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Credit deflation and the reflation cycle to come (part 2)

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10 hours ago, DurhamBorn said:

I find it incredible that everyone is dumping,and has been dumping the very stocks that the next cycle will favour.Its almost like everyone simply thinks oil demand has gone forever,just like that.Although its not my favourite sector,i do think this is the one that will shock people how well it does.The fact NEST etc are dumping everyone out of big oil (and also the likes of BHP) when they are the very shares in the FTSE that will hedge inflation is mind boggling.They are probably going to buy Amazon with the money .Or Tesla.

I wish I was a fund manager. All you have to do is match the index (and the index doesn’t include dividends) and your fund collects your 1% so you keep your fat salary. Any year you out perform hello big bonus. It must be the best paid to effort job out there.

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10 hours ago, DurhamBorn said:

I find it incredible that everyone is dumping,and has been dumping the very stocks that the next cycle will favour.Its almost like everyone simply thinks oil demand has gone forever,just like that.Although its not my favourite sector,i do think this is the one that will shock people how well it does.The fact NEST etc are dumping everyone out of big oil (and also the likes of BHP) when they are the very shares in the FTSE that will hedge inflation is mind boggling.They are probably going to buy Amazon with the money .Or Tesla.

Ditto, but maybe `they` have got it incredibly right or `we` have got it incredibly wrong...only time will tell!

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37 minutes ago, Knickerless Turgid said:

Personally, HL and ii.

Don't do a Guitarman, Joe...

I've been trading on my own account ten years, and still see myself as a minnow in a sea of sharks.  I would be very very careful of starting to trade now when we are in the mother of all bubbles, to be honest.

Every penny I have in stocks my wife and I see as not existing until we pull it out and have cash in hand.  That's how little I trust the system.

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15 minutes ago, Castlevania said:

I wish I was a fund manager. All you have to do is match the index (and the index doesn’t include dividends) and your fund collects your 1% so you keep your fat salary. Any year you out perform hello big bonus. It must be the best paid to effort job out there.

I've known a few - the effort is immense.

 

Not trading - but cut throat political infighting to stop others taking your job and your clients.

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7 minutes ago, wherebee said:

I've been trading on my own account ten years, and still see myself as a minnow in a sea of sharks.  I would be very very careful of starting to trade now when we are in the mother of all bubbles, to be honest.

Every penny I have in stocks my wife and I see as not existing until we pull it out and have cash in hand.  That's how little I trust the system.

The market is bent. The amount of insider trading that goes on, especially in the smaller stocks, is ridiculous and so blatant as to be taking the piss.

As a retail punter, accept that you will only ever receive the crumbs from the tables of the big boys; if you can get fat on those, then crack on.

That is not to detract from the core message of this thread, which has always been bang-on.

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1 hour ago, JoeDavola said:

What do you lot use as a trading platform?

Interactive Brokers.  Don't be put off by the complex platform. The low commissions, full range of global instruments and markets, and platform stability during market panics more than compensates for the steeper learning curve. 

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6 hours ago, wherebee said:

I've gone in on BHP and BP just due to this thread driving my thinking to clarity.  Amazing to see BP, for example, at prices last seen in 1995.

Look at Repsol,on January 1st 2000 it was 19.35,today its 6.58.

Now you could argue that these kind of stocks should trade in a range and the return is more from the divi,and that is party true.However the price the market is placing on their future cash flows is astounding.Of course the massive liquidity injections and the rise of passive and ethical investing etc explains a lot of the capital allocation.

Whats really happened is rates being so low and inflation so low has favoured companies that dont have massive capital assets.

The irony is Repsol is actually one of the leaders in green energy,it has a superb pipe network in Spain that could carry hydrogen and its refineries are the best in Europe.They also have a lot of hydro power,and coming on stream wind and solar and could be a huge player in Hydrogen down the lines.They are also probably one of the only big oil companies who gets easy access to South American for cultural reasons.

