The Case for Holding a Big Cash Position This Week
This week, I find myself in a bit of a quandary. As a rule, I dislike having a large cash position, but that is where I find myself right now. And try as I might, I can’t find anywhere to set it to work. To anyone trained in a dealing room, money is the tool you use to make money, so sitting on a lot of undeployed cash shows either a lack of imagination or just basic laziness. I would like to think that neither of those things apply to me, but I genuinely think that cash is not a bad option right now, even for an energy investor. Nor do I like recommending doing nothing in my role as a commentator and writer, particularly when focused on energy.
One of the great things about energy as a sector in which to invest is that there is nearly always something about which one can be positive. If oil is dropping, natty may be gaining, or alternative energy stocks may be flying, and if all else fails and things look questionable all around, there is always the relative safety and decent yield of utilities or MLPs to fall back on.
This week, though, I have really struggled to find anything to get behind with any enthusiasm.
Both oil and natural gas look a bit oversupplied. As I have said a few times recently, I don’t believe that the tension with Iran will have a lasting impact on crude, so expect it to drop back below $60 before too long, while natty has settled back right where it was before the now somewhat confusing-looking spike up to around $7.50. Nor is alternative…
This week, I find myself in a bit of a quandary. As a rule, I dislike having a large cash position, but that is where I find myself right now. And try as I might, I can’t find anywhere to set it to work. To anyone trained in a dealing room, money is the tool you use to make money, so sitting on a lot of undeployed cash shows either a lack of imagination or just basic laziness. I would like to think that neither of those things apply to me, but I genuinely think that cash is not a bad option right now, even for an energy investor. Nor do I like recommending doing nothing in my role as a commentator and writer, particularly when focused on energy.
One of the great things about energy as a sector in which to invest is that there is nearly always something about which one can be positive. If oil is dropping, natty may be gaining, or alternative energy stocks may be flying, and if all else fails and things look questionable all around, there is always the relative safety and decent yield of utilities or MLPs to fall back on.
This week, though, I have really struggled to find anything to get behind with any enthusiasm.
Both oil and natural gas look a bit oversupplied. As I have said a few times recently, I don’t believe that the tension with Iran will have a lasting impact on crude, so expect it to drop back below $60 before too long, while natty has settled back right where it was before the now somewhat confusing-looking spike up to around $7.50. Nor is alternative energy particularly appealing when the White House has just basically said that the principles on which “green” energy policy has been based for a couple of decades no longer apply. Nuclear power still looks to have a future and was a great play a few months ago, but even there, there are issues. At this point, valuations in that space look a bit stretched, as evidenced by the fact that NuScale, for example, is trading at around 45x sales.
Valuation is also a problem for more conventional energy stocks, pretty much across the board. Over the last three years, the Energy Sector ETF, XLE, has had an average P/E of around 13, but is currently trading at around 21 times trailing earnings. Even if the economy stays strong and oil does stay above $60, that is just not an attractive entry point for energy stocks.
So, that leaves utilities and MLPs, but the immediate environment creates problems there, too. They, like any yield bearing instrument, are sensitive to interest rates, and there is unlikely to be any big drop in rates any time soon. Jay Powell presumably won’t decide that now, when he has nothing to lose, is a good time to give in to the President’s demands for big rate cuts. His term ends in May, but if you think that Trump’s nominee for the position, Kevin Warsh, will be a “super-dove” you haven’t been paying attention to his record as a Governor from 2006-2011, when he was a noted hawk. Admittedly, that was a different time, but everything he said back then points to him seeing core inflation nudging 3% as a problem.
In addition, Warsh’s views only matter if he passes Senate confirmation which, in the current political climate, is no certainty. If he reiterates his past penchant for tight policy he will lose the Trump loyalists, but if he changes tune, Democrats will shout “hypocrisy!” loud enough to get the attention of moderate Republican senators. Confirmation will require a delicate balancing act, and should he not be confirmed it is likely that an already nervous community of global investors will be further spooked. They will sell Treasuries, pushing interest rates higher, regardless of what the Fed does.
History suggests that there will come a time when either growth will start to pick up, making even high P/E energy stocks attractive again, or interest rates will start to fall at a sharper rate, bringing utilities and MLPs into focus. Right now, though, neither of those things is true. So, with neither oil nor natty likely to pop and with energy-related equities in a holding pattern at best, cash doesn’t look like too bad a place to be. As a colleague of mine from my dealing room days liked to say, sometimes, square is a position too. Now is one of those times.