2020: Second Quarter Update

Portfolio Update
Please see the recent Portfolio Update piece, for some thoughts on the current portfolio and its structure. 

During the quarter OM made the following changes:
New Position:  Blockchain/Crypto (Thematic)
Added to: Shipping/Tankers (Dislocation), and Uranium (Dislocation)
Reduced: Greece (Dislocation), Brazil (Thematic), and Fourth Industrial Revolution (Thematic)
Exited: None.

Performance and Review
Following the dismal first quarter, equity markets surged during the second quarter with the S&P 500 posting its best performance since the fourth quarter of 1998!  OM’s portfolio sadly failed to join the Q2 party, rising a measly +0.7% and significantly underperforming both the S&P 500 Total Return (+20.5%) and the MSCI World (Total Return, Net Dividends; +19.4%).  For the year, this leaves the portfolio down -29.9% while the market indices are down mid-single digits (S& P 500: -3.1%, MSCI World: -5.8%).

Second Quarter Attribution

Our Man’s Q2 can largely be summed up as a significant negative contribution from Shipping/Tankers, a good contribution from the 4th Industrial Revolution theme and reasonable contributions elsewhere.

Shipping/Tankers (-853bps) were a significant drag on performance during the quarter, and for the first half of 2020.  While tanker rates are shaping up to have a stellar year and companies have performed exceptionally strongly, the stock price performance has been abysmal with most trading at or below the lows of March 2020!  

The bear case for tankers is centered on expectations of a prolonged period of rates at or below break-even stretching into early 2022.  These low rates will be driven by (i) demand for oil coming back slowly, (ii) floating storage - where oil was stored on tankers at sea - unwinding over a prolonged period now there is no contango, and (iii) ship owners will order more vessels.    Let’s be clear, these are not unreasonable or crazy fears especially for an industry that’s been in a 10-year bear market.   Certainly, it’s hard to argue that post-COVID demand is uncertain and that unwinding of floating storage will likely increase pressure on rates as more ships become available for transportation.  However, as noted in the recent portfolio update, OM believes that “if demand remains weak then pricing will not be as bad as investors fear”.  Why?  Firstly, supply is constrained; it’s one of the oldest fleets, with one of the smallest order books of the 2000s.  Secondly, the strong rates over the last 9 months coupled with the operational and financial leverage have created options for tanker companies to weather periods of low rates and reward shareholders.  This is best shown through a couple of examples.  

Teekay Tankers (TNK) came into Q4-2019 over-levered and with significant debt payments due within 12-24mos.   The exceptional rates of the last 9mos have allowed the company to (i) refinance 31 vessels pushing its debt maturities out 4 years, (ii) earn ~$7.50-8.00/share in 9 months (or almost two-thirds of its Q2-end market cap), which it wisely used to (iii) reduce its net debt by over 35%, and finally (iv) it leased some of its ships out for 6-24mos at strong rates, thereby reducing the break-even of its vessels in the spot-market to ~$10K per day.  The end result is a company vastly better poised to handle a period of lower rates, through both its financial position and its reduced sensitivity to those rates (due to the ships out on those 6-24month time charters).  OM rather hopes this starts to get reflected in stock prices, especially if/when tanker rates prove to be “not as bad” as investors fear.

On the other hand, Euronav (EURN) is the least levered and best managed of OM’s tanker names.  In 2020, it has so far returned 10% of its market cap in dividends and is happily purchasing its shares in the open market while they trade at a discount.

Given the rise in the markets, it’s not surprising that most of the portfolio were at least positive contributors.  The Idiosyncratic book led the way, aided by solid performance from the Funds (+238bps) which all rose 15-21% leaving 3 of the 4 broadly in line with the S&P 500.  GVAL, which systematically focuses on the most undervalued stocks in the most undervalued markets is lagging.   The position in Texas Pacific Land Trust (TPL, +130bps) rallied strongly, as oil prices rebounded and the company edged closer to converting to a corporation (from a land trust).

