Cheap Oil Could Be a Big Problem

Steve McDonald
by Steve McDonald, Bond Strategist, The Oxford Club

According to a recent Barron’s article, the huge shale oil and gas reserves in the U.S. and and worldwide will give a huge boost to the U.S. economy and drive oil prices down to as low as $75 in the next few years.

It only makes sense. According to optimistic estimates, the U.S. could be energy independent by 2020. That means a huge reversal of the status quo.

That’s the good news for the U.S. The problem with $75 oil, though, is the companies that rely on high oil prices - the exploration and development companies. They will see big drops in their revenues. They can’t have prices drop 25% and not feel it in their wallet.

I have been pounding the table for several years about buying oil and gas services instead of the big risk-takers. This is one more reason to get away from the E&P companies.

The names I mentioned recently were Schlumberger (NYSE: SLB), Halliburton (NYSE: HAL), Seadrill (NYSE: SDRL) and Transocean (NYSE: RIG), and that’s just the tip of the iceberg.

The list of companies that will benefit from the oil and gas boom and take none of the big risks is almost endless. It includes lots of big names.

Over the next few years, as prices fall, the squeeze will be on. The pressure will be on those companies that rely on the price of oil for their survival - the E&P folks.

Don’t get caught in this trap. The play going forward is in the oil and gas services, not the producers.

Colon Cancer’s Death Rate May Be Taking a Big Hit

The second biggest cancer killer, colon cancer, will be easier to find and have a much better survival rate if Exact Sciences (Nasdaq: EXAS) has its way.

An FDA panel just gave unanimous approval for Exact’s new test for colon cancer, and it will likely gain final approval by the end of this year.

The challenge now will be selling it to the medical community. But analysts think this will be a slam dunk.

The test is more expensive than the current one, but Exact’s early detection rate and the overall detection rate is significantly higher than the old test: 92% versus 74%.

That’s 18 more people per hundred who will live... even if the insurance folks drag their feet, which they always do. Would you pay an additional $300 for that kind of peace of mind? I will.

The new test does have a higher false positive rate: 10% versus 4.5%. But which would you prefer? A false positive or a misdiagnosis?

And it will reduce the number of colonoscopies required. I’d pay $300 just to avoid that.

The market for this test is about $300 billion a year.

Exact’s numbers aren’t anything to write home about right now. It has spent the last 10 years doing nothing but developing this test. But it is expecting a 58% growth rate this year and 25% a year for the next five years. And when the sales begin to come in, this could really run.

Exact Sciences: Keep an eye on this one.

The “What Does It Take?” Slap in the Face Award

When the Fed started its bond-buying program, it was intended to boost inflation as well as push the economy along.

Well, we just hit our 22nd straight month of inflation below the Fed’s target, and - in case you missed it - the economy isn’t on fire, either. In fact, the only folks who seem to think it’s doing fine are the politicians who need good economic news to keep their jobs.

What does it take to see that this isn’t working? How can we have had the money presses running at full bore for the past few years and still have no inflation and slow growth?

Maybe raising taxes and increasing regulations during the worst slowdown since the Great Depression wasn’t such a good idea.

Oh, and we are on the verge of $18 trillion in debt - $25 trillion is the point of no return.

Thanks for nothing, Washington.

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