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NASDAQ Assumes Command As Big Four Come Through As Energy Gets Pummeled!

“Energy forecasting is easy. It’s getting it right that’s difficult” – Graham Stein, 1996

The great thing about numbers is they tell a clear picture without any words. Consider these figures- year to date, the NASDAQ composite is up 24.87%, the S&P 500 is ahead by 1.25%, and the Dow Jones Industrial Average has lost 7.39% (All figures come from the August 1 edition of the Wall Street Journal). A third grader looking at these results would understand where most market capital is flowing. It’s all tech, all the time. On Thursday, market darlings Apple, Amazon, Facebook, and Google reported their quarterly results for the period ending June 30. Three of the four smashed estimates, while Google came up just a touch short. The first three showed top line growth, and in the case of Amazon, it came in at a whopping 40%. Amazon’s revenue number surpassed eighty billion dollars, meaning it is probably on track to exceed three hundred billion dollars for the year. Facebook only grew revenues eleven percent, while Apple posted the same growth rate, too (11%). For equity market investors, their results paint a clear picture of why investors favor those companies. They are large, dominant in their industries, grow their revenues, and generate enormous amounts of cash. An investor doesn’t have any financial risk because they all have billions of dollars of cash on the balance sheet. Investors know a good thing when they see it and have been buying these stocks for quite a long time. Their valuations are through the roof, but as long as they keep growing, capital flows to these names. On the opposite side of the market are the poor chaps in the energy space, specifically big oil.

I know, how could anyone feel sorry for the energy industry. For over one hundred years, citizens have seen the oil industry as bloodsuckers who get a piece of flesh every time a person needs to fill up their tank. There is probably some truth in that characterization, but consider a few important facts when it comes to oil. First, our society and civilization depends on it, and will so for another 20 years minimum, probably closer to 50 years. Second, oil is a difficult substance to find, and ultimately, obtain. It is dangerous to move. It requires the skills of highly educated people. Drilling for it costs a great deal of money, and the probability of finding it is slim, usually less than 1 out of every 5 wells drilled actually strikes black gold. As of right now, over 90% of our transportation relies on some form of oil. With all this as background, the current environment is as tough for the energy industry as it has seen in probably fifty years. The largest companies, think Exxon, Chevron, BP, Shell, and Total, all have stock prices which have lost billions of dollars of value for investors over the last decade. Shell cut their dividend in the last quarter, and Exxon, Chevron, and Shell all reported miserable quarters in the last few weeks. Exxon did not generate positive cash flow. Their poor results are related to non existent demand for jet fuel because of microscopic air travel. Air travel is slowly coming back, but not at levels which are helping the airline or energy industry anywhere near fast enough. If you think the pain is bad with big oil, it is even worse for the on shore drillers. There have been a tidal wave of bankruptcies of small and medium sized exploration companies located in the Baaken, Western Canadian, and Permian basins. Refiners are also suffering as poor oil demand continues to compress margins. Looking forward, oil futures show prices improving in 2021, but with the recent flare ups of Covid, investors aren’t buying that in any way, shape, or form. Even worse, you know joltin Joe, Senator Markey, Mrs. Warren, and AOC aren’t disposed to lend the industry a helping hand in the event the polls hold up in November (heaven forbid). The old line about the best cure for low oil prices being low oil prices will probably have validity, and with the lack of capital expenditure over the last few years, any further restrictions on the energy industry could also have meaningful implications on production. If we throw in the posture of OPEC and Russia on cooperating with oil cuts, let’s just say the entire industry has plenty of incentive to see things change. You have to believe the biggest fans of the pharmaceutical industry are the oil companies, along with everyone else in the world.

I thought I would make an observation about the great one, Mr. Buffett. Mr. Buffett was the largest beneficiary of the huge run-up in Apple’s stock on Friday, a ten percent move. The position makes up nearly 50% of Berkshire’s total market value. I find it also quite notable that Buffett has been adding to his Bank of America holdings, and more fascinating he has not added more of Wells Fargo. Staying in the same industry, it is pretty well known what company is the best one in that area. I would have expected Mr. Buffett buying more in that name, but that has not been the case. It certainly bears watching, especially with big B sitting on 130 billion big ones.

Next week, the earnings parade will continue. All eyes will continue to be on our unbelievably bad politicians. Specifically, the negotiations continue over a second stimulus package to help the millions of unemployed who saw their 600 dollar a week payment go bye bye yesterday. There are plenty of other issues which need to get solved, and in time they probably will. Unfortunately, a great many people don’t have a lot of time to wait, but don’t ever think the preening pols care one whit. Here in Las Vegas, it’s a mild 113 degrees, so that keeps us paying attention as well. On that note, stay cool, and thanks for reading the blog this week.

