The Tariff Man has done it again. President Donald Trump recently announced that he will expand import taxes on American consumers of auto parts, nails, and other goods made in the United States with steel and aluminum. Apparently, untaxed imports of these metals put our national security at risk.
Under the latest proclamation, some imports of products made with aluminum will be subject to an additional 10 percent tax, while some steel products will be hit with a 25 percent one. The decision comes two years after the first round of steel and aluminum tariffs, a little over a month following the United States-Mexico-Canada Agreement’s approval by the U.S. Congress, two weeks after Trump signed a phase one trade deal with China, and while the U.S. government is in the middle of some trade negotiations with the Europeans.
Thanks to the new trade agreement, Canada and Mexico are exempt from these new levies. Argentina and Australia are exempt from the added aluminum tariffs, while Brazil and South Korea are exempt from the additional steel tariffs. This complexity could make a phase two agreement with China difficult, and it likely won’t help with the Europeans.
Interestingly, the president does seem to understand that his original tariffs on steel and aluminum have had a negative impact, as predicted by many economists.
The recent proclamation acknowledges that the metal levies have reduced imports of foreign metals and that, as a result, U.S. imports of some products made with those metals “have significantly increased since the imposition of the tariffs and quotas.” The net effect, the proclamation continues, “has been to erode the customer base for U.S. producers of aluminum and steel.” Exactly!
This outcome is a well-documented impact of tariffs on intermediate goods such as steel and aluminum. First, these tariffs raise the cost of the imported metals, and as a result, that raises the production costs for American manufacturers that use these inputs. Unsurprisingly, this means higher prices for American-made products and an increase in imports of goods made with those metals.
For instance, over a year ago, I wrote in this column that an increase in the cost of steel was raising the cost of producing garbage disposals in the United States. Having to cover the tariff expense by charging higher prices, these American producers saw some of their customers switch to foreign-made garbage disposals. The same thing happened with sugar. As domestic sugar producers were protected from foreign competition with sugar tariffs, the importation of candy bars increased significantly.
Even if we ignore the additional cost of the retaliatory tariffs imposed by our very annoyed trade partners, Trump’s tariffs have had many other documented negative effects on American consumers of steel and aluminum. These effects are revealed by the thousands of requests by American manufacturers for exemptions from the import tax. These manufacturers, some of them steel manufacturers themselves, are finding that the higher prices they must now pay for some inputs are making them less competitive.
A recent study published by economists Aaron Flaaen and Justin Pierce at the Federal Reserve Board researched whether the recent wave of tariffs has delivered on the president’s promise to help U.S. manufacturing. After taking into consideration the retaliatory tariffs, the answer is pretty clear: no. The American Enterprise Institute’s Michael Strain summarizes the findings in detail for Bloomberg magazine. “Beyond reducing manufacturing employment,” he notes, “the study concluded that producer prices increased, but that manufacturing output did not. So the tariffs didn’t just hurt the economy as a whole, but damaged the manufacturing sector specifically.”
Most people, when faced with this evidence, would back away from using tariffs—but not the Tariff Man. Trump has brazenly decided that he will now double down with new tariffs on derivative products. Unfortunately, these same policies will yield the same sour results.
The Tariff Man has done it again. President Donald Trump recently announced that he will expand import taxes on American consumers of auto parts, nails, and other goods made in the United States with steel and aluminum. Apparently, untaxed imports of these metals put our national security at risk.
Under the latest proclamation, some imports of products made with aluminum will be subject to an additional 10 percent tax, while some steel products will be hit with a 25 percent one. The decision comes two years after the first round of steel and aluminum tariffs, a little over a month following the United States-Mexico-Canada Agreement’s approval by the U.S. Congress, two weeks after Trump signed a phase one trade deal with China, and while the U.S. government is in the middle of some trade negotiations with the Europeans.
Thanks to the new trade agreement, Canada and Mexico are exempt from these new levies. Argentina and Australia are exempt from the added aluminum tariffs, while Brazil and South Korea are exempt from the additional steel tariffs. This complexity could make a phase two agreement with China difficult, and it likely won’t help with the Europeans.
Interestingly, the president does seem to understand that his original tariffs on steel and aluminum have had a negative impact, as predicted by many economists.
