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Ori Eyal's July 2009 Letter to Investors in Emerging Value Capital Management

Ori Eyal's July 2009 Letter to Investors in Emerging Value Capital Management

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Published by The Manual of Ideas
Emerging Value Capital Management, LLC
July 2009 letter to investors
Dear Partners and Shareholders,
Following is our tenth monthly letter to investors. As always, I am happy to speak with partners
(and potential new partners) so please do not hesitate to call me with any questions, thoughts or
comments.
Fund Performance:
During July 2009, EVCM Fund returned an estimated +5.3% (net to investors). During this same
time period, the S&P500 (SPY) returned approximately +7.5%, and the MSCI All Country World
Index (ACWI) returned approximately +9.4%.
Since inception (10/15/2008), EVCM Fund returned an estimated +27.8% (net to investors).
During this same time period, the S&P500 (SPY) declined approximately -1.0%, and the MSCI All
Country World Index (ACWI) returned approximately +6.5%.
The stock market rally continued in full force in July. EVCM fund had a nice return, but lagged the
markets due to our defensive positioning. We remain very defensively positioned with lots of
cash and bonds, high quality stocks, a few shorts and hedges, and disciplined position sizes.
When stock markets decline again (and sooner or later they will) our risk aversion should help
protect our capital.
As before, I caution investors not to focus on monthly returns (monthly results are mostly random
and should not be extrapolated). Rather, I hope you will evaluate my performance over a multiyear
period.
July 2009 2009 YTD Since Inception
(10/15/2008)
EVCM – Net to Investors +5.3% +22.3% +27.8%
S&P500 (SPY) +7.5% +9.5% -1.0%
MSCI All Country World Index (ACWI) +9.4% +16.4% +6.5%
*Please note that individual investor net returns will vary due to the timing of one's investment. The results reported above
are unaudited estimates and may be subject to change.
152 West 57th Street
Floor 46
New York, NY, 10019
Tel1: 312-363-8599
Tel2: 212-277-5607
Fax: 212-974-1850
Page 2 / 4
Value of $1000 invested at inception:
$700
$800
$900
$1,000
$1,100
$1,200
$1,300
$1,400
10/14/2008
10/31/2008
11/30/2008
12/31/2008
1/31/2009
2/28/2009
3/31/2009
4/30/2009
5/31/2009
6/30/2009
7/31/2009
EVCM Fund SPY ACWI
Stock market rally continues:
The stock market rally continued in full force in July. For both the economy and for individual
companies, anything less than a terrible news report was viewed as a bullish sign. Many
corporations reported something along the lines of: “the rate of decline is slowing”. Dusting off
my old college calculus book, I figured out this statement seems to mean that the second
derivative of sales with respect to time is positive. But why stop at the second derivative? I
suspect it is only a matter of time before we go to the third derivative of sales and some company
reports the “great news” that: “the rate of the rate of decline is slowing”.
Like with most other rallies, there is a “story” being told to justify the bullishness. The current
story is that the crisis of 2008 has caused corporations to dramatically reduce their expenses and
employee counts so that they are now ultra lean and efficient and will post great results once the
economy recovers. While this story may have a kernel of truth to it, it makes me wonder how
inefficiently these corporations must have been running prior to 2008. Reducing unnecessary
costs and increasing operational efficiency is part of the ongoing job of every manager. It should
not be undertaken only in response to a crisis.
As far as I can tell both the macroeconomic and company specific data remain weak. At best we
can say that the economy and corporate results are, on average, less weak than we expected.
Stock prices ultimately follow corporate earnings and it is difficult to see corporate earnings
increasing significantly given the strong macro economic head winds we still face. While I am
continuing to see some attractive investment opportunities, our overall portfolio positioning
remains defensive and conservative. I am unwilling to ris
Emerging Value Capital Management, LLC
July 2009 letter to investors
Dear Partners and Shareholders,
Following is our tenth monthly letter to investors. As always, I am happy to speak with partners
(and potential new partners) so please do not hesitate to call me with any questions, thoughts or
comments.
Fund Performance:
During July 2009, EVCM Fund returned an estimated +5.3% (net to investors). During this same
time period, the S&P500 (SPY) returned approximately +7.5%, and the MSCI All Country World
Index (ACWI) returned approximately +9.4%.
Since inception (10/15/2008), EVCM Fund returned an estimated +27.8% (net to investors).
During this same time period, the S&P500 (SPY) declined approximately -1.0%, and the MSCI All
Country World Index (ACWI) returned approximately +6.5%.
The stock market rally continued in full force in July. EVCM fund had a nice return, but lagged the
markets due to our defensive positioning. We remain very defensively positioned with lots of
cash and bonds, high quality stocks, a few shorts and hedges, and disciplined position sizes.
When stock markets decline again (and sooner or later they will) our risk aversion should help
protect our capital.
As before, I caution investors not to focus on monthly returns (monthly results are mostly random
and should not be extrapolated). Rather, I hope you will evaluate my performance over a multiyear
period.
July 2009 2009 YTD Since Inception
(10/15/2008)
EVCM – Net to Investors +5.3% +22.3% +27.8%
S&P500 (SPY) +7.5% +9.5% -1.0%
MSCI All Country World Index (ACWI) +9.4% +16.4% +6.5%
*Please note that individual investor net returns will vary due to the timing of one's investment. The results reported above
are unaudited estimates and may be subject to change.
152 West 57th Street
Floor 46
New York, NY, 10019
Tel1: 312-363-8599
Tel2: 212-277-5607
Fax: 212-974-1850
Page 2 / 4
Value of $1000 invested at inception:
$700
$800
$900
$1,000
$1,100
$1,200
$1,300
$1,400
10/14/2008
10/31/2008
11/30/2008
12/31/2008
1/31/2009
2/28/2009
3/31/2009
4/30/2009
5/31/2009
6/30/2009
7/31/2009
EVCM Fund SPY ACWI
Stock market rally continues:
The stock market rally continued in full force in July. For both the economy and for individual
companies, anything less than a terrible news report was viewed as a bullish sign. Many
corporations reported something along the lines of: “the rate of decline is slowing”. Dusting off
my old college calculus book, I figured out this statement seems to mean that the second
derivative of sales with respect to time is positive. But why stop at the second derivative? I
suspect it is only a matter of time before we go to the third derivative of sales and some company
reports the “great news” that: “the rate of the rate of decline is slowing”.
Like with most other rallies, there is a “story” being told to justify the bullishness. The current
story is that the crisis of 2008 has caused corporations to dramatically reduce their expenses and
employee counts so that they are now ultra lean and efficient and will post great results once the
economy recovers. While this story may have a kernel of truth to it, it makes me wonder how
inefficiently these corporations must have been running prior to 2008. Reducing unnecessary
costs and increasing operational efficiency is part of the ongoing job of every manager. It should
not be undertaken only in response to a crisis.
As far as I can tell both the macroeconomic and company specific data remain weak. At best we
can say that the economy and corporate results are, on average, less weak than we expected.
Stock prices ultimately follow corporate earnings and it is difficult to see corporate earnings
increasing significantly given the strong macro economic head winds we still face. While I am
continuing to see some attractive investment opportunities, our overall portfolio positioning
remains defensive and conservative. I am unwilling to ris

