Author: therationalcloner

BEAR VS BULL LIVING DOCUMENT

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The Four Horseman
1. Howard Marks 5/5 on recession calls the past 50 years because he states that he only calls them when they are completely obvious.
2. Paul Tudor Jones, a macro trader with no down years from 96-2017
3. Drunkenmiller, a macro trader with 5/120 down quarters, no down years in 30 years.
4. Ray Dalio, a macro trader who is an elite historian on credit cycles

I pay very close attention to these 4 opinions on macro. They all know their bounds and say that they can’t predict the market and no one can. They even contradict each other from time to time. But I feel that they put the probabilities in my favor. I’ve added other opinions, but do not put much emphasis on them. I block out articles and CNBC anchors, columnist who won’t post their record on calls etc..

  • 10/3/18 Howard Marks calls for caution. selling more than buying. Has a $8.5B distressed debt standby fund in case of recession(started 2015).
  • 1/22/19 Klarman “it can’t be business as usual amid constant protests, riots, shutdowns, escalating social tensions. The seeds of the next major financial crisis may well be found under today’s sovereign debt levels.”
  • 2/8/19 Marks we are above the midpoint in the cycle. the probabilities are towards the downside, but not so much to not invest. Be more worried about losing money then making money. Be defensive rather than aggressive.
  • 3/5/19 Howard Marks “I think he will raise interest rates more than people think. I think there are a lot of reasons why we should have interest rates above today’s”
  • 3/23/19 3 month 10 year yield curve inverted
  • 4/25/19 Howard marks today were a little on the high side. I don’t see a lot of euphoria right now.
  • 4/26/19 Howard marks on people making money investing in things that other people aren’t willing to do. “But today, I don’t think anything is being ignored. Investors are willing to do almost everything.”
  • 6/12/19 memo In mid-2007, in a real economy that felt to me a lot like this one. In recent years, the U.S. has simultaneously experienced economic growth, low inflation, expanding deficits and debt, low interest rates and rising financial markets.It’s important to recognize that these things are essentially incompatible. They generally haven’t co-existed historically, and it’s not prudent to assume they will do so in the future. I’ve seen times in the past when people believed such an ideal state would continue in perpetuity, but it has never worked out that way. Widespread attaching of “the four words” to bullish propositions suggests that the environment is being perceived as flawless. When and if that swings to hopeless, the result is pain for investors.
  • 6/12/19 Tudor Jones “We’ll really have to see the impact they are going to have and if the next round of tariffs gets implemented. It’s a huge deal. I would say if they get implemented and we go to the $500 billion, I think certainly it’s possible it could tip us into recession,”
  • 8/4/19 Greenblatt does daily market analysis to see how expensive it is compared to the history since 1990. market is in the 19% % towards expensive. Which means it Has only been more expensive 19% of the time since 1990. At this price. During the past it has been 4-6% return over the next year, 10-12% over the next two. Not a prediction, but is what has happened in the past. Russell 2000 is in 6%. Next year return is flat
  • 1/14/20 Marks Q: is now a good time to invest? “probablistically it is not, because if you look, the market has been up for 11 years, it’s quadrupled off the low , we’re in the longest bull market, the longest expansion in history. Profits are not rising, stock prices are. It’s what we call a liquidity driven rally. That means it comes from people having a lot of money to spend… it doesn’t mean that the market is going to go down tomorrow, but I’d does mean that the odds, in my opinion, are not in the investors favor.
  • 1/23/20 31% cash Klarman “we believe that ongoing selling pressure of value names has contributed to mis pricing a that represent potential opportunity for long term-investors” “possible liquidity trap(d/t ineffective low interest rates.)” “the rocket fuel that has propelled markets in 2018 will run out.” “Should corporate earnings weaken, record-high profit margins shrink, markets falter, or inflation pick up (driving central bankers to reverse current easy money policies), the downside from here could be quite significant. As funds continue to flow into the hands of indexers, stocks not included in prominent indices relentlessly lag, while the beneficaries of such inflows move more or less in tandem, sometimes seemingly regardless of diverging fundamentals.”
