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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • 2013, The Rough Draft 21 comments
    Feb 2, 2013 12:47 PM | about stocks: GPT

    Here are our ideas, early results, and remaining catalysts for 2013.

    Best Long Ideas for 2013

    GKK: +26.19% / GKK-A +4.18% (we own >5%); dividends ahead

    Best Short Idea for 2013

    TMF: -12.99%; artificially manipulated bonds could mean revert

    Other Long Ideas

    ALJJ: +12.86%; tender offer could close

    AXLL (nee GGC): +37.91%; merger was successfully consummated

    BRK.A: +9.72%; discount to intrinsic value could tighten

    BRK.B: +9.25%; discount to intrinsic value could tighten

    DTD: +5.91%; dividend paying equities could beat bonds

    FNSAX +6.61% methodology could allow FNSAX to beat the SPY

    GCVRZ: +11.76%; could receive a >50% distribution

    GRR: -1.00%; could be subject to additional buybacks

    IFN: +5.88%; could be subject to additional buybacks

    LORL: +8.27%; could be liquidated at a premium

    NXY: -0.97%; this deal could close

    OBAF: +3.75%; could be acquired

    OSHC: +4.39% (we own >5-%); could be acquired

    RSP: +7.48%; methodology could allow RSP to beat the SPY

    SSE: +85.35% (we own >5%); acquisition could be consummated

    UBAA: +15.97%; discount to NAV could tighten

    DGTC: +1.76%; odd lot tender could close

    Other Short Ideas

    FXY: -6.61%; this is a generational idea that could begin to work

    TVIX: -47.54%; this is could be worth $0 based on security flaws

    VXX: -27.41%; this could be worth $0 based on security flaws

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

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Comments (21)
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  • Nice results.


    Chris, do the percentages above represent the performance from idea origin (or from 1-1-2013 etc.)?
    2 Feb 2013, 06:38 PM Reply Like
  • Author’s reply » Thanks.


    These are 2013 YTD numbers, out of sheer unadulterated sloth. Neither our cost basis nor our subsequent publication of these ideas lines up with calendar years and ideas for a given year is certainly arbitrary. But my thought behind this post is that some ideas cost virtually no premium over the beginning of the year (some are at a discount such as NXY). Others cost a bit more, which is relevant in the context of the remaining catalysts.


    The interesting questions to me are always, “what does it cost?” and “what is it worth?”. This is an update designed to mention the change in both “what does it cost?” and the change in any catalyst likely to lead to an answer for the question of “what is it worth?”.


    I have not sold or covered any of these, so the short term returns are meaningless to me. There is always a lot of noise, so often the moves are not indicative of any change in value. If someone asked me, “so what happened in January?” My answer would be, “SSE sold” in a deal that will probably be consummated shortly. As for February? ALJJ’s tender could close, NXY could close, and we could have deals in two other positions that we don’t talk about as of yet.
    2 Feb 2013, 07:30 PM Reply Like
  • $TVIX is a truly horrible product (unless you're short, of course).
    2 Feb 2013, 08:15 PM Reply Like
  • Author’s reply » It almost makes me feel badly.


    2 Feb 2013, 08:41 PM Reply Like
  • I've been shorting VXX and UVXY using options partly because I can't seem to get comfortable shorting the stock of these ETF's directly because the possibility exists of a short term super-spike in the VIX as a result of an extreme unexpected event. (On the day in October 1987 when the stock market crashed, the VIX would have exceeded 100 had it existed at the time--10x today's VIX.) I've wondered what percentage of a portfolio would be appropriate for shorting the stock of VIX ETFs directly given the extreme though extremely rare risks involved in doing so. 1%,2%,3%? I'd be grateful for any comments or opinions about this issue.
    2 Feb 2013, 09:18 PM Reply Like
  • Author’s reply » Your options trade is wise.


    My comfort with the equity short that takes into account your point on the potential for a short-term spike. I make the binary decision to invest or not wholly on expected value. However, the chance of a '87 event is limiting on sizing.


    What is the right size? My sizing model gives me a position that is only around 1%. It is in part due to the potential for a 10x move. It is also because of the opportunities that I hope and expect will come when we have higher volatility.
    2 Feb 2013, 09:26 PM Reply Like
  • When I first started shorting the VIX ETFs a couple years ago, I did so gingerly on volatility spikes; but after a while I realized that there are two scenarios that make shorting VIX ETFs compelling, and that they are independent of each other. The first, as I think you note, is opportunistically shorting on volatility spikes or periods of elevated volatility, such as we had during 2Q2011, because regression to the mean seems to be a natural law with volatility, which is to say that deviant volatility doesn't last over time. The other scenario involves merely the existence of contango between first and second month VIX futures, which occurs most of the time. As long as there is contango, the VIX ETFs suffer negative roll yield and lose some value every day by virtue of their function. During much of January, contango was 10% or higher, so VXX was losing .5% or more per day on average. The VIX could be flat for a period of time, yet contango would guarantee NAV decay, the steeper the contango, the faster the decay. And even in the event of an elevation in volatility, contango, which occurs most of the time, would serve to offset some of the appreciation in the value of VIX ETFs due to increases in the value of the VIX futures, and then when that period of elevated volatility were to begin to ebb, the decline in the value of the ETFs is compounded by the two effects: directionally down and contango induced negative roll yield. I can think of no realistic way for the VXX ETFs to gain substantial value and retain it for the longer term. The only way I can think of for that to occur would be for backwardation between first and second month VIX futures to occur a majority of the time and for the VIX to be steady to rising for the longer term. Suffice it to say, the first phenomenon is unrealistic; although it is possible for the VIX to maintain a relatively constant level for an extended period of time near the mean.


