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Who Will Sell Out America?

Written by Briton Ryle
Posted January 13, 2016

I have a question for you. Actually, I have a few questions. They all relate to the Saudi Arabian proposition to take its oil company, Aramco, public.

When you take a company public, you sell shares to the investing public. And since it's the first time the shares are offered to the public, it's called an initial public offering, or IPO.

For an IPO, it is the owner of those shares — whether it's the company or the owners of the company — that makes a lot of cash off the deal.

Usually, when a company goes public, the owners sell some shares along with the company's shares in the offering. That way the owners make some loot, and the company also gets some loot to fund expansion, maybe take care of some debt — whatever is needed to make the company stronger.

Wall Street investment banks get on board the IPO process basically as marketers. Companies like Goldman Sachs, Morgan Stanley, or Bank of America have a bunch of high net worth clients that they can market the new IPO shares to. And they may also buy shares themselves to put in investment funds they offer for sale.

The investment banks are also responsible for ensuring that the IPO price works. In other words, they need to make sure there are plenty of buyers willing to pay the IPO price. If they screw it up and the price falls, not only do they look bad, but they might also piss off some of their important clients who bought at a higher price.

This actually happened during the Facebook IPO. The investment banks got too greedy, jacked the IPO price too high, and it started dropping. Morgan Stanley had to step up and spend something like $100 million of its own cash on the open market to try and support the share price. Morgan Stanley then put the shares into its mutual funds, effectively "transferring" its own loss onto the investors that owned the funds.

Of course, it all worked out. Because Facebook shares are a lot higher today than they were on IPO day. But still, the point here is that the investment banks have to look out for the IPO company's interests.

Sorry for the long build-up, but it's important to get the setup right. So what I want to know is: Where does Saudi Arabia think it will IPO its oil company? What do they want to do with the money? And what investment bank is going to help them?

Saudi Arrogance

It's estimated that with 266 billion barrels of oil, an Aramco IPO might be worth $10 trillion. That's a ridiculous number. More likely, the Saudis would float a limited number of shares, representing a smaller part of Aramco. Let's say that would be worth $1 trillion. It's still a darn big number...

There's only one market that can really support an offering that big: the U.S. market. But let's say the IPO goes to the Saudi Arabian stock market. That market is worth about $400 billion right now. It would clearly need to attract foreign money into Saudi Arabia to support a valuation as high as what Aramco would command.

So even if Aramco isn't listed in the U.S. and instead ends up at home in Saudi Arabia, they will still need U.S. investors and their money.

Now we get to the real meat of my questions about an Aramco IPO. Should U.S. investors own shares of this company? And should U.S. investment banks help Aramco find U.S. investors?

Let's be perfectly clear about one thing: Saudi Arabia is deliberately crushing oil prices. It's doing this for a few reasons, one of which is to crush U.S. shale oil production. The Saudis want to see U.S. oil companies go bankrupt. That will mean a lot of U.S. investors and banks will lose money. Not only that, but the decline in oil prices and commensurate reduced drilling activity has cost a lot of American jobs. (Just yesterday, BP announced it was cutting 4,000 jobs.)

And the weakness in oil prices is a big reason S&P 500 earnings growth is expected to be very weak in 2016. The energy sector, which makes up around 16% of the S&P 500, is a negative drag on earnings. And one of the reasons the stock market has sold off so far this year is because earnings growth is expected to be weak.

It's not a huge stretch to say that Saudi Arabia is waging a war on the entire global economy. Low oil prices are absolutely affecting demand from emerging economies.

War is Expensive

Of course, Saudi Arabia's war on oil and the global economy is very expensive. They are missing out on $100 billion a year in oil revenue. They've already spent over $100 billion of their cash reserves, which now stand around $600 billion. And with a $10 billion-a-month burn rate, they will have spent half their cash by mid-2017.

They've cut spending, postponed a big solar project, and sold bonds to raise cash.

There's only one thing that's going to stop Saudi Arabia from waging its war on the global economy, and that's when they run out of cash to fund it. They know this, that's why they are proposing an IPO of their crown jewel Aramco in the first place. So by all means, let's help fund their war on the global economy by buying into the  Aramco IPO...

Now, I know what some people will say: "Oh, it's a free market, invest in what you want, money will go where the best opportunity is," and so on...

Most of the time, I agree with these platitudes. It is a free market, and any individual is free to do whatever he or she wants with their money.

But I've got a real problem investing in a country that's at best no friend to my country and at worst actively trying to do my country harm. It's not worth the 30 pieces of silver I might get in return.

I'm sure that a U.S. investment bank or two will jump at the chance to help the Saudis. Last year, Citi and Morgan Stanley helped Aramco sell $10 billion in bonds. I bet they would have no qualms helping the Saudis again for another big paycheck, even if it meant that more Americans would lose jobs and the S&P 500 would trade even lower.

It's sickening.

Until next time,

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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