North Korea.

"Here's to your thin red line, I'm stepping over" -- from Unchained, Van Halen (1981)

Fair Warning

Not to rattle your collective cages, but you must keep in the back of your mind a couple of thoughts regarding market sentiment. "Earnings season" is ongoing. There are several big names still out there, waiting to report. However, the season is winding down. Second-quarter earnings have been, across the board, largely positive. This has had an overtly positive impact on sentiment. The market has run to record levels. Old news. We get that.

While participants await the next "big thing", headlines are dominated by the threat of at worst global thermonuclear warfare, and at best, a regional conflict that would put the lives of 20 to 30 million people in jeopardy. For risk assets, this has just as overtly a negative impact on sentiment as any positivity recently witnessed. Bottom line, gang, is this. The North Korea story, even if allowed to fade into the background, will dominate sentiment for as long as it remains in the headlines. Given the mainstream media's tendency to cling to the most alarming story available, this may stay with us for a while. That's with or without a military outcome. Let's hope that this passes. Until something develops, play on.

Kim Jong-Un North Korea.
Kim Jong-Un North Korea.

Revisiting Oil, Again

Yesterday, inventories of U.S. crude showed a decline for the sixth consecutive week. On top of that, imports of crude into the U.S. averaged 7.8 million barrels a day last week, which was a rough 490,000 barrels less than the week prior. Those already mentioned inventory levels are now approximately 9% lower than they were a mere three months ago.

This has had little impact on pricing, you say? Not true. Market prices for WTI crude are indeed, now with the commodity approaching $50 again, nearly 20% higher than they were at the lows just this past June. That's with OPEC fading in and out of relevance. Wait, there's more.

You may have noticed Spencer Jakab's column in yesterday's Wall Street Journal. Apparently, market prices for futures contracts on WTI expiring six months out are trading at minuscule premiums to current spot pricing. What this does is greatly reduce the benefit of purchasing physical oil at current prices and hedging that purchase by selling the very same oil on paper in the form of a forward-dated futures contract. This has been standard practice for U.S. producers, as well as others. Does this mean that shale production will drop? Does this mean that foreign production will remain at these levels? It may, depending on where WTI crude continues to trade. If the underlying commodity can break through into the $50s, then the answer is simply "no". Production will not decline.

On the other hand, if for a second time we see failure at these levels, this will hamper any attempt to really hammer crude, and will ultimately put a bid under WTI in the mid-$40s. That's just what I think. Is it OK to add to energy longs here? For you? Maybe. This kind of advice, if wrong, can draw the ire of otherwise kind-hearted folks. For me, though? Yes, but selectively, and sparingly. Fair warning: I have been wrong on oil before.

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Oil, the Long Game

In the event that not all of us are news junkies, you may have missed the recent announcements made by both the United Kingdom, and France to ban sales of vehicles that run on both gasoline and diesel by 2040. Will this be a trend? Will this seriously hamper demand for crude? There is argument over when planet earth will see peak demand for oil. The International Energy Agency forecasts global energy demand to increase by 30% into that fateful year of 2040.

That is demand for energy though, not necessarily demand for crude. How companies in the energy game get there will vary greatly. Many of our well-known oil giants will be forced to evolve and to diversify services offered more greatly than they already have. Coal and oil are considered "dirty" forms of supplying this energy. They also tend to be cheaper. They will not go away quickly. My thoughts are that 2040 is hopeful, particularly for poorer nations. They will not travel this path unless subsidized.

Passenger vehicles currently account for 26% of all global demand for crude. This far exceeds demand for both aviation, and shipping purposes. Enter Tesla (TSLA - Get Report) , and its entry into affordable electric vehicles with the Model 3. Enter Volvo. That firm announced just last month that starting in 2019, all new models would be available in electric or hybrid form.

I believe that for military usage, there will always be a certain level of demand for crude. That represents a chunk, particularly at times when energy is needed in size, and right now. For consumer or industrial purposes though, the ball is clearly rolling. Natural gas, wind farms, solar power and ever evolving battery technology will enhance this evolution. The delay will come from the expense. Do you want to be in oil names? I think you want to be in diversified energy names that sell oil.

Chips and Dip?

Sarge favorite Nvidia (NVDA - Get Report) reports quarterly numbers tonight. Long the name? Hey, me too. How do we go about this? Do we follow the lemmings off the cliff and hope for the best? Do we act now to minimize any dent that we may see in our now-sizable gains in this name? You have to really love the sport, and love strategy. That's why they play chess in the National League, and checkers in the American League.

The focus tonight will be on the sale of graphics cards that are used in producing new forms of cryptocurrency. Exciting? Yes. We're pretty sure demand in this space has been robust. Forward guidance, though ... that's another question, given that these robust sales have probably already been priced in by the stock's incredible run since first-quarter earnings were released on May 9. This industry has the potential for classic boom-and-bust type forward-looking demand.

You want this car.
You want this car.

We also need to hear about machine learning and artificial intelligence. The latter of those two land us squarely on the doorstep of autonomous driving. Think there won't really be a significant need there? It's not about convenience, gang. It's about reducing overhead in the transportation industry. Oh, we're going there. Tesla's new model 3 electric cars are now produced with Nvidia supercomputers inside. Obviously this is at this point a growing business meant to enhance forward looking returns more than they can enhance any current numbers.

Speaking of the future, there is the new Volta chip, which is only available for pre-order at this time. That could actually have a suppressive impact upon second-quarter data, while pushing guidance for server growth higher toward year's end. It really does seem that Nvidia is in every pertinent segment of information technology. Did we miss anything? What was that? Gaming? Whoa, let's talk about gaming.

The gaming business drives roughly half of Nvidia's quarterly revenue. This segment includes the growing popularity of e-sports, and includes many of the same technology used in mining blockchain. Don't ask me. I don't play these games. I don't watch them. I am willing to invest in them.

The bottom line is that there is too much here to really go into depth in anything other than a face-to-face conversation. Let's defend ourselves. What I intend to do in this space is this. I am not buying puts for protection. I know that this "insurance" will save an investor on any given day, but it usually just withers one's profits. Not going there. I will likely ring the register on half of my long. This way I realize a nice gain, and I still have one toe in the water in case tonight's data produces a moon shot.

I will also likely try to produce some side revenue going into tonight's close by writing puts bearing a strike price at a significant discount to the last sale. Even with a last sale for the equity that closed above $172 last night, $155 Aug. 11 (tomorrow) puts went out at $1.29. That's not bad at all. The stock, however, will be volatile today. You do not want to swing early on this, and go to the beach for the afternoon. This is a last minute of the day kind of play.

Missed the entire NVDA run? Intel (INTC - Get Report) is making great strides in cloud computing, big data, artificial intelligence, and now with the acquisition of Mobileye (MBLY) , autonomous driving. Intel launched the Xeon Scalable server processor last month. This launch was the biggest ever for the firm in terms of early shipments. On top of that, Intel intends to launch another new product, a 10 nanometer based server chip prior to year's end. INTC only trades at 11 times forward looking earnings and pays a 3% dividend yield. Just saying.

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At the time of publication, Stephen Guilfoyle was long KSS, INTC, NVDA, short TSLA, although positions may change at any time. Please be advised that shorting stocks or doing options trades can entail increased risks and might not be suitable for all investors. Consult your financial adviser for details.