by Ivan Martchev
May 5, 2020
If it weren’t for the elimination of the uptick rule in 2007 and the subsequent infiltration of high-speed computerized trading, the volatility in the stock market would not be so high. The same is true for the commodity markets, even though the rules of trading there have always been different. The most extreme case of “computers gone wild” is the recent trading in May 2020 WTI crude oil futures (CLK20), where the last trade in the contract was a positive $9.06 one day after the contract settled at negative $37.67.
The last day the contract was traded, it had a daily range of minus $16.74 to plus $13.86 – a $30 daily range. The previous trading day, when we went as low as minus $40.32 intraday, the daily range was $60.
I understand that the oil market has an imbalance. I understand that the world used to use 100 million barrels per day in crude oil and that number dropped to 70 million very quickly due to coronavirus-related mandatory shutdowns. Since production cuts were not as fast as the drop off in demand, a supply glut rapidly built up. Still, I think computerized trading obviously added to the price volatility.
I asked a futures trader with decades of experience what happened in the May 2020 WTI futures contract and he said very simply: “It’s computers.” Algorithmic systems buy strength and sell weakness at the speed of light. They don’t make the markets more liquid; they make them more volatile in times of stress.
My source, who has decades in the trenches of the futures markets, trades futures for a living. He said he has had to change the way he trades dramatically in the past 10 years as “the price just kept moving away from me by three ticks” as the algorithmic trading systems “sniffed out” his limit orders.
Crazy things may happen with the June 2020 WTI futures contract (CLM20), as oil storage limits may be even tighter, as it seems that the cuts in oil production globally have not been as fast as the drop off in demand, which is unlikely to come back as fast as it fell. Still, all of this information was well known on the day before the CLK20 contract had a $60 daily range and went as low as -$40.32. Gut feeling tells me that if it were not for computers gone wild, the May 2020 WTI contract may have not gone negative at all.
For more on how computerized trading that front-runs investors and costs them billions of dollars per year, read “Flash Boys: A Wall Street Revolt” by Michael Lewis, or see his 60 Minutes interview.
A Wave of Oil-Related Bankruptcies is Coming
Because the tripling of crude oil production since 2008 was caused by unconventional methods known as “shale oil,” we are likely to see U.S. rig count fall to all-time lows and U.S. production being cut by a large amount, possibly half. This is because shale oil has production methods that are significantly more expensive than conventional drilling methods. I doubt that with the present oil price that settled at the end of last week at $19.78 on the June 2020 WTI futures contract any shale production is profitable.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Since the reopening of the economy is not going to be as fast as the shutdown, I don’t believe the oil price will come back to make shale oil profitable in 2020. Because most of the shale oil was financed with debt, there are coupon payments that have to be made and falling revenues, which are likely to fall further in a depressed oil price environment. There is only so much oil you can produce at a loss and then you have to store it, which we know won’t be an option soon. The only way to go forward is to shut uneconomic production, which means bankruptcy for high-cost producers and many oil-service companies.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
Diamond Offshore (DO) already filed for bankruptcy in late April. Nabors Industries (NBR) is a land driller, but its probability of filing for bankruptcy in 2020 is exceptionally high, given how much drilling budgets will be cut and how fast the oil price will recover in order to rejuvenate any drilling activity.
Navellier & Associates does not own Diamond Offshore (DO) or Nabors Industries (NBR) in managed accounts or our sub-advised mutual fund. Ivan Martchev does not own Diamond Offshore (DO) or Nabors Industries (NBR) in personal accounts.
The Nabors conference call on May 6 will be interesting for any insights as to where the oil service industry is going at the time of the biggest demand shock it has ever experienced. A 1-for-50 stock split that was introduced for NBR stock in late April does absolutely nothing to change the economics of drilling for oil. Right now, there aren’t any economies for most shale oil operators.
The present coronavirus pandemic illustrates well the absurdity that is still being taught in business schools – that if one has a viable business model, the financing of the business between equity and debt is irrelevant. This hopelessly flawed academic model is absurd because it assumes the linearity of economic growth and the business environment. While the coronavirus shock is extreme, neither economic growth nor the business environment are predictably linear. Interest payments on debt are an obligation, while dividend distributions to equity holders are a discretion of the board of directors for a public company.
How many businesses, not only oil-related, do you think wished they only had equity financing now?
