Quick Update, Some Links/News

Quick Update: Market Madness

The indexes were mostly rangebound in the past month after Trump euphoria faded, while value stocks had their longest losing streak.  My portfolio steadily lost ground.  Wednesday had a shock 3% fall on rates disappointment:

I think its a one off drop.  The VIX is back in the teens, and international markets didn't sell off. 

During the panic, I sold off:

• XOM before the big fall.  It should be working but wasn't.
• And Gold (GLD) after it.  Expecting higher growth in the future, gold fares badly.

Last night, replaced them with Argentina (ARGT), XLF and some crypto.   These are trades - they may get held a long time, but no convictions.

The blue items are trades, the black ones investments.  My portfolio is down about 8% from its all time highs after Trump.

Some Ideas:

For future investigation:

• Europe is cheap and hated.  Poland may recover if we get a Ukraine ceasefire.  I have not looked at any stocks there.  Maybe GPW.
• South America, as they follow Milei's path.  Probably ETFs, these markets are inaccessible to retail.

Some Links/News:

• Several days lack-of-wind in Germany leads to sky-high power prices in Sweden.  Swedish minister says they are in a "shit situation" because Germany does not have reliable baseload energy.

• (Nov 29th) Saudi Arabia calls off major Defence Treaty with US, and can no longer normalise  Israel relations.  Makes it harder for Trump to bargain with them for lower oil prices.

• Goehring & Rozencwajg's 3Q Commentary mentions that shale gas production peaked in November 2023, "and has since slipped by 1%, or 1 billion cubic feet per day".   Need to watch this, its a long term threat to my gas pipeline stocks.

Sold my Bitcoin

I've been trading a small 1-2% bitcoin position, buying low and selling high.  I'm trying my hand at active trading.  By buying and selling based on Hedgeye's risk ranges I've made more and lowered my stress level.  I'm not a natural trader, so I'm quite happy with myself, even with only a few thousand dollars profit over two months.  If it was a lower volatility asset, or if it had just broken out of a multi year bear market, then I could buy and hold.  But for something with high volatility thats been going up so long that everybody is excited about it, active trading is safer.

Finally sold it tonight.  There's too many signs of exuberance:

• Youtuber beats the world record for the longest time sitting on the toilet.  He's sitting there till his shitcoin hits 50m.
• Meme coins like MOODENG coin.   At least she's cute.

• Hawk Tuah coin, rug pull.  She's cute too.  She can spit on my thang.

The crypto market might shoot higher for a few months, but this is fucking crazy.  I'm out.  We all know how this ends.

Bought an Argentina stock

Last night I bought an Argentina ADR.  Its a company thats part of an oligopoly in a cyclical industry.  Should do well as the economy recovers.

Reasons for buying:

• Hedgeye projects that Argentina's recession ended this quarter with two more quarters of increasing growth and decreasing inflation.
• Their past year GDP and inflation numbers are so bad that theirs plenty of room for improvement.  Going from triple digit inflation and 1 plus percent real growth, these numbers could improve for years.
• Argentina is rich in natural farming and energy resources, if they can just get their government policies right.  They need enough capitalism to encourage business, and enough protection for workers so income gap is kept down and they don't become socialists again.

Its a 1.5% position.  The reasons for the caution and small position size are:

• The stock has broken out, always overbought.  And it has bigger price moves than bitcoin.
• Company has high debt, normal for its industry.
• Inflation is expected to fall over the next 6 months: from triple digits to double digits!  This is unimaginable to me.  How the fuck to people live like that?  A time series measured in pesos is incomprensible.  I learned theres an IFRS standard for reporting in hyper-inflationary currencies.
• Argentina has failed for the last 100 years.  Betting that this time is different.
• No idea of politics in Argentina.

We'll see if Milei gets re-elected in Oct 2025.

This ideas is from John Polomny.

Sold Some Gold

Sold a little gold, around 4%.  It had run up for months before the election, but dropped afterwards, Now got an 6% position.

The reasons, from short term to long term:

• Hedgeye's trend is weakening, though still bullish.  And they are projecting a few months of increasing growth in the next six months, bad for gold.
• Gold ran up for months before the election.  Mostly no one noticed, but by the end mainstream media was reporting on it.
• I do not know if Trump wants a weaker dollar.  He needs it if manufacturing is to come back to America.  But he also says he wants the USD to be a reserve currency.  And growing oil production is positive for the USD.  Tariffs may also increase the value if the USD (lowering the currencies of the countries they are aimed at).  
• The new administration is looking to grow its way out of debt.  Rather than just inflate its way out.

My gut says we need a lower USD to fix the persistent trade deficit.  But I don't know.

I still think theres inflation.  Government debt is too big, and most of government spending is mandatory (required by law).  But we are looking at less inflation, more growth, with maybe a tiny bit of austerity.  The train wont stop, but it can slow down. Maybe 3% inflation, 3 percent real growth.

I also want to deleverage a bit, because we don't know what can happen.  They new administration may:

• Make a security deal with Saudi Arabia, for cheaper oil
• Get allies to pay for US troops, narrowing the budget deficit.  Or make them buy long term bonds to pay for it.
• Tie tariffs to foreign policy - you get to sell more into the US market if you support the US politically and militarily, and if you put tariffs against other countries that don't.
• Do a shock 10% devaluation of the USD.  Either unilaterally, or another plaza accord.

The rules have changed.  Someone may be about to kick over the chess board we've all been playing on since the 1940's.

Update 25-Now: I sold 6% my gold, 3 or 4% remaining

Quick Update

My portfolio was up a couple of percent for the Trump win.  Not bigly.  Gas pipelines made 5-year highs, but gold and energy were down.

Trades

Hedgeye's trend for Industrial metals have broke down: Platinum (last week), copper (last night), and silver (weak but still holding).  Sold the first two, reduced the third.  I don't know why - I expected industrial metals would react positively to a Trump win.  But they were trading positions so no need to think about it.

Still got a small 1/2 percent bitcoin position remaining after selling some last night (doh!).  Its broken out, bullish, but overbought.  My gut feeling is to wait for 100K then sell the news.

