Oil Crash Part 2
On Monday, the May WTI contract which was expiring sold off hard. That wasn’t important because it’s not really the price of oil. Real price of oil is the June contract. It cratered on Tuesday just in case you thought the Monday decline wasn’t real. Plus, Brent crashed too. This wasn’t a freakish crash.
Details of the decline get into the weeds of how the futures market works. But the initial catalyst is all about demand or the lack of it for that matter. Supply cuts didn’t impact prices because they were small; there is simply no demand. This is different from a normal recession where cuts would help ease the glut. Demand has fallen off a cliff.
You can see how much of a glut there is by looking at the tanker stocks. For example, Scorpio Tankers rallied 82.8% from its low on March 18th. All the tanker stocks are up hugely because there is nowhere the put the oil that’s being drilled. Worst oil drillers are about to go bankrupt. Many investors are especially concerned about Oasis Petroleum.
An easy way to look for stocks that are in trouble is to see if they trade below $1. Next look if it can make money with oil at $40 as many frackers can’t.
Junk rated energy companies with near term maturities are getting destroyed. As you can see from the chart above, he March 2021 bonds of QEP resources trade at 40. Many energy companies are in trouble. However, the major companies’ stocks are doing fine. Most investors realize that low oil prices won’t continue. These big firms will benefit from this decline. Their smaller competitors will go bust allowing the majors to buy assets for pennies on the dollar.
Specifically, on Tuesday, the price of WTI oil fell 43.37% to $11.57. July contract fell 31% to $18.04. Anywhere you look there is carnage. Brent also crashed. It fell from 24.4% to $19.33. Its low on the session was the lowest price since December 2001. Brent wasn’t done falling on Tuesday. Early in the session on Wednesday, Brent fell $2.91 to just $16.42. It’s now below WTI which is at $18.3.
Can The 10 Year Yield Hit A New Low?
Remember, in February the 10 year yield’s decline predated the crash in stocks. March was all about stocks. It seems like the treasury market is about to be back in the news. It's doubtful that the treasury market will reenact the size of the crash in yields in March. But the 10 year yield could fall to an all time low considering the deflation we are seeing.
CRB Core Commodity index is down 42.79% year to date. CPI will definitely be negative. It’s possible that the 10 year yield will hit a new low.
As you can see from the chart below, the yield fell to 54 basis points on Tuesday which is a new record low close. It’s currently at 55 basis points. Its record low is 38 basis points. Volatility when it hit its record low in February is why the closing low was much higher than the low on the day. This decline has been much more managed. We aren’t seeing abject fear. It’s still not a positive that the yield is this low. It’s not surprising either since recessions will likely mean negative yields in the future.
Chipotle Not In Trouble
Chipotle reported great results all things considered. At the end of February, the comp sales growth was 14.4%. There was a 2.1% benefit from leap day. There was only 3.3% same store sales growth as you can see from the chart below. That’s because March saw a 16% decline in growth. In the week ending March 29th, same store sales growth was -35%. That gives you an idea of how bad the results will be in April and May.
Q1 digital sales were up 81% yearly and March digital sales growth was 103%. This was the company’s saving grace. Digital sales are 26% of the business now. That’s why the stock rose 5.76% after hours. The company is in perfect shape because it has $909 million in cash and no debt. The company opened 19 stores and 100 remained closed. The firm will survive this crisis easily.
Netflix Reports Steller Growth
You know the major oil stocks are oversold when they barley react to crashing oil prices. And you know Netflix is overbought when the stock doesn’t rally after huge growth in subscriptions. That was all priced in as the stock was flat after hours following the release. The firm reported $1.57 in EPS which missed estimates for $1.65. Revenues of $5.77 billion beat estimates by a tick.
Star of the show was the record 15.8 million increase in global subscriber additions which beat estimates for 8.2 million. No one is surprised Netflix did well. There are no sports to compete with it and no one can go outside. This is the perfect environment for Netflix. The company expects a decline in viewership after the shutdowns end. It guided for 7.5 million global subscriber additions in Q2, but admitted this is a guess.
Amazing Snap User Growth
Snap also had high user growth because people are stuck inside. Revenues were up big even though ad spending is slowing because of the recession. The firm lost 8 cents per share which missed estimates by a cent. It had revenues of $462 million which beat estimates for 428.8 million. That’s 44% growth. Global daily active users were up 39 million to 229 million. That’s the highest user growth since Q2 2017.
Revenue per user actually increased. It was up from $1.68 to $2.02. Clearly, Snap gained market share because the ad spending pie is shrinking. Advertisers flocked to the company because that’s where the eyeballs were. The stock rose 20.05% after hours following this report. Unlike Netflix, these results weren’t priced in to the stock. Netflix stock is at a record high, while Snap is down 25.86% year to date.