We feel horrible to be Right. The day after the Election we suggested to anyone who would listen that the Softwood lumber was coming back.Today's Canadian Business newspapers are full of the Details. At that time the pushback we received was that it would increase the cost of homes to the US Consumer. Why would anyone ever think that Trump would care? What percentage of his famously committed base actually are in the market to buy a house? The reason the US buys so much lumber is because they need it. The Tragedy is that Trudeau had a chance to get out in front of this Issue. Opportunity lost. Dairy is coming next. Opportunity lost. What about a Border Adjustment Tax for our Oil and Gas Exports? We didn't build those Pipelines. Opportunity lost.
On the other side, the Hedgies that bet against Home are being stunningly proven right. In a past life, we dealt with Marc Cohodes. Very bright. Independent thinker. No problem pulling the trigger. As this investigation by the OSC grinds on, why would anyone own this stock? What is the possible upside? Many hedgies have been closing up shop. They aren't always wrong.
The S&P earnings are no longer led by Alcoa.This morning we are digesting the Caterpillar results. The stock seemed to be a low conviction Buy. Trump's Infrastructure spending was going to help them. But, what about mining and Energy? They reported $1.28 eps. The consensus was 62 cents. Could this be the beginning of a Trend?
The Aramco IPO is coming shortly. We suspect that the recent run-up in the price of Oil might have something to do with that. They have said that the valuation should be about $2T. The 5% IPO will thus bring in $100B. The Kingdom has reduced their tax rate from 85% to 50%. They claim that will bring the valuation to comparable levels with other International Oil securities. The Saudi Forex reserves have been falling. They were at $2.8T in late 2014. That's when they led the prices lower. The latest Forex reserve numbers have gone below $2T. Goldman wrote recently that " 2017-2019 is likely to see the largest increase in mega projects production in history, as the record 2011-2013 CapEx commitment yields fruit. This long lead time wave of projects and a short cycle revival, led by US Shales, could create a material oversupply in 2018-2019". Are the Saudis going to extend the Agreement? If Oil prices go up the Shale producers will be able to hedge like crazy. Saudi problem. If the prices decline then they will have Deficits. Down go the Forex Reserves. Lose, Lose.
Market fear appears to be benign. The VIX is still trading below its long-term average. The VIX implies the market moves over the next 30 days. The SKEW tracks option prices that only pay if there's a major market move. Black Swan type of move. SKEW made a record high last month. It's still there. This is prompting some strategists to enumerate those Risks. We really appreciated the Macro Tourist yesterday. He wrote about how easy it is to come up with negative scenarios. How many people come out and agree with you. Very few criticise you. Yet markets climb higher up the "Wall of Worry". Opening higher again today.
Invest the Money.
Edward Pennock CFA, Founding Partner
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