Author: the_red_deer

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Rate Expectations

Short one today – don’t have much to talk about. No more than a few weeks ago inflation was all anyone could talk about. The discussion was whether there would be a 0.50% rate hike vs a 0.25% hike.

Here’s where we sit today, as a result of war in the Ukraine and its potential to slow the economy:

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More headwinds are rearing their heads. As the expectation for growth starts to slow, commodities are spiking in price. Crude oil is up 9% today at $104, a far cry from negative crude oil in 2020 and ~$60 pricing one year ago.

Inevitably the term Stagflation will likely become a greater part of the conversation. That is, when inflation is material and growth is stagnant, a terrible combination.

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Brazilian Interest Rates

It’s interesting to see the way different parts of the world work outside of the Western economies. Brazil moved on interest rates starting last year. Previously at 2%, the central bank now has its rate set at 10.75%.

The central bank has moved interest rates much more in line with inflation versus the US:

I guess the interesting thing to think about is if the US were to move rates up to match inflation, they would be well north of 6% versus almost zero today. Something to think about.

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The Left Tail

As I’ve mentioned in more recent posts, often markets move to the downside due to reasons the crowd (including myself) will never anticipate. Said differently, the only certainty is that nobody will predict the next recession / depression.

The war in Ukraine / Russia is very much top of mind and it’s difficult to think about other things to the detriment of long term investing.

On the positive / hopeful side of things – delegations from either side may meet in Belarus to discuss a ceasefire. On the negative side – Putin is making mumblings of readying his nuclear force (???) and war is still very much a thing. The humanitarian crisis is heartbreaking as the numbers of potential refugee migration escalate by the day.

The state of current affairs was certainly not in the realm of what was thought as a rational move by Russia – so much so that it’s newest best friend, China, has distanced itself publicly.

My takeaway is that while it’s not productive to always be thinking about what the next unpredictable thing may happen in life, it is productive to spend some time on it on a regular basis, if only to remind one’s self that unpredictable things happen.

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Blue Sky

I feel fortunate to be enjoying clear skies and and active stress free days while away skiing (aside from picking what to eat for dinner). Other parts of the world are not so fortunate, especially those in Ukraine today.

As the fighting deepens and targets shift from military to civilian, I feel a lot more frustration at world leaders versus when it was a lot of chest thumping circa one week ago.

Markets whipsawed on Thursday and jumped on Friday. The large swings of a manic market appear to be classic moments of widening probabilities and disappearing liquidity.

I’ve continued picking up shares of select companies that pay out a good share of their earnings but remain cautious to not move too quickly. Remaining over-capitalized is not only a strategic asset but a psychological asset (to the detriment returns due to cash drag).

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Mayhem

On the road today as well…

Markets are rattling with Russian bombing of military sites in Ukraine. The Moscow stock market halted trading and major Russian companies are -40%.

M&A and new equity issuance is grinding to a halt – and accordingly some associated companies are selling off more dramatically than others.

Steve Schwartzman, founder of Blackstone, preaches that his coping mechanism for mayhem is to wait for a bottom and buy after the market turns (in his case transact for private companies).

My current view is nibble slowly. Keep calm and carry on.

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Gone Fishing

On the road for some skiing and having issues with WordPress so keeping this short.

Looks like we have war or something close to it in Ukraine. Anybody’s guess how markets and economies react over the short and medium term. Uncertainty reduces liquidity which reduces prices. But things never unfold as is easily predictable.

Keep calm and carry on…

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Put Your Nose Down

One business that I’ve been reviewing prior year earnings transcripts to better understand management’s thought process for various acquisitions had a simple but powerful comment when an investor asked if they can do more to get the word out on the company and illustrate how much progress it has made. The CEO’s response is longer than this, but I excerpted one specific part:

…at the end of the day, [I’ve] been around [companies] that are not great stories, but really high market caps. And [I’ve] been around [companies] that kept the nose down and just really worked hard, and I usually would always want to own the ones that they keep their nose down and just work hard, and that’s kind of where we are. But I appreciate the point.

