2019: First Quarter Review

Portfolio Update

The theme for the major portfolio changes in Q1 could easily be “Trying to save a draw from the jaws of victory”, especially in the Technical and Short books!

- Technical Book:  OM re-entered the Technical Book at the start of February, when the analysis confirmed that the market’s rise since Christmas Eve was the start of a new prolonged up-trend and not just a bounce.  While OM managed to enter lower than he’d exited back in October, the sharp January rally meant the ‘gains’ were relatively small (2-5%). 

- Shorts:  OM closed the Short Biotech position in the first half of the quarter. While the position was broadly flat, it should have been a substantial gain.  OM managed the position poorly!  The sharp gains in the middle of December coupled with the Technical model signaling a likely bounce should have been the sign for OM to exit stage left with a 30%+ profit in a few months.  He didn’t and in the aftermath of Bristol-Myers Squibb’s massive bid for Celegene in January,  it became a battle to limit Q1’s losses and break-even overall.

- Dislocation – Shipping:  OM entered the Shipping theme during Q1, with a focus on the transportation of crude oil, oil products and LNG.  While IMO 2020 will have a major impact on Shipping, OM believes that the impact on the oil production/refining markets will be just as profound, and the largest impact will be on shipping miles related to these products.   The position is meaningful today, but if the data continues to look attractive it has the potential to be an outsized position in Q3/Q4 and the run-up to IMO 2020 being enacted at year-end.

- Idiosyncratic:  OM bought back most of the Texas Pacific Land Trust (TPL) he sold in Q4, though this at least was at a much better price!  He also exited the position in Fannie Mae (FNMA), which was up well over 100% in the quarter following the Trump Administration making a number of moves, which culminated in the President announcing his intent to end the conservatorship of Fannie Mae & Freddie Mac.  Smarter folks than OM, who have spent vastly more time on the complexities of the situation, believe this could be the start of real reform and that it will have a material impact on the valuation.   However, this seems one for the experts to fight over; it is a low conviction position for OM and with a surfeit of ideas and little knowledge/insight of the political process required to achieve reform, he’s leaving it to others.

Finally, at quarter-end OM changed the account that houses the portfolio for boring technical reasons (ability to use non-taxable $, etc.); OM took advantage of this, to make a number of changes to the portfolio at quarter-end rather than in the weeks beforehand.  The largest change was that the position in Greece was again materially increased but expect a separate article on this, and the current portfolio, in the near future.

Performance and Review

The first quarter saw the portfolio rise +10.4%, though this lagged both the S&P 500 Total Return (+13.7%) and the MSCI World (Net Dividends) (+12.5%).

Dislocations

- Greece was by far the largest contributor in the portfolio, adding 339bps to performance, as it responded to the market’s reduced fears.  There will be an election in Greece this year, possibly as soon as May, and OM believes that like Argentina’s 2014 election it will change the narrative around Greece. 

- Uranium posted a small gain (+53bps), with increased sentiment following Kazatomprom’s listing during the fourth quarter and both spot and long-term contract prices holding up well.  However, long-term contracting is largely on hold at the moment while the Trump Administration makes a determination under Section 232 on the amount of imported uranium into the country.  Shipping (-1bps) was flat on the quarter.

Thematic

- Despite being a small position, the 4th Industrial Revolution theme (+202bps) was a large contributor due to its Chinese names; it wasn’t just Chinese A-Shares that went crazy!

- Brazil (+51bps), Vietnam (+73bps), and India (+46bps) benefited from the increased market sentiment and rallied strongly.  The Blockchain (+46bps) theme also did well, though Overstock (OSTK) has yet to execute on either the sale of its retail business or the completion of its private deal with GSR.  Both were delayed in February, though the company’s tZero security trading platform did go live.

Idiosyncratic

The Idiosyncratic book’s gains (+298bps) were evenly split between the Funds book (+142bps) and the Equities (+156bps).  The Funds book rose with the market during the quarter, with the US-centric funds outpacing US markets though the Global Value fund lagged a little.  The two single name positions, Texas Pacific Land Trust (TPL) and Fannie Mae (FNMA) both rallied very strongly.  In TPL’s case, it was buoyed by the rise in the oil price and the market’s realization that its success is as (if not more) tied to the quantity of oil drilled/etc. on its lands than the price.  As noted above, the Trump Administration made a number of moves suggesting their seriousness at ending the conservatorship of Fannie Mae and Freddie Mac, which saw FNMA more than double during the quarter.

Finally, Our Man re-entered the Technical (+105bps) and exited the Short Book (-140bps) during the first half of the quarter.  The Short book suffered as biotech rallied strongly in January, with the benefit of supportive M&A, while the Technical book participated in the market rally during the second half the month.

Portfolio (as at 4/4/19 - all delta and leverage adjusted, as appropriate)

Dislocations: 37.8%

20.2% - Greece (GREK, ALBKY, and EGFEY)

10.4% - Shipping (STNG, NVGS, DSSI and EURN)

7.2% - Uranium (URA, CCJ and NXE)

Thematic: 29.1%

7.2% - Vietnam (VNM)

7.1% - India (INDA and SCIF)

5.2% - Brazil (EWZ)

4.1% - Argentina (DESP, GLOB, GGAL and AGRO)

3.0% - Tech: 4th Industrial Revolution (JD)

2.5% - Blockchain

Technical: 21.6%

21.6% - OEW Technical positions (DDM, SSO, and QLD)

Idiosyncratic: 13.2%

10.1% - Funds (CWS, GVAL, and CAPE)

3.9% - Equities (TPL)

Shorts/Hedges: 0.0%

Cash: 8.3%

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.