Charts of the Month - September '23

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The Big 7 vs. The Old Guard

Let’s get the obvious out of the way – relative to growth stocks, we expect value stocks to produce more cash flow and to be priced more reasonably. The tradeoff is that we expect growth stocks to ‘grow’ into their valuations and make up for the lack of current fundamentals at some point in the future. These are the rules of the game - not that we all agree with them.

Last month, I made reference to my favorite of Peter Thiel’s axioms “You can invest in companies that deal in bits or you can invest in companies that deal in atoms” when looking at returns of the Construction Industry vs. Tech.

This section is a riff on a similar thought, with a bit more focus.

The Big 7 (Apple, Amazon, Meta, Google, Tesla, Nvidia, and Microsoft) have, as most of us know, carried market performance this year, and whether it’s The Big 7 or FAANG or some other combination of a highly concentrated group of companies in broadly ‘Tech’, have carried the market for the last decade+.

But over the last few weeks, cracks have once again begun to emerge as the S&P is now (as of this writing on 9/27), 400 points off its peak, led by today’s acronym-elite.

Higher rates, and the realization that they aren’t coming down anytime soon, are beginning to set in, and it feels like the tides have begun to shift. It’s feels like the market is starting to looking at the F word once again… Fundamentals.

But even when they do, we know it’s no longer just about fundamentals…

The question is, as of today and looking forward, with a rapidly shifting geopolitical and macro landscape, how do we want to be positioned and where do we want to be overweight? This isn’t a question of “Do we want to own defensive or cyclical stocks?” or even “Do we want value vs. growth?”.

It’s bigger than that.

This is a question of which companies are going to not only survive but thrive, in the dramatically different world of tomorrow.

One where fundamentals, a defensive geopolitical strategy, and an ability to thread the macro needle are all required to compete.

For me, it’s quite simple. I like cash flow, and I like that cash flow to be reasonably priced, in sectors that are necessary, not just a ‘nice to have’.

I give you, The Old Guard.

The Old Guard produces more cash flow on an Enterprise Value basis…

and is much more appropriately priced relative to its Big 7 peers.

I realize book values will differ across sectors, but it's a very relevant starting point for valuation dispersion (book vs. market) and a meaningful sanity check.

And the tides are continuing to shift:

• We’re unquestionably late in the macro cycle – everyone’s favorite bear, Mike Wilson of Morgan Stanley, reiterated this yesterday on Bloomberg.

• Tech, and specifically the Big 7, are facing numerous, large-scale headwinds (something we’re going to dig into in a soon to be released editorial).

• The Green Dream is dying under real rates - wind is quickly disappearing with numerous projects being shut in around the world, GE and Siemens can’t turn a profit on turbines, Ford is taking huge losses on their EV rollout and is now delaying their battery production facility over the UAW strikes, among numerous other anecdotes.

• ESG funds are closing, and the banks are, one by one, backing O&G investments once again (Goldman just last week and JPM earlier this year in front of Congress). The two virtue-signaling supermajors, Shell and BP, have done a 180 on their ‘never-going-to-happen climate pledges’ and are back to doing what they do best… finding, drilling for, refining, and selling oil & gas.

If you believe the world is going to continue to need reliable energy, that we will continue building roads, bridges, and buildings to support a growing global economy, that we are going to continue to re-globalize ports, refineries, and supply chains, and that maybe, just maybe, some of the AI & EV headlines are a bit overhyped, then maybe it’s time to revisit the old economy for the next decades' source of returns.  

Markets appear to finally be waking up to this reality, and we're positioning ourselves in front of it.

Nope – still not investment advice.

Ides of Macro - Podcast

After you finish reading this, make sure to go check out our latest podcast, with everyone's favorite ex-Goldman commodities trader, Tony Greer.

He and Roger put on an absolute trading masterclass and cover why Tony thinks we're in for a potential end-of-year reflation trade in commodities (something we covered in our Research piece earlier this week as well).

The Average Joe

If you're one of our beginner/intermediate level readers and/or just looking for a good daily finance newsletter, give The Average Joe a shot.

They cover all the news stories you may have missed, plus loads of good charts, and add in some much needed humor on top of it all. Plus, it's free, which is a great price...

Checking in on the Consumer

The American Consumer, the backbone of the U.S. economy and by extension, a key component of the global economy, is a bit of a mixed bag at the moment.

Not healthy for sure. But not terminal. Yet.

Here are a few charts that tell the story.

This one’s easy, excess savings from the pandemic are essentially gone, and JP Morgan’s Marko Kolanovic confirmed as much in a recent note. “Consumers have spent down the entirety of their excess financial savings from the pandemic”, and said, “we remain of the view that lower income cohorts are increasingly under pressure with fewer offsets and with little sign of relief from the high cost of capital environment”.

So the consumers’ balance sheet is not looking good.

But how’s their cash flow?

