SharperDingaan

Also keep in mind that the more heavy oil in a company production, the more volatility in the FCF, that even stela risk management will not save you from. Heavy oil netbacks can routinely change 25%+ in a single quarter, and all of it outside of management control. Not many years ago tar sand producers lost money on every barrel produced - when WTI at USD 40 couldn't cover the differential, transportation, and cash production costs. Ideally you are buying a heavy oil producer with a solid BS that has ability to absorb risk, and well < 50% of production hedged. Simply because you hold the stock to benefit BOTH from higher WTI prices (net), AND the operating leverage that the company has. Can't do that if the company has pissed that WTI exposure away! If you are a smaller company, the better option is to dilute the % heavy oil production via light oil or ngl/gas production. Or put the money into rigs diluting heavy oil exposure, versus spending it on heavy oil hedges. SD

O/G has a long way to go still, but there is a need to think much more strategically. In the WCSB, new pipeline egress comes onstream in 2H 2023. Most would expect current differential levels to permanently drop like a brick, and stay there indefinitely - adding an instant USD 10-15/bbl to the margin of every heavy oil producer in the WCSB, for ZERO additional capex. While the CVE, SU, MEG, etc., are first to mind .... the real beneficiaries will be those in the Peace River/Clear Water heavy oil plays. No mining required, 90%+ oil production, collection facilities already in place, cheap/easy to drill, payback periods in 4-5 months, versus the current 11-14. Then add M&A field consolidation as well. Capital discipline is also clearly visible in O/G servicing. When every company in basin X can drill at the local requirements, at about the same rate, and has the same retirement/labor issues, the value-add is in ability to both offer ongoing availability and consolidation within the supply chain. There is a reason why marketing has been moving under one roof, and there have been so many small acquisitions. It also reflects that we are not going back to the days when everyone, and their mothers, was drilling shale. Manufacturing vs boom/bust approach. Disclosure: We own well known companies in both these areas, and continue to do very well by them. May those unsophisticated ‘investors’ who need something big to gamble on, pay us all a visit SD

A lot of things can be 'hidden' on private books, and accounting conventions are often not applied. Have to think that a lot of garbage is being moved off the public books via repo agreements, and that it isn't been done for free. The 'security' on that garbage is also going to be extreme, so expect to read of some 'accidents' next year. No new money, ability to avoid forced sales instead. Same as with BTC; the 'real' security is not the crypto, it is who owns it. SD

Sadly, a lot more realistic than many would care to admit. The reality is that much of the lower quality stable coin collateral is actually worth zero, and the poster isn't going to put up anything more (more and better quality collateral). Were the stable coin issuer to break the peg, it would trigger similar breaks in their other pegs, and very likely bring on a rapid collapse. So the issuer bites the bullet, puts up their own assets, and prays. Had the launderer used an entire building as the collateral, the facilitator could at least seize it. Thereafter either collect the rents, or closedown/shut the building entirely if warranted. Or level it entirely, to avoid paying ongoing property tax. Total cost including ongoing transaction fee of maybe 5-7%?; higher the building cost, the lower the % cost. Had the launderer used stable coin collateral, it would have been both quicker/easier and the % cost is maybe 3-5%. Point? Much of the crypto 'capital' isn't going to be available if/when there is a 'run' on the eco-system; and the more private companies in the eco-system the worse it gets. If your counter-party is a private company you have to think they haven't got it, and the bigger they are - the more likely that is. What is worse, is that the bigger they are, the more likely they are also relying on the other big players in the eco-system..... Or identical to the big name I banks at the start of the GFC - just before Lehman Brothers was allowed to fall ..... Back then, the CB's had to step in as the implosion was within the main banking system. Today's crypto eco-system is almost entirely outside of the main banking system .. and much better replacements are waiting in the wings, fully tested and ready to go. Different imperatives. SD

