On Tuesday we talked about the quiet bull market in commodities. Today we want to talk about one specific commodity that has been lagging the sharp rebound in oil, but is starting to make a big-time move. It’s natural gas. And this is an area with some beaten up stocks that have the potential for huge bounce backs.
Natural gas today was up almost 6% to a six month high. The U.S. Energy Information Administration said in its weekly report that natural gas storage rose less than what analysts had forecast. But that was just an extra kick for a market that has been moving aggressively higher in the past NINE days (up 37% in nine days).
Now, we should note, nat gas is a market that has some incredible swings. Over the past three years it has traded as high as $6.50 and as low as $1.64.
For perspective on the wild swings, take a look at this long term chart.
You can see we’re coming off of a very low base. And the moves in this commodity can be dramatic.
Three months ago natural gas was continuing to slide, even as oil was staging a big bounce. But natural gas has now bounced 58% after sniffing around near the all-time lows. Meanwhile, oil has doubled.
Based on the backdrop for oil, broader commodities, the economy we’ve been discussing, and the acknowledging the history of natural gas prices, we could be looking at early stages of a big run in nat gas prices.
Summer is one of the most volatile periods for natural gas with the combination of heat waves, hurricanes and potential weather pattern shifts such as La Nina. During the summer months, a 50% move in the price of natural gas is not uncommon. Another 50% rise by the end of the summer would put it around $4. And four bucks is near the midpoint of the $6.50 – $1.65 range of the past three years.
Billionaires investor David Einhorn has also perked up to the bull scenario in nat gas. In his most recent investor letter his big macro trade this year is long natural gas. Here’s what he had to say: “Natural gas prices are not high enough to justify drilling in all but the very best locations. The industry has responded by dramatically reducing drilling activity. As existing wells deplete, supplies should fall. The high cost of liquefying and transporting natural gas limits competition to North American sources. Current inventories are high following a period of over-drilling and a record warm winter. However, the excess inventory is only a couple percent of annual production, which has already begun to decline. Normal weather combined with lower production could lead to a shortage within a year.”
This all contributes to the bullish action we’re seeing across commodities, led by the bounceback in oil. The surviving companies of the energy price bust have been staging big comebacks, but could have a lot further to go on a run up in nat gas prices.
In our Billionaires Portfolio, we have an ETF that has 100% exposure to oil and natural gas – one we think will double by next year. Join us today and get our full recommendation on this ETF, and get your portfolio in line with our Billionaire’s Portfolio.
We’ve talked about the bullish technical break occurring in stocks. That’s continuing again today.
Remember, a week from this past Friday we talked about the G7 (G8) effect on stocks. We stepped back through every annual meeting of world leaders since 2009. And the results were clear. If the communiqué from the meetings focused on concerns about the global economy, stocks went higher. It’s that simple.
Why? In the post Great Recession world, stocks are the key barometer of global confidence. Higher stocks can help promote economic recovery (better confidence, higher wealth effect). Lower stocks can derail it, and threaten a bigger downturn, if not fatal blow to the global economy.
Policymakers can and do influence stocks. And thus, when we’ve seen clear messaging from these meetings about global economic concerns, stocks have done well (in most cases, very well).
With all of this said, on May 27th, from the meeting in Japan, the G7 issued their communiqué and it started with global growth concerns. They said, “Global growth is our urgent priority.” The S&P 500 closed at 2099. Today it’s trading 2116 and is closing in on the all-time highs set in May of last year (less than 1% away).
Now, we talked in past months about the importance of Europe. The Fed’s best friend (and the global economy’s best friend) is an improving economy in Europe. We’ve seen some positive surprises in the data out of Europe, but the actions taken this morning by the ECB could be the real catalyst to get the ball rolling — to mark the bottom, to get Europe out of the slow-to-no growth, deflation funk.
They ECB started implementing a new piece to its QE program today. Of course, they promised bigger and bolder QE back in March (mostly as a response to the cheap oil threat). Today they started buying corporate bonds as part of that ramped-up QE plan.
With that, this is a very important observation to keep in mind. Over the history of the Fed’s three rounds of QE, when the Fed telegraphed QE, rates went lower. When they began the actual execution of QE (actually buying bonds), rates went HIGHER, not lower (contrary to popular expectations). Why? Because the market began pricing in a better economic outlook, given the Fed’s actions. We think we could see this play out in Europe as well.
