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2022 is likely to be a volatile period. The monetary help from the Fed over the past two years was unprecedented. The Federal authorities are now unwinding this help and unwinding it at a rapid pace. We are transition from a market assisted by a friendly Fed - to one - where the Fed is a headwind. They are draining the punch bowl. History suggests that these transitions are volatile and can take several months to play out. They also present fantastic opportunities in the right sectors and in individual stocks. Before we dive into the details, let’s examine the over arching factors that affect markets. What determines market direction?
 Earnings growth determines long term (multiple years) market direction. Change in liquidity (money supply) determines intermediate term (6-18 months) direction. Fed provides and takes away liquidity. At the outset of the pandemic, the Federal Reserve aggressively reduced rates and pumped record liquidity into the economy. This revived animal spirits, essential during a potential bust. Vaccines saved lives and the economy. However, as usual, the Fed kept the party going longer than they should have. A side effect of this monetary assistance (Fed + Govt) is inflation - which is the highest in decades – and has stayed high longer than the Fed expected.  Fed Actions. Fed has a dual mandate; 1) get citizens back to work and 2) keep a lid on inflation. Unemployment rate is back to 3.9%. Mission 1 accomplished. Mission 2, not so much. The latest consumer price increase was 6.9%. Therefore, the real interest rate (nominal interest which is at zero minus consumer prices) is deeply negative at (6.9%). This rate is one for the history books (see above chart). Removing monetary accommodation is the only logical choice in this economic backdrop. In layman terms, the Fed will reduce the pace of bond purchases from $120 billion per month to $0 by March 2022. In addition, markets are also anticipating 3 -4 interest rate increases in 2022. Whether the Fed will follow through with these rate increases remains to be seen, but markets will have a difficult time digesting these expectations of changes in Fed policy. A ‘full punch bowl’, aka Fed assistance, along with earnings growth, has undeniably been an important factor helping the market’s ascent. Now, the punch bowl is at a risk of running dry.  The canary in the coal mine, the weakest fall first. Markets are an iceberg, and what’s underneath the surface is most telling. While the surface is serene today, the depths have shown incredible churn and angst. The poor performance of ARK funds and frothy SPACs - is the first signal - markets are anticipating reduced liquidity. The weakest fall first. Small cap stocks have also struggled since March ‘21 (the point of maximum money growth), as they are more reliant on outside funding and tighter monetary conditions are looming. Both issues are well documented. So is market breadth. The relative weakness in discretionary stocks vs. staples stocks (as we move down market cap sizes) is also indicating a market advance that is defensive led.  The strongest fall last.
Over the years, the S&P has evolved into a more defensive and higher quality asset. Energy, industrials, material, and financials (value sectors) are a smaller representation. Growth and FANG dominate. Business valuations are determined by interest rates. Lower rates help, while higher rates hurt. Growth stock valuations are more sensitive to changes in rates. While inter-twined, falling interest rates were good for the market. Now, rates are rising, which will eventually pressure all growth assets, including the strongest. Take a look at the Growth vs. Value breakdown by market cap. The lines are increasingly sloping downwards as you move down market caps. Small cap growth stocks have underperformed their value counterparts since early 2021. As the Fed continues to raise rates, this weakness will spread to large cap stocks. It is possible that these negative conditions fix themselves. We must keep an open mind. It would require economic growth to remain strong and inflation to show consistent deceleration. This combination would allow the Fed to increase rates at a slower pace. However, yellow lights are flashing. This is also a strong sector and stock allocation signal. Value will do better than growth, and this relative strength should spread into more areas of the market. When the Fed is draining the punch bowl, it is a good time to be cautious and be ready for a deeper and prolonged correction in growth and low quality assets. The good news is that, cheaper prices and bargains are around the corner. -- This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future.
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I tried to explain the concept of a brand to my seven-year-old. Twenty seconds into my explanation, I knew I was losing her. Soon thereafter, she found a reason to run away. My explanation was complicated. So, I looked up the definition of a brand on Investopedia.
