Mike Larson - The Great Sector Rotation: Oil, S&P, Metals, Bitcoin

Hey, everyone, welcome to the K E.

We're all porting a daily editorial on Wednesday, March 11th.

We are chatting with Mike Larson.

Mike is the editor in chief at Money Show.

Shad and I were just at the Money Show conference in Vegas.

We had a great time and look, we're happy to have Mike back on the show to try

to make sense of what is just a wild market.

2026 so far as being defined as actual wars.

Well, 2025 being defined more as trade wars, but that's causing a whole

lot of volatility and the most volatile market right now is the oil market

rightfully so, right?

We do have a war ongoing in the middle east as we're talking and boy, boy,

this price can change real quick.

Crude is on the futures contract right around $86 a barrel.

It opened this week around $120 a barrel, but now we've gotten some, I guess,

more calm talk out of the White House saying this war will be over soon

rather than later, who knows where it will end or when it will end,

but Mike makes sense of this oil price.

What do you think the geopolitical premium is right now?

And what's your outlook for where oil could go from here?

Oh, man, you're asking me to make sense of oil prices here.

That's a, that might be a little above my pay grade, but I'll do my best.

Yeah, you know, this is a market where if you look at, I always like to think

about things before missiles and after missiles.

I guess that's how I would look at it.

I mean, you know, you had energy markets that had stabilized 2025 is sort

of a sideways to down move.

I mean, a lot of, you know, OPEC Plus was coming back on the market with more barrels.

The US production was steady, but not booming demand was man.

It wasn't fantastic.

It wasn't like there was some big, you know, Chinese juggernaut demand or any key

driver for the energy part of the complex, you know, you did have solid demand

for US LNG, a sort of long term trend of supplying some of the world's energy needs,

particularly in places like Europe, but it was a market that was essentially just sort

of not, I mean, not very exciting, which some of the energy traders and some of the companies

are involved in that, you know, they were kind of okay with that.

I mean, they didn't, you know, some of our operators, some of the people we have that

are in the oil well business and in the energy business in general, you know, they kind

of like stability, you know, they don't like big exploding booms because then they got

chased labor, they got chased land, they got to pay up and then those inevitably ending

crashes and they certainly don't like, you know, oil and $30, $40, $50 a barrel, they

don't want it that low either.

So before being in sort of that 60s, maybe, you know, 70-ish range was kind of home base.

But yeah, and then everything happened, we know, we know the news by now and I think it's,

you know, it's a pretty rational reaction to the news over the weekend for oil prices,

we were talking WTI or Brent to hit those 115, almost 120 level.

And then of course, you had the IEA and the G7 come in with the supply bazooka and, you

know, in first leak that they're going to, they're going to do a big release of SPR oil.

Now we were talking upwards of 400 million barrels potentially, you know, which is a lot.

It's interesting, the stat, you know, that some of your listeners probably already saw

or you did is that that's essentially, essentially even more than double the amount of reserves

that were released when Russia invaded Ukraine back in 2022.

And so obviously the attempt to calm the market was even larger than the attempt to calm

the market back in 2022.

And part of that's simply because you're talking about an incredible global squeeze point

in the state of Hormuz.

I mean, I saw a number that about, as a result of not just the straight effective blockade,

even though it's not kind of quote unquote official, they've effectively blockaded it

because shippers can't get insurance unless it's a taxonomical, they don't want to take

the risk, obviously the life and limb and property and so on.

I saw a stat that basically now, as of yesterday, 6% of global supply or production is shut

in because if you're in Saudi Arabia, you're in UAE Iraq, especially, you know, you can

produce oil, you don't have a place to put it.

So, you know, in some, I think Iraq was the shortest, had like the shortest lead time

to when all the tanks were full, essentially, some of the other countries have a little

bit longer because in the case of Saudi Arabia, they can start piping some oil, some

of their production to the Red Sea instead of the Gulf, but even that eventually is

only sort of a short to intermediate term solution, it's not a long term one.

So, you're seeing production get shut in, it's not just an oil, you're seeing it in terms

of gas production, LNG, I mean, Qatar is a huge world supplier of LNG, especially to Europe,

which is why you saw like European gas prices go bananas when the chaos broke out.

