Why It Feels Like the Dot Com Bubble All Over Again

By Justin Spittler

Today, we’re going to do something different. As you can imagine, we hear from our readers a lot. Some of them have nice things to say. Others…not so much. Most importantly, though, we get a lot of questions. Last week, we received a question that was so important, we’re dedicating this entire issue to it. This question might be something you’re wondering yourself…and it could have a huge impact on your money.

It comes from Joseph J., a subscriber to The Casey Report:

I read today’s newsletter (Trump Should Be Careful What He Wishes For) with great interest. In it you stated that “U.S. stocks are incredibly expensive…” But my question is: Based against what? We are in uncharted territory, and every single newsletter writer that I have asked this question of has failed to provide an answer. Perhaps you will be different.

Thank you for putting us in the hot seat, Joseph. Lucky for us, we didn’t make this claim lightly. We have plenty of facts to back it up. Before we show you the proof, you have to realize something: There are many different ways to value stocks. Everyone has their preference. A lot of folks use the price-to-earnings (P/E) ratio. Other investors look at a company’s book value or cash flow.

We prefer to use the cyclically adjusted price-to-earnings (CAPE) ratio.…
This ratio is the cousin of the popular P/E ratio. The only difference is that it uses 10 years’ worth of earnings instead of just the previous year’s. This smooths out the up and downs of the business cycle. It gives us a long-term view of the market. Right now, the CAPE ratio for companies in the S&P 500 is 28.4. That’s 70% higher than its historical average. U.S. stocks haven’t been this expensive since the dot com bubble.

This isn’t a good sign. As you may remember, the S&P 500 fell 41% from 2000–2002. The Nasdaq plunged 78% over the same period.

But the CAPE ratio is just one way to value stocks.…
To prove we’re not cherry picking, let’s look at some other metrics. First up, the price-to-sales (P/S) ratio. This ratio is just like the P/E ratio, but it uses the previous year’s sales instead of earnings. According to credit rating agency Standard & Poor’s, the S&P 500 currently trades at 2.02 times sales. That’s 40% higher than its historical average, and the highest level since at least 2000. Clearly, U.S. stocks are more expensive than normal. But that’s not even the main reason investors are nervous about them.

U.S. stocks seem to have lost touch with reality.…
As we all know, the stock market allows investors to own a piece of publicly traded companies. Most of the companies on the NYSE (New York Stock Exchange) are U.S. companies. Because of this, you would think the stock market would generally follow the health of the economy. If the economy’s booming, stocks should be soaring. If the economy’s struggling, stocks should be, too. That hasn’t been the case lately.

Since 2009, the S&P 500 has surged 239% to record highs. That makes this one of the strongest bull markets in U.S. history. During that same span, the U.S. economy has grown just 2% per year. That makes the current “recovery” one of the weakest since World War II. In short, Main Street hasn’t kept up with Wall Street.

The U.S. stock market is now clearly in “bubble territory”.…
Just look at the chart below. This chart compares the value of the U.S. stock market with the nation’s gross domestic income (GDI). GDI is like gross domestic product (GDP), but instead of measuring how much money a country spends, it measures how much money a country earns. It counts things like wages, corporate profits, and tax receipts. A high ratio means stocks are expensive relative to how much money an economy makes. You can see in the chart below that this key ratio is well above its housing bubble high. It’s now approaching the record high it hit during the dot-com bubble.

This is another serious red flag.…
But it doesn't mean stocks are going to crash next month, or next year. For this bubble to pop, something will have to prick it. We’re not sure what that will be…where it will come from…or when it will happen…
But we do know stocks don’t go up forever. Sooner or later, this bubble is going to end. When it does, many investors are going to take huge losses. Years’ worth of returns could disappear in a matter of months, even weeks.

The good news is that you can still crisis-proof your portfolio. Here are three ways to get started:

1. Set aside more cash. Holding extra cash will help you avoid big losses if stocks fall. It will also put you in a position to buy stocks when they get cheaper.
   
2. Own physical gold. Gold is the ultimate safe-haven asset. It’s survived every financial crisis in history. It will certainly survive the next one.
   
3. Close your weakest positions. Start by selling your most expensive stocks. They tend to fall the hardest during major selloffs. You should also get rid of companies that need cheap debt to make money. If problems in the bond market continue, these companies could be in trouble.
   

These simple strategies could save you tens of thousands, possibly more, when the inevitable happens.

---

Chart of the Day

Miners are rallying again. Today’s chart shows the performance of the S&P/TSX Global Mining Index. This index tracks the performance of companies that mine commodities like gold, silver, aluminum, and copper. You can see that this index skyrocketed at the beginning of last year. It nearly doubled between January and July. Then, it went almost nowhere for six months.

Three weeks ago, the S&P/TSX Global Mining Index broke out of this sideways trading pattern. It’s now trading at its highest level since early 2015. This is very bullish. It tells us that mining stocks may have just entered a new phase of a bull market. If you’ve been thinking about buying mining stocks, now might be a good time to get in. But don’t worry if you don’t know what to buy.

We recently put together a presentation that talks about one of the richest gold deposits in the world. Our top gold analyst has never seen anything like this in his career. Early investors in the company that owns this deposit could make 1,000% or more. But this opportunity won’t last long. Just two months from now, this world-class mine will “go live.” When it does, this company’s stock should shoot through the roof. For more details on this incredible opportunity, click here.

The article Why It Feels Like the Dot-Com Bubble All Over Again was originally published at caseyresearch.com.

Forget Dow 20,000… This Indicator Tells the Real Story

By Justin Spittler

It finally happened. For the last six weeks, the Dow Jones Industrial Average has been bumping against a ceiling. Yesterday, it broke through. The Dow topped 20,000 for the first time ever. Most investors are excited about this. After all, 20,000 is a big, round number. It feels like a psychological win for the bulls.

But it’s not an invitation to dive into stocks…not yet, at least. We need to see if the Dow can hold this level.
If it closes the week above 20,000, stocks could keep rallying. If it doesn’t, nothing has really changed. It could even be a warning sign. Until then, sit tight. Don’t chase stocks higher…stick to your stop losses…and hold on to your gold.

Don’t lose sight of the big picture, either.…

Remember, U.S. stocks are still very risky:

➢ They’re expensive. The S&P 500 is trading at a cyclically adjusted price-to-earnings ratio (CAPE) of 28.4. That means large U.S. stocks are 70% more expensive than their historical average.

