Saturday, May 21, 2022

Quick Updates: shorts and gold

Sold all my gold at a small loss.

Overall, now I am 29.5% short vs 98% long.  The shorts are: 

  • Low beta stuff, HYG and JNK.  Easy to hold, they usually just drip down.  
  • Some higher beta stuff: Q's and IWM.  I've been lucky.
  • Some Europe ETFs bought recently.  This position is currently at a loss.
  • Plus small positions in Korea and copper miner ETFs.

Comfortable with these short positions, they partially offsets declines on down days.  I could increase it a bit, but no longer feel pressure to.  My portfolio should be OK, no matter which way the winds blow.

Saturday, May 14, 2022

Quick update: shorts and gold

I've increased my shorts, buying on the small 1-3 day bounces.  Now I'm 24% short.  Most likely we get a crash into the next month.  Lower prices beget selling, as hedge fund redemptions start, till finally everything gets sold.

So I'm still looking to short more on bounces.  We are so oversold, we could get a rally first.

I've cut my gold position, from 10% to 4%, taking a small loss.  Gold has not been doing well, even in a falling market.  Maybe its because interest rates are rising.  Maybe fear from the Ukraine war has died down (sell the news).  I don't know.   Sell first, ask questions later. 

Sometime, it will be time to buy stocks.  Don't know when.

Friday, May 6, 2022

Miscellaneous Links (Doom and Gloom Edition)

Miscellaneous points, tangential to investments:

  • Perun: Reservists and Irregulars in Ukraine: Ukraine may win the war.  Russia treats it as a 'Special Military Operation', meaning no conscripts.  Their initial invasion force was only 100K men.  Because it is a war of survival, Ukraine has fully mobilised.  Unless Russia treats it as a real war and does a general mobilisation - possibly on May 9th - the numbers will turn against them.
  • Peter Zeihan discussed Russian oil two weeks ago (starts at 10:22) describing how, if the Russians can't sell their oil, they have to cut production permanently.  4-5m bpd offline for good, and no one can replace it.
  • Which may be why WTI still has three digits, despite the current China shutdowns and US stock market crash.
  • This Micheal Pettis tweet got me thinking: If the US no longer benefits from having a reserve currency, they can stop it by banning all foreign investment.  That will instantly balance the trade deficit.  Better than Trump's trade war.  In effect, anyone holding USD can no longer buy US treasuries, stocks, land etc, and  is forced to buy US goods and services instead.  How would my portfolio exist in such a world?  I have no idea. How would Asian countries (plus Germany) - who have been running trade deficits since WWII - change the structure of their economies?

Increased My Short Positions

Been shorting the bounces for the past week, now am 15.5% short with all positions nicely profitable.  Still bearish.  The fed is tightening into a slowdown.  Like a train heading off a cliff with the fed pressing the accelerator.  

The market probably bounces next week, I'll load up on more shorts.  15.5% short is small compared to 98% long.

Theres a small chance the market crashes next week, if that happens I'll hold my shorts, not trade around them.  They are a hedge.

Real money in the markets is made by being long.  These shorts are just a trade, maybe 2-6 months, to help me survive until its time to go long again.

Sunday, May 1, 2022

Going short

I think the market keeps correcting in the next 2 months.  Maybe 6-8 months.  Economic growth is slowing, the Fed is tightening, and the market internals are crap.  Should be at least as bad as Dec 2018.  Right now its like the market has run off a cliff, but hasn't dropped.


I added some shorts on Friday's open, which are now nicely profitable.  This market cycle is my first attempt at shorting.  This piece describes how I'm trying to do it.  A value investor trying to turn into a short seller.


How do professionals short?  Risk managing shorts is tough.

John Hempton at Bronte Capital described how they do it as fundamental long-term investors.  They search for fraud.  Like companies with mysteriously high margins, or where the products/numbers don't make sense in the real world, or ones run by previously fraudsters.  These stocks can go up several times on the way to zero - sometimes ten times  - so they manage risk with a lot of small positions.  Around 50-200 positions for a short book thats 50% of their longs.  They avoid heavily shorted stocks.  And continuously monitor positions to avoid gamma squeezes.  Its not possible for an individual investor.

Short-term traders risk manage by watching the screen all day, recognising when the position starts acting against them, and cutting their losses quickly.  They might be successful with a 2-to-1 failure rate, with failures typically cut a few hours after being placed, while successful shorts run for days.  I don't know how to trade, and I'm asleep most US market hours, so I can't do this.


Why am I going short?

