The Independent Investor: What's Up With Oil?
Two years ago, the experts were telling us that the price of oil would continue to fall. Twelve-dollar oil was a real possibility. The end of OPEC was nigh as well as their ability to influence geopolitics. It appears those predictions were premature.
The price of oil has more than doubled over that time, from roughly $30 a barrel in the spring of 2016 to over $71 a barrel today for West Texas Intermediate crude. Those same experts now expect the price could gain further, but there is no agreement on how much higher it can go.
The "swing" factor in that equation is firmly in the hands of American shale producers. They are the culprit of the past three-year decline in oil prices and will likely be the key determinant of future prices in the short-term.
In November, U.S. crude production exceeded 10 million barrels a day. We haven't seen that since I came home from Vietnam back in 1970. There is a real possibility that America could become the world's largest oil producer by the end of this year. That would put us ahead of both Saudi Arabia and Russia. What a change that has been since the days of the OPEC-instigated oil embargos, long lines at U.S. gas stations, and rationing!
The impetus for this astounding change in our fortunes has been the developing technology, which was largely government-funded, that has allowed U.S. entrepreneurs to explore and develop enormous oil and natural gas-rich shale deposits throughout the country. But that's only the beginning of this saga.
These producers, unlike traditional oil companies, can turn their energy spigot off and on at the drop of a hat. Typically, the oil majors such as Exxon or Saudi Arabia's Aramco, require five to 10 years to develop conventional oil reserves. Once in place the oil flows and it is difficult to change course quickly, whereas these unconventional players have developed their drilling and fracturing techniques to the point that they can respond to price changes within a few months.
At the same time, these modern-day wildcatters have cut their cost of production dramatically. They now represent half of all U.S. production and are increasingly profitable. For the first time, many of them will be able to fund future drilling and exploration through their own cash flow. The Permian Basin in Texas and New Mexico is the favorite target of future expansion.
However, that is not the whole story. It appears that even with a dramatic increase in shale oil production, the demand for oil in the short-term will outstrip supply. The world's economies have been growing and organizations such as the IMF are forecasting further growth in the years to come.
Oil and its derivatives, you see, are still needed to fuel this growth, despite advances in alternative energy. Every year, roughly four million barrels are consumed by the world's furnaces and engines. Oil analysts expect an additional one million barrels per annum will be necessary to satisfy future world demand.
That means energy producers will need to replace about 40 percent of this year's oil production over the next decade or so. The most logical and cost-effective approach to this challenge would be to exploit global reserves of shale oil. These deposits are abundant in just about every corner of the world. The problem will be in extracting it. Other countries are far behind our own energy producers. They will need to develop their shale ecosystem and supply chains from scratch.
Since most of these nations are either traditional oil producers/exporters or importers of oil, they will need to spend billions of dollars in new investments to gather, treat, transport and store these new shale oil deposits. As for their existing oil fields, oil majors will require a great deal of time and effort, as well as investment in new technologies, to compete with low-cost shale producers.
While longer-term demand for oil will likely remain robust, in the short-term, we can expect to see continued price volatility in the markets. That's because shale producers will be quick to jump-start new production as prices spike higher, and turn off the spigot when prices fall. It is no longer an OPEC-controlled market where Middle Eastern dictators and kings set prices and the world adjusts. Today's wild and wooly free market will require a strong stomach and an even stronger capacity to absorb sudden and sharp changes in price.
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@theMarket: China Worries Dominate Markets
You would think an unemployment rate that hit 3.9 percent in April would have cheered the market. It was, after all, the lowest such rate in 18 years. But no, all eyes were focused on the first round of China/U.S. trade talks, which conclude today.
The American team includes Commerce Secretary Wilbur Ross and two, hardline China hawks: Robert Lighthizer, our trade rep, and the administration's trade and manufacturing adviser, Peter Navarro. U.S. Treasury Secretary Steven Mnuchin heads the team that is trying, according to the President 's tweet, "trying to negotiate a level playing field."
What we would like to see from the Chinese is a commitment to increase their U.S. imports by as much as $200 billion by 2020. That's in addition to an agreement that would finally protect our intellectual property rights, while allowing American companies greater access to their markets.
