It has been a long time, blog. It was just over one year ago, amidst the market chaos following the pandemic shut downs, that I first wrote. It was a scary, exciting and [insert an adjective much stronger than ‘strange’] time. It has been about eight months since I last voiced my thoughts into the internet void. There are a lot of reasons for that, but the main one is that I only had the same thing to shout each day: This is a stupid market. And to say so little, I could just shout that on Twitter each day at the market close.
During my blogging silence, the world has not, from my perspective, become less scary, exciting or [whatever word you used that is much, much stronger than ‘crazy’]. I, on the other hand, have had to adapt. I am now seeing things in a much more enlightened way. Now I can see that everything is fine. So, let’s have a look at the financial news then…
It is eight thirty in the morning on Thursday, and I am at the store. I have read a few paragraphs of financial news and so, am fired up to write about my indignation. Here is the object of my disgust:
Taking it from the top, here is where I have issues:
Thursdays are big days for economic data, true. And equity markets were up strongly, true. Lower interest rates are not bullish. A bond rally and a stock rally are incompatible in the wild.
A surge in consumer spending fueled by government direct payments is not really a positive. Depending on where one stands along the communist/capitalist continuum philosophically, one could even think government involvement will attenuate a bad situation.
I will go and check to see, but my guess is a 10% climb, whether from the prior month or from the year earlier (which would be the first month of the lockdowns), might not be too strong of an actual, nominal increase.
A decrease in weekly INITIAL jobless claims is a reason for optimism, yes. Not knowing if the improvement is due to economic activity in the real world or just government incompetence is not as hopeful a thought.
And finally, INITIAL claims were still 576,000 NEW CLAIMS. DOWN FROM 769,000. THESE ARE NOT POSITIVE NUMBERS.
I’m sure this market is super smart, and everything is fine.
It is ten minutes after one in the afternoon on Sunday. I am at the store. Last week was an exciting one in the markets, with many S&P cos reporting earnings including all of the tech giants. Readers may recall I had a small speculative bet on silver, with option expirations on the 17th, which I wrote about here: http://rwhadvisoryllc.com/animal-spirits-or-spirit-animal/
Sadly, my calls expired just as the trade was coming into the money, but I did get shares put to me as the price crossed $19 and have enjoyed the gains on the way up. I maintain my long position in silver and continue to accumulate physical at the store. I don’t really have a price target at which I will sell. I view this, like gold and #bitcoin, as an easy trade for the foreseeable future and will probably only sell for reasons of necessity. If we see $48, I will probably take some profits and reallocate. Recall that I took only a very small position.
I should also follow up on this note I posted in between blog entries: http://rwhadvisoryllc.com/note-to-self-when-to-sell-dollars/ . Since then, the dollar has, in fact, dropped below 94.5. In fact, is reached about 92.64 before turning around to end the week at 93.46. I have dutifully reviewed my dollar long position and left it in place. I have not previously disclosed or discussed my dollar long position, so let me start with that.
I am fundamentally in the camp which says the dollar is going to go up, and will become very strong, i.e. the deflationary camp. I have found strong thinking on both sides of the inflation/deflation debate, and I squirm a little knowing how smart some of the people are saying that the dollar is crashing, but when I weigh these arguments on my own scales I have assayed that the dollar will experience a very strong rise before any final capitulation, should final capitulation occur. Also for the record, I think final capitulation will occur, just not now and not next. For insights into one of the strongest influencers on my long dollar thinking follow @jeffsnider_aip on Twitter and watch his Eurodollar university series on youtube: https://youtu.be/P0q7W9Hqk0M
But that isn’t the only reason I went long USD. I am thinking of it as a little bit of a paired trade with a bullish spread on CVX. I think we will be seeing some real volatility in oil over the next 12 to 36 months, ultimately with much higher overall prices. CVX, which was hammered after a negative earnings report last week, is a business I am familiar with and have traded or owned in the past. I expect the volatility in the dollar to show its reflection, both positively and negatively, in the overall stock performance of CVX. In the longer term I am expecting to shed my dollar long, and in the meanwhile look for gains and losses to partially off-set between these two trades. I don’t expect it to be a very direct kind of hedge. Just a little bit of a paired trade. I will be looking for USD to reach at least 104 before I think about selling.
