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Weekly rollup | March 20-26 2023

Stocks Mentioned: Valero Energy (VLO), Rio Tinto Group (RIO), B&G Foods (BGS), Canfor Corp (TSX:CFP), Stratasys (SSYS), NVIDIA Corporation (NVDA), iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI), General Mills (GIS), Freeport-McMoRan Inc (FCX), Southern Copper Corporation (SCCO)

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March 20 2023

Short Valero Energy (VLO)

Crude oil traders don't seem to have told energy investors that they are pricing in a recession. That's our window of opportunity to get short a refiner.

Cover the RIO short. There's enough short exposure in the portfolio now and I don't want to be short three copper miners.

March 21 2023

Buy B&G Foods (BGS). Market cap: $1.07 billion. Share price: $15.07

I have been looking for longs to offset the short exposure and my first preference was utilities and staples. Try as I might, I don't see good risk-reward in utilities except perhaps Dominion Energy ($D) but it's too much of a bottom-fish for me. In staples, I like JM Smucker ($SJM) and Campbell Soup ($CPB) as defensive plays, but I want more upside and more risk than these two names can provide.

Hence, BGS. The company has nearly $2.5 billion in debt against $868 million in equity, trades at 0.5x sales and 1.24x book. Inflation ravaged the company's business last year, resulting in 2022 EPS of negative 16 cents. The company guided 95 cents to $1.15 in earnings for this year, which would be in line with 2021 results. If they can hit $1, that's a forward PE of 15x, which is pretty decent for a consumer staple company.

What about the debt? Therein likes the risk, which is what makes the stock cheap. That and the 6.5 million shares the company issued (71.67 million shares outstanding) from Q3 2021 to year end 2022.

We buy cheap, but with a catalyst. If the Fed hikes 25 bps tomorrow and inflation heads lower through the year, the company should be able to return to profitability and service the debt. If the economy enters a recession, investors pile into staples, which should help with multiple expansion. At some point, given the brand recognition and value of its portfolio, a PE firm may seize the opportunity to take the company private. Not saying this is the catalyst I'm looking for, but there are several upside catalysts.

The downside is limited by a stop loss at $13.3, slightly below the 100 DMA and right in the middle of the breakout gap for a risk of 11.7%.

Buy Canfor Corp (TSX:CFP)

Another attempt at the lumber trade, buying value with share buybacks and the end of the US-Canada tariff spat being potential catalysts for a re-rate. Stop loss at $21.22 for a risk of 7.3%.

March 22 2023

Hedged my short tech positions with a long oil position. Rather than have to panic cover if the Fed pauses or cuts, this affords me the luxury of assessing and reacting. The rest of my short positions and puts are unhedged. Long oil and short Valero (VLO) is logically inconsistent, so cover the VLO short for now.

Buy 3D printing company Stratasys (SSYS)

The stock is in play.

"Stratasys Ltd. (Nasdaq: SSYS) (the “Company”), a leader in polymer 3D printing solutions, today announced that its Board of Directors has unanimously rejected the unsolicited proposal it received from Nano Dimension Ltd. (Nasdaq: NNDM) (“Nano”) to acquire Stratasys for $18.00 per share in cash.

Consistent with its fiduciary duties, and in consultation with its independent financial and legal advisors, the Stratasys Board of Directors carefully reviewed and evaluated the proposal. Following the review, the Stratasys Board concluded that Nano’s proposal substantially undervalues the Company in light of its standalone prospects and is not in the best interests of Stratasys and its shareholders.

Stratasys’ Board and management team are confident that the Company’s standalone plan will create significantly greater value for its shareholders than the Nano proposal. Stratasys recently delivered its sixth consecutive quarter of profitability on an adjusted basis despite a challenging economic environment, and the Company remains laser focused on executing its strategy and managing its operations to effectively deliver sustained, profitable growth.

J.P. Morgan is acting as financial advisor to Stratasys, and Meitar Law Offices and Wachtell, Lipton, Rosen & Katz are serving as legal counsel."

Bond yields are cooling off ahead of the FOMC announcement. Either the market has it wrong or Powell's turned into a dove.

Stopped out of NVDA short.

March 23 2023

The Fed hiked 25 bps yesterday (to 4.75-5%) and continued to talk the talk on bringing down inflation, but the market is not buying it. Fed Funds futures are pricing in rate cuts later this year and don't think interest rates will be at 5.1% by year end, as suggested by the FOMC members' dot plot. Raoul Pal, in his latest RealVision Pro Macro update, commented that the Fed will be forced into an emergency 100 bps rate cut and more QE soon, in order to save the banking sector. Bonds and tech, which are extremely rate sensitive, are also refusing to price in a 5.1% year end rate. The interest rate on 13-week T-bills, which should ideally be around Fed funds, is 4.563%, or below the lower end of the range. Two year bonds actually soared higher yesterday.

