This beautifully ugly industry has massive upside potential

Despite improving fundamentals… the shipping sector is still dirt cheap—and creating a lot of opportunities for investors.

Harris “Kuppy” Kupperman, manager of Praetorian Capital, joins me today to discuss the subsets he’s currently focused on in the shipping sector… and why he believes there’s massive upside potential in this beautifully ugly industry [20:00].

Transcript

The Mike Alkin Show | 71

This beautifully ugly industry has massive upside potential

Announcer: Free and clear of the chatter from wall street, you’re listening to Talking Stocks Over a Beer, hosted by Hedge Fund veteran and newsletter writer Mike Alkin who helps ordinary investors level the playing field against the pros by bringing you market insights and interviews with corporate executives and institutional investors. Mike sits through all the noise of mainstream financial media and wall street to help you focus on what really matters in the markets. And now, here’s your host, Mike Alkin.

Mike Alkin: It’s Thursday, August 29th. I hope you’re doing well. We are here getting right down to the finish line of summer, thank God as I think, you know, I’m not a summer guy. Last couple of nights it was chilly here in the New York area, It’s great actually I put a sweatshirt on, sit outside with the fire pit smell of the other people in the neighborhood doing the same and nice smells in the air from the whatever they were burning CO2, I get it. This time of year that I really look forward to, I love the football seasons here we’ve got college football started getting down to the last preseason football game, then we get into the regular stuff. Just got my tickets, I’m taking my son to South Bend, Indiana we’re going to watch Notre Dame USC play in October, Touchdown Jesus.

Mike Alkin: We’re looking forward to that, Notre Dame-USC is a huge rivalry, we’re pretty excited to go there. I’m a monster football fan, played from the time I was, seven through high school, and then huge football fan, love it, and a huge college football fan and like I’m an analyst with numbers, I’m that way with sports stats and I could go back to years and years and years. Huge Notre Dame fan and I have never been to a Notre Dame football game in person, so pretty excited about it, and my son’s pretty jacked up too, we bought all that and got all the details out of the way there. Got the med still in the hunt for a playoff, cooled off a little bit of lost four in a row, kind of pissing me off.

Mike Alkin: They had such a Torrid streak, so it was bound to cool off a little bit. Got NHL hockey camp array to start here pretty soon, man! What a great time of year the fall. We got a lot to look forward to on that front. We talk a lot about my view on different industries, my market view, I might share it a little bit, not too long ago, on one of the podcasts, but typically the main market I’m not really too focused on. I’m looking for areas of inefficiencies, things that are down and out, that are beaten up, and many industries, companies that are beaten up and left for dead they deserve to be. It’s hard to find those industries where you start to see some inflection points, you have to be patient, you have to wait and I talk about, I don’t have to make money on it right away, it could be a year, two years, longer if I think the risk reward, if I think my upside is dramatic versus what the downside is.

Mike Alkin: And then if the risk reward is poor and you’ve got a lot of downside, well they kinda crazy. But if your risk reward is so dramatically skewed to the upside, I’m talking three to one, four to one, five to one and higher that’s attractive. And when those potential are big multiple returns and your downside is 20, 30%, whatever it may be in any industry you’re looking at but the potential is for much more, you know that’s a different style of investing, It’s not for many people because it’s not popular, you’re buying things that are out of favor, you’re going to have to wait a long time or the catalyst. But if you feel as though that the downside protected the upside, when the fundamentals turn will take care of themselves. So it’s always focusing on what that downside is and looking for those type of things. And you start to learn over the years that in these deeply cyclical industries, you’ve just got to learn the nuances of the industry, but it comes down to math. It’s supply and demand, and supply what is the marginal cost of production how many companies are producing above that.

Mike Alkin: How long can they afford to stay in production. What’s the price they’re getting for selling it? You start to interchange these things, you people know where I spent a lot of time in uranium, we’re not going to talk about uranium today but it’s in different industries, you start to look at these type of things. When you look in one of the industries where you tend to see dramatic moves, and by the way, these are not great businesses, like mining businesses are not good businesses. I had a buddy of mine who was a former partner at one of my hedge funds and we were talking and he was looking at the some of the numbers on the mining companies cause he’s getting excited about the potential to turn in uranium or the turn in uranium and not the potential turn, what has already turned and just the equity market hasn’t and figure it out. But saying “I’m not sure, if these are great businesses for the long term.” I said, “Dude, what planet …” He’s a bank analyst.

Mike Alkin: I said, “What planet are you on?” You’ve been doing this 25 years, these are cyclical beasts, that move up and down with supply and demand and because of human nature, when there’s too much of something people discard and throw it on the trash bin. And when there’s not enough, they come out of the woodwork and buy this stuff, and because the vast majority don’t do the work, it’s the 80, 20 rule, you’re left with headlines and news flow and money flows and who’s coming in and out, what companies coming in and out of an index, whatever it might be. But it’s not the fundamentals that are the focus and because a recency bias, things are in short supply all of a sudden we got to buy it, Oh my God, the narrative changes and there’s never enough of it and it’s never going to be enough.

Mike Alkin: And I could paint a picture and tell you why things are going to be so fabulous and it overshoots and then it comes down, and then you have periods in years where things are shitty. So you go from glory days to shitty days and, then all of a sudden when the capital dries up for the industry and companies are making stuff, or producing stuff, or pulling out of the ground, whatever they’re doing and it’s costing them a lot more to do that. Then they’re selling, and they cut capacity, and then people that goes through a bottoming segment of people say, “Well, they needed to do that.” Then it starts to happen, and companies, stock prices had been depressed and hammered and people don’t … It’s not popular because they could look at WeWork or beyond Beat or anything else that’s working and it’s cool and it’s growthy and it’s great.

Mike Alkin: And all of a sudden that’s where people’s interests are you’ve got the gold bugs you are always looking at gold, so in these deeply cyclical industries, it goes from euphoria to depression. When things are really depressed, that’s when you want to start looking and when things are really euphoric, you want to get out. I said to my buddy, they’re not great businesses, secularly year after year after year when they earn, they over earn and when they don’t, if they’re well managed, hopefully they under earned, but they don’t blow themselves up and he’s like, “No, I get it, I get it.” But as you look around the industries right now you’ve heard me talk about my oil and gas views and how does she know the shale plays where they’ve been because of free money basically, because of low interest rates they’ve been hitting that free money, but very low interest rates have been able to go out and borrow until the cows come home and lever up those balance sheets and grow, grow, grow and produce and produce and produce and cashflow shock.

Mike Alkin: Then after a while it’s been a long time now it’s been almost a decade and you can only have so much debt where your production rates are slowing and your cashflow, no matter what the price of oil is for three quarters of them, they don’t make money. At some point the chickens come home to roost, there’s, might be right. And so in that area where, his neglect been? Everything’s focused on the onshore as shale plays. Where are people taking it from that capital? So that capital has come out of offshore and the services companies and drilling companies, rebuilding and you name anyone that has to do with that, their prices have been crushed and destroyed. People have run it, and all of a sudden you’re looking at companies that are trading well below tangible book value and you look back, but where they trade in a prior period and the shit turn higher, and what’s it going to take? What’s going to take capital that has been starved in that industry.

Mike Alkin: It’s project had been canceled and canceled and canceled and money has been put into the shale plays and if that starts to slow and people realize, we still need to find a lot of oil every year, where’s that going to come from? All of a sudden it rotates back to the other, and people wake up one day and say, “Oh God, look how cheap that is.” That what happens, that’s the nature of it, but you’re going to go through long periods of time where the market’s going up and you’re doing nothing because your sector’s out of favor, but it might be bottoming and it might be a great risk reward.

Mike Alkin: Who cares what the market’s doing? What are you going to do? Fight and struggle and read the headlines and battle and figure out the S and P from here, is it going up 10 or 15% if it’s wrong, is it going down 20 is it going up 30% from here? Probably not. Could it go down 20-25 maybe? So what’s that risk reward your upside downside. One-to-one, how is that exciting, if you catch a shipping cycle or if you catch an offshore cycle, if you catch a uranium cycle, right and you got to wait a little bit, but you’re upside down.

