I (not so) quickly said to Jack...some general current views

(This was a response to question from Jack Brumby in his Sylvania Platinum (LON:SLP) post...https://www.stockopedia.com/content/sylvania-platinum-cash-rich-growing-and-cheap-567712/ ...it got more involved than i planned so put it here)

Hello Jack

I'm not very keen to talk about stocks that I might own but don't yet if they are small cap. I suspect my views and selections are of low interest with Stockopedia crowd (won’t be seen as very investable and not ‘quality growth’) but here’s a few things I have bought some of on falls:

Yellow Cake Yellow Cake (LON:YCA)
Cameco - $CCO
Jadestone - Jadestone Energy Inc (LON:JSE)
Duke - Duke Royalty (LON:DUKE)
Mercia - Mercia Asset Management (LON:MERC)

Talking commodities, I’m v interested in Uranium. I’ve be in a small degree for about 18 months and on a quite macro/thematic basis in that I think the commodity has bottomed out. Yellow Cake is special vehicle giving direct uranium exposure. Cameco is second biggest producer behind Kazatomprom. KAP is actually probably the ‘higher quality’ investment but its Kazakh! I mean higher quality in financial metrics terms butt that obvs comes with opaque political motives and general mgt standards that are likely to be below the Canadians. There is no such thing as a quality investment in Uranium…this is very high risk area. There’s a handful of smaller miners and all are struggling to get by. No one makes money at the current commodity price. Cameco and Kazatomprom have taken capacity out of production. Its super uncomfortable but no one making money at current prices plus capacity being taking off-line (and many smaller operators going under) is the classic capital cycle point to enter a commodity….All that said uranium is weird and uncomfortable - tiny little commodity markets always are. I don’t expect uranium to be safe through market volatility but it has already busted sentiment and it is market pretty independent of financial market and economic cycles…I believe market stress is likely to hasten people finding uranium interesting.

More commodities…Jadestone….I’m not often an investor in oil sector. I feel having an edge on a case by case basis can be very hard and success needs dedication and broad portfolio (there is a general underpricing of exploration and early or small development assets but high idiosyncratic risks with an overlay of occasional systemic). However, oil is hated and in a long bear market so trying to look. I particularly like the Asean angle and old and end field work with some easy discovery potential as majors pull out of area for variety of reasons. Shades of North Sea small oil co to it.

I’m interest in some other negative sentiment commodity markets and will be looking to see if they are suitable for a capital cycle turn. As I explain below I’m quite keen on some real assets at the moment. More generally I have a 30% exposure to gold miners through a variety of routes (fund, etf and stocks). It capital cycle sort of stuff and a macro view that although deflation impulses may come (last week) the path is probably inflation for a host of reasons with the primary thing being we cannot tolerate a debt deflation cycle so we will break all the rules to avoid it. In addition, relative de-globalisation is likely to be direction of travel (COVID19 boosts that too) and that is likely to spur activity (change is growth) and demand for commodities and commodity security will be part of the process.

I’m keen on financing of UK SME and that is part of what leads me to Duke and Mercia (and have a couple of other related things too). Duke I bought during its recent falls and Mercia I already owned but bought more (I also got some in the recent placing at 25p - overall I’m about 20% down on it). Looking bigger cap I don’t own any UK banks but my view is that they will be winners over the next decade and I may own some soon-ish but probably after selling some things that expect to do well through volatility. 

More generally, I think we will undergo a growth correction in the US (see below) and as a result I think there will be a chance to pick up growth at lower ratings globally and we might finally be in a phase where value outperforms meaningfully for a period. I'm not a value investor....I just welcome the change for the clearance and opportunity it brings. So I've got an eye on good small cap growth cos....hopefully at a better price.

And now some more general market view:

I've not done much during the volatility and have a fairly highly invested portfolio with near 15% cash (a bit more selling than buying). The above stocks were mainly additions to existing with only Duke being a new position. That said, approx half of my invested portfolio I believe has little economic cycle relationship with some of it (I hope) having strong negative correlation to negative market moves (not in perfect sync but as stuff plays out). This has been the situation for several years a little bit emphasised recently by selling Sylvania Platinum (LON:SLP), Diploma (LON:DPLM), Argentine stocks and smid cap Brazilian domestic revenue stocks. IMO I’ve removed a little extra downside risk (both in a volatility sense and fundamentally given unfolding environment). I’m still holding things that could be extremely negatively impacted by COVID19 though but where there is large upside.

I’m not actually very bearish. Several years ago I decided the bear phase of the current upturn would be a rather odd affair. I think that the weakness of USD during the acute sell-off phase is a hint that we are in an odd moment….maybe we’ll go back to the standard pattern of USD strength but if I’m right that the current sell off is a US market that was pregnant with the potential for a growth panic then weak USD would be a tell as the consequence would be a US version of a balance of payments crisis. Obviously that is very different from, say, an Argentine or Venezuelan one due to the systemic importance of USD….but some of the results are the same and one particularly important to note is the inflation of real assets. Some of you will find this view a little extreme. I actually think its a positive for the US but bad for the USD…not in an extreme Peso type fashion but structural weakness (think demise of UK dominance and slide of GBP).

