Saturday, November 18

Portfolio Update: Argentina, Greece and India

Argentina 9.7% (International Book)
Argentina has been a long-held thesis in the portfolio, it is approaching its 3rd anniversary, with the initial thesis being that the 2015 elections would bring significant change.  The crucial fact was that President Cristina Fernandez de Krichner couldn’t run in the election, after being term-limited and failing to secure the necessary votes for a constitutional amendment.  Under Cristina, Argentina had largely been isolated from the world markets with capital controls and a pegged currency that traded at a significantly different level in the black market (the ‘blue rate’).  The country was also involved in a long-running argument with bond hold-outs that ended with Argentina losing in court and being shut out of the global debt markets.  The result was an economy with significant imbalances (government subsidies/interventions), a large government deficit, runaway inflation, and exceptionally high interest rates. However, this also meant that Argentina was a country with very limited government debt - a benefit of not being able to borrow internationally!

The opportunity was that all 3 candidates, including the one favored by President Kirchner, were all likely to be substantial improvements.  As luck would have it, President Macri, the eventual winner, was viewed as the most market-friendly candidate (and no ally of President Kirchner).   Any doubts were dispelled in the first 100 days with an array of actions including floating the currency, removing capital controls, granting independence to the central bank (with a mandate to reduce inflation), announcing substantial reforms/ cuts to subsidies, settling with the old bond holdouts, and subsequently raising debt in the international capital markets. 

Unsurprisingly, markets rejoiced…including Our Man’s Argentinean basket of stocks, which are up 140%+.    OM expressed the Argentina theme through a small basket (5-6) of stocks as the ETF (ARGT) was a poor reflection of the opportunity (commodity heavy + largest position is focused outside Argentina).   The basket has steadily been pared back to OM's 2 favorite names, Pampa Energie (a beneficiary of electricity subsidies being cut) and Adecoagro (an agricultural company).

The recent strong win by President Macri’s party in congressional elections only increases the chances of reforms, and the possibility that Macri will run again.  With a low-level of government debt and wide-open credit markets, Argentina will continue to have the opportunity to reform at a reasonable pace.  Add to that a newly independent central bank that has been willing to raise rates to conquer inflation.  There are positive signs as inflation has started to fall and this is widely projected to continue.   

To Our Man this rather rhymes of a certain 1980’s US President who reformed an economy and saw the Federal Reserve defeat inflation.  That started a multi-decade boom for numerous asset classes in the US. So don't expect Our Man to exit Argentina any time soon (even if he can’t invest in Argentinean PE, which is likely the best asset class)!!  


Greece 2.7% (International Book)
Our Man’s previous Greece exposure was exceptionally disappointing – too early and over-sized – but like a moth to a flame, he has returned.  Yes, OM can see you shaking your heads sadly – so, why now?

The French.

Yup, I kid you not.  The Frogs have gone and done it!  It being, breaking the impasse between the Eurogroup (*cough* Germans) and the IMF over a longer-term plan on Greek debt sustainability - “The Eurogroup formally agreed to a longer-term French plan to link the scale of Greek bond repayments to the country’s economic growth…

So, now we’re finally near the end of the tunnel and by golly there’s light!  The light is Greece exiting the bailouts in mid-2018, with the banks looking like they are in decent shape to pass the final stress tests, and the market being prepared for new Greek debt.  And the tunnel?  After a 45% fall in GDP – the same decline as the US saw during the Great Depression - finally some stability and growth and a small government surplus.   And so, OM is back and hoping that the clearer catalysts (stress tests, exiting the bailout, issuing debt in the market and perhaps even elections) will stop the portfolio from seeing a second Greek tragedy. 


India 3.3% (International Book)
Our Man has a small position in India.  Though the % of NAV is larger than Greece, it is a much safer investment.  It has neither the substantial risk nor the same massive potential short-medium term upside as the Greek position.   

