In their latest episode of the VALUE: After Hours Podcast, Vincent Daniel, Porter Collins, Jake Taylor, and Tobias Carlisle discuss:
- Will We See Another ‘Big Short’?
- We’re In A Stock-Pickers Market
- The Intuitive Investor
- Nasdaq To Reweight Big Tech Dominance
- Rivian Up 50% For No Good Reason
- Employment – The Next Big Catalyst For The Fed
- Alibaba Represents Good Value
- Leading Indicators Flashing Yellow
- Meta Is Still Cheap
- Fed’s Actions Have Papered Over A Lot Of Cracks
- Bullish On Offshore Rigging
- Intel Sucks
- We Missed On Homebuilders
- Is It 2021 Again?
- Dumpster Diving In Financials
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
Tobias: We are live. This is Value: After Hours. I’m Tobias Carlisle, joined as always by Jake Taylor. Our two special guests today, you know it’s a big deal when it’s a foursquare, Porter Collins and Vinny Daniel from Seawolf Capital. How are you, gentlemen?
Porter: We’re doing great.
Vincent: Doing well.
Tobias: So good to have you on board.
Porter: Angry as always.[laughter]
Tobias: What is making you angry?
Jake: Yeah, that’s a whole segment we can do.
Porter: When you run a long, short portfolio, you’re only angry at all times.
Tobias: That’s it. There’s always something not working.
Porter: Something not working at all times. But it’s good. You’re always frustrated something when you find a turn in a sector trying to find the right one to pick, and then you pick the wrong one or whatever. Something’s always driving me crazy.
Rivian Up 50% For No Good Reason
Tobias: So, just before we got on, we were chatting about Rivian. Rivian’s got this innovative business strategy where they’re spending– It costs them $150,000 to make a car, which they then turn around and sell for $83,000. So, I think my instinct about getting one of those was right.
Tobias: That’s good value. But is that a good business strategy?
Vincent: Well, it is in this day and age.
Tobias: Yeah, that’s a good point.
Vincent: At least from a stock market perspective, it’s been a pretty damn good strategy over the last few weeks. And prior to going live, we were joking around. I got to give Porter, kudos, about two weeks ago or so. We bought a really small position in Rivian, which is just not something we do. I think Porter was going through the coastal Connecticut and saw a bunch of Rivians like the truck and said, “Hey, why don’t we buy some of this?” The old Peter Lynch model, is it correct?
Tobias and Jake: Yeah.
Vincent: Sure, as heck, I think the stock was up, what, 50% for no reason. Now I know what it feels like to be on the other side of one of these short squeezes where it’s like, “Wow, they could just go up and up and up with no basis or background other than that, it’s a heavy, short interest.”
Porter: Well, a couple of years ago, I had listened to we built this podcast. The CEO was on there. I loved it. Immediately, the guy went to RPI, and then went to MIT. All he wanted to do his whole life is cars. He graduated and got his PhD. The first thing he did is start Rivian or whatever with the predecessor, Rivian. And so, I respected him a lot. So, the stock was bombed out. Listen, they’re selling their cars now, and they’re selling the vans, and they’re starting to ramp up anyway. But the stock went up $10 and we sold it.
Jake: [laughs] How’d that annualize out?
Porter: Yeah, that’s something we never do. In one of the most speculative markets of all time, we’ve got a little speculative.
Is It 2021 Again?
Tobias: Is it 2021 again? Are we back in the good–? 2020, I guess, back in the good old days?
Porter: No, because liquidity is not there. The amount of liquidity is not there. I think the valuations were even dumber at that point, right?
Tobias: [crosstalk] dumb valuations out there. But yeah, that’s probably right. They were dumber.
Vincent: We don’t have the SPAC activity that we did in 2021. You don’t have the massive issuance. The stupidity that we see I think is isolated to just a certain cohort and sector of stocks. As you guys know, being value guys, it’s not everywhere. There’s actually a lot of things that are not necessarily that expensive at all. In fact, some of them are quite cheap. It’s just the money is not flowing there at all.
Dumpster Diving In Financials
Tobias: Well, let’s talk about that a little bit. What looks cheap to you? What do you like? What sectors and industries? I guess, don’t have to name names, if you don’t want to do that.
Vincent: You want to start, Porter?
Porter: We’ve been doing a little bit of dumpster diving in financials. We’ve liked energy for a long time. We’ve been buying more energy recently. We argue a lot about the gold miners and the gold stocks. The problem is, it goes back to that– A lot of these miners, whether it’s gold or uranium, they’re just not optically cheap stocks. Actually, there’s not a lot out there that’s optically cheap. We were going back and forth earlier.
One of the names we like the most we can go through a little later is the gap and adjusted differential between numbers. How do you think about that? How do you wade into that conversation and make a rational decision? I don’t think there’s a lot of cheap stocks out there, per se. The energy names, I think, have always been cheap, and I still think there are a handful of out there that are super cheap. So, that’s what we’re looking at.
Tobias: We got a question about the gold and the gold miners. “Do you have to have a view on gold to have a view on the gold miners here?”
Vincent: 100%. They will not move without a positive rate of change of the underlying physical. Or, at least, I would consider myself lucky if I own the miners. Gold went down and the miners went up.
Porter: We’re taping this on Tuesday afternoon. We have a big CPI print tomorrow morning, Wednesday morning. And so, if the CPI is under 3%, I think people are going to be of the opinion that the Fed’s done, even though that’s the total CPI, the core CPI still something like 5%, like food and energy sold, like 5.
Tobias: You think that even though, [unintelligible [00:06:04] said direct– When I saw him get asked that question, he said basically two more hikes. And the market seems to have priced in at least one of those hikes.
Porter: What does price didn’t mean? Was the bond market, the equity market?