As for China, the fact that Chinese Vice Premier Liu He, is heading the Chinese team indicates that the Chinese are more than willing to address the issues. Over the last two days, the Chinese media has remained cautious in reporting the talks while international trade experts warn that there will be no "grand" bargain" struck this time around.
The Chinese, however, are entering the talks softly, while following our own President Teddy Roosevelt's admonition to carry a big stick. That stick is soybeans. Over $14 billion were exported to China last year, but over the last month China has suddenly canceled several shipments of U.S. soybeans — about 133,700 metric tons. They have, instead, turned to Brazil to fill their demand and that country is happy to oblige.
The Chinese also slapped anti-dumping tariffs on American sorghum, used as animal feed and in making whiskey. Although that market only amounts to a little over $1.1 billion in exports, the action was big enough to cause Archer-Daniels Midland, a big agricultural processor, to announce a $30 million hit to its business.
Farm-belt politicians, who recognize that the soybean states had delivered a double-digit victory to the president, are already demanding relief for their constituents. As in all tariff actions, those who are not economically impacted by changes in tariffs support our new "get tough" trade policy — until those policies impact them personally.
Predictably, farmers are already grumbling that there are better ways of getting a level playing field without upsetting their apple (or soybean) cart. It also happens to be planting season. Farmers have no idea how much to plant, given the trade talks. The concerns for what this might mean for them personally is growing rapidly.
My own two cents is that the U.S. and China will come to an agreement of sorts. Our negotiators know that $200 billion in additional imports is a "big ask" of the Chinese. They simply don't need our imports, outside of those in sophisticated technology and in defense. There is no way we are going to export any kind of armaments, and the administration has already cracked down on technology transfers, so what's left?
Autos are a big-ticket item, and the Chinese have already promised to open their market to more foreign-made imports. There is also liquefied natural gas (LNG) which we produce in abundance. That could work if they have the necessary ports to accept delivery of that volatile energy product.
However, there is enough on-going uncertainty over the trade talks to have driven the stock market down to its 200-day moving average for the fourth time. Today's unemployment number barely made a dent in investors' consciousness. The last time unemployment was below 4 percent for any length of time was in the 1960s (when I was in high school). I think it is a big deal and one of the reasons I want you to remain fully invested.
Since there is absolutely no way to handicap the string of political events — Stormy Daniels, Mueller, Iran, Syria, etc. — we simply need to hold-on, and let the market barrel through this period of consolidation.
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The Independent Investor: Financial Scams Targeted at Elderly Are Epidemic
As Baby Boomers age, the volume of reported financial scams directed against them continues to escalate. By some estimates, more than $37 billion a year is now being stolen from America's elderly. And those are only the reported cases.
It is estimated that 5 million Americans are bilked by con artists every year. Some financial firms believe the total can exceed $37.5 billion annually. The Office of Children and Family Services in New York begs to disagree. They say that in their state alone $1.5 billion a year is stolen. And for every case that is reported, 44 are not.
Aside from the impact of losing their entire savings, elder fraud victims are dying at triple the death rate of other elderly adults. That is understandable when you realize the physical and emotional devastation that results from this type of fraud. Rarely, if ever, do the victims get their money back. The stress and time required to pursue the criminals increases the impact on senior victims' health and well-being.
"I'm a trusting person," says Dorothy, my 89-year-old, widowed, mother-in-law, who was a victim of a computer scam. Fortunately, she did get her money back, thanks to her adult childrens' quick response to the incident. Asked why she would give her credit card information to a total stranger, she shrugged and said, "I never expected that people would do things like that."
Last month, the Justice Department announced the largest nationwide investigation of elder fraud cases. This incident victimized over one million people with estimated losses of over $500 million. In this case, the perpetrators used mass mailings and telemarketing to ensnare innocent and trusting victims such as Dorothy.
What makes matters worse is Americans are living longer and many of them will suffer some form of dementia. Roughly half the population over 89, show some signs of impaired memory or other cognitive problems. That makes the scam artist's job even easier. And the more money you have, the higher the chance that you will be targeted. These criminals do their research carefully, identifying just the right set of circumstances that would make their victims an easy mark.
