News

Continuing The Long Game

As we write, the media reports the Saudis and the Russians are rumored to be making daily production cuts from as much as 10 to 15 million barrels a day. WTI Crude has rebounded from lows of $20 to about $26 and that is welcome news for the oil patch. The Saudis can produce at $10 per barrel, perhaps the cheapest in the world. Most US oil companies still can’t make money at $25. Hydraulic fracturing accounts for about half of the US oil production and is a key to eliminating US dependence on foreign oil. However, the future for fracking is depressing at current prices. As the world economy stalls and the supply of oil remains abundant, you might expect oil prices to remain suppressed, and we would agree. Sadly, some of the major beneficiaries of lower oil prices (airlines, cruise lines and freight, auto owners) are not in a position to benefit. Such is the craziness in which we are engulfed!
 
The virus is now firmly rooted, and many of the dire predictions are proving prescient. Some aren’t.  The ugly stats we see today were discounted by the markets several weeks ago. Stock prices dropped well before the ugly unemployment data hit the tape. We may see the unemployment rate reaching the mid-teens mentioned by the Fed. A major investment firm predicted as much as 30% unemployment. Be mindful of the accuracy of predictions, but surely more unemployment should be expected until the sequester subsides.
 
Beginning this week, small businesses will start getting approvals to borrow from the SBA to maintain their work force and pay operating costs while they await revenues to resume. Perhaps you own or work for one of those businesses. If the businesses qualify, take the money and remain open to the idea that the loan will be forgiven, and the principal added to the national debt – debt which the Treasury can now finance at zero to 1% interest rates. Millions of citizens will receive a one-time stipend if they have filed a tax return for 2018 and 2019.  We’re hopeful this money will be spent on paying for obligations and needs and that one check will get us through the crisis. We’re somewhat skeptical.  The good news is that fiscal policy should be helpful in getting the economy to the other side of the virus. 
 
We have nibbled at some stocks over the past week, and those purchases were not perfectly timed. We have sold some stocks in companies whose businesses we concluded would struggle more if and as the crisis continues. The equity portion of our portfolios continues to hold higher levels of cash than normal, and we will put it back to work – but not today. The businesses of some companies are benefiting from the crisis. CVS is hiring 50,000, Walmart 150,00, Lowe’s 30,000 and Amazon 100,000. Good news can be discovered.  
 
Certainly, our lives will not go on as they did pre-Coronavirus. We may congregate less, we may travel less, we may convene more frequently on Zoom, we may dine out less, we may cruise less, we may shop more from home.  Assuredly our hygiene will improve, and perhaps our health will improve as a consequence. A vaccine and a cure may become available to combat the virus. Several companies are working on it and doing so with some promising progress. The world will return to a version of its former self, and we can invest with less trepidation.
 
As we’ve encouraged in earlier notes, please don’t waste your time watching the tape and allowing its direction to dictate your mood. Much of the volatility due to algorithmic trading is unrelated to value.
 
Volatility due to margin or credit issues with one’s balance sheet has little to do with value and is a byproduct of leverage gone bad. Some of the selling can be attributed to a belief that the economic fallout will be worse than expected at the moment.  And then there are liquidations across all asset classes to raise cash – cash to fund diminished or suspended compensation, cash to fund obligations in the future, cash to run one’s enterprise as it weathers a challenged economy.  You can certainly conceive of other reasons.  One might sell a good stock or bond simply to raise cash.  And when you have a buyer’s strike, as we have today, expect the other side of the trade to get a bargain.  That bargain can be best illustrated by the large differential in bid/ ask for corporate bonds.  Late last year Carnival Cruise raised money in the bond market at 1% or so.  Yesterday they raised money in the bond Market at 11.5%. 
 
Bottoming in stock prices typically is a process.  It takes time to shake the weakest owners to the sidelines. The same is true for bonds. Bargains for travel, vehicles, consumer discretionary goods, dining, entertainment etc. will abound.
 
Worries over capital gains taxes next year will diminish.  Results from being thoughtful should exceed those from being panicked.  Fortunes will be earned on the recovery.
Patience might be rewarded. Sometimes the best investment action is patience.
 
Like you, we are taking sequester seriously and frankly, tiring of virus news.  The country continues to incrementally shut down, increasing the time needed to determine whether the viral threat is subsiding. Though we’re incapable of pinpointing that moment, subside we know it will.