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.

Portfolio Update – September 2022

A small note on the current environment and market; economic conditions are uncertain and are being impacted by a cross-current of conflicting short and longer-term trends.  These include the consequences of the COVID-19 lockdowns and the subsequent multi-speed re-openings, the varying amounts of fiscal and monetary support provided during COVID, a decade+ of loose monetary policy, and rising inflation caused in part due to supply constraints and as a result underinvestment in commodities that have been exacerbated by the Ukraine/Russia conflict.  As a result, there has been contradictory signals across countries and within different parts of the economy and markets, meaning there are a broad range of outcomes for both growth and inflation and there is data to support almost any view.

Market wise this has led to increased uncertainty and higher rates, which have been bad for stocks and credit.  It has also seen a tendency for the market to extrapolate limited datasets to smooth the uncertainty but then have sharp reversals when contradictory data comes out.  This is further compounded by the uncertainty over the Fed’s preference function due to the absence of inflation over a prolonged period.  What matters most to the Fed between inflation, financial sector stability, economic growth/unemployment, currency strength/stability, etc. and by how much?   

OM’s market view can be summed up as 🤷 with reasonable cases able to be made for almost any stance.  However, Our Man made several changes to the portfolio in early September.  These largely reflected some structural things that OM has been pondering a while with the most notable being profit-taking in Shipping/Tankers and the elimination of the Funds bucket of the portfolio.

For a broader round-up, and thoughts on the various buckets, please see below:

Uranium: 25.4% NAV

Marginal change, through the reduction in the Paladin Energy (PALAF) position

Since its inception, the uranium position has primarily been about the supply deficit and how higher prices would be needed to encourage greater supply.  While there have been signs of changes in the perception of nuclear generation and potentially increased demand (i.e. new power plants) over the last couple of years, the conflict in the Ukraine and resulting energy issues have acted as a catalyst and brought things to the fore.   So far in 2022, we have seen the UK lay out a strategy to build 8 nuclear power plants, Japan signal a return to nuclear power, the US further support its nuclear plants including the Inflation Reduction Act and California trying to u-turn on closing the Diablo Canyon nuclear plant, not to mention a spate of plans for small-modular reactors in Europe.  This unexpected increase in future demand merely underscores the supply deficit and potential upside for uranium.

Shipping/Tankers: 12.6% NAV

Major change through sale of ~40% of the position across all names

The decision to trim the position was relatively easy as OM the Shipping/Tankers position is up 100%+ in 2022.   Tankers have been a significant beneficiaries of the energy market turmoil caused by the Ukraine/Russia crisis.  As simple example, pre-conflict a small Aframax tankers would fill-up in Russia make the short run to Europe (Rotterdam) and then head back to refill.   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 (and back again), while other tankers service Europe with oil from the US or Middle East.  While this is a massive simplification it’s a good demonstration of how inefficient today’s reality is compared to pre-conflict!   Tankers are traveling a lot of extra miles and with fixed supply, unsurprisingly price is the variable that has changed.

So why keep the position (and in larger size vs. end-2021).  The tanker fleet is getting old and the order book is the lowest since 1996 so supply will be constrained for a long time.  Furthermore, while Tankers will be hurt if/when there’s a resolution in Ukraine and/or a recession, we’re also unlikely to revert to the pre-crisis trade routes.  This is especially the case when we look at where the oil is being exported (US oil production/exports near all time highs), where the refineries are and where the end consumers are.  

Given the above, OM leans to the view that the dislocation phase of the tanker trade is over, and the tanker market super cycle is finally beginning.  To reflect this, OM will move Tankers from dislocation to thematic at year-end.  The operating and financial leverage (and shady management) in the businesses means it won’t be smooth sailing and the position sizing reflects that and the thematic nature.   

Tin: 8.3% NAV

Minor change through increasing the position in Alphamin Resources (AFMJF)

The tin price has been very volatile over the last year; the current $21K price is down over 50% from its 2022 peak yet also near historical pre-COVID highs.  However, there’s been little change to the long-term outlook and the same demand-supply dynamics remain (https://ourmaninnyc.blogspot.com/2021/05/the-adventures-of-tintin.html).  OM took the opportunity to add to the Alphamin position; it is a largely debt free company that’s profitable at these prices as the lowest cost major producer, and it also has the largest untapped tin deposit adjacent to its existing mine.

 

International: India (6.7% NAV), Greece (3.5% NAV) and Brazil (2.2% NAV)

Minor change, exiting Vietnam but adding to Brazil

The position in Vietnam was exited – while Vietnam will benefit from supply chains being diversified from China, it’s more likely that many of these supply chains will be brought back to Americas than prior to COVID/Ukraine.

OM added to the position in Brazil – it’s a commodity rich country, with a cheap market, where interest rates (at 13.75%, from 2020 lows of 2.00%) are nearer the end of their cycle and with a pivotal election later this year.  It’s something OM continues to spend more time on, and if it’s going to be sized up meaningfully then OM will write in greater depth.   OM is additionally looking at Turkey, as a potential investment idea.

 

Equities/Funds: 5.6% NAV

Major change: exited all of the Funds’ positions (GVAL, CWS, ARTTX, and CAPD) and added marginally to JOE.

The biggest change to the portfolio was OM exited the Funds’ positions.  This is something that OM has been toying with for much of the last year – the positions were introduced a while ago to provide some consistent equity exposure as OM was chronically underinvested.  Today, OM has vastly more ideas, greater conviction in them, and a better understanding of his own investment style.  As such, there’s somewhat less need for the Funds positions and their capital will be allocated elsewhere.

Software/Tech (2.8% NAV) and Biotech (5.0% NAV)

No changes, though both Software and Biotech are approaching levels that are beginning to get attractive.

