Flagship Pod: What Stocks To AvoidJun 27, 2022
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This gives you the opportunity to ask us questions and hear our thoughts on the things you want answers to!
Here's what we went over:
Why on earth the S&P 500 is rallying out of bear market territory
What Bitcoin's brief drop below 20K means for crypto at large
What Warren Buffet is investing in & why
How we're looking at momentum with daily stock trades
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Check out the rest of the transcript below!
From Moby.co, this is The Flagship Pod, a weekly live podcast discussing the economy, the stock market, and the various market forces powering the world around you. As always, I'm your host, Peter Starr. Bringing you this time, once again, volatility wins, ladies and gentlemen. Here we are at very close to close on Thursday, June 23rd, 2022. We've had a pretty significant bear market for the past two weeks. And now, after a weird late day rally, the S&P 500 is about five points away from flirting with being above bear market territory. So once again, I have no idea what's going on. You have no idea what's going on. So let's see if we can find some answers in terms of understanding this market. As always, I'm joined by Justin Kramer, CEO, co-founder here at Moby.co, as well as our chief analyst. Justin, my dude, can't make heads or tails out of this one over here. What's good on your end?
Yeah, definitely good week so far. Starting to see some numbers potentially go in the right direction. Definitely too early to say one way or the other right now, but yeah, lot to unpack during this episode. Excited to get into it.
Absolutely. It's just one of those things, too, where you're just looking at all of these numbers and trying to understand. The main thing, audience, of course, is trying to look at these things from a longer time scale. It's really hard to know where you are in any particular market week over week over week. So more likely than not, this is a temporary reprieve from what is a normal bear situation. We can see ourselves going down more, more likely than not. But it honestly depends as we sort of race into winter here and just try to begin to understand. So a lot of places to potentially jump on here.
But I guess the main thing, Justin, is real quick, just patting you on the back once again, investment in energy seems to be the main play. We had a massive investment today from Warren Buffett into Occidental Petroleum, which notably does a lot of petroleum exploration in the Permian Valley ... I'm sorry, the Permian Basin out there in west Texas. So I'm hoping, Justin, you can kind of take me through what's going on in the energy sector. How are we trying to power through these ridiculous gas prices? Bringing US production back, that sort of thing. Can you kind of take me through what it means with this kind of huge investment, like what these sort of whales are thinking about in energy policy?
Yeah. It's interesting to see that. We've talked about this a lot, Peter, so I'm happy that you asked. But effectively, there's a few different things going on right now. So obviously Warren Buffett, to your point, is buying another $500 million worth of stock with a company that does 80% of its drilling in the Permian Basin, which is very interesting. He's doing it for a good reason, similar to reasons that we've been looking at. Obviously, there's a massive just energy shortage, kind of like what's going on right now, with implications coming out of supply shortages in Eastern Europe and other parts of the world, and energy prices have just gone sky high when you pair with inflation over the last six to 12 months here. So he's looking at big drillers in the US because we're going to have to start doing a lot more of our drilling on shore. Instead of necessary currencies, but almost commodities become the new currency in a sense.
So owning your own supply of energy, like if anything that we're learning from Russia right now is that that's super important. So we're taking, and so is Europe, taking a lot of the drilling and bringing it on shore. Or just producing energy on shore. So when you look at where the US producers drill, and ultimately refine their oil, most of it's in Texas. The Permian Basin is one of the largest drilling areas in the country. In recent years has seen a ton, a ton, a ton of capital expenditures for drilling in those specific areas. So rather than pick what stock is going to be most profitable, fall upon the biggest well, then have the right refining capabilities. We talked about the refining stuff last week. It can be hard. I mean, as long as oil prices are going up, you'll likely do well. But if you look at the company he invested in, the stocks up like 90% this year. And then if you look at some others, like Exxon Mobil, it's up 35%. Which is obviously great, but the upside is different.
