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Monthly rollup | February 2024

Stocks Mentioned: Patterson-UTI (PTEN), Liberty Energy (LBRT), Helmerich & Payne (HP), DR Horton (DHI), Super Micro Computer (SMCI) , Nvidia (NVDA), General Electric (GE), International Seaways (INSW), MicroStrategy (MSTR), iShares Bitcoin ETF (IBIT), DHT Holding (DHT), Conifex Timber (CFF.TO), Credit Acceptance Corp (CACC), Anglo American (LSE:AAL), Teck Resources (TECK), Western Copper and Gold (WRN.TO), i-80 Gold (IAUX), SSR Mining (SSRM), African Oil (AOI.TO), Wallbridge Mining (WM.TO), iShares Biotech ETF (IBB), Gasoline (UGA), Cameco (CCJ), Sandstorm Gold (SAND), Centerra Gold (CGAU), Global Ship Lease (GSL), Endeavour Mining (EDV.TO), , Barrick Gold (GOLD),

Gold Miners ETF (GDX), Junior gold miner ETF (GDXJ), Nutrien (NTR), Mosaic (MOS), Chesapeake Energy (CHK)


Highlights


Membership in the Telegram group with real-time updates is now closed. If you'd like to join, send me an email at kashyapsriram286@gmail.com


February 01 2024


The Fed sufficiently loosened financial conditions in November that the Treasury has breathing room. The magnitude of loosening can be seen in the follow-on auctions of the failed November 30Y bond issue



From discount to par to a 9.1% premium in a span of two months. They've recapitalized the banks without recapitalizing the banks by bringing yields down hard and effectively green-lighted them to get long duration again.


There's also $615B in RRPs and the BTFP is not due to expire until March, which is when they will decide on ending QT.


But all this easing is merely front running the Fed lowering rates and resuming QE, so it'll have to happen shortly. Expectations can't stay ahead of reality forever. Powell talks a good game but the rates market is already seeing past it.



Patterson-UTI (PTEN) is a drilling and completion services company with a market cap of $4.6B, $7B+ in 2024 revenue, and an investment grade credit rating. Even at a 10% net income margin, the stock is cheap at 6.5x PE. The company blew out its share structure through acquisitions, rolling up smaller cos and positioning itself as a leader in its space. Competitor Liberty Energy (LBRT) saw a re-rate in its share price following earnings, indicating the market is warming up to onshore oil services companies even as offshore is selling off.


Double bottom and emerging flag pattern. The Technicals align as well, which is nice to see when buying value.



Another name worth taking a look at is Helmerich & Payne (HP)



I missed the move in Liberty Energy (LBRT) and wouldn't chase it here.



Lumber stocks have moved up along with pretty much everything else since November. Canadian lumber plays look to be at an add point, having corrected more than lumber itself. The market is reflecting the weakness in housing following DR Horton (DHI) earnings, which is why the opportunity exists.


Where you stand on this trade is entirely dependent on your view on rates and housing.


February 02 2024


In the era before software started eating the world, analysts earned their paychecks following stocks of real world businesses. Industrials, transports, retail and the like. Companies reporting revenue growth while showing huge increases in accounts receivables and inventory were red flagged.


The tech bulls might find it hard to believe, but there was a time when people paid attention to the balance sheet and not just headline adjusted, adjusted non-GAAP EPS. Whenever I bring up the accounts receivables at Super Micro Computer (SMCI) or Nvidia (NVDA), the bulls dismiss it because the companies are growing revenues.


If a company indeed has high demand for its products and a backlog of orders, they favor cash and carry customers or at least bring forward the payment cycle.


If a company is pushing product out the door in order to book revenue, they're engaging in channel stuffing which will come back to bite margins and leave them saddled with unsold inventory.


The exception to this was General Electric (GE). GE formed a subsidiary, GE Capital, which made loans to customers so they could afford to buy GE products. Everything went great until the customers couldn't pay and then GE Capital went bust, taking the storied GE conglomerate down with it. Same thing happened numerous times in retail (remember charge cards?).


If receivables are growing but payables aren't, the company is acting as a bank, with all the risks inherent in that business.


Take your pick as to which explanation fits the AI bubble stocks best, but don't tell me the balance sheet doesn't matter because this time is different.


