By: Wilson

I came across some charts today from The Crude Chronicles that motivated me to write this piece. It helps that Amazon surprised everyone today that it is going to spend $200 billion in capex.

Source: The Crude Chronicles

That’s an eye-opening chart.

The Amazon announcement will make it 2 tech companies spending more money on the AI buildout than the entire “Western” oil & gas companies.

And who said oil & gas is a capex-intensive business?

In a November Memo I wrote titled, “Shitty Businesses.” People who invest in tech aren’t familiar with what a shitty business really is. In oil and gas, that’s a dime a dozen.

Why? Because you need to spend money to make money.

What’s the holy grail of running a business? A business that can make money without you having to invest/spend money.

Hedge funds are great businesses. Your operating costs are fixed, performance fees offer optionality upside, and scale begets scale. But the problem with hedge funds is that you need 1) a track record, 2) the ability to deliver market-beating returns, and 3) size.

So the barriers to entry are high because you can’t just start one tomorrow (well, you can, but you get the point).

Let’s use another example, the Substack subscription business.

Your product is your research/article, you spend time, publish it, and your economies of scale are infinite. One article could get you 1, 100, or 1,000 subscribers. The incremental cost of getting an additional subscriber is zero.

Over time, if you maintain a good reputation with a good track record, scale begets scale, readership begets readership, and the virtuous cycle grows. The key to maintaining a profitable/growing research service is to 1) control your costs, 2) control your overhead, and 3) improve the quality of the research/product. The issue is getting the publicity needed and the initial readership. That process is a grind, and it’s one of the many reasons why readership eventually funnels upward (to the most popular services).

Now, take the subscription business and add a new element to it. Instead of original content generation, you “spend” money to create content. You hire people to write articles. Without an effective way of controlling this cost, the returns are extremely unpredictable.

Sure, you might scale faster by branching out into more sectors or topics, but you also run the risk of diminishing the economies of scale of the business. In addition, you introduce key man risk where one of your contributors might decide to jump ship one day. In essence, the returns greatly diminish when you introduce this new element (hiring) into the equation. You no longer enjoy the infinite economies of scale.

What does that have to do with tech capex spend?

Tech was always considered a low-capex intensity business. That’s what made it so attractive for investors. You spend X on developing software or a product, you sell it, and the incremental cost of selling additional units were diminimis.

In the case of Meta, you have a social media platform like Instagram; scale begets scale, content begets content, and advertisers rush to your platform to spend money. You control user data, you know what time of the day they log on, what they see, what they like, and you can tailor each advertisement to their usage/behavior. You charge a premium advertising rate relative to peers because you have a competitive advantage. So long as people use the service, you have an enduring competitive advantage.

And the same scale dominance applies to every other major tech company, Amazon, Alphabet, you name it. As time goes on, you get bigger and bigger, and the smaller competitors exit the business. That’s how you build shareholder value.

But AI has upended all of that. If you don’t spend money on developing the infrastructure or the AI models, you risk falling behind, and if you fall behind, you are dead. Or at least that’s how a lot of the big tech guys are thinking about this. Apple is an exception here, and what’s ironic is that its failure in rushing towards a competitive AI model might actually turn out to be a benefit later on.

Only time will tell, but for how much longer will investors endure this period of rapid capex expansion?

And this is best illustrated by another amazing chart from The Crude Chronicles.

What preceded the crazy capex spend we saw from 2004 to 2014 in oil?

The decade-plus oil bear market we had to go through from 2015 to today.

What does that mean for tech? I don’t know, but this level of spending can’t continue.

Parting Words

Energy investors learned this the hard way. Fracking was revolutionary, but most investors didn’t make money from it. Oil and gas companies borrowed money to invest, leaving investors holding the bag. Growing production was the name of the game; whoever had the highest growth was winning all the investor attention. Then it all ended in 2014, and again in 2018, and again in 2020. Now discipline is the name of the game; everyone focuses on delivering free cash flow for investors, paying down debt, and maintaining rock-solid balance sheets.

Energy companies didn’t have this “come to Jesus” moment overnight. The market pounded this mentality into them for 5 years AFTER oil prices collapsed. For god sake, from 2017 to 2018, US shale grew US crude oil production by over ~150k b/d per month (+1.8 million b/d per year).

And if you go back in time, no one in energy thought, “Well, shit, if I grow this much and my competitor grows this much, doesn’t that mean we are all screwed?” Yes, but where was the discipline when it was obvious?

I do wonder if history rhymes here for the tech boys chasing the dream of AI. I’m not a specialist in that field, so my opinion on this shouldn’t matter. But I’ve seen a thing or two about bear markets and technological innovations; sometimes, they aren’t necessarily good for investor pocketbooks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

By: Wilson

In the past few weeks, I’ve been driving with absolutely nothing playing in the car. No radio, no Apple Music, no Audible, no podcasts, nothing, just total silence.

I wanted to spend the time to think, allow myself to let my mind wander. And when I do that, I have the tendency to dwell on my past mistakes. What I could’ve done, what I should’ve done differently, and how I can learn from those mistakes.

Perhaps it’s a genetic defect. I rarely spend time on the things I do well. Perhaps it’s just being too critical of myself. I rarely let myself celebrate any success. The way I look at it: if you aren’t trying to get better, then you will never get better. So spending time thinking about what you did well won’t actually make any difference. I guess that’s why I focus on the mistakes. So the more I let my mind wander, the more frustrated I get.

How many more “lessons” do I need before I actually get good at this game?

If I were to evaluate myself, I know for a fact that I’m not that smart. Jon Costello, HFIR’s head of research, is 10x smarter than I am. Despite having over 13 years of experience under my belt, I have made many investing mistakes more than once, which already puts me in the category of the dumbest people on Earth.

P.S. The three categories:

• Smartest - People who learn from other people’s mistakes.

• 2nd Smartest - People who learn from their own mistakes.

• Stupidest - People who never learn from any mistakes.

So yes, progress is never smooth, especially for me.

Progress

There is hope for even people like me at the end of the day. How do I know that for certain? Well, I will have to go off on a tangent: golf.

I’m not athletically gifted at all. I played tennis in high school and thought I could become a tennis pro. When I tried out for my university tennis team, I lost 6-0, 6-0. I think I won a total of 20 points. Thankfully, I’m not that dumb anymore, but you get the point.

I’ve always dabbled on and off in golf because my dad was a professional golfer on the Asian tour (back in the days). I played during my summer breaks where I would spend time in Shanghai mingling with my dad’s successful business students. I learned a lot of valuable business lessons back then that I still use today.

When I first started, I was terrible. It started with the slice problem. The driver swing was so bad that caddies (yes, they have them in Asia) would have to bring sand bottles to the tee boxes because I would make a divot. And then I had the chunks, the shanks, and every imaginable golf problem you can imagine.

But slowly, with enough practice, you start to get the hang of it. By year 2, I started to shoot in the 70s, but with the occasional blowups that followed any good round, as all golfers know.

After I started HFI Research in 2015, I put golf on hold and focused entirely on building the business. It wasn’t until COVID (2020) that I picked the sport back up, but with a different mindset. I was tired of having volatile rounds. One day, it could be in the 70s, and the next day, it could be in the 90s. That had to stop, so I figured, why don’t I use a checklist approach to playing golf, similar to that of investing?

I mean, we all have some level of mental checklist when we invest. Some of us write it down, some of us keep it in our heads, but we all use it to some degree.

Could it work for golf?

