Otso Monthly – January 2025

Performance overview

January was a good month for Otso! Our returns were strongly positive and exceeded the market. January’s performance was so strong that it should be considered an outlier. While we are very pleased with the performance, it is not realistically representative. Some of the performance is attributable to being in the ‘right place at the right time’. Some might call this luck. But, luck of this type also comes from strong positioning. Or, to an extent, laying the groundwork to benefit from such a market. Regardless of whether one calls it luck, skill, or both, a strong positive performance is a good performance.

The raw numbers are telling. The Otso US Opportunity Fund increased 10.19%(!) net of fees in January. This is an outlier event. We do not represent, nor expect, that such performance will be common. This was largely attributable to a position in TNA, which benefited significantly from the ‘good’ CPI data. The rationale for this position is simply that we are bullish on the overall market (see below). Thus, we believed that the prices at the beginning of January were a buying opportunity. The S&P500 (proxied by the SPY ETF) increased nearly 2.7% in USD terms. The AUD moderately appreciated in January (by 0.13% according to RBA exchange rates). Thus, the S&P 500 increased around 2.55% in AUD terms. We handily beat the benchmark in January.

A volatile month!

January had several overarching themes. However, the two most pertinent for Otso were macro themes and AI. To see this, we can have regard to the S&P500 graph:

For macroeconomic themes: January was a volatile month. This was reminiscent of December. The month started poorly, with strong payrolls data causing the market to fall on the back of reduced rate cut expectations. However, the market became more positive on the back of subdued CPI inflation data, which attenuated interest rate fears. As January was ending, the month veered due to tariffs. President Trump announced tariffs of 25% on goods from Canada and Mexico and 10% on Canadian oil. He also announced an additional 10% tariff on goods from China. The market reacted negatively, initially. This will likely influence markets in February.

The seesawing market benefited Otso. This is because Otso had positions in small caps at nadir of the market. These positions performed significantly well following the CPI inflation data. An especially strong performer was a position in TNA, which was entered via a cash secured put, and, over which, Otso wrote covered calls.

AI was a less significant theme for Otso. However, it had some impact towards the end of January. The major AI-move came from DeepSeek V3 and Alibaba’s Qwen 2.5. DeepSeek and Qwen represented significant improvements in AI cost. The DeepSeek model was reportedly developed utilizing less computing power than were Chat GPT and other models. This harmed companies such as Nvidia. However, how much long term damage there is could depend on whether DeepSeek indeed used ChatGPT’s model to help train its own model. In turn, this might imply that chips are still necessary to develop more cutting edge AI, which can then train other AI.

The AI stock movements had a very contained impact for Otso. This is because Otso’s only exposure at the time was via cash secured puts, which expired out of the money. Thus, for a period, Otso was negatively impacted. But, this negative impact reversed when the options that Otso wrote ultimately expired worthless (which is good for Otso).

Going forward? Tariffs and volatility

It is impossible to predict financial markets with certainty. Exogenous shocks occur regularly. The announcement of tariffs at the end of January highlights precisely this.

The tariffs are an interesting wrinkle. Tariffs are generally “bad”. Tariffs can entrench underperforming companies, and executives. This can undermine innovation and competitiveness. Ultimately, consumers might then face lower quality, but more expensive, goods. Investors might then be tasked with avoiding companies that have become ‘lazy’ by virtue of tariff protection.

The US tariffs are against China, Mexico, and Canada. The three countries warrant separate discussion.

• Mexico: The US has imposed a 25% tariff on goods form Mexico. The stated reason is to encourage Mexico to better secure its boarder so as to halt the flow of illegal immigrants and drugs. This is the most defensible tariff. It dovetails into Jamie Dimon’s assertion thar tariffs can be useful to achieve short term tactical goals. In this case, Mexico has a clear off-ramp: show that it is taking border protection seriously and properly address cartels.

• Canada: The US has imposed a 25% tariff on Canadian goods other than oil, on which it has imposed a 10% tariff. The ostensible reason is to encourage Canada to tackle fentanyl production and illegal immigration. However, the precise deliverables to reduce tariffs are more unclear. Canada has signaled that it will retaliate against the US, potentially targeting Republican states. The US has signaled that it will retaliate against any retaliation.

• China: the US has imposed an additional 10% tariff on Chinese goods. The ostensible reason is as a penalty for suppling precursor chemicals to illegal drug operations and for facilitating money laundering. It is not precisely clear what steps the US expects China to take to address its concerns. One might hypothesize that the US would have found a reason to tariff Chinese goods in any case and the US was simply looking for a reason.

The tariffs are likely going to weigh on financial markets. They will especially impact any country that imports significant goods (or inputs) from Canada or Mexico. Thus, an especial emphasis on supply chains is necessary. Small caps might also be sensitive to tariffs given that they often have less pricing power. This further implies that it is important to look for companies with market power and reasonable margins so that they can pass on, or absorb, cost increases, as necessary.

How then will Otso position itself, However, Otso will remain fully invested as we believe that the market is likely to remain at least flat over the next 12 months. However, Otso will closely monitor the market in February given that it has some exposure to the Russell 2000. This exposure was a positive in January. It will be important to monitor and manage it in February. And, given that Otso utilizes covered calls, being invested in an ‘at least flat’ market is better than not being invested. However, we also believe that the market will increase in 2025. Indeed, the analyst consensus forecast is for the S&P500 to hit at least 6,700 over the next 12 months. This makes investing preferable to sitting in cash for us.

The market will certainly be interesting in February! We look forward to working on your behalf to navigate these potentially volatile times.