Businesses now have to compete with the enhanced unemployment insurance. In many states, unemployment benefits exceed regular salaries.

 

 

Market Valuation

 

Based on the forward price-to-earnings ratio (12 months out), US shares are quite expensive… because EARNINGS have cratered.

 

 

The top five stocks increasingly dominate the S&P 500.

 

 

What Happened to Oil?

 

The price for West Texas Intermediate (“WTI”) crude oil, the U.S. benchmark, crashed WAY below $0 Tuesday.

Some of this is market mechanics… The May futures contract for WTI crude expires on Tuesday. That means traders holding onto contracts tomorrow would have to take physical delivery of the crude oil, so if this were to ever happen, today would be the day. No one wants to be stuck taking physical delivery of oil without a place to store it.

The move is completely rational. The ultimate complication is that storing oil costs money, and storage facilities aren’t unlimited. Right now storage is scarce and thus expensive, so it’s not worth it to buy oil today and store it. The cost of storing exceeds the value today; thus the price is negative.

If you look further out in the curve, into the coming months, oil prices are much higher. The contracts for June, July, and August are all trading in the low to high $20s.

The May delivery futures contract is down nearly 300% to around negative-$40 per barrel. The previous all-time low record for such a contract was positive-$10.42 per barrel, set in 1983.

 

 

Looking at the bigger picture, the plunge speaks to just how out of whack oil supply and demand (and storage) are today… Nobody wants oil.

U.S. capacity is quickly filling up and there is a fleet of Saudi tankers with seven times worth the typical monthly amount of oil about to hit the U.S. Gulf Coast. This will further compound the problem with little to no storage space available. If storage space disappears, this could force U.S. drillers to further halt production efforts.

The June contract sold off sharply as well but held above $20/bbl.

 

 

The recently agreed-upon supply cuts by OPEC+ are for May and June. As a result, the Saudis are said to have continued to pump huge amounts of oil in the meantime.

There isn’t much to add about the move in crude oil. We can’t find another occurrence of the front-month future of a major commodity contract trading in negative territory. It might have happened at some point, but we can’t find it. It’s at least worth pointing out the folly of “this won’t end well” kinds of comments related to the surge of shares in funds like USO, assuming that mom-and-pop are rushing into the oil fund.

 

 

 

Monday’s plunge below zero in the crude oil market, while remarkable and historic, is not the energy industry’s only problem or even its most serious one. It will inspire more government control over the economy and ultimately reduce economic growth.

  • When storing oil is a better business than producing it, logic suggests either reduced production or more storage. But logic isn’t in control here.
  • Such episodes often bring down a “whale” investor. This is possible but remains to be seen.
  • Risk managers will tighten controls to cover scenarios once thought impossible. This will affect the market’s “animal spirits.”
  • We could also see large players take advantage of the chance to buy smaller companies, thereby reducing competition.
  • This will create the appearance, and maybe the reality, that markets are nothing but “gross orgies of speculation.”
  • More government appearance is the likely outcome, leading to even slower growth.

A continuing theme in the coronavirus era is how it exposes problems that were already there. This negative oil incident does the same: complacency about risk and industry consolidation.  Unlike viruses, these are not natural phenomena. But they will have natural consequences.

Required breakeven oil prices in fiscal terms (at which the fiscal balance is zero) and external terms (at which the current account is zero):

 

 

Earnings Estimates

 

With the entire U.S. economy shut down, 15-20% unemployment, and -20% GDP, earnings are only expected to decline by 10%?

History suggests this is not likely to be the case.

“Nobody in America’s ever seen anything else like this. This thing is different. Everybody talks as if they know what’s going to happen, and nobody knows what’s going to happen.” – Charlie Munger, Berkshire Hathaway.

We are into an epic 40% down quarter on GDP and with no visibility, which is why a growing list of firms are pulling their guidance. The CAPE multiple peaked in January at 31.0x, shrunk to 24.9x in March, and is back to 25.9x. Let me just say, for the record, that we have never seen a bear market end with a smoothed P/E multiple as rich as 24.9x — the highest trough multiple was 21.2x back in that 2000-2003 tech wreck bear market. The average trough in the 8-recessionary bear markets back to 1960 is 12.8x and the median is 13.5x.

Whether its corporate profits, earnings, or GDP, no matter how you analyze the data, it suggests the outlook for stocks going into the summer is not favorable.

 

 

April 17, 1930 – the Dow Jones Industrial Average topped after retracing 50% of the decline from the 1929 crash…

 

 

April 17, 2020, exactly 90 years later, the Dow Jones Industrial Average has now retraced 50% of the decline from the February high…

 

 

Coronavirus Update – The Plan to Open the Country

 

The plan to open the country is where they break the population into five groups based on risk factors like age, and health condition.

For instance, Group 1 is under age 50. Group 2 would be 50 – 65 without body mass indexes of greater than 39. Group 3 would be those with BMI over 39. (About 3% of Ohio, as an example.)

All those over age 80 and those age 65 to 80 with one or more serious co-morbidities (hypertension, obesity, type2 diabetes, chronic lung disease, immune dysfunction, kidney disease requiring dialysis, increased clotting disorders) are in Group 5 (about 3.5% of population and 55% of deaths).

The recommendation is to offer some type of financial inducement for higher-risk groups to stay home until there is adequate testing of the total community. If we do something like this, they estimate that 80% of the working population can be released initially, and another 10% in phase 2, and then everyone when adequate testing and a vaccine are available.

The number of new US coronavirus infections remains stubbornly above twenty-five thousand per day.

 

 

 

All content is the opinion of Brian Decker