The setup couldn't be more perfect. It's Goldilocks vs. the three bears and each day it's winner take all, usually determined, of course, by the price of oil. The three bears do best with oil higher, Goldilocks wants it to stay low and there's virtually no in-between.
You remember the story of the three bears, so let's put them in perspective with Goldilocks who, of course, triumphs in the fairy tale, but tends to get eaten a lot lately if only to snap back to life the next day.
So, who are these three bears that she's got to deal with?
First, the baby bear is Brazil. Here you've got a country with an oil company that is teetering and could easily slip into insolvency. The company came out with a whole array of negative news about prosecutions and delayed financials, but the key thing you need to know is that it's cutting its exploration and production budget to conserve cash. I don't know if the cuts are enough to save the company in its current incarnation, which has billions in debt, including a lot of it owned by moronic foreigners. The government owns 60% of the company and it, I think, won't let it go under because it is the source of the biggest economic hope for that nation. Its reserves are tremendous, maybe the best in the world.
But as oil goes down, you have to say, "so what?" The bills may not be paid, a default may ensue and baby bear has the edge on Goldilocks the day that we see that happen.
Who's the mama bear that may feast on Goldilocks? That's all of these little oil companies in this country with acreage in the Marcellus, the Utica, the Bakken, the Permian, the Eagle Ford, the Niobrara and the Mississippian shales.
Every American company needs oil to be higher, but some need it a lot higher than others. Any company that bought property in the last two years in any of these shales is the equivalent of a homebuyer snaring a home in 2007. You've paid too much and you will most likely be repossessed. Mama Bear is going to do some serious repossessing as the cash flow runs out, the drilling budgets get slashed and the credit gets turned off. The problem here is that these things take time to go bad. They don't go bad overnight. If it did, we would already be watching Exxon (XOM) buying all the Eagle Ford and Permian, the two best prospects. The higher cost developments like the Bakken take more time and the lower-quality prospects like the Mississippian just cease to be a factor.
I know that some were cheered today that Repsol, the huge Spanish oil company, this morning bought Talisman, a down-and-out Canadian oil company for $8.3 billion. But this deal reminded me of when another Spanish company, Terra, bought also-ran Internet company Lycos for $12.5 billion in 2000 at the height of the dot-com boom only to sell it to some South Korean company for $95 million four years later. I think Repsol's real early. I've been telling you that there's no bottom in oil until we get the estimate cuts. We got a boatload today, so it makes sense that they rallied, as I said they would. It sure did help that oil came within a buck of where the Carolyn Boroden, our Fibonacci Queen, said oil would bounce. Bad day for Mama Bear, good one for Goldilocks.
Then there's the real bear, the Russian bear, and this one's a dominant and angry papa that I don't think's so easily appeased. Russia, put simply, is falling apart. Its biggest assets are oil and gas and there's a run on the country's banks, so the central bank took rates up to 17% last night from 10% to stop the run. I say it is too soon to tell if that boost will fail, as there are always knuckleheaded funds that will swoop in to get that yield and take their chances, mostly because the managers are playing with others peoples' money.
I am not backing a Russian bear that's being run by a dictator with an economy that's based on oil that is picking a fight over the Ukraine with the United States and Germany. The latter have a lot more divisions and a lot more firepower. That fight's a nonstarter for everyone, but Putin's not going to win in the end.
But what's so powerful about Goldilocks that she's might be able to be down there giving the bears the business?
First, you have a lot of companies in this country that wouldn't know where Brazil or Russia are, let alone investing in them.
That's why when CVS (CVS) announces some amazing numbers, as it did this morning, the stock can soar. The customers at CVS come to get their prescriptions filled and buy other goodies with their extra dollars saved at the pump. It's a transference from OPEC and some U.S and Canadian producers to you, so enjoy it. The CVS customers surely are. We know that so many restaurants and retailers are doing so well in this environment that you have to marvel at how quickly our economy is getting a boost from the lower gasoline prices. We are a consumer economy; it stands to reason. So, Goldilocks has a lot of spare change.
Second, every country other than the United States wants to cheapen its currency to get us to buy their goods. Instead the debasing, it's getting their rich people to buy our Treasuries because they are so fearful and our bonds are the safest place to deposit money. That capital flight sends our interest rates down, which makes for still one more stab at refinancing or buying houses for the American people. Mortgage rates going lower and less restrictive lending rules make for more homes being built and sold and still more money being spent in retail. Goldilocks has game.
Finally, there's the overall global impact of lower oil on other countries besides our own. Yesterday, we listened to Dave Cote from Honeywell (HON) talking about how all geographies are going to get a boost from lower energy costs. Dave's got a long-term view and he points out that one of the reasons why the economies of the world didn't bounce back hard coming out of the Great Recession is that energy didn't come down as it should have. It went higher. Oil's been a giant prohibitive headwind, he said, compared with where he thought oil should be, which is right about here. Now oil can be a tailwind, so we will see global GDP growth that will be better than expected. He echoed exactly what Klaus Kleinfeld, the CEO of Alcoa (AA), told me should happen.
Boeing's (BA) Jim McNerney and 3M's (MMM) Inge Thulin didn't tell me the same thing, but you have to question whether they aren't huge Goldilocks backers, given that they just boosted their dividends much more than expected and announced gigantic expansions to their buyback program. The latter, of course, can be spread out. But the former's real cash on the barrelhead, a true bet against the Kodiaks.
Now oil bounced back here today, which is fine after it's been cut in half, although it couldn't really hold its own. Still, it did bounce and if there were no bounce it would mean that things are pretty catastrophic. A bounce allows for a breath to be taken and a hedge or two be put on.
But I think the most important thing about this moment is that while hedge funds, which are trying to capitalize off of what happens between 3:30 p.m. and 4:00 p.m., and can often be right, we know that people like Alcoa's Kleinfeld, Honeywell's Cote, Boeing's McNerney and 3M's Thulin are real smart and not worth betting against long term. Sure, one or two of them can get marauded by a bear or two. But all four on the Goldilocks team? That could be the legion of boom if the bears chase after Goldilocks and let's face it, a lower-gasoline-fueled Goldie could be a real beast once the bears are done knocking themselves out over the potential collapse or Russia, Brazil and the U.S- based oils that feasted on borrowed money and are now on borrowed time.