Things from my Newsblur; 2022 Part 2

Hopefully, you’ve all had a fine summer – here are some interesting articles that piqued OM’s interest over the break!

 

The Incredible Tale of the Greatest Toy Man You’ve Never Known

With Christmas on the horizon, OM like many other parents is turning his thought to what to buy the kids (Mrs. OM has so far vetoed coal, laundry bags, and Clorox wipes!).   What better time to read about Al Kahn – whose made and lost (and made again) fortunes – and is behind toys such as Pokemon, Yu-Gi-Oh! And Cabbage Patch kids!

(Scott Eden, Inc.)

Ancient Traditions Reveal 2 Rituals That Will Make You An Awesome Parent

Parenting is hard, and surprisingly the books on it contain little science or even insight from wise moms!   Eric Barker looks at the lessons from Michealeen Doucleff’s book (“Hunt, Gather, Parent: What Ancient Cultures Can Teach Us About the Lost Art of Raising Happy, Helpful Little Humans.”) drawn from her time spent with the Maya in Mexico, the Inuit in the Arctic, and Hadzabe near the Serengeti.   OM found the suggestions interesting and is trying to implement some of them into our daily lives!

(Eric Barker, Barking Up the Wrong Tree)

The Business of Barcelona

For those football fans amongst us, the shenanigans at Barcelona over the last 12-18 months have been quite something to behold!   The Generalist has a great look at the business-side of Barcelona, and how it all went wrong including their spectacular profligacy and how they’re trying to fix those problems.

(Mario Gabriele, The Generalist)

Long Covid, The Long History Version

The inability to define, let alone effectively research or treat long Covid continues to be a glaring weakness in the medical response.  Unfortunately, post-pandemic/epidemic and post-viral ailments are consistently under-researched with few historical lessons learned.

(Zeynep Tufekci, The Insight)

The Crypto Geniuses Who Vaporized a Trillion Dollars

Now that it’s had its first institutional blow-up, I guess we can count crypto as a real asset class.  In a tale as old as finance Jen Wieczner goes inside the collapse of Three Arrows, run by Su Zhu and Kyle Davies.  The two-Ivy League-educated and Wall Street-trained investors blew up their multi-billion-dollar firm and took down a large part of the crypto industry with them.   Unsurprisingly it involves hubris, non-existent risk management and a lot of leverage.

(Jen Wieczner, both NY Mag)

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)

2022: First Quarter Update

 Portfolio Update
- Carbon Credits:  OM has debated taking a position in carbon credits for a while but finally took the plunge at the start of the year with an initial position in KraneShares Global Carbon Strategy (KRBN).   It has become clear with the Paris Accord & COP26 that the Western world (at least) is focused on carbon and has both set a target and timeline for its reduction.  To achieve these would require aggressive moves; California and the EU are the leading proponents of and first movers in decarbonization and have large cap-and-trade carbon allowance programs.   Unsurprisingly, the goal of these programs is to reduce carbon and hence both have created incentives for these carbon credits to increase in price over time.   KRBN has ~90% of its capital invested in EU and California Carbon Allowance Futures.

- Commodities/Mining: The case for many commodities/mining can broadly be understood by reading any of OM’s pieces on Uranium or Tin.   While OM believes these two commodities are the clearest examples of limited/constrained supply and increasing demand, many other commodities show a similar supply issues due to years of underinvestment and increasing demand.   Ironically, the demand side is often impacted by the increased desire for ‘renewables’ or ‘electric vehicles’, which are vastly more commodity intensive than the fossil fuel alternative.  OM began the theme with a position in Filo Mining (FLMMF), though the overall size of Commodities/Mining is likely to be limited while Uranium and Tin remain such significant positions.

- Energy: OM exited his position in Sandridge Energy (SD) during the first quarter.  The company continues to perform, and almost tripled for OM. Energy displays many of the same traits as Commodities/Mining, and OM preferred to allocate his capital there.

- Short/Hedges:  OM implemented a hedge for the first time in a long while; it seemed clear that inflation would lead to higher rates in the short-term with with various factors (including demographics) also suggesting the 40-year bull market in bonds could be over.  OM has largely avoided expressing such views in the past due to the limited ways in which to execute them efficiently.  This changed last year, after Harley Bassman and Simplify, launched the Simplify Interest Rate Hedge Strategy (PFIX).  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 long-term rates increase over the next seven years.  (For the curious, or nerdy, page 7 shows the modeled profile)


Performance and Review
OM’s portfolio ended the first quarter +4.45%, after recovering from a terrible start to the year that saw it down over -12.5% for the year in the final week of January.  While equity markets also rallied back from their lows, both the S&P 500 Total Return (-4.60%) and the MSCI World (-4.78%) ended the quarter in negative territory.