Mike Alkin: You’re upside downsides four, five, six to one. You’re talking hundreds of percent versus not. But it’s lumpy, right so it’s hard for institutions to jump on that because they need more consistent performance, but if you’re looking for really significant returns … and again, it doesn’t happen overnight, and again, there’s down-sided first because markets when they’re bottoming, it’s really hard. It’s just like you can’t go short these things at the top, right away you can’t load the boat because they could go on a lot longer than you think. But that changes one of the sectors that has caught my attention recently, and really there’s been a couple of guys that have brought it to my attention and two buddies of mine one is Chris McIntosh, had a New Zealand … “God, he lives in a beautiful part of the world”, sends pictures “Like Jesus.” McIntosh runs capitalist exploits and Glen Orchy Capitol and I have him on the podcast, he’s the one with the funny accent, smart as a whip, big macro guy always looking for blown up industries, didn’t do a lot of shorting but he’s very patient, very value oriented.

Mike Alkin: And the other guy who’s actually going to be in studio here very shortly when his Uber gets him here is Harris’ Kupperman, otherwise known as Kuppy. He has a website called adventures and capitalism, It’s that.com. adventuresandcapitalism.com, and he also runs a hedge fund called Praetorian Capital and same philosophy, very deep value, looking for companies at bottoms, shorts occasionally not a lot. They don’t do a lot of shorting, he shorts companies that he thinks are going to implode, but will be able to report … He could talk to you about that when he’s here, but he has in the past made money doing it and he’s really, really focused on it now, and one of the areas is the shipping space.

Mike Alkin: The more I’ve read, the more I’ve really been very intrigued by it and think there’s some significant upside. And with Kuppy and McIntosh, Kuppy will pick my brain on uranium he could ask me as many questions as we want, we’re friends and I’m happy to chat with him and on shipping I’ll pick his brain, and I thought it would be fun for you to listen to me, ask him a lot of questions about shipping here. But his view is really just a confluence of factors that Mark a bottom in this sector and he thinks there’s just a significant recovery at foot and the reason it’s kind of like why now he’s just starting to see it. This comes down to supply and, and shipping rates and these stocks that are trading well below their tangible book value.

Mike Alkin: And he wrote something I thought was pretty interesting and I just want to find it, he says here, “If I told you last year that Trump would initiate a trade war with China, you’d have likely expected the spot charter rate for a container vessel from China long beach, California to decrease. What if I told you the rates are now it’s seven year highs? I like to throw this fact out because it shows how wrong conventional wisdom can sometimes be when applied to finance. When you can find a moment where conventional wisdom intersects with factual data and the two disagree, you usually find a mis-pricing in the equity markets.” Think about that. That is just so well said, “When you can find a moment when conventional wisdom consensus, how the equities are trading now intersects with factual data and the two disagree.

Mike Alkin: You usually find a mis-pricing in the equity markets. When conventional wisdom eventually catches up, you have the opportunity for huge percentage gains, particularly when you’re dealing with a security that has massive operational leverage on top of financial leverage, especially when the fundamental story keeps getting better. All bull markets in cyclical sectors start with long periods of investor losses discussed with the sector and a lack of capital for companies to add new supply. The 11 year shipping bear market from 2008 to 2019 has all the hallmarks of a typical cyclical bottom complete with a wave of bankruptcies massively diluted capital raises. Over the past five years, banks took Epic losses and stop lending capital for growth while shipyards closed up or consolidated. Even if the industry wanted to resume rapid growth, there’s no one willing to fund vessels and new build prices are much higher following a massive wave of consolidation. Besides most yards are booked solid with scrubber installations.” We’ll talk about that. New build orders supply thinks of it, if you’re a mining bug, think of it as mine supply and shipping its new build orders these are long life, takes a long time to build these things.

Mike Alkin: In 2013, there was 2000-, 12, 13, there was 20 billion spent on new vessels that went up to 33 billion towards 14 and 13, I’m sorry, 2013 was 20-ish billion then you had a 35 billion spent in ’14, and a huge amounts of capital. Today growth and global new build orders, total dollars spent less than $5 billion, number of vessels less than a hundred back at the peak 800, supply is drying up. And the copy says, if you reread some of my pieces from the winter, my main thesis was that IMO 2020 was a gating function. That’s a regulatory CO2 burden thing that’s coming in, I’ve talked about it before it, we’ll talk about it with Kuppy that would necessitate that old tonnage gets scrapped. Meanwhile, newer vessels would have scrubbers installed and have insurmountable cost advantages, putting this in perspective. Depending on the spread between high sulfur and low sulfur fuels and transit speed, a Cat Capsize bulker with a scrubber could easily have a $10,000 daily cost advantage compared to a 20-year-old burning low sulfur fuel.

Mike Alkin: When you realized that spot charter rates were as low as 5,000 a few months ago and you see that the old vessel is no longer in the ball game anymore, it isn’t even playing the same spot. What I didn’t predict was the bottlenecks at the ship yards related to scrubber installations. As a cyclical market starts to recover, supply and demand tend to roughly balance, then there’s usually an unanticipated catalyst that takes a tight market and pushes it into a bull market. Depending on which shipping company is lying to you, the expected scrubber installations to take 20 to 30 days, we’re now looking at 40 to 60 in reality when is there anything ever go on schedule with a new technology? What’s really blown out charter rates was the fact that scrubber installs were supposed to be happening on a set timeline, suddenly vessels are cuing and waiting days or even weeks before the ship yard get to them.

Mike Alkin: Supply is leaving the market at a time when demand is inflecting positively, we’re not just saying rate recoveries and containers. The Baltic dry index just hit a five year high, very large gas carriers VLGC is just hit a four year high. VLCC rates just quadrupled from the lows earlier this year and last summer is seasonally VLCC is weakest period, but he goes on to say “Most important for me, LR rates also doubled in the past two weeks following an extended low while refiners were offline preparing for the new LF for mandates. Rates are now roughly twice what they were this time last year and the stocks are still dramatically, dramatically mis-priced.” So, we’re going to bring Kuppy in to talk all about it. Kuppy how are you?

Harris Kuppy: Good. How you doing?

Mike Alkin: Good man. So I just read yourself the August 20th a piece that you put out. So let’s start, but let’s go back, tell people who you are.

Harris Kuppy: Where should I start? God. My name is Harris Kupperman everyone alive calls me Kuppy except my wife and my mom. I’ve been publishing a blog called adventures and capitalism for about a decade now where I write about, my adventures in finance and business and I’ve taken a unique interest in shipping lately, having followed it for almost 20 years. It’s, an interesting sector I think because there’s not a lot of specialists.

Mike Alkin: and you run fund called Pretorian Capitals,

Harris Kuppy: Correct. I run a fund thanks for the marketing pitch.

Mike Alkin: Why not? Kuppy braved the torrential downpour that we’re having here on long Island to come out into, to record this, we appreciate that. I was talking about shipping, I read the piece that you were just talking about and one of the things Kuppy I was talking about was cyclical industries, when it’s really ugly, people tend to forget about it. It’s left for dead. So, talk about your history with investing in cyclical industries and what got you interested in that and how you think about it.

Harris Kuppy: Cyclical industries are interesting because they have cycles and every industry has a different cycle of different time frame and you have to be a historian and look back at what’s happened in the past to see what’s going to happen in the future. I’m actually a history major not a business major, I actually went to university and studied Roman history and I’m still waiting for the bull market in Roman history. But these sectors, they all repeat themselves. And what’s so interesting about cyclical sectors is that you don’t buy it when it’s collapsing, you don’t buy it when it’s making new lows, by the time it starts recovering, unless you’re in something like semiconductors that has a billion eyeballs on it, everyone’s forgotten about it. There’s no trading volume, it’s been in a nice, tight range kicking around the bottom, usually for years.

