BarbellStrat

giofranchi One of my favorite lines from a phenomenal book

There's a book I read -- I believe Taleb recommends-- called 'What I learned losing a million dollars.' It is a bit more trading oriented but nevertheless a worthwhile read.

ahh Phoscan. While my knowledge of commodities degrades the further we go from oil & gas, this looks interesting. I will take a closer look. Thanks.

Actually one of the most interesting prospects for investing in a commodity business is to find what I have gotten in the habit of referring to as a fulcrum investment. Take the oil & gas / petrochemicals sector for example. You look at where prices and expectations are for oil and gas, and you look at businesses that are not economic at those price level – i.e. relatively high cost producers. If they are significantly uncompetitive, the assets will be stacked / mothballed. If prices rise those assets will be activated and become economic. The parallels to call options should jump out at you. On top of all this, you have to have some sort of view on future commodity prices or at least their future potential movement / volatility. Some of the most amazing examples of this that I am aware of are in the chemicals space which is a bit downstream for my interest. In the mid to late 2000s some individuals bought cold-idle facilities that were rather old and uneconomic (in Texas if I recall right, but if not, somewhere else in the US). Subsequent to the shale revolution getting into full gear, post 2009, which resulted in a massive decrease in US nat gas prices relative to global crude oil prices, US chemical plants have an absolute cost advantage (as they use nat gas / NGLs as a primary feedstock) over most ex-US competition. Some of these plants that were purchased 5 – 10 years ago for $50MM - $100MM are worth billions now—privately held in some cases, but the owners are monetizing those gains with $1Bn+ debt deals. I think if you buy a commodity business that is currently mothballed you can create a very convex position that could work to your benefit, as opposed to buying a fully performing facility (with no moat in either case) where you may have a much more concave exposure. (There is a parallel about the potential attractiveness of distressed debt relative to most par lending here.)

As a new poster, I will start off unconventionally by pointing out a potential flaw of mine. A particular concern I have (to borrow from Larry Ellison) is that possibly, I used to think but now I just read “The Economist”. That said, this week’s issue of “The Economist” had two great articles on inequality in the US, primarily through the lens of returns to capital vs. labor (which modern economists still oddly abbreviate as K and L, in a nod to Marx). The problem I had with the CNN article is, like most things in the popular media, (a) it is overly reliant on anecdotes and (b) it seems to miss much bigger picture (meta?) concepts. The thing about the old days in the US in the 1950s, is they are the old days for a reason. Massive technological change has taken place in recent decades, and massive changes to global trade have occurred as well. The CNN article seemed to basically miss technological change, the substitution by firms of capital for labor, or ex-US employees for US employees based on responses to relative differences in costs. That said, I thought a picture toward the end of the CNN article showing the average $ handout to food stamp recipients vs farm subsidy recipients was excellent, and much needed. In my view, there aren’t easy answers here but all too often people across the political spectrum substitute a complex reality with ideology and/or stories. Psychology being what it is, I don’t really expect this to change though it’s a major problem. Here are the links to “The Economist” articles in the event that there are others interested. http://www.economist.com/news/leaders/21588860-labours-share-national-income-has-fallen-right-remedy-help-workers-not-punish http://www.economist.com/news/finance-and-economics/21588900-all-around-world-labour-losing-out-capital-labour-pains