Saturday, March 31

Things from my Newsblur; 2018 Part II


Our Man has been surprisingly competent at scheduling his time so far in 2018, creating a small sliver each week for reading and “thinking”.  A side product of this newfound competence is a more frequent “Things from my Newsblur”.  As usual, the more serious and the finance-orientated things are nearer the end. 

As someone who spends far too much time thinking about investing, this story appealed to OM on multiple levels.  A couple, who were approaching retirement, noticed a small flaw in the lottery odds of a particular game.  They did what all good investors should do; realize that they have a legal edge, show great discipline in waiting for the opportunity to manifest itself, and then bet really really big to maximize it.  What did really really big entail?  A 25-person syndicate, hours (sometimes days) filling in many thousands of lottery tickets on each of the 55 occasions they played in 8 years, $27million in winnings and ~$8million in profits!  Like most investment edges, it disappeared (the state closed that particular lottery game down) and an attempt to replicate the strategy in a different market (Massachusetts lottery) met with too much competition alerting the press.   (Jason Fagone, Highline – Huffington Post)

With the rise of Uber, AirBnB, etc. the nature of cities is changing, and with it so must their design.  Cities of the industrial age looked mechanical, cities of the information age can look like fractal networks — like nature.”  Can we build a city that’s truly modern and functional, but has the character of a medieval town?  (David Galbraith, Medium)

With all the doom around Brexit, there is at least one industry where Britain is the unquestioned world leader; the $10bn+ sandwich industry!  The British sandwich industry transformed how you eat lunch, then did the same thing for breakfast.  Sandwiches for dinner next?  OM hopes not!  (Sam Knight, The Guardian)

While not strictly a read, if you’ve ever wondered what the reality of being an Uber driver is, then this is an easy way to find out.  Spoiler alert: It doesn’t take long to discover it sucks!  (The Financial Times)

Despite what you might read on this blog in the upcoming weeks, Amazon is one of OM’s favorite companies.  This article talks about the process that led to deep learning becoming a key driver that powers most of Amazon, especially Alexa and Amazon Web Services.  The process starts with an imagined, and often technologically impossible product, and then working backwards giving it the flexibility to include features that haven’t been invented yet.  (Steven Levy, Wired)

A profile of Jim Simons, an investing legend.  The former cryptographer built Renaissance Capital whose algorithms made him a billionaire.  Now he’s using some of that money to fund his Flatiron Institute, which is devoted to computational science and to developing and applying algorithms to help scientists analyze enormous caches of data.  While Universities and scientists have become skilled at collecting data (especially digital), they are not coders and so often struggle to fully benefit from it.  The institute hopes to help  by providing top researchers with bespoke algorithms to analyze their data.    (DT Max, The New Yorker)

Anyone who’s spent more than a cursory amount of time looking at cryptocurrencies and the blockchain will have heard of Estonia.  The country is so eager to take on technological problems, and has had such foresight in its approach, that it is close to building the first entirely digital country.  What do I mean?  Imagine a world where your financial records, health records, employment history, and school grades were all on secure online system where you owned all your data and could control who sees it.   Yes, you…not Facebook or Equifax or Google, etc!  That’s the pathway that Estonia is trail blazing! (Nathan Heller, The New Yorker)

Cryptocurrencies have received a beating recently.  If you’re still interested in them and especially the underlying blockchain technology, then you should absolutely read this article.  Forewarning, it’s long and can be a bit technical/complicated in spots so you might need to re-read it a few times (OM did, and he’d still only claim to get the concepts rather than all of the details)…but it will be worth your time! (Preethi Kasireddy, via Medium)

Sunday, March 18

Portfolio Update (and Vietnam)


Well, that was fun!  After a serene 2017 and a rampant January, Mr. Market handed out a harsh dose of reality during February with the S&P 500 Total Return falling 10%+ intra-month before recovering.  In the midst of this, OM did very little during the month; adding to the Greece position and beginning a new one in Vietnam.  Let’s touch a little on both decisions, before looking more broadly at how the volatility is impacting OM’s view going forwards. 

Greece 
While the market was hitting its lows, Greece successfully issued a 7-year bond in an oversubscribed offering.  This alone reflects the change in investor perceptions, and is further highlighted by the 3.5% yield on the bonds (or a mere 75bps above similar US Treasuries)!  There remain hurdles to clear, most notably agreeing suitable debt relief and a post-bailout monitoring arrangement, but OM saw the successful bond issuance as another sign that things are on the right track.


