MONEY Taylor Swift

You’ll Never Guess What Taylor Swift Wanted to Be When She Grew Up

150209_INV_Taylor_1
Kevin Mazur/WireImage

Hint: It wasn't an entertainer.

Pop musician and gazillionaire Taylor Swift is no stranger to business strategy.

In recent months the self-professed “nightmare dressed as a daydream” has flexed her guns by spurning streaming music giant Spotify, investing in a $20 million New York apartment, and applying to trademark phrases like “Nice to Meet You. Where You Been?” for use on future commercial endeavors.

So where did the 25 year old get her financial savvy? One clue comes from an interview she taped for YouTube back in 2011, where she discusses her relationship with her stockbroker father, Scott Swift. The singer says her dad has been telling her to save money and invest in utilities since she was a child.

“My dad is so passionate about what he does in the way that I’m passionate about music,” Swift says in the video. “This guy lives for being a stockbroker… And anybody who talks to him, like, he’ll talk about me for the first five minutes, and then it’s, like, ‘Say, what are you investing in?'”

Swift goes on to explain that at the age of eight, while other students at school said they aspired to be astronauts and ballerinas, she wanted to be a financial adviser when she grew up.

“I love my dad so much, because he’s so gung-ho for his job, and I just saw how happy it made him, and I just thought, I can broke stocks,” she said.

If that line makes you roll your eyes, remember, as a wise person once said, “haters gonna hate, hate, hate, hate, hate.”

 

MONEY Religion

Investing Options Grow for Muslims

150209_INV_faith_1
Stuart Dee/Getty Images

U.S. Muslims who don't want to profit from interest or invest in certain types of businesses have an increased number of choices.

A growing number of options address the special investing needs of Muslims.

The U.S. Muslim population is expected to reach 6.2 million by 2030, almost three times the nation’s 2.6 million Muslims in 2010, the Pew Research Center estimates.

Muslim-Americans are younger and better educated than the average U.S. citizen, according to Gallup data. Moreover, they want to see a greater number of appropriate financial products, according to market research firm DinarStandard.

Their investing needs are similar to those of people who want socially responsible investments, but it requires additional expertise on the part of their adviser.

Under Islamic, or Shariah law, investors must shun companies involved in, for example, alcohol, tobacco, gambling or weapons — restrictions common to many religious groups. Shariah law also prohibits interest, because loans should be charitable acts. This makes buying fixed-income securities problematic, and purchasing banking company stocks impossible.

Companies must also have little debt: about 30% interest-bearing debt to trailing 12-month average market capitalization, according to organizations that set Islamic investing standards.

More investment products are becoming available. They include sukuk, the Islamic alternative to bonds, where returns are based on profits from an underlying asset. One fund, Azzad Wise Capital Fund, is available to U.S. retail investors. More choices will likely emerge, advisers say.

Morgan Stanley adviser Mark Rogers in Farmington Hills, Mich., helped his first Muslim-American client about 10 years ago and now serves more. He does not view them differently from clients who want socially responsible investments, he said.

“Once you understand how to apply the filter, it’s just business as usual,” Rogers said.

Naushad Virji, chief executive officer of Sharia Portfolio, launched his investment advisory firm in Lake Mary, Fla., 10 years ago and now serves clients in 21 states, he said.

Virji generally sticks to individual large-cap stocks — names with low debt such as Apple and Walgreens Boots Alliance — but said he is excited about developments in Islamic finance.

Amana Mutual Funds Trust, for example, and a new ETF from Falah Capital, Falah Russell-IdealRatings U.S. Large Cap ETF , are helping meet investors’ needs. But there is more to be done, Virji said. “We are in the infancy of Shariah-compliant investing in this country,” he said.

Advisers should go through each holding with clients to make sure they are happy with the choices, said Frank Marcoux, a partner at Wells Fargo’s Nelson Capital Management, a Wells Fargo & Co. unit. Some clients are even more strict than even the standard-setters, Marcoux said.

Clients also should understand they cannot expect to beat a benchmark, when chunks of companies are missing, Marcoux said.

But the main point is that advisers can help Muslims get in the market, Marcoux said. “People are surprised that this type of product and strategy even exists, and very appreciative.”

MONEY Tech

Amazon Just Admitted It’s Making Less Than You Think

150205_INV_Amazon
Chris Ratcliffe—Bloomberg via Getty Images

Investors need to wise up to Amazon's accounting games.

Shares of Amazon AMAZON.COM INC. AMZN -0.93% surged after the company reported its fourth-quarter earnings on Jan. 29, with investors focusing mainly on the small profit that Amazon managed during the holiday season. For the full year, Amazon posted a net loss of $241 million despite both double-digit revenue growth and generating nearly $2 billion of free cash flow.