➢ We’re still in a profits recession. Profits for companies in the S&P 500 stopped growing in 2014.

➢ And Donald Trump is president of the United States. Trump could do wonders for the economy and stock market. But he could also unleash a major financial crisis. It's still too early to tell.

As you can see, "Dow 2,000" isn't necessarily a reason to celebrate. In fact, as we told you two weeks ago, there's something much more important you should be watching right now.

The bond market is flashing danger.…
The bond market is where companies borrow money. It’s the cornerstone of the global financial system.
It’s also bigger and more liquid than the stock market. This is why the bond market often signals danger long before it shows up in stocks.

The bond market started to unravel last summer.…
Just look at U.S. Treasury bonds. In July, the 10-year U.S. Treasury hit a record low of 1.37%. Since then, it’s nearly doubled to 2.55%. This is a serious red flag. You see, a bond’s yield rises when its price falls. In this case, yields skyrocketed because bond prices tanked. The same thing has happened in long term Treasury, municipal, and corporate bonds.

Bill Gross thinks bonds are entering a long-term bear market.…
Gross is one of the world’s top bond experts. He founded PIMCO, one of the world’s largest asset managers. He now runs a giant bond fund at Janus Capital. Two weeks ago, Gross said the bull market in bonds would come to an end when the 10-year yield tops 2.6%. Keep in mind, bonds have technically been in a bull market since the 1980s.

According to Gross, this number is far more important than Dow 20,000. And we’re only 50 basis points (0.5%) from hitting it. In other words, the nearly four-decade bull market in bonds could end any day now.
When it does, Gross says bonds will enter a secular bear market... meaning bonds could fall for years, even decades. This is why Casey Research founder Doug Casey has urged you to “sell all your bonds.”

If you haven’t already taken Doug’s advice, we encourage you to do so now.…
You should also take a good look at your other holdings. After all, problems in the bond market could soon spill over into the stock market. If this happens, utility stocks could be in big trouble. Utility companies provide electricity, gas, and water to our homes and businesses. They sell things we can’t live without. Because of this, most utility companies generate steady revenues. This helps them pay dependable dividends.

Many investors own utility stocks just for their dividends.…
That’s why a lot of people call them “bond proxies.” Utility stocks don’t just pay generous income like bonds, either. They also trade with bonds. You can see this in the chart below. It compares the performance of the Utilities Select Sector SPDR ETF (XLU) with the iShares 20+ Year Treasury Bond ETF (TLT). XLU holds 28 utility stocks. TLT holds long-term Treasury bonds. XLU has traded with TLT for the better part of the last year. Both funds crashed after the election, too. But XLU has since rebounded.

You might find this odd. After all, the two funds basically moved in lockstep until a couple months ago.
But there’s a perfectly good explanation for this.…

Utility stocks pay more than Treasury bonds.…
Right now, XLU yields 3.4%. TLT yields 2.6%. That might not sound like big deal. But those extra 80 basis points (0.8%) provide a margin of safety. You see, the annual inflation rate is currently running at about 2.1%. That means the U.S. dollar is losing 2.1% of its value every year.

That’s bad news for everyday Americans. It’s also bad for bondholders. It means investors who own TLT are earning a “real” return (its dividend yield minus inflation) of 0.5%. Meanwhile, you’d be earning a real return of 1.3% if you owned XLU. Of course, utility stocks should pay more than government bonds. They’re riskier, after all. Unlike the government, utility companies can’t print money whenever they want. If they run into financial problems, they could go out of business.

Today, investors don’t seem to mind taking on extra risk for more income. But that could soon change…

Inflation could skyrocket under Donald Trump.…
If you’ve been reading the Dispatch, you know why. For one, Trump wants to spend $1 trillion on infrastructure projects. While this could help the economy in the short run, the U.S. government will have to borrow money to fix the country’s decrepit roads, bridges, and power lines. This would likely produce a lot more inflation. If that happens, real returns could shrink even more. And that could trigger a selloff in utility stocks and other "bond proxies," like telecom and real estate stocks. In short, if you own these types of stocks just for their dividends, you might want to consider selling them now.

We recommend sticking to dividend-paying stocks that meet the following criteria.…
The company should be growing. If it isn’t, you probably own the stock just for its dividend. That’s a bad strategy right now. It should have a low payout ratio. A payout ratio can tell us if a company’s dividend is sustainable or not. A payout ratio above 100% means a company is paying out more in dividends than it earns in income. Avoid these companies whenever possible.

It shouldn’t depend on cheap credit. After the 2008 financial crisis, a lot of companies borrowed money at rock-bottom rates to pay out dividends. If rates keep rising, these companies could have a tough time paying those dividends. If you own stocks that check these boxes, your income stream should be in good shape for now.

Chart of the Day

“Trump Years” stocks are on a tear. We all know U.S. stocks took off after the election. But some stocks did better than others. Bank stocks spiked on hopes that Trump would deregulate the financial sector. Oil and gas stocks rallied because Trump is pro-energy. Industrial stocks have also surged since Election Day.

Industrial companies manufacture and distribute goods. They include construction companies and equipment makers. E.B. Tucker, editor of The Casey Report, thinks these companies will stay very busy while Trump rebuilds America’s hollowed out economy.

He’s so sure of it that he recommended four “Trump Years” stocks last month. One of those stocks is up 11% in just six weeks. Yesterday, it spiked 8% after the company crushed its fourth quarter earnings report.
The company announced higher sales, fatter profits, and lower taxes. It raised its guidance for the year. In other words, it expects to make a lot more money this year…now that Trump’s in charge.

You can learn about this company and E.B.’s other “Trump Years” stocks by signing up for The Casey Report. Click here to begin your free trial.

The article Forget Dow 20,000… This Indicator Tells the Real Story was originally published at caseyresearch.com.

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Hundreds of Oil Stocks Could Go to Zero…Will You Still Be Owning One of Them?

By Justin Spittler

The largest shale oil bankruptcy in years just happened. If you own oil stocks, you'll want to read today's essay very closely. Because there's a good chance hundreds more oil companies will go bankrupt soon. As you probably know, the oil market is a disaster. The price of oil has plunged 75% since 2014. In February, oil hit its lowest level since 2003.

