Why Inflation Will Kill the Ponzi Sector (and Catalyze the Long-Awaited Sector Rotation from Growth to Value)...
A thread.
This topic was a black box to me a few weeks ago. I will try to crystallize what (I think) I now understand.
Disclaimer: Nothing in this thread is original. It brings together pieces from random tweets and discussions I’ve had recently, most notably with @hkuppy, @pineconemacro, @greekfire23, and @contrarian8888.
1- Inflation causes long term rates to rise. This is illustrated by the Fisher equation, which states that the risk-free long term bond yield (i) equals the real rate (r) plus inflation expectations (π), i = r + π.
1A- It also makes sense intuitively: inflation causes long term rates to rise because lenders require compensation for the loss in purchasing power of the money they lend out that will occur over the duration of the loan.
2- Growth stocks have become long duration assets, so when long term rates (the discount mechanism for valuation) rise, growth stocks get smacked. Since a larger bulk of their PV comes from expected growth in future cash flows, growth stocks are more sensitive to a rise in rates.
2A- Put bluntly, the Ponzi math used to arrive at current colossal valuations for growth stocks simply doesn’t work when you’re discounting back at, say, 5% instead of less than 1%.
2B- Conversely, value stocks are short duration assets with low price to book and are thus less impacted when rates rise. Old economy assets with lots of sunk capital & low incremental costs will get some love since any increase in prices will mostly serve to increase their ROA.
3- Now for some charts...
We can already see that QQQ/IWN has become tightly correlated with long term bonds $TLT:
4- And let’s not forget the blow-off top in $QQQ/$IWN on the 20y chart, which has taken some time to form:
4A- Let’s zoom in and look at the last 12 months of that same chart. The break of this trend-line might be key:
5- Also important, the growth/value spread has been whipsawing wildly. Notice the last two times we’ve seen this type of factor volatility, in 2000 & 2008:
6- We’re also currently witnessing the longest period of value underperformance relative to growth. And this decade’s performance is the worst in history for value stocks:
7- In sum, people have been calling for this rotation for years... Though it hasn’t happened yet, things can change very quickly. If the spread is pushed hard enough, it could snap a few thousand bps over a short time period and unwind violently, like it did in Q2’2000.
8- Buckle up. Listen to what the market is saying beneath the surface. Forewarned is forearmed. Let’s have some fun.
I missed a few others who - directly or indirectly via podcasts, tweets, articles, etc. - helped add clarity to my thinking on this subject. HT @profplum99, @trader_ferg, @ElonBachman, @Convertbond, @RaoulGMI, and others. Feedback always welcome and appreciated.
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This is an impressively poor take on $HNRG by @dyer440. Highlighting just to say that if this is the only bear case on Hallador, I should probably buy a lot more shares...
1- There’s very little substance in the thread, so not much to push back on. But note that he talks about weak Q1 FCF without having read the 10Q: it states that the hit to cashflow was a result of ~180k tons worth of coal shipment delays that will be deferred till later in 2021:
2- He then seems to imply that $HNRG will have a tough time in 2022. But in the very same 10Q as above they note explicitly that their sales position through 2022 is solid, with ~5M tons locked-in at just shy of $40 apiece:
Let’s talk about the most hated commodity and sector in the investment world today: coal.
For those brave enough to venture into this bleak and lifeless corner of the market, I’ll lay out the broad thesis in this thread.👇
1- Coal has fallen out of favour in recent years for two main reasons:
First, coal is the “dirtiest” fossil fuel; coal-fired plants release more greenhouse gas per energy unit than any other electricity source. This has placed coal squarely in the crosshairs of the ESG movement.
1A- Second reason is the rise of natgas. Thanks to the U.S. shale boom, associated gas production has exploded in the last decade.
This has contributed to collapsing natgas prices, which in turn allowed natgas to take more market share from coal and compete with it economically:
What are the implications of the twin collapse in $ARKK & $Crypto for broader markets?
A thread.👇
1- At the height of the rampant speculation in the Dot Com Bubble, many young investors thought they’d enjoy early retirement thanks to the easy fortunes they made on Internet stocks.
2- But as the bubble popped, so too did the speculative inclination of the average investor. The collapse essentially put a lid on the risk-seeking behavior that was so widespread in the years leading up to the crash.
The Shale Revolution enabled the US to dramatically increase its production of oil & gas in the last decade.
You can see it in this chart as the massive spike in tight oil production in ~2011.
But the revolution is over, which means opportunity for energy investors.
A thread.
1- The US has become the top oil-producing country in the world, accounting for almost 75% of the increase in global oil production over the last decade or so.
Oil & gas prices and related equities have suffered as this new production source flooded the market with new supply.
2- But that’s all coming to an end. As @BisonInterests noted, “There are strong cyclical arguments for this oil recovery having substantial upside, driven by low capital investment.”
Low prices have discouraged new drilling, hence rig count being near historic lows: