Checking in on the oil trade … Luke Lango’s latest forecast for the crypto market … a “coast to coast” housing correction is coming … a risky setup in public pensions
Oil investors have gotten nailed in recent weeks.
As you can see below, after having topped $120 a barrel in early June, West Texas Intermediate crude plunged to below $105 a barrel a few days ago (though it’s been rallying since).
Is the oil trade done?
Well, let’s make a distinction between “oil” and “the oil trade.”
In other words, there’s a difference between trying to play the spot price of oil itself and investing in energy companies that do well when oil prices are elevated.
As to the spot price of oil, news this morning suggests a new tailwind for higher prices – Saudi Arabia and the UAE are redlining output.
Two top OPEC oil producers, Saudi Arabia and the United Arab Emirates, can barely increase oil production, French President Emmanuel Macron on Monday said he had been told by the UAE’s president.
Saudi Arabia and the UAE have been perceived as the only two countries in the Organization of the Petroleum Exporting Countries (OPEC) with spare capacity to boost global deliveries that could reduce prices.
Reuters details how Macron had a call with the leader of the United Arab Emirates (UAE), Sheikh Mohammed bin Zayed al-Nahyan, who reportedly claimed his country is at maximum production. He then said that the Saudis can increase their production by only 150 thousand barrels a day.
If this is true, it will act as a floor on the spot price of oil. Assuming demand doesn’t fall off a cliff, that suggests there’s more life in the trade.
Now, even if production surpasses estimates, legendary investor Louis Navellier believes that if you’re focusing on the right energy stocks, the recent weakness in spot prices presents an attractive investment entry point.
From Louis’ Accelerated Profits update yesterday:
…Weak economic news emanating from Europe, as well as all the talk about a potential recession here in the U.S., caused a mini “commodity crunch” last week.
Crude oil, copper and other commodity prices all declined…
In my opinion, energy stocks still have room to run and will remain profitable even if crude oil falls to $90 per barrel after September, when seasonal demand naturally ebbs.
Louis points toward crude-oil and refinery companies that are still expected to report record second-quarter earnings. He calls out W&T Offshore (WTI), which is anticipated to report year-over-year earnings growth of 1,550% for the second quarter.
By the way, Louis’ Accelerated Profits subscribers sold a 1/3rd share of their WTI position at the beginning of the month, locking in gains of more than 60%. Their remaining 2/3rds share remains open in expectation of more profits.
What’s notable about this trade is that Louis added WTI to the portfolio only in April.
It’s a great illustration of how a quant-based market approach can result in a big, double-digit returns, even during a broad bear market. Congrats to all the Accelerated Profits subscribers.
Here’s Louis’ bottom-line on how he’s viewing the recent oil weakness:
I remain very bullish on our energy stocks, and view the recent dip as a good buying opportunity.
***Meanwhile, over in the crypto sector, bitcoin continues to consolidate around the $20,000 level
One week ago today, investors were reeling after a long holiday weekend that saw bitcoin hit a low of $17,708, a price not seen since 2020.
Our crypto expert Luke Lango suggested that one of two paths forward would be likely:
One, bitcoin consolidates around the $20,000 level over the next few months, then enter a new bull market as early as 2023.
Two, bitcoin could break down to $10,000 over the next few months. It would then consolidate around those levels for a few months, then enter a new bull market in late 2023.
So far, we’re holding the $20,000 level. But don’t get too comfortable.
From Luke’s Saturday update of Ultimate Crypto:
Bitcoin has shown solid support at $20,000… so far.
Things looked scary at first.
Last weekend, the sell-off refused to slow down. We broke $20K. We broke $19K. We broke $18K. It looked like a collapse to $10K was imminent.
Then, we sharply reversed course. BTC retook the $20K level, and we’ve been hovering above $20K ever since.
Importantly, since retaking the $20K level last Sunday, we have re-tested $20K five separate times and held every time.
Holding five different retests is a much-need sign of strength. However, Luke makes it clear that it’s too soon to believe the ultimate low is in.
For example, he writes that if inflation surprises to the upside, or if the numbers show that stagflation has become entrenched, bitcoin will collapse to $10k, taking the rest of the crypto market with it.
But if inflation cools and we sidestep stagflation, the bottom is in.
Here’s Luke’s latest roadmap for the sector:
Our base-case outlook remains the same as it was last week. We expect BTC to consolidate around $20K over the next six months.
