Hi Everyone,
I hope you had a fantastic first week back at work. Following up on my closing thoughts of 2021, I thought I would take you through my strategy for 2022.
My framework
how to enter a new position
what to watch out for
The 2022 Framework
Learning from some of my mistakes from 2021, I decided to lay down my big themes for 2022 and have a specific strategy for each of them.
The Market
I foresee a potential correction in market equities likely in the second half of the year but remain relatively bullish in the first half. We might see an end to the pandemic and see the covid crisis become an endemic disease and potential full-on easing of restrictions in the latter half of the year. I am not a doctor, but that’s exactly what my GP thinks. It might be wishful thinking, but I tend to agree.
The Economy
I still believe that inflation is here to stay. However, the genie is out of the bottle in the sense that inflation has made its way into wages. While used car prices might come down to pre-covid levels in 2023-2024, increased wages will have made their way into increased price coupled with “no-end-in-sight” for increased raw material inputs. This has been our central thesis for investing in commodities since late 2020.
Supply chains
Anecdotally, we have heard from many people in the trucking world that many workers who had reflated their investments/401k/superannuation/RRSP/retirement accounts from the last ten years have decided to call it a day and retire during the previous two years. Add to the fact that the training for new truckers was stopped for many months during the pandemic and that it takes time to issue new licenses, bear in mind a lot of these government-issued IDs have a colossal backup because of reduced staff procedure and working from home scheme, the lack of workers in the trucking industry will not be resolved in 2022. Cargo costs are also still elevated compared to pre covid level.
Energy
A decade of underinvestment in oil/gas/coal will keep putting upward pressure on the price. We keep reminding readers that any commodities supply is not something you can turn on and off. OPEC has been calling for months of increased oil production from their member countries, but they keep missing the target. This is free money for the member countries, and they can’t reach their quota, which leads me to believe, even if they want to increase their output production, they can’t.
To recap, pressures from Energy, wages, raw material, and supply chains will keep inflation elevated.
How to enter new positions
Learning again from some of the mistakes of 2021, I want to take a more systemic and rigorous approach to enter new positions. So let’s highlight the ones we currently would like to pursue.
Oil and Gas juniors; I like a lot of Canadian juniors that have significant free cash flow prospects at current oil prices. The issue that we are faced with is that some of the names we like have already increased 30% to 50% since the last week of trading in December. See below Surge energy as an example. My strategy here is to be patient and hope for a short-term mean reversion. The oil price has been on a tear for the last couple of weeks and could quickly reverse. On the other hand, it is also possible that it keeps increasing given the situation in Kazakhstan. Either way, I am staying put for now.
Cannabis sector; we have already entered our first tranche of investment in the exchange-traded fund POTX at 6$ a share. Why do I have a different approach here? This sector keeps seeing weakness and potential downward pressure in price, which means I welcome the opportunity to add to our current initial investment at 15% discount to our initial price. We already have seen a 75% price correction to the latest high, which begins to scream value.
Oil and Gas services; This one is a hybrid of the last two, and let me explain why. First, while we still see oil and gas service as a value play for the next couple of years, as a knock-on effect from the higher crude oil price, and could enter already an initial position, we may see short-term weakness in the ETF if the crude oil price would mean revert after its strong run in the last weeks.
Volatility index and portfolio protection. Last year, I tried to protect my portfolio from a potential market correction. While we were right in the thesis, I could not benefit from this call because my time frame was wrong. My revised strategy will be to buy the VIX volatility index (call spread with options; buy the 15 and sell the 25 or 30) when it reverts to 15 for the whole year. When this position begins to pay off because the VIX will have shot up, I will immediately sell a call spread to take advantage of the elevated volatility.
Copper and battery metals; we saw a consolidation in the price of copper in 2021. Our last copper play in Tree valley copper has also been burned. I am showing the copper ETF chart below, which I think might be a better and more general to enter the market. I still like another stock on copper. However, the price already appreciated 100% in the last couple of weeks and showed below. We will be patient on Northisle copper but might enter a position in the copper ETF at any time now.
What to watch out for
Forecasting tells you a lot about the person doing the forecast and very little about the future2. I do not pretend to know how 2022 will, but I have shared my thinking and framework here. Knowing that we tend to look for confirmation bias, I will look for the polar opposite. Specifically, suppose the inflation becomes too high and cannot be absorbed by individuals and slows down demand significantly. In that case, there could be a real drag and push further out in time for the need for oil and could tame inflation significantly. That could bring the world economy on a short-term path to lower world demand and ease pressure on the supply chain. It could very well be what the FED is attempting to do with their latest news on reducing the rate of bond purchases and entering a new cycle of interest rate hikes. We will be on the lookout for several leading indicators that could point to a slowdown in the economy, such as the Russel 2000, total hours worked, freight and cargo demand, credit impulse, and fiscal injections by the governments in the economy.
A lot of wealth is stored in the stock markets gains and cryptocurrency gains. If we were to see a general market correction faster than I have attributed in my framework, that would force the market to liquidate and again would bring down equities with it. That is a risk we must face every year. For that, we keep a good portion of the portfolio in cash.
The road out of serfdom portfolio
In the last week, we have entered three positions:
POTX: cannabis ETF
ERUS: Russia ETF
ATOM.V; uranium moose pasture explorer located in the Athabasca basin next to all the big names. At 3m Market cap, I see the minimal downside and a much more significant potential upside.
Have a great week, everyone!
Best,
Max
https://www.ft.com/
Quote from Warren Buffet
"Oil and Gas services; This one is a hybrid of the last two"
> How is this a hybrid of Cannabis & Oil & Gas Juniors?