We’ve moved into the next round of the crude oil “prize fight” between the United States and Saudi Arabia. Prices were back on the rise for the second straight week.
The challenge is what to make of it.
This week, the markets tried desperately to make sense of industry data and geopolitical problems. And some talking heads even speculated that U.S. producers were caving to Saudi price pressures because of what they saw this week.
It was volatile, to say the least.
On Monday, oil surged on news of double-digit cuts in capital expenditures (capex) by multinationals and plunging rig count levels. Then on Tuesday, of course, oil plunged after the U.S. reported record crude inventories. Crude spiked again for the next three days over concerns about a massive refinery strike, violence in Libya, ISIS in Iraq, and positive U.S. jobs data (a figure we’ll get into in a moment).
The headlines said multiple things. But when we really look deeper into the data, we find that all those capex cuts and the falling rig counts are not a lethal blow to the U.S. energy sector as some might have you believe: U.S. oil production is certainly here to stay.
In fact, that sudden plunge in rig data that fueled last week’s huge West Texas Intermediate (WTI) crude rally shows that the moth-balled equipment consisted of lower-producing oil rigs – in other words, the “low-hanging fruit.”
While the per-barrel price at these rigs might not justify production, neither would the volumes from those individual wells.
The reality is that there is such a massive amount of available oil now that we’ve barely seen a noticeable dent in U.S. production. Add to that the fact that technology improvements are boosting production at lower prices, and you have a country that has no reason whatsoever to blink first.
And so the ball is back in the Saudis’ court. They might live to regret their decision not to cut production in order to salvage market share.
In addition to growing anger from partner OPEC nations over crashing prices, Saudi Arabia has its own social budgets for 2015 that it must fulfill to avoid social unrest and to maintain peace.
Naturally, Dr. Kent Moors is all over this. As a 30-year consultant in the global energy industry, Kent is connected to the small “inner circle” of power players who control 90% of the world’s energy supply.
This week, he wrote a piece in Oil & Energy Investor that proves Saudi Arabia has far less leverage in the oil markets than its leaders believe. And their underestimation of one important economic factor could seriously haunt the kingdom in 2015 and beyond.
Check out his recent primer on shifting oil supplies and the dwindling influence of Saudi Arabia and OPEC . Look for two updates from Kent each week.
…AND HERE’S HOW WE’LL MAKE MONEY ON THEM
With oil prices swinging wildly this week, and “Big Oil” looking for a clear bottom, an important question should be on the minds of investors now looking at beaten down energy stocks:
“Was this week’s oil rally for real, or just a fake-out we need to ignore for now?”
Here’s what our friend and special contributor Michael E. Lewitt had to say this week:
“As always, the question is when to buy stocks that have dropped as much as these have over the past seven months. Given the poor earnings announcements, cutbacks in capital spending, and slowdowns in stock buyback programs, it is too early to dive into the beaten down stocks of the oil giants with fresh money. Investors expecting a near-term pop may be disappointed since oil prices are unlikely to recover quickly.
However, Exxon Mobil Corp. (NYSE:XOM) and Chevron Corp. (NYSE:CVX) stock are trading at reasonable valuations while still paying attractive, and increasing, dividends. Investors are unlikely to be hurt if they’re already in the stock, and plan to own these shares for a period of years.
For those of you already in the stock as long-term shareholders, hang on… It’s going to be a bumpy ride!”
This is good advice – and an even better profit play.ROGUES’ GALLERY: STANDARD & POOR’S
This week, another huge culprit in the 2008 Financial Crisis got off easy with a settlement.
Credit rating firm Standard & Poor’s has announced it will pay $1.5 billion to settle several lawsuits over its ratings policies on mortgage securities that fueled the 2008 financial crisis.
The company also agreed to “withdraw its assertion that the Justice Department lawsuit was political retaliation for the ratings firm’s 2011 downgrade.”
Recall, the ratings agencies were responsible for assigning risk levels to individual securities that were sold by the banks. Not only were many falsely planting AAA ratings on products that were just above junk status, but they were being paid by the banks to provide those pristine ratings.