Investments

Still keeping my tin (MSC:KLSE), as its an investment position - too illiquid to trade in and out.  Think I need to wait for the semiconductor market to improve, half of tin is used for solder.  No sign of this now.

Sandstorm Gold was down 9% on disappointing earnings plus a falling gold price.  I bought another 2%.  This might be a risk, since Hedgeye trends recently broke down for some gold related sectors.  We *may* be entering a period of accelerating growth, which is bad for gold.  And gold's uptrend was getting long in the tooth.

Hartalega (Malaysian glove manufacturer) was also up after the US election, probably because of USD strength.  And tariffs.  I expect the USD to fall longer term, but its not happening now.

Palm oil up a lot since I bought, need to see if theres any supply response.  Hard to get data.  Maybe March next year.

I sold Woodside, small loss (including dividends).  US natural gas export capacity will no longer be hindered by "green policies".

Question's I'm Thinking

*If* we are entering a period of accelerating growth, do I sell my gold (miners/royalties)?  I'm still bullish gold long term.

And in that time, if industrial metals are not working (for whatever reason), what do I buy?  With rising growth, shit flies.  Do I want to trade shit?

US daylight savings makes it harder for me to trade.

The Trump Effect

What effect does Tump have on investments?

This is a sea change.  With an overwhelming majority of presidential votes, a Senate majority, and a probable House majority (to be confirmed), they can make any changes.  They've got two years to do so before the 2026 Senate elections.  This time Trump has assembled a team of competent people, unlike the last time when he didn't expect to win.

What Does Trump Believe?

America has been on the wrong path for the past 40 years and needs to reverse:

• The US paid for the defence of its allies (Japan, Nato), who took advantage by selling into US markets.  From 1987: "The world is laughing at America's politicians as we protect ships we don't own, carrying oil we don't need, destined for allies who won't help....End our huge deficits, reduce our taxes, and let America's economy grow unencumbered by the cost of defending those who can easily afford to pay us for the defense of their freedom."
• "The concept of global warming was created by and for the Chinese in order to make U.S. manufacturing non-competitive." (tweet)

• China is the biggest threat to the US.  And I think this means right now - we need to prepare for a Taiwan war by 2027.  Ukraine and the Middle East are distractions.
• Doesn't want war with China.  Peace through strength.  Unlikely to see publicity stunts like Nancy Pelosi's Taiwan visit again, while both sides quietly build up military capabilities and alliances.
• The US needs to manufacture things again.  US industry is hollowed out by unfair trade practices, damaging workers, families and the social fabric.

• Inflation was a big reason he won.  Gotta either cut inflation or increase real wages.
• USD.  He criticised Biden over the weak Yen and Yuan hurting manufacturing.  OTOH, he is a "numbers go up" guy and may want a strong dollar to fight inflation.  On balance, I guess weaker USD long term.

What Policies do I Expect?

• Increasing domestic oil and gas production to grow America's industrial base.  Bad for O&G producers, good for O&G service companies and pipelines.
• Grow your way out of the debt crisis.  Growth, not stagflation.
• Maybe a Saudi security deal to increase oil, help inflation and pressure Iran/Russia.
• Tariffs.  10-20% for all imported goods.  Which countries have carve outs?  60% to infinity tariffs for China.
• Let Israel finish its war properly.  Leading to lasting peace in the ME.
• Freeze the current borders of the Ukraine war.  Not sure of this can be done - Putin may not agree, and who will enforce the peace?
• Still expect high government spending.  Expect it to be hard to decrease government expenditure.  Elon Musk cannot just fire Government workers like he did at Twitter - they are protected by law.
• Big changes in Healthcare with RFK, thought I don't follow this.  I'd worry if I was holding any Big Pharma or Health Insurance stocks.
• Deport some illegals (possibly only violent ones).  Cut welfare for them.  Fine companies that employ them.  Rising costs in US agriculture.

Biggest Change for Investors

The nature of inflation will change.  Growth instead of stagflation.  Oil and (US) natural gas should stay low in the next few years.

The US is gonna have large labour cost increases.  So inflation comes from there, instead of energy.  Good for workers.  I'm wondering how investors can benefit from it.

No chance of a recession next year.

In Asia, countries should benefit from manufacturing moving out of China.  Counterbalancing this is that countries with large US bilateral deficits may be targeted.  After China, then Vietnam, Japan & Taiwan follow:

Data Source: USTR

How do Asian countries adapt?  After 2-3 generations of trade surpluses, they need to start consuming.  Look to buy Asian importer or consumer stocks? Except for China, which is stuck.

How does this affect my investments?

One by one:

• North American Gas Pipelines: Should do well with increased natty production supporting a larger industrial base.  Just hold them and sell if they reach overvalued territory (eg: 30 times FCF).  They're fairly priced now so I probably wouldn't buy them.
• Oil Producers.  Expect stable or low oil prices in the next few years.  I'm willing to hold my oil producers, since they should be increasing production in coming years, and are profitable and pay dividends at WTI $70.  If I was buying, I probably wouldn't buy now, wait for Hedgeye's trend to change.  I think there'll be an oil shortage after a few years.
• Gas (LNG).  My gas play is Australia's Woodside.  Its a stodgy blue-chip company that pays out 80% of its profits as dividends.  Not a great capital allocator.  I think US deregulation and increased gas production may lead to more US gas exports.  Since Woodside isn't a great company anyway, I'm considering selling.
• Gold.  Questionable.  Gold won't do well with increasing economic growth - its a stagflation (or recession) play.  Not a growth play.  And gold is also a bit overexposed now, even CNN was writing about it.  But we still need to move away from the USD as a reserve currency, and gold is the only contender.  Its also the only thing in my portfolio that could go up if theres a Taiwan war.  So I'll hold.  May convert some of it to physical.
• Gold Miners and Royalty companies: Levered gold.  Miners may do better as energy costs fall.  My mid-sized miners/royalty companies should increase production in the next few quarters, so I'll hold them.
• Industrial Metals: should do well in a growth+inflation environment.  I'll hold my tin producer - I think tin has underperformed following semiconductors, it should get a boost with economic growth.  I'll trade silver and my copper producers with the Hedgeye Trend signals.  I just solf my Platinun due to this.
• Palm oil: No Tump effect.  Moves in long price cycles - 3 years before new trees start producing.  Starting to get too high?  I need to investigate the supply response in the past few years.
• Emerging Markets: Philippines stock exchange: this country should benefit from manufacturing capacity moving out of China, and their US trade defecit is not too big.  Hold it: I'm paid a 5% dividend (100% payout ratio) while waiting for a bull market.  Delfi (Indonesian chocolate producer): has been hit by rising cocoa prices - they are now unsustainably high - I'm holding, but it may take a few years for the company to grow.  Hartalega: Probably benefits from Trump, but its a cyclical, so I'm waiting for the cycle to play out to sell.  Poland Stock Exchange: may benefit from an end to the war in Ukraine.  Holding all of these stocks for now.
• Uranium (SPUT): Should benefit in the long term, but in the short term the spot U3O8 price just depends on a few buyers and sellers.

