|Dow||+191.75 to 18,252.24|
|S&P 500||+22.62 to 2,121.10|
|Nasdaq||+69.11 to 5,050.80|
|10-YR Yield||-.043 to 2.239%|
|Gold||+$2.60 to $1,220.80|
|Crude Oil||-$0.71 to $59.79|
The mainstream media gets a lot of things wrong. But, boy, was the headline on today’s Financial Times digital front page a zinger!
The headline? “Saudis claim oil price strategy success.”
In the story, Saudi Arabian officials said their “Oil War” — designed to squeeze U.S. shale producers — was working. They noted their country had gained market share vis-à-vis U.S. producers, and that this proved their 2014 strategy was working.
Frankly, I think that’s nuts! All the Saudis have succeeded in doing is torpedoing their own country’s finances! They’re bleeding cash and reserves like a stuck pig … and I maintain they’re going to be forced to fold soon!
Look, Saudi Arabia’s government gets roughly 90 percent of its revenue from oil sales. Its economy is nowhere near as diversified as ours, nor is it able to stomach low oil prices for long.
|Saudi Arabia’s government gets roughly 90 percent of its revenue from oil sales.|
It needs a global oil price of roughly $100 a barrel to balance its budget, according to informed estimates. But despite the rally we’ve seen over the past few months, the global benchmark Brent crude is only trading for around $66 today. It dropped as low as $45.19 in January.
What’s more, the Saudis didn’t cut back on spending as oil prices slumped. They went in the complete opposite direction! They’re launching huge domestic construction and welfare programs, with some 2,600 projects costing $50 billion in the works.
They’re also spending several billion dollars on military equipment and troop bonuses, as part of the Yemeni bombing campaign and a defense build up designed to counter Iran.
Yes, the Saudis started this Oil War with a large pile of reserves. But plunging revenue and surging spending are draining those reserves … fast. They’re literally burning through billions of dollars per week, with no end in sight. The government is “officially” projecting a record-high budget deficit of $38.7 billion in 2015. But I doubt that estimate is worth the paper it’s printed on.
|“The Saudis can’t keep this game up forever, or even for much longer.”|
The International Monetary Fund (IMF) is already warning Gulf countries like Saudi Arabia to get their finances in order. Other organizations and ratings agencies are likely to follow suit.
That brings me to my bottom-line view: The Saudis can’t keep this game up forever, or even for much longer. I believe they’ll soon have to cave in this Oil War, and back OPEC production cuts or tighter quota policing. That, in turn, will act as yet another force propelling energy prices and energy stocks higher.
What do you think? Is Saudi Arabia going to have to declare an end to this war of attrition? Or will they keep it up? How will their decision influence oil prices, if at all? Do you believe other forces are more powerful, bullish or bearish, for crude? Let me know your viewpoint over at the Money and Markets website.
|Our Readers Speak|
Income inequality, “obscene” CEO pay packages, and what — if anything — can be done about it was the hot topic of the day over at the website in the wake of my last column.
There were a ton of very well-thought-out, well-stated views. But I want to start with one from Reader Richard K., who shared the following extended take:
“I work for an American multinational company whose brands are recognized around the world. While the company is earning record profits, it is on a multi-year, cost-cutting plan that is targeting $1 billion a year in savings, every year. That has led to staff reductions and outsourcing across all functions and pay increases that do not match official inflation numbers.
“As the CEO announced the year-end results, a multi-billion dollar share buyback plan was announced yet again. Doing a bit of back-of- the-envelope math, the cost of the share buyback could have provided every employee worldwide a one-time bonus of $20,000 — and there would still be a billion left over for administrative costs associated with the plan.
“Based on the number of shares outstanding and the number of shares owned by the CEO and other top executives, the estimated cost per share should increase the value of the shares owned by our CEO by well over a million dollars-plus. Add to that the double-digit increase in the dividends per share being paid the shareholders and the top executives are being very well rewarded for another successful year.
