48 Comments

On STNG, they decided to put scrubber in most of their ships. Now hsfo vlsfo diff is about 80$, while they counted on 200+. A lot of money was invested, but chances are they won't see the expected return for that.

As such, it would seem better to avoid them in favour of other tankers.

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Thanks William. Which ones do you like best?

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Among others DHT looks interesting. They should be printing money at current prices, while their SP has come down fairly much. That said, we're in stormy waters so do not apply a swim-or-die approach (lame pun intended)

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Thanks William!

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I to work with a gentleman who was the first wave of Marines sent to Vietnam. He told me if your are ever in a crisis during a battle your first reaction is probably wrong. You have to sit back and try to evaluate your options. By the way after fulfilling his obligations to Marines and grad school he worked with Gus at GS on their arb desk.

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Thanks Alden! That's a great story! I like that line - your first reaction is probably wrong. I am putting that it into the vault. But are you sure the first reaction is to buy here? I feel like most people's first reaction might be to sell out of fear in here.

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When you talk about buying these stocks, relative to your personal portfolio, what percentage are you allotting for each? I subscribed because I’m looking for information and guidance....oh, and because you’re entertaining.

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I'd be interested to know too...do you follow a % of portfolio risk approach where max loss can't be more than 1% for example, or something different.

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I have a variety of different accounts, and different risk tolerances. But let me try to answer how I decide position sizing.

On the whole, I use volatility to decide position sizes. If I am trading Eurodollar / BAX future spreads (short term US and Canada interest rate spreads), then using a large notional that might be many times my total portfolio size makes sense as this spread barely moves. On the other hand, if I am shorting TSLA into the manic rise, then I might only be short 2% or some other small size of my account.

I remember talking to one hedge fund manager who told me his portfolio was 40% short TSLA, and I thought that was absolutely insane. Yet, if someone told me they had bought out of the money CNY calls (which are notoriously cheap) for 200% of their portfolio, I would barely bat an eye.

So, when we are talking about my specific stocks, I will use the same calculations. If I am buying XLU (a utility ETF), I will buy more than CCS (single name homebuilder). How much different? It then depends on how much I like the positions.

The MOST IMPORTANT THING TO REALIZE is that I use volatility and not notional size to determine position sizes.

As for how much total leverage I will use? In a calmer market, I have tons of leverage because I trade a lot of fixed-income spreads. One of my favourite trades - the steepener (long 2s and short 10s for example), doesn't move that much and usually carries well.

But in this environment, I have toned everything down. Way down. This is crazy volatility. I don't want to get forced out of positions as they whip around.

Hope this helps. I promise when things settle down, I will go through portfolio construction a lot more.

It's just being so crazy, that it would seem too confusing to see all the flailing around that I am doing trying to manage stuff.

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So then what is your portfolio risk target? And on average how many "ideas" do you have in your portfolio?

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I have a lot of trades that are too thin to talk about. Little arbitrages or value stocks that are thin.

In terms of big thematic stuff, it will vary from 3 to 10. Part of the reason for doing this new format is that I want to force myself to be more accountable and list positions more formally. However, the market has basically been crashing from the moment I started, so it makes no sense.

When things settle down, I intend to list all the thematic ideas and put stops. I just don't want to do it in these crazy times. Not only that, I am being a lot more nimble right now. I might get rid of positions more quickly than usual because of the heightened volatility. All the pro traders I know are being more nimble. They keep trying to take stabs on both sides, but they aren't getting married to any positions.

I promise to talk about this more when things settle down. I even have portfolio ideas that I want to discuss. Lots of things to add value to slower moving accounts.

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One thing this event has really ingrained in me is how important narrative is and that no matter how screwed everything looks, you need to consider whether you may have missed the move.

I got short in this market a few times when we were already 20% down and unfortunately it was too easy to shake me out on fear of a reverse at that point - so I've gained naff all being short even though we dropped further. A lesson learned for cheap thankfully, but an important one; don't be an a$$hole and chase.

