One of America's Last Icons Has Fallen
One of America's last icons has fallen... Another of Porter's shocking predictions has come true... Apple's terrible earnings... More interest-rate insanity... A mind-blowing report from Japan... P.J. O'Rourke: The 'bright side' of the 2016 presidential election...
In an unexpected announcement yesterday, ratings agency Standard and Poor's downgraded oil giant ExxonMobil (XOM) from its top rating of "AAA"...
This is a big deal.
The company's debt has held this top rating since 1930. That's 86 consecutive years, including the worst of the Great Depression.
The move leaves just two publicly traded U.S. companies with triple-A-rated credit: Microsoft (MSFT) and Johnson & Johnson (JNJ). Even the U.S. government no longer holds this rating.
As recently as the early 1980s, as many as 60 companies held triple-A ratings. By the early 2000s, the list had dwindled to less than 15.
Following the 2008 financial crisis – which saw several big names like Warren Buffett's Berkshire Hathaway (BRK), General Electric (GE), and pharmaceutical giant Pfizer (PFE) lose their "AAA" ratings – just four remained.
Before ExxonMobil, business-services firm Automatic Data Processing (ADP) was the last to lose this status in 2014.
Clearly, the crash in oil prices played a big role. But there is more to the story.
After all, Exxon maintained this rating for the better part of a century. It managed to hold on to it through the Great Depression, World War II, two energy crises in the 1970s, a 78% crash in oil prices in 2008, and countless other busts.
So what was different this time? In a word... debt. As the Wall Street Journal reported last night (emphasis added)...
The company's willingness to go into debt to fund its capital spending and keep paying out dividends even as oil prices plunged from highs of over $100 a barrel to as low as $26 has taken a toll on its balance sheet.
Its total debt, which stood at $38.7 billion at the end of last year, has more than tripled since 2012, according to S&P Global Market Intelligence...
In downgrading Exxon by one notch to double-A-plus, S&P cited the company's rising debt level and said dividend payments and share repurchases "substantially exceeded" internally generated cash flow.
The timing of the move was unexpected, but it shouldn't come as a surprise to regular Digest readers. Porter predicted this exact scenario last summer. From the September 4 Digest...
ExxonMobil is a triple-A-rated, global corporation. Its management team is considered to be the best in the world. I can't think of another financial writer who would ever question the safety or soundness of Exxon's management team. But... look at the numbers.
Over the last 10 years, Exxon spent $211 billion buying back its own stock, and $88 billion on cash dividends. Over the same period, it earned $242 billion in free cash flow (that's cash from operations, minus capital investments). So in just 10 years, Exxon has added $57 billion in debt, primarily to fund its share repurchases. That's a significant and material increase, representing about 20% of the company's market capitalization today.
Here's a prediction... as credit tightens and defaults rise – especially in the oil industry – Exxon will be placed on credit watch. Eventually it will lose its triple-A status.
How did Exxon respond to the news? By raising its dividend, of course.
This morning, the company announced it would increase its annual dividend by $0.02 to $0.75 per share. You just can't make this stuff up.
Now, new readers may be wondering if the downgrade is really a problem. If companies like Berkshire Hathaway – and even the U.S. government – are no longer rated "AAA," do these ratings even matter anymore? That's a good point...
A triple-A rating used to offer companies a significant advantage. It wasn't just a bragging right... It meant they could borrow money much more cheaply than others.
Thanks to the global bubble in cheap credit – courtesy of the Federal Reserve and other central banks – even poorly rated companies have been able to borrow at absurdly low rates. More on this later...
But the downgrade does matter in another important way. You can think of Exxon as a "canary in the coal mine" for a much larger problem. As Porter explained it in that Digest...
If the most creditworthy corporation in America can screw up its balance sheet during a 10-year credit binge, there's a very high likelihood that at least some of the management teams in your portfolio have done the same – or far worse.
In short, the crash in oil prices meant energy companies were the first to feel the effects of tightening credit. But they were far from alone in loading up on massive amounts of debt.
Cheap debt has encouraged many companies to use share buybacks and other forms of financial engineering to cover up a decline in real earnings. As the credit cycle turns, we could see a repeat of the recent problems in the energy sector, but on an even larger scale.
Of course, a desperate Federal Reserve could find a way to delay the inevitable, and keep the bubble going awhile longer.
Speaking of earnings declines, consumer-electronics giant Apple (AAPL) reported its latest quarterly results last night. And they were even worse than Wall Street analysts feared...
