Commentary

Cereal Guy

Confession time.  I am a cereal guy.  If it wasn’t for my wife Sheila, Shreddies would be the main staple in my diet.  Oh, and also a cold beer every now and then.  I also confess that I do not do the grocery shopping in my household, and if I am ever tasked with picking something up at the grocery store I NEVER look at the prices.  For today’s blog I googled the price of Shreddies and here is what I came up with.  The cost for a 550g box is as follows:

Walmart               $3.97

IGA                        $4.29

No Frills                $4.47

Safeway               couldn’t find it on the internet

So, I now know the cost of a box.  Imagine if this week prices dropped to their lowest level in over 20 years?  I am guessing here but $1.00 per box seems to be in the realm of reality.  I would be stupid not pick up a few cases, wouldn’t I?  Of course, I would need to notice the price reduction or the opportunity would slide by unnoticed by yours truly.  I’m sure you would agree that taking advantage of a cost reduction of 75% for something with a long shelf life is the smart thing to do.  Many of you may now be rolling your eyes saying who cares just get on with it Cereal Guy.

However, I contend that we should all care!  Every once in a while a true “Shreddie” opportunity comes along.  To take advantage we must understand that the opportunity is there and act accordingly.  But, to do that you need to know the price of a box.

As investors we tend to treat stocks differently than Shreddies.  We like to buy cereal at lower prices and stocks at higher prices.  We like to buy stocks in an uptrend (I get it, I’m human) that hopefully continues.  It intuitively feels good to buy something moving in the right direction.  So, stocks tend to be what in economics is called a “Giffen Good” – the higher the price, the more we want it.  Same thing goes for luxury vehicles and jewelry.  But not for cereal.

Due to the impact of the Giffen effect on investor actions (by that I mean that investors chase momentum and shun value), at certain points in the market cycle specific sectors tend to be thrown into the investment trash heap.  And that, is the reason for my cereal lead in.  Cheap investment Shreddies are out there creating a very significant investment opportunity (these do not come along too often – we are now acting on your behalf).  Of course, an investor must notice and understand price to benefit.  My trading platform charts back 20 years and clearly shows that this sector is trading at all-time lows.  In fact, trading at lower lows than those experienced in the great financial crisis of 2008/2009.

The sector – Energy.  Take a look at the iShares MSCI Global Energy Producers ETF (symbol FILL traded in the US).  This unit owns a large cross-section of the Global Energy sector (Exxon, Chevron, BP PLC, Royal Dutch Shell).  It is fair to say that as this unit trades, so does Global Energy.  Currently the unit trades around $12.50 up from a low of $7.77 in the depths of the March market swoon.  So, the unit is up roughly 60% from its lows, we missed the opportunity, there cannot possibly be anything more to be made, the horse is out of the barn.  To the contrary, in my view there is still significant upside.  As a matter of fact, the average annual return for this unit over the last 5 years is MINUS 9.53%!  There is PLENTY of upside!

The covid-19 crisis hammered energy consumption at the end of Q1.  This was into a period of on-going energy over supply thanks partly to a surge in tight energy technologies in the US.  When supply exceeds demand prices drop, and did they ever.  Excess production and covid-19 drilled (pardon the pun) energy stocks to the mat.  That same FILL unit started 2020 at over $19.00 and lost 60% of its value and is still down 35% from its recent high.  In my 20 years plus in this industry I have learned a golden rule, that lower commodity prices set the stage for higher commodity prices.  Put simply, covid-19 demand destruction in Q1 triggered significant commodity price weakness.  These low prices have meant significant under investment by the industry and have set the stage for a multi-year impairment of future oil production.  This lower future oil production will ultimately result in higher oil prices.  Evidence of underinvestment can be seen in drilling rig deployment.  Deployment is essentially non-existent, down 70% plus in the US and Canada over the last year.  By late summer/early fall we expect that demand will exceed supply.  The market is starting to sniff this out as it front-runs the price move. The risk/return ratio is heavily skewed in favor of energy investors over the next 12 months.  Stay tuned.

Pivot© continues to signal higher market highs are in the cards.  If that changes so will we.  Until then we will keep searching out opportunities.  Enjoy the ride.

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