The financial markets were roiled on Monday when what once seemed impossible happened. For the first time in history, the price of oil fell below zero.
And not just a little below zero, but a negative $37.63 per barrel. It was only the May futures contracts that expired the very next day (Tuesday) that fell below zero. However, it literally meant that if you were willing to take physical delivery of a barrel of oil in Cushing, Oklahoma, the producer would pay you $37.63 to take the oil off their hands.
It’s the most extreme indicator yet of the ongoing troubles in the oil patch. Also, unfortunately for producers, there doesn’t seem to be a quick fix in sight. Demand has collapsed by an estimated 29 million barrels per day in April. Without that daily drawdown, supplies are on the verge of overrunning every storage facility available.
Producers Store Oil
Producers and refiners here in the US are resorting to storing oil in railcars and unused pipelines. Meanwhile, in Europe, salt caverns in Sweden and other Scandanavian countries are either full already or have been booked.
The oversupply has already started to affect the price of the June futures contract. The price down to roughly $14 per barrel. This is the lowest price an oil contract has been with this much time remaining to its expiration date since the late ‘90s.
To put this week’s plunge into visual context, two strategists from Deutsche Bank, Jim Reid and Nick Burns, plotted oil prices going all the way back to 1870 in both nominal price and inflation-adjusted.
Amazingly, in nominal prices, oil was cheaper on Monday than it was 150 years ago in 1870.
“In nominal terms, it’s not a surprise to see that, over the 150 years for which we have data, there’s never been a negative price print before,” wrote Reid and Burns.
“This is stunning as it basically says that a barrel of oil earlier this week was effectively cheaper than it was in 1870.” they added.
You can see their charts below, the first one is nominal prices, the second is inflation-adjusted.
Source: Deutsche Bank
What This Brought
Fallout from Monday’s historic price collapse continues to dog the US Oil Fund ETF (USO). As we’ve covered, the ETF has quickly had to adjust its structure to avoid more massive losses as the price of oil futures keeps falling. The fund switched from only front-month contracts to allow contracts for a series of months in different amounts.
Today, it announced another switch in an attempt to stay afloat: an 1-for-8 reverse stock split. The move, which would take place after the market’s close on April 28, effectively shrinks the number of shares outstanding by 8x and multiplies the share price 8x. Nothing else about the fund changes, and investors won’t own more (or less) of the fund.
Kyle Bass, CIO of Hayman Capital Management, quickly tweeted his thoughts, calling the move “garbage.”
“After vaporizing billions from unweary investors this week alone, the retail killer USO begins the day at a 36% premium to its current asset value of $2.06. Reverse splitting garbage continues to give you garbage.”
Also warning retail investors to be cautious is Warren Pies, an energy strategist at Ned Davis Research. He says that most don’t fully understand what they are investing in.
“At best, they are expensive ways to gain programmatic futures exposure. At worst, they are designed to implode. Still, money continues to flow into the USO ETF. As of last week, USO’s assets reached an all-time high of more than $5 billion. To reiterate: In this environment, USO is a train wreck. Stay away.”
Unfortunately, for investors who piled into the ETF, thinking they were timing the bottom, the warning may be too little, too late.
UBS: Economy Still Facing Deep Risks
Economists at UBS warn that even after an uptick in economic activity in May and June, the pace of recovery slowed in July as consumers, workers and businesses remain cautious.
The economists believe that the unemployment rate will be hovering around 10% by the end of the year. However, they do expect a strong jobs recovery next year as the country wins the battle against the pandemic. They expect the country’s GDP to rise 5% in 2021 as the economy slowly returns to normal.
The Basis of Models
UBS’ chief US economist Seth Carpenter added that the models that UBS is basing their GDP projections on don’t factor in a large increase in new infections. This is something that could add another hurdle to the recovery. Alan Detmeister, a UBS economist, believes that the recovery is less about the number of cases. Instead, it’s more about the level of restrictions in place.
“The risks are deep,” said Carpenter during an interview with MarketWatch. He points to three challenges facing the economy as it tries to recover. These three include overall job growth is now slowing, incomes are falling, and both households and businesses are hesitant to make long-term plans.
When it comes to job growth, UBS economists are focused on what he calls “labor-market scarring,” according to Carpenter. He’s worried that the next 6 to 12 months could exhibit a “prolonged dislocation in the labor market,” and added, “What’s going to drive this is how fast people get their jobs back.”
The group also noted that except for the automotive sector, manufacturing jobs saw a drop in growth during July. The labor-force participation rate also slipped in July after gaining ground in May and June. “And within the employed, a large share remained either part-time for economic reasons or employed but not at work,” they noted.
Income Drops to Slow Recovery
Falling incomes will also slow any economic recovery. The bank warns that household incomes will drop 10% at an annual rate. This is due to the expiration of enhanced unemployment benefits and at least thus far, no additional stimulus checks. Even with an extension of unemployment benefits or another stimulus check, the economists say it won’t make up for the massive financial relief that was “the lifeblood to prevent the economy from tanking” from March through July.
This drop in incomes is putting further strain on the retail sector. Bankruptcies are piling up, most recently with Stein Mart announcing it would enter bankruptcy and will likely close most, if not all, of its 300 stores.
Neil Saunders, managing director at GlobalData Retail, notes that Stein Mart is just the latest retailer to go under. He’s also sure that won’t be the last. “The failure of Stein Mart is not only the latest in a long line of retail bankruptcies, it also underlines that even traditionally robust segments like off-price are not immune from pandemic-induced disruption.”
He added, “For a company that, at the start of this year, was in the process of selling itself to a private investment firm, the bankruptcy is an abrupt change in fortunes that shows the immense damage the pandemic has inflicted on retail.”