February 03 2024


Oil kept getting sold the past two days on rumors of a peace deal, yet all evidence points to the US poking Iran and trying to drag the regional power further into the conflict. Lost in all this is the revision higher in US oil consumption and the rebound in Chinese crude imports.


Is the oil market setting up for an "ouchie" moment next week?


February 04 2024



US warships being helpless in protecting shipping lanes against a small group of rebels armed with UAVs should come as no surprise. The Finns demonstrated similar skill during the Soviet invasion, using skiers armed with logs and molotov cocktails to disable entire tank divisions.


Americans cheering on Graham and his fellow warmongers would do well to reflect on the lessons of history.


The oil shorts better pray Blinken negotiates a peace treaty before markets open Monday.




Presented without comment.


February 06 2024



Barclays and FT talking about something all the sell-side firms and US media wilfully choose to ignore, and which Nvidia (NVDA) deliberately omits from its 10-Q filings.


The HNIs who bought CoreWeave founders' shares expecting to make bank in this year's IPO are going to learn the same lesson learnt by the retail guys who bought into Chamath's SPAC deals in 2021.




Saudi isn't adding spare capacity for the same reason US shale isn't adding to DUCs, which are now down 50% from mid-2020 levels. At $70 oil, why bother?


The spike in uranium prices from $16 to $120/lb happened for the same reason - everyone knew prices would go higher but nobody wanted to bring capacity online and be penalized by the market.


The traders who consider the Saudi news to be an indicator of weaker future demand have the wrong framework, in my opinion.


February 07 2024


Anecdotal story. A friend knew a guy who bought into Tesla early because he believed in Musk. The stock kept climbing and climbing, and by 2020 it ended up being nearly the whole portfolio. Instead of diversifying, he sold everything else and bought more Tesla. "It does better than every other stock so why bother with other stocks", was his logic.


Working in the newsletter industry catering to the retail side of the business, I've seen versions of this play out in every cycle. It's not that early investors don't make money when they are lucky enough to ride a bubble; it's that they don't have the mindset that allows them to bank their gains.


Everyone admires Mark Cuban but ends up being Masayoshi Son (of SoftBank).


Buy International Seaways (INSW)



I've been covering the Red Sea situation and its impact on shipping stocks since October. I added Hapag-Lloyd and Okeanis Eco Tankers in December. Since then, the trade has taken off and I've been waiting for a pullback to add. I believe the current pullback in INSW is a good add point. INSW isn't a great company, but they have a fleet of 77 vessels, including 13 VLCCs, 13 Suezmaxes, five Aframaxes/LR2s, 11 LR1s (including four newbuildings), and 35 MR tankers.


I don't like the management and I consider their use of poison pills to be a sign of poor corporate governance. However, in the current situation they can literally trip and fall into a pile of money so I'm overlooking long-term issues. I also like Hafnia and Teekay Tankers but INSW has more upside from current prices.


February 08 2024



One more time: why MicroStrategy (MSTR) is a terrible long-term investment for bitcoin maxis.


MSTR peaked at $1315 in Feb 2021 when bitcoin was at $46.8k. Class A shares outstanding as of the March quarter: 7,782,000


MSTR is now at $508 with bitcoin at $44.6k. S/O as of Dec 2023: 14,904,000


Saylor keeps talking about how MSTR has outperformed tech stocks and bitcoin since the inception of their bitcoin strategy, but unless you actually bought the stock in Q3 2020, the stock has been a terrible long-term investment.


A company that keeps blowing out its share structure is very different from a monetary asset with a fixed emission schedule. The premium to NAV that MSTR enjoys will go away now that the ETF presents an alternative for institutions. It's why the stock has struggled in recent weeks even as BlackRock's iShares Bitcoin ETF (IBIT) keeps attracting inflows.


MicroStrategy and the bitcoin miners are not good proxies for bitcoin. If you want leverage, just trade the futures or buy Solana.





Oil refiners and gasoline are doing better than oil itself. The generalist investors are staying away, but they'll be back once the sector rotation out of the Mag 7 and into commodity plays gets underway.


Meanwhile, commodities resilience in the face of a blow off top in tech - with Fed Funds at 5.5% - is pretty impressive. They're definitely not signalling a recession ahead.



