InvestMacro

Exactly nine months ago this weekend, I sounded the alarm for the pending arrival of a bear market in financial assets when “The First Five Days” of the January Barometer flashed a warning signal by closing lower than the end-of-year number from the prior week.

The Rolling Bear Market

For nearly the next eight months, I watched and read advisors, bloggers, and podcasters all chortle on and on in breathless anticipation of the emergence of the “Fed Pivot” to the extent that every sign of an abatement in the CPI numbers was met with mindless euphoria and wave after wave of buying while Wall Street insiders and corporate executives quietly and without fanfare were selling massive amounts of paper.

The volume and blatancy of insider sales were astonishingly outdone by the retail “buy-the-dipping” that results from the well-crafted Fed “script” that trains the kiddies to expect policy rescue and accompanying deliverance from portfolio purgatory.

Warren Buffett is quoted as saying that maximizing stock market performances involves being “Fearful when others are greedy and greedy when others are fearful.”

I had been holding fast to my strategy of fading every advance while pressing bearish bets while rolling bear market profits into additional (and egregiously large) precious metals holdings, which, up until Wednesday, September 28, 2022, seemed like a pretty good strategy.

However, the landscape all changed when the Bank of England announced it was buying — instead of selling — gilts (10-year U.K. bonds), putting an immediate end to the U.K. version of quantitative tightening and rather than calling it “easing,” they simply called it “temporary” and “emergency” purchases.

What resulted was a 7% rally in the S&P 500 on mammoth volume, and while pundits dismissed it as yet another “bear market rally” that should be sold aggressively, only with the fullness of time will I know without question the veracity of the MACD buy signal shown below,

Call it a “trader’s intuition,” call it a “gut feel,” or call it a “contrarian set-up” I think that the ferocity of retail dumping and shorting is moving to “overblown” status.

I furthermore think that the Twitterverse, with all of the gold bugs delighting in the demise of every sector that was in the limelight since March 2009, remains “interesting.”

Tech, crypto, and social media — all totally trashed in the past year — are now being jettisoned like spent boosters on a NASA launch.

It still astounds me how quickly the darlings of today become the pariahs of tomorrow.

I also sense extreme investor apprehension here due to the month of October, known as the “jinx month” because of crashes in 1929 and 1987, a 554-point swoon in 1997 as well as back-to-back massacres in 1977 and 1979, “Friday the Thirteenth crash in 1989 and finally the subprime meltdown in 2008.

All of these nerve-rattling declines represented the terminal moves in a longer-term trend of lower prices and were followed by extended rallies in 1946, 1957, 1960, 1974, 1987, 1990, 1998, 2001, 2002, and 2011.

Should You Be Cautious?

I have countless times written about the difficulties in trying to pick bottoms or tops during the final parabolic “terminal” moves that characterize important turning points.

This is why I usually scale into positions in October because while market trendlines that move from gradual to vertical provide me with a sense of how close the lows are in terms of time, they do not provide me with the same sense as to price.

So if the bottoming process takes three weeks in October, I might be paying US$10 in week one but US$2 in week three, so nibbling away in tranches is a reasonable strategy.

Even if I get caught in a 1987-style crash, some of the entry points are going to be ridiculously lower than where they are once panic subsides (which it always does), and bargain hunters arrive in droves.

Make no mistake; there are dozens of reasons to be cautious but based upon everything I have learned since 1974, the first time I picked up a Wall St. Journal (understanding nothing), there are an even greater number of reasons to be optimistic as you have read in the above paragraphs.

I have told everyone to fade the markets until the Fed openly admits to a policy reversion from the current “hostile” to a more “friendly” stance.

Even a “neutral” stance would allow for a sharp relief rally lasting several months and classified as a tradable rally.

Gold

Gold is acting far better here in October than it was in September (as is silver), and while I am long both, I am modestly ahead on silver and moronically underwater on gold.

That said, I believe that once this difficult month of October is behind us, I see a rally unfolding in all risk assets, and despite the fact that the only asset class that is devoid of anything resembling counterparty risk is the physical precious metals sector, the money managers of the world choose to lump the PM’s together with growth stocks, crypto, and high-tech zombies under the label of “risk assets.”

Alas, I am neither able nor willing to debate it in the world of social media hatemongers because it is pointless. It is like the debate over precious metals manipulation; it does not matter who wins the debate when the control of price is in the hands of a few government-sanctioned bullion banks.

I continue to hold that new purchases should be in physical gold and/or silver so as to avoid inclusion in the “risky stocks” all-encompassing drawdown potential where it matters not that you are a gold and silver producer, explorer, or developer when the margin calls arrive, you get trashed.

