Oil Floats

Something interesting about the coronavirus outbreak has been the number of “firsts” popping up. We’ve seen firsts for unemployment claim levels and for speedy stock market declines as well. We’re even in the midst of what feels like a first-time national run on toilet paper (at least since the 70’s – something about a Johnny Carson joke gone too far…). Another first in the past week has been negative prices in crude oil markets.

Last week the price of the U.S. oil benchmark, West Texas Intermediate, fell so far so fast that the price went negative, a first in modern history. As news broke of panicked selling, those of us not directly involved in the business got a reminder of how fundamental and powerful the forces of supply and demand are, the complexities of oil pricing, and how storage plays an important role.

Companies that use oil often buy it months in advance based on assumptions about business needs. During normal times, storage ebbs and flows based on supply and demand and usually finds an equilibrium. But these are far from normal times. As demand dried up because of stay-at-home orders here and around much of the world, excess oil already bought and paid for started accumulating rapidly. And as we’re all painfully aware, during this fast-moving crisis Murphy’s Law (if it can go wrong it will go wrong) applies to oil markets just like everything else.

The economic problems caused by coronavirus have left many purchasers of oil in a difficult spot. They know this situation won’t last forever and they also know they can’t simply dump the excess oil they’ve bought, like dairy farmers or pork producers are doing with their own products. Instead, they have to store it or, in some cases like last week, pay others to buy it from them, creating negative prices.

For those trying to store excess oil, the small town of Cushing, Oklahoma, is a primary location. The town of about 8,000 people is known as the “pipeline crossroads of the world” and its “tank farms” can hold approximately 91 million barrels of oil. Normally about 30% full, these are expected to reach capacity in the coming weeks.

With Cushing rapidly filling up, super tankers are floating around holding an estimated 160 million barrels of oil, about two to three times normal according to The Wall Street Journal. Companies typically rent these very large crude carriers (VLCC) for shipping and are currently paying a hefty premium to use them for storage. The ships are stationed outside major ports from Singapore to Long Beach and, presumably, will float there until demand bubbles up and prices for oil rise. The Journal also reports that each VLCC can hold about 2 million barrels and that there are enough out there to hold twice the current level. That’s a lot of oil stored very expensively. Hopefully we won’t have to find out where to store oil after that!

Meanwhile, oil prices are no longer negative, but volatility remains high. Just yesterday prices were moving downward around 25% to $13 even as the broader stock market moved higher. The price of oil is important for many reasons, just one being industry profitability. My understanding is that companies along the supply chain need oil prices to be around $30+ just to breakeven. Clearly, the oil situation is far from stabilized as people on all sides of the business are just as uncertain about the future as everyone else.

Here are two links to more information about this topic. The first is from JPMorgan and the second is a longer piece from The Wall Street Journal. The latter has a soft paywall, but hopefully you can access it because it’s an interesting read.

https://am.jpmorgan.com/us/en/asset-management/gim/adv/why-are-oil-prices-negative

https://www.wsj.com/articles/storage-crisis-worsens-for-glut-of-crude-caused-by-coronavirus-11587755805

Have questions? Ask me. I can help.

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Fending off the Bear

Investing during a crisis requires a certain amount of imagination. You have to imagine yourself ultimately being successful even though it’s tough in the present. And you have to imagine analogies to help get you through since a good chunk of the investing process is psychological. Maybe it’s the old “marathon and not a sprint” comparison, or perhaps the “farmer versus hunter” analogy. How about avoiding succumbing to a bear market by actually fending off a bear?

The following article from Jason Zweig of The Wall Street Journal resonates with me for multiple reasons. The author expands on themes I’ve addressed before about how to view bonds in your portfolio, about the insultation they can offer. Social Security and pensions offer similar protection but are rarely thought of in that way.

The piece also reminds me of my own bear experience deep in the Sierras. It was a large black bear and not a grizzly, and I remember feeling exhilarated and unafraid. I knew enough to remain calm and try to appreciate the experience because it wasn’t going to last. Maybe I’m jonesing for some social distancing out in the backcountry…

The “fending off a bear” analogy is a good one for obvious reasons. Markets are exceptionally volatile and even though prices have risen in recent weeks it’s still a very uncertain environment. So, in a sense, long-term investing these days is like dealing with an unpredictable wild animal standing in your path. You can’t turn back and the next steps you take are critically important.

Click below to read the article, “The Bare Necessities You Need for a Bear Market”. The additions in italics are mine.

