TheAiGuy

Won't work. Cartels only work if they control the bulk of marginal production and they share the same incentives. The Texas railroad commission worked b/c the marginal production was in Texas and there was a single actor, OPEC worked (in the 70s and precisely zero times afters) b/c they all hated Israel and the ME was the marginal supplier. Now the swing producer is a large group of independent producers acting under no legislative control under a political system without the appetite to force collusion (Frackers in NA). Development times are fast, technology is lowering costs and everyone has an incentive to drill.

all the time. WTF does it matter?

Mind unpacking this? I'm not sure I fully follow.

Yeah, I think that's reasonable. Also, you know, prices are on the low side of the historical range and I think its reasonable to expect them to go up at some point. But I think though, if I were to get comfortable investing in one the higher leveraged E&P firms, I'd really want to know when price are going to go, and for how long and to what level. But say prices go up, but the don't do so until all of these oil assets are bought in bankruptcy auctions. (Oh, I forgot to mention, you can also lower fuel consumption by changing the mix of automobiles. Lower oil prices typically encourage larger cars but that can be offset by recessions and other factors)

How implausible are these? Demand could slow due to a change in driving patterns, for example, if ecommerce leads to more efficient last mile delivery (UPS trucks delivering to ever house in the neighborhood vs cars all going to a store). Same thing with telecommuting -- marginal increases in telecommuting could have large effects on driving patterns. These don't require new forms of technology, more a behavior change that could come with a generational shift. This argument really only applies to the US, but you could see driving restrictions in China to combat smog, etc. Automation and tech driving down the cost of supply -- yeah, you're right that this shouldn't effect ROC on a prospective basis even if prices go down, but it does devalue the capital already invested (retrospective basis) and reduce margins for anyone using legacy processes (there are a lot of assumptions there but basically --> cheaper supply --> more oil --> lower price)

To give a more concrete example: if the price of oil shot up to $1000, production of EVs would shoot up and wells that were previously unprofitable would be developed, lowering the demand for oil and raising the marginal cost of supply. If you think about that, it suggest that the supply/demand equilibrium price point isn't set by demand alone (though, that is an important factor). It should be important to note this processes isn't sensitive to what the overall volume of oil, and volume can increase or decrease without effecting the equilibrium point.

what do you mean "moral and ideological ressons"? Just curious. I don't know, really. I can tell you that I don't like oil because I don't like pollution. But I want to say that there are people on the other side of that, who really like oil and not for its magical, poverty reducing effects. My best guess is there is a romanticism, sort of like cattle ranching. You know, a sort of manly, individualistic quality about the people find appealing. Also, when I read through various things on oil, I get the sense of fear over the malevolent puppet masters that screw over the little guy. Anyway, that's not material -- I wanted to point out the possibility of bias, but it doesn't change the rationality of the investment case. I do have a more tangible concern about the investment case. I more or less believe the supply side arguments, but I am concerned about long-term elasticity of supply and demand. Basically, if prices go up, does that drive future costs of fracking down? If any fracker is cash-flow positive, it creates an incentive to invest further in cost reduction, and that could encourage more participants to market. Likewise, increases in cost could spur an acceleration of the development of electric vehicles. My point is that there is partial substitutability of oil, and the equilibrium price point could be below the supply cost of oil for current output levels. This would be a long term bear case, though, even if what I am proposing were true, you still might see upside spikes in the price in the medium term. My mental model of commodity pricing would be something like, short term = random, medium-term = marginal cost of supply, long-term = down as a consequence of substitutability (btw, this is what happened in the 80s as power plants moved from oil to coal due to high prices). anyway, these are just my thoughts. I'm mostly interested in learning here.

Y'all know that in the 80s, the inflation adjusted price of oil fell below $40/a barrel and stayed there for 15 years, right? To get on my soapbox here: I can construct convincing arguments that oil prices should go higher from here but there is a very real chance that a large number of firms have to restructure their debt. I'm wonder how many are making decisions about what they think should happen -- largely, for moral or ideological reasons. Just thinking out loud, I've not touched an energy stock for moral and ideological reasons.