The facts are though the markets always hurt the most people they can.While everyone piles into the "future" companies they fail to understand in a rising inflation cycle they have zero chance of seeing cash returns even matching inflation,and once that sinks in the equity will fall to reflect that.

We are entering one of,or maybe the biggest industrial cycle since the war yet the markets are hugely underweight in the sectors who will gain.Going against the crowd takes focus,belief and skill,but when you have a macro road map you have confidence in its just a case of keep the emotion out,keep diversified .

The markets are down 20%+ in the UK,but most people on here should be ahead,even though they have many stocks down, due to gold and silver miner allocations and several others.Would i take 100%+ up in silver miners and others and down 10% in Telefonica,12% in Vod,15% in BT,2% in Shell,8% in Repsol ,and even some scattered 50% downs,any day of the week.So far we are navigating this cycle turn very well indeed.Some mistakes,some miss timing the odd scattered disaster,but in much better shape than most portfolios i suspect.

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5 minutes ago, DurhamBorn said:

Financial advisors have it even better.I had to use one earlier in the year to do a final salary transfer.The only way they will do it is if they think they get to manage the funds forever,so i had to go in and act like a punter who knew enough (to tick their regulator boxes),but let them think they would be managing the money.

The costs would of been 2.3% a year,and they pretty much bought things like Vanguard Lifestyle funds.In your 40s then 40/60,or 60/40 funds,a bond fund,a few equity trackers and thats about it.So a spread that over a very long period when not at the top of a cycle might bring in 6% a year before fees.The were taking over a third of the income.Take inflation and you would get about 1.5% and take a draw down of say 5% and its not good.

Of course the second the money arrived i started a transfer to my SIPP and hand delivered them a letter telling them not to invest as id decided to move to my SIPP and i wouldnt need their services anymore.In my SIPP once after dealing charges etc the fees are 0.1% a year for the amount in the transfer.

So lets say the transfer value is £200k and i invest in 40 stocks then leave those stocks alone for 30 years.The fees are 0.1% in a Hargreaves SIPP

The £200k left with the IFA.

That 2.2% difference in fees means that portfolio compounding those fees sees an extra £184k go in fees compared to the SIPP over 30 years.

So my Hargreaves SIPP starts at £200k

My IFA pension starts at £200k,

My IFA pension needs to get to £384k in 30 years just to cover the fees i dont pay in my SIPP.

 

Yeah. It has crossed my mind to become a financial advisor. The gap in the market as I see it is for those people (especially the self employed) on lowish wages that wouldn’t be materially worse off if they went on benefits I.e. if you earn £30k cut it down to £12k by putting £18k in a pension and get the government to top up your pay and pay your rent.

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34 minutes ago, Castlevania said:

Yeah. It has crossed my mind to become a financial advisor. The gap in the market as I see it is for those people (especially the self employed) on lowish wages that wouldn’t be materially worse off if they went on benefits I.e. if you earn £30k cut it down to £12k by putting £18k in a pension and get the government to top up your pay and pay your rent.

Nobody does this as nobody thinks it could possibly be legal. 

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1 hour ago, DurhamBorn said:

 

The markets are down 20%+ in the UK,but most people on here should be ahead,even though they have many stocks down, due to gold and silver miner allocations and several others.Would i take 100%+ up in silver miners and others and down 10% in Telefonica,12% in Vod,15% in BT,2% in Shell,8% in Repsol ,and even some scattered 50% downs,any day of the week.So far we are navigating this cycle turn very well indeed.Some mistakes,some miss timing the odd scattered disaster,but in much better shape than most portfolios i suspect.

I'm up 24% since June 15th.  That's insane when you think the rest of the market is down 20%. 

And it's not because I am smart, it's due to this thread and the general counter-culture approach of this site that has driven my views for years.

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22 hours ago, AWW said:

Most of their customers will be locked into long contracts, so it won't be quite that easy. I also think that a lot of people get an unseemly amount of pleasure from owning a new phone. Pleasure will be in short supply, and it'll only cost fifty quid... (per month, for the next two years).

We tight-arses with our 2 year old second-hand iPhones on the Smarty network are far outnumbered by the above people.

