Scott Barlow
A roundup of what The Globe and Mail's market strategist Scott Barlow is reading this morning on the Web.
Two prominent investment sources are arguing that energy stocks have come too far, too fast and have significantly outpaced fundamentals,
"Stocks have come a bit far," Gordon Douthat, an analyst at Wells Fargo & Co., said in an interview. "The anticipation that this storage overhang is normalizing has driven these names well beyond what the commodities have done."… Short-seller James Chanos said last week that he's considering wagering against explorers because they've gotten ahead of themselves. In the last three months, Denbury Resources Inc., SM Energy Co. and California Resources Corp. have all quadrupled in value as the price of oil rose by just 52 per cent."
Domestically, the big gains in oil stocks have been generally from high debt companies who were trading at 'going out of business sale' valuations, and then managed to hang on as the oil price rallied. It wouldn't be surprising to see some stock re-pricing based on actual cash flow assumptions.
"Oil Stocks 'Outrun Fundamentals' With 300% Gains in Three Months" – Bloomberg
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In other energy-related news, the Financial Times presented five ways for investors to gauge the sustainability of the rally in crude prices. They list Nigerian supply, the speed of Fort McMurray re-starts, Saudi Arabian output changes, U.S. shale, and hedge funds as the main factors to watch. On hedge funds,
"In the first 19 weeks of the year, money managers were net buyers of Brent crude oil, accumulating a near record position equivalent to 420 [million] barrels of crude… this record combined bullish position, however, has been trimmed in both of the last two weeks. Some funds have been taking profits after the huge run-up. That has sparked some caution in case a trickle of profit-taking should turn into a flood, exerting selling pressure on the market."
"Five things to watch for as oil nears $50 a barrel" – Financial Times
"Oil could snap back bigger and badder than ever" – Business Insider
"Demand for oil storage soars amid supply glut" – Financial Times
"Oil prices ease despite supply disruptions" – Reuters
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Goldman Sachs strategists have downgraded the totality of global equity markets and suggested moving assets to commodities,
" 'Until we see sustained signals of growth recovery, we do not feel comfortable taking equity risk, particularly as valuations are near peak levels,' [the report]said. 'Our equity strategists have become more defensive, owing to heightened drawdown risk and growth scarcity,' it added in a note dated May 17. Goldman Sachs said commodities had rallied on the back of a dovish U.S Federal Reserve, Chinese economic data and supply disruptions. It upgraded commodities, saying that such supply disruptions should support oil prices."
My confusion is this: if equities look bad because there's no growth, why would I want to buy commodities, arguably the most economically-sensitive asset class there is?
"Goldman Sachs cuts equities to 'neutral,' upgrades commodities" – Reuters
"Forget equities, Goldman Sachs says, put your money in credit" – CNBC
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I am starting – and I emphasize 'starting' – to get worried about global fixed income and equity income investments. Negative government bond yields are one reason, seemingly insatiable demand is another, and a potential lack of liquidity in high yield and other bond ETFs is a third.
Bloomberg's Tracy Alloway wrote a very good note on some of the risks in bond markets in her personal blog. Again, I'm not alarmed yet, but the time for investors to get informed and prepared for market risk is long before it happens.
"A short lesson in duration, from some long Petrobras bonds" – Tracy-Alloway.com
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Tweet of the Day: (U.S. financial insider/Investment banker) "@EpicureanDeal Structured products really were the dark, evil underbelly of Wall Street. The locus of asymmetric info and hidden profits. Tch tch." – Twitter
Diversion: (Interactive graphs) "Watch How Your Diet Has Changed Over the Past 40 Years" – Gizmodo