4 Ways To Lower Your Taxes In Retirement
With the likelihood of higher taxes in the future, it’s important to do as much planning as you can today to minimize your taxes during retirement. While nobody knows what the future holds, taxes generally go up over time, meaning even in retirement you could be faced with significant tax bills.
Fortunately, there are steps you can take today to help minimize your taxes in the future. Here are four ways you can help lower your taxes in retirement.
1. Know the Difference Between Each Retirement Account
401(k)s are tax-deferred. You contribute pre-tax income, and your employer may match your contributions up to a certain percent. When the time comes to start withdrawals, the money will be taxed as ordinary income. You can invest up to $19,500 in a 401(k) for 2020, plus an additional $6,500 catch-up contribution if you’re over 50 by the end of the tax year.
Roth 401(k)s are tax-free. Unlike a traditional 401(k), you fund a Roth 401(k) with after-tax dollars. This means your withdrawals are tax-free and penalty-free, as long as you’ve had the account for five years and are at least 59½. As an added benefit, there are no income limits on Roth 401(k)s. It makes this type of retirement account an attractive option for high-earners.
IRAs, or individual retirement accounts, are tax-deferred. Your withdrawals in retirement will be taxed as ordinary income. You can contribute up to $6,000 in 2020, plus a catch-up contribution of $1,000 if you are 50 and older.
Roth IRAs are tax-free. Because you contribute after-tax income now, you get tax-free withdrawals in retirement.
2. Know What Type of Investments Should Go Into Different Accounts
Investments That Should Go In Taxable Accounts: Index funds, ETFs, buy-and-hold stocks and tax-exempt municipal bonds should be held in taxable accounts.
Investments That Should Go In Tax-Free Accounts: Fixed income, REITS, commodities, liquid alternatives and other actively managed investments should be held in tax-deferred or tax-free accounts so you can grow the account without paying taxes along the way.
3. Prepare Now For Required Minimum Distributions
Under the CARES Act, all RMDs have been suspended for 2020. But you should plan for them to be reinstated at any time. If you have a 401(k) or a traditional IRA, you’ll have to start taking required minimum distributions (RMDs) every year.
If you turned 70½ in 2019 or earlier, you may have already started to take your first RMD by April 1 of the year after you reached 70½. For the rest of us, if you turn 70½ in 2020 or later, you can now wait to take your first RMD by April 1 of the year after you reach 72. To make sure you comply with the complex rules, our advice is to consult with your financial professional.
4. Consider a Roth Conversion
If you have a year with a particularly low-income level compared to normal, consider doing a Roth conversion. The conversion is a taxable event, so you’ll face a higher tax bill the year you convert, or you can slowly convert your accounts over a few years to help break up the tax implications. Critically, by converting to a Roth, any future withdrawals will be tax-free. Additionally, Roth IRA’s have no RMDs, so you aren’t forced to withdraw money every year.
All of these tips involve your retirement account, so consult with a financial or tax professional to make sure any of these changes are best for your individual situation.
Wall Street Insider: The Smart Money Is In Cash, Ready To Buy During A Correction
49% of Americans said they expect to live paycheck to paycheck each month. Additionally, 53% said they don’t have money worth at least three months of expenses saved in an emergency fund.
Those figures are from earlier this year before the pandemic began. Also, as you can imagine, these would be much worse today as the economic fallout from the coronavirus spreads into its fifth month.
Michelle Connell, the founder and president of Portia Capital Management, says the numbers show how weak the US consumer was even before the pandemic, so the prospects of a “v-shaped” recovery are “grim.”
“When the U.S. economic shutdown began in March, we were told to expect a “V- shaped” recovery. The consumer and the economy were originally expected to be fully recovered by the end of 2020 at the latest. Now the grim realities are starting to show,” says Connell.
The Rally and Tech Stocks
She points out that the stock market rally has been concentrated in just a few tech stocks. She also says that essentially every other stock that isn’t a tech stock hasn’t participated in the rally.
Since the S&P 500’s March drawdown of almost 35%, the index has almost retraced the year’s high and is currently 4% up for the year to date. But further analysis finds that only a handful of technology stocks have led this rally,” says Connell. She added that “Investors have focused on the companies that support “shut-in” consumers and workers.
The result has been that the top 10 names in the S&P 500 now comprise more than 27% of the index’s market weight and large-cap growth stocks have returned 20% year-to-date. To a large degree, the other 490 names and other investment styles have not participated. For instance, large to small “value” names are still down between 10%-to-16%% year-to-date.”
She says retail investors overtaken with “boredom” have piled into the markets. She also mentions that they “poured fuel on the government’s fiscal and monetary fire.”
Smart Money in Cash
So what should smart investors be doing right now?
The best idea, according to Connell, is to watch what professional money managers do in their own accounts, not what they are doing in their managed accounts.
And right now, they are in cash.
“You can always determine an institutional money manager’s real opinion on valuations when you ask them what they’re doing with their own money. Currently, many institutions are sitting on cash positions as large as 20% to 25% in their personal accounts.”
She adds, “If you’re sitting in cash, don’t feel dumb. History is on your side — and you are also in good company. Interestingly, over the past 30 years there has been a strong inverse relationship between the unemployment rate and the performance of the S&P 500. This relationship has been upended only over the past five months. Obviously, the $2.44 trillion of fiscal stimulus that has been pumped into the U.S. economy has created an artificial market environment. At some point, this inverse relationship will represent itself and the stock market will correct.”
She says to prepare for the correction by putting together a list of stocks to pick up at bargain prices.
“Be ready for pullbacks in the stock market and dislocations in private markets. And make a shopping list.”
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