Don't underestimate the contracts people sign up for.

I remember a while back being sat in an office with some CS girls - not highly paid. One was banging on about her great contract on the latest Samsung and about how it included Spotify... her monthly bill which she didn't seem to think was anything out of the ordinary... £80! Eighty fucking quid a month!

My 40% discount on Voda ran out a few months ago, and for the first time I've not been able to come to an agreement with the chatbot so have requested PAC codes for our 2 numbers. Not particularly annoyed as a Voda share holder as I doubt they make much out of me anyway! Sacking tight gits like me off can't be a bad thing :)

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14 hours ago, DurhamBorn said:

I find it incredible that everyone is dumping,and has been dumping the very stocks that the next cycle will favour.Its almost like everyone simply thinks oil demand has gone forever,just like that.Although its not my favourite sector,i do think this is the one that will shock people how well it does.The fact NEST etc are dumping everyone out of big oil (and also the likes of BHP) when they are the very shares in the FTSE that will hedge inflation is mind boggling.They are probably going to buy Amazon with the money .Or Tesla.

Interesting to hear oil is not your favorite sector DB, what would be your top 3 sectors. I do think oil is going to do incredibly well through this decade, like you I find it unbelievable that the mainstream narrative is vilifying and dismissing the sector so much.

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16 hours ago, Transistor Man said:

Worth a read:

“We stand at the cusp of a new bull market for oil...

https://ninepoint.com/commentary/commentaries/2020/062020/energy-fund-market-view-july-272020/

There are 4 key elements to the thesis:

1) US shale hyper growth is over – going forward companies will set lower growth targets (~5%) and expressly maximize free cash flow to allow for return of capital in order to compete with other sectors given what is now an abhorrent record of shareholder capital destruction. This means that US shale production will be largely inelastic to a rising oil price and this is a profoundly important development since without US shale non-OPEC production would have been flat for the past 5 years (!)

2) Global offshore production (about 1 in 4 barrels produced today) is entering a period of stagnation/decline due to too many years of insufficient investment. Industry has now fully harvested the last of the mega projects that were sanctioned in a $100 oil price environment and new projects coming online should be insufficient to fully offset base decline rates.

3) OPEC spare capacity, adjusted for currently constrained production that will come online over the next 6 months as production continues to normalize, sits at around 2MM Bbl/d (at best) and resides in a country with meaningfully higher oil price desires hence their unwillingness to bring on production anywhere near current price levels.

4) Oil demand will continue to grow for at least the next decade despite continued electric car adoption and expansion of (supposed) green energy capacity due to population growth rates and an aggregate increase in net living standards (which has a very high correlation to energy consumption).

That sounds pretty accurate, I must dig into who wrote it, they know what they are talking about. I'm glad someone else is calling bullshit on opec spare capacity and is pointing out opec supply growth is flat. Also 100% the US no longer being the growth engine being profoundly important. It's why I go on and on about it (sorry! But it'll be a very big deal, you'll see). Doesn't mention the decline rates though, world supply is going to get "mugged" by this in a few months time. Rig count down 2 in the Permian again this week. I don't see it creeping up till $50-$55 WTI, and add c. 9 months to that for oil to start flowing, to go with 4 that have passed. So we are now at a 13 month time lag for production to respond to tight supply/higher prices. That's enough time for a 2008 style spike. It'll take a while to work through stockpiles first before the market starts adjusting prices, but another big drawdown next week I think. I think thats why price is so muted at the moment: it wants to fall, but market smells inflation. It wants to rise, but "meh, stockpiles". Won't last. 

Number 4 is the big question for me. Demand has been linearly increasing fir decades, but my own habits are changing so why not everyone elses. I suspect it'll be a "sector rotation" of oil demand from consumer to industrial. World energy needs have not decreased, they are just moving around (e.g need less jet fuel, need more long car journeys. Need less imports, need more domestic manufacturing).

