The Energy and Basic Materials sectors have become legitimately good investments

Stocks finished higher again last week (S&P 500 +1.8%). The biggest story discussed was the hawkish Fed policy shift (lots of discussion around 50bp Fed hikes), pushing bonds lower and stocks higher. Earnings discussions were generally upbeat. Best sectors were energy (+7.4%) and materials (+4.1%); worst sectors were healthcare (-0.2%) and REITs (+0.4%).

SOME PERSPECTIVE ON FOSSIL FUELS

With the standard of living we enjoy in the U.S., it may be difficult to imagine that there are currently 850 million people on planet Earth who have no reliable access at all to electricity, regardless of the source. Few of us in the developed world know people so poor but it seems like a decent bet that if we could poll them, the vast majority would be much more focused on surviving tomorrow rather than what may happen 50 years in the future. The "really" poor face an existential crisis every day.

With the current geopolitical crisis between Russia and Ukraine, it is speculated that even much of developed Europe may be facing a crisis. The question is will Russia shut down the pipelines feeding Europe's energy. If a European energy crisis becomes a reality, we expect we will see that even for those who are not as unfortunate as the "really" poor, the vast majority of Europe will seek to get from one day to the next. They will likely have to put their plans of looking 50 years into the future on hold.

One of the great casualties of a 24-hour news cycle, news you choose, and social media, is that while it appears as if we have access to more information than ever before, our ability to discuss the benefits and the costs of various public policy prescriptions have devolved to the point where no real robust debate is possible. We found this data according to a Pew Research poll very interesting. While about 25% of American adults use Twitter, 25% of that group is responsible for over 97% of all Tweets. “Journalists” more than any other group of professionals are particularly fond of the forum as some indicator of their influence. This effectively means that 6% of our population is responsible for over 97% of all tweets! Looking at this data this way, at least for us, puts the data derived from Twitter in a new light.

Why is this important? Because the tweets of the few may be affecting the lives of the many. As one example, anyone on an investment committee has probably spent untold amounts of time on the climate change question without anyone ever asking whether the various schemes to reduce carbon emissions via portfolio management, while well-intentioned, are effective. We find value in reviewing history and its lessons to try and better understand our current challenges. One lesson that stands out is that seemingly simple accomplishments can have a dramatic impact on the future, and they are often not expected until they happen.

Specifically, we are referencing the time when the widespread exploration of fossil fuels began. The exploration of fossil fuels in Titusville, PA began a mere 170 years ago, and it has changed the course of history forever. One could even argue that the endeavor has done more to benefit the lives of ordinary people than perhaps any other single technological advance in history. (For reference, the Earth is estimated to be about 4 ½ billion years old.) The original alternatives to fossil fuels before the advent of industrialization, like timber, manure, and other biomass sources, it turns out, were far less efficient sources of energy and a much greater detriment to the environment than fossil fuels could ever hope to have been if used on the same scale.

In addition to providing a cleaner and more sustainable world than previous fuel sources offered, access to efficient and abundant sources of fuel allowed people to more easily feed themselves and stay warm while also allowing a largely agrarian population to easily see parts of the world more than 5 miles away from their homes, an unfathomable dream up until two centuries ago. Fossil fuels are also an essential element in the production of fertilizers that greatly increase the yield from farming. Unsurprisingly, there has, and still remains, a strong correlation between the use of fossil fuels and life expectancy. History shows us that it is far easier to see the faults in our current systems than to correctly identify the improved systems of the future.

It has become generally accepted that the world has become complacent and has done nothing to reduce its dependence on fossil fuels. We find this argument historically inaccurate. In 1931 the German Engineer Bruno Lange developed a solar cell using silver selenide. In the 1980s some of the first commercial concentrated power plants were built. Wind has been used to generate energy since 5000 BC. By the late 1800s, small wind-electric generators were becoming more common. In 1951, the first nuclear power plant produced usable electricity through atomic fission. By the late 1800s, there were over 50 hydroelectric power plants in use in the US and Canada. We have been trying to use and develop "clean energy" for as long as we've been using oil.

The challenge is that many of the technologies were not commercially viable (too expensive or no efficient way to store electricity) or they created additional risks (i.e. nuclear meltdowns) that were deemed too risky. Ironically, the progress that we have made in manufacturing and science (greatly supported by fossil fuels) has made it possible for us to create more efficient solar panels and windmills. It has also made it more efficient for us to mine the metals needed to create more batteries and electric vehicles. In essence, our use of fossil fuels has allowed us to move much further into other sources of energy.

So while we are not yet confident that the world has absolutely found the right "energy" path forward, we are confident we will continue to adapt and improve, as people have been doing for thousands of years. Research, development, and exploration continue as they did over 170 years ago in Titusville, PA, and we are fully confident the next 170 years will bring with them as significant change and improvement as oil did 170 years ago. The media constantly reminds us of the challenges we face today. Unfortunately, they do not give equal coverage to the research being done to solve the problems of tomorrow.

