Weekly rollup | Aug 22-28 2022
Stocks Mentioned: Zim Integrated Shipping (ZIM), BW LPG (BWLPG), StealthGas (GASS), West Fraser Timber (WFG), Cheniere Energy (LNG), Golar LNG (GLNG), Canagold (CCM.TO), Flex LNG (FLNG), Ur-Energy (URG), West Fraser Timber (WFG), Credit Acceptance Corporation (CACC), Western Forest Products (WEF)
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August 22 2022
ZIM short interest has continued higher, with shorting demand now at 73%, up from 68% as of Friday's close.
This (7/11) was the low for BW LPG (BWLPG). Nat gas not only held up, crazy volatility and all, but it has gone on to a new high. Natty is now up 87.4% from its June low! When will I exit the nat gas trade? When the trend turns.
StealthGas (GASS) starting to move, but not heavy on volume yet. Watch this ticker!
August 23 2022
BW LPG (BWLPG) reports Q2 results on the 29th. The company is the largest public listed owner of very large gas carriers, with a fleet of 38 VLGCs, and is poised to benefit from surging LPG demand. The higher the price spread between US and Asian LPG, the more the demand for LPG shipments from the US. Coupled with congestion at ports and the Panama Canal, which lower the effective capacity of the fleet, and the higher the profits for vessel owners. With Europe scrambling for any and all forms of energy, the trend in LPG transportation is long-term bullish. The company reported Q1 2022 TCE rates of $36,900 per day, as compared to $31k/day in 2021, $36.4k in 2020 and $35k in 2019. I expect rates to pick up and remain elevated as supply chains adjust to account for disruptions due to the Russia-Ukraine situation.
Zooming out to the monthly chart, the stock is at an 8-year high and up 210% from the March 2020 low. Even after this move, the stock is still 10% below book value of NOK 89.37. Balance sheet is healthy with a net debt to equity ratio of 0.39x. BW Group owns 40% of the company. There have been no insider sales reported recently. Funds have been net buyers and the company is recommended as a Buy by 7 of 7 analysts, with an average price target of NOK 96.12, or 19% above yesterday's close.
We're up 36% on this trade so far and I expect to continue riding this further. A weekly close below NOK 73 would make me re-evaluate my trade thesis.
From the Reuters article: Single-family housing starts, which account for the biggest share of homebuilding, dropped 10.1% to a rate of 916,000 units, the lowest level since June 2020.
Residential fixed investment declined at its steepest pace in two years in the second quarter, contributing to the second straight quarterly drop in gross domestic product during that period. More pain is likely yet to come for the housing market.
A survey on Monday showed the National Association of Home Builders/Wells Fargo Housing Market sentiment index fell for an eighth straight month in August, dropping below the break-even level of 50 for the first time since May 2020. Rising construction costs and mortgage rates were largely blamed for the drop.
If it's so darn obvious that the US housing market is dead in the water, why oh why would I want to own West Fraser Timber (WFG)? Glad you asked.
West Fraser is a diversified wood products company with more than 60 facilities in Canada, the United States, the United Kingdom, and Europe. The Company produces lumber, engineered wood (OSB, LVL, MDF, plywood, particleboard), and other products including pulp, newsprint, wood chips, and renewable energy. West Fraser’s products are used in home construction, repair and remodeling, industrial applications, papers, tissue and box materials.
The paper and pulp business is a loss making unit. The company makes all its profits from lumber and engineered wood products. It is joined at the hip to the US housing market - everything else is a sideshow.
Current market cap: $10.3 billion (share price: $90.81)
Trailing twelve months EPS: $25.17 (PE of 3.61x vs 15.22x for the Homebuilders ETF $XHB and 10.83x for Timber & Forestry ETF $WOOD)
Operating margin is still a robust 40%
First half 2022 operating cash flow of $1.6 billion
Working capital of $2.2 billion and long term debt of $500 million, which implies negative net debt of $1.7 billion
Book value of equity: $7.85 billion (Price to book of 0.76x vs 4.16x for XHB and 1.69x for WOOD)
Trailing twelve month sales: $10.4 billion (Price to Sales ratio of 0.75x vs 1.65x for XHB and 1.72x for WOOD)
To sum up, the stock is really, really cheap valuation-wise. Also, the company is shareholder-friendly, having spent $1.69 billion on share repurchases in H1 2022. That's on top of $1.3 billion spent on repurchases last year.
