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.