Carbon Credits: 0.0% NAV

OM exited the position in Global Carbon Credits (KRBN)

While OM is intrigued by the Carbon Credits space, in part because it would take a material event to push Europe and California away from believing their carbon cap-and-trade systems were part of a green solution.  Unfortunately, the Ukraine conflict and its impact on energy and electricity prices in Europe is such a material event.  With Europe representing 50-60% of KRBN and a debate beginning to emerge (https://www.euractiv.com/section/emissions-trading-scheme/news/eus-von-der-leyen-rebuffs-polish-call-to-suspend-carbon-market/) over pausing Europe’s cap-and-trade system, OM decided to exit the position.  However, you should expect to see it back in the portfolio in the future though it may be expressed differently (e.g. KCCA, which just reflects California’s Carbon Allowance system and is trading much more attractively).

Blockchain: 4.1% NAV

Marginal Change; exited Bitcoin (GBTC) but added to position in Overstock (OSTK)

OM was long overdue in exiting the Bitcoin investment, which turned a great profit into a healthy one.  The capital was largely reallocated to the position in Overstock (OSTK).  The broad outline of the case for OSTK is largely unchanged since OM’s original write-up.  The developments include the Founder/CEO departing and Overstock moving its blockchain assets into a vehicle that’s managed by a professional VC.   The most prominent of these blockchain investments – tZERO Group – is a blockchain based exchange that is regulated by the SEC and FINRA.  It received a strategic investment from Intercontinental Exchange (ICE, who run the New York Stock Exchange) earlier this year, which saw David Goone (a long-time ICE executive) become tZERO’s CEO.

Commodities: 1.5% NAV

No changes.  

OM is tentatively interested in increasing the size of this bucket, especially if recession fears increase and prices become more attractive.  After a decade of underinvestment there are supply/demand imbalances across many commodities, which are a core component of electric vehicles and the buildout of renewable energy.  However, OM is cognizant of the strong correlation of this bucket with a number of others in the portfolio (e.g. Uranium!), especially when markets are stressed or recession fears increase.

Shorts/Hedges: 5.7% NAV

Marginal change; added to OM’s position in PFIX

OM expects that future interest rates over the next 5-7 years will be higher than historical ones over the last 5-7 years.  For simplicity, PFIX invests ~50% of its capital into a US Treasury Bond (5-year) and uses the balance to purchase put options at 4.25% on the 20-year rate, expiring in May 2028.  In essence, with the value of the Treasury Bond providing a floor for PFIX should OM be wrong, the option provides substantial upside should medium term rates move beyond 4.25%.

Cash: 16.8% NAV

As a result of the portfolio changes, especially the liquidation of the Funds and reduction in Shipping/Tankers, OM is holding substantially more cash.  This cash level reflects OM’s view of the uncertainty in the economy and markets but expect OM to slowly start to invest it as either this fades or prices become more attractive.

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. 

2022: Second Quarter Update

Portfolio Update

- Uranium:  OM made a small tweak to his Uranium exposure, slightly reducing the broader exposure to Uranium Miners (URNM) and replacing it with NuScale Power Corp (SMR).  Nuscale is a leading designer of small modular nuclear reactors.

Performance and Review

After an exceptional five+ months to start 2022, OM’s portfolio came rudely back to earth during the final three weeks of June.  OM’s portfolio fell by -19.4% during the quarter, but three-quarters of that loss came in the final three weeks of June.   This resulted in the portfolio under performing both the S&P 500 Total Return (-16.1%) and MSCI World (-14.4%) for the quarter.  The strong start to the year, means that OM’s portfolio (-15.8%) is still ahead of those equity indices year-to-date - S&P 500 TR (-20.0%) and MSCI World (-18.5%)

Second Quarter Attribution

 

Before we look at the myriad of ways OM managed to lose money in Q2, let’s briefly touch on what bucked the trend.  Unsurprisingly, the ‘short/hedge’ position in PFIX (+35 bps) – a play on higher medium term interest rates - was profitable as the Fed finally began raising rates and investors began to consider whether inflation was cyclical or structural.  The more that inflation proves to be structural, the more likely we see higher medium-term rates.   Elsewhere, OM profited from two Energy-adjacent positions - Shipping/Tankers (+274 bps) and the holding in TPL.   Shipping/Tankers were a beneficiary of the Ukrainian crisis and the subsequent impact of the transport of crude oil and petroleum products.   At the simplest level, Russian crude is going to India/China rather than Europe and Middle Eastern crude is going to Europe – inefficient trade routes resulting in greater ton-miles and demand for tankers.  Finally, OM’s exposure to Carbon Credits (+12bps) gained despite all the issues around high energy and electricity prices.  OMs exposure is primarily to the EU and California carbon credit markets where Green/ESG policies are a shibboleth, and the least likely to be abandoned even in times of stress.

The losses were broadly driven by some combination of three things:

i.    Stocks were down.

ii.    That was a choice; short-term pain for (expected) long-term gain.

iii.    That was foolish.

Unsurprisingly, with global markets heavily falling most of Our Man’s stocks headed in the same direction; Tech/4th Industrial Revolution (-59bps), Biotech (-64bps), Funds (-156bps) and the position in JOE (together with TPL, forming Idiosyncratic -107bps).  Within this group, the longer duration names (Tech/Biotech) and housing-related (JOE) fell more heavily reflecting the weakness of these sectors of the market, while some of the Funds held up slightly better.

The two other large risks that OM has chosen to take are commodity risk and short US dollar risk.  The two are of course related, with commodity positions containing an implicit short-dollar relative position.  With the US dollar continuing to strengthen during the quarter it was a headwind for OM’s non-US exposure; Brazil (-10bps), Vietnam (-76bps), India (-72bps), Greece (-59bps) and the Cambria Global Value ETF (GVAL, within Funds) all lagged.  The first half of the year largely saw commodities rise, despite the dollar increasing.  That changed abruptly in early June after the market moved from focusing on inflation to fearing recession, and its potential negative impact on commodity demand.  The result was a sharp pullback across the commodity complex, and an even larger one in commodity related equities.  OM’s positions in Uranium (-837bps), Tin (-311bps) and Commodities/Mining (-17bps) were hurt by this move.  While both Uranium and Tin pulled back the long-term fundamentals of both continue to look good and the volatility comes with the space.  With OM’s limited ability to trade the portfolio, position sizing is key - these large quarterly losses were within OM’s risk tolerance for the positions.  

