What Will China Do?

The Chinese zero COVID policy has been a direct economic indicator for risk assets, representing a looming risk where China could lock down another 40-400 million people, which would undermine risk asset rallies, making reports of a politburo reopening committee planning to end the zero COVID policy by March a net positive for risk assets.

“the Chinese policy on kovid has been a direct economic indicator hasn't it so you know it's always been that looming possibility when you know risk assets are bouncing and you've got the trade on right to think to yourself oh no you know what if China locked down another 40 million or 400 million people or whatever the case may be um you know then I'm really in trouble so it's it's quite a relief to see that they're discussing you know ending that zero covet policy”

Europeans have gotten storage under control for this winter but next winter is really what must be worried about with Europe getting no solution for next winter and facing less Russian supply than this winter at unknown prices, creating a precarious bullish scenario that feeds into spiraling food costs.

“Europeans have gotten storage under control for this winter but next winter is really what we have to worry about already and that's kind of the way that I've approached it is that you know the Dutch ttf natural gas trade is long over for now but the crisis still looms right they haven't got any uh they've got no solution for next winter they're obviously going to have less Russian Supply than they did this winter and they don't know at what price they're going to have to go in and attempt to fill their tanks up for next winter”

Less Russian oil exports and continued attack on U.S. supply are structural factors that have not changed and won't change, making the cost of delaying investment in the E&P space the longer it takes for oil prices to return to normal.

“the thing that has not changed is that we are likely to get less Russian exports and we are likely to get a continued pressure on excuse me a continued attack on Supply here in the U.S what we know is none of that is changing so the longer we delay investment in the enp space the longer it's going to be before oil prices go back to normal”

Natural gas prices have retraced sharply in the US (Henry Hub), while a debate continues about whether the US should continue LNG exports to Europe given that US natural gas prices are rising as a consequence of those exports.

“we've seen a quite a sharp retracement than the Henry hop natural gas prize in the U.S but we also have an ongoing discussion on whether the U.S should continue to export loads of LNG to Europe given that the prices exploded to the upside in the U.S as well”

Iran attack headlines create underlying bid to fossil fuels and represent headline-driven market conditions that are adding uncertainty premiums to energy prices.

“you had this other headline about a potential Iran attack uh Iran attack that you mentioned earlier Andreas you know that puts me really on edge that's definitely going to lend an underlying bid to everything fossil fuels whether we like it or not and you know that's the type of headline driven Market that we're dealing with right now”

Year-end performance will likely see the divergence between up sectors (energy, commodities, value) and down sectors (tech, growth) exacerbate further, as historical patterns show leaders at year's start tend to remain leaders and laggards tend to remain laggards into year-end.

“my sense is into the end of the year you know the sectors that are up on the year and the sectors that are down on the year that's just going to get exacerbated in the last two months right that we've seen that happen time and time again and it feels like we're set up for this year to finish similarly”

Freeport McMoRan CEO Richard Atkinson expressed concern about where global copper supply will come from to meet Net Zero battery capacity build-out plans when listening to the scale of global Net Zero and battery production ambitions, suggesting fundamental copper supply deficit.

“Freeport McMoRan CEO Richard Atkinson in last week who was probably listening to all the plans for Net Zero and battery capacity being built and he's looking over at Global copper Supply saying I don't know where they're going to get it from”

Energy stocks became taboo and marked as uninvestable at exactly the time when they should have been attracting contrarian investor attention, similar to when Exxon Mobil was kicked out of the Dow, serving as a contrarian signal for long positioning.

“when you've been in this business long enough when you find out you hear things like Exxon mobils being kicked out of the Dow that should perk your interest in in looking at energy stocks when they become taboo down when they literally use the term uninvestable that's something that should perk your interest as a contrarian”

October was one of the best months for equities over the past year, with market sentiment having reached extremely negative levels at S&P 3,600 lows with VIX in low 30s, all market barometers showing extreme fear, followed by coordinated central bank actions (Bank of England, Bank of Japan, PBOC) turning the yuan around that night, triggering the expected relief rally.

“we got to a point where the markets were you know uh Jared dillian pointed out the best that we had a really negative sentiment a bubble and negative sentiment I mean it was really really dire down there at 3 600 on the lows um you know we saw all the market barometers you know do the things that you would expect to them to do when sentiment gets as dire and negative and fearful as we just lived through in the past several weeks with the vix up in the low 30s right what happens from there is that you know eventually cooler heads prevail it seems like you know the semi-coordinated actions of the bank of England the bank of Japan the pboc and turning the Yuan around last night all of those are starting all of those finally added up and we got that relief rally in stocks”

Oil and gas producers trade at 4x cash flow while the top 5 tech companies (Apple, Microsoft, Nvidia, Tesla, Amazon) trade at 50x free cash flow even after this year's declines, showing a structural valuation disparity where you're paying 50x for companies with structural deceleration in growth and profit margin contraction versus 4x for the most profitable and fastest-growing companies.

