Humans are irrational beings. New technologies amplify our strengths and weaknesses. This applies with full force to our irrationality.
We carry the world in our pockets. With a few clicks, we can buy whenever and whatever we wish…until we decide we do not have enough.
So we keep the merry-go-round going, gorging on information and chasing the "best" investment. The results are evident—the holding period steadily declines.
This means that the majority of market participants are increasingly impatient and reactive. This is an opportunity for the patient and proactive.
Of course, the duration of a transaction is not a sufficient precondition for defining the outcome. How long we stay in position is a consequence of our investment process, precisely its quality.
A high-quality process does not guarantee a successful transaction outcome—however, low quality guarantees misperformance.
It becomes even more interesting when we analyze our successes and failures and those of others. When we win, we focus on the quality of our skills; when we lose, we blame our lack of luck. Accordingly, we do the opposite when we analyze others' results.
To summarize:
· We attribute our success to skill.
· We attribute our failures to a lack of luck.
· We attribute other people's successes to luck.
· We attribute other people's failures to a lack of skill.
Our task as market participants is never to forget that to succeed in the long term, we need two ingredients—a quality investment process and luck. We can influence the former, while we cannot influence the latter. Therefore, we need to focus on our investment process, which will put luck on our side in the long run.
One prerequisite for quality in our investment process is having an open mind—not blindly following the dominant narrative. Instead, develop your own opinion.
The media ensures we don't miss the news from the investment world. China is one of the leading topics, and a market crash has been predicted in hindsight.
Before I go on, let me remind you that I am a long-term bear in China with a horizon of over five years. There are several reasons for this. The three fundamental variables determining a country's position for decades are energy, demographics, and geography. China faces a profound demographic crisis, is energy-dependent on fossil fuel imports from Iran and Russia, and has an inadequate geography.
However, over the next 12-24 months, I expect China to surprise most market participants. We have indicators of this.
Steel production has successfully recovered in recent months. Accordingly, China's iron ore imports have reached pre-C19 levels.
The reason for the recovery is the generous fiscal and monetary policy of the CCP. Money in circulation relative to GDP has been rising steadily,
This is positive for the economy in the short term. In the long term, however, it is like medicine exulting the symptoms but not the cause. In the coming quarters, the Chinese economy will feel relief, positively impacting Chinese equities.
Chinese banks have started to peel off the bottom.
The majority of banks have realized double-digit returns year-to-date. At the same time, they remain significantly undervalued as measured by price to tangible book and forward price to earnings.
One of China's biggest problems is energy dependence. The CCP is making decisive moves to reverse this process.
China has the fastest-growing nuclear power industry. However, other G20 countries have also started to catch up.
The US is investing intensively in its nuclear energy revival. For many of the G7 countries, it is not only energy but also infrastructure that needs to catch up. Capital investment in its renewal is reaching new records every year.
Raw materials are needed to build bridges, roads, and energy capacity. Capital investment in the mining and processing sector is still at rock bottom, and there is an apparent dissonance between supply and demand.
What does this mean?
Higher commodity prices and inflation. Speaking of commodities and inflation, two days ago, the US imposed a new series of tariffs on China:
· 100% EV, practical from 2024
· 25% on steel and aluminum, effective from 2024
· 50% on semiconductors, effective from 2025
The following two graphics have more details on the topic.
The new tariffs, in addition to being inflationary, will positively impact the affected industries in the Western Hemisphere. This is also positive news for South America.
Over the last three years, the region has performed excellently. The following chart compares South America and S&P500 performance and valuation based on forward PE.
Strong momentum and low relative valuation provide excellent asymmetric opportunities.
South America will also become increasingly important for Europe, and the same applies to West Africa. The reason, again, is energy.
The European Union is the most energy-dependent of all the Great Powers. There are several reasons for this:
· Anything outside renewables has been stigmatized, leading to a lack of investment in discovering and developing new deposits. At the same time, renewables, in addition to serving as an accessory to virtue signaling, are destroying capital that could be directed toward investment in nuclear and LNG power.
· Energy dependence on Russia. Our decisions have curious properties—their consequences accumulate non-linearly over the years. Where we are today is a result of everything done and not done in the past. So it is with Europe. Since the war in Ukraine began, the results of past decisions have come to light. EU is heavily dependent on energy imports from Russia and the US.
· The crisis in the Red Sea is affecting Europe the most. Tankers of crude oil and petroleum products from the Persian Gulf typically pass through the Red Sea (the exception being VLCCs, which generally pass through the Cape of Good Hope). So, the tankers are pushed to reroute via the Cape of Good Hope, resulting in higher day rates and longer voyages. European consumers must choose between delivery on time and competitive prices.
To sum up, Europe urgently needs to reduce its energy dependence on Russia and the US and then try to transform it into an energy-independent power.
Deepwater oil deposits exist around West Africa and South America, and more European companies are investing in them.
The following map shows how the deposits in question were formed:
The deposits are located at the contact points of the two continents - South America and Africa. Regions that are relatively well explored are marked in light brown.
Companies such as Equinor, Eni, Total, and several small E&P companies are developing projects on the Atlantic coast of Africa and South America.
The energy map becomes even more complex when we consider Russia's position. On its territory lies the world's largest undeveloped fossil fuel basin - the West Siberian Oil Basin. According to various estimates, it contains about 140-150 billion barrels of crude oil and 1,600 TCF of natural gas.
Despite the sanctions, Russia has successfully exploited the Western Siberian Basin. The Yamal LNG terminal and the Artic 2 are prime examples.
Artic is expected to be operational in 2024. Despite the sanctions, neither terminal is entirely Russian. European and Japanese companies are involved.
While discussing Russia, let me mention the latest news on the uranium market. Last week, Biden signed a bill imposing sanctions on Russian uranium imports. I assumed that Russia would retaliate, and that is what happened.
Yesterday, TENEX gave US companies importing Russian uranium a grace period of 60 days to place orders. If they don't do so by the deadline, they will likely lose the opportunity for future orders. It's getting interesting with uranium. Let's see where its price goes.
Now, it's time to share an actionable idea. In recent decades, Argentina's housing has been in a poor state, leading to a shortage of new buildings.
Accordingly, extreme inflation of over 100% has kept interest rates around 100%. Buying a home is almost impossible for a population with no dollar income. Demand for housing is low, which keeps prices low. This means diminishing profit margins for home builders, so they have no motive to develop new projects.
The first months of Millay's presidency have been highly successful. Inflation is falling at a remarkable rate. The Argentine Central Bank has lowered interest rates to 40%. This means that the majority earning in pesos will also gradually gain access to credit.
So, the tide will turn. Demand for property will drive prices north, boosting builders' margins. This will lead to more new projects to renovate the housing base and meet the growing demand.
Cement is the prime ingredient in construction. Loma Negra (LOMA) is one of the largest cement producers in the region. Unlike other Argentine stocks, Loma has lagged for precisely the reasons described. Its price has just broken out of meaningful resistance around $7.5-$8.0.
If the May bar closes above $7.5, it will signal an entry with a close stop loss of around $6.0 and an open take profit.