Stephen Schork's Oil Outlook

on is Steven Shork. He is the president of the Short Group. Stephen always a pleasure. Happy fourth of July to you. Uh, let's start. Where do you want to start? We could do gasoline prices comparing those to two thousand five, or maybe you want to talk about natural gas and kutar. Where would you like to begin? Well, I think let's start him. What's near and dear to everyone's heart listening,

and that is gasolene prices. Of course, of course, gasolene prices are a function of crude oil prices, So every one dollar move in the barrel of crude oil, you typically get a lag of about two or three weeks. Did knock on to guess lene on the pump is usually between two and two and a half cents, So given where guest lane prices war when crude prices began to tank back right around Memorial Day, we're looking at probably another ten cent fall in the price of gasoline.

So on the triple A survey, that would get guest line down to about two ten cents, which is more or less the bottom of what we saw last year. So from a consumer standpoint, the gasolene prices through the remainder of the holiday season this summer looks very favorable. So what industries or businesses that depend on consumer spending with that spending than translate into better business for those lines of sectors, or is there something else that you

can point us to. Well, When we had the sharp sell off in oil prices that began back at the end of the concern I had was that it wasn't just in the oil markets. It was in the steel wea bar market, it was in the lumber market, it was in all of the heavy industrial metal markets. So clearly the sell off in oil was more endemic of what was happening in the general border commodity. Given that industrial metals are are clear telltale of potential economic growth

this time around. The industrial metals complex has had a bump from the the the current administration. When we look at the charts of what these prices have been doing since November, you had a big spike, then you had a corrective pull back, but prices have been holding steady. And I take that as a positive sign given the potential of the demand for for these industrial commodities. If when, when, and if we ever see some sort of infrastructure plan

from this administration. Um So, oil prices have decoupled, and the decoupled for a very uh you know, basic good reason, and that is essentially, we are producing a lot of oil. And this is where Wall Street really made a core decision back in November and December in the realm of

the OPEC decision. That is to say, Wall Street was putting too much emphasis on OPEC dwindling power to dictate prices and paid little heed to the growing fact that the United States in this current environment is now the globe's swing producer when it comes to oil. So when we look at US production at it over two year high, the oil recount up hundred and when we look at

the hedges produces are well hedged. Also when we look at the produces, what's really interesting PIM is when we disaggregate the data, we can surmise that the oil producer, the only person in the world who must sell oil, likes to sell oil that is hedge forward production when spot oil prices are between forty seven dollars and fifty four dollars a barrel. So I don't think I'm going out on the limb to suggest that is the top

of the market. Now, what is the other interesting part of that PIM is when we look at the other side, the guys who must sell oil excuse, we must buy oil, and there's only one person in the world who has to buy oil, and that is an oil refinery. When we look at their hedging activity, they've been rather quiet

over the past year and a half. So even though we've had oil prices yell yelling between the mid forties mid fifties, the oil refinery, again I emphasized, the only person who has to buy kudol doesn't see a need to hedge oil prices at these levels. So clearly this is telling us that this continues to be a buyer's market in the oil realm and now today is effectively the first trading day of the third quarter, first trading

day of the second half of the year. What does that mean, Well, it means that kudal demand, which has and record strong here due the start of the summer driving season, that's going to peak rather soon and by the end of this quarter, we're going to take about a million barrels of demand out of the market as we go into the fall and we we we drive fewer miles, so that has to be concerned if you are a crude bullish investor. That's a great uh, sort

of summation of what is going on. And uh, Steve and I maybe just give you, you know, another forty seconds or so. So what should people be looking for right now? What's the most important thing? You know, they're listening to you, they're hearing this. What's the next you know,

guide post along the way? Yeah, well absolutely, the next guide post is, well, we've had a we had a nice corrective rebound in oil prices going into last week and that was a function of the market that was that was really over sold, so wall speak to risk appetite for lower oil prices had really ballooned over the past two months, a lot of that money has been exercised at a lot of profit was taking and now that we're into the second half, we probably are lower.

Now I put I need to put the caveat out there, PIM that everything I've stated is already well known in the market, So that means if it's well known, that means it is priced in. So that said, this is a very telling first day of the second half of the year because we're down at dollars six five. As I look at my Bloomberg that's a very barished tell tale.

