Who's long Greece?

July 22, 2017 7:34 AM

My good friend Chris, over at Capitalist Exploits has a new service named Insider Trade Alert. Needless to say, I’m a big fan. The strategy is a focus on “asymmetric risk/return scenarios” in un-followed and un-loved securities. When was the last time you even thought of Korean ship builders? When was the last time you thought that long-dated call premiums on European insurance stocks that will be leveraged to an increase in interest rates—or at least a return from negative interest rates, were too cheap? When was the last time you thought of Greek equities as anything but a bad joke?

Well, Greek equities may still be a joke and the management teams running them may still be scam artists, but that doesn’t mean there isn’t money to be made.

With that in mind, I’m attaching an article on Greek equities from Insider Trade Alert. It is the sort of independent thinking that I really enjoy.



Under-The-Radar Bull Market In One Of The World’s Most Hated Markets

In this this Insider trade alert, we take a look at one of the most hated markets in the world. While completely shunned by the investment community, it’s in a stealth bull market and today’s 5 investment ideas could deliver outsized returns over the coming 5 to 10 years.

This time, we’re going against conventional wisdom and getting long Greece.

To say Greek stocks are unloved would be kind. Hated is more like it. Certainly forgotten by the investment community, but, if you look carefully, in a stealth bull market. If you’re thinking to yourself, Chris, you are absolutely mad, then let me remind you that it is typical that the most uncomfortable positions almost always are coincidentally those where asymmetry exists.

We’ve been diligencing Greece for a long time now, talking with various fellow colleagues, sharing notes and so on, and I’m cognisant of trying to provide you with just what matters since if you let me fly, I’ll write a book on the topic and/or talk all day. Neither of which are necessary or useful for you.

So what is my underlying thesis for being bullish Greek equities? Well, instead of putting together a high flying reasoned discussion on how economic production is about to pick up and valuations still reflecting Greece being in a depression for the rest of time… let me approach this from a different angle.

Below is the Athens Mid Cap Index. There are about 20 stocks that comprise this index. Picture this: let’s say that just prior to the US Credit Rating Downgrade on the 2nd of August 2011 you knew exactly what all of the news flow was going to be for the next 6 years (until now). The only thing you didn’t know was how financial markets were going react to the news flow.


Wouldn’t you think that this would be a textbook bearish setup? Looking back now, I ask myself the question what more could possibly have been thrown at Greek equity markets over the last 6 years? Perhaps Greece leaving the Eurozone, though there is no guarantee that that would have been a bad thing.

Well, guess what? The average stock on the Athens exchange is trading more or less where it was just prior to the US Credit Rating Downgrade in early August 2011.

So if you had gone short a basket of Greek shares in early August 2011, you would have virtually nothing to show for your efforts some 6 years later in the face of what can only be described as absolutely toxic fundamental newsflow and sentiment. So if you haven’t made money now by being short, it’s useful to ask the question: what is going to help you make money in the future by continuing to be short?

We’re bullish on Greek equities for two important reasons.

One is because I cannot think of anything that could push them materially lower on a 5-10-year view, and the other is the impact that Chinese investment dollars via OBOR (One Belt One Road) will have on the economy. Right now there are precious few sellers left. Everyone who wanted to sell has done so while at the same time nobody, and I mean nobody, is looking at Greece, even though the market is telling us to pay attention. One of these days we’re going to wake up to find Greek equity markets ranking in the top performing markets globally. Wait for it!

Is my “reverse” way of thinking a “cop-out” for not doing hard core fundamental analysis on the Greek economy and drivers of economic growth, earnings growth, etc.? Certainly not. I’m no stranger to hard work and spending hours researching, and I’ll provide you with some of the valuation metrics further on where you can see for yourself the value sitting in front of us.

Also, I have been around long enough to know the future is a dynamic thing as there are so many random variables that can come into play. Furthermore, at the bottom of a market or near to it, you will never find any positive commentary/analysis.

Equity markets have this unique ability to anticipate changes in fundamentals. To be ahead of the market you have to have the ability to discard popular narratives and search for clues to allow us to anticipate what the market is going to anticipate.

I have also lived through many crisis before and studied bull markets that result. Bull markets happen for reasons which you would never have thought of at the time.

One of the best measures we use is watching how any given market reacts to “bad” news. If a market refuses to go down against a barrage of negative news, then there is a reasonable certainty that a market bottom is already in or near to forming. This doesn’t mean that it will turn around and vault higher the next day (or even within the next few months) because base forming is often part of the process too. What it does help us do is provide a probability setup where we can find extraordinary asymmetry well ahead of the pack. Thereafter the upside is a function of news coming in less worse than expected. Eventually, as market start to rise, investors/commentators start looking for reasons to justify why markets are moving higher. It’s a situation of the narrative following the market and acts as a self reinforcing mechanism. Soros, who is a pseudo intellectual parasite but phenomenal trader, refers to this as “reflexivity”.