First order thinking: who's going to be right, the Fed's dot plot or market expectations?

Second order thinking: as long as the market doesn't believe the Fed is serious about tightening financial conditions in order to bring down inflation, inflation expectations will remain sticky.

It doesn't matter who is going to be right. If the market doesn't bend to the Fed's will, the Fed will have a tougher job in terms of bringing down inflation expectations. Ignore the Austrian definition of inflation as an increase in money supply. For the Fed and market participants, inflation is the CPI, PPI, PCE and other statistical measures of consumption expenditures.

If inflation expectations remain high, future consumption will be brought forward. Buy now, pay later. Prices will go up due to inflation. Financing costs will decrease as the Fed cuts. People will consume more and go into debt since they expect tight credit to be temporary and higher inflation to be long lasting. FinTwit and media personalities constantly calling for money printer to go brrr, or the dollar to hyperinflate, doesn't help matters any.

Markets disbelieving the Fed's seriousness about bringing down inflation makes it that much harder for the Fed to actually succeed in bringing down inflation. It doesn't help that the Fed is spewing dollars abroad in the form of swap lines, further decreasing the purchasing power of the dollar and making imports more expensive. See my Twitter thread on why dollar swap lines are causing the dollar to weaken:

As long as credit remains tight, we are not going to enter a new bull market. As long as the markets refuse to believe the Fed, the deflationary 'collapse' will not happen either. It'll be a protracted bear market in US equities and bonds, until either the Fed gives up and starts printing, like they did in 1974, or until credit contracts hard enough to squeeze all leverage out of the system and allow for genuine price discovery without the overlay of central bank money printing. The Swiss National Bank's decision to hike 50 bps today is a step in the latter direction.

There is no trading implication based on this assessment. This is more of big picture thinking and me trying to make sense of the environment we're in. I don't think Powell wants his legacy to go down next to Arthur Burns (1970-78 Fed Chairman), as the man who killed the dollar and wrecked the American economy with inflation. But he may just end up doing the same thing. Burns famously said that the Fed is independent within the government, not independent of the government. If Congress wants to run $2 trillion in annual deficits, the Fed cannot remain restrictive even if they want to. The market is trying to price in all the probabilities, which means more volatility and a good chance of whipsaws on individual trades.

Bullish or bearish bias makes no difference. It's all about how to handle the volatility and whipsaws. I'll try my best to guide. Good luck trading this!

As I type this, the Nasdaq is up 2%, Dow 0.8%, S&P 1.05%, gold 2.4% and copper 1.7%. Oil is negative for the day. Look at my watchlist and see what's keeping up with the Nasdaq. Tech, bitcoin, dry bulk futures, China, South Korea, carbon credits and solar. That's a very narrow list. Market breadth is collapsing even as the big names are rallying. This is not bullish. If this were the beginning of a new bull market, our short positions would have been blasted. With the exception of NVDA, which defies gravity, no stops have been hit even on this supposedly wildly bullish day. I'm neither a stubborn bull nor a stubborn bear. I see this as evidence that the short side is the right side. If I'm wrong, I'm wrong, and that's that.

Sorry, add gold miners to that list as well. But that's with gold outperforming the Nasdaq so doesn't change my overall point.

When gold runs, it really runs.

This is a gold chart capturing the run up to and post the declaration of Putin's special operation in the Ukraine. Charts don't reveal the future, they merely provide information about the past.

March 24 2023

Deflation or higher inflation? I can argue both sides. These are uncertain times.

If you have a futures account, pull up crude oil futures.

Deutsche Bank being sent to the dustbin of history is somehow bearish crude, apparently. Knee jerk contrarian in me went long.

IAI got stopped out today at $86.43.

Cover the FCX short today, leaving SCCO as the only remaining copper miner short.

Buy General Mills (GIS)

Portfolio is too short heavy now and staples are going to see inflows as uncertainty spikes. Every weekend, it's a guessing game over which bank will fail. This is absolutely the time institutions with long-only mandates rush for defensive names. Banks and utilities don't fit the bill, so it has to be staples.

I know many trades are failing now, but that's just how it is in this environment.

Stop loss at $78.75 for a risk of 4.4%.

March 25 2023

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