Category Archives: Investing

Geely Automobile Holdings Limited (0175.HK): Chinese Automotive Play Could Benefit From Volvo Knowledge Spillovers

Through the Zhejiang Geely Holding Group the company has a direct link to the innovative plans within Volvo. Technologies developed and researched in Sweden could spillover to the Geely group which could further benefit the already successful Chinese companies. Last year the Volvo Group announced it would create a joint-venture with Swedish battery company Northvolt to develop and produce more sustainable batteries. Innovations developed within this collaborations could benefit the Geely holding directly, while not having to directly invest in the joint-venture. Even though the Geely holding does not enjoy any boost from the announced stock market entry of Volvo subsidiary Polestar, success technologies developed using this new funding are potentially at grabs for the Geely Holding.

Figure 1 – Overview of Geely Holding

Diversified Automotive Play

Despite announced profit cuts due to the chip shortage and announced lockdowns in Shanghai, the Geely Holding still benefits from revenue growth despite a profit shrinkage of 10% in 2021. The development of battery swapping company Livan is also an exciting development as the EV market enters a new stage of innovation. Battery swapping offers a key advantage over current recharging stations, namely quicker turnarounds, as well as allowing consumers to buy an EV without a battery at a lower cost and subsequently subscribe to a battery leasing programme. This creative business model could prove successful for Geely’s focus on middle income consumers. With developments in the field of autonomous driving, boosted income due to the profitable auto financing venture Genius AFC. Combined with growing market share in the high-end market with its European brand Lynk&Co and Chinese premium car brand Zeekr, the Geely Holding looks well-diversified within the automotive market.

High Exposure To Chinese Market Major Risk

Figure 2 – Sales and Market Share

However, the Chinese car manufacturer is mainly concentrated in China and as its market share within China does not grow tremendously, there is some market risk. While China sticks to its zero-covid policy, new supply chain issues could emerge due to the major challenge Omicron poses to this policy stance. As the chip shortage remains in-tact and other supply chains get affected by new stringent measure by the Chinese government it remains ambiguous whether Geely Automobile Holdings Limited (0175.HK) stock will find its reflection point after already dropping over 66% percent in the last few months. With a P/E ratio of 12.07 and expected sales growth of 24% the stock looks cheap, especially when compared to its sister company Volvo AB with a P/E of around 20. However, Volvo Group AB could enjoy large gains from the IPO of its daughter company Polestar that has its assembly line in Chengdu, China. Polestar will do this through a reverse merger with a special purpose acquisition company (SPAC) called Gores Guggenheim (NASDAQ: GGPI) and is valued at 20 billion dollars. Whether this step will be lucrative remains to be seen as rising interest rates pressure companies that focus mainly on future growth and need additional funding throughout the years.

The Chinese car manufacturer Geely seems to perform steadily despite supply chain issues and high competition within the Chinese market. However, large growth should not be expected on the short run but the Geely Holding proves that it performs consistently well with its profitable and growing business. It continuously develops and seems more dynamic towards changes which makes it more competitive than its European counterparts. Despite Chinese drawbacks due to (geo) political and pandemic related issues, the Geely Holding is certainly an interesting stock within well diversified portfolios.

Disclaimer: The writer of this article holds Geely Automobile Holdings Limited (0175.HK) stock, this article should not be interpreted as investment advice or anything like that.

The Endgame Is Near: The Banking Crisis Of The 1980s May Return And There Is No Real Solution

Taking a quick look back at the situation in the 1980s learns us that the current situation may just well be quite similar. During the 1980s inflation reached double digit figures causing high inflation because of strong oil prices. These were partly caused by Soviet intervention in Afghanistan and the impact of the Iranian revolution, which frightened investors and disrupted energy supplies. In the same period gold hits record high at $850 per ounce, just nine years after the United States took the dollar off the gold standard.

In 1973 President Nixon had to devalue the dollar to gold, making an ounce of gold worth $42.22 dollar instead of the previous $35 dollar. This resulted in a selloff in dollars for gold by speculators fearing even more depreciation. Later in 1973 Nixon decoupled the dollar from gold completely, which made the price of bullion soar to $120 per ounce, ending the 100-year history of the gold standard. The following years inflation reached the double digits causing a huge crisis as wages were frozen. The overall value of the dollar has dropped 90 percent since the 1950s as more and more money was printed to overcome trade deficits and refinance long-term Treasuries used to finance wars and crises. This trend has continued following the financial crisis of 2008 when central banks used a new way of financing their debt by buying up Treasuries using digitally printed money. Following the 2020 pandemic purchasing programmes the Federal Reserve’s balance sheet is at an all-time high of over 8 trillion dollars.

No alternative text description for this image
Figure 1 – Balance sheet Federal Reserve

With Russia standing at the borders of Ukraine as geopolitical tensions rise, oil prices creep higher and are ready to break to new highs surpassing the psychological level of $100 dollars a barrel. And as investments in oil and gas exploration projects are declining, while demand keeps on rising on red-hot economic recovery, this squeeze could last for a while. If the economy will see a similar pattern as in the 1970s and 1980s remains to be seen, however it is almost certain that developments will occur at much faster pace as markets are way more interconnected than forty years ago.