Here are the details on my CVX spread:
I was able to spend some quality time with the earnings release by NRZ this week, but since I have already carried on quite a bit, I will post my thoughts separately. PennyMac will release earnings this coming week, currently scheduled for August 6th and I am looking forward to hearing what they have to say. Broadly, for this group of companies, my themes are:
Transferring the bag, i.e. – shifting shares to public float, insider selling, loading up on debt, special bonuses and payouts to executives, etc.,
The attendant pumping behaviors that go with (1), above, especially an emphasis on the current and next quarterly outcomes, which will all be very strong, a reluctance to recognize known or knowable costs and impairments in the current period and an unwillingness to acknowledge the potential severity of our current economic situation,
The lack of self-awareness, avoidance or denial of the fact that huge profits are currently being privatized at the cost of taxpayers due to government manipulation of the markets and nationalization of mortgage banking risk, while privatizing profits, and
The structural weakness and obsolescence of residential loan servicing and correspondent lending as activities at all.
I will look forward to digging in deeper on those themes this week. Meanwhile, stay informed with these two fantastic podcasts from this past week (I am not compensated in any way for posting these links):
Pomp Podcast #351: Roger Ver on Personal Freedom and the Early Days of Bitcoin
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Final thought, and it is a difficult one: as of August 1 we had about 155,000 covid-19 related deaths in the United States. This has played out almost exactly as I had guessed when I wrote this: http://rwhadvisoryllc.com/another-blog-post-about-covid-19/ . Now we can see with hindsight that it has coalesced in the public consciousness only very slowly, and in the face of unimaginable denial. And arguably, sadly, this amount of death has not yet been sufficient to fully bring about that coalescence, as politicians, press, and common people all battle over every aspect of the disease and our response, leaving us without a uniform plan. Have we got a long way to run? Yes.
It is quarter-to-eight on Tuesday, and I am at the store. Just a note to myself that a 94.50 on DXY means I need to re-evaluate my bull case for the dollar, in the intermediate term. Totally normal to think this at quarter-to-eight on Tuesday.
It is about ten o’clock in the morning on Sunday and I am at the store.
There is a cute scene in the 1981 Disney classic “Dragonslayer” which I am reminded of often now. The story is a classic knight-saves-maiden-from-human-sacrifice tale, with our maiden selected from among the virgin girls to be fed to the dragon for the greater good. The scene I am reminded of takes place the evening before the scheduled, ritual feeding-to-the-dragon, and the knight, Galen, will almost surely be killed as he readies to face the dragon in its lair. Oh, if only there were another way out of this terrible dilemma for them both. The film makers of course are very aware there is another way out, and there is a little moment in the film to acknowledge it in an unspoken way. It’s cute. I keep having that same feeling as I listen to different podcasts and financial news outlets ponder the US dollar’s reserve currency status, where I think: ‘awe, isn’t that cute? They are talking about bitcoin but we are all playing it coy for the kids and not saying bitcoin. So cute!’. Of course, plenty of the pods are saying bitcoin, but the closer one gets to what I think is fashionably called the middle of the Overton window, the coyer the discussion. Just like movie theater audiences will invariably think to themselves (and one or two will invariably yell out) ‘Galen and Valerian should just have sex, then she won’t get sacrificed!’ I feel like yelling into my phone at these interviews: ‘oh, yeah, and there is already a politically neutral, high-functioning alternative with a booming financial services eco-system growing all around it!’. But they know that.
When I hear the discussions about secular transitions from deflationary to inflationary episodes, I have the view that bitcoin brings a lot of gravity with which to affect the process. So, within a framework of dialogues where participants seem to agree, more or less that 1) there will be a big impact from monetary and fiscal actions, 2) that impact should generally be negative effect on USD’s relationship with world trade, that 3) the timing and severity of the negative impact are ameliorated, domestically, by USD’s status as the pre-eminent global reserve currency, and 4) that the transition away from dollar denomination hinges on the lack of an alternative, it makes me think of Galen.
