Sword Investors LP - Q2 2020 Investor Newsletter

The S&P 500 returned 21% and nearly recovered all its losses from the first quarter that was caused by the forced economic lockdown due to COVID-19. The second quarter was characterized by a stock market rally everyone loves to hate that has continued to chug along into the third quarter even in the face of soaring positive COVID-19 cases across the country. The message from the markets seems to be that, despite rising cases, the economic upswing, measured by leading economic indicators will likely continue due to massive stimulus packages by the Fed. While the pace of economic growth will likely slow relative to the widely unexpected V- rebound seen in May and June, leading economic indicators continue to come in positive heading into the third quarter. In short, if mostly voluntary efforts (people learning to live with the virus) in terms of mask wearing and social distancing can work to reverse the recent spike in cases, less strict economic lockdown measures can be avoided. At the same time, the Fed’s efforts continue to get traction, with real rates at all-time lows while inflation expectation continue to improve. Also, money growth (liquidity) growth continues to perform well relative to the rise in the Fed’s balance sheet. Hopefully leading to increased productivity, employment, and profitability by the private sector. So, while the Fed was initially overwhelmed, it has managed to move out in front of the curve by increasing liquidity measures and decreasing discount rates. Taken together, when one looks at current normalized 2021 earing estimates, the 34% market drop during the first quarter likely fully priced in the COVID-19 demand shock with corporations likely to recover previous earnings losses if economic prospects continue to improve over time, which has been happening.

As mentioned in our first quarter letter during the March market collapse we covered almost all of our shorts that we had coming into the beginning of 2020, sold those names that we thought were fairly valued and/or would have a tough time weathering this tough environment, and concentrated the portfolio to those names we felt have gotten materially undervalued relative to their long term outlook once the environment returned to a somewhat normal level. This strategy has worked well for our portfolio during the quarter. For the second quarter of 2020, Sword Investors LP was up 38.92%, compared with the S&P 500 return of 21% and the R2500 Growth index return of 33%.