Tobias: Yeah, that’s a good point. That’s fair. There’s an expectation, I think that the first one priced in the futures market, but not so much, not in equities, not in bonds.
Porter: Futures market is wrong 100% of the time.
Vincent: The interesting part of all of this is that, over the last, say, month, month and a half, rates have increased. And in general, as rates increased, you would expect to see a decline in any long duration tailed asset of any kind. You’ve seen just the opposite, particularly in– Forget about the Magnificent Seven or whatever you want to call it. Let’s consider most of them, great companies. They’ve worked fine. I’m talking about the crap shit, right. The crap shit has ripped all of it. It just says to me, for the time being and subject to change obviously, that the short interest algo is far more powerful than the higher rate, long duration algo. These things are not supposed to go up when rates rise. These things are not supposed to go up when real yields are increasing. Yet, they go up every day, impressively every day. So, it’ll be interesting to see if tomorrow brings a change in the dynamic. Who knows? We’ll find out.
Tobias: Do you think that’s a result of the– The Fed did drain a lot of liquidity away, and then SVB, and FRC, and those other things got into trouble, and half of it came back out. And they now seem to have drained back below where they were before SVB.
Porter: Well, we talked about before, and it goes back to what they did in the [unintelligible 00:08:12] crisis. The UK went and did QE again. And that coincided with the bottom of the market in October. And then I think that, again, another bottom of the market was when SVB goes down, and not only do they provide support– You can take all your collateral to the Fed and get 100 cents of the dollar for it. And so, there was a lot more liquidity than you saw on the headline number. And then, we’re still running massive fiscal deficits. Was it 6% fiscal deficit? We have the Chip Act in there, we got the Inflation Reduction Act. This is so much stimulus, and I think that’s why the market’s going up. Listen, we’ve missed all the fancy tech trade, and we’ve been short some stuff, but thankfully, not all the Magnificent Seven. So, it’s gone crazy.
Tobias: Let me just give a shoutout to the crowd, fellas. We’ve got Philadelphia in the house. Brandon, Mississippi. Huntington. Yorkshire. Dubai. Moncton. Santa Domingo, Dominican Republic. Bendigo, Victoria, what’s up? Belgium. St. Louis. Cardiff, Wales. Boys are back. Tallahassee. Madison. Orlando, Florida. Pune, India. Madrid. Helsinki. Vienna. Jupiter, what’s up? All right. Yosemite. Yeah, me too.
Jake: I saw that the 30-year US mortgage crept up to, what, 7.38%?
Tobias: It’s getting big.
Jake: That’s back to kind norms. [laughs]
Leading Indicators Flashing Yellow
Vincent: For us, yeah, historical norms without the historic norms of valuation of the underlying [crosstalk]. To me, that’s the big deal that people miss. Hear some of the old timers say, “Well, rates used to be an X and we lived.” I go, “Yeah, but the price of a home was 20% of where we are right now.” It’s a material difference. For me, rates are given how financialized we are, given how levered we are, and given how high valuations are in underlying collateral. Rates are the leading, leading indicator, the way I think about it. And so, as that goes up, the ability for anyone to buy a home, to buy a car, to buy a piece of commercial real estate, just declines. The value has to come down absent you paying up in a material manner and putting your cash flows, or at least at risk.
So, as we were talking about it, I actually think many of the leading indicators are in stressing yellow signal right now. The market, for whatever reason, is ignoring it. There might be reasons for that. We could get into that. But in general, I think in the near term, if this continues, if rates stay where they are, I just think you’re going to see tougher economic conditions coming over the next three months to six months. It’s hard for me not to see that.
Porter: If you think back to our big-short trade, why was it different this time? I think that we saw, what was the, 228 mortgage, all the resets were going to come from the 2004 cycle and 2005 cycle were going to reset to higher to the base rate. The Fed had hiked– I forget the amount of times in consecutive quarters, like, 20 consecutive quarters, they had hiked. And so, rates were a lot higher. I’m guessing that you’re going to see it first in places where they have adjustable mortgages. Your home, Australia, Canada, UK, where inflation is still a real issue, rates are a lot higher and a lot of these mortgages are resetting higher.
So, all else being equal, your disposable income is getting cut pretty significantly. And home prices, especially in Australia, are significantly overvalued, and the debt service coverage looks pretty poor. Australia hasn’t had a recession since, I don’t know– [crosstalk]
Tobias: 1990s. 1992.
Jake: Toby was– [crosstalk]
Porter: And so, if I were a betting person, I don’t have this trade on, but I think you could see it there first, a recession there first, rather than the US.
Tobias: The tension is clearly between those people who think that housing is overvalued given where interest rates are, and their expectation is that interest rates fall back to where they were, and so housing doesn’t have to do anything. And other people who take power at face value that– He’s looking at inflation still running pretty hot, employment is still looking pretty healthy, even though it’s a lagging indicator. That gives them plenty of room to keep the rates up. And so, if Powell’s keeps the rates where they are, then housing has to come down, risk assets have to come down. If he panics and does what just about every other Fed chair has done and pins them to zero, then we’re back to the races.
Vincent: Yeah, I think that’s fair. But he can’t pin them to zero without something happening.
Tobias: Who pinning what? Yeah, it was something [crosstalk]
Vincent: Let’s be more rational, realistic and say, rates would gravitate towards 2%, 3%% Fed funds. He can’t do that without some form of stress occurring in, not just the economy, but probably in markets as well. So, I don’t know if you’re going to get the super goldilocks, which is I could bring rates to 2% to 3%, and the market is going to stay where it is, and therefore, go materially higher. Now, bull markets have done things that I never think that they would do, but that just seems too Polly Annic of an outcome. It’s possible, but I don’t think it’s anywhere near probable.
