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The Millennial Queen

Posted by Joel in The Axion Report

May 30th, 2011 | 3 Comments

Our author, a recent graduate of a University in California, further defines his generation and the “Millennial Queen”. His pick is well thought and deserving of the title.

As a Manager of a Macro-Trend Fund, the thinking and world view of the author, is important. I wanted to share the hope and aspirations of our future generations with you.

Joel Smolen,
Managing Partner Axion Capital Management, LLC

The Millennial Queen

After a discussion about the “Millennials” and the power and determination they exude, one may wonder who is “leader” or founder of that generation’s movement. Many big and powerful names were thrown out in my last article such as Mark Zuckerberg, the founder of Facebook and The Olsen Twins, the billion-dollar sister dynasty. However, I believe the “face” of the Millennials was a person who came after both of these people. She has no college degree, causes more controversy than Ralph Nader running for President, and is a self proclaimed “freak.” She is also estimated to be worth $110 million dollars and is one of the top philanthropists in their 20’s. She is Lady Gaga.

On the outside, Lady Gaga may seem like a strange pick for who I consider to be the “Queen of the Millennails.” After all, her credentials are less than orthodox. Get to know her a little more and you realize she is the perfect candidate. Many have compared her and her music to Madonna. In 2010 she was ranked by Forbes as the 7th most powerful woman in the world. She has been extremely financially successful but gives back much of her success to charities and organizations. On top of all of this she has been nominated for 249 awards and has won 116 including 5 Grammys. And she is only 25. However, what may be her most powerful strength is simply her multi-generational appeal. Her music transcends generations. Her music (although quite different) could be compared to U2, The Beatles and Michael Jackson in this way. Go to one of her concerts and on your left is a 22 year old man, on your right a 30 year old woman, in front of you a 40 year old woman and behind you a 10 year old boy. Did I mention her music is played in over half the world?

Lady Gaga is eccentric, outspoken and wild. She is also extremely intelligent, hardworking and caring. On stage she is one of the greatest entertainers around today and sells out every show in every city she plays. Behind the scenes, Lady Gaga is quite, compassionate and shrewd. She cares for others and gives back even more than she gets. Education is extremely important but she shows that tenacity, drive and love of what you do can be just as, if not more important. Lady Gaga may not have started the world’s largest Social Network or founded a multi-billion dollar company, but what she has done is none the less extraordinary and one of a kind. For me she will always be the Millennial Queen.

Written by Zach Norman

Thoughts and Trends in California.

Posted by Joel in The Axion Report

Mar 18th, 2011 | 26 Comments

The article below is the view of a recent graduate from a University in California, as he views the future and the trends which present all college graduate through out the world.

As a Manager of a Macro-Trend Fund, the thinking and world view of the author, is important. I wanted to share the hope and aspirations of our future generations with you.

Joel Smolen,
Managing Partner Axion Capital Management, LLC

The Millennials of California

                California is changing hands. Power is shifting. The leaders and innovators of the state are getting younger. No, these leaders, innovators and entrepreneurs have not discovered the fountain of youth, they are simply the generation known as “The Millennials” and they are on track to be the most innovative and successful generation ever.
So who are these Millennials? Well, a marketing or business book would define them as the generation that is somewhere between the age of 18-24 who were in their teens while entering the new millennium. On the surface, this generation may seem fairly unremarkable, let alone groundbreaking and innovative. Scratch a little deeper, and you may be astonished just how much your life is affected by all things “Millennial.”

Quite possibly the most famous young, innovative and successful Millennial is the creator of Facebook, Mark Zuckerberg. Zuckerberg is currently 26 and although is not a native Californian, he currently resides in Silicon Valley where he runs Facebook. What Zuckerberg created in Facebook is nothing short of astounding. He has created a social network of over 500 million people. If Facebook were its own country it would be the third most populous right after China and India. However, it is not the sheer amount of people on Facebook that makes it remarkable (although no one can deny having 500 million followers is something one should be able to brag about) but it is the fact that Zuckerberg has almost single-handedly given the world the power of connection. Facebook allows its users to search out old friends, relatives and colleagues, keep up-to-date tabs on all of their connections all the while making sure these connections are aware of minute to minute updates in one’s life. Zuckerberg’s Facebook could be called revolutionary. It is a fitting term too as it has been credited with being the catalyst of recent uprisings in Tunisia and Egypt. And if anyone thinks Zuckerberg is just a kid, and not a smart businessman, they would be quite wrong. In 2006, Zuckerberg was offered 1 billion (yes billion) dollars by Yahoo to buy Facebook. Most 22 year olds could only imagine this kind of offer in a dream, but Zuckerberg, being the smart, shrewd entrepreneur knew his company was more valuable than that. Facebook is now valued by Reuters to be worth 65 billion dollars . Not a bad business call from a 22 year old college dropout.

