Kuppy (02:53):
Offset obviously by all the political risks. I don’t think sanctions will do anything to these companies. If anything probably just increases the profitability of the companies. But there’s always the risk that they confiscate your shares, that they stop the dividends or don’t pay the foreigners the dividends. I think the biggest risk remains that the government instructs my broker to liquidate my position and I get a terrible price. I think there are a lot of ways to lose on this, but you don’t usually see high-quality businesses at one in two times earnings. It only happens at moments like this and if nothing too terrible happens I think these things will trade up back to historic multiples, which were very cheap as well.

Kuppy (03:30):
Though there’s probably a ceiling on valuations just given all the drama that just happened. There are a lot of portfolio managers that for ideological reasons cannot Russian stocks anymore. And that’s I guess unfortunate because they’re potentially going to miss out on the gains. I think it’s a contrarian, but I don’t know, cheap assets usually are.

Trey Lockerbie (03:49):
Now you were reporting that they were cheap even before this big drop, but you were also referring to the RSX index. I’m curious how the RSX relates to MOEX and if there’s any preference between the two.

Kuppy (04:02):
Well, I’m not sure how I can buy the MOEX. I bought the RSX, it’s a US dollar-denominated basket of the largest companies in Russia. It hits all the big ones. That’s just the way I’m playing it. It’s amazingly liquid. There’s a deep option chain on it with amazing liquidity as well. That’s just the way I’ve chosen to play myself. Look, I wrote on Monday night that I thought it was cheap when it opened the next morning, about 19 and a half. That’s where I bought most of mine. It’s at 16 right now, which is a little annoying. They usually don’t go this far against me this fast. I’ve done this over 20 years and sometimes you get them wrong or sometimes you’re just early. It’s a fine line between the two of those.

Kuppy (04:39):
I bought a bunch more yesterday, which was Thursday when it opened down. I also bought Sberbank and I’ve bought some other Russian assets. I’ve since taken, some profits just cause we had a balance. And at my core position, I trade around the core position. I’ve managed this by writing some additional puts by selling some calls to harvest that volatility. I’m just trying to box it in with short calls against it. I expect volatility stays high, it’s going to be a great way to add to the yields.

Trey Lockerbie (05:05):
You mentioned that Russia is obviously a big exporter of some commodities, oil comes to mind. They’re obviously an exporter there. The sanctions you also mentioned are interesting because the US just enacted some sanctions, but they’re saying that it won’t affect oil. I’m just curious how oil will be impacted from this development in your opinion, if at all.

Kuppy (05:27):
Well, it’s probably going to be bullish for oil. Global inventories have been ran down for a while now. They peaked out in the summer of 2020. It’s been running down. If you’re a consumer of oil that doesn’t produce your own oil, I think I’d be terrified. I’d be stockpiling. It likely increases our demand for oil. You have all sorts of things happening and this potential that the supply gets disrupted, this should be very bullish for oil. It has been leading up into this crisis. Oil traded up quite a lot. I would expect oil to stay elevated and likely go much higher.

Trey Lockerbie (05:58):
Yeah, to that point, it did have a huge run lately. It’s hit $100 as of late. It’s slightly below that at the moment. What are the implications of oil being at 100 or higher?

Kuppy (06:10):
Look, I don’t think there are any implications. It’s a global commodity that is going to be swinging around. It’s for, was it 150 years? It’s been volatile. It’s going to remain volatile. When there’s a more demand and supply like we have right now, it’s likely to keep going higher until additional supply comes online. And there really isn’t a lot of supply coming online for the next year or two, just you have reasonably good visibility when it comes to oil in terms of supply and this isn’t much. And then on the demand side, I see dramatic increases in demand. Oil for the last decade has been all about the supply side, where there had been excess drilling in the US, Shell mostly.

Kuppy (06:45):
And for the first time in a very long time, it’s going to become a demand story because six billion people want the same standard of living that a billion of us have in the west. And a lot of these people, usable know oil today. I think eventually they’re going to start using quite a lot of oil. I don’t think people realize what that S curve is going to do to demand. I think a lot of the large forecasters are expecting a million barrels a day of incremental demand each year. What if it’s three? What if it’s four? I think it could just dramatically overshoot and a lot of this demand is not price sensitive. And so I think oil should go much higher.

Trey Lockerbie (07:17):
We could argue also I get us that if oil continues to go higher things like gas prices will continue to go higher and it should have a trickle down to some inflation effect.

Kuppy (07:27):
Oh yeah, this would be very inflationary. That’s almost inevitable. It’s going to be wildly inflationary. If you look at oil, it’s one of the biggest components of all CPI indexes, because it basically goes into everything from logistics and transport, to plastics and everything basically has oil and an oil component. I think it’s going to be amazingly inflationary. I think oil’s going to end up going to a couple of hundred dollars. I don’t think people realize just how inflationary that is. It probably going to be bad consumers too. Inflation always hurts the poorest the most, and it’s the marginal consumer that’s really going to suffer here.

Trey Lockerbie (08:00):
Yeah. I’m no expert on oil, which is why I guess I’m so curious about it. The dollar index is also quite high. It’s sitting just shy 97. I’m curious if there’s any correlation there between the US dollar strengthening and oil strengthening at the same time. Does that have any correlation or impact?

