RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:00:00]
BRIAN: Hi, my name’s Brian James Decker, owner, founder of Decker Retirement Planning and starting season four of our safer retirement radio. Wanna welcome you to a bunch of interesting information, and we’re going to be focused on oil. How in the world this week did oil for the May contract drop to a negative price? We’re going to talk about that today. We’re also going to talk about how and have you understand how that affects your retirement portfolio.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:00:31]
BRIAN: So, we’ll dive right in. So, what happened to oil? The price of WTI, West Texas Intermediate Crude Oil, the US benchmark crashed way below zero dollars yesterday, Tuesday, April 21st. Some of this is market mechanics, for example, the May futures contract for crude oil expired Tuesday, April 21st, and so that means that traders holding onto contracts would have to take physical delivery of crude oil if they let that expire and they’re an owner.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:01:08]
BRIAN: No, they’re not going to do that. So, going into the contract expiration, they’re going to sell, and that’s what happened. For the second time ever, the price of crude oil went below zero. So, we wanna have you understand how that worked. If you look further out on the curve in the coming months, the oil contracts for June, July, and August are all trading in the high teens, low 20s right now today, Wednesday, April 22nd.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:01:42]
BRIAN: The May delivery futures contract is down 300 percent to a negative 40 dollars per barrel. This is just unheard of. The previous all-time low record for an oil contract was minus 10 dollars and 42 cents. That record was set in 1983. So, if you look at the NYMEX crude oil May price chart, minus 319 percent is the chart, and it shows from just the last few days it going from a positive 25 to sliding down to 20 and then down to 10 a couple of days ago, and then boom.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:02:27]
BRIAN: So, that again, was caused because the traders do not wanna take delivery of oil. They want to hopefully have the upside of price is what they were expecting. Looking at the big picture, nobody wants oil right now. The US capacity for oil storage is quickly filling up. There’s a fleet of Saudi tankers with seven times worth the typical monthly amount of oil about to hit the US Gulf Coast. This will further compound the problem with little, this is important, little or no storage for that oil available.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:03:07]
BRIAN: If storage space disappears, this could force US drillers to further halt efforts. The June contract sold off sharply, but still as of yesterday, Tuesday, closed above 20 dollars a barrel. Today, Wednesday, it’s down another 10 percent, trading into the high teens. That’s for the June contract. The recently agreed upon supply cuts by OPEC are for May and June. As a result, the Saudis are said to have continued to pump huge amount of oil meantime, same as the Russians.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:03:44]
BRIAN: There isn’t much to add about the move in crude oil. We can’t find another occurrence in the front month future contract trading in negative territory. It’s worth pointing out that the folly of this won’t end well kind of comments are happening all over the place when it comes to oil. There are supertankers that are now being parked off of the West Coast storing, not transporting, storing oil right now. There’s 160 million barrels of oil that’s floating in the ocean right now.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:04:23]
BRIAN: Monday’s plunge below zero in the crude oil market, while remarkable and historic, is not the energy industry’s only problem or even the most serious one, and it will inspire more government control over the economy and ultimately reduce economic growth. So, now point one I wanted to have you understand why the price went below zero. Now, we’re going to talk about the effects of this negative oil price.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:04:53]
BRIAN: When storing oil is a better business than producing it, the logic suggests either reduction in production or more storage, but logic is not happening in the energy markets right now. It’s full steam ahead by the producers. Such episodes often bring down a whale investor. So, we should hear in the next couple of weeks of a huge, historically successful investor that was on the wrong side of this energy trade and has put their people out of business.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:05:29]
BRIAN: Risk managers will tighten control to cover scenarios once thought impossible. That will infect the markets animal spirits. We could see large players take advantage of the chance to buy smaller companies, thereby reducing competition. This will create the appearance and maybe the reality that markets are nothing but orgies of speculation. More governments appearance is likely the outcome to control price leading to even slower economic growth.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:06:01]
BRIAN: The price of sugar is an agricultural price that is maintained by government subsidies. It may be that oil is now going to become a government subsidized price. That’s too bad. A continuing theme in the Coronavirus era is how it exposes problems that were already there. This negative oil incident does the same. Complacency about risk in an industry consolidation, unlike viruses, these are not natural phenomena, but they have natural consequences.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:06:35]
BRIAN: So, point number two on the low price of oil is the economic fallout. Is it or isn’t it going to be government subsidized? Now, I wanna talk about your portfolio which is point number three on the effect of a low oil price. In the past, the number one risk strategy among people before they became clients of Decker Retirement Planning is to use the dividend strategy.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:07:09]
BRIAN: And before I jump in and contrast that with the risk strategy that we use, I just wanna say that if you’re interested in having less risk in your retirement portfolio, one of the great Warren Buffett quotes is he says it’s when the tide goes out that you can see who’s swimming naked. If you’ve taken a major hit in your portfolio in the last two months, that means that your retirement plan is not set up correctly, because, and this is very important, our clients at Decker Retirement Planning didn’t take that hit in the first quarter.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:07:52]
