Pharos Investing Blog
Interesting spin on the stock market, personal finance and financial planning. Subscribe to get my weekly digest.

4th September, 2019
The state of affairs in the stock market
The trade war is causing untold uncertainty in stock market. Let us look at how the stock market has been performing in the recent days. CRC which is an oil stock has been going as low and as high as 15% in a single day on many days depending on how the stock market feels that the global economy is headed in the near future. Given the proliferation of algorithmic trading and passive investing via ETFs and various different kinds of funds, any news in any given sector is totally blown out of proportion.

And oil market is facing the brunt of this whipsawing, volatile and illogical state of affairs. Most of the self learning algorithms learn by analysis of patterns which have happened in the past without truly understanding the reason for those patterns of movements of stocks. Given that many stocks have volatility which cannot be explained clearly by one model, the recent past may give to exorbitant rationales for behaviour of any particular stock. Hence we see, movements like that of CRC stock. It increases market cap by 15% on any given day and decreases market cap by 15% on other days.

This bizarre state of affairs provides a clear opportunity for fundamental investors to take positions in the stock market with hedging after extensive scenario analyses. And many great fortunes wait to be made, given that algorithmic trading and passive investing have increased the degree of irrationality in the stock market and anybody with a crystal clear idea can use proper leverage and risk management to invest in any sector which is undervalued and short any sector which he/she thinks is overvalued.

One simple way to think of this according to me is the degree of undervaluation in the oil sector given the slowdown in shale oil production. According to EIA 914 reports, US oil production has not increased in the past six months while both IEA and EIA have been projecting massive growth in US oil production in both 2019 and 2020. This growth in oil production according to these agencies is enough to cover the increase in demand for these two years and also induce an oil glut. Given the overwhelming negative sentiment about oil, WTI and Brent have both been trading in the 50s and 60s throughout the year. And many oil stocks are trading at all time lows.

On the other hand, take Shopify Inc, which is an overblown stock relative to fundamentals and its relative importance to the world economy. Given that the stock has more than doubled this year and still seems going strong while not affected by the general volatility of the stock market, it seems like a good short. But given the irrationality of the stock market it might as well hit $1000 before it falls back. I strongly feel that the direction of Shopify Inc stock strongly depends on the next few quarterly reports. If the company fails to perform inline with the massive expectations set for the stock by the investors, we might see the stock head back to the 200s.

23rd May, 2018
Stock market run by giant dervishes?
Let us start with a conspiracy theory: The stock market is run by giant dervishes. Where are these giant dervishes? Why can't we see them?

We cannot see them because they are hiding in plain sight. And we don't see things which we don't want to see.

But how do these dervishes control the stock market? By manipulating the brainwaves of mindless moronic finance TV presenters and heads of commodity desks in various banks.

Why else would Citi announce a price target of $70 for WTI after WTI had crossed $70? Is Citi commodity desk run by stupid people? Probably not. The people in the commodity desk are controlled like puppets by the aforementioned giant dervishes.

The bizarre financial news everyday I hear makes me wonder if are really living in "The Matrix". How else can one explain the stupid price targets analysts come up with everyday?

One can only assume that the financial market is not rigged and there is a giant conspiracy afoot which normal human beings can never comprehend.

But let us assume that there is no conspiracy and the market is being run by coherent, functional and logical people. In this case, IPOs are priced exactly at intrinsic value and day traders are non-existent because everybody is trading perfectly like Vulcans using only logic and no emotion.

The above situation is not going to happen ever, even if algorithms are the only ones trading in the market. Because, algorithms are created by flawed human beings, machine learning notwithstanding.

Have we been numbed by the social media? By constant exposure to emotions by movies and telenovelas? Maybe this numbness explains many things which can be used to understand why people have lost sensitivity to the pulse of the market and keep repeating the same mistakes in the market again and again.

The financial market is deeply flawed and people who think differently than the herd are sure to become superbly wealthy.

10th April, 2018
Time to short Square Inc?
Is Square Inc starting its own bank? Is Square Inc a fintech company? Is Square Inc overvalued? Yes, for the third question. The 52 week range of the stock price for the company is $16.66-$58.46. While the annual revenues have jumped 30% from financial year 2016 to 2017. And the company is still making a loss.

