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What does Ray Dalio have in common with Trinidad James?

Braggadocio.

And Gold all in the portfolio.

I realize I'm not that funny, but there is a relevant and interesting investment point I can make that is related to that joke. For the past several - well - for a while now, we've been witnessing a steady normalization of the gold bug's investment philosophy among even the most esteemed professional investors. Historically, gold bugs have not exactly been ignored; but, I would argue they've drawn frequent comparisons to Chicken Little for constantly predicting the demise of the U.S. Dollar all the while "inflation" is conspicuously absent and the dollar is, well, fine. Is the sky falling, now? Let's ask Fred Hickey, who writes the fantastic investment newsletter "High Tech Strategist" that used to be about Fred's portfolio of tech stocks - these days it's about gold:

If you're interested in investing, you should at least follow Fred on twitter. And if my newsletter isn't enough monthly investment content for you, consider subscribing to HTS.

The logic actually is really simple. Almost everybody understands it. The Fed (and the Treasury) are printing money as fast as they can and we have (roughly) the same amount of actual stuff today that we had yesterday, so it would stand to reason that it will take more money tomorrow to buy the same amount of stuff you bought yesterday. But this has been true for as long as I can remember. So what has changed, today? Why are all of these investment luminaries buying gold now, when before they were concerned about deflation (Dalio), or focused on individual companies and security analysis (Einhorn), or short bonds and long agricultural land (Hendry), or ... long China (Druckenmiller - and then short China, and then long China again)?

And what of inflation? The government has been printing money since the press was invented. Where is inflation? Today's wsj.com headline would imply it's not here, yet: Consumer Prices Fall 0.8%, Most Since 2008 (on a year over year basis, prices are still up 0.3%, supposedly). I'm going to quote Fred again, from this month's issue of "High Tech Strategist," as it turns out the devil is in the details:

"Last month the BLS reported the CPI index for March increased 1.5% year-over-year, but the number was depressed by a sharp drop (10.5%) in the gasoline index (doesn't help much as people currently aren't driving), airfares (people aren't flying), lodging away from home (people aren't traveling), and apparel (people aren't visiting retail stores). All these category drops held the CPI down, while the things Americans are spending money on including medical care, food, auto insurance and education all rose more sharply." You really can't eat an iPad.

If you're prone to exasperation you're probably thinking this, too, is not exactly a NEW phenomenon. The "I can't eat an iPad" movement actually started in 2011. So I'll add a little color of my own.

Since the great financial crisis and great ("Terrible, yes, but great." - Garrick Ollivander) recession inflation has been absent because the supply of money actually hasn't been increasing as fast as the government press has been running. This is because of something known as, "the moneyness of credit." Or - "debt is money. Money is debt." As in, when I take out a loan (debt) to buy a house, and buy your house, you deposit the proceeds (money) in the bank and they lend your deposits out to someone else (debt) who uses the proceeds (money) to - well you get it. When the banks lend, they actually create money out of thin air. So how much money is there? Well how much debt is there?

In 2008, when "QE" first became a household term, the federal government started issuing debt in record numbers. Unprecedented indebtedness that repeatedly made headlines, and continued to for a decade, as it continues to today. But TOTAL debt has been falling, at least as a % of GDP, look:

Pink is bigger than ever before, but we're no more indebted today than we were in 2009 (or we weren't, three months ago), because we've been resolving and restructuring and eliminating mortgage debt this whole time. The money the federal government printed over the last decade was little more than a formal recognition of the money the banks had already printed during the housing bubble.

What's CHANGED, then, is the government's printing press has finally lapped the American households' persistent, and beautiful (to quote this post's titular investment idol), deleveraging. In a little less than 3 months we've taken total indebtedness from ~ 180% of GDP to over 250%. Households can't tighten their belts anymore, and the government printing is in overdrive. The Committee for a Responsible Federal Budget projects that the nominal amount of Federal Debt (the pink alone) will exceed GDP in 2020 for the first time since World War 2. It's clear that the slope of the Debt-to-GDP graph is no longer negative. Does that mean that this is a decade for inflation, even as last decade was a decade of deleveraging?

I try not to make a habit of making macroeconomic prognostications, but yeah, that's what it means. The last time that this happened, when total indebtedness grew from 2002-2010, gold went from $400/oz. to $2,000. That might be what's convinced Ray Dalio, Stanley Druckenmiller, Paul Tudor Jones, David Einhorn, Seth Klarman, Paul Elliot Singer, Jeffery Gundlach, Sam Zell, Fred Hickey, Hugh Hendry, Mark Mobius, and Trinidad James.