The recent proclamation acknowledges that the metal levies have reduced imports of foreign metals and that, as a result, U.S. imports of some products made with those metals “have significantly increased since the imposition of the tariffs and quotas.” The net effect, the proclamation continues, “has been to erode the customer base for U.S. producers of aluminum and steel.” Exactly!
This outcome is a well-documented impact of tariffs on intermediate goods such as steel and aluminum. First, these tariffs raise the cost of the imported metals, and as a result, that raises the production costs for American manufacturers that use these inputs. Unsurprisingly, this means higher prices for American-made products and an increase in imports of goods made with those metals.
For instance, over a year ago, I wrote in this column that an increase in the cost of steel was raising the cost of producing garbage disposals in the United States. Having to cover the tariff expense by charging higher prices, these American producers saw some of their customers switch to foreign-made garbage disposals. The same thing happened with sugar. As domestic sugar producers were protected from foreign competition with sugar tariffs, the importation of candy bars increased significantly.
Even if we ignore the additional cost of the retaliatory tariffs imposed by our very annoyed trade partners, Trump’s tariffs have had many other documented negative effects on American consumers of steel and aluminum. These effects are revealed by the thousands of requests by American manufacturers for exemptions from the import tax. These manufacturers, some of them steel manufacturers themselves, are finding that the higher prices they must now pay for some inputs are making them less competitive.
A recent study published by economists Aaron Flaaen and Justin Pierce at the Federal Reserve Board researched whether the recent wave of tariffs has delivered on the president’s promise to help U.S. manufacturing. After taking into consideration the retaliatory tariffs, the answer is pretty clear: no. The American Enterprise Institute’s Michael Strain summarizes the findings in detail for Bloomberg magazine. “Beyond reducing manufacturing employment,” he notes, “the study concluded that producer prices increased, but that manufacturing output did not. So the tariffs didn’t just hurt the economy as a whole, but damaged the manufacturing sector specifically.”
Most people, when faced with this evidence, would back away from using tariffs—but not the Tariff Man. Trump has brazenly decided that he will now double down with new tariffs on derivative products. Unfortunately, these same policies will yield the same sour results.
After Slashing Bonuses, Deutsche Bank Delays Promised Pay Raises
Look on the bright side: At least you still have a job.
After an almost unrelentingly demoralizing 2019, Deutsche Bank’s CEO is asking his bankers to make one last sacrifice for the sake of Sewing’s grand turnaround vision to keep this melting icecube intact just a little while longer.
What’s he doing, exactly? Well, waiting few extra months for pay raises promised last year.
But hopefully employees don’t read too much into the delay: because of the pay raises taking effect on Jan. 1, bankers will need to wait until April Fool’s Day instead, according to Reuters and the New York Post.
“After thorough discussions, we on the Management Board have taken the decision that, from 2020, any fixed pay adjustments in connection with the annual review or promotion process will be effective April 1 (not retroactively effective as of January 1).”
Unsurprisingly, Sewing blamed the many scandals and penalties that have plagued Deutsche Bank, saying they’ve hastened the need for dramatic cost cuts. For context: The bank has paid out more than $20 billion in fines over the last decade.
“We carefully assessed how this decision would impact our employees and benchmarked ourselves against peers,” Sewing said in a memo obtained by the New York Post.
Sewing stressed that for the bank to become more competitive and avoid even more painful cutbacks, it must be run in a “disciplined manner”. Perhaps he should tell that to his predecessors who allowed the global headcount at the German giant to swell to nearly 90,000.
“For the bank to be competitive and meet its goals for sustainable returns to shareholders it is vital that we further manage costs in a disciplined manner,” Sewing wrote. “This also relates to compensation.”
“We carefully assessed how this decision would impact our employees and benchmarked ourselves against peers,” Sewing added.
Anybody complaining about the delay should take a second to think about what they have to be thankful for: At least they still have jobs, and will continue to be paid.
“We will continue to compensate employees for their qualifications, experience and skills, commensurate with the requirements, size and scope of their role,” Deutsche Bank said.
Many of their now-former colleagues aren’t so lucky.
Earlier this month, the Washington Post reported that the homicide rate in Washington, D.C., in 2019 was higher than it was in 2018. There were 166 people killed in 2019, compared to 160 in 2018. In fact, the 2019 D.C. homicide rate is the highest number since 2008.