Free cash flow has long been the metric Amazon points to as the best way to measure the company’s performance, and Amazon certainly delivered on that front. But there’s a problem with Amazon’s free cash flow numbers: They ignore billions of dollars in spending that the company is financing through capital leases. Despite the impressive-looking free cash flow, Amazon is actually losing a tremendous amount of money, no matter how you slice it. I pointed this out in a previous article, which includes an explanation of exactly how Amazon accounts for its capital leases.

A funny thing happened during Amazon’s conference call a few days ago. Instead of just touting its free cash flow figures and moving on, as it usually does, the company actually mentioned these massive capital leases, pointing out that it finances some of its spending in addition to the capital expenditures reported on the cash flow statement. The biggest piece of this financing is for Amazon Web Services.

Why does this matter? Here’s a slide from Amazon’s earnings presentation showing the company’s reported free cash flow:

Source: Amazon.

This is essentially the same slide that Amazon shows every quarter, with one important difference: The second footnote points to some additional free cash flow measures in the appendix, including one which adjusts for its massive spending via capital leases. This is the first time that Amazon has actively pointed out its capital lease activity beyond the required disclosures in its financial statements. What does this slide look like?

Source: Amazon.

This changes the story pretty dramatically. Along with the $4.9 billion Amazon spent directly on capital expenditures during the past year, it also committed an additional $4 billion through capital leases. While this $4 billion doesn’t represent a cash expense today, these capital leases will have to be paid for during the next few years.

During the past 12 months, Amazon paid about $1.3 billion in capital lease payments, erasing most of its reported free cash flow. These payments are considered financing cash flows, therefore excluding them from the free cash flow calculation.

These payments are only going to rise as Amazon finances more of its spending. Next year, Amazon expects to spend a little more than $2 billion paying for these capital leases, according to its 10-K, excluding any additional capital leases that the company enters into next year. This will effectively wipe out any reported free cash flow, and these payments will continue to rise unless Amazon curtails its capital lease activity.

The second slide above shows how much Amazon is truly investing in its business. Unlike other companies with big public cloud business, like Microsoft and Google, Amazon doesn’t have billions of dollars in profit coming in from other businesses to finance all of this growth. During the past 12 months, Microsoft spent $5.3 billion in capital expenditures, with much of this going toward growing its cloud business. Google spent a staggering $9.7 billion.

If Amazon wants to remain competitive in cloud computing, it can’t slow down its spending. But it also can’t afford to keep spending as heavily as it has been. Amazon’s reported free cash flow numbers make it seem like the company can invest heavily and still manage to generate cash. Well, it can’t. Not even close.

Amazon’s long-term goal is to optimize free cash flow; but its reported free cash flow is meaningless if it doesn’t adjust for capital leases, or at the very least, payments on those capital leases. I applaud Amazon’s management for finally pointing out these capital leases to investors, as they are extremely important in order to truly understand Amazon’s business. But the company is still touting its nearly $2 billion in free cash flow as if it means something. It doesn’t.

If Amazon keeps doing what it’s doing, the company is going to be taking on a lot more debt during the next few years. It paid $210 million in interest during 2014, completely wiping out its operating income for the year, and this number will only rise if this heavy spending continues.

It turns out that Amazon isn’t some sort of magical cash machine, able to generate $2 billion of free cash flow while reporting far lower, or even negative, earnings, all the while investing heavily in capital-intensive businesses. Instead, it’s a company that’s borrowing billions of dollars in order to finance its growth, using lease accounting to make it appear profitable on a free cash flow basis. There’s nothing wrong with what Amazon is doing, but investors need to wise up to these sorts of accounting games.

Timothy Green has no position in any stocks mentioned, although he does own a Kindle, and he likes that quite a bit. The Motley Fool recommends Amazon.com, Apple, and Google (A shares). The Motley Fool owns shares of Amazon.com, Apple, Google (A shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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This article previously appeared under a different headline, “Amazon Just Admitted That It’s Losing Billions.”

MONEY Investing

Why Big Oil Can Withstand Cheap Oil Prices

BP gas station with rainbow in the background
Toby Melville—Reuters

What investors need to know about the recent struggles of the petro-behemoths

The price of oil dropped dramatically in the second half of last year, resulting in less-than-stellar earnings for some of the world’s biggest energy companies. Exxon Mobil, BP, and Royal Dutch Shell all recently produced underwhelming fourth-quarter results thanks to lower demand for, and excess supply of, oil.

Despite recent struggles, investors have not jumped ship, and the petro-behemoths have outpaced the broader stock market over the past week. What’s going on, and what does this mean for you?

