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The Next Financial Collapse Is Already on Our Radar

By Justin Brill
Saturday, May 9, 2015

The Weekend Edition is pulled from the daily Stansberry Digest. The Digest comes free with a subscription to any of our premium products.
 A handful of well-known investors were in New York City this week for the Ira Sohn Investment Conference. Every year, some of the world's best investors gather to share their latest investment ideas to raise money for pediatric cancer.
And some of their recommendations will sound familiar to longtime readers...
 Hedge-fund billionaire David Tepper – best known for his bullish "Don't fight the Fed" call on stocks in 2010 – is still bullish.
Back then, Tepper famously said, "What, I'm going to say, 'No Fed, I disagree with you, I don't want to be long equities?'"
This week, he noted that it's not just the Federal Reserve easing now. The central banks in Europe and Japan have since joined the Federal Reserve with their own easing programs, and – as we've been reporting – China could soon join the party. Said Tepper, "If it's hard to fight the Fed, it's even more difficult to fight four Feds."
 Tepper echoed the thoughts of our own Steve Sjuggerud and recommended going long Chinese stocks. He also agrees with Steve that Hong Kong stocks are incredibly cheap today. As Steve noted in the April 21 issue of DailyWealth...
Chinese stocks are up more than 100% in the last 12 months. (No, I am not kidding.) Meanwhile, the main Hong Kong stock market index is up less than 20% in the last 12 months.
The thing is, many of the same companies trade on both stock exchanges. (Yes, they are the same, identical businesses trading on two different stock markets.)
What has happened – as you can probably guess – is the shares listed in China have become dramatically more expensive than the shares listed in Hong Kong. To me, this is the biggest anomaly in finance today...
Tepper thinks China's quantitative easing could set off a big rally in commodities, too. "You've got to think about what that's going to do to things you own," he said.
He is also still bullish on U.S. stocks. "Something has to give in stocks," he noted. "Either stocks have to go up a hell of a lot, or Treasurys are going to go down a hell of a lot."
 In another notable presentation, "Bond God" Jeffrey Gundlach – the founder of DoubleLine Capital who is best-known for his skill in interest-rate trades – said U.S. interest rates have bottomed.
He also reiterated his warning on high-yield (aka "junk") bonds, saying, "No one in this room has lived through a secular interest-rate rise in high-yield bonds."
 But the biggest news of the day came from David Einhorn of Greenlight Capital...
Einhorn is probably best-known for correctly predicting the collapse of Lehman Brothers. He is generally considered one of the smartest hedge-fund managers on Wall Street.
Einhorn is short Pioneer Natural Resources, one of the leading U.S. shale oil companies. These companies are also called "frackers" because of the hydraulic fracturing ("fracking") technique they use to produce oil.
Einhorn is particularly bearish on Pioneer – calling it the "motherfracker" – but is bearish on shale oil companies in general. As he explained, "None of them generated excess cash flow, even when oil was at $100 a barrel."
He singled out Pioneer as "dramatically overvalued," saying that "Pioneer burns cash... Why is the market paying $27 billion for this company?"
Einhorn also mentioned EOG Resources, Concho Resources, Whiting Petroleum, and Continental Resources as some other examples of companies "that spend too much money and generate too little cash."
Shares of these companies are down 5%-9% since Einhorn spoke on Monday.
 "I tend to think he's wrong."
We reached out to one of our best contacts in the oil and gas industry – Texas wildcatter Cactus Schroeder – to get his thoughts on the matter...
While Cactus agrees the numbers for most frackers don't look great, he thinks Einhorn's short of Pioneer Resources in particular could be a mistake...
First, Cactus sees Pioneer and a handful of other companies as prime takeover targets.
The big oil majors – like ExxonMobil – are flush with cash right now. At some point, they're likely to start scooping up the best frackers with the best acreage... and Pioneer Resources has some of the best acreage in both the Eagle Ford Shale and the Permian Basin.
EOG and Concho Resources are also good companies with good acreage, and EOG, in particular, is on the cutting edge of drilling technology.
 But even if that doesn't happen, Cactus sees some positives...
Oil-services companies – the companies that provide the "picks and shovels" needed to produce oil – are a major expense for many frackers. And the prices they're charging are still reflective of much higher oil prices. Sooner or later, oil-services companies will be forced to align their pricing with a lower price of oil.
Once this happens, Cactus thinks some of the better companies could do well.
But Pioneer is even better off... The company owns its own sand mine and pumping equipment, so it's not at the mercy of oil-services providers like most other companies.
Regarding Einhorn's assertion that Pioneer is "burning cash," Cactus agrees, but points out that investors also need to look at how much it has increased reserves recently. The company was spending a lot of money to increase reserves, but is now bringing costs under control. It won't be drilling as much while oil prices are low, but its proven reserves are still high.
 But, like Porter, Cactus agrees that many frackers – those without great acreage and with too much debt – are likely in big trouble. As Porter mentioned in this essay...
Putting all of this together... the main takeaway is that it is far, far too early to go "bargain" shopping in the U.S. oil and gas industry. The sector is facing a huge three- to five-year shakeout as overly indebted producers must continue to produce oil – even at a loss – to generate cash flows to make debt payments. These bad debts will take a long time to wash out.
 Einhorn, Porter, and Cactus aren't the only big names who are worried about the oil industry today...
Regular readers are familiar with currency expert Jim Rickards. In fact, thousands of you took us up on our offer to get a copy of his "must read" book, The Death of Money.
Jim is now writing a newsletter for our colleagues at Agora Financial... and believes the next step in the "currency wars" we've discussed at length will strike the oil industry.
As Jim recently explained to his subscribers...
The next financial collapse, already on our radar screen, will not come from hedge funds or home mortgages. It will instead come from energy-related corporate debt.
He believes recent actions by the Fed – which have sent the dollar soaring versus the price of oil – will spell disaster for many oil companies.
But, as he explains, it's actually a good thing for a small group of investors who are using his proprietary new "IMPACT" trading system. He says using this system would have led to 530% gains in less than eight months from the dollar's move... 848% in less than seven months from the euro... and nearly 2,200% in just 10 days from the Swiss franc.
You can learn more about Jim's proprietary trading system in a presentation he recently put together, right here. (You won't have to sit through a long promotional video.)
Justin Brill

This Week's Winners
S&P 500 Symbol Change
Leggett & Platt Inc. LEG +9.0%
Estee Lauder-A EL +8.7%
Altera Corp ALTR +7.4%

Countries Symbol Change
Israel ISL +2.5%
Austria EWO +2.3%
Russia RSX +2.0%

Sectors Symbol Change
Biotech PBE +3.2%
Agribusiness MOO +2.4%
Homebuilding ITB +1.8%

Commodities Change
Lean Hogs +3.8%
Orange Juice +3.6%
Copper +1.4%
Date Range:4/30/2015 to 5/7/2015
From The Crux
This Week's Losers
S&P 500 Symbol Change
Windstream WIN -15.8%
Keurig Green Mountain GMCR -15.7%
Frontier Comm-B FTR -13.3%

Countries Symbol Change
China FXI -4.0%
South Africa EZA -3.7%
Australia EWA -2.7%

Sectors Symbol Change
Oil Services PXJ -4.2%
Telecom IYZ -3.4%
Clean Energy PBW -2.6%

Commodities Change
Lumber -7.3%
Live Cattle -6.4%
Coffee -4.2%
Date Range:4/30/2015 to 5/7/2015
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