Thursday Night Links

• Updating a chart from our piece Undervalued Energy Stocks, the first chart below showed that by March of 2022, the Energy weighting in the S&P had indeed risen sharply since we became constructive on the sector, but was still near record lows. Fully updated through year-end, we would note that energy has a smaller weight in the S&P 500 than it did at the peak of the dot.com bubble. The chart below shows that capex was bouncing off levels last seen in 1999.  Again, we would like to highlight that global GDP has exploded from $33 trillion at year-end 1999 to over $96 trillion in 2021.  KCR fears that investors do not appreciate that energy extraction is largely a function of capital investment.  Even with the chart updated and all the talk about energy prices, we can see that capex in the sector is still anemic. From our piece, Is it Too Late to Buy Oil Stocks, the updated chart below shows the price-to-sales ratio of energy divided by the price to sales ratio of tech (IT) stocks.  We can see that valuations are still at record spreads.  Unless it is different this time, tech valuations need to fall, energy valuations need to rise, or a bit of both needs to happen. [Kailash Concepts]
• The points in this exhibit represent the joint valuation of stocks and bonds during each quarter since 1976. The four red diamonds found in the lower left portion of Chart 1 signify the last two quarters of 2020 and the first two quarters of 2021, the period when doubts about the 60/40 strategy became increasingly louder. These four quarters represent the worst joint valuations for stocks and bonds in 45 years and starting from valuation extremes in both asset classes, it was hard to see how future 60/40 returns could come anywhere close to the long-term average. As it turns out, the skeptics were right! The 60/40 strategy had a terrible 2022, and the strategy utterly failed in protecting investors during this severe bear market. [CAIA Association] 
• Royalty production volumes averaged 25,914 BOE per day, a 27% increase over Q4 2021 and a 4% increase over Q3 2022, which included 12,166 barrels per day of oil royalty production. Quarterly revenues totaled $150.6 million, comprised of royalty production revenues of $144.8 million and other revenues of $5.8 million, including bonus consideration of $3.0 million. Quarterly funds from operations of $119.5 million ($0.50 per share basic and diluted) were 17% above Q4 2021 due to a combination of robust organic royalty production growth, acquisition royalty volumes and strong commodity pricing, and modestly behind Q3 2022 primarily as a result of a decline in WTI benchmark pricing and a wider heavy oil differential. [PrairieSky]
  
• On Tuesday, the maker of Lucky Strikes appointed Luciano Comin as its first director of “combustibles” as it now calls cigarettes. This could pave the way to jettisoning the cash-rich business. BAT, in common with rivals, has long pursued a two-track model. It relies on the sinking ship of cigarettes to fund investment into the lifeboat of non-combustion nicotine products, including vapes. But years down the track, cigarettes still make up the lion’s share of its revenues, more than 83 per cent on 2022 Visible Alpha estimates, and all of its profits. [FT]
  
