Another collection of analytics and thoughts for your investment planning consideration! Today, we’ll add yet more fuel to my “Energy in ’23” prognosis (pardon the pun). We’ll look at Fed and BOC policy and how it impacts us as investors. Plus, we’ll consider why the Canadian housing bubble is meaningful to stock investors. We’ll also take a look at the US long bond for a potential trade.
Let’s get at it:
More support for my bullish oil thesis
Last week I discussed my bullish energy outlook here. Two days after that blog, I quoted some very scary, oil-bullish comments by Saudi Arabia here. Then, this morning, I came into my office and read this from AGC Analytics courtesy BearTraps Research: “With national security in mind, the Biden White House wants a 20-30% strategic petroleum reserve refill between Christmas 2022 and Thanksgiving 2023 – WELL ahead of the 2024 presidential election”.
Oh, and have you been reading about the diesel shortage in North America? Rumors’ say that supplies are dangerously low. Supply chain/ transportation costs will go up, and another reason for expecting inflation, and investing in commodities!!
Diesel Shortage This Winter to Push Fuel Prices Higher, Goldman Warns | Financial Post
Bottom line: all of this supports my thesis of a good year for fossil fuels in 2023.
Quote of the day
“If the Fed doesn’t follow through with what is fully priced into expectations, its an ease” – Larry McDonald, BearTraps
For example – the BOC was expected to raise by 0.75% last week. In an oct 6 speech, Bank of Canada governor Tiff Macklem basically (paraphrased) said “There’s more to be done, and will need more information before balancing our aggressive hiking”. Then he does 0.5% instead of the expected 0.75%.
That’s an ease, even though its a tighten. Get it? Again – there are obviously concerns over the massive impact of higher rates on the most over-leveraged consumer in the world (Canadians!). See my housing bubble comments below.
From TINA to POA
Recall the acronym TINA (There is No Alternative) to stocks – when rates were low and markets were going up. Now we have POA (Plenty of Alternatives)!!
Of course, you know my favorite alternative is inflation-sensitive materials and commodities. But that’s not the only opportunity that I am seeing.
For example, some consider opportunities in bonds as the most attractive in decades. Again, referring to AGC research courtesy BearTraps: The upcoming Nov 8 elections might suggest future gridlock in US decision making – which would favor bonds according to their outlook. According to BearTraps, support from Europe to the Ukraine conflict has been inadequate, which has put pressure on the US. A change in the house to the less-spendy Republican side could put pressure for a Q1 resolution to the conflict (aka – pullback in spending). Good for bonds (less money printing), even if its temporary.
Technically, you can see the 30 year bond bull trendline was broken (since the 1990’s, not shown). So it ain’t the market it used to be. However, we are seeing an uber-oversold situation that is unlikely to continue.
- Moneyflow momentum (top pane) is at all time lows,
- 12-month Rate of Change (first pane below price chart) is historically oversold,
- 10-month RSI same thing,
- As is MACD.
To me, this is a neartermed, not macro opportunity that may be coming. So keep that in mind. Of course, you read my work enough to know that we look for hooks (up) on the indicators noted before acting. As/if/when that happens, we may be looking at a return to the 10 month (200 day) SMA, which lies near a resistance cluster near $118. The TLT currently resides near $96. Nice potential, to be sure! In order to understand the mechanisms behind that trade, I continue to encourage you to take my TA course here. And BTW–special announcement on limited time pricing coming this week!
Canada housing bubble rolling over
Housing prices in Canada are still up an estimated 52% since the pandemic. Canada’s household debt to disposable income hit 182% by Q2 2022. This, BTW, is one of the highest levels in the world. But now, real estate is declining – more aggressively in Toronto, Vancouver, Calgary and Montreal. Sales across the country are declining, which is of course the horse that leads the pricing cart. “The actual (not seasonally adjusted) number of transactions in September 2022 came in 32.2% below that same month last year and stood about 12% below the pre-pandemic 10-year average for that month.” This according to the Cdn Real Estate Assn.
Meanwhile, something near 60% of the mortgage market in Canada resets every 2.5 years – aka constant refinancing happening as we speak. This adds further pressure by higher rates on borrowers. The BOC is in a corner. What does this housing and overleveraged, over-mortgaged homeowner problem mean to us financial market investors? As I noted in my “Canada’s turn” blog – slowing if not outright discontinued rate hikes. And inflation!!!
Again: Bullish Canadian resource stocks. But….Bearish for the lenders. Banks, not so good a place to be, methinks.
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“Meanwhile, something near 60% of the mortgage market in Canada resets every 2.5 years” where was this info cited from? I was expecting a doozy in 2025-2026 from all the covid house buying that alot of mortgages would be up for their 5 year renewal. But by your statement maybe things aren’t as far out as I was expecting. If they are continuing to renew this fast wouldn’t that be good for the banks as their net interest margin would increase, my savings account hasn’t moved at the same speed as the mortgage rates. More provisions being added I understand that may cause weaker earnings.
I beleive that was from BearTraps research in one of their research reports last week.
I missed Biden’s declaration of wanting to do a 20-30% strategic petroleum reserve refill in that timeframe.
I did see that Biden is floating the idea of a Windfall Tax on Energy Producers like they did in Europe. The effect in Europe on oil producers was a 20-30% sell off. I rather doubt Biden would make such an announcement before the mid-term election, but I wouldn’t put it past him once the mid-term elections are over. What do you think?
I’ll be blogging on this soon Wendy, but in a nutshell: its not likely he can or will get it passed or will even try to do it from the intel I am reading. Its a vote-buying “damn those capitalists” strategy pre-midterms rather than something he can or should actually do. Too many issues to deal with
I have a couple questions:
With capital preservation an important goal in my registered accounts, how does one consider a 2023 oil trade with the likelihood of recession?
Second; bonds and growth stocks do well in a lowering interest rate environment.
But traditionally bonds do well when stocks don’t.
So how do we play the growth stock recovery and long bond recovery simultaneously?
Is it a barbell approach or first one and later the other approach and why?
Lance–its my opinion that commodities and their producers will have materially differing performance than during normal recessions simply because the supply / demand logistics and inflation remaining relatively high are different coming into this recession vs others. Particularly for oil.
As for bonds – to me, its a wait until we get more technical proof of a sustained rally before looking at the trade, as I note in the blog.
I am more inclined to play each side as the technicals show positives. So, I am not in much energy now – and no long bonds now. But I am watching to buy and will do so when each looks bullish independently.