The most recent momentum downturn was short-lived. And once again, the markets are in a frenzy over the prospect of more stimulus. Here we go again. I’m not opposed to the rebuilding of infrastructure across the United States. And with infrastructure stocks running again on Thursday, it was certainly an excellent time to use the recent downturn as a reason to sell puts on positions that you want to enter (cash-secured puts).
Now, investors can buy back any put contracts that they might have sold on these entry positions and pocket the difference in the premium. But how long will this latest infrastructure rally last? For a long time, it was assumed that an infrastructure deal had been priced into the market.
Rebuilding Current Infrastructure
What may not have been priced in is the success of Republicans to avoid any changes to the 2017 Tax Cuts and Jobs Act. Biden said that the deal would not raise taxes on gasoline. He also said that there would be no user fees on electric vehicles. So, there’s not a plan to pay for it. But there was moderate, bipartisan support. After the announcement, 11 Republicans and 10 Democrats publicly backed the deal.
The more liberal wing of the Democratic Party is not happy with the deal. Some argue that it’s too small in scale. Others say that it doesn’t address climate change. Some say that tax reform (meaning higher taxes) must be tied to the bill. Others want more social programs.
The Senate’s infrastructure bill means that it must pass through that chamber first before it goes to the House of Representatives. I expect that this bill will get through both Chambers of Congress. But I expect a lot of politicization of other issues and demagoguing along the way.
With that said, I question the timing for getting “hard” infrastructure programs underway. We have a shortage of workers. We have a lack of raw materials. And whenever the United States government starts buying up raw materials for programs and projects, it drives up the cost of those same materials for everyone.
There’s one final consideration. What happens when the stimulus money stops flowing? That’s the question that all the economic geniuses always forget about. The bill eventually comes due, and the hangover kicks in.
I suppose we must enjoy the music and keep dancing while it keeps playing. Given that my job is to determine when that music does finally stop playing, I’ll keep my ear out. At some point, there will come a day I won’t be able to hear a sound.
This morning, oil prices had pulled back a little. A colleague asked me if I thought that this pullback was a sign of something. Pull back? Oil prices are at three-year highs.
Oil and gas companies have been happy to cheer rising prices. With a possible breakdown in conversations between Iran and the West over its nuclear program, we may see crude move into the $80 to $90 range per barrel. My estimate is conservative. Goldman Sachs and executives at multiple oil companies have said that oil could hit $100 per barrel this month.
I’ve watched a lot of oil stocks rally in recent months. We’ll talk about small-cap energy on Friday. There are a lot of names out there offering distinct upside in the months ahead.