The long-term bull case for India is very widely known, and OM doesn’t have any special insight bar noting that the speed and prolonged nature of these changes is often under-appreciated.  The long-term bull case starts with the 2nd largest country in the world, which also (unlike the largest) has great demographics (working age population is not expected to peak for at least the next 10yrs).    

This is supplemented by some self-help.  The Modhi government has been busy (not always in a good way) and has made some structural shifts (taxation changes, bankruptcy code reform, financial reforms, etc) that will have long-term benefits.  However, the most interesting to OM is the push to digitize the economy, highlighted by the introduction of Aadhar (a unique individual ID number based on biometric information).  Unfortunately, most of the potential applications (loans, credit history, transaction confirmations, to name the obvious ones….) of this are “in the future” and many will initially be captured in the private markets (and OM is not a VC).  Thus, until OM has a clearer idea of how to directly benefit, expect India to be a small but consistent part of the portfolio.






Disclaimer:  Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take the above that way.  For added clarity, while Our Man is invested in all of the securities mentioned that’s a terrible reason for anyone else to do so.  Our Man also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you given your own circumstances/risk tolerance/etc. 

Saturday, October 28

Portfolio Update: Brazil

Brazil is the largest position in the portfolio by a significant margin, as OM feels it’s in that sweet spot when all of the relevant factors all line up.  Given how out-sized it is in the portfolio, Brazil is getting its own little write-up

Brazil: 25.8% (International Book) as of 9/30/17
The long-term argument is simple; Brazil’s long recession, and the equity bear market that lasted from 2011 to 2016 which saw an almost 80% loss (in USD-terms) is over.  The market bottomed in Jan-16 and a new cyclical (possibly event secular) bull market is beginning.  Furthermore, the public discourse around Brazil and investor sentiment reached a nadir in Q2-16 as the ‘Carwash Scandal’ enveloped the ‘elite’ business and political class culminating in the successful impeachment of President Rousseff.

So why invest?  Well, the highest return potential is when a situation improves from one that is terrible and completely ignored by investors, to one that’s ‘okay’ and attracts curious interest.  There were clear signs of this in Brazil during the middle of 2016 across a range of areas;
- At a macro level the balance of trade turned positive (historically a very good sign for Brazilian equity markets). 
- President Temer, the new President was viewed as a short-term President, and with politicians already held in contempt by the populace they were ironically more amenable to taking actions (i.e. economic and pension reforms) that they normally tried to avoid. 
- At a corporate level, both friends and professional contacts of OM said similar things; that companies, irrespective of sector, had to cuts costs to the bone to survive the last 5-years.  Many only survived as a result of competitors going out of business.  Or in layman’s terms, if there were any growth in demand these firms have a better competitive position and operating leverage! 
- While speaking with numerous Brazil-focused portfolio managers, Our Man kept hearing that fundamentally stocks (especially outside the most liquid names) were exceptionally attractive but…
The phrases after the “but” always represented the various constraints - self-confidence after a bear market, market concerns, what clients would think, potential business risk, etc. - that prevented the portfolio manager from participating (for now, in OM’s view).
- Finally, after a seemingly continuous fall the Brazilian market (in USD-terms) finally started to turn around, impulsing higher in early and mid-2016 and leaving the lows well behind. 

With this mix of promising signals, and the opportunity created by a short-sharp pullback in the wake of the US election, Our Man began his Brazilian position split between large-caps (EWZ) and small-caps (EWZS) in late-2016.

The data over 2017 has largely started to confirm many of the original premises.
- As noted, in the Q2-review, President Temer’s probability of being a short-term President increased after he was allegedly caught on tape discussing hush-money payments to jailed powerbroker Eduardo Cunha.  The entire process, which ended with him surviving an impeachment vote, ensured the public’s low esteem of politicians remained unchanged.  Yet, the probability of reforms passing increased with him surviving impeachment.
- Temer’s troubles led to a 20% pull back in May, which saw a subsequent bounce before retesting the May lows before rallying once more.  This created the technical sign for Our Man to add to his position, before adding once more as the rally went through the highs seen in May.
- The economy continues to improve on multiple fronts, be it GDP finally turning positive 

or inflation falling dramatically

or the balance of trade looking the healthiest in years.

