2024 - Third Quarter Review

 Portfolio Update
- Uranium: OM made a small addition to his position in the Junior Miners (URNJ) in the middle of the quarter.

Performance and Review
The portfolio rose +4.50% during the quarter, though substantially all of the performance came in the second half of September!  Overall, the portfolio slightly lagged equity markets with the S&P 500 TR up +5.89% and the MSCI World up +4.69%.   For the year, this leaves the portfolio + 20.64% which is nestled between the S&P 500 TR (+22.08%) and MSCI World (+18.75%).

Third Quarter Attribution

The third quarter saw some of the ‘newer’ dislocation positions come to the fore, with UK/European Financials (+191bps), Argentina (+148bps) and China (+118bps) driving returns. Sometimes being lucky on timing is what turns a good idea into a great return driver; all three of the positions have been successful since they were initiated.   The common thread is that OM waited longer than he typically does before entering them.  For example, both European/UK Financials and Argentina are ideas that OM spent much of H1-23 thinking about and working on.   Yet in both cases he waited till well after the work was done before entering.  OM was researching European/UK Financials in Q1-23, and despite the pullback after the Silicon Valley Bank collapse, he didn’t enter the position till early Q4-23 when it became apparent that Barclays’ earnings were inflecting upwards and management would have to acknowledge this in their 2024 guidance.   Similarly, while OM had done a lot of work on President Milei and his likely policies, OM didn’t enter the position till after President Milei’s electoral victory and the confirmation of his economic team.  While this meant he missed out on some gains during 2024, it allowed for more confident sizing of the position.

The primary detractors to performance were the long-held positions in Uranium (-139bps) and Tankers/Shipping (-120bps) though there has been no significant change in the theses to those positions.  In both cases supply is exceptionally constrained in the foreseeable future, while demand continues to tick higher.  In uranium, the moves to restart old nuclear plants (most notably the deal to restart Three Mile Island) and build new ones continues to further improve the medium-term outlook, though the nuclear fuel contracting for these plants won’t happen for a while.  However, OM believes that it makes it more likely that existing utilities (who are undercovered for their fuel needs) will seek a secure supply of fuel before these new plants come to market.   Given the supply deficit this is likely to get reflected in another material price jump, hopefully in 2025.  There were other losses in Blockchain/Crypto (-57bps) and Carbon (-7bps).

The rest of the portfolio benefited from some positive idiosyncratic developments, most notably in Tin (65bps, Alphamin continuing to execute), Commodities (+43bps, a takeover of Filo), Idiosyncratic (+63bps, strong performance from TPL).  Elsewhere, some of the core themes including Biotech (+33bps), Brazil (+33bps) and Reindustrialization of the US (+38bps), and India (+31bps) continue to grind higher, with the first three setting up strongly for 2025.  The residual position in Greece (+8bps) made a small contribution.

Portfolio (as at 09/30/24 - all delta and leverage adjusted, as appropriate)
Dislocations: 52.1%
21.8% - Uranium (URNM, URNJ, NXE, and SMR)
12.6% - European/UK Financials (BCS, LYG, NWG)
7.8% - Argentina (BMA, GGAL, SUPV)
5.5% - China (KWEB, FXI and JD)
4.3% - Brazil (EWZ)

Thematic: 40.9%
10.4% - Shipping/Tankers (STNG, INSW, TNK, DHT and FRO)
7.2% - Tin (AFMJF, MLXEF and SBWFF)
5.8% - India (IBN, INDA and SMIN)
5.2% - Biotech: 4th Industrial Revolution (IBB & XBI)
4.4% - US Reindustrialization (AIRR)
3.6% - Blockchain/Crypto (ETHE and OSTK)
1.7% - Carbon Credit Allowances (KCCA)
1.7% - Commodities/Mining (FLMMF)
0.7% - Greece (ALBKY)

Idiosyncratic: 5.4%
5.4% - Equities (TPL & JOE)

Shorts/Hedges: 0.0%

Cash: 1.6%

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; 2024 Part II

It’s been a while since OM appeared in your inboxes, and so what better way to return than to catch-up on some of the things he’s been reading over the summer and early Fall.

