This is a Big Problem for the Auto Industry, and it’s Getting Worse

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Car dealers may be coming off of their biggest sales year ever, but the future for the auto industry looks murkier as the percentage of Americans with a driver’s license continues to fall.

Just 77 percent of Americans aged 16 to 44 held drivers licenses in 2014, down from 82 percent in 2008 and 92 percent in 1983. The percentage of Americans with driver’s licenses declined across every age group from 2011 to 2014,according to an analysis by Michael Sivak and Brandon Schoettle at the University of Michigan Transportation Research Institute.

Several factors have led to fewer licensed drivers, including a lack of interest among younger consumers in driving or owning a car, a general return to cities and close suburbs with reliable public transportation, a rise in telecommuting, and the advent of ride-sharing services like ZipCar and on-demand taxis like Uber. Tighter restrictions on young drivers haven’t helped either.

The introduction of driverless cars, which some industry experts say will be on roads within the next decade, promises to further reduce the share of Americans who feel the need to get a driver’s license.

The result of fewer licensed driver is that the aggregate number of miles driven has plateaued over the past decade, according to research from the Brookings Institute.

That may be bad news for automakers and the gasoline industry, but it’s good news for drivers themselves. The 2015 Urban Mobility Scorecard from the Texas A&M Transportation Institute found that drivers wasted more than 3 billion gallons of fuel and spent 7 billion extra hours sitting in traffic last year, at a cost of $160 billion, or $960 per commuter.

Written by Beth Braverman of Fiscal Times

(Source: The Fiscal Times)

This Oil Market is Crazy, and it Could Get a Lot Worse

10 oil companies that will thrive as crude prices rebound
Provided by MarketWatch

The crude oil market has gone crazy, and it’s taking stocks along with it.

The question now is: When will oil hit bottom?

The bad news from your “oil guy” is that once the oil market has gone “parabolic” — either up or down — picking a bottom (or a top) is a frankly useless exercise.

The only insight I can give you is a comparison to the last time oil went bat-nuts crazy, and it’s not a happy one — in 2008, when it traded over $140.

That’s right, the only real parallel I have to the current action in oil is when oil unhinged itself on the upside. In that case, just like this one, all the fundamentals in the world couldn’t explain an oil market that was pricing itself over $120 a barrel.

Sure, people talked about the seemingly endless appetite for oil coming from emerging markets, including China and India. They talked about increasing supply-chain problems that could emerge from the instability in Iraq and Iran. They even mentioned the idea of “peak oil” a lot, where we’d literally run out of fossil fuels while demand was skyrocketing.

But none of that could possibly explain a futures market price that was increasing a dollar or two a day, while official target prices in OPEC were still well under $70 a barrel.

And you could feel it then — as oil screamed past $110 a barrel in March, there was no rhyme or reason left in the market. Only momentum players, speculators and hedge funds jumped in on a market that was getting juiced. No one needed a reason — there was money to be made.

Today, there are lots of fundamental reasons being used to try to explain oil dropping below $40 a barrel: huge surpluses, an increase in OPEC production from Saudi Arabia and Iran to come, U.S. producers who are managing to hang on despite extreme negative cash flows and back-breaking debt loads.

I don’t care. This is just like 2008, but in reverse: nothing fundamental can explain an oil market now trading under $30 a barrel.

There is however, the exact same group pushing the market down today that was responsible for the move up in 2008 — the same momentum players, hedge funds and speculators who all smell a dollar to be made on a market that’s gone parabolic.

With that group in current control of oil prices, trying to pick a bottom is more than impossible — it’s meaningless. The market will stop going down when the selling stops. Period.

What I can give you, perhaps, is a time frame. In 2008, we could feel the oil markets on the floor go into “silly mode” and disconnect from reality in the early spring, as prices moved above $110 a barrel. Prices didn’t peak until early July at $145.

I believe that oil under $40 represents an equivalent disconnect from fundamental economics, even economics as bleak as the current supply glut of oil today. We breached that level in early December, and since then, I believe that oil has had all the signs of an equivalently “parabolic” market.

A bottom price? That’s impossible to guess at. But a time frame for this move? Well, if 2008 is any guide, we could have possibly another three months of very volatile moves in oil before a bottom is truly set.

Everyone will jump over each other to claim to have seen the bottom, only to see it knocked out again the next day. And if the patterns of 2008 in oil hold true, that could mean a far worse outcome for stocks. No one has to be reminded what happened to stocks in the fall of 2008.

At the very least, there’s a very scary next three months for oil — and therefore probably stocks.