Yes, it did, and it worked wonders. The handicap dropped from 7 to a +2. I knew I was not athletically gifted at all, so I focused my attention (during practice) on making the preshot routine idiot proof. If I made a mistake, I would go back to the routine and refine it. Slowly but surely, progress was made, but it was slow.

Again, for people with zero talent like me, the progress is never smooth. There are months or even years where it feels like you are stuck, constantly refining the approach hoping that one day you can break through.

Fast forwarding to today, it’s as if all of the progress unfolded in the blink of an eye. I shot two back-to-back rounds of 63 (-9) and 68 (-4). The 63 was shot from a course rating of 71 and the 68 was shot from a course rating of 76.4. This produced an average handicap index of -6.9, which was the lowest I’ve ever averaged.

So yes, even for people like me with no talent, progress can be made.

Just Keep Going

I was reluctant to post this memo at first. I twiddled with the conclusion section for hours. I thought I would write a reflection section talking about my mistakes, then I thought, what’s the point?

Then I pivoted to writing something about how I’m going to get better, but then I thought, what’s the point?

And it wasn’t until a subscriber of mine posted the beautiful three words, “Just keep going.” That really nailed it on the head.

Just keep going. It reminds me of my favorite book, Shoe Dog, where Phil Knight gave himself this advice:

Let everyone else call your idea crazy... just keep going. Don’t stop. Don’t even think about stopping until you get there, and don’t give much thought to where “there” is. Whatever comes, just don’t stop.

~ Phil Knight, Shoe Dog

I guess during times of trials and tribulations, all we can do is keep going. Survive to fight another day, learn the countless lessons that you thought you would learn the first time but don’t, and just keep going. If we aren’t moving forward, then we are dying, and that’s all there is to it.

So instead of promising myself that I will get better or that I will learn from my mistakes, I guess the inevitable choice we all can make at the end of the day is to move forward.

Just keep going and know that progress is never smooth.

By: Wilson

We live in an interesting time. President Trump held a meeting with some of the top energy executives this past Friday, and the mandate from the top is to have US oil companies invest huge sums of money to revitalize the Venezuelan oil sector. Meanwhile, the President also wants $50/bbl WTI.

You can’t have your cake and eat it too.

As we detailed in our piece on Venezuela, it will take years of capex and billions of dollars before we see any meaningful increase in Venezuelan oil production. The first major hurdle is the legal framework behind any joint venture deals going forward. Some questions that oil majors will want answers to are:

• What is the royalty split with PDVSA?

• Who controls the barrels? (i.e., extraction, handling, loading, selling, payment)

• In the event of another government change, what’s the clawback and legal mechanism to protect the investments?

• Will there be enforcement in the event of theft and other illegal activities?

The questions go on and on, and until the new government is stable and there are legal frameworks in place that make any future deals bulletproof, Venezuela is uninvestable, period. Exxon’s CEO isn’t wrong and the truth hurts, but what no one seems to be talking about is the other point that was made last week.

WTI at $50/bbl makes the entire energy sector uninvestable.

And there lies an even bigger issue on the horizon. Just as the world is about to find out how much spare capacity OPEC+ holds today (watershed moment of 2026 write-up), non-OPEC supply growth ends at the end of 2026, and the current administration wants even lower oil prices. This won’t end well at all.

Sentiment Bottom

Towards the end of 2025, we took our XLE short position off the table.

Why?

It’s too much of a consensus trade. Everyone appears to be bearish on oil. Some of my favorite sentiment indicators are flashing right now, and here they are:

Cramer

Goldman’s Clients

IEA

Energy as a % of US ETFs

WTI to Gold

The key lesson I’ve learned from my years of following the oil market is that fundamentals do not call bottoms or tops; sentiment does. And if there’s one thing common, it’s that the world is almost universally bearish on oil today.

Fundamentally, one can make the argument that the “bottom” won’t happen until H2 2026, but the oil market never bottoms or tops when you want it to. If there’s a bottom, it will likely coincide with some significant news event (such as a peace deal or the like), and people will think we will have a surplus forever. When that happens, you will see us get really aggressive on the buying.

Until then, it pays to keep following these sentiment indicators. Perhaps it gets worse, but bottoms take time, and if you remember in 2020, the catalyst to buy (with the least amount of risk) was when the Pfizer COVID vaccine was announced. The signal will be obvious; you just have to pay attention and care.

Rant Time

It frustrates me to no end when people think cheap oil prices will last forever. It won’t. To understand why the oil market is where it is today, we all have to be thankful for the Permian. Without this play, we would all be trying to figure out where we can find supplies to meet the insatiable demand.

Again, for those keen on statistics, here they are:

• Permian added 4.72 million b/d of crude oil production since 2015.

• OPEC+’s effective spare capacity today is 1.73 million b/d.

• Delta = ~3 million b/d

If oil prices averaged over $100/bbl, would we have been able to supply the ~3 million b/d difference? Maybe, but the Permian did it with oil averaging in the $60s. And it’s evident by the competitiveness of the Permian that no other plays in the world could even come close.

But the Permian isn’t forever. There’s an end, and Exxon is eating all of the last low hanging fruits from its acquisition of Pioneer. Yes, the Delaware Basin outperformed a lot this year allowing Exxon to be the only producer to show material gains y-o-y (+300k boe/d , almost the entirety of the US crude oil production increase), but Midland Basin wasn’t so fortunate. Producers like Diamondback are instead opting to save the best for when oil prices are higher, as any competent/disciplined producer should do. But the Exxon growth spree has an end to it too.

By 2030, Exxon expects total liquids in the Permian to grow by ~800k boe/d, and that’s it. No more growth, plateau forever, and this is just a few years away. What happens after 2030? Where will we find another Permian? Guyana, which was supposed to be the largest offshore oilfield discovery over the last decade will only supply ~1 to ~1.3 million b/d of supply growth by 2030.

Without another Permian, the world won’t be so lucky. The low oil prices we are seeing today won’t last, and sadly, it’s too little too late already. Oil is uninvestable in a lot of people’s mind and energy companies have taken note. Instead of reinvesting excess free cash flow in exploration and development, companies are instead buying back shares and paying dividends. Yes, shareholders will benefit, but the world is more f***ed.

It is what it is.

All the while, the current administration, which is supposed to be pro-energy, is actively trying to push oil prices into the low $50s, making oil, already uninvestable, more uninvestable. What a bizarre time we live in. You would think that with Chris Wright at the helm, the administration would have a better pulse on the realities of the US shale industry, the very industry that saved the world from what would have already been a global oil supply crisis. Instead, they are trying to slow it down.

It is what it is.

Whatever happens to the oil market in the years to come is the result of everything we’ve done up to this point. After being beaten down for 12 years, most people have forgotten what it’s like to set a capital budget without being paranoid about prices collapsing in the months ahead. What about demand? What about OPEC? The constant paranoia will impact capex spending for years to come even if oil prices move higher. That’s what happens when you structurally beat down the very industry that’s keeping the world running. But again, it is what it is.

The truth is $50 oil is uninvestable. You can’t make fairy dust numbers work. The truth will be obvious in the months and years ahead, and I hope we can look back on this memo and realize what a precarious time we’ve lived through.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of FANG either through stock ownership, options, or other derivatives.

By: Wilson

Energy is one of the few sectors in investing with the highest amount of shitty businesses. For most investors, the allure of energy is that it offers:

• Inflation protection.

• Dividend.

• Cyclical upside.

• Boom-bust swings.

What kills most energy investors is the following:

• Constant inventory replacement (oil and natural gas wells deplete over time).

