The yield on the 10-year Treasury bond hit 1.14% on Tuesday, and institutional investors completely lost their minds. Let’s take this for what it really is: a great opportunity to buy cyclicals at a huge discount.
Groupthink among professional money managers is real. Herd mentality creates nonsensical price swings in asset classes. Pros had to be out of tech in February and now they feel compelled to be out of cyclicals.
They were wrong then … and they are wrong now.
The basis for these big portfolio swings is the idea that bond traders are somehow clairvoyant. Fixed-income investors are supposed to understand how geopolitical forces shape finance and the global economy, or so the theory goes. Portfolio managers closely watch bond prices and interest rates. Low 10-year yields suggest the health of the global economy is in peril.
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When yields fell below 1.2% earlier this week, pundits genuflected, then began to talk about a global recession and possible lockdowns as COVID case counts rise. Neither of these events is likely. Central bankers continue to supply liquidity and there is simply no political will to lock down.
Stock traders clearly overreacted with respect to the crystal ball gazing acumen of bond traders. And they overacted to growing numbers of COVID infections.
Already, we’re seeing the conversation turn to a heated global economy and rising rates.
Still, for now, the opportunity is in energy, and one great play for investors could be with Schlumberger Ltd. (NYSE: SLB).
The Houston-based company is changing the way large oil companies find and drill for oil and natural gas. It all must seem cliché, but managers have turned oil well service into a predominantly artificial intelligence (AI)/big data operation.
To be fair, data crunching and supercomputers have always been a big part of the search for energy. Many of the smartest computer scientists and the most powerful computers are aligned with energy firms. Yet Schlumberger is now pushing the limits of what is possible due in large part to an arrangement with Google Cloud.
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Using a cloud provider eliminates the costly exercise of building supercomputers and analyzing huge amounts of data. Google Cloud offers a scalable solution, and its software engineers are at the vanguard of artificial intelligence.
At the other end of the spectrum, energy prices remain historically high, and energy firms are preparing for an upcycle, according to first-quarter 2021 prepared remarks from CEO Olivier Le Peuch.
Schlumberger signed expansive new deals in Russia, China and the Middle East to complement its strong Americas business. Le Peuch sees sequential margin expansion and strong positive cash flow. The business is robust.
Shares have slipped from a recent high of $37 to $26.65. Nothing has changed other than the perception by bond traders that the global economy is headed into the tank. A month ago, the consensus was the opposite.
Long-term investors should strongly consider using near-term weakness as a buying opportunity.
Best wishes,
Jon D. Markman