Cutting Inflation Or Financial Liquidity: Not An Easy Choice

As previously mentioned , prior the the pandemic the Federal Reserve already faced problems when they started with their quantitative tapering programmes slowly cutting the amount of assets on their balance sheet. This caused a financial crush in the interbank market that shocked the Federal Reserve. As fear started to mount, the Federal Reserve had to cut interest rates three times following their unsuccessful quantitative tapering programme. This time the Federal Reserve is not only expected to start quantitative tapering, but is facing inflationary pressure if they continue their current regime. Moreover, this time interest rates have to rise at a much faster pace to dampen inflation, but this could come at a cost, many SMEs are much more indebted due to the corona lockdowns. Facing higher interest rates to refinance their debt, this will hurt businesses hard. On top of that is the surge of non-viable zombie companies that have benefited and survived due to the ultra-low interest rate environment and now will face the harsh financial reality if interest rates indeed will be hiked as much as expected. As the Federal Reserve keeps postponing this decision inflation keeps to surge and consumers face the consequences, especially low income groups.

This year will be a pivotal year for markets as volatility on markets picks up. Central banks are under increased pressure by civilians facing lower levels of purchasing power due to years of easy monetary policy. Their next step is vital to prevent a major financial crisis, but the current situation is not an easy one as picking the right balance between inflation and interest rates, e.g. purchasing power or employment. Interestingly, the European Central Bank is much more dovish than the Federal Reserve as they increasingly keep an eye on a third goal as well: the green energy transition. High carbon emission prices, along with higher oil, gas and coal prices is not necessarily a bad thing in the light of this vision. However, letting inflation rise to uncontrollable levels will come at a much higher cost for society. An underestimation of the danger of money depreciation could undermine the whole economy and hit back hard.

Disclaimer: The Golden Investor is not a fortune-teller, be sure to make the right decisions in accordance to your own financial situation, this is not investment advise or anything like that.

Leading Edge Materials (STO:LEMSE): Rare-Earth Gamble May Prove Lucrative Under Green EU Pressure

Two years after The Golden Investor’s first article on rare-earth opportunities, Lynas Rare Earths has risen over 500% as only big viable rare-earth miner outside of China. As prices for rare-earths like Neodymium have gone through the roof, profits have multiplied in this very concentrated market. Under great geopolitical and environmental pressure the EU is looking for alternative ways to secure the necessary amounts of critical raw materials needed for its ambitious green transition. However, as rare-earth mining is relatively unenvironmentally friendly rare-earth miners have been pushed out of the West towards China which now holds key market shares in the raw material market.

Figure 1 – Leading Edge Materials expects major growth in the CRM market

For small-cap miner Leading Edge Materials does have a differentiated asset portfolio of mines. With their full ownership over the Woxna Graphite mine and the Norra Karr rare earth deposit in Sweden, the company has a great foothold in Europe. While the tender for the exclusive exploration license in the Bihor Sud area in Romania that would add nickel and cobalt to the strategic raw material portfolio, could complete the extensive grip the company has in Europe.

China’s Power Is Major Supply Chain Risk

These critical raw materials the mainly Swedish board of Leading Edge Materials tries to attain are essential elements for batteries and magnets used in growing industries that the EU has appointed as important. The green and digital agenda of the EU cannot be completed without high dependency on China that still holds a firm grip over the critical raw materials market. The latest merger of the three big rare earth miners Minmetals Rare Earth, Chinalco Rare Earth & Metals Co and China Southern Rare Earth Group Co in China could drive prices in the already hot raw material market up even more.

Figure 2 – Geopolitical Risk in the CRM market is high

Licensing Risks Are Not Over Yet

On the long run a demand versus supply squeeze can uphold current elevated prices. However, as Norra Karr is located in a Natura 2000 region, Leading Edge is facing some counter-pressure as its initial mining license was not granted as it did not comply with the Natura 2000 regulations. However, since then Leading Edge Materials has been supported by the European Union as legislators realize extracting materials at Norra Karr could make the European rare-earth supply not only more stable but also more sustainable on the long run. Therefore, Leading Edge Materials could soon be finally set free to start their environmentally friendly operations at site. Important is to note that Leading Edge Materials uses cutting-edge technologies that cut emissions down 90% in the mining and processing of materials, in itself this company could give a helping hand to the EU to reach its green goals and supply chain targets.

Speculating on approvals could prove to be a lucrative gamble for investors looking to diversify their portfolio with high-risk green investments. However, this comes at a risk that these approvals will not occur and Leading Edge Materials (LEMSE:STO) will only be able to operate at their Woxna Graphite flake graphite mine that has the lowest operating margin in normal circumstances as competition is higher in that market. For now, Leading Edge Materials looks like a sustainable option in the mining sector.

Disclaimer: The writer of this article holds IQE (STO:LEMSE) stock, this article should not be interpreted as investment advice or anything like that.

Leverage In Finance : A Two-Edged Sword, How Does It Materialize?

