Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Commentary

What Stocks could the Saudi Drone attack boost

A simple drone attack on two Saudi oil facilities has profound consequences for many stocks.

To explain, oil prices suffered their worst disruption ever after Yemeni Houthi rebels wrecked the processing plants that produce most of Saudi Arabia’s oil for export. The attacks occurred on Saturday 14 September 2019, when the markets reopened on Monday 16 September 2019 prices rose 10%, The New York Times reports. However, oil prices were falling again on Wednesday, September 18, 2019.

Consequently, up to 5% of the global oil supply could off the market for an unknown period. A severe oil crisis is unlikely, because there is an oil glut with global stockpiles higher than usual. Moreover, oil production is increasing, US oil production is double what is in 2012, The New York Times estimates.

Will there be More Drone Attacks?

The greatest threat is more drone attacks against Saudi Arabia has no obvious defense. However, the Saudis could quickly end the threat by stopping their war in Yemen and withdrawing support for the Yemeni military.

To explain, the Saudis provoked the Houthi attack by providing massive amounts of military aid to the Houthis’ enemies in the Yemeni Civil War. Yemen is a small country next to Saudi Arabia that is embroiled in a complex civil war. The Yemeni Civil War is dangerous because Iran backs the Houthi rebels, while Saudi Arabia and its ally the United States, prop up the Yemeni government.

My suspicion is that the amount of destruction on 14 September will inspire more drone attacks because of the amount of destruction achieved at a low cost. Moreover, disruption to oil supplies could force the United States and China to pressure the Saudis to make peace with the Houthis.

U. S. President Donald J. Trump (R-New York) has a strong incentive to make peace. Trump faces reelection next year, and the American people are squarely against another Middle Eastern War. I think war is unlikely because Trump understands another war will doom his reelection.

What Stocks will the Drone War hurt?

Naturally investors and speculators will ask what stocks could fall or rise because of the “Drone War” in Saudi Arabia?

Here are some stocks that could fall because of the Drone War:

Lockheed-Martin (NYSE: LMT) -This giant defense contractor has a lot to lose because the Houthis just showed its signature products like warplanes and attack helicopters could be obsolete.

To explain, the Houthis brought Saudi Arabia to its knees with drones that could as little as $15,000. That calls the existence of fighter planes like Lockheed-Martin’s $1.2 trillion F-35 Lightning II Joint Strike Fighter into question. Notably, Saudi’s 313 jet fighters could not stop the refinery attacks.

I think Mr. Market ridiculously overpriced Lockheed Martin’s stock at $394.71 a share on 18 September 2019. My prediction is Lockheed is heading for a fall because many of its products including helicopters and fighter planes are as obsolete as horse cavalry.

Those looking for a stock to short need to take note. Lockheed could collapse totally if the drone attack leads to peace in the Middle East and a US pullout from that region. To clarify, I suspect a massive cutback in American military forces and spending will follow any U.S. pullout from the Middle East.

Why General Dynamics is in Trouble

General Dynamics (NYSE: GD) another giant defense contractor is in a similar position to Lockheed Martin. Tellingly, Mr. Market priced General Dynamics shares at $188.65 on 18 September 2019.

Notably, Saudi Arabia spends more of its gross domestic product (GDP) on defense than any other country, The Arab Weekly estimates. Much of the $68 billion the Saudis spent on defense in 2018 went to companies like General Dynamics.

Yet Saudi Arabia is defenseless against fairly simple drone attacks. My prediction is that companies like General Dynamics will have a far harder time peddling their wares soon. However, General Dynamics could find more customers for the drones from its Unmanned Systems Technology subsidiary.

Thus, I advise speculators looking for a short to examine General Dynamics and all defense stocks. I think defense stocks will go up briefly because of war hysteria but fall over time as investors realize how obsolete much of the defense giants’ arsenal is.

What Stocks could the Drone War Boost?

There are also a few stocks that I think the Drone War will boost.

