Title: Making Hay Monday - February 3rd, 2025 ("Looking south, twice")
Show: Haymaker (David Hay's Substack) — Making Hay Monday
Author: David Hay (Co-CIO, Evergreen Gavekal; Haymaker)
Date: 2025-02-03
URL: https://haymaker.substack.com/p/making-hay-monday-february-3rd-2025
Length: written post (PAID) — no video; no timestamps
Note: written source — no (mm:ss) cues; per-name "At" cells link to the post (read↗). Body retrieved from the post; light OCR cleanup only (real & kept as text).

It could be argued that former president Joe Biden rode the tariff coat tails of Donald Trump. Trump 2.0 could, of course, be a much different story as our current POTUS is threatening friends and foes alike with punitive tariffs. Should a 1930s-type trade war unfold, with all of its economically devastating consequences, it's unlikely President Trump will continue to push through his draconian levies. In the past, he has shown the willingness to perform policy pirouettes worthy of a professional ballet dancer.

Unsurprisingly, the U.S. trades at the highest Cyclically Adjusted P/E ratios among major (and some not-so-major) stock markets. This metric calculates an inflation-adjusted and smoothed earnings history over a trailing ten-year period. It is widely followed because it corrects for unusually high or low profits which can be distorted by booms and busts. While not shown, Brazilian stocks trade at a CAPE below eight, among the world's cheapest. Anything around 10 on this basis is considered deeply undervalued.

"It's super-easy to dollarise Argentina. This would end the fraud of the peso, which is melting like ice cubes in the Sahara." -Javier Milei
"Mickey Mouse is the aspiration of every Argentine politician because he is a disgusting rodent whom everybody loves." -Javier Milei
"Brazil has rediscovered itself, and this rediscovery is being expressed in its people's enthusiasm and their desire to mobilize to face the huge problems that lie ahead of us." -Luiz Inácio Lula da Silva

== Stocks, Bonds & Brazil... & Argentina ==

Power-Punchers
Let me be the first to admit we failed to capitalize on Argentina's breathtaking turnaround. Even though Team Haymaker is a fan of the reforms Javier Milei shoved through last year in that long-beleaguered country, we expected the economic pain to last much longer than it has.

The reality is that most of his new policies were not even enacted until last July. Yet more remarkable is his party's lack of a majority in Argentina's Congress. In fact, it holds a mere 38 out of 257 seats in its equivalent of the House of Representatives and just 7 out of 72 Senate positions.

For sure, Argentina has endured a wicked recession. Yet Milei's popularity has soared in recent months primarily because hyperinflation has been vanquished. Granted, inflation is still running at a toasty 3% per month, about 40% per year. But that's down from over 200% in 2023. It is also clearly heading lower and we won't be surprised if it's in the teens before long.

The economic damage appears to have hit its worst last year. In fact, the economy has moved back into positive-growth territory. While we watched and cheered from the sidelines, the Argentinian stock market gave a fantastic leading signal that better times were in the offing. The horizontal line represents, as usual, the critical breakout point above at least three-year resistance. In this case, it was around 40.

The Argentinian ETF tracking its market actually broke out in early 2023, well before Milei was elected in November of that year. Perhaps, as in America with Donald Trump last year, it began to discount his win in advance. Whatever the reason, it's clear it was a resoundingly accurate bullish signal.

The bond market in Argentina has also been a huge beneficiary of Milei's aggressive roll-back of statism writ large. Bond yields, denominated in its currency, are averaging around 40% presently. If that sounds outrageously high, please be aware they hit 126% in 2023.

The reason for bringing up this embarrassing error of omission on our part is due to what we believe is a second chance opportunity. Speaking of second, this is a follow-up Making Hay Monday (MHM) to the one we ran on January 13th. In that edition, we made a vigorous (we hope) case for Brazilian stocks and bonds.

For those not blessed with Arnold Schwarzenegger-like total recall, we asserted Brazilian government bonds yielding 15% with inflation at just 5% were a strong buy. However, we also admitted they are almost impossible for U.S. retail investors to acquire. As an indirect play on their yields receding, we suggested its stock market. It is easy for even do-it-yourselfers to gain exposure to Brazilian equities via the iShares ETF.

As sheer luck would have it, that has popped a nifty 10% over the last three weeks. That's certainly a nice rally, but the fact of the matter is that, at 25.30, it is still below where we first highlighted it last summer. That was during the late July/early August severe turbulence that hit global markets due to the unwind back then in the yen carry trade.

Our point is that the recent recovery doesn't undercut the long-term upside, at least not much. Yes, we'd probably wait a bit if you didn't buy any back in mid-January. But over time, this should have a lot more gas left in its tank.

One of our bullish arguments from that January 13th MHM was that Brazilian bond yields should come down hard, assuming the roll-out of more market-friendly policies.

Shortly thereafter, the aged Haymaker heard a successful money manager say pretty much the same thing on CNBC. However, much more tangible, and detailed, was a recent missive that hit our inbox from the enigmatic PauloMacro. His work is a favorite of some of the smartest people we know.