Oil crashed for a simple reason: There’s too much of it. New methods like “fracking” have led to a huge spike in global oil production. Today, oil companies pump about 1 million more barrels a day than the world uses.

Last year, America’s biggest oil companies lost $67 billion..…

To offset low prices, oil companies have slashed spending by 60% over the past two years. They’ve laid off more than 120,000 workers. They’ve sold assets and abandoned projects. Some have even cut their prized dividends.

For many oil companies, deep spending cuts weren’t enough…

The number of bankruptcies in the oil industry has skyrocketed….

Bloomberg Business reported earlier this month:

Since the start of 2015, 130 North American oil and gas producers and service companies have filed for bankruptcy owing almost $44 billion, according to law firm Haynes & Boone.

And that doesn’t even include two “big name” bankruptcies in the last couple weeks. Two weeks ago, Linn Energy filed for bankruptcy, making it the largest shale oil bankruptcy since 2014. It owes lenders $8.3 billion.

A week later, SandRidge Energy declared bankruptcy. It became the second biggest shale oil company to go bankrupt. The company owes its lenders about $4.1 billion. Ultra Petroleum, Penn Virginia, Breitburn Energy, and Halcón Resources also filed for bankruptcy in the past couple weeks.

Hundreds more oil companies could go bankrupt this year..…

The Wall Street Journal reported last week:

This year, 175 oil and gas producers around the world are in danger of declaring bankruptcy, and the situation is nearly as dire for another 160 companies, many in the U.S., according to a report from Deloitte’s energy consultants.

Defaults by oil and gas companies are already skyrocketing. The Wall Street Journal continues:

Oil and gas companies this year have defaulted on $26 billion, according to Fitch Ratings data. That figure already surpasses the total for 2015, $17.5 billion.

Fitch, one of the nation’s largest credit agencies, expects 11% of U.S. energy bonds to default this year. That would be the highest default rate for the energy sector since 1999.

Many investors thought the oil crisis was over..…

That’s because the price of oil has surged 80% since February. Dispatch readers know better. For months, we’ve been warning there would be more bankruptcies and defaults. We said many oil companies need $50 oil to make money. The price of oil hasn’t topped $50 a barrel since last July. Even after its big rally, oil still trades for about half of what it did two years ago.

Oil prices will stay low as long as there’s too much oil..…

Although the world still has too much oil, the surplus has shrunk in the past few months. In February, the global economy was oversupplied by about 1.7 million barrels a day. Thanks to U.S. production cuts, the surplus is now just 1.0 million barrels a day. The number of rigs actively looking for oil in the U.S. has dropped by 80% since October. This month, the U.S. oil rig count hit its lowest level in 70 years.

However, many other countries aren’t cutting production at all. Saudi Arabia and Russia, two of the world’s biggest oil-producing countries, are both pumping near-record amounts of oil. Frankly, these countries don’t have much choice. Oil sales account for 77% of Saudi Arabia’s economy. And oil accounts for 50% of Russia’s exports. If these countries stop pumping oil, their economies could collapse.

Low prices have made it impossible for some oil companies to pay their debts..…

U.S. oil companies borrowed nearly $200 billion between 2010 and 2014. If you’ve been reading the Dispatch, you know the Federal Reserve is mostly to blame for this. It’s held its key interest rate near zero since 2008. This made it incredibly cheap to borrow money. When oil prices were high, the debt wasn’t an issue. Companies made enough money to pay the bills. That’s no longer the case. Today, many oil companies are burning through cash to pay their debts.

To make matters worse, many weak oil companies have been cut off from the credit market..…

Before prices collapsed, oil companies could refinance their debt if they ran into trouble. This could buy them time to sort out their problems. These days, many banks will no longer lend oil companies money. Bloomberg Business reported last month:

Almost two years into the worst oil bust in a generation, lenders including JPMorgan Chase & Co., Wells Fargo & Co. and Bank of America Corp. are slashing credit lines for struggling energy companies…
Since the start of 2016 lenders have yanked $5.6 billion of credit from 36 oil and gas producers, a reduction of 12 percent, making this the most severe retreat since crude began tumbling in mid-2014.

Oil stocks are still very risky..…

But that doesn’t mean you should avoid them entirely. As we’ve said before, oil stocks have likely entered a new phase. You see, when oil prices first tanked, investors sold oil stocks indiscriminately. Both strong and weak stocks plunged. In other words, investors “threw the baby out with the bath water.” You often see this behavior during a crisis.

Exxon Mobil (XOM), the world’s biggest oil company, fell 34% since 2014. Chevron (CVX), the world’s second biggest, dropped 48%. Now that oil has stabilized, the stronger companies are separating themselves from the weaker companies. This year, Exxon is up 15%. Chevron is up 11%. The crash in oil prices has given us a chance to buy world class oil companies at deep bargains.

If you want to own oil stocks, stick with the best companies..…

If you're going to invest in the sector, there are four key things to look for: 

Make sure you buy companies that can 1) make money at low oil prices. You should also look for companies with 2) healthy margins 3) plenty of cash and 4) little debt.

In March, Crisis Investing editor Nick Giambruno recommended a company that hits all of these checkmarks. It has a rock-solid balance sheet…some of the industry’s best profit margins…and “trophy assets” in America’s richest oil regions. It can even make money with oil as cheap as $35.

The stock is up 9% in two months. But Nick thinks it could just be getting started. After all, it’s still 30% below its 2014 high. You can get in on Nick’s oil pick by signing up for Crisis Investing. If interested, we encourage you to watch this short presentation. It explains how you can access Nick’s top investing ideas for $1,000 off our regular price.

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You’ll also learn about an even bigger “crisis investing” opportunity on Nick’s radar. This coming crisis could radically change the financial future of every American. By watching this video, you’ll learn how to profit from it. Click here to watch.

Chart of the Day

Oil and gas companies are losing billions of dollars, we’re in earnings season right now. This is when companies tell investors if their earnings grew or shrunk last quarter. A good earnings season can send stocks higher. A bad one can drag stocks down.

As of Friday, 95% of the companies in the S&P 500 had shared first quarter results. Based on these results, the S&P 500 is on track to post a 6.8% decline in earnings. That would be the biggest drop in quarterly earnings since the 2009 financial crisis.

