Mas que nada! I had Sergio Mendes running through my head last night as I set up a new reference portfolio for my firm. According to Wikipedia, mas que nada translates from Brazilian Portuguese as "no way" or "yeah, right" and those are two phrases I often use to describe valuations in today's U.S. stock market, especially of certain sectors namely tech and so-called "meme" stocks.
We are living in strange times for the equity markets. There is an inflationary urge seen in macro data - as shown from yesterday's 13-year high reading in the CPI - that has not been seen for many years. Yet, the U.S bond market chose to shrug that off yesterday. Short covering, I reckon, from a very crowded, "short UST" trade that worked so well in 1Q21.
But when people are paying ridiculous multiples for assets, I generally try to take the other side of their trades. Or to find different people to follow.
My new reference portfolio attempts to put into action those words. It is balanced 50/50 short and long. On the short side, I have shorted Tesla (TSLA) (already ExCap's largest short position in client accounts. I have mentioned my Tesla thesis in one or two RM columns, so I won't belabor it here), Restoration Hardware (RH) , GameStop (GME) and Twitter (TWTR) . So there are two incredibly overvalued tech stocks, and two stocks that have risen incredibly in 2021, seemingly for no reason other than strong short interest in 2020, so I will classify them as meme stocks.
My biggest short actually goes on the long side of the portfolio, ProShares UltraPro Short 20+ Year Treasury ETF (TTT) . As I noted in yesterday's RM column the current movements in the bond market simply make no sense given the data - especially CPI - and I believe those trades will be unwound,
Where to find value in a seemingly valueless world? Energy and Brazil, hence my reference to Brazilian bossa nova legend Sergio Mendes and his energetic track in the lede to this column. In yesterday's column I mentioned Exxon Mobil (XOM) , and, much like my bear case on TSLA, I have mentioned XOM many times, so I won't belabor my bull case now. It's a must-own with oil at or near $70/barrel though. The other longs are Brazil-focused.
Why Brazil? My frequent trips there (I just returned yesterday to NYC from Sao Paulo) have convinced me that this country is about to experience a period of above-average economic growth. Brazil's COVID numbers aren't impressive yet, but the vaccination campaign has accelerated, and I believe the pandemic is past its peak even in the middle of winter there. But Brazil's economy, other than tourism, is most dependent on people making "stuff" and buying the raw materials to make that stuff from Brazil. That business is booming now.
It's not just oil, either. Prices for commodities across the spectrum are jumping now as COVID-related supply shocks are just beginning to abate and the inflationary pressures brought by the world's central banks are making prices for those raw materials skyrocket.
In my reference portfolio I added Petrobras (PBR) , Largo Resources (LGO) , and Cosan (CSAN) for exposure to three very different raw materials. Petrobras' product is obvious, and its offshore production is incredibly valuable (and easy to ship to China). Cosan offers exposure to Brazil's sugar, ethanol and biofuels industries while also owning the largest natural gas company in Brazil, Comgas, as well as interests in lubricants and railway transportation networks. Finally, for the future-focused folks out there, I added Largo Resources. Largo recently uplisted to Nasdaq from Toronto's TSX. Largo offers a unique mix of technology and resources. Largo produces Vanadium Redox Flow batteries (VRFB,) a tech that is far superior to Tesla's lithium-ion technology for stationary storage, in my opinion. Largo also owns a mine in Brazil that produces the vanadium itself. That's an attractive vertical integration.
And those are my longs. I felt the need to short Brazil's currency, the real, to minimize my exposure there, as all these stocks are ADRs or native U.S. listings. Unfortunately WisdomTree recently discontinued its Brazilian Real ETF, so I was left with a broader WisdomTree short emerging markets currency ETF (CEW) as my protection. When investing in emerging markets, always protect your currency exposure.
That's my portfolio. With a fully balanced long-short mix, it is up about 1% in its first day of existence. As always, there are portfolio management decisions that needed to be made. I should say that I really, really like the business positioning of Brazilian metals giant Vale (VALE) here, as well. But you can't own everything, just as, sadly, I can't short everything that is overvalued.
If you are looking for exposure outside the U.S. and to protect yourself from raging inflation on a global basis (especially in the U.S.), I believe this portfolio is a strong selection.