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If you have any questions about investing, please email me at information@y-hc.com.
Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation.  The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.

Stocks slump as Earnings, Virus, Dollar Weakness Create Investor Doubt!

Maturity of mind is the capacity to endure Uncertainty.
John Finley

Citizens living on the planet earth are going through a very unique period. The most obvious situation is the emergence and spread of a virus which has infected and killed too many people. The virus has also exposed the cracks of the relationship between many of the mature powers across the globe. Quite a few of the issues are related to China and the way they have handled the virus. Australia, England, and the United States are not very pleased with big red and their Corona virus actions, or should I say, lack thereof. If we add in China’s approach to expansion in the Asian peninsula and throughout Eastern Europe and Africa, well, there is plenty of tension in the world about China’s future plans. In the event your eyes are watering up and aren’t you able to focus on China, let’s make it easier for you and turn our attention to what took place in Europe this week. European leaders put the finishing touches on a 750 billion Euro package to aid countries across the Euro zone help businesses and citizens recover from the severe economic consequences which are taking place. About two thirds of the money is in grants, and one third in loans. The unique fact about the package is that it is the first time the Euro zone issued debt that is backed in unison by the Euro zone, as opposed to bonds that are issued by a singular country within the Euro zone. The other piece of the agreement which stood out was the northern countries were seen as stingy (Austria, Netherlands, Sweden, Finland, Norway) while the southern group is viewed by some as fiscally profligate (spendthrifts). The key countries of the zone are Germany, Germany, Germany, and Germany, with a bit of France thrown in. Ultimately, the hope is the nearly 1 trillion of debt being issued will help all twenty seven economies recover sooner rather than later. Time will tell.

Here in the United States, with the virus increasingly flaring up across the entire country, more mandates about mask wearing and further restrictions on service based industries are putting plenty of economic pressure on citizens in nearly every state. All investors are focused on the negotiations between the House and Senate on another aid package which would cover many issues: more unemployment insurance payments to supplement state aid, business liability waivers for workers and customers, another payment of 1200.00 and more for citizens and children (limited by income thresholds), and state and city financial assistance to bridge funding needs because of lower tax collections. Estimates are the package will range from one to three trillion, depending on what the details are of the final agreement (mess). No matter what the final figure is, in combination with the EU bond issuance, it is clear how markets took these events. Undoubtedly, investors believe, and for good reason, the dollar would weaken. Guess what happened? It did. Imagine that.

The biggest beneficiary of the weaker currencies are the metals, specifically gold and silver. Gold trades at an all time high of 1902.00 per ounce and silver right at 23.00. Both have appreciated significantly during the last three months. Usually, commodities like oil would also benefit from currency weakness. Investors aren’t believers of black gold because of the poor demand for travel, especially in the air. Another issue to add to the cocktail of the virus and plenty of debt issuance is political uncertainty in the United States. With one hundred days to go before the election, and a summer of protests, riots, vandalism, and now controversy between cities and federal authorities, there is little to no visibility on a great many important topics. Money craves predictability and certainty. For investors, uncertainty is traditionally despised. As such, equity multiples should contract the more uncertainty there is. As always, time will tell.

On the earnings front, the avalanche of reports rolled in as Coke and IBM started the week off while Intel ended it with a big miss. Microsoft beat but it’s cloud area saw a bit of slowing, while Snap guided its numbers down. Southwest Airlines beat estimates but we all know the state of affairs with anything related to travel. Chevron announced a huge deal by buying Noble. Tesla beat but sold off, although it remains in a stratosphere beyond comprehension. Las Vegas Sands told investors to write off 2020 as far as Las Vegas is concerned. Big oil will report earnings next week, along with Apple and hundreds of others. Much uncertainty remains, and you should it expect it to be with us for the foreseeable future. Of course, I am sure your mind is well developed and quite mature, so you will handle it quite well. On that note, enjoy the long summer days.

Thank you for reading the blog this week, and if you have any questions about investing, please email me at information@y-hc.com.

Get all Y H & C Investments weekly blogs and monthly newsletters by sharing your information below-

Yale Bock, Y H & C Investments, its clients, and the family of Yale Bock have positions in the securities mentioned in the blog,  Investing in securities involves risk and the potential loss of ones principal.  Past performance is no guarantee of future results.  All investment decisions should be considered with respect to ones risk tolerance, return objectives, liquidity needs, tax considerations, and one’s overall financial situation.  The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes. rn objectives, liquidity needs, tax considerations, and one’s overall financial situation.  The fact that Yale Bock has earned the right to use the CFA designation does not mean Y H & C Investments will outperform broad market indexes.

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