The lumber sector has already seen a couple of M&A deals this year (CTT and RFP) and there was a rumor on 7/19 that WFG was being acquired in a joint deal by Private-equity firm CVC Capital Partners and wood-panel manufacturer Kronospan Ltd. The share price soared from the previous day close of $83.24 to an intra-day high of $102.66 on this news. WFG squashed the rumor but noted that management had met with both companies. So perhaps something may still come of it. A cash-rich business with such stunning metrics is always going to be attractive to PE firms, since they can load the company with debt and easily generate a high IRR. If WFG falls to a takeover attempt, we get a small but quick win. If the company continues as an independent public-listed entity, even better.
I don't have a price target but a 10x earnings multiple implies a share price of $250, while the 15.22x multiple being accorded for XHB implies a price target of $383. The downside is minimal since the company has no net debt and continues to maintain robust operating margins. It's rare to find a cash flowing business trading cheap - I'm not going to get shaken out by alarmist news on housing starts.
StealthGas (GASS) reports earnings pre-open on Wednesday. The stock appears to be going up on earnings speculation. Note that the wild EPS beat in Q1 2022 only led to a small up move in the share price. The consensus EPS estimate is 18 cents. I doubt the company reports a massive beat which warrants this price action. I'm inclined to sell today, evaluate the earnings release, and then decide on re-entry. Based on entry at $2.89 on 6/23 and exit at $3.08 today, the trade gained 6.6%.
Note that I haven't turned bearish on the stock - just stepping aside from possible harm if earnings disappoint. I don't know the company well enough to take a stance on earnings.
August 24 2022
It has been 7.5 months since the stock market peaked and Barron's is calling the recession after the fact. US inflation has likely peaked and the comparisons are going to get better. As for the recession, it was the mildest one this century.
More signs of high commodity prices causing demand destruction emerging. It now costs twice as much to produce ammonia as it can sell for. Does this mean the ammonia price will double to catch up with the cost of production? No, it means usage of natural gas will drop until the price comes down enough to bring back demand. As counterintuitive as it sounds, this is a clearly deflationary force.
Why is ammonia priced at less than production cost? Because there's excess ammonia inventory keeping a lid on prices. Commodities can stay below cost of production for extended periods of time because supply cannot drop fast enough to keep pace with demand destruction.
This is the kind of example I had in mind when I wrote the article on inflation having peaked.
Golar LNG (GLNG) enters into swap arrangements for 50% of 2024 Dutch Title Transfer Facility exposure
"Golar LNG Limited ("Golar") announces today that it has entered into swap arrangements to hedge approximately 50% of its exposure to Dutch Title Transfer Facility ("TTF") linked production for 2024 at a TTF price of $51.20/MMBtu. A TTF price of $51.2/MMBtu is the energy equivalent to a Brent oil price of approximately $300/bbl. The hedging transaction secures cash flow visibility for part of our 2024 Distributable Adjusted EBITDA at an attractive historic level, whilst retaining meaningful exposure to the possibility of higher prices.
Based on TTF gas prices of $51.20/MMBtu, and current Brent forward prices for 2024 at $86/bbl, Golar's share of annual distributable Hilli Adjusted EBITDA for 2024 is expected to be approximately $294 million (fixed tariff of $67 million, Brent oil linked earnings of $73 million, and TTF linked earnings of approximately $154 million). Golar's share of expected 2024 annual debt service for Hilli's contractual debt is approximately $47 million (debt amortization of approximately $29 million and interest of approximately $18 million)".
Smart move on the part of Golar LNG. Linear thinkers assume natural gas prices will go up forever because the EU politicians will never allow Russian nat gas to enter the market. But chances are, something will break and the world will change dramatically instead. As a reminder that markets don't always behave as expected, recall that oil prices fell during the Gulf War.
"The world of oil defied expectations on the second day of the Persian Gulf War.
Oil prices crashed Thursday in their biggest one-day fall. Oil companies froze or lowered wholesale gasoline prices. Lines failed to appear at service stations. And oil supplies remained ample.
One day after the United States and it allies launched a massive attack on Iraq, oil prices in New York plunged an unprecedented $10.56 a barrel to $21.44--a dime below its price on Aug. 1, the day before Iraq invaded Kuwait. The free fall confounded predictions that a war would cause oil prices to soar as high as $60 a barrel.