Kuppy (08:18):
I’m no expert in currencies. I find currencies very difficult to decipher. The easiest way to look at currencies is that when it’s cheap to go on vacation, it’s cheap to go get dinner and a beer, it’s usually a good currency to buy. And when it feels expensive, it’s usually a good currency to sell. Over long periods of time, I’ve mostly made money with that sort of logic. Outside of that, predicting the direction of currencies, I don’t feel I have any special edge. I don’t know how much oil really matters to that. There’s certain petrol currencies that probably should do quite well because their trade services will expand. It’s hard to predict. I found the people who try to predict that usually get it wrong. There are much easier ways to make money in the markets, I’d rather focus on those.

Trey Lockerbie (08:57):
I’m also just curious about the driving factors leading to the oil price because obviously in early 2020 oil even went negative. When you talk about all this demand that’s there and has been there, that story really hasn’t changed. And if anything it’s growing. I think what you’re touching on there is this pendulum swinging and this lag effect, right? Where to get oil going again and getting new drills in place it takes what? Two years?

Kuppy (09:21):
On the supply side, you have a couple of major problems. Okay? Let’s start with OPEC. They’ve dramatically underinvested because their revenue goes to social programs and it’s going to be hard to get the capital to invest. And a lot of the OPEC projects are long-cycle projects. And so you’re talking five-year legs, get them to go. Next, you have US, Shell, that’s a quick cycle. But the problem is the shortages of every component. The impediments to growing production are just dramatic. You have three buckets you want to think about. You have OPEC where they’ve been investing minimally. They’ve really been putting their revenue into social programs. It’s going to be hard for them to take revenue away from social programs to invest in production.

Kuppy (10:02):
That’s why they haven’t really grown production in a while. They’ve always had excess capacities. They never thought to grow production. Well, it looks like their excess capacity is going to be put to the limit and there’s not going to be enough capacity there. They’re actually going to have to invest and it’s going to be slow. These are long-cycle projects. You have in the US where yes Shell is a quick cycle but it’s not going to come back like it did in the past. There are huge impediments, mainly labor, but also drill rigs, casing, pretty much every component of ramping up. You can’t just take a guy and hire him and put him on a drill. He has to be trained. It takes a long time.

Kuppy (10:35):
And so I think there are real structural impediments to ramping, but that will ramp up over the next two years maybe. And then finally where most of the world’s oil comes from is larger integrated oil companies. These companies are not making the sort of investments they used to, much of it being a long-term investment and long cycle. That’s because everyone’s attacking them. You have courts that are blocking them. You have pipelines getting canceled, you have drilling permits getting canceled. You’re having carbon taxes. You’re having people talking about excess profits taxes. You’re having a lack of access to capital, which is forcing them to deliver their balance sheets. They can’t issue bonds. They can’t get banks to deal with them.

Kuppy (11:10):
They are these pariah companies, yet they’re buying them for the global economy. And so there’s a lot of incentive for these companies not to expand, especially if they are going to be just taxed and penalized. And so you’re not seeing anything on the supply side. Like I said, you have six billion people that are going to have just dramatic increases in demand. That’s why I think oil goes to a couple hundred and anything geopolitical is just crazy on top, but I think it’s almost irrelevant. It’s just going higher.

Trey Lockerbie (11:34):
Now as retail investors, do you have a preference? If we were to take a position in oil, I think you focus mostly on oil futures. I’m curious as to why that is versus say, oil producers.

Kuppy (11:46):
Well, oil production is just a really terrible business. All the things I just talked about, you’re happily running your well and then someone comes along and puts an excess profit on you or says you have to pay a carbon tax now or they cancel a permit. Who wants to deal with that? I’m not a geologist. The geologists get it wrong. You take a ton of M&A risk. You take corporate governance risk. You take all these risks I don’t really want when all I want to bet on is oil going higher. Since I want to just bet on oil going higher, I just want oil. The great thing about oil is that it’s an amazingly liquid asset with an amazingly liquid futures and options chain.

Kuppy (12:22):
And so if I want to bet on oil, I’m just going to go buy out of the money oil calls. It’s the cleanest way to bet on oil. It’s the safest way. I don’t have to take any of these risks. I’m not going to wake up in the morning and there’s some bad news. If there’s some bad news, it probably means my oil goes up actually.

Trey Lockerbie (12:37):
The Fed policy as of late, I’ve heard you refer to it as project Zimbabwe, referring to the fact that Zimbabwe eventually had $1000 bills, right? And we might be heading in that direction. The Fed seems very obviously trapped here and it seems every policy decision will be an error. They’re right now tightening into weakness now that the market’s even rolling over. How much pain do you think the market can handle before the Fed starts to change course here?

Kuppy (13:03):
Well, there’s a lot of guys out there who think the Fed’s going to dramatically tighten. I think they probably should have. They should have been Q3 of 20, been tightening, but in the end, they didn’t and they’re going to have to pay the price for that. I don’t know what they’re going to be able to do now. When you look at it, look, at the economy, it’s a lot strong than people think. You’re coming up against just huge numbers last year, year over year because of stimulus and because of a lot of things. So you’d expect it to trail off a little. But if you comp negative over a huge year, last year, then it’s called a recession.

