17 Mile 2.0 Strategy Note 6

17 Mile 2.0

Strategy Note 6

August 18, 2017


PORTFOLIO ACTIVITY

Since August 3, positions in VIAB, TEVA, TRVG and EGN were initiated (VIAB was a re-initiation); the SNI position was closed; and the SPY short position maxed out. As of today’s activity, the portfolio looks as follows:

  • Longs: 100%
  • SPY Hedge: 100%

DISCUSSION

With S&P 500 breadth continuing to negatively diverge from the index itself, and the failure of a weak gag rally over the past week, it is pretty clear the market is in correction mode and likely on its way to 25% 50dma breadth.

So while I hate to add to a short “in the hole”, I like the odds here.

But nonetheless, interesting individual opportunities are cropping up left and right beneath the surface, so it has been tough to keep a high cash balance given the tendency for bombed out individual stocks to bottom out before the index. As such, with today’s move into EGN, the portfolio is fully invested on the long side.

If the S&P 500 continues down another 5%, with today’s hedge position that should provide another 5% of cash to deploy over the coming weeks.

* * * * * * * * * * * *

Energy is really, really bombed out at the moment, with sentiment around the sector epitomized no better than the Economist’s recent cover page:

So while I have been toying with the idea of a “dirty” E&P basket, today’s WSJ article on Elliot’s involvement in EGN usurped that plan. Key to the thesis is the following governance structure, as outlined in the closing paragraphs of the article:

“Energen is a rare, large publicly traded company based in Alabama, and the activists are looking to tap a little-used legal route in that state to change the board. Alabama law allows an investor with a 10% holding to call a special meeting and nominate directors to fill vacancies on the board.

“Corvex could be free to nominate six directors to expand Energen’s nine-member board to the 15 allowed in the company’s corporate rules. The activists could also run for more seats at the regular annual meeting next year, opening up the potential for a majority change in the next nine months, despite the fact that Energen doesn’t have annual elections for all its directors.”

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