The Weekly Beacon – December 20, 2024

The new crypto market

Perhaps it’s time we raise rates once again. As liquidity, investor sentiment, and potential improved crypto regulation continue to improve, meme coins and meme stocks are once again running rampant. Crypto markets as a whole are running hot as Bitcoin continues to hit new all-time highs.

However, this heat in crypto has also impacted alternative coins. We think this impact is partially bad. It has gotten so bad that a coin named ‘Fartcoin’ has a market capitalization of almost $1 billion. We are truly in the twilight zone.

We understand the benefits of crypto and its growing utilization, however, the inflation protection that some cryptocurrencies provide (like Bitcoin) is not nonexistent in the overall crypto market. What do we mean by that? The benefit of Bitcoin is that there is a limited supply and no more can ever be created (to our knowledge). This is where Bitcoin provides a bit more inflation protection relative to gold as gold is being mined every day (inherently increasing its global supply). However, there are an infinite number of cryptocurrencies, anybody with a bit of money or some coding experience can launch one and rug pull their investors. This has happened repeatedly in recent years, with meme coins launched or promoted by celebrities eventually collapsing and losing most or all their value.

This arguably means Bitcoin has an infinite number of competitors on a theoretical basis; whereas gold has a limited number of ‘competitors’ as there are a finite number of metals and precious metals.

This is the issue with crypto that leads many to question the asset class on a macro level. Just because we mention these issues does not mean we do not believe in the utilization of some coins including Bitcoin. We simply think that something needs to change in the overall space. We will not supply ideas to solve this as we are by no means deep crypto experts.

We hope you avoid Fartcoin and whatever other meme coins have been launched.

The roaring Chinese auto market

The Chinese auto market has grown by leaps and bounds over the last two decades. China’s car production share has increased from 1% to 39% since 2000 according to data sourced from Bloomberg, the International Organization of Motor Vehicle Manufacturers, and the Bank of America Global Research Division. China’s growth in the sector has occurred while Europe’s production has slipped from 32% to 13%, Japan’s production has slipped from 20% to 12%, and the U.S.’s production has slipped from 14% to 3%. This rotation in production has been driven by innovation in China and lower costs. Global auto companies have moved production into China to lower their costs over the last 20 years. We have also seen the birth of numerous Chinese auto producers over the last few years. China has also leveraged its dominance in electric vehicles and advanced battery technology.

These trends accumulated into China becoming a dominant auto producer. The Chinese government has also poured billions into the industry through state subsidies. China has also grown its global network in the auto industry specifically in EVs at a faster rate than Western producers.

Last week, we reported on our favorite auto-play, GM. We talked about the company’s strong earnings and failed investment in China. The CCP has aligned itself with domestic producers that are pure Chinese players to expand their global market share in the industry. We expect this to continue. Many developing nations will look to China for automobiles due to their low cost. We think this growth will allow China to maintain this dominant market share for years to come in the industry.

Trouble up north

On Monday morning, two Cabinet Ministers in Canada resigned from their top positions in the Canadian government. Of the two resignations, Chrystia Freeland came as a huge surprise. She has served as Minister of Finance since 2020 and as Canada’s Deputy Prime Minister since 2019. She was one of Trudeau’s closest allies, so this came as a huge surprise. In Freeland’s resignation letter, she seemingly took shots at the Prime Minister over their recent disagreements. Freeland reportedly disagreed with Trudeau’s budget and spending initiatives in recent months causing a rift between the two. Freeland’s resignation came on the morning that she was supposed to deliver the fall economic statement.

Monday’s resignations were the cherry on top for the Liberal government which has partially turned on its leader causing numerous resignations.

So, what do we think? We are surprised, to put it bluntly, that Freeland believed in mass government spending, and she has done so for four years, however, the recent initiatives championed by Trudeau were too far even for her. Trudeau’s new policies come as President-elect Trump has threatened Canada with a 25% tariff on exports.

Trudeau’s minority Liberal government is far behind in polling as we speak. The Conservatives (who are forecasted to win by a large majority) have been calling for an election for months. After this surprise resignation, numerous NDP and Liberal Ministers called for Trudeau to resign, and the leader of the Conservatives called for a no-confidence vote which would trigger an election.

All this uncertainty triggered shockwaves across Canada. The Loonie briefly hit $0.69 U.S. on Tuesday morning, a near 25-year low. Canada has lagged behind its peers in terms of economic growth in recent years and productivity has decreased across the country. This has all happened as Canada’s deficit has continued to expand.

We do not see it getting much worse north of the border. If an election is called and the results match what is forecasted, we could see lots of change in Canada. Decreased regulation, pro-business policies, and a tighter fiscal budget. We think buying Canada as a whole at current levels paints a pretty picture and we believe the risk-reward relationship is extremely attractive.

We will have to see what happens next and if our country gets an early election.

U.S. natural gas decline

The U.S. Energy Information Administration reported a decline in production of U.S. shale natural gas during the first 3 quarters of this year. Shale natural gas accounts for 79% of dry natural gas production in the U.S. If this year-over-year trend holds during the fourth quarter, it would be the first time since data was collected that U.S. shale production decreased.

Total natural gas production in the U.S. was flat versus last year. The decline in shale gas production has been driven by declines in production in Haynesville and Utica. The only growing region continues to be the Permian.