“The benefit of owning shares in a growing prosperous company is that as the company prospers, the price of the shares increases and so does the value of your investment. But is it not a conflict of interest where the senior executives are rewarded handsomely with stock and stock options … and then can dip their hands into the cookie jar yet again by benefiting from very generous share buy-back plans and dividend increases?
“In the past, when a large company prospered, the workers saw their income rise. Today when a company prospers, jobs get outsourced in the name of cost cutting and only the top executives along with the shareholders get the reward. And people wonder why there is a growing problem with income inequality.”
Reader George K. offered a bit of outrage on the topic, saying: “It seems that an ordinary worker must live and work for 373 years to earn the amount the CEOs get in one year. It is obviously obscene. At the Board level, they fix up their own salaries … Then they pat each other on the back and say ‘Well done mate.’
“It could be funny, if it was not serious. No CEO should get more than a person that manages a country. And in any case, never more than 10 times average earnings.”
But Reader Jeff countered with this view: “It’s stunning to me to think that a person with minimal skills, responsibility and education should be worrying about what the CEO makes. Improve your own lot in life and move up. Or start a company and run it the way you want and see how you do.
“Is 373X the right number? Who knows? But thinking there’s some ratio that’s just right is silly. Then again, that’s why the unions and Progressives come up with that stuff: Class warfare, division, and envy.”
Finally, Reader Chuck B. weighed in with his take — saying government isn’t the answer, morality and ethics in corporate boardrooms are. His comments:
“Why should politicians have ANY say in pay rates? Those that claim such, or vote for such, are shamefully trying to buy votes, and should be ousted. That said, the huge differentials in pay cited are obscene, and those bosses need to think about what they are doing.
“I’ve read of a few who refuse to take such pay, and share with employees. More should consider it. If they have stock in a company, and run it so well they gain value for ALL stockholders including themselves, that is different. But they might consider letting employees share in some way, via share bonuses or something of the sort. After all, the employees create most of that value.”
Where do I come down on all of this? I agree that government mandates over CEO pay aren’t the solution, and I do believe Corporate America needs to lead by example.
There’s nothing wrong with getting wealthy through the fruits of your labor, as many ethical, hard-working executives and company founders do. But to not spread the wealth more evenly … with shareholders AND employees … isn’t just immoral. It’s bad business. It leads to lousy morale and customer service, negative PR, and hurts the ability of your workers to buy your own products and services.
Am I right? Nuts? Somewhere in between? Feel free to let me have it over at the website!
|Other Developments of the Day|
Initial jobless claims sank 1,000 to 264,000 in the most recent week, while the more-stable four-week moving average dropped to a 15-year low. But the Producer Price Index that measures inflation at the wholesale level sank 0.4 percent in April. That was much worse than the 0.1 percent increase economists expected, as was the 0.2 percent decrease in the “core” measure that excludes food and energy.
The trader accused of helping cause the “Flash Crash” back in May 2010 says he was far from alone. Navinder Singh Sarao reportedly told the Chicago Mercantile Exchange that other traders were exploiting the market several times, but there is no evidence the CME aggressively cracked down on those manipulative moves. Now he’s facing several criminal and civil charges from U.S. regulators, and is fighting extradition in a U.K. court.
Many investors are now jumping on board promising trades I highlighted here in Money and Markets a few months ago, according to the Wall Street Journal.
Specifically, they’re now buying oil, emerging markets, and other contra-dollar assets that had gotten cheaper than at any point in decades! One investor put it this way: “There is an element of reversal here.” Dare I call it a “Big Reversal?”
The investigation into this week’s deadly Amtrak train crash is continuing, with officials trying to figure out why the train was traveling more than twice the speed limit for that section of track. The engineer Brandon Bostian reportedly braked, but it was too late as the train was travelling 106 miles per hour in a 50-mph zone.
So what do you think? Is the engineer probably at fault here? Are these Big Reversal trades going to gain steam, or is the fact everyone else is now jumping on the bandwagon a reason to be concerned? Make sure you share your thoughts on those stories, or any others I missed, at the website.
Until next time,