• Operational execution risks (drilling results may vary from one region to another, i.e., different levels of “tiers”).

• Management execution (inventory runs low, management either drills/explores organically or “acquires”).

• Macro commodity risks, i.e., the boom-bust cycle of energy commodity prices.

Most of the risk in energy investing can be defined by two easy-to-understand financial categories:

• Revenue: The price you receive for the commodity you sell (oil, natural gas, NGL, etc).

• Capex: The cost to replace existing production and the cost associated with creating incremental production growth.

Obviously, during the good times, revenue vastly exceeds capex, producer discipline go out the window, and capex ramps. Those are usually signs of the end of a bull cycle. Similarly, when capex drops, producers push production down, then we start to see the cycle turn.

The differentiating variables here that make an oil/natural gas producer better than a competitor can be summarized below:

• The repeatability and consistency of the reservoir. How consistent are the drilling results from one region to the next?

• How long do the inventories last? Is it capital-intensive? Does it require a lot of “de-risking”?

• Is the management team consistently improving drilling results over time? Is the management team improving the cost structure over time?

• Finally, what is the broader capital allocation policy? Does the management “chase” ideas (acquisition mentality) or does the management focus on organic idea development (buying land, etc)?

So if you want to boil down to what makes a shitty energy “producer” investment, you have to look for the following:

• High capital efficiency (not a good term in this case): the cost of replacing production.

If an oil or natural gas producer has a very high capital efficiency, it means that replacing 1 boe/d of production decline would be more costly than for a competitor.

If we use Canadian oil sands as an example, the cost to replace production is between C$18k to C$30k boe/d. And since Canadian oil sand production has a low decline rate (usually less than 10%), the yearly “maintenance” capex is low.

Similarly, a producer from a US shale region might have capital efficiency of $18k to $24k boe/d, but because the decline rate is usually 3-4x that of the Canadian counterpart (30-40%), the “maintenance” capex would be much higher.

I’m not saying US shale oil producers are shitty businesses. I’m just saying that from a capex standpoint, the higher the cost of “maintaining” your business, the shittier you are, relatively speaking. More on this later as I will branch off into the tech sector.

• Reserve Life: The lower it is, the shittier it is. The higher it is, the better it is.

This is obvious for many reasons. Every oil and natural gas producer has to publish a year-end reserve report. In the reserve report, reserve evaluators publish a figure called “reserve life index.” This RLI determines how long the reserves will last using a base production rate. You can calculate this yourself using the current production run rate and dividing it by the total reserves.

If certain oil or natural gas plays have a lot of variability and unpredictability in their operation, then it will be difficult to “model” the expected inventory level. I’m going to use oil sands as an example again because it is the best example here.

Oil sand producers like MEG Energy that just got sold to Cenovus had a reserve life index close to 50 years. Most of the reserves were proven, so it makes it very easy to predict just how much oil will come out with each new well (oil sand is a bit different, but please bear with me here). In the world of energy investing, assets like these are considered “high quality” because MEG had one of the best capital efficiency metrics in the energy sector, and the free cash flow generation ability was high. Couple that with a high RLI, and you have a high-quality producer.

Note: Yes, I’m bitter that CVE bought MEG out.

So if you want to understand what a shitty business looks like, then all you have to do is look for the exact opposite of MEG. A producer with less than 5-6 years RLI usually means trouble. It’s not rocket science.

Now it needs to be said that just because you have a reserve life index of 5-6 years doesn’t actually mean you will run out of reserves in that timeframe. Every year you spend capex on drilling and de-risking inventory, you will “add” to your reserves, and every day you produce oil or natural gas, you will reduce your reserves. At the end of the year, you tally up all the differences, and you come to a final figure.

As a result, a producer with a 5-6 year reserve life index might just keep chugging along at 5-6 years for 5-6 years. That’s not a joke. But the difficulty here is that they need to constantly de-risk or buy land. This makes the execution part more risky, and anything more risky is shittier by definition.

Editor’s Note: There is a lot more to cover on this topic, but that’s for another day. Below is really the point I wanted to make.

Why am I going on this rant?

Read more

By: Wilson

It’s hard to find “value” these days. In the energy world, there are some important investment themes we see for the years ahead, but the issues are 1) timing and 2) value. These themes are:

• The end of non-OPEC supply growth is coming. The oil market will be heading for a structural supply deficit after the 2026 to H1 2027 glut.

• In order to meet the supply growth needs for the decades ahead, offshore will be a key sector. This is a multi-year trend.

• Natural gas and Uranium will be the key to fueling the AI datacenter demand boom in the years ahead. Massive LNG export expansion in the US will fundamentally alter the way global LNG is priced.

Many of these long-term energy themes take a long time to play out. There are many peaks and troughs along the way, and the journey is usually never very smooth. While it’s my job to help you navigate through, readers must understand that when there’s nothing “cheap”, it’s my job to tell you the truth whether you like to hear it or not.

On Oct 22, I published a piece on the “major” changes I’m making to the HFI Portfolio. The key premise here is that a lot of the mistakes I’ve made so far in my career have to do with position concentration. I’ve vowed to keep position sizes below 10% and work harder at finding more ideas.

Well... we did find more ideas, and sadly, a lot of you don’t really care about them (lol).

What are those ideas?

Read more

The last 10 days have been very hectic. I am currently on the road, so the write-ups have not been on their normal publication schedule. So here's a more informal update for my thoughts on the latest idea discussions, oil, and natural gas.

Sable

Read more

By: Wilson

If I had a time machine, I wouldn't hesitate a second and travel back to 2018. That was the worst year of my life. For those of you who haven't been with us for that long, I will give you a brief summary of what happened.

2018

Going into 2018, we were convinced that oil prices were skewed to the upside. OPEC+ started cutting oil production at the end of 2016, and while the first half of 2017 saw global oil inventories balloon higher (thanks to cheating), the discipline from OPEC+ in H2 2017 brought balance back into the market, and visible oil inventories started to plummet.

The Saudis, in particular, targeted US commercial crude inventories with a targeted export reduction. This translated to a significant drop in US commercial crude storage, with the bottom around 380 million bbls in August 2018.

For the HFI Portfolio, we went into 2018 guns blazing. We had just made California Resources one of our top holdings, and the stock had performed splendidly.

Fast forwarding to March 2018 and President Trump (first term) decided to sanction Iranian oil exports. The mere threat of sanctions sent oil prices higher along with energy stocks. Our long position in CRC (cost basis of around $7) went to $35 by May 2018.

The good times were here, and I thought I was the king of the world. HFI Portfolio was up ~60+% for the year, and all was well. Iran was going to lose 2 million b/d, and there was no one who was going to save us from a structural supply deficit.

Sounds familiar?

And then came October 2018, that's when hell broke loose. Brent peaked at $80/bbl and CRC peaked at $45/share. Following the June 2018 OPEC+ meeting, the Saudis told the market that it was going to increase production by ~1 million b/d to offset the barrels lost from Iran.

But by October, and with oil prices surging, Trump decided that it wasn't the right time to sanction Iran, and instead, issued waivers. This immediate rug pull sent oil prices tumbling and coincided with one of the worst streaks in oil trading in history (down 11 days in a row in November 2018).

In addition, and this was the most important one, US shale was meaningfully surprising to the upside. US crude oil production saw growth of +250k b/d per month. And by the time the dust settled, US crude oil production had reached 12 million b/d (up from 8.8 million b/d at the beginning of 2017).

The combination of higher supplies from the Saudis and no sanctions being imposed on Iran sent oil prices and energy stocks tumbling.