Kuppy (13:34):
When you look at a two, it was stacked, the numbers are still quite good, but rated change is not going in everyone’s favor. But at the same time, like we just talked about, oil’s going much, much higher. And so if oil goes to a couple hundred, well inflation’s going to go to 20. They can’t be zero interest rates and printing money still. I think it’s ludicrous they’re still printing money because inflation’s like seven or eight. They said they’re going to stop printing money. They’re probably going to raise rates a bit, but the economy’s addicted to stimulus, it’s addicted to cheap debt.

Kuppy (14:03):
I have to think that after a few rate increases, the economy rolls over and the Fed’s totally trapped because I think you see inflation at 20 with the stock market down by half. I don’t know what they’re going to do, but I think the path of least resistance is to call it transitory, blame it on Russia, whatever it is they do, raise rates a few times, and just stay dramatically behind the rate of inflation. I think it’s almost inevitable. I just don’t think anyone has the willpower to have a recession. And so you are going to see just a lot of inflation instead.

Kuppy (14:31):
We’ve seen, Paul Volcker is the rare guy that actually went out there and he accepted a recession. You don’t see other central bankers doing that. All the rest of them, they talk tough and they just trail inflation. So no, I think the Fed’s going to stay really far behind and talk tough and do nothing.

Trey Lockerbie (14:48):
Gold has actually spiked up this week a little bit for the first time in a long time and with the projects Zimbabwe thesis and a few other, bullish on some commodities like oil. I’m curious why oil is your preference over gold? We mentioned the demand effect. I’m just curious why gold doesn’t play a portion into the portfolio.

Kuppy (15:08):
I think everyone should own some gold. I think it’s a great long-term investment and should be a core piece of everyone’s portfolio. I know I own a lot of it personally. But in terms of my portfolio, I look at commodities as being really a question of supply, demand and of being really just tied to that. It’s simple calculus in a way. Look, there’s a ton of gold, they have warehouses full of this stuff, very different than say oil, where the supply is draining every day and it actually gets consumed. Every day the world uses a hundred million barrels of this stuff and we’re draining about one to two every day. So just going to make it tighter and tighter. Whereas the stock of gold is just going to keep going up every day because they keep mining it.

Kuppy (15:48):
I just don’t think that’s the way to play it. If I wanted to play a commodity, I’m going to play something where supply and demand are going to get tight and that’s going to force the price higher and preferably you want to play something that your starting point is below the marginal cost of production. When I started in oil, oil was in the 40s and 50s and no one could produce it profitably or at least the marginal 20 million barrels of it or something. That’s where you want to start a commodity investment where no one could produce it profitably on the margin. Gold, all-in cost, the industry is like 13, 1400. It’s got a $400 gross margin right now. Just not as attractive though. I think everyone should own some.

Trey Lockerbie (16:22):
Yeah, there’s been this thesis out there that Bitcoin is the new gold, right? This week gold seemed to decouple quite a bit. If you zoom out, obviously the performance is quite different. You’re definitely not a Bitcoin maximalist, I would say, but you’ve managed to trade it pretty effectively. You bought it under 10,000 and sold out around 58,000 and the price has been pretty flat since then. I’m really curious to know what the signals were that you were looking at when you traded out at 58 and what signals there might be to even buy back in.

Kuppy (16:53):
I’ve been doing this for 20 something years and I just get this gut feeling sometimes and I’ve learned over time not to overthink it when my gut says something, I just go with my gut. Oftentimes it has no logical reason, but it’s one of these things where you wake up in the middle of the night and you say, why do I own so much Bitcoin? It’s something that nags that you can’t sleep. So you sell a quarter of it and the next day you have the same problem. You sell another quarter of it. And pretty soon you tossed a position. The thing that really, I guess I zeroed in on was the fact that, if you think of liquidity in the financial system, most things in the financial system work based on the rate of change, first and second derivative.

Kuppy (17:29):
Bitcoin is like the fifth derivative. It’s so far out there on the curve in terms of rate of change, of the rate of change, of the rate of change, blah, blah, blah. It got to be the spring of last year. It got to this point where it was obvious the Fed wasn’t going to be able to stimulate anymore and they would have to eventually pull back some of the stimulus because you saw inflation starting to pick up. On the rate of change, if the rate of incremental stimulus slowed, well, then that’s the place Bitcoin lives, it lives and dies on the rate of change. And then the thing that really crystallized it for me was when you started seeing some of the mining stocks, the crypto miners, where they started to diverge, where Bitcoin was making new highs.

Kuppy (18:05):
It kept making these little new highs, it go up a thousand, make new a high, pull back 5,000. Make a new high by a thousand, pull back. That’s not healthy behavior. The crypto miners stopped making new highs months before Bitcoin stopped. And whenever you see divergence is like that, where the producer in a commodity where the producer is trailing the commodity itself. We’ve seen this in lots of cyclical tops and various commodities. And I do a lot of commodities investing. I’m always attuned to it. It’s usually a sign that the relative strength of a trend is changing. And so between not getting to sleep at night and having a long history with commodities, having made lost fortunes at it, I said myself, it’s time to exit.