His piece was titled, "Brazil Is Turning a Corner and Nobody Seems to Care." While the first part of that is certainly debatable, the second isn't... other than a few rogue money runners like Paulo and the elder Haymaker. Sentiment toward Brazilian stocks is overwhelmingly negative.

He points out that this apathy, if not antipathy, toward Brazilian risk assets (and that would be almost everything down there, even its government bonds) has reached Global Financial Crisis intensity. Stock prices, for instance, are trading at levels they only fleetingly touched in 2008/2009. The P/E ratio on its main stock index, the Bovespa, is around 8.

Moreover, as he points out, that excludes Brazil's two natural-resource behemoths, Petrobras and Vale. (We must admit a soft spot for the former as it was an extremely lucrative holding for clients, and personally, a few years back.) Those two trade in the four-to-five times earnings range. For income investors, the average yield on the Bovespa is around 9%. Thus, the market is trading at a dividend return rate higher than its P/E, an exceedingly rare occurrence.

Brazil has also been de-equitizing, meaning the number of publicly traded companies has shrunk considerably; 13% of them have disappeared since 2021 and three-quarters of those have market caps less than $1.8 billion. In the U.S., of course, we have crudely named, as well as squirrelly, meme coins with market caps of that size... or more. Accordingly, once the bear market ends, and money comes back into Brazilian risk assets, there isn't much supply around, particularly with equities.

In addition, its currency is just as cheap as its stock market. On a Real Effective Exchange Rate (REER) basis, the Real, Brazil's monetary unit, is trading over 40% below parity. One of our favorite ways to make money overseas is via countries whose stocks and currency are trading at fire-sale prices.

One of the biggest drags on Brazilian financial markets is its nearly 80-year-old left-of-center president, Luiz Inácio Lula da Silva, more popularly known simply as Lula. Ironically, his first two terms (2002-2010) were both largely characterized by both economic and stock booms, particularly early on; yet, by its end, he was engulfed in scandal, as was much of his government. As a result, he was forced to change residences from el Palácio da Alvorada (the Palace of Dawn) to the ultimate big house, a prison in the city of Curitiba. A cynic could say that it was a lulu of a fall from grace.

During Lula 2.0, despite a decent economy and amazingly controlled (for Brazil) inflation, his popularity is plunging. As Paulo points out, "...this is the first time that Lula's popularity balance has been negative beyond the margin of error in his ten (non-consecutive) years in office".

His PT/Workers' Party is also increasingly out-of-favor with voters. Lula is dropping hints he won't run again in 2026. Both Brazil's stock and bond markets would likely erupt should he announce his retirement. Per Paulo, "If the market were to price in a lame duck status, equities would be 30%+ higher."

Based on Argentina's almost miraculous economic renaissance, which has provided a Falcon Heavy-like rocket thrust to its stocks and bonds, Brazilian political elite must be at least contemplating a bit of policy imitation. Any whiff that such a shift is looming should also help bring down interest rates materially and dramatically elevate P/Es.

One of Paulo's concluding comments is, "Investments with high income generation and asymmetric profiles don't come along often. In fact they are exceedingly rare, and most people only see a few of these in a single career".

Based on the snappy rally in recent weeks, a pullback is highly likely. Beyond that caveat, though, we agree with Paulo that this is a once in a one- or two-generation opportunity to position for high future returns. Almost as alluring is that the downside is greatly limited by expectations that are nearly as low as the ocean floor in Brazil's oil-rich Santos Basin.

Promising Picks
Another pleasant surprise of late has been the rebound by the nearly always despised gold miners. As we've previously observed, the negativity isn't entirely fair because some of them have performed admirably in both the stock market and from an operating standpoint... some.

One of the stellar performers in that regard is Franco-Nevada (FNV). We had mentioned this one in our December 9th MHM after listening to a Rick Rule podcast a week or so prior to its publication. During it, he expressed his fondness for its capital-lite business model and also that it had corrected hard on some adverse news out of that suddenly front-page-news country of Panama. It is possible its leaders will be a bit less militant toward FNV given the pressure it's under from the new occupant of the White House. However, one could argue the escalating tension might worsen the situation. Regardless, it's had a more than respectable rally.

Wesdome (WDO) and New Gold (NGD) were also highlighted, but in our December 2nd MHM. WDO has run up considerably while NGD is recovered a much more modest amount, from $2.70 to $2.82. That edition was primarily focused on gold investor extraordinaire Fred Hickey and the hefty WDO return since then should be credited to him.

(We'd like to once again re-recommend Fred's extremely reasonable newsletter, The High-Tech Strategist — admittedly, the name is a bit incongruent — for any serious precious metals investors.) As we were creating today's MHM, Fred's latest newsletter hit our inbox. In it, he expressed his positive views of WDO's most recent results. To wit:
"In Q4, Wesdome produced 49,567 gold ounces, up 37% year-over-year as its Kiena mine continues to ramp up. ... I calculate that Wesdome's Q4 revenues should come in around $130 million (U.S.). That's up 77% year-over-year."

