A little add-on to the London Stamps portfolio today, with write up before buying for once.

Titon Holdings is a little window fittings manufacturer, seemingly on a good enough path, especially relative to its valuation. It passes all my small caps criteria and there’s really not much to say about it, which is fitting. The main risk seems that their products or sales fall behind the competition, mitigated by down to earth management.

It’s particularly illiquid (7% on the LSE, 3.5% according to my broker’s live quotes) which I like as that can be unlocked if the company grows gently or is taken over — which seems pretty plausible here given the market segment and unchallenging valuation. Maybe it is worth a TON.

Unusually it’s an AIM style stock listed on the main market (thus stamp duty applies). I wonder if that might help making it less visible, although it shouldn’t matter. Quick scan with a screening tool finds half a dozen companies (>£1m profit, <£20m market capitalisation, LSE Main Market). Nothing on racy valuations here. Might be a dusty corner worth monitoring (although with Creightons and now Titon I’m well exposed to this segment now).

The recent discussion about high denomination banknotes has extended into the merit of paper cash.

In so far as paper cash is needed, does it need to be done the old school way? For buying goods in legal market, probably not, an alternative would be to use “bearer numbers” (implemented as QR-code or barcode) that could be printed on paper if people want that.

The way it would work would be something like:

  • ATMs are replaced by an online banking facility that debits the client’s account, credits the bank’s account at the central bank (or whoever is the barcode cash clearer), which in response issues a new random number associated with the amount. The number is printed in computer readable form on a ticker the punter puts in their wallet.
  • In a shop the punter shows the number (the ticket) which the cash register redeems with the central bank computer. A new number is issued for change and printed on the receipt. These numbers can then be spent at other shops.
  • People can also simply give away the printout to others, as long as the recipient trusts the giver not to spend a copy before them.
  • Splitting a ticket would require an online app similar to the shop’s cash register.

This reproduces something similar to paper cash but without the need for actual ATMs with a stock of high value banknotes, or a banknote printing and processing infrastructure.

The principal disadvantage is that it requires all non-trusted-parties transactions to be online, to check the value and validity of the number with the centralised issuer/redeemer computer system.

The issuer could be a Bitcoin-like system — you can indeed do all of the above with Bitcoin — though current blockchain technologies add a delay to transaction authorisation that’s impractical for most shop-style settings.

It could be argued this is less anonymous than paper-cash because all redeeming transactions are logged (like in Bitcoin).  Technically that could be done with current cash as well: banknotes have serial numbers that could be tracked to produce interesting meta-data — a government could easily mandate the use of some scanner widget in the cash registers of all legal businesses.

So, I’ve totally failed to follow my “blog before trading” rule these last couple of months. Maybe at a cost. Let’s catch up.

Obliquity London

Regular maintenance here, exiting Rexam which is (very slowly) being taken over by American competitors. Big mergers tend to be overpriced, though the long regulatory process has forced them to sell some assets which may mitigate that. But I’m not keen on having US mid-cap positions in this portfolio where they’re expensive to trade — although I have kept Steris when it reverse merged into UK-based Synergy Health last year.

A mid-cap position in Sthree, a plain regular classic quality-style recruiter was added to the portfolio. Exposure to the recruitment sector, along with Manpower, is probably complete now.

Stamp collecting

The position in Ascent Resources was halved during a speculative spike on news they might be taken over. This is a single project natural gas rights in Slovenia, from a notoriously accident prone company with a long history of failed projects — hence a discount to fair value, I’m betting.

The one remaining project has been stuck in a regulatory and funding conundrum for year and they’re making noise it might unlock this year. The takeover attempt produced a spike in the price, with hindsight it may have been better to sell the entire stake but now it’s gone back to earth I’ll sit and wait in case it either works out (the project start producing gas and the shareholders are not completely diluted) or perhaps more likely there’s another speculative spike.

The corporate structure is interestingly convoluted: Henderson Investors (and a few minority partners) own about £10 million of convertible loan notes (used to keep the company on life support while waiting for permitting to progress all these years) that they can convert to shares (at 100 shares per pound of loan value) thus diluting current shareholders to about 20% of the company. But if they did exercise in full, they’d own the company outright, which is unlikely to be either legally possible or simply desirable for fund managers. So in an exit they may have to negotiate their stake at above the loan value but possibly below the theoretical full dilution value.

Penguins on a beach

Investors in Falkland Islands Holdings waiting for returns.

On a more rule-based adjustement, I doubled the position in Falkland Islands, a most eccentric mini-conglomerate which has been perennially cheap. They’ve sold their oil shares and are reducing Falklands exposure, which is just retail and services by now, probably changing name, so might decouple from being seen as an oil-linked stock which might help towards a re-rating, perhaps. The rule triggered here was to either sell or re-weight positions falling below 50% of target.