Take a look at this chart of German yields. This is probably the most important chart in the world to watch over the next several days.
The German 10-year yield traded as low as 3 basis points (that’s earning 30 euros a year for every 100,000 euros you loan the German government, for 10 years). Of course, the most important visual in this chart is how close the German 10-year yield is to zero (the white line), and then negative rates.
Remember, we’ve said before that Draghi and the ECB have made it clear that they won’t cut their benchmark rate below zero. And “that should keep the 10–year yield ABOVE zero.” Were we right? We’ll find out very soon. If so, and if German yields put in a low today on the “actual execution” of the ECB’s new corporate bond buying program, then U.S. yields would be at bottom a here too.
You can see in the above chart, it’s a make or break level for the U.S. 10 year yield as well (as it is tracking German yields at this stage). While lower yields from here in these two key markets might sound great to some, it comes with a lot of problems, not the least of which is a negative message about the outlook for the global economy and thus damage to global confidence. Keep an eye on German yields, the most important market to watch in the coming days.
This Stock Could Triple This Month
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
Yesterday we talked about the bullish technical breakout shaping up in stocks. Today we want to talk about a very quiet bull market going on that supports the story for stocks. It’s commodities.
Within the course of the past four short months, commodities have gone being the leading threat for global stocks, to being a leading indicator of an emerging bull cycle for stocks.
Oil, of course, was the key culprit earlier in the year. At $26 oil the world was a scary place. The dominoes were lining up for widespread bankruptcies, starting in the energy complex and spreading to financials, sovereigns, etc.
If you recall, back in early February we said in our daily notes, “OPEC is not just in a price war with U.S. shale producers, but it’s playing a game of chicken with the global economy. We’ve had plenty of events over the past seven years that have shaken confidence and have given markets a shakeup – European sovereign debt, Greece potentially leaving the euro, among them. In Europe, we clearly saw the solution. It was intervention. Oil prices are creating every bit as big a threat as Europe was, we expect intervention to be the solution this time as well.”
Indeed, central banks stepped in and removed the risk with a slew of intervention tactics ranging from more QE from Europe, currency intervention from Japan, relaxing reserve requirements in China, to the Fed removing the prospects of two (of what was projected to be four) rate hikes this year.
That was the dead bottom in oil (which started with BOJ action in USDJPY). And it kicked broader commodities into gear, many of which had already bottomed weeks prior. No surprise, commodity stocks have been among the best performing stocks in the world for the past four months.
Now we have oil closing above $50 today, for the first time since July of last year. And remember, two of the best oil traders of all time have been calling for oil to trade between $80 and $100 by next year (both Pierre Andurand and Andy Hall).
We looked at this chart in our April 12th piece and said: “technically, oil looks like a technical breakout is here. In the above chart, you can see oil breaking above the high of March 22 (which was $41.90). In fact, we get a close above that level — technically bullish. And we also now have a technically bullish pattern (an impulsive C–wave of an Elliott Wave structure) that projects a move to $51.50, which happens to be right about where this big trendline comes in.”
You can see we’ve not only hit this trendline and gotten very close to that projection from April, but (not as easy to see in this chart) we have a clear break of this downtrend now. That line now comes in at $49.39. Oil last traded $50.49.
Next is a look at broader commodities. But first, we want to revisit the clues we were getting from commodities back in early March. Here’s what we said in our March 3rd note: “There are other very compelling signs that the global economy is not only backing away from the edge but maybe turning the corner.
It’s all being led by metals prices. Copper is often an early indicator of economic cycles. People love to say copper has ‘has a Ph.D. in economics’ because it tends to top early at economic peaks and bottom early at economic troughs. Copper bottomed on January 15 and is up 13% since.
The value of iron ore, another key industrial metal, has been destroyed in the past five years – down 80%. That metal bottomed quietly in December and is up 32% since.”
The Goldman Sachs commodity index is now up 44% from the bottom, though it’s heavily weighted energy. The more diversified CRB index is up 24%. Both would fall into the bull market category for those that like to define bull and bear markets. But bottom line, when you look at the above chart you can see how deeply depressed commodities have been. The trend is broken, and the model signals for big trend followers are flashing all over the place to be long. And as we said yesterday, in early stages of cyclical bull trends in stocks, energy does the best by far. With that, although the energy sector weathered a life threatening storm, the upside remains very big for the survivors.