Aave also either didn't have a margin agreement with the poster of the USDC collateral, or the poster couldn't maintain the USDC/CRV collateralization rate. Given that Aave had to take a receivable from the poster instead, and immediately write down the value of that receivable - most would think it is the latter. Just another indicator of how lax the financial controls are in this eco-system, outside of the main financial rails. The Stable Coin issuer had a choice of either breaking the peg or taking a write-down - yet chose the write-down (& the hit against their own capital) instead ? Not really rational unless the issuer is being made 'whole' via another mechanism somewhere else .... SD

No idea if they did this, but the obvious solution is to do it via the (private) parent. Parent/Whale derivative vs Sub/Whale derivative - lots of clever finance/accounting folks can help with the actual mechanics. This is fairly routine, there is nothing wrong with it, and it doesn't violate any disclosures. Our own view is that they probably do have the BTC beneficial interest, but for some reason - are unable to make a more granular disclosure. Simply because were they able to, they would have done so already. SD

Thing is, a Venezuela is typical of most of the world; and this also applies to countries with capital controls. China, as well as most other western countries from time to time. Same as venereal disease, BTC is not going away! Frankly, the best outcome is a spectacular implosion that enables a western introduction of CBDC shortly thereafter. Crypto made people wealthy on the way up, it will make people wealthy on the way down as well. There is no reason why we all should not be some of them! Different PoV SD

Some might find it worthwhile to step back, and read up on Roubini's recent comments. Keep in mind that much of the hate is because he doesn't sing from the same song book, and he has cost a great many very rich and influential people a great deal of money. Nothing to do with the man's arguments. Post the Mt Gox hack (800,000+ BTC), the price of BTC collapsed by 85%. Should SBF, Genesis, Grayscale, Galaxy, and Gemini go down, the impact will be comparable - BTC falls from the 19,000 pre SBF, to the roughly 2,850 (15% of old value) post collapse. With BTC at 2,850, most would also expect Tether and a few Stable Coin to have joined this bonfire as well. Obviously, not a popular view! Whatever ones view, most BTC holders will act in one of three ways; (1) hold off on new buying, (2) swing trade if you still like BTC, (3) exit if you do not. Or no new buying, and incentive to simply 'wait it out'. These names don't just need liquidity to survive the shock - they also need the liquidity to fund aggressive buys at higher prices. Back in the day, this would have been a JPM personally stepping into the pit and aggressively hitting every ask as the price moved up; whereas today, we just have snowflakes;. 'Do you feel lucky?' works much better when a well-known evil bastard is directly asking you the question! SD

Just to add some technical detail. A public Crypto Proof-Of-Reserve is an on-chain record, plus a 3rd party verification (auditor) that you are indeed the owner of the blockchain account. Good sound bite, but not really practical unless you are using some kind of a centralized ledger, as you would with a CBDC. Derivative beneficial ownership does not appear on a Proof-Of-Reserve, just as anything you have on a lightning network, or in a crypto exchange will not appear either. The BTC IS there - but it appears as a holding of the network and the crypto exchange, NOT as your holding. Proof-Of-Reserve assumes that the proven owner of the token, is also the beneficial owner; you have not transferred beneficial ownership via a derivative, or via some kind of loan arrangement. Obviously, in the real world, this just isn't true. SD

It is very, very unlikely that GBTC actually owns 633,567 BTC - far more likely is that the majority of this is just beneficial interest in BTC. A few long-term derivatives with whales transferring beneficial interest for an initial premium plus ongoing MTM settlements, plus a few similar but shorter term derivatives from ransom BTC accounts, a rolling string of in-the-money BTC calls/futures at various strikes, and only a few actual BTC. The reason being that the derivatives/futures/calls come with much more leverage, and none of that leverage shows on the company books; existing calls that go out of the money, are just replaced with new ones deep in money Problem is, that if there's a run .... those replacement call options &/or futures cost premium, and suck up cash. Some of those underlying BTC derivatives may also have windups if the company credit rating falls below XXX, forcing additional option/futures buys. All those CME derivatives also require daily MTM settlements in cash, whereas the long-term derivative MTM settlements are typically quarterly - and can often be 'negotiated' if needs be. A cash burn baby, burn. If you don't think GBTC makes it to year-end, you try to yank your derivative as soon as possible. If that isn't possible, you start hard-balling as soon as possible - for a deal resembling WEBs bailout of GS. GS are extremely good at their game, GBTC not so much ...... It took how many days? for Lehman Bros, Bear Stearns, Morgan Stanley, Merrill Lynch, AIG, etc. to blow up in the sub-prime lending crises that brought on the GFC - despite all the best efforts of the US Fed. Why should I have confidence that GBTC is likely to do better ?? It is early days still, but it is pretty hard to see how BTC doesn't fall a lot further. Good luck to all. SD

