Modern Markets Episode 10.0 - Oil, Pork, and Protests
April 26th, 2020, by FomoHunt
You can listen to this episode on all popular platforms at Anchor.FM
Modern Markets is deeply interested in the stories of readers and how COVID-19 has affected their daily lives. Please reach at modernmarketsinfo@gmail.com if you or someone you know has been directly affected.
NOT FINANCIAL ADVICE
Coronavirus (COVID-19) Updates:
Stats via Johns Hopkins, Confirmed Cases - 2,877,487 Total Deaths - 201,907 Total Recovered - 813,521 - Mortality Rate - 7.2%
“This is a reminder that under no circumstances should any disinfectant product be administered into the body”
- Lysol
Round the World in Markets - Global Uncertainty
North America
Trump suspends all immigration to the US over COVID-19. The president has followed through on previous claims that he would shut down the nation to immigrants, although now it is limited to those seeking green cards. It does not, however, apply to doctors or nurses who would be helping the relief efforts, or the spouses of US citizens and prospective adoptees. The purpose of the ban is to "ensure that unemployed Americans of all backgrounds will be first in line for jobs as our economy reopens."
A study done by the University of South California (USC) has conducted a survey in Los Angeles using antibody tests to gain a better understanding of how widely spread the coronavirus is. The study found that 2.8% - 5.6% of the adult population in LA had the COVID-19 antibodies, which means that at some point, they contracted the virus and recovered. While this lowers the mortality rate of the illness to 0.12% to 0.2%, Dr. Barbara Ferrer of the LA County Department of Health reminds us that this means the virus is still spreading. "These results indicate that many persons may have been unknowingly infected and at risk of transmitting the virus to others."
South America
Countries like Venezuela, which are in a constant state of economic uncertainty, are faring worse during this crisis. A nation with one of the most extensive oil supplies in the world has been subject to numerous trade embargoes and sanctions levied by both the US and other governments. For the nations still trading with Venezuela, the recent drop in oil prices has severely limited its purchasing power. Limited access to healthcare, food supplies, and stable currency have all impacted the country and its surrounding neighbors.
European Union
The EU continues to grapple with its economic issues. Spain has several aggressive initiatives to help fix their problems. The Spanish Prime Minister, Pedro Sanchez, is proposing that long-term bonds be used to raise $1.5 trillion to alleviate the impact of COVID-19. These would be spread out at the beginning of 2021 to the most affected sectors. An amount of this size would be the equivalent to one-tenth of the total GDP for the EU.
Africa
In the United States, stores selling alcohol and tobacco have been declared essential businesses and allowed to stay open. South Africa has taken the opposite approach and banned the sale of both alcohol and tobacco. Only three other countries have taken this action, including Thailand, Greenland, and certain regions of Mexico. A report in 2018 concluded that the alcohol industry of South Africa accounted for more than $583 million. For alcoholics, quitting "cold turkey" can lead to severe withdrawal symptoms, including death.
Asia
The state of Missouri is the latest to throw the blame on China for its handling of the coronavirus. The Missouri Attorney General, Eric Schmitt, is pursuing lawsuits against several Chinese entities, including the Chinese Communist Party and several government ministries. While suing international entities carries many legal complications due to diplomatic immunities, the attorney general is confident he will be able to find workarounds.
OIL, TANKS
(Image Credit Bloomberg TV)
Oil futures dropped to an unprecedented price of -$37 this week before bouncing back up. Social media quickly latched on the to a negative number and raised multiple questions:
Will my gas station pay me to fill up?
Is oil free now?
How do I buy this negative price?
Background
Crude oil is perhaps the most widely used and traded commodity in the world. Nearly every aspect of modern life is affected by oil as some form of it is in everyday products: gasoline, plastic, car ties, cosmetics, heavy machinery, and more. As a result, the oil market is a multi-trillion dollar economy with most of the oil supply found in Venezuela, the Middle East, Russia, and North America. While there has been an emphasis on renewable energy over the past two decades, oil consumption is on track to rise over time as the demand increases internationally.
What are Futures?
Like other commodities on the markets, oil companies can be bought and traded like other stocks. Future Contracts are a more recent addition to the financial markets. As explained by Investopedia,
"Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. Here, the buyer must purchase or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date."
