The Oil Bust Claims Its Biggest Victim Yet
Inflation is fading in Europe, too... The oil bust claims its biggest victim yet... 'From $2 billion to zero'... OPEC is 'opening the tap'... The New York Times echoes Sjug... 'Cash is rapidly becoming obsolete'...
Eurozone inflation slowdown 'confirmed'...
On Friday, we noted that U.S. consumer price index inflation fell again last month. This morning, we heard similar news out of Europe.
Eurostat, the European Union's statistical office, reported that consumer price inflation in the 19-country eurozone area fell to just 1.3% in June...
This is down from 1.4% in May and down from 2% in February, when inflation was at a four-year high.
Just as in the U.S., last year's big run-up in inflation appears to be fading.
'From $2 billion to zero'...
The ongoing oil bust has just claimed its highest-profile victim yet...
According to the Wall Street Journal, a $2 billion private-equity fund that "borrowed heavily" to buy oil and gas wells is now worth virtually nothing. From a report this weekend...
EnerVest, a Houston private-equity firm that focuses on energy investments, manages the fund. The firm raised and started investing money in 2013, when oil was trading at more than double the current price of about $45 a barrel. But the fund added $1.3 billion of borrowed money to boost its buying power. That later caused it trouble when oil prices tumbled.
Now the fund's lenders, led by Wells Fargo, are negotiating to take control of the fund's assets to satisfy its debt, according to people familiar with the matter.
"We are not proud of the result," John Walker, EnerVest's co-founder and chief executive, wrote in an e-mail...
We would think not...
All told, the fund's investors – many of whom are high-profile institutional investors – are likely to recover just pennies on the dollar from their initial investments. More from the Journal...
A number of prominent institutional investors are at risk of having their investments wiped out, including Caisse de dépôt et placement du Québec, Canada's second-largest pension, which invested more than $100 million. Florida's largest pension fund manager and the Western Conference of Teamsters Pension Plan, a manager of retirement savings for union members in nearly 30 states, each invested $100 million, according to public records.
The fund was popular among charitable organizations as well. The J. Paul Getty Trust, John D. and Catherine T. MacArthur and Fletcher Jones foundations each invested millions in the fund, according to their tax filings. Michigan State University and a foundation that supports Arizona State University also have disclosed investments in the fund.
Losses like this are practically unheard of among large private-equity funds. Investment firm Cambridge Associates reports that only seven billion-dollar funds have ever lost a penny for investors. And of those, losses of more than 25% are even more rare.
Suffice it to say, this is a big deal. But it may not be the last...
Several other energy-focused private-equity funds are in a similar predicament today, according to the Journal.
OPEC is 'opening the taps'...
Unfortunately, the latest crude oil news doesn't offer much reason for optimism...
Regular Digest readers know we've remained skeptical since the Organization of the Petroleum Exporting Countries ("OPEC") agreed to slash its production last fall. We've long suspected it was simply a matter of time before its members began to stray.
Now, those fears appear to be playing out. As financial newspaper Financial Times reported last week...
OPEC's compliance with its own oil supply cuts fell in June, the International Energy Agency said on Thursday, as it suggested some cartel members had "opened the taps."
Global oil supply rose sharply by 720,000 barrels a day last month, a closely watched monthly report from the IEA said, as Nigeria, Libya and Saudi raised output, with the compliance with the OPEC deal dropping to 78%.
Though Nigeria and Libya are exempt from OPEC's deal due to unrest and disruptions in both countries, higher output from OPEC's de facto leader Saudi Arabia will be closely scrutinized.
Of course, OPEC isn't alone in producing more oil...
U.S crude oil production continues to grow, too. As you can see in the following chart, it's now approaching 9.5 million barrels per day, just shy of the all-time record...
The bottom line is simple...
U.S. crude oil prices surged from around $45 per barrel to as high as $55 per barrel following OPEC's agreement.
But despite better-than-expected compliance among OPEC members through the spring – and an extension of the deal through next March – prices have moved lower again.
They now sit around the same levels they did before the deal was announced in November. And if this trend continues, they're likely headed even lower.
Cash is rapidly becoming obsolete...
Folks in the mainstream media continue to echo our colleague Steve Sjuggerud.
They're finally waking up to the huge opportunities in China today... the same opportunities Steve has been telling his subscribers about for years.
Last month, we noted a handful of outlets had caught on to the bullish implications of MSCI's big decision regarding emerging markets. As regular readers know, this decision played out almost exactly as Steve predicted... and his subscribers were positioned well in advance.
This weekend, the New York Times picked up on another huge trend playing out in China now. From the article...
There is an audacious economic phenomenon happening in China. It has nothing to do with debt, infrastructure spending or the other major economic topics du jour. It has to do with cash – specifically, how China is systematically and rapidly doing away with paper money and coins.
Almost everyone in major Chinese cities is using a smartphone to pay for just about everything... Just as startling is how quickly the transition has happened. Only three years ago there would be no question at all, because everyone was still using cash...
The article notes that the true breadth of this trend would likely seem unbelievable to most Americans who haven't experienced it first-hand. More from the Times...
