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Weekly rollup | Sept 19-25 2022

Stocks Mentioned: Bunge Ltd (BG), Grindrod (GRIN), Atlas Corp (ATCO), Zim Integrated Shipping (ZIM), DHT Holdings (DHT), Franco-Nevada (FNV), West Fraser Timber (WFG), FedEx (FDX), Paper (IP), Packaging Corp of America (PKG), Westrock (WRK), Weyerhaeuser (WY), Western Forest Products (WEF.TO, WFSTF), Mercer (MERC), Scorpio Tankers (STNG), SPDR S&P Regional Banking ETF (KRE), SPDR S&P Biotech ETF (XBI)

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September 19 2022

Update stop loss on Bunge Ltd (BG) to $88.14

This might get triggered today. Why the close stop of 8.8% from entry? This is a low volatility stock so a tight stop is warranted. Second, this would take out the 7/27 low and indicate the rally has fizzled. Third, this would be the second re-test of the 100 week MA.

Fundamentally as well, things are not great for BG. The company sold its wheat mills in Mexico and the status of its Russian and Ukrainian operations is unknown (to me). Maybe the market knows something I don't. Or the move is just a part of regular market volatility. Hard to tell.

Now that we own wheat, BG is not the sole agriculture exposure and I'm comfortable sticking to my stop and waiting for a better re-entry point.

I'm looking at this stock on a long -term timeframe, with the aim of riding a long uptrend. Staying out while the trend establishes itself is part of that.

September 20 2022

The stop on Bunge (BG) was not triggered but looks like I wasn't far off in saying the status of its Russian operations is a black box. The company sold its oilseed processing business in Russia, but did not reveal the selling price. The press release on the sale of their Mexican wheat mills was equally vague. I'm happy to hold my position with this stop loss in place.

Grindrod (GRIN) closed at $24.75 yesterday. That's 5% below the $26 proposed takeover price.

Atlas Corp (ATCO) closed at $14.48, 3 cents above the $14.45 proposed takeover price. Atlas has traded as high as $14.92, on news that some shareholders propose to vote no on the takeover deal.

Takeover speculation is not my forte. Sure, there's some juice left to be squeezed on GRIN, but I'm closing the position at $24.75 and banking my gain. Based on $21.56 entry, that's a one month return of 18.7% on a breakout trade, including 84 cents in dividend. The first GRIN trade gained 40.6%. As much as I try to take emotions out of trading decisions, I do feel a bit sad to be bidding goodbye to this stock, which I consider to be one of my best finds from bottom-up fundamental research. A South African dry bulk shipper with a fleet of smaller vessels isn't exactly sexy at first glance. It took a lot of work for me to understand the value proposition and a LOT of patience to time my entry to catch the exact bottom (1/24) on that first attempt. I'm very happy this one worked out.

A lot of people are asking me what is up with Zim Integrated Shipping (ZIM), my top trade idea exactly a month ago and one I've spoken about a lot over the last year. I put on an earnings trade that was stopped out for a 11.6% loss (dividend adjusted assuming 8/22 entry at open). The open trade, based on valuation, is still profitable, up 2.1% from the 11/30/2021 entry at $54.7. I've recovered half of my cost basis just in dividends, and fully expect to recover the other half in dividends as well. That's the beauty of this trade.

The dividends are safe. In the Q2 results release, the company re-affirmed full year 2022 guidance of $6.3-$6.7 billion in adjusted EBIT and still intends to return up to 50% of net income in dividends each year. The company is trading at less than cash on the balance sheet, has no net debt, and is not in a capex heavy industry where a surprise impairment charge can quickly change the value proposition. Some analysts argue that dividends don't matter, or that Zim's dividend policy is making the stock unappealing. My response is that when DHT Holdings (DHT) announced their intention to dividend out 100% of net income, the stock shot up 7.9% on the news and is up 17.2% ten days post the announcement. So clearly, dividends do matter. Just that it matters for DHT bulls, but not for ZIM bears.