Kuppy (18:42):
Besides, what’s Bitcoin worth? It’s a quote on the screen and it’s very ephemeral. And so it can trade at almost any price and had a really good gain in it. You don’t want to wake up one day and give that back. So I said, okay, I’m done. In terms of when to get back in, look, I had a great entry on my Bitcoin because the Fed was printing a ton of money. I knew it was time to get in. I’ll probably get back in when the fed is getting ready to print again or something else in the narrative changes. But I see no reason to own Bitcoin. I don’t think it’s going to crash. I don’t think it’s going to spike. I think it’s just going to be range-bound, 25,000 by 50,000, 60,000, something like that.

Kuppy (19:16):
It’s going to digest a lot of movement and there’ll be a time to get back in. I’m watching it. I understand why I want to own it. I just doesn’t feel ready yet. I wish I had something more concrete to say.

Trey Lockerbie (19:26):
No, I think that’s totally valid. I’m curious about the position, I guess the philosophy on gold versus Bitcoin and where you stand, because obviously as you put it sounds like you take a, I don’t know, Ray Dolly approach or something of, they have at least a little bit of gold. Everyone should have it. It’s good insurance. A lot of people look at Bitcoin the same way, but to hear you talk about it, obviously, you have different opinions on the commodity and how it serves a purpose. I’m curious what the difference there is to you.

Kuppy (19:51):
Well, I think there probably is a point in owning both, but honestly, they’re stores of value. They have unique attributes. I think there are reasons why Bitcoin is superior, just because I could trade it to you right now. Whereas it takes me a day to get some crew rents to you. There are certain advantages to that, but there are certain advantages to having gold in your hands. I think people should own a bit of both. In terms of which one’s better, it’s situation dependent. I’d rather just own some uranium or something, where it’s below the marginal cost of production and there’s a huge supply deficit, it hits both buckets in terms of what makes a great commodity investment. Whereas Bitcoin is above the cost of producing it as is gold and there’s not a deficit of either.

Trey Lockerbie (20:32):
Let’s talk about your uranium. That’s super interesting as well because it seems to be very uncorrelated to the stock market. What has piqued your interest in uranium recently? So much so that I think it’s even one of your largest positions now.

Kuppy (20:44):
Yeah. Sprott Physical Uranium Trust, Sprott as they call it, is my largest position. It’s a publicly-traded NT that owns physical uranium. I like the idea of my own physical uranium. That’s where I have most of my uranium bet, though I do own some Kazatomprom, which is the world’s largest producer and also the lowest cost producer. But the thing with uranium is that the world consumes, this year 2022, we’re probably going to consume about 185 million pounds of it, 185, and we’re going to produce about 155, let’s say. And so there’s about a 30 ish million deficit and that deficit is coming from warehouses where they have been surplus in prior years.

Kuppy (21:24):
But the uranium is well below the marginal cost to produce it, which is around 60 or 70. And of course, uranium has to go above the marginal cost to produce, right now it’s at 46. I bought my uranium at 31, well below the marginal cost to produce it. And so as these physical stocks get absorbed and consumed, you’re going to see the price move higher as people start getting worried about supply and access to supply because unlike a lot of other commodities is if you run out of uranium, your power plant has no point of existing. And so I genuinely expect the price of uranium to go higher. What’s interesting is you have this entity called Sprott Physical Uranium Trust that has a very active share issuance program that they use to acquire additional uranium and that’s ongoing every day.

Kuppy (22:05):
And so what it’s done is it’s added a new element to the supply-demand imbalance, where you have financial players like myself that are acquiring uranium off the market. And so it’s going to speed up the price discovery because excess uranium will disappear. It also has the effect of adding some FOMO, in that as the price starts going up, I would expect that the trading volumes would increase and this entity will issue more shares. And so as the price goes up, the demand will go up, which is usually counter to how most commodities operate. And so I think that the two of them will lead to an overshooting.

Kuppy (22:37):
It’s very similar to what I saw with Grayscale Bitcoin Trust, where this financial entity was acquiring Bitcoin and it had a mission to acquire coins and they’re for sale coins. And so after a while, they accumulated enough of the free float, it was impactful to the price. I just recognized that as the free float got cornered by this entity, it would push the price up, which would lead financial speculators into the market, which would accelerate this process, the feedback loop. We’ve seen the same thing happening with Sprott. They’ve now bought about 28 million pounds since they launched the vehicle, which is a deep amount of uranium. We’re talking about roughly 20% of global production and they’ve bought that over five months.

Kuppy (23:16):
It’s just changed the supply and demand imbalance that you’re almost at 60 million pounds versus the 30 it would normally be. I think this will accelerate. I think the price will overshoot. It takes a few years to bring a mine online and it will likely overshoot quite dramatically. And so it’s my largest position because when I invest, I try to do two things. I try to invest, add an inflection where the story is getting better. That’s what’s definitely happening in uranium, especially as it’s being seen as a green energy source. But you also try to invest in a way that if you get the thesis wrong you get your money back. Uranium at 31, it had basically been that price give or take a few dollars for a very long period of time when the fundamentals of uranium were far worse.

Kuppy (23:54):
So now that the fundamentals are improving, it seems unlikely that I lose more than a few dollars and that’s the whole point of investing. You look for something we can make five or 10 times your money if you’re right, and you get it wrong and you lose 10%, maybe you lose 20%. Sometimes you can make a little money. If you offset the two intelligently and you have a portfolio, these sort of risk a little to make a lot of investments on, you basically make a lot of money over time, as long as you have patience and you don’t do anything stupid along the way.