Written by Daniel Dicker of The Street

(Source: The Street)

Oil Plunge Sparks Bankruptcy Concerns

Bloomberg News

Crude-oil prices plunged more than 5% on Monday to trade near $30 a barrel, making the specter of bankruptcy ever more likely for a significant chunk of the U.S. oil industry.

Three major investment banks—Morgan Stanley, Goldman Sachs Group Inc. and Citigroup Inc.—now expect the price of oil to crash through the $30 threshold and into $20 territory in short order as a result of China’s slowdown, the U.S. dollar’s appreciation and the fact that drillers from Houston to Riyadh won’t quit pumping despite the oil glut.

As many as a third of American oil-and-gas producers could tip toward bankruptcy and restructuring by mid-2017, according to Wolfe Research. Survival, for some, would be possible if oil rebounded to at least $50, according to analysts. The benchmark price of U.S. crude settled at $31.41 a barrel, setting a 12-year low.

More than 30 small companies that collectively owe in excess of $13 billion have already filed for bankruptcy protection so far during this downturn, according to law firm Haynes & Boone.

Morgan Stanley issued a report this week describing an environment “worse than 1986” for energy prices and producers, referring to the last big oil bust that lasted for years. The current downturn is now deeper and longer than each of the five oil price crashes since 1970, said Martijn Rats, an analyst at the bank.

Together, North American oil-and-gas producers are losing nearly $2 billion every week at current prices, according to a forthcoming report from AlixPartners, a consulting firm, that is set to be published later this week.

“Many are going to have huge problems,” said Kim Brady, a partner and restructuring adviser at consultancy Solic Capital.

American producers are expected to cut their budgets by 51% to $89.6 billion from 2014, a reduction that exceeds the worst years of the 1980s, according to Cowen & Co. There is no relief in sight: The oil glut is expected to continue well into 2017, according to several banks, analysts and industry executives.

With little likelihood of an oil price rebound in the coming months, the companies that tap shale wells from Texas to North Dakota are splintering into the haves and have-nots.

Energy companies that took on huge debt loads to finance their slice of the U.S. drilling boom have no choice but to keep pumping to generate cash for interest payments. As they do, they are drilling themselves into a deeper hole. Companies including Sandridge Energy Inc., Energy XXI Ltd. and Halcón Resources Corp. all paid more than 40% of third-quarter revenue toward interest payments on their loans, according to S&P Capital IQ. Representatives for Sandridge and Halcón didn’t respond to requests for comment.

Greg Smith, Energy XXI’s vice president of investor relations, said the company has bought back more than $900 million in bonds to reduce interest expenses.

Some of the strongest operators with superior assets have locked in oil prices well above $50 a barrel this year through hedges, which serve as a kind of insurance policy against low prices. Even those producers with better balance sheets say they will keep pumping more. ConocoPhillips and Pioneer Natural Resources Co., two of the most successful shale operators in the U.S., plan to boost production this year.

Scott Sheffield, chief executive at Pioneer, said pulling more oil and gas out of the ground makes sense even though prices are low because the company’s most efficient wells still make good returns. Plus investors keep rewarding growth at energy companies considered to be solid.

“The ones that announced production declines into 2016, their stocks are getting hammered,” Mr. Sheffield said in an interview. Pioneer’s shares have lost about 16% in the past year, but the company successfully sold $1.4 billion worth of new stock last week in an oversubscribed equity offering.

Companies that drill themselves into a hole so deep they cannot escape will be forced to sell assets or tap revolving credit lines. That is a tricky proposition given that many energy players expect to see their borrowing bases cut as debt limits are reduced in light of the plunging value of oil-and-gas reserves in the ground.

More than $100 billion from private-equity firms is waiting in the wings to scoop up assets that are sold either before, or after, bankruptcy, experts say. But major corporate mergers and acquisitions remain unlikely, because any buyer would have to pony up voluminous amounts to cover the debts of a seller. Instead, opportunistic firms are waiting for the wave of bankruptcies to arrive. Once debt is wiped out, oil-and-gas fields will be cheap. The longer the oversupply sticks, depressing prices, the more companies will falter, leaving their assets ripe for picking at a discount.

“There’s no reason to be anybody’s savior,” said Chad Mabry, a senior energy analyst at FBR & Co. “If you can just get the assets out of bankruptcy, then you don’t have to save anyone.”

If an array of U.S. shale companies go bankrupt or assets fall into new hands and bondholders get crushed, bankruptcies will wipe the debt slate clean and lower the oil price needed to fetch a profit.

