Eruption: Markets Explode Higher Despite Hurricane, Debates, COVID, Unemployment
From the moment I first tuned into MTV as a child in the early 1980’s, I was hooked for life.
There was something about bringing a visual dimension into the music I loved that made it all the more memorable.
But even with all the amazing records put out during that period – by Talking Heads, The Cars, REM, Prince, and countless others – there was always one band that was just a little more memorable than the others.
So when we lost the great Eddie van Halen – on Tuesday at the far too-young age of 65 – it occurred to me that the world just became a little more boring as a result.
Literally nothing about him – from his randomly striped black, white and red “Frankenstein” guitar to the finger tapping technique he popularized – was conventional. And yet van Halen, or “EVH” to so many fans, approached his entire contrarian career with the conviction that can only come from true creative vision.
Examples of his contrarian streak abound. For instance, when criticized by his own legendary frontman David Lee Roth for writing the synthesizer-driven song “Jump” instead of another vehicle for guitar heroism, he responded “if I want to play a tuba or Bavarian cheese whistle, I will do it.”
Although that level of conviction famously gave rise to conflict between them, Roth also attributed their success to that tension, and generally defended the creative decisions of his former bandmate. Responding to Howard Stern’s assessment of Van Halen’s personality as “dull,” Roth said, “No, no, no. This is a world of specialization, and what he specializes in, he’s the best at, period.”
And on Marc Maron’s podcast just last year, he described both EVH and his brother Alex as having “craft…man, did they have artisanal super-small-batch scotch craft.”
I couldn’t agree more.
After all, I spent most of my teenage years chasing down that craft, headphones on, listening to his seminal guitar solo and tapping extravaganza “Eruption” in short bursts so that I could transcribe it note for note in tiny little pieces.
Although I never quite nailed the whole thing, going through the process managed to teach me a craft of my own that would serve me for the rest of my life.
How to learn.
And for that, I’m not sure I could ever thank him enough.
So long Eddie… I’ll miss ya.
From Eruption to Twister
What I learned about crude oil markets this week is that they’re not quite ready to capitulate in the same way they did back in April.
West Texas Intermediate prices rallied 3% to once again settle above US$41 per barrel as Hurricane Delta becomes the 5th named rotational storm to bear down on the Gulf Coast this year after Hanna, Isaias, Laura, and Sally.
That brings oil markets fairly close to the highs from September 18th, a level which is essentially serving as near-term resistance.
Source: Bloomberg
Hurricane Delta’s path looks a lot like Laura’s, however, which pretty much steered clear of major refineries and offshore drilling platforms.
Source: Bloomberg
And if you recall, oil markets posted a decisive 20% pullback once the lack of damage to oil infrastructure was assessed and vacation season drew to a close.
Source: Bloomberg
Moreover, the storage situation has not materially improved since we last checked in. Although off their highest levels, we remain at all-time seasonal highs.
Source: Bloomberg
So although storm surge may wreak some near-term havoc, we’ve seen this play out before. As such, the playbook remains the same here – a speculative ½ stake in ProShares UltraShort Bloomberg Crude Oil (NYSEArca: SCO) at current levels, and a second one if oil prices reach previous highs around $43 per barrel.
Despite Headwinds, Some Markets Getting “’Unchained”
Despite another contentious debate – although certainly a more civil one – markets have amazingly shaken off not just terrible unemployment numbers and the SCOTUS-related volatility, but also somehow managed to give the Heisman treatment to the President’s own COVID diagnosis.
And with today’s close, the S&P 500 now sits above its prior September resistance level and appears ready to break back out.
Source: Bloomberg
So while I still believe what I wrote on Tuesday – that without stimulus, economic conditions in the US are going to get much worse – we also can’t ignore the near-term trend.
The factor driving a big portion of this move is that the market has started to figure out a Biden win isn’t necessarily negative. In fact, it’s probably a net positive given that stimulus is likely to increase under a Democratic regime.
I think Democrats are also more likely to spend in the ways we need the most. Or as I wrote back in June…
We desperately need to rebuild our airports, roads, and bridges to restore our transportation system’s efficiency.
We desperately need advanced high-speed rail, which would allow citizens access to a more diversified job market while still maintaining the cost of living that is right for them and would also give businesses access to a wider pool of applicants.
We desperately need to solve the energy storage problem and perform a top-down redesign of our nation’s power grid – allowing consumers with distributed solar installments greater access to wholesale power markets, thereby incentivizing wider adoption rates.
We desperately need faster wireless connectivity, faster cloud infrastructure, more powerful software, and to construct a more sophisticated, personalized, efficient, and affordable health care system.
That means infrastructure, green energy, health care, and technology.
And sure enough, when we take a look at the solar energy sector, we see 16%, 25%, even over 60% gains in the top names… just over the last month.
Source: Bloomberg
Our position in Brookfield Renewable Partners (NYSE: BEP) is no exception, as it’s up 30% relative to the entry price back in July. But that rally appears to be losing some steam and taking profits here to roll into another position looks like the right thing to do.
Source: Bloomberg
Taking a quick look at sectoral ETF’s on a rotational basis (relative out-performers are in the top half of the graph), it looks like Biden’s increasing lead in the polls is also starting to cause a rotation into value stocks that benefit from a larger stimulus package. In this case, that means beaten-down names in banking (KRE, KBE), insurance (KIE), and telecommunications (XTL.)
Source: Bloomberg
I’ll take a look at those holdings over the weekend and see which companies comprise the largest weighting, with the eye to jump into one or more of those names on Tuesday.
And then maybe we can hitch a ride on one of these “Unchained” markets.
All the best,
Matt Warder
