“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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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.