2023: Third Quarter Update

Portfolio Update
All of OM’s changes to the portfolio came at the end of the quarter.
- Shipping/Tankers:  OM added a position in Frontline plc (FRO), the largest tanker company, prior to the seasonally strong fourth quarter.   While Tanker stocks have done well over the last couple of years, there remains the expectation that pricing will moderate in 2024 and 2025.

- Brazil: OM used the pull back in Brazilian stocks to increase the position.   

- Higher Medium Term Interest Rates:  In late Q3 the market finally began to accept the possibility that inflation may take longer to get under control and rates are likely to remain higher for longer.  This saw medium term interest rates climb materially, and OM took some profits by closing ~60% of the PFIX position which has more than doubled over the last 12-18mos.

Performance and Review
After lagging the markets during the first half of the year, OM’s portfolio materially outperformed in the third quarter rising +11.1% (compared to the S&P 500 TR: -3.3% and MSCI World: -2.6%).   This left the portfolio +18.6% YTD, which now leads the markets (S&P 500 TR: +13.1% and MSCI World: +12.1%).

Third Quarter Attribution
 

There were four main positive outliers that drove the performance.

•    Uranium (+884bps):   Both the spot price of uranium and the miners increased ~20% during September following the World Nuclear Association conference in London.  While OM didn’t attend the conference, he spoke with others who did and it’s clear that the tone was quite different this year.   In previous years utility buyers have been confident of securing uranium at attractive prices, but this year saw the first signs of uncertainty with the industry’s primary consultant now (finally) forecasting an under supplied market.   The move in the spot price, and continued climb in the long-term contract price, likely signals that we’re entering the middle innings of the rise.  For OM this likely means the thesis is moving from a dislocation opportunity to a thematic one.   However, much like uranium traded well below the cost of production on the downside, OM suspects that it will trade at unsustainable levels to the upside before the supply response arrives.

•    Higher Medium-Term interest rates (+283bps):  As mentioned above, during the quarter the markets finally came around to the view that interest rates were likely to remain higher for longer.  PFIX, which holds short-term bonds and medium-term swaptions, benefited both from the higher for longer move as well as the volatility that came with it.

•    Shipping/Tankers (+202bps):  Tanker shares continued to rise, with most companies announcing earnings and revenue numbers that beat expectations, paying sizable dividends, and guiding strongly.  The market continues to view the current strong fundamental performance as cyclical.  However, as OM sees it as somewhat longer lasting.  I’ll save you from hearing the thesis in depth again, but it’s one that permeates much of the portfolio; constrained supply due to long-term underperformance coupled with limited ability to quickly increase supply, all at a time when demand is inflecting upwards.

•    Idiosyncratic Equity positions (+110bps): The gains were evenly split between TPL and JOE, with the common factor being that both own attractive real estate – TPL in the Permian Basin in Texas and JOE in Florida panhandle.   Their similarities diverge there, with TPL benefitting from royalty interests and water-related services from the shale drilling in the Permian.  JOE develops resorts and residential communities, and in OM’s view has reached a critical mass of developments and population such that it makes it easier to continue to grow.

The majority of OM’s portfolio fell back with the market including positions in Software/4th Industrial Revolution (-19bps), Brazil (-12bps), Greece (-49bps), and Biotech (-34bps).  Unlike Uranium, the rest of the commodity-related exposure - Tin (-80bps) and Commodities (-50bps) – performed poorly.  The exposure to India (+50bps) was a pleasant outlier.

Finally, the Blockchain exposure (-160bps) was a meaningful drag on performance as Overstock gave back all its second quarter gains.   In Q2, Overstock made the transformative acquisition of Bed Bath and Beyond’s intellectual property and set about rebranding itself.   The third quarter reminded investors that it’s a process that will take time and relies on management execution.  Given the job management has done since taking over from ex-founder/CEO Patrick Byrne, OM has patience.

Portfolio (as at 10/2/23 - all delta and leverage adjusted, as appropriate)
Dislocations: 36.2%
30.6% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF, URG and SMR)
5.5% - Brazil (EWZ)

Thematic: 42.1%
14.9% - Shipping/Tankers (STNG, INSW, EURN, TNK, DHT and FRO)
7.5% - Tin (AFMJF, MLXEF and SBWFF)
6.0% - India (IBN, INDA and SMIN)
4.2% - Greece (GREK & ALBKY)
3.8% - Biotech: 4th Industrial Revolution (IBB & XBI)
2.3% - Blockchain/Crypto (ETHE and OSTK)
1.9% - Software: 4th Industrial Revolution (JD & WCLD)
1.4% - Commodities/Mining (FLMMF)

Idiosyncratic: 6.2%
6.2% - Equities (TPL & JOE)

Shorts/Hedges: 3.0%
3.0% - Higher Medium-Term Rates (PFIX)

Cash: 12.5%

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.  

