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Chesapeake Energy All in on Natural Gas

Forget oil—the real money is in natural gas.
Or at least that’s the message coming from a pioneer of the U.S. shale revolution, Chesapeake Energy (CHK).
From Prince to Pauper to Prince Again?
Once upon a time—when its stock was valued at more than $35 billion and its CEO, Aubrey McClendon, had the biggest pay package of any CEO of a listed firm—Chesapeake Energy was America’s best-known fracker.
But those glory days disappeared quickly, and Chesapeake became the poster child for the shale sector’s excesses.
About a year and a half ago, in the autumn of 2020, Chesapeake was in the midst of bankruptcy proceedings after the coronavirus pandemic-led crash in energy demand proved to be the final straw in the company’s fall from grace.
And for the industry more broadly, the prospects for liquefied natural gas (LNG) exports were looking bleak after a $7 billion contract to supply the French utility Engie went down the tubes on concerns over the emissions profile of U.S. natural gas.
Fast forward to 2022 and the picture has changed dramatically. Natural gas exports are booming!

Thanks to the Russian invasion of Ukraine and subsequent sanctions, Europe is in the middle of an energy crisis. It is buying up as much American LNG as it can. Those concerns about emissions are long forgotten.
In the first four months of the year, the U.S. exported 11.5 billion cubic feet a day of gas in the form of LNG, an 18% increase from 2021. Three-quarters of those exports went to Europe. And European leaders have pledged to ratchet up their imports by the end of the decade. There is also a massive opportunity in Asia, where LNG demand is set to quadruple to 44 billion cubic feet a day by 2050, according to a recent report released by think-tank, the Progressive Policy Institute.
And even here in the U.S., natural gas supplies look set to be tight this winter. Hot summer weather and high demands for power generation are sucking up supplies and leaving storage precariously low.
The investment bank Piper Sandler believes U.S. storage is on pace to fill just 3.4 trillion cubic feet of gas by the time winter arrives. That would be short of the 3.8 trillion cubic feet buffer usually needed to heat the country through a cold winter season. That could send already-elevated natural gas prices even higher in the months ahead.
These factors combined were behind the decision by Chesapeake Energy management to ditch oil in favor of gas.
This Shale Pioneer Refocusing on Natural Gas
On August 2, Chesapeake announced its plan to exit oil completely and return to its roots as a natural gas producer. The company said it would offload oil producing assets in south Texas’s Eagle Ford basin, allowing it to focus solely on gas production from Louisiana’s Haynesville basin and the Marcellus Shale in Appalachia.
Its CEO Nick Dell’Osso said the company made the decision because of better returns from its gas assets—it has had more success driving down costs and improving efficiency there when compared with oil.
Chesapeake emerged from bankruptcy in February 2021, vowing to shift from its previous model of growth at all costs to one of capital discipline and higher shareholder returns.
The company has expanded its natural gas portfolio of assets since its emergence from bankruptcy. It bought gas producer Vine Energy for $2.2 billion last August to bolster its position in the Haynesville, which sits close to gas-export facilities on the US Gulf Coast. And in January, it bought Chief Oil & Gas, a gas operator in north-eastern Pennsylvania’s section of the prolific Marcellus shale field, for $2.6 billion. Chesapeake also recently offloaded its Wyoming oil business to Continental Resources, the company controlled by shale billionaire Harold Hamm.
In summarizing Chesapeake Energy’s strategy, Dell’Osso said, “What’s different today than the past… is that we are allocating capital in a way that maximizes returns to shareholders, rather than maximizing [production] growth.”
Speaking with the Financial Times, Del’Osso added: “The industry was built on [oil and gas production] growth expectations, and company stocks were valued on growth expectations. That all had to get broken down.” The “reset” had been painful, but management teams would stick with the new model, the CEO said.
The strategy seems to be working. In May, Chesapeake reported record-high adjusted quarterly free cash flow of $532 million from the first three months of 2022.

Also in the second quarter, it announced an agreement to supply gas with the Golden Pass LNG facility. Golden Pass LNG is a joint venture company formed by affiliates of two of the world’s largest and most experienced oil and gas companies: QatarEnergy (70%) and ExxonMobil (30%).
The company now plans to pay $7 billion in dividends over the next five years. That is equivalent to well over half of its current market capitalization!
Chesapeake boasts of its best-in-class shareholder return program. It has completed about a third of its $2 billion share and warrant repurchase program, and it raised the base dividend by 10%, to $2.20 per share annually.
The company has a juicy variable dividend as well. Its next quarterly dividend will consist of the $0.55 per share base dividend and a variable dividend of $1.77. Management projects that, in the third quarter, it will pay out total dividends of $275 million to $285 million. The total dividend payout for 2022 should come in at between $1.3 billion and $1.5 billion.
Chesapeake’s yield is a very impressive 10% and I do not see that changing much as gas prices stay elevated. The stock is a buy anywhere in the $90s.
Read More from Investors Alley

About the Author
Tony Daltorio is a seasoned veteran of nearly all aspects of investing. From running his own advisory services to developing education materials to working with investors directly to help them achieve their long-term financial goals. Tony styles his investment strategy after on of the all-time best investors, Sir John Templeton, in that he always looks for growth, but at a reasonable price. Tony is a regular contributor for InvestorsAlley.com.