This Stock Could Triple This Month
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
We charted very closely the risks of the oil price bust. We thought central banks would step in and remove the risk. They did. From there, we thought stocks would track the path of oil. As long as oil continued higher, stocks would follow and slowly global sentiment would mend. It’s happened.
When oil sustained above $40, we turned focus to the extremely negative sentiment that was weighing on markets and economies. But given the extreme views on the world, we thought things were set up for positive surprises. We said this surprise element creates opportunities for asymmetric outcomes (bad is priced-in, good … not at all). That sets up for the potential of “good times” ahead for both markets and broader sentiment.
Fast forward: Earnings expectations were ratcheted down and broadly surprised on the positive side. Global economic data has been ratcheted down and is positively surprising. It’s happening in Germany, which is a very important indicator for a bottoming of the euro zone economy. If the threat of further spiral in Europe has lifted, that’s a huge catalyst for global sentiment. When global sentiment has officially moved out of the doom and gloom camp and back to optimism the horse will have already had plenty of steps out of the barn. And we think we are seeing it reflected in stocks, especially small caps.
With this backdrop, we think everyone could benefit by having a healthy dose of “fear of missing out.” Stock returns tend to be lumpy over the long run. When we you wait to buy strength, you miss out on A LOT of the punch that contributes to the long run return for stocks.
Consider what we said on February 11th (stocks bottomed that day and are up 16% since): “We often hear interviews of money managers during periods like this, and the question is asked “are you getting defensive?”
That’s the exact opposite of what they should be asking. When stocks areup 15–20%, and acknowledging that the long–run average return for stocksis 8%, that’s the time to play Defense. When stocks are down 15–20%, that’s the time to play Offense.
The reality is most investors should see declines in the U.S. stock market as an exciting opportunity. The best investors in the world do. The same can be said for average investors.
Here’s why: Most average investors in stocks are NOT leveraged. And with that, they should have no concern about stock market declines, other than saying to themselves, “what a gift,” and asking themselves these questions: “Do I have cash I can put to work at these cheaper prices?” And, “where should I put that cash to work?”
As Warren Buffett says, bad news is an investor’s best friend. And as his billionaire counterpart says, and head of the biggest hedge fund in the world, ‘stocks go up over time.’ With these two basic, plain-spoken, tenets you should buy dips and look for value.
Broader stocks have just gone positive for the year. Small caps are still down small. Remember, when the macro fog cleared in 2010, small caps went on a tear, from down 6% through the first seven months of the year, to finish UP 27%. Don’t miss out!
Don’t Miss Out On This Stock
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
As we head into Memorial Day weekend and stocks (S&P 500) have crossed back over into positive territory again for the year, we want to step back and acknowledge the relative calm in global markets and economies, compared to where we stood just three months ago, and talk about how different the second half is setting up to be.
Remember, just three months ago the S&P 500 was down 11.4%. Small cap stocks were down 17%. When stocks go lower, people predict crashes. They did. Oil was trading $26 and some bold people were predicting much lower – and lower for a very long time.
Sure, the world was a scary place when oil was $26. But we had a binary outcome on our hands. If oil continued to go lower, and for much longer, the energy industry was done, and the dominoes were lining up. We faced another wave of global economic and financial crisis that would have made the “great recession” look modest.
But if you stepped back and weighed the probability of the outcomes, the evidence was clearly supporting a recovery, not another date with global disaster.
Just days prior to February 11, when oil and global stocks bottomed, we said “a rigged oil market has the ingredients to undo all that the central banks have done for the past nine years to get us to this point. With that, we expect that, as intervention has stemmed the threat of everything that could have derailed recovery up to this point, intervention will be what stems the threat of the falling oil and commodity prices threat.”
The central banks manufactured a recovery from the edge of disaster in 2009. They went “all-in.” It would be illogical to think they would sit back and watch it all undone by an oil price bust, one that was orchestrated by OPEC in an effort to crush the competitive shale industry.
We already knew how far the world’s biggest central banks would go to preserve stability (perhaps civilization). They would do pretty much anything — “whatever it takes” in their own words.
So what marked the bottom for oil? Not surprisingly, it was intervention.
If we fast forward to today, with the trend of positive surprises in European data leading the way, it’s fair to say the state of global markets is getting closer to good.
What does that mean for stocks?