Let’s take a long term look at the Greek stock market and then go back over some of the crisis that have shaped the way I think about the beginnings of a bull market.

For the full article, please click here.



Categories: General
Positions Mentioned: none
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The Lowdown From LD Micro

June 11, 2017 11:11 AM

I don’t attend a lot of investment conferences as I prefer visiting companies on their home turf —you learn more that way. However, the LD Micro Invitational is “special” and after having missed the last few, I felt compelled to attend last week's and get an update on the state of micro-cap investing (I define micro-cap as companies trading for under $50 million market cap). Besides, where else can you gain access to almost 200 undiscovered companies, knock off a dozen 1 on 1’s and drink all the free Bulleit Rye Whiskey that you can handle? Even better, there were over a thousand institutional investors there—many of whom I hadn’t seen in ages. When I wasn’t watching presentations, I was being taken aside to hear why certain activists thought they deserved my votes; while being appraised of their plans should they unseat management. It’s the sort of networking opportunity that you cannot replicate—over 3 amazingly busy days. Even better, the size of the conference has grown dramatically since I last attended—clearly interest is returning to the micro-cap space.

If you’ll remember, back in 2014, I wrote about the difficulties of being a micro-cap company. In many ways, my view on micro-caps hasn’t changed—if you do not intend to raise capital or use your shares as currency to buy someone else, you shouldn’t be public until you hit a certain scale. Even then, you are at a tremendous disadvantage when compared to more mature companies.


Fortunately, at LD Micro, I learned that the world of micro-cap investing is finally changing for the better. Reg A+, the JOBS act, dramatically reduced public company costs and continued deferral of Sarbanes-Oxley have levelled the playing field somewhat for micro-caps. It’s cheaper than ever to come public and cheaper to stay public. While being public is still expensive, it is becoming more manageable.

If you look at micro-cap equity indices, most of these stocks have dramatically underperformed the broader markets for the past decade. This is largely the result of cash flow getting diverted towards public company and compliance costs, instead of productive investment. If these costs are now declining, micro-caps may resume their long-term history of outperformance when compared to larger companies. 5 years ago, it cost an incremental $1 million to be public in the US as compared to being private. Now that figure is probably closer to $250,000. That’s a huge savings for a company with only $1 million in EBITDA—it’s an incremental 75%!!!

Even more importantly, the days when a CEO could siphon off the majority of cash flow are largely over. Before, it was too expensive to mount an activist campaign on a smaller company and too hard to reach out to like-minded shareholders. Now, proxy costs have declined and it’s easier than ever to contact and canvas shareholders for their proxy votes. Shareholder capital will once again be invested in the business, instead of the CEO’s lifestyle.


Smaller companies often still suffer from illiquidity and reduced access to capital, but even here, the story is changing. After years where brokers largely ignored them, I have seen an increase in smaller company offerings—especially as the costs of registering securities have declined. In fact, quite a number of firms have seized on the opportunity of underwriting $2 to $10 million offerings in a universe where very few other brokers previously competed. As conferences like LD Micro grow, it’s attracting new investors, which further increases liquidity. Liquidity, in turn increases the ability to raise capital. It’s almost self-fulfilling.

I’m not going to say that it’s universally time to dive into micro-caps, every situation is different, but the playing field is once again tilting towards a balance where smaller companies can access the public markets for capital. The explosion in Reg A+ filings, an offering type that I didn’t even know about before last week, is an indicator of just how much pent up demand there is for small companies to come public and grow. After watching the number of US public listings shrink consecutively for years, we may be at an inflection point as companies once again go public for the right reasons—raising capital and growth.

The micro-cap space has once again become interesting—those who can sift through these companies are bound to find very interesting opportunities.

Categories: General
Positions Mentioned: none
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Mongolian Stock Exchange In NYC...

December 3, 2013 1:59 PM

As long-time readers know, I am now focusing a considerable percentage of my time on Mongolia. For those who are interested in learning more about one of the most rapidly growing economies in the world, Thursday's presentation by the Mongolian Stock Exchange (MSE) should be highly informative.




Altai Khangai, CEO of the MSE, and Saruul Ganbaatar, Deputy CEO of the MSE, will be making a presentation in New York City to educate investors about recent positive changes to the Investment Law, the Securities Markets Law and the Investment Fund Law of Mongolia.

The event will be held on December 5th at 6pm at the TKP New York Conference Center, East Village Room, located at 109 West 39th Street in New York City.

Following the presentation, I will be moderating a question and answer session.

If you wish to attend the presentation in New York City, please contact Amanda Loubier at Amanda@MongoliaGrowthGroup.com

I look forward to seeing many of you there.