If we still had naive governments I'd be all in short, but I think this has been a fantastic lesson in showing what happens when fundamentals disappear and the general risk narrative is the focus point of the market. I spent a lot of time last year wondering why the market went up when the fundamentals were weakening. How little I knew. I was one of those who actually hadn't a clue about how markets work - thinking the data is all that matters. This crisis has taught me some serious underlying market lessons; the main one being what you said in a previous post that sums it up well; 'by the time you've seen the data, it's too late'.

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Leighan, I have seen some really experienced traders get shaken off positions in this market. The bands have expanded so violently, people are having trouble hanging on.

great insights about how you are adapting.

I liked your comment about "naive governments." That's basically why I can't advocate assuming it's going to get worse. It probably will from a humanitarian point of view, but I just worry that the Central Banks are throwing so much at this problem, it will be tough for asset prices to go down. Have you heard anyone say, "we can't do that, we have no money." I haven't. All I have heard is "we will do whatever it takes."

Thanks for sharing your views!

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What a great, fun to read post. That’s all. Great job.

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Thanks Jim!

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Kevin, you´re probably way too early...

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That's what my wife is always telling me... badabing! And yes, it does look that way. Got the scars from today's action to prove it.

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The government stimulus part of your thesis makes sense but to get this through requires Congressional approval which is the opposing party. What incentive do they have to pass it? I remember in a previous post, you mention that government will only act if we get a financial crisis. Has your view changed?

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Yes, I think they are now scared to not pass it. I have always believed that this is a humanitarian crisis - not a banking crisis. They SHOULD pass it. I only worried they wouldn't. Sorry if that wasn't clear. (I worry about a lot of things. )

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Kevin, with the market has gone from "Buy the Dip" to "Sell any Rally", do you see that construct as being completed already? Would appreciate thoughts. Also as one of your other commentators detailed it would be good to have indicative sizing so it's clear how convicted (or not) you are and to shape context on the overall post. Hope this feedback helps.

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Hi Stephen. Thanks for the feedback. great suggestion on conviction levels. Once we settle down, I am going to make something up on the portfolio side and please feel free to send me suggestions.

As for the shift in tone. I am not sure. I think most people believe the bull market dead and that this is now a bear market that will take a year or two to play out. To me, it depends on two things:

1. If the virus ends up being worse than I fear

2. If the gov't ends up doing less than I hope

However, if it plays out like I believe it will (virus not as bad as market anticipates and stimulus ends up being greater than most forecast), then I could see a return to the bull market. I think that's the outlier call right now. Few are forecasting that sort of return.

I guess I would say, the market probably assigns a 1 in 10 chance of that happening and I am probably more like 1 in 2. Or something like.

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You had a post about energy debt a while back when the Saudis and Russians decided to wage an oil price war. Wouldn't the upcoming defaults and potential downgrades put a dent in your bullish thesis?

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Yes, I agree that this will be a problem for the market. And don't mistake me as bullish on oil. I think Russia/Saudis are going to try to crush American shale. But in doing so, they are going to lease every tanker floating on the ocean. Rates are exploding. So when I buy tankers, it's almost BECAUSE of the upcoming disaster coming in oil.

If there was no response from the gov'ts, then I would probably be much less bullish (and maybe even bearish). But I keep hearing "whatever it takes" and the gov'ts just keep raising numbers. When that doesn't work, they simply do more. Not only that, but there is a sea change about fiscal.

During the 2008 crisis, there was all sorts of calls about "we couldn't afford that." (and to be fair, we shouldn't have bailed out the bankers.)

But there are no more calls about not been able to afford anything. They are spending and printing in larger and larger amounts.

That determination is why I think it's tough to be bearish. I might be wrong, but that's my thinking.

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I would be very cautious in here. Maybe you get a bounce. Am sure you are aware Fed did not extend a CL to Central bank of China. You have the Saudis getting nailed to the wall with a strong $, and weak oil prices. With the BBB credit issue out there plus whatever is out there in PE boggy land, I hate to say this but I believe there is a lot more to come to the downside. Psychology of market has changed, little faith in the powers that be. I personally think the more the governments do the worse it gets. They are inciting panic. There needs to be a time out, let the volatility burn itself out. What the Central banks / politicians are unintentionally doing is pouring gas on the fire. Truly amazing the incompetence being exhibited. What is going on in the market should not be a surprise to anyone. I have maintained the virus simply exposed the flaws , deficiencies that were masked by the ultra low rates. The virus was the catalyst because it could not be controlled by the government and obviously and it effected the entire world. Kevin nailed when the Yen broke. That was when all the algo correlations broke down.

