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2024 Annual Letter

Writer's picture: Crystal Waters CapitalCrystal Waters Capital


Summary



Dear Crystal Waters Shareholders,

2024 was a year in which the market and the economy performed better than expectedThe bear’s recession still hasn’t come.  The S&P 500 racked up another double-digit gain with a +23.9% return, and Crystal Waters’ full-year return came in at +35.25%.  During January 2025, we are already up over +8%, double the S&P500 and NASDAQ.  Looking at 2025, The stock market appears overvalued, but much of the overvaluation is in the technology sector. As the bond market pushes up rates, we may see a much-needed correction in all stocks.  We can still find value stocks, small-cap stocks, and international stocks that are undervalued. Rather than a significant across-the-board decline, we may see a rotation toward stocks that are generally ignored by the market.  A broadening of the market across different segments would be a healthy outcome and an indication of the strength of the overall economy.


2024 Major Themes

Artificial intelligence, energy, cryptocurrencies, interest rates, inflation, and politics were all major themes in 2024.  2024 delivered a repeat of 2023, returning the 2022 losses many investors endured.  Last year was also a surprise for many analysts.  Some analysts were still on recession watch and predicted poor corporate earnings would lead to a slowdown.  Instead, we saw a solid economy, better-than-expected corporate earnings, and the Federal Reserve loosening monetary policy.  The technology-heavy NASDAQ surged +29.8%, and the DOW delivered a +13.25% return.  2024 stock market returns were a waterfall of events that began with interest rate cuts and inflation, taking the escalator down from 9% in June of 2022 to about 2.7% in 2024.  Corporate earnings were unexpectedly strong, especially in technology driven by artificial intelligence and data center growth.  The presidential election provided more certainty, consumer spending remained strong all year, and the workforce remained stable.  These conditions should set up 2025 for another strong year, but we should see a temporary pullback to adjust for stretched valuations.

 

In 2024, gold became a popular safe-haven asset, rising over 36% and reaching almost $2,800 per ounce. The central banks in China and India increased their gold reserves by 8% and 12%, respectively, driving record global increases in central bank purchases. 

 

Cryptocurrencies remained a central theme in 2024 as Bitcoin rose above $100,000 for the first time and closed the year at $93,429.  Bitcoin has been on a tear driven mainly by institutional and corporate ownership. Blackrock, Fidelity, and other institutional investors launched cryptocurrency ETFs, bringing in about $75 billion in assets in just six months.  Bitcoin is now operating on an institutional investing thesis showing that cryptocurrencies are maturing and integrating into all financial markets. 


The presidential election campaign brought out a flood of anti-sustainable energy and anti-ESG investing rhetoric.  However, the rhetoric doesn’t match the investing.  In 2024, the assets of ESG funds under management exceeded $3.2 trillion, 20% more than in 2023. Over $450 billion has been invested in new solar, wind, and hydrogen projects, and the ‘green bonds’ market has exceeded $1.5 trillion.  Crystal Waters’ sustainable energy investments have remained an important part of our portfolio and now include Small Modular Reactors (SMRs), a critical component for data centers and AI technology.  Our fossil energy investments are now focused on natural gas and liquified natural gas (LNG).  Any increase in oil production will bring oil prices down and increase natural gas supplies.  The most profitable area within the oil patch is LNG, which the U.S. exports mainly to Europe.  Both of our natural gas positions are low-cost leaders with large reserves.  One position is in a partnership to develop new LNG ports that leverage their gas supply, owned pipelines, and a new, innovative off-shore LNG processing plant expected in 2025.  While the rhetoric says, “Drill baby Drill,” the reality is most of the sustainable energy jobs are in republican strongholds.  While the fossil fuel industries continue to receive large subsidies, the solar and wind industries set five-year limits on when subsidies expire.  Electricity generated from solar and wind now exceeds coal and provides the least expensive energy.  We think our sustainable energy investments will continue to perform well over the next four years.

 

No recap of 2024 would be complete without discussing artificial intelligence (AI). In 2024, Nvidia emerged as the undisputed leader in AI, outpacing rivals Intel and AMD in revenue and market share. In the third quarter alone, Nvidia’s earnings surpassed the combined revenues of Intel and AMD by nearly 75%. Nvidia introduced the Blackwell GPU architecture, a groundbreaking product featuring 208 billion transistors and cutting-edge chip-to-chip interconnect technology that promises to change computing as we know it.  Tesla demonstrated an updated version of their Optimus humanoid robot that is now capable of more human-like tasks.  OpenAI introduced GPT-4o, redefining what’s possible with large language models.  GPT-4o can handle large documents, like extensive legal documents or a research paper, into a single prompt, streamlining the review and summarization process.  Google introduced Gemini and showcased its ability to organize and execute multi-step processes like marketing campaigns or complex workflows.  2024 saw hundreds of AI examples in software, PCs, data warehouses, business computing, robotics, and other industrial workflows.  Of course, AI is also rapidly finding its way into military applications such as intelligence gathering, analysis, and robotics.

