Macro Risks & Arise Sold

Macro view

A disclaimer is in order:

  1. A broad macro view of the world in all of its beautiful complexity is a really, really dangerous and risky thing to have. Most people are best off simply buying whenever they have spare cash – as long as it doesn’t threaten their personal situation. Never taking chips off the table at anytime in one’s life except when needing it to buy something is almost always the most prudent thing to do in order to secure buying power as we get older and to fight the fact that inflation eats into the real value of our savings.
  2. Whenever you or someone you listen to is having a negative and bearish macro view you should be particularly sceptical of that view. Being bearish is more interesting and intellectually stimulating so in that respect it can be rather seducing. The question is whether it is beneficial to the wallet because over the long haul being positive has won in the market by a huge margin historically. It does seem that humanity has a tendency to always overcome hardships. Many would argue though that recent decades have been aided artificially by mountains of debt, and that this is now a major source of our current problems.

The optionality of cash and equivalents in a high-risk setting

The markets seem very sure that 1) giant stimulus packages will be approved by the US congress, and 2) that they will work where everything else has failed. That may happen but it is very far from a sure thing and it won’t happen tomorrow, more like 2+ years down the road. In the meantime we are entering into dangerous territory and the risks are mounting on multiple fronts in the coming years. I realize it is unfashionable to make macro calls – and perhaps rightly so – but I do think prudence is called for considering the following factors, many of which have reached proportions unseen for decades:

List of macro risks:

  1. The geopolitical power balance is out of whack which has led to instability not seen since the late 70’s/early 80’s. Could turn out explosive.
  2. Rapidly growing tensions within all developed societies. Is this strictly limited to the immigrant situation or is it also rooted in the enormous inequality divide which is stifling consumption and thereby economic growth?
  3. Poor underlying demographics in the developed world, which may be a deeper and more fundamental cause for the slow growth of the last 10 years.
  4. A possible bubble in the bond market. This is way more dangerous to the world economy than a stock market crash due to the sheer size of the debt market (this could actually be bullish for stocks if money from bonds retreat into stocks). Will haircuts be needed for bondholders? And if so, what happens to the balance sheets that are heavily exposed to that debt?
  5. 0% interest rate for 10 years ought to lead to poor capital allocation, which in turn usually leads to recessions or outright depressions.
  6. How will the steep mountains of sovereign debt all over the world be paid back? Will central banks continue to stimulate and thereby increase risks of a giant blow-off and/or runaway inflation somewhere down the line?
  7. A global trade war seems increasingly likely (given administration picks). This could lead to a global recession.
  8. Low capex globally and high share buyback (which is typically a late-cycle phenomenon) means there isn’t much belief in the future. If companies aren’t investing where will future growth come from?
  9. Historically high margins. Is mean reversion inevitable or is it a sign of the IT economy being less capital intensive? If the former turns out to be true we are in for a multiple contraction.
  10. US jobless claims has fallen to a 43-year low. This is often an early indicator of a downturn and a late-cycle phenomenon since it suggests the potential for further growth is low as there isn’t much slack left. On top of that, even now when unemployment is this low the economy is struggling, which is not exactly a sign of underlying strength.
  11. AI could be here much sooner than expected. Some experts talk about a couple of years rather than 10 years. While this will provide opportunities in the long run – is our system adequately prepared for it in the short term?
  12. How will the stimulus package get financed? More debt or will Trump find a way to let Chinese money invest in roads, airports, etc.? Perhaps in exchange for not imposing trade tariffs on Chinese goods? Win-win if possible but is strong-arm tactics viable in the longer run…?
  13. High valuations among so-called ”safe” dividend stocks due to “reach for yield” desperation. Shiller PE of 28 and the non-manipulative Price/Sales ratio is through the roof at 2,6 (1,6 being the average). Warren Buffett’s favorite indicator Total market cap/GDP is also blinking red. This is currently at 127%. Based on historical averages a fair valued market would be at around 85-90%.
  14. Trump being Trump.

The bullish arguments that I see:

  1. A giant stimulus plan corresponding to 2,5% of GDP over a 10-year period in the US ought to move the needle IF it indeed is approved. And if Germany picks up the mantle and does the same if could have a big effect. It is also a huge gamble because if it doesn’t do much the debt situation will be even more dire as a result.
  2. Deregulation and tax cuts may also add some umpph. However, the latter could have a negative effect on long-term growth if much of it is given to the top, which would not do much for consumption.
  3. Bond weakness could transform into stock strength as the money leaving the bond market has to go somewhere. If I had to choose, I’d feel safer in the stock market than in the debt (bond) market right now.
  4. The possibility of a Trump impeachment would reduce many of the outlier risks. I suspect there will be a huge number of Republicans that will leap at the opportunity to get rid of him if it arises now that they have secured power. And I suspect there will be ample opportunities as the guy is likely to confuse his own financial interests with those of the state at some point.
  5. In general I think it is more prudent to move to the emerging world where there is growth potential due to low debt levels as well as lower valuations.

