By SA Marketplace :
By Daniel Shvartsman
The first half of 2019 saw a lot of green in the markets, as broader indices recovered from the brief bear market in the second half of 2018 and returned to new heights. Despite that, the wall of worry continued to grow, even if the specific concerns changed. Instead of a rising rate environment, expectations have shifted to a possible rate cut even with good job numbers. Geopolitical flashpoints have (re-)emerged in Venezuela, Iran, and in the ongoing China-US trade conflict. European economic growth appears to be slowing, and nobody's quite sure where we are in the US cycle. Oh, and another presidential election cycle is beginning.
So what to make of this all? We decided to take the temperature of the markets with a midyear Marketplace Roundtable. We asked our Seeking Alpha Marketplace contributors - authors who run investing services and provide ideas and guidance to members about how to think about the markets or at least certain parts of it - to share their views on the current climate and how they're positioning as a result.
Over 55 authors participated in our survey. We've grouped their responses into several categories, ranging from tech to commodities, biotech to dividends and income investing. We're going to share their responses in those grouped categories over the coming week or so. Each discussion will have two common questions about the market as a whole, two sector-specific questions, and a round of current favorite ideas. We hope you enjoy the discussion, and welcome you to join with comments on these issues or on any key points that didn't come up, or follow-up questions.
Today's topic is the commodity sector, with a focus on energy and gold. To help us get an understanding in those areas, we have the following panel:
Coming into 2019, markets had a degree of doubt about the trade war, the direction of the Fed, and our place in the economic cycle. That doubt seemed priced in. We're around all-time highs now, 25% up from lows - is the market doubt resolved?
Laura Starks : Market doubt is never resolved, even/especially with the NYSE closing at all-time highs. The current cycle is at a strong point, however.
Long Player : The considerable downside is still evolving. The all-time highs really state a lot of optimism. The pessimism in the press is not priced into the market.
Andrew Hecht : No, if anything the doubts are higher given the rising tension in the Middle East, and the upcoming US Presidential election which could position a left-wing candidate and democratic socialist against the incumbent from the Republican party. The pivot by the Fed to a more accommodative approach to monetary policy has fueled the move in the stock market.
Geoffrey Caveney : The broader stock markets, in the US and globally, are simply incredibly volatile and uncertain right now. The market moves in 2018 and 2019 so far, to me, look like one big giant "whipsaw" zigzag move. I expect more of the same whipsaw zigzag movements in US and global stock markets, but it could be quite unpredictable whether it goes up then down, or down then up, or something even more confusing. The S&P 500 could stay in the 2,500 to 3,000 range, but with big volatile back and forth moves within that range. If it breaks above or below that range, it could still be a whipsaw zigzag move, only a bigger one. In sum, I see broader stock markets as a short-term traders' market for 2019 and 2020, without lasting momentum in either direction.
The Critical Investor: Not yet, but China and Trump seem to navigate the markets pretty well, as they both fear recession and don't push things over the cliff. But there is a lot of pushing going on behind the scenes, no doubt, as it takes more and more time, indicating both don't want to give up anything without a fight.
Victor Dergunov : I think so, trade war tensions were at the forefront of recent market uncertainties. The market is at all-time highs and is likely to move higher over the next quarter or two. However, I would be increasingly nimble and cautious going forward as a recession could materialize within the next 6-18 months.
Laurentian Research : Pay attention to the inversion of 10-year treasury rate minus three-month treasury rate yield curve in June. That inversion raises a new red flag, although it is yet to be confirmed by the 10 year minus two-year treasury rate yield curve, although credit conditions appear to be still loose. The Fed decisions in the 2H will be critical for the economy. The trade war and trade talks alternate and it may go on for a while like that and continue to cause uncertainties. So the market doubt appears yet unresolved.
KCI Research Ltd. : No, not judging by fund flows. Specifically, investors are pulling money from equities, and putting money into bonds. On this note, State Street ( STT ) has said that May was a record month for ETF outflows from equity funds, and June was a record month for ETF inflows into bond funds.
What in your sector has changed in the first half of 2019, or what has your attention as you're researching positions?
Laura Starks : Upstream energy companies were pounded if they did not provide a line of sight to free cash flow and better investor returns. The biggest jolt, of course, was the Occidental ( OXY )-Chevron ( CVX ) bidding to buy Anadarko ( APC ), which also caused other small and mid-sized producers to be viewed anew as potential acquisition candidates. On the infrastructure side, continuing build-out of takeaway capacity is easing the Midland-Cushing oil price differential despite Permian production reaching new highs.