Trey Lockerbie (24:18):
Now, do you think we could see another parabolic move in uranium? Something like we saw in 2008 where it just spiked beyond belief?

Kuppy (24:26):
Yeah, I think it’s almost inevitable. I think we’re going to see a dramatic overshooting of the price of uranium. Right now this entity is buying a million pounds a week roughly and some weeks don’t buy any, some weeks it buys two million pounds. If you have the price starts going up, the entity only has one mission statement, which is issuing shares by pounds. And so if the price starts going up and it attracts speculators, what’s inevitable is the volume goes up and then issues more shares and buys more pounds faster, which then drives the price up, brings in more speculators, and the process just keeps going. It’s one of these reflexive sorts of concepts.

Kuppy (25:01):
I think that is the sort of thing that, as I said, they’ve been buying a million pounds a week when the price was in the low 40s. At a hundred, they could be buying two or three million pounds a week. What that’s going to do is just squeeze the available supply globally. Eventually, some regulator will stop it and stop it, because you can’t have the price go crazy and have utilities run out of uranium, but force it higher over time until someone steps in.

Trey Lockerbie (25:24):
Now, is that facing any geopolitical risk as well? The uranium, would it have any impact?

Kuppy (25:30):
There’s geopolitical risk in everything. I think the real geopolitical risk in uranium is that Kazakhstan is roughly half the world’s uranium production, they just had something of a revolution there. People are rightfully concerned about the stability of their supply of uranium. That was a nuclear power plant and I had an agreement with Kazatomprom to buy 100% uranium from them for the next five years. I’d be quite worried that something happens to that mine and I can’t get my uranium, whether it’s, that there are some sanctions, who knows what side Kazakhstan’s going to be in with Russia or something happens to the mine. The whole world relies on this one company and one country.

Kuppy (26:09):
And at the same time, Russia is by far the largest producer of refined uranium. They process the uranium from U308 into a usable form. And now if we sanction Russia and they want to actually do something back to the west, the easiest thing they could do to the west is just to say that they’re not going to sell us more uranium as processed. It would cost them a few billion a year, so it’s a rounding error, that’s a couple of days of oil sales, who cares? What we would do is turn the lights off in America and a bunch of Europe. That’s the place where they can really grab us because we’re so vulnerable. There are a number of geopolitical aspects to this. I think tensions with Russia and what’s going on in Kazakhstan, it has an element of risk to uranium.

Kuppy (26:50):
I think it’s yet another reason why utilities that have let their aboveground inventories get run down for quite a period of time, that they’d want to replenish those inventories just out of fear. Remember you have a 10 billion nuclear reactor. If you run out of uranium, it’s worthless, you can’t do anything with it. And so no one wants to run out, especially when uranium there’s only a couple percent of the total cost to run the facility. It’d be ludicrous to run out, which I think is going to lead to restocking and a lot more demand.

Trey Lockerbie (27:17):
You’re also CEO of Mongolia Growth Group, which is a publicly-traded company. I’m curious as to what the initiative is that brought you to Mongolia. It’s obviously real estate and you’re doing a lot of development there. What made you choose Mongolia and what’s the backstory on that?

Kuppy (27:33):
In the summer of 2010, I went to Mongolia. At the time it was the fastest-growing economy in the world. It had a very bright future for future economic growth. I decided to start an entity to invest in Mongolian real estate. We listed it in Canada, we raised $50 million to invest in Mongolia real estate. We did everything we said we do as a management team, we raised capital. We built Mongolia’s only institutional property management group. We built what I think is the second-largest sales, leasing organization in the country. We acquired some of the best assets in the country, mainly in the downtown core on the main street.

Kuppy (28:09):
Unfortunately, we got the thesis wrong and a year after we started the company, they had an election and the new government banned foreign investment, arrested a lot of the foreigners, stole a lot of assets, killed a couple of foreigners. It just became a terrible place to be an investor and it remained a terrible place to invest. That’s been a 10-year economic crisis. For a country that gets most of their income from selling commodities you’d think in a commodity boom, they’d be doing quite well, but oddly they’ve thwarted all the mind and just made a mess of everything. And so it turned out to be a terrible thesis.

Kuppy (28:41):
We still have a team there on the ground doing great work against hostile odds and we’re going to soldier on and hope that the Mongolian government eventually does the right thing. In the meantime, we have diversified the business by selling some non-core assets. We have used that capital to purchase public securities that have done surprisingly well actually, but a decent chunk of the balance sheet now is publicly traded securities and cash. We’ve launched a publication called KEDM. That’s Kuppy’s Event-Driven Monitor. It’s a service that tracks about 25 event-driven strategies. I use the service, we created it because I wanted the data quite honestly. But it tracks about 25 event-driven track strategies and basically just flags them. It’s a weekly update on what’s going on in the market plus my own commentary.

Kuppy (29:26):
It’s actually become a profitable business as well. We’ve transitioned the business to be a merchant bank. And we’re looking for businesses we could acquire, some minority or majority interest in, potentially 100% interest that we can impact the outcome of those businesses by adding our relationships and hopefully some financial discipline and creating some value. And so it’s gone in a different direction than I ever thought was possible, but it’s been interesting. It’s been exciting and the company’s in decent shape for the first time in a very long time financially.

