CVX

Extreme Volatility in Crude Oil Prices Continues

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After a short-lived reprieve on hopes that OPEC will suddenly abandon its strategy of share retention instead of price support and that US oil production was modestly lower through the first five months of the year than previously expected, reality is now setting back into the oil futures market (USO). At the time of this writing, West Texas Intermediate crude oil prices for October delivery are hovering in the $43-$45 per barrel range, and futures have traded wildly between “recession” and “bull market” the past several months and days, respectively. There are three major areas of concern that may continue to impede any sustainable rise in crude oil prices, however. 1. OPEC is not caving in. OPEC’s strategy to deal … Read more

Batten Down the Hatches – Another US Market Crash Probable

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A global financial contagion like that of the Financial Crisis just six short years ago cannot be ruled out. The magnitude of wealth lost in China’s (FXI) equity market is simply staggering, and we’re already witnessing bad loans soar across China’s Big 4 banks. We’re hearing that property, used as collateral for stock margin trading in China, is often being sold for 90 cents on the dollar as speculators look to cover losses. We expect the fallout from the collapse in Chinese equity markets to eventually reverberate through their property markets, impacting loan-to-values in the commercial and residential arenas, sparking significant loss rates and asset write-downs across the Chinese financial system. We continue to assess the tangible evidence of an … Read more

3 Observations

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Bulls raged back in a big way during the week of trading ending August 28 to erase some of the massive losses experienced from the May 2015 highs of 2,013 on the S&P 500. Though no longer staring down at 1,800, the S&P 500 still closed comfortably shy of 2,000. No matter what next week will bring, almost everybody is expecting more volatility. Could this then mean that we’re back to normal? The market has a very interesting way of disappointing the majority of investors the majority of the time. Here are 3 observations that are worth noting. 1. The Fed Doesn’t Have the Right Data…Yet The stark reality is one of two things: a) either the Fed knows exactly what’s going on … Read more

The Damage Has Already Been Done

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The Shanghai Index only fell another 1.3% yesterday. The US markets are cheering at the open Wednesday on hopes that last month’s July durable goods number is foretelling of what investors can expect after the latest leg down in the Chinese market and the collapse in US equity markets the past few weeks. Though “core” July durable goods orders were better than expected, pre-collapse data is no longer indicative of the true state of the US economy and what lies ahead, in our view. The Chinese government has gone “all-in” to prop up its bubbly market, one that is trading at 60 times reported earnings, but the impact, while arguably successful in preventing Armageddon in China for now, has only … Read more

The Debt Bubble Is Deflating; Will It Pop?

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The fundamental concerns surrounding the financial health of China-dependent companies across the globe are tangible, and the risk of a currency crisis and eventual credit crunch are real, if they aren’t already happening. Fortescue Metals Group (FMG), the fourth-largest iron ore producer in the world, announced over the weekend, that profits were nearly completely wiped out (down nearly 90%) for the fiscal year ending June 30, even as the firm shipped 33% more tons of iron ore during the period over last year’s mark. The largest iron ore producers, BHP Billiton (BHP) and Rio Tinto (RIO), are only adding to production overcapacity, conditions that are wreaking havoc on the commodity price. Iron ore prices are to remain under pressure as … Read more

The Flight to Safety

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Image Source: Pravine Chester It’s no secret that investors have been disappointed with returns across the equity market in 2015, and this week has not made the unrest any easier to deal with. Money managers across the globe will be looking at a short-term chart of the S&P 500 (SPY), observing that the broad US index has finally broken down from a critical multi-month base, and many will look to “lighten up” on some of their equity positions that they have been reluctantly “letting run” for months. It is no surprise to us why Netflix (NFLX) was one of the market’s worst performers in Thursday’s trading session. The company is trading at nearly 500 times earnings (not a typo), and the low … Read more

The Walking Dead?

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At 453.6 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. – Summary of Weekly Petroleum Data for the Week Ending August 7, 2015 The oil & gas energy complex is nearing a state of panic, if it isn’t already in one. We’ve been talking about the glut of energy resource supply for many months now, and our impeccable positioning in the newsletter portfolios long before the collapse in prices is well known. Kinder Morgan (KMI) had been a relative outperformer in the Dividend Growth Newsletter portfolio until we removed it at $40 per share a couple of months ago. The same had been true with … Read more

The Great Pipeline Cash Flow Deficiency

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A myopic view on the energy sector may lead one to ask the question whether the distributions of energy master limited partnership are safe. A broadminded view would answer that question in two words: absolutely not. Through the first six months of 2015, almost every energy-related MLP has spent more in total capital expenditures and distributions than they generated in cash flow from operations. Business models with financials such as these cannot be sustainable over the long haul without infinite access to capital via the debt or equity markets. We learned that housing prices don’t always go up (and that they can fall on a national scale) during the Financial Crisis, and we’ll eventually learn that debt-infused business models that … Read more

The Game Is Nearing an End for MLPs…

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The game is nearing an end for master limited partnerships (MLPs) in this energy cycle, in our view. We no longer feel comfortable, if we ever did, including any MLP in the Dividend Growth Newsletter portfolio. Linn Energy (LINE, LNCO), of the upstream variety, may have taken on far too much debt as an E&P entity, but its free-cash-flow management during the first half of 2015 has actually been decent…stronger than better-known upstream and midstream operators. Yet, despite Linn’s positive free-cash-flow execution, even after distribution payments, the entity’s bankers appear to be circling like sharks, ready to take a further bite out of its borrowing capacity (due to lower energy resource pricing). Fairly, the company simply can’t afford to take … Read more

Dear member,

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We have been blown away by the attention we’ve received from our warning on Kinder Morgan’s (KMI) valuation and dividend health. Our duty as an independent research provider has never been held in higher esteem as we outlined the prevalent hazards that reside both with sell-side research inundated with conflicts of interest and credit rating assessments that are paid for by the company. Independence will always trump biased analysis, and investors of all types have applauded us for this. We thank you. But being in the spotlight is nothing new for us. In the short history of the Dividend Cushion methodology, we have called in advance the dividend cuts on a few dozen equities: SeaDrill (SDRL), SuperValu (SVU), Roundy’s (RNDY), … Read more