Portfolio Update
- Thematic - Vietnam: OM took advantage of the recent sharp market moves to add to the position in Vietnam, bringing it from a small/starter position (2-4%) to a more medium-sized one (~6-8%) within the thematic book. While there has been much talk about a slow down in global growth and concerns over the future of global trade, it’s important to recognize that countries start from different places. For the long-term, it’s likely much better for Vietnam to have a trade agreement with the EU (such as the one signed this week) even if there’s uncertainty regarding global trade, than it was not having one over the last few years (when global trade saw fewer issues). Ceteris paribus, Vietnam is likely to continue to increase in size within the portfolio over the coming year.
- Technical Book: Unsurprisingly, after decorating the field with yellow flags in the second half of September, OM’s technical model flashed a second sell signal. OM used the bounce earlier this week to exit the technical book’s positions. Initial analysis suggests the probable scenario is more like the pull backs in 1984 and 2015/2016 - ~6months of 15-20% - rather than some of the grander falls. However, the mantra of the mentor within OM’s technical group is worth stating – “Project, Monitor and Adjust”. These initial scenarios are just that…probabilistic projections, to be monitored and adjusted to the reality that prices are showing us.
- Dislocations - Brazil: OM used the market strength to exit ~2/3 of the Brazilian position, reducing it to a 6-8% position. Brazilian stocks rallied strongly into the first round of the election (Oct 7th), and have continued rallying in the week or so since on the back of Jair Bolsonaro’s exceptionally strong performance. Bolsonaro is view as the most ‘market friendly’ candidate and is now the clear favorite in late October’s two-person second round.
Why exit now? Well, risk and uncertainty. For all the various global politicians described as “the Trump of XYZ”, Bolsonaro is the best fit; while the market may like his Finance Minister and approach, there are other significant questions and risks surrounding a Bolsonaro Presidency. With the ETF at $38-40 today compared to the $30-32 of a month ago, more of this risk is embedded in the trade today. Add in the uncertainty of the market environment (see Technical Book above), especially in Emerging Market countries (see Argentina’s issues over the last 6mos) and Brazil fails to justify being an outsized positions.
- Idiosyncratic – TPL: OM further reduced to the TPL position, selling another ~30% of the original holding for the same reasons as discussed in the last quarterly update, which leaves a 2-4% position.
Portfolio Thoughts
Some brief thoughts on the portfolio:
- The below notwithstanding, the portfolio changes mean that OM has likely locked in this year’s performance as a negative number (and most likely -5% to -15%). That’s a strange feeling!
- If OM’s current expectations are correct, it’s going to be vital to take advantage of having a lot of cash to buy at attractive prices and earn out-sized returns. That will be a harder decision that the ones over the last few weeks. If OM is wrong, and the market rallies away to much higher highs…the performance is going to really really suck both absolutely and relatively!! I’ll say it now, OM is comfortable with that…he’d regret it MUCH more if he ignored the signs he’s seeing, did nothing and the market pulled back.
- Though the portfolio is only ~56% invested, it is heavily biased towards Emerging Markets. As a result, OM expects the portfolio will have a higher beta and potentially a negative skew in the coming few weeks. The higher beta means that the portfolio will behave like it’s more heavily invested (e.g. 66-75%), while the negative skew means it will likely capture a little more of the downs than it will of the ups.
- The negative skew is potentially the most concerning, if it reaches an extreme (e.g. capturing 50-60% of the market’s upside but suffering 90-100% of the downside). This extreme is most likely to occur due to a rally in the dollar; a US-listed ETF (holding foreign country stocks) would suffer both from the fall of those stocks and also the dollar movement. Suffice to note, this is a risk OM is monitoring and currently comfortable with.
- OM has a LOT of ideas so expect some half-baked ideas posts in the coming weeks, including a Short/Hedge and a Dislocation.
- OM will be ☹ if Greece isn’t a large/outsized position & huge contributor next year.
Portfolio (as at 10/17/18 - all delta and leverage adjusted, as appropriate)
Dislocations: 20.8%
9.6% - Uranium (URA, and NXE)
6.8% - Brazil (EWZ, and EWZS)
4.5% - Greece (GREK, and ALBKY)
Thematic: 20.8%
6.9% - Argentina (PAM, DESP, and AGRO)
6.1% - Vietnam (VNM)
5.5% - Tech: 4th Industrial Revolution (JD, VIPS and IBB)
2.3% - India (IFN)
Idiosyncratic: 14.8%
11.5% - Funds (CWS, GVAL, and CAPE)
3.3% - Equities (TPL and FNMA)
Shorts/Hedges: 0.0%
Technical: 0.0%
Cash: 43.6%
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.