Instead of finishing the year up 60+%, we were down 42.2%.

So yes, that was the worst year ever, and I don't ever want to live through that again.

Why am I telling you this story?

Because there are a lot of similarities to today.

2018 Redux

Read more

By: Wilson

I firmly believe that the tariff war won't last. Market participants have rightly observed that Trump doesn't have the stomach to fight his ideology (tariffs are good). The reality won't let him, and in the 2025 edition, the credit market won't let him.

In my memo last week titled, "Trying To Find Clarity Amidst The Insanity," I said:

This tit for tat will continue until someone folds, and judging by the sensitivity of Trump to both 1) the stock market and 2) interest rates, the market will inevitably have to force it. So in another way, the worse things get (i.e. lower stock market or higher interest rates), the faster this all gets resolved before real damage is inflicted.

In other words, the faster the market declines, the better it is in the long-run as no real tariffs will be implemented and cooler heads will prevail.

There are other aspects of this tariff announcement that lead me to believe that it won't be sustained. The tit-for-tat nature of what's to come is so damaging to all sides that it reminds me of the Saudi oil price war in 2020.

Rewinding back to the events that unfolded this week and the sell-off to start this week finally caught Trump's attention. The more interesting dynamic that unfolded this week happened in US treasuries where the 10-year yield showed the fastest weekly increase since 2001.

But there appears to be a disconnect in people's perception of what's to come. If the US engages in the current tariff war (no changes), then wouldn't this hurt economic growth and result in a recession, which would push yields down?

In theory, yes, but this is not your normal market situation. The tariffs being imposed on China today (145% altogether) are akin to an embargo and will create havoc in the supply chain. Similar to the COVID supply chain crisis that resulted in inflation to shoot higher, the tariff will create a similar dynamic.

Even if Trump is successful in negotiating deals with other countries (soon), I think the embargo on Chinese goods will make it 1) expensive to replace and 2) difficult to source.

Either businesses in the US will have to eat the cost increase and pass it onto consumers, or there will be a lot of problems for small-to-medium sized businesses.

The credit market will continue to reflect the growing disconnect between perception (we are winning the trade war) to the reality (everyone is going to lose).

In the coming weeks, treasury yields will continue to climb, creating panic inside the Trump administration. I know for certain that Bessent has been watching the bond market closely, and even in Lutnick's case, the rise in yields will scream in his face that his policy recommendations are disastrous at best.

What's obvious to me here is that the credit market will be the key signal to watch for when this trade war ends.

Based on everything I've seen from China, they have 1) no incentive to cave in and 2) no issues with replacing imports from the US. It will be Trump that caves in, and it will be thanks to the rising yields.

Read more

By: Wilson

Nothing I can say to you today will offer you solace amidst this chaos. Unless, of course, you are in cash like Warren Buffett, in which case I'm sure you find all this chaos rather amusing.

Instead, I will do my best to offer you my thoughts about the latest tariffs and their impact on global energy markets.

Too Crazy To Be Real

As some of you may be keenly aware, the tariff rate math imposed by the US on all of its trading partners is 1) asinine and 2) flawed in logic.

If you have not seen the mathematical computation of the tariff math, here's a good snapshot from NY Times.

Source: NYT

The market, which was already feeling rather uncomfortable about the size of the tariffs announced, received even more bad news today when China imposed the same 34%, an asinine calculated figure to begin with, on the US.

The market turmoil you are seeing today is the result of that, as some market participants had hoped cooler heads would prevail amidst this chaos.

Sadly, that's not how it works, and I suspect cooler heads won't prevail until something actually breaks in the global economy. With China threatening tariffs on the US, Trump will have to show strength by reimposing tariffs.

Since the mathematical calculation was the trade deficit divided by 2, Trump has room to double the tariff rate back to 67%.

This tid for tat will continue until someone folds, and judging by the sensitivity of Trump to both 1) the stock market and 2) interest rates, the market will inevitably have to force it. So in another way, the worse things get (i.e. lower stock market or higher interest rates), the faster this all gets resolved before real damage is inflicted.

In other words, the faster the market declines, the better it is in the long-run as no real tariffs will be implemented and cooler heads will prevail.

There are other aspects of this tariff announcement that lead me to believe that it won't be sustained. The tit-for-tat nature of what's to come is so damaging to all sides that it reminds me of the Saudi oil price war in 2020.

Leading up to March 2020, Saudis tried to convince the Russians that a large production cut was needed to shore up the oil market in an effort to prevent massive storage builds. The Russians didn't think that was wise, so the Saudis did the opposite. It unleashed all of its spare capacity into the market in an effort to shut-in Russian oil production.

More specifically, it targeted Europe which caused Russian crude to sell for below operating breakeven. This tactic led me, at the time, to believe that the price war wouldn't last past a month. In a report I published on March 19, 2020 titled, "Everything That Has Happened So Far Indicates The Price War Won't Last." I said:

We did a deep dive into Rosneft's financials. Rosneft accounts for 40% of Russia's oil production. In 2019, it generated the following figures at $63/bbl Urals:

• Generated ~$21 billion in OCF in 2019.

• Generated $11.16 billion in FCF.

• Spending $12.63 billion in capex in 2020.

• Expected OCF at today's price is $5.5 to $6 billion.

Rosneft has yet to announce a capex cut but it has debt obligation due totaling $12 billion and including other financial commitments, a total of $25 billion due this year.

Rosneft will be negative FCF at these prices, so it will be forced to announce a capex cut soon. In addition, this scenario does not take into consideration the possibility of Rosneft being completely displaced in Europe, which the Saudis are now intending to do.

Rosneft will not even survive 6 months in today's oil price environment if it can't sell its oil. So the idea that Russia, the country can withstand the oil price decline is completely irrelevant to the analysis. If the largest producer requires a bailout from the government in the near-term, the price war will end before it even begins.

In the case of the tariff war, the math is also straightforward.

According to Brad Setser (shared from Citrini Research), the tariff announcement effectively amounts to an increase in the price of oil by $100/bbl.

And given the sensitivity of Trump to higher oil prices (or higher prices in general), the longer this painful sell-off lasts, the faster he will fold.

Energy Markets

If WTI manages to stay around $60 amidst this chaos, then you can say goodbye to the drill baby drill narrative.

Based on our latest model, US crude oil production will fall to average ~12.75 million b/d with an exit closer to ~12.4 million b/d.

Associated gas production will fall by ~2.5 Bcf/d, which would push Lower 48 gas production down to ~104 to ~104.5 Bcf/d by year-end.

Aside from the possibility that LNG exports get smacked alongside everything else the US exports, US natural gas market is going to be one of the more interesting markets for the rest of the year if production disappoints to the downside.

On the demand side, tariff uncertainty, whether implemented or not, is going to be negative for oil demand. Businesses will throttle back investments in the event that Trump restarts tariffs, but I think the negativity from this will be offset by the fiscal stimulus spending from China and Europe.

As for US oil demand, I fully expect weaker growth as I think businesses will be reluctant to spend/invest/hire amidst all of this uncertainty.

On the supply side, OPEC+ increasing production early definitely sent mixed signals in the market (we explained here). But with prices where they are now, non-OPEC supply growth is all but certain to disappoint to the downside. And since tariffs are not yet implemented and only marginal demand growth is impacted, the impact on inventory balances may be negligible.

All-in-all, based on everything I know today, these are the concrete conclusions I can reach:

• US crude oil production will fall this year versus the growth everyone expects.

