Displaying items by tag: bear market

Wednesday, 24 April 2024 02:00

Alternative Energy Stocks Struggling in 2024

Alternative energy stocks have had a poor start to the year as the iShares Global Clean Energy ETF (ICLN) is down 15% YTD. A major component of the industry’s struggle is the poor performance of Tesla, which has been dealing with slowing sales and falling margins. Last week, the company announced that it would be restructuring and laying off 10% of its workforce. In the first quarter, the company had its first decline in vehicle deliveries, from 422,875 in last year’s Q1 to 386,810 this year.

Another is that overvalued parts of the market have moved lower as it’s increasingly clear that rates will remain elevated in the near term. Higher rates have a negative impact on auto sales and result in higher financing costs for green energy projects, leading to fewer installations. 

The larger story is that the transition to electric vehicles (EVs) and clean energy from fossil fuels and internal combustion engines is simply taking longer than expected.  EV demand growth seems to have stalled despite optimistic forecasts from many organizations that demand would steadily increase over the next decade. Meanwhile, the supply of EVs is set to meaningfully increase in the coming years. 

Finsum: Alternative energy stocks have been a laggard so far this year. Two of the major reasons are slowing demand for EVs and higher interest rates. 

Published in Eq: Energy
Tuesday, 16 April 2024 04:12

Real Estate Stocks Sink on Inflation News

Entering the year, there was optimism around real estate stocks given consensus expectations of rate cuts due to inflation falling to the Fed’s desired level and a weakening economy. However, the economy has defied skeptics and remains resilient, while inflation is plateauing at higher levels. As a result, the Fed will be less dovish than expected, and the market has tapered back expectations for rate cuts to between 1 and 2 by year-end. 

Another consequence of the data is that mortgage rates are trending back to last year’s highs, with the 30Y at 6.9%. The real estate sector sank lower following last week’s inflation report, led by self-storage companies, office REITs, and homebuilders on the downside. 

Over the past month and YTD, the Real Estate Select SPDR Fund (XLRE) is down 4.6% and 7.8%, respectively. The current environment of rates at a 23-year high is clearly a major headwind. And there are no indications that the status quo will meaningfully change until there is improvement in terms of inflation or more damage to the economy. The impact is evident in terms of Fed futures. At the start of March, odds indicated more than a 50% chance that there would be four or more rate cuts by the end of the year. Now, these odds have plummeted to 5%. 

Finsum: Real estate stocks have sunk lower in the last month, along with the odds of aggressive rate cuts by the Fed. As long as ‘higher for longer’ persists, there will be considerable stress for the weakest segments of the real estate market.

Published in Eq: Real Estate
Tuesday, 09 April 2024 17:49

Meredith Whitney Bearish on Housing

Meredith Whitney, who previously forecasted the financial crisis in the mid-2000s, sees downside for the housing market, driven by changes in behavior among younger men. She sees the beginning of a multiyear decline in housing prices as the lower levels of household formation among men negatively impact demand. 

On the supply side, she sees more homes for sale due to the aging demographics of homeowners. Whitney’s perspective deviates from the consensus, which sees home prices as remaining elevated due to a lack of supply, coupled with a bulge in demand as Millennials enter their peak consumption years over the next decade. This year, most Wall Street banks are forecasting a mid-single digits increase in home prices. 

Another factor impacting housing supply is that the vast majority of mortgages were made at much lower rates. While many asset prices have declined due to the impact of high rates, home prices are an exception. Whitney contends that “normally you would think as rates go up, home prices would go down, and that hasn’t happened over the last two years. I think home prices will normalize because as more inventory and supply come on the market, you’ll see a true clearing price that is lower than it is today. So, I would say 20% lower than it is today.” 

Finsum: The consensus view is that home prices will continue rising due to low supply and demographic-driven demand. Meredith Whitney, well-regarded for predicting the financial crisis, is bearish on the asset class.

Published in Eq: Real Estate
Thursday, 11 January 2024 16:41

Energy Weakness Continues Into 2024

2024 has started off with a bearish tone for the energy sector amid concerns of a supply glut and weakening demand. On Monday, crude oil prices dropped 4% as Saudi Arabia reduced prices for Asian customers by $2 per barrel. 


This is leading to speculation that Saudi Arabia could be looking to regain market share by punishing US producers and undercut cheaper Iranian and Russian oil. It could lead to a similar situation as 2020 when oil prices collapsed as Saudi Arabia flooded the market to punish other producers. Currently, the US is producing 13.2 million barrels per day of oil and has been restocking inventories and increasing exports. Others see it more as the consequence of a weak demand environment and a reflection of a decelerating economy. 


Energy prices had been higher to start the year amid an increase in geopolitical tensions. These include Houthi rebels attacking commercial vessels in the Red Sea and the escalations in the war between Israel and Hamas which could turn it into a larger, regional war. However, these concerns are being dwarfed by the supply and demand picture as evidenced by West Texas crude oil at $70 per barrel. 

Finsum: Oil prices dropped as Saudi Arabia announced that it would be reducing prices for Asian customers. Some believe that the country could be acting to protect market share. 


Published in Eq: Energy
Friday, 29 December 2023 03:02

Expect Volatility to Continue for Oil in 2024

This year has seen some big swings in crude oil prices given a variety of developments. These include rising US oil production, OPEC production cuts, the ongoing war in Ukraine, rising tensions in the MIddle East following Hamas’ attack, and a slowing global economy. As a result, crude oil prices ended the year down 10%. 


Entering 2024, these will continue to be major themes that need to be monitored. At its last meeting, OPEC reduced its production by 2.2 million barrels per day and said that more cuts may be necessary to support the price. But, there is increasing skepticism whether countries will actually abide given that many are reliant on oil revenue. 


Another challenge for OPEC is that US oil production continues to rise. Next year, it’s forecast to be 13.3 million barrels per day, an increase from this year’s average of 13 million barrels per day. Companies like Exxon Mobil and Chevron recently made major acquisitions of domestic producers and are also increasing capital expenditures. Unlike smaller producers, these majors are able to take advantage of economies of scale to push their costs lower and remain profitable with lower prices. 


OPEC now only has control of 51% of the crude oil market which is the lowest in decades. This raises the possibility that Saudi Arabia could choose to increase the supply to temporarily crash the price of oil in order to punish these producers and take back market share, although most analysts believe this is unlikely. 


On the other side, demand is projected to grow at the smallest rate in a year - 1.3 million barrels per day. In 2023, oil demand increased by 1.8 million barrels per day.  In part, this is due to a slowing global economy especially in China. 

Finsum: Oil has been quite weak to end the year despite several bullish catalysts. In hindsight, the most important development has been rising US oil production which is expected to hit a new record next year. 


Published in Eq: Energy
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