For those interested, I can think of two places where I have recently heard some strong discussions about macro trend shifts, where the discussion of USD’s global reserve status seems to blush toward bitcoin. Both are on Macrovoices podcast. One of those I mentioned previously on Twitter, where you can follow me @goodfindstores Check it out here: https://twitter.com/GoodFindStores/status/1265462553011871744?s=20
The other is a Macrovoices episode I listened to just last night. Check out guest Harley Bassman at about minute 41:00 as he gets into explaining the dynamics he thinks will impact the secular transition:
I mean, he even says “there is no plan B”, as if a coy nod to the prominent analyst, thinker and writer from bitcoin Twitter, @100trillionUSD, and all of the bitcoin community.
Mentioned in this episode are a couple other themes I am following, and which are coming up more and more. The first is the idea of investing in art, jewelry, and other stores of value as a hedge against the risks of holding cash during an inflationary episode. It just gets a passing mention in this episode, but this subject is very germane for me since I am naturally long both fine art and jewelry through my resale store. I think antiques will also see a resurgence, if not for their value as decor, or utility items, then for their scarcity of material and construction. The second is the spread trade Mr. Bassman talks about putting on the SPY, to get strong trading leverage on a macro thesis in this messed up market. These are the exact kinds of trades I have been using to deal with the environment, and my speculative objectives. I think even my most recent post about SIVR fits this model of trading, which I wrote about here: http://rwhadvisoryllc.com/animal-spirits-or-spirit-animal/ . So, nice to hear such an experienced voice advocating the strategy I have been using. I have been hating the high cost of premiums on SPY, but maybe will fish around there and some other broad indexes for an appropriate spread trade when the markets open tomorrow.
It is about twenty minutes after eight in the evening, and I am at the store. This morning while doing my financial markets reading, I was caught up in the animal spirits. I made my usual, daily entry in the record books that the market is stupid; it was another nice up day, of course, because now those are the only kind. And I read a few pump articles on Seeking Alpha about one of my favorite subjects: silver. Gold looks like it is trying to push and stay higher. Like I said, animal spirits. So I have made a little wager on the potential for a silver rally between now and July expiry. Here is (approximately) the trade:
I have a real hate for this market, and see many areas of weakness that beg for shorting, but with interventionism and the potential for truly major currency issues, this small, short-time frame bet in a familiar category was all the more animal spirit I could muster. And for the record, I only did this trade 2X, so sold 2 of the puts, etc. Come July expiry, if it has not paid off, I will seriously consider rolling the trade, just because I think this is a thing that is going to happen.
What sort of dynamics might the turbulence of the current climate cause in the silver markets? If there truly is a ‘V’ recovery, and industrial demand for silver recovers to pre-covid levels, will there be a supply crunch due to mining interruptions? What if industrial demand does not recover? Glut, and price crash? Could consumer demand off-set significant decreased industrial demand? Will silver ever have a place on the currency, collateral or savings technology spectrum again? Will we have major, state-sponsored infrastructure and industrial spending initiatives as a part of this cycle, which will fuel demand for silver in the longer term? Most of these questions can’t be answered within my option period, but silver continues to feature in my thoughts for its potential.
It is about ten minutes after eight and I am at the store. Last night as I was loading inventory I listened to the most recent MacroVoices podcast featuring guest Ronald Stoferle. They covered many topics of interests, and the entire pod is worth a listen, as Erik’s always are. Check it out here: https://www.podbean.com/ew/pb-9q83q-de0932 . But the comments about silver had me checking in on the trade. I hadn’t been watching the silver trade very closely. Since I last wrote about silver on April 27, here, http://rwhadvisoryllc.com/silver-update-the-world-silver-survey/ when the closing spot price was $15.15 the metal is up 22% ending May at $18.49. Looks like it has taken a dive again so far in June, currently trading at about $17.99 as I write. Silver will continue to be an interesting part of the macro and monetary story, I believe. My take-aways? In the World Silver Survey the authors talk about and average silver price for the year of about $15.70 and a peak price of about $19. I would say so far their thesis is intact. Secondly, experts often talk about silver as gold’s volatile cousin, or sibling, or similar. I think in the MacroVoices pod I reference about the guest refers to silver as ‘gold on steriods’. During approximately the same time period (month of May) gold was up about 1.7%. I find May illustrates silver’s relative volatility.