Do you know if the author has a strong opinion on bitcoin? It seems like he'd have a strong opinion on bitcoin. Sorry I do not follow him, just caught up on the news through different articles... Sorry, that was opaque -- that guy's nuts. A lot of ALL CAPS and bold red text is SUPER CONVINCING. I do appreciate the other source you posted (which actually has a lot of the same data) but I had to laugh a little reading this.

Do you know if the author has a strong opinion on bitcoin? It seems like he'd have a strong opinion on bitcoin.

I don't value with EV/EBITDA. None of these measures will tell you want you want to know, which is typically price per value created over unit of time. Sometimes GAAP E or EBITDA will get you close enough to "value created over unit of time" but more often than not, in any type of value situation, that won't be true. Some times, measures like like "adjusted X" (where X is EBITDA, FCF, whatever) that management provide are pretty good estimates of Value per unit time. Most often, they're too rosy. If you want something better, you'll have to dig through the accounting notes, adjust earnings and/or cash flow in a way that makes sense to you based on your understanding of the business and how you see it progressing, and value of that. Edit: In some really interesting situations, you won't be able to estimate value per unit time very well at all, and price can become unhinged (in both directions).

How do you like it? I read The World of Yesterday (his memoirs) a few months ago and quite liked it. It's very good. I think I liked the World of Yesterday more, just because of the perspective he offers, but this one's also great.

So I really see two sets of opportunities: 1) I going to guess that a lot of Oil, Gas and Coal are going to go bankrupt. You could pick winners, those who will survive and do okay in this environment and will do phenomenally if prices rise. You can pick bad firms that aren't going to go bankrupt and buy the debt. You could also buy the debt of bad firms that will go bankrupt but have good non-cash assets. I don't have enough money to do this. I also don't have the background. Implicit in this strategy is that people won't start drilling again if/when prices go up. Alternatively, 2) A lot of industrials have gotten killed over their exposure to this market. Many of these are otherwise good business that had abnormally returns linked to high oil prices. Some of them, in their other lines of business, also have completely unrelated problems related to currency and transitions in their otherwise healthy businesses (*cough* rolls royce *cough*). Many of these industrials will see their earnings go up if prices rise and people start drilling again (which would be bad for opportunity set 1) but they aren't as leveraged, both to oil prices and financially.

I'm reading Beware of the Pity by Stefan Zweig, the comic book series Alias, and some boring books on accounting.

I think could be good opportunities on the debt side. I don't like the trade (yet?) but there are some shale companies and coal companies that will probably survive for another few years that have debt with a 20% yield to worst. The beauty of investing the debt, is you can find a cash-flow company that can service its debt and reduce the investment choice to: will they / won't they be able to roll over their debt in X-years? If the price of oil goes up, probably yes; if it goes down a lot probably not; some where in between, who knows. Dilutive equity raises are positive in the case and you don't even really care how well the company does -- it only needs to squeak by. Long term I'm with Uccmal.

+1

Asymcar is pretty great if you're interested in the auto industry. Different point of view.

And yet is there anything better? That's a constant topic of debate. Its unclear, although there are some serious (i.e. well funded) attempts at reform. The big benefits of peer review is that you can 1) share your work and 2) be vetted. Theranos obviously doesn't want to do 1) and all sort of bullshit gets through peer review, so "publishing" its as high of a bar as it could be. Reviewers typically do not have access to raw data, inspect the process or have any other means of directly detecting fraud -- its a system based on trust. Yes, but not if they decide to go Volkswagen and discard the data that shows issues in replication. We will have to see how this works out. She's definitely not a martyr that bulls try to depict her: she has tons of money, great backers, contracts. So really Theranos should show results. Should not be tough with X$B warchest, no? Yeah, by replication I mean independent replication. Its tricky with their lack of transparency but it is doable.

As a grad student toiling away in science for what can easily be described as a living wage, I'm excited for Theranos and wish them the best. As for that stuff about collaboration sharing of ideas, peer review is a mess. Its very slow and its sometimes useful, on a case-by-case basis. If they have something they think is close to production-ready, it seems fine to me that they've opted to forgo it. They gold standard is replication anyway. Oh, and I'm super skeptical their machines works.