Long Player : As usual politics are interfering with facts and that makes for a very interesting first half. Unconventional oil and gas issues are being repriced as they become more mainstream instead of the new growth area. The new profitability of this young industry is still not completely in the valuation process. The creation of highly leveraged entities appears to be a thing of the past (largely). The market is demanding more profitability discipline going forward.
Andrew Hecht : The breakout in gold above the 2016 peak at $1377.50 in late Q2 was a significant event. Gold has been in a bullish trend since the early 2000s, and has been moving higher in all currency terms. I believe this is a sign that the value of fiat currencies continues to decline which is both inflationary and a sign that higher raw material prices are on the horizon, sooner rather than later.
Geoffrey Caveney : See below for more details, but in the gold sector the summary is pretty simple: The Fed has done an incredible 180-degree reversal in just 6 months. As recently as last December, they raised rates for the 8th time in 9 quarters. Now just 6 months later, the Fed has virtually committed itself to multiple rate *cuts* this year and next year. This changes everything. It may or may not prop up the stock market, or it may just make it incredibly volatile. But it definitely provides a strong multi-year tailwind for the gold market . Also, the growing global central bank easing and rate cutting is related to growing questions about a global economic and financial slowdown. This also boosts safe-haven demand for gold.
The Critical Investor: Obviously gold has a pulse all of a sudden, and cannabis investments seem to have lost some appeal, meaning more investment money flows into mining again, fortunately. Usually, the summer is known for its "summer doldrums" but this time it seems different in gold stocks.
Victor Dergunov : I've reduced positions in some higher multiple staples, utilities, and other names. I'm interested in and I'm in overweight select technology, the gold sector, certain healthcare names, some energy companies, and financials. I also believe gold, silver and Bitcoin should continue to benefit from the Fed's policy flip long-term.
Laurentian Research : The general mood in gold mining has improved greatly toward bullishness, now that gold price has had a breakout above $1,350 after six years of bottoming and that mega-mergers have excited investors. The attention at The Natural Resources Hub (TNRH) has been turned to soon-to-be gold producers since latest-2018. As always, we emphasize the quality of assets, financial anti-fragility, integrity and ability of the management, and an adequate margin of safety as secured by deep undervaluation.
KCI Research Ltd. : I am a market generalist, with over two decades of professional experience, and even more personal experience. Additionally, I am a contrarian, value-oriented investor (a very tough place to be the past seven years), and for this reason, I have focused a lot of my research on relative and absolute underperformers. Drilling down even deeper, the energy sector has my attention, and during the first half of 2019, there continues to be a disconnect growing between energy equities, and energy prices.
How are you positioning for the back half of the year and into 2020, and why?
Laura Starks : For both Seeking Alpha Essential and my SA Marketplace platform Econ-Based Energy Investing (EBEI), I continue revisiting some stocks I have previously covered to determine if any strength or weakness is due to general sector cycling Black Hills Corporation ( BKH ) Diamondback Energy, Inc. ( FANG ) or company-specific operational issues ( TUSK ). I remain attentive to dividends and the potential for capital appreciation, while finding the wider investor community focus on green utilities (AWK, NEE) of interest.
Long Player : A lot of pricing has crashed thanks to politics. Now a lot of big and safe names in the industry offer darn good returns. So there is really no need to speculate at the current time to average decent investment returns.
Andrew Hecht : I continue to look for commodities that offer value and are close to or at the bottom end of their pricing cycles. I am also prepared for an increase in volatility given the situation in the Middle East, uncertainty when it comes to international trade, and risks associated with a hard Brexit. All of these factors together, or individually create the potential for periods of high volatility and risk-off in markets across all asset classes.
Geoffrey Caveney : Gold miners, gold miners, gold miners. And my long-time readers and subscribers know that I'm not just some permabull gold bug who always says this all the time. Back in 2017 I was bearish on gold miners and bullish on tech stocks, for good reason. But in 2018 the broader market momentum ended, and in late 2018 the gold market finally bottomed. Thanks to my patience and flexibility in 2017, I am now in a much better position to focus on the new gold bull market for 2019 and 2020.
The Critical Investor : As the widely feared recession seems to be pushed back now with something of an understanding between Trump and China, and the Fed indicating potential rate cuts, increasing confidence in the markets, and gold performing well, I am looking into gold leverage now.
Victor Dergunov : I'm more cautious on Q4 and 2020 especially. It is plausible we could be facing a recession by then. So, I will begin to hedge more, and reduce certain equity positions. The market may reach a top in Q4, or in 2020, but by this time there should be better investment opportunities around the world.