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A Little Light Reading

I don’t know about you, but I feel inundated with information these days. Now, much of this is normal in my profession. I’m used to the firehose of research reports, market watching throughout the day, economic news, and trying to keep up and make sense of it all.

But the rapid-fire nature of news reports about the coronavirus in recent weeks left me longing to unplug a bit this past weekend. After taking a deep dive into the $2 trillion relief package signed into law late last week, I looked around for a good book to fall into.

I had read The Wisdom of Finance a couple of times since it was published a few years ago, but it called to me again. Even though our current crisis isn’t the “fault” of finance, as it was back in 2008, the financial impact of coronavirus is all around us. Our lives are inextricably linked to the world of finance whether we like it or not.

So, as we seem to be entering Phase 2 (aka “the grind”) of our response to the pandemic and are being asked to shelter in place a while longer, I thought I’d share this book idea with you.

Don’t let the title scare you. There are no formulas or jargon-laden passages to contend with. Instead, the author illuminates core tenets of finance through stories from pop culture, literature, and elsewhere.

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It Keeps Getting Weirder

Infection rates, death counts, and this or that business deciding not to reopen. Understanding when to wear face coverings. Stay-at-home orders that seem perpetual and a mark of the new normal. These and myriad other uncertainties make it extremely difficult to keep a clear head amid a turbid flow of information coming from all points of the compass. The problem, of course, is that we’re in a historically unprecedented situation. We have little to reference for appropriate context and guidance about what to expect.

For example, the price of oil had been cratering in recent weeks on demand uncertainty. This makes sense given that so many people are staying home, not driving or flying, and so forth. Yesterday when the contract for delivery of oil in May was set to close many who owned it feared (presumably) not having enough storage space for the planned excess and had to pay others to take it off their hands. This caused the price of oil to close negative for the first time in modern history, probably one of the strangest occurrences I’ve seen in the markets. Now, this doesn’t mean gasoline will soon be free. Oil contracts for future delivery, even later this summer, are not negative, but right now there’s too much Texas tea floating around and (again, presumably) not enough places to store it. 

There truly seems to be no shortage of negative headlines in the world these days. But while there is much to be fretful about and even fearful of, hope remains. If optimism is a choice during the best of times, it’s a cultural imperative during times of crisis.

Along these lines I wanted to share recent work from my research partners at Bespoke Investment Group. I look forward to reading their analyses because they are apolitical level-headed observers of the economy, market developments and, during tumultuous times, the news in general. In short, they help provide meaningful context that is so hard to come by these days.

The following two short pieces are a good summary of where we’ve been and where we might be headed, as per Bespoke. Click the link below to see the information on my website.

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Quarterly Update

Before I start on this quarterly update I wanted to offer a few words about the recent relief/stimulus package from Congress. Much ink has been spilled writing about it in recent days, so I won't go into the details here. Instead, feel free to reach out with questions. The short answer about whether or not you stand to benefit is... yes! You've likely heard about money going to individuals but there's also money available for small businesses and independent contractors. So, if you've been impacted financially by the coronavirus you need to look into your options. Now, on to my recap of a truly nasty quarter for the markets...

In what seems like a different world from our current vantage point, markets started 2020 by rising amidst a healthy economy and in the face of continued trade uncertainty and even presidential impeachment hearings. But as the first quarter (Q1) hit mid-February the situation changed dramatically. The quarter ended being one for the record books, and just about all the records were bad.

Fortunately (or unfortunately, depending on your perspective), the US economy began the year on solid footing. Housing was doing well, we were at so-called full employment, there were signs of a manufacturing resurgence, and risk appetite was high. Then out of the blue came the coronavirus outbreak that needs no explanation.

As of this writing there are over 300,000 confirmed cases (and rising rapidly) in the US and more than 1 million globally. The death toll continues to climb at the rate of about 5% of those infected. In response, many governments around the world began shuttering their economies and accepting the myriad tradeoffs between stay-at-home orders, self-induced recession, and larger loss of life. Governments and central banks crafted relief packages to help soften the emerging economic blow. In the US, Congress passed its largest ever fiscal stimulus at over $2 trillion. The Federal Reserve unveiled a slew of financial crisis-era tools and decreased short-term rates to zero to help prop things up. All of this in about six weeks; quite the quarter, to say the least!