Apple reported revenues of just $50.6 billion. That's a year-over-year decline of nearly 13%, and its first quarterly decline in 13 years. Analysts were expecting revenues to decline just 10%.
The company earned a profit of $10.52 billion, or $1.90 per share, for the quarter... a 22% year-over-year decline. It also reduced this quarter's revenue guidance to between $41 billion and $43 billion, compared with previous expectations of $43.2 billion.
Despite the slowdown in earnings, the company raised its quarterly dividend by 10% to $0.57 per share. It also said it intends to increase its ongoing stock-buyback program by $35 billion to $170 billion through March 2018.
Shares fell as much as 10% this morning, but closed down 6.3%.
As you might expect, the iPhone was blamed for most of the decline in revenues.
Since Apple introduced it in 2007, iPhone sales increased every quarter for eight straight years. That streak has now ended.
The company said it sold 51.2 million iPhones last quarter, a 17% decline from a year ago.
Apple CEO Tim Cook suggested the decline was due to the popularity of its previous model, the iPhone 6. He said fewer users were upgrading to the new iPhone 6S as a result. He also noted that more Android smartphone users had switched to iPhones in the last six months than in any previous six-month period.
As we've discussed, Apple is already cheap. It's priced like it will never grow again. We wouldn't count the company out just yet... but even if that's true, it doesn't really matter.
Apple isn't going to disappear. Millions of people are obsessed with its products. It could easily become the next Altria (MO)... a stable, boring company that pays out growing dividends for decades.
Still, we can't help but notice the slowdown in iPhone sales is mirrored by a slowdown in the broader smartphone market. And Apple is just one of several companies – in a range of different sectors – reporting weaker-than-expected earnings this quarter.
Perhaps the U.S. economy isn't as healthy as the official data suggest?
As we write, the Federal Reserve is holding its latest policy meeting. No change in interest rates is expected at today's announcement, but the Fed is still widely expected to raise rates at least one more time this year.
Don't be fooled... If this weakness continues, it's only a matter of time before the Fed changes course and steps in again. Whether that's simply a rate cut, negative interest rates, or buying stocks directly (see below), you can bet the Fed will do something.
Earlier, we mentioned companies borrowing money at absurdly low rates. But today, we can report a new record in insanity...
According to the Wall Street Journal, European consumer-goods company Unilever (UN) just sold 300 million euros of five-year bonds that yield virtually nothing. From the article...
In one tranche of the 1.5 billion euro debt sale, the Anglo-Dutch company sold 300 million euros of bonds maturing in 2020 with a coupon of 0%, offering investors a yield of just 0.08%.
Those bonds are one of the lowest-yielding euro corporate debt sales on record, and highlight how unprecedented central bank stimulus measures continue to push down financing costs throughout debt markets.
That's right... Thanks to the European Central Bank's negative interest rates and massive quantitative easing ("QE") program, governments aren't the only ones who can borrow money for free. Corporations can do it, too.
If companies have been binging on cheap debt, just imagine what could happen when it's free.
Unfortunately, that's not even the craziest central bank news we can report today...
You see, Japan's central bank – the Bank of Japan ("BOJ") – didn't stop its QE program at the bond market. Instead of "printing" money to buy only bonds, the BOJ has been buying stocks, too. And according to a report in Bloomberg Business, it has been buying far more than almost anyone knew...
They may not realize it yet, but Japan Inc.'s executives are increasingly working for a shareholder unlike any other: the nation's money-printing central bank.
While the Bank of Japan's name is nowhere to be found in regulatory filings on major stock investors, the monetary authority's exchange-traded fund purchases have made it a top 10 shareholder in about 90 percent of the Nikkei 225 Stock Average, according to estimates compiled by Bloomberg from public data.
To put this in perspective, Bloomberg reports the BOJ is now a major owner in more Japanese blue-chip stocks than BlackRock, the world's largest money manager, and Vanguard Group, which controls than $3 trillion in assets.
New 52-week highs (as of 4/26/16): Bristol-Myers Squibb (BMY), Prestige Brands Holdings (PBH), and Silver Standard Resources (SSRI).
In today's mailbag, a subscriber responds to Porter's "End of America" request. What are you seeing? Let us know at feedback@stansberryresearch.com.
"Dear Porter, I am a lifetime Flex subscriber and I want to thank you for all you do for us at an extremely good price. I consider my membership the most valuable thing that I have spent my family's money on. Over the years I have spent substantially more with other advisers on what could only be described as misinformation and guesses. You requested that we send back our anecdotal feedback of how the business environment is out here for us. I think responding is the least I can do after years of well thought out missives from you.