In finance, in the broadest sense of the term leverage can refer to several situations : If we talk about corporate finance, it refers to the asset to equity ratio and thus presence of debts on the liabilities side. It also appears in the decomposition of the Return on Equity (ROE) with Return on Assets (ROA):

Where I is the interest rate due on debts. ROA – I is the leverage, it will be positive if the ROA is greater than the cost of debts. Debts create value for the company from an investor’s perspective. The same rationale can be used for funds using leverage. In this case a portfolio manager is borrowing money (has a short cash position / is short buying) to increase his buying power. The portfolio manager in turn pays interests over his short cash position. This means that with the additional amount of money invested it must generates a return greater than the interest paid over this borrowed money.

In these situations the two edged-sword and the danger of leverage are materialized by the increase in overall exposure to the acquired asset. The absolute impact of any movement of the value of the investment is greater in such situations. A more interesting point is reached when we shift our focus over derivatives, products whose values depend on the value of an underlying which can be an asset but also a variable. Examples are: Options, Futures, Swaps, Convertible bonds or CFDs. For these instruments, the leverage materializes less explicitly. The power of these instruments is that they permit investors to expose themselves to greater positions than initial costs.

Options, The Ultimate Leveraged Product For Risk-On Investors

You expect AlphaBeta, a biotech company, to successfully launch its future vaccine in 3 months. Currently, the stock is trading at $25 and the call price is $2 for a strike of $28, e.g. the option is currently out of the money. With $800 you can buy 4 contracts (standardized 100 options/contract). Suppose that at maturity the stock is worth $33 you are in the money. By exercising the profit of this trade is 400 (33 – 28) – 800 = $ 1,200. Representing a 150% return against only a 32% return of the underlying stock. Options allow for leverage without borrowing. Similar operations can be executed with futures and other derivatives. As holder of the options we transfer the risk to the writer of the options by paying a premium. The initial costs are simply the premium paid over the call options of $1, after acquisition the value of the options is increasingly dependent on its intrinsic value, e.g. the difference between strike price and the value of the underlying asset. As the maturity of the options is less than 9 months there is no buying on margin in this scenario.

Vernimmen.com : Some of the graphs and statistics ...
Figure 1 – Value of call options

The writer of the options at other side of the contracts takes on the risk and receives the premium as compensation for it. However, the writer of the option must meet margin requirements. If the writer of this option, wrote it “naked” (he did not owe AlphaBeta) the margin he should have paid to the broker would have been:

Indeed, the writer receives in any case the premium by writing the options but note that this is not a free lunch, he must afford his protection against the leverage of the product. This protection exceeds the premium received, in addition of the initial margin. Moreover, if things go wrong for the writer he will have to pay the broker if the maintenance margin is broken.

The leverage for this type of product is linked to the convexity of the instruments. For options we pay attention to Gamma, the second derivative of the option price regarding stock price. As stock prices increase, the option comes more in the money and exercising it more profitable. That is the same reason why as stock prices increase, the option price tends to follow the underlying price more closely. The non-linear shape of this dynamic is what creates the leverage effect of this product. This leverage effect makes the short position on options risky, especially when the underlying asset is not very liquid. This has huge consequences for the costs of hedging such short positions and meeting margin requirements. Realize that the option premium is a compensation for being on the sharpest edge of the sword.

Disclaimer: This article has been written for information purposes only from a personal viewpoint. It does not constitute a solicitation, offer, advice, consultancy or investment recommendation and as such is not intended to encourage the purchase of assets. The Golden Investor would like to remind you that any of assets is highly risky and therefore, any investment decision and risk remains with the individual investor.

Bibliography

  1. http://www.vernimmen.com/Vernimmen/Graphs_and_statistics.php

IQE (LSE:IQE): 5G Infrastructure Will Be Cash-Cow For This Stock

As central banks start unwinding their immense quantitative easing programmes and inflation keeps on soaring, the tech bubble seem to be over and losses are likely. However, IQE could be an exception and a good potential holding for investors looking to keep some part of their portfolio exposed to this booming sector. Global trends and adoption of technology pushes demand for semiconductors, the corona crisis has been a catalyst for this process. After initial lockdowns demand for semiconductors and complementary products has increased and outpaced supply. Where large companies like ASML (ASML:AEX) and Taiwan Semiconductor Manufacturing (TSM) hold key positions in the semiconductor supply chain, IQE could find its own niche as R&D-heavy player in the wireless and photonics field.

IQE, which makes semiconductor wafers for chips used in Apple (AAPL) products, recently announced profits could be lower than in 2020 as demand for smartphones went down, while the 5G rollout is still in its beginning phase. Two weeks ago IQE projected a potential 40% plunge in its annual core profit, as the British firm’s smartphone-making clients place fewer orders due to supply chain issues, driving its shares 20% lower. However, this also means the company now is trading at a discount. And as governments worldwide, including the Biden Administration, have made this one of their top priorities better times could be ahead. Despite the announced increase in production in H2 2021, semiconductor companies continue to suggest that these tight circumstances could extend well into 2022. So investors could best gradually increase their position over the course of the next months, as the disruptions can last over time.

