Well, thank you for this, which I hadn't noticed when I bought a half position yesterday for very similar reasons. Because I think their debt is under control, I see this as one of the handful of yieldcos that are on a yield which will look ridiculous in a year, when rates are dropping. They look comfortable with being able to maintain and slightly grow that 9.5%, while doing buybacks. Doing both simultaneously implies a fair degree of confidence in a company that is not a minnow in this space. (I also hold TENT, which IS winding up, because it is too small...)
Perhaps people don't believe in 2% inflation in the UK. I do actually, in spite of higher services pay, a China begins to export deflation again, and we begin to get on top of the energy equation. Forget growth: why would you be unhappy with 7.5% above inflation. I think these ITs are the bargain of a generation. And even if it only goes to 80p in two years, with divs that's 20% p.a. (I alwasys take a two-year view.)
more great work Mr Oak; i always look forward to your latest analysis.
i think the mkt is pricing this one a little like a Private Equity company with electricity holdings (albeit without the high PE fees), rather than a yieldco? i do wonder how much DD SEIT was capable of doing in all these various technologies in differing geographies? retail will of course get interested, but i suspect only when the yield>10%?
I wonder whether this is growth at a reasonable price or growth at a (very) risky price, like trying to pick up nickels in front of a train.
That train imo is the fast deteriorating bond market. This is the macro picture. The Fed needs to roll over a whopping $17tr of short term debt over the next 3 years - and for a soupcon just look at how poorly their bond auction went yesterday. Foreign buyers are calling it a day on US Federal debt, too.
This squeezes Reits, Seit and similar vehicles in 2 ways. First as interest rates rise (as Jeff Gundlach believes they will do) their yields become less attractive to investors. Second, the debt they carry becomes more expensive. Plus we must consider contraction of market conditions as well.
This is not exactly my area of expertise, so interested to hear any thoughts others may have on this, but I wouldn't touch with a bargepole.
What bond auction are you talking about? I didn't think they ran bond auctions on a Sunday!
Could you share a link for this evidence of the "bond auction that went poorly"?
So you believe SEIT is (very) risky because of some sort of armageddon event that you believe is imminent. Your evidence is Jeff Gundlach predicted this. And that interest rates will rise, foreign buyers will call it a day implying the world's reserve currency will imminently lose its reserve status (which has enabled the US to maintain a deficit for decades).
The problem with relying on Jeff Gundlach is he predicted the same thing:-
And has been wrong, wrong and wrong, so you'll forgive me if I fail to see the relevance of Jeff's opinion. I also notice Jeff recently said interest rates will fall, not rise.
SEIT meanwhile offers defensive characteristics since it energy services are usually a non-discretionary, essential service. Even in the event of this armageddon macro scenario you portray, people still use energy, and in fact during a recession would seek to conserve their use of energy which is also a core objective of this trust. Energy usage is fundamentally rising through the increasing use of AI, automation and energy transition - even if there is recession as you (and Jeff) say, it will prove a blip rather than some kind of fundamental change in how we use energy.
Go back to 1929, 1981, 2009 - never once in history has energy use declined.
The $17 tr figure comes from the St Louis Fed site, however I can't track it down at the moment as I'm on the move - apologies.
Where did I say anything about armageddon? I simply said that given (the basic economics of supply and demand) us interest rates will likely rise. You can look at the chart for the 10 year to see this has already been happening. You can also see that China, Japan and ME countries have all but stopped buying US Treasurys. The central banks have also been buying gold instead.
Thus, interest rates for US debt have been forced upwards. This, in turn, crowds out commercial borrowers who ultimately need to pay a higher coupon. (Check DEC'S credit arrangement today for an example of the rates being charged by banks).
I hear what you say about Gundlach. Still, I think (given the above) he has a point about medium and LT rates.
I don't question the increasing need for energy. It's the vehicle that I question, and I'm simply saying that SEIT's business model may not be the best to cope with a rising rate environment.
If rates are forced up (and the Feds lose control) then that will not likely be very positive for the markets as a whole imo. It may be that investment companies are harder hit in this eventuality.
You are correct armageddon is beyond what you described. And I share your concern about the US debt levels and I can see the mechanism by which that could lead to higher rates. Also that neither party appear to be seeking to tackle the issue certainly elevates the risk too.
So medium term/long term I don't disagree with you about US rates.
I guess where we disagree is how this impacts SEIT. SEIT has 43% gearing (less the recent £90m realisation) company-level gearing drops to zero.
Meanwhile, 85% of portfolio debt is fixed and on 4 year terms. So the cost of debt is not really an issue here and in the event of medium/long term rate rises (if - or let's say when - that occurs) could be managed through capital allocation. Energy supply as with many other things would reprice to face a higher interest rate world.
Oak, I think this is a healthy discussion and let me reiterate that your selections (seit included) are well researched and absolutely tip top.