"I was an owner of a company that we grew from one million to 83 million in annual sales from 1977 to 2014. I could go on at book length of how the deep state damaged and retarded the growth and job creation in this enterprise. The most egregious is the hidden tax no candidate will dare mention – the cost of insurance and legal fees to defend your well designed and properly working products in the market place from lawsuits. On top of all the other overt taxes this one alone is enough to stop manufacturing of any type of product in America.
"I now run a small bar and grill in a tiny town. You would think we are out of reach of the deep state here. NOOO way. The EPA now dictates how often I must pump my grease trap. The electric rates have gone up 2.5 times in six years. We have to pay for all the free energy being created by the windmills and the war on coal. The local property tax has doubled due to a mayor who is an ex-school teacher who really believes it is his duty to stimulate the economy by hiring more city workers. Really! The cost of local permits required went up five times this year.
"I had the TV on this morning to a financial channel where I could hear it but not see it. The guest was holding forth on how to help small business. He stated we just need to force the FED to get capital available down to the little guys on main street. When I finally saw the screen this nimrod was a Nobel laureate from Columbia University. My waste basket is full of daily offers to borrow capital. My bank wants me to take out more loans any time I want. I have capital in the market I can liquidate for use in the business at any time.
"What small business needs is the slightest chance to make a profit without the boot of the deep state on our neck. Capital will flood in so fast it will be unbelievable. In the meantime I am following Stansberry's Credit Opportunities and Stansberry Gold Investor to a tee. Well, maybe going a lot heavier on gold and silver than recommended. From the front lines I can reiterate your warnings... For others this will not end well." – Paid-up subscriber Mark R.
Regards,
Justin Brill
Baltimore, Maryland
April 27, 2016
Let's Look on the Bright Side
By P.J. O'Rourke
The primary election results are in from Connecticut, Delaware, Maryland, Pennsylvania, and Rhode Island.
Kudos to John Kasich for his second-place finish. Unfortunately, in a presidential race, there is no second place. Don't give up your day job, John.
Something seems to have gone wrong with Ted Cruz's attempt to bring the GOP establishment and the religious right together. Maybe setting up a cash bar in the revival tent was a bad idea.
Donald Trump is sitting pretty. Republican opposition to his nomination is folding like a cheap lawn chair.
Plus, Republican elites are scared that Trump will have security throw them out of the Republican convention in Cleveland if they protest against him.
Bernie Sanders supporters had one too many bong hits, got confused about where the polling booths were, and tried to vote for him in the changing room at Urban Outfitters.
But congrats to Bernie on his victory in Rhode Island – America's most insignificant state. Rhode Island fields no major league sports teams. Its economy is the size of Uzbekistan's. And the list of famous people born in Rhode Island begins with one Farrelly brother and ends with the other.
Hillary Clinton will be the Democratic candidate. She should lose. Only a miracle could recreate the divided and factious Obama coalition of liberals, blacks, Latinos, women, and young people. Trump is a miracle. They all hate Trump.
Everybody who ever voted for Obama and everyone they've "tweeted" and texted and friended on Facebook will turn up in polling places on Tuesday, November 8, in such immense crowds that you'll think the Democrats are giving away free beer.
Meanwhile, a lot of people who voted against Obama – but who regard Trump as a loudmouth and possibly unhinged – will be having a beer, too. But they'll be having it at home to drown their sorrows. They'll be staying away from the polls.
Therefore, Hillary will be the next president of the United States.
Let's look on the bright side.
Think of the entertainment value of having the Clintons back in the White House. What will the first scandal be?
Maybe Edward Snowden will release a secretly videotaped Hillary speech to Goldman Sachs where she shows top investment bankers the secret handshake that makes Dodd-Frank regulators lay off.
Or perhaps Hillary will claim to have been personally on the ground in Benghazi attempting to defend the life of U.S. Ambassador J. Christopher Stevens with her Beretta M9 semiautomatic pistol (which she purchased after scrupulously complying with federal government gun-buyer background checks because she's strongly in favor of stricter gun control).
Redacted top-secret State Department e-mails from Hillary's personal server could be leaked, revealing that Hillary was sexting the Dalai Lama.
Speaking of such things, don't forget that Bill will be on the prowl again (although he has learned his lesson). This Clinton administration will tolerate no hanky-panky with young interns. Uh-oh. Who just pinched Ruth Bader Ginsburg's bottom?