The case for nuclear continues to develop as the challenges of energy transition from fossil fuels, and the far longer timeline it will require, become clearer to even politicians.  The West is thinking about building new reactors (led by the UK), postponing closures (California) and restarting (Japan) existing ones, as well as considering the security of its uranium supply (e.g. US establishing Strategic Uranium Reserve).  These have had an impact on pricing higher up the nuclear fuel chain (SWU prices) as well as long-term contracting prices which are up 50% from last year.

OM believes the case for Tin is even cleaner, with the small changes since OM's last major update all further enhancing the case.  As the rest of the market begins to run out of supply, Alphamin Resources (AFMJF) has progressed in 2022 from not only being the lowest cost producer to also being the one with the largest & most attractive undeveloped resource.  The company suffered in Q2 after considering its strategic options but not finding a deal to its liking, coupled with a substantial fall in the price of tin.   OM was delighted (and took the opportunity to add some in Q3) – the company is debt free and profitable at today’s tin prices, meaning it can fund its development internally.  It is by some distance the premier asset in the most strategic metal.  If the West has learned anything from the Russia/Ukraine crisis then the large Western mining companies should be potential acquirers, though probability suggest that it will eventually be bought by the Chinese.   Hopefully, that day is still a year or two away allowing more of the value to accrete to existing shareholders rather than the eventual acquirer.

Finally, OM managed to throw away a bunch of performance; the crypto positions in GBTC and ETHE cost the majority of the Blockchain’s (-495bps) loss.  Why throw away?  Well, when OM talked about the position last he made clear the aim was to reduce the size and eventually exit during 2021.  Sadly, having a plan is great but failing to execute is not – had he heeded his own advice and exited at the end of 2021, the portfolio would have saved ~500bps.  There’s no great excuse (but lots of poor ones) for why he did not – hence that was (at best) foolish!   The size of the drops in GBTC/ETHE were so large and dramatic that OM is being judicious about when to exit them, especially given their small size.  However, unlike previously – the position will definitely be sold by 2022-end if not well well before.  While the crypto positions would still be healthily profitable (500bps+) even if the existing GBTC/ETHE holdings went to zero, this is not a private equity portfolio; the sting of 2022’s profit foolishly thrown away, far outweighs the 25%+ IRR even in that worst case scenario.

Portfolio (as at 06/30/22 - all delta and leverage adjusted, as appropriate)

Dislocations: 43.6%

23.5% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF, URG and SMR)

16.0% - Shipping/Tankers (STNG, INSW, EURN, TNK and DHT)

4.0% - Greece (GREK & ALBKY)

Thematic: 34.9%

7.3% - Tin (AFMJF, MLXEF and SBWFF)

6.8% - India (IBN, INDA and SMIN)

5.3% - Biotech: 4th Industrial Revolution (IBB & XLB)

4.1% - Blockchain/Crypto (GBTC, ETHE, and OSTK)

3.2% - Tech: 4th Industrial Revolution (JD & WCLD)

3.1% - Vietnam (VNM)

2.7% - Carbon Credits (KRBN)

1.9% - Commodities/Mining (FLMMF)

0.4% - Brazil (EWZ)

Technical: 0.0%

Idiosyncratic: 16.3%

11.1% - Funds (ARTTX, CWS, GVAL, and CAPE)

5.2% - Equities (TPL & JOE)

Shorts/Hedges: 3.7%

3.7% - Higher Medium-Term Rates (PFIX)

Cash: 1.5%

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; 2022 Part 1

OM has been very delinquent in updating the blog during a busy first half of 2022 - hopefully, this is the start of a little more frequent posting as we head into the second half of the year!  To ease us back into the flow here are some light reads and videos from the last 12mos that you might find interesting - especially if you have kids!


Here’s How to Understand What a “95% Accurate” Test Is Actually Telling You
Pretend you’re a doctor; You’re using a new test for Disease X, which afflicts 1 out of every 1,000 adults. The new test has perfect “sensitivity,” i.e. it detects every single true positive case of Disease X. It also has a false positive rate of 5%. Your last patient doesn’t have obvious symptoms, but you just got their positive test result. What is the chance that they actually have Disease X?”

If you answered ~2%, you’re shockingly good at mental math or you stopped, thought about it and used a pen/paper.  If you didn’t answer 2% (and especially if you answered 95%) then please read the article.  (David Epstein, Range Widely)


Why should we go to Mars?
With everything stressful, sad and concerning going on in the world, here’s something rather more hopeful.  NASA’s Perseverance landed on Mars in 2021.  Why does that matter?   Let Dr. Robert Zurbin of the Mars Society spend 5 minutes telling you why - it’s the real science, the challenge, and the future!  
(Dr. Robert Zurbin, YouTube) 

How to Outrun a Dinosaur
If you have kids of a certain age, this is the kind of stuff that’s helpful to know; Velociraptrors are vastly overrated by Jurassic World, juvenile T-Rex’s are not!
(Cody Cassidy, Wired)

How to Kick a$$ at your first job…any maybe second
OM was recently asked to give some advice to a couple of college-aged interns by a friend; Jackie DiMonte does it far better.
(Jackie DiMonte, Day by Jay)

10 easy ways you can tell for yourself that the Earth is not flat
It’s nearly the midterm election season in the US – politicians will say stupid things (including being utterly oblivious to what a “95% Accurate” test means).  Here’s one way even a child can disprove the stupidest thing you’ll probably hear.
(Moriel Schottlender, Popular Science)

How a Portuguese Fishing Village Tamed a 100ft wave
OM has never surfed, but one of the joys of last summer was watching “100 Foot Wave” with his kids and the various random discussions that followed each episode.  For those who don’t have HBO/HBO Max, this article tells the tale of Nazare in Portugal, and its local council and surfer Robert McNamara who have made it the epicenter of big wave surfing!
(Elly Earls)

Rock Skip Robot – The Perfect Science of Rock Skipping
If you’ve ever wanted to impress someone with your rock skipping abilities, then Mark Rober has some tips for you.  If you’ve ever wanted your kids to watch something interesting/useful then OM highly recommends Mark Rober’s YouTube channel.
(Mark Rober, YouTube)


