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Episode 19: Oil Value and Printing Money

Episode 19 - Part 1

Is oil good value or a value trap?

Published on: March 17th, 2020 • Duration: 5 minutes

In this episode, we discuss the turbulent times in oil, and multi-national delivery services giant FedEx. In the After section, we will be examining the University of Michigan Consumer Report.

05:16
  • 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. 

Episode 19 - Part 2

Is printing money the answer? 

Published on: March 20th, 2020 • Duration: 5 minutes

In this episode, we discuss how the central banks could use Modern Monetary Theory to help recover the world’s economy. With Coronavirus continuing to cause financial damage across the globe, is printing money our best option? 

05:12
  • This is Before & After from Refinitiv. I'm your host, Johanna Botta. On today's show, we'll be looking at MMT, the airlines and reporting on FedEx's results. 

    Modern Monetary Theory, or MMT, has been on the lips of many economists for a few years now. But has the Coronavirus pushed the reality of MMT into the spotlight? MMT is an economic theory that hypothesizes that a government should print money to expand spending up to the point of detrimental inflation. In the current situation, with the market in a sudden and severe bear market territory, many workers and small business owners in financial crisis are calling for a huge fiscal response from governments worldwide. And, well, why shouldn't they issue more debt at historically cheap levels to help the economy? That's the question that MMT doesn't back away from. And the answer from MMT proponents is, of course, spend and just print more money. In traditional economics the notion of printing money to solve a country's problems is almost universally regarded as a bad idea. Yet MMT proposes that money creation ought to be a useful economic tool, and does not automatically devalue the currency, lead to inflation or economic chaos. And so here we are on the verge of economic chaos as it stands, wouldn't now be a good time to find out if it works? The major caveat of MMT, of course, is that inflation would be bad, but if the job market collapses, as most experts assume, that would alleviate the pressure. What we might find is that if MMT works in this particular crisis, then the chorus for it to be a regular phenomenon will only grow. One advocate of MMT is Bernie Sanders. Sanders is being advised by Stephanie Kelton, an economics professor at Stony Brook University who is probably the most famous proponent of Modern Monetary Theory. The necessity of a public funds response to the economic hit has even the most hardcore-free market proponents questioning the limitations of helicopter money. Just look at this parabolic move in Fed balance sheet assets. It looks like the helicopter is already hovering overhead. 

    The airlines are in a very bad spot right now. Consider American Airlines that when in 2015 posted a $7.6 billion profit compared to about $500 million in 2007 and less than $250 million in 2006. This prompted CEO Doug Parker to say in 2017; "I don't think we're ever going to lose money again." 

    If only he were right. Then along comes Coronavirus, which overnight collapsed international travel and severely reduced all domestic flights. And now we find ourselves in a real moral conundrum. Should the taxpayers of the United States bail out the major airlines? How can a company with such a nice period of earnings in the last decade squander all that cash? Buybacks! American Airlines blew most of its cash on a stock buyback spree. From 2014 to 2020 in an attempt to increase its earnings per share, American Airlines spent more than $15 billion buying back its own stock. It managed to, despite the risk of the proverbial rainy day, to shrink its cash reserves. As of this March, they are now in debt over $30 billion with a market cap of $6.6 billion. 

    FedEx beat their subdued earnings numbers handedly. Their EPS came in at $1.41 versus $1. 27, and revenue came in at seventeen point five billion dollars versus sixteen point eight two billion. They did, however, suspend the outlook for the remainder of 2020 due to Coronavirus uncertainty. At first, the stock rallied up 7.4% to102 a share in the aftermarket trading, only to face a reality of S&P futures, which were lock-limit down the next morning, pulling the stock below the previous day's close of 94.96 By more than 2%. The report is the perfect example of the sign of our times. A good report for past performance on really dour expectations with no visibility into the future. This results in investors simply having no real edge in pricing the security and defaulting to the broader whims of the markets. We've said economic numbers have stopped mattering, perhaps the same can be said for earnings. 

    So there it is, MMT and American Airlines in the Before, FedEx in the After. Refinitiv data throughout. This has been the Friday episode of Before & After. Please subscribe and hit the notification bell to ensure you're alerted to all of Refinitiv's future market updates. 

    We look forward to seeing you again next week.