The Thematic book’s performance was driven by its 4th Industrial Revolution (+270bps) holdings, and especially the positions in Software-as-a-Service/Cloud software (WCLD).   With many of us working from home during the government lockdowns, these companies saw significant demand for the technological solutions.  Unfortunately, the median SaaS company now trades at 12x revenue, with many of the leaders trading at 20x revenue.  Though the group may continue to trade higher, OM isn’t comfortable adding at these valuations.   The rest of the thematic group performed reasonably win both India (+49bps) and Vietnam (+80bps) outpacing global markets during the quarter, though both lag meaningfully year-to-date.   Unfortunately, OM trimmed back the position in Brazil (+16bps) just before it rallied strongly.  The Blockchain/Crypto (-68bps) position was added late in the quarter.

Portfolio (as at 06/30/20 - all delta and leverage adjusted, as appropriate)

Dislocations: 38.5%
19.6% - Shipping/Tankers (STNG, DSSI, EURN, TNK and DHT)
14.5% - Uranium (URNM, CCJ and NXE)
4.3% - Greece (GREK & ALBKY)

Thematic: 18.1%
6.4% - Tech: 4th Industrial Revolution (JD & WCLD)
4.1% - Blockchain/Crypto (GBTC)
3.9% - Vietnam (VNM)
3.1% - India (INDA)
0.5% - Brazil (EWZ)

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

Idiosyncratic: 16.0%
15.4% - Funds (ARTTX, CWS, GVAL, and CAPE)
3.4% - Equities (TPL)

Shorts/Hedges: 0.0%

Cash: 24.6%

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. 

Portfolio Update – Mid-2020

For those who follow markets, I’m sure you’ve seen numerous pieces trying to look at the dichotomy between the rallying stock market and the improving but still uncertain economy.  For those who don’t follow the markets closely, don’t worry this is not going to be one of those pieces!  Frankly, OM is more sanguine than most and there are reasonable arguments on both sides.  As a natural cynic, OM currently struggles to be too bullish but there are some broad themes that he’s comfortable with – thus this portfolio update will break the book down differently from normal.  As you might quickly surmise from the depth of the write-ups, OM is more inclined to add to those themes listed first over those listed later on.
 

Supply is Constrained (38.3% of the ptf)

This is the largest part of the portfolio, and it will likely be for some time.  In essence, OM has no great conviction in what demand will look like and so has instead concentrated much of the portfolio in areas where supply is constrained.  In the not-going-to-happen ideal world, if demand is good then the constrained supply will manifest itself in higher prices, and if demand remains weak then pricing will not be as bad as investors fear.  Supply has been constrained in these areas predominantly as they have been terrible, horrible, no good, very bad sectors (or are otherwise controversial) for a long time.  Clearly, OM thinks they are at an inflection point BUT until this is proven over time the good news will be discounted, the bad will be extrapolated and the stocks will be VERY volatile.  That unfortunately is the cost of investing here and so the ability to see the forest from the trees, the conviction to stomach that volatility, and the honesty to walk away if/when things change are what is going to matter.  Our Man added to all three positions during the quarter.

- Uranium (URNM, CCJ & NXE): 14.5% position
Our Man added significantly to his Uranium position multiple times during the quarter.  While there is a longer piece coming on Uranium, most of the key factors have been discussed before – the difference is that after numerous false starts, and aided by COVID-19, the time is finally right.  Today, there are clear tailwinds on both demand and supply sides.  Notably, there are changing attitudes in the West that will impact demand; even AOC has gone ‘no nuclear’ in the Green New Deal to ‘leaving the door open for nuclear’ in 18-months, and in a subtle shift 'green energy' has become 'clean energy' that includes nuclear.  On the supply-side, COVID-19’s impact means the two largest producers have largely shut-down their production creating a major short-term supply-demand imbalance and further highlighting the longer-term supply deficit.
 