Oil Companies Have Lots of Money

The last three months of 2014 were not pretty for oil producers. The value of a barrel of oil hit around $115 in June, fell to $55 by the end of the year, and recently dropped to $45 before rebounding in the last couple of days. Exxon’s revenue dropped 21%, BP posted a replacement-cost loss (which is akin to net income) of $969 million, and Shell only saw gains thanks to ancillary businesses.

Despite the recent price uptick, oil’s outlook isn’t much better. The U.S. Energy Information Administration expects the price of oil to average $58 a barrel in 2015, compared to $109 just a few years ago. Lower oil prices simply makes it harder for major energy conglomerates to make money.

Fortunately for executives in Irving, Texas, London, and The Hague, however, large integrated oil and gas companies tend to have a lot of capital to soften these blows. Even after enduring a rough quarter, Exxon has nearly $5 billion in cash on hand, BP earned more than $12 billion for all of 2014, and Shell took in about $45 billion in cash flow last year.

Oil Companies Have Other Businesses

While cheaper oil makes the act of getting the black stuff out of the ground less profitable, other businesses in these large oil companies actually stand to benefit from lower oil prices. Exxon’s chemical operations, for example, actually saw a 35% increase in earnings over the same period in 2013.

“Our chemical business is very well positioned to take advantage of the lower commodity prices,” says Exxon’s head of investor relations Jeff Woodbury in the most recent earnings call. “Particularly in the U.S. our manufacturing sites are highly flexible and can run across a wide range of feedstocks, from ethane all the way to gas oil.”

It’s About Expectations

Falling energy prices was one of the biggest stories at the end of last year. Americans are feeling better about their own financial situation; cheaper prices at the pump feel to them like a pay raise or a tax cut. Which is to say, the market was not shocked that large oil companies had muted earnings during the last three months of 2014. In fact over the past six months shares of Exxon, BP, and Shell have fallen 6.7%, 16.2% and 17.6%, respectively. (The S&P 500, over the same period of time, has actually jumped 6.5%.)

OIL

And oil executives are doing all they can to lower costs and expectations for the near future. BP announced that it will be spending $4 to $6 billion less in capital expenditures in 2015 than it originally thought, and about $3 billion less than the company spent last year.“We have now entered a new and challenging phase of low oil prices through the near and medium term,” BP chief executive Bob Dudley said in a press release. Shell has also announced that it will reduce costs next year, and expects to spend $15 billion less through 2017.

What Does This Mean for You

Investors still pay a premium to own big oil stocks. Forward-looking price-to-earnings ratio for Exxon, BP, and Shell all exceed that of the S&P 500.

But they still look relatively attractive to USAA fund manager Bob Landry. Oil prices may not rebound this year, he says, but they’ve probably hit a floor at around $40 a barrel. “If you’re a long-term investor you can hold some of these companies that pay a solid dividend, and pick up shares for cheaper than what they were four-to-six months ago,” Landry says. “These companies can survive this turmoil thanks to a fortress balance sheet and the ability to generate significant cash flow.”

MONEY financial crisis

S&P to Pay Billions for Being the Watchdog That Didn’t Bark

Standard & Poor's building
Justin Lane—EPA

Standard & Poor's settlement is a reminder that the industry's safeguards failed in the lead-up to the financial crisis.

On Tuesday, Standard & Poor’s (S&P), agreed to pay $1.375 billion to settle claims by the Department of Justice and multiple state governments that the ratings agency defrauded investors in the lead up to the financial crisis.

As a bond-rating agency, S&P was responsible for keeping banks and other major financial institutions honest. Its apparently intentional failure to do so shows how one of the guard dogs of the financial system was co-opted by the very people it was meant to police.

Perverse incentives

Standard & Poors is one of three companies designated by the Securities and Exchange Commission as Nationally Recognized Statistical and Ratings Organizations (NRSROs). Their job is to rate the safety of bonds and thereby provide a kind of warning label for investors. The safest bonds—those issued by companies deemed most credit-worthy and best able to meet their financial commitments—are designated AAA; debt rated BB or lower is considered below investment grade, or “junk” in common parlance.

While companies like S&P theoretically exist to protect investors, much of their revenue comes from the lenders whose securities they were rating. As Kathleen Engel and Patricia McCoy describe in their book The Subprime Virus, ratings agencies generally bring in 1% of any debt deal they rate. Between 2000 and 2007, the three agencies underwrote $2.1 trillion in subprime mortgage-backed securities.

With that kind of money at stake, there was an obvious incentive for these firms to issue ratings that are favorable to the interests of their paying clients.

