Alan's Alert 7-1-2021

 

Oil is acting erratically this morning. I had crude futures up to $76.22 this morning before taking a tumble. As I send this out, it currently stands at $75.14. The oil market is really tight due to an influx of swing/momentum traders. I believe the current volatility is here to stay and should be taken advantage of. Big one day drops can be great opportunities to go long. Ultimately, we are going to be running into a large market deficit because of supply constraints, lack of new well development, and OPEC. Current rumors are flying around about OPEC’s meeting. Previous production deals could turn out to be less than previously advertised. Also, there is a rumor that the current production cut will be extended to the end of 2022 (it was going to end in April 2022). OPEC could be testing the waters here to see if shale producers will administer a healthy dose of self-control in the face of higher prices. If so, this will give the cartel a green-light to keep edging the price higher.

ISM put out their latest report on Manufacturing and it’s a wild ride. While the top number edged down (60.6 in June vs 61.2 in May), we are still in expansion mode (remember, anything above 50 indicates expansion). The number that really stood out to me was the change in price pressures which surged from 88 to 92.1. Now this data is considered “soft” data, as opposed to “hard” data. The difference being that soft data is based on surveys and hard data is based on actual numbers of sales or price changes. Still, this price pressures reading was the highest since July 1979.

Backlog of orders also decreased from 70.6 to 64.5. Inventories also kicked up 0.3 percentage points. This tells me that bottlenecks are starting to be alleviated.

Timothy Fiore, the Chair of the ISM Manufacturing Business Survey Committee had this to say about the report, “Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing levels of demand. Record-long raw-material lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy.” 

This continues to play into the perpetual inflation thesis. It also leads to the investment thesis that shipping companies like Costamere (CMRE) are the place to be. I know a lot of the easy money has already been made in the shipping companies:

I don’t think the story on these guys is over yet. We are still seeing high prices for sea freight, port backlogs, and long lead times for new ships to be built.

Finally, I want to discuss the article in Zerohedge from last night, “Welcome To the Post-COVID Luxury Spending Boom”. This article dovetails nicely with Bank of America’s analysis of the US Personal Savings rate data. BoA examined the numbers and estimated that Americans were sitting on $2.3 to $3.5 trillion in excess savings.  

All that stimulus money has been piling up in bank accounts. BofA explained it as consumers “saving for a sunny day”. Now that we are seeing more states opening up, sunny days are arriving. Robert Wenzel predicted this when he said that the real fireworks for the precious metals would be occurring shortly after the 4^th of July fireworks. I’m keeping a close eye on some of my favorite luxury goods brands as they could provide an opportunity for a good trade.

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Alan's Alert 6-30-2021

 

Job seekers are continuing to find employment, especially in the sectors of the economy that were hardest hit by the government shutdowns.  ADP’s National Employment Report was posted this morning and it showed an increase of 692k jobs from May to June.  624k of these jobs were attributed to the service sector.  Leisure and hospitality picked up the most workers at 332k, followed by education/healthcare at 123k.

Here’s the bigger picture:

Employment increased 0.6% month-over-month.  With May’s increase of 0.7%.  We are picking up jobs at a 7-8% annual basis.  At this pace, we’ll be back to the pre-shutdown employment around mid-January 2022.  With more states dropping the federal unemployment bonus, I expect this could happen sooner if it weren’t for…the massive amount of boomers leaving the workforce.  This graph from the Fed doesn’t do it justice:

According to the latest census data, the US has 328k+ people.  96.5M are 55 and older and their current participation rate is 38.4%.  Prior to the shutdowns, boomers were 40.3% of the workforce.  

 

I put together the spreadsheet below to highlight how significant this is:

As you can see, we have lost 1.8M of those 55 years of age and older from the workforce.  I expect many will not return.  As this age group moves into retirement mode, expect them to spend less as they live off their accumulated savings and investment holdings, putting downward pressure on inflation.  There will be a struggle between the spending of the boomers dropping off and the spending of the 25-54 age group increasing.  The upcoming times for this group could be particularly difficult if another market crash erodes the value of their 401ks or rampant inflation destroys their savings. 

 

But let’s look on the bright side, 692k jobs beat the consensus estimate of 600k.

OPEC+ meets tomorrow and the oil futures (/CL) price has been swinging wildly from $72.82 up to $74.12 in early trading.  Investors are weighing the odds of OPEC+ extending the oil supply cuts.  Russia has already signaled that they would like to increase production between 500k to 1M barrels per day.  We’ve seen how tight this market is when there were rumors that Iran was going to be bringing their production back online.  Prior to the shutdowns, OPEC went to war with US shale.  They pumped oil at an extreme pace to make US shale producers unprofitable and to hoard market share.  As OPEC has slowly allowed the price to rise, I expect they will be keen to keep a close eye on those shale producers.  If there is a signal that the cuts won’t be extended, expect the price to drop.  This will be a buying opportunity. 