I read Einhorn's book "Fooling Some of the People All of the Time" nearly a decade ago and was blown away by the kind of fundamental research he did on a single position. But his funds' performance at the time didn't reflect their intellectual firepower. Value investing was broken then, value investing is broken now.


It'll change when the quants blow up. Has happened before, will happen again.


February 09 2024


"The Red Sea issue has had a fairly limited impact on the VLCC business. So if the issue is being removed, it also have a limited impact. But it looks like it will stay on for little while, and I think it will incrementally or exponentially, rather, increase transportation costs for smaller ships going around and thereby making the bigger ships more and more favorable. So that could sort of be something that plays out.


But I think in the actual freight market, as I said, the Red Sea issue has had very limited impact. It has maybe had a bigger impact in the stock market and how people try to trade the event and the noise and are there more missiles hitting ships? Or is there some peace talks being negotiated or whatnot, it is influencing the capital markets.


But the underlying business is relatively stable, although I would say right now, as we speak, the freight market is moving up. So especially cargoes out of Middle East, the list of ships are now very tight, and you have owners that have been a bit reluctant to go to the area in general.


So this has maybe impacted by the ship lists are shorter. So now AG East is on par with the US Gulf Far East trade essentially. So modern ships are earning now in the low mid-50s for sort of straight-run business. And I would be surprised if this not has got more legs in the imminent future". - DHT Holding (DHT) CEO on the Q4 earnings call.


Imagine this had been a tech earnings call and the analyst had asked about AI. Do you really think the CEO would have said the AI hype is a load of bullcrap with zero impact on the business and only matters to stock market speculators?


Bitcoin


Bitcoin is at $47k and almost nobody except the OG crypto folks care. This is normal.


Almost everyone who touched crypto in the last cycle got badly burnt. They became unwitting creditors of the platforms that went under (BlockFi, Voyager Digital, FTX, Genesis, Pillow). Many of them jumped into buying and selling monkey JPEGs and other pieces of digital garbage, got REKT on DEX scams, and ended up losing everything.


Crypto peaked in May 2021, bitcoin in November 2021. Very few were smart enough to set aside cash for taxes, and ended up selling at huge losses in April 2022 to pay the tax man.


Now they are just waiting for the market to recover so they can exit their long held losing positions at breakeven. They have sworn to themselves they will never touch crypto no matter what. They just want their money back.


The Indian crypto community is knocked out - traders are too busy trying to figure out how to get their bank accounts unfrozen and couldn't care a whit about the bitcoin price.


The only ones still playing are the crypto whales and TradFi folks who got in once BlackRock blew the all-clear. This is why bitcoin is leading the pack. There is almost no speculative interest in crypto.


The 2020-21 cycle was different because crypto didn't go mainstream during the 2017 bull run. Coinbase did not advertise in the 2018 Super Bowl. During the last cycle, I covered crypto and crypto equities extensively - for a crypto newsletter and my own consulting practice. I quit at the top of the market.


This cycle, I'm content to just observe, nibble a bit, but stay mostly on the sidelines. A lot of my old clients are doing the same. The new folks who are chasing here will learn their lessons during the next bear market.



Conifex Timber (CFF.TO) has lost a bid to force B.C. Hydro to provide the vast amounts of power needed for its operations, upholding the provincial government's right to pause power connections for new crypto miners.


CFF had gone to the B.C. Supreme Court to have the policy declared invalid. But Justice Michael Tammen says in a ruling issued Friday that the government's move in December 2022 to pause new connections for cryptocurrency mining for 18 months was "reasonable" and not "unduly discriminatory."


B.C. Hydro CEO Christopher O'Riley had told the court in an affidavit that the data centres proposed by Conifex would have consumed 2.5 million megawatt-hours of electricity each year.




"When it becomes serious, you have to lie" - Jean-Claude Juncker


The market sees through Powell's poker face. It sees the reality of deficits that need to be financed and Treasury bills that need to be rolled over.


Cover the short position on Credit Acceptance Corp (CACC)


The company bought back another 100,000 shares. The NY AG lawsuit is having no impact on the price. There is little analyst interest in the earnings call, and at this point I'm giving up on this trade and moving on. I've attempted shorting CACC multiple times since 2021 with mixed results. And as I wrote in December, I'm going to focus on the long side and enjoy the tailwind of Fed liquidity rather than focus my time on fundamental short ideas.