The term brand refers to a business and marketing concept that helps people identify a particular company, product, or individual. Brands are intangible, which means you can't touch or see them. As such, they help shape people's perceptions of companies, their products, or individuals. Brands often use identifying markers to help create brand identities within the marketplace. They provide enormous value to the company or individual, giving them a competitive edge over others in the same industry. As such, many entities often seek legal protection for their brands by obtaining trademarks. The Investopedia description isn’t much better either. Ultimately, I challenged myself to describe a brand in one word. I came up with ‘trust’. Strong brands evoke strong emotions. Among all the emotions, trust is the most important one. Without trust, a brand cannot sustain itself over the long term. When I started to research what a brand stood for, I started my search on - of course - Google. I didn’t go to Yahoo, Bing, Ask.com, or any other place. I know that Google will bring me the most relevant results because the core mission of the Company is to index the world’s information. An entire SEO industry exists to make sure websites are optimized to be found on Google. Not for Excite.Com. So simply put, I trust that Google just isn’t another search engine, rather the best search engine. Trust elevates a business to brand status. Costco has the lowest prices. Costco’s gross margins are 15% - compared to 25% - for the rest of retail. Therefore, Costco marks up goods at half the rate that its competition does. This includes consumer goods, gas, or hot dogs. Most Costco customers know this by experience. Costco has built one of the greatest retail businesses in history by introducing price trust. Without trust, there cannot be a Brand. Families that are on the road, traveling with hungry kids, know that they can stop at the closest McDonalds, to make them Happy! That consistency of product and fast service - regardless of store or geography – is the key ingredient for hungry travelers. It's not any meal, it’s a Happy Meal. Fifteen years ago, buying a used car was a very different and unpleasant experience It meant going to many different mom and pop dealers, finding the car you wanted, haggling over the price, and then praying it wasn’t a lemon. Believe me, I’ve been on the wrong end of this transaction, more than once. Maybe you have also. There were a lot of things this market lacked, but the main one was trust. CarMax realized this and built a large business over several decades by eliminating lots of consumer pain points. They introduced no-haggle pricing, large inventory, easy trade-ins, easy returns, and many more features. This standardization tipped the market in its favor. Most importantly, CarMax introduced trust. Consumers at a grocery store can just pick up their favorite branded product just based on the logo of that product. We know it will taste the same, it will cost about the same, but picking up that particular branded product will cut down on ‘search costs’ for looking for the best alternative. Great consumer brands convey trust through product consistency and by eliminating search costs. Twenty years ago, Online businesses had to solve a critical problem of establishing buyer trust before they were willing to transact. The trust factor was solved by creating a customer review system. A significant number of great reviews by other customers meant the seller was trustworthy. Ebay built a great marketplace by introducing Paypal as a medium of trust between buyers and sellers who did not know each other. The seller was paid only after the buyer received and verified the purchase. Trust enables all marketplaces, especially Online marketplaces. Good businesses build customer trust through consistency. Without trust, it’s a transaction. That means a competitor can undercut you by lowering prices or take away business by introducing a product that is just slightly better. Trust elevates a business to brand status. Brands are the epitome of Trust. Armed with this information, I am hoping for better results in my next conversation with my daughter. -- This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future.  My daughter wanted a set of Russian dolls to play with. To watch her pack and unpack dolls these dolls made me think about how rare certain entrepreneurs are. Here is why: 90% of new businesses fail within a few years. Therefore, the entrepreneur that can grow and sustain a new business possesses a combination of resilience and critical thinking that is uncommon. To take it a step further, entrepreneurs that build second, and third unrelated business lines are rare breeds.
