Weekly summary 16/11

With yesterday’s update, we’ve completed this quarter’s earnings presentation commentary, which has been excellent in almost every case. Our model portfolio is built on a value investment philosophy with clear and unchanging objectives:

• Positive, double-digit returns

• Outperform any benchmark

After another strong week, we’re now approaching 30% YTD, and I trust that this investment philosophy and stock-picking style will continue to perform well in any market environment.

Weekly macro summary

There have been quite a few interesting events to analyze this week, and below I list the most noteworthy news. Let’s get started:

• Inflation data, while still at more than reasonable levels, showed an uncomfortable uptick after several months of positive readings. The reality is that, after a year of downward momentum, price increases seem to be gaining pace again, and the deficit measures and tax cuts promised by Trump would only add fuel to this fire.

  

   

  Despite the numbers pointing to a less favorable trend, markets are still pricing in another rate cut in December (82%) and another in January, though the path forward now seems less certain. Powell, during his Thursday press conference, did nothing to ease this uncertainty—in fact, quite the opposite:

  The economy is not sending any signal that we should rush to reduce interest rates.
  — Jerome Powell

  

   

  Moreover, another FED member, Thomas Barkin, went a step further, openly stating what we all know about the central bank’s long-term target:

  The last 30 years were highly conducive to low inflation; the next 10 years might be more inflationary due to deficits, deglobalization, and aging populations.
  — Thomas Barkin

  The FED has already set the stage to move its goalposts.

  

   

• Donald Trump has begun shaping his administration with a flurry of appointments this week. Among these, the appointment of RFK Jr. as Secretary of Health stands out. RFK Jr.’s profile is distinctly anti-big pharma, and he aims to revolutionize the country’s food and medicine sectors, potentially having a disruptive effect (already reflected in stock prices) on major pharmaceutical companies, fast food chains, and ultra-processed food manufacturers. We’ll be keeping an eye on these developments to identify any opportunities among companies impacted by this shift without facing significant actual consequences.

• Gazprom has informed Austria that it will suspend natural gas deliveries starting Saturday, November 16 (today), according to a gas flow monitoring platform. Austria remains one of the few European countries significantly reliant on Russian gas, while much of the continent has reduced imports since Russia’s invasion of Ukraine in 2022. OMV has stated it is prepared for this cutoff and confirmed it can continue supplying gas to its customers thanks to transport agreements with Germany and Italy, long-term contracts with other suppliers, and access to liquefied natural gas (LNG) from the Netherlands. However, this situation could exacerbate Austria’s energy crisis, where gas demand has already dropped significantly, impacting the manufacturing sector and contributing to the ongoing economic recession.

  The gas transit contract between Russia and Ukraine, which mainly supplies Austria and Slovakia, is set to expire at the end of the year, and Kyiv has reiterated it will not renew the agreement. While the European Energy Commissioner, Kadri Simson, assured that alternative supply sources are available to cover the shortfall, this shift underscores increasing pressure on countries still dependent on Russian imports.

  Europe is depleting its gas reserves faster than anticipated, and with rising prices projected for the summer, Germany, as the continent’s largest consumer, has warned of risks to restocking for the next heating season. The price gap between contracts for next summer and winter 2025-26 is widening, making it less profitable to purchase fuel for inventory replenishment. Operators are already focusing on the next winter season and the European Union’s mandatory target to keep reserves at least 90% full by November next year. If higher costs lead private market players—ranging from utilities to trading houses—to delay restocking next summer, governments may be forced to intervene, adding further uncertainty to an already volatile market.

  

   

  As we have been stating for two years, Europe cannot remain competitive without cheap energy imported from Russia. Several voices, including Hungary’s Prime Minister Viktor Orbán, are urging the European Union to reconsider sanctions against Russia, arguing that these measures keep energy prices high and harm the bloc’s economic competitiveness. Orbán emphasized that U.S. companies pay only a quarter of what their European counterparts spend on gas and electricity, creating a competitive disadvantage that is increasingly difficult to overcome.