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Single Stock ETFs Are Here

In July, AXS Investments debuted US-based investors’ first single stock Exchange Traded Funds. These ETFs allow investors to gain leverage on certain individual stocks.
However, because you are using leverage, there is more risk involved, and the authorities want investors to understand these risks before purchasing these new products.
The risks are associated with the leveraged exposure these new ETFs offer and the risk associated with investing in individual stocks. But since leverage is being applied, the risk level multiplies.
For example, one of the new ETFs being offered is the AXS 2X NKE Bull Daily ETF (NKEL) which provides investors 2X leverage to Nike (NKE) stock. This would mean that if you owned NKEL on a day when Nike stock increased by 0.50%, the NKEL ETF, which is 2X leverage, will go up 1.00%.
But, the opposite is also true. So if Nike stock fell by 1%, the NKEL ETF, which tracks Nike stock at a 2X leveraged ratio, would lose 2%.

Leverage is a very nice thing to have when it is being applied in the direction you want it to move. But leverage can be deadly when it is going against you.
Hence why the Securities and Exchange Commission is warning investors of the dangers associated with any single stock ETF, even if it is not marketing itself as leveraged.
One example of a new single stock ETF that is not marketing itself as leveraged is the AXS TSLA Bear Daily ETF (TSLQ). This ETF only tracks Tesla, but to the downside with just 1X leveraged exposure.
This essentially means that the TSLQ is shorting Tesla. But, unlike having to short a stock, which would require approval from your broker, a margin account, and the risk of not losing more than 100% of your investment, you simply have to buy this one ETF and not worry about the other things.
AXS currently has eight single-stock ETFs:
The AXS TSLA Bear Daily ETF (TSLQ), shorts Tesla.The AXS 1.25X NVDA Bear Daily ETF (NVDS) is short NVDA.The AXS 1.5X PYPL Bear Daily ETF (PYPS) which shorts PayPal.The AXS 1.5X PYPL Bull Daily ETF (PYPT) which is long PayPal.The AXS 2X NKE Bear Daily ETF (NKEQ) which is short Nike.The AXS 2X NKE Bull Daily ETF (NKEL) which is bullish Nike.The AXS 2X PFE Bear Daily ETF (PFES) is short Pfizer.The AXS 2X PFE Bull Daily ETF (PFEL) is long Pfizer.
The leveraged ones have the amount of leverage they are providing in the name of the ETF. But all the funds currently charge a 1.15% expense ratio and are intended to be held one day at a time due to the contango effect caused by gaining leverage or the inversion.
More single stock leveraged and inverse ETFs are coming to the market as Direxion, GraniteShares, and Kurv Investment Management all have filed with the SEC to be permitted to offer their own single stock ETFs.
The filing shows that roughly 35 stocks will have a corresponding ETF, with some being blue chip stocks, some in the technology world, some in energy, and even some that are just very volatile stocks.

Investors are and will continue to be given a lot of opportunities to invest with leverage and make ‘bets’ on the direction of individual stocks.
But, just because you can do something does not always mean you should do it.
Learn more about the risks of investing in these ETFs and how contango will affect your investment if you hold these ETFs for longer than one day at a time before owning these single stock ETFs.
Matt ThalmanINO.com ContributorFollow me on Twitter @mthalman5513
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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chef preparing vegetable dish on tree slab

Which Is The Better Restaurant Stock?

It’s been a volatile year for the restaurant industry group (EATZ), which found itself down over 29% for the year before its recent recovery. This rebound can be attributed to hopes that inflation has peaked combined with short covering, with the small-cap and mid-cap restaurant names having elevated short interest relative to other industry groups.
Following this rally, some investors might be looking for names that haven’t participated in the recovery. However, underperformance is often related to underlying problems with a business, so it’s essential to look at industry trends, sales performance, and other key metrics to ensure one isn’t buying into a value trap.
In this update, we’ll look at two restaurant brands with above-average short interest and see which is the better stock to own – Restaurant Brands International (QSR) or Red Robin Gourmet (RRGB).
Scale, Business Model & Unit Growth
From a scale standpoint, Restaurant Brands International (“RBI”) and Red Robin differ materially. RBI has more than 29,000 restaurants under four different brands (Burger King, Tim Hortons, Firehouse Subs, Popeyes Chicken), and Red Robin has 525 restaurants under one brand: Red Robin Gourmet Burgers.
Typically, the smaller-scale company would be the more attractive one assuming it was a high-growth concept and a similar business model. However, Red Robin is inferior in both categories.

