For those who follow markets, I’m sure you’ve seen numerous pieces trying to look at the dichotomy between the rallying stock market and the improving but still uncertain economy. For those who don’t follow the markets closely, don’t worry this is not going to be one of those pieces! Frankly, OM is more sanguine than most and there are reasonable arguments on both sides. As a natural cynic, OM currently struggles to be too bullish but there are some broad themes that he’s comfortable with – thus this portfolio update will break the book down differently from normal. As you might quickly surmise from the depth of the write-ups, OM is more inclined to add to those themes listed first over those listed later on.
Supply is Constrained (38.3% of the ptf)
This is the largest part of the portfolio, and it will likely be for some time. In essence, OM has no great conviction in what demand will look like and so has instead concentrated much of the portfolio in areas where supply is constrained. In the not-going-to-happen ideal world, if demand is good then the constrained supply will manifest itself in higher prices, and if demand remains weak then pricing will not be as bad as investors fear. Supply has been constrained in these areas predominantly as they have been terrible, horrible, no good, very bad sectors (or are otherwise controversial) for a long time. Clearly, OM thinks they are at an inflection point BUT until this is proven over time the good news will be discounted, the bad will be extrapolated and the stocks will be VERY volatile. That unfortunately is the cost of investing here and so the ability to see the forest from the trees, the conviction to stomach that volatility, and the honesty to walk away if/when things change are what is going to matter. Our Man added to all three positions during the quarter.
- Uranium (URNM, CCJ & NXE): 14.5% position
Our Man added significantly to his Uranium position multiple times during the quarter. While there is a longer piece coming on Uranium, most of the key factors have been discussed before – the difference is that after numerous false starts, and aided by COVID-19, the time is finally right. Today, there are clear tailwinds on both demand and supply sides. Notably, there are changing attitudes in the West that will impact demand; even AOC has gone ‘no nuclear’ in the Green New Deal to ‘leaving the door open for nuclear’ in 18-months, and in a subtle shift 'green energy' has become 'clean energy' that includes nuclear. On the supply-side, COVID-19’s impact means the two largest producers have largely shut-down their production creating a major short-term supply-demand imbalance and further highlighting the longer-term supply deficit.
- Shipping/Tankers (EURN, DSSI, STNG, DHT & TNK): 19.6% position
The tanker thesis can be summarized as the lowest ship order book in a decade+ combined with the oldest fleet in history: supply is constrained! It is why things like the COSCO sanctions and the oil contango drove significant increases in shipping rates. Unfortunately, while rates for 2020 are amongst the best in history, the stocks’ performance is not! Investors expect rates to be fallow, falling beneath operating break-even, in the coming quarters as the floating storage unwinds and oil demand comes back slowly. Unsurprisingly, OM doesn’t think that rates will be as bad…
- Blockchain/Cryptocurrency (GBTC): 4.1% position
OM will spare you a debate on bitcoin merits (or not), though as many of you know he owns cryptocurrency directly and has thus eschewed owning the less efficient ways of owning it in this portfolio. Well that changed in Q2, as he held his nose and overlooked GBTC’s inefficient structure to start a position in Bitcoin. Why? Two reasons;
(i) COVID-19 launched a perfect storm of unprecedented fiscal stimulus and monetary easing coinciding with Bitcoin’s halving date (when supply became more constrained!). Even the most ardent bitcoin believers couldn’t have dreamt of this! It’s not a coincidence OM refreshed you on Plan B’s stock-to-flow model in the last Things from My Newsblur.
(ii) OM is old enough to remember when UK Chancellor Gordon Brown selling half the UK’s gold for $275 in 1999-2002 (it’s ~$18,000 today!) and the launch of the GLD ETF a couple of years later, which helped the gold price rise through consuming a large part of new gold supply during the 2000s. After the collapse from the late-2017 highs reversed in late 2019, OM will be watching GBTC’s purchases of bitcoin to see if history rhymes.
