Daily Archives: February 15, 2018

Cryptocurrency

Why the Government’s Approach to Crypto Won’t Last

Crypto is in a tough spot…

One of those lousy, unsought, “damned if you do, damned if you don’t” spots.

You see, it needs a well-thought-out and fair regulatory regime.

And it needs the government to get it right.

What Are the Chances?

Man, that’s a big ask.

It’s like inviting Uncle Sam to tax your money but not too much… to raise the interest rates but not too much… to shrink government but not too much…

How do you arrive at “too much” or, for that matter, “too little”?

Chances are, when you invite the government into your personal or professional life, you usually regret it.

You simply don’t expect them to get this stuff right.

What I hope for?

That they don’t get it completely wrong.

That’s what I’d like with crypto.

It’s pretty clear that the government wants to throw the hammer down on scamsters and schemers…

What the SEC calls “bad actors.”

Great. I agree with the SEC when it says that a thinly traded and volatile market is ripe for fraud from many different actors.

Question is, can it do this and also maintain a light touch?

Can it choose its targets with a minimalist approach?

Can it regulate what is absolutely necessary and leave the rest alone?

As I said, it’s a big ask.

Some Surprising and Not-So-Surprising Signs

Ninety-nine times out of 100, the answer is “of course not.”

But this time may be different.

The government has recently shown surprising signs of NOT wishing to drown the crypto sector in overly restrictive regulations.

A great sign?

It came from the chairman of the Commodities Futures Trading Commission (CFTC) in a recent Senate hearing. He said that “do no harm” was the right approach for distributed ledger technology…

Just as it was some 40 years ago for the internet.

The SEC has also chipped in with some surprisingly sensible statements. A recent one said that ICOs “can be effective ways for entrepreneurs and others to raise funding.”

This is real ground for optimism.

But, alas, the government has also been sounding… well, like what we’ve come to expect from Washington.

Consider these statements that come from Congressional testimony and an article co-written by SEC Chair Jay Clayton and CFTC Chair Frank Giancarlo…

  • “We are disturbed by many examples of form being elevated over substance, with form-based arguments depriving investors of mandatory protections.”
  • “Cryptocurrencies are now being promoted, pursued and traded as investment assets, while their much-touted utility as an efficient medium of exchange is now a ‘distant secondary characteristic.’”
  • “Experience tells us that while some market participants may make fortunes, the risks to all investors are high. Caution is merited.”
  • “The SEC is devoting a significant portion of its resources to the ICO market.”
  • “The SEC has made it clear that federal securities laws apply regardless of whether the offered security – a purposefully broad and flexible term – is labeled a ‘coin’ or ‘utility token’ rather than a stock, bond or investment contract.”
  • “Simply calling something a ‘currency’ or a currency-based product does not mean that it is not a security.”
  • “Market participants should treat payments and other transactions made in cryptocurrency as if cash were being handed from one party to the other.”

Don’t get me wrong.

None of these statements are unreasonable.

They point to three valid concerns…

First, frivolous ICOs created by so-called entrepreneurs wishing to make a quick buck need to be reined in.

Second, fraudsters need to be identified and prosecuted.

And third, companies can’t circumvent security regulations merely by calling their coins “utility tokens” or a currency.

What Makes Me Nervous?

It’s what they said about “Main Street” investors…

[Our] concern [is] that too many Main Street investors do not understand all the material facts and risks involved.

This is classic Big Brother – “we’ve got to protect the little guys from their own ignorance” – talk.

I was inundated with this kind of talk when startup investing was limited only to accredited investors.

It took several years for the SEC to get off its hindquarters and extend startup investing opportunities to EVERYBODY, as the JOBS Act intended.

But there’s no JOBS Act here.

The government is free to act in the name of investor protection to limit and even bancryptos and ICOs.

What Will the Government Do?

A hint came last September.

The SEC’s new Cyber Unit will “recommend enforcement actions” relating to cryptocurrencies against those who violate securities laws.

So it looks like the SEC is shifting into a more aggressive approach.

But then there’s this hint…

In testimony to the Senate, the SEC said it would apply the same “facts and circumstances” analysis to determine whether ICOs and cryptocurrency markets should be classified as securities.

Instead of a broad crackdown on ICO activity, the SEC plans to continue enforcement on a case-by-case basis.

So perhaps not so aggressive, after all.

Some may even call this approach “balanced.”

Which, to me, is just another way of saying it can’t last.

A Leap in the Making

Blockchain technology is allowing us to make the leap from systems based on trust in people and institutions to trust in math.

One recent crypto roundtable chose this motto for its conference: “No leaders. No rulers. In code we trust.”

Meaning…

The government is NOT to be trusted. The banks are NOT to be trusted. Fiat money is NOT to be trusted.

And individuals with wealth or power? NOT to be trusted.

How much longer can the government remain “balanced” in the face of such a radical creed?

Blockchain technology has already created much wealth among its creators and adherents. It’ll create much more when it commercializes and scales.

So before answering, we need to acknowledge another question lurking below the surface…

How much longer can it remain committed to disrupting the existing financial order and replacing fiat money?

History says not long.

The blockchain is something new and potentially powerful.

Who will be the ones to unleash its power?

The government? The banks?

Or people who distrust both but trust code?

Nobody knows. If somebody tells you they do, they’re lying.

We all have a vision of how the world could change for the better, and it’s always according to our own principles.

So I’ll leave you with a bit of wisdom from the Liverpudlian gang, circa 1968…

You say you want a revolution
Well, you know
We all want to change the world
You tell me that it’s evolution
Well, you know
We all want to change the world.

