Source: Steel Seal of Thought

1. Two opposing views

Some time ago, a researcher recommended a logic from the refining and chemical sector to me:

The cracking price spread of overseas refined oil products continues to reach record highs. There is a big logic behind it. Under the influence of the epidemic and “double carbon,” overseas refining energy has been lost about 200 million tons/year. It is estimated that China has reached 3.3 times the production capacity of large-scale private refining and chemical production in recent years, and the price of refined oil products will probably remain high for a long time.

Meanwhile, the commissioning of new domestic private refineries is also in the final stages. Future new production capacity will be limited, and the profitability will far exceed that of traditional refineries. Private refining and chemical companies also have the largest production capacity of new materials in the world, providing a high growth logic, which will reverse the structural economy in the medium to long term for the olefin chain, which is currently at the bottom of the boom.

If you see this, and you think this sector is the next “coal stock,” don't worry, I'll give you another completely negative logic.

I asked a petrochemical researcher for advice on this point of view, and he said he couldn't agree at all.

The reason is simple: looking at the crude oil cycle, the European and American economies are in recession. The current oil price is likely to be in a downward cycle, falling below 40 US dollars. In this process, the loss of inventory prices in refineries will seriously drag down profits. Even if a small probability event occurs, oil prices remain at the current level, and refiners' profits are not very good.

He believes that without looking at current low valuations and falling oil prices, there is still room for stock prices to fall. Even if oil prices do not fall or even rise, there is limited room for stock prices to rise within a year, which is an opportunity with very low odds.

I deliberately compared these two opposing logics. It is very obvious. The optimistic logic is to look forward to the long-term value of the industry from the perspective of supply and growth; the bearish logic downplays medium-term trends from the perspective of demand and cycles. Earlier, more emphasis was placed on China's major manufacturing factors, and the latter was a trend judgment from the perspective of the global economy.

The views of these two parties also imply a larger difference — the continuation of inflation, will crude oil prices rise for a long time?

The former implied an idea that was particularly popular this year. Under green inflation, oil prices will not return to their original range; the latter believes that crude oil, as the mother of global commodities, is a strategic reserve, and the pricing mechanism is very complicated, and no one variable in supply can be used to judge changes in the cycle.

Who should I listen to?

It doesn't matter; the key is who you listen to the stock price.

2. A few watches that are not the same when walking

I often hear many retail investors complain that their information channels are too blocked and don't know how to make decisions; however, the biggest confusion for professional investors or institutional investors is a situation similar to the above. There are plenty of information channels, but there are too many conflicting logics or opinions.

For example, the scientific instrument for policy interest-rate loans that have been very popular recently:

Expert A, university buyer: Very urgent needs that have been delayed for nearly two years, and the probability that domestic equipment approval will pass is higher

Expert B, industry executive: There are currently no orders. Colleges and universities intend to prefer foreign products this time to prevent them from being able to buy them in the future

The same goes for medical equipment procurement:

Expert C: County-level hospitals are still very enthusiastic about purchasing, especially domestic equipment

Expert D: Hospitals are very cautious about interest-rate loans. If they can't pay off, the director will be on the “old loser” list

The problem with retail investors is that they don't have a “watch”; they don't know the time; the problem with professional investors is that they can only “read the picture”; the problem with professional investors is that they have a few different timelines, and they still don't know the right time. After listening to the opinions of a circle of experts, the final decision is still to “read the picture.”

In fact, this information is not contradictory. Any sector or company has all kinds of logic at the same time. If only good or bad, then the stock price will rise or fall into bankruptcy a long time ago, and investors must also understand all the core logic of the company they are investing in, whether negative or favorable.

Perception is one thing, but trading is another. Positive and negative logic does not cancel each other out; instead, positive logic develops one after another. In some environments, positive logic develops, and in others, negative logic develops.

However, transactions can only trade one of these logics. The simpler the transaction logic, the easier it is to distinguish right from wrong, and the sharper the effect. Therefore, it is more important to understand how these favorable and negative logics are reflected in stock prices?