“the oil and gas producers are are still an area they trade they Trade four times cash flow right now um in contrast to the top five biggest tax firms I call them Manta Microsoft Apple Nvidia Tesla Amazon still trade 50 times free cash flow um even after the the declines they've seen this year so you're paying 50 times for companies that are seeing a structural deceleration in their growth and and profit margin contraction as well um and then you have the the most profitable companies in the in in the market now fastest growing companies in the market now energy stocks trading four times cash flow”

The average U.S. voter likely doesn't make the connection between natural gas prices and base load power generation, thinking power just comes out of the wall like they think electric vehicles simply generate their own electricity without understanding the mechanical connection.

“I'm not sure that the average voter makes that connection Andreas between natural gas prices and base load power I think unfortunately the average voter thinks that the power just comes out of the wall like they try like the mechanism they try to sell you the electronic vehicles with”

The Commitment of Traders report gives mixed signals because there is significant upstairs risk on derivative products not captured in the report, creating huge risk not mentioned in positioning data, but the report's general direction is correct when indicating shorts (as in copper) suggesting balanced views rather than extreme consensus.

“I get I get mixed signals from the commitment of Traders report personally you know there's a lot of upstairs risk on derivative products that's created and does not get mentioned in the commitment of Traders reports but it's really huge risk that's also out there um I do believe though that they are generally giving you the right direction when they lean short”

Exxon and Chevron reported earnings last week and are carving their way to new highs, making refiners and integrated oil companies the only leading sector in the S&P 500 year-to-date while energy overall is the only real game in town for equity performance.

“you've got Exxon and Chevron reporting last week and and carving their way to new highs and once again you look around at the year to date s p performance and energy is really the only game in town”

Marathon Petroleum reported Q3 earnings of $7.81 per share beating $7.00 estimates with $47 billion in revenues beating $41 billion estimates, ran at 98% capacity with 3 million barrels per day throughput, operating margin doubled year-over-year to roughly $30 per barrel, raised dividend, and initiated stock buyback, with the stock subsequently reaching new all-time highs.

“Marathon comes out with with a quarter this morning the 7.81 earnings beating seven dollar estimates they had 47 billion in revenues beating 41 billion dollar estimates they ran at 98 capacity for the quarter they ran at a throughput of 3 million barrels of crude oil a day their operating margin doubled from the quarter last year to um you know roughly 30 dollars a barrel they raised the dividend they're working on the stock buyback”

Saudi Aramco printed their second-highest earnings report ever today, demonstrating they have no problem getting paid on the offer for crude oil they're selling to Asian clients, serving as evidence that OPEC producers are finding strong demand despite political pressure from U.S. SPR sales.

“you've got Saudi aramco printing their second highest earnings report ever today so obviously they're having no problem getting paid on the offer for the crude oil they're selling to Asian clients”

In October, there was a dramatic sector rotation with 20-25% gains in EMPs and oil/gas, natural resources, airlines, aerospace/defense with about 18 sectors rallying over 10%, including metals/mining, industrials, financials, consumer staples, and healthcare, while technology nowhere in the set of leaders and even with Twitter deal going through, social media remains the worst performing sector of the year.

“we saw 20 25 20 and 25 gains in sectors like EMP and oil and gas and cannabis we saw the natural resources spaces Airlines aerospence Aerospace and defense rally sharply about 18 sectors rallied over 10 percent in October included metals and Mining Industrials financials consumer staples and health care so that was a cyclical Bonanza of a recovery last month I didn't see technology anywhere in the set of leaders from October”

New job numbers reported today are surprisingly high, providing cover for the Fed to continue hiking interest rates, validating Tony's position that the Fed can move forward without pivoting despite market hopes for cuts.

“I've made it my trademark to always conclude with a meme in the daily briefing and I wanted to provide the audience with a meme um in relation to the job numbers that we've received today new uh high in the job numbers what needs to Rebound in the amount of job openings in the U.S earlier today um so everybody has been screaming recession but I think the FED uh sips a bit of tea after these jump numbers they can move forward and continue hiking interest rates”

Technology sector will continue to suffer into winter as long as upward pressure on 2-year yields continues, because even with white House respite hopes and Fed pivot expectations, 2-year yields remain in steep upward trajectory and pause at highs only when central banks intervene, reverting back when central banks go to sleep.

