2018: Fourth Quarter Review

Portfolio Update

Our Man’s working view is that things are okay despite the market’s gyrations and what you might have read.  While there is much uncertainty, the probability of a recession or credit market crunch currently remains low.  Markets have just moved from pricing in a scenario where everything goes perfectly, to one which suitably acknowledges the uncertainties.   Our Man expects that the market may retest the December lows, or at least see a meaningful pullback when this rally ends, and he will look to continue buying during that move.  

What’s he looking to add to the portfolio?

It will be a barbell approach; either positions where there is an event or catalyst in the coming year that will focus investors’ attention, or where the long-term secular trend is understood yet the current price provides a decent entry point for a multi-year holding.  OM also expects to re-enter the Technical book’s position, once he receives the requisite buy-signal.

Looking back at the 4th quarter, the changes to the portfolio occurred in three distinct phases: 

- The first set of trades, in early-to-mid October were largely discussed in prior posts.  Our Man added to his Vietnam position (VNM) and exited the Technical Book (SSO, QLD and DDM), further reduced the idiosyncratic TPL position and trimmed his Brazil exposure (EWZ and EWZS).   Later in the month,  he also went from long biotech (IBB) to short biotech (BIS).

- At the end of November, Our Man started a new Theme-Blockchain position, with a position in Overstock (OSTK).

- In the second half of December, Our Man added materially to the Dislocation-Greece position through the existing positions in the Greece ETF (GREK) and Alpha Bank (ALBKY), as well as a new position in Eurobank (EFGEY).  This recent piece from the last “Things from my Newsblur”, offers a detailed look at Greece (and especially Eurobank).  Our Man will write more but in essence; valuation is now reaching an absolute extreme, investor sentiment is terrible and has significantly diverged from fundamentals, but there is also a catalyst (elections!) in 2019 that can change that sentiment.

Performance and Review

The final quarter saw the portfolio fall -5.7%, which was substantially better than the S&P 500 Total Return (-13.5%) and the MSCI World (Net Dividends) (-13.4%).   Unsurprisingly, the majority of OM’s negative performance (-3.24%) came in the first 11 days of October before any of the changes were made to the portfolio.

Overall, Our Man’s October assertion that the portfolio changes had likely locked in 2018’s performance between -5% and -15% just about held true; the portfolio’s YTD performance ended at -14.9%.  Disappointingly this trailed both S&P 500 Total Return (-4.3%) and the MSCI World (ND) (-8.7%) by a material amount – though the damage was done early in 2018.

There were very few surprises in the portfolio’s performance during the 4th quarter, as it held-up consistently well and Brazil’s strength prevented any negative skew from developing. 

Dislocations

- Brazil was a major contributor, adding 268bps to performance, following Bolsonaro’s win in the Presidential elections. Our Man took advantage of the strong rise during October to significantly reduce the position.  Brazil remains attractive and while a Bolsanaro presidency will likely help economically, unlike Greece and Argentina a change of government wasn’t part of OM’s thesis.  As such, with reduced certainty and conviction, the position is smaller.

- Greece cost 141bps in the quarter.  As noted, the discrepancy between OM perception of reality and investor sentiment/the market’s belief is now significant.  If the technical picture was just a little better, OM would be all in.

- Uranium cost 122bps, as the stocks fell with equity markets.  The last 15 months have seen numerous positive fundamental developments, especially the actions by Cameco & Kazatomprom to reduce supply, but no reaction from stock prices.  The fourth quarter was similar with Uranium spot prices finally started to pick up (and long-term contract prices bottoming out) and Kazatomprom IPO’ing.  If these can’t encourage investors to relook at the space over the next few months, and drive stock prices higher then Our Man really shouldn’t be here (and certainly not in this size).

Thematic

Argentina (-6bps) and India (0bps) were flat for the quarter, while Vietnam (-25bps) saw only a minimal loss.  Argentina remains the most intriguing situation in the portfolio but it’s heavily dependent on whether President Macri runs again (and wins).  Our Man can see a scenario where Argentina is down 50% this year, but also one where it’s the equivalent of buying US stocks in 1984!  OM suspects you’ll see much discussion here about it over the course of the year…

While the above positions held up well, the same could not be said for the Tech: 4th Industrial Revolution (-97bps) and Blockchain (-69bps) themes, which both fell heavily.  The technology positions are both Chinese so suffered with both the retreat in Technology names and the weakness in China.  As for the Blockchain position; Our Man received a sympathetic “Investing is hard” email from a friend after Overstock announced a delay in the GSR deal within a week of OM’s post.   They did not execute well!

Other

The Technical (-130bps in Q4) book was reduced in late September following an initial sell signal, but still suffered during the market’s pullback in early October.  The pullback triggered the second sell signal, and the Technical positions were liquidated preventing any further loss.  This meant that the technical book proved a healthy contributor for 2018.

The Idiosyncratic book’s losses (-307bps in Q4) were evenly split between the Funds book (-155bps) and the Equities (-152bps).  Though Funds book fell, it managed to out-perform the market in the quarter.  Despite being cutback (twice), Texas Pacific Land Trust (TPL) still cost 147bps.  The company predominantly earns its revenue through royalties/leases for oil and gas production and easements (e.g. for oil pipes), largely in the Permian Basin.  The stock suffered as the oil price collapsed during the quarter; though the medium-term impact on production (if any) will prove more meaningful for TPL. 

Portfolio (as at 12/31/18 - all delta and leverage adjusted, as appropriate)

Dislocations: 28.2%

12.2% - Greece (GREK, ALBKY, EGFEY)

9.1% - Uranium (URA, and NXE)

6.9% - Brazil (EWZ)

Thematic: 22.0%

6.8% - Argentina (PAM, DESP, and AGRO)

6.0% - Vietnam (VNM)

4.5% - Tech: 4th Industrial Revolution (JD and VIPS)

2.7% - India (IFN)

2.1% - Blockchain

Idiosyncratic: 13.2%

10.8% - Funds (CWS, GVAL, and CAPE)

2.4% - Equities (TPL and FNMA)

Shorts/Hedges: -14.0%

-14.0 – Short Biotech (BIS)

Technical: 0.0%

Cash: 29.6%

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.