Who’s Afraid of Elemental Power
OM believes that nuclear will be the bridge between fossil fuels and renewables, and that the transition will take longer than people expect.  It’s part of the reason he has a BIG Uranium position!  Well, here’s some of the arguments for nuclear and a rebrand to make it less…scary.
(Harry Stevens, Washington Post)

2021 Third Quarter Update

Portfolio Update   

OM made some portfolio sales near the very start of the quarter: 

- Uranium:  OM trimmed his Uranium positon by approximately 1/5, reducing the positions in URNM, CCJ, NXE and URG.  Though OM felt that the launch of SPUT (see below) would have a positive impact, he expected it to come largely after SPUT’s NYSE listing in the US – it came much more quickly.  These positions were in the most established Uranium miners in OM’s portfolio, with the smaller more speculative positions in the theme unchanged.  As a result, the risk in the Uranium theme fell by less than 20%.

 

- Energy:  OM exited the position in Antero Resources (AR), as it reached his fair value target after tripling from his initial purchase price in October 2020.   Unfortunately, it proved too early as the natural gas crisis in Europe saw AR rise rapidly at the end of Q3.

 

- Tankers: OM trimmed his tankers position, through reducing STNG and EURN.  The medium-to-long term prospects continue to look good for tankers on both the demand and supply side.  Demand for oil/oil products is slowly/steadily returning as COVID wanes globally, and the supply book remains tight – owners are finally starting to scrap ships, and the strength in other shipping segments means there will be little room in shipyards for any new tanker orders till after 2025!   However, until demand hasn’t recovered sufficiently for tankers to receive the hockey stick pricing seen in other shipping segments, and after strong performance YTD the stocks were well ahead of rates. 

 

Before making some purchases at the start of September

- Idiosyncratic:  OM added to his position in JOE.

 

- Tin: OM added a position in Cornish Metals (SBWFF) – a junior Tin miner - to the portfolio after it continued to post encouraging results.  Fundamentally, Tin remains OM's highest conviction idea though it lacks Uranium's reflexivity and has limited investment options.

 

- India:  OM added to his India exposure through adding the MSCI India Small Cap ETF (SMIN), reflecting increased willingness to build the position following the delta variant.

 

 

Performance and Review 

The start of the second quarter of 2021 saw the portfolio continue to outperform markets, though this reversed meaningfully in June.  OM’s portfolio ended the quarter rising +6.3%, and trailed both the S&P 500 Total Return (+0.6%) and the MSCI World (Net, +0.6%).  For the year, this leaves OM’s portfolio up +38.0%, with the S&P 500 TR (+15.9%) and the MSCI World (Net, +14.8%). 

(OM: Performance numbers updated.  Apparently automating something is only good if you remember to check it works!)

 

Third Quarter Attribution

 

The portfolio continued to benefit from its exposure to Uranium (+495bps), which remains the largest position.  The moves in uranium were catalyzed by Sprott completing its transaction for the renamed Sprott Physical Uranium Trust (“SPUT”).  In mid-August, SPUT activated its at-the-money financing facility, which allows it to raise capital (at market prices) when SPUT is trading at a premium to NAV.  This new capital is then used to purchase more physical uranium!  In the back half of the quarter, SPUT raised over $450million and used it to buy almost 11 million pounds of Uranium.   These purchases helped drive the spot price up to almost $50, ensuring full reflexivity as this was reflected in SPUT’s NAV and price, which helped draw further interest (and investment) in SPUT and the Uranium equity ETFs.  Perhaps, even more importantly the long-term contract price also rose materially for the first time in years, to over $40!  OM continues to believe it’s relatively early in the uranium bull market, and the current energy issues are further highlighting nuclear’s importance.   While SPUT continues to raise capital (and a potential Q1-22 NYSE listing will further help) and with seasonal impacts helping uranium, the reflexivity is likely to continue. OM remains quite content to run an over-sized position and weather the volatility that comes with.

 

OM’s exposure to other commodities was also beneficial.  While the exposure to Tin (+63bps) wasn’t a massive driver, the thesis continues to strengthen, is entirely underappreciated, and the stocks are now reflecting but lagging the strong price action in the physical commodity.   With Alphamin Resources (AFMJF) set to announce drilling results as well as become debt free in Q4, it remains the position that OM is most comfortable in.  The small Energy exposure (+185bps) came from Sandridge (SD), which benefited from its fundamental improvements, as well as the sharp run-up in natural gas prices following its decision to remove hedges earlier in the year.  Finally, while not a commodity, OM’s Blockchain positions – especially in Bitcoin (GBTC) and Ethereum (ETHE) – are benefitting from many of the same factors.  In what seems to be a time of rolling bubbles, OM wouldn’t be surprised if cryptos reinflated over the next six months.

 

OM managed to lose money in just about every other position in the portfolio, though most were largely immaterial.  The Technology - 4th Industrial revolution (-3bps) and Biotech (-15bps) are both longer duration strategies, and have both struggled this year.   OM’s position in Oil and Product Tankers (-40bps) continues to bounce around, as oil demand slowly recovers.  While the short-term turn seems no closer, the long-term prospects continue to improve.  The scrapping of older vessels is increasing and new supply continues to dwindle.  The strength in other shipping markets, has resulted in orders for those segments and means that shipyards are being booked into the mid-2020s.  OM’s broad international exposure posted small losses – Vietnam (-29bps), Brazil (-11bps) and Greece (-4bps) – though this was partially offset by the increased India (+27bps) exposure.

 

The largest loss came in the Idiosyncratic bucket (-75bps), with both St Joe Company (JOE) and Texas Pacific Land Company (TPL) detracting from performance.   Though both companies own significant amounts of land in Florida (JOE) and Texas (TPL) there was no specific reason that drove the stocks negative performance.  Finally, the Funds (+15bps) produced a mild positive contribution.


