I have spent nearly four decades in and around financial markets, and that experience has left me with certain habits and preconceptions. I am, for example, usually reluctant to take an obvious trade and would far rather take a contrarian stance on a well-hyped story. I guess if I were to sit down with a psychiatrist, they would tell me that that is a product of the kind of arrogance that is needed to survive in a dealing room, but I prefer to think of it as a sensible way of avoiding a crowded trade. When a strategy is obvious, lots of people get involved, and when a lot of people trade in the same direction, even a small change in circumstances can prompt a rush for the exits. Meanwhile, the upside is limited simply because everyone who wants to buy already has.
Sometimes, though, the obvious trade is the right one to take, and that is the case now after Joe Biden revealed his administration’s infrastructure plans.
Let’s not fool ourselves, not even the most ardent Biden supporter can really believe that the plan as written will get through Congress. As easy as it is to get support for infrastructure projects, which usually look a lot like “pork”, through the House and Senate usually, the polarization of politics makes it virtually impossible right now. Republicans, who stood by and did nothing as Trump busted the budget over his term, have suddenly turned into fiscal hawks with a Democrat in the White House. Democrats, on the other hand,…
I have spent nearly four decades in and around financial markets, and that experience has left me with certain habits and preconceptions. I am, for example, usually reluctant to take an obvious trade and would far rather take a contrarian stance on a well-hyped story. I guess if I were to sit down with a psychiatrist, they would tell me that that is a product of the kind of arrogance that is needed to survive in a dealing room, but I prefer to think of it as a sensible way of avoiding a crowded trade. When a strategy is obvious, lots of people get involved, and when a lot of people trade in the same direction, even a small change in circumstances can prompt a rush for the exits. Meanwhile, the upside is limited simply because everyone who wants to buy already has.
Sometimes, though, the obvious trade is the right one to take, and that is the case now after Joe Biden revealed his administration’s infrastructure plans.
Let’s not fool ourselves, not even the most ardent Biden supporter can really believe that the plan as written will get through Congress. As easy as it is to get support for infrastructure projects, which usually look a lot like “pork”, through the House and Senate usually, the polarization of politics makes it virtually impossible right now. Republicans, who stood by and did nothing as Trump busted the budget over his term, have suddenly turned into fiscal hawks with a Democrat in the White House. Democrats, on the other hand, believe this is an opportunity to move to the left and are disappointed that the proposal shies away from some pet projects, even though most of them are at best only tangentially related to infrastructure.
There are, however, some things about this proposal that will have a good chance of making it through the process. It includes money for Texas’s ambitious grid upgrades to enable the exportation of the massive amount of wind power generated there, and other projects are also in Republican states, so the partisan opposition may not be completely unanimous. It also includes a nod to paying for it by hiking taxes on corporations, which will keep some of the left on board.
Still, even if parts of it fail, what the proposal does is to set a tone for the White House over the coming months. It illuminates their priorities, and there is no doubt that green energy is one of them. The obvious trades here take advantage of that. Solar and other alternative energy stocks, along with EV and fuel cell plays have been the “obvious” plays since the election, but after a strong run-up that got way overdone, as these things tend to do, and a seemingly inevitable retracement, this proposal will put them back in favor.
You could argue that U.S. solar stocks such as FSLR and SPWR are still overvalued, or that FCEL, PLUG et al could fall a lot further before they get back to sensible levels, and it may seem like EV stocks like Blink Charging (BLNK) and Acrimoto (FUV), and of course, the granddaddy in the space, Tesla (TSLA), have had their day and are returning to Earth with a bump. All of that, though, ignores the fact that this proposal allocates $174 billion to EVs, $100 billion to extend tax credits for renewable projects, and subsidizes the grid improvements that are needed for renewable projects to succeed.
That is a lot of government cash that will be floating around, and it makes current revenue and profit projections for a lot of these companies moot.
Then there is the big picture… If this morning’s job numbers are any guide, the economy is still in rapid recovery mode and that will mean traders looking for “value” and prepared to take on risk. Highly speculative plays will be a lot more appealing in that environment, and the more obvious, the better.
So, as obvious as buying renewable energy and EV stocks is after this proposal and even acknowledging that Congress will dilute and change the details, this is a time when the obvious trades are worth taking and I will be looking to buy some of these stocks on the dip. You should consider it too.
