More Blood
More Blood
Welcome all new subscribers to Alpha Letter. Every week I write about interesting opportunities in the public market. I focus on stocks off the beaten path. Broken businesses. Assets trading under liquidation value. Macroeconomics and where the economy is heading. I don’t like investing in large, popular companies and find a fascination with assets no one else is looking at.
Today’s piece will be focused on high level thoughts on the economy, interest rates and how valuations could head even lower.
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Markets Bleed
Markets continue to bleed going into Monday’s open. The global economic landscape appears to be heading into a deep recession. Central Banks across the globe continue to raise interest rates with a hope of causing a recession to slowdown the pace of inflation. Interest rates on 30-year mortgages have ticked up to 6% and will likely continue to climb. The only safe haven has been the energy industry which is up 41% YTD. But even now energy might not be safe in the face of a large global downturn.
My entire career in finance has been in an ultralow interest rate environment. Corporations could borrow at sub-three percent levels and aggressively expand production as their cost of capital was lower than any projected IRR. Fake tech companies with zero revenues were valued at billions. You could blindly buy anything in the Nasdaq and kill it. Millionaire crypto investors and NFT lunatics buying yachts with fake money.
When the cost of capital is basically nil, money flies and billions are created out of thin air. Everyone becomes a genius investor no matter the lack of skill as luck is easier to find under the blackjack table. Intangible tech assets with an arbitrary value are worth more than tangible hard assets with real value. Cash flows 20-years from now are worth more than cash flows today.
The days of wine and roses appear to be through. Easy money in the market is over. The old days of throwing $100,000 at a tech stock and turning it into $10 million are done. Valuations don’t matter until they matter. And it appears as if valuations are beginning to matter yet again.
Bull markets are easy and bear markets are challenging. Everyone looks like a genius in a bull market as the rising tide lifts all boats. When the tide eventually falls the once financial geniuses are seen without a bathing suit on. We are beginning the ones who have been swimming without a bathing suit.
Wealth can be created in a bull market. But real wealth is created in a bear market. Valuations can only fall so much. Eventually we will hit a bottom and stocks will begin the eventual re-rating upward and onward to new highs. Find quality companies at great prices and start dollar cost averaging into them. Think long-term and not short-term. Long-term thinkers will outperform short-term traders.
I’m around 30% cash headed into a deep recession with double digit inflation. It doesn’t feel great to have this much cash but it has protected my downside as most stocks have cratered. I’ve allocated a decent amount of money to new positions but I still struggle to find no brainer ideas that I can allocate a 20% position to. Valuations look cheap but I think they get cheaper.
My largest position is an OTC oil and gas company. The stock barely moves which has been great given the volatility in the market. I think the stock could go up 50% from here and still be cheap. An uplisting to a major exchange, special dividend or tender offer is a catalyst that could re-rate the stock. This is a 20% position for me and I have considered adding even more to it.
I continue to look at old school media companies as well. National revenues have fallen off a cliff as advertisers continue to pullback spending to front-run a global recession. However, local advertising revenues continue to perform well as small mom & pop companies see the benefit of advertising in a strong economy. I am watching large broadcasters closely. A few of them will be forced to restructure and declare bankruptcy. Assets will look cheap then. Vulture value investors will come in and clean up when this happens.
I am also closely following coal equities. The 2023 contracting season is in full force and we should be able to get pricing on coal for 2023. Valuations and dipped lower on fears of a slowdown in the steel industry. But thermal coal pricing is off the charts and met coal producers are selling to European thermal users. 2023 could be a great year. I am anxious to see how pricing turns out.
The market is tough right now. But in times of dire straights is when real money is made. Continue to focus on real assets, cash flows and valuations. There have been many downturns in financial history and this won’t be the last one. Focus on the long-term and you will do well. Don’t worry about the mark-to-market losses you are seeing in your portfolio. Worry about the price you pay and the valuation you buy an asset with. Time will take care of the rest.