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Let me get the cash management issue done first
Covering Cash generation is a continuation of last week’s piece where I was talking about 6 opportunities to structure your portfolio to take advantage of the coming volatility. For there to be volatility and not a bear market rally followed by a steeper dive, we need to have an upward bias going into a potential event. There is widespread acknowledgment that with interest rates rising institutions are dumping their bonds. Bonds must fall in principle to adjust to the higher rates. It doesn’t take a genius to realize that those dollars are being put to work into stocks. This is not high conviction money and it flows going back and forth with each new piece of news. Also, we are coming back into earnings and that I believe will be both a cause of downward pressure and then a return to gaining ground. So there are multiple and opposite forces at work here. Overall, I see a FOMO rally developing under all this noise. Much of the hot money will be forced into (in my opinion into growth) stocks as we get into the latter half of the year. In these next few months, the debate will continue and push sharp moves one way and the other. However, the chart will reveal over time that stock prices are rising, albeit with the toddling, and the lurching to and fro of a drunken sailor hiding the rise. The trends of the last few months will continue until the logistics bottlenecks start to become more clear, the rally will get more pronounced.
What I mean by bottlenecks that have been raising costs begun to ease include worker wages. Many will be perturbed that I have gone right after the stat that is widely viewed as never moderating – wages. Well if we add more workers as last month’s Worker Participation Rate is finally growing again. Why am I going in this direction? Well, next Friday we will see March Employment. I want to see strong growth in jobs, but also I want to see a higher unemployment percentage. Why would I want to see more people out of work? That’s not it at all, the unemployment rate is a measure of people looking for work. Since we saw a higher participation rate for the month before, if more people are looking for work and we have a really strong employment number that will mean that we are continuing to add more workers. More workers mean lower wage inflation. Technology is another very strong moderator of wage growth.
Let’s surface economic reports next week that could perturb the market
Well as I just mentioned April 1 will be March Employment numbers, which could move the market on Friday. What else could happen next week that could move the market?. Thursday we see the PCE Deflation indicators, I am not going into what PCE deflator is, just know that this is the Fed’s best measure of price rises. Obviously, if pops higher than expected the 10 years could get solidly above 2.5%. Recently stocks haven’t been too upset by the rise so far but if the 10-year moves much further I wonder if the market will react. Back to the point, we could have another 3 days to generate some cash. I suggested having a goal of 10% to 15% cash going into the next Fed meetings. I am also following my own advice, I have put aside 7% cash so far, and I expect to grow this to 15% by the April Fed meeting. I am also looking for the VIX to break under 20, which it almost did last week. When it does I want to get long on the VIX as a hedge. Also, after observing how the market is behaving, oil and gas stocks seem to be the opposite of how tech stocks trade so that is another reason to favor energy. I will also hedge against the Nasdaq 100 going into the Fed. I am going to count my hedges as part of my “Cash” because my cash is part of my hedging strategy. I went through this detail to really set my mindset to prepare for the volatility now that we know the next Fed meeting is live. If everyone knows that the Fed is going to raise, why would it sell-off? Well, for one thing, Powell repeated that we could have a 0.50% raise instead of 0.25%. That doesn’t 100% guarantee that he will. As long as that is a mystery the stock market could sell off into the meeting. Also, the way how jittery the market a number in the weekly economic calendar, just like the April 1 Employment numbers could influence the direction. So let’s keep some cash and do some hedging.
Ok, now what about this wild notion that the energy space needs to be recategorized as a growth sector.
