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Monday, January 8, 2024
Another Supply Chain Crisis Is Heating Up
Here we go again?
A different kind of supply chain disruption | Oil prices on the rise | Retailers feeling the squeeze | A second round of high inflation? | The best stocks to take advantage…
All is not well on the Red Sea…
Iran-backed Houthi rebels based out of Yemen have been attacking shipping vessels over the past months, threatening to make unwelcome waves in the global supply chain. In the wake of these attacks, several major shipping companies have suspended operations in the area entirely.
Danish shipping giant Maersk has said it will reroute vessels to avoid the Red Sea, instead moving them around the southern tip of Africa — a move that's expected to cost $1 million in extra fuel per round-trip from Asia to Northern Europe. British oil company BP, too, has suspended travel through the area.
That makes this the second such event involving this route since 2021, when the container ship Ever Given got lodged sideways in the Suez Canal and caused a brief, admittedly amusing, but altogether tremendous supply chain disruption.
Transit through the Red Sea and Suez Canal accounts for about 12% of global trade and roughly one-third of shipping container traffic. More than $1 trillion worth of goods pass through this route every single year. And since Western sanctions choked off oil supply from Russia, it's become a central passage for crude flowing from Saudi Arabia to Europe.
In a nutshell: This is a big deal. It could be the starting gun in a brand-new supply chain disruption.
And it could last much longer than a ship getting caught sideways… or in a worse case, even a global shutdown in attempt to stop a pandemic. Today, let's uncover just how big this deal is and what precisely it could impact…
The immediate impacts are already being felt. Oil prices are up nearly 7% from the December lows. And gasoline prices rose as much as 12%.
Regular readers know by now I'm bullish on oil prices for the foreseeable future. This is on the long-term time frame — I'm talking five to 10 years.
I've been adding to quality oil stocks on the recent weakness, and will continue to, because I think the fast-growing energy demands of the world (especially in emerging markets) — and the predominant use of oil to meet those needs (now and over the past several decades) — will inevitably lead to higher oil prices despite what "green" proponents will expect.
The Red Sea chaos is helping out oil bulls in the short term, too.
Take a look at this chart of crude oil futures:
The key thing I'm watching here is the breakout of the downtrend channel it's been in since October. Oil broke above the channel in late December, retested it, and is bouncing off it again. That's a good sign of a trend change.
Adding to this is the White House's efforts to start refilling the Strategic Petroleum Reserve (SPR), with the historic drawdown that began in 2021 now tapering off.
Oil is the current bright spot in the market, and the change in trend is significant. Oil stock buyers may someday soon look back on these prices as very, very cheap… and long-term investors should consider adding to their positions.
But there is a not-so-fun byproduct of this change in trend: higher inflation.
❖ Echoes of supply chain issues past…
You might recall a whole lot of vague talk of "supply chain weirdness" back in 2021. Car buyers, homebuilders, and a whole host of other prospective consumers got pinched by high prices.
What's happening in the Red Sea threatens much the same kind of disruption. Here's some key info and tickers from Reuters:
LOS ANGELES, Dec. 28 (Reuters) — Toymaker Basic Fun's team that oversees ocean shipments of Tonka trucks and Care Bears for Walmart (WMT.N) and other retailers is racing to reroute cargo away from the Suez Canal following militant attacks on vessels in the Red Sea.
Suppliers for the likes of IKEA, Home Depot (HD.N), Amazon (AMZN.O) and retailers around the world are doing the same as businesses grapple with the biggest shipping upheaval since the COVID-19 pandemic threw global supply chains into disarray, sources in the logistics industry said.
Walmart, Ikea, Home Depot, and Amazon are some of the biggest names in consumer retail. They're some of the most commonly shopped storefronts in the world. And they're all being affected by the latest supply chain disruption.
That means we should not just be wary of increased fuel costs… but higher product costs across the board.
Major corporations won't sneeze at the idea of passing these costs along to consumers, which could put another squeeze on Americans with all-time-high credit card balances, a savings rate at the lowest point since the Great Recession, and student loan payments further weighing things down.
If costs rise, spending could slow down dramatically — especially now with the holidays at our backs. That's a negative for consumer discretionary company earnings.
And even worse — it could contribute to the last thing Wall Street wants to see: a higher Consumer Price Index.
And depending on what we see, it could become the most talked-about piece of economic data this month.
It directly coincides with the disruptions we're seeing in the Red Sea, which began around the start of December. Core inflation numbers may strip out energy and food costs, but they're top billing in consumer budgets.
Anything putting a strain there will ripple through the economy. But December also happened to be the month the Fed turned dovish, suggesting rate cuts in 2024 are a near guarantee.
I'll be back with you Friday morning to cover what's in the latest report, but we should all prepare now for a potentially ugly number… and an even uglier market reaction.
Though — and I'll never tire of saying this — it's a market of stocks, not a stock market. Just as higher oil prices are helping out the oil majors as I write today, higher consumer product prices will help out the staples companies — the things folks need to buy, come rain or shine.
Think Walmart… Johnson & Johnson… Kroger… Home Depot.
These are the names consumers will turn to no matter what. And probably will keep turning to for many more decades.
They're defensive stocks for a volatile market — exactly where you want to be if volatility continues harming the more discretionary-oriented stocks that have taken a beating in the recent rout.
Just checking in on those in the discretionary category… Apple is down more than 2% year-to-date… Amazon, down almost 4%… Tesla, down over 4%…
These "Magnificent 7" names aren't yet catching the love they enjoyed last year. And it's no surprise. Risk is thick in the air.
As always, be selective with where you're placing your hard-earned capital. Global conflicts are reaching out from the core battlegrounds and affecting your wallet in subtle, but significant ways.
Be quick on your feet, buy great businesses at cheap prices, and always keep a slug of cash ready to buy more should they fall.
To your health and wealth,
Michael Salvatore Editor, TradeSmith Daily
P.S. Earnings season continues this week and next with a slew of financial firms. Just as interesting as their results will be their forward guidance for 2024, especially in the wake of the Fed's dovish pivot.
But after that, it's big tech. And these reports are where you'll really want to focus your attention. Especially if you're privy to the "alt data" that Andy and Landon Swan, founders of LikeFolio, have at their fingertips.
They believe this off-Wall Street data source will be key to correctly trading the post-earnings moves from the likes of Netflix (which they scored a 70% gain on in three days last year), Coinbase (a 216% win in four days), and Snowflake (a 71% gain, also in four days).
They go live with their latest findings tomorrow, joined by a very special guest from our network who's seriously impressed with what the Swans have been up to.
If you secure your seat to join them, you'll learn how to immediately access a report detailing their top sector to watch for earnings results this quarter. (Hint: This is $647 billion industry that isn't covered by any of the sector-component ETFs. The Swans say it's a real diamond in the rough, and a hot sector to watch this year.)
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
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