Believe In America (Part II)

December 1, 2016 2:44 AM

When the Central Bankers started printing money in 2009, I knew they wouldn’t be able to stop before they took things to an unimaginable extreme. When you’re in government and your policy isn’t working, you keep pushing harder—like your career is at stake if you fail. When China embarked on a massive infrastructure binge to re-ignite economic growth in 2008, it was obvious that once started, this would also continue for quite some time. What they’ve learned is that US $1 trillion a year just doesn’t kick-start an economy like it used to. This is why I don’t think Trump’s US $1 trillion infrastructure spending plan will stop at that. What’s $100 billion a year over ten years when the Chinese are doing a trillion a year? It just won’t create the sort of job growth needed.

With Trump at the helm, we can be proud that America is leading the western world in a new trend. You cannot fix an overleveraged economy with artificially low rates—you need spending on infrastructure. Trump realizes that. When America starts spending others will follow—just like they followed us with QE. What happens when everyone starts spending? Well, you’re going to need a lot of stuff and someone has to move that stuff around.

Last week, the Baltic Dry Index (BDI) hit a two year high following one of the worst bear markets in the index’s history. This bear market was caused by a crushing glut of ships that were ordered during the bull market of 2006 to 2012, but delivered en masse from 2010 onwards. The last of this glut should come in online in 2017. After that, there are almost no ships on the order book, meaning almost no more new deliveries until 2020—as it takes about 2 years to build a ship. So, a sector that has seen double digit tonnage growth crushing charter rates will now enter a period of no tonnage growth or even contraction as older boats are scrapped. At the same time, more stuff will suddenly need to be moved around on its way towards becoming infrastructure.


Baltic Dry Index is finally showing some life after making a multi-decade low at the start of this year.


My favorite company in this sector is Star Bulkers (SBLK: Nasdaq), which owns 68 bulk carriers today. After a two year period of declining asset values, repeated equity raises and forced ship sales, the business has stabilized. The loans have finally been restructured. There won’t be any more forced ship sales. Instead, you have one of the world’s lowest cost operators with a fully financed fleet that will grow to 73 ships by early 2018. Based on current BDI rates, they should be making good cash flow for the first time in two years. I expect charter rates to come off a bit over the winter, as they often do, but even then, SBLK should be roughly cash flow neutral—nothing like the past two years where charter rates didn’t even cover operating costs. Effectively, you have a long-dated call option on demand for bulk shipping recovering at a time when supply should finally cease.

You can buy the shares today for just a bit over $5 while net tangible book per share, should be a little over $7 based on current vessel values. Of course, vessel values are currently highly distressed and should charter rates increase, vessel values should increase dramatically. Additionally, $476 million of equity was raised in the past two years, with roughly two thirds of it put up by management and noted value investment group Oaktree Capital. I like it when the insiders keep buying and at a market cap of $289 million, you can buy the whole company at 60% of the price that they thought was appropriate for their investments in less than the whole company. You’re paying less than the insiders paid, less than the boats are worth and the BDI is going to continue rallying because Trump intends to make infrastructure great again.

Disclosure: Long SBLK, Short SBLK puts

Categories: Current Investments
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Is This The Right Shoulder?

August 18, 2016 5:54 AM

Everyone is asking: “Is this is the right shoulder in oil?”

I know, I’m not a chart guy, but I certainly respect charts for entry points. Sentiment on oil is awful. Inventory is high. Refined inventory is off the charts. New supply is expected from all sorts of countries. Yeah, I’ve heard it all, but so have the charts. Here we are, and it sure looks like oil is forming a 2-year inverted head and shoulders (H&S) reversal.

oil H&S

Look at the S&P Oil & Gas Exploration & Production ETF (XOP:NYSE) for the past 6 months. When oil took a $10 drop in July, the XOP barely even flinched. In my experience, when you’re coming out of a commodity bear market, the producers tend to lead the commodity higher.

xop chart

It’s been approximately 2 years since oil began its slide from nearly 100. A lot has changed at the producers and it makes sense that they’re starting to outperform. They’ve dramatically cut costs, reduced exploration spending and focused on debt reduction. The survivors now have stronger balance sheets. Plenty of their brethren didn’t make it.

If you think oil is coming back, you can go and chase these producers, but there’s a sector that really interests me and that is the oil services sector where many sub-sectors are still bouncing along their multi-decade lows—or making new lows as I write this. Many of these companies have just reported awful quarters. Their businesses are down dramatically, their cash flows are a mess—many of them are blowing covenants and some even have scary “going concern” notices in their financials.

Why shouldn’t these companies suffer? Producers are focused on paying down debt—they’re doing everything possible to stop spending. However, if there’s one thing that I know about the oil companies, it’s that they’ll start to spend if oil starts to rally. They can’t help it. That’s what oil companies do. De-levering is boring.

