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Capital 19 Catch-Up

Weekly Index Movement

S&P500-3.4%
Nasdaq-6.0%
Aussie All Ords+1.7%

After a couple of weeks of gains, the market fell last week and it was Fed Chair Powell’s fault.

Before we explain how he destroyed billions in value in 15 minutes, we will make the quick comment that 85% of companies have now reported earnings and, on average, they have been very much in line with the last 3 quarters. No growth, but no decline either. Despite a significant rise in rates, corporate America is still producing big profits.

The reason we start each week by looking at the 3 different indices is to decipher the underlying cause of movements. It is very obvious this week.

The Nasdaq (interest rate sensitive) fell the most, the S&P second and Australia actually rose.

In Aus, our RBA is taking a wait-and-see approach to interest rates and only gave us 25Bps while I was struggling to pick any winners on Melbourne Cup day.

In contrast, the US Fed slapped another 75bps rise which affected the Nasdaq stocks the most, but it was his comments that really got sellers hitting the button faster than I was having to fund my betting app.

In his prepared speech he said:

“the Committee will take into account the cumulative tightening of monetary policy [and] the lags with which monetary policy affects economic activity and inflation”

In other words, the FOMC will be willing to slow the pace of tightening because of the sum total of previous hikes and their lags are still preparing to hit the economy. Stock and bond prices soared in response as markets priced that language to mean a higher likelihood of 50 bps instead of 75 bps in December

Then, 38 minutes and 45 seconds into his press conference, AP reporter Chris Rugaber asked:

“It looks like stock and bond markets are reacting positively to your announcement so far. Is that something you wanted to see? Is that a problem or what, how that might affect your future policy to see this positive reaction?”

Powell’s answer was to reiterate (to make it clear) two comments

“the peak level of rates that we estimated in September are actually going to be higher”

“it’s premature to discuss pausing…that’s not something we’re thinking about.”

Clearly his intention was for markets to take his comments negatively.

Fed speak is not a prediction of the future. It is a tool they use to affect the present. You can see what they want to happen. They want stock prices down so companies change their hiring policies which will increase unemployment and reduce wages. That in turn will help lower inflation.

After 6 interest rate rises and rates now at 3.75%, there has been little impact on inflation.

It does make me question just how effective a Reserve Bank is. Businesses and economies have a natural cycle. As profits grow, businesses employ more people to deal with the increased sales. That gives more people disposable income which they spend and that, in turn, enables businesses to raise prices and employ more people.

But at some point, a critical mass is reached and business changes their mind and starts to reduce their employee count to protect profits. You know where that goes.

Powell has been wanting corporate America to stop hiring and raising wages so he does not need to continue to pump interest rates.

But the unemployment numbers on Friday show they are not listening to him.

The US added another 261,000 jobs last month and wages increased 0.4% month-on-month.

Exactly what he did not want.

But, there are signs that corporate America might be starting to get the message.

Lyft and Stripe announced cuts to their workforces. Amazon said it’s pausing hiring for corporate and retail jobs. Musk is making sweeping redundancies and major layoffs were announced at Delivery Hero (DELHY), Lyft (LYFT), and OpenDoor (OPEN) this week.

A rumour is also hitting the wires that Facebook (META) will be cutting some of their 87,000 strong workforce.

This is exactly what we need if the Fed is to engineer a soft-landing.

The Fed does not want to cause a recession. Ideally they want the economy to gradually slow to managable growth levels. It is going to be hard for them to achieve this, but not impossible.

There seems to be a mentality out there that something is going to break. That a recession is unavoidable. But current stock prices do reflect this, and I think it is premature to think a disaster or significantly lower stock prices are on the cards.

Likewise, it would be premature to say now is the time to load up.

The strategy remains to stay in value for now and wait and see what happens. After all, we are about to enter a very positive seasonal period for stocks.

Talking of value, we discuss a deep value play below that seems too good to ignore.

Seasonals

The six-month period of November-April has historically been much more positive than the six-month period of May-October. Hence the old market adage sell in May and go away.

Since 1988 the difference has been stark. Had you owned the S&P500 index in only the November-April period your gain would be +958%. Had you owned in only May-October you’d be up just 196%.

If you’ve read all the way here, I’m going to share with you my very special seasonal timing system.

