Alchanati Campbell & Associates
This is not a regular “What’s up Friday?” Newsletter. This piece will discuss the current events occurring around the world and the current market reactions and price movements in the stock market. In short, people are panicking and grocery stores, Purell manufacturers, and virtual communication companies are thriving. Most economies around the world are easing their policies to allow their companies and societies to have some relief. Central banks around the world are offering more liquidity and more easement in rates. Governments are lending money interest free to businesses who have been negatively impacted by loss of business and soon we may see consumers getting handouts. Businesses are closing, losing revenue, and some businesses are going bankrupt. Oil is in a recession and assets like Gold, Silver, and Bitcoin are being sold off for liquidity reasons. Countries are announcing national emergencies and are restricting travel to try to stop the spreading. Schools are closing, public spaces are closing, public events are being postponed, and people are working virtually from home. I am currently split: I believe that there could be more selling, but I also believe we can see the market moving higher (as you could see from the buying spree today with a 9% increase). The selling has been caused for two reasons: irrationality and poor emotions (fear, anxiety, panic) and companies being downgraded due to future earning losses and/or being directly affected by the virus (cruises, airlines, retailers, restaurants, entertainment parks, travel agencies, manufacturers, etc.). My tips: be cognizant of your expenses, DO NOT SELL, buy back slowly at these lows and hoard cash to prepare to buy some more, do not try to time or play the market, plan for the next expansion, and if you have debt, focus on either paying it off or restructuring it.
“At the beginning of the last recession, the first selloff was in the summer of 2007 and totaled about 15%. The Fed cut rates aggressively and the market rallied to a new high in October right before the start of the recession in December. The second drop was from that October high to a March bottom 19.5% lower. Stocks recovered nearly 2/3 of that loss before hitting the skids again. Stocks managed a 15% gain after the onset of recession on (misplaced) optimism about the Bear Stearns deal. By that time our recession indicators were clear with the yield curve, credit spreads and the CFNAI all in agreement.” – Joseph Y. Calhoun III
“Buy, sell, or hold? I think it’s okay to do some buying, because things are cheaper. But there’s no logical argument for spending all your cash, given that we have no idea how negative future events will be. What I would do is figure out how much you’ll want to have invested by the time the bottom is reached- whenever that is- and spend part of it today. Stocks may turn around and head north, and you’ll be glad you bought some. Or they may continue down, in which case you’ll have money left to buy more. That’s life for people who accept that they don’t know what the future holds. But no one can tell you this is the time to buy. Nobody knows.” – Howard Marks
“Oil is like a wild animal. Whoever captures it, has it” - J. Paul Getty. More than 50 years later, Mr. Getty could not be more right. In addition to all the turmoil these last two weeks have brought to the global economy, Russia and Saudi Arabia are in an all-out oil war. For the past three years, Russia has worked with OPEC to set oil prices via production levels, but last week Russia decided to blow up the relationship and undercut OPEC’s price target. In response, Saudi Arabia has gone all out. Saudi Aramco plans to pump 12.3 million barrels of oil per day in April. That is 27% above their recent levels and 300,000 barrels above their maximum capacity! Oil was already struggling due to COVID-19, so why did Russia decide now was a good time to start a price war and lead the oil market into a free fall? US crude plummeted 26% which was its worst day since 1991. The answer is very simple. Russia saw a chance to deal a major blow to America’s fragile oil industry and they went for it. Back in 2018, the US overtook Russia as the world’s largest oil producer, and this was only made possible by shale oil companies. Shale is a high-quality oil and is produced by fracking. Since 2014, shale oil companies are responsible for the boom in domestic US oil production, but this growth is built on a massive amount of debt as most shale oil companies are over-leveraged or heavily in debt and rely on high oil prices just to survive. The much needed high prices could be easily undercut by other oil-producing nations, especially Russia which can easily balance its budget at under half the price needed by US shale companies. In recent years, Saudi Arabia with OPEC has helped support these higher prices and allowed the domestic US oil industry to grow to this level at the expense of Russian market dominance, but Russia has had enough. Now it is one big game of chicken that neither Russia, Saudi Arabia, nor the US will win. Short-term and long-term projections do not look good for the oil industry. In the long run, oil is set to be replaced by cheaper and cleaner energy sources, but in the short term, the worst is yet to come. It is unlikely that OPEC or Russia will back down so the oil market will continue to experience turmoil, but demand is not likely to recover in the coming months as global travel is restricted. In the meantime, some US shale oil companies may not be able to make it through the storm and some are even expected to file for bankruptcy by the end of the month, adding to the 208 shale oil production companies that have filed since 2015 and the 21 oilfield service companies that filed in 2019 alone.
The Alchanati Campbell and Associates Team
WHAT'S UP FRIDAY? is a weekly newsletter that will give you a summary of "What's up?" on Wall Street, in the US and around the World written by The Alchanati Campbell and Associates Team. What makes us unique is we focus on long-term knowledge; knowledge that will still be useful to you 10 years from now.