In summation, to Our Man’s mind, Brazil is setting up as a perfectly positive storm of fundamentals and technicals meaning OM sees a de-risked (for example, versus 12mos ago) situation that is getting ready to continue its sharp rise.  Unless he’s horribly wrong and the Q2 lows are tested, OM hopes that despite the inevitable volatility he won't even be trimming his positions back till they're significantly higher or Brazil’s 2018 election is in he headlights.


Disclaimer:  Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take the above that way.  For added clarity, while Our Man is invested in all of the securities mentioned that’s a terrible reason for anyone else to do so.  Our Man also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you given your own circumstances/risk tolerance/etc.  

Thursday, October 5

2017: Third Quarter Review

There were a number of changes to the portfolio during the quarter.  A brief summary is below, but expect a broader portfolio review (likely in multiple parts) in the coming weeks.

International: 
- Added to Brazil (EWZ & EWZS): As readers will remember, Brazil fell heavily in mid-Q2 after recorded conversations (re. accepting a bribe) involving President Temer led to an impeachment attempt and potential criminal charges.  In mid-to-late-July, it became clear that these charges wouldn’t be accepted by the lower house of Congress (subsequently confirmed by a vote in August) and in late August the Brazilian market broke out to new highs.  OM added to the Brazil position on each of these events (in larger size on the breakout to new highs).  This makes Brazil the largest position in the portfolio.
- Bought India (INDA & SCIF): OM started a small position in India.  He’s been looking at it for a while, as it’s somewhere that’s likely a multi-year holding but was always too price sensitive.  Call this a first nibble at what might one-day be a much larger position.
-  Bought Greece (GREK & ALBKY): OM’s previous investments in Greece have been far from stellar (i.e. terrible) yet he returned to that poisoned chalice just before quarter-end.  Why now?  Time (and recapitalizations) help heal balance sheet wounds, and there was a small (under-reported) catalyst on debt reduction.  The initial position is very small - it would have to triple to cover prior losses - but the return potential is substantial and OM thinks the market is over-stating the risk.
- Exited Italy (EWI): OM exited the Italy position.  It has performed well, but other opportunities (i.e. Greece) are just more attractive at this point.

Equity: 
- Exited Dollar Tree (DLTR): While Dollar Tree is a beneficiary of tax reform (if it comes), with Amazon’s purchase of Whole Foods and stronger ideas out there, it was an easy sell.
- Exited Liberty Broadband (LBRDK):  This was actually the toughest decision in the portfolio, since Charter Communications (LBRDK just owns Charter and a subsidiary) is a fantastic business with good opportunities ahead of it.  There are some very good public write-ups about why Charter Comms (and thus LBRDK) will be worth substantially more in the future, and OM largely agrees with them.  In the end there were just things OM has greater confidence in.
 - Bought Texas Pacific Land Trust (TPL):  TPL is a publicly traded land trust that’s self-liquidating as it buys back shares with excess cash.   The trust benefits primarily from oil & gas royalties (the Trust’s land is located in the Permian basin), which have risen over the last 4-years even as the oil price has fallen.  Interestingly, in the middle of the year the Trust announced the formation of a subsidiary to provide water resources.  Given TPL owns the water rights under its land, there is opportunity to supply water to drilling companies and find ways to recycle the (non-potable) water that’s a byproduct of drilling. 

Currencies 
- Exited Short Euro (EUO): Our Man exited the short Euro trade in mid-late August.  Though it’s been a fantastic contributor over a number of years, the end was bittersweet – as noted previously, it should have happened earlier in 2017.  The exit also marked the end of Our Man’s dollar bull thesis – in its various guises (and including the Short Australia dollar positions, within the China Thesis) it ended up contributing over 1,000bps to performance!  It should have been more 😔...