In other words, futures contracts allow investors to speculate on the future price of an asset regardless of the current asset price. A further wrinkle is that buyers may be obligated to take physical possession of real assets or arrange for a third party to take ownership. For oil, this would require a buyer to receive a shipment of thousands of barrels of crude oil. Futures also allow traders to utilize high leverage, or multiplier, on their profits. Leverage cuts both ways, though, as price multipliers also carry a higher risk of losing money on the trade or becoming "liquidated." Without going into too much detail, futures are sophisticated financial products that offer a higher risk/reward ratio than traditional stock trading. Large amounts of money can be made or lost on a projected future price. Due to the speculative nature of futures trading, it has been compared to gambling.
So . . . Oil?
Right, back to oil. On April 20th the price of oil futures plummeted to the lowest price on record, bottoming at nearly -$40.00 before recovering.
In a macro sense, the price dropped dramatically as the supply of oil remains relatively high compared to the demand. In other words, the storage capacity for oil has been reached, and there are no more empty facilities. This drop in demand was foreseeable with quarantines and voluntary lockdowns, keeping the majority of Americans from driving or traveling by planes.
This situation caused the projected price of oil to drop so far that to sell the underlying assets (barrels of oil), a supplier would have to PAY to offload the barrels. As a result of the lower oil prices, alternative sources of petroleum have been similarly impacted. Shale and fracking companies, which use other means to extract oil from mineral deposits, have felt the sharp impact. Artem Abramov, the head of Rystad Energy Shale Research, stated: "With such a rapid decline in fracking already visible, very little activity will be happening in the oil basins during the remainder of the second quarter of 2020." The largest fracking sand provider US Silica has continued its drop in price from $6.14 in February to $1.26 in April. A continued lull in oil prices could drive shale companies out of business in the coming months.
The airline industry is being hit especially hard, as most flights are either grounded or operating at a substantial loss. Despite a $25 billion bailout, Boeing has seen it's stock downgraded by Citigroup, $175 to $150 per share. At the time of publishing, Boeing was trading at $128. Similarly, Delta Airlines has seen a substantial drop in revenue, losing over half a billion dollars in the last quarter. The company is also expecting a further decline in revenue of 90% from April to June.
President Trump has already pledged to bailout and assist the flagging oil market. In a recent Tweet, Trump said, in no uncertain terms, he would not let the industry fail. "We will never let the great US Oil & Gas Industry down. I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so that these very important companies and jobs will be secured long into the future!"
Treasury Secretary Steven Mnuchin has begun working with banks to ensure that oil companies remain solvent. However, this may be too little too late. Whiting Petroleum Corp has already declared Chapter 11 bankruptcy, despite oil recovering later this week. Even if the federal government decides to step in, the over-supply of oil remains a significant problem.
Social Unrest
(Image Courtesy of Yakima Herald)
Nearly a month into the Great Lockdown, the public is continuing to feel the pressure. Social unrest and protests have broken out in the US as citizens struggle to make ends meet as businesses and restaurants remain closed. Protesters have taken to social media like Facebook and Twitter to organize and then publicize their gatherings. Large crowds gathered this week in California, Washington, San Diego, Michigan, and Texas with signs proclaiming that the virus:
Is a hoax
A eugenic conspiracy
Overblown
Not as bad as keeping businesses closed
A plan to inject citizens with tracking chips
Facebook moved quickly to remove protest events from its platform in states with social distancing or stay-at-home orders in place. Several events in Michigan, California, and Wisconsin have been taken down. Youtube is similarly enforcing much more strict policies on content related to the coronavirus. It's CEO, Susan Wojcicki, commented on removing videos that contradict the World Health Organization's guidance on social distancing. Other videos removed have touted "miracle cures" over the last several months. Examples of content that violate policies are videos claiming that vitamin C and turmeric can help fight the virus. This wide-sweeping takedown dragnet has unfortunately also caught up videos that simply mention the word "coronavirus."
Flip-Flopping
Congress is feeling the pressure as Americans struggle to pay their bills, despite the $1,200 direct stimulus checks that have distributed. Further exacerbating the situation, President Trump seems to lack a stable information platform. He appeared to contradict himself as he announced, then retracted his opinion that the federal government has control over when states can open themselves back up for business. To add to the confusion, President Trump tweeted this week to "Liberate Michigan," "Liberate Virginia," and "Liberate Minnesota," in an apparent call to action. The intent is for the citizens of those states to disband the social distancing protocols his administration had previously recommended. These tweets came as the protests mentioned above, received attention in the mainstream media.