S&P and the financial crisis

According to a statement of facts released by the Justice Department and “agreed” to by S&P, that seems to be exactly what the company did. Contrary to the company’s Code of Practices and Procedures—which promises that its ratings “shall not be affected by an existing or a potential business relationship”—S&P “toned down and slowed down” the roll out of a new rating model for so-called Collateralized Debt Obligations (CDOs) after an unnamed investment bank suggested the system could jeopardize “potential business opportunities.”

The statement also shows S&P delayed for months ratings revisions on securities it knew to be failing. As far back as November 2006 the head of S&P’s residential mortgage-backed securities group sent two senior executives a spreadsheet—revealingly entitled “Subprime_Trouble.XLS”—warning that many S&P-rated loans were in serious trouble and should be downgraded.

Multiple sources told the Justice Department investigators that the group’s head frequently complained that her concerns were ignored because downgrades would hurt S&P’s rating business. A public warning that major downgrades were imminent was delayed until July, 2007.

Aftermath

The rest, as they say, is history. The housing crash brought to light the incestuous relationship between rating agencies and bond issuers, and eventually resulted in lawsuits like this one. Though S&P was not forced to admit wrong-doing, the case and subsequent settlement revealed a trove of information about the inner workings of the agency and wiped away a full year of the company’s profits.

Dodd-Frank imposed a number of additional regulations on ratings agencies, including new rules regarding conflicts of interest. But S&P’s payout is a reminder that it wasn’t just crooked banks and lenders that tanked the financial sector. The supposed watchdogs were involved as well.

MONEY Food & Drink

Why Shake Shack’s IPO Is Too Rich for My Blood

Shake Shack founder Danny Meyer (3rd R) and Shake Shack CEO Randy Garutti (2nd R) ring the opening bell at the New York Stock Exchange to celebrate their company's IPO January 30, 2015. Shares of gourmet hamburger chain Shake Shack Inc soared 150 percent in their first few minutes of trading on Friday, valuing the company that grew out of a hotdog cart in New York's Madison Square Park at nearly $2 billion.
Brendan McDermid—Reuters Shake Shack founder Danny Meyer CEO Randy Garutti ring the opening bell at the New York Stock Exchange.

I used to think Shake Shack might be undervalued. Not anymore.

Last week, I wrote a positive article on burger chain Shake Shack’s SHAKE SHACK INC SHAK 1.37% IPO on the basis that, “in [the indicative $14 to $16] price range, the shares could significantly undervalue Shake Shack’s growth potential.” The shares began trading today, and I’m much less excited about the offering. In fact, I think investors ought to avoid the stock entirely. What’s changed?

Is no price too high?

It’s not unreasonable to think a stock that is attractive at $15 may well be repulsive at more than three times that price — which is where Shake Shack shares are now trading. (The stock was at $48.62 at 12:30 p.m. EST.) Indeed, the underwriters raised the price range to $17 to $19 — and the number of shares being sold — before finally pricing the shares at $21.

Apparently, that did nothing to deter investors once shares began trading in the second market this morning – they opened at $47, for a 124% pop! Despite solid or even outstanding fundamentals, a business will not support any valuation. Price matters.

Last week, I compared Shake Shack to Chipotle Mexican Grill CHIPOTLE MEXICAN GRILL INC. CMG -1.09% . Let’s see how the share valuations of the two companies on their first day of trading now compare:

Number of restaurants operated by the company at the time of the public offering Price / TTM Sales
(based on closing price on first day of trading)*
Chipotle 453 4.4
Shake Shack 26 16.1

*Shake Shack’s price-to-sales multiple is based on the $48.62 price at 12:30 p.m. EST. Source: Company documents.

That’s a huge gap between the two price-to-sales multiples! Given the massive appreciation in Chipotle’s stock price since the close of its first day of trading — a more than fifteenfold increase in just more than nine years! — there’s a good argument to be made that the shares were undervalued at that time.

However, had Chipotle closed at $160 instead of $44 on its first day of trading — which would equalize the price-to-sales multiples — subsequent gains would have been significantly less impressive.

Buy potential performance at a discount, not a premium

Furthermore, with Chipotle, we are looking back at performance that has already been achieved, both in terms of the stock and the company’s operations. The Mexican chain has executed superbly well during that period.

With regard to Shake Shack — however likely you think a similar business performance is — it remains in the realm of possibility instead of certainty. I don’t know about you, but when I buy possibility, I like to buy it at a discount to the price of certainty.

Although I think Shake Shack’s brand positioning is comparable, and possibly even superior, to that of Chipotle, I’m not convinced the business fundamentals are as attractive.