But isn’t that impossible? After all, our nation’s capital has one of the strictest gun-control laws in the United States.
The Post points out, “D.C. Police Chief Peter Newsham has identified illegal firearms as a major factor fueling homicides.”
But how is that possible? Given that the city has such strict gun-control laws, how is it possible that people are still being killed by guns?
The answer is very simple. People who are willing to murder people don’t give a hoot about gun-control laws. Why should they? If they get caught, prosecuted, and convicted of murder, they are going to have to serve a very long jail term, maybe even life in prison. They know that. What difference does it make if a judge adds another 5 years for violating some gun-control law?
Clockwise starting at topleft: Glock G22, Glock G21, Kimber Custom Raptor, Dan Wesson Commander, Smith & Wesson Air Weight .357, Ruger Blackhawk .357, Ruger SP101, Sig Sauer P220 Combat.
That’s what many in the gun-control crowd have never been able to process. They just naively assume that if possession of guns is made illegal, everyone will comply with the law.
In making that assumption, the gun-control crowd, of course, is right. Most people will comply with the law. They don’t want to take the chance of being convicted of a felony. The problem, however, is that those are the people who oftentimes are the victims of violent crime. Thus, what a gun-control law does is disarm those people, thereby preventing them from defending themselves against people who don’t give a hoot for gun-control laws.
The Post adds another dimension to the gun-control equation. It writes: “We also hope that Virginia — a major source of the illegal firearms that flood the District — reimposes a law to limit purchases of handguns to one a month.”
So, you see, it’s not enough to impose strict gun control in D.C. It then becomes necessary to impose strict gun control in Virginia. Once that is accomplished, however, the guns will begin flooding in from Maryland, which means even stricter gun control there. And let’s not forget the likelihood that smugglers from North Carolina, seeing the soaring prices of black-market guns in D.C., will begin flooding guns into D.C. by boats traveling up the Potomac. They’re going to need strict gun control in North Carolina too to ensure that gun control in D.C. works.
In other words, to order to make D.C. a gun-free society, which is what the gun-control crowd really wants to accomplish, a strict gun-control regime will ultimately be needed all across the country. That means disarming law-abiding people in every state, thereby preventing them from defending themselves against the violent people who don’t care whether they violate gun-control laws.
Let’s assume the gun-control crowd got its wish and that the only people who have guns are the Pentagon, the military establishment, the CIA, the NSA, the FBI, the TSA, the DEA, ICE, and other federal officials.
The question then arises: Who protects the citizenry from those people? What if a national “emergency” or “crisis” involving “national security” occurs and those federal people begin rounding up American families who officials think pose a threat to “national security” and placing them in Abu Ghraib prison camps all across the nation? At that point, many American citizens will wish they still had their guns.
But one thing is certain: Once people surrender their guns to the government, they will never make the mistake a second time because they simply will not have the opportunity to make the mistake a second time. That’s because once people give up their guns to their government, there is no possibility that the government will let them ever have their guns back.
The real problem in America is violence, not guns. Enacting a one-per-month purchase of a handgun in Virginia, as the Post recommends, is like putting a Band-Aid on a massive hemorrhaging wound.
There are two major ways to drastically reduce violence in America:
(1) Legalize drugs, all of them. That would immediately put out of business all drug cartels and drug gangs. It would also drastically reduce the price of drugs, thereby reducing robberies, muggings, and thefts to get the money to pay the exorbitant black-market prices for drugs; and
(2) Bring all the troops home from the Middle East and Afghanistan (and everywhere else), where they have been killing and injuring people and wreaking massive destructive violence on a constant level for decades. It is a virtual certainty that this culture of violence has seeped into American society, especially with what appear to be copycat killings that target people for what appears to be no rational reason.
Let’s legalize drugs and end the Pentagon-CIA culture of violence overseas. Violence would plummet here at home, which would thereby eliminate one of the principal excuses for gun control here in the United States.
The right to keep and bear arms is a fundamental, God-given right, one that exists independently of the Second Amendment and the Constitution itself.
It is also a key to a safer, more secure society.
Gun control leads to higher homicides and to the possibility of federal tyranny. Too bad people in Washington, D.C., haven’t figured that out.