We gotta, we gotta. That was perfect. I want to thank you very much as always, Stephen Shorky is the president of the Short Group, giving us a detailed information about the oil and energy markets. Well, we turn our attention now to China. But in order to help us understand what's going on, I want to bring in Eric Valcunas, our senior et F analyst for Bloomberg Intelligence. Eric, a

pleasure always to have you. Maybe you could begin by just know I'm going to put you in a tough spot here because explain what has happened recently to markets in Asia and Uh, I'm referring obviously to the launch of a missile by the North Koreans, and we saw a tumble of about three quarters of a percent in the Japanese stock market yesterday when most Americans were on holiday. Yeah. Look, I mean this is part of international investing and in

particular emerging markets. UM. You know, there's a lot of opportunity, but there's also a lot of risk. In geopolitical risk is part of that risk. UM. But on the flip side, you know, you look at some of the countries you just mentioned. In particular, we focused on China and our last research report, especially mainland shares. They are basically have no correlation to the US market. So while they do have these times where they go down and the US

could go up or um. There that break of link of correlation is something it's valuable as a portfolio diversifier, UM, and something that's underrated, especially again when it comes to the mainland China shares, which investors can now get pretty easily through E T S. I want you to just compose a little UH sort of offering in your head, you know, to explain what has changed in the Chinese market to allow UH this new participation by non Chinese participants.

Yeah sure, I call it the Great Wall of isolation, and in China cross the board. That wall is crumbling. And while China has taken some steps to open up its a share market by issuing quota having a connect between Hong Kong and China, it's really M s C I who's come around a lot. M s c I recently has said they're gonna allow two stocks that are mainly in China shares into their Emerging Markets index. This

has covered pretty heavily two weeks ago. What we did is we looked at E t F that most hold those two twenty two stocks because there's so much money benchmarked to the M s C Emerging Markets and exit that once that they reach full inclusion in about five years, that's gonna equal about four hundred billion dollars in by orders of these two d and twenty two stocks, and the ETS that holds the most of those on a percentage basis is a s hr UM that holds seventy

percent on a weighted basis of those two two stocks, K B A. There's a few other ones. We have a diagram on B I, E t F, but basically a lot of the r et F s are a great way to get ahead of that money. However, you do have to accept some volatility, like some of the things you just mentioned um and a lot of people are a little skittish because the a share market um in went gangbusters up and down. It was a sort of a mini spike and crash, and I think a

lot of people are a little scared. But again, this is a long term play to try to get ahead of all the all those uh foreign investment investment dollars that are headed towards mainland China. I'm wondering if you could just repeat that specific part of what you were describing, because this is something that is already being set in motion. We just have not seen the effects and necessarily really even seen the actual activity of the investment. That's right.

I mean you can almost imagine that the China share markets a new country, and it's like the MSc Emerging Markets just identified it as an emerging market, so you're basically and it's such a big country, um it's seven trillion dollar market that it will ultimately be seventeen percent of the Emerging Markets Index, which along with the offshore shares,

would make China about of that index. That's how big China is, and so what people are the reason they're noticing and excited about this is that that's seventent of the emerging markets. There's two trillion benchmark to it. So um though, that money will go and buy those stocks because people are there's passive um ets and inexpens the track MSc Emerging Markets, but it's also active managers who are trying to beat it. So order to beat the Emerging Markets Index, you're gonna have to buy some A

shares to make sure you don't lag. And so that's why this opening up, especially with m c I is such a big deal in terms of opening up that market. Um and there's other countries that might be promoted, like Taiwan and South Korea. So ultimately you could be looking at an Emerging Markets index that's China in five to

seven years. Wow, that's something to take in. So all right now, so give us the detail then on the differences between the various exchange traded funds, because you know, there are a lot of acronyms and and a lot of fancy uh sort of names to these things, and you you actually take a look inside yeah, So China is so complicated. I call it's like an alphabet suit because because of the regulation, there's all these different share