AFC Wimbledon and the Pillars of a Perfect Football Club
OM is a fan and season ticket holder at AFC Wimbledon and will never tire of sharing their story.   OM was in London to see this victory over our rivals (not a derby!!!), and Daniel Storey captures the spirit of the day and what makes the club special.
(Daniel Storey, iNews)

Magic Pill – Johann Hari & the New “Miracle” Weight-Loss Drugs
Journalist Johann Hari takes a long look at Ozempic, and other GLP-1s, which have skyrocketed in popularity as a treatment for obesity.   Unlike most who’ve talked GLP-1s, Hari is on them and seen the benefits firsthand but also willing to take a critical look at how the drugs work and what it might mean for the future.   For those who prefer these things in podcast format, he’s spoken about it on Modern Wisdom and to Jay Shetty.
(via Tim Ferris blog.)

What Makes Katie Ledecky Great?
OM was having a drink recently with a friend and we were discussing investing, and the difference between mastery and greatness came up.  We concluded that greatness endures often through finding that balance between the contradictions of creativity and discipline and between focusing on process and outcome.  This article on Katie Ledecky – an unquestioned all-time swimming great – touches on those topics.
(Louisa Thomas)

Experts vs. Imitators
While we all want the best information, we are increasingly seeing people described as or claiming to be experts who are not.  Here’s a handy way to think about expertise and those who imitate it, including what to look out for and focus on.
(Farnam Street)

Inside the Biggest FBI Sting Operation in History
The wild tale of the Anom sting operation, where the FBI created/managed a secure messaging app, which became the go-to app for several global criminal groups.  The FBI worked in collaboration with law enforcement around the world, to help spread the app and track the messages before eventually making a string of arrests.
(Joseph Cox, Wired)

The Big Bad BREIT Post
The story of BREIT, the largest non-traded REIT in the world, is as old as finance - a liquidity mismatch between a product and the underlying asset, an array of misaligned incentives, and investors chasing performance with little regard for risk.  Thus, the tale of its issues when stresses hit the market in 2022 wasn’t new or particularly surprising.   What was is the lengths that the manager (and its agents/representatives) went to try to prevent the tale being told.  
(Phil Bak, BakStack)

2024 - Second Quarter Review

Portfolio Update
Our Man made some changes to the portfolio, with most of the theses discussed in the recent portfolio updates.

• Uranium:  Our Man rejigged his uranium exposure largely exiting single names and reinvesting the capital into the two ETFs (URNM and URNJ) that cover the miners and junior miners in the space.   The introduction of URNJ just over a year ago means that OM can hold broader exposure to junior miners, including to those listed globally.

• Shipping/Tankers:  OM continues to slowly prune the position, trimming the position in TNK.

• US Re-industrialization: As noted in the recent portfolio update, OM believes that the broad theme of US re-industrialization is significantly overly looked and added additional exposure (AIRR).

• 4th Industrial Revolution/Software:  OM exited the position in Software names, in part since the below positions have similar underlying properties/exposures.

• Blockchain: OM entered a position in one of the new Bitcoin ETFs, around the time of Bitcoin’s halving (which reduces future supply).   As recently noted, “while the Bitcoin halving slows future supply, OM suspects that this 12-month post-halving cycle will be driven by Institutional FOMO (vs. prior halvings’ retail FOMO) now that exposure can be more easily obtained via ETFs.”

• China: OM entered positions in both a broad China ETF (FXI) and Chinese Technology Company ETF (KWEB).   The thesis for this dislocation position can be found here.

• Greece: Finally, OM exited most of the position in Greece (GREK).  While Greece remains a reasonable opportunity, there are other more attractive opportunities and it lost out in competition for capital.

 

Performance and Review
The portfolio rose broadly in line with equity markets during the quarter with its +3.97% increase placing it between the S&P 500 TR (+4.28%) and the MSCI World (+3.03%).   Overall, this leaves it marginally ahead of the indices year-to-date at +15.44% (versus S&P 500 TR at +15.29% and MSCI World at +13.43%).

Second Quarter Attribution

The portfolio continued to benefit from its exposure to European/UK Financials (+173bps), Argentina (+140bps) and Shipping/Tankers (+159bps).  The UK Financials continued the trend of the last 6-12 months; increasing earnings and improved visibility on futures earnings as they reset interest rate hedges at higher rates.   While the market slowly adjusts to this, the stocks continue to trade at significant discounts to book value and single digit PEs.   The positions in Argentina benefited as President Milei’s initial reforms continue apace, including receiving Congressional approval.   It is early days for President Milei, and while things have started well economically there will inevitably be bumps in the road and the Argentina positions will be volatile.  The Shipping/Tankers positions continue to benefit from global uncertainty, with both the Russia/Ukraine and Israel/Hamas conflicts effectively tightening supply due to ships leaving the market (to transport Russian oil) or having to take longer routes to reach destinations (due to Houthi targeting of ships).