Here's another excerpt:
"Using conservative estimates for AISC and other expenses in Q4, I model Wesdome to earn 26 cents (U.S.) a share in earnings, 37% better than in Q3 (19 cents) and massively above the 2 cents earned a year earlier. That's in line with what analysts now expect for Q4. Those analysts immediately raised their estimates by about 10% following Wesdome's Q4 production report. They've forecast $1.02 per share for 2025, which means that Wesdome's stock ($9.90) is trading at less than 10 times the earnings estimate. Earlier I deemed that to be 'a significant discount.' I should really change that to read: 'a ridiculous discount'."

(The $9.90 is in U.S. dollars; above used Canadian currency as we did back in December.)

Those are bold words from a conservative analyst. However, I believe he has good reason to be bullish on WDO. Do realize, though, that it has moved up almost 25% or so from early December. Consequently, be judicious with any new purchases.

In the 12/2/24 MHM we also made some bullish noises about gold and silver, the commodities, as well as the leading gold-mining ETFs, both the junior and senior versions. They are all up a few percent, but that's nothing about which to break open the bubbly. However, after a very mild correction in December, gold had a strong January. It's now risen by 7½% this year, making a new all-time high in the process.

Fred expressed some concerns (which we share) about its overbought nature at this point. Per the following, you can tell he's wrestling with the decision to do some profit-taking once again. He's excelled at that over the years whenever gold and, particularly, the miners have come to life (always briefly in the latter instance).
"It could be this is the beginning of a parabolic move higher and I wouldn't want to miss that. Therefore, I'm trying to find a comfortable balance for my portfolio. As you know, 'trimming' near highs has worked out well for me in the past – but there's no guarantee it'll be the right move today. My best guess is that before a really big move for all the miners' stocks to happen, the investor love affair with the Magnificent 7 must end – just as occurred with large cap tech stocks in 2002."

One chicken way to play a continuing miner rally might be through the tarnished blue-chip names in this space. Like me, Fred believes NEM may report stronger-than-expected Q4 profits after a bitterly disappointing Q3. It's trading at essentially the same price it was in early December and actually fell further through the month. It bottomed (maybe) in late December around 37 and is presently a tad over $43. Expectations remain extremely low... for good reason. This has been a serial disappointer. On the downside, I did just see a Wall Street report where the analyst anticipated another stinker. When it comes to choosing between "The Street" and Fred, I'll take Mr. Hickey almost all of the time.

Down-&-Out Bunch
The semiconductor sector continues to strike us as vulnerable. This is both due to high valuations, currently almost 37 times earnings on a trailing year basis, and increasingly fragile technical, or chart, action. A bull on semis would say to not look at trailing profits but at those forecasted for 2025. However, earnings disappointments are beginning to spread in the group. Even the shining super-star, not just of this cohort but of the overall market, NVIDIA (NVDA), might not be immune to profit pressures as the year progresses.

It continues to be our belief that the age-old curse of this industry – double-, triple-, and quadruple-ordering during boom times – will once again come back to haunt the semis. We doubt NVDA will be immune. In fact, based on the frenetic pace of past orders for its admittedly remarkable chips, it might be the ultimate casualty of any demand hiccup. There is the chance that DeepSeek turns this into a reaction more akin to a convulsion.

== Full Lists ==

Asset-Class Lists (favored):
- Brazilian stocks
- Coal (especially of the metallurgical variety)
- The Japanese yen
- Offshore oil and gas drilling stocks (previously, we had warned about chasing them during a recent slight rebound but they have weakened again)
- Senior gold miners (these have rallied since the first of the year; thus, defer accumulation for now)
- Junior gold miners (they are now up 15% in this young year; they seem a bit extended to our eyes)
- Gold (bullion itself might be somewhat ahead of itself though its price action is very encouraging for the bull camp)

For income:
- mREITs and ETFs of AAA-rated CLOs
- 10-year U.S. Treasury notes/bonds
- The largest energy infrastructure MLP which has never reduced its distribution, even during the pandemic (it recently became somewhat overextended but has now pulled back to a decent entry point)
- Certain fixed-to-floating-rate preferred stocks (this is an upgrade from the Contenders section based on the rising odds of resurgent inflation over the next few years)
- Emerging Market debt closed-end funds (these have all pulled back lately, along with global bond markets, creating a better entry point)
- ETFs that hold lower yielding C-corp (non-K1) midstream energy entities
- ETFs that hold oil and natural gas (the natural gas variety has come down though it isn't nearly as cheap as it was last summer)
- ETFs that own oil futures contracts (oil has weakened materially since our downgrade; thus, some modest buying may be appropriate)

Down-and-out / avoid:
- Semiconductor stocks
- ETFs that own Indian Small-Cap Growth stocks (they are now down 21% from their recent peak; accordingly, we are much less negative on them)
- Meme stocks whose management is aggressively selling into buying frenzies
- Profit-free tech stocks
- Homebuilder stocks
- Industry leading stocks trading at the highest P/Es they've ever experienced