The Bulls Will Beat The Bears

At "Bous A La Mar", Revelers Take Plunge To Dodge Bulls And Beat The Heat

Zowy Voeten/Getty Images News

During near market boom times last year my article titled A Crash Is Becoming Certain was published on November 1. Then talking heads on TV were saying Buy, Buy, Buy when I was suggesting goodbye. Some made comments that questioned my sanity.

As it happened, I proved to be right on most key points as selling started soon after. My picks went up!

Today I read and see little other than that investors should be wary of the recent recovery because it is a false dawn. They have good reasons. Some important countries such Britain face crisis upon crisis being worsened now by inflation. China’s property boom has imploded and the central banks are fighting an inflation that they do not have the tools to fight.

Political policy makers have the tools but few are using them anywhere and for me to make a bullish case today will probably raise doubts about my sanity again.

Certainly today’s situation makes investing akin to finding the hole in fog…

Daio Paper Elleair Ladies Open - Round Two

Getty Images

I shall try to get the fog to lift so that some investors can put their balls in the hole and not in the bunkers.

First I will go through the elements in the worldwide fog that are making play so hard and then clear through that to highlight my idea of the winners and losers.

The Deep Fog

I see the main elements – some of which are in A Crash Is Becoming Certain – as follows:

The Bear Case

China

The housing market there has finally crashed but the full ramifications have still not yet worked through China’s economy which means much of the world’s too since China imports so much.

Apartment buyers are not paying mortgages and there are ghost towns unfinished because the developers have no money. Some have defaulted and the situation generally has severely weakened the banking sector. Around 20% of young people are unemployed and consumers have stopped spending.

The continuing Covid lockdowns have helped caused worldwide shortages of some key things that have fed inflation.

It is difficult to see through this fog but there are some signs of light in China that I will mention later.

Germany

Germany is the world’s 4th largest economy and is close to recession due to its need for gas and dependence on now sanctioned Russia for that; a situation that will be good for my US bull picks.

Britain

This country is almost a lost cause. Until the 1960s it was one of the most important countries in the world but has been on a downward slide ever since. The UK has long had a housing crisis and a health service crisis. Now it has an energy crisis and cost of living crisis.

Inflation – CPI – hit a 40 year high of 10.1% in July and average pay is now 3% lower in real terms than 12 months ago. Unlike China, Britain is cutting back on infrastructure investments and its central bank – the BoE – is raising interest rates. It is still the sixth-largest economy in the world measured by nominal GDP so still has importance but they seem to be fighting a new kind of civil war; the Greater London Authority announced it might place a moratorium on desperately needed new house building in west London until 2035 due to the electric grid running out of capacity! Workers are striking on the rail system and at a key seaport! National political leaders want to lower taxes to increase demand at the same time as the BoE is raising interest rates to reduce demand!

In the 1970s Britain needed an IMF rescue. Today the Financial Times says Britain is once again the sick man of Europe.

My advice to investors is – stay away from the UK.

Housing Markets Worldwide

Housing has long been an indicator for markets given its importance to economies. For most people it is their sole source of wealth and recently -from Canada through Europe to far away New Zealand – house prices started falling!

In the US the NAHB Housing Index dipped in July as rates rose. July NAHB Housing Market Index came in at 49, lower than the expected 55 figure.

According to this CNBC report mortgage demand is now at a 22 year low.

In July Housing Starts were -9.6% M/M to 1.446M vs. 1.540M expected and 1.599M prior (revised from 1.559M). Single-family housing start rate in July was 916K, down 10.1% from June.

Existing home sales continued their historic plunge in July to reach the lowest level in 7 years outside the pandemic, down approximately 1.7 million sales in just the last six months.

US existing home sales

Bloomberg, Financial Sense Wealth Management

House builders remain a sell. I thought that would happen so got out of my favourite house builders Lennar (LEN) and LGI Homes (LGIH) just in time.

Consumer Discretionaries are Discretionary

The Financial Times recently published a comprehensive article by Brooke Masters headed Companies are struggling to adjust as consumers go cold on goods.

One point she makes says “The July edition of McKinsey’s periodic consumer surveys found that 39 per cent of Europeans plan to spend less on non-food discretionary items in the next three months, partly because they expect – with good reason – to spend more on food and energy. In the UK, two-thirds of shoppers have already started buying less or cheaper clothing and electronics, an EY survey found.”

Some bear picks that will get gored include car makers and especially Tesla (TSLA) for reasons I wrote recently in Tesla Is Past Its Sell-by Date. Old timers will soon race past it in their EVs, as has Disney with Netflix.

Likewise some of the big tech companies like Amazon (AMZN) that has become a new age conglomerate. We know where the old age ones have gone – down!

