Smallcap Discoveries: Weekly Update: June 13

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Subject: Smallcap Discoveries: Weekly Update: June 13 - 17

June 13 - 17

Market Commentary

The Great Reset

The US Federal Reserve, as well as a number of central banks around the world, are trying to slow the economy to curb escalating inflation and several sectors, big ticket items like housing and autos, are bearing the full force of these actions right now. The pace of US new home construction fell by 14% from April to its lowest level in a year. Sales by US motor vehicle and parts dealers dropped by 3.5% in May after jumping by 1.8% in the previous month. And this was before the latest 75 basis point increase by the US Fed this past week. In Canada auto sales dropped by 8.5%. US retail sales fell by 0.3% in May after climbing 0.7% in April. Economists were expecting an increase of 0.2% for the month.

We saw a smoking hot CPI number of 8.6% for May. This type of number is what is driving the FED and other central bankers around the world to rapidly raise interest rates. It looks to me like the bankers are starting to get what they want, a slowing economy that decreases demand for a whole bunch of different items. Maybe even energy.

Here's a look at what the US Fed is currently expecting:

They are telling us they expect to see the median PCE inflation rate this year to be 5.2% and drop to 2.6% next year. This gets it much closer to the long-term goal of 2.0%. Keep in mind that the PCE tends to print slightly higher than the CPI numbers.

So why do I bring all this up? This is really what is driving the direction of the overall markets. Inflation and interest rates. Interest rates go up, the economy slows down and equities and most asset prices go down. If the Fed can be successful in drawing down inflation it will allow them to slow or stop interest rate increases and maybe even drop interest rates at some point. With all major North American markets hitting new 52-week lows investors seem to be thinking that the Fed won't be able to provide the fabled "soft landing", crushing inflation while continuing to grow the economy. Most investors are betting on a recession. I'm one of those investors that think we likely are in the early stages of a recession. Demand for many products will slow and cash will become more valuable. Expect more assets being liquidated. Expect more volatility. Expect more opportunity for mispricing of many assets.

The DOW was lower by 4.8%, Nasdaq was lower by 4.8% and the TSX was lower by 6.6%. All three North American markets hit new 52 week lows on Friday and Nasdaq is down 34.8% from its high to this week's low.

Energy

Oil and gas prices were considerably lower on the week. News that the Freeport LNG facility, damaged by fire 2 weeks ago, would now be off-line until later this year sent natural gas prices spiralling lower and closed the week at $6.94 down 28% from its recent high. WTI closed at $109.60 per barrel. Energy stocks had one of their worst weeks of the year. The XLE energy ETF was down 5.47% on Friday and 17.0% for the week. The parabolic move we saw the previous week in some energy stocks resulted in a very strong reversal in many of those same names.

Recession fears are impacting all sectors, or maybe it was the "Jim Cramer curse". On June 6th Mr. Cramer said, "Buy the dip in oil stocks, stay away from everything else". The XLE has dipped 17.8% since then.

North American drilling activity continues to improve. According to the Baker Hughes rig count we saw US drill rigs increase by 7 and up 15 rigs or 10.6% in Canada over the previous week.

Bitcoin

What a week for crypto currencies. As I write this bitcoin is trading at $18,340 down over 13% since Friday and down over 73% since its high reached in November. The concern is the potential for contagion and what entities may be hurt by the recent volatility in the crypto currency. Microstrategy, MSTR.Q has a roughly $1.7 billion in unrealized losses from their bitcoin holdings. This week crypto lender Celsius halted withdrawals raising concerns it may be insolvent. And Three Arrows Capital has its own liquidity concerns. The $10 billion hedge fund saw a massive drop in the value of its holdings and is considering asset sales and a potential bailout.

The Macro vs the Micro

While the macro picture continues to look uncertain the resulting volatility and chaos may be unearthing some interesting micro opportunities. Liquidity continues to be a driver in the market's actions. Investors may be throwing the baby out with the bath water as cash becomes important and some decide to sell anything they can. In markets like these many investors sell what they can, not what they want.

It may be still a little too early but there does seem to be some glimmers of life showing the life science sector. One thing I'm watching out for is new 52 week highs to try and identify some sector rotation and for the first time in quite a while a few life science names made the list. Let's see if more start to show up. It will be an indicator that funds are flowing back into the beaten-up sector.

I was fairly active this past week. Bri-Chem (BRY.T) hit another new 52 week high spiking to $0.95. I took some profits and took some of the proceeds and added some more shares in Enterprise Group, (E.T). I sold some Verde Agritech and nibbled on some shares of Ceapro (CZO.V) an Edmonton based life science company. And then on Friday I decided to take advantage of the big dip in energy names and bought some Baytex Energy (BTE.T). BTE has come back to its year-long trend line. I still prefer the energy service stocks but the rapid 25% drop in price was a little too good to pass up and my hope is to sell it on any meaningful bounce in the coming weeks.