The world has changed. The world has not changed. Embrace the chaos, but not in your portfolio.
I don’t need to go into the details about how damn weird things are right now. Housing, retail, tech, commodities, everything is in flux. The threat of rampant inflation, a Fed stuck in an impossible situation. Yet the fundamentals really haven’t.
All of this matters but it doesn’t help us make some money and build wealth in spite of how the system is rigged even more than it already was.
You can find plenty of news about how these topics are panning out. A lot of that coverage from the MSM is trash, as usual, but there is more than ever to work with for market mismatches that just don’t make sense. There’s even more for developments that have flown under the radar when we were all neck deep in politics and you know, trying not to die or lose all of our wealth.
Let’s take a quick look at three of the big topics and how the early signs may create some investor windfalls down the road.
Leaner and Meaner Pot Stocks
A lot of pot stocks have done exceedingly well in recent years, but a reckoning was due, and it came, and for most of them “recent years” only applies if you lump in what was going on several years ago.
That reckoning came, and it has largely now gone. The question is what comes next.
Short positions have steadily increased over the last several months, at least for trailing data since it isn’t reported in real time. But does it match the outlook for the companies, or it is an artificial construct of a market flush with cash and institutional investor largesse.
What makes this interesting to watch is how investors, mainly retail investors, since the big players are still choosing to stay on the sidelines, are reacting.
A groundswell of support is in the works for a classic short squeeze with the new modern “meme stock,” or Robinhood twist.
Quite frankly, the short positions are looking extremely exposed. They account for more and more of the “float” — the outstanding shares locked up by the share-borrowing schemes — while the businesses themselves are emerging from the debt and share issuance traps they faced.
Early investors saw incredible windfalls. Just ask any reader of The Crow’s Nest from Jimmy Mengel. It’s been a volatile ride but his portfolio is stacked with triple-digit winners in the sector, both in closed and open positions.
We talked about how pot stocks would have investor flow issues similar to speculative stocks like small mining companies years ago. The signs are now clear — the “reinflation” stage of the cycle is here and a lot of the financial engineering to externally meddle with share prices is unraveling. At the same time, debt and share issuance is stabilizing.
The second, serious wave of pot investing is here, and it may be the last one that matters, at least for investors looking for big gains.
The New Government Cheese
The Department of Defense, in every strategic outlook report for nearly a decade, has cited a need to secure critical metals for domestic production, stockpiling, or both.
The Trump administration was the first to give this serious consideration. Unfortunately the same mechanism, a law that allows the government to insert itself into industry to guarantee supplies, was used for more ephemeral issues related to the pandemic.
That diluted the concept and pushed it to the sidelines, but the argument still stands that the government should guarantee “friendly nation” supply chains. Support for the best mechanism — government loans to private enterprise — is overwhelmingly bipartisan.
I’m not really too keen on government intervention in markets that are well-served by public or private companies, but this one is low-hanging fruit. The government doesn’t seem interested in taking anything over with equity. It looks like it will be a secured round of financing at low-to-no interest.
The Biden administration is signaling that it will support both domestic and friendly nation critical metals production for electric vehicles.
This isn’t a novel idea. The government has long been a major buyer of cheese. Tons and tons of cheap cheese, tucked away in caves. Yes, this is a real thing, and it is surprisingly cheap to do. Stability of the supply chain is the reason that exists, and the model is ideal for critical metals.
Don’t think it ends with EVs though. The same core components are absolutely necessary for modern military tech. Think lithium, cobalt, rare earth minerals, and niche minerals such as vanadium.
Our in-house metals expert, Luke Burgess, will have more on that last one for you very soon. Stay tuned.
This is cascading into more and more recognition that the current paradigm isn’t conducive to national needs, both for businesses and government.
It is also leading to the recognition that exploring and exploiting smaller deposits is the only way to broaden the global supply chain, and there is growing recognition that it is the only way forward.
That opens up a lot of smaller JV and early stage miners, the kind that can drive fantastic profits.
Fractional Landlords
Speaking of markets that are looking pretty weird and really hot, the Wall St. Journal dropped an interesting article about how homebuilders and businesses are adapting to the housing market.
I suggest you read it, but there is a rapidly widening chasm between what middle income families can afford rent-wise and what they can afford for a down payment.
That creates demand, but not profit potential. There is even more there to work with than the article suggests, but it is a nascent trend.
Low interest rates for businesses that aren’t distressed and creditworthy buyers seem to be in a good place. Unlike the last housing crisis, credit standards are still tight.
However, that leaves some money on the table for homebuilders and other companies that are large enough, well-managed, and have deep pockets or easily tapped credit capacities.
Suburban rentals, retained by the homebuilders and managed by in-house or partner management companies, are rapidly growing in some of the hottest real estate markets in the nation.
A new breed of REIT or finance-modeled homebuilders is emerging. Essentially, investors can capitalize on fractional ownership without the extreme capital requirements now needed to enter the real estate market, with locked-in low-cost interest rates, all while capitalizing on the growing gap between all of this and rental prices.
This is still a tough time to get a feel for how these will pan out but early growth is promising. I’m not going to lie, this is a rough time to invest in commercial REITs of any sort. Now is the time though.
There is still a lot to unwind in the rental market, and REITs are notoriously hard to evaluate. Real estate appears fungible when it is just listed in a blended revenue or liability line in quarterly statements, but the devil is always in the details.
I’m going to keep tracking this for sure, especially because it can be a far more palatable way into a hot market, both for investment type and funds required.
This is far from a comprehensive list of what I’m looking at, let alone what the rest of the Outsider Club staff is working on, but make no mistake — there is a lot of potential out there, and we’ll keep tracking the kind of plays that work for smaller investors like us. Stay tuned.