2023: Second Quarter Update

Portfolio Update

- Uranium:  One of the benefits of having a position appropriately sized for your conviction and risk tolerance is that you are comfortable adding to it when prices and fundamentals diverge.   OM added a further 4-5% to the Uranium position in the middle of quarter.

Performance and Review

OM continued to lag equity markets (S&P 500 TR: +8.7% and MSCI World: +7.2%) with the portfolio rising +5.85% during the quarter.   This left the portfolio up +6.7% for year, well behind the S&P 500 TR (+16.9%) and the MSCI World (+15.1%).

Second Quarter Attribution

OM’s performance during the quarter can really be broken down into small number of things.  

• Commodity-related names began to rebound during the second quarter.  Both Tin (+85bps) and Uranium (+195bps) have seen their fundamentals improve – supply remains constrained (and potentially falling) while future demand incrementally improved – though the commodity price and stock prices have done little this year.   This changed as the quarter progressed.  The other Commodities (+28bps) exposure also benefited from this change.

• Two idiosyncratic events helped individual positions:
• Overstock (+133bps, within Blockchain +146bps) rallied after it purchased the Bed Bath & Beyond brand and intellectual property out of bankruptcy.  The acquisition is transformative for the company allowing it to relaunch a popular brand, without any of the associated bricks & mortar business and costs.  The firm also held a successful day highlighting its Medici Ventures Blockchain assets in late May.
•  Greek stocks (+150bps) rose sharply after the ruling New Democracy party won a landslide election. PM Kyriakos Mitsotakis has largely done a good job of reforming the Greek economy, with the government bonds now close to an investment grade rating. 
  

• However, Shipping (-141bps) gave back some of its first quarter gains as OPEC cut production further and investors worried this would negatively impact rates.

Beyond these OM’s portfolio benefited from the market’s tailwind led by the positions in India (+42bps), Brazil (+32bps), Idiosyncratic Equities (+21bps), and Biotech (+13bps).  The Technology - 4th Ind Rev (-3bps) was a minor detractor as uncertainties in China negatively impacted the position in JD.   Finally, OM’s exposure to rising medium rates (PFIX, +18bps) benefited as these interest rates increased.

Portfolio (as at 6/30/23 - all delta and leverage adjusted, as appropriate)

Dislocations: 27.8%

25.7% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF, URG and SMR)

2.2% - Brazil (EWZ)

Thematic: 46.5%

12.4% - Shipping/Tankers (STNG, INSW, EURN, TNK and DHT)

9.4% - Tin (AFMJF, MLXEF and SBWFF)

6.3% - India (IBN, INDA and SMIN)

4.6% - Biotech: 4th Industrial Revolution (IBB & XBI)

5.2% - Greece (GREK & ALBKY)

4.2% - Blockchain/Crypto (ETHE and OSTK)

2.3% - Software: 4th Industrial Revolution (JD & WCLD)

2.2% - Commodities/Mining (FLMMF)

Idiosyncratic: 5.8%

5.8% - Equities (TPL & JOE)

Shorts/Hedges: 5.4%

5.4% - Higher Medium-Term Rates (PFIX)

Cash: 14.5%

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; 2023 Part II

 As summer rolls around, here’s Part II for your beach reading!

The Man Who Broke Bowling
If you’re anything like OM, you occasionally find yourself at the bowling alley throwing a sad mix of 7s and 8s with the odd strike thrown in.   You’re certainly not like Jason Belmonte, who’s revolutionized the sport by throwing…two-handed!   
(Eric Willis, GQ magazine)


Relax for the Same Result
This is an old post that OM goes back to every so often when stressed and rushing to get something done by a deadline.   It’s a good reminder of the unproductive effort due to stress and how it neither helps the quality or speed of our work.
(Derek Sivers)

What Will Transformers Transform?
As regular readers will know, OM is a fan of Dr. Rodney Brooks and often posts his year-end update of prior predictions.  With everything that’s been written about Artificial Intelligence and GPT models (both the good and the bad), his article from a couple of months ago is worth rereading.  The punchline; “Calm down people. We neither have super powerful AI around the corner, nor the end of the world caused by AI about to come down upon us.”
(Rodney Brooks)


30,000 Reasons Wages aren’t Falling
We’ve spent much of the last year being told recession is imminent, unemployment is about to spike, and that wage hikes are coming to an end.  While we might be getting closer to that point, OM suspects that the world has also changed somewhat; that we are moving from a world that favoured capital to one that benefits labor.  It’s been something OM has been meaning to write about for a while now, but it’s a complicated subject and he’s never quite found the right words.  The good news is that Erik Renander found some of them…
(Erik Renander, Your Weekend Reading).


