3Q Results

My stock picks got Trumped.

The VT, my Mr. Market proxy for comparison is now up 1.5% vs my weighted picks of 0.7% and unweighted of 2.4%. Over the same time frame, the VTI, my U.S. markets proxy, is up 4.7%. Thankfully, my actual portfolio did not do as badly, and I spent the last couple of weeks shopping for new names. Lessons learned include not putting your small cap speculative positions at the top of your weighting.

3q-results

The 3 Worst Picks – LILA, CSAL, RSYS

LILA declined ~20% on earnings. I got out of the way on the first day, but ouch. As is typical for a John Malone vehicle, management subsequently announced a massive $300m stock repurchase plan on the grounds that the stock was “presently undervalued”. This is a typical Malone play – no dividends, no distributions, just well-timed buybacks. I still like LILA for all the reasons cited in this slide deck and this Seeking Alpha post. However, I am a bit worried about currency risk. A lot of LILA assets are denominated in the Chilean peso, so I bought back in with a more manageable position size.

CSAL declined on earnings and has since rebounded. My sense is that a lot of hot money had been sitting in CSAL, waiting for the REIT funds to step in. The dividend at 9.5% basically covers the downside and I didn’t hear anything on the earnings call to shake that belief. Management did announce a deal for towers in Mexico, Colombia, and Nicaragua. I’m bullish on two of those three countries, but I think investors got spooked post-Trump. The towers themselves are under-tenanted, and while I’m not thrilled about the multiple paid, the 10-day currency stretch helps to remove some of the valuation issues. Ultimately, I think anything that helps CSAL get away from relying solely on WIN is a good thing, and the triple-net REIT structure is highly attractive to me.

I think hedge fund investors in particular might be dominated by fears of a Trumpian calamity and the eventuality of a rate rise in December, so they’d rather close what they consider a speculative short-term position out during a year that has not been kind to them. I’m not sweating it, and I recently increased my position here.

RSYS was meh. They basically reported an in-line quarter with higher revenue potential pushed out a bit into 2017. This is a small bet on a big return and I’m sized accordingly there so quarterly timing is less of a concern. It is my sense that Cisco and the other network equipment providers have been milking network operators for years, and I found this summary of Google’s SDN insightful about the opportunity that RSYS and RDCM have ahead of them.

The 3 Best Picks – LVLT, TMUS, COMM

LVLT got an acquisition offer from CenturyLink for a ~$61/share, a sizeable premium to the $46.92 close on the prior day. CTL management hasn’t a clue, so they are trying to buy one. Unfortunately, CTL management will be around after the merger. Did I mention they have an underfunded pension and a declining top-line? I closed out my position. This one isn’t worth sticking around for.

TMUS announced strong subscriber numbers. I was hoping for a downturn, but I went ahead and opened a position because Trump. Ain’t no way no how someone doesn’t make an offer for TMUS within the next year. I could see cable companies or Sprint making a run eventually. It’s incredibly valuable to all 4 telecom companies to merge. On the cable side, they’re looking at quadplay in Europe, seeing big Euro companies like Altice stepping into the U.S. market, and realizing they ought to leverage their existing wireless options through VZ.

COMM got away from me before I could buy, and I’m just not excited about it at these levels.

FTR is a short 

FTR did about what I expected it to. The CFO was recently replaced but I don’t think he can right this ship. They’re carrying a lot of debt, and really struggling to make this VZ acquisition work. I sold on the earnings print and would short the stock if it gets above $5 again, maybe buy speculatively under $3, but don’t count on seeing your money again before the dividend gets cut. I suppose a reduction in capital gains tax could make them more attractive? There could be some policy help coming, but I’m skeptical of management’s ability to keep the company solvent when subscriber numbers keep heading the wrong way.

I sold SOUHY

It was a small spin-off comodity company which I don’t know much about and was denominated in AUSD. Not worth the time commitment to me.

FB is undervalued relative to the growth

A lot of soul-searching needs to go on in our society with Facebook. At the same time I think FB is undervalued, and I recognize that it is a monopoly. I got out of the way after earnings, and recently bought a small position again. I think FB has serious advertising issues. A lot of marketers can’t prove any sort of ROI from it, unless they work at a big ugly consumer products company. Fundamentally, I think even Mark recognizes this and is working to correct, which is why Facebook is now focusing on improving ad quality and targeting rather than simply expanding the number of ads to users. This is a good thing for investors in the long-run and I think the stock is oversold for the growth profile, even if revenue comes in a touch slower. The big ugly consumer product companies like P&G will still have to invest in Facebook, because nobody ever got fired using social media advertising and nothing sexier has come along yet.