- Shipping/Tankers (EURN, DSSI, STNG, DHT & TNK): 19.6% position
The tanker thesis can be summarized as the lowest ship order book in a decade+ combined with the oldest fleet in history: supply is constrained!  It is why things like the COSCO sanctions and the oil contango drove significant increases in shipping rates.  Unfortunately, while rates for 2020 are amongst the best in history, the stocks’ performance is not!  Investors expect rates to be fallow, falling beneath operating break-even, in the coming quarters as the floating storage unwinds and oil demand comes back slowly.  Unsurprisingly, OM doesn’t think that rates will be as bad…
 
- Blockchain/Cryptocurrency (GBTC): 4.1% position
OM will spare you a debate on bitcoin merits (or not), though as many of you know he owns cryptocurrency directly and has thus eschewed owning the less efficient ways of owning it in this portfolio.  Well that changed in Q2, as he held his nose and overlooked GBTC’s inefficient structure to start a position in Bitcoin.  Why?  Two reasons;
(i) COVID-19 launched a perfect storm of unprecedented fiscal stimulus and monetary easing coinciding with Bitcoin’s halving date (when supply became more constrained!).  Even the most ardent bitcoin believers couldn’t have dreamt of this!  It’s not a coincidence OM refreshed you on Plan B’s stock-to-flow model in the last Things from My Newsblur.
(ii) OM is old enough to remember when UK Chancellor Gordon Brown selling half the UK’s gold for $275 in 1999-2002 (it’s ~$18,000 today!) and the launch of the GLD ETF a couple of years later, which helped the gold price rise through consuming a large part of new gold supply during the 2000s.   After the collapse from the late-2017 highs reversed in late 2019, OM will be watching GBTC’s purchases of bitcoin to see if history rhymes.
 

 

Long-term looks good, short term questions (7.6% of the ptf)
OM’s positions in Vietnam, India and Brazil fall into this category.  The long-term thesis was covered last year; all three countries have a large millennial cohort that’s entering the workforce as the countries are economically liberalizing.   That’s historically been a great sign for a country’s economic growth and stock market performance.  The short-term questions all stem from COVID-19, the respective country’s handling of it and its broader impact.  While developed world nations have provided massive fiscal and monetary stimulus, those avenues are not as open in emerging markets.  The positions in India and especially Brazil were reduced, as it became clear that the two countries were struggling to deal with COVID-19.  Vietnam showed them how it should have been done.
 
- Vietnam (VNM): 3.9% position
- India (INDA): 3.1% position
- Brazil (EWZ): 0.5% position

 

The Department of the Near Future (6.4% of the ptf)
This has been the best performing part of the portfolio in 2020, with both the Software-as-a-Service (“SaaS”) exposure and JD.com up 50%+ through mid-year.  The thesis for SaaS is largely unchanged from when OM wrote it last year (part 1  and part 2) though the pandemic has likely hastened the transition to cloud services.  Unfortunately, this is largely priced in with the median SaaS company trading at ~12 x revenue, which is bubble territory!!
 
- SaaS (WCLD): 4.6% position
- JD.com (JD): 1.7% position

 

Permanent/Semi-Permanent Exposure (15.4% of the ptf)
An important part of investing is knowing yourself: OM tends to be cynical, which leads to him being underinvested.  The Funds book and the Technical book are two ways in which he tries to limit this investment flaw.  The Funds book is permanent exposure; it’s made up for 4 Funds, where OM either likes the thesis (if quantitatively driven) or the approach/manager (if qualitatively driven).  The positions aren’t traded and so provide consistent global market exposure.   The Technical book is based on OEW and is either invested or not, depending on the longer-term technical signals.
 
- Funds (ARTTX, CWS, CAPE, and GVAL): 15.4% position
- Technical: 0.0% position

 

Other/None of the Above (7.8% of the ptf)
Two positions don’t fit easily into any of the themes above. 
- Greece (GREK, and ALBKY): 4.3% position
The opposition New Democracy party swept to victory in Greece last year, in what OM was hoping would be the event that crystallized the dislocation in Greece.  Unfortunately, despite a strong economic plan and fruitful discussions with Europe, COVID-19 dealt the Mitsotakis government a poor hand. Greece has managed the crisis the best of any European country, with the Mitsotakis government showing the pragmatic approach OM had hoped for.  However, the lockdown has impacted economic progress, which has once more made Greece reliant on others and reduced investor interest.  As such, the Greece position is vastly smaller until there’s some clarity on the various European recovery mechanisms (which Greece will have to tap) and an increased sense of investor interst.
 
