Viking

Both Buffett and Lynch were two people who got me started on my ‘successful investing’ journey… so i will be forever grateful to both men. I still read One Up On Wall Street pretty much every year (different chapters). And i am a Buffett junkie. Might as well ask a parent who their favourite kid is… not going there

I think the next inflection point for the Canadian producers will be when they have hit their net debt targets. Much of what they are earning right now is largely masked because it is going to debt reduction - and the real benefit to shareholders is seen over the long term. (The opposite of what happens to companies that take on a bunch of debt - which usually boosts short term results). It looks to me like the sweet spot will be Q2 of 2023. By that time most Canadian producers likely will have hit their final net debt targets. And at that time 100% of what they earn will likely be returned to shareholders. And it oil continues to trade +$100 the returns for shareholders will be crazy. If oil goes to +$150… well, we can all dream… ————— The fly in the ointment might by M&A. We are already seeing some of it. Cenovus recently purchased assets from BP; but so far these purchases look pretty rational and at fair prices (cheap if oil prices stay elevated). We know most non-Canadian publicly traded producers are desperate to exit their Canadian oil sands assets so there are lots of sellers. The problem for Canadian producers is they have been aggressively paying down debt over the past 18 months which has been delaying the big payback for shareholders. And if they now start making big acquisitions before shareholders get more fully rewarded it will create quite the optics problem (unless the price is low and/or the strategic fit is compelling).

@jfan i was just about to post the same video (just watched it). Lyn Alden pointed listeners to Josh Young in one of her recent video’s so she obviously follows him. Anyone who wants to understand the current state of the oil market would be well served to watch Josh’s presentation. It is a fantastic summary of the current state of the oil market with lots of good historical information. Logical. Fact based. Not promotional. For those wanting to understand why Warren Buffett just dropped tens of billions into oil companies, paying what look to be peak prices… watch the video. There is a structural imbalance today in the oil market (demand > supply) that cannot be addressed in the short term (absent a severe recession like 2008). So oil prices will remain higher for longer… And there is a very good chance oil prices will go much higher. $150 oil is not a crazy number. And expect crazy volatility (like we are currently seeing).

@backtothebeach you make a great point. And one that i struggle with. What is the proper way to look at historical data/information when trying to value assets today and into the future in a high inflation environment? Investors have been working in a falling/low inflation environment for +40 years so have not had to think much about this. I like to look at 5 year stock price charts to get a quick idea of how a cheap a stock is trading (i.e. i love it when i see profitable and well run companies trading at or near a 5 year low). Obviously doesn’t mean i buy them… but it often helps identify opportunities. And when buying real estate, looking at historical prices is important. Yes, there are lots of other important things to consider when buying assets. But how useful is historical information in a high inflation environment that runs for years? A real life example: i starting to look for a 2 bedroom unit in a popular part of Vancouver (Kits). These units average about 850 sq ft and cost about C$850,000. Now if inflation is running at 8% for a year and prices stay at $850,000 does this mean the unit a year later is now really worth about $780,000 (in inflation adjusted money)? And if inflation runs 6% in year 2 does this mean the units is now worth $735,000? Meanwhile i am waiting for a 10% correction in nominal prices… which might never come. Now if inflation was running at zero and 2 years later that $850,000 unit was selling for $735,000 i likely would be running to buy it. (For real estate in Vancouver WE KNOW cost to build is going up at least at the rate of inflation. We also know rent is going up at rate of inflation - especially in Kits). And if nominal prices actually come down 10 or 15% is that not a beautiful thing in a high inflation world for people looking to buy assets? (Falling nominal prices is NOT a good thing for asset owners in a high inflation world.)

Added to SU and re-established position in CVE (their refinery business should be printing money). My cash weighting is still around 55%; I sold some Fairfax to fund my move back into energy.

The current sweet spot for energy looks to be refining where margins are nuts and look like they may stay high for a while. Q2 earnings for anyone with refining in their mix will be huge. Time to learn more about refining. ————— Looking way, way out… like to the fall (4 whole months away…. an eternity away for Mr Market) what will Europe (entering winter) and the nat gas picture look like?

