investment | Karl-Mikael Syding

Oil opportunities and the slippery slope of contango extraordinaire

Retarded Redux

Once, a friend from business school wrote in his capacity as a business journalist “It’s fascinating how retarded Syding is. He still hasn’t realized that…“. That was 20 years ago.

Well, here I go again, I just realized* there is this thing called contango…, and consequently I’ve had to update my view on oil.

*not really, see more below

Oil update – to keep or not to keep

This is a quick update on my thoughts on (brent) oil

It’s not a recommendation to buy or sell anything (see disclaimer page), it’s simply my thoughts on the issue of low oil prices potentially going (much) lower before exploding higher, and what that means for investments in oil futures and oil stocks.

Oil and Asperger’s

Back in August last year I wrote this article on brent oil and Asperger’s – about how I had profited from having both.

Today I’m long oil again, both a brent certificate/ETF (a Swedish instrument: Olja S)and two oil exploration companies (DNO and ShaMaran).

The case for oil is pretty easy and straight forward: the world is growing and we have reached peak cheap oil production. It will only become more and more difficult and expensive to find and extract oil, while the easily accessible oil reserves become depleted and go off-line one after the other.

The case against oil relies mainly on solar energy and more effective use of energy, including storage (batteries). Well, that and the coming super recession.

I’m pretty sure renewables won’t be able to fill the oil supply/demand gap within the next five to ten years – at least not unless oil prices sky rocket again, thus making non-subsidized alternatives attractive enough. I also think a recession has been more than priced in. I consequently think oil prices will be much higher than today 18 months from now, and yet much higher 18 months after that.

10$ oil

In the short term however, there are a few snags, including 10$ oil:

Easy money has fueled malinvestments in north American shale oil/gas production capacity. Nobody wants to be the first to fold, but some need to fold though in order to rebalance the oil market and support higher prices. The latter is taking longer than expected. Crashing oil junk bonds is, however, a good sign things are moving in the right direction.
Crashing oil prices have forced Opec to pump even more oil than usual on order to keep their countries afloat. Russia, Saudiarabia, Kuwait, UAE and Iran simply refuse to agree on the needed production cuts. Instead they seem hell bent to keep at this chicken race at least long enough to crush the north American shale industry.
Oversupply. The combined production of a pumped up Opec, Iran coming online and massive investments in shale production capacity have created a shortage of storage capacity. Once the industry runs out of storage (including in tankers and refined products) excess oil can and will be sold at just about any price.
1. Yes, 10$ per barrel is conceivable (for a very short time) – if that is what’s needed to make anybody find use or (build) temporary storage for it, not to mention paying the cost to move the product.

Contango extraordinaire in the face of a storage crisis

The reason I am considering taking my oil profits to the sideline for a while is solely based on the risk of a storage crisis which could spark a panic sell off that in a single month can create a truly massive contango, wiping out 20%, 30%, 50% of the value of an oil ETF or certificate.

I have based my investments on Opec doing what they can to crush the shale industry.

I have been ready to sit through a bottom in oil prices caused by both a supply war and a simultaneous recession.

I have been quite calm, faced with a contango of 1-2% per month for the rest of the year, and a total of 20% until the end of 2017. No problemo.

What I hadn’t really considered, until I listened to the MacroVoices podcast the other day, was the risk of literally overflowing oil storage facilities (check out some of the statistics here), and thus nobody willing to take delivery of oil at just about any price, while next month’s futures still trade at more or less reasonable prices. Even if current contango is limited to 1% per month, temporary spikes can kick that up to tens of per cent per month.

I previously thought it would be quite easy to find alternative uses, or to build temporary storage facilities if you stood to make a dollar or two per barrel per month in arbitrage, but it seems it just isn’t that easy.

Hence, if a long oil ETF trade as of today is to become profitable, the current oversupply of 2 million barrels per day pretty soon has to come down to zero. It only takes a few per cent production cuts by, Russia, Saudiarabia, Kuwait and UAE to accomplish that. However, they just won’t, if Iran is increasing its supply at the same time, and definitely not if it means the US shale industry will survive.

If the cuts or shut-downs, shut-ins, don’t come soon enough, any product relying on rolling oil futures contracts over from month to month, could be more or less wiped out, and not recover sufficiently in the ensuing rally, due to too low a starting point.

