Dear fellow investors,
We learned a long time ago that we wanted to know what smart professional investors were doing. It’s always better to know who is smart rather than being smart yourself. Therefore, we’ve constantly kept track of insider buying, what great investors like Warren Buffett and Carlos Slim were doing, and what the most successful hedge funds were up to. A recent chart stopped us in our tracks.
The only time you don’t want to ride along with what the smart money people are doing is when they pretty much all agree. Today, they all agree that oil and gas doesn’t look good for the next six to twelve months. Some of their reasons look like this:
- China’s economy is slow to come back
- The U.S. could have a recession
- There could be a cease-fire in the Middle East
- OPEC+ wants to raise production
We like a concept we’ve created called “a well-known fact.” It is a body of economic information that is not only “known” by everyone, but also has been acted upon by those who participate professionally in the particular market affected by the “well-known fact.”
Few professional investors were more bearish on China in 2011 than Smead Capital Management. We went there in 2011 and 2012 to speak to CFA Society gatherings at the behest of their education department. We came back convinced that BRIC trade enthusiasm was an overcooked goose and avoided it. We owned no oil and gas stocks from 2011 to 2019. Today, it is beginning to look like there is no light at the end of the Chinese tunnel. The ‘smart money’ crowd is avoiding China like the plague.
In the worst recession of 2007-2009 since the depression, gasoline consumption dropped 2%. Oil and gas are addictive legal drugs and are scarce resources. Remember, 80% of the U.S. GDP numbers are relatively fixed (think health insurance). The 20% that is variable is what gets whacked in a 3% contraction in the economy.
Longtime investors will be reminded that Starbucks was our largest position at the bottom of 2009. If we got paid back then for every investor who told us that nobody was going to want a $4 cup of coffee in a deep recession, we’d be rich today just from that money alone. Charlie Munger used to say, “Invert, always invert!” The truth was that the $4 cup of coffee was the only luxury people kept from 2009 to 2012.
This brings us to one of our favorite subjects: peace in the Middle East. Bearish hedge-fund managers are afraid that a cease-fire will occur with a terrorist organization. When did it become possible to negotiate with terrorists? It is safe to say that Iran will not stop funding terrorists because they get a friendly phone call from a politically motivated and well-respected U.S. diplomat. People groups that surround the nation of Israel have spent the last 3,000 years trying to get rid of them.
Lastly, OPEC+ wants to raise production, but an even bigger problem is what happens when fracking easy-access wells in the U.S. get exhausted and cause a big decline in production. Millions of barrels of oil need to be purchased to replenish the Strategic Oil Reserve. Data centers and artificial intelligence (AI) could cause electricity prices to explode. In the U.S., 40% of electricity is made with natural gas, which is abundant and cheap temporarily. The massive increase in electricity use could cause prices to double or triple. It all makes owning long-life Canadian oil assets look very attractive.
We are sitting through a correction in oil and gas stocks and are patiently waiting for the smart buyers to show up like they did in 2020-2022. Folks like Harold Hamm at Continental Resources and Warren Buffett/Carl Icahn in Occidental Petroleum (OXY). In our view, the Federal Reserve Board will give up on fighting inflation, and a depressing era in the S&P 500 Index combined with rising energy costs could send investors flocking our way.
Fear stock market failure,
William Smead
The information contained in this missive represents Smead Capital Management’s opinions, and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.
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