Buying companies stocks that are quickly running out of money is just bizarre.  Traders are now chasing stocks like their running for the goal line, but they have been turned around and don’t know their heading in the wrong direction.    There are 3 articles including one about the pending bankruptcy of Chesapeake Energy, one of the largest natural gas producers in the U.S.  CHK is just one of many energy producer’s bankruptcies that will happen into the next few years.  Many have already collapsed, been liquidated, or entered bankruptcy court and exited restructured with little value if any left for shareholders. 

 To me they are representative of the blind leading the blind.  And they are part of a classic end to a long term bull market.  I watched traders chase a near bankrupt Chesapeake run from $12 to as high as roughly $80 in two days and back to $19 the next day and down to $14 the following day.  That volatility is nothing but rank speculation that always happens at the end of a bull market. 

 By 2022 if energy prices do not improve just about every small to mid size oil and natural gas producer could be in bankruptcy court as their ability to meet debt payments end.  Interestingly to me, is I believe the founder of Chesapeake, Aubrey McClendon, had many of the characteristics of Donald Trump.  He used debt to build a company that functioned as long as he was able to borrow more money, meet his debt payments, and keep drilling more wells to maintain cash flow and keep a high stock price.  People who build empires in oil and gas and real estate use borrowing against assets to expand their empires.  Public oil and gas companies and real estate development companies have the added burden of trying to support their stock prices with consistent growth.   That means borrowing money because two things eventually happen, cash flow declines as oil or natural gas production declines.   Real estate booms almost always lead to busts because of over building.  McClendon and Trump also have similar personality characteristics, loving to show off their wealth, spending lavishly, and bragging about their accomplishments.  When McClendon’s empire started collapsing and he was indicted for price rigging, he died driving his car at high speed into a wall.

 A similar event could happen in commercial real estate.  In many high end cities, including Seattle, NYC, Miami and others construction has continued unabated.  Part of the reason  it has been possible to borrow money at historically low interest rates.  This has helped unemployment numbers before the pandemic as tradespeople were in demand.  Now as these buildings  are completed my belief is that finding tenants will be very difficult.  Unless it’s a small commercial building there are not for sale signs.  But many will be on the market and if one believes its hard to sell a home like it was in 2010, just think about the limited number of possible buyers for a large building that is mostly empty.   The cycle of despair will range from the owner who may have a down payment at risk on to those who financed its construction. 

Many of the jobs being lost in the oil and gas sector including the service sector maybe lost forever.  Jobs will also be lost in real estate development, but they are not large in size.  The biggest threat with real estate is the impact on those who financed the construction.  They are expecting to be paid back and if they cannot recoup their loans, they have to write down their value.  Liquidity in the banking sector will decline and that makes an economic recovery more difficult.    Carl