The Trumpconomy Outlook

It’s not all sunshine and roses here. I had positioned myself for a Clinton win. Now a lot of that comes into question and requires re-thinking. From a psychology perspective, I think Trump may have just pushed out the stock rally into mid-2017-2019. Somewhere in the next couple of years things will go south, but simply by surprising everyone (along with some decent economic data) I think DT has changed the prevailing market sentiment. Investors will be rolling into infrastructure plays, and a thousand other beaten down industrial assets which were presumed to be losers under Clinton. Bond investors will likely roll into stocks as well for the foreseeable future, and I don’t expect a cannibalizing effect to materialize. A lot of cash has been sitting on the sidelines. If rates and inflation go up, I think the stock market can keep rallying for 1-3 more years as investors who were in cash worry about inflation. Private wealth types are advising clients not to sell for tax gains this year, because they expect the Trumpublicans will lower the capital gains tax. Tech and anything else with global customers may become more unloved.

These dynamics will take time to fully play out. It takes a while to move big positions around if you are a mutual fund. Like most things Trump touches, I expect a lot of sizzle and no steak. So I plan to keep focused on tech and telecom with a smattering of industrials in the mix, and to be wary of any big market rallies from here.

In the telecom space, I expect Trump’s FCC to be far less aggressive about protecting things like Net Neutrality and yes, mega mergers. I bought TMUS, ELNK, and TWX. I also think the odds have gone up that AMT and CCI get aggressively acquisitive. They will be forced to offset resurgent telecom power once TMUS or Sprint is off the board. The only way to keep leverage over the telecoms will be to consolidate the supply of tower and fiber assets that feed VZ and T. 5G at this point looks like an incremental improvement, not a game changer for telecoms. This makes telecom REITS or companies with significant reitable assets like CSAL, CCOI, SBAC, and ZAYO more attractive.

In tech, the same tailwinds that existed before this election cycle are in place afterwards. A lot of people still don’t have smart phones or internet access. A lot of legacy technology is getting disrupted. The forces at work are so crazy-powerful that companies like Google and Facebook can spend money on all kinds of ridiculous moonshots, and still mint a lot of money on their core businesses. Companies with strong drivers and revenue/FCF growth >20% y/y will likely grow through any bear market too in my view. So I’m fine spreading my bets where the opportunities exist in work-outs, high dividend yielders, small cap value, and small-large cap growth. Lately I have been finding interesting work-outs. Hedge funds have not been able to compress deal spreads the way they used to because of costly failures like Valeant and regulatory fears.

My biggest single-name position is now TWX

TWX – I bought TWX the day the rumor came out that AT&T was looking to buy. Under Clinton this thing was a shoo-in. AT&T has a lot of lobbyists paying Republicans a lot of money. TWX has a lot of media strength to support presidential candidates and donated a lot of money to HRC. Nothing has changed. This deal is going to happen. First off you’ve got precedent with Comcast buying NBC. Secondly, Trump said a lot of inane campaign bull crap which he is now backing away from. Are politicians actors or are actors politicians now? I’m confused. He hasn’t said anything negative about T-TWX since the campaign, despite his supposed thin skin.

TWX’s valuation is at the high end at these levels, but I don’t mind getting into AT&T at a discount, though I may sell after the deal closes. The FCC will take a pound of flesh from AT&T, but I think there is an 80% chance that the deal goes through and my cost basis was $89.78. This is now my biggest position aside from VT. I swung for the fences.

allocation
401K Play Money – Separate from Auto-Investing Accounts

ELNK – I like Windstream and I think this deal goes through as well. I mostly play WIN through CSAL because of the favorable capital structure, but I took a small position here for kicks and am now regretting it because I have to wait for the stupid thing to wind up in mid-2017. Something like a 15-20% upside here if WIN does OK in the interim. I made a little merger-arb spread calculation here.

elnk-win-calc

I think the FCC will have a lot on its plate between the spectrum auction, AT&T-Time Warner, and probably T-Mobile. So I expect this thing won’t close until June.

RAD – An all-cash deal set to close the final month in a lame duck presidency? Yeah sure I’ll take a flyer on this one. It’s a small position, but the annualized return is 86% at this point. Worst case, this admin rejects it and they come right back in February to seek approval again. A lot of the deal-awaiting healthcare stocks are now rallying and I am thinking hard about HUM.