All the stock does is whipsaw. No trends.


Sell Anglo American (LSE:AAL)



Thanks to a great entry, we're only down 1% after two months of sideways price action. I'm still bullish on copper but Teck Resources (TECK) and Solaris (SLS.TO) offer better upside than AAL. AAL's De Beers diamond unit is in the news for the wrong reasons and could further pressure the stock. I prefer buying copper pure plays at depressed prices, or the metal itself.



Buy Western Copper and Gold (WRN.TO, MCap C$232.36M, Share price: C$1.40)



February 10 2024


If you'd invested $10k in bitcoin 10 years ago, chances are you left it on Mt. Gox and wrote it off. It might have even put you off bitcoin for good.



I worked for a crypto newsletter and I know several OG bitcoiners who sold hard during the covid crash. The move down from $8.8k to $3.5k was so swift, they panic sold thinking bitcoin was going to $1k.


There is so much more to long-term investing than looking at the angle of the chart and doing math on paper gains.


Back to the Future was a great movie but there's no such shortcut in real life.


February 12 2024

February 13 2024



Change "69" to "96" and bada bing bada boom, new price target. I wish I had that job.


Buy i-80 Gold (IAUX)



African Oil (AOI.TO)


The Africa Oil trade got stopped out today, even though oil is heading higher. I'm not closing the position here since I expect to re-enter.


February 14 2024


Buy Wallbridge Mining (WM.TO, MCap C$76.2M)



Buy the Biotech ETF (XBI)



February 15 2024




GMO's quarterly letter absolutely nails it. If you're an active manager benchmarked to the S&P 500 and have no strong opinion on Apple (AAPL), you either hold the 7% weighting the stock has in the index, or you'll underperform. If you want to run a diversified portfolio, there's no way you'll outperform an index where the top 7 stocks account for 28% by weight, especially so when the top 7 stocks outperformed the entire S&P 500 by a mind boggling 60%.


Active managers are now an endangered species. No one can resist the gravitational pull of a bubble created through gamma squeezes and fueled by passive strategies. If you do resist, and the bubble persists for another quarter, you get redeemed. Which explains why GMO needed to release their Q1 letter in the first week of February.



In December 2023, Super Micro Computer (SMCI) raised $524M at $262/share to fund its operating cash shortfall. It was a Wall Street feeding frenzy, with J.P. Morgan, BofA Securities and Goldman Sachs acting as lead book runners.


Usually, sell-side analysts are tapped to initiate coverage and write a fawning report before the investment bankers get their fat fees. In this case, I suspect they struggled to find an analyst who was willing to risk his reputation. It's a dirty job, but someone better do it - or else.


Hopefully, the $1040 price target assuages the wheeler-dealers on the other side of the Chinese wall and BofA gets to be top dog on the next capital raise. They should have issued a $2000 price target just to play it safe imo. 7.7x sales on a 6% net margin business isn't that far fetched, translating to a mere 128 PE.


Competitors might trade at 0.5x sales but they don't generate much in investment banking fees.


Heating oil futures



Gasoline futures



Crude oil futures



Buy gasoline (UGA)




Fire at a refinery in the US caused investors to panic sell crude and distillates, taking net length in crude oil futures (a gauge of investor interest) to extremely low levels. However, the Middle East situation, which has been escalating since the October attacks and shows no signs of slowing down, is very, very bullish for energy prices over the next 1-2 years.


The last time crude oil started running, the Biden administration used up the Strategic Petroleum Reserve (SPR) to quell the price increase. Gasoline prices decreased during the entirety of the 2022 summer driving season as a result. This time around, the government isn't in a position to intervene in the oil markets. And inflation is coming back. In the December FOMC, Powell said they will cut rates well before inflation gets to 2%.


The shipping disruptions are adding to lead times and cost of fuel delivery. The top 3 US refinery stocks (MPC, PSX, VLO) are moving up and to the right as the market anticipates fat refining margins.


Chart-wise, you can see heating oil headed clearly higher, and gasoline in a primary uptrend (higher highs and higher lows).


I'm bullish across the board, so I'm adding UGA here. But feel free to buy anything you fancy in the oil space - the entire sector is due for a re-rate higher.


