My thoughts on a possible ExxonMobil-Chevon merger; Suggested 'terms of service agreement' for the tech giants; Biden's Nightmare May Be China; Here's How Wall Street Has Always Manipulated the Markets
1) Over the weekend, the Wall Street Journal reported that the CEOs of oil giants ExxonMobil (XOM) and Chevron (CVX) have discussed a merger.
As you can see in the chart below, both stocks have been dogs over the past five years. In a period in which the S&P 500 Index has almost doubled, Chevron is flat and ExxonMobil is down 40%:
I'm particularly bearish on ExxonMobil, for reasons I most recently outlined in my September 16 e-mail, where I concluded:
ExxonMobil's stock is a classic value trap. Don't be tempted by the high dividend yield (currently 9.6%) – the company doesn't come within a country mile of generating the cash flow to cover it, so it will eventually be forced to cut it.
After updating the charts from that September e-mail with two more quarters of data, we can see that ExxonMobil's operating cash flow over the past decade has deteriorated so much that it has gone from comfortably covering capital expenditures plus the dividend to not covering both to, in 2020, not even covering either!
How has ExxonMobil funded these deficits? By taking on more and more debt, as you can see in this chart:
The same charts for Chevron show weakness as well – but not nearly as bad as ExxonMobil. Here are the cash flows:
And here's Chevron's net debt:
In conclusion, I'd avoid both stocks. As for a possible merger, I'm reminded of the old saying: "Two stones tied together still sink."
2) The tech giants' seemingly arbitrary policies regarding content moderation and kicking certain people off their platforms have generated a great deal of controversy. I agree with this blurb that appeared in The Bulwark:
My buddy drafted the "Terms of Service" agreement he would use in the event he created a social network. Here they are:
This social network is like a party I'm throwing at my house, and you're all invited. So here's the deal. I'm not gonna write a whole list of rules on a chalkboard like I'm your third-grade substitute teacher. I don't mind you being rowdy because this is a fun party in my house. But if you cross the line, I'll kick you out on your ass. Where is the line? I'm not going to try to explain it to you, so just keep yourself in check so you don't cross it.
But I'm not going to make any pretense here that I'm "fair" or "objective." If I like you, I'll probably let you get away with more. If I don't like you but you're still making the party cool, I'll probably cut you some slack. You might get a warning, or you might not. Look, I'm partying too, and I don't always have time to do warnings. Sometimes there will be a misunderstanding and I'll kick you out when I should not have, and maybe I'll regret it later. But probably not.
But if you're a real ass, you'll be kicked out so hard that you'll be staggering your drunken way down the street, mumbling to yourself about how unfair it was, and hearing the loud music from my amazing party which will be going on without you. And we won't even miss you.
So don't complain to me about my party. Behave yourself and know that I am arbitrary and capricious in defense of the rocking time we are having. And don't ask me to be "fair" because I'm just not.
This is exactly right. A TOS is not Hammurabi's Code. It's a set of guidelines subject to change at any minute that exist not to protect any individual "rights" but to make the product the company owns function better.
And people who pretend that this isn't the case are either lying. Or socialists.
3) Columnist Nicholas Kristof published a sobering op-ed in the New York Times earlier this week. One thing I know for sure: The markets aren't pricing in a shooting war between the U.S. and China! Biden's Nightmare May Be China. Excerpt:
"I think it's unlikely that there'll be a military confrontation there, but I don't rule it out," said Bonnie Glaser of the Center for Strategic and International Studies. That seems right to me – but I also worry that we're wrong. Few expected Xi to pick fights with India on their shared border, as he has several times in the past year, and heaven help us if he is similarly reckless toward Taiwan and sparks a war with the United States.
Dealing with Mitch McConnell will be a piece of cake for President Biden compared with dealing with Xi. Biden's challenge will be to constrain a Chinese leader who has been oppressive in Hong Kong, genocidal in the Xinjiang region, obdurate on trade, ruthless on human rights and insincere on everything, while still cooperating with China on issues like climate change, fentanyl, and North Korea (which many experts expect to resume missile launches this year). Oh, and we don't have a China strategy.
I'm just not sure we're up to this task...
I have no illusions about Beijing. But I worry that two trains are rushing toward each other, for several reasons:
- We Americans have a pattern of exaggerating threats. We fixated at various times on Nasserism, Southeast Asian dominoes and "Japan as No. 1." In retrospect, these fears had some basis but were too simplistic; let's not repeat that mistake in the case of China.
- We should bring a dose of humility to our discussions of China. The criticisms of Xi are deserved, but it's also true that an infant born in Beijing today has a longer life expectancy (82 years) than a baby born in Washington (78). China badly bungled its initial handling of the coronavirus outbreak, but then moved heaven and earth to halt the virus and save hundreds of thousands of lives. China is a complex and contradictory place, not a caricature.
- Let's distinguish between Xi and China, criticizing the former without demonizing the latter. Senior Chinese officials and their family members in private denounce Xi to me in scathing terms (one told me a few days ago that Xi is "a crazy person"). So we should avoid insulting the entire country and forcing officials to rally around their leader.
- Biden needs to manage Xi and reduce the risk of war without pulling his punches: Biden should denounce cultural genocide in Xinjiang but not seek a boycott of the Beijing 2022 Olympics, and he should strengthen ties with Taiwan but not gratuitously poke Xi in the eye. We can send Army Green Berets to train with Taiwan armed forces without releasing video of the training, as the Trump administration did. We can also work with China to reduce the risk of accidents and escalation.
4) Comedian Trevor Noah is hilarious – and makes good points! Here's How Wall Street Has Always Manipulated the Markets.
Best regards,
Whitney