So for us, what we're doing is rather than, and this is like with a lot of our investment theses, rather than try and pick the company who's going to do the best, we look for companies that are the ones who own the actual underlying infrastructure. So there's a company called MP Materials. We were saying, "Yes, you invest in testing, do these things, but wouldn't you want to own the company that's supplying the materials that go into the batteries needed for the technology within those electric vehicles?" For the oil, we're taking a very similar approach. Wouldn't you want to own the land itself? Who's the biggest landowner in the state of Texas? A company called Texas Pacific Land Trust, which we've talked about before. This is the largest land trust in the United States. Specifically, they are owning some of the most valuable land in the United States. What they do is rent out their land via royalties to ConocoPhillips, to Exxon Mobil, to a ton of drillers. And then ultimately, are able to derive kind of these ongoing royalties that have kind of ended last year and now are being renewed at significantly higher prices.
They have the highest gross margins in the S&P 500 as it costs basically $0 to own land. The land is used for not only oil, but it's used for water rights. It's used for railways. There's a ton of other use cases. And by definition, the stock itself has to buy back itself over time, which artificially boosts the price. Right now, the value of the stock is actually less than the value of the land. So there's a natural arbitrage opportunity that, again, most people are just missing on.
So it's a long-winded way of answering your question about, "Why oil? Where's it going? How are we playing it?" Warren Buffett's doing what other people are doing, and this is the way that we've chosen to play it over the last few years. We've been rewarded. TPL's up like 400% in the last five years. Getting back even further, it's up like 35000% of all time. So it's a company that we don't necessarily just like now, but like over the next decade.
This is going to get into a lot of what we're thinking about, audience. You're going to see a lot of this in our perspective, too, where we kind of look for the plays within plays to make sure that we're hedging our bets as best as possible. We can't really see what's going down re volatility, right? So when we're looking at that sort of thing, sure, energy is going to go up a lot potentially as prices rise and as onshore production happens more here in the US, and there's a potential for shareholder value to increase here. The best thing to do, though, is sort of like go after the people selling the shovels in the gold rush, rather than the people doing the actual mining. That's why you're seeing us highlight stocks, like Thermo Fisher Scientific on the biotech and pharmaceutical side, rather than making any other very speculative biotech recommendations or anything on the pharmaceutical side as well.
We want to make sure that we're hedging our bets because you'll see slower growth from these kinds of companies, but at the same time, there's a higher chance of growth, especially through a very weird and hard to predict period. If it turns out that we're being a little too conservative, and this is really just like a flash in the pan style recession, well, hey, that's awesome. Everybody wins. Of course, the pressure's causing inflation to go up and the market to go down are very long lasting. There's very little light at the end of the tunnel when it comes to our overall supply chain woes. At the same time for energy, same deal. It's very difficult--you can't just press, "Drill more oil in the US now," and expect it to happen next week. It's one of those things where we have been recovering from that bizarre period in April/May of 2020, when oil had a negative value, if you recall. People had to just hold onto barrels of oil. It was honestly a wild time. That kind of astounding shock has really, really long reverberations.
So that's why you'll see a lot of those more conservative plays from us. But at the same time, audience, you'll also see us trying to find those momentum moments as well. So, Justin, in a lot of the strategy that you've done, and a lot of the analysis that we're doing, we're also starting to look into more of these daily momentum plays. So I'd really love to get through your philosophy, Justin. Yesterday we published the first iteration of our daily stock trading ideas. And every day afterwards, we're going to be posting a new list, so to speak. Can you kind of take me through the idea of what momentum is? Like, are we turning into day traders here despite being longterm investors? What's the game when you're thinking about momentum throughout a period of more volatility, like what we're seeing?
Oh, just realized I was on mute. Always the joys of Discord. Yeah. So you're asking about day to day volatility, what we can do with trading. I mean, it's a very interesting area. To your point, we're not typically trading in general. We believe in fundamentally finding companies that are either undervalued or have long-term value associated with them that are achievable in the next five years, let's called it. For us to go after a trading strategy is very irregular. So I would just want to preface that. We typically do not do that, especially in stocks where it's significantly harder to trade than in crypto, for example.