 Vietnam
The argument for Vietnam is a simple one; it looks like China/Thailand 15-25 years ago and is treading down the same path.
- After the property bubble, there was a long and drawn out restructuring in the bank sector that started in 2011.  It took till 2015 before real estate transaction volumes really started to recover.  Now, with the real estate sector stabilized, the strength of the rest of the economy is becoming more apparent; growth is good, inflation is under control (2.5-5%), rates are low, and the government is using foreign inflows (see below) to build reserves.

- Vietnam has one of the lowest labor costs in Asia, with a young and educated demographic profile.   This comes at a time when labor costs in China (and Thailand) are rising due to an aging population.

- Vietnam is already a consumer-centric economy (65% of GDP) meaning the combination of good demographics (an influx of young workers) and job opportunities (see next point) sets up a virtuous cycle of opportunity.

 - Vietnam is seeing substantial Foreign Direct Investments (“FDI”) from global multinationals.  This began with Samsung’s $13bn investment in 2014 (and follow-up commitment of $7bn more by 2017) and has continued apace with 2017 setting a new record.  The Vietnamese government is continuing with reforms to further encourage foreign multinationals to set-up and invest.

 - In the medium-to-long term, if Vietnam is to follow in China’s footsteps and become the next up-and-coming Asian manufacturing powerhouse, further industrialization and urbanization lies ahead.

- The Vietnamese government has targeted a 70% market cap to GDP ratio (currently ~46.5%), which seems achievable given that similar countries include Singapore (200%+), Thailand (~90%), Philippines (~80%), and Malaysia (~120%).  The government is facilitating this through easing foreign ownership restrictions, privatizations and equitizations.  From OM’s Argentina discussions, you will remember these are all key criteria in moving from being a “Frontier” market to an “Emerging Market” and the wall of $ that brings.  For those that enjoy history’s rhymes, Vietnam’s government floated the company’s largest beer company (SABECO) in late 2016, and just sold a majority stake to ThaiBev.  The historians amongst you will note that back in 1993, Tsgintao Brewery was the first Chinese state-owned company to list in Hong Kong creating the H-share market that has blossomed today.

This week brought further confirmation of the interest in Vietnam, with Warburg buying a stake in Techombank and Amazon poised to enter the country, which both help indicate the strength of the long-term opportunity.


Overall
So what did February change in OM’s outlook?  In the immediate-to-short term, not a lot - new highs are likely coming and the speed of their arrival (the quicker the better) will provide more clues as to how far the market might run in the medium-term.  However, it is equally clear that the probability of 2019 being spectacular (think 3,500 on the S&P 500) was significantly diminished by the depth of February’s slump. 

As such, while OM is certainly not forecasting any end of the bull market it’s certainly wise to start preparing for it.  This is something OM is pondering and will be the focus of an upcoming post, but to whet your appetite here are the three positions that are likely most at risk of seeing their position sizes reduced:

- Brazil:  OM’s Brazil positions are very indicative of where the market finds itself, somewhere between rolling over and surging to impressive new highs.  Technically, it’s one of the clearest/most interesting charts out there – based on OM’s analysis, either we see 89-90K on the iBovespa relatively soon and are on the pathway to impressive new highs, or there’s likely a much more substantial pull-back.  Fundamentally, OM continues to like Brazil but with an election coming up later in 2018 it’s unlikely to remain vastly outsized unless we see that push to impressive new highs.

- IBB:  Biotech has done fantastically over the past few years, but of all the things OM owns it looks the closest to exhaustion.  Given how far it has come a pull-back could be substantial, and OM worries that should that occur the receding tide will reveal more Theranos’ swimming naked!   The decline won’t be as dramatic as Tech’s 99/00, but OM is using that as his broad heuristic and will be happy to wait until he hears other investors proclaim how they don’t invest in biotech/binary situations before diving back in.

- Uranium: Fundamentally, and conceptually, OM loves the Uranium thesis – it’s probably his favorite in the book.  However, as the chart below shows the price action sucks – sharp bounces when the production cuts were announced but no follow through.   Unless things turnaround, and soon, expect the position to be vastly reduced.


