Stanphyl Capital: the economic crisis is looming, and the electric vehicles that beat Tesla
Stanphyl Capital’s remark for the month ended December 2021, discussing the economic situation in the United States and their long positions in NuScale Power, Volkswagen AG (OTC 🙂 (OTCMKTS: VWAPY) and General Motors Company (NYSE: NYSE :).
Stanphyl Capital Performance
For December 2021 the fund increased by approximately 15.3% net of all fees and expenses. For comparison, the S&P 500 was up 4.5% while the was up 2.2%. For 2021, the fund grew 25.9% net, while the fund was up 28.7% and the Russell 2000 was up 14.8%.
Since inception on June 1, 2011, the fund is up 71.3% net while the S&P 500 is up 338.1% and the Russell 2000 is up 205.4%. Since inception, the fund has compounded at 5.2% net per annum compared to 15.0% for the S&P 500 and 11.1% for the Russell 2000. (The performance of the S&P and the Russell is based on their “Total Returns “which include reinvested dividends. Fund performance results are approximate; investors will receive exact figures from the outside administrator within a week or two. Please note that the returns of individual partners will vary based on their high levels.)
In November and December, the Market Sanitation Department finally arrived to pick up trash, and at the top of its list of non-recyclable (i.e. suitable for landfill only) items was the ETF innovation ARK (NYSE :), a giant collection of stock bubbles that we’ve been short of for much of 2021 (and remain short of somewhat small, though still significant) size. Thanks, Crazy Crooked Cathie, for helping give us a decent halfway year.
Our short position in Tesla (NASDAQ 🙂 also contributed a bit to this month’s gains. ultimately appears to be ‘losing the story’ as an attack of formidable new electric vehicles gains both market share and investor opinion shares, while another headwind from Tesla has been setting the tone. to death (for now, at least) from the planned extension of the U.S. electric vehicle tax credit, thanks to Manchin’s opposition to Biden’s spending boondoggle. (Please watch my twitter thread Why all VE credits are a massive waste of money compared to their immeasurable effect on “climate change”. )
On the long side, the novelty of the fund this month is a position on NuScale Energy, a designer of safe small modular nuclear reactors that is made public via a SPAC with the ticker SV; more on that later.
We are entering a stagflationary rehearsal of the 1970s
Meanwhile, I still believe that we are entering a stagflationary repeat of the 1970s which is why we own several high value stocks and remain sellers of high PE bubbles like Tesla and ARKK.. Even if the failure (for now anyway) of the “BBB Bill” removes some short-term inflationary pressures, this can be offset by the possible cancellation of $ 1 trillion in student debt and increasing demands for cost of living clauses from workers. (I suspect the new Omicron COVID variant won’t change that outlook, as patients seem to get much less sick than they would be with previous versions of the disease.)
The Fed’s new slightly less accommodative stance (i.e. printing tens of billions of dollars a month through March instead of June while predicting three tiny rate hikes in 2022 totaling less than 1%) is ridiculous compared to the rate of, even if this inflation were to ease considerably in 2022 to reach the range of 4% compared to the 6% and above that we see now.
Even at today’s absurdly low rates, interest on the nearly $ 30 trillion in federal debt costs about $ 400 billion a year. Does anyone seriously think that this Fed has the courage to face the political storm of Congress that has to slash medicare, defense budget, etc. in order to pay the costs of higher interest created by breeding these rates at a level corresponding to 4% + inflation? Powell doesn’t have the guts for this, nor does anyone else in Washington; so this Fed will be behind the inflation curve for at least a decade.
Meanwhile, the generalized increases in CPI, IPP and even the Fed’s nonsense Basic PCE continue to indicate that this inflation is not “transient.” (Nor is it limited to the United States; at 4.9%, the euro area recently reported its since its inception, and is highest since 1992.)
Despite all of this evidence, courtesy of Bank of America, we can see that the majority of investors – perhaps conditioned by 40 years of disinflationary complacency (the average portfolio manager is only 44) – still don’t believe that l inflation is a problem. (which probably explains why gold has yet to take off):
And thanks to University of Michigan survey, we can see that although short term consumer inflation expectations have flew…
this fear is right departure slip into:
Meanwhile, the similarities between the stagflation of the early 1970s and the ‘now’ remain troubling:
What was the economic situation in the United States like in 1973?
