Welcome back to Crazy Town. That's the odd city where everyone does everything wrong, buying the wrong stocks, reaching the wrong conclusions and taking the wrong risks.
What defines Crazy Town? Higher oil? Even slightly higher oil? The impact? It is threefold.
First, higher oil means less stress on the system. We are nowhere near where there will be less stress on the system. To be sure, you need to know that, on average, you need $45 a barrel to keep most companies alive in this country. There's some cheaper oil, but that's being pumped in 2015 and it won't be around long in 2016. At $45, the troubled oil companies can sell futures and lock in, say, $50, which keeps them around to play on and even allow for dividends.
Now we are $9 off the $45 mark, and that's pretty darned far. But any time we get away from anything in the $20s, hope springs eternal and the whole group comes roaring back on a bet that, once again, we have held levels north of $30. To me, this is silliness. You need to see some real movement upward to sustain most of these companies, and many will have to reorganize in 2016 if oil stays here. Plus, tomorrow we have inventories and last week's number caused bids to evaporate and oil plummeted. I see no reason why that couldn't happen again.
That means you will see the usual suspects go down if we get hit, mainly Freeport (FCX), Chesapeake (CHK) and a bunch of companies that Carleton English just highlighted -- or lowlighted, if you want to have a better characterization. Be careful of these. They all need dramatically higher prices to avoid harsh common stock circumstances.
Second reason? When you get higher oil, you take the heat of the incredible meltdown in the master limited partnerships and pipeline companies. These are companies that people buy for their dividends, not for their growth, with the possible exception of TransCanada (TRP) and Enbridge (ENB), two Canadian energy providers.
Put simply, this group has been one of the great disasters of this era. I cannot believe how poorly they have performed. Now, there have always been outlier pipelines that have periodically gotten in trouble. Plains All American (PAA) and Boardwalk Partners (BWP), for example, are widely considered to be second-tier players that have had real problems maintaining any growth.
Then a few weeks ago, an earth-shaking tectonic shift occurred among the pipeline companies. Kinder Morgan (KMI), which is a corporation, not a master limited partnership, decided to slash its dividend by 75% from 51 cents to 12.5 cents per share, something so unthinkable even a few months ago that it opened the floodgates of fear and loathing for the group. No one had been more vocal than CEO Rich Kinder about his plans to grow the dividend by 10% every single year.
A year later and he cratered it. Kinder had made two big acquisitions and they cost a lot of money and the company had a mountain of debt and the credit markets had become totally unfriendly at the same time that Kinder felt the stock was too low to offer equity.
So he just axed the darned thing.
You had to figure that if Kinder had no issues cutting his dividend by three-quarters, everyone could join them. Since then, a bunch have done so. However, yesterday another pipeline company, Oneok (OKE), which had fallen down to $22 from $36 just six months ago, came out and said it was going to maintain its distribution even as many thought it might go the way of Kinder.
When it didn't, the group took off. I do not believe this relief rally, which has taken Oneok all the way up to $29, would happen, however, if oil were going down. It's a positive confluence.
Finally, higher oil means there might be more demand than people realize. Oil got to within a few bucks of its low in the Great Recession where demand had dropped precipitously, and there's a growing new consensus that, given the economy's so much stronger than it was back then, oil is unnaturally low. I don't buy this argument one bit given that supply is so much bigger, particularly in the U.S., than it was back then. However, as I said, these are the reasons why we rally in Crazy Town, where gasoline -- the worst possible commodity to go higher because we all use it -- is regarded as a positive.