Then, there is Jeff Bezos. He sits on Mt. Rushmore for entrepreneurs. Not only he has built two of the biggest, yet unrelated businesses – but the sheer scale and leadership position that these businesses command are what makes these accomplishments absolutely jaw-dropping. The first one is the well know ‘everything retail store’. The second is one of the largest technology businesses in the world. Then there are advertising, logistics, hardware, and other future bets. No wonder Amazon is one of the highest valued businesses in the world. While ‘your margin is my opportunity’ is a well-known Bezos operating principle - others are less well known. (For a list of Bezos operating principles, here is a link to a blog post by Mr. Griffin (LINK) One of Amazon’s lesser-known core operating philosophy is to look at every major cost as an opportunity for a future source of revenue. And … have they done a miraculous job of executing on this initiative! The genesis of Amazon Web Services (AWS) - often referred to as the Cloud business - was one of necessity. Twenty years ago, Amazon - like the rest of retail - was a seasonal business. 50% of Amazon’s sales happened in the fourth quarter. The company needed massive excess server capacity to ensure customers could access their websites during the holiday season. However, most of this capacity was idle during the rest of the year. Jeff Bezos had an idea to rent out this excess capacity in the other three quarters to outside companies. Amazon Web Services was born. Here is a link to a great Twitter thread by an Amazon insider for background (LINK) In 2010, Amazon spent $1.7 billion on technology & content spending. In 2021, AWS is estimated to generate ~$60 billion in revenues with greater than 30% operating margins. This business is worth between $700 – 900 billion. Not only is AWS one of the most valuable technology businesses in the world – worth more than Adobe or Salesforce – but it is also the base layer or framework that other technology businesses are building on top of. Enabled by AWS, the cloud is eating software. Today, startups just get an account on AWS, instead of buying hardware. Entrepreneurs can focus on their core idea. AWS takes care of the rest. AWS has the distinction of single-handedly accelerating the pace of innovation and disruption for the world. Amazon Marketing services (AMS) is another example. Amazon has tremendous mindshare as close to 50% of American households today are Prime members. Therefore, Amazon is an obvious starting ‘search’ point for most consumer goods. It is much easier to show relevant Ads when consumers are telling you what they want. It is also easier to measure the efficacy of that advertising in a closed-loop system, such as the Amazon platform. On the other end, there are two million third-party sellers who need to showcase their products to high intent consumers. AMS is just leveraging this existing ecosystem, which makes its accomplishment less impressive, especially when compared to AWS. However, it is just as profitable. 2021 will be the first year when revenues from AMS will be greater than the total advertising expense of the entire Amazon business! Therefore, it is only a matter of time - that advertising - like AWS, will be a net income, rather than an expense. Global advertising is $650 billion dollars. Google and Facebook dominate online advertising. Today, AMS is small in the context of Amazon’s mindshare of consumers. However, as Apple introduces stricter rules around customer data tracking and Google eliminates the use of cookies, the data that Amazon has, becomes even more valuable for advertisers. It should not surprise anyone, if AMS, like AWS turns into an advertising juggernaut. The next, and currently, the most interesting one is Amazon Logistic services or AMZL. It is no secret that instant shipping is coming to most neighborhoods in America. To ensure a great order-to-delivery experience, Amazon is investing heavily in logistics, fulfillment centers, air capacity, and last-mile delivery. The sheer scale of Amazon’s current logistics investments is jaw-dropping. It far exceeds what Fedex, UPS, and DHL are incurring … cumulatively. It goes without question that Amazon wants to support the majority of its own business. However, some of these investments are also defensive in nature. Walmart and Target, through acquisitions, have figured out how to use their stores as shipping hubs. They have also grown their digital business faster than Amazon has, albeit from a much smaller base. The big question is will Amazon build a logistics network much greater than its own need and then rent out the excess capacity to other businesses? If the past is prologue, the answer is likely yes. Lastly, it is worth asking a few questions to directionally think