Kupotea

Price drives narrative and timeframes matter. In 2022 it was clear to everyone that rates had to go up and that would lead to slower growth (likely a recession) and lower valuations so the market tanked. The recession didn’t materalize because of excess savings accumulated during covid which meant a resilient consumer. Now we’re back close to all time highs, no excess savings, multiple contracting sectors and many marginal firms are going to struggle to roll over debt at current rates. Was the drop in 2022 justified? Does any of this matter in the long run? I’m not personally the buy and hold forever type. I’ve yet to find a company where I feel confident what the earnings will be like 10 years from now. I know Buffet and others have done this to great success but I personally lack the conviction. I feel far more confident in finding cheap businesses with a catalyst or looking through a trough to normalized earnings. That means for certain investments i need to have some sense of where we are in the business cycle. It’s not easy but it’s also not easy to find great business that will compound for decades. There isn’t one true investment style and i find it a little funny how much energy some people are devoting to tell others the right way to invest.

TLT and March puts on QQQ.

Not to mention that with the rapid decrease in headline CPI you have real yields soaring. Hard to see how this doesn’t cascade into a credit crunch unless the FED does an about face soon.

Large buys of SU, CVE, VET, TCW, NE, STNE. Counterintuitive market reaction and I think there's a good chance the recession sensitive/inflation trades rally hard over the next few months.

I don’t think you need a recession for stocks to perform poorly again this year. Lets assume the economy keeps chugging along which by all indications it has to date, where do long term treasury yields go? What’s a fair risk premium for equities if the 10 year yields 4-5%? Look at how copper is reacting with China reopening. Do oil prices stay subdued with low inventories and a global economy moving forward at full strength? How do you convince an entire cohort of retirees to come back to the workforce? There are compelling arguments that the economy remains strong. There are also indicators that we get a recession sometime in H2. I have yet to see a convincing argument that long term rates should be inverted without a corresponding hit to earnings.

I think there are two very important reasons for sticky inflation: 1) Tight labour markets due to baby boomers retiring. 2) A long period of underinvestment in commodities + ESG concerns. Hard to see anything resembling deflation unless you solve for those structural issues.

If this is the case, I continue to think coal producers with exposure to Newcastle pricing are the biggest beneficiaries. Local nat gas suppliers are going to see those heady profits taxed away.

I think it’s pretty much impossible to forecast a market bottom but it’s a lot easier to read existing market sentiment and general positioning. We just went through a 10+ year bull market with a classic bubble blow off. For the most part investors still have an overweighted allocation to equities. The narrative is changing to a recession without a quick FED bailout. There’s plenty of reasons for more fear and selling pressure. Whether that makes sense or not in the long run doesn’t matter because short term sentiment is what matters. One day we’ll run out of sellers and the market will start to climb on bad news and that will be the bottom. I don’t think it’s the worst thing in the world to have a pulse on the market and a macro viewpoint as long as that view remains fluid.

Anyone else think the top is in for yields? At least until we get the next round of aggressive QE...

Up 26% YTD. Mostly well timed entries and exits into various energy related stocks. Currently 50% invested and 50% in cash. This year has been a completely different approach than buy and hold which I've stuck to in the past. I've held the mindset all year that the general trend is down and have tended to only stick my neck out there for obvious opportunities then sold at the first sign of weakness. I'm still torn between greed in relation to structural commodity shortages and the fear of a global recession.

Bought a fairly large chunk of NE.

I agree with you that demand is likely to fall into the new year. My point was more that the broader stock market can’t have it both ways. Either we get a recession bad enough to squash demand or if the FED pivots and we skate by then an energy crisis is waiting on the other side. Based on my own positioning i’m hoping we do get a dip in energy prices so I can load up before the inevitable reflation.