For one thing, Shake Shack faces stiffer competition in its segment than Chipotle did (or does) in the likes of Five Guys and In-N-Out Burger. For another, Shake Shack’s same-store sales growth is significantly lower than Chipotle’s was, at just 3% for the 39 weeks ended Sep. 24 versus 10.2% for Chipotle in 2005, which was followed by 13.7% in 2006.

Don’t swallow these shares

Shake Shack may produce a premium burger — founder Danny Meyer refers to this segment as “fine casual dining” — but the stock is currently selling at a super-premium price. Paying that price is the equivalent of eating “empty calories” — it could end up being detrimental to your financial health.

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

 

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MONEY Tech

Why Apple Needs Its New Watch to Be a Huge Success

Apple Watch
Stephen Lam—Reuters Apple Watch

The pressure is on.

The market may have loved Apple’s APPLE INC. AAPL 0.88% blowout quarterly report on Tuesday afternoon, but this doesn’t take any of the pressure off of April’s highly anticipated Apple Watch. If anything, the report actually places even more weight on the tech giant’s initial foray into wearable computing.

Let’s go over some of the reasons why Apple needs its new watch to be a smashing success.

1. There is too much riding on the iPhone

Apple’s revenue during the holiday quarter may have soared 30%, but back out the iPhone and sales actually slipped 7%. The iPhone is hot — and that’s awesome — but it’s also 68.6% of the revenue mix at Apple.

Apple needs to earn its innovator wings again. With iPad sales plummeting and the iPod no longer even worthy of being its own line item in Apple’s quarterly summary data table it’s time for something new to take the weight off of the iPhone.

2. The iOS newbies are ripe for the picking

The only thing better than Apple selling a record 74.5 million iPhones is that a record number of them are also new to the tech giant’s mobile platform.

“We had the highest number of customers new to iPhone last quarter than in any prior launch,” CEO Tim Cook boasted on Tuesday night. “The current iPhone lineup experienced the highest Android switcher rate in any of the last three launches.”

In other words, there are a lot of people making their initial investments in Apple products. The long overdue move to introduce larger screens to keep up with the competition is predictably paying off by eliminating their objections to going Apple. This leaves them ripe to to absorb other Apple products, and it’s not iPads or iPods. Mac sales should benefit, but the no-brainer is an accessory that works in cahoots with the phone itself. Yes, we’re talking about the smart watch.

3. Let’s bring back the halo effect

It’s not a coincidence that the Mac experienced a resurgence shortly after the 2001 introduction of the iPod. The media player worked with Macs and PCs, but it made Apple desktops and laptops cool again. Don’t be surprised if we see this happen with the Apple Watch.

Ultimately the purchase of an Apple Watch is a commitment to iOS. It’s unlikely to work with Android or other devices, cementing an iPhone user in place. Wireless carriers make it brutally easy to switch sides every two years, but someone buying an Apple Watch is that much more invested to sticking to the iPhone at the next upgrade cycle.

4. Show Google how wearable computing is done

It’s not a surprise to see Google GOOGLE INC. GOOG -0.4% backpedalling from Google Glass. The search giant suspended sales of its high-tech specs to developers. They cost too much. They were too creepy. They weren’t fashionable enough.

However, this also opens the door for Apple to make a splash by showing how wearable computing can be fashionable and useful. Skeptics will argue that rival smart watches have failed, but that hasn’t deterred Apple in the past. There’s always time to get it right.

5. Apple can use a new winner

The only two product lines posting improving sales this holiday season were iPhones and Macs. We’re talking about the smartphone that it introduced nearly eight years ago and its legacy computer business that’s obviously even older.

The iPad has been shrinking for a year, joining the iPod that’s been diminishing in popularity for years. Apple TV seems to be holding its own, but it’s not substantial enough to merit being singled out as a category. It’s lumped together with the iPod in the “other products” catchall that posted an overall decline.

Apple can use another winner. The Apple Watch won’t lend itself to the same upgrade cycle as the iPhone. There won’t be too many people buying a new one every two years. However, if it succeeds it will give Apple a more recent product introduction to brag about.

MONEY Greece

What the Turmoil in Greece Means for Your Money

The head of radical leftist Syriza party Alexis Tsipras waves to supporters after winning the elections in Athens January 25, 2015. Tsipras promised on Sunday that five years of austerity, "humiliation and suffering" imposed by international creditors were over after his Syriza party swept to victory in a snap election on Sunday.
Marko Djurica—Reuters The head of radical leftist Syriza party, Alexis Tsipras.

Expect lower stock prices.