RDCM and RSYS – I bought into RDCM (finally) after earnings. NFV and SDN network plays look interesting right now. AT&T and VZ are clients, and neither firm looks expensive on a P/S basis. RSYS management sounds more enthused than RDCM, but I think part of the earnings call misunderstanding is because they were into the late afternoon hours in Israel and speaking a language that is not native to them. These are small positions with potentially big upsides.

VG – Vonage has strong cash flows and a good-looking strategy to leverage cloud-based telephony. The Nexmo acquisition looks like pretty good timing in hindsight. Another small position with big potential upside. VG quietly hired away someone from Google to be their CTO and I like what he has in the works. I would like to buy TWLO but its crazy expensive right now and there is a big lock-up overhang.

WLDN – an infrastructure play that has performed well since I bought it. A lot of insider ownership and the potential for big government investments intrigued me post-Trump win. See more details and good analysis here.

TMUS – I expect multiple bidders for TMUS within the next year. Deutsche Telekom is playing coy, but if the offer is sweet enough they will sell. There is a huge monopoly incentive for one of the other three carriers to buy TMUS, even if the valuation is in nosebleed range. Cable companies also want to get into the space. Between VZ and AT&T, AT&T has the clearly superior strategy. Ultimately I think TMUS’ pure focus on execution is smarter, but I’ll take the cash from T-TWX since it looks easy at this point, and figure out if I want to hold the AT&T stock then (probably not).

My asset allocation is still leaning outside the market

I expect the market to keep grinding higher until February barring some sort of crisis. I’m interested to see what the Republicans believe will spur the economy at a time of massive economic concentration and monopolistic power not just here in the U.S. but globally. See Samsung and South Korea.

Small business need to be the driver here for this to be a healthy sustained economic rally. If Congress simply rewards its donors we’re in trouble in 1-3 years. I think investors are getting desperate and betting on Trump, which is unfounded from what we know about him.

I’m looking at buying small multi-family real estate outside of the stock market, and am mostly limiting myself to defensive telecom stocks, small speculative positions, and 6-24 month workouts. Every paycheck I max out my 401k contributions. Everything else goes to paying down debt and building up the cash war chest for the next downturn.

It’s worth reiterating that I have removed about 25% of my portfolio into cash since 2015, which is not displayed in the pie chart above. So my cash position is understated in the chart. Let’s all hope January doesn’t go down like this.

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Go Home America You’re Drunk

The printing press changed our world in profound ways. It also brought with it revolutions, new types of government, and ultimately a better quality of life for everyone. Should we expect any less from the internet?

This election was a dumpster fire fueled by media trash. And you know whose fault it was? Everyone. Breitbart is trash. PJ Media is trash. Huffington Post is trash. The New York Times is definitely trash. This election broke every norm, every standard of journalistic quality, because both media sides simply said what their “base” wanted to hear to make a quick buck. I’m sorry Paul Krugman you may be an economist, but you are sometimes wrong and apparently unable to acknowledge it. This is what yellow journalism was like back when newspapers first became cheap and easy to distribute in the late 1800s. It is now back with a fucking vengeance.

When did every newspaper become an echo chamber ironically writing about echo chambers? When did Facebook mutate into a tool for people to enable outrageously judgmental virtue signaling which they would never do in real life? Always. Humans haven’t evolved in any meaningful way for thousands of years. We are all still primates with basic emotional drivers and response mechanisms and yet so many people this year (including me) expected better simply because we are able to communicate at the speed of light.

The internet is popular because it incentivizes our most basic desires for recognition, entertainment, and connection with family and friends. I kept expressing frustration to my mother about all of this vitriol on social media. She asked me “Why do you expect people to be better than they actually are?” Accept it. Stop virtue signaling, and maybe take action more tangible than a Facebook post if you are truly upset. The internet is a new tool to the human primate and it can be dangerous.Yes yes I hear you! I am blogging and virtue signaling right now! It’s a hard habit to break and I’m just trying to keep the pointy end of this new tool pointed away from myself and anyone else. But I promise you, this year I intend to try to get some referendums on the ballot for Kansas. Ah crap did I just virtue signal again? Dammit this is hard!