 

2024 Top Performing Stocks

The Magnificent Seven (Microsoft, Apple, Amazon, Alphabet, Meta, Nvidia, Tesla) stocks continued to perform in 2024, delivering about 25% of the S&P 500s earnings and accounting for about 33% of the S&P 500s total market capitalization.  The MAGS ETF gained 64% as a group in 2024, and all seven are expected to continue their capital investments in 2025, which we believe will fuel further growth as their AI investments begin to show revenues.

The top five S&P 500 stocks for 2024 tell us an evolving story about the broad economy.  Palantir’s data analysis platforms have rapidly expanded from government contracts to corporate enterprise customers.  Vistra, an electric utility company, has become a focal point in the AI revolution as the need for more power at data centers continues to grow.  Nvidia is still far ahead of the competition in developing AI computing systems and autonomous driving technology.  United Airlines delivered an incredible year, dispelling any fears of a slowdown.  Axon Enterprise, the law enforcement software and data collection company, excelled as law enforcement agencies and police departments looked for greater efficiencies with existing budgets.  Crystal Waters owns Palantir and an overweight position in Nvidia.  Of this group, only Nvidia is fairly valued; the rest are significantly overvalued and should eventually pull back.

 

1.     Palantir (PLTR) +340.5%

2.     Vistra Energy (VST) +257.9%

3.     Nvidia (NVDA)                         +171.2%

4.     United Airlines (UA)                +135.3%

5.     Axon Enterprise (AXON)         +130.1%

 

Portfolio Spotlight

SoFi Technologies (SOFI) closed the year with an impressive +112% rally.  Crystal Waters holds an overweight position in SOFI.  SOFI is a full-service financial technology company (FinTech).  SOFI offers customers student loan refinancing, private student loans, personal loans, mortgage loans, auto loan refinancing, investing, banking, credit cards, insurance, estate planning, and business solutions.  SOFI has built a moat around the business with its Galileo platform technology.  Galileo enables other FinTech companies to leverage SOFI’s technology to run their financial companies.  Galileo is to SOFI what AWS is to Amazon, a technology platform that generates revenue outside the core business.  Since acquiring a bank charter, SOFI can earn greater margins on all its products and retain and service a larger portion of the loans it originates.  Looking ahead, two significant themes benefit SOFI: 1) The ‘Great Wealth Transfer’ from boomers to their children, and 2) lighter regulations.  Boomers continue to transfer their wealth to their children and will do so over the next twenty years to the tune of $80 trillion dollars.  Some of those assets are finding their way into SoFi accounts whose customer base skews younger and growing.  The lighter regulations we’re looking for are mainly around capital requirements at banks like SoFi.  Banks hold more capital than required for any tested catastrophe, which reduces their ability to lend.  SoFi’s ability to lend and refinance loans is a significant revenue generator, while the excess reserves are dead money.

 

Crypto Currencies

One of the biggest stories in 2024 was the rally in Bitcoin above $100,000 and the end of the legal battle between the SEC and several large financial institutions, all vying for approval of their spot Bitcoin ETFs and ETPs.  While it’s easy to have a knee-jerk reaction that Bitcoin is just ‘fairy dust,’ we can look at history and see that all currencies, including the U.S. dollar, are man-made inventions that rely on people and institutions agreeing that the asset or commodity has value.  You can’t walk into Walmart and pay for your purchases with gold bars.  However, PayPal, Microsoft, AT&T, Apple, Starbucks, Whole Foods, Home Depot, and many others have mechanisms for you to use your Bitcoin to pay for purchases.  Crystal Waters holds an overweight position in the Grayscale Bitcoin Trust (GBTC) and the Grayscale Mini-Trust (BTC), the late received at no cost in a split of the original GBTC trust.  Over the past year, GBTC has delivered about a +116% return.  Crystal Waters started building a position in the Grayscale Bitcoin Trust before it became an ETF.  Our buys were made when the trust’s valuations were at deep discounts to the Net Asset Value of the Bitcoin the trust holds.  After becoming an ETF, the GBTC can trade at spot prices and closely track the actual value of Bitcoin.  Since 2015, Bitcoin has had a Compound Annual Growth Rate (CAGR) of nearly 83%.  Institutional investors and governments are adding bitcoin to their balance sheets, driving greater scarcity.  Our conservative estimate is that it will rise from the current level, around $104,000 per coin, to around $175,000 by year-end, or roughly another 70% gain from current levels.