Not only has Red Robin seen its store count decline by 10% over the past three years while RBI’s store count has increased 15%, but Red Robin operates a casual dining concept, and its brand is nowhere near as iconic as RBI’s top-rated brands in the coffee, burger, and chicken category, which are Tim Hortons, Burger King, and Popeyes, respectively.
Meanwhile, only 20% of Red Robin’s system is franchised vs. 100% for RBI, meaning that Red Robin is much more sensitive to inflationary pressures, seeing a sharp decline in earnings when it’s seeing food and labor costs rise.
So, while Red Robin does win from a scale standpoint, benefiting from considerably more whitespace, this doesn’t help if it isn’t growing. In addition, RBI benefits from much higher margins (43% gross margins vs. 16%) and a 5% unit growth rate vs. a declining store count for Red Robin, with no reversal of this trend in sight.
Restaurant Brands – 1 / Red Robin – 0
Positioning In A Recessionary Environment
From a positioning standpoint in a recessionary environment, there are also major differences that must be considered.
While RBI benefits from three quick-service restaurants with average tickets below $7.00 (Popeyes, Burger King, Tim Hortons), and one fast-casual concept (Firehouse Subs), Red Robin has casual dining restaurants.
The latter segment of the restaurant industry tends to massively underperform in recessionary environments, given that consumers are looking to trade down. However, if they are looking for a meal, takeout is the much cheaper option, saving money on alcohol (home vs. restaurant) and the tip. This is not ideal for casual dining names which rely on drinks/appetizers/desserts to boost margins.
Meanwhile, RBI is a go-to name in a recessionary period, with many consumers looking to trade down if they want convenience. Given the similarly priced menu to brands like McDonald’s (MCD), it’s no surprise that while casual dining traffic was down over 6% in June, quick-service restaurants like RBI’s brands were flat year-over-year.
This is related to the sharp rise in energy costs, fuel costs, mortgage rates, and grocery prices, all contributing to shrinking discretionary budgets. So, if we do head into a prolonged recession, RBI’s margins and the fact that quick-service/pizza will allow it to outperform in weaker economic environments give it the edge by a wide margin.
Firehouse Subs is a fast-casual and higher-ticket brand ($10.00+ price per check), but this makes up just ~1,200 of RBI’s ~30,000 restaurants, so I do not see this as an issue. Red Robin benefits from Donatos Pizza being rolled out across its system, but the sales contribution is too small (less than 5% of sales) to make a meaningful difference.
Restaurant Brands – 2 / Red Robin – 0
Finally, if we look at both names from a valuation standpoint, RRGB trades at ~8x EV/EBITDA while RBI trades at 13x EV/EBITDA, suggesting that RRGB is much more attractive from a valuation standpoint.
However, one wouldn’t expect to buy a Ferrari for the price of a Ford, and this is a case of RRGB being cheap for a reason. Not only does the company return no capital to shareholders (QSR pays a 4.0% dividend and buys back 2% of stock per year), but it has weaker margins, a declining store footprint, and is in a less attractive segment of the restaurant industry (casual dining vs. quick-service).
So, while the stock is far cheaper strictly on an EV/EBITDA basis, RBI is much cheaper on a PEG basis, trading at a PEG ratio of ~1.6, while RRGB trades at a PEG ratio of ~2.2.

Meanwhile, RBI investors are getting a guaranteed return of 4% per year from dividends alone to help weather general market volatility, boost total returns, and see continued earnings per share growth through opportunistic buybacks.
Restaurant Brands – 3 / Red Robin – 0
Final Verdict
To summarize, I see RBI winning in the valuation category as well, with RRGB being a case of a low-quality name trading at a fair price. Conversely, RBI is a high-quality name trading at an attractive price for investors with a long-term outlook. T
herefore, I see RRGB as an Avoid losing 0-3 to RBI, and I would view any pullbacks in Restaurant Brands International (QSR) below $57.00 as buying opportunities.
Disclosure: I am long QSR
Taylor DartINO.com Contributor
Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing.

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Has the Fed Already Whipped Inflation?