If we look back at 2010 we can see a lot of similarities. Stocks were hammered in the first half of 2010 by the potential default of Greece – and for energy stocks, the oil spill in the Gulf. The macro clouds were removed, and in the second half of 2010, the S&P 500 rallied from down 7% to up 15% by year end.
The Russell 2000 was down 6% for the year through July of 2010. Over the next five months it rallied 34 percentage points to finish UP 27% on the year.
What about energy? After being down 12% in the first half of 2010, the XLE (the energy ETF tied to a basket of energy stocks) returned 34% off the bottom and 22% for the year.
Also remember, in Fed tightening cycles, stocks tend to go UP not down. We’re officially five months into a Fed tightening cycle stocks are basically flat.
Don’t Miss Out On This Stock
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
Last week we talked about Warren Buffett’s new stake in Apple. Today we want to talk about the investor that recently sold Apple: Carl Icahn.
In a world where information is abundant, markets are priced quite efficiently. The way a stock re-prices is through CHANGE.
And that’s precisely what the influential investors that we follow in our Billionaire’s Portfolio specialize in. And that’s why they have such a tremendous record in posting consistent superior returns – and, in turn, building tremendous wealth for themselves and their investors.
No one has done a better job at creating change for shareholders than Carl Icahn – certainly not over the span of the past three decades. That’s why we have 20% of our Billionaires Portfolio in stocks owned and controlled by Icahn.
We consider Icahn the god-father of activism. Very early on, Icahn found that, among all of the complications people like to add to investing, there is a very simple opportunity to take advantage and capitalize on the simplicities that we all know about human nature.
In his words, “some people get rich studying artificial intelligence. Me, I make money studying natural stupidity.”
I’ll interpret that remark with these three simple points: 1) People will take advantage of opportunities to satisfy their own self-interests. 2) People will find ways to justify their self-serving actions. 3) People will be greedy.
Add this human nature to a concoction called the public equity markets, and you find, among many things, a witch’s brew of bad management teams at publicly traded companies.
To most investors, identifying a company that’s run poorly is a red flag – something to stay away from.
For Icahn, it’s opportunity. It’s blood in the water. Why? Because it presents the opportunity for CHANGE. And when you get change, you have a chance to make a lot of money as the stock re-prices to reflect that change.
Icahn has done this over and over throughout his long career. That’s why he has been able to compound money at nearly 30% a year for almost 50-years. That’s the greatest long-term investment track record in history (as far as we know). One thousand dollars with Icahn when he started has gone to$275 million.
Even at the age of 80, Icahn has been as vocal and as influential as ever. He influenced Apple to a near double by encouraging Apple to use their treasure chest of cash to buy back stock. Cash sitting on a balance sheet idle does nothing for shareholders. Share buybacks create shareholder value.
That’s the name of the game. Despite what some CEOs may think, that is precisely why they have been employed, to create shareholder value. And that is often the change that has to take place (the CEO or the mindset of leadership).
Icahn’s continued investing success can be attributed to one important talent: He’s a change-maker. When we follow him, we can be assured that he has a plan for change and that he will fight to make it happen. Plus, when we follow Icahn, we get an added bonus that few, if any, other big time investors summon: Because of his great success, his campaigns tend to attract other influential investors to join in – stacking the odds even more favorably for shareholders.
We’ll talk more about the “Icahn effect” tomorrow.
Don’t Miss Out On This Stock
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
This past week we’ve talked about the recent public disclosures made about the investments of some of the world’s best investors.
The biggest news was Warren Buffett’s new $1 billion plus stake in Apple.
Apple’s stock price peaked in April of last year (following a 65% rolling 12-month return). Much of that run up was driven by activist efforts of Carl Icahn. Icahn influenced sentiment in the stock, but also influenced value creation for shareholders by pressuring Apple management to buy back stock.
But since peaking last April (2015), Apple shares had lost nearly 34% as of earlier this month. Icahn dumped his stake and made it public in late April.
And then we find this past week that Buffett is now long (he’s in).
So should you follow Buffett? Is it the bottom for Apple? And what makes Apple a classic Buffett stock?
First, Buffett has compounded money at 19.2% annualized over a 50 year period. That’s made him the second wealthiest man in the world.
Buffett loves to buy low. He has a long and successful record of buying when everyone else is selling. Buffett purchased his Apple stake last quarter when Apple was near its 52-week low.