• Relatively speaking, oil demand growth this year will be weaker than previously expected, but if the tariffs aren't implemented, then it will be marginally lower.

• Non-OPEC supply growth will disappoint materially to the downside.

Conclusion

The market may inevitably force Trump or other countries to fold, but it's likely to get worse before it gets better. The math behind the tariff is so asinine that it makes you think all of this is just a joke. But logic seldom exists when people are panicking, and given the size of the liquidation we are seeing across the board, calmer heads won't return until there's more clarity around the tariff situation.

I reason that this whole situation won't last because it's too damaging to all parties involved (similar to the oil price war in 2020). Cooler heads will prevail, but the market may need to force that on them.

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

By: Wilson

People are turning rocks into gold.

No wait, it's not rocks they are turning to gold. It's air.

Yes, people are turning air into gold.

And to make matters better or worse, it's not just anyone doing it, it's the President of the United States of America, Donald Trump.

Actually, it's not just Donald Trump, it's his wife and possibly his two sons who will soon follow in this mythical quest of turning air into gold.

You see, in the world of alchemy, the concept of turning rocks into gold is the ultimate mythical goal. By transmuting base metals into gold, you need the philosopher's stone. And sadly, no one ever achieved this in alchemy.

But I come bearing great news. You no longer need the philosopher's stone to turn rocks into gold, because all you really need is 1) million of followers and 2) the audacity to not care at all about your reputation in the long run.

If you have those two key ingredients, then millions await. What are you waiting for? Here's the ultimate guide.

How to turn air into gold for dummies 101

On Jan 17, Donald Trump, soon to be US President, announced on X the release of the official Trump Meme coin called $TRUMP. Since the start of trading, the implied market cap is ~$60 billion.

Note: The $12 billion market cap is off of the circulating supply and not the total supply.

Trump has managed to multiply his net worth by 20x following the release of this meme coin. And what's more astonishing about this achievement is that Melanie Trump, the First Lady, soon followed suit today with her very own meme coin.

And she too has created billions out of thin air.

How much?

$12 billion

So what are the steps necessary to create gold out of thin air?

• Step 1: Become the President of the United States of America

• Step 2: Change all crypto-related regulations

• Step 3: Create your own meme(shit) coin

• Step 4: Sell it to your followers

• Step 5: Create a meme(shit) coin for all your family members

• Step 6: Rinse and repeat

I hope this was helpful, goodbye.

Let's be serious for a second here, how can any of this end well?

All jokes aside, we should all take a step back and just admire the times we live in for a second. Bitcoin, which started with some merits, gave birth to the whole cryptocurrency industry, which is quickly morphing into something that's going to spiral out of control.

In my memo titled, "Gold Rush in Crypto," I wrote that it only takes 30 seconds to create your own shitcoin. So what's going to prevent just a gold rush into creating your shitcoin? I mean we are already seeing this with the hawktuah girl getting sued and now Ryan Fournier pulled something off similar:

And soon after he saw how much his shitcoin was worth, he tried to dump it as fast as he could not realizing he was the market:

All of this has been well documented on X, so if you are fascinated, you can start here.

But what you are seeing here is just a precursor to what's to come later this year. Similar to the grift that was the NFT market, shitcoin, and meme coins are next. These worthless pieces of financial instruments are the newest attempt by human beings to make gold out of rocks or thin air. There is no intrinsic value to any of the craziness we are seeing here. It is literally the greater fool theory and the person that ends up holding the bag will be left with a pile of turds.

And unbeknownst to Trump followers, they are the liquidity providers. As Trump and his family members start to exit out of these shitcoins, people who are real believers will not only lose their hard-earned money by transferring wealth to him, but people will have their lives ruined because of this.

You don't have to be a rocket scientist to see the writing on the wall. It's an inevitable outcome and time will prove just how stupid we are to have even gone through such an experience.

The bigger implications

I think there's something bigger to be said about all of this madness. It is just a sign of the times and if you thought the dot-com bubble was crazy, I think this is 1,000x worse. By simply creating nothingness out of nothing and asking people to buy it, you can create billions in paper wealth, if that's not the definition of a bubble or a scam, I don't know what is.

But if you take a step back and think about how all of this plays out, you can kind of grasp the bigger picture.

You see, Bitcoin's strategic reserve is the real reason everyone got really bullish crypto and now with Trump getting involved, you know a crypto reserve increases in probability. But you must also realize that as the Trump family tries to exit out of these meme/shit coins, the liquidity funnel starts to dry up.

In fact, you almost want the bubble to get so big to the point that any type of liquidity exit event will in itself pop the bubble. So despite the US government possibly being a counterparty to the cryptomania, there will be a liquidity event at some point down the road, and you eventually run into the issue of not having any more suckers.

Or then there's also the bigger issue of other countries becoming potential buyers in the Trump shitcoins. Over the weekend, I asked people on X a serious question, what's to stop a country like China from secretly buying the Trump coin and in exchange for no tariffs?

The answer is nothing. In fact, because crypto transactions are very secretive in nature (you don't know who owns what wallets), it would be incredibly difficult to trace the origins of the fund. So there's nothing, in theory, preventing back channel "hush-hush" funds from being transferred to Trump.

Now am I saying that this will happen? No, but since he announced the release of his meme coin, I think this greatly increases the probability.

Bubble

Everything you are seeing today is the final stages of a massive bubble unfolding. Like NFTs, shit/meme coins are the final straw that broke the camel's back. At some point down the road, the Trump family will want to crystalize those gains, and that will require an enormous amount of suckers to absorb the liquidity. In my life, I've never seen an orderly liquidation. And in the case of a supply-squeezed bubble like the one we are seeing with the Trump coin, this time is no different.

And when this bubble pops, everything correlated to it will pop along with it. It will be 2022 on steroids and I can't wait to see what the aftermath will look like.

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

I'm just glad this year is coming to a close.

Source: HFI Portfolio

From a portfolio performance standpoint, the underperformance to the S&P 500 was not without the many mistakes along the way. While my decision to liquidate the energy portfolio in April 2024 turned out to be a key part of why we are still positive for the year, the re-entering in May/June cost us a good chunk of the returns we made previously (up 31.54% in early April).

From the analysis standpoint, there were also a lot of blunders along the way. In June 2024 when we saw OPEC+ crude exports meaningfully drop, I thought the setup for an oil price spike (albeit temporary) was in the making.

The reality?

OPEC+ crude exports did remain low. Global oil inventories dropped.

OPEC+ Crude Exports

Global Crude Inventories + Oil On Water

OECD Oil Inventories

However, oil prices failed to gain any traction as concerns over 2025 oil market balances (surplus), weak Chinese oil demand, and OPEC+ spare capacity continue to keep a lid on prices.

In addition, unrealistic non-OPEC supply growth, no matter the reality, continues to keep investors' sentiment negative on energy.

Source: Michael McDonough

As a result, energy is once again the worst-performing sector in 2024. Since 2011, energy has ranked either as the worst or 2nd worst performing sector in 8 out of the last 14 years. It takes a special skill to be that bad for that long, but that's what a bear market looks like.

Inversely, Bitcoin has been the best-performing in 11 out of the last 14 years.

A sign of the times I suppose. It's no wonder no one cares about energy.

Full Throttle Ahead

Read more

By: Wilson

"Have fun staying poor."

For those of you not familiar with this meme, it's what crypto enthusiasts tell the nonbelievers. If you give any signs of doubt, "paper hands" and "have fun staying poor" are usually some of the things thrown at you.