Faced with an apocalyptic unemployment rate of 28%, voters in Greece have drawn the line on austerity measures that have mired the country in a crisis rivaling that of the Great Depression. In the worst case, the move could lead to Greece’s exit from the European monetary union. In the best case, it will produce much-needed debt relief for the country’s ailing economy. But either way, it’s prudent to assume the turmoil will roil equity markets both here and abroad.

The issue came to a head earlier this week when Greece’s “radical left” Syriza party won a plurality of votes in the latest election. Led by 40-year-old Alexis Tsipras, Syriza campaigned on a platform to ease the “humiliation and suffering” caused by austerity. This includes debt relief and rolling back steep spending cuts enacted by Greece’s former government in exchange for financing from the International Monetary Union and other members of the European Union.

To say Greece has paid dearly for these cuts would be an understatement. The consensus among mainstream economists is that austerity during a time of crisis exacerbates the underlying issues. We saw this in Germany after World War I when France and Great Britain demanded it pay colossal war reparations. We saw it throughout Latin America following the IMF’s structural adjustments of the 1980s and 1990s. And we’re seeing it now in Greece and Spain, where unemployment has reached levels not seen in the developed world since the Great Depression.

The problem for Greece is that Germany and other fiscally conservative European countries aren’t sympathetic to its predicament. They see Greece’s travails as its just deserts. They see a fiscally irresponsible country that exploited its membership in the continent’s monetary union in order to borrow cheaply and spend extravagantly. And they see an electorate that isn’t willing to accept the consequences of its government’s actions.

To a certain extent, Greece’s critics are right. Over the last decade, its debt has ballooned. In 2004, the country’s debt-to-GDP ratio was 97%. Today, it is 175%. This is the heaviest debt load of any European country relative to output.

It accordingly follows that the European Union stands once again at the precipice of fracturing. If the Syriza party sticks to its demands and Greece’s neighbors won’t agree to relief, then one of the few options left on the table will be for Greece to exit the monetary union and abandon the euro. Doing so would free the country to pursue its own fiscal and monetary policies. It would also almost inevitably trigger a period of sharp inflation in a reinstituted drachma.

This isn’t to say global investors should be petrified at the prospect of even the most extreme scenario — that of Greece abandoning the euro. In essence, the euro is nothing more than a currency peg that fossilized the exchange rates between the continent’s currencies in 2001. By going off it, Greece would essentially be following in the footsteps of the Swiss National Bank, which recently unpegged the Swiss franc from the euro after a drop in the latter’s value made maintaining the peg prohibitively expensive.

A more complicated question revolves around the fate of Greece’s sovereign debt. Seceding from the monetary union won’t eliminate its obligations to creditors. It likely also won’t change the fact that the country’s debt is denominated in euros. Thus, if Greece were to exit the euro and experience rapid inflation, the burden of its interest payments would get worse, not better. This would make the prospect of default increasingly attractive if not necessary in order to reignite economic growth.

But investors have shouldered sovereign debt repeatedly since the birth of international bond markets. Just last year, Standard & Poor’s declared that Argentina had defaulted after missing a $539 million payment on $13 billion in restructured bonds — restructured, that is, following the nation’s 2002 default. Yet stocks ended the year up by 11.5%. The same thing happened when Russia defaulted in 1998. Despite triggering the failure of Long Term Capital Management, a highly leveraged hedge fund that was ultimately rescued by a consortium of Wall Street banks, stocks soared by 26.7% that year.

Given all this, the biggest impact on investors, particularly in the United States, is likely to make its way through the currency markets. When fear envelopes the globe, investors flee to safety. And in the currency markets, safety is synonymous with the U.S. dollar. Over the last year, for instance, speculation about quantitative easing by the European Central Bank, coupled with the scourge of low oil prices on energy-dependent economies such as Russia and Mexico, has increased the strength of the dollar. This will only grow more pronounced if the U.S. Federal Reserve raises short-term interest rates later this year.

The net result is that American companies with significant international operations will struggle to grow their top and bottom lines. This is because a strong dollar makes American goods more expensive relative to competitors elsewhere. Consumer products giant Procter & Gamble PROCTER & GAMBLE COMPANY PG -0.57% serves as a case in point. In the final three months of last year, P&G’s sales suffered a negative five percentage point impact from foreign exchange. As Chairman and CEO A.G. Lafley noted in Tuesday’s earnings release:

The October [to] December 2014 quarter was a challenging one with unprecedented currency devaluations. Virtually every currency in the world devalued versus the U.S. dollar, with the Russian Ruble leading the way. While we continue to make steady progress on the strategic transformation of the company — which focuses P&G on about a dozen core categories and 70 to 80 brands, on leading brand growth, on accelerating meaningful product innovation and increasing productivity savings — the considerable business portfolio, product innovation, and productivity progress was not enough to overcome foreign exchange.

