There's A Time To Be Greedy When Others Are Fearful, Now Is One Of Those Times

Investing is hard. It's the hardest game in the world. Just a month ago, Jim Cramer was telling everyone that energy stocks are a buy on every dip. Fast forwarding to today, no one wants to touch it with a 10-foot pole. 

To be fair, a lot has changed since then, and most of those things don't have a lot to do with the actual fundamentals of supply and demand. Instead, and as we've highlighted many times, they are psychological and related to how traders/investors are thinking about the markets going forward.

I hate saying "I told you so", but as I scroll through the Twitter feeds these days, the same theme pops up over and over again. It goes along something like this: "Oil is above $90 and energy stocks are trading like it's back down to $50. 'Insert frustration emoji.'"

We talked about this growing frustration back in this report titled, "Energy Stocks Take a Brutal Hit, Where to Next?" In the article, we said:

Over the next few months, things are going to be tough for energy investors. Oil prices are going to remain high thanks to a bullish physical market and low absolute oil inventories. Energy companies are going to make a lot of cash and dividends will increase. But the share prices, because of the market perception, will likely be stuck forcing people to become ever more aggravated.

With the Fed now expected to hike by 100 basis points at the next Fed meeting, the market is already pricing in an incoming recession. The 2-year and 10-year treasury have inverted even further since a month ago, and traders and investors alike are expecting the US economy to slow down. In addition, the US Dollar has risen to a 20-year high, and the market is perceiving the Fed to be successful in fending off inflation. All of this has resulted in the market now expecting commodities to cool off and investors are dumping their inflation hedges in favor of growth names (because of slower global growth on the horizon and lower bond yields).

But like we said a month ago, the Fed doesn't print commodities. While it has the ability to temporarily lower demand in the near-term, commodity demand profiles structurally increase with time. And as commodity prices move lower today, the lower price in itself will help stimulate demand, which will once again make the structural supply shortage that much more obvious.

For investors, now is not the time to doubt your own conviction. Now is the time to look at what's important going forward. In some way, by focusing on what's important, you can exclude the noise, and find the real value. While I'm not saying none of the things we said are unimportant, at the end of the day, investors should really care about two things: 1) how much money will the companies they own generate and 2) how sustainable is that business climate (e.g. prices).

If you take a big step backward, the oil and natural gas market will remain in a structural deficit for a long time to come. After 7-8 years of underinvestment, the chicken has come home to roost. So yes, my job is to help you navigate through the short-term turbulence, but it's also my job to tell you that the long-term direction has not changed. 

And looking at the valuation of these energy companies (using 2023 prices), it is obvious that things are cheap. Therefore, the only remaining question you have to ask is, has the fundamental direction of the oil market changed? If the answer is no, then you have to be greedy when others are fearful.