To hear Jeremy Siegel tell it, the Federal Reserve has already won its fight over inflation and should start taking its foot off the monetary brakes.
“I think the Fed should be near the end of its tightening cycle,” the ubiquitous market prognosticator and Wharton School finance professor told CNBC last week. According to Siegel, current headline inflation may still be high, “but forward-looking inflation has really been stopped. And I think the Fed should really slow down the rate of hiking, and if we get a snapback in productivity that’ll put further downward pressure” on inflation.
Is he right, or is it just wishful thinking so stocks can resume their decade-long winning streak?
Right now the signals look mixed, based on the two most important and widely-followed economic reports issued last week.According to the Commerce Department, second quarter GDP fell 0.9% at an annual rate, on top of the prior quarter’s 1.6% decline.

Until this year, the mainstream media would have immediately pounced on that as clear evidence that we are officially in a recession, following the traditional definition of a downturn as two back-to-back negative quarters. Now, however, with a feckless president poised to lead his party to an election Armageddon in November, we learn that the old standard simply doesn’t apply anymore, so we can’t use the dreaded “R” word.
Whether that’s pure bias or pure something else that also begins with a B, July’s robust jobs report, which showed the economy added a much higher than expected 528,000 jobs, does create some doubt whether we are in a recession or not, and if so, what the Fed plans to do about it.
Instead of viewing the jobs report as good news being bad news – i.e., the Fed will need to continue tightening to stifle economic growth—and sell stocks, the market instead went up on Friday and continued to rally on Monday morning. Is the recession – if there ever was one – now officially over, the inflation monster slain and no further need for the Fed to continue to raise interest rates?
Not according to at least one Fed official. Noting that the Fed raised interest rates by a steeper-than-expected 75 basis points at both its June and July meetings, Fed governor Michelle Bowman told the Kansas Bankers Association over the weekend that “similarly-sized increases should be on the table until we see inflation declining in a consistent, meaningful and lasting way.”
“Our primary challenge is to get inflation under control,” she said.
The Fed doesn’t meet again until September 20-21, which means a lot of economic statistics are going to come in in the meantime. Depending on what those figures reveal, will the Fed revert to its “data dependent” monetary policy stance, or will it stick with its new “forward guidance” policy and keep raising rates regardless of what the numbers show?If stock market sentiment is any clue, Professor Siegel may be onto something.
Since mid-June, the S&P 500 is up more than 13% and the beaten down NASDAQ is up over 18%. Of course, that could simply be a short-term, bottom-fishing rally that almost always appears during bear markets, sometimes for extended periods (like this one).
Should we take that to mean that the Fed is willing to at least wait and see what happens with inflation before it raises interest rates again in September? Or has it already made up its mind what it wants to do?
It seems overly optimistic to believe that nearly 14 years of massive monetary and fiscal stimulus that inflated the price of goods, services and assets could be unwound after a couple of relatively modest Fed interest rate hikes, with almost no similar restraint on spending by Congress.

Can inflation really go away that quickly? Can you get instant relief from a ferocious hangover by popping a couple of Advils?
Of course, this is something that a lot of other investors would dearly love to believe, but it just seems too painless. But others would argue that we have in fact suffered a lot of financial pain, and that it’s time for the good times to start rolling again. After all, including its latest rally, the S&P 500 is down 13% from its all-time high last December, while NASDAQ is still off by more than 21%.
However, those losses seem too modest compared to previous bear market drops. For example, the S&P plunged more than 50% during the 2008 global financial crisis, a period preceded by reckless regulatory stimulus that ignited the housing crash.
Should we therefore expect more pain to come, or will the next month’s economic statistics show that we’re just fine—inflation is coming down, more and more people are getting hired, and economic growth is only being modestly impacted?It will be interesting to watch what happens between now and the next Fed meeting. But I would keep my guard up.
George YacikINO.com Contributor
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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Strong Jobs Report Abates Fears of Recession

Last week, the jobs report was released. Economists were expecting an additional 258,000 new jobs added last month. The Labor Department’s report revealed that the U.S. economy has had robust job growth last month adding over 500,000 jobs in July.
The exceedingly strong numbers of the report diminished concerns about the United States entering a recession. While this optimistic report bodes well for economic growth, it certainly does not address inflation.
However, it does change market sentiment which had been intensely focused on the last two GDP reports. On July 28 the government released the advance estimate of the second quarter GDP. The report revealed that the GDP had decreased at an annual rate of 0.9% during the second quarter of 2022.
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Earlier this year the BEA reported a decrease in the first quarter GDP of 1.6%. The widely accepted definition of a recession is an economic contraction over two consecutive quarters.

