Credit deflation and the reflation cycle to come (part 3)

[planit]

So, as promised I have had a think on my outlook with a 2 month timeframe and this is what I came up with. These are just my thoughts so make of them what you will, I have tried not to sit on the fence too much so I can use it as the basis of my strategy.

 

Inflation

The biggest influencer this week (and then in a months time) will be the US inflation figures.

 

Inflation – US monthly figures

May-Jun 2021 = 0.905%

Jun-Jul 2021 = 0.474%

Jul-Aug 2021 = 0.274%

Aug-Sep 2020 = 0.246% ( this is the figure that will be replaced, anything less than this figure will increase the YoY figure)

 

Yearly

Aug 2020 - Aug 2021 = 5.20%

 

Expected figure 5.3% YoY and 0.3% MoM

 

Eventually inflation figures will need to surprise to the downside (as expectations keep rising). After ‘persistent’ inflation driving market moves over the last 6 months it wouldn’t take much for a print to be lower than expected.

Looking at the previous monthly figures, there has been a drop from 0.905% in June to 0.474% in July and 0.274% in August. A further halving of the figure would come in at 0.13% against the predicted 0.3%. This would drop the year on year figure to 5.0% and everyone would breathe a sigh of relief. This could result in a rally in tech coinciding with recovery and cyclical

 

US500/Markets

The blow off top is still possible but requires a favourable inflation figure either this month or next month. I see highest probability of either rise or move sideways in the markets over the next 2 months.

 

Oil

Oil has powered up on recovery hopes and growing realisation that there is a tight supply market. The general belief is the tight supply is due to OPEC+ being disciplined with production quotas, ie there is only a man-made shortage of supply. The west, especially US has allowed the power to shift decisively towards OPEC by reducing their own output and investment.

This growing realisation has made traders more confident (which also is boosted with forward hedging rising due to the energy crunch see below).

China imports 10% down in Sep which coincides with increased imports to the US which facilitated increased inventory levels. This slowed the rate of increase in the price of oil

Oil is already high and could spike higher (to $100+) if the inflation situation improves as above. I can’t see it moving down until there are worries regarding economic growth. In the absence of both the above it will probably trade $80-$90 for a while.

 

Gas

Temporary supply panic has caused the current situation. Everyone loves a crisis and the press have been pushing the narrative for a while now. In response everyone has been rushing out to secure enough winter fuel so they can reassure that they are prepared for anything. I feel we are over this now and the problem will fade away until a real structural shortage becomes noticed in a year or two. In the meantime it will not go back down to previous prices and will support decent profits at the producers.

 

Energy

Prices of energy are going to be an issue going forwards, medium and long term I see this as a huge issue as there are new sectors all competing for the same energy. In the past there were not car owners competing with grandma who is trying to heat her home. Over the next couple of months this is mainly going to be a political issue with government involved in trying to save it’s own arse by capping energy prices or giving/lending taxpayer money.

 

Gold

Until talk moves from tightening towards printing again I can’t see a trigger for gold to be moving much higher. We need an expectation that governments are printing to ward off a slowdown and ignoring inflation rising. Evidence of stagflation would do this. I feel it is more likely this will happen after some kind of market drop due to an economic slowdown being priced in. The initial drop will take gold down with it but gold would recover on the change in stance from the fed.

 

Telecoms

Can’t see this moving higher whilst there are more exciting high growth tech stocks doing well. This sector will come into it’s own at some point probably after an initial sell-off when people look for more resilient cashflow.

 

Tech

Tech will continue sideways unless the worry about inflation changes up or down (or there is an economic slowdown).

 

Economy

We could still have some good figures as secondary effects of the previous money stimulus feed into economic figures and people’s wallets. The money will run out at some point so there is a recession looming in the future. 

 

Conclusion

Next step of move into cyclical and recovery stocks is underway. Last time came to a halt due to delays in the recovery and delta. This looks to be around a year away at the moment to me.

I am positioning myself for a potential rise in the markets which could happen quickly if everyone believes that the Fed was correct in thinking the inflation was transitory. All sectors would rise in this situation but gold could lag due to lack of inflation or printing worries. The alternative scenario is the markets just stay jittery. As the situation changes I will update my strategy, I am still hoping at least one person on here will flag the crash before it happens

[TNS]

9 minutes ago, HousePriceMania said:

Which network connection are they using ?

 

No idea but it will almost certainly be sim card based. 

[HousePriceMania]

23 minutes ago, TheNickos said:

No idea but it will almost certainly be sim card based. 

Is anyone selling led boxes ?

[DurhamBorn]

2 hours ago, Harley said:

I'm down about 10% on TIMB.  That's quite good for me and nothing given the hold period and potential upside.  I'm struggling with Telcos given the charts and fundamentals, despite buying into the macro thesis.  I must try harder! 

