As always, this is not investment advice! Please do your own due diligence and take your own financial situation into account. Everyone has a different financial situation, which means different tolerances for risk and ability to take risk. What is appropriate for me may not be appropriate for you.
During the month of June1, the Paper Portfolio returned 6.32% vs 4.02% for the SPY. This brings YTD performance to 41.9% vs 16.8%, respectively. Since inception, the Paper Portfolio remains slightly behind at 47.4% vs 59.3%, respectively.
June saw markets continue to melt up. Not only did the Fed pause rate hikes, the economy continues to hum along better than expected. Although the Fed did signal potential need for more hikes depending on how inflation evolves, we are likely very close to the end of this hiking cycle. Headline inflation has been turning down since June of 2022 and recently accelerated down sharply with the latest CPI number coming in at 4.0%. The next CPI number is likely to start with a 3. Core inflation remains stickier in the 5%-ish area, but this is also likely to start declining meaningfully in the coming months as recent weakness in rents starts to filter through to core inflation.
All of this seems to suggest that the path of least resistance continues to be up. Markets have certainly performed well since bottoming in Q4 2022, but many investors remain skeptical. The fuel for every upmarket is always skeptics, and plenty remain. Although there are areas that are starting to see some froth again (e.g. perhaps peripheral AI plays, some meme stonks, certain areas of crypto), this rally remains hated and far from euphoria.
Beyond the domestic macro factors that buoy the market, there are other reasons to be cautiously optimistic.
One of the largest incremental negative surprises for global markets this year has been weakness in China. At the beginning of the year, China’s highly anticipated reopening was expected to be a major driver of global growth. So far, the reopening has been more disappointing that expected. While Chinese growth may remain weaker than expected, Chinese authorities seem ready to engage in at least a little incremental policy loosening. This will likely be good for global equity markets as capital becomes more readily available in the world’s second largest economy.
On the other side of the Old World, Europe also seems to be on the cusp of great change, perhaps for the better. Recently, Putin’s grip on power appeared to be swiftly (and surprisingly easily) challenged by Prigozhin, the head of the Wagner mercenary fighting group. Wagner forces not only took an important military base from the Russian military, Wagner moved from the front lines to nearly within 100km of Moscow without much of a challenge. It’s clear that there are deep divisions within Russia’s ranks. Although Putin did successfully diffuse the situation, the Ukraine war may be on the cusp of a more decisive turn. There remains a chance that Putin could escalate the situation to more terrifying levels such as with the potential usage of nuclear weapons. But sooner or later Putin may begin to see that even if he has the power to win any battle, he is now only playing to not lose the war.
And globally, the world is once again in the throes of great technological change. You’ve likely heard more than you care to know about AI since the start of this year, and now Apple appears to be in the early innings of ushering in the next computing shift with the Vision Pro headset. AI and AR / VR / mixed reality computing (or as Apple puts it, Spatial Computing) will likely transform the world significantly in the coming years. While great change brings great risk, it also brings great reward. The changes now reverberating throughout the world are changes that will enable the world to do more Work. All money comes from the performance and promise to do more Work. And if this next technological shift can enable us all to do more, we will be on the cusp of a new wave of Money creation that is up for the taking.
All we need to do is listen for the faint whispers from the Future of what’s next.
Turning to individual names in the Paper Portfolio, the month was driven by a few key names.
1/ KIND – Nextdoor retuned 15.6%, largely due to inclusion in the Russell indices. This builds on top of the strong performance delivered in May. Despite the significant run since reporting 1st quarter results, Nextdoor remains significantly undervalued relative to its long term potential and strong balance sheet.
2/ PINS – Pinterest returned 16.5%. Pinterest has now recovered from post-earnings weakness. Investors appear to be gaining confidence in the company’s transformation into a shopping destination, especially as it inks new advertising partnerships including with Amazon.
3/ SDGR – Schrodinger returned 40.0% as investors increasingly recognize the AI potential of the platform. Schrodinger’s platform uniquely combines AI with physics-based capabilities that promises to deliver better results than either alone.
4/ U – Unity returned 40.1% as it benefited from both the AI and AR / VR / mixed reality themes. Apple disclosed a partnership with Unity to bring apps to the Vision Pro headset. In addition, Unity announced new AI features and an AI marketplace that promises to help Unity customers accelerate game / app development.
On the losing side, Cloudflare (-7.5%), Moderna (-6.9%), and Okta (-6.1%) were some of the larger drags, but there are no major items of note.
For the July rebalancing, the Paper Portfolio will add a 3% position in ENVX (Enovix). Enovix is an aspiring US-based battery company with promising, differentiated technology. In contrast to currently commercialized batteries, Enovix’ batteries promise materially higher safety / lower fire risk with better efficiency. While the company has not yet commercialized its batteries, it is quickly ramping production capabilities and have significant interest from many top tier companies / entities including the US military. The management team is also stellar with highly accomplished executives. Given that it is not yet generating meaningful revenues, this is a higher risk holding. However, the potential upside is significant enough where I believe it makes sense to hold a small position.
Alright, that’s all folks. Onward. Let’s see what July brings.
Disclosures: Of the stocks mentioned, I own shares in NET, KIND, PINS, SE, MRNA, SDGR, U, OKTA, SNAP, and ENVX. I have no intention to transact in any shares mentioned in the next 48 hours.
1 June performance metrics provided run from 6/2 to 6/30. Due to a slight delay in the May update, May performance metrics ran through 6/2 instead of 5/30.
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