Time Out

Time out.  Stocks sold off yesterday objecting to the cocktail of crude oil and coronavirus.  Bond yields continue to fall catching money fleeing from equities.

 

N O T E W O R T H Y

 

Description: Stocks have been on shaky ground since it was announced that the Coronavirus brought economic heavyweight China’s industrial complex to a grinding halt.  Investors initially had trouble assessing the financial risk to companies.  The companies, for their part, gave very little guidance on what impacts the virus might have on their businesses, save a few like Apple, HP, Microsoft, Visa, and MasterCard who were the first big names to come forward.  There were some obvious candidates for trouble.  Namely, the airline industry, the cruise industry, and the travel/leisure sector.  As cases begin to grow in the US, investors are starting to take a closer look at further impacts, namely suppliers to those aforementioned such as food providers, jet fuel, and even employment.  It is now clear that the spread of the virus to the US will have an impact on a broad range of sectors as people hunker down and “socially distance” themselves until the virus is contained.  As the Fed moves to lower rates to ease financial conditions, banks are disadvantaged as their lending margins narrow, adding to the broader market stress.  This has caused a repricing of stocks (fancy word for selloff), which ultimately will bring stock prices to where their valuations reflect the diminished future earnings (in theory, but also in reality).  It is all painful and quite unruly at times, but ultimately, as more information becomes available, prices will settle in on new, lower valuations.  Which means, probably more pain to go but hopefully, less indiscriminate and based on facts.  Now a quick bit on crude oil.  Crude has been having a tough year.  It was already under pressure from lower demand caused from the trade war and a warm winter.  Supply has been a problem too with US shale producers pumping aggressively to keep their businesses liquid.  While OPEC+ has been trimming its supply, the cuts were not enough to balance out the lower demand.  This put further pressure on prices. OPEC+ is what Wall Streeters use to describe OPEC and Russia. OPEC is dominated by Saudi Arabia, which holds the second spot behind the US for oil production, and just behind Saudi Arabia is Russia.  Russia produces around 11 million barrels of oil each day and it is a large contributor to the Russian economy.  Lower prices from lower demand means less value for those 11 million barrels and cutting production only makes it worse until the supply starts to push prices higher,  If Russia believes that demand will pick up again it would not want to cut supply too quickly and give up the vital inflow of capital.  This is principally why they are opposed to further cuts.  Saudi Arabia decided to punish Russia for its dissension by flooding the market with additional supply and lowering prices.  Now Russia (and everyone else for that matter) feels the pain and the Saudis capture more global market share. That is the Saudi playbook, plus maybe a little bit of princely brinksmanship.  The result was a bit of panic in the US financial market which was already on its heels from the Coronavirus. Crude oil fell by -24.6% taking the energy sector down by -20.1%. The S&P500 fell by -7.6%, which was its largest single day drop since the financial crisis.

 

Prescription: Look beyond! Look beyond and determine if the current drivers of the selloff will persist and what those causes might be on your portfolio holdings.  What do I mean by that?  First, let’s assume that you hold stocks and sectors that you believe have long term value. Perhaps because the companies can generate lots of return on their assets through sales or possibly because they are great innovators and will continue to come up with new growth opportunities.  Now, let’s factor in the Coronavirus.  It is clear that the spread of the virus will cause consumers to cut back on travel, closed space entertainment, closed space shopping, tourism, and hotel stays.  The cut backs will certainly impact corporate revenues of companies in the effected sectors.  The big question is for how long.  Take a look at China, where the virus originated.  To date, there have been 80,754 confirmed cases of the virus.  That is a lot, but if you look at the amount of newly confirmed daily cases, you will see that the spread has slowed to almost a halt.  I have attached a chart from my Bloomberg terminal which shows the number of cases in China to see it from a graphical perspective.  There were only 19 new cases between yesterday and today.  The first cases appeared on January 11, about 2 months ago.  See my point? Things will get worse before they get better, but they will… get better.  The economic reverberations of a slowdown will most likely last at least another few quarters, which brings us into 2021.  Now you have to ask the big question.  Will the contents of my portfolio still bring long term value beyond, say 2020?  If the answer is yes, then don’t panic sell.  If the answer is no, well, you probably shouldn’t own it anyway.

THE MARKETS

 

Stocks experienced a massive selloff yesterday triggered by ongoing Coronavirus fears and nearly a  -25% drop in crude oil prices brought on by Saudi Arabia dumping supply into the market. Capital continues to spill into the bond market causing the aggregate bond market to rise. But not all bonds are created equally.  Riskier bonds have been falling as spreads widen.  High yield bonds, which are BB-rated and below, fell by -3.12% yesterday while the 10-year US treasury brought  yields down by -22 basis points to 0.54%.

 

NXT UP

 

– The President will be meeting with lawmakers today to discuss a stimulus package to help the economy through the Coronavirus spread.  Up for discussion are payroll tax cuts, hourly wage increases, and low or no interest loans.

– The Treasury will sell 38 billion 3-year notes. Those yield around 0.51% if you were wondering.

 

daily chartbook 2020-03-10