- Texas Pacific Land Trust (TPL): 3.4% position
Texas Pacific Land Trust is publicly traded land trust, with land in the Permian basin that benefits primarily from oil & gas royalties with a smaller (but growing) water business.  The trust was historically self-liquidating, using its excess cash to buy back shares, but has recently decided to convert itself to a C corporation

 

Cash (24.8% of the ptf)

Disclaimer:  Nothing above represents a recommendation in any way, shape or form so please don’t even think of trying to take it that way.  For added clarity, while Our Man is invested in all of the securities mentioned that’s a terrible reason for anyone else to do so.  Our Man also holds some cash and a few other securities (of negligible value).  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you given your own circumstances/risk tolerance/etc. 

Things from my Newsblur; 2020 Part 2

I hope you’re all safe and not going too stir crazy!   A broad Things from my Newsblur covering everything from Lord of the Flies, to Ewoks, to gambling on horse racing, before the finance and COVID-19 stuff!

The real Lord of the Flies: what happened when six boys were shipwrecked for 15 months 

William Golding’s book focuses on a stranded group of boys and their disastrous and brutal attempts to govern themselves.  The real-life version proved to be rather different from that best-selling book!

(Rutger Bregman, the Guardian)

The Great Buenos Aires Bank Heist

It’s not quite Ocean’s 11, but sometimes art imitates life – an all-star crew pull-off a simple but audacious plan and become folk heroes!

(Josh Dean, GQ)

Ewoks are the Most Tactically Advanced Fighting Force in Star Wars

It is a prerequisite that the bad guys in movies are incompetent.  Unfortunately, the same is often the case for the heroes – as demonstrated by the ineptness shown in the Battle of Winterfell. Now behold, far more on this subject.  As Star Wars fans must recognize, the Empire/First Order despite their overwhelming fire power lack basic co-ordination!  And the Rebels…well they have great spies, but their only plan is rely on “The Force” and regularly making low probability shots from one of their fighters!   Instead, as the article comprehensively shows…it is those cuddly Ewoks who’re the only ones that know what they’re doing!

(Angry Staff Officer, Wired)

The Gambler Who Cracked the Horse Racing Code

Horse racing was long considered the hardest sport to bet on due to the large number of variables and potential outcomes. This is the amazing story of Bill Benter, who wrote an algorithm that won at the track - and by won, we’re talking $1 billion!  For the finance folks, lots of similarities to the world of finance here! 

(Kit Chellel, Bloomberg)

The Birth of the NHS

While Aneurin Bevan was never Prime Minister, he is one of the most important British politicians of the 20th century.  Certainly the most important Labour one!  Some 75-years later, we can say that Bevan largely succeeded in his ambition to build a national health service based on four principles: it was to be free at the point of use, available to everyone who needed it, paid for out of general taxation, and used responsibly.  The irony, of course, was that the biggest opponent of the NHS at its inception – the British Medical Association – is now one of its biggest supporters.

(Andy McSmith, The Independent)

Modelling Bitcoin Value with Scarcity

With the Fed’s money printer going brrr coinciding with Bitcoin’s halving, it might be Bitcoin’s time to go mainstream.  For those of you of a financial persuasion, here’s Plan B’s important paper fusing a stock-to-flow to model Bitcoin’s value as one would precious metals.

(Plan B, Medium)

Coronavirus Will Bring Trade Wars and Rising Inequality. How to Fix it.

OM is a huge fan of Michael Pettis, whose posts and tweets on China are essential reading.  He’s just written a new book, together with Matthew Klein, espousing a different view on globalization, rising inequality, rising debt and the fragile economies they produce.   Matthew Klein previews it in this piece, noting “the danger is that a global conflict between economic classes within countries gets misinterpreted as a series of conflicts between countries with competing interests.”