Figure 1 – Semiconductor Disruptions

Transitory Supply Chain Disruption Could Be Buying Opportunity

IQE’s strong cash position makes it likely that this stock will rebound once the disruptions are over. Note that many markets that IQE is targeting with its products have yet to reach their full potential, and thus so is IQE’s stock price. However, some analysts point to the oil crisis of the 1970’s that turned the world on its neck as global changes caused major inflationary pressure. Currently, inflation can be partly explained by supply chain disruptions and supply and demand dynamics, and partly due tremendous amounts of liquidity pumped in markets by central banks. Interestingly, the latter is now reversed as even FED-chairman Jerome Powell now has admitted he made a policy mistake by calling inflation “only transitory”. However, this tightening next to the lasting supply chain disruptions could pose a huge setback to the now booming tech sector. As IQE has already adjusted their profit expectations, the current share price perfectly reflects the tight situation and could therefore be a buying-opportunity for those who think current disruptions will not last long anymore.

3D Sensing Equipment And Further 5G Rollout Future Cash-Cows For IQE

IQE’s VCSEL technology could play a major role in future technologies that more and more rely on real-life scanning of objects to operate. IQE’s technology is at the heart of multiple target detection, identification, tracking, and border protection systems. The company is focusing on the expansion of the Internet of Things where interconnection of devices will play an essential role in society. It’s innovative products are of top-notch quality, their tight relationship with Apple signals quality-excellence within this competitive market.

Figure 2 – Key markets in need for IQE’s semiconductor products

On the short run a re-surge of 200MM wafer production could push IQE’s profits up, depending on market conditions. However, the immense potential of photonic technology can go beyond all imaginations. However, IQE is not the only semiconductor company out there and picking a winner is hard, but considering their quality standards and large R&D investments, new innovations can be expected boosting profits on the long term for shareholders.

Disclaimer: The writer of this article holds IQE (IQE:LSE) stock, this article should not be interpreted as investment advice or anything like that.

Bibliography

  1. https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/when-will-the-semiconductor-shortage-be-resolved/

Pretium Resources (NYSE:PVG): Attractive Take-Over Target With Sound Financials

Last quarter, for the first time since the establishment of the enterprise, Pretium Resources’ cash position exceeded its debt after payment of its loans. However, this gold miner is also facing the rising costs of increased gasoline prices and the ongoing COVID-related costs. All-in sustaining costs (AISC) in the second quarter of $1,099 per ounce sold were higher than the comparative period in 2020. However, the still relatively high gold prices boost profitability. For the first six months of the year, their AISC is $1,053 per ounce, but this could creep upwards as diesel prices have surged even more in Q3. After a corona outbreak among employees it had to shut down operations temporarily last quarter which slightly harmed results. Interestingly, despite this unexpected break, their output only dropped four percent signalling the quality of the high grade soil on the Brucejack mining site.

Green Sustainability Path Of Pretium Could Drive Down AISC

The company has committed to purchase seven battery electric haul trucks to replace their fleet of 12 diesel-powered underground haul trucks, with the first one already in operation. Mobile combustion of gasoline and diesel contributed to roughly 68% of the greenhouse gas emitted from operating the Brucejack mine in 2020. After the rollout of this multi-year plan, we forecast a reduction of approximately 24% or 6,900 tons of carbon dioxide equivalent annually from the implementation of this initiative. As diesel costs remain high and are most likely to be taxed more in the progressive Canada of Trudeau, this shift can be considered a smart one. However, in terms of ESG standards this will boost the already high ranked ESG rating of the company, which is already among the top performers within the industry. This decision will most likely attract even more investors, providing equity cushioning insolvency issues in less prosperous times.

The Board Is Not Taking Risks, Which Is A Good Thing

During last quarters meeting directors were very reluctant to say anything about potential dividends or share buyback programmes as they explained to rather stay focused on decreasing their debt level and maintaining a healthy revenue stream. However, part of that could be a potential asset purchase at the end of next year. For now, the company remains focused on improving its own site and drilling for new high grade ores, as the current site is only sufficient for another one year of mining. After that, new sites have to be explored, so positive drill results are essential. The board of Pretium Resources wants to assure the long term viability of the company before rewarding shareholders. Paradoxically, this could benefit long term investors more than if the company would spend millions on investor compensations.

Figure 1- Pretium’s balance sheet has improved tremendously due to higher output and rising gold prices

The results of the following quarters Q3 and Q4 of 2021 will not show any shocking results in terms of output. However, in terms of exploration and drilling positive results are the key point to look at. Investors will want to look at the drilling results and assess whether the mine has a longer lifetime than currently can be disclosed. On the other side, gold prices remain strong and have been creeping up the last few weeks which obviously positively impacts the overall business. As stagflation fears are surging, gold prices could benefit from increased risk-off tendency after months of bullishness. However, within the industry Pretium Resources (PVG) is an example of excellence.

Disclaimer: The writer of this article holds Pretium Resources (NYSE:PVG) stock, this article should not be interpreted as investment advice or anything like that.

ETF’s: Diversification Reduces Risk, But Kills Competition

Since big players like Vanguard and BlackRock introduced exchange traded funds (ETF’s), investors have been able to effectively reduce risk in their portfolios. However, this has created a market externality that comes at the cost of the overall economy and might dis-incentivize firms to compete with each other. ETF’s contribute to common ownership of companies, and their boards are effectively only serving the interest of their shareholders by trying to gain as much capital as possible for them, creating a distorted business model on the long run. As many ETF’s are industry and sector specific some competing firms will come under the watch of the same shareholders whose interest is not always in-line with what is best of the company. These companies will be less inclined to compete with each other if the opposing competitor has the same owner.