Some have become near monopolies and face curbs by governments around the world. Most are ex-growth including Facebook (META) that is groping for a new direction under a new name. Old timer Disney (DIS) and others, including YouTube, are out-flicking Netflix (NFLX). This stock price chart shows the result in a costly way for Netflix shareholders…

Netflix stock price chart

Financial Times

Central Banks and Inflation

Central banks today are among the biggest dangers for investors. They live in another world cocooned by a thing they call CPI that must not go above 2% annually. The threat from inflation is more imagined than real, in my view. That figure of 2% was plucked out of the air as an ideal rate by the far away central bank of New Zealand. Since set it has rarely been exceeded. That has partly been due to China supplying the world with lower cost goods and partly to the western wealthy 1% and their political cohorts who have hollowed out the middle classes via low pay. Today a dearth of working people plus supply chain bottlenecks is leading to much needed pay increases for them and to price increases for goods. Do central banks want to stop those much needed pay increases by increasing interest rates?! And such increase will not solve supply issues. Only more supply will do that and interest rate increases will deter investment in that!

Inflation has been above the 2% benchmark since April, 2021. Dreadful! This is the picture for the 100 plus years prior to that:

CPI-U starting from 1913

CPI-U starting from 1913

US Department of Labour

Apart from the peaks in the latter 1970s/early 1980s, CPI has not gone much above 2% at any time in the past 70 years. Recent higher figures probably do not raise the long term average much higher either.

Nor is it easy to make much sense of that CPI measure that traps all. The Fed likes to strip out Food and Energy from the headline numbers to get at what they call core inflation. No one tells us what core inflation is made up of and a search provides little detail except to define it as “all consumer spending on durable goods, nondurable goods, and services.” Virtually every one of those is also affected by energy prices! Likewise Food that is non core essential spending; energy is needed to fuel farm machinery, nitrogen fertiliser is produced from natural gas (fertiliser prices are up 179% over the past year – source: Financial Times), delivery trucks and food shops use energy etc.

So the obvious main solution to virtually all CPI increase is to get energy prices down. That means investment in new supply and central banks deter that with higher rates that stop people buying and puts up the cost of investing.

Who will get the world out of this trap I know not because that 2% has become a gospel. The New York Times tells more about that in Of Kiwis and Currencies: How a 2% Inflation Target Became Global Economic Gospel

Central bankers have also trapped themselves. The Scottish Herald reported the governor of the BoE as saying recently “We don’t make policy with the benefit of hindsight.” Do they make policy knowing what lies in the future?! That needs a crystal ball not a central bank!

The US Fed says they are data dependent. Data is hindsight!

Former Fed chairman Alan Greenspan once said ‘I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant’. Source for quote; goodreads.com

I always questioned why he said things that he knew people would not understand but perhaps he did not know either!

One answer that I do know is that the uncertainty they cause is bad for market investors and companies seeking to invest to increase supply to meet demand. The latter being the best fix for high prices, for economies and thus for people.

Hopefully a way will be found to get monetary and fiscal policy makers joined up and working together.

For now I will move on to things as they are and make …

The Bull Case

China

I started the bear case with China and but I see some signs of hope. That also starts with the property market.

Apartment buildings at the Phoenix City residential project, developed by Country Garden Holdings in Shanghai

Qilai Shen/Bloomberg

Potential buyers are finally emerging for the Hong Kong property assets of troubled mainland developers. For example, the real estate unit of Hong Kong’s richest tycoon, Li Ka-shing, has now made an offer to buy China Evergrande’s Hong Kong headquarters – which has an expected value of more than $1.2bn.

Also the central bank has just cut interest rates and more cuts are likely.

This recent Financial Times article headed China property stocks rally on hopes of relief plan. I have kept away from investing in Chinese property companies but now might be a good time to buy for those making long term bets.

On the mainland the government is doing the traditional recovery thing and investing in roads and other infrastructure This Bloomberg report tells more: China readies $1.1 Trillion to support XI’s Infrastructure Push. That could give a boost to some US companies such as Cummins (CMI) that has long been embedded in China. I wrote about CMI in this article – Cummins: Hitting The Highway With Hydrogen. China is getting into hydrogen in a big way and also has an energy crisis at present due to lack of gas. It was the Chinese driven surge in gas use in 2021 that pushed up prices around Asia and Europe, exacerbated today by Putin’s brutal 18th century type behaviour in 2022 in Ukraine.

Ironically, China may now be reducing world inflation due to its lower demand for so many things. An excellent article by Matthew C.Klein in the Financial Times headed Beijing is tanking the domestic economy – and helping the world, tells more.

The US

Inflation. Newslogic reported that analysts at Mirabaud recently said “If we had zero per cent inflation month on month every month (which would be incredibly dovish) until the end of the year, we would still have inflation above 6 per cent in December,” A Bull’s Eye view – assuming Mirabaud included the current month of August, if we had zero per cent inflation month on month every month until the end of July next year we would have zero inflation in August, 2023! We won’t have zero inflation but if those important oil prices stay around current levels then YOY inflation will obviously be much lower.

House prices are falling and rent increases are slowing.

Used car prices are coming down and supply chain issues are getting fixed. Soon there will be a glut of semiconductor chips due to billions having been invested to meet demand. There is an important saying in the commodity market; “the cure for high prices is…high prices.”

