It’s been another newsworthy week for the markets as falling oil prices have taken a toll and there’s more evidence of China’s economic ‘restructuring.’ And, that’s not all – read on to catch up with key investor news from the week…
Does Energy Collapse Resemble Tech’s 2000 Bubble Bursting? —at last count, there were 59 Chapter 11 bankruptcy filings from companies in the oil and gas business. The Energy sector, as a whole, has felt the hit profoundly with earnings falling -56.4% in Q3 2015 and -78.6% in Q4 2015. For Q1, the damage is estimated to be even worse, with the current Zacks estimate being a -114.5% earnings drop in Q1. The latest two companies to file for bankruptcy were Midstates Petroleum (ticker: MPO) and Ultra Petroleum (ticker: UPO). Additionally, with a handful of other small players likely in line at bankruptcy court, it may not be long before the oil and gas sector overtakes the 68 bankruptcy filings seen by Telecom during the dot com bust in 2000. We believe the sector is in the long process of bottoming out, but it may be too early to start-in on the bullish bets. On the earnings front, one of the latest reports from a big player came from Royal Dutch Shell, which reported a 63% decline in earnings per share for Q1.
Mudslinging Over Valeant Pharmaceuticals—you’ve probably heard the name Valeant Pharmaceuticals (ticker: VRX) in the news lately either because high profile activist investor, Bill Ackman, is defending it or because of its stock price’s wild moves. The company, at face value, has had its share of troubles in recent quarters. Congress recently subpoenaed the company’s outgoing C.E.O., Michael Pearson, to testify about price gouging in the pharmaceutical industry. Also, in February, the company disclosed it had incorrectly accounted for $58 million in sales of its drug Philidor. Shortly after, the company announced it would have to review and restate earnings from the past two years because of the Philidor fiasco. The company is in questionable shape and over the weekend took a lashing from Berkshire Hathaway’s Warren Buffet and Charles Munger. Buffet crushed the company over what he implied were ill-advised price increases and business practices, and Munger packed an even more brutal punch in calling the drug-maker “a sewer.” Whatever the company’s future, it’s a good reminder of how important portfolio diversification can be. Having a large position in Valeant today is a scary proposition.
China Economic Data Reflects ‘Restructuring’—in fairly clear evidence of China’s economic ‘restructuring,’ we’ve seen a pattern emerge where manufacturing activity continues to show softness while the services sector becomes more robust. Many fret over the decline in manufacturing activity in China without looking at the other side. Recent data shows the services sector expanded again in April, though at a slower pace—from 52.2 to 51.8. New business has grown at a faster pace since the beginning of the year. Meanwhile, manufacturing garners more attention, and fears were renewed when activity fell for the 14th consecutive month—from 49.7 in March to 49.4 in April. On balance, the economy should find a comfortable medium as this ‘restructuring’ occurs.
Devastating Wildfires in Canada—the town of Fort McMurray is ablaze with a wildfire which expanded from 18,500 acres on Wednesday to 210,000 acres by Thursday. The blaze is now devastating and covers an area roughly ten times the size of Manhattan. The area is home to a sizable portion of oil sands production, and it is estimated that 680,000 barrels per day of crude output is offline. This amounts to roughly 20% of Canada’s crude production, which can make an impact on total supply over time (especially as big players move to cut production further). Hopefully, the fires are contained soon so residents can assess damage and rebuild.