Things from my Newsblur; 2018 Part IV

Time for another edition of “Things from my Newsblur”; as usual, the most investment-related stuff is at the end.

Eliud Kipchoge Is the Greatest Marathoner, Ever 
A well-timed interview/article by the New York Times, on Eliud Kipchoge.  Last weekend, the Kenyan obliterated the world marathon record in Berlin, and by posting a time of 2hrs 1min and 39 seconds he brought the spectre of running a sub-2 hour marathon into the realm of possibility.   For context, his new world record was 26+ miles at 4mins 38 seconds each…and if you’re looking to play along at home, turn your treadmill up to the fastest speed it goes and run for a couple of hours!   Unsurprisingly, a passion for running, singular focus, competitive desire and immense self-discipline feature heavily in Kipchoge’s story.  (Scott Cacciola, New York Time)   

Aston Martin building 28 Goldfinger DB4 reproductions - complete with gadgets 
For Bond fans of a certain vintage, the DB5 from Goldfinger is a classic!  Aston Martin are going to make 28 of them, and have teamed up with the special effects supervisor from the latest Bond film to design them.  If like Our Man, you don’t drive much, have no interest in spending a fortune on a car and much prefer to keep it simple…there’s already a LEGO version!  (Joel Stocksdale, Autoblog)  

The Untold Story of NotPetya, the Most Devastating Cyber Attack in History 
A fascinating account of the NetPetya virus; while targeted at Ukraine via an obscure locally popular accounting software, through a series of unanticipated events it ended up spreading globally.  It also revealed just how poorly everyone updates their computers, how fragile corporate IT systems are, and how interconnected we all are.   It’s worth reading this story, just to see how close AP Moeller Maersk came to losing almost their entire computer system, and the impacts this would have had across the globe.  These attacks aren’t going to get any less sophisticated, and like NotPetya it’s the unintended consequences (and victims) that will make or break them.  (Andy Greenberg, Wired)  

Brexit Explained 
Yes, OM is British. 
No, he doesn’t think a no-deal Brexit will result in people starving on the streets of London. 
Yes, Boris Johnson was probably right when he said President Trump would handle Brexit better than PM May. 
Yes, his rationale was pretty sensible and likely accurate. 
No, that doesn’t mean Boris would make a good (or competent?) Prime Minister
No, OM has no idea what’s going to happen.
However, if you want a good sense of the lay of the land, some well-thought out but easy to understand analysis, as well as likely probabilities then Helen Thomas’s article and blog are for you. 
If you’re so done with Brexit, I don’t blame you, and feel free to skip it
(Blondemoney)

What went wrong with IBM's Watson

IBM pitched its Watson supercomputer as a revolution in cancer care.  It's nowhere close. 
In the last portfolio write-up, OM talked about the fourth industrial revolution and artificial intelligence.  It is still early in that process, and IBM’s Watson seems a good example of where the marketing hype is somewhat advanced of the technological progress.  It’s by no means the only example, and there will be many more.  (Felix Salmon, Slate) and (Talia Bronshtein, STAT)  

The Next Financial Crisis Lurks Underground 
Bethany McLean, the journalist who led the reporting on the Enron scandal (and subsequently, co-wrote the excellent “The Smartest Guys in the Room”) writes about the paradox of shale companies, which are awesome and huge and "profitable" (imagine, OM doing finger quotes as you read that word).  However, as legendary short-seller Jim Chanos (see below for more on him) said for the article “The industry has a very bad history of money going into it and never coming out”.   This is not the first time the  dubious "economics" (more finger quotes) of Shale has been mentioned, even in the press!  However, like pretty much anything by Bethany McLean, it is recommended reading!  (Bethany McLean, New York Times)  

How Jim Chanos Uses Cynicism, Chutzpah - and a Secret Twitter Account - to Take on Markets (and Elon Musk)   
An interesting profile of Jim Chanos, “the Lebron James of short-selling”, who is best known for predicting the demise of Enron Corp back in 2001.  The article gives you a glimpse into the mind and approach of a short-seller, a group who tend to be rather non-conformist and ‘different’.  Chanos is the best known short-seller, having run short-focused hedge funds since 1985.  His funds’ performance is the perfect demonstration of both how hard short-selling is and also its value in a portfolio context; per the article, Chanos’ short-only fund has lost an annualized 0.7% per year, but his  flagship Fund that uses passive instruments on the long-side and offers market level exposure has returned approximately 2x the market’s return.  (Michelle Celarier, Institutional Investor)  