Thereafter, we expect the crypto markets to start breaking out in early 2023, before entering a new boom cycle by mid-2023 ahead of the BTC halving. We expect that boom cycle to last into early 2025.
In other words, we think cryptos go sideways from here into the end of the year, before soaring in 2023, 2024, and 2025.
By the way, Luke and Charlie recently held a special, live event that dives into tons of detail about where the crypto sector is headed. To catch a free replay (and get the name of a tiny altcoin the Luke and Charlie are incredibly bullish on), click here.
***Missed your chance to buy a home? Get ready for another swing at the plate
According to Moody’s Chief Economist Mark Zandi, a “coast to coast” housing correction is coming.
While not a 2008-style “crash,” Zandi predicts the most inflated markets will see a great deal of air come out.
With the Federal Reserve introducing the biggest increase in interest rates in years to combat rising inflation, home prices will likely fall in the housing markets that are most “juiced,” says Zandi.
Regions with signs of significant speculation, namely in the Southeast or Mountain West, can expect the pendulum to swing back.
Cities and states due for a correction include Phoenix and Tucson in Arizona, the Carolinas, northeast Florida, and above all, Boise — “the most overvalued market in the country,” per Moody’s analysis.
To be clear, a correction won’t be due to mortgage defaults or distressed sales, such as back in the subprime crash. The quality of most of today’s mortgage underwriting is high. We’re not seeing the irresponsible levels of subprime exposure as back in ‘08.
Instead, home-ownership costs have skyrocketed due to excessive liquidity and drastically elevated financing costs from the Fed’s monetary policy.
In light of this, Zandi expects prices to come down, but not crash.
Perhaps the “soft landing” many are hoping for?
***Finally, keep your eyes on this potential systemic problem
As of 2020, pension funds in the United States held an eye-watering $35.49 trillion dollars.
For context, that same year, the total global market capitalization of all publicly traded companies was about $93 trillion.
For additional “fun” context, imagine a military jet flying at the speed of sound, reeling out a roll of one-dollar bills behind it. How long would it take to roll out all 35.49 trillion of these dollar bills?
About 497 years…flying at the speed of sound.
So, what’s the point?
The point is U.S. public pension funds don’t have enough money to pay for all their obligations to future retirees. Their promised benefits are far more than what they’re generating from investment returns.
Of course, this has been the case for years. Even our epic bull market from 2009 through 2020 didn’t fix the imbalance.
For example, last year public pension plans had an average of only $0.75 for every dollar they anticipated owing retirees in future benefits.
Not a great place to start our discussion of pensions. But let’s add a new twist…
Public pension funds are now doing something incredibly dangerous in an attempt to make up their obligation shortfall…
From The Wall Street Journal:
More than 100 state, city, county and other governments borrowed for their pension funds last year, twice the highest number that did so in any prior year, according to a Municipal Market Analytics analysis of Bloomberg data.
Nearly $13 billion of these pension obligation bonds were sold last year, which is more than in the prior five years combined.
The Teacher Retirement System of Texas, the U.S.’s fifth-largest public pension fund, began leveraging its investment portfolio in 2019.
Next month, the largest U.S. public-worker fund, the roughly $440 billion California Public Employees’ Retirement System, known as Calpers, will add leverage for the first time in its 90-year history.
For context, just five years ago, none of the five largest pension funds used any leverage.
If the investment markets turn north, wonderful – investing with leverage will help juice pension returns, hopefully resulting in much-needed benefits funding.
Of course, if markets keep sliding, or even trade sideways, the potential fallout takes on a whole new magnitude, impacting your money.
Back to the WSJ:
While leverage could pay off if markets rebound, the losses it risks could affect not just the pension funds but also the state and local governments that stand behind them—and ordinary citizens.
When public pension funds’ investment returns fall short, governments are primarily responsible for taking up the slack, pressuring them to find the money by cutting other spending or by raising revenue from steps such as increasing taxes.
Public pension funds are “operating more like hedge funds in some cases,” said Joseph Brusuelas, chief economist at accounting firm RSM. “They’re treading on very risky footing doing things like this” …
Courts tend to protect pension promises, prohibiting cuts to retirees’ checks and often barring changes to the rules on how much current workers must set aside toward their eventual pensions.
That throws the burden of filling pension-fund gaps primarily on state, city and local governments, some of which have already endured years of spending cuts to cover pension payments.
It’s an interesting – and risky – situation. We’ll keep you updated.
Have a good evening,