Wednesday, June 2, 2021

Wednesday Links

  • I want to draw your attention to the chart above. As we know, the front end of the WTI curve is screaming, but the market remains convinced that there is plentiful supply out a few years. Remember how easy it was for shale guys to ramp up production last time? My hunch is that the ramp up will go slower this time around, meanwhile many years of underinvestment around the world will begin to take their toll on supply. What if XOM is just the first of many ETF hijackings? What if the attack on XOM changes how CEOs run their energy companies—if they want to keep their cushy jobs, they may need to stop drilling. What if the guys running the largest ETFs believe that they can accelerate the transition to “green” energy by dramatically increasing oil prices and making “green” products more cost competitive? It sure seems easier than lobbying governments for “green” subsidies while increasing taxes on fossil fuels—especially in emerging markets that are less focused on the environment. If increasing the price of oil is their “green” transition plan, the current oil price uptick won’t be a short-term thing. Maybe the heat of the move is still coming and it is in the deferred contracts? [Kuppy]
  • We can’t escape fossil fuels without significantly higher prices. Higher prices will level the playing field for alternative technologies by making them more competitive. Higher prices will spur significant investment in new energy R&D. Higher prices will also be the only way to motivate society to cut fossil fuel use. Said another way, fossil fuels are so useful for humankind that they will never be substituted unless prices skyrocket. Higher prices it shall be. The only way out is through. There are at least four forces aligning as huge tail winds for fossil fuel prices. First, and most important, the ESG/progressive crowd has utterly and totally won the narrative war and they will press the consequence of their undeniable victory to the maximum by attacking supply at every opportunity. Second, the fossil fuel industry is coming off a period of extended underinvestment in capital projects already, which was exacerbated by the fallout from the COVID-19 crisis. Third, massive monetary and fiscal stimulus is stoking demand for commodities globally, and fossil fuels will not be exempt (on the contrary, since fossil fuels are critical to the production of other commodities, they will feel an amplified effect of this phenomenon). Finally, and related to the third force, fiat currencies are being debased at an unprecedented rate. [Doomberg]
  • With prices rising, one might expect to pay a premium for inflation protection, but resource equities provide protection at a steep discount while also providing impressive diversification, the ability to capitalize on an inefficient sector of the market, and exposure to an asset class that has outperformed over the long-term. [GMO]
  • Beyond a tale of principal-agent problem and mental inversion as a tool to have in the toolbox, these oil shale capital expenditure stories may say something about the future price of oil. Investors in shale E&P companies - not just buyers of shares but the lenders - have subsidized oil production over the past five years. (You can sort of see this in a chart of XOP or a natural resources mutual fund.) [CBS]
  • Like tobacco, there is the mistaken perception that the oil business is dying. And some fraction of investors even think it is morally questionable to invest in producing the energy that our civilization runs on. Notice how much more consistent the net income of a pipeline company (MMP) or a royalty company (DMLP) is than an E&P company (DVN) or a refiner (VLO). Pipelines and royalties seem like the superior part of the hydrocarbon value chain. They are more consistently profitable over time, have less reinvestment requirement, and so more consistently send cash to shareholders. [CBS]
  • The most important investing theme in the world today is the potential reversion to long term trend of value vs growth (VvG). The covid case numbers are crashing and it appears as though herd immunity (through a combination of vaccines and previous infection) has been reached. The catalyst for the VvG inflection will be the economy reopening combined with shortages stemming from a year of lockdown socialism and the printing of $3.4 trillion in a year. The pent up demand for many types of goods and services is so high that we could see a one-time price spike, almost like a currency devaluation, that benefits old-economy goods producing companies and ends the bubble in the Robinhood fad stocks. [CBS]
