Friday Haymaker Edition

In The Ring - July 14th, 2023

Jul 14, 2023

“My whole view of the world is the future can be radically better and the two things that we really need for that are to lower the cost of energy and lower the cost of intelligence. And if we get those, we'll be quite surprised about how different and how much better the future is…I don't see a way for us to get there without nuclear.” -Sam Altman, the “founding father” of ChatGPT

Go Small Or Go Home!

When you are in the business of communicating your anticipations, as I am, you have to accept that you’re going to get some tough breaks. There unavoidably will be times when you go on record as expecting an event to happen and yet you are proven wrong, sometimes embarrassingly. Fortunately, there are also those times when circumstances fall into place to vindicate one of your expectations. This week brought one of those moments.

In the May 30th Making Hay Monday edition, I speculated that there might logically be synergy between a technology breakthrough the world is heavily focused on and one that is just emerging as an area of growing interest. The first is, unquestionably, AI; the second is, much more controversially, Small Modular Nuclear Reactors (usually initialized as SMRs). My totally inexpert musing in that earlier post was that the two might actually be synergistic. In other words, the power of AI might be harnessed to refine the technology of SMRs and move those out of the development stage (which they’ve been in for what seems like eons) and into actual electricity production.

Here’s what I wrote in the 5/30 MHM:

Who knows? Maybe AI can even accelerate the nuclear industry’s transition to molten salt reactors. Wouldn’t that be among the wiser ways to apply artificial intelligence to a half-century-old ‘new’ technology?

(Molten Salt Reactors are considered by some nuke experts to be the most advanced SMRs and their effectiveness was demonstrated in the 1960s at Tennessee’s Oak Ridge National Laboratory.)

As you may have seen, the big news for SMRs this week was that Sam Altman, the CEO of OpenAI, whose technology powers ChatGPT, is combining his SPAC with nuclear energy start-up Oklo. (“SPAC” stands for “Special Purpose Acquisition Company”.) Oklo is based in California and its mission is to create an SMR that can provide carbon-free electricity from reactors it owns and operates. Thus, customers would not have to be in the nuclear power business with all the attendant risks. Certainly, its home state has an acute need for reliable and affordable power.

Via this transaction, Oklo is being valued at around $850 million. Mr. Altman’s SPAC, AltC Acquisition, which he co-founded with a former Wall Street banker, Michael Klein (those folks are like Forrest Gump and weeds – they’re everywhere!). Their SPAC has $500 million in the bank – or, hopefully, in T-bills – just what a cash-devouring start-up desperately needs. Oklo has been around since 2013 and has yet to put a reactor in operation, which it hopes to accomplish by 2030 (emphasis on “hopes”).

This has been the history of the SMR mini-industry. Bill Gates’ TerraPower has burned through hundreds of millions and is still many years away from commercial operation. NuScale Power, another publicly traded SMR entity and also a SPAC, has been a money sink, as well. (By the way, none of these three SMRs utilize the molten salt technology on which I have become increasingly bullish.)

To learn more about Evergreen Gavekal, where the Haymaker himself serves as Co-CIO, click below.

Private Wealth Management

Compatibility Survey

Further, my friends at MicroNuclear (not publicly traded), which has developed a new molten salt process, believe they can “cut metal” almost immediately and achieve “first fission” as soon as next year. This assumes, among other critical need-to-haves, that they can get the go-ahead from a user that does not need Nuclear Regulatory Commission (NRC) approval. As I previously wrote, the NRC should possibly have an “A” in front of its name, as in “Anti”. Unsurprisingly, Oklo previously ran into the NRC’s brick wall which it is still trying to overcome. However, it has received Department of Energy approval to develop an SMR in conjunction with the Idaho National Laboratory. (Idaho has been a leading location for atomic advancements going back as far as 1949.)

Frankly, I wasn’t aware Sam Altman has been long involved with SMRs; he first invested in Oklo in 2015 and is its chairman. Thus, this isn’t a new love affair. But he’s clearly taking it to a higher — and costlier — level. He also has a substantial investment in a fusion start-up: Helion Energy.

Looping back to the potential links between AI and SMRs, this snippet from a July 12th Wall Street Journal article struck me as quite intriguing (and gratifying): “‘The AI systems of the future will need tremendous amounts of energy and this fission and fusion can help deliver them,’ Altman said, adding that he thinks that as AI advances it will contribute to nuclear-system designs.” (Emphasis added.) It’s fair to say I don’t normally hit the target nearly as well, or as quickly, as I did with that one, as we will soon see in Monday’s Down For The Count section.

