JACK FARLEY: Welcome to the Daily Briefing. I'm Jack Farley. It is Wednesday, June 23. Today the S&P ended up slightly in the red, but the NASDAQ eked out yet another gain ending on an all-time high. Samuel, what are you looking at?
SAMUEL BURKE: Well, Jack, we're still under major COVID restrictions here in Europe, but the travel industry is pushing back, and so, we may finally be able to get on planes coming in August.
JACK FARLEY: I'm glad to hear that. Oil today, speaking of travel, rallies on news of dwindling stockpiles with energy stocks going up, up, up.
SAMUEL BURKE: And speaking of surges, Bitcoin up more than 18% after dipping below $30,000.
JACK FARLEY: And we are joined by Real Vision's Weston Nakamura. Weston, how are you making sense of the action we saw today in global equities? I don't think we can hear you. Samuel, can you hear Weston?
SAMUEL BURKE: No, I don't hear Weston. We'll give them a minute to unmute. I just have to tell you. It's just amazing to me when you look at what's happened since last week, since the Fed and the dot plots, it was fascinating to think we're basically where we were before that last Fed meeting, that things have pretty much come full circle, the market new highs and so really, you can just delete the past few days in a sense, at least in the short term, certainly not in the medium or long term I'm sure you would say, Weston.
WESTON NAKAMURA: Yeah, well, it would seem like you could almost delete the last week, but it's notable to point out that on Monday and Tuesday, the Nikkei average in Japan had an absolutely insane whipsaw two days. We had 4% down on Monday, and then we had a 3.5% recovery on Tuesday. Today, it's as if nothing ever happened. That was all in reaction to the Fed Powell and the BOJ on Friday. There's a lot of hedge fund positioning unwinding, but it's very interesting to see this regional dispersion of indices that are no longer trading, glued together anymore.
JACK FARLEY: Weston, I want to ask you, to Samuel's point about how there's been so much topsy turvy action, it's very hard to tell what regime we're in. Are we in a regime where rates are rising, and energy stocks are doing well or where they're falling, and tech stocks are leading the charge? Every day, it's you're on and you're off and I think there's nothing more typifies that more than today, I saw earlier today, the two stocks that were leading the most in the S&P 500 were Occidental Petroleum, and Tesla Motors and those stocks have almost nothing to do with them.
You can't say, oh, it was the electric vehicle stocks, you can't say it was the oil stock today. It really was just a risk-on sentiment and you really can't tell where's the baton going passed you in terms of leadership within US equities? What are you making sense of this? How are you making sense of this, Weston?
WESTON NAKAMURA: I think you summed it up perfectly. I think right now, there's just this tug between inflation and transitory, how transitory is transitory, growth versus value. Then you have that like regionally like I was just saying with Japan versus let's say, UK, for example, Samuel, you speak on that as well, Europe. You have DM indices hitting an all-time record high, Japan just not all participating his top months ago. Then you see within sectors and then you see within single stocks as well a lot of dispersion.
What I'm really seeing is just I'm hoping we're finally in a phase in which we're actually not just in like 2020, where you can just go long anything, you can actually do some security selection and generate alpha based on, I guess, fundamentals.
JACK FARLEY: A stock picker's market, perhaps. Samuel, I have a question for you. While investors in the US market were pretty indecisive, in Europe, they definitely were decisive to the negative with the CAC 40 down 0.91%, the FTSE down 22 basis points and the DAX down 1.115%. How are you making sense of the weakness we saw in Europe?
SAMUEL BURKE: Well, a lot of it has to do with the fact that even though vaccinations have done so well here in the United Kingdom, that we're still under a form of lockdown. It's hard to believe that the vaccination rate is higher here in the UK than in the US and this is what governments have been pushing for, yet we can't even step foot and go on an airplane to most places and this is really keeping Europe in a lock hold. The UK, Brits going abroad to places like Spain, Portugal and Greece. It's really the lifeblood of the economy here in the summer months.
Finally, the travel industry is starting to say we've had enough. There's not enough clarity, there's not enough transparency to what the government is doing, and other countries are getting fed up with what the UK is doing. We finally had a window that says that maybe in August, people like me living here in the UK, will be able to get on airplanes and revive the rest of the economy in Europe.
I know there's been a lot of buildup in stocks during the past few months, but I'm curious to see what you thin, Weston, if this is already priced into the market, or you think that there will be more value unlocked as more and more people are able to get on easy jet flights, which is the equivalent to Southwest Airlines in the United States, and be able to take our summer holidays, as they say here to Spain, Portugal and those other beach countries? I really feel like that's what's holding the market back here in spite of that vaccine rates.
WESTON NAKAMURA: Yeah, but then again, like I said, Europe as a whole, Euro Stoxx is not really doing too bad. Certainly, the UK is certainly outperforming more than I had originally thought. My concern really is actually on the vaccine front would be the Olympics in Japan coming up, in which you have a very, very low vaccination rates, sub-10% for Japan, and we have basically the entire world about to congregate here in about four weeks. That's going to be messy.