about future businesses to emerge out of Amazon. Alexa! what are the largest costs for Amazon today? As we automate fulfillment centers, will robots replace the majority of human workers? If so, will Amazon build the best robots that can lead to full-scale picking and packing automation? Last-mile delivery is a significant cost item for Amazon. Will the Rivian acquisition provide the platform for autonomous delivery? Will Amazon build an automated fulfillment center floor for its own use and then produce that for competitors? What about Amazon Go and seamless checkout? Then there is healthcare. The list of potential Jeff’s dolls is long. In the year 2000, Amazon recorded sales of $2.7 billion. Last year, 2020, sales were $386 billion. That is an astounding revenue CAGR of 28%. Over the past three years, Amazon has averaged a 25% return on equity. The new businesses have a higher margin and require a lot less capital. Not only has Jeff produced dolls no one thought were possible, but the dolls are getting bigger and better. This month, Jeff Bezos stepped down as the CEO of Amazon, exactly 27 years after starting the company. He insists it's still Day 1 at Amazon. -- This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future. This week, a Federal Anti-Trust judge dismissed the Federal Trade Commissions (FTC) case against Facebook. Let me start by saying that I am not a legal expert. However, we can always learn from the past. Historically, the successful anti-trust cases had one thing in common – they controlled supply. In an analog world, that mattered. Consumers had no other way of getting goods or services. However, Facebook, or other Tech giants for that matter, control demand. It is much harder to prove bad intentions when consumers keep coming back. This likely is just the beginning - not the end - of the FTCs pressure on tech giants. The outcome is …. complicated. Here is the link to the entire post from September 2019. [LINK] Is Inflation Here To Stay? For the past two decades, most companies have been rewarded for efficiency. Lean and mean was the way to operate. The global closing and reopening of businesses, government stimulus, and the lack of labor has exposed supply chains. Bottlenecks everywhere have exploded.  The knock-on effects are also unpredictable. A chip shortage has affected new car production – exactly at a time - when consumers are moving to the suburbs in droves. In the absence of new cars, used cars are a hot commodity. As of May’s consumer price (CPI) report, used car and truck prices are 29% higher. Prices of oil were negative a year ago, and now they are in the 70’s. The business models of Uber and Lyft were predicated of rational economic principles. If demand rises, then raise prices. Higher prices (surge pricing) will incentivize drivers to offer their services, which will bring the market into equilibrium. The algorithm could not plan for Covid + unemployment benefit where drivers are incentivized to be a ‘couch potato’. In short, things are upside down. However, these disruptions are temporary. Over a year, most of these abnormalities will ‘normalize’. Does this mean we will revert to the old world of low growth and low inflation?  Our economy is a complex machine. Post the global financial crisis, consumers had record low savings. The two major savings buckets: 1) home, and 2) 401k, were severely impaired. Therefore, consumer spending (green line) for several years post GFC was anemic and below trend (figure 1a from Blackstone). Post-Covid, we have an entirely new ball game. Consumption has raced above the trendline (figure 1b from Blackstone). Home prices and 401k’s are surging. It is logical to assume that spending will slow as stimulus runs out. However, as we exit 2021, the unemployment rate will be half of 2010’s level and savings rate will be more than double (see below). The simple conclusion here is that the pent-up demand to ‘live life’ after Covid is real and consumers have the resources to follow-thru. Roaring 20’s anyone?  Is hyper-inflation in the forecast? The key condition for high inflation - is growth - that creates a sustained shortage of labor. While higher consumer spending is good for employment, there are lots of offsetting factors. Given the rate at which software and robotics are entering the adoption curve, any sustained tightness in labor is hard to envision. Investments in automation will accelerate and provide a key buffer. For once, the Federal Reserve may be correct to ignore the current high inflation readings, as temporary. I am hoping they get it right. As the great Yogi said, it’s tough to make predictions, especially about the future. -- This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future.  If you missed Picks and Shovels – Part I, read this first (LINK).