The fear of a disappointing jobs report that pressured yields on U.S. Treasuries and the dollar lower was reversed. The dollar gained 0.8% which is equal to Thursday’s decline. Gold gave up roughly half of the $30 gain Thursday declining by $14.50 on Friday. As of 6:25 PM EDT on Friday, gold futures basis the most active December contract was fixed at $1792.40.
Spot or physical gold lost $15.57 and was fixed at $1776.40 according to the Kitco Gold Index. On closer inspection, the KGX revealed that $13.60 of Friday’s decline of was a direct result of dollar strength, and a fractional decline of $1.20 was the result of traders bidding gold fractionally lower.
Gold futures closed above $1800 Thursday and the 50-day moving average was significant, however, very short-lived. It is also less likely that we will see gold recover quickly in that Friday’s jobs report strengthens the resolve of the Federal Reserve to raise rates by another 75 basis points in September.
This will also be highly supportive of the U.S. dollar as we saw in trading today.
According to Michael Hewson, chief market analyst at CMC markets, “Today’s labor market report is bad news for gold bulls, with next week’s CPI report the next key test,” the bearish sentiment reflected in the above quote was a common theme amongst other analysts.

Bart Melek, head of commodity strategies at TD Securities said, “Gold had recently rallied on the thought that the Fed will shift from hawkish to dovish. But the jobs data shows the U.S. economy is strong, and this can prompt the Fed to be more aggressive, which is not a good story for gold,” Melek added that the “next catalyst for gold prices will be the US CPI print coming out next week.”
The only wildcard is if there is an increase in geopolitical concerns regarding Russia’s war in Ukraine and/or China’s response to Nancy Pelosi’s visit to Taiwan.
For those who would like more information simply use this link.
Wishing you, as always good trading,Gary S. WagnerThe Gold Forecast

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Crypto Update: It Ain’t Over Yet

It was a close call this May with a doom-saying title “Crypto Apocalypse?” where I shared with you an annihilating model for Ethereum and a bearish chart of Bitcoin.
Let us see what happened in the crypto market since then in the chart below.
Source: TradingView
Total crypto market cap had skyrocketed to the maximum of just over $3 trillion last November. Since then, almost ¾ of the total market cap has evaporated on the crypto crash down to $762 billion this June. That hurts!

More than $2 trillion of wealth was destroyed during that collapse. Some people were calling it a “crypto-winter” of the market. All of us have probably noticed that less videos and posts with clickbait titles on “how to become a crypto-millionaire” or new rising stars in the crypto-market have been popping up on social media lately.
In the next market share chart, let’s check the status quo of the market leaders.
Source: TradingView
During the collapse of the market, the main coin (orange) has managed to increase its market share tremendously from 40% up to 48% on the peak in June. How could that happen as it was bleeding alongside the whole market? The speed of the drop is the main reason.
Bitcoin was falling slower than the rest of the market as some coins, even in top 20 tier, were busted very rapidly. Just look at the second largest coin Ethereum, it was losing its market share badly from 22% down to 15%, a level unseen since last January.
These days, both top coins are moving back to its historic boundaries. So, the status quo of the market remains unchanged. Bitcoin has a small surplus and Ethereum is leaking wounds as it is still in the red. However, the latter could take this chance to bounce off the valley to break up this long standing equilibrium.
Watch the Ethereum merge set for September 19th when the Ethereum completes its transition from the energy-intensive proof-of-work (PoW) consensus mechanism to a more environment-friendly proof-of-stake(PoS) mechanism.

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An updated chart of Bitcoin is up next. Most of you accurately predicted the valley of the Bitcoin collapse in the range of $15k-$20k. Kudos to you!
Source: TradingView
This is the updated original chart I posted this May when the price of the main coin was close to $35k. The anticipated crash in the second red leg down almost hit the preset target at $12.2k. The price of Bitcoin has halved to revisit the $17.6k level unseen since December 2020.
The Volume Profile indicator (orange) proved the idea that the price should drop huge once it slides into the volume gap area between $29k and $10k. Indeed, the collapse was fast and huge on this trigger. The price is still in that low-volume trap. Moreover, the current rise of the price doesn’t look convincing as it resembles the sideways consolidation pattern ahead of another drop. So, it ain’t over yet.

The recent valley of $17.6k is the minimum target of a possible drop. The earlier preset target based on equality of two red legs down is still intact at $12.2k. Breakdown below $10k would open way in the $4k area according to the Volume Profile indicator.
The breakup back above $29k is needed to restart the bullish cycle for the main coin.

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Intelligent trades!
Aibek BurabayevINO.com Contributor
Disclosure: This contributor has no positions in any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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Should We Prepare For An Aggressive U.S. Fed?