However, I also made a decent suggestion on June 15th when I downgraded uranium to a hold based on a sharp price run-up. Since then, it’s pulled back about 9%. That mild correction combined with the increasing momentum behind SMRs is causing me to return it to Champion status. Oddly, it’s retraced a bit at a time when most other commodities have been rising. For example, you may have noticed that one of my favorites — oil — has been bouncing back most vigorously.

A key catalyst for this pop by the natural resource sector has been a somewhat bizarre combination of a growing belief by market participants that the economy is strengthening at the same time inflation is ebbing. Usually, those factors create opposing forces. Unquestionably, the inflation number reported on Wednesday was very good news. It raises the distinct possibility that should the Fed hike once more at the end of this month, it will be the last. Consequently, the investment community is increasingly embracing a Goldilocks scenario: an economy that is neither too hot nor too cold. Over the last 30 years or so, that has been a delightful environment for stocks.

While I don’t have a problem with the consensus conviction that inflation is coming down fast right now (though I have serious doubts it will remain suppressed longer term), I am not nearly as comfortable with the soft-landing and, especially, the no-landing thesis. Based on most — but, certainly, not all— of the economic data I’m seeing, a recession is still very possible later this year. As I’ve noted in some of my recent podcasts, corporate earnings, the manufacturing sector and Gross Domestic Income (GDI, the counterpart of GDP) are all in contraction mode presently.

However, what I’ve also conceded is that there is one part of the economy that’s scorching like the weather in the Southwest this week: the build-out of new plants in America. This is reflecting the powerful trend toward “reshoring”, essentially bringing back the US of A’s industrial base from overseas, especially China. The Inflation Reduction Act is turbocharging this phenomenon, as it provides powerful incentives (some might say, excessive) to build-out domestic production.

This leads me to another Champions idea. As most Haymaker readers should know by now, I am a huge fan of securities — be they stocks, sector ETFs, or broad market funds — that are breaking out to three-year highs. Those doing so while achieving all-time highs are even more appealing to me. The below chart of the Industrial ETF (XLI) is, to my mind, a beauty to behold.

Price history of XLI since 2013 (note, the two earlier breakout signals in its long up-trend)*

*Past performance is not a guarantee of future results

This is clear technical confirmation that an industrial renaissance is indeed underway in the U.S. There is also a linkage to what I’ve often referred to as the Great Green Energy Transition, which also requires an enormous investment in new capacity. (It would be wonderful, in my opinion, if a considerable amount of that went into SMR development and deployment.) However, please be aware that XLI, like most cyclical plays, has spurted lately. Thus, a minor retreat is quite possible, even likely. Accordingly, if you do like this concept, go slowly. Dollar-cost-averaging into an attractive sector is much safer than doing so with an individual stock that could totally collapse, as so many did last year (with more to come soon, in my view; the echo bubble I’ve previously described is becoming yet more inflated — and dangerous).

It's been two months since we ran our breakout list so I thought I’d update that now. If you compare it to our May 15th Making Hay Monday edition, you’ll notice some new names. With individual stocks, I can’t provide specific recommendations due to SEC regulations, but my favorite charts are those that display a “range expansion”, or breakout, from a long-term trading range. In the case of XLI, 24 months is a bit on the shorter length of what I prefer, but when it’s a continuation of a long-term up-trend, and also a new all-time high is hit, that’s close enough in my book for government work (and, boy, is there a ton of that going on these days!). My preference is also for those that haven’t run too far after their breakout point.

There are some interesting names below that should benefit from the reindustrialization of America theme. As always, I’m partial to those with reasonable valuations, strong balance sheets and that generate abundant excess cash flow.

Happy hunting!

Please note: the items listed above are not recommendations.

Champion Picks

Industrial sector ETFs

Uranium

Japanese yen

Defense industry (particularly those contracted to manufacture in-demand weapons systems)

Oil and gas producer equities (both domestic and international)

Gold & gold mining stocks

Farm machinery stocks

Select financial stocks

U.S. oil gield services companies

S. Korean stock market

Copper-producing stocks

For income:

BB-rated bonds from dominant media companies and healthy automakers with upgrade potential

