March 11, 2016
The environment surrounding the market has changed dramatically from one month ago. At that time, the major market indices had declined substantially from their June 2015 highs. You may also remember that small-company shares were in a bear market, which is defined by a decline of 20% or more. The price of oil was also in freefall. As of the close today, oil has rallied over 40% from the bottom and major indices have recovered nicely as well. What has created the turnaround?
First, and probably most importantly, oil has recovered from the $27 per barrel area. According to Rystad Energy’s UCube database, the cost of producing oil from around the world varies from as low as $10 a barrel in Saudi Arabia & Kuwait to $53 in the United Kingdom. Their estimate for the U.S. is around $36 per barrel. As a result, prices much below the mid-30’s will result in production stoppages and could cause financial strain since many operators carry high levels of debt. Investors don’t mind low oil prices, but they don’t want levels that would create financial stress for operators, as well as for banks and other oil-service companies.
Frankly, we are not sure if there is another reason for the turnaround. One could cite political instability in the U.S., lack of global economic growth and a myriad other reasons. However, those potential causes are still true today, so why the rebound?! There has also been some discussion of a potential recession in the United States. After all, we are in year seven of expansion. However, as noted in last month’s letter, the leading economic indicators don’t point to a recession yet. As of now, there seems to be a disconnect between Wall Street and Main Street. Nevertheless, we will remain vigilant on this front.
We have treaded rather lightly in regards to allocating client assets, opting to keep a larger cash cushion where possible. We added Synchrony Financial (SYF) during February. The company is a provider of private label credit cards to many retailers across the United States. SYF was formerly owned by General Electric (GE). The company should begin to pay a dividend pending shareholder and board approval. We also purchased more of Trecora Resources (TREC). This company provides high-purity solvents that are then sold to petro-chemical companies. The domestic petro-chemical business is booming due to low oil and natural gas prices. Many of TREC’s customers are in the middle of plant expansions and their solvents are likely to be in demand for many years. Lastly, we purchased shares of TWM. TWM is an “inverse” Exchange-Traded Fund (ETF). This security is meant to increase in value in a declining market. It will serve as a buffer should the recent rally fail.
Jim Gentrup, CFA Steve Netzel
Portfolio Manager President
Netzel Financial Netzel Financial
Securities offered through Kalos Capital, Inc. at 11525 Park Woods Circle, Alpharetta, Georgia 30005, (678) 356-1100. Netzel Financial is not affiliated nor a subsidiary of Kalos Capital, Inc. or Kalos Management, Inc. Steven M. Netzel is licensed to solicit and sell securities and advisory services in multiple states. Please contact our office for the list of states. Investment Advisory Services offered through Val Vista Capital Management, a wholly-owned subsidiary of Netzel Financial. Val Vista Capital Management is a Licensed Investment Advisor (RIA) in Arizona. Steven M. Netzel and Jim Gentrup, CFA are both Investment Advisory Representatives (IAR) of Val Vista Capital Management. Netzel Financial, Val Vista Capital Management and Kalos Capital, Inc. do not provide tax or legal advice. The opinions and views expressed here are for informational purposes only. Please consult with your tax and/or legal advisor for such guidance.