I don't wanna sell my stocks because:

  • We are living off the dividends (my salary gets added to my portfolio every month).
  • Inflation should drop from 8% to maybe 3-4% this quarter.  Holding cash with 3-4% inflation, is still losing.
  • The commodity producers I'm holding (oil, copper & palm oil) have not yet fallen with the market.  Some have wobbled a bit.  These stocks probably get hammered in the next few months.  But they might not.  I'm still bullish on commodities/inflation long term, selling them now to buy back later is a risk.  For oil, for example, there are good reasons why it may go higher in the next few months (starts at 10:22), 

So I'm shorting to hedge my longs.  So I can stay long for longer.


How am I doing it? 

First, I'm using Hedgeye's risk range and following The Macro Show to determine what and when to short.  Basically, they look at what has historically gone down in the current economic conditions, confirm that is it going down now, then look for times it is overbought to short it.  They trade a lot, far more frequently than I can, so I have to adapt their process for my needs.

So I've got to be more of a trader when shorting.  When I buy something, there are hundreds of reasons: the company has a moat, its undervalued, or management is god-like.  When I short, its because the price is going down.

Second, I'm only shorting ETFs or funds: index, country or sector funds.  Hedgeye's individual stock shorts are often too quick for me, sometimes covering on the same day.  And individual stocks can move too fast: better than expected (or less worse) earnings results can make them gap up.  Or maybe Musk decides to buy them over.

Third: I hope to hold these shorts for a few months, or until the market turns.  Won't be doing much trading in and out, since I'm not a good trader, even when I'm awake.


The main lesson I've learned is how fierce bear market rallies can be.  I shorted Q's in March.  QQQ had been dropping a while and was overbought, it was a good day to enter the short.  But it moved against me:


It was a 2% position, which was too big for a volatile instrument like QQQ.  Should have started with a 1/2 percent or 1% position, then added to it if it moved against me.  Need to keep my short positions smaller half the size of my longs, and remember that bear market rallies can rip your face off.

Right now my positions are:

  • 98% invested in stocks (....the 2% cash is my last few month's salary).  Around 80% in low beta dividend payers, the remainder are commodity producers.
  • 10% invested in Gold.  Yes, on margin.  Gold should go up when the market falls.  
  • Offset by a total of -8.5% short positions.  Q's, Russel and Junk Bonds. Half these were added Friday.   May add more country shorts, eg: Korea, HK, Europe.
This piece is all I know about shorting.  If you've got this far, you'll realise I don't know much.  Its more a learning experience and probably too small to be a serious hedge.  Maybe it gives me some extra pocket money to buy more shares after the market has crashed.



Friday, April 29, 2022

Atalaya Copper

Atalaya is a small, copper miner, producing from a single mature mine in Spain.  Its listed on AIM/TSE.  Mkt cap is around 700m Euros.  I was attracted by the dividends.

Operations

They have been producing from their Cerro Colorado pit in the RioTinto mine near Seville (south Spain) since 2016.  From their 2022 production guidance (15.5Mt/year) and Proven Reserves on their website (128Mt @ 0.41% cutoff), the mine has 8 years life remaining.  Their June 2021 reserve estimate gives proven reserves of 139Mt @ 0.38% Cu, estimating a 12 year lifespan (ie: 11 years from now).  So this mine's lifespan is somewhere between 8 and 11 years.

They have new mine (Touro) in the north of Spain undergoing permitting. This has half the reserves and roughly half the potential production of Cerro Colorado:

And like any mining company, they have a number exploration projects ongoing.  Most are surrounding RioTinto:

Finances

The finances look simple and clean.  Normal looking income statement: 


They were profitable in 2020.

Low debt, net cash position.

They declared their first dividend late last year, and plan to payout 30-50% of free cashflows this year onwards.  The (annualised) yield based on that is 8.6% (at a share price of 4.50 GBP).  And that was 45% of earnings.  Can't extrapolate that into the future since it all depends on the copper price.

Risks

They are producing from a single mine.  Anything that goes wrong there affects their entire production.

Cerro Colorado only has an 8-11 year lifespan.  Production should start soon at Touro, but this is only half the size.  They need more projects to work out, just to replace Cerro Colorado.

Not much Geopolitical risk.  I like to own copper production away from Chile and Argentina, who are raising resource taxes.

I think Spain's gonna have a currency crisis and leave the EU, but that doesn't affect mining.  And I think Spain is not as safe a jurisdiction as Canada or Australia, but its better than Latin America or Indonesia.  With mining you can't be choosy.

Misc

Spain has a 19% withholding tax.  Should be 5% for Singapore residents (p7), but I'll need to see what Interactive Brokers charges.

I got this idea from an 2021 interview (paid link) on CruxInvestor.  He starts talking about Atalaya's projects at 22:00.  Dividends and acquisitions/mergers at 27:00.  Expansion at 39:40.

