I’m going to buy a third tranche of Synaptics here. This will get $SYNA to about 3/5 of a “full” position for me in this name though it’s still one of my smaller positions as I’m still continuing to build it per my playbook of scaling into my stock picks over time. Now onto today’s report.
I live in southeastern NM and if you head east down off the mountain that I call home, you’ll soon start to see oil wells doing their circular dance as they pump crude out of the ground. Drive a little further east into Artesia, Hobbs and on into western Texas and you’ll smell the sweet stench of the oil refineries. As you drive you’ll see cranes, detours and construction workers on the outskirts of every town as motels, hotels, apartment complexes and new subdivisions are being constructed. As energy’s downturn has taken on historic crash levels, you can imagine that everybody around here wants to talk about it.
Most of the conversations go like this:
“Cody, what do you think of this crash in oil’s price? Energy prices will bounce right back, so this must be a great time to buy energy stocks.”
“Well, I’ve seen these oil price cycles play out before, and the often take years or even decades to reverse.”
“No, I don’t think you’re right that oil and energy could be cheap for a long while. Peak oil theory, China demand, strangling energy regulations in the US…oil prices can’t stay down here, and they certainly aren’t headed any lower.”
One of the most important Revolution Investing concepts that we’ve followed over the years is that of “Expect the last expected outcome.” Energy’s cycle right now is likely reflecting why that concept is so important.
The more that people, industry and analysts expected that energy prices were going to stay high forever, the more they would invest. The mass influx over time of all the new supply of energy from fracking, natural gas, coal, wind, solar and renewable resources hits the markets. Meanwhile, the consumers and companies who demand energy to run their lives and businesses continually make adjustments to reduce their dependence on what they think could be a huge cost forever since they also expect energy prices to stay high.
Here’s what a billionaire tech investor friend of mine wrote to me yesterday: “Cody, Back when oil was sliding but still mid 80’s you asked if I was still prepared to build additional units in North Dakota. I said I was still full steam ahead, in the last two weeks my lender and virtually every lender I have spoken with have moved out of the market and on to the sidelines. Now either we spend 45 million of owners cash to build the next 250 units or we stop. Guess what…our project is stopped cold. ( No reference to North Dakota’s winter ) The dollar’s too high, the price of oil is very low, it is my supposition that the US will soon feel the result of this in our economy overall. The VIX is appropriately at a high and over the next several months I expect high volatility. UNCERTAINTY is the ‘Catalyst’ and both Greece and Oil have different effects but both represent the market with similar questions.”
Now extrapolate that “we are pulling back” dynamic over the entire energy sector. When a correction/crash in a cyclical sector like energy finally sets in, traders and analysts and investors all compound the downward swing in the cycle by eventually overcorrecting to the downside.
Eventually, that will likely cause a dwindling of supply even as consumers and companies start to grow accustomed to “cheap” energy prices making demand rise more than will be expected at that bottom. And you’ll get a whole upward price cycle playing out once again at that point.
However, as I keep pointing out, that can take years or even decades to play out — it’s not like all those unfinished hotels, apartments complexes and subdivisions will instantly be put back on the board as if they were Monopoly buildings. We’re right now, as I calculate it, about six months into this oil/energy collapse. I’m in no rush on energy.