At my firm, which is small compared to the billions many of our competitors manage, I have seen several attempts of financial fraud among our clients. Fortunately, because of our size, we have been able to identify and thwart these efforts. The facts are that advisors like ours may be your best protection against these scammers. You see, many states now mandate that resident advisors notify authorities if they suspect that one of their clients may be the victim of financial fraud. Here in Massachusetts, there is no such rule, but that doesn't matter to us. We believe it is our duty and obligation as fiduciaries to report any such actions.
It has happened to me personally. I detected monthly withdrawals from an elderly client's portfolio that was above and beyond her normal monthly withdrawals. After questioning her, I contacted elder services in the area, who in turn brought in the police. It turned out that her "trusted" personal assistant, who had access to her account, her credit cards, and everything else financial, had a gambling problem. She was financing her addiction by stealing from her client's checking account. Even though she was caught red-handed, she eluded jail time because she argued that she had "permission" to take what she needed from the account.
Trusting your advisor in this day and age, where one in every 13 financial advisors has been disciplined for some sort of misconduct, may seem like an oxymoron. It boils down to being sure that your advisor is, first and foremost, a fiduciary, who you trust and can supply the background and credentials to warrant that trust. Second, that he or she has a limited number of clients. The more clients, the more difficult it is to be able to spot and report instances of financial fraud.
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@theMarket: Peak Earnings Versus the Yield Curve
"Never a dull market" could be the motto of choice to describe stock market performance year-to-date. This week, we need to add two more concerns to the market's wall of worry.
"Peak earnings" is the first issue, which has been brought to the forefront by the 18-20 percent earnings gains reported by companies thus far for the first quarter. The bears would describe peak earnings as the peak of a growth cycle for a stock or a group of stocks such as an index like the S&P 500 or Russel 2000.
Typically during peak earnings, a company will report big "beats" in revenue and profits, but management will then guide investors' expectations lower for the next quarter or so (and maybe even the year).
A small but growing group of investors are comparing what happened back in May 2011 to events today. The S&P 500 rallied over 50 percent between March 2009 through May 2011.
Earnings peaked at that point, and the markets rolled over, at least temporarily. They fear this could happen again, especially when the effects of the tax cut will dissipate to some degree in 2019.
Here's my take: We all know that part of the strong earnings growth this past quarter was a direct result of tax savings. We knew it. You knew it. And the market knew it. Most analysts, including me, were expecting an 8 percent pickup in earnings simply due to taxes. That's exactly what happened. As such, there should have been (and is) a knee-jerk "sell on the news" reaction that continues today.
Second, should anyone but day traders really care about "peak earnings?" Just because a company's earnings next quarter or next year won't match or beat a 20 percent gain this quarter does not mean earnings won't grow. Next year, for example, the Street is looking for overall earnings to grow by about 10 percent. Granted that is half the rate of this quarter, but it is still growth and good growth at that. And don't forget that next year's growth rate will also be based on a larger pie of earnings reported this year.
I don't buy the peak earnings argument, nor do I necessarily agree with the second of this week's worry — an inverted yield curve. What's that, you may ask? It is when the long end of the bond market yields less than the short end. Historically, it has been an accurate signal that recession is coming.
Usually, investors demand higher rates of interest from bond issuers the further out in time (duration) they go. That makes sense when you think that the longer one holds an investment, say a ten or twenty-year bond, the higher the risk that something bad could happen (war, bankruptcy, inflation). Shorter term bonds: 3 months, 6 months, one and two-year has less risk because you hold it for less time and therefore have less interest (yield).
Given that the Fed is raising short-term interest rates, while the longer-dated bonds are remaining the same, or only rising a little, the yield curve is flattening. Bond and stock market investors have been watching the spread (the difference in interest rates between the two-year and 10-year bonds) narrow. It is making them increasingly nervous because it could be saying that there is more risk of a recession in the short-term than there is over the long-term.