San Francisco Poop Patrol Boss Arrested On Felony Fraud Charges Involving ‘Multiple Schemes’: FBI
San Francisco’s Director of Public Works was arrested on Monday by the FBI over a series of suspected pay-to-play schemes, according to the San Francisco Examiner.
Public Works Director Mohammed Nuru has been placed on leave following his arrest Monday by the FBI. (Kevin N. Hume/S.F. Examiner)
Mohammed Nuru, 57, was charged alongside San Francisco businessman Nick Bovis are alleged to have engaged in “corruption, bribery, and side deals by one of San Francisco’s highest-ranking public employees. San Francisco has been betrayed as alleged in the complaint,” according to a 75-page complaint unsealed this week.
“The complaint alleges corruption pouring into San Francisco from around the world,” said US Attorney for the Northern District of California, David Anderson, who added that the complaint alleges “corruption, bribery and side deals from one of San Francisco’s highest-ranking public employees.”
Above: David Anderson, U.S. Attorney for the Northern District of California, on Tuesday announced charges against Public Works Director Mohammed Nuru in a public corruption probe.
Of note, the Public Works department oversees San Francisco’s ‘poop patrol,’ which pays crews making six-figure salaries to clean up after the city’s notorious homeless population.
Nuru faces 20 years in prison if convicted on all counts – including an additional five years because he lied to the FBI about not keeping quiet about the investigation as originally agreed upon when he was arrested January 21st.
The alleged actions took place in 2018 and 2019 and were documented during a long-running and broad investigation involving undercover agents, informants, and extensive wire-taps. Other figures Bovis or Nuru interacted with are described obliquely in the complaint. Anderson said he’s certain individuals will recognize themselves and encouraged them to come forward.
“They have an opportunity to do the right thing — for San Francisco and all of us,” he said. “If they are inclined to do the right thing, they should … run to the FBI offices and disclose what they know. Or we’ll do it the other way.”
Bovis, Nuru’s partner in several of “five schemes” outlined today, is facing 20 years in prison. Both are free on $2 million bonds and will next appear in court on Feb. 6.
Anderson and FBI special agent in charge Jack Bennett outlined “five schemes.” The charges stem from the first and the four others are “charged to show state of mind.”
They are: 1. The Airport Scheme; 2. The Multimillion-Dollar Mixed-Use Development Scheme; 3. The Transbay Transit Center Scheme; 4. The Bathroom Trailer and Homeless Shelter Scheme; 5. The Vacation Home Scheme. –Mission Local
In some not so surprising news, a spy expert has come out saying what most of us already knew: the Steele dossier was completely “fabricated.” Nigel West, one of Britain’s leading experts on espionage, was hired to examine the dossier written by his friend Christopher Steele. He concluded it was all manufactured falsehoods.
West, hired to examine the dossier back in 2017, quickly concluded that “there is… a strong possibility that all Steele’s material has been fabricated,” according to the Sunday Times.
Woah. Britain’s @thesundaytimes reports that the infamous “Steele Dossier” on @realDonaldTrump, compiled by a former MI6 spy, which accused the US president of being compromised by Russia & drove the “Russigate” hoax, was a work of “fabrication.” https://t.co/Yyc8Bt5r4M
Steele’s scandalous document, which claimed extensive ties between the then-US President-elect Donald Trump and the Kremlin, was published by BuzzFeed in January 2017 and quickly became the cornerstone of “Russiagate.” Media talking heads insisted that much of it had been corroborated. In fact, nothing was. –RT
It took West a long time to come out with the information that the dossier was an utter fabrication. It isn’t clear why he waited so long to reveal what most already knew anyway. Even the FBI director at the time, James Comey, described the dossier as“salacious and unverified” in testimony to Congress. But the fact that this dossier was “unverified” did not stop Comey from signing an application for a FISA warrant that the Bureau used to spy on the Trump campaign via one of its advisers, Carter Page.
West told RT that he was surprised Steele made such obvious errors in the dossier. Some of the most glaring mistakes were those such as treating one particular source as an expert in three entirely different fields or making up the existence of the Russian consulate in Miami, Florida. The source in question starts out as a middle-manager at the Ritz-Carlton in Moscow, but is later described as an expert on cyber warfare, and later yet as an expert on money-laundering by Russian immigrants in the US, West explained.
“On the face of it, it looked inherently improbable that this single source was as proclaimed.”
