Bitcoin addendum: Running out of oxygen; the 'money of the internet' fallacy; and bitcoin futures & systemic risk

I really can't resist a quick addendum to my recent bitcoin post. I thought I had said all that needed to be said. But as Bitcoin's price has escalated to new highs of nearly US$20,000, there has been a commensurate rise in the degree of folly and fuzzy thinking, and I can't seem to keep my thoughts on the matter to myself. I have three additional points/observations to make:

Bursting the Bitcoin Bulls' Bubble

I really hate to do this. There has already been an inordinate wastage of humanity's collective time spilling ink on Bitcoin in recent months - something I contributed to with my first relatively-long post on the topic here (200% ago). But with the digital 'currency' having recently hit US$10,000/coin, I can't resist a follow-up. So permit me a brief indulgence.

The economics of blogging, and the challenges for traditional media & content creators

I started this blog nine months ago, and have since published 30 articles (excluding this post). On average, each article takes me about four hours to produce - typically about one hour to blast out my thoughts in one go (in an occasional burst of writer's inspiration), and then about three hours to iteratively re-read and edit the text (it is amazing how many times this must be done to remove typos and ensure the text flows smoothly and logically from one point to the next - as a general rule, the easier something is to read, the harder it is to write).

All set for the biggest equity bubble in history?

Back in February, I wrote about how my biggest fear in markets was not a melt down, but rather a melt up - a risk I felt investors continued to underestimate. The post - which is one of my best to date (if I may say so), can be found here. Nothing that has occurred in the nine months that have elapsed since that post has assuaged those fears, and indeed, we have seen global markets rally some 15-20% since that point in time, with Bitcoin and other speculative asset classes vastly exceeding that. Events seem to be unfolding in exactly the manner I had most feared.

Why I (and the market) are not worried about nuclear war with North Korea, and why Richard Thaler is wrong

Nobel Laureate Richard Thaler was recently reported as expressing bemusement about why global stock markets continued to levitate, and particularly given what he considered to be a material and growing risk of nuclear war. He noted:


"We seem to be living in the riskiest moment of our lives, and yet the stock market seems to be napping.... I admit to not understanding it". 

The (real) truth about our debt

Livewire Markets today posted an article by Stephen Koukoulas from Market Economics, entitled "The Truth About our Debt". The full article can be found at the link below.

However, in my interpretation, the crux of Koukoulas' argument is that we need not worry about the high level of Australian household debt - now approximately 200% of GDP - because looking at the debt is only half of the equation, and the level of household assets has also risen significantly. Australian households, on a net basis (assets less liabilities), are in fact as wealthy as ever, and so - it is argued - fears over Australia's high indebtedness are misplaced.

James Damore vs. The Google Archipelago

I was distressed and saddened this week to learn that Google had decided to fire James Damore for his circulation of an internal memo that dared to question some of the more extreme elements of the social justice warrior (SJW) inspired workplace equality/diversity movement.

Michael Kors +21.5%, and why value investing is so hard

Overnight (I reside in Asia), Michael Kors (KORS US) announced an above-expectation fiscal 1Q18 result, which sent the stock up 21.5% to US$45.25. Comp sales still declined by about 5-6% YoY, but this was better than the c10% decline the market was expecting. Earnings declined by about 20% YoY as operating margins fell from about 18% to 15%, but EPS declines were only in the mid single digits, because the company has bought back so many shares over the past 12 months at such low prices (the stock has been trading at 5x EBITDA and a mid-teen FCF yield for most the past 12mths).

BMW & bargains in plain sight

If the bears are to be believed, we are living in a world of overvalued global markets inflated by excessive central bank stimulus, that offer investors the torturous combination of scant opportunity and substantial systemic risk. I do not see this narrative in my portfolio. Sure, there are parts of global markets that are expensive - notably yield-proxies, and parts of the tech industry. However, there are still plenty of bargains in other parts of the market hiding in plain sight.

Deflationary delusions, the wealth effect, and the direction of causality

Of the many absurdities traditional economic theory has served up, one that I find particularly bemusing is the following: that deflation is an economy's mortal enemy because it causes consumers to defer consumption on the expectation that prices are likely to decline in the future, hobbling economic activity. The idea emerged after a multi-decade period of deflation in Japan which saw concurrent weak consumption/growth.

