Return of the Real

A lot of people these days like to use the term “real” to describe something or someone they admire. We say reverently that he or she is the “real deal,” or this team is “for real,” or this macho specimen is a “real man” or that this restaurant serves up “real Chinese cuisine,” etc. Hey, I use the term “real” too, as we all know what it means, even if it can be used in a many different contexts.

In 1996, “real” rap music icon Ice-T released his sixth studio album titled, “Ice-T VI: Return of the Real.” Now, I bring up Ice-T here not just because of his “realness,” but also because he happens to be the celebrity keynote speaker at this year’s largest gathering of free minds, FreedomFest.

I will be there, along with my fellow Eagle Financial Publications scribes George Gilder and Mark Skousen. This event is going to be amazing, as it features one of my favorite thinkers, Steven Pinker, as one of the keynote speakers. We also have one of the world’s most intriguing political figures, President Javier Milei of Argentina, who will also deliver a keynote address.

If you want to attend FreedomFest this year (and why wouldn’t you?) I am going to make it easy for you. This year’s conference takes place in Las Vegas, July 10-13, 2024, at the Caesars Forum Convention Center. And because you’re a reader of The Deep Woods, I am able to offer you a very special discount of $50 off the registration price.To take advantage of this special discount, simply go here, or call Hayley at 855.850.3733, ext. 202. Use the discount code EAGLE50 to get $50 off the registration price. (This discount ends on April 30, so act now.)

Getting back to the “real,” check out these lyrics from Ice-T’s hit “I Must Stand”:

And bein’ black ain’t easy, prejudice is real
But health and liberty is all we need for us to build
We gotta come together, unseparated
Check yourself like I did, black man, because we’re all related…

That’s as real as it gets, and it’s why I am excited to see Ice-T deliver his keynote.

Now, there’s another return of the real taking place right now, and here we come to the field of focus of my newsletter advisory services. That return of the real is the beginning of a return to reasonable equity market values.

As those of you who read my newsletters likely know, the macro environment in this market has deteriorated on numerous fronts over the past month. We know that because over the past month, we have seen a decline in stock prices that is, A) Appropriate and B) Likely not over unless news turns more positive.

In fact, three of the five biggest market influences we track witnessed deterioration last month. The biggest here was the expectation for a June interest rate cut by the Federal Reserve. Hope of a June cut was extinguished by the hot March consumer price index (CPI) report, and now the market must deal with the possibility of just two (or even fewer) rate cuts in 2024 (remember the market started the year expecting as many as seven cuts).

Related here is a stall in the decline of inflation, which has proven “stickier” than the bulls had hoped. We know that because of the aforementioned hot CPI data. Finally, geopolitics has reared its ugly head again as an influence on the market due to the escalating conflict between Israel and Iran. That rising tension is pushing oil and other commodity prices higher and weighing on sentiment.

Importantly, this deterioration has not resulted in a change in what I call the “fair value” for this market given the current set up. Right now, the fair value, call it “real value,” is the S&P 500 index trading at a 19-20X multiple. And at the current expected 2024 S&P 500 earnings-per-share estimate of $243, that means an S&P 500 trading range between 4,617 and 4,860, with the midpoint being 4,739.

As of this writing, the S&P 500 traded at 5,023. So, here the “real value” of the S&P 500 (the midpoint value of 4,739) now is 5.65% below the current price. That’s still a bit higher than real value, but when you consider that at its high of 5,254 on March 28, the S&P 500 real value was nearly 10% below that price, the market is getting increasingly more “real.”

Now, does this mean we are likely to get a pullback of 5-10% in the S&P 500 from here? Not necessarily.

Things could materially improve for the market if the Fed signals a June rate cut is back on the table, if inflation data declines faster than expected and if artificial intelligence (AI)-related earnings remain strong and geopolitical risks decline. Of course, the opposite could take place. The Fed could push back on the idea of any rate cuts in 2024, economic growth could suddenly roll over, inflation metrics could rebound and AI-related earnings could disappoint.

This latter scenario would essentially undermine the assumptions behind much of the market’s robust rally in Q4 2023 and year to date. And given how stretched markets still are, the net result would be substantive declines in stocks. And while the outcome here remains an open question, it’s a question we all, as investors, must be keenly aware of if we want to successfully navigate this “real” market.

ETF Talk: Strike Oil While the Market’s Hot!

The expression “strike while the iron’s hot” is not a new idiom. In fact, it dates back to the 15th century, where it originated from blacksmiths who could only work with their iron while it was, well, hot. And much like a good chunk of iron, the market is burning hot enough for us to strike — strike at oil, that is.

Oil has been seeing a resurgence in the market as of late. As the conflicts in the Middle East heat up due to Iran’s recent attack on Israel, some analysts are predicting that oil could rise to as high as $100 per barrel. That, combined with commodity exchange-traded funds (ETFs) having a potential resurgence due to inflation, creates the perfect opportunity to strike at one of the best oil ETFs on the market: the iShares U.S. Oil & Gas Exploration & Production ETF (IEO).