I couldn’t resist adding to my collection of falling knives with Snoozebox, who also incidentally have some of their container rooms stuck in the Falklands. The already depressed price sank after the CEO departure and a profit warning with the dreaded “going concern” notice.

I think they had a good concept with very poor execution: the original container rooms were not adapted to short term events, their core proposition, as the cost of moving them and setting them up will be too high. Current management understands that they need to redeploy this stock of container rooms on semi permanent assignments, and do the event accommodation business with more appropriate products, which they have just finished developing (foldable trailers, inflatable rooms). They’ll need funding to scale the latter, and or support the legacy business if it doesn’t get enough tenants to break even. Failure and/or dilution is a clear possibility, but success is also possible and it’s now priced as an option with odds towards failure. The price sank further the day after my first buy, possibly on a sell recommendation from Investor Chronicle, so I added up some more.

On the art of knife juggling

It may be too early: falling knives are probably better caught when they start getting better, after a few years, as it not only avoids those who sink straight down, but the market seems to have memory of the failure and to take time to accept good news after a few years of poor results. This would combine well with my new “net income > £1m” rule (here catching things emerging from losses). I will still keep this position as the trading spread is huge and I’d be upset if it does recover quickly, but I should perhaps avoid that in the future. Having blogged it first might have helped moderate speculative urges, as would perhaps being fully invested (so that buying something requires selling something with worse prospects). Thankfully my position sizing for small caps is very modest.

I’ve been an oil bear since last year, which has worked out quite well so far. It may be a good time to summarise my case. I should have written about it earlier, as it’s starting to become mainstream!

Demand and supply

On the demand and supply front, the big shock is increased from US shale. This is well known, but it seems to have taken some time to make an impact. Besides, many US exploration ventures are funded by a lot of debt, so not flexible as they could be — they’ll keep pumping as long as operational cost are break even. Exploration and setup costs are sunk costs, and leveraged structure prevent waiting for better times. Rapid technological improvements in extraction add to the price pressure.

Shale also applies to natural gas, which has seen it’s own supply boom, likely taking market share for some oil applications (NG vehicles?). For electricity, renewables have been getting from insignificant to a minor player, which is also more competition.

On the demand side, it seems merely steady, or facing downward pressures (“China”, austerity). With all that no surprise the price has to come down.

Besides known reserves are vast on a human lifetime scale. If we keep facing static or slowly increasing demand, speculative exploration could be totally suspended for thirty years or more, and the world would be unlikely to run out. This is a challenge to new exploration, which is merely adding to the glut.


On the politics side cartel agreement seems harder to obtain than in past cycle bottoms. US producers and OPEC agreeing seems very improbable. Even the recent partial deal between Russia and Saudi Arabia — keeping production at the current relatively high level — might be difficult to maintain as producing more to compensate for lower revenue per barrel will be a temptation difficult to resist.

Climate change policies may work out in reducing demand (at least some).

Cycle timing

Commodity cycles — over-investing when prices are high and under investing when they are low — tend to be quite long (5-10 years) as it requires project planning to flow through to reality on the ground and there’s lot of inertia around.

There are several signs of not being at the bottom, like high volatility, media interest, bullishness of traditional oil sector investors although this may be turning.

A strong contango (higher prices on contracts for future deliveries) is a sign of probably excessive hope, and keeps supporting production at above-spot prices — until it doesn’t.

The money shot

Not making any precise forecast, but let’s say that WTI is probably going to stay in a range $20-$35 until at least the end of 2017, with perhaps short lived escapades on both sides of the range.

Back to the trading floor

This post is really just an excuse to make a portfolio update less boring: in addition to selling BP and Total, as previously discussed, I’ve sold Petrofac. Although they seem well equipped to survive a downturn, the market will probably ignore that for a long while (the name of the company may be a curse). I’ve added more Amec Foster Wheeler, which is a more diversified (and further diversifiable) engineer at a distressed price (hence being underweight in the portfolio).

This is despite not being supposed to do significant sector bets in the Obliquity portfolios, but I make an exception in order to minimising regret: I’d be pissed if I’m right on oil while owning sector losers. It’ll be easier to accept missing a sector rebound (if possibly costly).

On the trading front, I’m short contango and long crude carriers (the speculators will need storage, while the carriers’ share prices have been moving down with oil) via options.

Monetary policy’s impact is made relevant by sticky prices. The stickier nominal salaries and fixed prices for products and services are, the greater the impact of changes in nominal money quantity.

Thing is, prices are getting less and less sticky.