@Dinar the supply side of the equation is super interesting. The deficit today is very large: 1.) inventories are at historic lows (and they keep coming down) https://www.rigzone.com/news/oil_inventories_down_to_dangerously_low_point-24-may-2022-169095-article/ 2.) OPEC spare capacity is very limited 3.) Russian supply is constrained due to war 4.) to try and lower prices, governments are releasing massive amounts of oil from strategic reserves. This cannot go on forever and the barrels released will need to be replaced. - https://science.howstuffworks.com/environmental/energy/us-oil-reserves-last.htm Yes, new supply from Iran and Venezuela would help increase supply. This is something to monitor moving forward. Bottom line, we have a pretty severe supply problem today that is likely to get worse in the near term. And this supply problem is keeping oil prices over $100. ————— On the demand side, it is worth noting we have a severe demand/supply imbalance with China (and large parts of its economy) in lockdown as a result of its zero covid policy…

We are exactly 6 months into 2022. Oil was my top pick to make money in 2022. And oil has performed spectacularly well (especially when compared to the overall stock market which is down 20 to 30%). Russia’s invasion of Ukraine was gas on the fire. However, oil was a trade for me: i actually started exiting my very oversized position in late January and was largely out of oil in Feb/March. Since then i have bought oil a number of times on big sell offs and sold a short time later for a nice quick gain. Over the past week i have been doing a fair bit of reading on oil and gas. And today a light bulb went off for me: i think oil is poised to do well for YEARS. i am starting to drink the secular bull market Kool-Aid. So I was buying oil again today and now oil is 4% of my portfolio. And if oil continues to sell off i will likely buy more. Why do i like oil as a secular investment: 1.) global demand will continue to grow each year by about 1 million barrels per day for the next decade. Demand is doing what it has done for all eternity: grow. People want to live a better life. The best way to do that TODAY (and the next 5 years at least) is hydrocarbons. 2.) supply, already in a deficit, WILL NOT be able to increase production by anything close to 1 million barrels per day for the foreseeable future. The supply function has permanently changed in Western countries. Thank you ESG (oil is a hated and villified industry… who in their right mind wants to work for an oil company today. Good luck attracting young talent). Investors do not appreciate what this now means for oil prices. PERMANENTLY HIGHER PRICES. Yes i know… that is a crazy thing to say… but i think it might be true (at least for the next few years). This means oil companies are going to keep earning outsized profits. Right now profits are going mostly to pay down debt (that ESG thing… banks can’t lend to dirty oil)). Once the debt is paid down shareholders will get paid. By the middle of 2023 the payouts to shareholders could be absolutely NUTS (10-15% dividends based on todays stock prices). Here is an update from Amrita Sen… very smart lady:

Energy right now is looking like steel and lumber did a year ago. The energy companies are making obscene amounts of money. But unlike steel and lumber it looks to be like the profits for energy companies will likely remain higher for longer. If we get a further sell off of energy stocks (on recession fears) it might be time to increase exposure again. Energy has been my best ‘buy the dip’ trade the past 3 months (paid out every time)… My usual buy is Suncor. But i am starting to look at a few of the smaller producers. MEG is looking interesting but might not get much love until more debt is paid down. I like that they are unhedged. What smaller energy producers are board members big on right now?

Where this discussion gets really interesting is if we get a recession around Nov and oil goes back to $60. You could see inflation drop dramatically. The Fed would be able to pivot. Or we could get that same recession around Nov and oil could go to $150 (due to geopolitical situation). This would keep inflation high and likely prevent a Fed pivot. So the range out possible outcomes really are quite large. And the impact on financial markets will vary depending on how things play out. Keep the popcorn coming… the movie is not nearly over yet. ————— For most investors probably 70% of total returns is likely driven by successfully anticipating/negotiating Fed policy. Capitalism 2.0. This has been true since 2008.

I have been trying to better understand India’s posture on the war in Ukraine. The speaker in the video below succinctly explains one of the key factors driving India’s response: security. Go to the 35:40 mark of video (discussion of India starts at 32:30 mark). China is India’s primary external threat. India’s security/military is built around managing the Chinese threat. And pretty much all of India’s military equipment is supplied by Russia - including munitions and spare parts. (Vietnam is in the exact same situation). And it would be massively expensive for India to pivot away from Russia (the speaker said it would not be like a consumer pivoting from Apple to Android when deciding to switch smartphone platforms which got a good laugh from the audience). ————— Viking’s additional comments: There are also significant economic benefits to India of supporting Russia: cheap oil, cheap fertilizer and first in line for grain shipments. All important for a country looking to raise much of its population out of poverty. And also wanting to avoid an all too possible political crisis (driven by high energy prices and lack of food). —————

I voted yes, inflation will start to come down. Why? I expect global economic growth will continue to slow in 2H (it is already happening). Now my guess is also that we see inflation come down only a little - from +8% to 6%. So still a big problem. And where inflation goes from there will depend on the Fed. My guess is they capitulate (and pivot). And that, of course, will likely result in inflation picking up again later in 2023. Bottom line, i think inflation likely remains uncomfortably high for years (with low interest rates). Financial repression like the late 1940’s - that is how you solve a too much debt problem. Which might actually be the Feds end game.

