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.

Quick Updates (May to Mid-June)

Small additions in last week's correction:

• Bought more gold, some GDX and GDXJ.  Would like to buy more but no money.  I'm also late to the party - everyone knows about gold's new highs - so keep it small.
• Shorted TLT

Other news:

• AEM (SGX) dives 15% after delivering a bad 1Q24 update.   Need to wait longer for the upturn.  Cyclicals are tough.
• Portfolio is up 1% last week.  

Its a very "risk on" portfolio.  My gut feeling is that the correction will continue, maybe triggered by Thursday night's inflation numbers.  Possible a falling SPY and rising VIX will drag down my portfolio, even though they are commodities and value which should benefit from inflation. Vol spikes, everything tumbles.

No plans to do anything, even if this happens.  Just pay off debt.  I'll only sell the short term holdings when the Hedgeye signals change.  If all goes well I won't be making any changes for a long time.

                 _______________________________________________________

Update 8th May 2024:

• Shorted another 1% TLT
• Portfolio has gone up another 1 or 2% again.

                 _______________________________________________________

Update 23rd May: Last night, commodities were hammered on talks of inflation concerns leading to possible higher rates.  My portfolio down 2%.

Tech (Nasdaq, BTC) were up, maybe because Nvdia beat expectations.

SPX is only down very slightly (-0.27%) and VIX is stable at 12ish.

I think this is a small correction, the commodities trade became too visible and was way overbought.  Need to shake out the speculators.

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Update 3rd June: Bought 2% Bitcoin last week.  Its consolidating.

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Update 10th June:

• Hedgeye's trend for oil turned bearish last week, I sold my weakest oil stock Acker BP.  Look to buy something else when it turns.
• Commodities hit hard last week, my portfolio down 1-2%.              

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Update 15th June: The correction continues.  Hedgeye now shows more sectors breaking down (eg: Europe, Financials).  Think the market is starting to price in stagflation instead of growth:

• Portfolio down another 0.5%.  Everything grinding down.
• Sold NIKL at a small loss as it broke trend
• Bought some more bitcoin as it was oversold.
• My trading positions are still bullish trend (FCX, SILV, Bitcoin, Gold miners).  Copper just barely.  In theory, industrial metals like copper and silver should not do well during stagflation.
• I'm holding my other positions throughout the cycle as they are either 1) companies that generate free cashflow and pay dividends even at low commodity prices, 2) too illiquid to buy-and-sell (Philippines Stock Exchange and Malaysia Smelting Corp), or 3) stock price should be more affected by fundamentals than the wider market (AEM:SGX and SPUT).

Quick Update - scary correction

After rising 1%  *per week* for several months due to rising inflation, my portfolio dived 1.5% last night.   Think its just the inevitable shakeout as the inflation trade became too crowded.  Last night, correlations went to one:

Sold all my bitcoin early last night as it was breaking Hedgeye trend.  I made decent money on bitcoin, over 25% in ten weeks on a 5% position.  For me BTC is purely for trading, not to HODL.

I bought some gold positions in past few days.  4% Gold, 1% Sandstorm and 1% GDX.  The stocks got crushed a couple of percent last night along with everything else.  Want to use the correction to buy more gold miners.  Keep positions small as I'm late to the party.

Short term, a lot depends on what Powell does tmr at 2pm.  Its his last chance to do anything before the Nov election.

Quick Update

Small changes around the margins:

• Sold bitcoin down to a 2% position.  Mixed signals.  I may buy it back, leave it, or sell it all.
• Cut platinum from 2% to 1%, not working compared to copper, silver and gold.
• Bought 0.5% position in Nickel Miners ETF (NIKL).  May buy some more.
• Bought 2% gold.  Would like to buy gold miners.

Long inflation.  Hedgeye predicts 9 months of rising yoy inflation.  I want to own a basket of commodities that perform well in inflation:

Source: Exhibit 9, The Best Strategies for Inflationary Times

Primarily Energy, but don't overdo it cause theres only a small sample size (8 cases above), and every time can be different.  So added precious and industrials.  Tough to own ags/softs/livestock or their producers, though I have United Plantations (palm oil).  I expect energy to perform well regardless of growth.  Gold to do better in stagflation.  And industrials to do better with inflationary-growth.  

And if I was really brave, I'd be shorting long term bonds to fund it all (see Exhibit 8).

Portfolio Update

An eventful month.

Bitcoin

Sold half my Bitcoin on Thurs night.  It *was* weakening, along with Tech.  And other Crypto like ETH were already trending down.  Bitcoin could be the "last man standing".

I am trading Bitcoin based on Hedgeye's trend signals.  I believe in Bitcoin as a stable, distributed network and an alternative to fiat.  But I don't have the balls to buy-and-hold something that can drop 70% in a cycle while generating no cashflow or dividends.  Hedgeye's signals keep you in for most of the uptrend and out of the downside.  Here is an old chart:

I may sell the rest of it or buy it back.  Depends on the signal. 

Market Correction

Market has corrected the past week, while VIX spiked to the high-teens:

I still think this is a short term correction.  But may be a long-term rotation out of tech.  Last night Nvidia was down 10% on no news.  My portfolio was somehow up last night, down 5% from its peak.

Copper and silver were both up last night, both are risk-on commodities.  Bitcoin - the ultimate risk-on commodity - was also up, despite Nvidia's fall.  Signals for higher inflation ahead?

