#148 - Oil Stocks Implode, Crypto Scams, and a Record Year for The NHL
In this week's episode of Reformed Millennials, Joel and Cam talk Oil Stocks, NHL revenues and SBF’s FTX buying an Alberta based company.
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👉 For specific investment questions or advice contact Joel @ Gold Investment Management.
In a bear market, eventually, every sector gets under pressure. Up until last week, oil and gas stocks were enjoying one of their best years. And then, they were hit hard. The Fed raised the base interest rate by 75bps and declared that its goal is to bring down inflation to under 2%. All of a sudden, the market’s main worry was not stagflation (high inflation and very low growth) but a recession (negative growth). The oil & gas sector ETF is now down 24% from its 52-week highs. Despite the drop last week, most oil & gas stocks are still in a long-term uptrend and many might have a short-term bounce near their year-to-date volume-weighted average price.
There are not many stocks left that are still above their 50 and 200-day moving averages. Lately, we have seen select Chinese ADRs and biotechs push against the mainstream weakness but overall there are just a few decent-looking long setups and none of them are really very exciting.
The silver lining is that even the scariest and longest bear markets experience powerful counter-trend rallies from time to time. Market breadth has become so weak that we might be close to one. SPY is about 5-7% from major potential support near 350–340. If that level doesn’t hold, we might see a major panic selling and acceleration lower. The faster, the better. It’s always preferable to rip the bandaid quickly than to be tortured for many months by choppy down-trending price action. I am not in a rush to be aggressive on the long side.
Typically, bear market bounces characterize by very high correlations, so A trader might just as well participate with an ETF like SPY, UPRO, QQQ, or TQQQ.
What are your favorites from these fallen angels?
💸Reformed Millennials - Post of The Week
Stan Druck Interviewed By Stripe's John Collison:
Notes from the interview provided by JSCC Cap - highlights mine.
Companies down 60-70% w.o a notable change in fundamentals so valuations have reset).
How slow the Fed was to recognize the problem (he thought they were slow in April of ‘21 yet in March ‘22 they were still buying bonds & didn’t pivot verbally until November).
In his 45 years as a CIO he has never seen a combination where there is no historical precedent (e.g., 8% inflation into a weakening economy with bond yields at 3%).
“I’m about to play a round of golf without a driver or 60 degree wedge”
He's made money over the last 6-8 mo's short fixed income & stocks, owning oil, (mistakenly) gold, & copper. Things are harder now so he’s waiting on his hands for a fat pitch, but at some point anticipates getting back to short equities & eventually USD. He still owns energy & other commodities and Ukraine has given the trade an extended life but thinks the world is short energy over the next 5-10 years due to ESG pressures which means the trade has legs.
Druck said you cannot build $2T in wealth/purchasing power, destroy $1T & it does not matter. He sees a high correlation between BTC & the NASDAQ & looks at it as an indicator. He said he’s sympathetic with what both Charlie Munger & Bill Miller say about Bitcoin.
He thinks there's a strong overlap b/w NASDAQ risk players & BTC owners, and then curmudgeons that are gold bugs and want that world to fall apart. He said there’s no question if you believe we are going to have irresponsible monetary policy & inflation going forward if it’s in a Bull phase you want to own $BTC, but if it’s in a bear phase you want to own gold. He also said he’d be shocked if blockchain isn’t a force 5-10 years from now. His advice to a 20-year-old tech investor would be to spend as much time in that space (similar to Internet & Cloud)
100% SUCCESSFUL INDICATORS:
Druck highlighted two historical facts that have undefeated track records:
(i) Once inflation is >5% its never come down until Fed Funds got greater than CPI
(ii) Once inflation is >5% its never been tamed without a recession.
He thinks the first will be violated but sees a recession highlighting the Fed has orchestrated just 2-3 soft landings historically (notably ‘94-’95) but with Fed Funds, at 75-100 bps and projections at 2-3% vs inflation at 8.6% we’re so far behind, with so much wood to chop, on the back of such a large asset bubble going into it probabilities support a hard landing.
We have $1.5-$2.0T of excess savings & it may be time to work thru that, but given the asset bubble & subsequent market destruction, Ukraine, and the 0 COVID policy in China, he sees a recession in ‘23 (just doesn’t know if it's early or late).