JACK FARLEY: Yeah, Weston, to what do you attribute to the exceedingly low rate of vaccination in Japan? Earlier, we put up a chart what Samuel was speaking of the rates of vaccination with Israel in the lead, United Kingdom just edging out the US. I don't even think Japan showed up on that chart. Why are people in Japan not getting vaccinated, and what risks does this pose as the Summer Olympics looms upon us?
WESTON NAKAMURA: Severe underpriced risk. There are many, many reasons that one could point to but at this point, it's just very inexplicable. The government knows that there's a vaccine, they just approved of, I think, Moderna last week. This has been around for quite some time now. Japan has the resources, Japan has ways to get vaccines, and Japan is proactively dragging their feet. It's an oxymoron.
It's very strange, because they're going to jeopardize the Olympics if they don't vaccinate people. They're putting a lot of manpower behind making sure that all the athletes that are coming in are going to get vaccinated at the expense of vaccinating their own citizens. It's becoming really just a huge political mess here, but they are in a bind, because of the contracts that they have signed with the IOC, the Olympic Committee. If they cancel it, that's on them. It's the cost on Tokyo basically.
SAMUEL BURKE: Especially on those tv deals that they have, they have to pay back money to a lot of big broadcasters, including in the United States and so, I think because of those contracts, there is no way that the Olympics aren't going through.
WESTON NAKAMURA: Exactly. If you actually look at Comcast, which is NBC Universal, which has the rights to the Olympics, there are a lot of open interest and put options for the July expiry, just in case, there's like a last minute cancel, because stocks are going to fall. But yeah, it's going to go through and it's going to be a very strange look. You're not allowed to cheer. It's going to be very quiet. I feel bad for the athletes, just be out there.
JACK FARLEY: That's Japan. I want to move back to Europe. Because, Samuel, today, we had some data out of Europe, the PMI or the purchasing manager's index, and with the exception of Germany, which had a 60.4 versus a 57.6, which was expected, the UK and France, United Kingdom and France, both came in lower than expectations. Even though their economies are growing in terms of both manufacturing and services, it was less than expected. How does that square with what you're seeing on the ground in the UK?
SAMUEL BURKE: Well, it's absolutely great in what I'm seeing. Yes, things like goods and services have obviously picked up, but at the end of the day, you have so many facets of the economy that are still on hold. I think there's a big divide. I don't think people in the United States realize just how stark that difference is between what you're allowed to do there in the United States and what we can do. I'm from Arizona, originally, and I was back home, and it was people had moved forward with their lives.
Here, you still have, especially when it comes to travel, that's why I was drilling this home, that the travel industry is finally putting strong protests up against the government, putting pressure on the Conservative Party here to put pressure on Boris Johnson, and they're finally giving in. You look around and if you were in the street, you would see yes, people are at restaurants, but on the periphery, there's still so much that isn't happening, and there's no sight of when that's happening and there's no clarity from the government.
Where you see other countries start to look at when they're going to have concerts or when they're really going to have stadiums that have people in them, we lag way behind in that. Again, a point I'd like to make, regardless of how you feel about vaccinations, the UK has put a lot of pressure on the people here to get vaccinated, the program has done very well but they're not rewarding the people in any way. There's pressure to get vaccinated, but not the true type of pressure that you get some type of reward for it. There's this real dichotomy here saying, you've got to go out and get vaccinated, but then you can't get on a plane, you can't go to a ballgame.
These types of pressures really have a knock-on effects for the rest of the economy. It doesn't surprise me to see that that's playing out in the numbers, because so many industries are saying enough already. This is stuff that in Arizona, people were talking about last year, it hasn't really gone into this year, but here in the UK, here in Europe, these pressures from the pandemic still really persist in spite of the similar vaccination rate the UK has. That's not true for the rest of Europe, but at the end of the day, you've got a country that's well over 60% vaccinated with two doses yet we're living how Americans were living six months ago.
JACK FARLEY: Samuel, to what do you attribute that? Is it the cultural reasons in the United States, people value freedom and perhaps Europe is more bureaucratic, or is that too simple? How do you explain that discrepancy?
SAMUEL BURKE: No, I think it is that type of libertarian streak that we have in the United States and that people have largely gone through it, because I don't think it would be politically possible to do what the UK is doing right now in any state in the United States, even New York or California, quite frankly. I think a lot of it does come down to those cultural values, those political values, but I think at the other side of it, the pandemic was so bad here, the second wave in places like the United Kingdom, that's in part why people have been willing to go along with this.
The question for me is how much longer, and I think today was that breaking point where the travel industry really was able to put that political pressure. But again, when you think about it, they're saying, we're not going to be able to travel into August? That's a real headache for the rest of Europe that's waiting for those British tourism, I was going to say dollars, but pounds and euros in this case.