  • 1/25/20 Tudor Jones “We’re just in the craziest monetary-fiscal mix in history. It’s so explosive, it defies imagination. It reminds me a lot of ‘99. The difference is the fed’s funds rate was 4.75%, today’s its 1.62%. Then we had a budget surplus, today we have a 5% deficit.” “The nasdaq gained 130% between 1999 to the market top in 2000.” “At the top, rated will be theoretically substantially higher…the market will go(up) until at some point the fed gets in the game(and reverses) this insane monetary policy they’re running.” 1999 had “a bunch of 6% corrections” “we’ve got monetary and fiscal conditions that would argue for some type of blow off that will ultimately be ended by the fed hiking a lot sooner than they would begin to contemplate.”(when asked if he agreed with tepper about 2020 continuing to go up)
  • 2/3/19 Tepper the coronavirus has “certainly ruined the environment” for stocks that was in place a few weeks ago, “You have to be careful, because it may be a game changer. So you’ve just got to be cautious,” “If you’re a long-term person, you better not be leveraged,”
  • 2/24/20 Marks “What I’ve been saying for months is that I’m afraid to be in the market today. I’m also afraid to be out,” “They’re are no screaming bargains today. It’s all a matter of finding the examples within each asset class that are a little more attractive than the others,”
  • 3/23/2020 Buying stocks but is nibbling.
  • 3/26/2020 Paul Tudor Jones We could retest the lows. The current bounce is most likely due to pension funds re-balancing after the crash.
  • 4/8/2020 ““There’s a curious disconnect between when you speak to the companies, most of which are closed, and what’s going on in the market,” Cramer when talking about what Tepper told him.
  • 4/9/2020 Marks We are currently in a worse crisis than both the dot.com bubble and GFC
  • 4/9/2020 Ray Dalio. “This is bigger than what happened in 2008.” We have too much leverage. things go down. too much leverage means youre broke. then you look around systemically and ask who do you not want to go broke. So you print money and keep them alive. In 2008 it was just the banks. But now it is more complex than that because there are more than just banks that need help. including small businesses etc. But it is more difficult now because we have an ineffective monetary policy bc interest rates have reached their limit and just buying normal financial assets won’t work. They have to buy the debt of the government, and the government has to be effective in getting buying power and production to those who need it around the world.
  • 4/10/2020 Chamath Palhihapititya: “As bad and dislocated as the equity markets are, and what I mean by that is people have just basically said ‘I’ve thrown up my hands in the air, I’m essentially going to be net long, I refuse to think about earnings, I’m going to assume that it’s going to be a 1-2 quarter abberation.’ So I’ve decided basically to step out of the equity markets in the public side for the time being, because I think that they are not reflective of what it is happening on the ground….In the public equity markets right now, if you have any reasonable way of just saying that this is just a 1 or 2 quarter aberration, you’re going to be given a hall pass for at least 9 months. Which means that the buying opportunities in public equities are limited to none .” He says there are better deals in the credit and private markets.
  • 5/14/2020 Druckenmiller the worst risk/reward ratio in stocks that he’s ever seen.
    If fed continues as planned, then liquidity will shrink after September 2020.
  • 5/15/2020 Tepper The second worst risk/reward ratio in stocks that he’s ever seen. The first was the tech bubble.
  • 5/18/2020 Marks The rating agencies/banks think that 15-25% of high yield bonds will default. This is roughly $400Bn the fed would have to buy. That’s a lot. In April 2020 there were 19 defaults/bankruptcies. This is the most in a month in history. There are still many more months to run, which will probably lead to more bankruptcies.