“If you had said to any trader (Wednesday) that we’re going to have a war tonight and tomorrow the market will be down $9 a barrel, they’d look at you as if you were a lunatic,” said Andrew Lebow, a trader at E. D. & F. Man International Futures Inc. in New York.
Source: IMPACT OF THE GULF WAR : Crude Plunges; Gasoline Prices to Dealers Cut : Energy: The movement defies predictions. But analysts warn that negative news could quickly reverse the market's course.
StealthGas (GASS) reported Q2 EPS of 32 cents, well above the 18 cents consensus. But something interesting happened to the stock price. The stock opened at $3.5, hit a high of $3.6, then plunged to $2.89 before stabilizing around $3-$3.1 as I type this. Volume so far is only slightly above average. I haven't evaluated the earnings release yet and feel no compulsion to buy this stock on such a volatile day. Still on the sidelines and waiting.
August 25 2022
Cheniere Energy (LNG) was indeed a momentum pick yesterday. The stock was written up as Chart of the Day on popular trading website BarChart.com. Thanks for those cheap puts go to the momentum traders and option writers.
Sell Canagold (CCM.TO) at 24 cents
The AGM was on 7/19, results were announced on 7/20. Over a month later, Sun Valley hasn't put forth any news on the financing at a premium. Looks like it was all talk, just to gain Board control. All they've done is announced the start of drilling. It takes one IR person a few mins time to put together a news release saying that. The old management team was capable of doing the same, so there's no real progress. Had Sun Valley really intended to set things right, they would have cashed up CCM already. I've given the trade well over a month. Waiting and hoping for Sun Valley to take action is not a trading strategy. I'm out.
Based on 29 cents entry on 7/21, exit at 24 cents for a loss of 17.2%. Shares are thinly traded, so make sure to use limit orders and sell over the course of the next few days if necessary.
August 26 2022
West Fraser Timber (WFG) up 6.5% yesterday on no news. Might be something brewing. Recall that the share price shot up last month on takeover rumors.
From Flex LNG FLNG Q2 presentation
Interesting to note that the forward curve (dotted line) constructed from exchange-traded futures contracts shows the price falling steeply by next year, presumably as more LNG storage and regasification capacity comes online and the Freeport LNG terminal gets back online. Food for thought: if Biden releasing SPR oil tamed gasoline prices this summer and ended the rally in crude, could an accelerated drawdown of European nat gas inventory end this parabolic move during/before winter season? Parabolic moves are not sustainable and when they end, they end badly.
For all the fear mongering, EU is in better shape for the winter season as compared to 2021. As demand for nat gas collapses due to high prices, at some point the inventory building stops when it becomes obvious that there just isn't sufficient demand to warrant those prices. Then the selling will start in earnest. Parabolic moves don't end in a mild and orderly correction. The setup certainly feels right for a trend change. I'm definitely starting to re-think holding on to our LNG/LPG shipping trades.
The inventory build-up has happened while pipeline supply of cheap Russian gas has collapsed. This is all high-cost inventory from LNG imports.
Put yourself in the position of the CEO of a utility company (or nat gas plant operator). You substitute cheap Russian nat gas for higher cost LNG and start charging your customers more for electricity. The electricity price goes parabolic, and you're happy you forward sold electricity and locked in an amazing profit. All good so far. Then, your customers curb their electricity demand, preferring to idle their plants than pay these unsustainable input costs (see Carlsberg and CF Fertilisers UK above). You're sitting on a sizable profit on your current inventory, but it is getting expensive to continue building inventory. There's also the risk that your retail customers will default or demand a government solution since they simply cannot afford to pay the bills, however much electricity they conserve. The demand destruction is evident, the cost of procuring more LNG is rising, and you're sitting on substantial gains on your raw material inventory. What do you do?
A nationalized utility may not have much choice but to keep running towards disaster, but every private player is for sure eyeing the exit.
Think this trend in motion will continue to stay in motion? Or meet a violent end in a matter of days to weeks?
Here's the full chart. Enlarge it, make it full screen, stare at it, and tell me this doesn't end in disaster for those long these forward contracts. (Source link)
If the EU politicians want to stay in power, they're going to have to fix this. The Russian solution is coming - matter of when, not if. There is simply no alternative.
"It's Time to Start Worrying About Winter 2023/24 as This Gas Crisis Will Last Until 2025", so says Stifel. Really? Do they assume Europe miraculously avoids freezing to death this winter, but Russian gas doesn't return via pipeline, the Ukraine war drags on, the sanctions continue, the EU economy doesn't collapse, and current conditions can safely be linearly extrapolated for 3 more years? It's the morons who nod their heads to this research who are probably long German electricity futures and forward fixing LNG purchases at these prices.