Seeing through the stock-based compensation ruse

A large and perennial frustration I have when researching companies in the US is the propensity of many companies to add back stock-based compensation to headline 'adjusted earnings'/'adjusted EBITDA', coupled with the propensity of many analysts and investors to take those adjustments at face value. In many cases, I believe the practice to be contributing to material overvaluation, as headline PE and EV/EBITDA multiples are often meaningfully understated.

Why I think digital currencies will go to zero

In 2011, my girlfriend at the time, who knew next to nothing about finance and investments, asked me out of the blue if she should buy some gold. She produced a bouchure she had procured from somewhere offering for sale small ounce-sized gold bricks. I was already bearishly inclined towards the metal at the time, but that comment cemented my bearishness. It called immediately to mind the depression-era saying that "when the shoeshine boys start telling you what stocks to buy, it's time to sell" (paraphrased). Sure enough, gold, which was at about US$1,800/oz at the time, was within a hare's breath of peaking. Gold now trades at closer to US$1,200/oz - a 33% loss over a 6yr period where the S&P500 has continued to surge to record highs.

The 'ick factor', and Ambac as an interesting long

I have found that a fruitful place to look for good investment ideas is amongst stocks that suffer from what might best be described as the 'ick factor' - i.e. it feels too icky to touch. And I have found that the more immediate and visceral the revulsion to the very idea of looking at a particular stock/industry/country, the better. The ideal reaction you want when you float an idea to most people is immediate disgust/dismissal. If you get that you're quite often on to something.

This is so for many reasons. For a start, it goes without saying that growth & fashion-chasing investors are unlikely to be interested in picking over dead carcasses, but the ick factor also means that a lot of otherwise intelligent and contrarian value investors, who generally act as the buyers of last resort in out of favor industries/stocks/countries, are also unlikely to even bother looking at it. This can result in larger-than-average degrees of undervaluation.

Time to take a punt on Nagacorp?

Nagacorp (3918 HK) is a company I have followed for a while. The company owns a first-class asset - an exclusive monopoly license to operate a hotel-casino in Cambodia's capital city Phnom Phen out until 2035 (which is built out and operational). The company has been growing like a weed, benefitting from growing tourism flows into Cambodia, and rising regional and (in particular) Chinese wealth (a key source of inbound tourism and gaming dollars).

The company took the significant downturn in Chinese VIP gambling activity in 2015-16 in its stride (which followed a Chinese corruption crack-down which hit Macau pretty hard), with the downturn barely registering in Nagacorp's financials. This reflected the property's mass-market appeal (about 50% of gross profit), coupled with its VIP positioning as something of a 'poor man's Macau' (although it has also been speculated that company has benefitted from Cambodia's somewhat more 'off the radar' location and lax oversight). The casino also benefits from gambling tourism from Vietnam, where until recently gambling was outlawed (a modest relaxation of these restrictions is currently being discussed/trialled).

Unicorn bubbles, Clutter, and the value of time

In recent years, Silicon Valley has witnessed something of a technology bubble Mark II, although this time the excesses have been concentrated in the private VC start-up funding market, rather than the public markets (large-cap FANG tech valuations are high, but I do not believe them to be bubblish as yet). The poster children have been the so-called 'Unicorns' - private VC-funded start-ups sporting valuations in excess of US$1bn, which are long on hopes/dreams/aspirations and rapid user growth, but short on profits (in fact large and growing losses are the norm).

Many of these Unicorns are marketing a number of cool new O2O services, and are growing active users and (sometimes) revenues very rapidly. The narrative is that everyone else - including incumbent players in adjacent old-world industries - have been too dumb to recognize the opportunity to provide such services on new-technology platforms, and that only tech-savvy 20-somethings have been smart enough to figure out both the business opportunity and how to bring such products & services to market. Mobile apps now mean every industry is ripe for 'disruption'.

E-cigarattes; cultural bias; pluralistic society; and warped incentives

Permit me a little bit of a rant here, but it is actually a very important case study in public policy gone awry, and how vested interests can capture the debate and result in the spread of false and misleading information, and result in policy choices occurring that are utterly irrational. Bear with me, as I believe the read will be worth it if you can persevere to the end, as smoking remains one of the most misunderstood phenomenon among intelligent members of modern day society.

