Don't let a selloff frighten you
Energy markets remain undersupplied and full of opportunities
Today’s market sell off is a wonderful opportunity to add to energy names that are already deeply undervalued. As Nobel laureate Richard Thaler has observed, investors over react to bad news and under appreciate favourable trends. That leads to churn, benefitting brokers and advisors with higher commissions so it should be no surprise that the populate business news channels with ill-conceived “recommendations” on how to parse the random price fluctuations in the daily auctions as if there were some magic to their claimed “insights”. As a group, they earn fees for clients who receive returns lower than index funds and claim to be experts. Experts at fleecing clients perhaps, but a long way from experts in business valuation. Consider the 3% to 5% drop in trading prices of popular energy names so far today - $WCP.TO, $CPG.TO, $ERF.TO, $CVE.TO, $BIR.TO, $BNE.TO, $RBY.TO, $CJ.TO, $ATH.TO and $ARX.TO are all off 3% to 5% in a few hours of trading and energy investors are in tears.
Not me. I am adding to my energy holdings. The hard data are a tailwind. Near term oil contracts are commanding premium prices, as this Bloomberg chart displays.
Wages in the oil patch are near record levels.
Global energy demand is robust with the rise unabated despite price volatility.
These are not indicia of an industry in trouble. Sure, there is a prospect of recession and I expect we will see one relatively soon since the rapidly rising cost of money is sure to crimp consumer spending eventually, and the burgeoning national debt is finding fewer and fewer buyers for bonds that while offering rates not seen in a decade still trade dollars with inflation running at about the same rate as treasury bill interest and higher rates likely with a depressing effect on bond prices sure to dissuade many from the space.
I often make risky investments and today is no exception, so I am adding long-dated call options on Baytex (BTE.TO) and Obsidian (OBE.TO) and shifting some cash into TC Energy at CAD$45 or so with a yield in the 7% range, a couple of hundred basis points higher than two to ten year T bills with a reasonable prospect of higher dividends over time and less risk of a rout in price that dogs those foolish enough to call bond rates lower any time soon.