Morning Note: Massive Overcompensation

 Here’s a snip from our July 14th of this year post (oil was $54 a barrel that day):

“As clients and regular readers have noticed, we remain bullish (long-term) on energy — and I’m not talking just renewables right here.

In a nutshell, fossil fuel markets have seen massive capital expenditure reduction of late — with the expectation of more cuts to come. I.e., we’re talking less capacity to produce to an extent that we think massively overcompensates for the go-forward reduction in demand due to the adoption in renewables.”

It’s $74 this morning!

Energy stocks presently represent our largest U.S. equity weighting, materials are a close second (a hair above financials).

Germany’s election results were initially welcomed in European markets last night, however, per below, there’s much to iron out over the next few months. Hence the bourses we follow are now, on balance, leaning red on the session.

Here’s from Bloomberg this morning:

“(Washington Post) — BERLIN — Chancellor Angela Merkel’s Christian Democrats posted their worst-ever election results on Sunday, coming in second to their traditional center-left rival for the first time in a decade and a half as parties prepare for what could be weeks of rocky talks to make a government.

With all 299 districts reporting, the center-right conservatives that have dominated Germany’s postwar leadership had just 24 percent of the vote, according to preliminary numbers. That’s the lowest mark for the storied party since its founding in 1945.

The center-left Social Democrats, who ran a steady campaign under Olaf Scholz, won 26 percent, a turnaround for the party that started election season in a distant third. It will give him the strongest mandate to form a majority government, but whether he can remains unclear.

And with the results so close, Christian Democratic leader Armin Laschet indicated that he would be doing “everything possible” to make a ruling coalition himself.

The election results will shape the future of policy not only in Berlin, but across Europe, where Merkel’s veteran hand will be absent as she moves into retirement. But with no easy path to a ruling majority for anyone, both lead candidates pointed to a lengthy road of talks ahead, saying they hoped to have a coalition agreement in place before Christmas.

The wrangling will take place amid a challenging backdrop for Germany and the European Union, including questions of how to steer the bloc’s finances after the coronavirus pandemic and coordinate the continent’s stance toward Russia and China.”

Asian equities were mixed overnight, with 8 of the 16 markets we track closing lower.

Europe’s mostly red, with 11 of the 16 bourses we follow trading lower as I type.

Quite the divergence across U.S. stocks this morning: Dow up 224 points (0.64%), SP500 down 0.21%, SP500 Equal Weight up 0.75%, Nasdaq 100 down 1.29%, Nasdaq Comp down 0.99%, Russell 2000 up 0.96%.

Note: Tech represents the longest duration equity sector, hence it is uniquely sensitive to interest rates, which are on the rise this morning… explaining the hit to the SP500 and Nasdaq Indices.

The VIX sits at 18.77, up 5.82%. The Nasdaq 100 volatility index (VXN) is up 9.89% this morning.

Oil futures are up 2.32%, gold’s up 0.53%, silver’s up 1.93%, copper futures are up 0.40% and the ag complex is up 0.82%.

The 10-year treasury is down (yield up) and the dollar is up 0.03%.

Led by energy stocks, uranium miners, base metals miners, bank stocks and Viacom — but dragged by  AMD (chip maker), ALB (lithium miner), tech stocks, healthcare and water stocks — our core portfolio is up 0.59% to start the week.

Ex-Barclays managing director John Porter emphasized a, if not “the”, key characteristic of successful traders/investors in an interview featured in Steven Drobny’s insightful book Inside the House of Money:

“…one must have discipline. It is even more important than idea generation. The key over time is to have the discipline to capitalize on your successes and minimize your mistakes because, ultimately, the game is about preservation of capital.”

Have a great day!



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