Trey Lockerbie (29:56):
Very interesting. I want to shift over to real estate in the US. It’s been skyrocketing here the last two years. I heard you say that we are somewhere around five million homes behind the population here in the US. I’m curious, are you seeing a top here now that the tapering has begun, or are we still just getting started given that deficit we’re running with the amount of homes?

Kuppy (30:18):
Well, there’s a huge deficit of homes in America. America used to produce over a million homes a year, and then starting in 2009, we started producing 600, 700,000 homes a year. The population of the country’s grown quite dramatically since then, and so there’s a huge catch-up wave now that’s with very early stages of. In terms of building housing, you also have huge demographic moves. You have work from home, which has allowed people to avoid having to live in a city that’s very expensive. They can live anywhere they want. You have people that have chosen to move to lower-cost states, to states with low or zero income tax.

Kuppy (30:53):
And that’s why you have places like Texas and Florida that are absolutely booming. And so it’s not just that you need more units, but you need units in the right places. And so the two of them have led to a huge demand for housing and I don’t think that’s going to change. Raise interest rates a little, now I already said, I don’t think they’re going to raise it much. Let’s say a 30-year mortgage goes up by 1% or 2%. It adds a couple of hundred dollars a month to the mortgage bill. Who cares? You save that much in more by leaving Manhattan and living in Florida, just from a state income tax.

Kuppy (31:22):
I just don’t think it’s going to matter what better Reserve does. There are a lot of people that are cashed up. Consumers are in a great financial position after the stimulus and they didn’t spend any money for two years on the COVID. They’re in great shape to go out there now and put a down payment on a home and build some equity. I think this trend’s a great trend. I think it’s a powerful trend. It’s one of my favorite trends, especially because I don’t think the Fed will actually do anything.

Trey Lockerbie (31:46):
You’ve written about CNR, which is Cornerstone Building Brands. I have to say I agree with your assessment here. The stock popped from $14. It’s up to 23, recently it’s on some very strong fundamentals. Does a play like this on housing play into the longer macro views you have on the market?

Kuppy (32:06):
Absolutely. Homebuilding is a pretty terrible business. You’re basically buying call options on land and you’re hoping those call options go into the money. If land prices stop appreciating, your balance sheet gets shredded. You buy a bunch of inventory. You pre-sell a home, you’re supposed to deliver it in six months or nine months. You don’t really know what your costs are going to be. This huge cost inflation, this huge labor cost inflation. You don’t even know if you can get components for supply chain issues. When the music ends, people find a way to get out of their home purchase contracts. You’re left with a bunch of inventory. You can’t sell. You have to markdown.

Kuppy (32:36):
It’s a very cyclical, terrible business. I don’t wish it on anyone. What I like is, companies like a cornerstone, where they produce the components that go into a home, you can ramp up and ramp down very rapidly. Cornerstone is the largest producer of vinyl windows in the United States. They’re also one of the largest producers of siding, gutters, doors, facade, every component that goes into the home they’ve consolidated a lot of players. Their returns on capital are 30%, maybe even higher. They put a little bit of debt on that and returns on equity are 100. It’s a company that’s trading for I think about three, maybe four times earnings.

Kuppy (33:11):
It’s such a good deal that the 49% shareholder has offered to take them privately at 24.65, which I think is an absolutely ludicrous price. I really do hope the board of directors shows some backbone and rejects that offer. And when they reject it, I bet the stock drops $5 and I’ll probably just buy some more. I’m not the sort of guy that sells a company that’s at the second or third inning of a 10-year trend. I don’t sell those sorts of things for four times earnings. That sounds crazy. That’s the sort of thing I buy. And so I really do hope they don’t sell it. But I think that a lot of the companies in the housing supply chain are going to do just great. That’s where I’d be putting my capital.

Trey Lockerbie (33:47):
Another one of those companies seems to be St. Joe, which is J-O-E. This company is based in Florida and has also popped about $10 in the last few weeks. You’ve written about this. What is the appeal? Is it similar or do you have a preference over the two?

Kuppy (34:01):
Joe’s much better. It’s about far a better business. It’s much cheaper too. St. Joe’s is one of the largest owners of land in the state of Florida. They own most of the land in two counties that are two of the fastest-growing counties in the United States. It’s truly beautiful where they own their land. The beaches are white crystalline, got lakes. It’s an amazing place. They’re avoiding the terrible business of homebuilding. They’re just selling lots. They’re prepping lots and selling them. The advantage and the value of that are that it used to be timberland. So it had really no value except for us timber.

Kuppy (34:32):
But as you bring people through the home builders, you can then build commercial real estate and earn recurring revenue. They’re building hospitality assets, they build golf clubs and marinas, and all these businesses that have pricing power, because they’re the only guy who has the land, and it’s been getting great developer margins. And so they’re selling the lots, capitalizing the value of the land, bringing people. And every time you build a home, all the land around it goes up in value. It’s a huge network effect. And then they’re going to have a hundred-year runway to be going and doing it. The amazing thing is that the stock trades for about an order of net asset value today and it’s unusually profitable.