Harris Kuppy: And it’s just forgotten about, which means you don’t have to be all that smart and you don’t have to bet is going to turn next week, is it going to turn next month and if not, I’m down to the 20%. You can literally watch it turn like what’s happening in shipping right now, you can watch and have confirmation in terms of what’s happening in the industry itself. Shipping’s amazing you have charter rates hitting five- and 10-year highs right now and most of the equities are a 10% off the all-time low.

Mike Alkin: Let’s stop there, that’s a great example you wrote about in the piece. All the trade Wars, people think trade is going to slow down, yet rates are going up. So the headline readers are going to not even bother to think about shipping.

Harris Kuppy: Well they’re probably shorting shipping because they think it’s going the other way. But, let’s continue on the cyclical sectors because it’s important, because I’ve been doing the same thing for 20 years and I’ve been doing it well and along the way you get to have some battle scars. Like I just have net gas, and if you’ve made too much money too fast and had too many good years in a row the trading gods need to humble you once or twice. They always do, [crosstalk 00:23:31] that’s what they’re there for or as my very good friend calls it mother market. And you have a situation where with these sectors you don’t have to buy them as it’s making new lows, you don’t have to really be a chart pattern reader, they all follow the same pattern. There’s too much production of something either demand has to catch up to supply or supply gets destroyed or usually a combination.

Harris Kuppy: You can wait for the bankruptcy’s, the restructuring, supply, depending on the industry, for instance, in shipping vessels usually aren’t destroyed they just change hands and consolidate and something like Shell oil supply actually gets destroyed because there’s a deep trail off in terms of production. But you need to wait until there’s the supply response and also the demand response. Having done this a long time, the trades that are led by an increase in demand as opposed to a destruction of supply are always the better ones because the supply side never catches up if demand is growing fast, you can’t just destroy supply as we’re looking at, like with coal for instance, you can even have a couple of year recovery but then it just starts making new lows.

Harris Kuppy: Anyway, I’ve been doing this a long time and they all look the same on the way up, which is that there’s been three or four false starts everyone shell shocked the insiders in the industry are shell shocked as soon as they start getting cash flow instead of rushing to increase supply like they did the last three cycles and getting themselves burned. Instead they’re just focused on de-leveraging, which is funny cause they really should be adding supply or consolidate and buying out their peers but they just de-lever. That’s the first thing, then they buy back stock and the insiders themselves don’t believe their recovery, which is why these recoveries tend to last longer than you expect them to. The highs are higher than you expect, also when the lows are lower than you expect.

Mike Alkin: When Kuppy’s talking about de-levering, he’s talking about reducing debt on the balance sheet, right?

Harris Kuppy: Do you want to talk shipping?

Mike Alkin: Let’s talk different categories of shipping because people might think shipping is shipping, but there’s so many different things there’s product tankers there’s a-

Harris Kuppy: Dirty tankers, there’s bulkers, there’s LPG, there’s basically seven main categories sub sectors, but then there’s parts of sub-sectors as well. And each of these has their own supply demand dynamics, partly caused by, you’re not going to take a very large vessel on a short run, some ports can’t take large vessels is lots and lots of different characteristics, which means that for a guy who specializes in this sector, people can look at shipping as this monolithic thing and reality it’s just the wrong way to think about it. And you could have sub-sectors, they’re doing very well while the other sub-sectors are doing poorly and vice versa, which gives you the lot of opportunity to make an attractive trade because so many generalists just think of shipping as this big thing. [crosstalk 00:26:32]

Mike Alkin: How are you prioritizing your research, your investing and what’s attracting you to those sub sectors within shipping?

Harris Kuppy: Right now we’re having something called IMO 2020, and what IMO 2020 basically says is that starting January 1 of 2020 all vessels have to burn low sulfur fuel. That’s fuel less than half of 1% sulfur content or they can install scrubbers and burn high sulfur fuel, which is substantially cheaper about two to 250 a ton cheaper today and likely even more cheaper … that’s probably the wrong word. But at some point in the future crosstalk 00:27:15].

Mike Alkin: You’re Roman history major, you’re not an English major, so don’t worry.

Harris Kuppy: I could barely talk at the time. But you have this situation with the sulfur fuel where a large percentage of the fleet is going to stall scrubbers, they’re going to burn the cheaper fuel. And then a large portion of the fleet, because most vessels last about 20 years and the scrubbers cost three to 5 million to install, it’s not cost effective to install them so a lot of the older vessels will become obsolete. Basically as time goes on, fuel efficiency gets better in vessels and so older vessels get scrapped because they’re less fuel efficient and fuel being about half the operating costs of a vessel, which makes it, less competitive to charterers. We just had a stair step function a few years back with eco vessels, which are dramatically more fuel efficient than a legacy vessels.

Harris Kuppy: And now you’re going to have another stair-step with people who install scrubbers. So what’s going to do is Lexi vessels are none EcoVessels, so seven year, eight years or older are increasingly be obsolete. I think you’re going to see a lot of these vessels get scrapped or what’s going to happen is they’re going to slow steam so they use less fuel. It’s kind of like if you’re driving your car, if you drive a bit slower, you use less fuel per mile and [crosstalk 00:28:33] exactly, but if you slow steam, the number of vessels a on this planet is pretty fixed. So if you go 10% slower on average, then you need 10% more vessels and what that’s going to do for the industry is small changes in the vessel numbers have huge changes in charter rates. Additionally you have the situation where the cost differential of using scrubbers versus being a legacy vessel for say a Capsize, it might be as much as 10,000 a day, which when you think about the fact that these vessels were only having 5,000 a day of revenue, you realize that anything it doesn’t have a scrubber is basically obsolete on day one.

Harris Kuppy: They’ll either go slower, in which case you need more vessels on this planet in order to move the ton miles needed or it’ll get scrapped. But in either case, what’s going to happen is you’re going to have less vessels, demand is going to stay constant or grow slightly. It grows slightly every year and you’re going to see charter rates increase and charter rates are totally independent of what happens in GDP it’s somewhat independent of what happens in supply demand of individual commodities or oil or whatever else. They’re, fully determined by a supply of vessels and we’re entering a new Super cycle in that you have this IMO 2020 is the gating function, which can take a lot of older legacy vessels, particularly those that are 15 years old and plus and force them to be obsolete on day one. I think when you have that much fleet destruction, you’re going to have a huge response in terms of charter rates and charter rates, 99% of that revenue goes to the bottom line.

Mike Alkin: When we talk about supply-demand here, when I think about uranium, I know how many mines there are. I know primary mines, pounds. I know the secondary supply, all the sources and I know how many reactors and the demand. We have our own numbers and then there’s consensus which is backward looking, but that’s why we think the opportunity exists. How does one think about supply and shipping, I know you put a great chart in there in your last piece on August 20th about the supply of vessels, but are there ship building yards? How do you track this stuff and how do you think about it?

Harris Kuppy: There’s expensive services like Clarkson’s that’ll sell you a lot of data, I basically use second hand data from people who lifted off Clark’s, I’m a value investor, but I think conceptually, the way to think about this is that we peaked out in 2008 in charter rates, we’re now year 11 of a bear market. There’s been a few false starts along the way, particularly in 2012-13 where they ordered a lot of vessels which were delivered 2016 and absolutely crushed the industry, what happened in 2016 onwards into 2000 say 18, is that pretty much everyone broke in the industry, every single player either went bankrupt, got bought by someone else, raised equities, so that they diluted 95% whatever happened. It was a global margin call on the industry and it reconfigured everyone’s balance sheets and scared the hell out of everyone and since then has been a real decline in ordering. You’ve seen ordering really just to replace vessels that have been scrapped and even then in some sectors you haven’t seen that much ordering. You also heard-

Mike Alkin: How long does it take to get the ship? How long do these things last?

