Making Hay Monday - June 10th, 2024
High-level macro-market insights, actionable economic forecasts, and plenty of friendly candor to give you a fighting chance in the day's financial fray.
Charts of the Week
The Household Survey has historically provided a better advance reading on when the jobs market is pivoting toward improving or deteriorating conditions versus the more closely watched Nonfarm Payroll Survey. As you are likely aware, the latter posted an extremely positive view of the U.S. labor market on Friday. Conversely, the Household Survey generated a much darker interpretation. Similarly, the trend in full-time employment continues to look increasingly recessionary. (With profuse thanks to Danielle DiMartino Booth and her team at Quill Intelligence for these images)
A recurring Haymaker theme has been what I’ve often referred to as “The Great Pushback”. The basic idea is that voters in most Western countries have been growing increasingly restive with the policies that have been implemented since the (over?) reaction to the pandemic. Similarly, there is ongoing frustration with the underreaction to the inflation surge that was produced by the Covid-related monetary and fiscal responses. In some cases, as with insurance premiums, consumers continue to suffer from central banks having let the inflation genie out of the bottle. This discontent is now manifesting itself at the ballot box with this weekend’s election results shocking Europe’s political establishment. In both Germany and France, the leading parties look to fall into minority positions. In the European Parliament, centrist, center-left, and center-right parties look set to secure a majority. It will be interesting to see if the U.S. follows this path in November.
“U.S. crude production rates are moving in a sideways-to-lower trend that is in keeping with our forecast—which is not what the consensus has been expecting.” -Mike Rothman, founder of Cornerstone Analytics.
“Our satisfactory results have been the product of dozens of truly good decisions—that would be about one very five years…Over time, it takes just a few winners to work wonders.” -Warren Buffett referring to Berkshire Hathaway’s extraordinary investment results.
Oil & Gas (Priced to Buy?)
Champions
Serious investors would be well-advised to study the long-term track record of Bill Nygren. Bill has had a guiding influence on the Oakmark Fund for almost 25 years and was recently the subject of a favorable Barron’s article. Considering that from the time that he’s been at the controls of this fund it has boasted a 15-year return of 15% the kudos are well-deserved. As Barron’s points out, that’s better than about 97% of its competitors.*
That he’s achieved such robust returns during a timeframe which has been mostly inhospitable to value managers is even more commendable. And there’s no question that Bill is of the value persuasion. As he told Barron’s: “We are deep in traditional value territory because of the way the market has repriced these higher organic growth businesses.”
He didn’t mention Nvidia by name, but it’s likely he was thinking about the stunning repricing it has had (which is becoming more stunning on a daily basis per the Contenders section).
It's not that he doesn’t own tech stocks. Included in the Oakmark portfolio is a longtime Haymaker favorite, Alphabet, which I prefer to refer to as Google. A key reason is likely that it trades at a reasonable 23 times forward earnings. Moreover, it has grown its earnings per share (EPS) by 20% annually over the past decade with but one down year, in 2022. Sales have increased at almost exactly the same pace and there have been no off years.
But that’s not the focus of this week’s Making Hay Monday. Back on May 6th, I promised to revisit an energy name that had been showcased in the past, mostly when it had sold off hard. However, we also did suggest it might be worthy of profit-taking, particularly in the fall of 2022 when it vaulted to 50.
Before we get into specifics, behind the paywall as usual, a more general oil comment is appropriate. This is particularly timely, in my view, based on the recent OPEC meeting that generated considerable controversy, mostly of an oil price negative nature. Some of the coverage was on the edge of ludicrous. Particularly misleading was the contention you may have heard or read that OPEC/OPEC+ (Russia is by far the most important member of the latter) is holding off around 6 million barrels per day (bpd) of production.
Per Cornerstone Analytics’ Mike Rothman, that is more than double the actual amount of supply constriction. Also, not a single oil market pundit, at least that I came across, pointed out the reason for the 2.5 to 2.8 million bpd of actual output reduction was because of the Biden administration’s immense Strategic Petroleum Reserve (SPR) withdrawals. Apparently, it has been dropping hints it may release more, over and above the small amount of gasoline being injected into the Northeastern region. This has likely emboldened short sellers to slam oil futures which is some 30 to 50 times larger than the physical market. (However, with prices down hard lately, there may be some modest SPR refills in the wings.)
In fairness, the sudden weakness of most U.S. economic data also includes softer demand for both gasoline and diesel. Thus, there is some fundamental justification for oil’s recent tumble. Regardless, overall crude stocks remain extremely low adjusting for the aforementioned SPR liquidations.
What’s likely a more significant factor is that U.S. oil production has also been ebbing. This includes what is by far the most important region, the Permian Basin. That’s not what most observers have been anticipating, though both Mike Rothman and the astute folks and Goehring & Rozencwajg have been warning about this for months. Mike, in fact, wrote last week that U.S. crude production is running below even their low-ball projections. It's also worth noting that the Permian is suffering some gas pains. By that I mean the flows from its wells are becoming increasingly gassy. One of the best producers in the Permian is Diamondback Energy. Back in 2017, oil averaged 74% of its output; now that is down to 59%.
Okay, let’s get to this week’s focus name.
As you will soon read, I’m relying heavily on Bill Nygren and his comments in the aforementioned Barron’s interview.