February 16 2024



This quote from Cameco's (CCJ) Q4 earnings call perfectly encapsulates why this company will forever remain a capital destroyer:


"We understand that to generate full cycle value, we can't be mining on spec. We must build a home for our pounds years ahead of time before we pull them out of the ground in order to avoid having to sell material into a thinly traded and discretionary spot market".


In 2022, when the spot price averaged $49.81/lb, Cameco realized $44.73/lb - a lag of 10%. In 2023, the spot price averaged $62.5/lb, yet the company only realized $49.76/lb - a lag of 30%.


Spot uranium doubled from the beginning of 2022 to the end of 2023, and yet the company only grew uranium sales by 45%.


Circa 1995, the gold miners embarked on a hedging scheme whereby they forward sold multiple years of gold production at then-market prices, and used the cash to expand production capacity. Anglogold Ashanti (AU) was the worst offender but many major miners participated in the madness.


The outcome was that the more gold prices went up, the more these guys lost money. You had a situation wherein the CFOs were praying for their revenues to collapse so their debt became easier to handle.


Cameco is in the same position. Nukem, a Cameco subsidiary which is in the spot uranium trading business, doesn't even get a mention in their press releases or earnings calls anymore.


Their deal making is so pathetic, they can't enforce long-term contracts when the spot price is below contracted price, yet they continue to sell at below market rates when they hold all the aces. Worse, they keep signing deals knowing fully well they are going to lose money in the future.


Of course, by then it'll be someone else's problem. I've seen companies make decisions that turn out to be mistakes in hindsight, but I've never seen a mining company adopt hara-kiri as a deliberate corporate policy.


Super Micro Computer


At the height of the Japanese bubble in 1990, the grounds of the Tokyo Imperial Palace were notionally worth more than all the land in the State of California. Japanese investors were buying buildings over asking just to get their names into the Guinness book of world records.


The sell-side firms driving this SMCI pump are making history, but when this bursts, they are going to get sued for leading clients on.



Wells Fargo was among the 7 joint book runners in the last offering. I guess they're not getting invited to the next raise.


My thoughts on shorting


Firstly, almost no one runs a 100% short book. Even dedicated short funds are long/short - short specific stocks and long the index/sector ETF as an offset.


Long/short strategies are way more long than short, say 120/20 or even 170/70 - longs will always have a higher % than shorts.


If you short a stock at $100, you can take the $100 and buy another stock with it. This gives you two ways to win. But, the buy-and-hold approach doesn't work when you add leverage. I like to use a 3-ATR stop, so long or short doesn't make much of a difference.


Except in this market where stocks gap up pre-market, way past any rational level. Then you're screwed. This has happened so often in the past year, it's incredibly frustrating.


It was equally frustrating to be long-only stocks in June 2022 and have every single position hit my stop.


That's when I decided to adopt a long/short approach, but longs are always, always a higher % than the shorts.


I might just go back to long-only once the commodity bull market gets going.


February 17 2024



On Tuesday, SSR Mining (SSRM) tumbled over 50% on reporting a problem at a gold mine in Turkey. Other miners with exposure to Turkey like Sandstorm Gold (SAND) and Centerra Gold (CGAU) fell in sympathy. The algos smelled blood and started a selling cascade on gold miners en masse.


Then something wonderful happened. Gold investors bought the dip, fought the algos off, and several miners managed to end the week green. The price action strongly suggests gold miners have finally bottomed and turned up, with almost no one noticing. This moment reminds me of Grant Williams'


 December 2015 presentation titled "Nobody Cares", which marked the beginning of a remarkable run that saw a 70% 1-year move in the GDX.


February 18 2024


Active fund managers are going the way of pit traders. Soon everyone will be doing what everyone else is doing because that's what everyone is doing. And price discovery in public markets will die a quiet death as the analyst talent moves to private equity and credit markets.



You can fight city hall but you can't fight liquidity flows.


February 21 2024


NVDA


The most awaited earnings release in the history of the markets.



Buy Global Ship Lease (GSL, MCap: $700M)


GSL is a past pick of mine. Search the group with the tag "GSL" and you'll see my frustrated attempts at trading this stock. The containership market turned down in 2022, and rates remained high throughout 2023 further hurting debt-laden companies. The current shipping disruptions and the prospect of Fed rate cuts should reverse this.


GSL is a value stock trading at 0.6x book with a dividend yield of 7.5%.