Democraaaaats, you don’t get off easy on this one. The Republicans did not abandon an entire voting block, ignoring the people who built their base, and what they actually wanted. This? This is on you DNC. Jim Webb was the literal canary in your coal mine. Your party lurched so far left that your media ridiculed and quickly rushed a popular West Virginia Senator to the sidelines. And after Jim Webb, Bernie Sanders put up a good fight for the white low-middle class and was also marginalized in favor of a candidate whose “turn it was”. A candidate so confident in data and out of touch with the ground-level that she did not bother to visit the state of Wisconsin.

The total HRC disconnect made sense to me in hindsight, because her Middle Eastern policy always felt like the soft fluff of someone who would never actually have to be present herself to witness the aftermath. She’s a perfect bureaucrat. I would happily have her running the EPA or working as Secretary of State again, but how much more elitist and out-of-touch can you get as a candidate? I have to give credit to Michael Moore. He had his finger on the pulse months ago.

I knew Hillary was disliked, and there was something really odd about these devout Trump supporters I kept encountering, but wow. Just wow. She had a massive pile of money in her favor, celebrity endorsements, a wealth of experience, but she simply did not resonate and could never resonate with a majority of the population outside of New York, LA, or San Francisco.

Look there are very real issues here and I understand that people are fearful, but let’s all pause and reflect on the root causes. Populism and irrational fear is a problem on both sides. Right after the election an HRC fan told me she was worried about Trump supporters partly because they all have lots of children, so future elections will also go their way. The irony of this statement is that it is the exact sort of beliefs that a xenophobic Trump supporter might espouse about immigrants. So let’s all take a breath and get some perspective. Fear is something else that got us here, because it can lead to irrational feelings like hatred. The best counter I have found to fear of others is to attempt to understand them.

The bar which the media has set for Trump is so very ridiculously low now that he might actually pleasantly surprise, which could get him elected again. I am skeptical that he will be either the revolutionary his base expected or the white supremacist which liberals fear. The truth is always somewhere in the middle. Give him some respect if not your trust, he is full of contradictions, perhaps a great natural politician because he somehow convinced 59 million people to vote for him.

Most of his nominees so far are long-term insiders. Essentially he’s running things like he ran the family business. He has a few mostly horrifying trusted confidantes and everyone else on the outside. His stated policy platform will inordinately reward the rich, and further hollow out a desperate middle class. This could be bad.

Republicans you have no excuse not to govern this time. I honestly thought you were finished, and your new president just rode a tiger into the White House. Hope that he tames the tiger before it eats him, and you. So far all I’m seeing is the same old conservative faces in Washington with the same old crappy plans.

Democrats you dun messed up. Stop promoting multicultural globalism so loudly. It works great in the cities, but it doesn’t play well in the impoverished hinterlands. Acknowledge that there are differing narratives here, and alternate, less-simplistic frameworks through which this election can be framed. Not everyone sees things through the lens of race. Please please please stop playing identity politics entirely, and stop labeling and stereotyping the other side as bigots. That’s what bigots do. Attack poverty instead of bias, because as this election has proven, bias is impossible to remove.

Libertarians, keep doing you. Write crappy blog posts that nobody reads.

People have asked me what happens next. I have no clue and this election has also proven that. So go home America you’re drunk. Sober up, reflect on the many failings from both sides during this election cycle, wake up tomorrow, drink some coffee, read some opinion pieces that you will probably hate from media sources which you despise, but have never actually read before.

Lots of crap came out of printing presses, and lots of good things too. This is a dangerous time, because our new primate tool confirms whatever preexisting biases we have. We’re all walking around with portable yes men. The only thing I can recommend is to keep talking with people both outside of the internet and via one-on-one chats. Public personas are often different than our private selves.

Have awkward conversations. Lots of them. And I’m biased but I liked the following reads as well:

http://www.realclearpolitics.com/

https://www.theatlantic.com/magazine/archive/2016/12/the-lessons-of-henry-kissinger/505868/

http://www.wsj.com/articles/the-electoral-college-is-anything-but-outdated-1479168669

http://nymag.com/daily/intelligencer/2016/11/andrew-sullivan-president-trump-and-the-end-of-the-republic.html

Asabiyah and Election Angst

In the 13th Century, Ibn Khaldun proposed the concept of asabiyah – the will of a society to engage in some sort of collective action. Regarding, asabiya in the U.S., I would say it is at the lowest I have witnessed in my lifetime. We should ponder why the gap between Rs and Ds has widened into a chasm, and why so many of us have relatives who live in Facebook echo chambers. I expect to see many posts in the next day from people feeling nervous about the election, grasping for asabiyah or attempting to build it themselves.