With this in mind, it seems best to assume revenue and earnings at American companies will take a hit while Europe works toward a solution to Greece’s problems. In addition, as we’ve already started to see, the hit to earnings will be reflected in lower stock prices. There’s no way around this. But keep in mind that we’ve been through countless crises like this is in the past, and the stock market continues to reward long-term investors for their patience and perseverance.

MONEY Oil

Why Oil Prices May Not Recover Anytime Soon

A worker waits to connect a drill bit on Endeavor Energy Resources LP's Big Dog Drilling Rig 22 in the Permian basin outside of Midland, Texas, U.S., on Friday, Dec. 12, 2014.
Brittany Sowacke—Bloomberg via Getty Images

Things could get worse for the oil industry before they get better.

Oil prices have collapsed in stunning fashion in the past few months. The spot price of Brent crude reached $115 a barrel in June, and was above $100 a barrel as recently as September. Since then, it has plummeted to less than $50 a barrel.

Brent Crude Oil Spot Price Chart

There is a sharp split among energy experts about the future direction of oil prices. Saudi Prince Alwaleed bin Talal recently stated that oil prices could keep falling for quite a while and opined that $100 a barrel oil will never come back. Earlier this month, investment bank Goldman Sachs weighed in by slashing its short-term oil price target from $80 a barrel all the way to $42 a barrel.

But there are still plenty of optimists like billionaire T. Boone Pickens, who has vocally argued that oil will bounce back to $100 a barrel within 12 months-18 months. Pickens thinks that Saudi Arabia will eventually give in and cut production. However, this may be wishful thinking. Supply and demand fundamentals point to more lean times ahead for oil producers.

Oil supply is comfortably ahead of demand

The International Energy Agency assesses the state of the global oil market each month. Lately, it has been sounding the alarm about the continuing supply demand imbalance.

The IEA currently projects that supply will outstrip demand by more than 1 million barrels per day, or bpd, this quarter, and by nearly 1.5 million bpd in Q2 before falling in line with demand in the second half of the year, when oil demand is seasonally stronger.

That said, these projections are built on the assumption that OPEC production will total 30 million bpd: its official quota. However, OPEC production was 480,000 bpd above the quota in December. At that rate, the supply-and-demand gap could reach nearly 2 million bpd in Q2.

Theoretically, this gap between supply and demand could be closed either through reduced supply or increased demand. However, at the moment economic growth is slowing across much of the world. For oil demand to grow significantly, global GDP growth will have to speed up.

It would take several years for the process of lower energy prices helping economic growth and thereby stimulating higher oil demand to play out. Thus, supply cuts will be necessary if oil prices are to rebound in the next two years-three years.

Will OPEC cut production?

There are two potential ways that global oil production can be reduced. One possibility is that OPEC will cut production to prop up oil prices. The other possibility is that supply will fall into line with demand through market forces, with lower oil prices driving reductions in drilling activity in high-cost areas, leading to lower production.

OPEC is a wild card. A few individuals effectively control OPEC’s production activity, particularly because Saudi Arabia has historically borne the brunt of OPEC production cuts. Right now, the powers that be favor letting market forces work.

There’s always a chance that they will reconsider in the future. However, the strategic argument for Saudi Arabia maintaining its production level is fairly compelling. In fact, Saudi Arabia has already tried the opposite approach.

In the 1980s, as a surge in oil prices drove a similar uptick in non-OPEC drilling and a decline in oil consumption, Saudi Arabia tried to prop up oil prices. The results were disastrous. Saudi Arabia cut its production from more than 10 million bpd in 1980 to less than 2.5 million bpd by 1985 and still couldn’t keep prices up.

Other countries in OPEC could try to chip in with their own production cuts to take the burden off Saudi Arabia. However, the other members of OPEC have historically been unreliable when it comes to following production quotas. It’s unlikely that they would be more successful today.

The problem is that these countries face a “prisoner’s dilemma” situation. Collectively, it might be in their interest to cut production. But each individual country is better off cheating on the agreement in order to sell more oil at the prevailing price, no matter what the other countries do. With no good enforcement mechanisms, these agreements regularly break down.

Market forces: moving slowly

The other way that supply can be brought back into balance with demand is through market forces. Indeed, at least some shale oil production has a breakeven price of $70 a barrel-$80 a barrel or more.

This might make it seem that balance will be reasserted within a short time. However, there’s an important difference between accounting profit and cash earnings. Oil projects take time to execute, involving a significant amount of up-front capital spending. Only a portion of the total cost of a project is incurred at the time that a well is producing oil.