For the past three years, I have been outside mainland China covering Asian technology from Hong Kong, which has a very different internet culture from the mainland. I knew that smartphone payments were taking over in China, as the statistics were stark: In 2016, China's mobile payments hit $5.5 trillion, roughly 50 times the size of America's $112 billion market, according to consulting firm iResearch.
Even so, the attendant cultural shift was graspable only in person. I recently moved to Shanghai and felt the change with cash acutely... At coffee shops and restaurants, I held up lines as I fumbled out my wallet and peeled off the bills to give the cashier. If I was hungry I had to go outside and find a restaurant, while bowls of noodles, groceries and coffee materialized at our office, ordered by my colleagues and paid for on the phone. If I had to get somewhere, I couldn't use my phone to unlock one of the ubiquitous bicycles that are a part of China's bike-sharing craze.
Even the buskers were apparently ahead of me. Enterprising musicians playing on the streets of a number of Chinese cities have put up boards with QR codes so that passers-by can simply transfer them tips directly.
"It has become the default way of life now," said Shiv Putcha, an analyst with the research firm IDC. "Literally every business and brand in China is plugged into this ecosystem."
Of course, Steve's subscribers aren't surprised. He's been talking about this trend for more than a year. As he told his True Wealth subscribers last July...
"I don't carry a wallet or purse," an executive told me during our first meeting in Beijing. This executive saw that I was a bit confused. So she smiled, held up her mobile phone, and said something shocking: "I do everything through [my smartphone.]"
It turns out, she's not alone. Most people in major Chinese cities do exactly the same thing... Think about what that means...
The Chinese actually invented paper money. They were the first to use it – more than 500 years before the Europeans. But they found something they like so much better today that the use of paper money is now done (for the most part) in China's major cities.
What the heck is going on? It's nothing short of a technological revolution... It might be the greatest technological revolution that I have seen in my career. It is certainly happening faster and on a larger scale than anything I have ever seen.
The crazy part is, investors aren't paying attention... You can buy the companies that are leading this charge – companies that have grown their sales tenfold over the last five years – at 2013 prices.
It may be one of the greatest speculating opportunities of your lifetime.
Put some of your money in this idea... and some money for your kids... and for your grandkids... This story is that big.
Incredibly, this technological revolution – which Steve has dubbed "The New China Economy" – is just one of four super-bullish trends he's following in China today. And while his subscribers are already showing fantastic early gains, Steve says it's not too late to join them. In fact, his preferred way to profit from China's mobile-payment boom is still a strong buy in his True Wealth China Opportunities portfolio.
If you aren't already reading True Wealth China Opportunities, what are you waiting for? Click here to learn more about a subscription.
New 52-week highs (as of 7/14/17): Boeing (BA), Alibaba (BABA), Bancroft Fund (BCV), Becton Dickinson (BDX), iShares MSCI BRIC Fund (BKF), Blackstone (BX), CBRE Group (CBG), Global X China Financials Fund (CHIX), WisdomTree Emerging Markets High Dividend Fund (DEM), Euronet Worldwide (EEFT), Emerging Markets Internet & Ecommerce Fund (EMQQ), iShares MSCI Italy Capped Fund (EWI), iShares MSCI Singapore Capped Fund (EWS), iShares MSCI South Korea Capped Fund (EWY), Facebook (FB), First Trust Emerging Markets Small Cap AlphaDEX Fund (FEMS), Fidelity Select Medical Equipment and Systems Fund (FSMEX), iShares China Large-Cap Fund (FXI), Global X MSCI Greece Fund (GREK), PureFunds ISE Mobile Payments Fund (IPAY), iShares U.S. Aerospace and Defense Fund (ITA), KraneShares Bosera MSCI China A Fund (KBA), KraneShares CSI China Internet Fund (KWEB), Lockheed Martin (LMT), iShares MSCI China Index Fund (MCHI), Microsoft (MSFT), Naspers (NPSNY), Nvidia (NVDA), NVR (NVR), ALPS Medical Breakthroughs Fund (SBIO), iShares MSCI India Small-Cap Fund (SMIN), ProShares Ultra S&P 500 Fund (SSO), Tencent (TCEHY), TransCanada (TRP), Weight Watchers (WTW), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).
In today's mailbag, more praise for Steve Sjuggerud's China research. Send your notes to feedback@stansberryresearch.com. Good or bad, we read them all.
"I was not interested in the China stocks when Steve started talking about them last year. However, as time went on I started looking at them and finally in May of this year I decided to try a few. I bought 7 from his list and an ETF of Chinese stocks. I only put about 4% of my IRA into these 8 positions to try them so I bought from 15 to 40 shares of each. As of 7/14/17 I am up on all 8 positions: 3.2 to 5.2% on 3, 11.8 to 14.3% on 4, and 36.8% on 1. I believe Steve has made another great call. I only wished I had listened more to start with and put double of the amount into these positions. Great call." – Paid-up Stansberry Alliance member Gary Thompson
Regards,
Justin Brill
Baltimore, Maryland
July 17, 2017