Long gone is the time where the price of flights was printed in a paper catalogue updated once a year. Dynamically priced flight can include changes in fuel cost, or demand and supply pressures, every few minutes, and people got used to it. You have a ballpark idea of what a flight cost, but known that the exact price will only be known at the time of booking.

Anyone who buys tech gadgets and shops around using internet comparison engines will end up paying the producer country price, as lean distributors with little stock and tight margins pass through currency impact, and this model dominates — sticky price competitors are structurally more expensive because they need  to add a buffer to both hedge currency risk, and to prevent adverse selection (people buying from them only when the exchange rate has moved favourably since the last sticky price was set). Even supermarkets now have dynamic price labels that can be updated in seconds.

What’s left of sticky prices? Wages and property are perhaps the main markets where stickiness still applies, though this too is challenged by short term rental contracts and short term employment (be it old school or gig-economy style), or variable compensation (bonus or commission based long term employment) where the net wage becomes decoupled from the notional sticky base salary. This is still a strong force, but for how long? I suspect the writing is on the wall: prices will get less and less sticky.

A possible danger for monetary policy is that backward-looking simulations use datasets from olden times, when prices were stickier than they are today, and thus unless a gradual decrease of stickiness is embedded in the model, will make increasing false predictions. More generally, monetary policy may become less and less important as nominal effects reduce, as changes to nominal quantities get absorbed by reality faster. Another reason to give fiscal policy a greater role in macro-economic management.

I used to think, like most value and fundamental investors, that market timing is difficult or impossible. I’m starting to come back on this and considering having a market timing component to my portfolio. It’s too risky to do on the market as a whole — moving one’s entire portfolio between stocks and cash or bonds — because this is undiversifiable (a portfolio dominated by whole-market timing has effectively 1 holding), but there may be opportunities for risk controlled allocations to sector or company specific cycles.

As a starting point I’m building a check list for spotting sectoral cycles. It’s a work in progress but here it is:

Bubble Bull/bear trap Bottoming
Dominant discourse “Paradigm shift” “This is a bubble!”, “This is the opportunity of a lifetime!” “Nobody ever made money investing in this!”
Volatility/volumes High/mid Mid/high Low
(Social) media interest High High Low
Closed-funds discount Premium Small/no discount Discount
Themed ETFs and retail products Launching Closing down

Why isn’t everybody doing it?

Most of these factors are reasonably easy to spot. But it’s that easy, why isn’t everybody doing it? A couple of possibilities:

  • The idea here is to capture sentiment, so it’s subject to errors if there are fundamental change that can kill an industry or are real paradigm shifts involved.
  • Knowing broadly where you are in the sentiment cycle seems straightforward, though imprecise and unlikely to find exact tops or bottom. Waiting for the cycle to turn may take longer than most investors’ attention span. Capturing a bottom or shorting a top may require more patience than most people have.
  • Intermediaries will have a hard time selling market-timing products as most clients behave like the herd (by definition).

Prospective guesses

Bubble Bull trap Bear trap Bottoming
Biotech, Internet retail, Unicorns Small caps, Equities Oil, Energy Metals mining, Airlines, Tankers/Shipping

Now the question is: is this confirmation bias? The Obliquity Portfolios have grown slight under/overweight in most of these themes — before I quite realised I was trading boom and bust cycles. I’ve also opened a little long tankers option basket a few days ago.

The current models used to fund digital media are not very satisfactory.

Old Newspaper likes firewalls, with content behind a monthly subscription. Like in the good old dead tree times. While those with a conservative ageing demographic can sometimes get a sizeable subscriber base, it does not seem to be the future when it’s so easy to move elsewhere in a world of plenty of free content. Attention seekers and new entrants will always be happy to produce free content when the cost of publishing itself is so close to zero.

Digital Natives like the advertising funded model, free to access at the expense of privacy, degraded user experience and an incentive to produce “Social Media leaders’ 25 ways to produce Click Bait headlines” content.

I hereby propose a new model: charge for comments. There are lot of trolls in the world who have a lot of rage, seem very motivated, and produce a lot of low quality and oft duplicated content that would be nice to see less of.

Several models can be envisaged:

  • Charge per comment: each post is charged a small fixed amount.
  • Deposit system: the user pays a fixed amount, once, that gives a right to a number of daily comments. The amount, or some of it, is forfeited if one or more posts are moderated away. Users who do not post objectionable content can get their deposit refunded when they decide to stop posting – for them posting remains close to free.
  • Attention auction: for popular articles with many comments, you could auction the most visible places in the comment page. Surely some people would pay a penny to lift their pearl of wisdom to comment page 1. This can be combined with the deposit idea.

This should help deal with spam as well as trolls incidentally. Payment in digital currency can preserve anonymity if so desired.


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