market leverage and other news -4

12:03 19-Nov-21

A little more for this week, as Orbital's CEO buys another 25K shares at $2.57 yesterday.  The earlier purchase, on Wednesday, didn't have more than an ephemeral effect on the stock.  Build Back Better just passed the House, but everything I said below about both it and OEG still applies.  I also checked with Clean Energy on its latest project, and the typical response:

We do not discuss the specific technology deployed at our RNG plants. In procurement, we review all of the different systems available, including XEBEC.

at least confirms that the products are under consideration, but that won't help XEBEF in the short term.  Market movement as we head into November expiration makes it look increasingly like only zombie capital is being deployed on the long side, and a crisis of faith and financing on both sides of the Atlantic seems ever more likely.

Thus, I'd like to end this week on a forward-looking point that I started this note with.  The euro briefly declined to €/$1.126 on IMF comments that rates there would not rise in the coming year, but it quickly rebounded to the €/$1.132 level I originally cited below.  Nonetheless, expectations in the U.S. are headed the other way.  So don't be surprised to declines of another penny or two over that time frame.  BGCP, which goes ex-dividend on Monday, should benefit.  I also wouldn't be surprised to see it go private in advance of it really showing the benefit of its transformation on the bottom line.  When markets are this broken, it's the only rational corporate response.

Hopefully closing out this note and the week, there is also PPL's dividend with a December 9th ex-date, which will definitely be its final one at 41.5 cents.  Utilities like Telus have been worthwhile additions over the past year, and I expect they will hold up relatively well during market turbulence, but note my differing strategy for the PPL transition.

On 11/19/21 4:38 AM, Esekla wrote:

To continue the news dump of items that don't necessarily stand best on their own...

Schlumberger's Genvia new energy startup is piloting next generation of electrolyzer technology from the CEA with Swiss Steel Group & ArcelorMittal, plus Vicat for cement.  This seems to simply be about using green hydrogen as fuel for their processes.  I therefore note that it is less green than the negative carbon hydrogen that could be produced by Xebec, whose stock has been falling as expected. 

Also, for what it's worth, Schlumberger used the October run-up in LBRT to offload 9.5M shares, or 14% of its Liberty Oilfield stake the day after Energy Recovery reported earnings.  I see that as confirming my skepticism on VorTeq and ERII, and continue the attitude by noting that replacing Flowserve for desalination near Dubai was an unquantified win.  Maybe it will serve as a proving point for further retrofits, confirming the "intense interest" that management cites, but we should have been far past that by now.  Sadly though, I can't fully extend my skepticism hydrocarbons in general, with oil meeting all challenges to stabilize around $80 and natural gas around $5.

Thus, I am taking some interest in the dip in LUMN ahead of its ex-date a week from today.  The 7.3% yield and smaller growth prospects allow me to play the long game, even as Dish goes with Equinix for backhaul and edge services.  M&A should eventually follow, especially if Dish fails.  I think that is more likely than spectacular success, but the jury is still out.

I reiterate that I can no longer claim the same interest for EBIX or its dividend a few days later at current prices representing less than a percent of yield.  The Modi regime is being forced to give ground in the face of persistent farm protests.  Though his term runs through 2024, one has to wonder what comes next in India with key provincial elections looming early next year.  I've been pitched other investments in India and have held off on them for such reasons, though this stance is hardly unique to the country given where we are in the market.

On 11/17/21 3:32 PM, Esekla wrote:

Notification of a 20K share purchase today by Orbital's CEO at $2.50 was just filed.  I'm not swayed by this, but it has reversed the decline in OEG shares that we'd seen since this morning's bump.

Speaking of repurchases, I may as well note that Vodafone is starting the final set of share repurchases to offset the first tranche of the convertible dilution it incurred to finance its Liberty purchase.  This program will run through March 8th, when the Vodafone will presumably commence a similar process for the other tranche, which is maturing that month.  It's been a rough few years for VOD, and though I'll be happy to capture profits from the entry point I noted recently, I wouldn't chase the stock much further past the upcoming dividend.