Projections for losses on energy loans continue to rise broadly, and some banks have started to raise their own forecasts for such losses. In a biannual review by a trio of banking regulators, the value of loans rated as “substandard, doubtful or loss” among oil and gas borrowers almost quintupled to $34.2 billion, or 15% of the total energy loans evaluated. That compares with $6.9 billion, or 3.6%, in 2014.

The largest U.S. banks have relatively small energy portfolios in the context of their overall lending. For instance, in the third quarter Wells Fargo & Co.’s oil-and-gas loan exposure was 2% of its total loans, roughly $17 billion, according to company filings. The bank, one of the largest energy lenders in the U.S., reports earnings Friday.

Since financial distress hasn’t been a good mechanism for slowing down U.S. oil production, many analysts fear that any pullback may come too late. U.S. government estimates pegged output at 9.2 million barrels a day at the start of 2016—1% higher than the start of last year when oil was trading for 40% more.

Written by Bradley Olson and Erin Ailworth of The Wall Street Journal

(Source: The Wall Street Journal)

8 Tips for Surviving the Market’s Record Drop

Yes, it’s entirely plausible that when Shanghai sneezes, Wall Street catches a cold. But try telling that to panicky investors and financial observers who will sadly suggest a more spot-on proverb: When Shanghai hacks up a lung, Wall Street runs for the safety of the bear cave.

Wall Street’s historic plunge – in which the Dow Jones industrial average plummeted 1,000 points Monday before “bouncing back” to a 588-point loss – appeared to subside Tuesday, as the Dow and Standard & Poor’s 500 index jumped 3.4 percent Tuesday morning. Call it an interest rate chill pill, as the People’s Bank of China cut interest rates for the fifth time in nine months, while investors held out hope that the Federal Reserve might hit the brakes on an interest rate hike.

Still, it’s far from a return to the bull market. “Investors are rightfully concerned,” says Kyle O’Dell, managing partner of O’Dell, Winkfield, Roseman & Shipp in Englewood, Colorado. “But smart investing is never rash, and it’s never reactionary.”

“It happened so fast and was so powerful that no one could’ve predicted it even a week ago,” says Jay Sukits, a clinical assistant professor of business administration at the University of Pittsburgh’s Katz Graduate School of Business. “But the worst thing you can do is panic: to sell right at the bottom the market.”

Got that? Don’t panic.

Instead, buckle down and follow the advice of these investment experts, who offer eight tips for making it through Wall Street’s current woes.

1. Scoop up the deals.

Attendees take pictures of the new Tesla Energy Powerwall Home Battery during an event at Tesla Motors in Hawthorne, Calif.

© Patrick T. Fallon/Reuters Attendees take pictures of the new Tesla Energy Powerwall Home Battery during an event at Tesla Motors in Hawthorne, Calif.

Keep in mind that China’s troubles can’t possibly derail strong economic indicators in the U.S., from improving job numbers to a robust real estate market. “The correction is a good thing for those who are now able to afford Apple (ticker: AAPL), Tesla (TSLA), Netflix (NFLX) and Amazon (AMZN),” says Todd Antonelli, managing director of Berkeley Research Group in Chicago. “We forget what goes up must come down. And this creates opportunity for all.” Apple, for example, was up almost 17 percent between Monday’s open and Tuesday’s open.

2. Diversify now. 

Traders work on the floor of the New York Stock Exchange.

© Brendan McDermid/Reuters Traders work on the floor of the New York Stock Exchange.

No one knows for sure whether this is a temporary correction, as markets always defy logic. Are we in a spell of irrational anxiety? Regardless, it’s crucial to build and manage a diversified growth portfolio, says Kevin Mahn, president and chief investment officer of Hennion & Walsh Asset Management in Parsippany, New Jersey. “That includes asset classes and sectors of the market not perfectly correlated with U.S. large-cap stocks. This is critical in the days and months ahead.”

3. Beware of bonds.

A trader works on the floor of the New York Stock Exchange during the afternoon of August 26, 2015 in New York City.

© Andrew Burton/Getty Images A trader works on the floor of the New York Stock Exchange during the afternoon of August 26, 2015 in New York City.

Many people will buy bonds, thinking it’s a safe haven. “But what if you purchase 10-year Treasury or 10-year corporate bonds, and interest rates rise?” Sukits says. “If interest rates go up – and there’s only one way to go, and that’s up – you’re going to get slaughtered.” Which leads us to …

4. Watch those interest rates. 

A trader works on the floor of the New York Stock Exchange during the afternoon of August 26, 2015 in New York City.

© Andrew Burton/Getty Images A trader works on the floor of the New York Stock Exchange during the afternoon of August 26, 2015 in New York City.

