bz1516

I'm going to make the case that dry bulkers are the best resource play for 2014. China is still growing rapidly even if at a somewhat lower rate of growth. That means more shipments and longer distance transits. China now accounts for than half of worldwide demand in a number of commodities. All this benefits shipments. At the same time there has been a supply response notably in iron ore and other commodities that favors shippers, even while prices are under pressure hurting miners. I like BALT and SB. All ships rise with the tide in shipping. Its a macro play that requires minimum effort to separate the ones you want to own from the rest of the pack.

I'm up 49.7% for the year. It was the first year I decided to only take positions in my high conviction ideas and let the percent of nav invested fall where it may. That resulted in averaging just a little over 50% long and about 7% of nav short. Am not temperamentally able to go to really large positions at this point. So the risk adjusted return was very high, but not by intention. Biggest winners were MCR.v and OCN, but also did well with BALT, SB and EH.to. Limiting losers was a very big factor, but that may have been just luck and a cooperating market with the largest loss 0.5% of nav. Right now only 40% long and ~8% short. Really would like to have more long ideas, but nothing looks good right now.

What do you do about the borrow on RVLT? I shorted it briefly and quickly covered; the borrow seems crazy expensive and the chance of buy-ins might be high. (I use Interactive Brokers.) The problem with selling calls is that you are still somewhat exposed to the cost of the borrow. If the stock goes up and the borrow gets expensive, the counterparty may exercise their call early to collect the borrow. This happened with Tesla. I'm obsessed with short selling but almost every trade looks crowded right now. 2- I've written about the dangers of short selling common stock here: http://wp.me/p1mOGr-y8 Nice article on your blog valuetrap! Last I looked the borrow at IB was ~30%. Thats high but there are two mitigating factors. I plan my shorts around events like quarterly reports to limit the amount of time unexpected news can screw up a short and in the case of high borrow fees reduce time held. Also when the stock price drops, so do the borrow fees so 30% can be reduced to say 10-12%, which is nothing on a stock with the implied vol. of RVLT. Sometimes planning to sell short too close to the news can be expensive. I spotted the Poseidon fraud in august, but being very cautious and not wanting to lose money on the way to zero, decided to sell it short on Oct 15. Unfortunately it became impossible for me to short it on the TSX a week before, and I never got the chance. At least I sold out my massive long at a nice profit.

I've had good luck shorting deep ITM calls. Otherwise I usually just short the common for liquidity and transaction costs purposes. Have had poor luck with pair trades and don't do them anymore. The problem with them is you have to be right on two stocks and the odds increase sharply that something will go wrong with the trade when there are two names involved. To me the most important thing about shorting is the kind of situation you short. I usually only short stocks I know as well as the industry analysts which are usually small caps or stocks I identify as civil frauds. I like civil frauds because the managements are constrained by a set of rules to keep themselves out of jail. I want the stock to be fundamentally obviously flawed in one way or another. that's the commonality of the two categories. RVLT and LYSDY are my two favorites right now. I avoid the large caps. I don't see what kind of edge I could have playing against armies of Ivy League B school grads that follow those companies.

For me, dry bulk shipping stocks are more like a momentum trade now and I am not very optimistic about its fundamentals and 3-5 year outlook. In fact, I was quite surprised by the MS report (seemed to fly contrary to what I have known for the past 1 yr and reinforced my skepticism towards sell side analyst reports). But then again I am constantly reminded of the quote from Maynard keynes - "The market can stay irrational longer than you can stay solvent" Here's a different view - http://gcaptain.com/alternative-view-morgan-stanleys/ You may also want to read this http://seekingalpha.com/article/1849921-diana-shippings-ceo-discusses-q3-2013-results-earnings-call-transcript?source=yahoo Its not just Morgan Stanley, but Jefferies and several other houses that have weighed in with industry buys since the Jefferies report, before the MS report. Some of his points I can't dispute or affirm one way or the other, but the ones where I have some knowledge, I don't agree. I think he's reaching on the iron ore for example. China he just is wrong and doesn't seem to have much knowledge of their economy.