As AI and data center growth accelerates, energy use will expand across the world. AI and data center energy use is expected to double over the next decade, where this energy usage will account for 6% of U.S. electricity production. Most of this energy demand growth will be filled by baseload sources like natural gas. Nuclear cannot as it operates near full capacity and new capacity takes close to 10 years to build. Renewables cannot be depended on in scale for other reasons. These reasons along with an increase in LNG capacity in the U.S. over the next few years will increase the demand for natural gas. We think this trend could eventually lead to an equalization of U.S. natural gas prices to Asian and European prices.

The only region that is seeing this so far is Texas which is forecasting mass electricity demand growth:

We think the demand for U.S. natural gas will expand moving forward while supply constraints are prevalent. The country is simply not ready for this expanded growth.

We think this will lead to higher natural gas prices and boosted earnings for U.S. producers. Now, we will warn you, that this trade is not risk-free, the industry is extremely volatile and can swing quickly in a matter of weeks. However, in the long term, we think producers in the industry will grow earnings, and free cash flows, and see their stock prices move higher.

Our favorite natural gas player in the U.S. is a company headquartered in Pittsburgh that is the largest producer in the Appalachian Basin, EQT Corporation. EQT sells natural gas to marketers, utilities, and industrial customers through pipelines. The company was founded in 1878 as Equitable Resources and changed its name in 2009 to EQT Corp.

The company has performed well over the last few years and has expanded its market share (and revenue) substantially over the last 5-10 years. We think it trades slightly expensive but is still an attractive opportunity moving forward. Perhaps waiting for a more attractive entry point would be a strong move if looking for some natural gas exposure.

Throughout this year, EQT Corporation has increased its guidance, announced a strong acquisition, and announced the sale of $1.25 billion in assets. This high-quality company has navigated the volatile natural gas market by adjusting production accordingly over the last two years. EQT has expanded its presence in Virginia in recent quarters which is the hottest data center market in the country.

EQT announced a $14 billion acquisition of pipeline operator Equitrans Midstream earlier this year. The deal will transform EQT into an integrated natural gas producer. The deal will help EQT capture continued natural gas volume growth. This acquisition was financed with debt which EQT is focused on decreasing. Last month, EQT announced a $3.5 billion joint venture with Blackstone. The alternative asset manager bought minority stakes in some of EQT’s pipelines while the energy producer maintained its control. As a part of the cash deal, EQT can reduce its debt by even more in the fourth quarter. As of September 30th, EQT had a net debt of $14 billion. The company is expected to exit 2024 with about $9 billion in net debt. EQT also boasts a low break-even price relative to peers something that we along with many are paying attention to.

We are happy this high-quality management team has maintained its disciplined approach while also prioritizing growth.

Disclaimer: MacNicol & Associates Asset Management holds shares of EQT Corporation across various client accounts.

Like its 1978

The Dow Jones had its ninth consecutive losing day on Tuesday, its longest losing streak since 1978. This is quite a glaring data point. We did not even see this long of a losing streak in the Dot-Com Bubble or Financial Crisis.

The losing streak comes ahead of the highly anticipated Federal Reserve interest rate decision on Wednesday. Economists are forecasting a 25-basis point cut by the FED and verbiage suggesting slower rate cuts in 2025. The S&P 500 also fell on Tuesday. The major index had negative breadth, the 12th consecutive occurrence the S&P featured negative breadth which is the longest streak on record according to Dow Jones Market Data (which goes back to 1999).

Rising yields and lower probabilities of lower interest rates have led to this negative streak across equity markets.

Perhaps this performance is caused by investors taking some profits off the table while valuations remain elevated and uncertainty across global markets continues to loom.

A brief Wednesday update

The Federal Reserve made it official on Wednesday slashing interest rates by 25 basis points in its last decision of the year. This was expected by economists and investors. Despite these expectations markets took a dip when this was announced.

In Chairman Powell’s statements, he said the FED will cut interest rates next year but indicated a go-slow approach. During his statement, Powell said the country is inching closer to the 2% inflation target but sees some work ahead until we reach that level. Powell did note the progress that the FED has made on the inflation front, however, uncertainty amongst FED officials around inflation was indicated by Powell (perhaps some are waking up to the realities of a second wave of inflation).

The FED’s interest rate forecast indicates a pause at its first meeting in January and is forecasting fewer cuts than previously forecasted throughout 2025. Higher for longer as we were expecting.

The U.S. Dollar rose after this announcement and was on pace for its highest close in two years (as of Wednesday afternoon). The US dollar has heavily rallied since Trump won the election. Remember, US $ up Canadian $ down …..

We expect inflation to remain a thorn in the side of the FED through 2025 and interest rates to remain elevated for quite some time.

In the consumer’s hands

We ran across a story we found very interesting this week. We thought it covered a great topic for the end of this year.

Constellation Energy announced a new initiative that will allow households to choose their energy source. Households in the Washington, DC area can choose 100% nuclear energy if they would like. This new program comes as public support for nuclear energy grows and more people wake up to the reality that nuclear energy is clean energy. This pilot program allows consumers to vote on nuclear energy with their wallets. As nuclear bulls and uranium investors, we fully support this pilot program and continue to remain bullish on the entire sector moving forward. We think uranium is one of the major industries that will have strong returns through the end of this decade.

Happy Holidays from our families to yours. We hope you have an enjoyable and safe holiday time.

MacNicol & Associates Asset Management

December 20, 2024

Click here for the PDF: The Weekly Beacon -December 20 2024