Elsewhere, Tin (+85bps) was a healthy contributor on the back of positive expectations for semiconductors (Tin’s primary use is acting as the ‘glue’ in semiconductors) and reduced supply after a scandal in Indonesia (one of the largest suppliers) limited exports.   The positions in India (+60bps) also helped - stocks initially dropped following Modi’s re-election in India before recovering as it became clear that he & his coalition partners would retain a working majority despite the opposition’s improved performance.

The primary detractors were positions in the Blockchain (-139bps), Brazil (-81bps) and China (-55bps).  The Blockchain positions were hurt by a pull-back in BYON as it reorganizes its retail businesses, and by the decline in Bitcoin/Ethereum from near their highs at the end of Q1.    While both Brazil and China are attractive fundamentally, both have continued to struggle and remain at/near their lows.  Elsewhere OM had small losses in Technology-4th Industrial Revolution/Software (-6bps, in part due to timing of exit and reallocating cash), Biotech (-6bps) and Carbon Credit Allowances (-11bps).

The remainder of the portfolio were small positive contributors, led by Uranium (+29bps), Greece (+18bps), Idiosyncratic (+15bps), US Re-industrialization (+9bps) and Commodities (+6bps).


Portfolio (as at 06/30/24 - all delta and leverage adjusted, as appropriate)
Dislocations: 50.5%
23.3% - Uranium (URNM, URNMJ, NXE, and SMR)
11.5% - European/UK Financials (BCS, LYG, NWG)
7.0% - Argentina (BMA, GGAL, SUPV)
4.6% - China (KWEB, FXI and JD)
4.2% - Brazil (EWZ)

Thematic: 42.6%
12.3% - Shipping/Tankers (STNG, INSW, TNK, DHT and FRO)
6.9% - Tin (AFMJF, MLXEF and SBWFF)
5.8% - India (IBN, INDA and SMIN)
5.2% - Biotech: 4th Industrial Revolution (IBB & XBI)
4.3% - Blockchain/Crypto (ETHE and OSTK)
4.2% - US Re-industrialization (AIRR)
1.9% - Carbon Credit Allowances (KCCA)
1.4% - Commodities/Mining (FLMMF)
0.7% - Greece (ALBKY)

Idiosyncratic: 5.1%
5.1% - Equities (TPL & JOE)

Shorts/Hedges: 0.0%

Cash: 1.8%

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.  

Portfolio Update – Part II – Everything Else

The positions in European/UK Banks (11.5% position) and Argentina (7.0%) represent classic dislocations, where investors have been disappointed by so much and for so long that they have given up.   The result is an attractively valued opportunity, with prices having bottomed, at a time when material changes are happening.  

The European/UK Banks’ (11.5%) 2023 year-end results finally led to sharp moves in the stocks, but it’s telling that even after rising ~40% year-to-date that Barclays still trades at ‘only’ 6.6x analysts’ 2025 Earnings and at 0.5x Tangible Book Value.  It doesn’t take a vivid imagination to see the possibility that things continue to improve from here and OM expects the UK banks to continue to surprise investors.   One of the counterarguments has been that the post-Brexit, the UK has been a hot mess encapsulated by Liz Truss’ short Prime Ministership.  The recent election campaign did little to dissuade this but today’s massive ‘centrist’ Labour majority means that the UK looks politically stable for the foreseeable future in sharp contrast to the uncertainty engulfing France, Germany and the US!

In Argentina (7.0%) it has quickly become clear that President Milei is seeking to make major changes very quickly.  While many will feel it is too fast, Milei has learned from Macri’s failed attempt at gradual reform a decade ago.   The reforms are broadly things that have been discussed for years including liberalizing the exchange rate regime, shrinking the money supply (including running down the central bank notes, LELIQs, which were held by the banks), balancing the budget and the start of structural reforms.  The reforms will be imperfect, and their passage into law and implementation will be complicated, but the direction remains positive. So far, Milei has played his political hand well.