I agree with AI Guy, jumping to fraud is a bit much. I think the most likely scenario is that Holmes is attempting to do something very hard and is having to deal with all of the hurdles & stumbling blocks in the way. Anything that wasn't hard wouldn't have them. And if this is true, we shouldn't be pointing figures and going "na na I told you so," we should be encouraging her. Because that is how major societal progress comes about, challenging very difficult problems and accepting that there's a large chance of failure. Failure should be the expectation in these sorts of situations... it doesn't mean Holmes/Musk/whoever aren't smart and aren't doing the right thing. If anything these sorts of bets deserve more hype & glory than they get, because it encourages other people to avoid spending their lives working on incremental improvements in favor of lower probability moonshots that can really help drive society forward. +1 +2

I hate hearing "fraud" thrown around so loosely. It would be unsurprising if Theranos can't deliver what they claim they can -- doesn't mean its a fraud. Science is hard and everybody, the scientists at Theranos and the reporters at the WSJ, have an economic and repetitional interest in their particular narrative. I would be very, very surprised if anyone but a very small fraction of the scientists and executives at Theranos don't fully believe they can and will deliver what they say they will. On one hand, they could very easily be wrong and seeing their data in a way that allows them to convince themselves they are on the right path. On the other, breakthroughs of this magnitude have happened repeatedly in biology.

That's what makes this fun. 8)

I don't know, most traders/investors now weren't around in the 80s, but Buffet was. The price of XOM didn't follow the price of oil down, and at the time, a lot of people were saying that the price of oil would stabilize and/or go back up. That has't always happened in the past and Buffett has lost money on oil before, so I think he pulled the trigger b/c there was a good chance that he was going to lose money on the deal.

Management at HTR has only been around since 2006-2007 (it was unclear to me reading it), but your point about its performance stands as its been roughly kept up with the S&P over that time. I don't think its reasonable to standardize on PE, though, that presumes quite a bit. You could also standardize on interest rates and push its performance down, or consider taxes, in which case it looks a lot worse, etc. Management, strategy and fees seem fine, though.

Or you increase your compounding power by 10-15% over the long-term life of the investment. This would be much more helpful than a 10-15% one-time boost. well, it's also a levereed bond portfolio of CCC rated MBSs. How do you feel about owning a basket of that at a 15% discount to NAV? I'd feel alright about it. Here's the deal, we all recognize that markets are mostly efficient, but that there are some inefficiencies. But the market has deemed the value of these CCC MBS at one value, and then at the same time said if you buy them as a package you get 15% off. I can't imagine it will work out in every situation, but it doesn't seem hard to beat the market when you're buying everything the market has available at double-digit discounts. My main problem with these things is the active management. You can't look at them and say you're simply buying assets cheaply relative to the market. You have to trust that the active management isn't going to burn through the benefit of that 10-15%. That's a harder question, but my guess is that anyone who carefully selected a handful of CEFs trading at 10+% discounts would have no problem handily beating the market. I haven't looked at the actual numbers to know if has been proven or not, but it's hard to come up with a scenario with the active managers of all of these funds just destroying the 10-15% value year-in and year-out. So Rivernorth, a fund manager who does CEF strategies and works with Oaktree and double line, look like they've been able to beat an appropriate benchmark by about 2% gross of fees over the last several years (all of this, of course, gets eaten up in their management fee). That's seems about right, though, b/c you could imagine that not all of that 10-15% discount is a real discount. Some of that probably reflects fee structure, but the underlying assets are often illiquid, and CEFs them selves are illiquid and more risky than an unleveled version of the portfolio, so presumably some of that discount is a liquidity premium and a haircut for management rather than a misspricing per se. I still think there's some alpha there (2% a year sounds reasonable to me), but I don't know if its enough to overcome the frictional costs of investing (taxes really) and there's not a huge margin of safety there. Edit If you capitalize a 1% management fee as a liability (with a 10% discount rate) and add that to the nav, you get something like a 10% discount as fair value