SharperDingaan

The SPR release has been hiding the near 1M boe/day US supply/demand mismatch. When the SPR release ends it will amount to another 1M boe/day cut in global supply, over and above the 2 M boe/day OPEC+ cut; sending crude prices up further. Doesn't look good for midterm re-elections when inflation is still 8%+, not really changing despite 200bp+ of rate hikes, and folks cant afford the gas to freely run their SUVs anymore. Post election most would expect a lot more Canadian south-bound heavy oil rail shipments, and a lot of new shale drilling to refill the reserve. The larger gas cuts on new wells feeding LNG exports, and the NA focus a snub on the SA refusal to delay cuts by a month. Additional carbon load from higher tar sands throughputs offset by lower carbon load from higher use of gas. Higher gas prices are also your friend. It's hard to sell the environmental story, when folks are having difficulties covering their costs every month, and you're driving gas prices past USD 6/bbl. Lose the midterms, and it changes the equation. ESG is fundamentally about how you make your profit, hence the appeal to younger generations - or governance. Whereas CSR is fundamentally about how you spend that profit amongst stakeholders, hence the appeal to the political world - or management. Governance directs, management does ... and management that doesn't, gets replaced. SD

Keep in mind that you still have to live with the great many who are losing their shirts, and progressively bankrupting. It isn't a pleasant experience, and it is very hard to meet friends and neighbors in the eye. Long time ago I helped a former Nortel client keep his option compensation 'funny money' through the collapse into bankruptcy. To minimize the wealth impact, we kept rolling the puts and spending the cash settlements on 1oz gold wafers at ridiculously low prices. When he eventually got packaged out and paid primarily in cash, he went to check his safety deposit boxes. The man came out with tears in his eyes. All around him, long-time friends and colleagues were losing their houses, their marriages, bankrupting, and in some cases even committing suicide as they'd lost everything. Yet here he was ... with a very good cash settlement, and literally boxes of gold wafers worth at least 4-5x what he had paid for them. Ultimately, he had to get help for a time. Today, there are a great many people who have benefitted from decades of Secret Santa. Point? It's not just about relative wealth, it's also about how you got it. SD

Our recent UK investment was three flats in London that were bought cheap because of structural damage. One of the uncles is a UK Quantity Surveyor, and we have a family friend who is also a structural engineer with experience in the UK construction industry. While the structural repair will be costly, it will be cheaper and quicker than demolish and replace, and the location warrants it. Upon completion we will be left with 2 very desirable modern flats, leased to our nephews, financed against a small mortgage. They can use the places themselves, or re-lease to someone else; but they will manage the properties - and will be responsible for cash shortages should they occur. Unique situation. I have always taken the view, that you plan today for where you would like to live 10-15 years hence - how long you will be there, what kind of property, what location, etc. After that it's just a matter of opportunities, and taking advantage as they materialize. Take advantage of the strong USD to buy up a few government bonds in the target country, and simply wait; at some point there will be a crash in the local property market, and that will be the time to go shopping. The exception to this, is if the target country has a history of ongoing devaluation. Different kind of animal. SD

"Blockchain does not solve real world trust problems. You still need to trust that the real world reflects what happens in the blockchain." Nah. Blockchain reduces corruption by making it harder to steal the money without trace; can't get off the off-ramp without leaving a trace to either your bank account, or the ATM that you used. And there is no point to substituting that old beater, if you cant get the money - trace free Of course there are ways around CBDC/blockchain, but it requires more sophistication, and ability to pledge security. Simply remove 30% of the 'little fish', and the level of corruption automatically declines. SD

Agreed, but right after WWII that wasn't the case; the black market thrived, and bribing to obtain all kinds of industrial 'favors' was a very common practice. People had to live, there was little infrastructure left, and they did what they had to do. Per the Corruption Perceptions Index (CPI) Germany (80) is less corrupt than Canada (74), and less corrupt than the Ukraine (32). While corruption is indeed the regional norm around the Ukraine, it is not the case in Estonia (74) where blockchain is in wide use. Most would expect that the financing to rebuild Ukraine would be primarily 'western', distributed using blockchain, and that corruption would average out at around 53 [(74+32)/2]; or about as corrupt as a Cypress (53) or a Saudi Arabia (53). Not great, but at least tolerable. https://www.transparency.org/en/cpi/2021 Cypress has long been a Russian money-laundering hub, and Saudi Arabia has long been the source of a good chunk of western oil and gas. Corrupt, but not corrupt enough to avoid doing business with. SD

Most would expect that the Russia/Ukraine special operation is going to end up a draw. Ukraine part of NATO, all annexed Ukrainian lands back in Ukrainian control, a new iron curtain on the border, and an agreement on both sides to withdraw short-term nukes from the frontier. No incursions into Russia, and no prosecution for war crimes. https://www.bbc.com/news/world-europe-63189627 The flip side is that on cessation of hostilities, large parts of Ukraine will very much resemble large parts of Germany after the bombing of WWII. Should reinvestment and rebuilding with state-of-the-art infrastructure, do much the same as it did for Germany; Ukraine becomes a future dominant regional economic power in the east. Level of corruption not much different to what it was in Germany at the time. The mystery is the path to peace, and the path to regime change in Russia itself. Lots of volatility, but the end point would seem to be pretty much baked in. SD

