As We See It

Equity markets have a new narrative of the transformation of everything by generative AI.  In 2016, the narrative was autonomous driving and the death of auto insurance, in 2020 it was online retailing and physical stores disappearing, in 2021 it was the Metaverse eliminating physical meetings, and today, ChatGPT and its brethren.  The divergence in performance between large and small cap companies is the largest in 25 years.  Many equity participants still see a significant recession and interest cuts ahead, but like characters in “Waiting for Godot,” it never comes. On the other hand, investors in 2023 have for the most part sold cyclicals, commodities, and real assets in anticipation of a recession.  Consequently, we have been able to buy companies in certain cases, below private market liquidation values or real estate at cap rates 200 bps higher than the private market.  If we decide to leave money in cash for up to 15 months, we are getting paid 5% or more almost risk free, compared to an S&P 500 dividend yield of 1.53%. We have been willing to sacrifice short term performance in this type of environment, although with our usual risk control. We have seen the best buying opportunities in certain shipping segments since 2020 such as dry bulk.

Case in point has been last week’s price action in crude tanker stocks.  On Sunday, June 4th, Saudi Arabia announced that they would be cutting production in July by up to 1.0 million barrels of oil per day.  That afternoon and the next morning, analysts predicted that crude tanker equities would fall deep into the red.  Looking at one name in particular, it was down 5.3% from the close on Friday, June 2nd to the end of the day on Monday, June 5th.  By Friday afternoon June 9th, the stock closed at slightly above the prior Friday’s level. We paid little heed to the headlines as we were at a real estate conference in New York. It is tempting to look at simple explanations or at short term rates and then project shipping equities forward.  Right now, there is no order book in crude tankers or dry bulk, the shipyards are full for 2 to 3 years, and prices for new builds are high.  If you are tempted to trade the headlines, you may be very successful.  Goldman lowered the December 2023 price of Brent by $9.00 on Sunday, and some traders may reduce their exposure to tankers. Just remember if you sell, we are in an unpredictable world. Trading is fundamentally difficult, with the big risk of generating a short-term gain and not being there for a long-term upside move.