No, I’m Not Selling Exxon and Chevron Here

Well, that cinches it. The world is in a recession. No, I am not talking about tomorrow’s US non-farm payrolls report, which some clown on an endless clown show FinTV network will inevitably, breathlessly, report as “not recessionary.”

No, I am dealing in the real world, where grown-ups operate, and that is dry bulk shipping. I have been following this group since 2006, and I have seen some incredible highs and lows in pricing of freight rates. The great thing about dry bulk shipping is that there is a standard, daily index, the Baltic Dry Index, compiled by the Baltic Exchange in London, that shows investors which way things are going.

Major bulks include coal, iron ore and grains, and prices to transport those cargoes have fallen sharply this summer. Trading Economics has the BDI time series chart here.

What this tells us is that the general level of global economic activity has slowed dramatically in the past three months. No, I am not talking about Amazon (AMZN) Prime delivery orders (I am a Prime member… I just placed one) but the real stuff. Oceanborne raw materials shipments that become things like food, steel (coal and iron ore joined together in the Bessemer process) and intangible things like power to keep our lights on and keep factories running.

The delta in demand is always China. With sporadic Covid lockdowns still occurring – Wuhan locked down last week based on, reportedly, four asymptomatic cases – that hurts demand for dry bulk goods, and of course oil, as well.

But while the BDI declines put stocks of dry bulk names like the Navios Group companies (NM) , (NMM) and Star Bulk (SBLK) in the penalty box, I would be careful about drawing a comparison with the hydrocarbon names. Drilling for oil and running a dry bulk ship are two completely different undertakings. So, to answer a question I have been asked the last few days by several of my clients, all of whom are overweight energy: “No, I am not selling Exxon (XOM) and Chevron (CVX) here.”

Front-month WTI oil futures contracts have fallen below $90/bbl. This is true, but the curve has flattened significantly. The highly-backward dated (front-month prices higher than future months) state of the curve a couple months ago is now a thing of the past. If you wanted to buy a barrel of oil for delivery in 12 months – August 2023 – you would have to pay about $81/nbbl for it. I consider anything above $100/bbl oil to be “boom” times, but, more importantly, I consider anything above $80/bbl to be “greenlight”, i.e. the companies will generate copious amounts of cash flow.

With WTI oil quoted in the “greenlight zone” even on contracts that expire one year from now, it is still all-systems-go for us, and for the HOAX model portfolio I created last December to exploit this stagflationary environment. HOAX, as adjusted for reinvestments – all HOAX component stocks pay dividends – has risen 36% since inception, and Cathie Wood’s (ARKK) , which has benefited from the Nasdaq’s senseless surge this week, but has never paid a dividend, and owns zero stocks that pay them, is still down more than 50% since 12/23/21, the date of HOAX’s inception.

My clients and I are not changing course. Exxon is yielding 4% at today’s level, and Chevron 3.7%, and both companies are buying back copious amounts of stock. Until I see those real return characteristics as likely to change – they aren’t – I simply will not sell my high-yielding stocks.

You want to take the other side, and bet on Elon Musk and Cathie and gossamer and dreams… be my guest. But if you have XOM and you are spooked at its “pullback” to $88/share (XOM is still up 40% ytd), then please email me and I will buy your shares.

The BDI is giving us a backdrop of global slowing. But that makes me more inclined to hang on to the real returns given by yield, especially as 10-year UST yields decline, making our dividends all the more attractive, on a relative basis. I am not going anywhere.

Exxon’s yielding 4%, Uncle Sam (the 10-year UST) is yielding 2.67% and Elon’s (Tesla (TSLA) ) company has never paid a dividend nor bought back a single share of TSLA. My clients and I choose to earn real returns on our hard-earned capital. Doing that in a global recession can be tricky, but we know, at the end of the day, we are getting paid for our trouble. Meanwhile, the rest of the market just hopes to find a Greater Fool to pay a higher price for a particular asset.

That’s my investing philosophy, and it is no HOAX.

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