In Focus: Avoid This Trade
Updated: Jul 11
June 5, 2020, news breaks that Warren Buffett's holding company Berkshire Hathaway (BRK.A) has purchased Dominion Energy's (D) natural gas and transmission assets for $9.7 billion. Wall Street is giddy,
The elation from the Street derives from two reasons. First, a deal is being done in the midst of a pandemic, and by Warren Buffett no less, signaling that the long-term outlook for the markets are good. Reason two is that Wall Street hates to see money in the bank. Over the last two years Wall Street has complained about Buffett's stock pile of cash and his reluctance to put it to work.
The coronavirus pandemic proves Wall Street wrong and Buffett right again. Berkshire Hathaway's pile of cash allows it to navigate the pandemic easily and make a big acquisition when other big companies are just trying to stay alive.
However, Wall Street may have celebrated too soon, and Buffett may have let an old mindset and cheap assets cloud his judgement.
April 21, 2020 the price of crude oil turned negative, reaching a low of negative $37 per barrel. The coronavirus pandemic has caused a decline in the demand for oil and a large over supply. Oil buyers and others have nowhere to store oil and are willing to pay the sellers of oil to take it back upon time of delivery.
Investors see this as an excellent opportunity to invest in black gold at a very low price. USO, the United States Oil Fund ETF sees a lot of action from retail investors and traders because it provides an easy way for investors to gain exposure to the oil markets.
July 2014, almost six years before oil prices would go negative, crude oil begins what would be a 19 month decline in price. From July 2014 to February 2016 oil would drop from ~$106 a barrel to ~$33 per barrel, a 68.8% decline. A strong dollar, OPECs failure to cap oil production, China's devaluation of its currency, and the Iran Nuclear Deal all play a part in driving the price of oil down in the 19 month time span.
Current day, there is still a belief that oil prices will rise again and that has prompted billionaires, millionaires, thousandaires, hundredaires, and fractional share buyers to accumulate oil and oil companies at their current low prices, but they're on the wrong side of the trade.
What Investors Are Missing
Since June 2019 to present Chevron (CVX), ConocoPhillips (COP), Exxon Mobil (XOM), and Phillips 66 (PSX) have lost ~$200 billion in market value. In the same time span Tesla (TSLA) has gained over $200 billion in market value. Coincidence? I think not.
This isn't a Tesla piece, I covered that back in April. This is a nudge for you, Warren Buffett, and other investors who want to be on the right side of the trade to wake up. Oil and fossil fuels are yesterday's news, renewable energy is the future.
The rise of renewable energy doesn't necessarily mean the end of fossil fuels right now. It will be a long time before the world can completely detox itself from fossil fuels, but the days of oil trading for $100 per barrel are long gone. It would take a great global catastrophe or unprecedented economic global growth for oil to see those levels again.
"If an individual can get the solar panels, buy the battery packs, and get essentially free software or low cost software, that allow us to collect the sun's energy and redirect it back into the grid, what you're going to see are utilities basically go upside down" - Chamath Palihapitiya
The Great Wealth Transfer, The New One
Wall Street and Warren Buffet are missing the great transfer of wealth that is occurring. Wealth is leaving fossil fuels and moving into renewable energy. America has seen this before when wealth moved from steamboats to railroads, railroads to airplanes, horses and buggies to cars, books to computers, compact disc and DVDs to digital media.
These great transfers of wealth usually reward the early investors handsomely, while leaving the investors reluctant to change with massive losses at worst or a stagnant portfolio at best.
Don't be Warren Buffett, don't be old school Wall Street, avoid the oil trade, renewable energy is the future, and the markets are telling us so.