The new position in China (4.6%) bears the dislocation traits; China has fallen from being THE place to invest for much of the last two decades to being described as ‘uninvestable’.  There are very good reasons for this, most prominently China’s actions reminding the world that it is not a capitalist country and it has a very different approach to the rule of law.  Unsurprisingly, stocks have fallen substantially with large cap China (FXI) bottoming early this year down 55-60%, and China Tech names (KWEB) down ~75%, from their respective February 2021 peaks.   This leads to two natural questions – when is the downside priced in and why now?   The answers are unfulfilling; it’s near impossible to tell when things are priced in, especially given a large part of the issue is structural.  However, the risk/reward is interesting – for example, Chinese Tech stocks trade at half the valuation of US ‘peers’ and the Chinese government has made incremental equity-positive steps (e.g. approving buybacks, etc.).  Though OM has started a position, he fully recognizes that China operates under a non-capitalist framework, and thus the size is smaller and the holding period will be shorter than otherwise.

The balance of OM’s portfolio is spread across a handful of themes; India (5.8%), Biotech (5.2%) and US Reindustrialization (4.2%).  The first two represent long-term themes that have been in the portfolio a while, and OM expects to outperform broader markets.

The US Reindustrialization (4.2%) theme is newer to the portfolio and is the one most ‘missed’ long-term theme by professional investors.  What is the reindustrialization of the US?  Well it’s electrification (EVs), energy transition (renewables), the second order effects of digitisation and AI, coupled with the reshoring trend and  massive multi-year fiscal stimulus programs (CHIPS Act, and especially Inflation Reduction Act, which changes the ROE on industrial capex).



While investors are aware of the above chart and boom in manufacturing capex it is largely viewed as a one-off spike rather than the early innings of a multi-year surge.   The problem is that it’s driven by a combination of numerous trends and lots of companies are seeing their own little part of these.  These companies can explain how they’re benefiting, but there is an inability to clearly articulate the scale of what’s happening and thus the longevity and size of the opportunity.   Well this is true except for 1 company; megacap Eaton, who are seeing it all, explaining it to the market, and have been handsomely rewarded for it (ETN:  +60% over 1-year, +160% over 3 years).   OM’s belief is that in the coming years, as the market better understands the scale and scope of US Reindustrialization the collection of smaller companies that are facilitating the different parts of it will be rewarded.

Portfolio Update: May 2024 - Part I - There's a Supply Deficit

OM was starting to write a short note on the current market environment, but finds those notes dull to consume and OM has little original to say. Broadly, OM’s market view can be summarized as  - things aren’t as good as we’d like but not as bad as people think, though inflation is likelier stickier than the Fed would care to admit.

However, Our Man has made several meaningful changes to the portfolio over the last few 6 months, largely reflecting opportunities that he’s been watching for a while.  As such, it’s probably a good time for a portfolio update – in two parts, so it doesn’t become too long and unwieldy.

Portfolio Update – Part I – There’s a Supply Deficit
The broadest theme across OM’s portfolio is that of a supply deficit; primarily where an under-investment in supply coupled with a slight growth in demand has resulted in the supply deficit.   The theme is most obviously seen across numerous commodity markets, which represent about 1/3 of OM’s exposure.   More generally, this is something that impacts physical markets (commodities, goods, etc) and because of the rise of digital/software driven business models over the last decade+ OM think investors are poor at truly understanding the impacts.   One of attractions of digital/software business models is that marginal cost is (almost) zero and supply is (almost) unlimited.  For example, if I want to use Microsoft Office on my computer, the cost is almost nothing to Microsoft and my usage has no negative impact on your use of Office on your computer.  However, this doesn’t hold true in the physical world – if I use this barrel  of oil then you cannot, and if there is a supply deficit we are effectively competing to use that barrel of oil leading to a very different impacts on price.

Uranium (24.3%) remains OM’s largest position as it is the purest expression of the supply deficit.  Given the 7-year plus time horizon to successfully permit, build and begin to operate a uranium mine, the supply side is relatively easy to project.   Uranium’s sole end use is as they key component in fuel for nuclear power plants, who purchase it under long-term contracts.   Over the last few years, OM has noted the sharp turnaround in sentiment towards nuclear power.  This has seen nuclear power become accepted as part of the clean energy solution (including within the EU’s green taxonomy/bond program), increased uranium demand through life extensions for nuclear plants (even in the US!) and plans for new plants globally.   This imbalance of projectable supply and increasing demand has not gone unnoticed by the markets with both the Uranium price and the mining stocks up multiples over the last few years.  Despite this, OM retains a sizable position believing that while we’ve reached the ‘end of the beginning phase’ there remains further to go.  Why?  The largest miners keep missing production targets, the best assets keep extending their timelines to start production, the US is determined to wean itself from Russian uranium fuel, the continued nuclear plant extensions and starts bolster demand, and finally the largest banks are only now starting to cover the sector.

