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Have We Got a Long Way to Run?

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:

  1. Transferring the bag, i.e. – shifting shares to public float, insider selling, loading up on debt, special bonuses and payouts to executives, etc.,
  2. 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,
  3. 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
  4. 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

https://www.youtube.com/watch?v=P9oC_goIX8I&feature=youtu.be

Danielle DiMartino Booth with Jeffery Gundlach

https://www.youtube.com/watch?v=WQQA74TtWao

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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.

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Antepenultimate Day, aka Sunday

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:

https://megaphone.link/SA6350053602

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.

https://www.aljazeera.com/news/2020/05/iran-warns-disrupting-fuel-shipments-venezuela-200517194044512.html

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.

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Oil Tanker Trade Update

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.