Oil, Oil Everywhere

  • All aboard the “VLCC” gravy train! (a mixed metaphor)
  • In a world… awash in crude oil
  • States buckle under unemployment claims
  • Big Business devours federal small-business loans
  • What in the actual hell? Donna Shalala’s new gig
  • NFL mock draft debacle…
  • … flags demand for 5G
  • Novel need for silver 
  • A reader on Trump’s election odds (despite recession)

It’s a really good time to own a VLCC.

A “VLCC” is not an exotic financial instrument of the kind that’s blowing up markets around the world right now. Rather it stands for “very large crude carrier” — a giant ship on which to haul crude oil from one place to another.

Until recently, lease rates for a VLCC ran about $14,000 a day. Right now? More than 28 times that amount, or about $400,000.

The globe — especially the United States — is awash in crude, with demand next to nil. Shutting down an oil well is more complicated than turning a faucet… so producers are literally running out of room to put the stuff as it continues to come out of the ground.

Hence the high demand for VLCCs — “floating storage,” as they say in the oil biz — and the bizarro-world phenomenon of negative oil prices.

As you likely heard yesterday, the front-month futures contract for West Texas Intermediate crude traded for… less than zero. Producers were paying storage outfits to take it off their hands. At the close of trading yesterday the price was minus $37.63.

To be sure, some of this absurdity is a function of the futures market calendar; May futures expire today. Without getting too deep in the weeds, futures prices come into line with the spot price — the actual price for actual barrels of the stuff in real-time — the closer you get to the contract’s delivery date.

So the oil price will likely “reset” to something above zero tomorrow. That said, don’t be surprised if it revisits negative territory in another month.

The debacle led to a brief halt in trading this morning for the most popular oil ETF — the United States Oil Fund LP (USO).

Years ago retail investors would pile into USO as a bet on a long-term rise in oil prices. More recently, they saw it as a way to “buy the dip” in expectation of a near-term jump.

Around here, we’ve always looked askance at USO. Our editors have never been fans, other than as a fast-money trading vehicle. (If you’re really curious about why it was a lousy way to play oil, Google “USO time decay.”)

Apart from that, there’s not much else to say today — other than to place the blame where it rightly belongs.

Josh Crumb

Yes, U.S. shale energy has been an immense blessing. Good ol’ American know-how made it possible. But the Federal Reserve’s ultralow interest rates lured shale producers down the primrose path of debt and ultimately into overproduction.

The bubble burst in 2014… and while a great deal of the damage was repaired in the years since, the corona-crash is undoing all those repairs and then some.

The oil turmoil is proving to be a drag on the stock market for a second day running.

At last check, the Dow was down another 2%. That’s an 1,100-point drop in two days. Well, it stands to reason the market was due to give up some of those monster gains from two weeks ago, sooner or later.

The front-month gold contract has given up about $10; it’s holding onto the $1,700 level for dear life.

The lone economic number of the day is another stinker — existing home sales down 8.5% in March.

And so it begins: New York state is looking for a federal bailout to cover unemployment claims.

Specifically, the Empire State’s government is asking for a $4 billion no-interest loan. It won’t be the last state to put in such a request.

“Many states entered the crisis with woefully inadequate unemployment compensation trust funds,” writes Jared Walczak from The Tax Foundation. New York, California and Ohio might well run out of money to pay claims by the end of this month. Texas is nipping on their heels…

Unemployment Coverage

“When states exhaust their trust funds,” Walczak goes on, “they must look to other sources of funding, either within their own state budgets or through loans from the federal government, which must ultimately be paid back — in some cases with interest.”

If a state’s unemployment fund is sufficiently solvent, the loans can be interest-free. New York’s is nowhere near solvent, but it’s asking for the no-interest break anyway. Texas’ is just as insolvent, and California’s even worse.

Outrage of the Day: At least 80 public companies scarfed up Uncle Sam’s “small business” loans before the money ran out last week.

We mentioned the case of Shake Shack (SHAK) yesterday — a case so egregious the company backpedaled and agreed to immediately return the $10 million it borrowed.

But it is hardly alone, according to an analysis by the Financial Times. “The FT analysis of Sentieo data identified 83 public companies that had collectively borrowed more than $330 million from the Paycheck Protection Program, on average $4 million each, though the Small Business Administration has trumpeted that the average loan for the program was just $200,000 among all recipients…

“Large restaurant groups including Potbelly and the owner of Ruth’s Chris Steak House disclosed last week that they had each drawn $10 million or more, taking advantage of an exemption for restaurant and hotel chains to the rule that otherwise limited PPP funding to businesses with fewer than 500 employees.”

This, while your favorite locally owned dining spot might or might not hang on through all of this…

Outrage of the Day (We have a tie!): How the hell did Donna Shalala get onto the commission overseeing the big-business bailouts?

As noted here on Friday, Congress punted on its basic duties in deciding how to spend $454 billion in bailout funds — outsourcing it instead to the Treasury and the Federal Reserve. And the Fed can use its financial sleight of hand to leverage that money into $4.54 trillion.