JACK FARLEY: Yeah, it really is a tale of two cities, comparing the UK and the United States. There's a chart that we could put up, which is of the TSA throughput, basically, how many passengers per day are going through us airports, and this is the blue line, and you can just see it is going up, up and showing no signs of slowing. Of course, there is daily volatility. Actually, what we put up here in the thick black line is the US crude oil rotary rig count, which is basically the number of large offshore US oil rigs, and it currently is 373, well above the depth level that we saw in March and April, but it's still well off the highs of somewhere around 800 or 900 that it normally is at.
This, Samuel, I think we could talk about our next topic, which is the fact that the price of oil continues to rise. Today, there was an announcement from the EIA, which is the Energy Information Administration for the United States, that their surpluses of oil had dwindled by just under a quarter of a million barrels compared to last week. On this news, Brent oil exploded higher, to actually as high as $76.02. Then there was a little bit of a strange statement from Prince Abdulaziz bin Salman, at a Bank of America conference speaking for OPEC, saying that we have the ability to control inflation, but it was a bit of a mercurial statement and it didn't scare the market, but it did cause oil to drift a little bit lower, of course, the energy stocks, roared higher, and then drifted slower after that announcement.
Weston, what do you make of the tremendous rise in energy? It's been the defining feature of this market, and yet now, it seems like we're on a precipice of a change, and we don't really know what's going forward. Is this a regime shift? Do you think $100 WTI, $100 Brent is realistic?
WESTON NAKAMURA: Well, the options market certainly thinks so. There's a lot of open interest at the $100 strike futures as well. If look at like CFTC COT data, you're just getting more and more length. You have anywhere from the likes of Goldman to everyone else projecting upwards of $80 per barrel and it looks like it's literally not stopping there. That said, if you look at the futures curve of crude, WTI crude, if you go way out to-- I think that they go out maybe like, maybe 10 years or so, but if you go out to let's say, December 2027, for example, you're looking at mid-50s for price.
You're going to see a severe backwardation right now, and it's a very unique situation, that structure, and that's not really sustainable for that long. Like you were saying earlier, it really just takes us a tiny shift in sentiment from OPEC, whether or not they actually do anything, or even say anything, if there's some decision that they want to cash in on these very high oil prices that they have not been benefiting from until recently, you can get a pretty ugly collapse, I think.
SAMUEL BURKE: Weston, I was particularly interested to hear one analyst talking about really how much places like Mexico and Colombia have been affected in terms of production, and they say that's going to cost a lot of money on both the front end and the back end. When you hear that, how do you factor that in?
WESTON NAKAMURA: You mean in terms of US energy plays?
SAMUEL BURKE: Yeah, in general, where crude goes in the short to medium term?
WESTON NAKAMURA: I think that with regards to the energy sector, for the US, for example, it's definitely the leader by far. I think we're looking at 43% year to date, clearly the leader. I think that it was Tony Greer, who said this a few weeks ago, perhaps, but just because the price appreciation has occurred, it doesn't mean that it's necessarily a crowded trade. In fact, it could actually just be the fact that because the price is appreciated, people are just hands off.
You might have very few people involved in this trade, and you could have a lot more capital coming behind the energy sector, particularly because of that rebalance that we talked about the last time of the momentum index, in which now energy has some representation as opposed to zero prior to so. As far as crude is concerned, 80 is probably possible, but if you want to play through equities, I think that there's probably more upside there.
JACK FARLEY: Yeah, of course, energy comprised at its lows of just 1.5% of the entire S&P 500. Now, it's something like three times that after the tremendous rally that we've had. Weston, you mentioned OPEC, their meeting is scheduled for July 1st, so it really is all eyes on OPEC. Are they going to continue to let the price float higher, or are they going to really instill price discipline? Also, Samuel to your earlier point about a dwindling production, I think that's true in Mexico and Colombia, as well as the broader world after the huge boom and bust that we saw in 2007.
These oil companies have put a lot of capital to work to invest in creating new supply and new infrastructure, and that has been an absolute dismal failure for the oil industry. I think their focus now is on cost discipline and returning capital to shareholders. I think we see that with the news from Exxon Mobil that they plan to cut five to 10% of their white-collar workforce and really focus on diminished costs. Weston, could you just go back to the backwardation point, could you share with us why is it that backwardation is typically seen as a bullish sign when the spot price is much higher than the futures price? Why is that typically seen as bullish?
WESTON NAKAMURA: Well, bullish in-- it depends on the timeframe. Obviously, if you're looking out many years from now, looking at crude prices that are $20 less, it's bullish near term, because it's basically-- I don't know if this time is different, but you have a lot of front-end demand, you have OPEC basically choke off supply and all that, but then the fact that you have $50 crude price out seven, eight years forward, I don't know if that's a byproduct of this secular shift away from crude and into more green energy and if this is therefore, here to stay or if it's going to correct back into contango.
But for now, it's positive because you can have a positive roll yield, so when you roll your futures you don't have to take a hit by rolling higher. You would actually get these smiles.