    Because the VIX is in essence trendless, my strategy in shorting VIX ETFs is to do so at regular intervals, such as monthly or quarterly, as well as opportunistically shorting volatility spikes as they occur. I short VIX ETFs even now when the VIX isn't elevated to try to take more advantage of the negative roll yield that occurs most every day. Incidentally, if you weren't already aware, someone has created a website that provides a real time graph of the VIX term structure and calculates percent differences in prices between the sequential monthly VIX contracts, which I've found handy:
    2 Feb 2013, 11:11 PM Reply Like
  • The contango is what sealed the deal for me on these. CBOE also has a page showing term structure:


    If you look at the futures prices and the term structure, VIX-futures are in a near permanent normal contango (by which I mean even the first month future is above spot VIX).


    I use SVXY to avoid the loan costs of a short.


    However, I'm considering Chris's idea of shorting the leveraged versions as a way to pick up the problems with leveraged ETFs.
    4 Feb 2013, 06:28 AM Reply Like
  • Author’s reply » Thank you for posting the link to the CBOE information on the term structure ( incidentally, if anyone wants cheap exposure to the CBOE itself, you might consider UBAA; more here: ).


    SVXY is a good idea; I bet that you will make a lot of money owning it.


    I would be interested in your conclusion to your look at the shorting the leveraged versions. I'm a bit greedy so like exploiting both the directional view and the security's flaws at the same time.
    4 Feb 2013, 06:37 AM Reply Like
  • "SVXY is a good idea; I bet that you will make a lot of money owning it"
    correction: already made a lot of money owning it ;)
    The expense ratio is obscene, but I don't have the funds to replicate it and it's a convenient way around the short problems.


    For shorting the leveraged versions I tried to look at whether it was possible to exploit the values independently of the direction (ie avoid the danger of a crash event). I looked $100 short TVIX + a hedge of $200 long VXX. I didn't do a proper study, but quick look at the graphs it appears that over short time periods (1-2 months) this works fine - spikes are mostly protected, and TVIX loses value over time. That then results in getting net long VIX, which isn't good. So the hedge would have to be cut back as it makes money which introduces the same buy high / sell low problem. My guess is that some sensible management of the hedge would work out through dedication to selling at a good price and watching the net exposure. Too messy for me to work out the details yet (unless someone pays me to do the research properly :P ).


    So my conclusion is that a) the leveraged versions can be shorted successfully, and b) management of crash event risk will require some attention to the position. If you're willing to take the crash event risk, then shorting the leveraged version will get you both direction and security problems.


    Perhaps Angler's options idea is a way to manage short term spikes. Haven't looked into it.


    For my portfolio, I don't want a 5-10x loss, so shorting a leveraged version probably means being very careful about exposure and/or hedging. I'm still thinking about whether and how to do it.
    4 Feb 2013, 08:12 AM Reply Like
  • Do you know if there is any theoretical maximum value to SVXY, like there is for the inverse ETNs? If vix stays around these lows, will we pick up the negative roll yield (less rebalancing costs in the etf), or is there a ceiling on it somehow?
    11 Mar 2013, 01:59 PM Reply Like
  • Author’s reply » I believe that the answer is "no", no maximum value.
    11 Mar 2013, 07:47 PM Reply Like
  • Author’s reply » Terrific explanation and strategy. Thanks for the post.


    Oh, and I was unaware of Cooll site.
    2 Feb 2013, 11:16 PM Reply Like
  • How do you guys deal with the IV in these levered ETFs when using options for downside premium?
    3 Feb 2013, 11:03 AM Reply Like
  • Author’s reply » They are basically just sized small enough such that we can survive if any when they spike 400-500%. The expected value of the shorts/writing calls/buying puts has been terrific, but they are zany in how they trade. It is essentially a transaction between vol and EV. I am particularly EV-sensitive and vol-insensitive, so it has served my purpose.
    3 Feb 2013, 11:16 AM Reply Like
  • Author’s reply » 2013 is starting off well, with net performance ahead of the S&P and GKK, which is my largest position and favorite investment idea, up over 25% year to date. Here are a few updates:


    ALJJ: The tender offer was successfully consummated.


    BRK.A./BRK.B: The discount to intrinsic value tightened.


    NXY: The merger was successfully consummated.
    2 Mar 2013, 03:48 PM Reply Like
  • Chris, further to the SVXY comments.... What seems particularly interesting for an investor who doesnt mind short turn swings is selling puts on SVXY. If you look at the 80 puts expiring in Jan 14, you can get around 30% returns on a cash secured basis. You may face a near term spike or even get put the stock if vol spikes, but over time what do you think of this as a strategy?
    5 Mar 2013, 10:45 AM Reply Like
  • Author’s reply » Terrific. Just needs to be sized correctly (which is always the case).
    5 Mar 2013, 10:49 AM Reply Like
  • I see that European marketing authorization has been given for Lemtrada! (Alemtuzumab)
    17 Sep 2013, 03:37 PM Reply Like
  • Author’s reply » Yes; the FDA has been working closely with the EU and will have the US decision out shortly.
    17 Sep 2013, 03:55 PM Reply Like
  • Author’s reply » GCVRZ Forum:
    17 Oct 2013, 05:01 PM Reply Like
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