Turkey: How Mehmet Simsek convinced Erdogan to drop his low interest rate policy
A portion of OM’s portfolio is in dislocation investing, where on first read the idea will look ugly.  Hopefully, kind reader your initial reaction will be “WTF???  Are you insane!” but will slowly trend towards “that’s weird, but kinda interesting!” over time (e.g. Uranium).  The key is being able to invest when valuation is cheap, fundamentals are turning, and there’s a narrative to draw others in!   Well, Turkey is exceptionally cheap, there are hints of a change, and it has the benefit that it can be geopolitically promiscuous between the US and China.  However, especially after Erdogan’s recent victory at the polls, it has lacked a narrative that will draw investors in.  Perhaps this major change in economic policy is the start of a ‘normalization’ in Turkey that at least removes the negative narrative.
(Ragip Soylu, Middle East Eye)


This is Biology’s Century – We’re not Ready for it
The phrase ‘biology’s century’ has been around for a while but has so far accurately encapsulated the 2000s with a record number of drugs approved including novel treatments for cancer, diabetes, numerous vaccines and the first gene therapies.  However, biotech’s limits are now testing the medical infrastructure that we have built and many of the solutions favor the expedient over the rigorous.
(Matthew Harper, STAT)

2023: First Quarter Update

Portfolio Update

There were no changes to the portfolio during the Quarter.

Performance and Review

OM’s portfolio posted a small gain of +0.8% to start 2023, which lagged the rising equity markets (S&P 500: +7.5% and MSCI World: +7.4%).  

First Quarter Attribution

 

The first quarter was largely uneventful for the portfolio with the positive performance driven by the exposure to Shipping/Tankers (+237bps), which continued their strong run.  The long-run structural case for Shipping/Tankers is one that is seen elsewhere in the portfolio; constrained supply due to long-term underperformance coupled with limited ability to quickly increase supply, all at a time when demand is inflecting upwards.  For tankers, the supply-side is the most attractive in decades for tankers with the oldest fleet in history, an order book (as % of fleet) at multi-decade lows and shipyards contracted out through 2025.  While demand had been steadily inflecting upwards, it jumped more meaningfully in 2022 due to the Russia-Ukraine war which altered hitherto efficient supply routes.  The upside for an investor in these types of investments is that the pain of the prior cycle means the market never quite believes that supply has rationalized, is unwilling to fund new supply and constantly expects disappointment and reversion to the historical mean.  This means that the opportunity can last longer (and potentially move higher) than it would otherwise, but the downside is that its performance will come in violent fits and starts.  This exceptional volatility – as every small downturn is assumed to be the end of the cycle, and as every rally converts more to the thesis but sees current prices extrapolated out – is the largest challenge for investors as prices will not move steadily alongside markets (i.e. there will be periods of massive under/outperformance) and investors must size positions at levels where they can suffer the downside.   

After a decade of disappointment, many commodity markets reflect this constrained supply, at a time of increasing demand, theme.  OM has concentrated the portfolio’s exposure primarily in Uranium and Tin, where the structural limits in supply and demand are particularly evident.  The Uranium exposure (-66bps) was a meaningful detractor in the quarter, while the Tin (-2bps) and other Commodity (-1bps) exposure were broadly flat.

OM benefited from some mean reversion in Blockchain (+50bps) and Software (+5bps), which had both been material underperformers in 2022.   These names were both also helped by the expectation that interest rates were peaking and would fall, following the failure of Silicon Valley Bank in March.   The change in interest rate expectations hurt OM’s play on Higher Medium Term Interest rates (Short/Hedges, -103bps).

