Reckoning?

Reckoning?  Stocks rallied last Thursday after the Fed announced another round of epic support.  The positive news overshadowed a report that 6.05 million Americans filed for unemployment benefits in the prior week.

 

N O T E W O R T H Y

 

Oil is well that ends well.  The past 18 months have been a rough road for global oil producers.  Though it seems like a lifetime ago given the pandemic crisis, the world was engaged in a nasty trade war with China and the US at its epicenter.  Being the world’s two largest economies, there were impacts and implications that went far and deep in the global economy.  A slowdown in global trade meant a decrease in crude oil demand, causing downward price pressure on the commodity.  As it has done so many times in the past, OPEC+ reluctantly agreed to supply cuts to prop prices up.  That is a story in and of itself… but then came the Coronavirus which initially struck China.  China was the first country to shutter its economy. China is the second largest consumer of crude oil behind the US, consuming roughly 14% of global supply.  Shutting down the Chinese economy meant deep cuts in demand, putting further pressure on crude oil prices.  As the scope of the virus quickly broadened, travel bans ensued and it became clear that many other countries would have to put their economies on pause.  My regular readers know that I often write that “oil IS the oil of industry”.  Shutting down production lines and decreasing shipments would certainly decrease demand for crude. Cutting travel meant less demand for jet fuel and social distancing meant less driving and demand for gasoline.  Oh, and a mild winter meant lower demand for heating oil.  Lower distillate demand put further pressure on crude oil.  That story is grim enough, but the next chapter made things even uglier.  The second and third largest producers of crude oil, Saudi Arabia and Russia, got into a bit of a spat over further cuts in production.  Saudi Arabia, in a controversial move, decided to start a price war aimed at gaining market share from Russia and the US by increasing production during a supply glut, thereby pushing prices down yet further. The Saudi’s have some of the lowest costs of extraction and their ploy would enable them to exact some pain on higher cost producers.  The move also caused crude oil prices to almost halve in the span of a week, taking the already war-torn energy sector with it.  It took some cajoling from the US President along with the pain of lost revenues to bring the Saudis and Russians back to the table, but they would finally restart talks last week in earnest. The result was a decision by OPEC+ to scale back production by -9.7 million barrels, agreed upon this weekend, WHILE YOU SLEPT.  The cut is slightly lower than the expected -10 million barrel cut expected at the end of last week.  The markets have not been impressed with the announced supply cut either. Why not?  It is estimated by experts that global demand is down by as much as 25 million barrels a day, so while a -10 million barrel cut is good, it is unfortunately well short of what would be needed to truly push crude prices back to where they once sat.  The possible good news in all of this mess is that gasoline prices are low, really low. According to AAA, the national average price for a gallon of regular gasoline is $1.88, down almost by $0.85 from just five weeks ago.  That would be a welcomed development if so many Americans were not out of jobs and stuck inside their homes.

 

Show me the money.  In the past several weeks, investors have been clamoring to figure out just how much negative impact the national economic pause would have on stock prices.  The initial reaction was harshly negative as stock prices plummeted by record-breaking daily moves.  As more information about the potential path of the virus trickled in, optimistic traders jumped back into the market causing record-breaking positive moves.  Though we can all agree that the economic pause is already having a devastating effect on revenues, it is hard to know just how much and which companies will be affected the most.  This makes most of the recent moves in stocks, both positive and negative, highly speculative.  This week, we will get our first real view into the financial health of individual companies as first quarter earnings season begins. JP Morgan Chase will start the parade with all of the major financials following.  This week, we will hear from 23 of the S&P500 companies on their performance in the first calendar quarter.  Unfortunately, this will be a tricky earnings season.  January saw only a mild slowdown in economic activity as the virus was largely contained overseas while February saw things worsening in the US as voluntary shut-downs began.  March saw the biggest impact as the national economic pause began in earnest.  So clearly we are expecting to hear that things have gotten rough over the past quarter, but what we really need to know is what will happen in the upcoming two quarters and with many companies withdrawing their forward guidance, that is becoming less clear.  Though it is frustrating, it is understandable that companies are unable to accurately predict sales in the upcoming six months.  So what should we hope to glean from these announcements?  This earnings season, more than ever in the past, it will be important to look beyond the ugly misses and focus on the management discussion.  Those calls will give us some insight into the health of corporate balance sheets, the confidence of the management team, and contingency plans for the rough road ahead.  Should some companies be willing to provide some forecasts for next quarter, investors need to focus carefully on the logic and drivers that go into the targets.  Refer to the earnings calendars that I post each Monday for more details on upcoming announcements.  This will be a tricky earnings season indeed.

 

THE MARKETS

 

Stocks traded up last Thursday on news that the Fed will be offering another +$2.3 trillion in loans to small / mid-sized companies and municipalities. They further announced that they would expand their bond purchases to include lower grade municipal and corporate bonds. The S&P500 climbed by +1.45%, The Dow Jones Industrial Average advanced by +1.22%, the Russell 2000 jumped by +4.63%, and the NASDAQ Composite Index traded up by +0.77%.  Bonds climbed on the news from the Fed and 10-year treasury yields fell by -6 basis points to 0.71%.

 

NXT UP

 

– The week ahead will feature housing numbers, regional Fed reports, the Fed’s Beige Book, Retail Sales, Industrial Production, and the Conference Board’s Leading Economic Index.

– Earnings season begins tomorrow with the banks.  Refer to the attached economic and earnings calendars for details.

daily chartbook 2020-04-13

econ numbers 4_13

earnings releases 4_13