For what it's worth, I think it's helpful that you raised cathie wood and nvidia (from your previous post). At the top level of analysis I think we are agreed that the bond market is far from rosy, long term interest rates might be tending higher.
The next question I think we need to ask is whether we are in a bubble. Interesting hear to see Warren Buffett trimming his holdings quire considerably. The Buffett value indicator meanwhile is flashing strongly overvalued.
Also I'm not so giddy about your take on nvidia. Would it make an OB portfolio for example? I doubt it.
At a mcap of $2.8 tr it's on a p/e of over 60. These multiples are similar to tech high-fliers of the late 90s. Bill Bonners take on what nvidia needs to do just to stand still is worth a read here imo: https://www.bonnerprivateresearch.com/p/pole-position/
My concern is if this is a bubble and pops, or even if there's recycling, the market will not discriminate and take all the new-fangled stocks with it, no matter the merits.
Now let's go to another stock that must surely be in OB teerain: a gold mining stock trading on FREE CASHFLOW of 1.(Metals Exploration) (I don't own).
Here the market seems to be pricing in all the worst at once - mine life being limited, not gonna get anywhere with exploration. Philippines too dangerous, etc. Finding all the worst reasons. Look on goldstockdata and you will see dozens of companies printing as fcf 5 or below next year.
I have no idea what a stock or market will do but imo I think there is greater earning stability in your picks like tharisa, cey etc ( I own paf and it's mega grade Sudan concession is being simply ignored, agm soon so maybe an update). Also I believe this time pms will get more resilient in a popping bubble (West hardly owns and East hordes, thus less covering). Also traditionall energy (eg o&g - broker views here:
Well, thank you for this, which I hadn't noticed when I bought a half position yesterday for very similar reasons. Because I think their debt is under control, I see this as one of the handful of yieldcos that are on a yield which will look ridiculous in a year, when rates are dropping. They look comfortable with being able to maintain and slightly grow that 9.5%, while doing buybacks. Doing both simultaneously implies a fair degree of confidence in a company that is not a minnow in this space. (I also hold TENT, which IS winding up, because it is too small...)
Perhaps people don't believe in 2% inflation in the UK. I do actually, in spite of higher services pay, a China begins to export deflation again, and we begin to get on top of the energy equation. Forget growth: why would you be unhappy with 7.5% above inflation. I think these ITs are the bargain of a generation. And even if it only goes to 80p in two years, with divs that's 20% p.a. (I alwasys take a two-year view.)
more great work Mr Oak; i always look forward to your latest analysis.
i think the mkt is pricing this one a little like a Private Equity company with electricity holdings (albeit without the high PE fees), rather than a yieldco? i do wonder how much DD SEIT was capable of doing in all these various technologies in differing geographies? retail will of course get interested, but i suspect only when the yield>10%?
I wonder whether this is growth at a reasonable price or growth at a (very) risky price, like trying to pick up nickels in front of a train.
That train imo is the fast deteriorating bond market. This is the macro picture. The Fed needs to roll over a whopping $17tr of short term debt over the next 3 years - and for a soupcon just look at how poorly their bond auction went yesterday. Foreign buyers are calling it a day on US Federal debt, too.
This squeezes Reits, Seit and similar vehicles in 2 ways. First as interest rates rise (as Jeff Gundlach believes they will do) their yields become less attractive to investors. Second, the debt they carry becomes more expensive. Plus we must consider contraction of market conditions as well.
This is not exactly my area of expertise, so interested to hear any thoughts others may have on this, but I wouldn't touch with a bargepole.
Hi Nick,
What bond auction are you talking about? I didn't think they ran bond auctions on a Sunday!
Could you share a link for this evidence of the "bond auction that went poorly"?
So you believe SEIT is (very) risky because of some sort of armageddon event that you believe is imminent. Your evidence is Jeff Gundlach predicted this. And that interest rates will rise, foreign buyers will call it a day implying the world's reserve currency will imminently lose its reserve status (which has enabled the US to maintain a deficit for decades).
The problem with relying on Jeff Gundlach is he predicted the same thing:-
30 months ago:
https://markets.businessinsider.com/news/currencies/jeff-gundlach-doubleline-federal-reserve-stocks-recession-bitcoin-crypto-nft-2022-1
18 months ago:
https://www.advisorperspectives.com/articles/2022/12/07/gundlach-u-s-will-face-recession-by-mid-2023
15 months ago:
https://www.pionline.com/economy/doublelines-jeffrey-gundlach-predicts-possible-recession-next-4-months
And has been wrong, wrong and wrong, so you'll forgive me if I fail to see the relevance of Jeff's opinion. I also notice Jeff recently said interest rates will fall, not rise.
https://www.cnbc.com/2024/05/01/doublelines-gundlach-sees-one-rate-cut-this-year-as-fed-keeps-up-inflation-fight.html
SEIT meanwhile offers defensive characteristics since it energy services are usually a non-discretionary, essential service. Even in the event of this armageddon macro scenario you portray, people still use energy, and in fact during a recession would seek to conserve their use of energy which is also a core objective of this trust. Energy usage is fundamentally rising through the increasing use of AI, automation and energy transition - even if there is recession as you (and Jeff) say, it will prove a blip rather than some kind of fundamental change in how we use energy.
