1/31/18
Yesterday’s
363 point Dow drop was accompanied by selloffs in bonds and gold. I.e., save
for perhaps the 3.25% spike in the vix (although intraday it
was up nearly 7%) yesterday was anything but a panicky run-for-the-fences kind
of down day. For me yesterday’s action (in fact, much of the
heightened volatility of late) – save for last week’s early-week
turbulence that I attributed to protectionist rhetoric – supports the
notion (my notion for sure) that the bond bull market’s days
are numbered.
Basically,
the stock market is going to have to come to terms with higher interest rates;
a factor that will call present valuation levels into serious question.
However, given where we appear to be in the economic cycle, where the Fed
appears to be in the tightening cycle, as well as the results of our ongoing
technical and fundamental analyses, history suggests (no guarantees mind you) that the present bull market in stocks has
a ways to run. If so, it’ll be the “climbing a wall of worry” scenario, it’ll
just be that the worry will be the market’s valuation level, which – despite
the attention it gets – is historically the absolute worst market-timing
indicator. Regardless, I have no doubt that it’ll be a rocky climb…
1/31/18
The energy sector is bugging me! For a number of reasons:
- I maintain that before the year’s out we could see a rally in the dollar that’ll be exacerbated by some major short covering.
- The Trump Administration is uber-friendly to oil production (bearish for price).
- OPEC and Russia’s production cuts (bullish for price) are working and, thus, North American production is now screaming higher (bearish for price).
- OPEC can be wishy-washy when it comes to production quotas. Should it abandon the current limit early, price would scream lower.
- Total S.A. just made its largest discovery ever in the Gulf of Mexico.
- Kuwait’s KPC will spend $114 billion on capacity expansion over the next 5 years.
- Exxon Mobile has successfully cut costs in the Permian Basin to the point that it now sees itself increasing production there three-fold.
The problem with my bearish thesis is that the global economy is
doing exceptionally well, which for sure means high oil demand (bullish for
price). Plus, looking at previous Fed tightening cycles, oil tends to do well
(dramatically last three occurrences), particularly in the early stages:
click to enlarge...
The “doing well” amid tightening cycles is obviously due to the
fact that the Fed tightens when the economy is in good shape and inflation is heating up.
The thing is, however, production has never been so easy and
North America has never been a player like it is today!
While I think that coming off of such a low base energy stocks
(certainly their earnings) can do well in 2018, the question is are they positioned
as well as, say, financials (deregulation and higher rates), materials
(infrastructure the world over), industrials (ditto materials) and consumer
discretionary (tight labor market, rising wages, optimism)?
Not to mention, from our year-end letter:
“4. Renewables: While the world will continue to consume fossil fuels into the future, anyone who would deny the fact that the industry faces major challenges, as the world pushes to clean itself up, is, well, in denial. Thus, while we'll indeed see geopolitical, etc.-induced spikes in the price of a barrel from time to time well into the future, the longer-term trend will indeed be a lessening of dependence on fossil fuels and, thus, a massive structural rebalancing that, again, poses major challenges for the industry in the years to come.”
We bought a new SUV in
December that I plug in at night. It uses gas too, but about half as much as
our last one. Oh, and we get a nice "clean energy" tax credit! And it’s amazing to drive (very
quick). I.e., I really like the feel when it’s in electric mode…
We’ll for
now take our energy target down a point to 7% and increase consumer
discretionary to 13%...
Have a great rest of your week!
Marty
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