(Tuesday Market Open) If interest rates can go negative, then why not crude?
We got the answer Monday when front month May crude fell to 36 dollars below zero in truly surreal trading with prices that sound like Minnesota temperatures deep in the winter. Producers are basically paying people to take away their oil.
The May contract expires today and volume is very thin, so it’s important to remember that’s not where most of the oil complex is trading. The June contract is where crude is really priced, and it’s still hanging out in positive territory. It did slide 20% this morning to below $16 a barrel and appears to be putting pressure on the stock market. That, along with worries about Congress delaying on a small business relief package, keeps eating away at last week’s big Wall Street gains.
Could the last couple weeks of rallying have been overdone? Some analysts say that a typical bear market can’t be overcome so quickly—despite the opening of the fiscal and monetary floodgates. It doesn’t help that analyst estimates for Q1 earnings continue to slip, and to hear news like Coca Cola (KO) saying this morning that global volumes in its beverage business fell 25% in Q1. The company withdrew its guidance, like so many others already have, and said changing dietary habits continue to be a challenge. KO fell slightly in pre-market trading.
There’s a ton of earnings ahead, with Netflix (NFLX) reporting after the close along with chipmaker Texas Instruments (TXN). Delta Airlines (DAL) earnings take flight tomorrow morning.
Overnight, futures market traded down to exactly 2750, so that could be the point of potential support in the S&P 500 Index (SPX) to watch today.
Futures Signal Some Hope
In the past, U.S. consumers could relish the idea of rock-bottom crude leading to bargain-basement fill-ups and putting the squeeze on producers in the Middle East. These days, crude’s troubles are everyone’s, including here at home where the oil industry recently pumped a record 13 million barrels a day.
Another thing that helped in the past was that when the energy industry suffered, industries like airlines and other transportation companies benefited. Someone would get hurt, but someone else would get helped. What’s different now is that there’s very little demand in those industries, so the positive effect isn’t there. Trading is all about relationships, and everything is related to each other. At this point, the relationships are off in some cases.
Until yesterday, crude had never been negative going back to when Edwin Drake drilled the world’s first commercial oil well in Pennsylvania in 1859. We apparently won’t have to wait another 161 years for light ahead in the crude complex, with futures prices projecting crude in the upper-$20s and $30s by summer and fall.
This futures curve could be worth watching in the weeks ahead. The more it steers toward contango (with higher prices for months further out), the more likely there’s optimism for an economic recovery. Crude is like a barometer that reflects expectations way beyond just the oil industry. As more states outline plans to get people back to work, that could ease some of the pressure on the June contract.
The May expiration at these ridiculously low levels speaks more toward lack of storage for crude being produced now. At one point Monday, the May contract moved about 30 points in 15 minutes, implying someone got in trouble with their position and had to get out quickly.
The question is whether by the time the June contract expires on May 19 demand has picked up enough not to have this kind of a situation. The futures market’s steep contango tells you that people are pushing off risk for a few weeks and hoping storage costs ease significantly, reflecting stronger demand by then.
There’s talk that production could fall sharply and that President Trump might ban Saudi imports. However, it’s costly for producers to bring down their operations and then get them going again, which helps explain why many keep on pumping. And crude is the ultimate in supply over demand, because you have to store it somewhere. You can’t store it on a friend’s back porch.
Stocks Couldn’t Divorce from Crude Fireworks
Crude’s dramatic downfall ended up being the storyline on Monday. As noted here yesterday, when crude is weak it not only implies lower consumer demand—which reflects the economy as a whole—it also can decimate the Energy sector. Energy isn’t a large percentage of the SPX, but it was one of the worst performers yesterday (see chart below). Some of the biggest oil producers and oil field services companies that had seen strength last week came under pressure Monday.
Overall, however, the crude move didn’t cause too much of a shake-up across the market Monday, and the SPX kept most of last week’s impressive gains. Volatility didn’t make too big a move either, though the Cboe Volatility Index (VIX) did cross back above the 40 line after falling below it last Friday for the first time since early March. The Treasury market held together, with 10-year yields staying above the 0.6% mark.