Precious-Industrials

Bought 2% Platinum (2%) and 1% Silver (now holding 2% at my buy price).

Platinum fundamentals are covered nicely by the Modern Investing Substack.  Not buying any producers (eg: Sibayne-Stillwater) because:

• The metal itself is volatile enough, comparable to silver.  They correlated strongly, until silver took off in April, while platinum hasn't followed:

• They're in South Africa, which can't keep the lights on.  A collapse in South Africa would collapse the stocks and drive platinum metal prices higher.
• Don't buy equities when the equities market is correcting.

Tin

Tin spiked 20% since the start of this month:

Malaysia Smelting Corp (MSC) is up 40% since I bought.  Plan to hold as I think we're still in the start of the industrial production up-cycle.  And there are real supply issues.  MSC generates cashflows and pays dividends, so its not something I need to trade in-and-out of.

Bloomberg reports this price spike is due to a single trader's futures positions (click on the tweet's picture, then register with Bloomberg to read for free), causing a short squeeze.  The article is mostly positive tin, but they report high speculative long positions, meaning its due for a short term correction. 

Oil

Added 1% more Var Energi, now that oil has dipped after resolving the fake war between Iran and Israel.

Positions

Still positioned for inflation.  Think the correction will be over in days or weeks:

Position Update

Small changes:

• Bought 1% Silver on the Wednesday night.  Thats my full position, silver is really volatile.
• Copper shot up.  Southern Copper (SCCO) up 20% in a week.
• Cash now at -6%.

The portfolio value usually creeps up, night-by-night.  This is the sweet spot, where it goes up softly, regularly...but not so much that you think about selling.

Probably doing nothing for a while, just paying down debt.

Gold Miners look worth investigating, but I don't have any money now.

Bought AEM:SGX

AEM is a semicon supplier making test platforms for Intel, which should benefit from Intel's new Foundry business.  They made a loss in 2023 due to the biggest-ever covid-"stay-at-home"-semicon-bubble deflating, and the stock is down 35%.  I got this idea from the Value Investing Substack (part1) (part2) (paid links).

Its both a growth stock and a cyclical:

I think the 2H23 results were a cyclical drop, they should recover with the semiconductor cycle. And they have a structural tailwind behind them with the US trying to construct semiconductor fabs outside Taiwan and Intel re-establishing its manufacturing capability.

The key question for this company is: how much of its revenue is cyclical/non-cyclical, and recurring/non-recurring?  I am not sure yet, but it would affect wether its a trade or a buy-and-hold:

Source: 2023 Results Presentation (slide 11)

Its trading at around 10X peak earnings, not as cheap as I'd like but OK for a fast grower.  I bought a 5% position.

Risks:

• I don't have good knowledge of the semicon industry, hard for me to keep track of this niche (Suppliers of systems level testing equipment to Intel).

• In January an inventory shortfall was discovered, company said it was due to a manual mistake.  I believe theres no high-level fraud.

• The chart looks like shit and I may lose some fingers catching a falling knife.

• Or dead-SGX-stocks remain moribund, while Q's and crypto rocket in a new liquidity bubble.

I'm in a negative cash position now, so won't be buying anything else.  Will take a few months to pay off from my dividends/salary:

This blog will probably be quiet for a while.

Quick Updates: Risk On.

Bullish.  Now 99% invested:

• Bought more bitcoin 2 weeks ago, up to 5% allocation (buy price).  Bitcoin shot up after that.  This is a trade, follow the Hedgeye trend signals.  I am not willing to hold thru the cycle.

• Added small 1% position in Oil Tankers.  There is an upcoming shortage of VLCCs (22:00 to 28:40).  Its only a 1% position so I can average down later.  Risks are that 1) We may have a recession, 2025 onwards.  2) Rates are now artificially high from Red Sea Houthi Attacks, these will probably be resolved this year, so rates may drop.  3) From the chart, its not at the bottom now.

These don't invalidate the thesis but delay it, so I may get a better price later. 

Need to remind myself that this is cyclical, not a dividend play.  Don't hold forever.

• Copper turned bullish in Hedgeye's trend signal last week.  I added 1% FCX as the highest beta copper play. Want to add another 1%.  Copper is a risk-on inflation hedge.  But FCX is a trade, won't hold it through the cycle.

Long term I expect a decade of inflation.  Every position (except Delfi) reflects this.  Medium term it may alternate between growth-inflation (risk-on) and stagflation (risk-off).

Can't shake the feeling that we passed over a recession that we should have had, and some parts of the market are looking bubbly (middle-of-bubble in AI, and start-of-bubble in crypto).  But I think no downturn till after the election.  I am guessing that bursting the bubble would lead to unrelated stocks (like mine) selling off by 10-15% - a buying opportunity before they recover.  But I don't want to sit out the bull market because of a possible 10-15% correction in a few years.

Other notes:

• Delfi reported bad results due to higher cocoa prices, stock is down almost 10%.
• United plantations reported good results, stock up 10%.  Too bad my position was half the size of Delfi.
• Uranium needs to cool off after $100 excitement.  Fundamentally there may be a shortage of enrichment capacity that stops utilities buying.  I'll keep holding SPUT, its down almost 25% from its peak.  Gotta shake out the laser-eyed speculators.
• Hedgeye turned bullish on China, for the first time in years.  I am not buying, partially because I got no cash left.  If I did, it would be a trade.