With the recent Trump US presidential victory, the hint of a strategic reserve for Bitcoin has the community hyped and pumped. Not since the glorious NFT days have I seen so much euphoria being injected into an investment community.

Yet as I will illustrate to you, just because the tide lifts all boats doesn't mean that it will have a good outcome for the rest. In fact, it usually never ends well. Like the game of hot potatoes, it's always the ones that least expected that end up falling victim to this new bubble sensation.

MEME Coins

My favorite category in the cryptocurrency community is the MEME coin category.

At the top of the list, Dogecoin takes the helm coming in at a market cap of $59.7 billion. What started off as a joke from Elon Musk has now turned itself into something serious. At this market cap, it dwarfs the market cap of Suncor Energy (SU) ($46 billion), which produced 812k b/d of oil in Q3 2024.

If, hypothetically, one could take one of these entities and make it vanish. Which one do you think will have the most impact on this world?

Well, that doesn't require a lot of brainpower to figure out, but if the oil market suddenly lost 812k b/d of oil production, the supply & demand outlook would immediately change for 2025, while the disappearance of Dogecoin wouldn't have any impact.

But that's beside the point. Because on one hand, you have a company that's traded on "fundamentals", and on the other, you have a speculative asset that can demonstrate human emotions in real time. Yes, I know energy stocks are also capable of illustrating human emotions as well, but it's more to the tune of depression than excitement.

So what makes people want to buy Dogecoin? I don't know and there's no intrinsic value to Dogecoin. But there isn't any value to any of the MEME coins I posted above. In total, if you take the top 100 MEME coins and add up its current market cap, it's $118 billion.

I guess MEMEs are worth something after all.

Things you often see at the top...

As I was scrolling through X today, I saw this post from Le Shrub:

Source: Le Shrub

At first, I had to pause and double-check to make sure this tweet was real. I'm a subscriber to Citrini, so I checked his X feed to make sure the post was real, and then I double-checked the existence of Orca with salmon hat.

And to my astonishment (disappointment), it's real and it has a market cap of $100k.

Just when I thought Fartcoin reaching nearly $900 million market cap was the sign of the top, things are starting to get incredibly out of hand.

But the craziness doesn't end there. Did you know you can start your own shitcoin in less than 30 seconds?

This was demonstrated by someone on X.

What we are witnessing today is unparalleled in terms of scale and speed. The digital age has made the speculation that much easier and the internet has made it all too accessible. At the end of all this, there are going to be a lot of people burned, and while there are always semi-truths to bubbles, the fringe assets (shitcoins) always get destroyed.

What pops the bubble?

I don't know the answer. But bubbles never pop because there is an obvious catalyst, it pops on its own weight. It simply runs out of people buying more shitcoins. It simply runs out of suckers.

Perhaps more and more people will discover how easy it is to start your own memecoin or shitcoin, and the abundant supply overwhelms. Or perhaps, people just wake up one day and realize that owning something called Fartcoin that has gone up 3x in one week may not be considered prudent trading.

I don't know, and if I knew the answer to this question, I would've participated in the bubble, right?

Maybe I'll just have fun staying poor and watching all of these people get rich. Or maybe temperament is the only thing that I have that gets me through this insanity.

Whatever the case, this won't last. It never does. And history often shows that the people who end up getting in when things get wild always lose money. This time is no different.

Analyst's Disclosure: I/we have a beneficial long position in the shares of SU either through stock ownership, options, or other derivatives.

By: Wilson

I recently attended a dinner in Tokyo with a bunch of golfer friends. The main topic of discussion at the dinner table was about crypto and how Trump's recent presidential victory will usher in the golden age of crypto.

One by one, they started pitching their favorite shitcoin and which one will start performing the best. Some started showing intraday chart patterns illustrating what patterns they like to use when trading these shitcoins. One of them proclaimed that XRP will hit $8 and that it's not too late to get in. Another claimed that Dogecoin was going to hit $1 soon thanks to Elon's creation of DOGE.

It was the wild wild west again.

As I sit there listening to their amazing P&L run in the past 4 weeks, I can't help but remember this wonderful viral picture:

A sign of the times I suppose. No one gives a shit about value, and they definitely won't give a shit about energy investing.

Trying to Be Rational? Good Luck

It's not easy being rational these days. I look on my X feed and all I see are people posting P&Ls and how they were right to have stuck through the 2022 bear market. Chest pounding and high fives are everywhere, all the while, investor euphoria is near an all-time high.

Source: Bloomberg, Macrobond

But it's not going to be easy calling the top in this either. While the S&P 500 trades at just a fraction of the P/E multiple it saw in 1999 (28.4x), strategists are calling for an even higher move.

P/E - 26x today

Source: Charlie Bilello

And if you go back and look at the P/E multiple from 1998 to 1999, it went from 27.8 to 28.4 on the back of a 16.7% increase in earnings. This pushed the S&P 500 up another 19.5%.

It's no wonder why strategists are all piling on the bull train expecting another move higher in stocks.

Source: Warren Pies

But this market is not your typical bull market, because the concentration is getting extreme.

For the market to rally further from here, either the S&P 490 will have to start moving disproportionally higher or most of the expansion will come from the top 10 largest stocks. Mag 7 will comprise most of that move and with valuations already elevated, another move up will only exacerbate the valuation disconnect.

And with everyone jumping on the bandwagon calling for another move higher, no one is going to give a shit about value investing. Let's face it. It's worked just 3 out of the last 10 years (2016, 2021, and 2022). Sadly, I don't think there are that many value investors left.

It's a dying breed, a sign of the times.

Extinct?

Market cycles can be undoubtedly cruel, but more so in the information age. With social media these days showing influencers capable of pumping new shitcoins to dump on their fellow followers without any worries over the regulatory backlash, it is a sign of the times that the old way of investing may be going extinct.

Or rather, people of this generation are not embracing what investing is in the truest sense. Perhaps guys who stick to the old ways will just go away with time, or perhaps, market cycles will play their cynical pivotal role and teach a new generation of investors what a euphoric bubble frenzy really is.

Time will tell. I don't have a crystal ball, but I can't help but ponder the consequences of the actions taken and the emotions of those who aren't partaking in this feverish frenzy. It's tough to stay rational because at times, it will feel that if you don't participate, you will go extinct.

But this is where the true definition of temperament comes in. Do you have the mental fortitude to stay inside your circle of competence and not do foolish things?

I guess this is where markets test the soul more than the brain.

But you should give a shit...

I'm here to tell you that you should give a shit. In the game we call life, the only thing that ultimately matters is the process we undertake. The process of how we do everything defines who we are. Perhaps people who are participating in the bubble frenzy have an extremely disciplined process, or perhaps they are just gamblers.

But what they do has no relevance to what you do. Rational investing, at its core, is keeping your mind even-keeled and not being impacted by exogenous factors. So long as you develop your circle of competence, and stay within that circle, things usually don't go wrong. It's when you start venturing into the unknown and speculate on things you have no right to speculate that the outcome usually punishes you.

My advice? Stay focused on the disciplined value approach. It might not feel like it's the right thing to do right now, but it will ultimately reward you in the long run. It always has.

Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.

By: Wilson

For those of you who don't know, I am a large shareholder in Gear Energy (TSE: GXE.TO, GENGF). Today, the company announced a transformational deal that will result in the sale of Gear's heavy oil assets. You can read the press release here.

While I am extremely limited in what I can say publicly, I know that many of you have followed me into Gear back in 2016. It's been a bittersweet road characterized by excitement and a lot of disappointments.

