'This is what a bear market feels like'...
'This is what a bear market feels like'... The historic oil deal is already in doubt... An update on Big Oil dividends... How to get started with short-selling...
Yesterday, the benchmark S&P 500 Index closed with its first three-day winning streak of 2016. As I write, stocks are up more than 5% since hitting new 52-week lows last week.
But before you become too bullish, it's important to keep the moves in perspective...
Since topping last May, U.S. stocks are clearly in a downtrend – defined by a series of lower highs and lower lows.
They're also trading well below both their 200-day moving average and their 20-month exponential moving average. If you're not familiar, these are two tools many professional traders use to judge the market's long-term trend. The S&P 500 broke below both these lines last month, signaling that the long-term trend is now bearish.
Of course, we have no crystal ball... If anyone tells you they know for certain where the market is headed, we suggest you reconsider where you're getting your advice. But the weight of the evidence says there is likely more downside to come.
Stansberry Short Report editor Jeff Clark agrees... He says the sharp rally of the past few days is classic bear market "behavior." As he told his subscribers in a note on his real-time Direct Line blog yesterday afternoon...
Take note of your emotions right now. Because this is what a bear market rally feels like. And, we'll probably see a lot of them this year.
When most folks think of a bear market, they often picture an outright crash... But history shows that's rare.
Instead, most bear markets are made up of a series of big declines (where stocks become extremely oversold and investors become extremely bearish) followed by violent rallies (which relieve those extremes and set the stage for the next decline).
In fact, nine of the top 10 biggest rallies in history took place during the severe bear markets of the Great Depression and the 2008 financial crisis. (Of note, the only exception was in 1987, when stocks rose 10% in a single day after crashing 22% two days earlier. This wasn't officially a "bear market" rally, but it did follow the largest one-day decline in history.)
Jeff's recommendations are designed for short-term traders rather than longer-term investors. So they may not apply to you. But we believe his advice about managing your emotions in a bear market is valuable for all our readers, so we're sharing a portion of his note below...
To profit off of bear market rallies, you have to be willing to buy when conditions get oversold – like we saw last Thursday. It's tough to do, because it usually happens at a time when the market looks like it's going to fall off a cliff, and when everybody else you know is talking about shorting stocks.
But, if you don't buy in anticipation of an oversold rally, the bear is not likely to let you in easily. The market usually gaps higher (like it did on Friday), leaving everyone in the dust.
The initial move is usually quite strong. Indeed, almost all of the largest, single-day gains in the market have occurred during bear markets.
As Jeff explained, you want to start taking profits when conditions move from oversold to overbought...
This will be easy. You've made money while most other traders missed the boat. And you'll happily take the gains off the table.
And the market will continue higher. That's when your emotions will cause a problem.
You'll kick yourself for not holding out for even larger gains. You'll start listening to other traders who, having missed the chance to buy at the bottom and having been buried on their short trades, are now proclaiming the correction is over and it's time to buy. And you'll start chasing stocks that have already popped 10%-15% higher in just a few days.
That's usually just about when the bounce ends and the bear makes another appearance.
Insight like this is just one of the reasons Porter recently named Jeff's Stansberry Short Report one of the top five publications he thinks every subscriber should be reading during this bear market.
In the Direct Line, Jeff shares his latest thoughts and trading ideas in real time throughout the day... And it's available free of charge to every Stansberry Short Report subscriber.
If you're not already a subscriber to the Stansberry Short Report, click here to learn how you can try it now – along with everything else we publish – for a fraction of the normal subscription cost.
Well, that didn't last long...
On Tuesday, we discussed news of a tentative oil deal between Russia and Saudi Arabia. In short, the world's top two oil producers agreed to "freeze" production at last month's record levels... so long as fellow members of the Organization of the Petroleum Exporting Countries ("OPEC"), Iraq and Iran, agreed to do the same.
And today, we see Iran and Iraq have already put the deal in doubt...
In a statement yesterday, Iranian oil minister Bijan Zanganeh was positive about the deal. "This is the first step and other steps should also be taken," he explained. "This cooperation between OPEC and non-OPEC members to stabilize the market is good news. We support any effort to stabilize the market and prices."
But while he said Iran "welcomes" cooperation between OPEC and non-OPEC producers, what he didn't say could be more important... He offered no indication that Iran itself was willing to freeze production, which the deal would require.