Conclusion

Production is from a single mature, low grade mine.  Sustainable for 8-11 years.  They are profitable by running it efficiently.

Their long term future depends on bringing on production from the areas surrounding Cerro Colorado.  This ends up being a binary event - either one of them works or it doesn't.  There is a lot of luck in mining.  The most likely place to find new reserves is next to an existing mine.

Saturday, April 23, 2022

Quick notes on Woodside Energy (ASX:WPL)

Largest Australian LNG producer, with long-life conventional projects.

Its a well-covered blue chip, so no point over analysing it.  I just want to get a feel for their risks and numbers.

GeoPolitical Risk

Very low.  All 2021 production and 94% of their 2P reserves were from offshore Australia.  So its is safe from any wars/revolutions in Russia, Asia or the Middle East.  About half their 2C gas reserves are in Canada, and they have some development in Senegal.

Some China risk.  30-40% of Australia's LNG exports go to China.  Probably the same proportion for Woodside's.  If China attacked Taiwan, these would need to find a new market.  That event would probably tank the LNG market.

Some ESG risk: In 2021 19% of Woodside shareholders vote to "manage down" oil and gas production.  Australia is pretty woke.

Reserves

After dropping for the past 7 years, 1P and 2P reserves doubled in 2021, the increase being transferred from their 2C reserves (p56), almost all of it to due to first time reserves classification of the Scarborough development (West Australia) (p145) (p26).

Taken at face value, they have 12 years of 1P gas reserves remaining.

Balance Sheet

Net debt is low at 3.7bn.  Less than 1X 2021 EBIDTA (a good year).  Or 2X 2020 EBIDTA (a bad year).

Historical Cashflows

They paid high dividends, even in 2020's downturn.  I'm a bit uncomfortable with this.  I did the numbers below to get a feel for their last past 10 years' cashflow generation, capex and dividends.

CashFlows from Ops are usually greater than Cash(out)flows For Investment.  The yellow line is usually positive:

Dividends are high, based on 50-80% of NPAT.  No relationship between cashflows generated and dividends paid out:

Over the period, the average annual cashflow generated (CFO-CFI) was 1.2bn  The average dividend paid out was 1.1bn.  So they paid almost all cash generated as dividends!

These dividends are a little high and could be better used for growth.  But they are probably sustainable - its not a ponzi.  I just dislike cyclical companies that pretend to be something they aren't.

The latest 2021 dividend of USD 1.35 is 80% of NPAT.

BHP Merger

The proposed merger with BHP Petroleum, if done in Dec 2021 (pro forma), would have:
  • Almost doubled the number of issued shares (up 95%)
  • Not increased debt, but added a 4.1 billion provisions (restoration, I think)
  • Increase 1P reserves by 62% (in MMboe - however BHP's reserves are 'oiler', at around 30% oil) (p235)
  • Changed production profile to be 'oilier': up to 30% oil.  Also change production profile from 100% Australian to 15% GOM and 5% Trinidad and Tobago (near Venezuela) (p238)
  • Increased CFO from 3792m to 6314m (up 86%).
  • Increased CFI from 2941 to 4042 (up 37%)
2/3rds of BHP's assets are in GOM.  These have a 20-30 year expected life.  Their Australian assets have a 10 year lifespan (p151):


They expect 400m pre-tax savings annually (p226) in 'synergies' which are not part of the pro-forma numbers above.

From the numbers, I'm guessing the merger maaaaayyy be OK for Woodside shareholders.  If they get their 'synergies'.  They are both Australian companies, so no culture shock.  BHP is a motivated (maybe irrational) seller.

Capex and Production Growth

For Woodside, the term capex means "Cashflow from Investment".

I couldn't find much.  Best I found was 2019 (pre-covid) slides expecting a 2021 peak in capex of 4-5bn (slide 39):

With ramp ups in production volume till 2024-2026 (slide 9):

Actual 2021 CFI was 2.9bn.  Looks like a lot of investment has been pushed back and is still to come.

Presentations and transcripts in 2020 and 2021 don't give long term capex targets, they only give them for the following year.  2022's capex is expected to balloon to 4bn (excluding BHP's assets) (p24).

Conclusion

Blue chip company paying almost all its cashflows as dividends.  I think it will diversify my energy stocks, adding production from a low risk part of the world.

I'll add this to my watchlist.  Not buying it now cause I think the market's going off a cliff in the next 3 months.  And there's a chance that woke BHP shareholders dump their unholy fossil fuel shares once the merger goes through on June 1st.

Misc

Australian WHT on dividends to Singapore residents is 15%.

The main business problem the company has is a rising AUD and costs, if the commodities boom continues.