It may be that Hillary will follow Obama's example of how to get a Clinton out of his hair and make Bill secretary of state. Uh-oh. Who just pinched Aung San Suu Kyi's bottom?
A globe-trotting Bill might actually lessen world tensions. When Bill was president, he went to Northern Ireland and droned on and on and on until the IRA and the Loyalists got so bored that they agreed to lay down their arms if Bill would just shut up.
He almost pulled off the same trick with the Israelis and the Palestinians.
If Bill threatened to go to Raqqa, ISIS suicide bombers might detonate their suicide vests ahead of time in their own homes to avoid having to listen to him. The suicide bombers would get to go to paradise with 72 virgins. No virgins will be left in paradise if Bill gets there first.
Yes, we'll suffer from at least one – and probably several – silly liberal Supreme Court justice appointments. But the justices Hillary appoints will be so silly and so liberal that they'll spend every Supreme Court docket for the rest of the decade arguing cases about making the NHL provide transgender toilets in hockey-team locker rooms.
The international economy is about to tank. Porter says so. It will be swell to have a Democrat to blame it on.
It won't matter whether Hillary caused the international economy to tank or not. Hillary lies about everything so she's a perfect scapegoat. I had a little sister who lied about everything. I could always blame stuff on her. It was great. My dad would say, "Who took the car without permission and put a dent in it?"
I'd say, "My little sister."
She'd say, "I'm only 7!"
And I'd say, "You know how she fibs."
Same thing with Hillary when she says, "I did not default on People's Bank of China loans!"
Even the Chinese Communist politburo sounds believable compared with Hillary.
Hillary will put an end to the bitter partisan divide in Washington because the really ugly, nasty attacks on her will come from Bernie on her own side of the aisle. Republicans can just sit back and laugh.
And Bernie can bring out hordes of anti-Hillary demonstrators. Trump supporters, tea-party advocates, and Republican stalwarts will protest against Hillary, too. But only after 5 p.m., because they have jobs. Feel-the-Bern activists are all living in their parents' basements and are free to screech and yelp and wave misspelled placards in front of the White House anytime, night or day.
But the best thing about Hillary is that she'll be the salvation of the Republican Party.
The Republican Party has destroyed itself in the 2016 presidential elections.
The GOP ran a lot of nitwit candidates. It went off on pointless tangents about abortion, gay marriage, Muslims, and immigrants while ignoring real issues such as the deficit, the national debt, out-of-control entitlement spending, and – according to my 12-year-old Republican son – New England Patriots quarterback Tom Brady's unjust four-game suspension for pursuing a sensible deflationary policy.
The GOP let goofy blowhard Donald Trump be the spokesman for millions of ordinary, sensible Americans who are fed up with a government that taxes the hell out of their income... dumps costs and regulatory burdens on their business... screws up their health insurance... can't provide decent medical treatment to veterans... refuses to give their children school choice... and cares more about useless demonstrators screeching and yelping and waving misspelled placards in the afternoon than it cares about hardworking employees going to work in the morning.
I'm old enough to remember the last time the Republican Party destroyed itself. That time it was Watergate and cover-ups and high crimes and misdemeanors by the Republican president. Plus, Nixon left us with a lousy economy and a bumptious administration by an unelected, nice-but-clueless Gerald Ford. Anyone want a "Whip Inflation Now" button?
That was the end of the GOP. The Republican Party was kaput. No Republican would ever be elected to any important office or position of national influence.
Then all it took was four years of Jimmy Carter.
After four years of Carter, the sun was shining on the Republican Party again. And Carter was a hug-a-bear compared with Hillary, a lovable Mr. Rogers in his cardigan sweater.
And Carter wasn't that liberal by Clinton standards. I just checked Wikipedia. It says, "In 1979, Carter deregulated the American beer industry... This Carter deregulation led to a strong craft microbrew culture in the United States, with 3,418 microbreweries, brewpubs, and regional craft breweries." We'll all be toasting Carter on November 8.
Meanwhile, the lousy, failed, one-term Hillary Clinton presidency will act as an incubator for Republican leadership. The Republicans will hatch some talent. Maybe, with a guy like Paul Ryan, they already have.
Some Republican is going to come along to sort the serious GOP issues from the trivial ones. Some Republican will be able to speak – wisely and coherently – for the disgruntled Trump supporters, able to reassure the disappointed tea-party constitutionalists, able to bring a pot of glue (instead of a jar of acid) to bind together the regular commonsensical elements of the American electorate.
Check this space in 2020. It will be Morning in America again.
Regards,
P.J. O'Rourke
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