First Quarter Attribution

 

Given the context of everything that happened in the markets during the first quarter, little in OM’s portfolio proved particularly surprising.  The quarter began with questions over whether inflation would prove to be transitory and whether (and by how much) the FED would have to raise rates.  The Russian invasion of Ukraine and subsequent sanctions highlighted and exacerbated the supply-demand imbalances in many commodities, which rose significantly.  This further entrenched the likelihood that inflation would be both greater and more persistent than expected, meaning the FED would have to raise rates quicker or higher (or most likely both) than previously anticipated.

Given all of the above, it’s unsurprisingly that OM’s winners were largely from the commodity and hard asset related investments.   The positions in Uranium (+411bps) led the way, as the case for nuclear power was further underlined as Europe’s reliance on Russian natural gas was made clear.  The quarter saw both France and the UK commit to building more nuclear plants, the US discuss potentially banning Russian uranium and/or tax credits for nuclear power.  OM’s other commodity positions – Tin (+136bps), Commodities (+36bps) and Energy (+44bps) – also contributed to performance.  In particular, the positions in Alphamin Resources (Tin) and Filo Mining (Commodities) were good contributors after both reported positive results in their respective drilling programs.  

Outside of direct commodity exposure, the other winners were also related to the key macro changes.  The Shipping (+238bps) positions in oil and product tankers were direct meaningful beneficiaries of the conflict in Ukraine.  Changes to the efficient flow of oil and its products, leads to extra seaborne miles of travel and higher utilization for the tanker fleets.  This was most cogently demonstrated by Zoltan Pozsar (of CS) who noted that while it's easy to say China will buy Russian crude oil rather than Europe, in the real world just this change would use all the existing ships running the European route and tie up 10% of the VLCC tanker (the largest size of tanker) fleet!  The Short/Hedge (+36bps) directly benefited from the rise in rates, which saw its embedded options become more valuable.  The Idiosyncratic positions (+61bps) also aided performance; both Texas Pacific Land Trust (TPL) and St Joe Co (JOE) are real estate plays.

The detractors from the portfolio were equally unsurprising – growth stocks are long duration assets as their profits/cash flows occur well into the future.  Unsurprisingly, as medium and long-term rates increase these cash flows are worth less today than they were previously.  Three of the primary detractors were Blockchain (-164bps), Biotech (-104bps) and Tech-4th Industrial Revolution (-84bps) which all reflect this concept.  The Funds book (-88bps) was driven by negative performance across the board.   The negative performance from Vietnam (-42bps) and India (-31bps) in part reflected the geopolitics around countries believed to be in China/Russia’s orbit and the possibility of reduced globalization with supply chains moving nearer end customers and to friendlier countries.  Finally, the position in Carbon (-24bps) was a detractor as there was some debate as to whether Europe would pause or waive its cap-and-trade allowance program due to the war in Ukraine.  The position recovered most of its losses by quarter-end; decarbonization is quasi-religious in Europe/California and it will take more than a potential world war to slow it down.

The positions in Greece (+8bps) and Brazil (+12bps) weren’t material contributors, though Brazil – a commodity exporter – rose meaningfully in the quarter.  After a tough couple of years and with an upcoming election and rates nearer a peak than trough, it’s a position that OM is spending a lot of time researching.



Portfolio (as at 03/31/22 - all delta and leverage adjusted, as appropriate)

Dislocations: 41.5%
27.4% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF and URG)
10.2% - Shipping/Tankers (STNG, INSW, EURN, TNK and DHT)
3.8% - Greece (GREK & ALBKY)

Thematic: 39.1%
9.0% - Tin (AFMJF, MLXEF and SBWFF)
8.3% - Blockchain/Crypto (GBTC, ETHE, and OSTK)
6.2% - India (IBN, INDA and SMIN)
4.9% - Biotech: 4th Industrial Revolution (IBB & XLB)
3.2% - Tech: 4th Industrial Revolution (JD & WCLD)
3.2% - Vietnam (VNM)
2.1% - Carbon (KRBN)
1.7% - Commodities/Mining (FLMMF)
0.4% - Brazil (EWZ)

Technical: 0.0%

Idiosyncratic: 15.8%
10.5% - Funds (ARTTX, CWS, GVAL, and CAPE)
5.3% - Equities (TPL & JOE)

Shorts/Hedges: 2.6%
2.6% - Higher Medium-Term Rates (PFIX)

Cash: 1.0%

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.  

2021: Fourth Quarter Update

Portfolio Update  

- India:  OM added to the portfolio’s India exposure through bother larger caps (INDA) and smaller/mid caps (SMIN).  OM also added a position in ICICI Bank (IBN).