However, right now the volatility is really high, and when volatility is really high, there's a lot of opportunities to be made. After working with our data science team in tandem for a while now, they finally convinced us, us being the fundamental side of the business, that this was a strategy worth pursuing. Something that is extremely high risk, but something that could be providing daily stock ideas, using momentum, using artificial intelligence, to ultimately select stocks that have the ability to go up day over day, go down day over day, and ultimately be able to capitalize off it since there's such big, big volatility swing.
We released that yesterday. We released it for our premium members on our site. That updates every single day. So every single day that the market's open, five days a week, most weeks, bearing any holidays, you'll see new trade ideas. What you can do is in there buy stocks that ... you don't have to buy all of them, but maybe buy stocks that you think can do well, based on what we're saying, what you think, and then ultimately, are able to leverage that. Not all of them will be winners, not all of them will be losers, but there will be ... We're obviously making the bet that the winners will overshadow the losers.
This is a very boomer or bust type thing, which again, is not fundamental rooted in who we are. But there is opportunity that we will do deploying the strategy for some time until volatility goes away, and we don't see the trading kind of aspect of it being integrated in the long run. But for the short run, this is definitely something that we've been capitalizing on. We're excited to roll it out. I know a lot of people have been asking for us to do something like this.
Another thing to keep in mind is that we have to find these fundamental plays, but also find those momentum swings as well. So if you're a Moby.co member, make sure you check that post out every day. We won't necessarily send notifications out for each of those swings, but it's one of those things where if you just kind of bookmark that post, you can check it daily. You're going to see those kind of momentum moments day over day over day over day, that kind of add up to trends over time. But it's one of those things where the moment we talk about in here on this podcast, it becomes stale. So let's go ahead and move on, too.
Because one thing that's happened between the two recordings we've done, Justin, is we ... The last time you and I talked live on air, Bitcoin was hovering around 20 K, and now it's hovering around 20 K again. But between those two points, we had a pretty significant flash in the pan crypto winter that drove Bitcoin all the way down to 17 K. So our audience is honestly very curious about ... We're seeing a lot of lineup between the trends in the NASDAQ and the trends in Bitcoin. They kind of follow each other a lot, more and more than ever. Bitcoin obviously swings even harder, and therefore swings the rest of the crypto market even harder. NASDAQ goes down, then Bitcoin goes down, which crushes alt coins, so on and so forth, because we're seeing more and more institutional money enter the crypto space. Even during this crypto winter.
Obviously, right now, you're seeing a lot of whales prepare for all sorts of price action as people wondering what the recovery here is going to be. So can you kind of take me through your thesis? You literally, I think moments before this podcast came out, published a new report about what's going to recover first, stocks or crypto. Can you kind of take me through what you're seeing in terms of the crypto winter and how we're sort of thinking about it?
Yeah. It's interesting, a lot of people are starting to ask this right now. It seems like most people, maybe not on this podcast, necessarily, people who are listening now, people who are listening later, are kind of starting to say, "Hey, maybe we're approaching a bottom. Or maybe if we're not approaching a bottom, we're almost there." So what is going to recover? When is it going to recover? What's going to recover harder? This seems to be kind of on the forefront of everyone's mind right now.
So there's basically two different ways they're approaching this. The first way is, again, similar to everything we're doing, is taking a longterm fundamental view on this. The second thing we're doing is we have to factor in risk. So this becomes very personalized. So this take this with a grain of salt, because it'll be different per everyone's risk attitude. But effectively, the question we're asking ourselves are, "Okay, things will rebound at some point. So when they do rebound, what will rebound harder?" The obvious answer right now is crypto. Having said that, could easily keep sliding down further. So the room it will have to make on the upside is significantly higher. But once it hits the absolute bottom, crypto's beta relative to the market is significantly higher. So when things do bottom out, crypto should be following a very similar path to equities. They're both risk on assets. So as you invest in risky assets, the other risky assets are correlated. So as equities go up, stocks ... sorry, not stocks, but crypto should go up as well.