A five-person commission appointed by Congress is supposed to exercise oversight — two Democrats, two Republicans and a chair agreed to by leaders of both parties.

The choice of Shalala is, and we’re being generous here, a head-scratcher.

Donna Shalala

Shalala is the Florida congressmember who was Bill Clinton’s secretary of health and human services. She circulates in the most elite company — including the company at that posh party in the Hamptons we spotlighted last summer. Her net worth two years ago was at least $4.6 million.

At The American Prospect, writer David Dayen has been poring over Shalala’s most recent financial disclosure, dated last May.

“She holds shares in Boeing, as well as Alaska Airlines and Spirit AeroSystems, which builds a lot of pieces of Boeing aircraft. She owns Chevron, ConocoPhillips, Royal Dutch Shell and Occidental Petroleum at a time of a historic crash in oil prices… She owns retailers and retail producers Ralph Lauren, L Brands, Burlington Stores and Five Below… She owns big banks JPMorgan Chase, Wells Fargo, Bank of New York Mellon, BBVA Compass and HSBC…”

Conflict of interest much?

The Republicans are going full crony as well, appointing Sen. Pat Toomey of Pennsylvania — a longtime Wall Street banker. Oy…

OK, the following development has to be bullish for companies involved in 5G wireless…

For the Win

The annual NFL draft starts on Thursday. Like so much else this spring, it will be a virtual-online affair — team executives working from home. To ensure this first-of-its-kind event goes as smoothly as possible, the NFL did a dry run yesterday afternoon.

It did not go well. From the New York Post: “‘Mock draft today already technical glitch [with] Cincinnatis 1st pick!!! Brutal,’ a person involved texted to ESPN’s Adam Schefter, who tweeted the complaint by 1:24 p.m.

“Coaches and general managers told ESPN’s Dianna Russini there were communication issues and bandwidth was a problem.”

Did someone say bandwidth?

Granted, 5G’s massive bandwidth won’t be up and running on a scale to save the NFL’s hide this week… but it turns out several names in the 5G space are reporting earnings.

And while Wall Street is writing off earnings season for many companies — i.e., the travel and retail names Donna Shalala has on her disclosure forms — earnings season matters a lot for the 5G names.

“After all,” our income specialist Zach Scheidt reminds us, “more people are working from home. Schools have transitioned to online education. Families are home streaming more video content and hosting FaceTime or Zoom calls.

“And all of this drives demand for 5G networking and the devices that connect to these life-changing networks.”

In particular, Zach will be eyeing which 5G companies are raising their dividends — that’s right, upping their payouts to investors despite the corona-shock to the markets.

As a refresher from yesterday, Zach is keen on Verizon (VZ), with a generous 4.2% yield. It reports earnings Friday morning, but it probably will hold off on raising the dividend until the fall.

For a near-term dividend increase, Zach says look at the chipmaker Xilinx (XLNX)… which reports tomorrow after the close. “Typically,” he tells us, “the company has increased its dividend every year for its spring quarter.”

But for the biggest streams of 5G income… well, Zach’s reserving those names for his paying subscribers. These are the companies that will benefit from the buildout of 5G infrastructure in a totally unexpected way… as he’ll explain when you follow this link.

While the price of silver languishes relative to gold — still below $15 as we check our screens! — we see a novel use for the white metal…

Russia

“Cossacks and police officers enforcing the coronavirus lockdown in Russia’s western city of Kaliningrad have donned modified face masks that local scientists say can be worn for days without being replaced,” reports the Reuters newswire.

The cheap cotton is augmented with a super-slender coating of silver.

No, it’s not been proven more effective than anything else in double-blind, placebo-controlled trials… but the folks at Immanuel Kant Baltic Federal University figure it’s worth a shot.

“In my view we’re able to slightly increase the efficiency of this accessory — and it is an accessory, not a medical device — because we believe the active silver surface can kill some amount of the virus,” says Aleksander Goyhman, director of the university’s nano-materials center.

Only problem? Securing enough raw material — both cotton and silver. “It’s important for us that someone helps with the raw materials,” says university president Alexander Fyodorov.

To the mailbag and a reader’s reaction to Jim Rickards’ revised probabilities for the presidential election (it’s now a 50-50 toss-up)…

“In ordinary times with a recession induced by a variety of factors, Jim would be on the money; this is a different beast with an artificially induced economic disaster. 

“People know that, and Trump can still pull this one way out of the fire. The left wing knows that and that's why they are fabricating all of the criticism about his response. On the other hand, our electorate is sometimes less than well informed and Jefferson's admonition may play out.”

The 5: Still more than six months before Election Day. And who knows how much of it will be in mail, in person, etc. We’ll continue to check in with Jim as he assesses and reassesses the probabilities…

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

P.S. If you suspected Wall Street will come out of all the bailouts, volatility, etc., smelling like a rose… you’re right.

But colleague James Altucher wants to direct your attention to a quant-designed trading system that can lead you to newfound riches no matter what’s happening in the markets.

Learn how it works right here. Please note this presentation will go offline as soon as the market opens tomorrow morning at 9:30 a.m. EDT.

Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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