PS:  A few more South American companies popped up this week as potential momentum value plays.   Mostly utilities.  I passed for some reason.  Maybe the debt levels.

Market hates the debt on the big ones,and thinks there is zero growth for the smaller ones.I agree with that on both counts.However my model shows the sector is now hugely influenced by inflation because of the structure of the industry.The debt and depreciation are pretty much fixed so IF they can increase prices with inflation then they should see free cash increase a lot.The EU has done massive damage to the industry in Europe,but another part of the thesis is they will back off.I think the industry will consolidate and get around things by sharing assets.That way they can push up prices from the asset they share so they all pay it and then all get it back in profits.I think there might be movement on the regulation as well where telcos can charge the likes of Facebook etc for use.Its a win/win for countries because it means getting money out of big tech and being taxed from telcos profits and also investment in their countries networks.

The sector could drift slowly lower,but im hoping the divis across them all cover all or most of any losses until the sector turns.

 

[Barnsey]

[DurhamBorn]

4 hours ago, Seacrest said:

How does the Uk post high,s from here unless there is a huge disconnect from reality.  I would expect profit warnings shortly,   N2EX for this afternoon has Electricity priced at over 40p per Kwh,  you also need to factor in the levvies imposed on Industry that will add 35% to the cost of the consumed,  so between 6pm and 8pm un hedged industry is paying somewhere around 56p per Kwh for power. 

CO2 is available from europe at almost 4 x the cost of the limited and now controlled supply  in the UK,  I could go on. profits from companies are being  eroded fast,  some Utilities will work 90 days payments  for Industry  if you are reporting out quarterly and using a yearly average as your cost base we are shortly going to see who is unhedged,  its far too late for anyone to hedge now until next autumn unless there is a huge disruption coming,  business who's suppliers have gone to the wall, cannot hedge outside of contract so the hedges have gone as well they are also now subject to next day pricing.  I guess the industry levvies  could be stopped for a while so they only pay consumed cost.    these are indeed interesting times...  

One sector im miffed with is transports as i bought them for exactly the above reason,they are hedged for 3 to 4 years and so could suddenly be much cheaper than cars etc.I managed some profits buying at the bottom on some,but still a poor performance considering the work.However it was simply down to the nature of the trigger we were waiting for.Lockdowns.An example of why you need to be spread and that however good,and even being right can still end up losing you some capital,or missing out on gains elsewhere.

[Barnsey]

I remain convinced the Conservatives want to hand power to Labour.

 

[planit]

Something I thought worth flagging up is the markets are in a bit of a mess.

There has been an unprecedented amount of dividend suspensions and disruption.

On top of this company accounts suffered huge disruption due to lockdowns, stimulus, gov backed loans and temporary changes to customer behaviour.

 

The end result of the above is stock screening doesn't currently work, people are finding it very hard to invest on sensible fundamental figures and therefore investment decisions might be stuck in the headlights somewhat.

This doesn't really apply to the people here who are identifying sectors and companies on different metrics. Also the above affects some industries more than others. For example no one knows if the move to Zoom meetings is permanent or whether people are going to shop online going forwards.

It will take 18 months for trends to be settled and easier to predict going forwards. Some things will take longer as dividends suddenly stopping will be hard for pensioners to forget.

 

I thought I would bring this up as there will be companies and sectors that are not currently valued correctly. For example, I don't think anyone has digested properly the profits of the oil companies, they are trading on crazy forward PE ratios that would not normally be possible. BP valued on a current profit rate at 15 time PE would be worth £9 per share.

 

We all need to be patient as normality will slowly return and in the mean time we should make an effort to take advantage of any unbalances we see.

[Noallegiance]

12 minutes ago, planit said:

We all need to be patient as normality will slowly return and in the mean time we should make an effort to take advantage of any unbalances we see.

A timely comment, for me.

My patience with many aspects of life is running extremely thin. It feels like I've been patient for a decade.

Being so close to things changing adds to the pressure.

Kinda like when a woman/man/hedgehog/mineral/pulsar/hermaphrodite superhero is at the end of child labour and 'can't go on'. 

[Yadda yadda yadda]

2 hours ago, geordie_lurch said:

Yet another 'conspiracy theory' becoming true here... smart meters are only there to control when the plebs can use electricity and now when we can charge these new amazing electric vehicles It's also interesting because TPTB are also admitting the national grid simply isn't able to power our energy needs going forward without such restrictions Just wait until this is also tied into your Covid Passport (Digital ID) and "social credit score" so if you haven't been a good 'citizen' you won't be allowed any power

"The United Kingdom plans to pass legislation that will see EV home and workplace chargers being switched off at peak times to avoid blackouts.

