Damn, Oil is Cheap
The late, great investor Sir John Templeton often reminded us that "Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria."
John Templeton made his bones during the Great Depression, when he bought 100 shares of each of the 109 NYSE stocks, then trading for under $1 a share. He made his first fortune in the run-up to WWII. He made another by investing in Japan in 1960. But he became a billionaire by pioneering the mutual fund industry.
In other words, he was a classic contrarian investor with a good eye for finding a bottom and seeing the future.
Zig When the Market Zags
Here at Energy and Capital, we try to be good contrarians as well. Just yesterday, I had the entire staff gather around the water cooler and take the contrarian oath: “I, [say your name], will always think for myself and never blindly do what the crowd is doing...”
The biggest problem most of us have with being contrarian investors is that contrarians move too soon. The age-old question is how do you know when to buy or sell in order to maximize your gains?
The classic way is to simply buy low and wait.
I am highly confident that oil will be higher five years from now and any buyer now will be justly rewarded. That said, I would rather buy at $12 than at $27.
One way to determine when to buy is to know where we are in the market cycle.
Here is a nice chart sizing up the stages of a bull and bear market:
Right now, oil is in a falling or bear market. You will notice that a bear market is similar to the five stages of grief that we all learned in our Psych 101 class. That is: denial, anger, bargaining, depression, and acceptance.
After almost two years of falling oil prices, I would guess we are in the late stages of the bargaining period — somewhere in capitulation and before despair.
Whoa, Despair & Agony
Most of those who have invested in oil stocks have given up. Those still holding think rightly that it is too late to sell.
Still, the down market has some time left.
This morning, WTI was trading at $26.71.
Two years ago, when oil was trading in the $75–$100 range, I wrote in this space that it was going to $33 — few believed me.
But that's how markets work. They have a tendency to overshoot both on the high side and on the low.
So is it time to get back in?
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There are starting to be early signs of a bottom, but we are not there yet.
Inventory, for example, remains well above its five-year high.
But on the Flip Side...
More than 40 oil and gas developers have already gone bankrupt in the United States. And you need corporate corpses to mark a bottom.
The Wall Street Journal is predicting that one-third to one-half of all U.S. oil companies will go bankrupt by the end of 2017.
The report claims that North American oil and gas companies are losing $2 billion every week at current prices. And yet they have no choice but to keep drilling in order to keep cash flow going so that they can pay their bank loans.
At some point, the wave of defaults will overwhelm the sector and slow production. It hasn't happened yet. EIA said that oil production is up 1% in 2016 over last year.
In other words, there is no rush to dive back in. You know it's a bottom when people don't even want to talk about the possibility of buying. Then you wait until the downtrend is broken, a technical bottom is put in, extreme value is there, and the smart money comes back.
Kinda like what is going on in the gold sector right now. More on that next week.
All the best,
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.
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