Quick Update: Gold and Gold Royalty companies

Gold Royalty Companies: Early in October I stumbled across Mining Stock Monkey looking for gold miners.  I ended up taking a 4% position in a medium sized gold royalty company.  They're a better alternative to miners, as they're not affected by rising costs, like Newmont was last month.  But the big Gold Royalty companies are at nosebleed valuations.  And the small ones are bleeding cash or reliant on one or two revenue streams.  The medium sized ones that are just turning cashflow positive may be better bets.  Mining Stock Monkey also has a youtube channel where he discusses details on some smaller companies.

Gold is finally starting to get attention, even from mainstream media like CNN.  Worries me a bit as its getting too visible.  But I'll hold my 10% (paper) gold and 8% mining and royalty companies (at buy price) for the long term, not try to trade around them.  Theres a good chance gold stays rangebound for a long time, like oil in the past two years or Uranium in the past 12 months.

Physical Gold.  Luke Gromen did an interview on gold, he mentioned paper gold, while he thinks the ETFs' units are backed by gold reserves, but the risk is with the LME ("where historically a lot of the GLD gold was").  Unallocated gold in LME.  By "paper gold" he means "unallocated gold derivatives centred in London".  Still trying to figure out what he means.  But I'm thinking of converting my gold ETFs to physical.  For most of the black swans I can think of:

• Taiwan war
• US civil war
• US govt devalues USD 10% in a day

...gold is an insurance, and the only insurance.  If this shit actually happens, I'd be spending some uncomfortable nights wondering if my gold ETF positions were actually worth anything.

Quick Update and thoughts on oil and gold.

My portfolio surged past SGD 1.2m last week, everything has been going right the past month.  The cherry on top was a the oil price shooting up due to fears of Israel attacking Iran's oil infrastructure.

I can't see any effect if Iran's oil export facilities are bombed.  Iran only produces 3.7m bpd, half of which is exported - say under 2m.  The Americans can release 1m bpd from their SPR for a month or two.  Last year Saudi Arabia voluntarily cut 1m bpd, and OPEC+ an additional 1m.  The world can make up for it.

Iran may retaliate against Saudi Arabia's oil facilities, that would cause a large oil increase.  And a long lasting one.  Don't think it'll happen, but its a small possibility.

I still expect oil to stay around $70-90 for a while, until reserves go down.  Politics can drive it higher (middle east war) or lower (Trump peace deal with Saudis).

My portfolio is now heavily weighted to oil.  Luke Gromen (33:52) suggests that gold will replace US bonds as a reserve store-of-value.  Gold is the 'release valve' in the world's search for a new reserve currency. Governments would prefer gold to go up instead of oil - as oil is inflationary, even though they don't control it....they could affect it to try to increase production and stop oil rising too much.

In this scenario, I think gold miners skyrocket, while oil producers do ok (as oil hovers in between $70-90).  Might be worthwhile buying more gold miners.  They will go up unless:

• there's a non-inflationary recession (interest rates and gold goes down), or
• oil surges (diesel is a large cost of mining).

So its a good hedge to oil producers, and will probably go up anyway.

Interesting Links

Commodities.  Supply/demand projections:

• Uranium (Sept 2024).  Justin Huhn shows an updated Uranium supply model (at 16:08).  From Cantor, he thinks demand here is a little optimistic.  Does not know if they include SMRs.  Probably derived from WNA's report, this looks like their upper demand scenario.  Theres a supply response from new greenfield mines in 2029.  Justin's own modelling shows at this point in time supply may meet demand, but only for 2 years.

• Anas Alhajii's views on LNG (Aug 2024): Contrary to the market, he is bullish, thinks producers will reign-in production (eg: rolling maintenance) if prices drop.

• Brendon Beylo's Tin Primer (Dec 2023).  The "Future Tin Projects" table is interesting.

ChinaTalk (Oct 2024) : JD Vance on the Economy: He's following Michael Pettis' ideas.  Why should the dollar be a reserve currency?  The Federal Reserve could impose a tax on any foreign purchase of US assets, with the rate adjustable to balance financial inflows and outflows.  Or they could buy foreign assets (like Singapore/Switzerland).  Reducing USD's reserve status (a falling USD) would help the re-industrialisation of the US, but the cant predict the first and second order global effects.

