Observations 2H2022 – Nov

Opportunistic times for businesses and investors.

Remaining liquid to seize opportunities as there will be. Most real assets have NEGATIVE expected returns in this current environment and then add inflation on top of that. Having cash at least only has the inflation factor.

We have been entrepreneurs and investors since pre-2000. Our current manufacturing business grew significantly during 2008 as we took on more manufacturing and grew significantly. We added towards supply chain raw materials. Remain financially stronger.

Backdrop of where we are today:

There is a contraction in economy.

$ infused into personal incomes and economy – stimulus, PPP loans, rates practically at zero “free money” etc without production and labor – excess money.

Productivity down – less output/$

change in the worker as well as more capital required to produce each output (that is an entire discussion)

Rise in Cost of capital, production, labor

Margins compressed

Dilution of Value

Revenues held up more by inflation and increased prices than higher output/vol – stagflationary nominal growth

Meanwhile, COGS & operating expenses much higher about 20-30% from our experience

Real demand coming down, less need for output and workers – employment challenges. Once they start, difficult to stop.

Real incomes & spending are weaker so business sales are also weaker.

Excess production is finding its way into inventory build. And w/o sales growth it is unsustainable.

Highly elevated Inflation coupled with Slowed Growth (global) and now less need for workers. Stagflationary Nominal Growth –>Stagflation

Our business: International Manufacturing, warehousing, B2B ecommerce

Thermal engineering equipment energy efficient. Only “green equipment” in our industries and compared to competitors.

Customers range from startups “mom & pop” to Fortune 500, many publicly traded LMT NASA, governments

Almost ALL industries – staples

Changing/Rotating Sectors & Customers who are buying due to the changing times

Rotation going on now – our customers making the larger purchases rotated to the larger companies, Fortune 500 as well as completely different industries/sectors. Less sensitive to rise in costs and these are industries less elastic and have sustained growth.

Smaller businesses are more sensitive to rise in cost of capital and debt for expansion and maintaining cash flow while margins compressed.

Also faced with higher costs of production and labor

Spending patterns have changed for the consumer. Different industries More goods during COVID to more services now. (that is an entire discussion in itself)

During COVID:

Our business saw a surge in equip sales to startups, Smaller businesses, discretionary industries, MORE GOODS production during pandemic.

Industries – still mainstay but surge in goods – discretionary products, candles, soap, consumables, cbd.

Post-Covid:

More sales to Fortune 500, larger companies – less sensitive to changes and rises in costs – debt, capital, prod, labor

Fewer foreign orders due to stronger DXY against foreign currencies.

Foreign orders usually about 30%

Foreign orders during 2008 rose to about 50%

Now less than 10% – and the ones that order are Defense companies or governments.

More consumer staples, industrials, food (choc & candy), medical, etc. inelastic goods and services – sales rise in equipment for services based and industrials

Aerospace

Turbine engines, metal molding & casting, 3D printing lower

Polymers – polyethylene cups, fiberglass, nylon bearings, plastic bags, epoxy glue, etc.

Additive manuf for Industrial Production

Lithium metal anodes – wax coating

Beauty sells! Body care, cosmetics

In line with PMI this past month:

Four industries with moderate-to-strong growth in September Machinery:

Transportation Equipment; Food, Beverage & Tobacco Products; and Computer & Electronic Products

Manufacturing is down at 50.9% – lowest level since May 2020.

New Orders are down to 47.1% contracting – lowest level since May 2020.

Manuf – Forward indicator for earnings. Earnings already under pressure with

Rising rates further slowed growth & diminished future valuations

Margins compressed

Potential Future lower demand Pattern:

Demand eased – new orders, export, customer inv index DOWN

Consumption declined – production and employment indexes