I was just in Puerto Rico for the first time in a couple of years. Woo! What a weekend. In a prior life, I worked for a fund and we invested in Puerto Rican banks. I’d go down there every so often to meet with management teams, regulators, government officials etc. I hadn’t been back in a while. The island seems to be doing okay. I’m still astonished that there hasn’t been a bigger property boom down there. It’s part of the US so there are no geopolitical concerns. The workforce is bilingual. Taxes are very low (yes, lower than Florida). World-class surfing. Unbelievably amazing food. I’m long-term bullish on Puerto Rico.

By Charles Ruff, CFA

Is Energy Fairly Valued?

I’s hard to say. It’s always painful chasing an industry or stock that already appreciated.

Two charts from Goehring and Rozencwajg help provide some perspective.

Commodity Prices vs. Dow Jones

Yes, energy (and commodity) stocks have moved higher but Energy is a tiny, tiny sliver of investment indexes. The ESG push has not helped this trend.

Energy is just 5% of the S&P 500. The entire sector is smaller than both Apple and Microsoft. (AAPL) is 6.5%. MSFT is 5.6%.

Super-Major Capital Spending

This chart is particularly worrisome for inflation. Supply will not grow if companies are not spending money to develop new oil & gas resources.

I pulled the numbers from Chevron to show this trend. Last time oil prices were around $100/bbl (left axis), Chevron was spending over $30 billion/year (right axis) to find and develop hydrocarbons.

In the last 12 months, Chevron has spent just $7.8 billion.

Chevron Capex and Avg Oil Price

Oil and gas producers will need to spend more to grow supply. When a company like Chevron spends money, it hires oil service companies (Schlumberger (SLB), Halliburton (HAL), Liberty (LBRT).

The service stocks have moved higher with the oil companies… can they keep going? Don’t forget, these fields don’t run on a switch. It take years for a new resource to produce meaningful amounts of oil and gas. We might have a long way to go.

The current state of the economy and the Federal Reserve

We are not in a recession, nor is one inevitable. – by Claudia Sahm

  • The Fed must continue to hike interest rates to control inflation
  • A strong labor market is a sign of a strong economy and strong consumption
  • I disagree with the author’s assessment that COVID is preventing people from returning to work. We’ve addressed this issue in prior weekend readings and I think there are numerous causes including child care issues and early retirements (partially thanks to strong equity markets).
    1. The author is absolutely correct that the trade off is NOT “less consumption, less inflation.” In the end, we need more supply.
    2. Higher rates can help reduce consumption of houses, mortgages, and other purchases that are directly financed.
    3. Higher rates will NOT help get agricultural exports from Ukraine and Russia
    4. Higher rates will NOT help build more semiconductors
    5. Higher rates will NOT help grow oil &gas supply (See above)
  • Supply adjustments happen because of capitalism, not because of the Fed’s monetary policy. A new harvest of agricultural crops takes at least a year. It takes years to build new fabs for semiconductors. Building more supply takes time!

Rochester is an absolutely amazing place for so many reasons.

This week I found another amazing reason: Skateistan, “a nonprofit that introduces Afghan children and other youths who are often excluded from athletics to skateboarding and the creativity and freedom that comes with the sport…. The nonprofit is based in Berlin, Germany, but started a pilot program in Rochester — the first in the United States — because of the city’s high concentration of refugees from Afghanistan.”

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