Categories: General
Positions Mentioned: none
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Kuppy's Book List

October 15, 2011 5:40 PM

Since I started this site, I have been asked at least 100 times for a list of recommended books. I've finally gone home to Miami (first time since April) and gone through my books. HERE'S MY LIST OF RECOMMENDED BOOKS. I want to point out the obvious, which is that I've left out many investment favorites.

If you haven't read your Security Analysis, you clearly need to. However, I don't feel the need to recommend such essential books. My list is instead a collection of the more esoteric and obscure books that I would highly recommend reading, especially since some of them aren't frequently read.



Categories: General
Positions Mentioned: none
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It All Looks The Same To Me....

October 10, 2011 4:03 PM

As a Floridian that’s recently moved to Mongolia, I have wizened up. Winters in Mongolia are cold, and I need a new wardrobe. My Florida ensemble (shorts, flip flops and whatever free t-shirt I got during a company visit), won’t cut it in Mongolia. Last winter, I survived on my only two sweaters. This year, I decided to go shopping for proper attire—as a value investor, I headed to the outlet mall on Riverhead, Long Island.

I won’t go through the details of my shopping. Let’s just say that I buy new clothes about once a decade and despise the experience. My sense of fashion is abysmal, but fortunately, every store has the exact same thing—so it’s hard to mess up too horribly. After a few stores, I became intrigued by just how similar they all were. The more stores I went into, the more perplexed by this I became.

Out of roughly two hundred stores, there were at least a dozen that specialized in jeans. I found this humorous because jeans are all pretty similar. To summarize a half century of jean evolution, we’ve gone from bell-bottoms, to ass tight, to ripped, to baggy to what I’ll currently call the “designer phase,” because jeans shouldn’t cost $250 a pair.


As a speedy shopper, I didn’t even have to bother with the specialty jean stores; every single other store has its own brand of jeans that look just like the designer ones—blue. They even have the same fake stains in the same places. The dress shirts were the same, the sweaters were the same. Quite honestly, everything looked the same.

There were a few dozen designers that I hadn’t heard of. I poked my head in for a refresher on pop culture—why bother? These stores had the same stuff as well. With a few broad exceptions, they all looked the same—but why shouldn’t they?

Any retailer with common sense has an army of experts who micro-analyze what fashionable celebrities were wearing last week, because it’s likely selling well at the mall this week—naturally, they analyze the mall sales as well. If it sells well for one retailer, all the competitors buy some, Fed-Ex it to China and mass produce it the week later. With the current information and shipping revolutions, anyone can copy anyone else’s style in days. If it works for one retailer, by the end of the week, it works for everyone. In a world without the ability to differentiate, what’s the value of a retail brand? Probably not much.

I’ve always thought that retailing was an awful business and clothing retailers were even worse. Let’s face it; it’s a business with very high fixed costs. The whole profitability rests on the ability to push through high sales per foot. Even mark-downs don’t matter; the margins are just that large to begin with. Sales are everything. In the past, you could differentiate yourself if you could guess right about the fashion trends. You would either do well, or flop horribly. Those who got it correct more often than not, made lots of money for their shareholders. If there’s four seasons a year, in any multi-year period, almost every retailer would have a horrible quarter eventually—it’s inevitable that they would guess wrong at least once. As an investor, it was quick money to buy the bad quarters if I had any confidence that the company could survive long enough for their fashion sense to return. Now, I’m not sure if anyone can win at this. It all looks the same.


What if the era of high margin retail apparel is over? In the past decade, information technology and the internet have eroded the profits of industry after industry. Why should clothing retailers be immune? Luxury brands are losing the war against knock-offs, which increasingly look like the original. Now the copying game is going down market.

There are a few true brands out there, particularly in the luxury space. But tell me, what’s the difference between The Gap, Express, Aeropostale, Eddie Bauer, American Eagle, The Limited, Ann Taylor, Perry Ellis, etc? In the more niche category, Pacific Sunwear and Quicksilver are practically the same. What’s the difference between the five sneaker stores at the outlet store? I can go on and on. Sure, there are subtle differences, but not enough for someone like me to discern. Why should any of these businesses have profitability that’s substantially beyond their costs of rent?

The amount to be spent on clothing is static in any given year. If someone gains share, someone else loses. In the past, you gained market share by outmaneuvering your rivals on the grounds of fashion. No longer is it a game of guessing the right style, where some guys can guess better. What if the battle for market share increasingly involves price wars since it all looks the same? I’m clearly no expert on anything to do with fashion, but I’ve never understood the huge margins that companies like The Gap can earn on rather non-unique blue shirts. Maybe the days of 40% margins is over because every other retailer has the same damn shirt too.

Categories: General
Positions Mentioned: none
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