Just doing some back of the envelope math it looks like US oil+distillate+gasoline have been drawing by about 5 million barrels a week on average in 2022. You have maybe 200 million barrels of oil readily available between commercial reserves and the SPR before you run into issues and need congress to tap the remaining SPR. So that's about 10 months to get supply more in line with demand. Global spare capacity is essentially tapped out as OPEC hit its ceiling back in July despite falling well short of their quota. It's also not just a question of capex with the oil producers as there literally aren't enough working oil rigs and fracs to meaningfully grow production if you wanted to. You need at least a 6 month lag to go out and build more fracs, etc. but with a recession looming over everyone's heads and ESG concerns will that actually happen? I think the market is seriously underestimating these issues. Either the global economy gets whacked sometime soon and demand falls enough to meet supply or, if all these fears are overblown you just walk right into an energy crisis by next summer.

Biden is proposing a ban on US oil products. He’s also floated the idea of reinstating the US crude export ban from the past. Obviously either or both of these scenarios would have ramifications for US refiners and producers. It would also be terrible for Canadian producers who have no access to tidewater. I’m wondering if anyone knows how it would impact Canadian producers who export out of the US to global markets? Would flow through exports have similar restrictions? If you add US diluent to Canadian heavy midstream does that make it a US product? Does anyone know any good producers tied to Brent pricing? I’m thinking Australia may be the best market to look into but wouldn’t be surprised with a windfall tax in that jurisdiction if Brent moons.

Under normal circumstances it wouldn’t be but with significant demand destruction and fuel switching it should be enough. As always though it depends on the weather.

Yes somewhat. I don’t believe 4% long term yields are sustainable so either the FED tips their cards and the entire curve flattens down or within the next year we see the long duration stuff invert as things start to break. Seems like a good risk reward bet at this point. My only fear would be if the FED pivots so hard that inflation rips higher but that’s a pretty low probability event in my opinion.

Bought a large amount of TLT and some energy stocks TECK.B, BNE, MEG.

I think the best energy play is coal producers at the moment. You have companies like BTU trading in the range of 1x EV/EBITDA based on next year’s strip. Obviously coal will be phased out of western economies within the next decade but I just don’t see the developing world moving away from the cheapest source of available base-load electricity. As long as coal is cheaper than natural gas I expect increasing demand from India, China, etc. All the supply side constraints applicable to oil/gas (lack of available financing, lack of certainty for future demand, etc.) are even stronger for coal.

TBF. Economy isn't that weak and inflation isn’t low. Bond yields are heading higher.

Can you give more of your insight into what you feel the market has already priced in? The way I see it, the market has shrunk multiples in response to higher rates but is still a ways away from pricing in a reduction in earnings. Even if it is just a mild recession.

Agreed but supply is only so elastic. With a current deficit and spare capacity almost fully tapped you get demand destruction as the balancing factor. You need a way to encourage supply growth in what many see as a sunset industry. If we do get a recession and oil prices collapse do we not just end up with a bigger gap coming out of the other side? If the economy muddles along how long does it take to fill the current deficit? I think we continue to grind higher until the economy breaks or the investment community changes their minds on the need for higher capex.

Buying several oil producer/servicing stocks: SU, GXE, MEG, and TCW.

Took a full 10% allocation in MSGE at sub $51. There's nothing better than a stock with covered downside and significant upside optionality.

That assumes all different crypto currencies are intended for the same use case which doesn't have to be the case. There are three supposed uses for cryptocurrency that I've heard of: 1. As a form of currency. (So far this is clearly not the case and honestly who knows if it will ever happen.) 2. As a store of value a.k.a. digital gold. (Bitcoin looks to be the clear winner on this front. Its functionality makes it a great store of value but pretty terrible for the use case below.) 3. As an infrastructure to develop applications for decentralized verification. (This is where most of the competition in the crypto space is happening, web3, etc.) If you want to speculate on the value of digital gold you're welcome to. If you want to try to evaluate the value of various crypto currencies as a platform for applications you can do that too. It's pretty clear at this point that crypto isn't going away and it's also clear that it was/is still in a bubble based on its current use cases.