Will We See Another ‘Big Short’?
Jake: Is there anything like with the Big Short, where there was a catalyst with a known date to it, where like, “Okay, all this is going to go sideways on this date”? Do you see have anything that you’re seeing that might be a candidate for a reckoning at a particular time period?
Porter: Vinny seems to be smiling. So, I don’t know. What do you think?
Vincent: No. Where’s the issues, right? The issues are in the sovereign. And so, as a result, there’s no timetable. Whenever something bad happens, they cave in and they print. As Porter was saying, they did that in October of last year with the UK. They did it in March with– [crosstalk]
Porter: That’s what the debt ceiling.
Vincent: Right. They did it with the debt ceiling. So, the big issue for us is that, yeah, you could have idiosyncratic pockets of issues, but nothing– so it seems, can be material enough, because if it is material enough– Unlike the last time during the Great Recession, I truly believe that the Fed did not know what a lot of the people who were looking at the underlying banking system knew. They didn’t know how severe it was. Now they know and they’re on it.
Credit Suisse goes under, and they’re flooding the system with dollar swap lines to make sure that nothing associated with Credit Suisse is going to impact the rest of the world. So, to answer your question, yeah, there is something out there, and there probably is a definable date. The debt ceiling was a definable date. But what do you do? You just change the rules, and print more money or keep the thing afloat.
Tobias: What about an Airbnb bus? I follow a few of these accounts who think that there are a lot of people who are extended on these things, because they’re looking at them as a cash flowing asset and they assume X amount of occupancy, wherever rates, wherever they are.
Porter: There is no [crosstalk]. What’s the catalyst though?
Tobias: Well, you just can’t make the payments. There’s not enough occupancy to– you just lose a few, it seems.
Porter: If and when they lose their jobs, then I think that’ll be the cascading effect.
Jake: What about corporations saying, “You got to come back to the office now”?
Vincent: But that’s not material enough to really– [crosstalk]
Tobias: As a trigger for the Airbnb us.
Employment – The Next Big Catalyst For The Fed
Vincent: [crosstalk] I think Porter is right. Employment is probably the next big catalyst for the Fed. We could get a benign inflation print tomorrow. Who knows? How they calculate that crap. I don’t think that really materially changes the Fed’s intent. Meaning, they’re probably still going to go one, maybe two. I don’t see them going more than that, quite frankly, because I think something would crack if they continue to go, really crack, like we did in March. But I think they’ll materially change their tune to the more dovish variety once employment shifts, whenever that occurs.
Porter: You look all around the world, inflation is still really hot. Brazil is the only place that doesn’t have hot inflation right now and their rates are…
Vincent: Although the leading indicators are suggesting they’re coming down, Porter.
Porter: Rates are coming down.
Tobias: No, even rates of inflation are coming down.
Porter: Look, the US is still X food and energy at 5. That’s higher than the Fed wants.
Porter: They are scared about the lag effects. Once you lap the easy comps, you still have a wage spiral, because I forget that– UPS is having the contract negotiations. I think Delta Air Lines just did– A lot of these guys– [crosstalk]
Jake: Starts getting structural.
Porter: Yeah, the unions are powerful once again, for the first time in a long time. Look at the UK. I think their minimum wage is like $25 or something like that, and they just keep ratcheting that higher to afford the property.
Tobias: Michael Kao had been a little bit bearish on oil. I think thesis is something like, there’s a recession coming. Energy tends to not do as well through a recession. Therefore, these marks have got to come down. He’s probably been saying that for six months, I hope I’m not six months or more. It seems to have been pretty right so far. What does it take to get–? I asked this fully disclosed– I’m up to my risk limits on energy.
Tobias: I’m interested to know.
Jake: Tell me why I’m right, please. [laughs]
Porter: I think there’s two things, and they’re pretty powerful. One was, the weather was very benign this year. It was called 2-3 standard deviation event in terms of a war winner. And so, you saw gas prices collapse in December. And then two, you had the SPR release.
Tobias: That’s still being drained[?], I think.
Porter: No, I think they’re done right now. And so, the SPR is done. The weather is at least normalizing. So, pretty so far, it’s been a warm summer. And then you have OPEC cutting, and you were still waiting on China stimulus, which may or may not come, but it’s a benefit. So, I’ve said for a while that I think, both gas in the US and oil have probably bottomed, and these stocks are doing a little bit better. There’s a guy on Twitter that has all this data going back to the 1200s. Basically, all the commodities are correlated. I think oil is the granddaddy of them all. As oil goes higher, so goes everything else.
So, they’ve all been correlated down, whether it’s copper or any of these things. And so, I think as oil goes higher, you’re going to see more commodity inflation. I’m not calling for $120 oil at all. I’m saying the bottom is probably in and bias higher.
Vincent: I think you started seeing bottom. Let’s rewind the clock six, nine months when he initially made his call. As Porter said, yeah, the SPR release, you had Capex increasing, rig counts were going up. You had phantom supply coming from Russia and other places above and beyond. Some of these still exist, but the underlying price of energy bottomed once the rig counts started– like the second week or third week when US rig counts started to decline in a material manner. You saw [unintelligible 00:21:18] and all that just stopped going down. And then from there, I joked around that you’ll probably see the bottom in [unintelligible 00:21:31], the minute Rafa puts up the serve at the French Open.
Vincent: [crosstalk] While Rafa didn’t play, that was pretty much it. And so, we’ll see. Weather needs to happen, but you once again reduced Capex in fossil energy. Even whatever supply you are getting, you’re not getting as much as you were six months to nine months ago.