On 11/17/21 11:43 AM, Esekla wrote:

Nokia has introduced a new cloud SaaS (Software as a Service) business and targets $3.1b in revenue with 25-30% annual growth.  I have some doubts about how quickly this will gain traction and find it telling that the company has no immediate customers, only discussions with communication service providers and enterprises.  However, integration with hardware and expertise in threat detection may be a unique selling point, even though the OpenRAN approach that Nokia was pushing after Intel wrecked its business should have negated that, in theory.  If the company can actually achieve its targets, that should substantially increase margins and could even bring the dividend back, but I'm not holding my breath.

There's no doubt however, that Nokia's cloud software move is a major threat to Amdocs, if only in the form of more pricing pressure.  At its investor day, the company forecast slight acceleration (pg 25) in the revenue growth that was my original opportunity and this morning's Maltese win is underwhelming compared to past publication periods.  It is no surprise to me that the stock is down over 5% since earnings at the beginning of the month.  Nonetheless, I see Amdocs as the better company.  I will continue to monitor its price and would only become interested on drops below $70 and above 2% yield, though $60 and 2.4% would not be surprising.

How all this plays out is one of the prime investment questions for 2022.  Build out will be occurring as shown by Apollo's Brightspeed branding of its purchase and associated move to take advantage of RDOF the funds that Lumen appears to have abandoned.  Build Back Better may pass early next week as Democrats make ridiculous claims about it taming inflation.  We'll probably see what the CBO has to say over the weekend and December 15th appears to be the new drop dead date.  Looking further ahead, next year should begin to show whether Dish survives or is destined to be crushed by the increasing debt load of its spectrum purchases, though.  We might start getting more action against tech megacaps a little sooner, though.

As for the actual physical build outs, Orbital is preparing with official notice of the purchase of Front Line Power Construction as tipped with earnings on Monday.  The purchase is being funded by a $105.0 million 5-year Term Loan, 2-year restricted shares of OEG common stock, and an approximate $85.0 million Promissory Note held by the Sellers.

I'm more interested in the run-up in MX that started yesterday.  The only related news that I can find is soothing statements from China's second in command.  Mostly though, this just looks like pre-settlement trading ahead of Friday option expiration, and justifying my opinion that completely discounting Magnachip's go-private prospects was not proper pricing.  Texas Instruments is finally moving ahead with new chip capacity, but we won't see wafers until at least 2025.  Regardless, it seems like we can always count on regulators to take things down to the wire.

On 11/16/21 3:21 PM, Esekla wrote:

Market leverage for October edged upward to 4.67x as debt increased 3.6% and available cash fell 2.4%.  This exceeds the prior 4.58x record we saw two months ago in conjunction with September's declines.  Now, as then, we're seeing new market highs, but I suspect they are unsustainable for the long term.  The dollar has continued to strengthen, even since the overnight rate I quoted in association with Vodafone's report to €/$1.132 which is a classic short-term warning.  Despite this, American natural gas is at $5.15 with JKM and TTF rising even more sharply as Nord Stream 2 had its certification temporarily suspended by German regulators until its ownership comes more completely under their authority.  This isn't showing in Golar or New Fortress stock prices so far, but it's relevant, and GMLPF has been firming despite being ex-dividend.

In this environment, I've been looking at but refusing to add new energy stocks, even those with high yields.  Shell is simplifying its corporate and stock structure to domicile exclusively in the U.K. and I'm doing the same with my portfolio.  However, that doesn't mean I'm abandoning my existing natural gas or utility picks which were added months ago for just such an eventuality.  I'm also holding some time-sensitive GRoDT bets like AKTS; Akoustis management announced a fourth MU-MIMO CPE WiFi 6E win this morning with production ramping by mid-2022.  There's no hard and fast rule that leverage or indexes can't go higher in the short term.  It's best to think of this as spring that can snap or continue to gradually stretch or contract.  As in investor, extended contraction would be the option that worries me most and, together with inflation attrition, it might be the option that suits the Fed's agenda of eroding savings and forcing people back to work the best.  However, there are other forces at work, and unintended consequences are always a risk.