OM sees similar dynamics are playing out across Commodities/Mining (1.3%), and in particular in the smaller Tin (7.8%) market.  The supply deficit in the Tin market continues to edge closer as supply in Indonesia & Myanmar – major tin producers – run into problems.  The demand-side case continues to strengthen; as a reminder, ~50% of Tin demand is as solder, primarily as the ‘glue’ to make semiconductors – it is a direct beneficiary of the emergence in AI, and the subsequent demand for AI chips and increasing computing power.   Furthermore, Tin has no substitutes in the production of semiconductors, and has a no impact on the price of the end goods – the iPhone contains <25c worth of Tin, but wouldn’t work without out it.  If the tin price increased by multiples, it has almost no impact on end demand.   Finally, while commodities aren’t a core driver of the Brazil (4.7%) thesis, they are a meaningful contributor given the country (and its companies) are a major supplier of many commodities.   OM suspects that we’re seeing the impact of supply deficits in Uranium ahead of in other markets given the simplicity of its story.  As such, it’s likely that as OM’s exposure to uranium decreases over time, much of that capital will find its way into other commodity-related themes that are only starting to recognize the supply deficits in their markets.

Outside of commodities, the impact of limited new supply and increased demand is also clearly visible in Shipping/Tankers (12.1%), where positions have rallied strongly over the last 3-years.  This originally began due to the IMO 2020 changes but has been supercharged as a result of the Russia/Ukraine war.  We’ve previously discussed its impact on the demand side, but the sanctioning of tankers has also reduced supply.   The Russia/Ukraine war has had the effect of highlighting and exacerbating the imbalances in the tanker market, pulling some of the performance forwards and OM expects the position to continue to shrink over the short-to-medium term.

Elements of the supply deficit dynamic also help underpin some other positions including Idiosyncratic Equities (5.7%), Carbon Credits (2.3%) and Blockchain/Crypto (3.8%).  Both idiosyncratic equity companies (TPL and JOE) own real estate where there is increased demand for its usage be it through oil/gas drilling in the Permian (TPL), or increasing population and build out in Northwest Florida (JOE).  California Carbon Allowances are a man-made ‘environmental commodity’ where regulation specifically targets reducing supply over time to drive the price higher.   Finally, OM has added to the Blockchain/Crypto position – while the Bitcoin halving slows future supply, OM suspects that this 12-month post-halving cycle will be driven by Institutional FOMO (vs. prior halvings’ retail FOMO) now that exposure can be more easily obtained via ETFs.   

Part II will look over the rest of the portfolio...

 

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.

2024: First Quarter Review

Portfolio Update
Our Man made a smattering of changes to the portfolio in mid-January.    The changes saw some new dislocations/themes added to the portfolio, as well as some adjustment of existing position sizes.

- Added Argentina (new Dislocation):  Following President Milei’s victory in the Argentine elections and the initial burst of reforms, especially the moves to liberalize the exchange rate, OM took an initial position in Argentine Banks.   OM will pen something in in greater depth, should this position be materially increased, but for those with interest you can read the positive case, as articulated by one of OM’s friends (an EM specialist).

- Added American Reindustrialization (new Theme):  Professionally, OM has been discussing this as the biggest under the radar theme in markets today.   The difficulty is that it’s hard to express well given it’s a tailwind for a broad swathe of largely mid-cap companies, but a primary driver for very few.   Thankfully, the First Trust RBA American Industrial Renaissance ETF (AIRR) captures many of the names impacted by the theme.

- Carbon Credits (new Theme): OM re-entered the Carbon Credits theme, taking exposure to California Carbon Allowances (KCCA).  

- Reduced Shipping/Tankers:  OM exited the position in EURN as following its transaction with FRO the company is no longer a tanker play.

- Reduced Uranium (URNM):  OM took some profits in Uranium, given the exceptional performance in recent months.  URNM rallied over 60% between the end of June 2023 and OM’s trim in mid-January 2024.

- Added to Brazil – OM made a small addition to the Brazil position.


Performance and Review
The portfolio rose with the markets during the first quarter of the year; its +11.04% increase slightly surpassing both the S&P 500 TR (+10.56%) and the MSCI World (+10.09%).  

First Quarter Attribution

 

There were four primary drivers of performance in Q1 - two long-held positions and two of the newer positions.   The positions in Uranium (+248bps) and Tankers/Shipping (+230bps) were again the largest drivers of performance.   They both continue to benefit from a continual stream of incrementally positive news and have gone from controversial and ignored ideas, to broadly accepted but underappreciated and underinvested ones.   