Why a Leading VC is Betting Big on a Decentralized Internet 
With the big fall in Bitcoin/Ethereum/etc this year, many have been quick to label the entire cryptocurrency and blockchain space as dead/a bubble/all over.  This is the counter-argument, that while prices got well ahead of the technology last year, the space continues to attract exceptionally smart folks; both on the VC-side and the engineer/technical folks who may make yet make it a success.  Chris Dixon, of Andreesson Horowitz, talks about what he sees in crypto and why he’s launched a fund focused on it.  (Kevin Maney, Breaker)

OM’s Philosophy: How Today’s Portfolio Fits

As a follow-up to OM’s last piece on his investment philosophy and strategy, this one looks at how the current portfolio fits within that framework.

Dislocations – 35.4% NAV, as of end of June 2018 
OM seeks to take advantage of dislocations – areas of the market where performance has been abysmal and investors have lost hope.  In addition to cheap valuations and fundamentals that are turning around, these investments require a narrative to help encourage investors to reexamine the opportunity.

Brazil (20.3% NAV) 
The longer-version of the thesis can be found here.  The shorter version is that Brazilian equities lost 80% (in USD-terms) between 2011 and 2016, and investor sentiment reached a nadir in early 2016 as the Carwash Scandal enveloped Brazil’s elite culminating in the successful impeachment of President Rousseff.  With sentiment at a trough, there were positive signs; new President Temer was viewed as competent and a short-term fix, and the length-and-depth of the recession meant that politicians were open to reform (especially pension) and companies had spent 5-years cutting costs to survive (i.e. created operating leverage to any pick-up in demand).  This was supplemented by the macro environment picking up (Brazil exited recession in 2017) and stock prices rising.

However, the big current question is whether the narrative peaked in December 2017, when Brazilian stocks continued to rise even as the planned pension reforms were shelved.  If so, this position should be vastly smaller especially considering the uncertainty of the upcoming election.

Uranium (9.5% NAV) 
Uranium remains the most frustrating position in the portfolio, which is a sign that it should probably be a smaller one.  Nothing has changed in the thesis;
- The primary demand is nuclear power plants which are slowly coming back online (post Fukushima) and being built (mainly in China and India).  These plants have long-term contracts (2-10yrs) and the majority of existing contracts come due in the 2018-2020 time frame.
- The supply-side is now rational.  A multi-year price war saw suppliers seek to build/retain market share, but the continued falling price meant there was no investment and most mines currently operate at a loss.  Two suppliers (Cameco and Kazakhstan) now control over 50% of the market, and have both been disciplined and aggressive in shutting down capacity.  Our Man hoped that these public demonstrations of supply-side discipline, especially the major cuts coming into 2018, would help start to drive the narrative and price but despite strong rallies on the shut-downs, there’s been little price follow-through.

Greece (5.6% NAV) 
Greece suffered through the Great Depression (and more) and everyone’s still annoyed/frustrated with them, with investors having been burned more than once.  However, Greece exited its third (and final?) adjustment program a couple of weeks ago and the IMF/EU came to a French-brokered understanding re. its future debt path earlier in the year.  While there is much reform that still needs to happen, it’s also too easy for outsiders to discount what’s already been done (e.g. reforms making it easier to fire workers, new laws to work out NPLs, etc.).

OM has limited the position size since while all the ingredients are in place there is no compelling narrative to force people to look at Greece again.  As such, OM is waiting to see (i) Greece come to market with another debt issue, and especially (ii) elections.  OM suspects that the latter will prove a strong driver of the narrative, especially if Kyriakos Mtzitokis’ New Democracy look like winning.  They represent a much more palatable partner to investors/the EU/the ‘media’/etc. than current Greek PM Alex Tsipras and his Syriza party.

Thematic – 28.8% NAV, as of June-end 2018 
This represents OM’s exposure to long-term secular themes.  The themes likely won’t change much over time though the underlying components and position sizes may do.

The 3^rd/4^th Industrial Revolutions (14.2% NAV) 
The Digital Revolution (3^rd Industrial Revolution) was the shift from mechanical/analogue technology to digital electronics; at the simplest level think sending mail to email.  It began with the invention of the transistor (1947) which led the advent of digital computers, and it continues through today cellphones and the Internet.  The Fourth Industrial Revolution is building upon and extending the Digital Revolution, and seems likely to transform society in the coming years/decades.  So far, it has been characterized by breakthroughs in fields such as robotics, artificial intelligence, machine learning, autonomous vehicles, genome science, and cryptography.  Most will have at least heard of some/most of these fields, but they are all still emerging and their impacts and relative importance isn’t yet known.