Since I have my resale business, I continue to accumulate physical silver, but have not revisited a trade. I still have exposure to silver through my CDE trade (if you missed it you can read about it here: http://rwhadvisoryllc.com/one-of-the-days-in-quarantine/ . I am comfortable to continue in that fashion, as far as silver goes.
I have much, much more to write since last publishing. Coming topics will include:
Writing my own shitcoin on the Ethereum network
Orchid VPN
CA AB 2501 and reason # 47 on why MSRs are a liability, not an asset
Securitization of personal property and collectibles, or tokenizing them (ah…a peak at some of the thinking that went into launching Good Find Stores?)
So, getting this half-blog posted now and will return soon with these other topics.
Final thought: I had a former friend and colleague reach out to me the other day. She had seen my work anniversary notification on LinkedIn, and checked my profile. We haven’t spoken in about five years. She asked “Looks like you are consulting and doing retail?!” The way I would say what I am doing is: I am building and buying businesses that interest me, and align with my long-term macro thesis and providing business planning, management and operations services, but only in exchange for equity-based compensation. But yeah, if you took a snapshot, I am totally doing consulting and retail. Specifically resale retail, which is an important distinction.
It is about ten minutes after four on Sunday, and I am at the store. I have a few thoughts to add to my blog ahead of penultimate day tomorrow on the May crude oil contract, so that is why I am here, roused to action after my nearly two days of torpor.
As we round the corner into the May oil contract expiry, the consensus appears to be that settlements will be more orderly and there will not be a repeat of last month’s eye-popping negative oil prices. My trades for on-the-water storage have retraced, but I still have conviction. Regardless of an orderly match-up tomorrow and Tuesday between paper and physical, storage on the water looks to me like it is going to be around for a while, and the tanker companies still look positioned to print money from it for a good little bit. My trades last until the October expiry for NAT, so I don’t need to worry if nothing exciting happens with May deliveries. For my FRO trade, I am good through June and can look ahead to Q1 earnings and estimates as a catalyst, currently scheduled for May 21st.
There have been a number of signposts along the way to help me get conviction that the storage trade will play out, including this one I just saw from @chigrl:
There has been plenty of additional discovery in support of the trade and it does leave me a little baffled that the tankers aren’t already doing better. Here is an interview with Frontline CEO Robert Macleod:
I found it informative, and the three things I took away were 1) I think he actually kind of giggled, at one point, when talking about the charter rates they would be reporting when he is allowed to disclose earnings, 2) charter terms are extending, which I felt might explain the leg down we saw in charter prices, and 3) he acknowledges that there will be a pendulum swing in the other direction, sometime early next year, when tankers have offloaded to land storage, but supplies are still excessive causing a dearth in shipping and significant excess capacity. In a world where you think the market is a forward-looking discounting mechanism, like they taught me to say in college, you might think this third point could explain the retrace in my tanker trade. As I said though, I retain conviction.
I am compelled to add this link, which I was listening to AS I WRITE. I just click-holed through to it and have never heard this person before, but I had literally written “I retain conviction” at about the 19:30 point in this podcast (see about minute 24:30ish), and I also love that he trashed on Nordic American (NAT) which was my exact trade last month (which I made very much on the fly without real research). Also appreciated his comments on the relationship between equity and debt. Agree with his position that equity benefits when debt is retired. Debt holders are betting against equity. They are enemies, IMO, from an incentive standpoint. Anyway, appreciated his thinking and delivery, so following him @JohnPolomny to learn more. Final note: disagree with the diminutive euphemism he uses for the global health crisis.
One last thing to mention, not so much because I think it impacts this specific trade, but certainly I think it is an important development in the macro-trade: these tankers from Iran going to Venezuela.
I am haunted by the sense of theater I feel behind the actions of pretty much all participants. I don’t think it leads to solutions. Not solutions with a Nash equilibrium, anyway. More like the solutions you get in the school yard when the grownups aren’t looking.