From an investing standpoint, Gear was not the investment I had hoped it would be. Unless your cost basis is in the 10 cents range, it has not been an investment that's made anyone wealthy.

While I can probably write an entire book on the journey so far, I will instead focus this memo on the road ahead.

Details

As stated in the press release:

Gear Energy Ltd. (TSX: GXE) (OTCQX: GENGF) ("Gear" or the "Company"), is pleased to announce that it has entered into an arrangement agreement (the "Agreement") with a large publicly traded company (the "Purchaser") pursuant to which the Purchaser will acquire all of the issued and outstanding common shares of Gear (the "Gear Shares"), excluding its Central Alberta, Southeast Saskatchewan, and Tucker Lake properties (collectively, the "Newco Assets") which will be transferred to a newly formed entity ("Newco"), for $110 million in cash, subject to adjustments as provided for in the Agreement (the "Transaction").

The Transaction will be accomplished by way of a statutory plan of arrangement under the Business Corporations Act (Alberta) (the "Arrangement"). Under the terms of the Arrangement, each holder of Gear Shares (each a "Gear Shareholder" and collectively, the "Gear Shareholders") will receive $0.607 in total consideration per Gear Share, consisting of, at such Gear Shareholder's election: (i) $0.607 in cash per Gear Share; (ii) 0.3035 common shares in Newco ("Newco Shares") per Gear Share; or (iii) a combination thereof, subject to proration and consideration caps set out in the Arrangement.

Under the Arrangement, Gear will transfer the Newco Assets to Newco with the remainder of its properties, consisting of its Lloydminster heavy and medium oil assets (other than the Tucker Lake property) (collectively, the "Gear Assets") remaining with Gear which will be acquired by the Purchaser. Newco will be led by the existing management team and board of directors of Gear.

In essence:

• The total consideration of the deal is C$0.607 per share.

• Shareholders will be able to choose which one they want more (cash or shares of the newco).

• Because this transaction is a sale of the corporate entity, shareholders in Gear will be "paid out" in cash and shares (if that is the result of the vote).

• And depending on the vote, it will likely be a combination of the two depending on how many shareholders vote and for what.

Strategic Rationale

As stated in the press release:

The board of directors (the "Gear Board") and management of Gear continuously review options available to the Company to ensure that shareholder value is being maximized and view the Transaction as advantageous for Gear Shareholders.

Key highlights of the Transaction include:

• Meaningful Cash Consideration: Gear Shareholders will have the opportunity to receive immediate cash consideration of up to $0.607 per Gear Share, subject to the proration and consideration caps set out in the Agreement.

• Creation of Newco: Through ownership of Newco, Gear Shareholders will have the opportunity to unlock significant value by accelerating organic growth and delineating the future potential of the Newco Assets.

To further expand on the Newco strategy (no name has been chosen yet, so it's called Newco for now):

Newco is anticipated to be led by Kevin Johnson as President and CEO and Gear's current management team. Following closing of the Transaction, Newco will focus on the development of the Newco Assets, which have significant, fully funded growth potential.

Newco will retain 31% of Gear's production, equating to approximately 1,700 boe/d (consisting of 1,100 bbl/d of light crude oil, 200 bbl/d of NGLs and 2,000 mcf/d of conventional natural gas) with a liquids weighting of 80% and a deep inventory to grow production and cashflow. Key characteristics of the Newco Assets are summarized below:

• Central Alberta: Low decline, light oil production base supported by multiple Belly River waterfloods and stacked light oil growth opportunities analogous to local and regional industry drilling activity.

• Southeast Saskatchewan: Established light oil development in the Bakken/Torquay with waterflood potential and on-going evaluation of additional up-hole targets. In place gas conservation reduces the emissions footprint with increasing revenue through gas and NGL sales.

• Tucker Lake: 1,920 hectares of undeveloped, heavy oil rights in the Cold Lake oil sands region with up to six prospective zones mapped. Recent offset development of the Mannville Waseca sand highlights the upside potential of this asset.

Newco's 2025 capital program, which is expected to be finalized and communicated to shareholders in the Circular or by press release, will be fully funded, supported by internally generated cash flow and a $35 million new credit facility, to be provided by ATB Financial upon the closing of the Transaction.

From the shareholder perspective, the best way to think about this transaction is that we are refocusing the company into an area that we believe will give us a runway to grow.

From a financial transaction standpoint, the cash portion of the deal allows shareholders to de-risk their investment in Gear while simultaneously participating in a growth company. By selling the 3,700 boe/d of production, Newco has the asset base to grow production quickly.

I think Kevin Johnson and the team are the right people to get this done, and we will continue to focus on asset quality as the most important criterion going forward.

Conclusion

My journey in Gear is coming to a bittersweet ending. But with the conclusion of this deal, a new beginning starts and I hope that the new strategic path we've embarked on will reward shareholders.

As always, please reach out to me if you have any questions.

Analyst's Disclosure: I/we have a beneficial long position in the shares of GXE.TO either through stock ownership, options, or other derivatives.

Wilson Wang is a director for Gear Energy.

By: Wilson

It's been 7 years since I last visited Shanghai. It was quite a nostalgic feeling to return to a place I called home previously. I spent a good chunk of my childhood years here (age 4 to 9) watching the city blossom from what was previously considered to be a undeveloped city into the world class city it is today. I was also fortunate enough to spend the summer months here from age 10 to 21. In a lot of ways, Shanghai is like my 2nd home. Both my parents are from here, so there's a deep emotional connection for me whenever I come back.

The timing of my return was also fortuitous. We had just made a meaningful investment in Alibaba, and the oil thesis for 2025 is heavily dependent on China's oil demand growth. With that, I am here to share with you some of my thoughts on what I've seen so far, and what the latest fiscal policies measures could do to change China's incoming growth trajectory.

Incredibly Integrated

Read more

By: Wilson

Artificial intelligence is the new buzzword in business, but while the tourists are fascinated by the marvels of the new world-breaking technology, the people who are creating AI are fixated on an increasingly difficult issue - power.

Sam Altman, CEO of OpenAI, recently asked the Biden administration to help fund and build 5 gigawatt data centers. To give you an idea of how much power 1 gigawatt is, it's the equivalent of 100 million LED bulbs. This page from energy.gov is especially helpful.

What's more fascinating about the AI arms race versus the traditional data center arms race is that AI requires a data center that's capable of handling massive amounts of power demand needs in one location. So while engineers try and figure out ways to make AI more power efficient, the hyper scalers (Facebook, Google, Amazon, and Microsoft) will look for ways to build a larger data center that uses a cheap enough energy source and is economically sensible. Perhaps that's why both Google and Microsoft are looking at nuclear power as an alternative source of energy.

But in the meantime, the boom we are seeing in AI won't stop anytime soon, and power burn needs will likely vastly surprise to the upside. This is why I have a hard time grasping what S&P is trying to predict with its drop in natural gas power burn demand assumption by 2029.

The contrast between S&P's forecast of -2.7 Bcf/d and EQT's +10 Bcf/d forecast is probably the largest I've ever seen in any commodity.

Read more

By: Wilson

On Sept 3, I alerted to subscribers that I would be making some big changes to the HFI Portfolio. As a result of the trade alert, we sold out of VRN and VET at a loss, while we took a sizable position in Alibaba (BABA). Subscribers had advanced heads up beforehand with a memo released on Sept 1.

Fast forwarding to today, Alibaba along with other Chinese tech stocks have gone on a tear as China embraces the equivalent of QE from the Fed back in 2010.