The US’ relationship with nuclear (and thus uranium) is similar to the rest of the world; over the last 2-3 years the US has seen growing bipartisan acceptance of nuclear culminating in President Biden’s recent endorsement.  However, despite this the US is likely to be the last place to commission a significant expansion in nuclear power as the US has high construction costs and amongst the lowest electricity prices in the world.  OM’s expectation is that US firms will first learn by building plants overseas, using this to help reduce the cost structure to something closer to that achieved by the Koreans (but still more expensive than the Chinese).   Thus, despite the broad acceptance, new US nuclear plants are likely to signal the end of the Uranium trade than being a purely positive sign.

The newer positions in Argentina (+210bps) and European/UK Financials (+169bps) were strong contributors.  The UK Banks continue to suggest improvements in their earnings and have been rewarded with steadily increasing estimates and investor interest.  In Argentina, it has quickly become clear that President Milei is seeking to make major changes very quickly.  There is, and will continue to be, much debate about the pace of the changes but Milei has learned from Macri’s failed attempt at gradual reform a decade ago.   The reforms are broadly things that have been discussed about Argentina for years including liberalizing the exchange rate regime, shrinking the money supply (including running down the central bank notes, LELIQs, which were held by the banks), balancing the budget and the start of structural reforms.  The reforms will no doubt fail to be perfect, and their passage into law and implementation will be complicated, but the general direction is positive.

Elsewhere, the portfolio received healthy gains from positions in the Blockchain thesis (+117bps) after a spot Bitcoin ETF was approved by the SEC.  The most successful time to own cryptocurrencies has historically been from ~6mos before the Bitcoin halving to ~1 year afterwards.  Despite this being well known, OM suspects this will once again prove to be the case around the May-24 halving.  Thus, while the exposure here may increase in 2024, expect it to only last till this time next year.

Elsewhere the gains slightly outpaced the losses, which is unsurprising given the strong market performance.  There were solid contributions from Reindustrialization of the US (+64bps), Tin (+43bps), Greece (+31bps), India (+25bps), Biotech (+21bps) and Commodities (+14bps).  The only detractors came from positions in Brazil (-41bps) and Carbon (-24bps).


Portfolio (as at 03/31/24 - all delta and leverage adjusted, as appropriate)
Dislocations: 46.3%
24.2% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF, URG and SMR)
10.7% - European/UK Financials (BCS, LYG, NWG)
6.2% - Argentina (BMA, GGAL, SUPV)
5.2% - Brazil (EWZ)

Thematic: 48.2%
13.4% - Shipping/Tankers (STNG, INSW, TNK, DHT and FRO)
6.6% - Tin (AFMJF, MLXEF and SBWFF)
5.5% - Biotech: 4th Industrial Revolution (IBB & XBI)
5.5% - India (IBN, INDA and SMIN)
4.4% - Blockchain/Crypto (ETHE and OSTK)
4.0% - Greece (GREK & ALBKY)
3.3% - US Reindustrialization (AIRR)
2.5% - Carbon Credit Allowances (KCCA)
1.7% - Software: 4th Industrial Revolution (JD & WCLD)
1.4% - Commodities/Mining (FLMMF)

Idiosyncratic: 5.2%
5.2% - Equities (TPL & JOE)

Shorts/Hedges: 0.0%

Cash: 0.3%

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; 2024 Part I

OM aims to publish six Newsblur posts this year instead of waiting to accumulate numerous articles. Thus, expect shorter posts with 4-5 articles but with more timely content.

The Best Day.  The Very Best Day.
OM loves football (aka soccer), especially his team - AFC Wimbledon. Recently, they faced their hated rivals in a heated match, echoing John Green's sentiment that "football is the most important of all unimportant things."  I’ll spare you all the details, but this is a short 5min video that OM will come back to whenever he needs a pick me-up!

For those who don’t want to watch it; as OM tells his kids – prepare, give your best, and control what you can.  Success isn’t guaranteed, but sometimes – just sometimes – you will score a 94th minute winner in front of your fans, the roof will be lifted off and everything will make sense for a little while.   
(John Green/@vlogbrothers on YouTube)

The Profile Interview: Rob Henderson on Why We Hold ‘Luxury Beliefs’ and Develop ‘Status Anxiety’
A slight departure from the norm but I think a good one;  I have read Rob Henderon’s blog for a few years now and I’m working my way through his just released memoir (Troubled: A Memoir of Foster Care, Family, and Social Class).   I like them both a lot but it’s not for everyone, amongst other things it requires holding conflicting views of the author and some of his ideas at the same time.  For those who are curious, The Profile’s (also a good read) interview is a good starting point.