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Alden - I think you are spot on correct when you say, "let the volatility burn itself out." That's the best advice I have heard in ages. When I think about what I would like to see in the market, it's not a straight up market, but rather see moves calm down to under 2% every day. That's what I am hoping for. And maybe I am guilty of "hoping" it comes rather than simply waiting for it. Appreciate the point of view. Really great comment!

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Just to be clear, didn’t the world experience a pandemic in 1918?

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Yes, I guess you are right! Pretty sure we weren't trading on an interconnected electronic world back then, though. :)

Sometimes I feel like I have been trading so long, I actually remember the Spanish flu crisis.

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You're right about the impact of a "not-connected" world. Check out the DJIA chart on this article compared to the deaths caused by that flu. No impact to the market then.

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Great post. Always tough to be booolishhhh when most are bearish AF. My .02c, the hard V isn't in play as we're looking at some form of recession. Personally, I think we will bounce back in more of a U shape. A 'V' recovery assumes infections peak during next 4-6 weeks, but god for bid they don't, all bets are off. Another thing that worries me is Europe is so ugly right now, US mkt is expensive on a relative basis. With that said, I agree, the Fed is clearly saying game on. The yield action is really interesting, 10Y above 1% not-not bullish. When we do find a bottom, I also love the home builders. Check out OSB CN - - dual listed, NYSE and TSX, report in USD, FY 2019 sales of $1.7bn. 90% of their capacity is directed towards Oriented Strand Board (OSB) which is used in new home construction / repair and remodel. I am bullish the stock on account of weekly re-fi rates in the US, weeklies are spiking hard (MBAVREFI INDEX on Bloomie). With lower-for-longer rates, borrowing to buy is not out of the question in a U-bottom + any slip up in housing activity will only be a blip (if there is one). Interestingly, US housing starts have been below the LT average for some time now, not to mention fiscal spending shot in the arm.

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Winston. You are probably correct that I am too bullish on the recovery. At this point, I would probably be happy with your U recovery. :)

Thanks for the heads up on the OSB. I am putting it on my list of stocks to watch. I will write up a full piece on the homebuilders, but too many forget that the biggest demographic is not Boomers, but instead millennials. Here in Canada, they have all bought houses, but in the US, they are still living in their parents' basements. Everyone tells me they won't buy houses and make families. I call BS on that one. They will do what every generation does. They will have just done it later.

And this virus induced collapse in rates has cemented the next bull market in housing. Trump and the rest of the government will hand out credit, and housing will fly.

One last thing - before this virus hit, one of the most well-connected guys I know said to me, "the smartest long-short guy I know is limit long builders." I don't think he was wrong, he was just early. :)

Nice to meet you and thanks for putting me on your email distribution list. Would love to grab a beer when we are allowed to socialize again!

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The beer sounds good, looking forward my friend. PS. I looked at the STNG US calls today, vol is just crazy expensive, 200%. Probably best to just buy the equity. Only reservation is the USD exposure right now when so many +50% off sales up in the great white north.

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What's your favourite "quality stock that has been drubbed too far" name? And btw, I agree - Canada is on sale compared to the US.

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There are a few. First off, im buying RY CN and BNS CN, because if they're fckd, we're all fckd. ATZ CN is down 45%, less than 1x levered, always packed when I've been in store, not luxury, but not fast fashion. This one is a simple as 'will your wife/daughter still shop at Aritza in 2 months'. Answer is prob YES. Set & forget. OSB CN for reasons listed before. PKI CN another. It's down 50%. They're a fuel retailer (fancy for gas stations), impacted by oil spot, but when wholesale oil prices fall, retail doesn’t fall as much and as fast so in the near term, gas station operators can take advantage of an increase in margins. I know demand is fckd for time being, but LT this is a FCF beast. Similar to ATD/b, most of their fuel is purchased at spot prices (meaning they can take advantage of what’s currently a significantly lower oil price environment). While some gas station operators may have contracts, some are branded, offset by the fact their refinery crack spreads are wider now (which they will benefit from). It's a plug your nose and buy.