SBF has had some very interesting interviews recently .. in one of them he gives a 'black box' example. To paraphrase the mechanics, with BTC held at a constant value. Put 100 BTC into a box (At 30K/BTC, value is 3,000,000). The box issues 3,000,000 'Box Coin' ... valued at $1 each. 20% of the coin are air-dropped to create buzz/trading incentive, 40% are sold for cash at an average $1.25, and 40% are retained by the box founders. The 1,200,000 (40%) 'Box Coin' are sold for $1,500,000 in cash, and the cash paid out to the BTC contributors. The box has a 'value' of $3,750,000 (3M 'box coin' @ 1.25) supported by 100 BTC valued at 30K ($3,000,000) and 750K of capitalized 'buzz' (3.75-3.00M) - or thin air. The BTC contributors are out the 100 BTC worth 3M, up 1.5M in cash, and up 1,200,000 (40% retention) 'Box Coin' worth 1.5M. Same 3M asset on the contributors books, but now it's a bar-bell of 1.5M cash + 1.5M shitecoin. Repeat BTC contributions and air-drops dilute the holding 300%, raise the original founders holding to 3,600,000 'Box Coin' (3x1.2M) and raise the price of 'box coin' to $3.00. Higher, because early buyers of 'box coin' at $1.25 are selling for > a double, and telling their friends via social media that it's free money!; network effect driving Ponzi characteristics. The original BTC contributors are now out the 100 BTC worth 3M, up 1.5M in cash, and up 3,600,000 (40% retention) 'Box Coin' worth 10.8M. Now the asset on the contributors books, is 1.5M cash + 10.8M shitecoin. The higher 'Box Coin' goes the wealthier they seem to be - BUT the more of it is just capitalized 'buzz'. That 10.8M of shitecoin is only supported by 40 BTC (40% of the original 100 contributed), and actually worth 1.2M. However, repeat a few times and it becomes hard to distinguish between the real and funny money; particularly if the founders/'box coin' holders are not overly financially literate. Mania. Every time a new product is sold via a 'skimming' market penetration policy, the seller is doing the same thing; capitalizing the buzz around a cool and new product - that you too can have!; for a price well above what the product will sell at once we start selling it in volume. Normal course business. The rest of it is just greed and delusion. Ride of a lifetime while it lasts, but eventually the punch bowl runs dry, there are margin calls that we cannot meet, and we go bankrupt. Cleans the slate, and allows the gamblers to go around a 2nd, 3rd, 4th time, etc., etc. Different PoV. SD

Long term, FICA score gets replaced with a local reputation score, and smart contracts/CBDC facilitate payments at a transaction cost close to zero. The 2B+ unbanked connect to the internet via cheap (& robust) laptops, and satellite link (Gates/Musk). Solar panels to charge the laptop via China's various belt and road initiatives. The old jeweler/money lender in your community who lent based on reputation and collateral, replaced with internet lenders. The scale solution that FICA scoring enabled, replaced with a much more robust (and higher capacity) global solution. SD

These days the gold thing is a pretty poor example. I can now digitally separate the blood gold from the ethical gold in your wedding band, and trade them both as separate commodities tied to the value of the physical commodity. The value of the ethical gold being worth nothing more than what you are willing to pay for it! SD

