This installment of The Matt Allen Letter is free for everyone. If you would like to read about stock analysis, stock market analysis, and much more. You can subscribe here.
In this newsletter, we are going to discuss the commodity crisis, and the best way that you can profit off it. Keep in mind, the airlines hedge oil to help their balance sheets. If oil is going up, this means it costs way more to fly their planes. They will buy oil stocks/futures to make a profit off them to help their cost. You can do this as well.
We are in the middle of unprecedented economic times. It feels like each year since 2020, we have faced a different form of unprecedented times.
We are facing sky high inflation, a commodity crisis, and a geo-political war that we haven’t seen since world war 2.
My goal here is to help you really understand inflation and interest rates.
First, I want to discuss the record high inflation. The latest numbers are showing that inflation is sitting at around 7.2%.
I have had multiple people ask me, how is the best way to fix inflation? The answer is simple, but it is a double edge soared.
The two reasons that we are in this inflation crisis is because the federal reserve did not raise interest rates in 2021 and the supply chain shock.
The easiest way to fix both of these issues is by raising interest rates. Unfortunately, when you start raising interest rates in an aggressive manner, a recession will happen. It’s the definition of the law of unintended consequences in economics.
I will give you a simple example in the construction sector:
When interest rates are so low, real estate investors are able to burrow money for basically free allowing them to build TONS of real estate properties. Business is booming!
When this happens, construction companies start rapidly expanding their business to keep up with the demand of the real estate investors. In theory, this is a great for the economy because people are making money, hiring workers, and helping develop communities.
However, if you let the party go on to long, the economy gets overheated. The federal reserve’s job is to raise rates so this slows it down. Unfortunately, the federal reserve did not in 2021.
*Enter a supply chain shock*
What do you need when building a house? Lumber. Due to covid-19, lumber suppliers were not able to keep up with the demand of the booming housing market. The price of lumber hit all-time highs.
This sent the price of lumber soaring which made the price of building a house soar! All of a sudden, we had Wallstreet firms who had the money, jump into the residential space driving the prices of houses way up.
*Re-enter the Fed*
The Fed’s job is supposed to be to recognize this and raise rates in a slow manner. By doing this, you limit the amount of cheap money that real estate investors can burrow. This means that the building/buying will slow which means the lumber and housing market will drop in price.
However, since the Fed failed at their job in 2021, they plan on raising rates at an aggressive pace. When you raise rates at an aggressive rate, it will cause a recession.
In the most simple form: The construction worker that was hired to build more houses is laid off because there is no more work. However, he can no longer pay the mortgage for his brand new house that he overpaid for. He goes to the bank, and they will not refinance him because the Fed has really tightened the money supply that banks are able to lay off. These types of events will happen in every industry.
The price of nickel futures that had spiked by 73% on Monday at the London Metals Exchange in a historic short squeeze. On Tuesday, Nickel spiked another 100% all the way up to $100,000 per metric ton. The LME halted nickel trading at a price of $81,051.
The short squeezed explained:
Russia is the 3rd largest nickel supplier and producing 9% of the worlds production.
Chinese tycoon Xiang Guangda, chairman and founder of the world’s largest nickel producer, took out a massive short position against Nickel futures. Xiang began building the short position late last year to hedge rising output, and because he thought the rally in nickel prices that occurred during 2020-2021 would be over.
However, Xiang did not anticipate the Russian invasion of Ukraine which caused nickel prices to surge leading to him getting short squeezed.
Xiang now owes $2 Billion dollars a day to cover his short position.
If he decides to cover his position by buying more nickel, the price of nickel will keep soaring! This is exactly what happened with GameStop in the short squeeze of early 2021.
We use nickel for steel buildings, electronics, batteries, and a bunch of technology in EV cars. I do not think the price of nickel will sustain at these prices, but this could have a HUGE impact on the global markets.
Nickel Trades: The stock that I like the most for a nickel trade is $Vale. This company makes $1.5 Billion for every 10,000 per metric ton that nickel goes up. The stock sits at $18
Nickel went from $20,000 to $100,000 in a period of 2 days, so you can do the math.
I spotted Unusual option activity in the June 17th call options for Vale.
Keep in mind, if the price of nickel comes down, the stock will go down as well.
We have talked about oil in previous newsletters, so I will not go into to much detail here.
Unfortunately, oil prices are no where close to returning to normal levels. With the United States cutting off Russian Oil, we are going to see a short term spike for sure.
The current price of oil is around $130 a barrel. Goldman Sachs has came out and predicted a $135 average cost per barrel the rest of 2022 which would put gas prices around this price for the rest of the year.
In 1979/1980, gas costs the average consumer 7% of their entire spending. If we return to those levels, gas will be at $10 a gallon.
There is a large consensus on wall street that we will see that 7% level.
Keep in mind that any de-escalation between Ukraine and Russia will send oil prices way down.
Oil Trades: If the price of oil keeps going up, two interesting plays are $CEI and $REI. They sit at $1.05 and $3.50. (Both are down today because oil is down.)
Obviously any blue-chip oil stock is a great play as well.
Keep in mind, if the price of oil comes down, the stock will go down as well.
Wheat has returned to the prices of the 2008 international food crisis. Ukraine and Russia are two of the leading producers of wheat.
This has made wheat futures SURGE in price due to a world supply shock. Traders are taking their profits, but a turn back to the upside would not be a surprise.
This will continue a record surge in the global cost of food. This will have a big impact in the United States but it will have a horrible impact in third-world countries who do not have the resources that we have here.
American buyers of wheat will delay as long as they can because we have that ability. Unfortunately, most third world countries do not.
Wheat trade: The etf $weat tracks the price of wheat futures, and it is the safest play when dealing with wheat.
Keep in mind, if the price of wheat comes down, the stock will go down as will.
I hope that I was able to help you understand the commodity crisis better!
Have a good rest of the week!
Stay Hungry, Stay Long