Silent Cartel-Forming Can Harm Consumers

If all companies across the industry will have the goal to serve the common owner, this can lead to silent cartel forming, where there is no need for specific agreements to offset anti-competitive behavioral practices. This can vary from limiting production and the raise of prices, but also more in-evident measures like reduced investment which leads to lower innovation. Where in mergers there are clear regulations in place to prevent the creation of monopolies, common ownership is harder to map, analyze and therefore harder to regulate. In many different countries new policies are set in place to improve transparency related to ownership. In the European Union the Ultimate Beneficial Owner (UBO) register has been adopted and impelemented to map all shareholders with over 25% ownership within a certain firm. Under the 5th Anti-Money Laundering Directive the register has been mandated to be open to the public.

Empirical Evidence Is Ambiguous

Koch et al. (2021) do not find a robust relation between common ownership and industry-wide price-levels, nor do they find evidence for industry profitability. However, their results could differ if tested for higher percentage levels of common ownership. Moreover, we know that there are anti-competitive effects from common ownership in the airline and banking industries (Azar et al., 2016; Azar et al., 2018). However, it is clear that common ownership has its effects on the market and therefore could be prone to regulation if competition authorities find more robust relationships. Three index fund manager effectively control the whole index market, Vanguard has 51%, BlackRock 21% and State Street Global 9%. The large jump below in 2010 is due to the acquisition of Barclays Global Investment by BlackRock in 2010. This shows that the rise of common ownership of large blocks of stock is to a large extent a consequence of the rise of index funds and of what Azar (2020) calls “the Big Three”.

Figure 1 – Common Shareholder Pairs S&P 500 (Azar, 2020)

The Common Ownership Trilemma

But it all comes down to the classic common ownership trilemma in which portfolio diversification, shareholder representation and competition are balanced. The most extreme scenario being a situation where all companies within a certain sector have to same common owner, that is when both shareholder representation (of the common owner) and portfolio diversification are maximized, but effectively create a monopoly in which there is no place for competition. There is a wide gap between some common ownership and monopoly-like destruction of competition, but the drawbacks of common ownership should be faced as it the whole of society benefits from healthy competition driving market dynamics leading to technological innovations and ultimately economic growth. Moreover, it could be argued that shareholders on the long run benefit more from competition and the resulting innovation as competition does not have to be a zero-sum game. When discounting for future profits, shareholders could actually be better off in a situation with high levels of competition, therefore competition authorities have every incentive to keep protecting healthy dynamics within the market.

In conclusion, it is good that regulators start implementing policies that map the common ownership. Tackling the potential negative sides of the drive for diversification in the financial sector will be much harder, as investors and thus large stakeholders in this debate have deep pockets which will potentially undermine the effectiveness of every policy set in place to reduce negative externalities involved with high levels of common ownership. For now it remains to be seen if governments are strong enough to withstand lobbyists.

Bibliography

  1. Koch, A., Panayides, M., & Thomas, S. (2021). Common ownership and competition in product markets. Journal of Financial Economics, 139(1), 109–137. https://doi.org/10.1016/j.jfineco.2020.07.007
  2. Azar, J., 2016. Portfolio diversification, market power, and the theory of the firm. Unpublished working paper. University of Navarra.
  3. Azar, J., Schmalz, M.C. and Tecu, I. (2018), Anticompetitive Effects of Common Ownership. The Journal of Finance, 73: 1513-1565
  4. Azar, J. (2020). The common ownership trilemma. University of Chicago Law Review, 87(2), 263-296.

Is The Correction In The Markets Over?

We have been in the red for about two weeks now, and as I have reported in the past, fear of an “economic slowdown” is dominating the market. Inflation is still too high and does not seem to be as “transitory” as the “big bosses” want us to believe. The futures opened in the red last week due to worsening sentiment on the Chinese debt of the Evergrande Group, where regulators are cracking down on the “abuses” that have driven up property values and loans that have contributed to the collapse prices of new construction to near default; and the Federal Reserve meeting that will lead to a “new direction”, towards reducing stimulus from November.

Economic Data and Forecasts

Last Wednesday’s Fed meeting sets out further details on the path forward for the “coveted” rate tapering. Powell is expected to remain open to “running changes” in the face of any issues that may arise (an accelerated tapering and a rate hike). In fact he hinted at a reduction in interest rate purchases by the end of the year (after the November meeting) and the dot plot indicates that an interest rate increase of 0.3% could come as early as next year. The aim will be to have inflation just above 2% “for a while”. The new economic projections of the FOMC show inflation in 2022 up to 2.2 % from 2.1 % in the previous estimates, and a forecast of 2.2% in 2023. Unemployment is forecast at 3.8% in 2022 and 3.5% the following year, and GDP is forecast to rise to 3.8% in 2022 and 2.5% in 2023 (currently at 6.7% compared compared to previous figures of 6.6%).

