OK, guys, which is it?
“U.S. Stocks Open Lower as Rate-Hike Fears Hold Sway,” says MarketWatch.
“Stocks Open Sharply Lower With Dow off 100 Points: Strong Dollar, Oil Weigh,” retorts CNBC.
We have no idea. But here at The 5, it’s oil that has our attention this morning.
The buzz among traders is that high inventory levels will grow still higher. Crude is sloshing around terminals and even aboard tanker ships… with nowhere to go. Demand for home heating oil in the Northeast is easing with winter breaking. Refineries need less oil right now as they temporarily shut down, to shift to summer-blend production.
Thus, a barrel of West Texas Intermediate is back below $50 as we write — $49.46.
Most of the media chatter about oil prices is happy stuff — more money in your pocket. But as we’ve said before, that’s far from the whole story…
“When you spend $2 per gallon less at the pump, that means someone else — the oil company — is getting $2 less,” says our Jim Rickards. “Your gain is their loss.
“None of us needs to shed a tear for Big Oil, but the practical effects of greatly reduced oil prices and energy company revenues show up in damaging ways. The low price of oil causes new projects to be delayed and existing high-cost fields to be shut in. That means layoffs and reduced capital expenditure for pipes, equipment and transportation.
“Jobs in the oil field are high-paying jobs. Jobs waiting in a restaurant are not. If we gain restaurant jobs and lose oil field jobs, it’s not clear the economy is better off.”
“From there, things start to get ugly,” Jim goes on.
“The price of oil is low both because demand has slowed down along with slower global growth and because supply is up due to fracking. But all of that fracking output costs money to develop, and a lot of that money was raised in the form of junk bonds. When those junk bonds were issued, the projects behind them assumed oil would be priced in a range from $80-130 per barrel.”
As Jim explained here in January, total corporate debt issuance for energy exploration between 2009-2014 works out to $5 trillion. With many of these projects no longer profitable, a wave of defaults is set to hit late this year or early next.
But that’s something for only bankers to worry about, right?
“Some of that debt might be in your 401(k),” Jim counters — “buried inside a ‘high yield’ fund sold to you by your broker.
“That’s something you might want to take a look at. Whether it’s owned by you, your neighbor or the bank across the street, the point is someone owns it and those holders are looking at a tidal wave of write-offs coming their way.
“Look closely at the equity names in your portfolio, but also look in the bond part of your portfolio to see if inside any bond funds you may own are holding notes issued by frackers, or bonds issued by frackers. Many investors don’t realize they may have exposure to this sector. It’s not too hard to find out. Screen for small-midsized oil exploration and production companies, especially those in the fracking industry.”
Reminder: The $5 trillion in energy debt is part of a $14 billion pile of bad debt.
After the junk bonds issued by energy firms blow up, that will be followed by the subprime auto loans that have been bundled up into securities — just like subprime home loans back in 2006.
And the coup de grace — defaults by foreign companies that issued debt denominated in U.S. dollars. A couple of years ago, those debts were manageable. With a rising dollar now, they threaten to become crushing.
“Not all of these loans will default,” Jim acknowledges, “but even a 10% default rate would result in over $1 trillion of losses for investors.”
[Ed. note: We got a substantial response on Friday to the release of Jim’s new book, The Big Drop: How to Grow Your Wealth During the Coming Collapse.
You won’t find it on Amazon or at the few neighborhood bookstores left standing. It’s an Agora Financial exclusive. And it’s more practical, less theoretical, than Jim’s two best-sellers, Currency Wars and The Death of Money. It’s where the proverbial rubber meets the road — actionable guidance on the back of his unique analysis.
With a $14 trillion pile of debt starting to teeter, you can’t afford to be without the advice in The Big Drop. Learn how to get a free copy right here.]
The slide in the major U.S. stock indexes is accelerating as we continue to write: At last check, all the indexes are down at least 1%. The Dow is off more than 200 points, at 17,779.
Treasuries are benefiting, the yield on a 10-year note slipping below 2.13%. Meanwhile, the 10-year debt issued by Germany, Italy and Spain has slid to record lows.
The euro has slipped to another 12-year low, at $1.075. The dollar index has notched another 12-year high, at 98.2.
Gold is the lone no-drama asset today — little changed from 24 hours ago, at $1,164.
“Small-business owners are finding reasons to hire and spend,” says National Federation of Independent Business chief economist Bill Dunkelberg.
The NFIB’s monthly Small Business Optimism Index notched a slight increase during February, to 98.0. That’s the third-highest reading since 2007. Within the index, the highlight is that 29% of small-business owners say they have job openings that are proving hard to fill.
In addition, “quality of labor” is cited as the single-most important problem facing 14% of survey respondents. Only taxes and regulations are cited by more.
“Large firms have been powering the economic recovery since the Great Recession,” says Dunkelberg, “but that may be shifting to the small-business sector.”
