The S&P 500 rose 224 bps for the month, while the Bloomberg Barclays US Aggregate Bond Index (AGG) fell by 27 bps. Year to date, the S&P 500 and the AGG have returned +859 bps and +275 bps. There is little doubt that we are in a bubble, from a high CAPE ratio, elevated P/Es, optimistic retail sentiment and S&P 500 tech crowding. The concentration in the S&P 500 has returned to extreme levels, with the largest 10 companies accounting for 40% of the index’s market capitalization. They are more overvalued than the top 10 companies in the S&P 500 in the 1990’s IT bubble. On the other hand, we are seeing significant opportunities to deploy capital in the types of real businesses that we want to own long-term. Many are being ignored by the trading crowd, which translates into attractive entry prices. And buy we did.
We increased our exposure to many energy shipping names We see continued demand for distillate transportation, given that refineries representing 20% of California’s refining capacity are scheduled to be closed at the end of 2025 and the beginning of 2026, while Lindsey Refining, which supplied approximately 10% of the UK fuel oil, unexpectedly shut down in July after being looted by its owners and declaring bankruptcy. We added to our LNG shipping exposure before the announcement of the US – EU trade framework requiring $750 billion of energy purchases, based on our assessment of the asymmetry of stock entry prices. Europe is also a significant purchaser of propane, which is positive for the VGLC names. But this good news didn’t make it into many equities.
Perhaps this weak performance was factor trading, which can create a lot of day-to-day noise. Trump announced on 7/30 that he plans to impose secondary sanctions on Russian energy exports to India in addition to a 25% tariff. Such restrictions would be beneficial for our energy shipping holdings, as they would force India to replace crude oil moving on the dark fleet to compliant tankers. Yet since tariffs are viewed as negative for international trade and thus shipping, these stocks traded off. There could be another explanation, which we call “The Norwegian Vacation Heuristic.” The entire country is on vacation somewhere. You are more likely to find a CEO on the beach in Italy than in the office. Liquidity disappears from the shipping market. The weak price response to positive events in shipping may be nothing more than the European holiday season. We will see if the equities pick up when everyone returns to work.
