Oil majors reported their quarterly earnings last week, including Exxon (XOM). I couldn’t have cared less.
There was a time when I’d carefully parse the quarterly reports, or listen to Diane Swonk come on CNBC and tell me about the 0.3% change in the employment participation rate, or find crude stockpiles had decreased 1.7m barrels when they were only expected to drop a million, and I’d consider all of them valuable pieces of investing information.
Not anymore. The macro stories are now so enormous as to make all other ‘normal’ metrics barely worth consideration. And right now, there are TWO that are overwhelming – the US liquidity picture and the Coronavirus. Trouble for me is, these two enormous metrics are way outside of an oil trader’s expertise.
But not so outside that he doesn’t have some ideas to pass along.
First, on liquidity. Few would argue that the stock market and other assets have been pumped up by a seemingly never ending supply of Federal reserve purchases and Federal government relief over the last several years. If you are on the side of super trader Jeremy Grantham, you’ve limited your exposure and scream with your hair on fire to your clients that the bubble is about to burst, which Jeremy has done for most of the last nearly 10 years, missing most of the upside. If you’re on the side of super trader Paul Singer, you extend your exposure constantly but hedge every dollar you invest, while still screaming with your hair on fire that the bubble is about to burst – which Elliot Management has done exceedingly successfully for the past 10 years.
I’m with the guy making money. Which is a reason I’m a big advocate of options premium selling with nearly every trade I make or recommend.
But no matter what side you’re on, we all know deep in our hearts that the bubble is going to burst at some point like Grantham and Singer fear. Those guys know that there’s no such thing as a ‘new normal’ or ‘this time it’s different’. We also shouldn’t fear it. If we’re prepared, we can ride it out, like in 2000 and 2008. But if we’re not, we’re likely to be the guys catastrophically selling at the bottom like so many in 2000 and 2008.
Let’s leave liquidity alone for a moment and talk about Covid.
The major question of the last year’s equity rally, spectacular as it has been, has been about the return of economic growth. The passing of the pandemic would bring all that lovely pent-up demand that the market’s been banking on, in travel and consumer goods and entertainment and retail. In this country, we’ve seen many signs of precisely that kind of resurgence. But most of the rest of the world hasn’t had the vaccination success this country has had to also see that kind of rebound. And now it seems like their prospects, as well as ours, are being muddied again by the Delta variant.
I know – this variant is far less deadly than the original and vaccination has provided tremendous protection against it. But the continued stubborn reticence towards universal vaccination has allowed Delta to put up some scary growth, even here in the US. The CDC doesn’t expect the peak in infections to come until October at the earliest. That means the rest of the summer and fall will be a daily report of increasing hospitalizations and deaths – and certain to put a damper on further asset gains.
It’s with both of these macro events in mind that I’m advising a retrenchment in investing, at least in oil and oil stocks.
I could throw at you a ton of technical indicators and charts – which are hardly a religion for me – but all of them indicate that both oil and oil stocks have reached levels that are teetering back towards a bear market move – at least for the medium-term.
The reason I’m raising cash right now is not out of panic – it’s a risk/reward evaluation of the possible upside for oil and oil stocks and the current environment – both the liquidity ‘bubble’ (in spite of the $1T infrastructure deal) and the Delta variant are sure to negatively impact oil and oil stocks FIRST. Below I’m going to give some guidelines for where and how to raise cash, so that you don’t butcher your portfolio, but leave what’s working and pare down what’s not.
It is always difficult as an investment advisor to tell folks to stop investing. Very bad for business.
But that’s what the market’s are telling me, and that’s what I’m telling you. Take the rest of the summer off, and see what September brings.
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