🚨 TELL Buy Alert 🚨
The Macro is Running the Show
TLDR at end
This memo maybe unpopular but I am going to call it how I see it and share my perspective with you all on the current market situation. My intent is to take an objective look at our current state of affairs and how I intend to navigate it.
Here we go!
- The Macro is greater than the Micro - while there are still fantastic companies out there and I agree many are on sale from a historic valuation perspective. The way I see it is, until we get through these Macro headwinds.. it might just not matter. What to do about it? Stick to your strategy, especially if you are a long term investor and pay attention to the businesses that are getting beat up yet are sitting on strong growth trends. $NVDA is a prime recent example that comes to mind.
- Inflation is a real problem - Specifically in Energy and Food costs. Unfortunately, I do not see much relief coming for either of these sectors. As the meme above jokingly states, the current global economy runs on cheap hydrocarbon energy. While many feel carbon neutral goals are attainable within the decade, the realist in me doesn't see this as truly attainable. I believe the transition away from hydrocarbons will take decades. We need truly available and viable alternatives at cheaper (unsubsidized) costs for this to really happen. On food, grains are the major problem. The geopolitical environment has caused large producers, Ukraine and Russia, to dramatically cut future supplies leading to many countries to start locking down their domestic supplies. What to do? not much, this might simply be something that we will need to weather. Consider buying energy companies and possibly large food suppliers like $CVX $XOM $TELL (my personal play) and $CAG or $GIS.
- The Fed Has One Tool Left - Raising Rates. The FOMC minutes yesterday were preparing us for a more hawkish approach and they will be using this tool and soon. The question is, will this truly combat inflation that is based on rising input costs not a hot economy. What to do? Consider buying banks $BAC is my personal favorite.
- We are already in a Recession - I know it is not official yet but in my experience when the narrative turns this way, we are already there. It simply takes time to "confirm" that we are in a recession. What to do? Focus on raising cash, adding a bit more from your day job to your 401K or IRA's and take advantage of the downturn. Recessions are natural and happen periodically.
TLDR: The macro environment is in the driver seat. Until we figure out inflation, specifically energy and food it is going to be a tough market to navigate. The FED is going to raise rates to fight it but this will likely just confirm that we are in the midst of a recession. Despite these headwinds, if you are a long term investor do your best to raise cash and buy quality that has been beaten up. Focus on companies with real earnings and consumer staples that are capable of weathering the storm.
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For the comment about already being in a recession I would ask your comments on the discrepancy between GDP and GDI (Gross Domestic Income), which is up over 2% QoQ vs GDP at -1.5%. Could GDP numbers be too strongly negative because of a sharp rise in net imports to meet inventory demand rather than a more structural weakness? Everywhere I go in my state all the small businesses still have signs saying they're hiring
Northern Europe's Largest Nat. Gas Storage Facility Is Empty
I've written about nat. gas as a national security asset and wanted to point to Northern Europe's largest nat. gas facility UGS Rehden - run by Gazprom - that's currently empty.
The way it works is that over summer months nat. gas storage levels are increased by 50-60% while consumption during winter months deplete levels to about 30% (that dynamic plays out across facilities.)
As we turn to this upcoming summer and a potential bottleneck as far as refilling goes, strategic partnerships between Europe and American export facilities - in the fullness of time, - will become increasingly interesting.
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Pretty alarming stuff! Thanks for sharing the insight. What corrections would be necessary to curb this? Would US drilling be a possible solution?
Happy Friday Everybody!
Here is my portfolio update from the past few weeks.
$NVDA is still holding onto the top spot and starting to put some distance between it and the next closest position. Over the past month or so, my mega-cap names have been leading the pack this is not overly surprising to me as I feel that these names are a great place for investors to hide out in times of volatility.
$TELL has continued to be my best performer of late on the back of ever rising natural gas prices.
European Natural Gas
There's been a lot of back and forth around America's ability to deliver natural gas to Europe.
I collected CERAWeek commentary from the leading oil & gas execs. All the comments can be accessed here (bottom of the post):
Charif Souki is the Executive Chairman of $TELL
The Gamestop of O&G?