An excerpt from the book Hedge Hogs, the story of how Brian Hunter blew $8 billion taking outsized long positions in natural gas futures. The trade had worked the previous year and made $1.3 billion. Mistaking a bull market (helped by Hurricane Katrina) for brains, he attempted to corner the market, buying more contracts as the price went against him. This works in futures if you can scare off the person on the other side of the trade and force them to cover. But you can only fight the market for so long. He kept pushing 2006 winter gas prices to unsustainable levels (sounds familiar?) and taking long spread positions on 2008 contracts.
The strategy was essentially an attempt to bully those traders taking the other side of his bets into covering. But the size of his trades pulled capital from other parts of the firm (Amaranth was structured as a multi-strategy hedge fund run by 12 managers, but Brian was top dog) and the losses became too big to hide. No trader is big enough to bully a $600 billion market, and the chickens came home to roost. By September 2006, the gas glut had made it obvious that the price had to come down. Amaranth tried to raise more capital from outside investors by falsely claiming to be up 25% for the year but the ploy failed. A week later, they went bust.
Natural gas futures aren't called the widow maker for no reason. The swings have always been wild. When this bubble bursts, I'll be watching for short entries in EQT, CHK, RRC, AR, SWN and GLNG.
Sell BW LPG (BWLPG)
The company reports earnings before market open on Monday. I've been growing uncomfortable with the natural gas trade as I've ranted on and on today. Plus, the stock is not behaving well. The stock opened at NOK 80.1, hit a high of 83.8 and then quickly reversed lower, going all the way down to 79.1. Maybe I'm reading too much into the price action, but the stock is set to close below the 20-day EMA. I've grown wary of the LPG/LNG trade given that Twitter is full of nat gas bulls. Maybe I'm reading too much into the price action because of that. But with 9 mins to closing bell in Europe, I've decided it's better to exit and miss out on further gains than to give back profits. Sell.
Zim Integrated Shipping (ZIM) went ex-dividend today and is down 2.7%. This trade hasn't worked this week, but the short interest has grown to such a level that the squeeze has to come. Patience.
Absolutely no way this ends well for the shorts.
Contrast the ZIM short utilization with the go-to stock for short sellers, Tesla. The level of bearishness in container shipping is just insane - something has to break soon, and I'm betting it's not further downside.
Today's correction is a good add point for Ur-Energy (URG). The next uranium bubble, driven by Japanese reactor re-starts and rising global cognizance of the need for a nuclear renaissance to address rising electricity prices, is just getting underway.
Warren Buffet is absolutely right when he says be greedy when others are fearful. Today is THE day to be greedy. I bought DAC, URG, YCA, GRIN, SI, TK and WFG. Cash levels are at the lowest they have been in a while. Today reminded me of the 2016 election scare.
Tuesday, Nov 8, 2016: Stock futures took a nosedive as states reported Tuesday night, revealing a tightly-contested 2016 presidential election between Donald Trump and Hillary Clinton. With each state Trump took, Dow futures dropped – plunging 800 points, according to CNBC. At 10 p.m. MST, the Nasdaq and the S&P 500 futures halted at the limit-down until the market opens Wednesday morning, CNBC reported.
Wednesday, Nov 9, 2016: Dow closes up 250 points; financials surge after Trump election upset. Russell 2000 outperforms S&P 500, soaring 3%.
Earlier this month, regional banks (KRE) gapped higher from the $64 level. If this level holds and the KRE moves higher over the next few weeks, I would consider it as corroborating evidence that the inflationary depression is over and the recovery has begun. In March 2009, banks bottomed, bounced, made a higher low in July, and it was off to the races until the QEs led to yet another inflationary bubble in 2011. While new highs in equities are unlikely when credit markets are tight, this could very well be the beginning of a recovery. Forget Powell, watch the banks. And bonds. Interesting to note that U.S. investment-grade bonds ($AGG) are down a mere 20 bps today. However, credit spreads are going to widen so this is not the time to be a knee-jerk contrarian and buy bonds.
Buy Western Forest Products (WEF.TO, WFSTF)
This is a sector I like and the other trade in this sector West Fraser Timber (WFG) has been a winner so far. Company had a great Q2 and the level of M&A interest in this niche sector is a sign that low valuation isn't going to equal dead money. I'll have a write-up soon, I just wanted to put this out during market hours.