Traders expect the U.S. Fed to soften as Chairman Powell suggested they have reached a neutral rate with the last rate increase. The US stock markets started an upward trend after the last 75bp rate increase – expecting the U.S. Fed to move toward a more data-driven rate adjustment.
My research suggests the U.S. Federal Reserve has a much more difficult battle ahead related to inflation, global market concerns, and underlying global monetary function.
Simply put, global central banks have printed too much money over the past 7+ years, and the eventual unwinding of this excess capital may take aggressive controls to tame.
Real Estate Data Shows A Sudden Shift In Forward Expectations
The US housing market is one of the first things I look at in terms of consumer demand, home-building expectations, and overall confidence for consumers to engage in Big Ticket spending. Look at how the US Real Estate sector has changed over the past five years.
The data comparison chart below, originating from September 2017, shows how the US Real Estate sector went from moderately hot in late 2017 to early 2018; stalled from July 2018 to May 2019; then got super-heated in late 2019 as extremely low-interest rates drove buyers into a feeding frenzy.
As the COVID-19 virus initiated the US lockdowns in March/April 2020, you can see the buying frenzy ground to a halt. Between March 2020 and July 2020, Average Days On Market shot up from -8 to +17 (YoY) – showing people stopped buying homes. At this same time, home prices continued to rise, moving from +3.3% to +14% (YoY) by the end of 2020.

The buying frenzy then kicked back into full gear and continued at unimaginable levels throughout 2021 as interest rates stayed near lows and FOMO increased.
Over the past 7+ years, the excess capital meant buyers could sell their existing homes, relocate to a cheaper area, avoid COVID risks, and reduce their mortgage costs with almost no risks. This “great relocation” event likely sparked the high inflation/CPI trends we are battling right now.
(Source: Realtor.com)
Extreme Easy Monetary Policies May Prompt A Harsh U.S. Fed Action In The Future
Traders expect the U.S. Federal Reserve to softly pivot away from rate increases after reaching a “normal level.” I believe the U.S. Federal Reserve will have to continue aggressively raising rates to battle ongoing inflation and global concerns.
I don’t believe traders have even considered what may be necessary to break this cycle – or are simply hoping they never see 14% FFR rates again (like we saw in the 1980s).
The harsh reality is the excess capital floating around the globe has anchored an inflationary trend that may be unstoppable without central banks taking interest rates to extremes. There was only one other period where I see similarities between what is taking place now and the recent past – 1970~2003.
Throughout that span of time, the U.S. Federal Reserve moved away from the Gold Standard and entered an extended period of money creation. This prompted a big increase in CPI and Inflation, leading to extreme FFR rates above 15% in 1982 to battle inflationary trends (see the charts below). CPI continued above 5% for another 15+ years after 1982 – finally bottoming in 2010.
What if the extended money printing that started after the 2007-08 Global Financial Crisis sparked another excess capital/inflation phase just like the 1970 to 2003 phase? What’s next?

Excess Money Must Unwind Over Time To Prompt A New Growth Phase
My thinking is the 2000~2019 unwinding phase, prompted by the DOT COM bubble, 911 Attacks, and the eventual 2008-09 Global Financial Crisis, pushed the devaluation of assets/excess toward extreme lows. This prompted the U.S. Federal Reserve to adopt an extended easy money policy.
COVID-19 pushed those extremes beyond anyone’s expectations – driving asset prices and the stock market into a frenzy. As inflation trends seem unstoppable, the Fed may need to take aggressive actions to thwart the global destruction of capital, currencies, and economies and avoid a massive humanitarian crisis. Run-away inflation will harm billions of people who can’t afford to buy a slice of bread if it goes unchallenged.
The U.S. Federal Reserve may be forced to raise FFR rates above 6.5~10% very quickly to avoid rampant inflation’s destructive effects. And that means traders are mistakenly assuming the U.S. Federal Reserve will pivot to a softer stance.
Real Estate Will Be The Canary In The Mine If Fed Stays Aggressive
I believe Real Estate could see an aggressive unwinding in valuation and future expectations if the U.S. Fed continues to raise rates over the next 12+ months aggressively. Once mortgage rates reach 8% or higher, home buyers and traders are suddenly going to question, “where is this going?” and “where will it end?”.