(Matthew Klein, Barron’s)

Five Points about US Trade Over the Last Thirty Years

Speaking of trade, Brad Sester’s been through the data and pulled some interesting (and surprising) nuggets.  Unsurprisingly economic theory holds up less well in the real world, especially when IP can be off-shored to a tax haven!

(Brad Sester, Council of Foreign Relations)

The Real Reason To Wear a Mask

The ever changing ‘advice’ around masks – the CDC and WHO both went from no masks to wear masks – is one of the examples of institutional failure during this crisis.  Simple common sense and the maths of it should have led to early insistence on masks in public places! 

(Zeynep Tufekci, Jeremy Howard & Trisha Greenhalgh, The Atlantic)

COVID-19 Targets the Elderly.  Why Don’t Our Prevention Efforts?

As much of Europe and the US starts to exit lockdown and slowly open the economy back up the ‘debate’ over our choices has been largely non-existent, and largely limited to two groups insisting the other’s aims are to kill the economy or kill people.  Instead, we should be discussing if/how we can most effectively prevent COVID’s spread going forward.  On a related point, for New Yorkers - while Governor Cuomo has largely done a good job in handling COVID-19, it may well be the ill-advised executive order to send COVID-19 patients to nursing homes negates it all!

(David Wallace Wells, New York Magazine)

2020: First Quarter Update

Portfolio Update

The rationale behind most of Our Man’s main portfolio changes was discussed in the recent post, No Más!!

The subsequent addition to the Shipping – Tanker names was also discussed in Can You Spell: C-O-N-T-A-N-G-O.

Performance and Review

The first quarter saw the portfolio fall -30.4%, significantly underperforming both the S&P 500 Total Return (-19.6%) and the MSCI World (Total Return, Net Dividends; -21.0%).

First Quarter Attribution

The first quarter can pretty easily be summed up as OM doing too little too late! 

Frustratingly, this was especially the case with the portfolio’s Emerging Markets exposure, which accounted for approximately half the losses.   OM knows better; the low-level of local institutional ownership means EM always sees a shoot first and ask questions later approach during crises.  This has the inevitable double whammy for US dollar investors of hurting both the stocks and the currency.  Given the longer-term nature of OM’s theses the delay in reducing the positions was exceptionally poor portfolio management.  

The limited position sizes help curtail the losses in the thematic positions in Brazil (-240bps), India (-150bps) and Vietnam (-180bps) though none are now positive contributors over the last year+.  The biggest loss came from the large dislocation position in Greece (-1,040 bps), which also gave up slightly more than all of last year's gains.  Ironically, the new Greek government acted much more quickly and decisively than its European peers to combat the Covid-19 crisis.   It is now receiving plaudits for its efforts, which have helped limit both cases and deaths but OM vastly over-weighted this competence in his decision-making.   Unfortunately, given tourism represents ~20% of the economy and small businesses are the major employer there will still be significant economic consequences.  However, Greece’s prompt actions should help restart its economy more quickly than others, and hopefully the government can continue to show similar competency in rebuilding the economy.

The other Dislocation positions in Shipping/Tankers (-467bps) and Uranium (-139bps) were detractors during the quarter.  We’ve discussed Shipping/Tankers enough, but similar dynamics resulting from a tightly supplied market are finally starting to play out in the Uranium space.  Both positions were added to in early April.

The remaining Thematic position in Tech: 4th Industrial Revolution (-14bps) was a minimal detractor, with the position in online Chinese retailer JD.com (JD) benefiting from the lock down in China.

The Idiosyncratic book saw the position in Texas Pacific Land Trust (TPL, -160bps) fall in sympathy with the decline in the oil price, which overwhelmed the news that the Trust’s internal Committee recommended it convert to a C-Corp structure.   Finally, the Funds exposure (-270bps) and Technical book (-370bps) largely fell back in line with global markets.