Harris Kuppy: It depends on the type of vessel, but somewhere between 18 and 36 months is a useful guideline from the day you order it until it’s delivered it needs sea trials and everything else so there’s a lag in ordering vessels. And in terms of the shipyards, they’ve also mostly gone bankrupt. There’s been a lot of consolidation and a lot of the shipyards are book steady for the next two years putting scrubbers in. Even if you ordered a vessel today, where are you going to build it? So you have the second gating function, you can’t really order vessels. And what also has happened is that a lot of the guys who lent to the sector, they also went broke, so you know those German banks that are in trouble that they were some of the largest lenders as were a bunch of Korean groups and other banks that were really operating the ship yards as a make work program.

Harris Kuppy: They said, we’ll lose a little bit of money on the lending side and we’ll make it up in tax revenue well it turns out they lost a lot of revenue, they lost a lot on the lending side. And so you’ve had a lot of banks exit the sector there’s been a lot of bulk portfolio sales, been a lot of banks that say we’re just not going to do shipping anymore it went from used to be able to borrow at Libor, maybe even less than Libor, because some state entity subsidized you to order more vessels, now if you want equity in the sector, you’re going to have to do a 9% preferred. The cost of capital’s increased quite dramatically in the equity side, and on the debt side, which is another gating function, charter rates are at multi-year highs right now, but no one is making money still, it’s just starting.

Mike Alkin: So talk about that, talk about the peak charter rates and where they’ve come down to and how much room for recovery there is.

Harris Kuppy: Put it this way, I don’t have the numbers in front of me, but for quite a long time you could make more than a 100,000 a day operating Cape side. So vessel moving, iron ore, and coal and there’s some peaks and troughs and it’s not like oil where … It’s 55 give or take $2. It’s been that way for a couple months now. These things are very, very volatile, day to day, week to week. But use a 100,000 as your Guide point, and for many years you could make 100,000 a day moving iron ore from Brazil or Australia to China, and then for a very long time, you’re making 5,000 a day, that’s revenue it’s cost you 10,000 a day to operate the boat very rough numbers.

Harris Kuppy: You have, let’s call it 6, 7, 8,000 a day to operate it. You have 1000, 2000 best GA, let’s just call it 10,000 you have financing costs a few thousand a day, you then have depreciation that’s a real cost when your vessel only last 20 years, you can’t just [inaudible 00:34:33] this, so you have a break even in the 15 20,000 a day range and you’re getting 5,000 a day. I mean, just not all of that is cash, but yours is bleeding to death. Even now, we’ve had a very strong recovery with capes are in the low thirties right now. They’re finally making some profit for the first time in almost a decade. Think how far we’ve gone.

Mike Alkin: And think how much catch up they need to make. I mean, they’ve destroyed shareholder value.

Harris Kuppy: At some point in the cycle, these things need to earn their cost of capital, which means you need rates to go much higher and stay there for many years to replenish balance sheets and start reordering it’s a cyclical industry, but you’re not just going to stop at cash break even, you need to pay down debt, you need to cover depreciation. And you need to earn a return on capital, if you assume you need to earn a 10, 15% return on capital in this industry, why can’t rates go back to 100,000 or 50,000 and stay there a few years?

Mike Alkin: So the shipping industry does not have a great reputation for management teams. I’m trying to be polite, for the last 20 plus years, I could think of how many shipping CEOs really are … People would argue that are not shareholder friendly sometimes. These are very closely held companies. They’ve been through some brutal cycles how did they resist the urge when the cycle turns to just go out and do what they do in the hotel industry, in any industry, in the cyclical industry, it turns, things start to get good and they start flooding the market again with supply. What’s your sense of where discipline is right now?

Harris Kuppy: There’s two parts to that question, in terms of discipline, no one has any capital so they can’t flood the market. You need equity to buy a vessel there is no equity available to anyone you need another six months or a year where for the first guys have enough equity built in their balance sheets that can start making orders again. It’s a ways out and then it takes two years to deliver a vessel. Three years of lifetime in shipping. Remember you have …

Harris Kuppy: I’ve read some studies on this, your average vessel last 20 years and it’s assumed that only six or eight quarters in those 20 years the vessel is actually profitable. You usually get two cycles in the lifetime of a vessel and they last between three and four quarters, age maybe a little more. And that’s all you get a [crosstalk 00:37:01]. And when you have those periods, those six to eight or maybe 10 quarters, whatever, I’ve ready a few studies on this when we talk about excess profits, we mean excess profits.

Mike Alkin: Just crushing it. When they do, they have to. I was telling before you got here, a friend of mine said to me he’s a bank analyst, 25 year hedge fund guy and he’s looking at uranium and he’s like, “I got to tell you, I’m not sure these are great businesses.” I said, dude, “What are you smoking?” Like of course they’re not great businesses, none of these cyclical industries are great businesses these are deeply cyclical it’s human emotion. It’s supply and demand, it’s over capacity it’s under, it’s under supply and you’re playing the cycle and he’s like, “Okay, I got it now. But that’s the thing, they’re not great businesses and like you said a handful of quarters they have to over earn because for those periods where they’re struggling.

Harris Kuppy: When they over earn, it’s not unusual for them to make 50% return and equity in each quarter. In one quarter, 50% return on equity, maybe even a hundred percent return on equity. It’s not unusual to do that multiple quarters. Remember you have operating leverage on top of financial leverage, so when things are good, they’re amazingly good. For people who saw the crypto bubbles of the last two years where, things went from some silly price to some other silly price because it’s all made up. I kept telling people wait until you see a shipping bubble, it’s different orders of magnitude even more crazy than crypto.

Mike Alkin: It’s interesting when as an investor, I’ve learned over the years that you don’t have to own great businesses Because Buffet, obviously every, [crosstalk 00:38:51]. If you own a crappy business that’s priced like it’s dead, it just has to gets back to crappy and you can still make a lot of money. And if you own an okay business that’s priced like it’s dead or crappy, it just has to get back to okay. Things are mis-priced sometimes.

Harris Kuppy: With any cyclical industry, you don’t know how far it’s going to go what you’re just trying to do is say, is this industry beat down? Is it inflecting? And then as the data points come at you, you can figure out how long are you going to ride the wave, back up and sometimes you only get 50% or a double at best, and sometimes you can make 20 or 30 times your money. I wrote the last bubble, the last shipping bubble started for me in 2002 after the Exxon Valdez accident, a bunch of global organizations mandated that all crude oil tankers have to be double halt and they set a deadline where basically everything else would be obsoleted so there was this massive ordering a double halt vessels, globally everyone ordered too many vessels going up to the deadline and they destroy charter rates and bankrupted everyone.

Harris Kuppy: They took on a bunch of debt or these vessels and then all went bankrupt. That was basically what happened from 1999 to 2002. In 2002 the bankruptcy abated, and you finally had enough scrapping of the single hole vessels leading up to the deadline I think was 2004 and it was a phase deadline that charter rates started responding and I was able to buy a couple of shipping companies at 20 30 cents a dollar of NAV. And some of these like frontline,

Mike Alkin: He means net asset value.

Harris Kuppy: Net asset value and some of these like frontline. Three years later my quarterly dividend was more than I paid for the shares and even front line was a 50 bagger from me in four years it’s amazing. Another company O.M.I, I owned a 20 bagger and it was only a 20 bagger because they sold out too soon. The company put itself for sale. When these things turn their violence … And going back to your question about management teams of course they’re terrible, they’re always greedy, they’re always corrupted they usually have minimal equity ownership.

Harris Kuppy: They’re incentivized usually by how many vessels they own it’s a pride thing and [inaudible 00:41:18] to say how many boats you have, it’s also a way to make money because you usually pay yourself a few thousand dollars a day based on each vessel you have as a management fee. because you have affiliated third party manager that leads the company and there’s a lot of conflict of interest here and you have to look past those conflicts and see where you are in the cycle. Right now we’re at the part of the cycle where all the Krupp Greek guys are in the open market buying shares personally, all the companies are buying back stock. Some of the most egregious guys like Georgia Kahanamoku, from dry ships he just took his own company private-

Mike Alkin: He did an MBO right man? what sign is that signal?

