Life is full of uncertainty. Many have a hard time living with this, especially those of us who do not like surprises. As such, looking at the past and noticing common, recurring patterns might provide a reference point to apply to current circumstances. Such is the case in today's business climate, which investment decisions about the future are based on.
This week, it came to pass that many commodities fell to thirteen year lows. The grand poo-bah of all commodities is oil. Like it's fellow brethren, the current price is nothing to write home about, under $50 bucks for West Texas Intermediate ($47.12) and $52.21 for Brent. So, it should not have been any surprise when the big boys of oil, Exxon (NYSE:XOM), Shell (LONDON:RDSa), Chevron (NYSE:CVX), and BP (LONDON:BP), reported far lower profits than last year. For example, in this quarter last year, Exxon makes $8 billion, this year $4 billion. Chevron earned $5 billion last year, this year $500 million. As a result of the far lower price, Shell is cutting 6,500 jobs, and Chevron 1,500. Life is tough in the oil patch, yes, indeed. I know, you feel terrible for the oil boys. I do, too.
As someone who admires good mathematicians, the oilies certainly are. As such, they know they cannot keep their capital expenditures at current levels with the end product price at 50 bones and below. They have turned their wrath on the industries suppliers-steel, hoses, drillers, rigs, ships, you name it. Also, it appears they are working with each other to standardize equipment across the industry, so in the future, incompatible systems will not exist. You see, there are plenty of partnerships in energy as nobody wants to take the risk of spending billions by themselves. The oilies may be hated by the politicians and public, but they are sharp. As for the future, our oil leaders report lower for longer is the status quo for as long as the eye can see.
Another part of the business cycle is reporting season, and are we ever in the midst of it, especially in technology. The two most notable reports came from Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR). In many ways Twitter is very similar to Facebook, with a few very important differences. Both are loved by the world, and very much integrated with our society. Both struggled during their first year as public companies. Both are investing in applications centered around the mobile experience and video. Both are highly acquisitive, buying younger, promising entities for enormous sums. Many believe the prices they pay are too high, in a few cases, dramatically so. What gives?
First, Facebook has shown they can grow their user base and earn increasing amounts of money on mobile devices. Not so for Twitter. Second, and this is crucial, Facebook is led by a focused management team of Zuckerberg. Twitter's current CEO, Jack Dorsey, is also the leader of Square, which will now have an IPO in the near future. Focus and clarity of purpose is important for any businesses success, and even more so in the hyper competitive world of technology. Facebook has it, Twitter doesn't, at least in the current cycle.
There were a few other reports this week as well. Skechers crushed the estimates, as did Expedia (NASDAQ:EXPE), and both stocks jumped. Yelp (NYSE:YELP) caused shareholders to do more than yelp after missing and guiding down, and then the stock fell 25%. It looks like there is a good chance Yelp will be acquired by some company as the CEO resigned. More to come on that one.
I was reading on Bloomberg about how the largest investment banks are encouraging their hedge fund customers to use swaps as a substitute for large stock trades. There are all kinds of swaps for investors to use- interest rates, indexes, commodities, currencies, even weather related (for insurance companies). The banks are doing this so they can keep the lending commitments off of their proprietary trading books. I am sure Elizabeth Warren, Bernie Sanders, and Barney Frank will be impressed.
Speaking of the Democratic leadership, just had to remark on Nancy Pelosi's interesting comment that the nuclear agreement with Iran is a 'Diplomatic Masterpiece'. If you are Iran it is. Just goes to show you Nancy still remains one of the best available sources if you want a chuckle out of life. The only problem is the topic is so serious, there may be no more cycles for anyone if the big zero and his partners in crime, democratic cheerleaders, are wrong.
Disclaimer: Y H & C Investments, Yale Bock, and the family of Yale Bock own positions in securities mentioned in the blog post. Investing in stocks can lead to the complete loss of your capital. As always, on any company mentioned here, past performance is not a guarantee of future returns. Investing involves risk of losses on invested capital. One should research any investment and make sure it is suitable with your objectives, risk tolerance, risk profile liquidity considerations, tax situation, and anything else pertinent to your financial situation. Also, the CFA credential in no way implies investment returns will be superior for any charter holder.