Quick Update

Most of my portfolio is up nicely:

• Hedgeye turned bullish on China after stocks rose on stimulus news.  They project Q4 has increasing yoy Chinese growth, but it may only last a quarter.  I'm not buying due to long-term Taiwan risk.  The majority of my portfolio is commeodities, which is another way of playing China anyway.
• Commodities have kept going up since Hedgeye pivoted to quad 3.  I bought 2% silver and 2% platinum on dips.  And 1% bitcoin, which has not had a real dip.  Plus a 1% fomo buy in copper (FCX) at the highs.  Look to buy a little more bitcoin before I'm finished.   Now 110% invested.
• Hartalega jumped limit-up 30% in a day a few days after I bought it on news of increased US tariffs on China gloves.  I had not realised just how fuk'n volatile this stock was, this is the second 30% day in this year.  If I had, I may have sized it a bit smaller.  I still think its undervalued as the glove market recovers over the next 3 years.  Biggest risk is rising Ringgit.
• Oil still bearish Hedgeye trend.  Which may help Harta above.
• My "Turnarounds and Lottery Tickets" - like Purecycle Tech (good production news), and the whole Singapore OSV/rig sector going up - have done well. Still plenty of room to run.
• Gold has been slowly floating up, unnoticed, week-by-week.
• Tin has moved up and down finishing off flat.  Maybe because semis are still down.
• Uranium flat, no reaction to supply cuts from Kazatomprom.  Spot is still below the incentive price of ~ $100.

Turning Bullish. Buying more.

Last night Hedgeye became bullish on a few remaining risk-on commodities: copper and bitcoin.  Pivoting to Quad 3 (decreasing yoy gdp growth rate, increasing yoy inflation growth rate).  Free release of their daily Macro Show from before the market open:

Key points, from short term to long term:

• Copper and bitcoin turned bullish trend, following silver and softs in the last few days.
• But they were overbought (before last night's open), so I may want to wait a bit before buying.  I bought 1% silver yesterday morning, after the FOMC's "sell-the-news" correction.
• Kospi and semis not yet bullish (14:01)
• Bullish on EMs (India, Indonesia, Malaysia).
• Oil still bearish (28:28), the last major commodity holding out.  WTI's trend level (right now) is 76, if it goes above that it becomes bullish.
• No recession (24:05 and 25:53).
• Bullish on 'the market' (10:42) due to vol dropping.  Quad 3 has historically been good for the S&P 500 because its dominated by big-tech.  They're not buying the index, theres better things to buy.
• Projected US quad 3 in Q4, followed by quad 2 then quad 3 (38:52 background chart)
• Inflation (21:47) rate project to drop to 2.X% this quarter, then to increase to over 3% in 2Q25. 

How do I use Hedgeye?

• Helping to decide when to buy things.  For example, I delayed loading up on oil stocks for the past 2 months after oil went bearish on 23rd July.
• Getting out.  I got out of my high volatility and non-cashflow producing assets (eg: silver, bitcoin, a high beta copper producer) in late July to early August, as one-by-one they entered bearish trend.  After which the market did its mini-crash.
• Short term, they trade in-and-out a lot, increasing positions when something corrects and selling when it overextended.  Over a few days.  I don't, cause I'm not a good trader.

In summary:

• I want to buy commodities again: copper, silver and bitcoin.  Except oil.  Turn around and sell if they go to bearish trend.  Look to buy on dips.
• If someone gives you a crystal ball which can time the markets, you should use it.  Even if the ball is a little cloudy and keeps changing.  Be a few steps in front of the herd.

Buy commodities, except oil...unless they change trend.

Buying after Black Monday

What am I thinking?

In the short term: after the Nikkei's Black Monday I was expecting more turbulence for 1 or 2 months.  Someone who gets hit in the head with a baseball bat doesn't just get up and walk again the next day.  But the markets did recover the next day and have rebounded since.  I now think theres 60% chance the turbulence is behind us.

Medium term: Hedgeye sees slowing growth and inflation in Sept, but recovery after that.  No recession.  Their signals did get me out of my higher volatility exposure (BTC, silver, platinum) before the crash - while I choose to hold onto my lower-beta cashflow generating companies.  

Long term, the US dollar is gonna be devalued, I need to be holding stocks and commodities.  Cash is trash.

So I wanna buy stocks in the next two weeks, and commodities when Hedgeye signals them.

What am I doing?

• Bought more paper gold, now have 10%.
• Plus a few speculative positions.
• Currently buying a Malaysian stock now which got hit on Black Monday.  Not buying Japanese stocks, cause I get a headache trying to read their results.
• Am waiting to buy commodities (platinum, silver, plus copper & oil producers) when the Hedgeye trends signals change.  Maybe BTC.
• If we do get another quick crash (USD is oversold and gold/SPY overbought) I may buy gold miners.

The Malaysian stock I'm halfway through buying is Hartalega, a glove producer.  Very different from the stocks I usually buy:

• Its a cyclical and a turnaround play, as the world works off the glut of gloves stockpiled from covid.  Its now slightly profitable.
• They've been a long-term-term compounder. The type of company that can make me rich.
• They are a commodity user, their raw material (nitrile) is priced off energy.  Although I'm expecting high energy prices in years to come, I've got more than enough energy exposure.
• Full report here at Asian Century Stocks (paywalled).

The small speculative positions I added are:

• Two SGX companies rigs and OSVs.  Turnaround plays.  From Trader Ferg (paywalled).
• A Uranium company (From Unemployed Degen - paywalled).  Its risky and can go to zero.

My current positions:

I've been writing less about individual investment ideas and industries lately:

• Cause I'm busy with my day job.
• And there's a lot of excellent ideas already out there.  I used to want to find new ideas myself, which was an important part of learning.  But now I'm happy to be inspired by others (and investigate their work), or simply piggyback off it (if its detailed enough).  Substack is a game changer.
• I still think we're halfway through a decade of inflation.  There's only so many ways to say "Buy Inflation".

Need to be careful not to get stuck in my thinking.  "Inflation and Commodities" isn't a religion.  Eventually US debt gets inflated away and commodities reach unsustainable prices.  Then I start looking at "normal" companies (which use commodities as inputs and do well with low inflation).  Start learning again.

New Kitty.

Chaos and Commodities

Quick look at geopolitical events, black swans and how I'm positioned for them.

This is not to make money, but to stop getting killed in the markets.  Part of Risk Management.

The last 2 months have been crazy.

Trump vs Kamala

A Trump win probably means:

• Lower oil.  Drill baby drill.  And he is friends with the Saudis.  Michael Kao suggested he can do a security deal with MBS in exchange for lower oil prices.  (Edit: Probably requires congress approval?).  Makes sense: lower inflation and increased growth.  I think lower oil prices would lead to an economic boom for 1-2 years, then leading to rising oil prices as production comes up against hard supply constraints.