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Published by: The Manual of Ideas on Aug 23, 2009
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 Page 1 / 4
Emerging Value Capital Management, LLC
July 2009 letter to investors
Dear Partners and Shareholders,Following is our tenth monthly letter to investors. As always, I am happy to speak with partners(and potential new partners) so please do not hesitate to call me with any questions, thoughts orcomments.Fund Performance:During July 2009, EVCM Fund returned an estimated +5.3% (net to investors). During this sametime period, the S&P500 (SPY) returned approximately +7.5%, and the MSCI All Country WorldIndex (ACWI) returned approximately +9.4%.Since inception (10/15/2008), EVCM Fund returned an estimated +27.8% (net to investors).During this same time period, the S&P500 (SPY) declined approximately -1.0%, and the MSCI AllCountry World Index (ACWI) returned approximately +6.5%.The stock market rally continued in full force in July. EVCM fund had a nice return, but lagged themarkets due to our defensive positioning. We remain very defensively positioned with lots ofcash and bonds, high quality stocks, a few shorts and hedges, and disciplined position sizes.When stock markets decline again (and sooner or later they will) our risk aversion should helpprotect our capital.As before, I caution investors not to focus on monthly returns (monthly results are mostly randomand should not be extrapolated). Rather, I hope you will evaluate my performance over a multi-year period.
July 2009 2009 YTD Since Inception(10/15/2008)EVCM – Net to Investors
+5.3% +22.3% +27.8%
S&P500 (SPY)
+7.5% +9.5% -1.0%
MSCI All Country World Index (ACWI)
+9.4% +16.4% +6.5%
*Please note that individual investor net returns will vary due to the timing of one's investment. The results reported aboveare unaudited estimates and may be subject to change.
 