• At the COP29 climate summit held in Azerbaijan, tensions regarding the role of fossil fuels and the transition to renewable energy were on full display. The summit, which also seeks to mobilize hundreds of billions in climate financing, comes amid extreme weather events like wildfires and heavy rains, underscoring the urgency to act. During the same summit, the Biden administration outlined a plan to triple the United States’ nuclear capacity by 2050, highlighting the growing demand for this technology as a continuous source of carbon-free energy. The plan envisions adding 200 gigawatts (GW) of capacity through the construction of new reactors, reactivation of existing plants, and upgrades to current facilities. This initiative could also find continuity under the administration of President-elect Donald Trump, who has advocated for new nuclear reactors to power energy-intensive industries like data centers and factories. Furthermore, bipartisan support in Congress has solidified with the approval of a law in July that provides the Nuclear Regulatory Commission with tools to streamline regulations for advanced reactors and licensing of new fuels.

  While this announcement is certainly relevant to the nuclear thesis, Aleix tempered the excitement with a dose of historical and practical reality:

  Although Biden’s proposal to triple U.S. nuclear capacity presents an ambitious vision and underscores nuclear energy as a viable clean energy option, the reality shows that the path is far more complex and less achievable than it appears on paper.

  Since 2000, only three reactors—not full plants, just reactors—have been added to the U.S. energy mix, two of them at the same site: Vogtle in Georgia. Altogether, these additions account for just 3.5 GW. Now, the administration proposes adding 200 GW in the same timeframe, a 60-fold increase from what has been achieved since the turn of the century.

  This goal is not only unrealistic but also disconnected from practical and economic factors. The nuclear sector in the U.S. faces enormous bureaucratic hurdles; projects require approval from multiple agencies and take years to navigate. The lack of a sufficiently skilled workforce, combined with the technical complexity of simultaneously constructing multiple plants, makes this plan infeasible in the short term. And regarding costs, the numbers don’t add up. Vogtle reactors 3 and 4, whose project began in 2009 with an expected completion in 2017 at a budget of $14 billion, were only connected in 2023–2024, at a cost exceeding $35 billion—a staggering figure that is hard to justify for operators.

  If building just two reactors on time and within a reasonable budget has proven nearly insurmountable for the U.S., how does the administration intend to scale this model by a factor of 60? Only Russia, China, and, to a lesser extent, South Korea have demonstrated the ability to execute nuclear projects efficiently in terms of time and cost. The rest, including traditional nuclear powers like France, suffer from chronic delays and cost overruns.

  

   

  It increasingly appears we are approaching a game of musical chairs, where a contract will inevitably go unfulfilled as some utility, with contracted uranium, fails to receive material. Two pieces of news this week hint at this impending scenario:

  1. Russia has imposed restrictions on enriched uranium exports to the U.S. Although the U.S. had previously implemented similar measures on imports, there had been a possibility of granting exceptions to utilities, effectively rendering the restrictions symbolic. That is no longer the case.

  2. Kazatomprom continues signing commitments with China. With its operational and ramp-up challenges, the company is committing to more volume than it can realistically deliver. Eventually, some contracts will have to go unfulfilled—and it won’t be China’s.

  It’s only a matter of time.

• U.S. crude oil inventories, while increasing this week in the crude category, were highly bullish regarding product demand: +2.09Mb of crude, -0.69Mb in Cushing, -4.4Mb of gasoline, and -1.39Mb of distillates. Both implied demand data and fundamentals continue on a clear upward trend. Globally, we learned (from the not-so-suspect IEA) that in September, global oil reserves fell by 47.5 million barrels, marking their lowest level since January (an implied deficit of 1.58Mb/d). Furthermore, preliminary October data suggests this trend is ongoing, with global reserves declining for the fifth consecutive month.

  

   

  However, true to form, the IEA doesn’t let reality ruin a good model. They’ve once again published their forecasts for 2025, projecting a consistent surplus of ~1Mb/d, even assuming OPEC’s production cuts persist, driven by supply exceeding expectations. To understand the logic behind these ideas, we can look at the EIA’s actions this week: they initially forecast a 0.92Mb/d demand increase for 2024. Realizing they were off, they revised it up to 0.99Mb/d, but to keep their long-term models unchanged, they reduced the 2025 forecast from 1.29Mb/d to 1.22Mb/d, so everything balances out. And they act as if nothing happened.

  

   

  In my view, as almost always, these figures will need to be corrected as they observe real data and better understand the physics. A few weeks ago, they downgraded their September growth forecasts for the U.S., and in November, they did it again. This pattern will continue until it becomes clear there will be no growth left to project.