American gas on its way to Europe
A new tailwind for energy trading… domestic demand is slowing, will it drive prices down? … the 10-year jumps on the 50 basis point rate hike forecast
A lot of things are happening in the news. Today, let’s review several stories that are likely to impact your portfolio in the days and months to come.
***The United States will increase its natural gas exports to Europe
Last Friday, US and EU officials said they were aiming to supply Europe with an additional 15 billion cubic meters of US liquefied natural gas (LNG).
How will this help Europe reduce its dependence on Russian energy?
here is The Wall Street Journal:
The increase in gas supplies to the United States only partly covers the shortfall that Europe faces by turning away from Russian gas.
Officials across the continent are racing to sign new contracts with growers in the Middle East and Africa before next winter.
France has ended subsidies for new gas heaters in homes and will subsidize electric heat pumps instead. Italy, the second largest consumer of Russian gas after Germany, plans to burn coal in some power plants rather than natural gas.
This is yet another tailwind for energy trading that we have highlighted here in the Digest.
Keep in mind that we can’t just push a button and start delivering more LNG to Europe. We are already at the maximum of our current capacity.
On that note, back to WSJ:
The plan to end European consumption of Russian gas will take at least several years. LNG-producing countries are operating their export terminals at full capacity and building new ones takes time.
The United States is the world’s largest producer of natural gas, and in January and December was the largest exporter of LNG. Nearly 70% of these LNG shipments were destined for the 27 EU countries, the UK and Turkey.
“We currently export every molecule that has a terminal to liquefy it,” said US Energy Secretary Jennifer Granholm. “Because of the price, there is a desire to liquefy it and send it.”
Thus, the strengthening of national capacity will be a favorable wind for companies that help facilitate LNG exports.
*** Turns out that’s exactly the kind of company our macro specialist, Eric Fry, just recommended to his Investment report the subscribers
From Eric’s trade alert last week:
The US oil and gas sector has entered a new phase of prosperity; this notoriously volatile, boom-bust industry is booming again.
the SPDR Oil and Gas Exploration and Production ETF (XOP)for example, has climbed 66% in the past 12 months, while many individual names in the energy sector have doubled or tripled in the past year.
Despite these major moves, the new bull market in energy stocks is probably still in its infancy. If oil over $100 becomes the new norm, rather than a temporary fluke, oil companies will start minting money.
Eric recommended three intermediary energy partnerships. This type of business owns and operates revenue-generating assets such as oil and gas pipelines and storage facilities.
As the United States tries to expand its infrastructure to meet new demand from Europe, these companies will benefit.
Last week we highlighted the Alerian MLP ETF, AMLP, as an example of this corner of the market. It holds some of the largest midstream energy partnerships, including Magellan, Enterprise and Energy Transfer.
At the time of writing, AMLP’s payout yield is 7.75%. Meanwhile, the average payout yield of Eric’s three picks is even higher, at 8.1%. In addition, Eric chose his recommendations based on their performance and potential for outsized price gains.
If you’re looking to generate revenue in this inflationary environment – as well as growth, as the United States supplies Europe’s energy needs – you’ve found it.
*** Meanwhile, is slowing home sales dampening housing inflation?
Analysts had expected home sales to post a slight increase from January to February.
Instead, last week we learned that they had fallen 5.4%.
Additionally, pending home sales, which measure signed contracts on existing homes, fell 4.1% month over month.
This is the fourth consecutive month of falling pending sales, which are an indicator of future closings, in one to two months.
Given that this tally is based on contracts signed in February, when mortgage rates really started to take off, this is a strong indicator of how the market is reacting to the new rate environment, especially as it enters the crucial spring season.
Will this drop in demand slow the explosive gains in house prices that we have seen across the country in recent months?
Well, yes, it can slow down the rate at which house prices will rise – but don’t confuse this with the ability to buy houses at lower prices than today.
Experts suggest that rising house prices and soaring mortgage rates could dampen demand, but current owners will simply delist their homes rather than sell at lower prices.
Translation – don’t expect any relief on new home prices.
Lawrence Yun, chief economist for the National Association of Realtors, wrote in an email that he expects home prices to rise 5% this year. Although this is only about a third of the rate of increase of 2021, it is still “on the rise”.
Also, keep in mind that there’s a good chance we’ll see a 50 basis point hike in interest rates at the next Fed meeting, which will put even more pressure on the increase in total housing expenditure.
Now is not the best time to become a potential homeowner…or invest in mortgage companies.
Below we take a look at the chart from PennyMac Financial Services (PFSI).
It’s a great, well-run business, but it’s facing a headwind of rising prices and soaring mortgage costs.
After a monster 2020 and a solid 2021, PFSI here is down 23% in 2022.
Skyrocketing mortgage rates require mortgage refinancing from the kneecap, which is an important part of the business of a company like PFSI.
If you have lenders in your portfolio, be careful.
***Finally, keep an eye on the 10-year Treasury yield
Last Friday, it hit a new high in two years.
The yield on the benchmark 10-year Treasury bond jumped 10.4 basis points to 2.445%. As I write Monday morning, it is only slightly stretched, trading at 2.422%.
The move comes with growing expectations that the Fed will be more aggressive in raising rates.
As mentioned earlier in this Digestthis expectation leads many analysts and big banks to believe that we will see a 50 basis point rally in May – and possibly in June.
Goldman Sachs raised its forecast to 50 basis points on Monday at the May and June Fed meetings.
Bank of America on Friday joined those expecting bigger increases. The firm expects 50 basis point hikes in June and July, and 25 basis point hikes at all other meetings this year…
Citigroup on Friday called for four 50 basis point hikes from May.
This belief about a half point rise in May is supported by CME’s FedWatch tool.
As you can see below, the current probability of the Fed raising rates by 50 basis points at the May Fed meeting stands at 72.2%.
Over the past few weeks, we’ve highlighted all sorts of ways to play in a rising rate environment:
Oil stocks, middlemen, commodities, gold, fertilizer companies, and major cybersecurity players, among others. We will continue to bring you ideas. But, at the end of the day, if you haven’t taken steps to “protect rates” in your portfolio, I urge you to take the time to plan for it today.
Have a good evening,