MARKET INTERNALS AS A PREDICTIVE TOOL:
John asked about his ability to use market internals to predict the economy. Right now you have homebuilders down 50% on “good” fundamentals, trucking stocks down 40% on record-high earnings, and retail (which isn’t much of a leader but more leader than laggard) down w/ even once you adjust for COVID normalization.
These tend to have longer lead times so don’t expect a recession tomorrow but within 6-12 months.
He also spoke about his philosophy of putting all his eggs in one basket, watching it closely, and developing conviction 1-4x a year
He thinks investors get in trouble by being diversified with stale long ideas or short ideas; if he has 15-20% or in macro 200-300% of his assets in a single position, they are never stale, you need ruthless discipline, to be constantly paranoid, re-evaluating, & open-minded.
Working For the Goat George Soros:
His #1 lesson from Soros is sizing is 70-80% of the equation.
It’s not whether you are right or wrong. It’s how much you make when you are right and how much you lose when you are wrong. As an investor he believes in streaks, so he needs to have an investment that excites him and sees himself trading well.
He said the #1 piece of advice he got from his original mentor was focusing on what makes stocks move; e.g., why will people think differently in 18-24 months than they do today. Don’t invest in the present. The present doesn’t move stock prices change moves them.
Imagine a different world in 18 months and where these security prices would trade given the world you envision.
TECH BUBBLE EXPERIENCE:
Stan gave a rundown of his famous tech bubble story (e.g., shorting $200M in March '99 losing $600M in 4 weeks & being down 18% for the first time in his life. Flipping long finishing +42% net for the year. Thinking it's a bubble selling everything putting $6B of longs on "hours away from the top" losing $2-$3B in weeks down 18% again, taking 5 months off coming back shorting, and being +40% in 4Q).
Invest then Investigate:
He also spoke about "invest then investigate" and how given the competitive dynamics in the business over the last 20 years with more information & people you don’t have the time you used to have when you hear a good idea. If you wait 2-3 weeks 60-70% of the move could occur maybe not a long-term move, but entry price is important & important psychologically as you add over time. You don’t have time to do a deep-dive analysis. If you have intuition you buy it & then do analysis & double down or cut it, as opposed to waiting & then doing analysis.
He told the story of a Lehman analyst coming in who laid out the whole subprime thesis that by 3Q 2007 all hell will break loose, in the next 2 days Druck shorted everything in housing & was wrong for 6 months but the analysis was consistent & the deeper he dug more confident they got where are we now is as hard as ever to predict.
What CB's (central banks) did globally over the last 10-11 years leaves him open-minded to something really bad.
E.g., 1930s post asset bubble and horrible recession. Do they get stagflation or deflation? Japan still suffering since 1989. We could be no growth & sideways for 15-20 years like ‘66-’82, or something similar to Japan.
Druck has a bearish bias but he knows that exists in him and he has to manage that always viewing the world probabilistically & changes his mind.
Well worth the listen per usual as he's had the best "crystal ball" for 30+ years now in the world of macro.
🐦 Twitter Thread of The Week 🐦
My favorites from the thread:
Beautiful Mess Effect: We tend to view our mistakes & vulnerabilities with shame because we think they make us look unappealing. But research suggests our mistakes & vulnerabilities actually make us more relatable and endearing to other people. So don't be afraid to be human.
Backwards Law: The more you pursue happiness, the less likely you are to obtain it because chasing it will only remind you how much you don't have it. Ironically, the best way to find happiness is to stop worrying about it.
End-of-History Illusion: We're all works-in-progress that view our current selves as our final selves. This blinds us to the possibility of our own growth. Realize your potential by remembering you are not set in stone, and you never have to be who you were five minutes ago.
The Imp Of The Perverse: When you forbid someone from something, it makes them want it even more. A big reason why censorship is often ineffective; banning information only increases its appeal, leading to a Streisand Effect in which the info becomes shared even more widely.
Agenda-Setting Theory: What's important doesn't become the news, the news becomes what's important. The public conversation is based on whatever's reported by the press, giving the impression that this news matters most, when really it's just what was chosen by a few editors.
🎬 Video of The Week🎬
Burry stresses the economy is coming to a screeching hault. Will he be right again?
Joel says this is fear porn: What say you?