  • If the main consideration is public health, taxation of nicotine products could be counterproductive as there is consensus about the benefits of smokers substitutes for non-combustible nicotine or tobacco products. However, if lawmakers decide to tax these products, they should design a principled excise regime. Legislators should focus on raising revenue in a simple, neutral, transparent, and stable manner. Levying taxes based on these principles limits the adverse effects on the economy and the individual. A specific excise tax at a low rate is the most efficient way to design a tax on nicotine products as it allows smokers to substitute less harmful products for cigarettes. Lawmakers should keep spillover effects in mind, because taxes on nicotine products reduces the effectiveness of excise taxes on traditional cigarettes. Taxing nicotine products with similar qualities at similar rates regardless of design is another important consideration. Volume and weight-based tax design makes this easier as well as more transparent for consumers and businesses. Finally, the tax collections should be worthwhile relative to the burdens placed on consumers and businesses. With both state and federal legislatures poised to introduce new taxes and bans, access to harm-reducing products is in the balance for adult smokers. Policymakers would do well to consider the potential of these products in combating smoking of combustible tobacco products before supporting punitive taxes or bans. [Tax Foundation]
  • It started during a February vacation to Mexico City, when we did a mad dash of apartment viewing in La Condesa, a Greenwich Village-like neighborhood bursting with restaurants and shops. Hours before flying back to New York we found a great match—a bright, three-bedroom, three-bathroom apartment of 1,500 square feet facing the lush and lively Parque México—my favorite park in my favorite neighborhood of Mexico’s colorful and chaotic capital. By the time we finally closed on the apartment in June we reaped a bonus: The 8.1 million-peso price, which had originally converted into about $430,000, was by then worth only about $360,000 after the peso’s value had crumbled during the economic fallout from the pandemic. [WSJ]
  • I bought a used 2006 BMW M5 SMG (V10) with about 30k on the clock and sold it at 90k. While it was an amazing experience and a really, REALLY fun car, it was also the biggest financial mistake of my life. The SMG was the key factor, here. Almost immediately I had problems with it, starting with the input shaft sensor, which led to all sorts of complicated problems and physical damage to the clutch, flywheel, gears, etc. There were clutch issues, sensor issues, hydraulic issues, easily $3k+ per repair. Eventually, I was hesitant to even drive it, fearing I would be stranded or be in for an expensive repair. The car also showed a lot of signs of REALLY pre-mature wear, the leather dash was cracking, the seats faded, plastics not working, leaks developing. No matter how I took care of it, I couldn’t keep up, it really was a cheaply built car (for a car that retailed for $100k in 2006). The only saving grace was it’s V10 engine and physics-bending handling/grip. I’d repair the car, get addicted, something breaks, can’t sell a broken M5. There was ALWAYS an error, there was ALWAYS something not working, and ALWAYS expensive maintenance. Doing the Oil MYSELF cost me about $150+ for 10L of oil and a filter. Decent tires were $1000 a pair (2), with the rears being replaced about every year (thanks to my driving). I tried to post it everywhere for sale, but I had trouble finding a buyer who could scrap together the money for such an expensive the guilt of sticking someone with this nightmare. It took about 3-4 years of trying to sell, driving it intermittently, before I gave up and sold it to ‘webuyanycar.’ Not to promote anybody, but I was happy with what I got and amazed they so eagerly took a company, they have my blessing. Me any my wife celebrated when the check was deposited. The guy who scanned the codes read 71 errors on the CANbus. I’m pretty sure one of my LED Halo lamps went out the day I sold it, just to spite me. [Jalopnik]
  • Hi, It has been many days since I tried to withdraw some of my investments from Coinbase amounting to around $7000. The transactions didn't go through and the money did not come to my PayPal account. I got the email from CoinBase saying that they have cancelled my transaction but did not say where the money is because I did not get and it and it doesn't reflect in my Coinbase account. I did report to coinable through an email, I received a reply saying that the case has been sent to a senior specialist but I never heard back from them. I have sent a follow-up email but no response. I am disappointed to see such a lack of customer service from an international company. $7000 is a lot for me and I want this is be resolved so that I can have my money. Please advise on this. Thanks. [r/CoinBase]
  • Instead of noting that the hundreds of black inner-city riots last year have helped drive this year’s housing boom in suburbs and small towns, the prestige press has decided to obsess over the Tulsa riot of 100 years ago (which was started by blacks but ended by whites) as the reason blacks aren’t rich today. [Sailer]
  • The Wall Street Journal reported Tuesday that SEC officials wrote Tesla twice, in 2019 and 2020, arguing that some of Mr. Musk’s tweets should have undergone the required oversight. Tesla disagreed, telling the SEC that his messages weren’t within the scope of the agreement. There was no precedent for the communications-oversight policy in financial enforcement, although regulators often prod companies to improve compliance in the wake of scandals or missteps. Restraining how a brash CEO communicates with the public and investors has only led to more feuds with Mr. Musk and Tesla, who seem to understand the leverage they have. [WSJ]

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