Like a microcosm of the last decade – in November we went nowhere, but in a very interesting way. Kelpie returned 0.6% for the month whilst the FTSE All Share and HFRX Hedge Fund Index were down 0.9% and 1.2% respectively.
Entering the month I was increasingly very cautious. The reasons for my pessimism I detailed in my 3 Macro posts, on bank earnings and on my belief that the coming quarters are likely to be recessionary in the UK, Europe, and probably the US too. In an attempt to weather the storm cash balances floated up to around 20% as a result of the sales below – I cut a bunch of smaller positions that were not for stock specific reasons. I may revisit some or all of these names in time.
My macro hedges were increased, adding a short position on the S&P 500 and a short on the Aussie against the US Dollar. The focus of so many aspirational, post University Anglo-Saxon emigration fantasies/realities, I have been somewhat sceptical of the Antipodean dream. Anecdotal and personal experience of wage & housing inflation along with the cost of living tells me we are in a commodity dependent bubble. Would people really be so keen to move Down Under were it to officially rename itself as the effective Chinese Colony it has become?
These hedges served their purpose contributing over 1% of performance as the market fell mid month, at this point they were trimmed but, alas, not taken off completely before the month end mega rally. Much ado about nothing.
I have a watchlist, and a portfolio full of, stocks which I believe are either optically cheap, driven by extremely favourable fundamentals, dominant in their respective niches and for the most part, earnestly motivated to get the market to appreciate their intrinsic value. I would highlight Energold Drilling, Gravity, Dell and Yukon Nevada Gold in particular as stocks I view as extremely undervalued and most importantly, in control of their own destiny.
So why am I not buying with both hands? The answer is two-fold. The Shiller P/E index remains substantially over-valued for all but European indexes, indicating we will get better opportunities to buy ahead. More worryingly, the fact that I believe the range of macro possibilities is much wider than most managers are willing to admit makes me want to ensure I live to fight another day.
To quote Seth Klarman, “Why should the immediate opportunity set be the only one considered, when tomorrow’s may well be considerably more fertile than today’s?”
For the first time in decades investors truly have “nowhere to hide”. Cash and bonds earn near zero and are like dry tinder awaiting the (much anticipated) first sign of an inflationary match; meanwhile, equities are struggling through an ongoing, but occasionally stimulated, deflationary depression for the tapped out consumer which still represents 60-70% of First World GDP. In a volatile world, I don’t think it will pay to be fully invested.
British Sky Broadcasting
Investors Title Company
JZ Capital Partners
Congrats on the blog. I have really enjoyed reading it. I’d be interested to hear what Japanese equities your holding (Its an area I have looked at again and again) and what your view is, generally, on equities there? Also, what is your view on AUD? China blowup? Finally, what is your view with Yukon/Energold, is it purely about comparing production costs with market prices?
I’m ashamed to say I don’t hold direct Japanese equities. The reasons for this are two fold – I think I’d struggle to get good information on them (where would my idea generation come from?) and secondly I want the currency hedged.
I hold 2 funds – Neptune Japan Opps and GLG Japan Core Alpha both hedge all their exposure back to GBP. These guys have great track records, are benchmark agnostic and in Neptunes case, Chris Taylor is basically a macro guy which is key for Japan.
I am slightly concerned I’m missing a trick here because I know that Guy Spier, Monish Pabrai and various other value guys are finding companies trading at below net cash in the Japanese small caps. I just don’t think I’d be able to get an edge.
I have recently been reconsidering this position, it’s just not working out as I had planned – can I do better with the capital elsewhere?
I am very hopeful that the BoJ will (eventually!!) be given a mandate for change and vastly expand their current asset buying scheme. The BoJ has a program in place where it is actually allowed to buy Equities and REITS in an attempt to stimulate. This SHOULD underpin prices.
I keep meaning to do a write up on YNG or EGD but the fact is that there are a few fantastic write ups already floating around the blogosphere and I question if I can add any value on top of them!
I just think both of these stocks are trading at massive discounts to their intrinsic value. YNG has failed to deliver on multiple occasions and there are question marks over management; but we’ll have resolution soon. It’s asset backed too, it owns a very valuable strategic asset in one of only 3 roasters in Nevada – estimates put the value of it at $1bn relative to a market cap of $350m.
EGD is just a phenomenal growth story trading at a near an ex growth value multiple. It is firing on all cyclinders, revenue and earnings are up more than 100% YoY, Margins are improving dramatically as they move onto better contracts, everything is moving in their favour. The worry is that in a recession the PM Miners will pullback on discretionary exploratory drilling capex but the business has no debt so it’ll survive.
Mark Carter said:
I guess you’ve heard of a guy called Geoff Gannon. http://www.gannononinvesting.com/ He seems to be finding quite a few net-nets, and seems to be doing rather well with them. I guess the thing about net-nets is that you don’t have to think about them too much. If they’re abundant, then it’s a sign that the market is outrageously cheap, and that most of what you buy will work out.
Interestingly, though, hedge fund manager Hugh Hendry is shorting Japan as an indirect way of shorting China. He says that China is too dangerours to short directly. Japan is heavily dependent on exports to China, so if China takes a tumble, the Japan should follow.
Maybe Hendry has it right, but if Japan is as cheap as I keep hearing it is, then he’s probably making a risky bet.
Mark Carter said:
Why did you sell PTEC and BSY?
Hi Mark, it’s simple, I got nervous. I decided I wanted to cut risk/raise cash. Both were 2.5% positions and I exited completely at 270p and 716p respectively, so I got one right and one wrong!
The corporate governance and confused messaging from the CEO are worrying me about PTEC but it is just so cheap. I don’t understand why they would let such a good business keep getting mixed up in nonsense. I still stand by my write up though, it has a lot going for it.