The 4-year, US presidential cycle becomes very interesting right about now.

Similar to taking a 6-month window each year, if you take the period of November in year 2 through to April in year 4……..there has never been a losing period. That’s right. This period has been positive for stocks for every single president they have had.

If history is a reliable indicator, then perhaps here is a great time to load up after all.

Next Week

Mid term elections will be held on Tuesday. Predictions are Republicans will win back the house and maybe even the Senate. Markets would like one of the two to pass to Republican hands as it would stop any major new bills being passed.

I would like it too to stop Biden trying to hit my oil companies with an extra tax.

Then we will get CPI inflation on Thursday. Expectations are for it to stay above 8% and it would be a surprise if it comes in lower. But not so surprising if it comes in higher.

CatchUp Stock Tips

Buy DateBuy PriceCurrent PriceGain / LossStop Loss
TXN1 Aug 22177.94162.65-8.6%145.00
ASC8 Aug 228.5214.03+64.7%6.40
CDNS15 Aug 22188.83142.41-24.6%130.00
UNH22 Aug 22541.39538.17-0.6%450.00
GMS5 Sep 226.505.60-13.8%4.00
AAPL12 Sep 22159.59138.38-13.3%130.00
CRK19 Sep 2218.2218.43+1.2%12.00
OXY24 Oct70.8173.27+3.5%58.00

Ardmore Shipping – a Deep Value Buy.

We recommended Ardmore Shipping on August 8th because we realised Europe would need to buy oil and gas from the US when the sanction restrictions kicked in.

It has done well for us and is now up +65% from that date.

Ardmore released their quarterly profits last week and it was a ripper. Here are the highlights.

To get oil and gas from the US to Europe you need to load it onto special tanker ships, and there aren’t that many out there. It’s not like you can pop down to your local CostCo and pick up a nice tanker when you need it.

Ardmore owns a young fleet (average age is 8.4yrs) and they rent them out on day rates. Those day rates went up 53% in the last 3 months. Seeing as costs are fairly stable, the extra revenue drops straight to the bottom line.

As you can imagine, the idea of buying Russian gas again seems a long way off for Europe and the time it takes to build new tankers puts that out of the question.

Customers are outbidding each other to get these tankers to bring the oil and gas to them.

You can see where they are travelling here

From a valuation perspective, the vessels and equipment they own are worth $560million. The stock has a market cap of $568 million.

Buying this stock is like buying the tankers and getting the business and profits for free.

Tankers get booked in advance and often on long-term arrangements. That means Ardmore has a fairly good idea of income for the next several quarters.

If we assume revenue will be the same for the next 3 quarters as it was last quarter ($1.59) we come to a yearly earnings figure of $6.36. With the stock trading at $14 that puts it on a PE of 2.2.

It doesn’t get much more deep value than that.

Given this increase in profits and future bookings, Ardmore has announced they plan to commence a quarterly dividend payment. They estimate this to be $0.50 per quarter, which gives an annual yield of close to 15%.

In summary, you are looking at a company you can buy on a PE of 2.2, where you are only paying for the assets of the company and receiving a 15% annual yield.

It does not get much better than this.

Warning

Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account.

Disclaimer: Capital 19 Pty Ltd ABN 17 124 264 366 AFSL 441891 (‘Capital 19’) believes the information contained is reliable, however, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. This communication is for general information only and was prepared for multiple distributions and does not take account of the specific investment objectives of individual recipients and it may not be appropriate in all circumstances. Persons relying on this information should do so considering their specific investment objectives and financial situations. Any person considering action based on this communication must seek individual advice relevant to their circumstances and investment objectives. Subject to any liability which cannot be excluded under the relevant laws. Any opinions or forecasts reflect the judgment and assumptions of Capital 19 and its representatives based on information at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. The investment manager certifies that all the views expressed in this document accurately reflect their views about the companies and securities referred to in this document and that their remuneration is not directly or indirectly related to the views. Capital 19, its directors, representatives, employees or related parties may have an interest in any of the companies and securities in this document and may earn revenue from the sale or purchase of any financial product referred to in this document or any advice. Past performance is not a reliable indicator of future performance. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this document is prohibited without obtaining prior written permission from Capital 19.