Good Morning!

I am very excited to share that The Crossover has entered our next chapter with the official launch of The Crossover Podcast! Every week, the great Jacob Cohen and I will be breaking down some of the biggest stories from the world of VC, stocks, and specifically this week, media!

Make sure to check out the first episode using the links below:

Spotify Link: Click Here

Apple Link: Click Here

Showtime!

Was this email forwarded to you?

DEEP DIVE

T-Bills: From Boring to Brilliant?

Summer 2016

“I too believe that avoiding loss should be the primary goal of every investor. This does not mean that investors should never incur the risk of any loss at all. Rather “don’t lose money” means that over several years an investment portfolio should not be exposed to appreciable loss of principal.”

-Seth Klarman, Baupost Group

June 2016 was a special time in my life.

I had just completed my senior year of high school with a great group of friends, had a .700 batting average in varsity baseball (special shoutout to Joseph, our statistician for marking every error I reached on as a hit), my Cleveland Cavaliers were on their way to winning the NBA Finals, and my stocks were soaring high.

Like any other normal 18 year-old about to go on a gap-year overseas, I couldn’t stop thinking how stupid the idea of a 60/40 equities to bond portfolio was. Yes, the normal part of the prior sentence was sarcasm.

How could you blame me for thinking this was stupid?

From late 2008 onward, we were in a historically low interest rate environment where the idea of buying a bond just made no sense to me.

Check out the interest rate on one year Treasuries on the first day of January from 2009- 2016.

• 2009 & 2010: 0.4% & 0.45%

• 2011 & 2012: 0.29% & 0.12%

• 2013 & 2014: 0.15% & 0.13%

• 2015 & 2016: 0.25% & 0.61%

Very very low. Historically low.

Why would you invest a significant amount of your money in bonds when you could invest in high growth, high quality stocks in a macro environment that was ripe for it?

You wouldn’t. Especially when you are 18.

Winter 2023

Fast forward to 2023, (where my back has just finally healed from the high school athletic days), and I could not have a more different perspective on the relationship between investing in equities vs. bonds.

Sitting here today, a one-year US Treasury is offering around a 4.7% return. Back in the high school days, my low interest rate ego would have scoffed at a 4.7% return and taken the risks in the equities markets, however, the (slightly) more mature 25 year-old has quite the different perspective.

The lows in 2020 were painful, the highs in 2021 were euphoric, and then the disappearance of these gains, which felt like it happened overnight, were really really painful. You especially feel the pain when the money is money you worked hard for and not Bar Mitzvah $$$ from family and friends.

I learned many lessons through the rollercoaster of the past couple of years and am really grateful for it. Looking back, objectively, over this period will serve as a key foundation for my investment career.

Most importantly, these couple of years humbled me and have demonstrated how hard the market is to predict and how much we are at the mercy of interest rates (which decide everything) as well as the Fed. Now I fully understand why people just put their money into S&P 500 Index Funds and let it ride.

The landscape of bonds vs. equities looks extraordinarily different when you take into account a 4.7% annual return on your capital with basically zero principal risk. Over the past couple of months, I have become intrigued by the concept of realizing a risk-free return in the current uncertain environment.

FY 2023

I have absolutely zero idea what the markets will do in 2023 – shocker. The Crossover is looking to hire a fortune teller, but we are not there yet. Podcast came first. At the same time however, I am concerned about what this year has in store.

I am sure many of the other newsletters you read have broken down some of the economic data of why we might see a rescission including rise of consumer debt, decrease in disposable income, and rising interest rates.

I therefore, just want to share two “softer” perspectives on my concerns with the economy. It will also be clear that I wasn’t an economics major in college.

1. White Collar Layoffs

In 2022 alone, over 100,000 tech workers were laid off at many of the biggest companies including Meta, Amazon, Twitter, etc. This trend has continued into 2023 where more companies at the core of the US economy have announced layoffs like Salesforce (10%), Goldman Sachs (3,200 jobs), and most recently Microsoft (announcing 11,000 jobs) layoffs. Just today, Google announced layoffs too.

There are also other sectors outside of tech that are experiencing significant layoffs like real estate and automotive.

With the Fed last year sharing that they want unemployment at around 4.5%, and December’s unemployment rate at 3.5%, we still have some work to do when it comes to layoffs.

I am also concerned about the amount of startups/VC backed entities that will either fail or need to do serious layoffs. Additionally, as big media executives have discussed, the ad market has collapsed which is key fuel for the economy.

TL;DR – There is a lot of bad, and I am concerned that it will create a snowball effect (in a bad way)

2. Historical dips

Let’s take a look at a chart of the S&P 500 over the last 20 years.

There have been 3 major market “corrections” over the past ~25 years:

• Dotcom Bubble (2000): ~45%

• Housing Crisis (2008): ~50%

• COVID Pandemic (2020): ~30%

As we all know, After the COVID Pandemic drop, we rebounded just as fast as we dropped and then some to all time highs at around $4,750. Sitting here today, we are down around 17% which is a real correction – however, it just does not feel like enough when you take everything into account – especially when we are coming down from all time highs.

Two other ways to think of things:

• We are still up around 20% from pre-covid levels. However, just remember, in February 2020 one-year T-Bills was ~1.4%.

• In 2018, we had a ~14% correction from a much lower base – and only now we get 17%?

Interesting.

Wrapping It Up

I had a whole other piece written for today’s newsletter, but then I found myself watching a Dan Niles of the Satori Fund interview at 11:30 PM (again, normal right?) on Tuesday night. Niles has been a serious bear over the past couple of years and continues to be bearish on 2023.