The Governor of Michigan, Gretchen Whitmer, spoke up regarding the protests. "No one's more anxious to reengage our economy than I am . . . But I want to do it in a way that really does save life, that makes it safe, that mitigates risk and means that we can avoid a second wave, because as tough as this moment is, it would be devastating to have a second wave." The "second wave" is the potential resurgence of COVID-19 infections that occur following a decrease in confirmed cases. Projections anticipate that relaxing social distancing policies introduce a slew of new cases in August. The second wave of infections from the 1918 Spanish Flu resulted in more deaths than the initial surge, due in part to the outbreak of World War 1.
(Image Courtesy of Medium)
Specific states are allowing select businesses to open back up. Georgia has received the most attention over the last few days. Starting on 4/24, gyms, salons, and massage therapists can reopen with theaters and restaurants to follow on 4/27. Despite these re-openings, Coca-Cola, whose headquarters are in Georgia, is apprehensive that things will go back to normal. Its CEO, James Quincey, spoke to CNBC on the difficulties in returning to business. He stated he has "no expectation there's going to be a snap back to normal on Friday or Monday morning" and that "We shouldn't assume that each step forward is permanent necessarily." The calm and measured approach will likely see restrictions lifted and then possibly implemented again with the ebb and flow of the virus. Opening businesses back up, even in a diminished capacity, will undoubtedly see an increase in infections and deaths. However, this seems to be acceptable for some.
Tytan's Top 10 Weekly Reads
In this section, Tytan has listed the top 10 articles that he believes to be the most impactful to your learning.
1) Congress tells FCC to reverse ruling on 5G
2) Violent Food & Fuel Shortage Riots Grip Venezuela Amid COVID-19 Lockdown
3) The US will not take part in WHO global drugs, vaccine initiative launch
4) VECHAIN'S PARTNERSHIP WITH H&M EXPANDS TO HIGH-END BRAND COS
5) North Korea's Kim Jong Un Reported By Japanese Media To Be In Vegetative State
6) Twitter CEO Unveils Feature To "Editorialize" Trump's Tweets As Election Looms
7) China Continues To Flood The World With Defective Medical Supplies
8) In 2020 Oil-Exporters' Income Will Plunge By Over $1 Trillion, Forcing Widespread Stock Liquidations
9) The Coming De-Urbanization Of America
10) Over 40% Of San Diego Residents Turned To Food Banks Last Month
Another Stimulus
(Image Courtesy of Marketwatch)
Another bill has passed for coronavirus efforts. The Federal Government approved an additional $484 billion in relief efforts on Tuesday. The majority of the funds will go towards small business loans, which previously reached their limit of $349 billion. The small business loans have gotten a great deal of visibility recently. Many local businesses did not receive any funds, while other large national chains received publicly large amounts. The steak restaurant Ruth's Chris received a $20 million stimulus. Public companies like Shake Shack and Harvard University announced they would be returning their $10 million and $8.6 million stimulus check respectively after being called out by President Trump. Other large companies are keeping their free government money.
Businesses that missed out on the first round can apply on Monday for a piece of the $310 billion approved by Congress. More information can be found here.
The new stimulus may be too little too late for some industries. Tyson Foods, one of the largest meat companies in America, has shut down a pork processing plant due to the virus. The Waterloo facility employs 2,800 workers, has begun euthanizing piglets as there is not enough market demand for the current livestock supply. Up to 25% of the pork market may be shut down or operate at a lowered capacity, according to Steve Meyer, a pork industry economist. As it stands with the current price of pork, farmers stand to lose $37 per pig, compared to an expected gain of $10 per animal. The longer the US stays closed, the more negative economic news will follow.
Kaltoro
@kaltoro_
This newsletter, analysis, research, and commentary provided by Modern Markets, lead analyst Kaltoro, with contributions from TytanInc and Digital Lawrence. The publication incorporates data from numerous sources including, but not limited to, CoinMarketCap, Bloomberg, CNBC, Lunar Crush, and the team at FomoHunt.