I am long GDX, the VanEck Vectors Gold Miners ETF.


Caveat Emptor: Crude Oil, Futures, and the USO

Since launching my website and publishing my first newsletter on April 1st, I've received a fair amount of feedback, a bit of casual curiosity, and several fairly serious investment related questions. Two of those concerned the price of oil, and one came from a friend, yesterday, who was wondering how the price of oil could possibly be negative.

Up until yesterday, I could've said that the price of oil had never been negative before and left it at that. Today that would still be true, sort of, but it comes with a caveat. Yesterday, the May futures contract for West Texas light crude oil did, indeed, go negative. That contract expired today, and everyone who "bought" one yesterday, receives a barrel of crude oil and a $10 bill (at least). The money is for nothing and the oil is free, to put a modern spin on the Dire Straits song.

The reason the contract went negative is because, technically, the money is not for nothing. The money was in exchange for the promise to take delivery of a barrel of light, sweet crude oil in Cushing, Oklahoma, today. As you might expect, not everyone can actually do that. What you might not know is that quite a few people who have made that promise cannot actually do that. You'll hear the term "speculators" used to describe these folks. They are financially motivated buyers of commodity contracts, who purchase a contract in the hope that prices will rise, and they can sell it at a higher price. And it's not all gambling. The presence of financial buyers and sellers in the market for physical commodities provides a tremendous amount of liquidity to those contracts and makes it much easier for actual oil producers and refiners to "lock in" the prices at which they will sell (or buy) their raw material at a later date. And at the end of the day, the price of the contract can only really diverge slightly from the value of the underlying commodity, otherwise one of those actual producers or refiners would buy a barrel and leave it in their tank for a few days until they can sell it to somebody for what it's actually worth. The problem yesterday was that, with the contract near expiry, we essentially ran out of real world storage. There weren't any legitimate places able or willing to take another barrel of crude, and there was no shortage of desperate financial holders of the May contract who were absolutely required to dispose of them, at ANY price. As it turns out, they had to pay for the privilege. A stock or an option can only go to zero, but a real world commitment must be honored or otherwise paid for.

When I got the question yesterday, I remembered something about crude oil speculation and futures that I had hypothesized early in my career and never put to the test. I remembered that one of the primary ETFs investors use to track the spot price of crude oil, the USO ($2.81 as of today's close) invests 100% of its portfolio in the front month oil futures contract, and sells the entire portfolio to buy the following month's contract every four weeks. Its sister fund, the USL ($10.14 as of today's close) spreads its bets out equally over contracts spanning the next 12 months, and rolls only the front month into the 13th month every four weeks. When the oil futures curve is in contango (meaning that future oil costs more than now oil), both of these funds are forced to buy fewer contracts every time they "roll" the front month contract into the next one. This negatively impacts the net asset value of the funds, which maintain a financial interest in fewer barrels of oil after the roll than they did before. It's called "roll yield," and it's a cost of doing business for those investors who maintain a long position in a commodity using futures contracts. USO and USL pay the roll yield with their investors' capital, but the USO pays a lot more, because it's rolling 100% of its portfolio every month, while the USL is rolling only 8% of it. In 2009, when the oil futures curve was in fairly severe contango, I hypothesized that you could short the USO, buy the USL, and earn the roll yield without any exposure to the volatile price of the underlying commodity.

I was correct, but I did realize after a few minutes that it's not a "risk free" trade. The problem, of course, is that the oil market has to actually STAY in contango to keep benefiting from the roll yield every month. Whenever it finally snaps back - which is to say, whenever the front month contract actually increases in value and starts to approximate the 2nd month contract, the USO could snap back with a vengeance while basically nothing happens over at the USL. The "roll yield," trade is basically a short volatility trade, where you collect a small fee every month to have the position on and you hope that the USO never snaps back and wipes you out. As a result, I had never put the trade on, until yesterday when I put 20% of my portfolio into it.