Oil and gas companies are a big reason U.S. stocks are having such a horrible earnings season.

As you can see below, first-quarter earnings for energy companies in the S&P 500 have plunged 107% since last year. Keep in mind, this group includes Exxon, Chevron, and other blue chip energy stocks.

Again, if you’re looking to buy oil stocks, make sure you “look under the company’s hood” before you buy it. Steer clear of companies that are losing money and have a lot of debt.

The article Hundreds of Oil Stocks Could Go to Zero…Will You Still Be Owning One of Them? was originally published at caseyresearch.com.

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Distressed Investing

By Jared Dillian 

When most people think of distressed investing, they think of buying CCC-rated bonds at 20 or 30 cents on the dollar, then maybe sitting in bankruptcy court to divvy up the capital structure, making healthy risk-adjusted returns in the end. You just need to hire a few lawyers.

Distressed investors are a different breed of cat. It’s one of those countercyclical businesses, like repo men, who do well when everyone else is getting hammered.

I remember distressed guys killing it in 2002. Most people remember the dot-com bust, but there was a nasty credit crunch that went along with it. Nasty. High yield/distressed investments had some amazing years in 2003 and 2004. Convertible bonds in particular.

Funny thing about distressed investors is that they like to stay within their comfort zone. In my experience, they’re not keen on commodities. Like coal mining, which this week saw one bankruptcy filing and another one in the works. Distressed guys hate commodities because they are just timing the earnings cycle – which is the same as market timing.  Distressed guys want less volatile earnings so their projections aren’t totally dependent on commodity prices rising.

Coal is distressed, all right. But you don’t see the distressed guys getting involved. Even they are too scared!

Here’s a somewhat controversial statement: I think most commodities are distressed. Coal is definitely distressed. So is iron ore. Copper, too. And yes, even gold. Corn and beans have had a nice little run, but metals and energy in particular have been a complete horrorshow.

So I think it’s time to start looking at commodities as a distressed asset class. The assumption is that fair value of these commodities/producers is well above current market prices, and current market prices are wrong because of, well, a lot of things. In particular, a self-reinforcing process where selling begets more selling.

If you’re a distressed investor and you’re buying something at a deep discount, if you have a long enough time horizon, you’ll be vindicated eventually. Sometimes, it takes a long time. Sometimes, not very long at all. It’s pretty great when it works.

I have never had much aptitude for it. But I am trying it now.

Gold: A Special Case

Gold is a little different.

How do you value gold? It has no cash flows. An industrial commodity like copper is pretty easy to value. With gold, you’re trying to gauge investment demand (at the retail or sovereign level), which is hard, against mining production, which is a little easier.

But what an ounce of gold is worth is entirely subjective. More subjective than copper or cocoa or coffee. For example, if everyone started using bitcoin, there would be little to no demand for gold. (For the record, I think cryptocurrencies indeed have had an impact on gold demand.)

Basically, people want gold when they think their government no longer cares about the purchasing power of their currency. In our case, that was when the Fed was conducting quantitative easing, known colloquially as printing money.

But that’s not really what people were nervous about. Think about it. The Fed was printing money for monetary policy reasons. They were trying to effect monetary policy with interest rates at the zero bound. That’s different from printing money to buy government bonds because nobody else wants to. That’s called debt monetization.

When budget deficits get sufficiently large, people worry about things like failed bond auctions, that the Fed will have to step in and be the buyer of last resort. This is the nightmare scenario described in Greenspan’s Gold and Economic Freedom essay.

We had $1.8 trillion deficits not that long ago. The bond auctions were a little scary. I thought debt monetization was a possibility.

The deficit is lower today, mostly because of higher taxes, more aggressive revenue collection, and economic growth. As you can see, the price of gold has corresponded almost perfectly with the budget deficit.

With a small deficit today, nobody cares about gold.

Is the deficit going higher or lower in the future? Higher. Ding-ding-ding, we have a winner. One of the reasons I’m happy owning gold as a part of my portfolio.

Paper vs. Things

Asset allocation gets a lot easier when you figure out that the financial markets are a tug-of-war between paper and things. Sometimes, like now, financial assets (stocks and bonds) outperform. Stocks are overpriced, and bonds are way overpriced. Other times, like 10 years ago, commodities outperformed.

It has to do with the degree of confidence people have in… other people. A bond is a promise to repay. A stock is a promise to pay dividends, or that there will be something left over at the end. A dollar is a promise that it’s worth something, namely, a divisible part of the sum total of the productive abilities of all the people in the country.

These are pieces of paper. Paper promises. When confidence in promises is high, nobody needs gold, coal, or copper. When confidence in promises is low, time to build that underground bunker in the backyard. Confidence in promises is currently at all-time highs. Without making a positive statement either way, I’d say that only in the year 2000 were commodities more undervalued than they are right now.

Sidebar: it is tempting to treat commodities as an asset class, but you should try not to. They are idiosyncratic, and for most commodities, the cost of carry is high enough that it’s impractical to hold them for long periods of time.

Commodity related equities are a different story.

Disclaimer

I’m kind of biased on this, and I always think commodities are undervalued because I’m a deeply suspicious person and I don’t believe promises. I’ve owned gold and silver for years (plus GLD and SLV, and GDX and SIL), and if prices get low enough, I will add to those positions.

Keep in mind that I worked for the government under the Clinton administration. Clinton’s mantra to government employees was, “Do more with less.” The man did a lot to restrain the growth of government—and he was a Democrat!

People resented him for it. They wanted their fancy toys and their boondoggles. Public servants have been much happier under Bush and Obama. Not coincidentally, gold bottomed in 2000, at the end of Clinton’s presidency, and has basically been going up since.

So here is the secret sauce: You want to know when commodities are going up?
Watch the deficit. If someone dreams up free college for everyone, buy commodities with veins popping out of your neck.

Jared Dillian

If you enjoyed Jared's article, you can sign up for The 10th Man, a free weekly letter, at mauldineconomics.com. Follow Jared on Twitter @dailydirtnap

The article The 10th Man: Distressed Investing was originally published at mauldineconomics.com.

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Mike Seery: What is the Difference Between Old Crop & New Crop in the Agricultural Commodities?

