What Will the Recovery Look Like?
Stocks are famous for rallying in the face of bad numbers, and it’s clear that investors are expecting that the government stimulus leads to a quick recovery as states emerge from lockdown and business picks up.
Are bullish investors right? Will the economy recover quickly?
It’s impossible to say right now. How long the downturn lasts and how soon the economy recovers depend on answers to some critical questions:
- When will widespread testing, tracing, and treatment allow lockdowns to ease? Reopening America too soon and igniting a fresh wave of the pandemic will prolong the pain.
- Will employers maintain relationships with their laid-off staff? You can’t just flip a switch and reopen a closed business without skilled workers. The longer the shutdowns continue, the harder it will be for companies to staff up.
- How soon will consumer spending return? “Deferred” demand that’s pent up and just waiting for restrictions to ease could cause spending to surge; “destroyed” demand that’s not coming back could cause spending to remain depressed for longer. Here’s a simple example: deferred demand would be rescheduling a canceled vacation. Destroyed demand would be deciding to skip it entirely.
V, W, L, or Swoosh?
The “shape” of the eventual recovery is being hotly debated because it gives us insight into what would need to happen (and how long it could take).
I initially thought we would be looking at a V-Shaped Recovery. The economy was humming along, the virus comes and simon says “freeze”. We shut the economy down on a dime, but then it’s full steam ahead again once we have the virus under control. There are just two problems with that:
- Getting the virus under control is a lot harder than we first thought it would be. We’ve been in our homes on lockdown for a month and a half and while the cases are decreasing there are still a lot of new cases every day. We don’t know what kind of relapse we’re going to have in terms of people getting sick once the economy opens up, even if it opens up slowly. There’s been a lot of talk about herd immunity and testing for antibodies that show that you have had the virus already. The World Health Organization came out and said there is no evidence that shows having coronavirus prevents a second infection
- If everything opened back up tomorrow are you getting on a cruise, airplane, going to a ballgame, or anywhere there’s a big crowd.
Because of that we are probably looking at one of the other recovery patterns. The L-Shaped is the least enviable as that represents a long drawn out recovery over years for the economy to get back to where it was.
Improve Your Personal Image and Brand
Improving your image deals with more than just the clothes you wear. It highlights your personal brand; which includes things your like overall behavior, choice of dress, business and dining etiquette, and body language.
In the latest episode of the podcast I talked to Sharon Kornstein, owner and founder of Image Design Consulting, about how you can start improving your image today. Hopefully we’ll all be going back to the office soon and the tips Sharon gives can assist you to improve your personal image and brand.
The Price of Oil Goes Negative
We saw something this week that we’ve never seen before: Oil traded for a negative price. Oil prices have been under significant pressure recently even before the global economy came to an abrupt shutdown last month prices trending downward. This week it became crazy. Not surprisingly the headlines about the negative price of oil didn’t tell the full story.
To tell the story, we have to start by defining what a futures contract is? A futures contract is a financial product that requires an investor to take delivery of a commodity (in this case oil) at an agreed upon price and an agreed upon time in the future. It’s usually used by companies in the related industry. For example an oil producer (the one who drills for oil and pulls out of the ground) may want to use the contracts to ensure that it doesn’t sell it’s future production for too little. An oil refiner (the one who turns oil into gasoline, petroleum, kerosene, …) might want to make sure that it doesn’t pay too much for the oil that it needs. Speculators also use these contracts to make bets on the direction of the price of oil.
On Monday the May contract for oil dropped from $20 a barrel to -$38 a barrel. The reason for the drop is that the contract was expiring and investors were worried about actually having to take delivery of the oil. You can think of it as a game of hot potato. Whoever is left holding the contract when it expires actually receives the physical commodity. Investors in oil try to make money from the daily swings in the price of it. They have no interest in someone actually delivering barrels of oil to their front lawn if they are the ones left holding the contract. On top of that they are responsible for the transport of the oil which can cost a lot more than the -$38 a barrel that it was trading for. Investors were willing to say that they will pay you $40 to not have to worry about this risk and scramble A typical oil contract contains 1000 barrels of oil. Because
Oil and gas consumption is very low right now as no one is out driving or flying. There is a glut of oil right now and no where to store it. If you go back to econ 101 it’s simply the law of supply and demand.
Naturally the questions I’ve received this past week on the topic are what does this mean and is there an investing way to take advantage of it.
What does this mean?
Right now this upside down pricing is for short term pricing. The June contracts finished the week at $16 a barrel. When the price of oil is under $30 to $40 a barrel it has a recessionary impact on the economy. At $30 to $40 a barrel it’s not worth it for the big energy companies to drill for it. They shut down their drilling and exploration projects and lay people off. The energy industry isn’t as big as it used to be in terms of the overall economy but there are still 6.4 million Americans employed in the energy industry.
How can someone take advantage of it?
When someone asks me this I highlight the risks involved in investing in oil or energy companies right now. If you think the stock market is volatile, it’s nothing compared to the oil industry. The price of oil has been swinging 30-40% daily. It’s no secret that prices are low. Here is a chart of USO an ETF that was created to mimic the price of oil. Note) it doesn’t really do a good job replicating the price of oil. Yes, it is down 80% since January 1st.
The other way to invest in low energy prices is by buying stock in one of the big energy companies. Below is a chart of Exxon, Chevron, Royal Dutch Shell, British Petroleum and how their stock price has compared this year to the S&P 500 and the USO ETF. While not as much risk as strictly investing in the price of oil, these companies come with a lot of risk too. If it takes too long for the price of oil to bounce back these companies will shut down their projects, cut their dividend, lay off workers, and have trouble meeting their bloated debt payments. The price of oil may bounce back and the stock prices of the companies in the sector may come back off lows, but there is still a lot of risk and investors have to be careful.
The CARES Act and PPP Update
The other big news of the week is that another $320 billion got allocated to the Paycheck Protection Program bucket. If it’s anything like the first round the money will go quick. Here is an article from Neil Bass of The Bass Tax Group on three tips to maximize your success in getting a loan.