Coronavirus Could Hinder Beijing’s Ability To Fulfill Phase One Trade Deal
China’s next dilemma will be fulfilling the phase one trade deal, which states they must buy $200 billion in additional products from the U.S. over two years on top of pre-trade war levels, reported the South China Morning Post (SCMP).
The outbreak of the deadly virus has dramatically slowed China’s economy, with nearly 57 million people in 15 cities on lockdown for the next several weeks. Factories and transportation networks across much of the country are shut down, which means goods across domestic and international supply chains are not free-flowing in the country.
Cases of the deadly virus continue to exponentially rise, as government numbers on Tuesday night show more than 6,000 infected and 132 confirmed deaths. Comparing the deadly virus with the 2003 SARS outbreak – it’s important to note that coronavirus has already surpassed the number of infected by SARS in a few weeks, compared to the nine-month ordeal almost two decades ago.
Traders who spoke with SCMP had their doubts that China could hit hard targets of an additional $32 billion agriculture and $52 billion energy pledge over the next two years, mostly because the demand for the goods has collapsed. Also, countries like Brazil and Argentina have eroded U.S. market share in China over the last year with cheaper products.
“There are some cities and villages essentially in lockdown, and this will completely hamper the movements of not only people, but also agricultural goods. So hogs that are supposed to be going to the slaughterhouse, will just not be transported,” said Andrei Agapi, associate pricing director for agriculture at S&P Global Platts in Singapore.
Large swaths of the country’s industrial complex have been shut down, expected to last for the next several weeks. Currently, there’s no cure, and the spread of the virus is becoming uncontrollable, this could lead to extended shutdowns.
We noted Monday, Foxconn has a large manufacturing plant making Apple’s iPhones in Wuhan, the epicenter of the virus outbreak, along with other facilities nearby, are currently closed until February 10.
Besides major industrial hubs closed, critical transportation networks across China remain closed, which has impeded the ability of goods to move freely across the country.
“The viral outbreak definitely throws a wrench into those [purchasing] plans, not just in terms of logistics – as major ports and transport links are closed or disrupted – but also in [terms of] policymaker attention,” said Nick Marro, global trade lead at The Economist Intelligence Unit in Hong Kong.
Marro said the country is occupied with “mobilizing most of its resources to handle the outbreak, which is now the top item on the policy agenda. The trade war with the U.S. inevitably has to come second.“
Agapi said private buyers who want to hedge their import purchases in the futures market might not be able to do so until February 3, when markets open.
“Anybody that wants to buy soybeans will not be able to hedge their crush margins on the futures exchange, and that will be an additional reason why people will just hold off on their buying,” Agapi said. “Some people are also not going to be able to come to work depending on the restrictions on travel. So in practical terms, I think that is going to lower the buying base.“
Carlos Casanova, an Asia-Pacific economist at Coface, said the impact of the economy coming to a halt will be felt on the largest companies with “supply chain exposures to Wuhan and other cities that are locked down. As no merchandise will be leaving soon, we anticipate some degree of disruption and payment delays.”
Renaud Anjoran, CEO of China-focused trade and manufacturing advisory firm Sofeast, said travel bans in the country could lead to a more pronounced industrial slump, where factories could be idled for an extended period that would create further problems with the ability of some companies to purchase U.S. goods.
New York City professor suggested on national television that President Donald Trump has engaged in a “murder conspiracy” during his ongoing senate impeachment trial.
Maya Wiley, professor at the New School in New York City, made the comment Thursday during an appearance on MSNBC.
“[W]hen you look at the obstruction, part of what House impeachment manager Rep. Jerry Nadler (D-N.Y.) is saying is, this is suicide for congressional oversight if we do not take action on a president who by the way just yesterday in Davos kind of rejoiced at the fact that they had all the evidence and not Congress…” Wiley said.
The professor appears to be referencing comments in which Trump said during his visit to the World Economic Forum in Switzerland,
“When we released that conversation all hell broke out with the Democrats. Because they said, ‘Wait a minute, this is much different than what [Rep. Adam Schiff (D-Calif.)] told us.’ So, we’re doing very well. I got to watch enough. I thought our team did a very good job,” Trump said of the first hours of the Senate impeachment trial.
“But honestly, we have all the material. They don’t have the material,” Trump added.
Wiley then compared the president’s actions to that of a “murder conspiracy.”