It’s a given that Wall Street will squirm once the Fed raises interest rates. But would that be all bad? “It’s important to remember that equities generally continue to perform for several years after the first interest rate increase,” says Chris Gaffney, president of EverBank World Markets and based in St. Louis. “Regardless of when the first hike occurs, all indications are that the Fed will remain very cautious about the pace of increases.”

5. Count on oil to fuel the world engine – and China, too.

The New York Stock Exchange.

© Rex Features The New York Stock Exchange.

Keep an eye on oil prices, for as long as they stay low, it’s a good sign for the world’s economies. “Depressed oil prices hurt oil producers such as Russia, Saudi Arabia, Iran and Iraq, but they help nearly everyone else,” says Larry Elkin, president of Palisades Hudson Financial Group in Scarsdale, New York. “China will benefit from the decline in commodity prices. So will India and the rest of Asia, much of Latin America outside Venezuela and most of Africa. So, too, will Europe, and even the United States, for although we’ve become a leading energy producer, we’re still a net consumer of energy produced elsewhere.”

6. Focus on the long term. 

A man explains the stock market's recent fluxuations on the floor of the New York Stock Exchange during the afternoon of August 26, 2015 in New York City.

© Andrew Burton/Getty Images A man explains the stock market’s recent fluxuations on the floor of the New York Stock Exchange during the afternoon of August 26, 2015 in New York City.

Remember what happened on April 22? Both the Dow and S&P 500 hit record highs. Remember what happened on March 9, 2009? The Dow hit a 12½-year low. And so it comes and goes. “You can’t predict when a storm is going to hit,” says Jonathan Gassman, co-founder of G&G Planning Concepts, a financial planning firm in Manhattan. “Yes, it may have an effect in the short term, but you’ve invested for the long term.” So avoid getting seasick. “It’s gut-check time. Use it wisely,” he says.

7. Maybe it’s the August effect. 

The statue of George Washington across from the New York Stock Exchange on Wall Street in New York City.

© Felix Hörhager/dpa/Corbis The statue of George Washington across from the New York Stock Exchange on Wall Street in New York City.

Even top-line investment pros need a vacation, and August is often when they take one. Expect investors to put on their game faces after Labor Day – just as we did during our school days, says Michael J. Driscoll, clinical professor and senior executive in residence at Adelphi University’s Robert B. Willumstad School of Business. “The volatility of the markets may not end this week. But when everyone gets ‘back to school,’ analysts will decide that some companies have been oversold on fears that their industries will disappear. The countries that caused so much concern earlier in the summer will still exist. They may be growing slower or faster than anticipated – but they’ll still be here,” Driscoll says.

8. Beware the panic pundits. 

Traders work on the floor of the New York Stock Exchange during the afternoon of August 26, 2015 in New York City.

© Andrew Burton/Getty Images Traders work on the floor of the New York Stock Exchange during the afternoon of August 26, 2015 in New York City.

Don’t panic? That might not be a slam dunk, given that you’re going to hear a lot of doomsday talk in the next few months. Laugh it off. “Remember the 2001 book, ‘The Coming Collapse of China’? In recent times, a bunch of gurus wrote about the ‘coming collapse of America,’” says Mike Peng, a professor of organizations, strategy and international management at the University of Texas at Dallas. “My suggestion is not to believe in such end-of-the-world messages. America has been collapsing for several hundred years, [starting with] with the White House being burned down in 1812. And, of course, China has been collapsing for 5,000 years.”

Written by Lou Carlozo of U.S. News & World Report

(Source: U.S. News & World Report)

Three Financial Facts of the Week

Provided by Wikimedia
Provided by Wikimedia

Fact #1
As oil prices have fallen to their lowest level in 6 ½ years, gasoline prices at the pump may soon follow suit. As of August 24, the average retail price for a gallon of regular gas nationwide stood at $2.595 and 12 states have at least one gas station selling regular gasoline for under $2 a gallon.
Source: MarketWatch

Fact #2
According to J.P. Morgan Asset Management, 6 of the 10 best days on the S&P 500 occurred within two weeks of the 10 worst days.
Source: Business Insider

Fact #3
According to the Consumer Conference Board, the number of homes sold but that have not yet started construction rose to an annualized 192,000 in July 2015, the most since June 2007.
Source: Bloomberg

Written by Rob Coursey of Value Line Funds

Summer Price Break! 5 Things That Are Actually Cheaper This Summer

© Jamie Grill Photography/Getty Images
© Jamie Grill Photography/Getty Images

For the most part, consumers are accustomed to seeing prices for a wide range of goods go in only one direction: up, up, and up. Often, this is simply the result of inflation and regular price increases. There are also freak price spikes like the current situation with eggs, which have risen dramatically of late thanks to the bird flu outbreak. And more costly eggs have in turn begun causing price increases everywhere from diners to bakeries.

