Letters like this always have a disclaimer about how this isn’t investment advice. This article talks about a literal trade we have on. But it isn’t investment advice. My real investment advice is don’t just do a trade because some dude on Substack likes it, do your own research.

A laundry list of hedge funds blew up this week. It’s a perfect illustration of the incentive problem that so many funds suffer from. These funds blew up from an event that, while big, was obviously possible and obviously should have been in their risk models. Too many PMs take a lot of risk, and if it works they clip fees, and if it doesn’t work it isn’t their money. “Heads I win, tails you lose.” Also, if you want to YOLO AI stocks, just do it yourself and don’t pay a fund high fees to basically replicate the SOXX ETF.

Whenever there is market turmoil, the natural question is “did this create opportunities?” For individual equities it is usually hard to tell. A stock that falls a lot - especially after it has just gone up a lot - isn’t necessarily cheap. Anytime a stock falls 90%, that means it fell 80% and then another 50%. But sometimes it isn’t hard to tell. These are the rare cases where markets dislocate to such a degree that you can buy a thing for $100 in one location and sell the same thing for $110 somewhere else. This is as close to free money as exists in markets, which is why it is rare.

How can it happen at all? There is no law of the universe that says that prices in markets need to be efficient - it takes actual participants to do the buying and selling and push prices towards efficiency. If that buying and selling is impeded, then anything is possible. During the Global Financial Crisis, everyone was pulling in their horns and tons of arbitrages popped up. If you had the balance sheet, there was literally free money for you to take.

Which brings us to today. The main nuclear power ETFs have been aggressively sold as part of the broader AI selloff, and are down ~30% in the last 3 months. Are the companies in those ETFs now cheap? Our view is no. But, there is something else tucked into those ETFs that has also suffered from the same outflows. It’s called the Sprott Physical Uranium Trust. The Trust is pretty straightforward - it’s basically a warehouse full of uranium. If you want to know what it is worth, you can take how much uranium they own and multiply it by the price of uranium. A small haircut for administrative costs is in order, and then ta-da, you have a fair value estimate.

Because of the “baby with the bathwater” selling, today the Trust trades at a 16% discount to the value of the physical uranium they hold. These dollar bills cost 84 cents. Does this mean you have guaranteed returns? No, definitely not. Again, efficient markets are not a law of the universe. The discount could continue to grow and anyone who buys it today could lose money. But I will say that this is the 5th time since the Trust was created that the discount has blown out to this level, and in the previous 4 cases the 1 month return was over 10%. We love the risk/reward and are positioned accordingly.