Mind you, in 2008 and 2020, they took cash prices lower as well, which contrasted 1987 when the cash market for gold went from US$425 to US$505 in a week, while the TSE Gold and Silver Index containing all the big gold miners crashed from over 10,000 to less than half of that.

Fear and Greed

Warren Buffett is quoted as saying that maximizing stock market performances involves being “Fearful when others are greedy and greedy when others are fearful.”

I like to add the adjective “irrationally” as in “irrationally fearful” with yet another quote in mind, and that one being from the mouth of John Maynard Keynes, who reminded us that “Stocks can remain irrational longer than we can remain solvent.”

Do you wait for the result and then move?  Do as you must, but I do not want to be short in November.

Sometimes markets can remain “irrationally fearful” much longer than I might have reasonably expected, and that is where I try to discipline myself to focus on position size.

As an example, I might be totally convinced that the S&P is going to close out the year back above 4,000 but rather than going “all-in,” I use call options with a finite dollar amount of risk rather than a fully-leveraged portfolio.

This is because if I am wrong, I will still have an ample cash position with which to react, especially if things take longer or not at all, which does happen.

There is no doubt that there is a lot of blood flowing in the streets right now, and with the fear-greed gauges at levels last seen in April 2020, December 2018, March 2009, and October 2008, I believe it is time to reduce my bearish exposures and slowly shift to a conservatively-bullish stance.

I am loaded with junior copper/gold /silver /uranium developers but have no positions in the broad market components that will have the highest “beta” in the advent of a “risk-on” shift brought about by the specter of a bullish policy reversal.

Wealth managers across the planet are all hemorrhaging, creating this torrent of Main Street gore to the extent that some very large pools of investment capital are ready to pounce.

Do not think for a minute that the mid-term U.S. elections are a factor in keeping pressure on the markets; once the Democrats are ceremoniously swept out of the House and Senate, watch for a serious rebound.

Do you wait for the result and then move?  Do as you must, but I do not want to be short in November.

Think “risk-on” because we have had nine months of “risk-off,” and the blogosphere is short up to the teeth. . .

Michael Ballanger Disclaimer:

This letter makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents my views and replicates trades that I am making but nothing more than that. Always consult your registered advisor to assist you with your investments. I accept no liability for any loss arising from the use of the data contained on this letter. Options and junior mining stocks contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. One should be familiar with the risks involved in junior mining and options trading and we recommend consulting a financial adviser if you feel you do not understand the risks involved.

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Asset manager Chen Lin’s picks for 2022’s last quarter include a whole stable of biotechs with some precious metals thrown in.

He cashed out of one position and doubled down on some others.

According to Zacks research, the biomedical and genetics industry has underperformed the S&P 500 Index and the medical sector so far in 2022, having declined 28.9% compared to 25% for both the medical sector and S&P.

But there is hope on the horizon. The sector carries a current Zacks industry rank of 77, which puts it in the top 31% of more than 251 industries Zacks tracks.

Biotech “bottomed around mid-year,” Chen said. “Now it is starting to rebound. I had a good year in biotech. I see continuing rebounds of my biotechs in the coming years.”

Tricida Inc.

Tricida, Inc. (TCDA:NASDAQ) is developing Veverimer, which is designed to treat metabolic acidosis in patients with chronic kidney disease. It’s a return from Q3 on Chen’s list.

The U.S. Food and Drug Administration (FDA) did not approve the drug in 2020, but the company is awaiting the outcome of a new trial which will be “the most important data readout in its history,” Chen said.

“The chance of positive data (in the trial) is extremely high, in my opinion,” Chen said. “With the positive data, TCDA can file for approval next year. The stock has at least a 10-fold upside after approval.”

Top shareholders in the company include OrbiMed Advisors LLC at 18.47%, VR Adivser LLC at 17.14%, Sibling Capital Ventures LLC at 11.54%, and Steven A. Cohen at 5.9%, according to Reuters.

Tricida’s market cap is US$659.68 million, with 55.7 million shares outstanding, 51 million of them free-floating. It trades in a 52-week range of US$13.85 and US$4.10.

Has gold bottomed? It is possible, but it appears today it is retreating from its resistance area. We need a solid break above $1740 for more proof the bottom is in, which would also break the downtrend.

A good thing we got stopped out of most of our gold stocks in June. Near term, I believe there is more potential in the energy sector, where I have been making most of my new picks this year and two more below.

There is renewed interest in GICs and term deposits at the banks now that interest rates have gone up. A person can get 4% to 5% by locking into three to five year terms. Rates vary by type and bank, but that is a good ballpark number.

While this is a safe investment, the downfall is your money is tied up, and there is no chance of getting a higher rate or making a capital gain.