A separate statement from Iran's OPEC envoy, Mehdi Asali, may offer clues to its real thoughts on that matter. "Asking Iran to freeze its oil production level is illogical," he said. "When Iran was under sanctions, some countries raised their output and they caused the drop in oil prices."
In a statement this morning, Iraqi oil minister Adel Abdul Mahdi also said his country supports cooperation...
The deterioration of the oil prices has directly impacted the global economy and the historical responsibly of the producers requires great speed in finding positive solutions that will help prices return to the normal [levels].
But he, too, stopped short of saying Iraq would agree to freeze its production.
As we discussed on Tuesday, it's possible that a real deal could be struck. But we aren't holding our breath.
Stansberry Resource Report editor Matt Badiali agrees. As he explained in yesterday's issue of our free Growth Stock Wire e-letter, no matter what Iran says publicly, it's extremely unlikely to ever agree to this deal...
The deal is contingent on Iran's agreement. And if you know anything about Iran and Saudi Arabia's relationship, you know this deal is already in doubt. Saudi Arabia and Iran's relationship is terrible, and Iran isn't about to agree to restrict oil production right now after 35 years of sanctions.
Iran plans to increase production between 500,000 and 1 million barrels of oil per day. That will add much-needed foreign currency to Iran's economy. If the deal between Saudi Arabia and Russia hinges on Iran, it's dead in the water already.
More important, Matt says even if a deal is somehow reached, simply freezing production at current levels won't "fix" low oil prices...
The only way for oil prices to rise from here is if world demand increases and we're able to consume the oil surplus. Oil-production freezes like this are useless political baloney. They don't fix the fundamental issue... and that's what really matters.
Switching gears a bit, you might remember Matt made another big oil prediction last fall.
In short, Matt said the decline in oil prices could lead to the "impossible." As he wrote in the October issue of the Stansberry Resource Report...
The "impossible" in this case is the failure of one of the surest, safest income streams in the world. To many, this income stream is sacrosanct... a foundational aspect of the family holdings, like grandma's ring or the family farm.
Are the dividend payments of the world's blue-chip oil companies safe?
People all over the world are familiar with the firms we're talking about. You can hardly go anywhere without seeing the logos of major oil firms like ExxonMobil, Chevron, Royal Dutch Shell, and BP (formerly British Petroleum). Because of their dominant position in the energy food chain, these resource companies are among the most reliable in the world... known for their steady cash flows and reliable dividend payments... which are nearly as reliable as the rising sun.
This month, we're suggesting the impossible: Some of these dividends will be cut.
Matt predicted that one or more of these companies could be forced to cut their dividends or take extreme measures – like loading up on even more debt or selling off assets – to keep paying them. He also singled out Royal Dutch Shell (RDS-A) as the biggest risk of the group.
So far, these firms have avoided that fate. But recent news suggests Matt's prediction could soon come true...
Two weeks ago, we noted that $42 billion oil producer ConocoPhillips (COP) slashed its quarterly dividend 66%, from $0.74 to $0.25 per share. Last week, $18 billion oil producer Anadarko Petroleum (APC) cut its dividend 81% to just $0.05 per share. And yesterday, $8 billion oil producer Devon Energy (DVN) announced it was slashing its dividend 75% to $0.06 per share.
These companies aren't in the same league as giants like ExxonMobil (XOM) and BP (BP)... but they aren't exactly penny stocks, either. These are large, established oil companies with long histories of consistent dividend payments.
Seeing these "second-tier" companies in trouble could mean the blue-chip producers are next. And that's not just conjecture. We're already seeing signs of trouble...
As we discussed earlier this month, BP announced a 91% decline in earnings and a record annual loss of $5.2 billion last quarter. While it reaffirmed its dividend payment for now, it admitted it would be taking on billions of dollars in additional debt to maintain it.
Matt shared his latest thoughts on the situation in a private e-mail this morning...
Big Oil is going to keep paying dividends, at the expense of current shareholders. BP, ExxonMobil, and Chevron are all borrowing big to maintain dividend payments. Debt is the only thing going up. Cash from operations is down by one-third across the board and debt is up more than 20% on average.
