WASHINGTON, August 30, 2017 – It’s been hard to read the market in August, due largely to the relentless news cycle, which has been pitting fake news vs. hype vs. an ever-morphing narrative that’s usually anti-Trump but sometimes isn’t. Add to this one genuine, epic disaster that can’t be faked – the endless clobbering of Houston, Texas by Hurricane (now tropical storm) Harvey – and we get a stock market that doesn’t really know where to go.
Please note, we don’t intend to minimize the ongoing physical and human disaster in Houston, where this writer’s brother-in-law owns and operates two businesses, BTW. But we try to stick to stocks and bonds in this column in the hopes of sharing our nearly 40 years of trading and investing experience with our readers.
For that reason, we do have to get into politics in this column, as the political climate in Washington as well as government action, inaction, rules, regulations – you name it – so heavily influence the direction of stocks these days.
From time to time, Mother Nature also intervenes in the market. In the case of Harvey, nature has intervened quite nastily in Houston, where the disaster is having and will continue to have a major effect on energy-related U.S. corporations, insurers, DIY emporiums, consumers and the economy itself over the next few months at least.
Houston has grown over the decades from being a swampy nonentity close to the Gulf of Mexico to its current status as America’s 4th largest city. In the process, it’s become a major international port. Perhaps even more importantly, it’s effectively the center of a vast Texas oil- and gas-centric energy hub stretching roughly from Corpus Christi through Galveston, Houston and Port Arthur before turning east and encompassing much of coastal Louisiana as well.
America’s sadly decayed Rust Belt, led by its once-massive and vital cities – from Milwaukee and Chicago, to Gary and Detroit, to Toledo and Cleveland, to Erie and Buffalo, plus Pittsburgh to the south – was once the vital job and manufacturing hub of America. When you needed stuff, that was where it was made. But as those jobs were shipped to China and elsewhere over the past few decades by globalists and industrialists, that region vastly declined in national importance and influence, at least until it reasserted itself in the 2016 presidential contest.
Arguably, the vitality of the Rust Belt has been supplanted by the increasing importance of fossil fuel-based energy, both in the U.S. and around the world. While energy “hubs” have been growing in Appalachia and part of the old Rust Belt (the Marcellus and Utica shale formations) and the Bakken shale formation more or less centered in the Dakotas, the biggest and easiest oil and gas strikes have been occurring mainly in Texas and New Mexico (Eagle Ford) with contiguous activities in nearby Louisiana and Oklahoma. The capital city for America’s energy revolution, including the barely-born but already growing export of liquefied natural gas, is Houston, Texas.
That’s why we’ve been seeing massive fluctuations in energy-related stocks and fairly substantial fluctuations in in the price of West Texas International (WTI) and UK Brent crude beginning late last week and continuing as you read this. Short term, refineries (particularly to the extent they can stay open or restart in Houston) will get a boost as they’ll be able to sell their suddenly fairly scarce output at significantly higher prices.
That should be good for refineries and refinery stocks, particularly those companies whose Houston area facilities can either remain open or re-open quickly. It should be even better for companies whose refineries are mostly housed elsewhere than the Gulf Coast.
For example, one of our old favorites, Calumet (symbol: CLMT) – whose stock was battered nearly into penny-stock territory last year due to poor investment decisions and just plain bad luck – has been on a tear for the last two months and got another big boost today. That’s largely because it’s been refocusing its refinery output more on its boutique refinery products rather than gasoline. But it’s also because their modest number of refining facilities live well outside of the East Texas region.
Our modest position in CLMT is up an astonishing 40 percent in just the last couple of months. Stock picking skill? Maybe. But who could have known what nature was gone to deal to companies involved in the oil patch? Sometimes an investment win is just plain dumb luck.
Another surprise is our position in major refiner, Valero (VLO). Valero has a substantial presence in the Houston area. But it’s managed to keep at least one major refinery open throughout the storm, and will likely go online not long after what’s left of Harvey proceeds northeast into parts of Appalachia and beyond. The stock has been up, down and sideways depending on reports and rumors, but the general direction is up.
On the other hand, many pipelines are temporarily shut down, meaning that pipeline companies – often in the form of high-dividend paying master limited partnerships (MLPs) – are effectively frozen in time, unable to safely deliver its customers’ crude oil to Houston area refineries lest something go awry during the stubbornly ongoing storm, leaving them with costly cleanup and bad PR that will be flogged by left wing anti-fossil fuel agitators.
These stocks are not faring too well right now. And neither are those of the drilling and exploration companies that have, for now, been forced to shut in wells and cease new drilling activities until some time in the future when it’s safe to reopen these sites again and when those blocked pipelines reopen once again for business.
Business effects spiral out from here. Property-casualty insurers, for example will get clobbered short term, particularly if they haven’t offloaded adequate risk to that stout-hearted cadre of reinsurance companies. Such insurers, ranging from the Travelers (TRV) to Warren Buffett-owned Geico (which lives somewhere inside Berkshire Hathaway [BRK/A and BRK/B]) have been clobbered by investors in anticipation of large losses stemming from Harvey.
On the other hand, DIY hardware mega-outlets like Home Depot (HD) and Lowe’s (LOW) will be generating massive amounts of business as Houston and Louisiana area homeowners and companies begin the epic job of cleaning up, restoring and rebuilding. They’ll be winners here, at least for a quarter or two.
So the market game right now has been centered on finding the winners and the losers in the Houston/East Texas mega-disaster. The best bargains right now are likely to be found in companies that may have been grossly oversold during the last few days of panic selling, particularly as it involves the oil patch. But investors are still taking a chance by picking some of these stocks up. There could be more problems beneath the business surface as experts assess the current and future damage, which could cause further, and perhaps violent, weakness in these shares.
We’re currently pretty heavily invested in the energy sector for a variety of reasons, so we’ll keep you posted on our adventures. But stock picking, particularly from now through a week or two after Labor Day, is going to strongly resemble Mr. Market’s variation on Russian Roulette.
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