Crude Oil Prices Surge And The Rotation Continues

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Commenting on the surge in crude oil prices and today’s markets strategist Louis Navellier wrote in a note to investors:

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Q4 2020 hedge fund letters, conferences and more

A Big Rebound In Q1

During these market gyrations, it is important to remind everyone that good stocks bounce like fresh tennis balls, while bad stocks bounce like rocks.

I am expecting a big rebound because is the first quarter announcements will represent peak sales and earnings momentum, due largely to easy year over year comparisons as well as a strong economic recovery.  Typically, positive analyst earnings revisions, which have been abundant,  precede future earnings surprises.

Since September, Top 50 stocks in the S&P 500 with the largest market capitalization have risen 6.32%, while the Bottom 50 in the S&P 500 with the smallest market capitalization have surged 62.87%.  Finally, the Top 50 stocks in the S&P 500 with the best performance in the past five years have risen 7.37%, while the Bottom 50 in the S&P 500 with the worst best performance in the past five years have surged 67.74%.  This is a sign of a healthy market rotation.

The Rotation Continues

Much of this rotation in the stock market is due to the resurgence of energy related stocks as crude oil prices have surged in the wake of the Biden Administration’s cancelation of the Keystone Pipeline as well as a drilling ban on federal land.  Crude oil prices are also benefitting from a worldwide economic recovery led by China, emerging markets and the U.S.

The surge in plastic prices was caused by the big February freeze in Texas, which has caused a shortage of plastic and polyurethane, since many chemical plants were shut down due to mass blackouts.  Prices for polypropylene and polyvinyl chloride (PVC) have more than doubled this year. Because of a shortage of semi-conductors and plastic, GM, Ford, Honda and Toyota have all had to curtail their vehicle production in North America.

The global supply chain is now disrupted and expected to impact not just auto manufacturing, furniture and all the consumer products that use plastic.

Taiwan Delayed Semi-Conductor Production Ramp Up

Finally, a drought in Taiwan has delayed the ramping up of semi-conductor production, which is great news for Taiwan Semiconductor Manufacturing (TSM) and United Microelectronics (UMC) since it increases prices and pushes up the value of inventory.  It takes almost six months to boost the output of semi-conductors, since they are “layered” and need clean rooms to manufacture, so output cannot be immediately boosted.  As an example of how semiconductors are used in vehicles, they control LED and OLED screens in vehicles and other electronics, like the “stop-start” systems installed in almost all new vehicles to save gasoline mileage.

The International Energy Agency (IEA), based in Paris, is now forecasting that demand for diesel and gasoline is peaking due to growing market share for electric vehicles (EV).  Specifically, the IEA does not expect that the demand for diesel and gasoline will return to pre-pandemic levels.  The IEA also forecasted that 60 million EVs will be on the road in 2026, up from 7.2 million in 2019.

IEA Executive Director, Fatih Birol, said “We do not think gasoline consumption will come back to 2019 levels again.”  The IEA said daily gasoline demand dropped by a record 2.9 million barrels in 2020, down more than 10% from 26.6 million barrels a day back in 2019.

The Surge In Crude Oil Prices

Crude oil prices may not stay high forever, especially since worldwide crude oil demand tends to ebb in the fall after surging in the spring due the simple fact that there are simply more people in the Northern Hemisphere than the Southern Hemisphere.  Seasonal demand anomaly for crude oil should never be confused with strength.

The Biden Administration’s recent meeting with Chinese officials in Alaska did not go well.  China is no longer hiding its trade with North Korea and is ignoring the U.S. embargo.   If the tension between China and the U.S. was not high enough, a new Cold War seems to be developing between the U.S. and Russia after President Biden called Vladimir Putin “a killer.”  Turkish President Erdogan said President Biden’s comments were “unacceptable” and “not something that can be stomached.”   U.S. Turkish relations have become increasingly strained in recent years, so there is no doubt that many countries intend to test” the Biden Administration.

Despite China, Iran, North Korea, Russia, Turkey and Venezuela ignoring U.S. sanctions, embargos and/or being critical of the U.S., the good news is thanks to higher Treasury bond yields, the U.S. dollar has been firming up.  The key to a strong U.S. dollar is (1) a strong economy, (2) higher interest rates than the rest of the world and (3) confidence in its central bank as well as the current administration’s leadership.  Right now, I would give the U.S. a “score” of 2½ for these 3 factors, which is why the U.S. dollar has firmed up in recent weeks.

U.S. Poised To Beat China In Economic Influence

Despite all these international distractions, the U.S. is poised to beat China on economic influence this year.  Since the U.S. economy is about one-third larger than China, the U.S. economy this year should have a bigger impact on worldwide economic growth for the first time since 2005.  However, I should add that higher crude oil prices and other inflationary fears could impede U.S. GDP growth.

Speaking of inflation, the Federal Open Market Committee (FOMC) recent statement helped to squelch fears of rising inflation and higher bond yields Specifically, the FOMC reiterated that they would hold key short-term interest rates at 0% through 2023 and continue buying at least $120 billion per month in both Treasury securities as well as mortgage-backs securities until “substantial process is made.”

What the FOMC did that financial markets liked is that the Fed raised its 2021 inflation target to 2.4%, up from its previous estimate of 1.8% back in December.  The FOMC also expects inflation to ease to 2% in 2022 and 2.1% in 2023, so the Fed is sticking to its belief that recent inflationary forces are temporary.  Overall, financial markets like the fact the FOMC acknowledged inflation and raised its 2021 inflation forecast, but also reiterated its 0% key interest rate policy through 2023 and its quantitative easing.

New Buys

Pintrest Inc. (PINS) is of making the transition from negative to positive earnings growth, triggering institutional buying pressure.  In my opinion, the stock is a great near-term buy!

Williams Sonoma Inc. (WSM) Consumers continue to nest.  Analysts estimates are increasing.

New Sells

Atlassian Corporation (TEAM) and Clorox Corporation (CLX).

The Worldwide EV Revolution

There are some interesting anomalies that the worldwide EV revolution is causing, like an acute shortage of cobalt, which has soared in price.  During VW Group’s recent Power Day, a different type of lithium batteries were profiled, but VW made it crystal clear that the most efficient lithium batteries use cobalt, nickel, and silicon graphite anodes, like on their high-end Porsche Taycan EV.

During Power Day, VW Group said they will not be utilizing cobalt on some of their lower priced EVs under development, just like Tesla is now making EVs with less efficient, cobalt free batteries at their plant in Shanghai, China.  My take on VW Groups Power Day is that they intend to switch to the solid-state batteries that they are developing with QuantumScape (QS) as soon as possible, which are expected to appear in 2025 via its Artemis project, which will be a luxury EV model for Audi, Bentley and Porsche.

In the meantime, these acute supply chain shortages are making China more powerful than ever because it controls the raw materials used in lithium batteries and virtually all devices that rely on rare earth materials, like cobalt.

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