 - Biotech: While the overall market has been strong, the biotech market has been exceptionally weak.  Our Man took the opportunity to increase his initial starter position through the sector ETFs (both IBB and XBI).  [Editor’s Note: Yup, OM was too early to do this!]

 - Tin: The tin thesis represents OM’s single highest conviction thesis entering 2022, but its size remains constrained by the paucity of ways to express it.   However, OM continued to add to his position in Alphamin Resources (AFMJF).  Alphamin’s Bisie Tin Project is undeniably the single best tin asset on the planet, with ever increasing signs that the deposit is somewhat larger than believed.

Performance and Review 

While OM’s portfolio ended up broadly flat during the fourth quarter, this disguises the sharp swing in performance – by November 9th, OM’s portfolio was up just over 18% for the quarter (and 60%+ for 2022) before giving back all of this performance over the remainder of the quarter. 

OM’s portfolio ended the quarter rising +0.1%, and trailed both the S&P 500 Total Return (+11.0%) and the MSCI World (Net, +8.1%) after losing money during December’s rally.  This meant that OM’s portfolio ended 2021 up +38.1%, though this still outpaced the S&P 500 TR (+28.7%) and the MSCI World (Net, +24.1%).

Fourth Quarter Attribution

OM’s Shipping-Tanker positions (-219bps) were the largest detractor with fears over Omicron’s impact on demand hanging over the names.  This wasn’t the only cause of weak performance as headline rates were already largely disappointing during the seasonally strong 4th quarter.  However, there is a bifurcated market with modern vessels receiving vastly superior rates to more inefficient older vessels.   These discrepancies and the strong steel price meant we finally saw an uptick in the scrapping of older vessels, which is an important factor in balancing the market. 

The largest contributor to performance was OM’s exposure to Tin (+244bps); the metal was one of the best performing commodities in 2021, setting numerous record highs towards year-end.  OM’s stocks couldn’t keep up with the metal price though Alphamin generated substantial profits, now has no net debt and continues to see positive drilling result.  Elsewhere, little has changed with OM’s thesis during 2021 other than further evidence that demand remains strong and key producers are either running out of reserves (Myanmar, 17% of production but only a couple of years of reserves left) or are seeing shifts to more expensive types of mining (Indonesia, the largest tin producer).  

While Uranium (-41bps) was not the biggest detractor during the quarter, it saw the largest intra-quarter swing having been up almost 800bps at one point.  As mentioned last quarter, Sprott completed its transaction for the renamed Sprott Physical Uranium Trust (“SPUT”) and was an aggressive purchaser of Uranium in September and throughout the 4th Quarter.  This saw the Uranium equities rally significantly during the first half of the quarter, before falling back through a mixture of getting ahead of themselves and concerns over the Omicron variant.  Fundamentally, things remain positive with nuclear included in the initial draft of the EU Taxonomy, China indicating it plans to build another 150 nuclear plants over 15-years (i.e. more than the rest of world has in 35-years), and wide scale Western government support for Advanced SMR (small modular reactors).  Though Uranium is OM’s largest position, unlike earlier in the year, it is sized such that OM can stomach the volatility in the space.   OM’s Blockchain holdings (-15bps) also saw significant volatility over the course of the quarter, as both Bitcoin and Ethereum slumped after touching record highs. 

OM’s exposure to the ‘new’ economy was a detractor during the 4th quarter with both the software positions in Tech-4th Industrial Revolution (-38bps) and the Biotech (-55bps) positions hurting.   Software remains an attractive sector in the long-term, and its evangelists speak many truths but it just remains very expensive [Editor’s Note:  Still true, despite the fall so far in January] and thus undersized in the portfolio.   OM’s Energy exposure (-67bps) was a detractor during the quarter. 

The exposure to Funds (+102bps) was positive, as they participated in the market’s rise.  The idiosyncratic exposure (+73bps) was entirely driven by the position in JOE, which continues to successfully develop parcels of real estate in the Florida Panhandle.   Our Man’s broad international exposure in Vietnam (+30bps), India (+2bps), Greece (-5bps) and Brazil (-2bps) was largelyy flat.  Brazil, while the smallest position, is the one where OM is currently spending the most time!  The last two-years have been a terrible time with the impacts of COVID, the Bolsonaro presidency, slowing economic growth, high inflation and interest rates rising (seven consecutive times from 2% to almost 10% during 2021!).  However, this is what makes it an interesting potential dislocation.  We know all of these things but Brazil remains rich in commodities, we are near the end of the rate rising cycle, have an election later in the year, and the equity market is cheap (~8x).

