Recessions & Cold Wars

Happy Friday folks! Despite nearing that market-neutral Fed Funds Rate, officially being in a recession and a poor housing data release, the market returned a solid 4% since Monday’s open as tracked by the S&P 500. Thus, investors became more positive on the market’s outlook with bearish sentiment falling to 40% by this week’s end – down from 53% since the month’s start. While the S&P 500 gained some more ground above that key 4000 point level, we made some stellar recommendations in the energy sector as our $CVX and $XOM trades returned 8.7% and 7.4%. Read on for three special long term picks to help your portfolio endure what we believe is now the makings of the second cold war…
“As long as we persevere and endure, we can get anything we want.”
– Mike Tyson
Market Talk
Markets crave certainty and knowing the answer is what they appreciated this week as the main catalyst of the Federal Reserve’s 75bp rate hike was in-line with expectations. The market’s 4.06% gain this week brought the broader S&P’s P/E ratio to 20.87, still above its historical average of 16. However, the market’s main stride this week was in getting above the 50-day moving average for the first time since April, should it get above this next 4150-point resistance level it should be smooth sailing towards a sustained long-term bullish trend being confirmed by a golden cross of the 50 day MA overtaking the 200 day MA within Q3.
Long Term Picks: Price Appreciation Within The Second Cold War
So, it’s July 2022. There is a proxy war between NATO and Russia unfolding within Ukraine, and China has threatened the Speaker of the House before a potential visit to Taiwan. If you’re wondering how we got to this point, revisit our past articles. If you’re interested in what the current situation is, as well as potential outlooks for the future, keep reading. We’ll start with the current, and threatened kinetic conflicts. Most can agree that the war in Ukraine is a tragic humanitarian event that has destroyed the lives of millions, and one that should not have happened in the first place. That being said, as investors, we must understand the geopolitical, and economic ramifications that will show themselves as a result of this bloody conflict. Throughout the majority of the Western world, the United States excluded, it was long thought that large-scale kinetic warfare was a thing of the past. Lack of defence spending, diminishing armed forces size, and refusal to modernize military equipment proved this. However, Russia’s invasion was a rude awakening that has brought on a desire to bolster defence spending across much of the European Union and other allied nations. As such, we are reiterating our long recommendation for Lockheed Martin, as they are the chief contractor for a large portion of global defence markets.
Moreover, this reiteration is supported by the recent hostility shown towards Speaker of the House Nancy Pelosi’s potential visit to Taiwan. These threats include statements such as “If US fighter jets escort Pelosi’s plane into Taiwan, it is invasion. The PLA has the right to forcibly dispel Pelosi’s plane and the US fighter jets, including firing warning shots and making tactical movement of obstruction. If ineffective, then shoot them down.” made by Global Times reporter, Hu Xijin. While these threats mark a noticeable increase in rhetoric from Chinese state controlled sources, they also add merit to the idea that the world will need many more Lockheed manufactured weapons going forward. This second Cold War isn’t merely contained to physical conflict, multiple facets of global financial systems, and computer chip manufacturing have come into contest throughout recent months. First off, we must discuss the historic move to block Russia from the SWIFT clearance system. This system is used by roughly 11,000 financial institutions to move money across the globe. In my opinion, this move will go down in history as one of the biggest blunders in US history, let me explain why. Before this move, countries like China and Russia had motivation to move off of the SWIFT system, and away from the USD, however, they did not have the means as they would not have gained enough international support. After the SWIFT maneuver, Russia now has necessity, as such they are willing to take more risk, hence the publicized press surrounding the potential BRIC currency. This economic war has also begun to affect the advanced world’s most important industry, semiconductors. This effect is mainly due to the main chip manufacturing powerhouse of the world, Taiwan Semiconductors’ proximity to China. Although the CCP has repeatedly attempted to quell global fears through press statements, the real players know where each piece on the chessboard lies.
To combat this, the United States Senate has recently passed the CHIPS+ act to bring American dominance back to the semiconductor industry. You may recognize the CHIPS name from a bill that was proposed last year, however that did not end up passing, and the resulting slimmed down version is what’s going to the house in the near future. This bill marks a rare, bipartisan cause that has united representatives from both sides of the aisle, as such the cause of returning chip dominance to the United States will likely continue to gain support throughout the coming months, and years. In terms of specific US chipmakers that could benefit from the bill, we recommend a long position on Skywater Technology Inc ($SKYT-NASDAQ) as they are likely to benefit immensely from this bill. The company has a market cap just north of $450M, and currently has contracts with the DOD, in collaboration with Google, for open source microchips. Moreover, the company has significant demand for their chips within the consumer wearables market. In any case, this Cold War will result in the return of US protectionism, and the US manufacturing sector as a result. It will be extremely interesting to see these developments over the coming years, and we hope our prognosis will assist in guiding you through these turbulent times. Now more than ever is the time to do your own research and question everything, the news is biased and politics is polarized. Take a top-down approach to investing like we do and weigh all the factors facing the market before zooming in on a sector, nevertheless a name to focus your capital on. Till next week, Coachmen out.
Chart of the Day – Big Tech Revenue Growth in Real Terms