Not great either, as it’s well below trend and, as we’ve noted numerous times since before the summer, when no one else was talking about it, student loans are about to kick in, and that’s another $22 billion per month out of the consumer's discretionary income.

This view is supported by the Fed’s latest Beige Book, saying “Consumers may have exhausted their savings and are relying more on borrowing to support spending”.

So, with a weakened balance sheet and below-trend cash flow, you’d expect to see some loan delinquencies.

Which we are.

It should be noted however, that even with FinTwit (FinX?) losing their collective minds over the 100 basis point rise in delinquencies, we’re still just now hitting pre-COVID levels and a ways off from the GFC and previous levels.

Rising delinquencies are no good, for sure. But we’re not at alarming levels. Yet.

The lone bright spot is in single-family mortgage delinquencies where we’re basically sitting near multi-decade lows.

This makes sense for two reasons:

1- Your mortgage is likely the last payment you’d miss seeing as shelter is slightly more important than your Macy’s credit card.

2- More than 50% of mortgages today are pandemic-era mortgages when rates were still low, and most (thank God) are fixed rate. So we don’t have to worry too much about a GFC-type bubble exploding with higher rates.

(For a deeper look at the real estate market, check out our latest Research piece… not all REITs are created equal.)

One thing’s for sure, the pandemic-enabled surpluses are behind us, and we’re now beginning to get a clearer, normalized view of the health of the consumer in a post-COVID world.

It’s not pretty – but it’s not apocalyptic.

Yet.

Earlier this week, we published our latest Research report for September. In it we covered

• How the upcoming treasury auctions are going to dumpvbillions of long dated bonds into the market to finance the historic deficit, which will increase duration, and steepen the yield curve, out of an inversion - a most beloved recession indicator.

• Public REITs are some of the most hated (and therefore oversold) investments on the market, but we make a counter argument as to why they may be a great buying opportunity.

• Our updated view on the surging US "King" Dollar.

• The potential for a reflation trade before the recession that everyone seems to be waiting for.

If you're interested in these themes and want to take a deeper view with us, sign up for Research at the button below. It's priced at $15/month or $150/year.

Email us anytime to discuss.

Leave the Climate Debate Aside

Leave it alone for now.

Let’s think about energy sources on a more micro, human-centric level.

Burning coal is really dirty. We all know that. No one argues that… at least I don’t know anyone who does.

I’m arguing, however, that the more clear and present danger to a society that burns a lot of coal is not the convoluted, hyper-political, ‘my science is better than your science’ climate change debate.

No, it’s simply about air quality.

A sad but true story came out of Indonesia a few weeks ago when it was announced that Jakarta was going to shut down a coal plant because their president, Joko “Jokowi” Widodo had developed a cough that he has attributed to the capital’s abysmal air quality, which is home to some 10 million people. (Indo was also about to host the ASEAN Summit and presumably wanted attending members to not leave with a hunk of coal in their chest.)

But Indonesia is far from alone.

There are still 2,400 coal power plants live around the world today (have a read of our “If we actually wanted to solve the problem”).

And there are many cities where these power plants, coupled with little to no regulation of the transportation industry, are causing deathly high rates of pollutants in the air.

The WHO defines ‘good’ air quality as <5 µg/m3.

Yikes…

If you read us enough, you likely know where this is going.

Gas + Nuclear = Problem Solved.

India and China, the two most polluted countries in the world, are also the two with the biggest push into nuclear power electricity – the cleanest of all.

Yes, nuclear is expensive and time-consuming, but it’s the only permanent fix to the problem.

Until then, there’s natural gas. 50% cleaner than coal and in abundance around the world.

On our first ‘The Geopolitics of Commodities’ podcast, Jacob Shapiro and Adam Rozencwajg had a phenomenal, long-form conversation, touching on many topics, but the exchange on LNG takes home the Oscar.

Jacob notes that the U.S. has an incredible amount of LNG export capacity coming online. And even with the large quantities of gas promised to be shipped to our friends in Europe, it’s still likely there will be a lot of excess supply.

Adam agreed, but noted that this is not a new phenomenon, and said, “new supply always seems to find new demand”.

Adding, “Right now, natural gas in the United States, with a two handle, is by far the cheapest molecule of energy on Earth by like 75%, which isn’t sustainable.” By sustainable, he means that eventually, that cheap energy is going to find a home somewhere around the world that is willing to pay more for it, which will lead its market price higher.

This paints a very clear understanding of the energy markets in my head – one where, ignoring the politics, the media narratives, the push for alternative forms of energy - and just focusing on economics - the cheapest, best form of energy will always be in demand and find a home, as long as there’s supply to fulfill it.

Said differently, the economics of energy will win out. Greta be damned.

As countries get richer, they demand certain things. Most of which are energy-intensive - air conditioning, cars, meat, etc.

But before all of that, it’s cleaner air.

That's it for this month.

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As always, we'll see you out there...

-Tim