Glencore Is in My Wheelhouse

 | Jan 23, 2014 | 3:00 PM EST  | Comments
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Sometimes, you just know an initial public offering is going to be a bad deal, especially when the issuer's management is comprised of smart guys. For example, when Blackstone (BX) went public, everyone knew that it was going to be the top in private equity for a long time. The deal still went fine -- you have to own Blackstone if you want to stay close to the index -- but 2008 was unkind to any of the holders of that deal (or Fortress (FIG), another example).

So, when Glencore (GLEN.L) went public in 2011, once again, everyone knew it was going to be a bad deal. Here are the smartest of the smart guys, the Goldman Sachs of the commodities world -- if these guys are selling, you do not want to be buying. Everyone knew it was the top of the metals market. But you can't not own Glencore if you want to stay close to the index. Predictably, the stock was down more than 50% over the next couple of years.

I am interested in Glencore because I'm a raging commodity bull and I have been looking at various ways to play the stock. You probably already know this, but Glencore is not a U.S. company; it is domiciled in Switzerland and listed in London. Its ADR trades on the Pink Sheets and it is not very liquid. I am going to buy this stock Friday, and I am going to buy the ordinary shares in Europe.

Glencore has a rather interesting history. It was founded by Marc Rich, who controversially was pardoned by President Bill Clinton on his final day in office. Rich had attracted the attention of the authorities by evading taxes and violating the oil embargo with Iran. But to his credit, he built what is essentially today's spot market for oil. After fleeing the U.S., he continued operations from Switzerland until he tried and failed to corner the zinc market in the early 1990s and had to be rescued by another firm. The combined firm is essentially today's Glencore (although it has essentially purged Rich from the company's history).

Glencore trades commodities. It's not a bunch of guys sitting in a room punting around e-mini futures. They trade in the physical market. They run the copper mines in out-of-the-way places in Africa and ship the wheat from the harvest in Ukraine. They bring together buyer and seller along every step of the supply chain. These markets are not transparent, and there are arbitrage opportunities. A lot of this trading takes place based on relationships cultivated over the course of years. It is not easy. But they operate globally, and they are highly profitable, even during the commodities downturn of the last couple of years.

Just like it usually pays to be long an investment bank when financial conditions are improving, it usually pays to be long a company like Glencore when commodities conditions are improving. This is my wheelhouse: top-down macro trades. I'm not particularly interested in the valuation. We are talking about a company with near-monopolies in some markets with direct exposure to higher prices and higher volatility in the very early innings of higher prices and volatility returning to the market. There isn't a chance in the world you could talk me out of buying this stock. The reason I like it the most? Nobody else does.

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