In light of the recent moves between US and the EU you can bet these guys will get financing...
It is a reflexive play, so beware of the speculative nature of it. Big risk and reward.
TELL Me Something Good!
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I’m not experienced in technical trading, so this is a new indicator to me. I gather the cup and handle is an indicator to go long?
Seeing a lot of new faces joining Commonstock welcome and please follow me on my investment journey!
Recent news for my holdings:
- $AMZN - Very happy to be a long term holder with the split announcement!
- $Y - Made the news just yesterday as the Oracle of Omaha seemingly liked this company enough to buy it!
- $TELL - is nearing its Driftwood II groundbreaking and with LNG in high demand with the oil and gas shortages I am looking for a strong few years especially for their export business
- $ZIM - (not on the graph as it is not a large enough holding.. YET) This is a company who continues to impress me as I build a position. From a fundamental perspective I am not sure I have ever seen a better company. In an inflated market it is still only a 2.5X P/E ratio and just upped its dividend to a whopping $22 a share!
Also, I'd like to repost my stock picking strategy for any new followers!
The Importance of Knowing Who is at the Helm..
I had a fantastic call with @nathanworden, @tecantra, and @sidnistandard last night discussing options among other topics. During our talk we all were learning about each others investing styles and strategies. What was amazing was how differently we all approached due diligence (DD) but I believe we all learned a few new tricks from one another. The lesson I want to drive home with this memo is how important knowing who the CEO of a company is that you are investing in. It often gets overlooked, people dig into the fundamentals or the technicals but often forget the VERY HUMAN ELEMENT of investing and that starts at the top.
So let's talk about why you should get to know your companies CEO's and what to look for.
Why you should care: This is actually fairly simple to answer. The CEO is the captain of the organization and who the analysts are BASING THEIR ESTIMATES ON. The CEO is the proverbial "Horses Mouth" to the market.
What you should look for:
Who is this person? Do you like them? If you don't like them.. odds are analysts won't care for them either.. I do not know about you but if I don't like the person behind whatever it is I am involved with in any capacity.. I probably won't like what they represent. That implicit bias can come out in the tone analysts use what articles they write and if they even bother talking about them at all.
Who would you pick in a fight? not exactly literally here.. but are they a strong leader or someone who will likely back down? Marc Benioff of $CRM is a prime example of this. I was listening to him on an earnings call a few years ago and some poor analyst had the audacity to ask him if he was worried about Microsoft entering the cloud space. His response was classic.. he basically laughed the guy out of the room and told him "We have been eating Microsoft lunch in the cloud for years and that isn't going to stop". That told me everything I needed to know.. I literally sat in my car listening and thought to myself.. well damn. I am doubling my position tomorrow. This guy is the man. Look at $CRM's chart.. go on do it.. its up and to the right year after year.
Have they done this before? again, sounds simple enough but it is really important. I bought into $TELL heavily over the past year mainly because of Charif Souki this is not his first successful play in the Natural Gas space. He was CEO of $LNG before he had a falling out with Carl Icahn and left to start $TELL. The second time around is always a bit easier for me personally anyway so I can't imagine it isn't for him.
Are they trustworthy / believable? for this one let's look at a bad example.. Dara Khosrowshahi of $UBER.. this guy was supposed to be the best thing since sliced bread but I hate to bring it to everyone's attention.. he is just never right about what matters.. I personally drank his Kool Aide a bit too long before I came to this realization.. All the ideas and concepts he sells to the market sound great but they have one problem. They do not know how to make money. For that reason the stock is exactly where it was during its IPO two years ago. I know this is shots across the bow a bit but really what has he delivered to shareholders other than the promise of profits and then some Adjusted EBIDTA B.S.? "Hey Dara.. you can call me Dan Rather because I have news for you.. if you are going to adjust your earnings at least adjust them enough to be profitable." I know they report this week and are trading in sympathy with $LYFT today but when I signed up at IPO I did not expect to be in the same place two years later.. So here is Mr. Wonderful to tell you what I think.