- Soaring energy costs
- Soaring public deficits
- Soaring labor costs
- CPI> 6%
- Stocks on the verge of entering a bear market as inflation was about to crush PE ratios
- The price of gold on the verge of skyrocketing
What does the economic situation look like in the United States? today?
- Soaring energy costs (such as developed countries “Make war” on fossil fuels)
- Soaring public deficits
- Soaring labor costs
- Low-cost China cut off from supply chains (an inflationary factor not found in the 1970s)
- CPI> 6%
So just like in the 1970s I believe actions enter a bear market as inflation crushes their PE ratios, while deeply negative real interest rates will eventually push up the price of gold.
Meanwhile, stock indexes are so extended that a myriad of exogenous events (both “known unknowns” and “unknown unknowns”) could shatter this market even independent of inflation or Fed actions. Courtesy of @MichaelAArouet & Top-down charts we can see that the real return on S&P 500 CAPE earnings has fallen to levels seen only before previous crashes…
… while CurrentMarketValuation.com we can see that the valuation of the US stock market as a percentage of GDP (the so-called “Buffett indicator”) is unbelievably high…
So here are some additional comments on some of the fund’s positions; please note that we may increase or decrease these positions at any time …
New to the fund this month is a long position in NuScale Power, which will go public in the first half of 2022 by merging into a SPAC with the (temporary) ticker SV. I believe the world will soon recognize that the alone The practical way to decarbonize is nuclear power, and NuScale designs small modular reactors (SMRs) using passive safety that have the only design (so far) approved by the Nuclear Regulatory Commission.
This is a light investment firm (NuScale only provides engineering services), and although the first reactors in the pipeline were not commissioned until the end of this decade, the cash flow starts much earlier because the business is paid as construction progresses.
With a pro forma enterprise value of just $ 2 billion with excellent strategic owners and (according to management) enough liquidity to grow into positive cash flow, I think this is an interesting speculation. in a very “sexy” story, with the added bonus that the pre-merger price should have a floor of around $ 10 as this is where holders are allowed to buy back their shares, thus making this trade rather skewed for a while. at least the next few months.
We continue to hold a long position in Volkswagen AG (via its ADR, which represent “preferred shares” which are identical to “ordinary” shares, except that they do not have voting rights and therefore sell at a discount), because the share was recently sanctioned due to short-term chip shortages and short-term uncertainty about the future of its current CEO.
However, Volkswagen controls a lot of great brands whose electric vehicles (many of which are more technologically advanced than Tesla’s) combine to outperform Tesla in Europe and are expected by the end of 2022 to match Tesla’s electric vehicle sales in China. (Thanks to the introduction in October of the $ 25,000 ID.3 there, VW’s T4 EV sales in China will be at least 60% of Tesla’s.)
In total, VW sells around 10 million cars a year (plus many trucks), compared to around 1 million a year for Tesla. Yet Tesla’s diluted market cap is over 9 times that of VW, meaning an investor pays over 90 times as much for every Tesla sold as for every VW sold! And VW is selling for less than 6 times the estimated profits in 2022!
We continue to hold a long position in General Motors (GM), which currently only sells about 8.5 times profit estimates for 2022. GM does everything in electric cars, autonomous driving (via its Cruise property) and software, yet it is extremely cheap because, as with other established car manufacturers, investors have (for now) abandoned it in favor of “pure-plays of the electric car”, a sector which thus became the biggest valuation bubble in history.
You can read an overview of GM’s future plans (given on an Investor Day in early October) in this press release. And when it comes to “autonomy,” keep in mind that unlike Tesla, which sells Rubes a fraud without LiDAR, Cruise is already manage a fleet of fully self-driving cars in San Francisco; you can see many videos of this on his YouTube channel.
I therefore consider these positions (GM and VW) as “autonomous value share purchases” and “Relative Value Paired Trades” against our Tesla Short Sale.