A better alternative is TC Energy Corp. (TRP:NYSE).

TC Energy Corp.

TC Energy offers more potential than GICs, with comparatively small risks. At CA$55.75 and an annual payout of $3.60, TC Energy yields 6.5%.

TC Energy owns and operates 93,300 kilometers of natural gas pipelines and 653 billion cubic feet of storage space in Canada, the United States, and Mexico. It also has a 4,900km network of oil pipelines, which supply Alberta crude to the U.S. market.

It also invests in several power-generation facilities, including wind, solar and nuclear. The current quarterly dividend is $0.90 per share. The company has raised its payout every year since the turn of the century.

The company is projecting 5% annual growth, and I see no reason why dividends will not keep increasing. Second-quarter results came in slightly ahead of analysts’ expectations.

Net income attributable to shareholders was $889 million ($0.90 per share), compared with $975 million ($1 per share) in the same period of 2021.

For the first six months of the fiscal year, net income was $1.24 billion ($1.27 a share). In the same period of the prior year, the company reported a loss of $82 million.

TC Energy announced a major expansion into Mexico on August 4, 2022. TC Energy and Mexico’s state-owned electricity producer Comision Federal de Electricidad (CFE) announced the launch of a $4.5 billion pipeline that will deliver natural gas from the southwestern U.S. to southern Mexico.

TC Energy said the CFE’s decision to take a 15% share in the project — the 715-kilometer offshore Southeast Gateway pipeline — is a landmark transaction for the Mexican utility as its first public-private partnership.

The Southeast Gateway pipeline is expected to be operational by 2025, and TC Energy said the project enjoys broad-based support from all levels of government, environmentalists, and regulators.

The project will allow the CFE to replace power plants currently fuelled by high-sulfur oil with natural gas-fired facilities that produce half the greenhouse-gas emissions. Over the course of this decade, Mexico’s appetite for natural gas is expected to increase by 50%.

TC Energy is also expanding into what I see as a high-growth market with strong future growth, exporting Liquid Natural Gas (LNG). Their $40-billion LNG Canada project will have an export terminal in Kitimat, B.C., at the end of TC Energy’s Coastal GasLink pipeline and aims to be up and running by 2025.

This next graphic is from TC Energy’s presentation

In March this year, TC Energy announced the signing of option agreements to sell a 10% equity interest in the Coastal GasLink Pipeline Limited Partnership to Indigenous communities across the project corridor.

The opportunity to become business partners through equity ownership was made available to all 20 Nations holding existing agreements with Coastal GasLink.

The formal establishment of these agreements comes from an interest expressed by Indigenous groups across the project corridor to become owners in Coastal GasLink alongside Alberta Investment Management Corporation, KKR, and TC Energy.

The next graphic from their presentation illustrates that TC Energy is already benefiting from the LNG boom and will continue to do so and especially with its own Kitimat terminal in 2025.

The stock has dropped to the lowest level in almost two years, simply correcting too far in sympathy with oil stocks.

It does not matter the price of oil and gas; TC Energy is paid to move it at whatever price. The stock is of great value here.

Atlas Corp.

With Atlas Corp. (ATCO:NYSE), we are sitting on a big gain from our $7.33 Buy price, and there currently is a cash offer of $15.50 per share to take Atlas private.

Assuming that happens in six months, an investor who buys the stock now would see a $1.40 return plus $0.25 in dividends for a total of $1.65 or 11.7%, not bad for six months in today’s markets.

I am surprised arbitrage traders have not bid the stock higher, but it may be a function of this terrible market.

To recap, in April 2022, Fairfax Financial Holdings Limited (“Fairfax”) exercised warrants to purchase 25.0 million common shares of Atlas. The warrants, which were originally issued on July 16, 2018, had an exercise price of $8.05 per common share for an aggregate exercise price of $201.3 million.

Immediately following this exercise, Fairfax and its affiliates held in aggregate 124,805,753 common shares, representing approximately 45.1% of the then-issued and outstanding common shares of Atlas.

Fairfax continues to hold 6.0 million warrants.

On August 4, 2022, Atlas’ Board of Directors received a non-binding proposal letter, dated August 4, 2022, from Poseidon Acquisition Corp., an entity formed by certain affiliates of Fairfax, certain affiliates of the Washington Family (“Washington”), David Sokol, Chairman of the Board of Atlas, and Ocean Network Express Pte. Ltd., and certain of their respective affiliates, to acquire all of the outstanding common shares of Atlas, other than common shares owned by Fairfax, Washington, Mr. Sokol and certain executive officers of the Company, for $14.45 cash per common share.