Does the company deserve the present market capitalisation of $18.18 billion? Probably not. The tech mania is subsiding slowly in the stock market. Unless Square Inc start its own bank or it gets bought over by Paypal or the big banks for an extraordinary amount of money, it is a good short at $45.89 per share.

As mentioned in the blog about Square Inc before, the company is neither a market leader nor has significant competitive moat. The advantage for valuation for the company comes from the fact that it is viewed as a fintech company. Given the sector rotation underway now in the stock market, SQ might go as low as $16 again. But at $45, it is an easy short provided the short is hedged with calls in case of sudden offers of acquisition.

18th September, 2017
Oil in deficit
Looking at the recent monthly reports of OPEC and IEA, one comes to the distinct conclusion that the oil market is in deficit. And the total US production according to the EIA 914 report has barely changed since February 2017. So, why is WTI still below $50?

There are many amusing arguments made by the bears:
- EVs are going to take over the world
- Demand for oil is dying
- The OPEC cuts are ineffective
- Shale oil has breakeven at $50
- US shale production can be increased and decreased at will, it is basically like opening a tap to get water from the water tank

EVs are going to take over the world eventually, when they find cost effective battery solutions and most of the world has no more electricity grid problems. Most third world countries where most of the oil demand is coming from have regular outages of electricity. So, the people who live there don't have enough electricity to power their TVs and refrigerators continuously, let alone an EV. And most EVs have a higher starting price than their counterpart ICE vehicles.

According the latest IEA OMR, oil demand is up by 1.6 MBPD year on year for 2017. This hardly seems like demand is dying for oil. In fact most forecasts put that oil demand in 2018 will break the 100 MBPD barrier for the first time in history. It seems very interesting that oil bears have lost totally their critical thinking when it comes to this point. If oil demand is dying, there should be a drastic reduction on demand for oil, or at least there should be no demand growth. Looks like the oil bears can't even figure out basic arithmetic. I will simplify it for them. When the demand is increasing, it is growing. When the demand is decreasing, it is dying.

Another argument which bears like to point out is that OPEC cuts are ineffective in that whatever production is cut by OPEC, is in fact filled by US shale. Nothing could be farther than the truth. While OPEC and NOPEC cut together 1.8 MBPD since January this year, US production has increased by only about 300KBPD. Granted that Libya and Nigeria have seen recent increases in production of about 700KBD, that still leaves 800KBPD in production cuts. This argument shows really how illogical oil bears are. A production cut, takes oil out of the market. So, in fact, the cuts made since January have made the situation for oil much better than say if OPEC and NOPEC were still pumping more oil.

There have been many arguments and publications saying that most of the shale oil production breakeven is below $50 or $40 or even $30. Apparently some of these shale companies have higher margins than Apple. This is laughable. No commodity product can have such high margins. Unless, there is a distinct shortage of the product or if there is very high demand. This again contradicts the assumption of the bears that demand is dying and there is a surplus of supply. If the demand is dying, why are shale producers having such huge margins. Why is offshore drilling for oil still alive? Some of the ludicrous arguments I have heard from the bears is that shale is totally going to replace offshore drilling which produces about 30MBPD+ oil per day. This is beyond laughable.

If shale has such low breakevens, it must be reflected in their income statements and balance sheets. Most of the shale companies are heavily indebted and were in loss even when oil was trading at $50 in 2Q2017. So, the magical breakevens touted by the oil bears are non-existent.

There has been a rumour going along online in numerous trading forums that shale oil, especially DUC wells can be turned on or off at will. It's like turning on or off a tap attached to a really big water tanker. Shale extraction of crude oil is a complex and highly technical process. Comparing this extraction process to turning on or off of a water tap is highly insulting to the technological innovation that made shale extraction possible. While oil bears constantly use shale production in their arguments, they fail to understand the extraction process and technological complexity of the shale extraction process. So, it is definitely not like a water tap which can be turned on or off at will.