I will now step off my soap box and hope you all start looking at who is leading the companies behind your stocks. I have found great success simply betting on the right people over any fundamental or technical analysis. The right people find a way to be successful invest in those people.
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People matter more than numbers. But numbers are easier to compare. Lots of alpha in being a good judge of people.
Keep us posted on leaders you think are good. This should be talked about more.
Will Natural Gas Prices Keep Going Higher?
This memo is an attempt to answer a question I just asked on Sam Stribling's Bull Thesis on Tellurian. $TELL
@strib pointed out that natural gas prices are rising and could be the highest in 13 years this winter.
I think that is reasonable- but my question is: Will natural gas prices be able to keep going higher beyond that?
Argument in favor
Yes, natural gas is now the country's primary electricity fuel, displacing coal throughout most of the country. And yes, we now use natural gas components to replace oil throughout our petrochemical systems— we use the stuff to make everything from lipstick to diapers to safety glass to insulation to pesticides... etc.
Higher demand means higher prices, right?
For a bit, which is what we're seeing right now. But sustained rising natural gas prices? My bet is no.
In an environment where $5 natural gas is the norm, it makes economic sense to drill for natural gas just for the gas. (Usually drilling is done specifically for the oil and not natural gas. The natural gas is either wasted or reluctantly collected, but most of the time it isn't economical to be the main reason for drilling.)
Shale tech has gotten a lot better in the last 8-10 years, and there will likely be explosive growth in on-shore production of natural gas.
Unlike off-shore wells that take years to bring on-line, and can get shut down in an instant by hurricanes like Ida, _on-_shore shale wells reach full output in a mere six weeks.
Prices won't rise because supply will be able to expand quickly to meet demand.
Every bit of oil & gas production that moves on-shore is more sustainable, lower cost, cleaner, and lower risk than anything that is international or offshore.
How this affects Tellurian?— not sure, I'm just starting to look into them. They operate a low-cost, global natural gas business that delivers natural gas to customers worldwide. They have a portfolio of natural gas production of nearly 100 drill-able locations with an estimated one trillion cubic feet of net resource.
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I definitely think the shale industry's historical lack of capital discipline whenever prices rise is a big reason why the sector is incredibly cheap at current equity levels and futures pricing... market doesn't believe prices will stay here bc they think drill baby drill is coming back, following two years of discipline.
Counter-arguments to this... 1) front-month prices are $5, but the futures curve is heavily backwardated ... <$3 when you get out to 2024+ ... well economics are largely based on the long-term price outlook, which influences the decision to grow rather than hold production levels flat; 2) investors want the industry to stay disciplined, focusing on free cash flow and shareholder returns, rather than growth; 3) a lot of natural gas producers have hedged a substantial amount of their future production at prices WELL below currently levels... this limits the cash flow upside from current high prices that would have allowed them to deploy more capital to grow; 4) the largest natural gas basin (Marcellus/Utica up in Appalachia) has takeaway constraints... not enough pipeline capacity to support growth that would get gas to high priced markets... incremental volume instead is "trapped" in the Northeast where prices are lower; 5) domestic demand should continue to grow... new LNG export capacity (new capacity at Corpus, Sabine Pass, Calcasieu Pass over next year or so), new power demand as coal/nuclear plants are closed, increased exports to Mexico, etc... so the market can absorb some level of production growth anyway; 6) core exhaustion ... the cores of the major natural gas basins are known and finite... the best inventory is held in the hands of a small number of producers... over the next couple years, a lot of producers will run out of the good stuff they are drilling now, forcing them to drill lower quality wells, driving the average breakeven producer price in the US higher over time.
I'll refer to my post you mentioned above about where I think prices go near term... warm winter probably $3-3.50 ... cold winter $15+ (honestly who knows, it could be epic)... longer-term, I'd agree that $5 is likely not sustainable... like if the 10-year strip moved to $5, that probably wouldn't last long... even the most disciplined producers would probably hedge $5 and then grow some... but I do think the <$3 long-term strip is undervalued... and that many natural gas equities are undervalued... they don't need $5 ... $3 works great. The $4 futures curve for 2022 is awesome.
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