I almost posted on two of the dry bulkers I own, SB and BALT but in thinking about them I realized there is a more speculative nature to them than EH which I chose as my highest conviction position. Of course SBLK and these will move up and down together, based on the health of the Chinese economy. So they all will rise or fall together based on the macro environment. Those that are the most leveraged, the most financially insecure, will move up the most and of course move down the most in the event of a decline in the dry bulk market. I like SBLK after reading the MS industry buy report recently but do not know it nearly as well as some of the others. It may be time to start moving away from the least leveraged bulkers and add maybe a name or two with a little more leverage, without getting to the high leverage of an EGLE or a GNK. Those that have the most exposure capes are the most exposed to the momentum in the iron ore market. Imo that is a good bet as any drop in prices there will increase shipment volume. This is kind of a natural hedge. Its definitely the time to move away from some of the names with long term contracts like DSX a NMM to those that are more exposed directly to the BDI and short term time charters. Its hard to know what to do right now as all these names have moved quite a bit, but the outlook in China continues to be very strong and the new build situation can't come into play until 2016. One analyst looks at new build prices and prices on older ships and believes that owners won't flood the market with new build orders until the price of older ships hits 80% of the value of new builds. If that is correct then the earliest we are likely to see a supply response would be 2017 or 2018. Thats more than enough time for these stocks to travel significant highly from here.

I like EH, TSX. Lots of confidence in high growth earnings forecast after new concept loan stores have been extensively tested in the field. They now have 43 of the new concept stores.

At close to 2x BV its priced in a lot more growth than companies with a lot better records. As is typical in the insurance sector there are delayed reactions to turnarounds which are quite visible. Very little in top line growth in the last 4 years. I see it as worth about half its current selling price. If there is a new secret sauce its not visible on their website. I'm a little baffled why its so high priced?

EPS growth rate for last few years would be very impoortant. Portfolio offers chance for increased profitability in future.

If you want to hone your short selling skills that's the first question you should ask. What you come up with is the first step of the journey in that direction.

Since my first message in this thread where I reported on my position in BALT I've since taken a position in Safe Bulkers, SB. Whereas BALT is completely leveraged to BDI spot with heavy exposure to Capesize, SB is somewhat less exposed to BDI spot and more exposed to Panamax and smaller sized ships. Dry bulk shipping is driven by BDI spot and time charter rates, which are in turn driven by the Chinese economy and expected increases in shipping capacity. Its cyclical as some value plays are, but we appear to be at the beginning cycle.

The performance of these funds is dependent on the volatility environment they operate in. In periods of extreme volatility they will decay rapidly along the lines that the standard narrative on them describes. However in periods of low volatility the decay is more or less inconsequential. The pattern of volatility is also very important. In the current period of very low volatility there is no reason these funds cannot be held for long periods. A rule of thumb I use is they are safe to use if the VIX is below 25 and unsafe if the VIX is above 40. The VIX is only loosely related to the kind of volatility that cause these funds to decay so it is truly a rule of thumb and not a clear rule. The point being the value in holding the fund will be greater than any decay if the VIX is below 25 and conversely the decay will outweigh the intended value of the position if the VIX is over 40.

Met coal has the headwind of a huge supply response coming out of Outer Mongolia, not to mention Inner Mongolia which has also increased production. Thermal coal has headwinds in the US and China. In the US ng delivered prices are much lower than coal. In both the US and China environmental considerations make it the energy source of least choice. In China most of that smog comes from the burning of coal and charcoal. Its not clear what the new leadership will do about it. In China you used to see mostly women wearing protective masks. Now the number of people wearing masks is much larger and its men also. there are other commodity plays which would not have such big negatives to overcome.

I'm all over the lot, depending somewhat on where we are in the cycle. I tend to go back and forth between micro caps and small caps and between deep discount to BV and moderate premiums. The only stocks selling at deep discounts to TBV now are insurance stocks and most of those are reinsurers. The largest cap stock recently has been OCN, about $5B. I prefer to stay away from stocks with sell side analysts, but that seems to run in cycles as well. I think you give up too many choices with just one set of parameters.

I took a position in BALT, not too long ago. BALT has a decent b/s and safety and lots of upside as well. There are some shippers that are highly leveraged and carry substantial risks, while others like NMM and DSX have comparatively little risk, but will not participate when conditions become favorable again. I think there is a moat for shippers.. Its just that it lasts only 2-3 years. So best to get in early and not overstay. Dry bulk shippers are my preferred way to play China. You have to like aggregate demand in China to buy shippers. Jefferies recently put a buy on the group.

