A Flood of Biblical Proportions

Wednesday, 11 March 2020
Adelaide, Australia
By Bernd Struben

  • Markets
  • Black silver?

After being sidelined yesterday, we itch to dive into the latest market ructions. But first, a quick word on our free daily investment letters, Money Morning and The Rum Rebellion.

If you subscribe to these you’ll have noticed a striking difference this morning. (Readers of Fat Tail Media’s Profit Watch and The Daily Reckoning will have noticed the same thing.)

Namely, that group publisher James Woodburn has hit the ‘Stop Press’ button.

That doesn’t mean these publications won’t go out this week.

What it does mean is that instead of the normal daily issues, readers will get a coordinated company-wide analysis of the turmoil gripping Aussie and global markets.

Today, editorial director Greg Canavan joins former publisher Dan Denning and The Daily Reckoning editor Shae Russell in a special video presentation. For their breakdown of the huge ups and downs roiling stocks, bonds, oil and gold, you can watch the video here.

Moving on…

Like I said up top, I was unexpectedly sidelined yesterday.

As Greg wrote to you  in Tuesday’s Port Phillip Insider, I took the day off to get over ‘just a cold.’

At the beginning of the year he wouldn’t have needed to tell you it was ‘just’ a cold. But times have taken a rapid unexpected change.

Heading off to school yesterday, my six-year-old daughter told me ‘You have the coronavirus.

I assured her that I did not. Yet when I went to Woolies for throat lozenges I made an effort not to sniffle or cough. Or even clear my throat.

I knew I only had a cold. But would the other shoppers…many of them older…know that?

There were plenty of lozenges left. But no toilet paper or tissues. And there was a palpable tension in the air.

It reminded me of the almost electric anxiety that takes hold the day before a hurricane strikes. (A lifelong fan of the ocean, I’ve been directly hit and side swiped by hurricanes in North Carolina, The Bahamas and Curacao…so far.)

The uncertainty a hurricane brings — where will it hit and how bad will it be? — isn’t just on display in supermarkets. Stocks, bonds, commodities, real estate…every market is experiencing waves of alternating buying and selling.

Some, like gold and bonds, are seeing more ups than downs. Others, like oil and bank stocks, are seeing more downs than ups.

Just look at the global benchmark for bonds, the 10-year US Treasury.

Yesterday they dipped to an unprecedented 0.32%, meaning bond values had shattered last week’s record highs. (Remember, bond yields move in the opposite direction of the price.) Demonstrating the current volatility, yields ramped back up to 0.75% overnight our time.

But even the 0.32% yield looks great compared to Germany. On Monday the German bund yield fell –0.87%.

Then there’s the stock markets.

Aussie stocks are swinging wildly between gains and losses. Not just day-to-day, but hour-to-hour.

Yesterday, the ASX 200 was down 3.6% in early trading…only to close for a gain of 3.1%. The Age tells us, ‘the trading range was the largest in 20 years’.

Today, stocks were ‘supposed’ to follow US markets higher. But investors clearly didn’t read the script. At time of writing the ASX 200 is down 2.9%.

This is no time for the weak of knee…or stomach.

Yet while you may wish to reconsider your exposure to any kind of index tracking equities, all this uncertainty does offer up some select opportunities. Huge ones, even.

Over at Exponential Stock Investor, Ryan Dinse explains:

This market panic is a huge opportunity. If we can play it smart.

We’ll be looking for great new stocks to buy in this bloodbath…

It might not feel like it, but these are actually the best times for us. It’s a classic stock picker’s market.’

One stock Ryan’s particularly keen on — come hell or high water — is leading the charge in quantum computing. And they’re planning to do so with systems capable of operating not at near absolute zero. But at room temperature.

Details here.

Now, to the markets!

Markets

Following Monday’s watershed sell-off, US markets regained a good chunk of their losses on Tuesday. The bounce was based on the back of highly optimistic hopes that government stimulus packages will offset the economic sapping impacts of the coronavirus. Hopes a sliding futures market indicates are again fading today.

Overnight, the Dow Jones Industrial Average closed up 1,167.14 points, or 4.89%.

The S&P 500 closed up 135.67 points, or 4.94%.

European stocks continued their downward slide, putting all the major indices well into bear market territory. (That’s when the market loses more than 20% from recent highs.)

In Europe the Euro Stoxx 50 index closed down 49.05 points, or 1.66%. That loss puts the Euro Stoxx down 23.9% over the past month. Meanwhile, the FTSE 100 fell 0.09%, and Germany’s DAX closed down 149.53 points, or 1.41%.