- Uranium (URNM, CCJ & NXE): 14.5% position
Our Man added significantly to his Uranium position multiple times during the quarter. While there is a longer piece coming on Uranium, most of the key factors have been discussed before – the difference is that after numerous false starts, and aided by COVID-19, the time is finally right. Today, there are clear tailwinds on both demand and supply sides. Notably, there are changing attitudes in the West that will impact demand; even AOC has gone ‘no nuclear’ in the Green New Deal to ‘leaving the door open for nuclear’ in 18-months, and in a subtle shift 'green energy' has become 'clean energy' that includes nuclear. On the supply-side, COVID-19’s impact means the two largest producers have largely shut-down their production creating a major short-term supply-demand imbalance and further highlighting the longer-term supply deficit.
- Shipping/Tankers (EURN, DSSI, STNG, DHT & TNK): 19.6% position
The tanker thesis can be summarized as the lowest ship order book in a decade+ combined with the oldest fleet in history: supply is constrained! It is why things like the COSCO sanctions and the oil contango drove significant increases in shipping rates. Unfortunately, while rates for 2020 are amongst the best in history, the stocks’ performance is not! Investors expect rates to be fallow, falling beneath operating break-even, in the coming quarters as the floating storage unwinds and oil demand comes back slowly. Unsurprisingly, OM doesn’t think that rates will be as bad…
- Blockchain/Cryptocurrency (GBTC): 4.1% position
OM will spare you a debate on bitcoin merits (or not), though as many of you know he owns cryptocurrency directly and has thus eschewed owning the less efficient ways of owning it in this portfolio. Well that changed in Q2, as he held his nose and overlooked GBTC’s inefficient structure to start a position in Bitcoin. Why? Two reasons;
(i) COVID-19 launched a perfect storm of unprecedented fiscal stimulus and monetary easing coinciding with Bitcoin’s halving date (when supply became more constrained!). Even the most ardent bitcoin believers couldn’t have dreamt of this! It’s not a coincidence OM refreshed you on Plan B’s stock-to-flow model in the last Things from My Newsblur.
(ii) OM is old enough to remember when UK Chancellor Gordon Brown selling half the UK’s gold for $275 in 1999-2002 (it’s ~$18,000 today!) and the launch of the GLD ETF a couple of years later, which helped the gold price rise through consuming a large part of new gold supply during the 2000s. After the collapse from the late-2017 highs reversed in late 2019, OM will be watching GBTC’s purchases of bitcoin to see if history rhymes.
Long-term looks good, short term questions (7.6% of the ptf)
OM’s positions in Vietnam, India and Brazil fall into this category. The long-term thesis was covered last year; all three countries have a large millennial cohort that’s entering the workforce as the countries are economically liberalizing. That’s historically been a great sign for a country’s economic growth and stock market performance. The short-term questions all stem from COVID-19, the respective country’s handling of it and its broader impact. While developed world nations have provided massive fiscal and monetary stimulus, those avenues are not as open in emerging markets. The positions in India and especially Brazil were reduced, as it became clear that the two countries were struggling to deal with COVID-19. Vietnam showed them how it should have been done.
- Vietnam (VNM): 3.9% position
- India (INDA): 3.1% position
- Brazil (EWZ): 0.5% position
OM’s positions in Vietnam, India and Brazil fall into this category. The long-term thesis was covered last year; all three countries have a large millennial cohort that’s entering the workforce as the countries are economically liberalizing. That’s historically been a great sign for a country’s economic growth and stock market performance. The short-term questions all stem from COVID-19, the respective country’s handling of it and its broader impact. While developed world nations have provided massive fiscal and monetary stimulus, those avenues are not as open in emerging markets. The positions in India and especially Brazil were reduced, as it became clear that the two countries were struggling to deal with COVID-19. Vietnam showed them how it should have been done.
- Vietnam (VNM): 3.9% position
- India (INDA): 3.1% position
- Brazil (EWZ): 0.5% position
The Department of the Near Future (6.4% of the ptf)
This has been the best performing part of the portfolio in 2020, with both the Software-as-a-Service (“SaaS”) exposure and JD.com up 50%+ through mid-year. The thesis for SaaS is largely unchanged from when OM wrote it last year (part 1 and part 2) though the pandemic has likely hastened the transition to cloud services. Unfortunately, this is largely priced in with the median SaaS company trading at ~12 x revenue, which is bubble territory!!