Bullish On Offshore Rigging
Porter: We’ve been very bullish on Offshore drilling and all that type of stuff, because one of our biggest positions has been Petrobras still is in the energy giant in Brazil. And most of their drilling is all offshore. They’re going hog wild in terms of trying to drill and putting up new contracts for these drill ships. Tidewater has done really, really well. Some of these names have moved a lot, but Petrobras is still an incredibly cheap stock, mid-20 dividend yield, 4 PE, however you want to value it. I think the macro in terms of emerging markets is looking as good as it’s been in a while over domestic markets, at least.
So, you have [unintelligible [00:22:59] rate, they hiked from, I think, 1 to 14, and interest rates are down 14%, and inflation is down to three. You finally have that dynamic working and the currency has done very well. And so, I think when you get these inflection points in the macro really right, they were upgraded by earlier put it on a credit watch upgrade by S&P. If you go through and read that report, it talks through all the dynamics of why the yields can come down, why the currency can strengthen. And so, when that happened, you saw all these Brazilian stocks move higher.
Tobias: What do you make of the strength of the consumer in the US? It seems like there’s a lot of discretionary spending around on travel in particular. Not so much, I guess in retail, because retail, we got a print this morning that said that [unintelligible [00:23:57] were down year on year. People spending a lot of money. We had biggest weekend ever, I think, over the July 4th weekend.
Vincent: Let’s paint the bullish current picture right now, if we can. One, unemployment is really low. I’m talking mostly domestic right now, US. Unemployment is really low. Wages are still pretty favorable. If you own your home, chances are, there’s a very, very good chance that your mortgage rate is fixed and below 4%.
I also heard from people that are not in our business, but it makes sense that work from home has saved you a heck of a lot of money commuting. All of that has probably increased discretionary income and pent-up demand where you can go out and travel, and people have wanted to live. How long that lasts or at least the rate of growth on that, I think is the real question to me. But that part of the consumer has been strong.
We Missed On Homebuilders
What has not been strong are big ticket items. Aside from travel, the big-ticket items of an auto, of a house. The homebuilders, as you guys probably know, has been an incredible sadly we missed it, thankfully, we weren’t shorted, has been an incredible place for Alpha this year. It’s a really truly bottom-up story. But when you think about the amount of new homes that are sold in the country versus the amount of existing homes sold in the country, the overall aggregate pie of homes being sold, the transaction velocity is down. And so, as a result, housing overall is not doing that well. Auto overall is not doing that well. The new OEMs are beginning to incentivize, because many people can’t afford or shouldn’t want to afford $1,000 monthly auto payments. So, those big-ticket items have suffered at the expense of it, you think of travel. So, I don’t think the overall consumer story is super robust. I don’t think it’s weak. It’s just pockets of spending has shifted.
Porter: The TSA numbers are flat with 19. The prices are up a lot more than they were, which is great for airline profits and all that kind of stuff. That’s why it’s amazing. If you look at these charts of the airline, as of early June, they had done nothing. And then they just basically skyrocketed in the past– taken off in the past– [crosstalk] [laughter]
Tobias: It’s expensive every time I get a– [laughs]
Jake: Oh, my God.
Tobias: Home builders was a really strange one, because they all came into the screen. I did hold a lot of those and the things that I managed, just because they were unusually cheap. But I was as scared about that as anybody else was, because I could see that– I thought the recession would hit those pretty badly. I didn’t see that. Everybody would get trapped in great mortgages, and then that would squeeze out into the new homes, and they’d have this absolute bonanza period.
Porter: I think that the amount of people in the world that had that thesis was four or five. Not many people had that, “Oh, yeah, we knew that you weren’t going to be able to move mortgages, but who knew you’d be the new wholesaler would just rip.” That’s because employment stayed strong.
Vincent: Porter, I got to give a shoutout to our friend. So, about six months ago, these idea meetings– And arguably, probably one of the best stock pickers we’ve ever met. He does mostly financials. I’ll give him his name, Jordan Hymowitz, if you guys know who he is. He runs a phone called Philadelphia Financial. Pitches the homebuilders to us. I forget exactly if he had the exact theory of which played out. It doesn’t really matter. I think his theory was, from October, rates were down 50 basis points and the slight rate of change of improvement in home builders, even though it was a poor seasonal season, not many people buy homes in the winter. Nevertheless, these stocks are going to work. He nailed it. I remember saying to him, I’m saying like you, Tobias, “This doesn’t fit my eye. It doesn’t fit my brain. But knowing it’s you, it’s probably going to work.”
Vincent: Because you’re just that good where things are going to work for you. And sure, shit, it worked. What do you do with– [crosstalk]
Porter: And knowing us, we didn’t buy it either.
Vincent: We didn’t buy it. But we didn’t short them. We didn’t short them. What you do from here with these things? I don’t know. I can’t buy these charts that look like this. If you look at the historic ranges of where these sit– I like to look at the builders on a price to book basis. They’re not incredibly expensive yet, but they are no longer where guys like us want to sit and go buy them, if we could get over– [crosstalk]
Tobias: Yeah, you got to be smart. You got to know what’s happening at this point.
Jake: Yeah, it’s a different bet, for sure.
Vincent: Different bet. Very different bet.
Tobias: There seems to be a lot of supply coming on from the new homebuilders too. These numbers are going to be wrong, but I saw 1.6 million homes are being built in it. I think we’re transacting at fewer than a million at the moment.
Jake: That’s just LA. I’m just kidding.[laughter]
Tobias: Nothing gets is built in LA.
Porter: We are structurally short housing still.
Vincent: As a country.
Tobias: I always wonder about those. I think that that’s right, because we can see how– There was so little building going on in the aftermath of the GFC. We seem to have been underbuilding by 500,000 homes a year, something like that, for an extended period of time. At some point, that has to catch up and maybe that’s now. But I always wonder– [crosstalk]
Porter: We’ve made up the difference in multifamily, which a lot of people don’t consider. But I’ve also thought this country as a whole has done a poor job, narrative job of the rent versus buy equation for people. It’s not the end of the world if you’re renting. But nevertheless, I agree with the other parts of the discussion in terms of short homes.