Veering

So, it’s a chicken race, and I’m not entirely sure I want to be part of it anymore. The risk of suddenly losing even ‘just’ 10% in a single month’s contango simply is too much of a gamble for me.

I will keep my oil stocks, but I just might sell my oil certificates as early as this Monday.

If I were you, I would think long and hard about what kind of oil exposure I had and why.

With that I leave you, and encourage you to spread this article far and wide, to help others in their quest for making a quick buck in oil.

P.S. If you haven’t subscribed to my newsletter or read my eBook already, don’t hesitate to sign up. It’s free, spam free, easy to unsubscribe, and I hear it’s pretty entertaining as well as useful (sometimes)

10 000 hour rule debunked again

This 5-minute article suggests a few simple but powerful mental tools for getting more out of life and investment research efforts, avoiding waste and suboptimization

Some become world champions in just 1 000 hours, some never

First you must realize, there is no ~~spoon~~ 10 000 hour rule

Please e-mail me at mikael.syding@gmail.com if you don’t recognize the picture

The 10 000 hour rule was debunked a long time ago, specifically when Donald Thomas, who commenced high-jumping in 2006, won the world championship in Osaka just a year later in 2007 (clearing 2.35m), without proper high-jumping shoes. The first time he ever tried high-jumping, on a bet, in January 2006, he cleared 2.13m in ordinary tennis shoes.

Actually, the 10 000 hour rule was a deliberate misinterpretation of data. The original research only showed the following:

if you have the genes
and the ambition
you may become a master in your area of expertise
if you practice between 3 000 and 30 000 hours
and then there are outliers, like Donald, who shows you could train even less, given a certain set of genes

i.e. a completely meaningless and useless result.

Don’t be that guy throwing the 10k hour rule around as if it meant something.

If Donald had, he might not even have bothered with the high jump, and this little man would have been world champion instead:

Stefan Holm (181cm, 5″11 1/4) trained more and better than any other high jumper in the noughties and jumped 2.30m or more 119 times, but, e.g., never 2.42m like Patrik Sjöberg in the middle of the photo above did.

Sure, you’ll get better, the more you practice, but there is nothing guaranteeing becoming a master, no matter how much you practice. And, if lucky, you could get there much faster.

There is no 10 000 hour rule

The opposite of spending your life on just one endeavour

-I’m a trysexual, I’ll try anything once

Okay, I wouldn’t go that far, not in horizontal hip-hop, and not as a general rule either.

However, there is a 20-hour ‘rule’ that is immensely more useful than both the 1-hour and the 10 000-hour dogmas:

If you focus and practice intelligently for 20 hours on learning a new skill, you will become “quite proficient”

In 20 hours you can become good enough to enjoy your new skill, good enough to keep learning more on your own and good enough to know if it’s something you have a talent for and would enjoy developing even more.

If you’re interested in how to acquire a new skill in 20 hours, check out Josh Kaufman’s TED talk from March 2013.

Studio 50:1

110%

Sport jocks sometimes claim to “give it 110%”. Now that’s just retarded.

And it’s not due to a lack of education. They typically got the expression from their (gym) teachers. Anyway, never aim for 110%. You will be disappointed if you do.

20%

Google famously (used to) let it’s employees spend one day a week on any project they like. That’s 20% goofing around to let creativity flow, and maybe come up with significant improvements and business ideas.

I think Google has restricted the extent of its experimentation hours lately. They are still hanging on to the principle though. And so should you. Just because you’re grown up, doesn’t mean you have nothing more to learn. Actually, it’s quite the opposite. The older you get, the more you need to make a deliberate effort, to keep novelty and personal growth in your life.

1% effort for 50% of the outcome

Whereas 1 hour probably is more than enough for most of broadening your bedside horizons, and 20 hours is good for trying out what skills match up with your preferences and talent… I’d say, if you put in 100 hours (just 1% of the infamous 10 000 hours) you will leave most of mankind behind in that area, often achieving about half the level of a professional.

Call it the 1% effort system. People will keep referring to Gladwell’s 10khr, and so can you. But rather than go for the full Monty, aim for just 1% of the 10k, i.e. 100 hours of focused and deliberate effort to kind of “master” a new discipline.

You won’t win any championships but you’ll become pretty good at most things you try; typically much, much better than any beginner. Languages, sports, programming, design, sales, psychology, you name it.