The Fed may have to break a few things to battle inflation trends. This same thing happened in the early 1980s, and real asset growth didn’t start to accelerate until the last 1990s (amid the DOT COM Bubble).
Real Estate & Financials May Show The First Signs Of Stress
I believe IYR and XLF are excellent early warning ETFs for a sudden shift in consumer/economic activity related to future Fed rate decisions.
Once the Fed moves away from expected rates/trends, the Real Estate and Financial sectors will begin to react to economic contractions and weakening consumer demand/defaults.
This potential trend is still very early in the longer-term cycle, but I believe traders are falsely focused on a possible U.S. Fed pivot, thinking the Fed will shift away from continued rate increases.
I believe the U.S. Federal Reserve must raise rates above 5.5% FFR in order to start breaking inflationary trends. That means FFR rates need to rise 125% or more from current levels (250 bp+) – which may be higher.
Learn more by visiting The Technical Traders!
Chris VermeulenTechnical Traders Ltd.
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation for their opinion.

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text on shelf

Chart Spotlight: Target Corp. (TGT)

With millions of kids heading back to school in just weeks, investors may want to keep an eye on oversold retailers like Target Corp. (TGT).
Source: MarketClub
Granted, Target hasn’t been popular among investors.
After all, the stock collapsed on an earnings miss. EPS came at $2.19, which was short of expectations. Revenue came at $25.17 billion. Analysts were expecting sales to come in at around $24.49 billion.

“Throughout the quarter, we faced unexpectedly high costs, driven by several factors, resulting in profitability that came in well below our expectations, and where we expect to operate over time,” Target Chief Executive Brian Cornell added.
It’s why the TGT stock plummeted from about $207 to a low of $140.
But the pullback has become overkill, creating a solid opportunity.
Source: MarketClub
For one, according to the MarketClub tools, the intermediate and short-term trends are moving in the right direction. MarketClub is showing green weekly and daily Trade Triangles, which is an indication of further short term upside in the beaten-down retail stock.
Other analysts, such as Wells Fargo’s Edward Kelly, are just as bullish.
Kelly just upgraded TGT stock to overweight from equal weight, with a new price target of $195 a share. Even with negatives, the analyst says the sell-off is overdone, creating “the opportunity to pick up a proven share gainer into an underappreciated earnings recovery at the right price,” as quoted by Barron’s.
The back-to-school season could make the stock even more attractive.
According to K12dive.com, “A 2022 back to school survey from consulting services firm Deloitte shows concerns about inflation are not stopping parents from spending more than last year to get their children ready for the new school year. Although 57% of parents are concerned about inflation’s impact on the cost of school products, 37% plan to spend more than they did last year, the survey found. Deloitte estimates this will result in an 8% annual increase in back-to-school spending, which calculates to $661 per child versus $612 in 2021.”
Target also has a strong history of running during the back-to-school season.

In 2019, for example, TGT ran from about $80 to about $106. In 2020, TGT ran from $118 to $134. In 2021, it ran from about $237 to $263. And while the U.S. economy isn’t doing so hot at the moment, I still believe TGT could see another good run as kids get set for school again.
With MarketClub’s shorter term green Trade Triangles, oversold conditions, bullish analysts, and back-to-school season just weeks away, Target could be a winner.
Ian CooperINO.com Contributor
The above analysis of Target Corp. (TGT) was provided by financial writer Ian Cooper. Ian Cooper is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Ian Cooper expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

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gold bars

Gold Stocks Trading At Deep Discounts

It’s been a mixed Q2 Earnings Season for the Gold Miners Index (GDX), with most producers posting solid operational results but revising cost guidance higher to reflect inflationary pressures. These pressures are related to fuel (diesel) and labor inflation, partially related to a tight labor market in prolific mining regions.
However, a few companies have bucked the trend, and others are in a position to claw back any margin declines experienced this year. These miners are the ones to own, and due to depressed sentiment in the sector, they’re trading at large discounts to their net asset value, with two being prime takeover targets.
Alamos Gold (AGI)
Alamos Gold (AGI) is a mid-cap gold producer operating in Mexico and Ontario, Canada, that has three mines and a development project in Manitoba.
The company was one of the few miners not to raise its cost guidance this year due to diesel hedges and operating high-grade underground mines. Notably, it’s also tracking nicely against production guidance, explaining the stock’s sharp rally following its Q2 results.
However, the real news for AGI was the release of its Island Gold Phase 3+ Study, which has outlined an operation capable of producing over 270,000 ounces per year at all-in sustaining costs below $600/oz.