Elsewhere performance was a mixed bag ranging from negative contributions in Idiosyncratic (-51bps), India (-29bps) and Biotech (-23bps) to a positive one from Greece (+71bps).  Brazil (-4bps) was a small negative detractor but remains the position OM is most likely to add to alongside Uranium and Tin.  In addition to the return of Lula as President, the Brazilian Central Bank was more proactive in managing inflation (increasing rates from 2% to almost 14% from the early 2021) and is now reaping the benefits of that.   

Portfolio (as at 4/1/23 - all delta and leverage adjusted, as appropriate)

Dislocations: 22.5%

20.6% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF, URG and SMR)

1.9% - Brazil (EWZ)

Thematic: 46.8%

15.1% - Shipping/Tankers (STNG, INSW, EURN, TNK and DHT)

9.2% - Tin (AFMJF, MLXEF and SBWFF)

6.0% - India (IBN, INDA and SMIN)

4.8% - Biotech: 4th Industrial Revolution (IBB & XLB)

4.4% - Greece (GREK & ALBKY)

3.0% - Blockchain/Crypto (ETHE and OSTK)

2.5% - Software: 4th Industrial Revolution (JD & WCLD)

2.0% - Commodities/Mining (FLMMF)

Idiosyncratic: 6.0%

6.0% - Equities (TPL & JOE)

Shorts/Hedges: 5.5%

5.5% - Higher Medium-Term Rates (PFIX)

Cash: 19.3%

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; 2023 Part 1

It’s been too long since OM posted anything of note, so lets get the ball rolling with the first Things from my Newsblur for 2023.

Why Hot Wheels are one of the most inflation proof toys in American history

When he was young OM was a big fan of Hot Wheels cars, today it’s OM’s kids who enjoy them.  This article helps explain Hot Wheels’ history and longevity and how its kept prices so affordable over the years.   (Fernando Alfonso III, NPR)

 

99 Good News Stories You Probably Didn’t Hear About in 2022

This article is a good reminder to seek our balance in what you read and where you get your news from.  On the heels of more financial strife, the anniversary of the war in Ukraine, et al – here’s some of the good things that happened in 2022.  (Future Crunch)

Wildlife Photographer of the Year Winners

In a similar vein, here are some of the stunning nature photographs from last year.  My favorite was the bat-snatcher, what’s yours?

(NPR)

What I Think About LeBron Breaking My NBA Scoring Record

Just a classy article written after LeBron James became the all-time NBA leading scorer.

(Kareen Abdul-Jabbar)

The End of Silicon Valley (Bank)

The demise of Silicon Valley Bank (‘SVB’) is a financial story, but at their core bank runs are stories about trust.  Silicon Valley and venture capital more than anywhere else is an industry founded on trust.  While there have been signs of this weakening over the last decade, SVB’s failure is poignant as it suggests just how much it has weakened (and how herdlike VC’s are!).  More broadly it is also reflective of the journey that society has embarked on since the Great Financial Crisis with trust in institutions declining across the board.

(Ben Thompson, Stratechery)

Evolution of a Structural Bull Market: The PTSD Pullback

Regular readers know OM has a lot of commodity-related exposure in his portfolio principally through uranium and tin position.  While OM’s not yet ready to declare that a commodity super-cycle is here, it is increasingly clear that supply is constrained and demand is continuing to increase.  If a structural commodity bull market (or supercycle) is really here, this is a vital read for investors as it will help remind folks (or educate those who haven’t yet seen a commodity bull market) just how volatile commodity bull markets are.  They are NOT anything like the tech/software markets we’ve seen in recent years.  (Arjun Murti, Super-Spiked)

2022: Fourth Quarter Update

Portfolio Update

- After the array of changes to the portfolio during the third quarter (see update), OM made no changes in the fourth quarter.

- As noted in the update, at year-end OM moved the Greece & Shipping positions from Dislocations to Thematic.  The Shipping positions were OM’s largest contributor during 2022 – adding over 1,200 basis points to performance - and are pricing in a vastly more attractive future than they were 12 months ago.  Given the changes on both demand and supply side, the positions remain attractive going forwards but no longer offer excess opportunity.  

- OM moved the position in Brazil from Thematic to Dislocation at year end, after President Lula returned to power.  It’s a situation – along with Turkey (no position, yet!) – that OM has spent a lot of 2022 researching so expect an update soon.

Performance and Review

OM’s portfolio posted a healthy gain of +6.4% during the fourth quarter, though this lagged the rising equity markets (S&P 500: +7.6% and MSCI World: +7.5%).  Despite the rally during the fourth quarter, OM’s portfolio ended the year down -2.7%, though there was some small consolation as this was ahead of equity markets (S&P 500: -18.1% and MSCI World: -16.3%).