Portfolio (as at 09/30/21 - all delta and leverage adjusted, as appropriate) 

Dislocations: 44.4% 

26.2% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF and URG)

10.7% - Shipping/Tankers (STNG, INSW, EURN, TNK and DHT)

4.1% - Greece (GREK & ALBKY)

3.4% - Energy (SD)

 

Thematic: 30.7% 

9.3% - Blockchain/Crypto (GBTC, ETHE, and OSTK)

5.0% - Tin (AFMJF, MLXEF and SBWFF)

4.6% - Tech: 4th Industrial Revolution (JD & WCLD)

4.4% - India (INDA and SMIN)

3.5% - Vietnam (VNM)

3.4% - Biotech: 4th Industrial Revolution (IBB & XLB)
0.4% - Brazil (EWZ)

Technical: 0.0%  

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

Idiosyncratic: 15.8% 

11.5% - Funds (ARTTX, CWS, GVAL, and CAPE)

4.4% - Equities (TPL & JOE)

Shorts/Hedges: 0.0%

 

Cash: 9.2%

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: May 2021

After a very quiet Q1, OM made a number of changes to the portfolio during April with the catalyst being an influx of cash into the portfolio, aka OM’s retirement account, after he changed jobs.  Given this, and the portfolio’s strong run over the last ~6mos what better time for a broad update.

In the recent post on Tin, OM mentioned that the largest core theme across the portfolio is things where supply is limited and where there is increasing demand.  This is not a sudden change, and regular readers will know this is a core concept and risk that OM has talked about since the Mid-2020 Portfolio Update.  Today, OM’s exposure to it has increased to over half the portfolio from ~38% in mid-2020, driven by the positions in Uranium, Shipping/Tankers, Tin, and Energy.  This theme is also related to a lesser extent with both  the Equities and Blockchain positions.

Positions (size order, all sizing is as of April 30th)
Dislocation - Uranium: 28.0% NAV
The first few months of 2021 have seen a steady stream of positive news flow and catalysts in the Uranium market.  Most surprisingly, we saw a step shift in attitudes in the West where nuclear power had gone from being on its way out to finding new support as part of a green energy future.  France extended the life of its existing nuclear plants and the EU is poised to declare nuclear as a green investment.  The turnaround in the US was even sharper, with the White House backing subsidies for nuclear power plants to help meet its green goals.  Meanwhile, the developing world continues to build nuclear power plants, most notably in both China  and India.

Two major uranium mines, the Ranger Mine in Australia and the COMINAK mine in Niger have closed in 2021.  Though the closure of these mines had been long flagged, it further reminds investors of the supply issues in uranium.   Supply was also tightened in an unconventional way.  A number of junior mining companies raised capital from the markets with the specific intent to use it to purchase physical uranium! The difficulty that they faced, and the delayed delivery schedules, reflect the paucity of supply especially as the two largest global miners (Cameco and Kazataprom) are also purchasing uranium as a result of reduced production due to COVID-19.
 
Finally, Sprott Asset Management – a large well-known player in commodity circles – announced the acquisition of Uranium Participation Corp and the establishment of the Sprott Physical Uranium Trust (“SPUT”).  Sprott will be listing SPUT in New York, where hit has 4 other listed physical metals trusts, and will be marketing it with the ability to raise capital at market prices to purchase more physical uranium!  Most importantly all of these things are happening as utilities are approaching the time when they need to start contracting to meet their future uranium needs.

Uranium stocks have run strongly over the last 6+ months, and in some cases are comfortably ahead of the fundamentals.  However, OM’s belief is that we’re still in the early stages of this bull market and that the volatility should be weathered.

The majority of OM’s holding is in URNM, a well-constructed uranium ETF.  Additionally, OM holds about 25% of his exposure split between CCJ (the largest western producer) and NXE (which owns the single best uranium asset globally).  The balance is split between four junior miners (PALAF, URG, BNNLF and DNM) who are in various stages of production.


Dislocation – Shipping/Tankers: 12.9% NAV
Not much new to report on tankers; rates are between bad and dreadful but as the world moves towards reopening and normality the demand for oil is increasing.   The order book remains exceptionally low, especially for product tankers, and with steel prices increasing there is added incentive for owners to scrap old tankers.  OM's position is reasonably evenly spread across five shipping names (EURN, STNG, TNK, DHT and INSW, which replaces DSSI as the companies are merging).  This combination gives OM a little more exposure to product tankers (which carry petroleum products, such as gasoline, diesel fuel, etc.) than crude oil tankers.

Theme – Blockchain: 12.2% NAV
The volatility in digital assets over the first four months of the year has seen the two listed closed-end trusts move from trading at premiums to their value to trading at discounts to NAV.  OM took advantage of this by retaining the same direct exposure to digital assets but broadening it by adding a smaller position in ETHE (Grayscale Ethereum Trust) after it fell from trading at a healthy premium to a small discount.  To compensate for his new position, the existing position in GBTC (Grayscale Bitcoin Trust) was reduced.  

While digital assets have, and will likely continue to be, exceptionally volatile it works in both directions meaning that the management of position sizes really matters.  As a reminder, OM’s approach to digital assets in this portfolio reflects a shorter-term public market view of the investments rather than any longer-term opinion on the digital assets.  To this end, the portfolio construction reflects (i) a broad band of exposure to these assets (currently 6-10%), (ii) that this band will both be reduced and narrowed during 2021, and (iii) OM wants to capture the broad upward trend but also be diligent about taking profits (i.e. think something similar to a trailing stop once the position grows beyond the upper band).  So far, it has worked reasonably well with OM having crystallized so much profit that even if GBTC and ETHE fell to $0 tomorrow, it would still have been a healthily profitable investment.

OM also re-entered his position in OSTK; the broad concept is similar to OM’s original write-up but the changes in management have had  a material impact.  Though the share price is much higher than when OM originally exited, the business prospects for the retail business have improved markedly and there is significantly less uncertainty around the digital assets.  The core online retail business is better managed and took advantage of the shifts due to COVID.  It has grown significantly and unlike many online retail businesses it is profitable!   Overstock’s array of investments in digital portfolio companies is also now being professionally managed after a transaction with Pelion Venture Partners.  The deal allows Overstock to participate in most of the upside, while also retaining direct stakes in certain of the companies (most notably tZERO, a SEC and FINRA regulated trading platform for digital assets!)