“But it’s also a murder conspiracy and the victim here is the Constitution,” Wiley said.
Coronavirus Attention “Way Overblown”, Dr. Ron Paul Warns Real Danger Is Fed “Doesn’t Have Control”
Dr. Ron Paul appeared Wednesday on the Quoth the Raven Podcast to speak with host Chris Irons about the coronavirus, Fed policy and gold prices heading into the election.
To start, Dr. Paul claimed that he thought fears about the virus were overblown. He said the virus is being reported on “way out of proportion with the amount of attention people should be giving it.”
“The danger is way overblown. There’s no way what I’m saying is perfectly clear, I’m just going by my best and what’s happened in the past,” he said.
When asked about the origins of the virus and whether he thought it could have been human-made, he said:
“About whether or not it came from a laboratory or was produced deliberately, I just don’t think so.”
“It’s all a gimmick, probably to try and sell more vaccines,” Dr. Paul commented when asked about whether or not he believed China’s data about the virus.
Dr. Paul said he didn’t believe just as he doesn’t believe the U.S. when it came to China’s macroeconomic data. From there, Dr. Paul talked about the addiction to money printing the Fed currently has.
“It’s the middle class that suffers” when the Fed destroys the money, Dr. Paul said. And when asked about whether or not its possible to even gauge risk anymore, given the amount of money printing that has taken place in the U.S., he replied that he didn’t think it was possible.
When speaking about the Trump administration’s policy of continuing to print money, Dr. Paul said there are “short-term benefits” but that ultimately, “the Fed doesn’t have control” of what happens in the long term.
“They don’t have control and it just drives them nuts,” Dr. Paul says.
“The markets are more powerful.”
When asked about what he thought the price of gold would do heading into the November election, Dr. Paul commented: “The gold price is going up. Spending is excessive and it’s going to get worse. And it will be monetized.”
“There’s always an excuse for gold to jump $100,” Dr. Paul concluded.
When asked about the country’s consistent position of being at war in the middle east, Dr. Paul said it “makes him sick” when congresspeople use the constitution and freedom as an excuse to go to war.
Finally, on the topic of the impeachment, Dr. Paul said:
“They’re trying to impeach a President out of clear blue hatred…”
The investment case for oil companies has been under attack recently. Climate change activists know that the dividends paid by the largest of these companies are among the most lucrative and stable over time, of any payers in the marketplace today. Further, they know these attacks will receive wide coverage precisely because of the criticality of the dividend stability to these companies stock price. It’s a two-fer for these folks. The only thing is…it isn’t true.
Dividends are the principle reason to own the shares of the major oil companies. The dividend payouts these days are yielding 4-7 percent, thanks to the depressed equity valuations of the oil majors. As you will note, this is well above most other options, like U.S. 10-year treasury notes as an example. Any threat to the dividend will absolutely bring a “dog diving under the bed in a thunderstorm” response from the typical investor. They will push the sell button lickety-split. And, of course, that’s just the response hoped for. Smart investors in these companies will pause just a moment for a second opinion. Perhaps one with some facts behind it, like you will read in this article.
“Sustainable” forms of energy are all the rage these days. You can’t watch a money show without hearing from the bloviator de jour about how “Green Energy” will replace traditional hydrocarbon sources in about ten-years or so. Among these worthies are the CEOs of major institutional holders, like Blackrock or Norway’s Sovereign Wealth Fund and other large banking and fund management companies. These leaders will freely admit they are moving toward divestiture due to the political narratives regarding climate change, stating it as a fact. The truth is they have no rational basis, but are rather yielding to the out-spoken minority “stake-holders,” who are demanding action on their part to divest “dirty energy sources.”
As noted above in this article, we will take a closer look at the investbility of some of the biggest dividend payers on the planet. In doing this we will look past the splashy headlines that the CEO’s of these companies garner in watering-holes like Davos. Get ready for some real analysis, and prepare to sleep well at night knowing your retirement portfolio will be there when you need it.
Climate change propaganda and misinformation
The stimulus for this article was an article I chanced on by a climate change crisis group called the Institute for Energy Economics and Financial Analysis, or IEEFA.
A little research finds this is an organization that takes its mission as:
“The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.”
