2019 September CAD

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0.04% MTD

5.55% YTD

Dear Partners,

For the month of September, the fund was up marginally at 0.04%.

We continued to rotate the Fund’s capital away from strategies that carried excessively high securities lending costs. As we have mentioned in the past, these charges have reached as high as $1 million dollars a month. We have realized this is a racket created by investment banks offering us unrealistically cheap convertible bond and warrant offerings. The banks did this knowing we would borrow shares to short and hedge the debenture or warrant. On a tour of the underground parking garages in Toronto’s financial district, it was evident that members of the securities lending departments owned the newest and fastest sports cars. Simply put, there is no free lunch in this business, and we got stuck with a fat bill. Bravo guys. We acknowledge we were wrong, and like all fast money strategies, this one is becoming a distant memory.

In our August letter, we explained how the debt of Japan, The European Union, and the United States have now reached a point where they must maintain interest rates near zero or even negative, or else face acceleration of their national debt. Japan’s total government revenue was 30% of GDP, and the national debt is 2.5 times GDP. This is equivalent to an economy with $100 of GDP creating revenue of $30 to support all its government programs and services and a debt of $250. FYI, Japan has run a deficit of at least $3 per year for 27 years. Based on this fact set, rates cannot go back to positive in Japan anytime soon (1% interest rates will double their annual deficit). The European Union has picked up on this and has pushed its rates to negative as well. The US is quietly (except for the president) trying to move rates down from their staggeringly high level of 1.7%. Last week, the US Federal Reserve announced they will start buying $60 billion of short dated T-bills every month to accomplish this. Rates are not going up. Repeat - RATES ARE NOT GOING HIGHER! Those days are gone and adapting to this means uncovering new opportunities that thrive in low rate environments.

Our conclusion is that investors want to own more assets that don’t have negative cost to hold, and that they can only hold so much in broad market equities. To adapt to this reality, in the past 45 days we have met with or listened to presentations from 75 precious metals companies and have been impressed with what we discovered. Most have no net debt and have learned over the past bear market (the last 7 years) to operate well below the current market price of gold/silver. We see an opportunity in this asset class and have initiated a medium-term strategy of being long the best of the best low-cost cash flowing producers and short a combination of the metal and the ETFs for the majors and the juniors. This hedged portfolio has had an unlevered return of 17.8% annualized over the last 5 years with a maximum draw down of 21% and a total return of 127%. The drawdown occurred when the US and the European Union both promised they were ending their quantitative easing programs. As they are politicians, a promise isn’t the same for them. We believe the fundamental backdrop for the commodity coupled with quantitative analytics and solid fundamental analysis will provide Caravel Cad Fund Partners an even more attractive return going forward. We look forward to continuing this exercise of identifying more opportunities and returning the Fund to its goal of delivering 20% returns.

We thank you for your continued confidence and capital.

Caravel Capital