I’m not going to tell you that buying highly leveraged service companies with covenant breaches and revenues that are down by half in the past year is a “sleep well at night” sort of investment, but I think that a basket of them can be. I bring this up, because many of these companies trade at less than 20% of book value and book value is mostly made up of equipment that is only a few years old. Heck,some of the offshore service companies trade at less than 10% of book. Even better, many of these companies have already taken a few rounds of impairments to their book value. Hence, true replacement value is even higher. Sure there’s debt, sure there are going to be hiccups and a few more scary quarters, but these guys have also been cutting costs for 2 years. Plenty of competitors have already failed and been liquidated. If there’s going to be a bounce-back in business it will flow to the survivors' bottom line in a hurry. If that happens, I don't see why these service companies can't trade back to book. In fact, for most of the past few decades, they’ve traded at a premium to book. I don’t want to name names, because I’m pretty sure a few companies in my basket will go to “oil services heaven” but if I'm right, a few 10-baggers will balance that out. The question then is: "Is this really the right shoulder?"  

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Fake Currency, Fake Exchange...(uggh)

August 7, 2016 12:26 PM

So, the inevitable happened, someone hacked Bitfinex where I kept part of my Bitcoin stash. It sounds like I’m getting back 64% of my bitcoins and a BFX token which I can potentially exchange for shares of iFinex Inc., which happens to be the Bitcoin exchange that lost my damn bitcoins in the first place!!! Why would I want to own non-tradable illiquid equity in an exchange that no one will ever want to put money into again? Why do I want BFX tokens? Why do I want Bitcoins in the first place? This has now been the second sizable hack in 2 months (the other was ETH), where someone successfully stole crypto-money and turned it into real money. Momentum may still rule the day, but when your fake currency can be stolen by real crooks, it’s unlikely that a true mania bubble can form—manias are built on misplaced trust. At this point, Bitcoin may not even appear safe enough for the Chinese to launder money with. At least Beanie Babies and baseball cards were safe in your basement. The whole premise of Bitcoin Bubble 2016 was that a new group of exchanges had grown up with venture capitalist supervision and there would be no more Mt. Gox style implosions.

Fortunately, I split my bet between 2 exchanges due to security fears. Even more fortunately, I kept substantially more at the other exchange due to it having more prominent backers—I chose Bitfinex because it was the exchange with the most US Dollar trading volume. Over the past few days, I’ve been cashing out my Bitcoin from the exchange that hasn’t been hacked. In case you're curious, even if I hadn't been hacked, I would still be selling as it is much less likely that this becomes a bubble now. While I haven’t figured out the value of my (likely worthless) BFX tokens, with a bunch of sales at just under USD $600 at the un-hacked exchange, compared to my cost basis at USD $450, and a 64% recovery of my Bitfinex Bitcoins, it seems like I will actually come out with a small gain on this fake currency.


Back to real investing…


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Brexit Bargains

July 7, 2016 12:57 AM

In all my global wanderings, I’ve only been to London twice—during one of those visits, I didn’t even leave Heathrow. To say that I understand the inner psyche of the British is foolish, but I certainly would have voted in favor of Brexit. I would have voted this way, not because I’m uneducated, impoverished or racist. I certainly don’t feel disenfranchised. I would have voted for Brexit out of sheer personal self-interest. As I watch both leading UK parties disintegrate into internecine chaos, I feel even more confident that having one less layer of politicians and bureaucrats is a net positive for everyone.

Over the past week, a lot has been incorrectly written on this Brexit vote and how it will destroy UK economy along with the British Pound (GBP). I find that much of this content comes from those who depend on the EU for their own livelihoods. As I sift through endless studies, I have this continued head-scratching moment full of confusion and frustration. Why are all these studies coming from the same fools who have bound the EU into a straight-jacket of no growth and endless regulations? They know nothing about economics, so why are the big banks all quoting them. Brexit, simply put, is an existential threat to the Eurozone intelligentsia and their ability to continue their vapid lives paid for by the citizens of Europe. Why aren’t people willing to call it what it is? Peddling fear is the only recourse for those who have already lost the debate. Investors are now running around terrified of nothing.

Brexit 3

I tend to think that Brexit will be quite good for the UK economically. As the dust settles and the fear-mongering abates a bit, rational logic will prevail and this view will become more universal. Until then, fear, panic and forced sales will likely create one of the best opportunities this year to pick up bargains in well-positioned companies standing to benefit from the tail-wind caused by increased UK economic growth.

Let’s start with the obvious, less regulations makes your economy grow faster. Any time you reduce regulation, it’s a good thing. I don’t think anyone can dispute this. The UK is about to abandon a lot of silly rules. So what are the legitimate fears of Brexit?

Let’s start with trade. Right now, the UK is party to numerous treaties with the EU. Does anyone think that the UK will be excluded from future trade with the EU? The EU will make a big stink and likely make things tough on the UK at first, but that won’t last long. The UK imports more from the EU than it sells to the EU. Who would want to stop trade with a net-importer? What does the UK sell a lot of? Oil. If the EU doesn’t want that oil, it will get onto a tanker and go somewhere else that it’s welcomed. I can’t tell you how the new treaties will get re-drafted, but the UK will end up in a favored position in regards to trade. I’ve read a number of thoughtful articles that point to the UK’s rather large trade deficit—another legitimate concern—however, after a nearly 20% drop in the GBP against the Euro (EUR) in the past year, that will begin to self-correct.  