Headline inflation will come down simply because of the way it is calculated; current month additions smaller than current month roll-off. Which is essentially, confirmation of the anecdotal observations that we see all around us everyday. Thing is, current month additions do not fall unless market liquidity and market confidence is reduced. This is where the CB's just do not see adequate evidence of it yet, so continue with the rate hikes and the QT; entirely different PoV. Hence CB's keep reducing until we will get a market seizure, and a step-down in market confidence. While CB's have lots of practice in restoring markets, the reduction in market confidence remains for a while. Hard to argue against. To quickly get to positive real rates of return again, we collectively need a big drop in the inflation rate, and less market liquidity and market confidence. If you are a sales person reliant upon market confidence to facilitate transaction occurrence and commission income ... this is terrible. Talking heads are in the marketing business. SD

There is a very big difference between selling to initiate a swing trade, selling at some risk adjusted target price, and selling just the beneficial ownership. We routinely do swing trades and win more often than we lose. We almost always lose on the risk adjusted target price - sold too early, missed the subsequent big move, didn't sell when we should have, etc. We almost always win on the beneficial ownership - sale of calls that didn't exercise, margining to withdraw value, etc. Swing trades are never 100% of the holding, at most it's a 50% sale to achieve MTM neutrality. It is one thing to take advantage of current market opportunities, but if you are not on board with the company's overall plan - you really shouldn't be in it, period. The bar that scorpioncapital speaks of below. Point here, is that we use the sell decision as primarily a portfolio wide risk reduction tool, not an end as to itself. Different PoV. SD

Family investments are little different to institutional investments; they require a very clear Investment Policy Statement, reviewed every 3 years. Purpose, objectives, risk constraints, etc. Our primary objective is training, and not a minimum return. We're in it to make money, and fund various objectives - but it's really all about transferring skills, and walking the talk. Our best return is an investment blowing up, that requires the uncles expertise and experience to fix - hence crypto and UK housing development as desirable long term investments. SD

People are talking their book. - the 'advice' to 'slow down' the interest rate hikes is just evidence that the hikes are working. People are teaming up to sell the collective 'we're too big to fail' argument, that justified the long standing fed 'put' - and the addicts are telling everyone that it's madness to discontinue it !!! It would seem that the economy is indeed slowing, liquidity is drying up, asset bubbles are deflating as rates rise - and that it is becoming harder to move the dog sh1te. CB actions are working. Thing is - this ain't the GFC anymore, and times have changed. There are far too many financial intermediaries for the coming financial innovations, we need a market driven cull, the most efficient way of doing that is by pulling the 'put' and letting the distressed go. We started the decade+ of CB intervention with the Lehman Brothers collapse, we end it with a repeat, restoration of moral hazard, and new financial rails. The collateral damage reducing the gap between the rich and the poor, and facilitating a social 'reset'. SD

The enterprising lad would be looking to a swing trade. Sell 1/2 a position into the returning open. Buy it back again after the November rate hike. Reinvest in additional shares for sale into the traditional Xmas 'Santa Claus' rally SD

Gas markets are local, not global; local demand will pull in supply, but the supply is limited to what can fit in the pipe. Without a sizeable local gas source, all else equal; the local gas price in Berlin will depend upon the number of feeder pipes into Berlin - and their diameters. The further you are from tidewater, the more you pay for the gas. Sure, lots of places have Shale - but the expertise to drill it is very concentrated, and often viewed as a strategic export. To use US drillers to open foreign fields, will typically be tied to use of US engineering, US shipping, US refining, yada, yada, yada. A significant issue for many of these locations. Everybody loves shale ... until they discover that they can light their tap water. Shale production is developed in remote areas for a reason - Europe is largely too populated. Europe's local markets may eventually pay global price for their gas, but it is going to take a very long time. And by that time - much of the demand will have switched over to electric. Local gas prices permanently higher for longer. SD

The US Fed is not going to stop raising rates for a while yet. While the EU is currently matching the rate hikes, comes the winter energy situation, it will not be able to - and EU/GBP devaluation against the USD will worsen. EU goods are getting cheaper, but the reality is that with no energy the incremental supply is limited. Goods on-shored to the US are primarily to improve supply chain robustness/resiliency; foreign cost + transport cost has relatively little to do with it. Even with the greater distance, China is still going to be a cheaper source than the EU, and for quite some time. Every former treasurer, knows that to nullify FX risk; fund the foreign asset with a liability in the same currency. Long time ago we deliberately mismatched by mortgaging in GBP to buy laddered Canada's at 1 GBP to 1.69 CAD. Today, as those Canada's mature, CAD proceeds convert into GBP at 1.49 CAD to 1 GBP or better. We end up with no GBP mortgage, and a bump in GBP equity resulting from the FX gain. While we had the GBP mortgage we lowered our UK tax bill, and used the Canada's to support tax deductible margin borrowing. The result was sizeable enough o/g gains to fund the down payment on the next property. Fortune and glory! SD

"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. The Fed 'put' ended a long time ago, the shape/magnitude of the yield curve is being restored to historic 'norms', and 'moral hazard' is back on the table. Add to it that a great many analysts have no experience with anything but the put, and it is 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. The return of 'moral hazard' also has to be seen - for it to be believed. Poster child opportunities. SD

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

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.

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

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

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

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

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

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

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

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

"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