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Thanks Winston! Really appreciate you sharing your views!

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No offense but I feel like you've been leaning long since this new format started. As I said before that's what makes a market but you're first and last sentences were kind of funny b/c most of your articles have been bullish. I think my indicator to go long will be when you write a bearish article (saying that tongue and cheek, not to be offensive). Not a big fan of indicators but take a look at the monthly for the DOW and drop RSI on there. Go back to 2008 and you'll see we 'could' have quite a ways to go until we've bottomed on that sentiment. Another good write up but I'm still on the other side of things.

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No offence taken. For sure, all else being equal, it’s been a while since I have been bearish. I have had times when I felt like the government didn’t get it, and greatly reduced exposure. But I have not being outright bearish since the new format started. At this point though, I am as bullish as I have been since I began the new format.

And yes, I hear you about sentiment. And I could be wrong. No doubt about it.

But I’m taking a stab here at some decent longs.

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The virus is so far from settling down in main streets around the world (actually just getting going in many) that it's hard for me to think that we've hit a market bottom. Maybe you're right though as the shock value wears off.

In any case, here's a question about IVOL that you wrote about some time ago. Given the record volatility we're going through, why is it still just sitting there?

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Ivol needs volatility in the yield curve. And not only that, it owns TIPs - which have been hammered. That TIP holding is what disappointed me. Maybe I should write about it again.

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I re-read your RINF suggestion in breakevens yesterday and also started buying

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Kevin, when you wrote this post, you said: "In terms of single homebuilder names, I love CCS. I will go into more detail when I write up this theme, but I am buying the builders down here." Not sure when you are planning to write that up but would love to hear even in a few words why CCS is superior. I when you wrote it, I looked at the chart and then opened a smaller position. I'm wishing I'd taken on more and am considering sizing up a bit.

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Hey Greg.

I love, love, love CCS.

Here is the elevator pitch as to why:

1. American millennials are the largest demographic and have yet to really form households. Everyone thinks they are different. They aren't different, they are just late (after seeing their parents blow up on real estate, they are gun shy. But they will do what all generations do - make families).

2. You don't want to own real estate selling to the 1%'ers. That stuff is way up. You want to own NON-GATEWAY cities. So no NYC, no Miami, no LA. You want boring stuff in the middle.

3. CCS is run by two brothers who own TONS of stock. Skin in the game.

4. They were one of the few homebuilders who didn't blow up in 2008.

5. They recently bought (stole because it was so cheap) a company called Wade Jurney (fastest growing private builder) that has figured out how to sell super cheap homes and make money.

6. With a few other tuckins, CCS is now big enough that a major will buy them.

7. Two brothers are in their 60s (maybe 70s) and don't have kids that will take over.

8. This company will get bought during the next bull run in homebuilders.

And in general, homebuilders are a terrific buy. If anything, this virus has only made the bull thesis stronger. Home prices are all about how much the consumer can carry. Assuming the worker gets their job back, rates will be rock bottom low and they will buy houses.

Hope this helps!

6.

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Thank you for the backstory. I like that thinking. I agree that once the pandemic blows over, homebuilding will be strong. I suspect the rally of the past two days is a bull trap and I freed up some cash for the next round of bargain hunting. Putting more CCS on my shopping list.

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You were spot on regarding government panicking. There has definitely been a bounce. Do you think it is a small bounce as in a bear market rally or a larger bounce to continue the bull market trend?

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Hi Roy,

I was spot on... for about ten minutes. :)

If you can tell me how bad the virus will be for developed economies, I can tell you the chances of this being a real bear or not.

However, I do think that sentiment is OVERWHELMING BEARISH and even the smallest amount of good news will cause a monster short covering rally.

Whether that's a real rally or not, is still up in the air.

I am leaning more towards the idea that this was too much of a blow for equities, but it might surprise us. But I think the right way to trade right now is to write blue tickets first.

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