Negative gearing & surging rents: Is Andrew King disingenuous; delusional; or just plain dumb?

The NZ Herald recently reported on the Labour Party's proposal to eliminate negative gearing tax deductions for property investors. The proposal drew fire from NZ Property Investors Federation executive officer Andrew King, who warned that if the policy was introduced, rents would rise sharply, penalizing renters and particularly those trying to save up a deposit for their first home. It was implied that rents could rise by as much as 65% - the degree to which the after-tax cost of providing rental accommodation would rise for landlords absent present-day tax deductions.

While it is standard fare for those with a vested interest in the property market to - shall we say - 'incline towards an optimistic interpretation' of the facts - this sort of scaremongering about rents is something that has always deeply irked me. This line of reasoning is so cynical, and so shamelessly self-interested and false, that I can't resist writing something about it.

J-walking, and how investors' risk perceptions are irrationally distorted

I attended the University of Auckland between 2001-05. Throughout this period I had to J-walk back and forth across a busy street regularly to reach a lecture hall. I did so for years without giving it a great deal of thought or circumspection.

Then one afternoon, as I was walking out of the hall after a routine lecture and chatting nonchalantly to a friend, I was greeted by a sudden and violent screeching of tyres, following which I witnessed a hapless young student crossing the street being hit by a car, propelled onto its bonnet, and then thrown back onto the pavement like a rag-doll (fortunately the accident was not fatal). Needless to say, it was an extremely disturbing and unpleasant experience.

A (satirical) interview with the co-founder of dollar-discount.com

Today it is my great pleasure to introduce to you the co-founder and CEO of dollar-discount.com. Since its founding two years ago, the company has delivered extraordinary growth in monthly active users (MAU) and gross dollar merchandise value (GDMV). Forbes has labeled dollar-discount.com the latest addition to the prestigious 'Unicorn' club, with the company's latest funding round with SoftBank and Sequoia having recently closed and valued the company at US$1.2bn. I think you'll agree the story of what this 24 year old without any prior business experience has achieved in under two years to be truly inspiring. Thanks for joining us here today.

Pleasure to be here.

Brokerage/ETF price wars, and implications for the cost of capital

The Wall Street Journal reported this morning that Fidelity has announced a reduction in its online trading commission rates from US$7.95 to US$4.95 a trade. This move follows Charles Schwab's decision several weeks ago to cut its commissions from US$8.95 to US$6.95, and in response to Fidelity's decision, Schwab announced yet a further reduction in rates to US$4.95 as well. This emergent price war among discount online brokerages has sent the share prices of Schwab, TD Ameritrade, and E*Trade into a tailspin (and rightly so).

It remains to be seen how far this price war has to run, but it could be a fairly long way, as these brokerages still charge considerably more than disruptor Interactive Brokers (your correspondent's primary broker), which allows you to trade US stocks for as little as 1c per share due to the platform being fully automated. It would appear that the cost of trading is on course to continue to trend steadily towards zero over time.*

Giving Money3 a wide berth

I recently took a quick look at ASX-listed Money3 (MNY AU). A well-known NZ-based small-cap outfit own it and have labelled it one of their top picks, and Ray Malone, of AMA Ltd fame (AMA AU), is also the (non-executive) Chairman. I have followed AMA for a long time and admire the company and what Malone has achieved with it, and made good money on the stock in the past (although I am long out of the stock now - I bought at 5c but sold way way too soon, at about 15c). MNY has also been growing quickly and the stock has done well over the past five years, and trades at superficially modest earnings multiples (a low teen forward earnings multiple, although closer to 2x book).

What I found horrified me, and it suffices to say that I won't be investing.

Vacationing in Japan, and going long Yen

I took a break from blogging (and more than casual on-the-road research) last week by taking a quick vacation to Japan - a long overdue first-visit. The snowboarding in Niseko was excellent. Tokyo was the bustling and colourful metropolis I expected it would be; and the food was outstanding. These were all consensus views on Japan, and the consensus was right.

There is another consensus view on Japan I am less in agreement on, however: that the Yen is a sell. I think it's probably a buy.

Why I worry more about a melt-up than a melt-down

Most stock market investors worry incessantly about the risk of a potential market melt down. I don’t. I worry about the risk of a market melt up. To be clear, this is absolutely not a prediction. But it is a risk factor I worry about, and think other investors should worry more about too.