On Sept 28, 2022, Poseidon Acquisition Corp. revised its price upwards to $15.50 cash per common share.

On or about November 1, 2022, Atlas will pay another $0.125 dividend, and on Feb 1, 2023, another $0.125 dividend.

Atlas is our only shipping stock at this time, so I am suggesting replacing it with DHT Holdings.

DHT Holdings

DHT Holdings Inc. (DHT:NYSE) is an independent crude oil tanker company with a fleet trading internationally and consists of crude oil tankers in the VLCC segment.

On June 30, 2022, DHT had a fleet of 24 VLCCs, with a total dwt of 7,453,519. I have followed this company for many years and see now as a good time to buy.

A recovery in the VLCC market was expected in 2022 after two years of Covid restrictions affecting oil demand. Tankers International reported that the data shows a definite boost.

Globally they count an additional 27 monthly liftings in the VLCC spot market in the first half of this year compared to the 2021 annual average, and we are very close to reaching pre-Covid fixing volumes.

27 additional cargoes per month would employ more than 30 VLCCs full-time if they were all traded between the AG and Singapore. Of course, some travel shorter distances, and some travel further.

Then add in the Ukraine war, and we see more tankers heading to Europe to make up for Russia’s supply. All things combined have caused tanker rates to soar.

On September 12, 2022, Tradewinds reported spot tanker rates at $43,600 per day, and now they are at $49,000 per day. This is about double from a year ago. This will give a big boost to DHT’s cash flow and earnings late this year and in 2023.

September 8, 2022, DHT Holdings announced a new dividend policy with 100% of net income being returned to shareholders in the form of quarterly cash dividends. The new policy will be implemented in the third quarter of 2022.

Svein Moxnes Harfjeld, President & CEO, stated, “The key considerations behind the new policy are the strength of our balance sheet and liquidity position in combination with no current plans for significant capital expenditures. The timing of the decision and its implementation reflects our constructive market outlook.”

I expect this will result in a minimum dividend of $0.50 per year and could easily go well over $1.00 if tanker rates stay high. At a $7.40 share price and a $0.50 dividend is a 6.8% yield.

DHT had a good second quarter

Quarterly Highlights:

• In the second quarter of 2022, the Company’s VLCCs achieved an average rate of $24,300 per day.
• Adjusted EBITDA for the second quarter of 2022 was $32.5 million. Net profit for the quarter was $10.0 million, which equates to $0.06 per basic share.
• In May 2022, the Company entered into agreements to sell DHT Hawk, built in 2007, and DHT Falcon, built in 2006, for $40 million and $38 million, respectively. The vessels were both delivered during the second quarter of 2022, and the sales generated a combined gain of $12.7 million. The Company repaid the outstanding debt of $13.3 million combined on the two vessels.
• In June 2022, the Company prepaid $23.1 million under the Nordea Credit Facility. The voluntary prepayment was made under the revolving credit facility tranche and may be re-borrowed.
• In the second quarter of 2022, the Company purchased 2,826,771 of its own shares in the open market for an aggregate consideration of $15.9 million at an average price of $5.6256. All shares were retired upon receipt.
• For the second quarter of 2022, the Company declared a cash dividend of $0.04 per share of outstanding common stock, payable on August 30, 2022, to shareholders of record as of August 23, 2022. This marks the 50^th consecutive quarterly cash dividend. The shares will trade ex-dividend from August 22, 2022.

So far, in the third quarter of 2022, 68% of the available VLCC days have been booked at an average rate of $23,600 per day on a discharge-to-discharge basis (not including any potential profit splits on time charters).

This is not much different than Q2, but as time goes on, the cheaper rates will drop off and be replaced with the higher rates that are currently in the market.

For example, in July 2022, the Company entered into a five-year time charter for DHT Osprey at $37,000 per day, with the charterer’s option to extend two additional years at $40,000 per day and $45,000 per day respectively. The vessel is expected to deliver into the contract in August.

DHT has a relatively new fleet of ships compared to most tanker companies, with only three of their 24 VLCCs pre-2011. Those three were built in 2007. Newer builds are more efficient, have less maintenance, and are not subject to discount rates that can be applied to older tankers.

At the end of 2020, Statista reports that 46% of oil tankers are 15 years old and older.

I like DHT because they are well-run and very efficient. The stock has pulled back and is not reflecting its new dividend policy, which few, if any, other tanker companies can afford to do.

Most important is the low valuation of peers. Tanker stocks started to rally in April and May and have all pulled back in the past month. When I compared DHT to several other tanker stocks, it is at the bottom of the pack, with only a +15% gain in the past year. I see no good reason for this and believe the stock can play catch up and pay a good dividend too.