Since you have a lot of 100 hour chunks at your disposal, you can become an instant expert in hundreds of useful or entertaining skills. If nothing else, you can find out where your talents are and what satisfies you the most, rather than arbitrarily choosing chess, golf or tennis and end up wasting 10 000 hours on something you don’t really enjoy and won’t win at anyway.

In 100 hours you’ll acquire most useful skills regarding long term value investing, but you’ll still not be done by 10 000 hours

A sell-side analyst spends 10 000 hours per large cap company he covers during the course of his career. You could catch up on the essentials in just 5, and become somewhat of an expert in 20, not to mention a 100

Even more importantly, trying new things, practicing them wholeheartedly will increase your brain plasticity; hence future learning of other skills will be easier.

It’s fun too. Being a beginner is fun. There are no expectations, no anxiety, just a steep learning curve and a lot of hilarious failed attempts.

Commit and quit. Give it your all (yes, 100%, or close to it, but not for long, not for 100% of your life). Focus! Be serious. Give it one hour, just one hour. Then one more, just one more.

If you’re not completely hooked after 20 hours, try something else. The brilliant thing with the 20-hour system is that you can try so many things before deciding what should stick. If it’s useful and enjoyable enough, keep going until you get to a 100 hours.

The 1:50 rule in practice

Last summer I read the unabridged 2400 page book The Count of Monte-Cristo in French to improve my French.

I spent about 100 hours on learning the basics of Portuguese on DuoLingo last spring.

For no other reason than exercising my brain.

However, if you want it to really stick, it’s advisable to have a specific use for any skill you set out learning.

Commit and quit. Restart.

Fair disclosure: I quit both this year’s handstanding and side split efforts after just a few hours, due to lack of interest and slight injuries. Perhaps next year.

I spent somewhere between 20 and 100 hours on Khan Academy’s math section, but now I’m taking a pause. I’m not sure how much time I put into Python and Javascript on Codecademy and Khan but probably around 25.

What I really should focus my next 20-100 hours on is online marketing skills, such as web design, SEO and writing copy. There are always new things to learn, new skills to attempt.

Working out, the 1% turned into 2%

I’ve tried several martial arts, tennis, volley ball, football etc. Martial arts is the only thing that managed to keep me interested long term, but my work schedule forced me to quit.

I took up weight lifting (again) in 1996 to keep in shape “until I could get back to martial arts” but I never did, and now I’m hooked by the iron instead.

I’ve typically always spent 1-2% of my time working out (more before I turned 22), and since I retired I’ve stabilized at around 2%.

I work out 4 hours a week, in practice 2% of the available time, doing mostly heavy compound exercises with free weights. In fact, most of that time is resting between sets, which I spend reading and writing.

I don’t do any specific cardio, except for a quick warm-up on the tread mill before working out.

I’m by no means a bodybuilder as such, but I am quite fit, despite sitting at an office desk for 20 years and eating whatever I like, including a lot of french fries, ice cream and drinking my fair share or more of alcohol.

Cooling down after a sauna:

The picture above is the result of a 1% effort that got me hooked and expanded to 2%. By focusing on the most effective exercises, I look and feel athletic at 43, despite only going to the gym for about 90 minutes every second day (including 5-10 minutes of mobility exercises every fourth day).

There are no 110%, 100% or such efforts in my diet either. I fast (16:8) and I drink fish oil. That’s it. I still bench 300+ lbs, I haven’t had a cold in 9 years and my Omega 6:3 balance is exceptionally low at 2.0.

Summary – Hard made easy:

Forget about the 10 000 hour myth. There is no spoon.
Try just one more skill, then one more, for a limited amount of time
Commit and quit. Don’t get stuck, don’t force feed yourself skills you don’t like or need
Give it 1% and enjoy half of the master level – the Sprezzaturian way
Even if you don’t use the skill per se, your learning ability is improved or maintained

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Are you too ‘smart’ to short the market? Then do this

Unlike most smart investors, financial pundits, TV commentators…

…and not least my eloquent friends at Wall Street Playboys,…

I do time the stock market, and I don’t shy away from making my recommendations or investments public.

