Need to Know

‘We’re not in there for the next 20%, we’re in there for the next 300%.’ Two veteran managers on a neglected asset.

Critical information for the U.S. trading day

Oil-related companies have been neglected and their time is coming, say two veteran managers.

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Stocks are tilting lower to kick off Tuesday trading as a looming Fed meeting, auto strikes and now surging oil prices weigh over investors.

Our call of the day comes from a pair of veteran money managers who see big volatility coming and offer ideas on how to protect from it. They are Harris “Kuppy” Kupperman, founder and CIO of Praetorian Capital, and Louis-Vincent Gave, CEO of Gavekal Research, who jointly spoke to financial platform Real Vision in an interview that aired on Monday.

They both weigh in on how easy monetary policy and generous fiscal policies are going to work against markets. “Everything is priced on the 10 year (Treasury yield), and it keeps fighting and bouncing and seems to have broken through 4%,” said Kupperman, who warns 6% is possible, at which point “most risk assets blow up.”

How are they investing? Kupperman says he’s bullish on hard assets that are below the costs of producing them, and which have a lot of cash flow or which he thinks will have lots in the next year or two.

“We own a lot of uranium, we own a lot of offshore energy, we own a bunch of land. None of this stuff, particularly, needs the economy to function. I don’t have a strong view of what happens with GDP, I think the fiscal stays stimulative, but I can see a world where the 10-year blows up and fiscal isn’t enough. In [2008], a bunch of subprime things blew up and the whole financial system froze, and it didn’t matter that oil was at $140, because the whole system fell apart,” he said.

Gave notes energy has bucked the Iran-Saudi deal, Middle East peace, and growth worries from China, Europe and now the U.S. over the past six months. “Everything should have pointed toward energy taking a breather, and instead, it continues to grind higher. I love something that contradicts common belief and I particularly like energy for another reason. I tend to believe that energy today is the ultimate anti-fragile asset,” he said.

He says over the past 35 years, investors could buy the stocks they wanted and reduce the volatility with U.S. Treasurys, which would protect them from any big shocks to the system, but that hasn’t worked for 2.5 years.

“So I think we’re moving into a world where energy is the new anti-fragile asset class, it’s the new thing that actually diversifies your portfolio. Meanwhile nobody owns it, because it’s a very small part of benchmarks because of ESG constraints because of a terrible decade between 2013 an 2021, lots of reason to not own it,” he said.

Read: What the ‘mysterious shrinking’ of Wall Street’s fear gauge means for stocks, according to DataTrek

Soon, lots of quantitative models are going to start recognizing energy investments are a good diversifier for portfolios, says Gave. But “guys like Kuppy and myself, guys who are almost religious about it, we’re not in there for the next 20%, we’re in there for the next 300%,” he adds.

Kuppy says the energy investments he likes fit his criteria of really beaten down investments for decades. “Think of the inflation. We’re not back anywhere near where we were the first half last decade in terms of spending, but oil-field services everything costs twice as much,” he said.

He owns energy services companies, because they are trading dirt cheap when it comes to equipment replacement costs, with no debt and lots of cash.

“It’s gonna be volatile but Louis is right…I’m not playing for the next 20%. These things get overbought and oversold, everyone gets tossed off their scent. You’d be amazed at how many people bought these things and sold and bought and sold and made no money while they keep going up. You have to just have a view and ride.”

Opinion:?Oil stocks could outshine clean-energy shares under this climate change scenario

The markets

Stocks are shifting lower and Treasury yields are rising, with the focus on oil prices CL BRN00, which continue to surge. Chevron CEO Mike Wirth sees oil likely hitting $100 a barrel. The dollar , meanwhile, is under pressure. German bund yields are near a 12-year high after an ECB official said rates will need to stay at record levels for an extended time.

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The buzz

United Auto Workers President Shawn Fain has given a deadline of Friday at noon Eastern for additional strikes if that if substantial progress toward a deal with the Big Three automakers — Ford F, General Motors GM and Stellantis STLA.

Grocery-delivery app Instacart CART will make its stock debut Tuesday with a valuation of around $10 billion, after setting its IPO price at $30 a share, the upper end of its expected range.

AutoZone AZO shares are slipping after the auto parts retailer reported forecast-beating earnings, but its domestic commercial business fell short. This week will also bring us earnings from General Mills GIS and FedEx FDX (see preview).

Housing starts for August fell 11.3% to the lowest level since June 2020, while building permits rose 6.9% to the highest since Oct. 2022. The Organization of Economic Cooperation and Development lifted its forecast for global growth in 2023, but cut its outlook for economic activity in 2024.

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The chart

The past several years have been marked by a “remarkable correlation” in global bond yields, excluding Japan, Don Rissmiller, chief economist at Strategas and research analyst Brandon Fontaine, told clients in a note on Monday. Their question is whether labor markets could start doing the same, and offer up these charts.

“The basic idea here is that if we see labor markets start to crack abroad where we’ve seen policy tighten (which is true across many countries), we would expect the early signs of U.S. labor market cracks (temp employment rolling over, etc) to continue and deepen. This scenario would lend support to the idea that tighter policy is working, though with a longer lag. Policies & bond markets have been synchronized. Now the lagged effects of those policies on the labor market may also be synchronized … that’s what we’re staying tuned for,” Rissmiller said in emailed comments.

Top tickers

These were the top searched stock-market tickers on MarketWatch as of 6 a.m.:

TSLA Tesla
NKLA Nikola
AMC AMC Entertainment
TTOO T2 Biosystems
NVDA Nvidia
AAPL Apple
GME GameStop
MULN Mullen Automotive
ARM Arm Holdings

Random reads

Researchers may have developed the “holy grail” replacement for less earth friendly palm oil.

Thieves in Europe are targeting “liquid gold,” that is, olive oil.

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