Portfolio (as at 03/31/20 - all delta and leverage adjusted, as appropriate)

Dislocations: 39.4%

26.9% - Shipping (STNG, DSSI, EURN, TNK and DHT)

8.9% - Greece (GREK, ALBKY, and EGFEY)

3.5% - Uranium (CCJ and NXE)

Thematic: 14.0%

5.4% - Tech: 4th Industrial Revolution (JD & WCLD)

3.2% - Vietnam (VNM)

2.7% - India (INDA)

2.7% - Brazil (EWZ)

0.0% - Blockchain (no positions)

Technical: 0.0%

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

Idiosyncratic: 16.1%

13.7% - Funds (ARTTX, CWS, GVAL, and CAPE)

2.3% - Equities (TPL)

Shorts/Hedges: 0.0%

Cash: 30.6%

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. 

Shipping/Tankers: Can you spell C-O-N-T-A-N-G-O?

Yup, it’s yet another Tankers post!  If you think that all OM talks about is tankers, you’d be right and Mrs. OM and his colleagues can vouch for that! 

After the last update, OM kept buying tanker stocks until finally reaching the “stop buying” limit of 25% NAV on March 23rd.  This article helps explain why.

It was just over a year ago when OM first wrote about tankers, and November's update laid out the thesis' key points:

• Tanker Supply:  After years of oversupply, the tanker markets were finally tight with order books well below historical averages.  With the supply of vessels fixed in the short-run, small changes in demand can have a big impact on tanker rates.
• Operating (and Financial) Leverage:  The operational leverage of tankers, where most of the costs are fixed, means that a small change in rates has a massive impact on the P&L.
• Valuation:  The fall in the tanker stocks during January/February 2020 took valuations back to the early 2019 lows of 0.3-0.5x net asset value.
• Impact of IMO 2020: OM felt that IMO 2020 was going to be the catalyst that brought tanker stocks to the attention of others.  This was largely proving to be the case, though rates are very seasonal, January’s was the best January in a decade and February was heading in a similar direction.  It has since been usurped...

So what changed?

In the last three weeks there have been major changes to both the demand and supply for oil:

• Demand has collapsed.  In response to Covid-19 most of Europe, the US and India are on lockdown, while even the recovering parts of Asia (such as China) are only operating at 70-80% of historical levels.  Unsurprisingly, this has meant that the demand for oil and oil products has also collapsed, with some estimating it has fallen by 20 million barrels/day. 
• Supply has increased.  In the first half of March, OPEC+ couldn’t come to an agreement to reduce oil production after the Russians balked at further cuts.  Saudi Arabia responded by stating it would increase its own production by 2-3 million barrels/day and offering discounts to key customers.

These factors have led to the oil price plummeting.  It has also created two interesting things for tankers; the surplus of oil (10-20mn barrels/day) needs to be stored somewhere and there is a huge contango in the oil markets.

Oil can be stored on land in tanks, at refineries, at oil terminals and in countries’ strategic oil reserves.  However, there’s only ~1 billion barrels of storage available globally and the oil has to be shipped there on crude tankers that move really really slowly! 

Oil can also be stored at sea, in crude tankers, and the contango in the oil market is making this exceptionally attractive.   Contango is when the futures price of a commodity is higher than the current spot price.

This shows that magnitude of the contango, which is surpassing that of the Great Financial Crisis.  Today, someone buying oil and immediately hedging it six months out (by selling the future) can make ~$13.43 per barrel of oil profit, less the cost of storing it for 6 months.   Or put another way, you could make almost ~$27mn risk-free profit if you filled a VLCC tanker to store your oil.  How much to pay for that storage?  The answer has been a lot, the majority of your profit since the market for tankers is tight your profit is risk-free.  The impact of this is two-fold (i) its putting a floor on tanker rates, and (ii) every VLCC that’s used for floating storage is unavailable to transport crude (at a time when Saudi wants to increase production).  

What has this meant?

Well Q2 is typically the seasonal low for tankers as refineries go into maintenance and the deals signed today are for journeys in the second quarter.  Yet, as the chart below shows we’re seeing record rates – in fact rates haven’t been higher since the 1980s!!!

