Buying banks, oil and cars ahead of stagflation?!

Buying banks, oil and cars ahead of stagflation?!

04 October 2022 from Mikael Syding

The recession is getting closer. Higher interest rates, higher electricity prices and high petrol prices take away consumption and investment space from both consumers and businesses. The market hasn't really bought into this yet – so far only valuation multiples have been lowered. When, in addition, the forecasts start to be revised down, yes, then the stock market will probably fall in the second half. That would be consistent with historical patterns, where it has normally been the case that the second and third thirds of a bear market, calculated in time, produced larger declines than the first third.

It has been about nine months since the stock market decline began. maybe it's almost as long left. Normally we would then have more than half the race ahead of us. Yes, -30% more from here for the S&P 500 and Nasdaq in time until hope can be ignited for new stimulus next fall fits well with my view of the economy, inflation, central bank decisions and the 2024 US presidential election.

Inflation is considered the worst threat, a threat that the Federal Reserve wants to combat by all means. It is done in the same clumsy way that the "deflation threat" would be countered with "whatever it takes", which is the reason why we now have an inflation problem at all. The alleged deflation problem of 2009-2021 was, of course, only an effect of the crashed house price bubble, which the Fed had created in response to the IT crash of 2000-2003. That IT stocks had such unjustifiably high levels to crash from was due, as is well known, to the fact that, yes, precisely that, Fed chief Greenspan gave the green light for an IT bubble in the second half of the 90s.

Even at the absolute peak in March 2000, it was claimed from the central bank that you can never recognize a bubble until afterwards. But, yes, there are always signs and markers, such as Michael Burry very rightly noted. Many experienced investors with fantastic returns gave relatively timely warnings about unreasonably high valuations both in 1999-2000, 2006-2007, 2019 and 2021. But the central banks go to war, always with what they consider to be the perfect answer to the problems of the last crisis. Precisely because of this, they create greater and greater imbalances, increasingly desperate and large, unproven experimental measures, which cause ever greater fluctuations. The question this time is whether the downward swing will also reach record highs and the resulting valuations record lows, or whether the bankers will give up early again.

In the latter case, the Fed and the ECB would soon follow in the footsteps of the Bank of England and start the money presses again. Unfortunately, it would likely cause even worse disasters down the line, as if needed when there is war in Europe, Russia (maybe) bombs its own gas pipeline to force Germany and the EU into submission this winter. But in the short term capitulating central banks are likely to be good for stock prices, cryptocurrencies and precious metals. A pivot to renewed stimulus before inflation has been overcome means that the transition to a new economic system is accelerated. And then it is mainly the debtor side of the economy that is erased, which means problems for pensioners, cash, wage earners and consumers, while real assets in some cases retain or increase their relative value. Typically, however, it gets worse for everyone in such an environment, so it is important to try to improve one's relative position as much as possible.

Among the news today, e.g. the recent problems of Credit Suisse and Deutsche Bank. Their problems seem to never end after the headless expansion of the early 2000s. They may risk dragging more European banks with them in the case and, in the worst case, shaking also the EU itself to its foundations when certain countries want to be able to stimulate their own economies and save their banks on their own terms without the forms being dictated from the central EU side. Greece, Spain and Italy are, as always, the usual suspects.

Personally, I see US oil companies as relatively the strongest card in the stock market. Inflation, geopolitical unrest, deglobalization, marginalization of Russia and more all point to much higher oil prices. In fact, so does the transition to renewable energy. It takes enormous amounts of energy to dig up the minerals needed to build solar cells and wind turbines – and for the construction itself. In the short perspective, the energy must be taken from coal, oil and natural gas; and only in 10 years' time perhaps from new nuclear power plants. In the even longer term, solar and wind can become self-sufficient, i.e. produce more energy than is required for the expansion of new solar and wind parks, but then we start talking about a 15-20 year horizon. It is lucky that even Germany discusses restarting nuclear power plants and not shutting down its last three.

Despite the incipient banking crisis in Europe, I still see Nordic banks as good investments in the coming year. They are already cheap on reported earnings and earnings forecasts and it is highly unlikely that their core business or credit losses are significantly affected by problems for CS and DB, including secondary effects. The declines today, Monday for e.g. Danske bank and Swedbank may very well be really good buy positions, but of course you still have to respect that the now negative market psychology behind investments in banks first requires reassuring quarterly reports to turn around.

For most stocks and industries the same applies, look for relatively safe industries, industries that can increase margins when interest rates, commodity prices and electricity prices skyrocket, but don't buy everything at once. So don't try to spot an exact bottom, but average in the coming likely second half of this decline and position yourself in good time for a Fed pivot in the second half of 2023.

A somewhat unexpected sector to look at may be the automotive industry. Porsche was listed last week, which could increase interest in car manufacturers in general. In addition, all petrol car manufacturers now have electric alternatives, so the negative ESG label is being washed away. At the same time, it has the side effect of pressuring Tesla. With each passing quarter, Tesla's lead in electric cars is being eaten away while the company urgently tries in a panic to change its image from a car company to a robot and AI company. Unfortunately, things are going pretty badly on both fronts. The demonstration of Optimus this weekend showed that Tesla's robot dance is 10-20 years behind companies such as Boston Dynamics and Honda. And at the same time, Tesla released weak sales figures for September and Q3. It is therefore increasingly difficult to justify the purchase of a Tesla car with an old design. The S/3/X and Y are all starting to get quite a few years behind them and no new models are in the works.

Even the Tesla share itself is having a hard time, partly because of Elon Musk's increasingly strange actions, e.g. sounded like he announced his own departure this weekend, but also that there are now loads of more modern options from real car companies in all price segments. Tesla is being eaten up by companies like Porsche and BMW from one side and Renault and Honda from the other. In addition, Musk himself is busy buying Twitter, which could force more stock sales this fall after the lawsuit over the acquisition in mid-October.

It probably feels a bit premature to buy mainstream car manufacturers like GM, Ford, Honda, Toyota, Renault, Volkswagen and Porsche just before the mother of all stagflation strikes at the same time with an energy crisis, but the turnaround may come sooner than you think. I believe that the absolute bottom in stock prices for cyclically sensitive sectors such as autos and retail will occur in the second quarter of 2023. This is because things stop getting worse at an increasing rate and because valuations have simply become so low that real value investors are attracted back into the market. The key will be when the Fed swings to new stimulus, and to try to find a point some six months before that happens.

Again, the best way to ride the upswing is to average all the way through the next year's slump in stable companies that can finance themselves and have strong balance sheets, as well as low implied normalized Profit / Earnings P/E ratios. There are banks, oil companies and actually even some old car companies. However, certainly not Tesla, which is more likely to be the last stone to fall before you can put an end to this round of crashes for tech companies. If Tesla is to be valued in roughly the same way as other successful car companies, we will probably be talking about just over one times sales, or upwards of 100 billion dollars in enterprise value. That corresponds to a share price of just over 30 dollars. In that light, Honda and Renault, relatively speaking, or for that matter Porsche and Volkswagen, look extremely much more interesting - stagflation or not.

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03/12/2022 10:29:40


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