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Are the markets pricing the effects of this war correctly? As far as I understand it, the blockade (which seems to be in effect) of the strait of Hormuz is going to reduce the amount of oil in the market by about 20%, until either the war ends, or another pipeline workaround is found. This is going to be absolutely catastrophic for the world economy, especially for Asia, as there isn't a ready substitute. Even in the US, where we produce enough oil to cover domestic consumption, increased prices are going to hurt consumers and businesses significantly. It's not just oil: sulfuric acid for mining is made from Middle Eastern Crude, most of Europe's LNG comes from Qatar, and global air shipping routes are also going to become more costly. Even if we reach an agreement with Iran tomorrow (unlikely given the nature of the regime), the supply chain shock would be at least on the level of the Iraq War in 2003.
Yet the SP500 is only down 2% from January this year. Are investors not taking this war seriously, or is there really nowhere else to park money other than in US tech stocks?
I personally sold all my index funds and random stocks a few days ago and reinvested the money into US Oil Companies and 3-months CDs.
Not even close. PTRRY, NTR, PXS, EKO etc. will thrive in this new suicidal macro while China will grow and control the light cone. But US oil producers face a huge threat: Trump banning exports and crashing domestic prices. But you're a bit late, after so much movement the risk:reward's much lower.
The growth in passive investing already removed price discovery to a large extent, but everyone sold their vol away (options became popular) pinning the indexes. As everything unwinds, the indexes will experience radical price discovery again.
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I'm interested to see which runs out first, oil supplies or the copium supplies traders are huffing in extreme quantities.
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Aren’t the point of index funds to never try and time the market? Buy, hold, and buy more until you’re close to retirement?
Sure, but it's not like I can't rebuy these index funds after the dip. This isn't day trading, but responding to a global event on the level of COVID.
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That's my understanding, yes. If you don't know enough to predict what the day-to-day stocks will do, and you have a long enough time frame, the line will generally go up. It's kind of like betting on the favorite every time to outright win, no points spread. Sure, you'll lose some, and sure, there will be cases where picking the underdog will win you a lot more, but you'll come out comfortably ahead of where you started in the long run.
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Right now prices are a bit high, but volatility (as measured by VIX and options prices) is super high, suggesting there's a huge range of ways this could go. Sound reasonable to me.
My main opinion is still that the US military is giving an absolute master class of dominance right now. They've recently destroyed everything on Kharg Island except the oil facilities, so that Iran can still sell its oil while limiting its ability to attack oil tankers. If this goes on much longer, Iran just isn't going to have anything left, and the strait will be open again. Then oil will crash back to where it was before, at historically relatively cheap prices.
Of course, it's also possible that this all blows up tomorrow. In that case oil shoots up again. Bad news for China, and anyone else who relies on imported oil. But everyone is scrambling to find workaround for that, too. Rationing, strategic oil reserves, the Saudis sending oil to the Red Sea, nonconventional oil increasing production, coal... there are options, even if it's painful in the short term.
I'm glad you brought up the Kharg Island thing, because it is the perfect example of showy tactical dominance that acomplishes zero strategic objectives.
All of the oil on Kharg Island is Iranian oil. The only purpose the garrison on Kharg serves is to protect the island's oil infrastructure. Drones from the mainland can still reach the Kuwaiti shipping lanes. The strategic situation before and after the airstrikes is... exactly the same.
What if the strategic objective is to demonstrate that "we know exactly what you have and where it is and can strike at you with relative impunity without damaging the adjacent infrastructure?"
This was already shown decisively in Operation Midnight Hammer / the 12 days last year where Israel made Iran it's absolute bitch for 2 weeks
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I don't think this is true. If Iran wants to keep Kharg Island, and we take it, then it allows us to bargain for a post-war outcome that is more beneficial to us. Assuming we intend to negotiate with the regime at some point, which it seems likely that we do, it's only a stupid play if we gain less value out of holding the island than the costs we incur to take it. (Which might in fact be the case, and I would be interested in such an argument, but you do not present one here.)
It also potentially allows the US to push ISR assets up closer to Iran's borders and deny Iran use of whatever assets they have there.
Finally, assuming the Iranians will have a fairly normal response to having their land taken and try to either get it back or retaliate, it could bait them into make foolish decisions or even just divert their targeting away from US/allied/random third party assets. This is also beneficial to the United States.
What ISR assets do you expect the USA to park right off shore of Iran that can't be flown in circles a comfortable few hundred km away? This is fantasy. The point was to send a message. There is 0 strategic benefit to this aside from the message.
Passive SIGINT sensors, possibly ground-based radar, possibly sea surveillance capabilities like hydrophones.
I think this is a good intuition, and you might be right that there's little value from a sensing perspective. It's possible that the US can replicate any land-based assets there with air/space assets, but ground-based sensors aren't subject to the same deployment and maintenance constraints as aircraft, so it might be able to fill gaps in coverage. Similarly a hydrophone array deployed there would be able to run ~indefinitely, unlike helicopter-dropped sonarbuoys.