- SaaS (WCLD): 4.6% position
- JD.com (JD): 1.7% position
This has been the best performing part of the portfolio in 2020, with both the Software-as-a-Service (“SaaS”) exposure and JD.com up 50%+ through mid-year. The thesis for SaaS is largely unchanged from when OM wrote it last year (part 1 and part 2) though the pandemic has likely hastened the transition to cloud services. Unfortunately, this is largely priced in with the median SaaS company trading at ~12 x revenue, which is bubble territory!!
- SaaS (WCLD): 4.6% position
- JD.com (JD): 1.7% position
Permanent/Semi-Permanent Exposure (15.4% of the ptf)
An important part of investing is knowing yourself: OM tends to be cynical, which leads to him being underinvested. The Funds book and the Technical book are two ways in which he tries to limit this investment flaw. The Funds book is permanent exposure; it’s made up for 4 Funds, where OM either likes the thesis (if quantitatively driven) or the approach/manager (if qualitatively driven). The positions aren’t traded and so provide consistent global market exposure. The Technical book is based on OEW and is either invested or not, depending on the longer-term technical signals.
- Funds (ARTTX, CWS, CAPE, and GVAL): 15.4% position
- Technical: 0.0% position
An important part of investing is knowing yourself: OM tends to be cynical, which leads to him being underinvested. The Funds book and the Technical book are two ways in which he tries to limit this investment flaw. The Funds book is permanent exposure; it’s made up for 4 Funds, where OM either likes the thesis (if quantitatively driven) or the approach/manager (if qualitatively driven). The positions aren’t traded and so provide consistent global market exposure. The Technical book is based on OEW and is either invested or not, depending on the longer-term technical signals.
- Funds (ARTTX, CWS, CAPE, and GVAL): 15.4% position
- Technical: 0.0% position
Other/None of the Above (7.8% of the ptf)
Two positions don’t fit easily into any of the themes above.
- Greece (GREK, and ALBKY): 4.3% position
The opposition New Democracy party swept to victory in Greece last year, in what OM was hoping would be the event that crystallized the dislocation in Greece. Unfortunately, despite a strong economic plan and fruitful discussions with Europe, COVID-19 dealt the Mitsotakis government a poor hand. Greece has managed the crisis the best of any European country, with the Mitsotakis government showing the pragmatic approach OM had hoped for. However, the lockdown has impacted economic progress, which has once more made Greece reliant on others and reduced investor interest. As such, the Greece position is vastly smaller until there’s some clarity on the various European recovery mechanisms (which Greece will have to tap) and an increased sense of investor interst.
- Texas Pacific Land Trust (TPL): 3.4% position
Texas Pacific Land Trust is publicly traded land trust, with land in the Permian basin that benefits primarily from oil & gas royalties with a smaller (but growing) water business. The trust was historically self-liquidating, using its excess cash to buy back shares, but has recently decided to convert itself to a C corporation
Two positions don’t fit easily into any of the themes above.
- Greece (GREK, and ALBKY): 4.3% position
The opposition New Democracy party swept to victory in Greece last year, in what OM was hoping would be the event that crystallized the dislocation in Greece. Unfortunately, despite a strong economic plan and fruitful discussions with Europe, COVID-19 dealt the Mitsotakis government a poor hand. Greece has managed the crisis the best of any European country, with the Mitsotakis government showing the pragmatic approach OM had hoped for. However, the lockdown has impacted economic progress, which has once more made Greece reliant on others and reduced investor interest. As such, the Greece position is vastly smaller until there’s some clarity on the various European recovery mechanisms (which Greece will have to tap) and an increased sense of investor interst.
- Texas Pacific Land Trust (TPL): 3.4% position
Texas Pacific Land Trust is publicly traded land trust, with land in the Permian basin that benefits primarily from oil & gas royalties with a smaller (but growing) water business. The trust was historically self-liquidating, using its excess cash to buy back shares, but has recently decided to convert itself to a C corporation
Cash (24.8% of the ptf)
Disclaimer: Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take it 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.
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