Source: Allied Shipbroking

The chart is for VLCCs, but you could substitute just about any crude or product tanker chart in there and it would look similar.

Will it last forever? 

Of course not but remember the operating leverage.  It means the sharp uptick in rates is dropping straight into the profits and free cash flow.  Combined with the low valuations, OMs tanker holdings are conservatively going to earn 25-50% of their entire market caps in just the first half of 2020.   Until last week, the market didn’t care and there’s a reason why this industry has seen companies and mgmt. aggressively buying shares!

It’s a perfect once in a generation positive storm; a tight tanker market, with massive excess supply and a huge contango incentivizing storage all at a time when cos are trading at low valuations.  

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 DHT, TNK, STNG, DSSSI and EURN - that’s a terrible reason for anyone else to invest in them.  You should not buy any of these securities because Our Man has mentioned them, but should do your own work and decide what’s best for you given your own circumstances/risk tolerance/etc.

Things from my Newsblur; 2020 Part 1

With COVID-19 having spread to the West, OM has repurposed this Things from my Newsblur into a COVID-19 special.   Hopefully, a non-COVID-19 mental health break Things from my Newsblur will soon be upcoming. 

Stay safe people and WASH YOUR HANDS!

It’s hard not to drown in the sea of information, and misinformation, out there on COVID-19.  For OM, the single best curator of all things COVID-19 has been Azeem Azhar (@azeem), who’s refocused his weekly newsletter towards the subject.  His Exponential View newsletter is always one of OM’s weekly must reads.  That is especially the case this week, so if you read nothing else find time for this one.

Exponential View Newsletter #262 (free)
Read this; great curation of all things COVID-19, from progress against the virus, to China after covid and what it may mean for business models.  (Azeem Azhar)

Can Handwashing Really Stop the Spread of COVID-19

In short, it won’t eliminate the risk of infection but there’s evidence that it’s a simple and powerful safety measure.  Importantly, it also allows people to feel that they have something they can control in this fight.  (Sara Rigby, Science Focus)

Coronavirus: Why You Must Act Now
Coronavirus: The Hammer & the Dance (follow-up to above article)

Tomas Pueyo’s original post used statistical analysis of the data available in early March to show why Western nations had to move far more aggressively on COVID-19.  It has been viewed 40 million times, and widely shared and quoted by numerous experts.   His follow-up article on what the next 18 months might look like offers a glimpse at the potential road ahead.  (Tomas Pueyo, published in Medium)

Why the Coronavirus Has Been So Successful

This clear and detailed report on the pandemic explains why we should all be taking social distancing and self-isolation seriously.  (The Atlantic, Ed Yong)

But it’s not all bad news; having most of the world’s best scientists focus on one disease, leads to jumps in progress.

There are over 250 clinical trials for COVID-19 currently underway.

There’s already new cheaper and quicker tests developed for testing for it and numerous groups are racing to develop antibody tests that can show if you’ve previously had COVID-19 (and thus potentially be immune to it).

We can learn best practices from some other countries’ success in stopping the virus affecting their healthcare workers. 

Portfolio Update: No Más!

Our Man followed through with the things on his docket last week, reducing the portfolio’s exposure about 8-10% above Thursday's market bottom.  Frankly, OM hopes it’s a decision that looks abysmal in the future, since that likely means that COVID-19 came and passed quickly with limited impact.

The primary rationale for it was a combination of material year-to-date losses, increasing evidence of the West’s questionable handling of the COVID-19 outbreak, and the increased uncertainty caused by COVID-19.  