3. Behind the rise and fall of stock prices

Many people think that the rise in stock prices is due to the large number of people buying and the decline is due to the large number of people selling, but in reality, the amount of the quantity bought and sold is always equal. The direct reason for the increase is “active buying,” that is, for investors who keep buying, and the reason for the decline is “active selling,” that is, investors who continue to sell against buying.

If no one takes the initiative to buy or sell, the stock won't be traded; there are only pending orders.

Why should investors actively buy or sell? Of course, it's trading “negative logic” or “favorable logic.”

Taking the previous private refining and chemical industry as an example, active buying believes that the next supply logic and growth logic will become the dominant logic of the company's performance, and the stock price will have a major upward trend; active selling changes the previous favorable logic, believing that the global recession is a foregone conclusion. The downward cycle of crude oil is already clear, and the negative logic will continue to ferment, and stock prices will continue to fall.

In this process, there is a phenomenon contrary to intuition. All “shareholders” are potential shorting forces. The only difference is whether they sell now or in the future; all “coin holders” have potential power to go long; the only difference is whether they are buying now or in the future.

As a result, all followers formed a multi-party base camp in the lower left corner and maintained their attention because of the negative logic; all shareholders formed an empty base camp in the upper right corner and continued to hold because of favorable logic.

The buying and selling orders placed in the transaction are equivalent to the vanguard forces sent from these two main camps, and active buying and selling are transformed into the other party's strength after the transaction is completed.

There's also something counterintuitive here. Shareholders' holding logic is favorable logic. That's true, but why do followers focus on negative logic?

Still, take the refining and chemical sector as an example. As far as I am concerned, I am optimistic about the long-term investment value of private refining and chemical companies. In the long run, growth will account for a larger proportion, but this process may be very long, and it is difficult to see the bottom. If oil prices actually fall next year, then there is also a possibility that DaRefining and Chemical will lose its current position again, and these companies will not occupy a large share of new materials within a few years.

Therefore, followers keep watching or are in no hurry to buy. The ostensible reason is that the stock price is not cheap enough or uncertain; the underlying reason is that they are waiting for the negative factors to ferment or disappear.

Therefore, in the process of “followers continue to take action” and “holders continue to change,” stock prices move up and down over and over again. If investors can only understand and agree with the logic of one party, it is essentially watching the sky to eat, which is no different from gambling.

This article uses large refining and chemical companies as key examples, because investors who are bullish and bearish in this cyclical industry generally have a balance of power and opposing views, and everyone can accept them with peace of mind.

However, in some classic long-term growth industries, or those that have been abandoned by investors for a long time, investors are particularly prone to falling into one faction's view due to long-term strong or sluggish stock prices. Once a trending inflection point occurs, investors will lose a lot, such as pharmaceuticals, such as liquor.

4. Excessive interpretation of a single logic

One experience is that when stock prices are high, negative factors are more likely to ferment; when stock prices are low, favorable factors are more likely to ferment.

However, this experience is not necessarily correct. Another situation also often occurs: at high positions, investors turn a blind eye to repeated negative factors; at low positions, investors turn a blind eye to repeated favorable factors.

These two opposite experiences, from turning a blind eye to the downside, to good or not rising, to a situation where the stock price peaked and bottomed out.

The pharmaceutical market in 2022 may seem sudden; in fact, it has already experienced these three phenomena:

Turning a blind eye to the benefits: On September 8, 2022, as a result of the dental implant collection, the winning bid price was more than two to three times that of the previous collection in Ningbo. As a result, Tongze Medical's stock price rose for two days, and then all fell back. At the same time, the documents encouraging hospitals to purchase interest-rate loans for medical equipment were issued, and the market did not respond at all.

Unfavorable phase: Spine consumables collection on September 27, because the previous collection was a disadvantage, so the stock price also fell by a big wave first. The final price reduction was actually about the same as joint collection in 2021. There were also 60%. Orthopedic companies had a lackluster start. They didn't expect it to rise all the way up. Investors looked for good fortune everywhere.

More sensitive to benefits: On October 14, Fujian's electrophysiological collection rules were introduced. At the same time, the 22 provincial IVD biochemical reagent collection plan can be selected if the price is reduced by 20%. This is a clear benefit. Not only did the market open, but it also received a perfect score throughout the day. Pharmaceutical stocks skyrocketed across the board on the same day, and 20 cm stocks hit the screen.