Announced by Transport Secretary Grant Shapps, the proposed law stipulates that electric car chargers installed at home or at the workplace may not function for up to nine hours a day to avoid overloading the national electricity grid.

As of May 30, 2022, new home and workplace chargers being installed must be “smart” chargers connected to the internet and able to employ pre-sets limiting their ability to function from 8 am to 11 am and 4 pm to 10 pm. However, users of home chargers will be able to override the pre-sets should they need to, although it’s not clear how often they will be able to do that.

In addition to the nine hours a day of downtime, authorities will be able to impose a “randomized delay” of 30 minutes on individual chargers in certain areas to prevent grid spikes at other times."

 

My parents have an electric car - they don't often drive far so it works for them. They also have solar panels. My Dad charges the car when it is sunny. Theoretically a smart charger could prevent this. Apparently they get enough juice in the winter for it to work then too.

Conclusions are that their charger could eventually be worth more than it cost. Also that the Government is mental. It isn't their role to say when you can or cannot do something. If electricity is more expensive at certain times then allow businesses to charge more at peak and less off peak. Let the market do its job. If people could lower their bills by having a smart meter installed and using off peak energy then they will do so. They might even switch to heat pumps or electric heating. Although that is far fetched as it seems a shit solution.

As things stand it isn't even worth my while installing a more efficient gas boiler. Depreciation over ten years is at least equal to savings (fuel and maintenance). That is before opportunity cost. That calculation is changing as gas prices rise.

[Majorpain]

17 minutes ago, planit said:

I thought I would bring this up as there will be companies and sectors that are not currently valued correctly. For example, I don't think anyone has digested properly the profits of the oil companies, they are trading on crazy forward PE ratios that would not normally be possible. BP valued on a current profit rate at 15 time PE would be worth £9 per share.

We all need to be patient as normality will slowly return and in the mean time we should make an effort to take advantage of any unbalances we see.

I picked up a small slice of BP yesterday, they are lagging behind Shell and in the short/medium term i think they will even themselves out.  I think its only about 10% but ill take what I can get!  

[Majorpain]

1 hour ago, Barnsey said:

Ok, so unemployment isn't up, but high energy prices are making life distinctly unpleasant for everyone at the minute so whilst history isn't repeating itself, it is IMO rhyming.

[Chewing Grass]

17 minutes ago, Yadda yadda yadda said:

Conclusions are that their charger could eventually be worth more than it cost. Also that the Government is mental. It isn't their role to say when you can or cannot do something. If electricity is more expensive at certain times then allow businesses to charge more at peak and less off peak. Let the market do its job.

The government aren't mental, they are globo-fascist corporate communists.

[Mapper]

2 minutes ago, Chewing Grass said:

globo-fascist corporate communists

Try saying that with a mouthful of vegan cheese.

[DurhamBorn]

42 minutes ago, planit said:

Something I thought worth flagging up is the markets are in a bit of a mess.

There has been an unprecedented amount of dividend suspensions and disruption.

On top of this company accounts suffered huge disruption due to lockdowns, stimulus, gov backed loans and temporary changes to customer behaviour.

 

The end result of the above is stock screening doesn't currently work, people are finding it very hard to invest on sensible fundamental figures and therefore investment decisions might be stuck in the headlights somewhat.

This doesn't really apply to the people here who are identifying sectors and companies on different metrics. Also the above affects some industries more than others. For example no one knows if the move to Zoom meetings is permanent or whether people are going to shop online going forwards.

It will take 18 months for trends to be settled and easier to predict going forwards. Some things will take longer as dividends suddenly stopping will be hard for pensioners to forget.

 

I thought I would bring this up as there will be companies and sectors that are not currently valued correctly. For example, I don't think anyone has digested properly the profits of the oil companies, they are trading on crazy forward PE ratios that would not normally be possible. BP valued on a current profit rate at 15 time PE would be worth £9 per share.

 

We all need to be patient as normality will slowly return and in the mean time we should make an effort to take advantage of any unbalances we see.

Funny enough i have £9 a share for BP as my expected cycle price,but that includes divis.Im not sure they will retain share buy backs once the shares are over £4.50 though and might revert to special divs at that point.

I think the market is caught wondering if the inflation is longer term or not.What is certain is the government is at the point where it just wants to tax everything.Of course that ends up costing more in the long run.The dislocation in the energy sector is mostly due to governments over taxing and over regulating.They pretty much handed investment capital from the big utilities and handed it to some spivs who could set up,pay directors huge salaries,then go bust passing the costs onto society and the very utilities the government screwed over in the first place.