Accordingly, markets around the world were extremely volatile and fell precipitously during Q1 before clawing back a bit at quarter’s end. Here’s a roundup of how major markets have performed so far this year:

  • US Large Cap Stocks – down 19%
  • US Small Cap Stocks – down 31%
  • US Core Bonds – up about 3%
  • Developed Foreign Markets – down 23%
  • Emerging Markets – down 24%

Read the rest by clicking the link below...

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Crisis Investing

It was Mike Tyson who said everyone has a plan until they get punched in the mouth. I’ve always liked that quote and it seems to pretty much cover the last few weeks, doesn’t it?

We plan for the future, for retirement, for how our investment portfolio is going to help us accomplish our goals. We plan to get our kids through college. And then that right uppercut comes from out of nowhere… bam! It leaves us feeling bloodied and dizzy, and wondering if there was any value in all that planning when life seems so uncertain.

Fortunately, planning does have value. One clear example is how the planning we’ve done helps provide a framework to evaluate your options during times of market crisis. It helps us triage, so to speak, when figuring out what if anything to do with your investments.

As I see it there are three groups of individual investors right now: The Spenders, the Almost-Spenders, and the Savers. Each group has its own triage framework to lean on and you need to know which group you’re in. This isn’t always an easy task, especially when the fear and anxiety we’re all facing makes it difficult not to join a fourth group, the Sellers.

All three groups have a challenge ahead of them, so here are some thoughts to help frame your decision-making. You’ll likely notice the recurring theme of having a plan, sticking to it, and not letting fear dictate your options. This is probably the best advice in difficult times even though it doesn’t necessarily make things any easier.

The Spenders –

You’re probably descending through various levels of anxiety while seeing your portfolio values drop. This is the money you’ve spent decades saving and it’s taking hits from all directions, including the money you’re withdrawing to live on.

During times of crisis it’s important for Spenders to revisit the details of their retirement plan. If I did the plan originally it included a “bear market test” based on retiring just before the Great Recession. How does this current situation compare? Does your plan require any tweaks? Test it and find out.

Where does spending money come from when stocks are down? Well, from bonds of course! If you’re feeling scared about the current market environment, please go through the following exercise and insert your own numbers. If you need the bond and cash amounts, just ask.

  • Add up your spending needs for the next year. Let’s say this is $80,000.
  • Subtract known sources of income, such as Social Security, any pensions, rental income, and so forth. Let’s say all of this together equals $60,000.
  • That leaves you with an expected $20,000 draw from your investment portfolio.
  • Now please divide the total amount you have in bonds and cash in your investment portfolio by that $20,000. This tells you, in back-of-the-envelope fashion, how many years you can “afford” to wait for stocks to recover.

Is the answer to your math question at least two years? Five? Ten? During the Great Recession it took investors 2-3 years to get back to normal if they did the right things, such as diligently rebalancing and not selling out of fear. How long do you think it would have taken had they sold stocks during the worst of it?

In other words, Spenders can use their bonds to fund their lifestyle while allowing their stocks enough time and space to recover. Two years is probably a minimum, but you likely have much more than that. Hopefully this provides a little piece of mind during very turbulent times.

The Almost-Spenders –

These folks are less than five years from retirement and are feeling a ton of anxiety right now. They’re in their peak earning years but are planning to start winding down soon. Does this crisis mean they should stop funding their retirement accounts? Does it mean shopping for a more comfortable desk chair and maybe an office plant because they’re now going to have to work longer?

The next few years will be critical for this group and they can’t afford to make mistakes. This would be true even in the best of market conditions. As above, they should revisit, update, and retest their plan based on current market values. Does the plan still hold up? If not, what changes can be made to allow for retiring on schedule? And it probably included assumptions for continuing to fund your retirement accounts. Prices today are at a discount. Now’s the time to keep buying if you can afford it, even if it’s uncomfortable.

The Savers –

Typically, these are younger investors who are trying desperately to manage their finances and pay down debt while still trying to save for their future. That’s a tall order anytime, but it’s made more challenging by a looming virus-induced recession.

If Savers find themselves unemployed for a time, they should avoid hitting up their retirement accounts to fund their living expenses. Easier said than done, I know, but the 10% penalty and taxes on top of realizing investment losses creates a huge hole to climb out of later.

Assuming they still have a job during this crisis, their framework right now is the simplest of the three groups. All they need to do is buy more, as much as they can reasonably afford. They need to put more money into their retirement accounts and buy more stock. Prices for high quality diversified mutual funds and index funds are 30+% less than they were a month ago and potentially moving lower. In short, there’s rarely been a better time than now to start ramping up retirement savings.

Have questions? Ask me. I can help.

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