Once equities start going up, crypto will then move sharper up. So what we mean by that, for example, if equities go up 10% over the next month, crypto could move up 10, 20, 30%. So you're definitely getting more upside if you're investing in crypto. But again, volatility is going to be extremely paramount. Even on the way up, you'll see up, you'll see down. And then it could easily keep sliding further. So there's a very, very high measurable level of risk that you would be taking, if you ultimately go down the path of choosing crypto over stocks.
It doesn't have to be mutually exclusive. You can allocate some towards each. But if you're asking yourself right now, "What will rebound harder?" The answer is likely to be crypto. If you ask when that will happen, they'll probably happen at the same time. If you're asking specifically when that'll happen, it is impossible to call the bottom. The number one thing investors are doing are forward looking. So as soon as there's some light at the end of the tunnel, I can see this thing starting to reverse. We saw the first at the end of the tunnel starting to appear potentially yesterday with the fed saying that they believe demand will go down.
It's funny that that's light at the end of the tunnel, but ultimately, demand going down means less demand. Overall, less demand overall means demand, supply can catch up, the imbalance between the two. They catch up. Inflation goes down. Inflation goes down. Interest rates can stop finally going up. High interest rate environment, stocks can't do well because no one's borrowing. And it just doesn't encourage spending in the economy. It's kind of like how the whole supply chain works.
So long story short, if demand goes down, inflation could go down. Just because demand goes down, doesn't mean inflation will go down. We can have a period of high inflation, low demand, high unemployment, which is called stagflation. But I mean, again, these are things that we all need to monitor. So long story short, we need some sort of sign inflation is going down before markets start going back up. If there is no hope at the end of the tunnel, it's going to be very hard for things to recover.
The chief thing to keep in mind, too, is remembering, audience, what things are driving inflation primarily as well. If you look at the CPI and just see 8.6%, what does that mean? And then you break that down and you see things like new and used car sales and new and used car leases, and then the most important thing being energy, being the chief thing that is bringing inflation up. When you look at that and you understand that, "Okay, energy prices typically go up during the summer months because America and the West, people turn on their air conditioning, people drive around a lot more, and they travel a lot more." So if we see a period of demand destruction, especially for energy during this period, during this summer, that would be an astounding event, because that would be demand going down at a period when it usually goes up, which would have a significant cooling effect on inflation. So it's really hard to predict whether or not that's something that could actually happen. You got to kind of just like trust the process, so to speak.
I'm very excited to see where the CPI ends up next month. I think that's going to be a very critical print to see. Because the main thing is, if we saw inflation go down in June, that's sign that inflation is going down overall. And then if it pops back up in July, that's natural, because, you know, demand goes up in July, August, and September. So I'm very excited to see if they actually pull off this level of demand destruction, so to speak. Not demand destruction, but demand diminishment. So keep that in mind as well. So it's one of those things where I would be very shocked to see inflation really cool off in July. But then you're looking at August and September, that's the potential for it to really like start accelerating that process, if the fed really has a chance to get this under control.
But to bring that all back to crypto as well, what you're what you're hearing from us, audience, is obviously we're doing more lagging indicators than leading indicators, because it's so hard to predict what crypto, Bitcoin specifically, is going to do during this period. Because this is the first genuinely, even borderline bear market, borderline recession that the crypto industry has dealt with. Remember, crypto was born after 2009, as a response to the financial crisis for the last significant recession. 2020, yes, was a huge downturn, but not a full on recession. We shoved so much money into the economy that we shot us right back up. This recession is the recession that should have happened should COVID-19 not blown up the world for the past two and a half years. So keep that in mind, too. This is the first time we're going to see genuinely recessionary behavior around crypto. No one has seen what the crypto market's going to do.
I think it's really important, too, just to like put out little like barometers. I would be shocked if Bitcoin stays above 20 K. I think it's pretty likely to go down below again. But again, that's not a prediction, that's me saying, "Oh, I'd be very surprised." I'd also be very surprised if Bitcoin never dips down below 15 with all this kind of negative price pressure. But that's me looking at the math as best I can. And mainly using technical analysis, which again, in crypto is the only tool you really have because there's very few fundamentals to go off of. Technical analysis can be very fidgety. It's basically looking at old patterns and saying, "Well, this pattern's happened before, so maybe this one will happen in the future." Keep that in mind. So it's really hard to predict what's going to happen here.