But he famously stays away from technology. Why Apple? For Buffett, Apple is a global, dominant brand. That trumps sector. He loves brand name companies with a loyal customer base, and there is probably no company on the planet with a more loyal customer base then Apple. Plus, one could argue that Apple is a consumer services company (with 700 million credit cards on file, charging customers for movies, songs, apps …).
Generally Buffett pays less than 12 times earnings for a company. Of course there are exceptions, but Apple fits this criterion perfectly with a P/E of 10.
Buffett loves companies that have a high return-on-invested-capital (ROIC) and low debt. Apple has an ROIC of 28%, extremely high. Companies with a high ROIC usually have a “wide moat” or a competitive advantage over the rest of the world. That gives them pricing power to drive wide margins.
Apple really is the classic Buffett stock. And now that Buffett has put his stamp of approval on Apple, we believe the stock has bottomed, especially since it’s so cheap compared to the overall stock market. And he’s not the only billionaire value investor who loves Apple. Billionaire hedge fund manager David Einhorn also loves Apple. He increased his Apple stake last quarter to 15% of his entire hedge fund, almost $900 million dollars worth.
Don’t Miss Out On This Stock
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaire’s Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
As we’ve discussed over the past few months, markets can be wrong—sometimes very wrong.
On that note, consider that the yield on the U.S. ten–year Treasury was trading closer to 2.30% after the Fed’s first rate hike last December—the first hike in nearly ten years and the symbolic move away from the emergency zero interest rate policy. The ten–year yield has, incredulously, traded as low as 1.53% since. One end of that spectrum is wrong, very wrong.
Remember, as we headed into the last Fed meeting, the ten–year yield was trading just shy of 2% (after a wild ride down from the December hike date). And the communication to that point from the Fed was to expect FOUR rate hikes in 2016.
Of course, in the face of another global economic crisis threat, which was driven by the oil price bust, the Fed did their part and backed off of that forecast—taking two of those hikes off of the table. Still, yields under 2% with even two hikes projected seemed mispriced.
So following a dramatic 85% bounce in oil prices and the threat of cheap oil now behind us (seemingly), as of yesterday afternoon yields still stood around just 1.79%. That’s more than a 1/2 percentage point lower than the levels immediately following the December hike. And that’s AFTER two voting Fed members just said on Tuesday that they should go two or threetimes this year. So with global risks abating, the Fed is beginning to walk back up expectations for Fed hikes.
Confirming that, as of yesterday afternoon, the minutes from the most recent Fed meeting have been disclosed, which now indicate that a June hike is likely assuming things continue along the current path (i.e. no global shock risks emerge).
Still, the yield on the ten–year Treasury is just 1.84%, 5 basis points higher than it was yesterday morning, prior to the Fed minutes.
Why?
The bet is that the Fed is making a mistake raising rates (at all). But at these levels for the ten–year yield, it’s a very asymmetric bet. The downside for yields here is very limited (short of a global apocalypse), the upside is very big. That makes betting on lower yields a very dangerous one, if not a dumb one. When people are positioned the wrong way in asymmetric trades, the adverse moves tend to be violent. I wouldn’t be surprised to see 2.50% on the U.S. ten–year Treasury by the year end.
Don’t Miss Out On This Stock
In our Billionaire’s Portfolio we followed the number one performing hedge fund on the planet into a stock that has the potential to triple by the end of the month.
This fund returned an incredible 52% last year, while the S&P 500 was flat. And since 1999, they’ve done 40% a year. And they’ve done it without one losing year. For perspective, that takes every $100,000 to $30 million.
We want you on board. To find out the name of this hedge fund, the stock we followed them into, and the catalyst that could cause the stock to triple by the end of the month, click here and join us in our Billionaires Portfolio.
We make investing easy. We follow the guys with the power and the influence to control their own destiny – and a record of unmatchable success. And you come along for the ride.
Yesterday, SandRidge Energy was yet another energy company to file for bankruptcy this year. Many hear bankruptcy news and think of failed companies. But in plenty of cases, it’s more about opportunism than it is about desperate last acts.
Before we talk about the SandRidge story, we want to give some bigger picture context.
As we discussed a few months ago, the oil price bust, while many thought would be a positive for the economy, because it puts a few bucks in the pockets of consumers, has actually been a huge net negative, because it has brought the energy industry to its knees.
If oil stayed at $26, the shale industry in the America would be done. All of the associated businesses (transportation, logistics, refining, housing, marketing, etc.) – done. Hundreds of thousands of jobs were lost already, and probably millions would have followed. Guess who lends money to the energy sector? Banks. The financial system would once again have been in widespread crisis.
