About a month ago. the S&P 500 was down by about 7% ytd. The Energy sector was up by about 40%

Today, in the early afternoon, the S&P is now ahead ytd by 4%, with the Energy sector up by 31%.

At the same time, memory maker Micron is up by 78% ytd. The 4 TB solid state drive my family gave me as a birthday gift last November has tripled in price to $500 and the 4 TB CF express card I bought for my video work somewhat earlier (a year?) than that for ~$200 now sells for close to $2000.

Another way of putting this:

…as a human being, a citizen and a former infantryman, I find the war against Iran deeply disturbing, if for no other reason, the apparent lack of any thought or planning put into the decision to attack by the administration, and the equally unsettling unwillingness of Congressmen of both political parties to take effective action to stop it.

…but taking that hat off and donning my stock market visor, there are other sectors of the market that are far more important. Energy is only 4% of the index; but IT makes up about a third; and the consumer is about 15%. There is an overall negative impact on the economy from the sharp rise in the oil price caused by the war, since the US imports about 6.5 million barrels of oil daily in addition to the 13.5 million or so we produce. Presumably, this implies a further contraction to spending, with most of the burden borne by families with average or below-average incomes, and in addition to the cost of the tariffs.

Another thing to keep in mind: since the war’s beginning, the US stock market is no longer lagging the rest of the world’s bourses. This is presumably because, generally lacking large oil reserves, economies in Europe and the Far East are being hurt more deeply than the US.

The Organization of Petroleum Exporting Countries was formed in 1960. It only came to prominence in the mid-1970s, however. That’s when OPEC set production quotas for member countries–and put oil prices on the long road from a selling price of $1 or so a barrel to the current $100-ish.

Late in the last century, there was plenty of discussion about “peak oil.” Back then it meant the day when global demand would exceed the ability of the world’s oil nations to supply their black gold and would result in a sharp increase in prices. Great for oil producers, not so much for consumers.

Today, though, the term has come to mean peak demand, the time when alternative energy sources begin to replace significant amounts of petroleum.

The cartel itself can be divided into two camps, nations like Saudi Arabia or the United Arab Emirates, which have oil reserves that can continue to produce for decades and decades, and other members whose reserve lives are relatively short. The former group, which has to date dominated OPEC policy making, has a strong economic interest in keeping prices low–in order to delay the shift to alternative energy sources. The latter want the highest possible price today. They have no need to plan for the decades ahead.

It seems to me that the UAE is effectively joining the second group, which implies to me that it believes we’re now at, or past, peak oil. The trigger, I’d imagine, is the US attack on Iran, whose chief long-term result may end up being underlining the attractiveness of alternative energy sources. And although it will take some time, I imagine that leaving the cartel frees it to substantially increase its production.

The two chief economic policies of the second Trump administration from its earliest days have been, as I see them:

–to use ICE to remove immigrants from the domestic workforce. This is a (dubious, for me) cultural goal, with clear and substantial negative consequences for US GDP.

–the second continues, whether framed this way or not, to be to reduce the real value of government debt through creating inflation. Foreign government holders of Treasuries have recognized this from the beginning, and have been taking the sensible course for them: they sold their exposure to the dollar quickly in currency markets and have been dribbling out the bonds bit by bit since.

The worry is that Kevin Warsh will follow administration orders to lower interest rates even though Fed professionals believe that to do so would ultimately cause prices to rise. The idea is that rates that are too low reduce the incentive to save, as well as making borrowing to spend on goods and services easier and less expensive. All this results in increased demand, which causes sellers to raise prices. An inflationary spiral begins.

History says this process feeds on itself and is very hard to stop once put in motion, without sharp increases in rates. Higher rates on new Treasury bonds decrease the value of older, lower-rate issues–which is why foreign government owners of tons of Treasuries are selling.

On the other hand, holders of fixed assets like property tend to benefit, which may be why a former real estate investor desires this outcome.

oil

For almost half a century, Iran has made the point that it would close the Strait of Hormuz in the event of an attack. It has mined waters in the area in the past. It is also a supplier of drones to Russia and a host of other parties. The global issue with closing the Strait is that about 20% of the world’s oil travels to market through it.

If news reports are accurate, however, the world doesn’t seem to have planned that well for any of this happening prior to the US attacking Iran.