“I still think that that's going to continue as long as upward pressure on rates continues Andreas and no matter what kind of uh respite we're looking for out of the fed or no matter what kind of pivot anybody is looking for one thing has not changed and that is the Steep upward trajectory of two-year yields so that's kind of the thing that that's scaring me a little bit where you know yields paused at their highs and jiggled around a little bit when all the central banks showed up and once again the Natural Market forces tend to Prevail when the central banks go to sleep”

Technology stocks may see some short-term gains during retracement rallies if the Fed makes incrementally positive comments, but the sector won't be able to participate materially this year, unlike energy stocks like Marathon Petroleum which are carving new all-time highs on earnings days with strong fundamental and structural tailwinds.

“I don't think technology is going to be able to participate at all this year you know it may be something to grab onto for a percentage gain in the retracement rally If the Fed has some positive incrementally positive comments... I'd much rather be long the sector that's got stocks carving new all-time highs on earnings days like the refiners did today... I think that that is where the rotation is going to end up”

After investors take losses selling Google, Apple, Microsoft etc., they will rotate into fossil fuel and energy sectors because these sectors are fundamentally intact, structurally intact, and have strong tailwinds behind them with visible earnings beats and momentum.

“I think that once people make the decision as to whether they're going to pitch you know their um their Google or apple or Microsoft after the beating that they took this year I think that the people that do are going to find their way into the fossil fuel and energy sectors because they line up as fundamentally intact structurally intact with a lot of lot of Tailwinds behind them”

All it will take for copper to pop is first the China story to alleviate negative headwinds, then economic growth returning while maintaining electronic vehicle and Net Zero push pressure, creating conditions for copper to find a bottom and eventually rally.

“all it's going to take for copper to pop at some point is like you said first the China story is probably first and foremost if we can alleviate that negative that probably you know takes away some headwinds um and then if we can get you know the risk on story bet going in a little bit of economic growth going um as long as we keep pressure on this electronic vehicle um you know Net Zero push I think copper finds a bit at some point and I'm willing to be patient waiting for that”

The Biden Administration's windfall tax threat on energy companies demonstrates fundamental misunderstanding of markets because the market sets the clearing price for gasoline and diesel, not government policy, and any actual windfall tax would initially be a short-term negative for stocks but markets will likely overcome it given current buyer momentum.

“the byte Administration makes that statement about windfall profits in the energy industry not really understanding that's the market that sets the clearing price for gasoline and diesel fuel and everything else so um it just demonstrates a further misunderstanding of the markets by the by the administration but it also leaves them with a lever to pull right and quite honestly if he does you know place a new windfall tax or something like it on these companies that it probably would be initial short-term black eye”

The commodity crude oil will snap back and catch up to XLE (energy stocks) sometime between now and end of year but certainly around the turn of the midterm elections because WTI is under its 200-day moving average while energy stocks are well above theirs, creating a technical and fundamental gap that Tony expects will snap shut.

“it feels to me like the commodity is the one that's going to snap back and catch up this time right the stocks have been soaring in the face of the s p which has largely Been Under Pressure you've got a situation now where the commodity WTI is under its 200-day moving average and the stocks are well above their 200-day moving average and soaring away so I think at this point Andreas it's my bet would be that those jaws kind of snap shut and you see crude oil catch up dramatically to WTI sometimes excuse me crude oil catch up to XLE sometime between now and the end of the year but certainly right around the turn of the midterm elections”

The current oil market is a battle royale between Joe Biden trying to sell the Strategic Petroleum Reserve to lower gas prices before next Tuesday (midterms) and OPEC members questioning what Biden is doing to the physical and paper oil markets when they have a strong physical market and Biden is weakening both.

“it's a battle it's a battle royale taking place right before right before our eyes it's Joe Biden trying to sell the spr and lower the gas price before next Tuesday and it is the members of OPEC that are saying what the hell is this guy doing to the physical oil Mark to the paper oil markets when we have such a strong physical oil Market over here and they have one over there”

After the midterms, a windfall tax becomes less likely as the political environment shifts, and if the oil market respects the idea that an SPR seller is being removed or slowed, energy will see political tailwinds rather than headwinds for the long bet.

“you're still positive on energy uh and if anything I'd actually say that you'd expect political title wins for that bet after Tuesday um rather than the political headwinds that we're faced with right now for the long energy bet”