China Thesis: 
- Added to Chinese A-Shares (ASHR):  Our Man materially added to the A-shares position during the quarter.  China is a swirling surfeit of liquidity seeking somewhere to call home, drive up prices and then move on once more when the authorities play whack-a-mole.  We've seen it at least once each in real estate, domestic equities, commodities, and most recently bitcoin.  With the authorities making it harder to invest in bitcoin (the latest home), the liquidity is on the hunt once more.   OM is wagering that the 19th National Congress starting in Q4, will offer the stability for local equities to shine once more after the boom/bust of 2015.  Technically, they’re setting up well and OM wouldn’t rule out a run at 2015 (or even 2007) highs.
- Exited Short Australian Dollar (CROC):  Much like the short Euro position, OM exited this position during the middle of the quarter.  Unlike the Euro position, the sin wasn't holding it too long, it was re-entering/sizing it in Q2 despite the technicals looking unattractive.

Commodity: 
- Added to Uranium (URA):  OM sized up the position in Uranium mining companies (URA) after the recent pullback held above its 2016/2017 lows (spot uranium also held above its 2016 lows).  This coupled with Japanese power plants slowly coming online and the supply discipline holding creates an interesting opportunity.

Performance and Review 
The second quarter saw OM’s portfolio rise 512bps, while the S&P 500 (TR) rose 4.5% and the MSCI World was up 4.1%.  For the year, this left OM’s portfolio +13.4% compared to +14.2% for the S&P 500 (TR) and +13.0% for the MSCI World.  

Performance was driven by the International/Country book (+476bps), with Brazil being the primary contributor (just over 300bps).  As noted above, Brazil bounced back sharply from Q2’s Temer-related fall, and OM was helped by added to the position in the quarter.  Argentina and Italy were also healthy contributors.

The Technical book (+124bps) was a direct beneficiary of the market rise.   The Funds book (+39bps) also rose with the market, though it underperformed during the quarter but remains comfortably ahead of the market in 2017.  The Equity book (+14bps) was only a marginal contributor with negative performance from Vipshop Holdings (VIPS, -59bps) offsetting most of the gains driver by Liberty Broadband (LBRDK, +36bps) and Biotech (IBB, +34bps).

The China Thesis (-42bps) and the Currencies book (-81bps) both detracted from performance due to the long Dollar exposure before those positions exited the portfolio.  Finally, the Commodities book (-18bps) hurt as Uranium stocks continued to muddle around.

Portfolio (as at 9/30 - all delta and leverage adjusted, as appropriate)
41.4% - International (Brazil, Argentina, India and Greece)

25.7% - Technical (DDM, QLD and SSO)
15.9% - Equities (JD, VIPS, TPL, FNMA & IBB)
10.3% - Funds (CWS, GVAL, and CAPE)
9.4% - China-Related Thesis (ASHR)
7.3% - Commodities (URA)

2.9% - Cash  

Disclaimer:  Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take the above that way.  For added clarity, while Our Man is invested in all of the securities mentioned that’s a terrible reason for anyone else to do so.  Our Man also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you given your own circumstances/risk tolerance/etc. 

Friday, September 15

Investing Thoughts: Part I

OM changed jobs this summer and the process helped hone his view of what’s important investing and makes for a good investor.   Rather than discuss all of the thoughts in this post, OM is going to touch on a couple of items and hopefully tie it to himself and this portfolio.  For long-time readers, it will hopefully offer a deeper explanation as to the evolution of this portfolio (especially over the last 24-30 months), and some hints at how it might continue to evolve going forwards.