"Global Ship Lease is a leading independent owner of containerships with a diversified fleet of mid-sized and smaller containerships. Incorporated in the Marshall Islands, Global Ship Lease commenced operations in December 2007 with a business of owning and chartering out containerships under fixed-rate charters to top tier container liner companies. It was listed on the New York stock Exchange in August 2008.


As at September 30, 2023, Global Ship Lease owned 68 containerships ranging from 2,207 to 11,040 TEU, with an aggregate capacity of 375,406 TEU. 36 ships are wide-beam Post-Panamax.


As at September 30, 2023, the average remaining term of the Company’s charters, to the mid-point of redelivery, including options under the Company’s control and other than if a redelivery notice has been received, was 2.1 years on a TEU-weighted basis. Contracted revenue on the same basis was $1.81 billion. Contracted revenue was $2.23 billion, including options under charterers’ control and with latest redelivery date, representing a weighted average remaining term of 2.8 years".


Contracted revenue is $800-$860M per annum, of which at least 40% should flow to the bottom line.


Shipping is a cyclical business, so PE is not the most important metric. However, GSL is in the leasing business as much as the shipping business, and this forward visibility, low dividend payout ratio (17-20%), and ability to refinance debt at lower rates should help re-rate this stock higher when value makes a comeback.



Technically, the stock is in a long sideways consolidation. This is the third attempt to break above the upper Bollinger Band. The short-term traders may want to wait for a weekly close above $22.03 to signal that the consolidation is over.



Another approach would be to wait for the relative strength vs the SPY to turn up on the daily chart.


Or, just buy value and wait it out. That's my approach with this stock. This is a business I understand and consider low risk, so I have a higher allocation to it. Value investing will come back once the AI bubble bursts and fundamentals start to matter. I'm positioning for that.


February 22 2024



Super Micro (SMCI) is issuing convertible debt for $1.5 billion, with a twist - the offering also has options that allow everyone involved to speculate on the stock price. Move over 0dte options, we have a new king.


February 23 2024



Endeavour Mining (EDV.TO, EDV.L) Update


Endeavour paid a US$0.41 half-yearly dividend, which annualises to a 5% yield. I expected to see a takeover offer by now, but I can understand the reasons for the delay.


Yesterday, the biggest gold miner Newmont (NEM) fell 7.6% to make a fresh 52-week low. Newmont is down over 25% ytd and down over 64% since its 2022 high. Back then, gold was at $1997/oz versus $2026/oz today, or practically unchanged. What's changed is the capital markets environment for cyclicals, which is partly warranted given the high debt to equity ratios sported by cyclicals.


Newmont is the biggest component of the GDX ETF with a 13.2% weighing. When it sinks, the GDX ETF takes a hit and capital flows out of all the other mining stocks that are also a part of the ETF. Given these ETFs are market cap weighted and perform no due diligence, the good gets thrown out with the bad. In normal times, value investors would swoop in to buy the bargains but these are not normal times. Value investors have been clubbed over the head by momentum and factor investors, run over by ETF flows, and are on life support even as they fight redemptions.


Barrick (GOLD) almost made a bid for First Quantum (FM.TO) and then backed off, perhaps because the astute CEO sensed deteriorating market conditions and didn't want the algos to clobber the stock. And now Newmont has admitted that acquiring Goldcorp (GG) was a mistake, taken huge impairments, and is looking to divest six of its assets.


This is not the right time for a company to put itself up for sale.


I've slightly trimmed by Endeavour position and am planning to wait it out. The stock should move up 20-30% when a deal is announced; I don't expect a higher premium. I think it's worth waiting, but with a smaller position. I'm leaving this trade open.


After trimming, Endeavour is a 6.1% position in my main account. The second biggest position has a 4.4% weighting. I had to trim it only because it was much larger sized than the others - I'm not giving up on it. Hope that clarifies.


February 24 2024


Gold miners


On 22nd February, gold mining giant Newmont (NEM) fell 7.6% (down 24.4% ytd) to hit a fresh 52-week low. Newmont is the highest exposure in the Gold Miners ETF (GDX) with a current 12.7% weighting. Just as with SSR Mining (SSRM) last week, this managed to drag down the entire sector. But unlike SSRM, Newmont's troubles are bad news for the other gold miners.