Central Banks Start Changing Their Mind

QE ($120 billion per month) could soon be reduced and the Fed could start raising rates earlier than the markets expected. After recent declines, US Treasury bond prices returned to the upside. The yield on the ten-year bond rose to 1.56% (the highest since June). The yield on the ten-year bond rose to 1.56% (the highest since June) and consequently caused turmoil on the stock markets (remember, it is not a “red candle” that detererminate the trend). These are due (obviously) to the Fed’s decisions not to reduce stimulus but to “feel” the pressure of monetary tightening (tapering gradual tapering that will end within six months of the the new year) and to leave interest rates close to zero (forecasting a rise in 2022), and finally to inflation (energy prices have increased, +7% in the last month), which is expected to fall back towards the 2% target as soon as the rise in prices in some sectors stop.

Paradoxically, Lagarde, unlike Powell, raised questions on the “transitory” inflation, pointing out that we are coming from a 10-year period of “dis-inflationary regimes” and therefore higher inflation during this period is to be “endured”.

If we shift our attention to gold, we see that it is moving over the support formed at the $1676 USD level (since June 2020), creating a “channel” that we can call “lateralisation”. In fact, for several months now, gold has hardly “functioned” as a “safe haven asset” for several months now and the and the recent fall is due to its strong correlation with real rates, which have risen (the first sign of a regime change?). The dollar, despite the fact that there is no the link from before, has risen acting as a “protection” benefiting from the quarterly GDP. But watch out for the unemployment data, which are on the rise, rising to 362 thousand compared to the 335 thousand forecast. If we analyze the data from the financial crisis of 2008 to today, it seems as if we are in a similar situation to 2013, because prices are forming a pattern of decreasing highs in anticipation of a new “danger” Taper tantrum.

Figure 1 – Taper Tantrum

Analyzing the S&P500 at the time of the US House’s approval of the debt ceiling, we can see how this produced a Relief Rally, this is a respite from a broader market sell-off that results in temporarily higher stock prices, and then rebounded again when the Senate passed the ceiling again, (it looks like the classic “Dead Cat Bounce” but we await confirmation). The political situation is putting a strain on the American system and, to quote Yellen, ‘failure to reach an agreement could result in the Treasury Department defaulting’. Specifically, the “debt ceiling” does not authorize new spending, but allows the sale of bonds with the consequent increase in the ceiling. I think the market for the time being has already discounted the news that Congress will not be able to suspend or raise the debt ceiling (raised or suspended 78 times since 1960), so we should expect volatility to increase as the deadline approaches (18 October) and in the event of a resumption of the trend.

Figure 2 – S&P 500 Analysis

While investors are scrambling for a possible short-term “pullback”, they know that a pull back is the rule in these situations and could therefore represent an investment opportunity. Beyond that, I think the more appropriate question to ask at the moment is: Will inflationary growth put pressure on central banks, will these concerns lead to interest rates rises, or will it impact demand (and lead to stagflationary circumstances)? All we can do is wait.

Disclaimer: “This article has been written for information purposes only and the technical analysis of the charts is a personal viewpoint. It does not constitute a solicitation, offer, advice, consultancy or investment recommendation and as such is not intended to encourage the purchase of assets. I would like to remind you that any of assets is highly risky and therefore, any investment decision and risk remains with the individual investor”.

China Evergrande Group (3333.HK): Chinese Property Giant Could Offset Disastrous Credit Crunch

The large property owner has since its IPO more than ten years ago grown to one of the largest developers on the Chinese mainland. However, its aggressive expansion strategy has mainly been fueled by debt. The company has liabilities to over two hundred fifty financial institutions, also in the United States. The high-yielding Chinese company holds over $300 million U.S. dollar in debt, with creditors all over the world. Last week the company reported that it could potentially default on some of its debt. In recent months the company has spun-off many of its side-businesses in an effort to raise enough capital to prevent such a crunch. However, it hasn’t been enough to prevent a major crash of this Chinese giant, once ranking as one of the 200 largest companies.

Unlike The United States, The Chinese Government Tries To Maintain Control

Xi Jinping, China’s president, has targeted unsustainable growth in recent months as some companies like Evergrande were posing a great treat to the Chinese financial system. After Alibaba and Tencent lost double digits to the Chinese crackdown of tech giants, the property sector is now feeling the pressure of the government. It should be noted that both efforts of the Chinese government should be seen as a sign of strength, as Xi Jinping seems to be aware of the financial and political risk large indebtedness and big tech could pose to its leadership. The current situation in the United States is completely different, as big tech undoubtedly has a large influence on its government, while the financial sector is too-big-to-fail. Their Chinese counterparts are not afraid to let large partly state-owned companies default, which has increased pressure on Evergrande to clean-up their balance sheet.

Firm Governmental Hand Has Slashed Boomed Economy

In recent months commodity prices have surged to all-time-highs, but the Chinese crackdown on private business has cooled off some commodities. Iron ore is back at more acceptable levels, while also copper and rare-earths have lost some of its initial gains. If the default of the Evergrande Group actually will occur, this will have tremendous implications for all businesses in China as foreign capital will be pulled out of the country. Also it is unclear what exposure Western financial institutions have to the Chinese emerging market, but a collapse of the Chinese financial boom could be well-ahead. This will pose a huge threat to the global economy as we have seen how interrelated global financial systems are after the last financial crisis in 2008. But unlike then, now the government seems to be less inclined to bail out these giant companies, but rather lets creative destruction do its work. That is why investors have been dropping shares and bonds of Evergrande ever since the first signs of a potential collapse. However, this also means that the bankruptcy of Evergrande might become a self-fulling prophecy. The Golden Investor believes bailing out companies that are deemed to fail is not worth it, as these companies should be held responsible for their own bad financial situation, and not the tax payer.