In the interview, Niles shared the line “don’t try and be a hero out there.” This line resonated with me. There is a ton of uncertainty and being very aggressive and putting a lot of capital into the markets just makes me too nervous.

The Crossover Portfolio made moves earlier this week that took money off the table and gives us a significant cash position. I will likely not take the cash position any higher than this as I am a big believer in having core positions in the markets and not trying to time the market.

I have already debated plenty with myself that I am in too much cash trying to slightly time the market. Valid opinion.

However, the idea of putting 20% of that cash into a guaranteed 4.7% annualized return with this much going on sounds like not only a responsible move, but one I feel very comfortable with at this time.

S&P 500 could have a good year and this move could be a mistake. But I hate the feeling of losing more than I do of winning, and this is just how I see it.

If I am wrong? May generating 4.7% on my cash be my biggest problem in life.

As Seth Klarman also says, “the most important thing for an investor is to be able to sleep well at night.”

With this updated portfolio strategy, I am sleeping like a baby.

-Alan

P.S – This was the first piece I have done regarding the macro environment in a while and will likely be the last one for a while. I like breaking down stocks and VC backed companies a whole lot more! If only I was the one that decided what to write about. Oh wait…

THE CROSSOVER ARCHIVE

Rippling, Paylocity, 2023 Predictions

Missed a recent edition? That's okay! Now you can just click on these links below to catch up on what you missed!

• 01/13 - Rippling: A Generational Company?

• 01/06 - Is Paylocity Worth the Price?

• 12/30 - 10 Predictions for 2023

• 12/16 - Is Splunk a Slam Dunk?

• 12/09 - Public: FinTech's Next Star

CHARTS OF THE WEEK

Supply Chain Normalizing

PORTFOLIO

The Crossover Portfolio

Note: The Crossover Portfolio is a mock portfolio of how I would be investing and not with real money. All trades are shared publicly @ The Crossover Twitter as they are recognized.

• Moves: We made several moves this week lightening up our positions in $PENN, $PARA, $DOCN, $ESTC. $PARA and $PENN had great start to the years. With $PARA, I am concerned about the ad market going into $PARA's earnings, and with $PENN we just have a lot of it. I also wanted some risk off the table with the tech companies like $DOCN and $ESTC

• Note: The weighting in the portfolio is a little off so I am going to take a look at it over the weekend. I was just spending way too much time on it and wanted to get the newsletter out!

VENTURE CAPITAL

Deal Acquires Capbase

The Rundown: Deel, the global payroll Decacorn, acquired Capbase for an undisclosed sum of money, in order to offer their clients better equity management solutions

Key Points:

• Capbase was founded in 2018 and raised $6M in venture funding in order to build out a platform that can update a company's cap table in real time as it raises capital, issues shares, and signs contracts

• The $12B valued Deel exploded as the world went remote with their services that enable employers to pay employees in over 150 currencies legally and with ease

• Deel does not plan to compete directly against a Carta, but rather integrate Capbase's capabilities into its current platform.

Alan's Angle: Deel was one of the pandemic darlings being at the right place at the right time and executing well. The company was able to raise at a $12B valuation in May 2022 just 7 months after a raise at a $5.5B valuation. Deel was able to raise this round due to a massive explosion in ARR eclipsing $100M vs. $4M in ARR at the beginning of 2021. Not a bad 18 months.

However, to me, the story of the deal with Deal actually has to do with our friends at Rippling from last week. Last October, Rippling announced the launch of a global payroll product that gives Rippling US companies the ability to hire international and remote employees with ease.

Simply put, Rippling is coming for Deel and this is a move by Deel to try and differentiate and continue to improve their platform vs. Rippling and other competitors.

The Crossover Podcast

The Debut: Disney & Peltz

The Rundown: Last week, the legendary activist investor Nelson Peltz kicked off a proxy battle against Disney sharing his desire to be on the board and shake some things up

Key Points:

• Peltz's case focused on Disney's inability to find a successor for Iger, pausing their 57 year dividend, poor stock performance, his own personal track record, among other reasons

• Disney responded with a power point presentation of their own highlighting Peltz's lack of experience in media, Iger's phenomenal track record since he took over in '05, among other points

Alan's Angle: To hear my thoughts on this, you are going to have to check out the podcast. I only say that because it is a lot of fun, only 30 minutes, and I want you to meet my good friend Jacob. Speaking of Jacob, who is he? Jacob is an analyst/creator for The Hustle (owned by Hubspot) where he writes a newsletter for them to a couple million subscribers and hosts a daily podcast too to thousands. Most importantly, his greatest accomplishment is being my roommate.

MEME OF THE DAY

GOLDEN NUGGETS

• What a GOAT moment for Buccaneers Center Ryan Jensen on Twitter

• Awesome radio call by the Jaguars booth after their wild comeback against the Chargers was completed

• Lebron has now played against Jabari Smith Jr. and Sr. What a legend.

• What a legendary pic of Mikel Arteta. Gooners for life!

• University of Texas at Austin has banned TikTok!

• Great Article by Us Weekly on QEWD - a friend of the newsletter!

Thanks for the read! Let me know what you thought by replying back to this email.

— Alan

Disclaimer: The Crossover is not a professional financial service. All materials released from The Crossover are for educational and entertainment purposes. The Crossover is not a replacement for a professional's opinion. Contributors to the Crossover might have positions in the equities in the The Crossover Portfolio or mentioned in the newsletter.