In Asian markets Japan’s Nikkei 225 is down 264.96 points, or 1.33%. China’s CSI 300 is down 0.05%.

The S&P/ASX 200 is down 170.6 points, or 2.87%.

West Texas Intermediate crude oil is US$34.36 per barrel. Brent crude is US$37.72 per barrel. (More on oil below…)

Turning to gold, the yellow metal is trading for US$1,654.11 (AU$2,546.74) per troy ounce. Silver is US$17.00 (AU$26.17 ) per troy ounce.

One bitcoin is worth US$7,903.61. That’s down 13.4% since Sunday. Bitcoin looks to be another victim of investors scrambling for cash as stocks take a battering.

What’s the updated outlook for bitcoin and the other major cryptos in 2020? Find out here.

The Aussie dollar is sliding too, currently worth 64.95 US cents.

Black silver?

Getting back to oil, ‘black gold’ is starting to be priced more like ‘black silver’.

When I last wrote to you on Thursday, WTI crude was trading for US$46.36 per barrel. On Monday it cratered all the way to US$31.13, a loss of 32.9%. Today it’s nudged back up to US$34.36.

What’s going on?

As I’ve written here many times before, record production from the US shale revolution has long been putting downward pressure on oil prices. Demand fears — first from the US–China trade war and now from coronavirus recession implications — exacerbated oil’s decline.

Only OPEC+ has managed to keep WTI from collapsing below US$50 per barrel.

But no more.

Russia — the world’s third largest producer and the key ‘plus’ member — has had enough. The Russians failed to agree on further production cuts to artificially prop up crude prices. And the Saudis threw a fit.

Saudi oil giant Aramco says it will up production by 25% over last month’s levels. Returning the serve, Russian Energy Minister Alexander Novak says Russia may up its own production by 500,000 barrels per day.

If the world was awash with oil before, this could usher in a flood of biblical proportions. More so if the other OPEC members open their own taps wide…as is quite likely.

This is both good and bad news.

First the good news.

Low energy costs are good for households and most businesses.

Petrol costs in Australia are forecast to fall to…or below…$1.00 per litre. That would leave more money in many people’s pockets than the RBA’s last rate cut is expected to deliver. Money not based on cheaper debt. It will also offer a much-needed lift to the struggling airline and transport industries.

The bad news is that the majority of US shale companies need a price of around US$50 per barrel to be profitable. Meaning the next few months could see some of the weaker players go under.

And there’s plenty of risky debt involved in the sector. Debt that’s held by a lot of large banks. If oil stocks begin to default the resulting credit crunch could spread.

But I don’t expect the US shale industry to disappear. Some wells may go dormant and some companies may get taken over by bigger players. It’s possible the government may even need to step in with support for ‘national security reasons’. But when prices get back above US$50 those wells could start producing again quickly.

Now the other obvious bad news is for investors holding energy stocks.

Exxon Mobil Corp [NYSE:XOM], as one example, is down 37.8% year-to-date.

Woodside Petroleum Ltd [ASX:WPL] is down 37.7% over that same time.

I could go on.

But regular readers, I hope, will have reconsidered any positions they hold in oil stocks. I’ve banged on about the growing oil glut for almost two years now, after all.

As an example, this excerpt comes from the 1 April 2019 Port Phillip Insider, when crude was trading for US$60.39 per barrel:

Longer term, the supply of oil is simply greater than the demand. And that supply is only going to grow. That’s partly due to the fracking boom in the US. But traditional drilling is making a resurgence too…

As new “higher-gushing” oil wells come into play, it’s hard to envision the Russians gamely sticking to any production cut agreements as part of its membership in OPEC+.

More recently, in January 2020, crude failed to rally following a Yemeni rebel missile attack on Saudi oil fields. And on 30 January I wrote:

The real issue for oil bulls is the flood of oil waiting to inundate the market. A flood that OPEC+ can’t hold back indefinitely…

The ongoing supply glut will likely spell more bad news for the big energy stocks.

Exxon Mobil Corporation [NYSE:XOM], for example, is down 9.6% so far in 2020…

Rival Royal Dutch Shell [NYSE:RDS.A] hasn’t done much better. Its share price is down 6.7% since 2 January…

That may put the energy majors closer to fair value. But I wouldn’t go bargain hunting in the oil sector just yet.’

Did you go bargain hunting? Or did you steer clear?

Let us know at letters@portphillipinsider.com.au

Cheers,
Bernd