The biggest challenge for Berkshire post Buffett will be the scrutiny of every decision AND THE FREE PASS BUFFETT GETS WILL BE GONE (decisions, corporate structure, governance etc). Sub par returns for a decade? With Buffett around you tolerate it (even celebrate it)… because it is managed by Buffett. Sub par return for a decade post Buffett? Why would a rational investor hold it any more? ————— For years now Buffett has been primarily focussed on preserving the wealth of existing shareholders (the ones who bought in early). This is very different from how most companies are managed today.

The rental market in Vancouver is absolutely bonkers right now: super tight supply and spiking rents (for new rentals). +$1,500 for one bed and +$3,000 for two bed - if you can find them (and then beat out other applicants to secure the place). Prepandemic it was not unusual for landlords to get +30 applicants when listing units onto the market… and i think we are probably back to those market conditions. ————— In my neighbourhood (i rent a house) my guess is rents have increased 20% in the past 18 months (18 months ago supply for rentals was highest in many many years due to covid). Crazy thing here in Vancouver is we have rent control. My landlord was ‘allowed’ to increase my rent 1.5%. Nuts.

I am starting to buy into the thesis that we get an earnings recession in the coming quarters and perhaps not an actual economic recession (although growth is slowing). Why? We have a labour shortage. Still. High inflation and a strong labour market = higher than expected interest rates. Maybe we actually see interest rates close to 4% across the curve in the coming months. We will see Earnings recession + flattish growth + high inflation + solid labour market

Yes, recessions are not good for banks. With BAC selling off close to 40% i think its current share price already discounts a slowing economy. If we get a mild recession it will probably sell off another 5-10%. If we get a severe recession perhaps it sells off another 15-20%. Or maybe the narrative shifts and stock pops 10-15% higher. Maybe the stock at $31 already discounts a mild recession? We just don’t really know. I would love to bottom tick all my purchases… but i don’t think that is a realistic objective.

Care to share your top 3 holdings (highest conviction ideas as of todays prices)?

I am down to 40% cash. I am going to be patient until we see what happens with earnings season in July. I think earnings estimates are too high… spiking interest rates, oil and US$… and now a slowing economy… will hit corporate margins at some point in time. If i am right and earnings and earnings outlooks come down as companies report Q2 then analysts will be bringing down their 2022 and 2023 earnings estimates. And this will give us perhaps the final flush down in equity prices (or at least the next leg down). If not, i am 60% invested. Regardless i am confident Mr Market will serve up more wonderful opportunities in the coming months. ————— Normal bear markets take about 18 months on average to play out. We are what, about 6 months into this bear market… and inflation (the reason we are having a bear market) is not yet under control…

I think there are lots of puts and takes with financials today. My decision to buy today is more driven by my belief that these 2 stocks (BAC, FFH) will be trading much, much higher in 2-3 years. Yes, lots of volatility, especially for the next 6-12 months. I think the stock prices today bakes in lots of the downside. Will they get cheaper? Probably. But when they move higher it will likely be quick and i do not want to try and get too cute with my positioning. I do have lots of cash to buy more should they continue to sell off. I bought BAC today at $31.40 (my average cost is around $34). This is close to 40% off its recent high and the same price it was trading 4.5 years ago. They are a cash machine with most of the cash buying back stock (so its market cap at $260 billion is much lower than it was 4.5 years ago). BAC is morphing into a tech play (best in class). And it is levered to the US consumer (who are in great financial shape). 2 to 3 years from now (if not sooner) the stock should be back to $50. I will be buying more if it keeps going down. Fairfax just sold a largely unknown pet insurance business for US$1.4 billion (10% of its market cap of $14 billion). Fairfax shares today are trading at US$480, LOWER than where they were trading 8.5 years ago. Fairfax is also a big winner from rising interest rates (given average duration of bond portfolio was 1.4 years at end of Q1). We are are also in a hard market so top line growing nicely and should continue to increase to offset risks of inflation. Yes, Fairfax’s equity portfolio will be down substantially in Q2 but that is normal for equity holdings. My guess is BV will be up nicely in 2022 to something north of US$675-$700 at year end so shares are trading at about 0.70 x 2022 YE BV. The YE BV will have equities priced at distressed values. And in 2023 interest income will be much higher (perhaps $1 billion) and underwriting income could be stellar as well. I will be buying more if it keeps going down. (I did have US$450 as my ‘get aggressive’ price. The pet insurance sale pushed this higher.)

FFH, BAC, SU

@Spekulatius makes sense. I did re-establish a small position in Suncor today (my usual go to for oil). Along with Buffett I am drinking the oil Kool-Aid. I also am going to look more closely into Potash given the wars large impact on this specific commodity. Everything else (metals, lumber, steel) i am going to just monitor given the near term outlook (not good should we get a slow down). As compared to 2 years ago lots of commodity producers have reduced debt and are sitting on substantial cash piles creating a very interesting set up should the shares continue to go lower. Crazy how quickly sentiment changes.