Talk about long-term investing: Here’s something that makes Chris Mayer’s 10-year “coffee can” portfolio look positively restless.
Chris spotted a Reuters story recently about the Voya Corporate Leaders Trust Fund. Upon launch in 1935, it bought equal amounts of stock in 30 big U.S. companies.
Since, it’s sat still. No new positions. None.
“What’s so interesting,” says Chris, “is the story the portfolio tells. It still has some of the same names it had in 1935: DuPont, General Electric, Procter & Gamble and Union Pacific.
“But it also has positions that came about through mergers and/or spinoffs. For example, it owns Berkshire Hathaway via an original position in the Atchison, Topeka and Santa Fe Railway. It has CBS via a stake in Westinghouse Electric. It owns Honeywell through a stake in Allied Chemical.”
And some companies have gone defunct. Indeed, only 21 names remain.
Performance? “Remarkably,” Chris tells us, “the fund has beaten 98% of its peers over the last five- and 10-year periods. In fact, it’s beaten the S&P 500 for 40 years.”
Maybe you don’t figure on holding stocks for 80 years… or even the 10 in Chris’ coffee can. But it’s another argument for patience: “I urge you,” Chris says, “to try to hold onto your stocks a little longer.”
Good news on the legal front: Restaurants can’t be held liable if grease from a sizzling fajita skillet strikes a patron in the face while praying. At least in New Jersey.
Hiram Jimenez was the plaintiff in the case, which goes back to March 2010 and a visit to an Applebee’s in Burlington County.
“After receiving the food, Jimenez and his brother decided to pray,” reads an account in the Newark Star-Ledger, “and Jimenez bowed his head close to the table. As he was praying, he claimed he heard a loud sizzling noise followed by a grease pop, and felt a burning sensation in his left eye and on his face.”
Both a district court and an appeals court turned the case away. “The danger posed by a plate of sizzling hot food was self-evident,” ruled the two-judge appeals panel.
Hooray?
The only thing that would have made the lawsuit more ridiculous is if the defendant had been Chili’s — which has used the sizzle sound in its advertising since its first TV commercials.
“I wonder,” a reader muses after we mentioned General Motors’ buyback plans yesterday, “are the famous buybacks to ‘return value to the shareholders’ not just a disguise to cover the stock options so generously awarded to executives?”
The 5: Maybe. But much of it has to do with the earnings game. If you have fewer shares outstanding, the earnings per share can’t help but improve.
Meanwhile, our mind wanders this morning to an open letter BlackRock CEO Larry Fink wrote a year ago to the CEOs of every S&P 500 company. We cited it here in The 5.
“It concerns us,” Fink wrote, “that in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”
We offered up a real-world translation: “After five years, you turkeys have cost-cut as much as you possibly can. If you expect to keep growing your earnings, you jolly well better start investing in the future of your businesses to attract more customers. You do think such investments will pay off, right? Don’t you? Anyone? Bueller?”
It was a good question then with the S&P at 1,888. It’s still a good question now with the S&P at 2,050. As our Dan Amoss noted here last week, companies vulnerable to an economic slump will rue the day they binged on buybacks.
“Bravo for the RN and his wife MD for dishing out some reality on Obamacare,” a reader writes.
“As confirmed by his rant, I’ve contended for a very long time that Obamacare will soon be like visiting the DMV. Now serving No. 49, No. 49. Oh, great, I’ve only got 108 to go! I might make it by the 5 o’clock cutoff, and I got here early today (7:30 a.m.).
“Great, just as I’m about to hit retirement!
“Always (sic) enjoy The 5!”
“Yes, sir, the police state looked the other way and let the little ones enjoy their day on the slopes of the Capitol Hill,” a reader writes after our episode last Friday, “but let them try a lemonade stand without a permit and see what happens.
“God forbid the state couldn’t collect taxes on $20 or so of net profits. Geez, where was the nanny state? One of those kids could have gotten hurt, and then a lawsuit — OMG, how terrifying. I am sure they could sue for at least $100 million or so.”
“Uh… continue the war on wealth?” a reader suggests after we said yesterday the Fed is stuck between raising interest rates (and hosing Uncle Sam’s finances) or leaving them near zero (which hoses pension funds).
“We have now crossed over into the world of negative returns becoming acceptable,” our correspondent continues. “As fear trumps greed and more wealth holders move assets into ‘dry powder’ in the form of hard assets and strengthening U.S. dollar cash, I would expect rates on T-bills and cash accounts to go from zero to negative and purchase registration enabling Rooseveltian confiscation, starting with gold. Never let a good crisis go to waste.
“The proceeds from such measures could be used to hedge the pensions while supporting the mission of leveling the playing field in an era of Gini coefficients [a measure of income inequality] approaching 0.6.”
The 5: Man, that’s diabolical. Were you on the inside once?
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. “Three out of five taxpayers still haven’t filed,” says a Bloomberg dispatch about tax season this morning.
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