Time To Sell Something…As Hedge Funds Load Up On Pricey AssetsAdventures in Capitalism
Back in December, when anything with a CUSIP was getting dumped by hedge funds facing liquidations, I repeatedly made the point (here, here, here) that it was the time to buy—particularly those assets that were at the epicenter of those hedge fund liquidations. Now, five months later, with most securities having recovered quite nicely, I want to remind you of how dark it was in December. Do you remember the feeling of being fully invested while the market dropped a few percent a day? What if you were margined? That must have been scary. Some of my friends cracked and started getting drunk by noon. I can’t blame them. When you’re fully invested and your clients keep calling to complain, hiding at the local watering hole sounds better than watching your portfolio detonate. Especially, if every time you buy something, it drops by 10% the following day.
I want to remind everyone of this moment in time because it assuredly will happen again. If you have followed this site for any length of time, you’ll know that I don’t often make market calls. This is because I don’t feel that I have any particular skill at these sorts of calls. Rather, I want to remind people of the optionality value in having some excess cash. If there was some position that you wanted to punt at the lows in December and it just rallied 20%; you really should punt it now. If you were worried about your margin levels, then take down exposure or go find some hedges. Everyone’s book is different, but there’s no reason to be fully invested after a crazy first half rally.
I’ve personally taken my exposure way down. I’ve even sold some stuff I didn’t want to sell. With the trade war heating up, global economic data rolling over and the Ponzi Sector detonating, I’m going to get plenty of chances to buy some bargains if I’m patient. While I may miss the last few percent of upside in this rally, I prefer to have cash at this point—especially as the first five months have been so good to me.
This is the half-year position review for names I’ve spoken about on this site. I’ve also booked quite a few that I didn’t speak about—I want the room to add into the next dislocation.
Natural Gas Basket
I’ve booked all my Gulfport Energy (GPOR – USA) and Range Resources (RRC – USA) for a small net gain overall (gain on GPOR and loss on RRC). The main reason for the gains was my tenacity at averaging down in December, before taking most of the additional shares off during Q1’s bounce. I used the proceeds to substantially bulk up my positions in Antero Resources (AR – USA) and Sandridge Energy (SD – USA). AR and SD are substantially cheaper than GPOR and RRC and have much better balance sheets (AR’s underpinned by its stake in AM and SD due to their $100 million headquarters building covering their minuscule debt many times over). As I got to know these companies better, I realized that I should focus on the two that have the least overall risk if natural gas prices do not recover in the near term. Despite gas prices pulling back during the first half of the year, I remain bullish on natural gas (more to come in future posts).
Scorpio Tankers (STNG – USA)
Scorpio has had a great run and I sold about 25% in the low 27’s to re-weight the position on account of the 55% increase in price over my basis (gotta have some discipline when your largest position suddenly becomes your whole book). My investment is all about IMO 2020, yet the shares have rallied before we have seen any impact from it. At the same time, I suspect that Q2 results will be soft, hence my decision to take a few off as I can always bulk it up headed into the winter.
Tesla Motors (TSLAQ – USA)
It took some time, but the GigaFraud has finally started its trek towards zero. Following the capital raise, I somewhat reduced the size of my long puts as my whole position was January 2020 duration and I was showing a sizable gain. This capital raise will buy Tesla some time and I figured I didn’t need to have a high-teens percentage position in puts with 8 months left to them.
One of the reasons that I prefer put spreads (I had 200/100 Jan 2020 spreads) to outright puts on something like this, is that the short puts also decay with time. Following the capital raise, I booked all of my 100-strike puts in the 3’s and 4’s compared to the 7’s that I sold them at (net gains of 50%), which has served to make me a good deal shorter Tesla on a notional basis, despite having booked some 200-strike puts for nice gains as well.
I remain long a basket of currencies against the US Dollar. I am down about 2% on this basket since I wrote about it in the past. The jury remains out on which way the Dollar will break, but with implied volatility collapsing, a move is likely coming soon.
In summary, my book is rather skinny now. I have a shopping list of stuff that I want to own and I’m waiting for the next dislocation to buy. Over the years, I have found that the best opportunities are after a sector or full market washout and it rarely makes sense to be fully invested all the time—you’re much better off being patient. With all that in mind, I figured I’d remind everyone to keep some extra cash—especially with the storm-clouds on the horizon. Buying the recovery from the hedge fund liquidation low in December was the easy trade–don’t overstay your welcome. All is not rosy out there in the world.
Disclosure: Funds that I control are long shares of AR, SD, STNG and TSLA puts.
Article by Adventures In Capitalism