Daily Commentary

MarketMinder’s View: Since war broke out in the Persian Gulf region and Iran closed the Strait of Hormuz, a chokepoint through which some 20% of world oil transited pre-war, talk of other chokepoints closing or imposing fees to cross has surged. This was doubly the case early this year, when a Malaysian minister made an offhand comment about tolling the Strait of Malacca, among the world’s busiest chokepoints that connects the Indian and Pacific Oceans, serving as a gateway to and from Asia. Many took his remark out of context—a part of the typical fear of spreading conflict that often comes early in a regional war. This story should kill that fear dead, to whatever extent it still lingered. “Indonesia, Malaysia, and Singapore, the so-called Littoral States of the Straits of Malacca, affirmed the status of the Straits of Malacca and Singapore (SOMS) ‘as a Strait Used for International Navigation, where the right of transit passage applies, as enshrined in the 1982 United Nations Convention on the Law of the Sea (UNCLOS) and reflected in customary international law.’ The countries also said that it is important that all stakeholders respect ‘navigational rights and freedoms both in principle and practice.’”

MarketMinder’s View: This article mentions quite a few individual stocks in its discussion of both current and historical off-balance sheet debt fears, so please keep in mind the broader subject is our interest here—we don’t make individual security recommendations. This is, however, a great discussion of why the current off-balance sheet financing of data center buildouts by big Tech firms likely isn’t a crisis or fraud in the making. Comparisons to Enron’s financing in the dot-com bubble are beyond a stretch. Yes, there is a lot of cash going into off-balance sheet vehicles to fund investment in these facilities. But, “In the 1980s and early 1990s, hundreds of millions of dollars were plowed into these partnerships. This was common practice in the biotechnology during that time. Did some of the drugs fail in clinical testing? Yes. But did this cause a stock market panic? No. Like with today’s datacenters, the risks were spread. … The off-balance-sheet financing strategies today that are being used by big tech firms have different risks than what the biotech companies were doing when I was younger. Today, the disclosures required by companies doing this are significant. The scrutiny is intense. The investing public is smarter. Today’s risks are different and arguably more recoverable. … Today’s investors are financing land, buildings, electrical infrastructure and computing equipment. A datacenter can disappoint financially, but it doesn’t disappear because a clinical trial fails.” The article goes on to note that if there is excess investment in data centers, the market has a funny way of showing it, considering that by all accounts demand for data centers vastly exceeds supply today—and that is with AI usage still early in its development.

MarketMinder’s View: Italy is debating what its 2027 budget will look like and, for the second time in two weeks, the government is floating windfall profit taxes to help close the budget deficit and allow for greater government spending. The first was on banks; this one is another attempt to tax Energy companies. In addition, Italy and several other EU nations are pushing for Brussels to enact an EU-wide energy windfall profits tax. In considering this, please note MarketMinder favors no party nor any politician, assessing matters solely for their potential market effects. From that perspective, windfall profits taxes aren’t new in Europe or Italy, especially as they apply to the Energy sector. The country has an Energy production tax presently, which is aimed at funding sales tax cuts on gasoline the government enacted to try to keep pump prices down. But overall, moves like this are minor economic negatives that can dissuade production and activity. Simply, the more you tax something, the less you get of it. Today’s high profits in Energy also highlight another point: This is a sector prone to huge periods of booming profits and periods when prices are too low to profitably produce. We need energy all the time, so markets function best when the periods of boom are allowed to run without interference, ultimately funding the periods of bust. So the idea floated here is a negative, but likely a pretty small and unsurprising one. And who knows if this will come to pass anyway. Governments often publicly float tax policy changes before hammering out a plan—a means of getting feedback from the public, industry and commentators before moving forward. It may be that this is all it is.