Equities - Funds: 12.6% NAV
No changes.

Theme - 4th Industrial Revolution: 8.6% NAV
One of the things that has become apparent over the last year is that the future is arriving quickly; both in terms of technology and biotech.   On the technology side, much of what OM wrote last June still holds true; the thesis for SaaS (part I and part II) is largely unchanged and the pandemic has hastened the transition to cloud services.  However, the median SaaS company trades at 14x its revenues over the next 12M - something that is hard to justify.  As such, the exposure to technology has continued to slowly shrink and is now ~5%.

After five years of not doing a whole lot, biotechnology finally broke out in 2020 and surpassed its 2015 highs.  The genomics revolution began in April 2003 when the Human Genome Project – an international scientific research project seeking to determine the DNA sequence of the entire euchromatic human genome – was declared complete.  It took a leap forwards around 10-years ago with the emergence of CRISPR, and the ability to sequence and edit genomes.  The cost of this sequencing and editing has fallen significantly over the last decade.  While there are many legitimate debates and questions about the mRNA vaccines (Pfizer and Moderna) and their approval process, these vaccines are also clear beneficiaries of much of this work over the last decade and the first of their ilk.  This coupled with the speedier approval process and renewed interest in the space, means OM has taken a small position (~4%) through the biotech etfs.


Themes – Vietnam, India and Brazil: 7.7% NAV
Unsurprisingly, given the very long-term horizon it is unchanged from when OM wrote about it 18 month ago. 

Dislocation - Greece: 4.9% NAV
Following New Democracy’s impressive win in the 2019 Greek elections, things were looking up for Greece.  New Democracy inherited an economy that was rebounding and OM’s expectation was that a business-friendly government would help change the narrative around its recovery and draw investor interest.  The new government started well by persuading the EU to allow Greece to cut taxes and making reforms in order to reduce the primary surplus that the Greek government was mandated to run.   However, the arrival of COVID overshadowed all of Greece’s progress and dealt PM Mitsotakis’ government an abysmal economic hand.  The signs of the new government’s competence remain; it has managed the crisis better than most of Europe, and recently submitted a detailed national recovery plan to the EU that has already drawn positive initial evaluations.


Idiosyncratic - Equities: 3.8%
OM holds a couple of small real estate related positions. 
Texas Pacific Land Corp (TPL) was a publicly traded land trust, with land in the Permian basin that benefits primarily from oil & gas royalties from the drilling/pipelines/etc. on its land and from a smaller but growing water business.  The trust was historically self-liquidating, using its excess cash to buy back shares, but finally converted itself to a C corporation earlier in 2021.

The St. Joe Company (JOE) owns approximately 175K acres in the Florida Panhandle.  The stock was a hedge fund battle ground a half decade ago, with bulls arguing it traded for a fraction of its future value and bears saying the land just wasn’t worth much (and there would be limited future value, as nothing significant would be built).   They were both kinda right but on different time horizons - the bears in the short-term, the bulls in the longer-term – and the stock has gone sideways for much of the last decade.  Today, the population in the Panhandle has hit critical mass and JOE is now benefiting from the broader infrastructure on its land and increased building (at attractive prices).  COVID has further sped up the trend.


Theme – Tin: 3.1% NAV
OM recently wrote about Tin, and has subsequently continued to add to the position in Alphamin Resources (AFMJF) that makes up the vast majority of the tin exposure.

Theme - Energy: 2.4% NAV
OM has dipped his toe in Energy, through positions in two natural gas plays (AR and SD) who have both managed their businesses well during the turbulent times.  Longer-term, OM remains interested in the offshore oil services sector but has no current positions.

Cash: <5% NAV

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. 

2020: Fourth Quarter Update

 Portfolio Update
- Energy: One of the epicenters of the collapse in March, and OM suspects it will be a substantial dislocation opportunity.  OM thought this opportunity was likely still a year or two away in oil-related names, but there were some interesting US natural gas names.  OM took a position in Antero Resources (AR), who bought back both stock and bonds during the market stress and are well-hedged on their gas production.  

- Blockchain/Crypto:  Our Man sold 25% of his Bitcoin exposure (GBTC) in late December.  The position was up almost 3x from its cost basis and the position was bumping up against the maximum size (~12%).   

Performance and Review
Our Man’s portfolio finally participated in 2020’s equity party, rising over 30% during the fourth quarter and comfortably outperforming the markets.  It was a long time coming after the portfolio suffered mightily in Q1, and failed to join the equity rally until November.   

The fourth quarter’s performance saw the portfolio end the year down -5.8%, which still materially lagged equity markets.  For comparison the MSCI World (ND) was up +15.9%, and the S&P 500 was up +18.4% in 2020.

Fourth Quarter Attribution
 

The portfolio’s fourth quarter performance was driven by the positions in Uranium (+11.56%) and Blockchain (10.87%).   The Uranium performance was the least surprising; COVID-19 brought the supply deficit in the Uranium market to the fore.  This was further highlighted by Cameco halting production at its Cigar Lake mine in the 4th quarter and increasing its purchases in the spot market.   Unlike earlier in the year, investors were more interested this time with volumes in most Uranium names increasing materially along with prices.  After an almost decade long wait, the bull market in Uranium seems to have finally started.   Given the material supply deficits in the upcoming years, and the lack of capex over the last decade, OM hopes that this is just the start of the Uranium positions contribution.

OM’s position in Bitcoin (within the Blockchain theme) was well-timed with the crypto-asset rallying spectacularly.  Bitcoin is the logical extension of almost everything various market factions currently believe!

