Consumers to Gas Prices: F*ck Off
06/20/2022
With energy stocks mooning, I’m often asked now if it’s too late to hop on the bandwagon.
Short, unsatisfying answer: both yes and no.
Yes, because at the end of the day, oil producers are pretty shitty businesses that move in lockstep with the broader economy. But also no, because even a recession hits prices, the long-run picture is of a supply deficit. Don’t worry, though—there’s a solution to this issue.
As much as I think that we’re in for structurally higher oil prices, I’m not an oil cultist. If there’s a teachable moment in the ongoing crypto implosion, it’s that investment =/= religion.
Peace out.
Mike
Featured Article
Consumers to Gas Prices: F*ck Off
by Mike, Tycoonist Creator
Energy
Data from the Energy Information Administration (EIA) shows that U.S. gasoline demand slipped has slipped slightly this month, a sign that “demand destruction” could be setting in for oil.
Analysis: Many recessions have been preceded by a rapid rise in oil prices, including in the early-1970s, the early-1990s, and the late-2000s. Skyrocketing energy prices = crappy economic growth = people use less energy = lower energy prices.
As the old saying goes, the cure for high oil prices is high oil prices.
Oil Stocks: Although short-term gains can be made, ultimately commodity producers aren’t great inflation investments. Sooner or later, they will need to replace equipment and reserves at much higher prices… if a sudden downturn doesn’t get them first.
Long-term: As we’ve discussed numerous times over the last year, investor capital has fled oil, and capital expenditures are down sharply. Despite any short-term oil price decline, neither of those fundamental issues have been fixed.
Look to oil royalty companies for a less risky way to play oil prices over the long run.
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DeFi Bubble Implodes
Cryptocurrency
Ether and Bitcoin have crashed. Prominent crypto lender Celsius has frozen withdrawals. “Stablecoins” are looking more and more like they might be a giant fraud. According to crypto news site Oracle Hawk, 75% of cryptocurrencies are down 90% from their highs.
For crypto bros, it’s a shock… but not so much for Tycoonist readers.
Explanation: Recall that in December 2021, we discussed how the DeFi bubble was fueling the “greatest speculative mania in history.” Bogus “yields” and unlimited leverage made possible by DeFi schemes attracted huge investor inflows in excess of $100B, likely driving most of the crypto price action since 2020.
The implosion of this leverage-powered bubble shows that the only real use case for crypto is/was buying more crypto.
The scheme works as long as cryptocurrency prices keep going up (the definition of a pyramid scheme, we might add). But DeFi platforms can liquidate crypto posted as collateral in the event of a major decline, and borrowers have been forced to unwind their positions.
Call of Duty 2: Merger Arbitrage
Stocks
Merger arbitrage spreads are blowing up.
As the stock market goes into the toilet, investors are fretting that many M&A deals could get blown up. A number of interesting opportunities have arisen with stocks trading meaningfully below their acquisition prices.
Case in Point: Activision Blizzard ($ATVI) is be acquired by Microsoft for $95 in a deal set to close next year. However, the shares trade for $74.71 as of Friday’s close. That represents a 27% gain if the deal goes through as planned.
Warren Buffett is betting $5.6B that Microsoft closes the deal, telling shareholders in May that although he doesn’t know what the Feds will do, he knows that Microsoft has the money.
Other announced deals trading at discounts include Citrix ($CTXS), MoneyGram ($MGI), and Nielsen Holdings ($NLSN).
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