classes A shares, eight shares, red chips. I'll make it easy if an investor just wants to make a play on that foreign investment that's coming over. A s HR are the Deutsche Bank A share e TF is probably the best bet. K B A, which is the crane shares A share E t F would also work. Well, those are they already own those two two stocks. For investors who want, say, uh, like a wide a diverse China E t F that includes A shares, there's not that many. You sort of have to pick your your

share class, and that's why it's difficult. So a lot of people might use m CHI m c h I, which holds every other share class, in combination with a s HR, which is a shares. There's one that tracks all of them with the ticker c N. Doesn't have a lot of assets yet, but that gives you everything in one shot. Alternatively, if you're looking for an emerging markets index or e t F, there's one out there that's designed already to be like where M s C I will be in those five to seven years, it's

already China and that's the ticker on that KEMP. It was specifically designed look like k E m P the Crane Shares emerging market, and it was designed to look like what MSCI emerging markets will look like in seven years. So that's sort of skating to where the puck will be. I gotta say that's a really helpful guide that you've provided, Eric, Thank you. The composition of these various e t fsh and their volume of trading will sometimes well, let's just say,

you'll be in a in conflict. Where do you see the most liquidity for these e t f s. Who's going to be the most liquid, who's on the most platforms, and who's going to be able to take this and run with it. Yeah, So for a shares E T S, a s HR is by far the most liquid distinct trade. It has four million dollars, which isn't a ton, but it's liquid enough you could probably just put in a market order and be fine. Just to let you know,

the current volume is a hundred and thirty eight thousand shares. Yeah, I mean that's that spreads one or two cents and correct it's liquid enough, it's not spy no and no and and you know, no leverage, no swap based, nothing like that. This literally tracks China shares. I am shocked more people aren't buying the China share market again. It's like they discovered a new country that has seven trillion dollars worth of market cap and nobody owns it um

but ultimately people are going to own it. So it's a way to get ahead of it. Like I said, China A shares are largely you know, only two percent of that market is four and owned. So these there's a couple a share ets that do track those those stocks, and a s HR is the most liquid one of the group, and it's the it's the one that has the most waiting overlap with the foreign investment that's coming in. Uh, those two stocks that will ultimately be in the M

s c I emerging markets. Well, I gotta say, this is wonderful for you, for us to have you tell us all this. Eric Vaucina, senior et F analyst for Bloomberg Intelligence. He knows everything about the E t F market.

You know, one of the things to always focus on the strategies that money managers employ and uh, I'm looking at things such as low debt with strong cash flow, low price to earnings ratio, multi caap, maybe with a small to MidCap focus, and also the idea of trying to dominate a niche in the market that has a high barrier to entry. And here to tell us a little bit more about these ideas in the strategy is

George Young. He is a partner and portfolio manager at a Villary Funds and he joins us on the phone. Greg George, great to have you with us, Thanks for being here and belated happy fourth of July to you. Thank you very much, glad to be here. All right, let's start off. I want to get this idea looking at your your strategy because I know that you've got the Villary Equity Fund v l e q X and this is solely focused on equities and it emphasize this

is the potential in small and mid sized companies. What are you some of your criterias and maybe just give us an example, sure be glad to do that is something that has a low pe ratio, something that has a moat built around it, somewhat unassailable, and that's either by patents or some sort of service that they're able to provide that others aren't able to do. So. A couple of examples of that. One would be a software company epics UM that is a MidCap company. Their insurance software.

So if you think about it right now, Lloyd's London is an example, is still paper based. A lot of criteria for meeting insurance and analyzing insurance risks are done by paper, by people meeting and deciding what to do. All that can be digitized, it can be stored properly and it's something that can be analyzed on a more efficient basis. That's where edex comes into play. They link brokers and agents to try and assess risk. They've got

eighty percent recurring revenue. That's very important in our world because you want some predictability in any investment you're gonna make. How did how did you find epics and have you visited them? In John's Creek, Georgia. We've met with management before. They've got a CEO that owns ten percent of the company. That's very important to us that we have board and management who are engaged. Robin Robin exactly exactly. Uh. He takes a very strong interest in what's going on in

