October 2022 was an excellent month if you didn’t own Amazon or Meta, down respectively 9.35% and 31.37% for October. We have two potential explanations for October’s recent equity market advances. One is that equity investors have come to believe that the Fed is ripe to pivot again, with only another 150 bps of Fed Funds increases to go, and with likely reductions to follow in 2023. The other is the Midterm Elections heuristic. Since 1950, the midterm elections have brought an upturn for stocks, no matter which party has won, and no matter the issues. We have not changed our fundamental positioning. There is a not insignificant probability that we have entered a new investment paradigm that is different from the last decade. In 2022, market participants have learned the following lessons: stocks and bonds can both decline in value simultaneously; ESG investing will not automatically assure higher returns and may contribute to losses; paying too much for a company and assuming that there is a greater fool around the corner is not a long-term strategy; the cloud won’t grow indefinitely at 50% regardless of economic conditions; risk control does matter and that the West can’t transition to a carbon free world quickly, without putting the infrastructure in place and significant cost. We on the other hand continue to see some opportunities in shipping.
Among the stars of shipping sectors, we see LNG vessels and tankers for obvious reasons. Right now, LNG seems to be in a super cycle, while tankers may be approaching one. These are by their nature hard to predict. We scanned a 12-23-21 projection of various clean and dirty tanker rates for 2022. In terms of annual averages, they were too optimistic, and compared to the markets since September 2022, wildly pessimistic. As to their price targets for companies, the base and bull cases for some of the product tanker companies on 12-23-21 were 70% and 50% below current levels. Quite frankly, we would rather have this outcome than those of Meta for example, which in February 2022, had consensus sell side price targets of $399.95 (11-4-22 price: $90.79). No one has a crystal ball for the future, except to acknowledge that there are many factors which will determine outcomes in twelve months.
There are those that ascribe 2022’s market weakness to uncertainty. The future is unsure by its very nature. We know of investors who bought Meta, then Facebook at $304 in September 2020, telling us their growth was unassailable, and have subsequently lost 69% of their capital. On the other hand, we have written extensively about US energy policy and its consequences. President Biden came into office declaring war on fossil fuels, treating Saudi Arabia like a pariah, and embracing Iran. The administration has been successful on the first two goals and was rejected by the Iranians so far on the third. No one should be surprised by the consequences. We identified structural shortages of refinery capacity and potential outcomes. In late October, we read of Connecticut fuel wholesalers putting retailers on allocation, with inventories that are a third of normal levels. There is significant energy uncertainty because of the Russia-Ukraine war. It will be a different world if Western oil sanctions go into effect for crude and distillate products. We note there are some direct benefits to the new paradigm. The repairmen who constantly come to my house no longer talk of how easy it is to make money investing in the market as they did in 2020, while we were coping with investors who wondered why we weren’t bright enough to buy Facebook when we instead sought out opportunities in shipping.