I just got back from a trip to china. While there I took a side trip to Ordos. Ordos you may recall is China’s infamous “ghost city”, the city for 1 million never occupied and a symbol of China’s overbuilding. Amazingly this mall was quite crowded. There were a couple thousand people crowded into this mall with over 100 restaurants the day we visited for lunch. The mall here stands in stark contrast to the picture painted by Jim Chanos and others of a country plagued by overbuilding, ready to collapse of its own weight. My purpose in visiting Ordos, on what was really a personal pleasure trip to visit my daughter who works in HK, was to see first hand what Ordos, the poster city of overbuilding in China, was really like. That as it turned out was not so simple a task, as there are in fact several Ordos’s in and around Ordos. There is the new city of Ordos, the ghost city. There is the original city spelled Erdos, but which is also called the Dongsheng District. Then there is Ordos the greater area that would be the size of two or more large US counties. The larger area of Ordos on a multi county MSA type basis has 1,750,000 people. The Dongsheng district the original city known as Erdos has maybe 500,000 people. This district has been overbuilt with an additional vacant capacity for another ~200,000 to 250,000 people. Then there is the new city of Ordos. It was actually not built for a population of 1,000,000 as the narrative goes, but for 300,000. It’s been quoted in the western press as having but 10-20,000 people living in it. That number was correct several years ago when it was first built and those people then were mostly government employees who were forced to live there. Today several years later there are now ~65,000 residents now. That’s almost 22% occupied, not great, but a huge difference from the zero population that has been popularized. Looking at the region as a whole it is occupied by 1.75mm people, but has room for 2.2mm based on the additional building. So a vacancy rate of ~20%. Looking at the urbanized area there are 565,000 people living in the two Ordos cities, 15 miles apart, where 1,025,000 could live, for a vacancy rate of ~45%. Why talk about Ordos at all? As the worst case of Chinese overbuilding it represents an opportunity to see whether the canary in the coal mine will survive. The fact is people are moving into Ordos. There are three enclosed malls in the center of Ordos, roughly about 200,000 square feet each.. The one that gets all the publicity is the one that is completely empty. A second general retailing mall is about 60% occupied with the first 2 floors more or less fully occupied and the middle floor half occupied, with the 4th and fifth floors empty. The third mall is a food mall and it is bursting at the seams 100% occupied. So while not very robust, hardly a ghost city either. Surrounding the commercial center of the new Ordos, there are pockets of neighborhoods that look more or less fully occupied, actually looking like planned communities in the US complete with kids playing on the street. Ordos has the highest per capita income in China driven by natural resources including coal. The wealth there drove the overdevelopment. But there is organic growth taking place in Ordos as evidenced by the fact that families are moving in, although at a rate that will take years for it to reach planned levels. What I see here is what was a bubble, now taking advantage of its underlying growth. Ordos has already reached bottom. It does not have further to go down. If it is the worst case by far in China, it is easy to see other overbuilt areas coming back a lot quicker. The lesson I draw is that China will only improve from its overbuilding, even if it takes a while, not get worse. The other lesson is China is extremely complicated for westerners to understand and to be wary of those with pat answers.

IB customer service is excellent now. Over a 10 year period it has gone from a D- to an A. so the negative comments are out of date imo. The Friends and Family accounts offer an excellent opportunity to save money on fees. You can set up one advisor account and get all their data feeds for all your accounts by just paying the data fees on one account. So the person who moved his smaller accounts from IB because he couldn't justify all the fees really should have gone to Friends and Family. Friends and Family generally has more competent customer service and you can avoid the voicemail system using them, but on any detailed issue they will refer you to the specific department anyway.

Right now I like dry bulk shippers for a play on emerging markets especially as the Chinese consumer represents such a large segment of the EM. Investing directly in Chinese companies is too problematic for me and being spoiled with the US and Canada, just don't feel comfortable with the EMs in general.

I'm in China right now. Just finished a fact finding trip in Ordos. I see zero reasons for investing in any Chinese companies even though there must be some that would make excellent investments. The due diligence process is horrendous for small caps and how would it be possible to tell what the government might do that would affect any of the SOEs?

Seems like that is most likely to happen when there are voting rights and governance issues. I've seen it happen in Canada though several times. But wondering why that issue is not just a subset of buying a stock and having the price head south instead of north?