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SharperDingaan

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  1. "There is something seriously wrong with supply chains, or too much money printed, maybe both that has kicked the fed into gear." Under globalization, China/Asia was North America's workshop. The result was a robust, reliable supply line delivering high volumes of cheap goods into North America. For the most part, as long as money supply grew at about the same rate as the flow of goods - expansion could go ahead with little long-term impact on inflation. (Growth in goods demand/growth in goods supply equals roughly 1). But .. the long term cost of this was massive deficits, and a permanent raise in the living standards of suppliers. China's economy now internally consumes a much larger piece of what was being exported, and supply chains are no longer robust or reliable. Relative to recent history, that ongoing Asian growth in goods supply essentially became negative, while money supply remained strongly positive - inflation. While the goods sold in both markets look different (packaging, design, etc.) - the reality is that they consume the same resources (labor, materials, etc.); so the more Asian markets grow/consume ... the less for North America. When a CB is largely just rolling its total QE stimulus year to year, the correcting mechanism is immediate and aggressive QT. Raise the cost of money via higher base rates and reductions in system liquidity, and collapse the basket cases to release the resources they are consuming. It's only a matter of time now until we start seeing the big BK's. Most would expect the BK's to start occurring Q12023, should 2022 Thanksgiving-New Year's sales not deliver on its promises. Opportunity. SD
  2. The reality is that until Europe/Winter energy use is over, there is minimal incentive to reinvest in capex expansion. The solution to 'solidarity' and 'windfall' taxes is to simply cut higher cost production to the minimum - and book the resultant large write-downs. 'Manufacture' (via write-down's) accounting income to the average of the last 3 years, and avoid the taxes altogether. Earnings drop, EPS drops, share price drops. However, cashflow remains unaffected (rises if capex reduced), debt continues to be repaid, and buybacks/special dividends become more widespread. Price rises simply because net supply continues to shrink. Over time, supply slowly getting replaced from written-down existing fields that go back on-line as price permanently rises. Minimal new drilling, as the industry progressively asset strips. Higher prices accelerating main stream integration of renewables - but until production and delivery platforms take up the slack ... o/g prices rise, and remain high. Recessions reduce demand, and lower inflation, until eventually there are real returns on hard assets again. Smart. Of course, it doesn't have to be this way ... as OPEC/SA/UAE point out. Renewables are highly desirable, but until users actually have the upgraded energy infrastructure to support EV and the related green industries, o/g is the practical transitional fuel of choice. And it will remain so, until users have a credible long term energy policy that is fully integrated with global supply/demand. No political leadership. History repeatedly demonstrates that political leadership is transitory. It breaks down, conflicts result because political solutions could not be obtained, winners eventually impose it; it works for a while ... then the process repeats. Remarkably similar to what we have today. Lots of opportunities, but until there is demonstrable credible stability again, Euro energy is largely un-investable. A while back, we used to say the same thing about Greek and Irish banks! SD
  3. Proposals like this, are a good indication of just how screwed up EU energy currently is - and this in addition to the expropriation and nationalization (Germany/Rosneft) if you choose to argue it. The good news is that all these companies go on sale in a big way, they will still be on sale late winter, and USD/CAD will have appreciated against the EU. https://oilprice.com/Energy/Energy-General/The-Single-Largest-Energy-Market-Intervention-In-EU-History.html SD Exceptional electricity demand reductions A mandatory 5% cut in electricity consumption during peak hours is proposed. This would require member states to identify the 10% of hours with the highest expected price, and take appropriate action to reduce demand during those hours. The overall target is a 10% cut in total electricity demand until 31 March 2023. Temporary revenue cap on “inframarginal” electricity producers Power generation technologies with lower generation costs than natural gas – including renewables, nuclear, and lignite – would get their revenues capped. The commission wants to set this cap at €180 per megawatt-hour (MWh), arguing that a high cap will allow operators to cover their operating costs and investments. The surplus revenue will be collected by member states and used to help energy consumers reduce their bills. The measure seeks to target the majority of inframarginal generators, regardless of electricity market timeframe (spot market, forward market, PPAs, feed-in-tariffs, or other bilateral agreements). The targeted revenue will be collected when transactions are settled or thereafter. The commission estimates that €117 billion could be redistributed through this measure. Temporary solidarity contribution on excess profits generated from activities in the oil, gas, coal, and refinery sectors These sectors are not covered by the inframarginal price cap. The time-limited contribution would take the form of an additional 33% tax rate to be levied by member states on 2022 profits that are more than 20% higher than the average profit over the previous three years. This measure is estimated to collect €25 billion.