So does anyone have any strong views on the commodity complex these days? It is getting taken out behind the woodshed due to recession fears + parabolic move higher the past 4 months (way over owned). Is the bull market already over? Or is this just a healthy move lower before commodities make their next move higher? What parts of the commodity complex/companies are people getting interested in buying? Commodities, especially oil/energy, was the best performing sector this year. The bear market is now doing its thing. Oil: of all the sectors this is the one that looks most interesting to me in the near term. Fertilizer: not sure a mild recession changes the bull thesis all that much… perhaps time to get up to speed on this sector. Copper/metals: the supply/demand picture (due to EV transition) is very bullish for copper in the medium term. But over the next 6 months? Not sure… Lumber: i do follow this sector pretty closely and i am surprised the lumber stocks are holding up as well as they are given the near term outlook. Steel: i am watching Stelco. I hope it keeps selling off… they have so much cash on the balance sheet… Other sectors worth looking at? The question is if we get a mild recession in the coming months how low could the commodity complex go? A big commodity sell off would also be very helpful for the inflation picture in the near term (expectations of lower inflation also will reduce demand to own commodities as a hedge). Is the super cycle already dead?

i think the macro picture is very murky right now. so it is hard to know how things will evolve (or devolve) over the next 12 months. The Fed has just gotten started with its objective of tightening financial conditions… the real pain has not happened yet (20% decline in S&P from crazy high is not pain… it is just a run of the mill healthy correction). +30% decline? Ok, that would start to hit the pain threshold. Much of the easy money has been made: - shorting stocks and bonds - buying real estate - buying commodities I like Druckenmiller’s response: no strong conviction right now (as of a week ago). My solution? Carry a large cash balance and wait for the next fat pitch. Where i live (Vancouver) real estate prices are slowly turning lower and it is likely prices will continue to decline into the fall. I am looking to buy a 2 bedroom condo for my kids (graduating from university in a few years) and if prices come down 10-15-20% i will likely pull the trigger. To take advantage i need cash. I think earnings estimates for equities will be coming down for FY 2022 when companies report in a few weeks. If so we could see another 10-15% decline in equities in the coming months. To take advantage i need cash (versus trade positions). I continue to think in bear markets capital preservation is the key… so you can scoop up great bargains when most everyone else is lying in the fetal position crying. Cash. Patience. Opportunity. Action.

Hopefully this is an example of Fairfax being opportunistic. They already own 13% of JKH (185 million shares) worth around US$85 million (at todays closing price). With this financing it looks to me that Fairfax will get 208 million more shares (in 18 months) for US$75 million. Post conversion they will own 24% of JKH. I would imagine a well funded JKH may well be able to grow their market share given the crisis in Sri Lanka??? ————— Our Group - https://keells.com/our-group John Keells Holdings PLC is Sri Lanka’s premier diversified company. From managing hotels and resorts in Sri Lanka and the Maldives to providing port, marine fuel and logistics services to IT solutions, manufacturing of food and beverages to running a chain of supermarkets, tea broking to stock broking, life insurance and banking to real estate, we have made our presence felt in virtually every major sphere of the economy. Since our modest beginnings as a produce and exchange broker in the early 1870s, we have been known to constantly re-invent, re-align and reposition ourselves in exploring new avenues of growth. ————— The transaction amounts to a value of Rs.27.06 billion. The debentures will be issued at a price of Rs.130 each, resulting in the issue of 208,125,000 debentures to Fairfax with a maturity period of three years. The debentures will accrue interest at a nominal interest rate of 3 per cent per annum. Fairfax can convert each debenture to one new ordinary share of JKH after 18 months from the date of issue until maturity. The maximum post-conversion dilution as a result of the issue amounts to 13.06 per cent if all debentures are converted into new ordinary shares of JKH.

Hugh Hendry clearly made some poor choices when he was a little younger. What i like about Hugh? He is a bit of a historian (he is an old guy). And he tries to step back and look at the big picture when trying to explain what is going on (that framework thing). He is flawed but entertaining (in small doses). So many really interesting things going on with the US hell bent on increasing interest rates to tame inflation. Interesting hearing Hugh’s take on the rapid depreciation of the Japanese yen. Making Japan MUCH MORE COMPETITIVE versus all other Asian economies. Especially China which is pegged to the US$. South Korea can’t be very happy. If the Yen continues to devaluate (seems likely) at what point do we see other Asian countries respond? Perhaps time to read up on ‘1997 Asian Financial Crisis’.