Figure 1 – China Evergrande is not the only heavily indebted company

Other Developers Start Feeling The Pain Too

Other Chinese property developers are enduring the pain as investors dump shares amid rising concerns of systemic risks within the Chinese economy. The only reason why Evergrande has not yet defaulted is because it has gone on a selling spree, extended loans and desperately attracted short term investors to prevent an immediate collapse. The average sales price for its properties fell 26.3% to 7,130 yuan from 9,669 yuan per square meter, these bargain sales will put other developers also under pressure. However, it is not likely that the Chinese government will let the whole property market fall, so slight support might come. Whether Evergrande will survive remains to be disputed, but it seems that the company will most likely continue to crash down.

Disclaimer: The writer of this article doesn’t hold China Evergrande Group (3333.HK) stock, this article should not be interpreted as investment advice or anything like that.

Bibliography

  1. https://kr-asia.com/evergrande-seeks-safe-descent-from-usd-130-billion-debt-mountain
  2. https://asiatimes.com/2021/09/evergrande-debt-crisis-showing-signs-of-contagion/

Lynas Rare Earths (ASX:LYC): Record Profits For Exponentially Growing Essential Miner

Just 20 months after The Golden Investor’s first update on Lynas Rare Earths, the stock of this Australian miner has hit multiyear highs on the Australian Securities Exchange (ASX). Growing market demand for mainly Neodymium, crucial for the now booming semiconductor industry, has turned Lynas Rare Earths into an extremely essential miner. As demand for electric vehicles and other technological equipment surges, profits continue to jump.

Capital Thirsty Miner Has Exceptionally Good Balance Sheet

The ultimate scenario for any company has led to a tripling of profits compared to last year, as increased production and selling prices have led to record profits. It should be noted that Lynas has not endured very hard setbacks due to the pandemic. This year the average selling price for its products has almost doubled while also production of Neodymium-Praseodymium (NdPr) doubled to 1,393 tonnes last quarter. While demand stayed up during last year’s lockdowns, Lynas had to temporarily shut down its processing plant in Malaysia, resulting in last year’s $19.4 AUD million loss. However, this year the company posted a record $157.1 AUD million profit for the year ended June 30. And prospects remain good as demand continues to grow and competition is struggling to ramp up.

Figure 1- Full-Year results for Lynas Rare Earths (ASX:LYC)

Trouble In Malaysia Has Been Averted

In one-and-a-half year a lot has changed, where back then Lynas was in legal battle with the local government and communities for a license extension for their low-level radioactive plant, it is now considering to open a second processing plant in Malaysia as business is growing. Lynas ultimately received permission to continue to operate its Malaysian plant, but has gotten until 2023 to relocate the facility. The company is awaiting the last phase of getting full approval to open up a facility in Kalgoorlie, Australia. Their plans to open a processing plant in Kalgoorlie have gone into second gear as the Australian government has awarded the company a grant to implement the newest processing methods, in an effort to reduce dependence on China. The Kalgoorlie facility will then process the rare earth concentrate from the Mount Weld mine, taking over processing from its plant in Kuantan, Malaysia, where the company currently is processing at a reduced rate due to radioactive waste concerns on their site.

The United States Making Deals To Ensure Metal Security

This January, Lynas signed an agreement with the U.S. government to build a commercial light rare earths separation plant in Texas, as the world-leading country is pushing to secure domestic supply of essential minerals that China currently dominates. Production of rare earth minerals, used to make military equipment and electronics, received a push in the U.S. after the trade war with China fueled worries that Beijing may use its dominance to restrict supply. The deal comes after Lynas secured initial U.S. Department of Defense funding for a heavy rare earths separation facility in Texas in April 2019, which it is developing with joint venture partner Blue Line. This is due to the fact that in the current processing operations, heavy rare earths are not separated. The new processing plant in Hondo, Texas will be the largest rare earth separation plant in the world, and will separate both medium and heavy rare earth products.

Rare Earth Boom Could Bring Other Players

Currently, the only competition Lynas faces is from Chinese producers. But as governments worldwide are becoming aware of the necessity to ensure a steady influx of rare earths the investing climate has changed. The last few years a lot of capital has been granted to incentivize companies to develop new plants and processing technologies. However, like Lynas CEO Amanda Lacaze emphasizes, mining and especially rare-earth mining and processing is very capital intensive. New players should not underestimate risks. Rare earths are not as rare as they seem, however, extracting them is both polluting and challenging, making it an extremely risky capital-crushing business.

Investors looking for diversification should consider buying Lynas Rare Earth (ASX:LYC) stock. Due to its expansion drift and increasing governmental support impressive growth rates can be expected. Even if prices for its products will drop due to increased supply, Lynas will have a pivotal place in geopolitical terms. If the company effectively ramps up supply it could increase its already growing market share. The only competition it might face in the West is from MP Materials (NYSE:MP), but as Lynas is multiple steps ahead nothing seems to be in the way for the flourishing company.