I can be less bullish on oil, and even hold companies that use oil as an input.

• Rebuild America.  Return manufacturing back to the US after decades of decline.  The USD is overvalued - partially because its a reserve currency which everyone invests their excess savings into.  JD Vance questioned its roles as a reserve currency.  A Trump victory could see a sudden, deliberate devaluation of the USD by around 10% or so (ht: Lyn Alden public newsletter).  This would lead to a spiral of other currency devaluations, with shiny yellow rocks being the only currency worth holding.

The currency devaluation(s) will happen anyway, but with Trump it can be overnight. Hold gold in place of cash.

If the Democrats win, Kamala seems to be left leaning and big government.  Her policies are price controls and handouts (ban grocery price gouging, don't allow landlords to raise rent more than 5% a year).  I think congress would need to approve new laws in order to implement this - unlikely to happen.  She is probably a continuation of Biden.  America will still get rebuilt, and the USD devalued, just slowly.  Low growth and high inflation.  Better for my energy and pipeline stocks.

Ukraine and Russia

Ukraine invaded Russia.  Probably for a morale boost, and to change perceptions of the war both at home and for the countries providing weapons.  They also now control a gas pumping station that provides half of natural gas to Europe (Hungary, Slovakia and Austria).  If I were them, I'd blow it.

It may also put them in a better bargaining position if Trump forces them to negotiate.  The current view is that Biden fully supports Ukraine, while Trump will throw them under the bus (JD Vance: "I don't really care what happens to Ukraine one way or another").  A counterpoint is that the current US policy is to support Ukraine only so they can continue fighting, but not so they can win.  Trump is a good negotiator, and he may put pressure on Russia (increasing Russian sanctions and Ukrainian weapons supplies, increasing global oil supplies), leading to a Korea-like armistice.

So long term:

• If Kamala wins, same as usual.  Ukraine may be ground down in a few years unless international support increases.
• If Trump wins, negotiations for 6-12 months.  Then a ceasefire.  How favourable to Ukraine we don't know.  Energy may drop, a lot if sanctions are lifted on Russia (enough to allow them to maintain production facilities).  Still no Russian gas piped to West Europe (you cant buy energy from someone who just burned down your neighbour's house), maybe its shipped elsewhere instead....LNG down, LNG transport up?  If its a bad deal for Ukraine, then Finland and Poland quickly build nukes.  Followed by South Korea, Japan, Taiwan.

Middle East

A rocket attack killed 12 Israeli children at the end of July.  Israel and Hezbollah may be headed for war.

This war would make Gaza look like a warm up.  Hezbollah is a lot tougher than Hamas: man-for-man their special forces are as good as Israel's.  Unlike Gaza, Lebanon has open orders allowing weapons and fighters to leak in.  Hezbollah's rockets can cause large scale damage to Israeli cities.  The land is mountainous like Afghanistan.  There might be a bigger hostage situation than in Gaza.  I'd expect the Israelis to win in around a year - they have no choice.

Neither Israel nor Lebanon have oil, so we don't really care.  Two possible black swans:

• Israel hits Iran, specifically Kharg island to stop oil revenues.
• High Lebanese civilian casualties in a year-long war cause Arab populaces to protest agains their governments.  Worst case they overthrow their governments, really bad for oil production.  70% of Lebanon's population is Muslim, evenly split between Sunni and Shia, so the Arabs might not care if non-muslims or Shia get killed.

Both cases benefit my non-middle-east energy stocks.

Myanmar Civil War

Source: ResearchGate

~10% of the worlds tin comes from Wa state, bordering China and the Shan state.  The Wa State Army is (was?) allied with the ruling Junta against the Shan. Wa is in effect a Chinese satellite state.  Its a mountainous jungle region, so I think it can maintain control.  So tin production should not be affected by the civil war.

The rebels appear to be winning the civil war: they need to prove the can capture a city.  This would be the beginning of the end.  Myanmar may end up a satellite state of China. Some links:

• Warographics (April) Rebel forces make gains, possible post-war scenarios.
• Warographics (July) Rebel forces make more gains, can't see the Junta winning.
• Peter Zeihan (August) is pessimistic and thinks the Chinese do not want to control Burma, just keep it weak and divided.

UK Riots

Riots occured in the UK over migrants, sparked by fake news.  But the causes have been simmering years (Rotterdam sex grooming gangs, two tier policing).  British have continually voted against immigration, only to get more of it.  Jailing people who post on twitter does not fix the root causes of this, just adds fuel for the next fire.  Expect more riots in the months or years ahead.  

This problem will only go away when there's a government who promises to reduce unwanted (ie: Muslim) immigration.  Lets see if anyone runs on this in next year's May election.  Edit: The next election is 2029, they are fucked.

Not sure if this affects the wider economy, or the UK banks I'm looking at.  Really widespread riots would hit the economy.  An unexpected election result (like Brexit) would hit the stock market.  But these are one-off event that may or may not happen, I can't stop investing to wait for them.  Just limit any UK exposure.  Or trade the stocks as cyclicals, don't buy and hold.

China and Taiwan

No ones know what Xi is thinking. So I give a 20% chance for an invasion of Taiwan.  Either because he gets bad (or no) advice, or he sees CCP rule ending.  Most likely it would be a full out missile strike (also against US and Japanese forces) followed by an invasion - half-measures like a Chinese blockade gives the US forces to move, decreasing the odds of a successful invasion. (And the US can also blockade China).  An invasion can only occur during April or October.

I haven't found any hedge against this.  If it happens, global GDP goes down 10%.  Stocks may be cut in half immediately.  Most commodities would be hammered, as seaborne supplies to China get disrupted.  Gold may go up, but paper gold may fall with everything else in the panic.  USD spikes.

Nothing I can do about, so not worth thinking too hard.  I have no exposure to HK/China stocks, which would go to zero.  But the rest of my portfolio would be hit.  Limit my leverage.