Also In This Issue
A Look Ahead by Louis Navellier
Short-Covering in “Fad” Stocks Drove the Market Higher Early Last Week
Income Mail by Bryan Perry
A Second Shot at Buying the Very Best REITS
Growth Mail by Gary Alexander
Pandemics Did Not Kill the Market or the Economy in 1918-19 or 1968-69
Ivan Martchev is an investment strategist with Navellier. Previously, Ivan served as editorial director at InvestorPlace Media. Ivan was editor of Louis Rukeyser’s Mutual Funds and associate editor of Personal Finance. Ivan is also co-author of The Silk Road to Riches (Financial Times Press). The book provided analysis of geopolitical issues and investment strategy in natural resources and emerging markets with an emphasis on Asia. The book also correctly predicted the collapse in the U.S. real estate market, the rise of precious metals, and the resulting increased investor interest in emerging markets. Ivan’s commentaries have been published by MSNBC, The Motley Fool, MarketWatch, and others. All content of “Global Mail” represents the opinion of Ivan Martchev
Although information in these reports has been obtained from and is based upon sources that Navellier believes to be reliable, Navellier does not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute Navellier’s judgment as of the date the report was created and are subject to change without notice. These reports are for informational purposes only and are not a solicitation for the purchase or sale of a security. Any decision to purchase securities mentioned in these reports must take into account existing public information on such securities or any registered prospectus.To the extent permitted by law, neither Navellier & Associates, Inc., nor any of its affiliates, agents, or service providers assumes any liability or responsibility nor owes any duty of care for any consequences of any person acting or refraining to act in reliance on the information contained in this communication or for any decision based on it.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any securities recommendations made by Navellier. in the future will be profitable or equal the performance of securities made in this report. Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities in the event of a recession or adverse event affecting a specific industry or issuer.
None of the stock information, data, and company information presented herein constitutes a recommendation by Navellier or a solicitation to buy or sell any securities. Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The holdings identified do not represent all of the securities purchased, sold, or recommended for advisory clients and the reader should not assume that investments in the securities identified and discussed were or will be profitable.
Information presented is general information that does not take into account your individual circumstances, financial situation, or needs, nor does it present a personalized recommendation to you. Individual stocks presented may not be suitable for every investor. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. Investment in fixed income securities has the potential for the investment return and principal value of an investment to fluctuate so that an investor’s holdings, when redeemed, may be worth less than their original cost.
One cannot invest directly in an index. Index is unmanaged and index performance does not reflect deduction of fees, expenses, or taxes. Presentation of Index data does not reflect a belief by Navellier that any stock index constitutes an investment alternative to any Navellier equity strategy or is necessarily comparable to such strategies. Among the most important differences between the Indices and Navellier strategies are that the Navellier equity strategies may (1) incur material management fees, (2) concentrate its investments in relatively few stocks, industries, or sectors, (3) have significantly greater trading activity and related costs, and (4) be significantly more or less volatile than the Indices.
ETF Risk: We may invest in exchange traded funds (“ETFs”) and some of our investment strategies are generally fully invested in ETFs. Like traditional mutual funds, ETFs charge asset-based fees, but they generally do not charge initial sales charges or redemption fees and investors typically pay only customary brokerage fees to buy and sell ETF shares. The fees and costs charged by ETFs held in client accounts will not be deducted from the compensation the client pays Navellier. ETF prices can fluctuate up or down, and a client account could lose money investing in an ETF if the prices of the securities owned by the ETF go down. ETFs are subject to additional risks:
- ETF shares may trade above or below their net asset value;
- An active trading market for an ETF’s shares may not develop or be maintained;
- The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track;
- The cost of owning shares of the ETF may exceed those a client would incur by directly investing in the underlying securities; and
- Trading of an ETF’s shares may be halted if the listing exchange’s officials deem it appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Grader Disclosures: Investment in equity strategies involves substantial risk and has the potential for partial or complete loss of funds invested. The sample portfolio and any accompanying charts are for informational purposes only and are not to be construed as a solicitation to buy or sell any financial instrument and should not be relied upon as the sole factor in an investment making decision. As a matter of normal and important disclosures to you, as a potential investor, please consider the following: The performance presented is not based on any actual securities trading, portfolio, or accounts, and the reported performance of the A, B, C, D, and F portfolios (collectively the “model portfolios”) should be considered mere “paper” or pro forma performance results based on Navellier’s research.