If you think this was skill, please think again. This was 99% luck and 1% skill.

Why?

Because the same long argument for Chinese tech stocks could have been made 18 months ago or even 6 months ago. In fact, I looked at Tencent earlier this year and chose to not make it a meaningful position. What's the catalyst? Why will Chinese stocks re-rate?

However, I think being a beaten-down energy investor has helped improve my process in analyzing other sectors/stocks.

How so?

In energy investing, if you had only invested when things became extremely obvious, you made money. Similarly, if you sold when things became extremely obvious, you exited perfectly.

Anytime the setup gets murky, and things get uncertain (like what we are seeing today), the market always sells first and asks questions later. This perpetual beat-down has forced me to always ask what the catalyst is. Let's be honest, this journey so far in energy is far from easy, and some people have quit as a result. Who can blame them?

So looking back on the timing of the Alibaba long, I think there was a very obvious catalyst (with the benefit of hindsight). It was the conclusion of the antitrust review. What's funny about this event is that if you look at the stock price reaction on that day, it was down slightly. I guess the market isn't always so efficient...

What are my plans next?

I think the surge we are seeing in Chinese stocks is a good sign, but likely a premature one. Both the monetary and fiscal stimulus that China is going to embark on will have to materialize and actions need to speak louder than words. From a very objective view, I think there have been a lot of ticky-tacky fiscal stimulus announcements, and nothing concrete enough to make me think a seismic shift is here. China has far more long-term issues than it likes to believe, so there needs to be enough of a fiscal stimulus to really boost demand here.

But like all things markets, the stock market is usually a good gauge for both sentiment and the economy. Following this initial surge and after the hype dies down a bit, I will want to see 1) improving economic data and 2) material fiscal stimulus announcements.

As for my investment in Alibaba, I plan to hold this as I believe the stock remains extremely undervalued relative to its long-term prospects. I don't have a price target on this name, but if my experience in energy investing is telling, things will get rather obvious when it's time to sell (think crazy bubble signs).

I do wonder...

Now if we look past the Chinese stock market fever, I do wonder about the implications for the global macro markets here. The Fed is starting to ease, China is stimulating, gold is saying inflation is coming back, and oil prices are down?

a = b, b = c, but a (≠) c?

I don't know. Maybe I'm too biased to see the truth for what it is. And it definitely doesn't help that the media is publishing premature/fake news.

On the other hand, WTI is doing precisely what I thought would take place. It's back to where it last broke down, and if my thinking is right, then the move below $67.50 was a false breakdown, which should be validated here.

I think the market attempted to rebound back to the $75 level, but the technical resistance around $71 to $73 was too much. This retest was needed for the market to gain more confidence. We are doing it now, so please watch this area closely. A break below $67 would imply a downside back to $62 and possibly $55.

Other stocks I'm looking at...

Aside from energy and Alibaba, there are other stock ideas I'm looking at that could be worthwhile. They are Paypal, Lululemon, and Nike. I think all 3 companies are worth a look as 1) the brand value is exceptional and 2) I think they are going through a temporary hiccup.

From a valuation standpoint, these 3 stocks will not be as cheap as some of the energy stocks we own, but they are long-term compounders that would be nice additions to the portfolio. I think a balanced approach makes sense going forward, and we will do deeper dives on these names.

Better to be lucky than good...

Maybe it's skill, maybe, but I think it's far more luck than skill. I do, however, strongly believe that my experience as an energy investor will equip me with the skills to handle any other sector. Perhaps this is like the Chinese farmer story, a bad thing is not a bad thing... I don't know, or maybe I'm just trying to cope with the fact that I've sucked at investing since 2016.

I guess time will tell. Have I obtained the skills to translate my energy investing skills to other sectors? I don't know, but I hope I can get more lucky often. It sure beats being skilled.

Analyst's Disclosure: I/we have a beneficial long position in the shares of BABA either through stock ownership, options, or other derivatives.

On Dec 14, 2023, I published a piece titled, "Memo - It Can't Be That Simple." At the time, I wrote that the Fed interest rate hikes that started in mid-2022 coupled with elevated oil prices caused oil demand to surprise to the downside. More specifically, this is what I said:

The problem with being a specialist from time to time is that you are so into the weeds, you forget you are in the forest. In the case of the oil market, I even wrote on June 10 that the odds of demand surprising to the upside was minimal, and as a result, one should not expect a super tight market. But my bias led me to believe that the Fed was going to be unsuccessful in fending off elevated oil prices. On the other hand, I also knew that the US SPR release was real and those were real supplies. In hindsight, a more aggressive reduction in risk was appropriate given the "dark macro clouds" I saw on the horizon, and that was the simple mistake I made.

In essence, the lesson of don't fight the Fed rings true once again. While I'm not writing this as a mea culpa piece, looking back, it was just that straightforward. If the odds of demand surprising to the upside are nonexistent, it's likely time to step aside.

Fast forwarding to today, the market is pricing in a higher probability for a 0.5% cut than a 0.25% cut. Whether or not it's 0.5% or 0.25% is beside the point, the real conclusion you should arrive at is that the Fed views its effort in fighting off inflation as successful.

What's particularly interesting about the timing of all this is that the oil market is now finally buying into the weak oil demand thesis. While we thought at the start of 2024 that oil demand had the possibility of surprising to the upside, we were completely off on China, and the subsequent downward revision in demand.

With the consensus now firmly believing that oil demand will disappoint in 2025, we think the market has gone too far. If I take a step back and look at the bigger picture, this is the start of the Fed reducing interest rates. The market expects that by the middle of 2025, the Fed Fund's rate will be down close to ~3%. If that's the case, the outlook for oil demand is likely to surprise to the upside barring any unforeseen macro shocks.

Read more

By: Wilson

I think there's a reason why Warren Buffett went from buying net-nets (companies trading below liquidation value) to buying high-quality companies at a reasonable price. The more I look at my investment picks in the past and the returns they've generated, I can't help but realize that many of the names that were "cheap for a reason" almost always required a "timing" element versus the higher quality companies.

Higher quality companies possess the ability to grow themselves into their valuation and more, while there's an arbitrary ceiling for companies that are "cheap" by nature.

Take the oil and gas business for example, quality is defined by 1) management team, 2) resources, and 3) operational capabilities. Ideally, the best situation is to have a company like Suncor where there are resources and operational capabilities but lack the management team needed to get it done. In instances like this, an activist like Elliot Management can influence substantial change in a short time.

Read more

By: Wilson

Last week Friday, I wrote a memo titled, "Memoirs From A Beaten Down Energy Investor." In it, I expressed my frustration with my energy investments. This led me to start looking at ideas outside of the energy sector, and I can't help myself but gravitate toward the Chinese tech sector, which has just gone through (or is still going through) the current bear market (started in Q4 2020).

For many of the people looking at Chinese tech giants like Alibaba, Tencent, Baidu, JD, and etc, the last 3-years have been painful. I would say that no investment could be as painful as energy, but I think Chinese stocks and Chinese tech might be up there.

Judging by the dismal performance, it's no surprise that a lot of the people on Twitter and the people I talk to are all shunning Chinese tech. Political issues, governance, China's broader economy, and a whole host of issues arise when you bring up investing in Chinese tech. Shit, even magazine covers are starting to talk about the demise of Chinese tech.

But I think I'm going to be a bit of a contrarian here and offer my view of why I think Alibaba is a potential long. I don't own any stock yet, but I am looking at the name closely. I am also looking at other names in the sector, but this memo will be centered around Alibaba.

10,000 Foot View

Read more