what is his company? Even though it's a publicly owned company, he founded it, so he takes it very personally. That's exactly want. We want fellow investors to be investing alongside of us, and we want to engage management and board members. How did you find Evis Was that a screening process? Was that a personal effort on the part of one of your analysts or colleagues. Yes, good question. We depend on analysts to introduce us to different ideas and then

we follow through. We worked with a number of analysts and brokers for over twenty five years, so they know the type of companies it we like and they are very focused on the type of companies of fitting into our portfolios. They know we want investments for a long term, stocks that we can hold for three, five, ten plus years and our turnover reflects on our turnovers about fifteen percent per year, meaning we don't want to have any

of our clients exposed unnecessarily to taxes. We want to buy investments that we believe can work for a long period of time, even though there may be some volatility. Our clients understand that over the long period our investments have generally rung true. Well, you know, it's interesting looking at e bix because it seems to fit in the

narrative that you just described. What do you go through when the stock, let's say, is you know, in the sixties, sixty four was the high back in h I believe March of this year, what do you say or how do you react to the fact that, Okay, it was sixty four in March, it's fifty three now. But there are reasons why you want want it and may want even more of it. Sure. What we try to do is to try and make an assessment of what the company's value is based on what their potential earnings may be.

Uh So that means that we're buying something for longer term growth. This is company we just start buying about three weeks ago, and we're buying it right now as we speak. It's a great company that offers that long term potential. And in terms of a pricing scenario, we're not overly concerned about where it was. We're more concerned

about where it's going to be. So in that case, from a pe standpoint, relatively cheap, we think it's only trading in fifteen times next year's earnings and we try to look forward three years out and feel that it can grow. It's up like per year. Well, the symbol there is e B I X for this particular stock, Epics based in John's Creek and Georgia. Stock is down

about seven p so far this year. Uh. You know, I'd like to turn your attention, if you can, to the visits that you make the company management and the interviews that you do with competitors and suppliers. Uh, with or without naming names, could you give us an example of one of those meetings that maybe turned you against making the investment or made you gunshy about it. Sure, sure,

I've got a great example. There's a company a few years ago that had a proprietary interest in tires, manufacturing and replacing tires. If you go back about eight years ago, tires were very expensive for mining because at that point commodities were very expensive. UM. It's interesting because one of the founders, who's pretty well respected, made some disparaging comments about women and their ability to understand the mining and the tire business. UM. We didn't tolerate that, and irrespected

of whether he's a good leader or not. That reflected poorly on on management and we own that for about a day and a half and that was it. That's a very interesting Uh, that's a very interesting determination obviously, something that doesn't even take a balance sheet to figure out. No, it doesn't, and sometimes investments can can lend themselves to that.

You know, none of us are perfect, but we would hope that board and management understands the consumer, understands the way the world works, and just you know, at least some civility. And I dare say we're gonna have a little more civility in the world today. Well said speak if you can't about any recent changes, whether you've been adding to your cash positions, do you feel that having something increased liquidity will be useful in the near future. UM,

that's a very good question. Right now, we are having a little bit of a difficult time finding and essence, so we're about nine invested, we've got about ten percent in cash. So that's a good barometer of how enthusiastic we are about the market right now. UM. That being said,

every day the market offers many opportunities. There's a stock that UM ressembles for for for lack of a better word, a good example that was I'm sure listeners remember the Carnival Cruise Lines reckoned the Mediterranean a few years ago

with the cost Concordia. That's exactly right. So when we looked at that, we had Carnival crews on our our radar at the time coincidentally, and realized we could fairly quickly assess what the damages were going to be environmental, uh, personal injury, et cetera, and those are capped for better or worse. So it looked like a great opportunity. We

bought the stock. It was about ten percent off after that accident, and it contrasted with the BP oil spill that happened here in the Louisiana area where that was very difficult to put a number on what that costs would be. So we about Carnival Cruise Lines given that opportunity. So that doubtless will be opportunities in the market on on any given day, and just a question of us

being able to recognize those opportunities and act quickly upon those. Well, thanks for sharing your views, your thoughts, and some of your investments. George Young as a partner and portfolio manager at a Villary Funds, Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm

on Twitter at Lisa Abramo wits one. Before the podcast, you can always catch us worldwide on Bloomberg Radio