Birkoa Newsletter 9 (mid-September/end-August '22)

Dear Birkoa LPs:

Continuing with the macro-heavy landscape of the past few months, the past couple of weeks has teed things up well for our strategy.  

In line with my last newsletter when the Saudi Energy Minister iterated his thoughts on the disconnect between supply-side shortages and trading-side oil prices, OPEC+ did indeed follow through with a (token) cut in order to push up oil prices. While this time around the cut was menial, however it was more meant as a signal to the financial markets and traders that the Saudis and OPEC in general, will take any action to keep the price of oil high. Oil itself is still at the same level it was prior to the cut although it had taken off meaningfully the following day; however as the winter approaches, we can expect to see higher oil prices upcoming. Some of the systemic elements that could've brought down the price of oil including the supposed Iran Nuclear Deal revival talks seem to have been stalled, which helps our cause. Even if Iranian oil comes to the markets to the tune of 1 Million barrels per day, the Saudis will still support the price of oil by providing an effective ceiling. That was the point of this recent cut.

Of late, there's been a lot of movement on the so-called "Russian Oil Price Cap" by G7 nations, led by the U.S. While the G7 can keep imposing such caps (illegally I might add) endlessly until the cows come home, that oil is still slated to not be sold to them anyway (except for Japan) after December 5th. Thus effectively, other than interfering in the free functioning of markets, they have zero real power of enforcement. For this to work, a lot of different variables have to work in synchrony, most importantly getting China and India to agree to abide by the oil price cap. I don't have a lot of belief that they will. Moreover, all things equal, this measure risks retaliation by Russia which could shut down up to 5M bpd of production just to squeeze the West. We've already seen Russia squeeze Europe out of natural gas by indefinitely shutting down both Nordstream pipelines, and under that scenario I have seen reports by JP Morgan placing the price of oil as high as $380 per barrel. But my point is the risks to the price of oil are skewed more towards the upside than down, and I'm comfortable staying put with a price target of $125 per barrel by end of the year. Our oil positions are borderline flat or slightly positive now and I look forward to the much higher returns in the future.

We've seen movement up in the price of some metals; in fact due to the high energy costs in Europe, some metal smelting plants are cutting supply because they're being forced to cut production. We expect this to be positive to our metals position in Palladium, although more bullish factors are at play there (e.g: China's recovery and demand surge, Russian sanctions, etc.). Palladium has been able to hold the surge in its price that was last mentioned in one of the earlier newsletters from 3 weeks ago, and I continue to see evidence of movements towards my ultimate price target of $3000/ounce (currently at $2188/ounce). 

Crypto prices seem to be on a resurgent move the past couple of days after stalling and going down the past 2 weeks from their local peaks of $2k for Ether and $25k for Bitcoin. With the Ethereum merge into Proof of Stake from Proof of Work being planned for sometime around September 14th, which seems to be on track as of right now, barring anything extraordinarily negative, we could see further upside to our crypto positions. We're slowly but surely recovering from the May lows in crypto.

I believe the worst in China is behind us, as the recent upbeat earnings season from Q2 has shown us. Not only are the political risks seem to have subsided, such as delisting fears, there have been active developments made towards coming towards an agreement on such disagreements. Within the Chinese economy, there's a general feeling that the worst of lockdowns are over (even though there was a new lockdown in Chengdu about a week and half ago) and after the Party Congress in October, where Xi Xinping is expected to be re-elected for an unprecedented 3rd term, that the CCP will have more flexibility to ease on their COVID Zero policy. Even with all this demand destruction, by and large most of the Chinese holdings in our portfolio meaningfully beat earnings forecasts for Q2. One of our companies has shot up over 45% in the past 2 weeks on upbeat earnings. Both our mainland China holdings and American ADRs are well off their lows and I'm confident of their march forward.

The Chinese government and the PBOC have already taken measures to spur the economy and signaled their willingness to further ease monetary conditions. Remember the main reason for my bullishness on China is them being on the exact opposite spectrum when it comes to central bank policy compared to the West (while the latter is tightening now and is headed towards stagflation, China has a lot of room to ease). Moreover, most of their easing seem to be on the supply-side, meaning aiding infrastructure and construction, instead of consumer facing demand-side which spurs up the consumer economy. Since the Chinese have seen the negative impacts of demand-side monetary easing by the U.S., Japan and Europe over the past decade plus, they are less inclined to do so themselves. However, think of this as a great "arrow on their quiver" and this, if implemented, would only prove further bullish for our Chinese equities holdings. Therefore, just like oil, there are more bullish forces at play for Chinese equities than not.

While the path ahead may not necessarily be a straight line, I remain very happy with the general direction where we're headed. Finally, although insignificant, I have started to dip my toes a little bit into buying semiconductor stocks here in the U.S. as a hedge against the volatile situation in Taiwan. Taiwan Semiconductor and Manufacturing Company (TSMC) is already receiving less orders from its customers and there's been a large push towards moving back that supply chain here to the U.S. lately. The Biden admin recently passed a major program (CHIPS Act) to subsidize semiconductor fabrication and manufacturing in the United States. My undergrad alma mater, Purdue, which is one of the nation's top-5 engineering programs & has been on the forefront of leading the nation towards a U.S.-led semis-dominated economy for at least 2 years now, alone has attracted 2 major semis design and fabrication plants to West Lafayette, IN in the past few months (each with over $1B investment in design/manufacturing). I study these developments as they fit into the overarching de-globalisation thesis that Birkoa strategy is calling and preparing for with these supply chain disruptions. Such developments are expected to be incredibly bullish for the U.S. semis industry, and pretty soon, they'll trade as commodities instead of tech stocks. This is why even though I wouldn't quite touch the larger U.S. tech-dominated stock market with a ten-ft. pole, I decided to buy some semiconductors in low quantities because they had already corrected by 40-60% YTD.

Sincerely,

Pranjit Kalita
CIO

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Birkoa Newsletter 10 (end-September)

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Birkoa Newsletter 9 (OPEC+ Breaking News)