• John Josselyn, who visited New England in 1638 and again from 1663 to 1670, wrote "there be infinite numbers of ticks hanging upon the bushes in summertime that will cleave to man's garments and creep into his breeches, eating themselves in a short time into the very flesh of a man. I have seen the stockings of those that have gone through the woods covered with them." [wiki]
• Patients in the iron reduction group had a lower risk of subsequent cancer, and those who developed cancer had lower cancer-specific deaths and deaths from any cause than patients in the control group who developed cancer. At baseline, iron levels were similar in the two study arms. However, during follow-up, patients in the iron reduction group had lower iron levels than patients in the control group. In both groups, iron levels of all patients who developed cancer were higher during follow-up than those of patients who did not develop cancer. [JNCI]
• Constitutions are useful markers here not because they’re sacred, inviolable documents. Quite the contrary – often they’re barely even implemented. But they represent the fervent desire to establish some kind of precedent that will bind everyone else. The alternative, which the French revolution has a lot of, is the endless shifting of power, horse trading and back stabbing that happens when there’s no formal structure and lines of authority to decide who is really in charge. New constitutions are thus somewhat useful markers of when the reality of power has gotten so disconnected from the previous piece of paper that the current mob feel the need to justify the difference. Parenthetically, this reveals the brilliance of the current constitutional order in the US. If the option is available, you are much better off referring to the same piece of paper and saying that you’re totally still the legitimate heirs of 1789. A shockingly large amount of rubes will fail to notice that the modern government bears almost no resemblance in any of its practical arrangements to the government of 1789, so maybe, just maybe, you’re not actually governed by the piece of paper after all, and the government can very easily change with the paper staying the same. [Shylock Holmes]
• The members of the laptop class tend to regard their preferred redistributionist policies as motivated by concern for the poor, but they have a more self-interested basis. The educated professionals of this caste typically belong to the top 10 or 20 percent of the income distribution in cities that increasingly cater to the global superclass—the 1 percent and the 0.1 percent. Hence, they risk being priced out of hip neighborhoods by luxury developers and feel insecure about their income relative to their bosses and their college friends who went into finance. However, progressive reforms have largely backfired, making cities even more inhospitable to anyone below the top income stratum. By escaping to places where they can enjoy something closer to the consumption habits they can’t afford at home, they can leave the resulting mess to the lower classes, who don’t have the luxury of remote work. “In truth, the laptop class has no problem with brown-skinned laborers making $10 a day.” When asked if they could maintain their Mexico City lifestyle if brought back to their countries, most of the nomads I spoke to told me that they couldn’t. [Compact]
• This blog was bullish on Treasuries as far back as 2010, when the "marketable" federal government debt (consisting of securities that traded and excluding intragovernmental holdings) was $8.1 trillion. In March 2017 it is now $14 trillion. Yet the 10 year yield has fallen from 3.3% to 2.3% even as debt/GDP has grown from 53% to 74%. As the fundamentals of owning government debt have gotten worse, the prospective gain (yield) from owning has fallen! We can see that the federal government deficit is on the order of a trillion dollars per year, since there has been a $6.7 trillion increase in the marketable debt in just under seven years. Someday when the economy experiences another recession, the debt to GDP ratio will climb faster than it has during this expansion, since three factors will be working to accelerate it: GDP will fall during a recession, lowering the denominator; and debt will increase because tax revenue will fall while at the same time transfer payments will increase. Meanwhile, despite the booming economy the government debt keeps growing because the federal government runs an enormous deficit. It is politically imperative for whatever party is in power to borrow at low interest rates and maintain spending rather than try to balance the budget. Otherwise that party would be displaced by a different coalition willing to borrow on behalf of its voters. Trump has consistently said that he would grow the national debt, and his ideal budget consists of tax cuts, substantially more spending on defense and infrastructure, and no cuts to entitlement programs. The big drivers of the federal government deficit and therefore the increasing federal debt are the entitlement programs: Social Security, Medicare, and Medicaid. Defense spending is of course enormous but unlike the entitlement spending it does not scale with the growing aged population. [CBS]
• Microsoft’s use of the artificial intelligence used in ChatGPT to disrupt the internet search market is set to demolish the high profit margins that have underpinned Google’s core business, Microsoft chief executive Satya Nadella has predicted. “From now on, the [gross margin] of search is going to drop forever,” Mr Nadella said. He was speaking as the software giant unveiled an overhaul of its Bing search engine to incorporate AI advances that have been sweeping through the tech world since the launch of ChatGPT more than two months ago. [FT]
• The U.S. Navy’s Diving and Salvage Center can be found in a location as obscure as its name—down what was once a country lane in rural Panama City, a now-booming resort city in the southwestern panhandle of Florida, 70 miles south of the Alabama border. The center’s complex is as nondescript as its location—a drab concrete post-World War II structure that has the look of a vocational high school on the west side of Chicago. A coin-operated laundromat and a dance school are across what is now a four-lane road. The center has been training highly skilled deep-water divers for decades who, once assigned to American military units worldwide, are capable of technical diving to do the good—using C4 explosives to clear harbors and beaches of debris and unexploded ordinance—as well as the bad, like blowing up foreign oil rigs, fouling intake valves for undersea power plants, destroying locks on crucial shipping canals. The Panama City center, which boasts the second largest indoor pool in America, was the perfect place to recruit the best, and most taciturn, graduates of the diving school who successfully did last summer what they had been authorized to do 260 feet under the surface of the Baltic Sea. Last June, the Navy divers, operating under the cover of a widely publicized mid-summer NATO exercise known as BALTOPS 22, planted the remotely triggered explosives that, three months later, destroyed three of the four Nord Stream pipelines, according to a source with direct knowledge of the operational planning. [Seymour Hersh]