Harris Kuppy: A friend asked me, “Harris what do you think of the price did he get a good deal?” I go, “Of course he got a great deal”, and my friend goes, “Well, how do you know?” I was like, “I don’t know, but this is a guy who destroyed his company issued shares and you just bought it all. He must’ve gotten a great deal.” It’s just common sense. The other thing about, thinking about shipping is that unlike something like property where changes in asset value or slow and gradual, you could have vessels appreciating price very rapidly if charter rates go up. So you have situations where, Cape Capesize a vessel, it’s 50 million to build say today. I don’t have the exact numbers in front of me, but I think it was worth about 150 million in 2007 so it shows you what can happen to valuations as charter rates go up, and then of course, as charter rates went down the vessel depreciated in price, there’s probably went from being worth one 50 to 30 million a few years later. So you have this asset value that’s appreciating and depreciating levered three or four or five times, plus you have operating income. It’s just pure leverage, which is why you have these 50 peddle, these 30 and 50 fold moves all the time in shipping sectors.

Mike Alkin: So we’ve talked about I.M.O 2020, and what it’s doing, we talked about different sectors do well at different times. Is IMO 2020, though does it blanket the whole shipping industry because-

Harris Kuppy: The whole industry. It’s going to be a gaining factor for everything from [inaudible 00:43:35] to Capes, to LNG. Just everyone has to comply on Jan one. And I think there’ll be a few months of chaos because certain ports don’t have the infrastructure, they don’t have the right fuels. It’s worth noting that low sulfur fuel is not natural fuel, it’s a blend of different fuels and various vessels, well most vessels have engines designed to burn a certain fuel blend and I think there’ll be some mistakes where people put blends in that don’t work with the vessels. There’ll be a lot of problems and chaos and shipping is great because disruption increases charter rates because you have a cargo that needs to be moved and if the vessel you’re expecting isn’t there, you have to pay for a different vessel to move your cargo. Remember, you’re moving cargo is halfway around the world and the total cost of moving it is fractions, usually less than 1% of the value of the cargo. So you can pay up one, two, three times. It doesn’t really matter. You just got to move your cargo where we used to go.

Mike Alkin: What impact has this had on the refinery industry? IMO 2020.

Harris Kuppy: He might be going above my pay grade here, but there’s been a lot of capital investments into refineries to get ready for low sulfur fuel. You’ve also seen big changes in trade flows. Oddly America produces a lot of light sweet, yet most of our refineries are designed for Venezuelan crude so what that’s done is it’s taken a tanker rates up to begin with because since Trump put tariffs on … or basically stop trade with Venezuela, we’re searching other places further away for Venezuelan crude and we’re exporting our light sweet crude to people who are wanting that to refine it. So, despite the fact that America produces a lot of crude, we’re actually sending our crude very far away and we’re looking very far away to bring crew back home. You have refineries, which are multi-decade operations making multi-decade capital allocation decisions.

Harris Kuppy: And then something like the Permian happens or something like the trade war happens or something like the issues with Venezuela it disrupt shipping and that’s why … The other reason I’m so … there’s three reasons I’m so bullish right now, one is obviously because financing has been cut off as a new vessel building. The second reason obviously is IMO 2020 and the third reason is the trade Wars are amazingly bullish for shipping. Anytime you disrupt trade, it’s good for shipping.

Mike Alkin: Talk about that because people’s initial reaction is that there’ll be less shipping. So talk about how you see it unfolding.

Harris Kuppy: What do you use a statistic because I find this interesting. A number of shipping containers going into long beach, the port of Los Angeles every month, this year it’s comp negative. In July I comp negative nine, so it’s comping very negative in terms of total trade based on that data, you would probably expect that a container vessels would have charter rates down quite a lot because volumes are down a lot. Instead charter rates are at seven year highs and this is a function of IMO 2020, this is a function of a trade route disruption because vessels and now going to Vietnam or other places that don’t have the port infrastructure ready to load the vessels. Even though you’re having a situation where the total number of containers is down 9% in July, in the month of July, we made new multiyear highs and container vessels. It’s not just the volume to trade that matter, it’s the number of ton miles, it’s port disruptions, it’s anything that disrupts trade and creates bottlenecks as good for rates,

Mike Alkin: Liquid gas tankers what do you see there?

Harris Kuppy: I’m not particularly bullish in LNG tankers right now, I think everything will be good because of IMO 2020. And I guess my concern is that there’s been a lot of reordering of LNG vessels and it’s much easier to build an LNG vessel than it is to build a liquification facility. And I think you’re going to have a mismatch where the LNG vessels are probably not on time, but a few months late and your liquification facilities might be two, three, four quarters delayed. And then you’ll have lots of access festivals at a time when the spreads between Nat gas in Asia and Europe and in Gulf of Mexico are contracting which gives a less arbitrage profits, less trade profits, there’s kind of glut of NAT gas globally.

Harris Kuppy: And you’ve had a lot of these stranded NAT gas projects that have come online with their own liquification facilities called FLNG and it’s just created this sort of glut of supply. Demand is somewhat down and you have a lot of vessels coming. It’s one of the sectors that has the most vessels probably actually the most, and there’s a lot of demand coming too, but I just think there’ll be a mismatch in timing there. I have no exposure let’s put it that way.

Mike Alkin: I know you have fund limits and how big a certain sector can be. Where does shipping rank in your fund?

Harris Kuppy: We’re at the limit, the good thing is the way I set my fund up is that on entry we can go to the limit and then I have no requirement to cut it back. And with shipping as a sector that can multi-bagger upside I’m just going to let this one ride. I think there’s just massive upside in some of the sub sectors.

Mike Alkin: What do you think about draw-downs when you look at a cyclical like that. Even though everything fundamentally is turning in its favor, with a headline here or their stock to pull back 10, 15, 20% how do you think about upside downside when you’re thinking about these types ?

Harris Kuppy: Well, when the sector is inflecting, the chart will tell you it’s inflecting, you’re going to have a big long base. And then we start breaking into the top of the base. And when the news and the truck pattern are converging they both are doing the right things, then you get long. And there will be pullbacks, there’ll be some nasty pullbacks. In the 2002 to 2007 bull market, there were multiple 50% pullbacks. That’s life. You, deal with it. I always tell clients of mine that let’s take a stock that goes from 20 to 60 and ends the year at 40, my client might say, “Wow, you just lost a third of my money”, and I’m going to say, “No, I doubled your money.” You know, we are both right and if you can’t handle that sort of pull back- [crosstalk 00:50:26] I go buy a mini bond.

Mike Alkin: Anything else in cyclical land that has caught your fancy lately?

Harris Kuppy: You’ve kind of pulled me across the line on uranium, I think you’re right, I really do. I don’t know what happens, but I think you’re right and I own some uranium participation and I think it’s going to be very good for me. I think it might just take a little longer than we both think.

Mike Alkin: It’s interesting we’re a little different on that just because I have some catalysts that I think in the fall with the with contrary, but let me tell you what’s interesting in all of these terms, It’s always, sometimes you don’t even see something coming and it’s the catalyst you didn’t anticipate. That’s [crosstalk 00:51:20]

Harris Kuppy: So take a dry bulky, this is a sector that I’m not particularly bullish on because there’s been a lot of supply of dry bulk, especially Cape and … Go back with a dry bulk you have dry bulk [crosstalk 00:51:38]. Dry bulk is moving bulk products, it’s mainly iron ore and coal, but it’s agriculture, it’s cement, it’s scrap iron it’s anything bulky and there’s lots of classes of bulk tankers. But the big piece of the trade that people always focus on is iron ore and cooking coal. Historically been transported in something called a Capesize vessel, and there’s a new class of vessel called Newcastle max, which is bigger and it’s obsolete to the Cape size. And so, there’s been always this concern that Cape size rates would be crushed by these new, bigger vessels and they have been for the past few years. People have been very bearish on Capesize particularly because there’s a lot of delivery in 2016 which led to a lot of scrapping in 2016 of older vessels.