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The Americans aren't protecting their own oil: they're protecting global oil supply - which goes to SEA and Europe. Blockading the strait is only useful if it spikes the price of oil to pressure the Americans to stop. If they're still selling to non Israeli, non American customers downstream then it severely limits the effectiveness of the tactic. It's just for show.
The Americans and Israelis do not rely on Gulf oil for this exact reason, ever since the supply shocks of the 80s. I find that people who talk up Iran's actions in this light to be silly.
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Apparently Kharg island was one of the places Iran stored marine mines. Which would be sufficient reason to hit it.
Of course if the US intends to seize it, that would be another reason to hit it, but while that's what most people seem to think the US is going to do, I expect Qeshm and the nearby smaller islands would be a better prize.
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There is enough global strategic reserve capacity to cover the missing 20% of global production for about 6 months. There will be a ground invasion of Iran if the strait is still substantially closed after 3 months (you can quote me on this). My guess is that oil stays below $125 unless Iran sinks an aircraft carrier or something.
Regarding your efficient market hyopthesis point, a lot of the guys selling futures for West Texas Intermediate are oil drillers in Midland, not geopolitics analysts. You can take their money if you're paying attention.
Sadly this is not even remotely true due to the max rate we can get those reserves to market. Generally the max estimate for how fast you can get the reserves out is ~4.4 mbd, which is itself only about a fifth of the missing supply.
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You might want to check your sources for this, various number are made up, overestimates, assume unrealistic flow, or allow sour oil. For example the US SPR get sour and slow when it gets low. Perhaps we can't even get out what we put it. And OPEC states have had an incentive to over claim their capacity for years. The West also over promises. You should only take demonstrated capacity, not claimed.
Sour product's more important now because while the gulf makes up 20% of overall production, its refineries were producing half of exported "specialty" products. American fracking mostly produces on the lighter end too (besides gassing out).
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Why US oil companies. Most of a companies value is terminal value and not current cash flows. Is this war going to last 15 years?
Mainly because those are the companies listed on the NYSE and because US oil seems relatively safe from Middle East turmoil. There's no way quarterly profits don't go up from this. I can always sell if the war ends in the next 6 months.
Think you should do an excel dcf model one time before investing. One time profits from (like a oil price surchage boosting prices) is an incredible small part of a stocks valuation.
Jane St will gap the oil stocks down on “war ended” before you even see the headline.
Excellent advice and jdizzler you should listen to him and run a model to learn this intuitively before taking any action
The terminal amount is likely 70-90% of EV
This prompt works well enough to asks grok to get you a valuation model. I don’t agree with all its assumptions, but it’s good enough for someone to see the math on how you theoretically derive a stock price. Can choose any symbol. MSFT can out as about 70% of value is from earnings after 7 years.
“ For MSFT can you give me a quick dcf model for its stock valuation. Give me rough estimates of its cash flows for the next seven years and show the $ value of those earnings discounted to today and then show terminal value calculations”
Disclosure: short 3% of portfolio oil etfs
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If you need to ask if markets are pricing something correctly, as a member of the public with no insider knowledge, the answer is always yes. As others have mentioned, there are plenty of potential mitigations or off-ramps that could make this a relative non-issue in a few months.
Not your financial advisor but liquidating your entire portfolio based on a current event that the public has almost no visibility on seems incredibly insane to me.
IDK Covid was a pretty big market oversight: the market reacted quite late (March) when it was clear there would be a problem in January-February. The market has also been retarded for a long long time when it comes to tech, so I do not share your blind faith.
I mean I don't see the downside from a personal financial standpoint. I put the money in 3 month CDs and American oil companies. I can always sell both of these instruments and get back into index funds if the situation changes...
If you're bullish on a commodity you should find a way to get long in the commodity itself, for example USO. Company stocks are priced for all expected future cash flows while commodity markets respond more to dynamic supply and demand situations.
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I think the covid situation had less to do with the disease and more to do with the unpredictable, flailing government reactions thereto.
Yes when people discuss the consequences of COVID they're most often talking about the consequences of the government response to COVID. I'm always careful to be clear about which one I'm talking about.
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The semi-strong EMH is perhaps not true if you're a quant at a prop trading shop, but it is certainly true for a random guy off the street. I assure you anything you think you know about the war has already been priced into the market by an army of quants.
The SP500 was up like 10% from Jan 2020 at the end of the year. It did in fact turn out that the Fed would print unlimited money to keep the market going and that the pandemic wouldn't hurt the markets long-term. Lots of rationalist types were selling everything they had in early 2020 as well, but likely they all lost money unless they all bought back exactly during the March dip. Even if you think assets are over-priced it's not actionable unless you can predict how and when the drop will happen.
Your plan is, checks notes, to sell when prices are depressed and try to get back in if your new assets start dropping and index funds recover? Bold move.