Global Risks to Markets

No review of 2024 would be complete without noting the global conflicts that impacted markets.  Russia’s invasion of Ukraine in 2022 continued in 2024 and saw the U.S. and other countries providing military aid to Ukraine.  The new administration will likely take a different approach to ending the war, bringing uncertainty to oil and agricultural markets.  The Hamas attack on Israel and Israel’s response brought Iran, Hezbollah, and other adversaries into a prolonged war that disrupted the entire Middle East.  Tensions are growing between China and Taiwan, China and the U.S., the U.S. and Iran, Israel and Palestine, Israel and Iran, and even the U.S. and Canada and the EU.  One objective at the heart of these conflicts is resources—Taiwan’s dominance in semiconductor manufacturing and abundant rare earth minerals in the South China Sea.  Canada is rich in oil and lumber resources, while Greenland is rich in rare earth minerals needed in batteries and other technology.  The U.S. is the largest producer of oil and natural gas, but we need to export and import oil and gas to maintain stability worldwide.  We happen to import most of our oil from Canada and export most of our LNG to the EU. While markets have been reactionary to these global tensions, and the list of global risks is concerning, none of these events have changed our strategy.  Being aware of conditions is prudent.  Being fearful is not. 

 

Looking Forward to 2025

As we write this year’s letter, the World Economic Forum at Davos is taking place, and the theme this year is “Collaboration for the Intelligent Age.” The 2025 Davos Forum is the largest in history, with world leaders, CEOs, and economists from all over the world gathered to discuss the most critical issues facing the global economy. As leaders discuss the new geopolitical order, disruptive technologies, economic uncertainty, and the energy transition, one thing is crystal clear: international cooperation is more important than ever.  The AI revolution and the energy transition are at the forefront against a backdrop of women’s health, space technology, climate technology, and strong resilience in matters of geopolitics. When we wrote last year, a record $5.4 trillion in cash was sitting in money-market funds.  As we enter 2025, that number is between $6 trillion and $7 trillion, and we have to ask, “Why? What are we missing?”. 

 

Many analysts and market pundits believe this money will find its way into stocks, and that should be a reason to be bullish on stocks.  Looking deeper at this ‘sideline’ cash, we find that the funds not invested in equities seem normal.  According to data from Morningstar Direct, assets in money funds as a percentage of long-term assets stood at about 23% of long-term assets, which is only 3% higher than the average dating back to 2011 of 20%.  We don’t expect a flood of liquidity from these cash accounts to come into stocks.  Furthermore, with some valuations high and concentration in a handful of companies, we would prefer that all that cash remained in their low-interest accounts.

 

Artificial intelligence (AI) - will continue to be a significant investing theme in 2025.  To benefit from the AI revolution, we must look at where AI is now and where the technology is going.  Investments in AI to date have focused on semiconductors, data centers, network connections, and the large language models (LLMs) that are used to train AI to perform specific tasks.  For the most part, use cases have been rhetoric, not revenue.  We’re looking hard at where the best and most profitable use cases will likely emerge.  Today's obvious choices are energy, software, robotics, and autonomous vehicles.  Related to advancements in AI, we expect a new super cycle in PC replacement as companies upgrade to take advantage of the latest AI features and semiconductor performance.  Microsoft, Lenovo, HP, Dell, and Apple should be the primary beneficiaries of a PC super cycle.

 

The European Union - may also be a place to look for opportunities.  Global sentiment is currently dominated by excitement around the U.S. economy and a gloomier outlook on Europe.  Europe has been a front-runner in regulation with a regulation-first approach to all aspects of their economies.  The EU needs an innovation-first approach, and we may be on the cusp of seeing that materialize.  In September 2024, former ECB President Mario Draghi published a report on European Competitiveness, or lack thereof.  Jamie Dimon, CEO of JP Morgan, recently stated that everyone at Davos is talking about the Draghi Report.  If the EU takes the Draghi report seriously and acts on the recommendations quickly, European technology companies may have a place in our portfolio.