152 West 57th StreetFloor 46New York, NY, 10019Tel1: 312-363-8599Tel2: 212-277-5607Fax: 212-974-1850
 
 Page 2 / 4
Value of $1000 invested at inception:
$700$800$900$1,000$1,100$1,200$1,300$1,400
   1    0    /   1   4    /    2    0    0    8   1    0    /    3   1    /    2    0    0    8   1   1    /    3    0    /    2    0    0    8   1    2    /    3   1    /    2    0    0    8   1    /    3   1    /    2    0    0    9    2    /    2    8    /    2    0    0    9    3    /    3   1    /    2    0    0    9   4    /    3    0    /    2    0    0    9    5    /    3   1    /    2    0    0    9   6    /    3    0    /    2    0    0    9    7    /    3   1    /    2    0    0    9
EVCM FundSPYACWI
 
Stock market rally continues:The stock market rally continued in full force in July. For both the economy and for individualcompanies, anything less than a terrible news report was viewed as a bullish sign. Manycorporations reported something along the lines of: “the rate of decline is slowing”. Dusting offmy old college calculus book, I figured out this statement seems to mean that the secondderivative of sales with respect to time is positive. But why stop at the second derivative? Isuspect it is only a matter of time before we go to the third derivative of sales and some companyreports the “great news” that: “the rate of the rate of decline is slowing”.
 Like with most other rallies, there is a “story” being told to justify the bullishness. The currentstory is that the crisis of 2008 has caused corporations to dramatically reduce their expenses andemployee counts so that they are now ultra lean and efficient and will post great results once theeconomy recovers. While this story may have a kernel of truth to it, it makes me wonder howinefficiently these corporations must have been running prior to 2008. Reducing unnecessarycosts and increasing operational efficiency is part of the ongoing job of every manager. It shouldnot be undertaken only in response to a crisis.As far as I can tell both the macroeconomic and company specific data remain weak. At best wecan say that the economy and corporate results are, on average, less weak than we expected.Stock prices ultimately follow corporate earnings and it is difficult to see corporate earningsincreasing significantly given the strong macro economic head winds we still face. While I amcontinuing to see some attractive investment opportunities, our overall portfolio positioningremains defensive and conservative. I am unwilling to risk our capital by chasing this marketrally.Just a few months ago it seemed like there was no limit to how low stocks could go. Every daywas a new opportunity to sell and no “buy” decision went unpunished. It was difficult to imaginewhat would break the cycle and cause stocks to rise again. A few months have passed and all is
 
 Page 3 / 4
forgotten. Every day is a new opportunity to buy and stocks just keep going higher. This positivesentiment can and will turn on a dime. I don’t know when or what the catalyst will be, but I knowthat stocks are now pricing in a fairly rosy recovery and could decline significantly if investorsentiment shifts from greed back to fear again.Analysis of results to date:EVCM Fund has completed 10 months of operation. While this is far too short a time frame fromwhich to draw any firm conclusions, I believe that a brief analysis of our results to date iswarranted.Since EVCM funds inception, we have outperformed our benchmarks by a wide margin. Lookingat the chart above and the table below, you will notice that most of our outperformance has comein months where the markets declined (Oct 2008, Nov 2008, Jan 2009). We usually laggedbehind the markets on strong up months (Mar 2009, Apr 2009, and July 2009). This is exactlyhow it should be. Our investment process is focused first and foremost on capital protection andrisk management. We invest conservatively and constantly worry about how not to lose money.In the future, you should expect this pattern to continue. We are likely to lag the market in upmonths (hopefully by only a small margin) and we will attempt to avoid large declines in downmonths. The end result over a long term market cycle should (we hope) lead to significantoutperformance verses our benchmarks.Investment Analysis: Morgan Stanley Emerging Markets Domestic Debt Fund:The Morgan Stanley Emerging Markets Domestic Debt Fund (EDD) is a “global macro”investment that EVCM fund holds. EDD is a closed end investment fund that mostly holdsgovernment bonds of emerging market countries. The fund currently trades at a 16% discount tothe net value of its assets (NAV), has little leverage (about 20% - 25% leverage) has a dividendyield of 7.5% and an internal yield to maturity of over 10%. It is a low-risk way to diversify out ofthe US dollar while earning a nice yield.EDD currently has an overweight in Mexico, Brazil, Turkey, and Indonesia government bonds.Default risk for these bonds is low since governments rarely default on local currency bonds (theycan always print more local currency). The average duration for the portfolio is 4.25 years and theportfolio is positioned to be more or less interest rate neutral. The government bonds that EDDholds are mostly very liquid, with small bid/ask spreads, so calculated NAV for EDD is a reliablenumber.Clearly, owning EDD is a big bet against the US dollar and the Euro. As I have discussed beforethe financial situation of the US (and also Europe) is not good with government debt reachingrecords levels not seen since World War II. The US dollar rallied in 2008 and early 2009 asinvestors perceived it to be a safe haven. But with financial markets slowly returning to normal,the long term economic problems of the US and Europe will likely continue to pressure down thevalue of their currencies.

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