The Saudis Keep Giving

Saudi Arabia just keeps giving and giving. 

I write two articles a week for Wealth Daily. And while the stock market is pretty much a bottomless well of material, the House of Saud is giving it a run for its money. Every time I think about their idiotic oil policy, another article springs to life. Today, I’m wondering: What did they think would happen?

The great plan to crush oil prices, secure their own market share, kill U.S. shale production, and force OPEC members in line has been a complete failure. The only thing they’ve managed to get right is the “crush prices” part. They’ve certainly not killed the U.S. shale industry. Hurt it, yes. Something like 80 U.S. oil companies have gone out of business. But the oil is still there and will get pumped by stronger hands. 

How did they miss the fact that Permian Basin oil is profitable around $30 a barrel? I don’t know, seems like a pretty significant oversight. 

To be fair, I’ll grant that the Saudis may have gained a couple points of market share. But at what cost? You can’t make up the lost revenue on volume. They’re pumping as much as they can. And they’ve blown a massive hole in their budget. Deficits were $98 billion last year, and should be around $87 billion this year. Plus, they’ve had to spend $170 billion of their savings, roughly 23%. And debt to GDP has gone from 2% in 2013 to around 20% today.

There’s just no way you can look at those numbers and not think “disaster.”

But the funniest part to me has been the whole production cut fiasco that the Saudis have tried to orchestrate. It definitely looks like a face-saving move to me. The Saudis want prices higher, but they don’t want to admit that they made a mistake. If anything, the Saudis have lost power in OPEC, not gained it.

Eye for an Eye

It was assumed that Saudi Arabia wanted to put the squeeze on Iran when they boosted production and cut prices. Iran was just about to re-enter the global oil market, and the Saudi didn’t want them suddenly flush with cash.

In addition to Iran, the Saudis screwed over every OPEC member. Look at Venezuela. Sure, it’s never had a healthy economy. But today it’s on the brink of total collapse. And it’s the Saudis’ oil policy that pushed it over the edge. 

So now, the Saudis want to throw OPEC a bone and get oil production in line and prices higher. Only other OPEC countries don’t want to play ball. In a perfect act of retribution, both Iran and Iraq want production cut exemptions. They are both basically saying, “You want prices higher, you cut production.”

Iraq has been steadily raising its production to pre-war levels. That extra production is a bit like gravy. For Iran, it’s all gravy, because they haven’t been able to sell oil at all. Talk about a miscalculation — it might be true that both Iran and Iraq are better able to deal with low oil prices than the Saudis!

Pride is now at play in the OPEC production cut dealings. So I have no doubt that more article-worthy material is on the way. 

Shifting Gears…

You know I like to write “digest” style articles, hitting a few different topics in one article. Well, here goes…

****Keep on semiconductor stocks. Broadcom (NASDAQ: AVGO) bought out Avago earlier this year, and now the powerhouse is taking out Brocade (NASDAQ: BRCD). Qualcomm (NASDAQ: QCOM) just announced a $110 buyout price for NXP Semi (NASDAQ: NXPI). NXP does near-field communications (NFC), chips that broadcast in a small range. These are the chips that just appeared on credit and debit cards. NFC will also be very important when the Internet of Things (IoT) really gets going. 

It makes me wonder what Intel is doing. It is missing the mobile communications chip boom in a big way. And as cars go automated, this a huge opportunity that Intel is also behind on. So, keep an eye on Nvidia (NASDAQ: NVDA). Nvidia has a lot of potential in the driverless car space. That’s why it keeps hitting new highs. 

Also, Cypress Semi (NASDAQ: CY) has been getting some buyout interest around $14. It’s at $10 now and pays a 4.4% dividend. 

****My election barometer stock Gilead Sciences (NASDAQ: GILD) just threw a curveball. I’ve been watching it because it’s a biotech, and biotechs have been in the crapper since presidential hopeful Clinton attacked drug pricing. Investors worry that Clinton will try to reel in prices, hurting biotech profits. I’ve theorized that strength in biotech/Gilead suggests that investors are now comfortable that valuations are in line with the worst that a potential Clinton presidency could do. 

But Gilead missed earnings last night. The stock is down, and it may be losing its usefulness. Still, I’m watching the $73 level. If that holds, we may see some more upside action for biotech.

****Q3 GDP came in looking good at 2.9%. But don’t forget, health care spending is included in this. So as we spend more and more on insurance, GDP improves.

But real spending on stuff that we want isn’t improving. This might not be widely understood by the general population, but it’s an issue for the stock market. In fact, it might be the biggest issue for the long term. Consumer spending is the lifeblood of the U.S. economy. You just don’t want to see discretionary dollars being diverted to things like health insurance premiums.

****Twitter’s (NYSE: TWTR) business is actually improving. Last week, the company beat earnings expectations and grew monthly user numbers. Not by much, mind you, but anything is good at this point. I don’t know if you use Twitter, but as an investor, you should. The traders, money managers, and analysts that share their work on Twitter are top-notch. It’s a really great and useful community. And it looks like Twitter management has figured this out…

I understand that it is going after Yahoo! Finance, with soon-to-be-released stocks charts and other stuff. My experience of Twitter management is that they haven’t been very responsive to what their users want. This move would mark a change in that attitude. I know I’ve recommended Twitter stock higher than it is now, but I’ll say it again: around $18, it looks pretty good. And if you want to follow me on Twitter, here’s where you can.

Until next time,

Briton Ryle

@BritonRyle on Twitter

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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.