|Dow||+63.19 to 17,596.34|
|S&P 500||+9.19 to 2,035.33|
|Nasdaq||+24.13 to 4,708.16|
|10-YR Yield||+.009 to 2.178%|
|Gold||-$3 to $1,226.40|
|Crude Oil||-$1.26 to $59.67|
All oil, all the time.
That’s what it seems like the news is focused on, considering that crude prices just cracked through $60 a barrel today from a summer high near $108. That’s a five-year low.
But the decline in crude is nothing compared to what has happened in some energy stocks. The biggies like Exxon Mobil (XOM, Weiss Ratings: B) and Chevron (CVX, Weiss Ratings: C+) are down somewhat — around 3 percent year-to-date for XOM and 11 percent for Chevron. That’s some serious underperformance when you consider the S&P 500 is up more than 11 percent.
Yet the damage in some smaller drillers and producers is much, much worse. Take a name like Oasis Petroleum (OAS). It was trading for around $58 as recently as July. This week it fell to around $11. If you’re keeping track at home, that’s an 81 percent wipeout in just five months! Another smaller producer, Goodrich Petroleum (GDP), has gone from around $30 to $3.
High-yield bonds and ETFs that own “junk” (which I’ve been panning for several months) have also gotten hit hard. The reason? Concerns over billions of dollars in defaults from the most highly leveraged energy firms.
Just look at this chart of the SPDR Barclays High Yield Bond ETF (JNK). You can see that it tanked this week to the lowest level since June 2013:
|Click chart for larger version.|
Why such carnage? Some on Wall Street and in the media are claiming the oil market and the American energy renaissance is like a third incarnation of the previous two mega-bubbles — in dot-bombs in the late-1990s and housing and mortgages in the mid-2000s.
The general argument: Too many lousy companies took out too many easy loans to fund too aggressive oil and gas drilling plans. Now, there’s too much oil floating around, prices will keep tanking, everyone is going to go bankrupt, hundreds of billions of dollars of debt securities are going to get vaporized, and there’s no opportunity anywhere — sell everything before it’s too late.
So what’s my take?
Well, I predicted the housing and mortgage crisis in advance, and I helped investors navigate the terrible fallout. I witnessed the rise and fall of the dot-bomb boom first hand, working at an Internet company on the front lines.
|There will be tremendous value in shares of the survivors.|
I have to tell you that I don’t think this one measures up. Sure, there will be some defaults, some companies will go belly up, and all of that. But the dot-bomb and housing bubbles pervaded every corner of the economy, and every part of the capital markets. The bubbles drove the economy on the way up, and when they imploded, they plunged us into deep recessions and huge market collapses.
This situation looks a lot different to me, a more localized affair that doesn’t have the same widespread economic tendrils that those other bubbles did. And if there’s anything else we’ve learned from the past two wipeouts, it’s that they create tremendous value in shares of the survivors! As long as you keep cash in reserve on the way down, and only gingerly and opportunistically pick at the values being created, you can make a killing from countertrend rallies and the ultimate turnaround that will follow.
|“I’m more inclined to be a buyer than a seller in many instances.”|
So with oil now down to around $60, and many of these companies already hit hard, I’m more inclined to be a buyer than a seller in many instances. After all, it’s not like the evidence suggests the U.S. is in or headed into a recession — something that would suggest very little demand for energy products.
We just learned today that initial jobless claims fell 3,000 in the latest week to 294,000. Meanwhile, November retail sales jumped 0.7 percent. That was stronger than the 0.4 percent rise economists expected, and the best showing in eight months.
But I’m interested in what you think …
Is a third, massive wave of defaults and bankruptcies about to sweep through the economy and the markets — like we saw with dot-bombs in the late-1990s and housing in the mid-2000s? Or is this a localized problem for a few heavily indebted energy companies and the investors who bought their shares or bonds?