Opened in 2006 by BlackRock, Inc., IEO tracks a market-cap weighted index of U.S. companies in the oil and gas industry. The underlying index includes U.S. companies of various market caps that are involved in either the exploration of oil and gas, or the drilling, production, refining and supply of such products.

IEO’s top 10 holdings consist of ConocoPhillips (COP), EOG Resources, Inc. (EOG), Phillips 66 (PSX), Marathon Petroleum Corporation (MPC), Valero Energy Corporation (VLO), Diamondback Energy, Inc. (FANG), Hess Corporation (HES), Pioneer Natural Resources Company (PXD), Devon Energy Corporation (DVN) and Coterra Energy Inc. (CTRA). The fund’s cap-weighting structure makes it top-heavy, and its top 10 holdings comprise the majority of its overall portfolio. However, IEO is a well-managed fund, and has excellent underlying liquidity.

Currently, the fund has an expense ratio of 0.40% and $901 million in assets under management. Over 97% of the fund’s holdings are in Energy Minerals, making this an almost entirely energy-dominated fund.

Chart courtesy of https://stockcharts.com/.

As of April 15, the oil ETF is up 6.12% in the past month, 18.95% in the last three months and 16.84% year to date. This strong performance, coupled with the current market demand, makes IEO a strong choice for those looking to add an energy investment to their portfolio.

However, even with all the potential positives, IEO might not be the right iron to strike. You should always consider your investment goals and do your due diligence before adding any stock or exchange-traded fund to your portfolio.

As always, I am happy to answer any of your questions about ETFs, so do not hesitate to email me. You may see your question answered in a future ETF Talk.

In case you missed it…

Nothing Eclipses Man’s Rational Faculty 

Hey, did you see there was a solar eclipse last Monday? Of course you did, and that’s because there was a deluge of media coverage of the eclipse, and rightly so, as these kinds of celestial events don’t occur very often.

Now, as a one-time aspiring astrophysicist (it was my major at UCLA until I ran up against the impossibly tough graduate Physics classes), a love for astronomy, cosmology and the scientific method is part of my DNA. Indeed, I still marvel at the way we have been able to understand our world via our uniquely human attribute — our highly developed rational faculty.

Yet, in last Monday’s coverage of the eclipse, I heard a lot of language that irritated my rational nerves.

The worst of this offending language centered around how “small” we should all feel in the presence of nature, and how “insignificant” we are in the grand scheme of the heavens.

Well, to that, I will borrow a term my friends in the British SAS always used, and I will respond with a hearty… bollocks!

I say that, because “small” and “insignificant” are terms used to demean mankind’s status. They are used by countless demagogues and would-be heavenly dictators to make us feel like we require them to “save us” from ourselves and our very nature.

When I watched the eclipse, I marveled at how we know, with exacting precision, when and how the Sun and the Moon will interact to create this event, exactly which longitudes and latitudes will provide us with the best view of the “path of totality” and how to look at the Sun without damaging our eyes via the use of special glasses designed specifically for this purpose — glasses that you can have delivered to your door overnight via a few taps on your Apple (AAPL) iPhone into your Amazon.com (AMZN) shopping cart.

For me, feelings of “smallness” and “insignificance” are the polar opposites of what I felt looking at the eclipse.

Instead, I felt an incredible sense of pride in humanity’s ability to understand, as best we can, exactly how the universe operates, how celestial bodies move and the laws of motion that govern the cosmos. I also feel immense and important knowing that, through centuries of observation and rigorous study, humans have come to know all that we do.

Moreover, I have an even grander sense of significance knowing that every day, some of my fellow humans all over the world are working harder and smarter than ever to understand the universe in increasingly deeper and more intricate detail.

Think of all this in the following context. The ancient Chinese used to think that an eclipse was the Sun being eaten by a dragon. The Incas thought an eclipse was the sign of God’s wrath, and to appease that God, they offered up human sacrifices. The Mayans thought the Sun was breaking and that the world was collapsing.

Humans fear what we don’t know.

Conversely, humans can harness what we do know for our own betterment, and knowing how the cosmos works in service of this noble goal is one of the things we do best.

So, don’t feel small or insignificant in the diminished light of the eclipse. The fact that you are a living member of an advanced primate species that understands why this happened should make you feel grand, sublime, significant and, most of all, grateful to be a part of it all.

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And Speaking of Real…

“Only the knowledge that comes from inside is the real Knowledge.”

–Socrates

They certainly kept it “real” in Ancient Greece, as thinkers of that amazing era sought to study and codify the real wisdom of the world. Here, Socrates tells us that knowing ourselves is the truest, realist, knowledge.

Wisdom about money, investing and life can be found anywhere. If you have a good quote that you’d like me to share with your fellow readers, send it to me, along with any comments, questions and suggestions you have about my newsletters, seminars or anything else. Click here to ask Jim.

In the name of the best within us,

Jim Woods