Why the angst?

A healthy democracy does not play on genetic identity politics for short-term advantage. It does not offer a post-political career in media or paid speeches. It does not include one candidate inciting violence against another, and it does not shrug and say “well at least candidate X isn’t as bad as candidate Y”.

So why are these things happening?

War Peace and War by Peter Turchin has helped me to connect a few of the weirder puzzle pieces flotsamming to the surface this election cycle. Turchin has expounded on Khaldun’s asabiyah, wrapping it inside of the context of secular cultural cycles in War Peace and War, and highlighting the need for external threats to unite empires. Turchin’s meta-ethnic frontier-based coalescence makes a ton of sense, and establishment of an “other” explains why a big chunk of the election cycle has been dominated by questions about how to deal with ISIS, an organization that has a 1 in 45 million chance of killing an American. Elites understand that the true threats are Russia and China. Killing someone like Saddam, Khaddafi, or Kim Jong is just another Great Game. Of course the base doesn’t love these wars, because incidentally few elites die relative to the poor, and there is no clear-cut victory.

An important ingredient for asabiya is trust. When everyone is wearing a ski-mask online and anyone can create a Facebook account without verification, it’s too easy to spread false rumors about your political opponents and to create fake grassroots enthusiasm for your own. This results in lack of trust. We’re more connected than ever before as a society, and yet less assured that what others tell us is actually true.

In Turchin’s study of cycles within agrarian empires, inevitably a civil war occurs as elites on two sides of an issue incite their collective bases to wage war. I would like to believe that we are past warfare and that our election cycle is a good proxy for war. The cornerstone to a healthy empire is the peaceful transitions of power. I really dislike HRC. I think she’s displayed consistently mediocre judgement, and has shown a willingness to engage in pay for play politics, but I must admit I’m a little worried about a lone gunman scenario.

I don’t think our asabiya gets better until we get a credible external threat. It’s possible that Russia or China will serve those roles. I have faith that our economy/culture/military is superior to either one. My fear is that either of the two main candidates will result in bad policies which further hollow out of the middle class, causing more distrust, and hence weaker asabiya. HRC is a symbol of elitism, and how much consensus she will be able to muster during her first year is questionable. When elites (Colin Powell, David Petraeus, and now Hillary Clinton) live by a patently different set of rules this also results in a total lack of trust. Meanwhile, the RNC appears to be doubling down on obstructionism and Trump is setting himself up for a media presence after the election. All of the outrageous claims he has made will still be out there, floating around in the Inter-nether. The Republicans will still be a presence on November 9th.

The angst present on social media is interesting though. It seems to indicate that people ARE trying to discover/build a consensus with each other. The counter-argument is that the “others” they mention are typically from the other party.

My own belief is that we will continue to lurch along the same trajectory until a major crisis, either external or internal presents itself. History shows that empires only implement dramatic structural changes when confronted with emergencies. It could be economic. It could be war, disease, or the environment, or maybe people finally demand that someone bust up the Trusts. I really want the Republican Party to die, and for someone to clone Teddy Roosevelt.

Also, Mr. Robot is Pretty Good

The whole psychology aspect of the show is meh, but the technical details are spot-on. But the very best part of Mr. Robot is what is has to say about security. In almost every episode, the protagonist isn’t really hacking computers. He’s hacking the 7 Deadly Sins. It rings true with my experiences in the intelligence community.

  1. Identify one person in a network of people.
  2. Exploit that person.
    1. Figure out their weaknesses.
      1. Relationships – loved ones
      2. Vices – laziness, greed, lust, pride, etc
  1. Find the rest of the network.
  2. Exploit the network.

The personal flaws which people bring with them will almost always give you the keys to their castle. The structural flaws which they build into their castle will give you more targets to exploit. So from my vantage point, the worst thing someone can do on the Internet is to wave a big flag saying exactly who they are and what they do online, assuming they are important and not some bald-headed blogger.  Any network can be cracked. It just takes time and patience.

Having said that, consider the negligence here, and the likely results. This is by no means an endorsement of Cheeto Jesus.

People on the left may be tempted to sigh, to dismiss Trump as a fluke, and to believe that they can now ride roughshod over conservatives. I have a feeling that would backfire, and I think Hillary will be more pragmatic. She has always had a tin ear to the poor, and she does not possess Obama’s speaking talents. She’ll need to something to rally Americans around . Here’s hoping we can all find a common cause.