macro trading thoughts and news ?3

13:39 10-Jun-21

To close out this entry, and hopefully the week, I'll note that Energy Recovery essentially punted on the VorTeq at its annual meeting today.  It says it has not met its lifetime goals for the product but thinks it can.  The pilot unit is at a frack site now, and has another scheduled for July.  Supposedly it will be in a better position to detail its commercialization strategy in August, which the market seems to have taken as good news, but I think it is underestimating the length and rockiness of the road ahead.

Since I'm getting questions on it, message boards and other low-quality sites are misinterpreting the U.K. enforcement order issued to National Grid in relation to its transaction with PPL Corp.  This is unlikely to delay the transaction.  It simply means that National Grid will not make any changes to integrate the utility until it receives approval, as confirmed this morning.  As usual, it pays to ignore the message boards over the long run.

On 6/10/21 9:46 AM, Esekla wrote:

The CPI numbers just came in at 0.6% and 0.7% for May, with and without food and energy, respectively.  This is above even raised expectations, though below the rate of increase last month.  The negative reaction in equity futures was immediate, as this is well above the rate of wage growth and increases the pressure on the Fed to raise rates sooner.  For what it's worth, weekly jobless claims also came in a bit higher than expected, but lower than last week.

All this is good for BGCP, which resumed its rise, and for VIRT whose drop yesterday in response to comments from the new SEC chief just shows how much ignorance in there is in the market.  Virtu's CEO was on the news, sounding put upon, and I wouldn't be surprised if that tone was an intentional ploy to help buy back more stock.  Many of the changes under consideration, such as sub-penny order for national exchanges, would actually be of slight benefit to Virtu's business model.  Both companies also presented yesterday, with BGC saying it will be splitting out verticals, including a futures trading initiative starting next year, and documented growth in Fenics with larger banks finally coming on board.  He also narrowed expectations for finalizing the Corant sale to around early September, if not sooner.  Both VIRT and BGCP will also remain core holdings for me that require further patience, but VIRT below $29 looks like an opportunity.

For the short term, languishing MX shares remain my top interest, with the Korean press still going back and forth about things that shouldn't matter, since OLED DDIC tech isn't actually being exported.

I have no particular explanation for the large drop in NFE shares yesterday.  Maybe people just caught on to the Nord Stream 2 completion news that I'd already documented?  Regardless, it seems to already be recovering, and any further corresponding dips in GLNG look like opportunity to me.

To continue with some other follow ups to the news below, regulating Google as a utility would be an interesting and potentially effective response to its dominance, but the suit itself is not market moving.  MACom is also working with MaxLinear on deployments of its data center laser products.

Finally, Schlumberger is also partnering with Panasonic for its NeoLith lithium pilot.  It's management has also forecast a big rebound for oilfield services, but the corresponding rebound in SLB is of no interest to me.  As communicated below, I'm becoming progressively more interested in preserving capital on most fronts.

On 6/9/21 7:42 AM, Esekla wrote:

Xebec has announced a $1.6M 10-year contract for hydrogen recycling with a glass manufacturer in Germany.  The mention of hydrogen might get a rise this morning, but the amount is insignificant, even to a small company like Xebec.  What is of a little more value is that, with a second deployment, Xebec plans to accelerate sales to over 400 glass manufacturing facilities worldwide.  I remain invested in XBC/XEBEF for long-term growth despite my concerns about the broader market.

The Senate has passed a "competitiveness" bill to allocate funds for the executive order referenced below.  This happened a bit more quickly than even I expected, but again, it's a lot of money without a lot of detail.

Finally, a note about Energy Recovery's $13.8M award in Israel, with parts expected to ship in the second half, should have been included with the news dump  yesterday.  I still don't see a shred of investment value in ERII anywhere in double digits, but this is a large plant and over 10% of expected revenue for the year.

On 6/8/21 10:55 AM, Esekla wrote:

There's plenty of news so far this week, but I'd already foreshadowed almost all of it.  Nothing here is market moving.  The freshest corporate development is BGC's FX optimization for Captialab, which allows before and after SA-CCR adoption.  (Standardised Approach for Counterparty Credit Risk)  This becomes mandatory starting next year, so you can be sure that banks will be experimenting with such facilities starting with the upcoming round of stress tests.  BGCP is still undervalued, but some caution is understandable after recent gains and ahead of the business update due at the end of the month.

Also technologically interesting is MACom's new laser products and design modules.  Industry majors, including Nokia, have just suggested standardized designs for optical modules.  So, we can expect to see plenty of traction over the coming year or two.  However, despite an executive order from the White House, there are no specific semiconductor manufacturing actions being taken yet, beyond a general recommendation to invest $50b, as already reported.  This is something both political parties can get behind, but just as with infrastructure, it will involve lengthy arguments over who gets what for their special interests in Congress.

The Goldilocks situation continued with Yellen's G7 tax accord, but it's worth affirming that the framework is minor negative for Amdocs, which has an effective tax rate slightly below the 15% minimum.  Still, what's on the table is far more benign than many had feared, as is Google's $270M settlement with France.  There's also relief after Apple's WWDC event signaled more sniping rather than all out war with social media for the laggards in that walled garden; its new privacy features amount to nothing more than what's already long been available from the best independent browsers and email clients. 

Going forward, what's going to matter to the index dominating megacaps is how well they can transition their businesses to emerging economies like India.  We'll see if Amazon can fare any better than Vodafone did, but this puts Ebix in great position for its IPO.  Perhaps partnerships are why it has added another economist to its board? 

Orbital has done the same with a financial veteran, but I am staying away from both it and AMSC above $3 and $15, respectively.  In each case, the volatility was expected.  However, higher stock prices will just be further temptation to dilute like Westport, and a disincentive to acquisition by larger companies.  Furthermore, just as with other government initiatives, domestic wind faces challenges, and while grid solar will certainly grow, I think the media and market are ignoring the boom in residential solar, which serves as competition for natural gas as well. 

This will serve as a long term drag on Clearway, and underscores my thesis that utilities are one of the places to be going forward; PPL should announce completion of its U.K. transaction in the next couple of weeks, though I can't be sure how the market will immediately react or if it is prepared for the dividend cut to follow.  Current trading indicates that Big Money is getting quietly bearish while the chartists and swarm traders who often get wiped out in market crashes are still focusing on the porridge in front of them.  Smaller, more nimble investors may still have plenty of time, but I manage substantial capital and am beginning to shift back towards more dry powder and shorter term arbitrage like MX.

Questions are always welcome, but expect the notes to be a little more intermittent in this market transition period.  I will be looking at the CPI numbers on Thursday morning, followed by Energy Recovery's VorTeq decision later in the day.