Okay, they didn’t have crypto in mind.

But, from the sound of it, they could have.

Good investing,

Andy Gordon
Co-Founder, Early Investing

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Source: Early Investing 

Bear

Dump These Energy Stocks Before the Next Correction

After topping 10 million barrels per day for the first time since 1970 in November, the U.S. Energy Information Administration (EIA) said that U.S. crude oil production hit 10.2 million barrels per day in January. That surpassed the previous record (10.04 million barrels) for any month that was set in 1970 during the final days of the first Texas oil boom.

This is a remarkable feat considering the United States hit its low point in oil production in 2008 at about five million barrels a day. And oil imports are down to only about 2.5 million barrels a day as compared to the peak of 13.4 million barrels per day in 2006.

The EIA also upped its forecast for U.S. crude production for this year to 10.6 million barrels per day and for 2019 to 11.2 million barrels per day. If the forecast is right, it will make the United States the world’s largest oil producer, surpassing both Russia and Saudi Arabia.

For the prime example of the change in U.S. oil fortunes, look no further than the Permian Basin, which is located in Texas and New Mexico. Output there in 2017 totaled 815 million barrels. The previous record was set in 1973 at 790 million barrels.

All of this is good news, right?

Yes, if you’re an oil consumer. But if you happen to own oil stocks, the answer is a resounding no.

Shale Oil Company Stupidity

And the reason is obvious. The last time oil prices rose into the $60s per barrel, the U.S. shale producers pumped oil out of the ground as fast as they could. The assumption was that demand from places like China would continue to soar exponentially.

So when demand cooled a bit, the result was a crash that took the oil price into the 20s per barrel, which devastated the industry for several years.

Demand is still strong at the moment. For example, China is the second-largest market for U.S. crude oil, having imported 50 million barrels in the first nine months of 2017. But the oil storage facilities in China are nearing capacity, leaving an open question about the extent of future U.S. oil imports.

And since the recovery rate for oil from shale reserves remains very low, this suggests there is more potential for increased production as the technology to get at these reserves is improved.

Based on the history of absolutely no discipline from the U.S. shale industry, I expect an even greater flood of U.S. crude than the EIA forecast. That flood will likely send oil prices tumbling once again. And it’s not just the smaller shale companies that are solely to blame.

Energy giant ExxonMobil (NYSE: XOM) said in late January that it plans to increase its oil output in the Permian Basin fivefold by 2025 to 500,000 barrels per day. And Exxon is hardly alone among the majors.

Chevron (NYSE: CVX) also has said it will invest $2.5 billion in shale this year, with most of that investment going into the Permian Basin. For 2019, Chevron said it will invest a total of $4.3 billion into shale, with $3.3 billion of that going into the Permian Basin.

Oil companies continue to invest into shale even though most U.S. shale companies have struggled for profitability, and the industry as a whole has consistently lost money since the first successful shale oil wells were drilled in 2008-09. Exxon itself lost $439 million on oil and gas production in the US in the first nine months of 2017.

Other Considerations

While all of this is going, the smaller shale companies are also being adversely impacted by the change in the tax laws limiting interest deductibility.

Remember that many of the shale firms have heavy debt loads and now they will not be able to deduct all of their interest payments on that debt. According to Greensill Capital, if the limits on deductions in the 2018 to 2021 period had applied in 2016, companies would have been unable to claim tax relief on 39 % of their interest payments. The limit for 2022 onwards would have prevented relief on 97 % of those payments.

Consider too how quickly too oil dropped below $60 per barrel during just a few days of market turmoil, suffering its worst week in two years. That shows you will see how little firm support there is at the current price level. The steep price decline was likely the result of hedge fund liquidations – hedge funds had accumulated a record long position in crude oil.

Add this all up and I would avoid, or sell short if have a high risk tolerance, the oil producing sector as a whole.

Investment Implications

With the added consequences of the new tax law, I would definitely avoid the exploration and development companies that are carrying heavy debt loads. Two ETFs that have large exposure to these type of companies are the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) and the iShares U.S. Oil & Gas Exploration & Production ETF (NYSE: IEO). These two ETFs are down 12.88% and 9.05% respectively year-to-date. The former is off nearly 20% over the past year.

Even the Energy Select Sector SPDR Fund (NYSE: XLE), whose largest positions are Exxon (22.6%) and Chevron (17%), is actually a little in value over the past year. In other words, your money will be treated better elsewhere; especially in the light of these companies going in so heavily into shale and ramping up output that will very likely not be needed.

However, if you still wish to have some exposure to the oil sector, I would go with the Norwegian oil company Statoil ASA (NYSE: STO) whose stock is up 21% over the past 52 weeks. The company reported better-than-expected earnings in its latest quarter on the back of record production.

It also, in December, gave the go-ahead to its flagship Johan Castberg project in the Barents Sea after slashing costs by 50%. The breakeven for the project is now less than $35 per barrel. The Barents Sea is thought to hold about half of Norway’s undiscovered oil and gas. The company’s management also showed their savvy when they bought mature oil assets offshore Brazil for the equivalent of $10 per barrel in December.

Now don’t get me wrong. If oil falls in price, so will Statoil’s stock. But I like a management that is focused on squeezing costs and only going ahead with the most profitable long-term projects.

That is unlike some U.S. company managements that only know the words, “Drill, baby, drill!” No doubt due to the fact that some incentive packages for executives are still based on the amount of oil produced and not on bottom line profitability.

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Source: Investors Alley