So, it's a rough, it's a rough situation, I mean, again, you know, there's a war of words

going on, of course, the U.S. is blustering about its ability to keep that pipeline, you

know, that, that, sorry, that ceiling open, that, you know, by escorting ships or trying

to, you know, fight off potential mind-ling by Iran or providing insurance funds to the

operators, but, you know, you don't see a lot of the shippers really biting on that

in the oil companies really biting on that because I think the fear premium, the cost,

the risk to life and limb and property and everything else is just too high, so you're

not seeing much move at all. In that case, it's, you know, again, it's, it's entirely rational,

I think, to see energy prices, you know, oil prices maybe not be at 120 because of this

supply, which is going to, you know, lubricate the global petroleum markets for a while, but

it's also not really logical to expect oil to fall back to 65 or 70 because it's not

just the immediate impact of supply. I mean, I had honest, honest al-Hajjian, I didn't

emergency podcast recently with him in Martin Orren, one of our strategists, and, you know,

honest knows that energy markets inside and out provide some great insights that even

if, you know, the war were to end tomorrow, getting everything back to normal, getting production

back online, getting the ships in the right places, the crews in the right places, you

know, everything rebuilt that's damaged and so on, it's, you know, likely a multi-month

process, not even multi-day or multi-week, so with that being the case, you know, I think

we're all going to be dealing with elevated oil prices for some time. Again, and that's

even if, you know, we were sort of to sign an armistice tomorrow.

Yeah, there's just so much going on as far as the supply side and as far as the geopolitical

risk side that it's likely we're going to see higher oil prices for the foreseeable future.

So that brings up two questions, Mike. One is from the company perspective, a lot of times

you would think the higher oil prices would be better. Maybe they could raise their

hedges. It's going to be improving their margins. Nobody wants to make money in the back

of conflict, but as a producer of oil, you're going to appreciate the higher prices.

It's strange that XLE, which is the big producers, actually has rolled over some on this news

and it was going up when oil was in the mid 60s. So when oil was boring and kind of flatlining,

the stocks were doing good. Then the price spikes up and a lot of the stocks were selling

off. I was pulling up a lot of different particular stocks and just saying, I'm amazed

it's in the red on a day where oil will shot up to 120 and then back down into the 90s

now. It's in the mid 80s. What do you make of just from the stock perspective? Oil stocks

did better when oil was boring. Now that oil is exciting, they're actually rolling over.

Yeah, it's interesting. I just pulled XLE up on my screen. In December, in November,

it was gradually like glacial pace of climbing and all of a sudden the new year started.

And I think some of what was driving XLE in the new year was just money looking for new homes.

The rotation out of growth into value. It wasn't just XLE. It was to some degree of financials.

It was industrial materials. I think the initial move in XLE that you started to see in January

in particular before hostilities broke out was essentially this big trade of rotation from

growth to value. Now obviously in February, we've had that war premium added on. I mean,

XLE went from 45-ish at the start of the year to about 56 and change as we're talking. It got

as high as 58 a few days ago or a week and a half ago, give or take. You're right. They have

pulled back somewhat. I mean, I'm a closet technician, not a CMT or anything like that.

But I mean, it looks to me, frankly, like a bull flag in XLE after a big run-up. We're just sort of

consolidating. So unless a piece dividend breaks out and everything, we all get together,

shake hands and sing kumbai out of tomorrow. It looks to me from a technical standpoint. It's just

a rest before maybe another leg up. And again, I think one of the great conversations I had recently

with some with David Keller at Sierra Elf was pretty good to set follower of sector rotation

and blending technical analysis with sort of trend analysis overall. His point was that,

look, if the war would end tomorrow, of course, you're going to see defense stocks pull back.

