20/10 – October Market Commentary
The price for a barrel of crude oil fell to close the month of October at $35.79 (WTI) after spending much of October above $40. This is causing chronic pain in the energy markets where a long list of companies have filed for bankruptcy protection, other companies are trading at historically low values (sector weight as low as 2% in S&P 500), and the oil majors are straining to maintain dividends with low cash flows.
The causes for the fall in price of crude are numerous. Chief among the causes, energy demand expectations shifted lower as countries moved towards greater restrictions to ward off virus spread. Other contributors to the decline are rapidly rising production in Libya, currently in civil war, and US production does not seem to be in balance yet as storage levels continue to rise to levels that previously scared market participants.
Meanwhile, a frenzy of business consolidation has swept the US shale patch. Pioneer Natural Resources agreed to acquire rival Parsley Energy, ConocoPhillips is acquiring Concho Resources, Chevron acquired Noble Energy, and Devon Energy is merging with WPX Energy. It is a busy sector.
As cases increase and hospitals experience increased admissions several countries reimplemented varying degrees of lockdown/restrictions. Some US states are contemplating varying degrees of restrictions as virus cases rise. While we (and we think the market does too) did not think we would get back to lockdown-like conditions, current trends of several state hospitalizations may lead us there. Hopefully not. Even without state-imposed restrictions human behavior (staying home more, avoiding public spaces, etc) is having a severe impact on the economy.
What can be said is that the economy has not recovered – life is not as it was before. Just looking at industries around travel and vacation as example, we could be years away from previous norms. A new wave of lockdowns and restrictions could prolong any economic recovery, not just travel and leisure. We are not sure markets are priced for this.
Hopefully, Oxford scientists are successful with their 5-minute test. It would go a long way to shortening quarantines and alleviating lasting anxiety from potential exposure.
PayPal, perhaps one of the most widely known financial technology companies, has announced it would open its network to digital/crypto currencies (the realm of bitcoin, ethereum, etc). Square is similarly positioning itself for transactions. This could give new wind for a bubble to blow. Recall that back in 2018 cryptocurrencies experienced an extraordinary runup in prices that was considered by many to be bubble-like. We may see another speculative move in related prices. This is speculative. We watch with bewilderment as markets continue to behave in ways we consider irrational.
The nay-sayers were wrong again. Or were the yay-sayers? Tesla reported another profitable quarter and everyone got what they were looking for – Elon Musk has unlocked another cool $3 billion in stock for himself, the critics saw another poor underlying performance quarter, enthusiasts saw strong profit and cash flow, and Tesla got another shot at making primetime inclusion into the S&P 500 index. On the latter, the index committee skipped over Tesla’s inclusion, waiting for greater maturity from the company. We wonder if the recent credit ratings upgrade is an extra push of confidence. Combined with another profitable quarter maybe inclusion is in the offing. Who knows. It was certainly another interesting month and the company remains very highly valued relative to all other automobile manufactures combined.