First of all, I didn’t think of this on my own. I believe Bloomberg had someone on who put this forward a few days ago. Don’t send the guys in hospital whites and butterfly nets for me just yet. I am just looking at this energy sector in such a way that would justify a different investment strategy. In order to make this comparison, we need to define what comprises a growth sector and growth stock. Usually, the first thing to look for is a non-generic commodity. That would instantly disqualify Energy stocks, yet some chips are commodities, namely memory chips, yet they are still considered a growth sector. Also, there are a number of verticals in the chip sector where you could substitute one chip instead of another. I actually have more to say about Micron (MU) the memory chip company later on in this article. In any case, dunking on the chip sector does not make the energy stocks a growth sector, so here we go. The first thing about growth is that in a sector that is growing, companies in this sector have pricing power, and they are experiencing growth in revenue, profits and even with increasing output, the prices are staying elevated. That is exactly what is happening with the small and medium-sized EnP companies. The huge market cap names like Chevron (CVX) are less of a fit for the growth definition. The question is why was oil exploration underinvested in, it is this strange confluence of policy errors, misplaced priorities, and a lack of practical thinking about how to transition to non-Co2 producing energy sources. I won’t get into the whole Russia issue. We would still have elevated prices even with Russia pumping as much as it can. OPEC nations don’t have the incremental capacity, except Iran and they are not able to raise output. It is only the USA, with its leading technology for fracking, that can respond quickly. Many EnP companies have DUCs – Drilled but UnCompleted wells. Many of these companies in order to hold onto land leases must drill on that land. Also, many of these DUCs were drilled the last time WTI Oil was at 100. Likely many of them weren’t profitable when oil was 30 to 40, even 55. Now that we are likely to have oil elevated above $80-90 for the next several years, anyone that has the rights to those DUCs can just complete the wells and start pumping crude. To me, that is a growth business. How high do I think Oil could go? I hope it doesn’t get much higher than 130 because that will likely destroy consumption. Let me tie this up for you into a neat package. There was a reason why I brought up the Chip sector. That is because there are some striking parallels between Chips and the Oil sector. Chips also had underinvestment, in this case, the shortfall in ships was the cancellation for chip orders by the Car companies. Oil too fell hard during the pandemic, and then came back just as hard in the last 6 to 8 months ago as well. We saw the prices go steadily higher as production could not keep up with consumption. Also, the US government – both Republican and Democrat – just sat back and let China and other Asian countries take market share from the US and Europe. Again, I can say that the current issue with Chips was also impacted by poor government policy. Now there are going to be billions invested by the government and industry to move foundries away from China and Taiwan. That can’t be said for the oil patch, but they’re all that is really necessary for the government to declare an end to waging war with the oil sector, and also for the legislature to push back on choke-off financing and investment of the industry. Right now that is not happening so at least we can go ahead and buy Oil stocks on the dips without fear of the bottom falling out on the WTI oil price. I will share some more oil stocks that I am invested in and also one that I am looking at hard. So let’s look at what I have on my buy list, and what I invested in this past week.
My Trades and what is on my watch list
Let’s start with the Chip sector since it may appear that I was throwing shade on the chip sector. The demand for Chips is acute, and will likely stay that way for a number of years. Just because Intel (INTC), Taiwan Semi (TSM), and GLOBALFOUNDRIES (GFS) are all announcing new foundries, doesn’t mean they will come online this year or even 2023 or 2024. On top of that demand is still growing, everything that we depend on is requiring more and more Chips to enable more functionality. That said, I believe that capacity is starting to catch up, and the Car Companies are likely to benefit first. So we should see more cars manufactured toward the end of this year but even more in 2023.
Micron I think Chips are a good value if you use the volatility to your advantage. Take Micron – MU. It’s reporting this week, and I believe they will guide higher. In any case, it is still 50/50 whether they get destroyed by sellers, most likely short sellers. I have MU in a Call Spread and I am thinking of a long straddle, to capture the sell-off and then sit with the eventual rise back. MU has its foundries, and they have probably spent the last 18 months adding capacity, for what will be some fat years ahead. I see something similar for TSM, though TSM has already been under pressure for its announced investments in new foundries, and also the looming war with China. I think that the lesson the CCP will learn from Putin’s War is that they should wait another 50 years before they try something. So I would say for a long-term horizon, if I had TSM I would hang on to TSM. If TSM sells off and gets under 100, I would buy with both fists. Regrettably the longer it stays under 110 the more likely it breaks under. Right now I don’t have any position in TSM.
NVIDIA (NVDA) I think NVDA has plenty of upsides since its ATH is 350 and currently trading at 275. NVDA is at the center of every hot technology, they also are providing software for their chips and systems to make it easier to set up AI and Machine Learning applications. From the business side, NVDA software locks in users and grows its network. I have call spreads in NVDA.