Of course, you can see energy pull back. But the broader rotational action that's been going on

since October, I mean, that's not just because of the war premium and fear of geopolitics that's

happened in the last few weeks, that really, that rotational action, again, stretches back to the

beginning of the fourth quarter. So his contention, and I tend to agree with the thinking, is that,

sure, you might squeeze some of the war premium out of this, but the bigger rotation out of growth

into value, towards foreign stocks from domestic, towards small caps from mega caps and so on,

I think that's probably going to continue to be the story. It's getting amplified, of course,

because of what we've seen, headline-wise, but overall, there's a bigger picture thing going

on here, force going on here, which is what you highlight. I mean, you saw the sector start to run

at the start of the year, but it wasn't just this sector that was starting to run. It was other

value-type sectors, industrials, materials, what have you that were moving. And again, that's kind

of part of that bigger picture story, in my opinion. Yeah, I read an interesting note this morning

out of Canacorn Genuity that was addressing this. The oil stocks lagging at oil price, and they

point to the fact that normally these oil stocks follow the forward strip in the 12-month

forward oil futures contract is actually kind of in line with what these stocks or how these stocks

are reacting, but also made the point that this straight-ahore moves shut down. Essentially,

even if it does reopen, there's a bottleneck here, and that does really forecast, I guess, a

generally higher forward strip price. So, hey, these oil stocks, again, still look good, but let's

shift their focus a little bit to the US markets, because we're about a month and a half away from

the last all-time high. That's 7,000 number that the S&P hit. The S&P isn't down that much. It's

down about 3%, let's say, but it's been choppy, and look, you can argue it's lower highs, lower lows,

for a month and a half now. So, how concerned do we need to be here, Mike, that this downtrend,

this choppiness, and overall general weakness, albeit not a crashing market, could persist for a while?

Yeah, I mean, let's be honest. I think the biggest thing that worries me the most isn't so much

that Nvidia or the XLK has done absolutely nothing in six months. You can look at the XLF,

the financial ETF. It's all the way back to where it traded last summer. You know, June July

give or take. So, you've seen some of the, you know, and obviously a lot of us tied to credit worries,

is private credit in issue, with BDCs, you know, we know what's going on there. Plus, you layer on

top of that, what's happened on the inflation front, potentially from oil, which therefore means

the Fed can't cut as much, and there's credit worries, if all of a sudden everybody's paying four and

a half, you know, or five bucks, depending where you live for gas, that's going to squeeze budget,

so there's some concerns about credit. So, I think more than anything of all the sectors and parts

of the market, I follow the financials are probably the, you know, the most yellow flag type sector

I would put. I mean, it's not screaming, you know, get out of everything to me, but it is saying,

hey, AI story, everybody's been talking about it, oil, obviously we're talking about what's

happening in the Middle East, but what's more important to me as a credit guy, as somebody

who follows that part, that part of the market is pretty closely, you know, I see that as a little

more worrisome. So, you know, we'll have to see how that sorts out. I haven't had great expectations

for the market in the first quarter, and again, the first half, and I've been saying that for a while

before this other stuff happened geopolitically, and certainly I'm not changing my opinion of anything,

I'm kind of more convinced that it's going to be a rough start to the year. Maybe we get some

momentum as we get towards the back half, we get, you know, we get through some of the worries about

the economy, we get, you know, we adjust, make the adjustment to higher energy prices, I mean,

all of those things ultimately, you know, will, I don't think they're catalyst for the market to crash

or anything, but they do have to be worked through. So, that's what we're doing, and I think that's

going to be, you know, that sort of backing and filling chop, whatever kind of metaphor you want to

use, I think that's what we're going to be facing for quite a while for now. Mike, I'm curious

to get your thoughts on how dependent the market is to future Fed rate cuts, because so much

airtime was given to Trump kind of bullying Powell for a while, and then Trump finally puts in Kevin

Warsh, and then he's seen us a hawk, but even though he probably wouldn't have got the job unless

he had promised that he was going to start cutting, there seems to be not an agreement

internally within the Fed and all the different shares, you know, that all the different

heads that it seems to be that someone cuts, some are even talking about hikes, but you bring

inflation into the picture, you bring higher energy prices, and if inflation starts ramping up,

how much can they really cut? How much of that is an overhang on the market right now, the fed

spectations? Yeah, I mean, that absolutely looked, you know, it's funny over my years in the

industry, there's been times when people will say, oh, while higher oil prices slow the economy,

therefore it gives the Fed room to cut, and then sometimes the same people a few months later will

say, well, how oil prices are inflationary, because they're going to drive prices up, so

you can argue it both ways, I've seen some people talk out of both sides of their mouth,

my opinion, and it seems to fit with how the market is trading this time, is that it's more

tilted towards the inflationary risk. I mean, as we're talking, pull up a chart of TLT,

that thing's breaking down, the ETF for, you know, the long end of the US treasury curve,

you know, tracking from a price standpoint, you know, so I think the market, a lot of that's

because we never got back to the sub two percent or two percent inflation, you know, core inflation

rate, even before this war, you know, latest war broke out, and now you learn top of that, the

impact of oil and gas and everything else, you know, that's why I think the market, the bond market,

in particular, is kind of having a harsher reaction to this conflict that you've seen in the past.