Tobias: That seems that structural shortness of homes seems to go away every time there’s a bust. The rental vacancy is spiking at the moment. Rental vacancy is getting back to where we were. It’s back above 2017, 2018, 2019.
Vincent: Well, a lot of the consumer metrics are great. The credit card delinquencies are back to nearing 2008 levels. Same within auto– [crosstalk]
Tobias: Oh, sorry. I was adding bankruptcies in there as well.
Porter: Yeah, I haven’t looked at the bankruptcies. I don’t probably don’t think so it’s anywhere close to that. And then you think about commercial real estate, it’s also not good. Great, the Fed didn’t hike two more times. That’s not good for any of those underlying metrics. And so, it’s hard for me to get super bullish about what’s going on.
We’re In A Stock-Pickers Market
Again, we’re doing our usual dumpster diving in places where we like, where there are a couple of different financials, which there’s two. Again, we have two financials. We have a handful of energy names. All it takes with a couple of nice catalysts, and inflection points, and that’s how we tend to make money. Buy well and hope for a nice little catalyst and hopefully, have good management team along the way to help you out.
Jake: Do you feel like that implies that it’s like this next perspective, call it year, two years or whatever is likely to do well for guys who are a little bit more stock pickers and not so much just riding a tide.
Porter: I would have said that six months ago.
Jake: [laughs] Yeah. Whole career.
Vincent: I always laugh at this question, because– If you ever watch golf, they always say, it’s a ball strikers course. Well, what isn’t a ball striker’s course?
Vincent: My view is, it’s a stock picker’s market. Well, it’s now going to become a stock picker’s market. Well, tell that to the person who had Nvidia for the last six months. He thought it was a stock picker. He or she thought it was a stock picker’s market. It just happened to be not the stocks that we… to like. So, in that regard, I don’t know, I prefer to think that there should be opportunities all over the place at some point. Long or short, it’s just our job to find them.
Alibaba Represents Good Value
Porter: We were doing some work on Alibaba recently.
Vincent: I was going to ask them this question.
Porter: You look at the valuation, and it’s back to 10 times earnings. The sales have been pretty good. Sales have been great, actually. They’ve run into a steamroller. What is the Communist Party? They’ve paid their fines, and I think both Alibaba and Alipay have paid their fines most recently. And so, you start to wonder, “Hey, if they’re through this and a little bit more China stimulus, maybe that’s the type of stock you can buy that is not a normal value stock.” Apple got to 10 times, Meta got to 10 times. Maybe that too. We were just trying to go through it, did some modeling on it, and we owned a little bit, and waited out here a little bit, see how it goes.
Tobias: Does the ability to collect on the bet concern you? That’s the main issue, isn’t it? The nature of your right as an American holder of some sort Offshore entity that then invests derivatively into the underlying. You don’t have this direct right like the way that you do in the States where you hold a share. You can– [crosstalk]
Vincent: The way we handle that is generally speaking, sizing the position, clearly a risk. Could I ever envision Alibaba being our largest position? No.
Vincent: No way.
Tobias: And because of that. So, what I like to do is say, “Okay, what percentage of capital would I have at risk in this single stock based upon that risk,” which you could wake up tomorrow morning and you could be down 60%, just because of what you said. So, it will never be at the top of the pile for us. That said– [crosstalk]
Porter: But that’s been a risk for a long time, right?
Porter: You’ve gone through a lot of the risks. The Chinese government coming after– Jack Ma being vanished to wherever he is. You’ve taken a lot of those hits, and that’s the reason for the discount now at this point.
Tobias: He’s teaching somewhere now, Jack Ma.
Porter: Yeah. For what is arguably one of the better, more well-run companies in the world. If you look at versus Amazon, you could have a very good intellectual discussion that Alibaba is better run or more profitable at least.
Meta Is Still Cheap
Tobias: Yeah, I bought Meta when it troughed and got beaten up.
Porter: Yeah, you did. When is the last time we were on you were buying Meta?
Tobias: To be fair, I bought it before it got really, really cheap. I don’t know exactly where we started, but we bought it all the way down. Something like Meta, I feel like you could do that. Basically, you’re betting on Zuck coming to his senses at some point, because quantitatively, it was stupid cheap. But if they keep on spending in the Metaverse, that’s a word I haven’t heard for a while.
Tobias: Spending in the Metaverse. [laughs]
Vincent: Someone got to him really early and intelligently well. He turned Metaverse into AI and combined with just the normal business, which you’re right. It was stupidly cheap given the margins and the cash flows. So, good call on your part. We did a similar thing. It wasn’t as impactful. When Google came down, I had Meta envy and I said, “Well, why can’t this happen to Google?” When it got into the 1990s– I did not see the upside that Meta had, nor do I see it as well. But when those businesses come cheap and for sale, I think it’s our job as value-oriented people to really take a hard look at it, because they’re great businesses and you rarely get an ability to buy them cheap. Something’s usually wrong.
Vincent: You’re not going to be able to buy Nvidia cheap unless something materially goes wrong, and then we have to assess and underwrite and see whether it fits our process.
Tobias: What did you make of that whole–? The Jensen Huang, whatever it was, the earnings call or whatever it was, where he came out– The year on year, the sequential revs were down a little bit. I understand he’s not at all a promotional CEO. He’s a conservative-ish CEO. And then he said, $7 billion to $11 billion.
Porter: I think people would debate you on that one.
Tobias: Okay. I’m not that close to it. I understood that him saying $11 billion was pretty much like that was they’re going to hit that number.