BRIAN: We didn’t lose any money in cash, safe money, and our risk portfolios were actually higher. So, we actually made money in the first quarter. If that’s something that you’d like more information on, take a second, call 833-707-3030 and you’ll be able to talk to someone, sign up for a 15 minute call with one of our planners and they’ll find out if there’s some things that we might be able to help in your retirement plan.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:08:23]
BRIAN: Back to energy, the dividend strategy is where you would buy dividend producing investments and let five, six, seven percent dividends roll in, and I’ve heard the quote so many times, quote I don’t care what the markets do, I just let the dividends roll in. Well, now Houston, there is a problem, and you’ve gotta deal with it, because what used to be low risk dividends, now you have high potential of dividend disruption, because the companies, I would guess that half of the high dividends in your portfolio are energy related, and half of the high dividends in your portfolio are real-estate related.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:09:15]
BRIAN: So, let’s talk about that. There’s going to be a lot of defaults and bankruptcies in the energy space, because companies, when they’re producing oil at 30 dollars a barrel and the price of oil right now is 18, they’re going to be out of business very soon unless that price quickly goes back above their break even. So, just know that that dividend is in serious jeopardy.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:09:43]
BRIAN: And when you have a low risk portfolio or what you think is a low risk portfolio, and you have default risk that’s very high, you are unknowingly putting your retirement at high risk using the dividend strategy, because in the past it probably was low risk, but now it has become high risk because of the energy price and where it is and the coming defaults and bankruptcies and cut dividends.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:10:14]
BRIAN: Please take this as a huge warning to review your strategy with one of our planners, and we can tell you if your dividend strategy is in jeopardy. Now, the other half of the portfolio is in real estate. Is real estate in trouble like the energy space is? I would say yes, because if you have real estate investment trusts that are cranking out a six or seven percent dividend, and you’ve got tenants in there that have been ravaged because of Amazon through retail or food companies, restaurants that have been shut down for the last 60 days and maybe longer, you have many that cannot any longer pay their rent, pay their lease and are looking at possible defaults and bankruptcies.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:11:11]
BRIAN: In the past this dividend strategy has been half has come from energy, half has come from real estate, and now both are at high risk of defaults and bankruptcy. So, this is something that we hope that you take a look at your dividend strategy, because in the past you thought it was safe. Now, you have very high risk of dividend default and dividend cuts. So, what happens when your portfolio of five, six, seven percent dividend strategies have defaults in it. Here’s what happens.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:11:48]
BRIAN: You have a price of 30 dollars a share. That’s what you brought. It’s bringing in six or seven percent, and then the markets close today and after hours XYZ company announces they’ve cut their dividend. Tomorrow it opens at 20 dollars. So, you have a 30 percent loss, and you have a company not paying any dividends, and now you need to sell it and reinvest that capital at a 30 percent loss into another investment that’s paying five, six, or seven percent.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:12:21]
BRIAN: What do you do? Is there a better way? Yes, and yes. What you should do is find out what the cash per share EBIDTA earnings before interest, dividends, taxes, and amortization is and see if that’s covering the dividend. If there’s cash flow net of a dollar a share and the dividend is a dollar 50, you are in trouble. You are waiting for a default, a pending default, because they’re borrowing to pay that dividend. If you see that that’s the case, please readjust your portfolio.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:12:56]
BRIAN: Take a look at all your dividends. Go to the financials and look at EBIDTA, earnings before interest, dividends, taxes, and amortization per share and see what the dividend is, and there should be a comfortable gap between what your dividend pays per share and the cash flow to cover that. I hope that makes sense. The strategy that we use in contrast is we have three parts to our portfolio at Decker Retirement Planning. In the retirement portfolio you have safe, you have emergency cash, and that’s invested in FDIC banks that are earning 1.7, 1.8 percent.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:13:43]
BRIAN: You have safe money that historically is averaging about 3 or 4 times what the CD rates are. Let that sink in, and then you have risk money. The risk money, which by the way your dividend portfolio is, is what we use for risk managers, we use computer trend following models, which is a lot of jargon for these are computer models that are designed to make money as markets trend higher and markets trend lower.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:14:17]
BRIAN: We just had a big litmus test of that in the last two months. Our clients, in the first quarter, actually made money when the markets hurt most retired people. Our cash is FDIC insured, earning 1.7, 1.8 percent. Our safe money is principle guaranteed, so we didn’t lose a dime there, and our risk managers, which is what we’re talking about and how the energy program is going to decimate and dramatically hurt the dividend strategies that retirees use.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:14:52]
BRIAN: Our risk portfolio was able to make money in the first quarter as most indexes were down over 20 percent. This is your retirement. Make sure you’re dealing with a fiduciary. Make sure that your plan is tight and is able to take the next hits in the market. So, give us a call. This is Brian J. Decker at Safer Retirement Radio. Give us a call at 833-707-3030. You’ll spend 15 minutes talking to one of our planners and help you have a safer retirement. Thank you very much.
RR S4 E1 OIL TANKING & HOW IT EFFECTS YOUR RETIREMENT [00:15:32]
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