Investors evaluating any of Navellier & Associates, Inc.’s, (or its affiliates’) Investment Products must not use any information presented here, including the performance figures of the model portfolios, in their evaluation of any Navellier Investment Products. Navellier Investment Products include the firm’s mutual funds and managed accounts. The model portfolios, charts, and other information presented do not represent actual funded trades and are not actual funded portfolios. There are material differences between Navellier Investment Products’ portfolios and the model portfolios, research, and performance figures presented here. The model portfolios and the research results (1) may contain stocks or ETFs that are illiquid and difficult to trade; (2) may contain stock or ETF holdings materially different from actual funded Navellier Investment Product portfolios; (3) include the reinvestment of all dividends and other earnings, estimated trading costs, commissions, or management fees; and, (4) may not reflect prices obtained in an actual funded Navellier Investment Product portfolio. For these and other reasons, the reported performances of model portfolios do not reflect the performance results of Navellier’s actually funded and traded Investment Products. In most cases, Navellier’s Investment Products have materially lower performance results than the performances of the model portfolios presented.
This report contains statements that are, or may be considered to be, forward-looking statements. All statements that are not historical facts, including statements about our beliefs or expectations, are “forward-looking statements” within the meaning of The U.S. Private Securities Litigation Reform Act of 1995. These statements may be identified by such forward-looking terminology as “expect,” “estimate,” “plan,” “intend,” “believe,” “anticipate,” “may,” “will,” “should,” “could,” “continue,” “project,” or similar statements or variations of such terms. Our forward-looking statements are based on a series of expectations, assumptions, and projections, are not guarantees of future results or performance, and involve substantial risks and uncertainty as described in Form ADV Part 2A of our filing with the Securities and Exchange Commission (SEC), which is available at www.adviserinfo.sec.gov or by requesting a copy by emailing firstname.lastname@example.org. All of our forward-looking statements are as of the date of this report only. We can give no assurance that such expectations or forward-looking statements will prove to be correct. Actual results may differ materially. You are urged to carefully consider all such factors.
FEDERAL TAX ADVICE DISCLAIMER: As required by U.S. Treasury Regulations, you are informed that, to the extent this presentation includes any federal tax advice, the presentation is not written by Navellier to be used, and cannot be used, for the purpose of avoiding federal tax penalties. Navellier does not advise on any income tax requirements or issues. Use of any information presented by Navellier is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.
IMPORTANT NEWSLETTER DISCLOSURE: The performance results for investment newsletters that are authored or edited by Louis Navellier, including Louis Navellier’s Growth Investor, Louis Navellier’s Breakthrough Stocks, Louis Navellier’s Accelerated Profits, and Louis Navellier’s Platinum Club, are not based on any actual securities trading, portfolio, or accounts, and the newsletters’ reported performances should be considered mere “paper” or proforma performance results. Navellier & Associates, Inc. does not have any relation to or affiliation with the owner of these newsletters. There are material differences between Navellier & Associates’ Investment Products and the InvestorPlace Media, LLC newsletter portfolios authored by Louis Navellier. The InvestorPlace Media, LLC newsletters and advertising materials authored by Louis Navellier typically contain performance claims that do not include transaction costs, advisory fees, or other fees a client may incur. As a result, newsletter performance should not be used to evaluate Navellier Investment Products. The owner of the newsletters is InvestorPlace Media, LLC and any questions concerning the newsletters, including any newsletter advertising or performance claims, should be referred to InvestorPlace Media, LLC at (800) 718-8289.
Please note that Navellier & Associates and the Navellier Private Client Group are managed completely independent of the newsletters owned and published by InvestorPlace Media, LLC and written and edited by Louis Navellier, and investment performance of the newsletters should in no way be considered indicative of potential future investment performance for any Navellier & Associates separately managed account portfolio. Potential investors should consult with their financial advisor before investing in any Navellier Investment Product.
Navellier claims compliance with Global Investment Performance Standards (GIPS). To receive a complete list and descriptions of Navellier’s composites and/or a presentation that adheres to the GIPS standards, please contact Navellier or click here. It should not be assumed that any securities recommendations made by Navellier & Associates, Inc. in the future will be profitable or equal the performance of securities made in this report.
FactSet Disclosure: Navellier does not independently calculate the statistical information included in the attached report. The calculation and the information are provided by FactSet, a company not related to Navellier. Although information contained in the report has been obtained from FactSet and is based on sources Navellier believes to be reliable, Navellier does not guarantee its accuracy, and it may be incomplete or condensed. The report and the related FactSet sourced information are provided on an “as is” basis. The user assumes the entire risk of any use made of this information. Investors should consider the report as only a single factor in making their investment decision. The report is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security. FactSet sourced information is the exclusive property of FactSet. Without prior written permission of FactSet, this information may not be reproduced, disseminated or used to create any financial products. All indices are unmanaged and performance of the indices include reinvestment of dividends and interest income, unless otherwise noted, are not illustrative of any particular investment and an investment cannot be made in any index. Past performance is no guarantee of future results.