You know, I think of all, in addition to the financials, it's very interesting to me that in a

headline world, a headline risk, we're all of a sudden you got missiles flying and all this

stuff happening in the least, you never really saw a flight to safety in US treasuries, that's

different. I mean, you go back to many conflicts over a couple of decades, you would typically see

people, you know, if they're going to sell stocks, they're going to buy US bonds, right? They're

going to, you know, out of stocks into treasuries for safety and so on, but obviously we haven't

seen that this time around, and that, you know, that's a pretty noticeable shift from patterns

of past crises. So I think that does, you know, the feds kind of boxed in, you look at the rate

futures market, there's basically zero, essentially zero chance of a cut at next week's meeting.

The chances aren't very great for April and even June is sort of, I think by check this morning,

only about pricing in a 35 or 36 or 7% chance of a cut of 25 cut in June. Now, we all know that

can change within coming data and with headlines and so on, but the market doesn't seem very

confident. The feds going to do anything for a little while now. And yeah, that's a problem for,

you know, the equity market broadly speaking that was hoping for a little bit of a boost from

cheaper money. So the dollar is up on the back of this war, but it's still under 100 on the dollar

index and it's kind of back to it's high for this year, which is not much higher than where it started

the year. So broadly, then Mike, is there a flight to safety? Where are we seeing money go when

we have this war and usually you do see a bit more of a flight to safety? Yeah, I mean, it's a little

bit in gold. I mean, you know, I think obviously you'd see more if we weren't seeing the dollar

up so much. I mean, the fact the dollar is stronger on the back of this conflict. That's certainly

keeping gold from moving to the upside as much as I think it otherwise would. But gold is certainly

holding in there. It's not, you know, after that blowoff we had in January, it's given back some

ground, but nothing, not all that much. So some of it's into the dollar, some of it's into energy

stocks as a hedge. I think some of it, even though it's not making a big impact, is into precious

metals. I mean, again, they're holding while other parts of the market are suffering, but that,

you know, it's not bonds. I mean, that really isn't. It's, you know, still to some degree metals.

Some degree just, just the US dollar in general, but as you pointed out, I mean, we're not talking

about a monumental move to the upside dollar breakout, anything that looks to me, like it's,

you know, a bigger narrative shift from the weaker dollar overall. So I, you know, I wouldn't put

much, I wouldn't read too much to get too excited about the pop we've had in the dollar, especially

in terms of the, once you look at the longer term chart and longer term context there.

Well, Mike, in other place, the money was rotating, I guess, for safety was the boring sectors,

like consumer staples and materials and utilities and things like that. But even those have rolled

over recently. So the question is, where do you go to hide? But it seems like a lot of the air

came out of the software and the memory and some of the tech stocks. Is there any other areas where

you see money rotating under the surface? Because we've been talking a lot about the S&P 493,

like now that the Mag 7 has had a little bit of a deflation, the money is widened out. But

is there any other areas you think are absorbing some of the rotation?

I mean, utilities have done pretty well as, you know, and they're sort of, they've sort of

straddled, are they safety or are they, you know, are they an AI play? So utilities have done well.

You know, REITs have started to break out to the upside. They're kind of retesting that

breakout. So that's maybe a part of the market that, you know, is worth keeping an eye on. We'll

see it sort of come back to test its breakout levels. That's kind of interesting to me. I think

there's certainly, you could make a case that real estate is a bargain plus dividend play here,

plus a lot of the excess given the office crash, the retail crash and so on has already been squeezed

out. So that might be something to look at. But in general, you know, this is a time and it's

sort of been my expectation for the first half of the year where you want to have more cash,

just, you know, not be taking big, big shots, big risks because again, we're in this, this,

you know, you can trade the ranges. You can, you know, do more shorter term activity in terms of

putting a lot of money to work on, you know, a big bull run. I don't see a reason to do that. I'm

more of kind of a sit on my hands and, you know, let's get through this, this first half and then

see where we're at. It's be moderately bold, but, you know, don't be too aggressive.