Zuckerberg is not the only young, successful, powerful leader figure in California. The list is substantial filled with big names, as well as little known Millennials. Mary-Kate and Ashley Olsen are native Californians and still hold the title of being the youngest self made millionaires. They became known for their cute, rambunctious antics on “Full House” but have since then established themselves as hugely ambitious, smart businesswomen. If you have a daughter anywhere between the ages of say 9 and 15, she at some point more than likely has purchased an Olsen Twin product.

Ever heard of You might have. Maybe your business even uses its financial services. The Mountain View based company was founded by Aaron Patzer when he was 25 years old and sold the company in 2009 for $170 million. 

Sam Altman (22) created another Mountain View based company called “Loopt” that provides location based functions for cell phones.  Raj Lahoti (25) founded the hugely successful website out of San Diego. The site aggregates information from the motor-vehicle agency in each state, all in one place. Users can access information on everything from applying for a license to ordering a driving record, without the aggravation of standing in long lines. Alexis Demko (25) is also a resident of San Diego. She created “Lil Bogies,” an online children’s golf apparel store. She saw an untapped market, and has been capitalizing on it since 2001 with great success.

For years many have held onto the notion that a person typically attains success either later in life after years of hard work, or is born into it. The past ten years have shown us that success does not check your age at the door. There is no ID required, just a great idea, tenacity, and a little luck. Californians should be proud but not surprised that many of the young and successful have either originated or migrated to California. This state has after all always been a forerunner for change and innovation. Although the fundamentals of business will probably never change, those who run it will. The business innovators are getting younger, smarter and more and more innovative each year. It is important to always evaluate a business idea not by its creator, but by the quality and promise it exudes. For all we know, the next groundbreaking business idea is currently being created by a 15-year old, but only after his homework is done of course.               

Zachary Norman
March 17, 2011
Novato, California

Data and ages from this paragraph are from 2007

Joel Smolen featured in March 2010 SeekingAlpha interview

Posted by Joel in The Axion Report

Mar 19th, 2010 | 32 Comments

High Conviction: A Brazilian Miner With a Game-Changing Strategy

SeekingAlpha: Joel, to start please tell us a bit about your fund and what it holds.

Joel Smolen: I established Axion Capital Management and Axion Opportunity Fund in 2001. The Axion Opportunity Fund, LP is an absolute return fund that seeks to deliver superior returns over the mid- to long-term through opportunistic investment strategies. In the last two years we have concentrated our focus on the emerging markets, energy, commodities and technology spaces.

We have added to our energy related holdings, particularly oil, during periods of weakness and plan to do so in the future. We also continue to build our commodity positions in base materials and other commodities. In Q3 and Q4 of 2009 we added soft commodity positions to our portfolio.

SeekingAlpha: What is your highest conviction stock position in the fund currently – long or short?

Joel Smolen: While we hold all of our positions with a high degree of conviction, one of those stocks in our fund is the Brazilian mining company, Vale (VALE). We have a 12 month ADR share price target of $42, which at the time of this interview would imply a gain of more than 30% over the current price. In addition, we own call options on the stock.

Vale is the largest diversified mining company in the Americas and the second largest metals and mining company in the world, with a presence in 30 countries and a market capitalization of around $150 billion. It is also the largest producer and exporter of iron ore and pellets, which comprises around 70% of gross revenue but over 90% of its EBITDA. The remaining nonferrous division, primarily nickel, copper, potash, coal and aluminum products account for roughly 8-10% of the remaining EBITDA.

Vale is also the largest logistics company in Brazil. Due to the frequent remoteness of mines and energy intensive nature of mining, Vale has invested in hydroelectric dam projects such as the Belo Monte hydroelectric dam project. In total, Vale owns stakes in eight hydro dams in Brazil and Indonesia with roughly 2,500 total megawatt capacities. The company also owns its own transportation networks, ports and processing plants and is strategically growing this side of the business in ways that provide for a very compelling growth story.Can you talk a bit about the sector? And to what extent is Vale an industry pick as opposed to a pure bottom-up pick?

The iron ore mining market is worth about $200 billion a year, second only to crude oil. We are very optimistic about the mining sector over the next few years. In our view, global demand for mineral and metal commodities have begun a new growth cycle fueled by the nascent recovery of the developed economies and the resumption of high growth rates in the emerging economies, namely China.

We believe China will continue to be a significant demand driver for iron ore for the foreseeable future. In addition, demand is coming online in South East Asia and the Middle East. As a result, we are seeing a tighter than previously estimated iron ore market. The strong demand coupled with limited supply is reflected in the rapidly rising iron ore spot prices which have shot up from $82 in September to the current price of $138 per ton, which represents a jump of nearly 70% in six months.

