Our midyear thematic review – continued
After almost 4 months of closure, traffic through the Strait of Hormuz appears to be normalizing. The world has seen a shortfall of a little over 1 billion barrels of oil and refined products, and even now, it will take some time.
We fully expect our refining theme to give up some of its YTD gains. We live in a factor-driven world, so if it looks like oil and smells like oil, it will be sold off like oil whenever a peace deal is announced. Meanwhile, crack spreads are holding up well. It’s almost as though it will take several years to rebuild all the refined product inventory that the world is short of.
We are looking forward to Q2 earnings to see how much of their market cap refiners have earned in just one quarter, given that crack spreads have been hovering around $50. This theme is due for an update.
But this week we want to focus on two other thematics: our short on bitcoin treasury strategies, and our long position in Futures Commission Merchants. Let’s face it. The only thing we like more than talking about Michael Saylor is talking about Marex (MRX).
Reflexivity going in reverse (again)
Less than a year has passed since our write-up on the reflexive nature of the Bitcoin Treasury trade. As Kuppy likes to say: most outcomes in finance seem obvious – it’s the timing that’s difficult. In this case, we have to give props to our analyst who wrote this up as a short in September of last year.
Despite VC spending tens of billions of dollars on finding a use case for Bitcoin, we still haven’t met someone who bought bitcoin with a use case in mind. People buy it because they think it will go up in price (in dollars), and then brag about their intelligence and great fortune during the family Christmas dinner.
We have called Bitcoin the ultimate greater fool asset, where you will always need a larger fool to step in to prop up the price. In 2023, this greater fool was the IBIT ETF, which opened up the market to institutional asset allocators. Then, in 2024, crypto went up in anticipation of the US Government stepping in as a major buyer. That never materialized. Instead, MSTR stepped in with roughly $40b of buying power in 2025. Will MSTR go down into Bitcoin history as the greatest fool? We tend to think so.
Ever since Bitcoin stopped going up, it lost its only use case. In hindsight, the only surprise is how long it took for the world to run out of greater fools.
But MSTR turned an unproductive asset with questionable value into an outright Ponzi by selling the concept of “crypto yield” to retail investors. Then he took it a step further by leveraging up and promising retail a safe 11.5% dividend on the prefs he issued.
The only difference between the 50% dividends Mr. Ponzi offered on his stamp business was that he needed to pretend to have a cash-flowing business underlying his dividends.
In hindsight, taking an unproductive asset such as bitcoin and issuing debt against it might finally unravel bitcoin.
We don’t take pleasure in other people’s misery or financial loss. But we do have a strong aversion of companies pumping clear stock promotes to retail investors with misleading advertisement, and financial metrics that are clearly wrong.
In the short run, Saylor is boosting his USD reserves to avoid becoming a forced Bitcoin seller, simply to meet his dividend payments – or worse, to have to consider cutting the dividend on the prefs, which would probably open him up to a lot of litigation risk for deceptively marketing his 11.5% dividend prefs as virtually risk free.
This probably takes the waterfall scenario off the table in the near term. But the long-term outcome remains inevitable.
Futures Commission Merchants
Back in July of last year, we wrote about our ‘long vol’ basket. We argued that while we had no idea what Trump had in store for the capital markets, it was bound to lead to a lot of volatility. About a year later, it’s safe to say that vol surprised on the upside. In the first half of this year, we’ve seen 20 sigma events in precious metals, natural gas, and oil.
Furthermore, we discussed a business that is known as a Futures Commission Merchant (FCM) as our favorite way to play this, with Stonex (SNEX) and Marex (MRX) the best known public companies. While we’ve stopped just short of turning KEDM into a Marex newsletter, it hasn’t been hard to miss our bullish stance on the company.
Let’s start with the countercyclical nature of the business.
Commodity brokers such as BGC (BGC) and TP ICAP (TCAP LN) are great to own in moment of market volatility as they benefit from the higher traded volumes. However, in the long run, brokers are a mediocre business: Trading is done via Bloomberg chat, and PMs tend to place their trades with whichever broker took them to the strip club the day before. The relationship is with the individual broker, and not with the firm.
While Marex originated as a metals trade desk that later expanded into energy trading, its transformation came with the acquisition of Rosenthal Collins, which enabled it to enter the US clearing market. Margins in this business expanded from 5% at the time of acquisition, to 50% today. Talk about successful M&A…
Clearing of futures isn’t just a higher margin business, akin to financial infrastructure, it is also very sticky. It takes a year or more for an FCM to onboard on a different exchange, and upwards of half a year for a new client to onboard with an FCM.
It is also a consolidating industry.
If you’re a big-4 airline and you need to hedge your jet fuel risk, you’d probably end up calling GS or JPM. MRX and SNEX are unlikely to want to take on concentrated counterparty risk for a business of that size. But once you’re in the middle segment, the list of companies you can call is remarkably small: Marex, Stonex, Archer Daniel and RJ O’Brien were your best bets. But with SNEX’ acquisition of RJO, the market continues to consolidate.
Banks have exited due to high regulatory requirements, while small players can’t keep up with the required investments in tech and compliance.
That creates a rollup opportunity for the likes of MRX and SNEX. The playbook comes down to this: buy a subscale brokerage, realize synergies on day 1 because your scale means you pay lower clearing fees at CME or ICE. Then cross-sell the new client base into your structured hedging products. We heard you like to hedge your fuel risk? How about an FX hedge or rate hedge while we’re at it?
Traded volumes grow, while the number of firms willing to clear those trades for you keeps shrinking.
The result is that SNEX is a company that’s consistently putting their capital to work at >20% ROE, with MRX now earning well over 30% ROEs on its capital.
MRX commented during Q1 that Q2 was run-rating at $1.50 EPS. If we’re at a $6 EPS run rate, this still trades only at 11x P/E. 11x P/E isn’t nearly as compelling as the 7x P/E at which we initially pitched it, but it is still a far cry from the multiple a 30% ROE business typically trades at, or the >20x P/E we see at SNEX.
While volatility in H2 should normalize somewhat, this is offset by various acquisitions, organic growth in their prime brokerage business, and the fact that rate hikes are back on the table (NII is material).
MRX 7x’d their earnings in the last 5 years. We get it, the business is hard to understand. The market struggles to understand in what kind of market environment this business works. If they continue to show that they can grow their business regardless of the environment, we believe they will receive the same recognition the SNEX receives.
The great (!?) thing about this stock is that once a quarter, the share price seems to dip for no specific reason. There has been no shortage of buying opportunities and we think that will remain the case.
This story deserves a follow-up that dives deeper into their M&A strategy and very successful track record. But we will leave that for next time and move on to this week’s events.