Advanced Micro Devices (AMD) is often mentioned in the same breath as NVDA. They also have similar chips that perform both image processing and can power the data center. They are direct competitors but there is plenty of business for both.
I am likely to add MU in shares if it does sell-off after earnings.
I have been investigating the Oil and Gas names for the last few weeks.
Some of my long-term readers will recall that I have shared that the EnP (exploration and production) sector has failed me. In fact, I had to buy and sell oil names a few times because I was so skittish in investing that the moment I saw green I would sell. This is in my trading account. I did buy and hold a small number of shares from a half dozen oil companies and realized that several were up 50% in several months. This gave me pause, and about 2 weeks ago I started rebuilding. I see energy as almost a hedge on my tech names since anytime tech sells off the oil names go in the opposite direction. So let me start with a small-cap oil name that I don’t own yet but will buy tomorrow. The name is SandRidge Energy (SD), this company has come out of bankruptcy and has restructured, also made a few acquisitions, and also sold some acreage. Now they are sitting with $4.5 per share in cash and it is generating $1 per quarter in profits right now. They are as I said a small cap at $355M, yet as small as they are they managed to attract the likes of Carl Icahn, who owns 13%. Icahn knows the oil patch and he knows how to get his companies acquired. They either because it was once in bankruptcy or because of restructuring the PE ratio is a mere 5.5 times. I looked around and that is a very low valuation. I believe the rest of my stocks are probably well known by you since I have mentioned them a few times already. Coterra (CTRA), Apache (APA), Devon Energy (DVN), Kosmos (KOS), Earthstone (ESTE), Tellurian (TELL). I am looking for other special situations like SD.
StoneCo (STNE) is an eCommerce platform for Latin America. Warren Buffett is an investor, and they have great growth projections. I am still buying.
I also went long in Zillow (ZG), I believe that the economic cycle cannot overpower demographics. As the mortgage rates rise, and housing values start to fall it will paradoxically draw more housing for sale, as those who were on the fence will sell. Also, employment will stay high, and that will bring up more buyers as the prices stabilize. Another data item is the forbearance on mortgages will come to an end that should bring several million houses to the market.
I believe that PayPal (PYPL), DocuSign (DOCU), and Zoom (ZM) have finally bottomed. I have been buying these names with confidence as well.
I find splits and spinouts very attractive.
I took a small position in AT&T (T), and am looking to add to it. AT&T Inc. declared a stock dividend in connection to the planned WarnerMedia merger with Discovery, Inc. (DISCA). On the closing date of the transaction, which AT&T said it expects in April, AT&T shareholders will receive an estimated 0.24 share of stock in Warner Bros. Discovery, Inc. for each share of AT&T. The record date for the stock dividend, which AT&T said would be tax-free, is currently April 5. I think that HBO/Discovery will be very competitive with Disney and even Netflix. T has given us the option to take cash instead of .24% of HBO/DISCA. I like having that option.
I sold Mountain Pass (MP) not because I found something that made them less valuable. I just thought the stock hit a high level and with the volatility, we are experiencing I think I could buy it back lower. I trimmed my Airbnb (ABNB) only because I think it hit upward resistance as well, and if it falls back I will buy it back.
In Summary, like I introduced last week, from before the beginning of 2022 we have seen quite a bit of volatility. I think we can now use that volatility to our advantage. Today I reminded my readers to keep a cash management discipline. That means that by concentrating on creating cash you remove the emotion from consciously selling a stock. You may have bought stock last year and now have an emotional attachment to. I am just asking you to trim a few shares from each position. That isn’t the same as forcing yourself to sell everything. Also, I put forward the idea that Oil and Gas could be a growth sector for the next few years, that gives me that much more confidence and get more aggressive in getting long the oils.
Please note: You should not take the above text as investment advice. I am not a broker, a registered investment advisor, or a certified money manager and I cannot give financial advice. What I am doing is chronicling my thought process, and I hope you gain from it. Always do your own research and understand what you are buying, what your risk is, and be sure before you make a purchase. Also, only trade what you can afford to lose.
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