Kuppy (35:06):
All their metrics are going in the right direction, 50 to 100% growth year over year and its year over year against last year, which was 50, 100% growth also. All the metrics are going great place. You’re buying this business for about a quarter of what I think the land is worth and the land and the assets they have. They just announced earnings this week and they’re phenomenal, but I expect them to be phenomenal. I’m really actually confused that the stock doesn’t trade for a few hundred dollars a share. You’d think that a business like this growing as rapidly as it is would trade for a premium to net asset value, not a discount. But that’s what makes a market and that’s why I tend to make money at this market. You find things people miss.

Trey Lockerbie (35:40):
Well, you tend to make money in lots of different ways. Just from this discussion, it sounds like you have this Swiss army knife of different approaches. I’m curious about what you use the most. You’ve talked a little bit about options. Is that the main way you play the market just by buying and selling calls and puts and hedging in that fashion or are you guys ever buying, holding long term?

Kuppy (35:59):
Most of what I do is buy and hold long-term stuff. I find a strong macro trend like housing and I just buy. I’ve owned Joe for over two years now. I’ve owned Cornerstone for over two years. You find something good, you just buy it. And eventually, something will change in the trend and you sell. But I try to buy the best assets and the strongest trends. Sometimes it only lasts a couple of quarters. Sometimes it lasts for years. You never really know, but that’s the core of what I do. I’d say the second thing I do is event-driven. And that’s why we built KEDM so that we can systematize this and do it better.

Kuppy (36:31):
It’s amazing what it flags in terms of corporate events and cap structure changes and fun flow events and that stuff we missed and we’re just making a fortune. What it’s done is it’s changed the portfolio. When you look at a portfolio, most people have a static portfolio where they have a certain number of positions and they go up and down with the market. What we’ve done is try to replicate what Warren Buffett does, where he owns businesses, every month he gets more cash, the cash just keeps coming in and he gets to reallocate that of cash. Sometimes he buys more private businesses. Sometimes he buys more public businesses, but that cash just keeps coming in.

Kuppy (37:04):
With the adventure of the inside, we’re pretty, reliably having positive months, 10, 11 months year cash comes in and when you get it wrong, you don’t really lose much. And when you get it right, sometimes you make huge amounts of money. A couple of hundred basis points a month, maybe even a thousand bips in a month. That just lets you just keep adding and adding. It really works well in that it does well usually when the market’s volatile, and when the market’s volatile my for the book goes down. It’s great to have this cash come in because you’re buying a bunch of stuff that you really just dropped.

Kuppy (37:33):
And so the two offset very well and it’s creating really a much more dynamic portfolio. It’s just a living, breathing organism as opposed to just a list of taker symbols and shares. And so by evolving the portfolio in that way, I think it just dramatically increased the returns.

Trey Lockerbie (37:48):
I’m curious about volatility actually because the market definitely rolled over a bit this week. I think it was down almost 15%. Volatility hasn’t spiked a whole lot. I’m following the VIXY mostly when I watch and I’m not seeing that really reverse in the same fashion or the same magnitude. Are you long volatility, longer-term or how do you look at volatility? Do you ever play that?

Kuppy (38:11):
Occasionally I’ll play volatility. I don’t know, I tend to mostly lose that at it. I’m a volatility seller. I usually sell volatility, usually by writing puts, sometimes we sell covered calls, but I’m usually selling volatility and letting time work in my favor. When it comes to the calls or the puts, it’s usually, it’s something that I don’t mind owning on the put side. Sometimes I’m not dying to own it. Sometimes I really am dying to own it. But I set a price I want to own it at, I always make sure I have the cash. I write the put. Either I make 5% on my capital, give or take five, six, seven, whatever the number is over a month. Or I get shares really cheap that I don’t mind owning or maybe even I want to own.

Kuppy (38:47):
It’s the best trade-off there is. I think everyone should be doing that. And the same goes with covered calls. You set a price you want to sell it at and you sell those calls and maybe you only make 1% a month, but that 1% it just heads up. It’s this gift from heaven that when you’re a portfolio manager like myself if you make 15 or 20% in a year, you’re a God at this game. Well just selling calls against everything you own basically gets you there. There are a lot of easy things you can do that really improve returns. It’s just easy stuff. It’s just being disciplined though. I’m a volatility seller and on the VIX, I don’t know. Sometimes I buy it, I usually lose.

Trey Lockerbie (39:22):
One question I’m really dying to ask is around cash. Our TIP finance tool has a momentum feature and there’s a stop loss recommendation for the S&P, around 4,000. This week the S&P dropped all the way 4100. It touched, it bounced back up going higher today. But for the momentum to turn red, that’s a pretty scary indicator to potentially move to cash in our opinion. I’m curious how you look at cash because obviously, we’re in a double bind here where you don’t want to be losing money in the market, but you also don’t want to be sitting on cash with it inflating away at eight-plus percent. How much cash do you typically have on hand in emergencies for reallocation and when do you think about moving more into cash in times like this?

Kuppy (40:06):
I have a dynamic portfolio. I tend to sell stuff when it gets to 80 cents on fair value. I don’t fight that last 20 cents. The money in the market’s made it buying some at 20 cents and selling it at 80. It’s not holding it from 80 to par. And so I tend to run a portfolio with far more liquidity. We target about 115 to 125 long. We’re usually a little bit levered, call at 120 is the baseline. When I’m sitting there and I’m 100 long, there’s no cash in the balance sheet, but I have 2000 points of the room that I can reallocate. And with those 2000 points of the room, I have the flexibility that if something happens as Russia came out of the blue, I can allocate, or some other idea comes out of the blue, you can allocate fast, you don’t have to sell something to make room.