Can the rest of the market and economy continue to chug along despite the energy problems? Or is energy weakness enough to derail the U.S.? Can oil prices just sit here at $60 … or fall to $50 or even $40? Or are they headed back to $100? Use the Money and Markets website to weigh in and share your thoughts with your fellow investors.
|Our Readers Speak|
Washington’s deal-making madness got several of you to comment on the website overnight.
Reader Linda R. said: “Are you kidding me? A good deal? Making deals is what got us to $18 trillion in debt. These spendthrifts in Washington need to learn to do without, just like the rest of us. We cannot continue to do this! The Republicans are as bad as the Democrats on this issue — they all only know spending, spending, spending!”
Reader Hymn added: “I believe they ‘hammered out a deal’ because it was in the parties’ best interest. The Republicans needed to look reasonable prior to taking control of the Senate and showing their true colors once there. The Democrats didn’t want to push back against the few things the Republicans piled on, due to timing and the resulting shutdown had they held out.
“Speaking of time, given the last minute presentation of the bill, who do you suppose actually read it? Not many is my guess.”
Finally, Reader Richard said: “What some call partisan politics could also be referred to as people with principles standing firm. This current agreement has a lot to do with making a deal before a new Congress is seated.
“Few things are as connected as Washington politics and our markets/economy. If conservatives in Washington don’t stand up and stop the expansion of government, especially social programs, we have very little to hope for.”
As for the other topics I’ve touched on, Reader Denis M. weighed in on energy, saying: “Oil will rebound, however, the countries to watch now are Saudi Arabia and Iran. Things are potentially very explosive, with that old bogey of religion and history time and again has shown us this.”
And when it comes to wireless phone service, Reader Norm said: “Last January I switched from a Sprint 2-year, $69/month (plus fees & taxes = $84) plan with limited data to T-Mobile’s prepaid plan with unlimited everything for $50/month through Wal-Mart.
“To do this, I bought a Windows 8 smartphone at Wal-Mart for $79, and love it. Have had zero issues will cell reception in southern California and can use the $34 extra for more urgent things like gasoline or groceries. Seems like the Big 3 are ripping us all off!”
Great thoughts and insights all around. We’ll have to see if Washington becomes a help, a hindrance, or just something in between after the new Congress begins in early 2015. It would be nice if we didn’t have to worry about D.C. machinations for a change, but it’s hard to count on that.
Feel free to jump into the discussion at the website now, using this link. I’ll do my best to further things along and answer your questions in my daily columns as well.
|Other Developments of the Day|
Uh oh. Did I speak too soon on the spending bill? Some more liberal Democrats are up in arms over provisions that pertain to bank regulation and campaign finance.
Specifically, legislators like Democratic Senator Elizabeth Warren don’t like a provision that would allow banks to fund derivatives trades with government-insured deposits. Another thorny clause would triple the amount of money people could donate to political parties.
A damning Senate report on the Central Intelligence Agency and its interrogation tactics and results was released earlier this week, and its contents are being debated vigorously in Washington and in the press. This New York Times story looks at many of its findings.
The plunge in oil continues to put pressure on Russia, where the central bank was just forced to raise interest rates by another 100 basis points to 10.5 percent to stem currency outflows. The move didn’t accomplish much, though, and the ruble remains down about 40 percent against the dollar this year.
On the flip side, Norway’s central bank cut its benchmark short-term rate by 25 basis points to 1.25 percent. The country depends on oil production and exports for a significant portion of its economy, and policymakers are worried lower energy prices will hammer growth.
The Golden Globe nominations were released today, with the movie “Birdman” getting the most movie award nods and HBO garnering the most TV award nominations. Is it just me, or have you never even heard of Birdman? Tune in during January to see if it … er … flies away with the most trophies!
If you have any comments on these news stories, or others you’ve stumbled across, hop on over to the website to weigh in. I read as many of the remarks as I can, and I know your fellow investors appreciate them.
Until next time,