Musk and the murder in commodities
My best guess at what is happening
The memes are already starting to pour in. The latest development in the Twitter/Musk saga has taken an interesting turn. Greg Roumeliotis of Reuters put out a piece earlier today stating that “Twitter set to accept Musk’s $43 billion offer”. This has certainly stirred up the crowd in favor of censorship and those that enjoy making memes.
Musk made two bold moves last week that set this up. First, he secured funding through Morgan-Stanley. Second, he began to have direct talks with the major shareholders. Musk made a very reasonable offer and he wanted to make this known to those it would affect the most. It was obvious that those on the twitter board were not seriously invested in the company. This opened the eyes to many of the actual shareholders and when Musk contacted them, they listened.
There is still a possibility that this deal doesn’t happen. All sorts of things can go wrong in M&A deals but Musk has put all the pieces into place to make it happen. I keep going back and forth whether some of the larger holders are going to accept the deal. Blackrock being the primary one. Time will tell and my view from the sidelines has been glorious. My only dog in this fight is that if Musk does take the company private, I would think very hard about re-joining twitter.
Commodity Market Madness
It has not been smooth sailing in my portfolio of stocks for the past week. Earlier today I received the following email:
What are your thoughts on what is going on this last week in the market getting hammered. It seems nonsensical given the inflation data. Or is this just a lucky buying opportunity?
I agree that it seems nonsensical. Inflation is hot and people should be moving into hard assets and away from unprofitable tech stocks. There are two factors that also need to be considered.
China’s lockdown policy
Market participant expectations
China’s lockdown policy has not just been a terrible policy for China but it has worldwide repercussions that are reverberating through the world economy.
The country’s initial lockdown paved the way for non-communist countries to do the same. The whole idea that a lockdown of society would be an effective remedy to “flatten the curve” was debunked by the WHO prior to 2019. Their whole manual for helping society make it through a pandemic was tossed out the window when 2020 came along.
While the rest of the world has begun to awaken to the mistakes of lockdown policy, China has refused to relent. The current incredibly harsh and prolonged lockdown of Shanghai has seen over 28.5 million people trapped. Videos have made it out of China that show the starvation and crippling conditions the lockdown has caused. Now it looks like Beijing is upping their testing requirements of citizens. In the past, this has been the harbinger that a lockdown was coming next. Beijing is home to over 21 million. Many have already gone out in a panic to clean store shelves of food items in preparation.
These lockdowns will have secondary effects in China. The biggest will be agricultural. Due to these rolling lockdowns, trucking into the rural areas has dropped off significantly. Seed and fertilizer deliveries have been severely curtailed. Eric Mertz at General Crisis Watch has done tremendous work on outlining exactly what has been happening in China. Using his insights, I believe China could witness one of the largest famines in it’s history. Which is saying something.
The second largest secondary effect is the energy demand in China. With over 28 million people locked down, energy demand has been seriously curtailed. Businesses have been shuttered and production facilities empty. This is being reflected in commodity prices over the past week.
Finally there are also the ghosts of 07-08 and 2000-2002 to contend with. If you look back at those times in the market, it wasn’t just the tech stocks or bank/mortgage lenders who were sold off. A wide swath of stocks saw price reversals during those market downturns. This is due to hedge funds (HF) and private equity (PE) firms. When price moves against these giants, they begin to sell. As a fund, a down quarter is not tolerable. If back-to-back down quarters are experienced, the redemptions begin. Those that have handed their money over to be managed begin to demand it back. These market giants then accelerate the selling.
What we’ve seen in the market from late last year to now is heavy selling in non-profitable tech stocks. HF and PE firms are heading for the exits. Now, the yield curve has inverted signaling an on-coming recession and redemption rumors are beginning. This will lead to the selling of more than just unprofitable tech. There will be market wide pressure on all stocks. The best remedy for the small investor is to:
Set up stop-loss orders on all your stocks. This allows you to sleep well at night. When I start a position, I give it a bottom line limit. If it looks like a good investment but drops 7-8%, I know that the timing was wrong. From personal experience, I know that I can only withstand so much loss before I capitulate. I make sure I don’t reach that limit and let the stop loss do the work for me. Once the position has gone positive, it’s important to move those stop-loss orders up. You’ve secured a profit, don’t let it turn into a loss.
Own stocks that pay dividends. It is much easier to weather a storm in the market when you know that the company you own will be paying you to hold their shares. Knowing this, I’m able to give these stocks a longer leash in terms of their stop loss order.
Stay away from businesses that have been heavily invested in by HF and PE firms. It is great to find these on the way up but terrible on the way down. The businesses that this market giants target have larger market caps. This is so when the big boys buy in, they won’t rock the boat. Smaller market cap businesses stay off the radar of these big fish because the HF and PE firms can’t buy in without significant movement higher in the price. It’s akin to putting a big fish in a small bowl.
To pull it all together, the recent selloff in commodities is directly associated with the reduction in the estimated energy consumption in China. Also, I don’t anticipate the selling to be over yet. If Beijing announces a lockdown, commodities will see further headwinds. The fundamentals concerning the inflation in the US have not changed. In fact, we’ll get a look at the money supply data tomorrow. My expectation is that it will disappoint and show continued contraction. The tightening of the money supply with reduce the fervor in the capital markets leading to more selling in the market. I’m beginning to turn bearish but I’m not there yet. I want one more look at the money supply data before I start buying puts.