Laurentian Research : We are increasing our positions in copper mining stocks, after having completed positioning in gold stocks in 1Q2019. In our view, some copper mining stocks look very attractive at this point in time, while the long-term outlook for the red metal seems bright in spite of the short-term market softness. In addition, we are considering whether, and when, we should raise our cash position in 2020.
KCI Research Ltd. : With passive, ETF, and trend following quantitative fund flows now accounting for north of 80% of monthly fund flows (and really over 90% in my opinion), I think it is a dream environment to be an active investor who goes against the grain. For this reason, going into the second half of 2019, and into 2020, positioning against these extremes is very important. Specifically, I am short bonds, particularly at the long end of the yield curve, expecting higher interest rates, I am long value versus growth, and I think commodities, and commodity equities will be the best market performers in both relative and absolute terms.
What is the most important thing to watch for in the energy sector right now? Trade war, potential conflict in the Middle East, the Venezuela turmoil, or something else?
Laura Starks : Venezuelan turmoil is priced into the market; the Middle East is characteristically chaotic, but uncharacteristically holding together on supply cuts via OPEC; the growth in demand for oil remains a question. On the strictly anecdotal side, electric cars could eventually hurt oil, help utilities (which means natural gas & coal). Still, it is confounding to see how few people realize that since hydrocarbons comprised 85% of global energy supply in 2019, renewables - at only 4% - cannot immediately supplant hydrocarbons. In the global total, nuclear-derived electricity is another 4% while hydroelectricity (dams) is 7%. Surprisingly, many seem unaware that the large upfront capital cost, land requirements, low energy density, and intermittent availability of renewables means they are not the sole answer to global energy poverty.
Darren McCammon : If someone can consistently forecast the energy event of the day and make money investing in it, more power to them. I instead seek to understand and follow long term trends following it up in-depth research into, "Who benefits?"
My goal being to find the companies which both benefit and have an attractive risk vs. reward profile. In the energy sector the strong trend I feel confident will continue is increasing volumes of natural gas transported. There are specific companies which benefit from these volume increases (note volume, not price) including: Archrock ( AROC ), CSI Compression ( CCLP ), Energy Transfer ( ET ), Golar LNG ( GLNG ), Dynagas ( DLNG.PB ), GasLog ( GLOP.PB ), and Teekay ([[TK]], [[TGP]], [[TGP.PB]]). You can read more about them in My Top Ideas For 2019 and the more recent update to that top idea, Tick, Tock Goes The NG Transport Clock .
Long Player : The biggest issue is probably industry profitability. Our long-term independence from some very unstable countries depends upon low cost and growing production. We are well on our way to energy independence with costs that will eventually rival the Middle East the way things are going. Time will tell if we get there. Interestingly, this may mean that the refineries will have to adjust for more light oil. It has been about 40 years or so since they adjusted to more heavy oil. To me it is amazing that the cycle will partially reverse due to all the unconventional light oil being produced.
Andrew Hecht : Iran is the most significant factor because 20% of the world's crude oil travels through the Strait of Hormuz each day. A new government in Venezuela would weigh on the price of oil, but a trade pact with China would boost the price of the energy commodity. The potential for upside price spikes is elevated because of Iran. In natural gas, the price declined to its lowest level since 2016. I am hoping it drops to $2 or below to create bargains for the winter peak season in 2019/2020 running from November through next March.
KCI Research Ltd. : None of the above, in my opinion. Something else is global demand growth. On this front, I do not expect a recession, and I think we at the beginning of a cyclical upturn in global growth, which should be bullish for energy supply/demand fundamentals.
Gold finally cleared $1400 in mid-June. Is this a fluke or the sign that a new bull cycle is coming, or something in between? Why?
Andrew Hecht : Gold has been rallying in all currencies since the early 2000s which is commentary on the full faith and credit of governments that print legal tender. Gold looks ready to enter the next leg of its bull market, but it will not move in a straight line. I favor buying dips in gold and other precious metals which are the ultimate currencies of the world.
Geoffrey Caveney : This is not a fluke at all, this is a new gold bull market. Every single year over the past 5 years, the gold price had hit resistance at $1350 or the high $1300s and failed there: It happened in 2014, 2015, 2016, 2017, and 2018. But now in 2019, the gold price has broken out to a level where it hasn't been since 2013. It is clearly a result of a combination of the end of the Fed rate hike cycle; the imminent beginning of Fed rate cuts and global central bank low rates, negative rates, and easing; and rising geopolitical tensions. Meanwhile, stock prices have been at elevated valuations for years, while the gold price has been at a low level for years. This new gold price breakout has great significance, and now is a great time to be long gold and gold miners.