That's like you taking a 30% pay cut and running up huge credit-card debts. It's unsustainable, but that's the choice these companies are making. Dividends are a status symbol. If you cut them, you are clearly in trouble. None of these companies' CEOs wants to lose his job over a dividend cut... so they'll keep running up debt to prevent it from happening.
I'm still most concerned about Shell. Its merger with BG Group was poorly conceived at the start, but with oil prices this low, it could devastate the company. The breakeven oil price for the deal to work was $60 per barrel. Today's oil price means Shell overpaid. Plus, Shell used up most of its cash reserves ($20 billion) on the deal, too. What you are left with is a company that has to dump assets and borrow money to keep paying dividends. Shell is going to end up a much smaller, much more indebted company shortly.
Finally, we'll end today's Digest with a reminder...
Since Porter began warning readers about a bear market last fall, we've received more questions about selling stocks short than just about any other topic.
If you'd like to learn more about short-selling, be sure to read the newest module in our Bear Market Survival Program tomorrow.
Module 5 will detail how short-selling works, how to use it to protect your portfolio and profit as stocks fall, and even share a list of some of our top short-sale candidates today.
Bear Market Survival Program subscribers can expect to receive Module 5 tomorrow afternoon. If you haven't joined us yet, click here to learn more.
New 52-week highs (as of 2/17/16): Kaminak Gold (KAM.V) and Sysco (SYY).
In today's mailbag, an angry subscriber is confused... and more praise for the Stansberry Flex program. Send your notes to feedback@stansberryresearch.com.
"What the f@#$? For a few guys who switch every day subscriptions on Flex, you will change and punish all honest subscribers? Punish them, not the entirely community! In 2 years I switch subscriptions for 3-4 times and now I am ok. I have what I need. I don't need changes! I pay my part of the deal and expect you will do the same. After all, only by keeping our word, to better or worse, define us as a Man. I hope you will have the same day as I had, after I read your mail." – Paid-up subscriber I.A.
Brill comment: We think you've misunderstood...
We're not changing our Stansberry Flex service. We're going to continue to allow existing subscribers to switch their subscriptions whenever necessary... even if that means some subscribers continue to exploit the loophole.
Instead, effective next month, we're no longer going to offer new subscriptions to Stansberry Flex. Of course, existing Stansberry Flex subscribers will continue to receive lifetime access to their publications as promised.
Out of fairness to our new subscribers, we're allowing folks one last chance to join the program before we shut the offer down permanently.
After that, if you want access to our full range of publications, you'll have to subscribe to each of them individually, or subscribe to our full Stansberry Alliance lifetime program for $25,000. Click here to learn more about Stansberry Flex before this offer closes next month.
"As a Flex member since I joined Stansberry a few years ago, I am surprised you need to sell the offering. It is clearly the best deal. (And I am not one of the bad guys; I have only switched letters a handful of times to find the analysts that fit my style). P.J. is a great addition to your content. I have been a fan for years. No better person to analyze politics for the Stansberry network. Cheers" – Paid-up subscriber Craig K.
"Porter, I support you in closing the FLEX program. It was a great idea, but it is infuriating that some members were 'working the system' far beyond its intent and to the unnecessary work for your staff, not to mention acting like Alliance members but sidestepping the fee. I think your alternative was extremely fair, but if those set upon stealing the work of your researchers, editors, etc., are going to be blatant and nasty – big surprise considering what they are doing – then I think you are wise to close the door. If there was a hole in the bottom of your boat, no question you would stop the leak.
"The only sad part is that this allows those already cheating the clear intentions of the Flex program to continue. And it makes it unavailable to new people who could clearly benefit. But you are clearly in the right, and I am glad to see at least future efforts by others to bypass the intent of the program thwarted. Pretty pompous for the abusers to claim you were not keeping your word when they have been hurting the business and stealing your work. I'd like to think the vast majority of members would agree with you.
"My father used to advise us to do what was both right and smart. These people may think they are smart, but it is their values and morality that are questionable. Too bad you cannot print the names of the abusers so they might receive some of the humiliation due to them, but from what we know of their misuse of a good business opportunity, they would probably be on the doorstep in Baltimore with their lawyers. With great respect and high regards." – Paid-up subscriber Ginger F.
Regards,
Justin Brill
Baltimore, Maryland
February 18, 2016
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