BB-rated intermediate term bonds from companies on positive credit watch

Certain fixed-to-floating rate preferred stocks

Select LNG shipping companies

Emerging Market debt closed-end funds

Mortgage REITs

ETFs of government guaranteed mortgage-backed securities

BB-rated energy producer bonds due in five to ten years

Select energy mineral rights trusts

Contenders

The following suggestion might be a tad on the too-cute side based on my belief we could see oil break above $100 later this year. But, once more on the fortuitous side of fate, our table-pounding recommendation of energy producers on June 23rd proved timely. The leading Permian Basin producers have snapped back in the 6% to 8% vicinity. That’s a nifty move in a short timeframe, despite today’s retracement. By no means am I suggesting profit-taking for anyone but the most hyperactive traders. Even then, I’d recommend only a trim, not an exit. But after such a quick up-move, being a bit more patient on putting new money to work in this sector is reasonable. (Actually, I wrote this section yesterday and today’s slide illustrates the risks of buying after a sharp rally.) Another decent call was to suggest some buying in midstream energy during their recent minor slippage. They have also been a beneficiary of the inflation downshift and the related bond rally. A certain pipeline attached to one of Warren Buffett’s Berkshire Hathaway’s larger oil and gas producers has particularly perked up. Exercising discipline when doing more buying with midstream issues is also advisable for the time being.

Oil and gas producer equities (both domestic and international, with a particular focus on those well exposed to the Permian Basin)

Top-tier midstream companies (energy infrastructure, such as pipelines)

Singaporean stock market

Top-tier midstream companies (energy infrastructure such as pipelines)

Short-intermediate Treasurys (i.e., three-to-five year maturities)

Japanese stock market

European banks

U.S. GARP (Growth At A Reasonable Price) stocks

Telecommunications equipment stocks

Swiss francs

Singaporean stock market

Intermediate Treasury bonds

Small cap value

Mid cap value

Select large gap growth stocks

Utility stocks

Down For The Count

Well, so much for my timely bond call. In the June 30th Haymaker edition, I pointed out that my warnings about the long-term Treasury had been at least partially justified. This was when the long T-Bond ETF, TLT, had eased back about 3%. Yields across the Treasury curve we’re breaking out to the upside, as I noted. And then came Wednesday’s stellar inflation release. This triggered a rally in almost everything including across the Treasury debt complex. Even short-term notes rallied hard, driving their yields down from a recent 16-year high of over 5% to around 4.7% today. All in all, it was about a 40 basis point (0.4%) yield decline. That’s a very big move for a short-term debt security in such a brief time period.

On longer term Treasurys, it has been a less dramatic rate drop, about 20 basis points, but prices are, of course, more volatile further out on the maturity spectrum. In my partial defense, I have been a fan of three- to five-year Treasurys so I haven’t totally missed the move. Further, in our June 30th Haymaker I did strongly endorse short-to-intermediate term corporate bonds with yields in the 6.7% to 7% range.

As far as what happens from here, a further price rally (meaning yields moving lower yet) is entirely possible. There was a huge short position in longer T-note and T-bond futures contracts. As a result, bullish news, like the encouraging CPI report this week, can have an outsized impact. Looking out toward the rest of the year, I remain dubious on the durability of this rally, at least, once again, on longer-term Treasury notes and bonds. As I’ve written numerous times, I believe somewhere around $2 trillion of new government bonds will be hitting the market at the same time the Fed is a persistent seller. The shorter-term offerings should have swarms of buyers. However, further out I think fears of “fiscal dominance”— the idea that the Fed will once again have to step into finance U.S. government deficits to keep rates from ripping higher — are likely to become pervasive. Ergo, I remain bearish on long-term govies and would rather play falling extended rates via emerging market debt in the stronger developing economies. Closed-end funds that traffic in those bonds have also been coming to life of late. It’s my expectation that will continue in the months and years ahead.

Long-term Treasury bonds yielding sub-4%

Homebuilders stocks

Electric Vehicle (EV) stocks

Meme stocks (especially those that have soared lately on debatably bullish news)

The semiconductor ETF

Junk Bonds (of the lower-rated variety)

Financial companies that have escalating bank run risks

The semiconductor ETF

Bonds where the relevant common stock has broken multi-year support.

Profitless tech companies (especially if they have risen significantly recently)

Small cap growth

Mid cap growth

Also, a final note for the week, one which ties in well with today’s edition. We were happy so many of you found time to watch my interview of Richard McPherson and Doomberg on the topic of small modular nuclear reactors (SMRs). However, although we included a link to MicroNuclear’s extremely detailed explanatory video in the interview’s YouTube description, we’ve had quite a few inquiries as to where the video can be found. For convenience, we’ve linked to it right here. Enjoy! (and please share this with your science- and energy-interested friends and associates.)

Haymaker

Friday Haymaker Edition

In The Ring - July 14th, 2023

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