The pharmaceutical stock market for the past week is to take out all the positive logic of pharmaceuticals and interpret it. The reason why it is so extreme is precisely because before, the market took out all the negative logic and interpreted it over and over again.

As mentioned in the previous model, the followers are the “base camp of many parties,” and the focus is on when the interpretation of negative logic ends. However, investors are not always rational. Long-term excessive misinterpretation can easily make investors numb to changes in fundamentals. The “multi-party base camp” is occupied by “long-time neglecters”, just like “the wolf is here.” The benefits have actually come, and they can't believe it.

The other extreme is the advantage of excessive interpretation over a long period of time, which has led to the emergence of a significant proportion of “long-term hedging investors” among the shareholders that should have been the “base camp of the bears.” Long-term high positions have greatly increased investors' tolerance for overvaluation, and the interpretation of weak fundamentals is extremely numb.

Liquor is regarded as a model for long-term investment because of its good business model. Coupled with Maotai's “A-share brothers” sitting in the city, a bunch of second-tier major liquor stocks, and the support of many big V's, liquor investment has become an A-share myth.

However, the liquor business model is not impeccable; it is still weakly cyclical.

The cyclicality of liquor comes from channel inventory. Manufacturers want more channels to buy. Because liquor is resistant to storage and can increase prices, the channel is actually leveraging enterprises. The actual terminal consumption growth rate is 10%, and after inventory is leveraged, it becomes 20%. Similarly, during the downturn period, the actual terminal consumption growth rate dropped from 20% to 10%. The previous 3-month inventory became 6 months. As channels needed to be digested, the company's performance became no growth or negative growth.

This typical negative logic of liquor has been experienced by almost all famous liquors, including Maotai, but it is easy to be selectively overlooked because the business model is too excellent, and because the past five years just happened to be a period of concentration of industry leaders and consumption upgrades, but at the end of the economic downturn, if Maotai cannot continue to raise prices, the cyclicality of liquor will eventually reappear.

The liquor market for several years has nurtured a group of “value investors” who have been brainwashed. They believe that a sector with a good business model is an “empire that never sets”. You can lie back and earn money by holding positions along the way. If you don't make money, your will is not firm enough.

However, there is no money in the world that can be made by simply relying on a good business model. If Maotai is confirmed by the market that it has no ability to raise prices and the sub-high-end price increase channel is closed, the negative logic will fully unfold. These long-term locked investors will provide a steady stream of “bear forces.” The adjustment of liquor may not be significant, but the time may far exceed imagination.

5. Trading logic at inflection points rather than trading reality

Many readers read through my articles and said that the discussion was wonderful, but what are your conclusions? Are you bearish or bullish? Buy or sell?

I'm very sorry, but even without considering compliance issues, I won't give you a clear trading conclusion. I think the most important thing is to show all the favorable and negative logic.

Many investors have a fatal flaw in their thinking. Once they have accepted a logic, it is difficult to accept the complete opposite logic at the same time. I read the “Historic Inflection Point for Crude Oil Prices”. If you agree, you can no longer accept the view that oil prices will fall back to $40; after agreeing that liquor is the best long-term asset, you can no longer accept that liquor is also cyclical, and Maotai's valuation may return to more than 20 times in the future.

Perhaps the reason is that our education always likes to instill absolute truth, emphasizes what is wrong, and rarely thinks critically.

As a result, investors who focus on growth styles look at everything like growth. Investors who are good at profiting from huge fluctuations in the cycle look at everything in a cycle.

“Growth players” are used to constantly searching for new prey and keep trying and error; “cyclical players” always wait for a good opportunity every few years among the familiar varieties with huge cycle fluctuations. When the two meet on a narrow road, it is naturally easy to pass each other's SB.

At the inflection point of the long-term bottom and top of the stock price, trading is usually logical rather than realistic. You need to be bullish when there is no hope, and be bearish in the midst of prosperity and hustle and bustle. Logic represents “what should happen” rather than “what is now”. Investors at this time do not need financial reports or orders, high-frequency data, and need rational thinking through the fog of reality.

Editor/jayden