One of my favorite examples of 'undefinable DCF value' is this one .. https://artreview.com/frans-hals-painting-two-laughing-boys-stolen-for-the-third-time/ Sure, the painting itself is worth what someone else is willing to pay for it .... but this one is obviously worth quite a bit more than that. Should you meet some of the former owners when in the 'big house' - you're meeting people of class and taste, and are one of them. Respect!! SD

The reality is that no one has any idea; as no one has a proven market tested method by which to value it. Historically, all that we really know, is that if an asset value under stress does not go to zero; it typically bottoms out at less than the market thinks it is worth (dead cat bounce). And we have no idea as to what those numbers are, until we get there. All that we can really do is step away, and let the markets do their thing. SD

Like it or not, the crypto meltdown is proving the value of BTC and ETH under hostile conditions; they haven't gone to 'zero', and most would also argue that they are unlikely to. That reality is being rubbed in our faces, and we don't like what we see; BTC and ETH clearly have 'value' - and we can't calculate it !!! The crypto ecosystem is going through its first real shakedown, and there will be failures/collapses - good! We all find out just how robust the various 'pegs', 'tethers', digital-dollar, and BTC/ETH futures/options actually are. Proof of concept under hostile conditions; and a material de-risking that is long overdue. CBDC, and re-plumbed securities trade/confirm/settlement is in the wings, waiting to go. Most would also think that once the futures/options market pass the test, CB's will be in the market - doing a little stress test 'nudging' here and there. There is a reason why regulatory oversight is reactive, and not proactive. BTC is the Yin to CBDC Yang. Venereal disease (BTC) has been with mankind since the beginning of time, and despite every effort known to man - it is still with us today. BTC is not going away! SD

Lot of things being missed here. 'Crypto' is an eco-system. Cash for Alt-Coin to pay the developers => Alt-Coin to Stable-Coin (1), Stable-Coin (1) to Stable-Coin (2) to raise the credit quality, Stable-Coin (2) => BTC, BTC sold for cash to monetize the developers forced stake in that underlying Alt-Coin. Lots of variations around this - but ultimately it is about escaping the green eye-shades, controlling the flow of dollars into software development. No 'hard' business case at a 25%+ ROI, no money Exchanges are highly vulnerable here. They do not exist without the market trust and trade volume to make them financially viable. Most major brokerages can now offer the same services, with greater financial stability, better security, lower transaction cost, and regulatory protection. So .... if the KYC of a bank is not an issue, what do I really need a Coinbase for ? So that I can trade dog sh1te ??? Stable-coins are highly vulnerable here. Simply because it is highly likely that the value of the Alt-Coin 'collateral' is < than the value of the stable coin issued. So .... if the stable-coin issuer cannot cover the collateral shortfall ... most would expect the stable-coin to 'break-the-buck', 'gated' exits, and essentially a collapse of the stable-coin. And ...... it just needs one stable-coin, anywhere, to demonstrate it. Funds are also vulnerable. Most will either have a (whale sourced) long-term derivative transferring beneficial interest of BTC/ETH in return for a premium and a periodic MTM settlement, or a series of rolling CME BTC/ETH futures/calls. There is 7 weeks until year-end, and at current prices these rolls/MTM settlements are going to suck a lot of cash .... that fund issuers may not have. Much of the disruption is outside the main banking rails, and regulators have worked diligently to keep exposure to just BTC and ETH - net of CME risk management. A crypto blow-up isn't going to spread unless the CME goes down, and should there be a credible threat; they will have a temporary fed backstop in some fashion. It will be more the banking rails using the disruption to buy the exchanges, and NOT crypto threatening the banking rails. CB's are well versed in using 'condoms' to contain toxic financial waste - DB and CS provide regular practice. The prices of BTC/ETH might be volatile for a time while 'moral suasion' is re-established, but contagion is highly unlikely. In 2022, our various CB's are too well practiced! May we all do well. SD

