Opportunity in Overvaluation

The world changes fast. Fifteen years ago the energy future of U.S. was bleak as it appeared the world was going to be short of energy: Stateside conventional natural gas production was in trouble along with peak oil. But markets work: Horizontal drilling combined with hydraulic fracking, while creating a glut devastating to the producers, has been remarkably outstanding for the rest of society. “The United States is about to begin a new era as a net energy exporter…The change will occur in 2020, according to the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2019 (AEO2019), released in January 2019. The country will maintain that status through 2050, AEO2019 says.” SME

At some point we’ll want to revisit the energy sector as investors, and owning the lowest cost producer(s) in the lowest cost basin(s) would provide the best risk adjusted returns. AAPG. However, be aware “Analysts believe that 2018 will go down as the best year for internal combustion vehicle sales ever, predicting a downturn in demand for the mode of propulsion starting in 2019.” The Drive

Meanwhile, it’s the credit bubble which will tell the tale. Everything you could possible want to know and more about the U.S. federal deficit in chart form from The Manhattan Institute.  Alasdair Macleod asks if you got gold?

“…MMT’s central tenets will become increasingly influential among the coming generation of voters and investors.” Popular Delusions

Grant’s: “Mattel creditors are lending to a company already loaded with leverage, as net debt of $3.2 billion stands at 7.7 times consensus 2019 adjusted Ebitda. Operating income of $125 million in the 12 months ended Sept. 30 failed to cover the $190 million in interest expense incurred over that period.” How does this end well?

Generally speaking, asset prices are outrageous: The Corporate Share Count, Valuations, and Trend by Steve Blumenthal.

Today’s narrow market favors growth over value to an extreme, yet, “By steadily rebalancing against the market’s most extravagant bets, RAFI strategies are positioned to recoup accumulated shortfall at the cycle’s turn, delivering meaningful long-term value-add.” Research Affiliates

‘Stock pickers are now feeling like an endangered species. Just one-tenth of the US equity market’s trading volumes now comes from fundamental stock investors, with most of the rest coming from index derivatives and passive funds.’ FT

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Institutional Investor: “Passive investors may unwittingly be taking a huge active bet on the most overvalued sector of the market, according to new research.” At this time Active Managers Just Can’t Win the Loser’s Game by John Authors. Meanwhile, “(F)unds are dumping stock so they can qualify as ESG compliant for 2020. It’s a bloodbath out there.” Kruppy nails the opportunity.

“When I first entered the securities industry in 1979 (yikes!), paper assets were very cheap, and about to get cheaper, while hard assets were quite pricy and poised to get even pricier. It was a great time to be gradually shifting out of oil, gold, silver, copper, farmland, et al, and be moving into stocks and bonds. Of course, almost no one wanted to do so. Today, the exact opposite is true—buying and holding a passive balanced portfolio of US stocks and bonds—heavily tilted toward stocks these days—is assumed to be all an investor needs to do to generate superior returns. Based on the way the economy and politics are trending in the US these days, that’s likely to be just as return-crushing as bailing on stocks and bonds was forty years ago.” Evergreen Gavekal

Evergreen Gavekal has commentary on the MLP’s for investors searching for yield.

“An important ratio of commodity versus equity valuations just reached a fresh 50-year low resembling two prior significant cyclical US stock market peaks in 1972 and 2000.” Crescat Capital

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In spite of the poor stock market returns expected over the next decade, many are the opportunities.

Is it really December? The Independent Stock Analysis portfolio begins 1-1-2020.