December 16, 2014

Are Resource Stocks The Obvious Trade?

A year ago, how many people would have predicted the 10 year US Treasury yield would be lower? A year ago (and beyond) the ‘obvious’ trade was to short rate products. Obviously that was the wrong trade.

I think the world is more Japanese than it wants to admit.

Will resource stocks come back? Is this the obvious trade at the moment?

Eventually shale production and investment will cease (as it is unprofitable at these oil prices) and world supply could shrink by up to 9 million barrels a day (I suppose that’s the worst case). That in turn would spike oil prices back up.

That could all take months to a couple years to play out. But look at oil during the financial crisis. How far and fast it fell and then subsequently rose again.

My gut feeling is that we are in a v-shaped market for oil and energy stocks. But I don’t know when oil sees a floor. Could be when it becomes more obvious that rigs are shutting down. Or perhaps when OPEC finally capitulates and says it will reduce production.

But OPEC won’t do that UNTIL shale production starts shutting down first. 1) OPEC has the ace because it can generally produce cheaper than North American shale producers, and can therefore hold out for longer, and 2) I believe America is supporting Saudi Arabia’s decision to maintain production because this helps destroy Russia’s economy.

Russia geopolitical expansion is a growing problem, but Russia’s dependence on oil exports to finance its budget (thus its military) is it’s weak spot. The US is not dependent on oil exports and so can withstand some short-term pain to eliminate a growing long-term threat.

This is how America won the cold war. They are not stupid.

Perhaps this doesn’t end until Putin is out.

This could get worse before it gets better. You might start seeing HY energy company defaults in America. Bankruptcies across Russia. If Putin starts losing domestic support he might feel backed into a corner and lash out in some way…perhaps militarily or by merging with a fledgling EU country, potentially destabilizing Europe.

I can’t predict a bottom, but I am cautiously chipping away buying fairly blue chip names or relatively stable sectors (i.e. Consumer Staples) here and there. Looking out for deals. Things down 10% or more. Things that will pay me to wait.

I already have enough energy exposure so I’m not buying more. But if oil goes down close to $40 I will add more. OPEC has come out implying that $40 is their floor.

No comments:

Post a Comment