Come on dude you are being obtuse. If the war ends I will immediately sell the oil stocks and get back into index funds. At most I've lost out on a couple percent of gains. The index funds are already down a couple points since I sold, so at worst it'll be a wash. I was going to sell most of my index funds at some point anyway, as they are way too heavily invested in NVIDIA and tech in general, and I want to rebalance away from that.
During the pandemic there was plenty of time to buy during the dip when it was clear that things were going back up. It's not that hard to time the market, it's hard to make max profits.
I think you are right here.
The hyping up of "the pros" (who are often just rule-followers during the times when they are not misled by fear or greed) and the obfuscation, overcomplicating and mystifying of investing is harmful to the man in the street.
Market timing is far from impossible and it is the key to getting more than mediocre results. Often the writing is on the wall.
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You are assuming you will make it on time to the sell button after you read the headlines, meanwhile Jane Street has already sold them all down three days in advance after having already predicted the end of the war.
If oil stocks and index funds start moving in uncorrelated directions you stand to lose a lot more than a couple percent.
Easy to say in hindsight, but if you missed the window by even one month you were pretty much just re-buying into Jan-Feb 2020 prices anyways, and if you missed the window by even two months you would have lost money.
At the end of the day it's your money, so do as you please with it - just realize that historically these sorts of bets have been horrific for the people trying to implement them.
And on the pedestal, these words appear:
My name is Ozymandias, King of Market Timers;
Look on my Works, ye Mighty, and despair!"
You're not doing anyone any favors here.
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It wasn't hard to buy Nvidia shares at the lows in 2022 and make 10x. It was hardly an obscure company back then. Even pre-ChatGPT it was pretty clear AI was going to be a big thing if you'd read a few things about technology between 2020 and 2022. There were early versions of GPT-3-based AI that I, random guy off the street who couldn't tell you what a tensor is, checked out and was surprised by the intelligence of. Obviously this was going to be huge and worthy of investment.
I did that, made a good amount of money from Nvidia and later on ASML, AVGO... Of course I've made a fair few mistakes too. Nevertheless, my returns are much higher than market average.
Efficient pricing is cope. Fundamental analysis works just fine, your theses just have to be right and that's something that no amount of quant skills or training can teach.
My issue with a lot of this thinking is that it's wrapped up in so many layers of hindsight bias. It's very easy to be right directionally, but have no clue on the timing and magnitude of the shift in the market you expect.
Nvidia had runaway 10x success because the unprecedented virality of ChatGPT, which OpenAI expected to be a boring research preview, drove a crazy compute demand supercycle.
There are many timelines where AI still ended up being a Big Deal, but where Altman decided not to release ChatGPT for safety reasons and hence LLM's didn't see unprecedented human and financial capital investment, and where the hyperscalers had time to build out TPU's, Trainium, Ascends, whatever, and hence Nvidia never ended up becoming a multi-trillion dollar company.
Congratulations on being abnormally successful - but if you're smart enough to have returns that good, surely you must realise that everyone else is just paying into some prop trader's next bonus.
Someone would've released this tech eventually though. It was more than just ChatGPT, there was character.ai reaching prominence in September 2022, Facebook was doing something similar for academics... People could've read some of gwern's posts about GPT-3 and seen the potential there. He was going on and on and on about how powerful this technology could be.
I admit I cannot predict timing. But just knowing that something will be big in the future at some point, that's worth something.
They wouldn't need trainium if they didn't want to train AI models, nor Ascends... And we can judge the strength of Nvidia's execution and their knowledge, that's fundamental analysis. We can say 'ok the people making these kinds of accelerators for 20 years know a thing or two about it, whereas latecomers are less likely to do well'?
Tech tends to concentrate as the barriers of entry can be quite high in hardware. There are only a few companies that make HBM. No matter who makes the GPU they'll still need HBM. So that's a good pick. Or ASML. Only they make the most modern chip fab tools. 147% in 5 years is pretty decent, more like 250-300% since the start of the AI boom in 2022/2023. The big chipmaker is a pretty obvious buy for something that runs on masses of chips...
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Iran isn't indiscriminately attacking ships. So, e.g., Chinese vessels have been able to transit without being attacked.
This means the global economic impact will be much less severe than if the Strait was actually closed (for instance with uncharted mines).
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Less than that because
Iran's oil is still getting through.
The Saudis and the UAE have pipelines to bypass the straits, which were not at capacity before things started
Venezuelan oil should be ramping up
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Partly this but another major cause is that the slow bleed is actually rather rational here. It could end at any point so no one wants to be the one to sell right before Trump is pressured off/gets bored/actually wins/pick whatever resolution you expect here. A major panicked sell off increases the chance of Trump pulling away, which would then fuck the people who sold off after all.
The slow bleed will accelerate as the war drags on (if it does) and the likelyhood of immediate resolution in some way becomes less concerning.
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