Would someone please tell the Fed!

Medium to longer term house builders should be a good bet based on demographics and under supply. I may go back into LEN and LGIH before year end.

Unemployment is low and there are plenty of jobs available, many with good pay, so the US is in better shape than many other countries. The new Inflation Prevention Act will help too.

I see the best investment opportunity in some US companies that will gain hugely from many other countries due to their…

Energy crisis

If “the cure for high prices is… high prices” it will be a while before that is the case for oil and gas due to years of underinvestment in supply. Putin’s murderous attack on Ukraine has massively added to gas supply issues.

Gas in this article means natural gas and not gasoline.

Gas stocks might also be the new defensives! That contradicts history and especially since I consider the most volatile component of the energy sector – natural gas – as the strongest and safest bet right now.

I favour gas over oil because recession or no recession gas is needed for many things whereas oil demand is already being replaced by LNG and RNG powered heavy trucks and buses, electric and hydrogen powered cars etc. Also according to the IEA Russia’s output is only 3% lower today than before the attack on Ukraine due to its sales China, India and Turkey plus US output is increasing. I am staying away from oil, just in case.

US Natural Gas futures have been trading around the $9.30/MMBtu mark, not far from a 14-year peak of $9.75/MMBtu hit in late July, buoyed by strong overseas and domestic demand. The temperatures in the US this summer remain high, with several heatwaves boosting demand for air conditioners. On top of that, Freeport LNG has recently agreed with regulators to partially restart operations in October at its closed export plant in Texas. The resumption of flows will withdraw more gas from storage and boost exports. Adding to the bullish outlook, demand from Europe remains strong as the critical Nord Stream 1 pipeline from Russia to Germany is currently running at 20% capacity.

The gas price in Europe is around the equivalent of $400 per barrel of oil!

In Asia the price is very high too. This chart shows the enormous differences…

Gas price chart

IEA

Much of Europe now has an energy crisis mostly caused by a natgas shortage. Imported LNG is the best solution. China has had power outages. China, India and Japan are huge LNG importers and are now competing with European countries to get more LNG. Germany and others are rapidly building LNG import terminals.

More will come via the Freeport LNG facility when it fully opens and others that are under construction.

That leads me to my…

Bull Picks

I wrote about them in several articles and will link those here.

My top pick for natgas supply is Antero Resources (AR). My May 3, 2022, article tells more: Antero Has Massive Inflation Beating Resources. Since then we have had the S&P 500 rally that many of us doubt will continue. That put the S&P up 1.27%. AR is up 12.43%. YTD the S&P is down 11.8%. AR is up 135%. AR beats inflation too!

I see no reason for that to stop if history repeats itself. On April 1, 2014, the closing price was $65.67. That is 57% higher than the price today of $41.87. World demand conditions are more favourable today than then!

Another point strongly in AR’s favour is its market leading transportation and midstream facilities via its near 30% ownership of Antero Midstream (AM). That makes AR the most integrated NGL and natural gas business in the U.S. and takes its output directly to coastal export facilities to take advantage of those higher prices elsewhere in the world.

Among my other picks are…

Chart Industries (GTLS) and Tellurian (TELL). More information about them both is in my article published on January 7 titled T’Winners For 2022. The title proved apt as the two are winners: GTLS is up 39% and TELL is up 46%. The S&P 500 – down 10% since then!

Plus…

Exelerate Energy (EE) and New Fortress Energy (NFE). For space reasons I will say no more here but together they provide essential means of getting LNG to customers worldwide and re-gasifying it for them. Their websites are under their above linked names.

EE is a new buy for me. I bought NFE recently and have been rewarded with a 119% gain! Strong gains can be expected in future as these companies are still relatively unknown.

The latter point brings me to my article title conclusion that…

The Bulls Will Beat The Bears

I have managed to do beat them. YTD my portfolio of 50 stocks (that includes some big losers and my above mentioned picks) is up 28.8%. The S&P 500 is down 11.8%.

As always there are risks. It could be the US goes into recession but I am an optimist and think the US might regain to its traditional role and lead the world out of its downturn. China assumed that role during the 2008 financial crisis but some of the very things that helped that – such as the vast building programmes – are causing problems for China today.

Also on the risk side is the very high PE of GTLS of 173 but a huge backlog of orders that might ease that in future. TELL must walk its many months – almost years! – of talk and get a very large, long term, LNG supply contract soon.

I am negative on central banks generally but optimistic the Fed will see the light and go easy on rate increases.

And while some companies like EE and NFE are still relatively unknown it is also the case that many of the global opportunities they will benefit from are unknown and underappreciated because many US investors tend towards insularity and have little interest in happenings elsewhere in the world.

I have tried to highlight some of those happenings in this article – as I do in all my articles – and when the results of those show through in my mentioned companies’ results the bears need to get well away from the bulls stampeding in!

I recommend buying my Bull picks now and start the stampede in!

Readers will know of others too and I hope they share knowledge on those in comments below.

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