Harris Kuppy: You don’t have a lot of older vessels right now that can still be scrapped. So people have been very bearish to these, and for most of the last year they were traded at five, seven, 8,000 a day and it cost you 10,000 a day to operate the vessel before you have depreciation and interest costs. So everyone’s losing money. And when a sector starts getting tight, and I have a couple of friends in the shipping industry that actually own these sorts of vessels, there’s this thing called gaping where give gaps in trade flows and suddenly someone trying to ship product is willing to pay up dramatically more because there is no vessel nearby.

Harris Kuppy: And so you have this thing called gaping and I always have people flag it for me because it’s important, it shows that it turns about to happen. So despite the rates being in the toilet my friends who own these vessels were starting to get really bullish, which means the industry starting to get a little tight. And then going back to your point, you never know what the catalyst is. They started putting these scrubbers on about a month ago and everyone budgeted 30 days. Well, it turns out it’s more like 50 or 60 days and it’s not just- crosstalk 00:53: Big piece of capital equipment that no one has any experience installing. It takes longer than expected, but it’s not just that, it’s that they had very clear timelines. You’re going to show up at this Korean port on this day, the next day you go into dry dock and 30 days you were ready to go for repositioning for a cargo.

Harris Kuppy: What it did, is it destroyed everyone’s schedules and everything and you have hundreds of vessels queuing outside Korean ports as opposed to moving dry bulk around, which is why a Cape side vessel went from 5,000 a day to like 33, 34 a day and the sector it goes up another thousand or two every day because more and more of these vessels are just queuing at Korean ports because they have no shipment schedule. They weren’t trying to schedule anything, it’s too expensive to reposition them back to Path or somewhere else. This is going to sit there and wait and you just have this giant … having the technical term is cluster fuck [crosstalk 00:54:36] but you’d never know what makes a second ago tight. And then the issue is if you have steel mills that start drawing down in inventory, then it’s not like this, this short term thing.

Harris Kuppy: And then it’s just done when everyone gets their scrubbers, you need to still replenish all his inventory. So it’s probably going to get tighter. Weights are probably going to go higher before it starts normalizing out. And we’re only in like the second or third innings of installing scrubbers. This might go for two years and you might make enough money in the next two years to pay for all your boats. Which is amazing when you think about it, you look at a piece of property and you don’t even get a four or five or six cap, but it’s 25 years to pay it back. And here you have a Cape size in it depending where rates go, you might pay the whole thing off in a year.

Mike Alkin: I know we’re going to talk about one of the names you like which is one that I’ve actually written about in my newsletter, but I think is very interesting that you like and you turned me on to, it was Scorpio tankers. I think it’s one of your bigger possessions. Why don’t you talk about Scorpio?

Harris Kuppy: So that’s my largest possession I’ve been following Scorpio almost since the IPO in 2014. It’s always seemed like a great idea I just knew the timing was wrong because I went through the double hole tanker trade in the early two thousands. A Scorpio is a product tanker, they are the largest product tanker fleet globally. The youngest fleet, about two and a half years. Their whole fleet will have scrubbers on it by the end of next year. Product tankers move refined products around. And the reason it’s so interesting is that globally, you going to need about 3 million barrels a day more a low sulfur refined product starting January one. And so you’re going to have this shift where vessels don’t burn high sulfur so you can have a lot less demand for dirty tankers. A lot more demand for clean tax, which is what a product tanker is.

Harris Kuppy: And depending on whose research you read, it’s somewhere between five and 15% increase in demand because it’s not just the 3 million barrels that needs to be moved it’s all the ton miles you don’t, you’ll think of it in terms of a volume moved, its ton miles moved. So you need to resupply all these ports, you need to build up new trade routes that don’t exist today. You’re going to have bottlenecks and disruption and general chaos. And so when you have that change in a sector where you haven’t seen much new supply coming over the next two or three years rate should do something crazy. I knew from my double whole tanker experience that if you played it too soon, you get hurt. They ordered a lot of product tankers in preparation for this and rates were in the toilet for three years.

Harris Kuppy: And anyone who owned a product tanker lost a few thousand dollars a day, every day, 365 days a year for multiple years. Companies like Scorpio had to raise capital multiple times to keep the lights on, and then it started turning that last November we saw a turn where rates went from losing a few thousand a day to making 10 or 20,000 a day. It was a short term blip, but it showed that there was an evening out of supply and demand because there’s very little supply calming right now just because people have lost money at this for so many years, they stopped ordering. You also have an issue where a lot of older vessels, because the coatings have been scrapped at a younger age or if not scrap, they start trading the dirty markets. So you have basically a 15 year old age for these vessels versus 20 for other vessels.

Harris Kuppy: And so you’ve seen a bit more obsolescence. And what’s going to happen on January one is demand should increase quite dramatically. What will you see in shipping a lot before you see a super spike is you see a few short spikes. So you saw one in November and December, you saw another one this spring where you went to five, six year highs and rates. On average this year rates are about 10,000 ahead of last year. So you take like an LR, it’s doing about 20,000 a day on average versus 10,000 a day last year. So it’s actually making a bit of money not a lot, but it’s making a bit of money now. When you start comping positive year over year, you know, things are starting to get better.

Harris Kuppy: But this is all getting better before IMO 2020 kicks in when demand’s going to kick in quite dramatically for these vessels. My thinking is that you might see charter rates go to some crazy number. Why not in the first couple months of disruption? Why can’t charter rates go to 100,000? Back in 2007-8, they were there, why can’t we go back there and stay there for a couple months? Maybe we can stay there a few quarters. I don’t really know. But at those rates, Scorpio might be able to earn $25 stock today why can’t Scorpio are at $50 this year? It sounds crazy to stay, but why can’t it?

Mike Alkin: Everything’s centered in a spot basis. [crosstalk 00:59:46] throughout shipping and Scorpio and others. How do you how much ever gets locked up through contracts and a longer term stuff?

Harris Kuppy: Actually, most of the fleet is locked up through contracts. It’s kind of rare to be spot, it’s kind of rare to have a company that’s all spot. The danger of being all spot is that if you guess wrong, you can lose a lot of money. Which what happened to Scorpio, they were bullish too early and they raised capital every year, once a year and diluting everyone. But most shipping is done on a multiyear contract or their contracts sometimes are fixed contracts. Sometimes they linked to an index and partly fixed a lot of variations. But it’s rare to go on spot. I don’t have exact data in front of me as to … but my understanding is that a good chunk of the global fleet is fixed.

Mike Alkin: There’s a way to figure out uncovered contract demand looking forward. Like in uranium I could look at the utilities and know by region, how much uranium needs are not covered by contracts. And when those contracts are rolling off, what kind of visibility do you have on that?

Harris Kuppy: I’ve never seen any research on that actually. I do know that if you look at where contract prices, so take an M R right now it’s doing about 12,000 a day. And if you were to sign a one year contract, you’re going to get around 19 to 20,000 so the contract price is quite a lot higher than today’s price. Remember the guys signed these contracts, they’re the Vittles and Trafigura and Glencore’s of the world. They tend to be the smart money. So if they’re willing to pay you 19,000 they think they’re getting a good deal. And right now they’re getting 12 so they think at some point in the next 12 months it’s going to be dramatically above 19 to offset the fact that at least this month they’re below 19.

Harris Kuppy: It tells you where the forward market is and the forward market tends to be rather accurate not so much that the average over the next 12 months will be 19,000. but it tells you the direction people are thinking. So if the forward market is below the spot, it tells you people expected lower above. And you can see the forward. It’s been creeping up for many months now while spots had a few spikes, but it hasn’t really been creeping up yet. And so it’s just like an indicator of what’s going to happen.

Mike Alkin: So you mentioned a lot of the shipping industry tends to be a Greek owned. I don’t know what, but a fair amount. When you think of shipping, you think of a big Greek families with dynasties. Shift gears for a second. I know that you had mentioned to me in the past that you think Greek’s interesting as a country from investing standpoint, what’s the thesis there?