 

It pains me to have to talk about this but I think it could have an impact on future market reactions.  The stock market discounts future events into the present.  Since the government has made serious in-roads into the economy by shutting down businesses due to virus infections, it’s important to keep an eye out for the possibility that it may happen again.  This is something that I don’t want to fathom.  However, my job as an investor is not to determine whether a certain government policy is good or bad, it is simply to understand what reaction the market would have to such a policy and front-run it.  The news media has really ramped up the rhetoric that this delta variant is something to be worried about.  For those who understand how variants work, this is nothing to be concerned about.  As viruses mutate, they will always mutate to being more infectious.  Thankfully, they never become more deadly and in fact, become less so.  While the infection rate will increase, hospitalizations and deaths will drop off.  I believe we are already starting to see this.  Unfortunately, there are 24 letters in the Greek alphabet giving the infotainment industry lots of fodder for more variants.  Thankfully, they’ve already wasted 4 Greek letters, let’s hope they get through the next 20 sooner rather than later.

 

Alan's Alert 6-2-2021

 

 By Alan Baerlocher

OIL!

 Black gold has broken through the final resistance of the past year which was $67.98 on 3/8.  Americans came out in force on Memorial Day to remember that people have died for their freedom to travel, camp, and BBQ.  TSA reported a traveler throughput of 1.9M on 5/31.  This is still below pre-pandemic levels of 2.5M but far exceeds the 350k in 2020.

 Looking at a longer dated chart of oil futures, the $65-$70/barrel price was a sticky point from July-September in 2018.  Oil eventually peaked at $76.90 in October of 2018 before the shale revolution ran the price back into the $50-$60 range.

 

Putting a cap on yesterday’s oil run was OPEC.  They announced a production increase in July.  OPEC is aware of US shale producers and have butted heads with them before.  They want oil prices to rise but they don’t want to push the price to a height that would cause shale producers to come out of hibernation and kick production into overdrive.

 

Another factor in the oil picture is Iran, and that country’s potential return to the international market.  In 2018, Iran was producing up to 5M barrels per day.  Their current output in somewhere around 3.5M bbd.  Stacking up against OPEC+, they would be the 5^th largest producer behind Saudi Arabia, Russia, Iraq, and the UAE.

You can see from the chart above that inventories are quickly dropping to their pre-pandemic average.  Even with the potential production from Iran and US shale, I foresee an oil price that continues to climb the “wall of worry”.  I wouldn’t rule out $80+ by the end of summer.  If inflation really gets hot, it could climb to triple digits.  To me; USO, BNO, Crude Futures, & producers still have room to run.  I still like Continental (CLR), Marathon (MRO), and Cabot (COG).  If you are high risk, Diamondback Energy (FANG) has a high debt load and a high weighted average cost of capital, but a great operating margin. Things could really turn in their favor with high inflation (reducing the debt) and a high oil price.

 

 

ISM Manufacturing

 

I want to touch on the data coming out of the ISM.  Manufacturing PMI came in at 61.2%.  Anything above 50% indicates expansion.  New orders, production, & employment were all growing.  Deliveries are slow and backlogs are growing.  The bottlenecks are still in the economy with workers incentivized to stay on the couch.  Many respondents to the ISM survey conveyed a similar response.

·         “…struggling to find employees..”

·         “…finding workers at the factory and warehouse level is not only impacting our production, but suppliers’ as well..”

·         “…lack of qualified candidates to fill both open office and shop positions..”

·         “labor shortages impacting internal and supplier production.”

 

It’s obvious that this problem won’t solve itself until one of two things happen.  1) Unemployment benefits are cut or 2) Wages raise to a level that entices workers to find work.  All commodities were up in price except acetone.  Thirty-two commodities were in short supply including;

·         aluminum

·         corrugated boxes

·         electrical & electronic components

·         lumber

·         MDF

·         plastic products

·         PVC

·         circuit boards

·         semiconductors

·         steel & steel products

·         and wood pallets.

 

ISM services survey comes out tomorrow.  I am guessing it will be a lot of the same.  The ADP employment report also comes out tomorrow.  It will be interesting to see what it holds in store for us.

 

 Construction Spending

Lastly, the total construction spending report was posted yesterday.  We continue to see spending on construction increasing.  Spending was up 9.8% Y/Y and .2% M/M.  We are well into the boom phase of the business cycle.  Both labor and raw materials are still tight, yet spending continues to creep up.