When analysts and traders talk about agricultural commodities such as soybeans & corn the one thing they generally mention is old crop versus new crop and that might confuse some beginners on what exactly is the difference. I will keep it simple because the only difference between old crop and new crop is that old crop in soybeans is any month other than November as an example is March or May and all months that were grown last year while the new crop is the November soybeans and will be harvested this October of 2015 and will be grown this summer.

That’s why sometimes there is a price difference between the old crop and the new crop because of the fact that this year’s harvest in soybeans could be as high as 4.2 billion bushels pushing prices lower in the November contract as old crop and new crop can also have different carryover levels or supply levels.

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Old crop corn is any month other than the December contract while the new crop is only the December contract which will be grown this summer and harvested in October and sometimes there’s a price difference between old crop and new crop as well because as we will be harvesting around 13.5 billion bushels in October which is the reason why the December corn can be lower than the May corn because that was old crop which was harvested last October also having different supply situations.

Many of the agricultural commodities are affected by old crop & new crop including the grains, meats, coffee, and cotton so if you need help understanding which month you should be trading feel free to give me a call at any time & I will be more than happy to make sure that you are trading the correct month.

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This Weeks Free Webinar....How to Find High Probability Earnings Trades

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In this webinar John will discuss......

  *  Why earnings announcements offer a quarterly opportunity you may want to take off from work for
  *  Why playing big price movement is not the only way to trade around earnings
  *  How to plan around earnings season each quarter so you’re not caught by surprise
  *  How to avoid the common mistake traders make around earnings
  *  The simple way to know which options to trade around earnings so you never pick the wrong one

And much more…..

Don’t worry, if you can’t attend live. We’ll send you a link to the recorded webinar within 24-48 hours. But you must pre-register for the event.

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See you Tuesday,
Ray C. Parrish
aka the Crude Oil Trader


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Beware of Flashy Stock Repurchases When The Market Is on The Rise

By Andrey Dashkov

Retail giant Bed Bath & Beyond just announced plans to buy back another $2 billion in shares, which the company will start doing after it completes its current share repurchase program. You’ve seen it before: Press releases emphasize that buybacks return value to shareholders, analysts sometimes rely on repurchases to spot a stock to write up next, and management likes to tout their focus on shareholder returns. But what’s the real story? Why would a company buy its own shares?


There are but a few situations when returning cash to shareholders instead of paying dividends or investing in new projects is prudent:

• The company has largely exhausted investment opportunities that would generate a positive net present value (NPV).
• The stock is trading below its intrinsic value; or
• The tax on dividends is so high compared to the capital gains tax that it makes sense to boost the share price and let shareholders enjoy the extra return instead of receiving heavily taxed dividends.

When these situations happen we support repurchases. In the reality, however, managers often have their own reasons to buy back shares; let’s look at the more popular ones.

First, management’s compensation is often based on share price performance or earnings based metrics like earnings per share (EPS), which buybacks are designed to boost.

Second, higher share price increases the value of a company’s options. Managers are often shareholders, too, but unlike you and me, they have direct access to the Treasury. When managers own a lot of their own company’s stock, they may have too much skin in the game. This may skew their preferences toward increasing the share price at the expense of long term business growth.

Third, share buybacks became a standard (and often abused) signal to the market that: a) the company’s stock is undervalued, and b) that management takes care of the shareholders. Both of these statements may be correct in isolation, based on the company’s fundamentals and management practices. Nonetheless, a buyback should not convince you that either is true.

One additional reason is often overlooked. Many a CEO has been fired for an acquisition that did not work out. When the decision is made to dump the acquisition, it is accompanied by a write off against earnings, sometimes worth billions of dollars. Wall Street armchair quarterbacks are quick to point out how much better off shareholders would have been if they had just paid out what they lost in dividends. Buying back company shares, with all the accompanied hoopla, is less likely to be a career threatening move.

Linking the two subjects together makes for nice copy; however, keep it in perspective. For example, a technology company that realizes their product line is becoming obsolete will often make acquisitions to increase their product line market share, or move them into a new business with long term potential. Buying back company stock, then having to go into the market and borrow at high interest rates, might be the exact wrong move. The key is making the right acquisitions for the company to continue to grow and pay dividends for the next generation.

In fact, managers have proven to be pretty bad stock pickers even when they have only one stock to pick. As my colleague Chris Wood showed in A Look at Stock Buybacks, managements have bought shares of their own companies at pretty bad times in the past. Moreover, the expectations of higher valuation based on higher EPS did not always materialize. Even though a lot of investors use P/E as their main gauge of value (which they shouldn’t), there is no convincing evidence that buybacks can support high valuation multiples in the long term.

Your Bottom Line

 

History has shown that the only value-creating buybacks were the ones carried out when stocks were deeply undervalued. In those instances, the repurchases helped companies outperform the market. But overall the optimism and confidence inducing press releases that accompany buybacks should be taken with a huge grain of salt.

As a rule of thumb, beware of increased buybacks when the market is on the rise (everybody is an investment guru when everything is going up) or when management compensation is closely tied to the share price performance or earnings based metrics. Companies with better corporate governance may fare better when it comes to managing conflicts of interest, but there is a significant vested interest there that investors should be aware of. Don’t mistake noise for a sign is all.

When it comes to returning value to shareholders, we appreciate companies that invest in long term projects—or pay dividends. Despite the potential tax implications, the yield strapped investors may be better served with a special dividend these days than with a promise of a better price in the future.

Learn more ways to cut through press rhetoric by signing up for our free weekly e-letter, Miller’s Money Weekly, where my colleagues and I share timely financial insight tailored for seniors and conservative investors alike.

Sign up here, and we’ll send a complimentary copy straight to your inbox every Thursday

The article Beware of Flashy Stock Repurchases When The Market Is on The Rise was originally published at Millers Money

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Fundamentals Rendered Irrelevant by Fed Actions: Probability Based Option Trading

The fundamental backdrop behind the ramp higher in equity prices in 2013 is far from inspiring. However, fundamentals do not matter when the Federal Reserve is flooding U.S. financial markets with an ocean of freshly printed fiat dollars.

As we approach the holiday season, retail stores are usually in a position of strength. However, this year holiday sales are expected to be lower than the previous year based on analysts commentary and surveys that have been completed. This holiday season analysts are not expecting strong sales growth. However, in light of all of this U.S. stocks continue to move higher.