The most interesting of Henderson’s ideas is the term he coined, ‘luxury beliefs’, which he defines as “ideas and opinions that confer status on the affluent, while often inflicting costs on the lower classes and everyone else.  A core feature of a luxury belief is that the believer is sheltered from the consequences of his or her beliefs.”
(The Profile)

Things I Don’t Know About AI
There is no shortage of opinions on AI, but this is an interesting way to think about what we don’t know.   Written by a Founder/VC, the opening sentences sum it up; “In most markets, the more time passes the clearer things become. In generative AI (“AI”), it has been the opposite. The more time passes, the less I think I actually understand.”
(Elad Blog)

Can Trade Intervention Lead to Freer Trade
OM believes that there’s something wrong with the version of ‘free trade’ today, and that the next 50-years are likely to see something quite different from the last 50-years.   Michael Pettis article delves more into this, and his introduction sums the issues up well!

“A well-functioning trading regime would permit neither the large, persistent trade imbalances that characterize the current global trading system nor the perverse flow of capital from developing economies to advanced economies. Global trade needs new rules that encourage a return to the benefits of free trade and comparative advantage.”
(China Financial Markets)

2023: Fourth Quarter Review

Portfolio Update
All of OM’s portfolio changes happened at the start of November:
- European/UK Financials:  OM built the recently discussed position in European/UK Financials.   
- Biotech:  OM increased the Biotech position by ~1.75%.
- Shorts/Hedges - Higher Medium-Term Rates:  OM exited the position in PFIX at the start of November, as the 10-Year Treasury traded around 5% meaning that higher rates for longer were finally being priced in.  The timing proved fortunate as subsequent economic data and commentary from various Fed/Treasury officials led markets to change their view and expect numerous rate cuts in 2024.

Performance and Review
OM’s portfolio rose with the markets during the final quarter of the year; its +10.73% increase fell between the S&P 500 (+11.69%) and the MSCI World (+9.84%).  This resulted in the portfolio ending the year +31.29% for 2023, which was ahead of markets (S&P 500: +26.29% and MSCI World: +23.18%).    While a solitary year means little, 2023 ended up being decent overall performance especially considering the portfolio protected capital in 2022.

Fourth Quarter Attribution

While there has been much talk of the ‘Magnificent 7’ (aka MAG7), a small cadre of technology-related stocks driving the market higher with limited contributions from others, that was not the case for OM.    While OM owns none of the MAG7, it was in many ways close to an ideal year for the portfolio.   

The portfolio benefited from the timing/maturity of its core exposures; the Shipping/Tanker theme drove performance in 2022 and early 2023, before handing over to the Uranium positions that contributed over +1,000bps to performance in the second half of the year.   With the Shipping/Tanker theme in its ‘beginning of the end’ phase, it will likely continue to be cut back and shrink during 2024.  Uranium is – after a long wait – finally in the sweet spot of its investment lifecycle as the opportunities on the demand side, challenges on the supply side, and the material gap between demand/supply are now beginning to be understood by industry players and reflected in market pricing.   More generally, OM’s belief remains that the demand/supply trends we are seeing in the Uranium sector are likely to be repeated in many other mining/commodity sectors in the coming years.

The turbulent and uncertain markets in 2022/2023 were also generous in helping offer up new opportunities (European Financials) and the chance to increase exposure to some existing ones (Biotech).  This is something that has continued into the early part of 2024, with OM having started new positions in Argentina (Dislocation) and American Re-industrialization (Thematic) and added to the Brazil position.

The portfolio’s fourth quarter performance was largely reflective of the market, with everything contributing to performance.   The standout was the exposure to European/UK Fins (+197bps) that rose 20%+ as their third quarter earnings began to further highlight the value proposition for investors.  The portfolio’s Blockchain (+177bps) exposure was helpful, with the position in ETHE benefiting from the expectation of a Bitcoin ETF getting SEC approval in January 2024, and the belief that an Ethereum one would be next.

The non-Uranium commodity positions continue to lag, with Tin (+4bps) and Commodities (+8bps) making marginal gains.   In many ways there are similarities to where the Uranium (+186bps in Q4-23) position was in 2021, with clear signs of the coming stresses in the market visible to the few who are looking.        