Successful investing is about the marriage of skillset and personality 
To those folks that know OM well, the following should all be quite familiar – (i) OM is a very skeptical fellow, (ii) if you ask OM about any idea (not just financial) and expect an immediate answer, it will be “No” (Mrs. OM heartily attests to this one), and (iii) OM knows lots of random crap and loves a good analogy.  What does that mean investment-wise?  Well, OM tends to start his investment thinking at “No” and work his way towards “Yes”.  He is pretty good at putting together disparate pieces of information (data, anecdotal points, history, liquidity and/or chart information, etc), and combining them with some heuristics to get to an investment theme.  This means that you should see that the majority of ‘positions’ in the book are thematic, with the non-thematic positions* largely residing in the Equity book.

Personality-wise, the most important trait is that Our Man is very comfortable being miserable, especially if he thinks he’s going to be correct AND get rewarded for being right!  This ties-in with the thematic approach, since hopefully the reader’s first reaction to a new thesis will range from “Really?” to “Ugh”.  OM thinks that investing, despite rising belief to the contrary ironically from both ‘value’ investors and quantitative investors, is a mix of analyzing data and understanding psychology; knowing when (and how strongly) to apply each is vital.  Themes are likely to seem largely psychological initially, but should require confirmatory data (both ‘fundamental’ and price) as they progress and hopefully grow in the portfolio.

This also leads to a couple of things that OM hopes you won’t see in the portfolio going forwards (and long-time readers will certainly recognize them, unfortunately).  
- The best way to play a theme, especially on the short-side, is often through the second or third derivative due to the convexity or better risk/reward.  So, while OM may astutely and correctly recognize that Australian swaptions was a great way to play on a China slowdown back in 2010, he has no ability to trade Australian swaptions in this portfolio.  Furthermore, trying to put on an inefficient bastardised version of the trade (EWA puts, in that case) negated all that was great about the original idea (such beautiful risk/reward) and turned a ~10x return into a small loss!  Thus, while you might hear from OM about weird and exciting ways to play an idea (I’m looking at you L Michigan/Detroit CDS for those that want to short Autos), a poor man’s version will not appear in the portfolio.  If you see one, don’t hesitate to let OM know!!!!
- For OM’s style, it’s vital to determine between something is out of favor (or where OM early) versus just being wrong.  Those who’ve read this blog over the years will know that OM has increasingly used technical analysis to help with this.  Too many of the positions where OM has lost money had technical signals suggesting it was a bad idea (or certainly wasn’t a good idea), be it Greece (version 1) or OM’s willingness to stick with his US Dollar bull thesis through 2017 (let alone foolishly adding to it).   The performance of the currency book this year indicates it’s clearly a work in progress, but expect it to continue becoming a more prevalent piece of the decision-making. 

* But what of the Technical and Funds books I hear you cry!  And you have a valid point; both books both exist to help counter OM’s skepticism, an unfortunate side-effect of which is under-investment.  As OM has noted, the hope is that the books will outperform the market over the long-run with the base case being that they should provide long-term quasi-market exposure for a part of the portfolio which otherwise would be held in cash.

Position sizing is the most under-appreciated skill in investing 
The older OM gets, the more he finds himself agreeing with Stan Drunkenmiller that “the only way to make long-term returns...that are superior is by being a pig.”  The key is to understand both when you have an idea that truly excites you and when to bet big on it. 

For OM this means accepting that every investment position has a beginning, a middle and an end, and being patient enough to wait until the middle to size a position up and ruthless enough to start cutting it back and exiting as we get towards the end.   Thus for OM the risks are being too big too early (i.e. in the beginning phase, leaving you only bad choices going forwards), not being big enough in the middle period, and having too big a position for too long when an investment is coming towards its natural conclusion.   The bullish US Dollar trades during 2017 were a conspicuous failure to be ruthless enough on cutting back a position that was in its end-game – a bull market that’s in its 6 year (historically it’s about how long USD bull markets have lasted) with a technical picture that was deteriorating.