The other thing I am starting to look into as well is the liquidity in the crypto space. Specifically looking at on chain analytics and seeing where there's a lot of money on exchanges, thinking about who's going to make big moves. The thing you have to keep in mind about crypto, and Bitcoin specifically, is that while it's getting more and more established, and more and more large institutional money is there, it's like any other market wherein you've got a vast majority of individual players with a very small amount of holdings, and then a small number of huge whales holding onto ridiculously large amounts of assets. Those whales in the crypto space have far more power than individual banks in like the actual stock market, because overall, crypto is much smaller.
So what you're going to see from whale action in crypto has a lot more potential to move the market than say, Warren Buffett buying a bunch of stocks. Because yes, Warren Buffett did buy $500 million worth of stocks, but when you compare that to the absolutely insane overall value of any particular equities market, it's a much smaller percentage than say one particular crypto whale making a huge move in Bitcoin. Which is kind of what you saw over the weekend, which drove drove us down to $17,000 per coin for a hot second. So that's the main thing you have to watch. We're going to be getting a lot of really interesting information over the next six months to see if this is an overall full on recession, first of all, and then seeing how crypto responds to a recessionary environment.
We've had crypto winters before, but they were brought right back up by people having ... by qualitative easing, but people still having a lot of liquidity and taking that out of the equities markets and putting that into crypto and seeing what's going to happen. If we see a full-on pullback, there's no telling how low crypto may go, specifically Bitcoin. Of course, I'm only going to be watching Bitcoin during this time and making predictions about that because alt coins are really hard and I'm not going to say anything about Ethereum until we hear more about the update happening in August. Hopefully, fingers crossed, for gosh's sake. Not to wax poetic re crypto, Justin, but I just want to make sure that we have all of those complex ideas in mind.
As we move forward though, Justin, what else am I looking for in terms of understanding if this is just ... if volatility's winning right now and we're literally three points away from popping right out of bear territory in the S&P? Obviously this is probably more of like a bear market rally, since we've been in an extended downturn since roundabout December/January. But what else should I be watching to make sure I understand what's going on here?
Yeah. I mean, unfortunately, the fed is just ultimately dictating everything in the economy right now. Outside of the geopolitical aspect, if you're strictly looking at the stock market, the equity market, it's wed by the Federal Reserve. I cannot stress how important that is. You go back to the 1950s, which is obviously a long time ago, and there's been roughly 15 bear markets since then. Out of the 11 bear markets ... the 11 out of the 15 bear markets, when the fed was not accommodative, i.e., which is raising rates, slowing down monetary policy, and just not being accommodative, markets haven't bottomed. They haven't recovered. The market needs the fed to be accommodative. Accommodative means pumping the economy with money, lowering interest rates so that people are borrowing more and stimulating demand in the economy.
Right now, inflation is so ridiculous and out of control they can't do that, but ultimately, once things start to get better, the fed hints that maybe they're not raising rates anymore and they start turning the other way, even start doing more quantitative easing, that's when we can start to get to a direction where things change. So right now, obviously look for the companies that are doing well. The companies that are resilient. They'll help be the companies that shape the next five, 10 years in the markets. But ultimately, things truly, truly can't change until that happens.
We are seeing a small rally this week because there's been rumors that the fed may not do 75 basis point raised. They might do a 50 basis point raise. That'll be because inflation is not as high as we may have thought into next quarter, since demand's slowing down. So those are the hints we want to watch for. Because then if the fed reacts, slows down their interest rates, say we're approaching of top, that's when we can start potentially going the other way. But ultimately, until the fed is on investor's side, which in their defense, they can't be right now, it's going to be extremely hard to go the other way.