Tobacco stocks were the ‘Sin Sector’ of the past generation. These businesses were built to exploit human addiction to Nicotine. Despite rising prices of cigarettes and the ultimate risk - death – many consumers had to have their fix. Rising regulation could not stop Tobacco companies and they provided great returns to shareholders over several decades. Today, the dopamine hit has replaced the nicotine hit. While many aspire to quit checking their social updates, only a select few can claim victory. Technology companies have leveraged the building block of ‘dopamine’ to build great products that leverage the basic human need to be ‘liked’. Consumer engagement is strong. While smokers were a small subset of the population, social media consumers are virtually everyone with a mobile phone. The network benefits are strong. Social media is a two-sided network. Consumers on one end, advertisers on the other. As the total time spent by society on social media networks has grown, advertising spend has migrated over from traditional channels. Today, digital consumer engagement is a bare minimum for every business. Digital spending provides better attribution – easy to know what worked or what did not – and a much higher return on investment over alternatives. 30%-40% of venture capital raised is spent on advertising. Startups may not pay rent or taxes, but everyone pays the advertising tax to acquire new customers. If consumer acquisition cost (CAC) is the new rent (Link to an INC article) then social media properties are the new landlords. The distribution and scale moats are wide and deep. These companies make money by maximizing the amount of time spent on their platforms. To keep consumers interested, they innovate. Innovation has no limits. Video and original programming have been an easy way to increase the time spent. However, the progress in Augmented and Virtual Reality (AR/VR) has the potential to be the next platform of change. While we are already trying on clothes and interacting with brands using AR, the advancement and adoption of this technology has the potential to be truly revolutionary. The scale and range of applications would span multiple categories – from personal connection, education, science, entertainment, and work. “Imagine wearing a pair of glasses that lets you visit with your parents no matter where you are, tour the Louvre on your lunch break and walk and talk with a friend on the other side of the planet and truly feel that they are at your side” – Social Media Company It took two decades to go from a clunky, mobile box phone, to a supercomputer in our pockets. With the dizzying rate of improvement in chip design, gaming, 5G, and cloud computing, new platforms are evolving fast. Therefore, we are likely to go from a bulky headset or glasses to something elegant and consumer-centric much faster than we believe. The day that I can box with Mike Tyson, play one-on-one basketball with Michael Jordan is not that far off. Imagine this new “new world” collide with advancements in data science where advertisements are the ones we want to see. A complex auction process that quietly runs in the back connects advertisers with consumers who are most likely to enjoy that piece of content. While this might be hard to envision today, this is the goal. On the flip side, AR/VR might not evolve to engage consumers. Advertising is inherently a cyclical business. The tide is venture capital spending could recede in a recession. The regulatory drumbeat could get louder and act against big Technology. The investing business is full of risks, and unless one has a way of handicapping and underwriting the risks and the rewards, it is better to stay on the sidelines. The best investments are the ones where consensus opinion on a business is the glass half empty, but we see enormous future opportunities. This opportunity also needs a leader who is a proven visionary, a valuation that is mouth-watering, with a strong core that can handle external setbacks. Then we sit and wait…. --- This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future. What is a ‘Picks and Shovels’ business?
A strategic business that becomes the key cog in bringing a product or service to market and extracts the most value out of the product chain. Here is an alternative, and a simpler explanation straight for Wikipedia: A pick-and-shovel play is an investment strategy that invests in the underlying technology needed to produce a good or service instead of in the final output. It is a way to invest in an industry without having to endure the risks of the market for the final product. The investment strategy is named after the tools needed to take part in the California Gold Rush. The strategy is named after the tools used to mine for gold during the California Gold Rush of the 1840s and 1850s. Prospectors needed to buy a pick and a shovel to be able to mine for gold. While there was no guarantee that a prospector would find gold, the companies that sold picks and shovels were earning revenue and thus were good investments. The Microsoft operating system or the Intel chip are great examples. While the personal computer industry revolutionized the way we worked, PC companies spent most of their time fighting for survival. It was an undifferentiated industry. Even Apple, one of the most innovative companies today, had to pivot its strategy, to avoid bankruptcy. On the other hand, the Microsoft operating system and the Intel chip were the picks and shovels. It did not matter if Dell, Compaq, IBM, or Gateway won or lost the market share battle. As long as consumers bought more PCs, Microsoft and Intel won. Every single time. Here is another example. While air travel provides tremendous benefits to passengers, airline businesses have never captured this value for their investors. Why? Every airline virtually offers the same experience. The cheapest ticket usually wins. To make matters worse, unpredictability with operating conditions (weather), volatile input costs (oil), massive fixed costs, and large investments to buy new planes to improve service standards leave the cash coffers always on empty. However, Aftermarket Parts businesses that support aerospace and defense have enviable track records. They provide cheap spare parts that are critical to fleet repair and maintenance. Airline companies want cheaper parts alternatives, to improve airline profitability. Once a ‘part’ gets approved, it's very sticky. More planes and more travel - lead to more wear and tear - and a greater need for parts. Within the entire value chain, these businesses generate