I like the Zim trade because it is such an easy trade. You buy, forget about it, and just collect the dividend every quarter. No need to worry about exiting as long as the stock isn't overvalued. Generating trade ideas, doing the homework, waiting for the setup, risking capital, watching the price action and waiting for add/exit points is a lot of work. Collecting dividends is as close as it gets to clipping bond coupons and letting time work in your favor. That's the way I am looking at this trade. Based on your entry and the dividends you've collected so far, the risk/reward on this trade would be different for you. That's also why I had a stop on the earnings trade but didn't let that shake me out of the long-term (and to remind you yet again, still profitable) position.

I've come across very few stocks like this in my whole career. Franco-Nevada (FNV) is one of them. FNV is a royalty company that has paid consistent dividends. Looking at the stock chart, you wouldn't guess it's a gold royalty company. Holding that stock through the initial slump during the GFC paid off massively for those fortunate enough to accumulate shares post its IPO. Another is ITC Ltd (NSE:ITC), a cigarette company in India. I've held ITC for over 4 years. The stock price has done a round trip over this span, but I've collected 10-15% of my cost basis on the initial purchase in tax-free cash dividends. Prior holders did even better, since in 2016 the company issued 1 extra share as a share dividend for each 2 shares an investor held.

Such long-term holdings can't make up too much of a trading portfolio, but ZIM represents merely one of 17 open trades and ZIM and EuroDry are the only value trades. I sold MATX and all the other containership positions so I could hold just this one value trade in a sector that's getting beaten up. That's the risk management part kicking in. If the Zim trade is bothering you and keeping you up at night, perhaps your context on this trade is different.

To re-iterate, there is absolutely nothing wrong with Zim and I continue to like it for the value. That hasn't changed one bit since my initial valuation model last November.

September 21 2022

Wheat is rising on news of the Russia-Ukraine escalation. Crude oil and nat gas are being bid. Aussie gold miners closed lower, but miners are green in London and pre-open in the US. Watch gold here. When the news of the Russian invasion first made headlines in February, gold ticked up quite violently before giving back its gains. Too many factors at play today, but gold certainly looks interesting as a potential buy. Everything depends on the FOMC outcome.

Canfor Corporation (TSX:CFP) is announcing a temporary reduction in production in British Columbia (BC) due to challenging market conditions. The production capacity will be reduced through a two-week curtailment beginning September 26, 2022 at the majority of solid wood facilities in BC and will be followed by the resumption of reduced operating schedules until the end of 2022. This is expected to result in a reduction of approximately 200 million board feet of production capacity.

Recall that West Fraser Timber (WFG) announced a permanent curtailment of BC production just last month. I'm adding a stop loss to this trade at $76.15.

If challenging market conditions persist, this is going to affect Western Forest Products (WEF.TO, WFSTF) as well. Add a stop loss on WEF at C$1.39.

It's not just lumber, the "challenging market conditions" are also hurting paper companies. The profit warning from FedEx (FDX) hit International Paper (IP), Packaging Corp of America (PKG) and Westrock (WRK), causing them to gap lower on 9/16 by 6.5%, 11% and 4.8%, respectively. Weyerhaeuser (WY), the leading timber REIT, has been hammered down by the news of a work stoppage by union employees in Oregon and Washington.

The weakness is sector-wide, so this is not the time to be second guessing stop losses. I closed the Mercer (MERC) trade at $14.3 on 9/9 after that quick bounce and the stock is now at $12.66. The down moves have been rapid in several companies in this sector. Best to stick to the stop losses and preserve capital here. I am sure I'll re-visit the timber trade once the price action is more conducive, but for now I'm going to let the trades get stopped out at $76.15 for WFG and C$1.39 for WEF.