Is it time to double down on the oil storage super contango bet? I have been doing my market and macro reading and listened to the MacroVoices update on oil contango and the storage crisis. My NAT options have retraced to $1.25. These are October 2020 expiry with a $5.50 strike. Currently up 100%, but that represents a very significant retrace from the high, and the options are still twice as costly as when I bought them. My polestar on matters oil, Erik Townsend at www.macrovoices.com, has just acknowledged evidence to support the storage crisis may have abated, due to aggressive well shut-ins and capacity created by decreased tanker spot market activity coming out of the Middle East. The May contact expiry is next Thursday, with last trading day on Tuesday the week following. It is a short time to have exposure, and the time spreads have narrowed significantly. I think it is worth a little more exposure to the possibility that the markets are bluffing on storage capacity. I have looked around at some other tanker cos, and I am decided to go long Frontline (FRO). Here is my trade, which will see me past the Q1 earnings release on May 21st. I feel pretty confident that they will be reporting some pretty eye-popping numbers from oil on water storage:
It will be an interesting stretch of time with the coming expiry of May oil contracts, and then the Q1 earnings. Time will tell. I’m excited to learn.
It is still May 6th, and I am still at the store. It is now about twenty minutes before seven in the evening. I want to write a few words about PennyMac and earnings tomorrow. Obviously, with my history with PennyMac and its management, my views on the company are plagued by biases. Those biases suggest the company operates at a constant deficit in human and intellectual capital which will impede even a successful strategy. And my assessment of the company’s strategy is basically this: PennyMac is not a company built to last. It is a company built on the oldest models for the purpose of exploiting the institutionalized business of mortgage banking. It exists to profit to the very fullest extent possible before the inevitable collapse of the current, anachronistic (and I would add anti-competitive, socialized risk) model of the industry. I don’t judge that as a wrong-headed thing to do. In fact, it cannot be argued against, if one looks at the financial performance of the company so far. I am saying the company is purpose-built, and that purpose is not to lead an industry into the future, but to seek the available excess rents while they exist. While one can chalk up my views of management to the bitterness of a failed work assignment, I think this strategy assessment stands up to scrutiny. If one considers the start of the company, where its money came from, what other business interests that same money had and has in and around the same industry ecosystem, who the leadership team is and what their backgrounds are, I think there is a good argument to say I am right. Time permitting, I will expound more on these questions of origin and interests.
PennyMac’s planned obsolescence is not its only weakness at this point in time and this point in the economic cycle. Or perhaps even because of its mission, it is concentrated in businesses I think are especially vulnerable to sudden disruption, by intervention or by market forces. Specifically, I am talking about correspondent lending and residential mortgage loan servicing. I view these as obviously fragile businesses that are capital intensive and valueless. Again, I will certainly be expounding on these subjects in more detail in the future. Add to these the latest developments in credit risk securities esoterica, financed with leverage, of course, and gorged on by PennyMac and I just could not be more bearish.
Still, is it enough to have conviction for a trade? No. I just don’t have enough insight to say what the trade will be for tomorrow’s earnings. I am on the sidelines, eager for a look at whatever the public docs say and don’t say. Even if I thought I had insight into financial under performance, in this climate of Fed intervention, I’m not sure it would matter. Everyone is getting a bailout if they are big enough to have lobbyists. And PennyMac minds its Washington connections.
If I could share one tradable insight, it would be this: During the first quarter founding partners of the company, acting in coordination with it, took actions as disclosed in published 8-Ks, to dis-invest about 35% of the company’s equity, transferring it to public float. People will argue that these sorts of actions get planned well in advance, and many features of the economic landscape could not have been known by the investors and management at the time the decisions were being made. My point would be that it doesn’t matter. The founders had an exit planned when they went in, and they are beginning to exit. They may be very happy/lucky that they transferred their ownership and its attendant risks to the public just as the markets were about to collapse (and arguably, just as the old model of the mortgage industry is about to disappear). Maybe it is just good fortune. But keep in mind, many sophisticated investors have been aware of the potential impacts of the coronavirus since December, or possibly November of last year. This is doubly true for investors who are well connected politically or who have global financial interests. Even putting all of the pandemic to one side, as though it never had happened, the macro-climate was already in serious distress. Fed interventions have pre-dated the coronavirus by many months. I can easily imagine that the founding investors saw the sun setting on the business model and started to execute their planned exit well before the virus. It was just time.
I don’t know how bad tomorrow’s results will be, or maybe even they will be good. But the rats are leaving the ship. It won’t be staying afloat for long.
Parting gift: another #bitcoin meme that made me laugh over and over… https://twitter.com/i/status/1258070598225408001