Let’s explain this business model another way…
If you’re crooked and you want to sell a car that has a bumper falling off and a tire missing, who would you want giving the appraisal? The shady guy who you can pay to say it’s worth $10,000… Or the honorable person who says it should be thrown in a junkyard? Because that’s easiest way to describe how ratings agencies worked during the run-up to the financial crisis.
The settlement news has led to significant criticism from watchdogs, investors, and members of Congress who argue that the company’s business model is still flawed.
In fact, the monstrous Dodd-Frank Act barely addresses the fact that the temptation for ratings agencies to assign faulty ratings for profit still exists. It hasn’t been fully addressed since 2008.
The ratings agencies have gotten off easy. They were supposed to be the first watchdog. But they let the horde run right passed them… and into the pockets of every taxpayer and home owner in the United States.
One of the solutions being pitched in Washington is the idea that financial companies will have to rotate agencies on a regular basis. It’s not the best solution, since collusion is still possible.
But at least someone started the conversation.MY BIG FAT GREEK HEADACHE…
It was another week of drama and flair in Europe, where the squabbling between Greece and the European Central Bank (ECB) grew louder over the nation’s debt obligations.
On Thursday, the ECB abruptly canceled an agreement that allowed Greece to offer its junk rated bonds as collateral for central bank loans. Now, the Greek central bank will have to pump money into its banking system with emergency liquidity over the next two months.
[Do centralized planners have any other plans except the debasement of their own currency?]
The waters seemed calm until late Friday afternoon. Then Standard & Poor’s downgraded Greece’s long-term debt, sending the Dow Jones down 60 points and offsetting enthusiasm about the U.S. economy. That downgrade sent ripples across the Atlantic Ocean and hit our domestic markets.
Recall, Greece’s new, leftist government wants to roll back the austerity measures imposed by the ECB when Greece was unable to cope with its huge debt and needed a bailout from Europe.
The ECB simply decided to stop funding Greece’s lenders, which means that if they need money, Greece is going to have to print it. The ECB knows that Greece doesn’t want to have to do this, but the new anti-austerity party wants to keep its campaign promises.
So who is going to win this battle? The answer might surprise you.
Even though the ECB is playing hardball with Greece and says the nation must apply for a debt extension by February 16, our Chief Investment Strategist Keith Fitz-Gerald suggests that the ECB is going to have to make some concessions.
“They kind of have no choice,” Keith said during an interview on CNBC this week.
“This is like that old joke: If I owe you a dollar, it’s my problem, if I owe you a hundred million, it’s your problem. Greece knows the ECB has got to play ball and I think that’s going to happen behind closed doors.”
That’s why Keith says that you should be cautious as this story unfolds.
“Everybody’s looking for security. That’s why you’re seeing Treasuries bid on. I think you’re going to see risk come off until the answers are there,” he said. He added that it will be a “big relief” to markets when the impasse gets resolved.
Friday’s downgrade caught everyone off guard, which is why we always need to prepare ourselves for such events accordingly. Remember three things that we talk about quite often here: Set your stop losses to your level of risk tolerance, prepare for buying opportunities, and stay fresh on our investment strategy from the Money Map Method, right here.
And for more of Keith’s insight on Greece, watch his recent interview on CNBC World here.
AHEAD OF THE CURVE
Helping you become a better investor is one of the most important goals we have here at Money Map. So, each week, we’re featuring an important lesson, insight, or metric that can offer you simple guidance on how to make your time more fun and, of course, profitable.
Last week, we highlighted some of our favorite quotes from many of the most successful investors, CEOs, and entrepreneurs of today’s generation.
Today, we want to discuss the idea of being conservative while trading aggressively. Now, that might sound a bit crazy when you hear it. But many professional traders are able to outperform the markets because they actually have more losing trades than winning trades…
“What?” you ask.
This week, our Small-Cap Investing Specialist Sid Riggs explains why you do not need to be right in all of your trades. In fact, you can profit even more by learning how to manage your losses on your most aggressive and speculative trades.