The Critical Investor: I don't believe in fundamentals for gold, sentiment drivers at most. Therefore, it is very hard if not impossible to pinpoint to any structural fundamental development in gold, and anyone who says he can should be taken with more than a few grains of salt. The one thing you could look at as sentiment drivers are negative real interest rates, but this isn't consistent as well, combined with the open interest of COT reports (Commitment of traders), and try to make something out of it.
Victor Dergunov : Gold is up and it should continue to go higher as worldwide monetary easing resumes. The difference between now and the past several years is that the U.S. is about to begin easing instead of tightening. This should lead to a great deal of increase in the U.S.'s money supply, which directly correlates with the price of gold .
Laurentian Research : At The Natural Resources Hub, we focus on picking miners that own low-cost assets, is run by able and conscientious entrepreneurs, and is undervalued. Businesses as such can make good money even at gold prices well below $1,400 so a gold bull market is welcome but not absolutely required. With that said, we do think a bull cycle will probably be confirmed in the next couple of years, as part of the general commodity bull market.
KCI Research Ltd. : Gold is sniffing out competitive devaluation. Building on this narrative, precious metals equities, which have underperformed precious metals for a majority of the time since 2011, are poised to outperform.
What is one of your current favorite ideas, and what's the quick thesis?
Laura Starks : U.S. refining stocks like Valero ( VLO) , Marathon ( MPC ), Delek ( DK ), HollyFrontier ( HFC ), and others are off. I believe they will see upside from their preparation to make IMO 2020 low sulfur marine fuel, along with potentially cheaper Bakken crude and localized strengthening of demand -- or redirection of current exports -- from the shutdown of the 335,000 barrel-per-day Philadelphia Energy Solutions refinery. I appreciate the nimble, thoughtful engineering culture characteristic of the best refiners.
Long Player : Quick thesis would be low or no debt profitable growth. Favorites include EOG Resources ( EOG ) and Diamondback Energy ( FANG )
Andrew Hecht : I am bullish on the prospects for the Brazilian real and Brazil's economy given the new Bolsonaro government. Brazil is a mineral-rich nation and a rise in the value of the currency would increase the production costs of commodities where the country is a leading producer and exporter. A higher real could lift the prices of those raw material markets.
Geoffrey Caveney : Wheaton Precious Metals ( WPM ) offers excellent value and prospects, for a nice combination of reasons: 1. Leverage to the new precious metals and miners bull market for the next 12-24 months. 2. Relative safety as a precious metals royalty and streaming company, reducing the risks that miners face. 3. A combination of value and momentum as the stock continues to recover from the recent resolution of its tax issue with the Canadian government. I like this combination very much. To go for bigger gains, taking more risk but for greater potential reward, junior gold miner and explorer stocks are the place to be.
The Critical Investor : My favorite idea and my largest position is Adriatic Metals (( ADT )), a very high grade polymetallic explorer operating in Bosnia-Herzegovina, which is coming with a resource estimate soon which will likely surprise, and in a few months after this it will come with a PEA which will likely surprise the markets even more.
Victor Dergunov : Bitcoin ( BTC-USD ): capped supply, essentially unlimited potential demand, I would look for Bitcoin and certain altcoins to go much higher longer-term.
Laurentian Research : At this time, we like Lion One Metals ( LOMLF ) a lot, which operates in Fiji, part of the ring of fire where numerous giant gold mines are found. The company is poised to pour first gold in 2020, providing it with cash flow. On the other hand, the exploration upside in its Tuvatu concessions - not only in shallow epithermal targets but also in deep alkaline porphyry gold prospects as it recently recognized - can potentially multiply its high-grade gold resource. So this is a barbell investment play. The miner is run by Wally Berukoff, a serially-successful entrepreneur and major shareholder. The stock, currently consolidating after a bounce off the bottom in January 2019, is still deeply undervalued.
KCI Research Ltd. : I have written about two companies recently in the energy sector, Encana ( ECA ) and Cenovus Energy ( CVE ), which actually used to be sister companies with CVE spinning out of ECA in November of 2009. They are both in the energy sector, they have both underperformed, and they are both in my top-twenty list of total return candidates.
Thanks to our panel for participating! As a reminder, you can check out their profiles and services at these links:
Watch out for the next edition of the midyear Roundtable tomorrow, on small caps. If you have any thoughts on the commodities discussion above, please chime in below!
See also Small Business Confidence Holding At A High Level on seekingalpha.com