Portfolio Update

Given there were a number of new additions to the portfolio at the end of 2016 and in early 2017, this seems like an appropriate moment to look at the various books/themes in the portfolio and talk a little more about them.


Technical: 22.7% NAV (all sizes are as of March-end) 
The positions are unchanged and are relatively evenly split between DDM, SSO, and QLD, which represent exposure to the major US indices   Currently Our Man’s technical model is strongly in “Buy” territory, and while it indicates there are possibilities of 5-8% pull backs in the near future barring a much more substantial reversal in markets it seems unlikely that its recommendation will change.  Thus, Our Man’s not expecting much to change here for a while.


International:  20.1% NAV 
This book currently has positions reflecting themes in Argentina, Brazil, and Europe (Italy).
- Argentina (8.9%) is the largest theme, though this was reduced during Q1 as OM exited PZE (Petrobras Argentina, which rallied strongly in late-2016) and reduced the size of the PAM (Pampa Energie) position.  The remaining exposure to the theme comes through Pampa (6.4%) and Adecoagro (AGRO, 2.5%).  It’s now been over a year since President Macri took office, and he’s made a remarkable number of changes to help Argentina transition towards a more market-based (vs. government driven) economy including the removal of capital controls, allowing real independence to the Central Bank (which has since decided to target inflation), settling with bond holdouts opening the way for Argentina to raise USD debt, and reducing government subsidies and price caps.   While these things are only now starting to impact the economy, they have already improved investor sentiment which is highlighted by the prospect of Argentina returning to the MSCI Emerging Markets Index this summer.   While OM hopes to see the benefit of the increased liquidity and flows, the position is likely to be one that declines as Argentina continues its move towards normalization.

- The recent additions of Brazil (7.6%) and Europe (Italy 3.7%) were discussed in the year-end review.  Both positions are likely to increase in the future, especially if the recent pullback in Brazil continues.

- Finally, at the start of the year, GVAL was removed from this book and added to the new Funds book (see below)


Equities: 19.3% 
The equities book is made up of broadly evenly sized positions (~3.5%) in JD.com (JD), Vipshops (VIPS), the Nasdaq Biotech ETF (IBB), Dollar Tree (DLTR) and Liberty Broadband (LBRDK).  JD (which Our Man re-entered in January at a mildly better price than he sold it at last year) & the long-held VIPS position are both plays on the Chinese Consumer; think of them as companies that one day could be Amazon & an online TJ Maxx respectively.   Both Dollar Tree and Liberty Broadband (mainly Charter Communications, whose services fellow New Yorkers see as the new “Spectrum”) are exceptionally well run businesses which would also would be beneficiaries of tax reform in the US.

There is also a much smaller position in Fannie Mae (FNMA, 80bp), which along with the position in IBB was discussed in the year-end review.


Funds:  9.9% 
This represents a new book/theme in the portfolio; all of the exposure is expressed through ETFs (or potentially funds).  These ETFs have something about them that has piqued OM’s interest and are why I think they’ll outperform markets over the long-term.   Given that this outperformance is expected over the long-term, the changes to this book are expected to be extremely small.  Currently, there are 3 broadly equally-sized positions in the book:
- GVAL and CAPE are both based on applications of Shiller’s PE Ratio (aka Cyclically Adjusted Price Earnings, CAPE).  GVAL applies it to International stocks (finding the cheapest stocks in the cheapest countries), and CAPE applies it to US sectors.  To Our Man’s mind Shiller’s PE Ratio/CAPE is a tool that is poorly applied in finance with too many trying to use it as a timing mechanism or reason for a short-term decision, whereas it’s real value is as a very long-term measure of relative value.  The intent of both ETFs is to buy things that are cheap on a relative basis (compared to other countries/sectors) and Our Man’s wager is that over the long-term this will prove to be more profitable than the market.  The GVAL position was moved from the International book/theme as it seems to better fit here.
- CWS:  Our Man has read the Crossing Wall Street blog for most of the last decade, and this ETF is based off that blog.  CWS publishes an annual “Buy List” of ~25 stocks at the start of each year, which are equally weighted and then no changes can be made during the year.  Each year only 5 stocks from the Buy List have been replaced, with the others carried forward (with any additions) onto the new Buy List.  This longer-term focus (typically, 4-5 years on the Buy List) leads to a bias towards quality and value and if the process can remain disciplined this can lead to out performance over time.


Commodities: 3.4% 
This book was changed from Precious Metals to better encapsulate the things that might go into it
- The Uranium stock ETF (URA) was added during January, and is the sole position in this book.  OM will likely go into the thesis on Uranium in greater detail at some point, but the cliff notes are:
1). Supply: 70% of supply comes from 2 producers (Cameco, a North American company, and the Republic of Kazakhstan) and both have cut supply in the last 12months and announced their intention to keep it down.  It takes a really long-time (5-7years+) to permit, build, and develop a mine so this capacity constraint has limited offsets.

2). Demand: The primary demand for Uranium is from nuclear power plants.  Post-Fukushima the demand fell substantially as Japan (and other countries like Germany) closed down their nuclear power plants.  Over the last year+ we’ve started to see some of these Japanese plants being updated and come back online, while other countries have approved and are building new (typically Generation III/III+) nuclear plants.  The building of new plants takes time (5-7 years to the plant approved, built) and will likely be slow (as countries wait to see how the new Generation III plants operate) but represents positive incremental change.  In the short-term, contracts for uranium supply are long-term (2-10yrs) with a significant percentage coming due within the next couple of years.

3). Price/Technical:  URA is down 80-90% from its 2011 peak and hit a low of $11.31 in mid-Jan 2016.  Subsequently, it held above this low in early November ($11.74) and confirmed a yearly uptrend in early 2017 (it’s price in 2017 closed at a level higher than any price in 2016!).  OM’s technical model suggests that the future path of URA is more likely to be a bear market rally than the start of a new bull market, but also that this could well be a particularly vicious bear market rally (to $40+!!!) given the depth & time of the decline.

Given this combination of supply/demand factors and the price/technical lining, OM believes that URA currently represents an attractive risk/reward.


Currencies: -47.6% 
OM continues to remain very long the US Dollar, with short positions in the Euro (via EUO) and Japanese Yen (via YCS).  The Euro short is around 2x the size of that in the Yen, with OM continuing to believe that the Euro will comfortably break par to the Dollar within the next 12-18mos.


China Thesis: 2.3% 
There are two components to OM’s China thesis; (i) that the Chinese are seeking to transition their economy to a Consumer-driven one (like the US/Europe/etc) and away from a Fixed Investment one, and that (ii) that they will provide as much monetary support as they’re able to in an attempt to smooth this transition.  To some degree, the Chinese internet positions (JD and VIPS) in the Equities book incorporate the view described in part (i) but in the China Thesis book it is expressed via a small short position in the Australian dollar (42% of Australian exports go to China, in particular commodities used for Fixed investments).  This short position has been substantially larger than it is today (10%+ vs ~1.5%). Part (ii) of the thesis is expressed through a position in Chinese A-shares (~3.5%) with OM believing that much of China’s monetary support will end up finding its way into the local stock market and that 2007 and 2015’s highs (50%+ above here) will be eclipsed before the market finally peaks. 



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.