Hmmm, what the heck are they talking about, you may wonder? One thing is for sure they have an agenda against the petroleum industry, making their conclusions suspicious to this reader. Now, let’s understand information can be completely accurate and still be misleading.
I haven’t gone back and fact-checked any of the information linked from this IEEFA article. Instead, I did my own investigation using company documents to see if I could justify my faith in the companies whose viability was being questioned. My results will be revealed in the next section of this article.
Like most investigations that start with an agenda, the IEEFA article contains a grain of truth. This “grain” helps to anchor the disinformation that follows. To wit: many oil companies have outspent cash flows maintaining dividends over the time period measured.
IEEFA course provides no context here, just raw data. This can be misleading. In the discussion that follows, we will provide some context to help evaluate the concerns that we really have.
What is the trend for the future? Are our investments safe, as safe as any stock investment can be, and are the dividends many of us rely upon to maintain our retired standard of living, likely to continue?
That’s what I want to know, and I expect if you are reading this article, you do as well.
Reasons why super major stocks will remain investible
Let me offer the following points that should give you more confidence in the ability of these companies to continue earning your trust and your capital on into the future.
1. Dividend Payout Patios (Net income/dividend)
Ratios below 1:1 are considered “safe,” classically, but safe is a relative term. Over the past five years all of these companies with the exception of Total (NYSE:TOT) bonds sales have been the way they covered the dividend. Currently, they are in the range of or slightly above historical sub 1:1 levels.
The context lacking in the IEEFA article, denoted by the hump in the middle of the chart above, represents the full impact of the “lower for longer” oil price. The impact of these lower price realizations, and the fact that these companies were also slow to whittle down their capex budgets, meant that the dividend was being supported by borrowing.
So what is the truth, if that IEEFA article is so offbase? What are these companies telling us about coverage projections going forward? Let’s look at a few cash flow projections from this cohort.
Based on a Brent price of $60, Shell, (NYSE:RDS.A) (NYSE:RDS.B) projects free cash flows to rise from around $28 bn in 2020 to about $35 bn by 2025. With current obligations of about $16 bn for dividends, that leaves an increasingly fat amount for stock repurchases. Dividend coverage should improve consistently over this time and shareholders should lose no sleep. The check will be in the mail.
ExxonMobil (NYSE:XOM) recently has struggled to maintain a sub-1:1 cash flow to dividend ratio as my chart above shows. Currently, it is well above that and the current 5.15 percent yield notes the markets dissatisfaction with that situation. That will change and soon. With the Liza field coming on line and with break-even costs in the $30/bbl range, as much $5 bn of free cash could be generated from that project alone. XOM is on track to produce a million barrels a day from the Permian by 2025 with BE costs as low as $20/bbl. Bank America Merrill Lynch recently put out a bullish call on XOM with a price target based on increasing cash flow from these projects of $100/share.
Chevron (NYSE:CVX) is a dividend champion that has been increasing its dividend in recent years and lowering capex resulting in its current 0.53 coverage ratio. Market sages will tell you that the safest dividend is one that’s just been raised. CVX consistently ranks as one of the best-managed companies and has a project portfolio that will keep profits gushing in years to come. It grew cash flow by 50 percent YoY in 2018, and current management’s fiscal discipline should maintain that trend over the next few years. It currently covers capex and dividends with a $52 oil price, and has been buying back stock currently at a clip of $4 bn per annum.
This has turned into a long article so I will skip the same type of analysis for (NYSE:BP) and (NYSE:TOT) in terms of project portfolios and capex restraint. All of these companies have redesigned their upstream projects to be cash flow positive with oil prices much lower than they are now. In this core group of Super Major energy companies, investors should sleep well at night.
2. Stock buybacks.
These companies are all buying back billions of dollars of their common stock every year. This decreases the total dividend payout, and makes the dividend safer for each remaining share of stock. In the past year, Shell has bought back about $12 bn worth of its stock, on a 2018 commitment of $25 bn by 2020. Shell recently announced that weaker than expected oil prices might drag this out a bit. That knocked the stock price down a bit, which I saw as a buying opportunity.
Shell will buy another ~$3 bn in Q-1 of 2020. Do investors care if this happens by the end of 2020 or takes a quarter or two more? They shouldn’t. On the plus side, oil prices might rise more than anticipated and share repurchases could be accelerated. As you may have noted things can change rapidly in the oil market.