Conclusion

Trump may give us economic growth and lower oil prices for a while.  Ukraine ceasefire bearish for energy.  Long term, the value of money goes down.  Don't hold USD - unless China invades Taiwan.

This post is a little depressing.  Next time I'll post cat pictures or something.

Sold AEM:SGX

 When I bought AEM in March I was betting there would be:

1. An economic recovery,
2. that would see the semiconductor industry in a up-cycle,
3. and would further benefit Intel Foundries, which has tailwinds behind it,
4. and would disproportionately flood down to AEM, as an Intel test equipment supplier.

Only 1 and 2 occured.

Following Intel's disastrous results 2 weeks ago, AEM released bad results this week.  Bearing in mind that 2023's results were already bad...

I can't tell if AEM's (or Intel's) problems are structural or cyclical.  Advantest and Terradyne's semicon sales and profits increased yoy in 1H2024, but they provide a wider range of Automated Test Equipment, not just SLT, which AEM focuses on.  They also have exposure to AI and lagging end chips (eg: automotive) that AEM/Intel doesn't have.  Advantest management stated (p5): "There was robust CapEx spending by customers for high-performance semiconductors in both SoC and memory, mainly related to generative AI. On the other hand, demand for mature process applications remained soft since the 3rd quarter of the previous fiscal year, resulting in a QoQ decline in sales."      ("Mature applications" --> PCs and servers --> Intel).

My mistakes were catching a falling knife...in a complex and unpredictable industry I can't follow.

There's a chance that this is the bottom.  Semiconductor stocks are also in a down cycle now, so its a bad time to sell.  AEM's lousy results may be the new CEO kitchen-sinking it.  It could just be a matter of timing, as Intel Foundry's capex catches up.  

But I don't know.  So I sold today, taking a nearly 50% loss.  Or 2.4% of my portfolio.  Take the loss and move on.

Getting the macro right does not compensate for getting the stock-picking wrong.

Lloyds Bank

Quick Notes on LLoyds Bank in the UK.

Competition

Lloyds is the largest local bank with a 16-19% share in mortgage lending, the next largest is NatWest (formerly RBS) at 12-13%.  The largest 5 banks have a 60% market share.  Lloyds has ~20% market share of current account balances.  From these numbers, the UK market has 6 large players with > 5% market share.  So there's limited competition, but its not as comfortable as the Australian or Singapore market, controlled by 3-4 banks.

What do they do?

• They primarily make their money from interest (~70% of their Net Income in 2Q).  Primarily mortgages (book size of 307m mortgages, 40m other retail loans and 88m commercial).   Their deposits are 2/3rds retail, 1/3rd commercial (slide 16).  All pretty standard stuff - they are a traditional bank doing savings and loans.
• For their ~30% non-interest income ("other income - slide 18"), 75% of it is from commercial and retail banking.  I assume bank fees.  The remainder is Insurance, Pensions and Investments.

Balance Sheet

• CET1 ratio is 14.1%.  But they want to reduce it to 13% by 2026 and return excess capital to shareholders (slide 24).
• Loan to deposit ratio is 95%, which is on the high side compared to Singapore (low 80s) or US banks (10-year average of 72%).
• They have a large "structural hedge" (slide 17) from the pre-covid zero-interest rate period.  It yields around 1.35% interest, as the hedges expire in a 4% interest rate environment they'll yield more.  The hedge reduced 2023 profits by an estimated 800m (page 4), or 10% of 2023's PBT.  It depends what the interest rates are (actually what the forward curves are) when they expire.

Risks

Digital banks like Starling, Monzo and Revolut have been growing and taking market share.  Especially among young people.  Now 10-15% of the population has bank accounts with each of them.  Lloyds bank fares badly in customer satisfaction, trailing behind them.  But I'm not sure how much money they manage to capture, or how many people use them as their primary bank account and deposit salary - banking is a 2-sided market and you need scale to be profitable.  Only Starling is profitable.  Although the newcomers have made banking easy with mobile app features, its not a moat and can be copied by the incumbent banks.  (FT article).

The UK has been suffering through a recession in the past 2 years.  I think they will tax dividends on foreign shareholders.  Its a no brainer.

Biggest risk is the UK's long term prospects.  It has recovered from its recession, but may continue with weak (below 1%) growth as the past 2 years.  The UK's long term prospects look gloomy due to cheap energy from the North Sea running out, the end of Russian gas, and Brexit.  Politically and economically, they are probably going to become the 51st state - not a bad thing, but a big step down from being Europe's financial centre, or the old "empire on which the sun never sets".

Capital allocation

I like their capital allocation:

There are around 66bn shares issued (p302).  Buying 2bn pounds per year at a price of (lets say) 1 pound each removes 3% of shares every year.

Business Cycle

Banks are cyclical.  Where are we in the business cycle?

UK has been in a tough spot due to rising energy prices from the Ujkraine war and Brexit.  You can find YouTube videos of boarded up sops and houses.  They do have some structural problems to work through.

1Q24 just exited a recession, putting an end to almost 2 years of low/negative growth:

Source: Trading Economics

Hedgeye predicts the UK will have increasing yoy GDP growth in the second half of this year.  But that can change tomorrow.

Valuations

Price to book is 0.85.

At 70p, it would have a 1H annualised PE of 10.2.

Using 2023 numbers (a period of sub-1% growth but very high rates), the PE would be 9.2

Summary

The leading bank in a not-too-competitive market.  Its been recovering and recapitalising from its 2008 blow-up, and is now starting to return money to shareholders.

The stock shot up 6% yesterday when results were released.  I may be late to the party, is a recovery already priced in?  Biggest risk is that the UK recovery is weak.

Quick Updates (July and August)

Quick updates to my portfolio, stuff I did a while ago, nothing to do with Trump's shooting.

Future quick updates I'll just append to the end of this post, rather than cluttering things up.  These are all small moves around the margin.

• Bought 4% Exxon Mobil (XOM)
• Cut BTC on 21st and 24th June at a slight loss.  Its fallen since then.  Better a small loss than a big one.
• Sold Gold miners on 29th June.  Small loss

The market has been range bound.  Hard for a long term investor, or someone obeying trend following signals.