  4. Different POV .... The current real return on a 2yr treasury is roughly -4.30% (3.96-8.26), and -4.69% on a 5 yr treasury (3.57-8.26). If a 100bp increase in interest rates instantly reduced inflation by 100bp; the Fed would need to hike by 215bp (4.30%/2) - just to get to a zero real rate of return. Then add to it, whatever historic real of return is deemed appropriate Of course, a rate hike does not produce an immediate 1:1 impact; as inflation lags, the same period impact is not 1:1. In the early stages the impact is a lot less than 1:1 as the economy still has positive inertia, whereas in the later stages it is a lot more than 1:1 as negative inertia in the economy compounds upon itself. There is a reason for the typical under and over shoots that occur. 215bp to get to zero real return, plus 35%? (75bp) timing difference to overcome the lag, plus 150bp? required for historic rate of return. Total fed hike required of around 440 bp (215+75+150) - or elimination of the current negative yield, entirely via a series of rate hikes. Most would think that the rate hikes are just getting started. There is strong incentive to go hard, go early, collapse demand so as to better match supply, and reduce inflation as quickly as possible. SD
  5. We take a very similar approach, but unless we're digging out from a too high cost base - we take the cash gain off the table. At the 50,000 foot level; if you reinvest the cash gain in more of the same, there was no net benefit to your casino win. You just have your original capital at risk, plus your new gain, over a larger share count at a lower cost/share. All else equal, as the cost price declines, the sooner you get into the green again. But take the cash gain off the table and you have the same share count - but on the original capital at risk MINUS lifetime net gains to date. Original capital at risk declines over time, until eventually there is NO original capital at risk Identical to the payback period of a corporate investment, with proceeds either repaying debt used to make the investment, or funding new/replacement investments. Successfully repeat over time, and in most cases you get BOTH a growing equity portfolio and a rising cashflow. SD
  6. For us, it's typically a round trip on 50% of the underlying position. MTM adjustments net out on the resultant swing-trade cash/50% position pair, but we're up cash if we can repurchase for less than we sold at. We win more times than we lose, but it can occasionally be quite some time before the trade is closed out. Best results are when you can trade industry seasonality. SD
  7. Existing gas pipelines will be tied into the new LNG degasification terminals; with new valves installed in the pipe to prevent the gas going to Russia. Going forward it becomes an egress problem for Russian gas, but otherwise no other changes. The Russian gas now has to compete for euro egress at the tie-in points - if it is more expensive than the Qatari gas, it shuts in. Elegant. As gas is a lot more 'forgiving', switching sources is much less of an issue. Different for oil refining, but at some point it will follow the same path as gas, and refiners will configure for both crude sources. Russia is stuck with just its LNG export terminals until there is new pipe to China. Given that under the current sanctions Russia can't finance its portion of the new pipe build without Chinese help, China controls the timing. Comes December 05, after ports close to Russian sea-borne access, were there to be an accident at those LNG terminals ...... All those non Chinese buyers of cheap Russian gas become very vulnerable. If the LNG carrier can't load, they have to go to the spot market; and if there ain't no gas .... welcome to higher prices. Traders market. SD
  8. Germany expropriated and nationalized the Rosneft assets. So ... when one of the biggest economies in Europe feels that it has to do this; one has to expect that the other European economies are about to do something similar. If I own a key euro energy asset that isn't closely aligned with the state - I now have the very real possibility of sudden 'temporary' partners; in anything energy shipping, energy loading/offloading facilities, pipelines, utilities, or consumer gas/electric distribution. I am not going to be making any money this winter from Europe's errors, if I am invested in European energy assets ..... SD
  9. For the most part, the distribution channels lock in the selling price for the summer. The brewer hopes for a hot summer, and the margin on incremental volume making up for cost increases through the summer. Summer was great, but with too many brewers there wasn't the necessary volume lift to adequately compensate for cost increases. Next summer is when you are going to see the higher prices, along with lots of promotion to move product. The brewers themselves clubbing together to brew their best lines in much larger contract brews that lower costs; one brewer brewing the base beer for everyone, each partner adding their own post production adjuncts, and the packager packing to partner specific specs. Joe six-pack still gets his thanksgiving pumpkin spiced ale - but it comes with different flavor shots, in different containers, and in different branded packaging. SD