3. Debt reduction.
This is a priority for all of these companies and is being funded through free cash and assets sales with the proceeds going to debt reduction. Portfolio “high grading” is underway. It’s not perfect and sometimes it one step back for every two steps forward. Picking on Shell once again, the official target for debt to capital is 25 percent. Moving toward that goal for most of 2018, the company has taken a stutter-step higher to the 28 percent range. Part of this was due to lease costs hitting the balance sheet in late 2018. There can be no doubt that lower than anticipated oil prices has slowed this process.
Shell management reminds us of this regularly during the analyst calls. What matters to us is that they consider it a matter of the utmost priority. Ben Van Beurden comments in response to an analyst’s question regarding the timing of stock buybacks and debt reduction:
“So, very clearly, we are still completely intent on buying back $25 billion of shares and we are also completely committed to strengthening the balance sheet by bringing debt down.”
4. Diversifying the product mix to include “Green Energy.”
Green energy or sustainable energy sources is the path to the future, or so we are repeatedly told. It is only prudent for the big oil companies to seed research and startup companies in this area. So far, none of these efforts have reached the level where they are accounted for separately on the balance sheet however, with the notable exception of LNG. Whether it’s biodiesel in Brazil, or electrical charging stations in the UK, or wind farms in the Permian, or LNG, efforts are being put forth by them all. Whether any of these can turn a profit down the road remains to be seen. For now, it is enough that the exercise is underway, as it raises their ESG profile.
5. Investing in new technologies.
These companies all have and are developing more AI expertise with big data. The Shells and BPs of the world all generate huge amounts of data every day. Terabytes upon terabytes of it daily. Historically, the resources to manage this information efficiently just did not exist. Now it does these companies are moving rapidly to integrate and perhaps monetize this technology.
“AI can help find those cost reductions by tackling a range of problems. Its deployment in upstream operations could yield collective savings in capital and operating expenditures of $100 billion to $1 trillion by 2025, according to a 2018 report by PricewaterhouseCoopers. Most companies declined to discuss their exact spending on AI.”
As these resources are deployed in remote locations or refineries, costs will come down as the article quoted above notes.
Risks
Oil prices carry the key risk to dividend sustainability over the near and medium term. As we’ve seen in a plus-$50 environment they can all make money and cover their dividends.
West Texas Intermediate- WTI, has fluctuated wildly in price over the last 10 years. For the last four however, it has been above $50 except for a couple of very brief periods. I’m ok with economics built on $50 oil.
Environmental and Social Governance-ESG, risk must now be built in to the risk profile in owning these stocks. It can be thought of as replacing the old exploration risk that modern technology has reduced dramatically. When I entered the oilfield 40+ years ago, dry holes- ones with no hydrocarbon shows, ran as high as 85 percent of the exploration wells drilled. Today that ratio has more than flipped with dry holes being a rarity. Just what is the extent of this risk?
No one really knows for sure. That said, a measure of comfort can be taken in the broad ownership of legacy oil stocks. For example, have a look at the top ten institutional holders of ExxonMobil below.
These are the companies that hold the trillions of retirement dollars from 401Ks and Roth IRAs. They are invested in the big oil companies for yield, stability, and to an extent growth. I don’t mind keeping company with the tens of thousands institutional holders of XOM and the other companies we’ve been discussing.
The key takeaways for you as an investor in the big oil company dividend payers is that they are all on track to deliver the cash flow that underpins the dividends they are committed to pay.
As investors, there is no doubt we need to keep an eye on this ESG divestiture movement. For the short term it represents little threat to the value of our investments. It is worth noting however, the Norwegian Sovereign Wealth fund has endorsed companies like Shell and BP expressly. In a recent Financial Times article Norway’s Finance Minister, Siv Jensen commented that:
“Ms Jensen said the largest oil and gas majors were given a reprieve because Norway believed such groups were “in all likelihood” the ones that would make the main investments in renewable energy in the future.”
You have a responsibility here as well. That is the task of vetting what you read and take stock in. Ask yourself as read if there is an under-lying agenda that is masked behind the seemingly objective and forthright information being presented?
We’ve shown here that information presented this way can be completely factual and still be misleading. Potentially with portfolio damaging consequences if acted upon. Caveat emptor! Protect your wealth!