• Software’s taking over the world!  Bitcoin’s software, that’s it…
• Total Addressable Market (TAM) is more important that profit!  What has a bigger TAM than pristine collateral and/or money!
• Concerned about Fed money printing, unlimited stimulus and (hyper)inflation?  Bitcoin has limited supply and is a hedge to those risks!
• Frustrated by the ‘elites’ – politicians, Fed, etc?  Stick it to the man, and own bitcoin.
• Need faith in something?  Bitcoin’s even been compared to a religion…
  

And so on…Is Bitcoin really all of these things?  Of course not, it may not even be any of them.  However, in this moment, Bitcoin is the reflection that people want to see.  Throw in a reflexive technical situation – an institutionalizing asset where one vehicle (GBTC) is consuming all of the new supply – and there’s a possibility of a bubble that will extend far beyond even the bulls’ imaginations.  As previously noted, OM has some long-term crypto exposure elsewhere and the position in this portfolio is more flexible.  It is currently managed within a 6 to 12% band; when it reaches the maximum it is cut back to the middle, and should it reach the bottom-end OM is inclined to add more.  As bitcoin (and GBTC’s) price increases, expect the position size to fall and that band to narrow.

The 4th Industrial Revolution (+155bps) technology positions in SaaS companies (WCLD) and JD.com were the most consistent performers throughout 2020, and performed well again in Q4.

The portfolio also clearly benefited from the sector rotation in the market, with both the Energy (+44bps) and position in Texas Pacific Land Corporation (TPL, +161bps) rising.   TPL will also complete its reorganization from a Trust to a Corporation following a year-long process at the start of 2021.

The Funds (+254bps) exposure was a healthy contributor, benefiting from the rotation in stocks and the out performance of non-US markets.  This exposure to international markets, especially
Emerging markets, saw healthy gains for India (+67), Vietnam (+77bps), Greece (152bps) and Brazil (17bps).

The sole detractor from performance was the Shipping/Tanker (-34bps).

Portfolio (as at 12/31/20 - all delta and leverage adjusted, as appropriate)
Dislocations: 43.1%
25.7% - Uranium (URNM, CCJ, NXE and URG)
13.2% - Shipping/Tankers (STNG, DSSI, EURN, TNK and DHT)
4.2% - Greece (GREK & ALBKY)
1.1% - Energy (AR)

Thematic: 24.9%
9.6% - Blockchain/Crypto (GBTC)
6.6% - Tech: 4th Industrial Revolution (JD & WCLD)
3.8% - Vietnam (VNM)
3.2% - India (INDA)
0.5% - Brazil (EWZ)

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

Idiosyncratic: 17.3%
14.2% - Funds (ARTTX, CWS, GVAL, and CAPE)
3.1% - Equities (TPL)

Shorts/Hedges: 0.0%

Cash: 14.7%

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. 

Uranium - COVID-19 Brings the Supply Deficit to a Head.

It’s been a while since OM last talked about Uranium in depth – over 2.5 years(!) – and with it closing in on becoming the largest position in the portfolio, what better time for an update!

    
Demand
The demand for uranium comes from one source – nuclear power plants, which generate ~10% of the world’s electricity, and show consistent and steadily increasing demand.  
 
Since the Fukushima tsunami in 2011, the trend in the US & Europe had been towards closing nuclear power plants leading to a belief (and lots of press articles!) that nuclear was being phased out.  Since OM started investing in uranium this has changed, with existing plants seeing extensions and projects being planned.   The change has been driven by a recent focus on ‘clean energy’ (vs. ‘green’ energy) that values nuclear’s carbon-free, safe(!) and low cost provision of base power,  coupled with the beginning of the development of small and advanced modular nuclear reactors.
 
While the Western world and press was focused on the decline of nuclear, the same was not true in Asia where countries, led by India and China, continued to plan and construct nuclear power plants.  

Source: Visual Capitalist - Mapped: Visualizing the World's Nuclear Reactor Landscape

Finally, nuclear utilities typically purchase uranium through primarily through  long-term contacts and the cost of uranium is a small % of their total costs.  The chart below shows the long-term contracting boom of the last cycle, with the recontracting phase expected to be begin in the next 18 months.

Supply Side
While demand for uranium has been a nice gentle incline, the attractiveness of the opportunity reflects that supply is constrained!   Almost 2.5 years ago, OM discussed how the 2 largest miners – Cameco (through its Mcarthur River/Key Lake mine) and Kazataprom – both cut supply by a combined 20% in an economically rational attempt to help bring the market back towards balance.  
 
The magnitude of these supply cuts has seen the Uranium market shift from being oversupplied to a supply deficit of ~20mn lbs (or 15% of global production) before COVID-19!  COVID-19 had a major impact on uranium mining with  Cameco closing its remaining flagship Cigar Lake mine (12% of primary uranium supply!), and Kazataprom having to reduce both its production targets (by 10mn lbs, or 8% of annual primary supply) and its 2020 wellfield development (which will reduce its 2021 production capacity).  This led to fears of a potential supply shortfall of ~40mn lbs in 2020!  The cutbacks also led to both Cameco (especially in Q2) and Kazatprom (beginning in late Q2) entering the spot market to fulfil existing contracts.

This short video from Purepoint Uranium shows the impact of the cuts.

 

Eagle-eyed readers will have noted (i) the importance of Kazataprom and Cameco (Cigar Lake & McArthur River) due to both their size and as the lowest cost producers and (ii) that almost half of the existing & idled production is uneconomic at today’s prices!
 
While Cigar Lake will start coming back online in September 2020, the market is expected to remain in significant deficit, which is exacerbated by major mines (Ranger in Australia & COMINAK in Niger, which are a combined >5% of primary supply) permanently closing at the start of 2021 and Kazataprom confirming low 2022 production levels (i.e. no attempt at trying to recover from 2020/21 production losses).
 
Why Now?
Earlier this year, before the impacts of COVID were fully felt, the World Nuclear Association published its biennial "Nuclear Fuel Report", and for the first time made the Expanded Summary available publicly.  For those who don't follow the space, charts such as the below helped codify the supply gap.

Source: World Nuclear Association - The Nuclear Fuel Report Expanded Summary

However, even the WNA report was overshadowed by the impacts of COVID-19 - demand for nuclear power remained largely unchanged, while the impact on supply pulled everything forwards.   The Uranium spot price jumped ~50% after Cameco started purchasing in the open market, and both Cameco & Kazataprom will be doing so in the second half.  OM suspects Cameco is re-opening Cigar Lake, both due to the costs of keeping it in care & maintenance but also for security of supply (to meeting existing contracts) given the limited inventory in spot markets, and Kazataprom needing to buy.   

