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Trade #4 In SAS Fund

|Includes: BCS, BP p.l.c. (BP)
  • Selling BCS @ $11.41 (bought @ $8.50 with 10% of AUM) for 34% intra-trade profit, before fees.
  • Purchasing BP, leveraged in call options, with balance.

BCS had a nice run after the reactive sell-off post Brexit vote. I was able to capitalize on this once the price settled and a few positive catalysts materialized by purchasing shares at $8.50. Selling here at $11.41, as although I believe holding BCS will continue to be a profitable decision, I see BP as a very attractive candidate currently, and a better place to invest over BCS in the medium-term (over next 1-3 years).

BP reported a slight underperformance last quarter, but a closer look shows continued growth across multiple fronts. Meanwhile, Gulf spill expenditures will markedly decrease this year over last (from $7.1B to about $5B), and continue aggressively decreasing in 2018 ($2B) and 2019 ($1B). Also their divi is lovely (7%). Due to a slightly lacking quarter the stock sold off approx 4% as well, and then saw some fairly aggressive buying the rest of last week. I like this price action coupled with what should be a continuing bull run in oil, and see no compelling reason for the stock not to find higher ground throughout 2017 especially.

I believe the low institutional support will begin to reverse course this year as well, and eclipse 20% ownership at some juncture (around 11% currently). The divi should be safe as long as Brent stays above $50/bbl average for 2017--a very likely scenario, in my opinion. I believe at some point this year we will see Brent come close to $70/bbl.

The downside appears protected, unless oil crashes. But OPEC and NOPEC seem relentless in their pursuit of higher oil prices (90% compliance currently), and shale wells simply cannot come on line and produce fast enough to matter. Demand is rising, even more so than previously thought (by 100k/bbl/d more than anticipated, according to latest IEA report), and almost the entire world's oil suppliers are agreeing to cut back production. This is a very easy call, frankly.

BP has also been buying up plenty of cheap assets that should pay off nicely into 2020 and well beyond. And their 20% stake in OAO Rosneft (Russia based) should begin to show lucrative returns, especially with a sympathetic (to RUS) US leader in the Oval Office.

Therefore, moving the above AUM from sale of BCS into BP shares at $34.53, and into $33 July 2017 call options ($2.15 ea) with an 80%/20% distribution for leverage. OPEC cuts should extend right through this summer, as they have stated.

This is a good moment to talk a bit about the further breakdown of costs the SAS Fund will theoretically incur per trade. There are of course fees associated with moving large amounts of capital around. Also there can be market impact from these trades, depending on the % of daily volume the trade represents. For the sake of brevity, we will consider the following fees and market impact per trade:

-buy or sell made in ETF ==> 0% market impact

-private placements for shares + warrants ==> 0% market impact

-buy or sell equaling 1% - 5% of the daily volume ==> 0% market impact

-buy or sell equaling 6% - 10% of the daily volume ==> 0.5% market impact

-buy or sell equaling 11% - 15% daily vol ==> 1% MI

-buy or sell = 16% - 20% DV ==> 1.5% MI

-B or S = 21% - 25% DV ==> 2% MI

-B or S > 25% DV will be conducted privately between parties, and thus incur no market impact.

In terms of fees, we shall simply consider a 1% fee annually as our expense ratio. Actively managed MFs have an average asset-weighted expense ratio of 0.89%. So we'll go higher in our assumptions to be conservative.

Therefore, given the above, the current performance for the SAS Fund (with 1% in fees deferred until Aug 2017) is as follows:

FUND Starting Balance $100,000,000.00 AUM

ACHN: -13.4% (realized)

ARWR: -3% (realized)

CYTR: -2.2% (paper)

LNG: +0.42% (paper)

BCS: +3.4% (paper)

RUSL: +26% (paper)

BRZU: +14.8% (paper)


NET Profit of +26.02%

FUND Balance: $126,020,000.000

Current transaction:

3.4% AUM ($4,284,680.00) in BCS sold with 0% market impact, and placed into BP with 0% MI, divvied as follows:

-$3.43mm long shares @ $34.53/share = 99,333 shares

-$854.68K long call options @ 2.15 ea, expiry July 2017, strike $33 = 3,965 contracts

Cheers and good trading.