Naughty Flicks

Skip NavigationMarketsBusinessInvestingTechPolitics & PolicyVideoWatchlistInvesting ClubPROLivestreamMenu(See the video above for Todd’s full chart breakdown.) The old saying goes that rotation is the lifeblood of a bull market. With the S & P 500 making all-time highs this week, that just doesn’t seem to be the case this year. Only two sectors matter so far this year: energy (up 47%) and technology (up 39%). The S & P 500 is up 14.65%. The other nine sectors that make up the American economy are also “also-rans,” (horse-racing analogy often heard here in Saratoga Springs), below the YTD % return of the S & P 500 As I get ready to rebalance and reallocate our portfolios, we have to decide whether energy keeps the lead or whether lower inflation expectation and easing geopolitical pressure take the edge off energy and put technology back in front by year-end? One way I’m looking to get energy exposure is in South America. In Brazil’s October 4th presidential election, Senator Flávio Bolsonaro finished first with 47% of the vote to the incumbent’s 45%, and upset the polls. The Ibovespa jumped 7.7% to a record the next day, the iShares MSCI Brazil ETF (EWZ) rose 12.6% in dollar terms. I can’t help but ask whether Brazil is having its Argentina moment. Since Javier Milei was elected Argentina’s president in November 2023, the Global X MSCI Argentina ETF (ARGT) is up 198%.Same stretch: EWZ is up 98%, and the S & P is up 91%. The runoff is October 25th and with a 2-point gap it isn’t decided. I’m not picking a winner, but the market is clearly repricing Brazil’s political risk, and if that continues, Brazil could have room to do what Argentina did. My way to play it is Petrobras (PBR) , Brazil’s state-controlled integrated oil major. It pumps the oil, refines it, and sells the fuel. The election moved the stock, but the barrels are why I’d stay with it. Its flagship field, Busios, is the largest ultra-deepwater oil field in the world, sitting under a thick layer of salt far offshore. Petrobras pumps mostly medium-sweet crude from this pre-salt layer. It’s low in sulfur, so refiners can turn it into clean diesel and low-sulfur shipping fuel more cheaply. That crude is priced off Brent, the global benchmark, so Brent holding around $100 flows through to the production side. On the refining side, I’m watching the diesel crack spread, the margin between what diesel sells for and what crude costs. It remains elevated, and Petrobras is running its refineries at record levels, so it has two engines working at once. On the technicals, PBR’s weekly chart broke through the resistance of about $20.50 to $22, with a last trade of $23.73. If that old resistance now acts as support, which is very typical price action behavior, PBR could move higher. The stock yields about 5%, and it trades at just 4X’s forward earnings, It’s not expensive. We’re just about set to rebalance and reallocate our portfolios here at Inside Edge, and I’m geared up to add a 2% allocation to PBR in our dividend and growth portfolio. It gives us integrated oil exposure, more importantly, a stake in the refining and marketing side tied to the diesel crack spread, which has been very much in favor this year. As we’ve talked about in other CNBC Pro column articles, the downstream refiners and marketers most tied to the crack spread have seen the biggest gains this year. This is an international way with a geopolitical kicker bid to get more exposure. Todd Gordon is the Founder of Inside Edge Capital. DISCLOSURES: Gordon owns PBR personally and with Inside Edge Capital, LLC. Charts shown are Koyfin. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.Read More