In tandem with increased demand, I think a significant value driver for the industry will come in the form of the upward adjustment in the pricing mechanism for iron ore. While negotiations continue to develop, I think we could see a resetting of the benchmark price to as much as 60% or more in 2010, versus previous estimates in the 20-30% range.

Our decision to add Vale as one of our core holdings is a reflection on how we tend to invest. In general our fund tends to spend a great deal of time processing information, developing a thesis and then building our positions accordingly. This is precisely what happened in the case of Vale. While I have experience in commodities and metals in particular, we still looked closely at the industry as a whole before we identified some unique and compelling characteristics in the company that we felt would benefit most from the emerging growth story. In many respects it is an organic global-macro, top down approach. We feel this approach has allowed us to stay nimble and opportunistically pick our spots where we can generate the most value for our investors.

SeekingAlpha: How is Vale currently positioned vis a vis its competitors?

Joel Smolen: Vale is the largest iron ore mining company in the world and competes primarily with Australian based Rio Tinto (RTP) and BHP Billiton (BHP) as well as a diverse universe of regional providers. Vale currently owns nearly 33% of the seaborne iron ore market compared to Rio Tinto’s market share of around 19% and BHP’s share of 17%. The remainder of the market is divided among smaller market participants. Vale also produces some of the highest quality iron ore with iron content up to 67% giving it premium pricing power.

While Vale enjoys the dominant role of iron ore producer, it is disadvantaged by structural market challenges that are not easily overcome. Namely, Vale’s shipping time to its largest customer is on average 45 days or three times longer than Rio Tinto and BHP. Greater transit distances naturally translate into higher freight costs and increased risk exposure to transport price volatility and a generally greater risk profile in terms of weather, event risk, etc.

Having said that, as I alluded to earlier one of the most exciting things about Vale has been the strategic thinking behind the company’s growth plan which we feel will allow it to build market share and reduce variability to its cost structure.

Vale expects to increase iron ore production capacity by 50% from 300 mtpy to 450 mtpy by 2014. Much of these gains are likely to come from the Carajas complex which, because of previous logistical investments, has lowered the production cost of high quality iron ore. This should have a constructive expansion of margins.

In addition, Vale is embarking on a strategy to reduce its dependency on the maritime freight spot market by extending its transport fleet of ore carriers. Currently, the Vale fleet consists of 18 Capesize vessels with a capacity of 150,000 tons each for a total haul capacity of 2,700,000 tons. The company has recently ordered 12 VLOCs (Very Large Ore Carriers) which can each carry 400,000 tons each, more than doubling the company’s previous haul capacity. It also has an option to add an additional 6 VLOCs for another 2,400,000 ton of haul capacity.

To handle the massive carriers, the Chinese port at Qingdao will build three 400,000-tonnage terminals for the unloading of Vale’s iron ore. The first project is slated for completion by the end of 2010. Vale will also make use of long-term freight contracts which when combined with larger ore carriers, should minimize some of the structural transit advantages enjoyed by Rio Tinto an BHP Billiton.

One can make strategic adjustments with ore carriers and freight contracts, but it doesn’t change the fact that relative to its main competitors it has an extended distribution channel. It still takes Vale’s iron ore on average 45 days to travel from Brazil to Chinese ports and by contrast, it only takes around 15 days on average for iron ore to travel from Australia to China.

To minimize these disadvantages, Vale has embarked on a thoughtful strategic plan that effectively shortens the distribution channel for end users while growing market share organically and gaining greater access to smaller regional markets. The company is acquiring land in strategic forward locations closer to the end users and developing massive regional storage and distribution and pelletizing facilities. These facilities will have the potential to produce various blends to meet the specific needs of each client.

For example, the Malaysian facility will be capable of handling 30 mtpy with an expandable capacity of 90 mtpy. Like Qingdao, Malaysia will be able to handle the extra large ore carriers. This facility will cut transit time to China to around 15 days, enabling the company to supply its clients more promptly and will be comparable to that of its main competitors. In addition, it should have a positive impact on the company’s variable cost structure. A similar facility in Oman will serve the Middle East and North Africa.

Not only does this distribution strategy improve their position relative to the Australian companies in selling to China, but it also opens up new opportunities to sell directly to smaller regional buyers in the Middle East and South East Asia. These new distribution channels effectively cut out the middle men and provide a point of differentiation.

In summation, we believe that Vale is very well positioned to grow their existing market share organically over the coming years while reducing variable costs and opening new markets. This is a long term, game-changing strategy.

Read the entire SeekingAlpha interview:

Axion Capital Management Launches Blog

Posted by Joel in The Axion Report

Mar 16th, 2010 | 7 Comments

Axion Capital Management has established a distribution channel for our observations and commentary.