Category: Finance

Did I mention that Western Canadian Select is trading at under US$10/barrel right now?

Only the most solvent are going to survive this, but pick the right survivors at the right time (likely nearing the end of this year or perhaps the beginning of 2021) and when US shale supply finally starts dropping to the point where light oil exports start to decline, it bodes fairly well for Canadian heavy oil to be imported into the USA, even with an oil-hostile administration such as the Liberals.

Heaven forbid, if Trans Mountain ever gets constructed (don’t hold your breath), there will be even more of a bounce. Keystone and Enbridge Line 3 will be providing a larger pipe to US heavy oil refineries, and if TransMountain is finished, then that will allow for another competitive outlet.

But for now, there is still too much US domestic supply, especially since demand is in the dumpster. The shale producers though will stop most capex, and there will be heavy declines.

Here’s another fun chart – US Gas Prices – Go to Sam’s Club (Walmart’s second-grade competitor to Costco) in Oklahoma and you’ll see them selling gas for US$0.99/gallon! I’ll save Canadians the currency and metric conversion – that’s CAD$0.37 per litre.

If I was on the retail side of things, if there was any mechanism where you can buy at retail your anticipated future level of gasoline expenditures for the next 20 years for 99 cents per US gallon, I’d be hedging at these prices. When that time is done, chances are electric vehicles will be much more prevalent.

May 2020 crude: US$23.07
December 2020: US$32.98
December 2021: US$37.07
December 2022: US$39.42
December 2023: US$41.10 ($1.40 bid-ask spread so midpoint price here).

As I write this:
S&P 500 -20.4% YTD
TSX Composite -21.7% YTD

Buckle up. After posting 3 monster-sized gains in a row, if you’re into the short-term trading thing it’s probably a good time to harvest a few bucks since the ‘second wave’ will start hitting the headlines. I’ve taken off my S&P 500 exposure, but will add it back on later.

This is where you are going to see supply chains get rationed and there will be further spin-off business disruptions that are second and third-order effects of shutting down half of a country’s economy and shutting in the population.

The numbers will get worse in terms of people confirmed with COVID-19, and the death count will rise. However, the growth of this will flat-line.

This is also the phase where you are going to see significant social unrest in the population. Shutting in a population for a week is one thing, but the second and third week you are going to get a lot of people that are going to be stir-crazy.

The primary thesis is the same, however – the trend between now and half a year later will be up, but there are going to be a lot of dips and drops as this panic continues to resolve itself.

Some other miscellaneous notes.

Tailored Brands (TLRD:US) I’ve mentioned before – they shut down their entire operation in the second half of March. Their stock is somewhat up, but their unsecured debt (July 2022) has cratered to about 25-30 cents on the dollar, and this is a pretty good sign that they’re going to go into Chapter 11. Considering the lease-heavy aspect of their business they are probably going to be using this as a way of breaking the leases, recapitalizing and getting on with it. They’ve got a billion and a half dollars of secured credit, so the unsecured holders are going to get killed (or more precisely, they’ve already been killed).

FTI Consulting (FCN:US) specializes in bankruptcy consulting, and looking at their chart, they’re right up there with toilet paper maker Cascades (TSX: CAS) as having a stock chart you’d never see any huge market dump on.

There is a lot of “liquidity sniping” on the TSX. I don’t know what this is formally called, but I’ll explain. You see a quote at bid 11.50 and ask 12.50, and you think it’s a really good deal at these prices (say you believe it is worth 17), and there is supply coming into the market (i.e. it is a down day in the market). You put in a bid at 11.55, and then some computer puts in a bid at 11.56, and you realize there’s no way you’re going to get any liquidity because the computers are going to beat you. The way you defeat this is to use hidden orders. You put a hidden order in at 11.55, and so when some guy puts in a market order to sell, you get priority at 11.55. The computer then sees the trade and has to adapt to dark liquidity, and it has a much more difficult time to do so – how much of the spread is actually being captured by you? Most brokerages don’t allow hidden orders, but Interactive Brokers does.

Today is the day where the “Oh my God, I sold everything a week ago because I was going to get a better price in the month of May when this Coronavirus thing was going to end” crowd realizes that they are done and now have to get that cash back to work, except it is difficult to do anything other than hit asks.

The supply (forced liquidation selling, panic selling) goes away. This results in prices going up since there is still an avalanche of demand. There will also be volatility – except this time on the upside.

Psychologically there is the anchoring effect – people see things that have traded at 10%, 20% below current prices and think if they just wait it will get back there – after all, more and more people are diagnosed with this Coronavirus thing, more people are going to die of it, more people going to ICUs, and all of the carnage in the media, the shut-downs, the horror stories of people that can’t do this or that, etc., etc.

This is wrong thinking. In the lens of the financial markets, it doesn’t matter. In the lens of the financial markets, they will be asking themselves how much companies will make in 2021 and beyond, even though fiscal 2020 will be a disaster.

If you were lucky enough to buy on March 23rd, today (the S&P 500 is at 2530 as I write this) you probably will have made about a fifth to a quarter of the gains that await you over the next three to six months.

However, you won’t get much size in a massive up day like this (unless if you are talking about extremely small quantities relative to company size). There will be a day or two where the news headline will be sour, pronouncements of things never ending, but those will be the days to get proper liquidity. There will also be liquidity provided by supply from people that have gotten hacked to death and want to lower their risk exposure on the up days to limit their losses.

Also, the true liquidity is in the index futures, so if you lack specific names, it’s better than nothing.

My opinion on the actual matter on the ground is relatively meaningless, but I suspect the ‘inflection point’ of cases is turning, so that future growth percentages will taper from this point forward. I also suspect that the true mortality rate will be under a percentage point.