Bull

  • 6/7/18 Jamie diamond we are in the 6th inning, possibly another 3 years of growth. Consumers balance sheets are good. Income is increasing, debt levels are low. The growth has been slow only 20% in 9 years. Where as an average recovery would be a 40% growth over a 7-8 year period. Buffett agreed in the same interview
  • 12/10/18 tudor Jones could see 2019 going up or down 10%. If it goes down 10% then it’s a layup and “I’m going to buy the hell out of it”. Says fed will not hike in 2019.
  • 12/18/18 drunkenmiller yield curve is at amber not red
  • 2/11/19 Tudor Jones i think this year we’re going to continue to have U.S. exceptionalism and U.S. outperformance,” Paul Tudor Jones says. “The S&P 500 will outperform its peers, it will outperform emerging markets.” Rates won’t go down, they will probably go back up and I think the dollar stays firm,” “I’m very bullish in the U.S. stock market.” “Last year, we walked into a situation with a lot of euphoria; a huge amount of long-equity positions both in the U.S. and globally,”. “We took those positions and we washed them into a trillion dollars in corporate buybacks. Fast forward to where we are today, all that leveraged positioning … that’s been washed out.
  • 3/1/19 Dalio 35% chance of recession- down from 70% a month earlier(after feds dovish view and announcement of stopping roll off of balance sheet) 8/16/19 40% chance of recession by the end of 2020 9/5/19 20% Chance of recession through 2020.
    10/22/19 “It doesn’t feel to me like a recession is imminent. I don’t think we’re going to go 5 years without it, so some time two years from now.” Howard Marks.
  • 1/17/20 Tepper “I love riding a horse that’s running. We have been long and continue that way. At some point the market will get to a level that I will slow down that horse and eventually get off.”
  • 1/24/20 Dalio “cash is trash” “there’s still a lot of money in cash..everybody’s missing out, so every one wants to get in” “you have to have a well diversified portfolio, be global, and be balanced… you have to have a certain amount of gold in your portfolio.” “The depreciation of the exchange rate and the printing of money over the next few years are gonna be the biggest things.” “So basically…if you oversimplify a portfolio, you want stock in the technology disruptive companies and some gold. Because it’s the new technology revolution in relationship to the monetization question I think.”
  • Once upon a time, there was a President with a special investigator on his tail…
  • …so he started a trade war, threatening the world’s 2nd largest economy with tariffs…
  • …while the Fed had nearly inverted the yield curve.
  • The year was 1995!
  • For 2018 Goldman says stock repurchases pumped $509 billion into the market last year after adjusting for equity offerings and mergers and acquisitions. The only other net buyers of stocks last year were individual investors, who put in an additional $190 billion. On the other hand, pensions, mutual funds and foreign investors were all net sellers of stocks last year, collectively pulling $460 billion out of the market.

EAF from Pabrai

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This document is a collection of Pabrai’s own words on Graftech from his lectures/interviews with Graham and Doddsville”” Boston College Lecture() Manual of Ideas[]. Citation is made via punctuation respectively notated above.

Where he found the idea
“There’s a fan of Mohnish in Canada who sent me the full write-up and thesis on GrafTech. All I had to do was to have mastery of the English language, and thankfully the education system did teach me that. I read it and I said “Okay, let’s verify the facts.” And the facts all checked out.”

What it does:
“GrafTech makes ultra-high performance electrodes, which go into electric arc furnaces that are used in mini-mills to make steel. Nucor, for example, is a customer. There are two ways to make steel: you can either make it with iron in a blast furnace or you can melt scrap in an electric arc furnace. To melt the scrap, you need these graphite electrodes able to withstand the 2,000- or 3,000-degree heat in the furnace. GrafTech makes these electrodes.”

Constrained Capacity
“There are only three or four other manufacturers of these electrodes in the world. It takes three to five years to construct a new ultra-high performance electrode manufacturing facility for greenfield expansion, so supply is very constrained. On top of this, GrafTech is the only manufacturer in the world that is backward-integrated. There is a very critical raw material required to make these electrodes called needle coke and, again, there are just three or four manufacturers of needle coke in the world. (Outside of China there are only 4 needle coke producers in the world, 2 are in the U.S. and 2 of them are in Japan. The one in the U.S. is Graftech, in Texas). “It’s a byproduct of refining petroleum; for example, ConocoPhillips is a big supplier of needle coke…It takes a long time to construct a new needle coke facility, maybe five years or more. To sum up, there are number of factors in this industry that make it challenging to instantaneously raise capacity. ” ( So if someone were to try to bring in new capacity of needle coke, there are a number of challenges…One of the challenges is that the last needle coke plant built in the world was…the Graftech plant….40 years ago. The know how to build..and run those plants are…non existent. Pretty much..the only players who could even go there would be the existing players…The time it would take from the time you said, let’s go build a plant to the time you have production coming out the other end is close to 7 years. And the cost would be several $100M. So its very hard to justify the capital required, let’s say $500M…and the gestation period of the seven years, with no crystal ball to tell you what the market looks like 7 years from now. So, as far we know, the none of the non china players are planning any…capacity increase or new additions. So this tightness of needle coke may continue well past 5 years… Needle coke has another application which is in EV batteries, and that demand…is skyrocketing….It could cause significant tightness.)