Porter: Well, they’re getting a lot of price too, right? They got a lot of price and a lot of volume. And so, I would suspect the next couple of quarters would be really good after that. Let’s see.
Vincent: My concern would be more the longer-term, not the near term. My guess is every newly minted VC backed entity has something to do with AI that combined with larger entities just buying whatever chips they can get to put together some form of AI policy or strategy for the company.
Jake: [crosstalk] Every board is asking, what are you doing?
Vincent: What’s that?
Jake: I was just saying, every board is asking, what’s our AI plan?
Tobias: I just think it’s crazy that intel can’t figure themselves out here. I owned it– [crosstalk]
Porter: They’re so into the PC market, which sucks. That’s the other thing. Look at Apple sales. I know Apple’s done great as a stock, but the sales aren’t good. The handset market is not great. The PC market is not great.
Vincent: I’m not sure this is the reason why intel has sucked. And I agree with you. We’ve tried once or twice to own it as well. But that CEO’s initial compensation package for not doing much of anything can make you want to vomit. It’s just a hard thing to swallow when you see that much money being made without any material improvement in the prospects of the company and the stock.
Nasdaq To Reweight Big Tech Dominance
Tobias: Otavio Costa had this tweet about, the amount of market capitalization that whatever we’re calling them now, the Magnificent Seven Fan Mag or whatever– What do we finally settle on there for those guys? He said, they’re like, the market capitalization as a proportion of the S&P 500 of– The biggest 10 stocks, he’s saying is 31.7% as of June 30. But their earnings contribution is 21.5%. They’re occupying a materially bigger part of the index than they’re actually earning, which would seem to suggest to me that at some point that reverses.
Porter: Maybe. That’s not a game we play. We try not to mess with that. We don’t do much trying not to look at the market that much. We just try to find stocks that we like and stocks that we like to short.
Tobias: What about Nasdaq largest five positions? I think like 48% of the Nasdaq 100. I think from Bill Nygren where he said, they’re so concentrated that they might lose their diversification issue, which is part of the reason why I think they’ve been taking down some of those positions. They’re not market capitalization waiting them. They’re doing something else to them now. I don’t know how they’re going to treat it, but there’s some change coming up.
Porter: Listen, you can feel that these stocks are just exhausted. They had that move. I think it was mid-June rebalancing that they were just going straight up every day, and the amount of billions added to our trillions added to the market cap just in random trading. It was too much.
Vincent: It gets back to a prior conversation we had, that becomes a function, if you believe in the whole the ETF phenomenon and passive. Employment and the money coming in the door, it’s only going to the top cap weighted names, or at least a good portion of it. And that combined with momentum strategies. Employment becomes an interesting dynamic when it comes to markets, if unemployment ever got materially bad. And then I think you would see those names sell off for reasons like, why are they selling off? Well, you just don’t have the flows coming in the door anymore.
I’m not sure if we get there or how we get there, but I do agree with you that we’re at levels right now where if I was someone who owned them. I think you referenced it. I even think Nasdaq is concerned and are changing the weightings of it, because it’s just the concentration is really too high.
The Intuitive Investor
Jake: I prepared a special little piece for you, guys, specifically that’s all about intuition, because I feel like you guys have pretty amazing record of intuition of things. So, I was wondering if I could go through that now.
Vincent: Oh, God.
Jake: No, this will be good. It actually started with a conversation I was having with a quant mind and friend of mine, and he was saying that it’s almost any famous investor or a successful investment strategy can be codified into rules, and then run as a quant portfolio, and therefore, which means it’s likely to be arbitraged away at some point by computers. And so, what he was saying is that, real alpha now is when a fundamental qualitative investor actually goes against their own rules, which implies that you have to have some intuition about what causes you to deviate. And then now, it’s a skill to know when to deviate from your traditional rules. So, the first thing I would want to know, do you guys agree with that? Well, one, is intuition even a real thing that you could depend upon or is that more of like a woo-woo concept?
Porter: Well, before we get into that, look at guys like Steve Cohen. They claim on his own trading book he’s never had a down year. A lot of that’s intuition. Yes, he’s got some-
Porter: -help, whatever. He obviously has great intuition. Some people are just fabulous traders. An investor is very different than a trader. And so, I think that traders have great intuition about how to– Even if you’re a bond trader, you’re an equity trader or a commodities trader, go to commodities. Commodities are very, very– The fundamentals are more ephemeral there than they are in stocks. And so, what makes oil go up? It’s supply and demand. And so, you have to understand those dynamics pretty well, and inflection points and stuff like that.
Jake: At the end of the day, it’s really just subconscious pattern matching. There’s some studies that support this. There’s this one called the Iowa gambling task. Basically, participants are presented with four decks of cards. They draw a card and that either adds to their total or subtracts from their total, and they get paid out from it. Some of the decks have these bigger rewards in them, but they’re also more frequent penalties to the point where it’s a negative expected outcome pull on that deck. And then other ones are positive, but they tend to be smaller.
What they find is that, people usually within 40 polls to 50 polls, they’re fairly effective identifying and sticking to the good decks, and so they’re consciously they understand like, “This is the deck I want to pull from.” But what’s interesting is, they’ll galvanic skin response, which is basically like a measurement that gets at stress, and people will exhibit stress when they’re hovering over the bad deck within 10 trials. So, long before it’s any kind of conscious [Tobias laughs] sensation, their body actually starts to know that that’s a losing deck before they even know. I’m curious. Do you guys have any that Spidey sense about something and do you trust it? When do you trust it and when do you fade it?
Vincent: Yes. I think we’ve been doing this long enough to know– I know my tells. I know what I’m stressed out about certain reasons, where it’s coming from and how it manifests in my body. I could feel it. So, I do believe in the fact of intuition. If I don’t feel like our portfolio is optimal, it’s a stress factor for me. I don’t know, if a portfolio is ever optimal or you never really feel like it’s truly optimal. But when you know you’re wrong, you feel it. I feel it. I feel it all the time. So, I do believe in intuition.