There are a lot of reasons to hate ETFs, and I do hate them. As an active investor and investment management professional I've long believed that indexing is not the panacea for individual investors that the academics would have you believe. But that's a different rant. The worst thing about ETFs and the relevant characteristic to this blog post, is that they market what they "track," as opposed to what they "own," and most investors don't really understand the difference. They buy the USO because they want to "track" the price of oil. They own the front month oil futures contract in size. The USO actually owned, as of close yesterday - about 25% of the outstanding June futures contract. The USO, which CANNOT TAKE DELIVERY OF OIL, has PROMISED TO TAKE DELIVERY OF 25% OF ALL THE OIL IN TEXAS AND OKLAHOMA THIS JUNE. The prospectus uses different language, but that's (more or less) what it means. The investors who punt a few hundred dollars at the USO don't understand the difference. They think they're buying the price of oil, and they aren't. It breaks my heart to see that individual investors are buying USO in record numbers (https://robintrack.net/symbol/USO) because I know that few of those understand that the USO will destroy a tremendous amount of value when they try to roll a full 25% of the outstanding June contract into July. And unfortunately, I know that it's those investors who are supporting the price of the USO at levels well above it's actual NAV and creating what basically does amount to an opportunity to make a profitable trade, without assuming any risk.

These are odd times, and odd things are happening. Even one month ago I didn't think the front month contract could go negative. But it did. When I looked into the roll yield trade again yesterday I quickly calculated what would happen if the USO were to roll it's 100% long June Oil position into July at prevailing prices. They were originally scheduled to do that over the course of three days, May 5th to May 8th. Spoiler alert - it would destroy quite a bit of value - so I was about ready to hit the sell button and put the trade on, but there's more. The folks at USCF (the guys who sponsor the USO and USL ETFs) aren't completely oblivious. They read the wall street journal, too, so when this article was posted on Friday, they filed with the SEC to notify their shareholders that no longer would the USO track solely the front month futures contract, but it would own 80% of the June contract and 20% of the 2nd month, July. I wondered what would happen if they made that change in it's entirety yesterday around midday, (the June contract was acting poorly yesterday, too) and I came up with a back-of-the-napkin NAV estimate around $3.55 for the fund, which was still trading north of $3.80. Again, all of this is public information, but the individuals buying USO on Robinhood cannot reasonably be expected to get notified every time USCF files an 8-k saying they've DRAMATICALLY ALTERED THE MAKEUP OF THEIR FUTURES PORTFOLIO IN ORDER TO MAKE A FRAGILE GUARANTEE OF THEIR FUND'S SURVIVAL.

Long story short (ha.), I sold USO at $3.80 thinking I was selling $3.55 for $3.80, and I bought USL in roughly the same amount, so that I wouldn't have any exposure to general price movements across the curve. It turns out that USO ended the day with a NAV of $3.46. I made money, but I don't feel great about that. Unfortunately, the real test is still to come - USO destroyed almost $0.30 (or more, depending on how much of the June contract blood you think is on USO hands) of fund value yesterday, trying to move 20% of its portfolio one month into the future, so what will happen on May 5th, 6th, and 7th, when the other 80% of the portfolio was to get rolled? An already bad situation can only be made worse by the fact that USO actually publishes its trading schedule, and has promised to buy and sell its oil promises on specific dates. So - while I would normally not recommend trying to "arbitrage" the roll yield disparity between the USO and the USL, I felt that the fund found itself in such an abnormal and dire situation that there was sufficiently little risk it could extricate itself before the curve returns to normal.

They felt so too. Last night, the USO suspended new creation baskets for shares in the ETF. Meaning, they finally admitted, "owning 25% of the June contract is too much, we can't really buy more to support new investors, anymore." Refreshing, but a little late. The June contract got hammered today. It ended the day at $13.12, down from $20.43. At first I thought other investors and speculators were doing what I was doing, and maybe they were. But towards the end of the afternoon, the USCF made another announcement on behalf of the fund. They sold half the June position in order to put 5% of the portfolio into the August contract, and another 35% of the portfolio into the July contract. Unfortunately, that means they're paying the roll yield TODAY. And it's no small number. A $3.46 portfolio of 80% June WTI Crude and 20% July WTI crude should've closed today with a NAV around $2.28. If they rolled the full 40% of assets they intended to roll at today's closing prices, that would cost the fund another $0.50, and they could report a NAV at day's end of $1.78. The USO closed at $2.81. I'm still short, and I still don't feel good about it. Actually I had to short more today to keep the hedge in place; USL did not decline anywhere near as much. And I don't even have to care if the curve stays in contango, the roll is happening NOW.