Cover the Scorpio Tankers (STNG) short position. I should have heeded the initial $37.95 stop, in hindsight. This is just such a terrible company fundamentally that I held on too long, waiting for some corporate action to break the uptrend. The hammer candle on the weekly chart (see 7/8 update) was a warning sign to cover. This isn't a trade I'm proud of - it's in my hall of infamy along with my attempts to short Amazon, Tesla and Apple repeatedly from 2018-2021.

Based on $26.8 short entry on 5/4 and including 20 cents in dividends, I'm closing this at $42.57 for a 59.6% loss.

Stop loss triggered on Western Forest Products (WEF.TO, WFSTF) at C$1.39. Cover the position for a 13.1% loss.

WFG stopped out at $76.15

12-0 vote to hike by 75 bps, balance sheet reduction of $95 billion a month continues

Hammer candle forming on the daily gold chart.

September 22 2022

Indian government is not averse to a weaker INR against USD, according to a government source.

The banking ETF KRE is still holding up, but biotech XBI is now below the 100 DMA. Exit at $77.2 for now to preserve capital. I'll look to re-enter once the ETF moves back above the 100 DMA and holds up.

Now that the Fed has emphatically stated there will be no pivot and their agenda is to do the opposite of the Greenspan put - actively destroy every floor in asset prices and force them lower - buying and holding is going to be a terrible strategy. My focus is now playing defense, defense, defense.

September 23 2022

Stopped out of Bunge (BG) yesterday.

In 2018, I learnt the hard way not to fight the Fed. In 2022, I'm doing the emotionally difficult thing by taking my lumps and exiting stocks I've spent months researching. The FOMC is expected to raise rates another 75 bps in November and 50 bps in December, taking the Fed Funds Rate up to 4.5%. This is most definitely not the time to ignore stop losses.

Tinplate is down 6.4% today on this news. While fundamental research doesn't always help with picking winners, a little effort is all it takes to avoid investing in sure-fire losers.

Sell KRE. Didn't get the bounce I expected.

Currencies are going wild today. The pound is down 3.1%, Aussie dollar down 1.3%, kiwi down 1.1%, euro down 1%, gold down 1.8%, bitcoin down 1.5%. UK 5-year bond yields are up 14% today. The Fed's strong dollar policy is destroying the world and there's more pain to come unless the rate hikes and Quantitative Tightening are reversed. Not surprisingly, traders are panicking. Ray Dalio is calling for a recession. Fight the urge to "do something" out of panic. Nothing good comes out of knee-jerk emotional trades.

To paraphrase a famous Rocky quote:

"The market ain’t all sunshine and rainbows. It’s a very mean and nasty place and I don’t care how tough you are it will beat you to your knees and keep you there permanently if you panic and make emotional decisions. You, me, or nobody is gonna hit as hard as the all-powerful Creature from Jekyll Island. But it ain’t about how hard ya hit. It’s about how hard you can get hit and keep moving forward. How much drawdown you can take and still keep moving forward. That’s how winning is done! Now if you know what your holdings are worth then keep calm and get what they are worth. But ya gotta be willing to take the hits, and not blaming the Federal Reserve or Powell or Putin or even Ursula von der Leyen or anybody! Only losing traders do that and that ain’t you! You’re better than that!”

“If you can keep your wits about you while all others are losing theirs, and blaming you. . . . The world will be yours and everything in it, what's more, you'll be a man, my son."

- Rudyard Kipling.

I'm going to pour myself a stiff drink and take the night off (8:26 pm local time so it's not too early for a drink. India is 9.5 hours ahead of EDT).

September 24 2022

September 25 2022

A lot of people are saying that this put option activity is a sign of a market bottom. I disagree. The trend will turn when it turns. In 2020, Softbank bought billions of dollars worth of calls and the market took off after that.

Chinese brokerage account openings went exponential well before the market top. These types of news articles are no reason to engage in knee jerk contrarian thinking. And they're definitely not a timing tool.

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