Another Manic Monday Coming

Submtted By Peter Tchir of Academy Securities

I expect that we will see a lot of “green dots” on the Bloomberg Terminal Sunday night, as there was almost no asset (other than energy) up on Friday. I do know that my Monday will start bright and early, at 5am on CNBC. Away from that everything is a bit up in the air.

There are headlines that can push us in either direction. Some developments that seem good, some that seem bad, some that seem weird, and some that are just downright confusing and/or contradictory.

Transiting the Strait

There seem to be three possibilities to transiting the Strait:

Please see Thursday’s SITREP U.S. Expected to Conduct Strait Transit This Month. On Saturday morning Admiral Cooper, in a video on X, said “Iran’s ability to threaten freedom of navigation in and around the Strait of Hormuz is degraded.” The report went on to list other actions being taken to knock out the capability of Iran to target ships in the Strait. This fits Academy’s view that the U.S. is actively taking steps to prepare for safe transit.
More countries have signed the Joint Statement expressing a “readiness to contribute to appropriate efforts to ensure safe passage through the Strait.” A bit “wishy-washy” at best, and went to great pains to reference the United Nations and International Energy Agency, and avoid referencing America. Not sure if this does much, but it is a step in the right direction. If we are going to stick to the “Manic Monday” theme, this reminds me of the line, “blame it on the train, but the boss is already there.”
Mounting “chatter” that Iran is “selling safe passage” for about $2 million per ship. I did get some secondhand confirmation from a trusted source that these discussions are in fact occurring. Unclear how effective they will be.

All of these things are “encouraging” in terms of shipping. A U.S.-led (or even solely U.S.) effort to encourage ships to transit the Strait is the most promising in terms of being a “real” solution. The Iranian “insurance” plan seems dubious at best, and not great for the world.

Unfortunately, it is being widely reported that Iranian leadership is steadfast on trying to keep the Strait from being transited by global shipping and is unwilling to even negotiate on the topic.

Polymarket has several opportunities to “predict” things:

Strait of Hormuz traffic returns to normal by the end of April. Only 27% down from 50% as recently as March 12th.

Lots of opportunity for stocks to do very well if that is really reflective of what is being priced into the market. I think it is too small of a market to be particularly useful, but lately it does seem that some “obscure” prediction markets get volume and pricing that indicates someone “knows” something – so worth at least keeping an eye on.

Boots on the Ground, or Mission Accomplished?

Marine expeditionary forces are on the way. There has been a lot of discussion about the potential to “seize” Kharg Island (now that Iran’s military facilities have been hit hard). Or to possibly clear Iranian forces close to the Strait. There is a lot of debate on what taking Kharg Island would mean. One school of thought is that controlling the ports would rapidly force Iran to the table as their primary source of income and leverage would be in U.S. hands. Others see a lot of risks to the plan, from hardening resolve, to still requiring the Strait to be open, to how much money/currency does Iran have and how long could they hold out, even if they were not able to sell another barrel of oil? I’m more in the latter camp, but we can debate this option later this week as the Marines arrive.

Also, why spend much time thinking about boots on the ground, when the President has been posting on Truth Social “We are getting very close to meeting our objectives as we consider winding down our great Military efforts in the Middle East with respect to the Terrorist Regime of Iran.”

This statement could be a negotiating tactic. Maybe it is just to lull Iran into a false sense of security (the initial attack on Iran occurred during ongoing negotiations). Maybe it is just a “trial balloon” to see how people (voters) and possibly markets respond?

Literally, both extremes - “boots on the ground” and “we won, time to go home” - are on the table. It really could be a Manic Monday.

Un-Sanctioning, De-Jonesing, and Releasing

In the past week or so, the administration has:

Taken off sanctions on Russian oil. This certainly helps keep the price of oil lower than it would be otherwise, though I suspect most of the oil still winds up going to China and India, at less of a discount. At the same time, I would be very concerned about what this means for Russia if I’m either Ukraine or the EU. Secretary of War Hegseth has been pointing out how any lack of inventory in the U.S. military is a direct result of giving weapons to Ukraine. If Europe isn’t already thinking about the need to potentially “go it alone” against a wealthier Russia, they should be. It might not get to that point, but that is certainly one message that can be taken from this very “transactional” administration.
Removed sanctions on Iranian Oil “on the sea.” The Treasury Secretary made this announcement and referenced 140 million barrels that will now be without sanctions. That is a big “release” of oil, but I’m told by oil experts that while the amount at sea is around that, as much of 100 million barrels is already spoken for (largely by China) and is in transit. So, it might be “only” 40 million barrels. If one goal of seizing Kharg Island is to apply maximum economic leverage, this move seems to give Iran more wiggle room. In the aftermath of this, it will be interesting to see how Iran has funded itself? Presumably not in dollars, so in yuan? Bitcoin? Barter?
A 60-day suspension of the Jones Act. This basically allows any ship to transit goods between two U.S. ports. It is viewed by many, including me, as a potential first step towards export controls. The U.S. is not designed (currently) to use all of the oil, gas, LNG, diesel, etc. that it produces domestically. Pipelines aren’t developed for that. The Jones Act has made it unprofitable to do that. This allows some of that to occur, helping keep oil prices low. There is a limit to how effective it can be without export controls (and I’m not a big fan of export controls, but it is something we should watch).
- The U.S. price for any energy product, with no export controls, is basically the Global Price minus Freight Costs minus some “Inertia” (where “Inertia” is existing relationships, agreements, etc.). So, as “global” prices rise, U.S. prices will rise, because the drillers, refiners, etc., will make more money selling it overseas if prices don’t rise domestically. It is economics 101, so we will see what else gets implemented to keep domestic prices lower if they continue to rise across the rest of the world.
Strategic Petroleum Reserve releases. I have not done the work, but it sounds like the U.S. released almost 90 million barrels of oil. Since there is only excess capacity to load about 25 million barrels a month, the release gives us some breathing room, until June or so (3 to 4 months). There is more to be released, though there is some limit, as apparently some amount of oil needs to stay in the reserves to keep the facilities’ structural integrity intact. Europe has supposedly been slower on releasing their supplies, but that is possibly because they are worried it will get bought elsewhere, so they will bleed out their reserves more “judiciously.” Europe’s lack of energy independence is once again being highlighted! The President did admonish the leader of Scotland for buying North Sea oil from Norway, and wind turbines from China, while curtailing their own drilling in the North Sea. How long before Europe gets the ProSec™ message?
No relief on tariffs. I would have put this in play, at least for some things (energy, fertilizer, etc.) but I was never a huge fan of the broad application of tariffs in any case.

Airbus for Drones

According to Wikipedia, Airbus was created in 1970 as a consortium of European aerospace companies to produce wide-body aircraft to compete with American built airliners. If I was in the EU, I’d be pounding the table for a drone equivalent of Airbus:

It is quite clear that drones are effective. They have their limitations (both on the hardware and software sides), but they can certainly play a meaningful role in deterrence and defense (as well as provide offensive capabilities).
They are cheap and relatively easy to make. Making a 5th generation jet is extremely difficult. Ditto for aircraft carriers and capital ships. Even modern missile systems are expensive and require highly specialized machinery. Take a bunch of factories that used to make cars (or other things) and ramp up drone production. A drone factory for the Ukrainian Army was recently opened in the U.K. I see great difficulty (and that is being kind) in the EU developing a fighting force with the equipment they have any time soon (like in the next 5 years). A fleet of drones and unmanned surface vessels that is enough to give Putin some pause seems far more plausible.
The “consortium” construct is important as it would hopefully remove some of the national interests that already impair Europe’s efforts to rearm themselves quickly and with some degree of compatibility.

Possibly a non sequitur but I want to invest in companies that might fit this sort of model as it seems to be an obvious choice, and eventually, usually after a lot of whining and moaning, and a couple of near-catastrophic failures, Europe does the obvious thing. (The European Debt Crisis from the beginning to “whatever it takes” seems to fit this path well).

The U.S. is Neither an Oasis Nor a Mirage

As brent crude soared higher than WTI (and grades of crude most of us have rarely heard of skyrocketed even more), the U.S. equity markets seemed to treat the U.S. as an “oasis.” We already mentioned that even with energy independence, we will see higher prices along with the rest of the world (unless we go to some form of export control). So, we are not immune. But we do have advantages - hence we are neither an oasis (really good), nor a mirage (all fake).