The good news (depending on how you look at it) is that I think they've "saved" the fund by rolling it all today. They've paid more than a pound of flesh to diversify into 40% front month, 55% second month, and 5% third month contracts, but they've created a sturdier portfolio and set the precedent that they will act nimbly in times of crisis to prevent a situation where the fund finds it cannot roll a front month contract that's effectively worthless. In other words, I don't think that USO will be de-listed. But I will caution anyone who holds a few shares - if you think that USO will "snap back" to $10 or higher because, well hey, that's where it was when we all stopped driving at the beginning of March and created this mess, you'd be wrong. In order to survive the fund has re-configured its portfolio and it tracks a financial interest in far fewer barrels of oil, now, than it did at the beginning of March. Then, a 10% increase in the price of oil was $1 in value to USO shareholders. Today it will be a little less than $0.20. And if you're hoping that contango will end and the USO will roar back, well, they've dramatically reduced their exposure to that, too. They had to.

Several of you will be wondering what to do, today? What to do if you own USO? Well... it's complicated. I'm not going to keep this position on forever (or even very long for that matter), but the troubles aren't over yet. Certainly I do not think that the supply glut can be ameliorated before May 8th, but the administration and everyone else in the world is trying. The Texas railway authority is convening to try to mandate a production cut across the state. Saudi Arabia has already agreed not to send as much oil our way in June and July as they did in May. The administration has opened the strategic petroleum reserve to take on excess supply. So - I don't think that the USO fund will collapse. But I think it's worth less than $2, and it closed today at $2.81. Unfortunately, the situation is so bizarre and it's unfolding so fast that I can't really recommend selling USO tomorrow morning until I know what price USO is trading at tomorrow morning and how much of their portfolio they were able to roll today. What I can say is this: If you aren't involved yet, please, please, please, don't just buy USO because it seems like oil has to go higher.

For now, I guess I agree with this guy. Stay away from USO.

Disclosure: I am short USO, and long USL. I wrote this blog post myself, and it reflects my personal opinions. I am not being compensated for it, and I have no professional relationship with the funds' sponsor, USCF, or their parent company.


Reminiscences of a Stock Operator, Or: The Anatomy of a Short Sale

When I first decided that I would launch Antrim Investment Research, I wrote a blog post entitled, "Investment Philosophy: The Local Rock Pit," that meanders through some of my thoughts about the philosophy of security selection as well as my reaction to Peter Lynch's folksy-investment-guru styling from "One Up on Wall Street." Candidly, at that time I hardly knew the difference between Squarespace and WordPress, and my goal was merely to explore the capabilities of my new investment advice pulpit. But today I felt that I should revisit that post, because I had committed the rather egregious sin of teasing my audience with a skeptical take on Tesla Inc. (TSLA 617.69 +7.80 +1.28%) while disclosing only that I had no position in the name either way. That feels rather cowardly, so I'll endeavor to rectify the situation today.

Those who have worked with me in the past (or spoken to me a few times) will be aware that I am rather bearish on TSLA, the stock (I do think the cars are cool). I might as well have said so in the aforementioned blog post - I did indicate that I did not share the market's optimism. But all of that has been true since TSLA crossed $200 in 2014. It was trading near $750 when I wrote that blog, and it's closed today at $745.21. I wasn't short then, and I'm not short today - but I did make a mistake in the interim. I shorted TSLA in some size towards the end of March, and covered that position at a loss in mid-April. I'm not going to go into much detail about TSLA's fundamentals or valuation in a quick blog post (though I will likely do so at some point in the future), but I would like to take this opportunity to talk about something you don't usually hear about from investment professionals: my mistake, how I made it, and why, so that you might gain some insight into my investment process, or learn something about short selling and risk management.

I am, at heart, a value investor. I'm a bottom-up stock picker; an old-school security analyst versed in the art of qualitative fundamental analysis. I relish in the knowledge that the market is inefficient and provides me with mis-priced investment opportunities on a daily basis. I endeavor to identify them, and I invest in those securities with the conviction that my diligence is adequate to inure my portfolio against the risk of permanent capital impairment. In fact, I hold only one professional belief with greater conviction than that I reserve for my precious investment portfolio, which is: I have been, and will frequently continue to be, wrong. It presents something of a paradox for the self assured professional.

In the end, the resolution of this paradox is rather simple. You have to install some type of risk management or mitigation into your investment process, because betting the house every single time is guaranteed to end in ruin for anyone who runs the risk of being wrong one time. Most investors will be familiar with the concept of diversification as a risk management strategy. I like diversification, to a point. Eventually I do believe that diversification dilutes my time and attention away from my best ideas, but I, like any responsible professional, understand the need to have at least 5-7 uncorrelated ideas in the portfolio at all times. At an even more fundamental level, though, one must practice self-reflection and self evaluation. The successful investor must constantly re-evaluate their thesis anew, re-testing assumptions and modeling ever more potential scenarios in order to constantly reassure themselves of the validity of their initial analysis. Armed with this knowledge and a desire to be intellectually honest with myself throughout the investment process, I confidently tolerate even extreme volatility in my long investments while I await the rewards I know that patient, long term investors reap.