the highest returns on capital. Aftermarket product businesses are the picks and shovels in aviation. This brings us to the newest iteration of Picks and Shovels - The commerce enablers. Covid was a massive catalyst for E-commerce, and I wrote about it early in the pandemic (LINK). Every business was forced to invest in an online presence. Lots of new E-commerce businesses were formed out of necessity last year. To add fuel to the fire - during the time of overwhelming demand - Amazon made a strategic decision to restrict sales to essential consumer goods. Merchants that relied on Amazon, as their sole sales channel, had to rethink strategy and establish other channels to sell. As a result, E-commerce penetration grew more in one year than in the previous half-decade. When most physical retail was closed and we (consumers) were forced to search for buying alternatives, getting customers to buy (customer acquisition) was easy and low (no) cost. Those were the good old days. However, as the world reopens, and we get back to some of our old habits, these E-commerce companies face a different world. Instead of customers coming to them, they must seek them out. Competition has intensified. The only way to grow is to spend generously on digital advertising to acquire new customers. In this world, the picks and shovel companies are the digital enablers. Social media companies - that already have our attention - will attract a disproportionate share of advertising dollars. If history is a guide, a majority of the newly formed E-commerce businesses will struggle. E-commerce requires massive scale in logistics and customer acquisition. The climb to the top of the ‘scale’ mountain is arduous. However, the best advertising businesses will generate strong returns over the foreseeable future. They are the key cog in the wheel. Digital advertising is the pick and shovel play on E-commerce. In Part II, I discuss how Social media companies make money. --- This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future.  Over the past decade, Bitcoin has ascended into mainstream investment discussions based on 1) increase in value and 2) the rabid nature of its ownership base. Rather than a programmable network, or a transacting medium, Bitcoin has evolved simply into an investment medium – an alternative commodity of sorts. The 45% drop in value over the past month has ignited the same-old debate on the value and utility of Bitcoin. Bitcoin, along with other Cryptocurrencies, are evolving platforms. Therefore, it is critical to keep an open mind to new information and developments, instead of getting locked into a dogmatic belief that is for, or against. Here is the framework for owning Bitcoin the way I see it today.
Pros of Owning Bitcoin
Cons of Owning Bitcoin
When an asset lacks underlying cash flow, price depends on the emotion of the market. Momentum then becomes the strongest emotion. High prices attract buyers and low prices bring on more sellers. If you look at the large swings in bitcoin over the past decade, momentum is the easiest explanation. It is the ultimate confidence game. --- This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future. A faster deployment of vaccines has improved the odds of a faster re-opening and economic recovery. Small caps as well as cyclical stocks have outperformed the market over the past six months. However, most intermarket relationships are indicating that this outperformance is in its late innings and investor should look to reposition portfolios. Here is a look at the Dark Arts of Intermarket Analysis. --- This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future.  GameStop’s (GME) Lightning in a Bottle
Everyone loves an underdog story and boy do we have a great one. Make no mistake - DAVID (LINK) - found an inefficiency. He found a boat that was tilted too much on one side (too many funds betting on lower prices) – and flipped it over. He beat Goliath (Wall-St’s elite) at his own game. Markets are a meritocracy. The best ideas always win, regardless of who or where they come from. However, a group of retail investors by themselves - CANNOT ever change market dynamics for too long. Not even in single securities. Other sophisticated funds took full advantage of the market dynamics. Then the unexpected happened. A good investment thesis then escalated into an anti-establishment movement. A movement that is looking for justice for Main street – one that is expressing the frustration felt by masses that feel disillusioned - and feel left behind. The score card, GME rose 400% in a week, a one-in-a-hundred-year event. Cornering the market Several stocks shot up like rockets last week. These are markets that are cornered by artificial constraints, not by fundamental changes in businesses. However, nothing is ever new in financial markets - simply because human behavior never changes. While the narrative is always different, the iteration of fear and greed is always the same. Speculators have been cornering markets since the beginning of time – from railroads, onions, silver, and now ….. in various securities. (LINK). It is purely an artificial scarcity in supply – which works for a short period – but always ends badly for the speculators. The Un-intelligent Investor Media outlets have reported a change of the guard. After a decade of mostly investing in index funds, the retail investor is engaged. In the case of GME and other stocks this week, a small percentage of early investors will reap handsome rewards. The majority will lose … and lose big. Stocks over time go to what the business is worth. There are no exceptions. Does anyone really believe that GME, a brick-and-mortar videogame middleman, is worth a $100/share, let alone $300/share or $22 Billion in equity value? In the worst case, regulators will step in, to stop a run on the markets. Losses will only bring more disillusionment, further emphasizing that the system is rigged against the little guy. It is sad. Markets offer unlimited opportunity to those who are willing to get rich slowly – and unlimited losses to those looking to get rich overnight. --- This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future. A new year brings a flurry of investment predictions. While putting precise targets on where markets end the year is silly, working through a list of big picture pros and cons is a good intellectual exercise. Markets are forward-looking, and this exercise helps un-anchor from the events of the past and take an inventory of the future. Here is a list of a few things that I consider important. Here are the Pros.
