2020: Third Quarter Update

Portfolio Update
- Uranium:  Our Man continued to materially increase the Uranium position, as the positive signs continued.

- Blockchain/Crypto:  Our Man added to the Bitcoin (GBTC) position near quarter-end.

Performance and Review
OM’s portfolio hasn’t yet been invited to the market fun, rising just +2.2% during the third quarter.  This pales in comparison to the S&P 500 Total Return (+8.9%) and the MSCI World (Total Return, Net Dividends; +7.9%).  For the year, this leaves the portfolio down -28.3% while the market indices have recovered their early year losses (S& P 500: +5.6%, MSCI World: +1.7%).

Third Quarter Attribution
 

The third quarter was surprisingly quiet for OM’s portfolio, with broad-based gains being partially offset by losses in Shipping/Tankers (-103bps) and the Texas Pacific Land Trust (TPL, -82bps) position in the Idiosyncratic book.   Both positions  indirectly impacted by oil, especially fears about second COVID waves and a slow recovery in oil demand.  In the case of tankers, the market expects exceptionally weak rates through 2021 with the companies receiving little credit for the extraordinary earnings of the last 12mos that have radically improved their balance sheets.

The two other positions that fit into the broad “supply is constrained” theme – Uranium (+55bps) and Blockchain/Crypto (+60bps) were good contributors.  The news flow on Uranium continues to be positive on the supply side, as well as the removal of some regulatory uncertainty that may encourage utility demand.  The Blockchain/Crypto book benefited as bitcoin continued to see increasing acceptance as a store of value, with Microstrategy, a publicly listed company, moving part of its cash holdings into bitcoin.  OM believes that this institutional acceptance is likely to continue, but that the role GBTC may play in consuming the supply of bitcoin (similar to GLD's impact on gold during the 2000s) is under-rated.   Given the commodity-bias (Uranium & Tankers) at the top of OM’s portfolio, the Blockchain/Crypto exposure is OM’s hedge in case we get a full on bubble in software/growth.  Bitcoin is digitization and "software taking over the world" taken towards its logical extreme.

The rest of the portfolio showed reasonable gains led by the exposure to the 4th Industrial Revolution, especially Software-as-a-Service (SaaS) stocks.  While SaaS is a great business model and technological progress has been pulled forward by COVID, the valuations are exceptionally high.  The median public SaaS company trades at 16.0x next-twelve month’s revenue estimates, a healthy jump from the already nosebleed 13.1x pre-COVID.  Caveat emptor; beware, they’re not ALL going to turn into the next FANG companies!

The thematic exposure to Vietnam (+38bps) and India (+49bps), both emerging markets countries with attractive demographics, finally started to participate in the market rally.  This broader participation also helped the Funds (+128bps), which recouped its losses for the year during the quarter.


Portfolio (as at 09/30/20 - all delta and leverage adjusted, as appropriate)
Dislocations: 41.5%
18.8% - Uranium (URNM, CCJ, NXE and URG)
17.8% - Shipping/Tankers (STNG, DSSI, EURN, TNK and DHT)
4.0% - Greece (GREK & ALBKY)

Thematic: 21.2%
7.1% - Tech: 4th Industrial Revolution (JD & WCLD)
5.8% - Blockchain/Crypto (GBTC)
4.2% - Vietnam (VNM)
3.6% - India (INDA)
0.5% - Brazil (EWZ)

Technical: 0.0%
0.0% - OEW Technical positions (DDM, SSO, and QLD)

Idiosyncratic: 18.8%
16.3% - Funds (ARTTX, CWS, GVAL, and CAPE)
2.5% - Equities (TPL)

Shorts/Hedges: 0.0%

Cash: 15.3%

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. 

Things from my Newsblur; 2020 Part 3

It’s been too long since OM’s last “Things from” so I’ll spare you much of an introduction.  The broad inspiration for this “Things from” is the FT interview with the world’s greatest short seller, where he called this “the golden age of fraud”.  While it’s rarely wise to disagree with Jim Chanos, perhaps the more charitable “the golden age of half-truths” is a better description.

The Vampire Ship
As you know, OM likes tankers and here’s a wild tale about one, the Noor One.  It’s a tale about heroin smuggling and Europe’s largest ever drugs bust, but that’s just the opening act.  The main course sees the gangsters involved trying to murder each other across the globe, together with witnesses and journalists dying in unexplained circumstances in Greece.  It ends with still-raging political corruption scandals in Turkey and the Middle East, as well as in Greece where the one of the country’s leading oligarchs has been enveloped.
(Alexander Clapp, The New Republic)

Beware What Sounds Insightful
With the proliferation of newsletters (and Medium posts) comes a fine warning; what sounds insightful and what is useful or true are often not the same thing!
(Cedric Chin, Commonplace)

Wirecard and me: Dan McCrum on exposing a criminal enterprise
Wirecard, a multi-billion dollar market cap German fintech company, which imploded earlier this year is the public market's poster child for the Golden Age of Fraud.   This article is just the cliff notes of the FT’s 5-year investigation of the firm, which included providing evidence that much of the business wasn’t real.  Yet all this led to was the stock rocketing upwards (and into Germany’s DAX index), Wirecard spying on the journalists and the BAFIN (German securities regulator) choosing to investigate McCrum & the FT rather than Wirecard.  In the end, a special audit by KPMG led the company to announce $2 billion was ‘missing’ in June 2020, and this turned out to be the tip of the iceberg.  Today, the stock is worthless, the CEO and various associates are in jail awaiting charges, and the COO is on the run.
(Dan McCrum, Financial Times)

An Arrest in Canada Casts a Shadow on a New York Times Star, and The Times
This story, about the unraveling of Rukmini Callimachi’s reporting on terrorism is one OM was sad to read.  It shows the difficulty for journalism as it seeks a profitable business model, but also – much like the markets – how bad incentives can lead to narrative driving everything, and facts being rearranged to suit them.
(Ben Smith, New York Times)

From Boom to Bloodbath
One of the things OM is currently researching is the opportunities arising as a result of the collapse of Shale – I see your natural gas producers, and (eventually) offshore oil services cos!   With the collapse in oil prices bringing the Shale revolution to a screeching halt, Justin Miller looks at what it means for Texas and whether the state can transition to become a renewable energy powerhouse.
(Justin Miller, Texas Observer)

This Overlooked Variable is the Key to the Pandemic
Spoiler alert, it’s not R!  Another fantastic piece by Zeynep Tufekci – the West has been slow to understand and adapt to the evidence that ‘the corona’ (to quote OM’s kids) doesn’t spread like the flu but more like 2003’s SARS.  Super-spreader events are far more important than the average captured by R, and recognition of this leads to VERY different policy choices.  See Japan for more information.  (Zeynep Tufekci, The Atlantic).

The Students Left Behind by Remote Learning
“The desire to protect children may put their long-term well-being at stake” sub-heading is another reminder of the touch choices COVID-19 has forced upon us, and how we struggle when the benefits and costs are unequal and when measured on different time horizons.  
(Alec MacGillis, New Yorker)