Monthly Update October
Market situation, 4 Special situations, Portfolio Management & comments on 23 companies
This week, we are sharing the monthly summary for the month of October, in which we cover:
Market situation summary, macroeconomic events, and an overview of Oil & Gas markets.
A section on companies in interesting situations that we believe is interesting to have a look for the short term
Portfolio management - how we perceive the current situation and how we are positioning the portfolio to maximise returns while protecting against downsides.
A summary of the companies in the portfolio and those on the watchlist (23 companies with relevant updates).
Before moving on to the publication, we would like to take a moment to briefly and concisely introduce our Moram Premium project, which we launched in May of this year and which is receiving a terrific welcome:
If you have any questions, you can contact us at firstname.lastname@example.org
October was a tough month for stock indices worldwide. The S&P 500 recorded its third consecutive month of declines, something that hadn't happened since March 2020. The last time it fell for four consecutive months was in 2011, during the Eurozone crisis and the U.S. debt ceiling debate. Europe and Asia also experienced a similar scenario, with the Euro Stoxx 50 dropping by 2.24%, its worst month since September 2022, the Nikkei losing 3.14%, and the Hang Seng suffering its worst drop to date among major indices, with a 3.91% loss.
Once again, the worst-performing index of the month was the Russell 2000, which dropped by more than 7%. In terms of sectors, Energy and Discretionary Consumer were the worst performers in a month where only Utilities managed to stay out of negative territory.
This downward trend was primarily due to the increase in global interest rates, which reached new cycle highs. The yield on U.S. 10-year treasury bonds even surpassed 5%. This has a negative impact on equities, not only in terms of valuation but also in terms of the competition it poses, as high and secure interest rates raise questions about retail investors' portfolio allocation.
It's worth noting that gold prices increased significantly by 7.3% in October due to demand for safe assets, marking the strongest month for gold since the banking turmoil of March. Bitcoin also benefited from uncertainty acting in a similar way than gold (obviously with much higher beta). Moreover, it was an important month as rumours about the future trading of its ETF boosted the price. We believe the question now is more about when the approval of the ETF will happen rather than if it will happen. This could be a significant step for Bitcoin especially considering that it has its next halving will happen in April 2024.
We are not big fans of using any specific playbook, but we believe it's interesting to have a clear framework for what tends to work best in each economic environment. Potentially, up to now, we have been in the lower-right quadrant, and the decision to stop raising the Fed interest rates made on Wednesday, along with ISM data below expectations and the weak employment data on Friday, might suggest that we are already entering the lower-right quadrant. That's why the sectors that have benefited the most over the last three days are Consumer Discretionary, Financials, and Real Estate.
In terms of the macroeconomic picture, perhaps the most significant events of the month have been the decision by the FOMC to maintain interest rates between 5.25% and 5.50%. This decision was mainly driven by the cautious comments regarding further rate hikes, which the market interpreted as potentially marking the end of this cycle of rate increases, unless they are compelled to do so due to sudden data that proves to be more inflationary than expected (the jobs data from this Friday doesn't point in that direction).
Attention continues to be focused on U.S. Treasury bonds, especially the long-duration segment. Despite the rebound in the past week, the situation in Japan, where they recently removed the rigid 1% yield cap on the 10-year Japanese yield, causing it to rise, has increased volatility.
Regarding GDP, the initial U.S. reading for Q3 2023 came in at 4.9%, surprising on the upside and showing strong consumer spending during the summer months. It's important to note that this is just the initial reading, and past experiences have shown that second and third readings, further from the media spotlight, tend to revise downward. So, while the initial number is promising, it should be taken with caution. Nonetheless, estimates for the fourth quarter are being adjusted downward due to the weakness in the early data from October.
In Europe, the economy showed weakness in the third quarter with a 0.1% decline. Early data for October is following a similar trend, suggesting to the European Central Bank (ECB) that there may not be much room for further rate hikes.
Regarding the CPI, there have been persistent inflationary pressures, with the U.S. core CPI reaching a five-month high of +0.32% in September. Although fears of a second wave of inflation have subsided, achieving the 2% inflation target does not seem to be an easy task.
Oil & Gas
The main event that has influenced the evolution of oil prices this October has been the conflict between Israel and Hamas. However, despite the tensions, Brent crude prices have closed the month nearly 10% lower than where they started, despite the increase in the week following the events of October 7. In fact, it's the first month that Brent has closed lower since May.
On the natural gas front, it has been a quite eventful month as well, partly due to the Middle East conflict that caused Egypt to cut exports to Europe (representing a little over 4% of the EU's LNG imports) because of power cuts resulting from the conflict. Additionally, Chevron has reached an agreement with its workers to end the second strike of the year at its export facilities (following the one in September).
Despite the events in recent months (strikes in Australia, conflict in the Middle East, apparent sabotage of the Estonia-Finland gas pipeline, etc.), the fundamentals of European natural gas remain relatively weak and likely do not justify the current TTF prices. It's important to note that inventories are nearly 99% full. Weather reports predict a cold second half of November, but the winter would have to be exceptionally cold to significantly draw down inventories and justify prices around €50/MWh.
Interesting situations we are following
We believe it could be interesting to add this section to the monthly updates, discussing situations we are monitoring (which may or may not result in investments) and that we think could yield short-term rewards. Obviously, this is not investment advice, and we share this simply to explain the rationale behind these short-term decisions, which we base more on our market perception than on absolute conviction in the companies (similar to the other companies we share and have in the watchlist portfolio).
Marine Products: It is one of the five recreational boat manufacturers trading in the US, including the special situation of Twin Vee. It always trades at a premium compared to the rest because it is very well managed, with the management holding nearly 70% of the shares, and they have a net cash position of $60 million (used for buybacks, etc.) for a market capitalization of $350 million. The results were slightly worse than expected, and when it lost the 200-day moving average, the market pulled it down by 35% from the results (in 4 days).
We believed it was a somewhat more conservative option than others mentioned in this section, and we thought it made sense that when the market turned upwards, it would recover some of the ground. This is one of the times we probably nailed the buying zone at $9.50-$9.75, and despite the high degree of uncertainty in the market, due to its capital structure and technical situation, it is likely a more conservative option if you believe the rebound will continue (i.e., in case we are right, we don't expect it to rise as much as other options, but if things turn around, the downside also appears to be smaller).
Disclaimer: We own shares, and this does not represent any form of recommendation.