Always bet on human ingenuity. The list of potential setbacks is long: 1) The vaccines might not be as effective as advertised, 2) new strains might accelerate the spread of Covid, or 3) a large portion of the population might not take the vaccine. However, I believe the likely case is that vaccine logistics and treatment availability will improve, and most at-risk populations will receive a vaccine. This points to a higher probability of ‘life back to normal’ in 2H 2021. Strength begets strength. Public companies survived due to their scale while small businesses took the brunt of Covid. As we return to normal, the scale benefits will magnify the competitive advantages of larger enterprises. This is an underappreciated element of the market advance. Durable operating leverage. Businesses were forced to rapidly cut costs during Covid. Revenues will grow faster than expenses as the economy returns. Earnings growth will remain strong and profit surprises will continue for multiple quarters. Improved household finances. It has taken more than a decade for consumers to recover after the near-death experience of the financial crisis. A combination of forced savings of ‘everything from home’ in 2020 and help from government stimulus has left consumer finances in a strong position. Strong new business formation. The latter half of 2020 had the highest new business formation in over 15 years. Large cloud platforms, social networks, and global marketplaces have created a plug and play system for new business owners. Entrepreneurs can focus on their core skill set and outsource the rest. Here is a list of Cons… Peak QE. The Fed is growing the money supply by 25% annually. It is unlikely that this rate of money pumping will be surpassed and therefore serve as a headwind to market multiples. Interest rates are too low. The justification for above-average valuation is based on historically low-interest rates. If rates stay this low over the next 5 years, stocks will go a lot higher. However, a rebounding economy and economic stimulus will force interest rates upwards. While this is a normal course for a typical economic cycle, this cycle is quite atypical. A rapid rise in interest rates will be turbulent for markets. Valuation above average. While current market valuation is above average, it has to be viewed in the context of ultra-low interest rates and a once in a 100-year pandemic. Most businesses will get back to a normalized earnings trajectory in 2022-23. Understanding valuation within that context makes it a mild negative. Return of the individual investor. The rise of the Robinhood trader has brought on a new level of option speculation. The size of YOLO (you only live once) speculation has grown and this lottery call option buying is the biggest near-term risk to the market. However, this is a microbubble that will dissipate over time without causing a major market event. In hindsight, 2010 or 2017 was a great time to invest, but felt uncomfortable, or at times …. wrong. 2021 is no different. As investors, it is paramount to look at opportunities and risks dispassionately. Valuation is a deterrent to returns at extremes, and we are far from that. We are emerging from a deep recession, with a long runway for economic and earnings growth. Markets have partly anticipated that and are likely to enter a period of consolidation (choppy sideways move). In the big picture, the pros outweigh the cons by a large margin and we are still in the early innings of a multi-year market cycle. --- This material does not constitute an offer or solicitation to purchase an interest in Latticework Partners, LP (the "Fund"). Such an offer will only be made by means of a confidential offering memorandum and only in those jurisdictions where permitted by law. An investment in the Fund is speculative and is subject to a risk of loss, including a risk of loss of principal. There is no secondary market for interests in the Fund and none is expected to develop. No assurance can be given that the Fund will achieve its objective or that an investor will receive a return of all or part of its investment. This material contains certain forward-looking statements and projections regarding the future performance and asset allocation of the Fund. These projections are included for illustrative purposes only, are inherently speculative as they relate to future events, and may not be realized as described. These forward-looking statements will not be updated in future. |