Our Man has long-held various technology and biotech names in the old Equities book; while the companies have their own attractive traits, these “Industrial Revolutions” are the overarching theme that binds them together.  OM suspects that by classing all the positions that are predominantly driven by this theme together, it will help from a sizing and risk management perspective.

If you’d like to read a simple primer on the 4^th Industrial revolution, here’s a good one from World Economic Forum.

Argentina (8.0% NAV) 
Argentina started in the dislocation book; Kirchnerism from 03-15 resulted in a poorly managed and distorted economy, with no access to global capital markets.  However, political change was imminent; President Cristina Fernandez de Kirchner couldn’t run in the 2015 elections, and any of the 3 candidates would be more market friendly.  She was replaced at the end of 2015 by President Macri, the most market friendly of the candidates.  President Macri began an impressive liberalization of the economy including removal of currency controls, inflation targeting independent central bank, settling with the bond hold-outs allowing Argentina to access capital markets, etc.  

The thematic bet is long-term that Macri-ism succeeds and Argentina becomes a ‘normal’ country and market economy, with single digit inflation and normalized interest rates.  This allows the development of a broader credit market (both corporate and personal) and businesses have greater ability to plan/invest for the future.  Think of the US in the early 1980s, following Volker’s raising rates to tame inflation, as a good but vastly simpler historical rhyme.

India (4.9% NAV) 
The long-term bull case for India is widely known, and OM doesn’t have much special insight.  The thematic case starts with the 2^nd largest country in the world, which also has great demographics and is (relatively) technologically advanced.  These natural advantages are supplemented by some self-help.  While there is much to criticize the Modi government over, it has made some structural shifts (taxation changes, bankruptcy code and financial reform, etc.) and the push to digitize the economy, highlighted by the introduction of Aadhar (a unique individual ID number based on biometric information), is potentially world-leading.

Vietnam (3.1% NAV) 
The cliff notes for the Vietnam is that it looks like China/Thailand 15-25 years ago and is treading down the same path.  The longer form can be found here; expect Vietnam to be in the portfolio for a long time though the position size will vary depending on the pace of reforms, the strength of the economy and the proximity and likelihood of any MSCI upgrade (to Emerging Market status, from Frontier).


Idiosyncratic – 18.2% NAV, as of June-end 2018 
The idiosyncratic book is made up of two things; a small number of attractive individual stocks and some Funds.  These Funds take advantage of some structural inefficiency be it through active stock picking/time horizon or using a combination of (valuation) factors to systematically allocate capital. 

Texas Pacific Land Trust (TPL, 6.7% NAV) – if there could be a poster-child for the type of individual stock in the idiosyncratic book, it would be TPL.  It’s attractively priced, not covered by any Wall Street analysts (of note), not in any ETFs, and its business (oil royalties, land leases, and water rights) has no real peers to benchmark it against.  Throw in the uniqueness of its structure – it was created in 1988 as a result of the Texas Pacific Railway co going into receivership, and all it does is manage/sell land and use the proceeds to buy back shares – and nobody really knows or cares about it.   

Fannie Mae (FNMA, 0.3% NAV) – Either the government should not be sweeping all of FNMA’s profits to the Treasury and it’s worth multiples of the current price, or they should and it’s worth almost nothing.  For a resolution, it requires political decisions to be made on a topic nobody wants to make-them on (government’s role in the mortgage market) and with no immediate need for a decision.  Think of it as a glorified option with lots of unknowns and very attractive risk/reward payoff.  Also, it has no time decay but also no strike date…it could be here forever and worth the same, or worth multiples next quarter/year.

As previously noted, the Funds (11.3% NAV) are within the idiosyncratic 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.
- 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.


Technical - 32.9% NAV, as of June-end 2018 
The Technical book was added back in 2014, to help compensate for OM’s natural skepticism by formulaically take long positions (in the levered ETFs for the S&P 500, Dow Jones and Nasdaq 100) to capture long-term trends in these markets.  The position-sizing of these positions is also rules-based, and more information on the genesis and rules for the Technical book can be found here.


Hedges/Shorts 
None currently.