Portfolio (as at 12/31/21 - all delta and leverage adjusted, as appropriate) 

Dislocations: 40.1% 

24.9% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF and URG) 

8.5% - Shipping/Tankers (STNG, INSW, EURN, TNK and DHT) 

4.0% - Greece (GREK & ALBKY) 

2.7% - Energy (SD)

Thematic: 30.7% 

9.2% - Blockchain/Crypto (GBTC, ETHE, and OSTK) 

8.3% - Tin (AFMJF, MLXEF and SBWFF) 

6.9% - India (IBN, INDA and SMIN) 

6.2% - Biotech: 4th Industrial Revolution (IBB & XLB) 

4.2% - Tech: 4th Industrial Revolution (JD & WCLD) 

3.8% - Vietnam (VNM) 

0.3% - Brazil (EWZ)

 

Technical: 0.0%

 

Idiosyncratic: 15.8% 

12.0% - Funds (ARTTX, CWS, GVAL, and CAPE) 

5.0% - Equities (TPL & JOE)

 

Shorts/Hedges: 0.0%

 

Cash: 3.8%  

 

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

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. 

2021 Second Quarter Update

Portfolio Update
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.  Those changes were recapped here.

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 +6.1%, and trailed both the S&P 500 Total Return (+8.6%) and the MSCI World (Net, +7.6%).  For the year, this leaves OM’s portfolio up +29.2%, with the S&P 500 TR (+15.3%) and the MSCI World (Net, +14.2%).


Second Quarter Attribution

 
The portfolio continued to benefit from its exposure to Uranium (+401bps), which remains the largest position.   The trend of positive news flow continued during the second quarter culminating in Sprott Asset Management – a large well-known player in commodity circles – announcing the acquisition of Uranium Participation Corp and the establishment of the Sprott Physical Uranium Trust (“SPUT”).  Sprott will be listing SPUT in New York (likely early Q4), where it 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.  However, Uranium stocks have run strongly over the last 6-12 months, and in some cases are comfortably ahead of the fundamentals.  While OM thinks we’re still in the early stages of this bull market, he reduced the position in early July by about a fifth.

The Dislocation portion of the portfolio was also aided by Shipping/Tanker (+118bps) and Energy (+128bps) positions, which benefited as economies continue to slowly reopen.  For all the talk of electric vehicles and lock downs, gasoline demand in the US has already returned to record levels.  Much like Uranium, the sharp rally in the stocks is ahead of the fundamentals and led to OM reducing exposure to both these areas in early July.

The sole significant negative contributor during the quarter was the Blockchain theme (-272bps), which gave back slightly over half of Q1’s gains.  The losses came from OM’s positions in Bitcoin (GBTC) and Ethereum (ETHE) partially offset by the position in Overstock (OSTK).  There has been much written about the fall in digital assets, OM merely notes the peak came after a fevered period of speculation and also coincided with the Coinbase IPO, which provided an alternative way for institutions to get broad exposure to digital assets.  The only other negative contribution came from the Idiosyncratic Equities (-6bps).

The remainder of the portfolio posted gains, though largely lagged the S&P 500 as US markets outperformed International markets.  This was most clearly seen in the Funds (+67bps), and the international positions – Greece (+18bps), India (+11bps), Brazil (+10bps), and Vietnam (+51bps).   The 4th Industrial Revolution positions in Technology (+45bps) and Biotech (+2bps) were also contributors.   Finally, the position in Tin (+33bps) contributed healthily though – in contrast to Uranium – the equities failed to keep up with the metal price, which continues to climb to record highs on the supply deficit.


Portfolio (as at 06/30/21 - all delta and leverage adjusted, as appropriate)

Dislocations: 51.2%
29.3% - Uranium (URNM, CCJ, NXE, PALAF, DNN, BNNLF and URG)
13.9% - Shipping/Tankers (STNG, INSW, EURN, TNK and DHT)
4.4% - Greece (GREK & ALBKY)
3.7% - Energy (AR & SD)

Thematic: 28.9%
9.3% - Blockchain/Crypto (GBTC, ETHE, and OSTK)
5.0% - Tech: 4th Industrial Revolution (JD & WCLD)
4.0% - Vietnam (VNM)
3.8% - Biotech: 4th Industrial Revolution (IBB & XLB)
3.8% - Tin (AFMJF and MLXEF)
2.5% - India (INDA)
0.5% - Brazil (EWZ)

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

Idiosyncratic: 15.9%
12.2% - Funds (ARTTX, CWS, GVAL, and CAPE)
3.6% - Equities (TPL & JOE)

Shorts/Hedges: 0.0%

Cash: 4.0%

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.