Okay, so you’re not one of the three winners of the largest Powerball in history.
And you’re not this guy — the 7-11 owner who gets a $1 million “bonus” just for selling the winning ticket:
I’ll admit, I’m a little bitter than I spent yesterday evening at 7-11 in a line that wrapped around the building, when I should have been enjoying my first night on this lovely Florida vacation.
Yes, I drank the lottery Kool-Aid. Yes, I’m embarrassed about it. Let’s move on.
While those chumps are splitting their winnings, which will end up being about $528.8 billion each before taxes, you and I will need to get our heads back in the investing game and earn money the real way.
Right now, that means preparing ourselves for the impending economic storm.
Toxic Oil
Even more upsetting than the fact that I didn’t win the Powerball is that media buzz over the lottery is indirectly masking signs of a repeat of the 2008 banking crisis, all thanks to toxic oil and the freefall in prices.
This week, America’s largest banks report their Q4 2015 earnings (JP Morgan Chase this morning, Wells Fargo and Citigroup on Friday, Bank of America on January 19th).
During JP Morgan Chase’s call earlier today, the company earnings increased by almost 10%, superseding estimates and closing out 2015 with impressive results that should soothe worried investors… sort of.
When asked about his opinion on the state of the U.S. economy, the CEO of America’s largest bank (by assets) admitted that, for the first time since 2009, he was worried about “smaller energy firms.”
In fact, Jamie Dimon’s concerns were significant enough for him to do something he has not done in years:
For the first time since March 2010, instead of reducing the amount of loan loss provisions, JP Morgan Chase actually increased them by $89 million.
When Dimon does something like that, it’s time to pay attention.
Bear Down
Most analysts believe Dimon’s move to be in response to BOK Financial Corporation’s recent 8% stock plunge.
On Wednesday, the Oklahoma-based regional bank (which generates more than 70% of its loans from oil-driven firms) announced that it expects its provision for credit losses to be $22.5 million for Q4 2015.
Earlier estimates were dramatically lower, between $3.5 and $8.5 million. The underestimation reflects a four-fold increase in necessary loss provisions.
“A single borrower reported steeper than expected production declines and higher lease operating expenses, leading to impairment on the loan.”
— Stacy Kymes, executive Vice President of Corporate Banking at BOK Financial
BOK isn’t the only small bank that has suffered because of oil prices. Earlier this month, Associated Banc-Corp disclosed an additional provision of $13 million towards bad loans.
Prior to that, in Dec 2015, Hancock raised its allowance for loan losses by $42 million.
What we’re seeing now is a growing list of banking companies experiencing worsening credit issues in the energy sector. The downturn in the oil market has energy lenders on pins and needles, and unfortunately, very few signs point to the situation improving.
Citigroup’s head of commodities research, Ed Morse, saw this coming last year, when he predicted that crude could fall “perhaps as low as the $20 range for a while.”
Morse is no longer on his own with predictions like this. Goldman Sachs and Morgan Stanley also recently said that oil could likely fall to $20 a barrel.
According to the Federal Reserve, the number of oil and gas loans and commitments rated as substandard, doubtful, or loss-making almost quadrupled to $34.2 billion in the year through March 2015 — and that was when oil prices remained above $55 per barrel.
Although Jamie Dimon has also declared support for continued energy lending, it’s clear that he will likely not stand alone in taking precautionary measures.
Some U.S. experts are estimating that up to 30% of energy companies will go bankrupt if oil prices don’t improve.
Even if the impact is most extreme for smaller energy firms (like the ones that Dimon is worried about), those are the companies that account for ~50% of leverage in the domestic shale space.
Banks are directly exposed to this risk.
When in the Sunshine State…
As I toured the area of Delray Beach with my long-time friend who’s living here and working on her PhD, I noticed that basically every house and business has industrial “impact shutters” mounted over their windows.
You’ve probably noticed these as well if you’ve ever spent time in the Sunshine State.
Impact shutters are part of the Florida lifestyle and decor, since some of the worst hurricanes in U.S. history have hit these shores.
Tropical cyclones have impacted Florida in every month of the year except for January and March. (Hence why I planned my vacation for this week!)
The point I’m trying to make — and this might be a very obvious and horrible metaphor — is that investors need to start hanging their impact shutters.
Jamie Dimon already has, and BOK Financial is wishing it had months ago.
Until next time,
Jennifer Clark for Pro Trader Today