Cycle
“In 2018, prices for these electrodes went crazy. Historically, they were $2- 3,000, maybe $4,000, a ton. Last year, they went all the way to $25,000 or $35,000 a ton. They just went bonkers. Of course, all the electrode manufacturers reaped incredible profits.”

Contracts
“These electrodes represent only 3% to 5% of the total cost of making steel. It’s a small part, but it’s a critical one. The chemistry of these electrodes is very important, and so is the consistency of the supplier. GrafTech went to their customers and said “Hey, these electrode prices are going crazy, it’s hard to get supply. Do you want to sign a contract with us where we’ll guarantee the supply and the price for the next three to five years?” All kinds of customers took them up on that. As a result, 70% of their production for the next several years is already sold, at a known margin and a known selling price. These are locked in, take-or-pay contracts. Unless the customers go bankrupt, these are enforceable contracts. Furthermore, they’re spread across hundreds of customers, so the revenue stream is very diversified. If you look at that 70% of revenue which is locked-in over the next several years, it covers the market cap. It’s IPSCO 2.0. Now it’s not coming in two years because it’s not 2004 – it’s coming in five years. But such is life; that’s still okay… The other 30% of production is sold on the spot market. This gives you a variation on what can happen. If electrode prices go crazy again, they will make super profits. They’ve only sold the production where they know what their costs are. No other ultra-high performance electrode manufacturer can offer their customers these types of contracts because they don’t have control of the raw material, so they don’t know what their cost of raw materials is going to be three years from now. GrafTech is the only manufacturer that can offer this.

Moat
“GrafTech is the only electrode manufacturer which owns a large needle coke facility.” (They pretty much have a lock on the production cost of needle coke…They are the low cost producer of needle coke. So for example, today, if you are an UHP producer, you would be paying $4,500 to $5,500 per ton per needle coke, in the case of Graftech, their production cost, needle coke and everything they need to make their electrodes is $2,750 per ton. So while the other producers may be at…$6,000 or $7,000 per ton, Graftech is at $3,000 or $2,700 per ton. That’s a pretty significant delta….for about 70% of the production.)

Improving Efficiency
(Before Brookefield bought them, they had six plants, what Brookfield did was take 6 plants down to three…they honed in on a whole bunch of manufacturing efficiencies… and streamlined those plants and their cost structures…It’s not a business where they’re looking at huge tailwinds and just flying on those tailwinds…they went into the details of manufacturing to get efficiencies..and even..today, Graftech had an earnings call, they have two plants…one is in Monterrey and one is in Pennsylvania. Pennsylvania has been mothballed and could be brought back to life. They are moving some work from Monterrey to Pennsylvania, it’s a 2-3 year project for them to do these movements, it doesn’t increase capacity, but it definitely takes it’s cost structure down. This is a business that is doing continuous ..blocking and tackling to improve their efficiencies.)