-----------

27th July:

• Hedgeye has signalled a few months of slowing inflation and slowing growth ahead.  Not a recession, but a slowdown.
• Commodities have been hit hard.  Copper, Platinum, Silver, oil all broke down.  I sold Silver &  Platinum as they're too volatile to hold through the cycle,  And Freeport McMoran, as a high cost copper producer in risky countries.  And XOM, to cut oil exposure.  Most of these trades were profitable.
• Mag7 is probably unwinding, but I don't know if it takes the whole market down with it (like in 2020), or money moves into value stocks (like 2001).
• Added 2% gold as it dipped in the past few days.
• I now have 3% cash and 7% gold (cash that can't be printed).   Investigating what to buy.  No rush.
• Separately, thinking of sellingWoodside, as US LNG exports ramp up in the coming years.  Maybe replace it with a US producer.

Review of Williams Companies (WMB)

Williams Companies (WMB) has doubled since I bought it in mid-2020.  Should I sell it?

Business Segments

What do they do again?  And how are they affected by energy prices and inflation?

Based on 1Q24 EBIDTA (slide 8):

• 39%: Interstate Gas Pipelines.  Mostly Transco (30%) running through the east coast, bringing gas from the Appalachians and GoM to consumers and LNG export terminals.  Smaller pipelines in the Northwest.

Regulated long-term contracts: "The rates are established primarily through the FERC’s ratemaking process, but we also may negotiate rates with our customers pursuant to the terms of our tariffs and FERC policy."   In general, FERC gas-transmission rates are often adjusted for cost-of-service (bottom p1), so its like a "delayed" inflation adjustment.

• 38% Gathering and Processing from gas fields.  Collecting and treating gas (eg: removing NGLs) from producing fields so it can be transported in pipelines.  Mostly volume based.  So indirectly affected by price (eg: revenue drops during warm winters).  Management mentioned these contracts are often inflation protected (bottom p19).  A few of them have exposure to gas prices (bottom p18).

• 13% Gathering and Processing from oil fields: onshore (7%) and GoM (5%)

• 4% Marketing.  Deliver gas to customers, bear the risk of price movements in-between the time of order and delivery.  Very volatile.  Was 10% of EBIDTA in 2023, -ve in 2022, and negligible in 2021.

A 2022 Fitch Report estimated that 50% of revenue was from regulated or take-or-pay contracts.  so rough guess: maybe a quarter of their G&P revenue is covered by take-or-pay. 

Cashflows

CFO covers dividends.  But not always CFI and dividends together.  ie: They are investing for expansion:

They rarely sell assets, last made substantial disposals in 2018: 

Maintenance capex was 820m in 2023, and is guided at 800m and 1.2b for 2024 and 2025 (p11).

Growth

Growth capex was 1.9bn in 2023, and is expected to be 1.6bn in 2024 and 1.8bn in 2025 (p11).

The above "growth capex" excludes acquisitions of new businesses.  Following this, I'll take the words "capex" or "growth capex" in this post to exclude acquisitions, which is pretty strange.

Lets put it in a table.  AFFO below is CFO (excluding some working capital changes and minus a few things) - think of it as "Smoothed CFO" ¹:

AFFO easily covers maintenance capex plus growth capex, and almost covers dividends after that too.  It doesn't cover acquisitions in 2024, so debt will go up.

They say they've gotten 19.5% ROIC on their 2019-2022 investments (p12).  Seems ridiculously high, but these are usually small "bolt on" projects.  e.g.: small pipelines adding off their main lines, adding new takeaway or feeds to new customers.  Or adding incremental G&P capacity to their existing network.

And thats probably only for growth capex, as recent acquisitions were bought at 7-10X EBITDA (1), (2).

Overall they aim to grow EBIDTA and dividends by 5-7% in the next 2 years.

The background is growth opportunities from the expected US LNG export boom (slide 16):

Management comments on the urgency of this (p17): "Our issue is that our customers, which are some of our best and biggest customers on Transco are –their demands are very urgent. And for us to sit around and wait to finalize any more of the demand that was pending out there, really, it doesn't serve those customers very well." 

To summarise, they are still growing, and taking on debt to afford to both pay dividends and make acquisitions.  At some stage of the cycle - years later - that may become a bad thing, but its good today.

Valuation

Taking FCF to be "AFFO minus maintenance capex" ², it is projected to average 4.2bn over 2023 to 2025. At a share price of $42.5, thats a price to FCF of 12.x.  Fairly priced for a long term growth rate of 5-7%.

The yield is 4.5% before tax (or 3.1% after tax for me).   AFFO payout ratio is just under half.

Conclusion

Its not cheap anymore - growth is priced in.  I wouldn't buy now, but its not clearly overvalued so I'll hold.  We're probably still at the beginning of the US natural gas export boom.

1 AFFO is defined by them as "cash flow from operations excluding the effect of changes in working capital and certain other changes in noncurrent assets and liabilities, reduced by preferred dividends and net distributions to noncontrolling interests. AFFO may be adjusted to exclude certain items that we characterize as unrepresentative of our ongoing operations".^↩

2 Their definition is different - slide 34^↩

Investing for the next Decade of inflation

These interviews from Lyn Alden and Luke Gromen explain why we'll get high inflation this decade.  US Federal debt is too high and must be reduced by inflation - financial repression - where interest rates are lower than inflation for a long time.  Cash holders will suffer and bondholders will get screwed.  But not in a straight line, it bounces around.   Its a more rigorous and nuanced description of Kuppy's Project Zimbabwe diatribe.

Key Points:

• (6:19) US has entered Fiscal Dominance, meaning govt spending affects the economy more than interest rates.  Because:
• High Federal Debt means that they are paying interest to someone (bondholders or savers) which becomes income.
• Low Private Sector debt means there is not much bank debt to reduce.

So high rates might actually stimulate the economy, of the income from high rates is more than the reduction in debt.