Companies are reporting on their worst quarter in history, so share prices are dropping back. I'm happy to hold and will add add ladders too. I don't think this is the second shoe to drop. I'm increasingly buying into the sector rotation idea for the BK - Hedgeye are talking alot about stagflation and what sectors do well then/in the 70s. Includes tech, which hadnt occurred to me. I think DB is spot on to be focussing on corporate bond maturities and coupons. 

 

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4 hours ago, MvR said:

Interactive Brokers.  Don't be put off by the complex platform. The low commissions, full range of global instruments and markets, and platform stability during market panics more than compensates for the steeper learning curve. 

What version of the platform do you use? Ive tried mobile, web based or downloaded the workstation. All have been unsuable (for options) to me one way or another and Ive found myself going back to Saxo and their crap prices. Disclaimer - I didnt follow any tutorial 😁

Edited by Cattle Prod

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15 hours ago, DurhamBorn said:

find it incredible that everyone is dumping,and has been dumping the very stocks that the next cycle will favour.Its almost like everyone simply thinks oil demand has gone forever,just like that

Wasn't it the same for silver 2 summers ago?! A great contrarian indicator imo.

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4 hours ago, MrXxxx said:

Ditto, but maybe `they` have got it incredibly right or `we` have got it incredibly wrong...only time will tell!

Very good to check bias like this. I try to do it regulary, but it always comes back to "Anything to compete with the energy density of petroleum yet? No, ok." 

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4 hours ago, DurhamBorn said:

The irony is Repsol is actually one of the leaders in green energy,it has a superb pipe network in Spain that could carry hydrogen and its refineries are the best in Europe.They also have a lot of hydro power,and coming on stream wind and solar and could be a huge player in Hydrogen down the lines.They are also probably one of the only big oil companies who gets easy access to South American for cultural reasons.

Last week Repsol bought into wind and solar in Chile, cultural connections matter. They would know all the politicians, local CEOs, what to say, how to do it, sit down for a pisco and do a deal. And they have the cash.

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55 minutes ago, Talking Monkey said:

Interesting to hear oil is not your favorite sector DB, what would be your top 3 sectors. I do think oil is going to do incredibly well through this decade, like you I find it unbelievable that the mainstream narrative is vilifying and dismissing the sector so much.

Fwiw it's not my favourite sector either 😁

A sector on decline can never be my favourite, but its the one I understand best so own the most. I think it's going to go out with a bang, hopefully stimulating the transition to better energy sources. I fully expect to be out of a job in 8 years time.

My favourite is precious metals. I think its going to go from being a laughing stock to one of the most important sectors in the world, like it always has been. I think this 100% fiat era since 1971 will be seen as an abberation. 

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24 minutes ago, Cattle Prod said:

That sounds pretty accurate, I must dig into who wrote it, they know what they are talking about. I'm glad someone else is calling bullshit on opec spare capacity and is pointing out opec supply growth is flat. Also 100% the US no longer being the growth engine being profoundly important. It's why I go on and on about it (sorry! But it'll be a very big deal, you'll see). Doesn't mention the decline rates though, world supply is going to get "mugged" by this in a few months time. Rig count down 2 in the Permian again this week. I don't see it creeping up till $50-$55 WTI, and add c. 9 months to that for oil to start flowing, to go with 4 that have passed. So we are now at a 13 month time lag for production to respond to tight supply/higher prices. That's enough time for a 2008 style spike. It'll take a while to work through stockpiles first before the market starts adjusting prices, but another big drawdown next week I think. I think thats why price is so muted at the moment: it wants to fall, but market smells inflation. It wants to rise, but "meh, stockpiles". Won't last. 

Number 4 is the big question for me. Demand has been linearly increasing fir decades, but my own habits are changing so why not everyone elses. I suspect it'll be a "sector rotation" of oil demand from consumer to industrial. World energy needs have not decreased, they are just moving around (e.g need less jet fuel, need more long car journeys. Need less imports, need more domestic manufacturing).