Harris Kuppy: Outside of Argentina, I don’t think any other country outside of wartime has destroyed their economy as much in the last 90 years. Greece joined the EU, they got really cheap debt. As a result, they went crazy and spent a lot of money, borrowed a bunch of money from everyone who would lend them money. And in 2008, they went broke and then they went broke again and they went broke again. They got bailed out, they went broke. I forgot how many bailouts that were, but effectively Greece, is small country, all the banks lent to all their buddies.

Harris Kuppy: Their buddies refused to pay him back. [crosstalk 01:03:19] But this just giant mess created with too much debt. And the ECB came in and they say, “We’re going to fix this problem”, grab austerity on top of debt. And all that did was basically distress at values, destroy businesses. And you had this deflationary spiral where the GDP lost 25% over a 10 year period, which is amazing when you think about it. Wages went down and employment went to like 30%. The Greeks didn’t help because about halfway through they decided they were going to try Drachma and then they changed their mind and they say they’re going to try it again. They had an election, they threw some Molotov’s at each other, no one want to put money in the banking system … All the capital basically left the banking system. They had exchange controls. It was just a giant mess of a country. And the stock market’s down.

Mike Alkin: Wonderful people in beautiful country though.

Harris Kuppy: Oh, I love it there. Great food, everyone’s friendly everyone’s drunk at all times. But the stock market’s down something like 90 something percent and the banks all had three bailouts. And so I went there two years ago looking for opportunities and it was all bombed out. And I just had this feeling that I wasn’t ready yet, just because something’s cheap doesn’t mean anything, need a catalyst, and there was no catalyst. The government was still doing stupid stuff and you had no idea where the ECB stood or anyone else stood in terms of what was happening. But while I was there, I had this odd experience and that I met the very senior guy from the opposition political party New Democracy and he invited me to their office. I still don’t know why.

Harris Kuppy: And we talked for about two, three hours about economic policy. And I came away saying, if these guys ever win an election, I want to buy as much Greek exposure as I can. Their whole platform was basically get rid of dumb regulations, cut taxes, and stop a bunch of projects that have stalled out highway and power plants and all this other stuff. And so about a month and a half ago, two months ago now they call a snap election and I looked at a quick snapshot of where the polling was and it seemed very likely that New Democracy is going to win. And I bought a very large position in the Greek ETF, I think it was up 10% of the day they announced the snap election and I didn’t really care. I just bought it and I’m up about 10% since then a which is reasonably good, I think considering that with the rest of the EM’s been obliterated.

Harris Kuppy: I think most of the EM’s down like 20% since then and am up 10. So had EM just held in. I’d be up a lot more. But New Democracy, won they’re doing all the right things. Did July government budget data came out tax revenues of 8% a year over year, which is kind of crazy when you think about it because Greeks don’t pay taxes. The economy is doing quite well they finally lifted exchange controls last week. The Prime Minister has been pushing around the edges, but he’s lowering the tax rates from I think 28% to 24%. And the Germans aren’t really happy with him, but they seem to be letting him do what he wants, which really is the first step in terms of, I think the rest of the Eurozone following, they’ve taken monetary stimulus as far as possibly can go. I don’t know if you go from minus 40 BPS to minus 60 BPS or minus 100 BPS, it’s going to do anything else than any fiscal stimulus.

Harris Kuppy: And I think Greece will be the litmus test for what can be done with fiscal stimulus. But as they start fiscal stimulus in the tax side and also infrastructure I really expect a great stock market to come back quite a lot. So as I said, it’s down 90%. I’ve always found the most money is made when somebody goes from down 90 to down 70. Yeah. So you triple your money. I have this saying, when it goes from really shitty to sort of shitty is the most profitable part of the cycle. I don’t expect Greece to be Singapore. Don’t get your hopes up too high. It’s still Greece but I think there’s going to be a great run here. Look, if Argentina, if the Argentine ETF in US dollar terms could more than double during a time when Macri basically accomplished nothing in his presidency and had runaway inflation and just made a mess of that thing. Why can’t Greece at least double? they’re in euros.

Mike Alkin: How do you get your ideas, which drives your process? Talk about your investment process, your idea flow kind of work you do to get you comfortable at something.

Harris Kuppy: Idea generation isn’t very hard. I am amazingly lucky in that my friends were all smarter than me-

Mike Alkin: I thought I was who had that idea?

Harris Kuppy: How many times at midnight have am I texting about uranium? So having really smart friends-

Mike Alkin: I thought I was the only one who also had smarter friends than me.

Harris Kuppy: I get most of my ideas from my friends, my friends share. I always say that the best way to make money is going out to beers with a friend and just asking them what they’re down on that they still believe in. And if I could buy in at 20 or 30% less than someone really smart paid I’ve already got a built in edge and that’s usually the first part. And especially because there’s so much in this earth to follow and keep track of I just don’t have the bandwidth. So if my friends have done most of the work and they can point me in the right direction and save me a month of work by just giving me a 10 key presentations to read or … It just makes it so much easier. And I hope to return the favor in shipping because I know most of my friends don’t look at that. But that’s the best way to find ideas outside of that. Look at what’s down a lot, go to a bunch of a message boards, value investor clubs, seeking alpha, those sort of places. I mean I just read religiously. I work 15 hour days and all I do is read all day. [crosstalk 01:09:26]. I travel a lot to talk about that.

Mike Alkin: What do you do? Where do you go? When you go somewhere, you got to look at companies, you got to talk to, administer officials that you set it up, do you go and just wander and get a feel? I know you were just in a [crosstalk 01:09:42].

Harris Kuppy: Every trip is different. I mean, I like to do a disaster travel. I’m usually going to see civil Wars and revolutions. [crosstalk 01:09:54] the only civil war I’ve been to actually is Ivory Coast. So I got held up at gunpoint by some seven year old boy soldiers and I decided that I don’t want to do that again. But I travel a lot, I have a lot of friends, so I usually just piggyback on their travel ideas. The trip to Greece originally was my very good friend Sasha who said, let’s go to Greece, it’s bombed out and I think it’s going to recover soon. I said, “Sounds good.” And we all went through our roll of decks, and I had a few people I knew in Greece, he did too. And pretty soon you have a week of meetings in Athens, which in hedge funds that are increased banks increased it’s amazing especially in your country that’s so bombed out that you don’t have a lot of hedge funds visiting anymore.

Harris Kuppy: And the ones that are visiting, usually short sellers that when you come and you say, “Look, we’re looking to buy stuff.” It’s amazing, who’s willing to meet you? Like, no, my fund isn’t that large. But I met with all four systemic banks and I met with the CEO and the CFO. Think of the access we got. It’s just amazing. We met with the number two guy or so, in a New Democracy. They were just so surprised we were there. I was just in Cyprus a few months ago, I met with bank of Cyprus. They were amazingly open and to take a meeting as long as I wanted. I’m always amazed at how much time people would give you of their time. But I usually travel with a couple friends.

Harris Kuppy: The danger of go to a meeting by yourself is you walk out and go, man, that was great. You need a friend to kick it around with you because about 20 minutes later you’re like, so what did he mean by that? You should have two or three people, someone will find the flaws in the meeting. And besides, it’s just much more fun that way because when the meeting’s done, you type up your notes and you hit the bars and you go discover a country. Because Greece isn’t to me just the banking system, it’s everything else that’s going around there because the banking system needs the rest of the economy to support it. So you have to get a sense of what’s happening. And I always find the best information comes from the local bartenders. They know what’s going on, you just talk to them taxi drivers, [crosstalk 01:12:15] and you just learn. You just figure it out.

Mike Alkin: What any countries, any regions in the world, you won’t invest in.

Harris Kuppy: I will invest anywhere.

