Submitted by QTR's Fringe Finance
This is part 2 of an exclusive Fringe Finance interview with shipping analyst (and friend of mine) J Mintzmyer, where we discuss the state of the supply chain in the country, the developments with Canadian truckers, logistics, the effects of Covid and what shipping names he likes for 2022. Part 1 of this interview is here.
J is a renowned maritime shipping analyst and investor who directs the Value Investor's Edge ("VIE") research platform on Seeking Alpha. You can follow him on Twitter @mintzmyer. J is a frequent speaker at industry conferences, is regularly quoted in trade journals, and hosts a popular podcast featuring shipping industry executives.
J has earned a BS in Economics from the Air Force Academy, an MA in Public Policy from the University of Maryland, and is a PhD Candidate at Harvard University, where he researches global trade flows and security policy.
Q: J, What do you make of Covid's effect on the shipping sector? Is there any chance that a loosening of restrictions will happen this year, in your opinion? If so, what affect will that have?
COVID-19, or more precisely the global policy response to COVID-19, is a key factor in the entire supply chain mess. Things were already tight in late-2019 and US ports, particularly on the West Coast, have been underinvested for a decade, but the enormous lockdown disruption is what 'broke' the machine.
Probably not the best metaphor, but I sometimes compare this to a snake accustomed to eating a steady diet of hamsters every day and keeping the jungle free of rodents.
Then the hamsters disappear for a few weeks and the snake gets super hungry, eventually finds a warthog and panic eats. While the warthog is stuck digesting in the snake, hundreds of hamsters are piling up, running amok, and the jungle is infested. That's crude, but that's essentially what happened with ports operating at near full capacity by 2019 while the world was addicted to gimmicks like Just-in-Time inventory management. ...the unwind is taking awhile.
Easing restrictions obviously will help, but the system is all sorts of broken right now. Even with no government meddling and friction, this will take several months to unwind, even in the most optimistic scenarios.
Do you see the U.S. economy heading toward recession. Why or why not?
That's a bit out of my scope as a maritime shipping investor. Frankly, the Chinese economy is a bigger focus and risk area for many of our investments. Generally speaking, my concern would be if a mixture of higher rates and equity market collapse drove a rapid slowdown in hiring and other economic activity. The corrections we saw in January were very encouraging and it looks like a decent chunk of the speculative bubble has started to deflate.
Do you ever use market cap to GDP to measure how expensive stocks are? Why are why not? If not, what's your favorite metric to use.
Also a pretty broad question for me, but I'll try my best, just please remember I'm outside of my lane here! I think the market cap-GDP ratio is likely skewed based on how many companies are public versus private. Although not a perfect index, I do like the Schiller CAPE (cyclically-adjusted price to earnings) caveated by interest rate levels.
A mistake a lot of bears have made for the past 3-4 years was to ignore that we are in a ZIRP environment (zero interest rate policy), which means historical CAPE comparisons are flawed. With rates now set to slowly start rising in 2022, the CAPE starts to become more relevant and that's likely why high-flier speculative things like the ARKK ETF have been unwinding hard.
If you look past the broad market indices (SPY, QQQ, Dow 30), we are arguably in the midst of a raging bear market in small caps. Price discovery is starting to come back, and fundamental valuations should hopefully play a much larger role going forward.
Any progress on ports being upgraded or rail lines being improved, as you suggested may happen back in 2021?
The infrastructure bill had some hefty port allocations, but these are massive projects which will take years to roll out. Call me in 2023-2024 to chat about those!
The far bigger supply chain concern this year is the pending renewal of the ILWU (west coast labor union) contract, which expires at the end of June. This was a hard-fought 3 year extension agreed back in mid-2019 when the industry was in a far weaker position. This time around, the workers have enormous bargaining power and they are likely to fight for better provisions. If this leads to a strike or shutdown of any sort, then congestion could surge, freight rates could blow through the roof, and all my more conservative projections are likely to be exceeded.
In this sort of outcome, stocks like ZIM could go to $200+. Will this happen? It is hard to tell. Labor negotiations are never easy, but the industry might also be more willing to cut a sweetheart deal or offer a lucrative extension until things are more normalized. We'll see... I am watching closely!
Do you ever invest in rail? If so, what are some of your favorite names and why? If not, why not? How does rail differ from shipping to a novice investor?
No. Valuations just are not attractive in rail right now versus the maritime angles. Rail is a better business in general due to fixed capacity and extreme difficulty for new entrants to compete (i.e. a strong moat), but I don't believe it's worth paying 5-10x the valuations versus strong maritime shipping firms.
Maritime shipping is more of a commodity like energy stocks or mining stocks. Rail is much more comparable to utility or telecom stocks.
Tell us about what's new with your service.
Thanks for asking! We have rolled our updated Model Portfolios for 2022, which recently included an update for February 2022. Thus far YTD (as of 2 February), our models have returned an average of 12.3% while the Russell 2000 is down over 10%, so I am very proud of that performance. As a reminder, in 2021, our models returned an average of 136.2%, which was the best year on record. We cater primarily to larger investors and traders and also work with a few dozen family offices and hedge funds. If you are interested in checking out our research platform, please head to www.mintzmyer.com. If you are a smaller trader or investor, then you can follow me on Twitter @mintzmyer.
Part 1 of this interview is here.
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I have not personally vetted J’s returns — it is up to readers considering his service to do so. I own ZIM as does J, as disclosed. None of this is a solicitation to buy or sell securities. It is only a look into our personal opinions and portfolios. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe.
These are not the opinions of any of my employers, partners, or associates. I get shit wrong a lot. If I am here listing things I got right or things I think will happen in the future, note that there are likely twice as many things I got wrong over the same period of time. I’m not a financial advisor, I hold no licenses or registrations and am not qualified to give advice on anything, let alone finance or medicine. Talk to your doctor, talk to your financial advisor or your therapist. Leave me a alone and do your research elsewhere. If you can find somewhere to rate this Substack one star, please do so as to save future readers from the misery of my often wholly incorrect prognostications.