OM suspects this will be the primary ongoing battle for the rest of his investment life.  However, to try to help matters and force himself towards the best decision, he’ll hopefully be clearer in stating where he thinks investments are in their lifecycles.  Initially, the assumption will typically be that OM is early to the investment and they’re all in the beginning.  Increasingly confirmatory data (both fundamental and price) is likely to signal a move towards the middle and should be reflected in an increased position size.  Finally, as we get to the end the theme will hopefully be very well worn (and things like this will appear in and on the cover of the Economist) the bar for adding to a position should be significantly higher (perhaps impossibly so) as OM should be exiting stage left.

Hopefully, this post will serve as a nice appetizer to hopefully add some context to the main course of the coming portfolio update.

Wednesday, September 6

Things from my Newsblur Reader; 2017 Part III

With summer ending, what better time for the latest “Things from my Newsblur”?   As usual, the more serious (and finance) things are nearer the end.  The final section this time is a little different – it’s a special crypto-assets section, given how much they have been in the news recently.

“We’re creating a world that feels true” – How to Make Great TV, explained by FX spy drama The Americans 
It’s often cited that we’re living in a golden age for television shows (or at least those of a certain genre) and though it doesn’t have the following of some others, The Americans falls into that genre.  It’s a firm favourite in the OM household, and here Vox go behind the scenes to look at the laborious process of making a high-quality TV show.   It’s as painstaking and labour intensive as you’d imagine.  (Vox, Caroline Framke)

Mo Willem’s Funny Failures 
If you have kids of a certain age (by OM’s reckoning 2-5yrs old, though probably older too) then you’ve read some of the Elephant and Piggie books.  Mo Willem’s, the author, reveals a little of how he started to write the books and how difficult it is to write for early readers.   (New Yorker, Rivka Galchen)

What Brands Are Actually behind Trader Joe’s Snacks 
OM lives in Brooklyn, and he can tell you…Brooklynites are bat-sh*t crazy for Trader Joe’s, and their own brand wasabi peas and the likes.  Who makes these (apparently tasty) morcels exclusive to Trader Joe’s – in many cases, it’s not who you think! (Eater, Vince Dixon)  

‘Bro, I’m going rogue’: The Wall Street Informant who Crossed the FBI 
The story of a Wall Street informant who helped the FBI put away over a dozen financial scam artists, and who then spectacularly double crossed them.  To quote the central character, “Remember the movie American Hustle? It’s kind of like that, with way more dirt and twists and f---ed-up shit”.  (Bloomberg, Zeke Faux)  

Airlines Make More Money Selling Miles than Seats 
The golden goose isn’t your ticket or bag fee - it’s the credit card you use to collect frequent flier miles.  Some analysts think the value of these loyalty programs is worth more than the airlines core business.  (Bloomberg Pursuits, Justin Bachman)  

Was it ALL Her Fault?  An Economist Re-examines Brazil’s Crisis 
As you know OM loves Brazil, to the extent that it’s currently over 25% of his portfolio!  Well, here’s the longer-term counter-argument; the problems in Brazil are more structural in nature, and this makes them much harder to fix.  (America’s Quarterly, Gray Newman)  

Why People Still Support Trump 
It’s not all about bigotry and ignorance, and if Democrats want to win (in 2018, and especially 2020) they best recognize that and fast.   Calling your opponents names and assigning the worst traits to them is well, Trump-like.  (Bloomberg View, Clive Crook)

Crypto assets Central
OM has been fascinated by crypto assets for a while, and owns a small amount outside of this portfolio.  While much of the focus has been on the currencies (Bitcoin and Ethereum, and lately tokens and ICOs) the underlying technology (i.e. blockchain) holds interesting possibilities.  While the currencies are doing a great impression of Technology stocks in 1996-2000 (and arguably putting them to shame), it will be interesting to see if the potential of the underlying technology is as important over the longer-period.  