Disclaimer: The writer of this article holds Lynas Rare Earths Ltd (ASX:LYC) stock, this article should not be interpreted as investment advice or anything like that.

AppHarvest, Inc. (APPH): Vertical Farming Is Fruitful Ground For Growth

The veggies at AppHarvest (APPH) are growing fast and employment has been going up since the opening of the first high-tech plant in Morehead, Kentucky. AppHarvest, which started trading on Nasdaq on February 1, has lost 75 percent from their February highs and is now trading 20 percent below their IPO-price. The company generated $2.3 million in net sales in the first quarter 2021 as it began harvesting from its Appalachian high-tech indoor farm, representing 3.8 million pounds sold with the farm only partially planted as the facility ramped up.

Big Plans For The Future

AppHarvest is currently operating one high-tech indoor farm that is expected to produce more than 40 million pounds of tomatoes annually, with plans to build a network of 12 high-tech farms by the end of 2025. Two more high-tech farms are now under construction in Kentucky, one designed to grow leafy greens, and another in Richmond planned for tomatoes. After multiple financing rounds this summer four more projects were scheduled for development, and two of those began construction in Q2 2021.

AppHarvest purchased its flagship Morehead farm in March, giving it the ability to leverage the asset at attractive financing rates to fund more development. The company has finalized key terms for a 60% loan-to-value financing transaction for the Morehead facility at an expected interest rate of around 4 to 5%, which is a good deal considering current market circumstances. This summer AppHarvest has done multiple financing rounds to fund other large-scale projects that are still in the pipeline.

Major Stock Correction After High Losses And Lower Guidance

The company reiterated its full-year 2021 outlook of net sales of $20 to $25 million back in Q1, but suffered tremendous losses when the company reported a $32 million net loss in second quarter and had to lower its full year sales guidance to the range of $7 million to $9 million. However, considering the successful funding rounds this summer, AppHarvest (APPH) can continue its aggressive thirst for expansion and continue innovating the farm industry with cutting-edge technologies. However, despite inflation in many assets, tomatoes are trading at 10-year lows, and due to problems in the scaling-up process Q2 was a failed quarter for the sustainable company.

Pessimistic Guidance Could Result In Unexpected Gains

In their latest quarterly report the company addressed viability concerns by coming with a more pessimistic guidance. Despite being on track to have 12 large-scale farms operating in 2025, they have lowered their assumptions due to higher distribution costs as expected. This has resulted in lower expected growth figures as AppHarvest has only incorporated 9 out of 12 farms in their long term guidance, moderating investor expectations for the company. However, the current market cap does not represent the tremendous growth potential for this company correctly. After large losses in the latest quarter investors should reconsidering buying AppHarvest (APPH) stock as sustainable vertical farming is the future.

Disclaimer: The writer of this article holds AppHarvest (APPH) stock, this article should not be interpreted as investment advice or anything like that.

Nautilus, Inc (NYSE:NLS): Home Exercise During Next Winter Lockdowns

As people increasingly start to return to the gym the pandemic boosted sales of the home fitness equipment company should tank. However, there seems to have been a lasting effect of the lockdowns on the behaviour of people, as many people get used to the idea of staying home. According to the guidance of the company current sales could be overblown, but also portray the potential for home fitness equipment to become increasingly conventional. And while big brother Peleton (NDQ:PTON) is overvalued with a triple digit P/E-ratio, Nautilus has got a forward P/E ratio of 10, which shows that there is much more room for growth. Under current market circumstances Nautilus could outperform as other better known stocks tend to be overvalued.

New Lockdowns Could Offset Exponential Gains For Nautilus

As the western world gets increasingly vaccinated, hospitality rates are much lower than in the previous years. However, many governments are still cautious with completely opening-up their economies. This means that people will be home more and have more spare time available, especially as working-from-home seems to become the standard. This is a chance for a company like Nautilus to profit even more from the current pandemic. As the future is uncertain and new strains of the virus could undermine the protective effect of the vaccine, the next winter period will show whether current sales of home fitness equipment will continue to boost revenue and net income for Nautilus.

Crystal Clear Business Strategy Will Prove Lucrative

Currently, like Peleton, Nautilus is developing a connected fitness platform for their clients. However, by being primarily focused on consumers Nautilus is more affected by shifts in economic circumstances. But it should be noted that Nautilus equipment is significantly cheaper than Peleton’s expensive equipment. Nautilus is clear about their plans to dominate the consumer home fitness market with their affordable equipment. Along with their innovative JRNY platform current high growth could be just the beginning of a longer run up in the next years. For long term stock holders looking to diversify their portfolio with a cheap stock that offers some protection against pandemic-related burdens, Nautilus (NYSE:NLS) is the way to go.

Nautilus ended the latest quarter with $113 million in cash and equivalents and with less than $14 million of debt this company has one of the healthiest balance sheets out there. Therefore, The Golden Investor is extremely bullish on this pandemic-proof fitness stock.

Disclaimer: The writer of this article holds Nautilus (NYSE:NLS) stock, this article should not be interpreted as investment advice or anything like that.