Companies are reporting on their worst quarter in history, so share prices are dropping back. I'm happy to hold and will add add ladders too. I don't think this is the second shoe to drop. I'm increasingly buying into the sector rotation idea for the BK - Hedgeye are talking alot about stagflation and what sectors do well then/in the 70s. Includes tech, which hadnt occurred to me. I think DB is spot on to be focussing on corporate bond maturities and coupons. 

 

That is crucial going forward,the bond maturity profile and coupons.Big debt,big asset companies like oil and telcos are all rushing to re-finance and lock in really low coupons.The market is ignoring it because they think prices are going to keep falling.In macro terms there is actually a massive pincer movement forming.I cant stress highly enough how important this is for positioning for the cycle.In simple terms a telco is putting in fiber now with coupons of around 2.7% that the regulator is now flagging as allowing CPI price increases.Of course the regulator thinks who cares inflation is staying below 2%.However they are wrong,hugely wrong.Once CPI is 4% and your OPEX starts to fall,then margins are going to expand fast.I think we are in for a great cycle on here.Getting the silver run right is providing lots of extra capital to pick up areas on their backsides.

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You can read that Opex point across to the oil industry, its the key metric keeping things going currently. I've spoken here before about Johan Sverdrup field. A dream field. Its up and running now, most capex spent at historically low rates of interest. This is the hard bit for oil companies. Sinking capital and not seeing a return for 3, 4, 5 years. In the meantime prices cycle. Ideal is to invest capital during low price environment, at low bond coupons. Reap the rewards. Exxon is also notably doing this in Guyana.

Opex on JS is now 3 or 4 dollars a barrel. Thats it. Its already producing a river of cash. When prices rise and the bond coupon remains the same, they wont know what to do with the cash.

I recently saw a bond maturity profile on a competitors investor presentation (Apache) They are starting to pitch this as a sellling point. On the face of it their balance sheet is in rag order, sky high debt. But they had most bond maturing 2035-2044 at an average coupon of 4.5%! That might sound high but I assure you it's not for the oil indudtry. And theyve just discovered a ton of oil in Surinane. I'm not an investor (balance sheet too shake, too much shale) but I'll be watching closely. Many oil companies would kill for a debt profile like that.

Edited by Cattle Prod

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2 hours ago, Cattle Prod said:

Fwiw it's not my favourite sector either 😁

A sector on decline can never be my favourite, but its the one I understand best so own the most. I think it's going to go out with a bang, hopefully stimulating the transition to better energy sources. I fully expect to be out of a job in 8 years time.

My favourite is precious metals. I think its going to go from being a laughing stock to one of the most important sectors in the world, like it always has been. I think this 100% fiat era since 1971 will be seen as an abberation. 

CP, sorry to hear that but wouldn't your employer retrain you in renewables, assuming of course that your skills are transferable? Saying this probably betrays my ignorance of the oil sector! (btw, PM's are not strictly a 'stock', but i did like what you did there! However, apologies if you were talking gold/silver miners?)

 

But in terms of favourite sectors and next-cycle-sectors that will run their assets/cash flow ahead of inflation, are there other ones apart from energy/telecoms/potash?

Health is probably another sector, but not so clear which parts of that industry will benefit.

...but beyond this, I guess much greater thinking has to be done into which (sub?) sectors might do particularly well from the coming industrial/infrastructure cycle boom. Steel/chemical has been mentioned before, but are there others to be aware of?

Edited by JMD

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2 hours ago, Cattle Prod said:

What version of the platform do you use? Ive tried mobile, web based or downloaded the workstation. All have been unsuable (for options) to me one way or another and Ive found myself going back to Saxo and their crap prices. Disclaimer - I didnt follow any tutorial 😁

I use the Trader Workstation desktop download. TBH it runs pretty painfully slowly on my 5 year old Macbook Pro.. better in the "Classic" look than the newer "Mosaic" look, and I needed to up the memory allocation too. Beyond that, it's about customising the layouts to give you what you need and no more.

It runs much faster on WvR's newish Macbook Air, so my computer has a lot to do with it.

It's not an easy platform to work out, but you get there eventually. 

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