To summarise, most of the arguments made by oil bears are superficial and lack consistency or even a mediocre depth in analytical or critical thinking. The constant bearishness in news by the media about crude oil and the resultant negative price action has further bolstered the oil bears' thinking. Sooner, rather than later, the bears are going to be proved wrong and by then, they'll have lost a lot of money on their bets.
10th September, 2017
Shipping and commodities
The Baltic Dry Index which provides an assessment of the price of moving goods by sea has quadrupled in two years from a low of 291 in February 2016 to the present high of 1332. Sadly, many of the shipping stocks haven't quadrupled. And the Guggenheim Shipping ETF (SEA) has hardly budged this year trading in the range of $10-$13. The industry has been in a downturn for quite sometime plagued by oversupply and fears of death of commodities consumption.

There is a definite oversupply in dry bulk vessels, tankers as well as container ships. There is oversupply in containers of container ships too. But the amount of negativity in the sector which is equal to or even more than the negativity concerning oil sector is overblown. Some of the stocks in the sector have seen a rebound. Container leasing company Textainer Group Holdings Ltd (TGH) has more than doubled from a low of $6.90 to a present price of $16.75 this year.

As the financial media has been calling for the death of oil, coal and natural gas consumption, so have they been calling the death of commodities consumption as well as that of shipping industry. The shipping industry according to the media is struck in the perfect combination of oversupply and downturn and hence will probably never see recovery according to the naysayers. But the sectors which are down today will rise again and the sectors which are seeing all time highs will come down tomorrow.

The Goldman Sachs Commodities Index to Dow Jones ratio which is below 0.2 for the first time since 1973 for the past couple of years, shows us that commodities are ridiculously undervalued. What the analysts are missing, given that most analysts are hedgehogs and not foxes is that there is a huge commodities consumption demand coming from the countries in South and South East Asia. The combined population of India and SE Asia is around 2 billion. And they are going to start consuming commodities in a manner similar to China at the beginning of 2000s.

I see a dramatic increase in shipping costs concurrent with the increase in steel prices and stock prices of shipping companies at the most by the end of 2018. Shipping and commodities companies are ripe for investment now given that many companies with decent balance sheets are trading at all time lows.
2nd August, 2017
Is Square Inc overvalued?
Square Inc is a provider of devices and software to process cashless payments. It has four primary hardware products:

a. Magstripe Reader
b. Chip Card Reader which reads EMV cards
c. Contactless + Chip Reader
d. Stand for Contactless + Chip

It also has a point of sale software called Square Point of Sale which is compatible with Android and Apple devices.

Square has several competitors in the cashless payment space which include Paypal Here, Intuit GoPayment, iZettle and Clover Go. It is neither a market leader in online processing of payments nor does it have significant moat in terms of superior software and hardware for payment processing. Its share price appears clearly overvalued at $26.81.

1Q2017 results of Square Inc:

- EPS of -0.04
- YoY growth of revenue for 1Q2017 is 21.6%
- Number of weighted shares increased by about 35 million from 4Q2016 to 1Q2017
- Cashflow from operations was healthy due to $31.6 million of share based compensation
- $440 million was issued as convertible notes
- 101.5 million potential common shares from options, restricted stocks, warrants etc.

As we can see, the company is still suffering from losses which might turn positive in 2Q2017 due to growth of revenue compared to 1Q2017. Majority of the revenue is still from transactions and not from hardware or software sales. If there is a slight downturn in the US economy, Square Inc shares will be hit hard.

Disclosure: I am short Square Inc

25th July, 2017
Recently I was reading a book on forecasting by Philip Tetlock and Dan Gardner about forecasting which was called "Superforecasting". Mr Tetlock describes his experience with working with the Intelligence Advanced Research Projects Activity (IARPA) and Good Judgement Project (GJP) and how a group of amateurs in GJP beat the official control group in a forecasting tournament sponsored by IARPA.

Mr Tetlock comes to the conclusion at the end of the book that forecasting is real and effective and not the equivalent of a chimp throwing at a dart board.

Why is this book important? I think there are two reasons.