Earnings growth, sales growth, or strong management are irrelevant in determining price action in today’s stock market. In fact, the entire business cycle has been replaced with the quantitative easing and a Federal Reserve that is inflating two massive bubbles simultaneously.

Through artificially low interest rates largely resulting from bond buying, the Federal Reserve has created a bubble in Treasury bonds. In addition to the Treasury bubble, we are seeing wild price action in equity markets as hot money flows seek a higher return. Usually fundamentals such as earnings, earnings estimates, and profitability drive stock prices.

However, as can be here the U.S. stock market is being driven by something totally different......Read "Fundamentals Rendered Irrelevant by Fed Actions: Probability Based Option Trading"



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Why Investors Must Be Cautious At These Prices

Last week on October 8th the financial market experienced a broad based sell off. Every sector was down with utilities being the only exception.

The individual leadership stocks, which are typically small to mid-cap companies (IWM – Russell 2K) that have a strong history and outlook of earnings growth, were hit hard as well.

Whenever the broad market experiences a price correction, one of the most important factors I analyze is how well leading stocks hold up and show relative strength to the broad market.

So, where does this leave us going forward?

When stocks that have been leading the market higher and only pausing during market corrections in the S&P500, Dow, and NASDAQ, it’s a positive sign. This tells us investors and big money continues to flow into the risk on assets (stocks).

Conversely, when these leading stocks/sectors begin succumbing to the selling pressure of the broad market, it quickly grabs my attention and tells us it’s time to be aware that a major top may be forming.

It looks as though the broad market rally is just barely hanging on. If the leading stocks and sectors begin breaking below their 50 day moving averages, my proprietary SP500 Market Timing & Trading System will shift to sell mode and things could get ugly for those who do not know how to trade a bear market.

Here's our chart work including videos for "Why Investors Must Be Cautious At These Prices"



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SDRL - Seadrill announces second quarter 2013 results

Consolidated revenues for SeaDrill in the second quarter of 2013 were US$1,268 million compared to US$1,265 million in the first quarter of 2013. The increase was despite the sale of the tender rig business, which operated for only 30 days in the quarter, resulting in a US$100 million revenue decline from 1Q 2013. Overall improvement in fleet performance more than offset this revenue reduction.

Operating profit for the quarter was US$507 million compared to US$552 million in the preceding quarter. The decrease is driven by gain on sale of the West Janus in the first quarter, offset by lower operating and SG&A expenses during the second quarter.

*      Seadrill reports its best operating results and net income ever and generated second quarter 2013 EBITDA*) of US$665 million

*     Seadrill reports second quarter 2013 net income of US$1,750 million and earnings per share of US$3.68

*     Seadrill increases the ordinary quarterly cash dividend by 3 cents to US$0.91

*     Economic utilization for floaters increased to 94% in Q2 2013 from 92% in Q1 2013

*     Economic utilization for the jack-up fleet in Q2 2013 was 98%, down from 99% in Q1 2013

*     Seadrill secured a three-year contract for the newbuild drillship West Neptune with a total estimated revenue potential of US$662 million

*     Seadrill realized a gain of US$1,256 million from the sale of the tender rig division to SapuraKencana Petroleum for a total consideration of US$2.9 billion

*    Seadrill completed the sale of the tender rig T-15 to Seadrill Partners LLC (SDLP) for a total consideration of US$210 million

*    Seadrill ordered two jack-ups for a total estimated project price of US$230 million per rig, with deliveries in 4Q 2015 and 1Q 2016

*     Seadrill and SapuraKencana joint project secured an eight year contract for three Pipe Laying Support Vessels with a total estimated revenue potential of US$2.7 billion

*     North Atlantic Drilling completes sale and leaseback transaction for the newbuild harsh environment jack-up West Linus for US$600 million


Subsequent events

*     Seadrill appoints Per Wullf as CEO to take over from Fredrik Halvorsen

*     Seadrill orders four ultra-deepwater drillships for an estimated project price below US$600 million per rig, with deliveries scheduled for the second half of 2015

*     Seadrill orders two jack-ups for an estimated project price of US$230 million per rig, with deliveries in the second and third quarters of 2016, respectively

*     Seadrill reaches 50.1% ownership in Sevan Drilling and launches mandatory offer for all outstanding shares which closed on August 22, 2013

*     Seadrill secures a 180 day contract for the newbuild ultra-deepwater drillship West Tellus with a total estimated revenue potential of US$150 million

*     Seadrill secures a 2.5 year contract for the jack-up rig West Freedom with a total estimated revenue potential of US$222 million

*     Seadrill secures a one year contract extension with Talisman in Malaysia for the jack-up rig West Vigilant at US$167,000 per day

*     North Atlantic Drilling is awarded an extension of the current drilling contract, in addition to a new drilling contract for West Navigator, securing employment to December 2014 with a total estimated revenue potential of US$98 million

Click here for complete earnings report and consolidated financial information

Here's a FREE Trend Analysis for SeaDrill....ticker SDRL

Doubting your ability to pick the perfect stock?

Our trading partners at Premier Trader University are gearing up for another great free webinar on Thursday. This week we'll be focusing on trading ETF's around earnings season. This is especially interesting if you have been doubting your ability to pick the perfect stock?

Why not skip the pressure. Exchange Traded Funds (ETFs) are traded in a basket so you don't have to pick just one.

In this webinar, we'll tell you our favorite ETFs to trade with Options. With these hidden gems, you'll receive exposure to different countries trading just a single product. Plus, we'll let you in on a little secret, trading ETFs are a perfect for trading around earnings seasons. And we'll show you how it's done.

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See you Thursday,

Ray @ The Crude Oil Trader

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Devon Energy Reports Second Quarter 2013 Results

Devon Energy Corporation (NYSE:DVN) today reported net earnings of $683 million or $1.69 per common share ($1.68 per diluted share) for the quarter ended June 30, 2013. This compares with the second-quarter 2012 net earnings of $477 million or $1.18 per common share ($1.18 per diluted share).

Adjusting for items securities analysts typically exclude from their published estimates, the company earned $491 million or $1.21 per diluted share in the second quarter. This adjusted earnings result represents a 119 percent increase compared to the second quarter of 2012.