The links to the U.S. are real and will hurt:

Somewhere around 40% of the revenue generated by Fortune 500 companies comes from overseas. If Europe and Asia are struggling, it will impact companies here.
While the products might be American, many are manufactured elsewhere and are subject to supply disruptions, which would further impact profits for U.S. companies.
Those countries went out of their way not to mention the U.S. in their “letter,” which makes me wonder, again, do U.S. brands still have the same “cache” for non-American consumers?
Interest rates have spiked across the globe. The cost of everything, everywhere has gone up with this pretty dramatic move in yields. The U.S. 2-year yield went from 3.38% to 3.9% in 3 weeks. U.K. yields are incredibly jealous of that “strong” performance – as they rose 100 bps in the same period!

Ironically, and somewhat par for the course in this “stop-loss” driven market, Private Credit outperformed even as markets probably should have started adding global recession risks to the reasons to be concerned about private credit. But it seems that everyone was so underweight that even a realistic issue didn’t cause much/any new pain.

Urea and Limp Mode

In the long list of “knock-on” effects from the slowdown in goods from the Middle East, we can add another “risk” – DEF. Diesel exhaust fluid is used in diesel engines to reduce harmful emissions. Since 2010 (or so), if a diesel engine doesn’t have enough DEF, the vehicle is restricted to going 5 to 15 mph (limp mode). Supposedly the vehicle can be reprogrammed, but this is yet another thing to highlight regarding the quirkiness and complexity of supply chains and products. Oh, I almost forget, urea is about 33% of DEF. Gulf urea costs have almost doubled since the start of the year.

Not trying to make a big deal about this (unlike helium for semiconductors), but thought it would provide a nice break, and I always enjoy learning something new.

NI CHEM <go> Majeure <go>

I need to find some better hobbies than checking out Bloomberg for stories containing “Force Majeure” but it is getting more worrisome by the day.

If you go to Google Trends it is pretty clear that others are starting to be fascinated with this as well.

Already Too Late?

It is already precarious for Asia (ex-China), the Middle East itself, and Europe. The costs, potential supply chain disruptions, AND higher rates (when many mortgages are floating rate) seem to be a recipe for recession.

A resolution this week, or maybe even next, and maybe we scrape by. Maybe the U.S. is still out of range for a recession, but a recession was barely a gleam in the eye of any “doomer” a month ago, and that risk now has to enter the conversation.

Risks to the global economy are rising. While the U.S. is in much better shape (we were in better shape before the conflict and have more robust protection against the new problems created by the conflict), that doesn’t mean we don’t have risk (we are not a mirage, but we are not an oasis either).

Yields scare me right now.

The moves don’t seem to make sense in the context of higher oil prices. Yes, higher oil prices should impact yields, but by this much?

We saw 2s vs 10s flatten (which makes some sense, if higher prices will slow demand over time), but on Friday, 10s underperformed.

I am not sure the consumer is in a position to do well in this rising rate environment. Again, private credit didn’t seem to care on Thursday and Friday (and I had recommended being long those sectors recently, because too much pessimism was being priced in). I think they should care as the risk of a slowing economy with potential supply chain hiccups is a real risk here.

Bottom Line

I wish it was Sunday, 'cause that’s my fun day.

Okay, it is Sunday, but it is certainly not my fun day. Nor has it been for the past few weekends (though to be honest, deep down, I enjoy these stressful times).

Manic can be good.

By the time this makes it to our website, and you see it distributed, we might have some clarity one way or the other. We are likely to continue to be affected by dueling headlines.

There are still plenty of paths to a really strong week for markets, especially if the “winding down” messaging comes to fruition with a resolution in the Strait.

There are other ways we can see progress that might not give us a “manic” rebound, but a rebound nonetheless.

Unfortunately, there are plenty of paths that lead to more problems and some that could lead to a manic week, and not in a good way.

I do believe that as we move down the road, in a week or two, markets won’t react to positive headlines, as the “fear” that it is already “too late” gets priced into markets.

I’d love to say “buy Treasuries” but we seem to have broken some resistance and it is difficult to justify the size of the move solely on the economics of what is occurring in the Middle East.

I guess my “bottom line” is cautious for now, but be prepared to be very bullish, though any thought of being bullish will diminish as the days go by if we don’t see progress in getting us off the current path. The current path, as it goes on, will make it “too late” for some economies, and even if the U.S. can avoid the worst of it, it won’t be great for earnings (and hence the stock market). Rates seem to be telling such a different story that bonds seem like a “screaming” buy here, but that too seems dangerous.