Thankfully, from time to time consumers get to benefit from the occasional price decrease on goods and services—including some of their favorite treats. Here are five things you’ll actually pay less for this summer.

BACON

While bacon prices aren’t cheap by historical standards, they are significantly cheaper than in the summer of 2014, when they spiked amid low supplies. According to the Bureau of Labor Statistics, the average price for a pound of bacon as of May 2015 was below $5, compared with $5.50 at the start of 2015 and more than $6 last summer. Overall, bacon prices fell 18% over a 12-month span.

GAS

After surging steadily through much of the spring, gas prices have dipped of late, hitting a national average of $2.77 for a gallon of regular at the start of the week, according to AAA. Drivers in nearly all states are paying at least 75¢ less per gallon compared with a year ago, and AAA estimates that cheap gas prices in 2015 have helped Americans collectively save $65 billion on fuel costs thus far this year.

OTHER PORK PRODUCTS

The same rise in the nation’s pork supply that’s caused bacon prices to retreat is lowering prices for pork chops, hot dogs, and the like. The American Farm Bureau Federation recently estimated that the cost of a typical July 4 cookout that feeds 10 people is 3% cheaper than it was a year ago. One of the reasons why this is so is that two of the main dishes—hot dogs and pork spare ribs—are 2% to 4% less expensive than they were in 2014.

AIRFARE

At the start of the year, researchers from the likes of Expedia predicted that flight prices would fall in 2015, if for no other reason than airlines would finally have to lower fares in the face of dramatically cheaper fuel prices. And while airfare prices depend on a range of factors—route, timing, demand, etc.—data from the flight search Hopper.com show that overall, domestic flights in the spring and early summer were 8.7% cheaper compared with the same time last year. The site also predicted that the trend will continue through the summer, with the average flight selling for $18 (or about 6%) less than in the summer of 2014.

DAIRY PRODUCTS

The USDA reports that national stockpiles of butter, cheese, and milk are all up significantly compared with a year ago, and prices for most dairy products—including yogurt, ice cream, and blocks of cheese—are down as a result. Bear in mind that some of the price decrease is based on how expensive dairy products were for much of last year. Butter consumption, for instance, has been increasing for years, and prices spiked to near record prices last summer through the fall.

Written by Brad Tuttle of Money

(Source: MSN)

Why Big Oil Deals are Ready for an Explosion

Copyright CGP Grey/Flickr
Copyright CGP Grey/Flickr

The long wait for oil and gas deals appears to be nearing an end as two transactions worth more than $18 billion were announced in the past 24 hours.

Shale producer WPX Energy Inc. today said it plans to buy a closely held exploration company for $2.35 billion, and refiner Marathon Petroleum Corp. Monday said it will buy a major natural gas processor for $15.8 billion.

A long-awaited “sale on shale” had yet to come to pass in the first half of the year as the oil and gas producers that created a U.S. energy revolution didn’t see their shares fall nearly as much as oil prices. Deals fell to the lowest level in a decade, creating a disconnect between buyers and sellers that has narrowed. The deals are beginning to follow.

“Some folks with high costs will have to bite the bullet,” said Jim O’Brien, chair of the energy practice at law firm Baker & McKenzie LLP.

As oil has slid downward again toward the $50-a-barrel mark, trading around $52 today, here are three charts that help explain why a deal surge is around the corner:

Reserve Values Have Cratered

Buyers of energy companies or assets want to know one thing: how much future oil or gas — known as reserves — am I getting for my money?

For more than 60 North American producers, the going rate on reserves — measured as a ratio of enterprise value to future barrels — is cheaper than it’s been at any time in the last 10 years.

Oil chart 1

© Bloomberg Oil chart 1

Reality of Low Prices Is Taking Hold

The biggest quarter for oil and gas deals in the past decade was in the final months of 2009, about a year after crude began tanking amid the global financial crisis.

In a few months, we’ll be hitting the one-year mark of when falling oil prices turned into a full-scale crash at the end of 2014.

Oil chart 2

© Bloomberg Oil chart 2

Company Values Aren’t as Inflated as They Were

The value of oil and gas companies, as estimated by analysts, is finally falling in line with actual share prices.

Deals often pick up when this “spread” falls, or when share prices compare more closely with value estimates. The recent decline indicates merger activity may pick up soon.

Oil chart 3

© Bloomberg Oil chart 3

Written by Bradley Olson of Bloomberg

(Source: Bloomberg)