Short sellers do not have this luxury.

The very nature of the short sale does not afford the investor the ability - no matter how patient and self assured they may be - to wait out any and all volatility, secure in the knowledge that their analysis is sound. The short seller, quite simply, has sold something that does not belong to them. It doesn't matter whether it's old or new, or whether it's blue. What we can say for certain is, it's been borrowed, and the short seller has sold it. This can present a problem when its owner wants it back, and it does present a problem for the security analyst awaiting the encounter between price and intrinsic value.

David Einhorn said it best in, "Fooling Some of the People All the Time: A Long, Short Story," when he wrote, "Twice a silly valuation is not twice as silly." Let's imagine we've sold short a company that we believe is a total fraud. If it is, it's worth $0. It's no more rational for it to trade at $10 than $100 if it's not worth anything. Which is to say, if it's at $100, it could go to $1000. Who's going to stop it?

When you sell a stock short, your risk management process cannot consist solely of re-evaluating your thesis and re-testing your assumptions, because you do not have the luxury of outlasting any and all volatility. But neither is the short sale a rare and mysterious thing that must be approached with unprecedented caution and treated with fear and reverence. It's really just a bet that a stock will go down and it requires a bit of risk management. For whatever reason, probably because I'm a simple guy, I've always preferred simple solutions to my difficulties, and I've resolved this one by adhering to just about the simplest system I've ever heard of: the same one prescribed by the character, "Old Turkey," in "Reminiscences of a Stock Operator." When asked for investment advice, Old Turkey would only ever say one of two things, "It's a bull market, you know," or, "It's a bear market, you know." If it seems controversial that you could distill all the investment advice accumulated over the course of a successful career in the markets down to one pithy aphorism, it's because most people seem to think things are a sight more complicated than that. But as far as I'm concerned, it's a pretty good place to start. The lesson, such as it is, is that you shouldn't spend a lot of energy fighting the general trend, since trends tend to persist.

All of which brings me back to Tesla. I am willing to say that I do not believe that Tesla is properly valued by the market, and I am willing to express my skepticism about their ability to service their debts without raising additional dilutive equity by selling the shares short. What I am not willing to do is stand directly in opposition to an ongoing, exuberant, speculative fervor in TSLA shares. It might seem simple, but it saved me a lot of money simply NOT being short from around $200 to wherever TSLA peaked ($917.42!).

In Q1 of this year, however, two things changed. First - we entered a bear market and TSLA stock stopped going up. That's not enough to short the shares, but that's another essay for another day. Second - the Covid-19 pandemic and enforced social isolation measures resulted in the closure of TSLA's Fremont, CA manufacturing facility. Together, I saw a catalyst that directly (and negatively) impacted TSLA's ability to service their debt, and a shift in the prevailing market sentiment that favored the short seller, and I initiated a position.

I patiently endured a (typically) violent bear market rally in late March and early April, until the sentiment shifted again. While the S&P remains (in my opinion) comfortably in bear-territory, TSLA has begun to revisit its over-exuberant speculative fervor phase on the strength of a new thesis. Investors have started to believe that long-feared competition from the legacy auto-OEMs in fully electric vehicles will be scrapped or delayed as those companies struggle to re-open shuttered factories in the wake of the pandemic (to me this sounds a bit like a tacit admission that competition would've been a challenge for TSLA, but hey, the punch is already spiked, drink up!). TSLA bulls, assured of TSLA's survival, are equally assured of the demise of the traditional auto OEMs. And, it being the case that those same OEMs are, in fact, heavily indebted, enough credibility is lent this new wrinkle on the TSLA bull case that we're back off to the races. While my opinion on TSLA's fundamentals has not changed, I am forced to admit we are back in a bull market (as far as TSLA is concerned, anyway).

So for now: I covered my position, at a loss. I'm confident that when the time is right I'll get my money back. With interest.

Disclosure: I have no positions in any of the stocks mentioned herein, and no plans to initiate a position in any of those stocks in the next 72 hours. I have no business relationship with any company mentioned in this post, and I am not being compensated for its publication.

This is a blog post, and it is not intended as a recommendation to buy or sell any of the securities to which it refers.


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