in November a ­­­decent Q3, with revenue, gross margin and operating income all roughly flat year over year, at $8 million, 45% and $133,000 respectively.

Management reiterated that 2023 revenue will be up slightly vs. 2022, at around $27 million. Meanwhile, at a current price of $1.05/share with 30.4 million shares outstanding and $33.2 million in cash and Treasuries (and no debt), Fuel Tech is selling for an enterprise value of approximately $1 million.

This is the kind of company that will either ignite growth and its stock will climb higher (as its core fossil fuel pollution treatment business is in a long term, government mandated decline, its new “ ” water treatment is the potential medium term catalyst for that), or it’s cheap enough to make a good strategic acquisition target, as removing the costs of being an independent public company could make it instantly earnings accretive while allowing the buyer to acquire a nice chunk of revenue cheaply.

The risk here is that if there’s no acquisition and the water treatment business (which announced promising test data in the Q3 earnings release) doesn’t pan out, Fuel Tech will become what Buffett might have called “a cigar butt business with just a few puffs left in it” (albeit pollution controlled puffs).

Thus, this should be a very small position in anyone’s portfolio, as it is in ours. as I believe both of them moved too far, too fast in the November/December rally. I’ll revisit them if they return to lower prices. And now, Tesla… Elon Musk built Tesla’s (NASDAQ:TSLA) absurd $800 billion market cap on the back of lie after lie and fraud after fraud, and now he’s its underlying business as those lies and frauds come home to roost, simultaneously alienating potential customers and (finally!) attracting scrutiny from worldwide government regulators.

Margins and profits are , and only death spiral price slashing prevents a plunge in deliveries. Based on Q3’s financials (a similarly awful Q4 is likely to be reported in January, with yet more price cutting leading to more deliveries but at ever worsening margins), Tesla is now just a car company in financial decline, with negative earnings comps, a steadily sliding operating margin (in Q3 just 7.6%, 30% of which came from emission credit sales) and decreasing GAAP earnings ($2.12/share/year based on Q3 annualized in an industry with a typical PE ratio of around 6).

And those margins will to decline as Tesla continues to slash prices, raise worker salaries and soon , and government incentives that are being withdrawn. In 2019 Elon Musk that the hardware in then current Teslas (and every subsequent Tesla) would soon receive software to make them hugely profitable “robotaxis.” As far back as January 2016 that every new Tesla had all the hardware needed to be completely self driving and would receive the necessary software by 2018, and he “demonstrated” this with .

Yet here we are in December 2023 and the NHTSA just Tesla to make its cars self driving via an upgrade of its driver monitoring system (an action , making more severe restrictions likely). This has been a consumer fraud and for millions of people to sue Tesla for billions of dollars, while negatively impacting Tesla’s current and future sales via negative publicity that has turned its so called “Autopilot” and “Full Self Driving” into .

In 2022 ; needless to say, I agree with him. On top of Tesla’s massive “self driving” fraud, in December Reuters published of Tesla’s deadly and financially fraudulent multi year cover up of defective suspensions (providing yet more evidence of both Musk’s sociopathology and Tesla’s fraudulently low warranty reserve), thereby and, possibly related to those defective suspensions, in December it was revealed that .

Now let’s put these massive safety deceptions and cover ups into context: as bad as Tesla’s financials are lately, how much might they be “in reality”? I mean, why would anyone trust financial statements from a guy who’s been caught lying and covering up deadly safety defects multiple times over the years and cycles through CFOs the way McDonald’s cycles through Gen Z fast food workers??? In fact, in August Tesla’s most recent CFO suddenly quit (or was fired) on no notice, the latest in a of sudden and unexplained Tesla CFO departures.

This may be tied into the possibility that following the revelation of regarding the range of Tesla’s cars, his alleged , and, in addition to the above mentioned Reuters story, Handelsblatt’s story about while people continue to die in (or because of) Teslas . In fact, Tesla’s confirmed that the company has received subpoenas regarding transgressions.

Whether from these crimes or something else, Musk go down because fraudsters like him do… even if he thinks he has an “airtight strategy” (blackmail?) to combat these regulators: As for Tesla’s hype story, “AI,” the three top leaders of team left the company in October… I’m sure things there are going great! Meanwhile, Tesla will soon open its U.S.

charging stations to cars from most other manufacturers which, in turn, will adopt Tesla’s connector and charging protocol. (Those competitors are building their networks, too.) Seeing as people buy a Tesla instead of a competing EV in order to access those chargers, and seeing as all the competing charging networks will also adopt this protocol while paying Tesla (Tesla open sourced it), this will cost Tesla more in lost auto sale profits than the pennies per share it may gain from charging profits.

And Tesla has objectively its “product edge,” with many competing cars now offering comparable or better , better interiors, and better quality. In fact, Tesla ranks near the bottom of and its (out of 111!) in Germany’s rigid safety inspection system! Tesla’s faces competition from the much better made (and often just ) electric , , , , , , , , , and , as well as multiple Chinese models in Europe and Asia.

And Tesla’s Model 3 has terrific direct “sedan competition” from Volvo’s , , and , as well as local competitors in China. And in the high end electric car segment worldwide the outsells the Model S, while the spectacular new and , and , and make the Tesla look like a fast Yugo, while the , and do the same to the Model X.

And oh, the Tesla first previewed in 2019 won’t be much of a “growth engine” either, as by the time it in meaningful mass production in late 2024 that grotesque looking kluge will enter a dogfight of a market vs. , , the and . Another favorite Tesla hype story has been built around so called “proprietary battery technology.” In fact though, Tesla has proprietary there—it buys the vast majority of its cells from , and (while the “4680s” it’s trying make itself with vs.

the older “2170s” at the pack level), and regarding the real world range of its cars. And even if Tesla wind up successfully making some 4680 cells of its own, , and BMW has already it will buy them from CATL and EVE. Meanwhile, here is Tesla’s competition in cars (note: these links are updated regularly)… And in China… Here’s Tesla’s competition in autonomous driving; the independents all have deals with major OEMs… Here’s where Tesla’s competition will get its battery cells… And here’s Tesla’s competition in storage batteries… Thanks, Mark Spiegel Stanphyl Capital.