Right now every fiber in my body screams to short the stock market:

Risk aversion is on the rise (seen in general market dispersion, chaotic and nervous intraday patterns, loss of trend uniformity, increasing High Yield spreads) and any little event could topple that first crucial domino that sets off the rest. The whole market is nothing but an unstable pile of fingers of instability.
The rally is extremely long in the tooth and some robot traders could just as well take that as a cue to try the downside (NB: 80% of the trading is automated robot trading)
Oh, did I mention the US stock market is the most expensive it has ever been (on some measures, and just 10-20% below the epic peak of year 2000 on others)? Swedes hoping for a safe haven in dear old Stockholm should note that the OMX index usually mirrors the US indices perfectly in downturns, no matter if OMX lagged a little before.

The stock market in a nutshell (pic from Hussman)

Directly from Hussman, just as the picture above: The yellow shaded areas show points where credit spreads might be defined as “rising.” For simplicity, I’ve shaded all points where credit spreads had advanced 90 basis points from their 6-month low, and were greater than their 150-day moving average. Observe that the steepest losses we’ve observed in the S&P 500 in recent decades have been concentrated during those periods of objectively widening credit spreads. I’ll say this again: low and expanding risk premiums are the root of abrupt market losses.

The purple shading identifies only a subset of those points that also match the market return/risk profile that we currently observe (basically identifying recently overvalued, overbought, overbullish conditions that were then joined by deteriorating market internals or widening credit spreads).

But, I get it, you just don’t want to short the market. It seems immoral, dangerous, unnatural… You’d rather just wait for a good buying opportunity – and you don’t want your money to sit idly on a zero per cent bank account meanwhile.

You could copy my strategy, which is to slowly accumulate investments that have already become somewhat cheap (but, as always, risk becoming cheaper, much cheaper, further ahead) and trade others opportunistically (I like gold and currencies, since they don’t really have ‘intrinsic values’ like stocks. That makes it easier to disregard the dangers of picking unknown pennies in front of an unknown bulldozer)

So, what am I doing exactly? I mean, I have retired, I am officially a retarded hedge fund manager. I could live splendidly off of my capital for the rest of my life. However, as the retard I am, I want to prove that I am right. Just saying I said so afterward simply isn’t enough. I want to make some money too.

Except for my big short (which is waaaaay under water) on the Swedish stock market, this is what’s currently in my direct financial portfolio (except apartment, pension funds, private companies like the publishing company and the floating sauna company, russian art etc.)

Software as a service: A convertible loan and a sell option in a Human Resources software company – if things look okay, I’ll convert to shares and later use the sell option, if they look really good, I’ll convert and keep the shares for a while. If things turn really ugly, I’ll end up with a large mansion in the countryside
Cash at the bank (dry powder)
Loans to friends (not that dry gun powder, but perhaps I’ll get to call on these when the time comes – at least they stick to regular amortization schedules)
Gold (albeit “paper gold”) SPDR Gold shares ETF – gives me some USD exposure as well as some insurance against Yellen’s next move (+21% so far on this trade)
Gold mines (senior = actually producing gold) Market Vectors Gold Miners ETF – like above but with more juice (+24% on this trade so far)
USD 3x leverage – I halved my position in the USD yesterday (75% profit in a year) but still have a fair amount left. The Swedish Krona, SEK, usually falls in times of trouble. If China falters probably doubly so due to Sweden’s export dependency to Asia. The USD on the contrary, despite all its shortcomings, is the safe haven of first choice for most investors (incl. americans themselves selling foreign assets). The Fed might even consider raising rates this year which I can’t see any other central bank doing.

Smaller investments and speculative short-time bets (oil):

Creditsafe – small unlisted credit service company, provides credit quality information on companies and private individuals
Oil (Brent) 5x Leverage (entered today )
Peptonic medical – oxytocin pioneers (very small investment)
Opus – small investment (testing services and testing equipment mainly for the auto industry – hopefully a secular growth story, the share price has recently halved and that’s why I stepped in. However, the shares will likely fall a lot more before this is over)

My suggestion to you (except shorting stocks) is:

Invest in a business (your business perhaps?) or learning a skill
Keep cash ready for opportunistic buying in the case of a (flash) crash
Think outside your geographic region (stocks, currencies)
Slowly, slowly accumulate stocks that really excite you and have become forgotten by other investors that chase a shrinking pool of rising large caps
Consider buying things like gold or oil, but do your homework first, don’t just follow my lead