Chinese stocks just closed another horrible week.

The Shanghai Composite Index lost another 8% this week, after losing 12% last week.

We covered the massive sell-off in Chinese stocks a few weeks ago and things have only gotten worse since then. The Shanghai, the fourth largest stock exchange in the world, has lost an incredible 37% of its value since June 12. The plunge has erased $5 trillion in value from China’s stock market.

The crash came immediately after Chinese stocks had a historic rally of 135% in just 10 months, as you can see from the chart below.

Chinese stocks are typically volatile. The country has had rapid economic growth. The numbers issued by Chinese companies are notorious for being misleading. Corruption is widespread. And the government often tries to order its stock market around. The government’s “corrective measures” often make things worse.

For example, the Chinese government has tried to stop the current crash by banning short selling (betting that a stock will fall) and devaluing its currency. These attempts have failed. This is now the biggest crash in Chinese stocks since the financial crisis.

The loss of wealth here is stunning. Bloomberg Business reports that the $5 trillion erased from Chinese stocks is twice as large as the entire stock markets of Brazil, Russia, India, and South Africa combined.

China’s crashing stock market is rattling financial markets worldwide. US stocks are coming off their worst week in four years, and Japan’s stock market lost 13% in five days before rebounding.

China’s sell-off is also slamming commodities. China is the world’s largest consumer of commodities. Earlier this week, the Bloomberg Commodity Index, which tracks 22 different commodities, hit a 16-year low. Oil has dropped 60% from last summer to its lowest price since the last financial crisis.

•  Another big deal in the battered oil sector was announced this week…

Schlumberger (SLB) wants to buy Cameron International (CAM) for about $15 billion.

Bloomberg Business reports:

Cameron stockholders will receive 0.716 Schlumberger shares and a cash payment of $14.44 in exchange for each Cameron share, according to a regulatory statement on Wednesday. The deal valued Cameron at $66.36 a share, a 56 percent premium based on both companies’ closing share prices on Tuesday before the deal was announced.

Schlumberger is the world’s biggest publicly-traded oil services company. It’s worth over $90 billion. Oil services companies are the “picks and shovels” of the oil sector. They sell services and equipment to oil producers like Exxon.

Cameron is a much smaller oil services company valued at just under $12 billion. It manufactures drilling and maintenance equipment for wells, pipelines, and refiners.

Crashing oil prices have hammered both companies. As of Tuesday, Schlumberger’s stock price was down 34% for the year. Cameron’s stock price was down 43%…before it rocketed 41% on the takeover news.

•  Low stock prices have sparked a wave of deals in the oil space…

The Wall Street Journal reports:

The Schlumberger-Cameron deal is unlikely to be the last combination of oil-field service companies, the part of the energy industry that has borne the brunt of the pain inflicted by lower oil prices. The sharp decline in oil prices has been a catalyst for energy deals, with more oil-and-gas M&A so far this year than in the same period of any other year on record, according to Dealogic. Year-to-date, acquisitions totaling $314 billion have been announced—more than double the volume of oil-and-gas deals seen at this time last year.

OIH, an ETF that holds big oil service companies, is down 43% over the past year. It’s common for beaten-down industries to see a lot of takeovers…because companies know they can get better deals when stock prices are low. Schlumberger, for example, is saving billions of dollars by buying Cameron now, when oil prices are low, instead of last summer when the price of oil was high.

Earlier this summer, Halliburton (HAL) and Baker Hughes (BHI) announced plans to merge. The deal is valued at over $35 billion. It is pending regulatory approval. If the merger goes through, the combined company would be the 2nd largest oil services company in the world, behind Schlumberger.

We don’t recommend investing in the oil service sector right now. Even though oil service stocks are much cheaper than they were a year ago, they could still get cheaper. Like the industry they serve, oil service stocks are very cyclical. They go through big booms and busts. And right now, they’re in a big bust.

The oil service sector is on our watch list. We’ll let you know when it starts to look interesting again.

•  One part of the oil market is booming…

Oil shipping companies move oil across oceans. They make money based on the volume of oil they ship. Unlike big oil companies, they don’t need high oil prices to make big profits.

E.B. Tucker, editor of The Casey Report, is bullish on oil shippers. His analysis suggests that the industry will continue to boom for at least the next year. The oil industry is working through its biggest oversupply in 17 years…and it’s the job of oil shippers to transport that oil from countries that produce it to countries that need it.

E.B.’s favorite oil tanker stock just announced excellent quarterly results. It more than doubled its dividend, and is now yielding an annualized 13.1%. You can find out more by taking a risk-free trial to The Casey Report.

Chart of the Day

Crashing oil prices have slammed oil stocks. XOP, an ETF that holds the largest oil explorers and producers, has dropped 52% in the last year.

However, today’s chart shows that oil stocks still aren’t cheap…

By taking the ratio of XOP divided by the price of oil, we can see how cheap or expensive oil stocks are compared to the price of oil. The higher the line, the more expensive oil stocks are compared to the price of oil.

As you can see, oil stocks are still very expensive compared to the price of oil. They’re still significantly more expensive than they were at any time from 2008 to 2014.

If the price of oil stays low, oil stocks will need to fall a lot more from here before they’re truly cheap compared to oil.

Regards,

Justin Spittler
Delray Beach, Florida
August 28, 2015