2019: Third Quarter Update

Portfolio Update

- Added to Greece (Dislocation):  Greece is the Word…and OM took advantage of the pullback in Q3 to add yet more.

- Added to Shipping (Disruption):  OM sized up the positions in Product Tankers and Crude Tankers as we came towards the seasonally strong fourth quarter and the IMO 2020 regulations going into effect at year-end.  Expect to hear a LOT about Shipping!

- Reduced Uranium (Dislocation):  OM reduced the Uranium dislocation position, but trimming the ETF holding (URA).  While the medium-term prospects remain attractive, the expected catalysts have done nothing to change the narrative.  Though there are discussions for various long-term contracts underway, OM decided he’d prefer to wait with a smaller position until something starts to change the narrative.

- Sold Argentina (Theme): As discussed here, Our Man exited the entire Argentina position.

- Sold Blockchain (Theme):  Our Man exited the position in Overstock.  The key for this position was the “execution"; Overstock selling its retail business and for a decent price leaving a pure blockchain focused company, without the CEO Patrick Byrne’s ‘interesting’ side getting in the way.   Well, Byrne was full of surprises including stepping down as CEO and selling his stake, and when the new CEO almost immediately demurred on selling the retail business, OM didn’t hang around!   For all the investment’s volatility over the last ~9mos, it ended flat (almost to the dollar).

Performance and Review

The second quarter saw the portfolio fall -4.0%, which underperformed both the S&P 500 Total Return (+1.7%) and the MSCI World (Total Return, Net Dividends) (+0.5%).   For the year, this leaves the portfolio at +13.3%, which is trailing both the S&P 500 Total Return (+20.6%) and the MSCI World (Total Return, Net Dividends) (+17.6%).

Thematic

The substantial majority of the losses in the Thematic investments came from the positions in Argentina (-152bps).  This was discussed in depth here, and the positions exited during the quarter. 

The Overstock position, which saw the Blockchain theme contribute +57bps, was also exited during the quarter.   True to form, CEO Patrick Byrne proved ‘interesting’ – his claim that he was involved in assisting the FBI led to the stock to fall 30% in 2-days during August, before it rallied strongly following his resignation.  That resignation letter discussed a personal relationship with a Russian agent, assisting the FBI, and referred to “the deep state”.  When the new CEO indicated that Overstock were happy with the retail business and were continuing with the plan to pay a ‘digital dividend’, Our Man decided to use the run-up in price to  leave the drama behind.

The Fourth Industrial Revolution (-40bps) positions fell back, primarily in the early part of September as the market reconsidered the premium valuations it was offering to growth (especially software) name.  The various thematic country positions - Brazil (-18bps), Vietnam (+11bps), and India (-46bps) – were a mixed bag though there was no major news.

Dislocation

Early July saw the Greek elections, which New Legacy won as expected.  After rallying following the second quarter’s European elections, the market sold the news though New Legacy’s securing of an outright majority was a promising surprise.   New PM Kyriakos Mitsotakis laid out his plans for tax cuts and structural reforms in 2020, and began the process of getting the European Commission to sign-off on his plans.  The Greek positions (-60bps) were a small drag on performance though it created the opportunity to further add to them late in the quarter.

The seasonally weak third quarter saw day rates hold up well, meaning the Shipping positions (-14bps) posted a marginal loss.  OM’s holdings continue to trade at a discount to NAV, but with numerous positive trends on the horizon including the seasonally strong fourth quarter, a better supply/demand balance than in many years, refineries coming back online, and the move towards the US becoming an oil exporter well underway.   This is without even mentioning IMO 2020, which goes into effect on January 1st and has the potential to create a major dislocation. 

The Uranium positions continued to disappoint costing -99bps over the quarter; as noted above, there is limited traction in the names and it seems we will need to see long-term contracts signed at materially higher prices before the stocks move.

Idiosyncratic & Technical

Texas Pacific Land Trust (TPL, -63bps) fell despite the company settling its proxy fight with some major shareholders.  It appointed three people from the shareholder group to the exploratory committee looking at whether the company should convert to a C-Corp, and will come to a recommendation by year-end.  There wasn’t much else to report, with the Funds (-3bps) falling slightly caused by the non-US exposure, and the Technical Book (+18bps) participating in the market’s rise.

Portfolio (as at 09/30/19 - all delta and leverage adjusted, as appropriate)

Dislocations: 45.4%

23.9% - Greece (GREK, ALBKY, and EGFEY)

15.1% - Shipping (STNG, NVGS, DSSI and EURN)

6.4% - Uranium (URA, CCJ and NXE)

Thematic: 24.2%

6.5% - Tech: 4th Industrial Revolution (JD & IGV)

6.1% - India (INDA and SCIF)

6.6% - Vietnam (VNM)

5.0% - Brazil (EWZ)

0.0% - Blockchain (no positions)

Technical: 21.6%

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

Idiosyncratic: 13.0%

10.0% - Funds (CWS, GVAL, and CAPE)

3.1% - Equities (TPL)

Shorts/Hedges: 0.0%

Cash: 6.6%

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

Things from my Newsblur; 2019 Part 4

A surprisingly timely Things from my Newsblur covering a broad array of topics.   Given that, why not start with everyone’s least favorite – Brexit!