And unlike baseball, just two out of ten big hits can make you look like a Hall of Famer.
Here’s how it’s done…
THE PROFIT PLAY
This week’s profit play comes from Shah Gilani, our Capital Wave Strategist and editor of Capital Wave Forecast and Short Side Fortunes.
One of his favorite tech stocks received such a high-and-tight “haircut” last week that it’s time to pounce.
This stock’s fall set up a remarkable bargain-basement buying opportunity for investors…
For most of the past 18 months, investors have loved Microsoft Corp. (Nasdaq: MSFT), pushing it up by 50%.
Satya Nadella, the company’s new CEO, was largely responsible. His “mobile-first, cloud-first” strategy seemed just the tonic to counter a decade of flat stock performance.
But on January 26, Microsoft’s quarterly revenues missed expectations due to slumping PC sales and a strong U.S. dollar. The firm warned these problems would persist for much of 2015.
On the following day, the stock fell 9.25%. By the end of the week, it was down 18% from its 52-week high.
Now, Shah sees a rare buying opportunity. Microsoft stock has been a long-time favorite of his due to its upside. “You’ve got a company that’s making inroads into new business opportunities thanks to a creative new CEO,” he said. “And the company is cash-rich and pays investors a very decent dividend of just over 3%.”
Despite the recent decline, Microsoft’s long-term prospects haven’t changed.
Shah’s advice: “Buy the stock here and add to it all the way down to $36 – if you are lucky enough to get more at lower prices.”
Of course, Shah’s not the only one who’s crazy for Microsoft right now. Check out Bill Patalon’s premium Private Briefing, The Surprising Stock That’s “an Absolute Steal.” If you’re not a subscriber, you can click here to take advantage of a 50% discount and start getting Bill’s Private Briefing every day.
LET ME FINISH
On Friday, Wall Street cheered a “better-than-expected” report despite the “official” unemployment rate rising to 5.7%.
But we all know that this official rate is one of the great deceptions of our time.
And this week, one of the experts on the subject of unemployment in the United States pulled back the curtain and exposed the 5.7% fraud for what it really is.
This week, Jim Clifton, the CEO of polling firm Gallup, wrote a scathing editorial on his company’s site that shamed U.S. data collectors for lying about the official unemployment rate.
In the editorial titled “The Big Lie,” Clifton explained that his company’s research indicates that just 44% of Americans have a full-time job with an organization that pays 30 hours a week.
He also explained the tricks and bogus calculations used by the U.S. Department of Labor to massage its data and mislead Americans. Here are a few things they don’t tell you, but Mr. Clifton was kind enough to share in his column:
“If you, a family member or anyone is unemployed and has subsequently given up on finding a job — if you are so hopelessly out of work that you’ve stopped looking over the past four weeks — the Department of Labor doesn’t count you as unemployed.” That’s right… And 30 million Americans fit in this category. That’s 9% of the population.
And if you’re working part time, but you really want part time work… you guessed it… you’re not unemployed either. “If you have a degree in chemistry or math and are working 10 hours part time because it is all you can find — in other words, you are severely underemployed — the government doesn’t count you” as unemployed. But that’s nothing compared to this last bombshell…
Are you out of work, but occasionally doing some part-time work? Well: “If you perform a minimum of one hour of work in a week and are paid at least $20 — maybe someone pays you to mow their lawn — you’re not officially counted as unemployed.”
Seriously, you can’t make this stuff up.
The “official” number we saw yesterday was cooked. In fact, Gallup projects the real unemployment rate has increased 1% since December.
But we’ve said before, the other number that we have to pay attention to is the workforce labor participation rate. This figure is the percent of the “working-age population” that is either employed or seeking a job. Today, that figure is at 62.9%.
That means that 37.8% of our working-age population are, at best, severely unemployed.
That’s a near 36-year low, and a sign that we have a long way to go, and that our politicians aren’t doing anything to fix the situation except squabble, print, tax, and spend…
Well, that’s it for us this week.
Be sure to drop us a note at Dispatch@MoneyMapPress.com if you have any feedback or questions.
Until next week,
Mike