And Now For The Coming Attractions

[February 2, 2024}

In January, equity and bond markets diverged, as investors realized that rate cuts may be fewer than anticipated, and perhaps not as soon. Various key economic data, such as Q-4 GDP Advance Estimate, December 2023 Jobs Report and U.S. Retail Sales for December, reaffirm that the US is not yet in a recession and the consumer is spending. Outperformance by large cap growth tech continued and resulted in the S&P 500 Market Cap Weight exceeding the S&P 500 Equal Weight Index by 250 bps.  However, the Magnificent Seven may need to be renamed the Big Six, as Tesla’s (TSLA) stock price is down 24.63% year to date.  TSLA has been reducing prices to grow demand as they have saturated their luxury market, and autonomous driving and robotaxis have been slow to materialize. As it becomes more of a car manufacturer and less of tech business, Tesla’s p/e will likely compress.  On the question of US interest rates, our basic position is unchanged.  The Fed will likely cut, but not as much as the market anticipates.  If it comes in March or June, we see little difference.

As we begin to enter shipping earnings season in earnest, the reactions to earnings releases will be driven by the narratives, that is to say what is baked into the stocks.  For example, the expectations are so low for LNG names that we believe not terrible would take the stocks higher. Many times, it depends on the ownership of a stock and the time horizon of their investors.  If there are pod shops participating in a name, managers of the individual pods get fired if they are down 6%.  They have an incentive to minimize losses quickly.  Since we are long term investors, we find their pain as our opportunities, especially if a company misses consensus, but the fundamentals are intact.  It all depends on the risk/reward and our thoughts about the future performance of the segment.

Some of our shipping companies are benefiting from the conflict in the Red Sea, especially those exposed to the clean products trades (Gasoline, diesel, and jet fuel).  We expect to receive higher dividends, while valuations don’t fully incorporate the magnitude of the higher spot rates.  We don’t know how long the current situation will last, but Biden’s previous strategy of appeasing Iran above all else, makes a quick resolution unlikely.  Since 2021, the Biden administration has turned a blind eye to Iranian sanction violations.  Iranian oil exports are up 5.0x since the Trump Administration, mostly in substandard, aged tankers. In the clean tanker segment, we are more focused on fundamentals such as the recent, ninth announced closing of a European refinery since 2020. The lack of EU refining requires imports of clean products from farther away.  All else being equal, longer voyages decrease capacity and strengthen rates.  There are also unintended consequences, even temporarily.  The spread between High Sulfur Fuel Oil and Very Low Sulfur Fuel Oil has risen 40% month over month due to the Red Sea conflict.  For our companies that own ships that are scrubber equipped in dry bulk and crude tankers trading in spot markets, the wider spreads translate into higher profitability.  The US is not alone in poor policy choices.  French farmers attempted to barricade Paris with tractors in a revolt against French and EU agriculture and decarbonization policies.  The strike has been resolved by the French Government promising trade barriers on food imports and less strict environmental rules. Although everyone is for net zero, there is pushback when the predictable costs arrive in the form of inflation, red tape, and lower living standards. Net Zero is like chastity, good for someone else.