This would make its Island Gold Mine (130,000 ounces per annum at ~$900/oz currently) one of the lowest-cost mines globally and a top-5 in Canada from a profitability standpoint. I believe this is a game-changer, but due to the poor sentiment sector-wide, the stock has not enjoyed the premium it should for this news.
Assuming the expansion is successful and the company can receive permits for its Lynn Lake Mine in Manitoba, Alamos has a path to become a 750,000-ounce producer at sub $850/oz costs by FY2027 a major upgrade from 460,000 ounces at $1,200/oz currently.
This should command a large premium to net asset value ($11.00 per share), yet it trades at a discount at a share price of $7.40, making this a rare opportunity to pick the stock up on sale.
So, from a growth/value standpoint, AGI is a must-own name if one is looking for gold exposure.
Karora Resources (KRRGF)
The second name worth keeping a close eye on is Karora Resources (KRRGF), a small-cap gold producer operating two mines in Western Australia.
While the region has seen cost escalations due to a labor market that impacted Karora’s Q1 results, the company should have a much stronger second half of the year. From a bigger picture standpoint, it has paved a path toward 90% production growth by 2026.
During Q1, Karora produced 30,000 ounces of gold at all-in sustaining costs of $1,396/oz, translating to a significant margin hit.
However, this figure had $300/oz in COVID-19-related costs, and the company will benefit from increased productivity and higher grades in H2 2022. That said, even with H2 improvements, its FY2022 costs will likely come in at or above $1,040/oz.
(Source: Company Filings, Author’s Chart)
While some investors might be discouraged by the increase in costs year-over-year, it’s important to note that Karora’s plans to nearly double annual production with a second decline will lead to a meaningful drop in unit costs. This will be driven by higher throughput and additional nickel production, with the latter translating to higher by-product credits.
So, while costs could rise 3-5% in 2022, I see this as merely an aberration in the long term. In fact, if Karora can execute successfully and grow production from 120,000 ounces to 200,000 ounces by 2024, we could see costs decline to record levels below $950/oz.
Despite this rare combination of production growth and margin expansion looking out to 2024, Karora trades at a market cap of $430 million, leaving the stock trading at a 60% discount to its estimated net asset value.
Based on what I believe to be a fair P/NAV multiple of 1.10, I see a 180% upside to fair value ($6.82). So, at a current share price of US$2.40, I see Karora as a steal, and I see any short-term margin compression baked into the stock already.
Skeena Resources (SKE)
The final name on the list is Skeena Resources (SKE), a small-cap gold developer that’s working to restart one of the highest-grade gold mines globally.
Since SKE began work on the Eskay Creek Project in 2018, it has had considerable exploration success. This is evidenced by the project now being home to nearly 6.0 million gold-equivalent ounces, with Skeena envisioning an open-pit mine with modest upfront capital and operating costs below $700/oz.
Once in production (the goal is for late 2025), this would make Eskay Creek one of the lowest-cost gold mines globally, commanding a premium relative to its peers.
So, why did the previous operator halt mining operations?
With gold prices under pressure in 2008 and less extensive infrastructure in the area, the previous operator was forced to focus solely on the material above 12 grams per tonne of gold. There’s only so much gold at these grades that a company can uncover.
However, due to these ultra-high cut-off grades, the operator left behind millions of tonnes of 4.0 gram per tonne material, which Skeena is after.
A mine plan reliant on these much lower grades is made possible due to the new infrastructure that includes a 287kV Northwest Transmission Line and the Volcano Creek Hydroelectric Power Station that’s 7 kilometers from the site and much higher gold prices ($1,700/oz v. $750/oz).
(Source: Skeena Resources Presentation)
Based on the current mine plan and after factoring in inflationary pressures, I have estimated a net asset value of $970 million for Skeena’s Eskay Creek Project, plus an additional $300 million for exploration upside (ounces not yet in the mine plan), and its high-grade Snip Project as well as additional properties in the Golden Triangle of British Columbia.

Compared to Skeena’s market cap of ~$430 million, Skeena trades at a fraction of fair value. In an environment where producers are seeing rising costs, Skeena is a very attractive takeover target, given that its projected operating costs are more than 40% below the industry average ($1,230/oz).
Obviously, there’s no guarantee that Skeena will be acquired, but producers are flush with cash and looking at ways to claw back lost margins related to inflationary pressures. In my view, this increases the probability of Skeena being taken over within the next year, and I would estimate a bid above $9.00 per share if a suitor wanted to make a serious offer.
This translates to a 70% upside from current levels, and producers could use their strong balance sheets to get this deal done to avoid share dilution. So, with more than 100% long-term upside if Skeena goes it alone and short-term upside in a takeover scenario, this 65% decline in SKE is a gift.
Gold stocks are a volatile group to invest in, but if one buys the best when they’re hated, they can generate sizeable returns. In my view, Alamos, Karora, and Skeena are three of the best, and they’re now trading at their most attractive valuations since March 2020. Hence, I have recently started positions in all three names.
Disclosure: I am long AGI, SKE, KRRGF
Taylor DartINO.com Contributor
Disclaimer: This article is the opinion of the contributor themselves. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information in this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one’s portfolio.

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