Brexit 1

The next fear is that the finance industry will leave London and seek out a new home. Let’s be serious here—London is the capital of European finance because finance goes where there’s liquidity. There is no other city in Europe that has the density of bankers, traders, brokers, insurers, etc. You cannot recreate London. Look at all of the Caribbean islands that have tried to become a finance hub for North America. Capital will always go where there’s liquidity and it’s treated best. With low taxes and the same common first language of all international trade, London will remain the finance hub of Europe—the same special position that it’s had for centuries.

The final fear was that after Brexit, there would be a period of forced liquidation by various pension funds, endowments and sovereign wealth funds, leading to a short-term decline in wealth amongst the elites of Europe. The EU may even punish the UK and create a crisis in order to threaten other wayward nations from leaving. This has now happened and it’s no longer a fear. The liquidations probably have yet to run their course, but the short-term self-interest of the 1% can’t dominate a country. Besides, the more that the EU scares people senseless, the better the bargains will become for everyone else. At some point in the future, this will all be forgotten—much like the reason for all the selling in the first place.

With that out of the way, I want to throw my first (of many) ideas out there. I want to be long GBP against the Euro. This spread has blown out by almost 20% in the past year—first on fears of Brexit and then the actual event. The panic in the GBP has overshot and the EUR has plenty of its own problems—from secession movements to plebiscites over EU membership, to the neutron bomb known as Deutsche Bank (DB: NYSE). Brexit almost guarantees that the EU as we know it will fail. Once one leaves, they all will. As the EUR continues its slow-motion implosion capital will continue to go somewhere (often nearby) for safety. Think of the tens of billions spent by the Danes and Swiss to stop their currencies from appreciating. Now think of the GBP which has a 3-month positive treasury carry of nearly 100 bps when compared to Germany and plenty of liquidity. Where do you think capital flees to during the next Eurozone Crisis?

Brexit 4


Disclosure: Long GBP.EUR

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The Chinese Laundromat

May 8, 2016 6:21 PM

What is the national pastime of China? If you answered gambling, you probably have a few Chinese friends. What is the national pastime of Chinese business people? If you answered tax evasion, corruption and money laundering, then you’ve tried to do business in China. When a handful of businessmen merged these two pastimes, they made a fortune by building casinos in Macao. Now, the Chinese government is cracking down on Macau, but cultures don’t change—they find new outlets. Is Bitcoin the next combination of these pastimes?

I’ll be honest, until about a month ago, I hadn’t thought much about Bitcoin. It seemed like a fringe product for people to buy illicit goodies. Then, a friend forwarded me a chart of Chinese Bitcoin usage and I saw the light. Over the past two years, the Chinese went from a negligible percentage of daily Bitcoin trading volume to between 90% and 95% of the trading volume. That’s a huge increase in usage. They can’t all be buying Bath Salts and Moly and a quick google search laid out a number of creative schemes to launder money out of China using Bitcoin. The wealthy have Macau and now the peasants have Bitcoin for moving their wealth out of China.

bitcoin 2

In rough numbers, there are about US $7 billion of Bitcoin in existence, of which about US $2 billion are owned by early creators and adopters—hence these Bitcoin do not change hands often. A US $5 billion pool of Bitcoin is tiny in today’s world. A certain quantity must be owned by those who are in the act of facilitating all this money laundering in China. As demand increases, so will the size of this frictional Bitcoin pool. What happens if Bitcoin continues to increase in value? Won’t the Chinese who are actively trading it, start buying it up, instead of using it to simply facilitate transactions? Besides, it’s much sexier than the rebar futures they all chased last month.

Coming back to the US, the big blow-off move in Bitcoin two years ago was a pure speculative bubble. Since then, over US $700 million has been invested by various VC firms in Bitcoin startups. They call it the “Bitcoin Economy” which sounds ridiculous to me, but for these investments to have value, they will have to create products to facilitate the use of Bitcoin and then market those usages. That could be a huge source of incremental demand.

Finally, everyone agrees that global central banks have collectively lost their mind. Gold is seen as archaic. Will a hipster in San Francisco buy a product often associated with guns and right-wing politics? Of course not—but he may be willing to buy Bitcoin to diversify out of paper currency. Besides, his liberal friends now work at Bitcoin start-ups. I know it’s a long shot, but I can see a lot of reasons for Bitcoin to go higher, potentially a whole lot higher. Speculative bubbles can have a mind of their own, especially given the tiny size of the total Bitcoin pool.

Over the past week, I bought some Bitcoin and am long from an average of about US $450. I am using a stop of US $350. I rarely use stop loss orders as I usually buy assets that have downside protection, hence lower prices make for better bargains. In the case of Bitcoin, there is no natural value—value is driven by emotion. However, I feel like I can risk $100 and maybe make many times that. Besides, look at the chart below. If you didn’t know what the product was, wouldn’t you want to be long and with size?


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