Firstly, it exposes the forecasters in the news media for the charlatans they are. Most of the forecasters in the news media have no credibility whatsoever and they're never held accountable for their past forecasts which have been wrong. In the book, Brier score is suggested as a way to measure the accuracy of a forecaster.

Secondly, it gives various tips on becoming a serious forecaster. One tip is of course using Brier score to become a better forecaster yourself. Another is to use "perpetual beta" to constantly make yourself a better forecaster.

While the book itself is an effective primer for getting to know forecasting, it lacks serious analytical tools for improving forecasting. But then, it was written more for coffee table reading than for a serious analyst. It was a thoroughly enjoyable read and worth spending US$11.55 on.
14th July, 2017
Efficient Market Hypothesis and Entrepreneurship
The basic premise of Efficient Market Hypothesis is that stock market is basically efficient, including all the information about various market company participants, general economic conditions, future scenarios etc etc.

There never has been a bigger lie perpetrated about the stock market as this hypothesis. Let me give an example of the common shares of Banco Santander.

The common shares of Banco Santander were trading at around $4.50 in July 2016 before the sudden Brexit positive vote. This resulted in shares falling to about $3.80. An year later, they're trading at $6.80. A jump of almost 80%. No sane person can ascribe that the movement of the stock of Banco Santander, one of the biggest and strongest banks in Europe is due to markets processing all the information about this company efficiently. If anything, Market overreacted and oversold the stock after Brexit and afterwards it overbought the company.

Similarly, a lot of academic research has gone into entrepreneurial activities. A basic conclusion of this research is that most new companies fail in the first three years of starting, so most people are better off not being entrepreneurs.

But, does this conclusion hold water? Given the right training and temperament, most people should be successfully able to run their own businesses. There are so many ordinary people who live their entire lives running their own businesses. Luck alone cannot explain their success.

I feel that academic research in these areas is not competent enough and leads to erroneous conclusions. Sometimes, common sense is all there is to guide us towards our goals in Investment and Entrepreneurship.
13th June, 2017
The miracle of shale oil??
What's happening with oil? Is shale really going to replace conventional oil? It seems highly unlikely. Yet, investors keep pouring money into these shale companies. And oil price right now is really volatile and low.

It seems like a good time to buy oil stocks right now. For the long term of course.

Some investors have been comparing oil to coal and how coal now is considered a dying industry. Apparently oil is going the same way due to the ingenuity of shale producers who are so innovative that they poured lots of money into R&D while the industry was going through the worst downturn ever in 2015-2016. They produced these shale innovations while they were firing workers left and right and cutting costs everywhere.

The last time I checked, the plane I flew in from Bali to India was still running on jet fuel which itself is derived from crude oil. Crude oil runs the world. It will take a long time for it to become irrelevant.

The market is a crazy place. Soon investors might bid up Tesla's share so high that it will become more valuable than Exxon Mobil. Never mind that Tesla has a revenue of $7 billion and Exxon Mobil has a revenue of $220 billion. The overvaluation and undervaluation have crept into almost every sector I can think of. Big data is overvalued, energy is undervalued. Electric car companies are overvalued, renewables are undervalued.

The craziness in the the market continues.

3rd June, 2017
Why the financial media is confusing
I have been checking out Bloomberg news and Forbes lately. Some of the analysts predict that Tesla will reach $1000 per share soon. Some say it is going to $20. Prediction and forecasting is of course difficult. And if the analysts could forecast correctly, they'd not be analysts. They'd be millionaires with their own yachts surrounded by models.

What's wrong with financial media is the amount of confusion it creates everyday by giving different biased opinions on everything. And these opinions are as flexible as an expert yoga master. Add to this the corruption which is rampant in the financial circles. No wonder most investors who watch this stuff or read it have high blood pressure and are losing money daily.

The best thing for an investor to do is tune out all news. All news is bad news, no news is good news. That adage is very true when it comes to investing. An investing approach based on fundamentals and common sense always beats whatever the talking heads are saying on TV.

Do not watch news. Especially finance news. Enjoy that time with your family or your friends or immerse into your hobbies. You'll save money in the long run and keep yourself healthy. ????
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