Welcome. The content below is free to the public. It might be worth what you are paying for it. Having studied economics and being in finance for over two decades, I have learned that only one thing is certain - that almost nothing is certain. As we endeavor to come up with our best analysis of the world around us, the opportunities and risks, we have to try to overcome a myriad of issues including our own ignorance, biases and emotions. What follows are my attempts to overcome those obstacles. Welcome to my view - publishing Monday and Friday afternoons.
On several occasions, including in the winter Oil & Gas Report, I have pointed out that the financing of new oil projects must be economic based on conservative assumptions and not based on hopeful future projections. This past week in Houston, Saudi Arabia oil minister Ali al-Naimi made the point very clear:
"Cutting low cost production to subsidize higher cost supplies only delays an inevitable reckoning.”
“The producers of these high-cost barrels must find a way to lower their costs, borrow cash or liquidate,”
“Inefficient, uneconomic producers will have to get out... This is tough to say, but it’s a fact.”
“It sounds hard, and unfortunately it is, but it is a more efficient way to rebalance markets,”
“If we can get all the major producers not to add additional barrels, then this high inventory that we have now will probably decline in due time... It’s going to take time. It’s not like cutting production. That is not going to happen.”
“There is no sense in wasting our time seeking production cuts; they will not happen... What will happen is we will all as major producers find it easy to freeze production, let demand rise and let some inefficient supplies decline, and eventually the market will balance.”
If there is any doubt that Saudi Arabia and their Gulf Cooperation Council allies aren't going to keep producing at their current paces, then those doubters simply aren't paying attention. The idea that the lowest cost producers would cut production now that oil demand is flattening and high cost producers were taking market share simply makes no sense. It is the highest cost producers that need to move out. That is not manipulation, that is a normal market. For those who want a free market, here it is.
Immediately after that meeting, Whiting Petroleum cut capital spending 80%, Continental Resources 66% and Chesapeake Energy 69%. Those come shortly after other announced capex cuts of 20% to 60% for 2016 at Anadarko, Conoco, Apache, Devon, Marathon, Exxon, Chevron and a raft of others. This all of course after the massive cuts in 2015.
Who are the "high cost" producers?
After multiple attempts to put in a bottom, the oil and gas markets finally seem to be working their way to definite bottoms. Don't jump in with both feet just yet though, bottoming is a process and as we've seen, it can be a very painful one. Friday's jump in crude of 12% wasn't even enough to make it a profitable week for oil. Our short oil trade earlier last week did very well. I expect more bets against oil to do well as it works its way to a bottom with a price per barrel in the teens for a day or two this spring.
I know most of you know about the Super Bowl market predictor. Basically, if an old AFL team wins the Super Bowl, the stock market falls. If an old NFL team wins, that's good for the stock market. I don't really want to get into that even if it's been like 80% accurate. What I know is that there are multiple reasons that the stock market should continue to correct despite the potentially soothing sounds of Janet Yellen this Wednesday and Thursday.
While Cam Newton might have a hard time understanding what happens when everybody on his team doesn't play well - including himself - the markets sure are starting to understand what happens when the world economy grows at a slower pace. Back in January I wrote an article for MarketWatch titled Markets Are Adjusting to "Slow Growth Forever" that described exactly what is going on in global markets. Here's the short of it:
Almost a year ago I started warning to carry more cash in your portfolio. In September I declared that "The Bear Market Has Begun." Finally, a few weeks ago, I explained that Markets Are Adjusting to "Slow Growth Forever."
In the past few months we have now seen a downturn that is officially a correction and threatening to become an outright bear market. I believe that the bear market is virtually guaranteed at this point. As I covered in my annual letter, excluding the largest companies, most of the various parts of the economy reached bear market territory in 2015. Given declining earnings estimates for the third consecutive quarter, it would be a surprise if mega-caps didn't join in the pain.
Some of the market darlings sport huge price to earnings ratios and with growth peaking even at those companies, it is unlikely they don't fall in sympathy. After a brief relief rally, we are once again seeing the downward trends in markets. What investors need to keep in mind, is that the bear market really has begun. Short of central bank intervention - which we'll get - there is very little hope of not completing the process. I expect the S&P 500 to reach about 1600 before reversing course upwards. It could of course get worse, but it would take a crisis event for that to happen.
The below chart takes advantage of something I learned in economics, that is, when approximating, use thick lines.
I only have a few minutes before I have to run, but I am watching this market action and it screams one thing to me - BE PATIENT!
I know everybody wants to "make a trade" and I do some of that, however, the majority of your money ought to be more patient. As I've recommended time and again the past year, hold 25% to 50% in cash equivalents. There are several huge buying opportunities developing. I covered some in my recent webcast "My Investment Approach."
Here are some of this week's important and interesting articles that I remembered to bookmark. I willfully acknowledge that quite a few of these I get from other people's "things to read" lists and from what gets tweeted at me. I try to pass on pieces without a firewall.
You'll notice a lot of articles that have charts. I like charts. It makes learning easier, but be careful, some charts are propaganda using biased data. Think things through in the context of a "slow growth forever" global economy that is anything but a free market and that is driven by social concerns, political ambitions, academic mistakes, monetary manipulation, fear and greed. Learn to be a chess player, and not just the flat board kind, the multi-dimensional, four level, more than two sides, animated characters with magic kind.
As you know from my forum post, I spent a lot of time this weekend studying Chesapeake Energy (CHK) from top to bottom. I also read the Barron's Roundtable Part 1. If you haven't read it, I suggest getting a copy or seeing if it's online somewhere for free. In the first couple pages of the discussion, the term demographics was used several times, which is a topic I've been bringing up for years.
The general tilt of the panel, which included Jeff Gundlach, Mario Gabelli, Abby Joseph Cohen, William Priest among other heavy hitters, was that slow growth was in fact the new normal that I've been discussing in articles for awhile now. Gundlach and Priest sounded a similar alarm, and have both have been for some time now, that we should expect secular slow growth. They didn't go so far as to say "slow growth forever" as I did in a recent MarketWatch article, but those two at least seem to be thinking in that direction.
This all adds up to continuing to take extreme caution with our portfolios. As the initial subscribers know, I suggested holding 25-50% in cash repeatedly beginning early last year. I also made some too early investments in energy which I am not repairing with you as we trade the continuing to fall oil prices with Iran coming online with 500,000 more barrels of oil per day. I believe for a moment, maybe two days, oil will fall below $20 per barrel before the next OPEC meeting which is currently scheduled for June but likely to be moved up to the end of March.
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