 

Healthcare– has already been revolutionized by AI and machine learning technology, and we expect more discoveries in 2025. Nvidia’s supercomputers significantly reduced the time to create the first COVID-19 vaccination by analyzing all known compounds and determining the most likely candidates for a vaccine. Miracle drugs like semaglutide, commonly known as Ozempic, Wegovy, and others, were initially developed for type 2 diabetes. Their use in treating the obesity epidemic is improving health outcomes and reducing revenues for fast food and snack foods.  AI will help drug companies focus their research, improve trials, and hopefully reduce costs, bringing a ‘miracle’ drug to market every couple of years.  We’re optimistic that companies like Eli Lilly, Moderna, and other large pharmaceutical companies will bring tremendous innovation to the market through a combination of empirical research and mergers and acquisitions of highly innovative small biotechnology companies.

 

Energy – is rapidly transitioning from predominantly fossil fuels to sustainable, cleaner energy. For the first time, solar and wind have generated more electricity than coal. Liquified Natural Gas (LNG) is now the most important fossil fuel globally, and 2025 should be a major turning point for LNG investors.  This is due in part to a series of new export facilities set to come online next year, including Corpus Christi LNG Stage 3 in Texas and Plaquemines LNG in Louisiana.  Of the 27 million metric tons of new global LNG supply expected in 2025, nearly 90% will come from North America. The U.S. is the world’s largest exporter of LNG.  An event that has received little news coverage is where we’ve placed our investment.  Crystal Waters has built a position in a U.S. oil and gas company that has partnered with a company that is launching brownfield, deepwater ports, which require minimal additional infrastructure investment to support up to four floating LNG vessels producing up to 13 million metric tons of LNG per annum. The partnership purchased the largest natural gas pipeline in the Gulf of Mexico and received approval from the Department of Energy for long-term exports of LNG.  We expect these floating LNG ports to come online in 2025.   Crystal Waters maintains investments in leading solar and wind companies, and we have begun to add investments in nuclear energy.  We’re specifically interested in Small Modular Reactors (SMRs) due to their unique design characteristics that enable them to be located next to data centers without any connection to the utility grid.  We also see SMRs being used by industry and for new housing developments as a means of reducing stress on the grid, increasing housing supply, and reducing wildfire hazards.  Some of the best SMRs do not use water for cooling and utilize a molten salt technology that theoretically makes a meltdown impossible.  SMRs are easily transported on a flatbed truck and can be swapped out like a battery once the reactor rods are fully depleted.

 

Finances and Investing– are topping Americans’ priorities list in 2025. 2025 is the first year where buying a house is not the number one financial goal. The top three goals are 1) Paying off debt, 2) Creating an emergency fund, and 3) Buying a house. However, when asked what Americans want to buy in 2025, a new car tops the list. Paying down debt and making a new car payment is counterintuitive, but all these goals benefit two of our financial positions. We are also bullish on Latin America and have been building two positions that give us exposure to the best opportunities in retail and mobile banking in Latin America and Mexico. Most consumers in Latin America and Mexico have been excluded from banking services, but smartphone usage is very high, making mobile banking and shopping an enormous market opportunity.  2025 is shaping up to be a pivotal year for mobile banking in these markets, and valuations for the stocks are attractive.


Crystal Waters Partners, LP

Crystal Waters' Annual Report Card for 2024 compares our performance against some of the biggest funds.  These are audited returns before fees.

 

2024 Average of all Hedge Funds                                                                  10.70%

Fund

Manager

2024 Return

Light Street Capital

Glen Kacher

59.40

Discovery Capital Mgmt.

Rob Citrone

52.00

D.E. Shaw Oculus Fund

David Shaw

36.10

Bridgewater China

Bridgewater Advisors

36.10

Crystal Waters Capital

Clay Baker/Mikael Rudolfsen

35.25

Citadel Tactical

Ken Griffin

22.30

Schonfeld Fundamental Equity

Steven Schonfeld

21.10

Citadel Equities

Ken Griffin

18.00

Citadel Wellington

Ken Griffin

15.10

Millenium

Israel Englander

15.00

Bridgewater Pure Alpha

Bridgewater Advisors

11.20

 

We’re always excited to invest in great companies at reasonable prices.  To that end, we study the macro global issues to identify significant themes and ultimately identify the best-of-breed companies within our investment thesis.  While risks are ever present, 2025 should offer many excellent opportunities to build existing investments and start new ones.  We welcome any additional investments from our existing partners and new referrals.


Thank you for your trust and your partnership,  

                

Clay Baker                                           

Co-Managing Partner                                            





Mikael Rudolfsen

Co-Managing Partner






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