Its been my view that there would be a correction due to US valuations being ahead of underlying economic reality (poor RoW and worsening US). The US market is the most overvalued its ever been on a median valuation basis. Lots of complex arguments for why this is okay....which usually revolve around low rates and anaemic growth elsewhere...and I bet some of the talking heads saying rate cuts by Fed are irrelevant or bad also think that high valuations are okay based on US rates+growth argument. Hahahaha.

If we were confident in our economy and markets (or if our confidence has been previously deflated so our expectations were already low) then the market would have sharp correction to COVID19...like last week....but then would normalise and look through the short term cost. I don't think anyone half sensible investing decent amounts will be looking at COVID19 and thinking its an armageddon play and so go to cash/gold/butter/guns etc….they will look through….however late cycle and with high valuation and expectations that may look a lot like armageddon in price terms…we just dunno and we’ll probably flit around from here between end of the world and look through, however…

I believe the global response function of governments and other relevant global organisations (central banks, IMF, etc) will be highly surprising and, on the whole, a rather aggressive spur to activity on a look through basis. The put this time wont be CBs but fiscal policy. Note, the intervention last year by Fed in repo markets can be viewed as the indirect monetisation of US fiscal deficit (I loop you back to weak USD).

There’s a black swan risk around some of the currency and macro stuff which is the significant strengthening of Chinese currency in a global context…that involves quite a lot of explanation and I’m fed up typing now! (I did put something in a recent SCVR so could look that up for flavour of it - https://www.stockopedia.com/content/small-cap-value-report-fri-28-feb-2020-carnage-vrs-foxt-565786/?comment=17#17 )

So what's going down? We are undergoing a growth de-rating a la 2000. It wont be the same as 2000 due to different structural factors but its a useful comparator. This could run along for a long time if COVID19 as modest impact or go quickly if virus causes super disruption. The former will provide use ability to stock pick and macro position to make money even as bear market rumbles. The latter will be much more indiscriminate and classic havens territory (although reasons to be careful in doing that, see below, with closure of markets etc in that situation).

From a US perspective, 2000-3 was a period whereby picking the median stock would have made you absolute positive money despite the 50% bear market in cap weighted indices. Add in a deliberate value bias and minted! Wack in a short mega caps (say SP500 short) or even better TMT (Nasdaq) and you look like a hedge fund genius....which is why the modern hedge fund industry really took off then...lucky monkeys.

This time wont play like that as the median stock in US is highest valuation ever, its not just a small cohort of ridiculously priced mega caps and TMT. There is broad based over valuation and excessive expectation in the US.

Economically, financially, politically and socially we are in a very different position too than 2000. We are not confident about our societies and so there is a willingness to be radical…if the excuse can be found (or, worse, a nutter elected). COVID19 will be part of the excuse to get radical. Radical will be something like 1930s New Deal in nature (ie heavy govt intervention in functioning of economy) and war economy like WW2 and its aftermath (financial repression, yield curve control, etc). Overall, this makes me want to be safe but counterintuitively I believe safe involves being highly exposed to real productive assets (property a bit less good…it ain’t productive and its generally expensive). So my bias is to be pretty long and to eschew hedging. Its possible that banks and trading get closed if COVID19 is very severe global shock that we can’t look through…in such a situation I most want to own rights of ownership to productive businesses. It’ll be super uncomfortable but surprising negative things could happen to cash or financial instruments.

And the most important short run macro factor?....its all about China...if it genuinely ramps up production and makes large stimulating investments a la 2008-10 then the deflationary impulse will be temporary and not too tricky to see as temporary. If they can't then more than COVID19 this will create a state of emergency and yuge response function from govts....looking through will be harder and extreme market interventions more likely. I balance to China getting up and running....as it has to, more virus cases or not

Note, I have a tendency to think extreme and then cycle back from that. Take the above with a big pinch of salt. Most of my portfolio is bottom up stock picking but with an eye to the macro picture I paint above. I have performed decently in recent years but not as well as a growth-quality-momentum investor. I’m not really a value investor and I do look for what i perceive to be growth and quality quite often too. But I am contrarian. Not in a value or very numerically driven style. I don’t rely on much screening and quite ad hoc in how I look for things as the reason I own something is if I can find dissonance…dissonance is what turns me on…and then I have to understand why there is dissonance and what the opportunity is. Screening tends to blunt that by throwing up attractive ‘facts’…I can see that works for many but not me.

That was much more of an answer than I expected! Been cathartic to write though (but done quickly with little checking so apologies on typos and bad grammar etc - I’ll maybe look back and tidy in a day or too). Note, people that know me know that I can have quite strong views and then quite suddenly flip them….so nothing above is written in stone for me and I may realise I’m being a bit dumb.

Ciao
mojo out