The volatility from fund windups and restructurings is still to come. Lot of funds are down 80%+ on the year, and will need to either wind up, recapitalize, or merge into other similar funds within the same 'fund family'. Those who agree will extract 'concessions', those who do not will take further losses as holdings are dumped into a market with few buyers. If you own units in a crypto fund, as an experiment ... see if you can sell some of them without a sudden 'hand-holding' call, and a temporary house 'restriction'. It will tell you quite a few things ..... including a sense as to how material the funds capitalized deferred sales charge is SD

But also no different to the rest of your banking data. Institutions, accounts, passwords, etc. Things you will rapidly find out comes the day you have to wind up someone's affairs as their executor! SD

This is the model for almost all utilities, not just the electricity companies. As P&E is constructed on a cost plus basis, there is incentive to spend as much as possible in the build phase - by overbuilding; 150% of forecast demand, margin of safety at 4x design load vs 2, etc. Thereafter the utility will fill it's excess capacity by offering cheaper rates on higher volumes of throughput, and be looked upon favorably. Goodwill converting into a planned minimum annual rate increase for the next 10-20 years. As long as the technology does not radically change over the P&E design life, the model works. Of course, inflation and upgrades are part of life, and result in additional rate increases as/when required. The investor risk is a premature strand of the P&E, as either the need no longer exists (o/g pipeline), or the existing technology is about to radically change (EV, blockchain, etc.). The reward is that rates don't reverse - so if inflation declines, or throughput rises, the incremental margin flows direct to the bottom line - as unencumbered distribution. Ideally, a cowboy CEO uses that margin to buy things that the company shouldn't - to inflate current EPS and create a 'growth' P/E multiple. Eventually the cowboy explodes, the company materially cuts its dividend, and the share price implodes as the investor base churns over (TransAlta Utilities). That's when you buy, and in quantity SD

Aaaah, everybody needs an anarchist. For most it's just a fashion statement, and a schtick by which to get laid; spend all your time in either a nice warm coffee shop, a bar, or a bed!!. Almost always the anarchist is a lot smarter than he/she portrays, and is often a trust fund kid; but isn't really going to make a difference in the world. Harmless. Then you get the twisted bastards .... and either a Baader-Meinhof gang, or a Satoshi Nakamoto is born! Be careful what you wish for SD

Some very good memes on this thread! 'Tradition' has it that BTC is really just another 'stock', and bought/sold accordingly; trade it via an exchange but hold it in your own secure wallet off the exchange - yes it's also a currency, but I treat it as stock! More efficient processes are to hold it either via a fund (diversification, management, dividend, etc.), or a company (ie: Overstock). Depending where you live, the funds/stocks may also have limited legislated protections; a plus in Canada. However you hold; if your interest is in the cryptocurrencies, most of your holding is going to be BTC and ETH. If your interest is the blockchain applications, most of your holding is going to be in the platform companies &/or the tech funds. Different strokes. BTC's main 'legal' attraction is its appeal to those in hostile nations, where local currency is routinely devaluing. Hold you wealth in BTC as a hedge against local currency devaluation, but risk the possibility of having to sell the BTC for less USD later; 'terrible hedge!'. Thing is; that relative to today's price, when BTC is at USD 10,000-15,000 the upside volatility is largely on par with the downside. The lower BTC goes, the more attractive a hedge it becomes. There is also the coming 'halving', and the introduction of 'western' CBDC's which most people would view as supportive. No way you're using a CBDC to settle a black market transaction, cash is king! ... but the wealth accumulation still needs to be 'stored' somewhere - in either a 'bent' bank, or BTC. BTC isn't going away. SD

We have been lucky, as a good chunk of our QTD gain allocation has not yet been rolled in. From the risk perspective, the smart thing is to swing trade a portion of your holding; in anticipation of a later buyback at a lower price. If/when that takes place, and at what price, is anyone's guess. SD

Posted our view in the OBE investment thread. They did all the right things in Q3, but disappointment was inevitable. New wells came on line late, and investors hadn't adjusted their expectations re lower crude prices and higher differentials. Most quarters we swing trade around the ER to limit disappointments. At times like this, we look like heros. SD

OBE SD