But short-term doesn't mean the recession would start tomorrow, or next week, or even next year. In past cycles, the average time between the onset of an inverted yield curve and a recession was over 20 months. Besides, there are other variables — inflation, credit, monetary policy and the overall economy — that are at least equal, if not greater importance, in determining a recession. There is no justification I see to sell stocks now for a possible recession based on a yield curve that has not inverted but only flattened slightly.
While I don't put much credence into these new concerns, it does and will generate even more volatility in the markets. We have a whole series of unknowns and potentially negative developments to overcome. Everything from a tariff-inspired trade war to a renegotiated NAFTA trade agreement, geopolitical issues ranging from the Iran nuclear agreement to North Korea talks, not to mention on-going disputes with China, Russia and Syria. If you add in domestic concerns: Mueller, Cohen, the upcoming mid-term elections, etc., we have a nasty mix of uncertainty that should keep the markets guessing and me writing. In the meantime, stay invested and look for better days ahead.
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The Independent Investor: The Opioid Effect
Opioids are killing us. Both literally, as well as from an economic point of view. The economy has already suffered over $1 trillion in lost potential and those losses appear to be growing by the hour.
Last year, 62,000 Americans fatally overdosed on some form of opioid. It is getting to the point that almost every one of us knows someone who is either addicted or died from these drugs. However, while death is a tragedy, we tend to ignore how much this problem is costing our society.
"You can't put a price tag on the death of a loved one," we say, but actually we can. It's called the "value of a Statistical Life," or VSL. Federal agencies routinely use VSL measures in estimating the expected fatality risk-reduction benefits of a proposed safety regulation. It is based on studies that track how individuals trade off wealth for reduced mortality risks.
For the most part, the riskier the job, the more income a worker will demand to do it.
Recently, the President's Council of Economic Advisors incorporated this concept in assessing the economic costs of the opioid crisis. They found that for years, we have been underestimating the price tag of this crisis by not including VSL. To put this in perspective, in the next two years alone, by applying the concept of VSL the opioid crisis will cost the United States over $500 billion.
Let me explain why: As more and more young people succumb to this scourge, the economic costs begin to accelerate year after year. Statistically, the average age of overdose victims is about 41 years old. Think of all the lost wages and productivity that could have been, but will now never occur, times the number of years of one's expected life. Currently, that is estimated to be around $800,000 per person's death, according to a consulting institute, Altarium, which is measuring this trend.
However, that doesn't include other costs such as lost tax revenues, additional spending on health care, education, social services and the criminal justice system. If one just analyzes the health care cost alone from 2001 to 2017, the opioid health care price tag was over $217 billion.
Unfortunately, those health care costs seem ready to explode in the months and years to come. President Trump, who has rightfully recognized the gravity of the situation, has proposed that $17 billion in extra spending be directed to combating the crisis. Of that amount, $13 billion would be ear-marked for expanding access to prevention, treatment and recovery support services.
The consequences of this problem continue to show up in ways that few of us would expect. For example, two-thirds of America's youth don't qualify for military service today. Besides behavioral, educational and physical failings, a goodly number of those kids have addiction issues. How many? One out of every six young adults (between the ages of 18 and 25) battle a substance use disorder.
On the other end of the scale, an estimated 15 percent of elderly individuals suffer with substance abuse and addiction. It is something that I personally must watch for among retirees.
As we get older, we need more medical treatments, many of which involve surgery. Take me for example, I had both knees replaced over the last three years, plus prostate surgery.
Let me tell you, the pain meds flowed like manna from heaven. All the most notorious prescription opiates were at my beck and call. Fortunately, I was also trying to run a business, deal with the markets, and talk to clients. I was just too darn busy for pain meds. But I am an exception.
Consider the typical 60-70- 80 something, patient who is retired that has little to occupy his or her waking day, where the temptation to abuse these prescription meds is enormous. It has escalated to the level where Investment advisors like me are now being trained to identify the symptoms of opiate addiction or abuse among our clients.
No question about it, this opioid crisis is hamstringing the nation where it hurts the most, its people. Anything we can do, public or private, to stem the spread of this pandemic should be one of our highest priorities. Fortunately, our president feels the same
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