Valuation & Downside Protection
“There is a company called GrafTech that recently showed up on my radar. It’s similar to IPSCO in many ways. We don’t know the trajectory, but I think the odds of losing money are pretty muted, while there’s a built-in element that could give me a nice double or triple in not too long. What’s not to like about that? ” (So if you look at it very simply… the company has, let’s say, realistically, maybe the ability to produce 180,000 or maybe 190,000 tons of UHP electrodes a year. And approximately 145,000 of that, they have this low cost advantage. Maybe there is about 30,000 to 40,000 tons where they don’t have the low cost advantage. Those 30,000 to 40,000 tons, even in today’s environment where profits are good for everyone, it’s probably like, maybe $60-80M in..EBITDA…from that non captive of 30%. And the captive tonnage which is the 145,000, that’s before you take out corporate overhead and everything else, your at $2,750 and you’re selling at close to $10,000….You’re at north of a billion in margins and then you can take out $60-70 million of overhead, and another $60-70M of capex,…and maybe another …..$125M for debt. So you take out $300M and then you take out taxes, you still have about..$500-600M[which is locked] for several years. Between their cashflow in the next 5 years, is..approximately equal to the market cap. This advantage…with needle coke, could extend well beyond 5 years. The bottom line, is the bet i made, is …We’ve got a very prudent capital allocater, and owner of Graftech in Brookfield…Brookfield understands buybacks..capital allocation…really well, they own 80%of the stock…and three of their guys are sitting on the board…I would expect that the cashflow that comes out of Graftech, in the next few years, will have some very efficient usage. probably, most likely, a large portion is going to get returned to shareholders, because they don’t have any other need for the cash…It looks like…heads I win, tails I don’t lose much. the downside is quite well protected, the upside is kind of hard to gauge. But i think if you can make bets…where you cover the floor…that’s much of the battle.) “From my point of view, it’s the same thing as IPSCO. Who knows what’s going to happen here? I certainly don’t. But why do these opportunities exist in the first place? It’s because markets hate uncertainty. The market, just like me, has no idea what the other 30% of production is worth. And Mr. Market has no idea what cash flows look like for 100% of production after five years. But we’ve got the downside covered, so we just sit on it. If at some point we get a deal done with China, we get a deal done with the rest of the world, if the world starts humming again, maybe things go crazy. But maybe none of that happens and we get our money back. There’s a wide range of outcomes, but virtually all are acceptable.” (There are scenarios under which, we can lose money on Graftech, there are scenarios under which Graftech can go to zero, there are many things that can happen which can destroy the thesis. That doesn’t mean it’s a bad investment. There are business where you could make 10x your money and it would not have been a prudent investment. And there are businesses you would have lost a lot of money and it was absolutely correct to make the investment. And… as long as we have done our homework and try to assess the probabilities correctly, you can not always tell the score by what’s on the board. you have to go deeper than that to tell the score.) [I don’t know whether I should mention this but I’ll go out on a limb: one of the businesses that I think we’re almost at the tail end of buying, is a company which in the next five years will generate cash flows equal to or probably higher than its market cap. It’s like with IPSCO — they are contracted cash flows. They’re locked in. It’s not just giving a multiple. You actually have visibility into 2022, 2023-type numbers. The company is probably going to dividend out these cash flows as they come out. If I invested, say, $50 million in this business, and $50 million or $70 million of cash flow will come in in the next five years, and that entire $50 million or $70 million gets pushed out, then in five years, I’ve got my money back. In fact, some of that is starting to come back a year from now, but I still own the business, and I still own all the assets and plant and equipment and all of that, just like IPSCO. I like those types of bets. I cannot tell you what that business is worth, but I can tell you what the floor is, and we’re buying below the floor. That’s quite exciting. Anytime we get to make these kinds of bets where we have very low risk with very high uncertainty, then the next part of the equation, which is a likely high reward, is on the cards. I have more experience now than I had when I was doing Frontline, but we’ll see how it actually plays out. If it doesn’t play out with a bull case, then we won’t lose any money. We’ll probably make some money, if it works out with a bull case, then we’ll make a lot of money.]

His conviction in the company
“At the end of the day, price matters. I wish I can get better at this. I think many times companies that look expensive are actually cheap. It’s all a matter of the future cash flows. But I am such a cheapskate, as you saw with IPSCO and GrafTech. Should I buy GrafTech or should I take a flier on MasterCard? GrafTech or Amazon?” … “But I think if you had something like GrafTech, someone like Charlie Munger would say if you had two other positions, you’ll be fine. In fact, Charlie would probably say that if you were 1/3 Berkshire, 1/3 a compounder like Costco, and 1/3 GrafTech, that’s probably okay”

EAF Contracts of Gold

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Clone: Mohnish Pabrai unit price(Assuming he bought at the bottom): $10

Pabrai is very familiar with the needle coke industry through his investment in Rain Industries. This investment seems similar to his investment in ISPCO, with an emphasis on “similar”, not the exact same scenario. He simply lays out a model for us to use. Skip to 1:25:00 https://youtu.be/_0XPurSI9cQ

Continue reading “EAF Contracts of Gold” →