| Monday's Headlines 1. US markets tumble as oil slides 2. US relaxes import tariffs for 90 days 3. WTI oil for May falls below zero as demand disappears 4. Companies are set to slash spending Markets Closed
 image: The-Tor/Getty
Markets Today U.S. markets lost the momentum that has propelled them out of bear territory over the past two weeks as oil prices slid yet again, casting more doubt on a near-term recovery for the global economy. The May contract for West Texas Intermediate oil, which is the industry benchmark, fell below $0 for the first time in history (more below).
Technology stocks, which have led the rally in recent days, could not hold onto early gains today either. Volatility, which has been relatively quiet of late, came back with a vengeance as the VIX, or Volatility Index, spiked 15%.
About 20% of S&P 500 companies will report first-quarter earnings this week, and while their results are expected to show the early impacts of the global economic shutdown in March, their outlooks for the rest of the year will be daunting. Companies in the travel, leisure, hospitality, oil, and industrial sectors will warn of steep losses ahead and drastic measures they will be taking to curb spending and preserve their businesses.
Bill Miller, an investing legend famous for beating the S&P 500 for 15 straight years, wrote this elegant piece of analysis that crystalized for me what has been happening in the stock market lately. I thought it was well-written and poignant enough to share with you:
"Prices and valuations are highly sensitive to the marginal return on invested capital and to business risk. When the economy is declining, or there are fears that it will, valuations on those companies whose return on invested capital (ROIC) is most sensitive to economic change (mostly traditional cyclicals) will decline more than those that are more resistant, such as consumer staples, utilities, bond proxies, and many recurring revenue businesses. Companies with high debt leverage and economic sensitivity fare the worst as the market discounts the possibility they will experience financial distress. When the market sees a recovery, the exact reverse occurs, which is what we saw in the week ending April 10, one of strongest weeks in market history." – Bill Miller, Miller Value Partners, April 2020 **Survey alert: We are running another survey of our U.S. newsletter readers to learn more about your views on these volatile markets and moves you may or may not be making in your portfolios. We don't do anything creepy or untoward with the information you provide... I promise. If you would, please take this brief survey, and we'll let you know what we learn. Thanks!**
Headlines:
 Crude Oil Prices in Historic Collapse In another one of those, "I'd never thought I'd live to see the day," moments, crude oil prices fell below zero for the first time in history. More specifically, futures contracts tied to the delivery of West Texas Intermediate oil (WTI), for May, fell more than 100% to settle at negative $37.63 per barrel, meaning producers would pay traders to take the oil off their hands.
This particular futures contract was set to expire tomorrow, in that buyers of the oil would have to take physical possession of those barrels at the prices they bid for them up until today. The problem is, there's literally no room to store the oil that will accumulate unused next month, so no one is willing to pay to store it. They'd rather pay you to keep it.
Read more: Why Oil Prices Fluctuate
Meanwhile prices for the October WTI contract sold at $34 per barrel today, so there is clearly a sign for demand in the fall. Today's price collapse was more a market anomaly than the scary headline it portends to be. It is shocking and unprecedented, but it's more of a symptom of the way oil is traded than a sign of the fossil fuel apocalypse.
The collapse in current oil prices, combined with the hope that economic activity will resume by autumn, has created a market condition called contango—in which prices for a commodity are higher in the future than they are in the present.
Impact on Regional Bank Stocks While the collapse in oil prices has hit oil stocks hard, it has also hurt regional bank stocks in Texas. Those banks are deeply tied to the fossil fuel industry, which is experiencing a historic shake-up. Even though the Federal Reserve has promised to back up the banks to prevent a liquidity crisis, the collapse of an entire industry may be too much for these banks to bear.
chart courtesy Koyfin Charts  Spending Set to Evaporate One of the inevitable consequences of this global pandemic and the economic slowdown will be a massive cut in business spending, which is guaranteed to prolong the recovery. Goldman Sachs is predicting a 33% drop in cash spending in 2020 by S&P 500 companies, on average, as firms prioritize liquidity. Goldman predicts cash usage will decline to $1.8 trillion from $2.6 trillion last year, which means a big reduction in CapEx and R&D spending. Those are expected to fall by 27% and 9%, respectively.
Buybacks and dividends will also decline sharply in 2020, falling by 50% and 23%, Goldman predicts as it forecasts a 15% decline in first quarter earnings.
chart courtesy Goldman Sachs 
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   Word of the Day Contango is a situation where the futures price of a commodity is higher than the spot price. Contango usually occurs when an asset price is expected to rise over time. This results in an upward sloping forward curve.
Futures contract supply and demand affect the futures price at each available expiration. In contango, investors are willing to pay more for a commodity at some point in the future. The premium above the current spot price for a particular expiration date is usually associated with the cost of carry. Cost of carry can include any costs the investor would need to pay to hold the asset over a period of time. With commodities, the cost of carry generally includes storage costs and cost risks associated with obsolescence.  image: thoughtco.com
Today in History April 20th, 1720: Declaring that he "can calculate the motions of the heavenly bodies, but not the madness of the people," Sir Isaac Newton sells his 7,000 pounds' worth of South Sea Co. stock at a 100% profit. Newton is no financial novice—he had, after all, been master of the Royal Mint—but the excitement around England's first great IPO proves too much even for him, and he soon gets back in. Newton ends up losing 20,000 pounds when the bubble bursts in the fall, and from that moment on, he can "never bear to hear the South Sea referred to for the rest of his life."
John Carswell, The South Sea Bubble (The Cresset Press, London, 1960), pp. 131 and 199.
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Monday, April 20, 2020
Crude Reality
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