For anyone trying to grow their capital; make a living off their investments; or build a business around managing (and making money for) other investors, the absolute worst thing that could happen would be if markets everywhere were to surge and become (and remain) extremely expensive. Imagine, for instance, a world in which stocks traded at 50x earnings. It would be extremely hard to make money in markets. If you invested, you would be offered a poultry 2% earnings yield in exchange for considerable risks. I would likely have to give up and return all the money I was managing to my investors. I’d be out of business.

Fortress Investment Group; buying breakouts; position sizing; and perpetual self-loathing

I woke up to a pleasant but also slightly bittersweet surprise today over my morning coffee – overnight (I reside in Asia) Softbank had announced a bid to buy out Fortress Investment Group (FIG US) Class A shareholders @ US$8.08 a share. This was an approximate 40% premium to the stock’s previous price, and 66% above the levels prevailing at the commencement of 2017. 

FIG was a 1% position in the primary portfolio I manage (larger in some others), and was acquired in stages over the past six months at a US$5.21 average. I bought my base position (about half) at approximately US$5.00, and I then bought the break-out in January, doubling my position in the US$5.30-5.50 range. A 50-60% gain in less than six months is nice. But it's much nicer on a 5-10% position than a 1% position. I didn't know whether to celebrate or beat myself up for not buying more. More on that later.

Martial arts & the UFC; Michael Lewis; and why rouge punters predicted the GFC, not the mainstream

Michael Lewis has stated that what inspired his fantastic book The Big Short (subsequently made into a Hollywood movie) was the mystery and intrigue of why a handful of under-resourced, small time mavericks and outsiders such as Michael Burry seem to have been able to see something that almost the entire mainstream could not, and predict the financial crisis (or, I would add, at least identify a significant risk of one occurring).

Bank CEOs; Chairmen of the Federal Reserve; and mainstream academics and economists alike all completely missed it, and subsequently claimed the crisis was “impossible for anyone to predict”. Michael Lewis likes to base his books around interesting characters that shed light on a deeper and more interesting story. He wrote an fantastic book that I highly recommend, but in my view he never really got to the bottom of the mystery he sought to solve.

Crisis investing, prejudice, 'blink' investing, and Ferrexpo as a compelling long

I like to go hunting for bargains in off-the-beaten-path places, and particularly in areas of distress. When a figurative financial bomb goes off, I like to run towards it.

This is not an exercise in financial masochism. There is a logic to this eccentric proclivity. If you take a look at a long term chart of the S&P 500, it is fairly obvious when the best times to buy were – they were during recessions and/or financial crises (e.g. 2000-03; 2008-09). That was when the best bargains were to be found. One option is to sit around and wait for a once-in-a-decade market downturn. Another is to actively seek out parts of the world where downturns are already in motion.

Bubble-trouble with Australian/NZ mortgage risk-weightings

Approaching a decade on from the global financial crisis (GFC), I continue to remain amazed by how little the world has learnt. Indeed, Australia and New Zealand, for instance, remain in the grips of record property bubbles at present and are repeating many, if not most, of the same mistakes. The same can likely be said of Canada, and perhaps the UK as well (although I'm less confident on the latter).

While all sorts of new banking regulation has been proposed and implemented in the crisis' wake, the root cause of the crisis does not appear to have been either recognized or addressed. Consequently, the same fundamental mistakes are recurring, but merely in a different guise - namely the use of artificially-low mortgage risk weightings. But first some quick background.

Do tax cuts for the rich help or harm the economy? It depends!

A frequent source of public policy confusion is the issue of whether corporate tax cuts/tax cuts for the rich (the two are similar but not quite the same) help or harm the economy. The issue is also of increased relevance at present given Trump’s pledge to significantly cut US corporate tax rates.

The typical argument from conservative republicans and neo-classical economists in favour of tax cuts for the wealthy is that they boost the economy by providing increased resources to finance investment. Higher investment, in turn, helps the economy and creates jobs. A virtuous circle is kicked off, with the lower economic tiers of society benefitting via the so called ‘trickle down’ effect.

Why the CAPE multiple is fatally flawed

The Cyclically-Adjusted PE (CAPE) multiple – usually calculated as the market price divided by 10yr average inflation-adjusted EPS – is fashionable amongst value investors. It is particularly popular as a way to value broader market indices. Unfortunately, it has become a deeply flawed and misleading measure.