When it comes to ETFs, size does matter. Barrick Gold (GOLD) acquired Randgold in 2018 to become #1. Newmont one upped Barrick by merging with Goldcorp in 2019 and becoming top dog. Agnico Eagle (AEM) played for the #3 spot by acquiring Kirkland Lake (KL) and TMAC Resources.


Having a higher weighting in the GDX/GDXJ became the name of the game, setting off a wave of mergers and acquisitions.


Now comes the hangover. Agnico has written down the value of KL's assets. Newmont has not just taken impairment charges on Goldcorp's assets, they are trying to get them off their books.


Turns out, gaming the ETFs pays in the short run but leads to problems down the road.


Smaller miners tend to trade at a premium to NAV. The expectation is that some other miner will scoop up shares in order to grow bigger. With Newmont looking to divest assets, that acquisition premium is now gone. This is going to hurt valuation across the sector, but the single mine operators and pre-revenue junior miners are going to be particularly hard hit.


If this sounds all doom and gloom for the gold bugs, here's the twist.


After all this drama, the GDX ETF is only down 0.74% for the week. The junior gold miner ETF (GDXJ) is down only 0.34%. The gains in the quality stocks made up for the losses in the dogs.


The sharp drops at the open caused by algo selling was met with smart money buying. Across the board, on the weekly charts, you can see several ugly wicks down but not many solid red candles.


This is the second consecutive week where gold miners have shown strength, but unless you really looked, you would have missed it.


This sector offers something for both the fundamental and technical oriented traders. Biotechs in November had a similar setup (net-net value stocks in a primary uptrend).


Einhorn was right when he said the markets are broken. Can't just buy value or expect the fundamentals to matter.


But a sector that appeals to a broader class of participants will see more inflows than one that doesn't. And thankfully for me, gold miners fit that bill.


Fertilizer Stocks




Fertilizer stocks Nutrien (NTR) and Mosaic (MOS) appear to have bottomed.


US natural gas giant Chesapeake Energy (CHK) plans to cut production by 30% citing oversupply in the domestic gas market.


Since natural gas is a feedstock for fertilizer production, lower gas prices should help their bottomline.


NTR trades at 1x book, 21x TTM PE. MOS trades at 0.8x book, 9x TTM PE.


Fertilizer prices fell 40% in 2023 yet these companies remained profitable and now enjoy a strong tailwind of firmer ag prices (stagflation), lower Israeli supply, and higher export volumes as the logistical challenges at Canpotex port operations get resolved.


Improving technicals and improving fundamentals. I like the setup.


Queries:

A. These stocks don't trade as a multiple of book

B. trends of fundamentals still bad (gross and operating margins still shrinking)

C. Revenue growth still not there


Response:

I don't want to buy capex intensive stocks that trade at a multiple to book. The revenue growth is coming - firming crop prices, potash/ nitrogen prices stabilizing at a higher base compared to pre-2022 levels, supply destruction (CF and Yara are shuttering capacity due to high nat gas prices in Europe, Israeli exports impacted by Houthis and the war, matter of time before sanctions impact Belarus/ Russian exports), IRA benefiting US ammonia production and resulting market share gains.


With commodities, you won't find the trend by look at the financial statements. This isn't like tech investing.


February 26 2024


Buy Fortuna Silver Mines (FSM; MCap: $838.6M)




Fortuna is a past pick of mine and a stock I've followed since 2015. I've been skeptical of their strategy ever since they acquired a development stage asset in Argentina in 2016, but the stock made for a perfect trading sardine with a tendency to mean revert all through the years.


The company started out refurbishing a crappy old silver mine in Peru during the early 2000s bull market in precious metals, used the cash to acquire a decent silver mine in Mexico, and hummed along quite well until they got it into their head that they needed to expand. Then came the disastrous Argentina acquisition, and hefty capex overruns and time delays as they tried to bring the new mine (Lindero) online. With the Peru asset in decline, and repeated problems with the Mexican government putting their future there in doubt, the company decided to shift its focus to Africa. 


In 2021, Fortuna acquired Roxgold (ROXG.TO) for $884.32M in an all-share deal.


Fortuna's current market cap: $838.6M.


This is a troubled company with a history of poor decisions. Yet, we are buying the stock because it is cheap. The idea is to buy and wait for mean reversion as more investors start buying into the miners.


