Episode 19: Oil Value and Printing Money

This is Before and After from Refinitiv. I'm your host, Johanna Botta. This week, we'll be looking again at turbulent times in oil, as well as multinational delivery service giant FedEx. In the After section, we'll be examining the University of Michigan Consumer Report. 

Bottom fishing the oil stocks right now poses the classic question; 'Is it value, or a value trap?' No doubt oil exploration companies in the U.S. are close to having people ask this question once the building stops being on fire of course. When oil had its massive drop on Monday March 9th, some of the biggest oil exploration companies in the world were down more than 30% in a day. For instance, Halliburton, the oilfield service company made famous by former V.P. Dick Cheney, saw its stock drop 38% from Friday's close until Monday's. So you might want to see a few things transpire before going bottom fishing in the oil stocks. First of all, crude needs to rally back a bit. As we already showed you last week, oil drilling companies got sold heavily and that was, of course, because of the historic one day collapse of crude oil, which was initiated by geopolitical game theory taking foot in real life. That being said, no one saw the outcome of both Russia and Saudi Arabia igniting an oil production war at the worst possible time. A solution of detent might be even less expected and therefore mispriced in probability. This is a fluid situation, and a variety of issues from internal pressure in Saudi Arabia to the external pressures from President Trump, for instance, could lead to a partial reversal of the crude output increase. The second thing to look out for is the energy credit market functioning again, or at least partially. Energy high yield corporate spreads over treasures was up nearly 15% over treasuries this week. That is not normal, and it's also showing a market that has, for all intents and purposes, really just gone into shock and stopped operating. So liquidity vanished and at last you're left with prohibited levels, which so much uncertainty. A V-shaped rebound in underlying crude prices, or a comprehensive U.S. Federal bailout of the industry would be the only real way to see the credit market revived. It would happen there first and then in the stocks.

As if FedEx needed more problems in 2020. Coronavirus has taken complete control of the global economy and the delivery service is certainly not immune. The stock is off 64% from highs made in 2018. Recently we saw President Trump restrict personal travel to and from Europe from the United States, which they emphatically stated would not affect cargo i.e. FedEx. But nonetheless, the stock already hammered, fell another 12% last Thursday following the announcement. The company is still reeling from cutting the cord with Amazon and what was already a slowing flow from China. However, no matter which way you slice it, FedEx earnings will be one of our first big corporate insights of the real impact on corporate results that rely on international trade. Most are expecting the global supply chain logistical problem, which has been in place since the China shutdown in early February, to cause a 6.8% decrease on FedEx earnings. This is a case where we're going to want to see how prices react. In this case, the median estimate is 1.68 a share. All ears will be open if FedEx sees a prolonged financial impact from the pandemic. And of course, if there's any silver lining in e-commerce demand improvements. 

The University of Michigan Consumer Sentiment Index came in slightly better than expected at 95.9, but considerably lower than the 101 from last month, and the lowest since October. The period that was measured was from February 26th through this last Wednesday March 11th. A period in which Coronavirus effects were already widely felt in both the broader economy and the markets. 

Richard Curtin, the survey's Chief Economist, said in the report; "The initial response to the pandemic has not generated the type of economic panic among consumers that was present in the run up to the Great Recession. The most important factor limiting consumers initial reactions", he said, "is that the pandemic is widely viewed as a temporary event."

A key statement which might not hold as the panic begins to accelerate with the closing of schools, public places and sports leagues. 

So there it is. Oil and FedEx in the Before, and the University of Michigan Consumer Sentiment Report in the After. Refinitiv data throughout. This has been the Tuesday episode of Before and After, please subscribe and hit the notification bell to ensure you're alerted to all of Refinitiv's future market updates. Have a good week, and we look forward to seeing you again on Friday.