Kuppy (40:47):
Because then you have slippage going both directions. You only want slippage going in one direction. But the thing is you can use that excess room for the event-driven because event-driven is often self-liquidating. A lot of the event-driven you do is writing puts. And so two to six weeks later they go to put heaven and itself liquidates itself. And if you have to, you’re right to put in a dollar and something great comes and it’s only stringing it 30 cents. Okay, fine. The last 30 cents I won’t capture, you can recycle that money really fast and move on. And so I like to have extra room. I like to run de gross. I’m not scared to gross up to 150 when there’s something really attractive to do, but you don’t want to be sitting there at 150 unless there’s some amazing opportunity like at the bottom in March of 2020.

Kuppy (41:29):
Otherwise, I usually keep my exposure low because you never know when something like this week comes along. It was terrifying and I put a lot of money to work, and everyone else was panicking. I was just excited. For the first time in a while, I got to feel a little greedy, because I knew I was buying great stuff cheap. In terms of momentum indicators, I have no idea. I always buy cheap stuff. If you get to own something for a couple of years in a macro trend, there’ll be times where the momentum is in your favor, there will be times when the momentum’s bad. There’ll be times when the chart looks good. There’ll be times when the chart looks gruesome. We just got to own it.

Trey Lockerbie (42:00):
Now with options, I’m curious, is there a sweet spot here for you when you’re looking at it? Is there a certain implied volatility number or even just a certain amount of expiration days that you like to play in?

Kuppy (42:11):
I like to be somewhere between a couple of days in about eight weeks, I rarely go out for more than two months. Sometimes I’ll do stuff that’s only a couple of days, but it’s usually about two months. I think the key with the options is a lot of people go to an options scanner and they choose the most, the companies with the highest volatility. You end up with a bunch of biotech stocks. Those things are 200 volatility because realize ball might be 300, it might actually be an undervalued ball. So just looking at it from a volatility standpoint is the wrong way to look at it with options. We really need to look at and say, if I got assigned this stock at this price, would I be happier or upset? That’s the only thing that matters. And then from there, you can prioritize it.

Kuppy (42:48):
I have a big working list of undervalued stocks. Just a spreadsheet of their stuff we are happy to own at certain prices. You can obviously prioritize it. If something’s a 20 ball and something else is the 60 ball, we’re probably going to write the 60, not the 20. In the end, or maybe we’ll do two-thirds in the 60, one-third in the 20 because we want to be a little diversified. I don’t know. But no, you get paint better when the ball is higher, so it’s worth doing. But the mistake people can make is to go into high ball names because sometimes those things ought to be a high ball, to really know that you want to own it.

Trey Lockerbie (43:18):
Now with something like oil, are you ever buying long-term leaps on something that, given that you have such a long-term time horizon for it?

Kuppy (43:26):
Yeah, we own quite a lot of out the money call options, futures options on oil. We own 23 call spreads. We own 25 calls, multiple different strikes, and some call spreads. But we bought these back when volatility was like 12, they were reasonably far out of money with tail balls. I think volatility has picked up a bit now just because more people are starting to look at them and realize that, if you’re going to hedge your portfolio, most people buy puts to hedge their portfolio. But I think the best way you can hedge a generic US equity portfolio is by buying call-offs on oil because every scenario that has the stock market crash involves oil going to 500, whether it’s Russia starting a war or the federal reserve panicking the federal reserve isn’t going to do a panic hundred bips hike unless oil is 300, all the way to 500.

Kuppy (44:12):
Every scenario that leads to the US equity market crashing usually starts with the price of oil going crazy. It just seems like a superior way to hedge, a cheaper way to hedge. We have that trade on for directional purposes, but also as a hedge to the rest of the book.

Trey Lockerbie (44:24):
Well Kuppy, this has been so fun and fantastic. I really won’t give you an opportunity before we sign off here to hand off to the audience where they can learn more about you, where they can learn more about your resources or even your funds and any other endeavors you want to share.

Kuppy (44:40):
Yeah, absolutely. The best place to follow me is Adventures in Capitalism. That’s my blog. I’ve been writing there for 10 years. It’s free. You get what you pay for. We flagged a lot of interesting themes and stock ideas over the last decade. I think my hit rate is probably better than any other blog out there. I’d say the other place to go is Kuppy’s Event-Driven Monitor, kedm.com. Those are the two best places to find me.

Trey Lockerbie (45:03):
Fantastic. Well, Kuppy, hope we can do it again sometime soon. I really enjoyed it.

Kuppy (45:07):
Yeah. Absolutely. Happy to do it anytime. Appreciate it.

Trey Lockerbie (45:10):
All right, everybody. That’s all we have for you this week. If you’re loving the show, please don’t forget to follow us on your favorite podcast app. You can reach out to us and find us on Twitter. My handle is @TreyLockerbie, and definitely don’t forget to check out the TIP finance tool. And with that, we are wishing peace for the planet and we’ll see you again. Next time.

Outro (45:27):
Thank you for listening TIP. Make sure to subscribe to Millennial Investing by The Investor’s Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only, before making any decision consult a professional. This show is copyrighted by The Investor’s Podcast Network, written permission must be granted before syndication or rebroadcasting.