Oils and banks. Oil and banks. Over and over again people want to buy these stocks because they are cheap.
But how cheap are they really? Not that long ago my charitable trust, Action Alerts PLUS, had a pretty big position in Citigroup (C) . With the stock trading a couple of bucks below tangible book value -- what the company is worth literally if you shut it down -- and the company committed to buying back about 8% of its shares a year, it was hard to figure out how I could be hurt, and easy to see how I could make some pretty decent money.
Plus the key regulatory test, the Fed's CCAR, or Comprehensive Capital Analysis and Review, gave Citigroup the best report of all the majors. And you had a 3% yield, not bad when rates are this low.
That was when the stock was at $68. It's now at $48 and it could go even lower. How could everything go so wrong?
First, when the pandemic turned ugly, the feds, out of an abundance of caution ruled no more buybacks. That's why we sold Citi as it was the principal reason to own the thing. That's not intellectual laziness; if you can find a company where management is committed to buying back stock and it is additive because it is below book value, theoretically you should just buy some stock and wait.
But without a buyback the most important prop was gone.
Second, Citi had some of its own problems, like a lack of internal controls that we are only just discovering. The CEO, Michael Corbat, is retiring and bringing in Jane Fraser to replace him at what now looks like an inauspicious time with layoffs and a regulatory crackdown. You have to wonder whether that 4% yield is a safety net or is that about to go, too? So strange given how well the bank did on the CCAR exam just a few months ago. But that's one of the big issues with the banks: Who really knows what's going on in them?
Finally, the numbers have to come down -- bad loans, bad yield curve.
So a promising and safe investment turns into a total debacle in just a few months time.
It often doesn't even matter how well you are doing with a bank. Morgan Stanley (MS) reported the best quarter of the banks and brokers and it's pretty much unchanged. First Horizon (FHN) had an okay quarter and it's in half from where it was two years ago. I keep hearing people talk about buying Wells Fargo (WFC) and it does seem like a bargain but wasn't Citigroup's stock in the fifties down from $80 at the beginning of the year?
I am close to saying they are simply unownable.
But I have reserved that label for the oils, the nat gases and the pipelines.
Hardly a day goes by without someone calling on the Lightning Round asking about an oil company that looks cheap. But I think we are entering a new era where they can't catch a break no matter what. Under President Trump there's no place they can't drill and they are going to overproduce. Under a President Biden I bet we will return to a regime where the rules are strict and the costs go up. In the meantime demand is down, and only the cartel keeps them from going dramatically lower because we can't seem to stop producing.
In this world we have an amazing thing happening that we don't talk nearly enough about: Exxon Mobil (XOM) . When I got to Goldman Sachs (GS) in 1982 I was told that the one stock you could always recommend to people was Exxon Mobil because we will always need oil and the company has a 50-year vision that will assure that it always has good production with low costs and a sturdy balance sheet.
Now it seems to have none of those. It's got a 9% yield which is a total red flag and it just got kicked out of the Dow Jones average, something that's unthinkable, for Salesforce.com (CRM) no less.
I don't want to pick too much on Exxon, not when Occidental (OXY) is flailing and trying not to become a single-digit midget. But the fall of Exxon shows you that any oil could suddenly be in trouble. And it's not like oil's at $26 a barrel.
I know the pipeline stocks look cheap with those big yields. But do you think that the 20% distribution on one of the largest, Energy Transfer (ET) , is sustainable? I wouldn't bank on it. Natural gas? If it didn't go up big this red hot summer I don't know what will drive it higher.
In other words, there's just keep going by, there's nothing here to see.
Oil and banks. They mix perfectly. It's just happens to be a toxic brew when its finished.
(Goldman Sachs and Salesforce are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