Record Production Driven By Strong Oil Growth

Total production increased to an average of 698,000 oil equivalent barrels (Boe) per day in the second quarter of 2013, exceeding the top end of the company’s guidance range by 8,000 barrels per day. This is the highest average daily rate in Devon’s history from its North American property base. Second quarter production benefited from better than expected results from several core development areas, including the Permian Basin and Barnett Shale.

Read the entire Devon Energy earnings report


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Atlas Pipeline Partners Reports Second Quarter 2013 Results

Atlas Pipeline Partners (NYSE: APL) today reported adjusted earnings before interest, income taxes, depreciation and amortization ("Adjusted EBITDA"), of $86.3 million for the second quarter of 2013, driven primarily by a continued increase in volumes across the Partnership's gathering and processing systems. Processed natural gas volumes averaged 1,253 million cubic feet per day ("MMCFD"), an 84.0% increase over the second quarter of 2012. Distributable Cash Flow was $58.0 million for the second quarter of 2013, or $0.78 per average common limited partner unit, compared to $32.8 million for the prior year's second quarter. The Partnership recognized net income of $10.1 million for the second quarter of 2013, compared with net income of $74.9 million for the prior year's second quarter.

Adjusted EBITDA and Distributable Cash Flow are non-GAAP financial measures, which are reconciled to their most directly comparable GAAP measures in the tables included at the end of this news release. The Partnership believes these measures provide a more accurate comparison of the operating results for the periods presented.

On July 23, 2013, the Partnership declared a distribution for the second quarter of 2013 of $0.62 per common limited partner unit to holders of record on August 7, 2013, which will be paid on August 14, 2013. This distribution represents Distributable Cash Flow coverage per limited partner unit of approximately 1.07x on a fully diluted basis for the second quarter of 2013.

Read the entire Atlas Pipeline Partners earnings report
 

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Chevron Reports Second Quarter Earnings.....Misses by $0.21, Beats on Revenue

Chevron Corporation (NYSE: CVX) today reported earnings of $5.4 billion ($2.77 per share – diluted) for the second quarter 2013, compared with $7.2 billion ($3.66 per share – diluted) in the 2012 second quarter. Sales and other operating revenues in the second quarter 2013 were $55 billion, compared to $60 billion in the year ago period.

"Our second quarter earnings were down from the very strong level of a year ago,” said Chairman and CEO John Watson. “The decrease was largely due to softer market conditions for crude oil and refined products. Earnings were also reduced as a result of repair and maintenance activities in our U.S. refineries.”

“We continue to advance our major capital projects. An important milestone was achieved in the second quarter with the loading of the first cargo of liquefied natural gas at the Angola LNG project, one of the largest energy projects on the African continent.” Watson continued,“ This marks an important step in the development of our LNG business. Additional LNG growth is expected in the coming years from our Gorgon and Wheatstone projects in Australia.

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Exxon Shares Fall after Big Earnings Miss

ExxonMobil's (XOM) $1.55 EPS, which fell far short of expectations, was the company's lowest EPS since Sept. 2010. (Q2 results)

Earned $6.86B on revenue of $106.47B billion after earning $15.9B on revenue of $127.36B in the year ago quarter when results were inflated by the sale of the Japanese lubricants division; removing those effects, net income fell 19%.

Upstream earnings were $6.3B, down 24.5% year over year, downstream earnings were $396M, down from $6.6B a year ago which included a $5.3 billion gain related to the Japan sale. Oil and gas production fell 1.9%.

Read the entire ExxonMobil earnings report



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Murphy Oil Corp. Reports 2nd Quarter 2013 Earnings

Murphy Oil Corporation (NYSE: MUR) announced today that net income was $402.6 million ($2.12 per diluted share) in the 2013 second quarter, up from $295.4 million ($1.52 per diluted share) in the second quarter 2012. Net income in the 2013 quarter included income from discontinued operations of $70.5 million ($0.37 per diluted share) compared to income from discontinued operations of $4.1 million ($0.02 per diluted share) in the 2012 quarter.

The 2013 income from discontinued operations was primarily generated by an after tax gain of $71.9 million from sale of the Mungo and Monan fields in the United Kingdom during the just completed quarter. Income from continuing operations was $332.1 million ($1.75 per diluted share) for the 2013 second quarter compared to $291.3 million ($1.50 per diluted share) in the same quarter of 2012.

The results of continuing operations improved in 2013 primarily due to higher earnings in the U.S. oil and gas business, which was attributable to growth in oil production in the Eagle Ford Shale area in South Texas.

Read the entire Murphy Oil Corp. earnings report.


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Hess Reports Second Quarter 2013 Earnings

Hess [HES] today reported net income of $1,431 million for the quarter ending June 30th 2013. Hess beats by $0.09, misses on revenue. 2nd quarter EPS of $1.51 beats by $0.09. Revenue of $4.11B misses by $0.95B

Hess says proceeds from $3.5B in asset sales made so far in 2013 have allowed it cut debts by $2.4B and add cash to its books. Will book $933M income from the $2.05B sale of Samara-Nafta to Lukoil made in April; without the sale, Q2 net income fell to $520M from $549M in the year-ago period.

The Russian divestment and other sales sent Q2 production falling to 341K boe from 429K boe a year ago, but output was within 340K-355K boe guidance.

Read the entire Hess earnings report

 
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Ensco and National Oilwell Varco Report Second Quarter Earnings ESV NOV

National Oilwell Varco (NYSE: NOV) today reported that for its second quarter ended June 30, 2013 it earned net income of $531 million, or $1.24 per fully diluted share, compared to first quarter ended March 31, 2013 net income of $502 million, or $1.17 per fully diluted share. Excluding transaction charges of $57 million pre-tax, second quarter 2013 net income was $568 million, or $1.33 per fully diluted share.

The Company’s revenues for the second quarter of 2013 were $5.60 billion, which improved six percent from the first quarter of 2013 and 18 percent from the second quarter of 2012. Operating profit for the second quarter of 2013 was $826 million, or 14.7 percent of sales, excluding transaction charges.

Backlog for capital equipment orders for the Company’s Rig Technology segment was at a historic record level of $13.95 billion as of June 30, 2013, up eight percent from the end of the first quarter of 2013 and up 24 percent from the end of the second quarter of 2012. New orders during the quarter were $3.15 billion, reflecting continued strong demand for oilfield equipment.