Fourth Quarter Attribution

 

Our Man’s portfolio largely rose with the market during the fourth quarter.   The Shipping/Tanker positions (+190bps) contributed strongly and were positive in each of the four quarters during 2022 despite the falling market.  In addition to the impacts of the IMO 2020 regulatory changes, they were and remain beneficiaries of the energy market complexity caused by the Ukraine/Russia crisis.  To repeat a simple example, pre-conflict a small Aframax tanker would fill-up with crude oil in Russia make the short run to Europe (Rotterdam) where it would be refined into oil products.  Due to the conflict this has become something akin to a couple of Aframaxes fill up in Russia, head out to sea to a ship-to-ship transfer to a larger VLCC, which then travels all the way to India or China, while other crude tankers service Europe with oil from the US or Middle East.  Furthermore, after the oil has been blended with non-Russian oil and refined in India and China the resulting oil products (gasoline, jet fuel, etc.) are likely heading back to the West on product tankers.  While this is a massive simplification it’s a good demonstration of how inefficient the reality of today’s oil supply chains are compared to preconflict!   Tankers travel a lot of extra miles and with fixed supply, unsurprisingly price is the variable that has changed benefiting these companies.

OM’s commodity exposure was also beneficial with both Tin (+248bps) and Commodities (+59bps) contributing.   The month-to-month moves in Tin and the related stocks can be volatile and impacted by recessionary fears but the medium-term story remains simple.  It is one of a currently balanced market where a commodity that has no substitutes is seeing increased inelastic demand coupled with declining supply.  There are only three western listed ways to participate, and OM is invested in all, with an outsized position in Alphamin Resources.  Alphamin, as part of its Bisie tin project, owns both the premier global tin asset (the Mbapma North deposit), as well as the best development asset (Mbapma South deposit, which is ~1km from Mbapma North reducing the development risk).  The caveat is that the Bisie tin project is in the Democratic Republic of Congo.

OM also benefited from the Idiosyncratic positions (+143bps, equally split between TPL and JOE), Greek exposure (+70bps) and the market’s view that medium term yields would be higher (Shorts, +41bps).

Despite the market rising, there were negative contributions from Uranium (-63bps) and Blockchain (-105bps).  The latter was impacted by the bankruptcy of (and potential/likely fraud at) FTX, which saw all cryptocurrencies fall.  While OM intended to exit the Ethereum (ETHE) position during Q4, the panic saw the Grayscale Ethereum Trust fall to a ~60% discount to the value of its Ethereum holdings.  Digital Currency Group (“DCG”, owner of Grayscale, the Trust’s sponsor) was caught up in the maelstrom around FTX’s bankruptcy and there are fears that like FTX it may have commingled assets leading to questions around the veracity of the Trust’s NAV.  OM is more sanguine than the market, in part as the assets are custodied at Coinbase, a US-listed entity (unlike Bahamas based FTX, or somewhere in the world based Binance).  Coinbase has released a statement confirming the assets are held separately, have/continue to be audited, cannot be lent out as well as the amount held.  While fraud remains possible it would require systemic corruption amongst US-based and listed bodies including DCG, Coinbase, third-party auditors and regulatory bodies.   Given this probability, OM felt it would be imprudent to sell ETHE at a 60% discount to its value (an equivalent to ~$500 for Ethereum).

Portfolio (as at 1/1/23 - all delta and leverage adjusted, as appropriate)

Dislocations: 23.8%

21.7% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF, URG and SMR)

2.0% - Brazil (EWZ)

Thematic: 45.7%

13.5% - Shipping/Tankers (STNG, INSW, EURN, TNK and DHT)

9.6% - Tin (AFMJF, MLXEF and SBWFF)

6.4% - India (IBN, INDA and SMIN)

5.1% - Biotech: 4th Industrial Revolution (IBB & XLB)

3.9% - Greece (GREK & ALBKY)

2.6% - Blockchain/Crypto (ETHE and OSTK)

2.5% - Software: 4th Industrial Revolution (JD & WCLD)

2.1% - Commodities/Mining (FLMMF)

Idiosyncratic: 6.6%

6.6% - Equities (TPL & JOE)

Shorts/Hedges: 6.7%

6.7% - Higher Medium-Term Rates (PFIX)

Cash: 17.3%

Disclaimer:  Nothing above represents investment advice or 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 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.