Once upon a time it made a lot of sense. That was the time when stock buybacks were a rarity and corporates returned cash to shareholders almost exclusively by way of dividend payments. However, today, stock buybacks are quite common – particularly in the US. Probably not coincidently, the US is also the market where the CAPE multiple is most frequently cited as an argument for why the broader market is overvalued. 

KORS 3Q result no kors for concern

The LT3000 Blog got off to a seemingly inauspicious start by posting a long thesis on KORS a day before the company’s 3Q result came in short expectations, sending the stock down as much as 15% intra-day (10% by the close). I increased my position by 50% at close to the daily lows of $35, reducing my average in to US$39, and increasing the position size to 25bp of the fund. The stock is trading up today early in the session at US$38, against a weak broader market, so my position is only marginally underwater at present.

The 3Q result itself was actually broadly in line with expectations. While headline sales and operating margins were down YoY, this was already baked into guidance/estimates. Comp sales declined slightly faster than expected (6-7%, vs. 5-6% expectations), but quarterly earnings actually beat street estimates by a penny. The real issue was weaker 4Q outlook commentary, where the company guided for an accelerated low-teen decline in comp sales in 4Q, and reduced its 2017 fiscal EPS guidance from about US$4.40 to about US$4.20.

Beijing Capital International Airport: Ready for take-off

Over the past few months, I have accumulated a 70bp position in Beijing Capital International Airport (694 HK) at an average price of HK$7.50, and continue to nibble at the position on weakness. Given the right opportunities to add, I can see this growing into a core portfolio holding in time. I believe the stock to be attractive, trading at a FCF yield of 8-9% and a forward FY17E PE multiple (on conservative assumptions) of 15x. Here is why.

BCIA operates the world’s second busiest airport, with annual passenger throughput of some 90m people. Airports are generally great tollgate-type businesses that have delivered outstanding risk-adjusted returns for long-term shareholders. One need look no further than the long term share price charts of the likes of Sydney Airport, Auckland International Airport, or Airports of Thailand or Malaysia for evidence of that. Multiples of 30-40x are not uncommon, as investors have come to appreciate the high value of these assets.

Michael Kors is out of fashion

I recently initiated a 20bp position in Michael Kors (KORS US @ $41.09) – the global luxury goods company run (Chief Creative Director) by its eponymous founder. My entire research process took less than an hour, and illustrates nicely one of the investment philosophies I have developed over the years – that more information does not necessarily lead to better decisions or better investment outcomes. One doesn’t have to know everything or even a lot to make money in markets in my view – only what is important. Indeed, it is arguable that being able to block out irrelevant noise is equally essential.

First things first – KORS screens very well using Joel Greenblatt’s ‘magic formula’ – the stock is trading on a 9x trailing PE ratio, and generates an extremely high ROE of approximately 40-50%. Indeed, the stock screens in the top 5% of companies in the S&P500 on this measure. Greenblatt has argued that a mechanical quantitative approach to buying stocks that screen well on these two combined metrics – using earnings yield as a proxy for ‘cheapness’, and ROE as a proxy for ‘quality’ – has historically trounced the market. It is always comforting to know, when selecting your preferred bottom up picks, that you are selecting from a pool of potential opportunities where the odds are likely skewed in your favour. That certainly does not guarantee a good outcome, but it does increase the probability of one materially.

Welcome

Welcome to The LT3000 Blog.

I have recently left a decade-long occupation as a professional securities analyst to pursue my passion as a full time investor, and perhaps eventually found and run my own fund. Owing to the now onerously-burdensome (and hence costly) regulatory requirements involved in establishing a fund these days, barriers to entry have risen for small-time punters such as myself. As a waystation, I am managing a small pool my own and friend & family money, and in the meantime, am enjoying being able to dedicate all of my energies to improving my capabilities as an investor. 

I have no grand ambitions for this blog – it just seemed like a fun thing to experiment with. I enjoy writing, and putting ones thoughts into writing is also a useful discipline. It quickly reveals any gaps in the chain of logic; missing facts; or insufficiently-scrutinized assumptions that may have crept into ones though process undetected. I do not wish for this blog to become a chore, however, so I intend to only post as frequently as a I feel inclined.