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The Market Always Wins

Written by Briton Ryle
Posted January 23, 2017

The market will always win. The Saudis are about to learn this the hard way.

They thought they could ramp production, crush prices, and kill off the U.S. shale industry. Then they could cut production, take control of pricing, and have a really sweet environment to cash in with the Aramco IPO. 

But they are not capitalists, so it's not surprising they failed to understand that it's not success that breeds innovation, it's hardship. In a perfect corollary to the notion that whatever doesn't kill you makes you stronger, the bear market for oil made U.S. oil companies better. The cost of producing shale has been cut in half in the last two years. 

Now, U.S. oil companies can offset nearly half of OPEC production cuts, and do so at a nice profit margin. Where three years ago, it cost ~$60 to produce a barrel of Bakken oil that would sell for $90, now it costs $30 and can be sold for $55. The pricing is even better in the Permian Basin, where it costs maybe $20 a barrel to produce a barrel of oil. Which is why ExxonMobil (NYSE: XOM) just plunked down $6 billion for a spot at the Permian banquet table. 

The Saudis are about to realize that they no longer control oil prices. U.S. companies do. So we're not likely to see a spike to $100. More likely, oil trades $55 to $70 this year, and the Saudis don't make as much on Aramco as they want/need. 

Occidental (NYSE: OXY) is the biggest Permian player. Personally, I gravitate to the smaller players, like Laredo Petroleum (NYSE: LPI).

Your Kung Fu is Very Strong, Where Did You Learn It? 

If you ever watched kung fu movies, you know that enemies always had respect for each other. Because whether you served the evil samurai or you fought for the peasants, it took years of study and disciplined training to become a kung fu master. So when you meet someone with stronger kung fu skills than your own, you know they've worked harder. You have to appreciate that, and it should also serve as motivation.

This is what capitalism does. It motivates people to work harder in order to improve their kung fu. 

I took my kids to see the movie Hidden Figures last week. This movie tells the story of three African American women who worked for NASA in the early 1960s and played important roles in getting astronauts into space. At the time, all of the mathematical calculations were being done by hand. That is, until one of the first IBM computers was installed.

Now, one of the three women was the head of the African American team of women doing calculations. And she recognized the IBM machine for what it was: a threat to her job and the jobs of the women she supervised. Because at the time, very few people had strong computer kung fu. But she didn't just lie down and let the inevitable happen...

She taught herself the programming language that the IBM computer used, then she taught all the women in her department. So when NASA realized they needed a whole team of programmers to feed the machine, these women stepped right in.

Of course, in the early ’60s, the civil rights law had not been passed yet. Martin Luther King, Jr. was still marching. There were no guarantees, and those African American women were pretty much at the bottom of the totem pole. But when you make yourself valuable to an employer, when your kung fu is strong, none of that matters.

Market forces will always prevail.

Wind and Coal...

Just a couple weeks ago, Amazon finished construction on a $400 million wind farm in North Carolina. Amazon wants to generate its own electricity for its data centers and bypass the local utility. 

Well, a few North Carolina legislators are asking president Trump to either kill the wind farm or force some big changes. They argue that the wind farm is a national security threat, because it will interfere with radar at a nearby Navy base. North Carolina's House Speaker wrote: "In our opinion, due to the consequences at stake, this wind project should never have been permitted to be built..."

But here's the thing: the Navy has already said that it's studied the wind farm, and it poses no threat to its radar. 

It should be obvious what's happening here. This wind farm will generate enough electricity for 60,000 homes. And the local utility will get exactly ZERO dollars from it. So the politicians are siding with the utilities to oppose the threat that renewable energy poses to utilities. This is happening around the country. Several states have passed laws to hinder solar and wind power

But guess what? It's not going to work. Companies can save themselves a lot of money by building their own solar and wind farms. Once again, the market will win. And I am not a fan of utility stocks because they are going to lose revenue. 

Here's another one: coal. Trump has promised to revitalize coal, helping the men and women that live in coal country. Not gonna happen. Sure, we will continue to use coal. But demand for coal isn't going to rise. Natural gas's kung fu is just too strong. It's the same with wind and solar...

And Twitter

I've been bullish on Twitter for about a year now. My thesis was that, since Twitter is now the go-to news source, management would figure out how to start making money and grow the brand. Now, I'm starting to think my thesis is wrong.

Twitter has been getting its butt kicked consistently by Facebook and Snapchat. And despite the constant reminders that its kung fu is not strong, Twitter is failing to improve. That's a bad sign...

This is why I love the financial market. It is the ultimate arbiter, the supreme judge. As an investor, you should take solace in this fact. The market will always win. And so if you stick with companies that have strong kung fu, you will be rewarded. It's as simple as that. 

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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