This is not a stock that I'd want to own through the entire bull market in the miners, but it is worth buying today.


February 29 2024


Crypto Market Outlook


Many of you in this group are my friends and people I've known and informally advised for a long time, so I'm putting this out even though it makes me uncomfortable to say this.


I started my crypto journey before the 2017 bull market, and have seen all the cycles firsthand. The scary block size wars, the ICO bubble, the "whitepaper" bubble, the privacy coin debates, the airdrops, the many mining scams, liquidity farming, algorithmic stablecoins, NFTs, IDOs, yield staking, the pump and dumps, you name it. I co-wrote (to my knowledge) the very first crypto newsletter for a retail audience, before Charlie Shreem's Crypto IQ newsletter and Teeka Tiwari's Palm Beach Confidential.


Over years of doing this, I've developed a nose for the markets. The beauty of crypto is that cycles occur much more rapidly than in the broader financial markets. It is a game of liquidity and narratives. Cryptos are like commodities - they trend. Once a narrative catches on, the virtuous cycle feeds on itself and accelerates, culminating in a parabolic blow-off top.


Today, bitcoin broke above $60k and promptly went up all the way to $64.5k before settling down. A parabolic move on top of a parabolic move. The volume surge broke Coinbase (COIN). I was monitoring the market on Kraken Pro and saw Kraken futures go post-only. KuCoin had a technical error. Only Binance continued to operate smoothly.


In the TradFi world, the bitcoin miners and MicroStrategy (MSTR) have all gone parabolic.


Nearly all the cryptos on my watchlist have gone parabolic, even Ethereum (ETH). Memecoin Pepe was up over 40% at one point today.


In absolute dollar terms, most cryptos haven't recovered to their 2021 peak. ETH is still far below its $4800 peak. Bitcoin is slightly below its $69k peak. But sentiment is off the charts bullish. Crypto fear and greed index is at 82, or extreme greed. Trading volumes are back at November 2021 levels. Futures volume is off-the-charts. A boomer trader who has been in markets for four decades and employs a conservative trading style is sporting laser eyes. Every second post on Twitter is about bitcoin.


Everyone who believed in the Bitcoin ETF and bought in has made an insane amount of money really quickly. That's true in every bull market, but this cycle has been a lot quicker than any of the others I've lived through. We've gone from $24.9k bitcoin on 11 September 2023 to $64.5k today, with hardly any measurable pullback. Altcoins have lagged, but they have also been brought along for the ride.


Easy money has made everyone forget how quickly this market can turn. Bitcoin can easily drop 25% in a day. Solana, Cardano, Polygon and Uniswap got wrecked in the June 2023 crash. It took a mere 5 days for Luna to vaporize $4 billion in value.


Risk happens fast, and it happens when people least expect it.


I don't think there's any asset that goes up forever. 


I don't see how bitcoin can maintain its current momentum.


I see too much leverage in the crypto ecosystem, and past cycles have taught me how quickly that can turn the markets.


We've had a good run. It's time to exit.


I've cleared out most of my crypto portfolio, leaving only the bonded Ethereum, Solana and Polygon holdings. I'm short bitcoin futures to hedge the decline in value of my staked assets. I've exited bitcoin and all my other altcoins (except Paxgold, which counts as cash equivalent). 


I didn't wake up today morning planning to do this. I reacted on seeing how things moved over the past 3 hours.


I'm not a top caller. To steal a phrase my friend often uses, I like to follow the trend to the end until it bends. But the sentiment extreme, exchanges going down, parabolic charts, the PR shenanigans and market manipulation that jump started the bitcoin run... all leave me feeling very uneasy. Maybe this continues - who the heck knows?


My chips are off the table. I plan to encash and exit the casino while there's still liquidity to be had.


Overall, in the last 24 hours, about $700M worth of crypto positions have been liquidated - long and short. Traders will now de-lever to meet their volatility parameters. This is how the selling starts, and then cascades.






Translation: "It's already gone parabolic but don't worry guys, it'll go even more parabolic and blow past $69k without pausing".


Beats me why analysts feel the need to hedge. You're not doing your job if you're afraid to call it like you see it. It's a parabolic blow off top. There, I said it.


"Normal functioning markets"


Good Trading!

Kashyap

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