I haven’t been able to write as much on the blog this year do to other commitments, but wanted to do this post as a quick update on names I’ve posted on in the past and future thoughts. Can’t quite call it a mid-year update, or full year update, so think of this as a 5/6ths year update…

In no particular order:

• $AGFS – This week Paine Schwartz announced it would acquire the company for $3/shr. They already have a very onerous pref and control a lot of votes. They clearly know the company well. That said, the offer was not subject to having financing. I’ve followed AGFS for some time and financing was always tough (hence the onerous pref) and financing is even more difficult right now. I’m closing out this position and moving on @ $2.75.
• $NCMI – what a disaster. Cineworld declared bankruptcy and that gives them the right to restrike the deal with NCMI. Plus, advertising continues to be weak as the economy slows down. As a post-mortem, I’m comfortable with my call to buy it as a levered play on theaters recovering, but I missed Cineworld risk. I thought even in BK, re-striking the NCMI deal made no sense (they just cut the deal in 2019, NCMI is superior to alternatives, re-striking the deal creates a big claim for NCMI as a unsecured creditor, and so on). No need to dwell on all the details, mistakes were made. Moving on.
• $BBBY ’24s – as expected, BBBY launched a distressed exchange.  The offer is pretty “meh” for the ’24s, despite swapping into either a non-convertible 2L security or a convertible one with a lower coupon vs. unsecured. However, in the non-convertible, they can call it in 1 year at 40c. In the convert, the strike is $12/share. Maybe if there’s a reddit mania again that makes sense, but pah-lease. In the meantime, they company continues to complete its ATM equity program and has raised $75MM + filed to raise another $150MM. I’ll wait for another offer….
• $AXL and other auto suppliers – I think the auto thesis is delayed due to inflation hitting earnings plus continued supply chain problems, but the thesis isn’t dead yet. I still like auto suppliers despite what seems to be a looming recession given production is still constrained.
• $ABM – a quiet winner YTD being up ~9.5%. They continue to grow well organically and margins are holding in. I still like it as a name no one seems to follow well.
• $BIG – can’t escape the woes of other retailers. They have a lot of issues, but I think with prices where they are, I’ll do ok in the next 5 years (famous last words)
• $CVEO – touches energy so no wonder it is up 58% YTD. Yet with leverage so low now and literal leverage to an energy up-cycle, why would I close out now?
• Muni Bonds & GSEs – rates continued their march up after I posted about Munis. I still think the value is quite strong. I also think I see more signs of a deflationary bust than continued increase in inflation. Sure, it is “stubborn” for now, but the Fed’s tools are a blunt instrument and take time. The main thing that keeps me up at night is Europe and their supply shock (see bottom of post for more).

But if you ignore that, the Fed has told you it wants to get back to 2% inflation. Do you believe them? If you do, but think pain comes in between now and then, do you own stocks right now? I’m OK owning highly-rated fixed income securities for what comes on the other side but in either case, are offering 7-8% tax-equivalent yields.

I tweeted about GSEs recently too (FHLB and Farm Credit bonds). These were offering yields >100bps than the same-rated treasury securities. There are reasons for that, such as the Fed stepping out of buying MBS, but also these becoming longer duration assets as rates went up, but also banks capital rules this year mean they aren’t buyers and probably sellers this year, BUT ALSO, foreign buyers have been priced out of the market due to FX hedging…

So you’re telling me all the buyers are out and I’m getting a historically massive spread for AAA paper? I’ll take it.

As for what keeps me up at night from here, it has basically nothing to do with the Fed. It is 100% Europe. I’m not sure how they will effectively deal with such a large energy shock and unfortunately, while 2022->2023 winter looks like no one will freeze, who knows about 2023->2024 winter and beyond. And in particular, how will that impact the economy?

I recently came across this slide from a chemical service, ICIS, which showed how much capacity had been idled or reduced in Europe. It’s insane. Especially when you look at the top constituents actually tend to be more critical (fertilizers are the top 3 and then polyethylene, PTA, PET which go into a lot of out everyday products and packaging). 

If you want to convince me of a more “embedded” inflation problem, I see it there. And it isn’t related to stimulus. It’s a supply shock. 

Here’s another one, excluding fertilizers, but also shows it based on % of capacity in chemicals. 

This earnings season, companies I follow with European exposure have noted a pretty precipitous drop off in demand in Europe. It makes sense. When you are worried about heat bills, you are less worried about buying a new car, TV, window treatments, or basically anything discretionary.

This seems like a big problem. I’m normally a really optimistic guy, but if I had to be a bear, I’d point here.