• (10:00) Fiscal and Monetary dominance is a continuum.  If true interest expense (minus entitlement paygo) goes to 100% of receipts, you are heading into Fiscal Dominance.  (12:06) We flip back and forth between them in a cycle:
• As you near fiscal dominance, the global dollar market gets crowded out,
• USD goes up, EMs get pressured to sell treasury bonds to defend their currencies...
• leading to an increase in treasury supplies, treasury market gets dysfunctional...
• so the Fed supplies liquidity, market calms down...weaker dollar.
• Bond and stock markets go up, assets up, higher tax receipts, no longer in fiscal dominance.

• Its a stop-start process.  (13:53) Its a function of the dollar - strong USD leads to crisis that must be fixed by Fed.  The Fed intervened several times before:
• 3Q23 (raising front end rates while keeping the long end stable)
• 3Q22 (Yellen running down TGA)
• So its a stop start process of: whenever a problem in the bond market occurs, Fed will buy US treasuries to lower the US dollar to stave off the crisis.  Cannot afford to let the price of US Treasuries be set by market forces alone.
• In another podcast he mentions DXY of above 1.05 (today's price) there'll be a treasury supply problem, "or if it goes to 1.04 to 1/03 it'll probably be OK", if it goes to 1.00 it'll be fine but with higher inflation.
• So in the long run, the price of US treasuries is held artificially low.  This is financial repression, LT bond holders get fucked.
• (19:40) Maybe the government tries to obfuscate it. eg: change SLR rules: fund banks to hold more treasuries.  When they have to choose between a financial crisis or inflation, they will choose the latter (eg: covered depositors in Silicon Valley Bank instead of letting them be wiped out).
• (24:30) When does the deficit start to matter?  Answer: We've already seen it in the markets, eg:
• Gold no longer correlating to real rates (Chart at 2:46).  
• 3Q2020 Treasury market crashed along with stock market - for the first time in 40 years.
• The process has started, and is accelerating.
• (29:07) The big deficit (rising debts) in the 80's were offset by falling interest rates and globalisation (cheap energy from Russia and cheap goods from China).  These 2 things have now reversed, so government debt starts to matter.
• (38:53) Do we see any way it can reverse?  Generally no:
• Deglobalisation speeds up the process, as increasing inflation leads to increasing bond yields.
• New oilfield discoveries could help reverse it by increasing productivity and lowering inflation.
• Economies that have recovered from this before have been non-financialized.  US has a financialized economy - too much tax income is tied to asset prices.  Austerity would cause asset prices to fall, and lower tax receipts.
• A 'productivity miracle'.  But there's some nuance:
• It can't be too fast.  eg: If AI takes too many people's jobs, it will reduce tax receipts further. 
• AI is different from previous tech revolutions like the internet and cloud computing, as its energy intensive.  It could decrease service costs but increase energy costs.
• (1:25) Think we're in a Secular inflation environment: the debt of the reserve currency issuer is not sustainable without inflation being higher than interest rates for a sustained period.   The test is: what happens to inflation the in the next expansion?  
• (5:43) Views on oil?  Follow conventional view: range bound between USD 70-90.  70 is when US shale starts to be unprofitable.  90 is where it starts to affect inflation.
• Views on different assets in the next 12 months:
• (11:45) USD: lower in an orderly manner, or sideways,
• (14:17) Gold and Bitcoin: Both a lot higher.  Probably halfway through the bitcoin upswing. (18:10) Luke things gold is becoming an oil currency, replacing the USD.  (23:08) "You need to stay un-levered, because the cycle is so volatile".
• Views on interest rates: No view, rising rates no longer effective due to Fiscal Dominance.  The fiscal situation, and oil supply/demand affect the economy more. (28:05) From 3Q23, if the ten year goes to 5%, this creates problems which make the Fed step in, so 5% is a ceiling.  
• (31:28) Lyn: the 60:40 portfolio doesn't work in Fiscal dominance, suggest replace bonds with energy/gold/bitcoin.  To guard against inflation instead of recession.
• (34:20) Recessions.  Recessions are now probably sector specific (eg: CRE) because fiscal dominance stimulates parts of the economy.  Not gonna see a 2008 crisis recession, maybe get a 2001 (shallow) or 1970's (stagflation) recession.  (37:55) In a recession, we can still expect CPI prices and the stock market to rise, like an EM.

The above is just a framework to understand whats going on.

As always, the market can do whatever it wants.  I can be right and still lose money if my timing's off.

How do I use this in investing?  

Historically commodities worked best in past inflationary periods.  Buy anything that can't be printed.

When do I buy?  Hedgeye models the next several quarters as having increasing US yoy inflation (see graph at 16:33).  So now.

More color:

• 86% of my portfolio is "inflation resistant":
• commodity producers
• Gas pipelines - irreplaceable assets producing inflation adjusted cashflows
• Companies that have low material/labour costs harmed by inflation (eg: stock exchanges),
• or commodities themselves.
• My core positions make up 100% of my portfolio.  This is stuff I'm comfortable holding throughout the cycle:
• stocks that generate cashflows and dividends even at the low point of the cycle.  If they're commodity producers, they're low cost ones.
• Or sometimes they're just too illiquid to trade.
• Uranium, which doesn't generate cashflows, but which I hold cause it doesn't correlate with the markets and supply/demand is out of whack for the next few years.
• My non-core positions make up another 6% of my portfolio, bought with borrowed money.  I trade in and out of based on Hedgeye trend signals.  When they work well, these signals last for months or quarters.  When they don't, I get whipsawed.  This is for stuff I don't want to hold during downturns:
• Higher cost commodity producers in risky countries, like FCX
• Bitcoin: I'm a believer, but I don't wanna hold something that can drop 70% peak to trough.
• Industrial commodities: like nickel, silver, platinum.  They're volatile since they also depend on demand.  In theory I should put tin in here, but Malaysian Smelting Corp is too illiquid to trade.
• I may short long term bonds.  Following to the Hedgeye trend signals.
• 1/3rd of my portfolio is US Energy pipelines, susceptible to a decade-long 10-30% fall in the USD.   Its a risk, but the US is the cleanest shirt in the dirty laundry pile.