Mike Alkin: What’s your worst investment like? Because I have plenty, what do you learn from your… [crosstalk 01:12:33]

Harris Kuppy: It’s not a mistake yet because it’s not crystallized, but [inaudible 01:12:42]. A company that I own shares in [inaudible 01:12:51]. It’s been my worst investment this year by far. I think it’s down like 70% from where I bought it. The lesson was, it’s really, really cheap, but the macro hasn’t worked with me. I took this view that they’re fully hedge 2019 and 20 on NAT gas and 21 and 22 they’re partly hedged, so it doesn’t really matter what happens, the price in that gas because they have zero exposure to it. And what I think what I missed was that most people, in the stock market are retarded and they’re so focused on tick for tick with Nat gas, especially with all the computers that just traded all like it’s one, Nat gas derivative the computers missed the fact that these guys are hedged, no one else’s.

Harris Kuppy: And so the stocks down quite a lot. I think my mistake was overthinking it and saying these guys are going to be okay and everyone else won’t. What I really should’ve done is wait until everyone drops. They’re all going to drop together with Nat gas and wait until the first couple of bankruptcies happen like I did with shipping and wait until a supply starts to get constricted a little and then gone to the one guy that’s a hedged and I was probably … I am nine months early in the trade and I think that’s the mistake is you got to wait until it’s actually turning. You can’t just go in there and say these guys protected. So I don’t really care. What happens is the underlying, you have to wait until the underlying itself is turning to because you’d get a better entry price.

Mike Alkin: It’s down 70% I don’t use StockWatch, I think they’re ridiculous personally. On shorts, I’m okay with that, but on long if the thesis is right, you get a draw down and you’re buying a cheaper if your thesis right. How do you think about that managing risk?

Harris Kuppy: So my view is you set a certain percentage of your portfolio for the position you want to own. And as it goes down you take it back to that waiting. So let’s say you set a stock at 10% of your portfolio and the stock drops 20%. Well you could add total basis points, more of your portfolio to get yourself back up to that a thousand dips or more, a day, which means you going to always be averaging down. It works marvelously when the stock recovers because you’re taking a cost bases way down. And then on the first nice recovery, you’ll take some off the table, get your average weighting, much lower it works terribly if a company goes bankrupt, you’ll end up dumping your entire portfolio away.

Mike Alkin: But at least you know where it could go to zero, right?-

Harris Kuppy: And it doesn’t matter how much cash is in a company, it doesn’t matter what you think you do and your due diligence this fraud and stock market stuff can always go to zero. You never want to bet your whole portfolio on anything. And so you do this with a scale and you say, “I’m going to keep averaging in and you really hope it doesn’t go to zero.” And part of that is your due diligence to make sure the balance sheet is robust enough to survive where it can go wrong. And it’s finding obvious points where it makes sense, where you have some sort of catalyst to add. Sometimes you scale it and every 50 cents down we’re going to add another 100 BPS, but much more likely it’s you wait for some sort of catalyst where you think there’s a reflection coming.

Mike Alkin: How do you start your position sizes and what’s a medium size and a big size position for you?

Harris Kuppy: I run a super concentrated fund. I do something that no one else does these days because … Most of the asset management industry basically tries to create the ETF and track whatever index they are because they don’t want to have a tracking error and they don’t have draw downs. So they have a very diversified book and they effectively have the no alpha. They have the index minus lag from fees. My portfolio is six to 12 of my best ideas. So is there a concentrated, my average position size is 10 13% around there. I do not do positions less than 5%. I just don’t believe in it. The only time I’ll ever have less than 5% it’s because I never got my full position filled which gets, I’ll usually just toss it because I’ve learned that position number 13, I don’t have the bandwidth to keep track of something bad will happen and I’ll miss it.

Mike Alkin: And if you are spending a lot of time on it, that means there’s something wrong

Harris Kuppy: I’ve found the positions that you spend the most time on are usually the ones that you’re totally wrong on. Yeah. It’s funny … Shipping is 35% of my book right now. I put almost no time into it. I checked the- [crosstalk 01:17:31]. Also norm. So, I check the charter rates in the morning and I check some news from a couple of shipping newsletters and I’m done. I don’t think about shipping because it’s going in the right direction. I know I’m right. Somebody like Antero, I spent a lot of time trying to figure out why it kept going down and keeping surprises. There was a NGLs were blowing out then there was based in differentials. It just stuff kept happening. But go back to your question, I run a very concentrated position book. You don’t have a lot of room for many errors when you only have six to 12 names.

Mike Alkin: All right, so let’s play a little word association. We got to wrap this up, Garrett. So Favorite country to travel to?

Harris Kuppy: Oh, I love Iceland, I love Greece, New Zealand three best,

Mike Alkin: Best investment ever made?

Harris Kuppy: Uranium.

Mike Alkin: What year? 2004.

Harris Kuppy: 2003 … I was looking back on this, I think my worst one was a 10 bagger, but some of them were like 30 and 50 baggers. I own a few million shares of Laramide. There was this guy … Is James Dines still alive.

Mike Alkin: Well yeah he is. The newsletter guy?

Harris Kuppy: He was like 90 back then. Well he came out with an alert and Laramide has been kind of a laggard and I had a few million shared, like 5 million shares trailing a dollar. It came out an alert to subscribers. You have to get into [inaudible 01:19:10] and the stock was indicated at 100. It’s just became like a dollar I believe, shares, and it was halted for almost two weeks. They couldn’t not to do any the exchange. I think I had died of it, I think it opened that like a seven or something, but it was still like, I don’t know [crosstalk 01:19:28]. Like multiple billions of shares here.

Mike Alkin: What’s your worst investment?

Harris Kuppy: I’ve seen some, junior gold miners go to zero.

Mike Alkin: That’s not uncommon. Who are three people in the world you’d like to have dinner with?

Harris Kuppy: I might take you longer. I don’t really know.

Mike Alkin: Alright. Where do you hang your hat?

Harris Kuppy: I live in Miami.

Mike Alkin: How long have you been down there?

Harris Kuppy: 15 years now.

Mike Alkin: You like it?

Harris Kuppy: South beach is great that’s great.

Mike Alkin: What keeps You up at night portfolio wise? Investing wise?

Harris Kuppy: So I have a small little hedge right now. It’s a cool percent of my book IWM puts, and I think it’s like 300 BPS or something. And that 300 BPS is the scariest part of my book. Even though it’s puts, because I hate being short and my long book, I don’t really worry because everyone’s profitable. They all have big buybacks in place and they’re all growing fast. Good things will happen to them. I’m worried about the short book that those 300 BPS go to, put heaven because Trump tweets something tomorrow.

Mike Alkin: Thoughts on Tesla Elon Musk.

Harris Kuppy: Let me take this in a different a different direction than other things I’ve said on Tesla, I give him credit actually, he’s taken this fraud a lot further than I ever thought was possible. What other people would have just jumped off the boat and sold them their stock and gone into hiding in Mexico. He’s created new and more creative frauds to overlay over the existing fraud and he’s found what’s the market cap like 30 billion of these he’s found like 30 billion of the dumbest money that ever existed. I mean these are guys who even SoftBank wrote off as being, too dumb and they just believe anything he says. I just don’t get it. I know it’s going to die. I just don’t know when but I have 2021 paper in June, so it’s going to cost her about $10 billion between now and then between operating losses and refinancings. And that’s a lot of money even in today’s low interest rate world that he’s needing to find.

Mike Alkin: Is there anything he says that you believe, business wise?

Harris Kuppy: Business-wise. no, he just compulsively lies. I don’t think he even knows the truth most of the time, which is somewhat odd. The holding’s fake. It really is. I just don’t get it.

Mike Alkin: All right man. We’re going to wrap it up. Thanks for coming in. I appreciate it.

Harris Kuppy: Thanks for having me on

Mike Alkin: Well, I hope you enjoyed the hour plus we spent with Kuppy. He was kind enough to come into t to the office and sit here while we recorded and now, he and I are going to go have a beer. So have a good week and we’ll talk to you next week. Thanks.

Announcer: The information presented on talking stocks over a beer is the opinion of its hosts and guests. You should not base your investment decisions solely on this broadcast. Remember, it’s your money and your responsibility.


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