August 27 2022
August 10th was the perfect day to cut risk exposure, Friday was the perfect day to add back risk exposure. That's actually a BS statement even if it sounds smart - there's no perfect day or perfect time since the market is a game of probabilities. But if you did cut risk on the 10th, you would have had the risk appetite to add to positions on Friday, instead of being panicked by what the media and FinTwit influencers were saying about recession, pain for American households, Powell, Jackson Hole or whatever news had everyone's fancy.
Remember looking at conjuring tricks as a kid? The conjurer will divert your attention to something irrelevant while setting the stage for his trick. These Fed speech days are like those conjuring tricks. They focus your attention on the irrelevant details. So what if the Nasdaq is down 4%? The tech-heavy Nasdaq is not the market. Investment grade bonds ($AGG) barely blipped on Powell telling the market he was going to cause everyone pain. AGG is down a mere 9.9% YTD, with the Fed aggressively hiking rates and promising rate hikes until kingdom come. It's a conjuring trick. And long-duration treasuries ($TLT) were up 75 bps on the day, and another 7 bps after-hours. Bond math says long duration assets are more sensitive to rising interest rates, but treasuries - the biggest, most liquid market on the planet outside forex - shrugged off the rate hikes. Why? The rate hikes are already priced in. Not just that. Treasury holders are banking on a future rate cut cycle.
Some commentators like to say bonds are defensive investments, but that's not true in an inflationary environment. The term bond vigilantes emerged in the '80s when bond owners took emerging market governments to task for printing too much money to support their mercantilist policies. Bond vigilantes kept inflation in check by selling bonds and raising the cost of borrowing. Also, for a bit of history, google Carter Bonds. In the inflationary 1970s, the US government had to borrow in "hard money" Swiss franc and German marks because the bond vigilantes didn't trust the US govt to not inflate away USD denominated debt. Treasuries are not defensive investments in an inflationary environment. But treasuries going up yesterday and corporate bonds barely moving plays well with my end of inflation thesis (see article on website).
The Fed may hike rates by 75 bps in September but after that, they should be done. Contrary to what you may see on the news, an expansionary fiscal policy and tight monetary policy actually make for a great regime to be invested in stocks. Tighter credit kills the zombie companies, freeing up capital for more productive uses. Think of a guy in a Manhattan penthouse keeping a fleet of John Deere harvesters, financed at 0% interest via a non-recourse loan, while a farmer in Iowa is on the waitlist as the local dealer is out of inventory. Zombie companies holding on to capital is a bit like that penthouse suite holding harvesters - they can afford to waste capital only because the cost of financing that capital is zero or close to zero. Now that there's an actual cost of capital, resources will be freed up for more productive uses, which is great for the economy.
The higher interest rate also incentivizes saving and investment, forces people to stop borrowing for consumption, which stimulates further economic growth. Huh? Think of it this way. If you buy a flat screen TV today on zero percent EMI, you're buying now and paying later. If not for the EMI option, you would have to save money for a few months to purchase that TV. The debt enables you to bring forward future consumption. When debt becomes expensive, your consumption demand gets shifted to the future. Businesses grow in the present because they are incentivized to meet your future demand i.e. they focus on the long-term rather than the immediate. This is how economies progress. The railroads weren't built to satisfy the needs of immediate customers but with an eye for their future potential. Uber wasn't built for San Francisco alone. After 14 years of loose monetary policy, tighter credit is desirable for a healthy economy.
That's my perspective, and the reason why I'm unfazed amidst all the Jackson Hole chatter. Hope you have a great weekend!
August 28 2022
"Using estimates based on vAuto data as of Aug. 15, used retail days’ supply was 47 days, which was down four days from the end of July. Days’ supply was up eight days year over year and up two days against the same week in 2019. Leveraging Manheim sales and inventory data, we estimate that wholesale supply ended July at 31 days, up five days from the end of June and up nine days year over year. As of Aug. 15, wholesale supply was at 30 days, down one day from the end of July and up eight days year over year and five days higher than 2019. Higher than normal days’ supply indicates conditions that favor buyers over sellers... The only prior times consumers felt worse about auto loan interest rates than they do now was in 1980–1982, when rates were much higher."
Higher inventory at dealer lots, declining consumer interest in auto loans, tighter credit. This combination of factors is why I believe the CACC short trade should start working soon.