Tobias: Part of the problem is that you get the best portfolio after a long period of underperformance. And so, you feel like, “Shit, but the portfolio looks really good.” And then the other way around too.
Porter: I was going touch on a slightly different angle. What we try to do is be contrarians, and try to look where other people aren’t looking. We’ve been recently pitching this stock to a couple of friends, and no one’s listening. W even pushed Eisman recently. He goes, “I can’t touch that stock.” You obviously underwrite the stock and figure out that your downside is 10% and your upside is 100%. Obviously, people won’t touch it because it’s got some hair around it or people have had bad memories with it. And so, that’s where we feel like that you got to find these idiosyncratic bets where there’s not a lot of downside, and then where you could take a big, big position in something that has 10% downside and 100% upside. That’s the way where we, you know, we try to make differentiate ourselves, I would say.
Vincent: There’s good news, bad news to that, which is, to me, the good news is, because of all of the dynamics of the plumbing of the market, I feel like the market levels of inefficiency is probably close to its all-time high.
Vincent: It’s inefficiently too expensive in many names. It’s inefficiently too cheap in a bunch of other names. The problem is is that the majority of publicly traded capital being run are long-term, short-term momentum. So, being a contrarian, I think it’s extremely difficult to scale to a massive size. You need super patient outside capital to deal with, like you said, Tobias, that your portfolio probably feels at its best after you’ve had three months of getting punched in the face. That’s hard for any outside manager to tolerate and take. That said, there’s probably some of the best opportunities, as we know, are names that no one wants touch, if you have some patience and duration.
Jake: So, this is this book, The Emotionally Intelligent Investor by this guy Ravee Mehta. In it, he talks about six items that will help you to determine when you can trust your intuition and when you shouldn’t. And his list is, number one, it’s only valuable if it concerns something in which you have ample experience. So, you guys have so much experience that you can start to trust it. And actually, in Howard Mark’s latest memo that came out this week, he was talking about how he’s made five market calls over 50 years. They don’t start until the year 2000, and even though he’d been doing it for 30 years at that point. And so, he had seen enough patterns to be able to match where your brain can recognize the pattern at that point. This is Buffett’s basic circle of competence.
Porter: You know those inflection points you’re like, “That’s going to move that stock.” I’m confident that, if X, Y, Z happens, this stock is going to go and go whole lot.
Vincent: It’s funny. You just brought up Buffett. So, of course, my head went to a tangent of what he’s been doing recently. You talk about energy, Tobias, that you’re knee deep in energy. Everyone doesn’t want touch it. They’re worried about a recession, but here’s the goat, right?
Vincent: Just made a second acquisition in energy in an LNG facility. I don’t know, I would pay attention to what he’s doing. God, I wish someone knocked us on the head when he started buying Japanese commodity.
Tobias: Oh, yeah.
Porter: We did look at it. We owned the Japanese banks in the very, very early parts of the bull market, but we didn’t trust that one. 30 years of really awful performance is hard to get behind.
Jake: Yeah. [laughs]
Vincent: Yeah. Financials are an interesting breed. There’s such a different characteristics. We just happen to know them fairly well, and perhaps, maybe too well when it came to Japan. But I just found it interesting. He keeps buying Oxy, and he just made another acquisition. What does he say?
Tobias: Not much though. $3.3 billion. Obviously, I agree with thesis, but it’s just– For him, it’s not a huge position.
Jake: So, a couple other things on this. Number two, remind yourself of your emotional biases. Number three, ask whether the investment reminds you of a previous situation where you’ve been successful. So, the more explicit you can be about the pattern match, probably the better. Number four, know the security and understand your risk reward. Like what you were saying, Porter, you know it’s a 10% downside, 100% upside. You still have to do the work, right?
Jake: Number five, bounce ideas off of someone else. So, that’s courting the outside view, to use Kahneman’s term. And then the last one, maintain freedom to change your mind. So, set up trip wires in advance. That would be like, “Okay, if this happens, that destroys my thesis on this and we have to change our mind.”
Porter: When we were bouncing this idea of off Eisman off different guys, and a lot of people were like, “Oh, I can’t touch this thing. It’s too small.” We heard all the downsides. We’re like, “Okay, we got it. We know we’re talking about. We got our risk and we’re fine.” Yeah, those are great, by the way.
Vincent: Yeah, I loved all of them. I feel like, whenever we’re super successful on name-by-name basis, we probably employ the majority of those in some way, shape, or form or even better. There were a few things that you said where you avoid. Some of the names that you’ve been involved in, or if you see common characteristics of names that you’ve had mistakes on, you say, “All right, get out now.”
Porter: We like to do is sit down with friends that we know are smart, know have a confidence in this stuff, give them the five-minute pitch, and see what they say. First of all, we’re all busy people. They have to listen to what you’re saying. And then, if they give you an intelligent response back like, “Oh, I can’t buy it, because my fund is levy,” or whatever, bounce off that idea. If your catalyst is the same catalyst that they’re thinking about, you know, that’s not the catalyst, because if everyone knows the catalyst is not a catalyst, right?
Porter: In those big high risk rewards, you have to bang someone over the head like, “Hey, idiot, we need to buy this stock. This is a big inflection point.”
Jake: Do you agree that the way that the market structure is now with so many Algos, so much systematic nature to it that the real Alpha will be available for a qualitative intuition? That’s where the real money is going to be made now is when you can catch some pattern that maybe an Algo couldn’t catch today?