- Thematic - Vietnam: OM took advantage of the recent sharp market moves to add to the position in Vietnam, bringing it from a small/starter position (2-4%) to a more medium-sized one (~6-8%) within the thematic book. While there has been much talk about a slow down in global growth and concerns over the future of global trade, it’s important to recognize that countries start from different places. For the long-term, it’s likely much better for Vietnam to have a trade agreement with the EU (such as the one signed this week) even if there’s uncertainty regarding global trade, than it was not having one over the last few years (when global trade saw fewer issues). Ceteris paribus, Vietnam is likely to continue to increase in size within the portfolio over the coming year.
- Technical Book: Unsurprisingly, after decorating the field with yellow flags in the second half of September, OM’s technical model flashed a second sell signal. OM used the bounce earlier this week to exit the technical book’s positions. Initial analysis suggests the probable scenario is more like the pull backs in 1984 and 2015/2016 - ~6months of 15-20% - rather than some of the grander falls. However, the mantra of the mentor within OM’s technical group is worth stating – “Project, Monitor and Adjust”. These initial scenarios are just that…probabilistic projections, to be monitored and adjusted to the reality that prices are showing us.
- Dislocations - Brazil: OM used the market strength to exit ~2/3 of the Brazilian position, reducing it to a 6-8% position. Brazilian stocks rallied strongly into the first round of the election (Oct 7th), and have continued rallying in the week or so since on the back of Jair Bolsonaro’s exceptionally strong performance. Bolsonaro is view as the most ‘market friendly’ candidate and is now the clear favorite in late October’s two-person second round.
Why exit now? Well, risk and uncertainty. For all the various global politicians described as “the Trump of XYZ”, Bolsonaro is the best fit; while the market may like his Finance Minister and approach, there are other significant questions and risks surrounding a Bolsonaro Presidency. With the ETF at $38-40 today compared to the $30-32 of a month ago, more of this risk is embedded in the trade today. Add in the uncertainty of the market environment (see Technical Book above), especially in Emerging Market countries (see Argentina’s issues over the last 6mos) and Brazil fails to justify being an outsized positions.
- Idiosyncratic – TPL: OM further reduced to the TPL position, selling another ~30% of the original holding for the same reasons as discussed in the last quarterly update, which leaves a 2-4% position.
Portfolio Thoughts
Some brief thoughts on the portfolio:
- The below notwithstanding, the portfolio changes mean that OM has likely locked in this year’s performance as a negative number (and most likely -5% to -15%). That’s a strange feeling!
- If OM’s current expectations are correct, it’s going to be vital to take advantage of having a lot of cash to buy at attractive prices and earn out-sized returns. That will be a harder decision that the ones over the last few weeks. If OM is wrong, and the market rallies away to much higher highs…the performance is going to really really suck both absolutely and relatively!! I’ll say it now, OM is comfortable with that…he’d regret it MUCH more if he ignored the signs he’s seeing, did nothing and the market pulled back.
- Though the portfolio is only ~56% invested, it is heavily biased towards Emerging Markets. As a result, OM expects the portfolio will have a higher beta and potentially a negative skew in the coming few weeks. The higher beta means that the portfolio will behave like it’s more heavily invested (e.g. 66-75%), while the negative skew means it will likely capture a little more of the downs than it will of the ups.
- The negative skew is potentially the most concerning, if it reaches an extreme (e.g. capturing 50-60% of the market’s upside but suffering 90-100% of the downside). This extreme is most likely to occur due to a rally in the dollar; a US-listed ETF (holding foreign country stocks) would suffer both from the fall of those stocks and also the dollar movement. Suffice to note, this is a risk OM is monitoring and currently comfortable with.
- OM has a LOT of ideas so expect some half-baked ideas posts in the coming weeks, including a Short/Hedge and a Dislocation.
- OM will be ☹ if Greece isn’t a large/outsized position & huge contributor next year.
Portfolio (as at 10/17/18 - all delta and leverage adjusted, as appropriate)
Dislocations: 20.8%
9.6% - Uranium (URA, and NXE)
6.8% - Brazil (EWZ, and EWZS)
4.5% - Greece (GREK, and ALBKY)
Thematic: 20.8%
6.9% - Argentina (PAM, DESP, and AGRO)
6.1% - Vietnam (VNM)
5.5% - Tech: 4th Industrial Revolution (JD, VIPS and IBB)
2.3% - India (IFN)
Idiosyncratic: 14.8%
11.5% - Funds (CWS, GVAL, and CAPE)
3.3% - Equities (TPL and FNMA)
Shorts/Hedges: 0.0%
Technical: 0.0%
Cash: 43.6%
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.
No comments:
Post a Comment