The broader market took a 2% haircut after a full week of Middle East attacks spilled over borders to include Lebanon. It is looking increasingly likely that this conflict will spread further as we have heard of at least 2 situations where rockets/drones were intercepted or landed in Turkey (a NATO member). I’m going to focus on macro level things this week, since that’s going to be the main driver for a while here.
Oil, oil, and more oil
Oil prices are spiking and went over $100/barrel over the weekend. Let’s talk about why that’s happening and what it means.
As mentioned in last week’s post, the Strait of Hormuz is shut down (effectively cutting off 20% of global oil consumption). The meager increase in output from OPEC+ is not nearly enough to cover the lost supply. We also saw strikes on multiple oil depots in Tehran which prompted Iran to threaten retaliatory strikes on oil facilities around the Gulf. If Tehran follows through they will effectively kneecap the supply capacity of the entire region. This turns a short term logistics problem (getting ships moving through a strait) into a long term production problem (spending months repairing facilities to reach pre war levels).
The US government is attempting to staunch the bleeding by promising they will provide insurance and escorts for ships that transit the strait. JP Morgan reports there are real questions on whether they even have the capacity to provide the amount of insurance needed because the providing agency lacks the necessary funding from Congress.
All of this fear is pushing oil prices higher. What does that mean? In the short term it means higher prices at the pump. We are already seeing gas prices rise up 17% from when the war started. Given the political climate in the US around affordability and inflation this is a terrible sign. We are already hearing chatter about tapping into the strategic oil reserve to ease the pain on the average consumer. In the medium to long term this means the cost to produce goods will rise (pushing the price of nearly everything up with it). That stubborn inflation the Fed has been battling will likely continue. Rate cuts are probably off the table (although a new Fed chair coming in May could shake things up).
New Supreme Leader
On Sunday Iran announced they selected a new Supreme Leader, Mojtaba Khamenei. He is the son of the former supreme leader and early indications suggest he is even more of an extremist than his father. This is a clear signal that Tehran has exactly zero intention of backing down.
With a formal leader named Iran once again has a single person directing their armed forces. It’s currently unclear what direction he will take but I am fairly confident that a man whose nearly entire family has been killed is not going to suddenly sue for peace.
What does this mean for us? Every reliable indicator suggests this conflict is going to drag on for a while. As I mentioned last week (and history readily confirms) a prolonged war will most likely lead to continued selling pressure across the broader market. Big banks are actively repricing their risk. They now have to account for a Federal Reserve that will likely abandon the rate actions everyone anticipated earlier this year. This reality will force a rotation out of speculative bets and into safe haven assets. Finding a safe haven that is not already wildly overpriced and painfully volatile (like gold) is going to be exceptionally difficult.
I am going to continue holding cash until there are actual signs of market direction. When the time comes I will deploy capital in tranches toward distressed assets that are insulated from oil pricing risk (specifically software).
Rapid Fire Observations
Some quick top level thoughts on other big things that happened last week:
- Oracle’s AI Conundrum: It was announced that Oracle
is ending its plans to expand its largest AI datacenter (the primary customer of which was OpenAI). There is also reporting that Oracle is planning a colossal layoff to fund their continued datacenter buildout spend (with some outlets estimating nearly 30,000 employees will be impacted). Nothing signals a healthy company quite like halting a primary data center project while simultaneously laying off employees to supposedly fund other data center projects. - Anthropic and the DoW: The saga over Claude and its military application continued this week with Anthropic vowing to fight against the DoW’s supply chain risk designation. It is entirely apparent to me that this is politically motivated and that egos at both the DoW and Anthropic are adding fuel to the fire. The primary concern here is the precedent being set by a government attempting to bankrupt a company simply over a disagreement on product usage. In a functioning free market the correct move is to cancel the contract and purchase from a competitor. Let the market decide their fate. I am deeply pessimistic about the direction this is heading and will actively monitor the outcome of this spat.
- CrowdStrike Earnings: Crowdstrike
reported their 4th quarter earnings and they crushed it. I mentioned last week that this would be a bellwether for how the SaaS industry is trending and they guided to increased revenues for their fiscal 2027. That’s a positive sign, however I still expect that macro level impacts of the Iran conflict will override here but if there’s a sell-off this is a stock I wouldn’t mind holding.
What’s Happening Next Week
We get our next CPI print for February on Wednesday. After the atrocious February jobs report last week any sign of increasing inflation in this report will inevitably exacerbate jitters and accelerate a broader selloff. We also get a second estimate for the 25Q4 GDP report on Friday. I will be looking to see what direction the revision goes. An upward revision could help calm the market. A downward revision means things will get exceptionally volatile.
Oracle reports earnings on Tuesday, where I expect they’ll officially announce their layoff and datacenter buildout plans. Investors are on edge for any signs the AI bubble might be popping. If there is a place for the pop to start, Oracle is my most likely candidate.
Dollar General
The Last Word
All of these macro level signals are clear warning signs right now. Things do not look positive. I am starting to stockpile cash in hopes of deploying it to purchase solid companies (specifically those in areas that are not directly tied to the price of oil). It is going to be a bumpy ride for a while.