Sunday, January 28

2017: Fourth Quarter Review

Portfolio Update  
The recent portfolio updates covered most of the portfolio changes in Q4, so OM won’t spent too much time on them: 
- Commodity:  As noted, Our Man increased the Uranium position to ~10% of capital.  The initial increase was through the addition of NexGen Energy (NXE) following Cameco’s announcement of a production cut, and it was supplemented by adding to the Uranium ETF when Kazatomprom also announced production cuts.   

- International: Our Man continued to add to the International portfolio.   The continued positive economic information out of Greece, encouraged OM to increase his exposure (GREK and ALBKY).  The pullback in the Indian market offered an opportunity to add to existing positions (SCIF and INDA).  Finally, the recent IPO of Despegar (DESP), an online travel booking firm, allowed OM to broaden the Argentina exposure. 

- China Thesis: Our Man exited his position in Chinese A-shares (ASHR).  While the position was reasonably profitable, the bull market has lacked the liquidity-fueled vigour that Our Man was hoping for.   The capital is better used elsewhere.


Performance and Review
The fourth quarter saw the  portfolio rise 6.7%, while the S&P 500 (TR) rose 6.6% and the MSCI World was up 5.4%.  This meant that while OM’s portfolio generated a healthy absolute return of +21.0% for 2017, it underperformed the +21.8% rise of the S&P 500 (TR) though it did have the consolation of outpacing the MSCI World (+19.3%).  

 

After an interminable wait, there was finally some good news on VIPS (+94bps) with Tencent and JD.com investing over $850mn to purchase a combined 10% of the company, and agreeing to work together.  The position in JD (+35bps) also rose during the month, with the tie-up seeming to confirm the long-held but largely unspoken belief that JD and Tencent were likely to work together against Alibaba.  Elsewhere in the equity portfolio, there was a good contribution from Texas Pacific Land Trust (TPL, +34bps), which continues to see increased contributions to revenue from its water services business.

The International book saw healthy contributions from India (+58bps), Argentina (+41bps) and Greece (+41bps).  The situation in all three countries continues to steadily improve, with the news of the Greek stress tests and its attempts to re-enter the bond market likely to be key factors in early 2018.  Argentina was the single largest contributor to performance in 2017, adding almost 700bps driven by the continued rise in Pampa Energine (PAM).  Brazil (-47bps) was a negative contributor in the quarter as debate raged over whether former President Lula would be allowed to stand in 2018’s elections.  President Lula was convicted of corruption in 2017, which would bar him from a Presidential run, but in December and appeals court agreed to schedule an early decision.  This re-opened the possibility of President Lula running, should his appeal be successful.   Brazil was also a healthy contributor in 2017, adding 350bps+ to performance. 

The Technical Book showed its value to OM’s portfolio in Q4 and 2017, benefiting from the rising markets.  The book was added in 2014, the first of a series of small changes over the years to hedge OM’s skeptical nature and ensure the portfolio always had some core long exposure.  It’s the “Technical” book as it is based purely on quantifying and investing in long-term trends in the market (S&P, Nasdaq and Dow).  For a recap, of the full details and rules…read here.

The Funds book saw decent contributions from all three positions, and had a good year – it outpaced the market by almost 300bps.  The Chinese A-Shares position contributed well in the 4th quarter, before OM exited the position, and the gains almost entirely offset the early year losses from the Australian dollar short position.  The Uranium thesis finally started to show signs of life in the fourth quarter, with the two largest producers both committed to taking significant capacity out of the market.   The strong fourth quarter meant the Commodity book ended positive for the year.

While OM exited the long US dollar positions earlier in the year, the Currencies book was the big negative contributor in 2017, costing over 400bps.  However, this doesn’t quite paint a full picture as the Brazil, Argentina, Greece, India and VIPS/JD.com positions are all implicitly short the dollar.  As such, while the Currency book housed all of the losses from OM’s long dollar position in the early year, the other books (especially the International/Country) benefited from the implicit short position during the latter portion of the year.


Portfolio (as at 12/31/17 - all delta and leverage adjusted, as appropriate) 
44.8% - International (Brazil 23.3%, Argentina 11.6%, India and Greece)
28.1% - Technical (DDM, QLD and SSO)
16.2% - Equities (JD, VIPS, TPL, FNMA & IBB)
10.2% - Funds (CWS, GVAL, and CAPE)
10.1% - Commodities (URA)
4.6% - 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.