Conclusion

One can argue whether the risk/reward points to a bullish or a bearish view, but one cannot argue against the fact that the risks are high. As a consequence of my own cautious view I have set out to increase the cash position to at least 30% and I am currently looking into gold miners as a potential currency and market hedge. I will probably post something about my findings further down the line.

For Those About to Trump etc.

In my last post I had said I’d write in depth about the US election situation but decided I cannot do it without it quickly becoming a private issue, which isn’t of interest to anyone. So I’ll just quickly say it makes me boil with anger that people chose untruth and unchecked aggression and that they were willing to put on a big gamble that will undoubtedly cause a great deal of harm to living beings all over the globe. But one either gets this or one doesn’t and my words won’t make dent of difference.

I hate what happened with uncontrollable anger. So this is my mistake for the year: In order to preserve mental health I will resort to shielding myself from the words of Trump and his lunatics to prevent that anger from taking over, preferring instead to read commentator’s analyses of the situation. As an investor you always want the naked source not other’s interpretations of it so this is a step backwards for me. Hopefully something will come in the way of this presidency so we can move on.

For the record: I was for Bush being elected in 2000 (and against in 2004) so this is not automated knee-jerk lefty speak. I have listened to tons of past interviews with Trump and figure I have a grasp of what the man is made of and it isn’t the material of a man with a grand and carefully thought out vision. His path is fraught with bankruptcies and court battles and there isn’t much else there except the ego’s will to express itself.

Portfolio update – Arise sold

I decided to sell my remaining stake in Arise. I took some chips off following the September spike and now I let go of the rest. The reason being the combination of 1) a collapse in e-certificate prices lately (143 SEK/MWh in October to 69 now) as well as what I regard as a surprising weakness in the electricity spot price (below 300 SEK/MWh for a full week). A combined price below 370 SEK/MWh in wintertime despite extremely low water reservoir levels (low capacity in the system ought to lead to higher electricity prices) while the share price is approaching a three-year high has made me decide to move to the sidelines.

In addition to this there is a bit of uncertainty about the fact that the Kölvallen-project (150-200 MW) has still not received the final permit. It was scheduled to happen in the fall of 2016 and now the decision is expected in Q1.

To be clear it was a close decision to sell and my cautious macro view and my wish to increase the cash position played a part. I still think the share price is a bit lower than fair value even given current circumstances but on the other hand it isn’t as much of a no-brainer proposition for me currently so I elected to monitor the situation from the sidelines and perhaps re-enter at a later time should the outlook as well as the margin of safety become more attractive again.

When I started writing about the stock in October 2014 the stock price was 17,10 (https://hammerinvesting.wordpress.com/2014/10/09/arise-windpower-traded-at-a-historically-large-discount-part-1/). Now it sits at 21,50 for a gain of 26%, which isn’t great for a two and a half year time frame but market beating nonetheless.

5 thoughts on “Macro Risks & Arise Sold

  1. What do you think about Arise now that the share price has come down significantly since your sale – and the price of the certificate has soared a bit?

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    1. Hi Ville, it’s definitely becoming more interesting. However, I’d like to see the combined e-certificate/elspot price move higher before considering a new entry. The new bond issuance was expensive (as well as dilutive to shareholders, potentially) in my eyes and makes it seem as if refinancing of the 2019 bond isn’t a given if electricity/e-certificate prices don’t start to move up from here. So that is what I would be watching.

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      1. Thanks a lot for your reply!

        Now that you mentioned the expensiveness of the new bond issuance, I started to think that apparently the current share price isn’t so, so cheap when you consider that possible dilution as well.

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      2. Out of curiosity, has your opinion on Arise changed lately now that the stock has plunged to its 5-year low? It would be interesting to read your current opinions on the company even as a longer article. 😉

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  2. Now that Kölvallen is off the table (at least for the foreseeable future) and the immediate pipeline of new projects is very slim I think the share price makes sense. 2017 has been a disaster for them and I’ll probably be on the sidelines till I see refinancing of the 2019 bond.

    I’m a bit concerned with the way the stock sold off leading up to the Kölvallen announcement. In the week leading up to the announcement there was a ton of selling by international brokers. I’m also not happy with the way the convertible bond was sold to investors as an offensive move when clearly it was all about repaying the old bond (at worse terms). When investors/owners are disrespected like that I always fear what other things management will be capable of doing in the future. Especially since they own so little stock themselves.

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