“Buy to the sound of cannons, sell to the sound of trumpets”
- Nathan Rothschild 1810
This note is a follow up to Mr. Market Hits the Canvas.
We have been asked by many what, if anything should be done in today’s markets. That is, other than sell. We agree with the many who feel that we are only witnessing the beginning of what will surely be one of history’s momentous chapters. One thing we should always do, however, is to keep our heart, our civility, our heads. This is often easier said than done. We can see this all around us.
Since we know that the favored disguise of opportunity is trouble, we also know that in this time of challenge can be found some of tomorrows great investment winners.
Yesterday, the energy sector lost its head. Energy stocks crashed. And crashed hard. The putative cause was the announcement that the Kingdom of Saudi Arabia would flood the markets with more Saudi oil. An additional 300,000 barrels per day of oil would be thrown onto the already-saturated markets. The price of Brent-Crude, the global standard, fell by 24% from Friday, to close at $34.36 per bbl. The price of oil is now down 50% from its January 6, 2020 peak. Many stock prices of the oil & gas producers fell 50% or more.
Shockwaves went out through global markets as well. The Dow fell 7.8% after a morning plunge of more than 7% triggered the NYSE to pause trading for the first time since 1997. This ‘circuit breaker’ is presumably meant to give traders pause, and prevent the free-fall of market prices. Investors sought refuge in gold and bonds.
Before this bout of bloodshed, this energy sector had already been hit by its share of cannon-fire. The entire energy-sector weighting in the S&P 500 had fallen to ~4.3% of the index. For reference, AAPL alone was equal to 4.7% of the index value. Yes, that’s right… before Covid 19, the entire US Energy sector was valued less than one company, Apple.
Though many shale-drillers have claimed that they can make a profit above $30 per bbl, fears of defaults in the oil-patch, and the further shockwaves this would generate caused the selling to go on almost unabated, in the financial and high-yield bond sectors as well.
Ladies and gentlemen, this is the “canon fire” to which Nathan Rothschild was referring.
The extreme bearishness facing the energy sector is not the only pillar of support for our confidence. Current valuations make this sector the cheapest they have been in over 35 years.
After yesterday’s close, the median price-to-book value of the top ten components of the XOP ETF( SPDR S&P Oil & Gas Explore & Prod; an equal-weighted exchange traded fund of oil and gas exploration and production companies) is 1, a level it hasn’t seen since 1986.
Jesse Felder of the Felder Report has also pointed out another significant feature: this group now sports a dividend yield that is more than 6% higher than the current yield on the US 10-year note. He is probably also correct in his assumption that this circumstance is the opposite of that in 1986.
Just as importantly, as the Fed reacts by cutting rates further, the US 10-year rate will fall further. Already, the interest rate-spread between the US and other countries has narrowed. As US rates have converged more toward, say, those of German Bunds, money has flowed out of the dollar and demand for dollars has waned.
The collapse of 10-Year yields should add short term bearish pressure to the dollar which has already to contend with long-term downward pressure in the form of unprecedented budget deficits and out-of-control fiscal spending. This downward pressure on the dollar should put a floor under the oil price which is inversely correlated to it (Ed. Note: this will also benefit gold/precious metals and other so-called hard assets).
Baron Rothschild, grandson of the man quoted above, is credited with the utterance to “Buy when there’s blood in the streets, even if the blood is your own.” There is indeed blood in the streets. Some of it may even be our own. But if we are to connect the near-to-the-far, we should consider this as an opportunity. For investments which may be rightly considered long-term, this is among the most compelling investment opportunities today.
It is true that maybe this is not even the end of the beginning, but only the beginning. Yet, if we are to follow the prescription we should keep our composure and look to just those areas of trouble and, of course, opportunity.
All of our team at Haydel, Biel and Associates are grateful for the trust you have placed in us. I sincerely welcome your questions and hope you are feeling safe and well in a world that seems to counsel otherwise. We look forward to hearing from you.
Thank You,
Chris Haydel
Principal | Senior Financial Advisor
Haydel, Biel & Associates Wealth Management
100 E. Corson Street, Suite 310 • Pasadena, CA 91103
Office: 626.529.8347 www.hbawealth.com