Oil producing countries like Venezuela and Russia would have defaulted. When a biggie like Russia goes, it has systemic ramifications. That event would have likely pulled the leg out from under the teetering European debt crisis chair. From there, Greece would have gone, and Italy and Spain would have probably defaulted. The European Monetary Union would have then finally succumbed to the unmanageable weight of the crisis.
To sum up, cheap oil would have been far worse than the sub-prime crisis. And this time, central banks and governments would have had no ammunition to fight it.
But, central banks stepped in to remove the “cheap oil” risk. The Bank of Japan intervened in the currency markets, and oil bottomed that day. China followed by ramping up bank lending. And Chinese institutions have been big buyers of commodities since. Then the ECB rolled out bigger and bolder QE. And the Fed removed two projected rate hikes from the table. All of this coordinated to directly or indirectly put a floor under oil. Today, oil is up 85% from levels of just three months ago.
So this begs the question: Why is an energy company like SandRidge, a company that has been surviving through the decline in oil prices, cutting production/cutting jobs, now filing bankruptcy? This is AFTER oil has bounced 85% and oil supply has just swung from a surplus to a deficit. And some of the best oil traders in the world are projecting oil prices back around $80 by the end of the year. Why would they throw in the towel now and not in February?
Back in February, SandRidge management missed a debt payment, opting to exercise a 30-day grace period. It was at that stage that the ultimate negotiation should have come with debt holders. Option 1): Restructure debt and perhaps dilute current shareholders by offering debt holders common shares. That gives the company time to ride out the storm of the oil price bust. And it gives all stakeholders a chance to see much better days. Option 2): Close the doors and liquidate assets, and creditors get cents on the dollar.
Instead, SandRidge management and directors negotiated more runway so that they could get to Option 3): the homerun lottery ticket.
In this option, oil prices recover and the company can begin producing profitably again, and brighter days are ahead. But if they rush to file Chapter 11 bankruptcy, while the business fundamentals remain depressed, they can win big. By swapping new stock for debt, the company gets freed of the noose of debt, and the debt holders exchange a piece of paper that was once worth pennies on the dollar, for common stock in a super-charged debt-free company.
That sounds like a win-win. The company continues to operate as normal. Management and the board keep their jobs (and likely their golden parachutes). And former debt holders can make a lot of money.
Who pays the price? Shareholders (the owners). Old shareholders of SandRidge stock have no say in the collusion between SandRidge leadership and creditors. So the owners of the company have their interests effectively stolen by a backroom deal and given to debt holders. And within the bankruptcy laws of Chapter 11, shareholders have no leverage. But who are some of the biggest and most effected shareholders? Employees.
SandRidge has over 1,000 employees. Let’s assume that, like many publicly traded companies, employees of SandRidge have been incentivized to buy company stock as part of their 401k plan (common practice). They have already seen their stock go from $80 to pennies. But now, as an insult to injury, they will continue working to enrich new shareholders while their board of directors have chosen to wipe out their interests.
And sadly, the common stock of companies like SandRidge (which was one of the most shorted stocks on the NYSE) are often shorted heavily by those that own the debt, in efforts to drive the company into Chapter 11, so that they can orchestrate precisely what’s happening today. The stock price gets cheap, then delisted from a major exchange, then credit ratings get downgraded, then banks cut credit lines, and voila, the company find itself in a liquidity crunch and turns to restructurings.
A huge factor in this “homerun option” for the board and creditors is for the company to continue operating as normal. If employees in this Chapter 11 situation would strike, maybe shareholders could have a seat at the negotiating table when these “pre-arranged” reorganization deals are cut. Still, that’s the leverage they hold to derail such a deal.
Consider this: In the depths of the real estate bust, billionaire activist investor Bill Ackman stepped in and bought beaten down shares of General Growth Properties, a company in bankruptcy because it couldn’t access credit. The company had strong assets and strong cash flow (as does SandRidge), but was dependent on a functioning credit market, which was broken at the time. As the largest shareholder, he battled in the board room for the shareholder. He helped management access liquidity and he convinced all stake holders that keeping equity holders intact would result in the biggest outcome for everyone. He was right, and when the credit markets recovered, GGP shares went from 20 cents to over $20 a share.
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We’ve talked about the bullish technical break occurring in stocks. That’s continuing again today.