Dominic Cummings: The Machiavel in Downing Street

While the political realignment in the U.S. is taking place within the political parties, in the UK it’s happening across the parties with Brexit as the central catalyst.  PM Boris Johnson and Dominic Cummings, his chief strategist and the guy who lead the Vote Leave campaign, have been the accelerant with their all-in approach and the hard-lining of October 31st as THE date.  Since becoming PM over the summer, PM Johnson has lost his majority, every meaningful parliamentary vote, unanimously in the Supreme Court and is testing political norms/conventions.  Yet, his Conservative party has jumped to a meaningful lead in the polls and he has cemented “No Deal” as the default option to the consternation of the Opposition whose fears and frantic reactions ratchet higher as the deadline approaches.  Cummings is central to the escalating tension.  Is he a fool that has thrown it all away and put the nation at risk?  Or is he a visionary that has realized that politicians and media in the “Westminster bubble” is out of touch with the country, and by keeping his eye on the ‘prize’ of achieving Brexit created a situation where the Opposition and the EU are trapped amidst multiple prisoner’s dilemmas and faced with making a Hobson’s choice.  So what is Cummings, fool or visionary? Or is he both?

(Harry Lambert, The New Statesman)

Bonus Cummings edition: This 2018 video, of Cummings talking about Why Leave Won the Referendum, is well worth watching.

Washington Should Tax Capital Inflows

Long-time readers will know that Our Man is a huge fan of Michael Pettis and his take on both China and economics.   This timely article, from a couple of months ago, talks about how taxing capital inflows is a far better way to balance trade than imposing tariffs. The article discusses how it addresses the root causes of the problem, and shifts most of the adjustment costs onto banks and speculators.   The idea was amongst the smorgasbord of things that the Trump Administration threatened last week; even a blind squirrel finds a nut! 

(Michael Pettis, China Financial Markets)

Neither & New: Lessons from Uber and Vision Fund

The spectacular collapse of the WeWork IPO has cast a spotlight on the valuation of companies in the private markets.  In particular, it is on a group of capital burning companies that use technology to facilitate real world services.  They are neither pure technology companies (e.g. Enterprise SaaS cos) nor are they old world companies.  It’s yet to be determined if they will grow to profitability or if, like the late 1800s Steel technological revolution, it’s all profitless prosperity.  Who better to explain the nuances than Ben Thompson!  Anyone remotely interested in technology should at least read his (free) weekly article!  (Ben Thompson, Stratechery)

The Streaming Wars: Ride or Die

With Netflix, Hulu, Apple, Amazon, Disney et al all streaming their content libraries, which ones should you watch?   What’s the difference between their offerings, their business models and their goals?  Which might survive? The excellent Matthew Ball breaks it all down in this comprehensive guide!  (Matthew Ball, Redef)

Why are Autoimmune Diseases on the Rise?

While genetics explain a good portion of autoimmune disease prevalence, changing environments (including stress) are helping lead to sharp increase in the number of cases.  For anyone who has, or knows someone who has, an autoimmune disease much of this article will feel familiar.  It touches on the increased prevalence, the lack of a central database for autoimmune disorders (of which there are over 100) which contributes to the long and hard process of identifying them, and the difficulty in treating them.  (Tessa Love, Medium Elemental)

Alberto Salazar: The inside story of Nike Oregon Project founder's downfall

An inside look from BBC reporter Mark Daly whose Panorama program sparked the USADA’s investigation, which led to one of athletics' most successful coaches being found guilty of doping violations.  That Salazar was a long-time friend of Phil Knight (Nike founder), founded and ran the Nike Oregon Project, and even after the story broke was supported by Nike Ambassador’s including his “good friend” the IAAF President, Seb Coe, only adds to the intrigue.  UK Athletics, which found “no reason to be concerned” despite taking evidence from whistleblowers and the BBC, comes out with no credit either!   It also shows how long these investigative pieces take to come to fruition.  The initial work began in 2013, to Panorama’s “Catch Me if you Can” program aired in 2015, USADA charging Salazar in 2017, and it took a secretive 2-year court battle to get justice! 

(Mark Daly, BBC Panorama)

Rap Battle Debate: Hamilton vs. Satoshi

Want to know about that Bitcoin thing but don’t want to read long dull pieces on it?   Well, here are the key arguments in a far more digestible 21st century format! (Rhyme Combinator, Youtube)