It's not just the fact that there are so many bad stocks out there that makes this market so nauseating.
It's that the bad stocks trade as if there is no price they are worth owning. When I looked at the charts last night I was shocked at how many stocks like Encana (ECA) and Genworth (GNW) and U.S. Steel (X) there are, stocks that, if you didn't know any better, can't make it in their current forms.
Now, I know Encana has made some gutsy moves, slashing its payout by 79% and selling a lot of non-core assets. But the simple fact is that while it has been able to raise and save cash and keep drilling going, it has a mountain of debt, including $7 billion in long-term borrowings, and that's just too much for this company to endure. Most stocks do not recover from going down to $5. I think this one can't, either. Sure, natural gas can spike, but it hasn't. Certainly not enough to save this one.
Genworth has a long-term care problem, which it has continued to minimize, instead trying to get you to focus on its mortgage insurance business, which is back being terrific after a long period in the wilderness. Many of the long-term care policies were written before life expectancy took a great leap forward, and medical care for these people and their assisted home living were budgeted incorrectly. So Genworth's stock repeatedly goes down, even though some of its other businesses have real value. Still, the losses from long-term care are, quite simply, unfathomable and I think Genworth's still in big-time denial mode.
U.S. Steel is amazing to me. It's been in some tough jams before, but always escaped and became a decent buy. But these days one pretty much has to presume from the action that there's no real bottom there. We have big imports, lots of dumping and a still-high cost structure.
The problem with this kind of thing is that we can't figure out if the stocks have fallen too much because of an overabundance of fear, or the stocks' declines are saying "don't you dare touch me, these are going to zero."
The really hard part of this market is that there are countless numbers of companies like U.S. Steel and Encana and Genworth, all over the place. They are, in some ways, emblematic of the moment. Southwestern Energy (SWN), for instance, is a very good company with very good natural gas assets, but it sells at $5 because people think it can't make it. That's most likely because a little more than a year ago Southwestern bought some natural gas assets in the Marcellus and the Utica for $5.8 billion and while they are very good assets with inexpensive sources of natural gas, they killed Southwestern's very good balance sheet.
That's the case with anyone who has tried to bottom fish in the oil patch, including Kinder Morgan (KMI).
U.S. Steel isn't alone. I don't know how AK Steel (AKS) can fight these trends. And Genworth is not the only company that wrote or bought long-term care businesses. Canada's Manulife (MFC) has just that kind of business.
As each of these companies is examined, we come back with the same answer each time: debt taken down at the wrong moment in the cycle that will not be able to be crunched without wrecking the equity first; that's what faces all of these kinds of weakened situations in many different industries.