Elsewhere, the weakness in the US Dollar helped the international positions; India (+56bps), Greece (+48bps), and Brazil (+104bps).  The rise in rates early in Q4 saw OM exit the Short/Hedge exposure (via PFIX, +16bps), while the subsequent change in rate expectations helped Technology – 4th Industrial Revolution (+26bps) and Biotech (+101bps) names rally strongly in the second half of Q4.   There were also decent contributions from the Shipping/Tankers theme (+122bps) and the Idiosyncratic names (+23bps).


Portfolio (as at 12/31/23 - all delta and leverage adjusted, as appropriate)
Dislocations: 45.4%

29.6% - Uranium

10.1% - European/UK Financials
5.7% - Brazil

Thematic: 44.5%
14.7% - Shipping/Tankers 

6.9% - Tin 

5.9% - Biotech: 4th Industrial Revolution 

5.8% - India 

4.2% - Greece 

3.7% - Blockchain/Crypto 

1.9% - Software: 4th Industrial Revolution 

1.4% - Commodities/Mining 

Idiosyncratic: 5.8%
5.8% - Equities 

Shorts/Hedges: 0.0%

Cash: 4.3%

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.  

European/UK Banks - Dislocation postion (Q4-23)

During the middle of the fourth quarter of 2023, Our Man built a dislocation position in European (and specifically UK) Banks.   The crux of the thesis can be summed up as European banks spent the last 15 years using profits to rebuild their capital base and are now ready to start returning those profits to investors, and it comes right at the moment when profits are likely to rise due to higher interest rates.  The market doesn’t believe this as everyone knows European Banks are terrible no good investments, and that a UK recession is coming and thus rates will go back down.

Yes, I know you’re disgusted that OM bought European/UK banks – perhaps almost as disgusted as Mrs. OM was - but that’s a necessary condition for a dislocation investment!  As a reminder, dislocation investments should be unloved by investors (hated is even better!) and thus absolutely and relatively cheap, but with something upcoming that will help change the narrative and price.

Everyone knows that European banks have been an awful investment for over a decade.  Here’s Barclays over the last 10-years; a whole of ugly!  
 

And it’s not just Barclays, the entire European Bank index has a measly 2% annualized total return over the last decade, and negative returns over 20 years!  And yes, OM did notice the 2023 demise of Credit Suisse!  

However, the terribleness of European/UK banks is a known known and it leaves Barclays – a premium UK bank (stop laughing in the back!) – trading at ~0.5x book and a P/E of 5x.  Furthermore, expectations are low with market analysts expecting little to no growth in earnings in the upcoming years.  

Yet, the dirty secret is that after spending over a decade of using profits to repair balance sheets and capital ratios, the European banks are finally ready to return some of that lucre to a moribund shareholder base.  Whisper it quietly, but European banks are much better capitalized than their US counterparts (and with far less of the not marked-to-market financial chicanery)!

 

While OM could walk you through all the financials, Barclays were kind enough to provide a slide that goes directly to the heart of the matter.
 

What’s going on here?   Well, Barclays invested in a massive long-term interest rate swap portfolio to smooth its P&L.  Their timing was suboptimal, locking in exceptionally low rates – as seen by the average hedge yield of <1% through 2022.   However, the good news is that about 20% of the portfolio (50-60B GBP) rolls off each year and in 2022 and 2023 it began being reinvested at much healthier rates (4.57% at Q3-23).  This is why the light blue bars for 2024 and 2025 are a cloudy white at the top; if the entire portfolio generated 4% (vs 1.54% as of Q3-23) then the hedge income would be ~10B GBP, off the charts compared to the dark blue bars of 2019 to 2022.

So why doesn’t the market see this or care?  Well, the uncertainty is of course over the 5-year swap rates in 2024 through 2026, given it will take till 2026 for the low rates to be rolled out of the portfolio.  For simplicity think of the portion of the hedge at 2019s rates being rolled into 2024s rates, and 2020s in 2025s, etc.  The market’s belief is that the UK economy is weak, a recession is coming and that rates will fall.   While this is certainly possible, it helps create the kind of dislocation trade that OM loves; hated, cheap and with the market already assuming bad things and pricing that in.  If nothing happens, and the UK just muddles along with rates remaining broadly similar then Barclays will profitably roll that massive hedge portfolio and the stock is seriously mispriced.  

The same analysis broadly holds true for other European banks, but OM has focused his positions on the UK since (i) inflation is likely a little more structural there (in part due to Brexit) and (ii) ‘everyone knows’ that the UK economy is weak and rates are coming down.

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.