“Gilty” as Charged – OWTW

A lifetime ago now — actually, it was only back in January of this year — the 30-year Gilts traded at 80bps. A few weeks ago that hit 5% and now trades at 4%.

And if you’re a visual learner, here’s the bond chart for you:

As we commented in the most recent issue of Insider newsletter:

Pension funds hold about two thirds of their portfolios in this garbage so this is a huge problem. But it gets better… or worse. You see, because pension funds were getting such a shitty return from their Gilts, they pledged them as collateral so that they could go out and buy something that would provide a return (risky unprofitable “growth” mostly).

This is why for over three years now we’ve been warning about the entire risk parity trade. Now it’s all blowing up. We were early to see the danger but that sure beats the hell out of being late now, doesn’t it?

So anyway, back to the good ol’ Gilts, which have been pledged as collateral by those pinstripe suits at billion pound pension funds. Well, their models never accounted for both bonds and equities to decline AT THE SAME TIME. And certainly not at such speed. Now they are likely being forced to meet margin calls on that collateral that just vomited on the carpet. And so they have to sell assets (equities) to meet those calls. Any profits made for the year have long been vaporised, and now it’s a matter all about survival.

This time around, bonds are THE true bubble.

When folks finally realize this there is only one place with deep enough markets to take the capital flows and that is equities — but they’re not all made the same (hint: value, not growth… and we’ll touch on that in a second).

📉  LIKE THE DOT-COM BUBBLE…

A year or so ago we said that we feel like the next bear market will play out like the “dot-com” bear market of the early 2000’s, not the 2008 crash.

In both instances, the S&P 500 went down about 50%. However, in the five years leading up to the peak of the TMT bubble in 2000, value stocks (virtually any company that manufactured physical stuff) were discarded by the investment community. They actually went down when the Nasdaq went onto triple (near enough).

Then the crack happened. If you had the wisdom to buy a basket of small cap value stocks come the end of the bear market in March 2003, you had at worst broken even, whereas the Nasdaq was down some 75%. One year later you were up about 50% and the Nasdaq was still down 60%. Here is the DJ US Small Cap Value Index against the Nasdaq and indexed to 0 in September 2000:

We have something similar happening today. If we take our own portfolio as a yardstick, we’re up about 8% YTD. Meanwhile, the Nasdaq is down some 33%.

Of course, it would be great to be up 25%, but the year isn’t out yet. And being up when the Nasdaq is -30% and S&P 500 -25% isn’t something to hang our heads in shame.

Considering how shocking the performance of bonds has been in conjunction with equities this year, perhaps we should be holding our heads up high.

There have been few places to hide in this bear market, but “somehow” we were able to find those little enclaves of true value — and we’ll have more on that in a moment.

🤷  ALL THINGS TRANSITORY…

Feels like a lifetime ago, when — back in February 2020 — we started warning that lockdowns will bring about inflation and shortages. Fast forward to today, and this pesky stuff is now part of our daily lives. We recently set up a dedicated inflation channel in our Insider private forum, where members can share their own experiences with all things “transitory”.

First, an interesting “inflationary” contribution from Insider member, Anissa:

Something I purchased in 2020 vs price today.

Another Insider member, Vitalie, is back with an energy update:

The energy situation in Moldova keeps worsening. The main electric utility has warned about a 284 MWh deficit in the power grid, following Ukraine’s decision to stop all energy exports last week. There is also a shortage of Russian gas (which the Russians are blaming on the Ukrainian gas transit company), which is the main source of electricity generation, and Romanian imports can’t cover the deficit of either gas or electricity. So the utility is warning about potential rolling blackouts.

And a follow up with an interesting glimpse into post-Soviet era:

A local news outlet has asked their staff if they remember how they dealt with the blackouts during the 90s (it was a common thing back then over here). Here are three accounts (translated from Russian), Europeans should take heed, unfortunately.

I remember doing my homework by candlelight when I was in elementary school, and there was a brick on the kitchen gas stove to warm the air better. Olga Gnatkova, Deputy Chief Editor of NewsMaker———

We made a lamp with a bandage and oil. There was also a kerosene stove, which still lies somewhere in the attic. Natalia Titova, NewsMaker social media editor———

My grandparents and I played cards under a kerosene lamp. Grandmother always cheated, and grandfather sang Moldovan songs to us. We have two kerosene lamps, one of them is a wedding present for my great-grandmother and great-grandfather. They took it to Siberia, returned with it, we survived the 90s with it, and, apparently, we will have to use it again. Alina Mikhalkina, correspondent for NewsMaker

Twenty years later, we’re going back to kerosene lamps again.

🤔  ON PUSHING YOUR LUCK…

On the topic of uncovering value…

We figured it would be worth sharing a recent question from an Insider member and our thoughts on the matter:

This may or may not be a general question – but I’ve held [stock name redacted] since recommended in the Weekly and watched it go through a 10+ multiple back to 4+ right now. I’m aware of you guys mentioning in the monthly calls that the problem is often getting out too soon, but I’m not sure that applies to this stock at least as it was speculative and a discovery. Is this a case of “should have sold” because of the general trend of any discovery thru production story (can’t find the chart right now) which says that discovery is generally a bit of a feeding frenzy with speculators who then get disinterested after a few weeks of no further news? I’m just trying to take a lesson from this so as to apply it intelligently next time – Am I correct or is it more nuanced than that?

There is no right or wrong answer. But in our view, it is so easy to risk 0.5% of one’s capital on a trade. If the trade goes against you by 50%, who cares? Even if it goes to zero, it won’t affect your portfolio (perhaps your ego).

But what if the stock goes up 5x or 10x? How far should you “push your luck?” Will you be gutted to sell at 5x up, only to see the trade to go 10x? Or will you be gutted to see the trade go up 5x and then fall back to where you started a few months later? These are only questions that you can answer.

The only advice we can offer is: don’t be too quick to take profits or close the trade.

Want an example?

Okay… What if you had the “wisdom” to latch onto Sigma Lithium way back in 2019? And what if you did buy it and then sold it last year, locking in a 500% gain?

Well, now Sigma is up almost 2,200%.

Note that this isn’t a recommendation by any means. But merely an example to illustrate our point.

The longer we are in this game the more “right and “wrong” become a blur or at least various shades of grey.

🤣 WEEK’S HUMOUR

Told ya those kerosene lamps would come handy again.

Have a great weekend!

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