Go back to 1929, 1981, 2009 - never once in history has energy use declined.
https://ourworldindata.org/grapher/global-energy-substitution
OB
Apologies I'm overseas mostly sailing. The bond auction was last week, one commentary on it is here:
https://www.zerohedge.com/markets/ugly-5y-auction-sends-yields-2-week-high?ref=biztoc.com
The $17 tr figure comes from the St Louis Fed site, however I can't track it down at the moment as I'm on the move - apologies.
Where did I say anything about armageddon? I simply said that given (the basic economics of supply and demand) us interest rates will likely rise. You can look at the chart for the 10 year to see this has already been happening. You can also see that China, Japan and ME countries have all but stopped buying US Treasurys. The central banks have also been buying gold instead.
Thus, interest rates for US debt have been forced upwards. This, in turn, crowds out commercial borrowers who ultimately need to pay a higher coupon. (Check DEC'S credit arrangement today for an example of the rates being charged by banks).
I hear what you say about Gundlach. Still, I think (given the above) he has a point about medium and LT rates.
I don't question the increasing need for energy. It's the vehicle that I question, and I'm simply saying that SEIT's business model may not be the best to cope with a rising rate environment.
If rates are forced up (and the Feds lose control) then that will not likely be very positive for the markets as a whole imo. It may be that investment companies are harder hit in this eventuality.
Hi Nick, thanks for the update.
You are correct armageddon is beyond what you described. And I share your concern about the US debt levels and I can see the mechanism by which that could lead to higher rates. Also that neither party appear to be seeking to tackle the issue certainly elevates the risk too.
(I wrote about the fact that the BRICS nations are seeking to avoid dollars for trade - and debt - in my article https://theoakbloke.substack.com/p/born-on-the-4th-of-july)
Cathy Wood speaks to a similar narrative in her monthly "In the know" and I find her evidence quite compelling:
https://www.youtube.com/watch?v=GqWuUSd4q7s&t=1865s
So medium term/long term I don't disagree with you about US rates.
I guess where we disagree is how this impacts SEIT. SEIT has 43% gearing (less the recent £90m realisation) company-level gearing drops to zero.
Meanwhile, 85% of portfolio debt is fixed and on 4 year terms. So the cost of debt is not really an issue here and in the event of medium/long term rate rises (if - or let's say when - that occurs) could be managed through capital allocation. Energy supply as with many other things would reprice to face a higher interest rate world.
Enjoy your sailing
OB
Oak, I think this is a healthy discussion and let me reiterate that your selections (seit included) are well researched and absolutely tip top.
For what it's worth, I think it's helpful that you raised cathie wood and nvidia (from your previous post). At the top level of analysis I think we are agreed that the bond market is far from rosy, long term interest rates might be tending higher.
The next question I think we need to ask is whether we are in a bubble. Interesting hear to see Warren Buffett trimming his holdings quire considerably. The Buffett value indicator meanwhile is flashing strongly overvalued.
Nvidia and just 2 other stocks make up a full 20% of the entire S&P market cap. https://www.slickcharts.com/sp500
The entire mining sector, by comparison, is 1%.
Also I'm not so giddy about your take on nvidia. Would it make an OB portfolio for example? I doubt it.
At a mcap of $2.8 tr it's on a p/e of over 60. These multiples are similar to tech high-fliers of the late 90s. Bill Bonners take on what nvidia needs to do just to stand still is worth a read here imo: https://www.bonnerprivateresearch.com/p/pole-position/
My concern is if this is a bubble and pops, or even if there's recycling, the market will not discriminate and take all the new-fangled stocks with it, no matter the merits.
Now let's go to another stock that must surely be in OB teerain: a gold mining stock trading on FREE CASHFLOW of 1.(Metals Exploration) (I don't own).
Here the market seems to be pricing in all the worst at once - mine life being limited, not gonna get anywhere with exploration. Philippines too dangerous, etc. Finding all the worst reasons. Look on goldstockdata and you will see dozens of companies printing as fcf 5 or below next year.
I have no idea what a stock or market will do but imo I think there is greater earning stability in your picks like tharisa, cey etc ( I own paf and it's mega grade Sudan concession is being simply ignored, agm soon so maybe an update). Also I believe this time pms will get more resilient in a popping bubble (West hardly owns and East hordes, thus less covering). Also traditionall energy (eg o&g - broker views here:
https://www.zerohedge.com/markets/high-flying-commodity-sectors-set-keep-climbing
might be more resilient going forward. But these are views in the spirit of a discussion and might well be entirely misguided.
Keep up the outstanding work Oak and thanks for the best wishes!