 |
| Coronavirus is the name of the devastating cyclone currently tearing through the streets. The accompanying storm pelting us with heavy rain, lightning and strong winds is the war for market share in the energy markets |
History was made on February 19, 2020 when the S&P 500 hit the historic closing high of 3,386.15 points. Thirty-three calendar days later, the S&P 500 hit a recent closing low of 2,237.40. Ouch! That’s nearly a 34% decline in just about a month! Since then, of course, the S&P 500 has partially recovered and is now down a mere 24% from recent highs.
What’s going on
Themes are being woven during these tumultuous times that have very serious long-term implications. Since The Ignorant Investor’s last post, markets have experienced historic, breathtaking declines with the market swinging wildly between positive and negative territory on a day-to-day basis, for several weeks often with percentage moves in the S&P 500 that exceed 4%. Spreads broke wide open and trading slowed to a trickle even among typically active names. Counterparties were disappearing, hailing back to regulatory changes imposed on institutions by the Volcker rule. Treasury market behavior was becoming unusual and unpredictable. Liquidity was drying up. Cracks were beginning to form across the financial markets as the reality of the crisis facing the United States became clear as large portions of the economy started to shut down. Something needed to be done in order shore up investor confidence and backstop the US financial system or the house of cards would come tumbling down.
An oversimplified view of mostly supportive March events
March 11. Fed provides 175 billion USD in overnight lending
March 12. Fed provides 1.5 trillion USD in liquidity through repo market
March 13. NCAA cancels March Madness [not relevant, but it caught my attention!]
March 14. Fed plans to buy Treasuries to support market, up to $80 billion
March 16. Over the weekend, Fed cuts rates to 0%, announces a 700 billion USD return to quantitative easing (ie plans on buying Treasurys and MBS) and helps banks out by loosening reserve requirements
March 17. Fed provides another 500 billion USD for repo operations
March 18. Bill Ackman personally tanks the equity markets with doomsday predictions on TV. Later people are angry because, hey, guess what? He shorted the market last month!
March 20. Fed backstops additional asset classes to ensure liquidity
March 23. Fed announces unlimited quantitative easing program in orderly to fully support markets
March 27. After a week of added pork and political positioning, Congress comes together on an unprecedented 2 TRILLION USD relief bill to help blunt the coronavirus effects on the economy.
War-time level support has been enough to calm market panic
That’s plenty of support, and it was very much needed. The US economy – the real economy, mind you, not some ethereal representation like the stock market – was in peril, with demand shocks permeating a variety of industries. The historic stock market, along with energy woes (more on that below) were also significant enough to jump into the real world and impact the real economy. And liquidity was evaporating.
Okay, fine. This is all very scary, but what does this all mean? Has the market bottomed? The stock market collapsed and made history for all the wrong reasons because the fundamental case for the equity market became obscured in the unknowability around the coronavirus COVID-19 and the US government’s response to it. China demonstrated that containment can work and Italy equally demonstrated that a lack of serious response to the virus will result in death, suffering, and economic stoppage.
In the United States, once liquidity was restored and credit markets backstopped, the monetary side of things started to look okay. Once Congress and the US President were able to come to terms around a stimulus package and implement measures to slow the virus’s spread, government response looked satisfactory. The last piece of this jigsaw puzzle (again from an over simplified view), is how well the US can contain the COVID-19 outbreak and how quickly treatments and vaccines can be developed by biotech and pharmaceutical companies. Yes, that industry the public loves to hate on will soon be the one saving us all.
Prevailing logic says that indiscriminate selling should be a good time for long-term to investors to take a hard look at the fundamentals and examine which companies may have been way oversold. As always, and especially during this time, be sure to talk with your investment advisor before making any decisions!
Requiem for the dream of American energy independence
 |
| The death, and then structural transformation, of America’s shale oil production industry may be imminent in a world awash in cheap crude |
Oh, there is one important item missing from the above timeline. March 8th, a Sunday. After the collapse of OPEC+ discussions on March 6th, Saudi Arabia announced plans to flood global markets with oil in the midst of a massive, global demand shock due to coronavirus. Production is rising significantly at a time when demand may have fallen by 20 million bpd according to the IEA head (read about these comments at Bloomberg), while US shale companies call foul.
Analysts have been examining global unused global storage capacity, and estimate there to be roughly a billion barrels of excess capacity remaining during the week ending on March 20th. When compared against the 140M weekly demand/supply imbalance talked about by the IEA, this sets up an oil crisis of unparalleled historic proportions. Oil prices at $40 is somewhat beneficial to the US economy. Oil prices at or below $20 will destroy the US shale oil industry and the dream of US energy independence (the US was never truly energy independent, remaining a net importer of crude even as shale oil production kept increasing). Unless world producers can come to an understanding in coming weeks and months, there is a tidal wave of bankruptcies coming to the USA. Tread very careful in US oil and gas markets; there is a reason some energy producer stock prices have fallen 90% in just a month.
The Bottom Line
This is a difficult time for folks. Many people around the world are experiencing social isolation to help combat the spread of the virus and jobs are being lost across many different industries. Last week, initial jobless claims exploded above 3 million... yet this is expected to be simply the tip of the iceberg. Most of us aren't directly working to help those affected by the virus, but if we've managed to navigate recent market downturns fairly well, let's remember to check up on our family, friends, and neighbors. Perhaps if we've been blessed through smarts or dumb luck to mostly benefit from recent declines, we can help share those blessings with those less fortunate than ourselves.