• The losses began with Shipping’s sell-off in January and accelerated last week, as emerging market indices collapsed.
• It appears that most of the Western governments were caught off-guard by the spread of COVID-19, and reacting to events rather than having proactive plans.   Bizarrely, the UK is an exception; it has a very clear plan though it is highly controversial and has been at least partially misunderstood.   If you’re in the UK you must read Azeem Azhar’s newsletter post on it.  If you're not in the UK, you should read it anyway.
• The uncertainty around COVID-19’s impact is worth discussing as ideally one should be a buyer in weeks like last week when there is “blood in the streets”.  The argument for buying now is that this too shall pass, and numerous high quality stocks cheap on historical (or post-COVID-19) earnings.  Thus buying today is right, even if there’s another 10-20% downside, as these names will be markedly higher in 12-months’ time.  Normally, OM would nod in agreement.  However, with COVID-19’s spread to Europe and the Americas, the weak response and the potential multiple week lock-downs ahead OM believes the range of outcomes is exceptionally wide.  In the best case, it will look like nothing more than your typical economic or market slowdown and OM’s decision will be costly.  However, the impacts of a prolonged lock-down are non-linear; too many (both large and small) businesses have too thin margins, too many fixed costs, and too much debt to be able to survive with limited revenue for that long.  That starts to raise questions of the health of the economy we'll come back to post COVID-19.  OM suspects that in many scenarios, the solution is going to look a lot like MMT.

Portfolio Changes

The planned reductions to the portfolio were discussed in the previous post but were:

• Technical Book:  The Technical Book’s sell signal flashed in the final days of February, but OM waited for a meaningful bounce that never really came.  He exited it at the close (thankfully!) on Friday, but the delay (vs. the first trading day of March) cost a couple hundred bps!
• Greece:  OM cut this back materially.  It was the only particularly hard decision in the reduction of exposure.  The new government in Greece is largely doing very good job, including their fast response to COVID-19, but it doesn’t matter.  The economic rebound is going to be tested by COVID-19’s impact on tourism among other things, and Greek equities are going to get limited attention from investors.  The Greece ETF is trading below the levels when folks thought the country was run by a Crazy Leftist and about to leave the euro for the drachma.   This is why it’s still the 2nd largest position in the book.
• Brazil, India & Vietnam:  Both Brazil and India saw their first COVID-19 cases during the week, which led to OM to slightly increase his reduction in those positions.  Longer-term, Vietnam continues to a beneficiary of broadening supply chains but was also reduced.
• SaaS & Uranium:  The exposure to the older ETFs was cut back.  There are some more recently launched ETFs that better fit the theses, and OM will be adding these when the moment comes.  OM also trimmed back the JD.com position, which is up for the year.

OM also bought some more crude and oil product tankers!

In the week since OM’s last post on Shipping, Saudi Arabia and Russia started an all-out price water which saw oil prices tumble 30%+.  The combination of the attractiveness of storing crude & oil products and the Saudis hitting the bid on every VLCC tanker they could find saw tanker rates rise 4-8x last week!  This is the start of the low season, but instead rates are printing at all-time highs; there are ships that are literally making a year’s worth of income in a single 45-day voyage!!  OM added some Double Hull Tankers (DHT, crude tanker company with a fleet of VLCCs) but didn’t get filled in his attempt to buy Teekay Tankers (TNK).  If these rates continue and the stocks don't reflect it, expect OM to continue to keep buying more of his existing positions (and TNK) till he hits 25% NAV.    Given the cash flow that these companies are going to throw off in Q1 and Q2, OM is happy keeping this position at a much higher size though he’ll be selling lots of the rest of the portfolio to keep overall risk in check.  OM exited the existing position in Navigator Holdings (NVGS), which is focused on liquid natural gas not crude and oil products.

Portfolio (as at 03/13/20 - all delta and leverage adjusted, as appropriate)

Dislocations: 31.0%

17.9% - Shipping (STNG, DSSI, EURN, DHT and NVGS)

9.9% - Greece (GREK, ALBKY, and EGFEY)

3.2% - Uranium (CCJ and NXE)

Thematic: 15.1%

5.2% - Tech 4th Industrial Revolution (JD & WCLD)

3.4% - Vietnam (VNM)

3.3% - Brazil (EWZ)

3.2% - India (INDA)

0.0% - Blockchain/Crypto (no positions)

Technical: 0.0%

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

Idiosyncratic: 16.9%

14.2% - Funds (ARTTX, CWS, GVAL, and CAPE)

2.6% - Equities (TPL)

Shorts/Hedges: 0.0%

Cash: 37.1%

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.