Vincent: [crosstalk] Yeah, it usually resides in contrarian, because almost every single quant I know is long-term, short-term momentum. It’s usually at negative to slightly positive inflection points. We all live in the land of misfit toys. Believe it or not, Meta at one point was part of the land of misfit toys. I remember those days. No one wanted touch this thing.
Tobias: It was only 12 months ago. [laughs]
Jake: Yeah, it was 12 months ago. [laughs]
Vincent: So, to me, for guys like us, for people like us, that’s where the opportunities are going to lie. I don’t think we could do what we do in super scale. If you’re going to do anything in super scale, just buy the S&P, or employ some quant funds– Here gets to another point, which is, part of the things that make all these things go is the extremely low volatility levels, because almost all of these quant funds are structured on some form of low of a volatility targeting construct. Somehow, some way, over the last year and a half, given a war, given a raise in 500 basis points, given everything else, the key measurements of volatility have stayed incredibly low.
Jake: Yeah, how is that–?
Vincent: Incredibly low. Jake, you bring up some interesting concepts of how you look at stuff and recognizing patterns. Well, some of that is screening. We do value screening, and then we try to look at every spin off. We try to look at the big shareholder buybacks, the insider buy. We bought this little bank called Home Street recently. And sure enough, the director is buying $500,000 worth of stock. Stocks went from $50 to $4. The director is sitting there buying half a million dollars of stock, and all the insiders that are buying stock. I don’t know, maybe it’s not so bad. That’s the stuff that we look at. The stock stopped going down, it hasn’t gone up yet.
Porter: Disclaimer. Please do your homework on– [crosstalk]
Vincent: 100%. Home Street is quite the volatile beast. It’s a– [crosstalk]
Porter: And it could do a lot of business. Maybe it doesn’t.
Vincent: The Podunk Bank in the Pacific Northwest, we happen to believe they have a hidden asset that is sellable. We’ll see. But it is not necessarily for the faint of heart.
Porter: Thank you, Vinny.
Fed’s Actions Have Papered Over A Lot Of Cracks
Jake: Why has vol been so muted, given that feels like the rest–? There’s been plenty of exogenous things that people probably didn’t predict like a war, like inflation.
Tobias: SVB, the banks, Charlie’s regional.
Porter: The Fed papered over a lot of mistakes. Then I think that the economy just hung in there. And so, as it hung in and the unemployment stayed low, the vol started collapsing again. And then it’s a momentum thing too.
Vincent: I also get the feeling that these nouveau zero dated options. This is above my pay grade, but I just get the feeling that is suppressing vol a lot. I getting back to the point. The Fed has shown its hand. They’ll accept a little bit of malaise or raise rates, but if something materially goes wrong and it shows its ugly face, they bail it out. I think the market participants have figured that out.
Porter: Big time.
Tobias: Austan Goolsbee, who’s entirely sure what his– He’s on the Fed somehow. But he said, he thinks that it can match– [crosstalk]
Jake: I think he’s the Obama’s chief economist.
Tobias: He was. But he’s a Fed member. I’m not sure exactly where he’s sitting.
Jake: Mandarin? [laughs]
Tobias: He said, they can defeat the business cycle, something like that. They can manage it, so there’s no more business cycle.
Jake: Oh, God.
Tobias: That was interesting. We’ve been trying to do that since the invention of the Fed. Nobody’s figured it out yet, but maybe this time, it’s different. Permanently high plateau.
Porter: I wouldn’t have said that by him, but that’s cool.
Jake: [laughs] Well, that’s why you’re not a central banker. [laughs]
Tobias: Yeah. Important for confidence to exceed confidence to get to one of those positions, I think.
Vincent: Oh, yeah, big time.
Tobias: We’re coming up on time a little here, fellas. But if we wind the clock forward 12 months’ time, what do you think? Where do we get to from here?
Jake: Up and to the right. How’s that feel?[laughter]
Porter: I think that everyone thinks it’s up into the right. I just think that the comps are going to be very tough. You’ve benefited from low inflation, and now you have energy coming back up again. You have student debt payments going to be start being made. You have higher interest payments that’s going to be made. Inflation ate away in spending away a lot of excess savings. So, think you’re in for a long slog here in terms of the economy. What the market does, God only knows. And what China does I think is the big engine buying a lot of value stocks. What do they do? Do they stimulate, and do you see copper prices rebound, do you see iron ore prices rebound, and all that type of stuff? I think that’s the big wild card out there. The economy, I don’t think is going to be all that great.
Vincent: The only thing I would add is that 12 months from now, we’re going to be talking every day about the Presidential election cycle. Now, we could tune it out probably for another, what, four months, five months, six months probably. As we turn the calendar, we probably can.
Porter: But the stem is going to be there.
Vincent: That’s where I’m getting at, Porter, is that I actually think we’ll probably get more stem than people think simply because President Biden has shown to me, has shown his hand that he didn’t give a rat’s tale about fiscal deficits. The one thing he knows how to do is win an election, and you’re not going to win an election on austerity. So, I expect a hefty amount of handouts coming over the next year where probably being the similar places, the IRA, the Chips Act, some form of more abatement in student lending moratoriums and the like. But I expect a heck of a lot of political rhetoric impacting markets next year.
Jake: Bread and circuses.
Porter: Not a new concept take.
Tobias: Thanks so much.
Jake: Not a new concept. [laughs]
Tobias: Thanks so much, gents. Well, it’s always a pleasure to chat with you, guys. Vincent Daniel, Porter Collins from Seawolf Capital. If folks want to get in contact with you, follow along with what you’re doing, what’s the best to do that?
Porter: Twitter is probably– I’m @seawolfcap.
Vincent: I’m @vd718. Yeah, we’re on Twitter a lot. Just give us a holler. We love chatting.
Tobias: Thanks, JT. JT, and I’ll be back next week.
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