Macro & markets update
Regarding the market situation, it has been a relatively calm August. However, this calmness appears to be tense because everyone is anticipating a recession that has yet to materialise. In fact, at this moment, weak economic data is often met with positive responses from the market, and vice versa. This phenomenon is due to the market’s interpretation that economic weakness will be accompanied by future stimulus measures and interest rate cuts.
Macro
The U.S. economy has remained stronger than what one might have expected a year ago. The second reading of the second-quarter GDP, published on August 30th, showed a surprising quarter-on-quarter growth of 2.1%, down from the 2.4% reported in the July reading.
The economy was driven by consumer spending, despite the drastic interest rate hikes of 525 basis points over the last 15 months. Behind the strong consumer spending that is boosting the economy, there are several factors at play:
Low-interest rates in recent years allowed both businesses and individuals to borrow at very low fixed rates. Therefore, despite the significant increase in rates over the past year and a half, companies and individuals have not yet felt the full impact of the hike, especially until refinancing and mortgage updates come due.
As a result, except for tech companies (which require constant financing and some had significant excess personnel), businesses have not been forced into large-scale layoffs, and U.S. employment levels remain relatively tight for now.
During this time, consumption has continued to drive the economy, with unemployment at historic lows, aided by the excess savings from the COVID pandemic and forgiveness of student loan debt for individuals. However, many analysts believe this excess saving is nearing depletion in the second half of 2023, and the student loan forgiveness – estimated at $15,000 per affected individual – will restart this October, resulting in an expenditure of between $250 and $390 for more than 40 million Americans.
Noteworthy to highlight that consumer loans are reaching new records, with Americans continuing to use this method of spending despite the high-interest rates, which have already exceeded 20% for credit cards (Source: FRED).
The economic situation in the Eurozone is quite different from that in the United States. While its monetary policy tends to follow the moves of the Federal Reserve, its economy has less room than the American one for continued drastic interest rate hikes.
The latest GDP reading, published on September 7th, showed a growth of only 0.1%, revised downward from the previous reading of 0.3%. The reasons for Europe’s economic weakness are not only due to structural factors but also the energy dependency crisis, which affects the larger European countries more significantly. Despite gas prices offering some relief compared to last year, they remain much higher than their historical average.
Moreover, European consumers have to contend with higher and stickier inflation than in the United States, which is weighing down on their activity. Although it appears to have more room for excess savings, Europe is experiencing greater losses in purchasing power.
Oil & Gas sector
In the past week, Saudi Arabia announced that it will expand its oil production cuts of 1 million barrels per day until January 2024. Russia also announced that it would not only extend its oil export reduction until the end of the year but would also add another voluntary reduction of 300,000 barrels per day until December 2023 (here, we suspect that a portion of Russia’s “reduction” will not return because they cannot). In addition to all of this, we see U.S. inventories falling week after week, and the U.S. strategic reserve has reached its lowest levels in 40 years (350MM, the lowest since July 1983).
All of this has led Brent to rise more than 30% in the last 3 months. One of the industries that is benefiting the most and likely has more potential (from our point of view) is the Offshore Drillers, about which we published an article on our website approximately a year ago.
Regarding natural gas, which we published an extensive article about last week regarding the current situation, the Chevron strike at its Gorgon and Wheatstone facilities has begun, halting 5.1% of the world’s LNG production.
Stock Market
During the summer, the S&P 500 has been on a rollercoaster ride. In July, it was boosted by numerous economic data indicating disinflation, the likelihood of rate cuts by the Fed, corporate earnings well above estimates, and FOMO (Fear of Missing Out) following the new AI products.
However, in the month of August, precisely after the second reading of the U.S. second-quarter GDP (2.4%), the market corrected (remember, strong economic data is seen as negative by the market) due to fears of a second wave of inflation, higher interest rates for a longer period, and weak stock performance after earnings.
During this slight correction in August, fixed income also came into play. The yields on 10-year Treasury bonds increased, influenced by rising inflation expectations and low demand, as both China and Saudi Arabia, as well as Japan, reduced their holdings of U.S. Treasuries.
The rise in yields is a blow to long-duration assets that lead the indices, especially mega-cap stocks, as investors are attracted to the attractive returns of low-risk fixed income.
The rise in yields is also affecting small-cap stocks. Despite having a strong July largely driven by short covering, investors, in their quest for safety, are not betting on them.
The difference between the Nasdaq and the Russell 2000 has experienced its second-best session since November 2021 in the past week, reaching a new cycle high, placing it at levels not seen since the year 2000, during the dot-com bubble.
Companies monthly updat reviews
This month, we discussed in detail: New Fortress Energy, Golar LNG, Kistos, Vysarn, The Italian Sea Group, Sanlorenzo, Italian Wine Brands, GOGO, Twin Vee & Forza, Good Times Restaurants, Newlat, OneWater Marine, Arcos Dorados, Ecoener, MAU, Ferretti and Unidata.
New Fortress Energy
With the first of the three parts of the Fast LNG Pioneer now in Altamira, the second on the way, and the third expected to arrive before the end of September, production (1.4 MTPA) is expected to begin at the end of this month. The 2Q23 results were in line with expectations, but as we discussed in our NFE analysis (published here on May 2023), the strong 2022 results were more due to selling cargoes to Spot TTF that were originally booked for terminals that were not yet connected due to delays, rather than organic business growth.
There is positive news from Puerto Rico, where they have taken advantage of the energy shortages in the country to add 150MW, with another 200MW expected to be operational in 3Q23. Barcarena (Norsk Hydro contract) is also expected to come online before the end of the year. The La Paz Power plant is anticipated to be online in 3Q23, with Santa Catarina following in 1Q24. On the flip side, the other two FLNG projects appear to be slightly delayed to the end of 2024 and 2025. Some analysts, like Deutsche Bank, have initiated coverage with a price target of $60, but our outlook is not as optimistic – all the details can be found in our 2Q23 results analysis and the May thesis.
The preferred shares ($GMLPF 8.75%) trading on the pink sheets seems to have fallen into oblivion, and they are trading 60% below their levels when NFE acquired Golar Partners. Based on what was discussed in the conference call, it doesn’t look like this will change in the near term.
Disclaimer: This only represent our opinion and not any type of investment advice. It should also be noted that the authors holds exposition to the stock and may have a positive bias towards it, specifically short puts at $30.
OneWater Marine
After the significant drop in the stock post-results (largely due to a substantial reduction in guidance, as discussed in the days before when their peers reported), the stock appears to have stabilized in the $25-27 range. This week, they acquired Harbor Pointe Marina (Alabama’s Lake Martin), a dealer that generated $5.8 million in 2022 (for modeling purposes, we reduce this figure by 25% for 2023). It’s important to note that the deal excludes real estate and boat inventory.
We see this as a good one-time opportunity, and the company is optimistic about sales recovery in the coming quarters (although we are not as optimistic, at least until 2Q24). In our opinion, this adds more beta to the stock. It’s currently undervalued, and we’re monitoring it from the sidelines, looking for an entry point when we believe the stock is still undervalued but economic uncertainties are improving (likely buying way out-of-the-money calls as a hedge if it starts to move away). We like the company and the business model, but as we’ve shared so far, we believe that their decisions during the last year (see our analysis of OneWater Marine where we calculate the real prices paid for their recent acquisitions along with calculations about the interests they are going to pay for inventory) have been quite poor.
Disclaimer: At the moment, we do not hold any type of exposition. This is not financial advice