I think the Blair/Brown government was the worst in history ,but i think this is the second worst,nudging out Ethelred The Unready.

[wherebee]

15 minutes ago, DurhamBorn said:

I think the Blair/Brown government was the worst in history ,but i think this is the second worst,nudging out Ethelred The Unready.

Not a lot of people know this, but 'unready' actually comes from 'unread' or 'badly advised'.  He was the Trump of his day, surrounded by bad actors who sunk any chance of a good rule.  He kept fighting for England for a very long time.  Most of us DOSBODDERs would have been on his side.  (well, not me, I'm mainly welsh so fuck him).

[reformed nice guy]

1 hour ago, DurhamBorn said:

One sector im miffed with is transports as i bought them for exactly the above reason,they are hedged for 3 to 4 years and so could suddenly be much cheaper than cars etc.I managed some profits buying at the bottom on some,but still a poor performance considering the work.However it was simply down to the nature of the trigger we were waiting for.Lockdowns.An example of why you need to be spread and that however good,and even being right can still end up losing you some capital,or missing out on gains elsewhere.

If they are running reduced services will they be making cash by selling their cheap fuel?

[Sidd]

29 minutes ago, DurhamBorn said:

I think the Blair/Brown government was the worst in history ,but i think this is the second worst,nudging out Ethelred The Unready.

Also the most corrupt. Handing contracts left, right and centre to their buddies and effectively stealing tax payer money, as well as breaking laws (Hancock smooching and Priti's unofficial foreign business) without any consequences. Before they used to at least try to hide it, but now they don't bother as they know no will do anything about it other than post a few comments on the daily mail website or twitter and wait for the likes to come through to stroke their ego.

[ThoughtCriminal]

 

[DurhamBorn]

24 minutes ago, ThoughtCriminal said:

 

Our just in time manufacturing built on a 40 year disinflation cycle simply cant operate under these conditions.It was certain to happen at the end of the cycle,macro certain anyway.Its a race now.The ones who can pull enough production closer to home,increase wages first to hold staff and have margins big enough to take a hit will be the winners.As we always said massive dislocation as things change.The Tories think they are safe with Labour being such a disaster,but energy could bring them down yet.Critical to only own ares who can put prices up without losing much custom.

[kibuc]

On 08/10/2021 at 13:42, kibuc said:

They (Endeavour) also withold metals from sale during pullbacks and now have over 1moz silver and 3koz gold bullion in treasury, to be sold when prices recover. Great strategy if you can still support your daily operations, and they can.

First Majestic decided to follow suit, withholding 1.4moz out of their 3.3moz production for the quarter. Will it become a trend?

Stellar quarter by $AG by the way.

[AyrshireBoy]

5 hours ago, TheNickos said:

No idea but it will almost certainly be sim card based. 

You can still buy a 'dumb' charger but you can't claim the OLEV grant if it isn't capable of connecting to a network.

I can give a bit of advice on cheapest way to install an EV charger if anyone needs help with that.

[MrXxxx]

5 hours ago, planit said:

This doesn't really apply to the people here who are identifying sectors and companies on different metrics. Also the above affects some industries more than others. For example no one knows if the move to Zoom meetings is permanent or whether people are going to shop online going forwards.

Agree, although you need to base your picking on both qualitative and quantitative measures, at the moment I am biasing it more heavily towards the former.

[AyrshireBoy]

5 hours ago, Yadda yadda yadda said:

My parents have an electric car - they don't often drive far so it works for them. They also have solar panels. My Dad charges the car when it is sunny. Theoretically a smart charger could prevent this. Apparently they get enough juice in the winter for it to work then too.

Conclusions are that their charger could eventually be worth more than it cost. Also that the Government is mental. It isn't their role to say when you can or cannot do something. If electricity is more expensive at certain times then allow businesses to charge more at peak and less off peak. Let the market do its job. If people could lower their bills by having a smart meter installed and using off peak energy then they will do so. They might even switch to heat pumps or electric heating. Although that is far fetched as it seems a shit solution.

As things stand it isn't even worth my while installing a more efficient gas boiler. Depreciation over ten years is at least equal to savings (fuel and maintenance). That is before opportunity cost. That calculation is changing as gas prices rise.

Heat pumps are shit unless your house is super insulated even then the radiator size required is a joke.

If your doing a new build and put it in a concrete slab for underfloor heating then its amazing as that's what it was designed for.

Up here the local authorities have been installing them in poorly insulated houses so they can claim the FIT payments.

Tenants that already suffer fuel poverty are left with increased bills and a marginally better heating system than the storage heaters they replaced. 

[Bricormortis]

Denison mines (Uranium ) up over 8% today Kazatomprom over 7 %.