RILY Q4-2019 Earnings Transcript

I’m always looking for companies that keep their nose down and let earnings drive the story.

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Investing in an Inflationary Environment

On a private forum for accredited investors that I browse for private deals (primarily real estate), there’s heavy discussion on how to position one’s self for persistent inflation.

Generally speaking, when people think of high inflation, people think of Zimbabwe, the Weimar Republic, etc. Essentially extreme scenarios. The next most common scenario is the 1970s. The thought process is “I don’t want to be the patsy, how do I avoid it or benefit from it?”

There’s a phrase that often circulates these days, “scared money don’t make money.” I believe this is true. Those that hoard gold, bitcoin, put everything into floating rate loans, etc. – are the ones that likely dramatically underperform over full market cycles.

The harder, but what I posit to be the right way to invest, is:

  • To be broadly diversified
  • To invest in management teams that position for the ability to aggressively invest when times are bad
  • To invest in companies at low multiples of profit
  • To invest in companies that generate real and significant cash flow that is returned to owners
  • To keep adequate rainy day cash for peace of mind because life happens

In more simple terms, “keep calm and carry on.”

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Atlas Q4 Earnings Thoughts

Atlas had a banner 2021. They added an incredible amount of long duration contracted revenue. They were the only shipowner that undertook massive contracted new build programs. Injury rates are at industry lows. You can’t really ask more from a company that is reshaping the containership leasing business.

However what makes me most excited about the business is the culture set by David Sokol. Long term thinking. A culture of execution. A series commitment to sharp capital allocation. A focus on providing novel solutions for customers.

Most shareholders I encounter are here for the incredible spot rates that ships are leasing for today and hoping for some sort of short term action to boost the share price. Few focus on the contracted revenue that will start hitting in 2023 and 2024 or the goal setting of the organization to grow the energy business to equal or larger than the ship leasing business in 10 years.

Almost nobody focuses on the conservative and countercyclical nature of the management approach, in this case in reference to how to grow the nascent energy business:

But APR at some point will have similar opportunities and you just have to — you have to see through my experience in the last 40 years in the investing business, particularly when you’re looking for levelized business models is that things happen about every 5 to 7 years in different industries, and they provide enormous opportunity. I’ll never ever forget when Enron filed for bankruptcy. That opened up 18 months of the best investment opportunities in the energy industry. And those things –they happen in each industry and then they happen over time, you just can’t always predict them. But we’re just not going to jump into things on the come. We will get involved where we know we can develop long-term sustainable cash flows andcontinue to build the shareholder value for Atlas.

ATCO Q4-2021 Earnings Transcript

I expect an economic downturn to be kind to Atlas over a full cycle.

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Homebridge Mortgage Payments

Mike Cagney was on a recent podcast and illustrated how blockchain will affect the mortgage originator / servicer they purchased (Homebridge). The whole blockchain thing is still a bit confusing so real use cases help me understand it a bit better.

He outlined how today, a mortgage servicer receives a high volume of ACH transfers regularly, which they can’t clearly identify where they came from. I’m not sure why that is the case. He also outlined that they have to reverse ACH payments / clawbacks regularly as well. Net net, he said that the mess of payments requires substantial administration headcount to sort the mess regularly.

What Figure is or will do is load everyone onto and have them remit payments via Figure Pay. The payments will go over the Provenance blockchain rails without involving the ACH process, will be clearly identifiable, and there would be no need for clawbacks. I still don’t clearly understand the exact details of it but his overall conclusion is that the overhead needed today will not be needed in the future state. He indicated that getting people to use Figure Pay could be incentivized with bonuses that come from the savings of lower overhead.

To that end, I am looking forward to getting a better understanding of what the timeline is for both uptake of this payment mechanism and origination / securitization of future loans on Provenance’s blockchain.