There are times when it’s relatively easy to be an investor. This is definitely not one of them! For years, it was possible to just sit back and ride the market’s rising tide caused by nearly endless liquidity infusions from the Fed and the other leading central banks. Those days have come to an end.
It was also previously reasonable to anticipate another re-opening scenario for the global economy as Covid finally became a non-issue. It was further plausible that with the $2 ½ trillion of excess savings U.S. households have accumulated since the pandemic began, a rip-roaring spending surge was likely. Additionally, with the ultra-critical auto industry in nearly a one-year volume recession, a powerful rebound in vehicle production was almost certain to positively reverberate through the economy. But then came Putin and his murderous hordes…
For Europe, in particular, hopes of another re-opening burst have been dashed. Instead, a deep recession looks almost inevitable. As prior EVA PRs have highlighted, the energy crisis in Europe makes $4.50/gallon U.S. fuel prices look almost benign. Energy rationing on the Continent looks to be a done deal -- never a good thing from an economic activity standpoint.
Even more alarming is what natural gas prices (that have risen seven-fold in Europe over the past year) mean for fertilizer prices. (The good news is that the benchmark Dutch natural gas price has fallen roughly 60% recently.) Suffice to say, it’s an enormous problem. There are reports of farmers planting without fertilizers as they have become cost prohibitive. This has highly negative implications for crop yields. Even worse, Russia and Ukraine provide about one-quarter of the world’s wheat. As a result, the prospects of extreme food shortages, particularly in parts of the Middle East and Africa, are far from trivial.
It’s simply stating the obvious that the volume of problems afflicting the Planet Earth right now could almost fill up the latest 2727-page Congressional budget bill (yes, really!). But there is also the chance for a dramatic positive reversal should peace break out in Ukraine. Evidence is mounting that V. Putin realizes he’s made an enormous miscalculation. In addition to the numerous military setbacks his invading forces have suffered, he’s also managed to unite and reinvigorate NATO in almost unimaginable ways. The fact that Sweden and Finland want in, along with Germany’s stunning decision to dramatically increase its defense spending, must have him wishing he’d never given the attack order.
Now that he’s begun blaming his generals and intelligence services for misleading him, a door is perhaps opening for a negotiated peace. He can save face by throwing them under the bus, or maybe the tank, especially if he receives some territorial concessions and an assurance Ukraine won’t join NATO (which wasn’t going to happen, regardless). This, of course, would be a wonderful-for-humanity development. But it would also almost for sure trigger a rousing rally in financial markets. Accordingly, it’s extremely difficult for investors to decide between becoming more defensive or taking advantage of this year’s sell-off.
As I’ve often written, as bad as the official numbers are, the reality for most stocks is far worse. For example, according to JP Morgan’s Michael Cembalest, the average NASDAQ stock is down 40% from its peak levels. Ouch! Consequently, there could be a very robust recovery should sanity prevail in V. Putin’s brain. (Please allow me to encourage all EVA PR readers to check out today’s Bubble 3.0 chapter on everyone’s favorite bubble which is, of course, the U.S. stock market… or, at least it, was.)
So, what’s an investor to do? As I’ve written before the new world order — or, perhaps, more accurately, disorder — benefits a number of American industries. Energy and agriculture are obvious beneficiaries. There are less apparent winners, too, such as U.S. companies that are beneficiaries of what appears to be a massive capital spending cycle. This was already underway before the Ukraine tragedy due to the reshoring of production, in no small part due to tensions with China. But now, with the U.S. once again in a position to be the world’s breadbasket and its safest, most reliable, supplier of industrial products, this trend has even more force behind it.
Even if there is a cessation of hostilities in Ukraine, these companies should report strong earnings for years to come. If the fighting drags on, they should also prosper. Ironically, most of these new winners are not the ones with which most U.S. investors have been enamored. This ties into one of my main investment themes; namely, that a far different investment approach needs to be employed, one that recognizes our world has radically changed. In my view, it’s not changing back anytime soon.
Positioning Recommendations
LIKE
Per the above, we’re adding a new buy recommendation category: capital spending-oriented companies. You should make sure that they have substantial exposure to the US industrial base. Or you should hire Evergreen to do that for you… if you haven’t already!
Last week I pointed out that the gold miners were having an excellent year, up 15% as of last Friday. Because they remained so neglected by almost all investors, I suggested they had further upside. Fortunately, they have risen another 8% this week. I’d be a bit careful buying more at this level, but they still appear quite attractive long-term. With gold breaking above $2000 to a new all-time high (though not yet a decisive one), profits should be very strong. One negative is that the miners are major consumers of energy.
NEUTRAL
Some REITs have become extremely pricey, including the largest self-storage entity. If you own that one, I’d be doing some serious profit-taking right now.
DISLIKE
No changes to the below but I’d highlight that many green energy stocks are coming under pressure. However, there was a recent decent rally in the main solar power ETF. Regardless, it remains down almost 40% and its chart looks unappealing.
DISCLOSURE: This material has been distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or to participate in any trading strategy. Any opinions, recommendations, and assumptions included in this presentation are based upon current market conditions, are subject to change, and reflect the personal opinions of David Hay (an employee of Evergreen Gavekal) as of the date of this publication. This publication does not necessarily reflect the views of Evergreen’s Investment Committee as a whole. All investment decisions for Evergreen clients are made by the Evergreen Investment Committee. All material presented is compiled from sources believed to be reliable, but accuracy cannot be guaranteed, and Evergreen makes no representation as to its accuracy or completeness. Securities highlighted or discussed in this letter have been selected to illustrate the author’s investment approach and/or market outlook and are not intended to represent Evergreen’s performance or be an indicator for how Evergreen or its clients have performed or may perform in the future. Each security discussed in this letter has been selected solely for this purpose and has not been selected on the basis of performance or any performance-related criteria. The securities discussed herein do not represent an entire portfolio and, in the aggregate, may only represent a small percentage of a Evergreen’s client holdings. Evergreen actively manages client portfolios and securities discussed in this communication may or may not be held in such portfolios at any given time. Before making an investment decision, the reader should do their own research and/or consult with their financial advisor. Past performance is no guarantee of future results. All investments involve risk, including the loss of principal.