Perhaps the path forward will be electric vehicles, but there is a lot of data that causes us to question this path forward. We say this because one would be hard pressed to find another product more dependent upon resources from extractive materials than an electric vehicle. Electric vehicles use four times as much copper as an automobile powered by an internal combustion engine. As the table below shows, the widely accepted goal of having 30% of the world’s vehicles be electric vehicles by the year 2030 will require enormous investments in mining industries that are decidedly not eco-friendly.

Sadly, as stated above, in the information age when we have access to the 24-hour news cycle, news we choose, and social media our ability as a people to discuss the benefits and the costs of various public policy prescriptions appears to have devolved to the point where no real robust debate is possible. From an investment perspective, this is important, because there are few signs from world leaders that (despite the current lack of renewable energy sources) their commitment to the use of renewable energy is waning regardless of the costs that must be borne by their citizens.

If and until these policies change or until we have developed enough alternative energy sources that we are not dependent upon oil (which will take many years), the world is facing a policy driven shortage of fossil fuels, which is, in turn, contributing to an artificially high demand for industrial metals like copper, lithium, and manganese. The irony in this is that Energy and Basic Materials sectors have become legitimately good investments. Our research indicates that these sectors are still decidedly under-owned in the United States. We continue to recommend that our clients overweight them.

If the last two years have taught us anything, it is that no amount of trade and international cooperation will instill what are generally considered to be Western values in other civilizations who have no real desire to adopt them. Trusting China to do anything other than what is directly in its own best interests, especially when comes to the tradeoffs between economic development and climate issues, would seem to be in direct conflict with history. Further, given current events, the sanctions that would have the most impact on the barbarism of Putin’s Russia would be to flood the global market with America’s own oil and natural gas, driving prices down and depriving a rogue state of resources to fund an illegitimate war.

There are signs that the Biden Administration is about to ease the rules on developing and exporting liquefied natural gas (LNG) to ease the economic burden on Europe but as of yet, we've heard very little suggesting that America will move to fully access its considerable fossil fuel reserves any time soon. Somewhat ironically, this will be to the benefit of oil, gas, and basic materials companies in the West.

History has shown that free markets produce incredible leaps in human ingenuity. To the extent to which Savings equals Investment, we should all be confident that economic growth will solve the issue of climate change naturally. Adopting an, all of the above, approach in our use of various sources of energy will greatly accelerate the discovery of new technologies that are more environmentally friendly. Although it may not be an idea that is accepted by all, there are many who believe rationing fossil fuels in an effort to rid the world of the negative externalities associated with their use will only retard the process of decreasing carbon emissions.

Source: Jason De Sena Trennert, Strategas Research


Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments. Data provided by Refinitiv.

Sincerely,

Fortem Financial
(760) 206-8500
team@fortemfin.com

 


 

Latest News

 

Economy Week Ahead: Key Inflation, Jobs Numbers Highlight...

This week's economic data are expected to underscore both the highest inflation since the 1980s and a historically tight labor market.

The Wall Street Journal

Read Story

 

Stocks Waver as Bond Yields Surge With Inflation in Focus

New Covid-19 restrictions in China, including lockdowns in Shanghai, helped oil prices move lower.

Barrons

Read Story

 

Oil Prices Stay High as Russian Crude Shortage Hits Market

The de facto buyers' strike on Russian crude that began a month ago propelled oil prices to their highest levels in years. Now the real effects are starting to create a second wave of imp...

The Wall Street Journal

Read Story

 


Brian Amidei, along with Partners Joseph Romano and Brett D'Orlando have also been named *2014, 2015, 2016, 2017, 2018 Five Star Wealth Managers!

Disclosures:
Awards and recognitions by unaffiliated rating services, companies, and/or publications should not be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if Fortem is engaged, or continues to be engaged, to provide investment advisory services; nor should they be construed as a current or past endorsement of Fortem or its representatives by any of its clients. Rankings published by magazines and others are generally based on information prepared and/or submitted by the recognized advisor. Awards may not be indicative of one client’s experience or of the Firm’s future performance. Neither Fortem nor the recognized advisor has paid a fee for inclusion on a list, nor purchased any additional material from the award provider. The criteria for each award is listed below:

Five Star Professional Disclosure:
The Five Star Wealth Manager award is based on 10 eligibility and evaluation criteria: 1) Credentialed as an investment advisory representative (IAR) or a registered investment advisor; 2) Actively employed as a credentialed professional in the financial services industry for a minimum of five years; 3) Favorable regulatory and complaint history review; 4) Fulfilled their firm review based on internal firm standards; 5) Accepting new clients; 6) One-year client retention rate; 7) Five-year client retention rate; 8) Non-institutionalized discretionary and/or non-discretionary client assets administered; 9) Number of client households served; and 10) Educational and professional designations. The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or the magazine. The award methodology does not evaluate the quality of services provided. Additional information about this award is available at: fivestarprofessional.com/2016FiveStarWealthManagerMethodology.pdf
Fortem Financial 2016. All rights reserved.

Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness.

Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Forward looking statements are based on current expectations and assumptions, the economy, and future conditions. As such, forward-looking statements are subject to inherent uncertainty, risks, and changes in circumstance that are difficult to predict. Actual results may differ materially from the anticipated outcomes. Carefully consider investment objectives, risk factors and charges and expenses before investing. Fortem Financial is a registered investment adviser with the SEC. Advisory services are offered through Fortem Financial.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Fortem Financial

PRIVACY NOTICE REGARDING CLIENT PRIVACY

Fortem Financial Group, LLC, has adopted this policy with recognition that protecting the privacy and security of the non-public personal information we obtain about our customers is an important responsibility.

All financial companies choose how they share your non-public personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your non-public personal information. Even when you are no longer our customer, we will only share your non-public personal information as described in this notice. So, please read this notice carefully to understand what we do.

The types of non-public personal information we collect and share depend on the product or service you have with us. This information can include items such as your Social Security number and income, your account balances and transaction history, and your investment experience and account transactions.

We collect your non-public personal information in a variety of ways. For example, we obtain your non-public personal information when you open an account or give us your income information, tell us about your portfolio or deposit money, or enter into an investment advisory contract. We also collect your non-public personal information from other companies. For example, from the custodians who hold your account assets.

All financial companies need to share customer’s non-public personal information to run their everyday business. Below, we describe the reasons we can share your non-public personal information and whether you can limit this sharing.

We share your non-public personal information for our everyday business purposes such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, report to credit bureaus, to protect the confidentiality or security of your records, or as permitted by law. We may also share your non-public personal information for our own firm’s marketing purposes; so that we can offer our products and services to you.

Federal law gives you the right to limit only sharing non-public personal information about your credit worthiness for our affiliates’ everyday business purposes; sharing non-public personal information about you with our affiliates to market to you; and sharing non-public personal information with non-affiliates to market to you.

We don’t share non-public personal information about your creditworthiness with our affiliates for their everyday business purposes. We don’t share your non-public personal information with our affiliates to market to you. We don’t share your non-public personal information with non-affiliates to market to you. We also don’t share your non-public personal information for joint marketing with other financial companies. State laws and individual companies may give you additional rights to limit sharing.

We share non-public personal information with our parent company affiliate, Focus Financial Partners, Inc, for its internal and external auditing purposes. We also share your non-public personal information with a non-affiliate for the purpose of aggregating it and providing summary information based on this data to our parent company, Focus Financial Partners, Inc.

To protect your non-public personal information from unauthorized access and use, we use security measures that comply with federal law. These measures include computer safeguards and secured files and buildings.

Our policy about obtaining and disclosing non-public personal information may change from time to time. We will provide you notice of any material change to this policy before we implement the change.

If you have questions please call us at 760-206-8500 or go to our website at www.fortemfin.com.

IMPORTANT CONSUMER DISCLOSURE

Fortem Financial Group, LLC ("Fortem Financial" or the "Firm") is a federally registered investment adviser with offices in California and Arizona. Fortem Financial and its representatives are in compliance with the current registration and notice filing requirements imposed upon federally registered investment advisers by those states in which Fortem Financial maintains clients. Fortem Financial may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements.

This website is limited to the dissemination of general information regarding the Firm's investment advisory services offered to U.S. residents residing in states where providing such information is not prohibited by applicable law. Accordingly, the publication of Fortem Financial' website on the Internet should not be construed by any consumer and/or prospective client as a solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment, tax or legal advice. Furthermore, the information resulting from the use of any tools or other information on this website should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from Fortem Financial. Any subsequent direct communication from Fortem Financial with a prospective client will be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. Fortem Financial does not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to this website or incorporated herein, and takes no responsibility therefore. All such information is provided for convenience purposes only and all users thereof should be guided accordingly.

All statements and opinions included on this website are subject to change as economic and market conditions dictate, and do not necessarily represent the views of Fortem Financial or any of their respective affiliates. Past performance may not be indicative of future results and there can be no assurance that any views, outlooks, projections or forward-looking statements will come to pass. Investing involves risk, including the potential loss of principal, and the profitability of any particular investment strategy or product cannot be guaranteed.

Any rating referenced herein may not be representative of any one client's experience. Further, the Firm's receipt of any rating is not indicative of the Firm's future performance. The Charles E. Merrill Circle of Excellence award is granted by Merrill Lynch for outstanding client service and satisfaction. The award is granted based on annual criteria established by Merrill Lynch for its top decile advisors. The Barron's Top 1,200 Financial Advisors rating of the top financial advisors in the United States is based on data provided by participating firms. The following factors are included in the rankings: assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. Investment performance is not an explicit component. The Palm Springs Life's "40 Under 40" Rising Young Professionals to Watch in the Coachella Valley is based upon nominations from the local business community and selected by the staff of Palm Springs Life.

For information pertaining to the registration status of Fortem Financial, please refer to the Investment Adviser Public Disclosure website, operated by the U.S. Securities and Exchange Commission, at www.adviserinfo.sec.gov., which contains the most recent versions of the Firm's Form ADV disclosure documents.

ACCESS TO THIS WEBSITE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND WITHOUT ANY WARRANTIES, EXPRESSED OR IMPLIED, REGARDING THE ACCURACY, COMPLETENESS, TIMELINESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS WEBSITE OR ANY THIRD PARTY WEBSITE REFERENCED HEREIN.