Any time you think about the price of oil and how important it is that you get stability and even an upward bounce -- regardless whether you are thinking that we are in a V or a U bottom -- you have to think about Freeport-McMoRan (FCX). This company is at the forefront of everything that's bad: balance sheet, copper, gold, oil. It's got a ton of debt and it said in its latest conference call it needs to find partners.
Plus, just this morning Bank of America Merrill Lynch (BAC) downgraded them from buy to hold, which may be the beginning of a slew of downgrades, as there are still plenty of buys on this troubled company.
I think there's a huge game of chicken going on with Freeport. If oil is really going to plummet, why do a deal with them? Why not wait? If you believe that -- like Exxon (XOM), which has cut its buyback severely, or Chevron (CVX), which suspended it -- why not let FCX roll over? But if oil stabilizes and this bounce above $50 is real, or if copper stabilizes because of actual Chinese stimulus or a turn in the eurozone because of low oil and a highly accommodative change of heart by the Germans, then you won't get a sweet deal, or might not get a deal at all.
Now, by no means am I saying that you should buy FCX. If you like oil, you should go buy either a high-quality oil service company like Halliburton (HAL) or Schlumberger (SLB), or you should buy a high-quality major, like Royal Dutch (RDS.A), which is committed to its dividend. You can't buy one of these takeover names, because there are too many companies on the edge like Freeport. Much better to buy a company that can acquire weakness, not be weak itself; predator, not prey. I would call out an independent here, but we are just into independent earnings season and I need to see the reaction to some of these numbers before I feel confident in even saying the name of one, that's how disappointing I expect the earnings to be. If you want a high-quality spec, I would go with Core Labs (CLB), because it has already brought the expectations so low that I am confident it can beat them.
But for the overall market, I am beginning to believe that this high $40s level is good for all stocks, even some of the better oils. Think about what it does. Two dollar gasoline is divine for the consumer, and yet it still allows some flexibility on the part of the oil producers to be able to tough this moment out by selling oil forward and bringing in cash.
You need to see just this sweet spot where you have low prices for the consumer and business, which stimulate economies, but not such low prices that you have lots of bankruptcies which then shut down credit for those who really need it and create distress and hugely bad headlines all over the place. We don't want unemployment spiking. We want companies to hold out and deals to be made and cash infusions given .That's what's key.
In other words, at this point a U, where we are murkily moving across the bottom part of the letter, vs. a V where we are headed right up, is best for the vast majority of stocks, including even the better capitalized oils.
And perhaps the best way to tell if we are in stability mode, where the U bottom is being put in, is to watch FCX. If big investors come in, you should be more emboldened. If this one has to cut its dividend and gets hammered again, no matter how much you might like the "action," you will end up being the guy who got faked out because there turned out to be no big money behind the move.
Oh, and just to be sure, more people are in to me, pro and con about this name than any other I write about. A first-class battleground totally worthy of the cause!