A Blockchain Primer 
Err, what is the Blockchain?  How does it work?  Why does it matter?   Here’s the place to get those answered in language you can understand.  (Daniel Miessler’s blog)  

Why Big Business is Racing to Build Blockchains 
As if to confirm that blockchains aren’t solely for nerds, a number of large businesses are testing them to see what potential they may hold in the real world!  (Fortune, Robert Hackett) 

The Crypto J-Curve 
How should you value crypto assets?   Is it even possible?  Here’s a good place to start your thinking, by combining the current value with speculative value.  (@cburniske on Medium)  

The Bear Case for Crypto 
If you’re positive on Bitcoin/Ethereum and their blockchains, then it behooves you to understand the risks.  The best way to do so, is to find why smart people who think differently/the opposite of you do so.  This is a great place to start…(Preston Byrne)

Tuesday, August 1

2017: Second Quarter Review

Portfolio Update  
- Currencies: Our Man fully exited his Short Japanese Yen position (YCS) during the middle of the quarter.  The yen’s resilience meant that if the strong US Dollar trend were to continue, there would be better risk-reward elsewhere.  The Short-Yen position first entered the portfolio back in 2013, and is the single largest contributor to the portfolio’s P&L.  Goodbye old friend, it may be some time till we meet again.

- China Thesis: Our Man added to the Short Australian Dollar position (CROC) in the middle of the quarter, replacing the Short Japanese Yen position.

Performance and Review
The second quarter saw OM’s portfolio give up 148bps, in contrast to the markets; the S&P 500 (TR) rose 3.08% and the MSCI World was up 2.86%.  For the year, this left OM’s portfolio +7.88% compared to +9.34% for the S&P 500 (TR) and +8.60% for the MSCI World.  


While it will come as no surprise to hear that the second quarter was frustrating - as the portfolio was a morass of disappointments - it also proved to be rejuvenating!  A mixture of data and price action (including some in early July) helped clarify OM’s thinking.  Some themes that have been in the portfolio for a prolonged period (yes, I’m looking at you Long US Dollar) are on their way out, while others are now ready to enter the portfolio or be increased in size.  More on that, however in future posts.

The only two books that covered themselves in any glory during Q2 were the Technical book (+77bps) and the Funds book (+44bps).  The Technical book is fully invested, and Our Man’s models are not even close to suggesting that it’s time to pare back exposure let alone consider exiting.  The Funds book has had a fine start to life, comfortably outpacing the S&P through the first half-year, though it’s far too early to read much into this.

The International/Country book (+7bps) posted a modest gain but was full of contradictions with only the exposure to Italy (EWI) proving a solid gainer.  Argentina (PAM and AGRO) posted a mild profit, though both suffered after MSCI did not add Argentina to the Emerging Markets index.  While this was a short-term disappointment, OM continues to watch the Macri reforms and the (hopefully declining) inflation rate as longer-term indicators.  Brazil was a healthy detractor during the quarter as the “Carwash” scandal continued to rumble inexorably towards President Temer.   The hits kept coming into July, with former President Lula sentenced to prison for corruption though by then the selling had largely exhausted itself…

The Equities book (-17bps) was a small negative contributor during the quarter, driven by the positions in VIPS (cost 93bps) and DLTR (cost 45bps).   The uncertainty around VIPS continued, with the stock trading down as worries about its growth and fears surrounding Alibaba/JD.com’s overall market dominance continued.   OM’s view is largely unchanged; the fears are overstated and largely in the price but the proof of this can only be demonstrated over time (or a sharp negative change in the thesis).  The difference for the portfolio today (vs. historically) is that the position is much better sized with neither a good quarter (Q1) nor a bad one (Q2) forcing a decision upon OM.  The Dollar Tree (DLTR, -45bps) position suffered as Amazon’s takeover of Whole Foods changed numerous working assumptions about the industry, and President Trump’s lack of legislative wins made Tax Reform (of which DLTR would be a beneficiary) much harder to gauge in both scope and timing.  Why fight Amazon and/or Congressional incompetence?  DLTR was removed from the portfolio, subsequent to quarter-end.

