Thursday, January 26, 2023

Thursday Night Links

  • The S&P 500 needs a rally of 33% to recover last year’s losses in real (inflation-adjusted) terms, the Nasdaq an intimidating 61%, and ARKK, Cathie Wood’s ETF, as a proxy for aggressive growth stocks, would need to triple! Some of the very largest cap and most reliable growth names – the likes of Amazon, Alphabet, and Meta, the wonder companies of the past decade – have to rise 70% to 150% to regain their 2021 peaks. And the damage in a single year to broadly diversified stock/bond portfolios is the worst in nearly a century. At the beginning of last year, in “Let the Wild Rumpus Begin,” we predicted that total losses across the three major asset classes of stocks, bonds, and real estate could reach $35 trillion in the U.S. alone, including $17 trillion in stocks and $6 trillion in bonds. Well, so far, with real estate still making up its mind, losses in U.S. stocks have been over $10 trillion and in bonds over $5 trillion, in addition to an unexpectedly large loss of $2 trillion in cryptocurrency. Certainly, a decent chunk of the losses we predicted have already occurred, a down payment if you will. [GMO]
  • Simply put, this means that only one out of every three dollars (held by institutions) deviates from a cap-weighted benchmark. So, while we have previously estimated passive “market share” at 40% or 30% in Figures 2 and 3, this view provocatively suggests that the US equity market might actually be two-thirds passive. [Man Institute
  • Now let's turn to the macro outlook where everything I see today points towards continued oil and gas tightness. On the supply side, in the US, an increased spend of almost 50% and activity growth of nearly 30% yielded a production increase of about 5%. Given the increased spend required to grow and replace production, I expect activity to remain strong and service intensity to increase through 2023. I see the same supply side challenges in the international markets. One indicator being that despite OPEC's 2022 production quotas, several members did not meet their goals. On the demand side, we saw the resilience of oil and gas demand throughout 2022, even as central banks raised interest rates to combat inflation. I expect oil and gas demand to remain strong. As we start 2023, I also expect China's reopening to further increase demand. It's clear to me that oil and gas is in short supply and only multiple years of increased investment in both stemming declines and reserve additions will solve short supply. I believe these investments will drive demand for oilfield services for the next several years. The unique feature of this up cycle, as I see it, is the investor driven return discipline by both operators and service companies, which I expect drives a longer duration cycle and translates into years of increasing demand for Halliburton services. [Halliburton Company]
  • Of roughly 600 rigs worldwide that were available to lease for offshore projects in December 2022, about 90% were working or under contract to do so, according to research firm Westwood Global Energy Group. That was up from roughly 63% five years earlier. Some beneficiaries of the new offshore drilling boom are companies such as Transocean Ltd., Valaris Ltd. and Noble Corp. that own and staff the rigs, the most coveted of which are massive drillships such as Titan that are prized for their ability to work deftly in deep waters. These contractors are now charging the oil companies that lease drillships more than $400,000 a day, up from around $300,000 early last year and less than $200,000 two years ago. Analysts are forecasting rates will exceed $500,000 next year. [WSJ]
  • One major shale producer, Pioneer Natural Resources, targeted 16 to 21 per cent annual production growth in 2014. As one broker noted back in 2015: “In a $75-80 oil world, PXD (Pioneer Natural Resources) can grow close to 20% for a decade and, hence, we view it as a large-cap must-own stock exiting this cycle, whenever you believe that is. We believe that clear bifurcation of US winners will attract capital and prevent PXD from getting ‘cheap’ on consensus metrics in a world where few assets are cheap.” As a result of this growth profile, the stock typically traded between 20x and 40x EPS during the shale boom. In our opinion, that sounds like the current pitch for software, as Gartner estimates >20 per cent cloud software growth in 2023 despite overall IT spending only growing 5 per cent. As investor enthusiasm increased, companies created new metrics such as ‘lifetime value to customer acquisition costs’ (LTV to CAC) in the case of software and ‘oil well IRRs’ in the case of US shale. Both pointed to stellar unit economics and non-GAAP metrics to distract from the lack of cash flow and profitability at the company level. Investors bought into the narrative, believing that profitability would inevitably come once companies scaled up. [GQG Partners]
  • E-cigarette maker Juul Labs Inc is in early talks with three tobacco giants for a potential sale, strategic investment, licensing or distribution deal, the Wall Street Journal reported on Wednesday, citing people familiar with the matter. Juul, which was reportedly looking to file for Chapter 11 bankruptcy, has had separate discussions with Philip Morris International Inc, Japan Tobacco Group and Altria Group Inc, the report said. A deal is not imminent and the discussions may not result in a sale or partnership, the people told the Journal. The company, partly owned by Marlboro maker Altria, declined to comment. Juul reached late-stage talks with Altria last fall on a potential deal to sell its international business or license its U.S. intellectual property but the talks fell apart in September due to a potential bankruptcy filing, people familiar with the discussions told the Journal. The company has resumed discussions with Altria, the people added. In September, Altria exercised the option to be released from its non-compete deal with Juul almost four years after buying a 35% stake in the company. The once red-hot vaping company is currently facing thousands of lawsuits filed across the United States over claims that it deceptively marketed e-cigarettes and contributed to rising tobacco use amongst youth. Last week, Juul secured preliminary court approval of a $255 million settlement resolving the claims by consumers. Juul said in July it was in the early stages of exploring options including financing alternatives amid the lawsuits. But later in November, the company secured an investment from some of its early investors to stay in business. The U.S. Food and Drug Administration (FDA) in June briefly banned Juul's e-cigarettes, though it later put the order on hold following an appeal. [WSJ]
  • On January 26, FDA authorized the marketing of three new tobacco-flavored heated tobacco products included in Philip Morris Products S.A.’s supplemental premarket tobacco product applications (PMTAs). The products receiving marketing granted orders are Marlboro Sienna HeatSticks, Marlboro Bronze HeatSticks, and Marlboro Amber HeatSticks. The three HeatSticks products are “heated tobacco products” (HTPs) used with the IQOS device, an electronic device that heats tobacco-filled sticks wrapped in paper to generate a nicotine-containing aerosol. Based on FDA’s review of the supplemental PMTAs, the agency determined that the marketing of these products should be authorized because, among other things, the net population-level benefits to adult smokers outweigh the risks to youth. [FDA]
  • So we share the view that the DOE numbers look low to us and we would expect them to be corrected going forward. Our wholesale numbers are trending pretty high. So gasoline volumes through our wholesale channel are about 12% above where they were pre-pandemic levels, which we don't necessarily think is representative of the broader markets either. For us, I think the number which we focus on are more around the mobility data, which is kind of showing vehicle miles traveled flat to slightly above where it was pre-pandemic levels with some improvements in the efficiency of the fleet, it would say gasoline demand down maybe in the 2% range is what we kind of believe is most likely. [Valero Energy Corp]

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