Pete Miller, Chairman and CEO of National Oilwell Varco, remarked, “The second quarter of 2013 marked another solid quarter for NOV. Despite seasonal slowdowns in Canada and a challenging US market, the Company produced sequential gains in revenues and earnings, which were largely driven by strong revenues out of backlog and significant international growth within our Petroleum Services & Supplies and Distribution & Transmission segments.

The Company also ended the quarter with an all-time record backlog of capital equipment, as orders for new floaters and jackups continued at a strong pace, and orders for our floating production equipment more than doubled from the first quarter.” Miller continued, “In addition to our solid operating results, we are also proud to have doubled our regular dividend in the second quarter, further demonstrating our commitment to return more cash to our shareholders. As we move through the second half of 2013, we look forward to continued demand for our offshore drilling and floating production equipment, a gradual rebound in Canada, and continued growth from our other international operations.”

Read the entire National Oilwell Varco earnings report

Ensco plc (NYSE: ESV) reported diluted earnings per share from continuing operations of $1.55 in second quarter 2013, compared to $1.45 per share in second quarter 2012. Discontinued operations primarily related to rigs and other assets no longer on the Company’s balance sheet resulted in a gain of $0.02 per share a year ago. Diluted earnings per share increased to $1.55 from $1.47 in second quarter 2012.

Chairman, President and Chief Executive Officer Dan Rabun stated, “We continue to see strong, broad-based customer demand given the steady pace of new discoveries that must be appraised and developed. Based on our positive outlook, we recently ordered our eighth Samsung DP3 drillship, ENSCO DS-10, and our seventh Keppel FELS B Class jackup, ENSCO 110.”

Mr. Rabun added, “These new assets reinforce our fleet standardization strategy that provides customers consistently high levels of operational excellence.”

Revenues grew 17% to a record $1.248 billion in second quarter 2013 from $1.071 billion a year ago. Operating income grew 12% to $452 million and earnings increased $20 million to a record $361 million. The addition of ENSCO 8506 and ENSCO DS-6 to the active fleet as well as a full quarter of operations for ENSCO 8505 drove these increases. The average day rate for the fleet increased $36,000 year to year to $228,000.

Contract drilling expense was $607 million, up from $494 million in second quarter 2012. This increase was primarily due to adding new floaters to the active fleet as well as a previously anticipated increase in labor costs.

Depreciation expense was $153 million compared to $136 million a year ago. The $17 million increase was mostly due to a growing active fleet. General and administrative expense was $36 million in second quarter 2013, equal to second quarter 2012.

Interest expense in second quarter 2013 was $44 million, net of $13 million of interest that was capitalized, compared to interest expense of $30 million in second quarter 2012, net of $28 million of interest that was capitalized.

Read the entire Ensco earnings report



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Anadarko and Superior Energy Report 2nd Quarter Earnings

Anadarko Petroleum Corporation (NYSE: APC) today announced second quarter 2013 net income attributable to common stockholders of $929 million, or $1.83 per share (diluted). These results include certain items typically excluded by the investment community in published estimates. In total, these items increased net income by approximately $392 million, or $0.78 per share (diluted), on an after tax basis.(1) Cash flow from operating activities in the second quarter of 2013 was approximately $2.502 billion, and discretionary cash flow totaled $1.908 billion.(2)

Second Quarter 2013 Highlights

    *    Generated $290 million of adjusted free cash flow(2)
    *    Increased U.S. onshore oil volumes by almost 20,000 barrels per day over second-quarter 2012
    *    Reached milestones at four large scale oil projects in Algeria, Ghana and the Gulf of Mexico
    *    Drilled five deepwater discoveries in the Gulf of Mexico and Mozambique

"We continue to have exceptional performance from our portfolio, as evidenced by the results delivered in the second quarter of 2013," said Anadarko Chairman, President and CEO Al Walker. "Our U.S. onshore activities delivered year over year oil growth of 25 percent, averaging approximately 97,000 barrels per day during the quarter. We continued to drive significant improvements into our drilling and completions programs, and costs in each category were favorable to our expectations.

We reached milestones at four of our large global oil projects, which are advancing on schedule and on budget, and we achieved a success rate of almost 70 percent in our deepwater exploration/appraisal program, including five new discoveries. We also strengthened the balance sheet, improving our net debt to adjusted capitalization ratio(2) to 29 percent compared to 34 percent at the end of 2012."

Read the entire Anadarko earnings report

Superior Energy Services (NYSE: SPN) today announced net income of $68.6 million, or $0.43 per diluted share, on revenue of $1,159.7 million for the second quarter of 2013.

These results compare with the second quarter of 2012 net income from continuing operations of $142.8 million, or $0.90 per diluted share, and net income of $141.9 million, or $0.89 per diluted share, on revenue of $1,243.3 million.

For the six months ended June 30, 2013, the Company recorded net income of $132.3 million, or $0.82 per diluted share, on revenue of $2,295.2 million. For the six months ended June 30, 2012, the Company recorded net income from continuing operations of $213.0 million, or $1.49 per diluted share, and net income of $195.8 million, or $1.37 per diluted share, on revenue of $2,210.2 million.

David Dunlap, President and CEO of the Company, commented, "As previously announced, our decision to relocate pressure pumping equipment coupled with a slowdown in Mexico and weather in North Dakota impacted our results. However, this was partially offset by some underlying positives during the quarter including improved profit margins, increasing Gulf of Mexico activity and execution of our international growth strategy.

"We were able to slightly increase profit margins for the second consecutive quarter in the Onshore Completions and Workover segment despite downtime in pressure pumping related to equipment relocation and downtime for most services impacted by poor weather in North Dakota. This was achieved by our disciplined approach of maintaining margins rather than growing market share.

"Gulf of Mexico activity has increased at a rapid pace relative to last year with increases coming across our three business segments with operations in the Gulf. Our Gulf of Mexico revenue for the first six months of 2013 increased 34% over the first six months of 2012. Drilling Products and Services segment revenue in the first half of 2013 has increased 30% over the first half of 2012 due to increased deepwater drilling activity. In addition, our Subsea and Technical Solutions segment revenue in the Gulf is 29% higher as a result of a robust market for completion tools and products.

Finally, our international revenue for the first six months of 2013 has increased 13% over the first half of 2012 as growth plans in Brazil, Colombia and Argentina collectively performed as anticipated and in some cases, ahead of schedule."

Read the entire Superior Energy earnings report


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