Capital spending that has already been incurred is a “sunk cost.” The cost of producing crude at a particular well might be $60 a barrel, but if the company spent half that money upfront, it might as well spend the other $30 a barrel to recover the oil if it can sell it for $45 a barrel-$50 a barrel.

Thus, investment in new projects drops off quickly when oil prices fall, but there is a significant lag before production starts to fall. Indeed, many drillers are desperate for cash flow and want to squeeze every ounce of oil out of their existing fields. Rail operator CSX recently confirmed that it expects crude-by-rail shipments from North Dakota to remain steady or even rise in 2015.

Indeed, during the week ending Jan. 9, U.S. oil production hit a new multi-decade high of 9.19 million bpd. By contrast, last June — when the price of crude was more than twice as high — U.S. oil production was less than 8.5 million bpd.

One final collapse?

In the long run — barring an unexpected intervention by OPEC — oil prices will stabilize around the marginal long-run cost of production (including the cost of capital spending). This level is almost certainly higher than the current price, but well below the $100 a barrel level that’s been common since 2011.

However, things could get worse for the oil industry before they get better. U.S. inventories of oil and refined products have been rising by about 10 million barrels a week recently. The global supply demand balance isn’t expected to improve until Q3, and it could worsen again in the first half of 2016 due to the typical seasonal drop in demand.

As a result, global oil storage capacity could become tight. Last month, the IEA found that U.S. petroleum storage capacity was only 60% full, but commercial crude oil inventory was at 75% of storage capacity.

This percentage could rise quickly when refiners begin to cut output in Q2 for the seasonal switch to summer gasoline blends. Traders have even begun booking supertankers as floating oil storage facilities, aiming to buy crude on the cheap today and sell it at a higher price this summer or next year.

If oil storage capacity becomes scarce later this year, oil prices will have to fall even further so that some existing oil fields become cash flow negative. That’s the only way to ensure an immediate drop in production (as opposed to a reduction in investment, which gradually impacts production).

Any such drop in oil prices will be a short-term phenomenon. At today’s prices, oil investment will not be sufficient to keep output up in 2016. Thus, T. Boone Pickens is probably right that oil prices will recover in the next 12 months-18 months, even if his prediction of $100 oil is too aggressive. But with oil storage capacity becoming scarcer by the day, it’s still too early to call a bottom for oil.

MONEY #financialfail

“I Made $6 Million at Age 26—and Lost It by 28″

Dave Asprey
Dave Asprey

Dave Asprey, bestselling author of The Bulletproof Diet, confesses his greatest #financialfail: Not walking away from a losing investment

Not only is Dave Asprey the author of the recent New York Times bestselling book The Bulletproof Diet, he’s also a Silicon Valley investor and tech entrepreneur. His biggest financial fail, he admits, was being too greedy in his 20s and failing to get professional help with investment decisions. “I made $6 million when I was 26,” he says, “And I lost it when I was 28.”

Here’s how it happened, as told to me on my new podcast, So Money:

My career accelerated quite a lot at that time. I was the youngest guy at Exodus Communications, a $36 billion company.

I was in charge of due diligence for our mergers and acquisitions department. So, when we wanted to buy a company, I was the guy who’d go in and say, ‘Is this technology going to work for us? Yes or no?’

I attended board meetings. And because of that, I knew all of the upcoming acquisitions. So, I was blacked out [of trading stock he had received as part of his compensation]; it was illegal.

When those stocks started to teeter, what I should have done was quit my job, sell all of my shares and retire. Instead, I said, ‘I can’t do that. I might lose an additional $4 million in uninvested equity or something.’

So I stayed at the company. And the stock dropped from $60 a share to $5 a share.

In retrospect, I should have thought, ‘I have enough money. I can do whatever I want. I should just walk away today.’ I could have done that. But for six months, I didn’t walk away.

Every day, I was worth less and less in the bank account. And that was a grinding down, horrible feeling.

And there’s another thing. I don’t think I’ve ever talked about this: I was with some online broker—going back 15 years. It was a very cutting edge broker that let me do options and all this stuff.

Based on the reports it seemed like I had a couple hundred thousand grand in the account, at least enough to take care of my basic expenses. But there was a margin on that account that I didn’t even know about because I wasn’t managing the stuff tightly. I was too stubborn and fearful to hire someone to help me manage it. The margin ended up consuming most of the account before I even noticed.

Today, the advice translates to: Hire a professional to pay attention to the stuff that you’re not paying attention to.”

Every day, MONEY contributing editor Farnoosh Torabi interviews entrepreneurs, authors and financial luminaries about their money philosophies, successes, failures and habits for her podcast, So Money—which is a “New and Noteworthy” podcast on iTunes.

More by Farnoosh Torabi:

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