My guess as to how things will play out:

–the prior consensus was that peak world oil production would happen around 2030. This is a demand phenomenon, not supply. Current events, however, suggest that we’re seeing peak oil now

–if so, the oil producing countries worst affected would be Saudi Arabia and the US, with the development of Venezuelan heavy oil pretty much a non-starter without large government subsidies

–this would also imply that the oil price will tend to drift lower, until it reaches $50? a barrel, which is where the highest cost new drilling projects will no longer be profitable

–if the current situation triggers a large move toward renewable energy, which it may well, oil could follow the path into irrelevance once trod by wood and coal. Not something I’d bet on today, but a possible eventual outcome.

annual vs. 10k, what’s the difference?

Both documents contain audited financials (btw. the first thing to do in reading either document is to make sure the auditors say that the statements give an “unqualified” opinion of their audit– i.e., that they give a “true and complete” picture of company operations. If it’s not a clean audit, the opinion will typically state “except for xyz, where…”

The annual, though, is a marketing document. It’s printed in color on glossy paper, with smiling employees and customers and products portrayed as objects of desire. And it’s ok for the annual to skip over uglier stuff, say, a product recall, or loss of market share or a mass exodus by top management (which might actually be good)…

The 10k, on the other hand, can run to hundreds of pages of small-print prose, with most often no pictures. The annual is sometimes attached–usually as an exhibit, rather than part of the official report. This is because the 10-k is SEC-mandated disclosure, and may contain things that the company doesn’t want put in neon lights for copmpetitors and you and me as investors to see.

An example:

…early in my career, when I was an oil analyst, a colleague left the firm and I took over his coverage temporarily. One of his stocks had two main assets: a very simple offshore oil refinery in the Caribbean and a contract for cheap oil from Iran. The oil ended up in the US, but the company could avoid tariffs by importing refined proeducts rather than crude.

Anyway, the stock was plunging, for no apparent reason. The just-released annual was all sunshine. My numerous calls to the company headquarters were unreturned. I finally got to speak to an employee, who said simply “Look at page 73 in the 10-k,” and hung up. I did. Buried in the middle of that page was a single, small-print statement that the Iran contract had been cancelled.

Nothing anywhere else. But the company had fulfilled its legal disclosure obligation.

This is where AI comes in. I’ve thought for some time that once AI can do the tedious task of reading 10s with at least some measure of understanding, AI users will have a significant information advantage over other market participants.

I’ve recently been using Gemini to find out about the operations of a couple of companies I’m interested in. It’s surprisingly good in getting information like the case of the offshore refinery above. Eventually, Wall Street will catch on. And, although this may be too old-fashioned, my sense is that brokers are so highly trading oriented, rather than research based, that it will take longer than one might think for them to figure this out.

Even then, the game may only shift to diagnosing hallucinations faster than the sell side does.

This is about the stock market, not necessarily about my private life or yours. Could be there’s some carryover, though.

I know I do stupid things. And my 28 years of experience as a professional equity portfolio manager have convinced me that virtually all other portfolio managers also do stupid things, and on a regular basis.

To some degree, successful investors offset the clunkers that somehow slip into their holdings by selecting winners whose strong performance more than offsets the clunkiness of the clunkers. Or the winners outnumber the losers.

Nevertheless, it’s not an accident that there’s an old saw, “Ride your winners and cut your losers.”

In actual practice, however, this is a harder thing to do than one might think.

I’m writing this because I’ve had it in my head for some time that the substantial weakness in the dollar induced by the Trump administration (minus about 15% against the euro since the inauguration), coupled with the slowdown in GDP caused by tariffs and efforts to reduce the domestic workforce, have made publicly traded firms serving US consumers cheap enough to be attractive takeover targets for foreign multinationals. This would also be a convenient way of diversifying away from the the strong AI and semiconductor overweight my portfolio has had for the past year or more.

So far this hasn’t worked. Instead, the market has spread out, as I see it, anyway, into more derivative plays on the AI theme–still tech, but component suppliers, for example.

Why multinationals have no burning desire to increase their exposure to US brand names isn’t clear to me. To state the obvious, they either think the risks are too high or that chances are good that they can buy at lower prices at some later time. Either way, they seem to be saying that we haven’t yet seen the worst of the economic damage Washington is doing to the country.

To be clear, I don’t think the overall market is seeing things quite like this. Yes, it is avoiding companies hurt by tariffs, the sharp decline in the dollar and ICE activities. But it has also rotated away from pure software companies and design firms whose physical products are made by TSMC to component firms with manufacturing both inside the US and out.