What about the metals then? Precious metals also have been very volatile. Although gold still,

I think you can argue has a general uptrend that it's in and we just haven't hit all time highs

recently. Silver is a much wider range. Copper is off of its highs, but still holding around six

dollars. Is it just the same story for the metals as it is the rest of the markets that?

Yeah, look, I mean, when it comes to metals, I said this on the stage in Vegas. I did a,

a, a podcast or two as well. I mean, after the blow off upside move, the powerful reversal,

you know, that we saw in gold, silver and everything, it's just like what we've seen probably three,

four, maybe five times in this bull run. You are not just going to immediately go back to a bull trend

after seeing what was it? A $60 range in silver or something like that in a day or a $70 or whatever

it came to. I mean, that's the kind of blow off top crazy reversal, pain type situation. That

scares people away for a while. And what, what's happened in the last four or five times we saw

this in the bull run, you did nothing for three or four months. You basically chopped sideways.

And again, I would say that whether it was gold, silver or, you know, cutie dolls, whatever the

whatever the type of chart, whatever the asset was, you see a chart like that. It's going to take

a while to work through that, that, that action and just, you know, set the stage for new buyers to

come in. So I don't, same thing when it comes to the general outlook for markets. I don't think

metals do a lot for, you know, a couple of months here after that activity. But if I'm right,

and this is, you know, what happened in January is just like what happened in September,

which is just like what happened in May or April and in metals of last year, then, you know,

we're going to resume the bull market. Come, I don't know, May or June of this year.

Well, Mike, one other market we haven't talked about in a while is the cryptoverse. I know you've

mentioned the past. This isn't, you're not a crypto expert, but you have a lot of crypto experts

at the money show. There was a lot of people there still interested in the altcoins, but of course,

still in Bitcoin and Ethereum and some of the repository companies. What kind of a universe are

they living in now just because they're kind of caught in all these downtrends as well. But

it doesn't seem like there's anything breaking out or breaking down in the cryptoverse.

Yeah. I mean, you know, it's funny because what you see in crypto is sort of an amplified

version of what you've seen in tech stocks. I mean, you look at, you know, and even as

sundry a little bit worse, Bitcoin has had worse downside action than a lot of the tech stocks,

which have just chopped sideways. Although, even behind the headlines, some of the tech stocks have

come poorly. I mean, some people argue that your holders are the same. You know, big tech has a lot

of exposure to Bitcoin and other crypto. So they tend to trade similarly and that is kind of what

we've seen. So I think you're going to need to see a broader revival in tech to also sort of

revamp some of the excitement of the digital asset space. That being said, a lot of the longer,

I mean, if you ignore the price of some of these larger cryptos and you talk about the underlying

blockchain technology, adoption, shifting from traditional finance to decentralized finance,

and so on, you know, a lot of the takes that I heard in Vegas and that I've heard from some of

our crypto specialists is, yeah, you know, the swings and the price of these tradable cryptocurrencies

relative to the more much more gradual sort of path of industry adoption in the finance world and

other worlds. It's two different animals, but ultimately the latter is going to help support the

former. So I think that, you know, you can still make a case that digital assets shifting the

blockchain and shifting the tokenization, all, you know, the growth of the stablecoin industry,

all that ultimately, you know, points to a brighter future for the cryptocurrency asset class,

even as you're going to see, you know, pretty big moves and the tradable versions of these things,

the cryptocurrencies themselves. All right. Well, Mike, not much more to touch on here. Look,

I was just waiting for more of a defined direction, I guess, but this could take some time,

and quite frankly, look, the news headlines are being dominated by geopolitics right now,

and right now it's even hard to get a grasp on what's actually happening, I think, with all

these different news sources and AI, some of the generated stuff out there makes it really

confusing to really know what's going on, but the fact of the matter is this war's still ongoing,

and we're going to keep hearing about it until we get some sort of a ceasefire, and markets

remain very much range bound. Again, Mike Larson, editor in chief at Money Show, click that link

in the show notes to find out about the next upcoming Money Show conference. Mike, thanks for your

time today. Thank you, guys.