Exactly. It's pretty much the worst time ever to be somebody at the fed because it's a real rock and a hard place situation. Because ultimately, monetary policy isn't the thing that's really controlling this as much as other factors are. Like, the fed can't magically stop an invasion in Ukraine. And also can't just conjure wheat out of the ground now that we need to replace things like phosphorus and all that in our economy.
It's crazy, even before though the Russia stuff, and don't get me wrong, I fully agree with you, inflation was still around 7% and their long run target's two. So it's like, as much as the Russia stuff isn't helping, the Chinese stuff isn't helping, it's been bad for a while. I mean, the things, it just amplifies it, but we still have to be extremely self-aware, to a certain extent, that say this is a problem we brought on that just got worse, given the world events.
That's what we need to be looking forward to as well. It's one of those things where we're seeing sort of like the complete shocks that come from a globalized world. Not to say that globalization isn't a good thing or a bad thing. I think the more interconnected we are, the better we can do for all humanity. But it's one of those things where you're going to be seeing a lot of pushback against globalization for the next, who even knows. You're seeing us do more domestic oil production. You're seeing a lot of other nations kind of pull back into themselves. So it's going to be a very interesting process on the macro side as well. Wondering, "Is it going to be 1917 all over again pretty soon?"
It's really interesting to watch, but at the same time, it's good to see that the economy has a lot of this positive pressure throughout this situation. It's one of those things where the media will tell you, "Oh, potential huge crypto winter, Bitcoin going to 7,000," or something wild like that. But at the same time, what we're seeing is just a kind of low and slow grind through the economy just needing to sort out all of these supply chain shocks. So watch the signals, watch the momentum, and then make sure you're making these longterm positions so you never become a forced seller. It's one of those things where it's boring to talk about right now, kind of, because it's like the same thing over and over again. But what I'm really interested in is sort of seeing how this kind of aggregates over time.
So hopefully what we'll see is demand go down and the CPI cool off, even a little bit in July. Just seeing that would be absolutely massive to know that we're pushing in the right direction. But it remains to be seen. We only get one real inflation update once a month and that's not coming for a couple of weeks yet. But either way, Justin, we managed to careen right here into time. There's so much more I wanted to talk about. I wanted to talk more about crypto consolidation, like FTX by basically bailing out BlockFi and all of that. But literally, zero time there. I need to do a lot more analysis there to see just how much consolidation's going to happen in the crypto space.
Justin, any final thoughts from you as we sort of like get to the end here? Anything else we can think about as we sort of watch this happen and wonder how the market's pricing, and all this tomfoolery?
Yeah. I mean, we can talk about that at a later date. It's probably something good to talk about offline if people ask it. I mean, real quick, I can 30 seconds. CEO of the company is kind of taking a similar approach to Warren Buffett, running companies lean, fast. So while they're growing super fast over the last several years, they've been doing so with not that many employees. Coinbase has several thousand. They have like 2, 300, which is pretty crazy. So in a time where everyone's freaking out, firing, they have a ton of capital. That's why they're deploying it and buying companies, and becoming kind of like this consolidated figure. Similar we see with Berkshire Hathaway.
Kind of taking a play straight out of his playbook, we'll see how it plays out. But ultimately, they're in a really good position because they've built their company super responsibly. If they were publicly traded, they definitely would not be getting dinged nearly as hard as everyone else's.
Precisely. Yeah. But again, we'll have to see. It's kind of the same pressures. The conservative slow players use these kind of downturns to consolidate and become massive players. So interesting to see how that plays out. But again, it's one of those things we need more analysis for.
Either way, Justin, that brings us to time. Audience, thank you so much for all of your questions. If you have anything else for us, you can feel to DM me directly here on Discord. Or if you're listening to this in a recorded version, feel free to email me. I'm [email protected]. Otherwise, audience, I really appreciate your time. Just so you know, this podcast was produced, hosted and voiced by me, Peter Starr. All of the intellectual advice you heard today came from our chief analyst, Justin Kramer.
As well, audience, if you have any other questions for us, again, hit us up at [email protected]. Otherwise, as always, audience, I like to leave you with peace, love, and incremental gains. Everyone be well. Thank you so much.