Stocks held their own most of Monday, but hit session lows late when investors heard news of Congress getting tied up on efforts to put through a second round of $450 billion in small business funding. There could be a vote today on this, Reuters reported. If the measure passes, it might help give the market a pause from the selling. Still, oil has put a cloud over everything for now.
A Cloud Over Earnings
Speaking of clouds, BABA was one of the better tech performers Monday after the huge Chinese firm said it plans to go from the cloud being 33% of their business to over 50% by 2022. That’s an amazing statistic. It looks like they want to go up against cloud industry leaders like MSFT, Amazon (AMZN), and IBM (IBM), and they plan to invest billions. BABA already has the biggest share of China’s cloud market.
IBM happened to be one of the biggest companies to report Monday, and that brings up a trend so far this earnings season of companies not providing much of a future outlook to investors. While you can’t blame companies for being shy about giving guidance under these circumstances, it could raise more confusion for investors trying to get a sense of where to price the market looking ahead. Only nine of the close to 50 companies reporting so far provided estimates of what their profits would look like this year, Bloomberg reported.
As your mother used to say, ‘If you can’t say something nice, don’t say anything at all.’ That said, it’s not that they can’t say something nice—they arguably don’t know what to say. The reality is, no one knows when the situation will improve enough to allow things to get even somewhat back to normal.
As for IBM, it saw revenue fall 3.4% in Q1, and also withdrew guidance like so many already have this earnings season. IBM’s Global Technology Services segment, which includes infrastructure and cloud services and technology support services, posted $6.47 billion in revenue, down 5.9% year over year. It came in lower than the $6.51 billion consensus among analysts polled by FactSet.
In a statement, IBM told investors that its recurring revenue stream, continued gross profit margin expansion and strong balance sheet and liquidity position remain “stabilizing elements.” The stock traded just below the flat line in post-market trading after IBM reported.
Gold shining or dulling? Gold prices reached a record high last week, while oil prices were plunging. Usually gold is considered a safe haven investment—when the economy isn’t performing well or interest rates are falling, investors tend to lean toward gold. What’s interesting is that we didn’t see this happening when the equity markets experienced their selloff. In fact, gold prices started moving higher at around the same time the SPX started moving higher. We’re also seeing an inverse relationship between gold and oil prices—another anomaly.
There are fundamental reasons for the plunging oil prices—reduced demand, excess supply, and lack of storage facilities. And lower oil prices could indicate signs of a weakening economy, which may send investors to gold. But the two often move in tandem. So even though gold prices were rising, if oil prices continue to stay low for some time, there’s a chance gold prices could fall as well.
Seeking Insurance: Year-to-date, Healthcare has outperformed all other sectors besides Information Technology. It’s only off 3% since Dec. 31. Drilling into Healthcare sub-sectors, there’s been a lot of focus on biotech and big pharma because of companies working on treatments, vaccines, and tests for coronavirus. Last week, however, health insurers Anthem (ANTM), Cigna (CI), and Humana (HUM) started moving into the spotlight, too.
It’s not necessarily that insurers stand to make big bucks treating coronavirus patients. Most of the major ones already have said they’d waive out-of-pocket costs for that coverage. Instead, strong earnings last week from UnitedHealth Group (UNH) may have given a lift to health insurers, with UNH beating Wall Street estimates and reaffirming previous guidance. For insurers, the crisis has some positive elements, including lower costs for elective procedures since so many people are putting them off. However, it is costing these companies to add more patient access and expand coverage.
Skyward Again: Don’t look up yet, but some of those high-flying stocks from last year are rocketing upward so far this month. That includes Virgin Galactic (SPCE), up about 80% from its March low as of the close of last week, Tesla (TSLA), which doubled since March, and Chipotle (CMG), which nearly doubled. None are back to their old highs, but TSLA and CMG are making a run, while SPCE remains way under its peak. Before getting too excited about any of these particular stocks, investors should think very carefully. All could prove more volatile than some of the more seasoned, established companies in this environment, and even some of the bulls who own them wonder if they’ve gotten a little ahead of themselves. While there’s nothing wrong with taking a flyer on one of these if you feel you can afford to lose the money, it’s hard to argue for going all in at this point. Caution continues to be the watchword.