Economy: Oil Market May 22, 2020

Oil prices rise to $33. Storage crisis easing. Supply curtails to 11.5 million b/d. Fuel demand increases and stockpiles reduce 5 million barrels. States ease lock-down and travel rises.  Demand uptick matched with OPEC supply cuts, and U.S. wells shutdown. But gasoline demand is still soft, and outlook is still fragile with low prices discouraging production.

21- oil update-may21

Confucius Say ‘Man Who Give Money to Financial Advisor Quickly Become Poor’

ActiveAllocator dynamic constructed portfolio over-performed the 60/40 portfolio by 300 percent YTD. Over-performance attribution from reduction in maximum draw-dawn, arresting negative skewness, wider asset class universe, active active management. Adding typical financial advisor fees of +1% further increases differential in performance.

YTD ActiveAllocator +6.34%

YTD 60/40 Blend        -3.1%

4-blended vs activeallocator portfolio

Economy: Mayday! Mayday! Real GDP Shrinks 4.8% Q1 2020

Q1 GDP contracts -4.8%, -$234B . Consumer -5.3%. Business -1.2%. Personal consumption -7.6%. Services -10%. Goods-1.3%. Business -8.6%. Q2 GDP estimated to contract by 40%    2- q1, GDP Shrinks

#ActiveAllocator Research: Official numbers that have come in today confirm our model’s projections. U.S. Economy slips into recession during Q2. Real GDP Shrinks 4.8% Q1 2020. Mayday! Mayday! And Q2 data is going to be 10 times worse.

Implications of Petrodollar Flows Reversal With Low Oil Prices

Petrodollar wealth accumulation will drastically slow. Existing sovereign wealth fund (SWF) portfolios have been battered. Pressures on transfer from SWFs to meet government budgets will erode balances. Interest growing in M&A and acquiring international distressed assets, but national barriers to such investments being erected.

10-Petro dollar flow implications


Positive Reaction to Share Buybacks

Direct relationship between share repurchase size and excess returns at announcement. Multiple re-purchasers benefit more from large repurchase announcements. Smaller buyback announcements tend to be anticipated and partially priced in. Market reaction to buyback announcements is the uncertainty about whether the buyback will be executed. Larger repurchase correlated with greater abnormal return.

3-positive reaction to share repurchase


Decrease in Share Buybacks to Harm Investors in 2020

With earnings and therefore dividends  to remain low, companies should reduce outstanding shares to increase per share price through share buybacks. They ought to return value to shareholders and provide investors the option to benefit from continued appreciation and defer taxes by selling shares at later date.

1- Decreased Share Buyback Harms Investors

COVID-19 Global Spread Slows But Fatality Rate Climbs to 7%

Weekly growth rate in cumulative cases slows but mortality rate climbs to 7%, 150,000 deaths, including 34,000 in U.S. Cases approaching 2.2 million level. Fatalities 35 times outside China. Wuhan numbers jump 50% and remain suspect. Widespread testing and social distancing is critical to slowing spread.

17-corona cases

Labor Productivity Trends

With temporary unemployment in the U.S. at 20 million during April 2020 examining labor productivity is instructive. Amount of goods and services produced (output) compared with the number of labor hours used in producing those goods and services highest in China and declining in OECD. Real output per labor hour declining in the United States.

3-historical productivity declines

Labor Age Population Growth To Slow and Depress Productivity

Share of working age population in total population to reduce. Labor force will continue to age, with the average annual growth rate of the 55-years-and-older cohort to grow at multiples of rate of growth of the overall labor force. Immigration unfriendly policies to further depress labor productivity, an important factor input.

2-labor productivity slows

CDS Spread Better Leading Indicator Than Share Price During Market Stress

European bank shares were significantly downgraded from “pre-Lehman Brothers collapse” levels in 2008. However, better news was provided by CDS spreads, which narrowed for most banks (indicating higher creditworthiness) mostly due to government actions. This forward view captures underlying value better than traded shares prices.

12-cds spread

History Lesson: Banking Industry Reaction Time Lag 2008 Research: Even though the U.S. banking sector is sound at the moment I find that banks usually are slow to write down distressed assets and raise new capital during previous crisis– whether from government, government agencies, or the market. When banks get stressed their stock price falls and capital buffer reduces, a negative feedback loop which adds to the problem of raising capital. The Global Financial Crisis of 2008 offers valuable lessons – more so for countries such as India.

11- banking industry timelag

U.S. Treasury Real Yield is in Negative Territory

Safe investments decline in purchasing power. Surging bond prices reduce nominal yields and darkening consensus for growth prospects, reflects in negative real yields. Traditional fixed income relationship with other asset classes breaks down. Challenges for investment and spending policies and strategic asset allocation revision. Expectations of reduced inflation, but not outright stagflation.

14 negative yield

U.S. Dollar to Fall in Medium Term, Trade Balance Improvement, Interest Rate Differential Reduction

Coronacrisis resolution, positive news, slowdown in infections to reduce safe-haven asset demand and reduce US$ valuation. Federal Reserve’s stimulus to debase currency. US trade deficit narrows to $40 bn. Feb imports fall 2.5 percent to USD 247.5 billion and exports edge down 0.4 percent to USD 207.5 billion. Goods deficit with China narrows. Developed markets rates difference narrows as yields fall.

13dollar to srop

U.S. Treasury Yield Curve Shifts Down

ActiveAllocator Research: Surging bond demand drives up price of U.S. Treasuries, diminishing yields to less than 1% until 10 Year maturity. Strong signal of recession, global slowdown, worsening outlook, rise in risk aversion, aggressive monetary policy. Fed to boost purchases to inject liquidity, further driving up bond prices, and reducing yield.

12-Yield curve

Inflation To Remain Subdued Until Effects of Monetary Easing Assert In 2022

Low oil prices, reduced demand across all sectors, rising unemployment, stagnant wages to keep inflationary pressures in check during 2020-2021. Annual inflation rate fell to 1.5% in March of 2020 from 2.3% in February – fall in gasoline costs, apparel prices, prices of shelter, airline fares, consumer prices were key contributors. We estimate inflation to be around 0.5% in 2020, 1% in 2021 and 1.5% in 2022.

11- inflation outlook 2020

U.S. Household Balance Sheets in Great Shape Entering Corona Crisis

ActiveAllocator Research: Increase in value of corporate equity held has been largest (over 70%) contributor to improving household finances and balance sheets. Real estate, debt and other assets have improved too, but with de minimis effect. Increase in household asset value from $70 trillion to $135 trillion (mainly through corporate equity held), with liabilities increasing a minuscule 5.5 trillion to 16.5 trillion is responsible for $58 trillion increase in net worth.

9-us hh bs in great shape