The Race to Zero Has Begun

The 'brokerage wars' are heating up... The race to zero has begun... The U.S. shale industry is 'fitter, leaner, and faster'... The warning signs are still flashing for crude...


We begin today with a little good news for individual investors...

Last week, three of the biggest and best-known discount brokers – Fidelity Investments, Charles Schwab, and TD Ameritrade – announced they were slashing the commissions they charge to retail investors.

Fidelity said it was cutting its commissions for equity and exchange-traded fund trades from $7.95 to just $4.95. Schwab said it was lowering its commissions from $6.95 to $4.95. And TD Ameritrade said it would cut from $9.99 to $6.95.

These are among the steepest cuts by discount brokers to date...

But they likely won't be the last. As news service Reuters reported...

The deep cuts intensified an already fierce competition to lower fees in the investment industry, and the shares of Schwab and several other brokerages fell as markets weighed the potential for profits to be strained by discounts.

But the announcements also indicated the ambitions of brokers to win over clients to digital investment advice and other fee-based offerings. Mergers and acquisitions could be the next frontier for that battle.

"There's this race to zero," said Noah Hamman, chief executive of AdvisorShares, a provider of ETFs, who earlier in his career worked in Fidelity's trading business. "To be in that business you've got to have other services."

In other words, fees are likely to continue to fall as financial-services firms compete to attract clients to their more profitable businesses.

This is great news for individual investors... but could be painful for firms that are heavily dependent on the brokerage business.

Last Friday, Bloomberg published a report on the state of the U.S. shale oil industry...

In short, it noted the industry has quietly rebuilt itself from just one year ago. From the report...

When the who's who of the oil industry met a year ago in Houston, Saudi Arabia's energy minister had harsh words for U.S. shale drillers struggling with the worst price crash in a generation. "Lower costs, borrow cash or liquidate," said Ali Naimi, who managed the world's largest oil-exporting business for more than two decades.

In the year since, the drillers have largely taken Naimi's advice. While more than 100 have gone bankrupt since the start of 2015, the companies that survived have reshaped themselves into fitter, leaner and faster versions that can thrive with oil at $50 a barrel...

And as shale returns with a vengeance, it's not just the pioneer cowboys that dominated the first phase of the revolution in the Bakken of North Dakota. This time, Exxon Mobil Corp. and other major oil groups are joining the rush. It's a new reality that OPEC and Russia – the main forces behind the production cuts approved last year as a solution to re-balance the global market – are starting to acknowledge. "With $55 a barrel, we see everyone very happy in the U.S.," said Didier Casimiro, a senior executive at Moscow-based Rosneft PJSC.

This should sound familiar to regular Digest readers... We continue to expect U.S. shale oil production to surprise to the upside... and prices to surprise to the downside.

Of course, regular readers know our colleague Ben Morris agrees...

Ben has been highlighting the "froth" in the oil markets for months, and warned his subscribers back in January that much lower prices were likely.

Oil prices have held up since Ben originally issued his warning. But as he explained to his DailyWealth Trader subscribers this morning, the bearish case for crude is even stronger today than it was back then. From the issue...

Regular DWT readers are familiar with the Commitments of Traders ("COT") report for crude oil... The COT is a government report that classifies different types of traders and tracks their futures positions. There are two main groups of traders: industry professionals and speculators. The two groups usually bet in opposite directions...

Professionals in the oil industry use futures to protect themselves against volatility in the price of oil. They sell futures contracts (agreeing to sell some of the oil they produce) at prices where they're guaranteed a target return. The folks who take the other side of those bets – hedge funds and other traders – are speculating. When the COT report shows that these speculators all crowd to one side of a trade, it's often a good sign the asset is about to reverse.

As you can see in the six-year chart below, crude oil (the black line) rallies each time speculators' positions (the blue line) drop to around 200,000 futures contracts. And it usually stalls or drops when speculators get extremely bullish. In the past, "extremely bullish" was around 300,000 contracts. For a few years, it was closer to 400,000 contracts.

As of February 28, speculators held about 564,000 bullish futures contracts in oil...

New 52-week highs (as of 3/3/17): Allianz (AZSEY), CBRE Group (CBG), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), PowerShares S&P 500 BuyWrite Fund (PBP), and Two Harbors Investment (TWO).

A busy day in the mailbag... More feedback on Stansberry Portfolio Solutions and Stansberry's Credit Opportunities... comments on on the Snap IPO and short selling... and praise for P.J. O'Rourke. Send your notes to feedback@stansberryresearch.com.

"I swapped my Flex Alliance membership for Portfolio Solutions and thus far I couldn't be more pleased. I no longer have to agonize over which I should choose of the many recommendations from the several monthly letters, nor over the percentage of my portfolio to invest in each choice. That is very helpful. I have allocated roughly three quarters of my stock investment portfolio to The Capital Portfolio. The remaining quarter will be held in cash and the occasional investment I have chosen from the monthly letters not included in The Capital Portfolio.

"I still read each of the monthly letters because I want to understand the investments I am making. And also because I learn from the letters, separate and apart from making investments in the recommendations. I read The Capital Portfolio recommendations very carefully and also those not in The Capital Portfolio that I think might be candidates for investment. The rest I read not as closely, which is a real timesaver.

"I have found the Special Reports interesting and helpful and I love the [Stansberry] Newswire! If I have suggestions as we go along, I will send them along. As for now, I'm delighted!" – Paid-up subscriber Scott B.

"I'd like to add a comment on Porter's call for patience in buying and selling bonds. Before looking at the [Stansberry's] Credit Opportunities service I had never bought a bond. I looked at the Natural Resource Partners recommendation and was lucky enough to purchase the bond for under $52. I sold it last week for about $102 – a few dollars above par. By being patient I made over 90% on one of the least risky trades I've ever made. I'm now a believer, and looking forward to the wall of credit maturities coming due over the next few years." – Paid-up subscriber Joe B.

"One of my Construction foreman was bragging to me about the money he was making on Snap. Ninth inning? I'm thinking bottom of the ninth with bases loaded." – Paid-up subscriber William H.

"Porter, over the past 2 months I've taken substantial short positions per your recommendations... It's been a scary ride at times, and I know I could still get clobbered here, but at present the combined result is a $5,000+ gain. Pretty good considering these were done as insurance against a down market, and we are hitting all-time highs. Keep the good short ideas coming! Also, I took a charter membership in [Stansberry] Venture Value on the last day. I never would have imagined paying $7,999 for investment advice. Ever. But you and others at Stansberry Research have gained my trust over the years. We'll see what happens." – Paid-up subscriber R.P.

"I absolutely LOVE the editorial articles from P.J. O'Rourke. I don't care if he ruffles some feathers! His take on current affairs is spectacular and dead on target. Keep up the great analysis of our times!" – Paid-up subscriber Bruce K.

Regards,

Justin Brill
Baltimore, Maryland
March 6, 2017