First, electric vehicle makers. The Houthis justified the huge investments some companies are making in the  electric vehicle technology. To elaborate electric vehicles do not need oil to move. Thus, anything that increases oil prices could raise demands for electric cars and trucks.

Volkswagen

The biggest electric vehicle player is Volkswagen AG (VWAPY) which reportedly has plans to build 50 million electric cars in the next decade.

In particular, Volkswagen is planning a €20,000 ($23,000) electric sedan for the Chinese and European markets. I think Mr. Market underpriced Volkswagen at $17.20 on 18 September 2019.

Tesla Motors

The highest profile electric car company is Elon Musk’s Tesla Motors (NASDAQ: TSLA). Tesla has the most experience in electrics and the best technology. In addition, I think Mr. Market undervalues Tesla’s Gigafactory battery plants and electric semi-tractor.

To elaborate the Gigafactories could sell batteries to other companies. Meanwhile, there is a huge potential market for the electric semi. There are nearly two million semi-tractors on America’s highways, for instance.

Finally Tesla has experience selling large numbers of electric cars. No other carmaker has that experience.

However, Mr. Market grossly overpriced Tesla (NASDAQ: TSLA) at $243.53 a share on 18 September 2019. Hence, I think Tesla is headed for a huge fall in share price. So it could be a stock worth shorting. Yet I believe Tesla could be a value investment if its stock ever gets a realistic price.

I believe Tesla will fall because it reported a -$408.33 million net loss on 30 June 2019. Thus, Tesla loses money despite the $921.05 million gross profit it reported on 30 June 2019.

Underpriced Electric Vehicle Stocks

Ford (NYSE: F) this historic carmaker makes money and it could market an electric pickup truck as early as 2021, Car & Driver claims. Ford is so confident in its electric vehicles. it posts videos of its electric F-150 pickup performing stunts like pulling freight trains online.

In contrast to Tesla, Ford reported a net income of $148 million, a quarterly gross profit of $2.815 billion, and $38.048 billion in cash and short-term investments on 30 June 2019. I believe Mr. Market underpriced Ford at $9.26 on 18 September 2019.

Tata Motors Limited (NYSE: TTM) The British-Indian company’s electric Jaguar I-Pace won the 2019 World Car of the Year Award for the World Car Awards. Tata is selling I-Paces to the public now. Like Ford, Mr. Market underpriced Tata at $8.66 a share on 18 September 2019.

PACCAR Inc. (NASDAQ: PCAR) the commercial truck maker is planning several electric vehicles including an electric garbage truck, and a small electric semi. I think Mr. Market fairly priced PACCAR at $70.07 on September 18, 2019.

In the electric car race, I think Ford is the best bargain. However, there is no visible market appreciation for either Tata or PACCAR.

Avoid Oil Stocks

One class of stocks I advise people to avoid now is oil stocks. I think oil stocks are dangerous because nobody knows what will happen in the oil market.

In particular, I think Mr. Market overpriced the largest oil company Exxon Mobil (NYSE: XOM) at $72.46 on 18 September 2019. I think they overprice Exxon Mobil because its business model which relies on high oil prices is obsolete in today’s world of gluts and skyrocketing production.

In addition, XOM is one of many oil stocks in danger of collapse because of the drone attack. The danger is that the disruption of Saudi oil production could create a brief bubble in oil prices. In detail, the oil prices will remain high only until the Saudis come back online, or other producers increase exports to cash in. Then oil prices and oil stocks will crash fast.

Personally, I think the Saudis have the technical expertise to restart production quickly. However, the Houthis and their Iranian allies could have lots of drones. Yet, the Saudis can instantly end the Houthi threat by getting out of Yemen.

Therefore, I think any increase in oil prices and oil stocks will be a short bubble. It is a good time for smart investors to stay away from oil. Instead, electric vehicles appear to be the best long term values in energy and transportation in today’s market.