  10. Just to add to some of the commentary .... Lot of craft brewers are budgeting variable cost and wage hikes of 3-5%, alongside overhead hikes of 10-15%; to maintain margins, expect to pay 10% more per can. The higher price means a lot less beer sold, closures across the board, larger quantities of fewer beers, and a lot of people on layoff. JIT supply chains only work if the chain is both robust and reliable. Currently, neither are true; inventory is piling up everywhere, and order cancellation is common place. Even our own brewery is jammed with enough packaging, cans and hops to take us through winter and the spring ramp up. And our inventory is not going obsolete .... The sooner, and the quicker, the Fed/BoC drops the economy, the better off we all will be. Sure, we will lose money to higher interest rates - but we will more than make it back on higher volumes of cheaper beer, labor/material savings, and have people back at work. Different PoV. Post Covid cabin fever has run its course. Now it's the great rethink, and widespread disruption in historic buying patterns, as higher prices force changes. Expect widespread lower volumes of activity, and a lot more focus on the value add. Not a bad thing. At the macro level, it is essentially a wash. Less business activity, lowering overall earnings, and reducing prices. Offset by earnings discounted at lower rates, raising prices. But to get the lift ... the Fed/BoC needs to beat down inflation as ruthlessly and aggressively as is practical. The good news is that they will get a lot of deflationary help from business failures, a drop in the market level, and taught supply chains unwinding as new orders cancel. Interest rates will not have to go as high as might otherwise have been the case. SD
  11. You might want to rethink the utilities exception .... Utilities make a rate regulated return on their capital invested: they take on debt to build the most efficient plant possible (increase capital + operating efficiency), and finance it against the guaranteed revenue; the rate regulated return essentially resets the benefit of the financial leverage at a specific number. However it does not restrain the operating leverage - so managers have incentive to run the plant as efficiently as possible. A specific utility is bought because management has found a 2nd operational use for it; getting paid for co-generational use of the waste heat the plant produces. The benefit being the extra revenue stream divided over the share count x whatever the P/E multiple is - ' cause the more of this you can do, the more extra revenue, and the greater the probability of P/E expansion. Win/win SD
  12. "The invasion force of 200k soldiers by most estimates has taken over 80k casualties, and the volunteer brigades of 60 year old men they have been fielding lately are hardly going to be enough to replace them." 60 year old's are too used to living by their own decisions - they run versus stay and get killed. Whether their commanders shoot them, or the opposition, they are old enough to recognize that they are still dead. Whereas if they run ... they stay alive, and can easily blend back into civilian hood - smart. And all that captured Russian armament in the field can now instantly resupply Ukrainian forces. Ever since Roman times (& probably before); the traditional defense has been to kill 1 in 10 of the remaining troops (60 year old's) as a warning to the remainder; deserters are shot for a reason. The riposte is to kill the commander before he/she kills you, and run. In the Vietnam era, it was typically a pair of grenades thrown into the commanders fox hole. This is quickly turning into another Russian Vietnam (post Afghanistan). Keep squeezing the orange to extract the juice, and eventually the regime collapses - the Ace of Spades, and most of the other high ranking cards in the deck as well. Even in the US, the Vietnam War eventually brought down the administration of the time. SD
  13. Buy a bond instead, and be done with the index entirely. Both the BoC and the Federal Reserve are aggressively raising interest rates; which reduces cost to purchase, and raises the coupon on new issuances. We also know that rates are being driven high enough to defeat inflation, following which they come down again (economic theory). Simply wait for interest rates to start the decline, then buy a long-dated Treasury/Canada/Guilt at your desired maturity. Above market coupon for the term of the bond, no fees, low risk (sovereign only), highly liquid, and rising in value as the market interest rate falls - zero concern with whatever the index is doing. If in Canada - annual coupon receipt marginally > RRIF minimum withdrawal requirement. https://cupfa.org/wp-content/uploads/2012/05/Comparing_RRIF_to_Annuity_from-RetirementAdvisor_May2012.pdf Clean, simple, and idiot proof. SD
  14. It comes down to whether you think you make more being long Euro XYZ Energy Company for 4 months, or by being short on it (delaying your purchase) and getting paid to wait. On the short side, all that is really required is something in Euro land blowing up, that makes press headlines. Even the best jugglers can only keep so many balls in the air, and the more jugglers there are (every country in Europe), the greater the probability that at least one of them makes a mistake. On the long side you have to guess right, get the timing right, always have the liquidity to rapidly exit, AND have management not screw it up. All within a business environment that is very volatile. Which one of these two approaches has both the lowest risk, AND the highest return/unit risk? Depends upon the eye of the beholder. SD
  15. There is a lot of merit to simply parking money in USD treasuries, then using it to buy something in Europe during the depths of winter. Pounds and Euros are progressively devaluing against the ongoing US interest rate hikes, and waiting gives the various European energy issues time to blow up. If you can get 5% more for your USD, and can buy at 15% less - that's quite a bit of additional margin of safety. And all for free SD
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