This combination has made clear that after the decade long bear market Uranium trades below its cost of supply limiting the incentive for new mines to be built.  COVID-19 has exacerbated and highlighted the supply deficit.  For utilities (and the primary consultant that advises them) security of supply is a vital factor, and the upcoming contracting cycle will being the problem to a head and OM believes to materially higher prices to encourage new uranium mining development.  Our Man hopes to capture the vast majority of this move in the Dislocation book over the next couple of years!

 

 

Major Risks

 - It’s long been claimed the secondary supply, or spot market traders, will make up the difference.  With both Cameco & Kazataprom in the spot market during H2-20, we will find out.

- Idled supply will rush back into production though this is largely Cameco and Kazataprom.  It reflects a belief that Kazataprom will return to its 2014-era behavior of maximizing supply, despite the firm's changes (no longer selling in spot market, IPO, etc) and statement/behavior (supply cuts and statement re. supply through 2022).

- Less uranium being required (i.e. following the WNA’s lower scenario for reactor requirements) due to fewer nuclear reactors being built or greater efficiency.

- Another Fukushima!

COVID-19 and Portfolio Thoughts

Well, that was a fun! *sarcasm alert*

Our Man isn’t a doctor and, unlike far too many in finance and politics, he doesn’t even want to play one on TV! It says far too much about today’s world that the most sensible thing about COVID-19 from a non-expert came from the manager of Liverpool FC!

Thus OM isn’t going to opine on the spread of COVID-19, how you should deal with it, and what the various estimates of the virus’s potential R0, incubation period and case fatality rate are or what they might mean.  If, like OM, you work at a smaller company he will point you in the direction of Elad Gil’s primer and if you want to start thinking about the broader economic effects of a pandemic then Professor Wren-Lewis has you covered.   The three things OM will note is that so far we’ve learned:

1. Strict containment works in limiting COVID-19’s spread (see Singapore)
2. Aggressive and broad testing helps identify early who to isolate in order to prevent the virus' spread (see South Korea).
3. Western countries have, so far, been slow to do both of these things.

Instead OM is going to talk about is the market and some forward looking thoughts, as well as what it might mean for the portfolio. 

While COVID-19 originated in China, it was largely ignored by Western markets until the end of February, which coincided with (was caused by?) a sharp rise in cases in the West. The subsequent correction has been swift, sharp and brutal.   The largest factor in COVID-19’s market impact is the uncertainty – how far will it spread, how bad or deadly is it, and how much impact will it have on the economy and life. In the absence of high quality data, and limited trust in leadership and institutions (WHO, Chinese Government, CDC, etc.), the range of outcomes is wide and it’s often the loudest, not the best placed, voice that holds court. After not affecting the markets for ~6 weeks, this uncertainty quickly became doubt and fear.  In such times, investors go where they feel safest and to what has worked previously – especially government bonds. In the US equity markets, that has been Software and especially Software-as-a-Service, which ended February +7% for the year.

Since COVID-19 started in China, OM will be watching to see the resumption of normality there first.  Like all systems, China’s is incentives based - watch what the government does not what it says. OM is doing that by stealing Bill Bishop of Sinocism’s playbook for signs of China declaring victory.   OM doesn’t expect to be a buyer of much until we at least start to see:

• Xi visit Wuhan
• The Two Sessions is re-arranged
• Kids are sent back to school

OM’s operating assumption is that the uncertainty is the West will linger until there is greater clarity on COVID-19’s spread and impact, and the stock market will reflect this.  The longer it lingers then the worse the economic impacts of COVID-19 will be.  Even at this stage, OM suspects we’re starting to approach the point where we need both fiscal and monetary stimulus and the much like in 2008, it’s not going to come (in enough size) immediately.  Finally, the UK with an emboldened Prime Minister, a new Chancellor and a new Governor of the Bank of England might even be the first country to go full MMT on us!

So what is OM doing with the portfolio?

Unfortunately, nothing so far. 

Here are the things on his docket for the coming days/weeks:

- Technical Book: It saw its sell signal near the end of February.  Real-life issues meant OM failed to exit it during last week’s bounce, he won’t be so remiss next time.

- Uranium:  Though it has largely held up pretty well, OM is looking to exit the Uranium ETF (URA) position that is about 50% of the uranium exposure.  This reflects the reconstitution of the ETF to provider broader uranium exposure, and not just to the miners.  OM’s thesis is focused on the miners and a new more appropriate ETF (URNM) launched at the tail-end 2019.  Expect the capital to end up there eventually.

- Emerging Markets exposure:  OM has a LOT of it – Greece, Vietnam, Brazil and India are ~40% of the portfolio.  Irrespective of the long-term outlook, in times of financial stress emerging markets are never the place to be and OM will be trimming this exposure back.  This was not an unknown risk, and he should have been more proactive much earlier in the year!

- Software-as-a-Service: is largely flat on the year, despite everything.  OM suspects that it goes one of two ways from here: 

(i) COVID-19 fears are quickly dispelled and Software becomes that mythical investment; it protected when there was huge uncertainty and is also growing rapidly.  If so, OM expects to hear justifications that surely such a business, which was valued at 10x Sales before the model proved itself in times of economic stress deserves a higher multiple still?  And so, a real bubble shall have its narrative (and crypto as the logical extreme of this concept will go crazy).

(ii)  Or perhaps SAAS stocks are just 2020’s version of commodity stocks in 2008 – bullet proof and up healthily in mid-2008, until they collapsed to end the year down ~80%.  If so, they’re probably an attractive buy with far far better valuations at that point!  

Either way, OM will be exiting his position in the broad Software ETF (IGV); originally, it was the best of the bad proxies for SaaS.  OM would rather add capital to the existing position in the WisdomTree Cloud Computing ETF (WCLD), a recently launched SaaS-specific ETF, when it becomes clearer which path software will take.

- Shipping:  Oh shipping, that beautiful delightful hot mess.  See the most recent post!

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.