The China thesis (-20bps) was a negative contributor as the Short Australian Dollar position (CROC), overwhelmed the positive contribution from Chinese A-shares (ASHR).  As intimated above, expect changes to this book in Q3.   The Commodities (-41bps) portfolio also fell back over the quarter, though URA remained above its 2016 lows.  Breaching these would almost certainly lead to the position’s exit, but until then sizing means the impact is weatherable.

Finally, the Currency book (-198bps) drove the losses with the US Dollar weakening against the Euro and Yen.  There was no one reason, pick your choice…the Fed seems closer to taking a pause on interest rates, Europe seems closer to starting to raise, the Border Adjustment Tax in the US appeared to be close to death (since confirmed), or just the US dollar’s been in a 6-year bull market which is historically all you’ve seen.  Suffice to say, expect OM to exit the Short Euro position during Q3.  The c320bps the Currency book has cost through June - as the final leg down OM was anticipating failed to arrive – is disappointing.  However, even with 2017 included, the Currencies book – the epicenter of OM’s L US Dollar exposure - has still contributed ~3.5x this since 2014!

Portfolio (as at 6/30 - all delta and leverage adjusted, as appropriate) 
24.6% - Technical (DDM, QLD and SSO)
20.3% - International (Brazil, Italy and Argentina)
19.5% - Equities (JD, VIPS, DLTR, LBRDK, FNMA & IBB)
10.5% - Funds (CWS, GVAL, and CAPE)
2.5% - Commodities (URA)

-13.5% - China-Related Thesis (CROC – Short Australian Dollar, ASHR)
-28.9 - Currencies (EUO – Short Euro)

7.8% - Cash  

Disclaimer:  Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take the above that way.  For added clarity, while Our Man is invested in all of the securities mentioned that’s a terrible reason for anyone else to do so.  Our Man also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you given your own circumstances/risk tolerance/etc. 

Thursday, July 20

Things from my Newsblur Reader; 2017 Part II

OM is back!!! Yes indeed - after a short hiatus while he changed jobs and the OM family moved apartments, Our Man has returned.   And what better way to ease back into this blog than providing a short run down on some of the things he’s been reading. 

First gene therapy — ‘a true living drug’ — on the cusp of FDA approval 
In this age of Brexit, Trump, North Korea, Russia et al, it’s easy to forget that things like this – an FDA panel approving a first gene therapy drug and opening whole new genre of medicine – are likely to be looked back upon as biggest news from Summer 2017!  (Washington Post, Laurie McGinley)
 
Amazon’s New Customer 
Why did Amazon buy Whole Foods?   To buy a new customer, of course.  I think Ben Thompson nails it with this explanation, which also helps you think about Amazon’s retail business as a customer of its real businesses (AWS and Fulfillment centres/logistics).  Think of things in this manner and and the Whole Foods deal makes a lot more sense!  Oh, and you can see why AWS is the best business in the world – just a little toll on the internet.   (Stratchery, Ben Thompson) 

The secret origin story of the iPhone 
It’s hard to believe that the iPhone has been around 10 years.  This excerpt from Brian Merchant’s book gives an oral history and some context behind the work (and secrecy) that went into creating it.   
Spoiler alert: both the work and the secrecy were crazy!   (An excerpt from “The One Device” in The Verge, Brian Merchant) 

The Economy-Changing Power of the LED bulb 
One of OM’s first investment theses at his post-MBA job was centred on LEDs, their likely increasing prevalence and that meant for energy usage.  Some 7-years later, it’s nice to check back in on the thesis and see that the impact has even more impressive than OM’s thesis.   
Spoiler alert: “For all the attention given rooftop solar as environmental boon, new age investment and regulatory flashpoint, the LED bulb is three times more significant.” (Bloomberg, Justin Fox) 

AI versus MD 
A fascinating look at how computers are learning to try and spot patterns in medical scans and the difficulties (and successes) that they’re having.  Like many areas where deep learning, and big data, are being used it’s likely to change the nature of numerous jobs in the future.  (The New Yorker, Siddhartha Mukherjee)